Definitive Proxy Statement
Table of Contents

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

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Sun Microsystems, Inc.

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SUN MICROSYSTEMS, INC.

4150 Network Circle

Santa Clara, California 95054

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

November 5, 2008

10:00 a.m. Pacific Standard Time

Dear Stockholder:

You are cordially invited to attend Sun’s 2008 Annual Meeting of Stockholders, which will be held on Wednesday, November 5, 2008 at 10:00 a.m., Pacific Standard Time, at Sun’s Auditorium, located at the Santa Clara Campus, 4030 George Sellon Circle, Santa Clara, California 95054, for the following purposes:

 

  1.   To elect to the Board of Directors the eleven nominees named in the Proxy Statement;

 

  2.   To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2009;

 

  3.   To approve amendments to our Restated Certificate of Incorporation and Bylaws to eliminate all supermajority voting provisions contained therein;

 

  4.   To approve amendments to our 1990 Employee Stock Purchase Plan to increase the authorized shares issuable thereunder by 57,000,000 shares, extend the term by ten years and make certain other administrative changes;

 

  5.   To consider three stockholder proposals, if each is properly presented at the meeting; and

 

  6.   To transact such other business as may properly come before the meeting or any postponement or adjournment thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this notice.

Only stockholders of record at the close of business on September 15, 2008 are entitled to vote at the Annual Meeting or any postponement or adjournment of the meeting. A list of those stockholders will be maintained and open for examination by any of our stockholders, for any purpose germane to the Annual Meeting, during regular business hours at the address listed above for ten days prior to the meeting.

We are pleased to continue to take advantage of the Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their stockholders on the Internet. We believe these rules allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of our Annual Meeting.

As owners of Sun, your vote is important. Whether or not you are able to attend the Annual Meeting in person, it is important that your shares be represented. Please vote as soon as possible.

On behalf of our Board of Directors, thank you for your participation in this important annual process.

Sincerely,

LOGO

MICHAEL A. DILLON

Executive Vice President, General Counsel and Secretary

Santa Clara, California

September 24, 2008


Table of Contents

TABLE OF CONTENTS

 

     Page

General Information

   1

About Our Board and Its Committees

   6

Director Compensation

   9

Corporate Governance

   12

Security Ownership of Certain Beneficial Owners and Management

   15

Executive Compensation

   17

Report of the Leadership Development and Compensation Committee

   17

Compensation Discussion and Analysis

   17

Summary Compensation Table for Fiscal 2008

   31

All Other Compensation Table for Fiscal 2008

   33

Grants of Plan-Based Awards in Fiscal 2008

   34

Outstanding Equity Awards at Fiscal 2008 End

   36

Option Exercises and Stock Vested for Fiscal 2008

   38

Pension Benefits for Fiscal 2008

   38

Non-Qualified Deferred Compensation for Fiscal 2008

   40

Potential Payments Upon Termination or Change of Control

   40

Compensation Committee Interlocks and Insider Participation

   45

Related Person Transactions Policy and Procedures

   45

Certain Related Person Transactions

   46

Section 16(a) Beneficial Ownership Reporting Compliance

   46

Audit and Non-Audit Fees

   46

Report of the Audit Committee

   47

Proposal 1    Election of Directors

   49

Proposal 2    Ratification of Appointment of Independent Registered Public Accounting Firm

   51

Proposal 3     Approval of Amendments to Sun’s Restated Certificate of Incorporation and Bylaws to Eliminate Supermajority Voting

   52

Proposal 4     Approval of Amendments to Sun’s 1990 Employee Stock Purchase Plan to Increase the Number of Authorized Shares Issuable Thereunder, Extend the Term and Make Certain Other Administrative Changes

   55

Proposal 5    Stockholder Proposal Regarding Advisory Vote on Compensation

   61

Proposal 6    Stockholder Proposal Regarding Bylaw Amendment Related to Stockholder Rights Plans

   63

Proposal 7     Stockholder Proposal Regarding Bylaw Amendment to Establish a Board Committee on Human Rights

   65

Annex A     Certificate of Amendment to Restated Certificate of Incorporation of Sun Microsystems, Inc.

   A-1

Map and Driving Directions to Sun’s Santa Clara Campus

  


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SUN MICROSYSTEMS, INC.

PROXY STATEMENT

FOR

2008 ANNUAL MEETING OF STOCKHOLDERS

GENERAL INFORMATION

Why am I receiving these materials?

Our Board of Directors (the “Board”) has made these materials available to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail, in connection with the Board’s solicitation of proxies for use at our 2008 annual meeting of stockholders (the “Annual Meeting”), which will take place on November 5, 2008. We made these materials available to stockholders beginning on September 24, 2008. Our stockholders are invited to attend the Annual Meeting and are requested to vote on the proposals described in this Proxy Statement.

What is included in these materials?

These materials include:

 

   

Our Proxy Statement for the Annual Meeting; and

 

   

Our 2008 Annual Report to Stockholders, which includes our audited consolidated financial statements.

If you requested printed versions of these materials by mail, these materials also include the proxy card for the Annual Meeting.

What items will be voted on at the Annual Meeting?

There are seven items that will be voted on at the Annual Meeting:

 

  1.   The election to the Board of the eleven nominees named in this Proxy Statement;

 

  2.   The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2009;

 

  3.   A proposal regarding amendments to Sun’s Restated Certificate of Incorporation and Bylaws to eliminate all supermajority voting provisions contained therein;

 

  4.   A proposal regarding amendments to Sun’s 1990 Employee Stock Purchase Plan to increase the authorized shares issuable thereunder by 57,000,000 shares, extend the term of the plan by ten years and make certain other administrative changes;

 

  5.   A stockholder proposal regarding an advisory vote on compensation, if properly presented at the meeting;

 

  6.   A stockholder proposal regarding an amendment to Sun’s Bylaws related to stockholder rights plans, if properly presented at the meeting; and

 

  7.   A stockholder proposal regarding an amendment to Sun’s Bylaws related to establishing a Board committee on human rights, if properly presented at the meeting.

What are our Board of Directors’ voting recommendations?

Our Board recommends that you vote your shares “FOR” each of the nominees to the Board, “FOR” the ratification of the appointment of Ernst & Young LLP, “FOR” the approval of the amendments to our Restated Certificate of Incorporation and Bylaws eliminating all supermajority voting provisions, “FOR” the amendments to the 1990 Employee Stock Purchase Plan increasing the authorized shares, extending the term and making certain other administrative changes, “AGAINST” the stockholder proposal regarding an advisory vote on compensation, “AGAINST” the stockholder proposal regarding an amendment to our Bylaws related to stockholder rights plans and “AGAINST” the stockholder proposal regarding an amendment to our Bylaws related to establishing a Board committee on human rights.

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Where are Sun’s principal executive offices located and what is Sun’s main telephone number?

Sun’s principal executive offices are located at 4150 Network Circle, Santa Clara, California 95054. Sun’s main telephone number is (650) 960-1300.

Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?

Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders of record and beneficial owners. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.

How can I get electronic access to the proxy materials?

The Notice will provide you with instructions regarding how to:

 

   

View our proxy materials for the Annual Meeting on the Internet; and

 

   

Instruct us to send future proxy materials to you electronically by email.

Choosing to receive future proxy materials by email will save us the cost of printing and mailing documents to you and will reduce the impact of our annual meetings on the environment. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.

Who may vote at the Annual Meeting?

If you owned Sun’s common stock at the close of business on September 15, 2008 (the “Record Date”), then you may attend and vote at the meeting. At the close of business on the Record Date, we had approximately 744,967,054 shares of common stock issued and outstanding, of which 744,967,054 were entitled to vote.

What is the difference between holding shares as a stockholder of record and as a beneficial owner of shares held in street name?

Stockholder of Record. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered the stockholder of record with respect to those shares, and the Notice was sent directly to you by Sun.

Beneficial Owner of Shares Held in Street Name. If your shares are held in an account at a brokerage firm, bank, broker-dealer, or other similar organization, then you are the beneficial owner of shares held in “street name,” and the Notice was forwarded to you by that organization. The organization holding your account is considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct that organization on how to vote the shares held in your account.

What is the quorum requirement for the Annual Meeting?

A majority of Sun’s outstanding shares on the Record Date must be present at the meeting in order to hold the meeting and conduct business. This is called a quorum. Your shares will be counted for purposes of determining if there is a quorum, whether representing votes for, against or abstained, if you:

 

   

Are present and vote in person at the meeting; or

 

   

Have voted on the Internet, by telephone or by properly submitting a proxy card or voting instruction form by mail.

If I am a stockholder of record of Sun’s shares, how do I vote?

If you are a stockholder of record, you may vote in person at the Annual Meeting. We will give you a ballot when you arrive.

If you do not wish to vote in person or if you will not be attending the Annual Meeting, you may vote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone.

 

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If I am a beneficial owner of shares held in street name, how do I vote?

If you are a beneficial owner of shares held in street name and you wish to vote in person at the Annual Meeting, you must obtain a valid proxy from the organization that holds your shares.

If you do not wish to vote in person or you will not be attending the Annual Meeting, you may vote by proxy. You may vote by proxy over the Internet, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions provided in the Notice.

What happens if I do not give specific voting instructions?

Stockholders of Record. If you are a stockholder of record and you:

 

   

Indicate when voting on the Internet or by telephone that you wish to vote as recommended by our Board; or

 

   

Sign and return a proxy card without giving specific voting instructions, then the proxy holders will vote your shares in the manner recommended by our Board on all matters presented in this Proxy Statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the meeting.

Beneficial Owners of Shares Held in Street Name. If you are a beneficial owner of shares held in street name and do not provide the organization that holds your shares with specific voting instructions, under the rules of various national and regional securities exchanges, the organization that holds your shares may generally vote on routine matters but cannot vote on non-routine matters. If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, the organization that holds your shares will inform our Inspector of Elections that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a “broker non-vote.” When our Inspector of Elections tabulates the votes for any particular matter, broker non-votes will be counted for purposes of determining whether a quorum is present, but will not otherwise affect the voting results, except that broker non-votes will have the same effect as votes “against” Proposals 3, 6 and 7. We encourage you to provide voting instructions to the organization that holds your shares by carefully following the instructions provided in the Notice.

Which ballot measures are considered “routine” or “non-routine”?

Proposal 1 (election of directors), Proposal 2 (ratification of auditors) and Proposal 3 (elimination of supermajority voting) involve matters that we believe will be considered routine.

Proposal 4 (amendments to Sun’s 1990 Employee Stock Purchase Plan) and Proposals 5 through 7 (the stockholder proposals) involve matters that we believe will be considered non-routine.

How are abstentions treated?

Abstentions are counted for purposes of determining whether a quorum is present. Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. For the purpose of determining whether the stockholders have approved all other matters, abstentions have the same effect as an “against” vote.

What is the voting requirement to approve each of the proposals?

The following table sets forth the voting requirement with respect to each of the proposals:

 

Proposal 1 — Election of directors

   Each director must be elected by a majority of the votes cast, meaning that the number of shares entitled to vote on the election of directors and represented in person or by proxy at the Annual Meeting casting their vote “FOR” a director must exceed the number of votes “AGAINST” a director. Please see “Corporate Governance — Majority Vote Standard and Director Resignation Policy” for more information.

Proposal 2 — Ratification of appointment of independent registered public accounting firm

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy and entitled to vote on this proposal at the Annual Meeting.

 

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Proposal 3 — Approval of amendments to Sun’s Restated Certificate of Incorporation and Bylaws to eliminate supermajority voting

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of at least 75% of the shares outstanding on the Record Date.

Proposal 4 — Approval of amendments to Sun’s 1990 Employee Stock Purchase Plan to increase the authorized shares, extend the term and make certain other administrative changes

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy and entitled to vote on this proposal at the Annual Meeting.

Proposal 5 — Stockholder proposal regarding advisory vote on compensation

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of a majority of those shares present in person or represented by proxy and entitled to vote on this proposal at the Annual Meeting.

Proposal 6 — Stockholder proposal regarding an amendment to Sun’s Bylaws related to stockholder rights plans

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of at least 75% of the shares outstanding as of the Record Date.

Proposal 7 — Stockholder proposal regarding an amendment to Sun’s Bylaws related to establishing a Board committee on human rights

   To be approved by our stockholders, this proposal must receive the affirmative “FOR” vote of at least 75% of the shares outstanding as of the Record Date.

Can I change my vote after I have voted?

You may revoke your proxy and change your vote at any time before the final vote at the meeting. You may vote again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date, or by attending the meeting and voting in person. However, your attendance at the Annual Meeting will not automatically revoke your proxy unless you vote again at the meeting or specifically request in writing that your prior proxy be revoked.

Is cumulative voting permitted for the election of directors?

In the election of directors, you may elect to cumulate your votes. If you choose to cumulate your votes, you will need to notify the Corporate Secretary of Sun in writing at the address of Sun’s principal executive offices prior to the Annual Meeting or notify the chairman of the meeting prior to the commencement of voting at the Annual Meeting of your intent to cumulate your votes. If you hold your shares beneficially in street name and wish to cumulate votes, you should contact the organization that holds your shares prior to the meeting to assist you with this process.

As provided in our Bylaws and Corporate Governance Guidelines, if cumulative voting is invoked and there are a greater number of nominees for election of directors than the total number of directors to be elected, then majority voting will not apply with respect to the election of directors, and the eleven director nominees receiving the highest number of votes will be elected. If cumulative voting is invoked, you will have a total number of votes equal to the total number of directors to be elected, multiplied by the number of shares you hold. You may allocate these votes among the director nominees as you see fit. For example, if you hold 1,000 shares of stock, you could allocate 11,000 “FOR” votes (1,000 x 11 directors to be elected) among as few or as many of the director nominees as you choose.

The proxy holders intend to vote the shares represented by proxies to elect Sun’s eleven director nominees as set forth in Proposal 1. If cumulative voting is in effect at the Annual Meeting, the proxy holders will vote the shares represented by the proxies in order to elect as many of Sun’s eleven director nominees as possible or as they otherwise determine in their discretion. Cumulative voting applies only to the election of directors. For all other matters, each share of common stock outstanding as of the close of business on the Record Date is entitled to one vote.

Is my vote confidential?

Proxy instructions, ballots and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within Sun or to third parties, except:

 

   

As necessary to meet applicable legal requirements;

 

   

To allow for the tabulation and certification of votes; and

 

   

To facilitate a successful proxy solicitation.

 

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Occasionally, stockholders provide written comments on their proxy cards, which may be forwarded to management and our Board.

Where can I find the voting results of the Annual Meeting?

The preliminary voting results will be announced at the Annual Meeting. The final voting results will be tallied by the Inspector of Elections and published in our quarterly report on Form 10-Q for the fiscal quarter ending on December 28, 2008, which we expect to file with the SEC by February 9, 2009.

Who is paying for the cost of this proxy solicitation?

Sun is paying the costs of the solicitation of proxies. We have engaged Morrow & Co., Inc. as our proxy solicitor to help us solicit proxies from brokers, bank nominees and other institutions for a fee of $40,000, plus reasonable out-of-pocket expenses. We must also pay brokerage firms and other persons representing beneficial owners of shares held in street name certain fees associated with:

 

   

Forwarding the Notice to beneficial owners;

 

   

Forwarding printed proxy materials by mail to beneficial owners who specifically request them; and

 

   

Obtaining beneficial owners’ voting instructions.

In addition to soliciting proxies by mail, members of our Board, officers and employees may solicit proxies on our behalf, without additional compensation, personally or by telephone, or we may ask our proxy solicitor to solicit proxies on our behalf by telephone for a fee of $5 per phone call, plus reasonable expenses. We will also solicit proxies by email from stockholders who are our employees or who previously requested to receive proxy materials electronically.

What is the deadline to propose actions for consideration at the 2009 annual meeting of stockholders or to nominate individuals to serve as directors?

You may submit proposals, including director nominations, for consideration at future annual meetings of stockholders as follows:

Stockholder Proposals. For a stockholder proposal to be considered for inclusion in Sun’s proxy statement for our 2009 annual meeting of stockholders, the written proposal must be received by Michael A. Dillon, the Corporate Secretary of Sun, no later than May 27, 2009. The proposal will need to comply with Rule 14a-8 of the Securities Exchange Act of 1934 (the “Exchange Act”), which lists the requirements for the inclusion of stockholder proposals in company-sponsored proxy materials. If you intend to present a proposal at our 2009 annual meeting of stockholders, but you do not intend to have it included in our 2009 proxy statement, your proposal must be delivered to the attention of Michael A. Dillon, the Corporate Secretary of Sun, at our principal executive offices no earlier than June 26, 2009 and no later than July 26, 2009. If the date of our 2009 annual meeting of stockholders is more than 30 calendar days before or 60 calendar days after the one-year anniversary of the date of our Annual Meeting, your proposal must be received by Michael A. Dillon, the Corporate Secretary of Sun, no earlier than the close of business on the 90th day prior to such annual meeting and no later than the close of business on the later of (i) the 60th day prior to the date of such annual meeting or (ii) the tenth day following the day we publicly announce the date of the 2009 annual meeting of stockholders. As set forth in our Bylaws, your notice of a stockholder proposal not intended to be included in our 2009 proxy statement must set forth the information required pursuant to Sun’s Bylaws.

Nominations of Director Candidates. Stockholders may propose director candidates for consideration by the Board’s Corporate Governance and Nominating Committee by written notice directed to Michael A. Dillon, the Corporate Secretary of Sun, at the address of our principal executive offices. In addition, our Bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders. If you want to nominate an individual for election to Sun’s Board at the 2009 annual meeting of stockholders, you must deliver a written notice to the attention of Michael A. Dillon, the Corporate Secretary of Sun, no earlier than June 26, 2009 and no later than July 26, 2009. If the date of our 2009 annual meeting of stockholders is more than 30 calendar days before or 60 calendar days after the one-year anniversary of the date of our Annual Meeting, your proposal must be received by Michael A. Dillon, the Corporate Secretary of Sun, no earlier than the close of business on the 90th day prior to such annual meeting and no later than the close of business on the later of (i) the 60th day prior to the date of such annual meeting or (ii) the tenth day following the day we publicly announce the date of the 2009 annual meeting of stockholders. As set forth in our Bylaws, your notice relating to the recommendation or nomination of a director candidate must set forth the information required pursuant to Sun’s Bylaws.

 

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Bylaw Provisions. The relevant Bylaw provisions regarding the requirements for making stockholder proposals and nominating director candidates are available on our website at www.sun.com/company/cgov/cert.jsp. You may also contact the Corporate Secretary of Sun at our principal executive offices to request a copy of the relevant Bylaw provisions.

How can I communicate with the independent directors on Sun’s Board?

