UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant [ x ] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ x ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a -12 VSE CORPORATION (Name of Registrant as Specified In Its Charter) Payment of Filing Fee (Check the appropriate box): [ x ] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1. Title of each Class of securities to which transaction applies: N/A 2. Aggregate number of securities to which transaction applies: N/A 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): N/A 4. Proposed maximum aggregate value of transaction: N/A 5. Total fee paid: N/A [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1. Amount previously paid: N/A 2. Form, Schedule or Registration Statement No.: N/A 3. Filing Party: N/A 4. Date Filed: N/A 2550 Huntington Avenue, Alexandria, Virginia 22303-1499 Notice of 2009 Annual Meeting of Stockholders and Proxy Statement Fellow Stockholders: You are cordially invited to attend the annual meeting of stockholders of VSE Corporation ("VSE" or the "Company") to be held on Tuesday, May 5, 2009, commencing at 10:00 a.m., Washington, DC time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499 (the "Annual Meeting"). We are furnishing proxy materials to our stockholders over the Internet. You may read, print and download our 2008 Annual Report to Stockholders, Proxy Statement and Proxy Card at www.cfpproxy.com/3307. On March 24, 2009, we mailed our stockholders a notice containing instructions on how to access these materials and how to vote their shares online. The notice provides instructions on how you can request a paper or e-mail copy of these materials by mail, telephone or e-mail. If you requested your materials by e-mail, the e-mail contains voting instructions and links to the materials on the Internet. You may vote your shares by Internet, by telephone, by regular mail or in person at the Annual Meeting. Instructions regarding the various methods of voting are contained on the notice and on the Proxy Card. The proxy materials describe the formal business to be transacted at the Annual Meeting and a report on the operations of the Company. VSE directors and officers will be present to answer any questions that you and other stockholders may have. Included in the materials is our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that contains detailed information concerning the Company's activities and operating performance. The business to be conducted at the Annual Meeting consists of the election of nine directors and the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009. VSE's Board of Directors (the "Board") unanimously recommends a vote "FOR" the election of each of the director nominees and "FOR" the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009. On behalf of the Board, please vote your shares now, even if you currently plan to attend the Annual Meeting. This will not prevent you from voting in person, but it will ensure that your vote is counted. Your vote is important. Please note the location for the Annual Meeting. The VSE Building is located at 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, just off I-95/I-495 at Exit 176A (Telegraph Road-South). The building is also within walking distance of the Huntington Avenue Metro Station (Yellow Line), using the Lower Level exit to Huntington Avenue. I hope you will be able to join us. Sincerely, VSE CORPORATION /s/ D. M. Ervine D. M. Ervine Executive Chairman of the Board March 24, 2009 VSE CORPORATION 2550 Huntington Avenue, Alexandria, Virginia 22303-1499 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 5, 2009 To the Stockholders of VSE Corporation: Notice is hereby given that the annual meeting of stockholders of VSE Corporation, a Delaware corporation ("VSE" or the "Company"), will be held on Tuesday, May 5, 2009, commencing at 10:00 a.m., Washington, DC time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, for the following purposes: 1. To elect nine directors to serve until the next annual meeting of stockholders and until their successors are duly elected and qualified; 2. To ratify the appointment of Ernst & Young LLP as VSE's independent registered public accounting firm for the year ending December 31, 2009; and 3. To transact such other business as may properly come before the meeting or any adjournment thereof. Only record holders of VSE common stock as of the close of business on March 6, 2009, will be entitled to notice of, and to vote at, the meeting or any adjournments thereof. The list of stockholders entitled to vote at the meeting or any adjournments thereof will be open to the examination of any stockholder during the 10 days prior to the meeting at VSE's offices located at 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, during ordinary business hours. The VSE Corporation 2008 Annual Report to Stockholders, which contains the Company's consolidated financial statements and other information of interest to stockholders, accompanies this proxy material. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE ANNUAL MEETING. STOCKHOLDERS HAVE A CHOICE OF VOTING BY PROXY CARD, TELEPHONE OR THE INTERNET, AS DESCRIBED ON YOUR PROXY CARD. CHECK YOUR PROXY CARD OR THE INFORMATION FORWARDED BY YOUR BROKER, BANK OR OTHER HOLDER OF RECORD TO SEE WHICH OPTIONS ARE AVAILABLE TO YOU. ANY STOCKHOLDER PRESENT AT THE ANNUAL MEETING MAY WITHDRAW HIS OR HER PROXY AND VOTE PERSONALLY ON ANY MATTER PROPERLY BROUGHT BEFORE THE ANNUAL MEETING. By Order of the Board of Directors /s/ Thomas M. Kiernan Thomas M. Kiernan, Secretary March 24, 2009 VSE CORPORATION __________________________________ PROXY STATEMENT Annual Meeting of Stockholders to be held on May 5, 2009 __________________________________ INTRODUCTION General This proxy statement is being furnished to the stockholders of VSE Corporation, a Delaware corporation ("VSE" or the "Company"), in connection with the solicitation of proxies by VSE's Board of Directors (the "Board") for use at the annual meeting of VSE's stockholders to be held on Tuesday, May 5, 2009, commencing at 10:00 a.m., Washington, D.C. time, at the VSE Building, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499, and at any adjournments thereof for the purposes specified in the accompanying notice of meeting (the "Annual Meeting"). The mailing address of VSE's principal executive office is 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. VSE's telephone number is (703) 960-4600. On March 24, 2009, we mailed VSE stockholders a notice containing instructions on how to access our 2009 Proxy Statement and 2008 Annual Report and vote online. The notice also included instructions on how to receive a paper copy of the Annual Meeting materials, including the notice of annual meeting, proxy statement, and proxy card. If you received your Annual Meeting materials by mail, the notice of annual meeting, proxy statement, and proxy card from our Board of Directors were enclosed. If you received your Annual Meeting materials via e-mail, the e-mail contained voting instructions and links to the annual report and the proxy statement on the Internet, which are both available at www.cfpproxy.com/3307. The close of business on March 6, 2009, is the record date for the determination of stockholders entitled to notice of, and to vote at, the Annual Meeting. Holders of a majority of VSE's outstanding common stock, par value $.05 per share (the "Stock" or "VSE Stock"), as of March 6, 2009, must be present at the Annual Meeting, either in person or represented by properly executed proxy, to constitute a quorum for the transaction of business at the Annual Meeting. Abstentions and broker non-votes will be counted solely for the purpose of determining whether a quorum is present. A proxy submitted by a broker