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COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN

AMONG HASBRO, S&P 500 AND RUSSELL 1000

CONSUMER DISCRETIONARY ECONOMIC SECTOR(1)

 

The following graph tracks an assumed investment of $100 on the start dates indicated below in the Company’s Common Stock, the S&P 500 Index and the Russell 1000 Consumer Discretionary Economic Sector, assuming full reinvestment of dividends and no payment of brokerage or other commissions or fees. Past performance of the Company’s Common Stock is not necessarily indicative of future performance.

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2000

 

 

2001

 

 

2002

 

 

2003

 

 

2004

 

 

2005

Hasbro

 

 

$

100

 

 

 

$

157

 

 

 

$

107

 

 

 

$

205

 

 

 

$

187

 

 

 

$

202

 

S&P 500 Index

 

 

$

100

 

 

 

$

89

 

 

 

$

68

 

 

 

$

87

 

 

 

$

98

 

 

 

$

104

 

Russell 1000 Consumer Discretionary Economic Sector

 

 

$

100

 

 

 

$

105

 

 

 

$

80

 

 

 

$

106

 

 

 

$

121

 

 

 

$

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

While the information for Hasbro’s Common Stock and the S&P 500 Index is as of the last trading day in Hasbro’s fiscal year, the data for the Russell 1000 Consumer Discretionary Economic Sector is as of the last trading day in the calendar year.

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REPORT OF THE

COMPENSATION AND STOCK OPTION COMMITTEE

OF THE BOARD OF DIRECTORS

 

Hasbro Compensation and Stock Option Committee

 

The Compensation and Stock Option Committee (the “Committee”) of the Company’s Board of Directors is responsible for establishing and overseeing the compensation and benefits for the Company’s senior management, including all of the Company’s executive officers, and is authorized to make grants and awards under the Company’s employee stock equity plans. The Committee operates under a written charter which has been established by the Company’s Board of Directors. The current Compensation and Stock Option Committee charter is available on the Company’s website at www.hasbro.com, under “Corporate Information — Investors — Corporate Governance.”

 

In establishing the cash compensation, equity awards and benefits for the Company’s Chief Executive Officer, the Committee reviews benchmarking information provided by outside compensation consultants. In authorizing and approving cash compensation, equity awards and benefits for executive officers other than the Chief Executive Officer, the Committee reviews the recommendations of the Chief Executive Officer in addition to benchmarking information provided by outside compensation consultants.

 

The Committee is composed solely of persons who are both “Non-Employee Directors,” as defined in Rule 16b-3 of the rules and regulations of the Securities and Exchange Commission, and “outside directors,” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Board of Directors has determined that each member of the Committee is independent under the Company’s Independence Standards and the requirements of the New York Stock Exchange’s corporate governance listing standards.

 

2005 Compensation Policies With Respect to Executive Officers

 

Executive Compensation Philosophy

 

In structuring the compensation of the Company’s executive officers (including those five named executive officers appearing in the Summary Compensation Table that immediately follows this report) the Committee’s fundamental objectives are to attract and retain talented executives, align the interests of the Company’s executives with the long-term goals of the Company’s shareholders, and reward achievement of the Company’s goals and increases in long-term shareholder value by the executives. To achieve these objectives the Committee structures the Company’s executive compensation and benefits so as to:

 


 

 

 

 

• 

attract and retain talented executives who can make important contributions to the success of the Company,

 

 

 

 

• 

provide the Company’s executives with a strong incentive to increase the Company’s performance and the long-term value of the Company to its shareholders by tying a significant portion of the compensation for executives to the achievement of the Company’s financial objectives,

 

 

 

 

• 

reward executives for superior performance, and

 

 

 

 

• 

achieve these objectives in as cost-effective a manner as possible from the Company’s perspective.

 

The Committee employed the assistance of an outside executive compensation consultant to provide benchmarking information and other assistance to the Committee in structuring the Company’s 2005 executive compensation program. Although this outside consultant has performed other services for the Company, in the case of providing this assistance to the Committee the consultant was retained by, and reported directly to, the members of the Committee. The outside consultant provided additional information as to whether the Company’s executive compensation programs are reasonable and effective in promoting and rewarding the performance of the Company’s executives, achievement of the Company’s financial goals and increases in the long-term value of the Company to its shareholders.

 

The Committee considers the requirements of Code Section 162(m) in determining the various elements of its executive compensation program and, to the extent it is consistent with meeting the objectives of the Company’s

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executive compensation program, structures such compensation to maximize the ability of the Company to deduct such compensation. However, the Committee reserves the right to award compensation that would not be deductible under Section 162(m) where the Committee believes this is in the best interests of the Company and its shareholders.

 

Primary Elements of 2005 Executive Compensation

 

Executive compensation for fiscal year 2005 was composed of four primary elements:

 

 

 

 

 

• 

base salary,

 

 

 

 

• 

management incentive bonus awards,

 

 

 

 

• 

equity awards, and

 

 

 

 

• 

employee benefits.

