DEF 14A 1 def14a_2009.htm 2009 ANNUAL MEETING PROXY STATEMENT def14a_2009.htm
 
 
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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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Check the appropriate box:
     
   
Preliminary Proxy Statement
     
   
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Definitive Proxy Statement
     
   
Definitive Additional Materials
     
   
Soliciting Material Pursuant to §240.14a-12

 
 
Caterpillar 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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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
     
   
(1)
 
Title of each class of securities to which transaction applies:
     
   
(2)
 
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(3)
 
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(4)
 
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(5)
 
Total fee paid:

   
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
     
   
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Date Filed:

SEC 1913 (04-05)
 
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100 NE Adams Street
Peoria, Illinois  61629

Notice of Annual Meeting of Stockholders
Wednesday, June 10, 2009
1:30 p.m.  Central Daylight Time

Northern Trust Building
50 South LaSalle Street
Chicago, Illinois 60675

May 1, 2009
Fellow stockholder:

On behalf of the board of directors, you are cordially invited to attend the 2009 Caterpillar Inc. annual meeting of stockholders (annual meeting) to:

 
§
Elect directors.
 
§
Ratify Independent Registered Public Accounting Firm.
 
§
Act on stockholder proposals, if properly presented.
 
§
Conduct any other business properly brought before the meeting.

We have elected to furnish materials for the 2009 annual meeting to stockholders via the Internet.  We believe the use of the Securities and Exchange Commission e-proxy rule will expedite stockholders’ receipt of the 2009 proxy materials, lower the costs and reduce the environmental impact of our annual meeting.  On May 1, 2009, we mailed a notice to most stockholders containing instructions on how to access the proxy materials and to vote online.  All other stockholders were sent a copy of the proxy materials by mail or e-mail.  See page 1 of this proxy statement for more information on e-proxy and instructions on how you can (i) receive a paper copy of the proxy materials if you received a notice by mail, or (ii) elect to receive your proxy materials over the Internet or by e-mail, if you received them by mail this year.

You must have an admission ticket to attend the annual meeting.  Procedures for requesting the admission ticket are detailed on page 61 of this proxy statement.  Attendance and voting is limited to stockholders of record at the close of business on April 13, 2009.
 
   
Sincerely yours,
   
   
James W. Owens
Chairman


 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
   
 
   
       
   
       
   
       
   
       
   
       
   
       
   
       
 
 
 
 
   
   
   
   
 
   
   
 
 

 
 
PART ONE  Information about E-proxy, Meeting Attendance and Voting Matters
 
As permitted by e-proxy rules adopted by the Securities and Exchange Commission (SEC), Caterpillar Inc. (Caterpillar, the company or we or us) is providing, in most cases, the proxy materials for its 2009 annual meeting electronically via the Internet.  On May 1, 2009, we initiated delivery of proxy materials to our stockholders of record as of the close of business on April 13, 2009 one of three ways: 1) a notice containing instructions on how to access proxy materials via the Internet (notice), 2) paper copy mailing or 3) e-mail distribution.  If you received a notice, you will not receive a printed copy of the proxy materials in the mail.  Instead, the notice provides instructions on how to access the proxy materials and to vote online or by telephone.  If you received a notice by mail and would like to receive a printed copy of the proxy materials or elect to receive the materials via e-mail in the future, please follow the instructions included in the notice.  If you received a printed copy of proxy materials by mail and would like to register to receive a notice of proxy materials or an e-mail regarding availability of proxy materials in the future, you can do so by any of the following methods:
 
 
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Internet – Access the Internet and go to www.eproxyaccess.com/cat2009.
 
 
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Telephone – From within the United States or Canada, call us free of charge at 1-888-216-1280.
 
 
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E-mail – Send us an e-mail at cat@eproxyaccess.com, using the control number on the card as the subject line, and indicate whether you wish to receive a paper or e-mail copy of the proxy materials and whether your request is for this meeting only or all future meetings.
 
 
Q:
Why am I receiving this proxy statement?
   
A:
You have received these proxy materials because Caterpillar’s board of directors (board) is soliciting your proxy to vote your shares at the annual meeting.  This proxy statement includes information that we are required to provide to you under SEC rules and is designed to assist you in voting your shares.
 
 
Q:
What is e-proxy and why did Caterpillar choose to use it this year?
   
A:
SEC rules allow companies to choose the method for delivery of proxy materials to stockholders.  For most stockholders, we have elected to mail a notice regarding the availability of proxy materials rather than sending a full set of these materials in the mail.  Utilizing this method of delivery will expedite receipt of proxy materials by our stockholders and lower the costs and reduce the environmental impact of our annual meeting.
 
 
Q:
Why didn’t I receive an annual report or sustainability report with my proxy materials?
   
A:
Our 2008 annual report and 2008 sustainability report are available exclusively online (www.CAT.com/investor).  The online, interactive format of the reports furthers our efforts to lower costs and reduce the environmental impact of our annual meeting.  Complete financial statements, financial statement notes and management’s discussion and analysis for 2008 are included in the proxy materials as an appendix to the proxy statement.
 
Page 1



Q:
Who can attend the annual meeting?
   
A:
Anyone wishing to attend the annual meeting must have an admission ticket issued in his or her name.  Admission is limited to:

 
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Stockholders of record on April 13, 2009 and one immediate family member.
     
 
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Authorized proxy holder of a stockholder of record.
     
 
§
Authorized representative of a stockholder of record who has been designated to present a stockholder proposal.

 
You must provide evidence of your ownership of shares with your ticket request.  The requirements for obtaining an admission ticket are specified in the “Admission & Ticket Request Procedure” on page 61.  Notwithstanding the above, members of the media and analysts are permitted to attend the annual meeting pursuant to the directions provided in the “Admission & Ticket Request Procedure” on page 61.

 
Q:
What is a stockholder of record?
   
A:
A stockholder of record or registered stockholder is a stockholder whose ownership of Caterpillar stock is reflected directly on the books and records of our transfer agent, BNY Mellon Shareowner Services (transfer agent).  If you hold stock through a bank, broker or other intermediary, you hold your shares in “street name” and are not a stockholder of record. For shares held in street name, the stockholder of record is your bank, broker or other intermediary.  Caterpillar only has access to ownership records for the registered shares.  So, if you are not a stockholder of record, the company needs additional documentation to evidence your stock ownership as of the record date – such as a copy of your brokerage account statement, a letter from your broker, bank or other nominee or a copy of your voting instruction card.
 
 
Q:
When is the record date and who is entitled to vote?
   
A:
The board set April 13, 2009 as the record date for the 2009 annual meeting.  Holders of Caterpillar common stock on that date are entitled to one vote per share.  As of April 13, 2009, there were 601,751,560 shares of Caterpillar common stock outstanding.
 
A list of all registered stockholders will be available for examination by stockholders during normal business hours at 100 NE Adams Street, Peoria, Illinois 61629, at least ten days prior to the annual meeting and will also be available for examination at the annual meeting.
 
 
Q:
How do I vote?
   
A:
You may vote by any of the following methods:

 
§
 
In person – stockholders of record and stockholders with shares held in street name that obtain an admission ticket (following the specified procedure) and attend the meeting will receive a ballot for voting.  If you hold shares in street name, you must also obtain a legal proxy from your broker to vote in person at the meeting and submit it along with your ballot.
     
 
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By mail signing and returning the proxy and/or voting instruction card provided.
     
 
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By phone or via the Internet – following the instructions on your notice card, proxy and/or voting instruction card or e-mail notice.

 
If you vote by phone or the Internet, please have your notice, proxy and/or voting instruction card available.  The control number appearing on your notice or card is necessary to process your vote.  A phone or Internet vote authorizes the named proxies in the same manner as if you marked, signed and returned the card by mail.
 
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Q:
How can I authorize someone else to attend the meeting or vote for me?
   
A:
Stockholders of record can authorize someone other than the individual(s) named on the proxy and/or voting instruction card to vote on their behalf by crossing out the individual(s) named on the card and inserting the name of the individual being authorized or by providing a written authorization to the individual being authorized to attend or vote.
 
Street name holders can contact their broker to obtain documentation with authorization to attend or vote at the meeting.
 
To obtain an admission ticket for an authorized proxy representative, see the requirements specified in the “Admission & Ticket Request Procedure” on page 61.
 
 
Q:
How can I change or revoke my vote?
   
A:
For stockholders of record: You may change or revoke your vote by submitting a written notice of revocation to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629 or by submitting another vote on or before June 10, 2009 (including a vote via the Internet or by telephone).  For all methods of voting, the last vote cast will supersede all previous votes.
 
For holders in street name: You may change or revoke your voting instructions by following the specific directions provided to you by your bank or broker.
 
 
Q:
Is my vote confidential?
   
A:
Yes. Proxy cards, ballots, Internet and telephone votes that identify stockholders are kept confidential.  There are exceptions for contested proxy solicitations or when necessary to meet legal requirements.  Innisfree M&A, the independent proxy tabulator used by Caterpillar, counts the votes and acts as the inspector of election for the annual meeting.
 
 
Q:
What is the quorum for the meeting?
   
A:
A quorum of stockholders is necessary to hold a valid meeting.  For Caterpillar, at least one-third of all stockholders must be present in person or by proxy at the annual meeting to constitute a quorum.  Abstentions and broker non-votes are counted as present for establishing a quorum.  A broker non-vote generally occurs when a nominee (such as broker) holding shares for a beneficial owner does not receive instructions from the beneficial owner on how to vote on a discretionary matter. Because the nominee does not have discretionary voting power (as provided under New York Stock Exchange (NYSE) rules), he or she will not be able to vote on the matter.
 
 
Q:
What vote is necessary for action to be taken on proposals?
   
A:
Directors are elected by a plurality vote of the shares present at the meeting, meaning that director nominees with the most affirmative votes are elected to fill the available seats.  All other actions presented for a vote of the stockholders at the 2009 annual meeting require an affirmative vote of the majority of shares present or represented at the meeting.  Abstentions and broker non-votes have the effect of a vote against matters other than director elections.
 
Votes submitted by mail, telephone or Internet will be voted by the individuals named on the card (or the individual properly authorized) in the manner indicated.  If you do not specify how you want your shares voted, they will be voted in accordance with management’s recommendations.  If you hold shares in more than one account, you must vote each proxy and/or voting instruction card you receive to ensure that all shares you own are voted.
 
 
Q:
When are stockholder proposals due for the 2010 annual meeting?
   
A:
To be considered for inclusion in the company’s 2010 proxy statement, stockholder proposals must be received in writing no later than January 1, 2010.  Stockholder proposals should be sent to Caterpillar Inc. by mail c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  Additionally, we request that you also forward all stockholder proposals via facsimile to the following facsimile number:  309-494-1467.
 
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Q:
What does it mean if I receive more than one proxy card?
   
A:
Whenever possible, registered shares and plan shares for multiple accounts with the same registration will be combined into the same card.  Shares with different registrations cannot be combined and as a result, the stockholder may receive more than one proxy card.  For example, registered shares held individually by John Smith will not be combined on the same proxy card as registered shares held jointly by John Smith and his wife.
 
Street shares are not combined with registered or plan shares and may result in the stockholder receiving more than one proxy card.  For example, street shares held by a broker for John Smith will not be combined with registered shares for John Smith.
 
If you hold shares in more than one account, you must vote for each notice, proxy and/or voting instruction card or e-mail notification you receive that has a unique control number to ensure that all shares you own are voted.
 
If you receive more than one card for accounts that you believe could be combined because the registration is the same, contact our stock transfer agent (for registered shares) or your broker (for street shares) to request that the accounts be combined for future mailings.
 
 
Q:
Who pays for the solicitation of proxies?
   
A:
Caterpillar pays the cost of soliciting proxies.  Proxies will be solicited on behalf of the board.  This solicitation is being made by mail, but also may be made by telephone or in person.  We have hired Innisfree M&A Incorporated for $15,000, plus out-of-pocket expenses, to assist in the solicitation.  We will reimburse brokerage firms and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for sending proxy materials to stockholders and obtaining their votes.
 
 
Q:
Are there any matters to be voted on at the meeting that are not included in this proxy statement?
   
A:
We do not know of any matters to be voted on by stockholders at the meeting other than those discussed in this proxy statement.  If any other matter is properly presented at the annual meeting, proxy holders will vote on the matter in their discretion.
 
Under Caterpillar bylaws, a stockholder may bring a matter to vote at the annual meeting by giving adequate notice to Caterpillar Inc. by mail c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  To qualify as adequate, the notice must contain information specified in our bylaws and be received by us not less than 45 days nor more than 90 days prior to the annual meeting.  However, if less than 60 days notice of the annual meeting date is given to stockholders, notice of a matter to be brought before the annual meeting may be provided to us up to the 15th day following the date the notice of the annual meeting was provided.
 
 
Q:
Can I submit a question in advance of the annual meeting?
   
A:
Stockholders wishing to submit a question for consideration in advance of the annual meeting may do so by sending an e-mail to the Corporate Secretary at Directors@CAT.com or by mail to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  At the annual meeting, the chairman will alternate taking live questions with questions submitted in advance, if any.
 
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PART TWO  Corporate Governance Information
Our board has adopted Guidelines on Corporate Governance Issues (corporate governance guidelines), which are available on our Internet site (www.CAT.com/governance) and also available in print upon written request to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  The corporate governance guidelines reflect the board’s commitment to oversee the effectiveness of policy and decision-making both at the board and management level, with a view to enhancing stockholder value over the long term.
 
Structure
 
As of the date of this proxy statement, our board consists of 14 directors and is divided into three classes for election purposes.  One class is elected at each annual meeting to serve for a three-year term.  With the exception of the Chairman, all directors are independent as determined under NYSE listing standards and the categorical standards described under “Director Independence Determinations” on page 7.

Directors elected at the 2009 annual meeting will hold office for a three-year term expiring at the 2012 annual meeting.  Directors in the other two classes will continue in office for the remainder of their terms.  See pages 15 and 16 for proposal information regarding directors up for election this year.

If a nominee is unavailable for election, proxy holders will vote for another nominee proposed by the board or, as an alternative, the board may reduce the number of directors to be elected at the meeting.

At the April 2009 board meeting, the board elected, effective June 1, 2009, Ambassador Susan C. Schwab as a director of the company.  Ambassador Schwab will be appointed to a board committee at a future board meeting. Upon the effective date of her directorship, Ambassador Schwab will be a Class III director, and her business experience and current directorships, if any, are provided with her description as a Class III director below.  Upon the effective date of Ms. Schwab's election, the board will have 15 directors.

The current composition of the board classes is as follows:

 
Class I – Directors with terms expiring in 2011
 
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W. FRANK BLOUNT, 70, Chairman and CEO of JI Ventures, Inc. (venture capital).  Other directorships: Alcatel-Lucent S.A.; Entergy Corporation; and KBR, Inc.  Mr. Blount has been a director of the company since 1995.

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JOHN R. BRAZIL, 63, President of Trinity University (San Antonio, Texas).  Dr. Brazil has been a director of the company since 1998.

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EUGENE V. FIFE, 68, Managing Principal of Vawter Capital LLC (private investment).  Mr. Fife served as the interim CEO and President of Eclipsys Corporation (healthcare information services) from April to November of 2005.  He currently serves as the non-executive Chairman of Eclipsys Corporation.  Mr. Fife has been a director of the company since 2002.

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GAIL D. FOSLER, 61, President and Trustee of The Conference Board (research and business membership).  Prior to her current position, Ms. Fosler served as Executive Vice President, Senior Vice President and Chief Economist of The Conference Board.  Other directorship:  Baxter International Inc.  Ms. Fosler has been a director of the company since 2003.

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PETER A. MAGOWAN, 67, former President and Managing General Partner of the San Francisco Giants (major league baseball team).  Mr. Magowan has been a director of the company since 1993.
 
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Class II – Directors nominated for election this year
 
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DANIEL M. DICKINSON, 47, Managing Partner of Thayer | Hidden Creek (private equity investment).  Other directorship:  BFI Canada Ltd.  Mr. Dickinson has been a director of the company since 2006.

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DAVID R. GOODE, 68, former Chairman, President and CEO of Norfolk Southern Corporation (holding company engaged principally in surface transportation).  Other directorships: Delta Air Lines, Inc. and Texas Instruments Incorporated.  Mr. Goode has been a director of the company since 1993.

§
JAMES W. OWENS, 63, Chairman and CEO of Caterpillar Inc. (machinery, engines and financial products).  Prior to his current position, Mr. Owens served as Vice Chairman and as Group President of Caterpillar.  Other directorships:  Alcoa Inc. and International Business Machines Corporation.  Mr. Owens has been a director of the company since 2004.

