Schedule 14A

(Rule 14A-101)

Information Required In Proxy Statement

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934
(AMENDMENT NO. )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

Sonoco Products Company

(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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET

HARTSVILLE, SOUTH CAROLINA 29550 USA

 

March 15, 2007          

 

To Our Shareholders:

 

You are cordially invited to attend our Annual Shareholders’ Meeting to be held at the Center Theater, 212 North Fifth Street, Hartsville, South Carolina, on Wednesday, April 18, 2007, at 11:00 a.m. (Eastern time).

 

We have enclosed a Notice of 2007 Annual Meeting of Shareholders and Proxy Statement that cover the details of matters to be presented at the meeting.

 

In addition to acting on the matters listed in the Notice of Annual Meeting of Shareholders, we will discuss the Company’s progress, and you will be given an opportunity to ask questions of general interest to all shareholders.

 

We have also enclosed a copy of our 2006 Annual Report, which reviews the Company’s past year’s events and discusses strategy and the outlook for the future (or we delivered one copy of the Annual Report for all shareholders at your address).

 

We hope that you will come to the 2007 Annual Meeting of Shareholders in person; however, even if you plan to attend, we strongly encourage you to complete the enclosed proxy card and return it to us in the enclosed business reply envelope. Or, you can vote by telephone (if you live in the United States or Canada) or via the Internet. Instructions are shown on your proxy card. If you are a shareholder of record and later find you can be present or if for any reason you desire to revoke your proxy, you can do so at any time before the voting. Your vote is important and will be greatly appreciated.

 

 

Harris E. DeLoach, Jr.
Chairman, President &
Chief Executive Officer

 

TABLE OF CONTENTS

 

 

SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET

HARTSVILLE, SOUTH CAROLINA 29550 USA

 

 

 

By order of the Board of Directors,

 

Charles J. Hupfer
Secretary

March 15, 2007

 

SONOCO PRODUCTS COMPANY

 

1 NORTH SECOND STREET

HARTSVILLE, SOUTH CAROLINA 29550 USA

 

 

 

We are sending you these proxy materials in connection with the solicitation by the Board of Directors of Sonoco Products Company of proxies to be used at the Annual Meeting of Shareholders (“Annual Meeting”) to be held on Wednesday, April 18, 2007, at 11:00 a.m. (Eastern time) at The Center Theater, 212 North Fifth Street, Hartsville, S.C., and at any adjournment or postponement of the meeting. The terms “we,” “our,” “us,” “Sonoco” and “the Company” all refer to Sonoco Products Company. The proxy materials are first being mailed on or about March 15, 2007.

 

Who May Vote

 

You will only be entitled to vote at the Annual Meeting if our records show that you were a record shareholder on February 23, 2007. At the close of business on February 23, 2007, a total of 99,539,900 shares of our common stock were outstanding and entitled to vote. Each share of common stock has one vote.

 

Voting by Proxy

 

If your shares are held in street name by a broker, bank or other nominee, it will send you instructions that you must follow to have your shares voted at the Annual Meeting. If you hold your shares in your own name as a record shareholder, you may instruct the proxy agents how to vote your shares by completing, signing, dating and mailing the proxy card in the enclosed postage-paid envelope; by dialing the toll-free telephone number shown on your proxy card (if you live in the United States or Canada); or by accessing the Web site shown on your proxy card. Of course, if you are a record shareholder, you can always attend the meeting and vote your shares in person.

 

The proxy agents will vote your shares as you instruct. If you sign and return your proxy card without giving instructions, the proxy agents will vote your shares FOR each person named in this Proxy Statement as a nominee for election to the Board of Directors and FOR ratification of the selection of PricewaterhouseCoopers LLP (“PWC”) as our independent registered public accounting firm for the fiscal year ending December 31, 2007. The proxy agents will vote according to their best judgment on any other matter that properly comes before the Annual Meeting. At present, the Board of Directors does not know of any other such matters.

 

How to Revoke Your Proxy

 

You may revoke your proxy at any time before it is voted. If you hold your shares in your own name as a record shareholder, you may revoke your proxy in any of the following ways:

 

 

Subsequent voting by telephone or via the Internet cancels your previous vote. If you are a shareholder of record, you may also attend the meeting and vote in person, in which case your proxy vote will not be used.

 

If your shares are held in street name by a broker, bank or other nominee, you may revoke your voting instructions by submitting new voting instructions to the broker or other nominee who holds your shares.

 

How Votes Will Be Counted

 

The Annual Meeting will be held if a majority of the outstanding shares of common stock entitled to vote (a “quorum”) is represented at the meeting. If you have submitted valid proxy instructions or are a record shareholder and attend the meeting in person, your shares will be counted for the purpose of determining whether there is a quorum, even if you wish to abstain from voting on some or all matters introduced. “Broker non-votes” also count in determining whether a quorum is present. A “broker non-vote” occurs when a broker, bank or nominee who holds shares for a beneficial owner attends the meeting in person or by proxy but does not vote on a particular proposal because the broker, bank or nominee does not have discretionary voting power for that proposal and has not received voting instructions from the beneficial owner.

 

If a quorum is present at the Annual Meeting, directors will be elected by a plurality of the votes cast by shares present and entitled to vote at the Annual Meeting. “Plurality” means that, if there were more nominees than positions to be filled, the persons who received the largest number of votes would be elected. Because there are the same number of nominees as positions to be filled, we expect all nominees to be elected. Votes that are withheld or that are not voted in the election of directors will have no effect on the outcome of the election. Cumulative voting is not permitted.

 

Any other matter, including ratification of the selection of PWC as our independent registered public accounting firm, that may be brought before the meeting will be approved if the votes cast in favor of the matter exceed the votes cast against the matter. Votes that are withheld or shares that are not voted will have no effect on the outcome of such matters.

 

Cost of this Proxy Solicitation

 

We will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, we expect that some of our officers and regular employees will solicit proxies by telephone, fax, email or personal contact. None of these officers or employees will receive any additional or special compensation for doing this.

