UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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KB HOME

(Name of Registrant as Specified In Its Charter)

 

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

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KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

 

 

 

March 9, 2009

 

Dear Fellow Stockholder:

 

Your officers and directors join me in inviting you to attend the 2009 Annual Meeting of Stockholders of KB Home at 9:00 a.m. Pacific Time on April 2, 2009 at our headquarters in Los Angeles, California.

 

The expected items of business for the meeting are described in detail in the attached Notice of 2009 Annual Meeting of Stockholders and Proxy Statement. We also will discuss our 2008 results and our plans for the future.

 

We look forward to seeing you on April 2.

 

Sincerely,

 

 

Jeffrey T. Mezger

President and Chief Executive Officer

 

Notice of 2009 Annual Meeting of Stockholders

 

 

 

 

 

 

 

By Order of The Board of Directors,

 

 

Wendy C. Shiba

Executive Vice President, General Counsel and

Corporate Secretary

Los Angeles, California

March 9, 2009

Table of Contents

 

KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

Proxy Statement
for the
2009 Annual Meeting of Stockholders

 

Attending the Annual Meeting
Date:		Thursday, April 2, 2009
Place:		KB Home Headquarters 10990 Wilshire Boulevard Los Angeles, CA 90024
To Attend:		You and one guest may attend. You will need to show proof that you were a stockholder on February 14, 2009 and a valid photo ID. Parking is available at the garage for the meeting location, which is accessed from Veteran Avenue. You may be subject to a security check.
Note:		No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted. Additional rules of conduct will apply at the meeting.

 

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Access to Corporate Governance Documents

You can view, print and download copies of the following corporate governance documents at www.kbhome.com/investor/corporategovernance:

• Certificate of Incorporation

• By-laws

• Corporate Governance Principles

• Board Committee Charters

• Ethics Policy

You may request free print copies of these documents by writing to our Corporate Secretary at the address listed below under “Communications with the Board.”

	•	Audit and Compliance (“Audit Committee”)
	•	Management Development and Compensation (“Compensation Committee”)
	•	Nominating and Corporate Governance (“Nominating/Governance Committee”)

Communications with the Board

Any interested party may write to the Board or to any non-employee director in care of our Corporate Secretary at KB Home, 10990 Wilshire Boulevard, Los Angeles, California 90024. She or the Assistant Secretary will review and forward letters, as they determine appropriate, to one or more directors. Directors determine whether and how to respond. They will not forward items unrelated to Board duties.

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The chart below shows the current members of the standing Board Committees as of the date of this Proxy Statement and the number of meetings each Board Committee held during our 2008 fiscal year. Mr. Mezger does not serve on any Board Committees.

 

 

 

 

The Board has delegated certain responsibilities and authority to each Board Committee as described below. At each regularly-scheduled Board meeting, each Committee Chair (or another designated Committee member) reports to the full Board on his or her Committee’s activities.

 

Audit Committee. The Audit Committee is responsible for general oversight of our (i) accounting and reporting practices; (ii) internal control over financial reporting and disclosure controls and procedures; (iii) audit process, including our independent registered public accounting firm’s qualifications, independence, retention, compensation and performance, and the performance of our internal audit department; and (iv) compliance with legal and regulatory requirements and management of matters in which we have or may have material liability exposure. In addition, the Audit Committee may act for the Board to authorize us or our subsidiaries or affiliates to incur, guarantee or redeem debt or debt securities.

 

The Audit Committee also oversees the preparation of a required report to be included in our annual proxy statements and is charged with the duties and responsibilities listed in its charter. The Audit Committee’s report is provided below under the heading “Audit and Compliance Committee Report.” The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

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The Board has determined that each current member of the Audit Committee is independent under our Corporate Governance Principles (as described below under the heading “Director Independence”), New York Stock Exchange (“NYSE”) listing standards and Securities and Exchange Commission (“SEC”) rules. The Board has also determined that each current member of the Audit Committee is financially literate under NYSE listing standards, and that Ms. Lora qualifies as an “audit committee financial expert” under SEC rules.

 

Compensation Committee. The Compensation Committee is responsible for (i) the evaluation and compensation of the CEO and his direct reports; (ii) oversight and approval of the general design of our executive compensation and benefit programs; (iii) our efforts to attract, develop, promote and retain qualified senior executive talent; and (iv) the evaluation and determination of non-employee director compensation. The Compensation Committee oversees the preparation of the compensation discussion and analysis to be included in our annual proxy statements, recommends to the Board whether to so include the compensation discussion and analysis, provides an accompanying report to be included in our annual proxy statements, and is charged with the duties and responsibilities listed in its charter. The compensation discussion and analysis for this Proxy Statement is provided below under the heading “Compensation Discussion and Analysis,” and the Compensation Committee’s report is provided below under the heading “Management Development and Compensation Committee Report.”

 

The Board has determined that each current Compensation Committee member is independent under our Corporate Governance Principles and NYSE listing standards, is a “non-employee director” under SEC rules and is an “outside director” under Section 162(m) of the Internal Revenue Code (the “Code”).

 

Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures. Under our By-laws, the Board has the authority to fix the compensation of our executive officers and non-employee directors. The Board has delegated this authority to the Compensation Committee as provided in the Compensation Committee’s charter. Per its charter, the Compensation Committee annually reviews and approves the goals and objectives relevant to our CEO’s compensation, evaluates his performance in light of those goals and objectives and other criteria, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves our CEO’s compensation based on the evaluation. The Compensation Committee also evaluates, in conjunction with our CEO, the performance of his direct reports, and reviews and approves their compensation.

 

The Compensation Committee exercises the Board’s authority with respect to our employee compensation and benefits plans (including our employee equity compensation plans) and policies, except to the extent that the Board, in its discretion, reserves its authority. This delegation includes the authority to select eligible participants, recommend and approve grants and awards, set performance targets and other award eligibility criteria, approve an aggregate incentive pool for any annual or long-term incentive awards, interpret the plans’ terms, delegate certain responsibilities and adopt or modify as necessary any rules and procedures to implement the plans, including any rules and procedures that condition the approval of grants and awards. The Compensation Committee also periodically reviews our compensation and benefit plans and, from time to time, will recommend to the Board new plans or modifications to existing plans. The Compensation Committee’s exercise of this authority, including specific considerations applied and determinations made, with respect to the compensation and benefits awarded to our named executive officers under our plans is discussed below under the heading “Compensation Discussion and Analysis.”

 

The Compensation Committee, from time to time, reviews and makes recommendations to the Board regarding non-employee director compensation consistent with the goals of recruiting the highest caliber directors to serve on the Board, aligning directors’ and stockholders’ interests, and fairly paying directors for the work required to serve stockholder interests given our size, scope and complexity of operations.

 

In its oversight of executive officer and non-employee director compensation, the Compensation Committee seeks assistance from our management and has engaged an outside compensation consultant, Semler Brossy Consulting Group LLC (“Semler Brossy”), as further described below under the heading “Compensation Discussion and Analysis.” The Compensation Committee may delegate to a subcommittee or to our management any duties and responsibilities as the Compensation Committee deems to be appropriate and in our best interests, but it cannot delegate to our management the authority to grant equity-based awards.

 

Compensation Committee Interlocks and Insider Participation. All current Compensation Committee members served throughout our 2008 fiscal year, except for Mr. Bollenbach, who joined on April 3, 2008.

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J. Terrence Lanni served as the Compensation Committee Chair throughout our 2008 fiscal year until November 13, 2008, when he resigned from the Board. Mr. McCaffery was designated Compensation Committee Chair on December 5, 2008. No member of the Compensation Committee during our 2008 fiscal year was part of a “compensation committee interlock” as described under SEC rules. In addition, none of our executive officers served as a director or member of the compensation committee of another entity that would constitute a “compensation committee interlock.”

 

Nominating/Governance Committee. The Nominating/Governance Committee is responsible for (i) providing oversight of our corporate governance policies and practices; (ii) identifying, evaluating and recommending to the Board individuals who are qualified to become directors; and (iii) performing ongoing assessments of the Board’s size, operations, structure, needs and effectiveness. The Nominating/Governance Committee also reviews and makes recommendations to the full Board on proposed changes to our Certificate of Incorporation and By-laws, periodically assesses and recommends action with respect to stockholder rights plans and other stockholder protections, reviews and approves or ratifies (as applicable) “related party transactions,” as further described below under the heading “Certain Relationships and Related Party Transactions,” and is charged with the duties and responsibilities listed in its charter.

 

The Board has determined that each current member of the Nominating/Governance Committee is independent under our Corporate Governance Principles and New York Stock Exchange listing standards.

Director Qualifications

 

Director Independence

Selected Director Attributes

• Personal qualities, accomplishments and reputation in the business community.

• Financial literacy, financial and accounting expertise and significant business, academic or government experience in leadership positions or at senior policy-making levels.

• Geographical representation in areas relevant to our business.

• Diversity of background and personal experience.

• Fit of abilities and personality with those of current and potential directors in building a Board that is effective, collegial and responsive to the needs of our business.

• Independence and an absence of conflicting time commitments.

The Board makes independence determinations annually based on information supplied by directors and other sources, the Nominating/Governance Committee’s prior review and recommendation, and certain categorical standards contained in our Corporate Governance Principles. These standards are consistent with NYSE listing standards. The Board has determined that all non-employee directors who served during our 2008 fiscal year and all current director nominees are independent under the Board’s director independence standards. Accordingly, Messrs. Bollenbach, Burkle, Finchem, Jastrow, Robert Johnson, McCaffery, Moonves, and Nogales and Ms. Lora are independent. In addition, the Board has determined that all of the Board Committees are entirely composed of independent directors.

 

In making its independence determinations, the Board considered the following transactions during our 2008 fiscal year: (a) radio and billboard advertising expenditures we made at market rates with CBS Corporation (at which Mr. Moonves serves as Chief Executive Officer), and (b) building materials purchased at market prices from Temple-Inland Inc. (at which Mr. Jastrow served as Chief Executive Officer through December 2007), and for which we received standard purchase rebates, for use in our homebuilding operations. In each case, the transactions considered were in the ordinary course of our business and the business of the counterpart company and fell well within the categorical independence standards contained in our Corporate Governance

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Principles. In each case, Messrs. Jastrow and Moonves were deemed to not have a direct or indirect material interest in the expenditures, and did not participate in the transactions in an individual capacity.

 

The Nominating/Governance Committee is responsible for identifying and evaluating director candidates. Candidate evaluations may occur at regular or special meetings of the Nominating/Governance Committee and at any point during the year. The general qualifications for director candidates are described above under the heading “Director Qualifications,” and in the box above titled “Selected Director Attributes.”

 

The Nominating/Governance Committee has retained professional search firms from time to time to assist it with recruiting potential director candidates to the Board based on criteria the Nominating/Governance Committee provides to the firm. These firms help identify, evaluate and select director candidates and are typically paid an agreed upon fee plus expenses for their work. A professional search firm helped recruit Mr. Robert Johnson to the Board in 2008. Current directors or other persons may recommend candidates to the Nominating/Governance Committee.

 

Any security holder may recommend a director candidate for the Nominating/Governance Committee’s consideration by submitting the candidate’s name and qualifications to us in care of the Corporate Secretary at the address listed above under the heading “Communications with the Board.” Director candidates recommended by a security holder are considered in the same manner as any other recommended candidates.

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The Board sets non-employee director compensation based on recommendations from the Compensation Committee. Mr. Mezger is not paid for his service as a director. The Compensation Committee has retained Semler Brossy to assist it with designing our compensation and benefit programs, including our non-employee director compensation program. Non-employee director compensation is currently provided under our 2003 Non-Employee Directors Stock Plan (“Director Plan”). The key components are described below.

 

Director Year

A Director Year is the period between our annual meetings of stockholders. The 2008 Director Year began on April 3, 2008 and ends on April 1, 2009.