that is not voted is sometimes referred to as a broker non-vote. As of the close of business on March 6, 2009, there were 5,128,380 shares of Stock outstanding and approximately 300 stockholders of record. Each stockholder is entitled to one vote for each share of Stock held of record as of the close of business on March 6, 2009, on all matters which may be submitted to the stockholders at the Annual Meeting. Matters to be Considered The purpose of the Annual Meeting is to vote on the election of nine directors to the Board and to ratify the appointment of Ernst & Young LLP as VSE's independent registered public accounting firm for the year ending December 31, 2009. As of the date of this proxy statement, the Board does not intend to present, and has not been informed that any other person intends to present, any matter for action at the Annual Meeting other than those matters -1- specifically referred to herein. If, however, any other matters are properly presented to the Annual Meeting for action, the proxy holders will vote the proxies, which confer authority on such holders to vote on such matters, in accordance with their best judgment. The persons named as attorneys-in-fact in the proxies are VSE officers. Voting and Recommendations of the Board of Directors All Stock represented by valid proxies will be voted at the Annual Meeting in accordance with the directions on the proxies. If no direction is indicated on a proxy, the Stock represented thereby will be voted as recommended by the Board, namely "FOR" the election as VSE directors of each of the nine nominees listed below under Proposal No. 1, and "FOR" the ratification of the appointment of Ernst & Young LLP as VSE's independent registered public accounting firm for the year ending December 31, 2009, as discussed below under Proposal No. 2. Vote Required Directors are elected by a plurality of votes cast, including Stock voted, and without regard to either broker non-votes or proxies as to which authority to vote for the nominees being proposed is withheld. The ratification of the appointment of Ernst & Young LLP as independent registered public accounting firm will be determined by a majority of the votes cast, without regard to broker non-votes or proxies marked "ABSTAIN." How to Vote VSE is making its proxy materials available to stockholders on the Internet. You may read, print and download our 2008 Annual Report to Stockholders, Proxy Statement and Proxy Card at www.cfpproxy.com/3307. On March 24, 2009, we mailed a notice to stockholders containing instructions on how to access our proxy materials and vote online. On an ongoing basis, stockholders may request to receive proxy materials in printed form by mail or electronically by e-mail. You may vote your shares by Internet, by telephone, by regular mail or in person at the Annual Meeting. Each of these voting options is described in the notice and the Proxy Card. You should complete and return your Proxy Card, or vote using the Internet or telephone voting options, to ensure that your vote is counted at the Annual Meeting, or at any adjournment of the Annual Meeting, regardless of whether you plan to attend. If you return an executed Proxy Card without marking your instructions, your executed Proxy Card will be voted "FOR" the election of each of the nine director nominees named in this Proxy Statement and "FOR" the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2009. If you are a stockholder whose shares are not registered in your own name, you will need appropriate documentation from the stockholder of record to vote in person at the Annual Meeting. If you want to vote your VSE Stock that is held in street name in person at the Annual Meeting, you will need a written proxy card in your name from the broker, bank or other nominee who holds your Stock. Revocation of Proxies A stockholder returning a proxy to VSE may revoke it at any time before it is exercised by granting a later proxy with respect to the same Stock or by communicating such revocation in writing to VSE's Secretary. In addition, any stockholder who has executed a proxy but attends the Annual Meeting in person -2- may cancel a previously given proxy by voting in person whether or not the proxy has been revoked in writing. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of VSE Stock as of March 6, 2009, based on VSE records, information filed with the Securities and Exchange Commission (the "SEC"), and information provided to VSE. Based solely on this information, no person or group of persons beneficially owned more than five percent of VSE Stock except Calvin S. Koonce. Information on Mr. Koonce's beneficial ownership of VSE Stock is given below. The voting and investment powers of the VSE Stock listed below are held solely by the reported owner unless otherwise indicated. ________________________________________________________________________________ Shares beneficially Percent of Name of Beneficial Owner owned class (a) ________________________________________________________________________________ Certain Beneficial Owners - ------------------------- VSE ESOP and 401(k) Plan (b) 95,499 1.9% Non-Employee Directors - ---------------------- Ralph E. Eberhart 1,700 * Clifford M. Kendall 43,314 * Calvin S. Koonce (c) 847,914 16.5% James F. Lafond (d) 7,094 * David M. Osnos (d) 17,800 * Jimmy D. Ross (d) 4,340 * Bonnie K. Wachtel (d) 48,736 * Executive Officers and Other Directors - -------------------------------------- Thomas G. Dacus (d) 8,166 * Donald M. Ervine 24,168 * Maurice A. Gauthier (e) 1,800 * Michael E. Hamerly (d) 13,062 * Randy W. Hollstein 0 - Thomas M. Kiernan 0 - James M. Knowlton 35,006 * James W. Lexo, Jr. 1,990 * Thomas R. Loftus (d) 27,296 * James E. Reed 3,244 * Carl E. Williams 1,229 * Crystal R. Williams 0 - Directors, Nominees and Executive Officers as a Group - ----------------------------------------------------- (19 persons) (d) (f) 1,086,859 21.2% * Represents less than one percent. (a) Based on 5,128,380 shares of VSE Stock outstanding as of the March 6, 2009, record date. -3- (b) These shares are held in trust for the benefit of the VSE ESOP and 401(k) Plan participants. Three VSE officers serve as trustees of the ESOP and 401(k) Plan and share voting and investment power over the shares held by the Plan. The mailing address for the ESOP and 401(k) Plan is 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. (c) Mr. Koonce's mailing address is 6550 Rock Spring Drive, Suite 600, Bethesda, Maryland 20817. (d) Includes the following number of shares of Stock that the non-employee directors, executive officers, other directors, and all directors, nominees, and executive officers as a group have the right to purchase pursuant to the exercise of stock options that are exercisable within the next 60 days: James F. Lafond-2,000, David M. Osnos-2,000, Jimmy D. Ross-500, Bonnie K. Wachtel-2,000, Thomas G. Dacus-4,500, Michael E. Hamerly-3,000, Thomas R. Loftus-12,000, and all directors, nominees, and executive officers as a group-26,000. (e) The share amount reported above for Mr. Gauthier (1,800) does not include 5,831 shares of VSE Stock, with subsequent vesting and issuance dates, awarded to Mr. Gauthier on April 28, 2008, as an inducement to become VSE's Chief Executive Officer and President. Subject to the term of Mr. Gauthier's Employment Agreement not having terminated, the Employment Agreement provides for vesting and issuance dates for the 5,831 shares as follows: 25% of the shares will be vested and issued to Mr. Gauthier on April 28 of 2009 and 2010, and 50% of the shares will be vested and issued to Mr. Gauthier on April 28, 2011. (f) Excludes the 95,499 shares beneficially owned or controlled by the trustees of the VSE ESOP and 401(k) Plan. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), requires VSE officers and directors and persons who own more than 10% of the VSE Stock to file reports of ownership and changes in ownership with the SEC. Such officers, directors and stockholders are required by SEC regulations to furnish VSE with copies of all such reports that they file. Based solely on a review of copies of reports filed with the SEC and written representations by certain officers and directors, VSE believes that all VSE officers, directors and stockholders subject to the reporting requirements of Section 16(a) filed their reports on a timely basis during 2008, except for SEC Form 3s that were filed late on behalf of VSE executive officers Randy W. Hollstein and Crystal R. Williams, reporting that Mr. Hollstein and Ms. Williams owned no VSE Stock. Proposal No. 1 -------------- ELECTION OF DIRECTORS Nominees At the Annual Meeting, stockholders will elect, by a plurality of the votes cast, in person or by proxy nine VSE directors, who will constitute the entire Board. Each nominee listed below is currently serving as a VSE director and was elected by the stockholders at the last annual meeting of stockholders, except for Maurice A. Gauthier, who was appointed a director by the Board on February 23, 2009. Each nominee elected as a director will serve until the next annual meeting of stockholders and until his or her successor is elected and qualified. If any nominee should become unable to serve for any reason, the proxies will be voted for such substitute nominee as shall be designated by the Board. -4- The nine nominees for election as VSE directors and certain information regarding them are as follows: Name and Principal Occupation Age Director since _____________________________ ___ ______________ Ralph E. Eberhart 62 2007 General, U.S. Air Force (Ret.), formerly Commander-in- Chief, North American Aerospace Defense Command (NORAD) and U.S. Northern Command. General Eberhart retired from the Air Force in 2005 after 36 years of service. He was then appointed and continues to serve as President of the Armed Forces Benefit Association (AFBA) and as Chairman of its related enterprises: 5Star Bank, 5Star Life Insurance Company, AFBA 5Star Investment Management Company, and AFBA 5Star Fund, Inc. He is also a director of Rockwell Collins, Inc. Donald M. Ervine 72 1987 VSE Executive Chairman of the Board. Mr. Ervine served as the Company's Chairman and Chief Executive Officer from 1992, and as its President and Chief Operating Officer from 2002, through April 28, 2008. Maurice A. Gauthier 61 2009 VSE Chief Executive Officer, President and Chief Operating Officer. Mr. Gauthier completed a distinguished military career of over 28 years of service, retiring in 1997 as a Navy Captain. Mr. Gauthier worked for VSE from October 1997 through February 1999 as Vice President and Director of Strategic Planning and Business Development, before joining the Nichols Research Corporation as President of its Navy Group. With the acquisition of Nichols Research Corporation by Computer Sciences Corporation (CSC) in 1999, Mr. Gauthier served as a CSC Vice President and General Manager until rejoining VSE in 2008. Clifford M. Kendall 77 2001 Private Investor (for more than the past five years). Mr. Kendall is Chairman of the Board of Regents of the University System of Maryland. Mr. Kendall was one of the founders of Computer Data Systems, Inc., in 1968, and he served as its Chairman and Chief Executive Officer from 1970 to 1991 and as Chairman until December 1997. Calvin S. Koonce 71 1992 Chairman, Koonce Securities, Inc., a securities broker/dealer firm (for more than the past five years). James F. Lafond 66 2003 Retired executive and certified public accountant. From 1998 to 2002, Mr. Lafond was Washington Area Managing Partner, Pricewaterhouse-Coopers LLP. He previously served in various leadership positions at Coopers & Lybrand (1964 to 1998). He is also a director of WGL Holdings, Inc. (table continued on next page) -5- Name and Principal Occupation Age Director since _____________________________ ___ ______________ David M. Osnos 77 1968 Of counsel (previously senior partner) at Arent Fox LLP, attorneys-at-law (for more than the past five years). He is also a director of EastGroup Properties, Inc. Jimmy D. Ross 72 1994 General, U.S. Army (Ret.), formerly Commanding General, U.S. Army Materiel Command. He is also a director of Stanley, Inc. Bonnie K. Wachtel 53 1991 Vice President and General Counsel, Wachtel & Co., Inc., brokers and underwriters (for more than the past five years). She is also a director of Information Analysis Incorporated. Board of Directors, Committees, and Corporate Governance There are currently nine Board members. Except for Mr. Ervine and Mr. Gauthier who serve as VSE's Executive Chairman and Chief Executive Officer, respectively, all of our current directors are "independent" as defined by the applicable rules of The NASDAQ Stock Market, Inc. ("NASDAQ"). The independent directors regularly have the opportunity to meet without Mr. Ervine or Mr. Gauthier in attendance. During 2008, there were six regular Board meetings, and no director attended less than 75% of the aggregate of (a) the total number of Board meetings (in person or by telephone) and (b) meetings of Board committees on which he or she served (during the period that he or she served). VSE does not have a specific policy regarding attendance at the annual stockholders meeting. All directors, however, are encouraged to attend if available, and VSE tries to ensure that at least one independent director attends the annual stockholder meeting and is available to answer stockholder questions. Seven directors, including six independent directors, attended last year's (2008) annual meeting. Pursuant to a Transition Agreement between the Company and Donald M. Ervine dated as of April 22, 2008, the Board will, subject to applicable laws and regulations and the Board's fiduciary duties to the Company and its stockholders: (i) nominate Mr. Ervine to be elected as a VSE director by VSE's stockholders at each annual and other meeting of VSE's stockholders at which they will elect VSE directors and (ii) if Mr. Ervine is then a VSE director, appoint and maintain Mr. Ervine as Chairman during the period commencing on April 28, 2008 and continuing until at least the date of the first annual or other meeting of VSE's stockholders in 2010 at which they will elect VSE directors. The Board has an Audit Committee, a Nominating and Corporate Governance Committee, a Compensation Committee, and a Planning and Finance Committee. The current charters for each of the Committees are available on VSE's Internet site, www.vsecorp.com. The members of the Board committees, as of the date of this Proxy Statement, are identified in the following table. -6- Board Committees and Membership, 2008-2009 Nominating and Corporate Planning and Audit Compensation Governance Finance Director Committee Committee Committee Committee - -------- --------- --------- --------- --------- Ralph E. Eberhart X X X Donald M. Ervine Chair Maurice A. Gauthier X Clifford M. Kendall X X Chair Calvin S. Koonce X X X James F. Lafond Chair X X David M. Osnos X X Jimmy D. Ross Chair X X Bonnie K. Wachtel X X X Audit Committee. The primary purpose of the Audit Committee is to oversee VSE's accounting and financial reporting processes and the audits of VSE's financial statements. The Audit Committee is directly responsible for, among other things, the appointment, compensation, retention and oversight of the Company's independent auditors. All of the Audit Committee members during the past fiscal year were independent in accordance with applicable rules of the SEC and NASDAQ. Each member is able to read and understand fundamental financial statements, including the Company's consolidated