April 8, 2009

 

Dear Stockholder:

 

You are cordially invited to attend Masco Corporation’s Annual Meeting of Stockholders on Tuesday, May 12, 2009 at 10:00 A.M. at our corporate offices in Taylor, Michigan. The following pages contain information regarding the meeting schedule and the matters proposed for your consideration and vote. Following our formal meeting, we expect to provide a review of our Company’s operations and respond to your questions.

 

Please vote on the matters presented in the accompanying Notice and Proxy Statement. Your vote is important, regardless of whether or not you are able to attend the Annual Meeting. Voting instructions can be found on the Proxy Card. Please review the enclosed Proxy materials carefully and submit your vote today by mail, telephone or internet.

 

On behalf of our entire Board of Directors, I thank you for your continued support of Masco Corporation and look forward to seeing you on May 12.

 

Sincerely,

 

Richard A. Manoogian
Executive Chairman

MASCO CORPORATION

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Date:		May 12, 2009
Time:		10:00 A.M.
Place:		Masco Corporation 21001 Van Born Road Taylor, Michigan 48180

 

The purposes of the Annual Meeting are:

 

1. To elect three Class III Directors;

 

2. To ratify the selection of PricewaterhouseCoopers LLP as independent auditors for Masco for 2009;

 

3. To consider and act upon a proposal to amend the 2005 Long Term Stock Incentive Plan;

 

4. To consider and act upon a proposal to approve the material terms of the performance goals under the 2005 Long Term Stock Incentive Plan; and

 

5. To transact such other business as may properly come before the meeting.

 

The Company recommends that you vote “For” all of the Director nominees, “For” the selection of PricewaterhouseCoopers LLP as independent auditors, “For” the approval of the amendment to the 2005 Long Term Stock Incentive Plan (the “2005 Plan”) and “For” the approval of the material terms of the performance goals under the 2005 Plan.

 

Stockholders of record at the close of business on March 16, 2009 are entitled to vote at the meeting or any adjournment thereof. Whether or not you plan to attend the meeting, you can be sure that your shares are represented at the meeting by promptly voting your Proxy by telephone, by internet, or by completing, signing, dating and returning your Proxy Card in the enclosed postage prepaid envelope. Instructions for each of these methods and the control number that you will need are provided on the Proxy Card. You may withdraw your Proxy before it is voted if you do so in the manner specified in the Proxy Statement. Alternatively, you may vote in person at the meeting. Directions to our offices where the meeting will be held are on the back cover of the Proxy Statement.

 

By Order of the Board of Directors

 

Barry J. Silverman
Secretary

 

April 8, 2009

 

 

 

 

 

TABLE OF CONTENTS

 

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS OF
MASCO CORPORATION

May 12, 2009

 

 

The Board of Directors of Masco Corporation is soliciting the enclosed Proxy for use at the Annual Meeting of Stockholders of Masco Corporation to be held at its offices at 21001 Van Born Road, Taylor, Michigan 48180, on Tuesday, May 12, 2009 at 10:00 A.M., and at any adjournment. This Proxy Statement and the enclosed Proxy are being mailed or otherwise made available to stockholders on or about April 8, 2009.

 

We are paying the expense of this solicitation. Our executive officers and other employees of Masco may solicit Proxies, without additional compensation, personally and by telephone and other means of communication. In addition, we have retained Morrow & Co., LLC, 470 West Avenue, Stamford, CT 06902 to assist in the solicitation of Proxies for a fee of $12,000, plus expenses. We will reimburse brokers and other persons holding Masco common stock in their names or in the names of their nominees for their reasonable expenses in forwarding Proxies and Proxy materials to beneficial owners.

 

Stockholders of record at the close of business on March 16, 2009 are entitled to vote at the meeting. On that date, there were 359,379,909 shares of Masco common stock, $1 par value, outstanding and entitled to vote. Each share of outstanding Masco common stock entitles the holder to one vote. We will conduct the meeting if a majority of the outstanding shares is represented in person or by proxy. Broker non-votes and abstentions will be counted toward the establishment of the quorum. A broker “non-vote” occurs when the shares that a nominee holds for a beneficial owner are represented at the meeting, but are not voted on a proposal because the nominee has not received specific instruction from the beneficial owner and the nominee does not have discretionary voting power to vote on the proposal.