 

The Board of Directors has fixed the number of directors of the Company at 12. At our Annual Meeting, four directors will be elected. Messrs. F.L.H. Coker, C.C. Fort, J.H. Mullin, III, and T.E. Whiddon have been nominated to hold office for the next three years, their terms expiring at the Annual Shareholders’ Meeting in 2010, or when their successors are duly elected and qualify to serve. The proxy agents intend to vote FOR the election of the four persons named above unless you withhold authority to vote for all or any of the nominees. The Board of Directors recommends that you vote FOR each nominee.

 

Although Mr. Coker has been nominated for election to a three-year term, he will reach mandatory retirement age in October, 2007, and is only eligible to serve on the Board until that time.

 

 

 

* F.L.H. Coker is a first cousin of J.L. Coker.

 

Members of the Board of Directors whose terms of office will continue until our Annual Shareholders’ Meeting in 2008 are:

 

 

 

* F.L.H. Coker is a first cousin of J.L. Coker.

 

Members of the Board of Directors whose terms of office will continue until our Annual Shareholders’ meeting in 2009 are:

 

Mr. B.L.M. Kasriel, whose term is expiring at this Annual Meeting, has decided not to be a candidate for re-election to the Board. Mr. Kasriel’s service on various Board committees (as indicated on the following pages) will continue until the Annual Meeting. Information about Mr. Kasriel follows:

 

 

Our listing agreement with the New York Stock Exchange requires that at least a majority of the members of our Board of Directors be independent. Under the Exchange’s standards, “independent” means that a director has been determined by the Board to have no material relationship with us (either directly, or indirectly through an immediate family member or as a partner, shareholder or officer of an organization that has a relationship with us). To assist us in making these determinations we have adopted the following guidelines, which are also the guidelines set forth in the New York Stock Exchange Listing Standards.

 

A director will not be considered independent if:

 

 

The following relationships will not be considered to be material relationships that would impair a director’s independence:

 

 

Based on these criteria, our Board of Directors has determined that the following directors, who constitute a majority of the Board, are independent:

 

C.J. Bradshaw, J.L. Coker, P.L. Davies, C.C. Fort, B.L.M. Kasriel, E.H. Lawton, III, J.E. Linville, J.M. Micali, J.H. Mullin, III, M.D. Oken and T.E. Whiddon. The Board of Directors had also previously determined that R.J. Brown and Paul Fulton, both of whom served on the Board during 2006 but have previously retired as a result of reaching the mandatory retirement age, were independent under these criteria.

 

Our non-management directors meet at regularly scheduled executive sessions without management present. The presiding director for each meeting is elected by those directors in attendance at that meeting. Shareholders and other interested parties may communicate with the non-management directors by writing to Non-Management Directors, c/o Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA.

 

We have adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics for our directors, officers and employees. Copies of these governance guidelines and the Code of Business Conduct are available through our Web site at www.sonoco.com. Printed versions are available to our shareholders on request to the Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA.

 

Our Corporate Governance and Nominating Committee recommends to our Board of Directors nominees to fill vacancies on the Board of Directors as they occur, and recommends candidates for election as directors at Annual Meetings of Shareholders. Such candidates are routinely identified through personal and business relationships and contacts of the directors and executive officers.

 

In recommending candidates, the Corporate Governance and Nominating Committee evaluates such factors as it deems appropriate based on our current needs. These factors may include diversity, age, skills such as understanding of appropriate technologies and general finance, decision-making ability, interpersonal skills, experience with businesses and other organizations of comparable size, and the inter-relationship between the candidate’s experience and business background and other Board members’ experience and business background. Additionally, candidates for director should possess the highest personal and professional ethics, and they should be committed to the long-term interests of the shareholders.

 

The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders, if the shareholders comply with the following requirements. If you wish to recommend a director candidate to the Corporate Governance and Nominating Committee for consideration as a Board of

Directors’ nominee, you must submit in writing to the Corporate Governance and Nominating Committee your recommended candidate’s name, a brief resume setting forth the recommended candidate’s business and educational background and qualifications for service, and a notarized consent signed by the recommended candidate stating the recommended candidate’s willingness to be nominated and to serve. This information must be delivered to the Chair of the Corporate Governance and Nominating Committee at the Company’s address and must be received no later than January 5 in any year to be considered by the Committee as a potential Board of Directors’ nominee. The Corporate Governance and Nominating Committee may request further information if it determines a potential candidate may be an appropriate nominee. Director candidates recommended by shareholders that comply with these requirements will receive the same consideration that the Committee’s other candidates receive.

 

Director candidates recommended by shareholders will not be considered by the Corporate Governance and Nominating Committee for election at an annual meeting unless the shareholder recommendations are received no later than January 5 of the year of the meeting. In addition to making such recommendations, shareholders have the right to nominate candidates for election as directors at an annual meeting if they make a written nomination at least 60 days prior to the meeting. Any such nomination should be submitted to our Corporate Secretary at 1 North Second Street, Hartsville, SC 29550 USA. No such nominations have been made for this Annual Meeting.

 

Any shareholder or other interested person who wishes to send communications to any member of the Board of Directors should mail such communications addressed to the intended recipient by name or position in care of: Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA. Upon receipt of any such communications, the Corporate Secretary will determine the identity of the intended recipient and whether the communication is an appropriate shareholder communication. The Corporate Secretary will send all appropriate shareholder communications to the intended recipient. An “appropriate shareholder communication” is a communication from a person claiming to be a shareholder in the communication the subject of which relates solely to the sender’s interest as a shareholder and not to any other personal or business interest.

 

In the case of communications addressed to the Board of Directors, the Corporate Secretary will send appropriate shareholder communications to the Chair of the Corporate Governance and Nominating Committee. In the case of communications addressed to the independent or non-management directors, the Corporate Secretary will send appropriate shareholder communications to the Chair of the Corporate Governance and Nominating Committee. In the case of communications addressed to committees of the Board, the Corporate Secretary will send appropriate shareholder communications to the Chair of such committee.

