DEF 14A 1 formdef14a.htm DEFINITIVE PROXY STATEMENT formdef14a.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
 
Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:
o
Preliminary Proxy Statement
o
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
T
Definitive Proxy Statement
o
Definitive Additional Materials
o
Soliciting Material Pursuant to §240.14a-12

Alliance Data Systems Corporation
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
     
Payment of Filing Fee (Check the appropriate box):
T
No fee required. 
o
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
 
 
(1)
 
Title of each class of securities to which transaction applies: 
 
 
(2)
 
Aggregate number of securities to which transaction applies: 
 
 
(3)
 
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 
 
 
(4)
 
Proposed maximum aggregate value of transaction: 
 
 
(5)
 
Total fee paid: 
 
   
o
Fee paid previously with preliminary materials.
o
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.
 
 
(1)
 
 
Amount Previously Paid: 
    
 
(2)
 
Form, Schedule or Registration Statement No.: 
    
 
(3)
 
Filing Party: 
    
 
(4)
 
Date Filed: 
 
 
 


 
 
 
 
 
 
ALLIANCE DATA SYSTEMS CORPORATION
7500 Dallas Parkway, Suite 700
Plano, Texas 75024
(214) 494-3000

NOTICE OF 2012 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 7, 2012

To the stockholders of Alliance Data Systems Corporation:

We will hold the 2012 annual meeting of our stockholders at Hilton Easton, 3900 Chagrin Drive, Columbus, Ohio 43219, on Thursday, June 7, 2012 at 10:00 a.m. (local time), for the following purposes:

(1)  
to re-elect two class III directors;

(2)  
to hold an advisory vote on executive compensation;

(3)  
to ratify the selection of Deloitte & Touche LLP as the independent registered public accounting firm of the company for 2012; and

(4)  
to transact such other business as may properly come before the annual meeting or any adjournments or postponements thereof.

Stockholders of record as of April 9, 2012 are the only stockholders entitled to vote at the meeting and any adjournments or postponements thereof. You are cordially invited to attend the meeting, but whether or not you expect to attend in person, we urge you to grant your proxy to vote your shares by telephone or through the Internet by following the instructions included on the Notice of Internet Availability of Proxy Materials that you received, or if you received a paper copy of the proxy card, to mark, date, sign and return the proxy card in the envelope provided. You may still vote in person if you attend the meeting, even if you have given your proxy. Please note, however, that if a broker or other nominee holds your shares of record and you wish to vote at the meeting, you must obtain from that registered holder a proxy card issued in your name.

Pursuant to rules promulgated by the Securities and Exchange Commission, we are providing access to our proxy materials, including this proxy statement and our annual report on Form 10-K for the year ended December 31, 2011, over the Internet.  As a result, we are mailing to many of our stockholders a Notice of Internet Availability of Proxy Materials instead of a paper copy of our proxy materials.  The notice contains instructions on how to access those proxy materials over the Internet, as well as instructions on how to request a paper copy of our proxy materials. All stockholders who do not receive a notice will receive a paper copy of our proxy materials by mail.  This electronic distribution process reduces the environmental impact and lowers the costs of printing and distributing our proxy materials.
 
  By Order of the Board of Directors 
   
  /s/ Leigh Ann K. Epperson
  Leigh Ann K. Epperson
  Corporate Secretary
 
 
April 20, 2012
Plano, Texas
 
 
 

 
 
 
ALLIANCE DATA SYSTEMS CORPORATION
7500 Dallas Parkway, Suite 700
Plano, Texas 75024

PROXY STATEMENT
2012 Annual Meeting of Stockholders
To be Held on June 7, 2012

The board of directors of Alliance Data Systems Corporation is soliciting your proxy to vote at the 2012 annual meeting of stockholders to be held on June 7, 2012 at 10:00 a.m. (local time) and any adjournments or postponements of that meeting. The meeting will be held at Hilton Easton, 3900 Chagrin Drive, Columbus, Ohio 43219.

The Notice of Internet Availability of Proxy Materials or this proxy statement and the accompanying proxy card, notice of meeting and annual report on Form 10-K for the year ended December 31, 2011 were first mailed on or about April 20, 2012 to all stockholders of record as of April 9, 2012. Our only voting securities are shares of our common stock, of which there were 52,181,862 shares outstanding as of April 9, 2012. We will have a list of stockholders available for inspection for at least ten days prior to the annual meeting at our principal executive offices at 7500 Dallas Parkway, Suite 700, Plano, Texas 75024 and at the annual meeting.

Questions and Answers about the Proxy Process

Why did I receive a Notice of Internet Availability of Proxy Materials instead of a paper copy of the proxy materials?

Pursuant to Securities and Exchange Commission (“SEC”) rules, we are providing access to our proxy materials over the Internet.  As a result, we are mailing to many of our stockholders a Notice of Internet Availability of Proxy Materials instead of a paper copy of our proxy materials. The notice contains instructions on how to access our proxy materials over the Internet, as well as instructions on how to request a paper copy of our proxy materials by mail.

Why didn’t I receive a Notice of Internet Availability of Proxy Materials?

We are providing those of our stockholders that have previously requested a paper copy of our proxy materials with paper copies of our proxy materials instead of a Notice of Internet Availability of Proxy Materials.

How can I access the proxy materials over the Internet?

Your Notice of Internet Availability of Proxy Materials or proxy card will contain instructions on how to view our proxy materials for the annual meeting, which include our proxy statement and annual report on Form 10-K, on the Internet. Our proxy materials are also available on our company website at http://www.alliancedata.com.

What is the purpose of holding this meeting?

We are holding the 2012 annual meeting of stockholders to re-elect two class III directors, to hold an advisory vote on executive compensation and to ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012. The director nominees, all of whom are currently serving as our class III directors, have been recommended by our nominating/corporate governance committee
 
 
1

 
 
to our board of directors; and our board of directors has nominated the two nominees and recommends that our stockholders re-elect them as class III directors. The board of directors also recommends that our stockholders (1) approve, on an advisory basis, the compensation of our named executive officers and (2) ratify the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012.  If any other matters requiring a stockholder vote properly come before the meeting, those stockholders present at the meeting and the proxies who have been appointed by our stockholders will vote as they think appropriate.
 
How does the proxy process and stockholder voting operate?

The proxy process is the means by which corporate stockholders can exercise their rights to vote for the election of directors and other strategic corporate proposals. The notice of meeting and this proxy statement provide notice of a scheduled stockholder meeting, describe the directors presented for re-election, include information about the advisory vote on executive compensation, include information regarding the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012 and include other information required to be disclosed to stockholders. Stockholders may vote by telephone or through the Internet, or by returning a proxy card, without having to attend the stockholder meeting in person.

By executing a proxy, you authorize Charles L. Horn and Laura Santillan, and each of them, to act as your proxies to vote your shares in the manner that you specify. The proxy voting mechanism is vitally important to us. In order for us to obtain the necessary stockholder approval of proposals, a “quorum” of stockholders (a majority of the issued and outstanding shares of common stock as of the record date entitled to vote) must be represented at the meeting in person or by proxy. Because few stockholders can spend the time or money to attend stockholder meetings in person, voting by proxy is necessary to obtain a quorum and complete the stockholder vote. It is important that you attend the meeting in person or grant a proxy to vote your shares to assure a quorum is present so corporate business can be transacted. If a quorum is not present, we must adjourn the meeting and solicit additional proxies; this is an expensive and time-consuming process that is not in the best interest of our company or its stockholders.

Why did I receive these materials?

All of our stockholders as of the close of business on April 9, 2012, the record date, are entitled to vote at our 2012 annual meeting. We are required by law to distribute the Notice of Internet Availability of Proxy Materials or a full set of proxy materials to all of our stockholders as of the record date.

What does it mean if I receive more than one set of materials?

This means your ownership of shares is registered under different names. For example, you may own some shares directly as a “registered holder” and other shares through a broker in “street name,” or you may own shares through more than one broker. In these situations, you may receive multiple sets of proxy materials. It is necessary for you either to attend in person (please note, however, that if a broker or other nominee holds your shares of record and you wish to vote at the meeting, you must obtain from that registered holder a proxy card issued in your name), to vote your shares by telephone or through the Internet by following the instructions provided in the Notice of Internet Availability of Proxy Materials, or to return a signed, dated and marked proxy card if you received a paper copy of the proxy card. If you vote by mail, make sure you return each proxy card in the return envelope that accompanied that proxy card.

If I own my shares through a broker, how is my vote recorded?

Brokers typically own shares of common stock for many stockholders who are referred to as “beneficial owners.” In this situation, the “registered holder” on our stock register is the broker or its nominee. The beneficial owners do not appear in our stockholder register, and their ownership is often referred to as holding shares in “street name.” Therefore, for shares held in street name, distributing the proxy materials and tabulating votes are both two-step processes. Brokers inform us how many of their clients are beneficial owners and we provide the broker with the appropriate number and type of proxy materials. Each broker then
 
 
2

 
 
forwards the appropriate proxy materials to its clients who are beneficial owners to obtain their votes. When you receive proxy materials from your broker, instructions will be included to submit your voting instructions to your broker. Shortly before the meeting, each broker totals the votes and submits a proxy reflecting the aggregate votes of the beneficial owners for whom it holds shares.

How do I vote?

You may attend the annual meeting and vote your shares in person.  Please note, however, that if a broker or other nominee holds your shares of record and you wish to vote at the meeting, you must obtain from that registered holder a proxy card issued in your name.
 
 
You may also grant your proxy to vote by telephone or through the Internet by following the instructions included on the Notice of Internet Availability of Proxy Materials, or by returning a signed, dated and marked proxy card if you received a paper copy of the proxy card. To grant your proxy to vote by mail, sign and date each proxy card you receive, indicating your voting preference on each proposal, and return each proxy card in the prepaid envelope that accompanied that proxy card. If you return a signed and dated proxy card but you do not indicate your voting preference, your shares, except for those shares you own beneficially or in the ADS Stock Fund portion of the Alliance Data Systems 401(k) and Retirement Savings Plan, will be voted in favor of the two class III director nominees, the approval, on an advisory basis, of the compensation of our named executive officers, and the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012, all in accordance with the recommendation of our board of directors.  If you are a registered holder or hold your shares in street name, votes submitted by Internet or telephone must be received by 11:59 p.m. eastern daylight time on June 6, 2012. For shares you own in the ADS Stock Fund portion of the Alliance Data Systems 401(k) and Retirement Savings Plan, your proxy card or voting instructions must be received by June 4, 2012.  For all other shares that you own, your voting instructions must be received in time for the annual meeting.  All outstanding shares of common stock for which you have provided instructions that are received by the applicable deadline will be voted.

Does my vote matter?

Yes. Corporations are required to obtain stockholder approval for the election of directors and certain other important matters. Stockholder participation is not a mere formality. Each share of our common stock held on the record date is entitled to one vote, and every share voted has the same weight. It is also important that you vote to assure that a quorum is present so corporate business can be transacted.

What constitutes a quorum?

Unless a quorum is present at the annual meeting, no action may be taken at the meeting except the adjournment thereof until a later time. The presence at the annual meeting, in person or by proxy, of stockholders holding a majority of our issued and outstanding shares of common stock as of the record date will constitute a quorum for the transaction of business at the 2012 annual meeting. Shares that are represented at the annual meeting but abstain from voting on any or all matters and “broker non-votes” (shares held by brokers or nominees for which they have no discretionary power to vote on a particular matter and have received no instructions from the beneficial owners or persons entitled to vote) will be counted as shares present and entitled to vote in determining whether a quorum is present at the annual meeting. If you own shares in the ADS Stock Fund portion of the Alliance Data Systems 401(k) and Retirement Savings Plan, your shares will not be represented at the meeting for quorum purposes and the trustee cannot vote those shares if you do not provide a proxy with explicit directions to the trustee. The inspector of election appointed for the annual meeting will determine the number of shares of our common stock present at the meeting, determine the validity of proxies and ballots, determine whether a quorum is present, and count all votes and ballots.
 
 
3

 

What percentage of votes is required to re-elect directors, to approve, on an advisory basis, the compensation of our named executive officers and to ratify the selection of Deloitte & Touche LLP as the independent registered public accounting firm of the company for 2012?

If a quorum is present, directors are elected by the affirmative vote of a majority of the votes cast, in person or by proxy. The number of shares voted “For” a director nominee must exceed the number of votes cast “Against” that nominee. Stockholders may not cumulate their votes with respect to the re-election of directors.

If a quorum is present and a majority of the shares represented, in person or by proxy, and entitled to vote are voted in favor of Proposal Two, the compensation of our named executive officers will be approved on an advisory basis.  Votes marked “For” Proposal Two will be counted in favor of approval, on an advisory basis, of the compensation of our named executive officers.  On Proposal Two “broker non-votes” will not be counted as votes cast “For” or “Against” the proposal and thus will have no effect on the outcome of the approval, on an advisory basis, of the compensation of our named executive officers.  An “Abstention” with respect to Proposal Two will not be voted on that item, although it will be counted for purposes of determining the number of shares represented and entitled to vote. Accordingly, an “Abstention” will have the same effect as a vote “Against” Proposal Two.

If a quorum is present and a majority of the shares represented, in person or by proxy, and entitled to vote are in favor of Proposal Three, the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012 will be ratified.  Votes marked “For” Proposal Three will be counted in favor of ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012. An “Abstention” with respect to Proposal Three will not be voted on that item, although it will be counted for purposes of determining the number of shares represented and entitled to vote. Accordingly, an “Abstention” will have the same effect as a vote “Against” Proposal Three.

What is the effect of not voting?

The effect of not voting depends on how you own your shares. If you own shares as a registered holder, rather than through a broker, your unvoted shares will not be represented at the meeting and will not count toward the quorum requirement. Assuming a quorum is present, your unvoted shares will not affect whether a proposal is approved or rejected. If you own shares through a broker and do not vote, your broker may represent your shares at the meeting for purposes of obtaining a quorum. As described in the answer to the following question, if you do not provide your broker with voting instructions, your broker may or may not vote your shares, depending upon the proposal.  If you own shares in the ADS Stock Fund portion of the Alliance Data Systems 401(k) and Retirement Savings Plan, your unvoted shares will not be represented at the meeting and will not count toward the quorum requirements, or affect whether a proposal is approved or rejected.

If I do not vote, will my broker vote for me?

If you own your shares through a broker and you do not vote, your broker may vote your shares in its discretion on some “routine matters.” However, with respect to other proposals, your broker may not vote your shares for you. With respect to these proposals, the aggregate number of unvoted shares is reported as broker non-votes. Broker non-vote shares are counted toward the quorum requirement.  Proposals One and Two set forth in this proxy statement are not considered to be routine matters and brokers will not be permitted to vote unvoted shares on these two proposals. Proposal Three set forth in this proxy statement is a routine matter on which brokers will be permitted to vote unvoted shares.

Is my vote confidential?

It is our policy that all stockholder meeting proxies, ballots and voting records that identify the particular vote of a stockholder are confidential. The vote of any stockholder will not be revealed to anyone other than an inspector of election or a non-employee tabulator of votes, except: (1) as necessary to meet applicable legal and stock exchange listing requirements; (2) to assert claims for or defend claims against us; (3) to allow the
 
 
4

 
 
inspector of election to certify the results of the stockholder vote; (4) in the event of a contested proxy solicitation; or (5) if a stockholder has requested that their vote be disclosed.

Can I revoke my proxy and change my vote?

You have the right to revoke your proxy at any time prior to the time your shares are voted. If you are a registered holder, your proxy can be revoked in several ways: (1) by timely delivery of a written revocation delivered to Leigh Ann K. Epperson, Corporate Secretary, Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024; (2) by submitting another valid proxy bearing a later date; or (3) by attending the meeting in person and giving the inspector of election notice that you intend to vote your shares in person. However, if your shares are held in street name by a broker, you must contact your broker in order to revoke your proxy.

Will any other business be transacted at the meeting? If so, how will my proxy be voted?

We do not know of any business to be transacted at the 2012 annual meeting other than the re-election of directors, the approval, on an advisory basis, of compensation for our named executive officers and the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for 2012, as described in this proxy statement. The period specified in our bylaws for submitting proposals to be considered at the meeting has passed and no proposals were submitted and not withdrawn. However, should any other matters properly come before the meeting, and any adjournments and postponements thereof, shares with respect to which voting authority has been granted to the proxies will be voted by the proxies in accordance with their judgment.
 
Who counts the votes?

If you are a registered holder, your vote, as provided by mail, telephone or through the Internet, will be returned or delivered directly to Computershare for tabulation.  As noted above, if you hold your shares through a broker or trustee, your broker or trustee returns one proxy to Computershare on behalf of its clients.  Votes will be counted and certified by the inspector of election.

Will you use a soliciting firm to receive votes?

We use Computershare, our transfer agent and their agents, as well as brokers to distribute all the proxy materials to our stockholders. We will pay them a fee and reimburse any expenses they incur in making the distribution. Our directors, officers and employees may solicit proxies in person, by mail, telephone, facsimile transmission or electronically. No additional compensation will be paid to such directors, officers and employees for soliciting proxies.  We will bear the entire cost of solicitation of proxies.

What is the deadline for submitting proposals, including director nominations, for our 2013 annual meeting?

Requirements for Stockholder Proposals to Be Considered for Inclusion in the Company’s Proxy Materials:

If any of our stockholders intends to present a proposal for consideration at the 2013 annual meeting, excluding the nomination of directors, and desires to have such proposal included in the proxy statement and form of proxy distributed by the board of directors with respect to such meeting, such proposal must be in writing and received by us not later than December 20, 2012. Proposals may be submitted by eligible stockholders and must comply with the relevant regulations of the SEC regarding stockholder proposals.

Requirements for Stockholder Proposals or Director Nominations to Be Brought Before the 2013 Annual Meeting:

If any of our stockholders intends to present a proposal or nominate a director for consideration at the 2013 annual meeting without inclusion in the proxy statement and form of proxy, notice of such proposal or nomination must be in writing and received by our Corporate Secretary no sooner than February 7, 2013 and no later than March 9, 2013.  Any such notice must comply with our bylaws. The foregoing time limits also apply in determining whether notice is timely for purposes of rules adopted by the SEC relating to the exercise of discretionary voting authority with respect to proxies.
 
 
5

 

A copy of our bylaws is available from our Corporate Secretary upon written request. Requests or proposals should be directed to Leigh Ann K. Epperson, Corporate Secretary, Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024.

How can I request a full set of proxy materials?

You may request, without charge, a full set of our proxy materials, including our annual report on Form 10-K for the year ended December 31, 2011, for one year following the annual meeting of stockholders.  If a broker or other nominee holds your shares of record, you may request a full set of our proxy materials by following the instructions contained in the Notice of Internet Availability of Proxy Materials that you received.  If you are a registered holder or if you own shares through the ADS Stock Fund portion of the Alliance Data Systems 401(k) and Retirement Savings Plan, you may request, without charge, a full set of our proxy materials by following the instructions contained in the Notice of Internet Availability of Proxy Materials that you received or by written request directed to Leigh Ann K. Epperson, Corporate Secretary, Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024.
 
 
6

 
 
DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the name, age and positions of each of our directors, nominees for director, and Section 16 officers as of April 9, 2012:

 
Name
 
 
Age
 
 
Positions
Bruce K. Anderson
 
72
 
Director
Roger H. Ballou
 
60
 
Director
Lawrence M. Benveniste, Ph.D.
 
61
 
Director
D. Keith Cobb
 
71
 
Director
E. Linn Draper, Jr., Ph.D.
 
70
 
Director
Leigh Ann K. Epperson
 
46
 
Senior Vice President, General Counsel and Secretary
Edward J. Heffernan
 
49
 
Director, President and Chief Executive Officer
Charles L. Horn
 
51
 
Executive Vice President and Chief Financial Officer
Kenneth R. Jensen
 
68
 
Director
Bryan J. Kennedy
 
43
 
Executive Vice President and President, Epsilon®
Melisa A. Miller
 
53
 
Executive Vice President and President, Retail Credit Services
Robert A. Minicucci
 
59
 
Director; Non-Executive Chairman of the Board
Bryan A. Pearson
 
48
 
Executive Vice President and President, LoyaltyOne®
Laura Santillan
 
40
 
Senior Vice President and Chief Accounting Officer
         

On September 2, 2011, we entered into a Retirement Agreement with Ivan M. Szeftel who formerly served as our Executive Vice President and President, Retail Credit Services, pursuant to which Mr. Szeftel agreed to continue to both serve in an advisory role and as chief executive officer of our bank subsidiary, World Financial Network Bank, or WFNB, and as Chairman of WFNB’s board of directors through March 1, 2012.