 

You can ensure that your shares are voted at the meeting by submitting Proxy instructions by telephone, by internet, or by completing, signing, dating and returning the enclosed Proxy Card in the envelope provided. Submitting your Proxy by any of these methods will not affect your right to attend the meeting and vote. The telephone and internet voting procedures are designed to authenticate your identity, to allow you to give your voting instructions and to confirm that your instructions have been recorded properly. Specific instructions for stockholders of record (that is, stockholders who hold their shares in their own name) who wish to use the telephone or internet voting procedures are on the enclosed Proxy Card. You may revoke your Proxy at any time before it is exercised by voting in person at the meeting, by delivering a subsequent Proxy or by notifying us in writing of such revocation (Attention: Barry J. Silverman, Secretary, at 21001 Van Born Road, Taylor, Michigan 48180).

 

The Board of Directors is divided into three classes. The term of office of the Class III Directors, consisting of Thomas G. Denomme, Richard A. Manoogian and Mary Ann Van Lokeren, expires at this meeting. The Board proposes the re-election of Messrs. Denomme and Manoogian and Ms. Van Lokeren. The Board of Directors has made an exception to its age 72 retirement policy for Mr. Manoogian based on his leadership of Masco as Chairman and Chief Executive Officer for many years, and his current service as Executive Chairman.

 

Upon election of the Class III Directors nominated at the Annual Meeting, the terms of office of Class I, Class II and Class III Directors will then expire at the Annual Meeting of Stockholders in 2010, 2011 and 2012, respectively, or when their respective successors are elected and qualified. The Board of Directors expects that the persons named as proxies on the Proxy Card will vote the shares represented by each Proxy for the election of the above nominees as Directors unless a contrary direction is given. If prior to the meeting a nominee is unable or unwilling to serve as a Director, which the Board of Directors does not expect, the persons named as proxies will vote for such alternate nominee, if any, as may be recommended by the Board of Directors.

 

Our Bylaws provide that Directors are elected by a majority of votes cast (except in the case of contested elections, in which case Directors are elected by a plurality). In a majority vote, if the votes cast for a nominee exceed the votes cast against that nominee, the nominee is elected. Votes that are withheld will be treated as abstentions, which along with broker non-votes, will not affect the election since they are not treated as votes cast. Proxies cannot be voted for a greater number of persons than the number of nominees named.

 

Each nominee has tendered an irrevocable resignation that becomes effective if the majority of the votes cast are against such nominee and if within 90 days after the election results are certified, the Board of Directors (excluding nominees who did not receive a majority of votes for their election) accepts such resignation, which it will do in the absence of a compelling reason otherwise.

 

Information concerning the nominees and continuing Directors is set forth below.

 

 

The Board of Directors continues to focus on Masco’s corporate governance principles and practices and is committed to maintaining high standards of ethical business conduct and corporate governance for Masco.

 

Masco’s Corporate Governance Guidelines require that a majority of our Directors qualify under the independence and experience requirements of applicable law and the New York Stock Exchange (“NYSE”). For a Director to be considered independent, the Board must determine that the Director does not have any direct or indirect material relationship with Masco. The Board, pursuant to the recommendation of the Corporate Governance and Nominating Committee, adopted categorical independence standards to assist it in making a determination of independence for Directors. Masco’s independence standards are posted on our website at www.masco.com and are attached to this Proxy Statement as Appendix A.

 

The Board has made an affirmative determination that all of our non-employee Directors are independent. The independent Directors are Messrs. Archer, Denomme, Earley, Istock and Losh, Professor Johnston, Ms. Payne and Ms. Van Lokeren. Mr. Peter A. Dow, who retired as a Director in May 2008, was considered independent during his service. In making its independence determination for each non-employee Director, the Board reviewed all transactions, relationships and arrangements for the last three fiscal years involving each Director and the Company. With respect to Mr. Earley, the Board considered the annual amount of sales to Masco by DTE Energy Company, where he serves as Chairman of the Board and Chief Executive Officer, and determined that the amount of sales in each fiscal year was significantly below 2% of that company’s annual revenues. With respect to Messrs. Archer, Dow, Earley, and Istock and Ms. Payne, the Board considered the annual amount of Masco’s discretionary charitable contributions to charitable organizations where those individuals serve as a director, and determined that those individuals were not active in the day-to-day operations of the charitable organizations and that Masco’s contributions were significantly less than the greater of $1 million or 2% of the respective organization’s revenues.

