STARWOOD HOTEL & RESORTS WORLDWIDE INC DEF 14A 2009
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
March 26, 2009
You are cordially invited to attend Starwoods Annual Meeting of Stockholders, which is being held on Wednesday, May 6, 2009, at 10:00 a.m. (local time), at the St. Regis Washington, D.C., 923 16th and K Streets, N.W., District of Columbia 20006.
At this years Annual Meeting, you will be asked to (i) elect eleven Directors and (ii) ratify the appointment of Ernst & Young LLP as Starwoods independent registered public accounting firm for 2009.
As owners of Starwood, your vote is important. Whether or not you are able to attend the Annual Meeting in person, it is important that your shares be represented. Please vote as soon as possible. Instructions on how to vote are contained herein.
We appreciate your continued support and interest in Starwood.
Very truly yours,
NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERS
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
A Maryland Corporation
Kenneth S. Siegel
March 26, 2009
White Plains, New York
If you have any questions about the Annual Meeting, you should contact:
Starwood Hotels & Resorts Worldwide, Inc.
1111 Westchester Avenue
White Plains, New York 10604
Attention: Investor Relations
Phone Number: 1-914-640-8100
If you would like additional copies of this Proxy Statement or the Annual Report, or if you have questions about the Annual Meeting or need assistance in voting your shares, you should contact:
D.F. King & Co., Inc.
48 Wall Street
New York, New York 10005
Phone Number: 1-800-859-8511 (toll free)
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
1111 WESTCHESTER AVENUE
WHITE PLAINS, NY 10604
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD May 6, 2009
THE ANNUAL MEETING AND VOTING QUESTIONS AND ANSWERS
Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the Company or Starwood), has made these materials available to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail, in connection with the solicitation of proxies by the Board of Directors (the Board) for use at the Companys 2009 Annual Meeting of Stockholders (the Annual Meeting), and at any postponement or adjournment of the Annual Meeting. The Company is first making these materials available (and is mailing the Notice of Meeting and Internet Availability of Proxy Materials) on or about March 26, 2009. This Notice contains instructions on how to access the Companys proxy statement and 2008 Annual Report to Shareholders and vote online. By furnishing this Notice, the Company is lowering the costs and reducing the environmental impact of its Annual Meeting.
The Company intends to start mailing a paper or electronic copy of its proxy statement and 2008 Annual Report to those stockholders who have requested a paper or electronic copy on or about March 26, 2009.
The Annual Meeting will be held on May 6, 2009 at 10:00 a.m. (local time), at the St. Regis Washington, D.C., 923 16th and K Streets, N.W., District of Columbia 20006. If you plan to attend the Annual Meeting and have a disability or require special assistance, please contact the Companys Investor Relations department at (914) 640-8100.
At the Annual Meeting, the stockholders of the Company will consider and vote upon:
1. The election of eleven Directors to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified.
2. The ratification of the appointment of Ernst & Young LLP (Ernst & Young) as the Companys independent registered public accounting firm for 2009.
3 Such other business as may properly come before the meeting or any adjournment or postponement thereof.
The Board is not aware of any matter that will be presented at the Annual Meeting that is not described above. If any other matter is presented at the Annual Meeting, the persons named as proxies on the enclosed proxy card will, in the absence of stockholder instructions to the contrary, vote the shares for which such persons have voting authority in accordance with their discretion on any such matter.
Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?
Pursuant to the rules adopted by the Securities and Exchange Commission, we are providing access to our proxy materials over the Internet. Accordingly, we sent a Notice of Internet Availability of Proxy Materials (the Notice) to our stockholders of record and beneficial owners as of the Record Date. All stockholders will have the
ability to access the proxy materials on the web site referred to in the Notice or request to receive a printed set of the proxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found on the Notice. In addition, stockholders may request to receive proxy materials in printed form by mail or electronically by email on an ongoing basis.
The Notice will provide you with instructions regarding how to:
Choosing to receive your future proxy materials by email will save us the cost of printing and mailing documents to you and will reduce the impact of our annual stockholders meetings on the environment. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those 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.
If you were a stockholder of the Company at the close of business on March 12, 2009 (the Record Date), you are entitled to notice of, and to vote at, the Annual Meeting. You have one vote for each share of common stock of the Company (Shares) you held at the close of business on the Record Date on each matter that is properly submitted to a vote at the Annual Meeting, including Shares:
On the Record Date there were 182,496,505 Shares outstanding and entitled to vote at the Annual Meeting and there were 17,058 record holders of Shares. The Shares are the only outstanding class of voting securities of the Company.
Only stockholders of record, or their duly authorized proxies, may attend the Annual Meeting. Registration and seating will begin at 9:00 a.m. To gain admittance, you must present valid picture identification, such as a drivers license or passport. If you hold Shares in street name (through a broker or other nominee), you will also need to bring a copy of a brokerage statement (in a name matching your photo identification) reflecting your stock ownership as of the Record Date. If you are a representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are a representative of such stockholder.
Please note that cameras, recording devices and other electronic devices will not be permitted at the Annual Meeting.
The presence in person or by proxy of holders of a majority of the outstanding Shares entitled to vote at the Annual Meeting constitutes a quorum for the transaction of business. Your Shares are counted as present at the meeting if you:
Abstentions and broker non-votes are counted for purposes of determining whether a quorum is present at the Annual Meeting.
If a quorum is not present when the Annual Meeting is convened, or if for any other reason the presiding officer believes that the Annual Meeting should be adjourned, the Annual Meeting may be adjourned by the presiding officer. If a motion is made to adjourn the Annual Meeting, the persons named as proxies on the enclosed proxy card will have discretion to vote on such adjournment all Shares for which such persons have voting authority.
If you have Shares that are held by a broker, you may give the broker voting instructions and the broker must vote as you directed. If you do not give the broker any instructions, the broker may vote at its discretion on all routine matters (i.e., election of Directors and the ratification of an independent registered public accounting firm). For non-routine matters, however, the broker may NOT vote using its discretion. This is referred to as a broker non-vote.
Shares not voted due to withheld votes, abstentions or broker non-votes with respect to the election of a Director or the ratification of the appointment of the independent registered public accounting firm will not have any effect on the outcome of such matters.
Directors will be elected by a plurality of the votes cast at the Annual Meeting, either in person or represented by properly authorized proxy. This means that the eleven nominees who receive the largest number of FOR votes cast will be elected as Directors. Stockholders cannot cumulate votes in the election of Directors. See What happens if a Director nominee does not receive a majority of the votes cast? below for information concerning our director resignation policy.
Ratification of the appointment of Ernst & Young as the Companys independent registered public accounting firm requires FOR votes from a majority of the votes cast at the Annual Meeting, either in person or represented by properly completed or authorized proxy. If a majority of the votes cast at the Annual Meeting vote AGAINST ratification of the appointment of Ernst & Young, the Board and the Audit Committee will reconsider its appointment.
Under our Bylaws, a Director nominee, running uncontested, who receives more Withheld than For votes is required to tender his or her resignation for consideration by the Board. The Corporate Governance and Nominating Committee will recommend to the Board whether to accept or reject the resignation. The Board will act on the tendered resignation and publicly disclose its decision within 90 days following certification of the election results. The Director who tenders his or her resignation will not participate in the Boards decision with respect to that resignation.
If you are a stockholder of record, you may vote in person at the Annual Meeting. We will give you a ballot when you arrive. If you do not wish to vote in person or if you will not be attending the Annual Meeting, you may vote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, if you request printed copies of the proxy materials by mail, you can also authorize a proxy to vote by mail or by telephone.
Each Share represented by a properly completed written proxy or properly authorized proxy by telephone or over the Internet will be voted at the Annual Meeting in accordance with the stockholders instructions specified in the proxy, unless such proxy has been revoked. If no instructions are specified, such Shares will be voted FOR the election of each of the nominees for Director, FOR ratification of the appointment of Ernst & Young as the
Companys independent registered public accounting firm for 2009 and in the discretion of the proxy holder on any other business that may properly come before the meeting.
If you participate in the Savings Plan and have contributions invested in Shares, the proxy card will serve as a voting instruction for the trustee of the Savings Plan. You must return your proxy card to the transfer agent on or prior to May 1, 2009. If your proxy card is not received by the transfer agent by that date or if you sign and return your proxy card without instructions marked in the boxes, the trustee will vote your Shares in the same proportion as other Shares held in the Savings Plan for which the trustee received timely instructions unless contrary to ERISA (Employee Retirement Income Security Act).
You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting. You may submit a proxy again on a later date on the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date, or by attending the meeting and voting in person. However, your attendance at the Annual Meeting will not automatically revoke your proxy unless you vote at the meeting or specifically request in writing that your prior proxy be revoked.
If you receive more than one proxy card from the Company, it means your Shares are not all registered in the same way (for example, some are held in your name and others are held jointly with a spouse) and are in more than one account. Please sign and return all proxy cards you receive to ensure that all Shares held by you are voted.
The Board recommends that you vote FOR each of the Director nominees and FOR ratification of the appointment of Ernst & Young as the Companys independent registered public accounting firm for 2009.
In addition to our charter and Bylaws, we have adopted Corporate Governance Guidelines, which are posted on our web site at www.starwoodhotels.com/corporate/investor_relations.html, to address significant corporate governance matters. The Guidelines provide a framework for the Companys corporate governance and cover topics including, but not limited to, Board and committee composition, Director share ownership guidelines, and Board evaluations. The Corporate Governance and Nominating Committee is responsible for overseeing and reviewing the Guidelines and reporting and recommending to the Board any changes to the Guidelines.
The charters for the Companys Audit Committee, Capital Committee, Compensation and Option Committee and Corporate Governance and Nominating Committee are posted on its web site at www.starwoodhotels.com/corporate/investor_relations.html.
The Company has adopted a Finance Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Corporate Controller, Corporate Treasurer, Senior Vice President-Taxes and persons performing similar functions. The Finance Code of Ethics is posted on the Companys web site at www.starwoodhotels.com/corporate/investor_relations.html. The Company intends to post amendments to, and waivers from, the Finance Code of Ethics that require disclosure under applicable Securities and Exchange Commission (the SEC) rules on its web site. In addition, the Company has a Code of Business Conduct and Ethics (the Code of Conduct) applicable to all employees and Directors that addresses legal and ethical issues employees may encounter in carrying out their duties and responsibilities. Subject to applicable law, employees are required to report any conduct they believe to be a violation of the Code of Conduct. The Code of Conduct is posted on the Companys web site at www.starwoodhotels.com/corporate/investor_relations.html.
You may obtain a free copy of any of these posted documents by sending a letter to the Companys Investor Relations Department, 1111 Westchester Avenue, White Plains, New York 10604. Please note that the information on the Companys web site is not incorporated by reference in this Proxy Statement.
The Company has a Disclosure Committee, comprised of certain senior executives, to design, establish and maintain the Companys internal controls and other procedures with respect to the preparation of periodic reports filed with the SEC, earnings releases and other written information that the Company will disclose to the investment community (the Disclosure Documents). The Disclosure Committee evaluates the effectiveness of the Companys disclosure controls and procedures on a regular basis and maintains written records of its meetings. The Company will continue to monitor developments in the law and stock exchange regulations and will adopt new procedures consistent with new legislation or regulations.