 

The Committee uses these four elements in the combination it believes appropriately divides the compensation of its executives among guaranteed and variable components, with some variable compensation tied to achievement of yearly financial objectives and other compensation, such as option grants vesting over multiple years, tied to the creation of even longer-term shareholder value. Each of these elements is described in detail below.

 

Base Salary

 

Base salaries for new executive officers are initially determined by evaluating the responsibilities of the position being filled, the experience of the individual being hired and the competitive marketplace for comparable executive talent. Subsequent yearly adjustments in base salaries are made only in the event of changes in duties and responsibilities for the executive, or lack of competitiveness of the base salary with market compensation offered to executives with similar responsibilities, expertise and experience in other consumer products, leisure, lifestyle and other companies the Committee considers to be comparable with the Company, and/or competitive with the Company in recruiting executives.

 

The Committee generally sets executive base salaries and target bonus awards to be competitive with comparable consumer products, leisure, lifestyle and other competitive companies as surveyed in Hewitt Executive Total Compensation Measurement, prepared by Hewitt Associates, LLP, and Towers Perrin’s Executive Compensation Databank. The Committee believes that this positions the Company’s salaries and target bonus awards at a level that allows the Company to hire, retain and motivate talented executives while also keeping the cost of the Company’s executive compensation at a reasonable level as compared to other similar and/or competitive companies.

 

The salaries for all five of the Company’s most highly compensated executive officers in fiscal 2005 are included in the Summary Compensation Table that follows this report. There were no salary increases for any of the five named executive officers for fiscal 2005. On January 20, 2006, Mr. Goldner was promoted to Chief Operating Officer of the Company. In connection with this promotion Mr. Goldner’s annualized base salary was increased from $700,000 to $800,000. As with the Company’s five named executive officers, there were no increases in base salaries for any of the Company’s other executive officers for fiscal 2005.

 

Management Incentive Bonus Awards

 

Approximately 1,200, or 20%, of the Company’s employees, including all of the Company’s executive officers, were awarded management incentive bonuses with respect to fiscal 2005. Management incentive bonus awards for the Company’s executive officers were determined under two programs for fiscal 2005.

 

The management incentive bonus eligibility of Alfred J. Verrecchia, Frank P. Bifulco, Jr., Brian Goldner, Alan G. Hassenfeld and E. David Wilson was determined pursuant to the Company’s 2004 Senior Management Annual Performance Plan (the “Annual Performance Plan”). Under the Annual Performance Plan, the Committee designated fiscal 2005 corporate and business unit performance goals for the Company at the beginning of the fiscal year. These performance goals were based on the 2005 operating plan and budgets approved by the Company’s

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Board of Directors and were the same performance criteria used for the Company’s other bonus eligible employees as well.

 

The setting of performance goals involved both selecting the performance metrics that would be used to evaluate bonus eligibility and establishing the performance targets for each of those metrics. The Committee used four performance metrics to measure corporate performance in 2005. The four corporate performance criteria were total net revenues, net revenues attributable to identified core brand drivers, operating margin and free cash flow.

 

The Committee selected these four performance metrics to capture the most important aspects of the top and bottom line performance of the Company, in the form of sales, profitability and cash generation.

 

Business unit performance objectives were based on the first three of these criteria, namely total net revenues, net revenues attributable to identified core brand drivers and operating margin. Free cash flow is not used as a business unit performance objective because its computation can only occur for the Company at the corporate level.

 

In addition to establishing the performance criteria and target performance objectives for each such criteria, at the beginning of 2005 the Committee also established target bonus awards and maximum awards for each participant in the Annual Performance Plan corresponding with various levels of performance against the designated corporate and business unit objectives.

 

For Mr. Verrecchia and Mr. Hassenfeld, management incentive bonuses for 2005 were weighted 100% for corporate performance against the four corporate performance targets listed above. For Mr. Bifulco, Mr. Goldner and Mr. Wilson, who had business unit responsibility, bonuses were weighted 40% for corporate performance against the four corporate targets, and 60% for business unit performance, which consisted not only of the performance of the Company’s U.S. Toys and Games segments as applicable to the individual executive, but also of the performance of other business units being overseen by Mr. Goldner and Mr. Wilson, against the three business unit objectives.

 

The ultimate management incentive bonus paid with respect to 2005 was a function of the percentage of the performance goals achieved, with the Committee reserving the right to lower the bonus paid in its sole discretion in each case. The Summary Compensation Table that follows this report includes the management incentive bonus awarded to each of the Company’s named executive officers for fiscal 2005.

 

For fiscal 2005, Mr. Goldner, Mr. Hassenfeld and Mr. Wilson were awarded management incentive bonuses in the amount of $800,000, $107,200 and $290,000, respectively. The Company’s performance in 2005 represented approximately 107% achievement of the corporate performance goals under the Annual Performance Plan. The weighted achievement of all target corporate objectives, U.S. Toy segment objectives and objectives of the other areas of the Company’s business overseen by Mr. Goldner in 2005 was approximately 128%. The weighted achievement of all target corporate objectives, Games segment objectives and objectives of the other areas of the Company’s business overseen by Mr. Wilson was approximately 66%.