§
CHARLES D. POWELL, 67, Chairman of Capital Generation Partners (asset and investment management), LVMH Services Limited (luxury goods) and Magna Holdings (real estate investment).  Prior to his current positions, Lord Powell was Chairman of Sagitta Asset Management Limited (asset management).  Other directorships: Hongkong Land Holdings Limited; LVMH Moet-Hennessy Louis Vuitton; Mandarin Oriental International Ltd.; Textron Corporation; Schindler Holding Ltd.; and Yell Group plc.  Lord Powell has been a director of the company since 2001.

Consistent with the company’s corporate governance guidelines requiring directors to serve on no more than five public company boards in addition to the company’s board, on March 29, 2009 Charles Powell tendered notice of his resignation as a member of the Yell Group plc board of directors,  effective July 24, 2009.
 
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JOSHUA I. SMITH, 68, Chairman and Managing Partner of the Coaching Group, LLC (management consulting).  Other directorships: Comprehensive Care Corporation, Federal Express Corporation and The Allstate Corporation.  Mr. Smith has been a director of the company since 1993.

 
Class III – Directors with terms expiring in 2010
 
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JOHN T. DILLON, 70, former Chairman and CEO of International Paper (paper and forest products).  Mr. Dillon serves as Vice Chairman of Evercore Capital Partners (advisory and investment firm) and Senior Managing Director of the firm's investment activities and private equity business.  Other directorships: E. I. du Pont de Nemours and Company and Kellogg Co.  Mr. Dillon has been a director of the company since 1997.

§
JUAN GALLARDO, 61, Chairman  of Grupo Embotelladoras Unidas S.A. de C.V. (bottling).  Former Vice Chairman of Home Mart de Mexico, S.A. de C.V. (retail trade), former Chairman of Grupo Azucarero Mexico, S.A. de C.V. (sugar mills) and former Chairman of Mexico Fund Inc. (mutual fund).  Other directorships: Grupo Mexico, S.A. de C.V. and Lafarge S.A.  Mr. Gallardo has been a director of the company since 1998.

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WILLIAM A. OSBORN, 61, Chairman and former CEO of Northern Trust Corporation (multibank holding company) and The Northern Trust Company (bank).  Other directorship: Abbott Laboratories.  Mr. Osborn has been a director of the company since 2000.

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EDWARD B. RUST, JR., 58, Chairman, President and CEO of State Farm Mutual Automobile Insurance Company (insurance). He is also President and CEO of State Farm Fire and Casualty Company, State Farm Life Insurance Company and other principal State Farm affiliates as well as Trustee and President of State Farm Mutual Fund Trust and State Farm Variable Product Trust.  Other directorships:  Helmerich & Payne, Inc. and The McGraw-Hill Companies, Inc.  Mr. Rust has been a director of the company since 2003.

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SUSAN C. SCHWAB (effective June 1, 2009), 54, Professor, University of Maryland School of Public Policy. Prior to her current position, Ambassador Schwab held various positions including United States Trade Representative (member of the President’s cabinet), Deputy United States Trade Representative and President and Chief Executive Officer of the University System of Maryland Foundation and Vice-Chancellor of Advancement, University System of Maryland.
 
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Caterpillars board adopted a written process governing the approval of related party transactions for directors and certain officers in April 2007.  Under the process, all related party transactions are to be approved in advance by the Governance Committee.  A related party includes directors and executive officers and their immediate family members.
 
Prior to entering into such a transaction, the applicable director or officer  must submit a form to the companys General Counsel providing the details of the proposed transaction including whether:  (i) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year; (ii) the company is a party; and  (iii) the related person or his or her immediate family member has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10 percent beneficial owner of an entity involved in the transaction).  The General Counsel will then evaluate, based on the facts and circumstances of the transaction, whether the related person has a direct or indirect material interest in the transaction.  If so, the General Counsel will submit the matter to the Governance Committee for it to consider the following:
 
 
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The nature of the related persons interest in the transaction.
 
 
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The material terms of the transaction, including, without limitation, the amount and type of transaction.
 
 
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The importance of the transaction to the related person.
 
 
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The importance of the transaction to the company.
 
 
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Whether the transaction would impair the judgment of the director or executive officer to act in the best interest of the company.
 
 
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The alternatives to entering into the transaction.
 
 
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Whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally.
 
 
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The potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts.
 
 
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The overall fairness of the transaction to the company.

There were no transactions reported under the process for 2008. However, the Governance Committee did consider long-term transactions/relationships between the company and The Conference Board, for which Ms. Fosler is the president and trustee, The Northern Trust Company, for which Mr. Osborn is chairman and LSV Asset Management, for which Mr. Owens son is a partner.  On each occasion, the Governance Committee concluded that Ms. Fosler, Mr. Osborn and Mr. Owens  son do not have a direct or indirect material interest in the applicable relationship/transaction.
 
The companys corporate governance guidelines establish that no more than two non-independent directors shall serve on the board at any point in time.  A director is “independent” if he or she has no direct or indirect material relationship with the company or with senior management of the company and their affiliates.  Annually, the board makes an affirmative determination regarding the independence of each director based upon the recommendation of the Governance Committee.  The board makes its independence determination on a case-by-case basis, after consideration of all relevant facts and circumstances.  To assist the board in making its independence determination, the board has adopted the following standards, which conform to the applicable NYSE rules.  Under these standards, a director shall be considered independent if he or she:
 
(1)
Has no material relationship with the company, either directly or as a partner, stockholder or officer of an organization that has a relationship with the company, and does not have any relationship that precludes independence under the NYSE director independence standards;
 
Page 7


(2)
Is not currently, or within the past three years, employed by the company, or an immediate family member is not currently, or for the past three years, employed as an executive officer of the company;
 
(3)
Is not a current employee, nor is an immediate family member a current executive officer of, a company that has made payments to, or received payments from, the company for property or services in an amount which, in any of the past three years, exceeds the greater of $1 million or 2 percent of the consolidated gross revenues of that company;
 
(4)
Has not received, nor has an immediate family member received, during any twelve month period within the last three years, direct remuneration in excess of $120,000 from the company other than director and committee fees and pension or other forms of deferred compensation for prior services;
 
(5)
(i) is not a current partner or employee of a firm that is the company's internal or external auditor; (ii) does not have an immediate family member who is a current partner of such a firm; (iii) does not have an immediate family member who is a current employee of such a firm and personally works on the company's audit; or (iv) has not, nor has an immediate family member, been a partner or employee of such a firm and personally worked on the listed company's audit within the last three years;
 
(6)
Is not part of an “interlocking directorate,” whereby an executive officer of the company simultaneously served on the compensation committee of another company that employed the director as an executive officer during the last three years;
 
(7)
Is free of any relationships with the company that may impair, or appear to impair his or her ability to make independent judgments; and
 
(8)
Is not employed by a non-profit organization where a substantial portion of funding for the past three years (representing at least a greater of $1 million or 2 percent of the organizations annual consolidated gross revenues) comes from the company or the Caterpillar Foundation.

Applying these standards, on April 8, 2009 the board determined that each of the following directors met the independence standards: W. Frank Blount, John R. Brazil, Daniel M. Dickinson, John T. Dillon, Eugene V. Fife, Gail D. Fosler, Juan Gallardo, David R. Goode, Peter A. Magowan, William A. Osborn, Charles D. Powell, Edward B. Rust, Jr. and Joshua I. Smith.  In making its determination, the board considered the following company transactions, relationships or arrangements, which the board determined did not affect the applicable directors independence:
 
§
The Conference Board, for which Ms. Fosler is the president and a trustee, received payments from the company for research, subscriptions, conferences, webcasts, etc.  The board determined that Ms. Foslers independence was not affected by these payments because the amount of the payments made by the company was below the greater of $1 million or 2 percent of The Conference Boards consolidated gross revenues.
 
§
The Northern Trust Company, for which Mr. Osborn is the chairman, received payments from the company primarily for trustee services related to the administration of benefit plans.  The board determined that Mr. Osborns independence was not affected by these payments because the amount of the payments made by the company was below the greater of $1 million or 2 percent of The Northern Trust Companys consolidated gross revenues.
 
§
Various matching contributions made by the Caterpillar Foundation to non-profit organizations where directors or immediate family members are employed were also considered, however, none of the contributions affected the independence of any of the applicable directors.

In addition, the board determined that because Mr. Owens is the Chief Executive Officer of the company he is not independent based on the above standards.
 
Page 8


In 2008, our full board met eight times and regularly scheduled executive sessions, led by the presiding director, were held without management present.  In addition to those meetings, directors attended meetings of individual board committees.  Overall attendance for our directors at full board and committee meetings held in 2008 was 94.03 percent.  For board meetings only, attendance was 93.14 percent in 2008.  No director attended fewer than 75 percent of the total meetings held in 2008.  Company policy, posted on our Internet site, states that absent unavoidable conflict, all directors are expected to attend the annual stockholder meeting.  All of our directors attended the annual meeting in June 2008.

Our board has four standing committees - Audit, Compensation, Governance and Public Policy.  Each committees charter is available on our Internet site (www.CAT.com/governance) or available in print upon written request to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.

Following is a description of each committee of the board.  Committee memberships as of March 2, 2009, are listed in the Committee Membership table on page 10.

The Audit Committee assists the board in fulfilling its oversight responsibilities with respect to the integrity of Caterpillars financial statements, Caterpillars compliance with legal and regulatory requirements, the qualifications and independence of Caterpillars Independent Registered Public Accounting Firm (auditors), the performance of Caterpillars internal audit function and the auditors, the effectiveness of Caterpillars internal controls and the implementation and effectiveness of Caterpillars ethics and compliance program.  The Audit Committee performs this function by monitoring Caterpillars financial reporting process and internal controls and by assessing the audit efforts of the auditors and the internal auditing department.  The Audit Committee has ultimate authority and responsibility to appoint, retain, compensate, evaluate and, where appropriate, replace the auditors.  The Audit Committee also reviews updates on emerging accounting and auditing issues provided by the auditors and by management to assess their potential impact on Caterpillar.  During 2008, the Audit Committee met 11 times and overall attendance was 95.45 percent.  All members of the Audit Committee meet the standards for independence set forth in the NYSE listing standards and meet financial literacy guidelines adopted by the board.  Additionally, the board has determined that each member of the Audit Committee qualifies as an “audit committee financial expert” as defined under SEC rules.

The Compensation Committee assists the board in fulfilling its responsibilities in connection with the compensation of the companys directors, officers and employees. It performs this function by establishing and overseeing the companys compensation programs, recommending to the board the compensation of directors who are not officers of the company, administering the companys equity compensation plans, furnishing an annual Compensation Committee Report on executive compensation and approving the filing of the Compensation Discussion & Analysis section in accordance with applicable SEC rules and regulations for inclusion in the companys proxy statement. All members of the Compensation Committee meet the standards for independence set forth in the NYSE listing standards.  During 2008, the Compensation Committee met five times and overall attendance was 93.33 percent.

The Governance Committee assists the board by making recommendations regarding the size and composition of the board and the criteria to be used for the selection of candidates to serve on the board.  The Governance Committee discusses and evaluates the qualifications of directors up for re-election and recommends the slate of director candidates to be nominated for election at the annual meeting.  Stockholders who are interested in nominating a director candidate can do so in accordance with the policy discussed in the “Governance Committee” section on page 14.  In addition, the Governance Committee recommends to the board candidates for election as officers of the company.  The Governance Committee also oversees the corporate governance guidelines and leads the board in its annual self-evaluation process and shares the results thereof with the board for discussion and deliberation.  All members of the Governance Committee meet the standards for independence set forth in the NYSE listing standards.  During 2008, the Governance Committee met five times and overall attendance was 93.33 percent.
 
Page 9


The Public Policy Committee assists the board in general oversight with respect to matters of national and international public policy affecting the companys business, trade policy and international trade negotiations impacting the company, major global legislative and regulatory developments both in the U.S. and internationally affecting the company, investor, consumer and community relations issues, employee relations, implementation of policies promoting diversity within the company, sustainable development initiatives, and charitable and political contributions by the company or by any committee or foundation affiliated with the company.  All members of the Public Policy Committee meet the standards for independence set forth in the NYSE listing standards.  During 2008, the Public Policy Committee met five times and overall attendance was 93.33 percent.

Committee Membership
(as of March 2, 2009)
 
 
Audit
Compensation
Governance
Public Policy
W. Frank Blount
   
Ö*
 
John R. Brazil
 
Ö
   
Daniel M. Dickinson
Ö
     
John T. Dillon
Ö*
     
Eugene V. Fife
Ö
     
Gail D. Fosler
 
 
Ö
 
Juan Gallardo
     
Ö
David R. Goode
 
Ö*
   
Peter A. Magowan
   
Ö
 
William A. Osborn
Ö
     
James W. Owens
       
Charles D. Powell
     
Ö*
Edward B. Rust, Jr.
 
Ö
   
Joshua I. Smith
     
Ö
* Chairman of committee
 
 
You may communicate with any of our directors, our board as a group, our non-management directors as a group or any board committee as a group by sending an e-mail to a particular director, the board or a committee at Directors@CAT.com or by mail to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  The board has delegated to the Corporate Secretary, or his designee, responsibility for determining, in his discretion, whether the communication is appropriate for consideration by the presiding director, an individual director, a committee, a group or the full board.  According to the policy adopted by the board, the Corporate Secretary is required to direct all communications regarding personal grievances, administrative matters, the conduct of the companys ordinary business operations, billing issues, product or service related inquiries, order requests and similar issues to the appropriate individual within the company.  All other communications are to be submitted to the board as a group, to the particular director to whom it is directed or, if appropriate, to the presiding director or committee the Corporate Secretary believes to be the most appropriate recipient, as the case may be.  If a legitimate business concern is sent by e-mail or letter to the presiding director, a specific director, the board or a board committee, you will receive a written acknowledgement from the Corporate Secretarys office confirming receipt of your communication.
 
Page 10

 

Caterpillar’s code of ethics is called Our Values in Action (code).  Integrity, Excellence, Commitment and Teamwork are the core values identified in the code and are the foundation for Caterpillar’s corporate strategy.  The code applies to all members of the board and to management and employees worldwide.  It documents the high ethical standards that Caterpillar has upheld since its formation in 1925.  The code is available on our Internet site (www.CAT.com/code) and in print upon written request to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.

The Audit Committee has established a means for employees, customers, suppliers, stockholders and other interested parties to submit confidential and anonymous reports of suspected or actual violations of the code or our enterprise policies or applicable laws, including those related to accounting practices, internal controls or auditing matters and procedures; theft or fraud of any amount; insider trading; performance and execution of contracts; conflicts of interest; violation of securities and antitrust laws; and violation of the Foreign Corrupt Practices Act.

Any employee, stockholder or other interested party can submit a report via the following methods:
 
 
§
Direct Telephone:  309-494-4393 (English only)
 
 
§
Call Collect Helpline:  770-582-5275 (language translation available)
 
 
§
Confidential Fax:  309-494-4818
 
 
§
E-mail:  BusinessPractices@cat.com
 
 
§
Internet:  www.CAT.com/obp
 
 
The Audit Committee is comprised entirely of independent directors (as defined for members of an audit committee in the NYSE listing standards) and operates under a written charter adopted by the board, a copy of which is available on our Internet site (www.CAT.com/governance).  The current members of the Audit Committee are listed at the end of this report.  Management is responsible for the companys internal controls and the financial reporting process.  The auditors are responsible for performing an independent audit of the companys consolidated financial statements and internal controls over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board in the United States (PCAOB) and issuing a report thereon.  The Audit Committees responsibility is to monitor these processes.  In this regard, the Audit Committee meets periodically with management, the internal auditors and auditors.  The Audit Committee has the authority to conduct or authorize investigations into any matters within the scope of its responsibilities and the authority to retain such outside counsel, experts and other advisors as it determines appropriate to assist it in conducting any such investigations.  The Audit Committee is responsible for selecting and, if appropriate, replacing the current auditors (PricewaterhouseCoopers LLP).

The Audit Committee has discussed with the company’s auditors the overall scope and execution of the independent audit and has reviewed and discussed the audited financial statements with management.  Management represented to the Audit Committee that the company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States.  Discussions about the company’s audited financial statements included the auditors’ judgments about the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.  The Audit Committee also discussed with the auditors other matters required by Statement on Auditing Standards No. 61 Communication with Audit Committees, as amended by SAS No. 90 Audit Committee Communications (as adopted by the PCAOB in Rule 3200T).  Management, the internal auditors and the auditors also made presentations to the Audit Committee throughout the year on specific topics of interest, including, without limitation:  (i) management’s philosophy, asset allocation levels, risk management and oversight of the company’s pension funds;  (ii) accounting for the company’s pension funding obligations;  (iii) the company’s derivatives policy and usage review;  (iv) the internal audit plan for 2008;  (v) updates on the implementation of the internal audit plan for 2008;  (vi) the company’s information technology systems and the controls in place within those systems for compliance with the Sarbanes-Oxley Act of 2002;  (vii) the applicability of new accounting releases;  (viii) the company’s critical accounting policies;  (ix) risk management initiatives and controls for various business units within the company; and  (x) the company’s compliance with the internal controls requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
 
Page 11


The auditors provided to the Audit Committee the written disclosures required by applicable requirements of the PCAOB regarding the independent accountant's communications with the audit committee concerning independence, and the Audit Committee discussed the auditors’ independence with management and the auditors.  The Audit Committee concluded that the auditors’ independence had not been impaired.