 
7

 
 
PROPOSAL ONE: RE-ELECTION OF DIRECTORS

Our board of directors is divided into three classes, being divided as equally as possible with each class having a term of three years. Each year the term of office of one class expires. This year, the term of class III directors, currently consisting of two directors, expires. Our nominating/corporate governance committee has recommended to our board of directors and our board of directors has nominated each of the current class III directors, Robert A. Minicucci and Edward J. Heffernan, for re-election as a director, each to hold office for a term of three years until the annual meeting of stockholders in 2015 and until his respective successor is duly elected and qualified.

Mr. Horn and Ms. Santillan, and each of them, as proxies, will have full discretion to cast votes for other persons in the event any nominee is unable to serve. Our board of directors has no reason to believe that any nominee will be unable to serve if re-elected. If a quorum is present, directors are re-elected by a majority of the votes cast, in person or by proxy. This means that the two nominees will be re-elected if they receive more “For” votes than “Against” votes. Votes marked “For” a nominee will be counted in favor of that nominee. Votes marked “Abstain” will have no effect on the vote since a majority of the votes cast at the annual meeting is required for the re-election of each nominee. Stockholders may not cumulate their votes with respect to the re-election of directors. In accordance with our
bylaws, any nominee who does not receive a majority of votes cast shall immediately tender his resignation for consideration by our board of directors. Our board of directors will evaluate whether to accept or reject such resignation, or whether other action should be taken. The board of directors will publicly disclose its decision to accept or reject such resignation and its rationale within 90 days from the date of certification of the director election results.

The following sets forth information regarding each nominee, and the remaining directors who will continue in office after the annual meeting, including proposed committee memberships.

Class III Nominees for Re-Election to the Board of Directors
(Terms expiring in 2012; if re-elected, terms will expire in 2015)

ROBERT A. MINICUCCI, chairman of the board, has served as a director since August 1996. Mr. Minicucci is a general partner with Welsh, Carson, Anderson & Stowe, or WCAS, joining the firm in August 1993. Before joining WCAS, he served as senior vice president and chief financial officer of First Data Corporation from December 1991 to August 1993. Prior to joining First Data Corporation, Mr. Minicucci was treasurer and senior vice president of American Express Company. Mr. Minicucci is currently the chairman of the board of directors of Amdocs Limited and serves as a director of Paycom Inc. and Retalix Ltd.  Mr. Minicucci holds a Bachelor’s degree from Amherst College and an MBA from Harvard Business School.  Mr. Minicucci has demonstrated executive leadership skills in a similar industry and has first-hand knowledge of the company based on his experience as a member of our board of directors since our inception in 1996.

Committees:  Compensation and Executive

EDWARD J. HEFFERNAN, president and chief executive officer, joined us in May 1998, and has served as a director since June 2009.  From May 2000 until March 2009, Mr. Heffernan served as an executive vice president and chief financial officer of Alliance Data and, prior to that, he was responsible for mergers and acquisitions for Alliance Data.  Before joining us, he served as vice president, mergers and acquisitions, for First Data Corporation from October 1994 to May 1998. Prior to that, he served as vice president, mergers and acquisitions for Citicorp from July 1990 to October 1994, and prior to that he served in corporate finance at Credit Suisse First Boston from June 1986 until July 1990. Mr. Heffernan is currently a director of Children’s Medical Center Dallas.  Mr. Heffernan holds a Bachelor’s degree from Wesleyan University and an MBA from Columbia Business School.  Mr. Heffernan’s role as our former chief financial officer and current chief executive officer provides a link to the company’s management and a unique level of insight into the company’s operations.

Committees: Executive
 
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE TWO NOMINEES.

 
8

 

Continuing Directors

Class I Directors
(Terms expiring in 2013)

LAWRENCE M. BENVENISTE, Ph.D. has served as a director since June 2004.  Dr. Benveniste has served as the Dean of Goizueta Business School at Emory University since July 2005.  Dr. Benveniste served as the Dean of the Carlson School of Management at the University of Minnesota from January 2001 to July 2005, and prior to January 2001, he was an associate dean, the chair of the finance department, and a professor of finance at the Carlson School of Management.   He previously served on the faculties of Boston College, Northwestern University, the University of Pennsylvania, the University of Rochester and the University of Southern California.  Dr. Benveniste is currently a director of Rimage Corporation.  Dr. Benveniste holds a Bachelor’s degree from the University of California at Irvine and a Ph.D. in Mathematics from the University of California at Berkeley.  Dr. Benveniste’s academic background provides a unique perspective and broad overview of finance topics, as well as providing a rigorous level of questioning regarding procedures and disclosures.

Committees: Audit

D. KEITH COBB has served as a director since June 2004.  Mr. Cobb has served as a business consultant and strategic advisor for a number of companies since 1996.   He spent 32 years as a practicing certified public accountant for KPMG, LLP, including as the National Managing Partner – Financial Services and as a senior member of the firm’s management committee.  Mr. Cobb was vice chairman and chief executive officer of Alamo Rent-a-Car, Inc. from 1995 until 1996.  Mr. Cobb is currently a director of BankAtlantic Bancorp, Inc., BFC Financial Corporation, and the Wayne Huizenga Graduate School of Business and Entrepreneurship at Nova Southeastern University.  He completed a six-year term on the board of the Federal Reserve Bank of Atlanta, Miami Branch in 2002.  Mr. Cobb holds a Bachelor’s degree from the University of Southern Mississippi.  Mr. Cobb’s qualifications include extensive accounting and executive-level business experience, with a particular focus on the banking and financial services industries.

Committees: Audit (Chair) and Nominating/Corporate Governance

KENNETH R. JENSEN has served as a director since February 2001. Mr. Jensen has served as a business consultant and strategic advisor for a number of companies since July 2006.  Mr. Jensen served as the executive vice president, chief financial officer, treasurer and assistant secretary of Fiserv, Inc., a public company engaged in data processing outsourcing, from July 1984 until June 2006. He was named senior executive vice president of Fiserv in 1986. Mr. Jensen was a director of Fiserv, Inc. from 1984 until May 2007.  Mr. Jensen is currently a director of United Capital Financial Partners, Inc. and Transfirst Group Holdings, Inc.  Mr. Jensen holds a Bachelor’s degree from Princeton University in Economics, an MBA from the University of Chicago in Accounting, Economics and Finance and a Ph.D. from the University of Chicago in Accounting, Economics and Finance.   Mr. Jensen possesses both strong academic credentials as well as extensive executive leadership experience at a public company in a similar industry, including specifically an understanding of accounting and finance issues.

Committees: Audit and Executive
 
 
9

 
 
Class II Directors
(Terms expiring in 2014)

BRUCE K. ANDERSON has served as a director since August 1996.  He co-founded the investment firm Welsh, Carson, Anderson & Stowe, or WCAS, and has been a general partner of WCAS since March 1979. Prior to that, he served for nine years with Automatic Data Processing, Inc., or ADP, where, as executive vice president and a director of ADP, and president of ADP International, he was active in corporate development and general management. Before joining ADP, Mr. Anderson spent four years in computer marketing with International Business Machines Corporation, or IBM. Mr. Anderson is currently a director of Amdocs Limited and a number of private companies held within the partnership of WCAS.  He holds a Bachelor’s degree from the University of Minnesota.  Mr. Anderson has demonstrated executive leadership skills as well as having first-hand knowledge of the company and its industry based on his experience as a member of our board of directors since our inception in 1996.

Committees:  Nominating/Corporate Governance

ROGER H. BALLOU has served as a director since February 2001. Mr. Ballou served as the chief executive officer and a director of CDI Corporation, a public company engaged in providing staffing and outsourcing services, from October 2001 until January 2011. He was a self-employed consultant from October 2000 to October 2001. Before that time, Mr. Ballou had served as chairman and chief executive officer of Global Vacation Group, Inc. from April 1998 to September 2000. Prior to that, he was a senior advisor for Thayer Capital Partners from September 1997 to April 1998. From April 1995 to August 1997, he served as vice chairman and chief marketing officer, then as president and chief operating officer, of Alamo Rent-a-Car, Inc.  Mr. Ballou is also currently a director of Fox Chase Bank.  Mr. Ballou holds a Bachelor’s degree from the Wharton School of the University of Pennsylvania and an MBA from the Tuck School of Business at Dartmouth.  Mr. Ballou has served in a variety of executive level positions, including with a large public company in a similar industry. Mr. Ballou also brings banking industry experience to his service on our board of directors.

Committees: Compensation, Nominating/Corporate Governance (Chair) and Executive

E. LINN DRAPER, JR., Ph.D. has served as a director since February 2005.  He has served in an executive and directoral capacity for a number of companies since 1980.   Dr. Draper was chairman of the board of American Electric Power Company, Inc., or AEP, for 11 years until his retirement from AEP in 2004, and served as president and chief executive officer of AEP from 1993 to 2003.  He was the president of the Ohio Valley Electric Corporation from 1992 until 2004, and was the chairman, president and chief executive officer of Gulf States Utilities Company from 1987 to 1992.  Dr. Draper is a director of TransCanada Corporation, Alpha Natural Resources, Inc. and NorthWestern Corporation.  Dr. Draper also serves on the University of Texas Engineering Advisory Board. Dr. Draper was a director of Temple-Inland Inc. until February 2012.  He holds two Bachelor’s degrees from Rice University and a Doctorate from Cornell University.  Dr. Draper has extensive experience serving as an advisor and as a director, including compensation committee experience.  In addition, Dr. Draper has had executive-level experience in a highly regulated industry environment.

Committees: Compensation (Chair)
 
Executive Officers

LEIGH ANN K. EPPERSON, senior vice president, general counsel and secretary, joined us in June 2002 and assumed her current position in January 2011.  Prior to assuming her current position, she served as vice president, assistant general counsel.  Before joining us, Ms. Epperson was with Akin Gump Strauss Hauer & Feld LLP, where she practiced law from 1996 until June 2002. From 1995-1996, Ms. Epperson served as judicial clerk for the Honorable Barefoot Sanders, N.D. Texas.  Ms. Epperson holds a Bachelor’s degree from Colorado State University, a Master’s degree from the University of Texas at Dallas and a J.D. from the Southern Methodist University Dedman School of Law.
 
 
10

 

CHARLES L. HORN, executive vice president and chief financial officer, joined us in December 2009. From 1999 to November 2009, he served as senior vice president and chief financial officer for Builders Firstsource, Inc.  From 1994 to 1999, he served as vice president, finance and treasury, for the retail operations of Pier 1 Imports, Inc. and as executive vice president and chief financial officer of Conquest Industries from 1992 to 1994.  Mr. Horn holds a Bachelor’s degree in business administration from Abilene Christian University and an MBA from the University of Texas at Austin. Mr. Horn is a Certified Public Accountant in the state of Texas.

BRYAN J. KENNEDY, executive vice president and president, Epsilon, joined our wholly-owned subsidiary, Epsilon, in June 1996.  Mr. Kennedy has served as president of Epsilon since January 2009.  Prior to that, he served as chief operating officer for Epsilon since October 2001 along with various senior management and executive positions within Epsilon.  Mr. Kennedy held senior management positions with Capstead Mortgage Corporation from June 1990 to August 1994.  Mr. Kennedy holds a Bachelor’s degree from Wheaton College and an MBA from Harvard Business School.

MELISA A. MILLER, executive vice president and president, Retail Credit Services, joined us in February 2006 and assumed her current position in September 2011. Prior to assuming her current position, she served as senior vice president, chief client officer. Before joining us, Ms. Miller held a similar role with Experian, and prior to that she held several positions with Experian where she gained increasing responsibility in sales and client services roles during her 22 years of service.

BRYAN A. PEARSON, executive vice president and president, LoyaltyOne, joined our wholly-owned subsidiary, LoyaltyOne, Inc., in November 1992 and assumed his current position in 2006. Mr. Pearson has served as president for the AIR MILES® Reward Program since January 1999 and prior to becoming president, he held various senior management and executive positions within the AIR MILES Reward Program.  Mr. Pearson held management positions with Alias Research Inc. from June 1991 until October 1992. Prior to that, he worked in brand marketing at Quaker Oats Company of Canada from July 1988 until June 1991. Mr. Pearson holds a BScH degree and an MBA from Queen’s University.

LAURA SANTILLAN, senior vice president and chief accounting officer, joined us in February 2004 and assumed her current position in February 2010. Ms. Santillan has served in various capacities of increasing responsibility, most recently as vice president, finance since October 2007 and senior vice president, finance since December 2009. Before joining the company, she served as senior manager of reporting for Dresser, Inc. from February 2002 to February 2004 and director of financial reporting for Wyndham International, Inc. from 1997 to 2002. Prior to that, she was with Ernst & Young LLP from 1993 to 1997. Ms. Santillan holds a Bachelor’s degree from Southern Methodist University and is a Certified Public Accountant in the state of Texas.
 
 
11

 
 
CORPORATE GOVERNANCE

Board of Directors and Committees
 
We are managed under the direction of our board of directors. Under our bylaws, the size of our board of directors may be between six and twelve. We currently have eight directors, including seven non-employee directors. Assuming the stockholders approve Proposal One: Election of Directors, we will continue to have eight directors, including seven non-employee directors.
 
Our board of directors is divided into three classes of directors and each class serves a three year term. Our board of directors presently has four regular committees, consisting of the audit committee, the compensation committee, the nominating/corporate governance committee and the executive committee. The charters for each of these committees, as well as our Corporate Governance Guidelines and our Codes of Ethics for our Senior Financial Executives, CEO, Directors and employees, are posted on our web site at http://www.alliancedata.com.

During 2011, the board of directors met five times, the audit committee met 12 times, the compensation committee met eight times and the nominating/corporate governance committee met four times. Each of our directors attended at least 75% of the meetings of the board of directors and their respective regular committees.  It is our policy that the directors who are up for election at the annual meeting attend the annual meeting, and we encourage all other directors to attend the annual meeting if possible. All directors, including those up for re-election at the annual meeting, except Mr. Ballou, attended the 2011 annual meeting of stockholders.

Audit Committee

The audit committee currently consists of Lawrence M. Benveniste, D. Keith Cobb and Kenneth R. Jensen. Mr. Cobb currently serves as chairman of the audit committee. The primary function of the audit committee is to assist our board of directors in fulfilling its oversight responsibilities by reviewing: (1) the integrity of our financial statements; (2) our compliance with legal and regulatory requirements; (3) the independent registered public accounting firm’s qualifications and independence; and (4) the performance of both our internal audit department and the independent registered public accounting firm. In addition, the audit committee has sole responsibility to: (1) prepare the audit committee report required by the SEC for inclusion in our annual proxy statement; (2) appoint, retain, compensate, evaluate and terminate our independent registered public accounting firm; (3) approve audit and permissible non-audit services to be performed by our independent accountant; (4) review and approve related party transactions; and (5) establish procedures for the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding any questionable accounting or auditing matters. The audit committee adopted and will periodically review the written charter that specifies the scope of the audit committee’s responsibilities. Our audit committee members do not simultaneously serve on the audit committees of more than two other public companies. Also, as discussed under the caption “Risk Oversight Function of the Board of Directors” below, the audit committee has the primary responsibility to evaluate the risk information provided by management and to report to the full board of directors those material strategic, financial, compliance, operational and enterprise risks that the audit committee believes appropriate for review by the full board of directors.

The audit committee includes three independent members of our board of directors, as such independence is defined by applicable requirements of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC. As determined by our board of directors, each member of the audit committee is financially literate and two members are audit committee financial experts, as defined by the SEC, with accounting or related financial management expertise as required by the New York Stock Exchange. Each of Mr. Cobb, who currently serves as chairman of the audit committee, and Mr. Jensen is an audit committee financial expert, as defined by the SEC, because each has an understanding of generally accepted accounting principles (GAAP) and financial statements. Each of Mr. Cobb and Mr. Jensen has the ability to assess the general application of GAAP in connection with the accounting for estimates, accruals and reserves. Each has experience preparing, auditing, analyzing or evaluating financial statements that present
 
 
12

 
 
a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements, or experience actively supervising one or more persons engaged in such activities. Each of Mr. Cobb and Mr. Jensen has an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. Each acquired these attributes through education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions. Each has also had experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements.

Compensation Committee

The compensation committee currently consists of Roger H. Ballou, E. Linn Draper, Jr. and Robert A. Minicucci.  Assuming the stockholders approve Proposal One: Election of Directors, the compensation committee will continue to consist of Roger H. Ballou, E. Linn Draper, Jr. and Robert A. Minicucci. Dr. Draper currently serves as chairman of the compensation committee. The compensation committee consists of non-employee directors who are independent as defined by applicable requirements of the New York Stock Exchange, the SEC, and the Internal Revenue Service.

The compensation committee’s primary function is to oversee matters relating to compensation and our benefit plans.  Specifically, the compensation committee’s responsibilities include, among other duties, the responsibility to: (1) annually review the compensation levels of the members of our executive committee of management; (2) set salaries for the members of our executive committee of management, and recommend such matters to the board of directors with respect to our chief executive officer; (3) determine target levels of incentive compensation and corresponding performance objectives, and recommend such matters to the board of directors with respect to our chief executive officer; (4) review and approve our compensation philosophy, programs and plans for associates generally; (5) periodically review director compensation practices and recommend to the board of directors appropriate revisions to such practices; (6) administer specific matters with respect to our equity and certain other compensation plans; and (7) review disclosure related to executive and director compensation in our proxy statements and discuss the Compensation Discussion and Analysis annually with management. For a discussion about the compensation committee’s risk oversight in our compensation program design, see “Assessment of Risk in Compensation Program Design” contained in the Compensation Discussion and Analysis below.

With the assistance of an external executive compensation consultant, target compensation amounts for the members of our executive committee of management are determined by the compensation committee and, with respect to our chief executive officer, by the board of directors.  Typically, our chief executive officer makes compensation recommendations to the compensation committee with respect to the other members of our executive committee of management.  The compensation committee may accept or adjust the chief executive officer’s recommendations in its sole discretion and also makes a recommendation regarding the chief executive officer’s compensation to the full board of directors.  The chief executive officer does not make any recommendations to the compensation committee or to the board of directors relating to performance measures, targets or similar items that affect his own compensation.  Moreover, the chief executive officer recuses himself from any discussions of his own compensation during board of directors and compensation committee meetings.  Material changes to pay levels for individuals are typically made only upon a significant change in job responsibilities.

With the exception of significant promotions and new hires, the compensation committee sets target total direct compensation for the members of our executive committee of management immediately prior to the beginning of each year.  This timing allows us to consider the performance of the company and each potential recipient in the prior year, as well as expectations for the upcoming year.  Performance-based non-equity incentive compensation and long-term equity incentive compensation are awarded as early as practicable in the year, contingent upon the availability of the prior year’s financial results, in order to maximize the time period over which the applicable performance incentives apply.  Whenever practicable, our grants of equity-based awards to the executive officers are made on February 21 (or if February 21 falls on a weekend or
 
 
13

 
 
holiday, the next business day) of each year, or such other pre-determined date following public release of our earnings for the prior year.  This is consistent with our practice of granting equity-based awards for new hires, promotions and associates that have joined us as a result of a merger or acquisition on the 21st day of each month (or if the 21st day falls on a weekend or holiday, the next business day).  In the event there exists material information that we have not yet disclosed, the compensation committee may delay or defer the grant of any equity-based awards until all disclosures are current.

The compensation committee has the authority to delegate certain of its responsibilities under our compensation and benefits plans.  Under our compensation plans, the compensation committee generally may delegate administrative functions to members of management and may delegate other responsibilities under the plans to the extent permitted by applicable law. The compensation committee generally may not delegate (1) responsibilities with regard to participants subject to Section 16 of the Securities Exchange Act of 1934, as amended; (2) the responsibility to certify the satisfaction of applicable performance objectives set under the plans; or (3) responsibilities with regard to the compensation practices of the company.

Compensation Committee Interlocks and Insider Participation

Our compensation committee is currently composed of Messrs. Ballou, Draper and Minicucci, who are non-employee directors.  No member of the compensation committee is or has ever been one of our officers or employees.  No interlocking relationship exists between our executive officers or the members of our compensation committee and the board of directors or compensation committee of any other company.

