UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to Section 240.14a-12

 

THE BON-TON STORES, INC.

---

(Name of Registrant as Specified In Its Charter)

 

---

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

Payment of Filing Fee (Check the appropriate box):

þ		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

PROXY STATEMENT & NOTICE OF

2007 ANNUAL MEETING

 

 

THE BON uTON STORES, INC.

2801 East Market Street

York, PA 17402

www.bonton.com

 

May 16, 2007

 

Dear Shareholder:

 

You are cordially invited to attend our Annual Meeting of Shareholders to be held at the Company’s offices, 2801 East Market Street, York, Pennsylvania on Tuesday, June 19, 2007, beginning at 9:00 a.m. Enclosed is the official notice of meeting, the proxy statement, the proxy card and our 2006 Annual Report.

 

Your vote is important to us. Even if you plan to attend the meeting, please sign, date and return your proxy in the enclosed postage-paid envelope or vote by telephone or over the internet.

 

Sincerely,

 

Tim Grumbacher

Executive Chairman of the Board

THE BON-TON STORES, INC.
2801 East Market Street
York, PA 17402
www.bonton.com

 

NOTICE OF ANNUAL MEETING

 

The Annual Meeting of Shareholders of The Bon-Ton Stores, Inc. will be held on Tuesday, June 19, 2007, at 9:00 a.m., at the Company’s offices, 2801 East Market Street, York, Pennsylvania.

 

The purposes of the meeting are:

 

1. To elect an eight-member Board of Directors for a one-year term.

 

 

4. To consider any other matters as may properly come before the meeting.

 

Shareholders who owned shares of our stock at the close of business on April 27, 2007 may attend and vote at the meeting. You may vote by telephone or over the internet or by mailing the proxy card in the enclosed postage-paid envelope. Any shareholder attending the meeting may vote in person, even though he or she has already returned a proxy card or voted by telephone or over the internet.

 

Robert E. Stern

Vice President,

General Counsel and Secretary

 

York, Pennsylvania

May 16, 2007

 

 

Please vote by telephone or over the internet as instructed on the enclosed proxy card or complete, sign and date the proxy card as promptly as possible and return it in the enclosed envelope. If you vote by telephone or over the internet, do not return your proxy card.

 

TABLE OF CONTENTS

 

THE BON-TON STORES, INC.

 

 

We are providing this proxy statement to solicit your proxy for use at the annual meeting of shareholders which will be held at 9:00 a.m. on Tuesday, June 19, 2007. The proxy materials, which consist of the Annual Report, the Notice of Annual Meeting, this proxy statement and the proxy card, are first being sent to our shareholders on or about May 16, 2007.

 

We do not anticipate that any matters will be raised at the meeting other than those described in the notice. If any other matters come before the meeting, your proxies will be authorized to act in accordance with their best judgment.

 

When your proxy card is returned properly signed, or you have effectively submitted your proxy over the internet or by telephone, your shares will be voted in accordance with your instructions. If your proxy card is signed and returned without specifying choices, your shares will be voted “for” the Board nominees, “for” the amendment and restatement of The Bon-Ton Stores, Inc. Cash Bonus Plan (the “Cash Bonus Plan”), and “for” ratification of the appointment of KPMG LLP as independent registered public accounting firm.

 

You may revoke your proxy before its exercise by notifying the Secretary of the Company in writing, by delivering a properly executed, later-dated proxy card, by submitting your proxy again over the internet or by telephone, or by voting in person at the meeting.

 

Your proxy is being solicited by the Board of Directors. We will bear the cost of this solicitation, including the charges of brokerage houses, nominees and fiduciaries in forwarding these materials to beneficial owners. This solicitation may be made in person, by telephone or by other means of communication by our directors, officers or employees.

 

References in this proxy statement to a year refer to our fiscal year, which is the 52- or 53-week period ending on the Saturday nearer to January 31 of the following calendar year (for example, a reference to 2006 is a reference to the fiscal year ended February 3, 2007).

 

Shareholders of record at the close of business on April 27, 2007 are entitled to vote at the meeting. At that time, there were 14,499,090 shares of common stock and 2,951,490 shares of Class A common stock outstanding. The common stock and the Class A common stock vote together on all matters. Holders of common stock are entitled to one vote per share and holders of Class A common stock are entitled to ten votes per share. There are no other classes of voting securities outstanding. In the election of directors, shareholders do not have cumulative voting rights.

 

The presence at the meeting, in person or by proxy, of persons entitled to cast a majority of the shareholder votes will constitute a quorum.

 

The eight nominees receiving a plurality of the votes cast (that is, the eight nominees receiving the greatest number of votes) will be elected. A proxy marked “withhold” with respect to the election of a director will not be voted as to the director indicated, but will be counted for purposes of determining whether there is a quorum.

 

Approval of any other matter requires the affirmative vote of a majority of the votes cast. Abstentions and broker non-votes are counted to determine whether a quorum is present at the meeting but are not counted as a vote in favor of or against a particular matter. A “broker non-vote” occurs when a nominee for a beneficial owner does not vote on a particular matter because the

nominee does not have discretionary voting power as to that item and has not received voting instructions from the beneficial owner.

 

If you own common stock in your own name, you are an “owner of record.” This means you may direct the persons named as proxies how to vote your shares. If you fail to vote, the proxies cannot vote your shares at the meeting.

 

You have four voting options:

 

 

If a broker, bank or other nominee holds your common stock for your benefit but not in your name, your shares are in “street name.” In that case, your bank, broker or other nominee will send you a voting instruction form to use in voting your shares. The availability of internet and telephone voting depends on their voting processes. Please follow the voting instruction form sent to you by your bank, broker or other nominee.

 

If you are a participant in The Bon-Ton Stores, Inc. Retirement Contribution Plan (the “401(k) Plan”), your proxy will incorporate all shares you own through the 401(k) Plan, assuming all your shares are registered in the same name. Your proxy will serve as a voting instruction for the trustee of the 401(k) Plan. If you own shares through the 401(k) Plan and you do not vote, the plan trustee will vote your shares in the same proportion as shares for which instructions were received from other shareholders under the 401(k) Plan.

 

The Nasdaq Stock Market listing standards provide that if more than 50% of the voting power in a company is held by an individual, group or another company, the company is a “controlled” company. Using this definition, Bon-Ton is a “controlled” company because Tim Grumbacher, Executive Chairman of the Board, is the beneficial owner of shares of common stock and Class A common stock entitled to vote more than 50% of the votes entitled to be cast at the meeting. Mr. Grumbacher has indicated that he will vote “for” each of the nominees for director, “for” the amendment and restatement of the Cash Bonus Plan and “for” ratification of the appointment of KPMG LLP. Consequently, the election of each nominee for director, approval of the amendment of the Cash Bonus Plan and ratification of the appointment of KPMG LLP are assured.