balance sheet and consolidated statements of income, stockholders' equity and cash flow. The Board has determined that Mr. Lafond is an "audit committee financial expert" as defined in Regulation S-K Item 407(d)(5). During 2008, the Audit Committee met nine times. Compensation Committee. The primary purpose of the Compensation Committee is to oversee VSE's compensation structure, to review and provide guidance to the Board regarding the compensation of VSE's officers and directors, including the compensation of the Chief Executive Officer and other executive officers, to review and provide guidance regarding employment agreements, to administer certain compensation plans including stock option, restricted stock, and deferred compensation plans, and to perform such other duties and responsibilities as are consistent with the committee's charter. Each of the committee members is independent in accordance with applicable NASDAQ rules. The Compensation Committee met five times during 2008. Matters recommended by the Compensation Committee, and any delegation of its authority, are subject to approval by the Board; if such approval is not received, the Compensation Committee will reconsider the recommendation or proposed delegation. The Compensation Committee has the authority to retain outside counsel or other experts or consultants as needed. Additional information on the role and responsibilities of the Compensation Committee is provided under the heading "Compensation Discussion and Analysis," below. Nominating and Corporate Governance Committee. The primary purpose of the Nominating and Corporate Governance Committee is to make recommendations to the Board with respect to nominees to be proposed for election as directors and with corporate policies regarding, among other things, business conduct, securities trading, indemnification of VSE officers and directors, and conflicts of interest involving VSE officers, directors, and employees. Each of the committee members is independent in accordance with applicable NASDAQ rules. During 2008, the Nominating and Corporate Governance Committee met two times. -7- Planning and Finance Committee. The primary purpose of the Planning and Finance Committee is to consider and make recommendations to the Board regarding (a) strategic planning, acquisitions, mergers, and succession planning, (b) capitalization and long-term funding requirements, and (c) proposals concerning the financial policies and substantive financial transactions of the Corporation. During 2008, the Planning and Finance Committee met two times. Director Nominations and Qualifications. Stockholders may recommend persons to be nominated for election as directors of VSE at the annual meeting of stockholders. To be considered, such recommendation must be submitted in accordance with VSE's by-laws and must be received in writing by the Corporate Secretary of VSE no later than 90 days before the date in the current year which corresponds to the date on which the annual meeting was held during the immediate prior year. (Nominations for the year 2010-2011 should be received by the Corporate Secretary no later than February 4, 2010.) Such recommendation shall be accompanied by the proposing stockholder's name, evidence that such stockholder is a beneficial owner of VSE Stock, and the candidate's name, biographical data and qualifications. The policy of the Nominating and Corporate Governance Committee is to consider properly submitted stockholder nominations for candidates for Board membership as described below. In evaluating such nominations, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board and to address the membership criteria discussed below. Under these criteria for Board nominations, Board members should have the highest professional and personal ethics and values, consistent with longstanding VSE values and standards. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all stockholders. The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. Such Committee periodically assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. If vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee will consider various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee and may be considered at any point during the year. As described above, the Nominating and Corporate Governance Committee will consider properly submitted stockholder nominations for candidates for the Board. Following verification of the stockholder status of persons proposing candidates, recommendations will be aggregated and considered by the Nominating and Corporate Governance Committee at a regularly scheduled meeting. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials will be forwarded to the Nominating and Corporate Governance Committee. Such Committee also will review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder. The Committee has not in the past retained any third party to assist in identifying nominees for Board membership. -8- Lead Independent Director The Board has established the position of Lead Independent Director. The Lead Independent Director assists the Chairman and the other Board members in assuring effective corporate governance. On March 2, 2007, Mr. Osnos was appointed as Lead Independent Director, and he has served in such capacity since that date. Communications with the Board Individuals may communicate with the Board by submitting an e-mail to the VSE Board at board@vsecorp.com. All directors have access to this e-mail address. Communications that are intended specifically for non-employee directors should be sent to the e-mail address above to the attention of the Lead Independent Director or Corporate Secretary. Communications to the Board by mail can be addressed to The Board of Directors or a particular Board member c/o VSE Corporation, 2550 Huntington Avenue, Alexandria, Virginia 22303-1499. Code of Business Conduct and Ethics The Board has adopted a Code of Business Conduct and Ethics that applies to all of its directors, officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and employees. The Code is posted on VSE's Internet website www.vsecorp.com. VSE intends to satisfy the disclosure requirements under Item 5.05 of Exchange Act Form 8-K regarding any waiver or amendment of the Code with respect to VSE's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such required information on VSE's Internet website. Compensation of Directors Please refer to "Compensation Discussion and Analysis-Director Compensation" and associated director compensation table, notes, and narrative contained elsewhere in this Proxy Statement. Certain Relationships and Related Transactions On June 4, 2007, VSE acquired all of the outstanding capital stock of Integrated Concepts and Research Corporation ("ICRC") from (a) Koniag Development Corporation ("KDC"), which owned 80% of ICRC's capital stock, and (b) the Nancy Ellen Lexo Living Trust (the "Trust"), which owned 20% of ICRC's capital stock, for approximately $11.65 million paid at the closing, of which $1.67 million will be held in escrow for up to two years to secure KDC's and the Trust's post-closing indemnity obligations. Up to an additional $5.815 million in purchase price will be payable by VSE to KDC and the Trust, on a pro rata basis, if ICRC achieves certain revenues during an approximate six- year period after the closing, as provided in the purchase agreement among VSE, KDC, the Trust, James W. Lexo, Jr. ("Mr. Lexo"), ICRC and Koniag, Inc. Mr. Lexo is the sole trustee of the Trust and the beneficiaries of the Trust are Mr. Lexo and his adult children. In 2008 VSE paid the Trust, and in 2009 VSE expects to pay the Trust, approximately $111,352 and $324,785, respectively, as additional purchase price as stated above. As part of VSE's acquisition of