One Dauch Drive

Detroit, Michigan 48211-1198

www.aam.com

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

April 26, 2007

 

American Axle & Manufacturing Holdings, Inc. (AAM)

 

By Order of the Board of Directors,

 

Patrick S. Lancaster

Vice President, Chief Administrative Officer & Secretary

March 22, 2007

 

Along with the proxy statement and proxy card, we are sending you our 2006 Annual Report to Stockholders, which includes our audited, consolidated financial statements and other information that we encourage you to read. Mailing of these materials to our stockholders began on March 22, 2007.

 

 

2007 ANNUAL MEETING OF STOCKHOLDERS

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

PROXY STATEMENT

Annual Meeting of Stockholders
To Be Held April 26, 2007

QUESTIONS AND ANSWERS ABOUT VOTING AND THE ANNUAL MEETING

 

Why am I receiving this proxy statement?

 

The Board of Directors of American Axle & Manufacturing Holdings, Inc. (AAM or the Company) is soliciting proxies for the 2007 annual meeting of stockholders. You are receiving a proxy statement because you owned shares of AAM common stock on March 1, 2007 (record date), which entitles you to vote at the meeting. By use of a proxy, you can vote whether or not you attend the meeting. This proxy statement describes the matters on which we would like you to vote and provides related information so that you can make an informed decision.

 

What if I receive more than one proxy card?

 

Each proxy card represents shares held on the record date. You will receive multiple proxy cards if you hold your shares in different ways (e.g., trusts, AAM 401(k) plans, custodial accounts, joint tenancy) or in multiple accounts. If your shares are held in street name by a broker, bank, trustee or other custodian, follow the instructions on the proxy card(s) they provide. Vote the shares represented by each proxy card you receive.

 

What is the difference between holder of record and street name holder?

 

These terms describe how your shares are held. You are a holder of record if your shares are held directly in your name with AAM’s transfer agent, Computershare Trust Company, N.A. If your shares are held in the name of a broker, bank, trustee or other record holder, or through one of the AAM 401(k) plans, you are a street name holder.

 

How do I vote my shares?

 

If you are a holder of record, you may vote in person at the annual meeting or by proxy:

 

By mail.  Complete, sign, date and return your proxy card in the envelope provided.

By telephone.  Call the toll free number shown on the enclosed proxy card.

 

If you hold shares in street name, refer to the instructions provided by your broker, bank, trustee or other record holder for voting your shares by proxy. To vote these shares in person at the annual meeting, you must obtain a proxy from your broker, bank, trustee or other record holder.

 

How many shares may vote at the meeting?

 

As of March 1, 2007, we had 52,096,286 shares of common stock outstanding and entitled to vote. A holder of common stock on the record date is entitled to one vote per share owned. Under AAM’s by-laws, a majority of these shares must be present in person or by proxy to hold the annual meeting.

 

Can I change my vote?

 

You may change your vote at any time before the annual meeting by:

 

 

What are the Board’s recommendations on how I should vote my shares?

 

The Board recommends that you vote your shares as follows:

 

 

What are my choices when voting?

 

 

What vote is required to approve each proposal?

 

 

Votes withheld and abstentions will be counted as present for purposes of determining whether a majority of shares is present to hold the annual meeting. Abstentions will not be counted in the tally of votes for or against a proposal. A withheld vote has the same effect as an abstention.

 

How will the votes be counted?

 

Representatives of Computershare Trust Company, N.A. will count the votes and serve as our inspector of election. The inspector of election will attend the annual meeting.

 

What if I do not vote and do not attend the annual meeting?

 

If you are a holder of record and you do not vote your shares, your shares will not be voted. If you sign your proxy card without giving specific instructions, your shares will be voted as the Board recommends.

 

If you hold shares in street name and you do not give your broker, bank, trustee or other record holder specific voting instructions, the rules of the New York Stock Exchange (NYSE) permit your record holder to vote your shares on both proposals at its discretion.

 

If you do not give your record holder specific voting instructions and your record holder does not vote, the votes will be broker non-votes. Broker non-votes will have no effect on the outcome of the election of directors and the other proposal. Broker non-votes will be counted as present for purposes of determining whether enough votes are present to hold the annual meeting.

 

AAM’s Board is divided into three classes with three of the directors standing for election each year. The term for directors elected this year will expire at the annual meeting of stockholders in 2010. Each of the nominees below has agreed to serve that term. If any nominee becomes unavailable prior to the annual meeting to serve as a director, the Board may select a replacement nominee or reduce the number of directors to be elected.

 

The Board proposes that nominees John A. Casesa, Elizabeth A. (Beth) Chappell and Dr. Henry T. Yang be elected to the Board for terms expiring in 2010. The Board unanimously approved these nominations based on the outstanding achievements, special competencies and integrity of each nominee. A biographical summary of the principal occupation, professional background and experience of each nominee and returning director is provided.

 

Your Board recommends a vote FOR each of the nominees.

 

Returning Directors

Directors — to hold office until 2008 Annual Meeting of Stockholders

 

Directors — to hold office until 2009 Annual Meeting of Stockholders

 

 

 

Corporate Governance Guidelines

 

The Board has adopted Corporate Governance Guidelines that meet or exceed the requirements of the NYSE listing standards. AAM’s Corporate Governance Guidelines are available on our website at www.aam.com.

 

Board Structure and Self-Evaluation

 

The Board has nine members and is equally divided into three classes. Directors serve for staggered three-year terms. The Board believes that the staggered election of directors helps to maintain continuity and ensures that a majority of directors at any given time will have in-depth knowledge of the Company. The Board and the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee each conduct an annual self-evaluation in order to monitor and continuously improve the effectiveness of the Board and its committees.

 

Director Independence

 

AAM’s Corporate Governance Guidelines provide that at least a majority of the members of the Board and each member of the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee meet the independence criteria of the NYSE listing standards. In addition, the Board has established Director Independence Guidelines to assist in determining the independence of our directors. No director qualifies as independent unless the Board determines that the director has no direct or indirect material relationship with the Company. The Board considers all relevant facts and circumstances of which it is aware in making an independence determination. The Director Independence Guidelines are included in AAM’s Corporate Governance Guidelines, which are available on our website at www.aam.com.

 

Based on the independence criteria of the NYSE listing standards and our Director Independence Guidelines, the Board affirmatively determined in February 2006 that each of the following directors are independent: Elizabeth A. (Beth) Chappell, Forest J. Farmer, Richard C. Lappin, William P. Miller II, Larry K. Switzer, Thomas K. Walker and Dr. Henry T. Yang. None of the directors who qualify as independent has a business, financial, family or other type of relationship with AAM (other than as a director and stockholder of AAM), except for one relationship that is immaterial under the independence standards. One director had a relationship with an entity that was reviewed by the Board under the Company’s categorical independence standard and the NYSE listing standard covering payments for properties or services exceeding the greater of $1 million or two percent of the annual consolidated gross revenues of the outside entity. In this instance, the director is an officer of a non-profit organization that received sponsorship fees from AAM that were significantly less than the NYSE listing standard or the Company’s categorical standard. The Board determined that the relationship was immaterial and does not impair the director’s independence.

