UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934 (Amendment No.     )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Section 240.14a-12

 

HARRIS INTERACTIVE INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161 Sixth Avenue

New York, New York 10013

 

 

September 13, 2010

 

Dear Stockholder:

 

You are cordially invited to attend the 2010 Annual Meeting of Stockholders of Harris Interactive Inc., which will be held on Tuesday, October 26, 2010, at 161 Sixth Avenue (at Spring Street), Sixth Floor, New York, New York at 5:30 p.m. (local time).

 

At the Annual Meeting you will be asked to elect two directors to our Board of Directors and ratify the selection of our independent registered public accounting firm.

 

On the following pages, you will find the formal Notice of Annual Meeting and our Proxy Statement. Included with our Proxy Statement is a copy of our Annual Report on Form 10-K for our fiscal year ended June 30, 2010. We encourage you to read the Proxy Statement as well as our Form 10-K. These documents will provide you with information about our management, operations, markets, and services, as well as our audited financial statements.

 

Whether or not you plan to attend the Annual Meeting, please register your vote as soon as possible to ensure that your shares of Harris Interactive common stock will be represented at the Annual Meeting. We encourage you to take advantage of the option to vote by telephone or the Internet. If you prefer, you may complete, sign, date and return the accompanying proxy card in the enclosed postage paid envelope.

 

We hope that many of you will be able to attend the Annual Meeting in person. We look forward to seeing you there.

 

Sincerely,

 

Kimberly Till

President and Chief Executive Officer

 

Howard L. Shecter

Chairman

 

161 Sixth Avenue

New York, New York 10013

 

Notice of Annual Meeting of Stockholders to Be Held October 26, 2010

 

To Our Stockholders:

 

You are cordially invited to attend the 2010 Annual Meeting of Stockholders of Harris Interactive Inc., which will be held at 161 Sixth Avenue (at Spring Street), Sixth Floor, New York, New York at 5:30 p.m. (local time), for the following purposes:

 

1. To elect two (2) Class II directors to the Board of Directors to hold office for a three year term;

 

2. To ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for fiscal 2011; and

 

3. To act upon such other business as may properly come before the meeting or any adjournment thereof.

 

A copy of our Annual Report on Form 10-K for our fiscal year ended June 30, 2010 is enclosed with this Notice of Annual Meeting and attached Proxy Statement. For ten days prior to the meeting, a complete list of the stockholders entitled to vote at the Annual Meeting will be available for examination by any stockholder of record for any purpose germane to the Annual Meeting during ordinary business hours at our offices at 161 Sixth Avenue, New York, New York 10013. The list also will be available at the Annual Meeting.

 

By Order of the Board of Directors,

 

Marc H. Levin

Executive Vice President, General Counsel,
and Corporate Secretary

 

September 13, 2010

New York, New York

 

IMPORTANT: To assure that your shares are represented at the Annual Meeting, you must complete your proxy as soon as possible. You may vote your shares by telephone at 1-800-690-6903 or via the Internet at www.proxyvote.com by following the enclosed instruction form. If you prefer, you may fill in, date, sign and promptly mail the enclosed proxy card in the accompanying postage paid envelope. If you attend the Annual Meeting, you may choose to vote in person even if you have previously sent in your proxy card.

 

Stockholders should read the entire Proxy Statement carefully prior to returning their proxies.

 

TABLE OF CONTENTS

 

 

161 Sixth Avenue
New York, New York 10013

 

PROXY STATEMENT

September 13, 2010

 

FOR ANNUAL MEETING OF STOCKHOLDERS OF HARRIS INTERACTIVE INC.
To Be Held October 26, 2010

 

The accompanying proxy is solicited by the Board of Directors (the “Board”) of Harris Interactive Inc. (“Harris Interactive,” the “Company,” “we,” or “us”) for use at the 2010 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Tuesday, October 26, 2010, at 5:30 p.m. (local time) or any adjournment thereof, for the purposes set forth in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at 161 Sixth Avenue (at Spring Street), Sixth Floor, New York, New York. The date of this Proxy Statement is September 13, 2010. The approximate date on which this Proxy Statement and the accompanying form of proxy were first sent or given to stockholders is September 20, 2010.

 

Record Date; Voting Securities

 

Only stockholders of record at the close of business on September 1, 2010 are entitled to vote their shares of Harris Interactive common stock at the Annual Meeting and any adjournment thereof. As of September 1, 2010, there were 54,465,449 shares of Harris Interactive common stock issued and outstanding. Each holder of shares of common stock is entitled to one vote for each share of common stock held. Stockholders may vote in person or by proxy.

 

Voting Your Proxy

 

To ensure that your vote is recorded promptly, please vote as soon as possible, even if you intend to attend the Annual Meeting in person. You may grant a proxy to vote your shares via the Internet, telephone, or mail as more fully described below:

 

 

If you properly submit a proxy without giving specific voting instructions, your shares will be voted in accordance with the recommendations of the Board FOR:

 

 

If any other business properly comes before the stockholders for a vote at the Annual Meeting, your shares will be voted by the proxy holders in accordance with the recommendation of the Board, or, in the absence of any such recommendation, in accordance with their best judgment. Such persons also have discretionary authority to vote to adjourn the Annual Meeting.

 

Revoking Your Proxy

 

You may revoke your proxy at any time before it is exercised by:

 

 

Quorum

 

A majority of the shares of Harris Interactive common stock entitled to vote must be present either in person or by proxy at the Annual Meeting before any business may be conducted.

 

Tabulation of Abstentions and Broker Non-Votes

 

Abstentions and broker non-votes will be included in the number of shares present for purposes of determining whether a quorum is present at the Annual Meeting. Abstentions also will be counted as shares “present” and “entitled to vote”. A broker non-vote occurs when a broker has not received voting instructions from the beneficial owner of the shares and the broker does not have the authority to vote the shares because the proposal is non-routine. Broker non-votes are not counted as shares “entitled to vote” with respect to proposals over which they do not have discretionary authority. Therefore, while broker non-votes are considered “present” for purposes of determining whether there is a quorum, they are not considered “present” for purposes of determining the majority of shares at the meeting and entitled to vote on a particular action.

 

Shares Held in Street Name

 

If your shares are held in a brokerage account or by another nominee, you are considered the “beneficial owner” of those shares. As the beneficial owner, you have the right to direct your broker or nominee how to vote your shares, and your broker or nominee is required to vote your shares in accordance with your instructions. If you do not give instructions to your broker or nominee, then your broker or nominee will be entitled to vote your shares in its discretion as to the election of directors (Proposal 1) and ratification of the selection of our independent registered public accounting firm (Proposal 2).

 

As the beneficial owner of shares, you are invited to attend the Annual Meeting. Please note, however, that if you are a beneficial owner, you may not vote your shares in person at the Annual Meeting unless you obtain a “legal proxy” from your broker or nominee that holds your shares.

Electronic Delivery

 

We can reduce our expenses if you elect to receive your annual reports and proxy materials via the Internet. If you request, you can receive email notifications when these documents are available electronically on the Internet. You may sign up for this service at www.proxyvote.com.

 

Copies of our Annual Report on Form 10-K and our proxy materials can be accessed via the Internet at https://materials.proxyvote.com/414549.

 

Householding

 

Unless we have received contrary instructions, we send a single copy of the annual report, proxy statement, notice of annual or special meeting, or notice of Internet availability of proxy materials to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card. This process, known as “householding,” reduces the volume of duplicate information received at your household and helps us reduce our expense. We will deliver promptly, upon written or oral request, a separate copy of the annual report, proxy statement, notice of annual or special meeting, or notice of Internet availability of proxy materials to any stockholder sharing an address to which a single copy of the documents was delivered. You may request such separate copies, or request that separate copies of the annual report, proxy statement, notice of annual or special meeting, or notice of Internet availability of proxy materials be delivered in the future, by (i) sending written notice to: Harris Interactive Inc., Attention: Corporate Secretary, 161 Sixth Avenue, New York, New York 10013, (ii) sending written notice to Broadridge Financial Solutions, Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or (iii) calling (800) 542-1061. Stockholders sharing an address can request delivery of a single copy of the annual report, proxy statement, notice of annual or special meeting, or notice of Internet availability of proxy materials if they are receiving multiple copies by notice to the same address or calling the same telephone number.