Our Board encourages stockholders who are interested in communicating directly with our independent directors as a group to do so by writing to the independent directors in care of our Corporate Secretary. Stockholders can send communications electronically by clicking on “Contact Board of Directors” at our corporate governance website located at www.sun.com/company/cgov/index.jsp or by mail to: Michael A. Dillon, Corporate Secretary, Sun Microsystems, Inc., 4150 Network Circle, Santa Clara, California 95054. Stockholder correspondence received addressed to our independent directors will be reviewed by our general counsel or his designee, who will regularly forward to our independent directors all correspondence that, in the opinion of our general counsel, deals with the functions of the Board or committees thereof or that our general counsel otherwise determines requires their attention. Our directors may at any time review a log of all correspondence received by Sun that is addressed to the independent members of the Board and request copies of any such correspondence.

ABOUT OUR BOARD AND ITS COMMITTEES

Our Board and its committees meet throughout the year on a set schedule and also hold special meetings and act by written consent from time to time as appropriate. In addition, at the conclusion of each regularly scheduled, in-person Board meeting, Sun’s independent directors meet in executive session without employee-directors present.

During fiscal 2008, our Board held nine meetings. Each director attended 75% or more of the aggregate number of meetings of the Board and meetings of committees of which he or she served on during fiscal 2008. We encourage directors to attend our annual meetings of stockholders. Unfortunately, due to a change in the date of the 2007 Annual Meeting, only four of our directors serving on the Board as of our 2007 Annual Meeting attended that meeting. We anticipate a significantly higher percentage of our current directors will attend the 2008 Annual Meeting.

Our Board has an Audit Committee, a Leadership Development and Compensation Committee (the “LDCC”), and a Corporate Governance and Nominating Committee (the “CGNC”). The CGNC makes recommendations to the Board concerning committee memberships and the appointment of chairpersons for each committee, and the Board appoints the members and chairpersons of the committees. The following table lists the chairpersons and members of each committee as of the Record Date and the number of meetings held by each committee during fiscal 2008:

 

Director

  Audit   LDCC   CGNC

Scott G. McNealy

     

James L. Barksdale

      Chair

Stephen M. Bennett

    Chair  

Peter L.S. Currie

  Member    

Robert J. Finocchio, Jr.

  Chair    

James H. Greene, Jr.(1)

      Member

Michael E. Marks(2)

  Member    

Patricia E. Mitchell

      Member

M. Kenneth Oshman(3)

    Member  

P. Anthony Ridder

    Member  

Jonathan I. Schwartz

     

Number of Meetings in Fiscal 2008

  12   6   4

 

(1)   Mr. Greene joined the Board and the CGNC on May 1, 2008.

 

(2)   Mr. Marks joined the Audit Committee on August 1, 2007.

 

(3)   Mr. Oshman served on the CGNC until August 1, 2007.

 

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Audit Committee. The Audit Committee oversees our accounting and financial reporting processes and audits of our financial statements. Among other matters, the Audit Committee:

 

   

Hires, evaluates performance of and replaces Sun’s independent registered public accounting firm as appropriate;

 

   

Discusses relationships or issues that could hinder the independence of, and pre-approves the services provided by, Sun’s independent registered public accounting firm;

 

   

Discusses with management, internal auditors and Sun’s independent registered public accounting firm the quality of Sun’s accounting principles and financial reporting; and

 

   

Oversees the internal auditing functions and controls.

Each member of the Audit Committee meets the NASDAQ requirements as to independence and financial knowledge and is “independent” as defined in applicable SEC rules. Our Board has determined that all members of the Audit Committee qualify as “audit committee financial experts,” as that term is defined in Item 407(d)(5) of Regulation S-K of the Exchange Act. The Audit Committee operates under a written charter that complies with applicable SEC and NASDAQ requirements, a copy of which can be found on our website at www.sun.com/company/cgov/bcc.jsp.

LDCC. The LDCC has overall responsibility for approving and evaluating our compensation plans, policies and programs applicable to executive officers. Among other matters, the LDCC:

 

   

Reviews and approves the executive compensation policies, including compensation of the chief executive officer (the “CEO”);

 

   

Administers the employee equity incentive and stock purchase plans;

 

   

Reviews executive and leadership development policies, plans and practices; and

 

   

Advises the Board on executive succession planning.

The LDCC has delegated authority to our CEO to grant equity awards to employees below the level of Vice President. Please see “Executive Compensation — Compensation Discussion and Analysis — Other Compensation Policies” for more information. The members of the LDCC are all independent directors under applicable NASDAQ rules. The LDCC operates under a written charter, a copy of which can be found on our website at www.sun.com/company/cgov/bcc.jsp.

CGNC. The purpose of the CGNC is to ensure that the Board is properly constituted to meet its fiduciary obligations to stockholders and Sun and that Sun has and follows appropriate governance standards. Among other matters, the CGNC:

 

   

Reviews and approves nominees for service on the Board;

 

   

Considers candidates recommended by stockholders;

 

   

Reviews and reports to the Board with regards to matters of corporate social responsibility; and

 

   

Adopts, reviews and implements corporate governance policies and procedures.

The members of the CGNC are all independent directors under applicable NASDAQ rules. The CGNC operates under a written charter, a copy of which can be found on our website at www.sun.com/company/cgov/bcc.jsp.

Consideration of Director Nominees

The CGNC regularly reviews the current composition and size of the Board. The CGNC considers and evaluates any candidates who have been properly recommended by a stockholder, as well as those candidates who have been identified by management, individual members of the Board or, if the CGNC determines, a search firm. This review may, in the CGNC’s discretion, be based solely on information provided to the CGNC or may also include discussions with persons familiar with the candidate, an interview with the candidate, the retention of third-party interviewers or other actions. The CGNC Policies and Procedures for Director Candidates can be found on our website at www.sun.com/company/cgov/bcc.jsp.

 

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The CGNC evaluates candidates proposed by stockholders using the same criteria as those used for other candidates. In its evaluation of director candidates, including the members of the Board eligible for re-election, the CGNC considers the following:

 

   

The current size and composition of the Board and the needs of the Board and the committees of the Board;

 

   

Such factors as issues of independence, diversity, character, acumen, strategic vision and relevant experience, such as technology, accounting and finance, sales and marketing and international experience; and

 

   

Such other factors as the CGNC may consider appropriate.

The CGNC requires the following minimum qualifications to be satisfied by any candidate for a position on the Board:

 

   

Possession of the highest personal and professional ethics and integrity;

 

   

Proven achievement and competence in the candidate’s field and the ability to exercise sound business judgment;

 

   

Attributes that are complementary to those of the existing directors;

 

   

The acumen, drive and skills to assist and support management and make significant contributions to Sun’s success;

 

   

An understanding of the fiduciary responsibilities that are required of a member of the Board and the commitment of time and energy necessary to diligently carry out those responsibilities;

 

   

Diversity of experiences and personal and cultural attributes; and

 

   

Expansive professional background ensuring a comprehensive appreciation of Sun’s business including technology development, finance, sales and marketing, and international business.

Michael E. Marks was initially appointed to the Board in connection with a private placement transaction between Sun and Kohlberg Kravis Roberts & Co., L.P. (“KKR”) in April 2007, pursuant to which Sun agreed to appoint one person to its Board nominated by KKR. During fiscal 2008, KKR nominated James H. Greene, Jr., a member of KKR, to serve as its nominee to the Board. Upon the recommendation of the CGNC, Mr. Greene was appointed to the Board as KKR’s nominee. Mr. Marks remains a member of the Board, but is no longer affiliated with KKR.

For a description of the process for a stockholder to recommend a director candidate for the CGNC’s consideration or to nominate directors in accordance with our Bylaws, please see “General Information — What is the deadline to propose actions for consideration at the 2009 annual meeting of stockholders or to nominate individuals to serve as directors?”.

 

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DIRECTOR COMPENSATION

Director Summary Compensation Table for Fiscal 2008

The following table summarizes the total compensation earned by directors who were not executive officers during fiscal 2008.

 

Name

   Fees Earned
in Cash

($)(1)
   Stock
Awards

($)(2)
   Option
Awards

($)(2)
   Non-Equity
Incentive Plan
Compensation
($)
    Change in
Pension Value

($)
    All Other
Compensation
($)
    Total
($)

James L. Barksdale

   $ 55,393    $ 23,261    $ 17,536    $     $     $     $ 96,190

Stephen M. Bennett

     58,621      23,261      23,852                        105,734

Peter L.S. Currie

     57,165      23,261      11,606                        92,032

Robert J. Finocchio, Jr.

     67,165      23,261      16,428                        106,854

James H. Greene, Jr.

     9,117                                  9,117

Michael E. Marks

     56,322      23,261      8,894                        88,477

Scott G. McNealy(3)

     1,000,000      1,321,504      3,068,896      782,250 (4)     205,686 (5)     70,731 (6)     6,449,067

Patricia E. Mitchell

     50,393      23,261      16,502                        90,156

M. Kenneth Oshman

     50,393      23,261      17,536                        91,190

P. Anthony Ridder

     50,393      23,261      11,606                        85,260

 

(1)   With the exception of Mr. McNealy, includes fees payable for service as a director, committee chair or committee member as described in the narrative accompanying this table. Fees for Mr. Greene were prorated, as he did not provide service as a director or committee member for the entire fiscal year.

 

(2)   Reflects the dollar amount recognized for financial statement reporting purposes with respect to fiscal 2008, in compliance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards 123R (“FAS 123R”) for stock options and restricted stock awards granted in fiscal 2003 through 2008. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information, refer to Note 14 of the Notes to Consolidated Financial Statements in Sun’s Annual Report on Form 10-K for fiscal 2008 (our “Form 10-K”). These amounts reflect Sun’s accounting expense for these awards and do not correspond to the actual value that will be recognized by the directors with respect to these awards. A supplemental table following these footnotes sets forth: (i) the aggregate number of stock awards and option awards outstanding at fiscal year end; (ii) the aggregate number of stock awards and option awards granted during fiscal 2008; and (iii) the grant date fair value of equity awards granted by Sun during fiscal 2008 to each of our directors who was not an executive officer.

 

(3)   Represents Mr. McNealy’s compensation for his service as an employee of Sun. Mr. McNealy does not receive compensation for his service as a director of Sun.

 

(4)   Reflects amounts paid under Sun’s 162(m) Executive Officer Performance-Based Bonus Plan.

 

(5)   Represents solely the increase from fiscal 2007 to fiscal 2008 in the actuarial present value of Mr. McNealy’s accumulated benefit under Sun’s U.S. Vice President Severance Plan. Such increase is measured from the plan measurement date used for financial reporting purposes in our 2007 financial statements to the plan measurement date used for financial reporting purposes in our 2008 financial statements. See “Executive Compensation — Pension Benefits Table” and accompanying narrative for more information.

 

(6)   Represents: (i) $14,728 for personal use of aircraft; (ii) a tax gross-up of $49,203 with respect to the income imputed to Mr. McNealy for his personal use of aircraft and an estimate of the cost to Sun of the disallowance of corporate tax deductions attributable to the personal aircraft usage by Mr. McNealy; and (iii) $6,800 of matching contributions to Sun’s 401(k) Plan by Sun. The value of Mr. McNealy’s personal aircraft usage is determined based upon the incremental cost of such usage to Sun, including the hourly fees, related fuel expenses, other miscellaneous expenses and taxes paid to NetJets.

 

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Additional Information With Respect to Director Equity Awards

 

Name

  Stock Awards
Outstanding
at Fiscal Year
End

(#)(1)
  Option Awards
Outstanding at
Fiscal Year
End

(#)(2)
  Stock Awards
Granted
During Fiscal
2008

(#)(3)
  Option Awards
Granted
During Fiscal
2008

(#)
  Grant Date Fair
Value of Stock
and Option
Awards Granted
in Fiscal 2008

($)(4)

James L. Barksdale

  8,429   10,000   8,429     $ 174,978

Stephen M. Bennett

  8,429   10,000   8,429       174,978

Peter L.S. Currie

  8,429   5,000   8,429       174,978

Robert J. Finocchio, Jr.

  8,429   7,500   8,429       174,978

James H. Greene, Jr.

           

Michael E. Marks

  8,429   2,500   8,429       174,978

Scott G. McNealy

  181,250   3,787,550   125,000   500,000     7,294,663

Patricia E. Mitchell

  8,429   7,500   8,429       174,978

M. Kenneth Oshman

  8,429   10,000   8,429       174,978

P. Anthony Ridder

  8,429   5,000   8,429       174,978

 

(1)   Includes unvested restricted stock awards, restricted stock units and performance-based restricted stock units.

 

(2)   Includes both vested and unvested options to purchase our common stock.

 

(3)   Includes restricted stock units and performance-based restricted stock units.

 

(4)   Amounts in this column represent the fair value of stock options, restricted stock units and performance-based restricted stock units, calculated in accordance with FAS 123R. For option awards, that number is calculated by multiplying the Black-Scholes value by the number of options awarded. For restricted stock units and performance-based restricted stock units, that number is calculated by multiplying (x) the fair market value of our common stock on the date of grant less the per share purchase price by (y) the number of units awarded.

Annual Retainer

During fiscal 2008, our non-employee directors were paid an annual cash retainer for serving on the Board generally, plus additional cash retainers based on their committee service. These annual retainers, which are paid in quarterly installments, are:

 

Position

   Annual Amount

Board Member

   $ 50,000

Audit Committee Chair

   $ 20,000

LDCC Chair

   $ 15,000

CGNC Chair

   $ 10,000

Audit Committee Member

   $ 10,000

Other Committee Member

   $ 5,000

The above-listed annual retainers were approved by the Board in August 2007 and were effective following Sun’s 2007 Annual Meeting in November 2007. Neither of our employee-directors received compensation during fiscal 2008 for service as members of our Board. The annual retainer for non-employee directors will remain unchanged during fiscal 2009. A non-employee director may elect to defer up to 100% of his or her annual retainer pursuant to Sun’s 2005 Non-Qualified Deferred Compensation Plan.

 

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Equity Awards for Non-Employee Directors

During fiscal 2008, our non-employee directors participated in our 2007 Omnibus Incentive Plan (the “2007 Plan”). Under the 2007 Plan:

 

   

Newly elected non-employee directors. Each non-employee director who is not a partner, officer, director or affiliate of an entity having an equity investment in Sun is granted restricted stock units valued at $175,000 on the date he or she becomes a director.

 

   

Re-elected non-employee directors. On the date of each annual meeting of stockholders, each non-employee director who is re-elected and has served on the Board for at least six months is automatically granted restricted stock units valued at $175,000.

Restricted stock units granted to non-employee directors vest at a rate of 20% per year over five years, subject to the director’s continued service with Sun.

Potential Payments Upon Termination or Change of Control for Mr. McNealy

Mr. McNealy is entitled to certain benefits under Sun’s U.S. Vice President Severance Plan, U.S. Vice President Involuntary Separation Plan and form of Change of Control Agreement. Please see “Executive Compensation — Pension Benefits Table” and accompanying narrative and “— Potential Payments Upon Termination or Change of Control.”

 

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CORPORATE GOVERNANCE

Our business is managed by our employees under the direction and oversight of our Board. Except for Messrs. Schwartz and McNealy, none of our Board members is an employee of Sun. We keep Board members informed of our business through discussions with management, materials we provide to them, visits to our offices and their participation in Board and Board committee meetings.

We believe transparent, effective and accountable corporate governance practices are key elements of our relationship with our stockholders. To help our stockholders understand our commitment to this relationship and our governance practices, several of our key governance initiatives are summarized below.

Corporate Governance Guidelines. Our Board has adopted Corporate Governance Guidelines which govern, among other things, Board member criteria, responsibilities, compensation and education, Board committee composition and charters, Board self-evaluation and management succession. You can access these Corporate Governance Guidelines, along with other materials such as Board committee charters, on our website at www.sun.com/company/cgov/index.jsp.

Standards of Business Conduct. We have adopted Standards of Business Conduct applicable to all of our Board members and employees, including our CEO, chief financial officer (“CFO”), corporate controller and other finance executives. The Standards of Business Conduct constitute a “code of ethics” as defined by applicable SEC rules and a “code of conduct” as defined by applicable NASDAQ rules. The Standards of Business Conduct are available on our website at www.sun.com/company/cgov/standards.jsp. You may also request a printed copy of our Standards of Business Conduct by writing to us at:

Sun Microsystems, Inc.

Attn: Investor Relations

4150 Network Circle, UMPK14-336

Santa Clara, California 95054

or by calling us at (650) 960-1300.

Any waiver of the Standards of Business Conduct pertaining to a member of our Board or one of our executive officers will be disclosed on our website at www.sun.com/company/cgov/waivers.jsp.

Majority Vote Standard and Director Resignation Policy. Our Bylaws and Corporate Governance Guidelines provide for a majority voting standard for the election of directors. Under the majority vote standard, each director must be elected by a majority of the votes cast by the shares present in person or represented by proxy and entitled to vote at an annual or special meeting of our stockholders. A “majority of the votes cast” means that the number of votes cast “for” a candidate for director must exceed the number of votes “against” a director. A plurality voting standard will apply instead of a majority voting standard if:

 

   

A stockholder has provided us with notice of a nominee for director in accordance with our Bylaws; and

 

   

That nomination has not been withdrawn as of 20 days before we first deliver proxy materials to stockholders.

Under Delaware law, if an incumbent nominee for director in an uncontested election does not receive the requisite votes for re-election, the director remains in office as a “holdover” director until a successor is elected and qualified. Our Bylaws and Corporate Governance Guidelines include post-election procedures in the event an incumbent director becomes a holdover director, as follows:

 

   

The CGNC shall make a recommendation to the Board as to whether to accept the previously tendered resignation of the director.

 

   

Thereafter, the Board will act on the CGNC’s recommendation.

 

   

Within 90 days from the date the election results are certified, Sun will publicly disclose the Board’s decision and rationale, and, if applicable, the fact that such resignation was tendered and accepted by the Board.

 

   

The Board expects that a holdover director will not participate in the CGNC’s recommendation or the Board’s decision with respect to his or her resignation.

 

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Performance-Based Stock Awards. In keeping with the commitment to high corporate governance standards, our Board firmly believes in the pay-for-performance philosophy. Accordingly, in addition to variable pay programs, the LDCC has implemented the use of performance-based restricted stock units for senior leaders. These awards represented approximately 50% in value of the total awards granted to our executive officers in fiscal 2008. Please see “Executive Compensation” for more information.

Policy Regarding Stockholder Rights Plan. In May 2006, our Board terminated Sun’s stockholder rights plan and adopted a policy that Sun will submit any future stockholder rights plan (also known as a “poison pill”) to a stockholder vote, subject only to the ability of the Board to act on its own to adopt a rights plan if the Board, exercising its fiduciary duties, determines that under the circumstances then existing, it would be in the best interests of Sun and its stockholders to adopt a poison pill without prior stockholder approval. If the Board adopts such a poison pill, it will expire unless ratified by stockholders within one year of adoption. This policy is contained in our Corporate Governance Guidelines, which are available on our website at www.sun.com/company/cgov/guidelines.jsp.