 

This table shows owners of 5% or more of the Class A common stock or common stock as of April 2, 2007. Each person listed has sole voting power and sole investment power as to the shares indicated unless otherwise noted.

 

 

 

 

 

The holders of the Class A common stock have entered into an agreement granting Tim Grumbacher (or his personal representative) the right of first refusal to acquire any shares of Class A common stock proposed to be transferred.

 

This table shows, as of April 2, 2007, the holdings of our Chief Executive Officer, our Chief Financial Officer, the three other most highly compensated executive officers during 2006 (collectively, the “named executive officers”), each director, and all directors and executive officers as a group. Each person listed has sole voting power and sole investment power with respect to the shares indicated unless otherwise noted.

 

 

 

The Board proposes the following nominees for election as directors to hold office until the 2008 Annual Meeting of Shareholders and until their respective successors have been elected. Each is currently a director and has agreed to serve if elected. Should a nominee become unable or decline to serve before the Annual Meeting, the proxies may vote for a substitute recommended by the Governance and Nominating Committee of the Board, unless the Board reduces the number of directors.

 

ROBERT B. BANK — Director since 2002.  Age 60
Mr. Bank has been President of Robert B. Bank Advisory Services, a private capital investment and consulting firm, since 1990.

 

BYRON L. BERGREN — Director since 2004.  Age 60
Mr. Bergren has been President and Chief Executive Officer of Bon-Ton since August 2004. Mr. Bergren, who joined Bon-Ton in November 2003 as Vice Chairman and served as President and Chief Executive Officer of Elder-Beerman from February 2002 through August 2004, served as Chairman of the Southern Division of Belk, Inc. from 1999 to February 2002, and in senior executive positions at Belk, Inc. from 1985 to 1999.

 

PHILIP M. BROWNE — Director since 2002.  Age 47
Mr. Browne has been Senior Vice President and Chief Financial Officer of Advanta Corp., one of the nation’s largest credit card issuers in the small business market, since June 1998. Prior to that, Mr. Browne was a partner at Arthur Andersen LLP, where he was employed for more than 15 years.

 

SHIRLEY A. DAWE — Director since 2002.  Age 60
Ms. Dawe has been President of Shirley Dawe Associates, Inc., a Toronto-based retail management consulting group, since 1986. From 1969 to 1985, she held progressively senior merchandising and marketing positions with the Hudson’s Bay Company, a Canadian national department store chain. Ms. Dawe is a director of the National Bank of Canada and Birks & Mayors, Inc., a North American fine jewelry retail chain.

 

MARSHA M. EVERTON — Director since 2003.  Age 55
Ms. Everton has been President of Marsha Everton LLC, a York, Pennsylvania-based consulting firm, since September 2006. She was President of The Pfaltzgraff Co., a subsidiary of Lifetime Brands, Inc., a multi-channel retail company, from July 2005 to August 2006. From January 2002 to July 2005, she was President and Chief Executive Officer of The Pfaltzgraff Co., a casual dinnerware manufacturer. Ms. Everton was Vice President of The Pfaltzgraff Co. for more than ten years prior, and was responsible during this period for various departments including stores and direct marketing, corporate development and market planning and administration.

 

MICHAEL L. GLEIM — Director since 1991.  Age 64
Mr. Gleim was Vice Chairman and Chief Operating Officer of Bon-Ton from December 1995 to February 2002. From 1991 to December 1995 he was Senior Executive Vice President of Bon-Ton, and from 1989 to 1991 he was Executive Vice President of Bon-Ton.

 

TIM GRUMBACHER — Director since 1967.  Age 67
Mr. Grumbacher has been Executive Chairman of the Board of Directors of Bon-Ton since February 2005. He served as Chairman of the Board of Directors of Bon-Ton from August 1991 to February 2005. He was Chief Executive Officer of Bon-Ton from 1985 to 1995 and from June 2000 to August 2004. From 1977 to 1989 he was President of Bon-Ton.

 

ROBERT E. SALERNO — Director since 2002.  Age 59
Mr. Salerno has been Chief Operating Officer of Nancy Koltes Associates, a wholesaler of luxury domestics and linens, since June 2004. He was Chief Operating Officer of Kieselstein-Cord International, a luxury accessories wholesaler and retailer, from December 2002 to June 2004; and Vice President and Chief Operating Officer of Circline.com, an internet based broker of fine arts and antiques, from November 2001 to December 2002.

 

The key documents that constitute our corporate governance framework are as follows:

 

 

Each of the committee charters and the Code of Ethical Standards and Business Conduct is available on our website at www.bonton.com by clicking on “Investor Relations,” then “Corporate Governance.”

 

The Board of Directors has determined that each of Messrs. Bank, Browne and Salerno, Ms. Dawe and Ms. Everton is an “independent” director as that term is defined in the listing standards of the Nasdaq Stock Market. In determining independence, the Board of Directors carefully reviewed any possible related party transactions between Bon-Ton or any of its affiliates and each of the independent directors, including the Company’s purchase of merchandise from The Pfaltzgraff Co. Ms. Everton was the President of The Pfaltzgraff Co. from July 2005 to August 2006. In determining whether Ms. Everton is an independent director, the Board considered the Company’s transactions with The Pfaltzgraff Co. and determined that purchases by the Company were made in arms-length transactions that were not material to either company. Further, the Board determined that Ms. Everton did not have any direct or indirect material interest in the transactions.

 

During 2006, the Board of Directors held six meetings and took action by unanimous consent without a meeting three times.

 

No director attended fewer than 75% of the total number of meetings of the Board and committees on which he or she served while in office.

 

The Board has an Audit Committee, a Human Resources and Compensation Committee, a Governance and Nominating Committee and an Executive Committee. The primary functions of each committee, its members, the number of times the committee met during 2006, and certain other information regarding each committee, are described below.

 

Audit Committee

 

The members of the Audit Committee are Philip M. Browne (Chair), Robert B. Bank and Robert E. Salerno. The Board has determined that Mr. Browne is an “audit committee financial expert” as defined by SEC rules and the listing standards of the Nasdaq Stock Market. The Audit Committee is comprised entirely of “independent” directors under applicable SEC rules and Nasdaq

Stock Market listing standards and operates under a charter which was adopted by the Board of Directors. This charter is posted in the Investor Relations section of the Company’s website at www.bonton.com.

 

The Audit Committee appoints and establishes the compensation for the Company’s independent registered public accounting firm, approves in advance all engagements with the independent registered public accounting firm to perform non-audit services, reviews and approves the procedures used to prepare the Company’s periodic reports, reviews and approves the Company’s critical accounting policies, discusses the plans and reviews results of the audit engagement with the independent registered public accounting firm, reviews the independence of the independent registered public accounting firm, and oversees the Company’s accounting processes including the adequacy of its internal accounting controls. To assist it in carrying out its responsibilities, the Audit Committee is authorized to retain the services of independent advisors.

