BEAM INC DEF 14A 2011
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
Fortune Brands, 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):
520 Lake Cook Road, Deerfield, Illinois 60015
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
March 7, 2011
Dear Fellow Stockholders:
We are pleased to invite the stockholders of Fortune Brands, Inc. (Fortune Brands or the Company) to attend the Annual Meeting of Stockholders to be held on Tuesday, April 26, 2011 at 1:30 p.m. (CDT) at The Hilton Northbrook, 2855 N. Milwaukee Avenue, Northbrook, Illinois. We will consider the following matters:
such other business as may properly come before the meeting.
Stockholders of record at the close of business on February 25, 2011, the record date for the meeting, are entitled to vote at the Annual Meeting.
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SUBMIT YOUR PROXY OR VOTING INSTRUCTIONS AS SOON AS POSSIBLE. You may submit your proxy (1) by mail using a traditional proxy card, (2) by telephone at 1-800-690-6903, or (3) through the Internet at www.proxyvote.com.
PLEASE CONFIRM YOUR PREFERENCE FOR ELECTRONIC DELIVERY OF FUTURE ANNUAL MEETING MATERIALS. You can expedite delivery of your annual meeting materials and avoid costly mailings by confirming in advance your preferred method of delivery. For further information on how to take advantage of this cost-saving service, please refer to the accompanying proxy card.
This Proxy Statement and accompanying proxy are being distributed on or about March 11, 2011.
Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Stockholders to be Held On Tuesday, April 26, 2011.
The Notice of Annual Meeting, Proxy Statement and the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 are available at www.proxyvote.com
TABLE OF CONTENTS
FREQUENTLY ASKED QUESTIONS
Why am I receiving these materials?
The Company has made these materials available to you on the Internet or has delivered printed versions of these materials to you by mail in connection with the solicitation of proxies on behalf of the Board of Directors for use at our Annual Meeting of Stockholders on April 26, 2011. This Proxy Statement describes the matters on which you, as a stockholder, are entitled to vote. It also gives you information on these matters so that you can make an informed decision.
Why did I receive a one-page Notice in the mail regarding the Internet availability of proxy materials this year instead of printed proxy materials?
As a cost savings measure, the Securities and Exchange Commission (SEC) permits companies to furnish proxy materials to stockholders by providing access to these documents over the Internet instead of mailing a printed copy. Accordingly, we mailed a Notice of Internet Availability of Proxy Materials (the Notice) to selected stockholders. These stockholders have the ability to access, view and print the proxy materials on a website referred to in the Notice and request a printed set of proxy materials.
Can I get electronic access to the proxy materials if I received printed materials?
Even if you received a printed copy of our proxy materials, you may choose to receive future proxy materials by email. Choosing to receive your future proxy materials by email will lower our costs of delivery and will reduce the environmental impact of our Annual Meeting. If you choose to receive our future proxy materials by email, you will receive an email next year with instructions containing a link to view those proxy materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it or for so long as the email address provided by you is valid.
What items will be voted on at the Annual Meeting?
Stockholders will vote on the following items at the Annual Meeting, if each is properly presented at the meeting:
In addition, management will respond to questions from stockholders.
What are the Boards voting recommendations?
The Boards recommendation is set forth together with the description of each Item in this Proxy Statement. In summary, the Board recommends a vote FOR:
Who is entitled to vote?
Only stockholders who owned the Companys common stock or $2.67 Convertible Preferred Stock of record at the close of business on February 25, 2011 are entitled to vote. Each holder of common stock is entitled to one vote per share. Each holder of $2.67 Convertible Preferred Stock is entitled to three-tenths (0.3) of one vote per share. The common stock and $2.67 Convertible Preferred Stock are voted together as a single class. There were 153,646,394 shares of common stock and 160,164 shares of $2.67 Convertible Preferred Stock outstanding on February 25, 2011.
What is the difference between being a record holder and a beneficial owner of shares held in street name?
A record holder holds shares directly in his or her own name with the Companys transfer agent. Shares held in street name refer to shares that are held in the name of a bank or broker on a persons behalf. The majority of stockholders hold their shares in street name. For such shares, the bank or broker is considered the shareholder of record for purposes of voting at the Annual Meeting. As a beneficial owner, you have the right to direct that organization on how to vote the shares held in your account.
How do I vote?
If you received a Notice in the mail, you can either vote by Internet (www.proxyvote.com) or in person at the Annual Meeting. Record holders that received a copy of this Proxy Statement and accompanying proxy card in the mail can vote by filling out the proxy card and returning it in the postage paid return envelope. Record holders that receive these materials in the mail may also vote in person at the Annual Meeting of Stockholders, by telephone (800-690-6903) or by Internet (www.proxyvote.com). Voting instructions are provided on both the Notice of Internet Availability and the proxy card.
If you hold shares in street name, you must vote by giving instructions to your bank or broker. You should follow the voting instructions on the form that you receive from your bank or broker. The availability of telephone and Internet voting will depend on your banks or brokers voting process.
How will my proxy be voted?
Your proxy card, when properly signed and returned to us, or processed by telephone or via the Internet, and not revoked, will be voted in accordance with your instructions. We are not aware of any other matter that may be properly presented other than those described above. If any other matter is properly presented, the persons named in the enclosed proxy card will have discretion to vote in their best judgment.
If you hold shares in street name, your bank or broker is permitted to use its own discretion and vote your shares on certain routine matters (such as Items 2 and 5) if you have not provided voting instructions. Your bank or broker is not permitted to use discretion and vote your shares on non-routine matters (such as Items 1, 3, 4 and 6). Therefore, we urge you to give voting instructions to your broker on all six voting items. Shares that are not permitted to be voted by your broker with respect to any matter are called broker non-votes. Broker non-votes are not considered votes for or against, or entitled to vote with respect to, a proposal and will have no direct impact on any proposal.
What if I dont mark the boxes on my proxy?
Unless you give other instructions on your proxy card, or unless you give other instructions when you cast your vote by telephone or the Internet, the persons named as proxies will vote in accordance with the recommendations of the Board of Directors.
How many votes are needed to approve an item?
The nominees for director, in non-contested elections, must receive a majority of the votes cast at the meeting, in person or by proxy, to be elected. Under the Companys majority vote by-law provision relating to the election of directors, if the number of votes cast for a director nominee does not exceed the number of votes cast against the director nominee, then the director must tender his or her resignation from the Board promptly after the certification of the stockholder vote. The Board will decide within 90 days of that certification, through a process managed by the Nominating and Corporate Governance Committee and excluding the nominee in question, whether to accept the resignation. The Boards explanation of its decision will be promptly disclosed in a filing with the SEC. A proxy card marked to abstain authority for the election of one or more directors will not be voted with respect to the director or directors indicated.
The affirmative vote of shares representing a majority in voting power of the common stock and $2.67 Convertible Preferred Stock, voting together as a single class, present in person or represented by proxy at the meeting and entitled to vote is necessary for approval of Items 2, 4 and 6. The affirmative vote of a majority of the voting power of the Companys outstanding common stock and $2.67 Convertible Preferred Stock, voting together as a single class, is required for approval of Item 5. Proxy cards marked as abstentions on Items 2, 4, 5 and 6 will not be voted and will have the effect of a negative vote. With respect to Item 3, stockholders may vote in favor of holding the vote on named executive officer compensation every year, every two years or every three years, and they may also choose to abstain. The Board will take the voting
results on such proposal into account in determining whether to hold the advisory vote on executive compensation every year, every two years or every three years. Abstentions will have no effect on the outcome of Item 3.
Please note that brokers are not, in the absence of voting instructions from you, permitted to vote your shares on Items 1 (the election of directors), 3 (the frequency of the vote on executive compensation), 4 (the advisory vote on executive compensation), and 6 (approval of the Long-Term Incentive Plan). Therefore, it is important that you follow the voting instructions on the form that you receive from your broker.
Can I go to the Annual Meeting if I vote by proxy?
Yes. Attending the meeting does not revoke your proxy.
How can I revoke my proxy?
You may revoke your proxy at any time before it is actually voted by giving written notice to the Secretary of the Company or by delivering a later dated proxy.
Do I have dissenters rights?
Under Delaware law, dissenters rights are not available to holders of common stock and $2.67 Convertible Preferred Stock in connection with the Items to be acted upon at the Annual Meeting.
Will my vote be public?