Stock Ownership Guidelines. Our Stock Ownership Guidelines are designed to align the interests of our executive officers and directors with the interests of our stockholders and further promote our commitment to sound corporate governance. Under the guidelines:

 

   

Our executive officers must hold an amount of Sun common stock valued at two times their annual base salary (five times in the case of our CEO) by July 28, 2010, in the case of officers who were executive officers at the time the guidelines were adopted in July 2005, or, in the case of executive officers appointed after such date, within five years of obtaining their position.

 

   

Our directors must:

 

   

Hold 10,000 shares by July 28, 2010, in the case of directors who were directors at the time the guidelines were adopted in July 2005, or, in the case of directors elected after such date, within five years of obtaining such position.

 

   

Thereafter, hold a number of shares of Sun common stock having a value of at least $150,000 by August 1, 2012, or, in the case of directors elected after August 1, 2007, within five years of obtaining such position.

If an executive officer or director does not meet the guidelines by the applicable deadline, he or she will be required to retain 25% of the net shares received as the result of the exercise of Sun stock options or the vesting of restricted stock, restricted stock units or performance-based restricted stock units, until the guidelines are met. “Net shares” are those shares that remain after shares are sold or netted to pay the exercise price of stock options and withholding taxes upon the vesting of restricted stock, restricted stock units or performance-based restricted stock units. Our Stock Ownership Guidelines can be found on our website at www.sun.com/company/cgov/ownership.jsp. Please see “Security Ownership of Certain Beneficial Owners and Management” for information regarding the ownership levels of our executive officers and directors as of the Record Date.

Presiding Director. In accordance with the Corporate Governance Guidelines adopted, beginning in fiscal 2007, the independent members of the Board bi-annually elect a Presiding Director from among those members considered independent under the NASDAQ rules. Robert J. Finocchio, Jr. was elected to serve as the Presiding Director for fiscal 2008 and 2009. As Presiding Director, Mr. Finocchio’s duties include:

 

   

Coordinating, developing the agenda for and moderating executive sessions of the Board’s independent directors;

 

   

Advising the Chairman of the Board as to an appropriate schedule of Board meetings (seeking to ensure that the independent directors can perform their duties responsibly while not interfering with the flow of Sun’s operations);

 

   

Approving, with the Chairman of the Board, the content of Board meeting agendas;

 

   

Advising the Chairman of the Board as to the quality, quantity and timeliness of the flow of information from management that is necessary for the independent directors to effectively and responsibly perform their duties;

 

   

Recommending to the Chairman of the Board the retention of consultants who report directly to the full Board;

 

   

Acting as the principal liaison between the independent directors and the Chairman of the Board on sensitive issues; and

 

   

Performing such other duties, as the Board may from time to time delegate to the Presiding Director, to assist the Board in the fulfillment of its responsibilities.

 

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These duties are detailed in our Corporate Governance Guidelines, which are described above.

Mandatory Retirement Age. Our Corporate Governance Guidelines provide for a mandatory retirement age of 75 for directors. When a director reaches that age, the CGNC shall review the continued appropriateness of the director’s Board membership and recommend to the Board whether it should request the director’s resignation.

Separate Chairman and CEO. Although our Board does not have a policy on whether the roles of the CEO and Chairman of the Board should be separate, the positions did separate in April 2006 upon Jonathan Schwartz’s appointment as CEO and Scott McNealy’s retention as Chairman of the Board.

Offer of Director Resignation Upon Job Change. The Corporate Governance Guidelines include a policy that, in the event any director has a principal job change, including retirement, such director shall promptly inform the Board. The CGNC shall review such job change and, after consideration of the continued appropriateness of the director’s Board membership under the new circumstances, determine whether to recommend that the Board request that the director tender his or her resignation.

Joining Outside Boards. Our Board members are frequently invited to serve on the board of directors of other companies. Because such service may present an actual or potential conflict of interest, Sun has adopted a review process before any Board member may accept a new board position.

Committee Responsibilities. Sun has three Board committees: the Audit Committee, the LDCC and the CGNC. Each committee meets regularly and has a written charter approved by the Board. In addition, at each regularly scheduled Board meeting, the chairperson or a member of each committee reports on any significant matters addressed by the committee.

Independence. NASDAQ rules require listed companies to have a board of directors with at least a majority of independent directors. Our Board has determined that nine of our eleven directors are independent under the NASDAQ rules. Our independent directors are: James L. Barksdale, Stephen M. Bennett, Peter L.S. Currie, Robert J. Finocchio, Jr., James H. Greene, Jr., Michael E. Marks, Patricia E. Mitchell, M. Kenneth Oshman and P. Anthony Ridder. Our Board limits membership on the Audit Committee, the LDCC and the CGNC to directors who are independent under the NASDAQ rules.

Executive Sessions. At the conclusion of each regularly scheduled Board meeting, Sun’s independent directors meet in executive session without the employee-directors present. The Presiding Director moderates these meetings.

Outside Advisors. The Board and each of its committees may retain outside advisors and consultants of their choosing at Sun’s expense. The Board need not obtain management’s consent to retain outside advisors.

Board Effectiveness. It is important to Sun that our Board and its committees are performing effectively and in the best interests of Sun and its stockholders. The Board performs an annual self-assessment, led by the Presiding Director, to evaluate its effectiveness in fulfilling its obligations.

Succession Planning. Our Board recognizes the importance of effective executive leadership to Sun’s success, and meets at least annually to discuss executive succession planning

Stockholder Communication. Our Board encourages stockholders who are interested in communicating directly with Sun’s independent directors as a group to do so by writing to them in care of the Secretary of Sun. Stockholders can send communications electronically by clicking on “Contact Board of Directors” at our corporate governance website located at www.sun.com/company/cgov/index.jsp or by mail to: Michael A. Dillon, Corporate Secretary, Sun Microsystems, Inc., 4150 Network Circle, Santa Clara, California 95054. Correspondence that is addressed to the independent directors will be reviewed by our general counsel or his designee, who will regularly forward to the independent directors all correspondence that, in the opinion of our general counsel, deals with the functions of the Board or committees thereof or that the general counsel otherwise determines requires their attention. Directors may at any time review a log of all correspondence received by Sun that is addressed to the independent members of the Board and request copies of any such correspondence.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows the number of shares of our common stock beneficially owned as of the Record Date by:

 

   

Each person or group known by Sun, based on filings pursuant to Section 13(d) or (g) under the Exchange Act, to own beneficially more than 5% of the outstanding shares of our common stock as of the Record Date;

 

   

Each nominee for director;

 

   

The persons named in the Summary Compensation Table; and

 

   

All directors and executive officers as a group.

 

Name of Beneficial Owner

   Common
Shares
Currently
Held

(a)
   Common
Shares
That May
Be
Acquired
Within 60
Days of the
Record
Date(1)

(b)
   Total
Beneficial
Ownership
(a)+(b)
   Percent
of
Class(2)
 

Southeastern Asset Management, Inc.(3)

    6410 Poplar Avenue, Suite 900

    Memphis, TN 38119

   129,181,029       129,181,029    17.3 %

Jonathan I. Schwartz(4)

   486,109    1,157,550    1,643,659    *  

James L. Barksdale(5)

   230,100    7,310    237,410    *  

Stephen M. Bennett

   12,500    9,810    22,310    *  

Peter L.S. Currie

   26,686    4,185    30,871    *  

Robert J. Finocchio, Jr.

   6,686    5,435    12,121    *  

John F. Fowler(6)

   4,522    217,020    221,542    *  

Donald C. Grantham

   3,245       3,245    *  

James H. Greene, Jr.

             

Michael E. Lehman

   78,575    62,500    141,075    *  

Michael E. Marks(7)

   85,000    2,310    87,310    *  

Scott G. McNealy(8)

   14,566,433    2,920,050    17,486,483    2.3  

Patricia E. Mitchell

      6,685    6,685    *  

M. Kenneth Oshman

   583,300    7,310    590,610    *  

Gregory M. Papadopoulos(9)

   67,353    425,786    493,139    *  

P. Anthony Ridder

   2,500    4,185    6,685    *  

Peter Ryan

      15,818    15,818    *  

All current directors and officers as a group (21 persons)(10)

   16,284,318    5,753,572    22,037,890    2.9  

 

*   Less than one percent.

 

(1)   Includes shares represented by vested, unexercised options as of the Record Date and options and restricted stock units that are expected to vest within 60 days of the Record Date. These shares are deemed to be outstanding for the purpose of computing the percentage ownership of the person holding the options or restricted stock units, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

(2)   Based on 744,967,054 shares issued and outstanding on the Record Date.

 

(3)  

Based solely on information provided in a Schedule 13G/A filed jointly by Southeastern Asset Management, Inc., Longleaf Partners Fund and Mr. O. Mason Hawkins with the SEC on August 8, 2008 reporting beneficial ownership of Sun’s stock as of July 31, 2008. According to the Schedule 13G/A, Southeastern Asset Management, Inc., a Tennessee corporation (“Southeastern”), is a registered investment adviser under Section 203 of the Investment Advisers Act of 1940, Longleaf Partners Fund, a series of Longleaf Partners Funds Trust, a Massachusetts business trust (“Longleaf”), is an investment company registered under Section 8 of the Investment Company Act of 1940 and Mr. Hawkins is the Chairman of the Board and Chief Executive Officer of Southeastern. Southeastern has (i) sole voting power with respect to 61,834,159 shares; (ii) sole dispositive power with respect to 73,107,534 shares; (iii) shared voting and dispositive power with Longleaf with respect to 56,031,145 shares, which includes 5,000,000 shares underlying call options; (iv) no voting power with respect to 11,315,725 shares, which does not include 1,604,000 shares held by completely non-discretionary accounts over which the

 

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filing parties have neither voting nor dispositive power and for which the filing parties disclaim beneficial ownership; and (v) no dispositive power with respect to 42,350 shares, which does not include 1,604,000 shares held by completely non-discretionary accounts over which the filing parties have neither voting nor dispositive power and for which the filing parties disclaim beneficial ownership. Mr. Hawkins is a party to this Schedule 13G/A in the event he could be deemed a controlling person as the result of his position with Southeastern, but expressly disclaims the existence of such control. Mr. Hawkins does not own directly or indirectly any securities covered by this Schedule 13G/A.

 

(4)   Includes 6,250 shares of unvested restricted stock that are subject to Sun’s right of repurchase. Mr. Schwartz has sole voting power but no dispositive power with respect to these shares.

 

(5)   Includes 600 shares held by a charitable remainder trust for which Mr. Barksdale serves as trustee. Mr. Barksdale disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein.

 

(6)   Includes: (i) 2,459 shares held by Mr. Fowler’s wife; and (ii) 2,063 shares of unvested restricted stock that are subject to Sun’s right of repurchase. Mr. Fowler has sole voting power but no dispositive power with respect to the shares held by him individually.

 

(7)   Includes: (i) 50,000 shares held by WB Investors, LLC, an entity controlled by Mr. Marks; and (ii) 35,000 shares held by Epping Investment Holdings, LLC, an entity controlled by Mr. Marks and his spouse. Mr. Marks disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein.

 

(8)   Includes: (i) 6,250 shares of restricted stock held in an escrow account with respect to which Mr. McNealy has no voting power and which provides for the immediate sale of the shares upon vesting, subject to Sun’s policies and applicable securities laws; (ii) 73,270 shares in a trust for which Mr. McNealy and his wife serve as trustees; (iii) 13,962,816 shares held by a trust for which Mr. McNealy serves as a trustee; (iv) 100,700 shares held in a trust for which Mr. McNealy’s father-in-law serves as trustee and of which his children are the beneficiaries (the “Trust Shares”); (v) 9,648 shares held in California Uniform Transfer to Minors Act accounts for which Mr. McNealy’s wife serves as custodian (the “Children’s Shares”); and (vi) 383,754 shares held by a charitable foundation, for which Mr. McNealy’s wife serves as president (the “Foundation Shares”). Mr. McNealy disclaims beneficial ownership of the Trust Shares, the Children’s Shares and the Foundation Shares.

 

(9)   Includes 2,063 shares of unvested restricted stock that are subject to Sun’s right of repurchase. Mr. Papadopoulos has sole voting power but no dispositive power with respect to these shares.

 

(10)   Includes 23,377 shares of unvested restricted stock for all directors and officers as a group that are subject to Sun’s right of repurchase and to which each director and executive officer has sole voting power but no dispositive power with respect to such shares.

 

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EXECUTIVE COMPENSATION

Report of the Leadership Development and Compensation Committee

The LDCC, which is composed solely of independent members of the Board, assists the Board in fulfilling its responsibilities with regard to compensation matters, and is responsible under its charter for determining the compensation of Sun’s executive officers. The LDCC has reviewed and discussed the “Compensation Discussion and Analysis” section of this Proxy Statement with management, including our CEO, Jonathan I. Schwartz and our CFO, Michael E. Lehman. Based on this review and discussion, the LDCC recommended to the Board that the “Compensation Discussion and Analysis” section be included in Sun’s 2008 Annual Report on Form 10-K and in this Proxy Statement.

Leadership Development and Compensation Committee

Stephen M. Bennett, Chairman

M. Kenneth Oshman

P. Anthony Ridder

Compensation Discussion and Analysis

Introduction

Sun’s executive compensation programs are designed to effectively link the actions of our executives to business outcomes that drive value for stockholders. In designing these programs, we are guided by three principles:

 

   

Maintaining a clear link between the achievement of business goals and compensation payout. Executive compensation programs can be an effective means of driving the behavior needed to accomplish our objectives, but only if each executive clearly understands how achievement of predetermined business goals influences his or her compensation.

 

   

Selecting the right performance measures. Equally important, of course, is the selection of those performance measures. They need to be measurable and linked to both increased stockholder value and Sun’s success over the long term.

 

   

Sharing information and encouraging feedback. We also believe that focused and clear program design supports transparency for our stockholders. It is important for stockholders to understand the basis for our executives’ compensation, as this provides stockholders insight into our goals and direction and the manner in which company resources are being used to increase stockholder value. We welcome stockholder input on our compensation practices. Over the past several years, we have met with a number of stockholders and incorporated their suggestions into many of our programs.

We are committed to transparency and open disclosure. We hope this information provides insight into the process that we follow in designing and implementing our executive compensation programs.

Objectives of Our Compensation Programs

We believe that executive compensation should be directly linked to continuous improvements in corporate performance and increases in stockholder value. Sun’s executive compensation programs are designed to:

 

   

Motivate our executives to achieve business goals that drive value for our stockholders;

 

   

Provide competitive compensation packages that enable Sun to attract and retain highly qualified executives;

 

   

Reward performance; and

 

   

Recognize the achievement of both annual and long-term business results.

How We Implement and Manage Our Executive Compensation Programs

Role of Compensation Committee. The LDCC sets Sun’s overall compensation philosophy and reviews and approves our compensation programs, including the specific compensation of our CEO and the members of our executive leadership team, which includes each of our other executive officers named in the Summary Compensation Table for fiscal 2008. The LDCC, which has the authority to retain special counsel and other experts, including compensation consultants, has retained Towers Perrin in recent years to support their responsibilities in determining executive compensation and related programs.

 

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Role of Executive Officers and Consultants in Compensation Decisions. While the LDCC determines Sun’s overall compensation philosophy and sets the compensation of our CEO and other executive officers, it looks to its compensation consultant, our CEO, chief human resources officer (“CHRO”) and executive compensation staff to make recommendations with respect to specific compensation decisions. The LDCC, at its own discretion and without management present, meets on occasion with Towers Perrin to review executive compensation matters. As part of the annual personnel review and succession planning process, our CEO also provides the Board and the LDCC with his perspective on the performance of Sun’s executive officers, as well as an assessment of his own performance.

The LDCC establishes compensation levels for our CEO in consultation with, and based on the analysis provided by, the compensation consultant the LDCC retains. Our CEO is not present during any of the discussions between the LDCC and its consultant regarding his compensation. Based upon his own judgment and experience, our CEO recommends to the LDCC specific compensation amounts for executive officers other than himself. The LDCC makes the ultimate compensation decisions, incorporating both the feedback from the consultant and the CEO. Our CEO, CHRO and general counsel regularly attend the meetings of the LDCC to provide their perspectives on the competitive landscape and the needs of the business. Members of the LDCC also participate in the Board’s annual review of the CEO’s performance and the setting of annual performance goals.

Determining the Proper Mix of Different Elements of Pay. The principal components of our executive compensation programs are:

 

   

Base salary;

 

   

Quarterly performance-based cash bonuses;

 

   

Long-term incentives and performance-based equity awards; and

 

   

Severance and retirement benefits.

In determining how we allocate an executive’s total compensation package among these various components, we emphasize compensation elements that reward performance against measures that correlate closely with increases in stockholder value, which underscores our pay-for-performance philosophy. Accordingly, a significant portion of our executive compensation is at-risk, including the quarterly performance-based bonuses and long-term incentives. Our CEO and other executive officers, including each of the named executive officers, have a higher percentage of at-risk compensation (and thus greater upside potential and downside risk) relative to Sun’s other employees. We believe this is appropriate because our executive officers have the greatest influence on Sun’s performance. Equity awards, which for fiscal 2008 consisted primarily of stock options and performance-based restricted stock units, represent the largest component of pay in order to encourage sustained long-term performance and ensure alignment with Sun’s stockholders.

LOGO

 

 

(1)   Indicates the percentage of total compensation represented by base salary, on-target cash bonus payments and the estimated fair value of equity compensation granted for fiscal 2008. Equity values are based on projected fair values pursuant to a Black-Scholes methodology. The “Mix of Pay” chart for the named executive officers includes target compensation for Messrs. Grantham, Fowler, Papadopoulos and Ryan. Mr. Lehman is not included as he did not receive equity compensation in 2008.

Determining Total Compensation. We consider a variety of factors when determining executive compensation, including:

 

   

Market information (as discussed below);

 

   

Subjective elements, such as the scope of the executive’s role, experience and skills and the individual’s performance during the fiscal year;

 

   

The performance of Sun;

 

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Previous compensation;

 

   

Importance of retaining the executive for succession planning; and

 

   

Value of compensation relative to the corresponding objective.

Effect of Individual Performance. While the LDCC takes into consideration subjective elements, such as the executive’s skill set, individual achievements and role with Sun during the fiscal year, our named executive officers’ individual performance is not reviewed by the LDCC in conjunction with pre-established individual performance metrics. Instead, as stated above, the LDCC conducts such an assessment of our CEO, while our CEO proceeds with a similar assessment of the other executive officers. Our CEO then shares his perspectives with the LDCC, but it is the LDCC that ultimately makes compensation decisions for all of Sun’s officers, based upon their own collective experience and business judgment.

