UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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KEITHLEY INSTRUMENTS, INC.

(Name of Registrant as Specified In Its Charter)

 

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

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December 31, 2008

 

 

TO THE SHAREHOLDERS OF KEITHLEY INSTRUMENTS, INC.

 

This year’s Annual Meeting of Shareholders of Keithley Instruments, Inc. will be held at 12:00 Noon (EST), Saturday, February 7, 2009, at our corporate headquarters, 28775 Aurora Road, Cleveland, Ohio.

 

In addition to acting on the matters outlined in the Proxy Statement, we look forward to reviewing with you the results of the first quarter, which will end on December 31, 2008. As in the past, there will be an informal presentation on the Company’s business.

 

We hope that you are planning to attend the Annual Meeting personally, and we look forward to seeing you. Whether or not you expect to attend in person, the return of the enclosed proxy as soon as possible would be greatly appreciated and will ensure that your shares will be represented at the Annual Meeting. If you do attend the Annual Meeting, you may revoke your proxy should you wish to vote in person.

 

On behalf of the Directors and management of Keithley Instruments, Inc., we would like to thank you for your continued support and confidence in the Company.

 

Sincerely yours,

 

Joseph P. Keithley

Chairman, President and Chief Executive Officer

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Keithley Instruments, Inc. will be held at the Company’s corporate headquarters, 28775 Aurora Road, Cleveland, Ohio, on Saturday, February 7, 2009, at 12:00 Noon (EST), for the following purposes:

 

(1) To elect eight members of the Board of Directors to serve until the next annual meeting of shareholders and until their successors have been duly elected and qualified;

 

(2) To approve the Keithley Instruments, Inc. 2009 Stock Incentive Plan;

 

(3) To ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent accountants for the fiscal year ending September 30, 2009; and

 

(4) To transact such other business as may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

Only holders of Common Shares and Class B Common Shares of record at the close of business on Tuesday, December 9, 2008, are entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof.

 

 

By Order of the Board of Directors,

 

John M. Gherlein

Secretary

 

December 31, 2008

 

Please sign, date and return the enclosed proxy promptly.
A return envelope is enclosed for your convenience.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to be Held on February 7, 2009: This proxy statement and Keithley Instrument’s 2008 annual report to shareholders are also available on Keithley Instruments’ website at www.keithley.com/Investors.

 

KEITHLEY INSTRUMENTS, INC.

 

28775 Aurora Road

Cleveland, Ohio 44139

 

PROXY STATEMENT

 

 

ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 7, 2009

 

GENERAL INFORMATION

 

This Proxy Statement is furnished in connection with the solicitation of proxies by and on behalf of the Board of Directors of Keithley Instruments, Inc. (the “Company” or “Keithley”) for use at the Annual Meeting of Shareholders of the Company to be held on February 7, 2009, and any adjournment or postponement thereof. The time, place and purposes of the Annual Meeting are stated in the Notice of Annual Meeting of Shareholders which accompanies this Proxy Statement.

 

The solicitation of proxies is made by and on behalf of the Board of Directors. The expense of soliciting proxies, including the cost of preparing, assembling and mailing the proxy materials, will be borne by the Company. In addition to solicitation of proxies by mail, solicitation may be made personally and by telephone, and the Company may pay persons holding shares for others their expenses for sending proxy materials to their principals. No solicitation will be made other than by Directors, officers and employees of the Company.

 

The presence of a shareholder at the Annual Meeting will not operate to revoke the shareholder’s proxy. Any shareholder giving a proxy pursuant to this solicitation may revoke it by giving notice to the Company in writing or in open meeting. All properly executed proxies received by the Board of Directors of the Company pursuant to this solicitation will be voted at the Annual Meeting in accordance with the directions contained in such proxies. If no directions are given, properly executed proxies will be voted FOR the election of the nominees named in this Proxy Statement and FOR the proposals set forth in the Notice, with discretionary authority to vote on all other matters that may properly come before the Annual Meeting or any adjournment or postponement thereof.

 

The close of business on December 9, 2008 has been fixed as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. This Proxy Statement and the accompanying President’s letter, notice and proxy, together with the Company’s annual report to shareholders for the fiscal year ended September 30, 2008, are first being sent to shareholders on or about December 31, 2008.

 

VOTING RIGHTS

 

As of the close of business on December 9, 2008, there were outstanding 13,452,469 Common Shares, without par value, of the Company (“Common Shares”) and 2,150,502 Class B Common Shares, without par value, of the Company (“Class B Common Shares”). The holders of outstanding Common Shares on that date will be entitled to one vote for each share held, and the holders of outstanding Class B Common Shares on that date will be entitled to ten votes for each share held. Proxies received by the Company but marked as abstentions or broker non-votes will not count in favor of, or against, election of a nominee for Director. Broker non-votes will have no effect on and abstentions will have the effect of a vote against approval of the proposals relating to the Keithley Instruments, Inc. 2009 Stock Incentive Plan and the ratification of PricewaterhouseCoopers LLC.