 

Standing committees of the Board of Directors include the Audit Committee, the Organization and Compensation Committee, and the Corporate Governance and Nominating Committee. Each member of these three committees qualifies as independent as defined in Masco’s Corporate Governance Guidelines. These committees function pursuant to written charters adopted by the Board. The full text of the charters for these three committees, as well as Masco’s Corporate Governance Guidelines and Masco’s Code of Business Ethics, are posted on our website at www.masco.com and are available to you in print from the website or upon request. Amendments to or waivers of the Code of Business Ethics, if any, will be posted on our website in accordance with applicable requirements. The information on our website is not a part of this Proxy Statement or incorporated into any other filings we make with the Securities and Exchange Commission (the “SEC”).

 

During 2008, the Board of Directors held seven meetings and each Director attended at least 75% of the Board meetings and applicable committee meetings. It is the Company’s policy to encourage Directors to attend the Annual Meeting of Stockholders. All Directors attended the 2008 Annual Meeting of Stockholders.

 

The non-employee Directors meet in executive session without management at each regularly scheduled meeting of the Board of Directors. Mr. Istock was selected by the non-employee Directors to serve as the presiding Director for these executive sessions.

 

Any interested party that wishes to communicate directly with the presiding Director or the non-employee Directors as a group may send such communication to: Presiding Director, Masco Board of Directors, in care of Barry J. Silverman, Secretary, Masco Corporation, 21001 Van Born Road, Taylor, Michigan 48180. Stockholders may also send communications to the full Board of Directors, in care of Mr. Silverman, at the above address.

 

The Audit Committee of the Board of Directors, currently consisting of Messrs. Archer, Denomme, Earley, Istock and Losh and Ms. Payne, held six meetings during 2008. The Audit Committee assists the Board in its oversight of the integrity of our financial statements, the effectiveness of the Company’s internal control over financial reporting, the qualifications, independence and performance of our independent auditors, the performance of our internal audit function, and our compliance with legal and regulatory requirements, including employee compliance with our Code of Business Ethics.

 

The Board has determined that each member of the Audit Committee is financially literate and that at least four members of the Committee, Messrs. Earley, Istock, Losh and Ms. Payne, qualify as “audit committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K. Although Mr. Losh serves on the audit committee of more than three publicly traded companies, the Board has determined that such service does not impair his ability to serve on Masco’s Audit Committee.

 

Interested parties may send complaints relating to accounting, internal accounting controls or auditing matters to the Chairman of the Masco Audit Committee, in care of Barry J. Silverman, Secretary, Masco Corporation, 21001 Van Born Road, Taylor, Michigan 48180.

 

The Organization and Compensation Committee of the Board of Directors (the “Compensation Committee”), currently consisting of Messrs. Earley, Istock and Losh, Professor Johnston and Ms. Van Lokeren, held eight meetings during 2008. The Compensation Committee determines executive compensation, evaluates Masco’s management, determines and administers awards and options granted under our stock incentive plan and directs Masco’s succession planning process. This Committee exercised its authority to engage outside advisors and, for the past five years, has retained Hewitt Associates. Information about the Compensation Committee’s process and procedures for consideration and determination of executive compensation is presented in “Compensation Discussion and Analysis” below.

 

The Corporate Governance and Nominating Committee of the Board of Directors, currently consisting of Messrs. Archer, Denomme, and Istock, Professor Johnston, Ms. Payne and Ms. Van Lokeren, held four meetings during 2008. The Corporate Governance and Nominating Committee serves in an advisory capacity to the Board on the governance structure and conduct of the Board and has responsibility for developing and recommending to the Board appropriate Corporate Governance Guidelines. In addition, the Committee identifies qualified individuals for nomination to the Board, recommends Directors for appointment to Board committees and evaluates current Directors for re-nomination to the Board or re-appointment to Board committees.

