Federated Department Stores, Inc. DEF 14A
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.    )
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o Definitive Additional Materials
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Federated Department Stores, Inc.
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FEDERATED DEPARTMENT STORES, INC.
7 West Seventh Street Cincinnati, Ohio 45202
and
151 West 34th Street New York, New York 10001
 
April 4, 2007
 
To the Stockholders:
 
It is my privilege to invite you to attend Federated’s 2007 annual meeting of stockholders. We are holding the annual meeting on Friday, May 18, 2007, at 11:00 a.m., Eastern Daylight Savings Time, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. We are enclosing the official notice of meeting, proxy statement and form of proxy with this letter. The matters listed in the notice of meeting are described in the attached proxy statement.
 
Your vote is important. Accordingly, we encourage you to read the proxy statement and cast your vote promptly by following the instructions on the enclosed proxy card.
 
Thank you for your cooperation and support of Federated.
 
Sincerely,
 
Terry J. Lundgren Signature
Terry J. Lundgren
Chairman of the Board, President
and Chief Executive Officer
 
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE CAST YOUR VOTE PROMPTLY
BY FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD.
 


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FEDERATED DEPARTMENT STORES, INC.
7 West Seventh Street, Cincinnati, Ohio 45202
and
151 West 34th Street, New York, New York 10001
 
 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
 
 
To the Stockholders:
 
Federated hereby gives notice that the annual meeting of its stockholders will be held at 11:00 a.m., Eastern Daylight Savings Time, on Friday, May 18, 2007, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The items on the agenda for the annual meeting are:
 
  1.  To elect six members of Federated’s board of directors;
 
  2.  To ratify the appointment of KPMG LLP as Federated’s independent registered public accounting firm for the fiscal year ending February 2, 2008;
 
  3.  To approve an amendment to Federated’s Certificate of Incorporation changing Federated’s corporate name to “Macy’s, Inc.”;
 
  4.  To approve Federated’s 1992 Incentive Bonus Plan, as amended;
 
  5.  To approve the issuance of common stock under the Director Deferred Compensation Plan; and
 
  6.  To act upon such other business as may properly come before the annual meeting or any postponements or adjournments thereof.
 
Each of these matters is more fully described in the attached proxy statement. Stockholders of record at the close of business on March 23, 2007 are entitled to vote at the annual meeting or any postponements or adjournments of the annual meeting.
 
(-s- Dennis J. Broderick)
 
Dennis J. Broderick
Secretary
 
April 4, 2007
 
PLEASE VOTE BY FOLLOWING THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD. YOU MAY VOTE BY MAIL, BY TELEPHONE OR OVER THE INTERNET. IF YOU CHOOSE TO VOTE BY MAIL, PLEASE COMPLETE THE PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
 


 

 
FEDERATED DEPARTMENT STORES, INC.
7 West Seventh Street, Cincinnati, Ohio 45202
and
151 West 34th Street, New York, New York 10001
 
PROXY STATEMENT
 
Federated’s board of directors (the “Board”) is furnishing this proxy statement in connection with its solicitation of proxies for use at the annual meeting of Federated’s stockholders. The annual meeting will be held at 11:00 a.m., Eastern Daylight Savings Time, on Friday, May 18, 2007, at Federated’s offices located at 7 West Seventh Street, Cincinnati, Ohio 45202. The proxies received will be used at the annual meeting and at any postponement or adjournment of the annual meeting for the purposes set forth in the accompanying notice of meeting. We will begin mailing the proxy statement, the notice of meeting and accompanying proxy on April 12, 2007.
 
Except where the context requires otherwise, the term “Federated” includes Federated Department Stores, Inc. and its subsidiaries. All share and per share amounts in this proxy statement are adjusted to reflect a two-for-one stock split effected as a stock dividend on June 9, 2006.
 
TABLE OF CONTENTS
 
         
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POLICY AND PROCEDURES FOR PRE-APPROVAL OF NON-AUDIT SERVICES BY OUTSIDE AUDITORS
  A-1
   
1992 INCENTIVE BONUS PLAN
  B-1
   
DIRECTOR DEFERRED COMPENSATION PLAN
  C-1


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GENERAL
 
The record date for the annual meeting is March 23, 2007. If you are a holder of record of shares of Federated’s common stock at the close of business on the record date you are entitled to vote those shares at the annual meeting. You are entitled to one vote for each share of common stock you own on each of the matters listed in the notice of meeting. As of the record date, 459,620,329 shares of common stock were outstanding. This number excludes shares held in the treasury of Federated.
 
The Board has adopted a policy under which all voting materials that identify the votes of specific stockholders will be kept confidential and will not be disclosed to Federated’s officers, directors or employees or to third parties except as described below. Voting materials may be disclosed in any of the following circumstances:
 
  •  if required by applicable law;
 
  •  to persons engaged in the receipt, counting, tabulation or solicitation of proxies who have agreed to maintain stockholder confidentiality as provided in the policy;
 
  •  in those instances in which stockholders write comments on their proxy cards or otherwise consent to the disclosure of their vote to Federated’s management;
 
  •  in the event of a proxy contest or a solicitation of proxies in opposition to the voting recommendations of the Board;
 
  •  in respect of a stockholder proposal that Federated’s Nominating and Corporate Governance Committee of the Board, referred to as the NCG Committee, after having allowed the proponent of the proposal an opportunity to present its views, determines is not in the best interests of Federated and its stockholders; and
 
  •  in the event that representatives of Federated determine in good faith that a bona fide dispute exists as to the authenticity or tabulation of voting materials.
 
The policy described above will apply to the annual meeting.
 
A quorum of stockholders is necessary to hold a valid annual meeting. The holders of a majority of the stock issued and outstanding and entitled to vote at the annual meeting, present in person or represented by proxy, will constitute a quorum at the annual meeting for the transaction of business at the meeting. Federated will treat all shares of Federated common stock represented at the meeting, including abstentions and “broker non-votes,” as shares that are present and entitled to vote for purposes of determining the presence of a quorum. Federated will treat abstentions and broker non-votes as shares not voted for purposes of determining whether the requisite vote on a matter has been obtained. In order to obtain approval of any matter, the affirmative vote of the holders of a majority (or, in the case of the election of any nominee as a director, a plurality) of the shares of common stock represented at the annual meeting and actually voted is required. Consequently, abstentions and broker non-votes will have no effect on the outcome of the vote on any such matter. If the persons present or represented by proxy at the annual meeting constitute the holders of less than a majority of the outstanding shares of common stock as of the record date, the annual meeting may be adjourned to a subsequent date for the purpose of obtaining a quorum. “Broker non-votes” are shares held by a broker, bank or other nominee that are represented at the meeting, but with respect to which the beneficial owner of such shares has not instructed the broker, bank or nominee on how to vote on a particular proposal, and with respect to which the broker, bank or nominee does not have discretionary voting power on such proposal.


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All shares of common stock represented at the annual meeting by proxies properly submitted prior to or at the annual meeting will be voted at the annual meeting in accordance with the instructions on the proxies, unless such proxies previously have been revoked. If no instructions are indicated, such shares will be voted:
 
  •  FOR the director nominees identified below;
 
  •  FOR the ratification of the appointment of Federated’s independent registered public accounting firm;
 
  •  FOR the approval of an amendment to Federated’s Certificate of Incorporation changing Federated’s corporate name to “Macy’s, Inc.”;
 
  •  FOR the approval of Federated’s 1992 Incentive Bonus Plan, as amended; and
 
  •  FOR the approval of the issuance of common stock under the Director Deferred Compensation Plan.
 
You may vote in person at the annual meeting or by proxy. Federated recommends that you vote by proxy even if you plan to attend the annual meeting. You have three options for voting by proxy:
 
  •  Internet:  You can vote over the Internet at the Web address shown on your proxy card. Internet voting is available 24 hours a day, seven days a week. When you vote over the Internet, you should not return your proxy card.
 
  •  Telephone:  You can vote by telephone by calling the toll-free number on your proxy card. Telephone voting is available 24 hours a day, seven days a week. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. When you vote by telephone, you should not return your proxy card.
 
  •  Mail:  You can vote by mail by simply signing, dating and mailing your proxy card in the postage-paid envelope included with this proxy statement.
 
A number of banks and brokerage firms participate in a program that also permits stockholders whose shares are held in street name to direct their vote over the Internet or by telephone. If your bank or brokerage firm gives you this opportunity, the voting instructions from the bank or brokerage firm that accompany this proxy statement will tell you how to use the Internet or telephone to direct the vote of shares held in your account. The Internet and telephone proxy procedures are designed to authenticate your identity, to allow you to give your proxy voting instructions and to confirm that those instructions have been properly recorded. Votes directed over the Internet or by telephone through such a program must be received by 5:00 p.m., Eastern Daylight Savings Time, on Thursday, May 17, 2007. Requesting a proxy prior to the deadline described above will automatically cancel any voting directions you have previously given over the Internet or by telephone with respect to your shares. Directing the voting of your shares will not affect your right to vote in person if you decide to attend the annual meeting; however, you must first obtain a signed and properly executed proxy from your bank, broker or other nominee to vote your shares held in street name at the annual meeting.
 
If you participate in Federated’s Profit Sharing 401(k) Investment Plan or The May Department Stores Company’s (“May”) Profit Sharing Plan, you will receive a voting instruction card for the Federated common stock allocated to your account in the applicable plan. You may instruct the plan trustee on how to vote your proportional interest in any Federated shares held by the plan by signing, dating and mailing the enclosed voting instruction card, or by submitting your voting instructions by telephone or over the Internet. The applicable plan trustee will vote your proportional interest in accordance with your instructions and the terms of the plan. If you fail to vote, the trustee for the applicable plan, subject to its fiduciary obligations under


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ERISA, will vote your proportional interest in the same proportion as it votes the proportional interests for which it receives instructions from other plan participants. Under the terms of the two plans, the trustees must receive voting instructions from plan participants by 5:00 p.m., Eastern Daylight Savings Time, on Wednesday, May 16, 2007.
 
You may revoke your proxy at any time by:
 
  •  submitting evidence of your revocation to the Corporate Secretary of Federated;
 
  •  voting again over the Internet or by telephone;
 
  •  signing another proxy card bearing a later date and mailing it so that it is received prior to the annual meeting; or
 
  •  voting in person at the annual meeting, although attendance at the annual meeting will not, in itself, revoke a proxy.
 
STOCK OWNERSHIP
 
Certain Beneficial Owners.  The following table sets forth information as to the beneficial ownership of each person known to Federated to own more than 5% of Federated’s outstanding common stock as of December 31, 2006.
 
                         
    Most Recent
    Number of
    Percent of
 
Name and Address
  Schedule 13G     Shares     Class  
 
FMR Corp. (“FMR”)
82 Devonshire Street
Boston, MA 02109
    February 14, 2007       29,300,976       5.6 %
 
According to the FMR Schedule 13G, (a) 24,266,645 of the 29,300,976 shares beneficially owned by FMR (approximately 4.6% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management & Research Company, a wholly-owned subsidiary of FMR (“FMRC”), as a result of acting as investment advisor to various investment companies, (b) 14,500 of such shares (approximately 0.003% of the total number of shares of common stock outstanding) were beneficially owned by Fidelity Management Trust Company, a wholly-owned subsidiary of FMR (“FMTC”), as a result of its serving as investment manager of institutional account(s), (c) 3,439,788 of such shares (approximately 0.7% of the total number of shares outstanding) were beneficially owned by Fidelity International Limited (“FIL”), (d) 2,928 of such shares were beneficially owned by Strategic Advisers, Inc., a wholly-owned subsidiary of FMR, (e) 212,500 of such shares (approximately 0.04% of the total number of shares outstanding) were beneficially owned by Pyramis Global Advisor, LLC, an indirect wholly-owned subsidiary of FMR (“PGALLC”), and (f) 1,364,615 of such shares (approximately 0.3% of the total number of shares outstanding) were beneficially owned by Pyramis Global Advisors Trust Company, an indirect wholly-owned subsidiary of FMR (“PGATC”). According to the FMR Schedule 13G:
 
  •  Each of Edward C. Johnson 3d, Chairman of FMR and FMR, through its control of FMRC, has sole power to dispose of 24,266,645 shares described in clause (a) above. Neither Edward C. Johnson 3d nor FMR has sole voting power over such shares owned directly by the Fidelity Funds. The Fidelity Funds’ Boards of Trustees has the power to vote such shares.
 
  •  Edward C. Johnson 3d and FMR, through its control of FMTC, each has sole power to dispose of and vote the 14,500 shares described in clause (b) above.


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  •  FIL has sole power to dispose of the 3,439,788 shares described in clause (c) above, sole power to vote 3,128,968 of such shares and no power to vote 310,820 of such shares.
 
  •  A partnership controlled predominantly by family members of Edward C. Johnson 3d or trusts for their benefit owns shares of FIL voting stock with the right to cast approximately 47% of the total votes that may be cast by all holders of FIL voting stock.
 
  •  Edward C. Johnson 3d and FMR, through its control of PGALLC, each has sole power to dispose of and vote the 212,500 shares described in clause (e) above.
 
  •  Edward C. Johnson 3d and FMR, through its control of PGATC, each has sole power to dispose of the 1,364,615 shares described in clause (f) above and sole power to vote 1,350,015 of such shares.
 
According to the FMR Schedule 13G, Edward C. Johnson 3d and various Johnson family members are the predominant owners of the Series B shares of common stock of FMR, representing approximately 49% of the voting power of FMR. According to the FMR Schedule 13G, through their ownership of FMR’s voting common stock and related agreements, members of the Johnson family may be deemed to form a controlling group with respect to FMR.
 
Stock Ownership of Directors and Executive Officers.  The following table sets forth the shares of common stock beneficially owned (or deemed to be beneficially owned pursuant to the rules of the Securities and Exchange Commission, referred to as the SEC), as of March 23, 2007 by each Federated director who is not an employee of Federated, referred to as a Non-Employee Director, by each executive named on the 2006 Summary Compensation Table, referred to as a Named Executive, and by Federated’s directors and executive officers as a group. The business address of each of the individuals named in the table is 7 West Seventh Street, Cincinnati, Ohio 45202.
 
                         
    Number of Shares     Percent of
 
Name
  (1)     (2)     Class  
 
Meyer Feldberg
    76,853       63,500       less than 1 %
Sara Levinson
    70,122       67,000       less than 1 %
Joseph Neubauer
    103,540       63,500       less than 1 %
Joseph A. Pichler
    71,300       63,500       less than 1 %
Joyce M. Roché
    4,492       2,500       less than 1 %
William P. Stiritz(3)
    570,174       2,918       less than 1 %
Karl M. von der Heyden
    80,900       63,500       less than 1 %
Craig E. Weatherup
    69,500       63,500       less than 1 %
Marna C. Whittington
    86,266       63,500       less than 1 %
Terry J. Lundgren
    2,638,210       2,432,564       less than 1 %
Karen M. Hoguet
    587,394       493,982       less than 1 %
Thomas G. Cody
    615,222       559,714       less than 1 %
Thomas L. Cole
    628,439       540,424       less than 1 %
Janet E. Grove
    612,057       560,342       less than 1 %
Susan D. Kronick
    624,369       539,726       less than 1 %
Ronald W. Tysoe
    594,696       593,750       less than 1 %
All directors and executive officers as a group (17 persons)(4)
    6,951,703       5,685,974       1.5 %


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(1) Aggregate number of shares of common stock currently held or which may be acquired within 60 days after March 23, 2007 through the exercise of options granted under Federated’s 1995 Executive Equity Incentive Plan, referred to as the 1995 Equity Plan. Includes shares pledged as security in brokerage firm customary margin accounts, as follows: Stiritz, 407,256 shares; Whittington, 7,954 shares.
 
(2) Number of shares of common stock which may be acquired within 60 days after March 23, 2007 through the exercise of options granted under the 1995 Equity Plan.
 
(3) Includes 100,000 shares held by Mr. Stiritz’ spouse and 60,000 shares held by his son.
 
(4) Mr. Tysoe ceased to be an executive officer in October 2006 when he resigned from his position as Vice Chair of Federated. Consequently, his holdings are not included.
 
Securities Authorized for Issuance Under Equity Compensation Plans.  The following table presents certain aggregate information, as of February 3, 2007, with respect to the 1995 Equity Plan and Federated’s 1994 Stock Incentive Plan, referred to as the 1994 Stock Plan (included on the line captioned “Equity compensation plans approved by security holders”).
 
                         
                Number of securities
 
    Number of securities
    Weighted-average
    remaining available for
 
    to be issued upon
    exercise price of
    future issuance under
 
    exercise of
    outstanding
    equity compensation plans
 
    outstanding options,
    options, warrants
    (excluding securities
 
    warrants and rights
    and rights ($)
    reflected in column (a))
 
Plan Category
  (a)     (b)     (c)  
 
Equity compensation plans approved by security holders
    40,644,498     $ 26.99       27,420,704  
Equity compensation plans not approved by security holders
    0       0       0  
Total
    40,644,498     $ 26.99       27,420,704  
 
The foregoing table does not reflect shares of restricted stock previously issued under the 1995 Equity Plan or the 1994 Stock Plan. As of February 3, 2007:
 
  •  387,000 shares of restricted stock were outstanding and subject to possible forfeiture, and
 
  •  3,808,000 shares of common stock were available for future issuance as restricted stock or restricted stock units under the 1995 Equity Plan and the 1994 Stock Plan.
 
The shares remaining available for future issuance as restricted stock or restricted stock units are included in the totals reflected in column (c). Under the 1995 Equity Plan and the 1994 Stock Plan, if these shares are not issued as restricted stock they may be made subject to grants of stock options.
 
The foregoing table does not reflect stock credits issued under Federated’s Executive Deferred Compensation Plan, the Director Deferred Compensation Plan, and the Associated Dry Goods Corporation Executives Deferred Compensation Plan (assumed by Federated in connection with its acquisition of May), which plans have not been approved by Federated’s stockholders. Pursuant to the Executive Deferred Compensation Plan, eligible executives may elect to receive a portion of their cash compensation in the form of stock credits. For a discussion of stock credits issued to Non-Employee Directors under the Director Deferred Compensation Plan, see “Further Information Concerning the Board of Directors — Director Compensation” and “Item 5. Approval of the Issuance of Common Stock Under the Director Deferred Compensation Plan.” Pursuant to the Associated Dry Goods Corporation Executives Deferred Compensation Plan, participants elected to receive a portion of their cash compensation in the form of stock credits.


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Under the plans described in the immediately preceding paragraph, entitlements due to participants are expressed as dollar amounts and then converted to stock credits in amounts equal to the number of shares of common stock that could be purchased by the applicable plan at current market prices with the cash that otherwise would have been payable to the participant. Under the Executive Deferred Compensation Plan and the Associated Dry Goods Corporation Executives Deferred Compensation Plan, each stock credit, other than a stock credit payable in cash, entitles the holder to received one share of common stock upon the termination of the holder’s employment or service with Federated. Payments include dividend equivalents on the stock credits equal to any dividends paid to stockholders on shares of common stock. No specific numbers of shares are authorized for issuance under these plans.
 
