UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Standard Microsystems Corporation

(Name of Registrant as Specified In Its Charter)

 

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STANDARD MICROSYSTEMS CORPORATION

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JULY 17, 2007

 

 

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Standard Microsystems Corporation (“SMSC” or the “Company”) will be held at 10 a.m. on July 17, 2007, at the Hyatt Regency Wind Watch Hotel, 1717 Motor Parkway, Hauppauge, NY 11788, for the following purposes:

 

1. To elect directors;

 

2. To ratify the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm for SMSC for the fiscal year ending February 29, 2008; and

 

3. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof.

 

In accordance with the bylaws of SMSC, the Board of Directors has fixed the close of business on May 22, 2007 as the record date for the determination of Stockholders entitled to notice of and to vote at the meeting.

 

By order of the Board of Directors,

 

 

Walter Siegel
Vice President, General Counsel & Secretary

 

June 1, 2007

 

 

 

 

STANDARD MICROSYSTEMS CORPORATION
80 Arkay Drive
Hauppauge, New York 11788

 

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 17, 2007

 

PROXY STATEMENT

 

 

 

 

This statement is being furnished in connection with the solicitation of proxies by the board of directors (the “Board of Directors” or the “Board”) of Standard Microsystems Corporation, a Delaware corporation (“SMSC” or the “Company”), for use at its Annual Meeting of Stockholders to be held on July 17, 2007 and at any adjournment thereof. The approximate date on which this statement and the accompanying proxy are first being mailed to stockholders is June 4, 2007.

 

VOTING RIGHTS AND SOLICITATION OF PROXIES

 

Every stockholder of SMSC is entitled to cast, in person or by proxy, one vote for each share of SMSC common stock held at the close of business on May 22, 2007, the record date for the Annual Meeting. At that date, SMSC had 23,173,521 shares of common stock outstanding. The presence, in person or by proxy, of holders of a majority of the votes entitled to be cast at the Annual Meeting will constitute a quorum. Abstentions, withheld votes and broker non-votes are included in determining whether a quorum is present. Abstentions include shares present in person but not voting and shares represented by proxy but with respect to which the holder has abstained. Broker non-votes occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power on that item and has not received instructions from the beneficial owner.

 

The election of directors of the Company (“Directors”) is decided by a plurality of the votes duly cast at the Annual Meeting. Withheld votes and broker non-votes are not treated as votes cast and, therefore, will have no effect on the proposal to elect Directors. A majority of the votes duly cast at the Annual Meeting is required to approve each other matter to be acted on at the meeting. Abstentions and broker non-votes are not treated as votes cast and, therefore, will have no effect on the approval of any such matter. The proxy hereby solicited is revocable at any time prior to its exercise in any manner permitted by law. The proxies named in the enclosed form of proxy or their substitutes will vote the shares represented by the enclosed form of proxy, if the proxy appears to be valid on its face, and, where a choice is specified on the form of proxy, the shares will be voted in accordance with the specification so made.

 

No business other than as set forth in the accompanying Notice of Annual Meeting of Stockholders is expected to come before the Annual Meeting, but should any other matter requiring a vote of stockholders be properly brought before the Annual Meeting, it is the intention of the persons named in the enclosed form of proxy to vote such proxy in accordance with their best judgment on such matters. Stockholders who execute the enclosed proxy may still attend the Annual Meeting and vote in person.

 

The cost of preparing, assembling and mailing the proxy statement and related material will be borne by SMSC. In addition to soliciting proxies by mail, SMSC may make request for proxies by telephone, facsimile transmission or messenger or by personal solicitation by officers, Directors or employees of SMSC, at nominal cost to SMSC, or by any one or more of the foregoing means. Georgeson Shareholder Communications Inc. has been retained by SMSC to assist in the solicitation of proxies, for fees anticipated to aggregate approximately $7,500 plus reasonable out-of-pocket expenses.

 

The SEC permits companies to send a single set of annual disclosure documents to any household at which two or more stockholders reside, unless contrary instructions have been received, but only if the company provides advance notice and follows certain procedures. In such cases, each stockholder continues to receive a separate notice of the meeting and proxy card. This householding process reduces the volume of duplicate information and reduces printing and mailing expenses. We have not instituted householding for stockholders of record; however,

certain brokerage firms may have instituted householding for beneficial owners of our common stock held through brokerage firms. If your family has multiple accounts holding our common shares, you may have already received householding notification from your broker. Please contact your broker directly if you have any questions or require additional copies of the annual disclosure documents. The broker will arrange for delivery of a separate copy of this Proxy Statement or our annual report promptly upon your written or oral request. You may decide at any time to revoke your decision to household, and thereby receive multiple copies.

 

The principal executive offices of the Company are located at 80 Arkay Drive, Hauppauge, New York 11788.

 

STOCKHOLDER PROPOSALS AND OTHER MATTERS

 

Stockholder proposals intended for inclusion in the proxy statement for the next annual meeting must be received by SMSC by February 1, 2008. All stockholder proposals should be sent to the Vice President, General Counsel and Secretary, SMSC, 80 Arkay Drive, Hauppauge, New York 11788. SMSC retains discretion to vote proxies it receives for any stockholder proposal submitted for consideration at next year’s annual meeting not received by April 23, 2008 (or, under SMSC’s bylaws, May 16, 2008, for nominations for Directors). In addition, for proposals or nominations received by the applicable date in the immediately preceding sentence, SMSC retains discretion to vote proxies it receives provided that (1) SMSC includes in its proxy statement advice on the nature of the proposal and how it intends to exercise its voting discretion and (2) the proponent does not issue a proxy statement.