Based on: (i) the Audit Committee’s discussions with management and the auditors; (ii) the Audit Committee’s review of the representations of management; and (iii) the report of the auditors to the Audit Committee, the Audit Committee recommended to the board that the audited consolidated financial statements be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 20, 2009.

   
By the current members of the
Audit Committee consisting of:
 
 
   
John T. Dillon (Chairman)
 
Eugene V. Fife
 
   
Daniel M. Dickinson
 
William A. Osborn
 
           

Pre-Approval Process
 
The Audit Committee pre-approves all audit and non-audit services to be performed by the auditors.  It has policies and procedures in place to ensure that the company and its subsidiaries are in full compliance with the requirements for pre-approval set forth in the Sarbanes-Oxley Act of 2002 and the SEC rules regarding auditor independence.  These policies and procedures provide a mechanism by which management can request and secure pre-approval of audit and non-audit services in an orderly manner with minimal disruption to normal business operations.  The policies and procedures are detailed as to the particular service and do not delegate the Audit Committees responsibility to management.  These policies and procedures address any service provided by the auditors, and any audit or audit-related services to be provided by any other audit service provider.  The pre-approval process includes an annual and interim component.

Annual Pre-Approval Process
 
Annually, but no later than the April Audit Committee meeting, management and the auditors jointly submit a Service Matrix of the types of audit and non-audit services that management may wish to have the auditors perform for the year.  The Service Matrix categorizes the types of services by Audit, Audit-Related, Tax and All Other.  Approval of a service is merely an authorization that this type of service is permitted by the Audit Committee, subject to pre-approval of specific services.  Management and the auditors jointly submit an Annual Pre-Approval Limits Request.  The request lists individual project and aggregate pre-approval limits by service category.  The request also lists known or anticipated services and associated fees.  The Audit Committee approves or rejects the pre-approval limits and each of the listed services.  For 2008, the pre-approval limits were as follows:
 
Type of Service
 
Pre-Approval Limits
(in thousands)
Per Project
   
Aggregate Limit
Audit Services
 
$
500
     
$
25,000
 
Audit-Related Services
 
$
500
     
$
10,000
 
Tax Services
 
$
500
     
$
15,000
 
All Other Services
 
$
500
     
$
1,000
 
                   
 
Page 12


Interim Pre-Approval Process
 
During the course of the year, the Audit Committee chairman has the authority to pre-approve requests for services that were not approved in the Annual Pre-Approval Process.  Committee approval is not required for individual projects below the pre-approval project limits.  However, all services, regardless of fee amounts, are subject to restrictions on the services allowable under the Sarbanes-Oxley Act of 2002 and SEC rules regarding auditor independence.  In addition, all fees are subject to on-going monitoring by the Audit Committee.

On-Going Monitoring
 
At each Audit Committee meeting subsequent to the board meeting at which the Service Matrix and Annual Pre-Approval Limits Request are approved, the chairman reports any interim pre-approvals since the last meeting.  Also, at each of these meetings, management and the auditor provide the Audit Committee with an update of fees expected to be incurred for the year compared to amounts initially pre-approved.

Independent Registered Public Accounting Firm Fee Information
 
Fees for professional services provided by our auditors included the following (in millions):
 
 
2008
Actual
   
2007
Actual
Audit Fees 1
$
22.2
     
$
21.4
 
Audit-Related Fees 2
 
5.5
       
4.7
 
Tax Compliance Fees 3
 
2.8
       
2.2
 
Tax Planning and Consulting Fees 4
 
2.3
       
2.7
 
All Other Fees 5
 
0.3
       
0.1
 
TOTAL
 
$
33.1
     
$
31.1
 
 
1
Actual 2008 “Audit Fees” include $1.1 of audit fees related to Caterpillar Japan Ltd. following the consolidation of this entity in 2008.
2
“Audit-Related Fees” principally includes agreed upon procedures for securitizations, attestation services requested by management, accounting consultations, pre- or post- implementation reviews of processes or systems and audits of employee benefit plan financial statements.  Total fees paid directly by the benefit plans, and not by the company, were $0.6 and $0.6 in 2007 and 2008, respectively.
3
“Tax Compliance Fees” includes, among other things, statutory tax return preparation and review and advising on the impact of changes in local tax laws.
4
“Tax Planning and Consulting Fees” includes, among other things, tax planning and advice and assistance with respect to transfer pricing issues.
5
“All Other Fees” principally includes subscriptions to knowledge tools and attendance at training classes/seminars.
 
Page 13



The Governance Committee  is comprised of three directors, all of whom meet the independence requirements for nominating committee members as defined in the NYSE listing standards and determined by the board in its business judgment.  The Governance Committee operates under a written charter adopted by the board, a copy of which is available on our Internet site (www.CAT.com/governance).  As part of its mandate, the Governance Committee evaluates and makes recommendations regarding proposed candidates to serve on the board, including recommending the slate of nominees for election at the annual meeting.

Presiding Director
 
The independent directors of the board unanimously elected W. Frank Blount, an independent director of the company since 1995, to serve as presiding director. Among the duties and responsibilities of the presiding director are the following:
 
 
§
Presides at all meetings of the board at which the Chairman & CEO is not present, including executive sessions of the independent directors, and has the authority to call meetings of the independent directors if necessary.
 
 
§
Meets separately with the Chairman & CEO immediately following the meetings of the independent directors, and acts as a liaison between the Chairman & CEO and the independent directors by providing guidance and feedback and reviewing action items from those meetings.
 
 
§
Approves board meeting agendas and information provided to directors prior to board meetings.
 
 
§
Approves meeting schedules to assure that there is sufficient time for discussion of all agenda items.
 
 
§
Is available for consultation and direct communication with major stockholders.
 
 
§
Provides the Chairman & CEO with the results of the annual performance review in conjunction with the chairman of the Compensation Committee.

Director Resignation Policy
 
The board has adopted a director resignation policy (resignation policy), which can be found in the companys corporate governance guidelines.  The resignation policy establishes that any director who receives more “withheld” votes than “for” votes in an election shall promptly tender his or her resignation.  The independent directors of the board will then evaluate the relevant facts and circumstances and shall make a decision, within 90 days after the election, on whether to accept such tendered resignation.  The board will promptly publicly disclose its decision and, if applicable, the reasons for rejecting the tendered resignation. 

Process for Nominating Directors
 
The Governance Committee solicits and receives recommendations for potential director candidates from directors, the Chairman and Caterpillar management and may also utilize the services of a third party consultant to identify and evaluate potential nominees.  The Governance Committee also considers unsolicited inquiries or nominees recommended by stockholders in accordance with the following procedures and in compliance with the companys bylaws.

When considering a candidate, the Governance Committee believes that certain characteristics are essential.  For example, candidates must be individuals of high integrity, honesty and accountability, with a willingness to express independent thought.  Candidates must also have successful leadership experience and stature in their primary fields, with a background that demonstrates an understanding of business affairs as well as the complexities of a large, publicly held company.  Particular consideration will be given to candidates with experience as chief executive officer of a successful, capital-intensive businesses with international operations.  In addition, candidates must have a demonstrated ability to think strategically and make decisions with a forward-looking focus and the ability to assimilate relevant information on a broad range of complex topics.
 
Page 14


The Governance Committee also believes that certain characteristics are desirable, such as being a team player with a demonstrated willingness to ask tough questions in a constructive manner that adds to the decision-making process of the board.  At the same time, candidates should be independent, with an absence of conflicts of interests.  Moreover, candidates should have the ability to devote the time necessary to meet director responsibilities and serve on no more than five public company boards in addition to the Caterpillar board.  Candidates must also have the ability to commit to stock ownership requirements according to the companys corporate governance guidelines.

Stockholder Nominations
 
In accordance with the companys bylaws, stockholders may nominate a director candidate to serve on the board by providing advance written notice to Caterpillar Inc. c/o the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.  Such written notice of an intent to nominate a director candidate at an annual meeting must be given either by personal delivery or by United States mail, postage prepaid, to Caterpillar Inc. at the address previously provided no later than ninety (90) days in advance of such meeting.  The notice must set forth: (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the nominating stockholder is a stockholder of record of the companys stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC, had the nominee been nominated, or intended to be nominated, by the board; and (v) the consent of each nominee to serve as a director of the company if so elected.  The presiding officer of the annual meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.  You may request a copy of the companys bylaws by writing the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.

 
The board has nominated the following directors to stand for re-election for a three-year term expiring at the annual meeting in 2012.  The nominees were evaluated and recommended by the Governance Committee in accordance with the process for nominating directors as found on pages 14 and 15 of this proxy statement.

Directors are elected by a plurality vote of the shares present at the meeting, meaning that director nominees with the most affirmative votes are elected to fill the available seats.
 
Class II – Directors nominated for election this year
 
§
DANIEL M. DICKINSON, 47, Managing Partner of Thayer | Hidden Creek (private equity investment).  Other directorship:  BFI Canada Ltd.  Mr. Dickinson has been a director of the company since 2006.

§
DAVID R. GOODE, 68, former Chairman, President and CEO of Norfolk Southern Corporation (holding company engaged principally in surface transportation).  Other directorships: Delta Air Lines, Inc. and Texas Instruments Incorporated.  Mr. Goode has been a director of the company since 1993.

§
JAMES W. OWENS, 63, Chairman and CEO of Caterpillar Inc. (machinery, engines and financial products).  Prior to his current position, Mr. Owens served as Vice Chairman and as Group President of Caterpillar.  Other directorships:  Alcoa Inc. and International Business Machines Corporation.  Mr. Owens has been a director of the company since 2004.
 
Page 15


§
CHARLES D. POWELL, 67, Chairman of Capital Generation Partners (asset and investment management), LVMH Services Limited (luxury goods) and Magna Holdings (real estate investment).  Prior to his current positions, Lord Powell was Chairman of Sagitta Asset Management Limited (asset management).  Other directorships: Hongkong Land Holdings Limited; LVMH Moet-Hennessy Louis Vuitton; Mandarin Oriental International Ltd.; Textron Corporation; Schindler Holding Ltd.; and Yell Group plc.  Lord Powell has been a director of the company since 2001.

Consistent with the company’s corporate governance guidelines requiring directors to serve on no more than five public company boards in addition to the company’s board, on March 29, 2009 Charles Powell tendered notice of his resignation as a member of the Yell Group plc board of directors,  effective July 24, 2009.
 
§
JOSHUA I. SMITH, 68, Chairman and Managing Partner of the Coaching Group, LLC (management consulting).  Other directorships: Comprehensive Care Corporation, Federal Express Corporation and The Allstate Corporation.  Mr. Smith has been a director of the company since 1993.

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING  “FOR” THE NOMINEES PRESENTED IN PROPOSAL 1.
 
 

The board seeks an indication from stockholders of their approval or disapproval of the Audit Committees appointment of PricewaterhouseCoopers LLP (PricewaterhouseCoopers) as auditors for 2009.
 
PricewaterhouseCoopers has been our auditors since 1925.  For additional information regarding the companys relationship with PricewaterhouseCoopers, please refer to the Audit Committee Report on page 11 and the Audit Fees disclosure on page 12.
 
If the appointment of PricewaterhouseCoopers as auditors for 2009 is not approved by the stockholders, the adverse vote will be considered a direction to the Audit Committee to consider other auditors for next year.  However, because of the difficulty in making any substitution of auditors so long after the beginning of the current year, the appointment for the year 2009 will stand, unless the Audit Committee finds other good reason for making a change.
 
Representatives of PricewaterhouseCoopers will be present at the annual meeting and will have the opportunity to make a statement if they desire to do so. The representatives will also be available to respond to questions at the meeting.
 
YOUR BOARD OF DIRECTORS AND AUDIT COMMITTEE UNANIMOUSLY RECOMMEND VOTING “FOR” PROPOSAL 2.

 
Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.
 
Page 16


Resolution Proposed by Stockholder
Resolved: That the shareowners of Caterpillar Inc. (CAT) ask that the company take the steps necessary to reorganize the Board of Directors into one class subject to election each year and to complete this within one-year.

Supporting Statement of Stockholder
This proposal seeks to reorganize the Board of Directors of the Company so that each director stands before the shareowners for re-election each year.  We hope to eliminate the Company’s so-called “classified board”, whereby the directors are divided into three classes, each serving a three-year term.  Under the current structure, shareowners can only vote on one-third of the Board at any given time.

This proposal topic won 69% support at our 2008 annual meeting based on yes and no votes.  The Council of Institutional Investors recommends timely adoption of shareholder proposals upon receiving their first greater than 50% vote: “Boards should take actions recommended in shareowner proposals that receive a majority of votes cast for and against.”

We believe that corporate governance procedures and practices, and the level of accountability they impose, are closely related to financial performance.  It is intuitive that when directors are accountable for their actions, they perform better.  We also believe that shareowners are willing to pay a premium for corporations with excellent corporate governance.  If the Company were to take the steps necessary to declassify its Board, it would be a strong statement that this Company is committed to good corporate governance and its long-term financial performance.

We seek to improve that performance and ensure the Company’s continued viability through this structural reorganization of the Board.  If passed, shareowners would have the opportunity to register their views at each annual meeting – on performance of the Board as a whole and of each director as an individual.

We urge you to join us in urging the Company to take the steps necessary to declassify the election of directors, as a powerful tool for management incentive and accountability.  We urge your support FOR this proposal.

After thoughtful consideration, the board recommends voting AGAINST this proposal for the reasons provided below.

The board acknowledges that a majority of stockholders voted last year in favor of a similar proposal.  With that in mind, the board and the Governance Committee has considered the most effective structure for the board and determined, for the reasons presented below, that the current classified board structure continues to be in the best long-term interests of the company and its stockholders.

Stability and Continuity. In accordance with the company’s articles of incorporation, the board is divided into three classes – each serving a staggered three-year term. This structure provides the board stability, continuity and independence. This structure also enhances long-term planning and ensures that, at any given time, the board is comprised of directors who are intimately familiar with the company’s business and strategic goals. A classified board also benefits the company and its stockholders because it helps attract and retain director candidates who are willing to make long-term commitments of their time and energy. This commitment is necessary to achieve the goals established under the company’s Vision 2020 strategic plan – a commitment that stretches over several years and will be best fulfilled by a stable and continuous board.

Independence. Electing directors to three-year terms also enhances the independence of non-management directors by providing them with a longer term of office. The longer term provides a certain amount of autonomy from special interest groups who may have an agenda contrary to the company’s long-term goals and objectives and those of a majority of stockholders. As a result, independent directors are able to make decisions that are in the best interests of the company and its stockholders.
 
Page 17


Accountability to Stockholders. Because all directors are required to uphold their fiduciary duties to the company and its stockholders regardless of term, directors elected to three-year terms are equally accountable to stockholders as directors elected annually. Additionally, the company’s Director Resignation Policy promotes director accountability to shareholders.  The Director Resignation Policy, which is set forth in the company's Guidelines on Corporate Governance Issues (www.CAT.com/governance), establishes that any director nominee who receives a greater number of “withheld” votes than votes “for” is required to tender his or her resignation to the Governance Committee. The Governance Committee will consider the resignation and recommend to the board whether or not to accept the resignation. The independent directors will then make a decision regarding the resignation and publicly disclose their decision. The Director Resignation Policy provides stockholders a meaningful role in the election of directors, ensures public disclosure of directors’ decisions and acts as a vehicle for holding directors accountable for their actions or failure to act.

Financial Results and Stockholder Value. The proposal intimates that a declassified board equals improved financial performance. There is no objective evidence to confirm this suggestion, and is contrary to the company’s recent financial results. For fiscal year 2008, the company’s results marked the sixth straight year of record sales and revenues of $51.324 billion. The board believes that these financial results are a direct result of the board being comprised of independent directors who: (i) have had sufficient time to learn the company’s business and thereby contribute best to the development of its strategy to create long-term stockholder value and to oversee management’s implementation of that strategy; (ii) are knowledgeable about the company; and (iii) are pursuing the company’s long-term business plans and goals.