As a matter of policy, stockholder proxies, ballots and tabulations that identify individual stockholders are not publicly disclosed, but are available to the independent Inspector of Election, the proxy solicitation firm and certain employees of the Company.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a majority in voting power of the outstanding shares of common stock and $2.67 Convertible Preferred Stock entitled to vote will constitute a quorum. Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.
What if I am a participant in the Fortune Brands Retirement Savings Plan or the Fortune Brands Hourly Employee Retirement Savings Plan?
We are mailing this Proxy Statement and a proxy card to participants in the Fortune Brands Retirement Savings Plan and the Fortune Brands Hourly Employee Retirement Savings Plan (collectively, the Savings Plans) who invest in the Fortune Brands Stock Fund under the Savings Plans. The Trustee, as record holder of Fortune Brands common stock held in the Savings Plans, will vote whole shares attributable to your interest in the Fortune Brands Stock Fund in accordance with your directions given on the proxy card, by telephone or the Internet. If you invest in the Fortune Brands Stock Fund under the Savings Plans and you sign and return the enclosed proxy card, we will forward it to the Trustee of the Savings Plans. The proxy card will serve as instructions to the Trustee to vote the whole shares attributable to your interest in the manner you indicate on the card.
ELECTION OF DIRECTORS
The Board of Directors (the Board) consists of 10 members and is currently divided into two classes. Each term expires in successive years, with the term of the Class I directors expiring at the 2011 Annual Meeting and the term of the Class II directors expiring at the 2012 Annual Meeting. All directors will be elected annually beginning with the 2012 Annual Meeting of Stockholders. The Board proposes that the six nominees described below, each of whom is currently serving as a Class I director, be re-elected to Class I for a new term of one year expiring at the 2012 Annual Meeting of Stockholders and until their successors are duly elected and qualified. All nominees and all current Class II directors were elected by the stockholders. Proxies cannot be voted for more than the number of nominees proposed for re-election.
Each of the nominees has consented to be named as a nominee and to serve as director if elected. If any of them should become unavailable to serve as a director (which is not now expected), the Board may designate a substitute nominee. In that case, the persons named as proxies will vote for the substitute nominee designated by the Board.
The names of the nominees and the current Class II directors, along with their present positions, their principal occupations and directorships held with other public corporations during the past five years, their ages and the year first elected as a director of the Company, are set forth below.
Summary of Qualification of Directors
The Board believes that it is necessary for each of the Companys directors to possess many qualities and skills. When searching for new candidates, the Nominating and Corporate Governance Committee (the Nominating Committee) considers the evolving needs of the Board and searches for candidates that fill any current or anticipated future gap. The Board also believes that all directors must possess a considerable amount of business management experience (such as experience as a chief executive or chief financial officer) and educational experience. The Nominating Committee first considers a candidates management experience and then considers issues of judgment, background, stature, conflicts of interest, integrity, ethics and commitment to the goal of maximizing stockholder value when considering director candidates. The Nominating Committee also focuses on issues of diversity, such as diversity of gender, race and national origin, education, professional experience and differences in viewpoints and skills. The Nominating Committee does not have a formal policy with respect to diversity; however, the Board and the Nominating Committee believe that it is essential that the Board members represent diverse viewpoints. In considering candidates for the Board, the Nominating Committee considers the entirety of each candidates credentials in the context of these standards. With respect to the nomination of continuing directors for re-election, the individuals contributions to the Board are also considered.
The process undertaken by the Nominating Committee in recommending qualified director candidates is described below under Corporate Governance Director Nomination Process (see pages 11 and 12 of this Proxy Statement). The Board believes that there are
certain general requirements which are mandatory for service on the Companys Board of Directors, while there are other skills and experiences that should be represented on the Board as a whole but not necessarily by each individual Director.
General requirements for all directors:
Experiences, qualifications, and backgrounds to be represented on the Board as a whole:
Certain individual qualifications and experiences of our directors that contribute to the Boards effectiveness as a whole are described in the following paragraphs.
The Board of Directors recommends that you vote FOR the election of each nominee.
Corporate Governance Principles
The Board has adopted Corporate Governance Principles, which are available at www.fortunebrands.com/about/policies.cfm. The Principles describe our corporate governance practices and address corporate governance issues such as Board composition and responsibilities, compensation of directors and executive succession planning.
The Companys Corporate Governance Principles provide that a majority of the members of the Board, and each member of the Audit, Compensation and Stock Option and Nominating and Corporate Governance Committees, must meet certain criteria for independence. Based on the New York Stock Exchange independence requirements, the Corporate Governance Principles set forth certain guidelines to assist the Board in its determination of director independence.
Based on the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles, Messrs. Goldstein, Leroy, Mackay, Thomas, Waters and Wilson, Mrs. Hackett and Mrs. Tatlock were affirmatively determined by the Board to be independent. Due to Mr. Wesleys prior employment with the Company, he is not considered independent. When determining each directors independence, the Board considered charitable contributions made by the Company to organizations with which each director is affiliated. All such charitable relationships were deemed immaterial.
Also, none of the non-employee directors has any relationship with the Company other than being a director and stockholder, or any transaction or arrangement that interferes with such directors independence, except for Mr. Wesley by virtue of his prior employment with the Company.
Policies with Respect to Transactions with Related Persons
The Nominating Committee and the Board have adopted a Code of Business Conduct and Ethics which sets forth various policies and procedures intended to promote the ethical behavior of all of the Companys employees, officers and directors. The Code of Business Conduct and Ethics describes the Companys policy on conflicts of interest. The Board has also established a Compliance Committee which is responsible for monitoring compliance with the Code of Conduct. The Compliance Committee periodically reports on the Companys compliance efforts to the Audit Committee and to the Board.
The Board has also established a Conflicts of Interest Committee which distributes a Conflicts of Interest Policy to all of the Companys employees, officers and directors. The Conflicts of Interest Policy describes the types of relationships that may constitute a conflict of interest with the Company. All employees, officers and directors are required to periodically complete a questionnaire about potential conflicts of interest and certify compliance with the Companys policy. The Conflicts of Interest Committee reviews potential conflicts of interest and reports its findings to the Audit Committee.
The executive officers and the Board are also required to complete a questionnaire on an annual basis which requires them to disclose any related person transactions and potential conflicts of interest. The General Counsel reviews the responses to the questionnaires and, if a transaction is reported by a director or executive officer, the questionnaire is submitted to the Chairperson of the Audit Committee for review. If necessary, the Audit Committee will determine whether the relationship is material and will have any effect on the directors independence. After making such determination, the Audit Committee will report its recommendation on whether the transaction should be approved or ratified by the entire Board.
Certain Relationships and Related Transactions
During 2010, the Company did not participate in any transactions in which any of its directors, executive officers, any immediate family member of a director or executive officer or any beneficial owner of more than 5% of the Companys common stock had a direct or indirect material interest.
Director Nomination Process
The Nominating Committee is responsible for, among other things, screening potential director candidates and recommending qualified candidates to the Board for nomination.
When identifying and evaluating candidates, the Nominating Committee first determines whether there are any evolving needs of the Board that require an expert in a particular field. The Nominating Committee may retain a third-party search firm to assist the Committee in locating qualified candidates that meet the needs of the Board at that time. A search firm provides information on a number of candidates, which the Nominating Committee will discuss. The Nominating Committee chair and some or all of the members of the Nominating Committee, as well as the Lead Director (see page 13 of this Proxy Statement for description of the Lead Directors duties) and the Chief Executive Officer, will interview potential candidates that the Nominating Committee deems appropriate. If the Nominating Committee determines that a potential candidate meets the needs of the Board and has the appropriate qualifications, it will recommend the nomination of the candidate to the Board.
It is the Nominating Committees policy to consider director candidates recommended by stockholders, if such recommendations are properly submitted to the Company. Stockholders wishing to recommend persons for consideration by the Nominating Committee as nominees for election to the Board can do so by writing to the Secretary of Fortune Brands, Inc. at 520 Lake Cook Road, Deerfield, Illinois 60015. Recommendations must include the proposed nominees name, biographical data and qualifications, as well as a written statement from the proposed nominee consenting to be named and, if nominated and elected, to serve as a director. Recommendations must also follow the Companys procedures for nomination of directors by stockholders (see page 69 of this Proxy Statement) as provided in our Restated Certificate of Incorporation and By-laws. The Nominating Committee will consider the candidate and the candidates qualifications in the same manner in which it evaluates nominees identified by the Nominating Committee. The Nominating Committee may contact the stockholder making the nomination to discuss the qualifications of the candidate and the stockholders reasons for making the nomination. The Nominating Committee may then interview the candidate if it deems the candidate to be appropriate. The Nominating Committee may use the services of a third-party search firm to provide additional information about the candidate prior to making a recommendation to the Board.