 

The Ohio Revised Code, as it applies to the Company, provides that if notice in writing is given by any shareholder to the President, a Vice President or the Secretary of the Company not less than 48 hours before the time fixed for holding the meeting that such shareholder desires the voting to elect Directors to be cumulative, and if an announcement of the giving of such notice is made upon the convening of the meeting by the Chairman or the Secretary or by or on behalf of the shareholder giving such notice, then each shareholder shall have cumulative voting rights in the election of Directors, enabling such shareholder to give one nominee for Director as many votes as is equal to the number of Directors to be elected multiplied by the number of shares in respect of which such shareholder is voting, or to distribute votes on the same principle among two or more nominees, as such shareholder sees fit. If cumulative voting is in effect, the persons named in the proxy will vote shares represented thereby so as to elect as many of the eight nominees named herein as possible.

 

PRINCIPAL SHAREHOLDERS

 

Security Ownership of Certain Beneficial Owners

 

The following persons are known to the Company to be the beneficial owners of more than 5% of the voting securities of the Company as of December 9, 2008:

 

 

 

 

The business address of Mr. Keithley is 28775 Aurora Road, Cleveland, Ohio 44139. The address for NWQ Investment Management Company, LLC is 2049 Century Park East, 16th Floor, Los Angeles, California 90067. The address for Renaissance Technologies LLC is 800 Third Avenue, New York, New York 10022. The address for Babson Capital Management LLC is 470 Atlantic Avenue, Boston, Massachusetts 02210-2208.

Security Ownership of Management

 

The beneficial ownership of Common Shares and Class B Common Shares by each of the Company’s Directors and executive officers named in the Summary Compensation Table and by all executive officers and Directors of the Company as a group on December 9, 2008, is set forth in the table below:

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires Keithley’s executive officers, Directors and persons who own more than 10% of Keithley’s common shares to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These persons are required to provide the Company with copies of all Section 16(a) forms that they file. Based solely on the Company’s review of these forms and written representations from the executive officers and Directors, the Company believes that all Section 16(a) filing requirements were met during fiscal year 2008.

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

At the Annual Meeting, or any adjournment or postponement thereof, Common Shares and Class B Common Shares represented by proxies, unless otherwise specified, will be voted for the election as Directors of the eight persons named below who have been nominated by the Board of Directors following the recommendation of the Board’s Nominating and Corporate Governance Committee. If the eight nominees are elected, there will be two vacancies on the Board. Under the Company’s Corporate Governance Guidelines, one of the Company’s current Directors, James T. Bartlett, has reached the maximum age for board service and cannot be nominated for another term. Additionally, R. Elton White, a current Director, has decided to retire from the Company’s Board of Directors. Accordingly, they will no longer serve on the Company’s Board of Directors following the annual meeting and the Board has not nominated any other candidates to fill these vacancies. Instead, the Board expects to reduce the size of the Board to eight members, effective when Mr. Bartlett and Mr. White cease to be Directors.

 

Each of the Directors to be elected at the meeting is to serve until the next Annual Meeting and until his or her successor shall have been duly elected and qualified. Pursuant to the Company’s Amended Articles of Incorporation, one-fourth (calculated to the nearest whole number) of the number of authorized Directors, which equals three Directors, is entitled to be elected by the Common Shares voting separately as a class. Messrs. Bachman, Jackman and Reddy have been nominated as the Directors to be so elected by the holders of the Common Shares of the Company. The remaining five nominees are to be elected by the holders of the Common Shares and the Class B Common Shares voting together. The three nominees receiving the greatest number of votes of the Common Shares voting separately as a class, and the five other nominees receiving the greatest number of votes of the Common Shares and the Class B Common Shares voting together without regard to class, will be elected as Directors.

 

Each of the nominees is presently a member of the Board of Directors and each has indicated his or her willingness to serve as a Director, if elected. If any nominee at the time of election is unable or unwilling to serve or is otherwise unavailable for election (which contingency is not now contemplated or foreseen), it is intended that the shares represented by proxies will be voted for the election of any substitute nominee that may be named by the Board of Directors.

Nominees for Election

 

Set forth below is certain information, as of December 9, 2008, with respect to each person nominated for election as a Director.

 

 

 

 

CORPORATE GOVERNANCE

 

The Board of Directors held four meetings during the fiscal year ended September 30, 2008. During that fiscal year, no Director attended fewer than 75% of the aggregate of meetings of the Board and committees on which he or she served.

 

The Company has not established a formal policy regarding director attendance at the Company’s annual meeting of shareholders. However, the annual meeting has generally been scheduled on the same day as a regular board meeting. All of the Company’s Directors attended the 2008 annual shareholders’ meeting, except Mr. Hendrix.

 

The Company has five standing committees: the Executive Committee, the Audit Committee, the Compensation and Human Resources Committee, the Strategy Committee, and the Nominating and Corporate Governance Committee. Each of these committees has a written charter approved by the Board of Directors. The Board of Directors has also adopted Corporate Governance Guidelines. A copy of the charters for the Audit Committee, Compensation and Human Resources Committee and Nominating and Corporate Governance Committee and the Corporate Governance Guidelines can be found under the “Investor Relations” section of our website at www.keithley.com and are also available in print to any shareholder who submits a request to the Company c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. Set forth below is the current membership of each standing committee of the Board, with the number of meetings held during the fiscal year ended September 30, 2008, in parentheses.