ITEM 1. ELECTION OF DIRECTORS
 
Federated’s current Certificate of Incorporation and By-Laws provide that:
 
  •  beginning at the 2006 annual meeting, as current terms expire, directors will be elected at each annual meeting of Federated stockholders for a one-year term;
 
  •  directors elected prior to the 2006 annual meeting will continue to serve for their current terms; and
 
  •  by 2008, all directors will be elected annually and would serve one-year terms.
 
In accordance with the recommendation of the NCG Committee, the Board has nominated Sara Levinson, Joseph Neubauer, Joseph Pichler, Joyce M. Roché, Karl von der Heyden and Craig E. Weatherup, each of whom is currently a member of the Board, for election as directors. If elected, such nominees will serve for a one-year term to expire at Federated’s annual meeting of stockholders in 2008 or until their successors are duly elected and qualified. Information regarding these nominees, as well as the other persons who are expected to serve on the Board following the annual meeting, is set forth below. Ages are as of March 23, 2007. William P. Stiritz has reached Federated’s mandatory retirement age for directors and is retiring effective as of the date of the annual meeting.
 
Each nominee has consented to being nominated and agreed to serve if elected. If any nominee becomes unavailable to serve as a director before the annual meeting, the Board may designate a substitute nominee and the persons named as proxies may, in their discretion, vote your shares for the substitute nominee designated by the Board. Alternatively, the Board may reduce the number of directors to be elected at the annual meeting.
 
The Board recommends that you vote FOR the election of the nominees named above, and your proxy will be so voted unless you specify otherwise.
 
Nominees for Election as Directors — Terms Expire at the 2008 Annual Meeting
 
Sara Levinson
 
Ms. Levinson, age 56, has been the Non-Executive Chairman of ClubMom, Inc. since October 2002 and was President of the Women’s Group of Rodale, Inc. from October 2002 until June 2005. Prior to October 2000, she was President of NFL Properties, Inc. since September 1994. Ms. Levinson is also a member of the board of directors of Harley Davidson, Inc. and KickApps Corporation. Ms. Levinson has been a director since May 1997.


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Joseph Neubauer
 
Mr. Neubauer, age 65, has been Chairman and Chief Executive Officer of ARAMARK Holdings Corporation since January 2007. From September 2004 to January 2007, Mr. Neubauer served as Chairman and Chief Executive Officer of ARAMARK Corporation. From January 2004 to September 2004 he served as Executive Chairman of ARAMARK Corporation. Prior to that, he was Chief Executive Officer of ARAMARK Corporation from 1983 until December 2003 and Chairman from 1984 until December 2003. He is also a member of the boards of directors of ARAMARK Corporation, Verizon Communications, Inc. and Wachovia Corporation. Mr. Neubauer has been a director since September 1992.
 
Joseph A. Pichler
 
Mr. Pichler, age 67, was Chairman of The Kroger Co. from June 2003 until June 2004 and was Chairman and Chief Executive Officer of The Kroger Co. from September 1990 until June 2003. Mr. Pichler has been a director since December 1997.
 
Joyce M. Roché
 
Ms. Roché, age 60, is the President and Chief Executive Officer of Girls Incorporated, a national non-profit research, education and advocacy organization. Prior to assuming her position at Girls Incorporated in September 2000, Ms. Roché was an independent marketing consultant from 1998 to August 2000. She served as President and Chief Operating Officer of Carson, Inc. from 1996 to 1998 and also held senior marketing positions with Carson, Inc., Revlon, Inc. and Avon, Inc. Ms. Roché is also a member of the boards of directors of Anheuser-Busch Companies, Inc., AT&T, Inc. and Tupperware Corporation. Ms. Roché has been a director since February 2006.
 
Karl M. von der Heyden
 
Mr. von der Heyden, age 70, was Vice Chairman of the Board of Directors of PepsiCo, Inc. from September 1996 to January 2001. He is also a member of the board of directors of the New York Stock Exchange Group and Dreamworks Animation SKG, Inc. Mr. von der Heyden has been a director since February 1992.
 
Craig E. Weatherup
 
Mr. Weatherup, age 61, was Chairman and Chief Executive Officer of The Pepsi Bottling Group, Inc. from November 1998 until January 2003. Mr. Weatherup is also a member of the board of directors of Starbucks Corporation. Mr. Weatherup has been a director since August 1996.
 
Continuing Directors — Terms Expire at the 2008 Annual Meeting
 
Meyer Feldberg
 
Professor Feldberg, age 65, has been Dean Emeritus and Sanford Bernstein Professor of Leadership and Ethics at Columbia Business School at Columbia University since June 2004. Prior to that time, he served as the Dean of the Columbia Business School at Columbia University from 1989 to June 2004. He is currently on leave of absence from Columbia University and is serving as a Senior Advisor at Morgan Stanley. He is also a member of the boards of directors of Revlon, Inc., Primedia, Inc., UBS Global Asset Management and SAPPI Limited. Professor Feldberg has been a director since May 1992.


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Terry J. Lundgren
 
Mr. Lundgren, age 55, has been Chairman of Federated since January 15, 2004 and President and Chief Executive Officer of Federated since February 26, 2003. Prior to that time, he served as the President/Chief Operating Officer and Chief Merchandising Officer of Federated since April 15, 2002. From May 1997 until April 15, 2002, he was President and Chief Merchandising Officer of Federated. Mr. Lundgren has been a director since May 1997.
 
Marna C. Whittington
 
Dr. Whittington, age 59, has been President of Nicholas Applegate Capital Management since 2001 and Chief Operating Officer of Allianz Global Investors, the parent of Nicholas Applegate Capital Management, since 2002. Dr. Whittington is also a member of the board of directors of Rohm & Haas Company. Dr. Whittington has been a director since June 1993.
 
FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS
 
Attendance at Meetings
 
The Board held eight meetings during the fiscal year ended February 3, 2007, referred to as fiscal 2006. During fiscal 2006, no director attended fewer than 75%, in the aggregate, of the total number of meetings of the Board and Board Committees on which such director served.
 
Director Attendance at Annual Meetings
 
As a matter of policy, Federated expects its directors to make reasonable efforts to attend Federated’s annual meetings of stockholders. Nine of Federated’s directors attended its most recent annual meeting of stockholders.
 
Communications with the Board
 
You may communicate with the full Board, the Audit Committee, the Non-Employee Directors, or any individual director by communicating through Federated’s Internet website at www.fds.com/ir/corpgov or by mailing such communications to 7 West Seventh Street, Cincinnati, Ohio 45202, Attn: General Counsel. Such communications should indicate to whom they are addressed. We will refer any communications we receive that relate to accounting, internal accounting controls or auditing matters to members of the Audit Committee unless the communication is otherwise addressed. You may communicate anonymously and/or confidentially if you desire. Federated’s Office of the General Counsel will collect all communications and forward them to the appropriate director(s).
 
Director Independence
 
Federated’s Corporate Governance Principles require that a majority of the Board consist of directors who the Board has determined do not have any material relationship with Federated and are independent. The Board has adopted standards for director independence to assist the Board in determining if a director is independent. These standards are disclosed on Federated’s website at www.fds.com/ir/corpgov.
 
The Board has determined that each Non-Employee Director qualifies as independent under New York Stock Exchange (“NYSE”) rules and satisfies Federated’s standards for director independence. To assist the


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Board in making that determination, the NCG Committee reviewed, among other things, each director’s employment status and other board commitments and, where applicable, each director’s (and his or her immediate family members’) affiliation with consultants, service providers or suppliers of the company.
 
During fiscal 2006, the NCG Committee specifically reviewed whether Mr. Neubauer’s service on the board of directors of Verizon Communications, Inc. impacted his independence since Federated purchases telecommunications network management services from Verizon. The committee focused on two of the independence standards:
 
  •  whether the director or an immediate family member is affiliated with or employed in a professional capacity including as an executive officer, partner or principal, by any corporation or other entity that is or was a paid advisor, consultant or provider of professional services to, or a substantial supplier of, Federated; and
 
  •  whether the director is an employee or executive officer, or any immediate family member is an executive officer, of a company that makes payments to, or receives payments from, Federated for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million or two percent of the other company’s consolidated gross revenues.
 
The NCG Committee determined that Mr. Neubauer’s service on the Verizon board did not result in a failure to meet either standard because serving as a director of Verizon does not make him affiliated with Verizon in a “professional capacity” and he is not an employee or executive officer of Verizon. The committee then recommended that the Board determine that Mr. Neubauer qualified as independent.
 
Non-Employee Directors’ Meetings
 
The Non-Employee Directors meet in executive session without management either before or after all regularly scheduled Board meetings. The chairpersons of the Board Committees preside at such sessions by rotation. Non-Employee Directors who are not independent under the NYSE listing standards may participate in these executive sessions, but the Board would then hold at least one executive session each year exclusively for Non-Employee Directors who are independent under the NYSE listing standards.


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Committees of the Board
 
The following standing committees of the Board were in existence throughout fiscal 2006: the Audit Committee, the Compensation and Management Development Committee, referred to as the CMD Committee, the Finance Committee and the NCG Committee. The table below provides the current members of each Board committee and meeting information for fiscal 2006:
 
                                 
Name
  Audit     CMD     Finance     NCG  
 
Meyer Feldberg
            X **             X  
Sara Levinson
            X               X  
Terry J. Lundgren
                               
Joseph Neubauer
    X **     X               X **
Joseph A. Pichler
            X               X *
Joyce M. Roché
    X                       X  
William P. Stiritz
    X               X          
Karl M. von der Heyden
            X       X *        
Craig E. Weatherup
            X *             X  
Marna C. Whittington
    X *             X **        
2006 Meetings
    5       8       8       5  
 
 
* Chair
 
** Vice Chair
 
Audit Committee.  The Audit Committee was established in accordance with the applicable requirements of the Securities Exchange Act of 1934 and the NYSE. Its charter is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the Audit Committee charter, the Board has determined that all members of the Audit Committee are independent under Federated’s standards for director independence and that Dr. Whittington qualifies as a “financial expert” because of her business experience, understanding of generally accepted accounting principals and financial statements, and educational background. In addition, the Board has determined that other members of the Audit Committee also qualify as “financial experts.”
 
The responsibilities of the Audit Committee include:
 
  •  reviewing the professional services provided by Federated’s independent registered public accounting firm and the independence of such firm;
 
  •  reviewing the scope of the audit by Federated’s independent registered public accounting firm;
 
  •  reviewing any proposed non-audit services by Federated’s independent registered public accounting firm to determine if the provision of such services is compatible with the maintenance of their independence, and approval of same;
 
  •  reviewing Federated’s annual financial statements, systems of internal accounting controls, material legal developments relating thereto, and legal compliance policies and procedures;
 
  •  reviewing matters with respect to the legal, accounting, auditing and financial reporting practices and procedures of Federated as it may find appropriate or as may be brought to its attention, including Federated’s compliance with applicable laws and regulations;


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  •  reviewing with members of Federated’s internal audit staff the internal audit department’s staffing, responsibilities and performance, including its audit plans, audit results and actions taken with respect to those results; and
 
  •  establishing procedures for the Audit Committee to receive, review and respond to complaints regarding accounting, internal accounting controls, and auditing matters, as well as confidential, anonymous submissions by employees of concerns related to questionable accounting or auditing matters.
 
See “Report of the Audit Committee” for further information regarding the Audit Committee’s review.
 
Compensation and Management Development Committee.  The charter for the CMD Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the CMD Committee charter, all current members of the CMD Committee are independent under Federated’s standards for director independence.
 
The responsibilities of the CMD Committee include:
 
  •  reviewing the salaries of the chief executive officer and other executive officers of Federated and, either as a Committee or together with the independent directors (as directed by the Board), set compensation levels for these executives;
 
  •  administering the bonus, incentive and stock option plans of Federated, including (i) establishing any annual or long-term performance goals and objectives and maximum annual or long-term incentive awards for the chief executive officer and the other executives, (ii) determining whether and the extent to which annual and/or long-term performance goals and objectives have been achieved, and (iii) determining related annual and/or long-term incentive awards for the chief executive officer and the other executives;
 
  •  reviewing and approving the benefits of the chief executive officer and the other executive officers of Federated;
 
  •  reviewing and approving any proposed employment agreement with, and any proposed severance, termination or retention plans, agreements or payments applicable to, any executive officer of Federated;
 
  •  advising and consulting with Federated’s management regarding pension, benefit and compensation plans, policies and practices of Federated;
 
  •  establishing chief executive officer and key executive succession plans, including plans in the event of an emergency, resignation or retirement; and
 
  •  reviewing and monitoring executive development strategies and practices for senior level positions and executives to assure development of a pool of management and executive personnel for adequate and orderly management succession.
 
See “Report of the Compensation Committee” for further information regarding the CMD Committee’s responsibilities.
 
Finance Committee.  The charter for the Finance Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the Finance Committee charter, a majority of the members of the Finance Committee are independent under Federated’s standards for director independence.


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The responsibilities of the Finance Committee include:
 
  •  reviewing capital projects and other financial commitments and approving such projects and commitments above $15 million and below $25 million, reviewing and tracking the actual progress of approved capital projects against planned projections and reporting to the Board on all such projects and commitments of $25 million and above;
 
  •  reporting to the Board on potential transactions affecting Federated’s capital structure, such as financings, refinancings and the issuance, redemption or repurchase of Federated’s debt or equity securities;
 
  •  reporting to the Board on potential changes in Federated’s financial policy or structure which could have a material financial impact on Federated;
 
  •  reviewing the financial considerations relating to acquisitions and dispositions of businesses and operations involving projected costs or income above $15 million and below $25 million and approving all such transactions, and reporting to the Board on all such transactions involving projected costs or income of $25 million and above; and
 
  •  reviewing the management and performance of the assets of Federated’s retirement plans.
 
Nominating and Corporate Governance Committee.  The charter for the NCG Committee is disclosed on Federated’s website at www.fds.com/ir/corpgov. As required by the NCG Committee charter, all current members of the NCG Committee are independent under Federated’s standards for director independence.
 
The responsibilities of the NCG Committee include:
 
  •  identifying and screening candidates for future Board membership;
 
  •  proposing candidates to the Board to fill vacancies as they occur, and proposing nominees to the Board for election by the stockholders at annual meetings;
 
  •  reviewing Federated’s Corporate Governance Principles and recommending to the Board any modifications that the NCG Committee deems appropriate;
 
  •  overseeing the evaluation of and reporting to the Board on the performance and effectiveness of the Board and its committees and other issues of corporate governance, and recommending to the Board any changes concerning the composition, size, structure and activities of the Board and the committees of the Board as the NCG Committee deems appropriate based on its evaluations;
 
  •  reviewing and reporting to the Board with respect to director compensation and benefits and make recommendations to the Board as the NCG Committee deems appropriate; and
 
  •  considering possible conflicts of interest of Board members and management and making recommendations to prevent, minimize, or eliminate such conflicts of interest.
 
The NCG Committee reviews the director compensation program periodically. To help it perform its responsibilities, the NCG Committee makes use of company resources, including members of senior management in Federated’s human resources and legal departments. In addition, the NCG Committee engages the services of Mercer Human Resources Consulting as an independent outside compensation consultant to assist the NCG Committee in assessing the competitiveness and overall appropriateness of Federated’s director compensation program.


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Identification and Selection of Nominees for the Board
 
Federated’s By-laws provide that director nominations may be made by or at the direction of the Board. The NCG Committee is charged with identifying individuals qualified to become Board members and recommending such individuals to the Board for its consideration. The NCG Committee is authorized, among other means of identifying potential candidates, to employ third-party search firms. In evaluating potential candidates, the NCG Committee considers, among other things, the following:
 
  •  personal qualities and characteristics, accomplishments and reputation in the business community;
 
  •  knowledge of the communities in which Federated does business and Federated’s industry or other industries relevant to Federated’s business;
 
  •  relevant experience and background that would benefit Federated;
 
  •  ability and willingness to commit adequate time to Board and committee matters;
 
  •  the fit of the individual’s skills and personality with those of other directors and potential directors in building a Board that is effective, collegial and responsive to the needs of Federated; and
 
  •  diversity of viewpoints, background, experience and demographics.
 
The NCG Committee also takes into consideration whether particular individuals satisfy the independence criteria set forth in the NYSE listing standards and Federated’s standards for director independence, together with any special criteria applicable to service on various standing committees of the Board. The full Board (a) considers candidates that the NCG Committee recommends, (b) considers the optimum size of the Board, (c) determines how to address any vacancies on the Board, and (d) determines the composition of all Board committees.
 
The NCG Committee will consider candidates for nomination recommended by stockholders of Federated and will evaluate such candidates using the same criteria discussed above that it uses to evaluate director candidates identified by the NCG Committee. Stockholders who wish to recommend a candidate for a director nomination should write to the Nominating and Corporate Governance Committee, c/o Dennis J. Broderick, Secretary, Federated Department Stores, Inc., 7 West Seventh Street, Cincinnati, Ohio 45202. The recommendation should include the full name and address of the proposed candidate, a description of the proposed candidate’s qualifications and other relevant biographical information.
 
Director Nominations by Stockholders
 
Federated’s By-Laws also provide that director nominations may be made by the company’s stockholders. The By-Laws require that stockholders intending to nominate candidates for election as directors deliver written notice thereof to the Secretary of Federated not less than 60 days prior to the meeting of stockholders. However, in the event that the date of the meeting is not publicly announced by Federated by inclusion in a report filed with the SEC or furnished to stockholders, or by mail, press release or otherwise more than 75 days prior to the meeting, notice by the stockholder to be timely must be delivered to the Secretary of Federated not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was so communicated. The By-Laws further require, among other things:
 
  •  that the notice by the stockholder set forth certain information concerning such stockholder and the stockholder’s nominees, including their names and addresses;


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  •  a representation that the stockholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice;
 
  •  the class and number of shares of Federated’s stock owned or beneficially owned by such stockholder;
 
  •  a description of all arrangements or understandings between the stockholder and each nominee;
 
  •  such other information as would be required to be included in a proxy statement soliciting proxies for the election of the nominees of such stockholder; and
 
  •  the consent of each nominee to serve as a director of Federated if so elected.
 
The chairman of the Board may refuse to acknowledge the nomination of any person not made in compliance with these requirements. Similar procedures prescribed by the By-Laws are applicable to stockholders desiring to bring any other business before an annual meeting of the stockholders. See “Submission of Future Stockholder Proposals.”
 
Corporate Governance Principles and Code of Business Conduct and Ethics
 
The Corporate Governance Principles and the Code of Business Conduct and Ethics approved by the Board for adoption by Federated are disclosed on Federated’s website at www.fds.com/ir/corpgov.
 
Director Compensation
 
Non-Employee Directors receive the following compensation:
 
     
Type of Compensation
 
Amount of Compensation
 
Board Retainer
  $60,000 annually
Board or Board Committee Meeting Fee
  $2,000 for each meeting attended and for each review session with one or more members of management
Committee Chairperson Retainer
  $10,000 annually
Equity Grant
  up to 10,000 stock options annually
 
Each Non-Employee Director, his or her spouse and eligible dependents also receive executive discounts on merchandise purchased at Federated stores. This benefit remains available to them following retirement from the Board. As described below, the retirement plan for Non-Employee Directors was terminated in 1997.
 