 

 

 

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Chairman Retainer. Mr. Bollenbach is paid an additional annual cash retainer of $300,000 for his service as the Non-Executive Chairman of the Board. He may keep any retainer payment if removed from the Board without cause.

 

Expenses. We pay the non-employee directors’ expenses, including travel, accommodations and meals, for attending Board and Board Committee meetings and our annual stockholders meetings and any other activities related to our business. They do not receive additional compensation for attending Board-related or annual meetings.

 

Director Compensation During Fiscal Year 2008

 

 

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Mr. Lanni received an additional 600 stock units for his service as the Compensation Committee Chair and Mr. McCaffery received an additional 1,000 stock units for his service as Audit Committee Chair. Mr. Moonves received 2,400 stock options for his service as Nominating/Governance Committee Chair by electing to receive his 600 stock unit Chair retainer grant in Director Plan stock options. All other stock unit and stock option amounts reflect the Director Plan cash retainer and stock unit grant the non-employee directors elected to receive in stock units or, for Messrs. Bollenbach and Moonves and Ms. Lora, in Director Plan stock options. Upon his retirement effective April 3, 2008, and in accordance with his compensation elections and the Director Plan’s terms, we paid Mr. James Johnson $1,562,548 for the 54,807 stock units he held on that date based on the $28.51 closing price of our common stock on that date. Mr. James Johnson also held 143,957 Director Plan stock options on April 3, 2008 with various exercise prices, and has until April 3, 2009 to exercise these Director Plan stock options. As of the date of this Proxy Statement, he has not exercised any of these Director Plan stock options. Upon his resignation from the Board effective November 13, 2008, and in accordance with his compensation elections and the Director Plan’s terms, we paid Mr. Lanni $399,461 for the 31,553 stock units he held on that date based on the $12.66 closing price of our common stock on that date. Due to his resignation, Mr. Lanni forfeited 2,656 of the 7,967 stock units that were granted to him on April 3, 2008 for the 2008 Director Year. Mr. Lanni did not hold any Director Plan stock options.

 

Listed below are each non-employee director’s total Director Plan stock unit and stock option holdings as of February 23, 2009. Ms. Lora’s total stock unit holdings reflect an additional 333 stock units granted to her upon her designation as Audit Committee Chair on December 5, 2008, reflecting the pro-rated amount for the remainder of the 2008 Director Year.

 

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Directors Legacy Program. We established a Directors Legacy Program in 1995 to recognize our and our directors’ interests in supporting worthy educational institutions and other charitable organizations. In making adjustments to our philanthropic activities, the Board elected in 2007 to close the program to new participants. Messrs. Bollenbach, Robert Johnson, Lanni and Mezger do not participate in the program. Under the program, we will make a charitable donation on each participating director’s behalf of up to $1 million. Directors vest in the full donation in five equal annual installments of $200,000, and therefore must serve on the Board for five consecutive years to donate the maximum amount. A participating director may allocate the donation to up to five qualifying institutions or organizations. Donations are paid in ten equal annual installments directly to designated organizations after a participating director’s death with proceeds from the life insurance policies we maintain on each participating director’s life. Participating directors and their families do not receive any proceeds, compensation or tax savings associated with the program.

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At the Annual Meeting, the Board will present as nominees and recommend to stockholders that Messrs. Bollenbach, Finchem, Jastrow, Robert Johnson, McCaffery and Mezger and Ms. Lora each be elected as directors to serve for a one-year term ending at our 2010 Annual Meeting of Stockholders. Each nominee is currently a director, has consented to being nominated and has agreed to serve as a director if elected. Each nominee is standing for re-election, except Mr. Robert Johnson, who was elected to the Board subsequent to our 2008 Annual Meeting of Stockholders. Should any of these nominees become unable to serve as a director prior to the Annual Meeting, the persons named as proxies on the proxy cards for the Annual Meeting will, unless otherwise directed, vote for the election of such other person as the Board may recommend in place of such nominee.

 

On the date of the Annual Meeting, the Board will have 10 members.

 

Vote Required

 

Under our By-laws, the election of each director nominee will require a majority of votes cast at the Annual Meeting to be in favor of the nominee (i.e., the votes cast for a nominee’s election must exceed the votes cast against the nominee’s election).

 

Consistent with this director election standard, our Corporate Governance Principles require that each director nominee in an uncontested election at an annual meeting of stockholders receive more votes cast for than against his or her election or re-election in order to be elected or re-elected to the Board. An “uncontested election” is one in which no director candidates on the ballot were nominated by a stockholder in accordance with our By-laws. This election is an uncontested election.

 

Our Corporate Governance Principles also provide that a director nominee who fails to win election or re-election to the Board in an uncontested election is expected to tender his or her resignation from the Board. If an incumbent director fails to receive the required vote for election or re-election in an uncontested election, the Nominating/Governance Committee will act promptly to determine whether to accept the director’s resignation and will submit its recommendation for consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. The Nominating/Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s resignation.

 

Your Board recommends a vote FOR the election to the Board of each of the nominees.

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A brief summary of each director nominee’s and each incumbent director’s principal occupation, recent professional experience and the director’s directorships at other public companies, if any, is provided below.

 

 

 

 

 

 

 

 

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The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm to audit our consolidated financial statements for our fiscal year ending November 30, 2009. During our 2008 fiscal year, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other audit-related services, as further discussed below under the heading “Independent Auditor Fees and Services.” Representatives of Ernst & Young LLP are expected to attend the Annual Meeting, be available to respond to appropriate questions and, if they desire, make a statement.

 

Although we are not required to do so, we are seeking stockholder ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm as a matter of good corporate governance. If Ernst & Young LLP’s appointment is not ratified, the Audit Committee will reconsider whether to retain Ernst & Young LLP, but still may retain them. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in our and our stockholders’ best interests.

 

Vote Required

 

Approval of the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2009 requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

Your Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2009.

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Since the end of our 2007 fiscal year, we have generated significant net operating losses and unrealized tax losses (collectively, “NOLs”), and may have additional NOLs in our 2009 fiscal year. Under federal tax laws, we can use NOLs and certain related tax credits to offset ordinary income tax paid in our prior two tax years or on our future taxable income for up to 20 years, when they “expire” for such purposes. Until they expire, we can “carry forward” NOLs and certain related tax credits that we do not use in any particular year to offset income tax in future years. Although we were able to use certain NOLs that we had generated up to November 30, 2008 to offset the income taxes we paid in our last two tax years, as of the date of this Proxy Statement, we still have an $880 million net deferred tax asset related to NOLs we have generated but have not yet realized for tax purposes. This net deferred tax asset represents NOLs that we believe could be used to potentially offset approximately $2.2 billion of future taxable income. While we cannot estimate the exact amount of NOLs that we can use to reduce future income tax liability because we cannot predict the amount and timing of our future taxable income, we consider our NOLs to be a very valuable asset.

 

The benefits of our NOLs would be reduced or eliminated, and our use of our NOLs would be substantially delayed, if we experience an “ownership change,” as determined under Section 382 of the Code. A Section 382 “ownership change” occurs if a stockholder or a group of stockholders who are deemed to own at least 5% of our common stock (each, a “5-percent stockholder”) increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of our NOLs we can use to offset income tax equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” (reduced by certain items specified in Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this annual limit.

 

We believe that if an “ownership change” were to occur, the limitations Section 382 imposes could result in a material amount of our NOLs expiring unused and, therefore, significantly impair the value of our NOLs. While the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an “ownership change” has occurred, we currently believe that an “ownership change” has not occurred. However, if no action is taken, we believe that we could experience an “ownership change.”

 

After careful consideration, your Board believes the most effective way to preserve the benefits of our NOLs to long-term stockholder value is to adopt the Protective Amendment to our Restated Certificate of Incorporation and the Successor Rights Plan. The Protective Amendment, which is designed to block transfers of our common stock that could result in an “ownership change,” is described below under “Proposal 3” and its full terms can be found in the accompanying Attachment A. The Successor Rights Plan, pursuant to which we have issued certain stock purchase rights with terms designed to deter transfers of our common stock that could result in an “ownership change,” is described below under “Proposal 4” and its full terms can be found in the accompanying Attachment B.

 

Your Board urges stockholders to read carefully each proposal, the items discussed below under the heading “Certain Considerations Related to the Protective Amendment and the Successor Rights Plan,” and the full terms of the Protective Amendment and the Successor Rights Plan. Your Board unanimously adopted both measures on January 22, 2009, but the Protective Amendment requires stockholder adoption to be put into effect, and the Successor Rights Plan requires stockholder approval to remain effective after March 5, 2010.

 

It is important to note that neither measure offers a complete solution, and an “ownership change” may occur even if the Protective Amendment is adopted and the Successor Rights Plan is approved. There are limitations on the enforceability of the Protective Amendment against stockholders who do not vote to adopt it that may allow an “ownership change” to occur, and the Successor Rights Plan may deter, but ultimately cannot block, transfers of our common stock that might result in an “ownership change.” The limitations of these measures are described in more detail below. Because of their individual limitations, your Board believes that both measures are needed and that they will serve as important tools to help prevent an “ownership change” that would reduce or eliminate the significant long-term potential benefits of our NOLs, and substantially delay our use of our NOLs. Accordingly, your Board strongly recommends that stockholders adopt the Protective Amendment and approve the Successor Rights Plan.

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For the reasons discussed above under “Background to Proposals 3 and 4,” your Board recommends that stockholders adopt the Protective Amendment to our Restated Certificate of Incorporation. The Protective Amendment is designed to prevent certain transfers of our common stock that could result in an ownership change and therefore materially inhibit our ability to use our NOLs to reduce our future income tax liability. Your Board believes it is in our and our stockholders’ best interests to adopt the Protective Amendment to help avoid this result.

 

The Protective Amendment contains provisions that restrict direct and indirect transfers of our stock if such transfers will affect the percentage of stock that a 5-percent stockholder is deemed to own. In addition, the Protective Amendment includes a mechanism to block the impact of such transfers while allowing purchasers to receive their money back from prohibited purchases. In order to implement these transfer restrictions, the Protective Amendment must be adopted. The Protective Amendment is contained in a proposed new Article Ninth to our Restated Certificate of Incorporation, which can be found in the accompanying Attachment A and is incorporated by reference herein. Existing Article Ninth to our Restated Certificate of Incorporation will become new Article Tenth if our stockholders adopt the Protective Amendment. Your Board has adopted resolutions approving and declaring the advisability of amending our Restated Certificate of Incorporation as described below and as provided in accompanying Attachment A, subject to stockholder adoption.

 

Description of Protective Amendment

 

The following description of the Protective Amendment is qualified in its entirety by reference to the full text of the Protective Amendment, which is contained in a proposed new Article Ninth of our Restated Certificate of Incorporation and can be found in the accompanying Attachment A. Please read the Protective Amendment in its entirety as the discussion below is only a summary.

 

Prohibited Transfers.  Subject to certain exceptions pertaining to existing 5-percent stockholders, the Protective Amendment generally will restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to:

 

 

Restricted transfers include sales to persons or public groups whose resulting percentage ownership (direct or indirect) of our common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of our common stock would by attribution cause another person or public group to exceed such threshold. Complicated common stock ownership rules will apply in determining whether a person or group of persons constitute a 5-percent stockholder under Section 382 and whether less than 5- percent stockholders will be treated as one or more public groups, each of which is a 5-percent stockholder under Section 382. A transfer from one member of the public group to another member of the public group does not increase the percentage of our common stock owned directly or indirectly by the public group and, therefore, such transfers are not restricted. For purposes of determining the existence and identity of, and the amount of our common stock owned by, any stockholder, we are entitled to rely on the existence or absence of certain public securities filings as of any date, subject to our actual knowledge of the ownership of our common stock. The Protective Amendment includes the right to require a proposed transferee, as a condition to registration of a transfer of our common stock, to provide all information reasonably requested regarding such person’s direct and indirect ownership of our common stock. These transfer restrictions may result in the

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delay or refusal of certain requested transfers of our common stock, or prohibit ownership (thus requiring dispositions) of our common stock due to a change in the relationship between two or more persons or entities or to a transfer of an interest in an entity other than us that, directly or indirectly, owns our common stock. The transfer restrictions will also apply to proscribe the creation or transfer of certain “options” (which are broadly defined by Section 382) in respect of our common stock to the extent that, in certain circumstances, the creation, transfer or exercise of the option would result in a proscribed level of ownership.