In accordance with New York Stock Exchange (the NYSE) rules, the Board makes an annual determination as to the independence of the Directors and nominees for election as a Director. No Director will be deemed to be independent unless the Board affirmatively determines that the Director has no material relationship with the Company, directly or as an officer, stockholder or partner of an organization that has a relationship with the Company. A material relationship is one that impairs or inhibits or has the potential to impair or inhibit a directors exercise of critical and disinterested judgment on behalf of the Company and its stockholders. The Board observes all criteria for independence established by the NYSE listing standards and other governing laws and regulations. In its annual review of Director independence, the Board considers any commercial, banking, consulting, legal, accounting, charitable or other business relationships each Director may have with the Company. In addition, the Board consults with the Companys counsel to ensure that the Boards determinations are consistent with all relevant securities and other laws and regulations regarding the definition of independent director, including but not limited to those set forth in pertinent listing standards of the NYSE in effect from time to time. As a result of its annual review, the Board has determined that all of the Directors, with the exception of Mr. van Paasschen, are independent directors. Mr. van Paasschen is not independent because he is serving as the Chief Executive Officer of the Company.
In making this determination, the Board took into account that three of the non-employee Directors, Messrs. Aron and Daley and Ms. Galbreath, have no relationship with the Company except as a Director and stockholder of the Company and that the remaining seven non-employee Directors have relationships with the Company that are consistent with the NYSE independence standards. With respect to Mr. Duncan, the Board considered the fact that Mr. Duncan served as Chief Executive Officer on an interim basis from April 1, 2007 to September 24, 2007 and
received a salary and other benefits for his services. Prior to serving as Chief Executive Officer on an interim basis, the Board determined that Mr. Duncan was an independent director. Yahoo! Inc., Amazon.com, Inc., Gap, Inc., Nike, Inc., Intel Corp. and American Express Company, where Messrs. Hippeau, Mr. Ryder, Youngblood and Clarke and Ambassador Barshefsky are directors, respectively, are the only companies to transact business with the Company over the past three years in which any of the Companys independent directors served as a director, executive officer or is a partner, principal or greater than 10% stockholder. In the case of each of Yahoo! Inc., Amazon.com, Inc., Gap, Inc., Nike, Inc. and Intel Corp., the combined annual payments from the Company to each such entity and from each such entity to the Company has been less than .05% of the Companys and/or each such other entitys annual consolidated revenues for each of the past three years. In the case of American Express Company, with which the Company co-brands the American Express Starwood Preferred Guest credit card, the combined annual payments from the Company to American Express Company and from American Express Company to the Company has been less than 1% of American Express Companys annual consolidated revenues for each of the past three years and payments from American Express were less than 4% of the Companys annual consolidated revenues for 2008, less than 2% for 2007 and slightly more than 2% for 2006. Ambassador Barshefsky serves solely as a director of American Express and derives no personal benefit from these payments. These relationships are consistent with the NYSE independence standards. In addition, in the case of Mr. Quazzo, the Board considered that in January 2008 a fund managed by Transwestern Investment Company, LLC purchased the office building in Phoenix where the Company maintains an office. The Companys lease for the office space was negotiated and entered into prior to the acquisition with unaffiliated third parties at arms-length and was not amended in connection with the acquisition of the building by the fund. Mr. Quazzo has informed the Company that he did not derive any direct personal benefit from the office space lease, although his compensation does depend, in part, on Transwestern Investment Company, LLCs results of operations.
Mr. Duncan, who was an independent Director prior to his interim appointment as Chief Executive Officer, has served as non-executive Chairman of the Board from May 2005 until March 31, 2007 when he was appointed Chief Executive Officer on an interim basis, and from September 24, 2007 to the present. As a result, prior to March 31, 2007 and following September 24, 2007, the Board did not have a lead Director but Mr. Duncan, as Chairman, ran meetings of the Board. During Mr. Duncans appointment as Chief Executive Officer on an interim basis, the Chairman of the Corporate Governance and Nominating Committee served as the lead Director at the executive meetings of the Board. Mr. Quazzo, an independent Director, served as the Chairman of the Corporate Governance and Nominating Committee in 2008.
The Company has adopted a policy which requires the Audit Committee to approve the hiring of any current or former employee (within the last 5 years) of the Companys independent registered public accounting firm into any position (i) as a manager or higher, (ii) in its accounting or tax departments, (iii) where the hire would have direct involvement in providing information for use in its financial reporting systems, or (iv) where the hire would be in a policy setting position. When undertaking its review, the Audit Committee considers applicable laws, regulations and related commentary regarding the definition of independence for independent registered public accounting firms.
The Board has a policy under which Directors who are not employees of the Company or any of its subsidiaries may not stand for re-election after reaching the age of 72. In addition, under this policy, Directors who are employees of the Company must retire from the Board upon their retirement from the Company. Pursuant to the Corporate Governance Guidelines, the Board also has a policy that Directors who change their principal occupation (including through retirement) should voluntarily tender their resignation to the Board.
The Company expects all Directors to attend the Annual Meeting and believes that attendance at the Annual Meeting is as important as attendance at meetings of the Board of Directors and its committees. In fact, the Company typically schedules Board of Directors and committee meetings to coincide with the dates of its Annual Meetings. However, from time to time, other commitments prevent all Directors from attending each meeting. All Directors who were Board members at the time attended the most recent annual meeting of stockholders, which was held on April 30, 2008.
The Company has adopted a policy which permits stockholders and other interested parties to contact the Board of Directors. If you are a stockholder or interested party and would like to contact the Board of Directors you
may send a letter to the Board of Directors, c/o the Corporate Secretary, 1111 Westchester Avenue, White Plains, New York 10604 or online at www.hotethics.com. You should specify in the communication that you are a stockholder or an interested party. If the correspondence contains complaints about Starwoods accounting, internal or auditing matters or directed to the non-management directors, the Corporate Secretary will forward that correspondence to a member of the Audit Committee. If the correspondence concerns other matters, the Corporate Secretary will forward the correspondence to the Director to whom it is addressed or otherwise as would be appropriate under the circumstances, attempt to handle the inquiry directly (for example where it is a request for information or a stock-related matter), or not forward the communication if it is primarily commercial in nature or relates to an improper or irrelevant topic. At each regularly scheduled Board meeting, the Corporate Secretary or his/her designee will present a summary of all such communications received since the last meeting that were not forwarded and shall make those communications available to the Directors upon request. This policy is also posted on the Companys web site at www.starwoodhotels.com/corporate/investor_relations.html.
The Company indemnifies its Directors and officers to the fullest extent permitted by law so that they will be free from undue concern about personal liability in connection with their service to the Company. This is required under the Companys charter, and the Company has also signed agreements with each of those individuals contractually obligating it to provide this indemnification to them.
Under the Companys charter, each of the Companys Directors is elected to serve until the next annual meeting of stockholders and until his or her successor is duly elected and qualified. If a nominee is unavailable for election, proxy holders and stockholders may vote for another nominee proposed by the Board or, as an alternative, the Board may reduce the number of Directors to be elected at the meeting. Each nominee has agreed to serve on the Board if elected. Set forth below is information as of February 28, 2009 regarding the nominees for election, which has been confirmed by each of them for inclusion in this Proxy Statement.
Directors Nominated at the Annual Meeting will be Elected to Serve Until the 2010 Annual Meeting of Stockholders and Until his or her Successor is Duly Elected and Qualifies
Frits van Paasschen, 48, has been Chief Executive Officer of the Company since September 2007. From March 2005 until September 2007, he served as President and CEO of Molson Coors Brewing Companys largest division, Coors Brewing Company. Prior to joining Coors, from April 2004 until March 2005, Mr. van Paasschen worked independently through FPaasschen Consulting and Mercator Investments, evaluating, proposing, and negotiating private equity transactions. Prior thereto, Mr. van Paasschen spent seven years at Nike, Inc., most recently as Corporate Vice President/General Manager, Europe, Middle East and Africa from 2000 to 2004. From 1995 to 1997, Mr. van Paasschen served as Vice President, Finance and Planning at Disney Consumer Products and earlier in his career was a management consultant for eight years at McKinsey & Company and the Boston Consulting Group. Mr. van Paasschen has been a Director of the Company since September 2007.
Bruce W. Duncan, 57, has been President, Chief Executive Officer and Director of First Industrial Realty Trust, Inc. since January 2009, prior to which time he was a private investor since January 2006. From April to September 2007, Mr. Duncan served as Chief Executive Officer of the Company on an interim basis. He also has been a senior advisor to Kohlberg Kravis & Roberts & Co. from July 2008 to January 2009. From May 2005 to December 2005, Mr. Duncan was Chief Executive Officer and Trustee of Equity Residential (EQR), a publicly traded apartment company. From January 2003 to May 2005, he was President and Trustee of EQR. Mr. Duncan has served as a Director of the Company since April 1999, and was a Trustee of Starwood Hotels & Resorts, a real estate investment trust and former subsidiary of the Company (the Trust), since August 1995.
Adam M. Aron, 54, has been Chairman and Chief Executive Officer of World Leisure Partners, Inc., a leisure-related consultancy, since 2006. From 1996 through 2006, Mr. Aron served as Chairman and Chief Executive Officer of Vail Resorts, Inc., an owner and operator of ski resorts and hotels. Mr. Aron is a director of Norwegian Cruise Line Limited and Prestige Cruise Holdings, Inc. Mr. Aron has been a Director of the Company since August 2006.
Charlene Barshefsky, 58, has been Senior International Partner at the law firm of WilmerHale, LLP, Washington, D.C. since September 2001. From March 1997 to January 2001, Ambassador Barshefsky was the United States Trade Representative, the chief trade negotiator and principal trade policy maker for the United States and a member of the Presidents Cabinet. Ambassador Barshefsky is a director of The Estee Lauder Companies, Inc., American Express Company and Intel Corporation. Ambassador Barshefsky also serves on the Board of Directors of the Council on Foreign Relations and is a Trustee of the Howard Hughes Medical Institute. She has been a Director of the Company, and was a Trustee of the Trust, since October 2001.
Thomas E. Clarke, 57, has been President of New Business Ventures of Nike, Inc., a designer, developer and marketer of footwear, apparel and accessory products, since 2001. Dr. Clarke joined Nike, Inc. in 1980. He was appointed Divisional Vice President in charge of marketing in 1987, Corporate Vice President in 1990, and served as President and Chief Operating Officer from 1994 to 2000. Dr. Clarke previously held various positions with Nike, Inc. primarily in research, design, development and marketing. Dr. Clarke is also a director of Newell Rubbermaid, a global marketer of consumer and commercial products. Dr. Clarke has been a Director of the Company since April, 2008.
Clayton C. Daley, Jr., 57, has spent his entire professional career with Procter & Gamble, joining the company in 1974, and has held a number of key accounting and finance positions including Comptroller, U.S. Operations for Procter & Gamble USA; Vice President and Comptroller of Procter & Gamble International and Vice President and Treasurer. Mr. Daley was appointed to his current position as Chief Financial Officer, Procter & Gamble in 1998 and was elected Vice Chair in 2007. Mr. Daley is a director of Boys Scouts of America, Dan Beard Council, and Nucor Corporation. Mr. Daley has been a Director of the Company since November 2008.
