UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

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AVERY DENNISON CORPORATION

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AVERY DENNISON CORPORATION
150 North Orange Grove Boulevard
Pasadena, California 91103

 

PROXY STATEMENT

 

This proxy statement is furnished to stockholders on behalf of the Board of Directors (our “Board”) of Avery Dennison Corporation, a Delaware corporation (“Avery Dennison” or the “Company,” which are also referred to as “we” or “us”), for solicitation of proxies for use at our Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Thursday, April 28, 2011, at 1:30 p.m. Pacific Time at 150 North Orange Grove Boulevard, Pasadena, California and at any adjournment or postponement thereof. The purposes of the meeting and the matters to be acted upon are set forth in the preceding Notice of Annual Meeting.

 

We have elected to provide access to our proxy materials on the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders of record, while brokers and other nominees who hold shares on behalf of beneficial owners will be sending their own similar notice. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to request a printed copy by mail or electronically may be found in the Notice and on the website referred to in the Notice, including an option to request paper copies on an ongoing basis. On March   , 2011, we intend to make this proxy statement available on the Internet and to mail the Notice to all stockholders entitled to vote at the Annual Meeting. We intend to mail this proxy statement, together with a proxy card, to those stockholders entitled to vote at the Annual Meeting who have properly requested paper copies of such materials within three business days of request.

 

Voting of Shares.  You may vote by attending the Annual Meeting and voting in person or you may vote by submitting a proxy. The method of voting by proxy differs (i) depending on whether you are viewing this proxy statement on the Internet or receiving a paper copy, and (ii) for shares held as a record holder and shares held in “street name.” If you hold your shares of common stock as a record holder and are viewing this proxy statement on the Internet, you may vote by submitting a proxy on the Internet by following the instructions on the website referred to in the Notice. If you hold your shares of common stock as a record holder and are reviewing a paper copy of this proxy statement, you may vote your shares by completing, dating and signing the proxy card included with the proxy statement and promptly returning it in the preaddressed, postage paid envelope provided, or by submitting a proxy on the Internet or by telephone by following the instructions on the proxy card. If you hold your shares of common stock in “street name,” which means your shares are held of record by a broker, bank or nominee, you will receive a notice from your broker, bank or other nominee that includes instructions on how to vote your shares. Your broker, bank or nominee will allow you to deliver your voting instructions on the Internet and may also permit you to vote by telephone. In addition, you may request paper copies of the proxy statement and proxy card from your broker, bank or nominee by following the instructions on the notice such broker, bank or other nominee provides to you. Telephone and Internet voting facilities will close at midnight the night before the Annual Meeting.

 

Revocation of Proxy.  A stockholder giving a proxy pursuant to this solicitation may revoke it at any time before it is exercised by (a) delivering a later dated paper proxy or by submitting another proxy by telephone or on the Internet (your latest telephone or Internet voting instructions will be followed), (b) delivering to the Secretary of the Company a written notice of revocation prior to the voting of the proxy at the Annual Meeting, or (c) by voting in person at the Annual Meeting. Simply attending the Annual Meeting will not revoke your proxy. If your shares are held in “street name,” you may change your vote by submitting new voting instructions to your broker, bank or other nominee. You must contact your broker, bank or other nominee to find out how to do so.

 

Quorum and Votes Required.  Votes cast by proxy or in person at the Annual Meeting will be tabulated by the inspectors of election appointed by our Board for the meeting, which inspectors also will determine whether or not a quorum is present. At the Annual Meeting, (i) shares represented by proxies that reflect abstentions or “broker non-votes” (i.e., shares held by a broker or nominee that are represented at the meeting, but with respect to which such broker or nominee is not empowered to vote on a particular proposal) will be counted as shares that are present and

entitled to vote at the Annual Meeting for purposes of determining the presence of a quorum; (ii) there is no cumulative voting and the director nominees receiving a majority of the votes cast (in uncontested elections) will be elected (for purposes of determining the vote required to elect directors, “a majority of the votes cast” shall mean that the number of shares voted “for” a director’s election exceeds the number of votes cast against that director (with abstentions not counted as votes cast)); and (iii) for all matters other than the election of directors, the affirmative vote of the majority in voting power of the shares represented at the Annual Meeting and entitled to vote on the matter shall be the act of the stockholders and, therefore, abstentions as to a particular proposal will have the same effect as a vote against that proposal and broker non-votes will have no effect on the vote.

 

The Company has retained D. F. King & Co., Inc. to assist in soliciting proxies for this meeting at a fee estimated at $11,500, plus out-of-pocket expenses. Expenses incident to the preparation and mailing of the notice of meeting, proxy statement and form of proxy will be paid by the Company.

 

As of the date of this proxy statement, management knows of no other business that will be presented for consideration at the meeting. However, if any such other business shall properly come before the meeting, votes will be cast pursuant to these proxies in respect of any such other business in accordance with the best judgment of the persons acting pursuant to the proxies.

 

ITEM 1 — ELECTION OF DIRECTORS

 

Our Amended and Restated Bylaws in effect as of the date hereof (our “Bylaws”) presently provide for eleven directors, divided into three classes. Three directors are to be elected at the 2011 Annual Meeting to hold office until the Annual Meeting in 2014 and until their successors are duly elected and qualified. It is intended that the persons so appointed in the enclosed proxy will, unless authority is withheld, vote for the election of the three nominees proposed by our Board, all of whom are presently directors of the Company. In voting for the election of directors, each share has one vote for each position to be filled. All of the nominees have consented to being named herein and to serve if elected. In the event that any of them should become unavailable prior to the Annual Meeting, the proxy may be voted for a substitute nominee or nominees designated by our Board, or the number of directors may be reduced accordingly.

 

Our Board and Avery Dennison management have taken a number of steps to enhance our corporate governance profile not only to ensure compliance with the listing standards of the New York Stock Exchange (the “NYSE”), as well as the Sarbanes-Oxley Act of 2002 and The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and related regulations, but also based on their review of best practices as reflected by the policies of other public companies, the opinions of their outside advisors and the views of our institutional stockholders and proxy advisors. This year, we are proposing declassification of our Board, which will result in annual elections of directors beginning in 2012, and submitting for stockholder votes non-binding proposals to approve the compensation of our Named Executive Officers and the frequency with which such vote will take place in the future. Our website includes certain information about our corporate governance policies and practices, including: our current Corporate Governance Guidelines; Charters for the Audit, Compensation and Executive Personnel, and Governance and Social Responsibility Committees; Code of Conduct; Code of Ethics for the Chief Executive Officer and Senior Financial Officers; and the Audit Committee Complaint Procedures for Accounting and Auditing Matters. Stockholders may access this information by going to the “Corporate Governance” section of the “Investors” tab of our website at www.averydennison.com.*

 

Director Independence

 

Our Corporate Governance Guidelines require that our Board be comprised of a majority of directors who satisfy the criteria for independence required by the NYSE. The NYSE listing standards require that a majority of

 

 

* Our website address provided above and elsewhere in this proxy statement is not intended to function as a hyperlink, and the information on our website is not and should not be considered part of this proxy statement, nor is it incorporated by reference herein.

our directors be independent, and further that audit, compensation and nominating committees be comprised entirely of independent directors. An independent director is one who our Board affirmatively determines has no material relationship with the Company (directly or as a partner, shareholder or officer of an entity that has a relationship with the Company). Our Board has adopted categorical standards to assist it in making its annual affirmative determination of each director’s independence status. In the event that a director has a business or other relationship with us that does not fit within these standards and the director is nevertheless determined to be independent, we will disclose the basis for our Board’s determination in our proxy statement. Under our categorical standards, a director is presumed to be independent if he or she:

 

(i) has not been an employee of Avery Dennison for at least five years, other than in the capacity as a former interim Chairman or interim Chief Executive Officer;

 

(ii) has not, during the last three years, been affiliated with or employed by a present or former independent auditor of Avery Dennison or of any affiliate of Avery Dennison;

 

(iii) has not, during the last three years, been employed as an executive officer by a company for which an executive officer of Avery Dennison concurrently served as a member of such company’s compensation committee;

 

(iv) has no immediate family members (i.e., spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law and anyone (other than domestic employees) who shares the Director’s home) who did not satisfy the foregoing criteria during the last three years; provided, however, that with respect to the employment criteria, such director’s immediate family member may have (a) been affiliated with or employed by a present or former auditor of Avery Dennison or of any affiliate of Avery Dennison other than, in a professional capacity and (b) served as an employee but not as an executive officer of Avery Dennison during such period;

 

(v) has not received, and has no immediate family member who has received, during the last three years, more than $100,000 in any year in direct compensation from Avery Dennison (other than in his or her capacity as a member of our Board, or any committee of our Board or pension or other deferred compensation for prior services, provided that such compensation is not contingent in any way on continued service); provided, however, that compensation to such Director’s immediate family member as a non-executive employee shall not be considered in determining independence;

 

(vi) has not been during the last three years an executive officer or an employee, and has no immediate family member who, during the last three years, has been an executive officer of a company that made payments to, or received payments from, Avery Dennison for property or services in any of the last three years in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues;

 

(vii) has not been, and has no immediate family member who has been, an executive officer of a foundation, university, non-profit trust or other charitable organization, for which Avery Dennison and its respective trusts or foundations, account or accounted for more than 2% or $1 million, whichever is greater, of such charitable organizations’ consolidated gross revenues, in any of the last three years;

 

(viii) does not serve, and has no immediate family member who has served, as an executive officer or general partner of an entity that has received an investment from Avery Dennison or any of its subsidiaries, unless such investment is less than $1 million or 2% of such entity’s total invested capital, whichever is greater, in any of the last three years; and

 

(ix) is not otherwise disqualified by applicable Securities and Exchange Commission (“SEC”) or NYSE rules, regulations or listing standards.

 

A director is determined to be independent by our Board only if he or she meets the independence standards of the NYSE and our standards listed above.

After review and discussion of the relevant facts and circumstances for each director, including any direct or indirect relationships with Avery Dennison, and upon recommendation of the Governance and Social Responsibility Committee, our Board has affirmatively determined that the following directors are independent:

 

INDEPENDENT DIRECTORS
Bradley A. Alford		David E. I. Pyott
Peter K. Barker		Debra L. Reed
Rolf Börjesson		Patrick T. Siewert
John T. Cardis		Julia A. Stewart
Ken C. Hicks

 

The nine directors named above constitute a substantial majority, or 82%, of our current 11-member Board. Mr. Scarborough is not independent because he also serves as our President and Chief Executive Officer (“CEO”); Mr. Mullin is not independent because of his affiliation with certain business entities with which we do business. See Transactions with Related Persons for more information.