 

The Corporate Secretary is required to maintain a record of all communications received that were addressed to one or more directors, including those determined not to be appropriate shareholder communications. Such record will include the name of the addressee, the disposition by the Corporate Secretary and, in the case of communications determined not to be appropriate, a brief description of the nature of the communication. The Corporate Secretary is required to provide a copy of any additions to the record to the Chair of the Corporate Governance and Nominating Committee quarterly.

 

During 2006, our Board of Directors held four regularly scheduled meetings and three special meetings to review significant developments affecting us and to act on matters requiring the Board of Directors’ approval. During 2006, all directors attended 75% or more of the aggregate number of meetings of the Board of Directors and committees of which they were members.

 

We encourage, but do not require, our directors to attend the Annual Meeting of Shareholders. In 2006, fourteen of fifteen directors attended the Annual Meeting.

 

To assist it in performing its duties, the Board of Directors has established the six committees discussed below. All committees operate pursuant to written charters. The charters are available to shareholders through the Investor Relations page of our Web site at www.sonoco.com. These charters are also available in print to any shareholder upon request to the Corporate Secretary, Sonoco Products Company, 1 North Second Street, Hartsville, SC 29550 USA. The Board of Directors has determined that each member of the Audit, Corporate Governance and Nominating, and Executive Compensation committees is independent, as defined in the New York Stock Exchange’s listing standards as adopted in November 2004.

 

 

Members of the Executive Compensation Committee during the year ended December 31, 2006 were C.J. Bradshaw, Paul Fulton, B.L.M. Kasriel, J.E. Linville, J.H. Mullin, III, and M.D. Oken.

 

Mr. Oken was Chief Financial Officer of Bank of America until he retired in January 2006. During the second quarter of 2006, a Bank of America subsidiary managed the syndication and participated as agent in the renewal of a five-year committed revolving line of credit for $350,000,000 to support our commercial paper program and for general corporate purposes. Bank of America’s commitment to this facility is $40,500,000. A committed line of credit from Bank of America has been in place since 1987 and has been renewed, amended and increased or decreased according to our needs. Bank of America has extended other lines of credit to us as support for letters of credit, overdrafts and other corporate needs. It also provides treasury management services to us. We pay fees to the bank for these services and for the availability of the lines of credit, as well as interest on any borrowed funds.

 

All transactions were handled on a competitive basis. Management believes that the rates and provisions were as favorable to us as we could have obtained from similar sources.

 

Sonoco sold $334 thousand in products and services to Michelin North America during 2006. Mr. J.M. Micali, the Chairman and President of Michelin North America, is one of Sonoco’s directors. Please also see the disclosures about Mr. M.D. Oken set forth in the section “Compensation Committee Interlocks and Insider Participation”. Our management believes the prices and terms of the transactions reported above were comparable to those we could have obtained from other sources. We anticipate engaging in similar business transactions in 2007. The Board of Directors considered these relationships when making its determinations of independence.

 

George S. Hartley, our Assistant Treasurer, is married to Cynthia A. Hartley who is a Senior Vice President and a Named Executive Officer. Mr. Hartley had 2006 earnings of $159 thousand, and he received the usual employee benefits available to all employees at his level.

 

Related Party Transaction Administration

 

We require that each executive officer, director and director nominee complete an annual questionnaire and report all transactions with us in which such persons (or their immediate family members) had or will have a direct or indirect material interest (except for salaries, directors’ fees and dividends on our stock). Management reviews responses to the questionnaires and, if any such transactions are disclosed, they are reviewed by the Corporate Governance and Nominating Committee as to directors and director nominees or by the Audit Committee as to executive officers. We do not, however, have a formal written policy for approval or ratification of such transactions. Directors’ responses to the questionnaires are also reviewed annually by the Corporate Governance and Nominating Committee for the purpose of assessing independence under our Corporate Governance Guidelines and the New York Stock Exchange Listing Standards.

 

The types of transactions that have been reviewed in the past include the purchase and sale of goods and services from companies for which our directors serve as executive officers or directors, the purchase of financial services and access to lines of credit from banks for which our directors serve as executive officers or directors, and the employment of family members of executive officers or directors.

 

The following table shows information as of February 14, 2007, about persons known to us to be the beneficial owners of more than 5% of our common shares. This information was obtained from Schedule 13G filed with the Securities and Exchange Commission by the entity named below, and we have not independently verified it.

 

 

 

 

The following table shows the number of shares of our common stock beneficially owned as of February 13, 2007, directly or indirectly, by each director and by each executive officer named in the Summary Compensation Table.

 

 

 

 

 

On April 15, 2003, the Board of Directors adopted a resolution establishing stock ownership guidelines for outside directors. The guidelines establish a target level of ownership of our common stock based on years of service as a director from the date the guidelines were established. The guidelines are as follows: 3,000 shares, 5,000 shares and 8,000 shares after two, four and six years of service, respectively. Deferred Compensation Units are included in determining whether these guidelines have been met.

 

Our directors and executive officers are required to file reports with the Securities and Exchange Commission and the New York Stock Exchange showing the number of shares of any class of our equity securities they owned when they became a director or executive officer, and, after that, any changes in their ownership of our securities. These reports are required by Section 16(a) of the Securities Exchange Act of 1934.

 

Based on a review of Section 16(a) reports and any written representations made to us, it appears that all such filings for 2006 were made in a timely manner, except Vice President Kevin P. Mahoney inadvertently filed one Form 4 late due to administrative error. The corrected form was filed as soon as the error was discovered.

 

The first part of this discussion provides an overview of the compensation program for our executive officers, the material principles underlying our compensation policies and decisions and a description of each compensation element, how these elements fit together and how they further our goals.

 

The second part of the discussion describes and explains the specific actions taken with regard to compensation for executive officers in 2006. This discussion and analysis and the tables that follow focus on all aspects of compensation for the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and the three other most highly compensated officers. These five individuals are referred to as the Named Executive Officers (“NEOs”).