Effect of Compensation Previously Received on Future Pay Decisions. We consider actual compensation received in determining if our compensation programs are meeting their pay-for-performance and retention objectives. Adjustments to future awards may be considered based on these results. However, the LDCC generally does not reduce compensation plan targets based on compensation received in the past, as we do not want to create a disincentive for exceptional performance.

Competitive Considerations. We strive to compensate our executive officers competitively relative to industry peers. In order to evaluate Sun’s competitive position in the industry, the LDCC retained Towers Perrin to conduct an independent executive compensation review. Towers Perrin created a custom comparator group for Sun, which includes companies with comparable revenue in the hardware, software and technical services industries. Sun ranked approximately at the median of the comparator group in terms of annual sales at the time of the review in April 2007.

The comparator group companies are as follows:

 

Adobe Systems

   Dell    Microsoft

Advanced Micro Devices

   eBay    Motorola

Apple

   Electronic Data Systems    Network Appliance

Applied Materials

   EMC    Novell

BMC Software

   Google    Oracle

Cisco Systems

   Hewlett-Packard    Unisys

CA

   Intel    Yahoo

Computer Sciences Corp.

   IBM   

The companies included in the comparator group differ from those listed in the indices used to prepare Sun’s stock price performance graph, which can be found in our 2008 Annual Report to Stockholders. The LDCC found, based on input from our CEO, our Chairman of the Board and Towers Perrin, that the companies listed in the comparator group more closely represent the labor markets in which Sun competes for executive talent. The competitive market data for the study included a mix of two widely recognized external compensation surveys, as well as data disclosed in the comparator companies’ proxy statements.

 

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The following chart summarizes the elements of compensation we utilize, the LDCC’s “benchmark” for the element compared to the peer group, and the reasons we emphasize each form of executive compensation:

 

Compensation

Component

  

Sun’s Market

Reference Point

  

Reason

Base Salary

  

Median

(at market)

  

We believe the median represents the competitive baseline that must be paid in order to attract and retain the skills and experience necessary for these complex roles. We have chosen to target base salary at the median, and not higher, as we feel above-market compensation should stem from company performance.

 

Individual compensation may vary from the reference point based on such factors as performance, skills, experience, and scope of the role relative to peers.

Short-Term Incentive Bonus   

Above market

  

We have chosen to target annual incentive awards at an above-market rate because:

 

•   it allows us to offer attractive compensation opportunities to individuals with high-demand skill sets while linking pay to the achievement of annual goals, which is important to us because of our focus on innovation; and

 

•   our historical practice has been to set goals at “stretch” levels.

 

Actual payments will vary based on performance compared to goals. The target amount of the bonus may change to align the mix of compensation (targeted amount of “at-risk” pay) to reflect changes in job scope, reporting level, individual performance or other items related to the role’s impact on business results.

Long-Term Incentives (“LTI”)   

Above market

  

We have also chosen to target LTI awards at an above-market rate because:

 

•  it allows us to offer attractive compensation opportunities to individuals with high demand skill sets while linking pay to the achievement of both annual and longer-term goals, which is important to us because of our focus on innovation; and

 

•  our historical practice has been to set goals at “stretch” levels.

 

In addition, this provides an attractive opportunity to earn above-market long-term compensation in a manner that is highly aligned with stockholder interests.

 

Actual compensation will vary based upon stock price performance and achievement relative to the incentive plan targets. The target amount of the long-term incentives may change to align the mix of compensation (targeted amount of “at-risk” pay), to reflect changes in job scope, reporting level, performance or other items related to the role’s impact on business results.

Health, Welfare and Retirement Planning Benefits   

Competitive

  

Similar to base salary, we want to ensure health and welfare benefits are provided, yet feel that compensation and/or benefits above-market should result from business performance.

 

Programs for the named executive officers are substantially the same as for all other eligible employees.

Separation and Change in Control Benefits   

Competitive

 

Benefits under the plans are set to what is reasonable with respect to the intent of the program and what is competitive with comparator group practices.

  

Benefits provide minimum security to officers and employees.

 

Benefits for separation from service take into account length of service, expected length of time until subsequent employment is secured (except in the case of retirement), expense management, and the ability to attract qualified candidates into senior roles.

 

Change in control benefits are structured to support decisions that are in the best interests of stockholders, neutralizing personal concerns and managing related expense.

 

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Other Factors. To further assess the appropriateness of compensation, the LDCC also reviews:

 

Analysis

  

Purpose

Pay Mix

   To ensure pay at-risk is consistent with philosophy and comparator group practices; a significant majority of pay should be at-risk.

Internal Equity

   To understand whether internal pay differences are reasonable and consistent with market practice. The LDCC also considers scope and accountability of the role to assist in determining reasonable differences for internal compensation rates.

Total Compensation Statements

   To understand the purpose and amount of each pay component as well as the sum of all remuneration in order to gauge the reasonableness of each element and the total potential expense.

CEO Compensation versus Total Stockholder Return

   To ensure that the CEO’s pay is aligned with performance and set appropriately given industry performance and pay rates.

Performance Sensitivity Analysis

   To understand potential payments assuming various company performance outcomes.

Timing of Compensation Decisions. Executive compensation is typically reviewed at the LDCC’s April and July meetings in an effort to align compensation changes to the fiscal year. Annual compensation increases are not automatic, and are largely dependent upon Sun’s performance, individual performance and relative pay rates for the industry.

Results of the 2008 Compensation Review. Based on the results of Towers Perrin’s executive compensation review, the overall compensation levels for Messrs. Schwartz, Grantham, Papadopoulos and Fowler relative to the comparator group were determined to be generally at or modestly above the median. Mr. Lehman’s compensation was determined to be below the median, as he did not receive an equity award in fiscal 2008. At the time of Towers Perrin’s review, Mr. Ryan was not an executive officer, and therefore was not included in the analysis. However, based on other internal analyses the Company conducted while Mr. Ryan was in his former role as Senior Vice President, Global Sales and Services, Americas Region, Mr. Ryan’s prior compensation package was determined to be competitive with positions of similar scope at other high technology companies and consistent with Sun’s compensation philosophy.

Regarding the compensation components listed above, the base salary and short term incentive levels are generally in line with Sun’s market reference points. However, the results of the compensation review indicated that the equity compensation for each of the named executive officers was below the market reference point. The resulting compensation decisions for fiscal 2008 based on this review are discussed further below.

Elements of Compensation

While the amount of compensation may differ between our named executive officers, the compensation policies and factors affecting the amounts, as considered by the LDCC, are generally the same for each of our named executive officers, including our CEO. In this section, we discuss the LDCC’s considerations with respect to each element of compensation paid in fiscal 2008. For a discussion of the actual amounts paid to the named executive officers in fiscal 2008, see “Chief Executive Officer Compensation for Fiscal 2008” and “CFO and Other Named Executive Officer Compensation for Fiscal 2008” below.

Base Salary. In establishing base salary levels for fiscal 2008, the LDCC considered, in addition to the executive compensation review, and in its reasoned business judgment, individual performance, position scope, responsibility, experience and the need to retain executive talent in a highly competitive marketplace.

Quarterly Performance-Based Cash Bonuses. Executive officers, including each of the named executive officers, are eligible to participate in Sun’s Section 162(m) Executive Officer Performance-Based Bonus Plan (the “Bonus Plan”). The Bonus Plan links cash incentives to Sun performance on short-term, financial, operational and strategic measures that we believe are drivers of long-term stockholder value. Mr. Ryan was not eligible for the Bonus Plan for most of fiscal 2008 while he was in his former role. However, the structure of the bonus plan for which Mr. Ryan was a participant is similar to the structure as noted below.

 

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Financial Measures for Bonus Plan. For fiscal 2008, the Bonus Plan funding was based on two key measures:

 

Performance Measure

  

Why It Is Used

  

Measurement Basis

Revenue

   Revenue growth is an essential component of long-term success and viability and enables future strategic investments.    Generally Accepted Accounting Principles (GAAP)

Operating Income

  

Generating a return for investors is a priority.

 

Profits allow Sun to re-invest in R&D, operations and people for future success.

   GAAP operating income is adjusted to exclude restructuring, in-process R&D, intangible impairment charges, FAS123R and bonus payments under the Plan. These items are excluded to support long-term decisions.

To drive increased focus on results, the Bonus Plan is measured on a quarterly basis, providing the opportunity for quarterly bonus payments if the funding criteria are met for a particular fiscal quarter. The revenue and operating income goals were derived from Sun’s internal projections and business plan. The revenue and operating income targets for the Bonus Plan were set equal to Sun’s business plan.

Formulas Used. The formula for determining the bonus awards was as follows:

For fiscal quarters 1 through 3:

   Executive’s eligible wages

× Executive’s target bonus percentage

× Percentage of annual funding allocated to the quarter

× Bonus Plan funding percentage, based on achievement of target performance measures

= Quarterly Award

For fiscal quarter 4:

   Executive’s eligible wages

× Executive’s target bonus percentage

× Percentage of annual funding allocated to the quarter + additional funding for annual strategic goals

× Bonus Plan funding percentage, based on achievement of target performance measures                    

= Quarterly Award

The target performance measures under the Bonus Plan for fiscal 2008 are disclosed below in the “Bonus Plan Results for Fiscal 2008” table. As an added incentive for the fourth quarter of fiscal 2008, there was an additional funding opportunity representing approximately 15% of that quarter’s targeted funding based upon the achievement of annual strategic goals related to market share for a particular product and services, provided the revenue and operating income performance measures were met. We are not disclosing specific details of these annual strategic goals given their competitively sensitive nature and our concern that disclosure of these goals may provide competitors with insight into our acquisition and technology investment plans. The target level of performance was set at a “stretch level,” but deemed achievable. We ultimately achieved these goals, however, the target revenue and operating income goals for the fourth quarter of fiscal 2008 were not met, and therefore no additional funding was provided.

Structure of the Bonus Plan. The Bonus Plan structure is summarized in the table below:

 

FY08
Quarter

  

% of Annual
Funding

  

Performance Measure

  

Funding Range

(Minimum – Maximum)

Q1

     10%   

Q1 Operating Income (50%) and

Q1 Revenue (50%)

   0 – 200%

Q2

     25%   

Q2 Operating Income (50%) and

Q2 Revenue (50%)

   0 – 200%

Q3

     25%   

Q3 Operating Income (50%) and

Q3 Revenue (50%)

   0 – 200%

Q4

     40%   

Q4 Operating Income (50%) and

Q4 Revenue (50%); plus

annual strategic goals

   0 – 215% (the standard funding range of 0 – 200% plus the potential additional 15% for the annual strategic goals)

Annual

Total

     100%       0 – 206% (including the potential adjustments for the annual strategic goals, as noted for Q4, above)

 

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Our CEO was eligible for an annual target bonus of 200% of his base salary. Sun’s named executive officers, other than our CEO and Mr. Ryan, were eligible for annual target bonuses ranging from 85% to 100% of their base salary, while all other executive officers were eligible for annual target bonuses ranging from 45% to 100% of their base salary, depending on their positions. Mr. Ryan was not eligible to participate in the Bonus Plan prior to his promotion. However, prior to his promotion, Mr. Ryan was eligible to a participate in the SMI FY08 Quarterly Bonus Plan (the “Quarterly Bonus Plan”), which is similar in structure to the Bonus Plan. Because Mr. Ryan was eligible to participate in other sales incentive programs prior to his promotion during fiscal 2008, Mr. Ryan’s annual target bonus under the Quarterly Bonus Plan was 25% of his annual On-Target Earnings, which is the sum of Mr. Ryan’s base salary and his variable, sales incentive-based compensation opportunity.

In each case, the annual target bonus is divided into four quarterly bonus targets based on the funding percentages shown above. The target bonus payments were established with the expectation that the total annual target cash compensation (base salary plus on-target bonus amount) for each executive officer was competitive with their peers in the industry.

Bonus Plan Performance Thresholds and Payment Caps. The threshold performance required for the Bonus Plan to fund and the level of performance at which the Bonus Plan funding was capped is as follows:

 

   

Operating Income: For all quarters other than the third quarter of fiscal 2008, the thresholds were set to 40% of target performance for the respective quarter. For the third quarter of fiscal 2008, the threshold was set to 60% of target performance for the quarter. Bonus Plan funding was capped at 200% for each quarter of fiscal 2008. With the exception of the fourth quarter of fiscal 2008, potential payments were directly correlated with actual performance, meaning that if operating income performance in any quarter was 70%, the named executive officer was eligible to receive 70% of his target bonus payment. In the fourth quarter of fiscal 2008, the above-target achievement resulted in the modest acceleration of the Bonus Plan funding (i.e., for every additional 7% of above-target performance, the Bonus Plan was funded by an additional 10%).

 

   

Revenue: The threshold was set at 90% of target performance for all quarters in fiscal 2008. The Bonus Plan funding was capped at 200% for each quarter of fiscal 2008. Potential payments were directly correlated with actual performance, meaning that if revenue performance in any quarter was 90%, the named executive officer was eligible to receive 90% of his target bonus payment. From target achievement to the Bonus Plan funding cap of 200%, above-target amounts were funded based on equal increments of above-target revenue achievement (i.e., for every additional 1% of above-target performance, the Bonus Plan was funded by an additional 10%).

Additionally, in order for the bonus for the fourth quarter of fiscal 2008 to be funded, Sun had to achieve 8% GAAP operating income in that quarter.

Bonus Plan Results for Fiscal 2008. The actual results from the Bonus Plan in fiscal 2008 are as follows:

 

FY08

Quarter

  

Measure

   Target   Achievement   Level of Achievement    Performance/
Quarterly Funding

Q1

   Operating Income Revenue    $199M
$3,314M
  $262M
$3,219M
  Above Target
Below Target
   114%

Q2

   Operating Income Revenue    $341M
$3,651M
  $451M
$3,615M
  Above Target
Below Target
   116%

Q3

   Operating Income Revenue    $223M
$3,477M
  $130M
$3,264M
  Below Target
Below Target
     47%

Q4

   Operating Income Revenue    $570M
$4,050M
  $267M
$3,771M
  Below Target
Below Target
       0%
   8% Operating Income Threshold    8%   2%   Below Target   
   Annual Strategic Goals(1)    Confidential   Achieved   Above Target   

Total Annual Funding

       52%

 

(1)   While the annual strategic goals were achieved, the corresponding funding was not paid as the revenue and operating targets for the fourth quarter of fiscal 2008 were not met.

While the LDCC may exercise discretion regarding cash bonus awards for the fourth quarter, including discretion relating to each executive officer’s individual performance for the year, all of the executive officers, including the CEO, received cash bonus awards based solely on the formula funding results prescribed by the operating income and revenue performance measures, with no additional discretionary adjustments to ensure compliance with Section 162(m) of the Internal Revenue Code (the “Code”).

 

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Other Cash Compensation. The LDCC may award discretionary bonuses in order to recognize outstanding individual performance or assist in the retention of key talent. No such awards were made in fiscal 2008.

Long-Term Incentives.

Options, Performance-Based Restricted Stock Units and Restricted Stock Units. The LDCC provides our executive officers with long-term incentive awards through grants of stock options, performance-based restricted stock units and restricted stock units. Each of the three equity vehicles serves a particular purpose in supporting Sun’s long-term compensation strategy:

 

Plan

  

Description

  

Why It Is Used

Stock Options

  

•   Stock options provide the opportunity to purchase shares at a fixed price (exercise price), allowing the recipient to benefit from increases in stock price from the date of grant.

 

•   Options typically have a four-year vesting period to encourage a long-term perspective and to encourage key employees to remain at Sun.

 

•   All options granted to executive officers to date have an exercise price equal to the fair market value of Sun’s common stock on the date of the grant.

  

•   Directly align executive and stockholder interests.

 

•   Provide the opportunity to purchase and maintain an equity interest in Sun and to share in the appreciation of the value of the stock.

 

•  Represent performance-based and at-risk compensation, because the executive does not receive any benefit unless the stock price rises after the date of grant.

 

•  Provide a direct incentive for future performance.

Performance-Based Restricted Stock Units (“PRSUs”)   

•   For awards to the named executive officers:

 

•   If threshold performance for the measures are not achieved in the first year following the date of grant of the award, the entire award is forfeited. If threshold performance is achieved, but it is less than target performance, a prorated award will be provided (see “Structure of the PRSU Plan”).

 

•   If the threshold performance level is achieved in the first year following the date of grant of the award, then 25% of the award vests on the date the LDCC confirms that the criteria has been met, which is typically during the first quarter of the following fiscal year. The remaining 75% of the award vests at a rate of 25% per year over the subsequent three years, subject to the recipient’s continued employment.

 

•   Additionally, Mr. Grantham also had a separate long-term sales incentive such that, if certain performance measures were achieved each year for three years, then one-third of the award would vest each year over the three years.

  

•   Support pay-for-performance philosophy and retention efforts.

 

•   Link compensation to Sun performance for key financial metrics of growth and profitability.

 

•   Less dilutive to stockholders than stock options.

Restricted Stock

Units (“RSUs”)

  

•   RSUs vest subject to the participant’s continued employment for a specified period.

 

•   For fiscal 2008, RSUs were awarded on a limited basis.

  

•   Support retention and succession planning.

 

•   Provide a direct incentive for future performance.

 

•   Useful in recruiting new executives to Sun.

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Determination of Awards. The LDCC is responsible for determining who should receive awards, when the awards should be made, the exercise/purchase price per share and the number of shares to be granted for each award, in accordance with Sun’s Policy with Respect to the Granting of Equity Compensation (as described below). The LDCC considers grants of long-term incentive awards to the named executive officers each fiscal year.

Criteria Considered in Determining the Amount of Equity-Based Compensation Awards. The LDCC considers several factors in its determination as to the amount of equity awards to grant to our named executive officers, including: market practice, projected business needs, the projected impact of stockholder dilution and the associated compensation expense that will be included in our financial statements. Based on these considerations, the LDCC has progressively reduced the number of shares granted under Sun’s equity compensation plans, other than the Sun’s 1990 Employee Stock Purchase Plan, from 33 million in fiscal 2000 (representing a 4.2% annual use of shares as a percentage of common shares outstanding) to 17.9 million in fiscal 2008 (representing 2.4% of common shares outstanding). However, due to the recent decline in Sun’s stock price, we expect we will need to modestly increase the number of shares granted in fiscal 2009 in an effort to provide a competitive level of equity-based compensation.

Equity Awards Granted in Fiscal 2008. During fiscal 2008, the number of shares subject to equity awards granted to Sun’s executive officers was determined by the LDCC in their subjective review based on the executive compensation review, Sun’s performance and individual performance. Stock options and performance-based restricted stock units were the primary long-term incentive vehicles used, and each represented approximately 50% of the recipient’s total long-term incentive award value. The value for each component was estimated according to its fair market value (as determined under the Black-Scholes valuation model for stock options, and face value for performance-based restricted stock units). Based on the valuation of our fiscal 2008 long-term incentive awards, a performance-based restricted stock units award of one share was equivalent in value to an option to purchase 2.3 shares.

