UNITED STATES STEEL CORP DEF 14A 2006
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Statement Pursuant to Section 14(a) of
Notice of Annual Meeting
Tuesday, April 25, 2006
Please vote promptly either by:
--> the Internet, or
--> marking, signing and returning your proxy or voting instruction card.
March 10, 2006
Dear Fellow U. S. Steel Stockholder,
We will hold the annual meeting of stockholders of United States Steel Corporation in Room 1000, Two Mellon Bank Center, 501 Grant Street, Pittsburgh, Pennsylvania, on Tuesday, April 25, 2006, at 10:00 a.m. Eastern Time.
We will elect directors and an independent registered public accounting firm at the meeting. The Board of Directors has nominated four of our ten current directors for election this year. You can read about them, and about the other directors who will continue in office, on pages 15-20 of our proxy statement.
We hope you will vote either by telephone, over the Internet or by marking, signing and returning your proxy or voting instruction card as soon as possible, whether or not you plan to attend the meeting.
Table of Contents
We will hold our 2006 annual meeting of stockholders in Room 1000 on the tenth floor of Two Mellon Bank Center, 501 Grant Street, Pittsburgh, Pennsylvania 15219 on Tuesday, April 25, 2006, at 10:00 a.m. Eastern Time, in order to:
You are entitled to vote at the meeting if you were an owner of record of United States Steel Corporation common stock at the close of business on February 24, 2006. If your ownership is through a broker or other intermediary, you will need to have proof of your stockholdings in order to be admitted to the meeting. A recent account statement, letter or proxy from your broker or other intermediary will suffice.
By order of the Board of Directors,
Dan D. Sandman
Dated: March 10, 2006
United States Steel Corporation
We have sent you this proxy statement because the Board of Directors is asking you to give your proxy (that is, the authority to vote your shares) to our proxy committee so they may vote your shares on your behalf at our annual meeting of stockholders. The members of the proxy committee are John P. Surma and Dan D. Sandman. They will vote your shares as you instruct.
We will hold the meeting on April 25, 2006 in Room 1000, Two Mellon Bank Center, 501 Grant Street, Pittsburgh, Pennsylvania. The proxy statement contains information about the matters being voted on and other information that may be helpful to you. We began the mailing of the proxy statement, the proxy card and the 2005 annual report on or about March 10, 2006.
Questions and Answers
/*/ Who may vote?
You may vote if you were a holder of United States Steel Corporation ("U. S. Steel" or the "Corporation") common stock at the close of business on February 24, 2006.
/*/ What may I vote on?
You may vote on:
/*/ How does the Board recommend I vote?
The Board recommends that you vote:
/*/ How do I vote?
You may vote by telephone or over the Internet by following the instructions on the enclosed proxy card (or, if you own your shares through a broker or other intermediary, on the enclosed voting instruction card). You may also vote by marking, signing and dating the enclosed proxy card or voting instruction card and returning it in the prepaid envelope. The proxy committee will vote your shares in accordance with your directions. If you return a proxy card but do not mark the boxes showing how you wish to vote, the proxy committee will vote your shares FOR each proposal, but only if you have signed and dated the card. Unsigned proxy cards will not be voted at all. If you are a stockholder of record (that is, if you are registered on our books), you may also vote in person by attending the meeting.
/*/ May I change my vote?
If you are a stockholder of record, you may change your vote or revoke your proxy at any time before your shares are voted at the meeting by:
/*/ How many outstanding shares are there?
At the close of business on February 24, 2006, which is the record date for the meeting, there were 108,832,518 shares of U. S. Steel common stock (each share representing one vote and collectively representing 108,832,518 votes) outstanding.
/*/ How big a vote do the proposals need in order to be adopted?
Directors are elected by a plurality of the votes of the shares present in person at the meeting or represented by proxy and entitled to vote; that is, those receiving the most votes are elected, even if they receive less than a majority of the votes present. The independent registered public accounting firm is elected by a majority of the votes of the shares present in person at the meeting or represented by proxy and entitled to vote. Abstentions are counted as votes present and entitled to vote and have the same effect as votes against a proposal. Broker non-votes are not counted as either votes for or votes against a proposal. Both abstentions and broker non-votes are counted in determining that a quorum is present for the meeting.
/*/ What are broker non-votes?
The New York Stock Exchange permits brokers to vote their customers' shares on routine matters when the brokers have not received voting instructions from their customers. The election of directors and the election of independent auditors are examples of routine matters on which brokers may vote in this way. Brokers may not vote their customers' shares on non-routine matters such as employee stock compensation plans, mergers and contested proposals unless they have received voting instructions from their customers. Non-voted shares on non-routine matters are called broker non-votes.
/*/ What constitutes a quorum?
Under our by-laws, a quorum is one-third of the voting power of the outstanding shares of stock entitled to vote.
/*/ Will my vote be confidential?
All voting records which identify stockholders are kept permanently confidential except as necessary to meet legal requirements and in other limited circumstances such as proxy contests. The vote tabulators, who are U. S. Steel employees, and the inspector of election, who is independent, are required to execute confidentiality agreements.
/*/ How will voting be conducted on other matters raised at the meeting?
If any matters are presented at the meeting other than the proposals on the proxy card, the proxy committee will vote on them using their best judgment. Your signed proxy card, or your telephone or Internet vote, gives them the authority to do this. Under our by-laws, notice of any matter to be presented by a stockholder for a vote at the meeting must have been received by our Corporate Secretary on or after December 26, 2005, and no later than January 25, 2006, and it must have been accompanied by certain information about the stockholder presenting it. We have not received notice of any matter to be presented other than those on the proxy card.
