Polaris Industries Inc.

2100 Highway 55

Medina, Minnesota 55340

763-542-0500

Fax: 763-542-0599

 

March 10, 2008

 

Dear Fellow Shareholder:

 

The Board of Directors of Polaris Industries Inc. joins me in extending a cordial invitation to attend our 2008 Annual Meeting of Shareholders which will be held at our corporate headquarters, 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, May 1, 2008 at 9:00 a.m. local time.

 

In addition to voting on the matters described in the accompanying Notice of Annual Meeting and Proxy Statement, we will review Polaris’ 2007 business and discuss our direction for the coming years. There will also be an opportunity, after conclusion of the formal business of the meeting, to discuss other matters of interest to you as a shareholder.

 

It is important that your shares be represented at the meeting whether or not you plan to attend in person. Please vote by returning your signed proxy card in the envelope provided or by using the telephone or Internet voting options indicated on the proxy card. If you do attend the meeting and desire to vote in person, you may do so even though you have previously sent a proxy.

 

We hope that you will be able to attend the meeting and we look forward to seeing you.

 

Sincerely,

 

 

Gregory R. Palen

Chairman of the Board

 

Enclosures

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340
March 10, 2008

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Polaris Industries Inc. will hold its 2008 Annual Meeting of Shareholders at its corporate headquarters located at 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, May 1, 2008. The meeting will begin at 9:00 a.m. local time. At the meeting, we will:

 

1. Elect the following directors:

 

 

2. Ratify the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2008.

 

3. Act on any other matters that may properly come before the meeting.

 

The Board recommends that shareholders vote FOR the director nominees named in the accompanying Proxy Statement. The Board recommends that shareholders vote FOR the ratification of the selection of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2008, as described in the Company’s accompanying Proxy Statement.

 

Only shareholders of record at the close of business on March 3, 2008 may vote at the Annual Meeting or any adjournment thereof.

 

By Order of the Board of Directors

 

 

 

Michael W. Malone
Vice President — Finance,
Chief Financial Officer and Secretary

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the meeting, we urge you to vote as soon as possible by telephone, Internet or mail.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE 2008 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 1, 2008.

 

The Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders, the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2007 and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 are available at www.proxydocs.com/pii.

 

TABLE OF CONTENTS

 

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340

PROXY STATEMENT

 

 

 

The following table sets forth certain information with respect to the beneficial ownership of the Company’s common stock as of February 14, 2008 by each person known to the Company who then beneficially owned more than 5% of the outstanding shares of common stock, each director of the Company, each nominee for director, each executive officer named in the Summary Compensation Table on page 37 and all current executive officers and directors as a group. As of February 14, 2008, there were 33,743,578 shares of common stock outstanding. Except as otherwise indicated, the named beneficial owner has sole voting and investment powers with respect to the shares held by such beneficial owner. The table also includes information with respect to common stock equivalents credited as of February 14, 2008 to the accounts of each director under the Company’s Deferred Compensation Plan for Directors that is described in this Proxy Statement under the heading “Corporate Governance — Director Compensation.”

 

 

 

 

 

Our Board of Directors has adopted Corporate Governance Guidelines, which may be viewed online on our website at www.polarisindustries.com or may be obtained in print by any shareholder who requests it. Under our Corporate Governance Guidelines, which adopt the current standards for “independence” established by the New York Stock Exchange (“NYSE”), a majority of the members of the Board of Directors must be independent as determined by the Board of Directors. In making its determination of independence, among other things, the Board of Directors must have determined that the director has no material relationship with Polaris either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with Polaris. The Board of Directors has determined that Ms. Clayton and Messrs. Caulk, Menard, Palen, Schreck, Van Dyke and Wiehoff are independent and Mr. Zona was independent during his term of service as a director. The Board of Directors has also determined that Mr. Baltins is independent for all purposes other than service on the Company’s Audit Committee because he is a member of one of the law firms that provides legal services to the Company. Mr. Tiller, our Chief Executive Officer, is not considered to be independent by the Board of Directors. Accordingly, a majority of our Board of Directors is considered to be independent. Additionally, all current members of our Audit, Compensation and Corporate Governance and Nominating Committees are considered to be independent.

 

The Company obtains certain engine design consulting services from Menard Competition Technologies and Menard Engineering Limited (collectively, the “MCT Companies”), wholly owned subsidiaries of Menard, Inc. The MCT Companies were selected as a design consultant by the Company’s engineering group after a competitive proposal process and review. The Board of Directors considered Mr. Menard’s status as a shareholder of Menard, Inc. in determining that he is independent.

 

We have also adopted a Code of Business Conduct and Ethics applicable to all employees, including our Chief Executive Officer, our Chief Financial Officer and all other senior executives, and the directors. A copy of the Polaris Code of Business Conduct and Ethics is available on our website at www.polarisindustries.com and in print to any shareholder who requests it.

 

Under our Corporate Governance Guidelines, a process has been established by which shareholders and other interested parties may communicate with members of the Board of Directors. Any shareholder or other interested party who desires to communicate with the Board of Directors, individually or as a group, may do so by writing to the intended member or members of the Board of Directors, c/o Corporate Secretary, Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota, 55340.

 

All communications received in accordance with these procedures will be reviewed initially by the office of our Corporate Secretary to determine that the communication is a message to our directors and will be relayed to the appropriate director or directors unless the Corporate Secretary determines that the communication is an advertisement or other promotional material. The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board of Directors or one or more of its committees and whether any response to the person sending the communication is appropriate.

 

During 2007, the full Board of Directors met five times, four of which were in person. Each of the in-person meetings was preceded and/or followed by an executive session of the Board of Directors without management in attendance, chaired by Mr. Palen. Each of our directors attended 75% percent or more of the meetings of the Board of Directors and any committee on which they served in 2007. The Board also acted through two written actions in 2007. The Company does not maintain a formal policy regarding the Board’s attendance at annual shareholder meetings; however, Board members are expected to regularly attend all Board meetings and meetings of the committees on which they serve. All members of the Board of Directors attended our 2007 Annual Meeting, except for John P. Wiehoff, who was appointed to the Board effective July 26, 2007.

 

The Board of Directors has designated four standing committees. The Audit Committee, the Compensation Committee, the Corporate Governance and Nominating Committee and the Technology Committee each operate under a written charter which is available on our website at http://www.polarisindustries.com and is also available in print to any shareholder who requests it. The current membership of each committee and its principal functions, as well as the number of times it met during fiscal 2007, are described below.

 

Audit Committee

 

 

Compensation Committee

 

 

Corporate Governance and Nominating Committee

 

 

Technology Committee

 

 

During 2007, the law firm of Kaplan, Strangis and Kaplan, P.A. (“KSK”) provided ongoing legal services to the Company and certain subsidiaries in connection with various matters. Andris A. Baltins, a member of the Board of Directors, is a member of that firm. Due to the nature of Mr. Baltin’s interest in KSK, disclosure of this relationship is not required under applicable SEC regulations. However, the relationship is periodically reviewed by the Corporate Governance and Nominating Committee and the Board of Directors. The level of fees paid by the Company to KSK for services rendered is not material to either the Company or to KSK and the Board of Directors has concluded that the relationship does not constitute a material relationship that would impair Mr. Baltin’s independence.

 

Polaris’ Related-Person Transactions Approval Policy, which is applicable to all directors, executive officers and five-percent shareholders of the Company and their respective immediate family members, prohibits “related-person transactions” unless approved or ratified by the Corporate Governance and Nominating Committee.

 

Matters considered to be a related-person transaction subject to the policy include:

 

 

The following are not considered to be related-person transactions subject to the policy:

 

 

Directors and executive officers are required to consult with Polaris’ General Counsel as to any questions of whether a transaction could be considered a related-person transaction. Additionally, each of Polaris’ directors and executive officers also completes a questionnaire on an annual basis designed to elicit information about any potential related-person transactions.

 

Any potential related-person transaction that is raised will be analyzed by the General Counsel, in consultation with management and with outside counsel, as appropriate, to determine whether the transaction or relationship constitutes a related-person transaction requiring compliance with the policy. The potential related-person transaction and the General Counsel’s conclusion and the analysis thereof is also to be reported to the chair of the Corporate Governance and Nominating Committee.