 

In February 2007, applying the same standards, the Board determined that director nominee John A. Casesa is also independent from the Company. If all nominees are elected by our stockholders at the 2007 annual meeting, AAM’s nine-member Board will have eight independent directors.

 

The Co-Founder, Chairman of the Board & CEO, Richard E. Dauch, an AAM employee, and B.G. Mathis, who is related to an AAM executive, are not independent from the Company.

 

Executive Sessions of Non-Management and Independent Directors

 

Non-management directors meet in executive session without AAM management present at the end of each scheduled Board meeting. Independent directors meet in executive session without AAM management present at least once each year. Thomas K. Walker, an independent director, has been selected by the Board to preside at each executive session.

 

Stockholder Communication with the Board

 

Stockholders or other interested parties may communicate with the Board through the Secretary of AAM by mail at One Dauch Drive, Detroit, Michigan 48211-1198 or by e-mail at AAMBoardofDirectors@aam.com.

 

The Board has instructed the Secretary to review all such communications and to exercise his discretion not to forward to the Board correspondence that is inappropriate such as business solicitations, frivolous communications and advertising, routine business matters and personal grievances. However, any director may at any time request the Secretary to forward any communications received by the Secretary but not forwarded to the directors.

 

Code of Business Conduct

 

AAM has adopted a Code of Business Conduct that is designed to assist all AAM associates, executive officers and members of the Board in conducting AAM’s business with the highest standards of ethics and integrity. Included in the Code of Business Conduct is a Code of Ethics for AAM’s CEO, CFO, CAO and other senior financial officers. The Board annually reviews the Code of Business Conduct, which is available on our website at www.aam.com. A copy also may be obtained by any stockholder upon request to the AAM Investor Relations Department.

 

Related Person Transactions Policy

 

In October 2006, the Board adopted a written policy containing procedures for the review, approval and monitoring of transactions involving AAM and related persons as defined in the policy. This policy supplements AAM’s other conflict of interest policies as set forth in AAM’s Code of Business Conduct. The Board has delegated to the Audit Committee the responsibility for reviewing and approving all related person transactions in accordance with the policy.

 

Transactions covered by the policy include any financial transaction, arrangement or relationship or series of similar transactions, arrangements or relationships in which:

 

 

A transaction between AAM and a related person is not subject to this policy if the transaction:

 

 

A related person includes directors and executive officers and their immediate family members, stockholders owning more than five percent of the Company’s outstanding common stock as of the last completed fiscal year, and any entity owned or controlled by any one of these persons.

 

A related person transaction will be permitted only if the transaction is approved by the Audit Committee and is on terms comparable to those available to unrelated third parties. Any related person transaction involving a member of the Audit Committee must be presented to disinterested members of the full Board for review.

 

In considering a transaction, the Audit Committee and/or the Board may consider the following factors, as applicable:

 

 

Every director and executive officer is required to report any existing or contemplated related person transaction to AAM’s Vice President, Chief Administrative Officer & Secretary for presentation to the Audit Committee.

 

Richard E. Dauch’s son, Richard F. Dauch, is Executive Vice President — Worldwide Manufacturing of AAM. Richard F. Dauch earned $417,700 in base salary and annual bonus in 2006. His compensation was approved by the Compensation Committee. B.G. Mathis’ son, Robert W. Mathis, is Director Human Resource Operations at AAM. Robert W. Mathis earned $163,319 in base salary and annual bonus in 2006. As of the date of the Proxy Statement, no other existing or contemplated related person transactions have been brought to the attention of the Secretary, the Audit Committee or the Board.

 

Board Committee Composition

 

The Board held four regularly scheduled meetings and two special meetings during 2006. Directors are expected to attend all Board meetings, meetings of the committees on which they serve and stockholder meetings. During 2006, all directors attended 100 percent of the meetings of the Board and the committees on which they served. All directors attended the 2006 annual meeting of stockholders. The following table shows the Board committee membership and the number of committee meetings held during 2006.

 

Committee Membership in 2006

 

 

Audit Committee

 

The Audit Committee provides assistance to the Board with respect to: the quality and integrity of our financial statements, our compliance with legal and regulatory requirements, our independent auditors’ qualifications and independence, and the performance of our internal audit function and independent auditors. The Audit Committee operates under a written charter that was amended and

restated in October 2006. The Audit Committee Charter is attached as Appendix A and is available on AAM’s website at www.aam.com.

 

During 2006, Mr. Walker served as Chairman and Mr. Lappin, Mr. Miller and Mr. Switzer served as members of the Audit Committee. In February 2007, the Board appointed Mr. Miller as Chairman of the Audit Committee and appointed Mr. Switzer and Mr. Walker to continue to serve on the Audit Committee in 2007.

 

Of the current members of the Audit Committee, Mr. Miller and Mr. Switzer, both of whom are independent directors, qualify as audit committee financial experts as defined by SEC rules. The Board made a qualitative assessment of Mr. Miller’s and Mr. Switzer’s knowledge and experience based on a number of factors. For Mr. Miller, the Board considered, among other things, his current activities as Senior Investment Officer, Fund Management for the Ohio Public Employees Retirement System, and his board service on the Chicago Mercantile Exchange and the BTOP50 Managed Futures family of funds. For Mr. Switzer, the Board considered, among other things, his experience as a chief financial officer of Fruit of the Loom, Inc., Alco Standard Corporation and S.C. Johnson & Son, Inc.

 

Compensation Committee

 

The Compensation Committee is responsible for the following:

 

 

The Compensation Committee periodically reviews the compensation of our executive officers and, in the course of its determinations as to appropriate levels of compensation, considers the CEO’s recommendations based on each executive officer’s individual responsibility, performance and overall contribution. See Determining Compensation in the Compensation Discussion and Analysis below.

 

The Compensation Committee has delegated to its Chairman the authority, between Compensation Committee meetings, to grant equity awards to newly hired executives upon the recommendation of the CEO and the Vice President — Human Resources. The Chairman’s authority is limited to equity awards that are within the ranges previously established by the Compensation Committee. All equity awards approved under this procedure must be presented to the Compensation Committee at its next regularly scheduled meeting.

 

The Compensation Committee operates under a written charter that was amended and restated in October 2006 and is available on our website at www.aam.com.

 

The Compensation Committee has selected Towers Perrin as its independent compensation consultant to advise the Compensation Committee on matters related to director and executive officer compensation and compensation programs for other AAM executives. During 2006, Towers Perrin provided advice with respect to compensation of non-employee directors, including a review of equity awards and stock ownership guidelines for directors.