The Nominating Committees nomination process is designed to ensure that the Nominating Committee fulfills its responsibility to recommend candidates that are properly qualified to serve the Company for the benefit of all of its stockholders, consistent with the standards established by the Nominating Committee under the Companys Corporate Governance Principles.
Communication with the Board
The Board and management encourage communication from the Companys stockholders. Stockholders who wish to communicate with the Companys management should direct their communication to the Chairman of the Board and Chief Executive Officer or the Secretary, 520 Lake Cook Road, Deerfield, Illinois 60015. Stockholders, or other interested parties, who wish to communicate with the non-management directors or any individual director should direct their communication c/o the Secretary at the address above. The Secretary will forward communications intended for the Board to the Lead Director, or, if intended for an individual director, to that director. If multiple communications are received on a similar topic, the Secretary may, in his discretion, forward only representative correspondence. Any communications that are abusive, in bad taste or present safety or security concerns may be handled differently.
Board Leadership Structure
The Board believes that the Companys Chief Executive Officer is best situated to serve as Chairman of the Company because he is the director most familiar with the Companys business and industry, and most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy. Independent directors and management have different perspectives and roles in strategy development. The Companys independent directors bring experience, oversight and expertise from outside the Company and industry, while the Chief Executive Officer brings company-specific experience and expertise. The Board believes that the combined role of Chairman and Chief Executive Officer promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance.
One of the key responsibilities of the Board is to develop strategic direction and hold management accountable for the execution of strategy once it is developed. The Board believes the combined role of Chairman and Chief Executive Officer, together with an independent Lead Director having the duties described below, is in the best interest of stockholders because it provides the appropriate balance between strategy development and independent oversight of management.
Mr. Thomas, an independent director who serves as Chairman of the Audit Committee, was selected by the Board to serve as the Lead Director for all meetings of the non-management directors held in executive session. The Lead Director has the responsibility of presiding at all executive sessions of the Board, consulting with the Chairman and Chief Executive Officer on Board and committee meeting agendas, acting as a liaison between management and the non-management directors, including maintaining frequent contact with the Chairman and Chief Executive and advising him or her on the efficiency of the board meetings, facilitating teamwork and communication between the non-management directors and management, as well as additional responsibilities that are more fully described in the Companys Corporate Governance Principles. In addition, the Companys Lead Director facilitates the Boards annual performance assessment of the Chief Executive Officer.
Pursuant to the Companys Corporate Governance Principles, non-management directors of the Board are required to meet on a regularly scheduled basis without the presence of management. The Lead Director chairs these sessions.
Last year there were seven meetings of the Board. Each director attended at least 75% of the total meetings of the Board and committees of the Board of which the director was a member. In addition to participation at Board and committee meetings, our directors regularly engage throughout the year in personal meetings and other communications, including considerable telephone contact with the Chairman and Chief Executive Officer, the Lead Director and others regarding matters of interest and concern to the Company.
The Company does not have a formal policy requiring members of the Board to attend the Annual Meeting, although all directors are strongly encouraged to attend. Nine of the ten directors were present at the 2010 Annual Meeting of Stockholders.
The responsibility for the day-to-day management of risks lies with the Companys management team; however, the Board of Directors has an active role, as a whole and also at the committee level, in overseeing the strategy and process for managing the Companys risks. The Board regularly reviews information regarding the Companys business strategy, leadership development, resource allocation, succession planning, credit, liquidity and operations, as well as the risks associated with each. The Companys overall risk management program consists of periodic management discussions analyzing and mitigating risks, as well as an annual review of risks associated with each of the Companys three operating businesses and quarterly updates to the Audit Committee.
Annually, management identifies external, strategic, operational, financial and compliance risks, assesses the impact of these risks and determines how to mitigate such risks. The Audit Committee manages the Companys risk management program and reviews the results of the annual assessment. Management also provides the Audit Committee with quarterly updates on the Companys risks, changes and/or emerging risks. In addition, the Audit Committee oversees management of the Companys financial risks. The Companys Compensation and Stock Option Committee is responsible for overseeing the management of risks relating to the compensation paid to the Companys executives and the Companys executive compensation plans and programs. During 2010, the Compensation Committees newly engaged consultant, Meridian Compensation Partners, LLP conducted an assessment of the risks associated with the Companys compensation practices and programs. For more information about that assessment see Compensation Risks below. The Nominating and Corporate Governance Committee manages risks associated with the independence of the Board of Directors, potential conflicts of interest and the Companys corporate governance structure. The Corporate Responsibility Committee oversees management of risks associated with environmental, health and safety, diversity, philanthropy, global citizenship and sustainability. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed through committee reports about such risks. The Boards assignment of responsibility for the oversight of specific risks to its committees enables the entire Board, under the leadership of the combined Chairman and Chief Executive Officer and the Lead Director, to better monitor the risks of the Company and more effectively develop strategic direction, taking into account the various risks facing the Company, including the magnitude of management of such risks.
We believe that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. In addition, the Compensation Committee believes that the mix and design of the elements of executive compensation do not encourage management to assume excessive risks. The Compensation Committee, with assistance from its independent compensation consultant, extensively reviewed the elements of executive compensation to determine whether any portion of executive compensation encouraged excessive risk taking and concluded:
Furthermore, as described in our Compensation Discussion and Analysis, compensation decisions include subjective considerations, which restrain the influence of formulae or objective factors on excessive risk taking.
The Board has established an Executive Committee, an Audit Committee, a Compensation and Stock Option Committee, a Nominating and Corporate Governance Committee and a Corporate Responsibility Committee. The Audit, Compensation and Stock Option, and Nominating and Corporate Governance Committees are composed entirely of independent directors, as defined under the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles. The charters of each committee are available on the Companys website at www.fortunebrands.com/about/board.cfm.
A list of current Committee memberships may be found on the Companys website at www.fortunebrands.com/about/board.cfm. The Committee memberships as of the date of this Proxy Statement are set forth below:
The Audit Committee held six meetings in 2010. The Audit Committee also held three teleconferences to review and discuss earnings announcements. The Audit Committees primary functions are to:
Each member of the Audit Committee, as of the date of this Proxy Statement (Messrs. Leroy, Mackay, Thomas and Waters), is financially literate, has accounting or financial management expertise and is an audit committee financial expert as defined in Item 407(d)(5)(ii) and (iii) of Regulation S-K under the Securities Exchange Act of 1934 (the Exchange Act). Each Audit Committee member has also been determined by our Board to be independent as such term is defined in Rule 10A-3 under the Exchange Act, the New York Stock Exchange Listed Company Manual and the Companys Corporate Governance Principles.
Compensation and Stock Option Committee
The Compensation and Stock Option Committee (the Compensation Committee) held six meetings in 2010. The Compensation Committees primary functions are to:
Compensation Committee Procedures
The Compensation Committee directs management to prepare financial data used by the Compensation Committee in determining executive compensation. In addition, members of the Companys human resources department assist in the preparation of executive compensation tally sheets and historical information on compensation paid to executives. The Compensation Committee is presented with recommendations from management and from the Committees independent compensation consultant as to the level and type of compensation to provide to officers who hold the office of Vice President or a more senior office and for the chief executives of our operating companies. Members of the Companys legal department provide the Compensation Committee with general advice on laws applicable to executive compensation and the directors fiduciary duties in setting compensation.
The Chief Executive Officer attends meetings of the Compensation Committee. The Chief Executive Officers feedback about each officers performance is essential in the Compensation Committees determination of the officers salary and target incentive compensation determinations. See pages 23 through 36 of this Proxy Statement for more information about how the Compensation Committee determines the executive officers compensation.
Compensation Committee Consultant
The Compensation Committee is empowered to engage the services of an outside compensation consultant without the involvement of Company management. At the start of 2010, Hewitt served as the Compensation Committees outside compensation consultant, a role Hewitt had filled since January 2000. Hewitt was retained by, and reported directly to, the Compensation Committee during its engagement as
compensation consultant. As outside compensation consultant, Hewitt provided the following services and information to the Compensation Committee:
For its services to the Compensation Committee, Hewitt was paid approximately $45,000 in 2010.