 

Matters that are concluded to be related-person transactions are to be submitted for approval by the Corporate Governance and Nominating Committee in accordance with consideration of the approval factors described below. The presentation to the Committee is to include a description of the participants, the terms of the transaction, the business purpose of the transaction, the benefits to Polaris and to the relevant director, executive officer or five-percent shareholder.

 

In determining whether to approve a related-person transaction, the Committee is to consider the following factors, among others, to the extent deemed relevant by the Committee to the related-person transaction:

 

 

Any related-person transaction that is not approved or ratified, as the case may be, shall be voided, terminated or amended, or such other actions shall be taken, in each case as determined by the Committee, so as to avoid or otherwise address any resulting conflict of interest.

 

All current members of the Compensation Committee are considered independent under our Corporate Governance Guidelines. No interlocking relationships exist between the Board of Directors or the Compensation Committee and the Board of Directors or compensation committee of any other company.

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers to file initial reports of ownership and reports of changes of ownership of the Company’s common stock with the SEC. Executive officers and directors are required to furnish the Company with copies of all Section 16(a) reports that they file. To the Company’s knowledge, based solely upon a review of the reports filed by the executive officers and directors during 2007 and written representations that no other reports were required, the Company believes that, during the year ended December 31, 2007, all filing requirements applicable to its directors, executive officers and 10% beneficial owners, if any, were complied with, except that the Company failed to timely file a Form 4 (i) for Mark E. Blackwell with respect to the disposition of 2,219 shares of common stock on April 30, 2007; and (ii) for Mark E. Blackwell with respect to the disposition of 2,552 shares of common stock on July 26, 2007.

 

The Board of Directors of the Company is divided into three classes. The members of one class are elected at each annual meeting of shareholders to serve three-year terms. The Class II directors currently serving on the Board, whose terms expire at the 2008 Annual Meeting, are Messrs. John R. Menard, Jr., R. M. (Mark) Shreck and William Grant Van Dyke. In addition, the Board of Directors appointed John P. Wiehoff as a Class III director, effective July 26, 2007, to fill the vacancy created by an increase in the number of directors from eight to nine. Mr. Wiehoff has consented to serve a one-year term, which will expire at the 2009 Annual Meeting when the term of all Class III directors will expire.

 

Upon the recommendation of the Corporate Governance and Nominating Committee of the Board, the Board of Directors proposes that John P. Wiehoff, be elected by the shareholders as a Class III director for a one-year term expiring in 2009. Mr. Wiehoff was appointed as a director of Polaris by the Board of Directors on July 26, 2007 upon the recommendation of the Corporate Governance and Nominating Committee. Mr. Gregory R. Palen, the non-executive Chairman of the Board of Directors, initially recommended that the Corporate Governance and Nominating Committee consider Mr. Wiehoff as a potential candidate for election to Polaris’ Board of Directors.

 

Upon the recommendation of the Corporate Governance and Nominating Committee of the Board, the Board of Directors also proposes that the following nominees, all of whom are currently serving as Class II directors, be elected as Class II directors for three-year terms expiring in 2011:

 

John R. Menard, Jr.

R. M. (Mark) Shreck

William Grant Van Dyke

 

The persons named in the enclosed proxy intend to vote your proxy for the election of each of the four nominees, unless you indicate on the proxy card that your vote should be withheld from any or all of the nominees. If you are voting by telephone or on the Internet, you will be told how to withhold your vote from some or all of the nominees. Each nominee elected as a director will continue in office until his or her successor has been elected, or until his or her death, resignation or retirement.

 

After the election of one Class III director and three Class II directors at the Annual Meeting, the Board will consist of nine directors, including five continuing directors whose present terms extend beyond this Annual Meeting (Classes I, II and III will each consist of three members). There are no family relationships between or among any executive officers or directors of the Company.

 

We expect each nominee standing for election as a Class II director or as a Class III director to be able to serve if elected. If any nominee is not able to serve, proxies will be voted in favor of the remainder of those nominated and may be voted for substitute nominees designated by the Board, unless an instruction to the contrary is indicated on the proxy card.

 

The Board of Directors unanimously recommends a vote FOR the election of these nominees as Directors.

 

The principal occupation and certain other information about the nominees and other directors whose terms of office continue after the Annual Meeting are set forth on the following pages.

 

 

The following discussion and analysis describes the Company’s compensation objectives and policies as applied to the following named executive officers (the “Executive Officers”):

 

 

The practice of the Compensation Committee is to meet in January of each year to: (i) establish the annual base salary and annual incentive compensation opportunity for each of the Executive Officers for the current year, (ii) determine the annual incentive compensation to be paid to each Executive Officer for services provided during the prior year, (iii) determine the payout, if any, to be made under the Company’s long-term incentive plan to employees of the Company, including the Executive Officers other than Mr. Tiller, for the three-year performance period ended on the immediately preceding December 31st (iv) establish plan targets and performance measures for the three-year performance period beginning on January 1 of the current year for long-term incentive plan participants, and (v) determine stock option and restricted share awards, if any, to be granted to Executive Officers.

 

This section is intended to provide a summary of the five primary components of actual compensation awarded to or earned by each Executive Officer during 2007 as reported in the compensation tables and accompanying narrative sections appearing on pages 25 to 48 of this Proxy Statement and other compensation decisions made by the Compensation Committee in January 2008.

 

Process — When making individual compensation decisions for Executive Officers, the Compensation Committee takes many factors into account. These factors include the individual’s performance; the performance of the Company overall; retention concerns; the individual’s tenure and experience with the Company and in his or her current position; the recommendations of management; the individual’s current and historical compensation; the Compensation Committee’s compensation philosophy; and comparisons to other comparably situated executive officers (both those of the Company and those of the Company’s peer group).

 

Base Salary — The Company targets the base cash compensation of its Executive Officers at the 50th percentile of the market based on survey results. In 2007, the base salaries of Messrs. Tiller at $750,000, Bjorkman at $285,000 and Corness at $275,000 were approximately at the target levels. The Company believed this to be appropriate given their respective experience, performance and tenure in position. Mr. Morgan’s base salary was $375,000 in 2007, which is lower than the target. However, Mr. Morgan has received significant base salary increases since assuming his current position in May 2005. Similarly, Mr. Malone’s base salary, at $350,000, was lower than target in 2007, but he has received significant base salary increases in recent years as he has gained experience as Chief Financial Officer of the Company. See the Summary Compensation Table on page 37 of this Proxy Statement for more detail.

 

In 2008, the base salary of Mr. Tiller will remain at $750,000 in accordance with the terms of his employment agreement. The Compensation Committee increased the base salaries of Messrs. Bjorkman and Corness for 2008 by 4% to $295,000 and $285,000, respectively, in order that their base salary continue to approximate targeted levels. The Compensation Committee determined that their individual performance did not warrant a significant increase or decrease from the target. The base salary of Mr. Morgan was increased by 7% to $400,000, bringing his base salary closer to the target. The Compensation Committee determined that Mr. Morgan’s increased experience as President and Chief Operating Officer and his individual performance warranted such an increase. Although Mr. Morgan’s base salary remains below target, the Company expects that with continued strong performance he will receive further increases over time. Mr. Malone’s base salary for 2008 was increased by 7% to $375,000 in order to bring his base salary to approximately the targeted level, reflecting the Compensation Committee’s view

that as an experienced Chief Financial Officer who has been a strong performer in that role for over ten years, Mr. Malone’s base salary should now be at least at the target level. See the Summary Compensation Table on page 37 of this Proxy Statement for more detail.

 

Annual Incentive Awards under Senior Executive Annual Incentive Compensation Plan — Annual incentive awards for Executive Officers are subject to the Senior Executive Annual Incentive Compensation Plan. This plan was implemented in 2004 and was designed and is administered so that the annual incentive compensation paid to participants will be tax deductible under Section 162(m) of the Internal Revenue Code and the plan has been approved by the Company’s shareholders. In administering the plan, the Compensation Committee has determined a targeted incentive opportunity for each Executive Officer expressed as a percentage of base salary. On an annual basis, the Compensation Committee establishes performance metrics that must be achieved to qualify for varying levels of incentive compensation and determines the actual amount of incentive compensation to be paid for performance.

