Schedule 14A


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NameSchedule 14A
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EXECUTIVE COMPENSATION




Compensation Discussion and Analysis
        Our compensation programs for executive officers are administered by the Compensation Committee (the "Committee"), which is composed solely of three independent directors as defined by NASDAQ Stock Market Rules. The Committee operates under a written charter adopted by the Board. The Committee charter is included on the Company's website at the following address: http://kapstonepaper.com and printed copies are available to any stockholder upon request.
        The Committee has reviewed and approved the following discussion and analysis, which analyzes the objectives and results for 2008 of the Company's compensation policies and procedures for its four executive officers: Roger W. Stone, the Company's Chief Executive Officer; Matthew Kaplan, the Company's President and Secretary; Timothy P. Keneally, the Company's Vice President and General Manager; and Andrea K. Tarbox, the Company's Vice President and Chief Financial Officer (the "Named Executive Officers"). The Company's compensation programs have been adopted in order to implement the Committee's compensation philosophy, while taking into account the Company's financial performance. The Committee periodically reviews the Company's compensation programs and practices in light of the Committee's compensation philosophy, changes in laws and regulations, and the Company's financial goals.
Compensation Policies and Objectives
        The Committee believes that compensation for executive officers should be determined according to a competitive framework, taking into account the financial performance of the Company, individual contributions and the external market in which the Company competes for executive talent. In determining the compensation of the Company's executive officers, the Committee seeks to achieve the following objectives through a combination of fixed and variable compensation.
Pay Competitively
        A total compensation package should be competitive. For executive officers, including the Company's Chief Executive Officer, the Committee considers the level of compensation paid to individuals in comparable executive positions in the Company's peer group and at other paper and packaging companies with which the Company competes in order to recruit and retain executive talent.
Pay for Performance
        Our compensation practices are designed to create a direct link between the aggregate compensation paid to each executive officer and the financial performance of the Company. In order to accomplish this, the Committee considers the individual performance of each executive officer by reviewing, among other factors, the achievement of pre-established corporate and individual performance objectives as well as the recommendations of the Chief Executive Officer. The amount of each component of an executive officer's compensation is based in part on the Committee's assessment of that individual's performance as well as the other factors discussed in this section.
Executivesas Stockholders
        Our compensation practices are also designed to link a portion of each executive officer's compensation opportunity directly to the value of the Company's Common Stock through the use of stock-based awards.
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Elements of Compensation
        To accomplish its compensation objectives and philosophy, the Committee relies on the following elements of compensation, each of which is discussed in more detail below:


Base salary;



Annual performance-based cash bonus awards;



Long-term incentive compensation (in the form of stock options, restricted stock and restricted stock units).
        When approving the compensation of the Company's executive officers, the Committee reviews all of the elements of the Company's executive compensation program, including through the use of "tally sheets" showing each component and relevant accrued benefits.
        Each component of executive compensation is designed for a specific purpose. For example, salaries are the main component of cash-based annual compensation. Salaries are set to compensate each executive based on that executive's employment and salary history, position within the Company and comparable competitive salaries at other companies. With regard to the more variable components of the compensation package, annual bonuses are tied to the Company's short-term objectives, while equity-based compensation is directed towards successful results over a longer period. The purpose of the combination of salary, annual bonus and equity awards is to provide the appropriate level of total annual cash compensation and long term incentives, combined with an appropriate performance-based component. The Committee places the greatest emphasis on performance-based compensation through annual cash bonus awards and long term equity-based awards, which together comprise the largest portion of executive officer compensation. The Committee believes that the Company's executive compensation package, consisting of these components, is comparable to the compensation provided in the market in which the Company competes for executive talent and is critical to accomplishing its recruitment and retention aims.
        The Company does not have employment contracts with any Named Executive Officer. The Named Executive Officers do not have any severance arrangements.
Overview of Compensation Program and Process
Role of Committee
        The Committee is responsible for reviewing and recommending to the Board of Directors the base salaries and annual performance-based cash bonus awards and long-term incentive compensation for the Company's executive officers. These responsibilities are not delegated to others. The Committee also approves and recommends to the Board of Directors employee compensation and benefit programs, as appropriate.
Role of Management
        Management assists the Committee in fulfilling its responsibilities with respect to evaluating executive performance, proposing appropriate performance targets for the annual and long-term incentive plans and developing recommendations as to appropriate salary levels and award amounts.
Role of Consultants
        The Committee retained Frederic W. Cook & Co., Inc. ("Cook") as its independent compensation consultant. Cook reported directly to the Committee, and the Committee may replace Cook or hire additional consultants at any time.
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        Cook provided various executive compensation services to the Committee with respect to the Company's executive officers. The services Cook provided included advising the Committee on the principal aspects of the Company's executive compensation program, and providing market information and analysis regarding the competitiveness of the Company's program designs.
Role of Chief Executive Officer
        For 2008, the Company's Chief Executive Officer, Mr. Stone, provided to the Committee his recommendations with respect to potential compensation of the other Named Executive Officers. The Committee reviewed and gave considerable weight to these recommendations because of Mr. Stone's direct knowledge of other executives' performance and contributions. With respect to those officers, the Committee ultimately used its collective judgment to determine the compensation levels, including base salary, annual performance-based cash bonuses and long-term equity award grants. Mr. Stone also provided to the Committee his recommendations for his own salary, annual performance bonus and equity award grant. In this regard, Mr. Stone recommended that his compensation levels be identical to those of the Company's President, Mr. Kaplan, due to the current and historical level of work and responsibilities shared by them. The Committee ultimately determined and approved Mr. Stone's compensation independently based on its collective judgment.
Continuing Process
        While the Committee makes many of its compensation decisions during the first quarter of the year, the Committee continues to plan and review compensation matters throughout the year.
Benchmarking
        The Committee reviews survey information of executive compensation, both with respect to target and actual compensation data available, payable by a designated peer group as well as the competitive median of total compensation of general industry groups. The purpose of this review is to ensure that the Company's total executive compensation levels, including base salaries, annual bonus and equity awards, remain reasonable, competitive and appropriate. The Committee considers executive compensation paid at the peer companies when setting executive compensation levels at the Company, but the Committee does not attempt to maintain a specified target percentile within this peer group to determine executive compensation. In light of the request by Mr. Stone that he and Mr. Kaplan receive the same level of compensation, the Committee compares the aggregate compensation for Messrs. Stone and Kaplan against the aggregate compensation for the chief executive officer and chief operating officer of the peer group companies.
        The Committee annually selects the peer companies, which are generally in the paper and packaging industry, based on a number of factors, such as:


revenues;



market capitalization; and



the nature of their business.
        In February 2008, the Committee, with the advice of Cook, selected the following peer companies: AEP Industries; AptarGroup; Buckeye Technologies, BWAY Holding; Caravstar Industries; Chesapeake; Constar International; Deltic Timber; Glutfelter; Impreso; Mercer International; Myers Industries; Neenah Paper; Packaging Corporation of America; Pope & Talbot; PVC Container; Schweitzer-Mauduit International; VFP Technologies; Vikase; and Wausau Papers (collectively, the "Peer Group"). The Committee expects to reevaluate from time to time the composition of the designated peer group as the Company executes its strategy of organic and strategic growth.
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Components of Executive Compensation
        The following provides an analysis of each element of compensation, what each is designed to reward and why the Committee chose to include it as an element of the Company's executive compensation.
Base Salary
        Base salaries are reviewed annually in the context of the Committee's consideration of the effect of base compensation on recruiting and retaining executive talent. Accordingly, the Committee considers the executive compensation of the Peer Group. In establishing each executive officer's base salary, the Committee considers several factors, including individual job performance, salary history, competitive external market conditions for recruiting and retaining executive talent, the scope of the executive's position and level of experience and changes in responsibilities.
        As a result of the current economic conditions, the Company has implemented a number of temporary changes to its compensation structure. Effective February 1, 2009, the salaries of Mr. Stone and Mr. Kaplan have been reduced 15%, from $420,000 to $357,000. Mr. Keneally's salary has been reduced 7.5%, from $305,000 to $282,125, and Ms. Tarbox's salary has been reduced 5%, from $275,000 to $261,250. The Company's Compensation Committee has approved the temporary reductions in the base salaries of the Named Executive Officers.
Annual Performance-Based Cash Bonus Awards
        The Committee ties a significant portion of each Named Executive Officer's total potential compensation to Company performance and individual performance. In setting financial and operating performance targets, which are established early in the year, the Committee considers the Company's strategic and operating plans. The Committee also considers the budget for the next year and, after consultation with management, sets specific incentive targets that are directly linked to the Company's financial performance.
        In March, 2008, the Committee set the 2008 annual bonus targets for the Named Executive Officers. Bonus potentials for Named Executive Officers were set at percentages of their base salaries deemed appropriate for their current positions. The bonus potential for each of Mr. Stone and Mr. Kaplan for 2008 was set at up to 130% of his base salary (or $546,000). The bonus potential for each of Mr. Keneally and Ms. Tarbox was set at up to 90% of his or her base salary ($274,500 and $247,500, respectively).
        The objective of the annual performance-based cash bonus element of compensation is to align the interest of the Named Executive Officers with the Company's financial goals for the year and also to encourage and reward the achievement of individual goals. To achieve this, the Committee established the following measures to determine bonus payouts for 2008: for each of Mr. Stone and Mr. Kaplan, bonus was weighted 100% on the achievement of the Company's EBITDA goals; and for each of Mr. Keneally and Ms. Tarbox, bonus was based on both EBITDA performance and on individual performance goals. Mr. Keneally's targets include the EBITDA, working capital, freight cost, sales and safety initiatives of business units; and Ms. Tarbox's targets relate to infrastructure development, regulatory and reporting functions, risk management, human resources and strategic support.
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        With respect to the Company's EBITDA goals for 2008, the Committee established the following target payout levels:


 

 

 

 

 

 

 

 

 

 

 

 


 

2008 Target Payout Levels(1)

 

 


 

30%

 

50%

 

100%

 

EBITDA

 

$

42,000,000

 

$

56,000,000

 

$

73,000,000

 
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