ICRC, ICRC's chief executive officer, Mr. Lexo and VSE entered into an employment agreement under which Mr. Lexo is serving as a VSE executive vice president for strategic initiatives and business development and ICRC's chief executive officer, for a term expiring on December 31, 2009, as extended, subject to automatic extensions for successive one-year periods unless notice to terminate is given by VSE or the -9- officer at least 60 days prior to the expiration of the then current term. The employment agreement also provides Mr. Lexo with "change of control" benefits and other benefits generally provided to VSE officers. There is no family relationship between any director or executive officer of VSE and any other director or executive officer of VSE. Please refer to "Compensation Discussion and Analysis-Narrative to Summary Compensation Table" for information on VSE's Transition Agreement with Mr. Ervine, VSE's Employment Agreement with Mr. Gauthier, and other VSE employment agreements with executive officers and to "Compensation Discussion and Analysis-Compensation Committee Interlocks and Insider Participation" for additional information about directors and nominees for director. Pursuant to the Company's policies, including Code of Business Conduct and Ethics for the Directors, Officers and Employees of VSE Corporation, each of the above-referenced relationships and related transactions was subject to the prior consideration and approval of the Board, including a majority vote of the disinterested directors. VSE and the trustees of VSE's employee benefit plans have in the past effected certain of their transactions in VSE Stock through Wachtel & Co., Inc., of which Ms. Wachtel is a director, officer and shareholder, and through Koonce Securities, Inc., which is wholly owned by Mr. Koonce. During 2008 VSE benefit plans sold approximately 8,674 shares of VSE Stock through Wachtel & Co., Inc., for which Wachtel & Co., Inc. earned broker fees of less than $10,000. No benefit plan transactions in VSE Stock occurred with Koonce Securities, Inc. in 2008. Mr. Osnos is of counsel at the law firm of Arent Fox LLP, which has represented and is expected to continue to represent VSE on various legal matters. The Board unanimously recommends that stockholders vote "for" the election of each of the nine persons nominated to serve as a director of VSE for the ensuing year. Proposal No. 2 -------------- APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Based on the recommendation of its Audit Committee, the Board has appointed the firm of Ernst & Young LLP to be VSE's independent registered public accounting firm for the year ending December 31, 2009, and recommends to stockholders that they vote for ratification of that appointment. Although not required to do so, the Board has determined that it would be desirable to request stockholders' approval of this appointment. The ratification of the appointment of VSE's independent auditors will require the affirmative vote by the holders of a majority of the outstanding Stock present in person or represented by proxy at the Annual Meeting. If such approval is not received, the Board will reconsider the appointment. In 2008 and 2007, Ernst & Young LLP services included an audit of VSE's consolidated financial statements and reviews of the consolidated financial statements included in VSE's Form 10-Qs filed with the SEC for each of the quarters ended March 31, June 30, and September 30. Ernst & Young LLP services also included an audit of the effectiveness of our internal control over financial reporting as of December 31, 2008 and 2007. -10- Ernst & Young LLP's fees for professional services rendered for the years ended December 31, 2008 and December 31, 2007, were as follows: 2008 2007 Audit fees (1) $836,519 $716,896 Audit-related fees (2) 16,900 90,000 Tax fees (3) 17,960 21,820 _______________ (1) Includes fees and expenses related to the annual audits and to interim reviews, notwithstanding when the fees and expenses were billed. (2) Includes fees and expenses for services rendered from January through December of the fiscal year, notwithstanding when the fees and expenses were billed. The 2008 amount represents fees associated with VSE's acquisition of G&B Solutions, Inc. of $16,900. The 2007 amount represents fees and expenses for work performed to assist in the Company's preparation for the implementation of Section 404 of the Sarbanes-Oxley Act ($70,000), and fees associated with VSE's acquisition of ICRC ($20,000). (3) Includes fees and expenses for tax advisory services. The Audit Committee approves in advance all audit and non-audit services provided by the independent auditors prior to their engagement with respect to such services. The Audit Committee has delegated to the committee's chairman the authority to pre-approve additional audit-related and non-audit services not prohibited by law to be performed by VSE's independent auditors and associated fees up to a maximum for any one non-audit service equal to the lesser of $30,000 or 25% of the audit fees for VSE's most recent completed fiscal year, provided that the committee's chairman shall report any decisions to pre-approve such audit-related or non-audit services and fees to the full Audit Committee at its next regular meeting. The Audit Committee approved in advance all of the audit and non-audit services provided by the independent auditors in 2008 and 2007. A representative of Ernst & Young LLP is expected to attend the Annual Meeting, will have an opportunity to make a statement, if he or she desires to do so, and will be available to respond to appropriate questions. The Board unanimously recommends that stockholders vote "for" the proposal to ratify the appointment of Ernst & Young LLP to serve as VSE's independent registered public accounting firm for the year ending December 31, 2009. AUDIT COMMITTEE REPORT The Audit Committee is composed of three non-employee directors (Messrs. Lafond and Kendall and Ms. Wachtel), each of whom is considered an "independent" director for the purposes of the applicable rules of NASDAQ and the SEC. The Audit Committee's responsibilities are set forth in its charter, a copy of which is available on VSE's Internet site, www.vsecorp.com. The Board and the Audit Committee believe that the Audit Committee members are and were at the time of the actions described in this report "independent" directors as independence is defined by NASDAQ Rule 4200(a)(15). -11- The Audit Committee has implemented the requirements of the Sarbanes- Oxley Act of 2002 and the Marketplace Rules of The NASDAQ Stock Market, Inc. with respect to the responsibilities of audit committees of public companies. Among other matters, the Audit Committee reviews procedures on internal control over financial reporting with management and with the Company's independent registered public accounting firm, and it discussed with the independent registered public accounting firm the adequacy of the Company's internal controls and the overall scope and specific plans for their audit. The Audit Committee has reviewed and discussed with management VSE's audited consolidated financial statements as of and for the year ended December 31, 2008, and has discussed with VSE's independent registered accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received and reviewed the written disclosures and the letter from the independent registered accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the audit committee concerning independence, and has discussed with the auditors the auditors' independence and considered whether the provision of non-audit services by the auditors is compatible with maintaining their independence. Based on the foregoing reviews and discussions, the Audit Committee recommended to the Board