In addition to its services for the Compensation Committee, Hewitt was retained directly by management to provide various human resources-related services for the Company. These services included: pension administration, actuarial and record keeping services; and health and welfare plan consulting and administration services. Hewitt has provided these services directly to the Company for many years. The Compensation Committee did not separately review managements decision to engage Hewitt to provide these services. For services provided directly to the Company, Hewitt was paid approximately $2.75 million in 2010. The Compensation Committee considered the services provided to the Company by Hewitt and concluded that there was not a conflict that would impact the independence of Hewitts advice to the Compensation Committee.
However, in 2010, the Compensation Committee decided to engage a new outside compensation consultant with no business ties to the Company. The Compensation Committee interviewed compensation consultants and ultimately engaged Meridian Compensation Partners, LLC (Meridian) as its new outside compensation consultant. Since its engagement, Meridian has provided similar services to the Compensation Committee as were previously provided by Hewitt. Meridian does not provide any other services to the Company or to management directly. Meridian is prohibited from providing any services to the Company, although it may accept other engagements from the Board or any Board committees.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of our Boards Compensation Committee during the last fiscal year (that is, Messrs. Goldstein, Leroy and Wilson, Mrs. Hackett and Mrs. Tatlock) has (i) served as one of our officers or employees; or (ii) any relationship requiring disclosure under Item 404 of the SECs Regulation S-K. None of our executive officers serve as a member of the board of directors or as a member of a compensation committee of any other company that has an executive officer serving as a member of our Companys Board or our Companys Compensation Committee.
Corporate Responsibility Committee
The Corporate Responsibility Committee held four meetings in 2010. The Corporate Responsibility Committees primary functions are to review and recommend to the Board policies on the Companys responsibilities to its employees and the community. The Committee meets periodically with the Companys and its operating companies personnel to review and discuss each business programs and policies and performance in the areas of:
The Executive Committee did not meet in 2010. The Executive Committee has all the authority of the full Board, except for specific powers that are required by law to be exercised by the full Board. The Executive Committee may not amend the Certificate of Incorporation, adopt an agreement of merger, recommend actions for stockholder approval, amend the by-laws, elect, appoint or remove an officer or director, amend or repeal any resolutions of the Board, fix the Boards compensation, and unless expressly authorized by the Board, declare a dividend, authorize the issuance of stock or adopt a certificate of ownership and merger.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee (the Nominating Committee) met five times in 2010. The Nominating Committees primary functions are to:
Other Corporate Governance Resources
The charters of each committee, the Companys Corporate Governance Principles, the Companys Code of Business Conduct and Ethics and the Companys Code of Ethics for the CEO and Senior Financial Officers are available on the Companys website (www.fortunebrands.com/about/policies.cfm).
2010 Director Compensation
Summary of Director Compensation
The annual fee for services as a non-employee director of the Company was $80,000 during 2010. In addition, members of the Audit Committee (Messrs. Leroy, Mackay, Thomas and Waters) and the Compensation and Stock Option Committee (Messrs. Goldstein, Leroy, Wilson and Mrs. Hackett and Tatlock) received an additional $7,500 for their service on these Committees. In 2010, this fee was pro-rated for the Compensation and Stock Option Committee members as the fee was initiated on May 1, 2010. Also during 2010, the chairperson of each of the Audit, Compensation and Stock Option, Corporate Responsibility and Nominating and Corporate Governance Committees received an additional fee of $15,000 for such service (Messrs. Goldstein, Thomas and Wilson and Mrs. Tatlock). Mr. Thomas received an additional $20,000 for his service as Lead Director.
Each non-employee director receives an annual stock grant that is based on a set dollar value. The number of shares granted is determined by dividing the closing price of the Companys common stock on the grant date into the annual dollar value, rounded to the nearest 100 shares. In April 2010, the Nominating Committee set the dollar value at $115,000 and each non-employee director received 2,100 shares of our common stock under the 2010 Non-Employee Director Stock Plan (Mrs. Hackett deferred receipt of these shares until the January following the calendar year in which she no longer serves as a director of the Company).
2002 Non-Employee Director Stock Option Plan. The 2002 Non-Employee Director Stock Option Plan expired on December 31, 2006. Stock options have not been granted to non-employee directors since 2005; however, some of the non-employee directors continue to hold outstanding stock options granted under this Plan (see Certain Information Regarding Security Holdings on pages 67 and 68 of this Proxy Statement ). Under the terms of the Plan and prior to its expiration, each non-employee director who was first elected to the Board after April 30, 1997 was eligible to receive an annual grant of nonqualified stock options to purchase shares of our common stock under our stockholder-approved 2002 Non-Employee Director Stock Option Plan. The terms of the options granted under this plan are:
The option will be canceled to the extent of the exercise of the limited right.
Stock Ownership of Board Members
In order to more directly align the Boards interests with those of stockholders, the Company expects directors to establish and maintain a significant level of stock ownership. Stock ownership guidelines have been established for directors. The guideline for directors is three times their annual fee. The guidelines allow directors five years from the date of the directors election to the Board to meet the guidelines. All of the directors satisfy the guidelines. For information on the beneficial ownership of securities of the Company by directors and executive officers see Certain Information Regarding Security Holdings on pages 67 and 68.
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Discussion and Analysis (CD&A) section of this Proxy Statement explains the type and amount of compensation provided to the Companys named executive officers (NEOs) in 2010, as well as the principles and processes that the Boards Compensation and Stock Option Committee (Compensation Committee) follows in determining such compensation. The NEOs consist of the Companys Chief Executive Officer, Chief Financial Officer and the three other most highly paid executive officers as of December 31, 2010.
The CD&A is divided into four sections.
In 2010, Fortune Brands achieved its operational, financial and strategic objectives. The Companys three businesses emerged from the severe economic downturn in very strong competitive positions and outperformed their respective industries. Fortune Brands returned to strong growth in sales and even stronger growth in earnings. In addition, management and the Board established, in principle, a plan designed to maximize long-term value for shareholders with the contemplated separation of the three business units in 2011.
Fortune Brands has long believed in a pay-for-performance approach to compensation. The Companys financial results are a starting point for how the Compensation Committee decides to compensate the Chief Executive Officer and other NEOs.
The Committee recognized that the Companys 2010 results were a reflection of managements aggressive actions during the downturn and at the front end of the economic recovery to position the company to best compete now and in the future. Over the course of the downturn, management prepared for recovery by focusing on consumers, cost, and cash. Accordingly, we strengthened the position of our brands in the marketplace, improved our cost structures and the productivity of our supply chains, and enhanced our financial strength and flexibility. We went on offense at the front end of the recovery, making targeted investments in 2010 that helped us build profitable market share with successful new product innovations, brand-building programs, new business wins and strong growth in key international markets. The spirits business increased its strategic investment and gained momentum in key markets, delivered a record year of innovation and enhanced its organizational structure to help drive sustainable long-term growth. The home and security business significantly outperformed the home products market, won substantial new business, launched successful new products and leveraged its lean and flexible supply chains to drive very strong profit growth. The golf business strengthened its global leadership position with sustained new product innovations and successful international growth initiatives.
The Companys results and operating strength contributed to the 2010 decision to proceed with a separation of the three business units in 2011 to maximize long-term value for shareholders. This decision was the result of a lengthy, rigorous and thorough review of various options to best serve the interests of shareholders and was accelerated by the fact that the businesses emerged from the downturn in stronger positions than even we had anticipated. The reaction of shareholders and the financial markets was very favorable and contributed to the total shareholder return achieved in 2010.
Pay for Performance in 2010
The Compensation Committee and the Company strive to create a pay for performance culture. The Compensation Committees and the Companys compensation actions for 2010 reflected the Companys strong financial results, as detailed below.