The following table reflects the compensation information for each Non-Employee Director for fiscal 2006. Mr. Lundgren does not receive separate compensation for his service as a Director; his compensation is


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reflected in the 2006 Summary Compensation Table in the section titled “Compensation of the Named Executives for 2006.”
 
2006 NON-EMPLOYEE DIRECTOR SUMMARY COMPENSATION TABLE
 
                                                 
                      Change in Pension
             
                      Value and
             
                      Non-Qualified
             
    Fees Earned
                Deferred
    All Other
       
    or Paid in
    Stock Awards
    Option Awards
    Compensation
    Compensation (5)
       
Name
  Cash (1)($)     (1)(3)($)     (2)(3)($)     Earnings (4)($)     ($)     Total($)  
 
Meyer Feldberg
    51,000       189,183       102,438       6,666       20,575       369,862  
Sara Levinson
    48,000       181,746       102,438       0       27,246       359,430  
Joseph Neubauer
    57,000       220,782       330,780       6,920       15,866       631,348  
Joseph A. Pichler
    56,000       197,023       135,700       0       7,640       396,363  
Joyce M. Roché
    44,500       56,054       22,617       0       0       123,171  
William P. Stiritz
    52,000       75,883       135,700       0       105       263,688  
Karl M. von der Heyden
    58,000       238,411       135,700       10,918       12,734       455,763  
Craig E. Weatherup
    56,000       187,982       102,438       1,227       28,520       376,167  
Marna C. Whittington
    57,000       232,856       102,438       3,494       24,091       419,879  
 
 
(1) Under Federated’s Director Deferred Compensation Plan, 50% of the annual Board retainer (including the retainer payable to a committee chair) and 50% of the meeting fees payable to Non-Employee Directors (the “Mandatory Stock Compensation”) are paid in credits representing the right to receive shares of common stock (“Mandatory Stock Credits”), with the balance (“Elective Compensation”) paid in cash or deferred under the Director Deferred Compensation Plan. See “Item 5. Approval of the Issuance of Common Stock Under the Director Deferred Compensation Plan.” If a Non-Employee Director elects to defer all or a portion of the Elective Compensation into either stock credits or cash credits under the Director Deferred Compensation Plan, those amounts are not paid to him or her until service on the Board ends. Mandatory Stock Credits and stock credits relating to Elective Compensation that is deferred as stock credits are calculated monthly. Shares of Federated common stock associated with such stock credits are transferred quarterly to a rabbi trust for the benefit of the participating Non-Employee Director. Dividend equivalents on the amounts deferred as stock credits are “reinvested” in additional stock credits. Elective Compensation deferred as cash credits earn interest each year at a rate equal to the yield (percent per annum) on 30-Year Treasury Bonds as of December 31 of the prior plan year. Seven of the Non-Employee Directors elected to defer all or a portion of the Elective Compensation payable to them during fiscal 2006, as follows:
 


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    Elective
    Deferred
       
    Compensation
    as Cash
    Deferred as Stock
 
Name
  Deferred($)     Credits($)     Credits(#)  
 
Levinson
    48,000       48,000          
Neubauer
    57,000               1,498  
Pichler
    56,000       56,000          
Roché
    33,375               894  
Stiritz
    52,000               1,368  
Weatherup
    56,000               1,474  
Whittington
    57,000               1,502  
 
The amounts in the “Stock Awards” column reflect the variable accounting treatment and dollar amounts recognized for financial statement reporting purposes in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”) for fiscal 2006 for Mandatory Stock Credits issued in fiscal 2006 and prior years. Non-Employee Directors received the following Mandatory Stock Credits with respect to the Mandatory Stock Compensation payable to them in fiscal 2006:
 
                                 
                2006 Additional
       
    Mandatory Stock
    Mandatory Stock
    Expense Relating to
       
Name
  Credits(#)     Compensation($)     Variable Accounting($)     Total($)  
 
Feldberg
    1,345       51,000       138,183       189,183  
Levinson
    1,272       48,000       133,746       181,746  
Neubauer
    1,499       57,000       163,782       220,782  
Pichler
    1,480       56,000       141,023       197,023  
Roché
    1,144       44,500       11,554       56,054  
Stiritz
    1,368       52,000       23,883       75,883  
von der Heyden
    1,529       58,000       180,411       238,411  
Weatherup
    1,475       56,000       131,982       187,982  
Whittington
    1,502       57,000       175,856       232,856  
 
(2) The grant date fair value of the stock options granted to Non-Employee Directors in fiscal 2006 was $135,700. The amounts in the “Option Awards” column do not reflect compensation actually received by the Non-Employee Directors. The amounts reflect the dollar amount recognized for financial statement reporting purposes in accordance with FAS 123(R) for fiscal 2006 for stock options issued pursuant to the 1995 Equity Plan. The table below shows that the amount recognized includes awards granted in fiscal 2006 and in as many as four prior years. Since Mr. Pichler, Mr. Stiritz and Mr. von der Heyden are over age 65, only the full grant date fair market value of their 2006 stock option awards were expensed in fiscal 2006. The fair value of their stock option awards prior to fiscal 2006 have already been fully expensed. Mr. Neubauer turned age 65 during fiscal 2006, so the full grant date fair market value of his 2006 stock option award was expensed in fiscal 2006. In addition, the fair value of the portions of his stock option awards prior to fiscal 2006 that had not yet been fully expensed were expensed in 2006. Assumptions and terms used in the calculation of the amounts expensed for fiscal 2006 are included in footnote 15 to Federated’s audited financial statements for fiscal 2006 included in Federated’s Annual Report on Form 10-K filed with the SEC on April 4, 2007 (the “2006 10-K”), in footnote 15 to Federated’s audited financial statements for the fiscal year ended January 28, 2006 included in Federated’s Annual Report on Form 10-K

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filed with the SEC on April 13, 2006, as amended (the “2005 10-K”) and in footnote 12 to Federated’s audited financial statements for the fiscal year ended January 29, 2005 included in Federated’s Annual Report on Form 10-K filed with the SEC on March 28, 2005 (the “2004 10-K”).
 
                                                                         
    2006 Grants     2005 Grants     2004 Grants  
                2006
                2006
                2006
 
    Options
    FMV
    Expense
    Options
    FMV
    Expense
    Options
    FMV
    Expense
 
Name
  (#)     ($)     ($)     (#)     ($)     ($)     (#)     ($)     ($)  
 
Over Age 65 in Fiscal 2006:
                                                                       
Pichler
    10,000       13.57       135,700       10,000       13.12       0       10,000       9.30       0  
Stiritz
    10,000       13.57       135,700       1,666       11.08       0                          
von der Heyden
    10,000       13.57       135,700       10,000       13.12       0       10,000       9.30       0  
Turned Age 65 During Fiscal 2006:
                                                                       
Neubauer
    10,000       13.57       135,700       10,000       13.12       112,067       10,000       9.30       54,250  
Under Age 65 during Fiscal 2006:
                                                                       
Feldberg
    10,000       13.57       22,617       10,000       13.12       32,800       10,000       9.30       23,250  
Levinson
    10,000       13.57       22,617       10,000       13.12       32,800       10,000       9.30       23,250  
Roché
    10,000       13.57       22,617                                                  
Weatherup
    10,000       13.57       22,617       10,000       13.12       32,800       10,000       9.30       23,250  
Whittington
    10,000       13.57       22,617       10,000       13.12       32,800       10,000       9.30       23,250  
 
                                                 
    2003 Grants     2002 Grants  
                2006
                2006
 
    Options
    FMV
    Expense
    Options
    FMV
    Expense
 
Name
  (#)     ($)     ($)     (#)     ($)     ($)  
 
Over Age 65 in Fiscal 2006:
                                               
Pichler
    10,000       5.99       0       10,000       10.56       0  
Stiritz
                                               
von der Heyden
    10,000       5.99       0       10,000       10.56       0  
Turned Age 65 During Fiscal 2006:
                                               
Neubauer
    10,000       5.99       19,967       10,000       10.56       8,796  
Under Age 65 During Fiscal 2006:
                                               
Feldberg
    10,000       5.99       14,975       10,000       10.56       8,796  
Levinson
    10,000       5.99       14,975       10,000       10.56       8,796  
Roché
                                               
Weatherup
    10,000       5.99       14,975       10,000       10.56       8,796  
Whittington
    10,000       5.99       14,975       10,000       10.56       8,796  


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(3) The Non-Employee Directors held the following stock options and stock credits as of the end of fiscal 2006 (values are based on a closing price at fiscal year-end of $41.88):
 
                                 
    Stock Options     Stock Credits  
    Number of Securities Underlying
             
    Unexercised Options
    Number of Stock
    Market Value of
 
    (#)     Credits
    Stock Credits
 
Name
  Exercisable     Unexercisable     (#)     ($)  
 
Feldberg
    56,000       25,000       4,787       200,480  
Levinson
    63,000       25,000       15,229       637,791  
Neubauer
    63,000       25,000       56,483       2,365,508  
Pichler
    56,000       25,000       13,371       559,977  
Roché
    0       10,000       1,926       80,661  
Stiritz
    418       11,248       3,279       137,325  
von der Heyden
    56,000       25,000       43,942       1,840,291  
Weatherup
    63,000       25,000       30,891       1,293,715  
Whittington
    63,000       25,000       21,665       907,330  
 
(4) The present value of benefits under the Non-Employee Director retirement plan for each individual was determined as a deferred temporary life annuity based on years of Board service prior to May 16, 1997. The present value basis includes a discount rate of 5.85% and mortality rates under the RP2000CH table projected to January 1, 2006 using scale AA. The calculations assume that the annual retainer remains at $60,000 and a retirement at age 72, the mandatory retirement age for Directors.
 
(5) “All Other Compensation” includes the items shown below. Merchandise discounts are credited to the Directors’ charge accounts. Gross-up on taxes on the merchandise discount and spousal travel are paid in cash after the end of the year, so the amounts shown reflect the gross up on the prior fiscal year amounts.
 
                         
    Merchandise
          Spousal
 
    Discount
    Gross-Up
    Travel
 
Name
  ($)     ($)     ($)  
 
Feldberg
    13,475       7,099       0  
Levinson
    17,137       10,109       0  
Neubauer
    9,925       5,941       0  
Pichler
    2,814       1,263       3,563  
Roché
    0       0       0  
Stiritz
    0       105       0  
von der Heyden
    6,654       3,471       2,609  
Weatherup
    14,423       14,097       0  
Whittington
    16,583       6,204       1,304  
 
Director Retirement Plan
 
Federated’s retirement plan for Non-Employee Directors was terminated on a prospective basis effective May 16, 1997 (the “Plan Termination Date”). As a result of such termination, persons who first become Non-Employee Directors after the Plan Termination Date will not be entitled to receive any benefit from the plan. Persons who were Non-Employee Directors as of the Plan Termination Date will be entitled to receive


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retirement benefits accrued as of the Plan Termination Date. Subject to an overall limit in an amount equal to the aggregate retirement benefit accrued as of the Plan Termination Date (i.e., the product of the amount of the annual Board retainer earned immediately prior to retirement and the years of Board service prior to the Plan Termination Date), and the vesting requirements described below, persons who retire from service as Non-Employee Directors after the Plan Termination Date will be entitled to receive an annual payment equal to the amount of the annual Board retainer earned immediately prior to retirement, payable in monthly installments, commencing at the later of retirement or age 60 and continuing for the lesser of such person’s remaining life or a number of years equal to such person’s years of Board service prior to the Plan Termination Date. Full vesting will occur for Non-Employee Directors who reach age 60 while serving on the Board, irrespective of such person’s years of Board service. Vesting will occur as follows for Non-Employee Directors whose Board service terminates before the director reaches age 60: 50% vesting after five years of Board service and an additional 10% vesting for each year of Board service after five years. Board service following the Plan Termination Date will be given effect for purposes of the foregoing vesting requirements. There are no survivor benefits under the terms of the retirement plan. Five of the current Non-Employee Directors participate in the plan. If they had retired on December 31, 2006, each would have been entitled to a $60,000 annual payment for the following maximum number of years:
 
         
Name
  Years  
 
Feldberg
    5  
Neubauer
    5  
von der Heyden
    5  
Weatherup
    1  
Whittington
    4  
 
Director Stock Ownership Guidelines
 
In fiscal year 2005, the NCG Committee recommended, and the Board adopted, stock ownership guidelines for Non-Employee Directors. Under these guidelines, Non-Employee Directors are required to accumulate over time shares of Federated common stock equal in value to at least five times the annual Board retainer. Currently, the annual Board retainer is $60,000, so the guideline currently is $300,000 worth of Federated common stock. Shares counted toward this requirement include:
 
  •  any shares beneficially owned by the director;
 
  •  restricted stock before the restrictions have lapsed; and
 
  •  stock credits or other stock units credited to a director’s account.
 
Federated common stock subject to unvested or unexercised stock options granted to Non-Employee Directors does not count toward the ownership requirement. Non-Employee Directors must comply with these guidelines by December 9, 2010 or within five years from the date the director’s Board service commenced, whichever is later. As of the end of the last fiscal year, all Non-Employee Directors that have served as Directors for five or more years owned sufficient shares to satisfy the ownership guidelines.
 
Matching Gift Program
 
Non-Employee Directors may participate in the matching gift program of the Federated Department Stores Foundation on the same terms as all company employees. Under this program, the Federated


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Department Stores Foundation will match up to a total of $22,500 in gifts made by the director to approved charities in any calendar year. For fiscal 2006, the Foundation matched the following gifts:
 
         
    Matching Gift Amount
 
Name
  ($)  
 
Feldberg
    5,500  
Levinson
    11,500  
Neubauer
    22,500  
Pichler
    22,500  
Roché
    6,150  
Stiritz
    22,500  
von der Heyden
    22,500  
Weatherup
    22,500  
Whittington
    22,500  
 
ITEM 2.  APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Audit Committee has appointed KPMG LLP, an independent registered public accounting firm, to audit the books, records and accounts of Federated for the fiscal year ending February 2, 2008. The Audit Committee’s appointment is subject to ratification by Federated’s stockholders. KPMG LLP and its predecessors have served as the independent registered public accounting firm for Federated since 1988, and the Board considers them well qualified. Representatives of KPMG LLP are expected to be present at the annual meeting and will have the opportunity to make a statement if they desire to do so. It is also expected that they will be available to respond to appropriate questions.
 
Fees Paid to Independent Registered Public Accounting Firm
 
The table below summarizes the fees paid to KPMG LLP during fiscal 2006 and fiscal year 2005:
 
                                             
        Audit-
      All
   
Year
  Audit Fees($)   Related Fees($)   Tax Fees($)   Other Fees($)   Total($)
 
  2006       5,727,500       3,336,372       162,974                 0       9,226,846  
  2005       6,700,000       3,842,700       163,665       0       10,706,365  
 
Audit fees represent fees for professional services rendered for the audit of Federated’s annual financial statements, the audit of Federated’s internal controls over financial reporting and the reviews of the interim financial statements included in Federated’s Forms 10-Q.
 
Audit-related fees represent professional services principally related to the audits of financial statements of employee benefit plans, audits of financial statements of certain subsidiaries and certain agreed upon procedures reports.
 
Tax fees represent professional services related to tax compliance and consulting services, provided, however, that such tax consulting services did not involve the provision of advice regarding tax strategy or planning.
 
All other fees represent professional services other than those covered above.


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The Audit Committee has adopted policies and procedures for the pre-approval of all permitted non-audit services provided by Federated’s independent registered public accounting firm. A description of such policies and procedures is attached as Appendix A to this proxy statement and incorporated herein by reference.
 
The Board recommends that you vote FOR ratification of the appointment of KPMG LLP, and your proxy will be so voted unless you specify otherwise.
 
ITEM 3.  AMENDMENT TO CERTIFICATE OF INCORPORATION TO CHANGE CORPORATE NAME
 
The Board of Directors has adopted resolutions approving, declaring advisable and recommending that the company’s stockholders approve an amendment to Federated’s Second Restated Certificate of Incorporation to change its corporate name from “Federated Department Stores, Inc.” to “Macy’s, Inc.” If approved, the change in corporate name will become effective on June 1, 2007 upon the filing of a certificate of amendment with the Secretary of State of the State of Delaware. The company currently plans to file the certificate of amendment as soon as reasonably practicable after receiving approval of the amendment from its stockholders.
 
If this proposal is approved, Article First of the certificate of incorporation will be amended to read in its entirety as follows:
 
“The name of the corporation is Macy’s, Inc. (the “Company”).”
 
Purpose and Rationale for the Proposed Amendment
 
The Board is recommending the approval of the company name change to reflect the transformation that the company has experienced in recent years. Effective February 1, 2006, Federated realigned its store operations into eight retail operating divisions — seven Macy’s and one Bloomingdale’s. At the same time, it began to market and advertise the Macy’s retail operations on a nationwide basis as a nationwide department store. The Board believes that changing the company’s name to reflect one of its primary trade names will further promote the national awareness of the company in the minds of consumers, vendors, stockholders and the investment community.
 
Effect of the Proposed Amendment
 
If approved by stockholders, the change in corporate name will not affect the validity or transferability of any existing stock certificates that bear the name “Federated Department Stores, Inc.” If the proposed name change is approved, stockholders with certificated shares should continue to hold their existing stock certificates. The rights of stockholders holding certificated shares under existing stock certificates and the number of shares represented by those certificates will remain unchanged. Direct registration accounts and any new stock certificates that are issued after the name change becomes effective will bear the name “Macy’s, Inc.”
 
Currently Federated’s stock is quoted on the New York Stock Exchange under the symbol “FD.” If the proposed name change is approved, the stock will trade under the symbol “M.” A new CUSIP number will also be assigned to the common stock following the name change.
 
If the proposal to change the corporate name is not approved, the proposed amendment to Federated’s certificate of incorporation will not be made and its corporate name and ticker symbol will remain unchanged.


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Required Approvals
 
The affirmative vote of the holders of a majority of the total number of shares of common stock outstanding as of the record date will be required to approve this proposal. Abstentions and broker non-votes will have the same effect as a vote against this proposal.
 
The Board recommends that you vote FOR the amendment to the certificate of incorporation, and your proxy will be so voted unless you specify otherwise.
 
ITEM 4.  APPROVAL OF THE 1992 INCENTIVE BONUS PLAN, AS AMENDED
 
The 1992 Incentive Bonus Plan, referred to as the 1992 Bonus Plan, was approved by Federated’s stockholders at the 1997 and 2002 annual meetings. In order to preserve the deductibility of compensation awarded under the plan, Federated again is seeking approval of the 1992 Bonus Plan at this year’s annual meeting. The purpose of the 1992 Bonus Plan is to promote the attainment of Federated’s performance goals by providing incentive compensation for certain key executives of Federated and its subsidiaries.
 
