Texas Instruments DEF 14A 2008
Documents found in this filing:
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section
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Filed by the Registrant
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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NOTICE OF ANNUAL MEETING OF
You are cordially invited to attend the 2008 annual meeting of stockholders on Thursday, April 17, 2008, at the cafeteria on our property at 12500 TI Boulevard, Dallas, Texas, at 10:00 a.m. (Dallas time). At the meeting we will:
Stockholders of record at the close of business on February 19, 2008, are entitled to vote at the annual meeting.
TABLE OF CONTENTS
EXECUTIVE OFFICES: 12500 TI
BOULEVARD, DALLAS, TEXAS
TIs board of directors requests your proxy for the annual meeting of stockholders on April 17, 2008. If you sign and return the enclosed proxy, or vote by telephone or on the Internet, you authorize the persons named in the proxy to represent you and vote your shares for the purposes mentioned in the notice of annual meeting. This proxy statement and related proxy are being distributed on or about March 7, 2008.
If you come to the meeting, you can of course vote in person. But if you dont come to the meeting, your shares can be voted only if you have returned a properly signed proxy or followed the telephone or Internet voting instructions. If you sign and return your proxy but do not give voting instructions, the shares represented by that proxy will be voted as recommended by the board of directors. You can revoke your authorization at any time before the shares are voted at the meeting.
ELECTION OF DIRECTORS
Directors are elected at the annual meeting to hold office until the next annual meeting and until their successors are elected and qualified. The board of directors has designated the following persons as nominees: JAMES R. ADAMS, DAVID L. BOREN, DANIEL A. CARP, CARRIE S. COX, DAVID R. GOODE, PAMELA H. PATSLEY, WAYNE R. SANDERS, RUTH J. SIMMONS, RICHARD K. TEMPLETON and CHRISTINE TODD WHITMAN.
If you return a proxy that is not otherwise marked, your shares will be voted FOR each of the nominees.
Nominees for Directorship
All of the nominees for directorship are now directors of the company. If any nominee becomes unable to serve before the meeting, the people named as proxies may vote for a substitute or the number of directors will be reduced accordingly.
Director Nomination Process
The board is responsible for approving nominees for election as directors. To assist in this task, the board has designated a standing committee, the Governance and Stockholder Relations Committee (the Committee), which is responsible for reviewing and recommending nominees to the board. The Committee is comprised solely of independent directors as defined by the rules of the New York Stock Exchange (NYSE) and the boards corporate governance guidelines. Our board of directors has adopted a written charter for the Committee. The charter can be found on our web site at www.ti.com/corporategovernance.
It is a long-standing policy of the board to consider prospective board nominees recommended by stockholders. A stockholder who wishes to recommend a prospective board nominee for the Committees consideration can write to the Secretary of the Governance and Stockholder Relations Committee, Texas Instruments Incorporated, Post Office Box 655936, MS 8658, Dallas, Texas 75265-5936. The Committee will evaluate the stockholders prospective board nominee in the same manner as it evaluates other nominees.
In evaluating prospective nominees, the Committee looks for the following minimum qualifications, qualities and skills:
Stockholders, non-management directors, management and others may submit recommendations to the Committee. The board prefers a mix of experience among its members to maintain a diversity of viewpoints. For example, some board members may have spent much of their careers in business, some in government and some in academia. The boards current size is within the desired range as stated in the boards corporate governance guidelines.
Communications with the Board
Stockholders and others who wish to communicate with the board as a whole, or to individual directors, may write to them at: Post Office Box 655936, MS 8658, Dallas, Texas 75265-5936. All communications sent to this address will be shared with the board or the individual director, if so addressed.
Annual Meeting Attendance
It is a policy of the board to encourage directors to attend each annual meeting of stockholders. Such attendance allows for direct interaction between stockholders and members of the board. In 2007, all directors attended TIs annual meeting of stockholders.
The board has adopted the following standards for determining independence.
A. In no event will a director be considered independent if:
B. In no event will a director be considered independent if, within the preceding three years:
For any other relationship, the determination of whether the relationship is material, and consequently whether the director involved is independent, will be made by directors who satisfy the independence criteria set forth in this section.
For purposes of these independence determinations, immediate family member will have the same meaning as under the NYSE rules.
Applying these standards, the board has determined that the following directors have no material relationship with the company other than as a director and are, therefore, independent: Mr. Adams, Mr. Boren, Mr. Carp, Ms. Cox, Mr. Goode, Ms. Patsley, Mr. Sanders, Ms. Simmons and Ms. Whitman. In its deliberations, the board considered Mr. Adamss employment by the company in the role of independent chairman of the board from 1996 to 1998, and noted that the boards independence standards specifically permit employment of an independent director as interim chairman with no effect on that directors status (please see B.1. above). The board also considered a charitable contribution the company made to an organization for which Ms. Patsley and Mr. Sanders serve as national trustees. The amount of the contribution was well within the safe harbor for charitable contributions contained in the independence standards (please see D.1. above). Gerald W. Fronterhouse, who served as a director of the company before reaching the age of 70 and becoming ineligible to stand for reelection in April 2007, also had been determined by the board to be independent.
Directors Ages, Service and Stock Ownership
The table below shows the directors ages and beneficial ownership of common stock of the company and the year each became a director.
* Included in the common stock ownership shown above are:
Excludes shares held by a family member if a director has disclaimed beneficial ownership. Each director owns less than 1 percent of TIs common stock. No director has pledged shares of TI common stock.
The board has a long-standing commitment to responsible and effective corporate governance. A full description of our boards corporate governance practices is available at www.ti.com/corporategovernance.
TIs board of directors first adopted written governance guidelines and committee charters in 1973. Its policies and practices have evolved over time, adapting to meet the needs of TI and our stockholders, although some practices, such as maintaining a majority of independent directors, are of long standing. Our boards commitment to governance is evidenced by the time members devote to TI matters. Historically the board has met at least eight times a year. TI directors have also long participated in strategic planning conferences in addition to the regular board meetings. Directors interact directly with managers other than the chief executive officer at board meetings and the strategic planning conferences. This practice facilitates the directors oversight efforts and also gives directors opportunities to evaluate those managers, aiding directors in succession planning considerations. The board and each of its committees conduct evaluations annually; changes to processes such as agenda setting, and expanded presentations to the board on certain topics, are examples of improvements that have resulted from those evaluations.
The Governance and Stockholder Relations Committee typically considers and makes recommendations to our board on governance matters. Membership of the committee is determined by our board and the committee consists entirely of independent directors. On page 13 of this proxy statement is a summary of the committees responsibilities.
Our board regularly undertakes an assessment of its governance practices. Following are examples of significant governance practices at TI:
The boards corporate governance guidelines, the charters of the boards committees, TIs code of business conduct and our code of ethics for its chief executive officer and senior financial officers are available on our web site at www.ti.com/corporategovernance. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, Texas, 75266-0199, Attn: Investor Relations.
Board and Committee Meetings
During 2007, the board held nine meetings. The board has three standing committees described below. The committees of the board collectively held 24 meetings in 2007. Overall attendance at board and committee meetings was approximately 99 percent.
Committees of the Board
Audit Committee. The Audit Committee is a separately designated standing committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. All members of the Audit Committee are independent under the rules of the NYSE and the boards corporate governance guidelines. From January 1, 2007, to April 19, 2007, the Committee members were Ms. Patsley (Chair), Ms. Cox, Mr. Fronterhouse and Mr. Sanders. Mr. Fronterhouse, having reached the age of 70, was ineligible under the companys by-laws to stand for reelection at the companys 2007 annual meeting. Since April 19, 2007, the members of the Committee have been Ms. Patsley (Chair), Ms. Cox and Mr. Sanders. The Audit Committee is generally responsible for:
The board has determined that all members of the Audit Committee are financially literate and have financial management expertise, as the board has interpreted such qualifications in its business judgment. In addition, the board has designated Ms. Patsley as the audit committee financial expert as defined in the Securities Exchange Act of 1934, as amended.
The Audit Committee met six times in 2007. The Audit Committee holds regularly scheduled meetings and reports its activities to the board. The dates on which meetings will occur are generally set three years in advance to coincide with board meetings. The committee also continued its long-standing practice of meeting directly with our internal audit staff to discuss the audit plan and to allow for direct interaction between Audit Committee members and our internal auditors. Please see page 49 for a report of the committee.