 

Solicitation of Proxies

 

Harris Interactive will bear all costs of this proxy solicitation. In addition to soliciting stockholders by mail and through its regular employees, Harris Interactive will request banks and brokers, other custodians, nominees, and fiduciaries to solicit their customers who have shares of Harris Interactive common stock registered in their names and will reimburse them for their reasonable, out-of-pocket costs. Harris Interactive may use the services of its officers, directors and others to solicit proxies, personally or by telephone, facsimile or electronic mail, without additional compensation.

 

The following table sets forth information regarding the beneficial ownership of Harris Interactive common stock as of September 3, 2010 by each person who, or entity that, is known by the Company to own beneficially more than 5% of the outstanding shares of the Company’s common stock. This table is based on information provided to us or filed with the Securities and Exchange Commission (“SEC”) by our principal stockholders.

 

 

 

 

The following table sets forth information regarding the beneficial ownership of Harris Interactive common stock as of September 3, 2010 by (i) each director and director-nominee, (ii) the Chief Executive Officer, Chief Financial Officer, and each other executive officer named in the “Summary Compensation Table” below, and (iii) all directors and executive officers as a group. All shares are subject to the named person’s sole voting and investment power except where otherwise indicated. This table is based on information provided to us or filed with the SEC by our directors, director-nominees and executive officers.

 

 

 

 

The following table provides information as of June 30, 2010 with respect to shares of common stock that may be issued under the terms of the Company’s equity compensation plans, including the Company’s Long-Term Incentive Plan, adopted in 1999, as amended (the “1999 Incentive Plan”), the Company’s 2007 Long-Term Incentive Plan, adopted in 2007 (the “2007 Incentive Plan,” and together with the 1999 Incentive Plan, the “Incentive Plans”), the Company’s Employee Stock Purchase Plan, adopted in 1999, as amended (the “1999 ESPP”), and the Company’s 2007 Employee Stock Purchase Plan, adopted in 2007, as amended (the “2007 ESPP,” and together with the 1999 ESPP, the “ESPPs”):

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), and related SEC regulations, require the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership of those securities with the SEC, and to furnish the Company with copies of all Section 16(a) reports they file. Based solely on our review of the copies of these reports received by us and representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that all such filing requirements were complied with during the fiscal year ended June 30, 2010.

 

The current members of the Board and each of its standing Committees are set forth in the following table. The standing Committees of the Board include an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee.

 

 

 

 

 

The Board has adopted Corporate Governance Guidelines (the “Governance Guidelines”), which are posted at the “Investor Relations” — “Corporate Governance” — “Corporate Governance Guidelines” section of the Company’s website located at www.harrisinteractive.com. The Governance Guidelines require that independent directors constitute a substantial majority of the Board, and that all members of the Audit, Compensation, and Nominating and Governance Committees be independent. The Governance Guidelines provide that a director is independent when the director is free from any relationship that

would interfere with his or her exercise of independent business judgment, and who is “independent” under the standards for independence of the Nasdaq Stock Exchange and applicable law.

 

The Nominating and Governance Committee, based upon its review of responses to questionnaires inquiring about transactions, relationships and arrangements of directors and family members with the Company, recommended to the Board, and the Board determined, that six of the seven directors currently serving are independent under the Governance Guidelines and as defined under Nasdaq Rule 5605(a)(2). Directors found to be independent are designated as such in the “Directors and Committee Membership” table above.

 

All members of the Audit, Compensation, and Nominating and Governance Committees are among the directors found by the Board to be independent. In addition, the requirements for independence contained in Nasdaq Rule 5605(c)(2) require that members of the Audit Committee meet the criteria for independence set forth in Rule 10A-3(b)(1) promulgated by the SEC. The Board has determined that all members of the Audit Committee meet these criteria. The Board also has found that all members of the Compensation Committee fall within the “outside director” standard for purposes of Rule 162(m) of the Internal Revenue Code of 1986, as amended (the “IRC”).

 

Each of the nominees for election at the 2010 Annual Meeting is independent.

 

The Board held a total of ten meetings during the fiscal year ended June 30, 2010, and took five actions by written consent. The independent directors, identified above, met separately in executive session in accordance with Nasdaq Rule 5605(b)(2) five times during fiscal 2010. The number of meetings held by each Committee is identified in the “Directors and Committee Membership” table above. During the fiscal year ended June 30, 2010 all directors attended at least 75% of the aggregate of: (i) the total number of meetings of the Board of Directors (held during the periods for which they respectively served as a director) and (ii) the total number of meetings held by all Committees of the Board on which they served (held during the periods that they respectively served).

 

The Board of Directors has adopted a policy requiring that directors attend each annual meeting of stockholders absent compelling circumstances preventing such attendance. All directors standing for election or continuing, and then serving, attended the 2009 Annual Meeting of Stockholders.

 

Membership

 

The current members of the Audit Committee are identified in the “Directors and Committee Membership” table above. The Board of Directors has determined that each member of the Audit Committee is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.

 

Scope and Authority

 

The Audit Committee of the Board of Directors (a) monitors the integrity of the accounting policies, financial reporting, and disclosure practices of the Company, (b) reviews the results of the Company’s quarterly and annual financial statements and annual audit and recommends to the Board approval of their inclusion in the Company’s quarterly and annual reports, (c) appoints and monitors the independence and performance of the Company’s independent registered public accounting firm, (d) approves the compensation of the independent registered public accounting firm and approves in advance all permitted non-audit services to be provided by the Company’s independent registered public accounting firm, (e) meets with the Company’s independent registered public accounting firm to review the Company’s critical

accounting policies, internal controls, and financial management practices, (f) monitors the processes established and maintained by management in order for management to assure that an adequate system of internal accounting and financial control is functioning within the Company, (g) monitors the processes established by management in order for management to assure corporate compliance with legal and regulatory requirements, and (h) monitors the processes established and maintained by management for measuring, managing, and monitoring areas of enterprise risk designated by the Board. This Committee also receives, reviews, and takes action with respect to any complaints received by the Company regarding accounting, internal accounting controls, and auditing matters.

 

Audit Committee Charter

 

The Audit Committee operates under a written charter adopted by the Board. A copy of the Company’s Audit Committee Charter is available at the “Investor Relations” — “Corporate Governance” — “Audit Committee Charter” section of the Company’s website located at www.harrisinteractive.com. In April 2010, the Audit Committee conducted a review of its compliance with the Audit Committee Charter and determined that it has operated in compliance with the Charter’s provisions.

 

Audit Committee’s Role in Connection with the Financial Statements and Controls of the Company

 

Management of the Company has primary responsibility for the Company’s financial statements and internal control over financial reporting. The Company’s independent registered public accounting firm has responsibility for the audit of the Company’s financial statements. The responsibility of the Audit Committee is to oversee financial and control matters, among its other duties as specified in the Audit Committee Charter. The Audit Committee is responsible for retention and approval of compensation of the independent registered public accounting firm, and pre-approval of the permitted non-audit services to be provided by such firm. The Audit Committee meets regularly with the independent registered public accounting firm, without the presence of management, to ensure candid and constructive discussions about the Company’s compliance with accounting standards and best practices among public companies comparable in size and scope to Harris Interactive. The Audit Committee also reviews with management and the independent registered public accounting firm material developments in accounting that may be pertinent to the Company’s financial reporting practices.

 

Conduct of Audit Committee Meetings

 

The Audit Committee met with representatives of PricewaterhouseCoopers, LLP (“PwC”), the Company’s independent registered public accounting firm, at each of its quarterly meetings during the fiscal year ended June 30, 2010. The Audit Committee’s agenda for each meeting was established by its chairperson and the Company’s Chief Financial Officer at the time. The meetings were designed to facilitate and encourage communication among members of the Audit Committee and management.

 

At each meeting, the Audit Committee reviewed and discussed various financial and regulatory issues, and received a summary of any complaints received through the Company’s anonymous complaint procedure with respect to internal accounting controls or auditing matters. The Audit Committee, from time to time, reviewed and discussed reports regarding internal audit matters, reviewed policies and procedures, including among others the Company’s Internal Disclosure Controls Procedures and the Policy and Procedures With Respect to Related Party Transactions. The Audit Committee also periodically held separate executive sessions with representatives of PwC, representatives of Ernst & Young, which provides internal audit services to the Company, the Company’s Chief Financial Officer, the Company’s General Counsel, and the Company’s principal outside corporate legal counsel. Executive sessions included candid discussions of financial management, accounting, internal controls, and legal and compliance issues. Additionally, the Audit Committee’s chairperson periodically held separate discussions with representatives of PwC and Ernst & Young, and the Company’s Chief Financial Officer, General Counsel, and principal outside corporate legal counsel.