 

PROPOSAL 1

 

ELECTION OF DIRECTORS

 

Our Board currently has six members. A majority of our Board satisfies the current independence requirements of NASDAQ and the SEC.

 

Our bylaws provide that our Board consists of no fewer than three persons. The exact number of members of our Board is determined from time to time by resolution of a majority of our full Board.

 

Our Board is divided into three classes, with each Director serving a three-year term and one class being elected at each year’s annual meeting of stockholders. Messrs. Craig and Frisch serve as Directors with a term expiring on the date of the 2007 Annual Meeting. Messrs. Bilodeau and Dicks serve as Directors with a term expiring on the date of the 2008 Annual Meeting. Messrs. Caggia and Donahue serve as Directors with a term expiring on the date of the 2009 Annual Meeting. Our certificate of incorporation requires that such classes be as nearly equal in number of Directors as possible.

 

At the Annual Meeting, two Directors are to be elected to serve three-year terms ending at the Annual Meeting of Stockholders to be held in 2010, or until their respective successors are elected and qualified. The Board has nominated for re-election Timothy P. Craig and Ivan T. Frisch as Directors. Each of the two nominees has consented to serve as a Director if elected at the Annual Meeting and, to the best knowledge of the Board, each of such nominees is and will be able to serve if so elected. In the event that either of these nominees should be unavailable to stand for election before the Annual Meeting, the persons named in the accompanying proxy intend to vote for such other person, if any, as may be designated by the Board in the place of a nominee unable to serve. The Board has determined that both of these nominees are independent directors within the meaning of applicable regulations of NASDAQ and the federal securities laws.

 

The Board recommends that stockholders vote
“FOR” the Company’s nominees for Director.

Set forth below is a brief biography of each nominee for election as a Director and of all other members of the Board who will continue in office.

 

Nominees for Election as Directors
Term Expiring 2010

 

Timothy P. Craig (55).  Mr. Craig has been a Director since 2003. He formerly was President of the Consumer Printer Division of Lexmark International, Inc., from which he retired in 2003. He is currently President of Corevalus Systems, a small privately held company providing computer related music services to religious institutions.

 

Ivan T. Frisch (69).  Mr. Frisch has been a Director since 1992. He previously served as Executive Vice President and Provost of Polytechnic University of New York, from which he retired in 2003.

 

Incumbent Directors
Term Expiring 2008

 

Steven J. Bilodeau (48).  Mr. Bilodeau has been a Director of the Company since 1999 and currently serves as Chairman, President and Chief Executive Officer of SMSC. Mr. Bilodeau is also a director of Conexant, Inc.

 

Peter F. Dicks (64).  Mr. Dicks has been a Director since 1992 and also served as a Director from 1976 to 1991. His primary occupation is serving as a corporate director; directorships include, among others, Polar Capital Technology Trust, Graphite Enterprise Trust PLC, and Gartmore Fledging Index Trust.

 

Incumbent Directors
Term Expiring 2009

 

Andrew M. Caggia (58).  Mr. Caggia has been a Director since 2001. Mr. Caggia retired from SMSC after serving as Senior Vice President and Chief Financial Officer of SMSC from February 2000 until October 12, 2005 except for a short period in June 2005.

 

James A. Donahue (58).  Mr. Donahue has been a Director since 2003 and for the past five years has been Director, President and Chief Executive Officer of Cohu, Inc.

 

CORPORATE GOVERNANCE

 

Board of Directors and Committee Meetings

 

Our Board held nine meetings in fiscal year 2007. It is the Company’s policy that Directors are expected to attend all or substantially all Board meetings and meetings of the Board committees on which they serve. Each Director attended at least 75% of the total number of Board meetings and meetings of Board committees on which such Director served.

 

The Board does not have a formal policy on Directors’ attendance at annual stockholder meetings, but it has been common practice for all Directors to attend the annual meeting, and all current Directors attended the most recent annual meeting in July of 2006.

 

The Board has established the position of Lead Independent Director, and has determined that the Chairman of the Corporate Governance Committee, currently Mr. Frisch, will fulfill that role. The Lead Independent Director is responsible, among other things, for: coordinating the activities of the other independent Directors; presiding at non-management meetings of the independent Directors; relating to management Directors the results of deliberations among non-management Directors; acting as Chairman in the event the Chairman is unavailable; and acting as representative of the non-management Directors for communications with interested parties.

 

Our standing Board committees consist of an audit committee (the “Audit Committee”) established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a

compensation committee (the “Compensation Committee”) and a corporate governance committee (the “Governance Committee”).

 

Audit Committee:  The Audit Committee currently consists of Mr. Donahue (chairman), Mr. Craig and Mr. Frisch. Each member of our Audit Committee satisfies the independence requirements of NASDAQ and the SEC.

 

The primary function of the Audit Committee is to assist the Board in its oversight responsibilities on matters relating to SMSC’s financial reporting, systems of internal controls, and audit. The Audit Committee provides advice, guidance and direction to management and to SMSC’s independent registered public accounting firm, using information shared through a free and open line of communication among the Audit Committee, management and the independent registered public accounting firm and, as appropriate, initiates inquiries into various aspects of SMSC’s financial affairs. The Audit Committee meets each quarter with management and the independent registered public accounting firm to review SMSC’s financial results before such results are publicly released, and more frequently on other matters if appropriate. The Audit Committee is also responsible for hiring, and determining fee arrangements with, SMSC’s independent registered public accounting firm, monitoring the integrity of our financial statements, our independent auditors’ qualifications and independence, the performance of our audit function and independent auditor, and our compliance with legal and regulatory requirements. The Audit Committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of our independent auditors, and our independent auditors report directly to the Audit Committee. Our Audit Committee held ten (10) meetings in fiscal year 2007.