/*/ When must shareholder proposals be submitted for the 2007 annual meeting?
Shareholder proposals submitted for inclusion in our 2007 proxy statement must be received in writing by our Corporate Secretary no later than 5:00 p.m. Eastern Time on November 10, 2006. Shareholder proposals submitted outside the process for inclusion in the proxy statement must be received from stockholders of record on or after December 25, 2006 and no later than January 24, 2007 and must be accompanied by certain information about the stockholders making the proposals, in accordance with our by-laws.
Under our by-laws and the laws of Delaware, U. S. Steel's state of incorporation, the business and affairs of U. S. Steel are managed under the direction of the Board of Directors. The Board met eight times in 2005. The non-employee directors hold regularly scheduled executive sessions without management. The chair for these sessions is currently rotated among the committee chairmen; however, the Board has decided to name a presiding director, to be elected annually by the independent directors at the Board's organizational meeting following the annual meeting of stockholders, to chair these sessions. The presiding director, who must be an independent director, will also act as a liaison between the Board and executive management. The directors spend considerable time preparing for Board and committee meetings, and they attend as many meetings as possible. The directors' attendance at meetings of the Board and its committees averaged 96 percent in 2005. The Board has three principal committees, all the members of which are independent within the definitions of independence of both the New York Stock Exchange listing standards and the Securities and Exchange Commission's standards for audit committee members. Each committee may hire outside advisors, including counsel, at the Corporation's expense. The Board also has an Executive Committee made up of Messrs. Surma and Sandman, the role of which is to act on, and report to the Board on, significant matters that may arise between Board meetings. The directors are expected to attend the annual meetings of stockholders. All directors who were on the Board at the time attended the 2005 meeting. The table below shows the current committee memberships of each independent director and the number of meetings that each principal committee of the Board held in 2005.
Audit & Finance
The Audit & Finance Committee (the "Committee") has a written charter adopted by the Board, which is attached as Appendix A to this proxy statement and is available on the Corporation's website (www.ussteel.com) under "Investors" then "Corporate Governance". All the members of the Committee are independent (as defined by the New York Stock Exchange and the Securities and Exchange Commission (the "SEC")). The charter describes the Committee's purpose as follows:
The charter also requires that, to the extent practicable, all eligible (i.e. financially literate) independent directors shall be members of the Committee and that no director who serves on the audit committees of more than two other public companies may serve on the Committee unless the Board determines that such simultaneous service will not impair the ability of such director to effectively serve on the Committee.
The Committee has a number of members who meet the SEC's definition of audit committee financial expert. The Board has decided to name one of them, Charles R. Lee, the Committee's chairman, as the audit committee financial expert within the SEC's definition. Mr. Lee is independent as that term is defined by the New York Stock Exchange and the SEC.
The charter describes the Committee's duties and responsibilities as including:
The Compensation & Organization Committee (the "Committee") has a written charter adopted by the Board which is available on the Corporation's website (www.ussteel.com) under "Investors" then "Corporate Governance". The charter describes the Committee's purpose as including:
The charter requires that the Committee be comprised solely of directors who are independent and qualified under standards established by the New York Stock Exchange and who, in the opinion of the Board, are free of any relationship that would interfere with their exercise of independent judgment as members of the Committee. It further requires that the Committee consist of at least three members, each of whom shall be appointed by the Board, and that the Board select, as Committee members, directors whose experience and expertise will enable them to make substantial contributions to the Committee's endeavors.
The charter gives the Committee the following duties and responsibilities:
comparable companies, the awards given to the CEO in past years, and the CEO's leadership, integrity and effectiveness,
The Committee meets at least three times annually. It reports to the Board on all matters relevant to the Committee's discharge of its responsibilities, and makes such recommendations to the Board as the Committee deems appropriate.
The Corporate Governance & Public Policy Committee (the "Committee") serves as the Corporation's nominating committee. It has a written charter adopted by the Board which is available on the Corporation's website (www.ussteel.com) under "Investors" then "Corporate Governance". The charter gives the Committee the following duties and responsibilities:
The Committee's goals and responsibilities include establishing criteria for selecting new directors, and exercising oversight of the evaluation of the Board and management. The criteria for selecting new directors include (a) their independence, as defined by applicable law, stock exchange listing standards and the categorical standards listed in the Corporation's Corporate Governance Principles, (b) their business or professional experience, (c) their integrity and judgment, (d) their records of public service, (e) their ability to devote sufficient time to the affairs of the Corporation, (f) the diversity of backgrounds and experience they will bring to the Board, and (g) the needs of the Corporation from time to time. The Committee's charter provides that all directors should be individuals of substantial accomplishment with demonstrated leadership capabilities and that they should represent all shareholders and not any special interest group or constituency. The Corporation has an agreement with the United Steelworkers of America (the "USWA") that permits the USWA to suggest two individuals for consideration for Board membership. The agreement recognizes that every director has a fiduciary duty to the Corporation and all of its stockholders, and that each individual recommended by the USWA must meet the criteria described above. Messrs. Lucchino and Gephardt were recommended in this manner. The Committee's charter gives the Committee the sole authority to retain and terminate any search firm to be used to identify director candidates, including sole authority to approve the search firm's fees and other retention terms.
The charter requires the Committee to perform an annual self-evaluation and also to oversee the process of evaluation of the Board, its committees, and management. It also requires that all committee members be independent directors and that they, including the chairman, be appointed by the Board. The Committee has the authority to delegate tasks to subcommittees, and it is required to give regular reports to the Board.