Nominating/Corporate Governance Committee

The nominating/corporate governance committee currently consists of Bruce K. Anderson, Roger H. Ballou and D. Keith Cobb.  Mr. Ballou currently serves as chairman of the nominating/corporate governance committee. The primary functions of the nominating/corporate governance committee are to: (1) assist the board of directors by identifying individuals qualified to become board members and to recommend to the board of directors the director nominees for the next annual meeting of stockholders (or to fill vacancies); (2) recommend to the board of directors the director nominees for each committee; (3) develop and recommend to the board of directors a set of corporate governance principles applicable to us and to re-evaluate these principles on an annual basis; and (4) lead the board of directors in its annual review of both the board of directors’ performance and the Corporate Governance Guidelines. The nominating/corporate governance committee develops criteria for the selection of directors, including procedures for reviewing potential nominees proposed by stockholders. The nominating/corporate governance committee reviews with the board of directors the desired experience, mix of skills and other qualities, including diversity of race/ethnicity and gender, to assure appropriate board of directors composition, taking into account the current directors and the specific needs of our company and the board of directors. The nominating/corporate governance committee also reviews and monitors the size and composition of the board of directors and its committees to ensure that the requisite number of directors are “independent directors,” “non-employee directors” and “outside directors” within the meaning of any rules and laws applicable to us. The members of the nominating/corporate governance committee are independent as defined by applicable requirements of the New York Stock Exchange and rules and regulations of the SEC.

How does the board of directors identify candidates for nomination to the board of directors?

The nominating/corporate governance committee identifies nominees by first evaluating the current members of our board of directors willing to continue in service. Current members of our board of directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of our board of directors with that of obtaining relevant new skills, experience or perspective. The nominating/corporate governance committee has two primary methods, other than those proposed by our stockholders, as discussed below, for identifying new candidates for possible inclusion in our recommended slate of director nominees. First, on a periodic basis, the nominating/corporate governance committee solicits ideas for possible candidates from a number of sources — members of our board of directors, individuals personally known to either our
 
 
14

 
 
senior level executives or the members of the board of directors, and research, including database or Internet searches.

Second, the nominating/corporate governance committee may from time to time use its authority under its charter to retain, at our expense, one or more third-party search firms to identify candidates. If the nominating/corporate governance committee retains one or more search firms, they may be asked to identify possible candidates who meet the minimum and desired qualifications, to interview and screen such candidates (including conducting appropriate background and reference checks), to act as a liaison among the board of directors, the nominating/corporate governance committee and each candidate during the screening and evaluation process, and thereafter to be available for consultation as needed by the nominating/corporate governance committee.

In addition to the methods described above, any of our stockholders entitled to vote for the election of directors may nominate one or more persons for election to our board of directors at an annual meeting of stockholders if the stockholder complies with the nomination requirements set forth in our bylaws and any applicable rules and regulations of the SEC. Such nominations must be made by notice in writing and received by our Corporate Secretary no sooner than February 7, 2013 and no later than March 9, 2013. Such nominations will not be included in the proxy statement and form of proxy distributed by the board of directors. Each such notice must comply with the requirements set forth in our bylaws. In addition, a stockholder who wishes to recommend a prospective nominee for our nominating/corporate governance committee to consider for election to our board of directors may notify our Corporate Secretary as set forth below in writing with whatever supporting material the stockholder considers appropriate. Nominations and recommendations should be addressed to: Leigh Ann K. Epperson, Corporate Secretary, Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024.

How does the board of directors evaluate candidates for nomination to the board of directors?

The nominating/corporate governance committee will consider all candidates identified through the processes described above, and will evaluate each of them, including incumbents, based on the same criteria. Once the nominating/corporate governance committee has identified a candidate, the nominating/corporate governance committee makes an initial determination as to whether to conduct a full evaluation of the candidate. This initial determination is based on information provided to the nominating/corporate governance committee with the recommendation of the candidate, as well as the nominating/corporate governance committee’s own knowledge of the candidate, which may be supplemented by inquiries to the person making the recommendation or others. The preliminary determination is based primarily on the need for additional board members to fill vacancies or expand the size of the board of directors and the likelihood that the candidate can satisfy the minimum and desired qualifications set forth in the Corporate Governance Guidelines, as posted on our web site at http://www.alliancedata.com, as well as the applicable qualification requirements of the New York Stock Exchange and the SEC. There are no firm prerequisites to qualify as a candidate for our board of directors, but we seek a diverse group of candidates who possess the requisite background, knowledge, experience, expertise and time, as well as, where appropriate, diversity with respect to race/ethnicity and gender, that would strengthen and increase the diversity of the board of directors. We seek director candidates with time to make a significant contribution to the board of directors, to our company, and to our stockholders. Each member of our board of directors is expected to ensure that other existing and planned future commitments do not materially interfere with his or her service as a director. Directors are expected to attend meetings of the board of directors and the board committees on which they serve and to spend the time needed to prepare for meetings. If the nominating/corporate governance committee determines, in consultation with the chairman of the board of directors and other board members as appropriate, that additional consideration is warranted, it may request a third-party search firm to gather additional information about the candidate’s background and experience and to report its findings to the nominating/corporate governance committee.

The nominating/corporate governance committee also considers such other relevant factors as it deems appropriate, including the current composition of the board of directors, the balance of management and independent directors and the need for audit committee expertise. In connection with this evaluation, the
 
 
15

 
 
nominating/corporate governance committee determines whether to interview the candidate, and if warranted, one or more members of the nominating/corporate governance committee, and others as appropriate, will interview candidates in person or by telephone. After completing this evaluation and interview, and the evaluations of other candidates, the nominating/corporate governance committee makes a recommendation to the full board of directors as to the persons who should be nominated by the board of directors, and the board of directors determines the nominees to be recommended to our stockholders after considering the recommendation and report of the nominating/corporate governance committee.

The nominating/corporate governance committee evaluated and recommended to our full board of directors, and our board of directors approved, the director nominees submitted for re-election at the 2012 annual meeting of our stockholders. The nominating/corporate governance committee and the board determined that each nominee brings a strong and unique background and set of skills to our board of directors, enhancing, as a whole, our board of directors’ competence and experience in a variety of areas, including executive management and board service, internal controls and corporate governance, an understanding of industries in which we operate, as well as risk assessment and management. Specifically, in nominating our two class III directors for re-election at the 2012 annual meeting of our stockholders, the nominating/corporate governance committee and our board of directors considered such directors’ past service on our board of directors and its committees and the information discussed in each of such directors’ individual biographies set forth above.  Our board of directors unanimously recommends that our stockholders vote in favor of each of these director nominees.

Executive Committee

The executive committee currently consists of Roger H. Ballou, Edward J. Heffernan, Kenneth R. Jensen and Robert A. Minicucci. The executive committee has the authority to approve acquisitions, divestitures, capital expenditures and leases that were not included in the budget approved by the board of directors, with a total cost of up to $10 million, provided that prior notice of all acquisitions is given to the full board of directors. The executive committee did not meet during 2011.

Executive Session

We regularly conclude our board of directors’ meetings with executive sessions. First, the chief executive officer leads the board of directors in a director-only executive session. After the chief executive officer leaves the meeting, Mr. Minicucci, the chairman of the board, then leads the non-management members of the board of directors in an executive session. Each committee meeting also concludes, at the election of such committee members, with an executive session.

Board of Directors Leadership Structure

From shortly after our inception in 1996 until December 2009, our leadership structure was headed by our then current chief executive officer as both chairman of the board and chief executive officer.  Consistent with best practices for corporate governance, the board of directors amended our bylaws, effective as of December 10, 2009, to allow for a non-executive chairman of the board as elected from among the directors. On that date, the board elected Mr. Robert A. Minicucci to serve as non-executive chairman of the board. Mr. Minicucci has been a board member since our inception and had served in the lead director capacity since 2002.  We believe this leadership structure permits the chairman of the board to focus on the long-term strategic direction of the company while permitting the chief executive officer to concentrate on day-to-day operation and management of the company.

Risk Oversight Function of the Board of Directors

Management is responsible for the day-to-day handling of risks our company faces, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. The audit committee of the board of directors has the primary responsibility to evaluate the risk information provided by management and the risk management group and to report to the full board of directors those
 
 
16

 
 
material risks appropriate for escalation that might adversely affect the achievement of our strategic, financial, compliance, operational and enterprise objectives. Our risk management group consists of core risk personnel, as well as dedicated personnel at each line of business. Collectively, this group works with the segment business leaders to identify, assess, respond to and monitor internal and external risks, and then provide risk reports to our enterprise compliance council.

The enterprise compliance council, comprised of cross-functional and cross-geographic senior leaders, undertakes a review of the enterprise-wide summary risk information and analysis prior to delivery to the audit committee. The enterprise compliance council considers interrelated risks, identifies emerging themes across the enterprise and also highlights those critical risks that may be appropriate for deeper review by the board of directors, based on a combination of the likelihood of occurrence of the risk, the potential impact of the risk and the presence of mitigating controls. During the past year, our senior vice president for internal audit chaired the enterprise compliance council, which provided an integrated risk view of the organization and enhanced reporting to the audit committee regarding key risks faced by the organization.

For a discussion about risk oversight in our compensation program design, see “Assessment of Risk in Compensation Program Design” contained in Compensation Discussion and Analysis below.

Communications with the Board of Directors
 
We welcome and encourage stockholder communication with the board of directors.  The board of directors provides a process for stockholders and interested parties to send communications to the board of directors or any individual director. Stockholders and interested parties may forward communications to the board of directors or any individual director through the Corporate Secretary. Communications should be addressed to Leigh Ann K. Epperson, Corporate Secretary, Alliance Data Systems Corporation, 7500 Dallas Parkway, Suite 700, Plano, Texas 75024. All communications will be compiled by the office of the Corporate Secretary and submitted to the board of directors or the individual directors on a periodic basis. Stockholders and interested parties may also submit questions or comments, on an anonymous basis if desired, to the board of directors through our Ethics and Compliance Hotline at (877) 217-6218. Concerns relating to accounting, internal control over financial reporting or auditing matters will be brought to the attention of the audit committee and handled in accordance with our procedures with respect to such matters.
 
Director Independence
 
We have adopted general standards for determination of director independence that are consistent with the New York Stock Exchange listing standards. For a director to be deemed independent, the board of directors must affirmatively determine that the director has no material relationship with us or our affiliates or any member of our senior management or his or her affiliates. This determination is disclosed in the proxy statement for each annual meeting of our stockholders. In making this determination, the board of directors applies the following standards:

·  
A director who is an employee, or whose immediate family member is an executive officer, of our company may not be deemed independent until three years after the end of such employment relationship. Employment as an interim chairman or chief executive officer or other executive officer will not disqualify a director from being considered independent following that employment.

·  
A director who receives, or whose immediate family member receives, more than $120,000 per year in direct compensation from our company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), may not be deemed independent until three years after he or she ceases to receive more than $120,000 in compensation. Compensation received by a director for former service as an interim chairman, chief executive officer or other executive officer and compensation received by an immediate family member for service as a non-executive employee for us will not be considered in determining independence under this test.
 
 
17

 
 
·  
A director: (1) who is a current partner, or whose immediate family member is a current partner, of a firm that is our company’s internal or external auditor; (2) who is a current employee of such a firm; (3) who has an immediate family member who is a current employee of such a firm and who personally works on our company’s audit; or (4) who was, or whose immediate family member was, a partner or employee of such firm and personally worked on our company’s audit may not be deemed independent until three years after the end of the affiliation or the employment or auditing relationship.

·  
A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of our current executive officers serve on that company’s compensation committee may not be deemed independent until three years after the end of such service or the employment relationship.

·  
A director who is an executive officer, general partner or employee, or whose immediate family member is an executive officer or general partner, of an entity that makes payments to, or receives payments from, us for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or 2% of such other entity’s consolidated gross revenues, may not be deemed independent until three years after falling below that threshold.

·  
For relationships not covered by the guidelines above, the determination of whether the relationship is material and, therefore, whether the director would be independent, is made by the board of directors. The board of directors annually reviews the independence of its non-employee directors. Directors have an affirmative obligation to inform the board of directors of any material changes in their circumstances or relationships that may impact their designation as “independent.”
 
The board of directors undertook a review of director independence and considered transactions and relationships between each of the nominees (including their immediate family members) and directors (including their immediate family members), and us (including our subsidiaries and our senior management). As a result of this review, the board of directors affirmatively determined that, as of the record date for the 2012 annual meeting, none of Messrs. Anderson, Ballou, Benveniste, Cobb, Draper, Jensen or Minicucci has a material relationship with us and, therefore, each is independent as defined by the rules and regulations of the SEC, the listing standards of the New York Stock Exchange and Internal Revenue Code, or IRC, Section 162(m).
 
Code of Ethics
 
We have adopted codes of ethics that apply to our chief executive officer, chief financial officer, financial executives, board of directors and employees. The Alliance Data Systems Code of Ethics for Senior Financial Executives and CEO, the Code of Ethics for members of the board of directors and the Code of Ethics for employees are posted on our web site, found at http://www.alliancedata.com; we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to or waiver from a provision of this code of ethics, if any, by posting such information on our web site.

 
18

 
 
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 

Related Party Transaction Policy

It is our policy not to enter into any “related party transaction” unless the audit committee approves such transaction in accordance with our written related party transaction policy, or the transaction is approved by a majority of disinterested directors of the company.  The board of directors has determined that the audit committee is best suited to review and approve related party transactions, although the board of directors may instead determine that a particular related party transaction be reviewed and approved by a majority of disinterested directors.  The audit committee annually reviews and assesses the adequacy of the related party transaction policy and recommends any appropriate changes to the board of directors.

No member of the audit committee shall participate in the review or approval of any related party transaction with respect to which such member is a related party.  In reviewing and approving any related party transaction, the audit committee shall:

·  
satisfy itself that it has been fully informed as to the material facts of the related party’s relationship and interest and as to the material facts of the proposed related party transaction; and
 
·  
determine that the related party transaction is fair to the company.

For these purposes, a related party is: (1) any person who is, or at any time since the beginning of the company’s current fiscal year was, an “executive officer” of the company (as defined in Rule 405 promulgated under the Securities Act of 1933, as amended, and Rule 3b-7 promulgated under the Securities Exchange Act of 1934, as amended); (2) any person who is, or at any time since the beginning of the company’s current fiscal year was, a director of the company or a nominee for director of the company; (3) a person (including an entity or group) known to the company to be the beneficial owner of more than 5% of any class of the company’s voting securities; (4) an individual who is an “immediate family member” (including any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law)  of a person listed in 1, 2, or 3 above; (5) an entity that is, directly or indirectly, owned or controlled by a person listed in 1, 2, 3, or 4 above; (6) an entity in which a person listed in 1, 2, 3 or 4 above serves as an executive officer or principal or in a similar position, or in the case of a partnership, serves as a general partner or holds any position other than that of a limited partner; (7) an entity in which a person listed in 1, 2, 3 or 4 above, together with all other persons specified in 1, 2, 3 and 4 above, owns 10% or more of the equity interest, or in the case of a partnership, 10% or more of the partnership interest; or (8) an entity at which a person listed in 1, 2, 3 or 4 above is employed if (a) the person is directly involved in the negotiation of the related party transaction or will have or share primary responsibility at such entity for the performance of the related party transaction, or (b) the person’s compensation from the entity is directly tied to the related party transaction.

A related party transaction includes any transaction (including any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness)), or series of related transactions, or any material amendment to any such transaction, involving a related party and in which the company or any of its subsidiaries is a participant, other than: (1) a transaction involving compensation of directors (the procedures for the review and approval of such transactions have been set forth in the charter of the compensation committee of the board of directors); (2) a transaction involving compensation of an executive officer or involving an employment agreement, severance arrangement, change in control provision or agreement or special supplemental benefit of an executive officer (the procedures for the review and approval of such transactions have been set forth in the charter of the compensation committee of the board of directors); (3) a transaction with a related party involving less than $120,000; (4) a transaction in which the interest of the related party arises solely from the ownership of a class of the company’s equity securities and all holders of that class receive the same benefit on a pro rata basis; (5) a transaction in which the rates or charges involved therein are determined by competitive bids, or a transaction that involves the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or (6) a transaction that involves services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services.
 
 
19

 
 
At each audit committee meeting, management shall recommend any proposed related party transactions, if applicable, to be entered into by the company.  After review, the audit committee shall approve or disapprove such transactions and at each subsequently scheduled meeting, management shall update the audit committee as to any material change to those approved transactions.  The audit committee shall establish such guidelines as it determines are necessary or appropriate for management to follow in its dealings with related parties in related party transactions.

All related party transactions of which management is aware are required to be disclosed to the audit committee. If management becomes aware of a proposed related party transaction or an existing related party transaction that has not been pre-approved by the audit committee, management is required to promptly notify the chairman of the audit committee and such transactions shall be submitted to the audit committee for its review, consideration and determination of whether to approve or ratify, as applicable, such transaction if the audit committee determines it is fair to the company.  If management, in consultation with the company’s chief executive officer or chief financial officer, determines that it is not practicable to wait until the next audit committee meeting, the chairman of the audit committee has the delegated authority during the period between audit committee meetings, to review, consider and determine whether any such transaction is fair to the company and whether the transaction should be approved, or ratified, as the case may be.  The chairman of the audit committee shall report to the audit committee any transactions reviewed by him or her pursuant to this delegated authority at the next audit committee meeting.
 
 
20

 
 
COMPENSATION COMMITTEE REPORT

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

This report has been furnished by the current members of the compensation committee.

E. Linn Draper, Jr., Chair
Roger H. Ballou
Robert A. Minicucci
 
 
21

 
 
COMPENSATION DISCUSSION AND ANALYSIS

Overview

We consider our total executive compensation package integral to our ability to grow and improve our business. By design, we have tailored, with the guidance of external compensation consultants, a mix of compensation elements unique to our business.  Our total program, assuming sustained above industry-average performance, is designed to reward executive officers at competitive levels. However, the total program is also structured to significantly reduce rewards for performance below expectations.  The compensation committee believes that this design will attract, retain, and motivate executive officers with the quality and profile required to successfully lead the company and each of its segments in our highly competitive and evolving industries. The compensation committee further believes that this design does not create risks that are reasonably likely to have a material adverse effect on Alliance Data as discussed in more detail below.

Executive Officers

Our compensation committee, and with respect to the chief executive officer, the board of directors, annually approves compensation for our named executive officers, which for 2011 included Edward J. Heffernan, Charles L. Horn, Bryan J. Kennedy, Bryan A. Pearson and Ivan M. Szeftel. In determining appropriate compensation for these executive officers, the compensation committee uses the philosophies and methodologies described in this Compensation Discussion and Analysis.

Objectives of Compensation

The objectives of our compensation program are to retain our executive officers, to reward our executive officers for meeting our growth and profitability objectives and to align the interests of our executive officers with those of our stockholders. The total direct compensation in 2011 for our executive officers was a combination of three components:

·  
base salary;
 
·  
annual performance-based non-equity incentive compensation; and
 
·  
periodic (typically annual) awards of long-term equity incentive compensation, which may be subject to either performance-based or time-based vesting provisions, or both.

We use each component of compensation to satisfy one or more of our compensation objectives.  The compensation committee places a significant portion of the overall target compensation for our executive officers “at risk” in the form of performance-based non-equity incentive compensation and long-term equity incentive compensation, without encouraging excessive or unnecessary risk taking.  According to the survey results provided by our external executive compensation consultant, our target percentage of executive compensation “at risk” for 2011 was consistent with our proxy peer group.

Retention

We believe that continuity in our executive leadership is critical to our long-term success.  To encourage executive retention and foster a focus on long-term results, portions of the equity-based compensation granted to our executive officers are subject to multi-year vesting schedules.  In addition, the compensation committee has occasionally granted special retention awards designed to encourage retention of our executive officers.  Further details of these compensation practices are included below under the caption “Elements of Compensation.”

Pay for Performance

Historically, we have tracked metrics such as revenue growth, adjusted EBITDA growth, core earnings per share, or core EPS, growth and income from continuing operations before income taxes, or EBT, growth.  The compensation committee selects target performance measures for performance-based non-equity incentive compensation and long-term equity incentive compensation that it believes are integral to achievement of these and other growth and profitability objectives.  Performance-based non-equity incentive compensation and
 
 
22

 
 
performance-based long-term equity incentive compensation generally pay out or vest only upon achievement of a threshold performance target.  Further details of these compensation practices are included below under the caption “Elements of Compensation.”