Lizanne Galbreath, 51, has been Managing Partner of Galbreath & Company, a real estate investment firm, since 1999. From April 1997 to 1999, Ms. Galbreath was Managing Director of LaSalle Partners/Jones Lang LaSalle where she also served as a Director. From 1984 to 1997, Ms. Galbreath served as a Managing Director then Chairman and Chief Executive Officer of The Galbreath Company, the predecessor entity of Galbreath & Company. Ms. Galbreath has been a Director of the Company, and was a Trustee of the Trust, since May 2005.
Eric Hippeau, 57, has been Managing Partner of Softbank Capital, a technology venture capital firm, since March 2000. Mr. Hippeau served as Chairman and Chief Executive Officer of Ziff-Davis Inc., an integrated media and marketing company, from 1993 to March 2000 and held various other positions with Ziff-Davis from 1989 to 1993. Mr. Hippeau is a director of Yahoo! Inc. Mr. Hippeau has been a Director of the Company, and was a Trustee of the Trust since April 1999.
Stephen R. Quazzo, 49, is the Chief Executive Officer and has been the Managing Director and co-founder of Transwestern Investment Company, L.L.C., a real estate principal investment firm, since March 1996. From April 1991 to March 1996, Mr. Quazzo was President of Equity Institutional Investors, Inc., a subsidiary of Equity Group Investments, Inc. Mr. Quazzo has been a Director of the Company since April 1999, and was a Trustee of the Trust, since August 1995.
Thomas O. Ryder, 64, retired as Chairman of the Board of The Readers Digest Association, Inc. in January 2007, a position he had held since January 1, 2006. Mr. Ryder was Chairman of the Board and Chief Executive Officer of that company from April 1998 through December 31, 2005. Mr. Ryder was President, American Express Travel Related Services International, a division of American Express Company, which provides travel, financial and network services, from October 1995 to April 1998. In addition, he is a director of Amazon.com, Inc. and Chairman of the Board of Virgin Mobile USA, Inc. Mr. Ryder has been a Director of the Company, and was a Trustee of the Trust, since April 2001.
Kneeland C. Youngblood, 53, is a founding partner of Pharos Capital Group, L.L.C., a private equity fund focused on technology companies, business service companies and health care companies, since January 1998. From July 1985 to December 1997, he was in private medical practice. He is former Chairman of the Board of the American Beacon Funds, a mutual fund company managed by AMR Investments, an investment affiliate of American Airlines. He is also a director of Burger King Holdings, Inc., Gap, Inc., and Energy Future Holdings (formerly TXU Corp.). Mr. Youngblood has been a Director of the Company, and was a Trustee of the Trust, since April 2001.
The Board unanimously recommends a vote FOR election of these nominees.
The Board of Directors held 5 meetings during 2008. In addition to meetings of the full Board, Directors attended meetings of individual Board committees. Each Director attended at least 75% of the total number of meetings of the full Board and committees on which he or she serves.
The Board has established Audit, Compensation and Option, Corporate Governance and Nominating, and Capital Committees, the principal functions of which are described below.
Audit Committee. The Audit Committee, which has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the Exchange Act), is currently comprised of Messrs. Ryder (chairperson), Aron, Clarke, Daley and Youngblood, all of whom are independent Directors, as determined by the Board in accordance with the NYSE listing requirements and applicable federal securities laws. The Board has determined that each of Messrs. Ryder and Daley is an audit committee financial expert under federal securities laws and has adopted a written charter for the Audit Committee. The Audit Committee provides oversight regarding accounting, auditing and financial reporting practices of the Company. The Audit Committee selects and engages the independent registered public accounting firm to serve as auditors with whom it discusses the scope and results of their audit. The Audit Committee also discusses with the independent registered public accounting firm and with management, financial accounting and reporting principles, policies and practices and the adequacy of the Companys accounting, financial, operating and disclosure controls. The Audit Committee met 10 times during 2008.
Compensation and Option Committee. Under the terms of its charter, the Compensation and Option Committee is required to consist of three or more members of the Board of Directors who meet the independence requirements of the NYSE, are non-employee directors pursuant to SEC Rule 16b-3, and are outside directors for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation and Option Committee is currently comprised of Messrs. Aron (chairperson), Daley, Duncan, Youngblood and Ms. Galbreath, all of whom are independent Directors, as determined by the Board in accordance with the NYSE listing requirements. The Compensation and Option Committee makes recommendations to the Board with respect to the salaries and other compensation to be paid to the Companys executive officers and other members of senior management and administers the Companys employee benefits plans, including the Companys Long-Term Incentive Compensation Plans. The Compensation and Option Committee met 7 times during 2008.
Capital Committee. The Capital Committee is currently comprised of Ms. Galbreath (chairperson), and Messrs. Clarke, Hippeau and Quazzo. The Capital Committee was established in November 2005 to exercise some of the power of the Board relating to, among other things, capital plans and needs, mergers and acquisitions, divestitures and other significant corporate opportunities between meetings of the Board. The Capital Committee met 6 times during 2008.
Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee is currently comprised of Messrs. Quazzo (chairperson), Duncan and Hippeau and Ambassador Barshefsky, all of whom are independent Directors, as determined by the Board in accordance with the NYSE listing requirements. The Corporate Governance and Nominating Committee was established in May 2004, combining the functions of the Corporate Governance Committee and the Nominating Committee, to oversee compliance with the Companys corporate governance standards and to assist the Board in fulfilling its oversight responsibilities. The Corporate Governance and Nominating Committee establishes, or assists in the establishment of, the Companys governance policies (including policies that govern potential conflicts of interest) and monitors and advises the Company as to compliance with those policies. The Corporate Governance and Nominating Committee reviews, analyzes, advises and makes recommendations to the Board with respect to situations, opportunities, relationships and transactions that are governed by such policies, such as opportunities in which a Director or officer has a personal interest. In addition, the Corporate Governance and Nominating Committee is responsible for making recommendations for candidates for the Board of Directors, taking into account nominations made by officers, Directors, employees and stockholders, recommending Directors for service on Board committees, developing and reviewing background information for candidates, making recommendations to the Board for changes to the Corporate Governance
Guidelines as they pertain to the nomination or qualifications of Directors or the size of the Board, if applicable. The Corporate Governance and Nominating Committee met 10 times during 2008.
This year, Messrs. Clarke and Daley are standing for election by the stockholders for the first time. Mr. Clarke was elected a Director by the Board in April 2008 and Mr. Daley was elected a Director by the Board in November 2008. Mr. Clarke was recommended to the Board by the Chief Executive Officer, who believed that he would be a valuable addition to the Board based on his brand and marketing knowledge and experience. Mr. Daley was recommended by a search firm engaged by the Corporate Governance and Nominating Committee to recommend candidates with a strong financial background and international operations experience. The Corporate Governance and Nominating Committee conducted its own evaluation and interviewed Messrs. Clarke and Daley before making its recommendation to nominate each of them.
There are no firm prerequisites to qualify as a candidate for the Board, although the Board seeks a diverse group of candidates who possess the background, skills and expertise relevant to the business of the Company or candidates that possess a particular geographical or international perspective. The Board looks for candidates with qualities that include strength of character, an inquiring and independent mind, practical wisdom and mature judgment. The Board seeks to insure that at least 2/3 of the Directors are independent under the Companys Governance Guidelines (or at least a majority are independent under the rules of the NYSE), and that members of the Companys Audit Committee meet the financial literacy requirements under the rules of the NYSE and at least one of them qualifies as an audit committee financial expert under applicable federal securities laws. Annually the Corporate Governance and Nominating Committee reviews the qualifications and backgrounds of the Directors, the overall composition of the Board, and recommends to the full Board the slate of Directors to be recommended for nomination for election at the annual meeting of stockholders.
The Board does not believe that its members should be prohibited from serving on boards and/or committees of other organizations, and the Board has not adopted any guidelines limiting such activities. However, the Corporate Governance and Nominating Committee and the full Board will take into account the nature of and time involved in a Directors service on other boards in evaluating the suitability of individual Directors and making its recommendations to Company stockholders. Service on boards and/or committees of other organizations should be consistent with the Companys conflict of interest policies.
The Corporate Governance and Nominating Committee may from time-to-time utilize the services of a search firm to help identify and evaluate candidates for Director who meet the qualifications outlined above.
The Corporate Governance and Nominating Committee will consider candidates nominated by stockholders. Under the Companys current Bylaws, stockholder nominations must be made in writing, delivered or mailed by first class United States mail, postage prepaid, to the Corporate Secretary, 1111 Westchester Avenue, White Plains, New York 10604, and be received by the Corporate Secretary no later than the close of business on the 75th day nor earlier than the close of business on the 100th day prior to the first anniversary of the preceding years annual meeting. In accordance with the Companys current Bylaws, such notice shall set forth as to each proposed nominee (i) the name, age and business address of each nominee proposed in such notice, and a statement as to the qualification of each nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of Shares which are beneficially owned by each such nominee and by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations regulated by Regulation 14A of the Exchange Act, including, without limitation, such persons written consent to being named in the proxy statement as a nominee and to serving as a Director if elected. Although it has no formal policy regarding stockholder nominees, the Corporate Governance and Nominating Committee believes that stockholder nominees should be reviewed in substantially the same manner as other nominees.
The Company provides a comprehensive orientation for all new Directors. It includes a corporate overview, one-on-one meetings with senior management and an orientation meeting. In addition, all Directors are given written materials providing information on the Companys business.
Section 16(a) of the Exchange Act requires that the Companys Directors and executive officers, and persons who own more than ten percent of the outstanding Shares, file with the SEC (and provide a copy to the Company) certain reports relating to their ownership of Shares.
To the Companys knowledge, based solely on a review of the copies of these reports furnished to the Company for the fiscal year ended December 31, 2008, and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its Directors, executive officers and greater than 10 percent beneficial owners were complied with for the most recent fiscal year.
REGISTERED PUBLIC ACCOUNTING FIRM
The Board has appointed and is requesting ratification by stockholders of the appointment of Ernst & Young as the Companys independent registered public accounting firm. While not required by law, the Board is asking the stockholders to ratify the selection of Ernst & Young as a matter of good corporate practice. Representatives of Ernst & Young are expected to be present at the Annual Meeting, will have an opportunity to make a statement, if they desire to do so, and will be available to respond to appropriate questions. If the appointment of Ernst & Young is not ratified, the Board and the Audit Committee will reconsider the selection of the independent registered public accounting firm.
The Board unanimously recommends a vote FOR ratification of the appointment of Ernst & Young as the Companys independent registered public accounting firm for 2009.
