UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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SCHEDULE 14A

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Ferro Corporation

(Name of Registrant as Specified In Its Charter)

 

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March 29, 2011

 

Dear Shareholder:

 

I cordially invite you to attend the 2011 Annual Meeting of Shareholders of Ferro Corporation, which will be held on Friday, April 29, 2011. The meeting will be held at our corporate offices located at 1000 Lakeside Avenue in Cleveland, Ohio, and will begin at 10:00 a.m. (Eastern Time). At the 2011 Annual Meeting, shareholders will (i) vote on the election of four Directors, (ii) vote on the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011, (iii) vote in a non-binding advisory capacity to approve our executive compensation, (iv) vote in a non-binding advisory capacity to approve the frequency of the advisory vote on our executive compensation, and (v) transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof. The following Proxy Statement contains information about the Directors, a description of our corporate governance practices, information about our relationship with Deloitte & Touche LLP, a description of our executive compensation and other relevant information about our Company and the Annual Meeting.

 

Regardless of the number of shares you own, your participation is important. I urge you to vote as soon as possible by telephone, the Internet or mail, even if you plan to attend the meeting. You may revoke your proxy at any time before the meeting regardless of your voting method. If you choose, you may also vote your shares personally at the meeting. In any case, your vote is important.

 

I look forward to seeing you at the Annual Meeting.

 

Very truly yours,

 

James F. Kirsch

Chairman, President and

Chief Executive Officer

 

PROXY STATEMENT

 

This document is the Notice of Meeting and the Proxy Statement of the Board of Directors of Ferro Corporation (the “Board”) in connection with the Annual Meeting of Shareholders to be held on April 29, 2011, at 10:00 a.m. (Eastern Time).

 

Who is soliciting my proxy with this Proxy Statement?

 

The Board of Directors of Ferro is soliciting your proxy in connection with Ferro’s Annual Meeting of Shareholders.

 

Where and when will the meeting be held?

 

This year’s meeting will be held on April 29, 2011, at the Company’s corporate headquarters located at 1000 Lakeside Avenue in Cleveland, Ohio. The meeting will begin at 10:00 a.m. (Eastern Time). Parking is available at nearby facilities.

 

What will be voted on at the meeting?

 

At the meeting, shareholders will vote on the election of four Directors for terms ending in 2014, vote on the ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for 2011, vote in a non-binding advisory capacity to approve the Company’s executive compensation, vote in a non-binding advisory capacity on the frequency of the advisory vote on the Company’s executive compensation, and transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

What if I wish to attend the meeting?

 

If you wish to attend the meeting, you should so indicate on the enclosed attendance response card and return the card to Ferro. This will assist with meeting preparations and expedite your admission to the meeting.

 

Who is entitled to vote at the meeting?

 

The record date for this meeting is March 4, 2011. On that date, we had 86,558,144 shares of Common Stock (which have a par value of $1.00 per share) and 203,282 shares of Series A ESOP Convertible Preferred Stock (which have no par value) outstanding. Each of these shares will be entitled to one vote at the meeting. (The Common Stock and Series A ESOP Convertible Preferred Stock will vote together as a single class.)

 

How do I vote?

 

If you are a registered shareholder, you may cast your vote in person at the meeting or by any one of the following ways:

 

By Telephone:  You may call the toll-free number (1-888-652-8683) printed on your proxy card. Follow the simple instructions and use the personalized control number printed on your proxy card to vote your shares. You will be able to confirm that your vote has been properly recorded. Telephone voting is available 24 hours a day. Telephone voting is available through 11:59 p.m. Eastern Time on April 28, 2011. If you vote by telephone, you do not need to return your proxy card.

 

Over the Internet:  You may visit the Web site (www.investorvote.com/FOE) printed on your proxy card. Follow the simple instructions and use the personalized control number printed on your proxy card to vote your shares. You will be able to confirm that your vote has been properly recorded. Internet voting is available 24 hours a day. Internet voting is available through 11:59 p.m. Eastern Time on April 28, 2011. If you vote over the Internet, you do not need to return your proxy card.

 

By Mail:  You may mark, sign and date the enclosed proxy card and return it in the enclosed postage-paid envelope.

 

If you are a beneficial holder (your shares are held through your bank or broker), you will receive instructions on how to vote your shares with these proxy materials.

What if I change my mind before the meeting?

 

If you change your mind, you may revoke your proxy by giving us notice, either in writing before the meeting to: Secretary, Ferro Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147 USA or at the meeting itself. (If you do revoke your proxy during the meeting, it will not, of course, affect any vote that has already been taken.)

 

What if I submit a proxy without giving specific voting instructions?

 

If you properly submit a proxy without giving specific voting instructions, the individuals named as proxies on the proxy card will vote your shares:

 

 

Will my shares be voted if I do not provide my proxy?

 

If you are a registered shareholder and do not submit a proxy, you must attend the meeting in order to vote your shares.

 

If you hold shares through an account with a bank or broker, your shares may be voted even if you do not provide voting instructions to your bank or broker. Banks and brokers have the authority under the rules of the New York Stock Exchange, or NYSE, to vote shares for which their customers do not provide voting instructions on certain routine matters. The ratification of the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm is considered a routine matter for which banks and brokers may vote without specific instructions from their customers. You must provide voting instructions to your bank or broker for your shares to be voted on all other matters presented at the Annual Meeting.

PROPOSAL ONE: ELECTION OF DIRECTORS

 

 

At the Annual Meeting, shareholders will consider the election of four Directors for terms ending in 2014. The Directors are divided into three classes with each class having a minimum of three Directors. The Directors in each class are elected for terms of three years so that the term of office of one class of Directors expires at each Annual Meeting. The following pages contain information about Ferro’s Directors, including both the nominees for re-election and the Directors whose terms will not expire at this meeting.^*

 

Nominees for Election at this Annual Meeting

 

The current terms of office of Sandra Austin Crayton, Richard J. Hipple, William B. Lawrence and Timothy K. Pistell will expire on the day of this Annual Meeting (as soon as they or their successors are elected). The Board has nominated each of these incumbents for re-election at this Annual Meeting. Following is information about the four Directors nominated for re-election at this Annual Meeting:

 

 

Biographical Information:

 

Ms. Crayton is a Managing Director with Alvarez and Marsal, a professional services firm. Ms. Crayton joined the firm in January 2006. Prior to that, Ms. Crayton was President and Chief Executive Officer of PhyServ, LLC, a health care billing, collections, receivables and information company. Ms. Crayton was appointed Senior Vice President and General Manager of the Medical/Surgical and Psychiatry Management Centers of University Hospitals of Cleveland in 1988. From 1990 to 1994, she served as Executive Vice President and Chief Operating Officer of The University of Chicago Hospitals. In 1994, she was appointed President of Caremark Clinical Management Services, a division of Caremark Rx, Inc. In 1995, Ms. Crayton was named President of Caremark Physician Services, a division of Caremark, Inc., which provides physician practice management services. Between 1997 and 1999, Ms. Crayton was President and Chief Executive Officer of Sedona Health Care Group, Inc. In 1999, she became President and Chief Executive Officer of PhyServ LLC and retired from that position in 2001, when the company was acquired.