 

 

The Board has determined that all of the Directors, except for Mr. Keithley, are independent directors applying the standards set forth in the New York Stock Exchange listing standards. All of the members of the Board’s Audit Committee, Compensation and Human Resources Committee and Nominating and Corporate Governance

Committee are independent directors and met the independence criteria of the New York Stock Exchange listing standards with respect to such committee membership.

 

The non-management directors, all of whom are independent, meet in executive session without management during each board meeting. The non-management directors have appointed Brian J. Jackman to serve as the Lead Director and preside over these executive sessions. Shareholders and other interested parties may communicate with the non-management directors of the Board through the Lead Director by sending a letter marked “Confidential” and addressed to:

 

Lead Director, Keithley Instruments, Inc. Board of Directors
c/o Rosanne Sharrone
Keithley Instruments, Inc.
28775 Aurora Road
Cleveland, Ohio 44139

 

You may also send an email to the Lead Director through Keithley Instruments, Inc., Office of the President at rsharrone@keithley.com by indicating “Lead Director” in the subject line. The email will be forwarded to the Lead Director.

 

The Executive Committee is authorized to exercise all of the powers of the Board of Directors between meetings of the Board of Directors. All actions of the Executive Committee are reported to the Board of Directors at its first meeting following such action or actions.

 

The Audit Committee is responsible for assisting the Board in overseeing (i) the integrity of the financial statements of the Company, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the Company’s independent registered public accounting firm’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent registered public accounting firm. The Board has determined that Ms. Scherer is an audit committee financial expert within the meaning of Item 407 of Regulation S-K under the federal securities laws. Pursuant to its charter, the Audit Committee reviews transactions between the Company and its directors and others, and with firms that employ directors, and any other material related party transactions, including those requiring disclosure under Item 404(a) of Regulation S-K under the federal securities laws. The Audit Committee does not have written policies, procedures or standards that it applies in such review.

 

The Compensation and Human Resources Committee’s responsibilities are to review and approve the goals and objectives relevant to the compensation of the Company’s Chief Executive Officer, other executive officers and other employees who report to the Company’s Chief Executive Officer. Toward that end, the Committee oversees all compensation, equity and employee benefit plans and payments. The Committee is also responsible for periodically evaluating compensation for members of the Board of Directors and its committees and to review and approve changes in compensation and plans relating to director compensation. These responsibilities are detailed in the Committee Charter. Members of the committee are independent directors under the listing standards of the New York Stock Exchange, “non-employee directors” within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.

 

The Compensation and Human Resources Committee has retained Radford Survey + Consulting, the human resources consulting unit of AON Consulting, to provide assistance and advice with respect to executive compensation. The consultants report directly to the Chairperson of the Compensation and Human Resources Committee, although they also provide advice and discuss compensation issues directly with management. Over the past year, the consultant has, at the direction of the Compensation and Human Resources Committee, provided information and advice on a range of subjects as described under the caption “Executive Compensation and Related Information — Compensation Discussion and Analysis.”

 

The Chief Executive Officer, Chief Operating Officer and Vice President, Human Resources, attend committee meetings by invitation to provide input with respect to compensation and performance assessments of executive officers. In addition, the Chief Financial Officer attends certain meetings by invitation to provide input with respect to compensation plans. Consistent with the equity award grant policy adopted by the Board of Directors, the Committee delegates to the Chief Executive Officer authority to grant a limited number of equity awards as further

described under “Executive Compensation and Related Information — Compensation Discussion and Analysis — Equity Award Granting Practices.”

 

The Strategy Committee is responsible for ensuring that management has in place strategies and action plans as well as useful planning and control systems to enable the Company to meet its objectives.

 

The Nominating and Corporate Governance Committee is responsible for assisting the Board of Directors in identifying individuals qualified to become Board members; to recommend board committee structure, membership and operations; to develop and recommend to the Board a set of effective corporate governance policies and procedures; and to lead the Board in its annual review of the Board’s performance.

 

The charter of the Nominating and Corporate Governance Committee provides that the Committee shall make recommendations to the Board regarding director nominations, including director candidates recommended by shareholders. If a shareholder wishes to recommend a candidate, they should send their recommendation, with a description of the candidate’s qualifications, to: Chairman, Nominating and Corporate Governance Committee, c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. The Committee has not established specific minimum qualifications a candidate must have in order to be recommended by the Committee. However, in determining qualifications for new directors, the Committee will periodically establish and review Board succession plans, establish the experience and attributes needed to fulfill its responsibilities and work with the Chief Executive Officer to identify management’s needs for advice and counsel. A director candidate pool will be established from recommendations from shareholders and the Board of Directors. Additionally, the Nominating and Governance Committee may retain a board search consultant to identify and recruit potential directors.

 

DIRECTOR COMPENSATION

 

Effective October 1, 2007, non-employee Directors’ began receiving their compensation based upon a retainer structure. Previously, Director compensation was based on a combination of retainer and meeting attendance. The change in structure did not result in a material change to the total compensation that an individual Director received. This change was implemented so that meeting fees would not be a limit on Board of Director involvement in important corporate matters.