Audit Committee Review of Periodic Reports

 

The Audit Committee reviews each of the Company’s quarterly and annual reports, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained therein. As part of this review, the Audit Committee discusses the reports with the Company’s management and considers the required communications prepared by the independent registered public accounting firm about the Company’s quarterly and annual reports. The Audit Committee also considers related matters such as the quality and appropriateness, not just the acceptability, of the Company’s accounting principles, alternative methods of accounting under U.S. generally accepted accounting principles (“GAAP”) and the preferences of the independent registered public accounting firm in this regard, the Company’s critical accounting policies, and the clarity and completeness of the Company’s financial and other disclosures.

 

Audit Committee’s Role in Connection with the Company’s Report on Internal Controls

 

The Audit Committee reviewed management’s report on internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and related rules. As part of this review, the Audit Committee reviewed the basis for management’s conclusions in that report. Throughout fiscal 2010, the Audit Committee reviewed the results of management’s plan for documenting and testing controls, any deficiencies discovered, and the resulting remediation of any such deficiencies.

 

Review and Discussions with Independent Registered Public Accounting Firm

 

In its meetings with representatives of PwC, the Audit Committee asked the independent registered public accounting firm to address and discuss their responses to several questions that the Audit Committee believed were particularly relevant to its oversight. These questions included:

 

 

The Audit Committee also has discussed with PwC that PwC is retained by the Audit Committee and therefore, must raise any concerns about the Company’s financial reporting and procedures directly with the Audit Committee. Based on these discussions, its discussions with management, and its review of applicable periodic reports and financial statements, the Audit Committee believes it has a reasonable basis for its oversight judgments and for recommending that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

 

Membership

 

The current members of the Compensation Committee are identified in the “Directors and Committee Membership” table above.

Scope and Authority

 

The Compensation Committee (a) reviews and recommends compensation and benefits of the Chief Executive Officer for approval by the independent directors of the Company, (b) reviews and approves compensation and benefits for all other executive officers of the Company, and (c) establishes and reviews general policies relating to compensation and benefits for the Company’s employees. The Compensation Committee also recommends, for approval by the Board of Directors, compensation of non-employee directors. The Compensation Committee reviews and approves the incentive cash bonus plans of the Company and grants under the Incentive Plans.

 

Charter

 

The Compensation Committee has adopted a written charter, a copy of which is posted at the “Investor Relations” — “Corporate Governance” — “Compensation Committee Charter” section of the Company’s website located at www.harrisinteractive.com.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee during fiscal 2010 (identified in the “Directors and Committee Membership” table above) is or has been an officer or employee of Harris Interactive or any of its subsidiaries. No interlocking relationship, as described in SEC Regulation S-K Item 407(e)(4), existed during the last completed fiscal year between the Company’s Board or Compensation Committee and the board of directors or compensation committee of any other company.

 

Procedures for Determination of Compensation

 

The Compensation Committee oversees the design, development and implementation of the compensation for the Company’s non-employee directors, Chief Executive Officer, and other executive officers.

 

For directors, from time to time, the Company’s Human Resources department gathers data regarding peer group compensation. The most recent peer group comparison was done in fiscal 2007 for a peer group consisting of Arbitron, Inc., Digitas, Forrester Research, Inc., Greenfield Online, Inc., National Research Corporation, Net Ratings, Inc., and Opinion Research Corporation. The Compensation Committee reviews the peer group data, information from other sources such as the annual director compensation survey published by the National Association of Corporate Directors, the Company’s financial performance, and the scope of activity of the Board and its respective Committees and, based upon that review, the Compensation Committee recommends cash and equity compensation for directors to the full Board for final approval.

 

The process used for determination of compensation for the Company’s executive officers, including the CEO, is described below in “Compensation Discussion and Analysis — Role of Compensation Committee and CEO; Procedures for Determination of Compensation”.

 

Role of Compensation Consultants

 

The role of consultants in the determination of compensation is discussed below in “Compensation Discussion and Analysis — Role of Compensation Consultants”.

 

Membership

 

The current members of the Nominating and Governance Committee are identified in the “Directors and Committee Membership” table above.

Scope and Authority

 

The Nominating and Governance Committee (a) makes recommendations to the Board of Directors regarding the overall structure, size and composition of the Board, (b) selects director nominees for approval at the annual meeting of the Company’s stockholders, (c) makes recommendations to the Board of Directors regarding Committees of the Board and membership on those Committees, (d) oversees matters related to succession planning for the office of the Chief Executive Officer, and (e) oversees matters related to the governance of the Company.

 

Charter

 

The Nominating and Governance Committee has adopted a written charter, a copy of which is posted at the “Investor Relations” — “Corporate Governance” — “Nominating and Governance Committee Charter” section of the Company’s website located at www.harrisinteractive.com.

 

Director Nomination Process

 

The Nominating and Governance Committee believes that any nominee recommended by the Committee for a position on the Company’s Board of Directors must have personal character and integrity, must have sound judgment, must be willing to commit the time required for Board service, must have a commitment to representing the interests of all of the Company’s stockholders, must have experience relevant to the Company in one or more fields, and must have knowledge of corporate governance issues and practices. In considering candidates for the Board of Directors, the Nominating and Governance Committee requires that independent directors, as defined under Nasdaq Rule 5605(a)(2), comprise a substantial majority of the Board. The Committee also requires that at least three of such independent directors must qualify as independent under SEC Rule 10A-3(b)(1) and also satisfy the financial literacy requirements for Audit Committee membership, and that at least one such member of the Audit Committee be a “financial expert” as defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.

 

The Nominating and Governance Committee further believes that one or more, but not necessarily all, of the members of the Board of Directors should have:

 

 

Consistent with these criteria for potential director candidates, the Board values diversity of talents, skills, abilities, and experiences and believes that the diversity that exists on the Board provides significant benefits to the Company. Although there is no specific diversity policy, the Nominating and Governance Committee also may consider the diversity of its members and potential candidates in selecting new directors.

 

Procedures used by the Nominating and Governance Committee in identifying and evaluating candidates for election to the Company’s Board of Directors are posted at the “Investor Relations” — “Corporate Governance” — “Nominating and Governance Committee Nominating Procedures” section of the Company’s website located at www.harrisinteractive.com. The Committee believes that the continuing

service of qualified incumbents promotes stability and continuity in the boardroom, contributing to the Board’s ability to work as a collective body, while giving the Company the benefit of the familiarity and insight into the Company’s affairs that its directors have accumulated during their tenure. Accordingly, the process of the Committee for identifying nominees reflects the Committee’s practice of re-nominating incumbent directors who continue to satisfy the Committee’s criteria for membership on the Board, who the Committee believes continue to make important contributions to the Board, and who consent to continue their service on the Board. Consistent with this policy, in considering candidates for election at annual meetings of stockholders, the Committee will first determine the incumbent directors whose terms expire at the upcoming meeting and who wish to continue their service on the Board. The Committee will evaluate the qualifications and performance of the incumbent directors who desire to continue their service. In particular, as to each such incumbent director, the Committee will:

 

 

The Committee will, absent special circumstances, propose the incumbent director for re-election if the incumbent consents to re-nomination and the Committee determines that the incumbent continues to be qualified, has satisfactorily performed his or her duties as director during the preceding term, and there exist no reasons, including considerations relating to the composition and functional needs of the Board as a whole, why in the Committee’s view the incumbent should not be re-nominated.

 

The Committee will identify and evaluate new candidates for election to the Board where there is no qualified and available incumbent, including for the purpose of filling vacancies arising by reason of the resignation, retirement, removal, death, or disability of an incumbent director, or if the directors decide to expand the size of the Board. The Committee will solicit recommendations for nominees from persons whom the Committee believes are likely to be familiar with qualified candidates. These persons may include members of the Board and management of the Company. The Committee also may determine to engage a professional search firm to assist in identifying qualified candidates. As to each recommended candidate that the Committee believes merits consideration, the Committee will:

 

 

The Committee may, in its discretion, solicit the views of the Chief Executive Officer, other members of the Company’s senior management, and other members of the Board regarding the qualifications and suitability of candidates to be nominated as directors. In addition, in its discretion, the Committee may designate one or more of its members to interview any proposed candidate. Based on all available information and relevant considerations, the Committee will select a candidate who, in the view of the Committee, is most suited for membership on the Board.