 

Management is responsible for preparing SMSC’s financial statements and internal control over financial reporting, and the independent registered public accounting firm is responsible for performing an audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) with respect to both the financial statements and internal controls over financial reporting. Although each member of the Audit Committee is financially literate, as the Board interprets that qualification, none is currently practicing as a professional accountant or auditor. Their responsibilities do not include planning or conducting audits to determine that SMSC’s financial statements are complete and accurate and are presented in accordance with generally accepted accounting principles. The Audit Committee’s role also does not include a professional evaluation of the quality of the audits performed by the independent registered public accounting firm or that those audits were performed using generally accepted auditing standards. The Board has determined that each of Messrs. Donahue, Craig and Frisch qualifies as an “audit committee financial expert” and are independent under applicable rules of the SEC and listing standards of NASDAQ.

 

Compensation Committee:  Our Compensation Committee consists of Messrs. Craig (Chairman), Dicks and Frisch. Each member of the Compensation Committee satisfies the independence requirements of NASDAQ and qualifies as an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), and a non-employee director within the meaning of Rule 16b-3 of the rules promulgated under the Exchange Act. The Compensation Committee held seven (7) meetings in fiscal year 2007.

 

The primary duties of the Compensation Committee are approving the compensation of SMSC’s executive officers other than the Chief Executive Officer, and making a recommendation to the Board regarding the compensation of the Chief Executive Officer. The Compensation Committee also administers SMSC’s employee stock option, restricted stock and stock appreciation rights plans, and certain other benefit programs and is responsible for advising the Board on the compensation of the Company’s Directors. The Compensation Committee meets or communicates regularly, both with and without management.

 

The Compensation Committee also reviews and discusses with management the Compensation Discussion and Analysis prepared for inclusion in our annual report on Form 10-K and proxy statement and, based on such review, determines whether to recommend to the Board of Directors that the Compensation Discussion and Analysis be included in the annual report and the proxy statement. Furthermore, the Compensation Committee prepares the Compensation Committee Report furnished with our proxy statement. The Compensation Committee Report for fiscal year 2007 is included in this proxy statement under “Compensation Committee Report” below. The Compensation Discussion and Analysis describes the Compensation Committee’s procedures for determining executive compensation, including the role of compensation consultants and management.

 

Corporate Governance Committee:  Our Governance Committee consists of Messrs. Frisch (Chairman), Dicks, Craig and Donahue. Each member of the nominating and Governance Committee satisfies the independence requirements of NASDAQ. Our Governance Committee held two meetings in fiscal year 2007.

 

Among other responsibilities, the Governance Committee considers candidates for Director nominees proposed by Directors, the Chief Executive Officer and stockholders. The Governance Committee has and may retain recruiting professionals to identify and evaluate candidates for Director nominees. The Governance Committee seeks to identify those individuals most qualified to serve as Board members and will evaluate each candidate against many criteria including strength of character, judgment, business experience, specific areas of expertise, and diversity, taking care to maintain a majority of independent Directors. Potential candidates are screened and interviewed by the Governance Committee, and the Governance Committee is responsible for conducting, subject to applicable law, any and all inquiries into the background and qualifications of any candidate. The Board shall determine the final approval of any candidate. It is the Governance Committee’s policy, as part of its charter, to review any candidate recommended by the shareholders of the Company in light of the Governance Committee’s criteria for selection of new Directors. Any stockholder that would like to communicate directly with the Board or wishing to make a Director nomination should write to any named Director, c/o the Vice President, General Counsel and Secretary of SMSC at 80 Arkay Drive, Hauppauge, New York 11788. All such communications will be forwarded directly to the addressed Director.

 

Board Committee Charters

 

The charters for our Audit Committee, Compensation Committee and Governance Committee are available free of charge in the Corporate Governance section of the Investor Relations portion of our website at www.smsc.com or upon written request to the Secretary of the Company, 80 Arkay Drive, Hauppauge, New York 11788.

 

Corporate Governance Guidelines

 

The Company adopted corporate governance guidelines in July 2006 that are available in the Corporate Governance section of the Investor Relations portion of the Company’s website at www.smsc.com.

 

Code of Ethics and Business Practices

 

The Board has adopted a Code of Business Conduct and Ethics applicable to the Directors, Chief Executive Officer, principal financial officer, principal accounting officer and controller and all other officer and employees and is available. in the Corporate Governance section of the Investor Relations portion of the Company’s website at www.smsc.com.

 

PROPOSAL 2

 

TO RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS THE
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR SMSC FOR THE
FISCAL YEAR ENDING FEBRUARY 29, 2008.

 

Subject to ratification by the stockholders, the Audit Committee of the Board of Directors has selected PricewaterhouseCoopers LLP (“PwC”) as the independent registered public accounting firm for SMSC for the fiscal year ending February 29, 2008. PwC was the independent public accountant for SMSC for its fiscal year ended February 28, 2007. Representatives of PwC are expected to be present at the annual meeting, with the opportunity to make a statement, if they desire to do so, and are expected to be available to respond to appropriate questions.

 

If the selection of PwC is not ratified, or if prior to the next annual meeting of stockholders such firm shall decline to act or otherwise become incapable of acting, or if its engagement shall be otherwise discontinued by the Audit Committee, the Audit Committee will appoint another independent registered public accounting firm whose selection for any period subsequent to the next annual meeting will be subject to stockholder ratification at such meeting.