Assessment of Risk in Compensation Program Design

In connection with fulfilling its responsibilities, the compensation committee reviewed the design of our compensation program for both our executive officers and other officers and key contributors who receive performance-based non-equity incentive compensation and performance-based long-term equity incentive compensation and assessed the potential for our compensation program to encourage excessive risk taking. The compensation committee considered the following characteristics of our compensation program, among others: (1) a balance of both short- and long-term performance-based incentive compensation; (2) a balance within equity incentive compensation of both time-based restricted stock units and performance-based restricted stock units, some of which may also be subject to further time-based vesting restrictions; (3) the use of multiple performance metrics in incentive compensation, including the use of both corporate and segment-specific performance measures; (4) the definition of performance metrics at the beginning of the performance period; (5) inclusion of maximum payout limitations under our 2010 Omnibus Incentive Plan; (6) stock ownership guidelines applicable to certain key executives that were first implemented in 2006 and are monitored annually for compliance; (7) standardized equity grant procedures; (8) ability of the compensation committee to apply negative discretion in determining the payouts for incentive compensation; and (9) clawback provisions contained in various executive compensation plans and agreements. As a result of this review, the compensation committee believes that the design of our compensation program provides multiple, effective safeguards against and does not promote unnecessary or excessive risk taking that is reasonably likely to have a material adverse effect on Alliance Data.

Alignment with Stockholders

We believe that our directors and executive officers should maintain at least a minimum position in our common stock so that their interests are aligned with those of our stockholders.  Under our stock ownership guidelines, we require our chief executive officer to maintain an investment position in our common stock equal to five times his base salary; we require our chief financial officer and each of our other named executive officers listed here to maintain an investment position in our common stock equal to three times their base salary; and we require our non-employee directors to maintain an investment position in our common stock equal to five times their annual cash compensation.  Generally, these investment positions must have been met by December 31, 2006, or within five years from the January 1st following the time an executive officer first becomes subject to the stock ownership guidelines.  The following table shows the stock ownership levels at April 9, 2012 of our chief executive officer, chief financial officer and three other most highly compensated executive officers (our “NEOs”) as of December 31, 2011:

Name(1)
 
Title
 
Stock Ownership Position(2)
Edward J. Heffernan
 
President and Chief Executive Officer
 
21 times base salary
Charles L. Horn
 
Executive Vice President and Chief Financial Officer
 
2 times base salary(3)
Bryan J. Kennedy
 
Executive Vice President and President, Epsilon
 
15 times base salary
Bryan A. Pearson
 
Executive Vice President and President, LoyaltyOne
 
17 times base salary
                   
(1) On September 2, 2011, we entered into a Retirement Agreement with Ivan M. Szeftel who formerly served as our Executive Vice President and President, Retail Credit Services, pursuant to which Mr. Szeftel agreed to continue to both serve in an advisory role and as chief executive officer of our bank subsidiary, WFNB and as Chairman of WFNB’s board of directors through March 1, 2012. Therefore, Mr. Szeftel is not included in the table above.
(2) The share price used for ownership calculations is calibrated periodically under our stock ownership guidelines.  The twelve-month average fair market value of our common stock as of December 31, 2011, the last date on which we calibrated the stock price used to determine the retained value required by the stock ownership guidelines, was $89.93 and is the basis for the stock ownership positions shown in this table.
(3) Mr. Horn joined the company in December 2009; pursuant to the stock ownership guidelines, he has until January 1, 2015 to meet his required investment position.
 
 
23

 
 
In addition to our stock ownership guidelines for our directors and executive officers, we have also built stock ownership restrictions into the grants made to the non-employee directors since 2008, with each grant of restricted stock units containing restrictions that lapse on the earlier of 10 years from the date of grant or upon termination of the director’s service on our board of directors.

2011 “Say-on-Pay” Advisory Vote on Executive Compensation

We provided stockholders a “say-on-pay” advisory vote on the compensation of our named executive officers in 2011 and will continue to provide an annual advisory vote on executive compensation through our next stockholder advisory vote regarding the frequency of holding advisory votes on executive compensation, which shall be no later than our annual meeting of stockholders in 2017.  At our 2011 annual meeting of stockholders, stockholders expressed substantial support for the compensation of our named executive officers.  The compensation committee evaluated the results of the 2011 “say-on-pay” advisory vote together with the other factors discussed in this Compensation Discussion & Analysis, including the committee’s assessment of retention of executives, alignment of performance targets with growth and profitability objectives, evaluation of our executive compensation program by external consultants with respect to pay practices of our proxy peer companies, each of which is evaluated in the context of the committee’s fiduciary duty to act as such directors determine is in the best interests of our stockholders.  Based on its analysis, the compensation committee did not make any changes to the executive compensation program or policies as a direct result of the 2011 “say-on-pay” advisory vote.

Competitive Considerations

In determining appropriate levels of compensation, the compensation committee considers the competitive market for talent and compensation levels provided by comparable companies to minimize significant differences that could negatively impact our ability to attract and retain exceptional executive officers.  In 2011, the compensation committee directly engaged the assistance of an external executive compensation consultant, Meridian Compensation Partners, LLC. Meridian reviewed the compensation practices at the proxy peer companies set forth below, with whom we compete for business and talent, as well as general industry companies of comparable size. This approach provides us with a balanced perspective, reflecting industry, performance and company size considerations as they affect executive pay. Meridian collected, analyzed and presented comprehensive market data, including base salary and target short- and long-term incentive amounts, for each member of our executive committee of management, including our NEOs, from both published proxy data and proprietary data sources.

Market data provides an important benchmark by indicating what an executive could expect to earn at a comparable company and what we might expect to pay if we should have to recruit and compete for outside executive talent. However, market data is only one factor that the compensation committee considers in assessing the reasonableness of compensation provided to our NEOs. The compensation committee also considers other relevant factors, including an incumbent’s experience, breadth of knowledge, talent supply and demand that may be industry or application specific, cost constraints, internal compensation equity considerations, company performance, individual performance, expected future contributions, prior compensation and retention risk for each NEO. For 2011, the companies comprising the proxy peer group included:

   ·
Acxiom Corporation
·
Fidelity National Information Services, Inc.
·
MasterCard Incorporated
   ·
Convergys Corporation
·
First Data Corporation
·
Total System Services, Inc.
   ·
Discover Financial Services
·
Fiserv, Inc.
·
Visa Incorporated
   ·
DST Systems, Inc.
·
Global Payments Inc.
·
The Western Union Company
   ·
Equifax Incorporated
·
Harte-Hanks, Inc.
   

Our market capitalization is slightly below the median for this proxy peer group, while our annual revenue and one- and three-year total stockholder return fall at or near the median for this proxy peer group and our five-year total stockholder return is at the highest level in this proxy peer group.

When conducting the market review, the compensation committee reviews each component of compensation in relation to certain percentiles of those companies surveyed.  For our NEOs, base salaries
 
 
24

 
 
generally fall at or below the 50th percentile, while total cash compensation, which includes base salary and target performance-based non-equity incentive compensation, and total direct compensation, which includes base salary, target performance-based non-equity incentive compensation and target long-term equity incentive compensation, generally fall between the 50th and 75th percentile.  We believe compensation at this level, vis-à-vis the companies surveyed, is appropriate given our performance record; actual performance above or below each of the established targets for our performance-based non-equity incentive compensation and long-term equity incentive compensation results in actual compensation that may be higher or lower than these percentiles.

Elements of Compensation

Base Salary

While a large portion of our NEOs and other executive officers’ compensation is contingent upon meeting specified performance targets, we pay our executive officers a base salary as fixed compensation for their time, efforts and commitments throughout the year. To aid in attracting and retaining qualified executive officers, the compensation committee seeks to keep base salary competitive. In determining the appropriate base salary, the compensation committee also considers, among other factors, the nature and responsibility of the position and, to the extent available, salary norms for persons in comparable positions at both our proxy peer companies and those companies included in a general industry group demonstrating similar performance and other market characteristics; the expertise of the individual; and the competitiveness in the market for the executive officer’s services.  In 2011, the base salary for our NEOs fell at or below the 50th percentile of our proxy peer companies, as described above.

Annual Performance-Based Non-Equity Incentive Compensation

For 2011, performance-based non-equity incentive compensation was paid to our NEOs pursuant to the 2010 Omnibus Incentive Plan. The purpose of performance-based non-equity incentive compensation is to provide an incentive to our NEOs and other executive officers to contribute to our annual growth and profitability objectives, to retain such executive officers and, where possible, to qualify for tax deductibility under IRC Section 162(m).  The 2010 Omnibus Incentive Plan focuses on matching rewards with results and encourages executive officers to make significant contributions toward our financial results by providing a basic reward for reaching threshold expectations, plus an upside for reaching our aspirational goals.  Typically, base salary plus target performance-based non-equity incentive compensation, or total cash compensation, for our NEOs falls between the 50th and 75th percentile of our proxy peer companies, as described above.

Terms of Awards

Each NEO has a target payout amount that approximates a percentage of his annualized base salary.  Guided by our annual growth and profitability objectives, the payout of performance-based non-equity incentive plan compensation for our NEOs is generally contingent upon meeting segment-specific and/or corporate targets, which in 2011 were based on revenue and EBT at the corporate level, as well as segment-specific revenue and EBT for each segment.  As discussed above, the compensation committee does not believe that the targets set for each of these metrics promotes unnecessary or excessive risk taking that is reasonably likely to have a material adverse effect on Alliance Data.

The following tables set forth the individual calculations for the non-equity incentive plan compensation payouts for the 2011 performance year for each of our NEOs.  The non-equity incentive plan compensation for each of Edward J. Heffernan and Charles L. Horn was based on the consolidated corporate performance targets and weightings set forth in the first table below; Ivan M. Szeftel’s non-equity incentive plan compensation was based on a combination of consolidated corporate and private label services and credit performance targets and weightings set forth in the second table below; Bryan J. Kennedy’s non-equity incentive plan compensation was based on a combination of consolidated corporate and Epsilon performance targets and weightings set forth in the third table below; and Bryan A. Pearson’s non-equity incentive plan compensation was based on a combination of consolidated corporate and LoyaltyOne performance targets and
 
 
25

 
 
weightings set forth in the fourth table below.  For each performance target, payout is determined on a fixed scale, ranging from 30-70% payout when a minimum 90-95% of the target is met, 100% payout when 100% of the target is met and a maximum 200% payout when the target is exceeded at 120% or more for each of the metrics set forth in the various tables below.  Establishing a maximum payout amount under our non-equity incentive plan helps deter excessive risk taking, while having a minimum payout amount that can be earned at a defined performance threshold encourages goal attainment. No payout is made for performance below the minimum threshold.

2011 Corporate Performance for the Non-Equity Incentive Plan

 
Components
 
Target Performance
   
Weighting
   
Performance
   
Achievement Level
   
Payout Level
   
Weighted Payout Level
 
Consolidated Corporate EBT
  $ 403,000,000       67.0 %   $ 517,200,000       128.3 %     200.0 %     134.0 %
Consolidated Corporate Revenue
  $ 3,036,000,000       33.0 %   $ 3,008,100,000       99.1 %     93.7 %     30.9 %
Total:
            100.0 %                             164.9 %


2011 Private Label Services and Credit Performance for the Non-Equity Incentive Plan

 
Components
 
Target Performance
   
Weighting
   
Performance
   
Achievement Level
   
Payout Level
   
Weighted Payout Level
 
Consolidated Corporate EBT
  $ 403,000,000       20.0 %   $ 517,200,000       128.3 %     200.0 %     40.0 %
Private Label Services and Credit Revenue
  $ 1,500,000,000       20.0 %   $ 1,489,000,000       99.3 %     95.1 %     19.0 %
Private Label Services and Credit EBT
  $ 334,000,000       60.0 %   $ 450,800,000       135.0 %     200.0 %     120.0 %
Total:
            100.0 %                             179.0 %

 
2011 Epsilon Performance for the Non-Equity Incentive Plan

 
Components
 
Target Performance
   
Weighting
   
Performance
   
Achievement Level
   
Payout Level
   
Weighted Payout Level
 
Consolidated Corporate EBT
  $ 403,000,000       20.0 %   $ 517,200,000       128.3 %     200.0 %     40.0 %
Epsilon Revenue
  $ 700,000,000       20.0 %   $ 690,100,000       98.6 %     93.0 %     18.6 %
Epsilon EBT
  $ 94,000,000       60.0 %   $ 86,800,000       92.3 %     61.5 %     36.9 %
Total:
            100 %                             95.5 %
 
 
2011 LoyaltyOne Performance for the Non-Equity Incentive Plan

 
Components
 
Target Performance
   
Weighting
   
Performance
   
Achievement Level
   
Payout Level
   
Weighted Payout Level
 
Consolidated Corporate EBT
  $ 403,000,000       20 %   $ 517,200,000       128.3 %     200.0 %     40.0 %
LoyaltyOne Revenue
  $ 840,000,000       20 %   $ 836,700,000       99.6 %     98.8 %     19.8 %
LoyaltyOne EBT
  $ 174,000,000       60 %   $ 187,800,000       107.9 %     139.5 %     83.7 %
Total:
            100 %                             143.5 %

The target non-equity incentive plan compensation for each of Edward J. Heffernan, Charles L. Horn, Bryan J. Kennedy, Bryan A. Pearson and Ivan M. Szeftel is set forth in the first column of the following table and represents approximately 135%, 100%, 100%, 100% and 126% of their respective base salaries.  The actual non-equity incentive plan payouts, prior to the exercise of discretion to increase or decrease such
 
 
26

 
 
payouts by the chief executive officer or board of directors that are discussed below, are set forth in the final column of the following table.

   
Target Non-Equity Incentive
Plan Compensation
   
Weighted Payout
   
Actual Non-Equity Incentive
Plan Compensation
 
Edward J. Heffernan
  $ 1,194,750       164.9 %   $ 1,970,143  
Charles L. Horn
  $ 472,500       164.9 %   $ 779,153  
Bryan J. Kennedy
  $ 450,000       95.5 %   $ 429,750  
Bryan A. Pearson(1)
  $ 500,000       143.5 %   $ 717,500  
Ivan M. Szeftel
  $ 661,500       179.0 %   $ 1,184,085  
                   
(1) Amounts for Mr. Pearson are shown in Canadian Dollars; in the Summary Compensation Table, this amount was converted to U.S. Dollars using the prevailing exchange rate as of the last business day of 2011 of 0.98072868 U.S. Dollars per Canadian Dollar.

The compensation committee feels that revenue and EBT performance measures are integral to achievement of our long-term growth and profitability objectives.  However, when making awards, the compensation committee has discretion to select from numerous performance measures and may employ those performance measures it deems most appropriate for a given year.  The selected performance measures may differ from year to year, and may also include any of the following: revenue, annual return on capital, net earnings, annual earnings per share, annual cash flow provided by operations, funds from operations, funds from operations per share, operating income, before or after tax income, cash available for distribution, cash available for distribution per share, return on equity, return on assets, share price performance, improvements in our attainment of expense levels, implementation or completion of critical projects, improvement in cash flow or (before or after tax) earnings and attainment of strategic business criteria or total shareholder return.

We set applicable revenue and EBT targets at relatively high levels with respect to our past performance.  While performance targets have frequently been achieved, we are a young company with historically high rates of growth.  As we have encountered periods of slow economic growth but continued to challenge our lines of business to grow and expand our client base, these performance targets challenge our executive officers and will continue to encourage sustained above industry-average growth.  Additional details about the 2010 Omnibus Incentive Plan are included below under the caption “Plans or Agreements Governing Certain Elements of Executive Compensation.”

Our chief executive officer, with the approval of the compensation committee, may apply discretion to adjust up or down each payout of performance-based non-equity incentive compensation; however, the chief executive officer does not have the authority to make any such adjustments to his own payout amount.  The board of directors has the discretion to adjust up or down the chief executive officer’s payout of performance-based non-equity incentive compensation as well as that of any other executive officer.  In determining whether and to what extent any such discretionary adjustments will be made, the chief executive officer or the board of directors, as applicable, typically considers the value provided by the relevant executive officer, as demonstrated by the challenges addressed and particular expertise required of such executive officer during the fiscal year.  Mr. Heffernan exercised this authority to adjust the performance-based non-equity incentive compensation of each of Messrs. Horn, Kennedy and Pearson for 2011 upwards by approximately 6.5%, 4.5% and 8%, respectively.  Mr. Heffernan deemed his exercise of this authority appropriate in light of our fiscal year 2011 performance, which included double-digit increases in revenue, net income per diluted share, adjusted EBITDA, adjusted EBITDA net of funding costs and core earnings per diluted share despite the continued slower than expected recovery in the general economy in both the United States and globally throughout 2011.  More specifically, Mr. Horn continued to demonstrate strong leadership capabilities through his financial management of three large, complex lines of business and his focus on investor relations.  For the president of each segment, 80% of their respective performance-based non-equity incentive plan compensation is based on the performance of their respective segment. Mr. Kennedy led the Epsilon segment to a 38% increase in revenue and 28% increase in adjusted EBITDA for 2011 as compared to 2010, and was also instrumental in Epsilon’s acquisition of Aspen Marketing Services and management of Epsilon’s response to the data theft incident that occurred in March 2011.  Mr. Pearson led the LoyaltyOne segment through a year that included
 
 
27

 
 
8% growth for AIR MILES reward miles issuances by the segment’s AIR MILES Reward Program as compared to 2010 and in its international expansion through continued development of the dotz coalition loyalty program in Brazil as well as the implementation and introduction of key new AIR MILES Reward Program features in the fourth quarter of 2011.  The board of directors also exercised its authority to adjust the performance-based non-equity incentive compensation of Mr. Heffernan for 2011 upwards by approximately 6.5% in light of our strong performance under his management as described above and Mr. Heffernan’s continued skilled leadership in his role as president and chief executive officer of the company.

The aggregate performance-based non-equity incentive compensation paid to our NEOs for 2011 totaled $5,066,803.83, or approximately 44.8% of the performance-based non-equity incentive compensation pool funded pursuant to IRC Section 162(m).

Long-Term Equity Incentive Compensation

We grant long-term equity incentive awards to encourage retention and foster a focus on long-term results, as well as to align the interests of our NEOs and other executive officers with those of our stockholders.  In granting these awards, the compensation committee may establish such restrictions, performance measures and targets as it deems appropriate.  Generally, awards of long-term equity incentive compensation pay out only upon attainment of a threshold level of pre-determined performance targets, such as core EPS, revenue, EBT, operating cash flow or EBITDA growth, or continued employment of an executive officer.

Typically, total direct compensation, which includes base salary, target performance-based non-equity incentive compensation and target long-term equity incentive compensation, for our NEOs falls between the 50th and 75th percentile of surveyed companies, as described above.  In determining the size of long-term equity incentive awards, the compensation committee generally also considers, among other factors, the value of total direct compensation for comparable positions at both our proxy peer companies and those companies included in a general industry group demonstrating similar performance and other market characteristics, company and individual performance against strategic plans, the number and value of stock options and restricted stock or restricted stock unit awards previously granted, the allocation of overall equity awards attributed to our executive officers relative to all equity awards and the relative proportion of long-term incentives within the total direct compensation mix.

In 2011, we granted long-term equity incentive compensation to the executive officers, including our NEOs, pursuant to our 2010 Omnibus Incentive Plan.  We also have long-term equity incentive compensation that remains outstanding under our prior equity plans, including our 2005 Long Term Incentive Plan, our 2003 Long Term Incentive Plan and our Amended and Restated Alliance Data Systems Corporation and its Subsidiaries Stock Option and Restricted Stock Plan. Each of the four plans permit the board of directors to delegate all or a portion of its authority under the plan to the compensation committee, and the board of directors has done so except for purposes of awards to the chief executive officer.

Terms of Awards

After taking into consideration the market trend away from options in favor of full value shares and reviewing the long-term incentive practices of comparable companies, we believe that an equity mix of performance-based restricted stock units and time-based restricted stock units provides a conservative and balanced approach.  The portion granted in time-based restricted stock units is intended to provide not only some stability in our equity program and increase retention, but also to promote wealth accumulation by ensuring direct alignment with stockholders through our executives’ stock holdings.  The portion granted in performance-based restricted stock units, whose vesting criteria are tied to selected components of our financial performance, is intended to focus and incentivize our executives to deliver exceptional performance.  Performance-based restricted stock unit grants may be subject to both performance criteria and time-based restrictions to vest. With very limited exceptions, the executive officer must be employed by us at the time of vesting to receive the award.

 
28

 
 
The 45-day average fair market value of the company’s common stock as quoted on the New York Stock Exchange as of the date of grant is utilized as the basis for determining the specific number of either time-based or performance-based restricted stock or restricted stock unit awards.  We granted restricted stock awards under our equity plans through February 2006 and have granted exclusively restricted stock unit awards since that time, and we do not anticipate granting restricted stock awards in the future.