 

As part of the consideration of director independence, our Board considered sales and purchases of products and services in the ordinary course of business between the Company and its subsidiaries and the companies with which our directors were affiliated during 2010. None of the amounts paid to or received from these companies during the last three years exceeded the greater of $1 million or 2% of the other company’s consolidated gross revenues; therefore, these affiliations were determined not to affect the independence of the nine directors named above. Our Board also affirmatively determined that none of these relationships impaired the independence of these nine directors irrespective of the amounts paid thereto or received therefrom.

 

Board and Committee Meetings

 

During 2010, there were five meetings of our Board and twenty-one meetings of committees of our Board. In addition, there were three executive sessions of non-employee directors (which excluded Mr. Scarborough) and one executive session of only independent directors (which also excluded Mr. Mullin). Each of our directors attended at least 83% of the aggregate number of meetings of our Board and Board committees of which he or she was a member held during 2010, or if shorter, the period of time he or she served on our Board and its committees. We encourage directors to attend our annual stockholder meetings, and, except for Messrs. Börjesson and Hicks, all then-serving directors attended the 2010 Annual Meeting of Stockholders.

Standing Board Committees

 

The table below shows the current membership of each committee of our Board. Our Board has determined that, as required by NYSE listing standards, all of the members of our audit, compensation and nominating committees are independent, with the members of the Audit Committee also satisfying the enhanced independence standards for audit committee members set forth in applicable SEC rules and NYSE listing standards.

 

 

 

 

Audit Committee

 

The Audit Committee held seven meetings during 2010 in addition to a continuing education session with members of Avery Dennison management and certain third party advisors. The Audit Committee is appointed by our Board to assist our Board with its oversight responsibilities in monitoring the following activities:

 

(i) the integrity of our financial statements;

 

(ii) the independent auditors’ qualifications and independence;

 

(iii) the performance of our internal audit function and the independent auditors; and

 

(iv) our compliance with legal and regulatory requirements.

 

A copy of the Audit Committee Charter is available in the “Corporate Governance” section of the “Investors” tab of our website at www.averydennison.com. Our Board has designated Messrs. Cardis and Barker as “audit committee financial experts” (as such terms are defined by applicable SEC regulations).

 

Compensation and Executive Personnel Committee

 

The Compensation and Executive Personnel Committee met six times during 2010. The Compensation and Executive Personnel Committee is appointed by our Board to discharge our Board’s responsibilities relating to compensation of our directors, CEO and other executive officers, which includes the following activities:

 

(i) reviewing and approving corporate goals and objectives relevant to CEO compensation, evaluating the CEO’s performance in light of those goals and objectives, and determining and approving the CEO’s overall compensation level based on this evaluation, subject to ratification by our Board for any grant or award to the CEO intended to qualify for the performance-based compensation exemption from the limitation on deductibility of executive compensation imposed by Section 162(m) of the Internal Revenue Code;

(ii) reviewing and approving (a) the annual base salaries and annual incentive opportunities of the CEO and senior executives, and (b) as applicable to the CEO and our other executive officers, (A) other incentive awards and opportunities, including both cash-based and equity-based awards and opportunities; (B) employment agreements and severance agreements, (C) change-in-control agreements and change-in-control provisions affecting compensation and benefits and (D) any special or supplemental compensation and benefits, including supplemental retirement benefits and perquisites;

 

(iii) making recommendations to our Board on our compensation strategy, incentive plans and benefit programs for Avery Dennison employees;

 

(iv) overseeing and periodically assessing any material risks associated with our compensation policies and programs;

 

(v) recommending to our Board appropriate compensation programs and levels for our non-employee directors;

 

(vi) conducting an annual review of the CEO’s performance and periodically reporting to our Board on succession planning for the CEO and senior executives; and

 

(vii) reviewing our disclosure with respect to executive and director compensation and recommending to our Board that the Compensation Discussion and Analysis be included, together with the Compensation and Executive Personnel Committee Report, in the annual proxy statement.

 

A copy of the Compensation and Executive Personnel Committee’s Charter is available is available in the “Corporate Governance” section of the “Investors” tab of our website at www.averydennison.com.

 

The Compensation and Executive Personnel Committee works with an external compensation consultant to assist it in discharging its responsibilities. During 2010, Towers Watson was engaged as the compensation consultant for the Compensation and Executive Personnel Committee. Reporting directly to the Compensation and Executive Personnel Committee, Towers Watson performed no work for us in 2010 other than its work providing executive compensation consulting services to the Committee.

 

During 2010, in addition to providing assistance with establishing the annual components of executive compensation, the Compensation and Executive Personnel Committee’s compensation consultant, Towers Watson, provided support in several areas, including:

 

(i) undertaking a review of our director compensation program compared to two benchmark groups of companies (General Industry Companies in the Fortune 250 to 500, and the Materials and Industrial subsets of the S&P 500) and recommending an increase to Board retainers and a change to the equity portion of director compensation, in each case to set our director compensation more competitively;

 

(ii) conducting a pay-for-performance study that analyzed the alignment of our executive compensation with our financial performance in relation to the 49 companies in the S&P 500 Industrials and Materials subsets ranging from one-half to two times our size; and

 

(iii) performing an analysis of our overall executive perquisite and supplemental benefit program in light of current market practices and a range of alternative approaches to deliver such benefits.

 

For more information on Towers Watson, see Compensation Discussion and Analysis — Independent Compensation Consultant.

 

Governance and Social Responsibility Committee

 

The Governance and Social Responsibility Committee met twice during 2010; the Nominating and Governance Committee and the Ethics and Conflict of Interest Committee, which merged to form the

Governance and Social Responsibility Committee in April 2010, met twice and once, respectively, during 2010. The functions of the Governance and Social Responsibility Committee are to:

 

(i) assist our Board by identifying individuals qualified to become Board members consistent with criteria approved by our Board and to recommend to our Board the director nominees for the next annual meeting of stockholders, as well as between annual meetings when appropriate;

 

(ii) review and reassess the adequacy of our Corporate Governance Guidelines and recommend to our Board any proposed changes;

 

(iii) oversee the evaluations of our Board’s performance;

 

(iv) recommend to our Board, directors for membership on committees of our Board;

 

(v) review key corporate social responsibility initiatives, including matters of interest to our stockholders, the business community and the general public;

 

(vi) review with management our business operations and practices with respect to matters such as sustainability and corporate citizenship;

 

(vii) oversee the effectiveness of our Values and Ethics Program and the Code of Conduct; and

 

(viii) report and make recommendations to our Board in instances where it is believed that a significant conflict of interest could exist or when significant questions arise related to the interpretation or enforcement of our Legal and Ethical Conduct Policy.

 

A copy of the Governance and Social Responsibility Committee’s Charter is available is available in the “Corporate Governance” section of the “Investors” tab of our website at www.averydennison.com.

 

Finance Committee

 

In addition to the aforementioned committees required by applicable SEC rules and NYSE listing standards, we also have a Finance Committee, which met three times during 2010. The Finance Committee is appointed by our Board to assist it with consideration of matters relating to our financial affairs and capital requirements and in such capacity may perform the following duties on behalf of our Board:

 

(i) provide an overview of our financial planning policies and practices;

 

(ii) carry out special assignments for our Board; and

 

(iii) review our capital structure strategies, including our stockholder distributions and financing requirements.

 

Board Leadership Structure

 

Combined Chairman and Chief Executive Officer

 

As described in our Corporate Governance Guidelines, our Board has no specific policy with regard to the combination or separation of the offices of Chairman of our Board (“Chairman”) and CEO. Our Board believes that, in part because assigning the responsibilities of these roles can be a useful component of succession planning, our Board leadership structure and who should serve as Chairman and, if appropriate, Lead Independent Director, should be reevaluated periodically by our Board through the Governance and Social Responsibility Committee.

 

Mr. Scarborough was elected by our Board as President and CEO in May 2005, having served as President and Chief Operating Officer since May 2000, when he also became a member of our Board. As President and CEO, Mr. Scarborough is responsible for the general supervision, direction and control of the business and affairs of the Company, for which he has served in various leadership positions since 1983. On February 26, 2010, our Board elected Mr. Scarborough to the additional role of Chairman (in an executive session at which he was not present),

effective upon the retirement of Kent Kresa, our former Chairman, on April 22, 2010. Mr. Kresa retired as Chairman due to his reaching the age of 72, in accordance with our Corporate Governance Guidelines.

 

In making its decision to combine the roles of Chairman and CEO in February 2010, our Board determined that it was in the best interests of the Company and its stockholders to leverage Mr. Scarborough’s in-depth operational, financial and managerial experience and knowledge as President and CEO with his extensive familiarity with the discharge of our Board’s oversight responsibilities as a director, particularly in light of the challenging business environment the Company had been facing during the global economic downturn. The Governance and Social Responsibility Committee reevaluated our Board leadership structure in February 2011 and recommended to our Board that Mr. Scarborough continue to serve as Chairman because he (i) remains best positioned to identify matters of operating and strategic importance for our Board as our Board looks to support management in achieving our long-term goals, and (ii) has served as an effective bridge between management and our Board since his election as Chairman, noting that evaluations of his performance in such role had been favorable during the 2010 Board evaluation process. Our Board determined to continue Mr. Scarborough’s service as Chairman, based on its view that the combined leadership structure enhances the Chairman/CEO’s ability to provide insight and direction on important strategic initiatives to both our Board and management.

 

Lead Independent Director

 

With the combined roles of Chairman and CEO and to provide independent oversight of Board decision-making, our Board believes that it is appropriate to have a Lead Independent Director. Our Corporate Governance Guidelines describe the duties of the Lead Independent Director, which include the following:

 

(i) to preside over executive sessions of our Board and meetings of our Board at which the Chairman is not present;

 

(ii) to serve as liaison between the Chairman and the non-management directors;

 

(iii) to approve information sent to our Board;

 

(iv) to approve meeting agendas and meeting schedules to ensure that appropriate items are discussed and there is sufficient time for discussion of all agenda items;

 

(v) to have the authority to call meetings of the non-management directors; and

 

(vi) to consult and communicate directly with our major stockholders if and as requested.

 

On February 26, 2010, in conjunction with its election of Mr. Scarborough as Chairman, our Board elected Mr. Pyott as Lead Independent Director (with Mr. Pyott abstaining from the vote), effective upon Mr. Kresa’s retirement as Chairman on April 22, 2010. In electing Mr. Pyott, our Board recognized his familiarity with the Company and the operations of our Board having served as our director since 1999, as well as his external qualifications to fulfill the duties described above, having served as chairman of the board of directors of Allergan, Inc. since February 2006. In connection with its review of our Board leadership structure in February 2011, the Governance and Social Responsibility Committee recommended to our Board that Mr. Pyott remain as Lead Independent Director, noting that evaluations of his performance in such role had been favorable during our Board evaluation process. The Governance and Social Responsibility Committee further noted that Mr. Pyott’s chairmanship of the Compensation and Executive Personnel Committee and membership on the Governance and Social Responsibility Committee give him particular insights with regard to executive compensation and corporate governance matters, which are of significant concern to stockholders. Our Board determined to continue Mr. Pyott’s service as Lead Independent Director based on the Governance and Social Responsibility Committee’s recommendation.