 

Ms. Crayton formerly served as a director of Gambro AB (a medical technology and healthcare company) and NCCI Holdings, Inc. (a workers’ compensation database management firm).

 

 

 *  For each of the Directors, the number of shares reported as “Common Stock Owned” is as of March 4, 2011, the record date for the Annual Meeting, and includes shares that the Director owns beneficially, deferred shares and deferred stock units that are converted to Common Stock after a one-year vesting period. The number of shares reported as “Common Stock Under Option” is as of March 4, 2011, but includes shares subject to options that would be issued if the Director exercised all stock options vested within 60 days after March 4, 2011.

 

Biographical Information:

 

Mr. Hipple is the Chairman of the Board, President and Chief Executive Officer of Materion Corporation (formerly known as Brush Engineered Materials Inc.), a manufacturer of high-performance engineered materials. Mr. Hipple has served as Chairman of the Board and Chief Executive Officer of Materion since May 2006 and President of Materion since May 2005. Mr. Hipple was Vice President of Strip Products of Materion from July 2001 until May 2002, when he became President of Alloy Products of Materion. Prior to joining Materion, Mr. Hipple was President of LTV Steel Company, a business unit of the LTV Corporation.

 

 

Biographical Information:

 

Before the sale of TRW Inc. to Northrop Grumman in December 2002 and his retirement from TRW in February 2003, Mr. Lawrence served as TRW’s Executive Vice President, General Counsel & Secretary. TRW was a provider of advanced technology products and services for the global automotive, aerospace and information systems markets. Mr. Lawrence first joined TRW in 1976 as counsel specializing in securities and finance. He held positions of increasing responsibility within the TRW law department until his appointment as TRW’s Executive Vice President of Planning, Development and Government Affairs in 1989 and a member of TRW’s Management Committee. In 1997, Mr. Lawrence was named to the additional position of Executive Vice President, General Counsel & Secretary.

 

Mr. Lawrence also serves as a director of Materion Corporation (formerly known as Brush Engineered Materials Inc.), a manufacturer of high-performance engineered materials.

 

 

Biographical Information:

 

Mr. Pistell was elected to the Board in September 2010.

 

Mr. Pistell currently serves as the Executive Vice President — Finance & Administration and Chief Financial Officer of Parker Hannifin Corporation, a leading diversified manufacturer of motion and control technologies and systems. On November 29, 2010, Parker Hannifin announced Mr. Pistell’s plans to retire from his position as Executive Vice President — Finance & Administration and Chief Financial Officer effective March 31, 2011. Mr. Pistell was appointed the Executive Vice President — Finance & Administration in April 2005 and has been Chief Financial Officer since April 2003. Prior to his appointment as Chief Financial Officer of Parker Hannifin, Mr. Pistell served as the company’s Vice President — Treasurer from July 1993 to April 2003.

 

Ms. Crayton and Messrs. Hipple, Lawrence and Pistell have each agreed to stand for re-election. While we have no reason to believe that any of these nominees will be unable or unwilling to serve at the time of the Annual Meeting, in the unlikely event any of them does not stand for re-election, the shares represented by proxy at the Annual Meeting may be voted for the election of a substitute nominee named by the Board.

 

Vote Required

 

The four nominees who receive the greatest number of votes cast by the shares present, in person or by proxy, and entitled to vote will be elected Directors. Abstentions and broker non-votes will not be considered as shares voted for or against the election of the nominees. If you return a proxy without giving specific voting instructions, then your shares will be voted for the election of Ms. Crayton and Messrs. Hipple, Lawrence and Pistell. If you own your shares through a bank or broker and do not provide specific voting instructions to the bank or broker or do not obtain a proxy to vote those shares, then your shares will not be voted in the election of Directors.

 

If the election of Directors is by cumulative voting (see page 48 below), the persons appointed by your proxy intend to cumulate the votes represented by the proxies they receive and distribute such votes in accordance with their best judgment to elect as many of the Board nominees as possible.

 

Board Recommendation

 

The Board recommends that you vote “FOR” the election of Ms. Crayton and Messrs. Hipple, Lawrence and Pistell. Unless you instruct otherwise on your proxy card or by telephone or Internet voting instructions, your proxy will be voted in accordance with the Board’s recommendation.

Directors Continuing in Office

 

The following are the Directors who will continue in office after the Annual Meeting:

 

 

Biographical Information:

 

Mr. Brown currently serves as the Chief Executive Officer of Performance Fibers, a global leader in high-performance industrial fibers and related materials. Mr. Brown has worked in chemical and chemical-related businesses for the majority of his career and has strong international experience. Prior to joining Performance Fibers, Mr. Brown was Vice President and President of the Performance Chemicals Business of W.R. Grace & Co. from 2005 until 2007. Prior to his position with W.R. Grace & Co., Mr. Brown spent 19 years at General Electric Company, where he served as the President & Global Business Unit Leader of GE Advanced Materials and Silicones from 2003 until 2005 and President and General Manager of General Electric Sealants and Adhesives from 1999 until 2003.

 

Mr. Brown also serves as a director of Kraton Polymers LLC, a leading producer of engineered polymers and styrenic block copolymers.

 

 

Biographical Information:

 

Dr. Hwang has over 30 years of experience in materials, electronics, chemicals and coatings through her management and/or ownership of businesses. She has served as the President of H-Technologies Group since 1994, encompassing international business, worldwide manufacturing services, intellectual property management and joint ventures. Dr. Hwang is an invited guest columnist for Global Solar Technology magazine. Dr. Hwang was also the Chief Executive Officer of International Electronic Materials Corporation (a manufacturing company she founded, which was later acquired). Earlier in her career, Dr. Hwang held senior executive positions with Lockheed Martin Corp., SCM Corp. and The Sherwin-Williams Company. Dr. Hwang holds a Ph.D. in engineering and M.S. degrees in liquid crystals and in chemistry. She has served as National President of the Surface Mount Technology Association and in other global leadership positions and is an international speaker and author of more than 300 publications and several textbooks on leading technologies and global market thrusts. Dr. Hwang has been elected to the National Academy of Engineering and International Hall of Fame (Women in Technology).

 

Dr. Hwang is a board member of Singapore Asahi Chemical Industries, Pte. Ltd. (a Singapore chemical company) and Case Western Reserve University and formerly served on the board of Second Bancorp, Inc.

 

Biographical Information:

 

Mr. Hyland has comprehensive operations, sales and international experience in multiple industries. Mr. Hyland currently serves as Chairman, President and Chief Executive Officer of Mueller Water Products, Inc. Prior to joining Mueller Water Products, Inc., Mr. Hyland served as Chairman, President and Chief Executive Officer of Walter Industries, Inc. from September 2005 until December 2006. Prior to that time, Mr. Hyland served as President, U.S. Fleet Management Solutions of Ryder System, Inc. from June 2005 to September 2005. He served as Executive Vice President, U.S. Fleet Management Solutions of Ryder from October 2004 to June 2005.