 

Nominating/Corporate Governance Committee

 

The Nominating/Corporate Governance Committee’s primary responsibilities are to:

 

 

The Nominating/Corporate Governance Committee operates under a written charter that is available on our website at www.aam.com. Mr. Lappin served as Chairman of the Nominating/Corporate Governance Committee during 2006. In February 2007, the Board appointed Mr. Walker as Chairman of the Nominating/Corporate Governance Committee.

 

Selection Process for Director Nominees.  In consultation with the Co-Founder, Chairman & CEO, the Nominating/Corporate Governance Committee identifies, evaluates and recommends potential candidates for membership on the Board. The Nominating/Corporate Governance Committee conducts all necessary and appropriate inquiries into the backgrounds and qualifications of the candidates and considers questions of independence and possible conflicts of interest. Based on the Nominating/Corporate Governance Committee’s evaluation, it recommends those candidates who meet the Board’s criteria for further consideration and interviews by the Nominating/Corporate Governance Committee and other directors. The Nominating/Corporate Governance Committee then submits its recommended nominees to the Board for approval and nomination.

 

Before the Board nominates an incumbent director for re-election by our stockholders, the incumbent director may be evaluated by the Nominating/Corporate Governance Committee and/or the Board. This evaluation is based on, among other things, the incumbent director’s meeting attendance record and contributions to the activities of the Board.

 

The Nominating/Corporate Governance Committee considers recommendations of potential candidates from Board members, our CEO and our stockholders. Mr. R.E. Dauch recommended current nominee John A. Casesa for consideration by the Nominating/Corporate Governance Committee and the Board based upon Mr. Casesa’s knowledge of and experience in the automotive industry.

 

Director Qualifications.  AAM’s Corporate Governance Guidelines provide the qualifications for Board membership. Candidates for director nominees to the AAM Board are reviewed in consideration of the current composition of the Board, the operating requirements of the Company and the interests of stockholders. Although specific qualifications may vary from time to time, desired qualities and characteristics include:

 

 

For director candidates recommended by stockholders, the Nominating/Corporate Governance Committee follows the procedures described below in Other Matters, Stockholder Proposals for 2008 Annual Meeting. The Nominating/Corporate Governance Committee will evaluate candidates

recommended by stockholders using substantially the same criteria as it uses in evaluating director candidates recommended by our Board members or CEO.

 

Executive Committee

 

The Executive Committee exercises the authority of the Board during the intervals between Board meetings and does not meet on a regular basis. Its members are identified in the Committee Membership in 2006 table above.

 

Technology Committee

 

The Technology Committee oversees and provides advice to AAM regarding AAM’s product, process and systems technology. Its members are identified in the Committee Membership in 2006 table above.

 

Background

 

AAM’s success is dependent on our ability to compete in the highly competitive global automotive industry. In 2006, we made significant adjustments in our business to address the unprecedented structural change occurring in the domestic automotive industry, including the continuing market share erosion of our major customers. We took actions to realign and resize our production capacity and cost structure to meet current and projected operational and market requirements. We took steps to reduce our workforce, redeploy machinery and equipment and rationalize our U.S. production capacity. We also constructed new manufacturing facilities in China and Poland and continued to expand operations in Mexico and Brazil. The costs associated with these restructuring actions had a significant impact on our 2006 consolidated financial performance. We incurred special charges and recognized asset impairments as a result of these actions. We believe these actions position us for future growth in the global automotive industry.

 

A description of industry trends and competition and our restructuring actions and special charges is included in our 2006 Annual Report on Form 10-K filed with the SEC on February 21, 2007.

 

Leadership

 

Our ability to compete in the highly competitive global automotive marketplace is dependent on the effectiveness of our leadership team. Our leaders are responsible for driving the level of corporate and individual performance required to succeed in a competitive environment that places new demands on our ingenuity, innovation and resourcefulness each and every workday. They must continue to make proactive, often difficult decisions and provide direction during these challenging times.

 

The Compensation Committee and the Board believe that AAM’s experienced and well-regarded management team is essential to AAM’s success. AAM’s Co-Founder, Chairman & CEO, Richard E. Dauch, has more than 41 years of automotive experience and is a recognized leader in the industry. The four other executive officers listed in the Summary Compensation Table (named executives) have held progressively more responsible positions with the Company and have demonstrated their dedication and commitment to AAM. The same can be said of all our executive officers.

 

Structural Change

 

As with many aspects of our business, AAM’s compensation and benefit programs for U.S. salaried associates, including executive officers, are undergoing significant change. During 2006, we implemented the following changes with the approval of the Compensation Committee and the Board:

 

 

These changes were implemented to reduce AAM’s structural costs and to align our compensation and benefit programs with the competitive conditions of the global automotive marketplace. These and other restructuring actions generally impact our entire workforce, including executive officers, who are being asked to overcome the challenges facing our Company in a highly competitive industry environment. We may adjust our compensation programs as we restructure, resize and strive to profitably grow our global business.

 

Executive Compensation Objectives

 

Our executive compensation programs reflect our results-oriented corporate culture that rewards achievement of aggressive goals. Our compensation program for executive officers is designed to attract, retain, motivate and reward talented executives who will advance our strategic, operational and financial objectives and thereby enhance stockholder value.

 

The following principles are considered in setting compensation programs and pay levels:

 

 

 

¹ AAM’s competitor peer group consists of ArvinMeritor, Inc., Autoliv, Inc., BorgWarner, Inc., Collins & Aikman Corporation, Dana Corporation, Delphi Corporation, Dura Automotive Systems, Inc., Lear Corporation, Magna International, Inc., Tenneco Automotive, Inc., Tower Automotive, Inc. and Visteon Corporation.

 

 

Determining Compensation

 

The Compensation Committee’s process for determining compensation levels for executive officers differs depending upon the compensation element and the position of the individual being considered. For each executive officer, the Compensation Committee annually reviews each element of compensation described below in consultation with the Co-Founder, Chairman & CEO. A number of factors are considered in determining individual compensation levels, including performance of the individual and the business unit or function under his or her leadership, the Company’s performance, and economic and business conditions affecting AAM at the time of the review. Management and external sources provide relevant information and analyses as the Compensation Committee deems appropriate. Competitive market data may be considered from time to time, but we do not set compensation levels at a targeted percentile or rely solely on such data to make compensation decisions. While substantially guided by the applicable performance metrics of our programs, the Compensation Committee retains authority to exercise its judgment when approving pool and individual awards.

 

With respect to the CEO, the Compensation Committee meets in executive session to assess annual Company and individual performance. Subject to the terms of the CEO’s employment agreement, the Compensation Committee determines Mr. R.E. Dauch’s compensation based on the factors the Compensation Committee, in its discretion, considers relevant and in the best interest of AAM.

 

For purposes of reviewing total compensation and considering potential payments to executive officers upon termination of employment or a change in control, the Compensation Committee reviewed in October 2006 tally sheets for the named executive officers. The elements and calculations reviewed are substantially similar to the information provided in the tabular disclosure for each named executive officer in Potential Payments Upon Termination or Change in Control below. Following the 2006 review, the Compensation Committee decided to review tally sheets for selected executive officers on an annual basis.