 

The Audit Committee met six times during 2006.

 

Human Resources and Compensation Committee

 

The members of the Human Resources and Compensation Committee (the “HRC Committee”) are Shirley A. Dawe (Chair), Robert B. Bank and Marsha M. Everton. The HRC Committee is comprised entirely of “independent” directors, as defined by the listing standards of the Nasdaq Stock Market, and operates under a charter which was adopted by the Board of Directors. This charter is posted in the Investor Relations section of the Company’s website at www.bonton.com.

 

The HRC Committee advises and assists management in developing the Company’s overall compensation strategy to assure that it promotes shareholder interests, supports the Company’s strategic objectives, and provides for appropriate rewards and incentives for the Company’s management and employees. The HRC Committee reviews, evaluates and provides recommendations to the Board regarding the plans, policies and programs relating to the compensation of the Company’s principal executive officers, the general compensation policies of the Company, succession planning, management development and termination policies and arrangements. In addition, the HRC Committee reviews and approves the structure of the Company’s bonus plans, administers the Company’s stock option plans and oversees the Company’s retirement, defined benefit and health and welfare plans.

 

At the end of each year, the HRC Committee evaluates the performance of the Executive Chairman of the Board, the President and Chief Executive Officer, and the other principal executive officers of the Company with respect to approved goals and objectives. In addition, annually, or whenever the Company hires a new executive officer, the HRC Committee establishes the compensation levels for the Chairman of the Board, Chief Executive Officer and the other principal executive officers, including base pay, annual incentive compensation, long-term incentive plan participation, entrance into an agreement regarding employment and any special or supplemental benefits. (See “Compensation Discussion and Analysis” for additional discussion of the elements of executive officer compensation.) The compensation of the President and Chief Executive Officer is also reviewed by the full Board of Directors. The HRC Committee annually reviews with the Chief Executive Officer the performance of the other executive officers and approves their compensation for the next year. Finally, the HRC Committee establishes the corporate goals under the Company’s Cash Bonus Plan and has the authority to determine whether the requirements for receipt of a bonus should be waived.

 

The HRC Committee may delegate its authority to a subcommittee comprised solely of its members. To assist it in carrying out its responsibilities, the HRC Committee is authorized to retain the services of independent advisors. (See “Compensation Discussion and Analysis” for additional discussion of the processes and procedures for the consideration and determination of executive and director compensation.)

 

The HRC Committee met 16 times during 2006.

 

Governance and Nominating Committee

 

The members of the Governance and Nominating Committee (the “GN Committee”) are Michael L. Gleim (Chair) and Marsha M. Everton. Mr. Gleim is not an “independent” director as set forth under the Nasdaq Stock Market listing standards. As discussed above, the Company is a “controlled company” under Nasdaq Stock Market listing standards. As a controlled company, the Company may elect, and has elected, not to have a nominating committee comprised solely of independent directors. Mr. Gleim provides the Board with valuable insight with respect to both the governance of the Company and the nominations process, and, therefore, the Board believes that he should continue as a member of the GN Committee.

 

The GN Committee reviews, develops and makes recommendations to the Board of Directors regarding various aspects of the Company’s governance processes and procedures. It also recommends candidates for election to fill vacancies on the Board, including renominations of members whose terms are due to expire. The GN Committee is also responsible for making recommendations to the Board regarding the compensation of its non-employee members. The GN Committee operates under a charter which was adopted by the Board of Directors. This charter is posted in the Investor Relations section of the Company’s website at www.bonton.com.

 

The GN Committee met three times during 2006.

 

Executive Committee

 

The members of the Executive Committee are Tim Grumbacher (Chair), Shirley A. Dawe and Michael L. Gleim. The Executive Committee has the authority to act in place of the Board of Directors on specified matters.

 

The Executive Committee has the following responsibilities: to propose the Board agenda for each year and to refine the agenda prior to each Board meeting; to keep the members of the Board informed of pertinent issues that arise between regularly scheduled quarterly Board meetings; and to act as a sounding board for the Company’s Chief Executive Officer as appropriate. The Executive Committee Charter, under which the Executive Committee operates, was adopted by the Board and is posted in the Investor Relations section of the Company’s website at www.bonton.com.

 

The Executive Committee met 18 times during 2006.

 

The GN Committee considers any appropriate recommendations for candidates for the Board. Any candidate recommended for the Board shall, at a minimum, possess a background that includes a solid education, sufficient business, professional or academic experience and the requisite reputation, character, integrity, skills, judgment and temperament and such other relevant characteristics, which, in the GN Committee’s view, have prepared him or her for dealing with the multi-faceted financial, business and other issues that confront a board of directors of a corporation with the size, complexity, reputation and success of the Company.

 

The GN Committee will consider shareholder recommendations for candidates for the Board from any shareholder who has been a continuous record owner of at least 3% of the common stock of the Company for at least one year prior to submission of the recommendation and who provides a written statement that the shareholder intends to continue share ownership through the date of the meeting at which directors are to be elected. Any such shareholder recommendation should be sent to the Governance and Nominating Committee, c/o Office of General Counsel, The Bon-Ton Stores, Inc., P.O. Box 2821, York, PA 17405. No shareholder recommendations have been received since the 2006 shareholder meeting.

 

In addition, the GN Committee considers potential candidates recommended by current directors, Company officers, employees and others. When appropriate, the GN Committee may retain executive recruitment firms to assist in identifying suitable candidates. The GN Committee screens all potential candidates in the same manner regardless of the source of the recommendation.

 

In nominating candidates to fill vacancies created by the expiration of the term of a member of the Board, the GN Committee determines whether the incumbent director is willing to stand for re-election. If so, the GN Committee evaluates his or her performance in office to determine suitability for continued service, taking into consideration the value of continuity and familiarity with the Company’s business.

 

The Company has adopted a policy which encourages Board members to attend the annual shareholders meeting. Three members of the Board attended the 2006 Annual Meeting of Shareholders.

 

Any shareholder who wishes to communicate with the Board of Directors, or any individual director, may do so by directing correspondence which prominently displays the fact that it is a shareholder-board communication, to such director or directors, c/o Office of General Counsel, The Bon-Ton Stores, Inc., P.O. Box 2821, York, PA 17405. Until and unless a procedure is adopted by a majority of the independent members of the Board whereby it may be deemed unnecessary or inappropriate to relay certain shareholder communications to the appropriate parties, all shareholder communications will be relayed to the intended director or directors.

 

Messrs. Grumbacher and Bergren are employees of the Company and are not paid any separate compensation for serving as directors. They are the only employees who serve as directors.