Key Compensation Initiatives for 2010
During 2010, the Company made certain changes to elements of the compensation program so as to better align our executive compensation structure with current market practices. The Compensation Committee:
Summary of Long Standing Compensation Practices
The Compensation Committee is committed to maintaining the Companys excellent compensation practices. The following long standing practices remained in effect in 2010:
Compensation Philosophy and Policies
Objectives and Principles
The Compensation Committee has the following objectives for its executive compensation program:
In support of these objectives, the Compensation Committee formalized the following guiding principles for setting and awarding executive compensation:
Pay for Performance
The Compensation Committee believes that the majority of an NEOs compensation should be dependent upon Company performance. Exceptional performance should result in increased compensation; missing performance goals should reduce the amount of incentive compensation that is paid. The Compensation Committee has consistently adhered to the Companys pay for performance philosophy. For example, as the recent economic downturn negatively affected Company performance, so has it negatively impacted incentive compensation levels within the Company. No bonuses were paid to NEOs for the 2008 year based upon Company performance. Furthermore, as a result of Company performance, performance shares for the 2006-2008, 2007-2009 and 2008-2010 performance periods did not pay out. These results have caused
compensation realized by NEOs to go down significantly over the last three years, further illustrating the Companys commitment to the pay for performance philosophy. See the W-2 Compensation Table on page 39 of this Proxy Statement for more information about the NEO compensation paid in 2008, 2009 and 2010.
In 2010, the Compensation Committee instituted a new clawback policy with respect to incentive compensation. The clawback policy mitigates the risks associated with the Companys compensation policies, because certain executive employees will be required to repay compensation in the circumstances identified in the policy. The clawback policy gives the Board the discretion to seek recoupment of the incentive based compensation paid or granted to certain executive officers in the event of a material restatement of the Companys financial statements (other than to comply with changes in applicable accounting principles). The Compensation Committee will reevaluate and, if necessary, revise the Companys clawback policy to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act once the rules implementing the clawback requirements have been finalized by the SEC.
Prohibition on Hedging Risk of Owning Company Stock
To more directly align managements interests with stockholders interests and concurrently limit excessive risk-taking by management, the Company has a formal policy prohibiting any director, officer (Vice President and above) or chief executive officer of a first-tier subsidiary from hedging the risk of owning Fortune Brands stock or from trading in derivatives of the Companys stock.
Stock Ownership Guidelines
To further align managements interests with those of stockholders, the Company expects executives and directors to establish and maintain a significant level of stock ownership. In 2010, the Compensation Committee raised the stock ownership guidelines for the Chief Executive Officer, Senior Vice Presidents and Chief Executive Officers of each of the Companys operating subsidiaries. The new guidelines are:
The guidelines allow executives five years from the date of hire or promotion, as applicable, to satisfy the guidelines. In 2010, the Compensation Committee determined that all five NEOs satisfied the guidelines, four of whom met the applicable multiple of salary and one who had not held his current position for five years.
The Compensation Committee reviews the competitiveness of the Companys executive compensation program by comparison to market practices. For this purpose, the Compensation Committee uses a comparison group of consumer products companies
(the Survey Group). Hewitt Associates, Inc. (Hewitt), the Compensation Committees outside compensation consultant at the time, recommended the companies to be included in the Survey Group. After careful consideration, the Compensation Committee approved the composition of the Survey Group.
In 2010, the Survey Group consisted of 19 consumer products companies with median 2009 revenue of $7.7 billion compared to the Companys 2009 total revenue of $6.7 billion. For 2010, the Company eliminated five companies (3M, Anheuser-Busch, Emerson Electric, Kraft Foods and Unilever NV) that were in the 2009 Survey Group. The companies in the 2010 Survey Group are either primary competitors of the Company or are premier consumer products companies of similar size and scale, including global operations. In either case, we believe that we compete with these companies for executive talent. The 2010 Survey Group consists of:
Generally, the Compensation Committee benchmarks the Companys executive compensation program against the Survey Group. At the beginning of 2010, the Compensation Committee generally targeted base salaries and total direct compensation for NEOs to fall between the 50th and 75th percentiles of the Survey Group. Later in the year, the Compensation Committee revised its target to be the 50th percentile of the Survey Group for 2011 compensation. The Compensation Committee uses this benchmark as a guideline, not a rigid requirement. The Compensation Committee may determine with respect to one or more individuals, including an NEO, that it is appropriate to deviate from a benchmark with respect to a particular compensation element or total compensation. The factors that go into a decision to deviate from a specific benchmark may include market competition for a particular position, an individuals possession of a unique skill or knowledge set, proven leadership capabilities, or amount of experience with the Company in their current role.
For 2010, Mr. Carbonaris target and actual total compensation were both below the 50th percentile of the Survey Group. The average target and actual total 2010 compensation for the NEOs as a group fell between the 50th and 75th percentiles.
Role of the Compensation and Stock Option Committee
Compensation Committees Purpose and Duties
The purpose of the Compensation Committee is to discharge the responsibilities of the Companys Board of Directors relating to the compensation of the Companys NEOs, officers who hold the office of Vice President or above, and the chief executive officers of each of our operating subsidiaries. The Compensation Committee ensures that the NEOs and other members of management are compensated in a manner that is consistent with
competitive practices, individual and Company performance and applicable legal requirements. The Compensation Committee is also responsible for developing the compensation principles and philosophy discussed above.
Compensation Committees Use of an Outside Consultant
The Compensation Committee directly retains a nationally recognized firm, Meridian Compensation Partners, LLC (Meridian), as its outside compensation consultant, to provide advice and recommendations on the amount and form of executive compensation. During 2010, the Compensation Committee used Hewitt Associates as its compensation consultant until it engaged Meridian. The consultants regularly met with the Compensation Committee and were included during executive sessions without the presence of management. In 2010, the outside consultants attended five out of six Compensation Committee meetings. Meridian is prohibited from providing any services to the Company or management, although it may accept engagements from other committees of the Board. Please see Corporate Governance Board Committees Compensation and Stock Option Committee Compensation Committee Consultant for further information regarding the Compensation Committees use of Hewitt Associates and Meridian.
Process for Determining NEO Compensation
The process for determining the Chief Executive Officers compensation is different than the process for the other NEOs. At the beginning of each year, the Board discusses the Chief Executive Officers performance goals in a variety of areas such as the Companys financial results (including specific performance goals used in our incentive plans), performance against direct competitors in our markets, operational and portfolio strategy, balance sheet flexibility, stock performance, succession planning, diversity and corporate governance. The entire Board (absent the Chief Executive Officer) assesses the Chief Executive Officers performance. The Chairwoman of the Compensation Committee and the Lead Director of the Board then meet with the Chief Executive Officer to provide him with the Boards assessment of his performance. The Compensation Committee next analyzes the competitive benchmarking data supplied by its outside compensation consultant in conjunction with the Boards assessment of the Chief Executive Officers performance and then sets his total compensation. (See pages 27 and 28 of this Proxy Statement for information regarding such competitive data.) The Compensation Committee then discusses its actions with respect to setting the Chief Executive Officers compensation with the Board, in Executive Session.
For NEOs other than the Chief Executive Officer, the Chief Executive Officer reviews each NEOs performance with the Compensation Committee, where he recommends compensation levels for the NEOs other than himself. The Chief Executive Officers recommendations take into account benchmarking data and may include subjective individual considerations based upon his day-to-day interactions with each NEO, such as individual job performance, incumbent experience, retention concerns, and an executives ability to impact future results for the Company. The Compensation Committee will combine this information with objective factors, such as the Companys performance and benchmarking data, and the Compensation Committee will also use their own knowledge and experience in working with each NEO when setting compensation levels.
When setting compensation levels, the Compensation Committee utilizes tally sheets containing the information shown in the tables on pages 37, 42, 44 and 48 of this
Proxy Statement for each NEO including the Chief Executive Officer, to assist it in analyzing the NEOs total compensation and various individual elements of their compensation, as well as potential accumulated wealth under the Companys equity programs. This analysis also includes a review of potential compensation payable in connection with a separation of employment under various separation scenarios. The tally sheets provide context for the Compensation Committee in the determination of the elements and total compensation paid to each NEO.
Elements of the Executive Compensation Program
The Company provides a number of types of compensation to the NEOs, some of which are fixed and some of which are variable and dependent upon Company performance. The mix of elements allows the Company to achieve all of the Compensation Committees objectives for the executive compensation program, from retention of the management team to the alignment of managements interest with those of the Companys stockholders.
In 2010, 84% of compensation awarded to the Chief Executive Officer was variable and performance based, while on average, 72% of total compensation awarded to the other NEOs was performance-based. The high percentage of performance-based compensation reinforces the Companys emphasis on paying for performance.
The Compensation Committee reviews base salary levels for the NEOs annually. The Compensation Committee considers competitive market data but also considers other factors, such as exceptional individual performance, retention concerns or tenure with the Company.