 

 

Biographical Information:

 

Mr. Kirsch was elected Chairman of Ferro’s Board of Directors in December 2006. He was appointed Chief Executive Officer and a Director in November 2005. Mr. Kirsch joined Ferro in October 2004 as its President and Chief Operating Officer. Prior to joining Ferro, Mr. Kirsch served as President of Premix Inc. and Quantum Composites, Inc., manufacturers of thermoset molding compounds, parts and sub-assemblies for the automotive, aerospace, electrical and HVAC industries. Prior to that, from 2002 through 2004, he served as President of Quantum Composites, Inc. From 2000 through 2002, he served as President and director of Ballard Generation Systems and Vice President for Ballard Power Systems in Burnaby, British Columbia, Canada. Mr. Kirsch started his career with The Dow Chemical Company, where he spent 19 years and held various positions of increasing responsibility, including global business director of Propylene Oxide and Derivatives and Global Vice President of Electrochemicals.

 

Mr. Kirsch also serves as a director of Cliffs Natural Resources Inc. (an international mining and natural resources company).

 

 

Biographical Information:

 

Mr. Sharp serves as a consultant to various private equity groups. In 2001, Mr. Sharp retired as President of North American Tire for The Goodyear Tire & Rubber Company, a tire, engineered rubber products and chemicals manufacturer. Mr. Sharp began his career with Goodyear in 1964. Following various assignments in the United States and abroad, he was named director of European Tire Production in 1984. He was appointed Vice President of Tire Manufacturing in 1987 and later Executive Vice President of Product Supply in 1991. In 1992, he became President and General Manager of Goodyear’s European Regional Operations. He was elected President of Goodyear Global Support Operations in 1996 and served as President of North American Tire of Goodyear from 1998 until his retirement in 2001.

 

Mr. Sharp is also a director of Jiangsu Xingda Tyre Cord Co. Ltd. (a Chinese tire component supplier), Exceed Company Ltd. (a designer and distributor of footwear, apparel and accessories), 2020 ChinaCap Acquirco, Inc. (a special purpose entity, which was acquired by Exceed Company Ltd. in October 2009) and Theotino, Inc. (a specialty IT outsourcing company dedicated to servicing small and medium enterprises worldwide).

 

 

Biographical Information:

 

Mr. Vargo has extensive global experience in treasury, investor relations, business strategy, acquisitions and divestitures, finance, and operations in global corporations. On March 1, 2010, Mr. Vargo was named Vice President and Chief Financial Officer of ICF International effective April 1, 2010. Prior to joining ICF International, Mr. Vargo served as the Executive Vice President and Chief Financial Officer of Electronic Data Systems (“EDS”) and served as a member of the EDS Executive Committee. Mr. Vargo joined EDS in 2004 as Vice President and Treasurer and was promoted to Co-Chief Financial Officer in March 2006. Before joining EDS, Mr. Vargo served as Corporate Treasurer and Vice President of Investor Relations at TRW Inc., now part of Northrop Grumman, until 2003.

 

Board Meetings and Attendance

 

During 2010, the Board met 7 times and each Director attended at least 75% of the total number of meetings of the Board and the committees on which he or she served. Mr. Pistell, who was elected to the Board during September 2010, did not attend meetings until after his election. In accordance with Ferro’s Corporate Governance Guidelines, the Directors are encouraged to attend the Annual Meeting of Shareholders. All of the Directors who were in office at the time attended the 2010 Annual Meeting held on April 30, 2010.

 

CORPORATE GOVERNANCE

 

Corporate Governance

 

The Board of Directors and management believe that good corporate governance enhances investor confidence in Ferro and increases shareholder value. The imperative to continue to develop and implement best practices throughout Ferro’s corporate governance structure is fundamental to Ferro’s strategy to enhance performance by creating an environment that increases operational efficiency and ensures long-term productivity and growth. Sound corporate governance practices also ensure alignment with shareholder interests by promoting fairness, transparency and accountability in business activities among employees, management and the Board. Representative steps Ferro has taken to fulfill this commitment include, among others:

 

 

Corporate Governance Principles

 

The Board has adopted Corporate Governance Principles. These Corporate Governance Principles, which may be found on Ferro’s Web site (www.ferro.com), are intended to assure that Ferro’s Director qualifications, committee structure and overall Board processes provide good corporate governance and independent oversight of the Company’s management.

 

Director Independence

 

The Board has also adopted formal Guidelines for Determining Director Independence, which are available on Ferro’s Web site (www.ferro.com). The purpose of these Guidelines is to assist the Board in its evaluation of and determination as to the independence of members of the Board. The Guidelines meet or exceed in all respects the standards set forth in section 303A of the New York Stock Exchange listing standards, and the Board has determined that all Directors, other than Mr. Kirsch, qualify as “independent” under such standards.

Board Committees

 

The Board of Directors has three committees, which are the Audit Committee, the Compensation Committee and the Governance & Nomination Committee.

 

Audit Committee

 

The Audit Committee assists the Board with oversight of the integrity of Ferro’s financial statements, compliance with legal and regulatory requirements relating to Ferro’s financial reports, Ferro’s independent registered public accounting firm’s qualifications, independence, and performance, the performance of the internal audit and risk management functions, compliance with legal and ethical policies and accounting practices and systems of internal controls. The Audit Committee is not, however, responsible for conducting audits, preparing financial statements or the accuracy of any financial statements or filings, all of which remain the responsibility of management and the Company’s independent registered public accounting firm. The Audit Committee’s charter may be found on Ferro’s Web site (www.ferro.com).

 

The current members of the Audit Committee are Ms. Crayton, Dr. Hwang and Messrs. Pistell and Vargo. Messrs. Brown, Lawrence and Sharp and former directors, Messrs. Premdas and Sullivan, also served on the Audit Committee during 2010. Mr. Sharp served as the Chair of the Audit Committee until the date of the 2010 annual meeting. Since the date of the 2010 annual meeting, Mr. Vargo has served as the Chair of the Audit Committee. Each member of the Audit Committee is “independent” as required under section 301 of the Sarbanes-Oxley Act of 2002, as well as under the standards contained in section 303A of the New York Stock Exchange’s listing standards and the Company’s Guidelines for Determining Director Independence. The Board has designated Mr. Vargo as the Audit Committee’s named financial expert, as defined in section 407 of the Sarbanes-Oxley Act and the Securities and Exchange Commission’s (the “SEC”) rules under that statute. (Mr. Vargo’s biography is on page 8 above.) Each member of the Audit Committee has the requisite financial literacy required under section 303A of the New York Stock Exchange (the “NYSE”) listing standards to serve on the Audit Committee.

 

The Audit Committee met 7 times in 2010. The Audit Committee’s report is on page 45 below.

 

Compensation Committee

 

The Compensation Committee is responsible for recommending policies for compensation of Directors and setting the compensation of the Senior Management Committee, which is comprised of the Company’s executive officers. The Compensation Committee also oversees the various compensation and benefit plans and policies of the Company generally. The Compensation Committee’s charter may be found on Ferro’s Web site (www.ferro.com).

 

The current members of the Compensation Committee are Messrs. Brown, Hipple, Hyland, Lawrence and Vargo. Mr. Sharp and former directors, Messrs. Bulkin and Mee, also served on the Compensation Committee during 2010, with Mr. Bulkin serving as the Chair until the date of the 2010 annual meeting. Following the 2010 annual meeting, Mr. Hipple has served as the Chair of the Compensation Committee. All members of this Committee meet the “independence” standards contained in section 303A of the NYSE’s listing standards and the Company’s Guidelines for Determining Director Independence.