 

Each non-employee director receives both cash compensation and stock compensation comprised of the following:

 

 

Robert B. Bank, one of the Company’s non-employee directors, serves as the Board’s representative on the committee that oversees the Company’s Retirement Contribution Plan. For his service on this committee, Mr. Bank receives $1,250 for each meeting attended. In addition, in 2006 the Board approved supplemental payments in the amount of $5,000 to each of the members of the HRC Committee other than the Chair and a supplemental payment in the amount of $15,000 to the Chair of the HRC Committee. Directors may defer all or any part of their cash compensation into additional restricted stock units.

 

The following table presents the compensation provided by the Company during 2006 to each non-employee director for service on the Board of Directors:

 

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS
VOTING “FOR” THE ELECTION OF THE
NOMINEES LISTED ABOVE

 

 

AMENDMENT AND RESTATEMENT OF
THE CASH BONUS PLAN

 

The Cash Bonus Plan was adopted by the Board of Directors and was approved by the Company’s shareholders in July 2004. Subject to shareholder approval, the Board of Directors has adopted an amendment and restatement of the Cash Bonus Plan as described below. Approval of the amendment and restatement of the Cash Bonus Plan requires the affirmative vote of a majority of the votes cast by holders of common stock and Class A common stock.

 

The Cash Bonus Plan is a performance-based plan that is intended to provide a means by which those key employees who are designated as participants may be compensated for their roles in the performance of the Company. The Cash Bonus Plan was adopted by the Board of Directors as a means to provide greater flexibility in the establishment of performance goals and setting of target bonuses while permitting such bonuses to be fully deductible as “performance-based compensation” (as that term is used under Section 162(m) of the Internal Revenue Code (the “Code”)).

 

The purpose of the amendment and restatement adopted by the Board is to increase the maximum individual bonus available under the Cash Bonus Plan from $1,500,000 to $5,000,000 and from two times base salary to three times base salary of an eligible participant. No 2007 bonuses in excess of $1,500,000 may be paid under the Cash Bonus Plan unless and until the amendment and restatement has been approved by the Company’s shareholders.

 

The design and administration of the Cash Bonus Plan are intended to cause all taxable compensation attributable to the Cash Bonus Plan to be treated as “performance-based compensation.” As a consequence, the provisions of the Code which would otherwise limit the deductibility by us of certain executive compensation in excess of $1,000,000 should not be applicable to any compensation expense attributable to the Cash Bonus Plan. The Cash Bonus Plan is administered by the Human Resources and Compensation Committee (or such other committee consisting exclusively of two or more “outside directors” as may be designated to act in that capacity by the Board from time to time). This administrative committee for the Cash Bonus Plan is referred to in this Proposal Two as the “Committee.”

 

The material provisions of the Cash Bonus Plan, as proposed to be amended and restated, are described below. The description of the Cash Bonus Plan is qualified in its entirety by the Cash Bonus Plan as amended and restated, a copy of which is attached to this proxy statement as Appendix A and is incorporated herein by reference.

 

Eligibility.  Participants in the Cash Bonus Plan are those key executives, including the named executive officers, who are designated by the Committee to participate in the Cash Bonus Plan from time to time. As of April 24, 2007, 688 executives and other employees have been designated by the Committee to participate in the Cash Bonus Plan.

 

Shareholder approval and term of Cash Bonus Plan.  The Cash Bonus Plan has been in effect since February 1, 2004, and will continue in effect, amended as described in this proxy statement if approved by the shareholders, until it is terminated by the Board. The Cash Bonus Plan may be submitted for reapproval by the shareholders from time to time, and should be so reapproved no later than the shareholders’ meeting that occurs in the fifth year following its last shareholder approval in order to remain qualified as a “performance-based” compensation arrangement for purposes of the Code rules regarding executive compensation referred to above.

 

Benefits under the Cash Bonus Plan.  In general, the benefits under the Cash Bonus Plan consist of a cash bonus payable to participants provided the performance goals established by the Committee are met and, if met, to the extent met. Following the adoption of the amendment and restatement, the maximum amount that can be paid to any one participant under the Cash Bonus

Plan with respect to any one fiscal year is three times his or her base salary in effect for the relevant year, and in no event may any such bonus exceed $5,000,000.

 

The bases for such performance goals may include: stock price, market share, gross sales, gross revenues, net revenues, pretax income, operating income, cash flow, earnings per share, return on equity, return on invested capital or assets, cost reductions and savings, return on revenues or productivity, or any variation or combination of these. In addition, the Committee may establish as an additional performance measure the attainment by a participant in the Cash Bonus Plan of one or more personal objectives and/or goals that the Committee deems appropriate, including, but not limited to, implementation of Company policies, negotiation of significant corporate transactions, development of long-term business goals or strategic plans for the Company, or the exercise of specific areas of managerial responsibility.

 

In all cases, measurement of the Company’s or a participant’s achievement of one or more performance goals must be objectively determinable and, where applicable, determined in accordance with generally accepted accounting principles. In all cases, the performance goals for a year must be established no later than 90 days after the beginning of the year. The achievement of performance goals established under the Cash Bonus Plan must be certified by the Committee before any bonus may be paid.

 

Administration of the Cash Bonus Plan.  The Cash Bonus Plan is administered by the Committee which, as noted above, will at all times consist exclusively of two or more “outside directors” (as that term is defined under Section 162(m) of the Code). The resolution of any questions arising with respect to the Cash Bonus Plan will be determined by the Committee, and all such determinations are final and conclusive.

 

Amendment and termination of the Cash Bonus Plan.  The Board may terminate or revoke the Cash Bonus Plan at any time and may amend the Cash Bonus Plan from time to time, provided that none of the termination, revocation or amendment of the Cash Bonus Plan may, without the written approval of the participant, reduce the benefit to which the participant would otherwise be entitled, and provided further that no changes that would increase the benefit available will be effective without approval by the Committee and without disclosure to and approval by the shareholders in a separate vote prior to the date the participant would become entitled to such increased benefit. In addition, the Cash Bonus Plan may be modified or amended by the Committee as it deems appropriate in order to comply with any rules, regulations or other guidance promulgated by the Internal Revenue Service with respect to applicable provisions of the Code.

 

Federal tax issues.  Section 162(m) of the Code limits the deductibility of compensation in excess of $1,000,000 to certain employees of publicly held companies (this limitation is referred to herein as the “million dollar cap”), unless the compensation comes within certain exceptions. One exception to the million dollar cap is available for “performance-based compensation.” In order for taxable compensation to be within this exception to the million dollar cap, a number of requirements must be satisfied, including the establishment of performance goals by a committee of two or more “outside” members of the Company’s Board, disclosure to the shareholders of the material terms of the performance-based bonus arrangement under which the bonus is to be paid, and approval by the shareholders of that arrangement. Additional rules apply to the ongoing administration of such an arrangement in order for compensation to qualify as performance-based.