 

The Compensation Committee’s review of AAM’s compensation and benefit programs is an ongoing process. In the context of ongoing structural change and continuous improvement, management

continually evaluates the cost and effectiveness of the Company’s programs and requests Compensation Committee review and approval of recommended changes as appropriate.

 

Elements of Compensation

 

The principal elements of compensation of our executive officers are:

 

 

Although all executive officers are eligible to participate in the same compensation and benefit programs offered by AAM, our CEO is the only executive officer whose pay is governed by an employment agreement. The terms of Mr. R.E. Dauch’s employment agreement are described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards table.

 

The discussion below of the elements of compensation applies to executive officers, including our named executives. The compensation of Mr. R.E. Dauch is discussed separately in Compensation of Co-Founder, Chairman & CEO below.

 

Base Salary.  Base salary is a fixed element of cash compensation for executive officers. The Compensation Committee reviews base salaries of executive officers on an annual basis. Adjustments to individual base salaries of executive officers are made in conjunction with the annual review process described in Determining Compensation above.

 

Base salaries for executive officers are adjusted annually through annual merit increases. Salary increases for executive officers are included in our budget for AAM’s annual merit program for U.S. salaried associates. Under this program, the Compensation Committee establishes a merit pool in the fourth quarter of each year to pay merit salary increases in the following year.

 

In establishing the merit pool, the Compensation Committee considers compensation surveys by recognized independent consultants and professional organizations that project salary budget increases for salaried employees at comparable companies, including members of AAM’s competitor peer group and other automotive suppliers with operations in the U.S. The Compensation Committee approves adjustments to the merit pool to remain competitive with industry pay averages for salaried associates. In October 2006, the Compensation Committee approved a merit pool equivalent to a 3.5 percent average 2007 increase for our U.S. salaried associates.

 

Annual Cash Incentive.  Annual incentive compensation is designed to align executive officer pay with AAM’s annual performance, measured by our achievement of financial targets established under our Incentive Compensation Plan for Executive Officers. Cash incentive awards for the named executives are permitted to the extent the Company meets or exceeds annual performance targets set by the Compensation Committee. Individual awards may be adjusted by the Compensation Committee based on the CEO’s review of individual performance.

 

Under our incentive compensation plan, the performance factors used to measure performance and calculate bonus awards are: (1) net income as a percentage of sales, (2) after-tax return on invested capital (ROIC) and (3) net operating cash flow. These factors are consistent with the overall performance goals and long-term strategic direction that the Board has set for our Company. We believe that an emphasis on these factors aligns the interests of management and our stockholders.

 

The calculations of ROIC and net operating cash flow, which are non-GAAP financial measures, are set forth in Management’s Discussion and Analysis under Supplemental Financial Data in our 2006 Annual Report on Form 10-K filed with the SEC on February 21, 2007.

 

Net income as a percentage of sales is a key indicator of the Company’s financial and operational performance. ROIC is a meaningful measure for us because it reflects how efficiently and effectively

we deploy our capital, which is particularly important given the cost competitive, capital intensive nature of our industry. We believe that sustained returns on invested capital in excess of our Company’s cost of capital create value for our stockholders over the long-term. Net operating cash flow is also a meaningful performance measure because it is commonly used by management and investors to assess our ability to generate cash flow from business operations to repay debt and return capital to our stockholders.

 

In October 2005, the Compensation Committee weighted each performance factor equally for the 2006 performance period. For each of these factors, the Compensation Committee established target and threshold levels of performance and then designed a formula scaled to performance that can be more or less than target. Target and threshold award levels for net income as a percentage of sales and ROIC were established based on a review of our competitor peer group benchmarks for the three most recently completed fiscal years (2002-2004). Target performance levels are intended to be aggressive but achievable metrics based on industry conditions known at the time they are established. For 2006, the target level payout for all three performance factors was set at 100 percent of base salary for executive officers (other than the CEO).

 

For 2006, the threshold award level for net income as a percentage of sales was set at one percent and the target award level at three percent. The target level of performance for 2006 net income as a percentage of sales was established to meet the performance of the top one third of our competitor peer group for the three most recently completed fiscal years.

 

The threshold award level for ROIC was set at four percent and the target award level at nine percent for the 2006 performance year. The target level of performance for 2006 ROIC was set more than 600 basis points higher than the average of our competitor peer group for the three most recently completed fiscal years. This target level of performance exceeded the objective of being at least 200 basis points higher than such competitor peer group average.

 

The threshold award level for net operating cash flow was set at 50 percent of our budgeted net operating cash flow and the target award level at 100 percent of our budgeted net operating cash flow for the 2006 performance year.

 

In the first quarter of each year, the Compensation Committee meets to review the Company’s financial results for the previous year and determine the degree to which performance targets have been achieved. In January 2007, the Compensation Committee determined that the Company did not achieve the stated threshold performance goals in 2006. As discussed above, AAM’s 2006 consolidated financial performance was impacted by the costs associated with the significant adjustments we made in our business to address the unprecedented structural change occurring in the U.S. domestic automotive industry. Unanticipated customer decisions also had an impact on our financial results. These special charges and customer decisions were unanticipated at the time the Compensation Committee established the 2006 performance targets under the incentive compensation plan.

 

The Compensation Committee recognized that management’s actions in 2006 were in the best long-term interest of AAM and that the payment of annual incentive awards to our executives, including executive officers, would help motivate and reward our leadership for their commitment and accomplishments during this period of unprecedented structural change in the U.S. domestic automotive industry.

 

The Compensation Committee concluded that it would be in the best interest of AAM if the incentive compensation plans were amended to give the Compensation Committee discretion to adjust the method of calculating the attainment of performance goals in recognition of: (1) unanticipated special charges or gains, (2) unanticipated industry-wide factors affecting Company performance or (3) unanticipated customer decisions affecting Company performance.

 

On February 1, 2007, upon the recommendation of the Compensation Committee, the Board approved amendments to our incentive compensation plans for executive officers and non-officer

executives effective January 1, 2006. As amended, the plans permit the Compensation Committee to make adjustments to annual incentive awards based on the three performance factors described above. The Amended and Restated Incentive Plan for Executive Officers was filed as an exhibit to our 2006 Annual Report on Form 10-K filed with the SEC on February 21, 2007.

 

On February 1, 2007, the Compensation Committee approved the funding of 2006 incentive awards at an average of approximately 50 percent of annual base salary for executive officers (other than the CEO). These awards were determined based on our achievement of the threshold performance goals established by the Compensation Committee for 2006, after excluding the impact of the unanticipated special charges and unanticipated customer decisions affecting Company performance discussed above.

 

The Compensation Committee approved cash awards to the named executives that were paid on March 15, 2007. These awards are shown in the Summary Compensation Table.