 

The Compensation Committee met 5 times in 2010. The Compensation Committee’s report is on page 26 below.

 

The Compensation Committee retained Towers Watson (formerly Towers Perrin), a nationally recognized executive compensation consulting firm, to serve as its compensation consultant until the third quarter of 2010. During the third quarter of 2010, the Committee retained Pay Governance LLC (“Pay Governance”) as its compensation consultant. Pay Governance is a consulting firm formed by former partners of Towers Watson, including the consultants that served the Compensation Committee. Pay Governance is totally independent of Towers Watson and only offers executive compensation consulting services, eliminating any potential concerns regarding the independence of the Compensation Committee’s advisor or conflicts of interest. Pay Governance assists with the design of pay plans and reviewing the effectiveness and competitiveness of the Company’s

compensation programs. Pay Governance also provides the Compensation Committee and management with market data on the compensation programs of peer companies. To ensure that Pay Governance’s consulting services are independent and objective, the Compensation Committee and Pay Governance take the following steps: (i) Pay Governance reports directly to the Compensation Committee Chair; (ii) at least annually, the Compensation Committee conducts a review of Pay Governance’s performance; and (iii) Pay Governance’s fees are not linked to the size of the Company’s executive compensation programs.

 

The Chief Executive Officer (“CEO”) and Vice President, Human Resources make recommendations regarding compensation of the Senior Management Committee (other than for the CEO) based on competitive market data, internal pay equity, responsibilities and performance. The Compensation Committee makes all final determinations regarding executive compensation, including salary, bonus targets, equity awards and related performance goals. From time to time, the Compensation Committee delegates to the CEO and Vice President, Human Resources authority to carry out certain administrative duties regarding the compensation programs, including grants of equity awards to non-executive employees and new hires. For more information on how executive compensation decisions are made, see the “Executive Compensation Discussion & Analysis” section beginning on page 17 below.

 

Governance & Nomination Committee

 

The Governance & Nomination Committee is responsible for recommending to the Board corporate governance principles, overseeing adherence to the corporate governance principles adopted by the Board, recommending to the Board criteria and qualifications for new Board members, recommending to the Board nominees for election as Directors and recommending to the Board the composition and chairs of each committee. The Governance & Nomination Committee’s charter may be found on Ferro’s Web site (www.ferro.com).

 

The current members of the Governance & Nomination Committee are Ms. Crayton, Dr. Hwang and Messrs. Hyland, Lawrence and Sharp. Mr. Lawrence serves as the Chair. Former director, Mr. Sullivan, also served on the Governance & Nomination Committee during 2010. All members of this Committee meet the “independence” standards contained in section 303A of the NYSE’s listing standards and the Company’s Guidelines for Determining Director Independence.

 

The Governance & Nomination Committee met 3 times in 2010.

 

In its role as the nominating body for the Board, the Governance & Nomination Committee reviews the credentials of potential Director candidates (including potential candidates recommended by shareholders), conducts interviews and makes formal recommendations to the Board for the annual and any interim election of Directors. In making its recommendations, pursuant to the Company’s Corporate Governance Principles, the Governance & Nomination Committee considers a variety of factors, including skills, independence, background, experience, diversity and compatibility with existing Board members. The Governance & Nomination Committee may also consider such other factors as it deems appropriate in the best interests of the Company and its shareholders. The Governance & Nomination Committee does not have a policy exclusively focused on the consideration of diversity; however, diversity is one of the factors that the Governance & Nomination Committee considers when identifying potential Director candidates and making recommendations to the Board.

 

The Governance & Nomination Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. If any Board member is of retirement age or does not wish to continue in service or if the Governance & Nomination Committee or the Board decides not to nominate a member for re-election, then the Committee identifies the desired skills and experience in light of the criteria outlined above. The Governance & Nomination Committee then considers potential Director candidates that may be recommended by the Board, senior management, shareholders and consultants. During 2010, an independent member of the Board identified Mr. Pistell as a Director candidate.

 

The Governance & Nomination Committee considered each Director’s leadership experience, specific industry or manufacturing experience and familiarity with global operations. The Directors hold or have held executive officer positions in organizations that have provided them experience in operations, management, risk management and leadership development. The Board and the Governance & Nomination Committee believe that

these skills and qualifications combined with each Director’s diverse background and ability to work in a positive and collegial fashion benefit Ferro and Ferro’s shareholders by creating a strong and effective Board. Set forth below are qualifications with respect to each member of the Board:

 

Mr. Kirsch brings to the Board an extensive understanding of Ferro’s business and has experience working as a senior officer for major organizations with international operations. As the Chief Executive Officer since 2005 and the Chairman of the Board since 2006, Mr. Kirsch has played an integral role in shaping Ferro’s strategic direction.

 

Mr. Brown’s distinguished career in chemical and chemical-related businesses and strong international experience adds to the Board relevant knowledge for Ferro’s future success. In addition, Mr. Brown has demonstrated leadership experience and currently serves as the chief executive officer of an industrial fibers company and a member of the board of another publicly traded company.

 

Ms. Crayton has experience serving in several senior management positions in both the public and private sector and is currently a managing director of Alvarez and Marsal, a professional services firm. In addition, Ms. Crayton has served as a director of the Company since 1994 and has extensive knowledge of the Company’s industry and its strategic challenges.

 

Mr. Hipple has leadership and management experience with a business that produces and supplies high performance engineered materials globally. Mr. Hipple currently serves as chairman of the board, chief executive officer and president of a publicly-traded company and provides the board with insight and experience leading a public company comparable in size and with international sales.

 

Dr. Hwang has three decades of international business experience in materials, electronics, chemicals and coatings through her management and/or ownership of businesses. She has served in a number of senior management positions, including president and chief executive officer. Her knowledge of the materials industries and experience in manufacturing infrastructure offers a broad perspective on the industries in which Ferro participates. In addition, she has served on international advisory boards and the boards of both public and private companies and non-profit organizations.

 

Mr. Hyland has comprehensive operations, sales and international experience in multiple industries, which will benefit the Company’s diverse business units. In addition, Mr. Hyland currently serves as the chairman, chief executive officer and president of another publicly traded company.

 

Mr. Lawrence has experience with legal compliance, risk assessment, government relations and business development in global automotive, aerospace and information systems markets. Mr. Lawrence served as secretary and general counsel of a Fortune 500 company and has extensive experience dealing with corporate governance issues. In addition, Mr. Lawrence also serves as a member of the board of another publicly traded company.

 

Mr. Pistell has extensive experience in corporate finance, treasury, international business and diversified manufacturing. In addition, Mr. Pistell has served in a number of senior management positions in accounting and finance including as the chief financial officer of a publicly traded company.

 

Mr. Sharp has extensive experience in international operations. He served in several senior management positions in the United States and abroad, which provides the Board with global perspective. In addition, Mr. Sharp serves as a member of the board of both public and private international companies.

 

Mr. Vargo has extensive experience in treasury, investor relations, business strategy, acquisitions and divestitures, finance and operations in global corporations. In addition, Mr. Vargo has served in numerous senior management positions at other publicly traded companies and is currently the chief financial officer of a publicly traded company.