 

Bonuses payable under the Cash Bonus Plan are intended to be provided only on the attainment of the performance goals established by the Committee for the year for which the bonus is paid. Assuming the Cash Bonus Plan, as amended and restated, is put into effect in accordance with its terms, is approved by the Company’s shareholders, and is administered in accordance with the provisions set forth therein, the taxable compensation payable under the Cash Bonus Plan should qualify as “performance-based compensation” that is exempt from the million dollar cap.

 

New Plan Benefits.  The following table sets forth the annual bonus opportunities for 2007 depending on the extent to which the performance goals established by the Committee are achieved, assuming the amendment and restatement of the Cash Bonus Plan is approved by shareholders.

 

The Bon-Ton Stores Amended and Restated Cash Bonus Plan

 

 

THE BOARD OF DIRECTORS RECOMMENDS
VOTING “FOR” APPROVAL OF THE AMENDMENT
AND RESTATEMENT OF THE CASH BONUS PLAN.

 

 

RATIFICATION OF THE APPOINTMENT

OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee has recommended ratification of its appointment of KPMG LLP (“KPMG”), which served as our independent registered public accounting firm in 2006, to serve as our independent registered public accounting firm for 2007. If the shareholders do not ratify this appointment, another independent registered public accounting firm will be considered by the Audit Committee.

 

In making its selection of KPMG, the Audit Committee considered whether the non-audit services provided by KPMG are compatible with maintaining KPMG’s independence.

 

FEES PAID TO KPMG

 

 

 

 

The Audit Committee is responsible for the pre-approval of all audit services and non-audit services performed by the Company’s independent registered public accounting firm. All of the fees shown in the chart above were pre-approved by the Audit Committee. The Audit Committee may delegate to one of its members the authority to grant such pre-approvals, and any such approvals are presented to the full Audit Committee at its next scheduled meeting.

 

A representative of KPMG is expected to be present at the meeting, will have the opportunity to make a statement if he or she so desires, and will be available to respond to appropriate questions from shareholders.

 

THE BOARD OF DIRECTORS RECOMMENDS
VOTING “FOR” RATIFICATION OF THE APPOINTMENT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee is comprised of three independent directors. The members of the Audit Committee are not professionally engaged in the practice of auditing or accounting, and rely, without independent verification, on the information provided to them and on the representations made to them by management and the Company’s independent registered public accounting firm.

 

The role of the Audit Committee is to assist the Board of Directors in its general oversight of the integrity of the Company’s consolidated financial statements and compliance with legal and regulatory requirements. The Audit Committee is directly responsible for the appointment, compensation and oversight of the Company’s independent registered public accounting firm, KPMG. Management is responsible for the preparation, presentation and integrity of the Company’s consolidated financial statements, for its accounting and financial reporting principles and for the establishment and effectiveness of internal controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. KPMG is responsible for performing an independent audit of the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board, expressing an opinion as to the conformity of such consolidated financial statements with generally accepted accounting principles and on management’s assessment of the effectiveness of internal control over financial reporting. KPMG has free access to the Audit Committee to discuss any matter it deems appropriate.

 

The Audit Committee has reviewed and discussed with management and KPMG the audited consolidated financial statements, management’s assessment of the effectiveness of the Company’s internal control over financial reporting and KPMG’s evaluation of the Company’s internal control over financial reporting. Management represented to the Audit Committee that the Company’s audited consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has discussed with KPMG the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees.”

 

KPMG also provided the Audit Committee with the written disclosures required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and the Audit Committee discussed KPMG’s independence with them.

 

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

 

Members of the Audit Committee:

 

Philip M. Browne, Chairperson

Robert B. Bank

Robert E. Salerno

 

Overview

 

During the last four years, the Company has experienced dramatic growth in the size and scope of its operations, primarily through the acquisition of The Elder-Beerman Stores Corp. in October 2003 and the acquisition of the Carson’s division of Saks Incorporated in March 2006. Sales increased from $713 million in 2002 to over $3.3 billion in 2006. During the same period, the number of stores increased from 72 stores operating in nine states to 283 stores operating in 23 states. The Company’s common stock has performed well as the Company has grown, rising in value from $4.14 per share on the last trading day in 2002 to $37.32 on the last trading day in 2006. As the Company has transitioned into a larger organization and the Company’s executives have assumed additional responsibilities, the Human Resources and Compensation Committee (for purposes of this Compensation Discussion and Analysis, the “Committee”) has implemented a compensation program for senior executives designed to recognize these changes by providing compensation that is competitive with similarly sized retail businesses and that attracts, retains and rewards executives for performance. The Committee has increased base salaries for the Company’s Chief Executive Officer and other executives, in some cases substantially. At the same time, the Committee has granted stock options, awarded restricted stock and introduced performance-based restricted stock units with increasing frequency to better align the interests of executives and shareholders. In addition, the Committee has established challenging performance goals in connection with annual cash incentive compensation.

 

This Compensation Discussion and Analysis addresses the compensation of the Company’s “named executive officers.” Throughout this proxy statement, the individuals set forth in the following table, consisting of the Company’s Chief Executive Officer, Chief Financial Officer and the three other highest paid executive officers, are referred to as the “named executive officers”:

 

 

Compensation Philosophy and Objectives

 

The Company’s executive compensation program is designed to attract, motivate, reward and retain executive officers who are critical to the Company’s long-term success and the creation of shareholder value. The Committee’s philosophy is to directly link an increasing portion of the Company’s executive officers’ compensation with corporate performance and increases in shareholder value. The following are the objectives that guide the Committee’s decisions regarding compensation:

 

 

 

Based on the foregoing objectives, the Committee has structured the Company’s annual and long-term incentive-based cash and non-cash executive compensation to provide incentives to executives to achieve the business goals set by the Company and reward the executives for achieving such goals.

 

Role of the Committee in Compensation Decisions

 

The Committee is responsible for establishing, implementing and monitoring the compensation programs of the Company to ensure that they support the Company’s strategic and financial objectives. The Committee also reviews employee benefits and policies and their impact on and relation to Company culture. Each member of the Committee is an independent director under applicable Nasdaq Stock Market listing standards, a “non-employee director” under applicable SEC rules and an “outside director” under applicable Internal Revenue Service rules. The Committee holds meetings throughout the year and also acts by written consent in lieu of a meeting.

