Polaris Industries Inc.

2100 Highway 55

Medina, Minnesota 55340

763-542-0500

Fax: 763-542-0599

 

March 1, 2007

 

Dear Fellow Shareholder:

 

The Board of Directors of Polaris Industries Inc. joins me in extending a cordial invitation to attend our 2007 Annual Meeting of Shareholders which will be held at our corporate headquarters, 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, April 19, 2007 at 9:00 a.m. local time.

 

In addition to voting on the matters described in the accompanying Notice of Annual Meeting and Proxy Statement, we will review Polaris’ 2006 business and discuss our direction for the coming years. There will also be an opportunity, after conclusion of the formal business of the meeting, to discuss other matters of interest to you as a shareholder.

 

It is important that your shares be represented at the meeting whether or not you plan to attend in person. Please vote by returning your signed proxy card in the envelope provided or by using the telephone or Internet voting options indicated on the proxy card. If you do attend the meeting and desire to vote in person, you may do so even though you have previously sent a proxy.

 

We hope that you will be able to attend the meeting and we look forward to seeing you.

 

Sincerely,

 

 

Gregory R. Palen

Chairman of the Board

 

Enclosures

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340
March 1, 2007

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Polaris Industries Inc. will hold its 2007 Annual Meeting of Shareholders at its corporate headquarters located at 2100 Highway 55, Medina, Minnesota, 55340, on Thursday, April 19, 2007. The meeting will begin at 9:00 a.m. local time. At the meeting, we will:

 

1. Elect the following directors:

 

 

2. Approve the Polaris Industries Inc. 2007 Omnibus Incentive Plan.

 

3. Act on any other matters that may properly come before the meeting.

 

The Board recommends that shareholders vote FOR the director nominees named in the accompanying Proxy Statement. The Board recommends that shareholders vote FOR the approval of the Polaris Industries Inc. 2007 Omnibus Incentive Plan, as described in the accompanying Proxy Statement.

 

Only shareholders of record at the close of business on February 21, 2007 may vote at the Annual Meeting or any adjournment thereof.

 

By Order of the Board of Directors

 

 

 

Michael W. Malone
Vice President — Finance,
Chief Financial Officer and Secretary

 

 

YOUR VOTE IS IMPORTANT

 

Whether or not you plan to attend the meeting, we urge you to vote as soon as possible by telephone, Internet or mail.

 

TABLE OF CONTENTS

 

POLARIS INDUSTRIES INC.
2100 Highway 55
Medina, Minnesota 55340

PROXY STATEMENT

 

 

 

 

The following table sets forth certain information with respect to the beneficial ownership of the Company’s common stock as of February 14, 2007 by each person known to the Company who then beneficially owned more than 5% of the outstanding shares of common stock, each director of the Company, each nominee for director, each executive officer named in the Summary Compensation Table on page 38 and all current executive officers and directors as a group. As of February 14, 2007, there were 35,509,003 shares of common stock outstanding. Except as otherwise indicated, the named beneficial owner has sole voting and investment powers with respect to the shares held by such beneficial owner. The table also includes information with respect to common stock equivalents credited as of February 14, 2007 to the accounts of each director under the Company’s Deferred Compensation Plan for Directors that is described in this Proxy Statement under the heading “Corporate Governance — Director Compensation.”

 

 

 

 

 

Our Board of Directors has adopted Corporate Governance Guidelines, which may be viewed online on our website at www.polarisindustries.com or may be obtained in print by any shareholder who requests it. Under our Corporate Governance Guidelines, which adopt the current standards for “independence” established by the New York Stock Exchange (“NYSE”), a majority of the members of the Board of Directors must be independent as determined by the Board of Directors. In making its determination of independence, among other things, the Board of Directors must have determined that the director has no material relationship with Polaris either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with Polaris. The Board of Directors has determined that Ms. Clayton and Messrs. Caulk, Menard, Palen, Schreck, Van Dyke and Zona are independent and that Mr. Fruhan was independent during his term of service as a director. The Board of Directors has also determined that Mr. Baltins is independent for all purposes other than service on the Company’s Audit Committee because he is a member of one of the law firms that provides legal services to the Company. Mr. Tiller, our Chief Executive Officer, is not considered to be independent by the Board of Directors. Accordingly, a majority of our Board of Directors is considered to be independent. Additionally, all current members of our Audit, Compensation and Corporate Governance and Nominating Committees are considered to be independent.

 

Mr. Pierer resigned from the Board of Directors of the Company effective August 3, 2006. Mr. Pierer was not considered to be independent by the Board of Directors based on his relationship to Cross Industries AG under the Call Option Agreement (as described under the section entitled “Corporate Governance — Certain Relationships and Related Transactions” on page 11 of this Proxy Statement).

 

The Company obtains certain engine design consulting services from Menard Competition Technologies and Menard Engineering Limited (collectively, the “MCT Companies”), wholly owned subsidiaries of Menard, Inc. The MCT Companies were selected as a design consultant by the Company’s engineering group after a competitive proposal process and review. The Board of Directors considered Mr. Menard’s status as a shareholder of Menard, Inc. in determining that he is independent.

 

We have also adopted a Code of Business Conduct and Ethics applicable to all employees, including our Chief Executive Officer, our Chief Financial Officer and all other senior executives, and the directors. A copy of the Polaris Code of Business Conduct and Ethics is available on our website at www.polarisindustries.com and in print to any shareholder who requests it.

 

Under our Corporate Governance Guidelines, a process has been established by which shareholders and other interested parties may communicate with members of the Board of Directors. Any shareholder or other interested party who desires to communicate with the Board of Directors, individually or as a group, may do so by writing to the intended member or members of the Board of Directors, c/o Corporate Secretary, Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota, 55340.

 

All communications received in accordance with these procedures will be reviewed initially by the office of our Corporate Secretary to determine that the communication is a message to our directors and will be relayed to the appropriate director or directors unless the Corporate Secretary determines that the communication is an

advertisement or other promotional material. The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board of Directors or one or more of its committees and whether any response to the person sending the communication is appropriate.

 

During 2006, the full Board of Directors met seven times, four of which were in person. Each of the in-person meetings was preceded and/or followed by an executive session of the Board of Directors without management in attendance, chaired by either Mr. Palen or the chair of the Corporate Governance and Nominating Committee. Each of our directors attended 75% percent or more of the meetings of the Board of Directors and any committee on which they served in 2006. The Board also acted through three written actions in 2006. The Company does not maintain a formal policy regarding the Board’s attendance at annual shareholder meetings; however, Board members are expected to regularly attend all Board meetings and meetings of the committees on which they serve. All members of the Board of Directors attended our 2006 Annual Meeting, except for William Grant Van Dyke, who was elected to the Board effective July 19, 2006.

 

The Board of Directors has designated four standing committees. The Audit Committee, the Compensation Committee, the Corporate Governance and Nominating Committee and the Technology Committee each operate under a written charter which is available for review on our website at http://www.polarisindustries.com and is also available in print to any shareholder who requests it. The current membership of each committee and its principal functions, as well as the number of times it met during fiscal 2006, are described below.

 

Audit Committee

 

 

 

Compensation Committee

 

 

Corporate Governance and Nominating Committee

 

 

Technology Committee

 

 

The law firm of Kaplan, Strangis and Kaplan, P.A. (“KSK”) provides ongoing legal services to the Company and certain subsidiaries in connection with various matters. Andris A. Baltins, a member of the Board of Directors, is a member of that firm. During 2006, KSK received $508,390 in legal fees from the Company.

