SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Rule 14a-12

 

Waste Management, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1001 Fannin Street, Suite 4000

Houston, Texas 77002

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

OF WASTE MANAGEMENT, INC.

 

Date and Time:

 

May 11, 2010 at 11:00 a.m., Central Time

 

Place:

 

The Maury Myers Conference Center

Waste Management, Inc.

1021 Main Street

Houston, Texas 77002

 

Purpose:

 

 

Only stockholders of record on March 15, 2010 may vote at the meeting.

 

Your vote is important. We urge you to promptly vote your shares by telephone, by the Internet or, if this Proxy Statement was mailed to you, by completing, signing, dating and returning your proxy card as soon as possible in the enclosed postage prepaid envelope.

 

LINDA J. SMITH

Corporate Secretary

 

March 29, 2010

 

 

 

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

 

WASTE MANAGEMENT, INC.

1001 Fannin Street, Suite 4000

Houston, Texas 77002

 

Our Board of Directors is soliciting your proxy for the 2010 Annual Meeting of Stockholders and at any postponement or adjournment of the meeting. We are furnishing proxy materials to our stockholders primarily via the Internet. On March 29, 2010, we sent an electronic notice of how to access our proxy materials, including our Annual Report, to stockholders that have previously signed up to receive their proxy materials via the Internet. On March 29, 2010, we began mailing a Notice of Internet Availability of Proxy Materials to those stockholders that previously have not signed up for electronic delivery. The Notice contains instructions on how stockholders can access our proxy materials on the website referred to in the Notice or request that a printed set of the proxy materials be sent to them. Internet distribution of our proxy materials is designed to expedite receipt by stockholders, lower the costs of the annual meeting, and conserve natural resources.

 

 

 

Our Board of Directors currently has eight members. Each member of our Board is elected annually. Mr. Pope is the Non-Executive Chairman of the Board and presides over all meetings of the Board, including executive sessions that only non-employee directors attend.

 

Stockholders and interested parties wishing to communicate with the Board or the non-employee directors should address their communications to Mr. John C. Pope, Non-Executive Chairman of the Board, c/o Waste Management, Inc., P.O. Box 53569, Houston, Texas 77052-3569.

 

We separated the roles of Chairman of the Board and Chief Executive Officer at our Company in 2004. The separation of the roles occurred in connection with our Board of Directors’ succession planning for the retirement of A. Maurice Myers, our then Chairman, Chief Executive Officer and President. At that time, our Board decided that when Mr. Myers retired, the Company should appoint separate individuals to serve as Chairman and as Chief Executive Officer.

 

We believe that having a Non-Executive Chairman of the Board is in the best interests of the Company and stockholders. Over the past several years, the demands made on boards of directors have been ever increasing. This is in large part due to increased regulation under federal securities laws, national stock exchange rules and other federal and state regulatory changes. More recently, macroeconomic conditions such as the global recession and turmoil in the credit markets have increased the demands made on boards of directors. The Non-Executive Chairman’s responsibilities include leading full Board meetings and executive sessions, as well as ensuring best practices and managing the Board function. The Board named Mr. Pope Chairman of the Board due to his tenure with and experience and understanding of the Company, as well as his vast experience on public company boards of directors.

 

The separation of the positions allows Mr. Pope to focus on management of Board matters and allows our Chief Executive Officer to focus his talents and attention on managing our business. Additionally, we believe the separation of those roles ensures the independence of the Board in its oversight role of critiquing and assessing the Chief Executive Officer and management generally.

 

Our executive officers have the primary responsibility for risk management within our Company. Our Board of Directors oversees risk management to ensure that the processes designed and implemented by our executives are adapted to and integrated with the Company’s strategy and are functioning as directed. The primary means by which the Board oversees our risk management structures and policies is through its regular communications with management. The Company believes that its leadership structure is conducive to comprehensive risk management practices, and that the Board’s involvement is appropriate to ensure effective oversight.

 

The Board of Directors and its committees meet in person approximately six times a year, including one meeting that is dedicated specifically to strategic planning. At each of these meetings, our Chief Executive Officer; President and Chief Operating Officer; Chief Financial Officer; and General Counsel are asked to report to the Board and, when appropriate, specific committees. Additionally, other members of management and employees are requested to attend meetings and present information, including those responsible for our Internal Audit and Environmental Audit functions. One of the purposes of these presentations is to provide direct communication between members of the Board and members of management; the presentations provide members of the Board with the information necessary to understand the risk profile of the Company, including information regarding the specific risk environment, exposures affecting the Company’s operations and the Company’s plans to address such risks. In addition to information regarding general updates to the Company’s operational and financial condition, management reports to the Board on a number of specific issues meant to inform the Board about the Company’s outlook and forecasts, and any impediments to meeting those or its

pre-defined strategies generally. These direct communications between management and the Board of Directors allow the Board to assess management’s evaluation and management of the day-to-day risks of the Company.

 

Management is encouraged to communicate with the Board of Directors with respect to extraordinary risk issues or developments that may require more immediate attention between regularly scheduled Board meetings. Mr. Pope, as Non-Executive Chairman, facilitates communications with the Board of Directors as a whole and is integral in initiating the frank, candid discussions among the independent Board members necessary to ensure management is adequately evaluating and managing the Company’s risks. These intra-Board communications are essential in its oversight function. Additionally, all members of the Board are invited to attend all committee meetings, regardless of whether the individual sits on the specific committee, and committee chairs report to the full Board. These practices ensure that all issues affecting the Company are considered in relation to each other and by doing so, risks that affect one aspect of our Company can be taken into consideration when considering other risks.

 

The Company also initiated an enterprise risk management process several years ago, which is coordinated by the Company’s Internal Audit department, under the supervision of the Company’s Chief Financial Officer. This process initially involved the identification of the Company’s programs and processes related to risk management, and the individuals responsible for them. Included was a self-assessment survey completed by senior personnel requesting information regarding perceived risks to the Company, with follow-up interviews with members of senior management to review any gaps between their and their direct reports’ responses. The information gathered was tailored to coordinate with the Company’s strategic planning process such that the risks could be categorized in a manner that identified the specific Company strategies that may be jeopardized and plans could be developed to address the risks to those strategies. The Company then conducted an open-ended survey aligned with the objectives of the Company’s strategic goals with several individuals with broad risk management and/or risk oversight responsibilities. Included in the survey was the identification of the top concerns, assessment of their risk impact and probability, and identification of the responsible risk owner. Finally, a condensed survey of top risks was completed by approximately 200 senior personnel to validate the risks and the risk rankings.

 

The results of these efforts were reported to the Board of Directors, which is responsible for the design of the risk management process. Since its implementation, regular updates are given to the Board of Directors on all Company risks. In addition, the Audit Committee is responsible for ensuring that an effective risk assessment process is in place, and quarterly reports are made to the Audit Committee on all financial and compliance risks in accordance with New York Stock Exchange requirements.

 

The Board of Directors has determined that each of the following seven non-employee director candidates is independent in accordance with the New York Stock Exchange listing standards:

 

Pastora San Juan Cafferty
Frank M. Clark, Jr.
Patrick W. Gross
John C. Pope
W. Robert Reum
Steven G. Rothmeier
Thomas H. Weidemeyer

 

Mr. Steiner is an employee of the Company and, as such, is not considered an “independent” director.