 

The Board recommends that stockholders vote
“FOR” ratifying the selection of PricewaterhouseCoopers LLP as the independent registered
public accounting firm for SMSC for the fiscal year ending February 29, 2008.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

SMSC has been informed that, as of May 3, 2007, the persons and groups identified in the table below, including all Directors, nominees, executive officers and beneficial owners of more than 5% of its common stock, owned beneficially, within the meaning of SEC Rule 13d-3, the shares of SMSC common stock reflected in such table. As of May 3, 2007, each Director, nominee or executive officer of SMSC disclaims beneficial ownership of securities of any subsidiary of SMSC. Except as otherwise noted, the named beneficial owner claims sole investment and voting power as to the securities reflected in the table, and the address of each of the persons whose name appears in the table below is c/o SMSC, 80 Arkay Drive, Hauppauge, New York 11788.

 

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Based solely on a review of copies of reports and written representations furnished to SMSC by its executive officers, Directors and persons beneficially owning more than 10% of any class of SMSC equity securities, SMSC believes that all reports required, under Section 16(a) of the Securities Exchange Act, to be filed by its executive officers, Directors and persons beneficially owning more than 10% of any class of SMSC equity securities in the 2007 fiscal year were timely filed.

 

MANAGEMENT

 

Executive Officers

 

The Company’s executive officers and their ages as of May 1, 2007, are as follows:

 

 

Steven J. Bilodeau has served as the Company’s President and Chief Executive Officer, and as a member of the Company’s Board of Directors, since March 1999. Mr. Bilodeau is also a director of Conexant, Inc.

 

Peter S. Byrnes has held various operations and management positions with the Company since 1995. Prior to becoming Vice President of Operations in April 2006 he had served as Vice President and General Manager, Computing Platforms Solutions Group since November 2003. Prior to that he served as Vice President, Operations from June 2000 through November 2003.

 

Joseph S. Durko has served as the Company’s Vice President and Controller since March 27, 2006 and became the Chief Accounting Officer on May 16, 2006. Mr. Durko previously served as a Manager at BBK Ltd. Mr. Durko was the director of Financial Reporting for TRW Automotive from 2003 to 2004, and was the Vice President, Finance and Corporate Controller for Ventiv Health, Inc. from 2000 to 2002. Mr. Durko is a certified public accountant.

 

Walter Siegel has served as the Company’s Vice President and General Counsel since October 24, 2005 and Secretary since November 15, 2005. Prior to joining the Company, Mr. Siegel was Vice President for Law and Business Development and Deputy General Counsel at Symbol Technologies, Inc. from March 2000 to October 2005.

 

David S. Smith has served as the Company’s Senior Vice President and Chief Financial Officer since October 12, 2005. Mr. Smith was a Managing Partner of Stonewall Capital Advisors LLC from February 2003 to

September 2005. He was Vice President-Finance and Chief Financial Officer of Dover Corporation from March 2000 to October 2002.

 

Aaron L. Fisher has served as the Company’s Senior Vice President, Products and Technology since September 6, 2006. Prior to joining SMSC, he served as Chief Executive Officer of T-Networks, a venture capital-funded company that developed optical components, from 2001 to 2006.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview of Compensation Program

 

The Compensation Committee of the Board is composed entirely of independent Directors within the meaning of applicable NASDAQ, SEC and IRS regulations. The charter of the Compensation Committee was amended in April 2007, and is available in the Corporate Governance section of the Investor Relations portion of the Company’s website at www.smsc.com. Pursuant to its charter, the Compensation Committee shall, among other duties, perform the following:

 

a) Review periodically the Company’s compensation philosophy and strategies;

 

b) Benchmark the Company’s compensation practices against relevant companies;

 

c) Review annually, the goals and objectives relevant for the compensation of the CEO, evaluate the performance of the CEO and recommend for approval by the independent Directors of the Board the compensation of the CEO.

 

d) Review annually, with input from the CEO, the performance, goals and objectives relevant for the compensation of executive officers other than the CEO, and approve their compensation.

 

Compensation Philosophy and Objectives

 

The Compensation Committee of the Company has developed and implemented executive compensation programs that seek to attract and retain the talent required for the continued success of our business. In addition, our executive compensation programs are structured to enhance the profitability of the Company and improve shareholder value by closely aligning the financial interests of the Company’s named executive officers with those of its shareholders.

 

To achieve these objectives we offer an executive compensation program that consists primarily of two key elements: (1) current compensation composed of annual base salary and annual cash bonuses and (2) long-term compensation composed of restricted stock awards, stock appreciation rights (“SARs”) and stock options. Though the Compensation Committee has no formal rules for allocating between long-term and current compensation, our executive compensation program is deliberately designed so that long-term compensation, rather than short-term compensation, comprises a significant portion of each named executive officer’s compensation. We believe the increased emphasis on long-term compensation serves to properly align the interests of our named executive officers with those of our shareholders by directly linking management incentives to the Company’s long-term performance, as reflected primarily in stock price appreciation and increased shareholder value. The Compensation Committee also believes that long-term compensation serves as a retention mechanism for executives since each of our long-term equity incentives vest, at a minimum, over several years of continued service to the Company. The current compensation component of our executive compensation program is also designed to attract and retain key talent.