 

During fiscal 2010, the Company did not pay any fee to a third party to identify, evaluate, or assist with the identification or evaluation of director nominees.

 

In making its selection, the Committee will evaluate candidates proposed by stockholders under criteria similar to the evaluation of other candidates, including among others the candidate’s agreement to comply with the Company’s Code of Ethics and the Company’s policies related to trading in the Company’s securities, director ownership of Company stock, and majority vote for directors. The Committee may consider, as one of the factors in its evaluation of stockholder recommended nominees, the size and duration of the interest of the recommending stockholder or stockholder group in the equity of the Company. The Committee also may consider the extent to which the recommending stockholder intends to continue holding its equity interest in the Company, including, in the case of nominees recommended for election at an annual meeting of stockholders, whether the recommending stockholder intends to continue holding its equity interest at least through the time of such annual meeting.

 

Nominees for Election at the Annual Meeting

 

The Nominating and Governance Committee has nominated and recommended Howard L. Shecter and Antoine G. Treuille for election to the Board by the stockholders at the Annual Meeting.

 

Candidates Recommended by Stockholders

 

Stockholders may recommend qualified director candidates for consideration by the Nominating and Governance Committee using procedures posted at the “Investor Relations” — “Corporate Governance” — “Submissions by Security Holders of Nominations for the Board of Directors” section of the Company’s website located at www.harrisinteractive.com. The procedures generally require that the recommendation be submitted in writing by mail, courier, or personal delivery, addressed to: Chairman of the Nominating and Governance Committee of the Board of Directors, c/o Corporate Secretary, Harris Interactive Inc., 161 Sixth Avenue, New York, New York 10013. The envelope should indicate that it contains a stockholder recommendation for director nomination. Submissions should be as required by the procedures and in general must include:

 

 

 

Nominating recommendations for an annual meeting of stockholders must be received by the Company at least 90 calendar days prior to the first anniversary of the date of the proxy statement for the prior annual meeting of stockholders. The Nominating and Governance Committee will review and evaluate each candidate whom it believes merits serious consideration using the Nominating and Governance Committee Nominating Procedures described above.

 

In addition to recommending candidates to the Nominating and Governance Committee, a stockholder may directly nominate a director by giving written notice in proper written form to the Corporate Secretary pursuant to the Bylaws of the Company, which are posted at the “Investor Relations” — “Corporate Governance” — “Bylaws” section of the Company’s website located at www.harrisinteractive.com. To be timely, a stockholder’s notice to the Corporate Secretary must be delivered to or mailed and received at the principal executive offices of the Company not less than 90 calendar days nor more than 120 calendar days before the first anniversary of the date of the proxy statement for the prior annual meeting of stockholders. To be in proper written form, a stockholder’s notice to the Corporate Secretary must set forth as to each person whom the stockholder proposes to nominate for election as a director:

 

 

In addition, the notice must set forth as to the stockholder giving the notice:

 

 

Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

 

The Company’s policy is to facilitate communications between stockholders and other interested parties and the Board of Directors. Stockholders wishing to communicate with the Company’s Board of Directors should follow the detailed procedures posted at the “Investor Relations” — “Corporate Governance” — “Procedure for Stockholder Communications with the Board of Directors” section of the Company’s website located at www.harrisinteractive.com. The procedures, as detailed on the website, provide for communications to be in writing and mailed to the Board of Directors, Harris Interactive Inc., c/o Corporate Secretary, 161 Sixth Avenue, New York, New York 10013. The Board of Directors has adopted a separate procedure for communications regarding accounting, auditing, and financial reporting matters, which may be found at the “Investor Relations” — “Corporate Governance” — “Complaint Procedure for Accounting, Auditing, and Financial Reporting Matters” section of the Company’s website located at www.harrisinteractive.com.

 

Board Leadership Structure

 

The Board of Directors believes that the segregation of the roles of Board Chairman and the Chief Executive Officer ensures better overall governance of the Company and provides meaningful checks and balances regarding its overall performance. This structure allows our President and Chief Executive Officer to focus on developing and implementing the Company’s business plans and supervising the Company’s day-to-day business operations, and allows our Chairman to lead the Board in its oversight and advisory roles. Because of the many responsibilities of the Board and the significant time and effort required by each of the Chairman and the Chief Executive Officer to perform their respective duties, the Company believes that having separate persons in these roles enhances the ability of each to discharge those duties effectively and, as a corollary, enhances the Company’s prospects for success. The Board also believes that having separate positions provides a clear delineation of responsibilities for each position and fosters greater accountability of management. For the foregoing reasons, the Board of Directors has determined that its leadership structure is appropriate and in the best interests of the Company’s stockholders.

 

Board’s Role in Risk Oversight

 

The full Board oversees an enterprise-wide approach to risk management, designed to support the achievement of the Company’s strategic plans and objectives, improve long-term organizational performance, and enhance stockholder value. It is management’s responsibility to manage risks and bring to the Board’s attention material risks facing the Company.

 

The Board has overall responsibility for the oversight of the Company’s risk management process. The Board’s oversight responsibility includes monitoring the steps management is taking to manage material risks, and assessing management’s appetite for risk in the context of the Company’s operations and strategy. The Board carries out its oversight responsibility directly and through the delegation to its Committees of responsibilities related to the oversight of certain risks, as follows:

 

 

On a regular basis, the Board and its Committees receive information and reports from management on material risks that the Company faces and how the Company is seeking to control the risks if and when appropriate, and each Committee makes periodic reports regarding risk oversight in its area of responsibility to the full Board.

 

In September 2006, the Board adopted the Governance Guidelines. The Governance Guidelines generally describe the respective roles and responsibilities of the Board of Directors and management, and the expectations of individual directors. The Governance Guidelines, among other matters:

 

 

In addition, the Governance Guidelines establish a majority vote standard for directors, as described below.

 

The Board of Directors has adopted the following policy providing for resignation of a director upon receipt of a greater number of “Withhold” votes than “For” votes in an election of directors.

 

In an uncontested election of directors (i.e., an election where the only nominees are those recommended by the Board of Directors), any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election will promptly tender his or her resignation to the Chairman of the Board following certification of the stockholder vote.

 

The Nominating and Governance Committee of the Board of Directors will promptly consider the resignation submitted by a director receiving a greater number of votes “withheld” than votes “for” his or her

election, and will recommend to the Board of Directors whether to accept or reject the tendered resignation. In making its recommendation, the Nominating and Governance Committee may consider any factors or other information that it considers appropriate and relevant, including without limitation, any known stated reasons why stockholders “withheld” votes for election from such director, the length of service and qualifications of the director, the director’s contributions to the Company, and this policy. The Board of Directors will act to accept or reject the tendered resignation, taking into account the Nominating and Governance Committee’s recommendation and any other information and factors it deems relevant, within 90 days after the date of certification of the election results. Promptly after making its decision, the Board of Directors will publicly disclose, by a filing with the SEC, its decision regarding the tendered resignation and the rationale behind it.

 

Any director who tenders his or her resignation pursuant to this provision will not participate in the Nominating and Governance Committee recommendation or Board consideration as to whether or not to accept the tendered resignation.

 

If one or more director resignations are accepted by the Board of Directors, the Nominating and Governance Committee will recommend to the Board of Directors whether to fill such vacancy or vacancies pursuant to the provisions of Article III, Section 5 of the Bylaws of the Company, or to reduce the size of the Board of Directors pursuant to the provisions of Article III, Section 1 of the Bylaws of the Company. If the Board of Directors determines to fill such vacancy or vacancies, the Nominating and Governance Committee will nominate a person or persons to fill such vacancy or vacancies for consideration by the Board of Directors.

 

If a director’s resignation is not accepted by the Board of Directors, such director will continue to serve until the expiration of his or her term, or his or her earlier resignation or removal.