 

For fiscal year 2008, Directors who are not employees of the Company received the following fees, which are paid quarterly:

 

 

Directors may defer their fees under the Keithley Instruments, Inc. 1996 Outside Directors Deferred Stock Plan. Under the terms of that Plan, the fees are invested in Common Shares, the total number of which are included in Security Ownership of Management table found on page 3, and will be paid out in cash or Common Shares on a specified date or upon retirement from the Board of Directors per the election of the recipient.

 

In addition to retainer fees paid in cash, for fiscal year 2008, each non-employee Director received an annual Common Share grant equal to approximately $58,000 issued in four installments. Additionally, any new non-employee Director will receive a restricted stock award worth $75,000, rounded to whole shares, upon his or her initial appointment to the Board. The shares will vest over a three-year period. These shares are issued pursuant to the Keithley Instruments Inc. 2002 Stock Incentive Plan. Effective October 1, 2005, the Board of Directors established a policy requiring Directors to own $100,000 of Common Shares in the Company (including shares held in the deferred compensation plan). It is expected that the Company’s Directors achieve this ownership level within four years of the establishment of the policy, or in the case of new Directors, within four year’s of their election. All

of the Directors had met this policy; however, despite retaining these and other shares, three of the Company’s Directors are not in compliance with this policy as of December 9, 2008 due to the Company’s current stock price.

 

Also as a result of the Company’s recent low stock price, in December 2008 the Compensation and Human Resources Committee determined that it should limit the number of Common Shares to be issued to each non-employee Director with respect to his or her annual Common Share grant to 3,000 shares per quarter. This will limit the dilution of shareholders and will have the effect of lowering the non-employee Directors total compensation if the Common Share price is below $4.83 per share.

 

The following table summarizes the compensation received by each Director during fiscal year 2008:

 

Director Compensation for Fiscal Year 2008

 

 

 

 

The Company also reimburses Directors for their reasonable expenses associated with attending Board meetings and provides them with liability insurance coverage for their activities as Directors.

 

Under the Company’s Articles of Incorporation and Code of Regulations, the Directors are entitled to indemnification from Keithley to the fullest extent permitted by Ohio law. The Company has entered into indemnification agreements with each of the Directors. The agreements do not increase or decrease the scope of the indemnification provided by law and set forth processes and procedures for indemnification claims.

 

CODE OF ETHICS

 

The Company has a Code of Ethics that applies to all employees, executive officers and Directors of the Company, including the Company’s principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics includes provisions covering compliance with laws and regulations, insider trading practices, conflicts of interest, confidentiality, protection and proper use of Company assets, accounting and recordkeeping, fair competition and fair dealing, business gifts and entertainment, payments to government personnel, and the reporting of illegal or unethical behavior. The Code of Ethics is posted on the Company’s website and is available in print to any shareholder submitting a request to the Company c/o Marcia Miller, Keithley Instruments, Inc., 28775 Aurora Road, Cleveland, Ohio 44139. Any waiver of any provision of the code granted to an executive officer or Director may only be made by the Board of Directors or a Committee of the Board authorized to do so and will be promptly disclosed on the Company’s website at www.keithley.com.

 

 

EXECUTIVE COMPENSATION AND RELATED INFORMATION

 

Compensation Discussion and Analysis

 

This section describes the material elements of the Company’s compensation objectives and policies and the application of these objectives and policies to the Company’s executive officers, particularly the individuals named in the Summary Compensation Table on page 21.

 

Executive Compensation Governance

 

The Compensation and Human Resources Committee (the “Committee”) of the Board of Directors is responsible for reviewing and approving the Company’s executive compensation policies and objectives, evaluating executive management, setting executive compensation, and reviewing and approving the Company’s incentive compensation plans and equity based compensation plans for all eligible employees. Additionally, the Committee reviews and approves the amount and form of compensation to be paid to Directors for serving on the board of Directors and its committees. The Committee meets at least quarterly and more frequently as circumstances require. These responsibilities and other governance matters concerning the Committee are described under the caption “Corporate Governance.”

 

The Committee has selected and retained Radford Survey + Consulting, a business unit of AON Consulting, or Radford, as an independent consultant on compensation issues. The Committee engaged Radford to provide the Committee peer group analysis, survey data and counsel on compensation trends and issues, including compensation levels for officers and the Board of Directors, equity grants (both amount and grant terms) and stock ownership guidelines. The Committee has available to it relevant data and information regarding all elements of compensation as it makes its decisions regarding each element of compensation for the named executive officers. In 2008, the Company paid Radford approximately $80,000 for its services to the Committee.

 

Executive Compensation Philosophy

 

The Committee seeks to achieve a pay for performance culture through the Company’s executive compensation programs with the following goals:

 

 

In particular, the Company’s compensation programs are designed to reward the achievement of sales and earnings growth, quality of earnings and appreciation in the Company’s share price. The Committee also endeavors to set compensation levels that are competitive with companies that are our direct competitors in the test and measurement industry as well as a broader group of technology companies with which we compete for employees.