 

Our Board believes it is important to have executive sessions, with and without the Chairman/CEO. During 2010, Mr. Pyott presided as Lead Independent Director at the two executive sessions of non-management directors (which excluded Mr. Scarborough) and one executive session of independent directors only (which also excluded

Mr. Mullin) that were held after Mr. Pyott was elected as Lead Independent Director. Our former non-executive Chairman, Mr. Kresa, presided at the executive session of non-management directors held in 2010 before Mr. Pyott’s election. Mr. Pyott is expected to preside at all executive sessions in 2011.

 

Communications with our Board of Directors

 

Stockholders and other interested parties may write to our Board, any Committee, the Lead Independent Director or any individual director concerning business-related matters other than accounting and auditing matters to such party or individual c/o Secretary, Avery Dennison Corporation, 150 North Orange Grove Boulevard, Pasadena, California 91103. Stockholders and other interested parties interested in communicating regarding the Audit Committee Complaint Procedures for Accounting and Auditing Matters may write to John T. Cardis, Chairman of the Audit Committee c/o Secretary, Avery Dennison Corporation, 150 North Orange Grove Boulevard, Pasadena, California 91103.

 

Risk Oversight

 

Although our management is responsible for the day-to-day management of risks to the Company, our Board has broad oversight responsibility for our risk management programs, including enterprise strategic risk oversight. In this oversight role, our Board is responsible for satisfying itself that the risk management processes designed and implemented by our management are functioning, and that necessary steps are taken to foster a culture of risk-adjusted decision-making within the organization. In carrying out its oversight responsibility, our Board has delegated to individual Board Committees certain elements of its oversight function. In this context, the Audit Committee regularly discusses our risk assessment and risk management processes to ensure that risk management programs are effective. Employees who supervise various day-to-day risks provide reports and information to Board Committees and when appropriate to our Board. Our Board receives updates from its Committees on individual areas of risk, including the following:

 

(i) updates on accounting, credit, operational, financial reporting, and environmental, health and safety risks from the Audit Committee;

 

(ii) updates on financing related matters and risks, including liquidity risk, from the Finance Committee;

 

(iii) updates on compensation program issues and related risks, including the extent to which our compensation programs may promote excessive risk-taking as described below, from the Compensation and Executive Personnel Committee (see also Relationship of Risk to Compensation Policies and Practices following the Summary Compensation Table in this proxy statement); and

 

(iv) updates on corporate governance, business ethics and conflict of interest matters and related risks from the Governance and Social Responsibility Committee

 

We identify and discuss significant potential risks to the Company in our public disclosures.

 

Selection of Director Nominees

 

Nominees for directorship are recommended by the Governance and Social Responsibility Committee for nomination by our Board and election by the stockholders. The Governance and Social Responsibility Committee is responsible for reviewing with our Board the requisite skills and characteristics of new Board members, as well as the composition of our Board as a whole. Although we do not have a formal policy with regard to the consideration of diversity in identifying director nominees, the Governance and Social Responsibility Committee seeks nominees to recommend to our Board with a broad diversity of experience, professions, skills, geographic representation and background, which may include consideration of personal characteristics such as race, gender and national origin.

 

In considering whether to recommend any candidate for inclusion in our Board’s slate of recommended director nominees, including candidates recommended by stockholders, the Governance and Social Responsibility

Committee applies a number of criteria, as described in our Corporate Governance Guidelines. This assessment includes consideration of the following criteria:

 

 

The Governance and Social Responsibility Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Our Board believes that the backgrounds and qualifications of the directors, considered as a group, should provide a mix of complementary experience, knowledge and abilities that will allow our Board to fulfill its responsibilities.

 

The Governance and Social Responsibility Committee reviews the qualifications of any candidate with those of current directors to determine coverage and gaps in experience in relevant industries and in diverse functional areas, such as finance, manufacturing, technology, and investing. Sources for identifying potential nominees may include members of the Governance and Social Responsibility Committee, other Board members, our executive officers, third-party search firms, and stockholders. The Governance and Social Responsibility Committee will consider stockholder recommendations of candidates on the same basis as it considers all other candidates.

 

Stockholder Submission of Director Nominees

 

Stockholders desiring to make recommendations concerning new directors should submit the candidate’s name, together with the candidate’s biographical information, professional experience and written consent to nomination, to the Governance and Social Responsibility Committee of our Board of Directors, c/o Secretary, Avery Dennison Corporation, 150 North Orange Grove Boulevard, Pasadena, California 91103. Stockholders wishing to nominate new directors for election at an annual meeting must comply with the additional requirements described in this proxy statement under GENERAL — Stockholder Proposals.

 

2011 Nominees and Continuing Directors

 

The following pages provide information for each of the nominees for election at the Annual Meeting and each director whose term continues, including his or her age, positions held, current principal occupation and business experience during the past five years, as well as the names of other publicly-held companies of which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each director’s experience, qualifications, attributes and skills, which led our Board to the conclusion that he or she should serve as a director, we also believe that each of our directors has a reputation for integrity and an adherence to high ethical standards, as well as a commitment to representing the long-term interests of stockholders. In addition, each has demonstrated business leadership skills and an ability to exercise sound judgment, as well as a commitment to service to Avery Dennison and our Board.

DIRECTOR NOMINEES

 

Your Board of Directors recommends a vote FOR each of the three nominees below. The persons named as proxies will vote FOR the election of each of the three nominees, unless stockholders specify otherwise. If elected, these directors will hold office until the 2014 Annual Meeting of Stockholders and until their successors are duly elected and qualified.

 

 

CONTINUING DIRECTORS

 

DIRECTOR COMPENSATION FOR 2010

 

The following table provides information regarding compensation earned by or awarded to our non-employee directors during 2010:

 

 

 

 

 

 

Director Deferrable Cash Compensation

 

In February 2010, based on a review by Towers Watson of our director compensation program compared to two benchmark groups of companies (General Industry Companies in the Fortune 250 to 500, and the Materials and Industrial subsets of the S&P 500), the Compensation and Executive Personnel Committee (i) increased the amount of our Board retainer by $10,000; (ii) increased the amount of our Audit Committee Chair retainers by $5,000; and (iii) increased the amount of our other Committee Chair retainers by $2,500, in each case in an effort to set our director compensation around the median of the benchmark companies. Meeting fee compensation was unchanged. For 2010 and 2011, in addition to an annual equity grant of $100,000, denominated 50% in restricted stock units and 50% in an option to purchase shares of our common stock, as described in Director Equity Compensation and Stock Ownership below, the retainers and meeting fees for our non-employee directors were as follows:

 

 

Because he is our President and CEO, Mr. Scarborough receives no additional fees for services rendered in his capacity as Chairman.

 

Directors currently may choose to receive their retainers and meeting fees in (i) cash; (ii) deferred stock units to an individual account established in their name under the Directors Deferred Equity Compensation Plan (“DDECP”), which deferred stock units will be converted into shares of our common stock upon the director’s retirement; or (iii) a combination of cash and deferred stock units. Dividend equivalents are credited in the form of stock units to the accounts of directors who participate in the DDECP, which represent the value of the dividends per share paid by the Company, calculated with reference to the number of stock units held by each director.

 

Messrs. Börjesson, Cardis and Siewert have elected to receive their retainers and meeting fees in cash; Mr. Hicks receives half of his retainers and meeting fees in cash and the other half in deferred stock units under the DDECP. The remaining directors receive their retainers and meeting fees in deferred stock units under the DDECP, except for Mr. Mullin who defers his fees to an individual account established under the Director Variable Deferred Compensation Plan (“DVDCP”), under which deferred fees accrue earnings at the rate of return of certain bond and

equity investment funds managed by an insurance company. As of December 31, 2010, the following directors held stock units in the DDECP, in the amounts indicated:

 

DDECP BALANCE AT December 31, 2010

 

 

We also have a matching gift program under which we will match an amount of up to $10,000 that a director contributes to charitable and/or educational institutions.

 

Director Equity Compensation and Stock Ownership

 

In February 2010, based on the Towers Watson review described above, the Compensation and Executive Personnel Committee changed the equity portion of director compensation to bring uniformity with the approach used for our executives. As a result of the changes, each non-employee director who was a member of our Board in 2010 received an annual equity grant of $100,000, denominated 50% in restricted stock units (“RSUs”) and 50% in stock options. On April 22, 2010, each such director received 1,310 RSUs and an option to purchase 5,027 shares of our common stock at an exercise price of 100% of the fair market value of our common stock on the date of grant. The amount of RSUs granted to directors in 2010 was determined using the aggregate grant date fair value in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“ASC Topic 718” and formerly known as Statement of Financial Accounting Standards No. 123(R)), with the fair value estimated as of the date of grant adjusted for foregone dividends; the amount of stock options granted to directors in 2010 was estimated as of the date of grant using the Black-Scholes option-pricing model. The RSUs and stock options granted to directors vest ratably over three years, except that all unvested RSUs and stock options held by a director when he or she retires from our Board at or after age 72 in accordance with our Corporate Governance Guidelines become fully vested on the date of such retirement. The stock options granted to directors expire after ten years.

 

To help ensure that the interests of directors are aligned with those of stockholders, our stock ownership policy requires that non-employee directors acquire and maintain a minimum equity interest in the Company equal to the lesser of five times the annual Board retainer divided by our stock price or 6,500 shares. See Exhibit A attached to this proxy statement for further information concerning these guidelines. The Governance and Social Responsibility Committee reviewed non-employee director ownership levels in December 2010 and determined that, except for the two newest directors who have five years to achieve the minimum ownership levels in accordance with our policy, each director owned shares in excess of the minimum level required by the stock ownership guidelines. To our knowledge, based solely on our review of written representations from our directors, none of our directors purchased financial instruments designed to hedge or offset any decrease in the market value of Company common stock held, directly or indirectly, by them.

 

SECURITY OWNERSHIP OF MANAGEMENT

 

The following table shows the number of shares of our common stock beneficially owned by (i) each of our current directors, (ii) each of our named executive officers, and (iii) all current directors and executive officers as a group, in each case as of February 28, 2011.