 

The information contained in this Audit Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C promulgated by the SEC or the liabilities of Section 18 of the Securities Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act. The information contained in this Audit Committee Report shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act, except to the extent the Company specifically incorporates it by reference.

 

The Audit Committee has:

 

 

Based upon its review and discussion with management and PwC, the Company’s independent registered public accountants, the Audit Committee recommended to the Board that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 for filing with the SEC.

 

Submitted by the Audit Committee of the Board:

 

Mr. Stephen D. Harlan (Chairman)
Mr. David Brodsky
Mr. Steven L. Fingerhood
Mr. James R. Riedman
Mr. Howard L. Shecter
Mr. Antoine G. Treuille

 

The information contained in this Compensation Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C promulgated by the SEC or the liabilities of Section 18 of the Securities Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Securities Exchange Act. The information contained in this Compensation Committee Report shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act, except to the extent the Company specifically incorporates it by reference.

 

The Compensation Committee has reviewed and discussed the information set forth herein under “Corporate Governance — Committees of the Board — Compensation Committee” and “Compensation Discussion and Analysis” with the Company’s management, and, based upon such review and discussion, recommended to the Board that such information be included in this Proxy Statement.

 

Submitted by the Compensation Committee of the Board:

 

Mr. James R. Riedman (Chairman)
Mr. David Brodsky
Mr. Steven L. Fingerhood
Mr. Howard L. Shecter
Mr. Antoine G. Treuille

 

Under the direction of the Compensation Committee, the Company has designed a compensation program for its NEOs (defined below in “Compensation of Directors and Executive Officers”) intended to balance the need to provide competitive compensation with accountability for performance. The program provides:

 

 

The Company’s compensation programs are designed to deliver competitive total compensation and provide flexibility to reward performance and to adjust for evolving business conditions. Generally, the Compensation Committee does not react to short-term changes in business performance in determining the mix of compensation elements. The Committee does not rely on the formulaic achievement of financial goals in awarding compensation except in certain portions of the Company’s cash bonus plans, and in certain awards of performance-based equity incentives.

 

Consistent with the Committee’s focus on encouraging collaboration at all levels of the Company, the types of compensation and benefits provided to the NEOs are similar in most respects to those provided to the Company’s other executive officers. The Compensation Committee avoids providing significant perquisites to NEOs, and has provided only limited severance and change in control protection.

 

The Company’s compensation programs contain features to mitigate excessive risk-taking, including among others the Company’s ability to recover certain amounts received by the Company’s Chief Executive Officer in the event of accounting restatements due to material non-compliance of the Company with any financial reporting requirement, as described under “Compensation Discussion and Analysis — Management of Compensation-Related Risk”.

 

Overall Competitive Compensation Package

 

The Company’s compensation programs are designed to provide a competitive, guaranteed base salary, bonuses that reward both strong Company financial and individual performance, and equity incentives that are aligned with the long-term performance of the Company’s stock. In fiscal 2010, similar to fiscal 2009, competitive compensation was primarily driven by the need to meet market conditions in the recruitment of new executives to the management team. In future years, the Compensation Committee may more closely reference peer group benchmarks or other sources of competitive data, as it had in fiscal years immediately prior to 2009.

 

Individual factors affecting overall compensation for the Company’s NEOs include:

 

 

Mix of Types of Compensation

 

The Compensation Committee strives to achieve an appropriate mix between types of compensation in order to meet the Company’s objectives. Any apportionment goal is not applied rigidly and does not control compensation decisions. Rather, the Compensation Committee assesses an executive’s total compensation opportunities and whether the Company has provided the appropriate mix of incentives to remain competitive, take into account recent results, and motivate long-term performance. The Committee therefore balances compensation elements that provide a competitive base with those that provide pay for Company financial and individual performance and those that are aligned with long-term performance of the Company’s stock. The Compensation Committee may periodically engage outside professional firms to assist in understanding compensation levels in the broader marketplace, and will periodically assess this decision based on need and the Company’s financial situation. Additionally, although the Compensation Committee may consider peer group compensation levels as a reference point, its compensation decisions are based on the totality of all relevant facts and circumstances to be competitive in the marketplace, rather than a rigid, formulaic approach. In fiscal 2010, the Compensation Committee did not

engage the services of a compensation consultant or benchmark compensation elements against a peer group.

 

The Compensation Committee applies a different mix of base salary and cash bonus compensation to different executive officer positions, and it reviews the mix each year. Potential cash bonuses for its executive officers range from 100% of base salary for the Chief Executive Officer to 30% of base salary for the Interim Chief Financial Officer, Senior Vice President, Global Controller and Principal Accounting Officer.

 

The Compensation Committee seeks to align the interests of the Company’s NEOs with those of its stockholders by providing a significant portion of total compensation in the form of equity grants, generally through the Incentive Plans. The Committee also uses equity awards as incentives for NEOs to continue employment with the Company over the longer term, and therefore such awards generally include four-year vesting schedules. In fiscal 2010, the Compensation Committee made equity-based incentive grants to executive officers only in connection with their initial employment, assumption of additional responsibilities, and/or promotion, other than an equity-based incentive grant to Mr. Narowski for retentive purposes after taking into consideration his previous stock-based grants and the extent to which they had in-the-money value.

 

Base Salary — Remaining Competitive

 

Base salary is part of each executive’s compensation package because the Compensation Committee believes that the Company must guarantee a fixed portion of cash compensation in order to remain competitive in recruiting and retaining executives.

 

Base salaries are established by taking into account the totality of all relevant facts and circumstances, including the level of responsibility and role of the individual NEO. Although the Compensation Committee takes account of the need to be competitive in the marketplace, the experience, talent, and responsibilities of individual executives are the primary determinant of individual salaries. Adjustments are made on a subjective basis taking into account the executive’s performance. The Compensation Committee reviews base salaries annually, and in the interim if an NEO’s position or responsibilities change. Salaries are not automatically increased on an annual basis if the Committee believes that a raise is not warranted by either individual or Company performance, or that other forms of compensation are more appropriate to further stated objectives.

 

In November 2009, Mr. Salvoni, then Managing Director for Europe, was given management responsibilities for the Company’s Asia operations and his base salary was increased commensurately from 160,000 GBP to 172,165 GBP, effective November 1, 2009. Additionally, the Compensation Committee approved a monthly bonus of 2,000 GBP in March 2010, with retroactive effect to November 2009, for Mr. Salvoni in recognition of the significant time and effort expended by him in working to improve the financial performance of the Company’s Asia operations. Mr. Salvoni received the monthly bonus for the last time in March 2010. In March 2010, Mr. Salvoni was promoted to President, International, at which time he also assumed management responsibilities for the Company’s Canadian operations and his base salary was increased commensurately from 172,165 GBP to 195,000 GBP, effective April 1, 2010. In October 2009, the Compensation Committee reviewed the base salary of Mr. Narowski and increased it from $174,300 to $183,000, effective October 27, 2009, in order to better reflect his responsibilities at the Company. Also, in December 2009, the Compensation Committee approved a monthly bonus of $3,000 for Mr. Narowski in recognition of his service as Interim Chief Financial Officer, with retroactive effect to the date he was appointed to the role, November 20, 2009. Mr. Narowski will receive the monthly bonus until such time that he no longer serves as the Company’s Interim Chief Financial Officer.

 

For fiscal 2010, the Compensation Committee determined that the base salaries for Ms. Till, Dr. Terhanian, and Mr. Micali were appropriate based on their respective roles at the Company and overall Company performance. Base salaries for Messrs. Cox and Forkin were not adjusted during fiscal 2010 prior to their departure.

Cash Bonus Plans — Linking Compensation to Performance

 

The Company’s cash bonus plans are designed to directly link individual executive officer’s, including NEO’s, pay to Company, individual and, in some cases, specific business unit performance. The cash bonus plans are structured with the intent that they be equitable to stockholders.

 

The Compensation Committee establishes target bonus amounts, within contractual requirements related to minimum targets for certain NEOs, on a subjective basis after a review of recommendations made by management, the number of participants in the Company’s bonus plans, the aggregate of target bonuses under those plans as a percentage of overall Company expense, the relationship of potential bonus payments to the amount of earnings retained for the benefit of stockholders, the relative roles and responsibilities of the various officers covered by the bonus plans, the relative ability of the respective officers to impact overall Company performance, and the mix of other salary and equity incentive compensation for each covered individual. The target bonus established for each NEO is shown in a table below.