Protection Against Takeovers. A classified board structure also strongly encourages potential acquirers to deal directly with the board and better positions the board to negotiate the greatest possible stockholder value.  The classified board structure is designed to safeguard against a hostile purchaser gaining control of the company and its assets without paying fair market value. Because only one-third of the directors are elected at any annual meeting, it is impossible to elect an entirely new board or a majority of the board at a single meeting.  A classified board does not preclude a takeover.  Rather, it provides a company with time and leverage to evaluate the adequacy and fairness of any takeover proposal, negotiate on behalf of all stockholders and weigh alternative methods of maximizing stockholder value, including evaluating competing expressions of interest. In fact, recent studies suggest that classified boards may improve the relative bargaining power of managers and the board, as well as the stockholders who are the ultimate beneficiaries of such leverage, in any hostile takeover bid. See Bates, Becker and Lemmon, Board Classification and Managerial Entrenchment: Evidence from the Market for Corporate Control, (April 2007) at p. 30.

It is important to note that stockholder approval of this proposal would not in itself declassify the board. Under Delaware law, the state where the company is incorporated, to change the class structure of the board, the board must first authorize amendments to the company’s articles of incorporation and bylaws.  Stockholders would then have to approve each of those amendments with an affirmative vote of not less than 75 percent of the total voting power of all outstanding shares of company stock entitled to vote generally in the election of directors.

After careful consideration of this proposal, the board believes that the retention of a classified board structure remains in the best long-term interests of the company and its stockholders.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “AGAINST” PROPOSAL 3.
 
 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Resolved: That the shareholders of Caterpillar Inc. (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s bylaws to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders, with a plurality vote standard retained for contested director elections, that is, when the number of director nominees exceeds the number of board seats.
 
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Supporting Statement of Stockholder
In order to provide shareholders a meaningful role in director elections, our Company’s director election vote standard should be changed to a majority vote standard.  A majority vote standard would require that a nominee receive a majority of the votes cast in order to be elected.  The standard is particularly well-suited for the vast majority of director elections in which only board nominated candidates are on the ballot.  We believe that a majority vote standard in board elections would establish a challenging vote standard for board nominees and improve the performance of individual directors and entire boards.  Our Company presently uses a plurality vote standard in all director elections.  Under the plurality vote standard, a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.

In response to strong shareholder support for a majority vote standard in director elections, a strong majority of the nation’s leading companies, including Intel, General Electric, Motorola, Hewlett-Packard, Morgan Stanley, Wal-Mart, Home Depot, Gannett, Marathon Oil, and Safeway have adopted a majority vote standard in company bylaws or articles of incorporation.  Additionally, these companies have adopted director resignation policies in their bylaws or corporate governance policies to address post-election issues related to the status of director nominees that fail to win election.  However, our Company has responded only partially to the call for change, simply adopting a post-election director resignation policy that sets procedures for addressing the status of director nominees that receive more “withhold” votes than “for” votes.  The plurality vote standard remains in place.

We believe that a post-election director resignation policy without a majority vote standard in Company bylaws or articles is an inadequate reform.  The critical first step in establishing a meaningful majority vote policy is the adoption of a majority vote standard.  With a majority vote standard in place, the Board can then consider action on developing post-election procedures to address the status of directors that fail to win election.  A majority vote standard combined with a post-election director resignation policy would establish a meaningful right for shareholders to elect directors, and reserve for the Board an important post-election role in determining the continued status of an unelected director.  We feel that this combination of the majority vote standard with a post-election policy represents a true majority vote standard.
 
After thoughtful consideration, the board recommends voting AGAINST the proposal for the reasons provided below.

For the past five years, the company has received a similar proposal, and each year the proposal received less than a majority of the votes cast by stockholders. In light of these results and for the reasons provided below, the board believes that the company’s current method of electing directors continues to be in the best long-term interests of the company and its stockholders.

Company stockholders currently elect their directors by plurality voting. Plurality voting is the default standard under Delaware law, the state where the company is incorporated, and has long been the accepted standard among large public companies. Consequently, the rules governing plurality voting are well established and understood. Notwithstanding the foregoing, the board is cognizant of recent developments with respect to majority voting in director elections. In fact, in 2007, in response to a similar proposal, the board adopted a director resignation policy in connection with director elections (the “Director Resignation Policy”) to address the concerns presented in the proposal.  The Director Resignation Policy, which is set forth in the company's Guidelines on Corporate Governance Issues (www.CAT.com/governance), establishes that any director nominee who receives a greater number of “withheld” votes than votes “for” is required to tender his or her resignation to the Governance Committee. The Governance Committee will consider the resignation and recommend to the board whether or not to accept the resignation. The independent directors will then make a decision regarding the resignation and publicly disclose their decision. The board believes that the Director Resignation Policy promotes a good balance between providing stockholders a meaningful and significant role in the process of electing directors and allowing the board flexibility to exercise its independent judgment on a case-by-case basis.
 
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Moreover, the proponent’s characterization of plurality voting, particularly the statement that a director may be elected by a single vote even if a substantial majority of the votes cast are “withheld,” is improbable – especially in light of the company’s past voting results.  The company’s stockholders have an excellent history of electing strong and independent directors by plurality voting. During the past ten years, the average affirmative vote for directors has been greater than 96 percent of the shares voted through the plurality voting process. Further, as explained above, under the Director Resignation Policy, if a director receives more “withheld” votes than votes “for,” the director, must resign his or her position.

In addition, the Governance Committee, in conjunction with the Chairman and Chief Executive Officer, establishes and maintains stringent director criteria to ensure that the board is comprised of strong and independent directors. These criteria include the following: (i) integrity, honesty and accountability, with a willingness to express independent thought; (ii) successful leadership experience and stature in an individual’s primary field, with a background that demonstrates an understanding of business affairs as well as the complexities of a large, publicly held company; (iii) demonstrated ability to think strategically and make decisions with a forward-looking focus, and the ability to assimilate relevant information on a broad range of complex topics; (iv) being a team player with a demonstrated willingness to ask tough questions in a constructive manner that adds to the decision making process of the board; (v) independence and absence of conflicts of interest; (vi) ability to devote necessary time to meet director responsibilities; and (vii) the ability to commit to company stock ownership. These same criteria are applied to evaluate candidates nominated by stockholders. The nomination and election process has been instrumental in the construction of a board that is comprised of highly qualified directors from diverse backgrounds, and, with the exception of the Chairman, are all independent as defined under NYSE regulations.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “AGAINST” PROPOSAL 4.
 
 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Whereas: the United States exports weapon and related military equipment and services through foreign military sales (government-to-government), direct commercial weapons sales (U.S. companies to foreign buyers), equipment leases, transfers of excess defense materiel and emergency drawdowns of weaponry.

In 2007, the United States ranked first in arms transfer agreements with developing nations with $12.2 billion or 28.8% of these agreements.  The United States also ranked first in the value of arms deliveries to developing nations at $7.6 billion, or 44.2% of all such deliveries.  The weapons sold range from ammunition to tanks, supersonic combat aircraft, missiles and submarines.  (“Conventional Arms Transfers to Developing Nations, 2000-2007,” Congressional Research Service, Report for Congress, October 23, 2008)

Although it does not produce weapons systems, Caterpillar has, in the past, sold dual use equipment such as bulldozers through foreign military sales; however, the frequency and volume of sales is unknown.  Nor is there precise information on which countries have received Caterpillar equipment.

Resolved: Shareholders request that, within six months of the annual meeting, the Board of Directors provide a comprehensive report, at reasonable cost and omitting proprietary and classified information, on Caterpillar’s foreign sales of weapons-related products, and other equipment and services related to those products for the past 10 years, including the country of destination for the products.
 
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Supporting Statement of Stockholder
We believe with the American Red Cross that “the greater the availability of arms, the greater the violations of human rights and international humanitarian law.”  Global security is security of all people.  We are seeing an increase in human rights abuses inflicted on women, people of minority ethnicities, personnel of NGOs offering medical and other human services as well as employees of corporations servicing DOD contracts.  Use of Caterpillar equipment by foreign militaries in actions that violate human rights and international humanitarian law raises issues for Caterpillar corporate policy and risks damage to the Company’s reputation.

Therefore, we believe it is reasonable that the report include:

 
1.
Processes used to determine and promote foreign sales;
 
2.
Criteria for choosing countries with which to do business;
 
3.
A description of procedures used to negotiate foreign arms sales, government-to-government and direct commercial sales and the percentage of sales for each category;
 
4.
For the past ten years, categories of military equipment or components, including dual use items exported for the past five years, with as much statistical information as permissible; contracts for servicing/maintaining equipment; offset agreements; and licensing and/or co-production with foreign governments.

After thoughtful consideration, the board recommends voting AGAINST this proposal because it believes completing the requested report is an inappropriate use of company resources.

The company does not manufacture or sell weapons or weapon systems. It does, however, sell a limited amount of commercial equipment modified for military purposes (modified equipment) to foreign governments. These sales are predominantly performed one of two ways: (i) federally sponsored programs – most notably the Foreign Military Sales Program (program), or (ii) to company dealers who then sell such equipment to foreign governments.

As provided above, the company sells modified equipment to foreign governments under the program, although the overwhelming majority of sales performed by the company under the program involves ordinary equipment and not modified equipment. Under the program, the U.S. government provides financing to eligible foreign governments or organizations for the procurement of defense articles and services as well as ordinary commercial products. The U.S. government then sources these requests with U.S. manufacturers and administers the resulting contract. Sales and services under the program may be made only after the U.S. government has determined that the sale is consistent with the national security, foreign policy and economic interests of the U.S. The company has procedures and processes in place to ensure that sales of modified equipment and ordinary equipment made under the program are performed in accordance with the program and all other U.S. laws and regulations. In 2008, the company’s total sales and revenues under the program were approximately $18.9 million, which largely represents sales of ordinary equipment. These sales account for approximately 0.04 percent of the company’s 2008 sales and revenues of $51.324 billion.

In addition, the company sells modified equipment to its dealers who then sell such equipment to foreign governments. In 2008, sales of modified equipment to company dealers who then sold such equipment to foreign governments were very limited and amounted to approximately $11.9 million - approximately 0.02 percent of the company’s 2008 sales and revenues. The company also sold ordinary equipment to company dealers who then sold such ordinary equipment to foreign governments. However, pursuant to the language of the proposal, sales of ordinary equipment to foreign governments are outside the scope of this response. Given the company’s relatively small volume of sales of modified equipment to foreign governments in 2008, under both of the above-described methods, the board believes that it would be an inappropriate use of the company’s resources to complete the requested report.
 
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Moreover, any sales of modified equipment (and ordinary equipment) by the company under the program are a matter of public record through information provided by the U.S. government. The Department of Defense and Department of State provide notification of such sales to Congress, which is also made available to the public. Therefore, the board believes that producing the requested report would be, for the most part, duplicative and unnecessary.

The board believes that to allocate the necessary resources to complete a detailed report addressing an insignificant portion of the company’s business is an inappropriate use of company resources and not in the best interests of the company or its stockholders.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "AGAINST" PROPOSAL 5.

 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Resolved:  Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against related proposals in compliance with applicable laws.  This includes each 75% shareholder voting provision in our charter and/or bylaws.

Supporting Statement of Stockholder
Currently a 1%-minority can frustrate the will of our 74%-shareholder majority.  Our supermajority vote requirements can be almost impossible to obtain when one considers abstentions and broker non-votes.  For example, a Goodyear (GT) management proposal for annual election of each director failed to pass even though 90% of votes cast were yes-votes.  Supermajority requirements are arguably most often used to block initiatives supported by most shareowners but opposed by management.

The Council of Institutional Investors www.cii.org recommends adoption of simple majority voting.  This proposal topic also won up to 89% support at the following companies in 2008:

Whirlpool (WHR)                                  79%           Ray T. Chevedden (Sponsor)
Lear Corp. (LEA)                                  88%           John Chevedden
Liz Claiborne (LIZ)                                89%           Kenneth Steiner

The merits of this Simple Majority Vote proposal should also be considered in the context of the need to initiate improvements in our company’s corporate governance and in individual director performance.  For instance in 2008 the following governance and performance issues were identified:

 
·
The Corporate Library www.thecorporatelibrary.com, an independent investment research firm, rated our company:
     
“D” in governance.
“High Governance Risk Assessment.”
“Very High Concern” in Executive Pay with $17 million for James Owens.
 
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·
Our directors served on 8 boards rated “D” by the Corporate Library:
     
   
James Owens                             Alcoa (AA)
James Owens                             International Business Machines (IBM)
William Osborn                           Abbott Laboratories (ABT)
William Osborn                           Northern Trust (NTRS)
Edward Rust                               Helmerich & Payne (HP)
Edward Rust                               McGraw-Hill (MHP)
Joshua Smith                              FedEx (FDX)
Eugene Fife                                Eclipsys (ECLP)
 
 
·
James Owens and William Osborn were designate “Accelerated Vesting” directors by The Corporate Library due to their accelerating of stock option vesting to avoid recognizing the related cost.

 
·
Two directors were “Problem Directors” according to The Corporate Library:
     
   
David Goode due to his involvement with Delta Air Lines and its bankruptcy.
Frank Blount (our lead Director no less) due to his involvement with Entergy Corporation and its bankruptcy.
 
 
·
Three directors had more than 15-years tenure (independence concern):
     
David Goode
Joshua Smith
Peter Magowan

 
·
Our directors still had a $1 million gift plan – Conflict of interest concern.

 
·
We had no shareholder right to:
     
Annual election of each director.
An independent Chairman.
Cumulative voting.
To act by written consent.
To Call a  special meeting.
Elect directors by a majority vote – one yes-vote can now elect a director for 3-years.

The above concerns shows there is need for improvement.  Please encourage our board to respond positively to this proposal.
 
After thoughtful consideration, the board of directors recommends voting AGAINST the proposal for the reasons provided below.

The board believes that the super-majority voting standards under the company’s Restated Certificate of Incorporation (certificate) and Bylaws (collectively, governance documents) are appropriate and necessary. These super-majority standards ensure that broad stockholder support exists before significant changes to the company’s corporate and governance structure can be implemented. The company’s super-majority voting standards require approval of at least 75 percent of the outstanding stock of the company for a small but important number of matters of corporate structure and governance, which are as follows: (i) special meetings of the stockholders; (ii) actions by stockholders without a special meeting; (iii) the number, class and nomination of directors; and (iv) removal of a director without cause. The super-majority standards do not apply to the approval of a merger or business combination, for which only a simple majority is required.
 
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The board believes that a higher voting threshold for significant changes to the company’s corporate structure or governance is in the best long-term interests of the company and its stockholders. The board intentionally created a super-majority vote standard to apply to the areas described above because of their importance to the company. For example, the provisions not allowing stockholders to call a special meeting of stockholders or acting by written consent are meant to protect the interests of all stockholders and help create long-term stockholder value under all circumstances. These provisions encourage potential acquirers to deal directly with the board, which in turn provides the board greater leverage to negotiate the best possible return for all stockholders.

In addition, the board is subject to fiduciary duties under the law to act in a manner that it believes to be in the best interests of the company and all of its stockholders. Stockholders, on the other hand, do not have the same fiduciary duty as the Directors. As a result, a single stockholder or a group of stockholders acting in concert may act in their own self-interests to the detriment of other stockholders. Accordingly, the super-majority voting standards are necessary to safeguard the long-term interests of the company and its stockholders.

It is important to note that stockholder approval of this proposal would not in itself remove the super-majority vote standards from the governance documents. Under Delaware law, the jurisdiction where the company is incorporated, to change the super-majority standards the board must first authorize amendments to the company’s certificate and Bylaws. Stockholders would then have to approve each of those amendments with an affirmative vote of not less than 75 percent of the outstanding stock of the company entitled to vote generally in the election of directors.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “AGAINST” PROPOSAL 6.

 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Resolved:  That the shareholders of Caterpillar Inc. (the “Company”) request that the board of directors (the “Board”) adopt a policy stating that any consultant retained to advise the Board or the Board’s compensation committee on executive compensation matters (each, a “Compensation Consultant”), or any affiliate of a Compensation Consultant, should not be retained to provide any other services to the Company, to any affiliate of the Company, or to any of the Company’s senior executive officers.

The policy should be implemented so as not to violate any contractual obligations.

Supporting Statement of Stockholder
In our opinion, there has been increasing concern regarding the role compensation consultants may play in escalating executive pay.  Specifically, we believe the independence of compensation consultants is an important factor in determining how senior executives are compensated.  Regarding the selection of compensation consultants, one study observes that, “CEOs have often been involved in the selection process” (Bebchuk and Fried, “Pay Without Performance,” 2004).  The authors add that, “Even if the CEO has not been involved [in the selection process], the chosen consultant has understood that a recommendation that displeases the CEO may pre-empt the consultant’s future employment.”