 

The Committee periodically assesses Board composition, including whether any vacancies are expected on the Board due to retirement or otherwise. The Corporate Governance and Nominating Committee believes that Directors should possess exemplary personal and professional reputations, reflecting high ethical standards and values. The expertise and experience of Directors should provide a source of advice and guidance to Masco’s management. A Director’s judgment should demonstrate an inquisitive and independent perspective with acute intelligence and practical wisdom. Directors should be free of any significant business relationships which would result in a potential conflict in judgment between the interests of Masco and the interests of those with whom Masco does business. Each Director should be committed to serving on the Board for an extended period of time and to devoting sufficient time to carry out the Director’s duties and responsibilities in an effective manner for the benefit of our stockholders. The Committee also considers additional criteria adopted by the Board for Director nominees and the independence, financial literacy and financial expertise standards required by applicable law and by the NYSE.

 

The Committee uses a number of sources to identify and evaluate nominees for election to the Board. It is the Committee’s policy to consider Director candidates recommended by stockholders. These candidates are evaluated at regular or special meetings of the Committee, and all candidates, including those recommended by stockholders, are evaluated against the same criteria as described above or any others established by the Committee or the Board. Stockholders wishing to have the Committee consider a candidate should submit the candidate’s name and pertinent background information to Barry J. Silverman, Secretary, Masco Corporation, 21001 Van Born Road, Taylor, Michigan 48180. Stockholders who wish to nominate Director candidates for election to the Board should follow the procedures set forth in our charter and Bylaws. For a summary of these procedures, see “2010 Annual Meeting of Stockholders” below.

 

Messrs. Manoogian and Wadhams, who are employees of the Company, do not receive additional compensation for their services as Directors. Our compensation program for non-employee Directors includes both cash compensation and equity compensation designed to support their focus on long-term stockholder value and to recognize their long-term commitment to serve the Company. Non-employee Directors receive an annual retainer of $80,000, of which one-half is paid in cash. In order to more closely align the compensation of non-employee Directors with the long-term enhancement of stockholder value, the other half of the retainer is paid by means of restricted stock granted under our 2005 Long Term Stock Incentive Plan in accordance with our Non-Employee Directors Equity Program (the “Directors Equity Program”). Grants of restricted stock vest in 20% equal annual installments over a five-year period. A new non-employee Director is given an initial grant of restricted stock valued at one-half of the Director’s total retainer for the initial five years of anticipated service on the Board (subject to adjustment for partial years and for any increase in the annual retainer during the five-year period). After full vesting of the initial grant, each non-employee Director thereafter receives an annual grant of restricted stock valued at one-half of the annual retainer. These grants vest over the succeeding five years.

 

The Directors Equity Program also provides for the grant to each non-employee Director on the date of each Annual Meeting of Stockholders of a non-qualified stock option to purchase 8,000 shares of Masco common stock at the fair market value on the date of grant. In addition, each new non-employee Director receives a one-time non-qualified stock option grant of 32,000 shares under our 2005 Long Term Stock Incentive Plan. All of these options become exercisable in equal annual installments on the first five anniversaries of the grant date. Each option has a ten-year term for exercise, except that options may generally be exercised for only a limited period of time following death or, for options granted before October 27, 2005, following termination of service as a non-employee Director for any reason other than permanent and total disability or retirement on or after Masco’s normal retirement age for Directors.

 

The Directors Equity Program restricts Directors from engaging in certain competitive activities while serving as a Director and for one year following termination of service as a Director. Upon breach of this noncompete agreement, we may require the Director to pay us certain amounts realized from awards of restricted stock and option exercises, to the extent realized on or after termination or within two years prior to termination.

 

The Board has established stock ownership guidelines for non-employee Directors that require Directors to retain at least 50% of the shares of restricted stock they receive until their termination from service as a Director. The vesting arrangements and stock retention requirement are intended to assure that non-employee Directors maintain a financial interest in Masco over an extended period of time.

 

We provide a few additional benefits to Directors. Non-employee Directors are eligible to participate in our matching gifts program (which is generally available to our employees) pursuant to which we will match gifts made to eligible 501(c)3 tax-exempt organizations up to an aggregate of $10,000 (for 2008) and $5,000 (for 2009) for each participant. In addition, if space is available, a Director’s spouse is permitted to accompany a Director who travels to attend Board or committee meetings on Company aircraft. We have permitted, on an infrequent basis, non-employee Directors’ personal use of Company aircraft, although no such use occurred during 2008. Directors are also eligible to participate in our employee purchase program, which is generally available to our employees and enables them to purchase our products for their personal use at discounted prices. Former non-employee Directors who make themselves available for consulting receive an amount equal to the cash portion of the Directors’ fee for the remainder of the calendar year in which their service on the Board ends and $50,000 per year for two calendar years thereafter.