 

On August 11, 2005 and September 7, 2005, the Company, through its Austrian subsidiary, purchased a 24.9% interest in KTM Power Sports AG (“KTM”) from an institutional investor for $85.4 million. On July 18, 2005, the Company entered into a Call Option Agreement (the “Call Option Agreement”) with respect to the shares of KTM with Cross Industries AG (“Cross”). The shareholders of Cross are Pierer GmbH and Knünz GmbH, each beneficially owning 50% of the share capital and the voting rights of Cross. Stefan Pierer, the beneficial owner of 100% of the share capital and voting rights of Pierer GmbH, was appointed to our Board of Directors effective October 20, 2005. The Call Option Agreement granted each party a series of call rights to acquire the other’s ownership interest in KTM, which rights were generally to become exercisable in October 2007. On July 28, 2006 the Company announced that it would continue its strategic partnership with KTM at an operational and technical level but that it no longer anticipated that it would acquire a majority interest in KTM. Mr. Pierer tendered his resignation from our Board of Directors effective August 3, 2006. On December 22, 2006, the Company and Cross cancelled the Call Option Agreement and entered into a share purchase agreement for the sale by the Company of approximately 1.38 million shares of KTM, or approximately 80 percent of its investment in KTM, to a subsidiary of Cross for a purchase price of approximately 58.5 million Euros. The agreement provided for completion of the sale of KTM shares in two stages. On February 20, 2007, Polaris and Cross completed the sale of approximately 1.11 million shares for a purchase price of approximately 47.0 million Euros. The completion of the sale of an additional 0.27 million shares is to take place on or before June 15, 2007. At the conclusion of the second stage of the transaction, Polaris will then hold ownership of approximately 0.34 million shares, representing slightly less than 5 percent of KTM’s outstanding shares.

 

Polaris’ Code of Business Conduct and Ethics, which is applicable to all employees, officers and directors of Polaris, prohibits conflict of interest transactions. The following transactions constitute a conflict of interest:

 

 

 

Employees, officers and directors must obtain a waiver prior to engaging in a conflict of interest transaction. Waivers of the prohibition for officers and directors may only be made by the Audit Committee of the Board of Directors or, at the discretion of the Audit Committee, by the full Board of Directors. In addition, when a potential related person transaction, arrangement or relationship between a director and the Company becomes known, it is presented to the Corporate Governance and Nominating Committee, which then reviews the relationship and presents a description to the full Board of Directors. The potentially interested director recuses himself or herself from the deliberations by the Board of Directors in which a determination is made as to whether the relationship impacts such person’s independence for purposes of serving as a director.

 

All current members of the Compensation Committee are considered independent under our Corporate Governance Guidelines. No interlocking relationships exist between the Board of Directors or the Compensation Committee and the Board of Directors or compensation committee of any other company.

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers to file initial reports of ownership and reports of changes of ownership of the Company’s common stock with the SEC. Executive officers and directors are required to furnish the Company with copies of all Section 16(a) reports that they file. To the Company’s knowledge, based solely upon a review of the reports filed by the executive officers and directors during 2006 and written representations that no other reports were required, the Company believes that, during the year ended December 31, 2006, all filing requirements applicable to its directors, executive officers and 10% beneficial owners, if any, were complied with, except that the Company failed to timely file a Form 4 (i) for Mary P. McConnell with respect to the disposition of 3,271 shares of common stock, which were withheld by the Company to pay taxes associated with the vesting of restricted stock on March 31, 2006; (ii) for Gregory R. Palen and Robert L. Caulk with respect to grants of common stock equivalents on April 20, 2006; (iii) for William E. Fruhan, Jr. with respect to grants of common stock equivalents on April 3, 2006 and April 20, 2006; and (iv) for William Grant Van Dyke with respect to a grant of common stock equivalents on July 19, 2006.

 

The Audit Committee reports to and acts on behalf of the Board of Directors by providing oversight of (1) the integrity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, (4) the responsibilities, performance, budget and staffing of the Company’s internal audit function, and (5) the performance of the Company’s independent auditor, which reports directly to the Audit Committee. The Audit Committee is comprised of three directors, all of whom meet the standards of independence adopted by the SEC and the NYSE.

 

In performing our oversight responsibilities, we have reviewed and discussed the audited financial statements of the Company for the year ended December 31, 2006 with management and with representatives of the independent registered public accounting firm of Ernst & Young LLP (“E&Y”), the Company’s independent auditors. We also reviewed, and discussed with management and representatives of E&Y, management’s assessment and report and E&Y’s report and attestation on the effectiveness of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

 

We also discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees, as amended by Statement on Auditing Standards No. 90. We have received from the Company’s independent auditors the written disclosures and the letter required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and discussed the independence of E&Y with representatives of such firm. We are satisfied that the non-audit services provided to the Company by the independent auditors are compatible with maintaining their independence.

 

Management is responsible for Polaris’ system of internal controls and the financial reporting process. E&Y is responsible for performing an audit of the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and issuing a report thereon. Our committee’s responsibility is to monitor and oversee these processes.

 

In reliance on the reviews and discussions referred to in this Report, and subject to the limitations of our role, we recommended to the Board of Directors, and the Board has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

AUDIT COMMITTEE

 

Richard A. Zona, Chair
Annette K. Clayton
William Grant Van Dyke

 

The Audit Committee of the Board of Directors has engaged the independent registered public accounting firm of E&Y as independent auditors to examine the Company’s accounts for the fiscal year ending December 31, 2006. Representatives of E&Y will be present at the Annual Meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to appropriate questions.

 

Audit Fees.  The aggregate audit fees paid to E&Y for the fiscal years ended December 31, 2006 and December 31, 2005, were $777,000 and $717,000, respectively. These fees include amounts for the audit of the Company’s consolidated annual financial statements, statutory audits at certain foreign subsidiaries and the reviews of the consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q, including services related thereto such as attest services and consents. These amounts also include fees related to testing of the Company’s internal controls over financial reporting pursuant to Section 404(a) of the Sarbanes-Oxley Act of 2002.

 

Audit-Related Fees.  The aggregate audit-related fees paid to E&Y for the fiscal years 2006 and 2005 were $141,000 and $117,000, respectively. These fees related to the audit of Polaris Acceptance, the audit of employee benefit plans, assistance related to potential transactions and the issuance of certain industry reports.

 

Tax Fees.  The aggregate fees billed by E&Y for tax services rendered for the fiscal years 2006 and 2005 were $115,000 and $51,000, respectively. These fees primarily related to tax planning and compliance services, including assistance related to certain foreign subsidiaries.

 

All Other Fees.  There were no other fees paid to E&Y for the years ended December 31, 2006 and December 31, 2005.

 

Audit Committee Pre-Approval Requirements.  The Audit Committee’s charter provides that it has the sole authority to review in advance and grant any pre-approvals of (i) all auditing services to be provided by the independent auditor, (ii) all significant non-audit services to be provided by the independent auditors as permitted by Section 10A of the Securities Exchange Act of 1934, and (iii) all fees and the terms of engagement with respect to such services. All audit and non-audit services performed by E&Y during fiscal 2006 were pre-approved pursuant to the procedures outlined above.

 

The Board of Directors of the Company is divided into three classes. The members of one class are elected at each annual meeting of shareholders to serve three-year terms. The Class I directors currently serving on the Board, whose terms expire at the 2007 Annual Meeting, are Messrs. Andris A. Baltins, Robert L. Caulk and Thomas C. Tiller. In addition, the Board of Directors appointed William Grant Van Dyke as a Class II director, effective July 19, 2006, to fill the vacancy created by an increase in the number of directors from eight to nine. Mr. Van Dyke has consented to serve a one-year term, which will expire at the 2008 Annual Meeting when the term of all Class II directors will expire.