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation over $1.0 million accrued with respect to the chief executive officer and the four most highly compensated executive officers in addition to the chief executive officer employed by Federated at the end of the applicable year. Performance-based compensation will not be subject to the deduction limit if certain requirements are met. In the case of the 1992 Bonus Plan, one such requirement is that Federated’s stockholders approve the plan at least once every five (5) years.
 
The Board has amended the 1992 Bonus Plan, subject to stockholder approval at the 2007 annual meeting, as follows:
 
  •  to provide that the only form of payment under the 1992 Bonus Plan will be cash;
 
  •  to permit the 1992 Bonus Plan to use the same “performance measures” that the stockholders approved last year under Federated’s equity incentive plans;
 
  •  to add a definition of “change in control”; and
 
  •  to update the administrative provisions of the 1992 Bonus Plan.
 
The CMD Committee administers the 1992 Bonus Plan; however, the Board has retained the power to amend or terminate this plan. Each member of the CMD Committee is independent under Federated’s standards for director independence and NYSE rules. The CMD Committee may delegate its authority to executive employees of Federated from time to time, and may revoke any such delegation from time to time (references to the CMD Committee throughout this discussion also include any executive employee to whom the CMD Committee has delegated authority).
 
Executives of Federated or its subsidiaries (including store principals, general merchandise managers, store managers, vice presidents and other elected officers) may participate in the 1992 Bonus Plan if the CMD Committee designates them as a Participant for one or more performance periods. The 1992 Bonus Plan provides for both annual incentive awards and long-term incentive awards. Annual incentive awards are based upon the achievement of specified performance goals for the applicable fiscal year. Long-term incentive awards are based on the achievement of specified performance goals over a specified period, not to exceed five consecutive fiscal years. However, the CMD Committee stopped granting new long-term incentive awards under the 1992 Bonus Plan in 2002. The CMD Committee has no current plans to make long-term incentive


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awards, but believes it is in the best interests of Federated to have the flexibility to make long-term incentive awards under the 1992 Bonus Plan in the future. As of the date of this proxy statement, approximately 1,900 executive and management participants in the 1992 Bonus Plan are eligible for annual incentive awards, and no participants in the 1992 Bonus Plan have outstanding long-term incentive awards.
 
Before or shortly after the beginning of each performance period, the CMD Committee approves the applicable performance goals for the performance period for Federated and each other covered business unit and, in certain cases, for individual participants. The performance goals are based upon Federated’s business plan for the performance period. In the case of a participant who is, or is determined to be likely to become, a “covered employee” within the meaning of Section 162(m) of the Internal Revenue Code, the performance goals will be based solely upon one or more of the following measures of performance:
 
  •  total sales;
 
  •  comparable store sales;
 
  •  gross margin;
 
  •  operating or other expenses;
 
  •  earnings before interest and taxes (“EBIT”);
 
  •  earnings before interest, taxes, depreciation and amortization;
 
  •  net income;
 
  •  earnings per share (either basic or diluted);
 
  •  cash flow;
 
  •  return on investment (determined with reference to one or more categories of income or cash flow and one or more categories of assets, capital or equity, including return on net assets, return on sales, return on equity and return on invested capital);
 
  •  stock price appreciation;
 
  •  operating income;
 
  •  net cash provided by operations;
 
  •  total stockholder return; and
 
  •  customer satisfaction.
 
The performance goals may be expressed with respect to Federated or with respect to one or more of its business units and may be expressed in terms of absolute levels or percentages or ratios expressing relationships between two or more of the foregoing measures of performance (e.g., EBIT as a percentage of total sales), period-to-period changes, performance relative to business plans or budgets, or performance relative to one or more other companies or one or more indices. For participants who are not “covered employees” the performance goals may also include individual performance ratings or other performance measures, as determined by the CMD Committee.


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Each business unit’s actual performance during a particular performance period is measured against the applicable performance goals. If the business unit’s performance for the performance period:
 
(i) is below the threshold performance goal, no annual or long-term incentive awards are paid to participants;
 
(ii) is equal to the threshold performance goal, the threshold levels of annual and long-term incentive awards, as applicable, are paid to participants;
 
(iii) is equal to the target performance goal, the target levels of annual and long-term incentive awards, as applicable, are paid to participants;
 
(iv) is equal to or greater than the maximum performance goal, the maximum level of annual and long-term incentive awards, as applicable, are paid to participants; and
 
(v) is in between any two of the performance goal levels described in the immediately preceding clauses (ii), (iii) and (iv), the levels of the annual and long-term incentive awards, as applicable, paid to participants are determined through interpolation.
 
If a performance goal has no threshold level of performance, target performance must be achieved in order for any annual incentive award to be paid to participants. If a performance goal has no maximum level of performance and performance exceeds the target level of performance, the annual incentive will be calculated at a rate established by the CMD Committee for above target performance. No annual incentive award paid to any participant may exceed $7.0 million, and no long-term incentive award paid to any participant for any long-term performance period may exceed $3.0 million.
 
The 1992 Bonus Plan provides that all annual and long-term incentive awards will be paid to participants:
 
(i) in cash;
 
(ii) in a lump sum and/or in deferred payments; and
 
(iii) on the date(s) and other terms, including any premium in respect of any deferred payments,
 
in each case as determined by the CMD Committee at the time that performance goals are established for a particular performance period.
 
In connection with a change in control, the CMD Committee will take all actions that it deems necessary or appropriate to treat participants equitably, including the modification or waiver of applicable performance formulas, performance goals, performance measures, performance periods or awards, and including potentially establishing or funding a trust or other arrangement intended to secure the payment of awards. Under the 1992 Bonus Plan, a “change in control” occurs if:
 
  •  Federated is merged, consolidated or reorganized into or with another corporation and, as a result of or immediately following such merger, consolidation or reorganization, less than a majority of the voting power of the other corporation immediately after the transaction is held in the aggregate by the holders of the voting stock of Federated immediately prior to the transaction; or
 
  •  Federated sells or otherwise transfers all or substantially all of its assets to another corporation and, as a result of or immediately following such sale or transfer, less than a majority of the voting power of the then-outstanding securities of the other corporation immediately after such sale or transfer is held in the aggregate by the holders of voting stock of Federated immediately before the transaction; or


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  •  a person discloses that the person has become the beneficial owner of securities representing 30% or more of the combined voting power of Federated; or
 
  •  if, in any two-year period, individuals who, at the beginning of the period, constitute the directors of Federated cease for any reason to constitute at least a majority of the board.
 
A change in control will not occur under the third bullet point above if Federated, an entity controlled by Federated or an employee benefit plan of Federated or any entity controlled by Federated discloses that it beneficially owns securities, whether more than 30% or otherwise.
 
The foregoing discussion of the material provisions of the 1992 Bonus Plan does not purport to be complete and is qualified in its entirety by reference to the full text of the plan, which is attached as Appendix B to this proxy statement and incorporated herein by reference. The 1992 Bonus Plan is subject to amendment from time to time by the Board.
 
Awards under the 1992 Bonus Plan are determined based on future performance, so future actual awards, if any, cannot now be determined. The following table sets forth the annual bonus opportunities for fiscal 2007 depending on the extent to which the performance goals established by the CMD Committee are achieved. There is no assurance that performance goals will actually be achieved, and therefore there is no assurance that any awards actually will be paid for fiscal 2007 or any future performance period.
 
NEW PLAN BENEFITS
1992 Incentive Bonus Plan
 
                         
Name
  Threshold($)     Target($)     Maximum ($)(1)  
 
T. Lundgren
    600,000       2,250,000       4,500,000  
K. Hoguet
    160,000       600,000       1,200,000  
T. Cody
    170,000       637,500       1,275,000  
T. Cole
    195,000       731,250       1,462,500  
J. Grove
    195,000       731,250       1,462,500  
S. Kronick
    220,000       825,000       1,650,000  
R. Tysoe(2)
    0       0       0  
All executive officers as a group (8 persons)
    1,678,000       6,311,250       12,622,500  
All non-executive officers (approximately 1,892 persons)
    20,235,326       78,696,695       157,393,390  
 
 
(1) If corporate EBIT performance exceeds plan by more than a predetermined amount, the executives may receive a bonus in excess of the “maximum” amount reflected in the table. In no event, however, will an award exceed the $7 million plan maximum for annual bonus awards.
 
(2) Mr. Tysoe ceased to be an executive officer of the company when he resigned his position as Vice Chair of Federated. He is not eligible for an annual bonus in fiscal 2007.
 
Under present federal income tax law, a participant in the 1992 Bonus Plan will be taxed at ordinary income rates on the amount of any award received pursuant to the 1992 Bonus Plan. Generally and subject to the provisions of Section 162(m), Federated will receive a federal income tax deduction corresponding to the amount of income recognized by a 1992 Bonus Plan participant.


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If the holders of a majority of the shares of common stock that are actually voted on the matter at the annual meeting vote for the approval of the 1992 Bonus Plan, the 1992 Bonus Plan will be deemed to have been approved by Federated’s stockholders. If such approval by Federated’s stockholders is not obtained at the annual meeting, Federated will not receive a federal income tax deduction for any annual incentive awards payable to the executives subject to Section 162(m) of the Internal Revenue Code for any performance period commencing after February 3, 2007.
 
The Board recommends that you vote FOR the approval of the 1992 Bonus Plan, as amended, and your proxy will be so voted unless you specify otherwise.
 
ITEM 5.  APPROVAL OF THE ISSUANCE OF COMMON STOCK UNDER THE DIRECTOR DEFERRED COMPENSATION PLAN
 
On February 23, 2007, upon the recommendation of the NCG Committee, the Board approved and adopted the Director Deferred Compensation Plan (the “Director Plan”), subject to stockholder approval. In order for some elements of compensation that must be deferred under the Director Plan to be paid out in the form of Federated common stock, the NYSE requires that the issuance of Federated common stock with respect to Mandatory Stock Compensation (as defined below) be approved by stockholders. If stockholders approve the issuance of Federated common stock with respect to Mandatory Stock Compensation under the Director Plan, the effective date of the Director Plan is May 18, 2007, and it will cover compensation amounts earned after the date of the annual meeting. The Director Plan aligns the interests of Non-Employee Directors with the interests of other Federated stockholders by offering long-term stock incentives in addition to current cash compensation.
 
The following is a summary of the principal provisions of the Director Plan, a copy of which is set forth as Appendix C to this proxy statement.
 
Summary of the Director Plan
 
Shares Subject to the Director Plan.  The maximum number of shares of Federated common stock that may be credited to accounts and issued as Mandatory Stock Compensation pursuant to the Director Plan will be 250,000 shares, subject to adjustment in accordance with the Director Plan.
 
Participants.  Each member of the Board who is not a full-time employee of Federated or any subsidiary of Federated (“Non-Employee Director”) is a participant in the Director Plan. As of January 1, 2007, Federated had nine Non-Employee Directors eligible to participate in the Director Plan.
 
Administration.  The Board shall administer the Director Plan. The Board may delegate the administration of the Director Plan to the NCG Committee.
 
Mandatory Stock Compensation.  The Director Plan requires that 50% of the annual base retainer fee (including the fee payable to a committee chair) and 50% of the fees payable to Non-Employee Directors for attending Board and committee meetings (“Mandatory Stock Compensation”) be paid in credits representing the right to receive shares of common stock (“Mandatory Stock Credits”). The Mandatory Stock Compensation is subject to a three-year deferral period. Each month, a Non-Employee Director is credited with Mandatory Stock Credits equal to the number of shares of Federated common stock that could be purchased with the amount of Mandatory Stock Compensation payable to the Non-Employee Director for the month in accordance with the Director Plan. Mandatory Stock Credits are credited monthly to a bookkeeping account in the name of the Non-Employee Director. The dollar amount of any Mandatory Stock Compensation that is not credited


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as Mandatory Stock Credits (because the amount is less than the value of a share of common stock) is also credited to the account.
 
A Non-Employee Director’s account is credited on the last day of each calendar quarter with a number of additional stock credits equal to the amount of dividends paid by Federated during the calendar quarter in cash or property on the number of shares of common stock equivalent to the number of Mandatory Stock Credits in the Non-Employee Director’s account from time to time during such quarter (combined with other amounts of Mandatory Stock Compensation credited to the Non-Employee Director’s account other than as Mandatory Stock Credits) divided by the closing price of one share of common stock on the last trading day of such quarter. For purposes of the Director Plan, the stock credits described in the preceding sentence are treated as additional Mandatory Stock Credits. At the end of each calendar quarter, a number of shares of common stock equal to the amount of Mandatory Stock Credits credited to the Non-Employee Director’s account during the calendar quarter are credited to a rabbi trust.
 
Distributions will be made three years after the end of the calendar quarter in which Mandatory Stock Credits are credited to a Non-Employee Director’s account. Alternatively, the Non-Employee Director may elect to further defer distribution of the Mandatory Stock Compensation under the elective deferred compensation feature of the Director Plan until the Director’s service on the Board ends, at which time the Mandatory Stock Compensation will be distributed in shares of common stock in accordance with the distribution schedule elected by the Non-Employee Director. Distributions of shares of Federated common stock may be made directly from the trust.
 
Elective Compensation.  The 50% of fees payable to Non-Employee Directors that is not Mandatory Stock Compensation (“Elective Compensation”) is paid currently in cash or, at the election of the Non-Employee Director, may be deferred until the Non-Employee Director’s service on the Board ends.
 
If the Non-Employee Director elects to defer the Elective Compensation, the Elective Compensation may be deferred in the form of cash or in the form of common stock. Elective Compensation that is deferred in the form of cash is credited to the Non-Employee Director’s bookkeeping account at the end of each month. All amounts credited to the account as cash will accrue interest in accordance with the terms of the Director Plan. The amounts in the account will be distributed in cash in annual installments commencing on or about the first Tuesday following the end of the calendar quarter in which the Director’s service on the Board ends pursuant to the distribution schedule elected by the Non-Employee Director.
 
Elective Compensation that is deferred in the form of common stock is credited to the Non-Employee Director’s account as stock credits (“Elective Stock Credits”) at the end of each month. Each month, a Non-Employee Director is credited with Elective Stock Credits equal to the number of shares of Federated common stock that could be purchased with the amount of Elective Compensation payable for the month to the Non-Employee Director that is deferred in the form of common stock. Such dollar amounts that are not credited as Elective Stock Credits (because the amount is less than the value of a share of common stock) are also credited to the Non-Employee Director’s account. A Non-Employee Director’s account is credited on the last day of each calendar quarter with a number of additional stock credits equal to the amount of dividends paid by Federated in cash or property during the calendar quarter on the number of shares of common stock equivalent to the number of Elective Stock Credits in the Non-Employee Director’s account from time to time during such quarter (combined with other amounts of Elective Compensation that are deferred in the form of common stock and credited to the Non-Employee Director’s account other than as Elective Stock Credits) divided by the closing price of one share of common stock on the last trading day of such quarter. For purposes of the Director Plan, the stock credits described in the preceding sentence are treated as additional


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Elective Stock Credits. At the end of each calendar quarter, a number of shares of common stock equal to the number of Elective Stock Credits credited to a Non-Employee Director’s account during the calendar quarter are credited to the trust. Elective Compensation that is deferred in the form of common stock will be distributed in shares of common stock in accordance with the distribution schedule elected by the Non-Employee Director. Distributions of shares of Federated common stock may be made directly from the trust.
 
Adjustments.  In the event there is any change in the outstanding shares of Federated common stock as a result of (a) any stock dividend, stock split, combination of shares, recapitalization, or other change in the capital structure of the Company, (b) any merger, consolidation, spin-off, split-off, spin-out, split-up, reorganization, partial or complete liquidation, or other distribution of assets or issuance of rights or warrants to purchase securities, or (c) any other corporate transaction or event having an effect similar to any of the foregoing, Mandatory Stock Credits, Elective Stock Credits and the number of shares of common stock available for issuance under the Director Plan shall be adjusted accordingly.
 
Amendment and Termination.  The Board may at any time amend or terminate the Director Plan to the extent permitted by law. However, no such action may adversely affect a Director’s rights with respect to any fees already earned but not yet paid in cash, Mandatory Stock Credits, Elective Stock Credits or common stock without the Non-Employee Director’s written consent.
 
Compliance with Section 409A of the Internal Revenue Code.  To the extent applicable, it is intended that the Director Plan comply with the provisions of Section 409A of the Internal Revenue Code. The Director Plan shall be administered in a manner consistent with this intent. Any amendments made to comply with Section 409A of the Internal Revenue Code may be retroactive to the extent permitted by Section 409A and may be made by Federated without the consent of the Non-Employee Directors. Any reference in this Director Plan to Section 409A will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service.
 
Federal Income Tax Consequences.  The following discussion summarizes the federal income tax consequences to participants in the Director Plan. This summary is not intended to be complete and does not describe state or local tax consequences.
 
Taxes Related to the Receipt of Stock Credits.  The recipient of the Mandatory Stock Credits and Elective Stock Credits will generally be subject to tax at ordinary income rates on the fair market value of the common stock received in satisfaction of the Mandatory Stock Credits or Elective Stock Credits at the time of distribution. Federated will be entitled to a tax deduction equal to the amount of ordinary income recognized by the Non-Employee Director at that time.
 
Taxes Related to the Deferral of Cash.  Cash received under the Director Plan will generally be subject to tax as ordinary income in the year received. Accordingly, if a Non-Employee Director elects to defer receipt of Elective Compensation to be paid in cash, he or she will not be taxed currently, but will be taxed in the future when the cash is actually received. The cash will be taxed as ordinary income and Federated will be entitled to a tax deduction equal to the amount of ordinary income recognized.
 
If the holders of a majority of the shares of common stock that are actually voted on the matter at the annual meeting vote for the approval of issuance of common stock under the Director Plan, the issuance of common stock under the Director Plan will be deemed to have been approved by Federated’s stockholders. See footnote 1 to the 2006 Non-Employee Director Summary Compensation Table for a table showing the


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number of Mandatory Stock Credits credited to the Non-Employee Directors’ accounts in fiscal 2006 under the Director Plan.
 
The Board recommends that you vote FOR the approval of the issuance of common stock under the Director Plan, and your proxy will be so voted unless you specify otherwise.
 
COMPENSATION DISCUSSION AND ANALYSIS
 
Overview
 
Federated is one of the nation’s premier retailers, with fiscal 2006 sales of $27 billion. In August 2005, Federated completed the acquisition of The May Department Stores Company, nearly doubling the size of the company. The acquisition included over 400 store locations operated by May under 11 regional nameplates. During fiscal 2006, Federated converted the May regional nameplates to the Macy’s nameplate and the May stores to either Macy’s or Bloomingdale’s stores, strengthening the reach of both of the national retailing brands. At the end of fiscal 2006, Federated operated more than 850 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy’s and Bloomingdale’s. Federated also operates “macys.com,” “bloomingdales.com” and Bloomingdale’s By Mail. The company employs about 188,000 regular full-time and part-time employees.
 
The retailing industry is intensely competitive. Federated’s stores and direct-to-customer business operations compete with many retailing formats in the geographic areas in which they operate, including department stores, specialty stores, general merchandise stores, off-price and discount stores, new and established forms of home shopping (including the Internet, mail order catalogs and television) and manufacturers’ outlets, among others. In addition to competing for customers, Federated also must compete very aggressively for executive talent.
 