 

To assist the Board in determining independence, the Board of Directors adopted categorical standards of director independence, which meet or exceed the requirements of the New York Stock Exchange. These standards specify certain relationships that must be avoided in order for the non-employee director to be deemed independent. The Board reviewed all commercial and non-profit affiliations of each non-employee director and the dollar amount of all transactions between the Company and each entity with which a non-employee director is affiliated to determine independence. These transactions included the Company, through

its subsidiaries, providing waste management services in the ordinary course of business and the Company’s subsidiaries purchasing goods and services in the ordinary course of business. The categorical standards our Board uses in determining independence are included in our Corporate Governance Guidelines, which can be found on our website. The Board has determined that each non-employee director candidate meets these categorical standards and that there are no other relationships that would affect independence.

 

Last year the Board held eight meetings and each committee of the Board met independently as set forth below. Each director attended at least 75% of the meetings of the Board and the committees on which he served. In addition, all directors attended the 2009 Annual Meeting of Stockholders. Although we do not have a formal policy regarding director attendance at annual meetings, it has been longstanding practice that all directors attend unless there are unavoidable schedule conflicts or unforeseen circumstances.

 

The Board appoints committees to help carry out its duties. In particular, Board committees work on key issues in greater detail than would be possible at full Board meetings. Each committee reviews the results of its meetings with the full Board, and all members of the Board are invited to attend all committee meetings. The Board has three separate standing committees: the Audit Committee, which is a separately designated standing committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended; the Management Development and Compensation Committee; and the Nominating and Governance Committee. Additionally, the Board has the power to appoint additional committees, as it deems necessary. In 2006, the Board appointed a Special Committee, as described below.

 

The Audit Committee

 

Mr. Rothmeier has been the Chairman of our Audit Committee since May 2004. The other members of our Audit Committee are Ms. Cafferty and Messrs. Clark, Gross, Pope and Reum. Each member of our Audit Committee satisfies the additional New York Stock Exchange independence standards for audit committees. Our Audit Committee held nine meetings in 2009.

 

SEC rules require that we have at least one financial expert on our Audit Committee. Our Board of Directors has determined that Mr. Rothmeier and Mr. Pope are both Audit Committee financial experts for purposes of the SEC’s rules based on a thorough review of their education and financial and public company experience.

 

Mr. Rothmeier served in various leadership positions in the airline industry for approximately 16 years, including the positions of Chairman, CEO and CFO of Northwest Airlines. He founded Great Northern Capital, a private investment management, consulting and merchant banking firm, in 1993, where he continues to serve as Chairman and CEO. Mr. Rothmeier has a master’s degree in finance from the University of Chicago Graduate School of Business and a bachelor’s degree in business administration from the University of Notre Dame. Mr. Rothmeier serves on one public company audit committee in addition to ours.

 

Mr. Pope served in various financial positions, primarily in the airline industry, for approximately 17 years, including over nine years combined in CFO positions at American Airlines and United Airlines. He has a master’s degree in finance from the Harvard Graduate School of Business Administration and a bachelor’s degree in engineering and applied science from Yale University. Mr. Pope serves on three public company audit committees in addition to ours. The Board reviewed the time Mr. Pope spends on each company’s audit committee and the time he spends on other companies’ interests and determined that such service and time does not impair his ability to serve on our Audit Committee.

 

Mr. Gross serves on four public company audit committees in addition to ours. The Board reviewed the time Mr. Gross spends on each company’s audit committee and the time he spends on other companies’ interests and determined that such service and time does not impair his ability to serve on our Audit Committee.

 

Neither Ms. Cafferty, Mr. Clark, nor Mr. Reum currently serve on the audit committees of other public companies.

The Audit Committee’s duties are set forth in a written charter that was approved by the Board of Directors. A copy of the charter can be found on our website. The Audit Committee generally is responsible for overseeing all matters relating to our financial statements and reporting, internal audit function and independent auditors. As part of its function, the Audit Committee reports the results of all of its reviews to the full Board. In fulfilling its duties, the Audit Committee, has the following responsibilities:

 

Administrative Responsibilities

 

 

Independent Auditor

 

 

 

Internal Audit

 

 

Financial Statements

 

 

 

 

The role of the Audit Committee is, among other things, to oversee the Company’s financial reporting process on behalf of the Board of Directors, to recommend to the Board whether the Company’s financial statements should be included in the Company’s Annual Report on Form 10-K and to select the independent auditor for ratification by stockholders. Company management is responsible for the Company’s financial statements as well as for its financial reporting process, accounting principles and internal controls. The Company’s independent auditors are responsible for performing an audit of the Company’s financial statements and expressing an opinion as to the conformity of such financial statements with generally accepted accounting principles.

The Audit Committee has reviewed and discussed the Company’s audited financial statements as of and for the year ended December 31, 2009 with management and the independent registered public accounting firm, and has taken the following steps in making its recommendation that the Company’s financial statements be included in its annual report:

 

 

The Committee has also discussed with the Company’s internal auditors and independent registered public accounting firm the overall scope and plans of their respective audits. The Committee meets periodically with both the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations and their evaluations of the Company’s internal controls.

 

The members of the Audit Committee are not engaged in the accounting or auditing profession and, consequently, are not experts in matters involving auditing or accounting. In the performance of their oversight function, the members of the Audit Committee necessarily relied upon the information, opinions, reports and statements presented to them by Company management and by the independent registered public accounting firm.

 

Based on the reviews and discussions explained above (and without other independent verification), the Audit Committee recommended to the Board (and the Board approved) that the Company’s financial statements be included in its annual report for its fiscal year ended December 31, 2009. The Committee has also approved the selection of Ernst & Young as the Company’s independent registered public accounting firm for fiscal year 2010.

 

The Audit Committee of the Board of Directors

 

Steven G. Rothmeier, Chairman
Pastora San Juan Cafferty
Frank M. Clark, Jr.
Patrick W. Gross
John C. Pope
W. Robert Reum

 

The Management Development and Compensation Committee

 

Mr. Reum has served as the Chairman of our Management Development and Compensation Committee since May 2004. The other members of the Committee are Messrs. Clark, Pope, Rothmeier and Weidemeyer.

Each member of our Compensation Committee is independent in accordance with the rules and regulations of the New York Stock Exchange. The Compensation Committee met seven times in 2009.

 

Our Compensation Committee is responsible for overseeing all of our executive and senior management compensation, as well as developing the Company’s compensation philosophy generally. The Compensation Committee’s written charter, which was approved by the Board of Directors, can be found on our website. In fulfilling its duties, the Compensation Committee has the following responsibilities:

 

 

In overseeing compensation matters, the Compensation Committee may delegate authority for day-to-day administration and interpretation of the Company’s plans, including selection of participants, determination of award levels within plan parameters, and approval of award documents, to Company employees. However, the Compensation Committee may not delegate any authority under those plans for matters affecting the compensation and benefits of the executive officers.

 

For additional information on the Compensation Committee, see the Compensation Discussion and Analysis on page 20.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis, beginning on page 20, with management. Based on the review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement.

 

The Management Development and Compensation
Committee of the Board of Directors

 

W. Robert Reum, Chairman
Frank M. Clark, Jr.
John C. Pope
Steven G. Rothmeier
Thomas H. Weidemeyer

 

During 2009 each of Mr. Clark, Pope, Reum, Rothmeier and Weidemeyer served on the Compensation Committee. No member of the Compensation Committee was an officer or employee of Waste Management during 2009; no member of the Compensation Committee is a former officer of the Company; and no compensation committee interlocking existed in 2009. Mr. Pope entered into an open market transaction involving publicly traded debt of the Company, which is described below, under “Related Party Transactions.”