 

Upon the recommendation of the Corporate Governance and Nominating Committee of the Board, the Board of Directors proposes that the following nominee, who is currently serving as a Class II director, be elected as a Class II director for a one-year term expiring in 2008:

 

William Grant Van Dyke

 

Upon the recommendation of the Corporate Governance and Nominating Committee of the Board, the Board of Directors also proposes that the following nominees, all of whom are currently serving as Class I directors, be elected as Class I directors for three-year terms expiring in 2010:

 

Andris A. Baltins

Robert L. Caulk

Thomas C. Tiller

 

The persons named in the enclosed proxy intend to vote your proxy for the election of each of the four nominees, unless you indicate on the proxy card that your vote should be withheld from any or all of the nominees. If you are voting by telephone or on the Internet, you will be told how to withhold your vote from some or all of the nominees. Each nominee elected as a director will continue in office until his or her successor has been elected, or until his or her death, resignation or retirement.

 

After the election of one Class II director and three Class I directors at the Annual Meeting, the Board will consist of nine directors, including five continuing directors whose present terms extend beyond this Annual Meeting (Classes I, II and III will each consist of three members). There are no family relationships between or among any executive officers or directors of the Company.

 

We expect each nominee standing for election as a Class I director and Class II director to be able to serve if elected. If any nominee is not able to serve, proxies will be voted in favor of the remainder of those nominated and may be voted for substitute nominees designated by the Board, unless an instruction to the contrary is indicated on the proxy card.

 

The Board of Directors unanimously recommends a vote FOR the election of these nominees as Directors.

 

The principal occupation and certain other information about the nominees and other directors whose terms of office continue after the Annual Meeting are set forth on the following pages.

 

 

Upon the recommendation of the Compensation Committee, the Board of Directors has adopted the Polaris Industries Inc. 2007 Omnibus Incentive Plan (the “Omnibus Plan”) and is submitting it to the shareholders for approval. If approved by the shareholders, the Omnibus Plan will become “effective” (as such term is used in the Omnibus Plan) as of February 20, 2007. No awards will be made under the Omnibus Plan until the Omnibus Plan is approved by shareholders. The Omnibus Plan is a new long-term stock incentive plan intended to facilitate the continued use of long-term equity-based incentives and rewards for the benefit of the Company’s employees, directors and consultants, which are currently provided under several separate incentive and compensatory plans. If the Omnibus Plan is approved by shareholders, the Polaris Industries Inc. 1995 Stock Option Plan, the 1999 Broad Based Stock Option Plan, the Restricted Stock Plan and the 2003 Non-employee Director Stock Option Plan (collectively, the “Prior Plans”) will be frozen and no further grants or awards will be made under such plans. The Board believes that administering all future stock and equity-based awards under a single plan in lieu of such awards under the Prior Plans would increase the efficiency and effectiveness of the Company’s equity programs, reduce administrative and regulatory costs and create greater transparency with respect to the Company’s equity compensation practices. However, the Prior Plans will continue in effect after approval of the Omnibus Plan for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plans. If the Omnibus Plan is not approved by the Company’s shareholders, the Prior Plans will remain in effect according to their terms and the Company may continue to make stock and equity-based awards under such plans.

 

The Board’s approval of the Omnibus Plan is subject to the approval of the Company’s shareholders. Shareholder approval of the Omnibus Plan is desired, among other reasons, to ensure the tax deductibility by the Company of awards under the Omnibus Plan for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and to meet the listing requirements of the New York Stock Exchange.

 

The material features of the Omnibus Plan are summarized below. The summary is qualified in its entirety by reference to the specific provisions of the Omnibus Plan, the full text of which is set forth as Annex A to this Proxy Statement.

 

Administration

 

The Omnibus Plan is administered by the Compensation Committee of the Company’s Board of Directors. The Compensation Committee has the authority to determine, within the limits of the express provisions of the Omnibus Plan, the individuals to whom awards will be granted, the nature, amount and terms of such awards and the objectives and conditions for earning such awards. The Compensation Committee generally has discretion to delegate its authority under the Omnibus Plan to another committee of the Board or a subcommittee, or to such other party or parties, including officers of the Company, as the committee deems appropriate.

 

Awards under the Omnibus Plan may include incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted shares of common stock, restricted units, performance share or unit awards, other stock-based awards and cash-based incentive awards.

 

Stock Options.  The Compensation Committee may grant to a participant options to purchase Company common stock that qualify as incentive stock options for purposes of Section 422 of the Code (“incentive stock options”), options that do not qualify as incentive stock options (“non-qualified stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price, vesting periods, and other conditions on exercise will be determined by the Compensation Committee.

 

The exercise price for stock options will be determined by the Compensation Committee in its discretion, but may not be less than 100% of the fair market value of one share of the Company’s common stock on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise price may not be less than 110% of the fair market value of one share of common stock on the date the stock option is

granted. On February 21, 2007, the market price per share of the Company’s common stock was $51.50 based on the closing price of the common stock on the New York Stock Exchange on such date.

 

Stock options must be exercised within a period fixed by the Compensation Committee that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise period may not exceed five years.

 

At the Compensation Committee’s discretion, payment for shares of common stock on the exercise of stock options may be made in cash, shares of the Company’s common stock held by the participant or in any other form of consideration acceptable to the committee (including one or more forms of “cashless” exercise).

 

Stock Appreciation Rights.  The Compensation Committee may grant to a participant an award of SARs, which entitles the participant to receive, upon its exercise, a payment equal to (i) the excess of the fair market value of a share of common stock on the exercise date over the SAR exercise price, times (ii) the number of shares of common stock with respect to which the SAR is exercised.

 

The exercise price for a SAR will be determined by the Compensation Committee in its discretion, but may not be less than 100% of the fair market value of one share of the Company’s common stock on the date when the SAR is granted. Upon exercise of a SAR, payment may be made in cash, shares of the Company’s common stock held by the participant or in any other form of consideration acceptable to the Compensation Committee (including one or more forms of “cashless” exercise). SARs must be exercised within a period fixed by the Compensation Committee that may not exceed ten years from the date of grant.

 

Restricted Shares and Restricted Units.  The Compensation Committee may award to a participant shares of common stock subject to specified restrictions (“restricted shares”). Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over a specified forfeiture period and/or the attainment of specified Company performance targets over the forfeiture period.

 

The Compensation Committee also may award to a participant units representing the right to receive shares of common stock in the future subject to the achievement of one or more goals relating to the completion of service by the participant and/or the achievement of Company performance or other objectives (“restricted units”). The terms and conditions of restricted share and restricted unit awards are determined by the Compensation Committee.

 

For participants who are subject to Section 162(m) of the Code, the Company performance targets described in the preceding two paragraphs may be established by the Compensation Committee, in its discretion, based on one or more of the following measures (the “Performance Goals”):

 

 

 

The Performance Goals may be measured with respect to the Company or any one or more of its subsidiaries, divisions or affiliates, either in absolute terms or as compared to another company or companies, or an index established or designated by the Compensation Committee.

 

Performance Awards.  The Compensation Committee may grant performance awards to participants under such terms and conditions as the committee deems appropriate. A performance award entitles a participant to receive a payment from the Company, the amount of which is based upon the attainment of predetermined Company performance targets over a specified award period. Performance awards may be paid in cash, shares of common stock or a combination thereof, as determined by the Compensation Committee.

 

Award periods will be established at the discretion of the Compensation Committee. The performance targets will also be determined by the committee. With respect to participants subject to Section 162(m) of the Code, the applicable performance targets will be established, in the Compensation Committee’s discretion, based on one or more of the Performance Goals described under the section titled “Restricted Shares and Restricted Units” above. To the extent that a participant is not subject to Section 162(m) of the Code, when circumstances occur that cause predetermined performance targets to be an inappropriate measure of achievement, the Compensation Committee, at its discretion, may adjust the performance targets or the amount or value of the performance award.