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following tables show the number of Shares beneficially owned by (i) all persons known to the Company to be the beneficial owners of more than 5% of the outstanding Shares at December 31, 2008 and (ii) each of the Directors, nominees for Director and executive officers whose compensation is reported in this proxy statement (the Named Executive Officers), and (iii) Directors, nominees for Director, Named Executive Officers and executive officers (who are not Named Executive Officers) as a group, at January 31, 2009. Beneficial ownership includes Shares a stockholder has the power to vote or the power to transfer, and also includes stock options and other derivative securities that were exercisable at that date, or as of that date will become exercisable within 60 days thereafter. Percentages are based upon the number of Shares outstanding at January 31, 2009, plus, where applicable, the number of Shares that the indicated person had a right to acquire within 60 days of such date. The information in the tables is based upon information provided by each Director and executive officer and, in the case of the beneficial owners of more than 5% of the outstanding Shares, the information is based upon Schedules 13G and 13D filed with the SEC.
The following table provides information as of December 31, 2008 regarding Shares that may be issued under equity compensation plans maintained by the Company.
The Companys compensation programs are designed to align compensation with its business objectives and performance, enabling the Company to attract, retain, and reward executive officers and other key employees who contribute to the Companys long-term success and motivate executive officers to enhance long-term stockholder value. The Compensation Committee reviews and sets the Companys overall compensation strategy for all employees on an annual basis. In the course of this review, the Compensation Committee considers the Companys current compensation programs and whether to modify them or introduce new programs or elements of compensation in order to better meet the Companys overall compensation objectives.
During 2008, the Compensation Committee also reviewed some of the Companys long-standing compensation practices and decided to make significant changes, most of which will become effective in 2009. These changes include, among other things, (i) redesigning the compensation structure to achieve cost savings and align total compensation with competitive market data, (ii) eliminating tax gross ups in new change in control agreements entered into in 2008, (iii) eliminating the payout floor under the Companys bonus plans for the 2009 performance year, (iv) structural changes for the 2009 performance year to align the individual performance portion of annual bonuses to the Companys financial performance, and (v) freezing salaries for all bonus eligible associates in corporate and divisional offices, including the Named Executive Officers. In addition, for 2009 equity awards the Compensation Committee lowered the exchange ratio for 2009 equity grants from 3-to-1 to 2.5-to-1 for senior executives electing to receive a larger portion of their equity awards in options instead of restricted stock, because of the lower stock price and leverage opportunity. These changes were designed to better align compensation with (i) the creation and preservation of shareholder value and (ii) the Companys financial performance.
Objectives. As a consumer lifestyle company with a branded hotel portfolio at its core, the Company operates in a competitive, dynamic and challenging business environment. In step with this mission and environment, the Companys executive compensation program for our principal executive officer, principal financial officer and the Named Executive Officers has the following key objectives:
What the Program Intends to Reward. Our executive compensation program is strongly weighted toward variable compensation tied to Company results. Specifically, our compensation program for Named Executive Officers is designed to ensure the following:
Our Compensation and Option Committee (Compensation Committee) is responsible for, among other things, the establishment and review of compensation policies and programs for our executive officers and ensuring that these executive officers are compensated in a manner consistent with the objectives and principles outlined above. It also monitors the Companys executive succession plan, and reviews and monitors the Companys performance as it affects the Companys employees and the overall compensation policies for the Companys employees.
The Compensation Committee makes all compensation decisions for our Named Executive Officers. Our Chief Executive Officer, together with the Chief Human Resources Officer, reviews the performance of each other Named Executive Officer and presents to the Compensation Committee his conclusions and recommendations, including salary adjustments and annual incentive compensation amounts (as described in more detail in subsection B under the heading Incentive Compensation below). The Compensation Committee may exercise its discretion in modifying any recommended salary adjustments or awards to these executives.
The role of the Companys management is to provide reviews and recommendations for the Compensation Committees consideration, and to manage operational aspects of the Companys compensation programs, policies and governance. Direct responsibilities include, but are not limited to, (i) providing an ongoing review of the effectiveness of the compensation programs, including competitiveness, and alignment with the Companys objectives, (ii) recommending changes, if necessary, to ensure achievement of all program objectives and (iii) recommending pay levels, payout and/or awards for executive officers other than the Chief Executive Officer. Management also prepares tally sheets which describe and quantify all components of total compensation for our Named Executive Officers, including salary, annual incentive compensation, long-term incentive compensation, deferred compensation, outstanding equity awards, benefits, perquisites and potential severance and change-in-control payments. The Compensation Committee reviews and considers these tally sheets in making compensation decisions for our Named Executive Officers.
Management of the Company retained Towers Perrin in 2008 to perform a comprehensive review of the compensation paid to all associates other than executive officers. Towers Perrin provided advice concerning the total compensation, including base salary, bonus opportunity and equity awards at these levels. As a result of this review, management fundamentally redesigned the compensation structure for such associates starting in 2009 leading to significant cost savings and reduced overhead. Towers Perrin worked directly with management on this project and it was implemented by management with the approval of the Compensation Committee.
The Compensation Committee retained Pearl Meyer & Partners to assist in the review and determination of compensation awards to the Named Executive Officers (including the CEO) for the 2008 performance period. Pearl Meyer & Partners worked with management and the Compensation Committee in reviewing the compensation structure of the Company and of the companies in the peer group. Pearl Meyer & Partners does not provide any other services to the Company. The Compensation Committee approved Pearl Meyer & Partners equity program recommendations and compensation awards for the 2008 performance period.
The primary elements of the Companys compensation program for our Named Executive Officers are:
Mr. van Paasschens compensation structure was established in 2007 pursuant to his employment agreement. Mr. van Paasschen and the Company agreed to a compensation structure which was heavily geared towards performance and long term incentives, including equity awards in the form of restricted stock and stock options and restrictions on selling equity awards for two years (other than to satisfy tax withholding obligations). As a result, in the event of strong financial and individual performance, Mr. van Paasschen would benefit greatly in the form of long term incentive compensation (stock options and restricted stock), but his compensation would be significantly lower if the Company did not perform well or if his employment with the Company was terminated after a short period of time (due to the vesting requirements of the equity awards and generally no acceleration of equity awards for a termination with or without cause). For the other Named Executive Officers, pay is also structured to award performance but to a lesser degree in order to provide the Named Executive Officers with a minimum amount of compensation when the Company is unable to achieve its financial and strategic goals.
We describe each of the compensation elements below and explain why we pay each element and how we determine the amount of each element.
Base Salary. The Company believes it is essential to provide our Named Executive Officers with competitive base salaries that will enable the Company to continue to attract and retain critical senior executives from within and outside the hospitality industry. In the case of Named Executive Officers other than the Chief Executive Officer, base salary typically accounts for approximately 20% of total compensation at target, i.e., total compensation excluding benefits and perquisites, and is generally targeted at the median of the Companys peer group. In the case of Mr. van Paasschen, base salary for 2008 was limited to $1 million in order to keep this element of his compensation below the levels established by Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), which limits the deductibility of non-performance-based compensation above that amount. As a result, base salary accounted for approximately 12.5% of total compensation at target for Mr. van Paasschen. Base salary serves as a minimum level of compensation to Named Executive Officers in circumstances when achieving Company financial and strategic/operational objectives becomes challenging and the level of incentive compensation is impacted. Salaries for Named Executive Officers are generally based on the responsibilities of each position and are reviewed annually against similar positions among a group of peer companies developed by the Company and its advisors consisting of similarly-sized hotel and hospitality companies as well as other companies representative of markets in which the Company competes for key executive talent. See the Background Information on the Executive Compensation Program Use of Peer Data section beginning on page 25 below for a list of the peer companies used in this analysis. The Company generally seeks to position base salaries of our Named Executive Officers at or near the market median for similar positions.
Incentive Compensation. Incentive compensation includes annual incentive awards under the Companys Annual Incentive Plan for Certain Executives (the Executive Plan) as well as long-term incentive compensation in the form of equity awards under the Companys 2004 Long-Term Incentive Plan (LTIP). Incentive compensation typically accounts for approximately 80% of total compensation at target (87.5% for Mr. van Paasschen), with annual incentive compensation and long-term incentive compensation accounting for 20% and 60%, respectively (25% and 62.5% for Mr. van Paasschen, respectively). The Companys emphasis on incentive compensation results in total compensation at target that is set at approximately the 65th percentile level relative to the Companys peer group, but that is highly dependent on performance. The Company believes that this structure allows it to provide
each Named Executive Officer with substantial incentive compensation opportunities if performance objectives are met. The Company believes that the allocation between base and incentive compensation is appropriate and beneficial because:
Annual Incentive Compensation. Annual incentives are a key part of the Companys executive compensation program. The incentives directly link the achievement of Company financial and strategic/operational performance objectives to executive pay. Annual incentives also provide a complementary balance to equity incentives (discussed below). Each Named Executive Officer has an annual opportunity to receive an award under the stockholder-approved Executive Plan. If and when earned, awards are typically paid to Named Executive Officers partly in cash and, unless the Compensation Committee otherwise elects, partly as deferred equity awards in the form of deferred stock units (under the Executive Plan). The deferred stock units vest over a three-year period. See additional detail regarding these deferred equity awards in the Long-Term Incentive Compensation section below.
For the Named Executive Officers, the annual incentive award for 2008 was paid under the Executive Plan. Each year, the Compensation Committee establishes in advance a threshold level of earnings before interest, taxes, depreciation and amortization (EBITDA) that the Company must achieve in order for any bonus to be paid under the Executive Plan for that year (the EP Threshold). The Executive Plan also specifies a maximum bonus amount, in dollars, that may be paid to any executive for any 12-month performance period. When the threshold is established at the beginning of a year, the achievement of the threshold is considered substantially uncertain for purposes of Section 162(m) of the Code, which is one of the requirements for compensation paid under the Executive Plan to be deductible as performance-based compensation under Section 162(m). For 2008, the EP Threshold was $637,500,000.
Generally, a Named Executive Officer will receive payment of an award under the Executive Plan only if he remains employed by the Company on the award payment date. However, pro rata awards may be paid at the discretion of the Compensation Committee in the event of death, disability, retirement or other termination of employment. To determine the actual bonus to be paid for a year, if the threshold is met and subject to the maximum described above, the Compensation Committee also establishes specific annual Company financial and strategic/operational performance targets and a related target bonus amount for each executive. These financial and strategic/operational targets are described below.
If the EP Threshold under the Executive Plan is met for a year, the Company financial and strategic/operational goals referenced above are then used to determine a Named Executive Officers actual bonus, as follows:
The Company financial goals for Named Executive Officers under the Executive Plan consist of operating income and earnings per share targets, with each criteria accounting for half of the financial goal portion of the annual bonus. As the Company generally sets target incentive award opportunities above market median, the Company financial and strategic/operational goals to achieve such award levels are considered stretch but achievable, representing above-market performance. Consistent with maintaining these high standards and
subject to achieving the EP Threshold, the Compensation Committee retains the ability to consider whether an adjustment of the financial goals for any year is necessitated by exceptional circumstances, e.g., an unanticipated and material downturn in the business cycle that triggers, in response, an increased focus by the Compensation Committee on the Companys performance relative to the industry. This ability is intended to be narrowly and infrequently used and would, if applicable, be detailed in the proxy.
Performance against the financial targets determined 60% of Mr. van Paasschens total target opportunity and 50% of the total target opportunities for the other Named Executive Officers. Subject to achieving the EP Threshold, actual incentives paid to Named Executive Officers for financial performance may range from 0% to 200% of the pre-determined target bonus for this category of performance. For Named Executive Officers, the Company performance portion is based 50% on earnings per share and 50% on operating income of the Company, provided that Mr. Avrils Company financial portion was pro-rated based on his services for SVO, the Companys vacation ownership subsidiary, prior to his promotion in September 2008. From January through September, the Company financial performance portion is based on 50% on earnings per share and 50% on the net income for SVO.