 

The following table shows 2008 compensation for our Directors, other than Messrs. Manoogian and Wadhams, who are also Masco employees and receive no additional compensation for their service as Directors. The amounts shown under “Stock Awards” and “Option Awards” are the amounts we are required to expense for accounting purposes rather than the value of awards granted in 2008. The variation in these amounts among our Directors

reflects the expensing requirements of FAS 123R described below, under which expense accruals are calculated based, in part, on the proximity of the Director’s age to Masco’s normal employee retirement age of 65.

 

2008 Director Compensation

 

 

 

 

The following table shows the beneficial ownership of Masco common stock as of March 16, 2009 by (i) each of the Directors, (ii) each named executive officer in the “Summary Compensation Table,” (iii) all of our Directors and executive officers as a group, including Messrs. Gargaro and Leekley who have retired, and (iv) all persons who we know are the beneficial owners of five percent or more of Masco common stock. Except as indicated below, each person exercises sole voting and investment power with respect to the shares listed.

 

 

 

 

 

 

The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the integrity of the Company’s financial statements, the effectiveness of the Company’s internal control over financial reporting, the qualifications, independence and performance of the Company’s independent registered public accounting firm (“independent auditors”), the performance of the Company’s internal audit function, and compliance by the Company with legal and regulatory requirements and by employees and officers with the Company’s Code of Business Ethics. Management has the primary responsibility for the financial statements and the reporting process, including the Company’s system of internal control over financial reporting. In discharging its oversight responsibility as to the audit process, the Audit Committee reviewed and discussed with management the audited financial statements of the Company as of and for the year ended December 31, 2008, including a discussion of the quality and the acceptability of the Company’s financial reporting and disclosure controls and internal control over financial reporting, as well as the selection, application and disclosure of critical accounting policies.

 

The Audit Committee obtained from the Company’s independent auditors, PricewaterhouseCoopers LLP, the letter required by Rule 3526 of the Public Company Accounting Oversight Board “Communication with Audit Committees Concerning Independence,” and discussed with the independent auditors any relationships that may impact their objectivity and independence and satisfied itself as to PricewaterhouseCoopers LLP’s independence. The Audit Committee considered and determined that such independent auditors’ provision of non-audit services to the Company is compatible with maintaining their independence. The Audit Committee reviewed various matters with the independent auditors, who are responsible for expressing an opinion on the Company’s financial statements as of and for the year ended December 31, 2008, and the effectiveness of the Company’s internal control over financial reporting, based on their audit. The Audit Committee met with the independent auditors and discussed the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees,” including their judgment as to the quality and the acceptability of the Company’s financial reporting, internal control over financial reporting and such other matters as are required to be discussed with the Audit Committee in accordance with the standards of the Public Company Accounting Oversight Board. The Audit Committee also met with the independent auditors without management present.

 

Based on the above-mentioned reviews and discussions with management and the independent auditors, the Audit Committee recommended to the Board of Directors that the Company’s financial statements as of and for the year ended December 31, 2008 be included in its Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC. The Audit Committee also reappointed, subject to stockholder approval, PricewaterhouseCoopers LLP as the Company’s independent auditors.

 

J. Michael Losh, Chairman
Dennis W. Archer
Thomas G. Denomme
Anthony F. Earley, Jr.
Verne G. Istock
Lisa A. Payne

 

We are committed to maintaining executive compensation programs that promote the long-term interests of our stockholders by attracting and retaining talented senior corporate executives and motivating them to work collaboratively to achieve our business objectives. Our programs therefore stress compensation that is contingent on corporate performance and the price of Masco common stock, particularly over the long-term. The primary components of our executive compensation are base salary, a performance-based cash bonus, performance-based restricted stock awards and stock option grants. Our executive officers participate in retirement programs for key employees and in other group benefits generally available to all corporate office employees, and certain executive officers have access to a limited number of additional benefits. Our executive officers do not have employment or severance agreements.