 

Other Stock-Based Awards.  The Compensation Committee may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, SARs, restricted shares, restricted units, or performance awards. The terms and conditions of each other stock-based award will be determined by the Compensation Committee. Payment under any other stock-based awards will be made in common stock or cash, as determined by the Compensation Committee.

 

Cash-Based Awards.  The Compensation Committee may grant cash-based incentive compensation awards, which would include performance-based annual cash incentive compensation to be paid to covered employees subject to Section 162(m) of the Code. The terms and conditions of each cash-based award will be determined by the Compensation Committee. The following material terms will be applicable to performance-based cash awards granted to covered executives subject to Section 162(m):

 

 

 

Dividend Equivalents.  The Compensation Committee may provide for the payment of dividends or dividend equivalents with respect to any shares of common stock subject to an award under the Omnibus Plan other than stock options or SARs.

 

Eligibility and Limitation on Awards

 

The Compensation Committee may grant awards to any employee, director, consultant or other person providing services to the Company or its affiliates. It is presently contemplated that approximately 3,400 persons will be eligible to receive awards.

 

The maximum awards that can be granted under the Omnibus Plan to a single participant in any calendar year will be 600,000 shares of common stock in the form of options or SARs, 125,000 shares of common stock in the form of restricted shares, restricted units, performance unit or share awards and other stock-based awards, and $7,000,000 in the form of cash-based incentive awards.

 

Awards Granted Under the Omnibus Plan

 

As of the date hereof, no specific awards have been granted or are contemplated under the Omnibus Plan. In addition, the exact types and amounts of any future awards to be made to any eligible participants pursuant to the Omnibus Plan are not presently determinable. As a result of the discretionary nature of the Omnibus Plan, it is not possible to state who the participants in the Omnibus Plan will be in the future or the number of options or other awards to be received by a person or group.

 

An aggregate of 1,750,000 shares of common stock is reserved for issuance and available for awards under the Omnibus Plan, including incentive stock options granted under the Omnibus Plan. Further, no more than 150,000 of the total shares of common stock reserved under the Omnibus Plan may be awarded as restricted shares, restricted units, performance awards or other-stock-based awards, provided that this number will be increased by the number of shares subject to outstanding awards of a similar type under the Prior Plans as of the effective date of the Omnibus Plan to the extent such outstanding awards are terminated, canceled or otherwise forfeited in accordance with the terms of the Prior Plans without exercise or settlement of such awards in vested and nonforfeitable shares.

 

In addition to the 1,750,000 shares reserved for issuance under the Omnibus Plan, shares of common stock subject to outstanding awards under the Prior Plans as of the effective date of the Omnibus Plan will be available for awards under the Omnibus Plan to the extent that such outstanding awards are terminated, canceled or otherwise forfeited in accordance with the terms of the Prior Plans without exercise or settlement of such awards in vested and nonforfeitable shares. As of the record date of February 21, 2007, the Company had outstanding 4,641,250 stock options with a weighted average exercise price of $36.77 per share and a weighted average remaining contractual life of 5.74 years, as well as 425,847 shares of performance-based or time-based restricted shares. Note 2 to the Company’s financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2006 describes options and restricted shares outstanding at December 31, 2006. Between January 1, 2007 and the record date, Polaris granted 357,000 stock options with an exercise price of $46.66 per share and a 10 year term and 42,000 shares of performance-based or time-based restricted shares. The Company does not anticipate that any new awards will be made under the Prior Plans between the record date and the Annual Meeting on April 19, 2007. With respect to awards other than SARs made under the Omnibus Plan, shares of common stock not actually issued (as a result, for example, of the lapse of an option or a forfeiture of restricted stock), other than shares surrendered to or withheld by the Company in payment or satisfaction of the exercise price of a stock option or tax withholding obligations with respect to an award, will be available for additional grants under the Omnibus Plan. With respect to

SARs, the full number of SARs granted that are settled by the issuance of shares of common stock will be counted against the number of shares reserved for issuance under the Omnibus Plan, regardless of the number of shares actually issued upon settlement of the SAR award.

 

Shares to be issued or purchased under the Omnibus Plan will be authorized but unissued shares of common stock. Shares issued with respect to awards assumed by the Company in connection with acquisitions do not count against the total number of shares available under the Omnibus Plan.

 

Anti-Dilution Protection

 

In the event of any changes in the capital structure of the Company, including a change resulting from a stock dividend or stock split, or combination or reclassification of shares, the Compensation Committee is empowered to make such equitable adjustments with respect to awards or any provisions of the Omnibus Plan as it deems necessary and appropriate, including, if necessary, any adjustments in the maximum number of shares of common stock subject to the Omnibus Plan, the number of shares of common stock subject to and the exercise price of an outstanding award, or the maximum number of shares that may be subject to one or more awards granted to any one recipient during a calendar year.

 

Amendment and Termination

 

The Board of Directors may at any time amend, terminate or modify the Omnibus Plan, provided that no such action may be taken that adversely affects in any material way any award previously granted under the Omnibus Plan without the consent of the participant. In addition, except with respect to anti-dilution adjustments, (i) neither the exercise price of an outstanding option nor the grant price of an outstanding SAR may be lowered, (ii) no new award may be granted in exchange for the cancellation of an outstanding award, and (iii) no underwater option or SAR may be cancelled in exchange for a cash payment, without the prior approval of the Company’s shareholders, and no material amendment of the Omnibus Plan will be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rules. In no event may any awards be made under the Omnibus Plan after the tenth anniversary of its effective date. Certain provisions of the Omnibus Plan relating to performance-based awards under Section 162(m) of the Code will expire on the fifth anniversary of the effective date unless they are reapproved by the Company’s shareholders.

 

Federal Income Tax Consequences

 

The federal income tax consequences of the issuance and/or exercise of awards under the Omnibus Plan are as described below. The following information is only a summary of the tax consequences of the awards, and participants should consult with their own tax advisors with respect to the tax consequences inherent in the ownership and/or exercise of the awards, and the ownership and disposition of any underlying securities.

 

Incentive Stock Options.  A participant who is granted an incentive stock option will not recognize any taxable income for federal income tax purposes either on the grant or exercise of the incentive stock option. If the participant disposes of the shares purchased pursuant to the incentive stock option more than two years after the date of grant and more than one year after the transfer of the shares to the participant (the required statutory “holding period”), (a) the participant will recognize long-term capital gain or loss, as the case may be, equal to the difference between the selling price and the option price; and (b) the Company will not be entitled to a deduction with respect to the shares of stock so issued. If the holding period requirements are not met, any gain realized upon disposition will be taxed as ordinary income to the extent of the excess of the lesser of (i) the excess of the fair market value of the shares at the time of exercise over the option price, and (ii) the gain on the sale. Also in that case, the Company will be entitled to a deduction in the year of disposition in an amount equal to the ordinary income recognized by the participant. Any additional gain will be taxed as short-term or long-term capital gain depending upon the holding period for the stock. A sale for less than the option price results in a capital loss.

 

The excess of the fair market value of the shares on the date of exercise over the option price is, however, includable in the option holder’s income for alternative minimum tax purposes.

 

Nonqualified Stock Options.  A participant who is granted a nonqualified stock option under the Omnibus Plan will not recognize any income for federal income tax purposes on the grant of the option. Generally, on the exercise of the option, the participant will recognize taxable ordinary income equal to the excess of the fair market value of the shares on the exercise date over the option price for the shares. The Company generally will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant. Upon disposition of the shares purchased pursuant to the stock option, the participant will recognize long-term or short-term capital gain or loss, as the case may be, equal to the difference between the amount realized on such disposition and the basis for such shares, which basis includes the amount previously recognized by the participant as ordinary income.