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities (collectively, “Insiders”), to file initial reports of ownership and reports of changes in ownership with the SEC. Insiders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To our knowledge, based solely on our review of the copies of such reports furnished to us and written representations from certain Insiders that no other reports were required to have been filed for such Insiders, we believe that, during the 2010 fiscal year, our Insiders complied with the Section 16(a) filing requirements applicable to them.

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This Compensation Discussion and Analysis (this “CD&A”) provides an overview and analysis of our executive compensation program and is intended to provide narrative background for the compensation principles and practices underlying the detailed information contained in the executive compensation tables that follow this CD&A. Refer to Additional Information Regarding Executive Compensation below for a series of tables containing information about the 2010 compensation of our named executive officers (the “NEOs”) as follows: Dean A. Scarborough, Chairman, President and CEO; Mitchell R. Butier, Senior Vice President and Chief Financial Officer (“CFO”); Daniel R. O’Bryant, Executive Vice President, Business Development and former CFO; Timothy S. Clyde, Group Vice President, Specialty Materials and Converting; R. Shawn Neville, Group Vice President, Retail Information Services; and Donald A. Nolan, Group Vice President, Roll Materials.

EXECUTIVE SUMMARY

 

Executive Compensation and Our Performance

 

The Compensation and Executive Personnel Committee (referred to in this CD&A as the “Committee”) designs our executive compensation program and sets compensation to provide overall packages that align compensation with our financial performance over time, with reference to the performance and compensation of our peers. We structure our performance-based compensation program to reward the NEOs based on our performance, as well as the individual executive’s contributions, to further motivate our executives and align their compensation with stockholder interests. For our executive officers, the largest component of their total direct compensation opportunity is performance-based; for fiscal year 2010, approximately 88% of Mr. Scarborough’s and approximately 77% of the other NEOs’ total direct compensation consisted of performance-based compensation.

 

The Committee allocates compensation between cash and equity compensation based on its assessment of our objectives and the competitive practices of other public companies. The NEOs are awarded incentive equity compensation tied to appreciation of our stock price: such appreciation directly impacts the realized value for options and the number of shares that may be earned from performance units, which are awarded only if certain pre-determined Company performance objectives are achieved. The targeted 2010 long-term equity incentive opportunity represented approximately 78% and 75% of the CEO’s and NEOs’ total performance-based compensation, respectively.

 

Performance-based Cash Compensation.  We reduced our debt by $287 million, while contributing $78 million to fund our pension obligations (over $50 million more than required), during 2010. We also increased the return of cash to stockholders by (i) repurchasing three million shares of our common stock in the fourth quarter of 2010, (ii) raising our quarterly dividend by 25% to $0.25 in 2011; and (iii) receiving Board authorization in 2011 to repurchase five million additional shares of our common stock. In addition, we delivered solid results,† including with respect to the following financial measures, which serve as performance objectives under our annual bonus program and are described in further detail under Annual Cash Bonus under Senior Executive Annual Incentive Plan:

 

 

We substantially exceeded our targeted corporate adjusted sales growth of 3%, adjusted EPS of $2.60 and FCF of $340 million, resulting in a financial modifier of 200% for each of the NEOs. Given the amount of the financial modifier and upon the recommendation of the CEO, the Committee determined to cap the individual modifiers for the NEOs at 100%, resulting in a bonus payment of 200% for each NEO, driven entirely by the financial modifier.

 

Performance-based Equity Compensation.  In 2010, the CEO and other NEOs received long-term equity incentive compensation, with 60% in an option to purchase shares of our common stock and 40% in performance units (“PUs”) pursuant to our Mid-Term Incentive Program (“MTIP”), which PUs vest, if at all, at the end of a three-year performance cycle based on the Company meeting certain corporate performance objectives. See Long-term Incentives for 2010 below. Appreciation of our stock price directly impacts the realized value of the options, and the number of shares that may be earned with respect to PUs. As a result, the Committee believes that these long-term

 

 

† For complete information regarding our 2010 performance, stockholders are urged to read “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and the audited consolidated financial statements and accompanying footnotes thereto contained in our 2010 Annual Report on Form 10-K filed with the SEC on February 28, 2011 and made available or mailed to stockholders with this proxy statement.

incentives appropriately align executive compensation with the long-term interests of stockholders. In addition to their 2010 equity grants, the NEOs were eligible for the following compensation:

 

 

Pay-for-Performance Alignment

 

The Committee retained Towers Watson to analyze the alignment of NEO compensation with our financial performance in relation to 49 companies in the S&P 500 Industrials and Materials subsets ranging from one-half to two times our size. Based in part on this analysis for the 2007 to 2009 period, the Committee determined that our pay-for-performance alignment is strong because our:

 

 

Enhanced Compensation Governance

 

During 2010, the Committee approved several changes to our compensation programs, including:

 

 

 

 

 

The changes described above were made by the Committee based upon its review of evolving compensation governance practices in the marketplace. In addition, during 2010, our incentive compensation recovery “clawback” policy adopted in 2009 was in effect. See Incentive Compensation Recovery (“Clawback”) Policy below for further information.

 

COMPENSATION PHILOSOPHY AND OBJECTIVES

 

Our Board believes that hiring and retaining effective leaders and providing appropriate incentives for executives are essential to our success in the marketplace and to creating an attractive investment for stockholders. The Committee has responsibility for establishing and implementing our executive compensation program and has developed a compensation strategy and supporting plans that tie a significant portion of executive compensation to our success in meeting specified performance goals and positively influencing the appreciation of our stock price. The objectives of this strategy are to attract and retain the best possible executive talent, motivate these executives to achieve our near- and long-term goals, link the interests of executives and stockholders through equity-based compensation and recognize both individual contributions and overall business results.

 

The Committee believes that our compensation program should be balanced, providing a mix of incentive plans that balance long-and mid-term objectives, provide potential upside for exceeding performance targets and downside risk for missing performance targets. In addition, the program should balance retention with reward for stockholder value creation, while also ensuring that the elements of the program, individually and in the aggregate, do not encourage excessive risk-taking.

 

 

‡ A “gross-up” under Section 280G of the Internal Revenue Code is a contract provision under which a company pays the excise tax (and associated taxes) with respect to the payments received by an individual in the event of a change of control, such that the individual is left with the full, normally taxable amount of the benefit to which the individual is entitled.

Committee Oversight of Executive Compensation

 

The Committee is appointed by our Board to manage our Board’s responsibilities relating to the compensation of our directors, CEO and other executive officers, including the remaining NEOs. As set forth in its charter, the Committee’s major responsibilities with respect to executive compensation are to:

 

(i) review and approve Company objectives and goals related to CEO compensation annually, evaluate the CEO’s performance in light of those goals and objectives, and determine and approve the CEO’s overall compensation level based on this evaluation. In determining the incentive components of the CEO’s compensation, the Committee considers our performance and strategic direction and the value of incentive awards to CEOs at companies of similar size. Following its approval thereof, the Committee submits the CEO’s compensation package to our Board for ratification;

 

(ii) review and approve the annual base salaries and annual incentive opportunities of the other executive officers, which may include both cash and equity awards and opportunities, employment agreements and severance agreements and change-in-control agreements and change-in-control provisions affecting compensation and benefits. In addition, the Committee provides periodic reports and makes recommendations to our Board on our compensation program for the other executive officers. The Committee also reviews and approves special or supplemental compensation and benefits for the CEO and other executive officers, including supplemental retirement benefits and perquisites. The Committee is also charged with oversight and periodic assessment of any material risks associated with our compensation policies and programs;

 

(iii) select, retain and terminate any compensation consultant used to assist the Committee in the evaluation of compensation for directors, the CEO and other executive officers. The Committee has sole authority to approve the consultant’s fees and other terms and conditions; and

 

(iv) conduct evaluations of, and make reports to, our Board on succession planning for the CEO and the CEO’s direct reports. To that end, the Committee meets throughout the year to review and discuss succession planning for the CEO and his direct reports. As part of this process, the Committee reviews executives’ skill sets, experience and readiness for their next roles. In addition, development plans are reviewed. Our Board also reviews succession planning and potential successors to the CEO annually.

 

The Committee reviews and evaluates the CEO’s annual performance and determines salary and incentive awards for the CEO, taking into account the Company’s performance, the CEO’s performance against objectives agreed upon by the Committee and the CEO at the beginning of the year, the CEO’s self-assessment of his annual performance and market reference and other data provided by the Committee’s compensation consultant. The CEO makes compensation recommendations, including salary adjustments and incentive awards, to the Committee for the other NEOs and other executive officers based on the his annual review of their performance. These recommendations are presented to the Committee for review and approval. The Committee may exercise discretion to modify recommended salary adjustments or incentive awards.

 

The CEO, CFO and Senior Vice President and Chief Human Resources Officer participate during portions of Committee meetings related to executive compensation to assist the Committee by:

 

 

The CEO is not involved in the recommendations or decisions involving his own compensation; decisions regarding the CEO’s compensation are determined by the Committee meeting in executive session with its independent consultant.

Independent Compensation Consultant

 

The Committee has retained the services of Towers Watson, an independent executive compensation consultant, to assist in establishing the level of executive and non-employee director compensation, designing our incentive compensation programs and providing industry and peer group compensation and best practices information. See Board Committees — Compensation and Executive Personnel Committee in this proxy statement for information on services provided by Towers Watson to the Committee during 2010. Representatives of Towers Watson were present at every Committee meeting held in 2010, and may be consulted in between meetings at the Committee’s discretion.

 

The Committee conducted its annual assessment of the consultant’s performance in December 2010, which included a review of various performance measures and evaluation criteria as well as the fees paid to Towers Watson. The Committee determined that it was satisfied with the performance of Towers Watson. In 2010, Towers Watson received $235,750 in fees for its services to the Committee.

 

The Committee evaluated its compensation consultant’s independence in 2010, determining that — in part because Towers Watson provided no services for the Company (outside of its work for the Committee) during the year — Towers Watson was independent. Towers Watson and the Committee have had the following protocols in place since Watson Wyatt, predecessor entity to Towers Watson, was engaged by the Committee in October 2006, to establish and maintain the compensation consultant’s independence from management:

 

 

The Committee expects that it will incorporate a review of potential conflicts of interest in connection with its annual assessment of the compensation consultant’s performance to comply with the SEC regulations related thereto required by the Dodd-Frank Act, when and as required by such regulations.