 

OVERVIEW, PRINCIPLES AND COMPENSATION ELEMENTS

 

The Role of the Executive Compensation Committee

 

The Executive Compensation Committee oversees administration of our executive officer compensation programs and sets compensation for the CEO, CFO and other executive officers. Information about the purposes of the Committee is outlined on page 18 of this proxy statement. The Executive Compensation Committee does not delegate its decision-making authority relating to executive compensation.

 

Overall Compensation Objectives

 

The primary objectives of our executive compensation program are as follows:

 

 

Each aspect of the overall program is designed to support these objectives to various degrees with the overarching goal of maximizing shareholder value.

 

As discussed below, the executive compensation program has three components:

 

 

Direct Compensation Elements

 

The direct compensation elements of the executive compensation program consist of base salary, annual cash incentive compensation, and long-term incentive compensation comprised of stock-settled stock appreciation rights and performance contingent restricted stock units. With the exception of base salary, all elements of executive compensation are variable and are contingent on achieving performance targets based on one or more of the following key company performance indicators: growth in base earnings per share, growth in revenue, improvement in return on net assets employed, or reduction in working capital.

 

In constructing the direct compensation package for the NEOs and the other executive officers, the Committee adheres to the following principles:

 

 

The charts below show the use of these principles in the weightings the Committee has assigned to the 2006 direct compensation components at target. For annual cash incentives, “target” is equal to budget performance. For long-term incentives, “target” is equal to the grant date value of the shares calculated pursuant to Financial Accounting Standard 123R (FAS123R). Stock-settled stock appreciation rights vest in one year. Performance contingent restricted stock units will vest in three years assuming performance results are achieved as explained in more detail on page 31.

 

Determining Competitive Benchmarks — Total Direct Compensation

 

In order to determine competitive compensation levels, we annually participate in three national surveys conducted by the independent consulting firms of the Hay Group, Hewitt Associates and Towers Perrin. Collectively these surveys have over 1,000 participating companies, although some companies like us participate in more than one survey. These surveys cover a large number of similar positions across United States industry. In most cases, we match our corporate officer positions to survey data from companies with sales in the $1 billion to $5 billion range. Likewise, division officer positions are matched to a comparable division revenue range. From these surveys, we develop executive compensation levels for base salaries, total cash compensation (base salary plus annual target incentive compensation), and total direct compensation (total cash compensation plus long-term incentives). In addition to these broad surveys, each year the Committee’s consultant prepares customized compensation studies of fourteen peer packaging companies which have median sales, assets and market capitalization similar to that of Sonoco.

 

For 2006, these peer packaging companies were:

 

Aptar Group Incorporated
Avery Dennison Corporation
Ball Corporation
Bemis Company Incorporated
Caraustar Industries
Chesapeake Corporation
Crown Holdings Incorporated
Owens-Illinois Incorporated
Pactiv Corporation
Rock-Tenn Company
Sealed Air Corporation
Silgan Holdings
Smurfit-Stone Container
Temple-Inland Incorporated

 

The Committee uses the broader industry data to set specific compensation levels, but annually cross checks these levels against the more specific peer company data. In most cases the data from both sources are very comparable.

 

Our salary ranges and market prices for all salaried positions, including the CEO, CFO and other executive officers, are based on the combination of (1) a structured job evaluation system to provide for internal pay equity, and (2) a market pricing system that matches individual jobs to independent salary surveys to provide for external competitiveness as previously described.

 

The Committee uses the compensation survey data to establish competitive benchmarks for the three components of executive direct compensation: base salary, annual cash incentives, and long-term equity incentives, which are comprised of stock appreciation rights and performance contingent restricted stock units.

 

For each position, the competitive benchmark (midpoint) for base salary is set to be at the median (50th percentile) of the surveyed market. This means that one-half of the surveyed companies are likely to pay a higher base salary than we pay for a similar executive position and one-half will pay less.

For annual cash incentives and total direct compensation, the competitive benchmarks are set between the median and the 75th percentile of the survey data. For both the annual cash incentive and the performance contingent restricted stock unit portions of the long-term equity incentives, the Committee establishes goals for threshold, target, and maximum levels of performance with target approximating the competitive benchmark. If actual performance is less than threshold, no incentive compensation is earned at the end of the performance period. If actual performance is between the threshold and target goals, incentive compensation will be earned but it will be less than the competitive benchmark for that component of pay. If actual performance is above the target goal, incentive compensation will exceed the competitive benchmark for that component of pay. Likewise, stock-settled stock appreciation rights, the other form of equity compensation, will vary in value depending on the increase or decrease in the price of Sonoco stock. If the stock price does not increase above the grant price, the executive receives no value from the award.

 

The Committee believes that placing the majority of each executive’s total compensation at risk, with variable levels of payout possible, provides a strong incentive to achieve both short-term and long-term financial goals.

 

For annual cash incentive plans, we have established maximum incentive compensation levels as a percent of base salary for each executive officer position. Normally these plans are designed to pay 50% of this maximum incentive compensation (which approximates the competitive benchmark described above) at budget, although this can be adjusted on a case by case basis depending on the expected degree of difficulty in achieving budget.

 

Our long-term incentive program provides for awards of stock-settled stock appreciation rights (SSARs) and performance contingent restricted stock units (PCSUs). To determine the number of award shares in either case for each officer, the Committee uses the total direct compensation competitive benchmark for each officer position. The base salary midpoint and the competitive benchmark for annual incentive compensation are subtracted from the total direct compensation competitive benchmark to arrive at the competitive benchmark dollars available for the long-term component of the compensation plan. These dollars are then converted to SSARs and PCSUs and each officer receives a mix of 75% PCSUs and 25% SSARs.

 

Providing this mix of 75% PCSUs and 25% SSARs is in line with the Committee’s philosophy to strongly encourage long-term stock ownership among the officer group, while still providing some opportunity for the greater leverage inherent in stock-settled stock appreciation rights which operate very similarly to stock options.