 

Stock Appreciation Rights.  A participant who is granted stock appreciation rights will normally not recognize any taxable income on the receipt of the SARs. Upon the exercise of a SAR, (a) the participant will recognize ordinary income equal to the amount received (the increase in the fair market value of one share of the Company’s common stock from the date of grant of the SAR to the date of exercise); and (b) the Company will be entitled to a deduction on the date of exercise in an amount equal to the ordinary income recognized by the participant.

 

Restricted Shares.  A participant will not be taxed at the date of an award of restricted shares, but will be taxed at ordinary income rates on the fair market value of any restricted shares as of the date that the restrictions lapse, unless the participant, within 30 days after transfer of such restricted shares to the participant, elects under Section 83(b) of the Code to include in income the fair market value of the restricted shares as of the date of such transfer. The Company will be entitled to a corresponding deduction. Any disposition of shares after restrictions lapse will be subject to the regular rules governing long-term and short-term capital gains and losses, with the basis for this purpose equal to the fair market value of the shares at the end of the restricted period (or on the date of the transfer of the restricted shares, if the employee elects to be taxed on the fair market value upon such transfer). To the extent dividends are payable during the restricted period under the applicable award agreement, any such dividends will be taxable to the participant at ordinary income tax rates and will be deductible by the Company unless the participant has elected to be taxed on the fair market value of the restricted shares upon transfer, in which case they will thereafter be taxable to the employee as dividends and will not be deductible by the Company.

 

Restricted Units.  A participant will normally not recognize taxable income upon an award of restricted units, and the Company will not be entitled to a deduction until the lapse of the applicable restrictions. Upon the lapse of the restrictions and the issuance of the earned shares, the participant will recognize ordinary taxable income in an amount equal to the fair market value of the common stock received and the Company will be entitled to a deduction in the same amount.

 

Performance Awards, Other Stock-Based Awards and Cash-Based Awards.  Normally, a participant will not recognize taxable income upon the grant of performance awards, other stock-based awards and cash-based awards. Subsequently, when the conditions and requirements for the grants have been satisfied and the payment determined, any cash received and the fair market value of any common stock received will constitute ordinary income to the participant. The Company also will then be entitled to a deduction in the same amount.

 

Effective Date

 

The Omnibus Plan will be effective on February 20, 2007 if approved by the shareholders of the Company. If not approved by the shareholders, no awards will be made under the Omnibus Plan. If and when the Omnibus Plan becomes effective, the Prior Plans will be frozen and no further grants of equity or equity-based awards or cash-based awards will be made under such plans. However, shares of common stock subject to outstanding awards granted under those plans prior to the effective date of the Omnibus Plan will remain available for issuance under such plans and such plans will remain in effect after the effective date of the Omnibus Plan to the extent necessary to administer such previously-granted awards.

 

Approval of the Omnibus Plan will require the affirmative vote of the holders of a majority of the shares of the Company’s common stock present in person or by proxy and entitled to vote at the Annual Meeting, assuming the

presence of a quorum at the Annual Meeting (provided that the number of shares voted in favor of the proposal constitutes more than 25% of the outstanding shares of the Company’s common stock). If the shareholders do not approve the Omnibus Plan, it will not be implemented, but the Company reserves the right to adopt such other compensation plans and programs as it deems appropriate and in the best interests of the Company and its shareholders.

 

Except where authority has been withheld by a shareholder, the enclosed proxy will be voted for the approval of the Omnibus Plan. The Board of Directors unanimously recommends a vote “FOR” the proposal to approve the Omnibus Plan.

 

Assuming shareholders approve the Omnibus Plan at the Annual Meeting, the following table illustrates the amounts that would have been awarded under such plan for fiscal year 2006.

 

NEW PLAN BENEFITS

 

 

Our shareholders have approved the Polaris Industries Inc. 1995 Stock Option Plan, the Polaris Industries Inc. Restricted Stock Plan, the Polaris Industries Inc. Employee Stock Purchase Plan, the Polaris Industries Inc. Deferred Compensation Plan for Directors and the 2003 Non-Employee Director Stock Option Plan.

 

The Polaris Industries Inc. 1999 Broad-Based Stock Option Plan was approved by the Board of Directors, but was not approved by the shareholders. Neither the NYSE rules nor federal law required shareholder approval at the time the 1999 Broad-Based Stock Option Plan was adopted and accordingly it was not submitted for shareholder approval.

 

Under the Polaris Industries Inc. 1999 Broad-Based Stock Option Plan, each of the Company’s full-time employees, and any part-time employee who had performed at least 1,000 hours of service prior to the date of grant, received a one-time award of non-qualified stock options to purchase shares of Polaris common stock. The Company’s executive officers and directors are not eligible to participate in this plan. On April 1, 1999, an aggregate

of 675,400 options were granted under the plan, consisting of an option to each full-time employee to purchase 200 shares and an option to each part-time employee to purchase 100 shares of Polaris common stock. These grants were made at the fair market value of Polaris common stock as of the grant date. Of the 675,400 options initially granted under the plan, an aggregate of 518,400 options vested on March 7, 2002 when the closing price of Polaris common stock, as reported on the NYSE, was two times the per share exercise price of such options. The Board of Directors does not intend to grant any future options under this plan.

 

The following table sets forth certain information as of December 31, 2006, with respect to compensation plans under which shares of Polaris common stock may be issued.

 

 

 

 

The following discussion and analysis describes the Company’s compensation objectives and policies as applied to the following named executive officers (the “Executive Officers”):

 

 

This section is intended to provide a framework within which to understand the actual compensation awarded to, earned or held by each Executive Officer during 2006, as reported in the compensation tables and accompanying narrative sections appearing on pages 38 to 60 of this Proxy Statement.

 

Objectives of Polaris’ Compensation Program

 

Polaris’ executive compensation philosophy aligns executive compensation decisions with its desired business direction, strategy and performance. The primary objectives and priorities of the compensation program for Polaris’ Executive Officers are to:

 

 

To achieve these objectives, the Company has designed an executive compensation program that emphasizes performance-based incentives and consists of two key components:

 

 

 

Awards under the Senior Executive Plan, LTIP, Restricted Stock Plan and Stock Option Plan provide Executive Officers with incentives to achieve the Company’s business objectives and also serve as a retention tool. The value and attainment of these awards are driven by the Company’s financial and stock price performance. The incentive award target percentages of each Executive Officer under the Senior Executive Plan and the LTIP, as well as the number of stock options and performance-based stock awards under the Restricted Stock Plan to each Executive Officer, are determined by the Compensation Committee after consideration of the position held by the Executive Officer and the expected level of contribution to the achievement of the desired business objectives.

 

To attract and retain talented individuals, the compensation of Executive Officers must also be competitive with other companies in its comparable markets. Accordingly, the Company uses survey data, as described in the section entitled “Factors Used in Determining Compensation” below, to structure the total compensation opportunities provided to Executive Officers that (a) will approximate over time the median total compensation opportunities within the survey group as adjusted for company size, and (b) will result in higher than the median compensation if Polaris outperforms comparable companies and executives contribute meaningfully to that performance. Individual Executive Officer compensation opportunities and actual compensation are further influenced by Company performance and individual performance.