Awards granted during 2011

In 2011, our board of directors and compensation committee approved equity grants for our NEOs consisting of 80% performance-based restricted stock units and 20% time-based restricted stock units, which were awarded on March 21, 2011.  The performance-based restricted stock unit equity awards and the time-based restricted stock unit equity awards are scheduled to vest as to 33% of the awards in each of February 2012 and 2013, and on 34% of the awards in February 2014, provided that (1) the executive officer is employed by us at each such time and (2) with respect to the performance-based restricted stock units, we meet pre-determined EBT goals for fiscal year 2011 of $362.7 million to achieve a minimum 50% of the target award, increasing on a fixed scale with up to 100% of the target award obtained by achieving EBT of $403.0 million and up to a maximum 150% of the target award obtained by achieving EBT of $443.3 million.

The 2011 equity grants for each of our NEOs fell between the 50th and 75th percentile of our proxy peer companies.  Establishing a maximum payout amount under our long-term equity incentive plan helps deter excessive risk taking, while having a minimum payout amount that can be earned at a defined performance threshold encourages goal attainment. No payout is made for performance below the minimum threshold.

Performance-based and time-based equity grants for 2011 were made to our NEOs as follows:

Name
 
Performance-Based
Restricted Stock Units
 
Time-Based
Restricted Stock Units
 
Total Equity Value
(on Grant Date)
 
Edward J. Heffernan
    30,689     7,672   $ 3,195,471  
Charles L. Horn
    10,403     2,600   $ 1,083,150  
Bryan J. Kennedy
    17,685     4,421   $ 1,841,430  
Bryan A. Pearson
    17,165     4,291   $ 1,787,285  
Ivan M. Szeftel
    21,846     5,461   $ 2,274,673  

Our reported EBT was $514.1 million for 2011, which resulted in vesting of the 2011 performance-based restricted stock unit awards at 150% of the original grant amounts.  The compensation committee set the performance targets for EBT related to the vesting of the 2011 performance-based restricted stock units at the beginning of 2011 based on certain assumptions about our performance.  In determining the payout for the 2011 performance-based restricted stock units, the compensation committee exercised its discretion to adjust reported EBT for certain items, including (1) exclusion of certain foreign currency exchange translation benefits related to our Canadian LoyaltyOne segment; (2) adjustments for the Aspen acquisition (based on the imputed cost of capital that we had to spend to make this purchase as well as for the amortization of purchased intangibles) and (3) adjustments related to the interest expense related to our share repurchase program during 2011.  Adjusting for these factors did not alter the resultant payout at 150% of the 2011 performance-based restricted stock units.

The aggregate equity compensation awarded to our NEOs and other key executives for 2011 totaled $12.5 million or approximately 47% of the equity incentive compensation pool funded pursuant to IRC Section 162(m).

Awards granted during 2010

In 2010, our board of directors and compensation committee approved equity grants for our NEOs consisting of 80% performance-based restricted stock units and 20% time-based restricted stock units, which were awarded on February 22, 2010.  The performance-based restricted stock unit equity awards are scheduled
 
 
29

 
 
to vest as to 1/3 of the awards in each of February 2011, 2012 and 2013, and the time-based restricted stock unit equity awards are scheduled to vest as to 33% of the awards in each of February 2011 and 2012, and on 34% of the awards in February 2013, provided that (1) the executive officer is employed by us at each such time and (2) with respect to the performance-based restricted stock units, we meet pre-determined core EPS goals for fiscal year 2010 of $5.11 to achieve a minimum 50% of the target award, increasing on a fixed scale with up to 100% of the target award obtained by achieving core EPS of $5.68 and up to a maximum 150% of the target award obtained by achieving core EPS of $6.25.

Our reported core EPS was $5.86 for 2010, which would have resulted in vesting of the 2010 performance-based restricted stock unit awards at 115% of the original grant amounts; however, the compensation committee exercised its discretion to reduce this amount such that the 2010 performance-based restricted stock unit awards vested at 107%.  The compensation committee set the performance targets for core EPS related to the vesting of the 2010 performance-based restricted stock units at the beginning of 2010 based on certain assumptions about our performance.  In determining the payout for the 2010 performance-based restricted stock units, the compensation committee exercised its discretion to exclude certain items that were not included in those assumptions, including (1) the benefit of the acquisition of Equifax’s Direct Marketing Services and Database Marketing divisions (based on the imputed cost of capital that we had to spend to make this purchase) and (2) the accretive benefit of our share repurchase program during 2010.  Based on these factors, the compensation committee set the core EPS value for compensation purposes at $5.75 for 2010, which equates to a payout at 107% of the 2010 performance-based restricted stock units.

The aggregate equity compensation awarded to our NEOs and other key executives for 2010 totaled $10.6 million or approximately 52.9% of the equity incentive compensation pool funded pursuant to IRC Section 162(m).

Awards granted during 2009

In 2009, our board of directors and compensation committee approved 100% performance-based equity grants for our NEOs and other executive officers, which were awarded on February 23, 2009. The performance-based restricted stock units granted in 2009 are scheduled to vest as to 33% of the awards in each of February 2010 and 2011, and on 34% of the awards in February 2012, provided that (1) the executive officer is employed by us at each such time and (2) we meet a pre-determined core EPS growth target for fiscal year 2009 of 10% core EPS growth to achieve a minimum 50% of the target award, which then increases on a fixed scale with up to 100% of the target award obtained by achieving 17% core EPS growth.

Our reported core EPS was $5.16 for 2009, which would have resulted in a full vesting of the 2009 performance-based restricted stock unit awards; however, the compensation committee exercised its discretion to reduce this amount such that the 2009 performance-based restricted stock unit awards vested at 88%.  The compensation committee determined that the downward adjustment was appropriate for the executive officers given the financial performance of the private label services and credit segment in 2009.

On February 23, 2009, in connection with his promotion to executive vice president and president, Epsilon, Mr. Kennedy was awarded a grant of 22,347 time-based restricted stock units with a full grant date fair value of $619,459, 50% of which vested on February 23, 2010 and 50% of which vested on February 23, 2011.  On December 12, 2009, in connection with his employment as executive vice president and chief financial officer, Mr. Horn was awarded a grant of 4,896 time-based restricted stock units with a full grant date fair value of $315,302, 33% of which vested on December 21, 2010, 33% of which vested on December 21, 2011 and 34% of which vest on December 21, 2012, provided that Mr. Horn is still employed by us on such dates.

Perquisites

With limited exceptions, the compensation committee’s policy is to provide personal benefits and perquisites to our NEOs that are substantially similar to those offered to our other associates at or above the level of vice president. The personal benefits and perquisites that may be available to our NEOs in addition to those available to our other associates include enhanced life insurance, long-term disability benefits, an annual
 
 
30

 
 
physical, travel and related expenses for spouses in connection with company events, and in certain cases, commuting and living expenses. For additional information about the perquisites given to our NEOs in 2011, see the All Other Compensation Table below.

Reasonability of Compensation

In determining appropriate compensation levels, during the course of 2011 the compensation committee reviewed all forms of executive compensation, including base salary, performance-based non-equity incentive compensation, long-term equity incentive awards, ratios of vested to unvested equity previously granted to our executive officers, realizable amounts from equity previously granted to our executive officers, the company’s contributions to the Alliance Data Systems 401(k) and Retirement Savings Plan and Executive Deferred Compensation Plan and the value of any perquisites received for the 2011 performance year.  Based on company performance in 2011 and in prior years, and other applicable factors and known information, including the market data provided by our external executive compensation consultant, the compensation committee, and the board of directors with respect to the chief executive officer, have each determined that the total 2011 compensation paid to our executive officers was reasonable and not excessive.  As previously reported, our fiscal year 2011 financial performance included a year-over-year increase of 14% in revenue and 57% for net income per diluted share, a 23% increase in adjusted EBITDA, a 35% increase in adjusted EBITDA, net of funding costs and a 30% increase in core earnings per diluted share.  For 2011, base salary, target total cash compensation (base salary plus target performance-based non-equity incentive compensation), and target total direct compensation (base salary plus target performance-based non-equity incentive compensation plus target long-term equity incentive compensation) for our executive officers, were each between the 50th and 75th percentile of our proxy peer companies, as described above.

Tax Considerations

IRC Section 162(m) limits the tax deduction to $1 million for compensation paid to each of certain executive officers of public companies. The compensation committee has considered these requirements and believes that certain grants made under the Amended and Restated Alliance Data Systems Corporation and its Subsidiaries Stock Option and Restricted Stock Plan, the 2003 Long Term Incentive Plan, the 2005 Long Term Incentive Plan and the 2010 Omnibus Incentive Plan meet the requirement that they be “performance-based” and, therefore, compensation paid to our executive officers pursuant to the terms of these plans would generally be exempt from the limitations on deductibility. Our present intention is to comply with Section 162(m) unless the compensation committee determines that compliance in a particular instance would not be in our best interest.

Each year the compensation committee approves the maximum funding pool for performance-based non-equity incentive awards for our NEOs to be paid in the following year, based on a percentage of our operating EBIDTA.  The intent is to qualify, to the extent possible, cash compensation paid to NEOs as tax deductible by the company, subject to the limitations of IRC Section 162(m).  For the 2011 performance-based non-equity incentive plan, the compensation committee approved 1.07% for our NEOs (including our CEO) and other key contributors) of our operating EBITDA as the maximum award amounts allowable.  The aggregate performance-based non-equity incentive awards payable to these individuals may not exceed these amounts to preserve our IRC Section 162(m) deductibility.

In addition, the compensation committee approved a maximum award pool for equity incentive awards to be granted to our NEOs and other key executives in 2011 based on a percentage of our operating EBITDA.  For the 2011 equity incentive awards, the compensation committee approved 3.55% for our NEOs (including our CEO) and other key contributors of our operating EBITDA for the period from January 1, 2010 through December 31, 2010 as the maximum award amounts allowable.  The aggregate equity incentive awards granted to these individuals may not exceed these amounts to preserve our IRC Section 162(m) deductibility.
 
 
31

 
 
Termination Following a Change in Control

We believe that executive performance generally may be hampered by distraction, uncertainty and other activities in the event of an actual or threatened change in control event. In September 2003, in order to reduce such adverse effects, we entered into change in control agreements with the then current executive officers, which included Mr. Heffernan.

Qualifying Terminations

Payouts under the change in control agreement are triggered upon a qualifying termination, defined in the change in control agreement as: (1) termination by the executive officer for good reason within two years of a change in control event; or (2) termination of the executive officer by the company without cause within two years of a change in control event. A termination of the executive officer’s employment due to disability, retirement or death will not constitute a qualifying termination.  We believe that this “double trigger” approach is appropriate, whereby an executive officer will only receive payout under a change in control agreement following both a change in control and a subsequent termination under the enumerated circumstances.

Pursuant to the change in control agreement, “cause” for termination includes: (1) material breach of an executive officer’s covenants or obligations under any applicable employment agreement or offer letter or any other agreement for services or non-compete agreement; (2) continued failure after written notice from the company or any applicable affiliate to satisfactorily perform assigned job responsibilities or to follow the reasonable instructions of the executive officer’s superiors, including, without limitation, the board of directors; (3) commission of a crime constituting a felony (or its equivalent) under the laws of any jurisdiction in which we or any of our applicable affiliates conducts business or other crime involving moral turpitude; or (4) material violation of any material law or regulation or any policy or code of conduct adopted by the company or engaging in any other form of misconduct which, if it were made public, could reasonably be expected to adversely affect the business reputation or affairs of the company or of an affiliate. The board of directors, in good faith, will determine all matters and questions relating to whether the executive officer has been discharged for cause. Pursuant to the change in control agreement, “good reason” for termination by the executive officer includes the occurrence of any of the following events, in each case without the executive officer’s consent: (1) lessening of the executive officer’s responsibilities; (2) a reduction of at least five percent in the executive officer’s annual salary and/or incentive compensation; or (3) the company’s requiring the executive officer to be based anywhere other than within 50 miles of the executive officer’s place of employment at the time of the occurrence of the change in control, except for reasonably required travel to the extent substantially consistent with the executive officer’s business travel obligations as in existence at the time of the change in control. If an executive is party to an employment agreement, offer letter or any other agreement for services with us that contains a definition for either “cause” or “good reason” and that agreement is in effect at the time of termination of employment, the definition in that agreement will prevail over the definition contained in the change in control agreement described here.

Payments and Benefits Following a Qualifying Termination

Upon a qualifying termination, the executive officer will be paid all earned and accrued salary due and owing to the executive officer, a pro-rata portion of the executive officer’s target bonus, continued medical, dental and hospitalization coverage for a pre-determined period, as described below, other benefits due under benefit plans, all accrued and unpaid vacation and a severance amount. The severance amount is equal to two times the sum of the executive officer’s current base salary and target non-equity incentive compensation. Any severance amounts to which the executive officer is entitled will be paid in a lump sum within thirty days of execution by the executive officer of a general release. If an executive officer ceases to be actively employed following a change in control, he or she will receive the value of his or her deferred compensation account, if any, no earlier than six months following the end of the quarter in which the termination occurred, unless the executive officer dies before that time.

After a qualifying termination, the executive officer and his or her dependents are eligible to receive equivalent medical, dental and hospitalization coverage and benefits as provided to the executive officer
 
 
32

 
 
immediately prior to the change in control event or qualifying termination. Such coverage and benefits will continue for a period of 24 months following a qualifying termination. The change in control agreement further provides that if any payments or benefits that the executive officer receives are subject to the “golden parachute” excise tax imposed under IRC Section 4999, the executive officer will be entitled to a “gross-up” payment so that the executive officer is placed in the same after-tax position as if no excise tax had been imposed.

Change of Control - Impact on Outstanding Equity

In the event of a change in control, all equity awards made to the executive officer that remain outstanding generally remain subject to the terms and conditions set forth in any governing plan or award documents applicable to the equity awards. Our equity plans provide that our board of directors may accelerate vesting of stock options and restricted stock or restricted stock units in the event of a change in control. Further, in the event of a qualifying termination within twelve months of a change in control event, all restrictions on stock options and restricted stock or restricted stock units will lapse. Stock options will be exercisable following a qualifying termination until the earlier of the end of the option term or the end of the one year period following a qualifying termination.

Other General Terms of the Change in Control Agreement

The change in control agreement provides a mechanism to resolve disputes, does not constitute a contract of employment, and automatically renews every three years unless we provide 90 days advance written notice of our intent to terminate.  If an executive officer becomes entitled to a severance amount under a change in control agreement, such executive officer will not be entitled to severance payments under any other agreement or arrangement, including any employment agreement.

Termination for Cause - Impact on Outstanding Equity

Upon termination of an executive officer for cause, all vested but unexercised options granted to the executive officer will immediately be canceled. If an executive officer terminates employment for any other reason, including retirement, death or disability, but excluding a qualifying termination in connection with a change in control event, as described above, the executive officer may, for a limited time period, exercise those options that were exercisable immediately prior to his or her termination of employment. All unvested shares of restricted stock or restricted stock units granted to an executive officer will be forfeited upon that executive officer’s termination of employment for any reason other than a qualifying termination in connection with a change in control event, as described above; notwithstanding the foregoing, the compensation committee may exercise its discretion to accelerate the vesting of any unvested shares of restricted stock or restricted stock units granted to an executive officer upon that executive officer’s termination of employment for any reason other than for cause.

Distribution of Deferred Compensation

If an executive officer ceases to be actively employed, retires or becomes disabled, he or she will receive the value of his or her deferred compensation account, if any, no earlier than six months following the end of the quarter in which the termination occurred, unless the executive officer dies before that time. In the event of termination due to death, the balance of the account will be distributed in one lump sum to the executive officer’s designated beneficiary.

Plans or Agreements Governing Certain Elements of Executive Compensation

2010 Omnibus Incentive Plan

The 2010 Omnibus Incentive Plan provides for awards of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, cash incentive awards, deferred stock units and other performance-based awards to selected officers, associates, non-employee directors and consultants performing services for us or any of our affiliates. The 2010 Omnibus Incentive Plan is an
 
 
33

 
 
omnibus plan that gives us flexibility to adjust to changing market forces. The 2010 Omnibus Incentive Plan was adopted by our board of directors on March 25, 2010 and approved by our stockholders on June 8, 2010. On June 15, 2010, we filed a Registration Statement on Form S-8, File No. 333-167525, with the SEC to register an additional 3,000,000 shares of common stock, par value $0.01 per share, which may be issued and sold under the 2010 Omnibus Incentive Plan. As of December 31, 2011, as a result of grants made under all of our equity plans, there were outstanding 740,017 vested but unexercised options to purchase our common stock at a weighted average exercise price of $42.87, 345,189 unvested time-based restricted stock units, and 856,572 unvested performance-based restricted stock units.

The 2010 Omnibus Incentive Plan is administered by the compensation committee, which has full and final authority to make awards, establish the terms thereof, and administer and interpret the 2010 Omnibus Incentive Plan in its sole discretion unless authority is specifically reserved to the board of directors under the 2010 Omnibus Incentive Plan, our certificate of incorporation or bylaws, or applicable law.  Any action of the compensation committee with respect to the 2010 Omnibus Incentive Plan will be final, conclusive and binding on all persons. The compensation committee may delegate certain responsibilities to our officers or managers. The board of directors may delegate, by a resolution adopted by the board of directors, authority to one or more of our officers to do one or both of the following: (1) designate the officers and employees who will be granted awards under the 2010 Omnibus Incentive Plan; and (2) determine the number of shares subject to specific awards to be granted to such officers and employees.

During any calendar year no participant under the 2010 Omnibus Incentive Plan may be granted awards of more than 750,000 shares of stock, subject to adjustments. We may reserve for the purposes of the 2010 Omnibus Incentive Plan, out of our authorized but unissued shares of stock or out of shares of stock reacquired by us in any manner, or partly out of each, such number of shares of stock as shall be determined by the board of directors.  The maximum number of shares of stock available for awards shall be reduced by the number of shares in respect of which the award is granted or denominated. If any stock option is exercised by tendering shares either actually or by attestation, as full or partial payment of the exercise price, the maximum number of shares available shall be increased by the number of shares so tendered. Shares of stock allocable to an expired, canceled, settled or otherwise terminated portion of an award may again be the subject of awards granted thereunder. In addition, any shares of stock withheld for payment of taxes may be the subject of awards granted under this plan and the number of shares equal to the difference between the number of stock appreciation rights exercised and the number of shares delivered upon exercise shall again be available for awards.  Any award that by the terms of either the 2010 Omnibus Incentive Plan or the award agreement is to be settled in cash or property other than shares of stock will not reduce or otherwise count against the number of shares of stock available for awards under the 2010 Omnibus Incentive Plan.  The maximum cash amount that may be awarded to any single participant in any one calendar year may not exceed $7,500,000.

Upon termination of an executive officer for cause, all unvested and vested but unexercised options granted to such executive officer shall immediately be forfeited or canceled, as appropriate.  If an executive officer terminates employment for any other reason, including retirement, death or disability but excluding a qualifying termination following a change in control event, such executive officer may, for a limited time period, exercise those options that were exercisable immediately prior to such termination of employment.  All unvested shares of restricted stock or restricted stock units granted to an executive officer will be forfeited upon that executive officer’s termination of employment for any reason other than a qualifying termination following a change in control event; notwithstanding the foregoing, the compensation committee may exercise its discretion to accelerate the vesting of any unvested shares of restricted stock or restricted stock units granted to an executive officer upon that executive officer’s termination of employment for any reason other than for cause.  Additional information regarding change in control events is set forth under the caption “Potential Payments upon Termination or Change in Control.”

The 2010 Omnibus Incentive Plan provides for awards of incentive stock options to any person employed by us or by any of our affiliates. The exercise price for incentive stock options granted under the 2010 Omnibus Incentive Plan may not be less than 100% of the fair market value of our common stock on the date of grant. If an incentive stock option is granted to an employee who owns 10% or more of our common stock,
 
 
34

 
 
the exercise price of that stock option may not be less than 110% of the fair market value of our common stock on the date of grant. The 2010 Omnibus Incentive Plan also provides for awards of nonqualified stock options to any officers, employees, non-employee directors or consultants performing services for us or our affiliates. The exercise price for nonqualified stock options granted under the 2010 Omnibus Incentive Plan may not be less than 100% of the fair market value of our common stock on the date of grant. Under the 2010 Omnibus Incentive Plan, stock options generally vest one-third per year over three years and terminate on the tenth anniversary of the date of grant. The 2010 Omnibus Incentive Plan gives our board of directors discretion to determine the vesting provisions of each individual stock option. In the event of a change in control, this plan provides that our board of directors may provide for accelerated vesting of stock options.