All of the NEOs received base salary increases in 2010. Historically, the Compensation Committee has awarded base salary increases every year. However, in response to the global economic downturns effect on Company performance, none of the NEOs received base salary increases in 2009. In late 2009 and early 2010, the Companys performance began showing improvement. In light of the Companys improving performance and in recognition that no salary increases had been made since 2008, the Compensation Committee awarded salary increases in 2010, as follows:
Annual Incentive Bonuses
The Compensation Committee believes that an annual cash incentive bonus helps achieve the objectives of the Companys executive compensation program by aligning a significant portion of NEOs cash compensation with performance results. Annual incentive bonuses motivate executives to achieve short-term financial and operating results. In addition, the annual bonus opportunity contributes to the competitiveness of cash compensation levels.
The Companys Annual Plan rewards Company performance that meets or exceeds EPS targets set by the Compensation Committee at the beginning of each performance period. To determine annual bonus amounts, the Compensation Committee first sets a target level of bonus as a percentage of salary for each of the NEOs. The more responsibility and the greater the scope of an executives position, the higher the target bonus percentage was set. Unless the Compensation Committee exercises its discretion to adjust annual bonus amounts, bonuses are determined based solely on the Companys achievement of the EPS target; there are no other Company goals and no individual goals under the Annual Plan.
Target levels were set in the following amounts for NEOs in 2010:
For 2010, the Compensation Committee set an EPS target under the Annual Plan of $2.43, with a maximum payout if EPS equaled or exceeded $3.09 for the full year. Actual bonus payments can range from 0-200% of the target amount, based on the Companys actual EPS. The Companys actual EPS for 2010 was $2.84, resulting in a payout at 162.1% of target. The EPS result was a 21% increase over actual 2009 EPS results. The Compensation Committee believes that the EPS target for 2010 was rigorous and set sufficiently high to motivate our NEOs to perform at superior levels.
Long-Term Performance Incentives: Stock Options, Performance Share Awards and Restricted Stock Units
Overview. The Company designed its Long Term Incentive Plan (LTIP), which was approved by stockholders in 2007, to ensure that incentive compensation supports the long-term profitability of the Company and the performance of the Companys common stock. (A new LTIP is being presented for a stockholder vote this year and is described in this Proxy Statement on pages 59 through 66.) The Company can use the LTIP to provide a variety of types of awards, each intended to meet a specific objective and reward specified results.
In 2010, the Company awarded an equal mix of three types of long-term incentives under the LTIP:
The Compensation Committee believes this mix of incentives appropriately aligns managements interests with those of stockholders and is consistent with market comparables as represented by the Survey Group.
The Compensation Committee determines the size of long-term incentive grants primarily based on competitive long-term incentive market data for the Survey Group, although individual considerations may influence the size of the grant, as described on page 28 above.
Stock Options. The Compensation Committee granted stock options to the NEOs in February 2010. The options were granted in consideration of present and anticipated performance as well as past accomplishments of the NEOs. It was the Compensation Committees intent for the stock options to offer NEOs significant long-term incentives to motivate performance and to focus managerial efforts on enhancing shareholder value.
The number of stock options granted to each of the NEOs in 2010 is listed in the table on page 40 of this Proxy Statement.
Performance Share Awards. The performance shares awarded in 2010 are earned based on achievement of average return on invested capital (ROIC) and cumulative EPS targets. The Compensation Committee used these two performance measures because it believes they drive long-term stockholder value creation, one capturing growth (EPS) and the other capturing returns (ROIC). ROIC and EPS targets were derived from analyzing and setting operating goals for each of the Companys operating segments, and then calculating overall targets for the Company.
Historically, and as was the case with the 2008-2010 performance period, performance shares had a single, three-year goal attached to them. Although the Compensation Committee believes that setting a three-year goal is important for driving long-term efforts, the recent period of economic turmoil made long-term goal setting difficult. As a result, the Compensation Committee shifted from its historical practice on a temporary basis and, in 2009 and 2010, decided to use annual goals in the award of performance shares. Awards will continue to be paid out after three years, assuming each annual goal in the thee-year performance period is met.
Accordingly, performance share awards granted for the 2009-2011 and the 2010-2012 performance periods each have three annual performance targets approved by the Compensation Committee at the beginning of each year of the three-year performance period. No performance shares will be paid unless at least the minimum established goals are achieved for each year. The number of performance shares granted to each of the NEOs for the 2010-2012 performance period is listed in the table on page 40 of this Proxy Statement.
NEOs who receive performance awards will also earn cash dividend equivalents equal to the cash dividends that would have been paid on the number of performance shares actually paid out after the end of the three-year performance period, as though the recipient owned the shares during the performance period. Dividend equivalents are not paid until the performance period has ended and only on shares actually earned.
The following matrix shows the percentage of the target number of shares that will be paid to an NEO for a given level of Company performance during the 2010-2012 performance period:
The Companys practice of setting rigorous targets for performance share awards is evidenced in the following table, which discloses minimum, target and maximum goals for the 2008-2010 performance period, the first two years of the 2009-2011 performance period and the first year of the 2010-2012 performance period:
The difference in targets between the 2008-2010 and the 2009-2011 periods reflects the drastically changed market conditions from 2007 to 2009. In the 2008-2010 period, the Companys actual diluted cumulative EPS was $10.75 and average ROIC was 7.2%, resulting in no payout to NEOs for this period.
Under the 2009-2011 and 2010-2012 performance share awards, the 2010 target goal for EPS was $2.43, and the target goal for ROIC was 5.6%. The Companys actual 2010 adjusted EPS was $2.85 and average ROIC was 6.5%. The 2011 EPS and ROIC goals set by the Compensation Committee for the third year of the 2009-2011
performance period and the second year of the 2010-2012 performance are rigorous and set sufficiently high to require superior performance at both the target and maximum payout levels. Payouts for the 2009-2011 and 2010-2012 performance periods will not be determined or made until early 2012 and 2013, respectively.
In July 2009, the Compensation Committee granted an 18-month performance share award to the NEOs. The target value of the 18-month performance share award is 75% of the target value for the 2008-2010 performance share award, and no payout above 100% of target is possible. Despite the fact that the 2008-2010 goals were no longer viewed as attainable, the Compensation Committee made the 18-month award because it felt it was crucial to retain top talent and motivate them to make gains in market share. The following chart summarizes the performance goals and associated payout for the 18-month performance share award:
The cumulative diluted EPS for the 18-month performance period was $4.17, resulting in an average payout of 100%. The number of performance shares granted to each of the NEOs for the 18-month July 2009-December 2010 performance period is listed in Footnote 4 on page 43 of this Proxy.
The Compensation Committee utilizes diluted EPS growth for both the annual bonus plan and performance share awards. For performance share awards, the Compensation Committee utilizes average ROIC as an additional performance metric. The Compensation Committee has evaluated the use of other performance metrics for these awards and determined that the use of diluted EPS, versus other performance metrics, is the most comprehensive measure for driving growth of the Company in the near term, making it the most ideal performance metric for the annual bonus plan. The Compensation Committee also determined that the combined use of diluted EPS and ROIC are the most comprehensive factors for driving sustainable growth and returns longer term.
Restricted Stock Units. RSUs are primarily time vested awards that provide executives with an opportunity to earn shares of Company common stock. Each RSU is equal to one share of Company common stock that will be paid when the RSU vests. The Compensation Committee believes that RSUs provide greater balance and stability for the Companys long-term incentives. Additionally, RSUs provide a form of long-term compensation that aids retention, encourages long-term value creation and aligns managements financial interests with those of stockholders.
The Compensation Committee approved the award of RSUs to the NEOs at its February 2010 meeting. The RSUs vest three years after grant, subject to continued employment and achievement of an EPS goal of $1.00 cumulatively over the three-year performance period. Because the RSU awards included an EPS goal, the Company expects to meet tax deductibility requirements under Section 162(m) of the Internal Revenue Code. The award is otherwise intended to align managements interests with those of stockholders and to serve as a retention device.
The number of RSUs granted to each of the NEOs in 2010 is listed in the table on page 40 of this Proxy Statement.