 

Each year the Committee establishes the three-year performance targets for each element in the PCSU portion of the long-term incentive plan. These are based on an analysis of our prior performance, the economic environment and business outlook, and our forecasted growth potential. Incentive scales for vesting PCSUs are established for meeting threshold, target, and maximum goals, which in the judgment of the Committee represent achievement of acceptable, superior, and outstanding performance levels, respectively. If we do not achieve at least the “acceptable” performance level, no award is earned at the end of the performance period. We do not pay any current dividends or credit any dividend equivalents on unvested PCSUs in our long-term incentive plans. For any PCSUs that may vest but are deferred until after separation from service by an

individual executive officer, dividend equivalents are accumulated from the time of vesting until the issuance of actual shares.

 

Executive Benefit Elements

 

We have two benefit programs that apply only to executive officers: an Executive Life Insurance Program and a Supplemental Executive Retirement Plan (“SERP”), which is a part of the Omnibus Benefit Restoration Plan of Sonoco Products Company.

 

As stated earlier, the Committee has designed the overall compensation program to balance the attraction/retention objective against the performance oriented objectives. The annual incentive and long-term incentive programs are weighted more toward performance objectives, while the Executive Life Insurance Plan and the SERP are weighted more toward the attraction/retention objective.

 

Executive Life Insurance

 

Prior to 2005, the Executive Life Insurance Program consisted primarily of split-dollar life insurance. Under tax regulations in effect at the time, the cost to us was modest, consisting primarily of the time value of the money we used to pay the premiums. These life insurance programs were designed to allow companies to provide a significant benefit that served to enhance the retention of executives until normal retirement age. However, regulatory changes have made this form of executive life insurance no longer viable or cost effective since 2004.

 

In 2004, we took actions to convert certain split-dollar agreements entered into after 1995 for persons who were executive officers at that time into permanent life insurance policies in order to meet our prior commitments to the executive officers under the old contracts. The amounts of those new replacement life insurance policies (“Replacement Executive Life”) are fixed. Additional amounts of insurance are provided in the form of term life insurance (“Executive Term Life”). At the same time, the life insurance benefit for future executive officers was reduced and currently consists of term life insurance based on each executive officer’s base salary. For executive officers elected for the first time after April 20, 2004, this amount is equal to three times base salary.

 

The current limit on life insurance for most other active employees is $100,000. The new Executive Term Life insurance program allows us to provide new executive officers with a benefit in line with the industry median.

 

The current CEO and other NEOs all have the schedule of life insurance benefits in effect prior to April 20, 2004 as follows:

 

CEO — Five times base salary and target annual incentive compensation

 

Other NEOs elected prior to April 20, 2004 — Three times base salary and target annual incentive compensation

 

In addition, for the Replacement Executive Life policies, NEOs receive a “tax gross-up” payment in an amount sufficient to equal their tax liability on the insurance premiums attributed to them as income for tax purposes and on the gross-up amount.

 

Supplemental Executive Retirement Plan

 

We provide NEOs with a Supplemental Executive Retirement Plan that is designed to pay approximately 60% of the NEOs final average cash earnings at age 65 if the NEO has at least 15 years of service. This benefit is offset by pension benefits under the regular Sonoco Pension Plan and available social security benefits. The calculation formula excludes long-term compensation in any form. A more detailed description of the SERP and the benefits is on page 53 of this proxy statement.

 

We have two purposes for providing a SERP for executive officers:

 

 

Our corporate offices are located in a small town setting which provides some challenges in attracting and retaining the type of executives needed to operate a global enterprise of our size and complexity. The SERP is a critical component in meeting these challenges because its vesting provisions allow us to attract experienced mid-career executives (the 15 year vesting period) and retain them for the full term (age 65 for maximum pension benefit).

 

In short, the SERP is designed to meet our unique attraction and retention needs and is an effective complement to the short-term and long-term incentive plans that are designed to motivate our executives to perform at the highest level.

 

Executive Perquisites

 

In furtherance of our pay-for-performance philosophy, we provide only limited executive perquisites. These benefits are below the market median. We offer a financial planning/tax assistance allowance of the greater of 2% of base salary or $5,000. Our executive officers are also permitted limited, occasional use of the company aircraft for personal travel or family emergencies.

 

The rationale for providing the financial planning support is to encourage use of outside professionals and thereby free up executive time that would otherwise be spent on personal financial planning. In the case of the corporate aircraft, the CEO’s usage is modest and helps minimize time involved in commercial travel that could otherwise be directed to our business. For other officers, use of the aircraft is minimal, is reviewed on a case by case basis and is permitted only under circumstances where there is direct benefit to us to minimize time spent on personal travel or in the case of family emergencies.

 

Officers are also provided very limited “tax gross-ups” that are not provided for all employees. These are for financial planning reimbursement and for taxable income imputed to the officers because of the Replacement Executive Life insurance premiums we pay for as previously described. These gross-up amounts are listed under the “All Other Compensation” column in the “Summary Compensation Table” on page 44.

 

Some of the more common perquisites in industry that we do not provide to our executive officers include country club memberships, company cars or drivers, metropolitan city apartments, vacation retreats, executive dining services, or reserved parking. We believe most of these benefits are not closely linked to our overall compensation objectives and would have only marginal impact on either the performance or the attraction/retention objectives of our compensation program.

 

Other Considerations

 

Employment Contracts and Potential Payments Upon Termination or Change in Control

 

We have a long standing practice of not providing employment contracts, severance agreements, change in control agreements, or other such financial security arrangements for our executive officers. Executive officers are covered by the normal severance compensation policy applicable to our salaried U.S. employees.

 

With some exceptions that do not apply to the NEOs, employees who are involuntarily terminated from the company are eligible for severance payments in the amount of two weeks’ compensation. Qualifying employees with at least three complete years of service who agree to sign and be bound by an agreement releasing us from all liabilities arising from the employment relationship, may receive up to 11 additional weeks’ severance. Compensation for years 3 through 13 may be paid on the basis of one week’s compensation for each complete year of service. Accordingly, the maximum severance payment a qualifying employee, including an NEO, could be entitled to from standard and additional severance is 13 weeks’ compensation.