 

The Compensation Committee has established the following target annual incentive opportunities under the plan for each Executive Officer (expressed as a percentage of base salary):

 

 

These target annual incentive opportunities are based on the respective executive’s level of responsibility, consistent with comparable positions in the market when considering total cash compensation. These targets reflect the Compensation Committee’s view that the compensation opportunities of Messrs. Tiller and Morgan, who have the greatest overall responsibility for Company performance, should be weighted more heavily towards performance based compensation. These target annual incentive opportunities have remained unchanged for at least 10 years, other than for Mr. Morgan, who began to serve in the newly created position of President and Chief Operating Officer in 2005.

 

At the beginning of a year, the Compensation Committee establishes a “matrix” of the maximum level of annual incentive compensation that may be paid to individual Executive Officers under the plan at various levels of Company financial performance for the year. In the four years since inception of the plan, the annual performance targets have required year over year growth of earnings from continuing operations per diluted share of between 10% and 16% in order for the Executive Officers to qualify for an award equal to their target annual incentive opportunities. The financial operating targets are aligned with the Company’s internal operating plan for the year. In order for the Executive Officers to qualify to receive an annual incentive award at least at the level of their target annual incentive opportunity, Polaris must achieve growth in earnings from continuing operations per diluted share that exceeds the guidance provided to shareholders in January of the year of the earnings from continuing operations per diluted share expected for the year. The Compensation Committee sets these challenging targets in order to generate and reward superior performance. The Company has met these targets in two of the last four years.

 

In January 2007, the Compensation Committee, after considering the market for the products sold by the Company, the general economic environment and the Company’s plans for the upcoming year, set performance targets for 2007 that represented a 10% growth in earnings from continuing operations per diluted share in what was expected to be a difficult industry cycle and macroeconomic climate. In order for the Executive Officers to qualify for payment of their target incentive opportunities, it was necessary for the Company to achieve $3.00 earnings from continuing operations per diluted share for the fiscal year ended December 31, 2007. The Company actually achieved $3.10 earnings from continuing operations per diluted share in 2007.

In January 2008, the Compensation Committee determined the annual incentive compensation to be paid to each of the Executive Officers for 2007 performance after taking into consideration the Company’s actual 2007 financial performance-primarily growth in earnings per share; maximum amounts payable under the corporate performance/payout matrix established by the Compensation Committee at the beginning of 2007; corporate performance against specific strategic priorities established for the year; business unit or departmental performance; the target incentive opportunity (200% of base salary for Mr. Tiller, 100% for Mr. Morgan, and 80% for each of Messrs. Bjorkman, Malone and Corness); and individual performance for each Executive Officer. In considering individual performance, the Compensation Committee evaluated each Executive Officer’s contribution towards the following business goals with approximately even weighting: strengthening the core business; delivering operational excellence in quality and productivity; developing growth opportunities; enhancing the Company’s product technology and brand; and building a culture and team of employees to deliver the stated goals. The annual incentive compensation awards for 2007 were paid at the following percentages of each Executive Officer’s base salary: Mr. Tiller, 210%; Mr. Morgan, 109%; Messrs. Corness and Malone, 86% and Mr. Bjorkman, 80%. There is more detail on the 2007 Senior Executive Plan appearing on pages 25 to 29 of this Proxy Statement.

 

In January 2008, the Compensation Committee also established a performance and payout matrix for 2008 under the plan that will require growth in earnings from continuing operations per diluted share in excess of guidance provided to shareholders in January 2008 and within the historical range of 10 to 16 percent in order for the Executive Officers to qualify for an award equal to their target annual incentive opportunities. There is more detail on the 2008 Senior Executive Plan appearing on pages 25 to 29 of this Proxy Statement.

 

Long Term Incentive Plan (LTIP)

 

2005-2007 Performance Cycle — In 2005, the Executive Officers, excluding Mr. Tiller, received a grant under the LTIP that required a combined minimum of 8% compound annual growth in earnings from continuing operations per diluted share and 2% compound annual growth in sales over a three-year measurement period ending December 31, 2007. The Company did not meet the minimum performance thresholds set in 2005 and as a result there was not and will not be a payout to any of the Executive Officers under the 2005 LTIP grant in 2007 or in future periods.

 

2007-2009 Performance Cycle — In 2007, the Executive Officers, excluding Mr. Tiller, received a grant under the LTIP that was subject to a minimum performance threshold, a target payment and a maximum payout at 6%, 10% and 16%, respectively, compound annual growth in earnings from continuing operations per diluted share over a three-year performance measurement period, which will end on December 31, 2009. Participants also have the opportunity to earn additional compensation if the Company achieves at least 10% annual growth in earnings from continuing operations per diluted share and 5% or more annual growth in sales over the three-year measurement period. At the 10% performance target, the 2007 LTIP payouts, expressed as a percentage of base salary, would be 100% for Mr. Morgan and 80% for Messrs. Malone, Bjorkman and Corness and are based on their individual levels of responsibility. There is more detail on the 2007 LTIP grant on pages 30 to 32 of this Proxy Statement.

 

2008-2010 Performance Cycle — In 2008, the Executive Officers, excluding Mr. Tiller, are participating in a grant under the 2008 LTIP that is subject to a minimum performance threshold, a target payment and a maximum payout at 6%, 12% and 18%, respectively, compound annual growth in earnings from continuing operations per diluted share over a three-year performance measurement period, which will end on December 31, 2010. Participants also have the opportunity to earn additional compensation if the Company achieves at least 12% annual growth in earnings from continuing operations per diluted share and 5% or more annual growth in sales over the three-year measurement period. At the 12% performance target, the 2008 LTIP payouts, expressed as a percentage of base salary, would be 100% for Mr. Morgan and 80% for Messrs. Malone, Bjorkman and Corness and are based on their individual levels of responsibility. There is more detail on the 2008 LTIP grant on pages 30 to 32 of this Proxy Statement.

 

Stock Option Plan

 

The Compensation Committee generally awards stock options to Executive Officers on an annual basis. The Compensation Committee awards the options after reviewing market compensation data for each Executive Officer

and considering the need to retain key executives and align incentives with shareholder interests. The value of and the number of shares subject to the awards are based on benchmarked comparisons conducted by the Compensation Committee’s compensation consultant of similar positions at comparable companies.

 

2004 Stock Option Grant Vested in 2007 — In November 2004, the Compensation Committee awarded stock options to Executive Officers that vested on November 1, 2007. The stock options granted in 2007 have a ten-year life and were issued at an exercise price of $59.45 per share, which was the fair market value on the date of grant. The number of stock options granted to the Executive Officers and their computed value at the time of the grant in accordance with the Black-Scholes method of valuation were as follows:

 

 

At December 31, 2007, the exercise price of the options of $59.45, exceeded the $47.77 per share market value of Polaris common stock.

 

2007 Stock Option Grant — In January, 2007, the Compensation Committee awarded stock options to each Executive Officer, excluding Mr. Tiller, who was granted stock options in accordance with his employment agreement. The stock options granted in 2007 have a ten-year life, three-year cliff vesting and were issued at an exercise price of $46.66 per share, which was the fair market value on the date of grant. The number of stock options granted and their computed value at the time of the grant in accordance with the Black-Scholes method of valuation was as follows:

 

 

2008 Stock Option Grant — In January 2008, the Compensation Committee awarded stock options to each Executive Officer, except for Mr. Tiller. The stock options granted have a ten-year life, three-year cliff vesting and were issued at an exercise price of $43.57 per share, which was the fair market value on the date of the grant. The number of stock options granted and their computed value at the time of the grant in accordance with the Black-Scholes method of valuation was as follows:

 

 

There is more detail on Stock Option Awards on pages 32 to 33 of this Proxy Statement.

 

Performance Based Restricted Share Awards — In November 2004, Messrs. Tiller and Malone were granted 50,000 and 10,000 performance based restricted share awards respectively. Mr. Tiller’s award was part of his employment agreement and the award size was determined by comparing his compensation to other Chief Executive Officers in the market in 2004. In examining Mr. Malone’s overall compensation package in 2004 compared to the market, the Committee determined that Mr. Malone was significantly under the market in long term

compensation and granted him a special one time grant. Both Mr. Tiller’s and Mr. Malone’s awards had threshold performance targets of 12% compound earnings from continuing operation per diluted share growth over the three-year period from 2004 through 2006. The Company did not achieve the performance targets over the measurement period and as a result Mr. Tiller’s and Mr. Malone’s shares will lapse in accordance with their terms.