July 2009 Award to Mr. Carbonari. In July 2009, the Compensation Committee granted Mr. Carbonari a $2 million award to be earned ratably over a two-year period, half to be paid in stock and half to be paid in cash. Payment of the award is subject to continued employment, achievement of a six-month EPS target from July to December 2009 of $.75 and achievement of performance goals set by the Compensation Committee. The Compensation Committee retained the discretion to pay less than the full amount of the award or nothing. At its July 2010 meeting, since Mr. Carbonari remained employed by the Company and the six-month EPS goal was achieved, the Compensation Committee considered Mr. Carbonaris total performance in the areas of market share, total shareholder return and operational goals associated with the award. The Compensation Committee determined that Mr. Carbonari achieved multiple accomplishments, including: several of the Companys primary businesses outperforming competitors during the same period; assuring the smooth transitions of new CEOs for two of the Companys primary businesses; and overseeing the realignment of various individual businesses. As a result, the Compensation Committee recommended that the full amount of the first half of the award be paid to Mr. Carbonari. Payment was made to Mr. Carbonari on August 2, 2010 with 50% paid in Company stock and 50% in cash. In determining whether the second half of the award will be paid to Mr. Carbonari in 2011, if he remains employed with the Company, the Compensation Committee will consider Mr. Carbonaris performance in the following areas: operational and portfolio strategy, balance sheet flexibility, stock performance, succession planning, diversity and corporate governance.
Health and Related Benefits. The Companys health and related benefits include medical, dental, life, disability, accidental death and dismemberment and travel accident coverage. All health and related benefits provided to executive officers are offered through broad-based plans applicable to all employees.
Retirement Benefits. The Company believes that it is necessary to provide retirement benefits to recruit and retain executives. The Company provides retirement benefits to executives through a combination of a tax-qualified defined benefit plan, a tax-qualified defined contribution plan and a nonqualified defined benefit and defined contribution plan. Employees, including executives, hired after January 1, 2008 are not eligible to participate in the Companys defined benefit plan and receive benefits only under the defined contribution plan. The amount of benefits provided by each retirement plan and the pension formulae applicable to the NEOs are described in more detail on pages 44 through 46 of this Proxy Statement.
Severance and Change in Control Agreements. The Company has severance and change in control agreements with each of its NEOs. The agreements generally provide for severance benefits in the event of involuntary termination of employment or termination by the executive for good reason. No payments are made if employment is terminated due to death, disability or cause. Executives will receive enhanced benefits if a termination of employment follows a change in control of the Company. The change in control agreements are double trigger (both a change in control and involuntary termination of employment or termination by the executive for good reason must occur to receive payment). In addition, the Company maintains a retention agreement with Mr. Carbonari. The Company believes these agreements are necessary to ensure the continuity of management and to allow executives to focus on serving the Company in a change of control situation without the distraction of concern for their employment. These agreements, including Mr. Carbonaris retention agreement, are described in more detail on pages 48 through 52 of this Proxy Statement.
Perquisites. The Company permits use of Company aircraft by certain NEOs. In 2010, use of the Company aircraft was provided to Messrs. Carbonari and Omtvedt, who reimburse the Company for such use.
Tax Treatment. The Company generally receives a tax deduction for payments to executives under its annual and long-term incentive plans. Section 162(m) of the Internal Revenue Code limits the income tax deduction that the Company may take for compensation paid to the Chief Executive Officer and the other named executive officers, other than the Chief Financial Officer. The limit is $1 million per executive per year. However, performance-based compensation is excluded from the calculation under Section 162(m). The Compensation Committee believes that the annual incentive bonus, stock options, performance share awards and restricted stock unit awards will be fully deductible by the Company when paid or settled.
Compensation and Stock Option Committee Report
The Compensation and Stock Option Committee (the Compensation Committee) has reviewed and discussed the Compensation Discussion and Analysis with management and, based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 and the Companys Proxy Statement.
Compensation and Stock Option Committee
Anne M. Tatlock, Chairwoman
Richard A. Goldstein
Ann F. Hackett
Pierre E. Leroy
Peter M. Wilson
The Summary Compensation Table below sets forth accounting values for both fixed and variable elements of compensation for the NEOs, including unvested and/or unpaid stock awards and unexercised stock options. For example, performance share awards that have been granted to each of the NEOs during 2010 are presented in the Stock Awards column of the table below based on the awards grant date fair value as determined under applicable accounting rules. The grant date fair value of these awards is based on the Companys estimate of the number of performance shares which are likely to be earned by each NEO. Similarly, stock options granted to each of the NEOs during 2010 are presented in the Option Awards column of the table below based on these awards grant date fair value as determined under applicable accounting rules. However, the amount each NEO will actually realize from these equity awards may differ materially from the amounts shown in the table below and the related footnotes (in certain circumstances, the NEOs may realize no value under these awards). Investors should note that equity compensation awards granted or paid to the NEOs are reported in several different tables in this Proxy Statement.
2010 SUMMARY COMPENSATION TABLE
TAXABLE COMPENSATION REPORTED
The following supplemental table shows the amount of compensation reported for federal tax purposes for each of the NEOs for each of the indicated tax years. These amounts reflect the amounts reported for each individual in Box 1 of their respective Forms W-2 for each reporting year. We are providing this supplemental table to highlight the difference between compensation reported under the SEC rules and compensation amounts realized and reported as taxable income on Form W-2.
Amounts reported in Box 1 of the Form W-2 for each of the NEOs, as listed above, include, among other items: (1) total cash wages and bonuses paid to the NEOs for the taxable year, less amounts deferred under tax-qualified 401(k) plans; (2) the value of Company-paid life insurance in excess of $50,000 and any taxable pension accruals provided to the NEOs; (3) the value of any performance share awards, restricted stock awards or restricted stock units that were paid out or became vested during the taxable year; (4) the gain recognized upon the exercise of stock option awards exercised during the taxable year; and (5) annual contributions to their respective grantor trusts (except for Mr. Koley, who does not have a grantor trust).
Amounts reported in Box 1 of the Forms W-2 for the NEOs, as listed above, do not include any value for: (1) unvested performance share awards, restricted stock awards or restricted stock unit awards; or (2) outstanding but unexercised stock option awards. These items are contingent and may never materialize; however, in accordance with the SEC rules, values for these items are included in the Summary Compensation Table on page 37 in the year of grant, as well as in the tables below on pages 42 and 43.
2010 GRANTS OF PLAN-BASED AWARDS
Non-Equity Incentive Plan
The Annual Plan is a cash-based, pay for performance annual incentive plan. Under the Annual Plan, participants are eligible to receive a bonus if the performance goal established for the year is met or exceeded, unless employment ends prior to the end of the year for reasons other than death, disability or retirement, in which case no bonus will be paid. If employment ends as a result of death, disability or retirement, a participant will be paid a prorated annual bonus if and when bonuses are otherwise paid to participants. Messrs. Carbonari, Omtvedt, Roche and Hausberg currently are eligible to retire under the Supplemental Plan. Accordingly, these executives will remain eligible for an annual bonus, prorated for their service during the year, even if they voluntarily terminate employment before the end of the year.
Long-Term Equity Incentive Plan
The LTIP allows the Company to award executives a variety of forms of equity compensation using the Companys common stock. In 2010, the Company awarded an equal mix of stock options, performance share awards and restricted stock units. See pages 49 and 50 of this Proxy Statement for a description of the treatment of equity awards upon termination of employment.
OUTSTANDING EQUITY AWARDS AT 2010 FISCAL YEAR-END
As of December 31, 2010, the numbers in this column (see chart on page 42) had not yet vested. The corresponding market values are based on the closing price of $60.25 of the Companys stock on December 31, 2010.
For Mr. Koley, the numbers in this column show the remaining unvested RSUs (as of December 31, 2010) from his February 2009 grant. This award vests and becomes payable in three equal annual installments. Two-thirds of this award vested and was paid to Mr. Koley in February 2010 and 2011. As of February 1, 2011, Mr. Koley has 4,933 unvested RSUs.
Reported in this column are RSUs granted to Messrs. Carbonari, Omtvedt, Roche, Koley and Hausberg in 2009 of 53,500, 21,000, 13,800, 7,200 and 5,900 RSUs, respectively (which will vest on January 31, 2012) and in 2010, of 41,900, 15,400, 10,200, 5,200 and 3,800 RSUs, respectively (which will vest on January 31, 2013).
2010 OPTION EXERCISES AND STOCK VESTED
RETIREMENT AND POST-RETIREMENT BENEFITS
2010 PENSION BENEFITS
The Pension Plan is a tax-qualified defined benefit plan. In 2008, the Pension Plan was closed to newly hired employees, and the formula for accruing pension benefits was changed.