that the above referenced consolidated financial statements be included in VSE's Annual Report on Form 10-K for the year ended December 31, 2008, for filing with the SEC. Audit Committee: James F. Lafond (Chairman), Clifford M. Kendall, and Bonnie K. Wachtel COMPENSATION DISCUSSION AND ANALYSIS Overview of Compensation Program, Philosophy, and Objectives Under the supervision of the Compensation Committee of the Board, VSE has established compensation policies designed to attract and retain qualified executives and to link total compensation to corporate goals. The key elements of VSE executive compensation are base salary, a performance bonus incentive plan, and a long-term incentive plan. The Committee oversees VSE's compensation structure. The Committee makes all compensation decisions regarding the Chief Executive Officer and reviews and approves the compensation of all other company executives and officers. It reviews employment agreements, administers compensation plans including stock option, restricted stock, and deferred compensation plans. The Committee provides recommendations to the Board regarding director compensation and performs such other duties and responsibilities as are consistent with its charter. Actions of the Committee are subject to Board approval. If approval is not received, the Committee will reconsider the action. Under the Committee's supervision, VSE seeks to establish a compensation structure that is competitive, reasonable, and performance-based. "Competitive" means salaries and benefits sufficient to attract and retain the executives and employees VSE requires, while maintaining labor rates that permit the Company to compete effectively in the markets we serve. We test for competitive labor rates by measuring our prices for services against the prices of competitors and by monitoring our ability to successfully recruit -12- and retain employees. We also measure our salaries against compensation surveys for similarly situated executives and employees in companies having substantially comparable revenues, margins, and market capitalization. "Reasonable" means compensation that is consistent with the pay and benefits provided by other companies in our industry, reimbursable under cost-type government contracts, and perceived as "fair" relative to formal and informal benchmarks such as internal pay scales, financial results, and public perception. "Performance-based" means that compensation is earned, measured, and tested against standards of financial growth and profitability. VSE's executive officers are identified as the following officers, if appointed by the Board: * Executive Chairman of the Board * Chief Executive Officer * Chief Financial Officer * President * Chief Operating Officer * Presidents of each of the Corporation's principal business segments * Secretary and General Counsel * Corporate Vice Presidents as identified by the Chief Executive Officer. Currently, VSE has 12 executive officers, including two executive officers who are expected to retire in 2009. For compensation oversight, VSE officers include the senior officers of VSE's wholly owned subsidiaries Energetics Incorporated ("Energetics"), ICRC, and G & B Solutions, Inc. ("G&B"). Role of Executive Officers in Compensation Decisions At the end of the fiscal year, the Committee meets in executive session to review the performance and fix the compensation of VSE's Chief Executive Officer (the "CEO"). The Committee also reviews and approves the compensation of all other executives and officers based on recommendations submitted by the CEO. The Committee can exercise its discretion in approving, disapproving, or modifying any recommended salary increases or proposed awards to executives or other officers. In submitting recommendations to the Committee with respect to the compensation of other VSE executives and officers, the CEO evaluates the performance and recommends salary increases, bonuses, benefit plan participation, and all other elements of compensation affecting the executives. The CEO also considers evaluations and recommendations made by other executives in submitting recommendations to the Committee with respect to other officers. The Compensation Committee reviews all proposed officer salary increases in December of each year. Review of Executive Compensation During 2006 the Committee engaged PricewaterhouseCoopers LLP to provide consulting services initially with respect to designing procedures for making performance-based awards under the 2006 VSE Corporation Restricted Stock Plan and subsequently to perform a compensation analysis for VSE executive officers and directors. The Committee met and conferred with PricewaterhouseCoopers representatives numerous times during 2006 in both executive sessions and in sessions including certain executive officers. In making compensation decisions, the Committee measured each element of total compensation against a peer group of publicly traded companies developed with PricewaterhouseCoopers. The peer group, which is periodically reviewed -13- and updated by the Committee, consists of companies which the Committee believes are substantially representative based on industry group, market capitalization, revenues, and profit margin. These companies identified in 2006 are as follows: * Allied Defense Group, Inc. * Hawk Corporation * Analex Corporation (acquired * Alabama Aircraft Industries, Inc. in 2007) (formerly Pemco Aviation Group, Inc.) * Astronics Corporation * Sparton Corporation * Dynamics Research Corporation * SYS (acquired in 2008) * ENGlobal Corporation * Todd Shipyards Corporation * Essex Corporation (acquired in 2007) For comparison purposes, VSE's annual revenues are above the median revenues of the peer group. Because of variation among the companies comprising the peer group, PricewaterhouseCoopers also developed blended consensus data based on published survey data, proxy statement title match data, and top five highest paid data. During 2007 the Committee met with representatives of Equilar, Inc. who demonstrated the capabilities and potential uses of its executive compensation database product and analytic tools. The Committee subsequently authorized VSE to license the product and tools. The Committee also consulted with Corbin Company, a management consulting firm identified by the Company, to assist the Committee in the use of the Equilar product and tools as well as other compensation survey data available to Corbin Company. The Committee requested Corbin Company to review VSE's industry peer group (Analex Corporation, Essex Corporation and SYS are no longer independent companies) and to provide analysis and recommendations regarding executive compensation. Based on discussions with and the recommendations of Corbin Company, the Committee in executive session decided to maintain base salary target levels at the lower end of peer group level (25% to 50%), coupled with a performance-based incentive compensation plan so that total compensation levels can meet or exceed the upper end of the peer group; to provide for an annual base salary escalation adjustment; to update the peer group based on VSE's recent growth; and to address the wage compression issue (VSE often is required to pay new employees as much or more than it pays incumbent employees in similar positions). During 2008 the Committee interviewed three compensation consultant and advisory firms having nationwide experience. In the Committee's judgment, at this time it will be better served to utilize (a) the compensation and best practices information provided by the Equilar databases, (b) other compensation survey data related to specific compensation questions, analyses and recommendations, and (c) the use of outside consultants on an as required basis, than to retain an outside