 

Role of Executive Officers in Compensation Decisions

 

Because of his specific knowledge of their performance, the Chief Executive Officer consults closely with the Compensation Committee when the Compensation Committee determines the compensation of the other executive officers of the Company. The Chief Executive Officer discusses directly with the Compensation Committee and the

Board of Directors his own compensation, although the Chief Executive Officer does not participate in the deliberations or vote on any determinations of his own compensation. The other executive officers generally have minimal or no involvement in the compensation process for themselves. The General Counsel of the Company typically serves as Secretary of the Compensation Committee meetings and also, with outside counsel, from time to time advises the Compensation Committee on current legal issues relating to compensation matters.

 

Outside Compensation Consultant

 

The Compensation Committee has the authority to retain its own independent consultants or other advisers, and has done so in the past. The Compensation Committee retained Compensia, an outside compensation consultant in connection with the execution of a revised employment agreement with the Chief Executive Officer in March 2007. Compensia provides no other services to the Company.

 

Benchmarking Process

 

In structuring the executive compensation program, the Compensation Committee considers competitive market compensation data. In particular, the finance department periodically performs at the request of the Compensation Committee salary surveys based on publicly available data from peer companies. The Company also subscribes to the Radford Associates Executive Compensation Survey, a third party industry source, which it uses to benchmark executive compensation and to advise the Chief Executive Officer and Compensation Committee. Three of the Company’s named executive officers were recruited through retained executive search firms and the Company also relies on the advice of retained search firms as a source of market data. Prior to increasing the Chief Executive Officer’s salary in fiscal 2007, the Compensation Committee benchmarked the Chief Executive Officer’s compensation against the following peer semiconductor companies: Amis Holdings, Inc.; Cirrus Logic, Inc.; Conexant Systems, Inc.; Dsp Group, Inc.; Lattice Semiconductor; Microsemi Corporation; Pmc-Sierra, Inc.; Qlogic Corporation; Semtech Corporation; Silicon Image, Inc.; Silicon Laboratories, Silicon Storage Technology, Inc.; Vitesse Semiconductor; Zoran Corporation. These companies were determined to be “peers” based on the nature of their business, and revenues or market capitalization. The Committee determined that based on Mr. Bilodeau’s value to the Company his base salary should be in the middle to top half of the salaries paid to chief executive officers at the peer companies, and it believes his salary reflected that ranking at that time.

 

Components of Executive Compensation Program

 

Our named executive officers’ compensation is comprised primarily of two elements: (1) current compensation composed of base salary and cash bonuses and (2) long-term compensation tied directly to shareholder value, composed of restricted stock awards, SARs and stock options. In addition, as detailed elsewhere in this proxy statement, certain of the named executive officers, participate in the Company’s Supplemental Executive Retirement Plan (the “SERP”). All named executive officers, with one exception, are eligible to receive additional individual life and disability coverage in addition to receiving the same health and welfare benefits offered to all other employees.

 

Base Salary

 

Base salary represents the main fixed component of our executive compensation program. This element of compensation is designed to be competitive with similar semiconductor companies, or is structured in order to allow the Company to recruit and retain important contributors to the Company’s success. In determining the base salary for each of our named executive officers, the Compensation Committee considers performance of the individual, performance of the Company, length of service, the amount of time that has elapsed since any prior increase, the market for similarly situated positions, and other factors that the Compensation Committee determines are relevant in the particular case. In the case of new hires the Compensation Committee also considers the salary required to attract the individual, and the individual’s prior compensation history.

 

In fiscal year 2007 three executive officers received salary increases while serving as executive officers. Mr. Bilodeau’s salary was raised from $479,200 to $570,000; the size of the increase reflects the fact that he had not received a salary increase in two years and the significant growth of the Company during that period. Mr. Byrnes

salary was raised from $217,000 to $260,000. Mr. Statham also received an increase in salary from $210,000 to $235,000. All increases were made in recognition of the value of the services these individuals render to the Company and to retain and motivate these employees.

 

Annual Bonuses

 

Annual bonus opportunities for our named executive officers are governed by the Company’s Management Incentive Plan (“MIP”) and are typically established at the Compensation Committee’s and Board of Directors’ annual April meeting. Pursuant to the MIP, a named executive officer’s annual bonus opportunity is tied to both Company and individual performance objectives. The Committee retains discretion to reduce bonuses for unsatisfactory individual performance, to award bonuses if objectives are not satisfied in their discretion, or to adjust the MIP for changed circumstances. Under the terms of the fiscal year 2007 MIP, one-third of an employee’s bonus was based on the Company achieving a revenue objective, and one-third was based on the Company achieving a non-GAAP net income objective. In calculating these measures, the Compensation Committee included those items that it believed reflected the operating performance of the Company. Thus, the MIP did not require these measures to be GAAP financial measures. The remaining one-third of the bonus was based on certain strategic goals defined by the Compensation Committee and approved by the Board at its July 2006 meeting. The strategic element of the bonus can be adjusted by the Compensation Committee for individual performance. Participants in the MIP can have their bonus under each of the revenue and net income components increased by an additional 20% of the respective bonus target if a certain upside performance, as measured against the objectives, is achieved, which is paid in cash.

 

Approximately one half of the MIP is paid in the form of restricted stock that vests over three years, with 25% vesting after each of the first two years and the remaining 50% vesting after the third year. The Committee believes this vesting schedule serves as a retention tool and aligns the long term interests of management with the shareholders. The restricted stock is earned quarterly based on fiscal year-to-date achievement. The restricted stock portion of this bonus is adjusted for final full year-end results so that if the quarterly bonuses are not earned for failure to meet quarterly objectives, but the yearly objective is ultimately met, then the full restricted stock award is made at year-end. The cash portion is paid out after the end of the fiscal year based on full-year results. The strategic portion of the bonus and any increase due to exceeding objectives are paid in cash after the end of the fiscal year. All restricted stock awards under the MIP are approved by the Compensation Committee. In April 2007 the Compensation Committee and the Board of Directors approved the fiscal year 2008 MIP, whose structure is substantially similar to the fiscal year 2007 MIP.