The Committee reviews its charter during its first meeting of each calendar year.
Security holders may send communications through the Secretary of the Corporation to (1) the Board, (2) the Committee chairmen (who preside over executive sessions of the outside directors on a rotating basis) or, after April 25, 2006, the presiding director, or (3) the outside directors as a group. The Secretary will collect, organize and forward to the directors all communications that, in his or her judgment, are appropriate for consideration by the directors. Examples of communications that would not be considered appropriate for consideration by the directors include solicitations for products or services, employment matters, and matters not relevant to the shareholders, to the functioning of the Board, or to the affairs of the Corporation.
Our by-laws provide that each non-employee director shall be paid allowances and attendance fees as the Board may from time to time determine. Directors who are employees of U. S. Steel receive no compensation for their service on the Board. We pay our non-employee directors as follows:
Under our Deferred Compensation Program for Non-Employee Directors, each non-employee director is required to defer at least seventy percent of his or her retainer in the form of Common Stock Units and may elect to defer up to 100%. A Common Stock Unit is what is sometimes referred to as "phantom stock" because initially no stock is actually issued. Instead, we keep a book entry account for each director that shows how many Common Stock Units he or she has. When a director leaves the Board, he or she must take actual shares of common stock corresponding to the number of Common Stock Units in his or her account. We believe this is an effective way to increase the directors' equity interests in U. S. Steel and thereby further align their interest with that of the stockholders. We credit each non-employee director's deferred stock account with Common Stock Units every January. The ongoing value of each Common Stock Unit equals the market price of the common stock. When dividends are paid on the common stock, we credit each account with equivalent amounts in additional Common Stock Units. If U. S. Steel were to undergo a change in control resulting in the removal of a non-employee director from the Board, that director would receive a cash payment equal to the value of his or her deferred stock account.
Under our Non-Employee Director Stock Program, upon joining our Board each current non-employee director received a grant of up to 1,000 shares of common stock. In order to qualify, each director must first have purchased an equivalent number of shares in the open market during the 60 days following the first date of his or her service on the Board.
Our by-laws require non-employee directors to retire at the end of the month in which they turn 72, even if their terms have not expired. Employee directors must retire from the Board when they retire as employees, except that the CEO may remain on the Board, at the Board's request, through the month in which he or she turns 70. Our by-laws also provide that directors who undergo a significant change in their business or professional careers should volunteer to resign from the Board.
In the regular course of its business since January 1, 2005, U. S. Steel and its subsidiaries have had transactions with entities with which certain directors were affiliated. Such transactions were in the ordinary course of business and at competitive prices and terms. We do not consider any such director to have a material interest in any such transaction. We anticipate that similar transactions will occur in 2006.
The Board will present the following proposals at the meeting:
Proposal No. 1
Election of Directors
U. S. Steel's Certificate of Incorporation divides the directors into three classes: Class I, Class II and Class III. Each class must consist, as nearly as possible, of one-third of the directors. Once elected, directors serve for a term of three years and until their successors are duly elected and qualified. At each annual meeting, directors who are elected to succeed directors whose terms have expired are identified as being of the same class as those they succeed. A director elected to fill a vacancy is elected to the same class as the director he or she succeeds, and a director elected to fill a newly created directorship holds office until the next election of the class to which he or she is elected.
The current four Class II directors are nominees for election this year. The Board is recommending them for a three-year term that will expire at the 2009 annual meeting. Of the 10 current directors, two are officers of U. S. Steel; five have top executive experience with a wide variety of other businesses; one had a distinguished career in the military and the diplomatic corps before entering business; and two have had distinguished careers in public service. A brief statement about the background of each nominee and each continuing director is given on the following pages. If any nominee for whom you have voted becomes unable to serve, your proxy may be voted for another person designated by the Board.
The Board has affirmatively determined that no non-employee director has a material relationship with the Corporation (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Corporation). The Board made such determination based on all relevant facts and circumstances, including the categorical standards for independence adopted by the Board. Under those standards, no director is independent if:
"Immediate family member" includes a person's spouse, parents, children, siblings, mother and father-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person's home. It does not include individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated.
Our by-laws describe the procedures that must be used in order for someone nominated by a stockholder of record to be eligible for election as a director. They require that notice be received by the Secretary at least 45 days, but not more than 75 days, before the first anniversary of the date on which we first mailed our proxy materials for the preceding year's annual meeting of stockholders. The notice must contain certain information about the nominee, including his or her age, address, occupation and share ownership, as well as the name, address and share ownership of the stockholder giving the notice.
The Board recommends a vote for the election of each nominee.
Nominees for Class II Director
Continuing Class III Directors
Continuing Class I Directors
Proposal No. 2
Election of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP (PwC) has served as the independent auditor (now referred to as the independent registered public accounting firm) of U. S. Steel since its creation in 2001 and served as the independent auditor of USX Corporation, which included the U. S. Steel Group, for many years. We believe that their knowledge of U. S. Steel's business and its organization gained through this period of service is quite valuable. Partners and employees of PwC assigned to the U. S. Steel engagement are periodically rotated, thus giving U. S. Steel the benefit of new thinking and approaches in the audit area. We expect representatives of PwC to be present at the meeting with an opportunity to make a statement if they desire to do so and to be available to respond to appropriate questions.