 

Executive Compensation in Relation to Peers

 

Use of Market Analyses in Setting Total Direct Compensation

 

The Committee has established a “total direct compensation” positioning strategy for executive officers in the third quartile of companies similar in size, global scope and complexity with which we compete for executive talent. “Total direct compensation” includes base salary plus annual bonus (based on market reference data) and annual long-term incentive opportunities (which may include cash, stock options, performance units and restricted stock units). The Committee believes this positioning is appropriate given our business portfolio mix, product diversity and the global nature of our operations, which require our executives to have a wide range of business leadership experiences and skills. The Committee generally sets base salaries at or around the median, with the majority of NEO compensation consisting of performance-based incentive compensation to advance the Committee’s pay-for-performance philosophy and drive higher total direct executive compensation positioning.

 

We regularly analyze our executive compensation compared to market survey data. For overall executive officer compensation, we look at a broad cross section of U.S.-based companies to reflect the broad talent market across which we seek our executives, as disclosed in response to executive compensation surveys, making

appropriate adjustments and regressions to account for company size. Each year, we review surveys prepared by independent third parties to understand the compensation practices of publicly-traded companies and assess our competitiveness. In 2010, we primarily used surveys prepared by Hewitt Associates and Towers Watson.

 

In 2010, average total direct compensation was below the median for the CEO and at the median for the other NEOs.

 

Use of Peer Groups in Measuring Performance for Certain Performance-based Compensation

 

For certain compensation elements tied to corporate performance, we compare our performance with that of specified peer groups. The following peer groups have been used for corporate performance analyses, for the compensation elements described below.

 

 

 

Components of Executive Compensation

 

The key components of our executive compensation program are:

 

 

In determining executive compensation, the Committee reviews tally sheets for the CEO and each other NEO, which are designed to assist the Committee in understanding our compensation and benefit programs as applied to

each of the NEOs. The tally sheets include the following information for the most recently completed year, as well as the two previous years:

 

(i) compensation history, including annual cash compensation, long-term compensation, value of vested equity, and annualized cost of benefits and perquisites;

 

(ii) the expected value of annual cash compensation for the year, including annual cash compensation and the fair value of long-term compensation at grant;

 

(iii) accumulated value of compensation, including total accumulated value of equity grants, accumulated benefit values at retirement and value of deferred compensation, as well as whether the executive has achieved the applicable guideline under our stock ownership policy; and

 

(iv) a summary of contingent benefits under different separation scenarios, as applicable and including involuntary termination not for cause, termination following a change of control, termination for death or disability, or retirement.

 

The Committee believes that the tally sheets are useful in determining compensation because they provide a historical perspective on NEO compensation, include each of the various components of compensation offered by the Company, and contain actual information that will be reflected in the executive compensation tables included in the proxy statement.

 

Base Salary

 

Base salaries provide executives with a base level of monthly income to compensate them for services rendered during the fiscal year and are determined after consideration of the following factors:

 

 

In 2008 and 2009, the CEO and other NEOs did not receive any base salary increase as a result of global economic conditions and our outlook for performance. Based on our improving performance and in recognition of our long-term goals, the Committee increased the base salaries of Messrs. Scarborough, O’Bryant and Clyde by 3% in 2010, an amount proportional to the average percentage salary increase for the U.S. employee population. Mr. Nolan’s base salary increased by 5% in 2010 in recognition of the financial performance of his corporate group and to position his compensation around the market median. Messrs. Butier and Neville were not NEOs in 2009.

 

Performance-based Compensation

 

We structure our performance-based compensation program to reward the NEOs based on our performance, as well as the individual executive’s contributions, to further motivate our executives and align their compensation with stockholder interests. For our executive officers, the largest component of their total direct compensation opportunity is performance-based; for fiscal year 2010, approximately 88% of Mr. Scarborough’s and approximately 77% of the other NEOs’ total direct compensation consisted of performance-based compensation. The Committee allocates

compensation between cash and equity compensation based on its assessment of our objectives and the competitive practices of other public companies.

 

Our performance-based compensation for 2010 consisted of an annual cash bonus approved by the Committee in February 2011 based on 2010 performance against goals established at the beginning of the year, and long-term equity-based incentives granted by the Committee in February 2010.

 

Annual Cash Bonus under Senior Executive Annual Incentive Plan

 

The annual cash bonus is designed to compensate NEOs based on their achievement of individual and Company performance objectives with targets established to enhance the NEOs’ motivation to achieve superior results. In 2010, the CEO and other executive officers were eligible for an annual cash bonus under our Senior Executive Annual Incentive Plan (“SEAIP”) approved by the Committee in March 2009 and by stockholders at the 2009 Annual Meeting. Under the SEAIP, the NEOs are eligible to receive a maximum cash bonus based on a specified percentage of our gross profit less marketing, general and administrative expenses, in each case as reported on our consolidated statement of operations for the year, subject to Committee review and exercise of its downward discretion. See Financial Modifier below. The CEO is eligible for a bonus award of up to 1.5% of the SEAIP performance measure ($6.8 million in 2010), and the other NEOs and participants are eligible for an individual bonus award of up to 0.75% of the SEAIP performance measure ($3.4 million in 2010), respectively.

 

The Committee has the discretion to decrease, but not to increase, awards calculated under the SEAIP. Annual cash bonus payments made to the NEOs are included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table that follows this CD&A.

 

Formula

 

The following formula is used for calculating the annual bonus award:

 

Year-end Salary × Market Reference Bonus Opportunity % × Financial Modifier × Individual Modifier = Bonus Award

 

Bonus Opportunity

 

The Committee uses a bonus opportunity based on market reference data and consistent with our total direct compensation positioning strategy (for 2010, 110% and 60% of base salary for Mr. Scarborough and the other NEOs, respectively, based on their base salaries at the end of the year).

 

Financial Modifier

 

The financial modifier is the amount payable under our annual bonus plan based on our performance and the weighting of the performance objectives selected by the Committee at the beginning of the fiscal year. The components of the financial modifier are selected to further our pay-for-performance strategy and give management additional incentive to provide for long-term value creation. Consistent with the way in which the Company measures its own financial performance, in evaluating our achievement of the performance objectives, the Committee has the discretion to exclude the impact, positive or negative, of extraordinary items such as: currency translation; acquisitions and divestitures; changes in accounting principles, tax codes or related regulations and rulings; natural disasters, terrorism and war; costs related to the early extinguishment of debt; costs of litigation outside the normal course of business; and non-cash charges. The interpolation between target and maximum performance objectives is linear, with the total financial modifier capped at 200% of participants’ target annual bonus opportunities.

The performance objectives for 2010 were based on our annual financial results using the following metrics, determined by the Committee in consultation with Towers Watson in February 2010 based on our corporate strategies and objectives established during our annual operating plan process:

 

(i) sales growth, excluding the impact of currency translation (such metric being referred to as “adjusted sales growth” and representing 40% of the weighting);

 

(ii) earnings per share, excluding charges for restructuring costs, asset impairment and lease cancellation charges, loss from curtailment and settlement of pension obligations, loss from debt extinguishment, legal settlements, and gain on sale of investments (such metric being referred to as “adjusted EPS” and representing 40% of the weighting); and

 

(iii) free cash flow, which refers to cash flow from operations, less net payments for property, plant, equipment, software and other deferred charges, plus net proceeds from sale (purchase) of investments (such metric being referred to as “FCF” and representing 20% of the weighting).

 

The adjusted sales growth, adjusted EPS and FCF goals were designed as stretch goals achievable if we significantly improved upon our 2009 performance despite the strong headwinds of the global recessionary environment and emerging inflationary pressure from increasing raw material costs. In 2010, the Committee changed the weighting of the FCF metric from 331/3% in 2009 to 20% in 2010 and increased the weighting of each of the adjusted sales growth and adjusted EPS metrics to 40% to reflect a shift in management’s focus from debt reduction to profitable sales growth. As set forth in the table summarizing our results against these performance objectives, we substantially exceeded each of the three targets, resulting in the maximum financial modifier of 200% of participants’ target annual bonus opportunities.

 

2010 ANNUAL BONUS RESULTS

 

 

 

 

As shown in the chart below, over the last five fiscal years, including 2010, the financial modifier averaged 112%. The Committee believes the historical variability in the financial modifier demonstrates that the annual bonus plan has operated as intended to deliver performance-based compensation.

 

Year		Financial Modifier
2006			118	%
2007			88	%
2008			19	%
2009			136	%
2010			200	%
5-year average			112	%

 

Individual Modifier

 

The NEOs have individual performance objectives that are designed to supplement our annual financial goals and also enhance our long-term performance. Achievement of individual objectives is evaluated and translated into an individual modifier, which in most years can range from 0% to 150%. The Committee determines the individual modifier for the CEO based on its assessment of the CEO’s performance. The CEO recommends the individual modifiers for the other NEOs based on his assessment of their individual performance and the Committee considers the CEO’s recommendations before determining individual modifiers for the other NEOs. Although executives are eligible for an individual modifier based on their individual performance against objectives, no annual bonus may exceed the maximum award payable under the SEAIP.

 

For 2010, the NEOs met, and in many cases exceeded, their respective performance objectives established at the beginning of the year. However, given the amount of the financial modifier and upon the recommendation of the CEO, the Committee determined to cap the individual modifiers for the NEOs at 100%. As a result, the NEOs’ individual performance against the previously-established objectives did not materially impact their 2010 compensation.

 

Additional 2010 Bonus Opportunity

 

To motivate management to achieve success with our shift in focus from debt reduction to profitable sales growth and to further reward such success in excess of our operating plan targets, in February 2010, the Committee approved an all-or-nothing additional bonus opportunity if we were to (i) achieve greater than 5% annual organic sales growth, which is a financial measure that refers to the increase in sales excluding the estimated impact of currency translation, acquisitions and divestitures and the extra week in fiscal year 2009, and (ii) maintain an earnings before interest and taxes (“EBIT”) margin of greater than 7%. If we had achieved both these objectives in 2010, all incentive-eligible employees, including the CEO and other NEOs, would have received an additional 10% of their respective target bonus opportunities (before factoring in financial and individual modifiers).

 

Although we exceeded 5% in organic sales growth in 2010, after giving effect to the accrual for the additional bonus opportunity, we would not have achieved the minimum 7% EBIT margin. Therefore, in accordance with the terms of the opportunity, no additional bonus was provided to incentive-eligible employees, including the CEO and other NEOs.

 

Long-Term Incentives under Equity Incentive Plan

 

To align executive compensation more closely with the interests of the stockholders, our long-term incentives for 2010 consisted solely of equity awards granted under the Employee Stock Option and Incentive Plan (the “Equity Incentive Plan”), which are designed to:

 

 

 

The Committee believes that denominating all of the NEOs’ long-term incentives in the form of equity awards strengthens the alignment of executives’ interests with those of stockholders.

 

Administration of Equity Incentive Plan

 

Under its charter and pursuant to the Equity Incentive Plan, the Committee has the authority to make equity awards to our directors, officers and employees. The Committee reviews and approves the total annual pool of stock options, PUs and RSUs, as well as annual and special equity awards to executive officers, including the size of the awards and related terms and conditions. The Committee has delegated the authority to the Committee Chairman to approve special equity grants to executive officers. The Committee has also delegated the authority to the CEO to make equity awards for annual and special equity grants of stock options, PUs and RSUs to employees, other than executive officers. Following approval by the Committee or the CEO, as appropriate, special equity awards (other than those granted at the time of the annual grant) are granted and dated on the first day of the next third, sixth, ninth, or twelfth calendar month (if the NYSE is closed on that date, then on the first day thereafter that the NYSE is open). Special equity grants (including those for new hires, promotions, retention, and special recognition) may have different terms and vesting schedules depending on the purpose of the grant.

 

The Committee’s practice for options and RSUs granted under the Equity Incentive Plan is to utilize a minimum three-year vesting period, with ratable vesting during the period. For PUs, the performance period is a minimum of one year; however; PUs granted to date have all utilized a three-year performance period. Equity awards granted under the Equity Incentive Plan provide that, in the event of a change of control of the Company, all unvested equity awards become immediately vested. The period of exercisability for options following a qualified retirement would be the full term of the option for the CEO and the lesser of five years or the full term of the option for the other NEOs.

 

Long-term Incentives for 2010

 

The targeted 2010 long-term incentive opportunity represented approximately 78% and 75% of the CEO’s and NEOs’ performance-based compensation, respectively. In 2010, after discussions with its compensation consultant, the Committee targeted the following percentages and components for the long-term incentives of the CEO and other NEOs:

 

 

Appreciation of our stock price directly impacts the realized value of the options, and for the PUs, the number of shares that may be earned. As a result, the Committee believes that these long-term incentives appropriately align executive compensation with the long-term interests of stockholders.

 

Mid-term Incentives Subject to Vesting Based on 2008-2010 MTIP Cycle

 

For the 2008-2010 MTIP cycle, the performance objectives set by the Committee in February 2008 were one-third sales, one-third TSR (compared to other companies in the S&P 500 Industrials and Materials subsets) and one-third economic value added (“EVA,” which is net operating profit after taxes less a capital charge on assets employed), in each case excluding any restructuring or acquisitions. The threshold, target and maximum levels for the 2008-2010 cycle are set forth below:

 

2008-2010 MTIP Cycle

 

 

We did not achieve the performance objectives required for the PUs granted pursuant to the 2008-2010 MTIP to vest. Accordingly, these PUs were cancelled and no equity was received under the grant by eligible executives, including the CEO and other NEOs.

 

Performance-based Incentives Subject to Vesting Due to Achievement of Performance Objective in 2010

 

In 2005 and 2006, the NEOs — except for Messrs. Nolan and Neville, who were not employed by the Company at the time — were granted performance-based RSUs. These performance-based RSUs were eligible for dividend equivalent rights, which accrued at the times dividends were paid by the Company to stockholders generally. The 2005 grant was eligible to vest at year-end 2008, 2009 or 2010 provided that our ROTC met or exceeded the 67^th percentile of the peer group described in Executive Compensation in Relation to Peers above, and the 2006 grant was eligible to vest in year-end 2009 and 2010 (and would be again eligible year-end 2011) provided that our ROTC at year-end met or exceeded the 67^th percentile of the same peer group. If the 67^th percentile ROTC threshold was met at any applicable date, both grants would vest in full.

 

Based on its review of 2010 data, the Committee determined our ROTC at year-end 2010 was above the requisite 67th percentile of the relevant peer group. Accordingly, the 2005 and 2006 performance-based RSUs (including all accrued dividend rights) held by the NEOs were vested due to achievement of the performance objective in 2010, in the following amounts:

 

Executive Stock Ownership

 

To further align the interests of the NEOs with those of stockholders, the Committee believes that executives, including the NEOs, should acquire and maintain an equity interest in the Company. To help achieve this objective, in 2009, the Committee reviewed our stock ownership policy, which requires that our executives acquire and maintain certain levels of stock ownership during their tenure with the Company. Effective January 1, 2010, the Committee (i) increased the targeted ownership levels; and (ii) provided that executives could achieve their applicable ownership guideline level using the lesser of (A) the number of shares equal to a multiple of their respective salary or (B) a fixed number of shares, in each case within five years of the effective date of the revised policy or, for new or promoted executives, within five years of their hire or promotion. Effective March 1, 2011, the Committee further revised the stock ownership policy to count fifty percent (50%) of the intrinsic gain of any vested, unexercised stock options held by an executive when assessing his or her compliance with the applicable guideline ownership level. See Exhibit A attached to this proxy statement for further information concerning these guidelines. The Committee expects that the executives will make progress toward their new ownership levels during the five years. If an executive has not reached his or her applicable guideline ownership level by the later of January 1, 2015 or five years after his or her hire or promotion, the executive is required to hold all net shares acquired (shares remaining after the payment of taxes and transaction fees following the vesting of a stock award or an exercise of a stock option) until such time as he or she meets the applicable guideline ownership level.

 

Targeted levels of executive stock ownership are as follows, with the CEO designated a Level 1 executive and the other NEOs designated as Level 2 executives:

 

		Stock Ownership Guidelines(1)
		Multiple of Base				Fixed Shares
Level		Salary				or Units
Level 1			5	X			95,000
Level 2			3	X			27,000
Level 3			2	X			17,000
Level 4			1	X			4,000

 

 

 

The Committee reviewed the ownership levels of the NEOs in December 2010. Although the ownership levels of five of the six NEOs were below the guidelines on such date, all NEOs had plans to be in compliance by the 2015 deadline by which they must achieve their respective minimum level. To our knowledge, based solely on our review of written representations from our executive officers, none of our executive officers purchased financial instruments designed to hedge or offset any decrease in the market value of Company common stock held, directly or indirectly, by them.

 

Benefits

 

The Committee works with its compensation consultant and management to provide a benefit program that is competitive with other companies in the industries in which it competes for executive talent to support the recruiting and retention of employees, including the NEOs. In addition to the benefits described below, NEOs are eligible for benefits made available to all our eligible employees in the United States, including retirement, savings, health and welfare, and disability coverage; however, these benefit programs are not overseen by the Committee.

 

Defined Benefit Retirement Plans

 

We provide retirement benefits for all eligible employees, including the NEOs, under the Pension Plan. We also provide the BRP for eligible employees as described below. The Pension Plan and the BRP were closed to new employees effective January 1, 2009 and pension benefits under both plans stopped accruing after December 31, 2010. These plans are not administered by the Committee.

Pension Plan

 

Benefits under the Pension Plan are based on pensionable earnings, length of service, when benefits commence and how they are paid, and are currently calculated separately for each year of service. Employees vest in the Pension Plan after five years of service.

 

Employees who participated in the Pension Plan at any time from December 1, 1986 through November 30, 1997, may also have a benefit under the Stock Holding and Retirement Enhancement Plan of Avery Dennison Corporation (“SHARE Plan”). In order to receive a maximized benefit under the Pension Plan, these employees have the option to transfer their SHARE Plan balance to the Pension Plan, which would be converted into an annual annuity and combined with the monthly benefit from the Pension Plan. If they choose not to transfer their SHARE Plan balance, they would receive a lump-sum payment from the SHARE Plan.

 

Amounts payable under the Pension Plan may be reduced in accordance with certain provisions of the Internal Revenue Code of 1986 (as amended, the “Code”), which, as applied to plan years beginning on or after December 1, 1994, currently limit the annual amount of compensation used to determine annual benefit accruals under the Pension Plan to the first $245,000 of covered compensation as of December 31, 2010.

 

Benefit Restoration Plan

 

In December 1994, the Company established the BRP to provide for the payment of supplemental retirement benefits to eligible employees, including the NEOs, whose benefits under the Pension Plan are limited under the foregoing Code provisions. The BRP is a nonqualified excess benefit plan. Benefits are payable under the BRP in amounts equal to the amount by which a participant’s benefits, otherwise payable under the Pension Plan, are reduced under applicable provisions of the Code.

 

All NEOs, except Mr. Neville, currently have a benefit in at least one of the plans discussed above. For further information on these plans, refer to the narrative disclosure following the Pension Benefits in 2010 table below.

 

Supplemental Executive Retirement Plan

 

We established the SERP in 1983 to provide certain designated key executives with additional incentives to further our long-term growth and induce them to remain with the Company. Under the SERP, we contractually agreed to provide Messrs. Scarborough and O’Bryant, the SERP’s only active participants, certain supplemental benefits upon their respective retirements.

 

Changes in SERP Effective January 1, 2011

 

In December 2010, the Committee approved and obtained the requisite contractual agreement of Messrs. Scarborough and O’Bryant to the freezing of benefits under the SERP based on the participants’ average compensation as of December 31, 2010, rather than their final average compensation as of the date of retirement, with benefits remaining reduced by the other benefits described above. The Committee determined to freeze participants’ SERP benefits to: (i) be consistent with our decision to freeze the accrual of benefits under two of its U.S. defined benefit plans for all employees eligible to participate therein, effective December 31, 2010; (ii) reduce our overall exposure to accounting and cash flow volatility; and (iii) more closely align their compensation with our performance by issuing each participant an option to purchase shares of our common stock as described below.

 

As consideration for, and effective upon, their voluntary agreement to the freezing of contractual SERP benefits, the Committee granted each of Messrs. Scarborough and O’Bryant an option to purchase shares of our common stock, the number of which was determined by the Committee by evaluating the present value of the shortfall to each participant projected to be caused by the freezing of the remaining SERP benefits and to provide an additional incentive to create stockholder value. On December 13, 2010, upon his written agreement to the freezing of his contractual SERP benefits, Mr. Scarborough was granted an option to purchase 200,000 shares of our

common stock, the same number of shares as the grant he received in February 2010 as part of the Committee’s annual equity award process. On December 14, 2010, upon his written agreement to the freezing of his contractual SERP benefits, Mr. O’Bryant was granted an option to purchase 16,000 shares of our common stock. Both options have vesting, expiration and pricing consistent with our customary practices. See the Grants of Plan-Based Awards for 2010 table below.

 

SERP as in Effect in 2010

 

Under the terms of the SERP as in effect during 2010, benefits would commence generally upon the later of age 60 for Mr. Scarborough and age 55 for Mr. O’Bryant and separation from service (at the same time as the BRP) at a benefit level that, when added to the benefits to which they would be entitled from the Pension Plan, the BRP, the SHARE Plan at the time of retirement, certain Company contributions (plus interest) to the 401(k) Plan, fixed amounts representative of contributions plus interest to the deferred compensation plans and Social Security payments, would equal 62.5% for Mr. Scarborough, and 52.5% for Mr. O’Bryant of their respective final average compensation (annual average of their salary for the three highest twelve-month periods out of their last sixty months of employment with the Company plus the average of their three highest earned annual bonuses during their last sixty months of employment with the Company). As described above, this calculation would now be limited to the participants’ average compensation as of December 31, 2010.

 

Survivor and disability benefits are payable under the SERP under certain circumstances. If benefits were paid prior to age 62 for Mr. Scarborough and age 65 for Mr. O’Bryant, they would be subject to a reduction for early commencement. For further information on the SERP, refer to the narrative disclosure following the Pension Benefits in 2010 table below.

 

Defined Contribution Retirement Plan

 

The 401(k) Plan is a tax-qualified retirement savings plan that permits employees, including the NEOs, to defer up to 25% of their annual salary and bonus or, if lower, the limit prescribed by the Internal Revenue Service, to the 401(k) Plan on a before-tax basis. The employees’ elective deferrals are immediately vested upon contribution to the 401(k) Plan. The Company currently makes contributions to the 401(k) Plan in an amount up to 6% of employees’ eligible compensation, 3% of which as an automatic contribution and up to 3% of which as a match to 50% of employee contributions of up to 6%, subject to certain other Code limits. After three years of service, participants vest in the amounts contributed by the Company. Employees are immediately eligible to participate in the 401(k) Plan, which is not administered by the Committee.

 

Deferred Compensation Plan

 

Eligible employees, including the NEOs, may defer up to 75% of their base salary and up to 90% of their cash bonus in accordance with the 2005 Executive Variable Deferred Retirement Plan (“EVDRP”), which is a nonqualified plan. Deferrals are 100% vested. The EVDRP provides NEOs and other eligible employees with a long-term capital accumulation opportunity with a number of investment opportunities, including fixed income and mutual fund alternatives. Certain NEOs also participated in prior deferred compensation plans that are no longer available for new deferrals; none of our currently open plans offer investment options that provide above-market interest rates.

 

Due to the freeze of our U.S. pension plans effective December 31, 2010, beginning in 2011, the Company will make an annual contribution to each NEO’s deferred compensation account equal to 6% of cash compensation (salary and annual bonus) in excess of the 401(k) Plan limit. This contribution will be added to their deferred compensation accounts at the beginning of a plan year as long as (i) the NEO has contributed at least the pre-tax limit into the 401(k) Plan during the prior plan year and (ii) is employed by the Company at year end. This benefit is designed to supplement pre-tax 401(k) contributions that are limited for certain executives (by the Code).

Retiree Medical

 

Retirees, including the NEOs, may be eligible for medical coverage under our plan until they are eligible for Medicare provided they meet the following criteria: (i) elect to retire immediately following separation from the Company; (ii) receive a pension benefit from the Pension Plan; and (iii) are age 55 or older with 15 or more years of service. For employees who are at least age 60 and have 20 years of service, the cost for this coverage is shared by the Company and the retiree.

 

Supplemental Medical Insurance

 

All NEOs contribute to, and participate in, medical plans available to employees. In addition, in 2010, we provided each NEO, the NEO’s spouse and dependent children, with supplemental medical coverage, which was available to reimburse for medical costs not covered under the basic medical plan. In 2010, Mr. Scarborough had reimbursement coverage up to $30,000 per year for himself and for each covered family member, and the other NEOs had coverage up to $20,000 per year for themselves and for each covered family member.

 

While the NEOs may continue to contribute to, and participate in, the medical plans available to all employees in 2011, their supplemental medical benefits have been eliminated and replaced with an annual executive benefit allowance. See Perquisites — Changes in Perquisite Program for 2011 below.

 

Supplemental Dental Insurance

 

All NEOs contribute to, and participate in, dental plans available to employees. In addition, in 2010, we provided each NEO, the NEO’s spouse and dependent children, with supplemental dental coverage, which was available to reimburse the NEOs for dental costs not covered under the basic dental plan. This benefit included orthodontia coverage ($4,000 lifetime maximum) for dependents up to age 19. In 2010, Mr. Scarborough had reimbursement coverage up to $2,000 per year for himself and for each covered family member, and the other NEOs had coverage up to $1,500 per year for themselves and for each covered family member.

 

While the NEOs may continue to contribute to, and participate in, the dental plans available to all employees in 2011, their supplemental dental benefits have been eliminated and replaced with an annual executive benefit allowance. See Perquisites — Changes in Perquisite Program for 2011 below.

 

Life Insurance

 

We provide $50,000 in life insurance for all employees, including the NEOs. In addition, we provide each NEO supplemental life insurance equal to three times the NEO’s base salary less $50,000 (which is covered under our basic plan), up to a maximum coverage of $700,000.

 

Perquisites

 

We provide the NEOs with certain perquisites to attract and retain executives. The Committee periodically reviews the perquisites provided to the NEOs, and changed the program effective January 1, 2011.

 

Changes in Perquisite Program for 2011

 

Based on our analysis in October 2010 of the recently enacted federal health care reform legislation, we determined that we would not be able to continue offering supplemental medical and dental benefits to our executives. In connection with the elimination of these benefits effective January 1, 2011 and at the request of the Committee, Towers Watson performed an analysis of our overall executive perquisite and supplemental benefit program. Based on its review of the perquisites and supplemental medical and dental benefits provided by the Company during 2010, executives’ actual usage of such benefits, current market practices, the range of alternative approaches to deliver such benefits, and the recommendation of its compensation consultant, the Committee determined to replace the existing enumerated perquisites and supplemental medical and dental benefits with an

executive benefit allowance for Level 1 through Level 4 executives based in the United States as set forth in the table below, with the CEO designated a Level 1 executive and the other NEOs designated as Level 2 executives. In addition, Level 1 and Level 2 executives are also eligible for a separate financial counseling allowance.

 

2011 EXECUTIVE BENEFIT ALLOWANCE

 

 

 

 

The amounts set forth above are taxable compensation to the employee and there are is no tax gross-up for any such amounts.

 

The Committee believes the revised program reduces the administrative expenses associated with administering a variety of separate perquisites and provides senior executives with greater flexibility to select perquisites based on their needs or preferences rather than our specific options previously made available by the Company. Newly hired or promoted executives are eligible to participate in the program at the beginning of the month following their hire date or the effective date of their promotion, in either case receiving a prorated amount for the year. The Committee administers the program and may, in its discretion, adjust the annual benefit allowance amount or establish different annual allowance amounts applicable to additional levels of executives.

 

Perquisites Available in 2010

 

Annual Physical Examination

 

The NEOs are strongly encouraged to have an annual physical examination, which is paid for by the Company. The results are confidential between the physician and the NEO. This perquisite is (i) not subject to the executive benefit allowance described above and will continue to be reimbursed in 2011, and (ii) not taxable to the NEO.

 

Car Allowance

 

In 2010, the NEOs were eligible to participate in the executive car allowance program under which we provided each NEO with a monthly allowance. Each executive was responsible for leasing or purchasing his own vehicle, as well as for paying for all insurance and maintenance costs. The monthly allowance for the NEOs ranged from $1,700 to $2,500. For 2011, this perquisite has been eliminated and replaced with the annual executive benefit allowance described above.

 

Clubs

 

In 2010, the NEOs were eligible to be reimbursed by the Company for their membership in (i) up to two airline clubs to use when traveling; (ii) one health club; and (iii) for certain NEOs only, monthly dues for business and social club memberships. For 2011, these perquisites have been eliminated and replaced with the annual executive benefit allowance described above.

 

Financial Counseling

 

Only Level 1 and 2 executives were entitled during 2010 and are entitled for 2011 to reimbursement for financial counseling and tax preparation services, in an amount up to $25,000 and $15,000, respectively.

Home Computer

 

The Company has provided each NEO with a home computer and related equipment.

 

Incentive Compensation Recovery (“Clawback”) Policy

 

In February 2009, the Committee adopted a compensation recovery (“clawback”) policy. Under the policy, in the event of fraud or other intentional misconduct on the part of an employee that necessitates a restatement of our financial results, the employee will be required to reimburse the Company for any bonus awards or other incentive compensation paid or issued to the employee in excess of the amount that would have been paid or issued based on the restated financial results. The Committee approved the policy after consideration of market practices and to further align the interests of our employees with our stockholders and expects that it will review and modify the policy as may be required to comply with NYSE listing standards to be issued pursuant to SEC rulemaking currently scheduled to be finalized in 2011.

 

Severance Plans

 

Key Executive Change of Control Severance Plan

 

On December 3, 2009, the Committee adopted the Key Executive Change of Control Severance Plan (the “COC Severance Plan”) under which the NEOs and other designated executives would be eligible for severance payments upon termination of employment in connection with a “change of control” of the Company, subject to the terms and conditions in the COC Severance Plan. In the event of a qualifying termination of employment following a change of control, a participant designated as a Tier A executive would receive three times the sum of his annual pay, his highest annual bonus received in the preceding three years and the cash value of twelve months of his qualified medical and dental benefits, and a participant designated as a Tier B executive would receive two times the sum of his annual pay, his highest annual bonus received in the preceding three years and the cash value of twelve months of his qualified medical and dental benefits. Each participant in the COC Severance Plan would also receive a pro-rata bonus for the year of termination based on the highest annual bonus received by such participant in the preceding three years, as well as up to $25,000 in outplacement services for up to one year following the termination of employment.

 

After December 1, 2010, any change of control compensation to the NEOs would be determined in accordance with the terms and subject to the conditions of the COC Severance Plan. The Committee has designated the CEO a Tier A executive under the COC Severance Plan, with the other NEOs designated as Tier B executives.

 

Participants in the COC Severance Plan would not receive any excise tax gross-up; however, in certain circumstances, if a participant would otherwise incur excise taxes under Section 4999 of the Code, the participant’s payments may be reduced to the “safe harbor amount” (as defined in the COC Severance Plan), such that no such excise taxes would be due. In addition, payments under the COC Severance Plan would be offset by payments received by the participant under any other Company severance plan or agreement and any other statutory, legislative and regulatory requirements.

 

Executive Severance Plan

 

On December 3, 2009, the Committee also adopted the Executive Severance Plan (the “Severance Plan”) under which the NEOs and other designated executives would be eligible (or will be eligible on January 1, 2011) for severance payments upon termination of employment upon certain involuntary terminations of employment, subject to the terms and conditions described in the Severance Plan. In the event of a qualifying termination of employment, a participant designated as a Level 1 executive would receive two times the sum of his annual pay, his highest annual bonus received in the preceding three years and the cash value of twelve months of his health benefits, and a participant designated as a Level 2, Level 3 or Level 4 executive would receive the sum of his or her annual pay, his or her highest annual bonus received in the preceding three years and the cash value of twelve

months of his or her health benefits. Participants in the Severance Plan would also be eligible for up to $25,000 in outplacement services for up to one year following termination of employment.