 

Treatment of Pre-Existing 5-percent Stockholders. The Protective Amendment contains exceptions permitting certain transfers by “pre-existing 5-percent stockholders.” Pre-existing 5-percent stockholders are:

 

 

In contrast to the treatment of persons who become 5-percent stockholders (as defined in Section 382) after adoption of the Protective Amendment, who will be prohibited from disposing of any shares of our common stock without the express consent of your Board, a direct or indirect transfer of shares of our common stock by (but not to) a pre-existing 5-percent stockholder will be permitted so long as such a transfer would not:

 

 

These permitted transfers include transfers to a public group even though the public group becomes a new public group as a result of such transfer and is treated as a 5-percent stockholder under Section 382. In addition, the transferred shares of our common stock must be owned by the pre-existing 5-percent stockholder prior to the date of adoption of the Protective Amendment. These provisions will permit pre-existing 5-percent stockholders to dispose of shares owned by them, subject to the conditions above.

 

Consequences of Prohibited Transfers. Upon adoption of the Protective Amendment, any direct or indirect transfer attempted in violation of the Protective Amendment would be void as of the date of the prohibited transfer as to the purported transferee (or, in the case of an indirect transfer, the ownership of the direct owner of our common stock would terminate simultaneously with the transfer), and the purported transferee (or in the case of any indirect transfer, the direct owner) would not be recognized as the owner of the shares owned in violation of the Protective Amendment for any purpose, including for purposes of voting and receiving dividends or other distributions in respect of such common stock, or in the case of options, receiving our common stock in respect of their exercise. In this Proxy Statement, our common stock purportedly acquired in violation of the Protective Amendment is referred to as “excess stock.”

 

In addition to a prohibited transfer being void as of the date it is attempted, upon demand, the purported transferee must transfer the excess stock to our agent along with any dividends or other distributions paid with respect to such excess stock. Our agent is required to sell such excess stock in an arms’ length transaction (or series of transactions) that would not constitute a violation under the Protective Amendment. The net proceeds of the sale, together with any other distributions with respect to such excess stock received by our agent, after deduction of all costs incurred by the agent, will be distributed first to the purported transferee in an amount, if any, up to the cost (or in the case of gift, inheritance or similar transfer, the fair market value of the excess stock on the date of the prohibited transfer) incurred by the purported transferee to acquire such excess stock, and the balance of the proceeds, if any, will be distributed to a charitable beneficiary. If the excess stock is sold by the purported transferee, such person will be treated as having sold the excess stock on behalf of the agent, and will be required to remit all proceeds to our agent (except to the extent we grant written permission to the purported transferee to retain an amount not to exceed the amount such person otherwise would have been entitled to retain had our agent sold such shares).

 

To the extent permitted by law, any stockholder who knowingly violates the Protective Amendment will be liable for any and all damages we suffer as a result of such violation, including damages resulting from any limitation in our ability to use our NOLs and any professional fees incurred in connection with addressing such violation.

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With respect to any transfer of common stock that does not involve a transfer of our “securities” within the meaning of the Delaware General Corporation Law but that would cause any 5-percent stockholder to violate the Protective Amendment, the following procedure will apply in lieu of those described above. In such case, no such 5-percent stockholder shall be required to dispose of any interest that is not our security, but such 5-percent stockholder and/or any person whose ownership of our securities is attributed to such 5-percent stockholder will be deemed to have disposed of (and will be required to dispose of) sufficient securities, simultaneously with the transfer, to cause such 5-percent stockholder not to be in violation of the Protective Amendment, and such securities will be treated as excess stock to be disposed of through the agent under the provisions summarized above, with the maximum amount payable to such 5-percent stockholder or such other person that was the direct holder of such excess stock from the proceeds of sale by the agent being the fair market value of such excess stock at the time of the prohibited transfer.

 

Modification and Waiver of Transfer Restrictions. Your Board will have the discretion to approve a transfer of our common stock that would otherwise violate the transfer restrictions if it determines that the transfer is in our and our stockholders’ best interests. If your Board decides to permit such a transfer, that transfer or later transfers may result in an “ownership change” that could limit our use of our NOLs. In deciding whether to grant a waiver, your Board may seek the advice of counsel and tax experts with respect to the preservation of our federal tax attributes pursuant to Section 382. In addition, your Board may request relevant information from the acquirer and/or selling party in order to determine compliance with the Protective Amendment or the status of our federal income tax benefits, including an opinion of counsel selected by your Board (the cost of which will be borne by the transferor and/or the transferee) that the transfer will not result in a limitation on the use of the NOLs under Section 382. If your Board decides to grant a waiver, it may impose conditions on the acquirer or selling party.

 

Your Board may establish, modify, amend or rescind by-laws, regulations and procedures for purposes of determining whether any transfer of common stock would jeopardize our ability to use our NOLs.

 

Implementation and Expiration of the Protective Amendment

 

If our stockholders adopt the Protective Amendment, we intend to promptly file the Protective Amendment with the Secretary of State of the State of Delaware, whereupon such amendment will become effective. We intend to immediately thereafter enforce the restrictions in the Protective Amendment to preserve the future use of our NOLs. We also intend to include a legend reflecting the transfer restrictions included in the Protective Amendment on certificates representing newly issued or transferred shares and to disclose such restrictions to persons holding our common stock in uncertificated form.

 

The Protective Amendment would expire on the earliest of (i) your Board’s determination that the Protective Amendment is no longer necessary for the preservation of our NOLs because of the amendment or repeal of Section 382 or any successor statute, (ii) the beginning of a taxable year to which your Board determines that none of our NOLs may be carried forward and (iii) such date as your Board otherwise determines that the Protective Amendment is no longer necessary for the preservation of our NOLs. Your Board may also accelerate or extend the expiration date of the Protective Amendment in the event of a change in the law.

 

Effectiveness and Enforceability

 

Although the Protective Amendment is intended to reduce the likelihood of an “ownership change,” we cannot eliminate the possibility that an “ownership change” will occur even if the Protective Amendment is adopted given that:

 

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As a result of these and other factors, the Protective Amendment serves to reduce, but does not eliminate, the risk that we will undergo an “ownership change.”

 

Section 382 “Ownership Change” Determinations

 

The rules of Section 382 are very complex, and are beyond the scope of this summary discussion. Some of the factors that must be considered in determining whether a Section 382 “ownership change” has occurred include the following:

 

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Vote Required

 

Adoption of the Protective Amendment requires the affirmative vote of a majority of the outstanding shares of our common stock. The Protective Amendment, if adopted, would become effective upon the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware, which we expect to do as soon as practicable after the Protective Amendment is adopted.

 

Your Board recommends a vote FOR the adoption of the Protective Amendment to KB Home’s Restated Certificate of Incorporation.

 

 

Background on Our Existing Rights Plan

 

We have an existing stockholder rights plan that was adopted in February 1999 (the “Existing Rights Plan”). At the time of its adoption, the Existing Rights Plan was intended to reduce our vulnerability to certain potentially coercive takeover practices and takeover bids that are inadequate or otherwise inconsistent with our interests and our stockholders’ interests, and to encourage potential acquirors to negotiate with your Board. The rights issued under the Existing Rights Plan, as originally adopted, would generally be triggered if a person or group acquired a number of shares of our common stock that were entitled to 15% or more of our outstanding voting power. On January 22, 2009, your Board amended the Existing Rights Plan to decrease the triggering threshold of the rights from 15% or more of our outstanding voting power to 4.9% or more of our outstanding common stock, among other things. This amendment to the Existing Rights Plan was intended to help preserve the long-term value to us of our NOLs by deterring the acquisition of our stock in excess of amounts that could reduce or eliminate our ability to use our NOLs under Section 382 (as described above under “Background to Proposals 3 and 4”). The rights issued pursuant to the Existing Rights Plan expired on March 5, 2009. The Successor Rights Plan is intended to continue to help preserve the long-term value to us of our NOLs by deterring acquisitions of our stock that, under Section 382, could inhibit our ability to use our NOLs to reduce our future income tax liability.

 

The Successor Rights Plan

 

On January 22, 2009, your Board adopted the Successor Rights Plan to replace the Existing Rights Plan effective as of the expiration date of its rights on March 5, 2009. The rights issued under the Successor Rights Plan will expire on March 5, 2010, if our stockholders have not approved the Successor Rights Plan by that date. Subject to certain limited exceptions, the Successor Rights Plan is designed to deter any person from buying our common stock (or any interest in our common stock) if the acquisition would result in a stockholder (or several stockholders, in the aggregate, who hold their stock as a “group” under the federal securities laws) owning 4.9% or more of our then-outstanding common stock.

 

The Successor Rights Plan is intended to protect stockholder value by attempting to preserve our ability to use our NOLs to reduce our future income tax liability. Because of the limitations of the Protective Amendment in preventing transfers of our common stock that may result in an “ownership change,” as further described above under “Proposal 3,” your Board believes it is in our and our stockholders’ best interests to approve the Successor Rights Plan. Your Board of Directors has adopted the Successor Rights Plan and is recommending that stockholders approve the Successor Rights Plan at the Annual Meeting.

 

The following description of the Successor Rights Plan is qualified in its entirety by reference to the text of the Successor Rights Plan, which can be found in the accompanying Attachment B. Please read the Successor Rights Plan in its entirety as the discussion below is only a summary.

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Description of Successor Rights Plan

 

The Successor Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding common stock (an “Acquiring Person”) without the approval of your Board. Stockholders who owned 4.9% or more of our common stock as of the close of business on March 5, 2009 will not trigger the Successor Rights Plan so long as they do not (i) acquire any additional shares of our common stock or (ii) fall under 4.9% ownership of our common stock and then re-acquire 4.9% or more of our common stock. The Successor Rights Plan does not exempt any acquisitions of our common stock after March 5, 2009 by such persons. Any rights held by an Acquiring Person are void and may not be exercised. Your Board of Directors may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Successor Rights Plan. The terms of the Successor Rights Plan are substantially similar to those of the Existing Rights Plan, as amended by your Board of Directors on January 22, 2009.

 

The Rights. Your Board authorized the issuance of one right per each outstanding share of our common stock payable to our stockholders of record as of the close of business on March 5, 2009. Subject to the terms, provisions and conditions of the Successor Rights Plan, if these rights become exercisable, each right would initially represent the right to purchase from us one one-hundredth of a share of our Series A Participating Cumulative Preferred Stock for a purchase price of $85.00 (the “Purchase Price”). If issued, each fractional share of preferred stock would generally give the stockholder approximately the same dividend, voting and liquidation rights as does one share of our common stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or liquidation rights.

 

Exercisability. The rights will not be exercisable until the earlier of (i) ten calendar days after a public announcement by us that a person or group has become an Acquiring Person and (ii) ten business days after the commencement of a tender or exchange offer by a person or group if upon consummation of the offer the person or group would beneficially own 4.9% or more of our outstanding common stock.

 

In this Proxy Statement, we refer to the date on which the rights become exercisable as the “Distribution Date.” Until the Distribution Date, common stock certificates will evidence the rights and may contain a notation to that effect. Any transfer of shares of our common stock prior to the Distribution Date will constitute a transfer of the associated rights. After the Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of our common stock.

 

If there is an Acquiring Person on the Distribution Date or a person or group becomes an Acquiring Person after the Distribution Date, each holder of a right, other than rights that are or were beneficially owned by an Acquiring Person (which will be void), will thereafter have the right to receive upon exercise of a right and payment of the Purchase Price, that number of shares of our common stock having a market value of two times the Purchase Price.