The Nominating and Governance Committee

 

Ms. Cafferty has served as the Chairperson of our Nominating and Governance Committee since May 2008. The other members of the Committee include Messrs. Gross, Pope and Weidemeyer. Each member of our Nominating and Governance Committee is independent in accordance with the rules and regulations of the New York Stock Exchange. In 2009, the Nominating and Governance Committee met five times.

 

The Nominating and Governance Committee has a written charter that has been approved by the Board of Directors and can be reviewed by accessing our website. It is the duty of the Nominating and Governance Committee to oversee matters regarding corporate governance. In fulfilling its duties, the Nominating and Governance Committee has the following responsibilities:

 

 

Potential director candidates are identified through various methods; the Committee welcomes suggestions from directors, members of management, and stockholders. From time to time, the Nominating and Governance Committee uses outside consultants to assist it with identifying potential director candidates.

 

For all potential candidates, the Nominating and Governance Committee considers all factors it deems relevant, such as a candidate’s personal and professional integrity and sound judgment, business and professional skills and experience, independence, possible conflicts of interest, diversity, and the potential for effectiveness, in conjunction with the other directors, to serve the long-term interests of the stockholders. While there is no formal policy with regard to consideration of diversity in identifying director nominees, the Committee considers diversity in business experience, professional expertise, gender and ethnic background, along with various other factors when evaluating director nominees. The Committee uses a matrix of functional and industry experiences to develop criteria to select candidates. Before being nominated by the Nominating and Governance Committee, director candidates are interviewed by the Chief Executive Officer and a minimum of two members of the Nominating and Governance Committee, including the Non-Executive Chairman of the Board. Additional interviews may include other members of the Board, representatives from senior levels of management and an outside consultant.

 

The Committee currently intends to maintain the size of the Board at eight directors, which is consistent with the objective stated in our Corporate Governance Guidelines. The Nominating and Governance Committee will consider all potential nominees on their merits without regard to the source of recommendation. The Nominating and Governance Committee believes that the nominating process will and should continue to involve significant subjective judgments. To suggest a nominee, you should submit your candidate’s name, together with biographical information and his or her written consent to nomination to the Chairman of the Nominating and Governance Committee, Waste Management, Inc., 1001 Fannin Street, Suite 4000, Houston, Texas 77002, between October 30, 2010 and November 29, 2010.

 

The Board of Directors has adopted a written Related Party Transactions Policy for the review and approval or ratification of related party transactions. Our policy generally defines related party transactions as current or proposed transactions in excess of $120,000 in which (i) the Company is a participant and (ii) any director, executive officer or immediate family member of any director or executive officer has a direct or indirect material interest. In addition, the policy sets forth certain transactions that will not be considered related party transactions, including (i) executive officer compensation and benefit arrangements; (ii) director compensation arrangements; (iii) business travel and expenses, advances and reimbursements in the ordinary course of business; (iv) indemnification payments and advancement of expenses, and payments under directors’ and officers’ indemnification insurance policies; (v) any transaction between the Company and any entity in which a related party has a relationship solely as a director, a less than 5% equity holder, or an employee (other than an executive officer); and (vi) purchases of Company debt securities, provided that the related party has a passive ownership of no more than 2% of the principal amount of any outstanding series. The Nominating and Governance Committee is responsible for overseeing the policy.

 

All executive officers and directors are required to notify the General Counsel or the Corporate Secretary as soon as practicable of any proposed transaction that they or their family members are considering entering into that involves the Company. The General Counsel will determine whether potential transactions or relationships constitute related party transactions that must be referred to the Nominating and Governance Committee.

 

The Nominating and Governance Committee will review a detailed description of the transaction, including:

 

 

In determining whether to approve a related party transaction, the Nominating and Governance Committee will consider, among other things, whether:

 

 

Any member of the Nominating and Governance Committee who has an interest in a transaction presented for consideration will abstain from voting on the related party transaction.

 

The Nominating and Governance Committee’s consideration of related party transactions and its determination of whether to approve such a transaction are reflected in the minutes of the Nominating and Governance Committee’s meetings.

 

The following transactions did not constitute related party transactions under our policy because the ownership of the debt securities was less than 2% of the outstanding principal amount of the series; however, we are disclosing them in accordance with SEC requirements:

 

In 2008, Mr. Steiner, Chief Executive Officer and a Director, purchased $300,000 principal amount of the Company’s 6.10% Senior Notes due March 2018 in an open-market transaction. Interest payments on the notes

are made on March 15 and September 15 of each year, with the final interest payment made at maturity on March 15, 2018. In 2009, Mr. Steiner received interest payments in the amount of $18,300.

 

In 2009, Mr. Pope, Non-Executive Chairman of the Board, purchased an aggregate of $600,015 of our tax-exempt bonds in open market transactions. The three series of bonds purchased by Mr. Pope are remarketed semi-annually, at which time interest rates are set. Mr. Pope purchased the bonds in the remarketings that occurred in July 2009. Mr. Pope purchased $200,005 of each of the three series when the interest rates were set at 2.63%, 2.5% and 2.63%, respectively. However, Mr. Pope received no interest payments until January 2010, at which time he did not participate in the remarketings and, as a result, no longer owns these securities.

 

The Company is not aware of any other transactions that would require disclosure.

 

Special Committee

 

The Board of Directors appointed a Special Committee in November 2006 to make determinations regarding the Company’s obligation to provide indemnification when and as may be necessary. The Special Committee consists of Mr. Gross and Mr. Weidemeyer. The Special Committee held no meetings in 2009.

 

Stockholders may obtain copies of our Corporate Governance Guidelines, the Charters of the Audit Committee, the Compensation Committee, and the Nominating and Governance Committee, and our Code of Conduct free of charge by contacting the Corporate Secretary, c/o Waste Management, Inc., 1001 Fannin Street, Suite 4000, Houston, Texas 77002 or by accessing our website at http://www.wm.com.

 

Our non-employee director compensation program consists of equity awards and cash consideration. Compensation for directors is recommended annually by the Nominating and Governance Committee with the assistance of an independent third-party consultant, and set by action of the Board of Directors. The Board’s goal in designing directors’ compensation is to provide a competitive package that will enable the Company to attract and retain highly skilled individuals with relevant experience. The compensation also is designed to reflect the time and talent required to serve on the board of a company of our size and complexity. The Board seeks to provide sufficient flexibility in the form of compensation delivered to meet the needs of different individuals while ensuring that a substantial portion of directors’ compensation is linked to the long-term success of the Company.

 

Equity Compensation

 

Non-employee directors receive an annual grant of shares of Common Stock. There are no restrictions on the shares; however, non-employee directors are subject to ownership guidelines that require a minimum ownership and that all net shares received in connection with a stock award, after selling shares to pay all applicable taxes, be held during their tenure as a director and for one year following termination of Board service. The grant of shares is made in two equal installments and the number of shares issued is based on the market value of our Common Stock on the dates of grants, which are January 15 and July 15 of each year. In 2009, the equity grant to non-employee directors was valued at $110,000 and each director received a grant valued at $55,000 on each of January 15, 2009 and July 15, 2009. In addition to the annual grant, Mr. Pope receives a grant of shares valued at $100,000 for his service as Non-Executive Chairman of the Board, which is also awarded in two equal installments on January 15 and July 15 of each year. The grant date fair value of the awards is equal to the number of shares issued times the market value of our Common Stock on that date; there are no assumptions used in the valuation of shares.

 

Shares granted to the non-employee directors in January 2009 were granted under the Company’s 2004 Stock Incentive Plan and shares granted to the non-employee directors in July 2009 were granted under the Company’s 2009 Stock Incentive Plan.