 

Annual bonuses paid under the MIP are not qualified for purposes of Section 162(m) of the Code.

 

Long Term Equity Incentives

 

Since we believe aligning the interests of our named executive officers with those of our shareholders is a crucial component of the Company’s success, our named executive officer compensation is heavily weighted in long-term compensation. In addition to the restricted stock portion of our annual bonus payouts (described above), named executive officers are generally eligible to receive additional equity awards, either in the form of stock options, restricted stock or SARs. In addition, the Compensation Committee believes that the vesting element of long term incentives also serves as a retention mechanism for employees.

 

Newly hired executive officers generally receive options granted by the Compensation Committee to purchase the Company’s common stock via inducement stock option plans, which do not require shareholder approval. Existing executive officers receive a portion of their annual MIP bonus via shareholder approved restricted stock awarded by the Compensation Committee. Existing executive officers generally receive additional equity awards through the grant of SARs awarded by the Compensation Committee and/or a majority of the independent Directors. The Company’s SARs and Inducement Stock Option plans have not been approved by the shareholders of the Company and are not qualified for purposes of Section 162(m) of the Code.

 

Newly hired executive officers generally receive option awards on the date of their hire. Restricted stock awards to executive officers and other employees issued pursuant to the Company’s annual MIP are generally issued on the third Company business day after the Company releases quarterly earnings, and are priced at the Company’s closing common stock price on the NASDAQ exchange on that same day.

 

The amount of equity compensation offered to executive officers is based on a number of factors, including performance of the individual, performance of the Company, length of service, the amount of time that has elapsed since any prior grant of equity based compensation, the market for similarly situated positions, amounts required to attract new employees, and other factors that the Compensation Committee determines are relevant in the particular case.

 

In fiscal 2007 the Company adopted the Standard Microsystems Corporation 2006 Employee Stock Appreciation Rights Plan, as it did not have sufficient equity based incentives available for current employees under existing plans, and believes that long term equity based incentives are essential to retain key employees, minimize employee turnover, and align the interests of the employees with the shareholders. In addition, a significant percentage of the employee base had not received any stock options or SARs for two years. This plan provides for 2 million SARs to be made available for issuance to the employees of the Company. The SARs are intended to function substantially similar to stock options, but are cash-settled exclusively. The SARs granted generally vest over 4 or 5 years in equal increments and have ten year terms.

 

In fiscal 2007 five executive officers received SARs grants while serving as executive officers. Mr. Bilodeau received 300,000 SARs, Mr. Smith received 15,000 SARs, Mr. Byrnes received 50,000 SARs, Mr. Siegel received 5,000 SARs, and Mr. Durko received 9,000 SARs. These SAR grants were the first stock option or SAR grants to Messrs. Byrnes and Bilodeau in two years.

 

Though the Company has not adopted a formal policy governing the equity ownership of its named executive officers, we believe that the structure of the executive compensation program and its focus on equity incentives, both in terms of annual bonus payouts under the MIP and long-term compensation, fosters ongoing executive stock ownership. As a result, we expect that each of our named executive officers will develop an equity ownership interest in the Company as their careers with the Company progress.

 

The Company’s insider trading policy prohibits executive officers from buying, selling or exercising any market-traded option (put or call) on Company shares, from trading options for Company shares, from investing in other derivative securities based on Company shares, and from selling short any Company stock.

 

Health and Welfare Benefits

 

The executive officers are eligible to receive the same health and welfare benefits that are generally available to other United States based employees and a contribution to their benefit premium that is the same as provided to other employees. These benefits programs include health and dental insurance, health and dependent care flexible spending accounts, short term and long term disability, a patent award program, life insurance, accidental death and dismemberment, and certain other benefits. All named executive officers, with one exception, are eligible to receive additional individual life and disability coverage in addition to receiving the same health and welfare benefits offered to all other employees. Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended February 28, 2007, are included in the column labeled “All Other Compensation” in the Summary Compensation Table.

 

Retirement Benefits

 

SMSC maintains for its US-based executives a tax-qualified 401(k) plan, which provides for broad-based employee participation. Under the 401(k) plan, all SMSC employees, including executive officers, are eligible to receive matching contributions from SMSC in SMSC common stock up to sixty-seven percent (67%) of the amount they voluntarily contribute to the 401(k) plan, with a further limit that no matching contribution may be made for employee contributions in excess of six percent (6%) of their defined compensation in accordance with the 401(k) plan. The matching contributions for the 401(k) plan for fiscal year 2007 are reflected in the Summary Compensation Table.

 

In addition, under SMSC’s SERP, corporate officers that have been approved to participate in the SERP by the Board, whose employment terminates after full vesting (as provided in the SERP), or after a change in control, will generally receive, for ten years, in equal monthly installments, beginning at age 65 or such officer’s later retirement date (or, upon total and permanent disability, if earlier), an annual benefit equal to 35% of the executive’s Base

Annual Salary, as defined in the SERP. For participants who enter the plan after January 1, 2003, vesting upon a change in control of the Company is at the discretion of the Board. In March 2007 the SERP was amended, among other changes, to provide for certain alternative distributions for the participants in the SERP, and to change the timing of certain payouts under the SERP to comply with Section 409A of the Code (“Section 409A”). In addition, while the Company has made amendments in an effort to comply with Section 409A, it has amended the SERP to provide “gross up” tax protection in the event the participants incur a tax liability under Section 409A, despite efforts by the Company to make sure that no tax will apply. The financial statement expense for the SERP is set forth in the Summary Compensation Table.