 

Individual severance compensation arrangements, linked to non-compete agreements, may be negotiated at the time of separation as circumstances warrant.

 

Our long-term equity incentive plans also contain provisions for prorated or accelerated vesting of equity awards in the event of retirement, death, or disability, and in certain cases, change in control. These provisions apply similarly to all plan participants, including those below the executive officer level.

 

Review of Overall Compensation Components and Aggregate Awards

 

To evaluate the overall competitiveness of the executive compensation program, each year at its April meeting, the Committee reviews the total compensation package for each executive officer. This includes a summary sheet showing a history of base salary adjustments, annual incentive awards and total cash compensation for the last ten years (or term as an executive officer, if less), stock options or stock-settled stock appreciation rights outstanding and the option price, vested and unvested restricted stock units, projected annual pension at age 65, and the amount of executive life insurance coverage.

 

The Committee also reviews a tally sheet for each executive officer showing each element of the total amount of compensation awarded and realized during the prior year.

 

The Committee does not have a practice of adjusting the size of current and future compensation awards or compensation program components to reflect amounts realized or unrealized by an individual from prior equity grants. In other words, awards are not increased to compensate for prior performance below target, nor are they decreased because of performance above target. Likewise, since earnings on equity compensation are

not included in the pension calculation formula, any gains, or lack thereof, from prior awards are not considered in setting or earning retirement benefits.

 

Tax and Accounting Treatment of Compensation

 

Deductibility of Compensation

 

The Committee has taken, and it intends to continue to take, reasonable steps necessary to assure our ability to deduct for federal tax purposes compensation provided to senior executives. However, such steps may not always be practical or consistent with the Committee’s compensation objectives. Given that the earnings limit for deductibility has remained fixed since 1993, and the value of some compensation elements cannot be determined until year end, there are circumstances in which some executive compensation may not meet tax deductibility requirements. We can deduct all but $218,026 of the compensation shown in the Summary Compensation Table for 2006, excluding the value of equity-based awards which are subject to taxation in a later period.

 

Nonqualified Deferred Compensation

 

On January 1, 2005, the American Jobs Creation Act became effective. The Act changed the tax rules that apply to nonqualified deferred compensation arrangements. The final regulations under the Act have not become fully effective, but we believe we are operating in good faith compliance with the statutory provisions. We are currently assessing changes that will need to be made to our nonqualified deferred compensation arrangements to cause them to comply with the new regulations when they become effective at the end of 2007.

 

Accounting for Stock-Based Compensation

 

Beginning January 1, 2006, we began accounting for stock-based compensation in accordance with the requirements of FAS 123R, which requires us to expense the estimated value of certain stock-based compensation.

 

Stock Ownership Guidelines

 

To emphasize the importance of linking executive and shareholder interests, the Board of Directors has adopted stock ownership guidelines for executive officers. The target level of ownership of common stock (or Common Stock Equivalents) is established as a fixed number of shares. The target level for the CEO is 140,000 shares. The target for Executive and Senior Vice Presidents is 33,000 and 24,000 shares respectively, and the target for other officers is 7,000 shares. Each executive subject to the guidelines is expected to achieve the ownership target within five years from the date on which he or she became subject to the guidelines. Common stock held in the Sonoco Savings Plan, stock equivalents earned through non-qualified deferred compensation programs, time vesting restricted stock which vests within five years, and any other beneficially owned shares of common stock are included in determining compliance with the guidelines. Shares that executives have the right to acquire through the exercise of stock options or stock-settled stock appreciation rights are not included in the calculation of stock ownership for guideline purposes. As of February 13, 2007,

the CEO, the CFO, and all other officers with more than two years in their current position met the above ownership guidelines.

 

We currently do not have a policy with respect to hedging the economic risks of stock ownership.

 

Relationship with Executive Compensation Consultant

 

Mr. Daniel J. Ryterband, of Frederic W. Cook and Company, has been hired by and serves as the Committee’s executive compensation consultant. Neither he nor other members of his firm provide services to us in any area other than executive compensation. The Committee has the sole authority to dismiss the consultant.

 

Mr. Ryterband advises the Committee as to trends in executive compensation and provides specialized studies or expert advice as requested with respect to executive compensation issues. Mr. Ryterband meets in private session with the Committee at least once per year and attends regular Committee meetings in person or by phone as requested.

 

Management contacts with the consultant are limited primarily to the Senior Vice President of Human Resources (an NEO) and the Corporate Director of Compensation, who utilize the firm’s advice in the areas of compensation plan design and corporate governance issues. The CEO, CFO, and other executive officers may have incidental contact with the consultant.

 

The Committee believes this arrangement is appropriate and cost effective in meeting its responsibilities to shareholders and the needs of management for expert guidance and advice.

 

On a routine basis, members of management utilize consultants from various firms in areas where it is felt their expertise in specific executive compensation matters would be beneficial in developing proposals for the Committee to consider.

 

Timing of Equity Grants

 

For many years it has been our practice to grant stock options, SSARs, PCSUs, or other equity awards on the date of the first regular Board of Directors meeting in the calendar year, which is the first Wednesday in February. A press release announcing earnings information for the prior year is issued that morning and the option or SSAR exercise price is based on the closing price of our stock on that date. The recipients and the corresponding number of shares of equity awards, including stock options or SSARs and PCSUs, are approved by the Committee at its regular meeting on the day prior to the Board of Directors meeting.

 

Special stock option or SSAR awards are occasionally made to new hires. In such case, the exercise price is based on the closing price of our stock on the recipient’s first day of regular employment.

 

Occasionally stock option or SSAR awards or grants of restricted stock units are made to a corporate officer in recognition of a promotion or a change in position status. The effective date of these awards is the day following approval by the Committee.

 

Restricted Stock Grants

 

We have a practice of making a special one-time grant of time vesting restricted stock to individuals when they are first elected a corporate officer in recognition of this one time event and the individual’s increased responsibility. The number of shares granted is based on position. The shares are credited with dividend equivalents, which are not paid out until the shares vest. The shares vest in three equal increments on the third, fourth, and fifth anniversary of the grant.