 

Exchange. After the later of the Distribution Date and the time we publicly announce that an Acquiring Person has become such, your Board of Directors may exchange the rights, other than rights that are or were beneficially owned by an Acquiring Person, which will be void, in whole or in part, at an exchange ratio of one share of common stock per right, subject to adjustment.

 

Redemption. At any time prior to the later of the Distribution Date and the time we publicly announce that an Acquiring Person becomes such, your Board may redeem all of the then-outstanding rights in whole, but not in part, at a price of $0.001 per right, subject to adjustment (the “Redemption Price”). The redemption will be effective immediately upon the Board action, unless the Board action provides that such redemption will be effective at a subsequent time or upon the occurrence or nonoccurrence of one or more specified events, in which case the redemption will be effective in accordance with the provisions of the Board action. Immediately upon the effectiveness of the redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price, with interest thereon.

 

Anti-Dilution Provisions. The Purchase Price of the preferred shares, the number of preferred shares issuable and the number of outstanding rights are subject to adjustment to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a stock split or a reclassification of the preferred shares or common stock. No adjustments to the Purchase Price of less than 1% will be made.

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Amendments. Prior to the time the rights cease to be redeemable, your Board may amend or supplement the Successor Rights Plan without the consent of the holders of the rights. From and after the time the rights cease to be redeemable, your Board may amend or supplement the Successor Rights Plan only to cure an ambiguity, to correct or supplement inconsistent provisions, to alter time period provisions, or to make any other changes to the Successor Rights Plan, but only to the extent that those changes do not impair or adversely affect any rights holder as such (other than an Acquiring Person or an affiliate or associate thereof), and no amendment may cause the rights to become redeemable or amendable other than in accordance with this sentence.

 

Expiration. The rights issued pursuant to the Successor Rights Plan will expire on the earliest of (i) the close of business on March 5, 2019, (ii) the time at which the rights are redeemed, (iii) the time at which the rights are exchanged, (iv) the time at which your Board determines that the Protective Amendment is no longer necessary, (v) the close of business on the first day of a taxable year of the company to which your Board determines that no tax benefits may be carried forward, and (vi) the close of business on March 5, 2010, if prior to such time the Successor Rights Plan has not been approved by our stockholders.

 

Vote Required

 

Approval of the Successor Rights Plan requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

Your Board recommends a vote FOR the approval of the Successor Rights Plan.

 

Your Board believes that attempting to protect the tax benefits of our NOLs as described above under “Background to Proposals 3 and 4” is in our and our stockholders’ best interests. However, we cannot eliminate the possibility that an “ownership change” will occur even if the Protective Amendment is adopted and the Successor Rights Plan is approved. Please consider the items discussed below in voting on Proposals 3 and 4.

 

The Internal Revenue Service (“IRS”) could challenge the amount of our NOLs or claim we experienced an “ownership change,” which could reduce the amount of our NOLs that we can use or eliminate our ability to use them altogether

 

The IRS has not audited or otherwise validated the amount of our NOLs. The IRS could challenge the amount of our NOLs, which could limit our ability to use our NOLs to reduce our future income tax liability. In addition, the complexity of Section 382’s provisions and the limited knowledge any public company has about the ownership of its publicly traded stock make it difficult to determine whether an “ownership change” has occurred. Therefore, we cannot assure you that the IRS will not claim that we experienced an “ownership change” and attempt to reduce or eliminate the benefit of our NOLs even if the Protective Amendment and the Successor Rights Plan are in place.

 

Continued Risk of “Ownership Change”

 

Although the Protective Amendment and the Successor Rights Plan are intended to reduce the likelihood of an “ownership change,” we cannot assure you that they would prevent all transfers of our common stock that could result in such an “ownership change.” In particular, absent a court determination, we cannot assure you that the Protective Amendment’s restrictions on acquisition of our common stock will be enforceable against all our stockholders, and they may be subject to challenge on equitable grounds, as discussed above under “Proposal 3.”

 

Potential Effects on Liquidity

 

The Protective Amendment will restrict a stockholder’s ability to acquire, directly or indirectly, additional shares of our common stock in excess of the specified limitations. Furthermore, a stockholder’s ability to

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dispose of our common stock may be limited by reducing the class of potential acquirers for such common stock. In addition, a stockholder’s ownership of our common stock may become subject to the restrictions of the Protective Amendment upon actions taken by persons related to, or affiliated with, them. Stockholders are advised to carefully monitor their ownership of our stock and consult their own legal advisors and/or us to determine whether their ownership of our stock approaches the restricted levels.

 

Potential Impact on Value

 

If the Protective Amendment is adopted, your Board intends to include a legend reflecting the transfer restrictions included in the Protective Amendment on certificates representing newly issued or transferred shares and to disclose such restrictions to persons holding our common stock in uncertificated form. Because certain buyers, including persons who wish to acquire more than 5% of our common stock and certain institutional holders who may not be comfortable holding our common stock with restrictive legends, may not be able to purchase our common stock, the Protective Amendment could depress the value of our common stock in an amount that could more than offset any value preserved from protecting our NOLs. The Successor Rights Plan could have a similar effect if investors object to holding our common stock subject to the terms of the Successor Rights Plan.

 

Anti-Takeover Impact

 

The reason your Board adopted the Protective Amendment and the Successor Rights Plan is to preserve the long-term value of our NOLs. The Protective Amendment, if adopted by our stockholders, could be deemed to have an “anti-takeover” effect because, among other things, it will restrict the ability of a person, entity or group to accumulate more than 5% of our common stock and the ability of persons, entities or groups now owning more than 5% of our common stock from acquiring additional shares of our common stock without the approval of your Board. Similarly, the Successor Rights Plan is not intended to prevent a takeover, but because an Acquiring Person may be diluted upon the occurrence of a triggering event, it does have a potential anti-takeover effect. Accordingly, the overall effects of the Protective Amendment, if adopted by our stockholders, and the Successor Rights Plan may be to render more difficult, or discourage, a merger, tender offer, proxy contest or assumption of control by a substantial holder of our securities. The Protective Amendment and the Successor Rights Plan proposals are not part of a plan by us to adopt a series of anti-takeover measures, and we do not presently intend to propose or adopt any other anti-takeover measures. We are presently not aware of any potential takeover transaction.

 

Stockholders should be aware that we are subject to Section 203 of the Delaware General Corporation Law, which provides, in general, that a transaction constituting a “business combination” within the meaning of Section 203 involving a person owning 15% or more of our outstanding voting stock (referred to as an “interested stockholder”), cannot be completed for a period of three years after the date on which the person became an interested stockholder unless (i) our Board approved either the business combination or the transaction that resulted in the person becoming an interested stockholder prior to such business combination or transaction, (ii) upon consummation of the transaction that resulted in the person becoming an interested stockholder, that person owned at least 85% of our outstanding voting stock (excluding shares owned by persons who are both directors and officers of KB Home and shares owned by certain of our employee benefit plans), or (iii) the business combination was approved by our Board and by the affirmative vote of the holders of at least 66-2/3% of our outstanding voting stock not owned by the interested stockholder.

 

In addition, our Restated Certificate of Incorporation and our By-laws contain the following provisions that may be deemed to have a potential “anti-takeover” effect:

 

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Effect of the Protective Amendment if you vote for it and already own more than 5% of our common stock

 

If you already own more than 5% of our common stock, you would be able to transfer only shares of our common stock that you acquired prior to the effective date of the Protective Amendment and only if the transfer does not increase the percentage stock ownership of another holder of 5% or more of our common stock or create a new holder of 5% or more of our common stock (other than certain transfers that create a new public group). Shares acquired in any such transaction will be subject to the Protective Amendment’s transfer restrictions.

 

Effect of the Protective Amendment if you vote for it and own less than 5% of our common stock

 

The Protective Amendment will apply to you, but so long as you own less than 5% of our common stock you can transfer your shares to a purchaser who, after the sale, also would own less than 5% of our common stock.

 

Effect of the Protective Amendment if you vote against it

 

Delaware law provides that transfer restrictions of the Protective Amendment with respect to shares of our common stock issued prior to its effectiveness will be effective as to (i) stockholders with respect to shares that were voted in favor of adopting the Protective Amendment and (ii) purported transferees of such shares if (A) the transfer restriction is conspicuously noted on the certificate(s) representing such shares or (B) the transferee had actual knowledge of the transfer restrictions (even absent such conspicuous notation). We intend to cause shares of our common stock issued after the effectiveness of the Protective Amendment to be issued with the relevant transfer restriction conspicuously noted on the certificate(s) representing such shares and therefore under Delaware law such newly issued shares will be subject to the transfer restriction. We also intend to disclose such restrictions to persons holding our common stock in uncertificated form. For the purpose of determining whether a stockholder is subject to the Protective Amendment, we intend to take the position that all shares issued prior to the effectiveness of the Protective Amendment that are proposed to be transferred were voted in favor of the Protective Amendment, unless the contrary is established. We may also assert that stockholders have waived the right to challenge or otherwise cannot challenge the enforceability of the Protective Amendment, unless a stockholder establishes that it did not vote in favor of the Protective Amendment. Nonetheless, a court could find that the Protective Amendment is unenforceable, either in general or as applied to a particular stockholder or fact situation.

 

 

In order to allow us to obtain the benefit of a federal income tax deduction for the performance-based compensation we pay to our executive officers, we are seeking stockholder approval of the KB Home Annual Incentive Plan for Executive Officers (the “Plan”).

 

Generally, Section 162(m) of the Code prevents us from receiving a federal income tax deduction for the compensation we pay to certain executive officers in excess of $1 million for any year unless, among other things, that compensation is performance-based and has been paid pursuant to a plan approved by our stockholders. Currently, our only stockholder-approved compensation plan that allows for deductible performance-based cash incentives to executive officers is the Amended and Restated 1999 Incentive Plan, which will expire as to new incentives on April 2, 2009.

 

Accordingly, the Plan is intended to replace the Amended and Restated 1999 Incentive Plan with respect to future performance-based cash incentives that could qualify for tax deductibility under Section 162(m). The Plan must be approved by our stockholders to be used. If the Plan is not approved, no awards will be made under it.

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A copy of the Plan can be found in the accompanying Attachment C, and the following summary of the Plan’s material terms is qualified in its entirety by reference to the full text. Stockholders are urged to read the full Plan as set forth in Attachment C.

 

Summary of the Plan

 

The purpose of the Plan is to promote our success by providing participating executive officers with incentives that qualify as performance-based compensation under Section 162(m). The Plan will become effective upon approval by our stockholders, and will remain in effect until terminated by the Compensation Committee.

 

Administration. The Compensation Committee will administer and interpret the Plan. All determinations of the Compensation Committee shall be final and binding.

 

Eligibility. Participation in the Plan will be limited to our executive officers who are selected for participation by the Compensation Committee. We typically have between five and ten senior level employees whom we consider to be executive officers in this context.

 

Performance Measures and Targets. Before 25% of an applicable performance period has elapsed (but in no event later than 90 days after the performance period begins), the Compensation Committee will determine the executive officers eligible to receive an incentive award under the Plan and the specific performance goals, one or more of which must be objectively achieved during the performance period in order for an award to pay out. The Compensation Committee shall also establish a target amount for each award, and may also establish a lower minimum threshold and/or a higher maximum amount, as well as any other terms and conditions of the award that it deems appropriate. In all cases, the Compensation Committee shall establish an objective formula for computing the amount to be paid under each award if the specified goals are achieved; provided, that the Compensation Committee may, in its discretion, reduce or eliminate (but not increase) the amount actually paid to a participant under an award, based on our performance, individual performance or other criteria. The Compensation Committee may also determine that only a threshold level relating to a goal must be met for awards to pay out, and if multiple goals are selected, that awards will be paid upon achievement of threshold levels of any one or more of such goals. The specific goal or goals shall relate to one or more of the following performance measures:

 

 

Performance Period. The performance period for awards under the Plan shall be our fiscal year, unless another time period is selected by the Compensation Committee.