In November 2009, the Board terminated the 2003 Directors Deferred Compensation Plan, under which we previously granted deferred stock units to non-employee directors.

 

Cash Compensation

 

All non-employee directors receive an annual cash retainer for Board service and additional cash retainers for serving as a committee chair and for service on certain committees. Directors do not receive meeting fees in addition to the retainers. The cash retainers are payable in two equal installments in January and July of each year. The payments of the retainers for each six-month period are not pro-rated, nor are they subject to refund. The table below sets forth the cash retainers for 2009:

 

 

The table below shows the aggregate cash paid, and stock awards issued, to the non-employee directors in 2009 in accordance with the descriptions set forth above:

 

 

 

 

 

On December 31, 2009, Mr. Pope received a cash payment of $50,295, representing the payment of compensation earned in 2000 that Mr. Pope had deferred. The amount represents 1,488 phantom stock units that had been accrued under the Company’s 1999 Directors’ Deferred Compensation Plan and was paid in accordance with a deferral election that Mr. Pope had made in 1999. There are no phantom stock units outstanding under the 1999 Directors’ Deferred Compensation Plan.

 

The first proposal on the agenda is the election of eight directors to serve until the 2011 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. The Board has nominated the eight director candidates named below, and recommends that you vote FOR their election. If any nominee is unable or unwilling to serve as a director, which we do not anticipate, the Board, by resolution, may reduce the number of directors that constitute the Board or may choose a substitute. Our Bylaws provide that if any director nominee does not receive more than 50% of the votes cast for his election, he will tender his resignation to the Board of Directors. The Nominating and Governance Committee will then make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken.

 

The table below shows all of our director nominees; their ages, terms of office on our Board; experience within the past five years; and their qualifications we considered when inviting them to join our Board as well as nominating them for re-election. We believe that, as a general matter, our directors’ past five years of experience gives an indication of the wealth of knowledge and experience these individuals have and that we considered; however, we have also indicated the specific skills and areas of expertise we believe makes each of these individuals a valuable member of our Board.

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH OF THE EIGHT NOMINEE DIRECTORS.

 

DIRECTOR NOMINEE AND OFFICER STOCK OWNERSHIP

 

Our Board of Directors has adopted stock ownership guidelines for our non-employee directors that require each director to hold Common Stock or share-based instruments valued at five times his annual cash retainer, based on a $30.00 stock price. Non-employee directors other than Mr. Pope currently are required to hold 15,000 shares and Mr. Pope currently is required to hold approximately 31,600 shares. Directors have five years from the later of the date they join the Board or the effective date of an increase in the holding requirements to attain the required level of ownership. Ms. Cafferty, Mr. Pope, Mr. Clark and Mr. Rothmeier have all reached their required levels of ownership. The remaining non-employee directors have until July 2013 to reach their required level of ownership.

 

Our executive officers, including Mr. Steiner, are also subject to stock ownership guidelines, as described in the Compensation Discussion and Analysis on page 29 of this Proxy Statement.

The Stock Ownership Table below shows how much Common Stock each director nominee and executive officer named in the Summary Compensation Table on page 32 owned as of March 15, 2010, our record date for the Annual Meeting. The table also includes information about restricted stock units, stock options and phantom stock granted under various compensation and benefit plans. We did not include information about performance share units granted to executive officers under our incentive compensation plans. Performance share units are settled in shares of our Common Stock based on the Company’s achievement of certain financial performance objectives during a three-year performance period. The actual number of shares the executives may receive at the end of the performance period will vary depending on the level of achievement of the Company’s financial objectives, and can vary from zero to two times the number of performance share units granted. Since the number of shares, if any, that will ultimately be issued pursuant to the performance share units is not known, we have excluded them from the table.

 

These individuals, both individually and in the aggregate, own less than 1% of our outstanding shares as of the record date.

 

Stock Ownership Table

 

 

 

 

The table below shows information for stockholders known to us to beneficially own more than 5% of our Common Stock based on their filings with the SEC through March 15, 2010.

 

 

The federal securities laws require our executive officers and directors to file reports of their holdings and transactions in our Common Stock with the SEC and the New York Stock Exchange.

 

Based on a review of the forms and written representations from our executive officers and directors, we believe that all applicable requirements were complied with in 2009, with the exception of the following:

 

 

The following is a listing of our current executive officers, other than Mr. Steiner, whose personal information is included in the Director Nominees section of this Proxy Statement on page 16, their ages and business experience for the past five years.

 

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

 

The following Compensation Discussion and Analysis, or CD&A, discusses how our Management Development and Compensation Committee, referred to throughout this discussion as the Compensation Committee, made its compensation decisions for the Company’s executive officers that are named in the Summary Compensation Table on page 32 of this Proxy Statement. These officers include David P. Steiner, Lawrence O’Donnell, III, Robert G. Simpson, James E. Trevathan and Duane C. Woods. We refer to them collectively as the “named executive officers,” or “named executives,” throughout this Proxy Statement.

 

Our Compensation Philosophy for Named Executive Officers

 

The Company’s compensation philosophy is designed to:

 

 

With respect to our named executive officers, the Compensation Committee believes that total direct compensation should be targeted at the competitive median according to the following:

 

 

Highlights of 2009 Named Executive Officer Compensation

 

 

 

 

 

Overview

 

Base Salary.  We pay base salaries to our named executives to provide them with sufficient, regularly paid income for performing day-to-day responsibilities. The amounts of the base salaries we pay are meant to help us in attracting and retaining the best employees.

 

Annual Cash Bonus.  Our named executives’ bonuses are targeted at a percentage of base salary. Beginning in 2007, our named executives’ bonuses have been earned based solely on the achievement of Company financial measures, and can range from zero to 200% of target. We tie our named executives’ bonuses to the achievement of Company financial measures because these individuals have the highest level of decision making authority and, therefore, the most ability to influence the Company’s results of operations. As

a result, we believe it is appropriate to put their entire bonus at risk based on whether the financial goals of the Company are achieved. Additionally, we believe this level of objective determination and transparency for these individuals’ compensation is appropriate and important to stockholders. In cases of individual performance that varies significantly from expectations, the Compensation Committee has the discretion to increase or decrease the calculated incentive payment by up to 25%, resulting in a modified payout for the named executive. This modifier has never been used for a named executive officer.

 

The financial measures chosen for our named executive officers’ bonus calculations are those that we believe drive behaviors that increase value to our stockholders and are appropriately measured on an annual basis. Using income from operations as a percentage of revenues is meant to motivate employees to control and lower costs, operate efficiently and drive our pricing programs, thereby increasing our income from operations margin. EBITDA is an indication of our ability to generate cash flows before interest and taxes. We believe the ability to grow our cash flow is an important metric to our stockholders, and drives stockholder value. The specific targets for the income from operations as a percentage of revenues and income from operations, net of depreciation and amortization, of the Company necessary to earn a bonus in 2009 are discussed below.

 

Long Term Equity Incentives.  We grant performance share units with a performance period of three years to motivate our named executive officers to act in a manner that can increase the value of the Company over time. The number of performance share units granted to our named executive officers corresponds to an equal number of shares of Common Stock. At the end of the three-year performance period for each grant, the Company will deliver a number of shares ranging from 0% to 200% of the initial number of units granted, depending on the Company’s three-year performance against a pre-established ROIC target and subject to the general payout and forfeiture provisions. ROIC in our plan is defined generally as net operating profit after taxes divided by capital. Recipients can defer receipt of the shares issuable under their performance share unit awards until a specified date or dates they choose. Deferred amounts are not invested, nor do they earn interest, and are paid out in shares of Common Stock at the end of the deferral period. Since 2007, performance share units earn dividend equivalents, which are paid out based on the number of shares actually awarded, if any, at the end of the performance period.