The compensation committee is authorized under the 2010 Omnibus Incentive Plan to grant restricted stock or performance share awards with restrictions that may lapse over time or upon the achievement of specified performance targets, or both. Restrictions may lapse separately or in such installments as the compensation committee may determine. A participant granted restricted stock or performance shares shall have the stockholder rights as may be set forth in the applicable agreement, including, for example, the right to vote the restricted stock or performance shares.

The compensation committee is authorized under the 2010 Omnibus Incentive Plan to grant restricted stock unit awards. Until all restrictions upon restricted stock units granted to a participant shall have lapsed, the participant may not be a stockholder of us, nor have any of the rights or privileges of a stockholder of us, including rights to receive dividends and voting rights with respect to the restricted stock units. We will establish and maintain a separate account for each participant who has received an award of restricted stock units, and such account will be credited for the number of restricted stock units granted to such participant. Restricted stock unit awards granted under the 2010 Omnibus Incentive Plan may vest at such time or times and on such terms and conditions as the compensation committee may determine. The agreement evidencing the award of restricted stock units will set forth any such terms and conditions. As soon as practicable after each vesting date of an award of restricted stock units, payment will be made in either shares of our common stock, other securities or cash (based upon the fair market value of our common stock on the day all restrictions lapse).

The compensation committee is also authorized under the 2010 Omnibus Incentive Plan to grant stock appreciation rights, known as SARs. The exercise price per SAR shall be determined by the compensation committee and may not be less than the fair market value of a share of stock on the date of grant. The full or partial exercise of SARs that provide for stock settlement shall be made only by a written notice specifying the number of SARs with respect to which the award is being exercised. Upon the exercise of SARs, the participant is entitled to receive an amount in shares determined by multiplying (a) the appreciation value by (b) the number of SARs being exercised, minus the number of shares withheld for payment of taxes. The compensation committee may limit the number of shares that may be delivered with respect to any award of SARs by including such a limit in the agreement evidencing SARs at the time of grant.

Following certain significant corporate events, unusual and non-recurring corporate events or following changes in applicable laws, regulations or accounting principles, the compensation committee has the authority under each of the 2010 Omnibus Incentive Plan, the 2005 Long Term Incentive Plan and the 2003 Long Term Incentive Plan to waive performance conditions relating to an award and to make adjustments to any award that the compensation committee feels is appropriate.  Further, the compensation committee may reduce payout amounts under performance-based awards if, in the discretion of the compensation committee, such a reduction is appropriate.  The compensation committee may not, however, increase the payout amount for any such performance-based award.  In addition, these plans do not permit stock options to be “repriced” at a lower exercise price, or otherwise modified or amended in such a manner that would constitute a “repricing.”  Under each of the 2010 Omnibus Incentive Plan, the 2005 Long Term Incentive Plan and the 2003 Long Term Incentive Plan, the compensation committee has the authority to cancel or require repayment of an award in the event a participant or former participant breaches any non-solicitation agreement entered into with the company. Under the Amended and Restated Alliance Data Systems Corporation and its Subsidiaries Stock Option and Restricted Stock Plan, the board of directors or delegated committee thereof has the right to
 
 
35

 
 
amend any stock option or restricted stock or restricted stock unit award granted to a participant, in most cases subject to the participant’s written consent.

Executive Deferred Compensation Plan

We adopted an amended and restated Executive Deferred Compensation Plan in December 2007, to be effective as of January 1, 2008.  Our original Executive Deferred Compensation Plan was adopted in December 2004 as a successor to our former Supplemental Executive Retirement Plan, a substantially similar deferred compensation plan. The purpose of the Executive Deferred Compensation Plan is to help participants maximize their pre-tax savings and company contributions that are otherwise restricted due to tax limitations.  To be eligible to participate in the Executive Deferred Compensation Plan, an individual must: (1) be a regular, full-time U.S. employee of ADS Alliance Data Systems, Inc., one of our wholly owned subsidiaries; (2) receive a base salary equal to or greater than $150,000 on an annual basis, or have received total compensation on an annual basis of at least $170,000 as of December 31, 2003 and have not fallen below that amount in any subsequent year; and (3) be a participant in the Alliance Data Systems 401(k) and Retirement Savings Plan.  The Executive Deferred Compensation Plan allows the participant to contribute:
 
·  
up to 50% of eligible compensation on a pre-tax basis;
 
·  
any pre-tax 401(k) contributions that would otherwise be returned because of reaching the statutory limit under IRC Section 415; and
 
·  
any retirement savings plan contributions for compensation in excess of the statutory limits.

At the time of enrollment, a participant may direct the company to withhold a percentage of the participant’s base salary and also, provided the enrollment is effective no later than April 1st of the applicable year, the performance-based non-equity incentive compensation earned for services performed in the year but paid in the following year.  The percentage selected for each type of compensation is determined by the participant and may be any whole number percentage up to 50%.  A participant may not revoke, change or terminate an election to make contributions to the Executive Deferred Compensation Plan at any time following the end of the applicable enrollment period.  In addition, we will allocate to the participant any contributions to the Alliance Data Systems 401(k) and Retirement Savings Plan that would otherwise have been returned to the participant as a result of the limit imposed by the IRC on such 401(k) contributions.  This allocation includes non-matching retirement contributions and discretionary profit-sharing contributions to the Alliance Data Systems 401(k) and Retirement Savings Plan that were similarly restricted.  Loans are not available under the Executive Deferred Compensation Plan.  Contributions made under the Executive Deferred Compensation Plan are unfunded and subject to the claims of our creditors, with participants having the status of an unsecured creditor with respect to our obligation to make benefit payments.

Each participant is 100% vested in his or her own contributions. A participant becomes 100% vested in the retirement savings plan contributions after achieving three years of vesting service under the Alliance Data Systems 401(k) and Retirement Savings Plan. In the event of a change in control, as defined under the Executive Deferred Compensation Plan, participants will be 100% vested in their retirement savings plan contributions, and we will establish a rabbi trust to which we will contribute sufficient assets to fully fund all accounts under the Executive Deferred Compensation Plan. The assets in the rabbi trust will remain subject to the claims of our creditors. Account balances accrue interest at a rate that is established and adjusted periodically by the committee of management that administers the Executive Deferred Compensation Plan.

A participant who is actively employed generally may not withdraw or otherwise access any amounts credited under the Executive Deferred Compensation Plan.  However, at the time a participant elects to make elective contributions, that participant may elect to have all contributions made pursuant to that election for that year distributed as of January 1 of any subsequent year, subject however, to any restriction imposed under IRC Section 409A. The distribution shall be made within 60 days of January 1 of the specified year or, if earlier, the date required in the event of cessation of employment, retirement or disability, as described below.  Furthermore, amounts may be withdrawn in the event of an “unforeseeable emergency,” within the meaning of IRC Section 409A(a)(2)(B)(ii).  Any such early withdrawal must be approved by the committee of management administering the Executive Deferred Compensation Plan and may not exceed the amount
 
 
36

 
 
necessary to meet the emergency, taking into account other assets available to the participant, as well as any taxes incurred as a result of the distribution.  If the committee of management administering the Executive Deferred Compensation Plan approves a distribution on this basis, the distribution shall be made as soon as practicable thereafter; and the participant’s right to make elective contributions shall be suspended until the first day of the following year, subject to enrollment procedures.  If a participant ceases to be actively employed, retires or becomes disabled, the participant will receive the value of his or her account within 90 days after he or she became eligible for the distribution unless the participant is a “specified participant” under IRC Section 409A, in which case the distribution will be paid on the date that is six months and one day after the date of separation, unless the “specified participant” dies before that time.  Under current IRC Section 409A, each of our NEOs is considered a “specified participant.”  In the event of termination due to death, the balance of the account will be distributed in one lump sum to the participant’s designated beneficiary within 90 days after the date of the participant’s death.  A distribution from the Executive Deferred Compensation Plan is taxed as ordinary income and is not eligible for any special tax treatment.  The Executive Deferred Compensation Plan is designed and administered to comply with the IRC Section 409A regulations.

Group Retirement Savings Plan and Deferred Profit Sharing Plan (LoyaltyOne, Inc.)

The LoyaltyOne, Inc. Group Retirement Savings Plan, or GRSP, is a group retirement savings plan registered with the Canada Revenue Agency. Contributions made by Canadian associates on their behalf or on behalf of their spouse to the GRSP, and income earned on these contributions, are not taxable to associates until withdrawn from the GRSP.  Associate contributions eligible for company match may not exceed the overall maximum allowed by the Income Tax Act (Canada); the maximum tax-deductible GRSP contribution is set by the Canada Revenue Agency each year. The Deferred Profit Sharing Plan, or DPSP, is a legal trust registered with the Canada Revenue Agency. Eligible full-time associates can participate in the GRSP after three months of employment and eligible part-time associates after six months of employment. Associates become eligible to receive company matching contributions into the DPSP on the first day of the calendar quarter following twelve months of employment. Based on the eligibility guidelines, the company matches up to 5% of contributions dollar-for-dollar. Contributions made to the DPSP reduce an associate’s maximum contribution amounts to the GRSP under the Income Tax Act (Canada) for the following year. All company matching contributions into the DPSP vest after receipt of one continuous year of DPSP contributions.

Canadian Supplemental Executive Retirement Plan

We adopted the Canadian Supplemental Executive Retirement Plan in June 2009, to be effective as of January 1, 2009. The purpose of the Canadian Supplemental Executive Retirement Plan is to help participants maximize company contributions that are otherwise restricted due to statutory limitations. To be eligible to participate in the Canadian Supplemental Executive Retirement Plan, an individual must: (1) be a full-time Canadian employee of LoyaltyOne, Inc., one of our wholly-owned subsidiaries; (2) be in a vice president or higher position that has been designated as a member of a group of “key executives”; and (3) be a participant in the LoyaltyOne, Inc. GRSP. All contributions to the Canadian Supplemental Executive Retirement Plan are made by LoyaltyOne, Inc. in an amount equal to the maximum employer contributions which would be made to the participant’s DPSP account if the maximum contribution provisions of the Income Tax Act (Canada) were not applicable, less actual employer contributions to the participant’s DPSP account.

Contributions made under the Canadian Supplemental Executive Retirement Plan are unfunded and subject to the claims of our creditors, with participants having the status of an unsecured creditor with respect to our obligation to make benefit payments. A participant becomes 100% vested in the Canadian Supplemental Executive Retirement Plan contributions after achieving one year of vesting service, which may be the same year of vesting service under the DPSP. In the event of a change in control, as defined under the Canadian Supplemental Executive Retirement Plan, participants will be 100% vested in the Canadian Supplemental Executive Retirement Plan contributions. Account balances are credited or debited, as applicable, at least annually with deemed investment earnings or losses calculated assuming one hundred percent of the participant’s account were invested in the balanced funds provided as an investment option under the DPSP or such alternative investment funds as may be determined by the LoyaltyOne, Inc. retirement council from time to time.
 
 
37

 
 
A participant who is actively employed generally may not withdraw or otherwise access any amounts credited under the Canadian Supplemental Executive Retirement Plan. If a participant ceases to be actively employed other than due to the participant’s death or termination for cause, retires or becomes disabled, the participant will receive the value of his or her account, less applicable withholding taxes, within 90 days after he or she became eligible for the distribution. In the event of termination due to death, the balance of the account will be distributed in one lump sum, less applicable withholding taxes, to the participant’s designated beneficiary within 90 days after the date LoyaltyOne, Inc. receives formal notification of the participant’s death. In the event of a participant’s termination of employment for cause as defined in the Canadian Supplemental Executive Retirement Plan, such participant will forfeit the balance of his or her account, whether vested or unvested. A distribution from the Canadian Supplemental Executive Retirement Plan is taxed as ordinary income and is not eligible for any special tax treatment.

Alliance Data Systems 401(k) and Retirement Savings Plan
 
The Alliance Data Systems 401(k) and Retirement Savings Plan is a defined contribution plan that is qualified under IRC Section 401(k). Contributions made by associates or by us to the 401(k) and Retirement Savings Plan, and income earned on these contributions, are not taxable to associates until withdrawn from the 401(k) and Retirement Savings Plan. The 401(k) and Retirement Savings Plan covers U.S. employees, who are at least 21 years old, of ADS Alliance Data Systems, Inc., one of our wholly-owned subsidiaries, and any other subsidiary or affiliated organization that adopts this 401(k) and Retirement Savings Plan. We, and all of our U.S. subsidiaries, are currently covered under the 401(k) and Retirement Savings Plan.

We amended our 401(k) and Retirement Savings Plan effective January 1, 2008 to better benefit the majority of our associates. The 401(k) and Retirement Savings Plan is an IRS-approved safe harbor plan design that eliminates the need for most discrimination testing. Eligible associates can participate in the 401(k) and Retirement Savings Plan immediately upon joining us and after six months of employment begin receiving company matching contributions. In addition, seasonal or “on-call” associates must complete a year of eligibility service before they may participate in the 401(k) and Retirement Savings Plan. On the first three percent of savings, we match dollar-for-dollar. An additional fifty cents for each dollar an associate contributes is matched for savings of more than three percent and up to five percent of pay. All company matching contributions are immediately vested. In addition to the company match, we may make an additional annual contribution based on our profitability. This contribution, subject to board of director approval, is based on a percentage of pay and is subject to a separate three-year vesting schedule.

In 2009, 2010 and 2011, we made regular matching contributions under the 401(k) and Retirement Savings Plan as described in the preceding paragraph, and an additional discretionary contribution was approved by our board of directors in an amount equal to approximately 0%, 2% and 2%, respectively, of the participant’s compensation (as defined in the 401(k) and Retirement Savings Plan) during the 2009, 2010 and 2011 plan year, which amount may be integrated with the Social Security wage base to the extent permitted under IRC Section 401(l). The discretionary contribution vests in full upon achieving three years of service for participants with less than three years of service. All of these contributions vest immediately if the participating associate has more than three years of service, attains age 65, becomes disabled, dies or if the 401(k) and Retirement Savings Plan terminates.

On July 20, 2001, we registered 1,500,000 shares of our common stock for issuance in accordance with our 401(k) and Retirement Savings Plan pursuant to a Registration Statement on Form S-8, File No. 333-65556.  As of March 31, 2012, 837,880 of such shares remain available for issuance.

Retirement Agreement

On September 2, 2011, the company entered into a Retirement Agreement with Mr. Szeftel (the “Retirement Agreement”), pursuant to which Mr. Szeftel agreed to continue to both serve in an advisory role and as chief executive officer of our bank subsidiary, WFNB, and as Chairman of WFNB’s board of directors through March 1, 2012 (the “Retirement Date”).
 
 
38

 
 
Pursuant to the Retirement Agreement, as compensation through the Retirement Date, Mr. Szeftel will continue as an ongoing full-time employee at his current level of compensation, including remaining eligible to receive all short- and long-term incentive compensation payments per the terms and performance metrics established by the compensation committee.  From September 8, 2011 through the Retirement Date, Mr. Szeftel will receive all perquisites he received during 2011 and will continue to be eligible to participate in all benefit plans in which he was eligible to participate during 2011.

The Retirement Agreement imposes certain restrictive covenants on Mr. Szeftel, pursuant to which Mr. Szeftel agrees to keep certain information confidential and agrees to non-competition and non-solicitation restrictions through February 28, 2014 or such later date that is two years after Mr. Szeftel ceases to be a director of WFNB.  In exchange for agreeing to comply with these restrictive covenants and for the release and waiver of claims contained in the Retirement Agreement, Mr. Szeftel will be eligible to receive an aggregate of 78 weeks of his current base salary and an additional incentive compensation payment equal to one and one half-times his current target percentage of base salary, payable in 39 bi-weekly payroll cycles commencing on the first payroll date following the Retirement Date.

In addition, any performance-based restricted stock units and time-based restricted stock units scheduled to vest between March 1, 2012 and February 28, 2013 shall continue to vest through February 28, 2013.  Any time-based restricted stock units that are unvested as of February 28, 2013 shall be forfeited. Any restricted stock units for which performance restrictions have not been met as of February 28, 2013 shall be forfeited.  Any stock options that are or shall become vested on or prior to the Retirement Date shall be exercisable until February 28, 2013, subject to earlier expiration according to any such option’s original terms. Any options that are unvested as of the Retirement Date shall be forfeited.

Mr. Szeftel’s (1) employment offer letter with the company, effective May 4, 1998, (2) Change In Control Severance Protection Agreement, effective September 25, 2003 as amended, and (3) all previously existing non-compete, non-solicitation and confidentiality obligations are superseded by the Retirement Agreement.

Indemnification Agreements

We have entered into indemnification agreements with each of our NEOs so that they may serve the company without undue concern for their protection in connection with their services.  Under these indemnification agreements, if a current or former executive officer is made a party or is threatened to be made a party, as a witness or otherwise, to any threatened, pending or completed action, suit, inquiry or other proceeding by reason of any action or inaction on his part while acting on behalf of the company, the board of directors may approve payment or reimbursement of properly documented expenses, including judgments, fines, penalties, attorneys’ fees and other costs reasonably incurred by the executive officer in connection with such proceeding, to the extent not paid by applicable insurance policies.  This indemnification only applies to the extent permitted by Delaware general corporation law, and the company will not be liable for damages or judgments: (1) based upon or attributable to the executive officer gaining any personal profit or advantage to which the executive officer was not legally entitled; (2) with respect to an accounting of profits made from the purchase or sale by the executive officer of securities of the company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended; or (3) resulting from an adjudication that the executive officer committed an act of active and deliberate dishonesty with actual dishonest purpose and intent, which act was material to the cause of action adjudicated.

Non-GAAP Performance Measures for 2011

As described above, pursuant to IRC Section 162(m), tax deductions available for performance-based compensation paid to certain executive officers for 2011 were dependent, in part, upon the attainment of operating EBITDA targets as defined herein.  Operating EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable GAAP financial measure, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization and amortization of purchased intangibles plus the change in deferred revenue and the change in redemption settlement assets, as adjusted for foreign currency exchange rate changes.
 
 
39

 
 
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION

The following tables and accompanying narratives set forth the compensation paid to our chief executive officer, chief financial officer and the next three most highly paid executive officers for the fiscal years ended December 31, 2009, 2010 and 2011.