 

For the 2007 performance period, target and threshold award levels for net income as a percentage of sales and ROIC were established based on a review of our competitor peer group benchmarks for the three most recently completed years (2003-2005). Based on this review and on industry conditions at the time, the Compensation Committee approved the incentive criteria for the 2007 performance period in October 2006 consistent with those established for the 2006 performance period, including the same weighting of the bonus factors and the same target and threshold levels of performance. For 2007, the target level payout for all three performance factors was set at 100 percent of base salary for executive officers (other than the CEO).

 

Long-Term Incentives.  Long-term incentive compensation is designed to:

 

 

The Compensation Committee reviews and approves annual grants of long-term incentives to executive officers within a range established by the Compensation Committee. Individual awards are based on each executive officer’s level of responsibility, performance and other special circumstances as recommended by the CEO. Long-term incentive awards are made under the 1999 Restated American Axle & Manufacturing Holdings, Inc. Stock Incentive Plan (Stock Incentive Plan). The terms of the long-term incentive awards granted to named executive officers are described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards table.

 

We believe that the balanced use of stock options, PARS and RSUs (defined below) is consistent with our compensation objectives. Stock options, PARS and RSUs have a value tied to share price and are subject to vesting schedules that require continued service with AAM. PARS and RSUs provide value to our executives with the passage of time, and therefore serve as a reward and retention tool. PARS and RSUs also facilitate stock ownership. Stock options further align the interests of our executive officers and our stockholders as options only have value to the extent the price of our common stock on the exercise date exceeds the option grant price. Stock options provide motivation for our executive officers to focus on long-term stockholder value.

 

The Compensation Committee selected total stockholder return as the sole determinant of acceleration of PARS and RSUs. The acceleration provisions of PARS and RSUs motivate our executives to build long-term value for our stockholders above that of our competitor peer group. In combination with the performance metrics of our incentive compensation plan for executive officers discussed above, these metrics balance strategic, operational and financial performance with stockholder value creation. See Narrative to Summary Compensation Table and Grants of Plan-Based Awards table for a description of the stated threshold requirements for acceleration of PARS and RSUs.

 

In 2006, executive officers received a combination of stock options, PARS and RSUs. The 2006 equity awards granted to the named executive officers are shown in the Grants of Plan-Based Awards and Outstanding Equity Awards tables.

 

2007 Compensation Decisions Affecting Named Executives

 

On March 14, 2007, the Compensation Committee decided on the following compensation levels for our named executives:

 

 

In determining these compensation levels, the Compensation Committee considered, among other factors, the named executives’ leadership in (1) implementing the restructuring actions taken in 2006 in support of AAM’s strategic objectives, (2) establishing two new manufacturing facilities in China and Poland and (3) successfully launching the General Motors full-size SUV and pickup truck (GMT 900) program.

 

Equity Grant Practices.  AAM does not permit and has not permitted backdating, spring loading or other timing of options with the release of material, non-public information.

 

AAM generally makes grants to its executive officers and other executives on an annual basis, subject to the approval of the Compensation Committee. Historically, we have made these grants in the first quarter of each year to coincide with the communication to executive officers of their annual cash incentive awards for the previous year’s performance. This timing increases the impact of the awards by strengthening the link between pay and performance.

 

As described above in Long-Term Incentives, the Compensation Committee approves annual equity awards to eligible executives and executive officers. The Compensation Committee has delegated to its Chairman the authority, between Compensation Committee meetings, to grant equity awards to new hires upon the recommendation of our Co-Founder, Chairman & CEO and Vice-President — Human Resources. The Chairman’s authority is limited to equity awards within the ranges established by the Compensation Committee. All equity awards approved under this procedure must be presented to the Compensation Committee at its next regularly scheduled meeting.

 

In October 2006, the Compensation Committee adopted a written procedure related to grants of equity awards. This procedure states, among other things, that the grant date of an equity award is the date of Compensation Committee approval, and the exercise price of a stock option is the closing price of our common stock on the date of grant. Equity awards made in March 2006 to our named executive officers are shown in the Grants of Plan-Based Awards table.

 

Our securities trading policy states that executive officers and directors may not purchase or sell puts or calls to sell or buy our stock, engage in short sales with respect to our stock or buy our securities on margin.

 

Management’s Stock Ownership Requirements.  The Compensation Committee established the following stock ownership requirements in October 2004. Based on the market value of our common stock, ownership requirements are determined as a multiple of each executive officer’s base salary.

 

 

Stock ownership levels must be attained within five years from October 2004 or, for new executive officers, within five years from the date of becoming an officer. If compliance is not achieved in five years, 50 percent of an executive officer’s annual cash incentive award will be awarded as restricted stock until the applicable level is attained. Ownership requirements must be maintained until retirement. Shares owned directly (including restricted stock) or through AAM’s 401(k) plan are considered in determining stock ownership levels. Unexercised stock options and RSUs are not considered in determining stock ownership levels for executive officers.

 

Our Co-Founder, Chairman & CEO’s stock ownership exceeds the requirement for his position. All other executive officers have met or are on target to meet the stock ownership requirements for their respective positions.

 

Benefits.  Our executive officers participate in the full range of benefits and retirement plans provided to all U.S. salaried associates. We target our overall benefits package to be competitive with that of other companies with which we compete for associates.

 

The most senior executives of AAM, a group of approximately 50 (including executive officers), participate in a program of supplemental benefits specific to this group. We provide these senior executives with supplemental life, supplemental disability, umbrella liability and travel accident insurance benefits. The benefits provided in this program are designed, in the aggregate, to be competitive with those provided to executives in comparable positions at companies in our competitor peer group.

 

Executive officers are eligible to participate in AAM’s qualified and nonqualified defined benefit pension plans and 401(k) plan. They are also eligible to participate in a nonqualified deferred compensation plan that permits deferrals of a portion of base salary and/or annual cash incentive compensation on a pre-tax basis. These plans are described in the Pension Benefits, Nonqualified Deferred Compensation and Potential Payments Upon Termination or Change in Control sections below. In addition, executive officers are eligible to receive certain postretiree benefits upon retirement from AAM.

 

During 2006, we reviewed the retirement benefit programs for AAM’s U.S. salaried associates, including executive officers, to ensure that the programs were cost competitive and effective in supporting our efforts to attract and retain a skilled and talented salaried workforce. Our review included competitive benchmarking of the benefits offered by companies with which we may compete for talent, analysis of structural costs and funding requirements of various alternatives and consideration of the impact to plan participants. In 2006, we amended the U.S. salaried defined benefit pension plans (including the SERP) to transition to a defined contribution approach, increased the maximum Company match to the 401(k) plan and reduced or eliminated other postretiree benefits for U.S. salaried associates.

 

We believe these actions resulted in a competitive retirement program that recognizes and rewards service while maintaining a cost structure that will permit AAM to adequately invest in our business and compete in the global automotive industry.