 

The Governance & Nomination Committee will consider candidates for Director who are recommended by shareholders. Shareholder recommendations should be submitted in writing to: Secretary, Ferro Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147 USA. The recommendation letter should include the shareholder’s own name, address and the number of shares owned and the candidate’s name, age, business address, residence

address and principal occupation, as well as the number of shares, if any, the candidate owns. The letter should provide all of the information that would need to be disclosed in the solicitation of proxies for the election of directors under federal securities laws. Finally, the shareholder should also submit the recommended candidate’s written consent to be elected and commitment to serve if elected. Ferro may also require a candidate to furnish additional information regarding his or her eligibility and qualifications.

 

Board Leadership Structure

 

Ferro’s board leadership structure is comprised of a combined Chief Executive Officer and Chairman of the Board of Directors and a Lead Director. Currently, Mr. Kirsch serves as the Chief Executive Officer and Chairman of the Board of Directors. Ferro believes that a combined Chief Executive Officer and Chairman of the Board role is appropriate because it provides an efficient and effective leadership structure for Ferro and ensures that the Board of Directors’ agenda and Ferro’s strategic objectives and challenges are aligned, that the Board of Directors is presented with information required for it to fulfill its responsibilities and that Board of Directors’ meetings are as productive and effective as possible.

 

Ferro’s non-management Directors, all of whom are independent, meet at regularly scheduled executive sessions several times each year. These meetings are chaired by a Lead Director selected from among the committee Chairs. Mr. Hipple, the Chair of the Compensation Committee, currently serves as the Lead Director. Neither the CEO nor any other member of management attends these meetings except in limited circumstances if requested by the Directors. Following each executive session, the Lead Director or the other non-management Directors shares with the CEO such observations, comments or concerns as the Lead Director and the other non-management Directors deem appropriate.

 

The independent Directors have access to Ferro management as they deem necessary or appropriate. In addition, the Chairs of the Audit Committee, Governance & Nomination Committee and Compensation Committee meet periodically with members of senior management.

 

Board’s Role in Risk Management Oversight

 

The Board oversees the Audit Committee, which has the primary role in risk management oversight. The Board receives periodic reports from the Audit Committee with respect to its discussions with management regarding Ferro’s guidelines and policies governing the assessment and management of risks, any major risk exposures and steps management has taken to monitor and control such exposures and Ferro’s use of certain financial instruments. Management uses an enterprise risk management process to identify, assess, manage and mitigate risks to the Company. Each of the CEO, Chief Financial Officer (“CFO”), the Director of Internal Audit and the General Counsel of the Company periodically report to the Audit Committee with respect to risk management. In addition, each of the CFO and the Treasurer periodically report to the Audit Committee with respect to financial risk management and Ferro’s use of certain financial instruments. With respect to risk related to compensation matters, the Compensation Committee considers, in establishing and reviewing Ferro’s executive compensation program, whether the program encourages unnecessary or excessive risk-taking. The Compensation Committee periodically reports to the Board. Ferro’s Board leadership structure facilitates the effectiveness of the risk oversight process by having an experienced Chairman and Chief Executive Officer who has extensive knowledge of and experience with the risks that Ferro faces.

 

Other Corporate Governance Measures

 

Finally, Ferro has adopted a series of policies dealing with business conduct and ethics. These policies apply to all Ferro Directors, officers and employees. A summary of these policies may be found on Ferro’s Web site (www.ferro.com), and the full text of the policies is available in print, free of charge, by writing to: Secretary, Ferro Corporation, 1000 Lakeside Avenue, Cleveland, Ohio 44114-1147 USA. The Audit Committee is responsible for the review and oversight of the Company’s ethical policies. The Audit Committee must approve any exception, amendment or waiver to these policies. In addition, a description of any exception, amendment or waiver to these policies with respect to the CEO, CFO and the Company’s principal accounting officer, controller or persons

performing similar functions will be posted on the Company’s Web site within four business days following the date of the exception, amendment or waiver. Ferro also maintains a hotline that allows employees throughout the world to report confidentially any detected violations of these legal and ethical conduct policies consistent with local legal requirements and subject to local legal limitations. In addition, the Governance & Nomination Committee is responsible for reviewing and approving any related party transaction. Any shareholder or other interested party who wishes to communicate directly and confidentially with the Lead Director or the non-management Directors as a group may contact the non-management Directors at the following Web site: www.ferrodirectors.com. The non-management Directors will handle such communications confidentially.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Stock Ownership by Directors, Executive Officers and Employees

 

Ferro encourages share ownership by its Directors and executive officers and has ownership guidelines as described in Executive Compensation Discussion & Analysis. The information below shows beneficial ownership of Ferro Common Stock by (i) each Director, (ii) each executive officer named in the Summary Compensation Table on page 28 below, and (iii) all Directors and current executive officers as a group. Except as otherwise noted, each person has sole voting and investment power as to his or her shares of Common Stock. The information set forth below is as of March 4, 2011. None of our current Directors or executive officers own any of the outstanding shares of Series A ESOP Convertible Preferred Stock.

 

 

 

Stock Ownership by Other Major Shareholders

 

The following table sets forth information about each person known by us to be the beneficial owner of more than 5% of Ferro’s outstanding Common Stock or shares convertible into Common Stock.

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and Directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, Directors and greater than ten percent shareholders are required by SEC regulation to furnish Ferro with copies of all Section 16(a) forms they file.

 

To Ferro’s knowledge, based solely on review of the copies of such reports furnished to Ferro, during the fiscal year ended December 31, 2010, or with respect to such fiscal year, all Section 16(a) filing requirements were met, except for the disposition of 7,600 Common Shares by Dr. Hwang was filed late on a Form 5 and the disposition of 9,764 Common Shares by Mr. Thomas was filed late on a Form 4.

 

EXECUTIVE COMPENSATION DISCUSSION & ANALYSIS

 

Set forth below is a description of the process by which the Company, through its Compensation Committee, set the compensation of its Chief Executive Officer and other members of the Senior Management Committee for 2010. (The Senior Management Committee is comprised of the Company’s executive officers. See page 17 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.)

 

Executive Summary — 2010 Compensation Actions and Outcomes

 

The Company’s performance in 2010 demonstrated a strong recovery from 2009, a year in which financial performance was significantly impacted by the global recession. Financial performance exceeded the budgeted targets that had been established for the year for all metrics. Net sales increased by 26.8% compared with 2009 and gross margin percentage, excluding precious metals, increased to 27.1% of sales from 22.4% in the prior-year period. Operating profit margin increased to 11.1% of sales excluding precious metals, up from 4.2% for 2009. Both the gross margin and the operating profit margin have been adjusted to exclude special charges. Also during 2010, the Company successfully refinanced its debt offerings to extend maturities, improve liquidity and reduce future interest expense.

 

As a result of the Company’s strong recovery in 2010, certain extraordinary compensation actions implemented in 2009 were reversed. Specifically, salary increases for all non-union employees including executive officers, payment of matching contributions under the 401(k) Plan and Supplemental 401(k) Plan, and annual incentive plan payments were reinstated in 2010.