 

During the past several years, we have been strongly committed to increasing our variable performance-based compensation opportunity as a percentage of total compensation, while reducing the emphasis on fixed compensation such as annual base salary, executive benefits, and perquisites. In 2008 and in early 2009, we made the following changes to further strengthen our performance-driven approach to compensation:

 

 

Due to the current difficult business environment, performance-based bonus targets proved to be extremely challenging, and no cash bonuses or restricted stock awards were earned by the named executive officers for 2008. The general result of these developments was a reduction in 2008 executive compensation, although this is not apparent in the Summary Compensation Table due to SEC disclosure requirements for presentation in the Table. Also, because our outstanding awards vest over a much longer period than at most

companies, the economic downturn’s impact on our stock price has had a more significant effect on long-term compensation for our employees who receive stock compensation, especially our executive officers for whom the majority of their compensation is stock-based. However, we continue to believe that long-term vesting is in the best interest of our Company and its stockholders, since it so closely ties compensation to sustained long-term performance.

 

One of the critical responsibilities of the Board of Directors and senior management is to maintain a strong leadership team for our Company. We seek to attract and retain individuals who possess the outstanding personal qualities and experience that are essential to executive effectiveness and to the Company’s performance. These individuals are in demand by competitors within our industry as well as by others, and they usually have alternative employment opportunities. While non-monetary factors may provide significant motivation for these individuals, financial considerations are often persuasive in career decisions. Consequently, we must offer opportunities and compensation programs that are attractive to the individual and at the same time are compatible with the long-term interests of our stockholders. It is important that we retain executives who can effectively lead our business operations, particularly in difficult times. Compensation is one of several key elements necessary to maintain a strong leadership team.

 

We consider the inherent uncertainty involved in identifying, isolating and measuring individual contributions to corporate performance in the short-term as well as the long-term. Our approach to executive compensation emphasizes corporate rather than individual performance for our executive management group, because our operating strategy encourages collaboration and cooperation among our business and corporate functions for the overall benefit of Masco. Moreover, corporate performance will often be affected by factors outside senior management’s control (such as changes in economics or industry trends). Therefore, individual contributions may not be accurately measured solely by short-term corporate performance. Likewise, financial results for a particular year may not reflect our business strategies that enhance long-term stockholder value. Although we emphasize corporate performance, individuals may receive special recognition through adjustment of base salary or special equity awards as a result of their individual contributions, increased responsibilities and promotions. We use various performance metrics in the design and implementation of our compensation programs, but we also believe that the effectiveness of our executive compensation programs requires not only objective, formula-based arrangements but also the exercise of discretion and sound business judgment by senior management and by the Compensation Committee.

 

As a home improvement and building products and services company, the cyclical nature of our industries is an important factor in designing and implementing executive compensation programs that reward executives for actions that benefit our stockholders’ long-term interests. Our leaders must include executives who are capable and motivated to manage our business through all phases of our industries’ economic cycles. Compensation programs are designed to reflect the value of the management team’s contributions to the Company and the Company’s performance in light of the current general economic and industry conditions. It is important to note that performance-based variable compensation and equity participation are critical to the Company’s strategy.

 

Considering our compensation principles and our industries, and the important role of compensation in maintaining a talented executive team, we have developed the following objectives for our executive compensation programs.

 

 

Our executive compensation programs should be performance-oriented so that our executives’ interests align with those of our stockholders and achieve our business objectives. We design our incentive compensation programs to correlate the performance criteria used by these programs with the metrics we consider most significant to long-term stockholder value, such as earnings per share and cash flow. In administering these programs, we consider the relationship of compensation to our Company’s performance and the individual’s responsibilities and contributions to such performance.

 

Compensation programs that have significant long-term focus and emphasize long-term corporate performance serve our commitment to maximize long-term stockholder value by attracting and retaining the executive talent we desire. This focus also evidences our emphasis on management stability and long-term retention, particularly through the course of our industry cycle and considering general economic conditions.

 

 

The demand for top executive talent requires us to maintain compensation programs that, in the aggregate, can compete with compensation packages available to such individuals for alternative positions. Competitive compensation reduces costly and disruptive executive turnover. We want to attract, develop and retain strong executives who will understand the complexities of our business and the industries we serve and who will remain committed to our Company.