 

Perquisites.  AAM provides a limited number of perquisites for senior executives, including executive officers, which are described in the footnotes to the Summary Compensation Table. The most significant perquisite we provide is the use of a Company-provided vehicle that has substantial AAM content. This perquisite is common among automotive suppliers.

 

AAM does not own corporate aircraft and does not provide leased aircraft for personal use.

 

AAM does not pay for country club memberships.

 

AAM does not make loans to executive officers.

 

Compensation of Co-Founder, Chairman & CEO

 

Mr. R.E. Dauch’s compensation is governed by an employment agreement that is described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards table below. The CEO’s compensation arrangements are structured in consideration of the extraordinary value of his leadership and service to AAM since he co-founded the Company in 1994.

 

The primary elements of the CEO’s compensation are: (1) base salary, (2) annual cash bonus, (3) long-term incentives and (4) benefits and perquisites.

 

Base Salary.  Base salary is determined by the Compensation Committee as part of our annual compensation review process. Annual adjustments to base salary are made at the discretion of the Compensation Committee in consideration of Company performance and Mr. R.E. Dauch’s achievements as CEO. The specific factors considered may differ from year to year. Base salary for 2006 is shown in the Summary Compensation Table and discussed below.

 

Annual Cash Bonus.  Mr. R.E. Dauch is eligible for an annual cash bonus based on the Compensation Committee’s assessment of Company performance as compared to that of our competitor peer group. The factors considered in determining his annual cash bonus are described in his employment agreement. See Narrative to Summary Compensation Table and Grants of Plan-Based Awards table below. The annual cash bonus earned in 2006 is shown in the Summary Compensation Table.

 

Long-Term Incentives.  Under his employment agreement, Mr. R.E. Dauch is entitled to a grant of 300,000 nonqualified stock options each year. From 2005 through 2007, the Compensation Committee granted Mr. R.E. Dauch an annual combined award of stock options, PARS and RSUs. This mix of equity awards is similar to our long-term incentive program for other executive officers. These equity awards have the same vesting and other terms as those granted to other executive officers. In connection with the employment agreement extension dated November 3, 2005, AAM awarded R.E. Dauch 180,000 restricted shares and 120,000 restricted stock units. These awards will vest at the end of the extended term on December 31, 2009, subject to earlier vesting or forfeiture as described in the Narrative to Summary Compensation Table and Grants of Plan-Based Awards table.

 

Benefits and Perquisites.  Except as noted below, Mr. R.E. Dauch participates in the same benefit programs provided for other senior executives, including executive officers. In addition, under his employment agreement, AAM provides Mr. R.E. Dauch with the use of an additional Company vehicle and reimburses him for his purchase of a $5,000,000 life insurance policy. Perquisites provided to the CEO in 2006 are described in the Summary Compensation Table below.

 

During 2006, the Compensation Committee approved an amendment to Mr. R.E. Dauch’s employment agreement to provide postretirement health care benefits upon expiration of his employment agreement on December 31, 2009. In consideration of the changes in our retirement benefit programs, including the elimination of postretirement health care benefits for participants who retire after 2007, the Compensation Committee decided that the amendment was appropriate in view of his willingness to postpone his retirement from AAM until the expiration of the extended term of his

employment agreement. This amendment to the employment agreement dated November 15, 2006 is an exhibit to our 2006 Annual Report on Form 10-K filed with the SEC on February 21, 2007.

 

Determination of CEO Compensation

 

On March 14, 2007, the Compensation Committee determined Mr. R.E. Dauch’s compensation as follows:

 

 

In determining Mr. R.E. Dauch’s base salary increase and annual cash bonus, the Compensation Committee considered his proactive leadership in support of the significant adjustments AAM made to its business to address the unprecedented structural change occurring in the U.S. domestic automotive industry. Among the accomplishments in 2006 considered, the Compensation Committee noted that AAM:

 

 

The Compensation Committee also considered the future structural cost benefit resulting from these and other related restructuring actions.

 

In February 2006, the Compensation Committee increased Mr. R.E. Dauch’s base salary by 7.5 percent to $1,360,000 effective March 1, 2006. On March 15, 2006, he was granted the same equity awards as the March 14, 2007 grants shown above. Mr. R.E. Dauch’s annual cash bonus for 2005 performance was $2,700,000. In determining these compensation levels, the Compensation Committee considered a number of factors, including AAM’s profitable results in 2005 and Mr. R.E. Dauch’s proactive leadership in enabling AAM to distinguish itself from companies in our competitor peer group.

 

The Compensation Committee believes that Mr. R.E. Dauch’s compensation is reasonable under the circumstances and serves the interest of AAM.

 

Tax and Accounting Considerations

 

Deductibility of Executive Compensation.  In general, the compensation awarded to our named executive officers will be taxable to the executive and will give rise to a corresponding corporate deduction at the time the compensation is paid. Section 162(m) of the Internal Revenue Code (Code) denies a federal income tax deduction for certain compensation in excess of $1 million per year paid to the chief executive officer or the named executive officers. During 2006, our CEO received compensation in excess $1 million. Consequently, a portion of his compensation was not treated as a deductible income tax expense for 2006. Section 162(m) did not affect our ability to take a tax deduction for compensation paid to any of our named executives in 2006.

 

Although deductibility of compensation is preferred, tax deductibility is not a primary objective of our compensation programs. We believe that achieving our compensation objectives set forth above is more important than the benefit of tax deductibility. We reserve the right to maintain flexibility in how

we compensate our executive officers, which may result in limiting the deductibility of amounts of compensation from time to time.

 

Accounting for Stock-Based Compensation.  Effective January 1, 2006, we adopted FASB Statement No. 123R (SFAS 123R), Share-Based Payment. Stock-based compensation expense for all share-based payment awards that have not vested as of January 1, 2006, including nonqualified stock options, PARS, RSUs, restricted shares and restricted stock units, is based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

 

Nonqualified Deferred Compensation.  On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not become effective, we believe we are operating in good faith compliance with the statutory provisions that were effective January 1, 2005. Our nonqualified deferred compensation plan is described in the Nonqualified Deferred Compensation section below.

 

Section 280G.  Under our continuity agreements with named executives officers, they are entitled to a gross-up payment for excise tax resulting from a change in control under Section 4999 of the Code. This is to ensure that the named executive officer receives the same net after-tax payment that he would have received had no excise tax been imposed, subject to certain limitations. If a named executive officer’s change in control benefits exceed the safe harbor amount (i.e., three times the historical five-year Form W-2 average) by greater than 10 percent, he will be entitled to a gross-up payment for the additional excise tax. If, however, the change in control benefits are less than or equal to 10 percent of the safe harbor amount, then the named executive officer’s benefit will be reduced until the sum of the payments equals the maximum amount that may be paid to him without the imposition of the excise tax. These continuity agreements are described in Potential Payments Upon Termination or Change in Control below.