 

The Committee evaluates the Company’s compensation program at least annually to ensure that compensation opportunities provided to key executives are competitive with the compensation packages provided to similarly situated executives in the Company’s peer group and market surveys of similar companies, and is motivating executives to take the actions necessary to create shareholder value. The Committee seeks to foster a performance-oriented environment by making a significant portion of each executive’s cash and equity compensation based on the achievement of performance targets that the Committee believes will drive shareholder value creation. These performance targets include return on invested capital or assets and sales growth.

 

The Committee allocates total compensation between currently paid cash compensation and long-term compensation. Although this allocation may vary from year to year, for fiscal 2008 the allocation for Mr. Keithley, our chief executive officer, or CEO, and for Ms. Rae, our chief operating officer, or COO, was approximately 50% cash and 50% long-term compensation. For our other executive officers, the allocation ranged from 60-70% cash and 30-40% long-term compensation. The allocations are generally based on market competitiveness and the impact that the Committee believes each executive has on the Company’s long-term strategy. The executives with a greater impact on our long-term strategy generally receive a higher percentage of long-term compensation.

Executive Compensation Methodologies

 

The design of the Company’s executive compensation program has two principal aspects:

 

 

The Committee endeavors to set the sum of all four components of our compensation program (base salary, annual cash bonus, long-term stock awards, and health and welfare benefits), or total direct compensation, at median levels for the executive’s position based on a review of peer group companies and two broadly-based compensation surveys as described more fully below. The Committee targets our executives’ compensation at the market median because it believes the median ensures that our compensation program is sufficiently competitive to attract and retain talented executives and maintain both internal and external pay equity. Further, our annual bonus and long-term incentive awards are structured to offer above median total direct compensation for superior company performance. In addition, compensation decisions regarding specific individuals are impacted by individual job performance, Company performance, and significant changes in the competitive landscape for individuals possessing the skills we require.

 

The Committee annually reviews market information about executive compensation provided by Radford, together with performance assessments of our executives and recommendations provided by the CEO and COO (with the exception of Mr. Keithley for which no recommendation is made and Ms. Rae whose recommendation is made solely by the CEO). Generally, the Committee sets executive officers’ base salaries to fall within a range of +/- 20% of the median of surveyed companies, target bonus (as a percentage of salary) at approximately median, and target long-term compensation at median within the overall objective of targeting median total direct compensation in total for each executive. From year to year, target long-term compensation may be constrained by the rate at which equity is issued under our equity compensation plans, or “burn rate.” If the Company has exceptional performance, actual total compensation could exceed the median for total compensation for the surveyed companies in a given year. Company performance in fiscal 2008 was below a level at which executives could earn their target bonus or maximum payout under the long-term performance award units. As a result, total compensation for all of the named executive officers was below the market median.

 

In determining what it believes to be market median for executive positions, the Committee obtains market information from Radford regarding competitive market compensation data available from the proxy statements of peer group companies selected by the Committee and from two broad-based electronics industry surveys. The Committee reviews the peer group each year to ensure that it continues to be comprised of companies appropriate for purposes of comparison. Generally, the Committee establishes the peer group so that, based on revenues, the Company rank is at the 50th percentile. To achieve this result for fiscal year 2008, the Committee removed seven companies from and added three companies to last year’s list. The peer group for fiscal year 2008 consists of 17 publicly traded corporations that are headquartered in the United States with whom we compete for employees with similar skills. The following companies comprised the fiscal year 2008 peer group:

 

 

In addition, Radford supplemented the peer group data with data from two broad-based surveys covering companies in the electronics industry with revenue generally between $50 and $250 million to calculate a median consisting of a blended average of the two broad-based surveys and data from the peer group. The Committee uses the blended average to minimize the impact of any outlaying data points and because, in certain circumstances, the

companies in the peer group do not have proxy data for similarly situated executive positions that can be used for comparison to one or more of our executives.

 

Our management works with Radford to make specific recommendations to the Committee with regard to compensation based upon the market data and management’s assessment of the performance of each individual executive officer (other than the CEO). For the CEO, the Lead Director and the Chairman of the Committee lead an assessment by the independent directors of the CEO’s performance. Each independent director is asked to provide a confidential written assessment of the CEO to the Lead Director and to the Chairman of the Committee. The Committee Chairman then prepares a consolidated review, which is distributed to the Lead Director, and then to the independent directors for comment. Based on this assessment and the market data, the Committee sets the CEO’s compensation, and discusses its recommendations with the independent directors. Compensation amounts realized from past years and prior year equity awards are generally not considered in the current year’s determination of each individual’s compensation package. The impacts of tax or accounting treatments for particular forms of compensation also are generally not considered, except to the extent they reflect industry norms.

 

All salary changes for executive officers are generally made effective each January 1. Base pay levels and long-term incentive awards are generally determined and approved near the end of the calendar year at a regularly scheduled Committee meeting. The date is determined well in advance and generally occurs at the same time each year (in November) in connection with regularly scheduled Board and Committee meetings. For fiscal year 2008, preliminary annual bonus targets were reviewed at the regularly scheduled Committee meeting held in August 2007, and final annual bonus targets were reviewed and approved at a regularly scheduled telephonic meeting in September. This is the first year that an applicable performance period under the Performance Share Award Unit Program has been completed. The Committee met telephonically in September 2008 to review and approve the assumptions used and calculations made to determine the sales growth and return on assets (“ROA”)/return on invested capital (“ROIC”) components of the Performance Share Award Unit Program. See Long-Term Compensation Program for definitions of ROA and ROIC used with regard to the 2008 Performance Share Award Unit Program.