 

On January 31, 2005, Mr. Tiller was granted a 33,000 share performance based restricted share award in accordance with his employment agreement. The award had a performance target of 12% compounded growth in earnings from continuing operation per diluted share over a two-year period from 2005 to 2006. The Company did not achieve the performance target over the measurement period and as a result Mr. Tiller’s shares will lapse in accordance with their terms.

 

On January 29, 2007, Mr. Tiller was granted a 40,000 share performance based restricted share award in accordance with his 2007 employment agreement. The award has a performance target of 12% compounded growth in earnings from continuing operations per diluted share over a two-year period from 2007 to 2008.

 

There is more detail on the performance based restricted share awards on pages 33 to 34 of this Proxy Statement.

 

In addition to the primary forms of compensation discussed above, the Executive Officers are also eligible for other perquisites and benefits as discussed on pages 34 to 35 of this Proxy Statement.

 

Objectives of Polaris’ Compensation Program

 

Polaris’ executive compensation philosophy aligns executive compensation decisions with its desired business direction, strategy and performance. The primary objectives and priorities of the compensation program for Polaris’ Executive Officers are to:

 

 

To achieve these objectives, the Company has designed an executive compensation program that emphasizes performance-based incentives and consists of two key components:

 

 

 

Awards under the Senior Executive Plan, LTIP, Restricted Stock Plan, Stock Option Plan and Omnibus Plan provide Executive Officers with incentives to achieve the Company’s business objectives and also serve as a retention tool. The value and attainment of these awards are driven by the Company’s financial and stock price

performance. The incentive award target percentages of each Executive Officer under the Senior Executive Plan and the LTIP, as well as the number of stock options and performance-based stock awards under the Restricted Stock Plan, Stock Option Plan and Omnibus Plan to each Executive Officer, are determined by the Compensation Committee after consideration of the position held by the Executive Officer and the expected level of contribution to the achievement of the desired business objectives.

 

To attract and retain talented individuals, the compensation of Executive Officers must also be competitive with other companies in its comparable markets. Accordingly, the Company uses survey data, as described in the section entitled “Factors Used in Determining Compensation” below, to structure the total compensation opportunities provided to Executive Officers that (a) will approximate over time the median total compensation opportunities within the survey group as adjusted for company size, and (b) will result in higher than the median compensation if Polaris outperforms the corporate objectives established by the Board, executives contribute meaningfully to that performance and the Polaris stock price appreciates in value. Individual Executive Officer compensation opportunities and actual compensation are further influenced by Company performance and individual performance.

 

Polaris’ compensation philosophy for Executive Officers distinguishes between the compensation opportunities made available to Executive Officers and the compensation paid to Executive Officers. The Company provides and measures total compensation opportunities to its Executive Officers through a combination of base salary, target annual incentive opportunities under the Senior Executive Plan, the grant date fair value of stock option awards, the target incentive awards under the LTIP and the grant date fair value of performance-based stock awards. The actual amount realized by individual Executive Officers from their total compensation opportunities (other than base salary), if any, is dependent upon the Company’s actual financial and/or stock price performance over the term of the award as well as individual performance. Accordingly, if results fail to meet the goals established for one or more of the variable components of total compensation opportunities, then earned compensation is likely to fall below the survey group’s median total compensation depending upon the performance of the companies within that group.

 

Total compensation opportunities for each of the Executive Officers are also a function of their respective roles and responsibilities. In the marketplace surveys conducted by the Company’s compensation consultant, Chief Executive Officers are paid more than are other positions. Moreover, the mix of compensation opportunities for a Chief Executive Officer also differs from other positions. Likewise, compensation opportunities for a Chief Operating Officer, Chief Financial Officer and each of the other Executive Officers reflect the labor market for each of those areas of expertise. Accordingly, compensation opportunities of the Company are established to reflect the reality of competitive labor markets and the business strategy of the Company. For example, under the Senior Executive Plan, for 2005, 2006 and 2007, the Chief Executive Officer has a target performance payout of 200% of base salary. The target performance payout is 100% of base salary for the Chief Operating Officer and 80% of base salary for the other Executive Officers. The variation reflects the difference in responsibility for the overall performance of the Company and the mix and amount of compensation opportunities available for similar positions based on marketplace surveys. Similarly, base salaries, long term incentive pay, stock option and restricted stock awards for the Chief Executive Officer, Chief Operating Officer and the other Executive Officers will differ to reflect the responsibility of the position in the Company and marketplace surveys.

 

When Mr. Tiller’s 2007 Employment Agreement was being negotiated in 2006, a comprehensive market survey was completed for the Compensation Committee by the compensation consultant. Mr. Tiller’s current employment contract is in effect through 2008. As a result, no further analysis of Mr. Tiller’s compensation compared to the market was required in 2007 and 2008. The annualized value of target total compensation for Messrs. Morgan and Malone was between the 40th and 50th percentiles of target total compensation of comparable positions in the comparator group, whereas target total compensation for Messrs. Bjorkman and Corness was in the top quartile relative to comparable positions in the comparator group. Messrs. Bjorkman and Corness have historically had higher targets because of their years of experience both inside and outside of the Company in similar positions and their time in position at Polaris. Polaris’ objective is to provide pay opportunities to its Executive Officers that are consistent with its pay philosophy and correspondingly with the market values of comparable positions of the benchmark companies. In particular, those opportunities are comprised of salary, target cash incentive awards, and the grant date value of long-term incentives. Importantly, what is actually earned, from

these pay opportunities, especially from the annual cash incentive awards and long-term incentive arrangements are entirely a function of realized results. Accordingly, to the extent actual or earned compensation varies from its targeted total compensation percentile, this will be a function of performance of the individual and/or the Company. With respect to the Chief Executive Officer, from the time of his first contract in 1998, the Company determined that it would emphasize variable pay to a greater extent than the usual 50th percentile practices in market surveys for similar positions. As an example, median target annual incentive opportunities commonly approximate 90%-100% of base salary. The Company established a target annual incentive award opportunity that is 200% of base salary. It also used performance objectives that it believed to be stretch in nature. Similarly, long-term incentives for the Chief Executive Officer have historically been distinctly performance based. For instance, at the time of each contract signing, front-loaded equity awards of performance shares and premium priced stock options were made. The shares could only be earned if specific long-term earnings growth objectives were achieved. Similarly, value could only be accumulated under the stock option awards if the stock price rose considerably above the grant price. As a consequence of this approach and emphasis on variable pay, the Chief Executive Officer’s base salary has been at or below the 50th percentile while his targeted variable pay opportunity has been above the top quartile. As a result, his targeted total compensation opportunity is also above the 75th percentile.

 

Factors Considered in Determining Compensation

 

The Compensation Committee annually reviews competitive executive compensation levels based upon a report compiled by its independent compensation consultant, Hewitt Associates, Inc, that includes comparative compensation data from a survey of a group of companies that are primarily engaged in the manufacturing industry and have annual sales ranging from $1 billion to $4 billion. The criteria used to identify the survey group of companies remain consistent from year-to-year, although the actual companies within the survey group will vary depending on changes in reported sales. The Company believes that these criteria are effective in yielding a survey group of comparable companies because Polaris is a manufacturing entity and had annual sales of $1.8 billion and $1.7 billion for the years ended December 31, 2007 and December 31, 2006, respectively. All of the companies surveyed to establish the 2007 compensation opportunities are listed below:

 

 

Utilizing the survey group information, the Compensation Committee conducts its own review of the various components of Polaris’ executive compensation program and, with the assistance of the Chief Executive Officer, the President and Chief Operating Officer and the Vice President — Human Resources, determines the base salary and annual and long-term incentive targets and opportunities of the Executive Officers as a group and individually. In doing so, the Compensation Committee conducts an evaluation of the compensation opportunities and individual performance of each Executive Officer. Each executive’s skills, experience, time in position, achievements and level of contribution towards desired business objectives is reviewed. The Compensation committee uses this

information to determine the amount and mix of compensation opportunities and the actual compensation for the Company’s Executive Officers is based upon these assessments.