 

Management and the Compensation Committee believe the retirement benefits and other generally available health and welfare benefits programs described above are appropriate and consistent with its overall compensation program to better enable SMSC to attract and retain superior employees. Management periodically reviews the levels of benefits provided to all employees and makes adjustments, as necessary.

 

The Company also maintains a severance plan (the “Severance Plan”) for its United States based employees, and some of the named executive officers are entitled to receive benefits under this plan. The purpose of the plan is to allow the Company to recruit and retain employees. Executives under the Severance Plan are entitled to receive three months base salary as severance if they are terminated by the Company without cause; if such termination occurs within one year following a change of control of the Company the benefit is extended to six months base salary. In addition, all Executives under the Severance Plan are entitled to receive three months paid Consolidated Omnibus Reconciliation Act (“COBRA”) coverage if terminated without cause.

 

Perquisites and Fringe Benefits

 

A majority of the named executive officers receive a car allowance or leased automobile. Mr. Durko received a home relocation benefit of approximately $138,000 that is described in the footnotes to the column labeled “All Other Compensation” of the Summary Compensation Table.

 

Change of Control Arrangements

 

In addition, we have change of control arrangements with certain of our named executive officers, which provide for the executives to receive certain payments and benefits upon a change of control of the Company. Information regarding applicable payments under such agreements for the named executive officers is provided under the heading “Change of Control and Severance Agreements”. These arrangements include in certain cases gross up protection under sections 280G and 409A of Code, although the Company has structured its arrangements with these executives to try to make sure that no liability under Section 409A will apply. These arrangements are designed to maintain the continuity of the senior management team and to more closely align the financial interests of senior management with the shareholders of the Company.

 

Tax and Accounting Implications

 

Deductibility of Executive Compensation

 

Section 162(m) of the Code limits the amount of “applicable employee remuneration” deductible by SMSC for “covered” employees for any taxable year to $1,000,000. Qualifying performance-based compensation is not subject to such limitation if certain requirements are satisfied. Several of SMSC’s stock option plans permit the Compensation Committee to pay compensation that is “performance-based” and thus fully tax deductible by SMSC. However, compensation paid pursuant to the employee SARs plans, the Company’s MIP and the Company’s inducement stock option plans, are not qualified. It is the Compensation Committee’s policy to the extent feasible, to keep compensation within the deductible limits, although some compensation of particular highly paid employees may be non-deductible. In fiscal year 2007 the Company estimated that as a result of Mr. Bilodeau’s compensation exceeding the 162(m) limits, it will lose over $800,000 in tax benefits.

 

Accounting for Stock-Based Compensation

 

Beginning in fiscal year 2007, SMSC began accounting for stock-based compensation, including its stock option grants, restricted stock awards, and stock appreciation rights, in accordance with the requirements of FASB Statement 123(R).

 

Compensation of the Chief Executive Officer

 

The Compensation Committee reviews and recommends Mr. Bilodeau’s compensation to the independent Directors of the Board for approval. In fiscal year 2007 Mr. Bilodeau’s salary was increased from $479,200 to $570,000, his first salary increase in approximately two years. The Compensation Committee and the independent Directors determine Mr. Bilodeau’s compensation based on their assessment of his past performance, their expectations as to his future performance, and competitive pay scales for chief executive officers at peer companies. In fiscal 2007, Mr. Bilodeau received a bonus pursuant to the MIP of $694,390, consisting of $318,754 in cash and $375,636 in restricted stock vesting over three years. He also received an award of 300,000 SARs vesting in four equal increments over four years. Excluding restricted stock awarded as part of the Company’s annual bonus program, the award of SARs to Mr. Bilodeau was the first stock option or SAR award to him in over two years. Mr. Bilodeau is also entitled pursuant to his revised employment agreement in March 2007 to receive 50,000 options or SARs on a quarterly basis, on the same schedule as SARs are awarded to the Directors of the Company, unless the Board decides otherwise. To date, Mr. Bilodeau has not received any options or SARs pursuant to this provision of his agreement.

 

Executive Employment Agreements

 

Messrs. Bilodeau and Smith have employment agreements with the Company; and Messrs. Siegel and Durko have employment letters that were executed to induce them to join the Company. Mr. Siegel’s employment letter was amended in March 2007; Mr. Smith’s employment agreement was amended and restated in March 2007, and Mr. Bilodeau executed a revised agreement in March 2007, which supersedes his 1999 agreement. In each case, the purpose of the original letter or agreements was to induce the employee to accept a position with the Company, and the terms were established through individual negotiations. In some cases the Company relied on outside search firms or outside data sources to assist in determining market terms for these positions. These documents were amended in March 2007 to comply with Section 409A of the Code and for other reasons that varied among the officers. Each of Messrs. Smith, Bilodeau, and Siegel’s agreements provide certain payments and other benefits upon termination without cause or upon a change of control and for gross ups for any excise taxes or penalties imposed on the executive pursuant to Sections 280G and 409A of the Code, although the Company has attempted to structure each agreement so that there is no 409A tax liability. Mr. Durko also is entitled to certain severance benefits upon termination without cause or in certain events upon a change of control.

 

The other named executive officers are eligible to receive the standard benefits applicable to Executives under the Company’s Severance Plan. In March 2007 the Severance Plan was amended. The amendment clarified certain provisions of the Severance Plan and changed the timing of certain payouts to comply with Section 409A.