compensation consultant and advisory firm. The Committee directed the staff to develop information for an updated peer group, and this task is proceeding. Other information considered by the Committee in completing its 2008 reviews included industry peer group data developed by the staff, purchased third-party industry survey data, and commercially available survey data on director compensation. Executive Compensation Components For 2008, 2007 and 2006 the principal components of compensation for VSE executive officers were base salary, performance-based incentive compensation, long-term incentive compensation, deferred supplemental compensation and retirement and other benefits generally available to all employees. -14- The Committee has no preestablished policy or target for the allocation of compensation between either cash and non-cash or short-term and long-term incentive compensation. However, based on the compensation philosophy and objectives discussed above, the Committee intends that a significant part of total compensation for executives and officers should be at risk and subject to incentives based on achieving short and long-term performance-based goals. For the three-year period ended December 31, 2008, the percentages of total compensation of each component of executive compensation was approximately as follows (please refer to the Summary Compensation Table below for detailed amounts): Aggregate Percentages of Executive Compensation Components, 2006-2008 Aggregate Executive Percentage for Compensation Component 2006 - 2008 ---------------------- ----------- Base salaries 35% Performance-based incentive compensation 35% Long-term incentive compensation 21% Deferred supplemental compensation 8% All other 1% Based on this schedule, for the three-year period ended December 31, 2008, approximately 64% of executive compensation (performance-based incentive compensation, long-term incentive compensation, and deferred supplemental compensation) was at risk and subject to incentives based on achieving performance-based goals. Base Salary VSE provides named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. Base salaries for the named executive officers are determined for each executive based on his or her position and responsibility, experience and education, internal pay scales, market survey data, recent VSE hiring experience, and employment agreement where applicable. Base salaries for executives are generally expected to range between the 25th and 50th percentile of blended compensation survey data, so that when coupled with a performance-based incentive compensation plan, total executive compensation can meet or exceed the upper end of the peer group. Base salaries for executives, including the base salary of the CEO, are reviewed by the Committee in executive session at the end of each fiscal year and include any recommendations made by the CEO with respect to the other executive officers. Subject to Board approval, the Committee recommends changes to executive base salary that are implemented at the beginning of the next fiscal year. Based on its review, including the PricewaterhouseCoopers benchmark data, the Equilar database, and the other industry compensation data referred to above, the Committee approved annual base salary escalation adjustments at the rate of 3.5%, 4.5%, and 4.0% for 2007, 2008 and 2009, respectively. The Committee also approved base salary increases to adjust for merit increases and peer group comparison as follows: for 2007-Mr. Dacus ($9,000); for 2008- Mr. Ervine ($7,000), Mr. Loftus ($6,000), Mr. Dacus ($3,000), and Mr. Knowlton ($6,000); and for 2009-Mr. Loftus ($28,000), Mr. Lexo ($31,000), and Mr. Dacus ($14,000). -15- Base Salaries of Named Executive Officers, 2006 - 2009 Named Executive Officer 2006 2007 2008 2009 - ----------------------- ---- ---- ---- ---- Donald M. Ervine $325,000 $337,000 $360,000 $360,000 Maurice A. Gauthier -- -- 415,000 415,000 Thomas R. Loftus 175,000 182,000 197,000 225,000 Thomas G. Dacus 192,000 208,000 221,000 235,000 James M. Knowlton 200,000 208,000 223,000 223,000 James W. Lexo -- 185,000 194,000 225,000 Performance-Based Incentive Compensation During 2004 the Committee approved a performance bonus plan based on achieving annual financial results in excess of financial thresholds established by the Committee and submitted to the Board at the beginning of each year. The goals consist principally of revenue and pretax income targets for operating group executives, and return on equity for corporate staff, corporate officers, and corporate executives, including the CEO and the Chief Financial Officer (return on equity as defined is net income for the year divided by total stockholders' equity at the beginning of the year). To participate in the bonus program, an executive must be an employee during the fiscal year that the bonus is earned and at the time the bonus is distributed. During 2008 the performance bonus pool thresholds were established as follows: * The bonus pool for operations is determined by a percentage of pretax income formula based on a return on beginning VSE stockholder equity in excess of a 12% threshold. Individual operating group executives' bonuses are capped at 100% of salary. * The bonus pool for corporate staff, corporate officers, and corporate executives is determined as a percentage of salary based on VSE's return on equity in excess of a 12% threshold. Individual administrative bonuses are capped at 15% of salary for corporate staff, 65% of salary for corporate officers, and 100% of salary for corporate executives, including the CEO and the Chief Financial Officer. Performance bonuses for corporate executives, including the CEO and the Chief Financial Officer, range from 2% of base salary for achieving a return on equity of 12% to 100% of base salary for achieving a return on equity of 27% or higher for the years 2007 through 2009 and 25% or higher for 2006. For 2008, 2007 and 2006 VSE achieved annual returns on equity (net income) of approximately 34% ($19.0 million), 37% ($14.1 million) and 26% ($7.8 million), respectively, and the Committee approved aggregate annual performance bonuses under the plan of about $8.5 million, $6.5 million and $3.7 million, respectively. The performance bonuses for 2008 were paid to about 500 employees, including approximately $1.5 million paid to the named executive officers under the plan. Amounts paid to the named executive officers are reported in the Summary Compensation Table below under the heading "Non-equity Incentive Plan Compensation." Long-Term Incentive Compensation In prior years, VSE executives and other officers received, in addition to cash, equity-based compensation for their services to VSE. The equity compensation was provided in the form of options to purchase VSE Stock granted under VSE's 2004 Stock Option Plan approved by stockholders on May 3, 2004, and substantially similar predecessor plans for prior years. In December 2005, the Board discontinued awarding options to purchase VSE Stock. Options outstanding as of December 30, 2005, were not affected by this Board action. In lieu of long-term incentive compensation for 2006, the Committee recommended that the Board authorize an increase in VSE's contribution to the Deferred Supplemental Compensation Plan for 2006. See "Deferred Supplemental Compensation" discussion below. -16- The Board believes that compensating executives with restricted VSE Stock, rather than stock options, is a more appropriate and effective form of equity-based compensation. As with the former use of stock options, the use of restricted stock is intended to foster a long-term focus on VSE performance and to provide our executives with a means to establish an equity stake in VSE which will, in turn, align their interests with those