October
22, 2007
VIA
EDGAR AND OVERNIGHT
United
States Securities and Exchange Commission
Division
of Corporation Finance
100
F
Street, NE
Mail-Stop
7010
Washington,
D.C. 20549
Attention:
Ms. Mellissa Campbell Duru
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Re:
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The
Hershey Company (the “Company”)
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Definitive
Proxy Statement on Schedule 14A
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File
No.
000-00183
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Dear Ms. Duru:
As
requested by your letter dated August 21, 2007, The Hershey Company (“Hershey”
or the “Company”) submits the accompanying responses to the comments relating to
the Company’s Definitive Proxy Statement on Schedule 14A (the “Proxy
Statement”). For the staff’s convenience, we have restated each
comment in its entirety with the Company’s response following immediately
thereafter. Please telephone me at (717) 534-7912 if you have any
questions or further comments. In my absence, please feel free to
contact Steven J. Holsinger at (717) 534-7541.
The
Company acknowledges the adequacy and accuracy of the disclosure in the Proxy
Statement are the responsibility of the Company. The Company
acknowledges staff comments or changes in disclosures in response to staff
comments do not foreclose the Securities and Exchange Commission (the
“Commission”) from taking any action with respect to the Proxy Statement. The
Company also acknowledges that staff comments may not be asserted as a defense
in any proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
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Very
truly yours,
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| /s/ Burton H. Snyder | |
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Burton
H. Snyder
Senior
Vice President, General Counsel and
Secretary
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Enclosures
cc: Mr.
Robert H. Campbell,
Chairman,
Compensation and Executive Organization Committee
Mr.
Richard H. Lenny,
Chairman
and Chief Executive Officer
Director
Compensation 2006, page 20
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1.
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Please
confirm that you have presented the total dollar value of stock awards
in
accordance with FAS 123(R) made to the directors over the requisite
service period, inclusive of years prior to 2006. Also, please
disclose all assumptions you made with respect to the valuation of
the
awards. Please see Item 402(k)(2)(iii) and the accompanying
instructions.
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The
total dollar value of the stock awards was presented in accordance with FAS
123(R). Stock awards to directors are made on a quarterly
basis. Each award is made on the first day of the calendar quarter in
stock units having a fair value in the amount of $25,000. As set
forth in footnote (2) at the bottom of page 20, we determined under FAS 123(R)
to recognize the expense over the quarterly service period. As a
result, the FAS 123(R) expense of $100,000 attributable to 2006 is shown in
the
table; there were no unrecognized costs attributable to prior year awards.
The
assumptions made with respect to the valuation of the awards are also reflected
in footnote (2) at the bottom of page 20.
Compensation
Discussion and Analysis, page 33
“What
are the objectives…,” page 33
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2.
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Throughout
much of your disclosure, you provide an overly general description
of the
framework of your compensation program but do not provide meaningful
insight into the unique manner in which your company’s compensation
program functions in practice and was applied with respect to the
named
executive officers. For example, under this heading, you
disclose that an objective of the compensation program is to differentiate
between “good” and “great” performance, yet you omit specific reference
regarding how consideration of this objective factored into the
compensation awarded to an executive officer during
2006. Similarly, although you disclose the company’s use of a
total-rewards package, in the discussion and analysis that follows,
you do
not identify specific factors that were considered for each named
executive officer during fiscal 2006 that resulted in the total-rewards
package (both the type and level of compensation) that a particular
named
executive officer received. Please avoid overly general
descriptions of your program.
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Rather,
focus on providing meaningful analysis of how the program functions in
practice.
We
believe that the totality of the description of our executive compensation
program contained in the Compensation Discussion and Analysis is generally
responsive to the points noted. As discussed in responses below, the
primary drivers for compensation decisions regarding the 2006 fiscal year were
peer group benchmarking and 2006 corporate performance, and the specific factors
of the type referred to in the staff’s comment were not material and accordingly
were not addressed in the discussion and analysis. In preparing
future filings, we will be mindful of the staff’s comment regarding overly
general statements and, as
2
applicable,
will focus the discussion and analysis in future filings on the material aspects
of the executive compensation program and minimize general
statements.