 

We believe that the profitable allocation of capital is critical to the long term success of the Company. Using ROIC as a measure for incentive compensation purposes ensures that decisions are made with the best long-term interests of the Company in mind. ROIC is an indicator of our ability to generate returns for our stockholders. We believe that earnings growth is important and an appropriate measure for our annual bonuses. However, creating value over time is also important, and we therefore chose the three-year performance period for our long-term incentive compensation. We believe that using a three-year average of ROIC incentivizes our named executive officers to ensure the strategic direction of the Company is being followed and forces them to balance the short-term incentives awarded for growth with the long-term incentives awarded for value generated. The actual targets for ROIC under awards granted in 2009 are discussed below.

 

How Named Executive Officer Compensation Decisions are Made

 

The Compensation Committee meets several times each year to perform its responsibilities as delegated by the Board of Directors and as set forth in the Compensation Committee’s charter. These responsibilities include evaluating and approving the Company’s compensation philosophy, policies, plans and programs for our named executive officers.

 

In the performance of its duties, the Compensation Committee regularly reviews the total compensation, including the base salary, target bonus award opportunities, long-term incentive award opportunities and other benefits, including potential severance payments for each of our named executive officers. At a regularly scheduled meeting each year, the Compensation Committee reviews our named executives’ total compensation and compares that compensation to the competitive market, as discussed below. In the first quarter of each year, the Compensation Committee meets to determine salary increases, if any, for the named executive officers; verifies the results of the Company’s performance for annual incentive calculations; reviews the

individual annual incentive targets for the current year as a percent of salary for each of the named executive officers; and makes decisions on granting long-term equity awards.

 

The Compensation Committee uses several resources in its analysis of the appropriate compensation for the named executive officers. Since 2006, the Compensation Committee has used tally sheets to review the compensation of our named executive officers, which show the cumulative impact of all elements of compensation. These tally sheets include detailed information and dollar amounts for each component of compensation, the value of all equity held by each named executive, and the value of welfare and retirement benefits and severance payments. The use of tally sheets allows the Compensation Committee to view executives’ compensation in a detailed, cumulative manner and provides a means for comparing internal equity for all compensation components.

 

The Compensation Committee hires an independent consultant to provide advice to the Compensation Committee relating to market and general compensation trends. The Compensation Committee also uses the services of its independent consultant for data gathering and analyses, which the Compensation Committee uses for its discussions of and decisions on the named executive officers’ compensation. The Compensation Committee has retained Frederic W. Cook & Co., Inc. as its independent consultant since 2002. The Company makes regular payments to Frederic W. Cook for its services around executive compensation, including meeting preparation and attendance, advice, best practice information, as well as competitive data.

 

In addition to services related to executive compensation, the consultant has provided the Board of Director’s Nominating and Governance Committee information and advice related to director compensation. Frederic W. Cook has no other business relationships with the Company and receives no other payments from the Company. In February 2008, the Compensation Committee adopted a written policy to ensure the independence of any compensation consultants utilized by the Compensation Committee for executive compensation matters. Pursuant to the policy, no compensation consultant engaged by the Compensation Committee to assist in determining or recommending the compensation of executive officers may be engaged by management of the Company to provide any other services unless first approved by the Compensation Committee. Since the adoption of the policy, no engagements have been proposed to the Compensation Committee for approval.

 

Mr. Steiner and Mr. O’Donnell also play a part in determining compensation, as they assess the performance of the named executive officers reporting to them and report these assessments with recommendations to the Compensation Committee. Personnel within the Company’s People Department assist the Compensation Committee by working with the Compensation Committee’s independent consultant to provide information requested by the Compensation Committee and assisting the Compensation Committee in designing and administering the Company’s incentive programs.

 

One of the data sources used by the Compensation Committee is compensation information of a comparison group of companies. The purpose of the comparisons of our named executives’ compensation with executives at other companies is to gauge the competitive market. This market is relevant for attracting and retaining key talent and also for ensuring that the Company’s compensation practices are aligned with general practices. Each of our named executive officers has been promoted to his current position from within the Company, which the Compensation Committee believes is an important and beneficial practice.

 

In 2008, the independent consultant provided the Compensation Committee with a competitive analysis of total direct compensation levels and compensation mixes for our executive officers, using information from:

 

 

The comparison group of companies is recommended by the independent consultant prior to the actual data gathering process, with input from management, and the composition of the group is evaluated and approved by the Compensation Committee each year. The selection process for the comparison group begins with all companies in the Standard & Poor’s North American database that are publicly traded U.S. companies

in 12 different Global Industry Classifications. These industry classifications are meant to provide a collection of companies in industries that share similar characteristics with Waste Management. The companies are then limited to those with at least $5 billion in annual revenue to ensure appropriate comparisons, and further narrowed by choosing those with asset intensive operations and those focusing on transportation and logistics. Companies with these characteristics are chosen because the Compensation Committee believes that it is appropriate to compare our executives’ compensation with executives that have similar responsibilities and challenges at other companies. The comparison group used for consideration of 2009 compensation included the companies listed below:

 

 

 

 

The market and the comparison group data are blended when composing the competitive analysis, when possible, such that each data source is weighted 50%. The competitive analysis shows that the Company’s named executives generally are compensated within a median range of the compensation of the executives used in the competitive analysis. For competitive comparisons, the Compensation Committee has determined that total direct compensation packages for our named executive officers within a range of plus or minus twenty percent of the median total compensation of the competitive analysis is appropriate. In making these determinations, total direct compensation consists of base salary, target annual bonus, and the annualized grant date fair value of long-term equity incentive awards. When the competitive analysis was reviewed in 2008, it showed that none of our named executive officers’ total direct compensation was above the median for their peers in the competitive analysis.

 

The Compensation Committee seeks to comply with the performance-based compensation exemption under Section 162(m) of the Internal Revenue Code when appropriate. Section 162(m) generally limits a company’s ability to deduct compensation paid in excess of $1 million during any fiscal year to the Chief Executive Officer or any of the other named executive officers unless the excess amount is performance-based. Throughout the following discussion we have noted the programs that are designed to meet the Section 162(m) requirements.

 

The Compensation Committee also seeks to structure compensation that will provide sufficient incentives for named executive officers to drive results while avoiding unnecessary or excessive risk taking that could harm the long-term value of the Company. The Compensation Committee believes that the following measures help achieve this goal:

 

 

 

 

 

Elements of Named Executives’ 2009 Total Compensation

 

Base Salary — Each of our named executive officers is party to an employment agreement, approved by our Compensation Committee that provides for a base salary that, once increased, may not be reduced. The Compensation Committee’s annual decisions regarding base salaries generally relate to merit increases, if any, as each of our named executive officers has been in his current role for several years. In determining annual merit increases, the Company looks at competitive market data for cost of labor increases. In early 2009, the Compensation Committee determined that because of economic conditions, no named executive officers would receive an annual merit increase; however, the salary freeze was lifted for all Company employees in 2010. The table below shows the base salary of each of our named executive officers in 2009:

 

 

Annual Cash Bonus — The percentages of base salary targets for the annual bonuses of the named executive officers were set when the individuals were promoted to their current roles. These target percentages are reviewed annually to ensure they are still appropriate given the competitive market and the individuals’ responsibilities. Additionally, each year the Compensation Committee determines the financial measures that will be used for the named executives’ bonus determinations and sets the threshold, target and maximum measures necessary for bonus payments. The Compensation Committee makes these determinations based on what it believes are most likely to both drive and reward performance that is beneficial to the Company and stockholders generally.