In our view, the independence of compensation consultants can be compromised by additional business relationships.  According to an April 9, 2006 New York Times article, compensation consultants “are often motivated to produce big paydays for managers.  After all, the boss can hand their company lucrative contracts down the road.”  In  2007, the U.S. House of Representatives’ Committee on Oversight and Government Reform began investigating whether major U.S. consulting firms that provide pay advice to boards of directors also perform other services for company managers that may compromise their independence.
 
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According to a study by The Corporate Library, an authority on corporate governance, compensation consultants are associated with companies that pay at levels higher than the market median.  Further, these higher levels of pay are in general not associated with higher levels of shareholder returns (The Effect of Compensation Consultants, The Corporate Library, 2007).

Given these concerns, we believe that adopting a policy to require the use of independent compensation consultants will ensure that executive compensation decisions are rendered independently and in the best interests of shareholders.


Caterpillar Statement in Opposition
After thoughtful consideration, the board recommends voting AGAINST the proposal for the reasons provided below.

The Compensation Committee is responsible for overseeing the company’s compensation practices and programs. Hewitt Associates (Hewitt), through John Anderson (compensation consultant), assists the Compensation Committee with these tasks. Specifically, the compensation consultant assists the Compensation Committee by providing information and advice regarding the design and implementation of the company’s compensation programs, providing “benchmarking” data and providing analysis on trends and important new developments in the executive compensation field.

Contrary to the proponent’s assertions, the compensation consultant was not selected by the company’s CEO or management team. Rather, he was selected solely by the Compensation Committee and he reports directly to the Compensation Committee. The Compensation Committee also has the sole authority to terminate the compensation consultant and determine the terms and conditions of its relationship with the compensation consultant – including the fees for his services.

As documented in the company’s Compensation Discussion and Analysis (CD&A) in this proxy statement, a separate and distinct unit of Hewitt provides administrative services to the company in connection with its retirement and health-care plans (collectively, administrative services). As a result, the company and Hewitt go to great lengths to ensure the compensation consultant is separated, physically and financially, from the Hewitt business units that provide the administrative services. For example: (i) Hewitt has separated its executive compensation consulting group, to which the compensation consultant belongs, into a single, segregated business unit within Hewitt; (ii) neither the compensation consultant or any member of his team participates in any activities related to the administrative services; (iii) Hewitt pays its executive compensation consultants solely on their individual results and accomplishments (i.e., the compensation consultant does not receive any compensation or incentives based on the administrative services); and (iv) the administrative services are under a separate contractual arrangement and managed by a separate business unit of Hewitt.

The Compensation Committee annually reviews and examines the processes and policies Hewitt utilizes to keep its executive compensation services separated and “independent” from its other business units at Hewitt. The Compensation Committee performed this review in 2009 and it believes that the compensation consultant provides valued and objective compensation consulting services.

The proponent asserts that because Hewitt provides the administrative services in addition to compensation consulting, it is a foregone conclusion, without any specific factual support, that the company’s CEO is paid at a level “higher than the market median.” This assertion is misplaced and erroneous. The Compensation Committee is comprised of independent directors, as defined under NYSE regulations, who all have significant experience addressing and resolving sophisticated business issues.  Contrary to the proponent’s assumption, the Compensation Committee is not comprised of “zombies” who blindly follow the recommendations of the compensation consultant. Although the compensation consultant’s input is valued, the Compensation Committee independently makes the executive compensation decisions.

Additionally, contrary to the proponent’s assertions, the total compensation paid by the company to its CEO for 2008 was paid at “market level.” The Compensation Committee targets the CEO’s total compensation at the median level of the company’s benchmark group (See discussion of the company’s benchmark group on page 35 of this proxy statement). The company’s benchmark group includes some of its industry competitors, but it is mostly made up of companies that are similar in size (financial or otherwise) and global presence to the company and compete with the company for executive talent. In 2008, the company targeted and paid its CEO at the median level of the benchmark group; or in other words, at “market level.”
 
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Finally, the company provides significantly more information regarding its compensation consultant than what is required by SEC regulations. Generally, SEC regulations require companies to disclose whether it uses a compensation consultant and the role of the compensation consultant in determining executive compensation. In the CD&A included in this proxy statement, the company discloses the SEC required information and substantially more information concerning the compensation consultant (See page 33 of this proxy statement).

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "AGAINST" PROPOSAL 7.

 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Resolved:  That pursuant to Section 109 of the Delaware General Corporation Law, and Article VI Section 5 of Caterpillar Inc.’s Bylaws, the stockholders of Caterpillar Inc. (“Caterpillar”) hereby amend the Bylaws as follows:

Amend “Article IV Section 1 Officers,” which currently reads – “The officers of the corporation shall be a chairman of the board, who shall be the chief executive officer, one or more group presidents, one or more vice presidents (one of whom shall be designated the chief financial officer), a secretary and a treasurer, together with such other officers as the board of directors shall determine.  Any two or more offices may be held by the same person”―

to read as follows:

The officers of the corporation shall be a chairman of the board, a chief executive officer, one or more group presidents, one or more vice presidents (one of whom shall be designated the chief financial officer), a secretary and a treasurer, together with such other officers as the board of directors shall determine.  Any two or more offices may be held by the same person, with the exception of chairman, as indicated by Section 1a.”

And to add the following text as “Section 1a. Chairmanto Article IV:

“The Chairman shall be a director who is independent from the Corporation.  For purposes of this requirement, “independent” has the meaning set forth in the New York Stock Exchange (“NYSE”) listing standards, unless the Corporation’s common stock ceases to be listed on the NYSE and is listed on another exchange, in which case such exchange’s definition of independence shall apply.  If the Board determines that a Chairman who was independent at the time he or she was selected is no longer independent, the Board shall select a new Chairman who satisfies this independence requirement within 60 days of such determination.  Compliance with this independence requirement shall be excused if no director who qualifies as independent is elected by the stockholders or if no director who is independent is willing to serve as Chairman.  This independence requirement shall apply prospectively so as not to violate any contractual obligation of the Corporation in effect when the requirement was adopted.”

Supporting Statement of Stockholder
CEO James W. Owens currently also serves as chairman of Caterpillar’s Board of Directors.

We believe the role of Chairman should meet high standards of independence to ensure proper oversight of senior executives, and to increase accountability by management to the entire Board – something that is difficult to accomplish when management oversees the Board.  An independent Chairman would also likely promote more objective evaluation and compensation of our CEO, and would help facilitate an inclusive Board agenda.
 
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Additionally, we believe Caterpillar has demonstrated poor governance in many respects, including its continued classified board of directors, its high executive compensation (CEO Owens received over $17 million in 2007), its Guidelines on Corporate Governance, and its responses to proxy proposals in recent years.

We urge shareholders to vote FOR this Proposal.
 
After thoughtful consideration, the board recommends voting AGAINST this proposal for the reasons provided below.

Similar to the proposals rejected by stockholders in 2006 and 2007, this proposal asserts that the board cannot provide effective independent oversight of the company and its management team because an independent director does not hold the office of Chairman. The board believes that this assertion is without merit.

The companys Guidelines on Corporate Governance Issues establishes that the role of the companys Chairman is to be filled by the companys CEO.  The board believes the combined role of Chairman and CEO promotes unified leadership and direction for the company, which allows for a single, clear focus for management to execute the companys strategy and business plans. This leadership structure has resulted in the continued growth and financial success of the company. For fiscal year 2008, the companys results marked the sixth straight year of record sales and revenues of $51.324 billion. The board believes that these financial results are, in part, the product of the unified and focused leadership of its Chairman and CEO.

Notwithstanding the foregoing, the company has adopted various policies to ensure a strong and independent board. All directors, with the exception of the Chairman, are independent as defined under NYSE regulations, and all committees of the board are made up entirely of independent directors. In addition, the board and Governance Committee have assembled a board comprised of strong and sophisticated directors who are currently or have recently been leaders of major companies or institutions, are independent thinkers and have a wide range of expertise and skills.

In addition, in 2007 the independent directors unanimously elected, by and from the ranks of the independent directors, the Chairman of the Governance Committee as the board’s Presiding Director. The Presiding Director’s duties and responsibilities include: (i) presiding at all meetings of the board at which the Chairman is not present; (ii) serving as a liaison between the Chairman and the independent directors; (iii) approving information sent to the board; (iv) approving meeting agendas for the board; (v) approving meeting schedules to assure that there is sufficient time for discussion of all agenda items; (vi) the authority to call meetings of the independent directors; and (vii) if requested by major shareholders, ensures that he is available for consultation and direct communication. Based on these duties and responsibilities, the board believes that the Presiding Director provides an effective “counter-balance” to the combined role of CEO and Chairman.

Additionally, the board regularly meets in executive session without the presence of management. The Presiding Director presides at these meetings and provides the boards guidance and feedback to the Chairman and the companys management team.  Further, the board has complete access to the companys management team. On a regular basis, the board and its committees receive valuable information and insight from management on the “status” of the company and the companys current and future issues.

Given the strong leadership of the company’s Chairman and CEO, the counterbalancing role of the Presiding Director and a board comprised of strong and independent directors, the board believes it is in the best long-term interests of the company and its stockholders to maintain a combined role of Chairman and CEO.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “AGAINST” PROPOSAL 8.
 
Page 27

 
 

Pursuant to Rule 14a-8(l)(1) of the Securities Exchange Act of 1934, we will provide the name, address and number of company securities held by the proponent of this stockholder proposal upon receipt of a written or oral request.

This proposal requires an affirmative vote of the majority of shares present at the meeting to pass.  Abstentions and broker non-votes have the effect of a vote against this proposal.

Resolution Proposed by Stockholder
Resolved: The shareholders request the Board of Directors, at reasonable cost and excluding confidential information, report to shareholders as soon as possible on the Company’s process for identifying and prioritizing legislative and regulatory public policy advocacy activities.  The report should:

 
1.
Describe the process by which the Company identifies, evaluates and prioritizes public policy issues of interest to the Company;

 
2.
Identify and describe public policy issues of interest to the Company;

 
3.
Prioritize the issues by importance to creating shareholder value; and

 
4.
Explain the business rationale for prioritization.


Supporting Statement of Stockholder
The coal mining industry represents an important customer base to Caterpillar.

Caterpillar belongs to the U.S. Climate Action Partnership, a Washington, D.C.-based coalition that is lobbying for the regulation of greenhouse gas emissions.

Greenhouse gas regulation could harm the coal industry by forcing electric utilities to switch to other energy sources such as natural gas or wind.  Currently, about 50 percent of the U.S. electricity supply is produced by burning coal.

Greenhouse gas regulations are not likely to produce tangible, measurable or significant environmental benefits.

Shareholders want to know how Caterpillar could decide to lobby for dubious laws and regulations that would harm important customers.

After thoughtful consideration, the board recommends voting AGAINST this proposal for the reasons provided below.

The board believes that it is in the company’s best interests to be involved in and contribute to the legislative and regulatory process.  To that end, the company engages in lobbying and other political activities, as permitted by applicable law, to further its priority interests that will likely affect the company’s long-term goals and objectives such as fair trade, tax reform and financial appropriations for infrastructure. Federal and state laws require public disclosure of the company’s lobbying activities.  Specifically, under the Lobbying Disclosure Act of 1995, the company submits to Congress reports disclosing the amount spent on lobbying activities and the issues addressed by these lobbying activities. Accordingly, much of the information requested by the proponent is already publicly available.
 
Page 28


Submitting the requested report will also likely put the company at a competitive disadvantage.  The proponent requests that the proposed report not only disclose the public policies of interest to the company, but also the priority of such policies and the business rationale for such priority.  Most troubling, is the request to disclose the company’s rationale for its lobbying priorities. Disclosing this information will indirectly provide the company’s competitors information on the company’s strategy, goals and possible weaknesses. In turn, the company’s competitors will likely use this information in targeting marketing and lobbying activities of their own to exploit perceived weaknesses of the company. Moreover, because the company’s many competitors will likely not be required to complete the same type of report, the company would be competing on an “un-even playing field.”

Although the proponent is seeking a report on the company’s lobbying practices, it is obvious from the proponent’s supporting statement that its primary concern is the company’s involvement in the U.S. Climate Action Partnership.  In 2007, the company joined some of the world’s largest companies, such as Dupont, BP American, General Electric, General Motors and Rio Tinto, to form the U.S. Climate Action Partnership (USCAP).  The company joined USCAP, in part, to ensure that any climate change legislation passed by Congress does not unfairly impact the company or its customers. Climate change legislation has already been passed in California, and under the current U.S. presidential administration it is likely similar legislation will pass in the near term.  To this end, the company believes that being part of the legislative process will better position it to advocate the interests of the company and its stockholders and customers. In addition, through its involvement in USCAP, the company has been able to educate its USCAP partners of the critical role the company and its customers play in providing competitive energy supplies, energy security, energy infrastructure and environmental protection.

FOR THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “AGAINST” PROPOSAL 9.

 
 

Based on a review of any Schedule 13G or amendments to Schedule 13G filed with the SEC through April 19, 2009, there are no persons that beneficially own more than five percent of Caterpillar common stock.

Security Ownership of Certain Beneficial Owners and Management

Security ownership of management is included in the following table.
 
Page 29

 
Blount                                         
73,571
 1
   
Magowan                                                         
329,002
 12
Brazil                                         
32,803
 2
   
Oberhelman                                                         
716,349
 13
Burritt                                         
124,316
 3
   
Osborn                                                         
48,657
 14
Dickinson                                         
783
 4
   
Owens                                                         
1,717,537
 15
Dillon                                         
70,625
 5
   
Powell                                                         
45,400
 16
Fife                                         
46,000
 6
   
Rapp                                                         
318,699
 17
Fosler                                         
24,515
 7
   
Rust                                                         
28,933
 18
Gallardo                                         
268,110
 8
   
Smith                                                         
36,345
 19
Goode                                         
100,531
 9
   
Vittecoq                                                         
522,215
 20
Lavin                                         
240,775
 10
   
Wunning                                                         
476,233
 21
Levenick                                         
423,135
 11
   
All directors and executive officers as a group
5,981,641
 22
     
1
Blount - Includes 56,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to the Directors’ Deferred Compensation Plan (DDCP) representing an equivalent value as if such compensation had been invested on December 31, 2008, in 1,382 shares of common stock.
2
Brazil - Includes 24,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 497 shares of common stock.
3
Burritt - Includes 100,200 shares subject to stock options exercisable within 60 days.
4
 
Dickinson - In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 2,848 shares of common stock.
5
 
Dillon - Includes 52,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 706 shares of common stock.
6
Fife - Includes 24,000 shares subject to stock options exercisable within 60 days.
7
Fosler - Includes 20,000 shares subject to stock options exercisable within 60 days.
8
Gallardo - Includes 56,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 4,671 shares of common stock.
9
Goode - Includes 56,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 39,240 shares of common stock.
10
Lavin - Includes 202,132 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to the Supplemental Deferred Compensation Plan (SDCP), Supplemental Employees’ Investment Plan (SEIP) and/or the Deferred Employees’ Investment Plan (DEIP) representing an equivalent value as if such compensation had been invested on December 31, 2008, in 8,747 shares of common stock.
11
Levenick - Includes 364,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to SDCP, SEIP and/or DEIP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 5,611 shares of common stock.
12
Magowan - Includes 56,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 16,086 shares of common stock.
13
Oberhelman - Includes 638,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to SDCP, SEIP and/or DEIP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 35,404 shares of common stock.
14
Osborn - Includes 24,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 139 shares of common stock.
15
Owens - Includes 1,398,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to SDCP, SEIP and/or DEIP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 6,732 shares of common stock.
16
Powell - Includes 40,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 139 shares of common stock.
17
Rapp - Includes 281,202 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to SDCP, SEIP and/or DEIP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 8,985 shares of common stock.
18
Rust - Includes 24,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 8,569 shares of common stock.
19
Smith - Includes 20,000 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to DDCP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 1,511 shares of common stock.
20
Vittecoq - Includes 435,968 shares subject to stock options exercisable within 60 days.
21
Wunning - Includes 435,968 shares subject to stock options exercisable within 60 days.  In addition to the shares listed above, a portion of compensation has been deferred pursuant to SDCP, SEIP and/or DEIP representing an equivalent value as if such compensation had been invested on December 31, 2008, in 20,406 shares of common stock.
22
This group includes directors, named executive officers and five additional executive officers subject to Section 16 filing requirements (group).  Amount includes 4,577,752 shares subject to stock options exercisable within 60 days and 364,551 shares for which voting and investment power is shared.  The group beneficially owns less than one percent of the company’s outstanding common stock.  None of the shares held by the group have been pledged.
 