 

Elements of Executive Compensation

 

The Company’s executive compensation program provides the named executive officers with the elements of compensation described below.

 

Base Salary

 

Executive officers’ base salaries are benchmarked against the market median of the proxy data and the surveys discussed above. In general, for those executive officers who are not new to their positions and who are performing well, their salaries are targeted to the market median. All executive officers’ salaries are within a range of plus or minus 20% of the market median based on individual experience and performance. With the exception of Mr. Keithley, Mr. Plush and Ms. Rae, all named executive officers received salary increases during fiscal year 2008 ranging from 2.1% to 4.7% based upon individual performances and to ensure the Company’s compensation remained competitive with market movements for individuals with similar skills and experience in similar industries. With respect to Mr. Keithley, Mr. Plush and Ms. Rae, the Committee determined that these individuals would not receive a salary increase but instead would be eligible for an additional 10%, 5% and 5%, respectively, of their target bonus under for the Annual Incentive Plan. The Committee’s intent was to shift more of the compensation for the Company’s most senior executives to compensation elements based on Company performance. In addition, the target percentage for each of these individuals was within a range of 20% of median.

 

The following table sets forth the annualized base salary and the percentage increase for each named executive officer for fiscal year 2008.

 

Annual Bonus Program under the Annual Incentive Plan

 

The Committee determines target bonus awards under the Annual Incentive Plan, which are expressed as a percentage of base salary, for each executive officer based on the blended average market median discussed above determined by Radford for similar positions. The target bonus amounts are determined by the Committee, with consideration of the CEO’s recommendations (other than with respect to his own). Given the timing of salary increases, the prior year’s base salaries are used for determining target bonus awards in the current fiscal year Annual Incentive Plan. For each executive, the Committee establishes a performance threshold and target and a level at which the executive’s maximum bonus is earned. Awards under the plan are paid based upon actual performance against the pre-established performance objectives for the year approved by the Compensation Committee. At or below threshold performance, no bonus is earned. If Company performance is above threshold, payouts progress up to a maximum of three times the target bonus amount established for each executive. For 2008, targets under the Annual Incentive Plan were established at a level such that if the Company had achieved its annual business plan, the payout under the Annual Incentive Plan would have been approximately 78% of target.

 

For 2008, the Committee established pre-tax ROA and Sales Growth as the two quantitative performance measures for the Annual Incentive Plan. A payout is calculated for each metric independently, the sum of the two payouts is the bonus earned, subject to a maximum total bonus, which in 2008 was 300% of an individual’s target payout. Each measure was given equal weighting:

 

 

 

 

The Committee may increase or decrease the payout amounts by up to 25% of the targeted amount based on its assessment of the quality of the performance for both the Company and the individual as recommended by the CEO, with the exception of the CEO whose adjustment, if any, is made solely by the Committee.

 

The Committee evaluates the performance factors and targets for the Annual Incentive Plan each year. The Committee does not necessarily establish the performance targets based on management’s operating plan, but rather on performance levels that the Committee believes promotes Company growth without sacrificing quality of earnings or providing an incentive to executives to engage in risky business activities.

 

Bonus payouts under the Annual Incentive Plan are calculated at the end of each fiscal year and are paid annually in cash unless the employee has made a deferral election. Company performance in 2008 was below both the ROA metric threshold and the second trigger on the Sales Growth Component established for the year. As a result, for the second year in a row, no named executive officer received a payout under the Annual Incentive Plan.

 

The following table shows the annual bonus target under the Annual Incentive Plan, both as a percentage of salary and as a dollar amount for each named executive officer for 2008:

 

Long-Term Compensation Program

 

The purpose of the Company’s long-term incentive compensation program is provide a substantial equity incentive for our executive officers to manage the business for the long-term, complementing the annual bonus that rewards performance in a particular year, and to reward them for the performance of the Company and its Common Shares over multi-year periods. The Committee awards long-term compensation in the form of annual non-qualified stock option grants, and beginning in fiscal year 2006, performance award units, both of which were granted under the Company’s 2002 Stock Incentive Plan. Performance award units entitle the executive to receive a specified number of Common Shares if performance goals have been achieved as of the end of the performance period. The Committee has not established any long-term incentive programs that are settled in cash because the Committee believes that stock settled programs offer better alignment between the interests of our executive officers and our shareholders. The Committee in the past has generally not awarded restricted stock or restricted stock units to executive officers as part of the annual equity grants but, beginning in fiscal year 2009, it will be awarding restricted stock units to executive officers instead of non-qualified stock options as part a change in its long-term compensation philosophy. With the addition of restricted stock awards for executives, guidelines have been established for the 10 year retention of a portion of the restricted stock awards. See “Other Compensation Plans and Perquisites — Company Stock Ownership Guidelines.”

 

Radford establishes a median dollar value for competitive long-term pay for each executive officer position based on the blended average market median described above. The Committee awards a mix of non-qualified stock options and performance award units with a targeted value at or near the market median for each position, with adjustments for individual performance. However, in 2008, the Company’s relative stock price required lower target values to be granted in order to meet competitive dilution or burn rate guidelines. Those awards are set forth in the table below.