For the year 2005, PwC performed professional services for U. S. Steel in connection with audits of the financial statements of U. S. Steel, and of U. S. Steel's internal control over financial reporting as of December 31, 2005, and audits of certain subsidiaries and certain pension and other employee benefit plans. PwC has also reviewed quarterly reports and other filings with the Securities and Exchange Commission and other agencies. The Board recommends a vote for the election of PwC as our independent registered public accounting firm.
Our committee has reviewed and discussed U. S. Steel's audited financial statements for the year ended December 31, 2005 with U. S. Steel's management. We have discussed with the independent registered public accounting firm, PricewaterhouseCoopers LLP (PwC), the matters required to be discussed by Statements on Auditing Standards No. 61, as amended by Statements No. 89 and No. 90 (Communication with Audit Committees). We also discussed with U. S. Steel's management (i) management's assessment of the effectiveness of U. S. Steel's internal control over financial reporting as of December 31, 2005 ("Management's Assessment"); (ii) PwC's opinion of Management's Assessment and (iii) PwC's opinion of the effectiveness of U. S. Steel's internal control over financial reporting as of December 31, 2005. We have received the written disclosures and the letter from PwC required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and we have discussed with PwC its independence. Based on the review and discussions referred to above, we recommended to the Board that the audited financial statements for U. S. Steel be included in U. S. Steel's Annual Report on Form 10-K for the year ended December 31, 2005 for filing with the Securities and Exchange Commission.
The following table shows the fees paid to PwC for professional services for 2005 and 2004:
The Audit & Finance Committee (the "Committee") has the sole authority to pre-approve all audit engagement fees and terms as well as all non-audit engagements with PwC. The Committee has delegated to its chairman the authority to approve non-audit engagements of less than $500,000 between Committee meetings. In 2004 and 2005 all of the above services were pre-approved by the Committee in accordance with this pre-approval policy.
The following table furnishes information concerning all persons known to U. S. Steel to beneficially own five percent or more of the voting stock of U. S. Steel:
The Board has adopted stock ownership and retention requirements for executive management, and stock ownership requirements for non-employee directors. These requirements are part of our Corporate Governance Principles, which are available on our website (www.ussteel.com). Members of executive management are required to hold shares of the Corporation's common stock or other equity interests in specified amounts commensurate with their positions and salaries. For the CEO, the required minimum amount is a number of shares equal in value to five times the market reference point for his or her annual salary. For the members of the Executive Management Committee (the CEO and the executive officers reporting directly to him) other than the CEO, the required minimum amount is a number of shares equal in value to three times the market reference points for their annual salaries. For the other members of executive management, the required minimum amount is a number of shares equal in value to the market reference points for their annual salaries. Once such ownership amounts are reached, members of executive management are required to hold at least 25 percent of the shares realized through the exercise of stock options, grants of restricted shares and performance shares (after reduction for applicable exercise costs and taxes), until such executives are eligible for retirement and have obtained consent from the CEO to sell such shares. Non-employee directors are required to hold shares of the Corporation's common stock, which may include stock-based deferred compensation, at a level equal to two times the annual board retainer. Each executive officer and each director meets the applicable stock ownership and retention requirements.
The following table sets forth the number of shares of U. S. Steel common stock beneficially owned as of January 31, 2006 by each director, by each executive officer named in the Summary Compensation Table and by all directors and executive officers as a group. No director or executive officer beneficially owned, as of the applicable date, any equity securities of U. S. Steel other than those shown.
The following table shows Common Stock Units credited under the United States Steel Corporation Deferred Compensation Plan for Non-Employee Directors:
The following table sets forth certain information concerning the compensation awarded to, earned by, or paid by U. S. Steel to Mr. Surma and to the other four most highly compensated current executive officers of U. S. Steel who were serving as executive officers at the end of 2005 for services rendered to U. S. Steel or its subsidiaries as executive officers during 2005, 2004 and 2003:
Summary Compensation Table
2005 Option Grants
The following table sets forth certain information concerning options granted during 2005 to each executive officer named in the Summary Compensation Table:
These amounts appear in the Summary Compensation Table on page 25 of this proxy statement under the heading "Options/SARs". The Compensation & Organization Committee also considered alternate Black-Scholes per share values developed by their consultant to facilitate comparative and peer group measurements.
The following table sets forth certain information concerning options to purchase common stock and stock appreciation rights ("SARs") exercised by each executive officer named in the Summary Compensation Table during 2005 together with the total number of options and SARs outstanding at December 31, 2005 and the value of such options and SARs.
Aggregated 2005 Option/SAR Exercises
Section 16(a) Beneficial Ownership Reporting Compliance
No U. S. Steel director or officer or other person subject to Section 16 of the Securities Exchange Act of 1934 failed in 2005 to file on a timely basis any reports required by Section 16(a) of such act.
The Compensation & Organization Committee (the "Committee") of U. S. Steel sets policies and administers programs on executive compensation. When action should be taken on a specific compensation item, we either make a recommendation to the U. S. Steel Board or a subsidiary company board or take action on our own, whichever is appropriate. The Committee reports to the Board all actions that do not require the Board's approval. The purpose of this report is to summarize the philosophy, specific program objectives and other relevant factors considered by the Committee in making decisions with respect to the compensation of U. S. Steel executive officers, including the officers named in the Summary Compensation Table. In 2005 the Corporation implemented a new compensation strategy for all domestic, non-represented employees. The centerpiece of this strategy is a new compensation program that more closely links pay to performance, provides market-driven pay opportunities, and modernizes the Corporation's compensation approach to reflect the Corporation's leaner and flatter organization. The primary driver of this program is return on capital employed. New short- and long-term incentive plans approved by shareholders in 2005 will be effective for 2006 compensation purposes.