Compensation Committee. The Compensation Committee consists of three independent directors. Since January 1, 2007, the committee members have been Mr. Carp (Chair), Ms. Simmons and Ms. Whitman. The committee is responsible for:
The Compensation Committee holds regularly scheduled meetings, reports its activities to the board, and consults with the board before setting annual executive compensation. The dates on which meetings will occur are generally set three years in advance to coincide with board meetings. During 2007, the committee met nine times. Please see page 30 for a report of the committee.
In performing its functions, the committee is supported by the companys Human Resources organization. The committee has the authority to retain any advisors it deems appropriate to carry out its responsibilities. The committee retained Pearl Meyer & Partners as its compensation consultant for the 2007 compensation cycle. The committee instructed the consultant to advise it directly on executive compensation philosophy,
strategies, pay levels and decision-making processes. Additionally, the committee instructed the consultant to assist the companys Human Resources organization in its support of the committee on such items as identifying peer-group companies, analyzing the market level of compensation and developing compensation recommendations relating to the CEO and other executive officers.
The Compensation Committee considers it important that its compensation consultants objectivity not be compromised by other business engagements with the company or its management. In support of this belief, the committee adopted a policy in June 2007 on compensation consultants. In summary, the policy states:
During 2007, neither the consultant nor any of its affiliates performed services for TI other than pursuant to the engagement by the committee.
The Compensation Committee considers executive compensation in a multistep process that involves the review of market information, performance data and possible compensation levels over several meetings leading to the annual determinations in January. Before setting executive compensation, the committee reviews the total compensation and benefits of the executive officers and considers the impact that their retirement, or termination under various other scenarios, would have on their compensation and benefits.
The CEO and the senior vice president responsible for Human Resources, who is an executive officer, are regularly invited to attend meetings of the committee. The CEO is excused from the meeting during any discussion of his own compensation. No executive officer determines his or her own compensation or the compensation of any other executive officer. As members of the board, the members of the committee receive information concerning the performance of the company during the year and interact with our management. During the committees deliberations on executive compensation, the CEO gives the committee and the board an assessment of his own performance during the year just ended. He also reviews the performance of the other executive officers (except the chairman) with the committee and makes recommendations regarding their compensation. The senior vice president responsible for Human Resources assists in the preparation of and reviews the compensation recommendations made to the committee other than for her compensation.
The Compensation Committees charter provides that it may delegate its power, authority and rights with respect to TIs long-term incentive plans, employee stock purchase plan and employee benefit plans to (i) one or more committees of the board established or delegated authority for that purpose; or (ii) employees or committees of employees except that no such delegation may be made with respect to compensation of the companys executive officers.
Pursuant to that authority, the Compensation Committee has delegated to a special committee established by the board the authority to grant stock options and restricted stock units under the companys long-term incentive plans, subject to limits established by the committee. The sole member of the special committee is
Mr. Templeton. With respect to each of TIs two long-term incentive plans, the special committee is authorized to grant, amend or terminate (i) up to 500,000 restricted stock units per year and (ii) stock options and restricted stock units for an aggregate amount up to 2 million shares per year. The special committee has no authority to grant, amend or terminate any form of compensation to TIs executive officers. The special committee has typically used its delegated authority to make grants of stock options as needed between regularly scheduled meetings of the Compensation Committee to meet the requirements under certain foreign laws that the grants be made only during certain periods as a condition to qualifying for favorable tax treatment. The Compensation Committee reviews the grant activity of the special committee.
Governance and Stockholder Relations Committee. All members of the Governance and Stockholder Relations Committee are independent. Since January 1, 2007, the committee members have been Mr. Boren (Chair), Mr. Adams and Mr. Goode. The Governance and Stockholder Relations Committee is generally responsible for:
The Governance and Stockholder Relations Committee met nine times in 2007. The Governance and Stockholder Relations Committee holds regularly scheduled meetings and reports its activities to the board. The dates on which meetings will occur are generally set three years in advance to coincide with board meetings. Please see page 5 for a discussion of stockholder nominations and communications with the board.
The Governance and Stockholder Relations Committee has responsibility for reviewing and making recommendations to the board on compensation for non-employee directors. The board makes the final determination of compensation for non-employee directors. The committee has no authority to delegate its responsibility regarding director compensation. In carrying out this responsibility it is supported by TIs Human Resources organization. The chairman, the CEO, the senior vice president responsible for Human Resources and the Secretary also review the committees recommendations. The chairman and CEO also vote, as members of the board, on the compensation of non-employee directors.
The compensation arrangements for the non-employee directors are:
The board has determined that grants of equity compensation to non-employee directors should be timed to occur when grants are made to our U.S. employees in connection with the annual compensation review process. Accordingly, equity grants to non-employee directors are made in January. Please see the discussion regarding the timing of equity compensation grants in the Compensation Discussion and Analysis on pages 26-27.
Directors are not paid a fee for meeting attendance, but we reimburse non-employee directors for their travel, lodging and related expenses incurred in connection with attending board, committee and stockholders meetings and other designated TI events. In addition, non-employee directors may travel on company aircraft to and from these meetings and other designated events. On occasion, directors spouses are invited to attend board events; the spouses expenses incurred in connection with attendance at those events are also reimbursed.
Under the Director Plan, some directors have chosen to have all or part of their cash compensation deferred until they leave the board (or certain other specified times). These deferred amounts were credited to either a cash account or stock unit account. Cash accounts earned interest from TI at a rate currently based on Moodys Seasoned Aaa Corporate Bonds. For 2007, that rate was 5.42 percent. Stock unit accounts fluctuated in value with the underlying shares of TI common stock, which will be issued after the deferral period. Dividend equivalents are paid on these stock units. Beginning in 2007, directors were given the opportunity to defer their annual grant of restricted stock units.
We have arrangements with certain customers whereby our employees may purchase specific consumer products containing TI manufactured components at discounted pricing. Under these arrangements, directors were entitled to participate on the same terms and conditions available to employees.
Non-employee directors are not eligible to participate in any TI-sponsored pension plan.
2007 Director Compensation
The following table shows the compensation of all persons who were non-employee members of the board during 2007 for services in all capacities to TI in 2007, except as otherwise indicated.
Compensation Discussion and Analysis
This section describes TIs compensation program for executive officers. It will provide insight into the following:
Currently, TI has 14 executive officers. These executives have the broadest job responsibilities and policy-making authority in the company. We hold them accountable for the companys performance and for maintaining a culture of strong ethics. Details of compensation for our CEO, CFO and the four other highest paid individuals who were executive officers in 2007 (collectively called the named executive officers) can be found in the tables beginning on page 30.1
Program Objectives and Principles
The goal of the compensation program is to provide meaningful incentives that motivate executive officers to achieve profitable growth and build long-term capability that will deliver shareholder value. To achieve this goal, the compensation program has been designed based on the following principles:
In a cyclical industry such as ours, in which market conditions and therefore growth and profitability can change quickly, we do not use formulas or pre-set thresholds or multiples to determine compensation awards. Instead, we focus on relative performance, comparing TIs results to those of peer group companies. The only exception to this is the profit sharing program applicable to all U.S. employees, which pays in accordance with a profitability formula.
The primary elements of our executive compensation program are as follows:
Near-term compensation, paid in cash
Comparator Group for 2007
The Compensation Committee evaluates the companys performance and sets the level of executive compensation by comparison to a Comparator Group of companies. In evaluating TIs relative performance, the committee compares our performance with that of the competitors in the Comparator Group. To estimate the market level of pay, the committee considers compensation paid by companies in the entire list of Comparator Group to similarly situated executives.
The Comparator Group is intended to reflect the markets in which we compete for key talent. It consists of semiconductor competitors and other high-technology companies. The competitors include large and small companies, both broad-based suppliers and niche suppliers, that operate in our key markets of analog and/or digital signal processors (DSPs) or offer technology that competes with our products.
Every three years, the committee resets the Comparator Group after thoroughly reviewing the companies for comparability in markets and performance. The committee carried out that review in 2006. Annually the committee considers whether it would be appropriate to make minor changes to the Comparator Group for example, because a Comparator Group company has divested its semiconductor operations or merged with another Comparator Group company. This process is designed to keep the Comparator Group generally stable but also reflective of changes in relevant markets.