PRSU Plan Performance Measures. The performance measures for the performance-based restricted stock units granted in fiscal 2008 included annual revenue and operating income, each representing 50% of the potential funding (the “PRSU Plan”). As previously noted in our discussion of the financial measures for the Bonus Plan, we believe these measures were key determinants of Sun’s financial performance and ability to build long-term stockholder value.

Structure of the PRSU Plan. The PRSU Plan structure is summarized in the table below:

 

Measure

   Performance
Range
   Funding
Range

Operating Income (50%)

   78% – 125%    0% – 150%

Revenue (50%)

   97.6% – 104%    0% – 150%

Total

      0% – 150%

 

   

Operating Income: The threshold was set to 78% of target performance for fiscal 2008, equating to 40% growth over the prior fiscal year. The funding cap for the PRSU Plan was 125% of target funding. Potential payments were structured such that, at below target performance, the corresponding funding percentage was less than the actual performance percentage (i.e., if the operating income achievement result was less than 78%, the PRSU Plan funded at 66% of target funding). On-target performance resulted in 100% of target funding. Achievement above the performance target resulted in accelerated funding (i.e., if the operating income achievement result was 110%, the PRSU Plan funded at 125% of target funding).

 

   

Revenue: The threshold was set to 97.6% of target performance for fiscal 2008. The performance level at which the PRSU Plan funding was capped was 104%. Potential payments were structured such that, at below target performance, the corresponding funding percentage was less than the actual performance percentage (i.e., if the revenue achievement result less than was 97.6%, the PRSU Plan funded at 66% of target funding). On-target performance resulted in 100% of target funding. Achievement above the plan performance target resulted in accelerated funding (i.e., if the revenue achievement result was 102%, the PRSU Plan funded at 125% of target funding).

Performance Results for the PRSUs Granted in Fiscal 2008. The performance measure results were as follows:

 

Measure

   Target    Achievement    Level of
Achievement
   Performance/ 
Funding 
 

Operating Income

   $ 731M    $ 667M    Below Target    66 %

Revenue

   $ 14.49B    $ 13.88B    Below Threshold    0 %

Total Funding (% of target award)

            33 %

 

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The performance for the revenue goal was below the threshold performance level, and, therefore, no funding was provided from this measure. The resulting performance for the operating income goal was above the threshold, but below target, and, therefore, the funding level was 66% for this measure. Given that each measure represented 50% of the target potential performance-based restricted stock units award, the total funding for the PRSU Plan was 33%. The resulting award vests as to 25% in July 2008, with the remaining 75% vesting at a rate of 25% annually in each of July 2009, 2010 and 2011, subject to the executive officer’s continued service to Sun.

Deferred Compensation Plan. The 2005 U.S. Non-Qualified Deferred Compensation Plan (the “Deferred Compensation Plan”) is a voluntary, non-tax qualified, deferred compensation plan available to our directors, executive officers, including each of the named executive officers, and other members of our management staff. The Deferred Compensation Plan was adopted by Sun to enable these individuals to save for retirement by deferring a portion of their current compensation. Under the Deferred Compensation Plan, compensation may be deferred until termination or other specified dates chosen by the participants. In addition, deferred amounts may be credited with earnings based on investment choices made available by Sun’s 401(k) Investment Plan Committee for this purpose. Information regarding named executive officer participation in the Deferred Compensation Plan can be found in the “Non-Qualified Deferred Compensation for Fiscal 2008” table and the accompanying narrative.

Severance and Related Benefits. Executive officers, including each of the named executive officers except Messrs. Grantham and Ryan, are eligible to receive benefits under certain conditions in accordance with Sun’s Change of Control Agreement (the “Change of Control Agreement”), U.S. Vice President Involuntary Separation Plan (the “Separation Plan”) and U.S. Vice President Severance Plan (the “Severance Plan”). In the case of Messrs. Grantham and Ryan, each a U.K. resident, they are eligible to receive benefits under certain conditions pursuant to the terms of a letter agreement as described in the section “Potential Payments Upon Termination or Change of Control.” Based on a letter agreement with Mr. Lehman, he was not eligible for benefits under the Severance Plan until February 22, 2008, but is eligible for such benefits at this time. Mr. Grantham did not receive benefits from any of the aforementioned plans upon his termination from Sun as voluntary separation is not an eligible separation condition for benefits under these plans.

The Change of Control Agreements are intended to (i) support retention and succession planning; (ii) support decisions that are in the best interests of Sun’s stockholders; and (iii) manage related expenses. Should a change of control occur, benefits will be paid after a “double trigger” event as described in “Potential Payments Upon Termination or Change of Control.” Benefits are capped at the amounts prescribed under Sections 280G and 4999 of the Code, and Sun does not provide payments to reimburse its executive officers for additional taxes incurred (gross-ups) in connection with a change of control. Benefit levels have been set to be competitive with comparator group practices.

Benefits under the Separation Plan are intended to consider the employee’s service to Sun and the expected length of time to secure subsequent employment if an executive is involuntarily terminated without cause. The Separation Plan also assists in attracting executives to Sun.

The Severance Plan is primarily used for retirement transitions or when there is mutual agreement between Sun and the employee to discontinue the employment relationship.

To determine the level of benefits to be provided under each form of severance policy, the LDCC considered the circumstances of each type of severance, the impact on stockholders and market practices. All of Sun’s severance programs provide for a lump-sum payment at the time of the triggering event.

The benefits are triggered upon separation from employment and, solely in the case of the Change of Control Agreement, for “Good Reason” following a change of control (as described in the sections “Pension Benefits for Fiscal 2008” and “Potential Payments Upon Termination or Change of Control”). This assists with recruiting and retaining executives, whose roles generally tend to be less secure relative to other positions within organizations.

Perquisites. Sun’s executive officer benefit programs are substantially the same as for all other eligible employees, with the exception of a few items noted below:

The CEO is permitted to use corporate leased or chartered aircraft for personal use on a reasonable basis. The LDCC believes that given the time requirements of the CEO role, reasonable personal use of aircraft efficiently maximizes the CEO’s time with personal matters. The LDCC reviews the usage and expense associated with the CEO’s personal use of corporate aircraft on a quarterly basis to ensure usage is appropriate and does not exceed reasonable amounts. Mr. Schwartz did not use corporate leased or chartered aircraft for personal use in fiscal 2008.

 

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Additionally, the CEO is provided with a driver for commuting to and from Sun’s office. This allows the CEO to efficiently use what may otherwise be long commute times for conducting business, and provides added security.

To ensure the security of the CEO and his family, Sun provides a home security system for the CEO’s home.

If incurred, expenses related to the personal use of aircraft and the maintenance of the CEO’s home security systems are imputed as income to the CEO, and the additional tax liabilities are paid by Sun through a gross-up payment.

Each of the named executive officers are provided with reimbursement for an annual physical to help ensure the health and well being of those serving in a corporate leadership capacity.

Mr. Ryan, a resident of the U.K., is currently on an international assignment program. Consistent with Sun’s executive international assignee policy, Sun provided Mr. Ryan with a housing allowance, a car allowance and relocation support at levels beyond Sun’s standard international assignee policy. Tax equalization is also provided to Mr. Ryan as part of his international assignment program. Sun’s Tax Equalization Policy is designed to provide fair and consistent tax treatment for employees on an international assignment to ensure that such employees will be kept in a similar economic position as if they had remained a Sun employee in their home country. Details on the expenses associated with these benefits are provided in the “All Other Compensation Table for Fiscal 2008.”

Mr. Grantham, a resident of the U.K., was required to travel frequently to Sun’s headquarters in California. Accordingly, Sun provided Mr. Grantham with a car allowance and a per diem expense benefit. The tax liabilities associated with these benefits are paid by Sun through a gross-up payment. Details on the expenses associated with these benefits are provided in the “All Other Compensation Table for Fiscal 2008.”

Chief Executive Officer Compensation for Fiscal 2008

As previously described, the LDCC believes that CEO compensation should be driven by performance and should be largely at-risk. Accordingly, the majority of our CEO’s target cash compensation for fiscal 2008 was awarded in the form of quarterly performance-based cash bonuses. With respect to overall compensation, in an effort to encourage sustained long-term performance and alignment with stockholder interests, the significant majority of our CEO’s total target compensation is provided through awards of stock options and performance-based restricted stock units.

Results for Fiscal 2008 under the Leadership of Mr. Schwartz that the LDCC Considered in Assessing Fiscal 2008 Compensation and Determining Fiscal 2009 Compensation Levels.

The LDCC considered the following factors, among other things, in assessing Mr. Schwartz’s fiscal 2008 compensation and determining Mr. Schwartz’s fiscal 2009 compensation:

 

   

Improved gross margins by 1.3 percentage points, decreased total R&D and SG&A expenses by $70 million, improved non-GAAP net income per share on a diluted basis by 21% and increased cash flow from operations by $371 million;

 

   

Acquisition of MySQL, a key strategic component of Sun’s open source stack; and

 

   

Continued acceleration of global demand for open source offerings in the operating system, database and storage product lines.

In addition to the financial and strategic accomplishments listed above, the LDCC also considered Sun’s performance in relation to its annual fiscal 2008 operating income and revenue goals when determining Mr. Schwartz’s compensation. The results for revenue and operating income in fiscal 2008 were below target; however, this is believed to be in part due to the state of the U.S. economy, which represents a significant portion of the Company’s revenue.

CEO Base Salary. Based on Towers Perrin’s compensation review, and the position of Mr. Schwartz’s salary compared to the market reference point, Mr. Schwartz’s annual base salary was unchanged from the prior fiscal year, remaining at $1 million in fiscal 2008. Subsequently, during the compensation review for fiscal 2009, the LDCC determined that Mr. Schwartz’s base salary will remain unchanged for fiscal 2009. The LDCC based its decision on the updated results of Towers Perrin’s compensation study and in considering Sun’s overall results for fiscal 2008.

CEO Bonus Payments. Mr. Schwartz was eligible for a target annual cash bonus of 200% of his base salary, which could be increased or decreased depending on the achievement of the performance measures described above in the section “Quarterly Performance-Based Cash Bonuses.”

 

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Based on Sun’s financial performance for fiscal 2008, the cash bonus payments that Mr. Schwartz earned were as follows (with no discretion exercised by the LDCC to increase or decrease the formula amounts as the payments were deemed to be appropriate given the performance results):

 

Fiscal Quarter

 

Aggregate Financial

Measure Performance

 

CEO

Bonus Target

 

CEO

Actual Bonus Amount

1

  114%   $200,000   $228,000

2

  116%   $500,000   $580,000

3

  47%   $500,000   $235,000

4

  0%   $800,000   $0

Total Fiscal 2008

  52%   $2.0 million   $1.04 million

For fiscal 2009, the LDCC determined that the bonus structure for Mr. Schwartz will have an annual measurement period, versus the quarterly measurement period used in fiscal 2008, and will incorporate financial and non-financial measures. This change will enable us to better align compensation with longer-term goals of the CEO and Sun.

CEO Long-Term Incentive Awards. Mr. Schwartz received stock options in July 2007 and performance-based restricted stock units in September 2007. The number of stock options (500,000) and performance-based restricted stock units (200,000) granted to Mr. Schwartz were based upon the comparator group’s equity compensation values and mix of compensation components in accordance with the executive compensation review conducted by Towers Perrin, as well as the LDCC’s estimate of Mr. Schwartz’s potential for future contributions to Sun’s success.

Following the partial achievement of the performance targets as described above, 66,000 of Mr. Schwartz’s performance-based restricted stock units were ultimately awarded and 25% of these performance-based restricted stock units vested in July 2008. The remaining amounts will vest at a rate of 25% annually in each in July 2009, 2010 and 2011, subject to Mr. Schwartz’s continued service to Sun.

CFO and Other Named Executive Officer Compensation for Fiscal 2008

CFO Compensation. Mr. Lehman was re-hired to the position of CFO and Executive Vice President, Corporate Resources in February 2006. At that time, Mr. Lehman’s base salary was set at $700,000, his annual cash bonus target was set at 100% of base salary and he was awarded an option to purchase 125,000 shares and 87,500 restricted stock units, which vest over a three-year period. Mr. Lehman has not received any additional long-term inventive awards since that time. In April 2007, Mr. Lehman’s base salary was increased from $700,000 to $800,000 in recognition of the improvements in Sun’s financial operations, and in an effort to position his total compensation at a more competitive level. Mr. Lehman received cash bonuses totaling $417,200 under the Bonus Plan for fiscal 2008.

Named Executive Officer Cash Compensation. Upon reviewing the salaries and annual incentive targets for Messrs. Papadopoulos, Fowler and Grantham, the LDCC determined that their overall cash compensation was appropriately positioned in relation to market rates, and, therefore, none of these executive officers received a salary or target annual cash bonus increase in fiscal 2008. The annual base salaries for each of Messrs. Papadopoulos, Fowler and Grantham remained at $600,000, $575,000 and $746,280, respectively, while their annual cash bonus targets remained at 90%, 85% and 100% of base salary, respectively. Messrs. Papadopoulos, Fowler and Grantham received bonuses totaling $281,610, $254,884, and $389,185, respectively, under the Bonus Plan for fiscal 2008.

For the majority of fiscal 2008, prior to being promoted to his current role, Mr. Ryan led Sun’s sales organization for the Americas region, and participated in Sun’s sales incentive programs. Mr. Ryan’s total cash compensation was comprised of four components, including (i) a base salary of $476,186; (ii) a variable, sales incentive-based (“IB Plan”) compensation opportunity of $214,006 at target performance; (iii) shorter-term, strategic sales incentive (“SPIF”) opportunities with an aggregate payout range of $57,500 to $180,000 depending on performance; and (iv) a quarterly bonus opportunity pursuant to the Quarterly Bonus Plan of $178,340 at target performance.

Upon his promotion to the role of Executive Vice President, Global Sales and Services in June 2008, Mr. Ryan’s total cash compensation structure was changed to an annual base salary of $656,487 and a target opportunity under the Bonus Plan equal to 150% of his base salary. In his new role, Mr. Ryan is no longer eligible for the IB Plan or SPIF described above. Mr. Ryan earned a cash retention payment of $325,000 in July 2008, and will also be eligible for cash retention payments of $325,000 in July 2009 and July 2010, subject to Mr. Ryan’s continued service to Sun. The retention payments were offered to Mr. Ryan to ensure continuity in our leadership as Mr. Ryan adjusts to his new position.

 

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To arrive at the appropriate levels of compensation for Mr. Ryan’s new role, management conducted an analysis of the comparator group’s top sales roles. The comparator group consisted of the same companies previously mentioned, except that Motorola was removed and VM Ware was added, to better reflect Sun’s current product and labor market competitors. The analysis was reviewed by the LDCC’s consultant, Towers Perrin, and deemed reasonable for the role. The LDCC reviewed the recommendation and approved Mr. Ryan’s compensation structure in July 2008. Mr. Ryan’s total cash compensation was positioned to be close to the average of the comparator group. The majority of Mr. Ryan’s cash compensation is in the form of at-risk pay, which aligns with Sun’s philosophy of pay-for-performance.

Named Executive Officer Long-Term Incentive Awards. Messrs. Papadopoulos, Fowler and Grantham were awarded options to purchase 112,500, 106,250 and 125,000 shares, respectively, each granted at fair market value and vesting ratably over four years. They were each awarded 56,250, 43,750 and 75,000 performance-based restricted stock units, respectively, in September 2007. The long-term incentive amounts for Messrs. Papadopoulos, Fowler and Grantham were based on the comparator group’s equity compensation values and mix of compensation components in accordance with the executive compensation review, conducted by Towers Perrin, as well as Mr. Schwartz’s assessment of each individual’s potential contribution to Sun. Following the achievement of the performance targets as described above, 33% of the performance-based restricted stock units listed above were ultimately awarded, with 25% of this amount vesting in July 2008. The remaining amounts will vest at a rate of 25% annually in each of July 2009, 2010 and 2011, subject to each named executive officers’ continued service to Sun.

Upon Mr. Grantham’s separation from Sun, all of his unvested stock options, restricted stock units and performance-based restricted stock units were forfeited. Pursuant to Sun’s standard employment benefits for U.K. employees, Mr. Grantham received a payment equal to one-month’s base salary plus all unpaid, accrued vacation upon his termination of employment.

While in his prior role during fiscal 2008, Mr. Ryan received an option to purchase 15,525 shares granted at fair market value and 6,750 restricted stock units, each vesting ratably over four years. These awards were based on our annual analysis of competitive stock award practices for all levels within Sun, which we used to create stock award ranges. Mr. Ryan’s awards were within the range stated for his level at that time the awards were granted. Additionally, to further drive performance in the Americas region, and to assist in retaining Mr. Ryan, in January 2008, the LDCC granted Mr. Ryan performance-based restricted stock units with performance measures based on revenue performance for the Americas region in each of fiscal 2008, 2009 and 2010 (the “Americas PRSU Award”). Mr. Ryan was eligible to vest as to 25,000 restricted stock units annually upon the LDCC’s determination that the performance criteria for such year was achieved. However, in July 2008, the LDCC canceled the Americas PRSU Award, as the performance measures for the award were no longer appropriate for Mr. Ryan’s new role. No payments were made under the Americas PRSU Award.

Upon his promotion to the role of Executive Vice President, Global Sales and Services in June 2008, Mr. Ryan was offered 174,000 restricted stock units, which were awarded on July 30, 2008, and 174,000 performance-based restricted stock units, which were awarded on August 29, 2008. As mentioned in the discussion of Mr. Ryan’s cash compensation above, to arrive at the appropriate levels of stock-based compensation for the role, management conducted an analysis of the comparator group’s top sales roles. The LDCC’s consultant, Towers Perrin, reviewed the analysis and recommendation, and deemed it reasonable for the role. The LDCC reviewed the recommendation and approved Mr. Ryan’s stock-based compensation structure in July 2008. Mr. Ryan’s proposed stock-based compensation value was positioned between the average and the 75th percentile of the comparator group to aid in retention, to provide a meaningful long-term incentive that is aligned with stockholder perspectives and to align with Sun’s philosophy of pay-for-performance. The proposed performance-based restricted stock units component of Mr. Ryan’s compensation for fiscal 2009 is structured similarly to the PRSU Plan for other named executive officers as described above.

Given Sun’s performance in fiscal 2008, the LDCC believes that the compensation for these named executive officers was appropriate and consistent with our objectives.

Other Compensation Policies

Stock Ownership Guidelines. The LDCC believes that it is in the best interests of stockholders for Sun’s executive officers and directors to own Sun stock. See “Corporate Governance — Stock Ownership Guidelines” for a description of the stock ownership guidelines applicable to Sun’s executive officers, including the named executive officers and directors.

Hedging. We do not permit any employee, including officers or directors, to enter into any derivative or hedging transaction on Sun stock (including short-sales, market options, equity swaps, etc.).