Compensation programs for U. S. Steel's executive officers are designed to attract, retain and motivate employees who will make significant contributions to the achievement of corporate goals and objectives. The principal elements of our executive officers' compensation are:
For each of the above elements of compensation, the Committee exercises its discretion in the subjective consideration of the factors described below and within the limitations of the various plans.
The Board adopted a requirement that members of executive management hold shares of U. S. Steel common stock in specified amounts commensurate with their positions and salaries. (See page 23.) In 2005 the Committee adopted stock retention guidelines which, in addition to the stock ownership guidelines adopted in 2004, mandate ownership until retirement or termination of a specific percentage of shares (after tax) on all new equity grants. The Committee believes the combination of stock ownership and retention guidelines ensures that executives retain significant levels of ownership in the Corporation.
Salary administration at U. S. Steel begins with the development, and periodic adjustment, of salary structures for executive officers employed at the corporate level and at each major business unit. Each executive officer's position is assigned a salary level with an associated salary range. The two major objectives in developing salary structures and assigning levels are to maintain:
The data used in developing and adjusting salary structures are obtained from surveys and proxy disclosures coordinated by an independent consultant engaged by the Committee.
The Committee makes decisions on salary adjustments giving the highest weighting to performance; but other factors are also considered such as contribution, accountability and experience. Unless the Committee values a position more than other companies value the position, once an executive officer's salary passes the midpoint for the position, increases seldom exceed amounts necessary to maintain the salary near the market median, assuming performance merits such increases. Therefore, incentive opportunities provide the primary basis for significant increases in compensation. The salaries shown for the officers named in the Summary Compensation Table reflect the results of salary reviews and related actions taken by the Committee.
Short-Term Incentive Awards
U. S. Steel's short-term incentive (bonus) opportunities for executive officers are designed to provide awards near the average of those provided by similar companies for on-target performance. However, our incentive plans are designed to provide exceptional rewards for superior performance and lower rewards for below-average performance. Through 2005, the Committee has made bonus awards under the Annual Incentive Compensation Plan, as well as under the Senior Executive Officer Annual Incentive Compensation Plan, the latter of which was developed specifically to retain the Corporation's tax deduction for awards made to the officers named in the Summary Compensation Table and which was approved by the stockholders of USX Corporation ("USX") and the U. S. Steel Group on October 25, 2001. A new 2005 Annual Incentive Compensation Plan was approved by the stockholders on April 26, 2005. This new plan will replace the Senior Executive Officer Annual Incentive Compensation Plan and the Annual Incentive Compensation Plan, and it is designed to retain tax deductibility for short-term incentive awards. The new plan will be in effect for the 2006 performance period and will contain performance measures aligned with the Corporation's business strategy and performance goals applicable to all employees.
Senior Executive Officer Annual Incentive Compensation Plan
This plan provides for awards based on pre-established performance measures specifically related to income from operations, steel shipments, worker safety, workforce diversity, environmental emissions improvements and common stock performance. For each performance measure, the applicable portion of the bonus is awarded only if performance reaches the minimum, or threshold, level that is established annually for that measure.
The Committee certified in writing prior to payment of awards for the year 2005 that the pre-established, applicable performance levels (measured for incentive compensation purposes) required under the Senior Executive Officer Annual Incentive Compensation Plan were satisfied. This plan is no longer in effect following the 2005 performance period.
Annual Incentive Compensation Plan
The Committee also administers the Annual Incentive Compensation Plan under which other executive officers participate. It makes awards based on performance period comparisons with the current business plan, with performance in prior years and with peer groups on the basis of such financial measures as income from operations, income per ton shipped, cash flow and return on capital employed, as measured for incentive compensation purposes, as well as individual objectives. In addition, non-financial measures, such as safety performance (compared with the prior year's industry average) and environmental and workforce diversity performance are considered. In determining awards under this plan, consideration is also given to the absolute levels of income and cash flow. When making awards to executive officers
under this plan, the Committee gives such weight to the various factors as it deems appropriate.
Based on consideration of overall performance and/or other factors, the Committee may reduce or eliminate a short-term incentive award that would otherwise be payable under the above discussed plans. Such plans are no longer in effect following the 2005 performance period.
Long-Term Incentive Awards
Long-term incentive awards are of major importance in the mix of compensation elements because these awards provide the most direct link to the returns that you, as U. S. Steel stockholders, receive. The USX and the U. S. Steel Group stockholders approved the 2002 Stock Plan on October 25, 2001. We administer this plan, under which we may grant (1) stock options, (2) stock appreciation rights (although no stock appreciation rights have been granted since 2003 nor will any be granted in the future) and/or (3) restricted stock. Our stock options and restricted stock meet the requirements for deductibility under the tax laws.
The U. S. Steel stockholders approved the 2005 Stock Incentive Plan on April 26, 2005. A new long-term incentive program under the 2005 Stock Incentive Plan will be in effect for performance periods beginning in 2006. The new program represents a new, market-driven design for U. S. Steel's long-term incentive awards which is based on a market median long-term incentive multiple of the market median base salary for each position. With this as a basis, total long-term incentive value will be distributed equally among three equity vehiclesstock options, restricted stock and performance shares.