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Limitation on Benefits. The maximum amount paid to any participant in any fiscal year cannot exceed $5 million.

 

Determination and Payment of Awards. After the end of each performance period, the Compensation Committee will review performance against the pre-established goal or goals. The Compensation Committee will then certify the extent, if any, to which the goal or goals have been met. Then, after the final amounts have been determined, awards will be paid in cash as soon as practicable, but in no event later than March 15 of the year following the calendar year in which the performance period concluded.

 

Termination of Employment. Generally, if a participant ceases to be employed by us for any reason prior to the date on which an award is paid, the award will be canceled and the participant will not be entitled to any payment with respect to that award.

 

Change of Ownership. In the event of a change of ownership, the Plan provides that the performance goals for outstanding awards are deemed to have been met at the target level, and a participant will become entitled to promptly receive a pro-rated portion of the target level pay out amount, based on the percentage of the performance period that has elapsed at the time of the change of ownership. Any such payment would not satisfy the requirements for tax deductibility under Section 162(m) if the performance goals have not actually been met. The Plan contains a definition of “change of ownership” that is substantially identical to the one in the Amended and Restated 1999 Incentive Plan.

 

Amendments. The Compensation Committee may amend, suspend or terminate the Plan at any time; provided that, except for technical amendments to comply with the deferred compensation rules under Section 409A of the Code, no such amendment, suspension or termination shall, without the consent of a participant, adversely affect any right of the participant under the participant’s outstanding awards.

 

Non-Exclusivity. The Plan is not the exclusive means by which we can provide our executive officers with incentives, although discretionary bonuses and incentives under plans that have not been approved by our stockholders may not be tax deductible for certain of our executive officers under Section 162(m).

 

Estimate of Benefits. The specific awards to individual participants have not been determined under the Plan, and instead will be specified by the Compensation Committee from time to time. The framework of the Plan is substantially similar to that contained in the cash award portion of the Amended and Restated 1999 Incentive Plan. Accordingly, for an estimate of what our named executive officers would have received under the Plan in our 2008 fiscal year had the Plan been in effect instead of the Amended and Restated 1999 Incentive Plan, please refer to the non-equity incentive plan compensation shown below in the “Summary Compensation Table.” The aggregate amount of incentive compensation paid to our named executive officers for our 2008 fiscal year under the Amended and Restated 1999 Incentive Plan was $3,745,000.

 

Federal Income Tax Consequences

 

Under present federal income tax laws, participants will realize ordinary income in the year they receive a cash pay out under an award. We will be entitled to deduct a corresponding amount, provided that the Plan and the award satisfy the requirements of Section 162(m). It is our intention that the Plan be construed and administered in a manner that maximizes the tax deductibility of compensation under Section 162(m).

 

Vote Required

 

Approval of the KB Home Annual Incentive Plan for Executive Officers requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

Your Board recommends you vote FOR this proposal to approve the KB Home Annual Incentive Plan for Executive Officers.

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The Central Laborers’ Pension, Welfare and Annuity Funds, P.O. Box 1267, Jacksonville, IL 62651, the beneficial owner of 450 shares of our common stock, has notified us that it intends to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponent’s supporting statement.

 

Stockholder Proposal

 

RESOLVED: That the shareholders of KB Home (“Company”) request that the Board of Director’s Executive Compensation Committee adopt a Pay for Superior Performance principle by establishing an executive compensation plan for senior executives (“Plan”) that does the following:

 

 

Proponent’s Supporting Statement

 

We feel it is imperative that executive compensation plans for senior executives be designed and implemented to promote long-term corporate value. A critical design feature of a well-conceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance. The pay-for-performance concept has received considerable attention, yet all too often executive pay plans provide generous compensation for average or below average performance. We believe the failure to tie executive compensation to superior corporate performance has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.

 

We believe that the Pay for Superior Performance principle presents a straightforward formulation for senior executive incentive compensation that will help establish more rigorous pay for performance features in the Company’s Plan. A strong pay and performance nexus will be established when reasonable incentive compensation target pay levels are established; demanding performance goals related to strategically selected financial performance metrics are set in comparison to peer company performance; and incentive payments are awarded only when median peer performance is exceeded.

 

We believe the Company’s Plan fails to promote the Pay for Superior Performance principle in several important ways. Our analysis of the Company’s executive compensation plan reveals the following features that do not promote the Pay for Superior Performance principle:

 

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We believe a plan designed to reward superior corporate performance relative to peer companies will help moderate executive compensation and focus senior executives on building sustainable long-term corporate value. We urge shareholders to vote FOR our proposal.

 

Recommendation of the Board AGAINST the Proposal

 

Your Board recommends a vote AGAINST this proposal, which stockholders rejected by a significant margin at last year’s annual meeting. As with last year’s proposal, your Board believes that the proposal does NOT establish a pay-for-performance plan and, therefore, it does not serve the best interests of KB Home or its stockholders.

 

We share the proponent’s view that executive incentive compensation should appropriately reward performance that creates and sustains enterprise and stockholder value, and believe that this view is reflected in our current executive compensation philosophy and programs. These are discussed in detail below under the heading “Compensation Discussion and Analysis.”

 

By requiring us to set incentive compensation targets “at or below peer group median,” however, we believe implementing this proposal would seriously undermine incentive pay’s role in promoting value creation at this critical time. We also believe it would severely impair our ability to attract, motivate and retain high-caliber executive talent. Indeed, we cannot conceive how offering to reward someone with just average or below-average pay for delivering above-average results would provide an incentive for them to come to or stay with us, or motivate them to deliver such results. This is particularly true during a period when we are experiencing a severe industry downturn.

 

We continue to believe the proposal essentially fails to accomplish what its proponent asserts is a “critical design feature of a well-conceived executive compensation plan” – “a close correlation between the level of pay and the level of corporate performance.” In our view, restricting incentive compensation to a level below the level of performance required to earn it does not establish a “close correlation” between pay and performance. Therefore, we think the executive compensation approach in this proposal is clearly not “well-conceived,” even from the view of the proponent’s own standards.

 

We believe that our current executive compensation programs and practices, as further discussed below under the heading “Compensation Discussion and Analysis,” provide primarily performance-based pay consistent with the proponent’s compensation “principle,” while enabling us to remain competitive in attracting, motivating and retaining quality executive talent and a solid management team. As a result, we do not believe that adopting this proposal is necessary or desirable for KB Home or its stockholders.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The New York City Employees’ Retirement System, the New York City Teachers’ Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the New York City Board of Education Retirement System, collectively the beneficial owners of 214,935 shares of our common stock, have notified us that they intend to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponents’ supporting statement.

 

Stockholder Proposal

 

RESOLVED: that the shareholders of KB Home request the board of directors to adopt a policy that provides shareholders the opportunity at each annual shareholder meeting to vote on an advisory resolution, proposed by management, to ratify the compensation of the named executive officers (“NEOs”) set forth in the proxy statement’s Summary Compensation Table (the “SCT”) and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO.

 

Proponent’s Supporting Statement

 

Investors are increasingly concerned about mushrooming executive compensation especially when it is insufficiently linked to performance. In 2008, shareholders filed close to 100 “Say on Pay” resolutions. Votes on these resolutions have averaged 43% in favor, with ten votes over 50%, demonstrating strong shareholder support for this reform.

 

An Advisory Vote establishes an annual referendum process for shareholders about senior executive compensation. We believe the results of this vote would provide the board and management with useful information about shareholder views on the company’s senior executive compensation.

 

In its 2008 proxy Aflac submitted an Advisory Vote resulting in a 93% vote in favor, indicating strong investor support for good disclosure and a reasonable compensation package. Daniel Amos, Chairman and CEO said, “An advisory vote on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay-for-performance compensation philosophy and pay package.”

 

To date eight other companies have also agreed to an Advisory Vote, including Verizon, MBIA, H&R Block, Blockbuster, and Tech Data. TIAA-CREF, the country’s largest pension fund, has successfully utilized the Advisory Vote twice.

 

Influential proxy voting service RiskMetrics Group recommends votes in favor, noting: “RiskMetrics encourages companies to allow shareholders to express their opinions of executive compensation practices by establishing an annual referendum process. An advisory vote on executive compensation is another step forward in enhancing board accountability.”

 

The Council of Institutional Investors has endorsed advisory votes and a bill to allow annual advisory votes passed the House of Representatives by a 2-to-1 margin. As presidential candidates, Senators Obama and McCain supported the Advisory Vote.

 

We believe that existing U.S. Securities and Exchange Commission rules and stock exchange listing standards do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the “directors’ remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a clear voice that could help shape senior executive compensation.

 

We believe that a company that has a clearly explained compensation philosophy and metrics, reasonably links pay to performance, and communicates effectively to investors would find a management sponsored Advisory Vote a helpful tool.

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We urge our board to allow shareholders to express their opinion about senior executive compensation through an Advisory Vote.

 

Recommendation of the Board AGAINST the Proposal

 

Your Board recognizes the importance of communicating with stockholders about executive pay. Because your Board believes this proposal would not enhance its interaction with stockholders, however, it recommends a vote AGAINST the proposal.

 

Your Board takes stockholders’ views seriously and is committed to maintaining an open dialogue on KB Home’s business and affairs. In the past few years, your Board has adopted a number of corporate governance reforms in response to sound stockholder suggestions and as best practices. It has also enhanced the transparency of corporate governance processes and decision-making. For example, your Board believes the “Compensation Discussion and Analysis” below provides a considerable amount of information on KB Home’s executive pay philosophy, programs and determinations, and on the Board’s oversight of those subjects.

 

Stockholders have many ways to communicate directly to the Board and to management their specific ideas or concerns regarding executive pay or other matters. These include contacting the Board, the Compensation Committee, and/or individual directors through the Corporate Secretary, as described above under the heading “Communications with the Board,” and contacting our investor relations professionals. Your Board believes these are effective channels for stockholders to fully express their views on executive pay or corporate governance.

 

The proponents cite various statistics (including this proposal’s 90% failure rate), abstract principles, outside party opinions, and the experiences of other countries to support their proposal. But they do not explain how the proposed advisory vote would specifically benefit KB Home and its stockholders over current communication channels or otherwise strengthen KB Home’s corporate governance or the Board’s oversight of executive pay. After careful consideration, your Board believes the proposed “up-or-down” advisory vote would not be helpful because it would not provide useful information or actionable feedback. In addition, compared to the ways stockholders may currently communicate with the Board, your Board believes the proposed advisory vote (if adopted) could actually hinder constructive dialogue with stockholders about executive pay.

 

The outcome of an advisory vote would not identify the particular aspects of executive pay that stockholders like or don’t like, nor specify what should be changed, if anything. It would also not provide any information on why stockholders voted “for” or “against” named executive officer compensation. Without knowing the reasons for a particular outcome or having any way to assess the likely diverse, and possibly conflicting, stockholder preferences and motivations, your Board could not, consistent with its fiduciary duties to all stockholders, effectively respond to stockholders who voted one way or the other. Accordingly, your Board believes the proposed advisory vote would not help it or the Compensation Committee carry out their executive pay oversight role or improve KB Home’s corporate governance.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The AFL-CIO Reserve Fund, the beneficial owner of 400 shares of our common stock, has notified us that it intends to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponent’s supporting statement.

 

Stockholder Proposal

 

RESOLVED: Shareholders of KB Home (the “Company”) urge the Board of Directors to adopt principles for health care reform based upon principles reported by the Institute of Medicine:

 

 

Proponent’s Supporting Statement

 

The Institute of Medicine, established by Congress as part of the National Academy of Sciences, issued five principles for reforming health insurance coverage in a report, Insuring America’s Health: Principles and Recommendations (2004). We believe principles for health care reform, such as those set forth by the Institute of Medicine, are essential if public confidence in our Company’s commitment to health care coverage is to be maintained.