 

No such grants were made in 2006 as no new officers were named.

 

Role of Executive Officers in Determining Executive Compensation

 

Except for the CEO, the role of executive officers in determining executive compensation is primarily advisory in nature, especially with regard to the structure and composition of the compensation program. Each executive officer may make recommendations with regard to the size of awards for persons who report directly to him or her, but the final decision as to what is submitted to the Committee for their consideration is made by the CEO. The Committee has sole responsibility for determining the compensation for the CEO and for approving all other executive compensation.

 

Restatement or Adjustment of Performance Measures

 

The Committee has elected not to adopt a formal policy for adjustment or recovery of bonus awards or payments in the event that the performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment. The Committee prefers to retain the flexibility to address each such situation on its merits and determine the proper and appropriate course of action in fairness to shareholders and award recipients.

 

2006 COMPENSATION ACTIONS BY THE COMMITTEE

 

The following sections of this report include a discussion of the actions the Committee has taken with regard to 2006 compensation awarded to the NEOs and the rationale for those actions. The tables, accompanying narrative and footnotes which follow this report reflect the decisions covered by the discussion below.

 

Base Salary

 

Each year the Committee reviews the base salary of all senior executives, including the CEO, the CFO and the other NEOs, at its April meeting. The total amount of merit increases for the executive officer group as a whole takes into account market survey data as to the projected salary movement for executive positions at the surveyed companies during the calendar year, the average wage increase being given to other levels of our employees, and the current economic environment in which we are operating. Individual merit increase awards are based on each executive’s performance in his or her position during the past year, and the relationship of his or her current salary to his or her position’s base salary competitive benchmark. The Committee used these criteria to determine salary adjustments for the NEOs in 2006.

 

At its April, 2006 meeting, the Committee awarded Mr. DeLoach a merit increase of 4.0% based on its evaluation of his performance and an upward movement of 5.9% in the competitive benchmark for his position. With this increase, his salary equated to 104% of the 2006 base salary midpoint for his position. The Compensation Committee considered these specific achievements (primarily from 2005) in determining the increase amount:

 

 

The Committee took into consideration all aspects of Mr. DeLoach’s compensation package in granting a merit increase essentially comparable to that of other superior performers within the company.

 

The four other NEOs received merit increases ranging from 3.1% to 3.5%. The average merit increase awarded to all of our United States salaried employees was 3.5% and individual awards ranged from 0% to 7%.

 

Annual Cash Incentive Awards

 

In 2002, the Board of Directors adopted, and the shareholders approved, the Performance Based Annual Incentive Plan for Executive Officers. Under the terms of this plan, a maximum of 2.75% of income from operations, as defined in the plan, was established as an incentive pool for the CEO and the NEOs. The total amount of annual incentive awards paid to these individuals cannot exceed this maximum. For 2006, this maximum incentive pool was $9,550,044, which was in excess of the amount of actual incentive awards made by the Committee to these participants.

 

Set forth below are the performance elements, and their respective weightings as a percentage of annual incentive compensation, the Committee used to arrive at actual 2006 bonus awards. It is the Committee’s philosophy that annual incentive plan elements should be limited to three or fewer to maximize concentration on those most critical to the success of our business in the forthcoming year. Base earnings per share, revenue growth and working capital management are all considered to be key performance variables essential to maximizing shareholder value.

 

 

Base earnings per share are defined as earnings per share excluding the impact of restructuring charges and certain non-recurring, infrequent or unusual items and are used to place primary focus on year over year operating results. Revenue growth excludes revenue from acquisitions completed during the year.

 

We believe that in most years, base earnings per share will be the most critical measure in driving share price and, in turn, shareholder value. Consequently, the Committee felt that a 60% weighting on this element was appropriate. Revenue growth was weighted at 20%. This is an important Company objective, but profitable revenue growth is of greater importance, hence the lower weighting than that for base earnings per share. The Committee added working capital improvement as a performance element in 2006 because it believed there was an opportunity to increase cash flow through reduction in our working capital requirements.

 

2006 Incentive Plan Performance Targets

 

For 2006, the Committee established the following corporate performance targets for awarding annual incentive compensation. Based on year over year comparisons, the Committee believed these targets provided for reasonable growth and improvement, and if achieved, would produce performance necessary to deliver consistent results for shareholders.

 

 

Finally, the Committee has established an annual incentive compensation threshold, target and maximum expressed as a percentage of base salary for each NEO.

 

Potential annual incentive compensation earnings as a percent of base salary for each NEO is as follows:

 

 

These weightings are based on an analysis of competitive survey data and the Committee’s philosophy regarding the desirable ratio of fixed versus variable compensation.

 

At the end of 2006, our base earnings per share had increased by 12.7% over 2005 base earnings per share. As a result, all of the NEOs earned maximum annual incentive compensation on the base earnings per share measure.

 

However, as shown on page 39, growth in corporate revenue (excluding acquisitions) was 3.4%, which was below target, resulting in only partial annual incentive compensation earnings on this measure of performance.

 

Working capital was included as a corporate performance measure in the annual incentive program for the first time in 2006. As shown in the Actual Performance Column on page 39, the 2006 results were strong, contributing a significant increase in cash flow from operations and resulting in a maximum payout on this annual incentive compensation measure.

 

On February 6, 2007, the Committee reviewed and approved the 2006 annual incentive compensation awards for executive officers based on the predetermined targets for the financial measures shown in the table on the previous page and the calculations for actual performance against target. No additional discretionary bonus awards were made to any of the NEOs in 2006.

 

The following table shows the amount of annual incentive compensation awarded to each of the NEOs for 2006 and the percentage change in annual incentive compensation earnings from the prior year.

 

 

2006 Long-Term Incentive Program

 

As previously described, the 2006 long-term incentive program consists of two elements: stock-settled stock appreciation rights (“SSARs”) and performance contingent restricted stock units (“PCSUs”). These are awarded pursuant to the 1991 Key Employee Stock Plan, which has been approved by shareholders. As explained previously, base salary midpoint and the competitive benchmark for annual incentive compensation are subtracted from total direct compensation to arrive at the target dollars available for long-term compensation for each executive officer, and that target is converted 25% to SSARs and 75% to PCSUs.