 

The Committee is authorized to review and approve, and in some cases recommend for the approval of the full Board of Directors, the compensation for the Company’s executive officers, including the named executive officers. The Committee approves the performance goals with respect to annual performance-based compensation and equity awards to executive officers, including the named executive officers. The Committee monitors total compensation paid to the named executive officers and other key executives and considers whether such compensation is fair, reasonable and competitive in consideration of each named executive officer’s capacity to influence shareholder value and to promote the long-term growth of the Company. The Committee annually prepares a review and evaluates the Chief Executive Officer’s performance for the year compared to pre-determined and Committee-approved performance metrics. The total compensation of the Chief Executive Officer is evaluated to ensure that it is competitive in the marketplace and that the compensation package reflects the Committee’s assessment of the Chief Executive Officer’s contributions and value to the Company. The Committee prepares a recommendation for the approval of the Company’s Board of Directors with respect to changes in the compensation of the Chief Executive Officer. The Committee annually reviews the performance of the Executive Chairman and any payout to the Executive Chairman under the Company’s cash bonus program. The Executive Chairman’s base salary, annual bonus and equity awards were established in the Executive Transition Agreement as of February 1, 2005. The Chief Executive Officer annually prepares a review for all of his direct reports, including the named executive officers and other key executives, excluding the Executive Chairman, for the year compared to pre-determined and Committee-approved performance metrics. The total compensation for the respective executives, the performance appraisals and the recommendations made by the Chief Executive Officer are reviewed by the Committee for Committee approval.

 

Role of Management in Compensation Decisions

 

Management supports the Committee in its work. Management assists the Chair of the Committee in establishing the agendas for meetings and preparing materials for the review of Committee members in advance of each meeting. With respect to most compensation and benefit matters, including compensation of the named executive officers, management provides recommendations to the Committee. The Committee relies on management to evaluate employee performance and to make recommendations for salary and bonus levels as well as for grants of stock

options or awards of restricted stock. Management also works with the Committee to establish performance goals under the Company’s performance-based annual incentive compensation program that support the Company’s strategic direction. In furtherance of the foregoing activities, members of management including Byron L. Bergren and Dennis R. Clouser, Executive Vice President — Human Resources, attend meetings of the Committee. Each of them is excused from a meeting during discussion and approval of matters regarding his own compensation.

 

Compensation Consultant and Benchmarking

 

The Committee has engaged Hewitt Associates, an outside global human resources consulting firm, to conduct an annual review of its total compensation program for the Chief Executive Officer and the other named executive officers except the Executive Chairman. Hewitt Associates provides the Committee with relevant market data and alternatives to consider when making decisions on the compensation of Chief Executive Officer and on the recommendations made by the Company’s management for named executive officers other than the Chief Executive Officer and Executive Chairman.

 

In making compensation decisions, the Committee compares salary, annual incentive compensation and long-term equity incentive values against all retail companies in Hewitt Associates’ Total Compensation Database (the “Compensation Peer Group”). In 2006, there were 55 retail companies included in the database ranging in size from $200 million to $313 billion in sales. For comparison purposes, the Company’s annual sales are below the median sales of the Compensation Peer Group. Because of the large variance in size among the companies comprising the Compensation Peer Group, regression analysis is used to adjust the compensation data for differences in company sales. This adjusted value is used as the basis of comparison of compensation between the Company and the companies in the Compensation Peer Group.

 

The Committee has determined that it is appropriate to deliver total compensation at approximately the 50th percentile of the Compensation Peer Group for each element of compensation. However, the Company competes with many larger companies for the best executive-level talent, and the Committee may determine that it is in the best interests of the Company and its shareholders to provide compensation for selected positions that exceeds the targeted compensation levels depending on the circumstances, including the Company’s needs, market factors, and the experience level and contribution of the executive.

 

Components of Executive Compensation

 

The principal components of compensation for named executive officers are base salary, performance-based annual cash incentive compensation, long-term equity incentive compensation, perquisites and personal benefits, and retirement and other benefits. The Committee seeks to achieve a mix of these components such that the total is competitive in the marketplace. Traditionally, the Company compensated its executive officers primarily by paying base salary and an annual cash bonus and did not offer significant long-term equity incentive opportunities. The Committee is transitioning the Company’s compensation program from its historical short-term orientation, with a focus on base salary and annual incentive compensation, to a program with an increasing emphasis on long-term equity incentive compensation to better align the interests of the named executive officers with the interests of shareholders in long-term growth. The Committee does not have a pre-established policy for allocation between cash and non-cash or short-term and long-term incentive compensation. Rather, the Committee attempts to provide each named executive officer with a compensation package consisting of a balance of base salary, performance-based annual incentive compensation and long-term equity incentive compensation, in addition to perquisites and retirement benefits, that generally achieves a total compensation value at the 50th percentile of the Compensation Peer Group and addresses retention and competitive requirements. The Committee annually reviews the appropriate level and mix of compensation components.

 

The table below shows the mix of compensation received in 2006 by the Chief Executive Officer and the average of the other named executive officers as a group based on total compensation as reported in the Summary Compensation Table. As this table demonstrates, 74% of the Chief Executive Officer’s compensation in 2006 was tied to the financial performance of the Company or to the performance of the Company’s common stock. In addition, a majority of the other named executive officers’ compensation in 2006 was tied to the financial performance of the Company or to the performance of the Company’s common stock. The Committee believes that the compensation mix encourages the named executive officers to focus on the Company’s long-term performance and enhancement of shareholder value.

 

 

The Committee has reviewed all components of compensation of the named executive officers, including base salary, performance-based incentive compensation, long-term incentive compensation, accumulated realized and unrealized stock option and restricted stock gains, the dollar value to the executive and cost to the Company of all perquisites and other personal benefits and obligations under the Company’s supplemental executive retirement plans. A summary, or “tally sheet,” setting forth all the above components and affixing dollar amounts to each component was prepared and reviewed by the Committee. The Committee believes that the level of compensation of the Company’s named executive officers reflects the Company’s performance and that total compensation to each of the named executive officers is appropriate.

 

Base Salary

 

The base salaries of the Company’s executive officers are determined by evaluating the executive officers’ roles and responsibilities and compensation data regarding the Compensation Peer Group. The base salary of each executive officer is reviewed annually. If appropriate, the Chief Executive Officer recommends annual salary increases for each of the named executive officers and key executives other than himself and the Executive Chairman of the Board. The Committee’s decision to increase base salary for any named executive officer is based on the previously defined compensation philosophy and takes into specific account the level of responsibility of the executive officer, the Company’s performance, the executive officer’s individual performance, which is reviewed by the Committee annually, and the executive officer’s compensation compared to similarly situated executives in the Compensation Peer Group.

 

Minimum base salaries for Tim Grumbacher, Byron L. Bergren, Anthony J. Buccina and David B. Zant were established pursuant to employment agreements approved by the Committee and, with respect to Mr. Bergren’s and Mr. Grumbacher’s employment agreements, the Company’s Board of Directors. The minimum base salaries for these executive officers, as established pursuant to the applicable employment agreements, were based on a variety of factors, including the general level of executive compensation of similarly situated executives in the Compensation Peer Group, the general level of executive compensation at the Company and an evaluation of each person’s capacity to positively affect the Company’s performance.