 

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Compensation Committee of the Board of Directors

 

Forest J. Farmer, Chairman

Elizabeth A. Chappell

Thomas K. Walker

 

The following table summarizes compensation paid or earned for the fiscal year ended December 31, 2006 for Richard E. Dauch, Co-Founder, Chairman & CEO, Michael K. Simonte, Vice President — Finance & CFO and our three highest paid executives other than our CEO and CFO (named executive officers). All named executive officers were employees of the Company for the entire 2006 fiscal year.

 

 

 

Long-term incentive awards granted in 2006 to the named executive officers are shown in the following table. The annual and long-term incentive compensation programs are described in Compensation Discussion and Analysis.

 

 

Narrative to Summary Compensation Table and Grants of Plan-Based Awards table

 

CEO Employment Agreement

 

Our employment agreement with Mr. R.E. Dauch, as amended, provides that he will be entitled to receive the following compensation and benefits during the term of the agreement:

 

 

The current term continues through December 31, 2009 and may be automatically extended for successive one-year terms, unless either party gives notice of termination at least 60 days prior to the end of the applicable term. The potential payments and benefits upon termination of Mr. R.E. Dauch’s employment are described in Potential Payments Upon Termination or Change in Control.

 

Equity Awards

 

We granted nonqualified stock options, PARS and RSUs to each named executive officer in 2006 under our Stock Incentive Plan.

 

Stock Options.  Options granted in 2006 have an exercise price of $15.58, the closing market price of AAM common stock on March 14, 2006. The options vest in three approximately equal installments on the first, second and third anniversaries of the grant date. Generally, vesting may accelerate upon termination of employment due to death, disability, retirement or a change of control. If employment is terminated for any other reason prior to vesting, the award is forfeited. Awards expire ten years after the grant date.

 

A named executive officer may exercise all or part of the vested options at any time before the earliest of: (1) the expiration of the grant, (2) five years following termination of employment due to death, disability, retirement or a change of control, (3) 90 days following termination of employment without cause and (4) upon termination of employment for cause. Options may be exercised by paying the exercise price in cash, shares or a combination of cash and shares.

 

Performance Accelerated Restricted Stock and Restricted Stock Units.  Our named executive officers received grants of PARS and RSUs in 2006. PARS carry voting rights from the date of grant. RSUs give the named executive officer the right to receive cash equal to the fair market value of the common stock covered by the vested award. PARS and RSUs carry dividend rights from the date of grant, payable when AAM pays dividends on common stock.

 

PARS and RSUs vest on the fifth anniversary of the grant date unless vesting is accelerated at the end of the third or fourth years of the applicable grant. Vesting is accelerated on the third anniversary of the grant date if AAM’s total shareholder return for the preceding three-year period meets or exceeds the 66^th percentile of our competitor peer group. If the PARS or RSUs do not fully vest on the third anniversary, they may vest on the fourth anniversary of the grant date if AAM’s total

shareholder return for the preceding four-year period meets or exceeds the 66^th percentile of our competitor peer group. Generally, vesting may also accelerate upon termination of employment due to death, disability, retirement or upon a change of control. If the named executive officer’s employment is terminated for any other reason, he will forfeit his award.

 

CEO Equity Awards.  As an inducement for Mr. R.E. Dauch to enter into the November 3, 2005 employment agreement extension, we granted him 180,000 restricted shares and 120,000 restricted stock units. These awards vest at the end of the extended term of his employment agreement, December 31, 2009, subject to earlier vesting upon termination of employment without cause or due to death, disability or a change in control. If Mr. R.E. Dauch voluntarily resigns as CEO before December 31, 2009, he will forfeit these awards.

 

Upon vesting of his restricted stock units, Mr. R.E. Dauch will have the right to receive cash equal to the fair market value of the common stock covered by the vested award. The restricted shares and restricted stock units carry dividend rights from the date of grant, payable when AAM pays dividends on common stock. The restricted shares carry voting rights from the date of grant.

 

Employer Matching Contributions.  The Salaried Savings Plan, a tax-qualified 401(k) plan, provides a long-term savings vehicle that allows for pre-tax and post-tax contributions by eligible U.S. salaried associates, including named executive officers, and tax-deferred earnings. In 2006, the maximum match was 50 percent of salaried associates’ contributions up to six percent of salary. All named executive officers, except Mr. D.C. Dauch, participated in this plan in 2006 and are fully vested in Company matching contributions.

 

We amended the Salaried Savings Plan, effective January 1, 2007, increasing the Company match up to 10 percent of salary. In addition, participants, including Mr. Simonte and Mr. D.C. Dauch whose benefits were frozen as of December 31, 2006 under the Salaried Retirement Program (as described following the Pension Benefits table), will receive an additional annual retirement contribution between three and five percent of salary depending on years of service.

 

 

 

Options Exercised and Stock Vested in Fiscal 2006

 

There were no stock option awards exercised and no grants of PARS, RSUs, restricted shares or restricted stock units that vested in 2006 for the named executive officers.

 

The following table shows years of credited service and benefits that the named executive officers are entitled to receive under AAM’s Salaried Retirement Program and SERP. The years of credited service are through September 30, 2006, AAM’s fiscal year-end measurement date used for financial statement reporting purposes. The values shown are based on unreduced benefits deferred to the age at which unreduced benefits are payable. The assumptions used to calculate the actuarial present value of accumulated benefits are the same assumptions used in our audited consolidated financial statements for the fiscal year ended December 31, 2006.

 

 

 

 

We provide pension benefits for our named executive officers under our Salaried Retirement Program, a broad-based defined benefit pension plan open to substantially all of our U.S. salaried associates hired prior to January 1, 2002, and our SERP. The purpose of the SERP is to provide eligible associates with total retirement benefits at a competitive level with executives of other major industrial companies.

 

Salaried Retirement Program.  All named executive officers have elected to participate in the contributory portion of our Salaried Retirement Program and made monthly contributions to the program. The annual retirement benefit payable to the executive, commencing on retirement at or after age 65, equals the sum of the executive’s contributions plus an additional benefit based on the executive’s average monthly salary (determined as the average of the executive’s base salary in the highest 60 months during his final 10 years of service) and years of credited service. The amount of compensation that may be taken into account for determining benefits is limited under the Internal Revenue Code. The maximum annual compensation under this limit was $220,000 for the year ended December 31, 2006.

 

Benefits under the Salaried Retirement Program may be paid as a single life annuity or, if elected by the participant, in the form of a joint and survivor annuity with a reduction in the amount of the annual benefit.

 

Effective December 31, 2006, we amended the Salaried Retirement Program to freeze benefits at current levels for associates who will not be eligible to retire by December 1, 2011. Mr. R.E. Dauch, Mr. Rahangdale and Mr. Cumo, all of whom are currently eligible to retire, are grandfathered and will continue to accrue benefits under the program through the earlier of December 31, 2011 or the date of their retirement or other termination of employment.