 

During 2010, the Company also took the following actions to further align the interests of executive officers with those of shareholders and to enhance the Company’s compensation practices:

 

 

The Company’s strong financial performance in 2010 resulted in maximum payouts under the 2010 Annual Incentive Plan. Accordingly, annual cash compensation for the executive officers was above market median, consistent with the plan design of delivering pay that is above median for performance that greatly exceeds targeted results. This was in contrast to 2009 during which weak financial performance resulted in annual cash compensation levels below market median. This was also consistent with the incentive plan design of delivering less than competitive pay for results that fall below the Company’s performance targets. Long-term incentive grants made to executive officers, although higher in grant value due primarily to stock price improvement from 2009, remained below the market median due to limited share availability. With the approval of the 2010 Long-Term Incentive Plan and strong stock price appreciation, long-term incentive grants to executive officers in 2011 will be targeted at the market median, consistent with the Company’s pay philosophy.

 

Compensation Philosophy and Objectives

 

The primary objectives of the Company’s executive compensation program are:

 

 

 

Compensation Committee Oversight

 

The Compensation Committee of the Board (the “Committee”) is responsible for establishing, implementing and monitoring adherence to the Company’s compensation philosophy for the CEO and the other members of the Senior Management Committee. The Committee sets the compensation of the Company’s executive officers, recommends to the Board compensation for the Directors and committee Chairs and oversees compensation and benefit plans and policies of the Company generally.

 

In carrying out its oversight responsibilities, the Committee is supported by external executive compensation consultants and management. The Committee has the sole authority to retain (and terminate) any consultants used to evaluate the Company’s executive compensation.

 

The nature of this support is summarized below:

 

Role of External Compensation Consultants.  During 2010, the Committee initially retained Towers Watson and later, beginning in the third quarter, transitioned to Pay Governance LLC as the Committee’s executive compensation consulting firm (the “Compensation Consultant”). Neither Towers Watson nor Pay Governance LLC provided any other services to the Company during 2010.

 

The Compensation Consultant reports directly to the Committee and provides expertise to management and the Committee on the design of appropriate pay plans, analysis of the effectiveness of existing plans and the market-competitiveness of base salary, annual incentive levels and long-term incentive awards. The Compensation Consultant, with the knowledge and approval of the Committee, also provided advice to management and the Committee on the competitive elements of the separation policy and the revised form change in control agreement put in place during 2010, as well as on the pay program for non-employee Directors.

 

In fulfilling this role, the Compensation Consultant provides the Committee with competitive market data from two main sources. Compensation data is collected and analyzed from the proxies for Ferro’s peer group of specialty chemical companies in the S&P index and from other Mid-Cap companies. The peer group is selected based on factors including company size (e.g., revenues and employees), products, end-use markets and degree of global operations. Ferro’s peer group of companies that the Compensation Consultant analyzed for 2010 was updated to reflect Ferro’s growth in sales since the prior peer group was established in 2005. The 2009 sales for the new peer group companies generally ranged from one-half to two times Ferro’s sales and these companies

overlapped significantly with Ferro’s businesses and end-use markets. Ferro’s peer group of companies for 2010 included the following:

 

A. Schulman, Inc.		PolyOne Corporation.
Albemarle Corporation		RPM International Inc.
Arch Chemicals		Rockwood Holdings, Inc.
Cabot Corporation		Sensient Technologies Corporation
Cytec Industries Inc.		Sigma-Aldrich Corporation
FMC Corporation		Stepan Company
H.B. Fuller Company		Valhi, Inc.
The Lubrizol Corporation		Valspar Corporation
Nalco Company

 

In addition to reviewing the proxies of peer group companies, the Compensation Consultant reviews data obtained from nationally recognized compensation surveys that include hundreds of companies comparable in revenues to Ferro but from a broader range of industries. These additional data help confirm results found in the proxies of Ferro’s peers and represent the broader market within which the Company competes for senior executives. Data from both sources are used to develop “competitive” base salaries, annual bonuses, total cash compensation (salary plus bonus), long-term incentives and total direct compensation (cash compensation plus long-term incentives) for the CEO and other executive officers. These results serve as a basis for the annual review of the Company’s pay programs done by the Compensation Consultant for the Committee and for advising the Committee with respect to the effectiveness and competitiveness of the pay program. The Committee and the CEO use this information to establish base salaries, annual incentives and long-term incentive awards. The Compensation Committee approves all pay decisions related to the Senior Management Committee.

 

Role of Management.  Management of the Company supports the Committee in its assessment of executive compensation, implements decisions made by the Committee and ensures that the Company’s compensation plans are administered in accordance with the provisions of the plans. The Company’s Vice President, Human Resources and Director, Compensation provide the Compensation Consultant with information concerning executives’ responsibilities, compensation, benefits, Company financial data and business goals as necessary for them to complete their work for the Committee. The CEO and Vice President, Human Resources participate in an advisory capacity in the Committee’s meetings, including the annual compensation review in February each year, provide the Committee with data and analyses and make recommendations with respect to awards under the long-term incentive program. The Committee makes its decisions with respect to the compensation of the CEO in executive session.

 

Current Compensation Program

 

The Company’s current compensation program includes a base salary, an annual incentive, long-term incentives, retirement benefits and a deferred compensation plan. Executive allowances were eliminated in 2010. In addition, the Company provides its executives with protection in the event of fundamental changes in the Company’s ownership and control through change in control agreements. A separation policy, put in place in 2010, provides executives with specified payments in the event of a termination by the Company without “cause” or by the executive for “good reason”. The total compensation and the individual elements of compensation are periodically reviewed by the Committee based upon data provided by the Compensation Consultant on market practices of peers, as well as other companies comparable in size to Ferro. The competitive market provides a larger range of companies and more information regarding the compensation of officers than the data from Ferro’s peer companies because certain officers’ information is not available in the public disclosure by peer companies. Each element of the Company’s compensation program is discussed below.

 

Base Salary.  An executive’s base salary is cash compensation that is generally not at risk and is paid to the executive regardless of the performance of the Company in a particular year. The amount of base salary is reviewed on an annual basis and adjusted, if warranted, to reflect scope of responsibilities, individual performance and external market conditions. The Company targets base salary at the 50th percentile of the competitive market but considers other factors, including individual performance and experience, internal pay equity and scope and influence of the position, in setting an individual’s base salary and overall compensation level. This helps ensure

the Company’s ability to compete in the market for executive talent while maintaining fixed compensation costs at levels that are comparable to other companies of similar size.

 

Annual Incentives.  The Company’s Annual Incentive Plan (the “AIP”) provides an executive with an opportunity to earn additional cash compensation based upon the achievement of pre-determined Company financial and personal performance goals for the year. The AIP is designed to deliver incentive payouts at the 50th percentile of the competitive market for achievement of target performance levels. Target incentive opportunities, performance metrics and performance goals are established by the Committee after reviewing and discussing management’s recommendations and are communicated to participants near the beginning of each year. The financial AIP goals are linked to the financial goals in the annual operating plan approved by the Board of Directors and, for 2010, determine 80% of an executive’s bonus. Personal performance goals, weighted at 20% in 2010, are established at the beginning of the year and are closely linked to the Company’s business and strategic objectives. At the Committee’s discretion, AIP payments earned by the CEO and each Senior Management Committee member related to established financial goals may be adjusted upward or downward by as much as 20% to reflect individual performance in a given year. In addition, the Committee may adjust AIP performance results to account for certain special charges in exceptional or extraordinary circumstances where the effects of the item are auditable.