 

 

We evaluate our executive compensation programs in the aggregate. In order to adapt and respond to individual circumstances and changing business conditions, we use a variety of components that permit flexibility in establishing and adjusting executive compensation packages. We also recognize the importance of preserving for the Committee and senior management the ability to exercise discretion and judgment with respect to our compensation programs.

 

The application of these objectives to our executive compensation programs is discussed in the “Analysis of 2008 Executive Compensation” section below.

 

Our current compensation arrangements for our executive officers and other key employees consist of several components, each of which is designed to serve a specific purpose, as described in the “Analysis of 2008 Executive Compensation” section below. The key components are:

 

 

As discussed below, we use a combination of these components to provide a total compensation package that achieves our objectives.

 

It is the Company’s general policy not to enter into employment contracts with our executive officers or otherwise to establish individual severance or other arrangements that entitle them to additional compensation such as salary or bonus following termination of employment (except in the case of retirement or other post-termination arrangements applicable generally to participants under our benefit plans). Our executive officers are “at-will” employees who may be terminated at the Company’s discretion. We believe this preserves for the Company greater flexibility in its employment arrangements while permitting us to address specific circumstances as needed. Further, we have structured our compensation plans to prohibit competitive activities following termination of employment and to provide other significant protections that the Company has the discretion to exercise. Depending on circumstances, we may require a participant to forfeit unvested equity awards upon voluntary or involuntary termination of employment or even to return compensation previously earned.

 

The Company’s compensation programs are generally broad-based and applicable to all of our key employees, including executive officers. These programs are principally developed and administered by senior management, with independent oversight, direction, and approval by the Committee, which ultimately establishes and is responsible for our compensation policies.

 

For comparative purposes, we generally focus on a select group of publicly traded companies. We believe these comparison companies are representative of the types of firms with which we compete for executive talent, although we believe we also compete with private equity and other non-public companies as well. The skills and responsibilities we require in our executives are generally not unique to our industries or markets. Nevertheless, a number of the representative public companies we have selected for comparison operate one or more lines of business that compete in our industries or markets. Other major factors we use to select this compensation “peer group” include revenues, net income and market capitalization. Our revenues, net income and market capitalization are generally within the mid-range of this peer group.

 

The peer companies are:

 

 

For each named executive officer, we compare the overall competitiveness of total compensation, as well as each major component of compensation and the mix of components, with the peer group. We do not target executive compensation to specific compensation levels at other companies. When we review the compensation reported by other companies, we note factors that may have influenced the compensation paid by them, such as contractual compensation commitments they may have made to their executives, their corporate financial performance and the performance of their publicly traded stock. The Committee also considers the aggregate compensation of the named executive officers as a percentage of our net income and compares our percentage to that of the peer group.

 

We use a variety of resources in addition to publicly available data and published compensation surveys in order to establish compensation levels. Even though management on occasion utilizes the services of outside compensation experts, the Committee has exercised its authority to retain its own advisors, and since 2003, it has separately engaged Hewitt Associates, a global human resources consulting firm, to provide the Committee with independent advice on executive compensation matters. The major items for which the Committee asked Hewitt for its expert assistance were the revised schedule for certain annual compensation decisions, the restructuring of our retirement plans, including the substantial curtailment of our Supplemental Executive Retirement Plan and consequences to our executives who would be significantly disadvantaged, our special grant of restricted stock awards and the pricing mechanism for our equity awards. In addition to responding to specific requests the Committee may make from time to time, Hewitt meets with the Committee in executive sessions without management, assists the Committee in its review of peer group compensation and advises the Committee on its implementation of our compensation objectives. The Company has not requested and does not intend to request

that Hewitt provide additional services for the Company, other than the purchase of annual compensation surveys. The cost of these surveys in 2008 was $7,455.

 

During 2008, we continued our practice of providing to the Committee a tally sheet that comprehensively summarizes the various components of total compensation for our President and Chief Executive Officer, our Chief Operating Officer, our Chief Financial Officer, the other named executive officers and selected other executives. The tally sheet, which is prepared by our human resources department and provided to the Committee early in each calendar year, includes base salary, annual performance-based cash bonus, long-term stock incentive compensation, dividends on unvested shares of restricted stock previously earned, our costs for the foregoing and for perquisites and other benefits, including the annual costs under our retirement plans. Our tally sheet allows the Committee to compare an executive’s compensation with the compensation of our other executives as part of its consideration of internal and external pay equity. The Committee considers prior executive compensation history, including the extent to which the Committee exercised positive or negative discretion. Amounts actually realized by an executive from prior equity grants are not necessarily a factor in establishing current compensation, although the current value of outstanding equity awards may be considered by the Committee, particularly insofar as it is intended to support executive retention.