 

With respect to executive officers other than Mr. Verrecchia, Mr. Bifulco, Mr. Goldner, Mr. Hassenfeld and Mr. Wilson, target bonuses in fiscal 2005 were determined pursuant to the Company’s 2005 Management Incentive Plan (MIP). The same corporate performance criteria and targets that were used under the Annual Performance Plan were used under the MIP for fiscal 2005. The bonuses under the MIP for the remaining executive officers, all of whom are deemed to have corporate-wide responsibility, were based 100% on corporate performance, with such corporate performance representing approximately 107% achievement of the performance targets. In all cases, the bonuses earned under the MIP could be subject to adjustment downward to as low as 0% and upward by a factor of up to an additional 50%, based on individual performance against specified individual management objectives under the MIP. In all cases, the bonuses for performance under the MIP were reviewed by the Committee and adjusted to reflect the individual performance of the executive in question.

 

Long-Term Incentive Strategy and Equity Awards

 

In fiscal 2005, and in the years prior to 2005, the Company has employed stock options as its primary form of long-term equity compensation for executive officers and other eligible employees. The Company has only infrequently used restricted stock and deferred restricted stock units as a reward and retention mechanism. No

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restricted stock or deferred restricted stock unit grants were made to the Company’s executive officers in fiscal 2005.

 

In fiscal 2005, non-qualified stock options were granted to all of the Company’s executive officers pursuant to the Company’s employee stock option plans. The grants to the Company’s named executive officers in 2005 are reflected in the Option Grants in Last Fiscal Year table that follows this report. The Committee granted individual options to executive officers in order to provide an incentive to motivate and retain those individuals over a period of years who are important to the Company’s future success. Stock options are designed to align the interests of executives with those of shareholders by providing executives with a benefit from price appreciation in the Common Stock after the date of grant. In establishing the number of shares covered by the option grants made to the Company’s individual executive officers, the Committee reviewed market data with respect to equity compensation levels at comparable and competitive companies and determined grant levels which it believed compensated these individuals for stock price appreciation in a manner commensurate with their duties and potential contributions to the performance of the Company and its stock. Stock options granted under this program generally vest annually over the three-year period following the date of grant. All options granted in fiscal 2005 were granted with an exercise price equal to the fair market value of the Common Stock on the date of grant.

 

The Committee is currently in the process of determining its equity compensation program for fiscal 2006 and as part of that process is considering whether the Company will begin to employ other vehicles as a more significant component of overall long-term compensation, with a corresponding reduction in the use of stock options. The Committee is reevaluating the Company’s current long-term compensation strategy in light of a number of developments, including the mandatory expensing of stock options which is effective for the Company beginning in fiscal 2006, and the increasing use of restricted stock and performance awards in executive compensation.

 

Employee Benefits

 

In addition to receipt of salary, management incentive bonuses and equity compensation, the Company’s officers also participate in certain employee benefit programs provided by the Company. Executive officers participate in the Company’s Pension Plan, which is described on pages 24 through 26 of this proxy statement, and can participate in the Company’s 401(k) Retirement Savings Plan (“Retirement Plan”) and the Supplemental Benefit Plan (“Supplemental Plan”). To the extent that the Company’s matching contribution exceeds certain limits applicable to the Retirement Plan, which are determined pursuant to the Code, the excess is allocated to the executive officer’s account under the Supplemental Plan. The Supplemental Plan is intended to provide a competitive benefit for executive officers whose employer-provided retirement contributions would otherwise be limited. The amount of the Company’s matching contribution to the named executive officers under both the Retirement Plan and the Supplemental Plan is included in the “All Other Compensation” column of the Summary Compensation Table that follows this report.

 

The executive officers of the Company are eligible for life insurance benefits on the terms applicable to the Company’s other employees. In addition, Mr. Verrecchia and Mr. Hassenfeld are provided with executive life insurance. The cost of the Company’s premiums for executive life insurance programs for the named executive officers is included in the “All Other Compensation” column of the Summary Compensation Table.

 

The executive officers participate in the same medical and dental benefit plans as are provided to the Company’s other employees.

 

Executive officers are also eligible to participate in the Company’s Nonqualified Deferred Compensation Plan, which is available to all of the Company’s employees who are in band 40 (director level) or above. The Nonqualified Deferred Compensation Plan allows participants to defer compensation into various hypothetical investment vehicles, the performance of which determines the return on compensation deferred under the plan. Potential investment choices include the Company’s Common Stock, as well as other equity indices. Earnings on compensation deferred by the executive officers do not exceed the market returns on the relevant investments and are the same as the returns earned by other non-executive officer employees deferring compensation into the applicable investment vehicles.

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The Company reimburses designated executive officers for the cost of certain tax and financial planning services they obtain from third parties provided that such costs are within the limits established by the Company. The cost to the Company for this reimbursement to the named executive officers is included in the “Other Annual Compensation” column of the Summary Compensation Table.

 
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