Successfully integrating two retailers of the size and scope of Federated and May is a significant undertaking, requiring a tremendous amount of time and effort from Federated’s executive team during fiscal 2006 in addition to their ongoing responsibilities for Federated’s core business. Through the integration process, Federated identified many talented people from the May organization that Federated wanted to retain for the integrated business. Federated’s compensation programs are designed to compete with the compensation programs of other retailers and, as appropriate, general industry in order to attract and retain the best executives and keep them motivated to drive stockholder value.
 
Compensation Philosophy
 
Federated’s overall compensation program is performance-driven and designed to support the needs of the business by:
 
  •  Providing Competitive and Reasonable Compensation Opportunities.
 
Federated’s compensation levels and individual compensation programs are assessed against market norms periodically by the CMD Committee with input from independent outside compensation consultants as needed. Under ordinary circumstances, the CMD Committee undertakes a comprehensive review of the program approximately every three years. Pay data is validated against several benchmarks, including specific pay levels of other large retail and vendor organizations and information from published surveys of the retail industry and general industry. In addition,


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compensation of individual executives or specific plans or practices are reviewed more frequently, depending on business needs.
 
  •  Focusing on Results and Strategic Initiatives.
 
Federated’s compensation programs are based on measures of business success. They reflect a combination of specific internal measurements of success (such as EBIT, sales and cash flow) and external measurements of success (such as customer satisfaction and stock price performance). A portion of the compensation program focuses on the strategic initiatives that will help continue to differentiate Federated from other retailers and that are important in making Macy’s and Bloomingdale’s stores the customer’s first choice in shopping.
 
  •  Fostering a Pay for Performance Culture.
 
A significant portion of an executive’s compensation program is linked to variable compensation components, such as short-term cash incentives, stock options, stock credits and restricted stock. As a result, an individual’s compensation level is dependent on individual and company performance, including stock price appreciation. The mix of components and the proportion of each as a percentage of total compensation may vary from year to year, but the total mix is designed to maximize performance.
 
  •  Attracting and Retaining Key Executives.
 
Federated’s executives are recognized as some of the most talented people in the retail industry, and Federated’s training and development programs have earned national recognition. The compensation programs are designed to attract and retain high caliber executives who are key to the continued success of the business, who can provide consistent leadership and whose talents support strong succession planning.
 
  •  Providing a Strong Link to our Stockholders’ Interests.
 
The combination of the core principles above appropriately ties Federated’s performance with compensation and thereby aligns the interests of key executives with the interests of the stockholders.
 
Operation of the CMD Committee
 
The CMD Committee of the Board administers the compensation program for corporate officers and division principals, oversees the company’s benefit plans and policies, including its incentive and equity plans, and also ensures that appropriate succession plans are in place for the chief executive officer and other key executive positions. For a more complete description of the responsibilities of the CMD Committee, see “Further Information Concerning the Board of Directors — Committees of the Board” and the charter for the CMD Committee posted on Federated’s website at www.fds.com/ir/corpgov.
 
The Compensation Program
 
Key components of Federated’s current compensation program are:
 
  •  base pay;
 
  •  annual performance-based bonus (under Federated’s short-term performance-based non-equity incentive plan);


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  •  long-term performance-based and other equity incentives, including stock options, restricted stock and/or stock credits; and
 
  •  benefits.
 
With respect to Named Executives, the CMD Committee annually reviews base pay, annual bonus payments and equity awards at its March committee meeting, at which time all financial results for the prior fiscal year for the company are available and individual and company performance against financial targets can be measured. Generally, total compensation for this group is targeted between the 50th and 75th percentiles of market practice.
 
The CMD Committee periodically benchmarks the ongoing competitiveness of Federated’s compensation program to test how well actual compensation levels reflect the targeted market position and promote Federated’s compensation philosophy. As a general rule, the CMD Committee reviews a comprehensive benchmarking analysis by its independent compensation consultant for the chief executive officer every year and for the other Named Executives every three years. In addition, in evaluating the compensation of the Named Executives, the CMD Committee reviews the compensation of other senior Federated executives for internal pay equity.
 
For the chief executive officer and the vice chairs, the CMD Committee compares executive compensation levels with proxy data reported by a group of major retailers and vendors. In fiscal 2006, as a secondary test against the market, the chief executive officer’s compensation was also compared to the proxy data reported by a peer group of consumer products companies that manage national brands and have revenues ranging from $10 to $60 billion. The component companies of both peer groups are listed below.
 
         
Retailer and Vendor Peer Group
       
Abercrombie & Fitch
  Jones Apparel Group   Polo Ralph Lauren
Ann Taylor Stores
  Kohl’s   Sears Holdings
Best Buy
  Kroger   SuperValu
Burberry Ltd.
  Limited Brands   Talbot’s
Dillards
  Liz Claiborne   Target
Gap
  LVMH   TJX Companies
Gucci Group
  Neiman Marcus Group   VF Corp
J.C. Penney
  Nordstrom   Wal-Mart
         
Consumer Products Peer Group
       
3M
  General Mills   PepsiCo
Anheuser Busch
  Johnson & Johnson   Procter & Gamble
Colgate Palmolive
  Kimberly Clark   Sara Lee
Coca-Cola
  Kraft    
 
For the chief financial officer, the CMD Committee compares compensation to retail and general industry surveys published by various survey providers, including Hay, Hewitt, Mercer and Towers Perrin. These surveys contain compensation data for dozens, and in some cases hundreds, of companies.
 
The results of the benchmarking conducted in fiscal 2006 indicated that the compensation levels of the Named Executives were within the targeted pay positions. Federated’s chief executive officer’s compensation was between the 50th and 75th percentiles of the peer group of retailers and vendors, but below the median of


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the consumer products peer group. The compensation of the other Named Executives was between the 50th and 75th percentile of either the retail and vendor proxy data or the retail and general industry survey data, as applicable.
 
Compensation Mix
 
The components of compensation for the Named Executives are the same as for the rest of Federated’s executive group — base salary, annual performance-based bonus, long-term performance-based and other equity incentives and benefits. The CMD Committee has established guidelines for annual performance-based bonuses and for long-term incentive awards. The chart below shows the mix of compensation that would be payable to the Named Executives on average over time at these award guideline levels, factoring in current salary rates as well as the “Change in Pension Value and Non-qualified Deferred Compensation Earnings” and “All Other Compensation” amounts from the 2006 Summary Compensation Table. While the values in the chart may change from year to year, depending on how the CMD Committee administers the programs, as well as other factors, they broadly reflect how the CMD Committee structures Federated’s compensation program over time to support the performance elements of the company’s compensation philosophy.
 
Based on the combination of the annual performance-based bonus and long-term award guidelines, 75% of the chief executive officer’s total compensation is tied to financial performance and/or stock price performance. For the other Named Executives, more than 50% of total compensation is tied to financial performance and/or stock price performance. These ratios are consistent with Federated’s compensation philosophy of focusing on results and strategic initiatives and fostering a pay-for-performance culture.
 
As the chart below shows, the value of the long-term award guideline for the chief executive officer is almost three times the value of the annual performance-based bonus at “target.” For the Named Executives other than Mr. Tysoe, the value of the long-term award guidelines is almost two times the value of the annual performance-based bonus at “target.” These ratios encourage the Named Executives to focus on Federated’s long-term performance.
 
                                                                 
    Not Tied to Financial Performance and/or
  Tied to Financial Performance and/or
   
    Stock Price Performance   Stock Price Performance    
        Changes in
              Long-Term and
       
        Pension and
  All Other
      Annual Bonus at
  Equity
       
    Salary   Deferred   Compensation   Subtotal   Target   Compensation   Subtotal   Total
 
Chief Executive Officer
    13 %     11 %     1 %     25 %     20 %     55 %     75 %     100 %
Average of the other Named Executives
    26 %     14 %     2 %     42 %     19 %     39 %     58 %     100 %
 
For fiscal 2006, the compensation guidelines shown above were supplemented by the grant of merger stock credits to the Named Executives and by the special 2006 retention grants made on July 11, 2006 to the Named Executives other than Mr. Lundgren, Mr. Cody and Mr. Tysoe. Both of these awards provide additional long-term incentives intended to support the merger integration process and retain key members of Federated’s executive team during the most critical post-merger period.
 
Base Pay
 
Base pay is a significant retention tool when managed properly. Base pay is designed to compensate an individual for his or her level of responsibility and performance. The CMD Committee decisions regarding an individual’s base pay take into account many factors, including:
 
  •  division and/or company performance;


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  •  the individual’s current and historical performance and contribution to Federated;
 
  •  the individual’s future potential with Federated;
 
  •  the individual’s role and unique skills; and
 
  •  consideration of external market data for similar positions, adjusted for Federated’s size, the scope of responsibilities and the uniqueness of the role.
 
Federated utilizes base pay ranges for the chief financial officer and executive levels below that position, based upon position and responsibilities and market and competitive data, as described above. The CMD Committee periodically reviews base pay ranges, most recently in fiscal 2006. The CMD Committee adopted new base pay ranges for fiscal 2007 to reflect the integration of the May acquisition. Base pay of the other Named Executives is managed individually without using a base pay range.
 
Following the close of the fiscal year, the CMD Committee, with input from the full Board, conducts an annual performance review for the chief executive officer. The chief executive officer conducts an annual performance review for the other Named Executives. The CMD Committee bases its decisions about whether to increase base pay and, if so, by how much, on a number of factors, including those listed above and, for the chief financial officer, the individual’s salary within the base pay range established for that position. The CMD Committee reviews preliminary recommendations for annual increases at its February meeting and final recommendations at its March meeting. Annual increases in base pay normally take effect on April 1st of each year.
 
Fiscal 2006 Action:  In fiscal 2006, the Named Executives received the following annual base pay rate increases:
 
                 
    Annual Increase in
 
    Base Pay Rate  
    $     % of Base Pay  
 
T. Lundgren
    100,000       7.7  
K. Hoguet
    50,000       7.1  
T. Cody
    45,000       6.0  
T. Cole
    100,000       12.5  
J. Grove
    100,000       12.5  
S. Kronick
    45,000       4.5  
R. Tysoe
    0       n/a  
 
Annual Performance-Based Bonus
 
The Named Executives participate in the 1992 Bonus Plan. The 1992 Bonus Plan is a “non-equity incentive plan” under current SEC rules. It is designed to align a significant portion of the pay of Federated’s senior executives with Federated’s annual performance. The actual amount of annual cash bonus earned each year is based on Federated’s performance results against performance measures set by the CMD Committee at the beginning of the fiscal year. No bonus will be paid if Federated does not achieve a net profit, excluding restructuring charges and extraordinary items for the fiscal year.
 
For fiscal 2006, the performance measures were EBIT, sales, and cash flow dollars. The performance measures may not be adjusted for the Named Executives during the performance period except to prevent dilution or enlargement of any award as a result of extraordinary events or to exclude the effects of


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extraordinary, unusual or nonrecurring events, changes in accounting principles, discontinued operations, acquisitions or divestitures and material restructuring charges. Federated has not disclosed the specific performance targets for each of the performance measures because they constitute confidential business information that could damage Federated’s ability to compete effectively in the retail market place. However, the CMD Committee believes that the company’s business plan is such that achieving target levels of performance requires the executives to stretch. Over the last five years, the company has achieved performance below the “threshold” level of performance once, between “threshold” and “target” once, and in excess of “target” three times. The Named Executives would be entitled to the following percentages of base pay for achieving the following “threshold,” “target” and “maximum” levels of performance.
 
                             
        Annual Bonus as a % of Base Pay  
Position
 
Component
  Threshold     Target     Maximum  
 
Chief Executive Officer
  EBIT $     18 %     90 %     No maximum  
    Sales $     0 %     30 %     60 %
    Cash Flow $     12 %     30 %     60 %
                             
              Total     30 %     150 %     No maximum  
                             
Other Named Executives
  EBIT $     9 %     45 %     No maximum  
    Sales $     0 %     15 %     30 %
    Cash Flow $     6 %     15 %     30 %
                             
              Total     15 %     75 %     No maximum  
 
For the 2007 fiscal year, in order to encourage more aggressive sales plan strategies, the CMD Committee approved a change in the “threshold” level of performance for the “sales” performance measure, to 10% for the Chief Executive Officer and 5% for the other Named Executives.
 
Fiscal 2006 Action:  The CMD Committee reviewed performance data at the end of fiscal 2006 with management at its March 2007 meeting and determined that Federated achieved a net profit for fiscal 2006, excluding restructuring charges and extraordinary items, and determined the extent to which the targeted levels of performance measures were achieved. The annual bonuses for the Named Executives for fiscal 2006 were as follows:
 
                     
        Bonus Payout for fiscal 2006 as a % of Base Pay  
Bonus Component
  2006 Performance   Chief Executive Officer     Other Named Executives  
 
EBIT $
  Above Target     133.2 %     66.6 %
Sales $
  Below Target     0.0 %     0.0 %
Cash Flow $
  Maximum     60.0 %     30.0 %
                     
Total
        193.2 %     96.6 %
 
The maximum permitted annual bonus payment for any year under the 1992 Bonus Plan is $7.0 million. For fiscal 2006, the chief executive officer’s annual bonus was 38.6% of the maximum bonus payment under the 1992 Bonus Plan. The amount of annual incentive bonus paid for fiscal 2006 to each Named Executive is reflected in the “Non-Equity Incentive Plan Compensation” column of the 2006 Summary Compensation Table.


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Annual incentive bonuses are determined as a percentage of the executive’s base salary as of the last day of the fiscal year. Bonus percentages are interpolated for performance results falling between “threshold” and “target” and between “target” and “maximum” for the applicable performance component, as measured against the company’s business plan for those components. If a performance component does not have a threshold level of performance, bonus percentages are interpolated for performance results falling between target and maximum. If a performance component has no maximum level of performance and performance exceeds the target level of performance, the annual bonus will be calculated at a rate established by the CMD Committee for above-target performance. Annual bonuses are submitted to the CMD Committee for approval at its March meeting.
 
For a more complete description of the 1992 Bonus Plan, see the discussion under “Item 4. Approval of the 1992 Incentive Bonus Plan, as Amended.”
 
Special 2006 Bonuses.  To reflect the strong performance of the company during the year despite the many challenges associated with the merger integration activities throughout the year, the CMD Committee approved an additional $25,000 special bonus for fiscal 2006 for each of Mrs. Hoguet, Mr. Cody, Mr. Cole, Ms. Grove and Ms Kronick. In addition, the CMD Committee approved a $200,000 special bonus for Mr. Cody to recognize his handling of the unique legal and human resources aspects of the May integration process. (For additional information concerning special, merger related retention arrangements for Mrs. Hoguet, Mr. Cole, Ms. Grove and Ms. Kronick, see “Special 2006 Retention Grants” below.)
 
Long-Term Performance-Based and Other Equity Incentives
 
Each year the CMD Committee reviews the use of long-term incentives under three long-term plans:
 
  •  the 1995 Equity Incentive Plan, referred to as the 1995 Equity Plan;
 
  •  the 1994 Stock Incentive Plan, referred to as the 1994 Stock Plan; and
 
  •  stock credit plans adopted from time to time, referred to as the stock credit plans.
 
Federated’s stockholders have approved the 1995 Equity Plan and the 1994 Stock Plan. Approximately 1,900 executives are eligible for equity grants, including stock options and restricted stock, under these plans.
 
Stock Options.  The 1995 Equity Plan and the 1994 Stock Plan reflect Federated’s commitment to effective management of equity-based compensation. Stock option grants are discretionary. The CMD Committee determines grant types and grant levels based on market data (as described above), emerging trends and other financial considerations, including the impact on stockholder dilution. Options granted under the plans incorporate the following terms:
 
  •  the term of the option grants does not exceed 10 years;
 
  •  the exercise price is not less than the market price of the underlying Federated common stock on the date of grant (which, for purposes of these grants, is defined as the closing price of Federated common stock on the trading date prior to the grant date);
 
  •  grants do not include “reload” provisions; and
 
  •  repricing of options is prohibited, unless approved by the stockholders.


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Despite the accounting changes resulting in the expensing of stock options, Federated has continued to use stock options as a long-term incentive vehicle because:
 
  •  Stock options align the interests of executives with those of the stockholders, support a pay-for-performance culture, foster employee stock ownership, and focus the management team on increasing value for the stockholders.
 
  •  Stock options are performance based. All the value received by the recipient from a stock option is based on the growth of the stock price above the option price.
 
  •  Stock options offer a balance to the overall compensation program: the annual incentive plan focuses on financial objectives; the performance period of the stock credit plan focuses on longer-term financial and operational performance, while the holding period applicable to stock credits focuses on increases in stockholder value; and stock options focus on increases in stockholder value.
 
  •  Stock options have retentive value and provide a long-term focus.
 
The CMD Committee’s use of stock options has evolved in recent years:
 
  •  For years prior to fiscal 2004, the CMD Committee relied almost exclusively on stock options, and determined grants based on guidelines that specified numbers of option shares for each position.
 
  •  In fiscal 2004, the CMD Committee determined to shift from such a heavy reliance on stock options, and took other actions to reduce the impact of stock options on stockholder dilution.
 
  •  For fiscal years 2004 and 2005, the CMD Committee reduced option grant levels for the Named Executives by 50%. The CMD Committee replaced one-half of the stock option grant levels with stock credits under the 2004-2005 stock credit plan described below in the Stock Credits section, replacing three stock options with one stock credit. Stock credits are cash awards that track the value of Federated common stock. In addition, a portion of the stock credits is performance-based.
 
  •  For fiscal years 2006 and 2007, the CMD Committee re-evaluated how it should determine the numbers of options and stock credits to grant to the Named Executives, concluding that Federated should:
 
  •  determine levels of options and stock credits based on grant date dollar values rather than on numbers of shares; and
 
  •  emphasize stock credits more by shifting the ratio of stock credits to stock options from 50/50 to 60/40.
 
The CMD Committee approves annual stock option grants at its March meeting. The March meeting occurs after financial results for the company are available — at least four weeks after Federated releases its year-end earnings and at least ten days after February sales are announced. In fiscal 2006, the date of the CMD Committee meeting was March 24th. Under the terms of the equity plans, the exercise price for these stock options was set at the closing price of Federated common stock on the NYSE on the trading day prior to the grant date. The options vest 25% per year over four years beginning with the first anniversary of the grant date. In addition to the annual option grants, the CMD Committee may approve options grants on a limited basis on other dates in special circumstances, such as to newly hired executives, or to executives promoted into option eligible positions or to retain executives important to the success of the company.
 