 

Under the corporate bonus plan, a fixed dollar pool is established for each fiscal year, with actual payouts increasing or decreasing based upon achievement of pre-set financial metrics. In establishing the size of the bonus pool under the corporate bonus plan in each of fiscal 2010 and 2011, the Compensation Committee determined that the aggregate target bonus pool should not exceed the net income retained for the benefit of stockholders after payment of bonuses.

 

Actual payouts under the corporate bonus plan in each fiscal year are determined through targeted levels of achievement of specified metrics and management objectives. The metrics are intended to be those most closely linked to Company performance objectives over which the Compensation Committee believes the plan participants have the most direct control.

 

The fiscal 2010 corporate bonus plan (the “2010 Bonus Plan”) was designed to establish a pool of funds of up to $4,000,000 (the “2010 Bonus Pool”) to be available for making bonus payments to the NEOs as well as certain other employees if the Company, on a consolidated basis, achieved budgeted fiscal 2010 operating income, as approved by the Board in connection with establishing the Company’s fiscal 2010 annual budget (the “2010 Financial Target”). The percentage achievement of the 2010 Financial Target (the “2010 Funding Percentage”) determined the extent to which the 2010 Bonus Plan was to be funded, as follows: the 2010 Bonus Pool was to be fully funded if the Company achieved 100% of the 2010 Financial Target, funded at reduced levels if the Company achieved 95%, 90%, 85% or 80% of the 2010 Financial Target, or not funded if the Company achieved less than 80% of the 2010 Financial Target. The Board, in its discretion, had the option of increasing the size of the 2010 Bonus Pool if the Company achieved greater than 100% of the 2010 Financial Target.

 

Individual bonuses to NEOs under the 2010 Bonus Plan were based, in the applicable percentages for each NEO described below, upon achievement of (i) the 2010 Financial Target and (ii) individual metrics established for each NEO described below. In the case of Mr. Salvoni, 50% of his bonus was contractually guaranteed for fiscal 2010.

 

Ms. Till was entitled to a bonus amount equal to (i) 64% of her target bonus amount, multiplied by the 2010 Funding Percentage, and (ii) 36% of her target bonus amount, multiplied by the 2010 Funding Percentage, based upon the Board’s evaluation of her performance, with emphasis in the Board’s discretion on individual management objectives including developing products, methodologies, client relationships, and building a strong management team.

 

Each other NEO, except for Mr. Salvoni with respect to his contractually guaranteed bonus, was entitled to a bonus amount equal to (i) 70% of the NEO’s target bonus amount, multiplied by the 2010 Funding Percentage, and (ii) 30% of the NEO’s target bonus amount, multiplied by the 2010 Funding

Percentage, based upon an evaluation by the NEO’s manager of the NEO’s level of achievement of individual management objectives described in general terms below.

 

 

 

 

No bonus was payable to the NEOs under the 2010 Bonus Plan since the Company achieved less than 80% of the 2010 Financial Target.

 

The Compensation Committee exercised its discretion to allocate $200,000 in bonus pool funds (the “Discretionary Bonus Pool”) to avoid what the Committee believed to be an unfair result to specific employees who demonstrated outstanding performance in fiscal 2010. Based upon overall Company performance, the allocation was intended to keep actual bonuses for fiscal 2010 well below target levels, but to compensate for the structure of the 2010 Bonus Plan that would have prevented the payment of any bonus to employees whose individual efforts during fiscal 2010 merited a limited cash incentive compensation payment. Dr. Terhanian and Messrs. Micali and Narowski received discretionary cash bonuses in the amount of $5,000, $5,000 and $2,500, respectively, from the Discretionary Bonus Pool, in each case in recognition of exceptional fiscal 2010 performance in their respective areas of responsibility. Additionally, under the terms of his employment agreement with the Company, Mr. Salvoni received a contractually guaranteed bonus of 32,000 GBP for fiscal 2010. For succeeding fiscal years, Mr. Salvoni’s bonus will be calculated as provided only by the then applicable corporate bonus plan. Dr. Terhanian’s and Messrs. Micali’s and Narowski’s discretionary cash bonuses, and Mr. Salvoni’s contractually guaranteed bonus are reported in the “Bonus” column of the “Summary Compensation Table” below.

 

Fiscal 2010 target bonuses for each of the NEOs as compared to actual fiscal 2010 bonus payouts were as follows:

 

 

 

 

The fiscal 2011 corporate bonus plan (the “2011 Bonus Plan”) has been designed to establish a pool of funds (the “2011 Bonus Pool”) to be available for making bonus payments to the NEOs as well as certain other employees. The funding level of the 2011 Bonus Pool is based on the Company’s performance relative to budgeted fiscal 2011 consolidated operating income, as approved by the Board in connection with establishing the Company’s fiscal 2011 annual budget (the “2011 Financial Target”). Under the 2011 Bonus Plan, 100% of the 2011 Bonus Pool will be funded if performance is equal to 159% of the 2011 Financial Target. No bonus will be payable under the 2011 Bonus Plan if performance is less than 75% of the 2011 Financial Target. Between 75% and 159% performance, a sliding scale applies. The Board, in its discretion, has the option of increasing the size of the 2011 Bonus Pool if the Company achieves greater than 159% of the 2011 Financial Target. In the case of Ms. Till, 64% of her bonus payout under the 2011 Bonus Plan is based on the Company’s performance relative to the 2011 Financial Target and 36% is based on performance against her individual management objectives, as determined by the Board, in its discretion. Ms. Till’s individual management objectives under the 2011 Bonus Plan have not been finalized by the Compensation Committee. For the other NEOs, 70% of the bonus payout under the 2011 Bonus Plan is based on the Company’s performance relative to the 2011 Financial Target and 30% is based on performance against individual management objectives, as determined by the NEO’s manager, in his or her discretion.

 

Fiscal 2011 target bonuses for each of the NEOs are as follows:

 

 

Equity Incentive Compensation — Aligning Compensation with Stockholder Value

 

Historically, the Company’s equity grants were in the form of stock options, restricted stock grants, and in limited instances, grants of restricted stock units with terms similar to those applicable to restricted stock grants, under which executives recognize value commensurate with increases in long-term stockholder value. Restricted stock provides immediate value to the NEO, but places him or her at risk for actual losses in the event that stockholder value decreases. Both stock options and restricted stock link compensation to long-term performance. Both also have a retentive effect because they vest over a period of time. Since fiscal 2008, certain stock option and restricted stock awards granted to NEOs also were more closely linked to individual performance as well as stockholder value because vesting required not only continued service but also achievement of specific performance targets identified by the Compensation Committee at the time of the grant.

 

The equity incentives provided to each individual are based upon industry competitive practices and judgments made by the Compensation Committee as to the individual’s relative position, responsibilities, and historical and expected contributions to the Company. The Committee also takes into account the individual’s existing stock ownership, previous stock-based grants, and whether previous grants have in-the-money value for retentive purposes. Primary weight is given to the individual’s relative rank and responsibilities. Initial grants designed to recruit an executive officer to join the Company have been based on negotiations with the officer, equity being forfeited by the officer from his or her former employer, and reference to the Company’s historical option grants to existing executive officers.

 

Under the Incentive Plans, stock options are granted at fair market value and generally vest over a four-year period. 25% become exercisable on the one-year anniversary of the grant date, with the remainder vesting ratably over the remaining 36 months.

The Compensation Committee awards restricted stock at the market price on the date of grant, typically with a four-year forfeiture schedule. Historically, forfeitures lapsed on the same schedule as the Committee uses for stock option vesting. Beginning with grants made during fiscal 2008, forfeitures of 25% of restricted stock awards lapse on each of the first four anniversaries following the award date.

 

From time to time, the Compensation Committee has made certain performance-based stock option and restricted stock awards to certain NEOs, based upon the Committee’s belief that performance-based awards provide additional linkage between executive compensation and longer term growth of the Company. These awards may fully vest in less than four years and generally will include performance-based vesting requirements in addition to the continued service requirement.

 

In fiscal 2010, the Compensation Committee awarded only non-qualified stock options because of the Committee’s judgment that Company stock prices were not reflective of the historic and intrinsic value of the Company, and because option awards proved to be an attractive recruitment tool in rebuilding the senior management team.