Page 30



At Caterpillar, integrity is one of our core values.  We believe in the power of honesty and know the only way to build and strengthen our reputation is through trust.  We hold ourselves to the highest standard of integrity and ethical behavior and strive for transparency.  We welcome the opportunity to share this Compensation Discussion and Analysis (CD&A) with our stockholders.

We understand investors have a vested interest in executive compensation.  After reading this CD&A, we hope you will recognize a few vital points:
 
 
§
We have a thorough compensation review process
 
§
We have a competitive compensation plan that aligns executive performance and long-term stockholder interests
 
§
We do not backdate or re-price equity grants
 
§
We believe the best way to compensate our executives is to base their rewards on performance
 
§
We have no severance packages that apply solely to executives.  Change in Control provisions are found within existing compensation plans and apply equally to all participants in those plans.

During fiscal year 2008, Caterpillar was organized into six groups, each led by a group president.  Because the six group presidents have comparable responsibilities and are similarly compensated, we are including all six of the group presidents as named executive officers (NEOs), in addition to the Chief Executive Officer and Chief Financial Officer.

This CD&A describes the overall compensation practices at Caterpillar and specifically describes total compensation for the following NEOs:
 
 
§
James W. Owens, Chairman and CEO
 
§
Richard P. Lavin, Group President
 
§
Stuart L. Levenick, Group President
 
§
Douglas R. Oberhelman, Group President
 
§
Edward J. Rapp, Group President
 
§
Gerard R. Vittecoq, Group President
 
§
Steven H. Wunning, Group President
 
§
David B. Burritt, Vice President and Chief Financial Officer

We are fortunate to have executives who are “career employees” with a strong commitment to the long-term success of Caterpillar. In fact, the average tenure of our NEOs is 32 years.  Our reputation is a reflection of our employees’ ethical performance, and the values that guide Caterpillar have in turn rewarded our employees and stockholders with a successful and profitable company.
 
Compensation Philosophy and Objectives
 
Two primary components define Caterpillar’s compensation philosophy: Pay for Performance and Pay at Risk.

As an employee’s responsibility increases, so does the proportional amount of “at risk” pay. This is especially true for our executives who have direct responsibility for overall company performance. A significant portion of executive pay depends on meeting certain performance goals, which is fundamental to aligning executive pay with long-term stockholder interests.
 
Page 31


The Compensation Committee established three principles to drive this philosophy through the company’s compensation design.

 
1.
Base salary, as a percentage of total direct compensation, should decrease as salary grade levels increase. As employees move to higher levels of responsibility with more direct influence over the company’s performance, they have a higher percentage of pay at risk.
 
 
2.
The ratio of long-term incentive compensation to short-term incentive compensation should increase as salary grade levels increase. Caterpillar expects executives to focus on the company’s long-term success. The compensation program is designed to motivate executives to take actions that are best for the company’s long-term viability.
 
 
3.
Equity compensation should increase as salary grade levels increase. Employees in positions that most directly affect the company’s performance should have profitable growth for the company as their main priority. Receiving part of their compensation in the form of equity reinforces the link between their actions and stockholders’ investment. Equity ownership encourages executives to behave like owners and provides a clear link with stockholders’ interests.

In following these principles and tying employee compensation to both individual performance and the long-term performance of the company, Caterpillar links the interests of management and long-term stockholders. In addition, the compensation program is designed to attract and retain high-caliber, talented employees who will guide the company in continuing to meet and exceed its performance goals.
 
Overview of Compensation Practices
 
The Compensation Committee is responsible for the compensation program design and decision making process for NEOs.  The Compensation Committee regularly reviews Caterpillar’s compensation practices, including the methodologies for setting NEO total compensation.  The Compensation Committee also uses benchmarking to track Caterpillar’s practices and compensation levels against comparable companies within its industry and across multiple industries.  However, the Compensation Committee exercises its independent judgment when establishing compensation policies, especially when rewarding individual performance. The responsibilities of the Compensation Committee are described more fully in its charter available at www.CAT.com/governance.
 

Compensation Philosophy in Action - 2008 and 2009

2008 marked our sixth consecutive year of record sales and revenues, and we posted a record profit per share of $5.66. Consistent with our Pay for Performance philosophy described above, executives were compensated accordingly. As the 2008 Summary Compensation Table on page 49 shows, CEO Jim Owens received a base salary of $1.55 million and incentive pay totaling $4.35 million. He also received an equity award on March 3, 2008, valued at the time at $8.53 million, based on a stock closing price of $73.20 per share.  Since that date, the price of the company’s stock has changed significantly.

Caterpillar faces unprecedented economic challenges in 2009. Consequently, we have, among other things, suspended merit increases and frozen salary structures for all management and support staff globally (Mr. Owens’ salary has been frozen since April 1, 2007). Consistent with our Pay at Risk philosophy, described above, our executives’ total compensation for 2009 will be reduced dramatically.  For example, any payment under Caterpillar’s short-term incentive plans is contingent upon the company’s extremely challenging goal of earning $2.50 profit per share (including redundancy costs).  Mr. Owens received an equity award on March 2, 2009, valued at just over $4 million, based on a stock closing price of $22.17 per share.  In addition, the value of Mr. Owens’ 2006 - 2008 equity awards, and those of the other NEOs (all of which require three years to vest), have declined significantly since the grant dates and are now “under water” (see the “Outstanding Equity Awards at 2008 Fiscal Year-End” table on page 52).  Clearly, Caterpillar’s aggressive stock ownership requirements (discussed on page 41), coupled with its Pay at Risk and Pay for Performance compensation philosophy, directly align our executive team with long-term stockholder interests.
 
Page 32


How Caterpillar Determines Total Compensation for Executives
 
Performance Evaluation:  CEO
 
The board, excluding the CEO, performs the CEO’s evaluation.  The board’s evaluation includes both objective and subjective criteria of the CEO’s performance, including:
 
 
§
Caterpillar’s financial performance
 
§
The accomplishment of Caterpillar’s long-term strategic objectives
 
§
The achievement of individual goals set at the beginning of each year
 
§
The development of Caterpillar’s top management team

Prior to the board meeting, the Compensation Committee evaluates CEO compensation using benchmarking information (discussed on page 35) to set total compensation.  The Compensation Committee also performs its own performance review and provides its recommendations to the board.

Performance Evaluations:  NEOs other than CEO
 
The Compensation Committee, in conjunction with the CEO, performs the other NEOs’ evaluations, excluding Mr. Burritt whose evaluation is performed by Mr. Rapp.  Each February, the CEO submits a performance assessment and compensation recommendation to the Compensation Committee for each of the other NEOs.  The performance evaluation is based on factors such as:
 
 
§
Achievement of individual and company objectives
 
§
Contribution to the company’s performance
 
§
Leadership accomplishments

The Compensation Committee also reviews total compensation benchmark information, with respect to the other NEOs, and has the discretion to increase or decrease the CEO’s recommendation.  The Compensation Committee makes the final decision regarding the other NEOs’ total compensation.

Compensation Consultant
 
The Compensation Committee retains John L. Anderson (Mr. Anderson) of Hewitt to provide ongoing advice and information regarding design and implementation of Caterpillar’s executive compensation programs.  Mr. Anderson also provides information and updates to the Compensation Committee about regulatory and other technical developments that may affect the company’s executive compensation programs. In addition, Mr. Anderson and his team provide the Compensation Committee with competitive market information, analyses and trends on base salary, short-term incentives, long-term incentives, executive benefits and perquisites.

With the full knowledge of the Compensation Committee, Caterpillar has retained a separate and distinct unit of Hewitt to be the third-party administrator for Caterpillar’s U.S. retirement plans as well as Caterpillar’s U.S. Health & Welfare plans.
 
Page 33


The Compensation Committee believes that Mr. Anderson (and the team working with him from Hewitt) provides candid, direct and objective advice to the Compensation Committee, which is not influenced by any other services provided by Hewitt.  To insure independence:
 
 
§
The Compensation Committee directly hired and has the authority to terminate Mr. Anderson
 
§
Mr. Anderson is engaged by and reports directly to the Compensation Committee and the chair
 
§
Mr. Anderson meets regularly and as needed with the Compensation Committee in executive sessions that are not attended by any of the company’s officers
 
§
Mr. Anderson and his team at Hewitt have direct access to all members of the Compensation Committee during and between meetings
 
§
Mr. Anderson is not the Hewitt client relationship manager for Caterpillar
 
§
Neither Mr. Anderson nor any member of his team participates in any activities related to the administration services provided to Caterpillar by other Hewitt business units
 
§
Interactions between Mr. Anderson and management generally are limited to discussions on behalf of the Compensation Committee and information presented to the Compensation Committee for approval

Annual Review of Consultant Independence
 
The Compensation Committee is responsible, without the influence or input of management, for retaining and terminating compensation consultants and determining their terms and conditions, including fees.  Hewitt provides the Compensation Committee an annual update on its services and related fees. The Compensation Committee determines whether the compensation consultant’s services are performed objectively and free from the influence of management.  The Compensation Committee also closely examines the safeguards and steps Hewitt takes to ensure that its executive compensation consulting services are objective, for example:
 
 
§
Hewitt has separated its executive compensation consulting services into a single, segregated business unit within Hewitt
 
§
Hewitt pays its executive compensation consultants solely on their individual results and the results of its executive compensation consulting practice.  Mr. Anderson receives no incentives based on other services Hewitt provides to Caterpillar.
 
§
Mr. Anderson does own shares in Hewitt; however, he does not receive stock options or other equity-related awards from Hewitt
 
§
The total amount of fees for consulting services to the Compensation Committee in 2008 was in the range of $250,000 to $300,000
 
§
The total amount of fees paid by Caterpillar to Hewitt in 2008 for all other services, excluding Compensation Committee services, was in the range of $8 million to $10 million. This is compared to total Hewitt 2008 revenues of approximately $3 billion.
 
§
Other services are provided under a separate contractual arrangement and by a separate business unit at Hewitt

For these reasons, the Compensation Committee does not believe the services provided by Hewitt in conjunction with administering Caterpillar’s benefit plans compromises Mr. Anderson’s ability to provide the Compensation Committee with perspective and advice that is objective.
 
Page 34

 
 
Peer Group Benchmarking
 
 
 
 
Caterpillar uses a comparator group to benchmark (compare) all components of compensation to other companies within the group.  Caterpillar targets the executive total cash compensation package, as well as the long-term incentive compensation components, at the size-adjusted median level of the comparator group.  The Compensation Committee believes that targeting at the size-adjusted median level of the comparator group is necessary to attract and retain high-caliber employees.  This ensures that Caterpillar remains competitive while maximizing its resources for stockholders.
 
 
In an effort to attract and retain high-performing talent, the Compensation Committee uses benchmarking data when setting executive compensation.  Caterpillar’s revenues have risen sharply and far exceeded the median annual revenue for its previous comparator group – Hewitt Core Group 1 (HCG1).  To better align the comparator group with the company’s increased size and future plans for growth, the Compensation Committee revised the comparator group for 2008.  The Compensation Committee considered factors such as gross revenues and sales, global presence and positive earnings growth to determine what companies should be included in the comparator group.  Larger companies with higher revenues were added to provide a better basis for comparison.
 
For 2008, Caterpillar used the comparator group Caterpillar Compensation Comparator Group (CCCG), which includes 28 large public companies, listed below.  Because we compete for executive talent from a variety of industries, the 28 companies represent a cross section of industries, not just heavy manufacturing companies.  The peer group study methodology is consistent each year, which makes it easier to isolate how Caterpillar’s executive compensation is changing in relation to the market.  The Compensation Committee monitors the CCCG to ensure that it continues to provide a reasonable comparison basis for executive compensation.
 
The CCCG’s median annual revenue is less than Caterpillar’s.  To account for differences in the size of the companies in that group, the Compensation Committee conducts a regression analysis with each comparison.  Regression analysis adjusts the compensation data for differences in the companies’ revenue, allowing Caterpillar to compare its compensation levels to similarly sized companies.  The following companies compose the CCCG:
 
 
 
Page 35


Components of Caterpillar’s Compensation Program
 
 
Total compensation is a mix of total cash and long-term incentives.
 
Executive Short-Term Incentive Plan (ESTIP) and Short-Term Incentive Plan (STIP) are annual incentive plans that deliver a targeted percentage of base salary (excluding any variable base pay) based on performance against predetermined enterprise goals.  The plans are designed to focus the NEOs on the shorter-term critical issues that are indicative of improved year-over-year performance.
 
The Long-Term Incentive Plan (LTIP) includes both equity and cash under the Long-Term Cash Performance Plan (LTCPP).  LTIP is designed to reward the company’s key employees for achieving and exceeding the company’s long-term goals, to drive stockholder return and to foster stock ownership.
Total compensation for all NEOs is a mix of annual total cash and long-term incentives.
 
 
 
 
 
Annual base salary represents a small portion of our NEOs’ compensation.  In fact, on average, 82 percent of annual compensation for our NEOs varies each year based on Caterpillar’s performance.  The following chart shows the 2008 Total Compensation mix (based on targeted compensation).
 
 
 
Page 36


 
Total Annual Cash Compensation
 
The Compensation Committee’s review of 2008 market data showed total annual cash compensation structures for all NEOs were in line with the median level of the CCCG.  The Compensation Committee made no adjustments to the base salary compensation structures, or to the short-term incentive target opportunities shown below.
 
 
Total cash includes base salary and the Executive Short-Term Incentive Plan or Short-Term Incentive Plan.
 
 
 
 
Base Salary
 
Base salary increases are performance-driven.  The Compensation Committee uses the criteria described in the “Performance Evaluation” section to assess performance, which are assigned no particular weighting.  Base salary increases, however, are dependent upon assessment of these factors.  Base salary structures for Caterpillar executives are designed with a midpoint set at the median level of the CCCG.  For all employees, the minimum of the base salary structure is 80 percent of the midpoint and the maximum is 120 percent of the midpoint.  Base salaries for the NEOs are not increased above the midpoint of their respective structures without meeting certain performance requirements.  If NEOs reach the midpoint of their salary structure, any amount awarded above midpoint must be re-earned annually and approved by the Compensation Committee.  This amount is called variable base pay and is paid in the form of an annual lump sum cash award (disclosed in the “Bonus” column of the Summary Compensation Table on page 49).  This reinforces the Pay for Performance component of Caterpillar’s compensation program.
 
Executive Short-Term Incentive Plan
 
The NEOs, excluding Mr. Burritt, participated in the 2008 ESTIP.  The CEO was eligible for a target opportunity of 135 percent of base salary and the group presidents were eligible for a target opportunity of 100 percent of base salary.
 
In February 2008, the Compensation Committee reviewed and approved two enterprise-focused measures for the 2008 ESTIP.  As further described below, these two measures link the CEO and group presidents directly to the overall performance of Caterpillar.  The measures and their relative weights in determining ESTIP are as follows:
 
    § 75%  Corporate Return on Assets
    § 25%  Enterprise Quality
 
Prior to any ESTIP payout a “trigger” must be achieved, which is based on the company’s PPS.  If the trigger is not achieved, there is no ESTIP payout.  The Compensation Committee approved a PPS trigger of $2.50 for ESTIP because Caterpillar has a strategic goal of maintaining a PPS of at least $2.50 during a “trough” or economic downturn.
 
As with all components of Caterpillar’s compensation program, ESTIP rewards performance.  For both measures listed above, the Compensation Committee established the threshold, target and maximum performance levels.  If the threshold level is not achieved for a given measure, there is no ESTIP payout on that measure.  Increasingly larger payouts are awarded for achievement of target and maximum performance levels.  The following table outlines the payout factor range that applies to each performance level.  The payout factor for each measure does not exceed 200 percent.
 
Corporate Return on Assets (ROA) is Machinery and Engines profit after tax plus short-term incentive compensation expense (after tax) divided by average monthly Machinery and Engines assets.
 
 
 
Enterprise quality is a weighted average of the business unit quality performance factors.
 
 
 
Profit Per Share (PPS) is the portion of a company's profit allocated to each outstanding share of common stock, diluted by the assumed exercise of stock-based compensation awards.  PPS serves as an indicator of a company's profitability.  This is also known as Earnings Per Share.
 
 
 
 
 
Page 37


Return On Assets
 
The Compensation Committee approved ROA as the largest portion of 2008 ESTIP.  The Compensation Committee selected ROA because it is a good indication of how efficiently the company is using its assets to generate earnings and, if successful, it ultimately drives value to our stockholders.  The Compensation Committee reviewed forecasted versus actual ROA results to determine the appropriate target for the 2008 measure.  The corporate ROA slope ranged from a threshold of 6.50 percent to the maximum of 17.70 percent, with a target of 13.80 percent.  The following chart illustrates ROA performance levels.
 