 

Stock-Settled Stock Appreciation Rights

 

On January 31, 2006 (the day prior to the full Board of Directors meeting), the Committee approved SSAR grants to 674 key employees, including the NEOs. The SSARs have a one year vesting period and the grant price was set at $33.37 per share, the closing market price of our common stock on the date of grant (February 1, 2006). Accordingly, these SSARs will be valuable to the recipients only if the market price of the

stock increases. The FAS 123R grant date fair values and the number of SSARs granted to each of the NEOs are included in the “Grants of Plan-Based Awards” table on page 47. Target grants were calculated as described on page 31. The actual number of SSARs granted to the NEOs was based on the Committee’s assessment of each person’s relative performance in meeting the expectations for his or her position.

 

The award of SSARs to Mr. DeLoach, which was 7,000 shares higher than his competitive benchmark, reflects his leadership in achieving significant improvement in financial performance for the Company during his six-year tenure as CEO and successful completion of major acquisitions and strategic joint ventures.

 

The award to Mr. Hupfer, which was 5,000 shares higher than his competitive benchmark, reflects his strong leadership of the Treasury, Finance, and Accounting functions and his highly regarded reputation in the financial community.

 

The awards to the other NEOs, some of which were at or above competitive benchmark, were based on the relative performance of the business units for which they are responsible and/or specific results achieved in their areas of responsibility.

 

Performance Contingent Restricted Stock Units

 

On January 31, 2006, the Committee approved PCSU grants to 126 key employees, including the NEOs. The FAS 123R grant date fair values of PCSUs and the number of shares available at threshold, target, and maximum are shown in the “Grants of Plan-Based Awards” table on page 47. The number of PCSUs granted to each individual was based on his target award as described on page 31, and adjusted upward or downward from target based on the Committee’s judgment of the individual’s performance. The actual PCSU award to Mr. DeLoach was 14,000 shares above target, the award to Mr. Hupfer was 3,500 shares above target, and the awards for the other NEOs ranged from 0 to 4,500 shares above target. The size of these awards was based on the same achievements as cited above for the SSAR awards.

 

The number of these PCSUs that will vest after three years is dependent on our achieving specified performance levels of cumulative base earnings per share (“BEPS”), net of year to year changes in pension expense, and average return on net assets employed (“RONAE”) for the three-year performance period. The Committee feels that both elements are critical drivers of long term shareholder returns and has weighted them equally in the plan.

 

The following table sets forth the performance levels that must be achieved to earn the threshold, target, and maximum number of PCSUs under this plan.

 

 

 

 

To encourage continued employment, the plan provides that if less than 50% of a participant’s PCSUs vest at the end of the three year performance period, the remainder of that 50% of PCSUs will time vest after five years from the date of grant, subject to the participant’s continued employment for that period. Except for death, disability, or retirement other than for cause, termination of a participant’s employment prior to vesting will result in forfeiture of any unvested award. Officers who do not meet our stock ownership guidelines for their positions may not dispose of any shares that vest under this plan until such guidelines are met and maintained.

 

The plan does not permit the use of discretion if performance targets are not met. Performance goals will not be adjusted for sales, divestitures, or acquisitions of businesses.

 

PCSUs are not credited with dividend equivalents prior to vesting. All PCSUs fully vest upon a change in control unless the acquirer assumes outstanding grants. In cases where grants are assumed, PCSUs will vest immediately if the change in control is followed by subsequent involuntary termination of the participant’s employment (except for cause) or voluntary termination for good reason (as defined in the plan) within 24 months of the change in control event.

 

Earned Awards in 2006

 

On February 3, 2004, the Committee granted PCSUs to 26 executives, including the NEOs. The vesting of these shares was dependent on achieving pre-determined levels of cumulative BEPS and average RONAE for the three year performance period from January 1, 2004 through December 31, 2006.

 

Target performance over the three-year period was set at $4.29 cumulative BEPS as previously described, which equated to a compound annual growth rate of 5% per year, and from 9.0% to 10.0% average RONAE, depending on money spent on acquisitions. The two elements were weighted at 67% and 33% respectively. Actual performance was $5.60 cumulative BEPS which resulted in 150% of the target cumulative BEPS shares vesting, and 9.2% average RONAE which resulted in 70% of the target RONAE shares vesting . As a result, the overall vesting was 123.3% of the target shares. The value of the shares vesting under this plan for the NEOs is shown in the “Option Exercises and Stock Vested” table on page 50.

 

As provided for under the plan, corporate officers including the NEOs, must defer receipt of all vested shares that are not deductible under Section 162(m). Whether required or not, all of the NEO’s have elected to defer receipt of these shares until at least six months after separation from service with the Company.

 

During this three-year period, the aggregate market value of all outstanding shares of Sonoco common stock increased by 60% which equated to an approximate $1.4 billion increase in market value.

 

Value of Perquisites in 2006

 

In 2006, eight corporate officers used the previously described financial planning benefit for a total cost to us, including tax gross-ups, of $25,083. This includes payment to Mr. DeLoach of $4,658.

 

Six executive officers used our aircraft for personal travel in 2006. This use is valued at the “aggregate incremental cost” to us, and was $42,027 in 2006 for the officer group as a whole. Included in this amount was Mr. DeLoach’s personal use of the aircraft which was valued at $14,518.

 

The Executive Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” included in this Proxy Statement with management. Based on that review and discussion, the Executive Compensation Committee recommended to our Board of Directors that the “Compensation Discussion and Analysis” be included in our Annual Report on Form 10-K for the year ended December 31, 2006, and in this Proxy Statement.

 

J.H. Mullin, III (Chair)  C.J. Bradshaw  B.L.M. Kasriel

J.E. Linville  M.D. Oken

 

 

 

 

 

 

None of the other NEOs received perquisites in excess of $10,000.