 

In addition to the foregoing, a compensation tally sheet was prepared for the Chief Executive Officer and reviewed by the Compensation Committee in connection with the negotiation of Mr. Tiller’s most recent employment agreement in 2007. The tally sheet affixed dollar amounts to all components of the Chief Executive Officer’s compensation opportunities, including current pay (base salary and an annual incentive award opportunity under the Senior Executive Plan), deferred compensation, outstanding equity awards, benefits, perquisites, and potential change in control and severance payments.

 

Impact of Accounting and Tax Treatments

 

The Compensation Committee made decisions regarding executive compensation using forms of compensation that were compliant with Section 162(m) of the Internal Revenue Code. Section 162(m) generally provides that a publicly held corporation will not be entitled to deduct for federal income tax purposes compensation paid to either its chief executive officer or any of its four other most highly compensated executive officers in excess of $1 million in any year if that compensation is not performance related. In April 2004, shareholders approved the Senior Executive Plan and the LTIP. Senior executives of the Company, to whom Section 162(m) may apply, participate in the Senior Executive Plan in lieu of the Company-wide profit sharing plan. Awards under both plans approved by shareholders in 2004 would meet the requirements of Section 162(m) and be tax deductible to Polaris. Additionally, outstanding grants under the Company’s stock-based compensation programs, including stock option and performance-based stock award programs, are performance-based for purposes of Section 162(m). The Company believes that all compensation paid to Polaris’ executives for 2007 is deductible under the Internal Revenue Code.

 

Stock Ownership Guidelines

 

The Company’s Board of Directors has adopted stock ownership guidelines, which provide that the Chief Executive Officer and other Executive Officers are expected to own, directly or indirectly, shares of common stock or restricted share awards having a value of at least five and three times, respectively, their annual base salaries. Compliance with the stock ownership guidelines is voluntary but is monitored by the Vice President — Finance, Chief Financial Officer and Secretary of the Company. All Executive Officers are expected to satisfy the stock ownership guidelines within four years following the date of their becoming an Executive Officer. The following chart sets forth the stock ownership of each of the Executive Officers as of December 31, 2007 relative to the stock ownership guidelines:

 

 

Role of Executive Officers in Determining Compensation

 

The Compensation Committee meets with the Chief Executive Officer annually to review the performance of the Company’s other Executive Officers. The meeting includes an in-depth review of the performance of each Executive Officer. A summary of the performance review is presented to the full Board of Directors each year. For instance in January, 2008, in considering individual performance during 2007, the Compensation Committee evaluated each Executive Officer’s contribution towards the following business goals with approximately even weighting: strengthening the core business; delivering operational excellence in quality and productivity;

developing growth opportunities; enhancing the Company’s product technology and brand; and building a culture and team of employees to deliver the stated goals.

 

The Chief Executive Officer and Vice President — Human Resources assist the Compensation Committee in reviewing performance under the Senior Executive Plan metrics. Each Executive Officer has an incentive award target expressed as a percentage of base salary based on the individual’s level of responsibility. The Chief Executive Officer and Vice President — Human Resources review the pre-established incentive award targets, Company performance and individual performance for the other Executive Officers and recommend incentive award amounts for such persons to the Compensation Committee. In addition, the Chief Executive Officer makes recommendations to the Compensation Committee with respect to equity-based incentive awards for the other Executive Officers.

 

Annual Compensation

 

Base Salary.  To remain competitive with compensation levels of executives at comparable companies, Polaris targets the base pay of its Executive Officers at the 50th percentile of the survey group of companies identified above. Polaris believes that targeting base pay at a competitive level helps fulfill its compensation program objective of attracting and retaining high quality executives. Each Executive Officer’s salary relative to this competitive framework varies based on the level of his or her responsibility, experience, time in position, internal equity considerations and individual performance and is reviewed by the Compensation Committee on an annual basis. Specific salary adjustments take into account these factors and the current market for management talent. An Executive Officer’s base salary will also generally be reviewed at the time of a promotion or other change in responsibilities.

 

In 2007, the base salaries of Messrs. Tiller at $750,000, Bjorkman at $285,000 and Corness at $275,000 were approximately at the target. The Company believes this was appropriate given their respective experience, performance and time in position. In 2007, Mr. Morgan’s base salary, at $375,000, was lower than the target. Mr. Morgan has received significant base salary increases since assuming his current position in May 2005 and the Company expects him to move closer to target with continued good performance over time. In 2007, Mr. Malone’s base salary, at $350,000, was lower than target. Mr. Malone has received significant base salary increases in recent years as he has gained experience as Chief Financial Officer of the Company.

 

In January, 2008, the Compensation Committee set the base salaries for the Executive Officers. The base salary of Mr. Tiller will remain at $750,000; the same as in 2007 in accordance with his employment agreement. The base salaries of Messrs. Bjorkman and Corness are approximately at the target and as a result the Compensation Committee made a 4% increase to their base salaries in 2008 bringing Mr. Bjorkman to $295,000 and Mr. Corness to $285,000. Their individual performance did not warrant a significant increase or decrease from the target. The base salary of Mr. Morgan was under the target for President and Chief Operating Officer and as a result he received a 7% increase to $400,000 bringing him closer to the target. The Compensation Committee determined that Mr. Morgan’s increasing experience as President and Chief Operating Officer and individual performance warranted such an increase. The base salary of Mr. Malone was increased by 7% to $375,000 to bring him to approximately the target level, reflecting the Compensation Committee’s view that as an experienced Chief Financial Officer who has been a strong performer in that role for over ten years, Mr. Malone’s base salary should now be at least at the target level.

 

Senior Executive Plan.  Polaris awards annual incentives under the Senior Executive Plan based on the achievement of performance criteria established for a specific year. Polaris believes that the opportunities provided under the Senior Executive Plan fulfill all of its compensation program objectives by:

 

 

 

The Company’s Chief Executive Officer and other members of senior management, as designated by the Compensation Committee of the Board of Directors of the Company, participate in the Senior Executive Plan in lieu of the Company’s broad based annual profit sharing plan. In administering the plan, the Compensation Committee has determined a targeted incentive opportunity for each Executive Officer expressed as a percentage of base salary. On an annual basis, the Compensation Committee establishes performance metrics that must be achieved to qualify for varying levels of incentive compensation and determines the actual amount of incentive compensation to be paid for performance.

 

The Compensation Committee has established the following target annual incentive opportunities under the plan for each Executive Officer (expressed as a percentage of base salary):

 

 

These target annual incentive opportunities are based on the Executive Officer’s level of responsibility, consistent with comparable positions in the market when considering total cash compensation. The targets reflect the Compensation Committee’s view that the compensation opportunities of Messrs. Tiller and Morgan, who have the greatest overall responsibility for Company performance, should be weighted more heavily towards performance based compensation. The target annual incentive opportunities for Executive Officers have remained unchanged for at least 10 years, other than for Mr. Morgan, who began to serve in the newly created position of President and Chief Operating Officer in 2005.

 

The amount of an Executive Officer’s actual incentive award payment for a performance period is based predominantly upon Polaris’ financial performance measured against pre-established performance metrics. For example, due to below target financial performance in 2006, the Compensation Committee based the amount of annual incentive awards paid to Executive Officers for that year solely on the Company’s financial performance. The Compensation Committee’s determination of the amount of the annual incentive awards to be paid for 2007 was also primarily based upon the Polaris’ financial performance against pre-established performance metrics. However, the Committee also considered corporate performance against specific strategic priorities established for the year, business unit or departmental performance and individual performance. When evaluating individual performance during 2007, the Compensation Committee evaluated each Executive Officer’s contribution towards the following business goals: strengthening the core business; delivering operational excellence in quality and productivity; developing growth opportunities; enhancing the Company’s product technology and brand; and building a culture and team of employees to deliver the stated goals. In this way, awards under the Senior Executive Plan fulfill Polaris’ compensation objectives of supporting the Company’s business plans and annual goals and generating and rewarding superior performance.