The following companies were in the Comparator Group used in compensation decisions for 2007:
Analysis of Compensation Determinations for 2007
In setting compensation, the committee applied the same policies to all named executive officers, except Mr. Delfassy where noted in the discussion below. The committee determined each named executive officers compensation separately, without using any formula to set one officers compensation at a higher or lower level than another officers.
Total Compensation Before finalizing the compensation of the executive officers, the committee performed a tally sheet review (i.e., a review covering all elements of compensation) in order to understand fully the impact that its decisions will have on the officers total pay. The tally sheets included estimates of the information contained in the Summary Compensation Table (page 30) and the information on page 26. Based on this review, the committee determined that the level of compensation was appropriate.
Base Salary In January 2007, the committee set the base salary of each named executive officer for 2007. In keeping with its strategy, the committee targeted base salary for the named executive officers below the estimated median level of salaries that will be paid to similarly situated executives of the Comparator Group of companies in 2007. As a result of the committees decisions, the 2007 rate of base salary for the officers was as follows3:
The salary differences among the named executive officers (except the chairman) were driven primarily by differences in the market rate of pay for each officer. The increase for Mr. Templeton reflected the expected increase in the market rate of base salary for CEOs.
The market level of CFO compensation has risen significantly in recent years. In increasing Mr. Marchs base salary by 14.4 percent, the committee was responding to that market movement.
There was limited market information about executive chairmen in the Comparator Group companies. The committee determined that it would be appropriate to set Mr. Engibouss base salary at an annual rate of $300,000, or a reduction of $60,000 from the rate for 2006, in recognition of the planned transition in his role.
In 2006, Mr. Lowe assumed additional job responsibilities. The increase in his base salary for 2007 was in recognition of his greater level of experience in his new role as well as the expected increase in the applicable market level of base salary.
The increase for Mr. Hames reflected the expected increase in the market rate of base salary for executive officers generally.
Equity Compensation In January 2007, the committee granted long-term equity compensation to the named executive officers generally using a mix of stock options and restricted stock units. Except in the case of Mr. Delfassy, the amount of equity compensation was based primarily on the median number of shares that the Comparator Group was expected to grant to similarly situated executives in 2007.4 In addition, the committee considered the intrinsic value of outstanding equity compensation held by the executive officer, noting both the unvested retention value and the vested amount.
In the market assessment, the committee compared NQ Equivalent grant levels of the Comparator Group with those of TI. The NQ Equivalents were calculated by treating each option share as 1 NQ Equivalent, and each restricted stock unit as 3 NQ Equivalents. This 3:1 ratio approximates the relative accounting expense of granting one restricted stock unit as compared to an option for one share. In its grant decisions, the committee targeted the range between the 40th and 60th percentile of NQ Equivalents expected to be granted by the Comparator Group.
Please see the Grants of Plan-Based Awards in 2007 table on page 33 for details concerning the grants, including the exercise price of the stock options. The table below presents additional information, specifically, the changes in the NQ Equivalent levels as compared to 2006.
The differences in the equity granted to our named executive officers were primarily the result of differences in the applicable market level of equity compensation for their positions. In responding to anticipated changes in market levels of equity compensation, the committee believed it was appropriate generally to grant proportionally fewer shares under stock options while maintaining the number of restricted stock units, because of the stronger retention effect of restricted stock unit awards.
The committee made its grant decisions in terms of specific numbers of restricted stock units and stock option shares. However, before approving the awards, the committee considered the estimated value of the grants it intended to make. The value was estimated using the same methodology used for financial accounting. The committee considered the value in order to assess the financial impact of the grants on the company and to confirm that the value was within an acceptable range as compared with the anticipated value of awards granted by the Comparator Group to similarly situated executives. The committee also reviewed the total amount of equity compensation held by the officers in order to assess the retention value of outstanding unvested grants. In making these assessments, the committee used its judgment and did not apply any formula, threshold or maximum. These considerations did not result in an adjustment of the proposed awards from the targeted levels, which the committee considered to be appropriate.
In setting equity compensation levels for Mr. Templeton, the committee believed that equity compensation levels for CEOs would be lower in 2007 than in 2006. Exercising its judgment, the committee determined that a 10 percent reduction in the number of NQ Equivalents for Mr. Templeton would be reasonable in anticipation of the decline in the market level. The committee held the number of restricted stock units at the same level as 2006 (150,000 shares) for the reasons stated above, and, therefore, the entire 10 percent reduction in NQ Equivalents was made with respect to the stock option grant.
Perceiving a continuation of the trend toward higher levels of equity compensation for chief financial officers in 2007 as compared with 2006, the committee decided to grant Mr. March more equity compensation than in the previous year. The increase (5,000 restricted stock units) was focused on the restricted stock unit award because of the greater retention effect of such awards. As a result, the number of stock options granted to Mr. March was unchanged from last year.
In response to the continued evolution of the chairmans role, the committee decided to grant Mr. Engibous a stock option for fewer shares than in 2006. Exercising its judgment, the committee set the level of the grant at 120,000 shares, a reduction of about 55 percent from the prior years grant.
The approximately 50-percent decrease in the number of NQ Equivalents for Mr. Lowe from 2006 to 2007 is attributable to an off-cycle retention grant that he received in June 2006. Excluding the retention grant, NQ Equivalents were 12 percent higher in 2007 than 2006 because of his additional job responsibilities. For increased retention, the committee granted more restricted stock units in 2007 than in January 2006 while holding the number of shares under stock options the same as in 2006.
Anticipating that the market level of equity compensation for business managers would decline in 2007, the committee decided to reduce the number of NQ Equivalents for Mr. Hames by about 9 percent. The committee believed that a slight reduction in the number of restricted stock units was appropriate to maintain approximately the same proportion of restricted stock units and stock options as in 2006. The rest of the reduction in NQ Equivalents was taken from the stock option grant.
All grants of equity compensation were made under the Texas Instruments 2000 Long-Term Incentive Plan, which stockholders approved in April 2000. The grants have the terms described on pages 36-37.
Bonus In January 2008, the committee set the 2007 bonus compensation for executive officers based on its assessment of 2007 performance. The committee considered the bonus amount specified by the Executive Officer Performance Plan. In deciding whether to reduce that amount, the committee used the following performance measures to assess the company:
In addition, the committee considered our strategic progress by reviewing how competitive we are in key markets with our core products and technologies, as well as the strength of our relationships with key customers.
One-year relative performance on the three measures and one-year strategic progress were the primary considerations in the committees assessment of the companys 2007 performance. The performance measures were intended to provide an overview of our financial performance, as well as our success in pursuing our priorities. In total, this approach provided the committee with insight and knowledge to judge results and set compensation at the levels it considered commensurate with actual performance.
In the comparison of relative performance, the companies used were those identified above on page 20 as competitors in the Comparator Group.5
Consistent with the policy of holding the named executive officers accountable for company performance, this assessment of company-level performance was the principal factor in setting the officers bonus. For the officers other than the CEO and the chairman, the committee also considered, to a lesser extent, the 2007 performance of the organization for which the officer was responsible. The differences in the amounts awarded to our named executive officers were primarily the result of differences in the officers level of responsibility and the applicable market level of total cash compensation expected to be paid to similarly situated officers in the Comparator Group. In making these performance assessments, the committee did not apply any formula or performance targets. Instead, the committee considered the various factors and used its judgment.
Overall, the committee determined that TIs performance in 2007 put it well above the median of competitor companies in operating margin and total shareholder return. The committee also determined that TIs strategic position was strengthened and remains among the best in the semiconductor industry. Revenue growth was found to be about median on a three-year basis and below median on a one-year basis. After reviewing all these metrics, the committee applied its judgment and determined that, in total, performance in 2007 was about equivalent to 2006 and still well above the median of competitor companies. Below are details of the committees assessment.
Revenue and Margin
Total Shareholder Return
Based on its assessment of company performance, the committee determined that the bonuses of the named executive officers (other than Mr. Delfassy)6 should be at the same level as for 2006. Before finalizing its decision, the committee considered the officers individual performance. The performance of the CEO and the chairman was judged according to the performance of the company. For the other officers, the committee also considered the factors described below in assessing individual performance. In making this assessment, the committee did not apply any formula or performance targets.
Mr. March is the chief financial officer. The committee noted the financial management of the company.