 

Under the terms of the Incentive Plans and award agreements under them, as well as agreements related to awards granted outside of the Incentive Plans to new hires, all of the equity awards granted by the Company prior to fiscal 2009 vest immediately upon a change in control of the Company. Although the Compensation Committee believes that accelerated vesting upon a change in control provides an incentive to employees to remain with the Company and recognizes that the linkage between performance and stockholder value will not be the same after the change in control, in fiscal 2009 it changed its policy with respect to accelerated vesting of equity awards, as follows:

 

 

The Compensation Committee believes that these modifications to the circumstances under which accelerated vesting will occur upon a change in control better aligns the interests of the Company and its stockholders. The Compensation Committee will continue to review its policy regarding the circumstances under which vesting will occur upon a change in control.

 

During fiscal 2010, the Compensation Committee only made the following equity-based incentive grants to NEOs, all of which were time-based stock options subject to the Company’s standard four-year vesting schedule described above: (i) Messrs. Cox and Forkin received stock options in connection with their initial employment with the Company; (ii) Mr. Narowski received stock options for retentive purposes after taking into consideration his previous stock-based grants and the extent to which they had in-the-money value; and (iii) Mr. Salvoni received stock options in recognition of his increased responsibilities. Messrs. Cox and Forkin forfeited all of their stock options when they departed the Company in fiscal 2010.

 

Other Compensation

 

Deferred Compensation Plans

 

The Company does not offer any deferred compensation plans to its executives other than the 401(k) Plan available to all employees, described below.

401(k) Plan

 

The Company maintains a 401(k) Plan for its employees, including executive officers, to encourage employees to save some percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. The 401(k) Plan permits employees to make such deferrals in a tax efficient manner. The Company may, in its discretion, match employee deferrals. Through December 31, 2008, the Company made matching contributions equal to 50% of the first 8% of compensation deferred by employees with a cap of $4,000 (subject to IRS limits and non-discrimination testing) per calendar year. In January 2009, matching contributions were discontinued as part of the Company’s overall plan to control its costs. Although the Company did not resume matching contributions during fiscal 2010, it may, in its discretion, elect to resume matching employee deferrals in the future.

 

Perquisites and Other Benefits

 

Incidental to their employment by, and the nature of their duties to, the Company, the NEOs receive some compensation in the forms of perquisites and personal benefits. The most common forms of perquisites provided by the Company to its NEOs are additional life insurance and reimbursement of attorney’s fees in connection with negotiation of employment agreements, the cost of which is disclosed in the footnotes to the “Summary Compensation Table” below. The material perquisites and personal benefits received by the NEOs in fiscal 2010 are described under “Employment Agreements with Named Executive Officers” below and are included in the “Summary Compensation Table” below. For fiscal 2010, of the NEOs, only Mr. Salvoni and Dr. Terhanian received total perquisites that exceeded $10,000.

 

Post-Termination Compensation

 

The Company has entered into employment agreements with certain of its executives, including each of the NEOs other than Messrs. Micali and Forkin, who each entered into a letter agreement with the Company, and Mr. Narowski, who entered into a change in control agreement with the Company. With respect to the currently employed NEOs, certain of their employment agreements, Mr. Micali’s letter agreement, and Mr. Narowski’s change in control agreement provide for severance payments, described below under “Potential Payments Upon Termination or Change in Control”, if the executive’s employment terminates without cause or, in some cases, for good reason, including such a termination in connection with a change in control of the Company. Also, Dr. Terhanian’s employment agreement provides for severance if his employment agreement is not renewed by the Company at the end of each annual term. In addition, if there is a change in control, certain of the NEOs may be entitled to full acceleration of their equity based compensation while certain of the others are entitled to full acceleration of their equity based compensation, as described above under “Equity Incentive Compensation — Aligning Compensation with Stockholder Value”.

 

The Compensation Committee believes that these arrangements are important as a recruitment and retention device, as most of the companies with which the Company competes for executive talent have similar agreements in place for their executives. In addition, to the extent that these arrangements apply to a change in control of the Company, they help alleviate any concern NEOs might have regarding their own continued employment following a change in control, and also help incentivize the NEOs to remain with the Company to assist in any change in control transaction the Board determines is appropriate to pursue. The Committee balances protection of its executives upon a change in control with protection of the Company by making severance payments available only if the executive is actually terminated without cause or leaves for good reason after the change in control, and in the case of Ms. Till, or in contemplation of it (a so-called “double trigger” precondition).

 

The Company links severance benefits to agreements by the NEOs not to disclose the Company’s confidential information, not to engage in certain competitive activities, and not to solicit the Company’s employees and customers. An executive will forfeit the right to receive post-termination compensation if

any such restrictive covenants are breached. The Compensation Committee believes that these provisions provide important protection for the Company’s proprietary information and business.

 

The Committee also provides excess parachute payment protection, described in “Tax and Accounting Considerations” below, to Ms. Till and Dr. Terhanian.

 

In all cases, the Compensation Committee considers the cost, tax and accounting implications of post-termination payment arrangements.

 

The Compensation Committee has primary responsibility for assisting the Board in developing and evaluating potential candidates for executive positions, including the CEO, and for overseeing the development of executive succession plans. The Compensation Committee oversees the design, development, and implementation of the compensation for the CEO and the other NEOs.

 

For the CEO, the independent directors of the Board approve goals and objectives to be considered in awarding compensation. The Board Chairman and the Compensation Committee conduct a thorough performance evaluation of the CEO in light of the established goals and objectives and other factors, including, among others, interviews with persons with whom the CEO has regular interaction. The Compensation Committee then recommends all forms of CEO compensation, taking into account the goals and objectives of the Company’s overall compensation program, to the independent directors of the Board, who have final approval authority over the CEO’s compensation package as well as any target goals and objectives against which the CEO’s performance will be measured.

 

For other executive officers, the CEO and the Compensation Committee together assess performance and determine individual compensation, based on initial recommendations from the CEO and the Executive Vice President, Global Human Resources. The executive officers do not play a role in determining their own compensation, other than discussing individual management objectives with the CEO and Executive Vice President, Global Human Resources. In all instances, the Compensation Committee exercises its discretion in modifying any recommended adjustments or awards to executives and approving each executive’s compensation package.

 

From time to time, the CEO and the Executive Vice President, Global Human Resources recommend equity awards to be made under the Incentive Plans. The Compensation Committee, which has exclusive authority to make such awards to the CEO and other executive officers, considers such recommendations together with other factors, in determining whether to make such awards.

 

Neither the Company nor the Compensation Committee has an on-going contractual arrangement with any compensation consultant who has a role in determining or recommending the amount or form of executive officer or director compensation. The Compensation Committee does retain compensation consultants to assist it with specific issues from time to time. In fiscal 2008, the Compensation Committee used a compensation consultant to assist in evaluating equity incentive programs and compensation related to change in control circumstances. The Compensation Committee did not retain a compensation consultant in fiscal 2009 or 2010.

 

The Compensation Committee has established a policy regarding the dates for making grants of options, restricted stock, and restricted stock units under the Incentive Plans. Except in the case of awards made in connection with acquisitions or other extraordinary circumstances, awards are made only on the 15th calendar day of the month in which quarterly results are publicly announced or, if results are not announced by that time, seven days following their public release. These dates were established so that grants would be effective at a time when the Company expects the most current information regarding its performance to be available to the public. However, because the award dates are pre-determined, some

awards may be made at a time when the Company is in possession of material non-public information. The exercise price of each stock option awarded and to be awarded under the Incentive Plans was and will be the closing price of the Company’s stock on the date of grant.

 

The Compensation Committee administers the Incentive Plans, taking into account recommendations from management. The Committee selects those individuals to whom equity-based awards should be granted and determines the amount and terms of those awards.

 

During fiscal 2007, the Compensation Committee adopted guidelines that require any person appointed to serve as Chief Executive Officer, Chief Financial Officer, or Chief Operating Officer to own Company stock with a value equal to base salary within five years after the date of appointment to the covered position. Under the guidelines adopted in fiscal 2007, shares held in the Company’s 401(k) Plan and shares acquired through the ESPPs, as well as vested and unvested non-performance-based restricted stock, count toward the requirement, but unexercised stock options and unvested performance-based restricted stock do not.