 

Long-Term Incentives.  In April 2010, the Company’s shareholders approved the 2010 Long-Term Incentive Plan (the “2010 LTIP”). The 2010 LTIP replaced the earlier 2006 Long-Term Incentive Compensation Plan (the “2006 LTIP”). (The 2006 LTIP and the 2010 LTIP constitute the Company’s Long-Term Incentive Plan and are collectively referred to as the “LTIP” in this Executive Compensation Discussion & Analysis.) Grants in February of 2010 were made under the 2006 LTIP but all future grants will be made under the 2010 LTIP. The Company also has outstanding option awards under the 2003 Long-Term Incentive Plan (the “2003 LTIP”) and the Employee Stock Option Plan.

 

The LTIP is a critical component of the compensation program. It is designed to promote Ferro’s long-term financial interests and growth by attracting, retaining and motivating high-quality key employees and Directors and aligning their interests with those of the Company’s shareholders. The LTIP is administered by the Committee. Management proposes to the Committee the employees who will participate in the program and the number of shares to be granted to each participant. The Committee reviews, discusses and approves the types and number of awards to be made to each participant and approves the terms, conditions and limitations applicable to each award. The Committee delegates authority to the CEO, within pre-established limitations, to make awards to newly-hired employees or current employees who are not executive officers during the course of the year. Long-term incentive grant values are targeted at the 50th percentile of the competitive market, but may be adjusted after consideration of factors that include share availability, burn rate, and unusual changes in stock price.

 

The LTIP allows the Company to award six different types of long-term incentives, i.e., stock options, stock appreciation rights, restricted shares, performance shares, other common stock-based awards (such as phantom common stock units and deferred common stock units) and dividend equivalent rights. In 2010, the Committee authorized two types of LTIP awards — stock options and restricted shares. Stock options, comprising 80 to 85% of the targeted grant award value, provide strong alignment with shareholder returns. Restricted stock grants are directed towards retention of the executive team. The basic terms of those awards are described below:

 

 

 

The Committee generally makes all LTIP awards at its meeting on a pre-determined date in February. The exercise price of any awards, including stock option strike price, is determined by the closing price of Ferro Common Stock on the NYSE on the date the Committee approves the grants. From time to time during the year, the Committee (or the CEO pursuant to the authority delegated to him by the Committee) may award shares to a new hire or to a current employee. In such cases, the strike price of the grant is based on the closing price of the Ferro Stock on the NYSE on the date the award is granted which, in the case of new hires, is the first date he or she is employed.

 

Retirement Benefits.  In previous years, the Company offered its employees a defined benefit plan, known as the Ferro Corporation Retirement Plan (the “DB Plan”), and, for executive employees, a supplemental defined benefit program, known as the Ferro Corporation Supplemental Defined Benefit Plan for Executive Employees (the “Supplemental DB Plan”). The DB Plan and the Supplemental DB Plan provided employees annuity payments in retirement according to pre-determined formulas. Effective March 31, 2006, the DB Plan and the Supplemental DB Plan were “frozen” for purposes of future accruals. The plans have been frozen as to new entrants since July 1, 2003. Mr. Thomas, who was hired prior to July 1, 2003, is the only executive officer who has earned a benefit under the DB Plan and under the Supplemental DB Plan.

 

Consequently, the primary retirement benefits for executive officers in 2010 and going forward are a qualified defined contribution 401(k) plan, the Ferro Corporation Savings and Stock Ownership Plan (the “401(k) Plan”) and its companion non-qualified defined contribution plan, the Ferro Corporation Supplemental Defined Contribution Plan for Executive Employees (the “Supplemental 401(k) Plan”). The Supplemental 401(k) Plan provides participants with Company contributions that would have been made to their 401(k) and basic pension contribution accounts under the 401(k) Plan, were it not for tax law limitations. The Supplemental 401(k) Plan allows participants the option of a deemed investment in either Ferro Common Stock or the stable asset fund under the 401(k) Plan. No premium or guaranteed investment return is provided. In March 2009, the Company announced that it was temporarily suspending matching contributions under the 401(k) Plan and supplemental matching contributions under the Supplemental 401(k) Plan for all non-union employees effective with the first pay period on or after March 15, 2009. The Company reinstated the matching contributions to the 401(k) Plan and the Supplemental 401(k) Plan in April of 2010.

 

Deferred Compensation Plan.  Senior Management Committee members are eligible to participate in the Ferro Corporation Deferred Compensation Plan for Executive Employees (the “Deferred Compensation Plan”). Under the Deferred Compensation Plan, participants may elect to defer a percentage of their annual salary, as well as their annual bonus and/or performance share payout, to be paid at a certain time specified by the participant and consistent with the terms of the plan. The Deferred Compensation Plan allows participants the option of a deemed investment in either Ferro Common Stock or the stable asset fund under the 401(k) Plan. No premium or guaranteed investment return is provided. There are no executive officers participating in the plan at this time and, due to the low levels of participation, the Deferred Compensation Plan election process was suspended for 2010 and 2011.

 

Executive Allowance and Other Benefits.  Executive allowances, which had been paid on an annual basis to the CEO and other Senior Management Committee members, were eliminated for 2010 to increase transparency and simplify the compensation program. Salary adjustments were made in 2010, in part, to

compensate for the elimination of the executive allowances. Additionally, during 2010, the Committee adopted a separation policy for executive officers, consistent with recommended compensation practices and policies.

 

Change in Control Agreements.  For many years, the Board has recognized that, as is the case with many publicly-held corporations, there is always a possibility of a fundamental change in the Company’s ownership and control through a “change in control.” Any such threatened or actual change in control would create uncertainties and raise questions that could result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. In light of these facts, the Board determined that appropriate steps needed to be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control. Consequently, the Company has entered into change in control agreements with each of the executive officers. These agreements were revised effective January 1, 2009, for the primary purpose of compliance with Internal Revenue Code Section 409A. Change in control agreements offered to new executives during 2010 do not include an excise tax gross-up or a modified single trigger provision. For additional information on payments to executive officers as a result of a change in control, see the discussion under Employment Agreements and Termination and Change in Control Payments beginning on page 35 below.

 

Executive Compensation Process in 2010

 

The onset of the recession and the associated drop in sales and earnings that occurred beginning in the fourth quarter of 2008 caused the Committee to reconsider its approach for long-term incentive awards for 2009 and 2010. Goal setting was particularly difficult during this period as a result of extraordinary levels of economic uncertainty. In addition, the Committee was concerned about retaining the management team in light of the recent decline in the Company’s stock price, which resulted in an “underwater” position of most prior stock options grants and a reduction in expected payouts for outstanding performance share grants because of the unlikelihood of meeting performance targets. After discussing these concerns with the Compensation Consultant and considering other factors such as share availability, burn rate and the desire to avoid potential windfall pay gains as the economy improved, the Committee decided to modify the mix of long-term incentive awards granted to executive officers in 2009 to consist of only stock options and restricted shares. The Committee decided not to grant performance shares due to the difficulty of setting multi-year performance goals in an uncertain economic environment. The Committee decided to continue this approach for grants made in 2010. Due primarily to limited share availability, grants made in 2010 were similar in number of shares to those made in 2009. Competitive market long-term incentive data and stock price, therefore, were not primary considerations since there were insufficient shares to grant at the 50th percentile of the competitive market.