Fiscal 2006 Action:  The CMD Committee based the number of stock options granted in fiscal 2006 to each Named Executive other than Mr. Tysoe on a specific dollar value. Since he had announced his intention


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to resign from his position as a Vice Chair of Federated in fiscal 2006, Mr. Tysoe did not receive a stock option grant in fiscal 2006. The CMD Committee determined the grant date dollar value of the options granted to each Named Executive in fiscal 2004 using the Black-Scholes option valuation method and the grant date value of stock credits granted to each Named Executive in fiscal 2004, and then calculated the number of option shares and stock credits needed to provide the Named Executive with the same dollar value in fiscal 2006. The CMD Committee then awarded 60% of that dollar amount as “core” stock credits under the 2006-2007 stock credit plan (described below) and 40% of that dollar amount as stock options under the 1995 Equity Plan. The options have a 10-year term, vest 25% on each of the four anniversaries following the March 24, 2006 grant date and are priced at the closing price of Federated common stock on the NYSE on March 23, 2006. The 2006 stock option grants to the Named Executives are reflected in the 2006 Grants of Plan-Based Awards table under “Compensation of the Named Executives for 2006.”
 
For information concerning special retention stock option grants made to certain Named Executives in fiscal 2006, see “Special 2006 Retention Grants” below.
 
Stock Credits.  In March 2004, Federated implemented a two-year stock credit plan covering, among other personnel, the Named Executives. The plan was designed to accomplish several important objectives established by the CMD Committee, including:
 
  •  provide an incentive to drive the achievement of the Four Priorities (as discussed below);
 
  •  shift a portion of long-term compensation out of stock options and into stock credits to reduce dilution and share usage;
 
  •  offer a form of compensation that remains connected to stock price performance; and
 
  •  retain key executives.
 
After Mr. Lundgren’s appointment as chief executive officer in 2003, he outlined four key strategic initiatives to reinvent the company and drive profitable top-line growth for 2004 and 2005, referred to as the Four Priorities:
 
  •  Merchandise Assortments — differentiated and better edited assortments;
 
  •  Price Simplification — simplify pricing and highlight value;
 
  •  Improving the Shopping Experience — make it easy, efficient and comfortable; and
 
  •  Marketing — create a brand strategy.
 
To achieve those objectives, management executives would have to change the way they managed their businesses, often with steps that could have had a short-term negative impact on division and corporate performance and, consequently, on annual incentive compensation. The CMD Committee determined that the stock credit plan would be an effective tool to retain executives and keep them focused on the long-term significant changes needed to achieve the Four Priorities. The CMD Committee, with input from Mr. Lundgren, determines the extent to which the objectives relating to the Four Priorities have been achieved.
 
As described above, the 2004-2005 stock credit plan replaced 50% of the option grants to the Named Executives and, as a result, the number of options that normally would have been granted to participants in fiscal years 2004 and 2005 were reduced by 50%. The number of stock credits was determined by converting the replaced options with stock credits at a ratio of three stock options to one stock credit. One-third of the


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stock credits granted in 2004 were subject to performance criteria over 2004 and 2005, based on Federated’s Four Priorities.
 
At the end of fiscal 2005, the CMD Committee evaluated the performance results for the 33% of the stock credits granted in 2004 that were subject to performance criteria. Based on that evaluation, the CMD Committee concluded that 95% of those stock credits were earned. The remaining 5% of those stock credits were forfeited. The stock credits are subject to a two-year and three-year holding period and their ultimate value to the participants will be based on Federated’s stock price performance at the end of the applicable holding period. The value of one-half of the stock credit balance will be paid in cash in Spring 2008 and the value of the other half will be paid in Spring 2009. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date. During the holding period, participants receive additional credits on their stock credits equivalent to the dividends paid to stockholders on Federated common stock.
 
Two-thirds of the stock credits granted in 2004 were time-based. The stock credits are subject to holding periods and their ultimate value to the participants will be based on Federated’s stock price performance at the end of the applicable holding period. The value of one-half of the stock credit balance will be paid in cash in Spring 2008 and the value of the other half will be paid in Spring 2009. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date.
 
During 2005, the CMD Committee reviewed the elements of the total compensation program for the Named Executives and determined that stock credits continue to provide the link it seeks to align management’s compensation to Federated’s performance and stockholder interests and to drive implementation of the Four Priorities, including the introduction and implementation of the Four Priorities at the 400 plus stores acquired in the May transaction.
 
On March 24, 2006, the CMD Committee authorized a new stock credit plan for the 2006-2007 performance period. Stock credits issued under the 2006-2007 stock credit plan for the Named Executives other than Mr. Tysoe consist of core stock credits, 50% of which are time based and 50% of which have performance objectives tied to the Four Priorities, and merger stock credits, 100% of which have performance objectives tied to the achievement of synergies relating to the May acquisition, as follows:
 
                             
        Performance
    Payout of Earned Benefit  
Stock Credit
  Earning Criteria   Period     2010     2011  
 
Core
  50% based on performance against the Four Priorities     2006-2007       50 %     50 %
    50% time based     2006-2007       50 %     50 %
Merger
  100% based on performance against financial measurements of merger synergies     2006-2007       50 %     50 %
 
At the end of fiscal 2007, the CMD Committee will evaluate performance against the performance criteria applicable to the stock credits to determine the percent (from 0% to 100%) of performance-based stock credits earned by the Named Executives. The performance-based stock credits earned by the Named Executives and the time-based stock credits held by them will then be subject to the two-year and three-year holding periods. The value of one-half of the stock credits will be paid in cash in Spring 2010 and the value of the other half will be paid in Spring 2011. In each case, the value will be determined on the basis of the average closing price of Federated common stock as reported on the NYSE for the 20 business days preceding the payment date.


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The performance portion of the stock credits granted to Mr. Tysoe in fiscal 2006 are based on goals specific to his responsibilities for merger-related asset and real estate transactions. His stock credits are 75% performance-based and 25% time-based. Mr. Tysoe’s performance period is 2006-2007. In accordance with his separation arrangements with Federated, Mr. Tysoe will be paid his time-based and any earned performance-based stock credits in 2008. Mr. Tysoe’s separation arrangements are discussed in further detail under the heading “Compensation of the Named Executives for 2006 — Potential Payments Upon Termination or Change In Control.”
 
Participants who leave the company during the performance period will forfeit their core and merger stock credits unless they retire at or after age 62 with at least 10 years of vesting service or if they are terminated by Federated other than for cause, in which case their payments will be prorated for the number of months of completed service during the performance period divided by 24. Their payments will be made at the same time and in the same manner as payments to actively employed participants. In the event that a participant dies or becomes totally and permanently disabled during the performance period, the participant (in the event of disability) or the participant’s estate (in the event of death) will receive a lump sum payment of 50% of the participant’s core stock credit balance, discounted to present value.
 
Participants who leave the company during a holding period will:
 
  •  forfeit their core and merger stock credit balances if they leave the company voluntarily or if their employment is terminated for cause;
 
  •  receive the core and merger stock credits they have earned if they retire at or after age 62 with at least 10 years of vesting service or if they are terminated by Federated for other than cause, payable at the same time and in the same manner as payments to actively employed participants;
 
  •  receive a pro-rata payment of their core and merger stock credit balance if they retire between the ages of 55 and 62 with at least 10 years of vesting service, payable at the same time and in the same manner as payments to actively employed participants; and
 
  •  receive a lump sum payment of the discounted present value of the total account in case of death or total and permanent disability.
 
All stock credit balances in the 2006-2007 stock credit plan vest and become immediately payable upon a change in control of the company.
 
Fiscal 2006 Action:  The CMD Committee granted core stock credits and merger stock credits to the Named Executives on March 24, 2006. The grant value of the core stock credits was based on 60% of the grant date dollar value of the combined 2004 stock option and stock credit grants to these executives, as described above. Fifty percent of the core stock credits granted to the Named Executives other than Mr. Tysoe are time-based and 50% are performance-based, with performance measures tied to the Four Priorities. The value of the merger stock credits was approximately 33.3% of the value of the core stock credit grants. The merger stock credits are 100% performance-based, with performance measures tied to company-wide objectives related to achieving certain financial merger synergies during fiscal 2006 and 2007. The Named Executives other than Mr. Tysoe each received the following number of stock credits:
 
                         
    Core Stock Credits   Merger Stock Credits
    Performance-Based   Time Based   Performance-Based
 
T. Lundgren
    99,780       99,778       66,520  
Other Named Executives
    21,926       21,924       14,616  


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The CMD Committee will evaluate performance against the performance criteria applicable to the stock credits to determine the percent of performance-based stock credits earned by the Named Executives. The CMD Committee will award between 0 and 100% of the core performance-based stock credits depending upon execution of the strategic plan objectives relating to the Four Priorities. The CMD Committee will award between 0 and 100% of the merger stock credits depending upon meeting the objectives relating to merger synergies. Each Named Executive will receive the same percentage of their performance-based stock credits. All stock credits are subject to the holding periods described above. Mr. Tysoe received 18,274 time-based stock credits and 54,824 performance-based stock credits. The CMD Committee will award between 0 and 100% of his performance-based stock credits depending upon the level of achievement for his objectives relating to merger-related asset and real estate transactions.
 
Restricted Stock.  The CMD Committee also may grant restricted stock under the 1995 Equity Plan and the 1994 Stock Plan for retention and performance reasons. Restricted stock grants under the two plans can be either time-based or performance-based. Time-based restricted stock will generally be forfeited by the executive if the executive’s employment with Federated ends prior to the vesting date. Shares may vest 100% on the third anniversary of the grant date or in installments over a number of years following the first anniversary of the grant date. Time-based restricted stock may not fully vest in under three years. Performance-based restricted stock is subject to forfeiture if performance criteria applicable to the shares are not satisfied and/or if the executive’s employment ends prior to the vesting date. Performance-based restricted stock may not fully vest in less than one year. Depending upon satisfaction of the performance criteria, shares may vest up to 100% on the first anniversary of the grant date or in installments over a number of years following the first anniversary of the grant date. To the extent performance criteria are not satisfied, shares are forfeited. Restricted stock grants typically are approved by the CMD Committee at its March meeting and are granted as of that day. In addition, the CMD Committee may approve special restricted stock grants on other dates in special circumstances, such as to retain executives important to the success of the company.
 
Restricted stock can complement stock options. Stock options work well (that is, they provide incentives) when the fair market value of the stock is above or slightly below the exercise price of the options. However, stock options do not work as well (that is, they provide little or no incentive) if the fair market value of the stock underlying the options falls significantly below the exercise price of the options. On the other hand, restricted stock can continue to work well even if the fair market value of the stock falls significantly below the value on the grant date.
 
Fiscal 2006 Action:  Since the CMD Committee does not make “annual grants” of restricted stock, there were no “annual grants” in fiscal 2006. However, for information concerning a special retention restricted stock grant to certain of the Named Executives, see “Special 2006 Retention Grants” below.
 
Special 2006 Retention Grants.
 
In addition to the annual stock option grants, on July 11, 2006, the CMD Committee approved special grants under the 1995 Equity Plan of stock options and time-based restricted stock to Mrs. Hoguet, Mr. Cole, Ms. Grove and Ms. Kronick. Each of these executives is deemed by Mr. Lundgren and the CMD Committee as an essential member of the Federated-May integration team. The special grants were awarded as a tool to retain these executives and keep the integration team intact and the integration efforts on track. The CMD Committee determined July 11th to be an appropriate date to award the special grants because the date was sufficiently after the date on which Federated released its June, 2006 sales information (July 6, 2006) and sufficiently before the next financial release date. Pursuant to the terms of the 1995 Equity Plan, the exercise price for these stock options was set at the closing price of Federated common stock on the NYSE on


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July 10th, the trading date prior to the grant date. These options vest 100% on the third anniversary of the grant date. The shares of restricted stock granted will vest 100% on the third anniversary of the grant date, if the Named Executives remain employed through that date. The CMD Committee determined the numbers of shares of restricted stock and options for the July 11, 2006 grant so that the shares and options would have an aggregate value of approximately 4.0 to 4.5 times the executive’s base salary.
 
                 
    Options     Restricted Stock  
 
K. Hoguet
    125,000       42,000  
T. Cole
    150,000       50,000  
J. Grove
    150,000       50,000  
S. Kronick
    200,000       50,000  
 
Benefits
 
Benefits are established based upon an assessment of competitive market factors and a determination of what is needed to attract and retain high caliber executives. Federated’s primary benefits for executives include participation in the company’s broad-based plans: the cash account pension plan, the 401(k) profit sharing plan, the company’s health and dental plans and various insurance plans, including disability and life insurance and Federated’s matching gift program.
 
Federated also provides the following benefits to the Named Executives:
 
  •  Supplementary Retirement Plan — Federated provides a supplementary retirement plan to eligible executives described under “Compensation of the Named Executives for 2006 — Post Retirement Compensation.” The Supplementary Retirement Plan supplements the pension benefits provided under the cash account pension plan, and takes into account compensation that the tax rules do not permit the cash account pension plan to take into account. In addition, it supports Federated’s pay-for-performance culture by rewarding better performance with increased retirement benefits payable to eligible executives whose bonus compensation would otherwise not be taken into account under the broad based cash account pension plan. The Named Executives are taxed on supplementary retirement benefits when those benefits are paid.
 
  •  Deferred Compensation Plan — Federated provides executives the opportunity to defer receiving income until after they terminate their employment. This benefit offers tax advantages to eligible executives, permitting them to defer payment of their compensation and defer taxation on that compensation until after termination. The deferred compensation plan is described under the heading “Compensation of the Named Executives for 2006 — Post Retirement Compensation — Non-qualified Deferred Compensation Plans.”
 
  •  Financial Counseling — Federated pays for financial counseling services, the cost of which depends upon the compensation level of the executive. The Named Executives receive imputed income for fees paid for the services. This benefit provides the Named Executives with access to an independent financial advisor who is familiar with the Federated compensation and benefits programs and can provide the services efficiently and at the convenience of the executives, helping them focus more of their time on the company’s business.
 
  •  Automobile Program — Federated provides the Named Executives a choice of a car lease or an automobile allowance. The car lease option includes insurance, maintenance and fuel. This benefit provides the Named Executives with an opportunity to use a company-provided car for both business


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  and personal use. Where Federated facilities do not have free parking, they also receive a parking allowance. This benefit helps put the Named Executives on an even level with executives in the car program who work in locations with free parking. The company reports imputed income for income tax purposes for all company-paid expenses.
 
  •  Business Luncheon Club — The Named Executives are entitled to company-paid memberships at business luncheon clubs for the purpose of conducting business on behalf of Federated. Any meal or other expenses incurred at the clubs that are not business-related are the responsibility of the Named Executive. This benefit provides the Named Executives with access to congenial and helpful settings for business lunches and encourages them to use those locations for business lunches with vendors and other business related meetings.
 
  •  Additional Executive Discount — All regular employees are eligible for a base merchandise discount. The Named Executives are eligible for an additional discount on top of the base discount for a total discount of 40%. They are reimbursed for estimated taxes on imputed income associated with the additional discount. This benefit provides the company with a competitive advantage in attracting, retaining and motivating executive talent.
 
  •  Company Airplane — Mr. Lundgren is permitted to use company-owned aircraft for personal flights as well as business flights. This benefit increases the level of safety and security for Mr. Lundgren and his family. In addition, making the aircraft available to Mr. Lundgren allows him to efficiently and securely conduct business during both business and personal flights. Furthermore, given the delays today associated with early check-in requirements, security clearances, baggage claim and the need for additional time to avoid missing a flight due to possible delays at any point in the process, commercial travel has become even more inefficient in recent years, and making the aircraft available to Mr. Lundgren maximizes his availability to conduct business both before and after his flights. Finally, Federated believes that the value to Mr. Lundgren of making the aircraft available for Mr. Lundgren and his family, in terms of convenience and saving of time, is greater than the incremental cost that Federated incurs to make the aircraft available and therefore is an efficient form of compensation for him. Mr. Cody (and Mr. Tysoe prior to his resignation as a Vice Chair of Federated) is permitted to use company-owned aircraft for personal flights for up to a total of 25 hours of in-flight time per six month period under a former corporate aircraft usage policy that continues to apply to him. The company reports imputed income for income tax purposes for the value of any personal use based on the Standard Industry Fair Level (SIFL) in accordance with the Internal Revenue Code and Treasury Regulations.
 
Deductibility
 
The CMD Committee considers the deductibility for federal income tax purposes under Section 162(m) of the Internal Revenue Code in the design of Federated’s compensation programs. Section 162(m) places a limit of $1 million on the amount of compensation that Federated may deduct in any one year with respect to the Named Executives. There is an exception to the $1 million limitation for performance-based compensation meeting certain requirements defined by the IRS. Annual non-equity incentive plan compensation, stock option awards and performance-based restricted stock awards generally are performance-based compensation meeting those requirements and, as such, are fully deductible. The CMD Committee has taken the necessary actions to maximize the deductibility of payments under Federated’s 1992 Bonus Plan and of awards under its two equity plans. However, to maintain flexibility in compensating the Named Executives in a manner designed to promote Federated’s business goals, the CMD Committee does not require all compensation to be deductible.


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Consequently, portions of the total compensation program may not be deductible under Section 162(m), including the portion of base pay of some of the Named Executives in excess of $1 million, time based restricted stock and stock credit awards.
 
Change-in-Control Agreements
 
Federated entered into change-in-control arrangements with certain senior executives initially in 1992. The CMD Committee reviews and evaluates these arrangements periodically. In fiscal 2006, the CMD Committee reviewed the change in control arrangements, referred to as the Change-in-Control Agreements, with each of the Named Executives other than Mr. Tysoe, all of which were due to expire November 1, 2006. The CMD Committee determined that the arrangements help to attract, retain and motivate the caliber and quality of executive that Federated needs in its most senior positions, and that the arrangements help provide for continuity of management in the event of a change in control of Federated.
 
The CMD Committee determined that Federated should offer to extend the Change-in-Control Agreements for terms of one year, to November 1, 2007, and not change the other terms of the agreements. The CMD Committee wanted the benefit of another year’s experience to monitor trends in market practices for Change-in-Control Agreements and the guidance to be provided in final 409A Treasury Regulations before deciding whether to offer additional changes in the terms of the agreements.
 
The arrangements for the Named Executives provide that if, following a change in control, the executive is terminated for any reason, other than death, disability or for cause, or if the executive terminates his or her employment for “good reason,” then the executive is entitled to benefits described under the heading “Compensation of the Named Executives for 2006 — Potential Payments upon Termination or Change in Control.”
 
In addition, Federated’s equity programs and deferred compensation programs provide for accelerated benefits in the event of a change in control, which affect all participants in those programs as well as the Named Executives.
 
As part of its review in fiscal 2006, the CMD Committee determined that the Change-in-Control Agreements continued to fit into its overall compensation objectives because they address compensation issues that arise because of a very specific circumstance — that is, in the event of a change in control of Federated — and that are not otherwise addressed by other elements of the compensation program. The Change-in-Control Agreements:
 
  •  provide reasonable compensation opportunities in the specific circumstance of a change in control of Federated, which is a circumstance that requires special and unique provisions;
 
  •  help the executives focus on results and strategic initiatives in the unique circumstance of a change in control;
 
  •  help Federated attract and retain the highest caliber and quality of executives during the transition period associated with a change in control; and
 
  •  help provide a strong link to our stockholders’ interests by helping put the executive in a position to make decisions in the best interests of the stockholders, minimizing the executive’s concerns about his or her own job and position.