Once the EP Threshold is achieved, a minimum amount is generally paid on a component of the Financial Goals portion of the annual bonus subject to the Compensation Committee applying its discretion to reduce awards. Further, once a certain level of performance is achieved, the bonus payout for the applicable metric is limited to 200% (i.e., the performance maximum). The table below sets forth for each metric the performance levels for 2008 which would have resulted in 100% payout (i.e. target), the performance minimum level that would have resulted in a 50% payout and the performance maximum level that would have resulted in a 200% payout. In addition, the table sets forth the mid-points of performance and payout between the performance minimum to target and from target to performance maximum:
For the 2008 performance period, EBITDA (which exceeded the EP Threshold) for purposes of determining bonuses was $1,157,000,000. Actual results for earnings per share, Company operating income and SVO net income were $2.36, $819,300,000 and $85,000,000, respectively. Using the metrics described above resulted in a payout at 82% of target for the Company performance portion of bonuses for the 2008 performance period for the Named Executive Officers other than Mr. Avril. For Mr. Avril, the financial performance component was paid at 68% of target (61% attributable to SVO for eight months and 82% attributable to corporate for four months).
The strategic/operational performance goals for Named Executive Officers under the Executive Plan consists of Big 5 and leadership competency objectives that link individual contributions to execution of our business strategy and major financial and operating goals. Big 5 refers to each executives specific deliverables within the Companys critical performance categories operational excellence, brand enhancement, innovation, growth, and customer experience. As part of a structured process that cascades down throughout the Company, these objectives are developed at the beginning of the year, and they integrate and align an executive with the Companys strategic and operational plan. Achievement of Big 5 objectives typically accounts for 80% of the strategic/operational performance evaluation, and achievement of leadership competency objectives typically accounts for 20% of such evaluation. The portion of annual incentive awards attributable to strategic/operational/talent management performance represents 40% of Mr. van Paasschens total target opportunity and 50% of the total target opportunities for the other Named Executive Officers. Actual incentives paid to Named Executive Officers for strategic/operational performance may range from 0% to 175% of the pre-determined target amount for this category of performance. The evaluation process for Mr.
van Paasschen and the other Named Executive Officers with respect to each executives strategic/operational goals is described below.
Mr. van Paasschens accomplishments for the 2008 performance year included the following:
In light of Mr. van Paasschens accomplishments and impact on the Company, the Compensation Committee awarded him a bonus of $1,820,000 for 2008, representing 91% of target.
Mr. Prabhus accomplishments for the 2008 performance year included the following:
In light of Mr. Prabhus accomplishments, he received a meets expectations performance rating and was awarded 100% of his individual bonus target. Combined with the 82% financial performance component, Mr. Prabhus 2008 bonus was 91% of target.
Mr. Siegels individual accomplishments for the 2008 performance year included the following:
In light of Mr. Siegels accomplishments, he received a meets expectations performance rating and was awarded 100% of his individual bonus target. Combined with the 82% financial performance component, Mr. Siegels 2008 bonus was 91% of target.
Mr. Avrils accomplishments for the 2008 performance year included the following:
In light of Mr. Avrils accomplishments in 2008, he received a meets expectations performance rating and was awarded 80% of his individual bonus target. Combined with the 68% financial performance component (pro-rated for service as President of SVO from January through September), Mr. Avrils 2008 bonus was 74% of target.
Mr. McAveetys accomplishments for the 2008 performance year included the following:
In light of Mr. McAveetys accomplishments in 2008, he received a meets expectations performance rating and was awarded 100% of his individual bonus target. Combined with the 82% financial performance component, Mr. McAveetys 2008 bonus was 91% of target (pro-rated for his March 2008 start date).
Mr. Turner joined the Company in May 2008. Pursuant to his employment agreement, Mr. Turner was entitled to at least a pro-rated target bonus for 2008. The Compensation Committee awarded Mr. Turner the minimum amount permitted under his employment agreement and did not exercise its discretion to award amounts in excess of the minimum.
Overall, the Compensation Committee paid the majority of the Named Executive Officers individual bonuses that were at target for their individual performance, resulting in overall bonuses that were below target when combined with the Company financial performance portion. These decisions were made in consideration of the strong individual performance of each of the Named Executive Officers despite the difficult economic climate and multiple changes at the senior executive level resulting in changing roles and responsibilities.
Viewed on a combined basis once minimum performance is attained, the annual incentive payments attributable to both Company financial and strategic/operational performance range from 0% 187.5% of target for the Named Executive Officers, other than the Chief Executive Officer.
Equity awards are generally granted in February of each year following the announcement of the Companys earnings for the previous year. Performance reviews and bonus awards for the prior operating year are made at that time. In determining the equity awards granted in 2008, the Compensation Committee considered and took into account the Companys performance and the individual performance of each Named
Executive Officer in 2007 as well as the expected performance of the Company for 2008 at the time of grant. In addition, the Compensation Committee considers structural changes to the equity program and the fact that the Compensation Committee targets the median of the peer group for base salary but targets total compensation at the 65% percentile resulting in larger long-term incentive awards. Messrs. McAveety and Turner received sign on grants in 2008 following the commencement of their employment. In addition, in connection with his promotion to President, Hotel Group, Mr. Avril received an additional promotion grant in 2008 reflecting his increased role and responsibilities. Based on the factors set forth above, including the Companys performance and individual performance of each Named Executive Officer in 2007, the Compensation Committee believes that equity award grants in 2008 were appropriate.
Total compensation for this group is evaluated against the peer group identified in this proxy statement. Evaluated on this basis, the Compensation Committee believes the actual cash and equity compensation delivered for the 2008 performance year was appropriate in light of the Companys overall performance and individual executive performance.
In its review of the overall compensation strategy and program in 2008, the Compensation Committee made several key changes, most of which will be effective for the 2009 performance year. The Compensation Committee changed its philosophy on tax gross ups in change in control agreements and eliminated gross ups for arrangements put in place in 2008 with senior executives. For the 2009 performance year, the Compensation Committee also eliminated the minimum payout on the Company financial performance portion by establishing minimum performance measures that must be achieved for any bonus to be paid, made structural changes to align the individual performance portion of annual bonuses to the Companys financial performance and lowered the ratio for determining the number of options to be granted from 3-to-1 to 2.5-to-1. In addition, the Company froze salaries for all bonus eligible associates in corporate and divisional offices, including the Named Executive Officers. These changes were designed to better align compensation with (i) the creation and preservation of shareholder value and (ii) the Companys financial performance.
Evaluation Process for Strategic/Operational and Other Goals.
Other Named Executive Officers. With oversight and input from the Compensation Committee, the Chief Executive Officer, together with the Chief Human Resources Officer, conducts a formal performance review process each year during which he evaluates how each other Named Executive Officer performed against the officers strategic/operational performance goals for the prior year. The Chief Executive Officer conducts this evaluation through the Performance Management Process (PMP), which results in a PMP rating for each executive. This PMP rating corresponds to a payout range under the Executive Plan determined annually by the Compensation Committee for that rating. As noted, for 2008 the portion of the Executive Plan payouts based on PMP ratings could range from 0% to 175% of target. Where necessary to preserve the competitive position of the Companys compensation scale, the Chief Executive Officer may recommend a market adjustment to the base amount that is subjected to this percentage. At the conclusion of his review, the Chief Executive Officer submits his recommendations to the Compensation Committee for final review and approval. In determining the actual award payable to a Named Executive Officer under the Executive Plan, the Compensation Committee reviews the Chief Executive Officers evaluation and makes a final determination as to how the executive performed against his strategic/operational goals for the year. The Compensation Committee also determines, based on managements report, the extent to which the Companys financial performance goals were achieved and whether the Company achieved the applicable minimum threshold(s) required to pay awards. The Chief Executive Officer also meets in executive session with the Board of Directors to inform the Board of his performance assessments regarding the Named Executive Officers and the basis for the compensation recommendations he presented to the Compensation Committee.
Annual Incentive awards made to our Named Executive Officers under the Executive Plan with respect to 2008 performance are reflected in the Summary Compensation Table on page 29 and described in the accompanying narrative.
Long-Term Incentive Compensation. Like the annual incentives described above, long-term incentives are a key part of the Companys executive compensation program. Long-term incentives are strongly tied to
returns achieved by stockholders, providing a direct link between the interests of stockholders and the Named Executive Officers. Long-term incentive compensation for our Named Executive Officers consists primarily of equity compensation awards granted annually under the Companys LTIP and secondarily of the portion of the Executive Plan and Executive AIP awards that are deferred in the form of deferred stock units and shares of restricted stock, respectively. Taken together, approximately 60-65% of total compensation at target is equity-based long term incentive compensation.
The Compensation Committee generally grants awards under the LTIP annually to all other Named Executive Officers that are a combination of stock options and restricted stock awards. In 2008 we used a grant approach in which the award is articulated as a dollar value. Under this approach, an overall award value, in dollars, was determined for each executive based upon our compensation strategy and competitive market positioning. We generally targeted the value of these awards so that total compensation at target is set at the 65th percentile of our peer group, though individual awards may have been higher or lower based on individual performance (determined as described in the Executive AIP assessment above). The number of restricted stock shares is calculated by dividing 75% of the award value by the fair market value of the Companys stock on the grant date. The number of stock options has generally been determined by dividing the remaining 25% of the award value by the fair market value of the Companys stock on the grant date and multiplying the result by three. In light of the stock price and leverage opportunity, the Compensation Committee reduced this ratio to 2.5 for equity awards made in 2009. The Named Executive Officers are able to elect a greater portion of options (up to 100% options).
The exercise price for each stock option is equal to fair market value of the Companys common stock on the option grant date. See the section entitled Equity Grant Practices on page 27 below for a description of the manner in which we determine fair market value for this purpose. Currently, most stock options vest in 25% increments annually starting with the first anniversary from the date of grant. For stock options granted in 2008, awards granted to associates who are retirement eligible, as defined in the LTIP, vest in 16 equal quarterly periods. Unexercised, stock options expire 8 years from the date of grant, or earlier in the event of termination of employment. Stock options provide compensation only when vested and only if the Companys stock price appreciates and exceeds the exercise price of the option. Therefore, during business downturns, option awards may not represent any economic value to an executive.
Restricted stock units and restricted stock provide some measure of mitigation of business cyclicality while maintaining a direct tie to share price. The Company seeks to enhance the link to stockholder performance by building a strong retention incentive into the equity program. Consequently, for 2008 grants, 75% of restricted stock units and awards vest on the third anniversary of the date of grant and the remaining 25% vests on the fourth anniversary of the date of grant. For restricted stock granted in 2008, awards granted to associates who are retirement eligible, as defined in the LTIP, vest in sixteen equal quarterly periods. This delayed vesting places an executives long-term compensation at risk to share price performance for a significant portion of the business cycle, while encouraging long-term retention of executives.