 

The Senior Executive Plan was designed and is administered so that the annual incentive compensation paid to participants would be tax deductible under Section 162(m) of the Internal Revenue Code and the plan has been approved by the Company’s shareholders. In order to comply with Section 162(m), the Senior Executive Plan provides for incentive compensation payments based on the Company’s performance relative to financial operating targets established early in the year by the Compensation Committee. For the 2006, 2007 and 2008 performance periods, the Compensation Committee based the financial operating targets on annual growth in earnings from continuing operations per diluted share. The Committee believes that earnings from continuing operations per diluted share is the most effective and appropriate of the numerous business measurement criteria available under the Senior Executive Plan for a number of reasons, including, but not limited to: a) it is easily understood by the

Executive Officers, shareholders and employees of the Company, b) it is a measurement that is communicated in the audited financial statements of the Company and c) it is a measurement that is identical to the measurement used for purposes of determining the annual payments under the Company’s broad based annual profit sharing plan for all eligible non-executive employees of the Company.

 

In administering the Senior Executive Plan, during January of each year the Compensation Committee establishes a matrix for each Executive Officer of maximum annual incentive payouts, expressed as a percentage of base salary, across a range of levels of earnings from continuing operations per diluted share for the year. In determining the maximum payments at various levels of earnings from continued operations per diluted share growth, the Compensation Committee reviews the market for the products sold by the Company, the general economic environment and the Company’s internal operating plans for the upcoming year. The financial operating targets are heavily influenced by the Company’s internal operating plan for the year, which is not publicly disclosed. In order for the Executive Officers to qualify to receive an annual incentive award at least at the level of their target annual incentive opportunity, Polaris must achieve growth in earnings from continuing operations per diluted share that exceeds the guidance provided to shareholders in January of the year of the earnings from continuing operations per diluted share expected for the year. The Compensation Committee sets challenging targets in order to focus executives on delivering a high level of performance. In the four years since inception of the plan, the annual performance targets have required year over year growth of earnings from continuing operations per diluted share of between 10% and 16% in order for the Executive Officers to qualify for an award equal to their target annual incentive opportunities. During that same period, the Company has met or exceeded the required growth metric in two out of four years and the Executive Officers have received annual incentive payments at or above their target incentive opportunity (200% of base salary for Mr. Tiller, 100% for Mr. Morgan, and 80% for each of Messrs. Bjorkman, Malone and Corness) in two out of four years.

 

The following graph shows for fiscal years 2004 through 2007 the average annual incentive payments as a percent of target for the Executive Officers and percentage of internal operating plan achieved since the Senior Executive Plan was adopted, which illustrates the correlation between the internal operating plan and the actual payouts received by the Executive Officers:

 

 

When determining the amount of annual incentive awards to be paid at the end of a year, the Compensation Committee technically exercises “negative discretion” in accordance with the terms of the Senior Executive Plan in that the amounts paid to Executive Officers often represent a downward adjustment from the maximum amount payable in accordance with the matrix established at the beginning of the year. The reductions are not necessarily a negative reflection on an individual Executive Officer’s performance, but rather reflect the Company’s understanding that if the Compensation Committee were to be authorized to exercise “positive discretion” to increase annual incentive awards above the maximum levels established as payable at various levels of Company financial performance, the amounts paid would not be tax deductible to the Company. The Compensation Committee does not establish a formula for exercising its negative discretion in determining individual annual incentive awards. Accordingly, while performance targets are utilized under the plan, the level of those targets, and the use of negative discretion permits the Compensation Committee to consider other factors that it deems important to long-term

success and results. As a result, the annual incentive awards reflect both corporate and individual performance and, accordingly, the Senior Executive Plan operates as a discretionary plan subject to annual maximum payout limitations.

 

Awards under the Senior Executive Plan are paid prior to March 15th following the year during which performance is measured.

 

Senior Executive Plan Awards for 2006 — Awarded in February 2007

 

In January 2006, the Compensation Committee established incentive award targets under the Senior Executive Plan for fiscal year 2006 (the “2006 Senior Executive Plan Awards”) that required the Company to achieve earnings from continuing operations per diluted share of $3.50 in order for the Executive Officers to qualify for an award equal to their target annual incentive opportunities. The Company actually achieved earnings from continuing operations per diluted share of $2.72 for 2006. There were no other factors or criteria used in determining the actual incentive compensation for each Executive Officer other than actual reported earnings from continuing operations per diluted share for the year ended December 31, 2006. As a result of the Company’s actual 2006 performance and the Compensation Committee’s exercise of its negative discretion with respect to awards to Messrs. Tiller and Morgan, the following awards were made:

 

 

The Compensation Committee exercised its negative discretion with respect to awards to Messrs. Tiller and Morgan because as Chief Executive Officer and Chief Operating Officer, respectively, they have the highest level of individual responsibility for the overall performance of the Company and the Company did not meet its performance targets in 2006. The performance of the other Executive Officers did not warrant a significant increase or decrease from established payout percentages. The foregoing amounts were reported as incentive awards to each of the Executive Officers in the summary compensation table included in the Company’s Proxy Statement for its 2007 Annual Meeting of Shareholders.

 

Senior Executive Plan Awards for 2007 — Awarded in February 2008

 

In January 2007, the Compensation Committee established incentive award targets under the Senior Executive Plan for fiscal year 2007 (the “2007 Senior Executive Plan Awards”) that required the Company to achieve earnings from continuing operations per diluted share of $3.00 in order for the Executive Officers to qualify for an award equal to their target annual incentive opportunities. The Company actually achieved earnings from continuing operations per diluted share of $3.10 for 2007.

 

As noted above, the Compensation Committee’s determination of the amount of the annual incentive awards to be paid for 2007 was based upon Polaris’ financial performance against pre-established performance metrics, corporate performance against specific strategic priorities established for the year, business unit or departmental performance and individual contributions to strengthening Polaris’ core business; delivering operational excellence in quality and productivity; developing growth opportunities; enhancing the Company’s product technology and brand; and building a culture and team of employees to deliver the stated goals.

 

The 2007 Senior Executive Plan Awards paid to Executive Officers in February 2008 are reflected in column (g) of the Summary Compensation table appearing on page 37 of this Proxy Statement.

 

Senior Executive Plans Awards for 2008 — To Be Awarded in February 2009

 

In January 2008, the Compensation Committee established a matrix for each Executive Officer of maximum annual incentive payouts, expressed as a percentage of base salary, across a range of levels of earnings from continuing operations per diluted share for 2008 that will require that Polaris achieve growth in earnings from continuing operations per diluted share in excess of guidance provided to shareholders in January 2008 and within the historical range of 10 to 16 percent growth in such earnings in order for the Executive Officers to qualify for an award of their target annual incentive opportunities. The Compensation Committee anticipates making payments in February 2009 to the Executive Officers under the 2008 Senior Executive Plan.

 

The Compensation Committee established a target earnings from continuing operations per diluted share that had to be achieved in order to receive a corresponding target payout percentage for each Executive Officer. At target performance, the payout percentages calculated as a percentage of their annual base salary are 80% for Messrs. Corness, Bjorkman and Malone; 100% for Mr. Morgan and 200% for the Chief Executive Officer as identified below. At the same time, the Compensation Committee established a range of payout percentages ranging from 0% to a maximum payout percentage for each of the Executive Officers based on the actual earnings from continuing operations per diluted share. The maximum percentages are calculated as a percentage of base salary and are 375% for the Chief Executive Officer, 187% for the Chief Operating Officer and 150% for the other Executive Officers if the actual results are 17% or more above the targeted earnings from continuing operations per diluted share growth for the fiscal year ended December 31, 2008.

 

 

Long-Term Compensation

 

Long-term compensation awarded by the Company includes long-term cash-based incentive awards under the LTIP, stock options under the Omnibus Plan and, prior to April 2007, the Stock Option Plan, and performance-based stock awards under the Omnibus Plan and, prior to April 2007, the Restricted Stock Plan. The Company strives to find an appropriate balance between long-term compensation opportunities such as stock options that are dependent upon the market price of the Company’s common stock in order to align the Executive Officers’ interests with those of shareholders generally and those such as cash-based awards under the LTIP or performance-based stock awards under the Restricted Stock Plan that are dependent upon achievement of specific financial measures that Executive Officers can influence and manage over time and that will also drive shareholder value. Accordingly, approximately 60% of the grant date value of long-term compensation opportunities is provided to each Executive Officer in the form of stock options, with the remaining 40% allocated to cash awards under the LTIP or performance-based stock awards under the Restricted Stock Plan.