 

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Sun’s Policy with Respect to the Granting of Equity Compensation. Equity awards may be granted by either the LDCC or our CEO. Our CEO only has authority to grant equity awards to employees below the level of Vice President and in an amount not to exceed 12,500 shares per optionee. The Board does not grant equity awards, although the LDCC regularly reports its activity, including approvals of awards, to the Board.

Timing of Grants. Equity awards are typically and predominantly made at regularly scheduled, predetermined meetings of the LDCC. These meetings are usually scheduled shortly after the release of quarterly earnings, in which case, financial performance and potentially other material items have already been disclosed publicly, prior to the granting of any awards. On limited occasions, awards may be granted during an interim meeting of the LDCC, which generally are scheduled for the purpose of approving compensation packages for newly hired or promoted executives. The timing of the interim meetings, if they occur, is driven by the activity underscoring the need for the meeting, not the stock price. Awards granted by the CEO occur on the same dates as the regularly scheduled LDCC meetings, except as otherwise required by law with respect to employees outside the U.S. The CEO does not have discretion to determine grant dates.

Stock Option Exercise Price. The exercise price of a newly granted stock option (i.e., not an option assumed or granted in relation to an acquisition) is the closing price on NASDAQ on the date of grant, which is the date of the LDCC meeting.

Recovery of Compensation for Restatements and Misconduct. We do not have a general policy regarding the recovery of compensation following a restatement; however, our 2007 Omnibus Incentive Plan provides that:

 

   

Award agreements under the Plan may require participants to forfeit gains from awards if they breach the terms of any employment agreement, non-competition agreement, agreement prohibiting the solicitation of employees or clients or confidentiality obligation;

 

   

We may annul an award if a participant is terminated for cause, as that term is defined in the Plan; and

 

   

If we are required to restate our financial statements as a result of our material non-compliance with financial statement reporting requirements based on misconduct, our CEO, our CFO and certain other participants will be required to reimburse amounts they received pursuant to awards under the Plan during the 12-month period following the original filing of the financial statements.

Additional Tax Considerations

IRC Section 162m. The LDCC considers the implications of Section162(m) of the Code in setting and determining executive compensation. This section precludes a public corporation from taking a tax deduction for individual compensation in excess of $1 million for its chief executive officer or any of its three other highest compensated officers (based upon recent IRS interpretations). This section also provides for certain exemptions to this limitation, specifically compensation that is performance based within the meaning of Section 162(m).

In order to qualify certain forms of equity based compensation, such as stock options and performance-based restricted stock units, as performance-based compensation, amendments to the 1990 Long-Term Equity Incentive Plan were submitted to and approved by our stockholders at our 1994 annual meeting and the 2007 Omnibus Incentive Plan is structured to provide 162(m) qualification to stock options and other forms of performance-based awards.

Additionally, with respect to bonuses granted by the LDCC to executive officers, the LDCC approved the Bonus Plan to qualify under Section 162(m). Our stockholders initially approved the Bonus Plan at our 2001 annual meeting. Periodically, the Bonus Plan must be re-qualified by submitting it to our stockholders for approval. The Bonus Plan was submitted to and re-approved by our stockholders at the 2006 annual meeting.

The LDCC however, reserves the right to award compensation to our executive officers in the future that may not qualify as deductible compensation under Section 162(m). The LDCC will, however, continue to consider all elements of the cost to Sun of providing such compensation, including the potential impact of Section 162(m).

IRC Section 409A. Sun has reviewed its compensation programs that are subject to Section 409A of the Code and has, and will continue to, ensure compliance with this tax rule. Compensation programs are structured in accordance with 409A to ensure tax-efficient use of Sun’s resources.

 

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Summary Compensation Table for Fiscal 2008

The following table provides information regarding the compensation and benefits earned during fiscal 2008 by:

 

   

Our CEO;

 

   

Our CFO;

 

   

The three other most highly compensated individuals who were serving as executive officers of Sun at the end of fiscal 2008; and

 

   

One former executive officer who would have been among Sun’s five most highly compensated executive officers had he remained as an executive officer through the end of the fiscal year.

We refer to these individuals as our named executive officers. For more information, please refer to “Compensation Discussion and Analysis,” as well as “Narrative Description of Summary Compensation Table and Grants of Plan-Based Awards in Last Fiscal Year.”

 

Name and

Principal Position

  Year   Salary
($)(1)
    Bonus
($)
  Stock
Awards

($)(2)
  Option
Awards

($)(2)
  Non-Equity
Incentive Plan
Compensation
($)(1)(3)
    Change in
Pension
Value

($)(4)
  All Other
Compensation
($)(5)
  Total
($)

Jonathan I. Schwartz

Chief Executive Officer
and President

  FY08   $ 1,000,000       $ 2,306,385   $ 3,275,289   $ 1,043,000     $ 18,833   $ 58,366   $ 7,701,873
  FY07     1,000,000         7,582,647     2,776,603     2,507,000       20,559     246,569     14,133,378
                 

Michael E. Lehman

Chief Financial Officer and Executive Vice President, Corporate Resources

  FY08     800,000         902,147     396,566     417,200       1,208,000     6,608     3,730,521
  FY07     716,667         315,683     479,602     919,100       122,000     9,454     2,562,506
                 
                 

John F. Fowler(6)

Executive Vice President, Systems Group

  FY08     575,000         295,119     675,106     254,884       31,663     6,800     1,838,572
                 
                 

Donald C. Grantham(7)

Former Executive Vice President, Global Sales and Services

  FY08     995,040         195,617     348,288     389,185           141,390     2,069,520
  FY07     748,449         1,663,763     607,631     938,180           149,696     4,107,719
                 
                 

Gregory M. Papadopoulos

Executive Vice President, Research and Development and Chief Technology Officer

  FY08     600,000         479,428     965,230     281,610       60,072     6,800     2,393,140
  FY07     600,000         554,353     818,947     676,890       51,143     8,431     2,709,764
                 
                 

Peter Ryan(6)

Executive Vice President, Global Sales and Services

  FY08     489,281 (8)       203,228     84,336     277,834 (9)         624,242     1,678,921
                 
                 

 

(1)   Each of the named executive officers, with the exception of Messrs. Grantham and Ryan, also contributed a portion of his salary to Sun’s 401(k) Plan. Messrs. Grantham and Ryan each contributed a portion of his salary to the Sun Limited Retirement and Death Benefits Scheme (the “UK Retirement Scheme”), which is available to all of the employees of Sun Limited, our United Kingdom subsidiary.

 

(2)   Reflects the dollar amount recognized for financial statement reporting purposes with respect to fiscal 2008 and fiscal 2007, respectively, in compliance with FAS 123R, for stock options, restricted stock, restricted stock units and performance-based restricted stock units granted in fiscal 2003 through 2008. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information, refer to Note 14 of the Notes to Consolidated Financial Statements in our Form 10-K. These amounts reflect Sun’s accounting expense for these awards and do not correspond to the actual value that will be recognized by the named executive officers with respect to these awards. See the “Grants of Plan-Based Awards in Fiscal 2008” Table for information on awards made in fiscal 2008.

 

(3)   Except in the case of Mr. Ryan, reflects amounts earned under the Bonus Plan in fiscal 2008 and fiscal 2007, respectively. For Mr. Ryan, reflects the amounts earned under the (i) Quarterly Bonus Plan; (ii) variable, sales incentive-based compensation opportunity; and (iii) shorter-term, strategic sales incentive opportunity.

 

(4)  

Except in the case of Messrs. Grantham and Ryan, the amounts in this column represent solely the increase from fiscal 2007 to fiscal 2008 and from fiscal 2006 to fiscal 2007, respectively, in the actuarial present value of the named executive officer’s accumulated benefit under the Severance Plan. Messrs. Grantham and Ryan are not eligible to participate in the Severance Plan because they are British citizens. Amounts of such increases are measured from the plan measurement date used for financial reporting purposes in our 2007 financial statements to the plan measurement date used for financial reporting

 

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purposes in our 2008 financial statements. Mr. Lehman was not eligible to receive benefits under the Severance Plan until February 2008. Accordingly, the change in pension value for Mr. Lehman reflects the fact that he was eligible for $0 benefits in fiscal 2007. See “Executive Compensation — Pension Benefits Table” and accompanying narrative for more information.

 

(5)   Details regarding the various amounts included in this column are provided in the following table entitled “All Other Compensation Table for Fiscal 2008.”

 

(6)   Compensation data for Messrs. Fowler and Ryan is only included for fiscal 2008 as neither Mr. Fowler nor Mr. Ryan were named executive officers during fiscal 2007.

 

(7)   Amounts for Mr. Grantham were paid in Pounds Sterling and converted to U.S. Dollars using the exchange rate reported in the Wall Street Journal on the last trading day of fiscal 2008. According to the Wall Street Journal, the conversion rate of Pounds Sterling to U.S. Dollars on June 30, 2008 (the last trading day of fiscal 2008) was 1.9954:1.

 

(8)   Mr. Ryan began a U.S.-based assignment on July 1, 2007. Pursuant to Sun’s International Assignment Tax Equalization Policy (the “Tax Equalization Policy”), Mr. Ryan agreed to a reduction of his salary based on an estimated hypothetical tax. The estimated hypothetical tax is an amount which approximates Mr. Ryan’s periodic estimated tax deductions calculated with reference to compensation, benefits, deductions and credits otherwise available to Mr. Ryan had he remained in the U.K. The estimated hypothetical tax adjustment related to base salary for Mr. Ryan for fiscal 2008 was $276,903. As a result, Mr. Ryan’s base salary was reduced by $276,903, resulting in the actual payment of an aggregate of $212,378 for base salary in fiscal 2008. Mr. Ryan’s base salary was paid in Pounds Sterling and converted to U.S. Dollars using the exchange rate as reported by Reuters on the last day of the fiscal quarter in which such amounts were paid.

 

(9)   Pursuant to the Tax Equalization Policy, the estimated hypothetical tax adjustment related to amounts earned by Mr. Ryan for fiscal 2008 pursuant to the Quarterly Bonus Plan, the IB Plan and the SPIF was $101,184. As a result, Mr. Ryan’s compensation related to such amounts was reduced by $101,184, resulting in the actual payment of an aggregate of $176,650 for amounts earned pursuant to the Quarterly Bonus Plan, the IB Plan and the SPIF in fiscal 2008. These amounts were paid to Mr. Ryan in Pounds Sterling and converted to U.S. Dollars using the exchange rate reported in the Wall Street Journal on the last trading day of fiscal 2008. According to the Wall Street Journal, the conversion rate of Pounds Sterling to U.S. Dollars on June 30, 2008 (the last trading day of fiscal 2008) was 1.9954:1.

 

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All Other Compensation Table for Fiscal 2008

The components of the amounts shown in the “All Other Compensation” column of the Summary Compensation Table for fiscal 2008 are displayed in detail in the following table.

 

Name

  Year   Personal
Use of
Aircraft

($)(1)
  Home
Security
System

($)
  Car and
Driver/
Car
Allowance

($)(2)
    Housing
and
Relocation

($)(3)
  Per Diem
Payments

($)(4)
    Tax
Gross-Up
Payments

($)(5)
  401(k) Plan or
UK Retirement
Scheme
Contributions

($)(6)
    Other
($)(7)
  Total
($)

Jonathan I. Schwartz

  FY08   $   $   $ 52,066     $   $     $   $ 6,300     $   $ 58,366
  FY07     94,271     48,821     47,197                 48,518     7,762           246,569

Michael E. Lehman

  FY08                                 6,608           6,608
  FY07                                 9,454           9,454

John F. Fowler(8)

  FY08                                 6,800           6,800

Donald C. Grantham

  FY08             22,081 (9)         27,601 (9)     24,285     67,423 (9)         141,390
  FY07     7,155         24,014           30,018       23,020     65,489           149,696

Gregory M. Papadopoulos

  FY08                                 6,800           6,800
  FY07                                 8,431           8,431

Peter Ryan(8)

  FY08             25,232 (9)     143,988           402,501     48,508 (9)     4,013     624,242

 

(1)   The value of personal aircraft usage was determined based upon its incremental cost to Sun, including: (i) hourly fees, related fuel expenses, other miscellaneous expenses and taxes paid to NetJets; and (ii) an estimate of the cost to Sun of the disallowance of corporate tax deductions for personal aircraft usage.

 

(2)   Represents (i) the cost of a car and driver to transport Mr. Schwartz to and from work for security and efficiency reasons, as required by Sun; (ii) a car allowance of approximately $2,000 per month paid to Mr. Grantham; and (iii) a car allowance of approximately $2,000 per month and a parking allowance of $1,232 paid to Mr. Ryan.

 

(3)   Represents a housing allowance of $5,500 per month and a utility allowance of $200 per month paid to Mr. Ryan. Also represents an aggregate of $75,588 in expenses related to Mr. Ryan’s relocation from the U.K. to the U.S., including relocation fees, resettlement and destination fees, home leave adjustments, shipping fees, temporary living expenses and relocation travel.

 

(4)   Represents per diem payments to Mr. Grantham of approximately $2,500 per month, which Sun paid Mr. Grantham because he spent approximately 40% of his time working for Sun in the United States, while his permanent residence was located in Britain.

 

(5)   Represents tax gross-up payments relating to the income imputed to (i) Mr. Schwartz in connection with his personal use of corporate aircraft and the cost of installation of his home security system; (ii) Mr. Grantham in connection with his personal use of corporate aircraft and per diem payments; and (iii) Mr. Ryan in connection with his U.S.-based assignment.

 

(6)   Except for Messrs. Grantham and Ryan, represents 401(k) matching contributions, which are available to all of our regular employees who are on our U.S. payroll. Under our 401(k) plan, matching contributions are capped at $6,800 per calendar year. For Messrs. Grantham and Ryan, represents contributions by Sun to the UK Retirement Scheme.

 

(7)   Represents additional compensation related to Mr. Ryan’s U.S.-based assignment, including insurance services, tax preparation services and certain U.K. taxes reimbursable by Sun. These amounts were paid to Mr. Ryan in Pounds Sterling and converted to U.S. Dollars using the exchange rate as reported by Reuters on the last day of the fiscal quarter in which such amounts were paid.

 

(8)   Compensation data for Messrs. Fowler and Ryan is only included for fiscal 2008 as neither Mr. Fowler nor Mr. Ryan were named executive officers during fiscal 2007.

 

(9)   Amounts for Messrs. Grantham and Ryan were paid in Pounds Sterling and converted to U.S. Dollars using the exchange rate reported in the Wall Street Journal on the last trading day of fiscal 2008. According to the Wall Street Journal, the conversion rate of Pounds Sterling to U.S. Dollars on June 30, 2008 (the last trading day of fiscal 2008) was 1.9954:1.

 

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Grants of Plan-Based Awards in Fiscal 2008

The following table sets forth certain information regarding grants of plan-based awards to each of our named executive officers during fiscal 2008. For more information, please refer to “Compensation Discussion and Analysis.”

 

               Estimated Future Payouts Under
Non-Equity Incentive Plan

Awards(1)
         Estimated Future Payouts
Under Equity Incentive Plan

Awards
                            
Name   Type   Grant
Date
  Threshold
($)
 

Target

($)

  Maximum
($)
  Actual
Payouts
Under
Non-Equity
Incentive
Plan
Awards
($)(2)
    Threshold
(#)
  Target
(#)
    Maximum
(#)
 

Actual
Payouts
Under
Equity
Incentive
Plan
Awards

   

All Other
Stock
Awards:
Number of
Securities
Underlying
Options

(#)

 

All Other
Option
Awards:
Number of
Securities
Underlying
Options

(#)

    Exercise
or Base
Price of
Option
Awards
($)
 

Grant
Date Fair
Value

($)(3)

Jonathan I. Schwartz

  PRSU   09/04/07   $   $   $   $     66,000   200,000     300,000   66,000 (4)         $   $ 4,399,460
  Option   07/31/07                                   500,000 (5)     20.40     4,585,000
  Q1 Bonus       131,000     200,000     400,000     228,000                                            
  Q2 Bonus       327,500     500,000     1,000,000     580,000                                            
  Q3 Bonus       327,500     500,000     1,000,000     235,000                                            
  Q4 Bonus       524,000     800,000     1,600,000                                                
    Total:         1,310,000     2,000,000     4,000,000     1,043,000                                            

Michael E. Lehman

  Q1 Bonus       52,400     80,000     160,000     91,200                                             
  Q2 Bonus       131,000     200,000     400,000     232,000                                            
  Q3 Bonus       131,000     200,000     400,000     94,000                                            
  Q4 Bonus       209,600     320,000     640,000                                                
    Total:         524,000     800,000     1,600,000     417,200                                            

John F. Fowler

  PRSU   09/04/07                     14,438   43,750     65,625   14,438 (4)               962,382
  Option   07/31/07                                   106,250 (5)     20.40     974,313
  Q1 Bonus       32,013     48,875     97,750     55,718                                            
  Q2 Bonus       80,033     122,188     244,375     141,738                                            
  Q3 Bonus       80,033     122,188     244,375     57,428                                            
  Q4 Bonus       128,053     195,500     391,000                                                
    Total:         320,132     488,751     977,500     254,884                                            

Donald C. Grantham

  PRSU   09/04/07                     24,750   75,000     112,500   (7)               1,649,798
  Option   07/31/07                                   125,000 (7)     20.40     1,146,250
  Q1 Bonus(6)       48,881     74,628     149,256     85,076                                            
  Q2 Bonus(6)       122,203     186,570     373,140     216,421                                            
  Q3 Bonus(6)       122,203     186,570     373,140     87,688                                            
  Q4 Bonus(6)       195,526     298,512     597,025                                                
    Total:         488,813     746,280     1,492,561     389,185                                            

Gregory M. Papadopoulos

  PRSU   09/04/07                     18,563   56,250     84,375   18,563 (4)               1,237,348
  Option   07/31/07                                   112,500 (5)     20.40     1,031,625
  Q1 Bonus       35,370     54,000     108,000     61,560                                            
  Q2 Bonus       88,425     135,000     270,000     156,600                                            
  Q3 Bonus       88,425     135,000     270,000     63,450                                            
  Q4 Bonus       141,480     216,000     432,000                                                
    Total:         353,700     540,000     1,080,000     281,610                                            

Peter Ryan

  PRSU   01/29/08                     37,500   75,000     75,000   (8)               1,271,175
  RSU   11/14/07                       6,750 (9)                     134,993
  Option   11/14/07                                   15,525 (10)     20.00     127,771
  Q1 Bonus(6)       11,681     17,834     35,668     20,331                                            
  Q2 Bonus(6)       29,203     44,585     89,170     51,718                                            
  Q3 Bonus(6)       29,203     44,585     89,170     20,955                                            
  Q4 Bonus(6)       86,214     131,624     263,248                                                
  Q1-Q2 SPIF(11)(12)       20,000         80,000                                                
  Q3-Q4 SPIF(11)(13)       37,500         100,000                                                
  FY08 IB(6)(14)           197,606         184,830                                            
    Total:         213,801     436,234     657,256     277,834                                            

 

(1)   Except in the case of Mr. Ryan, the amounts in these columns reflect possible payouts with respect to each quarter in fiscal 2008 under the Bonus Plan. For Mr. Ryan, reflects the amounts earned under the (i) Quarterly Bonus Plan; (ii) IB Plan; and (iii) SPIF.