 

Accordingly, at its February 25, 2010, meeting, the Committee made long-term incentive grants to the CEO and Senior Management Committee, split between stock options and restricted shares. Mr. Kirsch was awarded 270,000 stock options and 53,500 restricted shares; Ms. Bailey and Messrs. Murry and Thomas were each awarded 60,000 stock options and 12,500 restricted shares; and Mr. Duesenberg was awarded 35,000 stock options and 8,000 restricted shares. The grant date value of these awards was at the 28th percentile of the competitive market.

 

Also, at its February 25, 2010, meeting, the Committee reviewed current levels of pay for the Senior Management Committee. The Committee considered the market data provided by the Compensation Consultant, the increase in job responsibilities assumed by Messrs. Murry and Thomas as a result of organization changes made in October of 2009, the decision to eliminate the executive allowances effective in 2010 and the recommendations of the Chief Executive Officer. After discussion, the Committee approved the following changes: Ms. Bailey, who was below the market median, received a 2.85% increase; Mr. Duesenberg, who was also below the market median, received a 6.8% increase; Mr. Murry, who was slightly above market median, received a 4.2% increase and Mr. Thomas, who was below market median, received a 17% increase. In addition, Ms. Bailey and Messrs. Duesenberg, Murry and Thomas received an additional $9,600 salary adjustment to compensate for the elimination of their executive allowances effective in 2010. The Committee also decided to increase the AIP target percentages for Messrs. Murry and Thomas from 55% to 60%, in recognition of their expanded job

responsibilities. These changes brought executive officers’ target bonuses and target cash compensation levels in line with the median of competitive market data, consistent with the Company’s pay philosophy.

 

Mr. Kirsch’s base salary rate, which was in the bottom quartile of the market data, was increased from $725,000 to $850,000 bringing him to market median. In addition, Mr. Kirsch received a $35,000 salary adjustment to compensate for the elimination of his executive allowance effective in 2010. Mr. Kirsch’s AIP target of 100% was consistent with market median and, therefore, no adjustment was made.

 

On February 15, 2011, the Committee reviewed the Company’s performance compared to the goals for the AIP. The AIP goals established for all participants worldwide, including the named executive officers, included the following Company level metrics: (i) gross margin; (ii) operating margin; (iii) operating profit; (iv) inventory days; (v) accounts receivable days and (v) personal performance goals. Threshold, target and maximum levels for each metric were established and communicated at the beginning of the year. These metrics were selected to focus management’s efforts on working capital management and improving the level and quality of operating earnings.

 

Actual results, which met or exceeded maximum on all metrics, were as follows:

 

 

 

Note:  For Gross Margin Percentage, Operating Margin Percentage and Operating Profit, better performance is indicated by higher values. For Inventory Days and Accounts Receivable Days, better performance is indicated by lower values.

The Committee also reviewed and discussed the accomplishments of each executive officer with respect to the 2010 personal performance goals specified in the following chart.

 

 

At their meeting on February 24, 2011, after review and discussion, the Committee determined that maximum performance had been attained and therefore approved the following AIP payouts: Mr. Miklich $255,000; Mr. Murry $468,000; Mr. Thomas $468,000; and Mr. Duesenberg $330,000. Likewise, the Committee approved an AIP payout of $1,770,000 for Mr. Kirsch. Total annual cash compensation for 2010 for Mr. Kirsch and the other executive officers, was significantly above targeted levels as a result of the maximum attainment on the AIP. Long-term incentive compensation was below median, due to limited share availability and stock price. As a result of more than competitive annual compensation and less than competitive long-term incentives, the Company’s total compensation for the executive officers was positioned between the 50^th and 75^th percentiles.

 

Stock Ownership Guidelines

 

Ferro has had stock ownership guidelines for its Directors and executive officers since 1998 reinforcing one of the key objectives of the Company’s pay program, the alignment of pay with the interests of shareholders. The guidelines are reviewed and updated periodically to ensure they achieve their intended purpose. The current guidelines require the CEO and other Senior Management Committee members to achieve target ownership levels of 150,000 shares and 30,000 shares, respectively, by December 31, 2011. Newly hired executives have five years

to achieve their target ownership level. Currently, Messrs. Kirsch, Miklich, Murry, Thomas and Duesenberg have exceeded 100% of their full ownership guideline.

 

For non-employee Directors, the stock ownership guideline is 10,000 shares. New non-employee Directors have five years from the date of election to achieve the target ownership level. Currently, all non-employee Directors have achieved the target ownership level.

 

Shares of Common Stock deemed to be owned by each executive officer and Director include shares owned outright with no restrictions, restricted share grants, shares owned in the 401(k) Plan, shares deemed to be invested in Ferro Common Stock through the Deferred Compensation Plan and Supplemental 401(k) Plan, 20% of vested options that are “in-the-money” by more than 30%, and shares represented by deferred stock units granted to non-employee Directors.

 

Section 162(m) Limitation

 

Section 162(m) of the Internal Revenue Code generally provides that certain compensation in excess of $1.0 million per year paid to a company’s chief executive officer and any of its three highest paid executive officers is not deductible by a company unless the compensation qualifies for an exception. Section 162(m) provides an exception for performance-based compensation if certain procedural requirements, including shareholder approval of the material terms of the performance goals, are satisfied. The LTIP contains the provisions necessary to qualify certain awards under the LTIP under the Section 162(m) exception and preserve the tax deductibility to the Company of compensation paid to executives under these plans in the future.

 

 

 

 

Compensation Policies and Practices as Related to Risk Management

 

The Compensation Committee and management do not believe that Ferro maintains compensation policies or practices that are reasonably likely to have a material adverse effect on Ferro. As part of a larger enterprise risk management review, during 2010 Ferro reviewed its compensation policies and practices with respect to executive and non-executive employees to ensure that Ferro’s compensation program continues to align the interests of Ferro’s employees with those of Ferro’s shareholders and does not create any unnecessary or excessive risk. In addition, the Compensation Committee annually analyzes Ferro’s compensation program when establishing executive compensation to ensure that they do not encourage unnecessary or excessive risk-taking and determined that the compensation policies or practices are not reasonably likely to have a material adverse effect on Ferro.

 

Compensation Committee Interlocks and Insider Participation

 

During 2010, no officer or employee of Ferro served as a member of the Compensation Committee. Also, during 2010, there were no interlocking relationships (as described in Item 407(e)(4) of SEC Regulation S-K) between members of the Compensation Committee and Ferro.

Plans Described in This Proxy Statement

 

 

2010 EXECUTIVE COMPENSATION

 

The following table shows the elements of compensation paid or earned during 2010, 2009 and 2008 to the Chief Executive Officer and the Chief Financial Officer and to the Company’s other three highest-paid executive officers as of December 31, 2010:

 

Summary Compensation Table

 

 

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth information regarding 2010 awards under the AIP and under the LTIP, i.e., awards of performance shares, restricted shares and stock options to each of the executives named in the Summary Compensation Table:

 

Grants of Plan-Based Awards

 

 

 

Outstanding Equity Awards, Option Exercises and Vesting of Stock Awards

 

The following table sets forth information with respect to each of the executives named in the Summary Compensation Table regarding vested and unvested options and stock awards held as of December 31, 2010:

 

Outstanding Equity Awards