LTIP.  Long-term cash-based incentives under the LTIP are awarded in an effort to:

 

 

Each of the Executive Officers, other than the Chief Executive Officer, participates in the LTIP. The plan was adopted with the intention that awards would be made under this plan in substitution for annual awards previously made under the Restricted Stock Plan. Payouts under the LTIP are based on financial performance measured over a period of three consecutive fiscal years. In determining the performance targets for the LTIP, the Compensation Committee evaluates the external economic environment, the external market for the products sold by the Company and the Company’s long term business plan.

 

At the beginning of each three-year performance period, participants choose whether their payout will be calculated based upon: (1) cash value at the time of award; or (2) cash value tied to Polaris stock price movement over the three-year performance period. Each Executive Officer has chosen to have his payout calculated based upon cash value tied to Polaris stock price movement over the three-year performance period. Similar to the Senior Executive Plan, Polaris establishes an LTIP target in January of each year for each Executive Officer participant expressed as a percentage of base salary based on that individual’s level of responsibility. A plan target of 100% and 80% of base salary was established under the LTIP for Mr. Morgan and the other Executive Officer participants, respectively, for the 2005 — 2007 performance period (“2005 LTIP Grant”), the 2006 — 2008 performance period (“2006 LTIP Grant”), the 2007-2009 performance period (“2007 LTIP Grant”) and the 2008-2010 performance period (“2008 LTIP Grant”). The Compensation Committee has discretion under the LTIP to either (i) disregard the impact of any extraordinary or unusual events (such as significant acquisitions or divestitures by the Company) in determining whether a performance objective has been obtained or (ii) to make appropriate adjustments in any performance objective to reflect the occurrence of such an event.

 

2005 LTIP Grant

 

Target awards under the 2005 LTIP Grant were dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings from continuing operations per diluted share growth using actual 2004 financial results as the base period.

 

The Company applied a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance fell between the threshold and target performance criteria or between the target and maximum performance criteria.

 

In January, 2008, the Compensation Committee determined that the threshold performance criteria had not been achieved for the 2005 LTIP Grant and, accordingly, no incentive awards were paid to the Executive Officer participants for that performance period.

 

2006 LTIP Grant

 

Target awards under the 2006 LTIP Grant will be dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings from continuing operations per diluted share growth using actual 2005 financial results as the base period.

 

 

The Company will apply a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

At the present time, the Company believes that it is unlikely that the threshold performance criteria will be achieved for the 2006 LTIP Grant and, accordingly, does not expect to make awards to Executive Officer participants for that performance period.

 

2007 LTIP Grant

 

Target awards under the 2007 LTIP Grant will be dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings from continuing operations per diluted share growth using actual 2006 financial results as the base period.

 

 

The Company will apply a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

2008 LTIP Grant

 

Target awards under the 2008 LTIP Grant will be dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings from continuing operations per diluted share growth using actual 2007 financial results as the base period.

 

 

The Company will apply a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

Stock Options.  The Company makes grants in the form of nonqualified stock options under the Omnibus Plan and, prior to the adoption of such plan in April 2007, the Stock Option Plan. The Stock Option Plan was frozen upon adoption of the Omnibus Plan. The value of the stock options is inherently tied to the performance of the Company, as reflected in its stock price, and provides Executive Officers with an opportunity to have an equity stake in the Company. Thus, the Company believes that the award of stock options furthers its compensation objectives by:

 

 

 

The Compensation Committee approves each stock option grant to Executive Officers under the Omnibus Plan and, prior to the adoption of such plan in April 2007, the Stock Option Plan. The number of stock options awarded is based upon the Company’s operating performance, individual performance, and market competitiveness as well as valuation data provided by the Company’s compensation consultant. Executive Officers are generally eligible to receive stock option grants on an annual basis. The Company ensures that stock option awards approved by the Compensation Committee will be granted subsequent to any planned release of material non-public information. The Company does not engage in the backdating, cancellation or re-pricing of stock options and has not engaged in such practices in the past.

 

The Compensation Committee considers stock option grants to Executive Officers in January of each year at the same time that it reviews other elements of Executive Officer compensation. In January, 2007, the Compensation Committee granted nonqualified stock options under the Stock Option Plan to several key employees, including the Executive Officers, in an effort to further its objective of retaining valuable talent and to provide the Executive Officers with an opportunity to have an equity stake in the Company. Mr. Tiller was awarded stock options in accordance with his 2007 Employment Agreement. Each of the stock options in the following table were granted on January 29, 2007 at an exercise price of $46.66, the closing price of the Company’s common stock on the grant date. The options become exercisable on January 29, 2010 and expire on January 29, 2017 and were granted in the following amounts:

 

 

In January, 2008, the Compensation Committee granted nonqualified stock options under the Omnibus Plan to several key employees, including the Executive Officers, in an effort to further its objective of retaining valuable talent and to provide the Executive Officers with an opportunity to have an equity stake in the Company. Each of the stock options in the following table were granted on January 31, 2008 at an exercise price of $43.57, the closing price of the Company’s common stock on the grant date. The options become exercisable on January 31, 2011 and expire on January 31, 2018 and were granted in the following amounts:

 

 

The amount of the each award in 2006, 2007 and 2008 was based on market-based compensation surveys for comparable positions and the retention risk for each Executive Officer. In addition, the same individual performance factors discussed in the “Senior Executive Plan” above were also factors in determining the amount of the award for each Executive Officer.

 

Restricted Stock.  The Company makes awards of performance-based stock on a selective and limited basis under its Omnibus Plan and, prior to the adoption of such plan in April 2007, the Restricted Stock Plan. The Restricted Stock Plan was frozen upon adoption of the Omnibus Plan. Generally such awards are made in connection with promotions, outstanding performance, hiring of new executives and extensions of existing employment arrangements. The Company believes that awards of performance-based stock are a vital factor in:

 

 

 

In November 2004, Messrs. Tiller and Malone were granted 50,000 and 10,000, respectively, performance-based stock awards under the Restricted Stock plan. Mr. Tiller’s award was part of his employment agreement and the award size was determined by comparing his compensation to other Chief Executive Officers in the market in 2004. In examining Mr. Malone’s overall compensation package in 2004 compared to the market, the Compensation Committee determined that Mr. Malone was significantly under the market in long term compensation and granted him a special one time grant. Both Mr. Tiller’s and Mr. Malone’s awards had threshold targets of 12% compounded earnings from continuing operations per diluted share growth over the three-year period from 2004 through 2006. The Company did not achieve the performance targets over the measurement period and as a result Mr. Tiller’s and Mr. Malone’s shares will lapse in accordance with their terms.

 

On January 31, 2005, Mr. Tiller was granted a 33,000 share performance based restricted share award in accordance with his employment agreement. The award had a performance target of 12% compounded growth in earnings from continuing operations per diluted share over a two-year period from 2005 to 2006. The Company did not achieve the performance target over the measurement period and as a result Mr. Tiller’s shares will lapse in accordance with their terms.

 

In December, 2006, the Compensation Committee granted performance-based stock awards under the Restricted Stock plan to several key employees including the Executive Officers, other than the Chief Executive Officer, in an effort to further its objective of retaining valuable talent. The Compensation Committee determined that such an award was necessary to address the substantial impact during 2006 of a rapidly changing business environment on the Company’s near and long-term performance objectives and the accompanying increase in risk of losing critical employees. The amount of the each award was based on market-based compensation surveys for comparable positions and the retention risk for each Executive Officer. In addition, the same individual performance factors discussed in the “Senior Executive Plan” above were also factors in determining the amount of the award for each Executive Officer.