 

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(2)   The amounts in this column reflect the actual payouts with respect to each quarter in fiscal 2008. These amounts were paid within two months of the end of each quarter, and the total payout is reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table for fiscal 2008.

 

(3)   The amounts in this column represent the market value of stock options and performance-based restricted stock units, calculated in accordance with FAS 123R. For option awards, that number is calculated by multiplying the Black-Scholes value by the number of options awarded. For performance-based restricted stock units, that number is calculated by multiplying (x) the fair market value of our common stock on the date of grant less the per share purchase price by (y) the number of units awarded.

 

(4)   These are performance-based restricted stock units. Because certain performance conditions were satisfied in the first year, 33% of the target amount was awarded on July 30, 2008 (the “Date of Determination”), 25% of which vested upon the award date. The remaining 75% of the amount awarded vests at a rate of 25% per year commencing on the first anniversary of the Date of Determination, subject to the named executive officer’s continued employment with Sun. Because not all of the performance conditions were satisfied in the first year, 67% of the target amount was forfeited.

 

(5)   This is a nonstatutory stock option that vests at a rate of 20% per year over five years from the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(6)   Amounts for Messrs. Grantham and Ryan were paid in Pounds Sterling and converted to U.S. Dollars using the exchange rate reported in the Wall Street Journal on the last trading day of fiscal 2008. According to the Wall Street Journal, the conversion rate of Pounds Sterling to U.S. Dollars on June 30, 2008 (the last trading day of fiscal 2008) was 1.9954:1.

 

(7)   These awards were canceled as none of the vesting conditions had been met at the time of Mr. Grantham’s termination of employment.

 

(8)   In connection with Mr. Ryan’s promotion to Executive Vice President, Global Sales and Services, these performance-based restricted stock units were canceled on July 30, 2008 because the performance criteria related to these performance-based restricted stock units were tied to Mr. Ryan’s previous position.

 

(9)   These are restricted stock units that vest at a rate of 25% per year over four years from the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(10)   This is a nonstatutory stock option that vests at a rate of 25% per year over four years from the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(11)   A SPIF is a sales incentive that provides an opportunity for a sales representative on an incentive-based compensation plan (an “IB Plan”) to earn an additional level of compensation over and above his or her On-Target Earnings upon meeting a goal or series of goals defined within a given sales incentive. To be characterized as a SPIF, the sales incentive must be tied to a period of no more than one or two quarters in duration.

 

(12)   Mr. Ryan’s SPIF for the first half of fiscal 2008 supported Sun’s goals to overachieve revenue and margin goals for the Americas region in the first two quarters of fiscal 2008. Region revenue, region contribution margin and product booking targets were the performance measures for this SPIF. The SPIF did not have a target payout, as the SPIF was structured to pay out at six graduating levels ranging from $20,000 to $80,000. However, actual performance resulted in no payment pursuant to this SPIF.

 

(13)   Mr. Ryan’s SPIF for the last half of fiscal 2008 measured performance in relation to revenue and contribution goals for the Americas region in the last two quarters of fiscal 2008. The SPIF did not have a target payout, as the SPIF was structured to pay out at four graduating levels ranging from $37,500 to $100,000. However, actual performance resulted in no payment pursuant to this SPIF.

 

(14)   Prior to moving into his new role on June 2, 2008, Mr. Ryan’s target pursuant to his IB Plan represented 30% of his “On-Target Earnings.” On-Target Earnings represents the combination of base salary plus variable compensation (i.e., the IB Plan) that an employee may earn annually, assuming continued employment and performance at assigned target levels of performance. In other words, 30% of Mr. Ryan’s On-Target Earnings was at risk. Prior to moving into his new role on June 2, 2008, Mr. Ryan’s target pursuant to the IB Plan was $214,006. The target and actual amounts were prorated to reflect his new role after that date. Mr. Ryan’s IB Plan utilized five (5) performance measures – a revenue metric for each of our four (4) product areas (Systems, Storage, Software and Services), as well as a regional margin metric. In addition, the IB Plan allowed for an additional payout if a volume goal was achieved. Although amounts under Mr. Ryan’s IB Plan are paid and reconciled against draws after the end of each quarter, the reconciliation is based on annual goals and criteria. If there is a deficit at the end of a quarter, the deficit amount is normally carried forward and reconciled with the aggregate IB Plan earnings in subsequent quarters. Mr. Ryan had a deficit after the end of the fourth quarter of fiscal 2008 in the amount of $8,165. Therefore, Mr. Ryan actually received aggregate payouts of $192,995 in connection with his IB Plan in fiscal 2008. Sun will recover the excess amount paid to Mr. Ryan before the end of fiscal 2009.

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

Employment Agreements

Except in the case of Mr. Ryan, we have not entered into employment agreements with any of the named executive officers. Each of the named executive officers is an at-will employee, except for Mr. Ryan. Although Mr. Ryan is currently on a U.S.-based assignment, as an employee of our U.K. subsidiary, Mr. Ryan is subject to the Sun Microsystems Ltd. Written Statement of Terms and Conditions of Employment (the “U.K. Employment Terms”). The U.K. Employment Terms require either party to give at least one month’s written notice of termination to the other party or such greater length of notice by Sun to Mr. Ryan as required by statute depending on the length of Mr. Ryan’s service.

Performance-Based Vesting Conditions

Please refer to “Compensation Discussion and Analysis — Elements of Compensation — Quarterly Performance-Based Cash Bonuses” and “— Performance Metrics and Results for the PRSUs Granted in Fiscal 2008” for a discussion of performance measures applicable to the Bonus Plan and the performance-based restricted stock units granted during fiscal 2008.

 

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Outstanding Equity Awards At Fiscal 2008 End

The following table provides information on the current holdings of stock options, restricted stock awards, restricted stock unit awards and performance-based restricted stock unit awards by our named executive officers as of June 30, 2008. This table includes unexercised and unvested stock options, unvested restricted stock awards and restricted stock units, as well as performance-based restricted stock units with performance conditions that had not yet been satisfied. The market value of the shares set forth under the “Stock Awards” column was determined by multiplying the number of unvested or unearned shares by the fair market value of our common stock on June 30, 2008, the last trading day of fiscal 2008.

 

     Option Awards        Stock Awards
Name   Grant
Date
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1)
   

Equity
Incentive
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)

 

Option
Exercise
Price

($)

  Option
Expiration
Date
       Grant
Date
  Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
   

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($)

 

Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

(#)

   

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units or
Other Rights
That Have
Not Vested

($)

Jonathan I. Schwartz

  04/12/00   17,500         $ 160.0000   04/12/10       07/28/05   12,500 (2)   $ 136,000       $             —
  06/13/00   7,500           180.1252   06/13/10       09/29/06           100,000 (3)     1,088,000
  04/18/01   50,000           74.3200   04/18/11       09/04/07           200,000 (4)     2,176,000
  11/07/01   18,750           50.3600   11/07/11                      
  11/07/01   18,750           50.3600   11/07/11                      
  03/19/02   50           36.5600   03/19/12                      
  05/02/02   50,000           25.8000   05/02/12                      
  07/25/02   75,000           14.8000   07/25/12                      
  07/23/03   100,000   25,000         15.4000   07/23/13                      
  04/30/04   200,000   50,000         15.6000   04/30/14                      
  07/29/04   120,000   80,000         15.1600   07/29/14                      
  07/28/05   90,000   135,000         15.4000   07/28/15                      
  04/27/06   200,000   300,000         19.8000   04/27/16                      
  07/31/07     500,000         20.4000   07/31/17                      
    Total:   947,550   1,090,000                         12,500       136,000   300,000       3,264,000

Michael E. Lehman

  02/22/06   62,500   62,500 (5)       17.2000   02/22/16       02/22/06   43,750 (6)     476,000        
    Total:   62,500   62,500                         43,750       476,000        

John F. Fowler

  04/18/01   2,000           74.3200   04/18/09       07/28/05   4,124 (2)     44,869        
  09/27/01   2,500           31.6400   09/27/09       07/27/06           28,125 (7)     306,000
  11/07/01   6,250           50.3600   11/07/09       09/04/07           43,750 (4)     476,000
  11/07/01   6,250           50.3600   11/07/09                      
  03/19/02   50           36.5600   03/19/10                      
  03/19/02   1,250           36.5600   03/19/10                      
  07/25/02   2,000           14.8000   07/25/10                      
  07/25/02   6,720           14.8000   07/25/10                      
  05/21/03   7,500           16.8000   05/21/11                      
  11/13/03   5,000   1,250         16.8320   11/13/11                      
  07/29/04   45,000   30,000         15.1600   07/29/12                      
  07/28/05   30,000   45,000         15.4000   07/28/13                      
  07/27/06   25,000   100,000         17.0400   07/27/14                      
  07/31/07     106,250         20.4000   07/31/17                      
    Total:   139,520   282,500                         4,124       44,869   71,875       782,000

 

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     Option Awards        Stock Awards
Name   Grant
Date
  Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
    Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1)
   

Equity
Incentive
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)

 

Option
Exercise
Price

($)

  Option
Expiration
Date
       Grant
Date
  Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
   

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

($)

 

Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested

(#)

   

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units or
Other Rights
That Have
Not Vested

($)

Donald C. Grantham

  10/11/00   7,500            203.7500   10/11/08                  
  04/18/01   5,000           74.3200   04/18/09                  
  06/13/01   5,000           65.0000   06/13/09                  
  09/27/01   3,750           31.6400   09/27/09                  
  11/07/01   5,000           50.3600   11/07/09                  
  11/07/01   5,000           50.3600   11/07/09                  
  03/19/02   50           36.5600   03/19/10                  
  03/19/02   5,000           36.5600   03/19/10                  
  03/19/02   12,500           36.5600   03/19/10                  
  05/14/02   12,500           28.2800   05/14/10                  
  05/21/03   1,000           16.8000   05/21/11                  
  05/21/03   2,250           16.8000   05/21/11                  
  11/13/03   2,500           16.8320   11/13/11                  
  09/17/04   3,000           15.7600   09/17/12                  
  01/27/05   7,500           16.4800   01/27/13                  
  04/28/05   12,500           13.7600   04/28/13                  
  04/27/06   25,000           19.8000   04/27/16                  
    Total:   115,050                                    

Gregory M. Papadopoulos

  04/20/99   25,000           50.1252   04/20/09       07/28/05   4,124 (2)   44,869      
  04/12/00   12,919           160.0000   04/12/10       07/27/06         46,875 (7)   510,000
  04/18/01   27,921           74.3200   04/18/11       09/04/07         56,250 (4)   612,000
  11/07/01   9,802           50.3600   11/07/11                  
  11/07/01   11,196           50.3600   11/07/11                  
  03/19/02   31           36.5600   03/19/12                  
  05/02/02   31,743           25.8000   05/02/12                  
  07/25/02   9,886           14.8000   07/25/12                  
  07/23/03   79,831     19,957       15.4000   07/23/13                  
  07/29/04   60,000     40,000       15.1600   07/29/14                  
  07/28/05   30,000     45,000       15.4000   07/28/15                  
  07/27/06   25,000     100,000       17.0400   07/27/16                  
  07/31/07       112,500       20.4000   07/31/17                  
    Total:   323,329     317,457                       4,124     44,869   103,125     1,122,000

Peter Ryan

  07/27/06   5,000     15,000 (8)     17.0400   07/27/14       07/27/06         12,500 (9)   136,000
  11/02/06   2,625     10,500       21.3200   11/02/14       11/02/06         5,625 (10)   61,200
  11/14/07       15,525       20.0000   11/14/15       11/14/07         6,750 (11)   73,440
                      01/29/08         75,000 (12)   816,000
    Total:   7,625     41,025                             99,875     1,086,640

 

(1)   Unless otherwise indicated, the total shares subject to these stock options vest at a rate of 20% per year over five years from the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(2)   The unvested shares subject to this restricted stock award vest as to 50% on each of July 28, 2008 and July 28, 2009, subject to the named executive officer’s continued employment with Sun.

 

(3)   The unvested shares subject to these performance-based restricted stock units vest as to 50% on each of April 27, 2009 and April 27, 2010, subject to the named executive officer’s continued employment with Sun.

 

(4)   These are performance-based restricted stock units. Because certain performance conditions were satisfied in the first year, 33% of the amount shown in the table was awarded on July 30, 2008, 25% of which vested upon the award date. The remaining 75% of the amount awarded vests at a rate of 25% per year commencing on the first anniversary of the award date, subject to the named executive officer’s continued employment with Sun. Because not all of the performance conditions were satisfied in the first year, 67% of the amount shown in the table was forfeited.

 

(5)   The unvested shares subject to this stock option vest on February 22, 2009, subject to the named executive officer’s continued employment with Sun.

 

(6)   The unvested shares subject to this restricted stock units award vest on February 22, 2009, subject to the named executive officer’s continued employment with Sun.

 

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(7)   The unvested shares subject to these restricted stock units vest as to 33% on each of July 27, 2008, July 27, 2009 and July 27, 2010, subject to the named executive officer’s continued employment with Sun.

 

(8)   The unvested shares subject to this stock option vest as to 25% on each of the second, third and fourth anniversary of the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(9)   The unvested shares subject to these restricted stock units vest as to 50% on each of January 27, 2009 and July 27, 2011, subject to the named executive officer’s continued employment with Sun.

 

(10)   The unvested shares subject to these restricted stock units vest as to 50% on each of May 2, 2009 and November 2, 2011, subject to the named executive officer’s continued employment with Sun.

 

(11)   The unvested shares subject to these restricted stock units vest at a rate of 25% per year over four years from the date of grant, subject to the named executive officer’s continued employment with Sun.

 

(12)   In connection with Mr. Ryan’s promotion to Executive Vice President, Global Sales and Services, these performance-based restricted stock units were canceled on July 30, 2008 because the performance criteria related to these performance-based restricted stock units were tied to Mr. Ryan’s previous position.

Option Exercises and Stock Vested for Fiscal 2008

The following table sets forth the number of shares acquired and the value realized upon the exercise of stock options and the vesting of restricted stock awards, restricted stock units and performance-based restricted stock units during fiscal 2008 by each of the named executive officers.

 

Name

   Number of Shares
Acquired on
Exercise

(#)
   Value Realized on
Exercise

($)(1)
   Number of Shares
Acquired on
Vesting

(#)
   Value Realized on
Vesting

($)(2)

Jonathan I. Schwartz

      $    106,250    $ 1,918,713

Michael E. Lehman

           43,750      850,382

John F. Fowler

           11,438      231,392

Donald C. Grantham

   59,800      224,124    82,563      1,643,660

Gregory M. Papadopoulos

           17,688      359,302

Peter Ryan

   5,000      18,150        

 

(1)   Value realized on exercise is based on the fair market value of our common stock on the date of exercise minus the exercise price and does not necessarily reflect proceeds actually received by the named executive officer.

 

(2)   Value realized on vesting is based on the fair market value of our common stock on the vesting date and does not necessarily reflect the proceeds actually received by the named executive officer.

Pension Benefits for Fiscal 2008

The following table provides information concerning retirement plan benefits for each of our named executive officers and Mr. McNealy under Sun’s Severance Plan. For additional information regarding other benefits provided upon retirement of the named executive officers and Mr. McNealy, please refer to “Potential Payments Upon Termination or Change of Control.”

 

Name

  

Plan Name

   Number of
Years
Credited
Service

(#)(1)
   Present
Value of
Accumulated
Benefit

($)(2)
   Payments
During
Last Fiscal

Year
($)

Jonathan I. Schwartz

  

Sun Microsystems, Inc.

U.S. Vice President Severance Plan

   18.5    $ 113,933    $   —

Michael E. Lehman

  

Sun Microsystems, Inc.

U.S. Vice President Severance Plan

   16.7      1,208,000     

John F. Fowler

  

Sun Microsystems, Inc.

U.S. Vice President Severance Plan

   17.9      175,866     

Donald C. Grantham(3)

               

Gregory M. Papadopoulos

  

Sun Microsystems, Inc.

U.S. Vice President Severance Plan

   13.8      298,182     

Peter Ryan(3)

               

Scott G. McNealy

  

Sun Microsystems, Inc.

U.S. Vice President Severance Plan

   26.3      1,138,192     

 

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(1)   Represents the number of years of service credited to the participant under the respective plan, computed as of the same pension plan measurement date used for financial statement purposes pursuant to our 2008 audited financial statements. Mr. Schwartz’s years of service include credit for his four years of service at Lighthouse Design, where he worked prior to Sun’s acquisition of that company in 1996. Mr. Lehman’s years of service reflect credit for his service with Sun prior to his re-hiring in February 2006. Although Mr. Lehman agreed to forego benefits under the Severance Plan for two years after his re-hiring, Mr. Lehman is now eligible for such benefits.

 

(2)   Pursuant to the requirements of the SEC, amounts represent the actuarial present value of the named executive officer’s accumulated benefit under the applicable plan, computed as of the same pension plan measurement date used for financial statement reporting purposes with respect to our fiscal 2008 audited financial statements.

 

(3)   Prior to his termination, Mr. Grantham was not eligible to participate in the Severance Plan because he was not a U.S. citizen. Mr. Ryan is not eligible to participate in the Severance Plan because he is not a U.S. Citizen.

Narrative Disclosure to Pension Benefits Table

Under the Severance Plan, which is not a conventional defined benefit plan, the current named executive officers are entitled to retirement benefits, subject to certain exceptions, when (i) they are at least 55 years of age; (ii) they have at least five full years of service; and (iii) their age plus their years of service equal at least 65 (collectively, “Retirement”). Benefits are paid in one lump sum six months from the participant’s termination of service and include notification benefits and severance benefits.

Notification benefits are not conditioned upon the execution of a release and waiver agreement and include:

 

   

The right to remain employed for 16 weeks following termination and to continue to receive his or her Pay (as defined above under “Narrative Disclosure to Pension Benefits Table”) during that period; and

 

   

The right to receive Sun-paid healthcare benefits for 16 weeks.

Severance benefits are conditioned upon the execution of a release and waiver agreement and include:

 

   

A payment composed of 32 weeks of Pay and COBRA premiums; and

 

   

A payment composed of four weeks of Pay and COBRA premiums for each Year of Service, subject to a maximum number of 32 weeks of Pay and COBRA premiums.

Additional benefits include 15 months of acceleration of stock options.