 

The annual bonus plan is designed to comply with the performance-based compensation exemption under Section 162(m) of the Code by allowing the Compensation Committee to set performance criteria for payments, which may not exceed the predetermined amount of 0.5% of the Company’s pre-tax income per participant.

 

The table below sets forth the performance measures set by the Compensation Committee for the named executive officers’ bonuses earned in 2009:

 

The performance measures used under our bonus plan in 2009 shown in the table above were calculated based on the Company’s consolidated results of operations. This is a change from prior years, when field based employees’ target measures were based on their specific Area or Group results of operations and only corporate employees’ target measures were based on consolidated results. In prior years, Mr. Trevathan and Mr. Woods’ performance measures were based on the results of operations of the Southern Group and the Western Group, respectively. The Compensation Committee’s decision to use the Company’s consolidated results of operations in 2009 for all employees was a direct result of the organizational changes that took place due to the restructuring we announced in the first quarter of 2009. We believe that using the Company’s consolidated results of operations resulted in all employees working toward the same end goals, and allowed us to reward employees, including named executive officers, in a manner that did not penalize them for the effects of the restructuring on specific field-based operations. Further, using consolidated results avoided incentivizing field-based employees to take actions that may have been overly aggressive in order to meet field-based financial goals given the negative short-term effects the restructuring may have had on those operations.

 

The Compensation Committee believes that the 2009 financial performance measures were goals that appropriately drove behaviors to create performance and results, in particular focusing on generating profitable revenue, cost cutting and cost control, and making the best use of our assets. When setting performance measure goals each year, the Compensation Committee looks to the Company’s historical results of operations and analyses and forecasts for the coming year. Specifically, the Compensation Committee considers expected revenue based on analyses of pricing and volume trends, as affected by operational and general economic factors; expected wage, maintenance, fuel and other operational costs; and expected selling and administrative costs. Based on this information and in light of general economic conditions and indicators in early 2009, the Compensation Committee determined that the target performance under the annual bonus plan should be relatively flat as compared to the prior year’s results. The Committee discussed the effects the recessionary environment was having on the Company’s results of operations and the challenges that the Company was facing in 2009. Given these factors, the Compensation Committee made the determination that if the named executive officers were able to maintain operating results consistent with the prior year, notwithstanding the difficult economic environment, those results should merit an award.

 

Mindful of the negative effect the recessionary environment of the last 18 months had on the Company’s volumes, which decreased our revenues, the Compensation Committee took additional action in early 2009. One of the Company’s most important programs has been its pricing excellence, wherein we focus on ensuring we receive appropriate pricing for all of our services. We announced that we are committed to our pricing program and we do not intend to take volumes at prices that do not cover our costs and that do not provide strong operating margins. As a result, in January of 2009, the Compensation Committee added a feature to our bonus plan to ensure that employees were maintaining discipline in executing our pricing programs. In order for named executives to be eligible to receive bonuses for 2009, minimum pricing improvement targets were required of our field operations and a minimum improvement target was required for consolidated Corporate results. If the Corporate measure was met, all named executive officers would be bonus eligible. If the Corporate measure was not met, field-based named executive officers, which include Mr. Trevathan and Mr. Woods, would still be eligible for a bonus payment to the extent his respective Group measure was met. The targets, shown in the table below, were a weighted average rate per unit increase, based on commercial, residential and industrial collection operations; transfer stations; and municipal solid waste and construction and demolition volumes at our landfills.

 

 

 

The Company exceeded the Corporate pricing improvement target and as a result, each of the named executives was eligible to receive his 2009 annual bonus payment.

 

In determining whether Company financial performance measures have been met, the Compensation Committee has discretion to make adjustments to the calculations for unusual, non-recurring or otherwise non-operational matters that it believes do not accurately reflect true results of operations expected from management for bonus purposes. In 2009, actual results were adjusted to exclude the effects of (i) charges related to our restructuring announced in the first quarter of 2009; (ii) an increase in net income caused by the accounting effect of an increase in long-term interest rates, which are used to calculate the present value of our remediation liabilities at our landfills; and (iii) charges related to our withdrawal from union sponsored multi-employer pension plans. The Compensation Committee deemed these adjustments appropriate for several reasons. The Company’s restructuring and withdrawal from the pension plans were actions that the Compensation Committee believes are in the best long-term interest of the Company, as we have been able to operate more efficiently, achieve cost-savings and avoid potentially significant pension liabilities in the future. The restructuring reduced our cost structure and provided better visibility and alignment to our area operations. We reduced the number of market areas from 45 to 25, and streamlined various roles and processes. We believe this improved management visibility and efficiency will provide additional short- and long-term benefits. As a result, the Compensation Committee determined that our named executives should not be penalized by the effects of these actions. Further, because the increase in net income caused by the increase in long-term interest rates was the result of accounting principles as opposed to actual operating results, the Compensation Committee determined its effects should also not be considered when calculating the achievement of targets. The Compensation Committee’s policy generally is for financial results to speak for themselves and determine incentive compensation for our named executives on objective bases. However, not adjusting for certain items, like those discussed herein, could have the effect of incentivizing these individuals to not take actions that are necessary for the longer-term good of the Company in order to meet short-term goals.

 

As adjusted for the items noted above, the Company’s income from operations as a percentage of revenue was 16.4% and income from operations, net of depreciation and amortization, was $3,104 million for 2009, which resulted in the following payouts, as a percentage of base salaries, for our named executive officers:

 

 

The Company’s restructuring was completed in 2009 and we believe the operational and organizational changes that were necessary have been fully integrated into the Company. As a result, the Compensation Committee believes using field-based results of operations for target measures of field-based employees in 2010 is appropriate. Additionally, in setting target measures and determining whether targets have been achieved, the results of Wheelabrator or recycling operations located in a geographic Group will be included in that Group’s financial results for incentive compensation purposes. We believe using field-based measures is appropriate because it ties our field-based named executive officers’ compensation directly to the success or failure of operations over which they have direct control. Including our Wheelabrator and recycling operations in our geographic Groups for incentive compensation of our named executive officers furthers our strategy of fully integrating our operations for full-service waste management solutions and maximizes results across all

lines of our business. This is one of the ways in which our Compensation Committee adjusts our practices periodically to ensure that our programs will have their desired effects.

 

Long-Term Equity Incentives — Long-term equity incentives are a key component of our named executive officers’ compensation packages. Our equity awards are designed to hold individuals accountable for long-term decisions by only rewarding the success of those decisions. The Compensation Committee continuously evaluates the components of its programs. In determining which forms of equity compensation are appropriate, the Compensation Committee considers whether the awards granted are achieving their purpose; the competitive market; and accounting, tax or other regulatory issues, among others. In determining the appropriate awards for the named executives’ 2009 long-term incentive grant, the Compensation Committee discussed granting stock options as a means to maximize the link between the value for the individual and the value created for our stockholders. Based on several factors, including the then current economic environment that could have given rise to questions regarding the timing of the stock option grants, the Compensation Committee decided to continue granting only performance share units to the named executive officers for 2009. However, in its discussions relating to 2010 equity compensation, the Compensation Committee decided to grant both performance share units and stock options to its named executive officers. The Compensation Committee determined that equally dividing the awards between performance share units that use ROIC to focus on improved asset utilization and stock options that focus on increasing the market value of our stock would appropriately incentivize our named executives.