 

All non-employee directors are required by the Governance Guidelines to own shares as described above in “Corporate Governance — Governance Guidelines”. All non-employee directors standing for election in 2010 or continuing in office are in compliance with stock ownership requirements.

 

The Company’s policies prohibit all insiders, including NEOs, from hedging the risk associated with stock ownership without express consent of the Board of Directors, which has never been requested or granted.

 

Revised Board Commitment Regarding Equity-Based Grants to Employees

 

In October 2007, the Board committed to the Company’s stockholders to limit the number of shares granted via equity-based awards to employees to an average of 2.7% of the total shares of common stock outstanding at the end of the Company’s three fiscal years 2008, 2009, and 2010, applying the following formula: (fiscal 2008% + fiscal 2009% + fiscal 2010%) ¸ 3 years £ 2.7% (the “2007 Commitment”). Each share of restricted stock granted is counted as the equivalent of two option shares for the purpose of calculating the total number of shares granted in a year under the 2007 Commitment.

 

Since October 2007, in order to help restore profitability to its business, the Company significantly restructured its senior management team and effectuated significant headcount reductions, resulting in substantial forfeitures from departing employees of equity-based grants. However, the 2007 Commitment did not take into consideration these forfeitures. Without accounting for the forfeitures, the number of shares granted via equity-based awards to employees as a percentage of total shares of common stock outstanding (“burn rate”) in fiscal years 2008 and 2009 calculated pursuant to the 2007 Commitment formula were 3.64% and 3.58%, respectively. After accounting for forfeitures, however, outstanding equity-based grants to employees during the same period decreased by approximately 2 million shares, or nearly 4% of the Company’s total shares of common stock outstanding.

 

Due to the lack of adequate flexibility under the 2007 Commitment to attract a new senior management team in fiscal 2009 through use, in part, of equity-based awards and the need to continue to align the interests of the Company’s employees with the interests of its stockholders, in fiscal 2009 management of the Company engaged in discussions with the RiskMetrics Group (“RiskMetrics”) regarding modifying the 2007 Commitment. In considering whether to support a modification to the 2007 Commitment, RiskMetrics took into account its current annual burn rate criteria applicable to the Company, which would permit an annual burn rate of up to 6.15%. After discussions with the Company’s management, RiskMetrics proposed modifying the burn rate percentage, without crediting cancellations or forfeitures, to 4.98% (applied as an average over the measurement period) and the measurement period to fiscal years 2009, 2010, and 2011. The Board supported RiskMetrics’ proposed modifications and on July 1, 2009 in a Current Report on Form 8-K filed with the SEC, the Board announced its commitment to the Company’s stockholders

to limit the number of shares granted via equity-based awards to employees to an average of 4.98% of the total shares of common stock outstanding at the end of the Company’s three fiscal years 2009, 2010, and 2011, applying the following formula: (fiscal 2009% + fiscal 2010% + fiscal 2011%) ¸ 3 years £ 4.98% (the “Modified Commitment”). For the purpose of calculating the total number of shares granted in a year under the Modified Commitment, each share of restricted stock granted will continue to count as the equivalent of two option shares and as mentioned above, shares cancelled or forfeited will not be credited against the annual totals.

 

Although the Board believes that the Modified Commitment preserves the Company’s ability to make appropriate equity-based grants for purposes of attracting and retaining talented employees and aligning the interests of its employees with that of its stockholders, it neither plans nor believes it will be necessary to fully utilize the maximum granting capacity available under the Modified Commitment.

 

The Compensation Committee does not believe that the Company’s compensation policies and practices for employees are reasonably likely to have a material adverse effect on the Company.

 

The Company has designed its executive compensation programs to avoid excessive risk-taking. The following are some of the features of the Company’s executive compensation programs designed to help the Company appropriately manage business risk:

 

 

Section 162(m) of the IRC generally denies publicly-held corporations a federal income tax deduction for compensation exceeding $1,000,000 paid to the Chief Executive Officer or any of the four other highest

paid executive officers, excluding performance-based compensation. Through June 30, 2010, this provision has not limited the Company’s ability to deduct executive compensation. The Compensation Committee will continue to monitor the potential impact of Section 162(m) on the Company’s ability to deduct executive compensation. The Incentive Plans have been designed, and are intended to be administered, in a manner that will enable the Company to deduct compensation attributable to options and certain other awards thereunder, without regard to the deduction limitation established by Section 162(m).

 

Section 409A of the IRC generally changed the tax rules that affect most forms of deferred compensation that were not earned and vested prior to 2005, and imposed an additional tax on certain forms of deferred compensation. The Committee takes Section 409A into account in determining the form and timing of compensation paid to the Company’s executives, and additional taxes under Section 409A are generally not applicable to the compensation provided by the Company.

 

Sections 280G and 4999 of the IRC limit the Company’s ability to take a tax deduction for certain “excess parachute payments” (as defined in Sections 280G and 4999) and impose excise taxes on each executive that receives “excess parachute payments” in connection with his or her severance from the Company in connection with a change in control. The Compensation Committee considers the adverse tax liabilities imposed by Sections 280G and 4999, as well as other competitive factors, in structuring certain post-termination compensation payable to the Company’s NEOs. Two NEOs, Ms. Till and Dr. Terhanian, are entitled to reimbursement for excise taxes on excess parachute payments, and Dr. Terhanian’s reimbursement is limited to the amount of the initial calculation of the excise tax.

 

The Company expenses stock option and restricted stock grants in accordance with the FASB guidance for stock-based compensation. More information regarding the application of the FASB guidance may be found in Note 14 to the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

 

Information in this section is provided for our Chief Executive Officer, Chief Financial Officer, the three other executive officers most highly compensated in fiscal 2010 serving as executive officers at the end of fiscal 2010, our former Chief Financial Officer and one individual, Mr. Forkin, who would have been among the three most highly compensated executive officers had he been serving at the end of fiscal 2010, calculated using the methodology for determining “total compensation” provided by the SEC (collectively, the “NEOs”). Mr. Cox, our former Chief Financial Officer, and Mr. Forkin departed from the Company effective November 20, 2009 and March 5, 2010, respectively.

 

The age and business experience of each of the NEOs, as well as information regarding the other executive officers of the Company, is set forth in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended June 30, 2010.

 

The following table and accompanying footnotes provide information regarding compensation of the NEOs for fiscal years 2008, 2009, and 2010:

 

 

 

 

 

 

 

 

 

 

The Company has entered into employment agreements with certain of its executives, including each of the NEOs other than Mr. Narowski, who entered into a change in control agreement with the Company, and Messrs. Micali and Forkin, who each entered into a letter agreement with the Company. The material terms of such arrangements are discussed below in “Employment Agreements with Named Executive Officers” and, with respect to currently employed NEOs, in “Potential Payments Upon Termination or Change in Control”. For further discussion regarding the determination of base salary and incentive compensation within the context of total compensation, see “Compensation Discussion and Analysis — Mix of Types of Compensation” above.

 

The following table and accompanying footnotes provide information regarding plan based awards to the NEOs in fiscal 2010:

 

Grants of Plan Based Awards in Fiscal 2010

 

 

 

 

 

Target non-equity incentive plan awards are set forth in Ms. Till’s, Dr. Terhanian’s, and Messrs. Cox’s and Salvoni’s employment agreements, and Messrs. Micali’s and Forkin’s letter agreements, applicable to fiscal 2010. The target for Mr. Narowski was established by the Compensation Committee for fiscal 2010. A description of the 2010 Bonus Plan is included above in “Compensation Discussion and Analysis — Implementing the Compensation Committee’s Objectives — Cash Bonus Plan — Linking Compensation to Performance”.

 

Stock options reflected in column (h) of the table above were issued at fair market value on the date of the grant and, among others, are subject to the following terms:

 

 

The following table and accompanying footnotes provide information regarding unexercised stock options and unvested restricted stock awards held by our NEOs as of June 30, 2010.

 

 

 

 

 

 

 

The following table provides information with regard to the amounts paid or received by the NEOs during fiscal 2010 as a result of the exercise of stock options or the vesting of restricted stock awards.

 

Fiscal 2010 Option Exercises and Stock Vested

 

 

 

 

Kimberly Till.  Kimberly Till serves as President and Chief Executive Officer of the Company pursuant to an employment agreement, effective October 21, 2008 (the “Till Agreement”). The material terms of the Till Agreement include, among other things: