One Dauch Drive

Detroit, Michigan 48211-1198

www.aam.com

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

April 29, 2010

 

American Axle & Manufacturing Holdings, Inc. (AAM)

 

 

 

By Order of the Board of Directors,

 

Patrick S. Lancaster

Executive Vice President, Chief Administrative Officer & Secretary

March 19, 2010

 

2010 ANNUAL MEETING OF STOCKHOLDERS

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

PROXY STATEMENT

 

Annual Meeting of Stockholders

To Be Held April 29, 2010

 

INTERNET AVAILABILITY OF PROXY MATERIALS

 

As permitted by SEC rules, American Axle & Manufacturing Holdings, Inc. (AAM or the Company) is providing the proxy materials for our 2010 annual meeting of stockholders electronically via the Internet. On March 19, 2010, we initiated delivery of proxy materials to our stockholders of record as of the close of business on March 3, 2010 via (1) a notice containing instructions on how to access proxy materials online, (2) paper copy mailing or (3) e-mail distribution.

 

If you received a notice by mail, you will not receive a printed copy of the proxy materials in the mail. Instead, the notice we sent provides instructions on how to access and review all of the information contained in the proxy materials. The notice also provides instructions on how you may submit your proxy over the Internet or by telephone. If you received a notice by mail and would like to receive a printed copy of proxy materials or elect to receive them via e-mail in the future, please follow the instructions included in the notice. If you received a printed copy of proxy materials by mail and would like to register to receive a notice of Internet availability of proxy materials or an e-mail regarding availability of proxy materials in the future, you can do so by accessing the Internet at www.envisionreports.com/AXL.

 

Why am I receiving this proxy statement?

 

You received these proxy materials because you owned shares of AAM common stock on March 3, 2010 (record date). AAM’s Board of Directors (Board) is soliciting your proxy to vote your shares at the annual meeting. By use of a proxy, you can vote whether or not you attend the meeting. This proxy statement includes information that we are required to provide to you and is designed to assist you in voting your shares.

 

Who is entitled to vote?

 

Holders of AAM common stock on the record date are entitled to one vote per share. You are a holder of record if your shares are held directly in your name with AAM’s transfer agent, Computershare Trust Company, N.A. If your shares are held in the name of a broker, bank, trustee or other record holder, you are a street name holder. If you hold shares in more than one account, each notice, proxy and/or voting instruction card you receive that has a unique control number must be voted so that all your shares are voted.

 

How do I vote?

 

You may vote by any of the following methods:

 

• In person — attending the annual meeting and casting a ballot.

 

If you vote by telephone or via the Internet, have your notice card or proxy and/or voting instruction card available. The control number on your card is necessary to process your vote. A telephone or Internet vote authorizes the named proxies in the same manner as if you marked, signed and returned the card by mail. If you hold shares in street name, refer to the voting instructions provided by your broker, bank, trustee or other record holder.

How many shares may vote at the meeting?

 

As of March 3, 2010, we had 71,576,175 shares of common stock outstanding and entitled to vote. Under AAM’s by-laws, a majority of these shares must be present in person or by proxy to hold the annual meeting and take any action during the meeting.

 

Can I change my vote?

 

You may change your vote at any time before the annual meeting by:

 

 

What are the Board’s recommendations on how I should vote my shares?

 

The Board recommends that you vote your shares as follows:

 

 

What are my choices when voting?

 

 

What vote is required to approve each proposal?

 

 

Votes withheld and abstentions will be counted as present for purposes of determining whether a majority of shares is present to hold the annual meeting. Abstentions will not be counted in the tally of votes FOR or AGAINST a proposal. A WITHHELD vote has the same effect as an abstention.

 

Who will count the votes?

 

Representatives of Computershare Trust Company, N.A., AAM’s transfer agent, will count the votes and serve as our inspector of election. The inspector of election will attend the annual meeting.

 

What if I do not vote and do not attend the annual meeting?

 

If you are a holder of record and you do not vote your shares, your shares will not be voted. If you sign your proxy card without giving specific instructions, your shares will be voted as the Board recommends.

 

If you hold shares in street name, you must vote by giving instructions to your broker, bank or other nominee (collectively, broker). You should follow the voting instructions on the form that you receive from your broker. The availability of telephone and Internet voting will depend on your broker’s voting process.

Election of directors.  Beginning this year, if you do not instruct your broker how to vote on the election of each director, your broker may not vote your shares with respect to each director’s election. Shares not voted will be broker non-votes. Broker non-votes will not count as votes FOR or AGAINST a director and will have no direct effect on the outcome of the election. Therefore, we urge you to give voting instructions to your broker on the election of each director. Broker non-votes will be counted as present for purposes of determining whether enough votes are present to hold the annual meeting.

 

Ratification of independent auditors.  Without your instructions, your broker is permitted to use its own discretion and vote your shares on the ratification of the appointment of the Company’s independent auditors. If you do not give your broker voting instructions and your broker does not vote, the votes will be broker non-votes and will have no impact on the outcome of the ratification proposal. We urge you to give your broker voting instructions on this proposal.

 

The Board proposes that the three directors standing for re-election as Class II directors, Salvatore J. Bonanno, Sr., Elizabeth A. Chappell, and Dr. Henry T. Yang, be elected to the Board for terms expiring at the annual meeting in 2013.

 

The Board is divided into three classes. Directors serve for staggered three-year terms. Class I consists of four positions and Class II and Class III each consist of three positions. The Board believes that the staggered election of directors helps to maintain continuity and ensures that a majority of directors at any given time will have in-depth knowledge of the Company.

 

The Board unanimously approved the nominations of our Class II returning directors based on the outstanding achievements, special competencies and integrity of each nominee. Each nominee, as well as each returning director, brings a strong and unique background and set of skills to the Board. Collectively, the Board has high levels of competence and experience in a variety of areas, including manufacturing, engineering, finance, international business, management, restructuring, risk management and the global automotive industry. A summary of the principal occupation, professional background and specific qualifications and/or skills of each nominee and returning director is provided below.

 

Your Board unanimously recommends a vote FOR each of the nominees.

 

Class II — Director to hold office until the 2013 Annual Meeting of Stockholders

 

 

Class III — Directors to hold office until 2011 Annual Meeting of Stockholders

 

Class I — Directors to hold office until the 2012 Annual Meeting of Stockholders

 

 

Corporate Governance Guidelines

 

The Board has adopted Corporate Governance Guidelines that meet or exceed the requirements of the NYSE listing standards. AAM’s Corporate Governance Guidelines are available on our website at http://www.aam.com/investors/corporategovernance.

 

Director Independence

 

AAM’s Corporate Governance Guidelines provide that at least a majority of the members of the Board and each member of the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee meet the independence criteria of the NYSE listing standards. In addition, the Board has established Director Independence Guidelines to assist in determining the independence of our directors. No director qualifies as independent unless the Board determines that the director has no direct or indirect material relationship with the Company. The Board considers all relevant facts and circumstances of which it is aware in making an independence determination. The Director Independence Guidelines are included in AAM’s Corporate Governance Guidelines, which are available on our website at http://www.aam.com/investors/corporategovernance.

 

Based on the independence criteria of the NYSE listing standards and our Director Independence Guidelines, the Board affirmatively determined that each of the following directors and nominees are independent: Salvatore J. Bonanno, Sr., Elizabeth A. Chappell, Forest J. Farmer, Richard C. Lappin, William P. Miller II, Larry K. Switzer, Thomas K. Walker and Dr. Henry T. Yang. Richard E. Dauch, Co-Founder, Chairman of the Board & CEO, and David C. Dauch, President & COO, are not independent due to their employment with AAM. Mr. D.C. Dauch is the son of Mr. R.E. Dauch.

 

Of the eight directors who qualify as independent, two directors have a relationship that the Board found to be immaterial under applicable independence standards. Mr. Bonanno serves on the Board of and has a minority interest in a supplier that receives payments for sales made to AAM. Ms. Chappell is an officer of a non-profit organization that receives sponsorship fees from AAM. Each of these relationships arose in the ordinary course of business. In addition, the annual amounts paid by AAM to each outside entity were substantially below the greater of $1 million or two percent of the annual gross revenues of such outside entity, which is the threshold amount established under the applicable independence standard. Accordingly, the Board determined that each relationship is immaterial and does not impair either director’s independence.

 

Board Leadership Structure

 

The Board believes that as AAM’s co-founder, Richard E. Dauch, is uniquely qualified to serve as Chairman of the Board while holding the position of CEO. Mr. R.E. Dauch has been CEO since he co-founded AAM in 1994 and has served as Chairman since 1997. The Board benefits from this structure through Mr. R.E. Dauch’s contributions as a strong leader with extensive knowledge of the global automotive industry and a unique commitment to the success of the Company he co-founded.

 

This Board leadership structure is further enhanced by independent director oversight. The Board is comprised of eight independent directors, including a lead director. Independent directors and management have different perspectives and roles in strategy development. One of the key responsibilities of the Board is to develop strategic direction while holding management accountable for execution of its business plans. Our leadership structure provides the appropriate balance necessary to accomplish this objective and is the most effective leadership structure for the Board at this time.

 

The Board recognizes that no single leadership model is appropriate for a Board at all times. Accordingly, the Board may consider a different leadership structure, including a separation of the roles of CEO and Chairman, as appropriate, as the Company’s business and leadership continue to evolve.

Lead Director and Executive Sessions

 

Thomas K. Walker was selected by the Board to serve as the lead director for all meetings of non-management directors held in executive session. Mr. Walker is an independent director and serves on every Board committee. The lead director’s responsibilities include presiding at executive sessions of the Board’s non-management directors and acting as a liason between the Chairman and the independent directors.

 

Non-management directors, all of whom are independent, meet in executive session without AAM management present at the end of each scheduled Board meeting.

 

Board Oversight of Risk

 

The Board as a whole and also at the committee level oversees management of the Company’s risks. The Board regularly reviews information provided by senior management regarding the Company’s strategic, operational, financial and compliance risks. In addition, the chairs of the Audit, Compensation, Nominating/Corporate Governance and Technology Committees regularly report to the Board the activities of their respective Committees, including matters related to risk.

 

The Audit Committee oversees management of financial risks and receives an annual report from management on the Company’s overall risk management structure and process. The Nominating/Corporate Governance Committee manages risks associated with corporate governance and management succession planning. The Compensation Committee oversees risks related to AAM’s compensation programs. The Technology Committee oversees risks related to AAM’s product, process and systems technology.

 

Additional review or reporting of specific risks is conducted as necessary or as requested by the Board or a Committee. For example, as the financial and liquidity risks of the Company increased during the economic and industry crisis in 2009, the Board assumed a more active role relative to managing these risks. During 2009, the Board held four special meetings and eight informational update sessions in addition to the four regularly scheduled meetings. These additional meetings and sessions were conducted to review management plans and reports and receive expert financial and legal advice from outside advisors. This process was instrumental in the Company’s ability to successfully navigate through this crisis and preserve value for AAM’s stockholders and other key stakeholders.

 

Stockholder Communication with the Board

 

Stockholders or other interested parties may communicate with the Board through the Secretary of AAM by mail at One Dauch Drive, Detroit, Michigan 48211-1198 or by e-mail at AAMBoardofDirectors@aam.com.

 

The Board has instructed the Secretary to review all such communications and to exercise his discretion not to forward correspondence to the Board that is inappropriate, such as advertising and business solicitations, frivolous communications and routine business matters and personal grievances. However, any director may at any time request the Secretary to forward any communication received by the Secretary.

 

Code of Business Conduct

 

AAM has adopted a Code of Business Conduct that is designed to assist all AAM associates, executive officers and members of the Board in conducting AAM’s business with the highest standards of ethics and integrity. AAM has also adopted a Code of Ethics for our CEO, COO, CAO, CFO and other Senior Financial Officers (Code of Ethics). The Board annually reviews the Code of Business Conduct and updates the Code as appropriate. AAM’s Code of Business Conduct and Code of Ethics are available on our website at http://www.aam.com/investors/corporategovernance. A written copy also may be obtained by any stockholder without charge upon request to the AAM Investor Relations Department by mail at One Dauch Drive, Detroit, Michigan 48211-1198 or by email at investorrelations@aam.com.

Related Person Transactions Policy

 

The Board has adopted a policy and procedure for the review, approval and ratification of transactions involving AAM and “related persons” as defined in the policy. This policy supplements AAM’s other conflict of interest policies as set forth in AAM’s Code of Business Conduct. The Board has delegated to the Audit Committee the responsibility for reviewing, approving and ratifying all related person transactions in accordance with the policy.

 

For purposes of this policy, a related person transaction includes any financial transaction, arrangement or relationship or series of similar transactions, arrangements or relationships in which:

 

 

However, a transaction between AAM and a related person is not subject to this policy if the transaction:

 

 

A related person includes directors and executive officers and their immediate family members, stockholders owning more than five percent of the Company’s outstanding common stock as of the last completed fiscal year, and any entity owned or controlled by any one of these persons.

 

A related person transaction meeting the above criteria will be permitted only if the transaction is approved by the Audit Committee and is on terms comparable to those available to unrelated third parties. Any related person transaction involving a member of the Audit Committee must be presented to disinterested members of the full Board for review.

 

In considering a transaction, the Audit Committee and/or the Board may consider the following factors, as applicable:

 

 

Every director and executive officer is required to report any existing or contemplated related person transaction to AAM’s Executive Vice President, Chief Administrative Officer & Secretary. In addition, AAM’s directors and executive officers complete annual questionnaires designed to elicit information about potential related person transactions. As of the date of this Proxy Statement, no existing or contemplated related person transaction has been brought to the attention of the Secretary, the Audit Committee or the Board.

 

Board Committee Composition

 

The Board held four regularly scheduled meetings and four special meetings during 2009. Directors are expected to attend all Board meetings, meetings of the committees on which they serve and stockholder meetings. During 2009, all directors attended 100 percent of the meetings of the Board and the committees on which they served, with the exception of one director who attended all but one of the Board meetings. Nine of 10 directors attended the 2009 annual meeting of stockholders.

The following table shows the membership of the Board’s committees during 2009 and the number of committee meetings held during 2009.

 

COMMITTEE MEMBERSHIP IN 2009

 

 

 

 

Audit Committee

 

The Audit Committee provides assistance to the Board with respect to: the quality and integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditor’s qualifications and independence, and the performance of our internal audit function and independent auditors. The Audit Committee operates under a written charter that is available on AAM’s website at http://www.aam.com/investors/corporategovernance.

 

The Board has determined that all Audit Committee members serving during 2009 are independent and financially literate under applicable NYSE listing standards. Mr. Miller and Mr. Switzer also qualify as audit committee financial experts as defined by SEC rules.

 

Compensation Committee

 

The Compensation Committee is responsible for the following:

 

 

The Compensation Committee operates under a written charter that is available on our website at http://www.aam.com/investors/corporategovernance. In accordance with our Corporate Governance Guidelines, the Compensation Committee is also responsible for recommending non-employee director compensation and benefits for approval by the Board.

 

Role of Management in Compensation Decisions

 

The Compensation Committee is responsible for making compensation decisions relative to executive officers. However, in making its decisions, the Committee seeks and considers input from senior management. Since management has direct involvement with and an in-depth knowledge of the business strategy, goals and performance of the Company, certain executive officers play an important role in the executive compensation decision-making process. Senior management participates in the Committee’s activities in the following specific respects:

 

 

Role of Compensation Consultant

 

In performing its duties, the Compensation Committee retains an independent compensation consultant. In July 2008, the Committee retained the services of Hewitt Associates LLC (Hewitt) to provide independent advice and ongoing recommendations on compensation matters related to the CEO, other executive officers and non-employee directors, including:

 

 

In the course of fulfilling its responsibilities, Hewitt communicates directly with the Chairman prior to Compensation Committee meetings. Hewitt also meets with management to gather information, prepare materials, and review proposals to be made to the Committee.

After 2009 year end, but prior to the filing of this proxy statement, Hewitt Associates spun off its executive compensation practice into a separate, independent entity named Meridian Compensation Partners, LLC. In order to maintain consistent process and representation, the Compensation Committee retained Meridian going forward as its independent executive compensation consultant.

 

Nominating/Corporate Governance Committee

 

The Nominating/Corporate Governance Committee’s primary responsibilities are to:

 

 

The Nominating/Corporate Governance Committee operates under a written charter that is available on our website at http://www.aam.com/investors/corporategovernance.

 

Selection Process for Director Nominees.  In consultation with the Chairman of the Board, the Nominating/Corporate Governance Committee identifies, evaluates and recommends potential candidates for membership on the Board. The Nominating/Corporate Governance Committee conducts all necessary and appropriate inquiries into the backgrounds and qualifications of the candidates and considers questions of independence and possible conflicts of interest. Based on the Committee’s evaluation, candidates who meet the Board’s criteria may receive further consideration, which may include interviews with the Nominating/Corporate Governance Committee and other directors. The Committee then submits its recommendations for nominees to the Board for approval.

 

Before the Board nominates an incumbent director for re-election by our stockholders, the incumbent director may be evaluated by the Nominating/Corporate Governance Committee and/or the Board. This evaluation is based on, among other things, the incumbent director’s meeting attendance record and contributions to the activities of the Board.

 

The Nominating/Corporate Governance Committee considers recommendations of potential candidates from current directors of our Board, our CEO and our stockholders.

 

Director Qualifications.  AAM’s Corporate Governance Guidelines provide the qualifications for Board membership. Candidates for director nominees to the AAM Board are reviewed in consideration of the current composition of the Board, the operating requirements of the Company and the interests of stockholders. Although specific qualifications may vary from time to time, desired qualities and characteristics include:

 

 

The Board as a whole should reflect the appropriate balance of knowledge, experience, skills, expertise and diversity that, when taken together, will enhance the quality of the Board’s deliberations and decisions. Although the Board has no formal policy regarding diversity, the Board believes that diversity is an essential element of Board effectiveness. In this context, diversity is defined broadly to

include differences in background, skills, education, experience, gender, race, national origin and culture.

 

For director candidates recommended by stockholders, the Nominating/Corporate Governance Committee follows the procedures described in Other Matters, Stockholder Proposals for 2011 Annual Meeting. The Nominating/Corporate Governance Committee will evaluate candidates recommended by stockholders using substantially the same criteria as it considers in evaluating director candidates recommended by our Board members or CEO.

 

Executive Committee

 

The Executive Committee exercises the authority of the Board during the intervals between Board meetings and does not meet on a regular basis. Its members are identified in the Committee Membership in 2009 table.

 

Technology Committee

 

The Technology Committee oversees and provides advice to AAM regarding AAM’s product, process and systems technology. Its members are identified in the Committee Membership in 2009 table.

 

Executive Summary

 

The massive restructuring of the U.S. domestic automobile manufacturers and many of their suppliers continued and accelerated in 2009. The results of the restructuring included bankruptcy reorganizations in the first half of 2009 for General Motors and Chrysler, AAM’s two largest customers. As the automotive industry continued to respond and adjust to reduced levels of customer demand and market requirements, AAM focused on managing what the Company could control. AAM continued to focus on its comprehensive multi-year restructuring plan and achieved permanent and transformational improvements in its cost structure and operating flexibility. Amid these challenging market conditions and the bankruptcy proceedings of AAM’s largest customer, AAM entered into agreements with GM to address commercial and financial issues in September 2009, which included the 2009 Settlement and Commercial Agreement and related operational and financing arrangements (collectively, the 2009 Settlement and Commercial Agreement).

 

AAM’s senior management team, comprised of our NEOs, led AAM through a difficult and turbulent operational and financial environment in 2009. With the full support of the Company’s Board, AAM’s senior management took difficult but necessary steps to preserve value for AAM’s stockholders and other key stakeholders while completing the Company’s restructuring outside the bankruptcy process. These steps included entering into the 2009 Settlement and Commercial Agreement with GM, amending senior credit agreements, refinancing substantially all of the senior debt maturities through 2014 and raising proceeds through an equity offering.

 

In connection with the restructuring, the Compensation Committee approved a proposal by management to reduce the base salaries of executive officers by 10 percent and cancel the payment of the annual incentive to executive officers, including the NEOs for fiscal 2009 and 2008. The Compensation Committee and the Board recognize that the performance of our NEOs under the extremely adverse conditions in our industry was instrumental in preserving and enhancing stockholder value in 2009.

 

In 2009, the Compensation Committee approved a redesigned executive compensation program that reflects an externally competitive compensation structure based on a comprehensive market study of executive compensation programs at companies in AAM’s peer group. The study was conducted in 2008 by an independent compensation consultant retained by the Compensation Committee. The new program resulted in a change to the mix of base salaries, target annual incentive opportunities and long-term incentives for executive officers. The entire long-term incentive program for executive officers in 2009 and 2010 will be a cash-based program as a result of AAM not having equity available for compensation-related grants for the next few years. Implementation of the new executive compensation program will occur over a two-year period that began in fiscal year 2009.

 

Certain provisions of the 2009 Settlement and Commercial Agreement place restrictions on the amount and form of compensation of our NEOs, among others. First, the annual compensation for any executive officer, current or former, cannot exceed $3 million beginning in fiscal year 2009. Second, beginning in September 2009 “golden parachute” (or change in control) agreements are prohibited. These restrictions will remain in place until ninety days following the later of (1) repayment and termination of the second lien term loan facility we entered into with GM and (2) termination of certain expedited payment terms described in the 2009 Settlement and Commercial Agreement. The actions taken by AAM to comply with these restrictions on compensation are described below.

Executive Compensation Philosophy and Objectives

 

The Committee is responsible for establishing and reviewing the overall compensation philosophy of the Company. The Committee believes that the compensation paid to executives should be structured to provide AAM executives with meaningful rewards, while maintaining alignment with stockholder interests, corporate values and management initiatives. In addition and while it is in effect, the annual compensation limit of $3 million and other restrictions contained in the 2009 Settlement and Commercial Agreement will be considered by the Committee in order to ensure compliance with the agreement.

 

In accordance with this philosophy, the Committee believes that the executive compensation program should consist of a mix of base salary, annual incentive compensation, long-term incentive compensation, perquisites and other personal benefits. One of the key objectives of establishing a mix of base salaries, annual incentive and long-term incentive compensation is to have a significant portion of total compensation be performance based such that this portion of compensation is contingent upon achieving stated company performance goals.

 

The Company conducted a comprehensive review of the executive compensation structure with the assistance of Hewitt Associates LLC (Hewitt), an independent compensation consultant retained by the Committee in 2008. The Committee established target percentile goals to be incorporated into the overall compensation philosophy of the Company. Therefore, in an effort to more closely align the objectives of the philosophy to market competitive practices, the Committee approved stated target percentile goals for each component of pay. The following pay percentile goals are used as a guide to help set compensation levels for the NEOs, excluding the CEO (whose compensation is determined under his employment agreement, as described below). In addition to these goals, the Committee considers other factors in setting compensation levels for the NEOs, including individual performance and the specific needs of the position for the Company.

 

 

These percentile goals were established based on the Committee’s objective that base salaries be consistent with market salaries at the 50^th percentile. The percentile goals for annual incentives and long-term incentives were set between the 50^th percentile and the 75^th percentile to enable the Company to reward executive performance at a rate slightly above average in order to compete for executive talent. These pay percentile goals are being implemented over a two-year period that began in fiscal year 2009.

 

Compensation Objectives.  The following fundamental objectives are considered in determining compensation programs and pay levels.

 

 

 

Market Analysis and Benchmarking

 

A peer group of 38 broad industrial manufacturing companies, including 10 automotive suppliers, were identified from Hewitt’s 2008 Total Compensation Measurement^(tm) database, for consideration by the Committee to help assess the competitive levels of pay and to provide data for 2009 and 2010 pay decisions. The peer group was selected to be representative of a broad industrial sector in which AAM competes for executive talent. The criteria used to assess the market and to select the updated peer group included:

 

 

The following companies met some or all of these criteria and were approved by the Committee for 2009 and 2010 pay decisions:

 

 

The market data analysis used in determining executive officer compensation levels was revenue size adjusted using regressed market values for each relevant position.

 

Tally Sheets

 

In July 2009, the Committee reviewed compensation tally sheets for each executive officer, including the NEOs. The tally sheets, which are prepared by management, provide a summary of the current amounts of each component of pay, including a historical review of prior long-term incentive grants. The tally sheets also provide a summary of the potential payouts and benefits upon various termination events. The elements and calculations reviewed are substantially similar to the information provided for each NEO in Potential Payments Upon Termination or Change in Control below. The Committee did not change the NEOs’ compensation based on its review of this information. The Committee expects to review updated tally sheets on an annual basis.

 

Components of the AAM Compensation Program

 

The primary components of AAM’s executive compensation program are base salary, annual incentives, long-term incentives, and benefits and perquisites. The discussion below of the elements of compensation applies to the NEOs, other than Mr. R. E. Dauch, our CEO. Mr. R. E. Dauch’s compensation is discussed separately in Compensation of Chief Executive Officer below.

 

Base Salary.  Base salaries provide fixed compensation to the executive for services rendered during the year. To more closely align its compensation programs with market competitive practices, the Company continued its implementation of the compensation program that began in 2009. In accordance with this program, the Committee based its salary determinations for the NEOs by reference to the 50th percentile of our peer group. NEO base salaries are also based on the recommendations of the CEO and President & COO. Those recommendations were based on experience, time in position, professional development, contribution to the Company, individual performance and other factors. In determining these base salaries, the Committee also reversed a

10 percent salary reduction that was taken in 2009. The Committee approved the following base salaries for 2010:

 

 

As previously disclosed, executive officer base salaries, excluding the CEO, for 2009 were based on reference to the 50th percentile of our peer group and included a 10 percent salary reduction that was taken in connection with the Company’s restructuring plan. Base salary for 2009, 2008 and 2007 is shown in the Summary Compensation Table.

 

Annual Incentive Compensation.  Annual incentive compensation is designed to align executive officer pay with AAM’s annual performance, measured by our achievement of financial targets established under AAM’s Incentive Compensation Plan for Executive Officers. Cash incentive awards are permitted to the extent the Company meets or exceeds performance goals set annually by the Committee. Annual incentive compensation at AAM is designed to:

 

 

2009 and 2008 Annual Incentives

 

In support of AAM’s restructuring plan, executive officers agreed to forego payments under the annual incentive plan for 2009 and 2008.

 

2010 Annual Incentives

 

In 2009, the Compensation Committee approved the use of net operating cash flow as the sole performance metric to be used in determining 2010 annual incentives. This performance metric was determined to be the most significant to the Company’s strategic initiatives for 2010. Additionally, the use of cash flow as the sole performance metric is appropriate for the following reasons:

 

 

Individual target incentive awards may be adjusted by the Committee, based on the CEO’s recommendation and other factors described in the plan. The following table summarizes the

approved target annual incentive opportunities for the NEOs beginning in 2010 (stated as a percentage of base salary):

 

 

 

 

The award levels for the net operating cash flow performance metric were determined in the fourth quarter of 2009 in conjunction with a review of the projections provided to AAM’s lenders during amendment of the senior credit facilities and the Board-approved annual budget.

 

Long-Term Incentives.  Long-term incentive compensation at AAM is designed to:

 

 

Due to the expiration of the 1999 Stock Incentive Plan in 2009 and the lack of a replacement long-term equity incentive plan, the Committee approved changes to the long-term incentive program for executive officers that impact both (1) the award opportunity to be provided and (2) the types of vehicles to be used.

 

2009 Cash-Based Long-Term Incentive Plan.  In 2009, the Committee approved a cash-based long-term incentive program, the AAM 2009 Long-Term Incentive Plan (AAM LTIP), which will provide the entire long-term incentive opportunity for executive officers. Under the AAM LTIP, each participant received a target award value, stated as a dollar amount, and based on a percentage of base salary.

 

In consideration of 2009 market data provided by Hewitt, the Committee approved a 20% reduction in the 2010 LTI target percentiles for executive officers, including the NEOs. The following table summarizes the target award amounts for the NEOs in 2010 and 2009:

 

 

 

 

Award payouts can range from 0 percent to 200 percent of the target value based on the level of performance over a three-year period beginning in January of the year of the award.

Performance Measures

 

For 2009 and 2010 grants under the AAM LTIP, the actual cash payouts will be determined based on the level of performance against two performance metrics approved by the Committee. One-half of the target award payment will be earned based on the cumulative amount of earnings before interest, taxes, depreciation and amortization (EBITDA) over a three-year performance period. In calculating this award, the plan gives the Committee discretion to exclude certain special items from EBITDA, such as special charges or gains, non-recurring operating costs, extraordinary gains or losses, the impact of changes in accounting principles, or any other unusual items. EBITDA was chosen as one of the measures of Company performance as it is a key indicator of the Company’s financial and operational performance and is useful in analyzing entity valuation. In addition, EBITDA as a performance measure compliments the metrics used to determine payouts under other incentive programs.

 

The remaining one-half of the target award amount will be earned based on a total shareholder return (TSR) measure that compares the Company’s TSR over the three-year performance period relative to the TSR of AAM’s competitor peer group as shown in AAM’s 2009 annual report. Relative TSR was chosen as one of the measures of Company performance in order to motivate executive officers to build long-term value for our stockholders above that of our competitor peer group. Share price appreciation and dividends paid will be measured over the performance period to determine TSR.

 

The following tables illustrate the threshold, target and maximum performance levels for determining award payouts for each performance measure. The EBITDA performance levels shown below were designed to incent a level of performance in the top one-third of our competitor peer group.

 

EBITDA Performance Measure

 

 

TSR Performance Measure

 

 

Senior Executive Special Incentive Program.  On March 15, 2010, the Compensation Committee approved a special incentive program for certain NEOs. The special incentive program was developed to recognize the extraordinary efforts of Mr. Simonte, Mr. D.C. Dauch, Mr. Bellanti and Mr. Lancaster in navigating the Company through the turbulent financial and market conditions in 2009. As a result of their individual and collective efforts, the Company was able to successfully complete its restructuring outside of bankruptcy, gain contract clarity with GM, and address liquidity concerns by entering into the 2009 Settlement and Commercial Agreement, amending senior credit agreements and raising cash proceeds through an equity offering.

 

Payments under the special incentive program for Mr. Simonte, Mr. D.C. Dauch and Mr. Bellanti are contingent upon termination of the financial accommodations provided by GM in connection with the 2009 Settlement and Commercial Agreement and the Access and Security Agreement (Access Agreement). The Committee and the full Board believe that termination of the financial

accommodations provided by GM and the Access Agreement is in the best interests of AAM, its stockholders and other key stakeholders. This action will demonstrate the Company’s viability and sustainability, therefore be an important milestone for the Company and an indicator of significantly improved financial health. The benefits to AAM of terminating the financial accommodations provided by GM and the Access Agreement include, among other things, a cost savings associated with eliminating the 1% sales discount related to the expedited payment terms. The Company also anticipates improved flexibility with respect to accessing new sources of debt capital by eliminating certain covenants and other restrictions that accompany the financial accommodations provided by GM and the Access Agreement.

 

The special recognition program was designed to retain Mr. Simonte, Mr. D.C. Dauch and Mr. Bellanti and to incent them to accomplish the objectives described above. It is expected that they will be instrumental to the Company in strengthening its financial and competitive position in the future. The special incentive program for Mr. Lancaster was designed to reward his efforts in 2009 and provide him with an additional retirement incentive. The special incentive program awards for Mr. Simonte, Mr. D. C. Dauch, Mr. Bellanti and Mr. Lancaster (award recipients) are as follows:

 

 

The Committee determined that the special incentive program was appropriately valued at $10 million in consideration of the total value that the award recipients preserved for the Company’s stockholders and other key stakeholders. The program is cash based due in part to the lack of equity available for compensation awards. The amount allocated to each award recipient was determined based on their individual contributions. As President & COO, Mr. D.C. Dauch led the operational restructuring of the Company and negotiations with GM resulting in the 2009 Settlement and Commercial Agreement described above. Mr. Simonte led the Company’s financial restructuring, including negotiations with lenders and GM, and effectively managed investor and media communications. Mr. Bellanti played a critical role in the operational restructuring efforts, while maintaining excellence in the Company’s quality, warranty, delivery and launch performance during an extremely difficult and volatile production environment. Mr. Bellanti’s management of the day-to-day operations of the Company enabled Mr. D.C. Dauch and Mr. Simonte to focus their efforts on the broader restructuring plans, negotiations and liquidity issues. Mr. Lancaster supported the GM negotiations with a focus on gaining commercial contract clarity and protecting the Company’s interests during GM’s bankruptcy proceedings.

 

The awards for Mr. Simonte, Mr. D.C. Dauch and Mr. Bellanti are comprised of special incentives and annual incentives. Special incentives are approximately 30%-40% of the total award and will be payable to the award recipients upon termination of the financial accommodations provided by GM and the Access Agreement. The date on which annual incentive payments commence is contingent upon the date of termination of the GM financial accommodations and the Access Agreement. The first annual incentive installment payment will be made no earlier than October 31, 2011 and the final annual incentive installment payment will be made no later than January 31, 2015. The award recipients must be employed with AAM on the relevant payment date to receive payment under the award, except in the event of death, disability, and resignation for good reason or termination other than for cause. Upon his retirement on or before December 31, 2010, the award for Mr. Lancaster will be payable in a lump sum.

 

The contributions of Mr. R.E. Dauch and his leadership role with the Company are discussed further in Compensation of Chief Executive Officer.

Other Compensation Components

 

Benefits.  Our executive officers participate in the benefits and retirement plans provided to U.S. salaried associates. A group of approximately 40 senior executives, including executive officers, also receive supplemental life, supplemental disability, umbrella liability, and travel accident insurance benefits.

 

Executive officers are eligible to participate in AAM’s qualified and nonqualified defined benefit pension plans and defined contribution plan. They are also eligible to participate in a nonqualified deferred compensation plan that permits deferrals of a portion of base salary and/or annual cash incentive compensation on a pretax basis. These plans are described in the Pension Benefits and Nonqualified Deferred Compensation sections below.

 

Change in Control Payments and Benefits.  Under the 2009 Settlement and Commercial Agreement, all executive officer continuity agreements, which provided enhanced severance benefits following a change in control, were terminated. The elimination of this benefit resulted in a significant reduction to each NEO’s total compensation package. The Committee considered this factor in determining other compensation components for 2010.

 

Perquisites.  AAM provides a limited number of perquisites for senior executives, including executive officers, which are described in the footnotes to the Summary Compensation Table. The most significant perquisite provided is the use of a Company-provided vehicle that has substantial AAM content. This perquisite is common among automotive suppliers. AAM has never owned a corporate aircraft and does not provide leased aircrafts for personal use. AAM does not pay for country club memberships.

 

Compensation of Chief Executive Officer

 

Mr. R. E. Dauch’s compensation is governed by an employment agreement, which was amended in December 2009. The agreement is further described in the Narrative to Summary Compensation and Grants of Plan-Based Awards Table below. The CEO’s compensation arrangements are structured in consideration of the breadth of his responsibilities for the entire Company, his unique experience in the automotive industry, his leadership skills and service to AAM since he co-founded the Company in 1994.

 

Compensation Limit.  In accordance with the December 22, 2009 employment agreement amendment between the Company and Mr. R. E. Dauch, the CEO agreed to forego compensation payable to him under his then current employment agreement to the extent his annual compensation would exceed the $3 million limit set forth in the 2009 Settlement and Commercial Agreement.

 

The primary elements of the CEO’s compensation are base salary, annual cash bonus, long-term incentives, benefits and perquisites.

 

Base Salary.  Base salary is determined by the Committee as part of the annual compensation review process. In determining Mr. R.E. Dauch’s compensation in 2009, the Committee considered his role in overseeing and directing the Company’s successful restructuring outside of bankruptcy under the extraordinary circumstances facing the automotive industry in 2009. As a result, value was preserved for AAM’s stockholders and other key stakeholders. The Committee considers Mr. R.E. Dauch’s continuing leadership, unique role and the services he provides to AAM critical to the achievement of the Company’s strategic goals for 2010.

 

In connection with the annual compensation limit set forth in the 2009 Settlement and Commercial Agreement, Mr. R.E. Dauch agreed to forego certain compensation and benefits that he was entitled to in accordance with his employment agreement. As described below, Mr. R. E. Dauch will no longer receive equity grants and did not receive a bonus in 2009 and 2008. He also agreed to terminate his change in control agreement. These factors were also taken into consideration by the Committee in determining Mr. R.E. Dauch’s base salary. Pursuant to the December 22, 2009 employment

agreement amendment, Mr. R.E. Dauch’s annual base salary is $2,702,300, effective June 16, 2009. Base salary for 2009, 2008 and 2007 is shown in the Summary Compensation Table.

 

Annual Cash Bonus.  Mr. R. E. Dauch is eligible for an annual cash bonus as described in his employment agreement. See Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table below. The annual cash bonus is based on the Committee’s assessment of Company performance as compared to that of the competitor peer group. Pursuant to his employment agreement, Mr. R.E. Dauch is entitled to receive an annual bonus payment of three times his annual salary if AAM outperforms its competitor peer group by greater than the historical amount. However, his annual bonus will be reduced, if necessary, to comply with the $3 million limit on annual compensation set forth in the 2009 Settlement and Commercial Agreement. In determining Mr. R. E. Dauch’s annual cash award, the Committee may use discretion in considering other factors, which may differ from year to year,

 

2009 and 2008 Annual Bonus.  The CEO agreed to forego bonuses for 2009 and 2008 in support of the Company’s restructuring plan.

 

Long-term Incentives.  Pursuant to the December 22, 2009 employment agreement amendment, Mr. R. E. Dauch agreed to forego receipt of the annual equity awards the Company had agreed to provide under his employment agreement since it was first executed in November 1997. As a result, effective January 1, 2010, Mr. R.E. Dauch will no longer receive annual equity awards from the Company.

 

On January 6, 2009, the Company awarded Mr. R.E. Dauch a long term incentive award of 150,000 stock options and 59,638 shares of restricted stock. This award was made pursuant to an amendment to his employment agreement in 2008, which changed the form of his annual equity award from stock options to a mix of stock options and restricted stock.

 

The terms of these awards are described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table.

 

Benefits and Perquisites.  Mr. R. E. Dauch participates in the same benefit programs provided for other executive officers. In addition, under his employment agreement, AAM provides Mr. R. E. Dauch with the use of an additional Company vehicle and reimburses him for premiums under a $5 million life insurance policy. The Company will also provide postretirement health care benefits upon expiration of his employment agreement. Perquisites provided to the CEO in 2009, 2008 and 2007 are reported in the Summary Compensation Table.

 

Management’s Stock Ownership Requirements

 

The Committee has established stock ownership requirements for executive officers. These stock ownership requirements were determined as a multiple of each executive officer’s base salary and the market value of AAM’s common stock.

 

Fixed Share Requirement for Executive Officers

 

The stock ownership requirements must be attained within five years from the effective date or, for newly appointed executive officers, within five years of such appointment. Prior to June, 2009, certain executive officers acquired and held shares of AAM stock through the AAM stock fund offering in the 401(k) plan. In 2009, the Company removed the AAM stock fund from the 401(k) line up and liquidated the fund. Liquidation of these shares held under the 401(k) plan reduced stock ownership levels of certain officers through no action of their own. In addition, the lack of an equity plan to grant restricted stock or other equity awards restricts the Company’s ability to support their achievement of stock ownership requirements. As a result, the Committee’s enforcement of the stock ownership requirements for executive officers will take these factors into account. Currently, all named executive officers are in compliance with the stock ownership requirements.

 

Federal Income Tax Considerations

 

Deductibility of Executive Compensation.  In general, the compensation awarded to the NEOs will be taxable to the executive and will give rise to a corresponding corporate deduction at the time the compensation is paid. Section 162(m) of the Internal Revenue Code (Code) denies a federal income tax deduction for certain compensation in excess of $1 million per year paid to the CEO or to any of the other NEOs other than the CFO. The portion of the compensation in excess of $1 million that we paid to our CEO in 2009 was not deductible for federal income tax purposes. Section 162(m) did not affect our ability to take a tax deduction for compensation paid to any of our other NEOs in 2009.

 

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of the Company’s compensation programs. The Committee believes that achieving the compensation objectives set forth above is more important than the benefit of tax deductibility. The Company reserves the right to maintain flexibility in how executive officers are compensated, which may result in limiting the deductibility of amounts of compensation from time to time.

 

REPORT OF THE COMPENSATION COMMITTEE

 

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

 

Compensation Committee of the Board of Directors

 

Forest J. Farmer, Chairman

Elizabeth A. Chappell

Larry K. Switzer

Thomas K. Walker

 

The following table summarizes the compensation of our named executive officers (Richard E. Dauch, Co-Founder, Chairman of the Board & Chief Executive Officer, Michael K. Simonte, Executive Vice President — Finance & Chief Financial Officer, David C. Dauch, President & Chief Operating Officer, Patrick S. Lancaster, Executive Vice President, Chief Administrative Officer & Secretary, John J. Bellanti, Executive Vice President, Worldwide Operations and Yogendra N. Rahangdale, retired July 1, 2009 as Vice Chairman & Chief Technology Officer) for the fiscal years ended December 31, 2009, December 31, 2008 and December 31, 2007.

 

 

 

 

 

Long-term incentive awards granted in 2009 to the NEOs are shown in the following table. The long-term incentive compensation programs are described in Compensation Discussion and Analysis and following the table below.

 

 

 

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

 

CEO Employment Agreement

 

In accordance with the December 22, 2009 employment agreement amendment between the Company and Mr. R. E. Dauch, the CEO agreed to forego compensation payable to him under his then current Employment Agreement to the extent his annual compensation would exceed the $3 million limit set forth in the 2009 Settlement and Commercial Agreement. Mr. R.E. Dauch’s employment agreement, as amended, provides for the following compensation and benefits:

 

 

The current term continues through December 31, 2010 and is automatically extended for successive one-year terms, unless either party gives notice of termination at least 60 days prior to the end of the applicable term. The potential payments and benefits upon termination of Mr. R.E. Dauch’s employment are described in Potential Payments Upon Termination or Change in Control.

 

Long-Term Incentive Awards

 

Stock Options.  Outstanding options vest in three approximately equal installments on the first, second and third anniversaries of the grant date. Generally, vesting may accelerate upon termination of employment due to death, disability or upon a change in control. The award is forfeited if employment is terminated for any other reason prior to vesting. Vested options expire ten years after the grant date and may be exercised any time before the earliest of: (1) the expiration of the grant, (2) five years following termination of employment (one year following termination for options granted

before 2002) due to death, disability, retirement or a change in control, (3) 90 days following termination of employment without cause and (4) termination of employment for cause.

 

Restricted Stock.  Restricted stock awarded to executives under age 60 vests on the third anniversary of the grant date. Restricted stock awarded to executives age 60 and over vests in three approximately equal annual installments through March 14, 2011. Vesting accelerates upon death, disability, termination of employment by the Company pursuant to a reduction in force or similar program approved by the CEO, or upon a change in control.

 

Performance Accelerated Restricted Stock (PARS) and Performance Accelerated Restricted Stock Units (RSUs).  PARS and RSUs vest on the fifth anniversary of the grant date unless vesting is accelerated on the third or fourth anniversaries of the grant date based on our total shareholder return. Vesting may also accelerate upon termination of employment due to death, disability or upon a change in control. If the NEO’s employment is terminated for any other reason, he will forfeit his unvested PARS and RSUs.

 

Vesting is accelerated on the third anniversary of the grant date if AAM’s total shareholder return for the preceding three-year period meets or exceeds the 66th percentile of our competitor peer group. If vesting is not accelerated on the third anniversary, then vesting is accelerated on the fourth anniversary of the grant date if shareholder return exceeds the 66th percentile of our competitor peer group for the preceding four years. Total shareholder return is defined as the cumulative appreciation (assuming reinvestment of dividends) of an investment in common stock. Vesting will not accelerate unless AAM has positive TSR.

 

PARS consist of issued and outstanding shares of AAM common stock, subject to forfeiture and transfer restrictions prior to vesting of the awards, and carry voting and dividend rights from the date of grant. RSUs consist of the right to receive, upon vesting of the award, an amount in cash equal to the fair market value of the number of shares of common stock covered by the award. RSUs carry the right to receive dividend equivalent payments from the date of grant, payable in the calendar quarter when dividends are paid on our common stock.

 

2008 Performance Awards.  In 2008, Mr. Simonte, Mr. D.C. Dauch and Mr. Bellanti received 25 percent of their long-term incentive award in the form of performance awards. The award represents the right to a payment in cash based on AAM’s relative TSR over a three year performance period beginning in January 2008.

 

The actual value realized under the 2008 performance awards will be equal to a percentage of the target payout based on relative TSR during the performance period. Following are the threshold, target and maximum levels of performance attainment and the related target level payouts:

 

 

Payout levels are linearly interpolated between percentiles. No performance awards may be earned unless relative TSR is at or above the threshold level of performance. If the Company’s TSR is negative over the three-year performance period, the maximum earned award would be 100% of the target award.

 

2009 Performance Awards.  The 2009 Performance Awards are discussed in the Compensation Discussion and Analysis.