As mentioned above, Named Executive Officers have a mandatory deferral of 25% of their awards under the Executive Plan in the form of deferred stock units, unless reduced in the discretion of the Compensation Committee. As such, the awards combine performance-based compensation with a further link to stockholder interests. First, amounts must be earned based on annual Company financial and strategic/operational performance under the Executive Plan. Second, these already earned amounts are put at risk through a vesting schedule. Vesting occurs in installments for employment over a three-year period. Third, these earned amounts become subject to share price performance. Primarily in consideration of this vesting risk being applied to already earned compensation (but also taking into account the enhanced stockholder alignment that results from being subject to share performance), the deferred amount is increased by 33% of value. The Compensation Committee has the discretion to accelerate vesting or pay out deferred amounts in cash (without interest and without the percentage increase in value) in a limited number of termination circumstances (e.g., involuntary terminations or retirements).
Mr. van Paasschen agreed not to sell any Company stock awards or shares received on exercise of options (except as may be withheld for taxes) for the first two years of his employment and thereafter only in consultation with the Board of Directors.
Benefits and Perquisites. Base salary and incentive compensation are supplemented by benefits and perquisites.
Current Benefits. The Company provides employee benefits that are consistent with local practices and competitive markets, including group health benefits, life and disability insurance, medical and dependent care flexible spending accounts and a pre-tax premium payment arrangement. Each of these benefits is provided to a broad group of employees within the Company and our Named Executive Officers participate in the arrangements on the same basis as other employees.
Perquisites. As reflected in the Summary Compensation Table below, the Company provides certain limited perquisites to select Named Executive Officers when necessary to provide an appropriate compensation package to those Named Executive Officers, particularly in connection with enabling the executives and their families to smoothly transition from previous positions which may require relocation.
For example, Mr. van Paasschens employment agreement provides that the Company will provide Mr. van Paasschen with up to a $500,000 credit (based on the Standard Industry Fare Level formula) for personal use of the Companys aircraft during the first 12 months of his employment with the Company, $495,086 of which was used. Mr. van Paasschen and his immediate family had access to a Company owned or leased airplane on an as available basis for personal travel, i.e., assuming such plane was not needed for business purposes, with an obligation to reimburse for personal use based upon the Companys operating cost, subject to the credit described above.
The Company also reimburses Named Executive Officers generally for travel expenses and other out-of-pocket costs incurred with respect to attendance by their spouses at one meeting of the Board each year.
Retirement Benefits. The Company maintains a tax-qualified retirement savings plan pursuant to Code section 401(k) for a broadly-defined group of eligible employees that includes the Companys Named Executive Officers. Eligible employees may contribute a portion of their eligible compensation to the plan on a before-tax basis, subject to certain limitations prescribed by the Code. Prior to 2008, the Company matched 100% of the first 2% of eligible compensation and 50% of the next 2% of eligible compensation that an eligible employee contributes. Beginning in 2008, the Company matched 100% of the first 1% of eligible compensation and 50% of the next 6% of eligible compensation that an eligible employee contributes. These matching contributions, as adjusted for related investment returns, become fully vested upon the eligible employees completion of three years of service with the Company. Our Named Executive Officers, in addition to certain other eligible employees, were permitted to make additional deferrals of base pay and regular annual incentive awards under our nonqualified deferred compensation plan. This plan is discussed in further detail under the heading Nonqualified Deferred Compensation on page 35.
Following the consummation of the sale of 33 hotels to Host Hotels & Resorts and the related return of capital to stockholders, the Board reviewed the change of control arrangements then in place with the Named Executive Officers and decided to enter into new change of control agreements with the Named Executive Officers at that time, which included Messrs. Prabhu and Siegel. On March 25, 2005, the Company adopted a policy proscribing certain terms of severance agreements triggered upon a change in control of the Company. Pursuant to the policy, the Company is required to seek stockholder approval of severance agreements with executive officers that provide Benefits (as defined in the policy) in excess of 2.99 times base salary plus such officers most recent bonus.
In connection with the hiring of Messrs. McAveety and Turner and the promotion of Mr. Avril, the Company entered into change of control arrangements with them that were similar to the arrangements in place for the other Named Executive Officers (other than the CEO). The arrangements with Messrs. McAveety, Turner and Avril, however, do not provide for a tax gross up if the benefits payable thereunder are subject to the 280G excise tax. Instead, the benefits provided are reduced until the point that the executive would be better off paying the excise tax rather than reducing benefits.
The Company also included change of control arrangements in Mr. van Paasschens employment agreement. These change of control arrangements are described in more detail beginning on page 36 under the heading entitled
Potential Payments Upon Termination or Change of Control. The Change of Control Severance Agreements are intended to promote stability and continuity of senior management. The Company believes that the provision of severance pay to these Named Executive Officers upon a change of control aligns their interests with those of stockholders. In addition, for executive officers hired in 2008, the Company changed its policy on providing tax gross-ups in change in control agreements. As a result, the change in control arrangements with Messrs. Avril, McAveety and Turner provide that the benefits are to be reduced until the executive is better off paying the excise tax rather than reducing benefits. By making severance pay available, the Company is able to mitigate executive concern over employment termination in the event of a change of control that benefits stockholders. In addition, the acceleration of equity compensation vesting in connection with a change of control provides these Named Executive Officers with protection against equity forfeiture due to termination and ample incentive to achieve Company goals, including facilitating a sale of the Company at the highest possible price per share, which would benefit both stockholders and executives. In addition, the Company acknowledges that seeking a new senior position is a long and time consuming process. Lastly, each severance agreement permits the executive to maintain certain benefits for a period of two years following termination and to receive outplacement services. The aggregate effect of our change of control provisions is intended to focus executives on maximizing value to stockholders. In addition, should a change of control occur, benefits will be paid after a double trigger event as described in Potential Payments Upon Termination or Change in Control. Benefit levels have been set to be competitive with peer group practices.
In connection with Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A), the Company amended the employment arrangements with each of the Named Executive Officers (including the CEO). These amendments made several technical changes designed to make the employment arrangements with such officers comply with Section 409A and the final regulations issued thereunder, and generally affect the timing, but not the amount of compensation of such officers under specified circumstances.
On August 14, 2007, the Company entered into a letter agreement with Mr. Siegel. The letter agreement provided for the acceleration of 50% of Mr. Siegels then unvested restricted stock and options in the event his employment was terminated without cause or by the executive for good reason within two years of the hiring of a new Chief Executive Officer. The purpose of the letter agreement was to support retention, stability and continuity and succession planning and to provide assurance to a key executive in a time of uncertainty regarding the Companys chief executive officer position. The special severance will expire on August 14, 2009.
In addition, the Company entered into a letter agreement with Mr. Prabhu clarifying that his severance included the acceleration of 50% of unvested restricted stock and options in the event that his employment was terminated without cause or by him for good reason. The clarification formally documented Mr. Prabhus existing severance arrangements as part of his employment by the Company.
In determining competitive compensation levels, the Compensation Committee reviews data from several major compensation consulting firms that reflects compensation practices for executives in comparable positions in a peer group consisting of companies in the hotel and hospitality industries and companies with similar revenues in other industries relevant to key talent recruitment needs. The executive team and Compensation Committee review the peer group bi-annually to ensure it represents a relevant market perspective. The Compensation Committee utilizes the peer group for a broad set of comparative purposes, including levels of total compensation, pay mix, incentive plan and equity usage and other terms of employment. The Compensation Committee also reviews Company performance against the performance of companies in this peer group. The Company believes that by conducting the competitive analysis using a broad peer group, which includes companies outside the hospitality industry, it is able to attract and retain talented executives from outside the hospitality industry. The Companys experience has proven that key executives with diversified experience prove to be major contributors to its continued growth and success.
Accordingly, the Company was able to attract and retain:
The peer group approved by the Compensation Committee for 2008 is set out below. We expect that it will be necessary to update the list periodically.
In performing its competitive analysis, the Compensation Committee typically reviews:
During 2008, compensation paid to the Companys Named Executive Officers was compared to peer group data reported in 2008 proxy statements, as provided by compensation consulting firms and reflecting 2007 compensation. The Companys Named Executive Officer compensation data taken into account for this comparison included 2008 salary, Executive AIP bonuses paid in 2009 for 2008 performance and equity grants awarded in 2008.
The competitive position of the Companys compensation based on total cash (salary and bonus) ranged from the median to the lower quartile while the competitive position of its compensation based on total compensation at target, which includes the equity grants, ranged from the median to the upper quartile.
Tax. Section 162(m) of the Code generally disallows a federal income tax deduction to public companies for compensation in excess of $1,000,000 paid to the chief executive officer and the four other most highly compensated executive officers. Qualified performance-based compensation is not subject to the deduction limit if certain requirements are met. The Company believes that compensation paid under the Executive Plan meets these requirements and is generally fully deductible for federal income tax purposes. In designing the Companys compensation programs, the Compensation Committee carefully considers the effect of this provision together with other factors relevant to its business needs. Therefore, in certain circumstances the Company may approve compensation that does not meet these requirements in order to advance the long-term interests of its stockholders. At the same time, the Company has historically taken, and intends to continue taking, reasonably practicable steps to minimize the impact of Section 162(m). Accordingly, the Compensation Committee has determined that each of the Named Executive Officers will participate under the Executive Plan for 2008.
On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, adding Section 409A to the Code and thereby changing the tax rules applicable to nonqualified deferred compensation arrangements effective January 1, 2005. While final Section 409A regulations were not effective until January 1, 2009, the Company believes it was operating in good faith compliance with Section 409A and the interpretive guidance thereunder. The company entered into amendments to the employments arrangements with its senior officers, including the CEO and Named Executive Officers, and amended its bonus and compensation plans in December 2008 to meet the requirements of these regulations. A more detailed discussion of the Companys nonqualified deferred compensation plan is provided on page 35 under the heading Nonqualified Deferred Compensation.
Accounting. Beginning on January 1, 2006, the Company began accounting for awards under its LTIP in accordance with the requirements of FASB Statement 123(R) (SFAS 123(R)).
In 2007, the Company adopted share ownership guidelines for our executive officers, including the Named Executive Officers. Pursuant to the guidelines, the Named Executive Officers, including the Chief Executive Officer, are required to hold that number of Shares having a market value equal to or greater than a multiple of each executives base salary. For the Chief Executive Officer, the multiple is five (5) times base salary and for the other Named Executive Officers, the multiple is four (4) times base salary. A retention requirement of 35% is applied to restricted Shares upon vesting (net shares after tax withholding) and Shares obtained from option exercises until the executive meets the target, or if an executive falls out of compliance. Shares owned, stock equivalents (vested/unvested units), and unvested restricted stock (pre-tax) count towards meeting ownership targets. However, stock options do not count towards meeting the target. Officers have five years from the date of hire or the date they first become subject to the policy to meet the ownership requirements.
Determination of Option Exercise Prices. The Compensation Committee grants stock options with an exercise price equal to the fair market value of a share of our common stock on the grant date. Under the LTIP, the fair market value of our common stock on a particular date is determined as the average of the high and low trading prices of a share of the stock on the New York Stock Exchange on that date.