 

The following table shows the median total dollar amount of the long-term compensation as determined by Radford for each executive officer, the actual number of stock options and performance award units granted to each named executive officer in 2008, and the total dollar value of long-term awards granted for fiscal 2008.

 

 

 

 

The long-term incentive awards shown in the foregoing table were granted in November of 2007. The Committee awards a mix of options and performance award units that reflects the executives’ ability to impact the Company’s execution of its long-term plans, and therefore a greater emphasis on pay for performance. Mr. Keithley and Ms. Rae generally receive a 50-50 split between options and performance award units and the other executive officers generally receive a 40-60 split of options and performance award units.

Performance award units are expressed as a number of shares and are earned over a three-year period, with payout dependent upon:

 

 

 

 

 

(1) Test & Measurement Segments Only

 

(2) Communications Test and Measurement Segment Only

 

 

 

ROIC is used for Mr. Keithley, Ms. Rae and Mr. Plush as they have more ability to impact the Company’s tax planning and capital structure than the other executive officers. The final amount earned pursuant to a performance award unit granted in fiscal year 2008 may range from no units to a maximum of twice the initial award, as specified in the agreement. The awards granted in fiscal year 2008 to executive officers, if earned, will vest on September 30, 2010. The current expected payout of these awards is at the target level. The following is a matrix that shows the percentage of target that will be paid based on various levels of sales growth compared to the peer companies and levels of ROA or ROIC:

 

 

 

The Committee selected sales growth rate and ROA/ROIC as the performance measures for the performance award units because the Committee believes these measures reflect a combination of growth and high quality earnings.

 

The first three-year performance period under the Company’s Performance Share Award Unit Program was completed at the end of fiscal 2008. The Committee met to review and approve the award payouts under the program in late September. The Committee reviewed the revenue growth of the peer companies compared to the Company’s revenue growth for the relevant three-year period that ended June 30, 2008. Four companies were removed from the peer group and the comparison because they were acquired, therefore, making data unavailable for the performance period. In addition, as provided for in the program, the revenue growth of the peer companies was adjusted for mergers, acquisitions and dispositions which impacted revenue growth and for which quantifiable and qualitative information was available. In addition, the Committee reviewed the Company’s average ROA and average ROIC for the three-year period that ended September 30, 2008. It was determined that based on the Company’s performance that the participants in the Performance Share Award Unit Program had earned a 50% payout.

 

The following table shows the number of performance shares that each named executive officer received under outstanding awards under the Performance Share Award Unit Program and the value of those shares on the tax valuation date (November 5, 2008: $3.62/share):

 

 

Equity Award Granting Practices

 

The Committee’s practice has been to grant long-term incentive awards (options, performance award units and restricted stock) at its November meeting held during the Company’s first fiscal quarter. The Board of Directors adopted a formal policy regarding the granting of equity awards in December 2006, which provides for the following:

 

 

 

In addition, all long-term equity incentive awards are subject to forfeiture, set off and recoupment for any claim that the Company may have against an optionee. These claims include:

 

(i) direct or indirect disclosure of trade secret or confidential information;

 

(ii) use of confidential information within the three (3) years preceding the optionee’s termination from employment with the Company;

 

(iii) any material violation by the optionee of the terms of any written agreement between the optionee and the Company;

 

(iv) Any action taken in direct or indirect competition with the Company; or

 

(v) Any attempt to induce any Company employee or any consultant of the Company to terminate his or her employment or other contractual relationship with the Company.

 

These rights of forfeiture, set off and recoupment extend to any gain, profit and income the optionee has realized from the exercise of options granted in 2007 or later, net of amounts withheld by the Company in connection with such exercise(s).

 

Health and Welfare

 

The Committee reviews the benefits provided to executive officers annually. Periodically it compares the value of these benefits to market data provided by Radford to ensure that said benefits and their value are reasonable and customary.

 

The Committee has provided named executive officers with the same health and welfare benefits it provides all its other US-based employees; including medical, dental and vision coverage, life and disability insurance, a defined benefit pension plan, a defined contribution plan and an employee stock purchase plan. The named executive officers also have the option to participate in the Company’s Deferred Compensation Plan. In addition, the Company provides each employee with term life insurance with death benefits equal to two times base salary, although executive officers, at their option, may receive whole life insurance rather than term life insurance.

 

Other Compensation Plans and Perquisites

 

Retirement Plans

 

The Company provides opportunities for all employees to save for retirement in four benefit plans: a voluntary defined contribution plan (401(k)), a company funded defined benefit pension plan, an employee stock purchase plan and a deferred compensation plan. These plans are designed to provide competitive retirement benefits.

 

401(k)

 

The Company maintains a defined contribution retirement plan for all its eligible employees in the United States under Section 401(k) of the Internal Revenue Code (the “401(k)”) Plan.