 

The Compensation Committee also determined that it was not necessary to provide this one-time grant to the Chief Executive Officer because he already had sufficient incentive to remain with the Company. In addition to furthering its objective of retaining key talent, the Compensation Committee also designed the award to drive shareholder value. Accordingly, each recipient was awarded two grants of performance-based stock-one conditioned on the achievement of compound annual earnings from continuing operations per diluted share growth of at least 6% and the other conditioned on the achievement of compound annual earnings from continuing operations per diluted share growth of at least 12%. The compound annual earnings from continuing operations per diluted share growth will be measured for fiscal years 2007 and 2008 over the actual $2.72 earnings from continuing operations per diluted share in 2006, and if the growth targets are achieved, these awards will vest on December 12, 2009. The awards will be forfeited if the performance objectives are not achieved. Individual awards will also be forfeited if a recipient leaves the Company either prior to achievement of the performance objectives or prior to the December 12, 2009 vesting date.

 

Under the terms of his January, 2007 employment agreement, Mr. Tiller was granted a performance-based restricted stock award under the Restricted Stock Plan, for 40,000 shares of the Company’s common stock, granted on January 29, 2007 when the fair market value of such stock was $46.66 per share. Mr. Tiller’s awards have performance targets of 12% compound earnings from continuing operations per diluted share growth over a two- year period from 2007-2008 and will vest in January, 2009.

 

Benefits

 

Polaris provides a full range of benefits to its Executive Officers, including the standard medical, dental and disability coverage available to employees generally.

 

Polaris also sponsors a 401(k) Retirement Savings Plan (“401(k) Plan”) that allows employees to make plan contributions on a pre-tax basis. Employees are automatically enrolled at 5% of gross income and can elect to contribute 0-50% of covered compensation into the 401(k) Plan. Polaris matches employee contributions

dollar-for-dollar up to 5% of covered compensation. Although Executive Officers are eligible to participate in the 401(k) Plan, the application of the annual limitation on contributions under Section 401(a)(17) of the Internal Revenue Code prevents Executive Officers from participating at the same level as non-executives. The Polaris Industries Inc. Supplemental Retirement/Savings Plan (“SERP”) provides executives who participate in the 401(k) Plan with the opportunity to defer up to the full 5% of covered compensation by making contributions to the SERP that are then matched by the Company as if they had been made under the 401(k) Plan. The SERP is intended solely to restore contributions lost because of the application of the annual limitations under the Internal Revenue Code that are applicable to the 401(k) Plan. This additional benefit, which assists the Executive Officers in accumulating funds for retirement, is consistent with observed competitive practices of similarly situated companies.

 

Other than the restorative SERP, the Company does not maintain a defined benefit supplemental retirement savings plan or a pension plan for the Executive Officers.

 

Perquisites

 

Polaris provides a limited number of perquisites to its Executive Officers in an effort to remain competitive with similarly situated companies.

 

Club Dues.  Polaris reimburses each Executive Officer for entrance or initiation fees and monthly club dues. During 2006 and 2007, only two of the Executive Officers received reimbursement for club dues. Polaris also provides tax gross-ups to Executive Officers on the amount of club due reimbursements.

 

Tax, Estate and Financial Planning Fees.  Polaris also reimburses its Executive Officers for tax, estate and financial planning fees. In addition, Polaris provides tax gross-ups to Executive Officers on the amount of tax, estate and financial planning fee reimbursements.

 

Exec-U-Care Coverage.  The Executive Officers are eligible to receive broad medical and dental coverage up to $50,000 a year through the Exec-U-Care program. Exec-U-Care supplements an Executive Officer’s basic health plan by reimbursing annual expenses not covered under the basic medical and dental benefit plans that are available on a Company-wide basis. Examples of such expenses include deductibles, co-insurance amounts, special health equipment and chiropractic care. Annual physicals at the Mayo Clinic are also covered for each Executive Officer and his or her spouse.

 

Polaris Products.  The Company provides each Executive Officer with temporary use of Polaris products to encourage a first-hand understanding of the riding experience of Polaris customers and to provide Executive Officers with an opportunity to evaluate product design and efficiency. The Chief Executive Officer is provided with the usage of unlimited Polaris products, the President and Chief Operating Officer is provided with 12 Polaris products and other Executive Officers are given their choice of six Polaris products, with a maximum of two from each product line. The products used by the Executive Officers are returned to Polaris at the end of a defined usage period based upon months, miles or hours, depending upon the product line. Polaris sells the returned products to dealers at an amount greater than the cost of such products to the Company. All Executive Officers also receive related Polaris parts, garments and accessories.

 

Corporate Aircraft Use.  Executive Officers are eligible to use the Company’s aircraft for personal travel. Under the Company’s Corporate Travel and Expense Reimbursement Policy, all incremental variable operating costs associated with such personal aircraft use must be reimbursed by the Executive Officer to the Company.

 

Severance Agreements

 

The Company has entered into severance agreements with the Executive Officers, which become effective upon termination of their employment resulting from certain change in control events and if the executive’s employment is terminated without cause in a non-change in control event. The severance agreements for the Executive Officers other than the Chief Executive Officer are meant to induce the continued employment of the Executive Officers and to enhance their loyalty and performance by providing them with certain compensation and benefits in the event a change in control of the Company occurs or their employment is terminated without cause in a non-change in control event. The Company had previously entered into severance agreements with the Executive Officers related to terminations resulting from a change in control. Effective January 16, 2008, the severance

agreements with the Executive Officers, other than the Chief Executive Officer, were changed to also address terminations without cause in a non-change in control event. This change was made when the Company announced its intention to begin the search process to secure a new Chief Executive Officer because Mr. Tiller has decided to step down at the end of 2008. The new non-change in control provision was made to ensure the continued employment and focus on high level performance of the affected Executive Officers during the search for the new Chief Executive Officer and during his or her integration at the Company and beyond. The terms of these agreements and the amounts payable thereunder is described in more detail under the section entitled “Potential Payments Upon Termination or Change-in-Control” beginning on page 48 of this Proxy Statement. The severance arrangement in the event of the termination of the employment of the Chief Executive Officer is set forth in his employment agreement and is described in more detail under the sections entitled “Potential Payments Upon Termination or Change-in-Control — 2007 Employment Agreement with Mr. Tiller” appearing on page 54 of this Proxy Statement. The Company’s severance programs are positioned to be relative to common market practice.

 

Employment Agreements

 

Polaris typically does not enter into employment agreements with its executives. However, it is party to agreements with its Chief Executive Officer, Thomas C. Tiller, and its President and Chief Operating Officer, Bennett J. Morgan. Polaris entered into these agreements because it believes that it is important to secure the leadership of these key management individuals.

 

The terms of the Employment Agreements with Mr. Tiller and Mr. Morgan are described in more detail under the sections entitled “Potential Payments Upon Termination or Change-in-Control — 2007 Employment Agreement with Mr. Tiller” and “— Employment Agreement with Mr. Morgan” appearing on page 54, respectively, of this Proxy Statement.

 

The Omnibus Plan, which was adopted in April 2007, is used to grant equity and performance-based awards similar to those previously granted under the Stock Option Plan, Restricted Stock Plan, the Polaris Industries Inc. 2003 Non-Employee Director Stock Option Plan (“Director Stock Option Plan”) and the Polaris Industries Inc. 1999 Broad Based Stock Option Plan. Such plans were frozen upon adoption of the Omnibus Plan. All outstanding awards under the existing plans will remain outstanding; however, no further awards will be granted pursuant to such plans.

 

The following table shows, for the fiscal years completed December 31, 2006 and 2007, the annual compensation paid to or earned by the Executive Officers.

 

 

 

 

 

 

 

 

As described under the section entitled “Compensation Discussion and Analysis — Elements of Executive Compensation — Perquisites” beginning on page 35 of this Proxy Statement, Executive Officers are provided with

the use of various Polaris products. There is no aggregate incremental cost to the Company associated with such use because Polaris sells the returned products to its dealers at an amount greater than the cost to the Company. In addition, Executive Officers are eligible to use the Company’s aircraft for personal travel, however, all incremental variable operating costs associated with such personal aircraft use must be reimbursed to the Company. During 2006 and 2007, none of the Executive Officers used the Company’s corporate aircraft for personal travel.

 

The following table shows all grants of awards under the Company’s incentive plans in 2007 to each of the Executive Officers named in the Summary Compensation Table and the estimated future payouts with respect to such awards. To the extent that an award only provides for a single estimated payout, that amount is reported as the “target” in columns (d) or (g) below.