Stock Option Grants
The Committee granted stock options in May 2005 under the amended 2002 Stock Plan, the final such grant under the 2002 Plan. These grants were substantially lower in grant-date value and share number when compared to prior years, reflecting the substantial increase in our share price and to continue the transition to a more market-based long-term incentive plan approach in 2006.
Restricted Stock Grants
The Committee established, for each recipient, an annual target level of restricted stock based on the same factors as those considered in granting stock options. A major grant is made to cover five years, with the intention that one fifth of the shares vests each year if performance is at the target level. The Committee vests restricted stock at levels higher or lower than annual targets, depending upon performance.
A major grant was made in 2000 by the USX Committee to cover the five-year performance period ending with 2004. Prior to 2005, we made interim grants only to permit vesting at the target level for the number of years remaining in the period. To emphasize the long-term nature of the awards, vesting decisions have been based on three-year average performance, which is compared with three-year peer-group performance for relevant businesses.
Vesting of restricted stock shares is based on pre-established performance measures specifically related to the responsibilities of plan participants. We can vest a portion of the annual target shares only if performance reaches the minimum, or threshold, level established for that period. After vesting, executive officers are expected to hold their shares consistent with the share ownership and retention guidelines for the respective executive officer's level within the Corporation.
In May 2005, the three-year (2002-2004) average performance of U. S. Steel was compared by the Committee with that of competitors for the measures shown below. This comparison has provided the primary basis for the determination of vesting levels for restricted stock. However, vesting levels may be reduced (or eliminated
entirely) based on overall performance and/or other factors considered relevant by the Committee.
Performance measures considered in connection with the vesting of restricted stock grants are:
Prior to the vesting of restricted stock shares in the year 2005, the Committee certified in writing that the pre-established applicable performance levels required under the 2002 Stock Plan were satisfied. The 2005 vesting was the final vesting of the restricted stock grant made in 2000.
The Committee also awarded performance restricted stock in May 2005 with vesting determined 100% in 2006 and a one-time transition grant of performance restricted stock for which vesting will be determined 50% in 2007 and 50% in 2008. The objective of the transition grant is to promote retention due to the extended vesting provisions of the new 2006 long-term incentive plan.
We authorized the review of our severance agreements in light of a revision to the tax laws (Jobs Creation Act of 2004) and in relation to current market practices. We recommended that the Corporation's Board replace the form of agreement currently in use with a revised severance agreement to better reflect current market practices and to comply with the requirements of the Jobs Creation Act of 2004. All persons who were parties with the Corporation to the previous form of severance agreement executed the new form of agreement, which effectively terminated the previous agreements. In addition to the severance agreements, provisions in the administrative regulations to our stock plans require accelerated vesting of all prior grants under such plans in the event of a change in control.
* * * * * *
The Committee periodically compares data on long-term incentive grants made at other companies with those made at U. S. Steel. Our objective in making grants under the 2002 Stock Plan is to provide opportunities to receive above-average compensation (compared with that of similar companies) when performance is above the target level.
Overall, executive compensation at U. S. Steel is designed to provide total pay that is above average when both short- and long-term incentive goals are exceeded. In response to the SEC's proposed expanded executive compensation disclosure requirements, the Committee reviewed a sample form of a tally sheet which may be used for future disclosure purposes.
In addition to the compensation comparisons described above, the Committee annually compares the salary, bonus and long-term incentive payouts for the CEO and U. S. Steel's other top officers with the same elements for similar positions at comparable companies. Mr. Surma's compensation reflects the same elements and factors discussed above. Having determined that the requisite performance criteria had been satisfied, the Committee vested 46,000 shares of Mr. Surma's restricted stock in May of 2005. Such vesting was the final vesting of restricted stock grants made prior to 2005. Also in May 2005, he received a grant of 146,500 stock options and two grants of restricted stockone grant of 14,200 shares and another grant of 17,000 shares. Both grants are dependent upon the Corporation's 2005 performance and his continued employment on the relevant vesting determination dates. The 14,200 shares will be available for vesting in May 2006, and 8,500 shares of the 17,000 shares will be available for vesting in each
of May 2007 and May 2008. Following a market study of CEO compensation, Mr. Surma's salary was increased to an annual rate of $925,000 in May 2005, an increase of $125,000. In 2006, he was awarded a bonus of $1,750,000 based upon the Corporation's 2005 performance.
Under Mr. Surma's tenure as President & Chief Executive Officer since October 2004, the Corporation has substantially improved its safety record and reported for 2005 its second highest level of income from operations, exceeded only by the Corporation's 2004 performance, which was the best in its history.
Effective February 1, 2006, Mr. Surma was elected Chairman of the Board after a smooth transition period from the prior Chairman. Mr. Surma has been recognized as a respected leader in the global steel industry with a clear vision for the future.
Seth E. Schofield
Robert J. Darnall
Charles R. Lee
Douglas C. Yearley
The line graph below compares the yearly change in cumulative total stockholder return of our common stock with the cumulative total return of the Standard & Poor's 500 Stock Index and the S&P Steel Index. The S&P Steel Index is made up of U. S. Steel, Nucor Corporation, Allegheny Technologies Incorporated and Worthington Industries, Inc.