 

Polaris’ compensation philosophy for Executive Officers distinguishes between the compensation opportunities made available to Executive Officers and the compensation paid to Executive Officers. The Company provides and measures total compensation opportunities to its Executive Officers through a combination of base salary, target annual incentive awards under the Senior Executive Plan, the grant date fair value of stock option awards, the target incentive awards under the LTIP and the grant date fair value of performance-based stock awards. The actual amount realized by individual Executive Officers from their total compensation opportunities (other than base salary), if any, is dependent upon the Company’s actual financial and/or stock price performance over the term of the award as well as individual performance. Accordingly, if results fail to meet the goals established for one or more of the variable components of total compensation opportunities, then earned compensation is likely to fall below the survey group’s median total compensation depending upon the performance of the companies within that group.

 

In 2006, the total compensation opportunities provided to the Chief Executive Officer and to the other Executive Officers fell in the top quartile and 68^th percentile, respectively, of grant date total compensation opportunities provided to executives holding equivalent positions in the survey group of companies.

 

Factors Considered in Determining Compensation

 

The Compensation Committee annually reviews competitive executive compensation levels based upon a report compiled by its independent compensation consultant, Hewitt Associates, Inc, that includes comparative compensation data from a survey of a group of companies that are primarily engaged in the manufacturing industry and have annual sales ranging from $1 billion to $4 billion. The criteria used to identify the survey group of companies remain consistent from year-to-year, although the actual companies within the survey group will vary depending on changes in reported sales. The Company believes that these criteria are effective in yielding a survey group of comparable companies because Polaris is a manufacturing entity and had annual sales of $1.7 billion and

$1.9 billion for the years ended December 31, 2006 and December 31, 2005, respectively. The survey group used to establish 2006 compensation opportunities included the following companies:

 

 

The survey group also included nine additional private companies for which annual sales data is not publicly available but whose compensation data was included in the underlying analyses to determine the market value of compensation. These nine companies met the peer group selection criteria and had annual sales between $1 and $4 billion. Polaris ranked in the 32^nd percentile of the survey group based on net sales.

 

Utilizing the survey group information, the Compensation Committee conducts its own review of the various components of Polaris’ executive compensation program and, with the assistance of the Chief Executive Officer, the President and Chief Operating Officer and the Vice President — Human Resources, makes an assessment of the skills, experience and achievements to determine the base salary and annual and long-term incentive targets and opportunities of the Executive Officers as a group and individually. The amount of compensation opportunities of the Company’s Executive Officers is based upon these assessments.

 

In addition to the foregoing, as part of its annual practice, a compensation tally sheet was prepared for the Chief Executive Officer and reviewed by the Compensation Committee in January 2006. The tally sheet affixed dollar amounts to all components of the Chief Executive Officer’s 2006 compensation opportunities, including current pay (base salary and an annual incentive award opportunity under the Senior Executive Plan), deferred compensation, outstanding equity awards, benefits, perquisites and potential change in control and severance payments. The information set forth in the tally sheet reviewed by the Compensation Committee is reflected in the compensation tables and accompanying narrative sections beginning on page 38 of this Proxy Statement.

 

Impact of Accounting and Tax Treatments

 

The Compensation Committee made decisions regarding executive compensation using forms of compensation that were compliant with Section 162(m) of the Internal Revenue Code. Section 162(m) generally provides that a publicly held corporation will not be entitled to deduct for federal income tax purposes compensation paid to either its chief executive officer or any of its four other most highly compensated executive officers in excess of $1 million in any year if that compensation is not performance related. In April 2004, shareholders approved the Senior Executive Plan and the LTIP. Senior executives of the Company, to whom Section 162(m) may apply, participate in the Senior Executive Plan in lieu of the Company-wide profit sharing plan. Awards under both plans approved by shareholders in 2004 would meet the requirements of Section 162(m) and be tax deductible to Polaris. Additionally, outstanding grants under the Company’s stock-based compensation programs, including stock option and performance-based stock award programs, are performance-based for purposes of Section 162(m). The Company believes that all compensation paid to Polaris’ executives for 2006 is deductible under the Internal Revenue Code.

 

Stock Ownership Guidelines

 

The Company’s Board of Directors has adopted stock ownership guidelines, which provide that the Chief Executive Officer and other Executive Officers are expected to own, directly or indirectly, shares of common stock or restricted share awards having a value of at least five and three times, respectively, their annual base salaries. Compliance with the stock ownership guidelines is voluntary but is monitored by the Vice President — Finance, Chief Financial Officer and Secretary of the Company. All Executive Officers are expected to satisfy the stock ownership guidelines within four years following the date of their becoming an Executive Officer. The following chart sets forth the stock ownership of each of the Executive Officers as of December 31, 2006 relative to the stock ownership guidelines:

 

 

Role of Executive Officers in Determining Compensation

 

The Compensation Committee meets with the Chief Executive Officer annually to review the performance of the Company’s other Executive Officers. The meeting includes an in-depth review of the performance of each Executive Officer. A summary of the performance review is presented to the full Board of Directors each year.

 

The Chief Executive Officer and Vice President — Human Resources assist the Compensation Committee in reviewing performance under the Senior Executive Plan metrics. Each Executive Officer has an incentive award target expressed as a percentage of base salary based on the individual’s level of responsibility. The Chief Executive Officer and Vice President — Human Resources review the pre-established incentive award targets, Company performance and individual performance for the other Executive Officers and recommend incentive award amounts for such persons to the Compensation Committee. In addition, the Chief Executive Officer makes recommendations to the Compensation Committee with respect to equity-based incentive awards for the other Executive Officers.

 

Annual Compensation

 

Base Salary.  To remain competitive with compensation levels of executives at comparable companies, Polaris targets the base pay of its Executive Officers at the 50^th percentile of the survey group of companies identified above. Polaris believes that targeting base pay at a competitive level helps fulfill its compensation program objective of attracting and retaining high quality executives. Each Executive Officer’s salary relative to this competitive framework varies based on the level of his or her responsibility, experience, time in position, internal equity considerations and individual performance and is reviewed by the Compensation Committee on an annual basis. Specific salary adjustments take into account these factors and the current market for management talent. An Executive Officer’s base salary will also generally be reviewed at the time of a promotion or other change in responsibilities. The Compensation Committee did not increase the base salary of any Executive Officer during 2006. For 2006, the base salary of each Executive Officer ranked slightly below the median at the 43^rd percentile of the survey group’s base salaries for executives holding equivalent positions.

 

Senior Executive Annual Incentive Compensation Plan.  Polaris awards annual incentives under the Senior Executive Plan based on the achievement of performance criteria established for a specific year. Polaris believes that the opportunities provided under the Senior Executive Plan fulfill all of its compensation program objectives by:

 

 

All Executive Officers participate in the Senior Executive Plan. An Executive Officer’s opportunities to earn payouts are substantially based upon overall financial performance measured against pre-established Company objectives. The amounts earned are also influenced by an assessment of each Executive Officer’s individual performance. In this way, awards under the Senior Executive Plan fulfill Polaris’ compensation objectives of supporting the Company’s business plans and annual goals and generating and rewarding superior performance.

 

The Company’s Chief Executive Officer and other members of senior management, as designated by the Compensation Committee of the Board of Directors of the Company, participate in the Senior Executive Plan in lieu of the Company’s broad based annual profit sharing plan in order that, among other things, the Company may treat awards to participants as “performance-based” compensation for the purpose of Section 162(m) of the Internal Revenue Code.

 

Polaris establishes a Senior Executive Plan target in January of each year for each Executive Officer expressed as a percentage of base salary based on that individual’s level of responsibility. A target percentage of 200% of base salary was set for the Chief Executive Officer and a target of 100% of base salary was set for the President and Chief Operating Officer for each of the 2005 and 2006 performance periods. A target percentage of 80% of base salary was established under the plan for the other Executive Officers for the same performance periods. When establishing the target percentages for each of the Executive Officers, the Compensation Committee also establishes a range of percentages of base salaries from 0% to a maximum permitted percentage that could be awarded to each Executive Officer depending upon Company performance. The Compensation Committee has discretion to provide less than target awards or more than the target amounts, not to exceed the maximum permitted percentage, based upon the attainment of Company and individual performance goals.