of our stockholders. In addition, the vesting provisions and other restrictions on sale of the equity awards encourage executive retention. VSE's 2006 Restricted Stock Plan was approved by the Board on February 9, 2006, and by our stockholders on May 2, 2006. During 2006 the Committee engaged PricewaterhouseCoopers to provide consulting services with respect to designing procedures for making performance-based awards under VSE's Restricted Stock Plan, and in December 2006, the Committee adopted written procedures for making these awards. The awards under the Restricted Stock Plan are subject to Committee authorization based on audited financial results, including total compensation costs, reasonableness of total employee compensation and other factors determined by the Committee and Board. In general, a dollar-denominated award equal to a percentage of a participant's base salary can be earned under the Restricted Stock Plan based on the return on equity achieved by VSE for the prior fiscal year. The awards range from 2.5% of base salary for a 12% return on equity to 60% of base salary for a return on equity of 25% or higher. The awards are subject to a two-year vesting schedule: one-third of the award vests after completion of VSE's annual financial audit and one-third on each of the next two anniversaries of such initial vesting date. As each third of the dollar- denominated award vests, the award is converted into restricted VSE Stock based on the fair market value (closing market price) of VSE Stock at the date of conversion. The restricted stock is subject to a two-year holding period and to other restrictions on sale. The Committee may, in its sole discretion, reduce or totally eliminate an award to the extent it determines that such reduction or elimination is appropriate under facts and circumstances the Committee deems relevant. For 2008 and 2007, the first two years of full operation of the Plan, VSE's annual return on beginning equity was approximately 34% and 37%, respectively, and the named executive officers were awarded a restricted stock bonus under the Plan equal to 60% of their base salary for each year, subject to vesting and other restrictions. Amounts paid to the named executive officers are reported in the Summary Compensation Table below under the heading "Stock Awards." Deferred Supplemental Compensation VSE has a non-qualified, non-contributory Deferred Supplemental Compensation Plan for all VSE officers. The plan provides, at the Board's discretion, for an annual contribution to the plan not to exceed 12% of VSE's consolidated net income for the year. Each officer's allocation from the annual contribution bears the same percentage to the annual contribution as that officer's salary bears to total annual officer salaries. * For 2008 an annual contribution of 8% of VSE's consolidated net income (approximately $1,463,000) was authorized and allocated to 39 participant accounts, including about $404,000 allocated to accounts for the named executive officers. * For 2007 an annual contribution of 8% of VSE's consolidated net income (approximately $1,110,000) was authorized and allocated to 33 participant accounts, including about $285,000 allocated to accounts for the named executive officers. -17- * For 2006 an annual contribution of 10% of VSE's consolidated net income (approximately $768,000) was authorized and allocated to 28 participant accounts, including about $229,000 allocated to accounts for the named executive officers. Two percentage points of the 10% contribution rate authorized for 2006 represented a contribution for the discontinued stock option plan discussed above in "Long-Term Incentive Compensation." The plan was amended in 2008 to comply with the nonqualified deferred compensation provisions of Section 409A of the Internal Revenue Code of 1986, as amended ("IRC Section 409A"). Benefits are payable to participants on retirement or resignation, subject to a vesting schedule, two-year non- competition agreement, and other plan provisions, or in the event of a change of control of VSE. The Board believes the vesting schedule and completion of the non-competition agreement prior to receiving a distribution encourage executive retention. Amounts contributed to the plan on behalf of the named executive officers are included in the Summary Compensation Table under the heading "All Other Compensation." Retirement and Other Benefits All VSE officers are entitled to participate in company fringe benefit programs, including the VSE Employee 401(k) Plan, which is an Internal Revenue Service qualified plan available to all eligible employees. During 2008 and 2007 VSE paid a 401(k) matching contribution equal to 100% of the employee deferral on the first 3% of the employee pay deferred and 50% of the employee deferral on the next 2% of the employee pay deferred, with all such contributions fully vested when made. During 2006 VSE paid a 401(k) matching contribution equal to 50% of the first 6% of employee pay deferred into the employee's 401(k) account, subject to a vesting schedule. Amounts contributed to the VSE 401(k) Plan on behalf of the named executive officers are included in the Summary Compensation Table under the heading "All Other Compensation." Perquisites and Other Personal Benefits VSE does not provide any of its executives, including the named executive officers, with perquisites or other personal benefits having a total annual value in excess of $10,000. The Committee periodically reviews the levels of perquisites and other personal benefits provided to the named executive officers. The Company has entered into employment and transition agreements with specified employees, including the named executive officers (see Summary Compensation Table discussion below). The agreements are designed to promote stability and continuity of senior management. Information regarding applicable payments under these agreements for the named executive officers is also summarized below under the caption "Potential Payments on Termination or Change of Control." The employment and transition agreements were amended in 2009 to comply with the nonqualified deferred compensation provisions of IRC Section 409A. -18- Tax and Accounting Implications Deductibility of Executive Compensation As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code which provides that companies may not deduct compensation of more than $1,000,000 that is paid to certain individuals. VSE believes that compensation paid under its incentive plans is generally fully deductible for federal income tax purposes. However, in certain situations, the Committee may approve compensation that will not meet these requirements to ensure competitive levels of total compensation for its executive officers. For 2008, 2007 and 2006, VSE believes that all compensation paid to the named executive officers is deductible for federal income tax purposes, except for deferred supplemental compensation contributions which may not be deducted until distributed in accordance with IRS regulations. Nonqualified Deferred Compensation In 2004, the American Jobs Creation Act of 2004 became law changing the tax rules applicable to nonqualified deferred compensation arrangements. The Company's Deferred Supplemental Compensation Plan and all VSE employment and transition agreements were amended in 2008 and 2009 to comply with the nonqualified deferred compensation provisions of IRC Section 409A. A more detailed discussion of the VSE's nonqualified deferred compensation plan is provided above under the heading "Deferred Supplemental Compensation." Accounting for Stock-Based Compensation Beginning on January 1, 2006, the Company began accounting for stock- based payments in accordance with the requirements of FASB Statement 123(R). Summary Compensation Table