Comparison of Cumulative Total Return(1)
The United States Steel Corporation Plan for Employee Pension Benefits ("Steel Pension Plan") is comprised of two defined benefits. One is based on final earnings and the other on career earnings. Benefits may be paid as an actuarially determined lump sum in lieu of monthly pensions under both the final earnings and career earnings provisions of the Steel Pension Plan. Directors who have not been employees of U. S. Steel do not receive any benefits under the Steel Pension Plan. In order to comply with the limitations prescribed by the Internal Revenue Code (the "Code"), pension benefits are paid directly by U. S. Steel when they exceed the amounts permitted by the Code to be paid from federal income tax qualified pension plans. The following table shows the annual final earnings pension benefits which would be payable for retirement at age 65 (or earlier under certain circumstances) with the various levels of eligible earnings and years of service shown. The benefits are based on a formula of a specified percentage (dependent on years of service) of average monthly earnings in the five consecutive years of the ten years prior to retirement in which earnings are highest. The benefits are not subject to any deduction for Social Security or other offset amounts. Years of service include service accrued as an employee of Marathon Oil Company (a formerly affiliated company), its subsidiaries and joint ventures ("Marathon"), and earnings for purposes of determining average monthly earnings include salary earned as an employee of Marathon. As of December 31, 2005, Messrs. Surma, Sandman, Goodish and Connelly, and Mrs. Haggerty, had 8, 32, 35, 34 and 29 years of service, respectively.
The annual career earnings pension is equal to one percent of total career earnings plus a 30 percent supplement. Total career earnings include salary earned as an employee of Marathon. The estimated annual career earnings benefit payable at normal retirement age 65, assuming no increase in annual earnings, will be $215,515 for Mr. Surma, $140,962 for Mr. Sandman, $110,317 for Mr. Goodish, $148,881 for Mrs. Haggerty and $81,483 for Mr. Connelly. Earnings for the purpose of calculating both the final earnings and career earnings pensions are limited to base salary (which includes any foreign service premium) as reflected in the Summary Compensation Table.
Pensions payable under the Steel Pension Plan to participants with Marathon service include service and earnings that are also used in the calculation of benefits payable under the defined benefit pension plans sponsored by Marathon ("Marathon Pension Plans"); therefore, the Steel Pension Plan benefits for such participants are reduced by their Marathon Pension Plan benefits. Because Messrs. Surma and Sandman have earned benefits under the Marathon Pension Plans, their U. S. Steel pension benefits will be reduced by their estimated annual Marathon pensions which are estimated at age 65 (assuming no increase in annual earnings) as $156,001 and $409,894,
respectively. However the pension payable under the Steel Pension Plan cannot be reduced below the amount calculated with only U. S. Steel service and earnings.
In addition to the pension benefits described above, Messrs. Surma, Sandman, Goodish and Connelly, and Mrs. Haggerty, participate in the United States Steel Corporation Executive Management Supplemental Pension Program ("Supplemental Pension Program") which entitles them, upon retirement after age 60, or before age 60 with U. S. Steel's consent, to the benefits shown in the table below. The benefits are based on a formula of a specific percentage, determined by years of U. S. Steel service, of the average of the three highest annual bonuses paid under the applicable incentive compensation plans in the ten years prior to retirement. The three most recent bonuses are reported in the Summary Compensation Table. The following table shows the annual supplemental pension which would be payable for retirement at age 65 (or earlier under certain circumstances) with the various levels of average annual bonus and years of service shown. Benefits will be paid as an actuarially determined lump sum in lieu of monthly supplemental pension benefits.
When Mr. Surma joined USX and Marathon in 1997 he was provided certain pension benefits, the obligation for which U. S. Steel has partially assumed. The benefits assumed by U. S. Steel consist of the difference between (1) Mr. Surma's pension under the Steel Pension Plan and Supplemental Pension Program determined by increasing the service Mr. Surma actually accrues under such plans by (a) 15 years for the purpose of computing his benefit eligibility and vesting and (b) a number of years equal to the product of 15 multiplied by the ratio of his actual accrued service under the Steel Pension Plan to his actual accrued service under both the Steel and Marathon Pension Plans for the purpose of calculating his pension benefits, and (2) his pension benefits under the Steel Pension Plan and the Supplemental Pension Program determined with his actual accrued service. The pension benefits so calculated will be paid to Mr. Surma by Marathon and U.S. Steel upon his retirement or, in the event of his death before retirement, to his surviving spouse or, if there is no surviving spouse, to his estate.
U. S. Steel has entered into a retention agreement with Mr. Sandman which provides enhanced pension benefits in return for his continued employment. If Mr. Sandman continues his employment through 2006, the Corporation will provide a pension upon his retirement equal to the difference between (1) his Steel Pension Plan benefits calculated with his actual service and age at retirement each increased by three years, a $4,800 annual social security supplement payable to the earlier of death or age 62, a lump sum distribution of these pension benefits calculated with the more favorable of the interest and mortality factors applicable to December 31, 2001 retirements or such factors applicable to his actual retirement date, and (2) his Steel Pension Plan benefits at his retirement. In addition he will have the Corporation's consent to retire with respect to the Supplemental Pension Program. Should Mr. Sandman die prior to retirement, the enhanced pension would be paid to his surviving spouse or survivor.
We believe that if a change in control of U. S. Steel appeared possible our officers should be encouraged to continue their dedication to their assigned duties. For that reason, we have entered into agreements, as discussed in the Compensation & Organization Committee Report on Executive Compensation beginning on page 29, with each of our officers that provide that, if an officer's employment is terminated under certain circumstances following a change in control, the officer will be entitled to the following severance benefits:
Each agreement has a term of approximately two years and is automatically extended by one year each September unless we notify the officer prior to then that we do not want it to be extended. In any event, however, each agreement continues for two years after a change in control. The severance benefits are payable if, any time after a change in control, the officer's employment is terminated for good reason or is terminated for other than cause or disability. The severance benefits are not payable if termination is due to the officer's death or disability or occurs after the officer reaches age 65.