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3.
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Please
identify the 54 peer group companies and the subset of 15 companies
that
comprise the “high-performing financial peer group.” Please
provide discussion and analysis of why these companies are comparable
to
your company for purposes of providing useful and comparable benchmarking
data. See generally, Item 402(b)(2)(xiv) of Regulation
S-K.
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The
identity of the 54-company primary peer group and 15-company subset of high
performing financial peers is provided on the accompanying
schedule.
We
indicate within the description on page 35 of these peer groups that the primary
peer group is composed of consumer packaged goods and general industry companies
with respect to which the committee’s consultant receives compensation survey
data, and provide annual revenue and market capitalization statistics for the
members of the group. With regard to the high-performing financial peers, the
discussion indicates that these companies are “primarily food, beverage and
consumer products companies” against which we assess our relative financial
performance and which represent competitors for executive talent. In
preparing the Proxy Statement, we concluded that our description of the peer
groups and size-adjusted benchmarking provided information sufficient for the
shareholders to gain an understanding of our development and use of peer data
and benchmarking process.
We
have considered the staff’s comments and, in future filings, we will expand our
disclosure in this area to include the list of the companies in each peer group,
expand the discussion of the description of the broader peer group, and provide
additional information relating to the rationale for the development of each
peer group.
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4.
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You
indicate that you target salary between the median and 75th
percentile. Your disclosure should include a discussion of
where you target each other element of compensation against peer
companies
and the percentiles represented by actual compensation paid for
2006. Please provide a clear discussion of the reasons if any
compensation paid falls outside the targeted
range.
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The
benchmarking discussion on page 35 indicates that we target each executive
officer position’s total direct compensation (base salary, annual incentive and
long term incentive) to fall within the 50th and 75th
percentile of the
size-adjusted peer group. We believe that the statement regarding target salary
levels referred to in the staff’s comment and the references within the
discussion of the annual incentive program and long-term incentive program
together provide the information relating to how and where the levels of the
total compensation package are set. However, we have considered the staff’s
comment and will include in future filings
3
an
appropriate statement regarding the targeting of each element of the total
compensation package.
With
respect to the staff’s comments relating to the percentiles of the actual
compensation paid for 2006 and explanations of where compensation falls outside
the targeted range, we believe our disclosures are responsive to these points.
For example, the discussion at the top of page 37 relating to the setting of
base salaries for 2006 and the discussion in the third paragraph on page 42
with
respect to the setting of base salaries for 2007 each indicate that certain
base
salary adjustments were made to close what was perceived to be a gap between
the
salaries and the peer-group based target salary. Where applicable, we will
continue to provide such disclosure in future filings.
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5.
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You
provide little discussion and analysis of the effect of individual
performance on compensation decisions despite disclosure suggesting
it is
a factor considered by the committee. For example, you state on
page 35 that final determinations of compensation actually awarded
relative to the percentile of compensation targeted is determined
in part
by reference to an executive officer’s performance. On pages
36-37, you disclose that individual performance factors into the
determination of base salaries paid and incentive compensation
awarded. You should provide additional detail and an analysis
of how individual performance contributed to actual 2006 compensation
for
the named executive officers. For example, disclose the
elements of individual performance, both quantitative and qualitative,
and
specific contributions the compensation committee considered in its
evaluation, and if applicable, how they were weighted and factored
into
specific compensation decisions. See Item 402(b)(2)(vii) of
Regulation S-K.
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Although
individual performance is a factor considered by the committee when making
compensation decisions, it was not a material factor to the decisions described
in the Proxy Statement. For example, the discussion on page 37 relating to
the
annual incentive program for 2006 indicates that achievement of individual
performance objectives are part of the overall measure for determining the
annual incentive payout. However, as described on page 38, no annual incentive
payments were made for 2006 because corporate results fell below target; no
consideration was given to individual performance factors. Where applicable,
in
future filings we will provide information with respect to those compensation
decisions where individual performance factors are material to the committee’s
considerations. In this regard, however, we note that as described in the fourth
paragraph on page 42, annual incentive payouts for 2007, if any, will be
entirely dependent on corporate performance and individual performance objective
will not be a factor.