 

The following table sets forth the compensation paid to or earned during Fiscal 2007 by (i) our principal executive officer, (ii) our principal financial officer, (iii) the Company’s three other most highly compensated executive officers who were serving as executive officers as of the end of Fiscal 2007, and (iv) two additional individuals for whom disclosure would have been provided but for the fact that they were not serving as an executive officer of the registrant at the end of the last completed fiscal year on February 28, 2007. Mr. Statham and Mr. Tan

ceased being executive officers on September 6, 2006 and April 5, 2006, respectively, and are still employed by the Company.

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

Employment Agreements

 

Steven J. Bilodeau.

 

Mr. Steven J. Bilodeau and SMSC have entered into an employment agreement providing for his employment as President and Chief Executive Officer of SMSC until November 18, 2008. Mr. Bilodeau’s current annual base salary is $570,000. His current total bonus opportunity pursuant to the Company’s MIP is approximately One Hundred and Fifty Nine percent (159%) of base salary. Mr. Bilodeau’s employment agreement also provides for:

 

 

David Smith.

 

Mr. David Smith and SMSC have entered into an employment agreement providing for his employment as Senior Vice President and Chief Financial Officer of SMSC until September 15, 2008. Mr. Smith’s current annual base salary is $325,000. His current total bonus opportunity pursuant to the Company’s MIP is approximately One Hundred and Two percent (102%) of base salary. Mr. Smith’s employment agreement also provides for:

 

 

Joseph S. Durko.

 

Mr. Joseph S. Durko and SMSC have entered into an offer letter dated March 27, 2006 providing for his employment as Vice President, Controller and Chief Accounting Officer of SMSC. Mr. Durko’s current annual base salary is $215,000. His current total bonus opportunity pursuant to the Company’s MIP is $85,000. Mr. Durko’s offer letter also provides for:

 

 

Walter Siegel.

 

Mr. Walter Siegel and SMSC have entered into an employment letter dated March 19, 2007 providing for his employment as Vice President and General Counsel of SMSC. Mr. Siegel’s current annual base salary is $280,000. His current total bonus opportunity pursuant to the Company’s MIP is $100,000. Mr. Siegel’s employment agreement also provides for:

 

 

The following table sets forth the awards granted pursuant to company plans for Fiscal 2007.

 

GRANTS OF PLAN-BASED AWARDS — FISCAL YEAR 2007

 

 

 

 

 

OUTSTANDING EQUITY AWARDS AT 2007 FISCAL YEAR-END

 

 

 

 

 

The following table sets forth information concerning each exercise of stock options, SARs and similar instruments, and each vesting of stock, including restricted stock, restricted stock units and similar instruments, during Fiscal 2007 for each named executive officer on an aggregated basis.

 

OPTION EXERCISES AND STOCK VESTED — FISCAL YEAR 2007

 

 

 

 

PENSION BENEFITS — FISCAL YEAR 2007

 

 

Mr. Durko is not a participant in the Company’s SERP. For a description of the Company’s SERP see the Compensation Discussion and Analysis contained in this proxy statement

 

CHANGE OF CONTROL AND SEVERANCE PAYMENTS

 

The following table provides information concerning the estimated payments and benefits that would be provided in the event of termination upon a change of control, termination without cause, and termination for death or disability for each of the named executive officers. A narrative description of the estimated payments and benefits to Messrs. Bilodeau, Smith, Siegel and Durko is contained in the summary of their employment or letter agreements in the Employment Agreement section of this proxy statement. Messrs. Statham, Tan and Byrnes are entitled to receive those benefits applicable to Executives under the Company’s Severance Plan. The Severance Plan provides that Executives, as defined by the Severance Plan, are entitled to receive three months of salary and three months of COBRA benefits for termination without cause; if termination without cause follows a change of control of the Company as defined in the Severance Plan the salary benefit is increased to six months of salary. Mr. Siegel and Mr. Durko are also entitled to receive under the Severance Plan the same COBRA benefit as Messrs. Statham, Tan and Byrnes.

 

Payments and benefits are estimated assuming that the triggering event took place on the last business day of fiscal 2007 (February 28, 2007), and the price per share of the Company’s Common Stock is the closing price on the NASDAQ Global Market as of that date ($28.57). There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or at any other price, or if any of the assumptions used to estimate potential payments and benefits is not correct. Actual payments or benefits could be materially different than those set forth below. Mr. Statham and Mr. Tan ceased being executive officers in fiscal year 2007, although they are still employed by the Company. The Company estimates as of February 28, 2007 that no 280G or 409A gross ups would have been due Messrs. Bilodeau, Smith or Siegel assuming a triggering event took place on that day. If payments are subject to a six month delay upon a separation of service under 409A Messrs. Siegel, Smith and Bilodeau would be entitled to interest on the delayed payments.

 

The Company’s form of stock option grant agreement for the 2005 Inducement Stock Option and Restricted Stock Plan contains non-solicit and confidentiality clauses that entitle the Company in the event of a breach of the foregoing clauses to seek to reclaim any profits made by an individual from the sale of stock options during the one year period prior to such breach. Messrs. Siegel, Durko and Smith have received stock options subject to this form of agreement. Messrs. Siegel and Durko have also executed the Company’s standard form employee agreement, which also contains confidentiality and non-solicit clauses; Messrs. Byrnes, Tan and Statham executed an earlier version of this standard form employee agreement that contains a confidentiality clause, but not a non-solicit clause. The employment agreements of Messrs. Bilodeau and Smith also contain confidentiality and non-solicit clauses.