Mr. Lowe is responsible for the companys analog semiconductor product lines. The committee noted the financial performance of those product lines, including the companys analog market share, and the position of the operations strategically and with customers.
Mr. Hames is responsible for the companys core and catalog DSP product lines as well as RISC (Reduced Instruction Set Computing) microprocessors and microcontrollers. The committee noted the financial performance of the product lines, including the companys catalog DSP market share, and the position of the product lines strategically and with customers.
Taking account of the individual performance, the committee decided that it would still be appropriate to hold the bonus of each officer at the same level as for 2006. Before setting the bonuses, the committee also considered whether total cash compensation for 2007 would be at an appropriate level if bonuses were the same as last year. The committee considered the level of total cash compensation to be commensurate with the companys and the officers performance. Accordingly the bonuses were held at the same level as for 2006.
Results of the Compensation Decisions Results of the compensation decisions made by the committee relating to the named executive officers for 2007 as compared to 2006 (other than Mr. Delfassy, who ceased to be an executive officer in January 2007) are summarized in the following table. This table is provided as a supplement to the Summary Compensation Table on page 30 for investors who may find it useful to see the
data presented in this form. Although the committee does not target a specific level of total compensation, it considers information similar to that in the table in order to ensure that the sum of these elements is, in its judgment, in a reasonable range. The principal differences between this table and the Summary Compensation Table are explained in footnote 7 below.7
For each of the officers, the decline in the total shown in this table from 2006 to 2007 is primarily due to the lower grant date fair value of the equity compensation awards in 2007. The lower grant date fair value in 2007 for each of the officers other than Messrs. Engibous and Lowe is primarily due to the lower fair market value of TI common stock on the date of the annual grant of equity compensation in 2007 as compared to 2006. For Mr. Lowe, the lower grant-date fair value in 2007 is primarily due to a retention grant that he received in 2006. For Mr. Engibous, the lower grant date fair value in 2007 is primarily due to the lower number of shares under his option grant in 2007 as compared to the option grant in 2006.
The Compensation Committees goal is to keep net annual dilution from equity compensation under 2 percent. Net annual dilution means the number of shares under equity awards granted by the committee each year to all employees (net of award forfeitures) as a percentage of the shares of the companys outstanding common stock. Equity awards granted by the committee in 2007 resulted in net annual dilution of 0.7 percent.
Policy on Equity Grant Timing
The Compensation Committee makes grant decisions for equity compensation at its January meeting each year. The dates on which these meetings occur are generally set three years in advance. The January meetings of the board and the committee generally occur in the week or two before we announce our financial results for the previous quarter and year.
On occasion, the committee may grant stock options or restricted stock units to executives at times other than January. For example, it has done so in connection with job promotions and for purposes of retention.
We do not back-date stock options or restricted stock units. We do not accelerate or delay the release of information due to plans for making equity grants.
The Compensation Committee reviewed in 2007 its long-standing grant practices and considered whether changes would be appropriate to conform to the emerging consensus about best practices. As a result of the review, the committee decided in July 2007 to change its practices for future grants. Beginning in January 2008, if the Compensation Committee meeting falls in the same month as the release of the companys financial results, the grants approved at the meeting will be made effective on the later of (i) the meeting day or (ii) the third trading day after the release of results. Otherwise they will be made effective on the day of committee action. Previously all grants were made effective on the day of committee action. The exercise price of stock options will continue to be the closing price of TI stock on the effective date of the grant.
Reflecting the companys culture of respect and value for all employees, the financial and health benefits received by executive officers are the same as those received by other U.S. employees except for the few benefits described below under the sub-heading Other Benefits in this section.
The executive officers participate in our retirement plans under the same rules that apply to other U.S. employees. We maintain these plans to have a competitive benefits program and for retention.
Like other established U.S. manufacturers, we have had a U.S. qualified defined benefit pension plan for many years. At its origin, the plan was designed to be consistent with those offered by other employers in the diverse markets in which we operated, which at the time included consumer and defense electronics as well as semiconductors and materials products. In order to limit the cost of the plan, we closed the plan to new participants in 1997. We gave U.S. employees as of November 1997 the choice to remain in the plan, or to have their benefits frozen in that plan and begin participating in an enhanced defined contribution plan. Mr. Templeton chose not to remain in the defined benefit plan. As a result, his benefits under that plan were frozen in 1997 and he participates in the enhanced defined contribution plan. Because Mr. Delfassy joined our U.S. payroll after 1997, he was not eligible for the defined benefit plan and instead participates in the enhanced defined contribution plan. The other named executive officers have continued their participation in the defined benefit pension plan.
The Internal Revenue Code (IRC) imposes certain limits on the retirement benefits that may be provided under a qualified plan. To maintain the desired level of benefits, we have a nonqualified defined benefit pension plan for participants in the qualified pension plan. Under the nonqualified plan, participants receive a benefit that would ordinarily be paid under the qualified pension plan but for the limitations under the IRC. For additional information about the defined benefit plans, please see pages 39-40.
Employees accruing benefits in the qualified pension plan, including the named executive officers other than Messrs. Templeton and Delfassy, also are eligible to participate in a qualified defined contribution plan that provides employer matching contributions. The enhanced defined contribution plan, in which Messrs. Templeton and Delfassy participate, provides for a fixed employer contribution plus an employer matching contribution.
Because benefits under the qualified and nonqualified defined benefit pension plans are calculated on the basis of eligible earnings (salary and bonus), an increase in salary or bonus may result in an increase in benefits under the plans. Salary or bonus increases for Mr. Templeton do not result in greater benefits for him under the companys defined benefit pension plans because his benefits under those plans were frozen in 1997. The committee considers the potential effect on the executives retirement benefits when it sets salary and performance bonus levels.
Any U.S. employee whose base salary exceeds a certain level ($130,000 per year in 2007) may defer the receipt of a portion of his or her salary, bonus and profit sharing. Rules of the U.S. Department of Labor require that this plan be limited to a select group of management or highly compensated employees. The program allows employees to defer the receipt of their compensation in a tax-efficient manner. We offer it in order to be competitive with the benefits packages offered by other companies.
Deferred compensation account balances are unsecured and all amounts remain part of the companys operating assets. The value of the deferred amounts tracks the performance of investment alternatives selected by the participant. These alternatives are a subset of those offered to participants in the defined contribution plans described above. The company does not guarantee any minimum return on the amounts deferred. In accordance with SEC rules, no earnings on deferred compensation are shown in the 2007 Summary Compensation Table on page 30 because no above market rates were earned on deferred amounts in 2007.
Employee Stock Purchase Plan
Our stockholders approved the TI Employees 2005 Stock Purchase Plan in April 2005. Under the plan, all employees in the U.S. and certain other countries may purchase a limited number of shares of the companys common stock at a 15 percent discount. The plan is designed to offer the broad-based employee population an opportunity to acquire an equity interest in the company and thereby align their interests with those of stockholders. Consistent with our general approach to benefit programs, executive officers are also eligible to participate.
Executive officers are eligible under the same plans as all other U.S. employees for medical, dental, vision, disability and life insurance. These benefits are intended to be competitive with benefits offered in the semiconductor industry.
Executive officers receive only a few benefits that are not available to all other U.S. employees. These benefits fall into one of two categories: personal and security.
Personal benefits: We promote sustained good health by providing a company-paid physical for each executive officer, and we encourage effective long-term financial planning by providing financial counseling up to $8,000 per year for each executive officer.
Security: We pay for maintenance and monitoring of home-security systems for certain executive officers to help ensure personal safety.
Separately, the chairman has an executive life insurance policy under an old program that is closed to new participants. Additionally, the chairman used corporate aircraft for personal travel on one occasion in 2007. The board of directors determined that for security reasons, it was in the companys interest to require the CEO to use company aircraft for personal air travel. Because this required use of the aircraft results in taxable income for the CEO, the company reimburses a portion of the tax expense that he incurs as a result of the requirement.
Separation Arrangement and Compensation Decisions
In connection with Mr. Delfassys planned retirement after 28 years of service to TI, the company entered into a separation arrangement with him in January 2007. Under the arrangement, he agreed to remain an active employee until August 2007. For one year thereafter, he will be on a paid leave of absence, from which point he will be on an unpaid leave of absence until the age of 55. Until July 2010, he is subject to a commitment not to become a director or executive officer of any for-profit company without prior TI approval
(which approval would not be unreasonably withheld) and not to hire any TI employee. These terms, which the Compensation Committee approved, serve TIs interest in a smooth transition in management of the organization for which Mr. Delfassy was responsible and reasonable protection against future competition.