 

Access to affordable, comprehensive health care insurance is the most significant social policy issue in America according to polls by NBC News/The Wall Street Journal, the Kaiser Foundation and The New York Times/CBS News. In our opinion, health care reform also is a central issue in the presidential campaign of 2008.

 

Many national organizations have made health care reform a priority. In 2007, representing “a stark departure from past practice,” the American Cancer Society redirected its entire $15 million advertising budget “to consequences of inadequate health coverage” in the United States (The New York Times, 8/31/07).

 

John Castellani, president of the Business Roundtable (representing 160 of the country’s largest companies), has stated that 52 percent of the Business Roundtable’s members say health costs represent their biggest economic challenge. “The cost of health care has put a tremendous weight on the U.S. economy,” according to Castellani, “The current situation is not sustainable in global, competitive workplace.” (BusinessWeek, July 3, 2007).

 

The National Coalition on Health Care (whose members include some of the largest publicly-held companies, institutional investors and labor unions) also has created principles for health insurance reform. According to the National Coalition on Health Care, implementing its principles would save employers presently providing health insurance coverage an estimated $595-$848 billion in the first 10 years of implementation.

 

We believe that the 47 million Americans without health insurance results in higher costs, causing an adverse effect on shareholder value for our Company, as well as all other U.S. companies which provide health insurance to their employees. Annual surcharges as high as $1,160 for the uninsured are added to the total cost of each employee’s health insurance, according to Kenneth Thorpe, a leading health economist at Emory University. Moreover, we feel that increasing health care costs further reduces shareholder value when it leads companies to shift costs to employees, thereby reducing employee productivity, health and morale.

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Recommendation of the Board AGAINST the Proposal

 

Your Board recognizes that health care reform is an important national priority and strongly supports efforts to improve the availability, quality and affordability of health care and health care insurance. Your Board believes, however, that health care reform is an issue that can be addressed only through state and federal legislative and agency action and is not a proper subject for the Annual Meeting. Your Board also believes that it is not in KB Home’s best interests to adopt the principles of a single organization given the complex nature of health care reform and the current wide-ranging policy debate on the issue. KB Home’s adoption of these principles would not help resolve this debate, aid in government efforts to enact and implement effective health care reforms, or otherwise benefit KB Home or its stockholders. Accordingly, your Board recommends that stockholders vote AGAINST this proposal.

 

KB Home has a strong commitment to supporting its employees with quality health care insurance coverage and other health and wellness benefits. It provides employees and their families with a comprehensive set of reasonably-priced medical, dental and vision care coverage options, opportunities to establish reimbursement accounts for health care and dependent care, and income protection vehicles, and makes available employee assistance and work/life support services programs to meet employees’ needs.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The following table shows, as of February 23, 2009, the beneficial ownership of our common stock by each current director and each of the current executive officers named below in the “Summary Compensation Table,” and by all current directors and executive officers as a group. Except as stated in footnote (c) to the table, beneficial ownership is direct and each director and executive officer has sole voting and investment power over his or her shares.

 

 

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The following table shows each person or entity known to us as of February 23, 2009 to be the beneficial owner of more than five percent of our common stock:

 

 

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We have established stock ownership requirements for our non-employee directors and senior management to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least 5,000 shares of our common stock or common stock equivalents within three years of joining the Board. Our Executive Stock Ownership Policy applies to members of our senior management team and requires executives at various levels to own a number of shares with a value equal to a range of one-to-five times base salary. Executives are expected to demonstrate meaningful progress toward satisfying their ownership requirement and to comply fully within five years of becoming subject to the policy, or be subject to consequences for non-compliance. The policy, as applied to our named executive officers, is discussed in additional detail below under the heading “Equity Stock Ownership Policy.”

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The Management Development and Compensation Committee of the Board of Directors has reviewed and discussed the following “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Proxy Statement.

 

Management Development and Compensation Committee

Michael G. McCaffery, Chair

Stephen F. Bollenbach

Timothy W. Finchem

Luis G. Nogales

 

 

We believe our KBnxt operational business model provides us with a distinct competitive advantage over other homebuilders. This disciplined, fact-based and process-driven approach to homebuilding, founded on a constant and systematic assessment of consumer preferences and market opportunities, is designed to generate operational efficiencies and return on investment for our business. To execute our KBnxt operational business model optimally, it is critical that we attract, motivate and retain a talented workforce in a highly competitive labor market.

 

Our executive compensation and benefit programs, including our arrangements with our named executive officers (“NEOs”), are structured to meet this need. They also aim to appropriately reward the contributions our NEOs and other executives make in creating and sustaining enterprise and stockholder value, taking into account each executive’s specific roles, responsibilities, experience, skill sets, and individual performance; the market for comparable jobs; the existing and expected business environment; and our overall financial and operational results. We believe that this focus on rewarding contributions that create and sustain enterprise and stockholder value establishes a clear alignment of executive and stockholder interests.

 

Compensation Committee Oversight Role. The Compensation Committee, with support from our management and outside advisors, oversees our executive compensation and benefit programs, including the specific arrangements we have with our NEOs. The Compensation Committee evaluates and, as necessary, adjusts these arrangements to ensure consistency with our compensation and benefit programs’ goals.

 

In addition to providing general oversight, the Compensation Committee annually reviews and approves goals and objectives for our CEO, evaluates our CEO’s performance in light of those goals and objectives and other criteria, and determines and approves our CEO’s compensation based on that performance evaluation, as discussed above under the heading “Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures.” The Compensation Committee also reviews and approves the compensation of the other NEOs.

 

Compensation Committee Consultant Role. Semler Brossy serves as the Compensation Committee’s independent compensation consultant, providing advice and perspective to the Compensation Committee on executive and non-employee director compensation and benefits. Under the Compensation Committee’s charter, and to maintain its independence and avoid any conflict of interests, Semler Brossy may not work directly for our management unless the Compensation Committee pre-approves the work, including fees. No such work was performed or fees paid in 2008.

 

CEO and Management’s Role. The Compensation Committee frequently asks for recommendations, input and support from our CEO and certain members of top management, particularly regarding compensation and benefit program design and implementation, employee feedback, and compliance and disclosure requirements. At the Compensation Committee’s request, the CEO reviews and discusses the performance and compensation of our other NEOs and makes recommendations to the Compensation Committee as to their annual base

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salaries, annual incentives and long-term incentives. Our management is responsible for implementing our compensation and benefit programs under the Compensation Committee’s oversight. Our management has retained a compensation consultant, Towers Perrin, for the purpose of providing compensation and benefits related information, analysis and support.

 

Use of Tally Sheets. Our management typically provides the Compensation Committee with a tally sheet for each NEO at the beginning of each fiscal year, and may do so at other times in connection with NEO compensation decisions. The tally sheets that are typically provided at the beginning of each fiscal year contain up to five years of data on various compensation components, including base salary, annual incentives and long-term incentives. The tally sheets provided at other times may contain all or some of this data. The Compensation Committee uses the tally sheets as one tool in making decisions on these compensation components. It also uses advice and input from Semler Brossy and our CEO and certain members of top management, and subjectively considers the factors described above under the heading “General Overview,” and general market and peer group data.

 

Our Peer Group
•   Beazer Homes		•   Centex Corporation
•   DR Horton		•   Hovnanian Enterprises
•   Lennar Corporation		•   MDC Holdings
•   NVR Incorporated		•   Pulte Homes
•   Ryland Group		•   Standard Pacific
•   Toll Brothers

Although the Compensation Committee finds this data helpful in assessing the overall competitiveness of our compensation and benefit programs to attract and retain executive talent, the Compensation Committee does not benchmark or target compensation and benefits at any specific level within a general industry or our peer group. This is largely because the Compensation Committee considers the individual performance of responsibilities unique to our business operations and KBnxt operational business model to be a more significant factor in making NEO compensation decisions.

 

CEO Employment Agreement. The terms of our CEO’s compensation are governed by his Employment Agreement. The Employment Agreements specifies that our CEO be paid an annual salary of no less than $1 million. It also specifies that he is eligible to receive an annual incentive and entitled to participate in our long-term incentive compensation arrangements on terms and conditions that are no less favorable than those that apply to our other senior executives. The Board believes the Employment Agreement provides compensation that is in line with CEO compensation practices in the homebuilding industry. Our CEO is the only NEO with whom we have an employment agreement.

 

In our 2008 fiscal year, due to the severe and sustained downturn in the housing market and the significant deterioration in the general economy in the second half of the year, we continued, and in some instances, accelerated, several strategic actions designed to help us maintain a strong cash position and balance sheet, generate positive cash flows, restore the profitability of our homebuilding operations and reposition our business to capitalize on an eventual housing market recovery when it occurs. These actions included significantly reducing our overhead, including our workforce levels, inventory investments and community counts, transitioning to new, value-engineered product, and consolidating operations or selectively exiting certain markets in line with the principles of our KBnxt operational business model. We ended the year with more than $1.25 billion of cash (including restricted cash), which exceeded our goals, no borrowings under our revolving credit facility, a lower year-over-year operating loss, lower overall debt levels, and market positions that we believe provide us with a solid foundation for growth as business conditions become more favorable. During our 2008 fiscal year, we experienced lower year-over-year net orders, homes delivered and

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revenues, and we expect those trends to continue into our 2009 fiscal year. These operational and financial results are discussed in greater detail in our Annual Report.

 

Given the prevailing business conditions and uncertainty as to the timing of a housing market recovery, the primary focus for our executive compensation and benefits program for 2008 was to retain and motivate, in a cost-effective manner, our top executive talent to achieve our strategic initiatives, recognizing that many are working with fewer resources and greater duties and responsibilities due to overhead and workforce reductions. The following discussion provides additional information and analysis regarding our executive compensation and benefit programs and the specific arrangements we have with our NEOs.

 

 

Perquisites. In 2007, we discontinued substantially all perquisites to our NEOs, including automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. The few perquisites we provided to our NEOs in 2008 are described below under the heading “Perquisites.”

 

Mix and Levels of Compensation Elements. The Compensation Committee uses its own judgment when approving the mix and levels of the above-listed compensation and benefit components for our NEOs, generally taking into account individual NEO performance and the other factors described above under the heading “General Overview.” The Compensation Committee also takes into account the totality of compensation that may be paid to an NEO in approving the NEO’s specific annual base salary, annual incentives and long-term incentives so that the overall compensation these components may provide is in line with what the Compensation Committee believes is appropriate. Reflecting its generally subjective approach to making NEO compensation and benefit determinations, the Compensation Committee does not follow a set formula or set a specific allocation for any one component within the total amount of a NEO’s overall compensation and benefits.

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Consistent with our focus on aligning our executive compensation and benefit programs with stockholder interests, the Compensation Committee has generally weighted NEO compensation significantly toward variable, performance-based annual and long-term incentives. As a result, each NEO’s total compensation can vary from year-to-year and from other NEOs’ compensation in any year depending on individual performance and our overall financial and operational results. To reflect the CEO’s key role in setting and executing long-term business strategies, the Compensation Committee has awarded the CEO a greater proportion of long-term incentives and greater overall compensation compared to the other NEOs.

 

Base Salaries. Base salary is a fixed element of compensation for our CEO and our other NEOs. The Compensation Committee annually reviews and may approve NEO base salary adjustments based on a number of factors, including each NEO’s experience and specific responsibilities; individual performance and expectations; our current and expected financial and operational results; equity of salary relative to our executives who are at the same internal management level, but who are not NEOs; market rates to ensure competitiveness; our general budgetary guidelines for base salary increases as set by the Compensation Committee; and our overall financial and operational results. Based on its subjective weighing of these considerations, the Compensation Committee maintained our CEO’s base salary for 2008 at $1 million, the minimum set in his Employment Agreement, and approved annual base salary increases in 2008 for our other NEOs of between two and four percent. The Compensation Committee believes these increases for our other NEOs appropriately balanced the need to maintain market-competitive pay levels to promote retention with our financial and operational performance and current business conditions.