Summary Compensation Table

 
Name and Principal Position
 
 
 
 
 
 
 
 
 
 
 
 
 
Year
 
 
 
 
 
 
Salary
($)(1)
 
 
 
 
 
 
Bonus
($)(2)
 
 
 
 
Stock Awards
($)
 
 
 
 
Option Awards
($)
 
 
 
Non-Equity Incentive Plan Compensation
($)(3)
   
Change in 
Pension
Value and Nonqualified Deferred Compensation Earnings
($)
   
 
 
 
 
All Other Compensation
($)(4)
   
 
 
 
 
Total
($)
 
Edward J. Heffernan
President and
Chief Executive Officer
2011
  $ 885,000   $ 129,857   $ 3,195,471     -   $ 1,970,143     $ 75,058     $ 77,177     $ 6,332,706  
2010
  $ 810,000   $ 127,983   $ 2,638,044     -   $ 2,274,791 (5)   $ 42,018     $ 27,673     $ 5,920,509  
2009
  $ 719,615   $ 5,312   $ 1,663,200     -   $ 1,182,188 (5)   $ 42,026     $ 46,203     $ 3,658,544  
Charles L. Horn
Executive Vice President and
Chief Financial Officer
2011
  $ 472,500   $ 50,000   $ 1,083,150     -   $ 779,153     $ 1,275     $ 37,579     $ 2,423,657  
2010
  $ 450,000   $ 52,668   $ 949,833     -   $ 658,350     $ 249     $ 19,497     $ 2,130,597  
2009
  $ 34,615     -   $ 315,302     -     -       -       -     $ 349,917  
Bryan J. Kennedy
Executive Vice President and
President, Epsilon
2011
  $ 450,000   $ 20,000   $ 1,841,430     -   $ 429,750     $ 2,062     $ 25,630     $ 2,768,872  
2010
  $ 415,000   $ 68,823   $ 1,529,906     -   $ 573,530     $ 1,508     $ 18,055     $ 2,606,822  
2009
  $ 382,500   $ 33,459   $ 1,727,259     -   $ 298,475     $ 1,819     $ 33,809     $ 2,477,321  
Bryan J. Pearson(6)
Executive Vice President and
President, LoyaltyOne
2011
  $ 490,364   $ 55,902   $ 1,787,285     -   $ 703,673     $ 29,015 (7)   $ 170,385     $ 3,236,624  
2010
  $ 482,078   $ 26,148   $ 1,698,388     -   $ 653,698     $ 6,545     $ 132,605     $ 2,999,462  
2009
  $ 444,881   $ 33,459   $ 1,108,800     -   $ 455,113     $ 4,222     $ 130,510     $ 2,176,985  
Ivan M. Szeftel
Former Executive Vice President and
President, Retail Credit Services
2011
  $ 525,000     -   $ 2,274,673     -   $ 1,184,085     $ 57,801     $ 95,206     $ 4,136,765  
2010
  $ 505,000   $ 53,449   $ 2,134,553     -   $ 1,578,320 (8)   $ 38,615     $ 66,290     $ 4,376,227  
2009
  $ 513,000     -   $ 1,247,400     -   $ 735,140 (8)   $ 45,336     $ 76,622     $ 2,617,498  
                   
(1) This column includes amounts deferred pursuant to the Executive Deferred Compensation Plan. See “Nonqualified Deferred Compensation” table for additional information.  In 2011, $194,700 was deferred by Mr. Heffernan, $23,625 was deferred by Mr. Horn and $42,000 was deferred by Mr. Szeftel; in 2010, $162,000 was deferred by Mr. Heffernan, $20,769 was deferred by Mr. Horn and $50,500 was deferred by Mr. Szeftel; in 2009, $122,335 was deferred by Mr. Heffernan and $30,780 was deferred by Mr. Szeftel.
(2) Amounts in this column represent discretionary increases to non-equity incentive plan compensation granted to the executive officers by the chief executive officer, and with regard to the chief executive officer, discretionary increases to non-equity incentive plan compensation granted by the board of directors. 
(3) This column includes amounts deferred pursuant to the Executive Deferred Compensation Plan, which amounts are not paid or deferred until February of the following year.  In 2012, $462,000 was deferred by Mr. Heffernan and $94,727 was deferred by Mr. Szeftel; in 2011, $345,555 was deferred by Mr. Heffernan and $94,427 was deferred by Mr. Szeftel; and in 2010, $144,500 was deferred by Mr. Heffernan and $39,139 was deferred by Mr. Szeftel. 
(4) See the All Other Compensation table below for further information regarding amounts included in this column. 
(5) For 2010, this amount includes $1,599,791 for 2010 non-equity incentive plan compensation paid in 2011 and $675,000 paid in 2010 for the final installment of a performance-based retention award.  For 2009, this amount includes $844,688 for 2009 non-equity incentive plan compensation paid in 2010 and $337,500 paid in 2010 for the second installment of the performance-based retention award. 
(6) Amounts included for Mr. Pearson are shown in U.S. Dollars but were paid to Mr. Pearson in Canadian Dollars.  To convert the amounts paid to U.S. Dollars, we used the prevailing exchange rate as of the last business day of the applicable year (for 2011 amounts, an exchange rate of .98072868 U.S. Dollars per Canadian Dollar; for 2010 amounts, an exchange rate of 1.003 U.S. Dollars per Canadian Dollar; and for 2009 amounts, an exchange rate of 0.9506 U.S. Dollars per Canadian Dollar). 
(7) This amount represents the deemed investment earnings (losses) credited to Mr. Pearson pursuant to the terms of the LoyaltyOne, Inc. Canadian Supplemental Executive Retirement Plan (“LoyaltyOne SERP”), which became effective on January 1, 2009. 
(8) For 2010, this amount includes $890,820 for 2010 non-equity incentive plan compensation paid in 2011 and $687,500 paid in 2010 for the final installment of a performance-based retention award. For 2009, this amount includes $391,390 for 2009 non-equity incentive plan compensation paid in 2010 and $343,750 paid in 2010 for the second installment of the performance-based retention award. 
 
 
40

 
 
The amounts reported in the Stock Awards column reflects the dollar amount, without any reduction for risk of forfeiture, of the estimate of the aggregate compensation cost to be recognized over the service period as of the grant date under FASB ASC 718, which for 2011 represents the closing market price of our common stock of $83.30 per share on the grant date of March 21, 2011. These amounts may not correspond to the actual value that will be realized by the NEOs. To see the value of awards made to the NEOs in 2011, see the Fiscal Year 2011 Grants of Plan Based Awards table below. Awards included in the Stock Awards and Option Awards columns were granted pursuant to the 2010 Omnibus Incentive Plan. Additional details are included above under the caption “Long-Term Equity Incentive Compensation.”

The amounts reported in the Non-Equity Incentive Plan Compensation column reflect the amounts earned and paid to each NEO in February 2010, 2011 and 2012 for 2009, 2010 and 2011 performance, respectively, under the Executive Annual Incentive Plan for 2009 and 2010 and the 2010 Omnibus Incentive Plan for 2011.  For the 2011 performance year, these amounts are the actual amounts earned under the awards described in the Fiscal Year 2011 Grants of Plan-Based Awards table below.  These payout amounts were computed in accordance with the pre-determined formula for the calculation of performance-based non-equity incentive compensation and the applicable weightings as set forth above in the Compensation Discussion and Analysis.

The amounts reported in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column consist entirely of above-market earnings on compensation deferred pursuant to the Executive Deferred Compensation Plan, as described below following the Nonqualified Deferred Compensation table.  Above-market earnings represent the difference between market interest rates determined pursuant to SEC rules and the 8.0% annual interest rate credited by the company on contributions during 2011.
 
 
41

 
 
All Other Compensation
 
 
Name
 
Year
 
Registrant
Contributions to
401(k) or Other Retirement Savings Plans
   
Registrant
Contributions to Deferred
Compensation
Plans
   
Life Insurance Premiums
   
Medical and
Dental
Insurance Premiums
   
Disability Insurance Premiums
   
Other
   
Perquisites and Personal
Benefits
 
Edward J. Heffernan
2011
  $ 17,464     $ 40,000     $ 42     $ 10,881     $ 83       -     $ 8,707 (1)
2010
  $ 9,800       -     $ 43     $ 12,449     $ 86       -     $ 5,295  
2009
  $ 14,069     $ 17,249     $ 587     $ 12,257     $ 83       -     $ 1,958  
Charles L. Horn
2011
  $ 17,464     $ 7,369     $ 42     $ 10,881     $ 83       -     $ 1,740 (2)
2010
  $ 5,179       -     $ 43     $ 12,449     $ 86       -     $ 1,740  
2009
    -       -       -       -       -       -       -  
Bryan J. Kennedy
2011
  $ 10,255       -     $ 42     $ 11,200     $ 83       -     $ 4,050 (3)
2010
  $ 1,915       -     $ 43     $ 12,449     $ 86       -     $ 3,562  
2009
  $ 14,069     $ 7,088     $ 312     $ 12,257     $ 83       -       -  
Bryan A. Pearson(4)
2011
  $ 11,009 (5)   $ 46,747 (6)     -     $ 89,816 (7)   $ 7,901 (8)     -     $ 14,912 (9)
2010
  $ 11,033     $ 38,522       -     $ 62,344     $ 8,429       -     $ 12,277  
2009
  $ 9,981     $ 31,207       -     $ 59,308     $ 8,589     $ 7,659     $ 13,766  
Ivan M. Szeftel
2011
  $ 17,464     $ 22,470     $ 42     $ 10,881     $ 83       -     $ 44,266 (10)
2010
  $ 9,800       -     $ 43     $ 12,449     $ 86       -     $ 43,912  
2009
  $ 14,069     $ 18,364     $ 415     $ 12,257     $ 83       -     $ 31,434  
                   
(1) This amount represents $1,958 in supplemental life insurance premiums and $6,749 for an executive physical.
(2) This amount represents $1,740 in supplemental life insurance premiums.
(3) This amount represents $4,050 for personal use of a country club membership.
(4) Amounts included for Mr. Pearson are shown in U.S. Dollars but were paid to Mr. Pearson in Canadian Dollars.  To convert the amounts paid to U.S. Dollars, we used the prevailing exchange rate as of the last business day of the applicable year (for 2011 amounts, an exchange rate of .98072868 U.S. Dollars per Canadian Dollar; for 2010 amounts, an exchange rate of 1.003 U.S. Dollars per Canadian Dollar; and for 2009 amounts, an exchange rate of 0.9506 U.S. Dollars per Canadian Dollar).
(5) This amount represents the company’s contributions to Mr. Pearson’s account pursuant to the DPSP.
(6) This amount represents the company’s contributions to Mr. Pearson’s account pursuant to the LoyaltyOne SERP.
(7) This amount includes medical, dental and wellness insurance premiums and $85,466 in required employer health tax, and a wellness program for emergency medical assistance outside of Canada.
(8) This amount includes both short-term and long-term disability insurance premiums.
(9) This amount includes $8,862 in supplemental life insurance premiums, $1,271 in long-term illness premiums, $4,779 in company subsidized parking and personal use of a country club membership.  Each of these items were either reimbursed directly to Mr. Pearson or directly paid on behalf of Mr. Pearson.
(10) This amount includes $3,157 for an executive physical, $23,482 in commuting and housing expenses and $17,627 for a housing tax gross-up.  Each of these items were either reimbursed directly to Mr. Szeftel or directly paid on behalf of Mr. Szeftel.
 
42

 
 
Fiscal Year 2011
Grants of Plan-Based Awards

The following table provides information about equity and non-equity awards granted to the NEOs in 2011, including performance-based non-equity incentive compensation awards and restricted stock unit awards.  Each award is shown separately for each NEO, with the corresponding vesting schedule for each equity award in the footnotes following this table.

   
Grant
Date
  Date Authorized by the Board of Directors or Compensation Committee (relative to option awards)  
Estimated Future
Payouts Under Non-
Equity Incentive Plan
Awards(1)
 
Estimated Future
Payouts Under Equity
Incentive Plan
Awards(2)
  All Other Stock Awards: Number of Shares of Stock or Units (#)(2)     All Other Option Awards: Number of Securities Under- Lying Options (#)   Exercise or Base Price of Option Awards ($/Sh)   Closing Market Price on Grant Date (relative to option awards)   Full Grant Date Fair Value of Equity Awards Granted in 2011  
Name
     
Threshold
($)
 
Target
($)
 
Maximum
($)
 
Threshold
(#)
 
Target
(#)
   
Maximum
(#)
             
Edward J.  Heffernan
 
3/21/11
                                7,672 (3)               $ 639,078  
Edward J.  Heffernan
 
3/21/11
                  15,345   30,689 (4)   46,035                     $ 2,556,394  
Edward J.  Heffernan
          $ 518,522   $ 1,194,750   $ 2,389,500                                        
Charles L. Horn
 
3/21/11
                                      2,600 (5)               $ 216,580  
Charles L. Horn
 
3/21/11
                        5,202   10,403 (6)   15,605                     $ 866,570  
Charles L. Horn
          $ 205,065   $ 472,500   $ 945,000                                        
Bryan J. Kennedy
 
3/21/11
                                      4,421 (7)               $ 368,269  
Bryan J. Kennedy
 
3/21/11
                        8,843   17,685 (8)   26,528                     $ 1,473,161  
Bryan J. Kennedy
          $ 225,000   $ 450,000   $ 900,000                                        
Bryan A. Pearson
 
3/21/11
                                      4,291 (9)               $ 357,440  
Bryan A. Pearson
 
3/21/11
                        8,583   17,165 (10)   25,748                     $ 1,429,845  
Bryan A. Pearson(11)
          $ 205,953   $ 490,364   $ 980,729                                        
Ivan M. Szeftel
 
3/21/11
                                      5,461 (12)               $ 454,901  
Ivan M. Szeftel
 
3/21/11
                        10,923   21,846 (13)   32,770                     $ 1,819,772  
Ivan M. Szeftel
          $ 224,910   $ 661,500   $ 1,323,000                                        
                   
(1) Awards shown in this column were granted pursuant to the 2010 Omnibus Incentive Plan.  Actual payout amounts of these awards have already been determined and were paid in February 2012, and are included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table above.
(2) Full grant date fair value of equity awards granted in 2011 is computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 and reflects the total amount of the award to be spread over the applicable vesting period.  The amount recognized for financial reporting purposes under ASC 718 of the target awards granted is included in the Stock Awards and Option Awards columns of the Summary Compensation Table above.
(3) The award is for 7,672 shares of common stock represented by time-based restricted stock units.  The restrictions lapsed on 2,531 shares on 2/21/12 and will lapse on 2,532 shares on 2/21/13 and on 2,609 shares on 2/21/14.
(4) The award is for 30,689 shares of common stock represented by performance-based restricted stock units, which could be adjusted up or down at the time of vesting.  On 2/21/12, 150% of the original award of 30,689 performance-based restricted stock units granted on 3/21/11, or 46,035 units, were earned and the restrictions on 15,191 units lapsed.  The restrictions will lapse on 15,191 units on 2/21/13 and on 15,653 units on 2/21/14.
(5) The award is for 2,600 shares of common stock represented by time-based restricted stock units.  The restrictions lapsed on 858 shares on 2/21/12 and will lapse on 858 shares on 2/21/13 and on 884 shares on 2/21/14.
(6) The award is for 10,403 shares of common stock represented by performance-based restricted stock units, which could be adjusted up or down at the time of vesting.  On 2/21/12, 150% of the original award of 10,403 performance-based restricted stock units granted on 3/21/11, or 15,605 units, were earned and the restrictions on 5,148 units lapsed.  The restrictions will lapse on 5,150 units on 2/21/13 and on 5,307 units on 2/21/14.
(7) The award is for 4,421 shares of common stock represented by time-based restricted stock units.  The restrictions lapsed on 1,458 shares on 2/21/12 and will lapse on 1,459 shares on 2/21/13 and on 1,504 shares on 2/21/14.
(8) The award is for 17,685 shares of common stock represented by performance-based restricted stock units, which could be adjusted up or down at the time of vesting.  On 2/21/12, 150% of the original award of 17,685 performance-based restricted stock units granted on 3/21/11, or 26,528 units, were earned and the restrictions on 8,754 units lapsed.  The restrictions will lapse on 8,754 units on 2/21/13 and on 9,020 units on 2/21/14.
(9) The award is for 4,291 shares of common stock represented by time-based restricted stock units.  The restrictions lapsed on 1,416 shares on 2/21/12 and will lapse on 1,416 shares on 2/21/13 and on 1,459 shares on 2/21/14.
(10) The award is for 17,165 shares of common stock represented by performance-based restricted stock units, which could be adjusted up or down at the time of vesting.  On 2/21/12, 150% of the original award of 17,165 performance-based restricted stock units granted on 3/21/11, or 25,748 units, were earned and the restrictions on 8,496 units lapsed.  The restrictions will lapse on 8,496 units on 2/21/13 and on 8,756 units on 2/21/14.
(11)   Amounts included for Mr. Pearson are shown in U.S. Dollars but were paid to Mr. Pearson in Canadian Dollars.  We used an exchange rate of  .98072868 U.S. Dollars per Canadian Dollar, which was the prevailing exchange rate as of December 30, 2011, the last business day of the year, to convert the amounts paid to U.S. Dollars.
(12) The award is for 5,461 shares of common stock represented by time-based restricted stock units.  The restrictions lapsed on 1,802 shares on 2/21/12 and will lapse on 1,802 shares on 2/21/13 and on 1,857 shares on 2/21/14. 
(13) The award is for 21,846 shares of common stock represented by performance-based restricted stock units, which could be adjusted up or down at the time of vesting.  On 2/21/12, 150% of the original award of 21,846 performance-based restricted stock units granted on 3/21/11, or 32,770 units, were earned and the restrictions on 10,814 units lapsed.  The restrictions will lapse on 10,814 units on 2/21/13 and on 11,142 units on 2/21/14.
 
43

 
 
Fiscal Year 2011
Outstanding Equity Awards at Fiscal Year-End

The following table provides information on the holdings of stock options and restricted stock units by the NEOs. This table includes unexercised stock options and unvested restricted stock units. Each equity award is shown separately for each NEO, with the corresponding vesting schedule for each award in the footnotes following this table.

   
Option Awards
 
Stock Awards
Name
 
Number of
Securities
Underlying Unexercised
Options -
Exercisable
(#)
 
Number of Securities Underlying Unexercised Options -
Unexercisable
(#)
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned
Options
(#)
 
Option
Exercise
Price
($)
 
Option
Expiration
Date
 
Number Of
Shares or Units
of Stock That
Have Not Vested
(#)
   
Market Value of Shares or Units
of Stock That
Have Not Vested
($)(1)
 
Equity Incentive Plan Awards:
Number of Unearned
Shares, Units or Other Rights That Have Not Vested
(#)
 
 
Equity Incentive Plan Awards: Market or
Payout Value of Unearned
Shares, Units or Other Rights
That Have Not Vested
($)(1)
Edward J. Heffernan
    28,699           $ 24.03  
6/23/13
                 
Edward J. Heffernan
    34,735           $ 31.38  
2/2/14
                 
Edward J. Heffernan
    19,337  
 
      $ 41.32  
2/3/15
                 
Edward J. Heffernan
    21,482           $ 43.01  
2/13/16
                 
Edward J. Heffernan
    15,223           $ 63.35  
2/21/17
                 
Edward J. Heffernan
                          13,858 (2)   $ 1,439,015        
Edward J. Heffernan
                          17,952 (3)   $ 1,864,136        
Edward J. Heffernan
                          26,341 (4)   $ 2,735,249        
Edward J. Heffernan
                          30,689 (5)   $ 3,186,746        
Charles L. Horn
                          6,493 (6)   $ 674,233        
Charles L. Horn
                          9,484 (7)   $ 984,819        
Charles L. Horn
                          10,403 (8)   $ 1,080,248        
Bryan J. Kennedy
    15,000           $ 43.20  
11/17/14
                   
Bryan J. Kennedy
    7,724           $ 43.01  
2/13/16
                   
Bryan J. Kennedy
    4,872           $ 63.35  
2/21/17
                   
Bryan J. Kennedy
                          8,009 (9)   $ 831,655        
Bryan J. Kennedy
                          8,976 (10)   $ 932,068        
Bryan J. Kennedy
                          2,992 (11)   $ 310,689        
Bryan J. Kennedy
                          15,276 (12)   $ 1,586,260        
Bryan J. Kennedy
                          17,685 (13)   $ 1,836,410        
Bryan A. Pearson
    8,000           $ 24.03  
6/23/13
                   
Bryan A. Pearson
    16,000           $ 31.38  
2/2/14
                   
Bryan A. Pearson
    20,000           $ 41.32  
2/3/15
                   
Bryan A. Pearson
    12,346           $ 41.32  
2/3/15
                   
Bryan A. Pearson
    7,724           $ 43.01  
2/13/16
                   
Bryan A. Pearson
    4,628           $ 63.35  
2/21/17
                   
Bryan A. Pearson
                          8,250 (14)   $ 856,680        
Bryan A. Pearson
                          11,968 (15)   $ 1,242,757        
Bryan A. Pearson
                          16,857 (16)   $ 1,750,431        
Bryan A. Pearson
                          17,165 (17)   $ 1,782,414        
Ivan M. Szeftel
    27,113           $ 41.32  
2/3/15
                   
Ivan M. Szeftel
    29,859           $ 43.01  
2/13/16
                   
Ivan M. Szeftel
    17,355           $ 63.35  
2/21/17
                   
Ivan M. Szeftel
                          10,466 (18)   $ 1,086,789        
Ivan M. Szeftel
                          13,464 (19)   $ 1,398,102        
Ivan M. Szeftel
                          21,314 (20)   $ 2,213,246        
Ivan M. Szeftel
                          21,846 (21)   $ 2,268,489        
                   
(1) Market values of the restricted stock unit awards shown in this table are based on the closing market price of our common stock as of December 30, 2011, the last business day of the year, which was $103.84, and assumes the satisfaction of the applicable vesting conditions.
(2) Stock units subject to time-based restrictions. The restrictions subsequently lapsed on 2,531 units on 2/21/12 and on 3,047 units on 2/22/12; the restrictions are scheduled to lapse on 2,532 units on 2/21/13, on 3,139 units on 2/22/13 and on 2,609 units on 2/21/14.
(3) Stock units subject to performance-based restrictions.  On 2/23/12, based on meeting a core EPS growth hurdle for 2009, the restrictions subsequently lapsed on 17,952 units.
 