Timing of Equity Grants. The Compensation Committee generally makes annual equity compensation grants to Named Executive Officers at its first regularly scheduled meeting that occurs after the release of the Companys earnings for the prior year (typically in February). The timing of this meeting is determined based on factors unrelated to the pricing of equity grants.
The Compensation Committee approves equity compensation awards to a newly hired Executive Officer at the time that the Board meets to approve the executives employment package. Generally, the date on which the Board approves the employment package becomes the grant date of the newly-hired Executive Officers equity compensation awards. However, if the Company and the new Executive Officer will enter into an employment agreement regarding the employment relationship, the Company requires the Executive Officer to sign his
employment agreement shortly following the date of Board approval of the employment package; the later of the date on which the Executive Officer signs his employment agreement or the date that the Executive Officer begins employment becomes the grant date of these equity compensation awards.
The Companys policy is that the grant date of equity compensation awards is always on or shortly after the date the Compensation Committee approves the grants.
Although, as discussed above, annual grants are generally made in February, under unusual circumstances grants may be made at other times during the year. For example, the economic downturn at the beginning of the current decade as well as the September 11 terrorist attacks and aftermath had a significant negative impact on the Company (and the hospitality industry generally) and its stock price. This severely weakened the retention aspect of the Companys equity awards outstanding at the time, particularly in the case of outstanding option awards, virtually all of which had exercise prices above the then-current trading price of the Companys common stock. To respond to this concern, the Company made the 2003 option grants in December 2002 with the intention of keeping executives focused on business results (including the Companys stock price), restoring financial motivation to succeed and retaining the Companys top performers.
The Compensation and Option Committee of the Board of Directors (the Board) of Starwood Hotels & Resorts Worldwide, Inc. (the Company) has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, recommended to the Board that the Compensation Discussion and Analysis be included in the Companys Proxy Statement for the 2009 Annual Meeting of Stockholders.
COMPENSATION AND OPTION COMMITTEE
Adam M. Aron, Chairman
Clayton C. Daley, Jr.
Bruce W. Duncan
Kneeland C. Youngblood
III. SUMMARY COMPENSATION TABLE
We describe below the Executive Plan awards granted to our Named Executive Officers for 2008. These awards are reflected in both the Summary Compensation Table on page 29 and the Grants of Plan-Based Awards section on page 31.
Mr. Turner received an incentive award in March 2009 relating to his 2008 performance. Under the terms of his employment agreement, Mr. Turner was entitled to receive at least a pro-rata target bonus. The Committee awarded the minimum amount pursuant to the employment agreement and did not exercise any discretion with respect thereto.
Each of the other Named Executive Officers received an award in March 2009 relating to his 2008 performance. The table below presents for each such Named Executive Officer his salary, target as both a percentage of salary and a dollar amount, actual award, the portion of the award that is deferred into restricted stock units and the 33% increase in his restricted stock units.
The following factors contributed to the Compensation Committees determination of the 2008 Executive AIP awards for these Named Executive Officers:
The following table provides information on the current holdings of stock options and stock awards by the Named Executive Officers. This table includes unexercised and unvested stock options, unvested restricted stock and unvested restricted stock units. Each equity grant is shown separately for each Named Executive Officer. The
market value of the stock awards is based on the closing price of Company stock on December 31, 2008, which was $17.90.
The following table discloses, for each Named Executive Officer, (i) shares of Company stock acquired pursuant to exercise of stock options during 2008, (ii) shares of restricted Company stock that vested in 2008, and (iii) shares of Company stock acquired in 2008 on account of vesting of restricted stock units. The table also discloses the value realized by the Named Executive Officer for each such event, calculated prior to the deduction of any applicable withholding taxes and brokerage commissions.
VIII. NONQUALIFIED DEFERRED COMPENSATION
The Companys Deferred Compensation Plan (the Plan) permits eligible executives, including our Named Executive Officers, to defer up to 100% of their Executive Plan or Executive AIP bonus, as applicable, and up to 75% of their base salary for a calendar year. The Company does not contribute to the Plan. Mr. van Paasschen made deferrals under the Plan in 2008 but no other Named Executive Officer did.
Deferral elections are made in December for base salary paid in pay periods beginning in the following calendar year. Deferral elections are made in June for annual incentive awards that are earned for performance in that calendar year but paid in March of the following year. Deferral elections are irrevocable.
Elections as to the time and form of payment are made at the same time as the corresponding deferral election. A participant may elect to receive payment on February 1 of a calendar year while still employed or either 6 or 12 months following employment termination. Payment will be made immediately in the event a participant terminates employment on account of death, disability or on account of certain changes in control. A participant may elect to receive payment of his account balance in either a lump sum or in annual installments, so long as the account balance exceeds $50,000; otherwise payment will be made in a lump sum.
If a participant elects an in-service distribution, the participant may change the scheduled distribution date or form of payment so long as the change is made at least 12 months in advance of the scheduled distribution date. Any such change must provide that distribution will commence at least five years later than the scheduled distribution date. If a participant elects to receive distribution upon employment termination, that election and the corresponding form of payment election are irrevocable. Withdrawals for hardship that results from an unforeseeable emergency are available, but no other unscheduled withdrawals are permitted.
The Plan uses the investment funds listed below as potential indices for calculating investment returns on a participants Plan account balance. The deferrals the participant directs for investment into these funds are adjusted based on a deemed investment in the applicable funds. The participant does not actually own the investments that he selects. The Company may, but is not required to, make identical investments pursuant to a variable universal life insurance product. When it does, participants have no direct interest in this life insurance.
The Company provides certain benefits to our Named Executive Officers in the event of employment termination, both in connection with a change in control and otherwise. These benefits are in addition to benefits available generally to salaried employees, such as distributions under the Companys tax-qualified retirement savings plan, disability insurance benefits and life insurance benefits. These benefits are described below.
Pursuant to Mr. van Paaschens employment agreement, if Mr. van Paasschens employment is terminated by the Company other than for cause or by Mr. van Paasschen for good reason, the Company will pay Mr. van Paasschen as a severance benefit (i) two times the sum of his base salary and target annual bonus, (ii) a pro rated target bonus for the year of termination and (iii) Mr. van Paasschens sign on restricted stock unit award (25,558 units) would be payable. None of the other equity awards granted to Mr. van Paasschen would be accelerated. If Mr. van Paasschens employment were terminated because of his death or permanent disability, Mr. van Paasschen (or his estate) would be entitled to receive a pro rated target bonus for the year of termination and all of his equity awards would accelerate and vest.
Pursuant to Mr. Avrils employment agreement, if Mr. Avrils employment is terminated by the Company without cause, he will receive severance benefits of twelve months of base salary and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination. In addition, Mr. Avril will also be entitled to acceleration of all of his restricted stock and options that were granted prior to August 19, 2008, but no acceleration for equity awards granted on or after August 19, 2008.
Pursuant to his employment agreement, if Mr. Prabhus employment is terminated by the Company without cause or by Mr. Prabhu voluntarily with good reason, he will receive severance benefits equal to one years base salary and he will be reimbursed for COBRA expenses minus his last level of contribution for up to twelve months following termination. In addition, the Company will accelerate the vesting of 50% of Mr. Prabhus unvested
restricted stock and options. The Company entered into a letter agreement on August 14, 2007 confirming the terms of the agreement as it relates to the acceleration of 50% of Mr. Prabhus unvested restricted stock and options.
Pursuant to Mr. Siegels employment agreement, in the event Mr. Siegels employment is terminated by the Company without cause, Mr. Siegel will receive severance benefits of twelve months of base salary plus 100% of his target annual incentive and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination. Pursuant to a letter agreement entered into on August 14, 2007, Mr. Siegel will also be entitled to acceleration of 50% of his then unvested restricted stock and options if he is terminated without cause prior to September 24, 2009.
Pursuant to Mr. McAveetys employment agreement, if Mr. McAveetys employment is terminated by the Company other than for cause, he will receive severance benefits of twelve months base salary and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination. In addition, the Company will pay the reasonable costs of relocation costs should Mr. McAveety relocate to Europe within one year of the termination of his employment
Pursuant to Mr. Turners employment agreement, if Mr. Turners employment is terminated by the Company other than for cause or by Mr. Turner for good reason, he will receive severance benefits of twelve months base salary and the Company will continue to provide medical benefits coverage for up to twelve months after the date of termination.
On August 2, 2006, the Company and each of Messrs. Prabhu and Siegel entered into severance agreements. Each severance agreement provides for a term of three years, with an automatic one-year extension until either the executive or the Company notifies the other that such party does not wish to extend the agreement. If a Change in Control (as described below) occurs, the agreement will continue for at least 24 months following the date of such Change in Control.
Each agreement provides that if, following a Change in Control, the executives employment is terminated without Cause (as defined in the agreement) or with Good Reason (as defined in the agreement), the executive would receive the following in addition to the items described in A. above:
In addition, to the extent that any executive becomes subject to the golden parachute excise tax imposed under Section 4999 of the Code, the executive would receive a gross-up payment in an amount sufficient to offset the effects of such excise tax.
Under the severance agreements, a Change in Control is deemed to occur upon any of the following events:
Each of Messrs. Avril, McAveety and Turner entered into similar change in control agreements in connection with their employment with the Company, provided that no tax gross-up is provided if such payments become subject to the excise tax. If such payments are subject to the excise tax, the benefits under the agreement will be reduced until the point where the executive is better off paying the excise tax rather than reducing the benefits.
Mr. van Paasschens employment agreement provides that he would be entitled to the following benefits if his employment were terminated without cause or he resigned with good reason following a Change in Control:
In addition, to the extent that Mr. van Paasschen becomes subject to the golden parachute excise tax imposed under Section 4999 of the Code, he would receive a gross-up payment in an amount sufficient to offset the effects of such excise tax.
In December 2008, the Company amended the employment arrangements and change in control agreements with each of the Named Executive Officers. The amendments were technical in nature and were designed to meet the guidelines of 409A of the Code. The amendments did not change any of the amounts payable to the Named Executive Officers.
The tables below reflect the estimated amounts payable to the Named Executive Officers in the event their employment with the Company had terminated on December 31, 2008 under various circumstances, and includes amounts earned through that date. The actual amounts that would become payable in the event of an actual employment termination can only be determined at the time of such termination.
The following table discloses the amounts that would have become payable on account of an involuntary termination without cause or a voluntary termination for good reason outside of the change in control context.
The following table discloses the amounts that would have become payable on account of a termination of employment by death or disability.
The following table discloses the amounts that would have become payable on account of an involuntary termination without cause following a change in control or a voluntary termination with good reason following a change in control.
The Company uses a combination of cash and stock-based awards to attract and retain qualified candidates to serve on the Board. In setting Director compensation, the Company considers the significant amount of time that members of the Board spend in fulfilling their duties to the Company as well as the skill level required by the Company or its Directors. The current compensation structure is described below.
Under the Companys Director share ownership guidelines, each Director is required to acquire Shares (or deferred compensation stock equivalents) that have a market price equal to two times the annual Directors fees paid to such Director. New Directors are given a period of three years to satisfy this requirement.
Company employees who serve as members of the Board receive no fees for their services in this capacity. Non-employee members of the Board (Non-Employee Directors) receive compensation for their services as described below.