Mean Dealer Repair Frequency measures the dealer repair frequency for a collection of products over a period of time approximately equal to their first year of operation.
 
 
Very Early Hour Reliability captures the number of dealer-performed repairs to a product that occur from the pre-delivery inspection through the initial hours of machine operation.
 
 
Significant Part Numbers are part numbers that have had failures in the last three years on products built in the last five years (unless the part is a remanufactured part).
 
 
Cat Production System (CPS) Assessment is the common Order-To-Delivery process to achieve our safety, quality, velocity, earnings and growth goals for 2010 and beyond.
 
 
 
 
Enterprise Quality
 
The Compensation Committee approved enterprise quality as the other 2008 ESTIP factor.  The Compensation Committee selected enterprise quality because Caterpillar must continue to place an increased emphasis on quality across the entire organization to meet our long-term goals.  Enterprise quality was measured by the weighted average of the various business unit quality performance factors, which are Mean Dealer Repair Frequency, Very Early Hour Reliability, Significant Part Numbers and Cat Production System (CPS) Assessment.  Each business unit’s quality performance factor or factors were weighted based on its applicable 2008 net sales and transfers (an inter-company sale).  The results were averaged to determine the enterprise quality result.
 
The 2008 ESTIP results were as follows:
 
 
 
 
The final 2008 ESTIP ROA was 12.6 percent, resulting in a payout factor of 88.62 percent.  The enterprise quality payout factor was 88.40 percent.  The resulting weighted payout factors from ROA and enterprise quality were added together to calculate the total cash payout factor of 88.57 percent, which resulted in a total payout of $5.6 million to the NEOs, excluding Mr. Burritt.  The Compensation Committee has discretion to reduce ESTIP awards based on performance, but individual increases are not permitted.  There were no adjustments made to the 2008 ESTIP payouts to the applicable NEOs.  Individual amounts paid under ESTIP are disclosed in the Summary Compensation Table on page 49 of this proxy statement, in the “Non-Equity Incentive Plan Compensation” column.
 
 
Short-Term Incentive Plan
 
As a vice president, our CFO, Mr. Burritt, participated in Caterpillar’s 2008 STIP (as did over 50,000 employees worldwide).  Vice presidents are not only measured on the achievement of their business unit goals, but also on corporate performance factors such as ROA and enterprise quality.  Mr. Burritt was eligible for a target opportunity of 90 percent of base salary.  His weighting was as follows:
 
 
§
77.5%
Corporate Return on Assets
 
§
12.5%
Enterprise Quality
 
§
10%
Business Unit Cost Reduction Measure
 
Page 38


PPS of $2.50 was also used as the “trigger” for 2008 STIP.  The same trigger methodology applies for STIP as described previously for ESTIP.  The 2008 results are included in the following table.
 
2008 STIP
Payout
Factor
Measurement
Corporate Return on Assets
88.62
Enterprise after-tax Return on Assets
Enterprise Quality
88.40
Based on a weighted average of several quality measures
Business Unit Measure
162.46
Composite of specific cost reduction goals for Global Finance & Strategic Services
 
The resulting weighted payout factors from ROA, enterprise quality and Mr. Burritt’s business unit measures were added together to calculate the total cash payout factor of 95.98 percent under the 2008 STIP.  Mr. Burritt’s individual STIP award amount is disclosed in the Summary Compensation Table on page 49 of this proxy statement, in the “Non-Equity Incentive Plan Compensation” column.

Level of Difficulty
 
The Compensation Committee sets the ESTIP and STIP threshold, target and maximum levels for all measures, including enterprise quality, so the relative difficulty of achieving the target level is consistent from year to year.  Target level performance goals are “stretch” goals that the Compensation Committee believes the NEOs will (on average over a long period) attain; however, as evidenced by the past three year payout levels, there is a substantial risk that target payout levels will not occur.  Even during the last three-year period of record sales and profits, our NEOs have not reached the maximum payout during any year.  Collectively, as illustrated in the table below, NEOs have averaged less than target over this same three-year period.
 
 
2008 Short-term
Payout Factor
2007 Short-term
Payout Factor
2006 Short-term
Payout Factor
Three-year
Average
Chairman and CEO
88.57
95.13
67.11
83.60
Group President
88.57
95.13
67.11
83.60
Chief Financial Officer
95.98
116.10
107.11
106.40
 
Long-Term Incentive Plan
 
The Compensation Committee annually analyzes market data on portfolio approaches for long-term incentive plans.  Portfolio approaches, where two or more long-term incentive compensation awards are used in some combination, are common practice. For example, SARs reward share appreciation; time-vested restricted units strengthen and enhance retention; and cash performance awards reinforce a long-term pay-for-results culture.
 
Caterpillar uses all three awards in its executive compensation package.  Instead of awarding all long-term compensation in the form of equity, the Compensation Committee has decided to award a portion in cash.  The mix between cash and equity is based on the market comparison.  The cash award is tied to long-term stockholder performance due to the measures within the plan.  Providing a portion of long-term incentive in the form of cash also allows Caterpillar the ability to manage its share run rate, and preserve the available pool of shares authorized for issuance under its equity plan.  The 2008 LTIP award mix is in the following table.
 
Run rate measures the rate at which companies grant equity.  It is the number of shares granted under LTIP in any one year divided by the number of common shares outstanding.
 
 
An equity award is a stock award representing ownership in the company.  Equity for Caterpillar currently consists of stock-settled Stock Appreciation Rights, Restricted Stock Units and restricted stock.
 
 
 
 
 
Page 39


Equity
 
Each year, the Compensation Committee benchmarks against the CCCG to determine a competitive equity award for each salary grade, including NEOs.  Our process benchmarks total equity value for all salary grades.  Consistent with the company’s compensation philosophy, individuals at higher levels receive a greater proportion of total pay in the form of equity.
 
In December 2007, the Compensation Committee approved the 2008 equity design, which consisted of a mix of SARs and RSUs.  This equity design supports our Pay for Performance and Pay at Risk philosophy.  RSUs represent actual shares of stock and therefore carry less risk than SARs.
 
The Compensation Committee has the discretion to make positive or negative adjustments to equity awards based on a subjective assessment of an individual’s performance, provided these adjustments do not increase the total number of awards issued to employees.
 
At the February 2008 Compensation Committee meeting, Mr. Owens discussed his recommendations with respect to standard equity award adjustments for all other NEOs.  Equity award adjustments were made and were based upon individual performance (discussed in “Other NEOs Compensation Decisions” section of this CD&A). At the February 2008 board meeting the Chairman of the Compensation Committee, Mr. Osborn, in consultation with the board and in accordance with the following “Annual Equity Grant Timing” section, established the equity award for Mr. Owens based on exceptional performance (discussed in “Compensation Decisions in 2008 and 2009” section of this CD&A).
 
The final 2008 SAR & RSU awards are disclosed in the Grants of Plan-Based Awards Table on page 51.
 
Annual Equity Grant Timing
 
The grant date for annual equity awards has historically been between mid-February to early March. The Compensation Committee has used this timing for annual equity awards because it was well after Caterpillar announced year-end financial results and allowed sufficient time for the company’s stock price to stabilize. For the 2008 equity grant, the Compensation Committee assigned March 3, 2008 as the grant date.  Caterpillar does not backdate, re-price or grant equity awards retroactively. The Compensation Committee approved the valuation of the 2008 equity awards at the February 12, 2008 meeting and delegated its authority to finalize the individual grants on the grant date to the Compensation Committee chair. The grant price ($73.20) was the closing price for Caterpillar stock as reported on the NYSE on March 3, 2008 (grant date).  All 2008 equity grants for the NEOs are disclosed in the Grants of Plan-Based Awards Table on page 51 of this proxy statement.
 
At the October 2008 meeting, the Compensation Committee approved a formal policy for the timing of the annual equity date.  As a result, beginning in 2009, the grant date for the annual equity grant will be the first Monday in March.
 
The standard equity award is the equity value determined each year by the Compensation Committee.  Each year, we benchmark against our comparator group to determine our standard award level, which is set at the median level of the comparator group.
 
 
A Stock Appreciation Rights (SAR) is a right to receive Caterpillar common shares based on the appreciation in value of a set number of shares of company stock between the grant date and the exercise date.  SARs were introduced in 2006 because they extend the life of the Caterpillar stock option pool and minimize stockholder dilution.
 
 
A Restricted Stock Unit (RSU) is a grant valued in terms of company stock. At the time of the grant, no company stock is issued. The grant entitles the recipient to receive Caterpillar common shares at the time of vesting.  RSUs were introduced in 2007 because they reduce the share run rate and may be more tax efficient for equity-eligible employees outside the United States.
 
 
 
 
 
Page 40


 
Chairman’s Restricted Stock Award Program
 
The CEO submits restricted stock grant recommendations to the Compensation Committee at each Compensation Committee meeting.  The Compensation Committee reviews the amount of the proposed grants as well as the CEO’s reasoning and approves or rejects the requested restricted stock grants.
 
At the February 2008 meeting, the board awarded Mr. Lavin 1,000 shares and Mr. Rapp 500 shares of restricted stock.  These awards were granted due to Mr. Lavin’s and Mr. Rapp’s exceptional performance, which is described in the “Other NEOs Compensation Decisions” section of this CD&A.
 
Stock Ownership Requirements
 
Equity compensation encourages our executives to have an owner’s perspective in managing the company.  Accordingly, the Compensation Committee approved stock ownership guidelines for all participants receiving equity compensation.
 
Specifically, NEOs are required to own shares equal to a minimum of 50 percent of the average (based on number of shares) of the last five grants received.  Failure to meet these guidelines results in automatic grant reductions, unless compelling personal circumstances prevent an employee from meeting his or her targeted ownership requirement.
 
Even though Caterpillar targets all officers’ total compensation at the median level of the CCCG, its stock ownership guidelines are much higher than the median level, reaching well into the upper quartile of practices of the companies examined.  At present, all NEOs exceed stock ownership guidelines.
 
Long-Term Cash Performance Plan
 
The LTCPP is a Pay at Risk plan that delivers a targeted percentage of base salary to each participant based on performance against the goals of the entire company.  The LTCPP is offered to NEOs and other key employees.  A three-year performance cycle is established each year for determining compensation under the LTCPP.  The Compensation Committee generally sets threshold, target and maximum levels that make the relative difficulty of achieving the target level consistent from year to year.  The payout amount can vary greatly from one year to the next.  The objective is to have payouts under the LTCPP be at target, on average, over a period of years.
 
Each year the Compensation Committee specifies two measures, such as relative PPS growth and ROE, each weighted 50 percent for the LTCPP.  The threshold performance levels must be met under each measure before a payout is made under that particular measure; however, there is no overall trigger as there is under ESTIP and STIP.  In other words, each measure triggers independently of the other.  Increasingly larger payments are awarded when the target and maximum performance levels are achieved.  The following table outlines the payout factor range that applies to each performance level.
 
The Chairman’s restricted stock award program is a tool that makes equity a part of the compensation program to help attract and retain outstanding performers.  Key elements of the program are 1) selected performance and retention-based grants can be made to officers and other key employees, as well as prospective employees; 2) restricted shares have three to five year vesting schedules; and 3) restricted shares are forfeited if the grantee leaves Caterpillar prior to vesting.
 
 
Relative PPS growth is one of two measures in the LTCPP.  It measures Caterpillars PPS growth against those companies in the Standard & Poors peer group.
 
 
Return On Equity (ROE)
is a profitability measure that reveals how much profit a company generates with the money stockholders have invested.  This is one of two measures in the 2006-2008 LTCPP.
 
 
 
 
The Compensation Committee selected the following Standard & Poor’s 500 companies (S&P group) to compare Caterpillar’s performance against the performance of our specific industry.  This S&P group is used because market cycle fluctuations are minimized when compared to similar companies.  The S&P group is used only for the relative PPS growth measure, not for setting levels of compensation under the LTCPP.

Page 41


The companies in this S&P group are:

Standard & Poor’s Group
 
§3M Company
§General Electric Company
§Navistar International Corporation
§Cummins Inc.
§Honeywell International Inc.
§PACCAR Inc
§Danaher Corporation
§Illinois Tool Works Inc.
§Pall Corporation
§Deere & Company
§Ingersoll-Rand Company Limited
§Parker-Hannifin Corporation
§Dover Corporation
§ITT Industries, Inc.
§Textron Inc.
§Eaton Corporation
§Johnson Controls, Inc.
§United Technologies Corporation

The 2008 LTCPP payout was based on a three-year cycle, which began in 2006 and ended in 2008.  The 2006-2008 cycle evaluated two components:  relative PPS growth, measured against the S&P Peer Group, and ROE, again each weighted 50 percent.  At the February 2006 meeting, the Compensation Committee determined that the targets (shown in the following table) were very challenging and that achieving the targets during this cycle would put the company far ahead of historical benchmark levels at other companies, including the CCCG, the S&P Peer Group and the S&P 500 overall.
 

2006-2008 LTCPP Measures
 
 
Relative PPS Growth
ROE
Threshold
25th percentile
20%
Target
50th percentile
30%
Maximum
75th percentile
40%

 
The final 2008 LTCPP ROE was 35.48 percent, resulting in a payout factor of 127.41 percent.  The relative PPS growth percentile rank was 42, resulting in a payout factor of 84.80 percent.  The resulting weighted payout factors were added together to calculate the total cash payout factor of 106.11 percent, which resulted in a payout of $7.5 million for all of the NEOs.

2006-2008 LTCPP
Payout
Factor
Measurement
Return on Equity
127.41
Enterprise Return on Equity
Relative PPS Growth
84.80
Relative PPS Growth measured against S&P Peer Group

The Compensation Committee has the discretion to reduce individual LTCPP awards based on performance, but individual increases are not permitted.  No adjustments were made to the 2008 LTCPP payouts to the NEOs.  Individual payouts were capped at $2.5 million and are disclosed in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

Risk
 
The Compensation Committee has reviewed the aforementioned incentive plans and does not believe the goals, or the underlying philosophy, encourage NEOs to take excessive risk.  By utilizing long-term cash and equity as the bulk of NEO total compensation, as well as our aggressive stock ownership requirements, we align NEO objectives with that of the long-term stockholder.
 
Compensation Decisions
 
The Executive Office (CEO and six group presidents) works as a team to drive our corporate strategy and deliver the annual business plan.  Our ESTIP is based on corporate ROA and enterprise quality metrics and is the same for each executive officer.  Our LTIP is the same for each executive officer and is based on corporate PPS growth relative to our peer group and ROE.  Annual merit pay adjustment and equity grants are based on the NEOs achievement of their goals set at the beginning of the year.  Both elements of compensation are benchmarked with peer companies and therefore keep the total compensation package competitive.
 
Page 42


 
Chairman and CEO Compensation Decisions
 
The CEO is evaluated by the board on company and individual performance metrics.  In February of 2009, the board reviewed the Compensation Committee’s assessment of Mr. Owens’ individual goals (which were created at the beginning of 2008) and his performance against those goals.  The most critical results for Mr. Owens for 2008 were as follows:
 
Integrated service businesses are service businesses containing an important service component.  These businesses include, but are not limited to, aftermarket parts, Cat Financial, Cat Insurance, Cat Logistics, Cat Reman, Progress Rail, OEM Solutions and Solar Turbine Customer Services.
 
6 Sigma is a term used to describe Process Improvement methodology using data driven process measures to strive for 6 sigma level performance (3.4 defects for every one million opportunities or operations).
 
 
§
 
 
Sales and revenues exceeded the 2008 goal ($48.6 billion) by 5.6 percent.  PPS was higher than 2007, but below the 2008 goal ($6.00).  Strong sales and revenues growth and improved price realization were offset by higher than planned costs, such as material and freight.
 
 
§
 
 
Integrated service related sales and revenue exceeded the 2008 goal by more than $600 million.  Growth in service businesses continued to stabilize earnings in peaks and troughs.
 
 
§
 
 
Overall employee engagement score was a record 81 percent favorable.  Achieved a world-class participation rate of 92 percent (over 103,000 participants).
 