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The Change-in-Control Agreements define “change in control” and “good reason” as described under “Compensation of the Named Executives for 2006 — Potential Payments upon Termination or Change in Control” below.
 
Stock Ownership Guidelines For Executives
 
During fiscal 2006, the Board adopted stock ownership guidelines for certain executives of Federated, including the Named Executives. Under the guidelines, each corporate officer at the level of Senior Vice President and above and each division principal is required to own Federated stock, as follows:
 
         
Position
  Ownership Guideline  
 
Chief Executive Officer
    5 x base salary  
Vice Chair and Executive Vice President
    3 x base salary  
Senior Vice President and Division Principal
    1 x base salary  
 
Shares counted toward the ownership requirement include:
 
  •  any shares beneficially owned by the executive;
 
  •  stock credits or other stock units credited to an executive’s account through deferrals under the company’s deferred compensation program;
 
  •  restricted stock before the restrictions have lapsed;
 
  •  time-based stock credits issued under the stock credit plans during performance and holding periods;
 
  •  performance-based stock credits issued under the stock credit plans during holding periods; and
 
  •  the executive’s proportionate share of the Federated common stock fund under the company’s 401(k) plan.
 
Federated common stock subject to unvested or unexercised stock options does not count toward the ownership requirement. An executive must comply with these guidelines by the later of August 1, 2011 or within five years from the date the executive is employed in one of the positions listed above. As of the end of fiscal 2006, each of the Named Executives owned sufficient shares to satisfy the stock ownership guidelines.
 
COMPENSATION COMMITTEE REPORT
 
The CMD Committee establishes and administers the compensation practices related to the senior executive officers of Federated and also ensures appropriate succession plans for the CEO and key executive positions. All members of the CMD Committee qualify:
 
  •  as “independent” under the applicable listing standards of the NYSE;
 
  •  as “non-employee directors” under Rule 16b-3 of the Securities Exchange Act of 1934; and
 
  •  as “outside directors” under Section 162(m) of the Internal Revenue Code of 1986.
 
The CMD Committee met eight times in fiscal 2006. The CMD Committee regularly meets in executive session without the presence of management.


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To help it perform its responsibilities, the CMD Committee makes use of company resources, including members of senior management in Federated’s human resources, legal and finance departments. The CMD Committee reviews tally sheets for the Named Executives that includes all elements of compensation and termination benefits.
 
The CMD Committee engages the services of Mercer Human Resources Consulting as an independent outside compensation consultant to assist the CMD Committee in assessing the competitiveness and overall appropriateness of Federated’s executive compensation program. In 2006, Mercer provided support to the CMD Committee in its annual evaluation of the chief executive officer’s compensation. Mercer benchmarked the chief executive officer’s compensation against the peer groups of companies described in the Compensation Discussion and Analysis. This analysis also considered Federated’s performance relative to the performance of retail peer companies during the chief executive officer’s tenure, as well as historical compensation and market trends. In addition, Mercer benchmarked the compensation of the other Named Executives and advised on market trends.
 
The compensation consultant works at the direction of the CMD Committee and maintains regular contact with the CMD Committee. The chief executive officer does not participate in the review process and has no knowledge of recommendations that impact his personal compensation prior to review by the CMD Committee. Periodically the CMD Committee meets with the compensation consultant without the presence of management, as well as in executive session.
 
The CMD Committee has reviewed and discussed the Compensation Discussion & Analysis with Federated’s management. Based on the review and discussions referred to above, the CMD Committee recommended to the Board that the Compensation Discussion & Analysis be included in Federated’s annual report on Form 10-K and proxy statement.
 
The foregoing report was submitted by the CMD Committee and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC or Section 18 of the Exchange Act.
 
Respectfully submitted,
 
Craig E. Weatherup, Chairperson
Meyer Feldberg
Sara Levinson
Joseph Neubauer
Joseph A. Pichler
Karl M. von der Heyden


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COMPENSATION OF THE NAMED EXECUTIVES FOR 2006
 
The following table summarizes the compensation for fiscal 2006 of Federated’s principal executive officer, principal financial officer, the four other most highly compensated executive officers of Federated as of the end of fiscal 2006, and a former executive officer, collectively referred to as the “Named Executives.” Because of the magnitude of the changes in compensation disclosure requirements under the rules adopted by the SEC in 2006, the SEC is not requiring companies to recalculate or restate the compensation information for 2004 and 2005 included in last year’s proxy statement. Consequently, only compensation information for fiscal 2006 is reflected in the following tables.
 
2006 SUMMARY COMPENSATION TABLE
 
                                                                         
                                        Changes in
             
                                        Pension Value
             
                                        and
             
                                  Non-Equity
    Nonqualified
             
                                  Incentive
    Deferred
    All Other
       
                      Stock
    Option
    Plan
    Compensation
    Compen-
       
Name and Principal
        Salary
    Bonus
    Awards(1)
    Awards (2)
    Compensation
    Earnings (3)
    sation (4)
    Total
 
Position
  Year     ($)     ($)     ($)     ($)     ($)     ($)     ($)     ($)  
 
T. Lundgren
    2006       1,383,333               6,651,653       3,464,675       2,704,800       1,199,550       243,106       15,647,117  
Chairman, President and
                                                                       
Chief Executive Officer
                                                                       
K. Hoguet
    2006       741,667       25,000       1,235,294       877,552       724,500       296,471       79,848       3,980,332  
Executive Vice President
                                                                       
and CFO
                                                                       
T. Cody
    2006       792,500       225,000       2,256,147       529,213       772,800       694,345       211,405       5,481,410  
Vice Chair
                                                                       
T. Cole
    2006       883,333       25,000       1,691,762       1,023,142       869,400       444,407       58,045       4,995,089  
Vice Chair
                                                                       
J. Grove
    2006       883,333       25,000       1,702,317       1,023,142       869,400       348,355       57,026       4,908,573  
Vice Chair
                                                                       
S. Kronick
    2006       1,042,500       25,000       1,978,004       1,146,552       1,014,300       475,305       58,535       5,740,196  
Vice Chair
                                                                       
R. Tysoe
    2006       830,000               3,275,056       554,758       801,800       299,029       285,682       6,046,325  
Former Vice Chair
                                                                       
 
 
(1) The amounts in this column reflect the dollar amounts recognized for financial statement reporting purposes for fiscal 2006, in accordance with FAS 123(R), for restricted stock awarded under the 1995 Equity Plan and for stock credits awarded under Federated’s stock credit plans, and thus include amounts with respect to awards granted in and prior to fiscal 2006. In addition, with respect to stock credits, the amounts also reflect variable accounting treatment. Assumptions used in the calculation of these amounts are included in footnotes 1 and 15 to Federated’s audited financial statements included in the 2006 10-K and in footnotes 1 and 15 to Federated’s audited financial statements included in the 2005 10-K. In all cases, the amounts assume that the Named Executive remains with Federated until all time-based restrictions have lapsed and that 100% of performance-based stock credits are earned.


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Restricted Stock:
 
                                                                         
    July 11, 2006 Award     March 26, 2004 Award     February 24, 2003 Award  
          Grant Date
                Grant Date
                Grant Date
       
          Market
    2006
          Market
    2006
          Market
    2006
 
    Shares
    Value
    Expense
    Shares
    Value
    Expense
    Shares
    Value
    Expense
 
Name
  (#)     ($)     ($)     (#)     ($)     ($)     (#)     ($)     ($)  
 
Lundgren
                                                    100,000       12.79       319,750  
Hoguet
    42,000       36.44       255,080                                                  
Cody
                                                                       
Cole
    50,000       36.44       303,655                                                  
Grove
    50,000       36.44       303,655       2,000       25.25       10,555                          
Kronick
    50,000       36.44       303,655                                                  
 
March 26, 2004 Stock Credit Grants:
 
                                 
          2006
    Dividend
    Total Expense
 
          Expense
    Expense
    for 2006
 
Name
  Shares (#)     ($)     ($)     ($)  
 
Lundgren
    114,744       1,807,108       58,542       1,865,649  
Hoguet
    36,062       410,890       18,398       429,289  
Cody
    42,620       186,676       21,744       208,419  
Cole
    42,620       384,982       21,744       406,725  
Grove
    42,620       384,982       21,744       406,725  
Kronick
    42,620       671,223       21,744       692,967  
Tysoe
    42,620       693,110       21,744       714,854  
 
March 24, 2006 Stock Credit Grants:
 
                                 
          2006
    Dividend
    Total Expense
 
          Expense
    Expense
    for 2006
 
Name
  Shares (#)     ($)     ($)     ($)  
 
Lundgren
    266,078       4,466,254       0       4,466,254  
Hoguet
    58,466       550,925       0       550,925  
Cody
    58,466       2,047,728       0       2,047,728  
Cole
    58,466       981,382       0       981,382  
Grove
    58,466       981,382       0       981,382  
Kronick
    58,466       981,382       0       981,382  
Tysoe
    73,098       2,560,202       0       2,560,202  
 
 
(2) The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes in accordance with FAS 123(R) for fiscal 2006 for stock options issued pursuant to the 1995 Equity Plan, and thus may include amounts from awards granted in and prior to 2006. Assumptions used in the calculation of these amounts are included in footnote 15 to Federated’s audited financial statements included in the 2006 10-K, in footnote 15 to Federated’s audited financial statements included in the 2005 10-K and in footnote 12 to Federated’s audited financial statements included in the 2004 10-K.
 


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    7/11/06 Grants     3/24/06 Grants     2005 Grants  
                2006
                2006
                2006
 
    Options
    FMV
    Expense
    Options
    FMV
    Expense
    Options
    FMV
    Expense
 
Name
  (#)     ($)     ($)     (#)     ($)     ($)     (#)     ($)     ($)  
 
Lundgren
                            177,352       13.58       501,758       550,000       10.50       1,443,750  
Hoguet
    125,000       13.67       308,524       38,970       13.58       110,253       55,000       10.50       144,375  
Cody
                            38,970       13.58       529,213       65,000       10.50       0  
Cole
    150,000       13.67       370,229       38,970       13.58       110,253       65,000       10.50       170,625  
Grove
    150,000       13.67       370,229       38,970       13.28       110,253       65,000       10.50       170,625  
Kronick
    200,000       13.67       493,639       38,970       13.58       110,253       65,000       10.50       170,625  
Tysoe
                                                    65,000       10.50       170,625  
 
                                                                         
    2004 Grants     2003 Grants     2002 Grants  
                2006
                2006
                2006
 
    Options
    FMV
    Expense
    Options
    FMV
    Expense
    Options
    FMV
    Expense
 
Name
  (#)     ($)     ($)     (#)     ($)     ($)     (#)     ($)     ($)  
 
Lundgren
    275,000       10.10       694,375       500,000       4.87       608,750       500,000       10.37       216,042  
Hoguet
    55,000       10.10       138,875       110,000       5.44       149,600       60,000       10.37       25,925  
Cody
    65,000       10.10       0       130,000       5.44       0       100,000       10.37       0  
Cole
    65,000       10.10       164,125       130,000       5.44       176,800       72,000       10.37       31,110  
Grove
    65,000       10.10       164,125       130,000       5.44       176,800       72,000       10.37       31,110  
Kronick
    65,000       10.10       164,125       130,000       5.44       176,800       72,000       10.37       31,110  
Tysoe
    65,000       10.10       164,125       130,000       5.44       176,800       100,000       10.37       43,208  
 
 
(3) The amounts reflected represent the change in fiscal 2006 in the actuarial present value of accumulated pension benefits under the company’s cash balance pension plan and supplementary executive retirement plan. Federated does not pay above-market interest under its deferred compensation plan. The assumptions used in determining the present value of benefits are the same assumptions used for financial reporting purposes. The present value of benefits was determined using a unit credit cost method and 5.85% discount rate. The assumed retirement age used for these calculations was the normal retirement age of 65, as defined by the plans and each Named Executive was assumed to live to and retire at the normal retirement age.
 
(4) Included in “All Other Compensation” is the incremental cost to Federated of the following perquisites for the Named Executives:
 
                                                 
                      Additional
             
                      Executive
          401(k) Matching
 
    Aircraft
    Financial
    Car
    Merchandise
          Contribution/
 
    Usage(a)
    Counseling
    Usage (b)
    Discount
    Gross up (c)
    Insurance Premiums
 
Name
  ($)     ($)     ($)     ($)     ($)     ($)  
 
Lundgren
    141,894       15,200       9,984       48,382       21,219       6,427  
Hoguet
    0       15,200       10,213       31,423       16,585       6,427  
Cody
    124,733       15,200       10,134       41,481       13,430       6,427  
Cole
    0       15,200       12,820       15,973       7,625       6,427  
Grove
    0       15,200       10,536       16,379       8,484       6,427  
Kronick
    0       15,200       11,264       14,959       12,410       4,702  
Tysoe
    82,729       15,200       10,328       124,635       46,363       6,427  

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(a) The amount shown for aircraft usage represents a ratio of personal flights divided by total flight hours on all company planes. The ratio was applied against total airplane cost (excluding depreciation, real estate taxes, insurance, rent and other fixed operating costs).
 
  •  Total flight hours equals the total number of hours for every flight flown.
 
  •  Flights were deemed business or personal based on the primary purpose for the flight.
 
  •  If a trip was deemed personal, ferry flight hours, if any, were included as personal.
 
  •  If a trip included an intermediary personal stop, only the difference between a direct flight and the indirect flight was considered personal.
 
  •  If a trip was exclusively personal except for a one-day business stop, all miles were treated as personal less an adjustment for the flight hours to and from the originating airport to the business location.
 
For a more detailed description of Federated’s policies with respect to personal use of company airplanes, see the “Benefits” discussion in the “Compensation Discussion and Analysis.”
 
(b) The amount shown reflects the product of (i) the percentage of miles the Named Executive used the vehicle for non-business reasons multiplied by (ii) the actual costs incurred to provide the vehicle, including the costs of the lease, fuel, parking and insurance, reduced by any personal contributions made by the Named Executive.
 
(c) The amount shown reflects gross up payments made in December 2006 on the executive discount for the period from November 2005 through October 2006.


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Plan-Based Awards
 
The following table sets forth certain information regarding the annual incentive plan and stock options and other equity awards granted during fiscal 2006 to each of the Named Executives.
 
2006 GRANTS OF PLAN-BASED AWARDS
 
                                                                                         
                                              All Other
    All Other
             
                                              Stock
    Option
             
                                              Awards:
    Awards:
    Exercise
    Grant Date
 
                                              Number of
    Number of
    or Base
    Fair Value
 
          Estimated Future Payouts Under
    Estimated Future Payouts Under
    Shares of
    Securities
    Price of
    of Stock
 
          Non-Equity Incentive Plan Awards (1)     Equity Incentive Plan Awards     Stock or
    Underlying
    Option
    and Option
 
          Threshold
    Target
    Maximum
    Threshold
    Target
    Maximum
    Units (#)
    Options
    Awards
    Awards
 
Name
  Grant Date     ($)     ($)     ($)     (#)     (#) (2)     (#)     (3)     (#) (4)     ($/sh)     ($)(5)  
 
Lundgren
    3/24/06       420,000       2,100,000       4,200,000                                                          
      3/24/06                                                               177,352       36.26       2,408,440  
      3/24/06                                       166,300               99,778                       9,532,244  
                                                                                         
Hoguet
    3/24/06       112,500       562,500       1,125,000                                                          
      3/24/06                                                               38,970       36.26       529,213  
      3/24/06                                       36,542               21,924                       2,094,544  
      7/11/06                                                               125,000       36.51       1,708,750  
      7/11/06                                                       42,000                       1,530,480  
                                                                                         
Cody
    3/24/06       120,000       600,000       1,200,000                                                          
      3/24/06                                                               38,970       36.26       529,213  
      3/24/06                                       36,542               21,924                       2,094,544  
                                                                                         
Cole
    3/24/06       135,000       675,000       1,350,000                                                          
      3/24/06                                                               38,970       36.26       529,213  
      3/24/06                                       36,542               21,924                       2,094,544  
      7/11/06                                                               150,000       36.51       2,050,500  
      7/11/06                                                       50,000                       1,822,000  
                                                                                         
Grove
    3/24/06       135,000       675,000       1,350,000                                                          
      3/24/06                                                               38,970       36.26       529,213  
      3/24/06                                       36,542               21,924                       2,094,544  
      7/11/06                                                               150,000       36.51       2,050,500  
      7/11/06                                                       50,000                       1,822,000  
                                                                                         
Kronick
    3/24/06       157,500       787,500       1,575,000                                                          
      3/24/06                                                               38,970       36.26       529,213  
      3/24/06                                       36,542               21,924                       2,094,544  
      7/11/06                                                               200,000       36.51       2,734,000  
      7/11/06                                                       50,000                       1,822,000  
                                                                                         
Tysoe
    3/24/06       124,500       622,500       1,245,000                                                          
      3/24/06                                       54,824               18,274                       2,618,736  


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(1) The Named Executives are eligible for an annual cash incentive award under Federated’s 1992 Bonus Plan, which is deemed a “non-equity incentive plan” under SEC rules. Bonus awards are interpolated for performance that falls between “Threshold” and “Target” and between “Target” and “Maximum.” If corporate EBIT performance exceeds plan by more than a predetermined amount, the Named Executives may receive a bonus in excess of the “maximum” amount reflected in the table. In no event, however, will a Named Executive receive an award that exceeds the $7 million plan maximum for annual bonus awards. The actual amount earned for fiscal 2006 under the 1992 Bonus Plan is reported in the “Non-Equity Incentive Plan Compensation” column of the 2006 Summary Compensation Table. For a more detailed discussion of the 1992 Bonus Plan, see the “Annual Performance-Based Bonus” discussion in the “Compensation Discussion and Analysis” and “Item 4. Approval of the 1992 Incentive Bonus Plan, as Amended.”
 
(2) The numbers in this column represent performance-based stock credits awarded to the Named Executives under Federated’s 2006-2007 stock credit plan. For a detailed description of these stock credits see the “Stock Credits” discussion in the “Compensation Discussion and Analysis.”
 
(3) The numbers in this column for the March 24, 2006 grant date represent time-based stock credits awarded to the Named Executives under Federated’s 2006-2007 stock credit plan. The numbers in this column for the July 11, 2006 grant date represent time-based restricted stock granted to the Named Executives under Federated’s 1995 Equity Plan.
 
(4) The numbers reflected in this column represent the number of stock options granted to the Named Executives under Federated’s 1995 Equity Plan.
 
(5) Stock options were valued as of the grant date using the Black-Scholes option pricing model, using the following assumptions:
 
                 
    3/24/06 Grant     7/11/06 Grant  
 
Dividend yield:
    1.50 %     1.50 %
Expected volatility:
    39.80 %     39.80 %
Risk-free interest rate:
    4.60 %     4.60 %
Expected life:
    5.3 years       5.3 years  
Black-Scholes value:
  $ 13.58     $ 13.67  
 
Restricted stock and stock credits were valued for purposes of this table based on the closing price of Federated common stock on the grant date.
 