 

Supplemental Executive Retirement Program.  Our named executive officers are eligible to receive the basic form of pension benefit under our SERP upon retirement at or after age 55. In addition, they are eligible to receive the alternative form of benefit, if greater than the basic benefit, upon retirement at or after age 62. The executive must have at least 10 years of credited service to receive either form of benefit under the SERP.

 

The total monthly benefit payable under the basic form of the SERP is equal to the following amount:

 

 

The Compensation Committee has discretion to reduce or eliminate the amount payable under the alternative form of benefit. Subject to the Compensation Committee’s exercise of its discretion, the total monthly benefit payable under the alternative form of the SERP is equal to the following amount:

 

 

SERP benefits payable under the basic and alternative forms are generally paid as a single life annuity. If the executive’s spouse is eligible for survivor benefits under the Salaried Retirement Program, however, the executive’s monthly SERP benefit will be reduced and paid in the form of a joint and survivor annuity.

 

Effective January 1, 2007, we amended the SERP to change the benefit accrual formulae for executives who are not grandfathered under the Salaried Retirement Program. Because they are grandfathered, Mr. R.E. Dauch, Mr. Rahangdale and Mr. Cumo may continue to accrue SERP benefits under the basic and alternative forms through December 31, 2011.

 

Mr. Simonte and Mr. D.C. Dauch, who are not grandfathered under the Salaried Retirement Program, will be eligible to receive a new defined contribution benefit, payable six months after retirement in a lump sum. The amount of the benefit will be equal to 12.5 percent of the executive’s final average compensation (determined as the executive’s average annual base salary and cash incentive for the highest five consecutive years), multiplied by the executive’s years of credited service, less the sum of the actuarially equivalent value of the executive’s benefits payable pursuant to our Salaried Retirement Program and the balance of the executive’s retirement contribution account under our 401(k) plan.

 

 

The following table summarizes the named executive officers’ compensation under the Executive Deferred Compensation Plan for the 2006 fiscal year. All of the named executive officers are fully vested in any applicable Company matching contributions.

 

 

 

Under AAM’s Executive Deferred Compensation Plan, a nonqualified, tax deferred savings plan, certain executives, including our named executive officers, may elect to defer the payment of six to 75 percent of their base salary and/or six to 75 percent of their annual incentive compensation award during any plan year. Base salary deferred into the Executive Deferred Compensation Plan receive a three percent Company match. The amounts deferred are unfunded and unsecured obligations of the Company.

 

Amounts deferred or credited into this plan are represented in the executive’s notional account and “invested” among funds similar to those available under the Salaried Savings Plan. Forty percent of deferral elections are automatically and irrevocably allocated to the restricted investment benchmark, the PIMCO Total Return Fund. The remaining 60 percent of deferral elections may be allocated by the executive to any of the investments available under the plan and may be reallocated on a daily basis among any of the investments available under the plan. Although the executive has no actual or constructive ownership of shares in the investment funds, the return on the executive’s account is determined as if the amounts were notionally invested in these funds.

 

The table below shows the investment fund options available under the Executive Deferred Compensation Plan and the annual rates of return for the calendar year ended December 31, 2006.

 

 

In the first quarter of 2007, the following investment fund options were added to the Executive Deferred Compensation Plan:

 

 

Distributions can be received upon retirement in a lump sum or in annual payments over a period of five or ten years, or in a lump sum upon death, disability, termination of employment, change in control or, if elected by the executive, during employment at a specified date after a minimum deferral period. The minimum deferral period is at least three years following the end of the plan year to which the deferral election relates, and distributions during employment consist of employee deferrals and related earnings or losses (not the Company contributions and related earnings or losses).

 

Under the employment agreement with our CEO and the continuity agreements and other arrangements covering our named executive officers, we will provide payments and benefits to our named executive officers in the event of termination of employment.

 

The following tables show the estimated potential payments and benefits that each of the named executive officers would receive upon termination of employment under different scenarios, assuming termination was effective on December 31, 2006.

 

CEO Continuity Agreement

 

Under our continuity agreement with Mr. R.E. Dauch, he will be entitled to the following benefits if the Company terminates his employment other than for cause, or if he resigns for good reason, within two years following a change in control:

 

 

These payments are contingent upon execution of a general release of claims against AAM and compliance with non-disclosure, confidentiality, non-competition and non-solicitation covenants for 3.5 years following termination of employment. In addition, he would be prohibited from directly or indirectly engaging in any business competitive with AAM and our products and any business that AAM plans to enter into within the following year, and from soliciting our employees and customers.

 

Generally, the following events are considered to be a change in control under the continuity agreement:

 

 

Cause and good reason have the same definitions as under the CEO’s employment agreement.

CEO Employment Agreement

 

Under our employment agreement with Mr. R.E. Dauch, the Company may terminate his employment with or without cause or upon his disability. Cause exists if he:

 

 

In addition, he may resign for good reason, meaning the Company:

 

 

If his employment is terminated for cause, Mr. R.E. Dauch will be entitled to accrued but unpaid amounts as of the termination date.

 

If his employment is terminated without cause, or if he resigns for good reason, he will be entitled to:

 

 

If he resigns without good reason, Mr.  R.E. Dauch will be entitled to accrued but unpaid amounts as of the termination date and reimbursement of premiums for the purchase of a $5 million executive life insurance policy for two years.

 

Under the employment agreement, Mr. R.E. Dauch is subject to:

 

 

If AAM terminates his employment due to disability, Mr. R.E. Dauch will be entitled to accrued benefits under applicable benefit plans and programs (such as our Deferred Compensation Plan, Salaried Retirement Plan and SERP) and reimbursement of premiums for the purchase of a $5 million executive life insurance policy for two years. Should Mr. R.E. Dauch die during the term of his employment agreement, his estate and/or spouse would be entitled to accrued benefits under applicable benefit plans and programs.

Continuity Agreements with Named Executives

 

Under our continuity agreements with the named executives, each named executive will be entitled to the following benefits if the Company terminates his employment without cause, or if he resigns with good reason, within two years following a change in control:

 

 

These payments are contingent upon the execution of a general release of claims against AAM and compliance with non-disclosure, confidentiality, non-competition and non-solicitation covenants for 2.5 years following termination of employment. In addition, the named executive would be prohibited from directly or indirectly engaging in any business competitive with AAM and our products and any business that AAM plans to enter into within the following year, and from soliciting our employees and customers.

 

Cause is generally defined as the named executive’s:

 

 

Good reason is generally defined as:

 

 

Change in control under the continuity agreements with named executives has the same definition as in the CEO’s continuity agreement described above.

 

 

Richard E. Dauch

 

The following table shows estimated potential payments upon termination, retirement and a change in control for Richard E. Dauch, Co-Founder, Chairman & CEO as of December 31, 2006. Mr. R.E. Dauch was eligible to retire on December 31, 2006. The assumptions used to determine retirement benefits are the same assumptions used in our audited consolidated financial statements for the fiscal year ended December 31, 2006.