 

Annual Incentives. In 2008, each of our NEOs, other than Mr. Cecere, who announced in 2007 that he would retire in 2008, was eligible for an objective performance-based annual incentive based on the level of our pretax income or loss for the year, subject to the discretion of the Compensation Committee to reduce or eliminate the incentive payout. In approving potential annual incentives for our NEOs, which was done at the beginning of 2008, the Compensation Committee sought to balance the need to retain and motivate our NEOs to achieve sound results with the objective of containing overall compensation expense given the business environment. These annual incentives are described below.

 

Each NEO was eligible to receive a potential annual incentive payout if we generated pretax income or a pretax loss of no more than $300 million for our 2008 fiscal year. If our pretax loss exceeded $300 million, our NEOs were not eligible to receive any annual incentive payout. The pretax income or loss metric was to be determined in accordance with generally accepted accounting principles, excluding impairment charges for inventory, goodwill or deferred tax assets. The Compensation Committee approved these parameters based primarily on our outlook at the beginning of the year. This outlook reflected our expectations of extremely difficult and volatile housing market and general business conditions throughout the year and our corresponding strategic business plans, which contemplated lower overall homes delivered and revenues compared to prior years as a result of repositioning and streamlining our operations through market consolidations, overhead reductions and a product transition initiative. Given this outlook, the Compensation Committee determined that the above pretax income or loss metric was substantially uncertain to be met and would, to the extent achieved, represent a strong performance result for the year.

 

If we generated pretax income, our CEO was eligible for a maximum potential annual incentive payout of $12.5 million, and each of our other NEOs was eligible for a maximum potential annual incentive payout equal to two times base salary, as follows: Ms Shiba $914,000; Mr. Hollinger $730,000; Mr. Barnard $600,000; and Mr. Masuda $620,000. If we generated a pretax loss of no more than $300 million, our CEO was eligible for a potential annual incentive payout of between $500,000 and $10.5 million, depending on where the specific amount of the loss fell within a defined set of loss and corresponding potential payout ranges. The Compensation Committee believed it appropriate to align potential annual incentive payouts with certain specific loss ranges within the pretax loss parameter to establish a strongly performance-oriented and motivating, yet cost-effective, annual incentive for our CEO. For our other NEOs, if we generated a pretax loss of no more than $300 million, Ms. Shiba was eligible for a target annual incentive payout equal to the amount of her annual base salary, or $457,000, and each of Messrs. Hollinger, Barnard and Masuda were eligible for a target annual incentive payout equal to 125% of his annual base salary, or $456,250, $375,000

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and $387,500, respectively. The target annual incentive payouts set for the other NEOs matched the annual base salary multiples the Compensation Committee approved for annual incentives at the NEOs’ respective internal management level. The Compensation Committee set the target salary multiple for Senior Vice Presidents (such as Messrs. Hollinger, Barnard and Masuda) above the target salary multiple set for our Executive Vice President (i.e., Ms. Shiba) to more evenly balance the target annual incentive payouts between those management levels given that our Executive Vice President is paid a higher annual base salary. The Compensation Committee believes the relatively higher potential payouts and more discrete potential payout ranges that it set for our CEO’s annual incentive compared to the annual incentives it approved for our other NEOs appropriately reflect Mr. Mezger’s unique and critical role in setting and directly overseeing the implementation of our overall operating strategy and significant related strategic initiatives, his broader responsibilities for driving our overall financial and operational performance, and his wide-ranging internal and external duties across all areas of our business.

 

The Compensation Committee believes the annual incentive parameters and corresponding potential payouts it approved for 2008 struck the appropriate balance between the objectives described above. The Compensation Committee also believes the approach to the 2008 annual incentives helped to: foster internal pay equity among similarly-situated executives, as the same salary multiples were applied within the same management level; set appropriate compensation expectations given the present business environment; and promote a performance-based orientation to annual incentives.

 

In addition to approving annual incentive parameters and corresponding potential payouts, the Compensation Committee identified for each NEO a mix of quantitative and qualitative financial and/or operational individual performance objectives related to each NEO’s specific role and position responsibilities. Mr. Mezger’s individual performance objectives focused primarily on achieving our liquidity and balance sheet goals for the year, providing leadership and oversight in the development and execution of our strategic initiatives to meet housing market conditions, which are described above under the heading “Compensation in Context: Fiscal Year 2008,” and implementing top management recruitment and development strategies. Ms. Shiba’s individual performance objectives focused primarily on providing leadership and oversight of our corporate governance, ethics and compliance standards and policies, minimizing our litigation exposure and successfully resolving material litigation. Mr. Hollinger’s individual performance objectives focused primarily on achieving our liquidity and balance sheet goals for the year and providing leadership and oversight of our accounting and financial reporting processes. Mr. Barnard’s individual performance objectives focused primarily on improving margins and driving the implementation of our strategic initiatives. Mr. Masuda’s individual performance objectives focused primarily on achieving our liquidity and balance sheet goals for the year and providing leadership and oversight of our joint venture investments and investor relationships.

 

The Compensation Committee used these individual performance objectives in deciding whether and to what degree it would apply downward discretion to the annual incentive payouts. It evaluated performance objectives tied to a specific financial or other quantitative or quantifiable result on an objective basis, and evaluated qualitative performance objectives on a subjective basis. It also considered the CEO’s evaluation of the other NEOs’ achievement of their individual performance objectives and the factors described above under the heading “General Overview.” In determining the annual incentive payouts to the NEOs, however, no specific weighting or formulas were applied to the individual performance objectives or the other factors considered. Rather, as discussed below, the Compensation Committee used its own judgment, taking into account the individual performance objectives and other factors, to determine the final annual incentive payouts.

 

Based on its terms, as described above, the objective pretax income or loss metric for the NEO annual incentives was determined to be a loss of $141 million. Accordingly, the NEOs were eligible for annual incentives in the following amounts: Mr. Mezger $6.5 million; Ms. Shiba $457,000; Mr. Hollinger $456,250; Mr. Barnard $375,000; and Mr. Masuda $387,500. The Compensation Committee also found that each NEO delivered strong performance with respect to their individual objectives in a challenging business environment. Given our overall financial results for 2008 and business conditions, however, the Compensation Committee in its discretion reduced the annual incentive payouts to most of the NEOs to the following amounts: Mr. Mezger

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$2.75 million; Ms. Shiba $0; Mr. Hollinger $370,000; and Mr. Masuda $250,000. Ms. Shiba’s annual incentive payout reflected that she was guaranteed an annual bonus for 2008 of $400,000 when she was hired in 2007. Mr. Barnard received his full annual incentive amount largely because he did not receive any long-term incentives, as discussed further below under the headings “Guaranteed and Discretionary Bonuses” and “Long-Term Incentives.”

 

In determining Mr. Mezger’s annual incentive payout for 2008, the Compensation Committee, with the Board’s approval, took into account our performance and Mr. Mezger’s achievements during the year amid extremely difficult and unstable conditions in the housing market and general economy. In particular, the Compensation Committee determined that Mr. Mezger provided excellent leadership in (a) directing the repositioning of the geographic and asset “footprint” of our business and the bolstering of our financial and operational ability to capitalize on an eventual housing market recovery when it occurs, while at the same time implementing necessary overhead reductions; (b) implementing a new product transition initiative to meet consumer demand for smaller, more affordable homes; and (c) recruiting key talent and maintaining a strong, focused management team during a period of significant challenge. The Compensation Committee also considered that our balance sheet was strong and liquid, as we achieved positive cash flows throughout 2008 and ended the year with a cash balance of $1.25 billion (including restricted cash), exceeding our expectations, no cash borrowings outstanding under our credit facility, a lower year-over-year operating loss, and lower overall debt levels. While the Compensation Committee believes that Mr. Mezger’s performance was outstanding in 2008, in light of our overall financial results for the year and the business environment, it exercised its downward discretion and reduced Mr. Mezger’s 2008 annual incentive from a potential $6.5 million to $2.75 million.

 

Guaranteed and Discretionary Bonuses. As discussed above, Ms. Shiba was awarded her guaranteed 2008 annual bonus of $400,000 in lieu of any annual incentive payout. The Compensation Committee approved a $45,000 discretionary annual bonus for Mr. Barnard to recognize his contributions to our new product transition and organizational repositioning initiatives in 2008 and to provide Mr. Barnard with higher annual compensation in lieu of long-term incentive awards based on current management development planning. As discussed below under the heading “Long-Term Incentives,” Mr. Barnard did not receive any long-term incentive for our 2009 fiscal year. The Compensation Committee approved a $430,000 discretionary bonus for Mr. Cecere to recognize his contributions and years of service as our chief financial officer.

 

Long-Term Incentives. We provide long-term incentives to our NEOs that consist primarily of grants of equity-based vehicles settled in cash or stock. Because the value of these incentives is tied to the share price of our common stock, we believe they are performance-based and establish a clear alignment of NEO and stockholder interests. We typically grant long-term incentives in October each year, in conjunction with a regularly-scheduled Compensation Committee meeting, for the following fiscal year. Mr. Cecere did not receive any long-term incentives in October 2007 or October 2008 due to his announced retirement.

 

As with the annual salaries and annual incentives it approved for 2008, the Compensation Committee determined in October 2008 that our long-term incentives for our 2009 fiscal year should be oriented to emphasize, in a cost-effective manner, the retention of top executive talent. In reaching this determination, the Compensation Committee considered that the retention value of our past long-term incentive awards is very low given the sustained downturn in the homebuilding industry and the general economy. This downturn has caused the price of our common stock to fall significantly below the exercise price of most of our outstanding employee stock options, diminished or eliminated recent payouts under our Unit Performance Program (“UPP”), which is further described below under the heading “Unit Performance Program,” and reduced annual incentive payouts. The Compensation Committee believes that these negative results severely undermine our ability to retain management talent critical to our long-term performance, yet are largely beyond our executives’ control and cannot be attributed to their actions or decisions. To address these circumstances and promote retention while containing compensation expense, the Compensation Committee approved 2009 long-term incentives that would deliver to our NEOs and other recipients, if earned, a level of total long-term compensation close to, though for NEOs slightly below, the levels provided to them (or similarly-situated individuals) in prior years when UPP performance units were granted in tandem with equity-based awards. As discussed below under the heading “Unit Performance Program,” grants of UPP performance units are no longer being made. Other objectives the Compensation Committee considered for our 2009 long-term incentives included that they be sustainable over time and varied market conditions; reward recipients for

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strong performance in delivering financial and operational results that drive stockholder value creation while reflecting expected position-based contributions and responsibilities; and balance and align stockholder and management interests. These other objectives are reflected in the types and mix of long-term incentives granted and the vesting conditions applied to the grants, as described below.

 

Based on these considerations and objectives, the Compensation Committee, with input from Semler Brossy and our CEO, granted to our NEOs a combination of SARs and phantom shares that are settled in cash only. The reason for using these vehicles is discussed below under the heading “Use of SARs and Phantom Shares,” and the specific amounts granted to our CEO and to the other NEOs are shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2008.”

 

For each NEO, the number of long-term incentives granted is based on a total value the Compensation Committee set for the NEO, a 75% allocation of that value to SARs and a 25% allocation of that value to phantom shares, and the closing price of our common stock on the grant date, October 2, 2008. The Compensation Committee approved the 75%/25% allocation between SARs and phantom shares to establish a strong link between the NEOs’ and stockholders’ interests in long-term value creation as the value of each SAR increases with increases in the share price of our common stock. At lower management levels, the allocation between SARs and phantom shares was weighted more towards phantom shares (from 50% to 100% of the overall grants to individual recipients) and restricted cash grants to promote retention.

 

Mr. Mezger’s long-term incentive value was set at $3.5 million based on the Compensation Committee’s view that it would appropriately compensate and motivate Mr. Mezger to continue to provide effective leadership and strong performance in developing and executing our long-term business strategy during the current housing market downturn, as the Compensation Committee felt he had in 2008 (see discussion above under the heading “Annual Incentives” with respect to the determination of Mr. Mezger’s 2008 annual incentive payout). The Compensation Committee also determined that the value was competitive with the value of long-term incentives granted to peer CEOs, although $1 million lower than the value set for Mr. Mezger in the prior year to contain compensation expense.