Each Non-Employee Director receives an annual fee in the amount of $80,000, payable in four equal installments of Shares issued under our LTIP. The number of Shares to be issued is based on the fair market value of a Share on the previous December 31.
A Non-Employee Director may elect to receive up to one-half of the annual fee in cash and to defer (at an annual interest rate of LIBOR plus 11/2% for deferred cash amounts) any or all of the annual fee payable in cash. Deferred cash amounts are payable in accordance with the Directors advance election. A Non-Employee Director is also permitted to elect to defer to a deferred unit account any or all of the annual fee payable in shares of Company stock. Deferred stock amounts are payable in accordance with the Non-Employee Directors advance election.
Non-Employee Directors serving as members of the Audit Committee received an additional annual fee in cash of $10,000 ($25,000 for the chairman of the Audit Committee). The chairperson of each other committee of the Board received an additional annual fee in cash of $10,000. For 2008, the Chairman of the Board received an additional retainer of $150,000, payable quarterly in Shares.
In addition, the Board established the following special committees in 2007-2008: (1) Search Committee, (2) Special Committee, and (3) Transition Committee. In 2008, each member of the Search Committee and Special Committee received an additional fee of $20,000 ($25,000 for each Chairperson), and each member of the
Transition Committee received an additional fee of $10,000. The members of these special committees were able to elect to receive such fees in cash or stock. For Directors electing stock, the number of shares awarded was determined by dividing the amount by the Fair Market Value (as defined in the LTIP) on the date of grant. These special committee shares generally vest upon the earlier of (i) the third anniversary of the grant date and (ii) the date such person ceases to be a Director of the Company.
Non-Employee Directors do not receive fees for attendance at meetings. However, the Company reimburses Non-Employee Directors for expenses they incurred related to 2008 meeting attendance, including attendance by spouses at one meeting each year.
In 2008, each Non-Employee Director received an annual equity grant (made at the same time as the annual grant is made to other employees) under our LTIP with a value of $100,000. The equity grant was delivered 50% in stock units and 50% in stock options. The number of stock units is determined by dividing the value ($50,000) by the average of the high and low price on the date of grant. The number of options is determined by dividing the value ($50,000) by the average of the high and low price on the date of grant (also the exercise price) and multiplying by three. For the 2009 grant, the ratio was lowered to 2.5-to-1. The options are fully vested and exercisable upon grant and are scheduled to expire eight years after the grant date. The restricted stock awarded pursuant to the annual grant generally vests upon the earlier of (i) the third anniversary of the grant date and (ii) the date such person ceases to be a Director of the Company.
In 2008, each Non-Employee Director other than Mr. Daley received an annual grant of 750,000 Starwood Preferred Guest (SPG) Points to encourage them to visit and personally evaluate our properties. Mr. Daley received a grant of 375,000 SPG Points in light of his November 2008 election to the Board.
In 2008, the Company made available to the Chairman of the Board administrative assistant services and health insurance coverage on terms comparable to those available to Starwood executives until the Chairman turns 70 years old and thereafter on terms available to Company retirees (including required contributions). The Company also reimburses Non-Employee Directors for travel expenses, other out-of-pocket costs they incur when attending meetings and, for one meeting per year, expenses related to attendance by spouses.
We have summarized the compensation paid by the Company to our Non-Employee Directors in 2008 in the table below.
Pursuant to SEC rules, the following table specifies the value for each other element of All Other Compensation that is valued in excess of $10,000 and not disclosed above.
The information contained in this Audit Committee Report shall not be deemed to be soliciting material or filed or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.
The Audit Committee (the Audit Committee) of the Board of Directors (the Board) of Starwood Hotels & Resorts Worldwide, Inc. (the Company), which is comprised entirely of independent Directors, as determined by the Board in accordance with the New York Stock Exchange (NYSE) listing requirements and applicable federal securities laws, serves as an independent and objective party to assist the Board in fulfilling its oversight responsibilities including, but not limited to, (i) monitoring the quality and integrity of the Companys financial statements, (ii) monitoring compliance with legal and regulatory requirements, (iii) assessing the qualifications and independence of the independent registered public accounting firm and (iv) establishing and monitoring the Companys systems of internal controls regarding finance, accounting and legal compliance. The Audit Committee operates under a written charter which meets the requirements of applicable federal securities laws and the NYSE requirements.
In the first quarter of 2009, the Audit Committee reviewed and discussed the audited financial statements for the year ended December 31, 2008 with management, the Companys internal auditors and the independent registered public accounting firm, Ernst & Young LLP. The Audit Committee also discussed with the independent registered public accounting firm matters relating to its independence, including a review of audit and non-audit fees and the written disclosures and letter from Ernst & Young LLP to the Audit Committee pursuant to the Statement on Auditing Standards No. 61 Communications with Audit Committees, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T regarding the independent accountants communications with the Audit Committee concerning independence.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the financial statements referred to above be included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
Audit Committee of the Board of Directors
Thomas O. Ryder (chairman)
Adam M. Aron
Thomas E. Clarke
Clayton C. Daley, Jr.
Kneeland C. Youngblood
The aggregate amounts paid by the Company for the fiscal years ended December 31, 2008 and 2007 to the Companys principal accounting firm, Ernst & Young, are as follows (in millions):
The Audit Committee pre-approves all services, including both audit and non-audit services, provided by the Companys independent registered public accounting firm. For audit services (including statutory audit engagements as required under local country laws), the independent registered public accounting firm provides the Audit Committee with an engagement letter outlining the scope of the audit services proposed to be performed during the year. The engagement letter must be formally accepted by the Audit Committee before any audit commences. The independent registered public accounting firm also submits an audit services fee proposal, which also must be approved by the Audit Committee before the audit commences. The Audit Committee may delegate authority to one of its members to pre-approve all audit/non-audit services by the independent registered public accounting firm, as long as these approvals are presented to the full Audit Committee at its next regularly scheduled meeting.
Management submits to the Audit Committee all non-audit services that it recommends the independent registered public accounting firm be engaged to provide and an estimate of the fees to be paid for each. Management and the independent registered public accounting firm must each confirm to the Audit Committee that the performance of the non-audit services on the list would not compromise the independence of the registered public accounting firm and would be permissible under all applicable legal requirements. The Audit Committee must approve both the list of non-audit services and the budget for each such service before commencement of the work. Management and the independent registered public accounting firm report to the Audit Committee at each of its regular meetings as to the non-audit services actually provided by the independent registered public accounting firm and the approximate fees incurred by the Company for those services.
All audit and permissible non-audit services provided by Ernst & Young to the Company for the fiscal years ended December 31, 2008 and 2007 were pre-approved by the Audit Committee or the Board of Directors.
All members of the Compensation Committee during fiscal year 2008 were independent Directors, and no member was an employee or former employee. No Compensation Committee member had any relationship requiring disclosure under Certain Relationships and Related Transactions, below. During fiscal year 2008, none of our executive officers served on the compensation committee (or its equivalent) or board of Directors of another entity whose executive officer served on our Compensation Committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporate Governance and Nominating Committee (the Committee) is charged with establishing and reviewing (on a periodic basis) the Companys Corporate Opportunity Policy pursuant to which each Director and executive officer is required to submit to the Committee any opportunity that such person reasonably believes (1) is within the Companys existing line of business or (2) is one in which the Company either has an existing interest or a reasonable expectancy of an interest, and (3) the Company is reasonably capable of pursuing. The Corporate Opportunity Policy is a written policy that provides that the Committee should consider all relevant facts and circumstances to determine whether it should (i) reject the proposed transaction on behalf of Company; (ii) conclude that the proposed transaction is appropriate and suggest that the Company pursue it on the terms presented or on different terms, and in the case of a Corporate Opportunity suggest that the Company pursue the Corporate Opportunity on its own, with the party who brought the proposed transaction to the Companys attention or with another third party; or (iii) ask the full Board to consider the proposed transaction so the Board may then take either of the actions described in (i) or (ii) above, and, at the Committees option, in connection with (iii), make recommendations to the Board. Any person bringing a proposed transaction to the Committee is obligated to
provide any and all information available to the Committee and to recuse himself from any vote or other deliberation.
The Board is not aware of any matters not referred to in this proxy statement that will be presented for action at the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed proxy to vote the Shares represented thereby in accordance with their discretion.
The Company will pay the cost of soliciting proxies for the Annual Meeting, including the cost of mailing. The solicitation is being made by mail and may also be made by telephone or in person using the services of a number of regular employees of the Company at nominal cost. The Company will reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for expenses incurred in sending proxy materials to beneficial owners of Shares. The Company has engaged D.F. King & Co., Inc. to solicit proxies and to assist with the distribution of proxy materials for a fee of $17,000 plus reasonable out-of-pocket expenses.
The SEC allows us to deliver a single proxy statement and annual report to an address shared by two or more of our stockholders. This delivery method, referred to as householding, can result in significant cost savings for us. In order to take advantage of this opportunity, the Company and banks and brokerage firms that hold your shares have delivered only one proxy statement and annual report to multiple stockholders who share an address unless one or more of the stockholders has provided contrary instructions. The Company will deliver promptly, upon written or oral request, a separate copy of the proxy statement and annual report to a stockholder at a shared address to which a single copy of the documents was delivered. A stockholder who wishes to receive a separate copy of the proxy statement and annual report, now or in the future, may obtain one, without charge, by addressing a request to Investor Relations, Starwood Hotels & Resorts Worldwide, Inc., 1111 Westchester Avenue, White Plains, NY 10604 or by calling (914) 640-8100. You may also obtain a copy of the proxy statement and annual report from the investor relations page on the Companys web site (www.starwoodhotels.com/corporate/investor relations.html). Stockholders of record sharing an address who are receiving multiple copies of proxy materials and annual reports and wish to receive a single copy of such materials in the future should submit their request by contacting us in the same manner. If you are the beneficial owner, but not the record holder, of the Companys shares and wish to receive only one copy of the proxy statement and annual report in the future, you will need to contact your broker, bank or other nominee to request that only a single copy of each document be mailed to all stockholders at the shared address in the future.
If you want to make a proposal for consideration at next years Annual Meeting and have it included in the Companys proxy materials, the Company must receive your proposal by November 26, 2009, and the proposal must comply with the rules of the SEC.
If you want to make a proposal or nominate a Director for consideration at next years Annual Meeting without having the proposal included in the Companys proxy materials, you must comply with the current advance notice provisions and other requirements set forth in the Companys Bylaws, including that the Company must receive your proposal on or after January 26, 2010 and on or prior to February 20, 2010, with certain exceptions if the date of the Annual Meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date of the 2009 Annual Meeting.
If the Company does not receive your proposal or nomination by the appropriate deadline, then it may not be brought before the 2010 Annual Meeting.
The fact that the Company may not insist upon compliance with these requirements should not be construed as a waiver by the Company of its right to do so at any time in the future.
You should address your proposals or nominations to the Corporate Secretary, Starwood Hotels & Resorts Worldwide, Inc., 1111 Westchester Avenue, White Plains, New York 10604.
By Order of the Board of Directors
STARWOOD HOTELS & RESORTS
Kenneth S. Siegel
March 26, 2009
General Directions To
The St. Regis Washington, D.C.