Mr. Delfassy ceased to be an executive officer of the company in January 2007. In anticipation of his retirement, the committee in January 2007 held his base salary unchanged from the 2006 level and granted him no equity compensation. Because he ceased to be an active employee in August 2007, the committee granted him no bonus for 2007.
Compensation Following Employment Termination or Change in Control
None of the executive officers has an employment contract. Executive officers are eligible for benefits on the same terms as other U.S. employees upon termination of employment or a change in control of the company. The current programs are described under the heading Potential Payments upon Termination or Change in Control beginning on page 42. None of the few additional benefits that the executive officers receive continue after the year of termination of employment except the executive life insurance policy for the chairman. The committee reviews the potential impact of these programs before finalizing the annual compensation for the named executive officers. The committee did not raise or lower compensation for 2007 based on this review.
Stock Ownership Guidelines and Policy Against Hedging
Our board of directors has established stock ownership guidelines for executive officers. The guideline for the chairman and the CEO is four times base salary or 125,000 shares, whichever is less. The guideline for other executive officers is three times base salary or 25,000 shares, whichever is less. Executive officers have five years from their election as executive officers to reach these targets. Directly owned shares and restricted stock units count toward satisfying the guidelines.
Short sales of TI stock by our executive officers are prohibited. It is against TI policy for any employee, including an executive officer, to engage in trading in puts (options to sell at a fixed price on or before a certain date), calls (similar options to buy), or other options or hedging techniques on TI stock.
Consideration of Tax and Accounting Treatment of Compensation
Section 162(m) of the IRC generally denies a deduction to any publicly held corporation for compensation paid in a taxable year to the companys CEO and four other highest compensated officers to the extent that the officers compensation (other than qualified performance-based compensation) exceeds $1 million. The Compensation Committee considers the impact of this deductibility limit on the compensation that it intends to award. The committee exercises its discretion to award compensation that does not meet the requirements of Section 162(m) when applying the limits of Section 162(m) would frustrate or be inconsistent with our compensation policies and/or when the value of the foregone deduction would not be material. The committee has exercised this discretion when awarding restricted stock units that vest over time, without performance conditions to vesting. The committee believes it is in the best interest of the company and its stockholders that restricted stock unit awards provide for the retention of our executive officers in all market conditions.
The Texas Instruments Executive Officer Performance Plan (described on page 19) is intended to ensure that performance bonuses under the plan are fully tax deductible under Section 162(m). The committees general policy is to award bonuses within the plan, although the committee reserves the discretion to pay a bonus outside the plan if it determines that it is in our stockholders best interest to do so. It did not exercise this discretion for 2007 performance.
When setting equity compensation, the committee considers the estimated cost for financial reporting purposes of equity compensation it intends to grant. Its consideration of the estimated cost of grants made in 2007 is discussed on page 22.
Compensation Committee Report
The Compensation Committee of the board of directors has furnished the following report:
The committee has reviewed and discussed the Compensation Discussion and Analysis (CD&A) with the companys management. Based on that review and discussion, the committee has recommended to the board of directors that the CD&A be included in the companys Annual Report on Form 10-K for 2007 and the companys proxy statement for the 2008 annual meeting of stockholders.
2007 Summary Compensation Table
The table below shows the compensation of the companys chief executive officer, chief financial officer and each of the other four most highly compensated individuals who were executive officers during 2007 (collectively called the named executive officers) for services in all capacities to the company in 2007, except as otherwise indicated. For a discussion of the amount of a named executive officers salary and bonus in proportion to his total compensation, please see the Compensation Discussion and Analysis on pages 17-29.
We believe that our compensation practices are fair and reasonable. Our executive officers do not have employment contracts. They are not guaranteed salary increases or bonus amounts. Pension benefits are calculated on salary and bonus only; the proceeds earned on equity or other performance awards are not part of the pension calculation. We do not guarantee a return or provide above-market returns on compensation that has been deferred. We have not repriced stock options, and we do not grant reload options. We do not provide excessive perquisites. Those few we do provide do not result in significant expense for TI. We believe our compensation program holds our executive officers accountable for the financial and competitive performance of TI, and for their individual contribution toward that performance.
Grants of Plan-Based Awards in 2007
The following table shows the grants of plan-based awards to the named executive officers in 2007.
None of the options or other equity awards granted to the named executive officers was repriced or modified by the company.
For additional information regarding TIs equity compensation grant practices, please see the Compensation Discussion and Analysis on pages 26-27.
Outstanding Equity Awards at Fiscal Year-End 2007
The following table shows the outstanding equity awards for each of the named executive officers as of December 31, 2007.
Outstanding Equity Awards at
Fiscal Year-End 2007 (Contd.)
The Option Awards shown in the table above are nonqualified stock options, each of which represents the right to purchase shares of TI common stock at the stated exercise price. For grants before 2007, the exercise price is the average of the high and low price of TI common stock on the grant date. For grants in 2007, the exercise price is the closing price of TI common stock on the grant date. The term of each option is 10 years unless the option is terminated earlier pursuant to provisions summarized in the chart below and in the paragraph following the chart. Options vest (become exercisable) in increments of 25 percent per year beginning on the first anniversary of the date of the grant. The chart below shows the termination provisions relating to outstanding stock options as of December 31, 2007. The Compensation Committee of the board of directors established these termination provisions to promote employee retention while offering competitive terms.
Options may be cancelled if the grantee competes with TI during the two years after employment termination or discloses TI trade secrets. In addition, for options received while the grantee was an executive officer, the company may reclaim (or claw back) profits earned under grants if the officer engages in such conduct. These provisions are intended to strengthen retention and provide a reasonable remedy to TI in case of competition or disclosure of our confidential information.
The stock option terms also provide that upon a change in control of TI, the option becomes fully vested to the extent it is then outstanding. Further, if employment termination (except for cause) has occurred within 30 days before the change in control, the change in control is deemed to have occurred first. Change in control is defined as (1) acquisition of 20 percent of TI common stock other than through a transaction approved by the board of directors, or (2) change of a majority of the board of directors in a 24-month period unless a majority of the directors then in office have elected or nominated the new directors (together, the standard definition). TI stock options have had these change-in-control terms for many years. They are intended to reduce employee uncertainty and distraction in the period leading up to a change in control, if such an event were to occur.
The Stock Awards in the table of Outstanding Equity Awards at Fiscal Year-End 2007 are restricted stock unit (RSU) awards. Each RSU represents the right to receive one share of TI common stock on a stated date (the vesting date) unless the award is terminated earlier under terms summarized below. In general, the vesting date is approximately four years after the grant date. Except for 2006 grants, each RSU includes the right to receive dividend equivalents, which are paid annually in cash at a rate equal to the amount paid to stockholders in dividends. The table below shows the termination provisions of outstanding RSUs as of December 31, 2007.
These termination provisions are intended to promote retention. RSU awards made after 2005 contain cancellation and claw back provisions, like those described above for stock options, in case of competition with TI or disclosure of TI trade secrets. The terms of awards after 2005 also provide for full vesting of the award upon a change in control of TI. Change in control is the standard definition unless the grant is subject to Section 409A of the Internal Revenue Code, in which event the definition under Section 409A applies. Section 409A defines a change in control as a change in the ownership or effective control of a corporation or a change in the ownership of a substantial portion of the assets of a corporation. These cancellation, claw back and change-in-control terms were added after 2005 to conform RSU terms with those of stock options (to the extent permitted by the Internal Revenue Code) and to achieve the objectives described above in the discussion of stock options.
In addition to the Stock Awards shown in the Outstanding Equity Awards at Fiscal Year-End 2007 table above, Mr. Templeton holds an award of RSUs that was granted in 1995. The award, for 120,000 shares of TI common stock, vested in 2000. Under the award terms, the shares will be issued to Mr. Templeton in March of the year after his termination of employment for any reason. These terms were designed to provide a tax benefit to the company by postponing the related compensation expense until it was likely to be fully deductible. In accordance with SEC requirements, this award is reflected in the 2007 Nonqualified Deferred Compensation table on page 40.