 

For our other NEOs, the Compensation Committee considered a total long-term incentive value set within a range of 150% to 250% of current base salary based on their internal management level. Within this range, the Compensation Committee subjectively approved a dollar value for each NEO based on a number of factors, including the above-described objectives for the 2009 long-term incentives, the NEO’s individual current and expected future performance and role, overall potential compensation cost, and the factors described above under the heading “General Overview.” Based on these considerations, the Compensation Committee approved for each NEO other than our CEO the following total long-term incentive values: Ms. Shiba $700,000; Mr. Hollinger $700,000; and Mr. Masuda $450,000. For the reasons discussed above under the heading “Guaranteed and Discretionary Bonuses,” Mr. Barnard did not receive any long-term incentives for our 2009 fiscal year.

 

Use of SARs and Phantom Shares. The Compensation Committee used cash-settled SARs and phantom shares for our NEOs’ 2009 long-term incentives because of the limited number of shares that were available for grant in October 2008 under our existing stockholder-approved equity compensation plans. The SARs and phantom shares are designed to mirror the attributes of stock options and restricted stock respectively, except that both instruments are settled in cash. Each SAR, if it vests, will provide upon exercise a cash payment equal to the positive difference, if any, between its grant price and the closing price of our common stock on the exercise date, and will expire on the tenth anniversary of its grant date. Each phantom share, if it vests, will provide a cash payment equal to the closing price of our common stock on the applicable vesting date, plus the cumulative value of all cash dividends or other distributions paid in respect of a share of our common stock from and including its grant date through and including the vesting date. Because the Compensation Committee believed it could not set meaningful and sustainable long-term performance targets due to the uncertain outlook for the housing market, the 2009 long-term incentives were granted without a performance-vesting requirement. Given the importance of motivating and retaining top executive talent in a difficult business environment, and the Compensation Committee’s view that the SARs are inherently performance-

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based and performance-motivating incentives that appropriately align the interests of executives and stockholders, the Compensation Committee determined that performance-vesting requirements would not be productive in driving financial and operational results over the performance period for the 2009 long-term incentives.

 

Unit Performance Program. For several years, our long-term incentives have included performance unit grants under our UPP. Each UPP performance unit provides a payout to a recipient only if specific goals set by the Compensation Committee are achieved at the end of a three-year period with respect to the following two performance metrics: our cumulative diluted earnings per share and the average pretax return on investment of the operations for which the recipient is responsible. If applicable performance goals are achieved, the value of a performance unit at the end of the three-year performance period depends on the degree to which the performance goals are exceeded and the Compensation Committee’s weighting of the two performance metrics at the time the performance unit is awarded. Recipients must remain employed with us for the entire three-year period to which a performance unit relates to receive a payout.

 

In October 2005, the Compensation Committee granted performance units to each of our NEOs (other than Ms. Shiba, who was hired in August 2007) and to other members of our senior management for the fiscal 2006-2008 performance period, which ended on November 30, 2008. The cumulative diluted earnings per share metric determined 75% of the value of these performance units and the average pretax return on investment metric determined the remaining 25%. Based on the results for the performance period, our NEOs did not receive any payouts on these performance units. The Compensation Committee did not approve any new grants of performance units under the UPP in 2007 or 2008, and has decided to suspend the UPP to streamline our overall long-term incentive compensation program.

 

Benefits. The majority of our health and welfare benefits are made available to all full-time employees, including our NEOs. During 2008, our NEOs also received a supplemental benefit that reimburses them for any out-of-pocket medical, dental and vision expenses that qualify for a tax deduction under IRS guidelines. In addition, our NEOs were provided with certain death benefits and participated in our Deferred Compensation Plan and Retirement Plan, each as described below under the heading “Post-Termination Arrangements.” These benefits are offered to attract key executive talent and to promote retention. Mr. Mezger participates in a program under which he is credited with a specific number of vacation hours that remains fixed throughout his employment with us, regardless of actual vacation time taken. When his employment with us ends, he is entitled to receive a payout of these vacation hours that is based on his then-current annual base salary. Mr. Cecere was also a participant in this vacation hours program. This program is closed to new participants.

 

Perquisites. In 2007, we discontinued substantially all perquisites to our NEOs, including automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. We no longer own a corporate aircraft, having sold it in 2007. On a few occasions in 2008, family members accompanied NEOs on business trips on a company-chartered aircraft; however, we did not incur any additional incremental cost for this travel. From time to time, we also make available to our employees for their personal use, including our NEOs, tickets to certain sporting events that are purchased as a season subscription for business purposes. We do not incur any additional incremental costs with such use. In connection with Ms. Shiba’s hiring and relocation from Cleveland to Los Angeles in August 2007, we agreed to pay for certain travel, temporary living, moving and home closing expenses and to provide her a monthly housing cost differential amount through December 2008. In 2008, Ms. Shiba received $276,703 under this arrangement.

 

Severance Arrangements. Mr. Mezger’s Employment Agreement provides him with certain severance benefits, discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

 

Following a review of executive severance policies at peer homebuilding companies and other similarly sized public companies, the Compensation Committee adopted an Executive Severance Plan in 2007 for non-change in control situations. All of our NEOs are currently participants under the plan. The plan provides a specified severance benefit ranging from one to two times salary and bonus depending on a participant’s

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internal management level, as discussed further below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

 

In July 2008, following stockholder approval of an advisory proposal, we adopted a policy under which we will obtain stockholder approval before paying severance benefits to an executive officer under a future severance arrangement in excess of 2.99 times the executive officer’s then-current base salary and target bonus. Future severance arrangements do not include severance arrangements existing at the time we adopted the policy or any severance arrangement we assume or acquire unless, in each case, the severance arrangement is changed in a manner that materially increases its severance benefits. We adopted this policy to underscore our intent to continue to remain below the 2.99 times limit in our future severance arrangements.

 

Other Payments Due Upon Termination of Employment and/or a Change in Control. In addition to the severance arrangements mentioned above, we maintain a Change in Control Severance Plan (“CIC Plan”) that provides participants with certain severance benefits upon a change in control and accelerated vesting of equity awards and benefits under our Death Benefit Only Plan (if a participant also participates in that plan). All of our NEOs are participants in the CIC Plan. The objectives of the CIC Plan are to enable and encourage our management to focus its attention on obtaining the best possible deal for our stockholders in a change in control scenario and to make objective evaluations of all possible transactions, without being distracted by the possible impact such transactions may have on job security and benefits; to promote management continuity; and to provide income protection in the event of involuntary loss of employment. In addition, in the event we experience a change in control, there is accelerated vesting of any unvested benefits under our Deferred Compensation Plan and our Retirement Plan, each of which is discussed below under the heading “Retirement Programs,” and certain of our employee benefit plans, including our equity compensation plans. The payments to which our NEOs may be entitled on termination of their employment and/or if we experience a change in control is further discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

 

Death Benefits. Our Death Benefit Only Plan, in which Messrs. Mezger and Hollinger participate, provides a death benefit to a participant’s designated beneficiary of $500,000 or $1 million (plus an additional gross-up amount sufficient to pay taxes on the benefit and the additional amount). Messrs. Mezger and Hollinger have a death benefit of $1 million. We closed the Death Benefit Only Plan to new participants beginning in 2004, and only term life insurance, with a $750,000 benefit level payable to an executive’s designated beneficiaries, has been made available to incoming eligible executives. We maintain this term life insurance benefit for Messrs. Masuda and Barnard and Ms. Shiba. We also maintain a life insurance death benefit for Mr. Mezger of $400,000.

 

Retirement Programs. Our 401(k) Savings Plan, a qualified defined contribution plan, is the only program we offer to all full-time employees that provides post-employment benefits. Our NEOs and certain other senior executives also participate in an unfunded nonqualified Deferred Compensation Plan, which allows pretax contributions of base salary and annual incentive compensation. We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. NEO deferrals under the Deferred Compensation Plan are shown below under the heading “Non-Qualified Deferred Compensation During Fiscal Year 2008.” We offer the Deferred Compensation Plan to give participating executives the ability to defer amounts above the contribution limits applicable to our 401(k) Savings Plan.

 

We maintain a Retirement Plan for certain executives that has been closed to new participants since 2004. Each of our NEOs, other than Ms. Shiba and Mr. Masuda, participate in the Retirement Plan. The Retirement Plan provides each vested participant with a specific annual dollar amount for 20 years commencing following the later of the participant’s reaching age 55; the tenth anniversary of the date the participant commenced his or her participation; or the termination of the participant’s employment with us. Mr. Mezger’s original annual benefit amount under the Retirement Plan was $450,000. For the other NEO participants, the original annual benefit amount under the Retirement Plan was $100,000. For each participant, the annual benefit amount is increased by the same annual cost-of-living adjustments that are applied to federal social security benefits, starting with the plan year ending November 30, 2006. Vesting generally requires five years of participation and, once vested, the participant is entitled to his or her full benefit. Details of NEO participation in the Retirement Plan are provided below under the heading “Pension Benefits During Fiscal Year 2008.”

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Code Section 162(m) generally disallows a tax deduction for compensation over $1 million paid to our highest paid executives unless it is qualifying performance-based compensation. We generally design compensation plans in order to maintain federal tax deductibility for executive compensation under Section 162(m), and the Compensation Committee considers the potential Section 162(m) impact when approving the compensation paid to our NEOs. The Compensation Committee recognizes the need to balance tax deductibility benefits with the need to provide effective compensation packages that enhance enterprise and stockholder value creation, however, and will approve compensation that may not be deductible under Section 162(m) where it believes it is in our and our stockholders’ best interests to do so.

 

Equity Stock Ownership Policy. We have had an executive stock ownership policy since 1998. It is designed to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. In February 2008, the Compensation Committee amended the policy, as described below.

 

The policy identifies specific levels of stock ownership that designated executives are expected to achieve. The targeted stock ownership levels for our NEOs range from 20,000 to 150,000 shares, depending on position. Executives subject to the policy have five years to achieve these ownership levels and must make meaningful progress every year towards the achievement of these ownership levels. Survey data and multiples of average base salaries per level were used to determine the ownership expected for each position. Share ownership may include shares owned outright by a designated executive, shares owned indirectly through our 401(k) Savings Plan and 60% of unvested restricted stock grants or phantom share rights. Phantom share rights are included so that executives subject to the policy would not be penalized for the limited number of shares that were available for grant under our existing stockholder-approved equity compensation plans at the time the policy was amended. It is assumed that executives will use the cash proceeds they receive from the vesting of phantom shares to increase their ownership of our common stock. Once required ownership levels are achieved, they must be maintained throughout the executive’s employment. Our policy provides both financial incentives to achieve ownership requirements as well as material consequences for non-compliance. The Compensation Committee may, from time to time, reevaluate and revise the ownership requirements to account for material changes in stock price. Our NEOs are currently in compliance with the policy.

 

Equity-Based Award Grant Policy. In February 2007, the Compensation Committee adopted a policy that is designed to enhance the process by which we grant equity-based awards, including stock options, SARs, phantom shares and restricted stock, by governing the timing of equity-based awards and establishing certain internal controls over the grant of such awards, as described below.

 

The policy requires that the Compensation Committee (or the Board) approve all grants of equity-based awards, and their terms. The policy does not permit any delegation of granting authority to our management. The grant date of any equity-based award will be the date on which the Compensation Committee met to approve the grant unless a written resolution sets a later date. The exercise price of any stock option award will not be less than the closing price of our common stock on the New York Stock Exchange on the grant date. All equity-based award grants made in 2008 were made in compliance with the policy and were approved at a regularly-scheduled Compensation Committee meeting in October 2008, as discussed above under the heading “Long-Term Incentives.”

 

Recovery of Compensation. Under his Employment Agreement, our CEO is required to repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002.

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