“What
process does the Committee…,” page 34
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6.
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Other
than a reference to the consideration of survey data, your discussion
omits analysis of specific factors the committee considered in its
evaluation of your Chief Executive Officer. Please provide an
analysis of the factors the independent members of the board
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4
considered
in evaluating the CEO during fiscal 2006 and in determining what type and
amount
of compensation to pay.
As
described throughout the Compensation Discussion and Analysis, the primary
drivers of compensation decisions for fiscal 2006 were peer-group benchmarking
and
the Company’s corporate performance. As noted above, individual performance
factors were not material to the committee’s and board’s decision-making in
2006, including with respect to the Chief Executive Officer. Accordingly, no
specific disclosure was included in the Proxy Statement. Should individual
performance factors be material to compensation decisions in future years,
we
will provide in future filings the appropriate information and analysis
suggested by the staff’s comment.
Annual
Incentive Program, page 37
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7.
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In
future filings, provide more analysis of how the respective percentage
range of the target awards for each executive officer, other than
Mr.
Lenny, were determined and the factors that are considered by the
committee in exercising its discretion, in certain years, to provide
awards in excess of the target percentage set for an executive
officer.
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We
have reviewed the staff’s comment and will include appropriate analysis in
future filings.
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8.
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We
note the distinction you make with respect to criteria and the actual
awards potentially payable to Mr. Lenny under the Annual Incentive
Program
versus the other named executive officers. Giving consideration
to Release 33-8732-A, Section II.B.1, please identify material differences
in compensation policies with respect to individual executive
officers. For example, address the reasons for the distinctions
in the type and amount of compensation awarded to Mr. Lenny relative
to
the other named executive
officers.
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As
described on pages 37-38, the contingent maximum award for Mr. Lenny is based
upon the same corporate performance goals applicable to the other named
executive officers, but is designed to ensure that any annual incentive award
payment would qualify as tax-deductible performance-based compensation under
section 162(m) of the Internal Revenue Code. As permitted by section 162(m),
achievement of the corporate performance goal would, in Mr. Lenny’s case,
qualify the contingent maximum award (and any lesser amount approved by the
committee) as tax-deductible performance-based compensation. In contrast,
achievement of the same level of corporate performance may only result in target
(not maximum) potential payouts for the other named executives. Had corporate
performance targets been achieved in 2006, the committee and board would have
made a final determination of the amount payable to Mr. Lenny based on the
extent to which the corporate performance goals were exceeded and upon an
assessment of Mr. Lenny’s performance against individual objectives. However,
since we did not attain our corporate performance goals in 2006 or pay any
annual incentive,
5
consideration
of other factors was moot. For future filings, when applicable, we will consider
the provisions of Release 33-8732-A, Section II.B.1 and provide appropriate
discussion and analysis along the lines suggested above.
Long-Term
Incentive Program, page 38
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9.
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Please
revise your discussion to address the specific factors considered
for each
named executive officer in awarding the amount and type of compensation
they were awarded during fiscal 2006. See Item 402(b)(1)(v) of
Regulation S-K.
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We
have reviewed our discussion relating to the long term incentive program and
believe it is responsive to the requirements of Item 402(b)(1)(v). For example,
in each of the subsections - performance stock units, stock options
and restricted stock units – we explain that the amount of the awards are
determined relative to the total compensation target or, in the case of
restricted stock units, as special incentives or to replace forfeited
compensation for newly-hired executives. Additionally, each of the subsections
contains a description of the type of the award and the characteristics that
make it an appropriate part of the overall compensation package. We note that
performance stock units are set with three-year performance cycles to reinforce
the objective for creating shareholder value and that the performance targets
are based on measures consistent with that focus. We note that options are
important because they only have value if the value of our common stock
increases. For future filings, we will continue to consider Item 402(b)(1)(v)
and provide the appropriate discussion and analysis.