 

After December 1, 2010, the severance compensation of all NEOs would be determined in accordance with the terms and subject to the conditions of the Severance Plan. The Committee has designated the CEO a Level 1 executive under the Severance Plan, with the other NEOs designated as Level 2 executives.

 

Payments under the Severance Plan would be offset by payments received by the participant under any statutory, legislative and regulatory requirement or under any other Company severance plan or agreement.

 

Employment Agreements

 

Termination/Expiration of Existing Agreements Effective December 2010

 

In October 2010, the Committee approved the termination of any remaining employment agreement between the Company and its NEOs. As a result, the employment agreements of Messrs. Scarborough, O’Bryant and Clyde terminated effective December 1, 2010. At that time, the Committee also approved the participation of these NEOs in the COC Severance Plan and the Severance Plan as of December 1, 2010. The employment agreements of the remaining NEOs (Messrs. Butier, Neville and Nolan) had previously terminated, effective December 31, 2009, with those individuals becoming eligible to participate in the COC Severance Plan and the Severance Plan as of January 1, 2010.

 

As a result of the termination of these employment agreements: (i) in the event of a qualifying termination of employment following a change of control, none of our NEOs would be eligible to receive a payment in excess of two times the sum of his annual pay, highest annual bonus received in the preceding three years and the cash value of twelve months of his medical and dental benefits, except for Mr. Scarborough, who would be eligible to receive a payment of three times such sum; and (ii) in accordance with the terms of the COC Severance Plan and the Severance Plan, none of our NEOs would be eligible to receive an excise tax gross-up on any payment made in connection with a qualifying termination of employment following a change of control, except for Mr. O’Bryant, whose separate retention agreement with the Company provides for an excise tax gross-up in the event a payment were made pursuant thereto. Mr. O’Bryant’s retention agreement expires August 14, 2012 and, if he remains employed by the Company after such date, he would not be entitled to any excise tax gross-up.

 

Employment Agreements Effective During 2010

 

Employment Agreement with Mr. Scarborough

 

As noted above, Mr. Scarborough’s agreement terminated on December 1, 2010. As such, the rights to which he is entitled upon a change of control or termination of employment are as described in Severance Plans above.

 

On August 1, 1997, we entered into an agreement with Mr. Scarborough, which was amended on May 1, 2005 to reflect his promotion to President and CEO and provided that, if his employment were terminated for any reason other than for cause, death, disability, or voluntary resignation without good reason (as such terms are defined in the agreement), he: (i) would have received a payment equivalent to a pro-rated annual bonus for the year of termination; (ii) would have received salary and bonus (based on his highest combined annual base salary plus bonus in any of the three previous years) for one year before a change of control and three years after a change of control (“severance period”); (iii) would have received additional retirement and supplemental retirement benefits that would have accrued during the severance period; (iv) would have continued to participate in benefit plans (including medical, dental, and life insurance) during the severance period (but reduced to the extent such benefits are provided by another employer); (v) would have received additional age and service credit under a deferred compensation plan following termination during the severance period (or the minimum age and service credit required for early retirement benefits and the retirement interest rate); and (vi) if such termination were to occur after a change of control, the Company would have paid for outplacement services not to exceed $50,000. Benefits and amounts to which Mr. Scarborough was entitled under the agreement would have been reduced to the extent of

any benefits and earned income from any new employment or services performed during the severance period. Under the agreement, Mr. Scarborough would have received a gross-up payment for any excise taxes that are imposed under Section 4999 of the Code; since the agreement terminated on December 1, 2010, he is no longer eligible for any gross-up payment.

 

Employment Agreements with Messrs. Clyde and O’Bryant

 

As noted above, Mr. Clyde’s January 1, 2002 employment agreement and Mr. O’Bryant’s January 2, 2001 employment agreement both terminated on December 1, 2010. These agreements were substantially the same as Mr. Scarborough’s agreement, including the change of control provisions described above. Following termination of their employment agreements, the rights to which Messrs. Clyde and O’Bryant are entitled upon a change of control or termination of employment are as described in Severance Plans above, except that Mr. O’Bryant also has certain rights described in Retention Agreement with Mr. O’Bryant below.

 

Retention Agreement with Mr. O’Bryant

 

On March 31, 2005, we entered into a retention agreement with Mr. O’Bryant under which he agreed to remain employed by the Company through August 14, 2012 in consideration for our (i) contribution of $1 million on April 1, 2005 to his deferred compensation account, which contribution (and any earnings thereon) vested upon his reaching the age of 55; (ii) grant to him of 30,000 shares of restricted stock, half of which vested on April 1, 2009 and half of which will vest on August 14, 2012; and (iii) grant to him of incremental options each year from 2005 to 2011 in an amount equal to $180,000 divided by the Black-Scholes value of our common stock on the date in February on which we make our annual stock option grants to executives, with vesting and expiration consistent with our customary practices. Under the agreement, these benefits vest upon death or disability, involuntary (not for cause) termination, good reason termination, or a change of control and Mr. O’Bryant would receive a gross-up payment for any excise taxes that are imposed under Section 4999 of the Code. Mr. O’Bryant’s retention agreement expires August 14, 2012 and, if he remains employed by the Company after such date, he would not be entitled to any excise tax gross-up.

 

TAX AND ACCOUNTING IMPLICATIONS

 

Deductibility of Executive Compensation

 

With our performance-based compensation programs, we aim to compensate the NEOs in a manner that is tax effective for the Company.

 

Under the 1993 Omnibus Budget Reconciliation Act and Section 162(m) of the Code, income tax deductions of publicly-traded companies may be limited to the extent total compensation for certain executive officers exceeds $1 million in any one year, except for compensation payments that qualify as “performance-based.” To qualify as “performance-based,” compensation payments must be based solely upon the achievement of objective performance goals and made under a plan that is administered by the Committee. In addition, the material terms of the plan must be disclosed to and approved by the stockholders and the Committee must certify that the performance goals were achieved before payments can be made. The Committee has designed certain of our compensation programs to conform with Section 162(m) of the Code and related regulations so that total compensation paid to any employee covered by Section 162(m) generally should not exceed $1 million in any one year, except for compensation payments that qualify as “performance-based.” However, the Company may pay compensation that is not deductible in certain circumstances.

 

Section 409A of the Internal Revenue Code

 

Section 409A of the Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose individuals to accelerated

income tax liabilities, penalty taxes and interest on their vested compensation under these plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements so that they are either exempt from, or satisfy the requirements of, Section 409A.

 

Section 280G of the Internal Revenue Code

 

Section 280G of the Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies which undergo a change in control. In addition, Section 4999 of the Code imposes a 20% penalty on the individual receiving the excess payment. Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits, and payments and acceleration of vesting under long-term incentive plans including stock options and other equity-based compensation. Excess parachute payments are parachute payments that exceed a threshold determined under Section 280G based on the executive’s prior compensation. In approving the compensation arrangements for our NEOs in the future, the Committee will periodically consider the elements of the cost to our Company of providing such compensation, including the potential impact of Section 280G. However, the Committee may, in its judgment, authorize compensation arrangements that could give rise to loss of deductibility under Section 280G and the imposition of excise taxes under Section 4999, when the Committee believes that such arrangements are appropriate to attract and retain executive talent.

 

Accounting Standards

 

ASC Topic 718 requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of stock options, restricted stock, RSUs and PUs under our equity incentive plans will be accounted for under ASC Topic 718. The Committee will periodically consider the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align accounting expenses of our equity awards with our overall executive compensation philosophy and objectives.

 

COMPENSATION AND EXECUTIVE PERSONNEL COMMITTEE REPORT

 

The Compensation and Executive Personnel Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included or incorporated by reference in our annual report on Form 10-K and this proxy statement.

 

 

The above Compensation and Executive Personnel Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report by reference therein.

ADDITIONAL INFORMATION REGARDING EXECUTIVE COMPENSATION

 

SUMMARY COMPENSATION TABLE

 

The following table and accompanying notes show the compensation earned or awarded during 2010, 2009 and 2008 by the CEO, the current and former CFOs and our other three most highly compensated executive officers.

 

 

 

 

Option awards vest ratably over four years.  The fair value of stock option awards is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for expected dividend yield, expected volatility, risk-free interest rate and the expected life of the options. The underlying assumptions used were as follows:

 

		2010				2009				2008
Risk-free interest rate			2.61	%			2.76	%			4.15	%
Expected stock price volatility			31.99	%			41.51	%			29.86	%
Expected dividend yield			2.51	%			3.83	%			2.76	%
Expected option term			6.0 years				6.1 years				6.0 years

 

Amounts for Messrs. Scarborough and O’Bryant include not only the aggregate grant date fair value of option awards granted as a component of long-term equity compensation in February 2010, but also the aggregate grant date fair value of option awards granted as consideration for their written agreement to the freezing of their contractual SERP benefits. Upon such agreement, Messrs. Scarborough and O’Bryant were granted an option to purchase 200,000 and 16,000 shares of our common stock, respectively.

 

 

All Other Compensation for 2010

 

 

 

 

Relationship of Risk to Compensation Policies and Practices

 

Executive Compensation

 

The Compensation and Executive Personnel Committee has designed our executive compensation program to provide the appropriate level of incentives that do not encourage our executive officers to take unnecessary risks in managing their businesses, or other employees to take unnecessary risks in carrying out their responsibilities. A majority of our executive officers’ compensation is performance-based, consistent with our executive compensation philosophy. The key components of this compensation and the features that mitigate any material risks related thereto are as follows:

 

 

 

 

The Compensation and Executive Personnel Committee’s independent compensation consultant, Towers Watson, conducted a risk assessment of our executive compensation program in 2009. Utilizing qualitative and quantitative factors developed for its assessment, Towers Watson concluded that our executive compensation program strikes an appropriate balance between corporate risk mitigation and executive pay for performance.

 

Sales-based Incentive Compensation

 

During 2010, Avery Dennison management reviewed all sales-based incentive compensation plans globally to assess whether those plans could potentially encourage excessive risk-taking. Our management documented the measures and administrative procedures for each plan and confirmed that no payment in excess of $500,000 was made pursuant to these plans. Our management sought to identify the specific business risks related to these compensation plans, as well as all relevant factors that mitigated these risks, and determined that our sales incentive compensation plans do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

GRANTS OF PLAN-BASED AWARDS FOR 2010

 

The following table provides information regarding grants of cash incentive awards made to the NEOs during 2010.