 

During 2006, Mr. Bergren’s base salary was increased from $750,000 to $1,000,000, and Mr. Plowman’s base salary was increased from $300,000 to $390,000. These salary increases were approved by the Committee based upon the increase in the size of the Company’s business, the increase in job responsibilities following the Company’s acquisition of Carson’s, and an evaluation of their individual performances. With respect to Mr. Bergren in particular, the Committee approved the

increase in salary based on its view of Mr. Bergren’s critical value to the Company in guiding the Company through the acquisition and integration of Carson’s. Mr. Buccina joined the Company in fiscal 2006 after working with Carson’s as its chief merchant. Mr. Buccina’s initial base salary was set at $780,000 based upon the Committee’s evaluation of Mr. Buccina’s depth of experience and his ability to positively influence the Company’s performance following the acquisition of Carson’s.

 

Performance-Based Annual Incentive Compensation

 

The Company has an annual incentive Cash Bonus Plan in which the named executive officers participate. Awards of cash bonuses under this plan are variable, and the payout of any cash bonus under the plan is dependent upon the achievement of pre-determined Company performance goals which are pre-approved by the Committee.

 

For 2006, the annual cash bonus program for the named executive officers focused on the achievement of two or three of the following goals: (1) net income, with a “threshold” of approximately $33.6 million, a “target” of approximately $37.3 million, and a “maximum” of approximately $50.2 million; (2) net sales, with a “threshold” of $3,265 million, a “target” of $3,327 million, and a “maximum” of $3,543 million; and (3) a specified level of gross margin return on inventory dollars, or “GMROI dollars.” The calculation methodology utilized to determine the achievement level for GMROI dollars requires that total Company gross margin, total Company average inventory at cost and total Company sales are balanced. The GMROI dollar goal requires achievement of Company sales at pre-determined levels related to the total financial goals of the Company, which is then multiplied by the approved gross margin return on investment rate for the Company. In the view of the Committee, the GMROI dollar goal is challenging but attainable.

 

The Committee assigns different goals and weightings for each named executive officer depending on the capacity of the named executive officer to influence the goal and the named executive officer’s area of responsibility. Payment of any portion of a bonus under the plan is dependent upon the Company’s achievement of at least the “threshold” level of net income. If the threshold level of net income is not achieved, there is no bonus payout under any of the goals of the plan for that year. In addition, if the net income “threshold” is attained, but the “threshold” performance for a goal other than net income is not attained, the portion of the bonus attributable to such other goal is forfeited.

 

The Committee reviewed and established competitive “threshold,” “target,” and “maximum” payout potentials under the cash bonus program for each executive officer. The following table sets forth (1) the approximate payouts, stated as a percentage of base salary, that could be earned by each named executive officer under the cash bonus program for 2006, and (2) the cash bonus performance goals and the weighting of such goals for each named executive officer for 2006. The Committee increased the payout potential at target for 2006 from what the payout at target would have otherwise been for Mr. Bergren (from 100% to 150%) and for Mr. Buccina (to 125% of base salary) to provide additional incentive to both of these key executives during the Carson’s integration period.

 

 

The Committee reviewed performance data as of the end of 2006 and determined the extent to which the targeted levels of performance were achieved. The effects of unusual or one-time transactions that were not included in the Company’s financial plan for 2006, such as the Company’s acquisition from Belk Inc. of four Parisian stores, were not included in the calculation of whether the performance goals for 2006 were achieved. The amount of annual incentive compensation paid for 2006 to each named executive officer is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

In addition to bonuses that may be awarded under the Company’s Cash Bonus Plan, a cash bonus may be awarded at the discretion of the Committee for extraordinary individual achievement by the executive or for other reasons, such as a signing bonus upon joining the Company. In 2006, Mr. Buccina received a bonus from the Company with respect to his performance at the Carson’s division of Saks Incorporated and a retention payment following the Company’s acquisition of Carson’s. Other than the payments to Mr. Buccina, no extraordinary bonuses were awarded to any of the named executive officers for 2006.

 

Long-Term Equity Incentive Compensation

 

Another component of executive compensation is long-term incentive compensation in the form of stock options, restricted stock and performance-based restricted stock units (“RSUs”). The Committee administers The Bon-Ton Stores, Inc. Amended and Restated 2000 Stock Incentive Plan and Performance-Based Award Plan (the “Stock Incentive Plan”) which provides for the grant of stock options and awards of restricted stock and RSUs. These grants and awards are intended to align the executive officers’ interests with those of shareholders by increasing the portion of their compensation tied to the long-term performance of the Company. The Committee annually reviews the performance of the named executive officers to determine whether grants of options or awards of restricted stock or RSUs are warranted. Option grants and awards of restricted stock and RSUs are made periodically at the discretion of the Committee and on the recommendation of the Company’s Chief Executive Officer, primarily to reward significant individual achievement and to attract and retain key talent. The proportion of long-term equity incentive compensation in relation to base salary

is a function of the named executive officer’s level of responsibility and capacity to enhance shareholder value.

 

The exercise price of options granted by the Committee is usually set at the closing price of the Company’s common stock on the Nasdaq Stock Market on the date of the Committee meeting at which the grant is approved. In certain instances, the Committee has set the exercise price at the closing price on a date in the future to allow time to notify the grantee of the option grant or to set the exercise price on the same date as the starting date of a new employee. If the Committee sets an option exercise price based on the closing price on the Nasdaq Stock Market on a date in the future, the Committee confirms that management does not anticipate any material announcements during the period from the Committee meeting until such future date. The Company has not issued any options with exercise prices that have been backdated.

 

Stock options and awards of restricted stock generally vest over a number of years. Any vested options are usually forfeited 90 days after termination of the recipient’s employment, and any unvested shares of restricted stock and unvested options are usually forfeited upon termination of employment. Such options and restricted stock, therefore, are also intended to encourage recipients to remain in the employ of the Company over a substantial period of time.

 

During 2006, the Committee granted options and awarded restricted stock and performance-based RSUs to the named executive officers as reflected in the “Grants of Plan-Based Awards” table below. The Committee awarded both restricted stock and performance-based RSUs to Byron L. Bergren in 2006. The Committee’s awards to Mr. Bergren were made based upon the Committee’s evaluation of Mr. Bergren’s leadership in completing the acquisition of Carson’s in 2006 and the key role he would play in leading the Carson’s integration. He received restricted shares worth $1 million at the time of grant that will vest at the end of 2008 and performance-based RSUs worth $1 million at the time of grant. One-half of Mr. Bergren’s performance-based RSUs vested at the target level based upon the achievement of the same net income goal set for 2006 under the Cash Bonus Plan. The other one-half of Mr. Bergren’s performance-based RSUs will vest, if earned, based upon the achievement of the net income goals established by the Committee for awards under the Cash Bonus Plan for 2007 performance. The awards of restricted stock and performance-based RSUs to Mr. Bergren reflect the Committee’s objectives to link an increasing portion of compensation to Company performance and to align the interests of executives with those of shareholders.