 
44

 
 
(4) Stock units subject to performance-based restrictions.  On 2/22/12, based on meeting a core EPS growth hurdle for 2010, the restrictions subsequently lapsed on 13,170 units; the restrictions are scheduled to lapse on 13,171 units on 2/22/13.
(5) Stock units subject to performance-based restrictions.  On 2/21/12, 150% of the original award of 30,689 performance-based restricted stock units granted on 3/21/11, or 46,035 units, were earned and the restrictions on 15,191 units lapsed.  The restrictions will lapse on 15,191 units on 2/21/13 and on 15,653 units on 2/21/14.
(6) Stock units subject to time-based restrictions. The restrictions subsequently lapsed on 858 units on 2/21/12 and on 1,097 units on 2/22/12; the restrictions are scheduled to lapse on 1,665 units on 12/21/12, on 858 units on 2/21/13, on 1,131 units on 2/22/13 and on 884 units on 2/21/14.
(7) Stock units subject to performance-based restrictions.  On 2/22/12, based on meeting a core EPS growth hurdle for 2010, the restrictions subsequently lapsed on 4,742 units; the restrictions are scheduled to lapse on 4,742 units on 2/22/13.
(8) Stock units subject to performance-based restrictions.  On 2/21/12, 150% of the original award of 10,403 performance-based restricted stock units granted on 3/21/11, or 15,605 units, were earned and the restrictions on 5,148 units lapsed.  The restrictions will lapse on 5,150 units on 2/21/13 and on 5,307 units on 2/21/14.
(9) Stock units subject to time-based restrictions. The restrictions subsequently lapsed on 1,458 units on 2/21/12 and on 1,767 units on 2/22/12;  the restrictions are scheduled to lapse on 1,459 units on 2/21/13, on 1,821 units on 2/22/13 and on 1,504 units on 2/21/14.
(10) Stock units subject to performance-based restrictions.  On 2/23/12, based on meeting a core EPS growth hurdle for 2009, the restrictions subsequently lapsed on 8,976 units.
(11)   Stock units subject to performance-based restrictions.  On 2/23/12, based on meeting a core EPS growth hurdle for 2009, the restrictions subsequently lapsed on 2,992 units.
(12) Stock units subject to performance-based restrictions.  On 2/22/12, based on meeting a core EPS growth hurdle for 2010, the restrictions subsequently lapsed on 7,638 units; the restrictions are scheduled to lapse on 7,638 units on 2/22/13.
(13) Stock units subject to performance-based restrictions.  On 2/21/12, 150% of the original award of 17,685 performance-based restricted stock units granted on 3/21/11, or 26,528 units, were earned and the restrictions on 8,754 units lapsed.  The restrictions will lapse on 8,754 units on 2/21/13 and on 9,020 units on 2/21/14.
(14) Stock units subject to time-based restrictions. The restrictions subsequently lapsed on 1,416 units on 2/21/12 and on 1,950 units on 2/22/12; the restrictions are scheduled to lapse on 1,416 units on 2/21/13, on 2,009 units on 2/22/13 and on 1,459 units on 2/21/14. 
(15) Stock units subject to performance-based restrictions.  On 2/23/12, based on meeting a core EPS growth hurdle for 2009, the restrictions subsequently lapsed on 11,968 units. 
(16) Stock units subject to performance-based restrictions.  On 2/22/12, based on meeting a core EPS growth hurdle for 2010, the restrictions subsequently lapsed on 8,428 units; the restrictions are scheduled to lapse on 8,429 units on 2/22/13. 
(17) Stock units subject to performance-based restrictions.  On 2/21/12, 150% of the original award of 17,165 performance-based restricted stock units granted on 3/21/11, or 25,748 units, were earned and the restrictions on 8,496 units lapsed.  The restrictions will lapse on 8,496 units on 2/21/13 and on 8,756 units on 2/21/14. 
(18) Stock units subject to time-based restrictions. The restrictions subsequently lapsed on 1,802 units on 2/21/12 and on 2,465 units on 2/22/12; the restrictions are scheduled to lapse on 1,802 units on 2/21/13, on 2,540 units on 2/22/13 and on 1,857 units on 2/21/14. 
(19) Stock units subject to performance-based restrictions.  On 2/23/12, based on meeting a core EPS growth hurdle for 2009, the restrictions subsequently lapsed on 13,464 units. 
(20) Stock units subject to performance-based restrictions.  On 2/22/12, based on meeting a core EPS growth hurdle for 2010, the restrictions subsequently lapsed on 10,657 units; the restrictions are scheduled to lapse on 10,657 units on 2/22/13. 
(21) Stock units subject to performance-based restrictions.  On 2/21/12, 150% of the original award of 21,846 performance-based restricted stock units granted on 3/21/11, or 32,770 units, were earned and the restrictions on 10,814 units lapsed.  The restrictions will lapse on 10,814 units on 2/21/13 and on 11,142 units on 2/21/14.
 
45

 
 
Fiscal Year 2011
Option Exercises and Stock Vested

The following table provides information on stock option exercises and restricted stock units vested during 2011.

   
Option Awards
   
Stock Awards
 
Name
 
Number of
Shares Acquired
on Exercise
(#)
   
Value Realized
on Exercise
($)
   
Number of Shares
Acquired on Vesting
(#)
   
Value Realized
on Vesting
($)
 
Edward J. Heffernan
    -       -       62,224 (1)   $ 4,783,655  
Charles L. Horn
    -       -       7,454 (2)   $ 620,099  
Bryan J. Kennedy
    -       -       42,291 (3)   $ 3,238,657  
Bryan A. Pearson
    -       -       43,432 (4)   $ 3,339,592  
Ivan M. Szeftel
    84,631     $ 5,294,622       54,774 (5)   $ 4,213,525  
                   
(1) Of the 62,224 shares acquired by Mr. Heffernan on vesting, 21,390 shares were withheld to pay withholding taxes.
(2) Of the 7,454 shares acquired by Mr. Horn on vesting, 2,001 shares were withheld to pay withholding taxes.
(3) Of the 42,291 shares acquired by Mr. Kennedy on vesting, 14,153 shares were withheld to pay withholding taxes.
(4) Of the 43,432 shares acquired by Mr. Pearson on vesting, 20,158 shares were withheld to pay withholding taxes.
(5) Of the 54,774 shares acquired by Mr. Szeftel on vesting, 20,353 shares were withheld to pay withholding taxes.
All values in this table reflect gross amounts before payment of any applicable withholding tax and broker commissions.  For Stock Awards, the value realized on vesting is calculated by multiplying the number of shares vested by the average of the high and low prices of our common stock on the New York Stock Exchange during the trading hours on the date of vesting.

 
Nonqualified Deferred Compensation

The table below provides information on the nonqualified deferred compensation of the NEOs in 2011, including contributions by each NEO and by the company and earnings on contributions credited during 2011.

Name
 
Executive
Contributions in
Last Fiscal Year
($)(1)
   
Registrant
Contributions in
Last Fiscal Year
($)(2)
   
Aggregate Earnings
in Last Fiscal Year
($)(3)
   
Aggregate
Withdrawals/
Distributions
($)
   
Aggregate Balance
at Last
Fiscal Year End
($)
 
Edward J. Heffernan
  $ 540,255     $ 40,000     $ 166,970     $ 0     $ 2,369,049  
Charles L. Horn
  $ 23,625     $ 7,369     $ 2,928     $ 0     $ 55,368  
Bryan J. Kennedy
  $ 0     $ 0     $ 4,488     $ 0     $ 58,556  
Bryan A. Pearson(4)
  $ 0     $ 46,747     $ 29,015     $ 0     $ 156,380  
Ivan M. Szeftel
  $ 136,427     $ 22,470     $ 121,814     $ (64,589 )(5))   $ 1,635,437  
                   
(1) In 2011, the following amounts were deferred from salary:  $194,700 by Mr. Heffernan; $23,625 by Mr. Horn and $42,000 by Mr. Szeftel.  In 2011, the following amounts were deferred from non-equity incentive compensation earned in 2010: $345,555 by Mr. Heffernan and $94,427 by Mr. Szeftel.
(2) All amounts in this column were included in the All Other Compensation column of the Summary Compensation Table above.
(3) The amounts in this column include all interest accrued on contributions under the Executive Deferred Compensation Plan for U.S. executives.  The above-market portion of such earnings, as defined by the SEC, is included in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column of the Summary Compensation Table above.  For Mr. Pearson, the amount in this column reflects the deemed investment earnings (losses) credited pursuant to the terms of the LoyaltyOne SERP.
(4) Mr. Pearson is a Canadian executive.  As a result, he is not eligible for Alliance Data’s EDCP which is offered to U.S. executives.  LoyaltyOne SERP amounts included for Mr. Pearson are shown in U.S. Dollars but were paid to Mr. Pearson in Canadian Dollars.  We used an exchange rate of .98072868 U.S. Dollars per Canadian Dollar, which was the prevailing exchange rate as of December 30, 2011, the last business day of the year, to convert the amounts paid to U.S. Dollars.
(5) On January 28, 2011, Mr. Szeftel received an in-service EDCP distribution.  Mr. Szeftel elected in December of 2006 to have his 2007 EDCP contributions paid out in 2011.
 
46

 
 
  Potential Payments upon Termination or Change in Control

The following tables show estimated payouts to our NEOs in the event of a termination of employment under the circumstances described under the caption “Termination Following a Change in Control,” and assuming such event occurred as of December 31, 2011.  In accordance with rules prescribed by the SEC, the amounts included with respect to equity awards have been calculated using the closing price of our common stock on December 30, 2011, the last business day of the year, which was $103.84.  A change in control, however, did not occur on December 31, 2011 and the employment of our NEOs was not terminated on that date.

We believe that executive performance generally may be hampered by distraction, uncertainty and other activities in the event of an actual or threatened change in control event. In September 2003, in order to reduce such adverse effects, we entered into change in control agreements with the then current executive officers, which included Mr. Heffernan.  The actual amounts that will be paid or provided to Mr. Heffernan upon an event described in the table below (if such an event were to occur) may differ from the amounts shown.

Messrs. Horn, Kennedy and Pearson do not have any contractual payments due upon any termination or change in control as of December 31, 2011 and are therefore not included in the information shown below.  Pursuant to our long-term equity grant agreements, in the event of a change in control, if the compensation committee fails to exercise its discretion to accelerate the award or fails to provide for the award’s assumption, substitution or other continuation, such awards would automatically vest prior to such change in control, resulting in a payout of $3,279,475, $6,415,339 and $6,523,540, respectively, to each of Messrs. Horn, Kennedy and Pearson assuming such change in control occurred on December 31, 2011.

On September 2, 2011, we entered into a Retirement Agreement with Mr. Szeftel, pursuant to which Mr. Szeftel agreed to continue to both serve in an advisory role and as chief executive officer of WFNB and as Chairman of the WFNB board of directors through March 1, 2012.  All amounts payable to him based on this actual termination of employment are described in detail under the captions “Plans or Agreements Governing Certain Elements of Executive Compensation” and “Retirement Agreement” above.  In addition, Mr. Szeftel’s Retirement Agreement provides for payments linked to his performance under certain restrictive covenants through February 28, 2014 or such later date that is two years after Mr. Szeftel ceases to be a director of WFNB. The Retirement Agreement provides that its terms will be binding on the company and its successors and assigns but does not specifically address treatment of Mr. Szeftel’s unvested equity in the event of a change in control as of December 31, 2011. Therefore, pursuant to our long-term equity grant agreements, in the event of a change in control, if the compensation committee fails to exercise its discretion to accelerate the award or fails to provide for the award’s assumption, substitution or other continuation, such awards would automatically vest prior to such change in control, resulting in a payout of $8,100,974, assuming such change in control occurred on December 31, 2011 and notwithstanding that the Retirement Agreement does not provide for the vesting of all such awards.  Upon his retirement effective March 1, 2012, Mr. Szeftel, assuming his continued compliance with the restrictive covenants contained in the Retirement Agreement, is expected to receive an amount equal to approximately $1,796,196 in thirty-nine equal bi-weekly installments, which amount represents one and one-half times Mr. Szeftel’s base salary, target bonus and health and welfare benefits for the most recently completed fiscal year.
 
 
47

 

Edward J. Heffernan

Payments and Benefits Upon Separation
 
Change in Control: Termination
Without Cause or Termination
by Executive Officer for Good
Reason
   
Termination for Any Reason
Other than in Connection
with a Change in Control
 
Severance Amount
  $ 4,159,500 (1)     -  
Pro Rata Target Non-Equity Incentive Compensation for 2011
  $ 1,194,750 (2)     -  
Benefits
  $ 21,928 (3)     -  
Value of Accelerated Equity
  $ 10,818,674 (4)     -  
Excise Tax and Gross-Up(5)
    -       -  
                   
(1) Represents the severance amount pursuant to the change in control agreement described above, and is equal to two times the sum of Mr. Heffernan’s current base salary and target non-equity incentive compensation.
(2) Represents Mr. Heffernan’s target annual cash bonus prorated for the portion of the year worked, which in this case is the full year, pursuant to the change in control agreement.
(3) Represents equivalent medical, dental and hospitalization coverage and benefits pursuant to the change in control agreement described above, and is estimated at two times the sum of the cost of Mr. Heffernan’s current equivalent benefits.
(4) Represents the intrinsic value of Mr. Heffernan’s accelerated stock options and the value of Mr. Heffernan’s accelerated restricted stock and restricted stock units as if exercised or sold on December 30, 2011, the last business day of the year, calculated in each case using the closing price of our common stock on December 30, 2011 ($103.84).
(5) The company annually assesses whether it would have incurred a tax gross-up obligation under Mr. Heffernan’s change in control agreement had a change in control occurred on the last day of the applicable fiscal year.  The company estimates that no tax gross-up obligation would have been incurred under this agreement if there had been a qualifying termination of Mr. Heffernan's employment immediately following a change in control event on December 31, 2011.
 
48

 

Director Compensation

Members of our board of directors who are also officers or employees of our company do not receive compensation for their services as directors. All directors are reimbursed for reasonable out-of-pocket expenses incurred while serving on the board of directors and any committee of the board of directors. Non-employee director compensation typically includes an annual cash retainer, cash meeting fees and annual equity awards consisting of restricted stock units.  Like our executive officers, we review the non-employee director total compensation annually. For 2011, Meridian Compensation Partners, LLC collected and analyzed comprehensive market data that we used as a benchmark for what we would expect to pay to remain competitive. However, market data is only one of the factors that we consider when assessing the reasonableness of non-employee director compensation. We feel this approach to non-employee director compensation is appropriate because: (1) we are a public company; (2) there continues to be an increased focus on corporate governance, which has been a corresponding drain on the available talent pool for directors; and (3) we want to align our non-employee director compensation plan with our executive compensation plans.

For the 2011-2012 service term of the board of directors, which began in June 2011 and ends in June 2012, the non-employee directors had the opportunity to receive some or all of the annual cash retainer, committee retainers and meeting fees in the form of equity in lieu of cash.  The chairman of the board has the opportunity to receive the additional $100,000 annual retainer in the form of equity in lieu of cash.  Non-employee director compensation for the 2011-2012 service term of the board of directors included:
 
·  
an annual cash retainer of $65,000;
·  
chairman of the board retainer of $100,000;
·  
audit committee chair retainer of $25,000;
·  
audit committee member retainer of $5,000;
·  
compensation committee chair retainer of $20,000;
·  
nominating/corporate governance committee chair retainer of $15,000;
·  
a cash fee per board of directors meeting of $1,500;
·  
a cash fee per committee meeting for committee members (other than committee chairs) of $1,000;
·  
a cash fee per committee meeting for committee chairs of $1,500; and
·  
an annual equity award valued at $110,000.
 
The following table provides information concerning the compensation of our non-employee directors for the fiscal year ended December 31, 2011.

Name(1)
 
Fees Earned or
Paid in Cash(2)
($)
 
 
 
 
 
 
Stock Awards
($)
 
Option Awards
($)
 
Non-Equity
Incentive Plan Compensation
($)
 
Change in
Pension Value and Nonqualified
Deferred
Compensation
Earnings
($)
 
All Other
Compensation
($)
 
Total
($)
 
Bruce K. Anderson
  $ 16,250   $ 179,391     -     -     -     -   $ 195,641  
Roger H. Ballou
  $ 36,500   $ 180,144     -     -   $ 2,867     -   $ 219,511  
Lawrence M. Benveniste, Ph.D.
$ 81,250   $ 125,583     -     -   $ 3,068     -   $ 209,901  
D. Keith Cobb
  $ 124,000   $ 113,919     -     -     -     -   $ 237,919  
E. Linn Draper, Jr., Ph.D.
    -   $ 226,709     -     -   $ 1,667     -   $ 228,376  
Kenneth R. Jensen
  $ 94,000   $ 113,919     -     -     -     -   $ 207,919  
Robert A. Minicucci
    -   $ 305,351     -     -     -     -   $ 305,351  
                   
(1) Edward J. Heffernan is not included in this table because he was an executive officer of the company during 2011 and thus received no compensation for his service as a director.  The compensation received by Mr. Heffernan as an executive officer of the company is shown in the Summary Compensation Table above.
(2) This column includes $70,000 deferred by Dr. Benveniste pursuant to the Non-Employee Director Deferred Compensation Plan.  Messrs. Anderson, Draper and Minicucci each elected to receive 100%, and Dr. Benveniste 50%, of their meeting fees in the form of equity in lieu of cash for the 2010-2011 service term.  Messrs. Draper and Minicucci each elected to receive 100%, Mr. Ballou 80%, and Mr. Anderson 75% of their annual cash retainer and committee retainer in the form of equity in lieu of cash for the 2011-2012 service term.
 
49

 
 
The annual cash amounts, other than the board of directors and committee meeting fees, and equity awards, if any, are paid at the beginning of the director’s service year, and prior year board of directors and committee meeting fees are paid at the end of the service year.  Time-based restrictions on the restricted stock units granted to non-employee directors in 2011 will lapse on the earlier of (1) June 29, 2021 or (2) termination of the director’s service on our board of directors.  The exercise price for stock options granted in prior years is the fair market value of our common stock on the date of the grant, which, according to the terms of each of our equity plans, is equal to the average of the high and low prices on the New York Stock Exchange during the trading hours on the date of grant.  Stock options expire ten years after the date of grant, if unexercised.  In addition to our stock ownership guidelines for our directors and executive officers, we have also built stock ownership restrictions into the grants of equity made to the non-employee directors since 2008, with each grant of restricted stock units containing restrictions which lapse on the earlier of 10 years from the date of grant or termination of the director’s service on our board of directors.

We offer our non-employee directors the option to defer up to 50% of their cash compensation under our Non-Employee Director Deferred Compensation Plan.  Any non-employee director is eligible to participate in the Non-Employee Director Deferred Compensation Plan. To be eligible to make contributions, a director must complete and file an enrollment form prior to the beginning of the calendar year in which the director performs the services for which the election is to be effective.  The only non-employee director who elected to make such a deferral in 2011 was Dr. Benveniste.  Participants in the Non-Employee Director Deferred Compensation Plan are always 100% vested in their contributions and related earnings.  The amounts reported in the Change in Pension Value and Nonqualified Deferred Compensation Earnings column are comprised entirely of above-market earnings on compensation deferred pursuant to the Non-Employee Director Deferred Compensation Plan, as described below.  Above-market earnings represent the difference between market interest rates determined pursuant to SEC rules and the 8.0% annual interest rate credited by the company on contributions during 2011.  This interest rate may be adjusted periodically by the committee of management that administers the Non-Employee Director Deferred Compensation Plan, which committee also administers the Executive Deferred Compensation Plan.

The amounts reported in the Stock Awards and Option Awards columns reflect the dollar amount, without any reduction for risk of forfeiture, of the estimate of the aggregate compensation cost to be recognized over the service period as of the grant date under FASB ASC 718, which represents the closing market price of our common stock of $94.07 per share on the grant date of June 30, 2011. Awards granted in 2011 and included in the Stock Awards column were granted pursuant to the 2010 Omnibus Incentive Plan, discussed in further detail above under the caption “Equity Incentive Compensation.”

We have also entered into an indemnification agreement with each of our directors.  These indemnification agreements contain substantially the same terms as described above with respect to our executive officers.
 
 
50

 

Director Aggregate Outstanding Equity Awards at Fiscal Year-End
 
Name
 
 
Stock Awards
(#)
   
 
Option Awards
Exercisable
(#)
 
Option Awards
Unexercisable
(#)
 
Bruce K. Anderson      8,803 (1)      5,459      -  
Roger H. Ballou       7,303 (2)      15,991      -  
Lawrence M. Benveniste, Ph.D.
    9,080 (3)     9,783     -  
D. Keith Cobb
    5,616 (4)     9,783     -  
E. Linn Draper, Jr., Ph.D.