2007 Option Exercises and Stock Vested
The following table lists the number of shares acquired and the value realized as a result of option exercises by the named executive officers in 2007 and the value of any restricted stock units that vested in 2007.
2007 Pension Benefits
The following table shows the present value as of December 31, 2007, of the benefit of the named executive officers under our qualified defined benefit pension plan (TI Employees Pension Plan) and nonqualified defined benefit pension plan (TI Employees Non-Qualified Pension Plan).
TI Employees Pension Plan
The TI Employees Pension Plan is a qualified defined benefit pension plan. Please see page 27 under the Benefits heading of the Compensation Discussion and Analysis for a discussion of the origin and purpose of the plan. Employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in this plan.
A plan participant is eligible for normal retirement under the terms of the plan if he is at least 65 years of age with one year of credited service. A participant is eligible for early retirement if he is at least 55 years of age with 20 years of employment or 60 years of age with five years of employment. In 2008, Mr. Engibous became eligible for early retirement. None of the other named executive officers are currently eligible for early or normal retirement.
A participant may request payment of his accrued benefit at termination or any time thereafter. Participants may choose a lump sum payment or one of six forms of annuity. In order of largest to smallest periodic payment, the forms of annuity are: (i) single life annuity, (ii) 5-year certain and life annuity, (iii) 10-year certain and life annuity, (iv) qualified joint and 50 percent survivor annuity, (v) qualified joint and 75 percent survivor annuity, and (vi) qualified joint and 100 percent survivor annuity. If the participant does not request payment, he will begin to receive his benefit in April of the year after he reaches the age of 70½ in the form of annuity required under the IRC.
The pension formula for the qualified plan is intended to provide a named executive officer with an annual retirement benefit equal to 1.5% multiplied by the product of (i) years of credited service and (ii) the average of the five highest consecutive years of his base salary plus bonus up to a limit imposed by the IRS, less a percentage (based on his year of birth, when he elects to retire and his years of service with TI) of the amount of compensation on which his Social Security benefit is based.
If an individual takes early retirement and chooses to begin receiving his annual retirement benefit at that time, such benefit is reduced by an early retirement factor. As a result, the annual benefit is lower than the one he would have received at age 65.
If the participants employment terminates due to disability, the participant may choose to receive his accrued benefit at any time prior to age 65. Alternatively, the participant may choose to defer receipt of the accrued benefit until reaching age 65 and then take a disability benefit. The disability benefit paid at age 65 is based on salary and bonus, years of credited service the executive would have accrued to age 65 had he not become disabled and disabled status.
The benefit payable in the event of death is based on salary and bonus, years of credited service and age at the time of death, and may be in the form of a lump sum or annuity at the election of the beneficiary. The earliest date of payment is the first day of the second calendar month following the month of death.
Leaves of absence, including a bridge to retirement, are credited to years of service under the qualified and nonqualified pension plans. Please see the discussion of leaves of absence on pages 46-47 below.
TI Employees Non-Qualified Pension Plan
The TI Employees Non-Qualified Pension Plan is a nonqualified defined benefit pension plan. Please see page 27 under the Benefits heading of the Compensation Discussion and Analysis for a discussion of the purpose of this plan. As with the qualified defined benefit pension plan, employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in this Plan. Eligibility for normal and early retirement under this plan is the same as under the qualified plan (please see page 27).
Benefits under this plan are paid in a lump sum. Participants may choose to defer receipt of their nonqualified pension benefit accrued before 2005 into their deferred compensation account. Participants had a onetime opportunity in 2004 to defer their nonqualified pension benefit accrued after 2004 into their deferred compensation account. The amounts so deferred will be distributed in accordance with the individuals deferred compensation elections. Please see page 42 for the executive officers deferral elections.
A participants benefit under the nonqualified pension plan is calculated using the same formula as described above for the TI Employees Pension Plan. However, the IRS limit on the amount of compensation on which a qualified pension benefit may be calculated does not apply. Additionally, the IRS limit on the amount of qualified benefit the participant may receive does not apply to this plan. Once this nonqualified benefit amount has been determined using the formula described above, the individuals qualified benefit is subtracted from it. The resulting difference is multiplied by an age-based factor to obtain the amount of the lump sum benefit payable to an individual under this nonqualified plan.
Amounts earned before 2005 and not deferred will be distributed when the participants benefit under the qualified pension plan is distributed. Amounts earned after 2004 and not deferred will be distributed subject to the requirements of Section 409A of the IRC. Because the named executive officers are among the 50 most highly compensated officers of the company, Section 409A of the IRC requires that they not receive any lump sum distribution payments under the nonqualified pension plan before the first day of the seventh month following termination of employment.
The effect of termination due to disability on a participants benefit is the same as discussed in the paragraph above, except that the participant may choose to defer receiving a payment under the plan until he reaches age 65 and then take a disability benefit. The disability benefit payable at age 65 is based on salary and bonus, years of credited service the participant would have accrued to age 65 had he not become disabled and disabled status.
In the event of death, payment is based on salary and bonus, years of credited service and age at the time of death and will be in the form of a lump sum. The earliest date of payment is the first day of the second calendar month following the month of death.
Balances in this plan are unsecured obligations of the company. In the event of a change in control, the plan provides for payment of the present value of the individuals benefit not later than the month following the month in which the change in control occurred. For amounts accrued under this plan prior to 2005, the standard definition of a change in control (please see page 36) applies. For amounts accrued under this plan after 2004, a change in control is defined as required by Section 409A of the IRC. For all amounts accrued under this plan, if there is a sale of substantially all of the assets of the company, the present value of the individuals benefit will be distributed in a lump sum as soon as reasonably practicable following the sale of assets.
2007 Nonqualified Deferred Compensation
The following table shows contributions to the named executive officers deferred compensation account in 2007 and the aggregate amount of his deferred compensation as of December 31, 2007.
Please see page 28 for a discussion of the purpose of the plan. An employees deferred compensation account contains eligible compensation the employee has elected to defer and contributions by the company that are in excess of the IRS limits on (i) contributions the company may make to the enhanced defined contribution plan and (ii) matching contributions the company may make related to compensation the executive officer deferred into his deferred compensation account.
TI employees whose base salary exceeds $130,000 are eligible to defer compensation. Participants may choose to defer up to (i) 25 percent of their base salary, (ii) 90 percent of their performance bonus, and (iii) 90 percent of profit sharing. In addition, in 2004, participants had a one-time opportunity to defer up to 100 percent of their nonqualified pension benefit accrued after 2004. Elections to defer compensation must be made in the calendar year prior to the year in which the compensation will be earned.
The company has determined that the investment alternatives for deferred compensation balances should generally be the same as the investment alternatives available under the companys defined contribution plan. These investment alternatives may be changed at any time.
During 2007, participants could choose to have their deferred compensation mirror the performance of one or more of the following mutual funds, each of which is managed by a third party (these alternatives are a subset of those offered to participants in the defined contribution plans): Northern Trust Short Term Investment Fund, Northern Trust Daily Aggregate Bond Fund Index, Barclays Global Investors Equity Index Fund, Northern Trust Russell 1000 Value Equity Index, Barclays Global Investors Russell 3000 Alpha Tilts, Northern Trust Russell 2000 Equity Index, Barclays Global Investors Active International Equity, Barclays Global Investors Lifepath Funds (Lifestyle 2010), Barclays Global Investors Lifepath Funds (Lifestyle 2020), Barclays Global Investors Lifepath Funds (Lifestyle 2030) and Barclays Global Investors Lifepath Funds (Lifestyle 2040). Prior to April 2005, participants could also choose to have their deferred compensation mirror the performance of TIs common stock; that choice was eliminated for new deferrals beginning in April 2005.
From among the available alternatives, participants may change their instructions relating to their deferred compensation daily, except that instructions to move compensation out of the TI stock fund are subject to our policy regarding transactions in TI stock. Earnings on a participants balance are determined solely by the performance of the investments that the participant has chosen for his plan balance. The company does not guarantee any minimum return on investments. A third party administers the companys deferred compensation program.
For compensation deferred before 2005, the participant while an employee may choose to receive a distribution at any time subject to a 10 percent reduction in the distribution. For compensation deferred after 2004, in the case of an unforeseen emergency, a plan participant may request a hardship withdrawal. To obtain a hardship withdrawal, a participant must meet the requirements of Section 409A of the IRC. Except for these circumstances, a participants balance is paid pursuant to his distribution election and is subject to applicable IRC limitations.