 

Awards under the Senior Executive Plan for each of the 2005 and 2006 performance periods were based upon the attainment of predetermined earnings per diluted share from continuing operations targets. The Company believes that earnings per diluted share from continuing operations is an effective method of measuring the

achievement of the objectives of the Senior Executive Plan stated above. Awards under the Senior Executive Plan are paid prior to March 15^th following the year during which performance is measured.

 

Senior Executive Plan Awards for 2005 — Awarded in February 2006

 

In January 2005, the Compensation Committee determined that incentive award targets under the Senior Executive Plan for calendar year 2005 (the “2005 Senior Executive Plan Awards”) would be based on earnings per diluted share from continuing operations of $3.50. The Company actually achieved earnings per diluted share from continuing operations of $3.29 for the full year 2005, which amount has been adjusted to $3.15 in 2006 to reflect the adoption of Statement of Financial Accounting Standards No. 123R utilizing the modified retrospective method. As a result of the Company’s actual 2005 performance, the Compensation Committee exercised its negative discretion in making the following awards:

 

 

The foregoing amounts were reported as bonus awards to each of the Executive Officers in the summary compensation table included in the Company’s Proxy Statement for its 2006 Annual Meeting of Shareholders.

 

Senior Executive Plan Awards for 2006 — Awarded in February 2007

 

In January 2006, the Compensation Committee determined that incentive award targets under the Senior Executive Plan for calendar year 2006 (the “2006 Senior Executive Plan Awards”) would be based upon earnings per diluted share from continuing operations of $3.50. The Company achieved earnings per diluted share from continuing operations of $2.72 for 2006. As a result of the Company’s actual 2006 performance, the Compensation Committee exercised its negative discretion only with respect to awards to Messrs. Tiller and Morgan in making the following awards:

 

 

The 2006 Senior Executive Plan Awards paid to Executive Officers in February 2007 are reflected in column (g) of the Summary Compensation table appearing on page 38 of this Proxy Statement.

 

Long-Term Compensation

 

Long-term compensation awarded by the Company includes long-term cash-based incentive awards under the LTIP, stock options under the Stock Option Plan, and performance-based stock awards under the Restricted Stock Plan. The Company strives to find an appropriate balance between long-term compensation opportunities such as stock options that are dependent upon the market price of the Company’s common stock in order to align the Executive Officers’ interests with those of shareholders generally and those such as cash-based awards under the LTIP or performance-based stock awards under the Restricted Stock Plan that are dependent upon achievement of

specific financial measures that Executive Officers can influence and manage over time and that will also drive shareholder value. Accordingly, approximately 60% of the grant date value of long-term compensation opportunities is provided to each Executive Officer in the form of stock options, with the remaining 40% allocated to cash awards under the LTIP or performance-based stock awards under the Restricted Stock Plan.

 

LTIP.  Long-term cash-based incentives under the LTIP are awarded in an effort to:

 

 

Each of the Executive Officers, other than the Chief Executive Officer, participates in the LTIP. The plan was adopted with the intention that awards would be made under this plan in substitution for annual awards previously made under the Restricted Stock Plan. Payouts under the LTIP are based on financial performance measured over a period of three consecutive calendar years.

 

At the beginning of each three-year performance period, participants choose whether their payout will be calculated based upon: (1) cash value at the time of award; or (2) cash value tied to Polaris stock price movement over the three-year performance period. Each Executive Officer has chosen to have his payout calculated based upon cash value tied to Polaris stock price movement over the three-year performance period. Similar to the Senior Executive Plan, Polaris establishes an LTIP target in January of each year for each Executive Officer participant expressed as a percentage of base salary based on that individual’s level of responsibility. A plan target of 55% of base salary was established for Mr. Morgan and a target of 80% of base salary was established for each of the other Executive Officer participants for the 2004 — 2006 performance period (“2004 LTIP Grant”). Mr. Morgan’s target percentage was lower than the other Executive Officer participants for the 2004 LTIP Grant because he was not serving as an officer of the Company when the 2004 LTIP Grant was made. Mr. Morgan was promoted to his current position as the President and Chief Operating Officer of the Company in April 2005. A plan target of 100% and 80% of base salary was established under the LTIP for Mr. Morgan and the other Executive Officer participants, respectively, for the 2005 — 2007 performance period (“2005 LTIP Grant”) and the 2006 — 2008 performance period (“2006 LTIP Grant”). The Compensation Committee has discretion under the LTIP to either (i) disregard the impact of any extraordinary or unusual events (such as significant acquisitions or divestitures by the Company) in determining whether a performance objective has been obtained or (ii) to make appropriate adjustments in any performance objective to reflect the occurrence of such an event.

 

2004 LTIP Grant

 

Target awards under the 2004 LTIP Grant were based upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings per diluted share growth using actual 2003 financial results as the base period.

 

 

The Company applies a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

The Company chose these performance metrics because it believes that annual sales growth and earnings per diluted share growth are long-term drivers of shareholder value. Awards under the LTIP, if earned, are paid prior to March 15^th of the year following the year in which the performance period ended.

 

In January 2007, the Compensation Committee determined that the threshold performance criteria had not been achieved for the 2004 LTIP Grant and, accordingly, that no incentive awards would be paid to the Executive Officer participants for that performance period.

 

2005 LTIP Grant

 

Target awards under the 2005 LTIP Grant will be dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings per diluted share from continuing operations growth using actual 2004 financial results as the base period.

 

 

The Company will apply a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

At the present time, the Company believes that it is unlikely that the threshold performance criteria will be achieved for the 2005 LTIP Grant and, accordingly, does not expect to make awards to Executive Officer participants for that performance period.

 

2006 LTIP Grant

 

Target awards under the 2006 LTIP Grant will be dependent upon the level of achievement of two performance criteria: three-year compound annual sales growth and three-year compound earnings per diluted share from continuing operations growth using actual 2005 financial results as the base period.

 

 

The Company will apply a non-discretionary sliding scale of percentages of base salary based upon the foregoing threshold, target and maximum award amounts to determine the amount of incentive award payable to each Executive Officer if actual Company performance falls between the threshold and target performance criteria or between the target and maximum performance criteria.

 

At the present time, the Company believes that it is unlikely that the threshold performance criteria will be achieved for the 2006 LTIP Grant and, accordingly, does not expect to make awards to Executive Officer participants for that performance period.

 

Stock Option Plan.  The Company makes grants under the Stock Option Plan in the form of nonqualified stock options. The value of the stock options is inherently tied to the performance of the Company, as reflected in its stock price, and provides Executive Officers with an opportunity to have an equity stake in the Company. Thus, the Company believes that the award of stock options furthers its compensation objectives by:

 

 

The Compensation Committee approves each stock option grant to Executive Officers under the Stock Option Plan. The number of stock options awarded is based upon the Company’s operating performance, individual performance, and market competitiveness as well as valuation data provided by the Company’s compensation consultant. Executive Officers are generally eligible to receive stock option grants on an annual basis. The Company ensures that stock option awards approved by the Compensation Committee will be granted subsequent to any planned release of material non-public information. The Company does not engage in the backdating, cancellation or re-pricing of stock options and has not engaged in such practices in the past.

 

The Compensation Committee previously considered stock option grants to Executive Officers in October of each year. During 2006, the Compensation Committee decided to defer its consideration of stock option grants to the Executive Officers until January 2007, at the same time that it reviews other elements of Executive Officer compensation. As a result, the Company did not grant any stock options to Executive Officers during 2006.