Stock Options.  All stock options granted to the Named Executives in fiscal 2006 were granted from the stockholder-approved 1995 Equity Plan. The options granted on March 24, 2006 vest 25% per year over four years beginning with the first anniversary of the date of grant. Therefore, in order to exercise all options in this grant, the recipient generally must remain with Federated for four years after the grant. The options granted on July 11, 2006 vest fully on July 11, 2009. For a more detailed description of Federated’s stock option plans, see the “Stock Options” discussion in the “Compensation Discussion and Analysis.”
 
Restricted Stock.  The shares of restricted stock granted to the Named Executives are time-based restricted shares and were granted from the 1995 Equity Plan. The shares were granted on July 11, 2006 and vest fully on July 11, 2009 if the Named Executive remains employed by Federated through that date. If any Named Executive’s employment ends prior to July 11, 2009, then the unvested shares of restricted stock held by that executive are forfeited. The Named Executives receive dividends on these shares at the same rate and


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Table of Contents

on the same payment date as other Federated stockholders receive dividends on the Federated common stock they own. For a more detailed description of the restricted stock grants, see the “Special 2006 Retention Grants” discussion in the “Compensation Discussion and Analysis.”
 
Stock Credits.  The CMD Committee authorized a new stock credit plan for the 2006-2007 performance period for senior management, including the Named Executives. For the Named Executives other than Mr. Tysoe, the stock credits consist of both core stock credits with performance objectives relating to the Four Priorities and merger stock credits with performance objectives relating to attainment of certain Federated-May merger synergies. These stock credits were awarded on March 24, 2006. At the end of fiscal 2007, the CMD Committee will evaluate the performance results for the stock credits granted in fiscal 2006 that are subject to performance criteria and may reduce the number of performance-based stock credits held by participants based on the attainment of the performance criteria. The stock credits will then be subject to a two-year and three-year holding period, with the value of the stock credits being paid out in cash in Spring 2010 and Spring 2011. For a more detailed description of the 2006-2007 stock credit plan and the terms of the stock credits awarded to Mr. Tysoe, see the “Stock Credits” discussion in the “Compensation Discussion and Analysis.”
 
Outstanding Equity Interests
 
The following table sets forth certain information regarding the total number and aggregate value of options, stock credits and restricted stock held by each of the Named Executives at February 3, 2007. The dollar amount shown for stock credits and restricted stock is calculated by multiplying the number of stock credits or shares of restricted stock, as applicable, by the closing price of Federated common stock ($41.88) on the last trading day of the fiscal year.
 
2006 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
                                                                 
    Option Awards     Stock Awards  
                                              Equity
 
                                              Incentive
 
                                              Plan
 
                                        Equity
    Awards:
 
                                        Incentive Plan
    Market or
 
                                  Market
    Awards:
    Payout
 
    Number of
    Number of
                      Value of
    Number of
    Value of
 
    Securities
    Securities
                      Shares or
    Unearned
    Unearned
 
    Underlying
    Underlying
                Number of
    Units of
    Shares, Units
    Shares,
 
    Unexercised
    Unexercised
                Shares or
    Stock
    or Other
    Units or
 
    Options
    Options
    Option
          Units of Stock
    That Have
    Rights That
    Other Rights
 
    (#)
    (#)
    Exercise
    Option
    That Have
    Not
    Have Not
    That Have
 
    Exercisable
    Unexercisable
    Price
    Expiration
    Not Vested
    Vested
    Vested
    Not Vested
 
Name
  (1)     (1)     ($)     Date     (#)     ($)     (#)(2)     ($)  
 
Lundgren
    225,000       0       25.6250       3/27/08                                  
      600,000       0       16.2187       2/25/10                                  
      306,976 (3)     0       21.5000       6/08/11                                  
      500,000       0       21.3400       3/22/12                                  
      375,000       125,000       12.7900       2/24/13                                  
      137,500       137,500       25.0050       3/26/14                                  
      137,500       412,500       30.5350       3/25/15                                  
      0       177,352       36.2600       3/24/16                                  
                                      100,000 (8)     4,188,000                  
                                      214,522 (9)     8,984,181       166,300       6,964,644  


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    Option Awards     Stock Awards  
                                              Equity
 
                                              Incentive
 
                                              Plan
 
                                        Equity
    Awards:
 
                                        Incentive Plan
    Market or
 
                                  Market
    Awards:
    Payout
 
    Number of
    Number of
                      Value of
    Number of
    Value of
 
    Securities
    Securities
                      Shares or
    Unearned
    Unearned
 
    Underlying
    Underlying
                Number of
    Units of
    Shares, Units
    Shares,
 
    Unexercised
    Unexercised
                Shares or
    Stock
    or Other
    Units or
 
    Options
    Options
    Option
          Units of Stock
    That Have
    Rights That
    Other Rights
 
    (#)
    (#)
    Exercise
    Option
    That Have
    Not
    Have Not
    That Have
 
    Exercisable
    Unexercisable
    Price
    Expiration
    Not Vested
    Vested
    Vested
    Not Vested
 
Name
  (1)     (1)     ($)     Date     (#)     ($)     (#)(2)     ($)  
 
Hoguet
    84,000       0       25.6250       3/27/08                                  
      46,000       0       16.2187       2/25/10                                  
      46,000       0       21.4250       3/23/11                                  
      153,488 (3)     0       21.5000       6/08/11                                  
      60,000       0       21.3400       3/22/12                                  
      82,500       27,500       14.2850       3/28/13                                  
      27,500       27,500       25.0050       3/26/14                                  
      13,750       41,250       30.5350       3/25/15                                  
      0       38,970       36.2600       3/24/16                                  
      0       125,000 (4)     36.5100       7/11/16                                  
                                      42,000 (8)     1,758,960                  
                                      57,986 (9)     2,428,454       36,542       1,530,379  
Cody
    120,000       0       25.6250       3/27/08                                  
      100,000       0       21.4250       3/23/11                                  
      203,720 (3)     0       21.5000       6/08/11                                  
      100,000       0       21.3400       3/22/12                                  
      32,500       32,500       14.2850       3/28/13                                  
      32,500       32,500       25.0050       3/26/14                                  
      16,250       48,750       30.5350       3/25/15                                  
      0       38,970       36.2600       3/24/16                                  
                                      64,544 (9)     2,703,103       36,542       1,530,379  
Cole
    72,000       0       16.2187       2/25/10                                  
      72,000 (5)     0       16.2187       2/25/10                                  
      36,000       0       21.4250       3/23/11                                  
      164,930 (3)     0       21.5000       6/08/11                                  
      72,000       0       21.3400       3/22/12                                  
      0       32,500       14.2850       3/28/13                                  
      32,500       32,500       25.0050       3/26/14                                  
      16,250       48,750       30.5350       3/25/15                                  
      0       38,970       36.2600       3/24/16                                  
      0       150,000 (4)     36.5100       7/11/16                                  
                                      50,000 (8)     2,094,000                  
                                      64,544 (9)     2,703,103       36,542       1,530,379  

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    Option Awards     Stock Awards  
                                              Equity
 
                                              Incentive
 
                                              Plan
 
                                        Equity
    Awards:
 
                                        Incentive Plan
    Market or
 
                                  Market
    Awards:
    Payout
 
    Number of
    Number of
                      Value of
    Number of
    Value of
 
    Securities
    Securities
                      Shares or
    Unearned
    Unearned
 
    Underlying
    Underlying
                Number of
    Units of
    Shares, Units
    Shares,
 
    Unexercised
    Unexercised
                Shares or
    Stock
    or Other
    Units or
 
    Options
    Options
    Option
          Units of Stock
    That Have
    Rights That
    Other Rights
 
    (#)
    (#)
    Exercise
    Option
    That Have
    Not
    Have Not
    That Have
 
    Exercisable
    Unexercisable
    Price
    Expiration
    Not Vested
    Vested
    Vested
    Not Vested
 
Name
  (1)     (1)     ($)     Date     (#)     ($)     (#)(2)     ($)  
 
Grove
    42,000       0       25.6250       3/27/08                                  
      30,000 (6)     0       19.0312       3/26/09                                  
      72,000       0       16.2187       2/25/10                                  
      36,000       0       21.4250       3/23/11                                  
      159,348 (3)     0       21.5000       6/08/11                                  
      72,000       0       21.3400       3/22/12                                  
      97,500       32,500       14.2850       3/28/13                                  
      32,500       32,500       25.0050       3/26/14                                  
      16,250       48,750       30.5350       3/25/15                                  
      0       38,970       36.2600       3/24/16                                  
      0       150,000 (4)     36.5100       7/11/16                                  
                                      51,000 (8)     2,135,880                  
                                      64,544 (9)     2,703,103       36,542       1,530,379  
Kronick
    50,000 (6)     0       19.0312       3/26/09                                  
      32,000 (5)     0       16.2187       2/25/10                                  
      72,000       0       21.4250       3/23/11                                  
      207,232 (3)     0       21.5000       6/08/11                                  
      72,000       0       21.3400       3/22/12                                  
      97,500       32,500       14.2850       3/28/13                                  
      32,500       32,500       25.0050       3/26/14                                  
      16,250       48,750       30.5350       3/25/15                                  
      0       38,970       36.2600       3/24/16                                  
      0       200,000 (4)     36.5100       7/11/16                                  
                                      50,000 (8)     2,094,000                  
                                      64,544 (9)     2,703,103       36,542       1,530,379  
Tysoe
    240,000 (7)             32.0312       3/27/08                                  
      240,000 (7)             35.8750       3/27/08                                  
      240,000 (7)             39.7187       3/27/08                                  
      100,000               21.4250       3/23/11                                  
      230,232 (3)             21.5000       6/8/11                                  
      100,000               21.3400       3/22/12                                  
      0       32,500       14.2850       3/28/13                                  
      32,500       32,500       25.0050       3/26/14                                  
      16,250       48,750       30.5350       3/25/15                                  
                                      60,894 (9)     2,550,241       54,824       2,296,029  

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(1) Unless otherwise noted, all options vest at a rate of 25% per year over the first four years of the ten-year option term.
 
(2) Performance-based stock credits vest at the end of fiscal 2007, subject to the satisfaction of performance criteria. Shares that vest will then be subject to the holding periods described in the “Stock Credits” discussion in the “Compensation Discussion and Analysis.”
 
(3) Stock options vested 100% on 6/1/05.
 
(4) Stock options vest 100% on 7/11/09.
 
(5) Stock options vested 100% on 2/25/04.
 
(6) Stock options vested 100% on 3/26/03.
 
(7) Stock options vested 100% on 3/27/02.
 
(8) Time-based restricted stock. For Mr. Lundgren, the shares vested on 2/28/07. For Mrs. Hoguet, Mr. Cole and Ms. Kronick, the shares vest on 7/11/09. For Ms. Grove, 500 of the shares vested on 3/26/07, 500 of the shares vest on 3/26/08 and the remaining 50,000 shares vest on 7/11/09.
 
(9) Time-based and vested performance-based stock credits, subject to satisfaction of holding periods that expire as follows:
 
                                 
    Holding Period Expiration Date  
    2/4/08     2/2/09     2/1/10     1/31/11  
 
Lundgren
    57,372       57,372       49,889       49,889  
Hoguet
    18,031       18,031       10,962       10,962  
Cody
    21,310       21,310       10,962       10,962  
Cole
    21,310       21,310       10,962       10,962  
Grove
    21,310       21,310       10,962       10,962  
Kronick
    21,310       21,310       10,962       10,962  
Tysoe
    39,584       21,310       0       0  
 
The following table sets forth certain information regarding the value realized by each of the Named Executives during fiscal 2006 upon the exercise of stock options and vesting of restricted stock.
 
2006 OPTION EXERCISES AND STOCK VESTED
 
                                 
    Option Awards     Stock Awards  
          Value Realized
    Number of Shares
    Value Realized on
 
    Number of Shares
    Upon Exercise(1)
    Acquired on Vesting
    Vesting
 
Name
  Acquired on Exercise (#)     ($)     (#)     ($)  
 
Lundgren
    262,500       4,880,469       0       0  
Hoguet
    44,000       687,251       0       0  
Cody
    185,000       2,506,644       0       0  
Cole
    269,500       4,777,399       0       0  
Grove
    126,000       2,407,401       500       17,788  
Kronick
    232,000       3,305,408       0       0  
Tysoe
    197,500       4,460,013       0       0  


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(1) The amounts “realized” from option exercises reflect the appreciation on the date of exercise (based on the excess of the fair market value of the shares on the date of exercise over the exercise price). However, because the Named Executives may keep the shares they acquire upon the exercise of the option (or sell them at different prices), these amounts do not necessarily reflect cash actually realized upon the exercise of those options.
 
Post Retirement Compensation
 
Retirement Plans
 
Federated’s retirement program, referred to as the Retirement Program, consists of defined benefit plans and a defined contribution plan. As of January 1, 2006, approximately 127,000 employees, including the Named Executives, participated in the Retirement Program.
 
Defined Benefit Plans.  Federated has two defined benefit plans covering the Named Executives — a cash account pension plan, referred to as the CAPP, and a supplementary executive retirement plan, referred to as the SERP. The following table shows the actuarial present value of the Named Executives’ accumulated benefit under each plan, calculated as of the end of fiscal 2006. Federated determined the present value using the same assumptions used for financial reporting purposes — a unit credit cost method, a 5.85% discount interest rate, and a normal retirement age of 65 (as defined by the plans).
 
2006 PENSION BENEFITS
 
                         
          Number of Years of
    Present Value of
 
          Credited Service
    Accumulated Benefit
 
Name
 
Plan Name
    (#)     ($)  
 
Lundgren
    CAPP       25       114,324  
      SERP       25       6,157,303  
Hoguet
    CAPP       24       152,216  
      SERP       24       1,643,087  
Cody
    CAPP       24       393,872  
      SERP       24       4,478,557  
Cole
    CAPP       34       363,711  
      SERP       34       4,402,809  
Grove
    CAPP       33       306,940  
      SERP       33       4,133,003  
Kronick
    CAPP       33       261,384  
      SERP       33       4,433,678  
R. Tysoe(1)
    CAPP       19       127,688  
      SERP       19       2,163,383  
 
 
(1) Mr. Tysoe’s employment with Federated commenced on March 1, 1987. However, pursuant to an arrangement with Federated entered into at the time his employment commenced, Mr. Tysoe is deemed to have commenced employment on February 19, 1981 for purposes of calculating years of vesting service for benefits accrual under the CAPP and SERP. The present value of the total amount of additional benefits


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due to Mr. Tysoe under his contractual arrangement is estimated to be approximately $626,573 as of February 3, 2007.
 
Cash Account Pension Plan.  Under the CAPP, a participant retiring at normal retirement age is eligible to receive the amount credited to his or her pension account or the monthly benefit payments determined actuarially based on the amount credited to his or her pension account. Amounts credited to a participant’s account consist of:
 
  •  an opening cash balance for participants in the plan at December 31, 1996, equal to the single sum present value, using stated actuarial assumptions, of the participant’s accrued normal retirement benefit earned at December 31, 1996, under the applicable predecessor pension plan;
 
  •  pay credits (generally, a percentage of eligible compensation credited annually based on length of service); and
 
  •  interest credits (credited quarterly, based on the 30-Year Treasury Bond rate for the November prior to each calendar year).
 
In addition, if a participant had attained at least age 55 by December 31, 1996 and had completed ten or more years of vesting service by December 31, 2001, the pension benefit payable in an annuity form, other than a single life annuity, will not be less than that which would have been payable from the predecessor pension plan under which such participant was covered on December 31, 1996.
 
Supplementary Executive Retirement Plan.  To allow the Retirement Program to provide benefits based on a participant’s total compensation, Federated adopted the SERP, which is a nonqualified unfunded plan. All benefits under the SERP are payable out of the general corporate assets of Federated. It provides retirement benefits to eligible executives based on all eligible compensation, including compensation in excess of Internal Revenue Code maximums, as well as on amounts deferred under Federated’s Executive Deferred Compensation Plan, referred to as the EDCP, in each case employing a formula that is based on the participant’s years of vesting service and final average compensation, taking into consideration the participant’s balance in the CAPP, the participant’s Prior Plan Credits (defined below) and Social Security benefits. As of January 1, 2007, approximately 850 employees were eligible to receive benefits under the terms of the SERP. Federated has reserved the right to suspend or terminate supplemental payments as to any category of employee or former employee, or to modify or terminate any other element of the Retirement Program, in accordance with applicable law.
 
Eligible compensation for this purpose includes amounts reflected in the 2006 Summary Compensation Table under the headings “Salary” and “Non-Equity Incentive Plan Compensation” but excludes amounts reflected in other columns of such table and excludes bonus amounts that exceed 100% (160% for Mr. Lundgren) of salary.
 
In addition to the CAAP and SERP, Federated’s Retirement Program includes a Profit Sharing Investment 401(k) Plan. The 401(k) Plan permits executives to contribute up to 8% of compensation (up to maximum amounts established from time to time by the Internal Revenue Code) each year. Federated matches contributions of up to 5% of eligible compensation each year. The matching rate is discretionary, but not less that 331/3% of matchable contributions. The executive may choose any of several investment funds for investment of the executive’s balances, and may change those elections daily. Benefits may be paid out at termination of employment. Executives may borrow portions of their investment balances while employed. Company contributions to the Named Executives under the 401(k) Plan are reported in the “All Other Compensation” column of the 2006 Summary Compensation Table.


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Prior to the adoption of the 401(k) plan, Federated’s primary means of providing retirement benefits to employees was through defined contribution profit sharing plans. An employee’s accumulated retirement profit sharing interests in the profit sharing plans (the “Prior Plan Credits”) which accrued prior to the adoption of the 401(k) Plan, continue to be maintained and invested as a part of the 401(k) Plan until retirement, at which time they are distributed.
 
Non-qualified Deferred Compensation Plans
 
Federated provides the opportunity for executives to defer compensation through the Executive Deferred Compensation Plan, referred to as the EDCP. Under the EDCP, eligible executives may elect to defer a portion of their compensation each year as either stock credits or cash credits. Stock credit accounts reflect common stock equivalents and dividend equivalents. Common stock equivalents are the number of full shares of Federated common stock for each calendar quarter that could be purchased based on the dollars deferred, and dividend equivalents are determined by multiplying the dividends payable upon a share of common stock to a stockholder of record during such calendar quarter by the number of stock equivalents in the participant’s stock credit account at the beginning of each quarter, less the number of shares distributable or withdrawn during each quarter in which the credit is being made. Total value of the stock credits is determined at the end of each quarter based on the closing price of the Company’s common stock as of the last day of the quarter. Cash credit accounts reflect dollars deferred plus interest equivalents determined by applying to 100% of such participant’s cash credits at the beginning of each quarter, less amounts distributable or withdrawn during such quarter, an interest rate equal to one quarter of the percent per annum on US 5-year Treasury Notes as of the last day of each quarter. Deferred compensation is distributed in the fiscal year following the fiscal year in which termination of employment occurs.
 
2006 NONQUALIFIED DEFERRED COMPENSATION
 
                                                 
          Executive
    Registrant
    Aggregate
    Aggregate
    Aggregate