For amounts that were contributed by the company and amounts earned and deferred by the participant before 2005 and earnings on those amounts (collectively, pre-2005 amounts), termination of employment with the company triggers distribution of the amount in the participants account. If the participant has a valid distribution election on file, TI will distribute the amount in his account according to his election.8 If there is no valid distribution election on file, TI will distribute the entire amount in the account as soon as possible following his termination of employment. For amounts that were contributed by TI and amounts earned and deferred by the executive officer after 2004 and earnings on those amounts (collectively, post-2004 amounts), if there is no valid distribution election on file, or if the participant elects to receive a lump sum distribution on retirement, TI will distribute the entire amount in the account on the first day of the seventh month following termination of employment. If a participant has elected installment payments, for post-2004 amounts, the first installment payment can be made no earlier than the first day of the seventh month following termination of employment.
In the event of the participants death, one-half of the amount in his account will be immediately paid to his beneficiaries. The remaining half will be paid to his beneficiaries on or about March 31 of the following year.
Like the balances under the nonqualified defined benefit pension plan, deferred compensation balances are unsecured obligations of the company. In the event of a change in control, amounts earned and deferred before 2005 will be paid to the individual not later than the month following the month in which the change in control has occurred. The standard definition of change in control applies. For amounts earned and deferred after 2004, the participant will receive payment of his balance not later than the month following the month in which the change in control as defined in Section 409A of the IRC has occurred.
Potential Payments upon Termination or Change in Control
None of the named executive officers has an employment contract with the company. They are eligible for benefits on generally the same terms as other U.S. employees upon termination of employment or change in control of the company. TI does not reimburse executive officers for any income or excise taxes that are payable by the executive as a result of payments relating to termination or change in control.
The following programs may result in payments to a named executive officer whose employment terminates. Most of these programs have been discussed above in the proxy statement. For a discussion of the impact of these programs on the compensation decisions for 2007, please see the Compensation Discussion and Analysis on page 29.
Bonus. Our policies concerning bonus and the timing of payments are described on page 19. Whether a bonus would be awarded, and in what amount, to an executive officer whose employment has terminated would depend on the circumstances of termination. It may be presumed that no bonus would be awarded in the event of a termination for cause. If awarded, bonuses are paid by the company.
Qualified and Nonqualified Defined Benefit Pension Plans. The purposes of these plans are described on page 27. The formula for determining benefits, the forms of benefit and the timing of payments are described on pages 39-40. The amounts disbursed under the qualified and nonqualified plans are paid, respectively, by the TI Employees Pension Trust and the company.
Deferred Compensation. The purpose of this plan is described on page 28. The amounts payable under this program depend solely on the performance of investments that the participant has chosen for his plan balance. The timing of payments is discussed on pages 41-42. Amounts distributed are paid by the company.
Equity Compensation. Depending on the circumstances of termination, grantees whose employment terminates may retain the right to exercise previously granted stock options or receive shares under outstanding restricted stock unit (RSU) awards. Please see pages 36-37. Certain RSU awards include a right to receive dividend equivalents. The dividend equivalents are paid annually by the company in a single cash payment after the last dividend payment of the year.
Profit Sharing. For a description of the purpose of this program, the formula for determining payments and the timing of payments, please see page 18. Like other U.S. employees, if a named executive officer remains employed through the end of the year, he will receive any profit sharing paid for that year. In the event of retirement or commencement of a bridge to retirement, any profit sharing will be paid for the portion of the year worked before retirement or the beginning of the bridge. In the event of termination due to disability or death, the officer or his beneficiaries would receive any profit sharing paid for the year. Profit sharing payments are made by the company in a lump sum.
Time Bank. Based on years of employment with the company, employees accrue hours in a time bank. Time bank hours may be used for paid absences from the office such as vacation and sick days. Employees receive a cash payment for any time bank hours still outstanding on termination of employment. The amount paid is calculated by applying the employees base salary rate in effect at the time of termination to the number of hours remaining in the time bank. Because of his reduced role, Mr. Engibous ceased accruing time bank hours in May 2004. The time bank payment to Mr. Engibous will be calculated by applying the base salary rate in effect before May 2004 to the number of hours in the time bank. Time bank payments are made in a lump sum by the company. They are ordinarily paid no later than what would have been the employees next regular pay cycle.
Life Insurance. As noted on page 28, Mr. Engibous has an executive life insurance policy under an old program that is closed to new participants. Mr. Engibous may choose to receive the cash value of this policy at any time upon termination of employment (including termination of employment due to disability). The company may also choose to stop making premium payments under the policy at any time. The cash value is the amount of money remaining in the policy after the premium expense and the monthly cost of insurance charges have been deducted. If he does not choose to receive the cash value upon retirement, the company may continue to make premium payments until he reaches the age of 65 (as of December 31, 2007, Mr. Engibous was 54 years old) or until he chooses to receive the cash value of the policy. The 2007 premium payment made by the company was $46,079. In the case of death, the proceeds of the policy, $2,700,000, would be paid to the designated beneficiaries in a lump sum by the insurer, Metropolitan Life Insurance Company. Payments made to Mr. Engibous under the policy will be paid in a lump sum by Metropolitan Life Insurance Company.
The following tables indicate the amounts for which each named executive officer would have been eligible if his employment had terminated on December 31, 2007, as a result of disability, death, involuntary termination for cause, resignation, or involuntary termination not for cause. Because none of the executive officers was eligible to retire as of December 31, 2007, no potential payments are stated assuming retirement.
Termination Due to Disability
Termination Due to Death
Involuntary Termination For Cause
Resignation; Involuntary Termination Not for Cause
In the case of a resignation pursuant to a separation arrangement, an executive officer (like other employees above a certain job grade level) will typically be offered a 12-month paid leave of absence before termination, in exchange for a non-compete and non-solicitation commitment and a release of claims against the company. The leave period will be credited to years of service under the pension plans described above. During the leave, the executive officers stock options will continue to become exercisable and his RSUs will continue to vest. Amounts paid to an individual during a paid leave of absence are not counted when calculating profit sharing and benefits under the qualified and nonqualified pension plans. During a paid leave of absence an individual does not continue to accrue time bank hours. He retains medical and insurance benefits at essentially the same rates as active company employees during the paid leave of absence period.
In the case of a separation arrangement in which the paid leave of absence expires when the executive officer will be at least 50 years old and have at least 15 years of employment with the company, the separation arrangement will typically include an unpaid leave of absence, to commence at the end of the paid leave and end when the executive officer has reached age 55 or completed 20 years of employment, whichever is later (bridge to retirement). The bridge to retirement will be credited to years of service under the
qualified and nonqualified defined benefit plans described above. The executive officer will not receive profit sharing or accrue time bank hours for the period he is on a bridge to retirement, but he will retain medical and insurance benefits at essentially the same rates as active TI employees.
In January 2007, the company entered into a separation agreement with Mr. Delfassy, which included a paid leave of absence and unpaid bridge to retirement as described above. Payments made in 2007 to Mr. Delfassy under this agreement are reported in the All Other Compensation column of the 2007 Summary Compensation Table. Additional discussion of the terms of this agreement can be found on pages 28-29 of the Compensation Discussion & Analysis.
Change in Control
We have no program, plan or arrangement providing benefits triggered by a change in control except as described below.
A change in control may trigger payment of the balances under the nonqualified defined benefit plan and the deferred compensation plan. Please see pages 40 and 42 for a discussion of the purpose of these provisions as well as the circumstances and the timing of payment.
Stock options may become fully exercisable, and shares may be issued under RSU awards, upon a change in control. Please see pages 36-37 for further information concerning these terms.
For a discussion of the impact of these programs on the compensation decisions for 2007, please see page 29.
The following table indicates the incremental amounts that would have been triggered for each executive officer had there been a change in control as of December 31, 2007. The actual amounts that would be paid out can only be determined at the time the change in control occurs.
AUDIT COMMITTEE REPORT
The Audit Committee of the board of directors has furnished the following report:
As noted in the committees charter, TI management is responsible for preparing the companys financial statements. The companys independent registered public accounting firm is responsible for auditing the financial statements. The activities of the committee are in no way designed to supersede or alter those traditional responsibilities. The committees role does not provide any special assurances with regard to TIs financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent registered public accounting firm.