Total service taken into account under the Pension Plan is capped at 35 years. In addition, participants will not receive less than a protected benefit that was grandfathered as of December 31, 2001 when the Company previously changed the pension plan formula. Generally, all employees hired prior to January 1, 2008 are eligible for the plan, except for certain executives who have employee grantor trusts described below. The estimated retirement benefits in the preceding table include any offset for Social Security benefits. The compensation used to calculate retirement benefits generally includes the categories of Salary and Non-Equity Incentive Plan Compensation from the Summary Compensation Table shown above on page 37, averaged over the five highest consecutive years.
The Moen Incorporated Retirement Income Plan is a tax-qualified defined benefit plan. The formula for determining monthly pension benefits is (a) 1.05% of compensation multiplied by years of benefit service up to 30 years, plus (b) 0.40% of compensation in excess of covered compensation multiplied by years of benefit service up to 30 years, plus (c) 1.00% of compensation multiplied by years of benefit service in excess of 30 years.
The Supplemental Plan pays the difference between the benefits payable under our tax-qualified defined benefit plan (the Pension Plan and, for Mr. Carbonari, the Moen Incorporated Retirement Income Plan) and the amount that would have been paid if the Internal Revenue Code did not limit the amount of compensation taken into account under, or benefits that may be paid from, a tax-qualified defined benefit plan. In addition, the Supplemental Plan provides the full pension benefit earned in years in which an executive is ineligible for the tax-qualified defined benefit plan. In calculating benefits, no credit is given for service in excess of 35 years. Through December 31, 2007, the Supplemental Plan also provided that certain senior officers of the Company (those who were Vice Presidents or more senior officers prior to 1999) receive an annual benefit equal to 52 1/2% of average compensation during the five highest-paid consecutive years of employment. Since 1999, the Compensation Committee has not approved this enhanced benefit for any additional executives. Messrs. Omtvedt, Roche and Hausberg are entitled to this retirement benefit. This retirement benefit is reduced by 1 1/2% of such average compensation for each year between the officers retirement and attainment of
age 65, unless he has completed 35 years of service. This benefit is also reduced by 1/2% of such average compensation for each year of service on and after January 1, 2008, since beginning on January 1, 2008, these executives will earn additional pension benefits at the same rate that applies to all employees in the Companys tax-qualified pension plan (1% of compensation per year of service). The Supplemental Plan benefit is reduced by benefits under the Pension Plan and the retirement plans of our subsidiaries or any prior employer, including an executives prior employers who are unrelated to the Company.
Payments of early retirement annual benefits under the Fortune Brands plans are calculated assuming a reduction of 6% per year prior to age 62 (unreduced at age 62) for Mr. Carbonari and 7% per year prior to age 60 (unreduced at age 60) for Messrs. Omtvedt, Roche and Hausberg. Mr. Carbonaris pension reduction is calculated differently than the other NEOs because the other officers were grandfathered under a plan provision applicable to certain employees who were employed as of December 31, 2001. Mr. Carbonari was employed by one of the Companys subsidiaries until January 1, 2007. Mr. Carbonaris annual early retirement benefit under the Moen Incorporated Retirement Income Plan is calculated assuming a 6% reduction per year from age 60 to 62 and a 4% reduction per year prior to age 60 (the benefit is unreduced at age 62). Mr. Koley does not participate in any Company defined benefit plan.
The pension benefits earned by the NEOs under the Supplemental Plan cannot be secured in a manner similar to the tax-qualified pension benefits earned by other Company employees. To provide for the security of these non-qualified benefits, the Company, prior to 1999, established grantor trusts for a limited number of executives, of whom four are NEOs. These trusts were approved by stockholders. The Company has not established any new grantor trusts since 1999 and no longer provides them to new executives. However, to retain current executives, the Company continues its past practice of contributing annually to the remaining grantor trusts. All of the NEOs with grantor trusts are eligible for retirement. As a result, the grantor trust program will be phased out in coming years.
The Company has carefully considered whether to continue funding the limited number of employee grantor trusts in existence. As part of its analysis, the Company took into account the fact that most of the executives with grantor trusts are nearing retirement and the grantor trust program will naturally be phased out in coming years. Accordingly, while the Company will continue to look for viable alternatives to the grantor trust program, for the present time it has decided to continue funding the previously established trusts.
2010 NONQUALIFIED DEFERRED COMPENSATION
The Companys nonqualified deferred compensation plan is a supplemental plan that pays the difference between the profit sharing contribution provided under the tax-qualified defined contribution plan and the contribution that would have been made if the Internal Revenue Code did not limit the compensation that may be taken into account under tax-qualified retirement plans. The contribution amount in 2008, 2009 and 2010 was equal to 6% of adjusted compensation, which generally includes salary and annual bonus. Compensation is adjusted by multiplying amounts in excess of the Social Security taxable wage base ($106,800 in 2010) by 1.25. This profit sharing formula applies uniformly to all eligible employees and is not enhanced for executives. Nonqualified profit-sharing benefits are paid in a lump sum upon termination of an executives employment.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL(1)
A number of Company employee benefit and incentive plans provide for payment or vesting of benefits upon termination of employment of any participant, including the NEOs. If terminated on December 31, 2010, the NEOs would receive benefits and payments under these plans in addition to the amounts described in the table above.
LTIP Awards. The following table shows the treatment of LTIP awards following a termination of employment, depending upon the reason for such termination. Messrs. Carbonari, Omtvedt, Roche and Hausberg currently are eligible to retire under the Supplemental Plan. Accordingly, a voluntary termination of employment by any of these executives will be considered a retirement, and the more favorable retirement provisions described below will apply.
The following chart explains the treatment of LTIP awards in the event of a change of control:
Retirement Benefits. Upon termination of employment, participants in the Companys defined contribution plans (both tax-qualified and nonqualified) may receive a distribution of their account balances. The Nonqualified Deferred Compensation table on page 46 of this Proxy Statement lists each executive officers balance under the nonqualified defined contribution plan as of the last fiscal year end. The Companys tax-qualified defined benefit plan and Supplemental Plan both provide pension benefits upon retirement (as defined in the plans). Messrs. Carbonari, Omtvedt, Roche and Hausberg are all retirement-eligible under the Supplemental Plan and are eligible to receive nonqualified pension benefits upon termination of employment. The Pension Benefits table on page 44 of this Proxy Statement and the narrative and footnotes that follow it provide additional detail on the amount and terms of these pension benefits.
Health and Related Benefits. In addition to the dollar values in the table above for health and related benefit continuation pursuant to severance and change in control agreements, the NEOs will receive health and related benefits pursuant to the Companys benefit plans applicable to employees generally. Because they are currently retirement-eligible, the NEOs (except Mr. Koley) are eligible for retiree medical coverage (until Medicare eligible) upon any termination of employment within the next four years. The retiree medical coverage program was closed to new hires in 1999, and Mr. Koley will not be eligible to receive retiree medical coverage.
Change in Control Agreements. In 2007, the Company entered into new agreements with Messrs. Carbonari, Omtvedt, Roche and Hausberg to provide each of them with benefits if they are terminated following a change in control of the Company. These agreements replaced similar agreements that had been in place for many years. However, the new agreements incorporated changes due to new tax regulations governing deferred compensation. The new agreements also reflect modifications to certain provisions to make the agreements more favorable to the Company and shareholders. A similar agreement was entered into with Mr. Koley when he began employment in 2009.
Each agreement states that if, subsequent to a change in control, (1) the Company terminates the executives employment for a reason other than disability or cause, or (2) the executive decides to terminate his employment for good reason, the executive will receive:
Payments under these agreements are generally made in a lump sum immediately following termination. For executives hired prior to 2008, if the special excise tax under Section 280G of the Internal Revenue Code applies, and the executives payments are not required under the agreement to be reduced to a level that will not trigger the excise tax, the Company will restore amounts lost by the executive officer due to the excise tax (Mr. Koley is not eligible for this restoration). If payments to the executive due to a change in control do not exceed the threshold dollar amount that triggers the excise tax by more than a specified amount, payments to the executive are reduced in order to avoid application of the excise tax. The Company has not provided these benefits to individuals who have become executives since 2008. The Company has established a rabbi trust with a bank for the purpose of making payments under the agreements. This trust currently is not funded. Any amounts payable under these change in control agreements are reduced by amounts payable under the severance agreements referred to below.