Performance
Stock Units, page 38
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10.
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You
should clarify your discussion and disclose all targets that you
have
established. Currently, you only reference a given financial
metric but do not specify what the actual target was. As a
result, investors cannot discern how the committee determined the
176%
payout rate. Please revise to disclose the
targets. To the extent you believe that disclosure of the
targets would result in competitive harm such that the information
could
be excluded under Instruction 4 to Item 402(b) of Regulation S-K,
supplementally, please provide a detailed explanation supporting
your
conclusion. To the extent you properly exclude targets because
their disclosure would cause competitive harm, discuss how difficult
it
will be to achieve the target levels or other factors. In this
regard, we would expect to see disclosure that contains appropriate
insight into the factors considered by the compensation committee
in
setting performance-related objectives. Please see Instruction
4 to Item 402(b) of Regulation
S-K.
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As
described on page 38, the performance measures underlying the 176% payout rate
for the 2004-2006 PSUs were based on three-year compound annual growth rate
in
EPS (“EPS CAGR”) as compared to the peer group median three-year EPS CAGR and
improvement in our return on invested capital (“E-ROIC”). The three-year target
for EPS was 9% (provided the peer group median three-year EPS CAGR was not
greater than 10%) and the three-year target for E-ROIC was a 130
6
basis
point increase in E-ROIC from 17.8% to 19.1%. Our actual EPS CAGR for the period
of 10.85% was above the 9% target and significantly above the peer group median
EPS CAGR of 6.27%, resulting in a maximum payout for this factor of
125%. Our actual three year E-ROIC of 19.12% was slightly above the
19.1%target,
resulting in a payout of 51% for this factor and a combined payout rate of
176%.
We
have considered the staff’s comment that discussion and analysis of the above
information would add to investors’ understanding of how the payout was
determined and we will include in future filings an appropriate discussion
and
analysis of the targets upon which payments are made.
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11.
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Consistent
with instruction 1 to Item 402(b), please provide greater clarity
to your
discussion on page 38 of the types of “specific adjustments” that the
committee made to the company’s performance to take into account
“extraordinary or unusual items” that occurred during a performance
cycle.
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During
fiscal year 2006, no adjustments were made in connection with the determination
of our results during any performance cycle. We acknowledge the obligation
to
provide to investors material information that is necessary to an understanding
of our compensation policies and decisions as described in instruction 1 to
Item
402(b) and confirm that if applicable, we will include in future filings an
appropriate discussion of any “specific adjustments” of the type described in
the staff’s comment.
Restricted
Stock Units, page 40
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12.
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Provide
further analysis of the criteria the committee considered when granting
restricted stock units as “special
incentives.”
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During
fiscal year 2006, we did not make any grants of restricted stock units to named
executive officers as special incentives. If applicable to future filings,
we
will provide appropriate discussion and analysis of the criteria behind any
special incentives that may be awarded.
Employment
Agreements, page 41
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13.
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Although
you disclose the various termination events and payments upon this
occurrence of the events, please describe and explain how the appropriate
payment and benefit levels are determined under the various circumstances
that trigger payments or provision of benefits under the employment
and
severance agreements and change of control agreements. See
paragraphs (b)(1)(v) and (j)(3) of Item 402 of Regulation
S-K.
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We
have reviewed our disclosures against the staff’s comment and paragraphs
(b)(1)(v) and (j)(3) of Item 402. We believe that the totality of the
description of the employment agreement and Executive Benefits Protection Plan
(“EBPP”) on page
7
41
and the detail regarding the determination of the payments and benefits provided
on pages 56 through 62 is responsive to the staff’s comment and the requirements
of Item 402. For example, the discussion on page 41 provides the rationale
for
our entering into an employment agreement with Mr. Lenny and for establishing
the EBPP, as well as indicating that the provisions of the EBPP were modified
in
2006 to better align the benefits of the plan with our peer group. Further,
the
description of the
various payments upon termination or change in control set forth on pages 56
through 62 contains detailed descriptions of the assumptions used and the
calculation of the amounts.