The committee has reviewed and discussed with management and the independent accounting firm, as appropriate, (1) the audited financial statements and (2) managements report on internal control over financial reporting and the independent accounting firms related opinions.
The committee has discussed with the independent registered public accounting firm, Ernst & Young, the matters required to be discussed by Statement of Auditing Standards No. 61, Communication with Audit Committees, as amended.
The committee has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, has considered the compatibility of non-audit services with the firms independence, and has discussed with Ernst & Young the firms independence.
Based on the review and discussions referred to above, the committee recommended to the board of directors that the audited financial statements be included in the companys Annual Report on Form 10-K for 2007 for filing with the SEC.
Pamela H. Patsley, Chair Carrie S. Cox Wayne R. Sanders
The Audit Committee of the board has appointed Ernst & Young LLP to be TIs independent registered public accounting firm for 2008.
The board asks the stockholders to ratify the appointment of Ernst & Young. If the stockholders do not ratify the appointment, the Audit Committee will consider whether it should appoint another independent registered public accounting firm.
Representatives of Ernst & Young are expected to be present, and to be available to respond to appropriate questions, at the annual meeting. They have the opportunity to make a statement if they desire to do so; they have indicated that, as of this date, they do not.
The company has paid fees to Ernst & Young for the services described below:
Audit Fees. Ernst & Youngs Audit Fees were $6,785,000 in 2007 and $7,470,000 in 2006. The services provided in exchange for these fees were our annual audit, including the audit of the effectiveness of internal controls over financial reporting, reports on Form 10-Q, and statutory audits required in non-U.S. jurisdictions.
Audit-Related Fees. In addition to the Audit Fees, the company paid Ernst & Young $586,000 in 2007 and $1,689,000 in 2006. The services provided in exchange for these fees included employee benefit plan audits, agreed-upon procedures reports related to compensation matters, a grant certification audit, access to Ernst & Youngs online research tool, an environmental certification audit, an energy-usage certification audit for a non-U.S. subsidiary, a research and development certification audit and a separate audit in support of a transaction to divest substantially all of the companys Sensors & Controls segment. Of the total Audit-Related Fees incurred in 2006, $1,019,000 was related to this separate audit.
Tax Fees. Ernst & Youngs fees for professional services rendered for tax compliance (preparation and review of non-U.S. tax returns), tax advice and tax planning (including expatriate tax services) were $503,000 in 2007 and $639,000 in 2006.
All Other Fees. Ernst & Youngs fees for all other professional services rendered were $21,000 in 2007 and $20,000 in 2006 for audit services for the TI Foundation.
Pre-approval Policy. The Audit Committee is required to pre-approve the audit and non-audit services to be performed by the independent registered public accounting firm in order to assure that the provision of such services does not impair the firms independence.
Annually the independent registered public accounting firm and the Director of Internal Audits present to the Audit Committee services expected to be performed by the firm over the next 12 months. The Audit Committee reviews and, as it deems appropriate, pre-approves those services. The services and estimated fees are presented to the Audit Committee for consideration in the following categories: Audit, Audit-Related, Tax and All Other (each as defined in Schedule 14A of the Securities Exchange Act of 1934). For each service listed in those categories, the Committee receives detailed documentation indicating the specific services to be provided. The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee reviews on at least a quarterly basis the services provided to date by the firm and the fees incurred for those services. The Audit Committee may revise the list of pre-approved services and related fees from time to time, based on subsequent determinations.
In order to respond to time-sensitive requests for services that may arise between regularly scheduled meetings of the Audit Committee, the Committee has delegated pre-approval authority to its Chair (the Audit Committee does not delegate to management its responsibilities to pre-approve services). The Chair reports pre-approval decisions to the Audit Committee and seeks ratification of such decisions at the Audit Committees next scheduled meeting.
The Audit Committee or its Chair pre-approved all services provided by Ernst & Young during 2007, and all pre-approvals by the Chair were subsequently ratified by the Audit Committee.
The board of directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP as the companys independent registered public accounting firm for 2008.
An individual who is a holder of record of 101 shares of the common stock of the company submitted a proposal for consideration at the 2008 annual meeting. The name and address of the stockholder will be furnished promptly upon request made to the company. The board of directors opposes the proposal for the reasons stated after the proposal.
The proposal reads as follows:
Qualifications for Director Nominees
WHEREAS Most Director nominees come from businesses totally unrelated to the corporation to which they have been nominated to serve on its independent executive governance Board;
WHEREAS It is known, throughout the financial industry, that Chairmen and CEOs have the power to appoint their own Boards of Directors. John Kenneth Galbraith, the reknown economist, said it bluntly: Senior Executives in the great corporations of this country set their own salaries.. and stock option deals.. subject to the approval of the Board of Directors that they have appointed. Not surprisingly, the Directors go along. (The Dallas Morning News, 1-16-2000, p. 1/10E);
WHEREAS Most corporate Boards in the United States consist of present or past Chairman, CEOs, or Presidents of other corporations, who, back home, have or had the power to nominate their own Boards of Directors;
WHEREAS Directors, nominated in such a fashion, have been called Puppets. by the author of this Proposal; Flunkies by David Broder (The Washington Post), and Rubber-Stampers Steve Hamm of Business Week);
WHEREAS Sir J. E.E. Dalberg said, Power tends to corrupt and absolute power corrupts absolutely;
WHEREAS ALL the non-employee Directors, COMBINED, often do not own enough shares in the corporations to which they have been nominated to have genuine feelings of fiduciary responsibility to its shareholders. Their allegiance tends to be directed to the Chairmen or CEOs who appointed them, as revealed in the enormously distorted Compensation Packages awarded to Principal Executives that are often totally unrelated to corporate Performance year after year after year,
WHEREAS Salaried employees shall NOT qualify as Director Nominees since their presence on the Board truly corrupts and destroys its function as a totally independent executive governance body;
WHEREAS Paul Volcher, former Chairman of the Federal Reserve Board, said, Stock options have been the principal source of egregious excesses in executive compensation over the past decade without exception. (Nightly Business Report, PBS, 9-17-2002)
WHEREAS Arthur Levitt, during his tenure as Chairman of the Securities and Exchange Commission, said, I spoke time and time again of the failure of the Board of Directors to do anything but act like absolute lambs in the face of their management companies. (Wall Street Week with Fortune, 11-8-2003, PBS-TV)
WHEREAS To have a totally and truly independent executive governance Board of Directors the nominees must come from sources over which Chairmen, Presidents, CEOs, and other Principal Executives in the corporation have no input or control, such as;
1. Individual Investors who shall, for at least the past three (3) years, have been, and currently are, the sole owner of at least three million dollars ($3,000,000) of the corporations shares, and/or:
2. Individuals representing Mutual, Pension, Labor, State Treasury Funds, Foundations or Brokerages holding at least five million (5,000,000) voting shares in the corporation to which they stand for nomination.THEREFORE, IT IS RECOMMENDED TO, and REQUESTED OF, the Board of Directors that knows the corroborative statements above have been proven to be true and factual, as attested to by the financial scandals still ongoing throughout the nation. It is time to put a dignified and decisive end to the present unethical method of nominating Directors and, upon approval of this Proposal, the selection and election of Qualified Nominees to the Board of Directors shall commence with the Annual Meeting in 2009.
The board of directors recommends a vote AGAINST the above stockholder proposal for the following reasons:
As of February 19, 2008, 1,322,919,454 shares of the companys common stock were outstanding. This is the only class of capital stock entitled to vote at the meeting. Each holder of common stock has one vote for each share held. As stated in the notice of meeting, holders of record of the common stock at the close of business on February 19, 2008, may vote at the meeting or any adjournment of the meeting.
Security Ownership of Certain Beneficial Owners
The following table shows the only person who has reported beneficial ownership of more than 5 percent of the common stock of the company. Persons generally beneficially own shares if they have the right to either vote those shares or dispose of them. More than one person may be considered to beneficially own the same shares.
All shares are held by the entities in trust accounts for the economic benefit of the beneficiaries of those accounts.
Security Ownership of Management
The following table shows the beneficial ownership of TI common stock by the named executive officers and all executive officers and directors as a group.