 

Perquisites and Other Personal Benefits

 

The Company provides the named executive officers with perquisites and other personal benefits that the Company and the Committee believe are reasonable and consistent with the Company’s objective to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to named executive officers. Perquisites consisted of supplemental medical benefits, automobile allowances, club memberships, relocation benefits, and reimbursement of legal fees incurred in connection with the negotiation of employment agreements. In addition, the Company has provided Mr. Bergren with rental housing in Milwaukee, Wisconsin for use during his frequent trips to the Company’s merchandising operations there. Perquisites traditionally have not constituted significant portions of executive compensation.

 

The named executive officers also participate in benefit programs available to employees generally, such as health and dental insurance, life insurance and the Company’s discounted purchase program.

 

Retirement and Other Benefits

 

In connection with the acquisition of Carson’s in March 2006, a subsidiary of the Company assumed the Carson Pirie Scott & Co. Supplemental Executive Retirement Plan (the “Carson’s SERP”). The Carson’s SERP is a nonqualified, unfunded supplemental retirement plan. The only

named executive officer who participates in the Carson’s SERP is Anthony J. Buccina. The Company anticipates that there will be no new participants in the Carson’s SERP.

 

The Company established the Bon-Ton Supplemental Executive Retirement Plan (the “Bon-Ton SERP”) to provide retirement benefits to certain executives. The Bon-Ton SERP is a nonqualified, unfunded supplemental retirement plan. The only named executive officer who participates in the Bon-Ton SERP is David B. Zant. The Company anticipates that there will be no new participants in the Bon-Ton SERP.

 

The named executive officers participate in The Bon-Ton Stores, Inc. Retirement Contribution Plan, a tax-qualified plan pursuant to which employees are able to contribute a portion of their annual salaries to the plan on a pre-tax basis. The Company generally has matched 30% of the first 6% of eligible compensation that is contributed to the plan. All employee contributions to the plan are fully vested upon contribution, and Company matching contributions vest after three years with the Company assuming a minimum of 1,000 hours is worked in each year. In addition to the matching contribution, the Company provides a discretionary retirement contribution to each eligible employee who has been employed at least one year, is employed on the last day of the year and worked 1,000 hours in 2006. The Company retirement contributions vest after five years with the Company if a minimum of 1,000 hours is worked in each year. In connection with the acquisition of Carson’s in March 2006, the Company assumed the Carson Pirie Scott & Co. Pension Plan (the “Carson’s Pension Plan”). The Carson’s Pension Plan is a qualified defined-benefit cash-balance plan in which the only named executive officer who participates is Anthony J. Buccina. The Carson’s Pension Plan was frozen to new participants in 2002 and all future benefit accruals were frozen in May 2006.

 

Employment Agreements and Payments Upon Termination or Change of Control

 

As discussed more fully below, the Company has entered into employment agreements with Tim Grumbacher, Byron L. Bergren, Anthony J. Buccina and David B. Zant. The decisions to enter into employment agreements and the terms of those agreements were based on the Company’s need to attract and retain talent for the long-term growth of the Company. Following Mr. Grumbacher’s resignation as Chief Executive Officer in 2004, the Committee determined that it would be beneficial to the Company to continue Mr. Grumbacher’s employment as Executive Chairman of the Board, and both Mr. Grumbacher and the Committee desired to evidence the arrangement in a written agreement. With respect to Mr. Bergren, the Committee determined that it is in the best interests of the Company and shareholders to retain Mr. Bergren’s services until at least February 2008, and the Committee designed his employment agreement to provide economic incentives for him to remain with the Company at least until that time. With respect to Mr. Buccina, the Committee and management of the Company determined that his services and merchandising expertise would be critical following the acquisition of Carson’s to ensure a smooth integration and to develop an appropriate merchandising approach for the combined company. With respect to Mr. Zant, the Committee and management of the Company determined that it would be in the best interests of the Company to enter into an employment agreement to retain Mr. Zant due to his private brand and merchandise planning experience. The material terms of employment agreements with the named executive officers are described under the heading “Summary of Employment Agreements with Named Executive Officers” beginning on page 33.

 

Pursuant to the employment agreements with the foregoing four named executive officers, the Company has agreed to arrangements which will provide severance compensation in the event of a termination, change of control or other triggering event. In addition, Keith E. Plowman, with whom the Company does not have an employment agreement, is a participant in the Company’s Severance Plan. These arrangements are designed to promote stability and continuity of senior management. Stock options and restricted stock will generally vest upon a change in control. The Company adopted “single trigger” treatment for equity awards to retain, focus and motivate executives during change in control discussions and to be competitive with current market practice in order to attract the best

talent. Information regarding applicable payments under such arrangements for the named executive officers is provided under the heading “Potential Payments Upon Termination or Change of Control” on page 35.

 

Tax and Accounting Implications of Executive Compensation

 

Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code limits the deductibility of compensation in excess of $1,000,000 paid to the Chief Executive Officer and the other named executive officers unless specified criteria are satisfied. The Committee reviews and considers the deductibility of executive compensation under Section 162(m) and believes that compensation recognized by such persons in 2006 is fully deductible for federal income tax purposes. The Committee has generally designed the Company’s compensation program in a manner that permits compensation to be deductible; however, grants of restricted stock, when and if those grants vest for tax purposes, may create compensation for the grantee that may be subject to the limitations on deductibility under Section 162(m). The Committee reserves the right to award non-deductible compensation when it believes such action would be in the best interests of the Company.

 

Accounting for Stock-Based Compensation

 

In 2006, the Company began accounting for stock-based payments, including stock options and awards of restricted stock and RSUs, in accordance with the requirements of Financial Accounting Standards Board Statement 123(R) (“SFAS 123R”). The Committee reviews the expenses for stock-based payments under SFAS 123R in connection with the grant of stock options and award of restricted stock and RSUs.

 

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

 

The Human Resources and Compensation Committee

 

Shirley A. Dawe, Chair

Robert B. Bank

Marsha M. Everton

 

 

 

 

 

 

The table below provides information regarding grants of options and awards of restricted stock and RSUs to the named executive officers under the Company’s Cash Bonus Plan and Stock Incentive Plan.

 

 

 

 

 

 

 

 

 

The Pension Benefits Table below shows the actuarial present value of accumulated benefits payable to each of our named executive officers and the number of years credited to each such named executive officer, under each of the Bon-Ton SERP, Carson’s SERP, Carson’s Pension Plan and the Executive Transition Agreement dated February 1, 2005 between the Company and Mr. Grumbacher (the “Executive Transition Agreement”), pursuant to which Mr. and Mrs. Grumbacher are entitled to continue participation in the Company’s group medical plan upon cessation of Mr. Grumbacher’s employment with the Company.

 

The present values set forth below have been calculated for all named executive officers assuming that each will remain in service until normal retirement age as defined under each plan. The Assumptions set forth in Note 9 to our audited financial statements included in our Form 10-K filed with the SEC on April 19, 2007 are used below and are incorporated by reference.