“Pay” is defined as base salary, not including bonuses or other non-base compensation. A “Year of Service” for purposes of the Severance Plan means a full or partial year of service at Sun prior to the employment termination date. For rehired employees, prior service at Sun will be counted if the prior service period exceeded the period when the executive was not employed by Sun. Years of Service generally include up to seven years of service credit for service with a predecessor employer that was acquired by Sun.

Other than Mr. Lehman, none of the participating named executive officers nor Mr. McNealy were eligible to receive these benefits on June 30, 2008 because they did not satisfy the “normal retirement age” criteria as of such date.

 

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Non-Qualified Deferred Compensation for Fiscal 2008

The following table sets forth information regarding the participation by the named executive officers in Sun’s Deferred Compensation Plan during fiscal 2008 and at fiscal year end.

 

Name

   Executive
Contributions
in Last FY

($)
    Registrant
Contributions
in Last FY

($)
    Aggregate
Earnings
in Last
FY

($)
    Aggregate
Withdrawals/
Distributions

($)
    Aggregate
Balance at
FYE

($)

Jonathan I. Schwartz

   $  —     $  —     ($45,408 )   $  —     $ 314,191

Michael E. Lehman

                          

John F. Fowler

                          

Donald C. Grantham(1)

                          

Gregory M. Papadopoulos

               (40,616 )           376,476

Peter Ryan(1)

                          

 

(1)   Prior to his termination, Mr. Grantham was not eligible to participate in the Deferred Compensation Plan because he was not a U.S. Citizen. Mr. Ryan is not eligible to participate in the Deferred Compensation Plan because he is not a U.S. Citizen.

Narrative Disclosure to Non-Qualified Deferred Compensation Table

The Deferred Compensation Plan allows the participating named executive officers to defer up to 60% of their annual base salary and incentive awards or commissions and 75% of their annual cash bonuses. The Deferred Compensation Plan also allows the participating members of the Board to defer up to 100% of their annual retainer.

Upon enrollment, participants select from a number of publicly available investment choices selected by Sun’s 401(k) Investment Plan Committee for this purpose, and the investment performance of the selected funds, net of fees, is thereafter credited to the participant’s account. Investment choices may be changed no more than once each month.

Participants can elect upon enrollment to receive up to one pre-retirement distribution per year beginning in the third year of plan participation. Although pre-retirement distributions can subsequently be postponed one time (subject to conditions) or canceled, participants cannot elect any additional pre-retirement distributions after initial enrollment, except in limited circumstances.

Benefits are generally payable to participants upon termination of employment either in a lump sum or in a series of annual payments (over five years, in the case of termination prior to retirement, or up to 15 years, in the case of a termination after retirement) as elected by the participants, subject to any requirements of Section 409A of the Code.

The Deferred Compensation Plan is the successor to an earlier plan that provided substantially similar benefits.

Potential Payments Upon Termination or Change of Control

Set forth below is a description of the plans and agreements that could result in potential payments to the named executive officers and Mr. McNealy in the case of their termination of employment and/or a change of control of Sun.

U.S. Vice President Severance Plan and U.S. Vice President Separation Plan

The Severance Plan and the Separation Plan (together with the Severance Plan, the “Severance Plans”) are available to Sun’s U.S. employees at the level of vice president or above, including Mr. McNealy and each of the named executive officers other than Messrs. Grantham and Ryan, who were not eligible to participate in the Severance Plans because neither of them is a U.S. citizen. The Severance Plans have a two-tier benefit structure. One set of benefits is available for vice presidents who are not on Sun’s Executive Leadership Team and another set of benefits is available for vice presidents and above who are members of our Executive Leadership Team. All of the named executive officers are members of our Executive Leadership Team.

The Severance Plan provides benefits upon an executive’s Retirement (as defined above under “Narrative Disclosure to Pension Benefits Table”) or Mutual Agreement. The Separation Plan provides benefits upon an executive’s termination as a result of a Workforce Reduction or Involuntary Termination.

 

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“Mutual Agreement” means that both the executive and Sun agree that the executive’s employment should terminate. A “Workforce Reduction” means the executive’s employment is involuntarily terminated because of the elimination or reduction of jobs due to a reorganization or otherwise. “Involuntary Termination” means the executive’s employment is terminated by Sun for any reason except “cause.” Cause is defined as misconduct as defined in Sun’s Misconduct Policy or documented unsatisfactory job performance.

Under the Severance Plans, in the event an executive officer’s employment is terminated as a result of Retirement, Mutual Agreement, a Workforce Reduction or Involuntary Termination, the executive will be entitled to receive notification benefits, without being required to work during the notification period. The notification benefits include:

 

   

The right to remain employed for 16 weeks following termination and to continue to receive his or her Pay (as defined above under “Narrative Disclosure to Pension Benefits Table”) during that period; and

 

   

The right to receive Sun-paid healthcare benefits for 16 weeks.

Under the Severance Plans, in the event an executive officer’s employment is terminated as a result of Retirement, Mutual Agreement, a Workforce Reduction or Involuntary Termination, the executive will also be entitled to receive severance benefits, which include:

 

   

A lump-sum payment composed of 32 weeks of Pay and COBRA premiums; and

 

   

A lump-sum payment composed of four weeks of Pay and COBRA premiums for each Year of Service (as defined above under “Narrative Disclosure to Pension Benefits Table”), subject to a maximum number of 32 weeks of Pay and COBRA premiums.

In addition, under the Separation Plan, in the event an executive officer’s employment is terminated as a result of a Workforce Reduction or Involuntary Termination, the executive will be entitled to receive six months of employment transition assistance. Moreover, under the Severance Plan, in the event an executive officer’s employment is terminated as a result of Retirement, the executive will be entitled to receive an additional 15 months of vesting for all outstanding stock options.

Amounts payable to an executive under the Severance Plans will be reduced to the extent the executive receives severance payments under the Worker Adjustment and Retraining Notice Act, or any other plan or agreement, including the Change of Control Agreements described below. In order to receive the severance benefits, the executive must sign a release and waiver agreement.

Change of Control Agreements

Each of our named executive officers has executed a Change of Control Agreement with Sun. Mr. McNealy has also signed a Change of Control Agreement.

Under the Change of Control Agreement, each beneficiary is eligible to receive the following benefits, should the beneficiary’s employment be (i) involuntarily terminated without cause or (ii) voluntarily terminated for Good Reason, within 12 months following a Change of Control and the beneficiary executes a separation agreement and release of claims:

 

   

An amount equal to two and one-half (2.5) times the beneficiary’s Annual Compensation (or, in the case of Messrs. Schwartz and McNealy, three (3) times his Annual Compensation);

 

   

Continuation of health benefits and group term life insurance for 24 months; and

 

   

Acceleration of vesting for all stock options, restricted stock awards, restricted stock units, performance-based restricted stock units and other long-term incentives held by the beneficiary.

The term “Annual Compensation” includes:

 

   

One year of the beneficiary’s base salary at the highest base salary rate the beneficiary received during the 12-month period preceding termination (the “Look-Back Period”);

 

   

100% of the greatest target bonus for which the beneficiary was eligible during the Look-Back Period; and

 

   

100% of the greatest target commission (if applicable) for which the beneficiary was eligible during the Look-Back Period.

 

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The term “Change of Control” means:

 

   

The stockholders approval of a merger or consolidation of Sun with another corporation resulting in a greater than 50% change in the total voting power of Sun or the surviving company immediately following such transaction;

 

   

The stockholders approval of a plan of liquidation of Sun;

 

   

The stockholders approval of an agreement for the sale by Sun of all or substantially all of Sun’s assets;

 

   

The acquisition by any person of securities of Sun representing 50% or more of the total voting power of Sun; or

 

   

Certain changes in the majority composition of the Board not initiated by the Board.

The term “Good Reason” means the occurrence of one of the following without the beneficiary’s express written consent:

 

   

A significant reduction of the beneficiary’s duties, position or responsibilities, or the beneficiary’s removal from such position and responsibilities, unless the beneficiary is offered a comparable position (i.e., a position of equal or greater organizational level, duties, authority, compensation, title and status);

 

   

A reduction by Sun in the beneficiary’s base compensation (base salary and target bonus) as in effect immediately prior to such reduction;

 

   

A material reduction by Sun in the kind or level of employee benefits to which the beneficiary is entitled immediately prior to such reduction with the result that the beneficiary’s overall benefits package is significantly reduced;

 

   

The beneficiary is requested to relocate (except for office relocations that would not increase the beneficiary’s one way commute by more than 50 miles); or

 

   

The failure of Sun to obtain the assumption of the Change of Control Agreement.

Grantham Letter Agreement

Mr. Grantham and Sun entered into a letter agreement on March 29, 2007 (the “Grantham Letter Agreement”), which provided Mr. Grantham with certain benefits should his employment be terminated in connection with a Workforce Reduction, his Retirement, Mutual Agreement, a Material Job Change or Involuntary Termination. Upon termination of his employment with Sun, Mr. Grantham was not eligible to receive any benefits pursuant to his letter agreement. Pursuant to Sun’s standard employment benefits for U.K. employees, Mr. Grantham received a payment equal to one-month’s base salary plus all unpaid, accrued vacation upon his termination of employment.

Ryan Letter Agreement

Mr. Ryan and Sun entered into a letter agreement on July 9, 2008 (the “Ryan Letter Agreement”), which provides Mr. Ryan with certain benefits should his employment be terminated because of Retirement, Mutual Agreement, a Material Job Change, a Workforce Reduction or Involuntary Termination. Pursuant to the Ryan Letter Agreement, the benefits are effective as of June 2, 2008, which is the date of Mr. Ryan’s promotion. Mr. Ryan is not entitled to any benefits pursuant to the Ryan Letter Agreement if he voluntarily terminates his employment, he is involuntarily terminated for cause or if he receives benefits under the Change in Control Agreement.

“Retirement” and “Mutual Agreement” are defined in the same manner as set forth in the Severance Plan. A “Workforce Reduction” and “Involuntary Termination” are defined in the same manner as set forth in the Separation Plan. A “Material Job Change” means Mr. Ryan’s job is re-leveled downward and Sun has determined, in its sole discretion, that such re-leveling constitutes a material job change. “Cause” means gross misconduct as described in Mr. Ryan’s statement of terms and conditions of employment or documented unsatisfactory job performance.

Under the Ryan Letter Agreement, in the event Mr. Ryan’s employment is terminated as a result of Retirement, Mutual Agreement, a Material Job Change, a Workforce Reduction or Involuntary Termination, Mr. Ryan will be entitled to receive notification pay and severance pay. Notification pay includes:

 

   

A lump sum cash payment composed of 16 weeks of Weekly Base Pay; and

 

   

Employment Transition Services.

Severance pay includes:

 

   

A lump-sum cash payment composed of 32 weeks of Weekly Base Pay and COBRA premiums; and

 

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A lump-sum payment composed of four weeks of Weekly Base Pay and COBRA premiums for each Year of Service, subject to a maximum number of 32 weeks of Weekly Base Pay and COBRA premiums.

“Weekly Base Pay” means Mr. Ryan’s base pay for a calendar week excluding car allowance, commissions, bonuses or any other non-base compensation. “Employment Transition Services” means career service assistance for 18 months.

In order to receive the severance pay, Mr. Ryan must sign a release and waiver agreement.

Tables

Except in the case of Mr. Ryan, for each of the current named executive officers and Mr. McNealy, the tables below estimate the amount of compensation that would be paid in the event of termination as a result of Retirement, Mutual Agreement, a Workforce Reduction or Involuntary Termination, in each case subject to the terms of the Severance Plans, and termination following a change of control, subject to the terms of the standard Change of Control Agreement. For Mr. Ryan, the tables below estimate the amount of compensation that would be paid in the event of termination as a result of Retirement, Mutual Agreement, a Material Job Change, a Workforce Reduction or Involuntary Termination, in each case subject to the terms of the Ryan Letter Agreement, and termination following a change of control, subject to the terms of the standard Change of Control Agreement. The amounts shown assume that each of the terminations was effective as of June 30, 2008 and take into account the Years of Service for each named executive officer and Mr. McNealy as of such date. Other than Mr. Lehman, none of the participating named executive officers or Mr. McNealy would have been eligible to receive retirement benefits under the Severance Plans or, in the case of Mr. Ryan, the Ryan Letter Agreement, had they retired as of June 30, 2008. “Health and/or Life Insurance” includes monthly Sun-paid or COBRA healthcare premiums, as applicable, and Sun-paid group life insurance premiums.

The price used for determining the value of accelerated equity was the closing price of Sun’s common stock on NASDAQ on June 30, 2008, the last business day of the fiscal year, less any applicable exercise price. Because the exercise price related to all outstanding, unvested options subject to the equity acceleration benefits under the Severance Plan and Change of Control Agreement exceeded the closing price of Sun’s common stock on June 30, 2008, there is no value attributable to our named executive officers and Mr. McNealy for such outstanding, unvested stock options in the tables below.

Mr. Grantham is not included in the tables because he was not serving as a named executive officer at the end of fiscal 2008. Payments received upon Mr. Grantham’s termination are discussed above under “Grantham Letter Agreement.”

Jonathan I. Schwartz

 

     Workforce Reduction or
Involuntary Termination
Under Separation Plan
   Mutual
Termination
Under
Severance
Plan
   Retirement
Under
Severance
Plan
    Termination Following
a Change of Control
Under Change of
Control Agreement
 

Pay

   $ 1,538,462    $ 1,538,462    $ 1,538,462     $ 9,000,000  

Health and/or Life Insurance Premiums

     25,468      25,468      25,468       24,736  

Career Transition Assistance

     3,660                  

Equity Acceleration

                     3,399,156  

Total

     1,567,590      1,563,930      1,563,930       12,423,892  

Michael E. Lehman

 

     Workforce Reduction or
Involuntary Termination
Under Separation Plan
   Mutual
Termination
Under
Severance
Plan
   Retirement
Under
Severance
Plan
    Termination Following
a Change of Control
Under Change of
Control Agreement
 

Pay

   $ 1,230,769    $ 1,230,769    $ 1,230,769     $ 4,000,000  

Health and/or Life Insurance Premiums

     25,468      25,468      25,468       24,936  

Career Transition Assistance

     3,660                  

Equity Acceleration

                     475,882  

Total

     1,259,897      1,256,237      1,256,237       4,500,818  

 

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John F. Fowler

 

     Workforce Reduction or
Involuntary
Termination Under
Separation Plan
   Mutual
Termination
Under
Severance
Plan
   Retirement
Under
Severance
Plan
    Termination Following
a Change of Control
Under Change of
Control Agreement
 

Pay

   $ 884,615    $ 884,615    $ 884,615     $ 2,659,375  

Health and/or Life Insurance Premiums

     25,468      25,468      25,468       24,768  

Career Transition Assistance

     3,660                  

Equity Acceleration

                     825,461  

Total

     913,743      910,083      910,083       3,509,604  

Gregory M. Papadopoulos

 

     Workforce Reduction or
Involuntary
Termination Under
Separation Plan
   Mutual
Termination
Under
Severance
Plan
   Retirement
Under
Severance
Plan
    Termination Following
a Change of Control
Under Change of
Control Agreement
 

Pay

   $ 923,077    $ 923,077    $ 923,077     $ 2,850,000  

Health and/or Life Insurance Premiums

     15,284      15,284      15,284       14,903  

Career Transition Assistance

     3,660                  

Equity Acceleration

                     1,166,580  

Total

     942,021      938,361      938,361       4,031,483  

Peter Ryan

 

     Retirement, Mutual Termination, Material
Job Change, Workforce Reduction or
Involuntary Termination Under Letter
Agreement
  

Termination Following a
Change of Control Under Change

of Control Agreement

 

Pay

   $ 706,986    $ 4,103,044  

Health and/or Life Insurance Premiums

     12,537      1,482  

Career Transition Assistance

     10,980       

Equity Acceleration

          1,085,833  

Total

     730,503      5,190,359  

Scott G. McNealy

 

     Workforce Reduction
or Involuntary
Termination Under
Separation Plan
   Mutual Termination
Under Severance Plan
   Retirement Under
Severance Plan
    Termination Following a
Change of Control
Under Change of
Control Agreement
 

Pay

   $ 1,538,462    $ 1,538,462    $ 1,538,462     $ 7,500,000  

Health and/or Life Insurance Premiums

     25,468      25,468      25,468       24,817  

Career Transition Assistance

     3,660                  

Equity Acceleration

                     1,971,511  

Total

     1,567,590      1,563,930      1,563,930       9,496,328  

 

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2008, the LDCC consisted of Stephen M. Bennett, M. Kenneth Oshman and P. Anthony Ridder. Each of the members of the LDCC during fiscal 2008 was an independent director, and none of them were our employees or former employees. During fiscal 2008, none of our named executive officers served on the compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on the LDCC.

RELATED PERSON TRANSACTIONS POLICY AND PROCEDURES

The Board has adopted a written Related Person Transactions Policy, that describes the procedures used to identify, review, approve and disclose, if necessary, any transaction or series of transactions in which: (i) Sun was, is or will be a participant; (ii) the amount involved exceeds $120,000; and (iii) a related person had, has or will have a direct or indirect material interest.

For purposes of the policy, a related person is one of the following:

 

   

A member of the Board;

 

   

A nominee for the Board;

 

   

An executive officer;

 

   

A person who beneficially owns more than 5% of Sun’s common stock (excluding any beneficial owner that reports its ownership on Schedule 13G with the SEC); or

 

   

Any immediate family member of any of the people listed above.

Under the policy, the related person is required to notify Sun’s corporate law group and provide them with information regarding the related person transaction. If the corporate law group determines that the proposed transaction is a related person transaction in which the related person’s interest is material, the Audit Committee must review the transaction for approval or disapproval. In determining whether to approve or disapprove a related party transaction, the Audit Committee shall consider all relevant facts and circumstances, including the following factors:

 

   

The benefits to Sun;

 

   

If the related person is a director, an immediate family member of a director or an entity in which a director is a partner, stockholder or executive officer, the impact on a director’s independence;

 

   

The availability of other sources for comparable products or services;

 

   

The terms of the transaction; and

 

   

If applicable, whether the terms are available to unrelated third parties or to employees generally.

No committee member shall participate in the review of a related person transaction if he or she is a related person or the related person is one of his or her family members.

Each of the following related person transactions shall be considered pre-approved by the Audit Committee, even if the aggregate amount involved exceeds $120,000:

 

   

Employment of executive officers;

 

   

Director compensation;

 

   

Certain specified transactions with other companies;

 

   

Certain charitable contributions by Sun;

 

   

Transactions where all stockholders receive proportional benefits;

 

   

Ordinary course business travel and expenses, advances and reimbursements; and

 

   

Indemnification payments.

Sun will disclose the terms of related person transactions in its filings with the SEC to the extent required.

 

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CERTAIN RELATED PERSON TRANSACTIONS

The Company has entered into indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which