 

Performance Share Units — Performance share units are granted to our named executive officers annually to build stock ownership and align compensation with the achievement of our long-term financial goals. Performance share units provide an immediate retention value to the Company since there is unvested potential value at the date of grant. Each annual grant of performance share units has a three-year performance period, and would be forfeited if the executive were to voluntarily terminate his employment.

 

The Compensation Committee determined the number of units that were granted to each of the named executives in 2009 by establishing a targeted dollar amount value for the award. The values chosen were based primarily on the comparison information for the competitive market, including an analysis of the named executives’ responsibility for meeting the Company’s strategic objectives. The values also reflect the Compensation Committee’s desired total mix of compensation for each named executive, which includes approximately 50% of total compensation relating to long-term equity although the percentage for Mr. Steiner is closer to 65%. Once dollar values of targeted awards were set, those values were divided by the average of the high and low over the 30 trading days preceding the Compensation Committee meeting at which the grants were approved to determine the target number of performance share units granted. The dollar value of the awards and corresponding number of performance share units are shown in the table below:

 

 

The table below shows the required achievement of the performance measures and the corresponding potential payouts under our performance share units granted in 2009:

 

 

The threshold, target and maximum measures are determined based on an analysis of historical performance and current projections and trends. The Compensation Committee uses this analysis and modeling of different scenarios related to items that affect the Company’s performance such as yield, volumes and

capital to set the performance measures. As with the consideration of targets for the annual bonus, the Compensation Committee carefully considered several material factors affecting the Company for 2009 and beyond, including the effect of the weak economy in early 2009 and economic indicators for future periods. Given these factors, the Compensation Committee determined that the target for ROIC for the 2009 award should be lower than in the prior year.

 

The table below shows the performance measures, the achievement of those measures and the corresponding payouts for the performance share units that have been granted since 2006:

 

 

 

 

In evaluating appropriate financial measures for the 2009 grant to named executives, the Compensation Committee decided to retain only ROIC, rather than an equal split between ROIC and EPS measurements. This decision was primarily a result of the Compensation Committee’s determination that the 2009 grant should subject named executives to the same measures as all other employees that are granted equity awards and that the most appropriate long-term financial measure for our Company’s employees generally is ROIC.

 

Our performance share unit awards are intended to meet the qualified performance-based compensation exception under Section 162(m). In February 2009, the Compensation Committee approved adjustments to the calculation of results under the 2006 awards that had a performance period ended December 31, 2008 to exclude the effect significant tax audit settlements had on the equity components of the calculation of ROIC. The adjustments increased the payouts of the 2006 awards and, as a result, the 2006 awards no longer satisfied the qualified performance-based compensation exception. This resulted in an increased tax expense to the Company of approximately $1.1 million, based on the federal and state combined statutory rate of 39%. The Compensation Committee believes that the adjustments were necessary and appropriate, particularly because the tax audit settlements were not reflective of operating performance. Further, it is important and consistent with the Company’s compensation philosophy that extraordinary, unusual, and one-time items do not affect the payout expected based on performance. Modifications were made to the terms of awards granted in 2007 and later to allow for payouts under those awards to be fully deductible under Section 162(m).

 

Stock Options — In 2010, the Compensation Committee decided to re-introduce stock options as a component of the equity compensation awarded to our named executive officers in order to direct focus on increasing the market value of our Common Stock. Stock options were granted in the first quarter of 2010 in connection with the annual grant of long-term equity awards at a regularly scheduled Compensation Committee meeting. The number of options granted to the named executive officers was based on a dollar value of compensation decided by the Compensation Committee; the actual number of stock options granted was determined by assigning a value to the options using an option pricing model, and dividing the dollar value of compensation by the value of each option. The stock options will vest in 25% increments on the first two anniversaries of the date of grant and the remaining 50% will vest on the third anniversary. The exercise price of the options is the fair market value of our Common Stock on the date of grant, and the options have a

term of 10 years. More information regarding the Compensation Committee’s practices related to stock options will be included in next year’s CD&A discussing 2010 compensation.

 

Post-Employment Compensation — The compensation our named executives receive post-employment is based on provisions included in individual equity award agreements, retirement plan documents and employment agreements. We enter into employment agreements with our named executive officers because they provide a form of protection for the Company through restrictive covenant provisions. They also provide the individual with the protection that he will be treated fairly in the event of a termination not for cause or under a change-in-control situation. The change-in-control provision included in each named executive officer’s agreement requires a double trigger in order to receive any payment in the event of a change-in-control situation. First, a change-in-control must occur, and second the individual must terminate his employment for good reason or the Company must terminate his employment without cause within six months prior to or two years following the change-in-control event. We believe providing a change-in-control protection ensures impartiality and objectivity of our named executive officers in the context of a change-in-control situation and protects the interests of our stockholders.

 

In August 2005, the Compensation Committee approved an Executive Officer Severance Policy. The policy generally provides that after the effective date of the policy, the Company may not enter into severance arrangements with its executive officers, as defined in the federal securities laws, that provide for benefits, less the value of vested equity awards and benefits provided to employees generally, in an amount that exceeds 2.99 times the executive officer’s then current base salary and target bonus, unless such future severance arrangement receives stockholder approval. The policy applies to all of our named executive officers.

 

Deferral Plan — Each of our named executive officers is eligible to participate in our 409A Deferred Savings Plan. The plan allows all employees with a minimum base salary of $170,000 to defer up to 25% of their base salary and up to 100% of their annual bonus (“eligible pay”) for payment at a future date. Under the plan, the Company matches the portion of pay that cannot be matched in the Company’s 401(k) Savings Plan due to IRS limits. The Company match provided under the 401(k) Savings Plan and the Deferral Plan is dollar for dollar on the first 3% of eligible pay, and fifty cents on the dollar for the next 3% of eligible pay. Participants can contribute the entire amount of their eligible pay to the Deferral Plan. Contributions in excess of the 6% will not be matched but will be tax-deferred. Company matching contributions begin in the Deferral Plan once the employee has reached the IRS limits in the 401(k) plan. Funds deferred under this plan are allocated into accounts that mirror selected investment funds in our 401(k) plan, although the funds deferred are not actually invested in the funds. We believe that providing a program that allows and encourages planning for retirement is a key factor in our ability to attract and retain talent. Additional details on the plan can be found in the Nonqualified Deferred Compensation table and the footnotes to the table on page 35.

 

Perquisites — In the beginning of 2008, we eliminated all perquisites for our executive officers. At that time, each of the named executive officers was given a one-time increase to his salary in an amount equal to the value of the perquisites, reduced for the impact that the increase would have as a result of annual bonuses being calculated as a percentage of base salary in that year. Our named executive officers will continue to receive an annual physical examination that is treated as a non-taxable benefit because it is required for the benefit of the Company.

 

Based on a periodic security assessment by an outside consultant, for security purposes, the Company requires the Chief Executive Officer to use the Company’s aircraft for business and personal use. Use of the Company’s aircraft is permitted for other employees’ personal use only with Chief Executive Officer approval in special circumstances, which does not occur often. All of our named executive officers are taxed on the value of their personal use of the Company’s airplanes, if any, in accordance with IRS regulations using the Standard Industry Fare Level formula. This is a different amount than we disclose in the Summary Compensation Table, which is based on the SEC requirement to report the incremental cost to us of their use.