The definition of a change in control for purposes of these agreements is complex but is generally summarized as follows. It includes any change in control required to be reported in response to Item 6 (e) of Schedule 14A under the Securities Exchange Act of 1934 and provides that a change in control will have occurred if:
USX Corporation entered into agreements with Mr. Surma and Mr. Sandman in consideration for their agreeing to serve as vice chairmen of U. S. Steel. The agreement with Mr. Surma calls for U. S. Steel, Marathon, Marathon Ashland Petroleum LLC ("MAP") and Speedway SuperAmerica LLC ("SSA") to provide certain non-qualified benefit supplements in addition to the pension and savings benefits and non-qualified deferred compensation to which he is otherwise entitled. Mr. Surma's pension benefit supplements payable by U. S. Steel are described on page 36. Marathon will provide such supplements to the extent, if any, that they are not provided by U. S. Steel. In addition to the pension enhancements, 15 years will be added to his actual U. S. Steel service solely for the purpose of determining vesting and eligibility for company contributions under the U. S. Steel Supplemental Thrift Program. The agreement with Mr. Sandman calls for U. S. Steel to provide enhanced pension benefits to Mr. Sandman if he remains employed by U. S. Steel at least through 2006. These benefits are described on page 36.
Statement Regarding the Delivery of a Single Set of Proxy Materials to Households With Multiple U. S. Steel Shareholders
If you have consented to the delivery of only one set of proxy materials to multiple U. S. Steel shareholders who share your address, then only one proxy statement and only one annual report are being delivered to your household unless we have received contrary instructions from one or more of the shareholders sharing your address. We will deliver promptly upon oral or written request a separate copy of the proxy statement or the annual report to any shareholder at your address. If you wish to receive a separate copy of the proxy statement or the annual report, you may call us toll-free at 1-866-433-4801 or write to us at U. S. Steel Shareholder Services, Room 611, 600 Grant Street, Pittsburgh, PA 15219-2800. Shareholders sharing an address who now receive multiple copies of the proxy statement or the annual report may request delivery of a single copy by calling us at the above number or writing to us at the above address.
We will bear the cost of this solicitation of proxies. In addition to soliciting proxies by mail, our directors, officers and employees may solicit proxies by telephone, in person or by other means. They will not receive any extra compensation for this work. We will also make arrangements with brokerage firms and other custodians, nominees and fiduciaries to forward proxy solicitation material to the beneficial owners of our common stock, and we will reimburse them for reasonable out-of-pocket expenses that they incur in connection with forwarding the material.
Our Corporate Governance Principles, Code of Ethical Business Conduct (which is applicable to all directors and employees, including the CEO and senior financial officers), Board committee charters, annual and quarterly reports on Forms 10-K and 10-Q, and this proxy statement are available on our website, www.ussteel.com, and are also available in print to any shareholder who requests them. By providing these documents we do not intend to incorporate the contents of the website into this document.
By order of the Board of Directors,
Dan D. Sandman
March 10, 2006
The purpose of the Audit & Finance Committee (the "Committee") shall be to
To the extent practicable, all eligible (i.e. financially literate) independent directors shall be members of the Committee. In addition, the Committee shall include among its members and designate at least one audit committee financial expert. No director who serves on the audit committees of more than two other public companies may serve on the Committee unless the Board determines that such simultaneous service will not impair the ability of such director to effectively serve on the Committee. Such determinations will be disclosed in the proxy statement.
Action By Full Board
Occasionally the full Board may act on items within the scope of the Committee's charter that relate to matters not set apart for audit committees by applicable law or stock exchange listing standards, e.g. certain financing matters.
Duties and Responsibilities
The duties and responsibilities of the Committee shall be:
with the Board any issues that arise with respect to the Corporation's compliance with legal or regulatory requirements.
all of which will put the Committee in a position to evaluate the auditor's qualifications, performance and independence, which evaluation shall include the review and evaluation of the lead partner of the independent auditor and take into account the opinions of management and the Corporation's internal auditors, and which shall also include consideration of whether, in order to assure continuing auditor independence, there should be regular rotation of the audit firm itself and not just the regular rotation of the lead audit partner as required by law. The Committee will report regularly to the Board and review with the Board any issues with respect to the qualifications, performance, and independence of the independent auditor.
Last reviewed and approved by the Board of Directors on January 31, 2006.
The undersigned hereby appoint(s) John P. Surma and Dan D. Sandman, or either of them, proxies to vote as herein directed on behalf of the undersigned at the Annual Meeting of Stockholders of United States Steel Corporation on April 25, 2006 and at any meeting resulting from an adjournment or postponement thereof and upon all other matters properly coming before the Meeting, including the proposals set forth in the proxy statement for such Meeting with respect to which the proxies are instructed to vote as follows:
Proposals of the Board of Directors The directors recommend a vote FOR
Notice of Annual Meeting of Stockholders on April 25, 2006
The Board of Directors and its Committees
Communications from Security Holders
Compensation of Directors
Proposals of the Board
Audit & Finance Committee Report
Information Regarding the Independence of the Independent Registered Public Accounting Firm
Security Ownership of Certain Beneficial Owners
Security Ownership of Directors and Executive Officers
Option Exercises and Year-End Values
Compensation & Organization Committee Report on Executive Compensation
Shareholder Return Performance Presentation
Change in Control Arrangements and Employment Contracts
Appendix A Audit & Finance Committee Charter