The 401(k) Plan offers the named executive officers and all other employees the opportunity to defer income. In addition, during 2008 the Company made a mandatory matching contribution to each employee equal to 25% of up to 6% compensation deferred by the employee, and was to match up to 50% of up to 6% of compensation deferred depending upon the Company’s financial performance. In December 2008, the Company determined to suspend its matching contributions in response to the rapid deterioration in global economic and industry conditions. The rules of the Internal Revenue Code limit the compensation that may be used in applying any deferral election or matching contribution. In 2008, that limit was $15,500 the (“IRS Cap”). In addition, the 401(k) Plan limits contributions to 25% of an employee’s base pay or the IRS Cap, whichever is less. The Company does not provide a tax-deferred non-qualified plan which would allow employees in excess of the IRS Cap to defer and receive a match on that portion of their compensation that does not qualify for the 401(k) Plan.

 

Defined Benefit Pension Plan

 

The Company’s United States pension plan provides retirement benefits to eligible participants who terminate employment at or after age 65, or who terminate employment before age 65 with at least five years of service. Benefits commence after termination of employment, but not before age 55. Retirement benefits are computed on the basis of pension credits for each year of the employee’s service. Generally, an employee’s pension credits will be equal to the sum of (i) 0.9% of the employee’s high five-year average annual compensation, not in excess of the employee’s Social Security “covered compensation” (as defined by Section 401(I)(5)(E) of the Internal Revenue Code) as of September 30, 1999, plus 1.5% of such average annual compensation in excess of “covered compensation,” with such sum multiplied by the employee’s years of credited service (up to 30 years) through September 30, 1999; plus (ii) 1.2% of the employee’s annual compensation for each plan year beginning on or after October 1, 1999. The annual retirement benefit (paid as a straight life annuity) of an average employee who works until normal retirement age will equal approximately 20-25% of his or her final pay at age 65. Several factors would impact the amount of the retirement benefit including leaving employment prior to normal retirement age or receiving wages that exceed the compensation limit for qualified pension plans. The Company does not maintain any Supplemental Retirement plans in which any named executive officer participates.

 

Employee Stock Purchase Plan

 

The Company provides an Employee Stock Purchase Plan to all eligible employees, including named executive officers. The plan provides that an employee may defer up to $25,000 per calendar year into the plan. The plan purchases shares with monies deferred once a year giving each plan participant a 5% discount on the share price. The share price is determined by the closing share price on the last day of the plan year which is June 30.

 

Deferred Compensation Plan

 

The Deferred Compensation Plan provides executive officers, directors and other key employees the opportunity to defer receipt of cash compensation. The Company does not contribute to this plan. Participants may elect to defer all or part of their cash compensation (base salary and annual bonus) for a specified period of years or until retirement. Participants can select from a variety of investment funds from which the earnings on their deferred cash compensation account will be determined. Participants in the Deferred Compensation Plan are considered unsecured creditors of the Company.

 

Perquisites

 

The Company provides executive officers with a Company car, a cell phone, whole life insurance equal to two times their annual salary, access to financial planning services, and access to a health club membership. In addition, to assist the Company in conducting business meetings and/or entertainment, the Company pays the cost of certain club dues for the CEO. Although the CEO may derive some personal benefit from the club use, the membership is used extensively for business purposes and he pays all expenses of his personal use.

 

Change in Control and Other Severance Arrangements

 

Upon a change in control as defined in the Keithley Instruments, Inc. 2002 Stock Incentive Plan, all stock options and any outstanding stock appreciation rights granted under the plan become immediately exercisable in

full and all restricted stock grants, including performance award units, become immediately vested and any applicable restrictions lapse. Performance award units vest at target levels. The Company does not have a formal severance policy, and the Committee must review and approve the severance of any officer. With the exception of Mr. Plush, no executive officer has a separate agreement providing change in control benefits, other than with respect to their equity awards.

 

Company Stock Ownership Guidelines

 

While the Company encourages its executive officers to own Common Shares, in fiscal year 2008 it did not have a formal policy requiring specified levels of share ownership. The Committee believes that its current compensation structure properly aligns the named executive officers with shareholder interest and, therefore, a formal policy is not necessary. In anticipation of granting restricted stock to executive officers in fiscal year 2009, the Committee has adopted a Share Ownership Program which requires executive officers who receive restricted stock under the long-term incentive program to hold some portion of the vested after-tax award for a period of ten years or termination from the Company. The percentages of after-tax amounts to be held are as follows:

 

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with the Company’s management. Based on the review and discussions referred to above, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

 

Compensation and Human Resources Committee

Brian R. Bachman, Chairman

Leon J. Hendrix

Barbara V. Scherer

Thomas A. Saponas

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth information concerning the compensation for our Chief Executive Officer and Chief Financial Officer, as well as the three next highest paid executive officers of the Company as of September 30, 2008 and 2007.

 

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS FOR FISCAL YEAR 2008

 

 

 

 

OUTSTANDING EQUITY AWARDS AT SEPTEMBER 30, 2008

 

 

 

 

 

OPTION EXERCISES AND STOCK VESTED FOR FISCAL YEAR 2008

 

 

 

 

PENSION BENEFITS AT SEPTEMBER 30, 2008

 

 

 

 

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL YEAR 2008

 

 

 

 

POTENTIAL PAYMENTS UPON EMPLOYMENT TERMINATION, DEATH OR CHANGE OF CONTROL