 

Other Compensation Policies and Practices

 

Stock Ownership Requirements — All of our named executive officers are subject to stock ownership guidelines. We instituted stock ownership guidelines because we believe that ownership of Company stock

demonstrates a commitment to, and confidence in, the Company’s long-term prospects and further aligns employees’ interests with those of our stockholders. We believe that the requirement that these individuals maintain a portion of their individual wealth in the form of Company stock deters actions that would not benefit stockholders generally. Additionally, the guidelines contain holding period provisions that generally require Senior Vice Presidents and above to hold all of their shares and Vice Presidents to hold 50% of their shares for at least one year, even after required ownership levels have been achieved. We believe these holding periods discourage these individuals from taking actions in an effort to gain from short-term or otherwise fleeting increases in the market value of our stock.

 

The stock ownership guidelines vary dependent on the individual’s title and are expressed as a fixed number of shares. Ownership requirements range from one to five times base salary as of the later of January 2005 or date of promotion into current position. The number of shares required to be owned is determined based on a $30.00 stock price, which was the market value of shares of our Common Stock when the guidelines were adopted. The Compensation Committee regularly reviews its ownership guidelines to ensure that the appropriate share ownership requirements are in place. Shares owned outright, deferred stock units, phantom stock held in the 401(k) plan and in the Deferral Plan count toward meeting the targeted ownership requirements. Restricted stock shares, restricted stock units and performance share units, if any, do not count toward meeting the guideline until they are vested or earned.

 

The following table outlines the ownership requirements for the named executive officers, each of whom had until January 2009 to meet the ownership levels:

 

 

Insider Trading — The Company maintains an insider trading policy that prohibits the named executive officers from engaging in most transactions involving the Company’s Common Stock during periods, determined by the Company, that those executives are most likely to be aware of material inside information. Named executive officers must clear all of their transactions in our Common Stock with the Company’s General Counsel’s office to ensure they are not transacting in our securities during a time that they may have material, non-public information. Additionally, as a general matter, it is our policy that no transactions that reduce or cancel the risk of an investment in our Common Stock, such as puts, calls and other exchange-traded derivatives, or hedging activities that allow a holder to own a covered security without the full risks and rewards of ownership, will be cleared.

 

We are required to present compensation information in the tabular format prescribed by the SEC. This format, including the tables’ column headings, may be different from the way we describe or consider elements and components of compensation internally. We have provided the following information because we believe it may be useful to an understanding of the tables presented in this section. The CD&A contains a discussion that should be read in conjunction with these tables to gain a complete understanding of our executive compensation philosophy, programs and decisions.

 

 

The value of stock awards included in the tables is the aggregate fair value of the awards on the date of grant. For the restricted stock units granted in 2007, this means that the entire grant date fair value of the awards is included in the table even though the awards vested in full after a three-year service period ended in January 2010. In the case of performance share units, the value is based on what we believe the most probable outcome is at the date of grant, and excludes the effect of forfeitures. The grant date fair values in the tables are based on the “grant date” for accounting purposes, which generally is the date on which the material terms of the awards have been communicated to the named executives. The Compensation Committee determines the dollar value of equity awards at a meeting that precedes the date of grant, and determines a number of performance share units to be granted based on a thirty day trailing average of the market price of our Common Stock. As a result, the amounts in the tables show the grant date fair value for accounting purposes, which differs from the “value” of the awards granted by the Compensation Committee as shown in the CD&A on page 27 of this Proxy Statement. These values are neither guarantees of performance by the Company nor compensation to the executives. Rather, they generally are the aggregate amounts the named executives may receive three years in the future if they and the Company meet expectations set by the Compensation Committee. We believe these values are helpful to readers, as they give the reader an understanding of the named executives’ potential compensation, and the amounts the Compensation Committee deemed appropriate compensation after the three-year period if the Company performed at target.

 

 

Summary Compensation Table

 

 

 

 

 

 

 

Mr. Steiner is required by us to use the Company aircraft for all travel, whether for personal or business purposes. We calculated the amount of the perquisite based on the incremental cost to us, which includes fuel, crew travel expenses, on-board catering, landing fees, trip related hangar/parking costs and other variable costs. We own or operate our aircraft primarily for business use; therefore, we do not include the fixed costs associated with the ownership or operation such as pilots’ salaries, purchase costs and non-trip related maintenance.

 

The amounts reported under “Other” include infrequent items that do not fall within any of the other categories. The amounts reported under “Other” for Mr. Woods relate to an airline club membership and a Company-sponsored entertainment event, and include the amounts of the gross-ups provided by the Company for the taxes owed on those perquisites.

 

Grant of Plan-Based Awards in 2009

 

 

 

Outstanding Equity Awards at December 31, 2009

 

 

 

 

Option Exercises and Stock Vested in 2009

 

 

 

 

Nonqualified Deferred Compensation in 2009

 

 

 

 

 

Potential Payments Upon Termination or Change-in-Control

 

The Company has entered into employment agreements with each of the named executive officers. The agreements contain provisions regarding consideration payable by the Company upon termination of employment as described below. In some cases, the form of award agreements for equity awards may also contain provisions regarding termination or change-in-control. Each of the agreements also contains post-termination restrictive covenants, including a covenant not to compete, non-solicitation covenants, and a non-disparagement covenant, each of which lasts for two years after termination.

 

We entered into employment agreements with our named executive officers based on competitive market practices and because they provide a form of protection for the Company through restrictive covenant provisions. They also provide the named executives a sense of security and trust that they will be treated fairly in the event of a termination not for cause or under a change-in-control situation. We believe change-in-control protections ensure impartiality and objectivity for our named executives and enhance the interest of our stockholders.

 

Employment agreements entered into with named executive officers after February 2004 include a clawback feature that allows for the suspension and refund of termination benefits for subsequently discovered cause. These provisions are applicable to Mr. Simpson and Mr. Woods, whose agreements were entered into in October 2004. The agreements generally allow the Company to cancel any remaining payments due and obligate the named executive to refund to the Company any severance payments already made if, within one year of termination of employment of the named executive by the Company for any reason other than for cause, the Company determines that the named executive could have been terminated for cause. Additionally, in August 2007, the Compensation Committee adopted an Executive Compensation Clawback Policy. The purpose of the policy is to set forth guidelines as to when the Company should seek reimbursement of payments that are predicated on the achievement of financial results. Generally, the policy allows the Compensation Committee to require reimbursement when there has been intentional or reckless conduct that caused financial results to materially increase an award or payment.

 

The terms “Cause,” “Good Reason,” and “Change-in-Control” as used in the table below are defined in the executives’ employment agreements and have the meanings generally described below. You should refer to the individual agreements for the actual definitions.

 

“Cause” generally means the named executive has:

 

 

“Good Reason” generally means that, without the named executive’s consent:

 

 

“Change-in-Control” generally means that:

 

 

The following tables represent potential payouts to our named executives upon termination of employment in the circumstances indicated pursuant to the terms of their employment agreements. In the event a named executive is terminated for cause, he is entitled to any accrued but unpaid salary only.

 

The payouts assume the triggering event indicated occurred on December 31, 2009, at which time the closing price of our Common Stock was $33.81 per share. These payouts are determined for SEC disclosure purposes and are not necessarily indicative of the actual amounts the named executive would receive. Any actual performance share unit payouts will be based on future performance of the Company. We have based the payout of performance share units included in the amounts below on target awards outstanding at December 31, 2009. The payout for continuation of benefits and perquisites is an estimate of the cost the Company would incur to continue those benefits.

Potential Consideration upon Termination of Employment:

 

David P. Steiner