 

Restricted Stock Plan.  The Company makes awards of performance-based stock under its Restricted Stock Plan on a selective and limited basis. Generally such awards are made in connection with promotions, outstanding performance, hiring of new executives and extensions of existing employment arrangements. The Company believes that awards of performance-based stock are a vital factor in:

 

 

In December 2006, the Compensation Committee granted performance-based stock awards under the Restricted Stock plan to several key employees including the Executive Officers, other than the Chief Executive Officer, in an effort to further its objective of retaining valuable talent. The Compensation Committee determined that such an award was necessary to address the substantial impact during 2006 of a rapidly changing business environment on the Company’s near and long-term performance objectives and the accompanying increase in risk of losing critical employees. The Compensation Committee also determined that it was not necessary to provide this one-time grant to the Chief Executive Officer because he already had sufficient incentive to remain with the Company. In addition to furthering its objective of retaining key talent, the Compensation Committee also designed the award to drive shareholder value. Accordingly, each recipient was awarded two grants of performance-based stock-one conditioned on the achievement of compound annual earnings per diluted share from continuing operations growth of at least 6% and the other conditioned on the achievement of compound annual earnings per diluted share from continuing operations growth of at least 12%. The compound annual earnings per diluted share from continuing operations growth will be measured for fiscal years 2007 and 2008 over the actual $2.72 earnings per diluted share from continuing operations in 2006, and if the growth targets are achieved, these awards will vest on December 12, 2009. The awards will be forfeited if the performance objectives are not achieved. Individual awards will also be forfeited if a recipient leaves the Company either prior to achievement of the performance objectives or prior to the December 12, 2009 vesting date.

 

Benefits

 

Polaris provides a full range of benefits to its Executive Officers, including the standard medical, dental and disability coverage available to employees generally.

 

Polaris also sponsors a 401(k) Retirement Savings Plan (“401(k) Plan”) that allows employees to make plan contributions on a pre-tax basis. Employees are automatically enrolled at 5% of gross income and can elect to contribute 0-50% of covered compensation into the 401(k) Plan. Polaris matches employee contributions dollar-for-dollar up to 5% of covered compensation. Although Executive Officers are eligible to participate in the 401(k) Plan, the application of the annual limitation on contributions under Section 401(a)(17) of the Internal Revenue Code prevents Executive Officers from participating at the same level as non-executives. The Polaris Industries Inc. Supplemental Retirement/Savings Plan (“SERP”) provides executives who participate in the 401(k) Plan with the opportunity to defer up to the full 5% of covered compensation by making contributions to the SERP that are then matched by the Company as if they had been made under the 401(k) Plan. The SERP is intended solely to restore contributions lost because of the application of the annual limitations under the Internal Revenue Code that are applicable to the 401(k) Plan. This additional benefit, which assists the Executive Officers in accumulating funds for retirement, is consistent with observed competitive practices of similarly situated companies.

 

Other than the restorative SERP, the Company does not maintain a defined benefit supplemental retirement savings plan or a pension plan for the Executive Officers.

Perquisites

 

Polaris provides a limited number of perquisites to its Executive Officers in an effort to remain competitive with similarly situated companies.

 

Club Dues.   Polaris reimburses each Executive Officer for entrance or initiation fees and monthly club dues. Only two of the Executive Officers received reimbursement for club dues in 2006. Polaris also provides tax gross-ups to Executive Officers on the amount of club due reimbursements.

 

Tax and Estate Planning Fees.   Polaris also reimburses its Executive Officers for tax and estate planning fees. In addition, Polaris provides tax gross-ups to Executive Officers on the amount of tax and estate planning fee reimbursements.

 

Exec-U-Care Coverage.   The Executive Officers are eligible to receive broad medical and dental coverage up to $50,000 a year through the Exec-U-Care program. Exec-U-Care supplements an Executive Officer’s basic health plan by reimbursing annual expenses not covered under the basic medical and dental benefit plans that are available on a Company-wide basis. Examples of such expenses include deductibles, co-insurance amounts, special health equipment and chiropractic care. Annual physicals at the Mayo Clinic are also covered for each Executive Officer and his or her spouse.

 

Polaris Products.   The Company provides each Executive Officer with temporary use of Polaris products to encourage a first-hand understanding of the riding experience of Polaris customers and to provide Executive Officers with an opportunity to evaluate product design and efficiency. The Chief Executive Officer is provided with the usage of unlimited Polaris products, the President and Chief Operating Officer is provided with 12 Polaris products and other Executive Officers are given their choice of six Polaris products, with a maximum of two from each product line. The products used by the Executive Officers are returned to Polaris at the end of a defined usage period based upon months, miles or hours, depending upon the product line. Polaris sells the returned products to dealers at an amount greater than the cost of such products to the Company. All Executive Officers also receive related Polaris parts, garments and accessories.

 

Corporate Aircraft Use.   Executive Officers are eligible to use the Company’s aircraft for personal travel. Under the Company’s Corporate Travel & Expense Reimbursement Policy, all incremental variable operating costs associated with such personal aircraft use must be reimbursed by the executive to the Company.

 

Change in Control Agreements

 

The Company has entered into change in control agreements with the Executive Officers which become effective only upon certain change in control events, which are defined in the agreements. These change in control agreements are meant to induce the continued employment of the Executive officers and other key employees and to enhance their loyalty and performance by providing them with certain compensation and benefits in the event a change in control of the Company occurs. The terms of these agreements and the amounts payable upon the occurrence of the change in control events is described in more detail under the section entitled “Potential Payments Upon Termination or Change-in-Control” beginning on page 48 of this Proxy Statement.

 

Polaris typically does not enter into employment agreements with its executives. However, it is party to agreements with its Chief Executive Officer, Thomas C. Tiller, and its President and Chief Operating Officer, Bennett J. Morgan. Polaris entered into these agreements because it believes that it is important to secure the leadership of these key management individuals.

 

The terms of the Employment Agreements with Mr. Tiller and Mr. Morgan are described in more detail under the sections entitled “Potential Payments Upon Termination or Change-in-Control — 2007 Employment Agreement with Mr. Tiller” and “— Employment Agreement with Mr. Morgan” appearing on pages 53 and 54, respectively, of this Proxy Statement.

 

One of the proposals that shareholders are being asked to consider at the Annual Meeting is the approval of the Omnibus Plan. As described in the section entitled “Proposal 2 — Approval of 2007 Omnibus Incentive Plan,” beginning on page 19 of this Proxy Statement, if approved, the Omnibus Plan will be used to grant equity and performance-based awards similar to those previously granted under the Stock Option Plan, Restricted Stock Plan, the Polaris Industries Inc. 2003 Non-Employee Director Stock Option Plan (“Director Stock Option Plan”) and the Polaris Industries Inc. 1999 Broad Based Stock Option Plan. All outstanding awards under the existing plans will remain outstanding; however, no further awards will be granted pursuant to such plans if the Omnibus Plan is approved by shareholders at the Annual Meeting.

 

The proposed Omnibus Plan, if approved, would not have a substantive effect on the elements of compensation that comprise each Executive Officer’s total compensation package. Under the Omnibus Plan the Company will continue to provide each Executive Officer with annual- and long-term incentives in the form of cash and share based awards with terms similar to those discussed in this Compensation Discussion and Analysis for 2006.

 

The following table shows, for the fiscal year completed December 31, 2006, the annual compensation paid to or earned by the Executive Officers.

 

 

 

 

 

 

 

 

The following table shows all grants of awards under the Company’s incentive plans in 2006 to each of the Executive Officers named in the Summary Compensation Table and the estimated future payouts with respect to such awards. To the extent that an award only provides for a single estimated payout, that amount is reported as the “target” in columns (d) or (g) below.