 
§
 
Overall safety improved by nearly 25 percent over 2007
 
 
§
 
As-delivered quality on machines, measured by our Very Early Hour Reliability metric, improved 8 percent over 2007
 
 
 
Other NEOs Compensation Decisions
 
The CEO presents each NEO’s performance evaluation to the Compensation Committee.  The focus of the evaluation for other NEOs is based upon product and business unit metrics in their respective areas of responsibility.  The CEO presented the Compensation Committee the following key points for each named executive officer in making compensation decisions in 2008 and 2009:
 
Richard P. Lavin, Group President
 
 
§
Aggressively implemented the Cat Production System across the Asia Pacific region
 
§
Made significant progress toward profitable growth targets in emerging markets
 
§
Successfully executed capacity expansion goals throughout the Asia Pacific region
 
§
Exceeded 2008 employee engagement goals in the Asia Pacific Marketing Division as well as overall safety for his business units
 
Stuart L. Levenick, Group President
 
 
§
Provided leadership for the re-structuring of Caterpillar’s earthmoving machine business into five end-to-end machinery business divisions
 
§
Aggressively deployed CPS across divisions, creating operational improvements in variable labor efficiency and inventory turns
 
§
Substantial improvement in engagement and safety among U.S. production employees
 
§
Significant focus on strategic acquisitions to position the company for future growth opportunities
 
Page 43


 
Douglas R. Oberhelman, Group President
 
 
§
Effectively managed period costs as a percent of sales and increased accountable profit for his business units
 
§
Significantly improved employee engagement and safety for his business units
 
§
Improved reciprocating engine inventory turnover in 2008 for his business units
 
§
Successfully expanded engine capacity in Asia
 
Edward J. Rapp, Group President
 
 
§
Significantly improved Building Construction Products’ overall quality metrics
 
§
Deployed a structured approach to manage the company’s liquidity as financial markets were severely disrupted
 
§
Provided leadership for long-term capacity planning initiatives
 
§
Effectively lowered inventory in the Building Construction Products Division through the deployment of CPS
 
Gerard R. Vittecoq, Group President
 
 
§
Instrumental in providing leadership for CPS initiatives, which resulted in improved safety, employee engagement and quality for 2008
 
§
Increased focus on inventory turns and provided leadership to the Corporate Supply Chain Director
 
§
Markedly increased accountable profit from 2007 to 2008 for his business units
 
§
Strongly supported Caterpillar’s Emerging Market strategy with an emphasis on Russia
 
Steven H. Wunning, Group President
 
 
§
Championed the company’s long-term product technology strategy, including a more effective R&D prioritization process, and led the development plan for the Tier 4 emissions product programs
 
§
Provided leadership to the enterprise simplification initiative, significantly reducing the number of suppliers and part numbers
 
§
Increased accountable profit through focus on 6 Sigma, and continued to deliver exceptional performance from the Progress Rail Division
 
§
Supported the deployment of CPS across reporting manufacturing operations, which resulted in higher delivery performance and improved safety and quality levels
 
David B. Burritt, Vice President and Chief Financial Officer
 
 
§
Exceeded challenging cost containment goals in 2008
 
§
Demonstrated leadership excellence while reorganizing business units
 
§
Delivered excellent cash flow benefits to the corporation and strengthened internal controls through continued focus on 6 Sigma
 
§
Maintained strong working rapport with the Executive Office and the external financial community
 
In February 2009, the Compensation Committee approved lump sum discretionary bonuses for Mr. Lavin, Mr. Levenick, Mr. Oberhelman, Mr. Rapp, Mr. Vittecoq and Mr. Wunning based on exceptional 2008 performance (see discussion above, “Other NEOs Compensation Decisions”).  In addition, to recognize his exceptional performance, Mr. Burritt received a lump sum discretionary award through STIP.  All compensation paid to or earned by NEOs in 2008 is disclosed in the Summary Compensation Table on page 49 of this proxy statement.
 
Page 44


Retirement and Other Benefits
 
The defined contribution and defined benefit plans available to the NEOs (excluding Mr. Vittecoq for the reasons described below) are also available to most U.S. Caterpillar salaried and management employees.  All of the NEOs (excluding Mr. Vittecoq) participate in all of the following U.S. retirement plans.
 
Mr. Vittecoq is not eligible for the U.S. benefit plans because he is on the Swiss payroll and eligible for the Swiss benefit programs.  He participates in Caprevi, Prevoyance Caterpillar and the Swiss Employees’ Investment Plan.  Both are Swiss retirement plans that are available to all other Swiss management employees.  Mr. Vittecoq is eligible under Caprevi, Prevoyance Caterpillar for an early retirement benefit with no reduction.
 
 
A defined contribution savings plan is a retirement plan that provides for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses.
 
 
A defined benefit pension plan is a retirement plan in which benefits must be definitely determinable.  Plan formulas are geared to retirement benefits, not contributions.  The plan is funded by contributions to a trust account that are separate from the general assets of the company.  The Pension Benefit Guarantee Corporation insures certain benefits.
 
 
A qualified retirement plan is afforded special tax treatment for meeting a host of requirements of the Internal Revenue Code.
 
 
A nonqualified plan is designed primarily to provide retirement income for essential employees.  There are no limits on benefits or contributions, and there are no reporting requirements so long as it is not funded.
 
 
 
Pension Plans
 
Caterpillar Inc. Retirement Income Plan (RIP)
 
Most U.S. salaried and management employees are eligible to participate in RIP.  Benefit amounts are not offset for any Social Security benefits.  Plan participants may choose among several payment options, such as a single life annuity, term-certain or various joint and survivor annuity benefits.  Of the NEOs, Mr. Lavin, Mr. Levenick, Mr. Oberhelman, Mr. Wunning and Mr. Burritt are currently eligible for early retirement, with a four percent benefit reduction, per year, from age 62.  Mr. Owens is currently eligible to retire with no reduction in benefits.
 
Supplemental Retirement Plan (SERP)
 
If an employee’s annual compensation or retirement income benefit under RIP exceeds the Internal Revenue Service tax code limitations, the excess benefits are paid from the SERP.  The formula used to calculate the benefit payable in SERP is the same as that used under RIP.
 
 
Page 45


 
Savings Plans
 
Caterpillar 401(k) Plan
 
Most U.S. salaried and management employees, including the NEOs, are eligible to participate in the 401(k) plan.
 
 
§
Contributions are made on a pre-tax basis
 
 
§
Participants can contribute up to 70 percent of their base salary and STIP awards
 
 
§
Contributions are limited by the tax code
 
 
§
Company matches 100 percent of the first six percent of pay contributed to the savings plan
 
 
§
All contributions vest immediately
 

Supplemental Deferred Compensation Plan (SDCP)
 
In addition to the 401(k) plan, all NEOs are allowed to participate in SDCP, which provides the opportunity to increase deferrals of base salary and to elect deferrals of STIP and LTCPP awards.
 
 
§
The plan was created in March 2007 with a retroactive effective date of January 1, 2005.  It effectively replaces SEIP and DEIP (both defined below).  The change allows the company to comply with the American Jobs Creation Act of 2004, which added Internal Revenue Code Section 409A.
 
 
§
Contributions are made on a pre-tax basis and are comprised of four possible contribution types:
 
Supplemental Base Pay Deferrals (maximum 70 percent deferral election)
 
Supplemental STIP Deferrals (maximum 70 percent deferral election)
 
Supplemental LTCPP Deferrals (maximum 70 percent deferral election)
 
Excess Base Pay Deferrals (flat six percent deferral election)
 
 
§
Supplemental Base Pay Deferrals earn matching contributions at a rate of six percent of the deferred amount
 
 
§
Supplemental STIP Deferrals up to six percent are matched dollar-for-dollar
 
 
§
Supplemental LTCPP Deferrals are not eligible for an employer matching contribution
 
 
§
Excess Base Pay Deferrals are matched 100 percent by the company.  This is provided to restore the matching opportunity that is not available under the qualified plan due to IRS limits.
 
 
§
All contributions vest immediately

Supplemental Employees’ Investment Plan (SEIP) and Deferred Employees’ Investment Plan (DEIP)
 
In addition to the 401(k) plan, all NEOs were previously allowed to participate in SEIP and DEIP.  These plans were frozen to new participants and new salary deferrals in March of 2007.  Pay deferred into SEIP and DEIP prior to January 1, 2005 remains in SEIP and DEIP.  Pay deferred on and after January 1, 2005 was transferred to SDCP.
 
Page 46


Perquisites
 
The company provides NEOs a very limited number of perquisites that it and the Compensation Committee believe are reasonable and consistent with its overall compensation program, and necessary to remain competitive.  The Compensation Committee annually reviews the levels of perquisites provided to the NEOs.  Costs associated with perquisites provided by the company are included in the All Other Compensation Table appearing on page 50 of this proxy statement.  Descriptions of these perquisites are provided below:
 
 
§
Limited personal use of company aircraft is provided for security purposes and to enable the NEOs to devote additional time to Caterpillar business.  A spouse may accompany a NEO on the company aircraft while he or she is traveling for company business.  Effective January 1, 2009, the tax gross-up on the spousal accompany travel perquisite was eliminated.
 
 
§
Home security systems are provided to ensure the safety of our NEOs
 
 
§
During 2008, the NEOs were provided an annual financial counseling allowance.  This perquisite has been discontinued effective January 1, 2009.
 
 
§
Mr. Owens participates in the Director’s Charitable Award program, which is provided to all directors of the company, and is funded by life insurance arrangements for which the company pays the premiums.  Mr. Owens derives no direct financial benefit from the program.
 
 
§
The Director’s Charitable Award program was discontinued for new directors after April 1, 2008.  Directors as of that date were grandfathered under the program.
 
Change in Control
 
Except as required by applicable law, Caterpillar has no special executive severance packages or contracts.  Mr. Vittecoq has an employment contract, which is required under Swiss law.  The change in control provisions are provided under our long-term and short-term plans and are standard provisions for these types of plans, which apply to all participants in those plans.  Our change in control provisions have no direct correlation with other compensation decisions.

The change in control provisions generally provide accelerated vesting and maximum payout under the incentive plans.  The change in control provisions impose a “double-trigger,” whereby a change in control and termination of employment without cause within 12 months of the change in control are needed to trigger the change in control provisions.  These provisions are intended to allow executives to evaluate business opportunities with the best interests of stockholders in mind, as opposed to maximizing their own personal interests.  The terms of the change in control provisions are applicable to all employees covered by these plans and are not specific to the NEOs.  Additionally, no payments are made for voluntary separation, resignation and termination for cause.

In the event of a change in control, maximum payout factors are assumed for amounts payable under the 1996 and 2006 Stock Option and LTIP.
 
 
§
LTIP allows for the maximum performance level, 150 percent payout factor, to be paid under each open plan cycle of the LTCPP.  This is prorated based on the time of active employment during the performance cycle.
 
 
§
All unvested stock options, SARs, restricted stock and restricted stock units vest immediately
 
 
§
Stock options and SARs remain exercisable over the normal life of the grant
 
 
§
The ESTIP is assumed to achieve the maximum payout factor, 200 percent, under a change in control

Change in control information is disclosed in the “Potential Payments Upon Termination or Change in Control” section on page 56 of this proxy statement.
 
Page 47


 
Tax and Accounting Implications
 
Deductibility of Compensation
 
The goal of the Compensation Committee is to comply with the requirements of Internal Revenue Code Section 162(m), to the extent possible, with respect to long-term and short-term incentive programs to avoid losing the deduction for compensation in excess of $1 million paid to our NEOs.  Caterpillar has generally structured performance-based compensation plans with the objective that amounts paid under those plans are tax deductible and the plans must be approved by the company’s stockholders.  However, the Compensation Committee may elect to provide compensation outside those requirements when necessary to achieve its compensation objectives.
 
Compensation Recoupment Policy
 
If the board learns of any misconduct by an officer who contributed to the company restating all or a portion of its financial statements, it will do what is required to correct the misconduct and prevent it from occurring again and, if appropriate, take necessary remedial action.

To determine the corrective action, the board will review the situation to identify whether the restatement was the result of negligence, or intentional misconduct.  The board will require reimbursement of any bonus or incentive compensation awarded to an officer or cancel unvested restricted or deferred stock awards previously granted to the executive officer if all of the following apply:
 
 
§
The amount of the bonus or incentive compensation was calculated based on the achievement of certain financial results that were subsequently the subject of a restatement
 
 
§
The officer engaged in intentional misconduct that caused or partially caused the need for the restatement
 
 
§
The amount of the bonus or incentive compensation that would have been awarded to the executive had the financial results been properly reported would have been lower than the amount actually awarded

Additionally, at the board’s discretion, it may dismiss the officer, authorize legal action for breach of fiduciary duty or take other action to enforce the officer’s obligations to the company.  In determining appropriate remedial action, the board may take into account penalties or punishments imposed by third parties, such as law enforcement agencies, regulators or other authorities.  The board’s power to determine the appropriate punishment for the wrongdoer is in addition to, and not in replacement of, third party actions.
 
Page 48


 
 
2008 Summary Compensation Table
 
Name and
Principal Position 
 
Year 
 
Salary 
 
Bonus2
 
Stock
Awards3
 
Option
Awards4
 
Non-Equity
Incentive
Plan
Compensation5
 
Change in
Pension
Value and
Nonqualified Deferred
Compensation
Earnings6
 
All Other Compensation7
 
Total 
 
J.W. Owens
2008
$
1,550,004
 
$
 
$
1,068,724
 
$
7,461,609
 
$
4,353,227
 
$
2,932,489
 
$
288,369
 
$
17,654,422
 
Chairman & CEO
2007
$
1,512,504
 
$
300,000
 
$
918,626
 
$
7,136,911
 
$
4,442,998
 
$
2,575,395
 
$
221,307
 
$
17,107,741
 
 
2006
$
1,350,003
 
$
300,000
 
$
 
$
7,029,846
 
$
3,723,703
 
$
2,171,992
 
$
243,077
 
$
14,818,621
 
R.P. Lavin 1
2008
$
584,004
 
$
10,000
 
$
317,172
 
$
2,484,182
 
$
1,071,222
 
$
381,424
 
$
619,217
 
$
5,467,221
 
Group President
                                                 
S.L. Levenick
2008
$
729,996
 
$
10,000
 
$
351,818
 
$
3,161,374
 
$
1,457,336
 
$
699,119
 
$
161,532
 
$
6,571,175
 
Group President
2007
$
712,248
 
$
110,000
 
$
260,667
 
$
3,379,672
 
$
1,560,817
 
$
531,446
 
$
85,148
 
$
6,639,998
 
 
2006
$
641,253
 
$
120,000
 
$
16,090
 
$
1,076,445
 
$
1,441,021
 
$
487,228
 
$
83,084
 
$
3,865,121
 
D.R. Oberhelman
2008
$
729,996
 
$
60,000
 
$
351,818
 
$
3,270,500
 
$
1,495,186
 
$
619,845
 
$
111,227
 
$
6,638,572
 
Group President
2007
$
729,996
 
$
198,000
 
$
260,667
 
$
3,412,413
 
$
1,666,505
 
$
568,400
 
$
100,431
 
$
6,936,412
 
 
2006
$
721,248
 
$
183,000
 
$
16,090
 
$
1,082,596
 
$
1,633,854
 
$
575,150
 
$
122,180
 
$
4,334,118
 
E.J. Rapp 1
2008
$
584,004
 
$
10,000
 
$
155,032
 
$
1,365,517
 
$
1,071,010
 
$
312,921
 
$
45,890
 
$
3,544,374
 
Group President
                                                 
G.R. Vittecoq 5
2008
$
880,993
 
$
20,000
 
$
319,010
 
$
2,484,182
 
$
1,735,385
 
$
843,600
 
$
45,240
 
$
6,328,410
 
Group President
2007
$
826,177
 
$
82,618
 
$
315,710
 
$
2,270,803
 
$
1,896,463
 
$
1,228,584
 
$
43,047
 
$
6,663,402
 
 
2006
$
753,981
 
$
114,870
 
$
 
$
2,226,118
 
$
1,707,398
 
$
1,532,982
 
$
40,159
 
$
6,375,508
 
S.H. Wunning
2008
$
729,996
 
$
10,000
 
$
284,238
 
$
2,484,182
 
$
1,465,075
 
$
777,695
 
$
109,237
 
$
5,860,423
 
Group President
2007
$
715,746
 
$
24,000
 
$
289,631
 
$
2,585,518
 
$
1,581,445
 
$
708,727
 
$
86,678
 
$
5,991,745
 
 
2006
$
657,747
 
$
130,000
 
$
 
$
2,226,118
 
$
1,501,523
 
$
621,107
 
$
78,674
 
$
5,215,169
 
D.B. Burritt
2008
$
494,751
 
$
25,000
 
$
112,443
 
$
1,068,634
 
$
858,879
 
$
436,890
 
$
68,015
 
$
3,064,612
 
Vice President & CFO
2007
$
454,503
 
$
 
$
43,190
 
$
647,601
 
$
930,660
 
$
352,648
 
$
63,152
 
$
2,491,754
 
 
2006
$
405,750
 
$
40,000
 
$
 
$
328,059
 
$
861,783
 
$
275,049
 
$
56,047
 
$
1,966,688
 
1
Mr. Lavin and Mr. Rapp were not NEOs in 2006 or 2007.