Summary
Compensation Table, page 45
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14.
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In
footnote 7, please disclose the methodology you used to compute the
aggregate incremental cost of the perquisites disclosed. See
Instruction 4 to Item 402(c)(2)(ix) of Regulation
S-K.
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The
methodology with respect to the relocation benefits provided to Mr. Bilbrey
is
set forth in footnote 9 on page 47. The amount shown for personal use
of Company aircraft by Mr. Lenny was computed on the basis of the incremental
operating cost of the flights. We will reflect this in future
filings, as contemplated by Instruction 4 to Item
402(c)(2)(ix).
Option
Exercises and Stock Vested, page 51
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15.
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We
refer you to footnote 2 to the table. You should compute the
value realized upon vesting in accordance with the actual closing
price of
the common stock as of the end of close of business on the vesting
date.
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As
described on page 38, under the terms of the 2004-2006 PSU awards which vested
at year-end 2006, the holder was permitted to elect to receive one share for
each PSU or to receive a cash payment equal to the per share value which, by
the
terms of the PSU, was equal to the average closing price for our stock during
the month of December, $50.37 in this case. In recognition of this, we used
the
$50.37 value, as we believed it to be a more accurate representation of the
value realized under the awards than the $49.80 year-end closing
price. Should this circumstance be applicable to future filings, we
will include in the footnote an explanation of the amount
used.
Pension
Benefits, page 52
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16.
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Please
clarify and simplify your discussion in this section. Also,
given what appears to be a benefit you provide to Mr. Lenny regarding
the
years of service he was credited and the rate of accrual for his
pension
benefits, disclose in Compensation Discussion and Analysis how the
committee determined the formula to apply to Mr. Lenny that you reference
on page 52.
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8
Our
discussion in this section is what we believe to be a succinct narrative setting
forth the detailed information required by Item 402(h)(3). In
preparing future filings, we will be mindful of the staff’s comment and attempt
to simplify the discussion.
As
described on page 52, Mr. Lenny’s benefit is provided pursuant to the terms of
an employment agreement we entered into with Mr. Lenny at the time he joined
the
Company in 2001. Accordingly, there were no determinations made by the
committee
during fiscal year 2006 with respect to this benefit. In light of this, we
believe that the description in the Compensation Discussion and Analysis of
retirement benefits and of Mr. Lenny’s employment agreement on page 41, together
with the cross-reference to the discussion on page 52, provides the information
necessary for an understanding of our actions in this
area.
9
2006
Benchmarking – 54 Member Peer Group
(*Denotes
“High Performing Financial Peer Group” – 15 companies)
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Altria
Group
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H.J.
Heinz*
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Novartis
Consumer Health
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American
Standard
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Hasbro
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PepsiAmericas
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Anheuser-Busch*
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Huffy
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PepsiCo*
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Avery
Dennison
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Interstate
Brands
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Procter
& Gamble*
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Avon
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J.M.
Smucker
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Reynolds
American
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Black
& Decker
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Jarden
Corporation
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Rich
Products
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Cadbury
Schweppes*
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Johnson
& Johnson
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S.C.
Johnson
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Campbell
Soup*
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Kellogg*
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Sara
Lee*
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Circuit
City
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Kimberly-Clark
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Schwan’s
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Clorox*
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Kraft
Foods*
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Sherwin-Williams
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Coca-Cola*
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Lafarge
North America
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Snap-On
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Colgate-Palmolive*
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Land
O’Lakes
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Starbucks
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ConAgra
Foods
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Masco
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Unilever
United States
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Darden
Restaurants
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McDonald’s
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VF
Corp.
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Diageo
North America
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Mission
Foods
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Wendy’s
International
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Eastman
Kodak
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Molson
Coors Brewing
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Whirlpool
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General
Mills*
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Nestle
USA
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Wm.
Wrigley Jr.*
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Gillette*
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NIKE
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Yum!
Brands
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10