 

In early 2009, as part of a general rationalization of our talent review and development process, we revised the review schedule for certain components of our compensation arrangements. We moved our review of fixed base salary and stock option grants from mid-year to the first quarter, which is the same time at which we have historically determined the level of achievement under the annual performance-based cash bonus and performance-based restricted stock award programs. We believe that determining these four elements of annual compensation together at the beginning of the year enables the Committee to optimize the executives’ compensation mix, and to better align compensation with our talent review and development process. This sequence also provides a better foundation for establishing the performance criteria and opportunity levels for the current year under our annual cash and restricted stock incentive programs.

 

Masco’s talent review and development process is used by the Committee and the Company’s President and Chief Executive Officer and Chief Operating Officer as they review compensation for individual executives. This process is part of our succession planning, and is how we identify and evaluate our key employees, including our executive officers, on an annual basis. The process also emphasizes executive development and performance in order to keep compensation in perspective as one element of a strong leadership team. As part of this program, our President and Chief Executive Officer and Chief Operating Officer develop a written assessment of each of the other executives who report to them. The assessment evaluates the executive’s performance, development progress and plans, and potential for advancement, and also considers market demand for the executive’s skill set. These assessments are provided to and discussed with the Committee and are considered by the Committee in connection with executive compensation determinations and promotions.

 

In evaluating our Executive Chairman, our President and Chief Executive Officer, and our Chief Operating Officer, and determining their compensation, the Committee considers the factors noted above for other executives, and also considers qualities of leadership and responsibility necessary for their positions, their relationships with our employees, customers, suppliers, Board of Directors, stockholders and the investment community, the contribution of their leadership to Company performance and governance, the impact of their leadership on the performance of our executive management team and their reputation for representing the Company in the community.

 

The Committee considers each component of executive compensation as part of its annual process. As the Committee determines each of the various components of compensation for the President and Chief Executive

Officer and the other named executive officers, it also considers the objectives described above and each of the other components, and compares each element to companies in the peer group as well as to total compensation.

 

Under our prior schedule, executive base salaries were reviewed annually in July. In response to deteriorating market conditions, and to continue the increased focus on pay-for-performance we have established over the last several years as discussed below, executive base salaries were generally reduced by 5% in 2008, and frozen at those reduced levels, which we believe are generally at or below the median base salary levels at our peer group of companies, for two years. In light of this reduction, the maximum opportunity levels under our annual cash and restricted stock incentive bonus programs were increased by 30%. These actions were not taken with respect to our President and Chief Executive Officer and our Chief Operating Officer, whose salaries were already set below the median pay of our peers when they accepted their positions in 2007. Base salary is a major factor in the formulas for performance-based cash bonuses and performance-based restricted stock awards, as well as for options and retirement benefits. Base salary provides current compensation and is not typically adjusted on account of Company performance, although on occasion salaries have been frozen or reduced, as was done in July 2008.

 

During the past several years, and again in July 2008 as noted above, we have reduced the percentage of total compensation represented by base salary and have increased the variable performance-based compensation opportunities in order to more closely align executive compensation with our stockholders’ interests and our business objectives, and to reflect changes to the mix of fixed versus variable compensation that had occurred in the marketplace. As a result of this changed emphasis, in four of the last six years our executive officers did not receive increases in base salary, except in connection with promotions and changes in responsibilities, or if salaries were determined to be well below the competitive market level.

 

As a result of our emphasis on pay-for-performance, variable compensation represents an even larger percentage of the aggregate of base salary plus cash bonus and restricted stock award opportunities than it did previously, having been increased from 67% to 72% for all named executive officers except for Messrs. Wadhams, DeMarie and Manoogian. Variable compensation remains at 86% for Mr. Wadhams and at 80% for each of Messrs. DeMarie and Manoogian. Accordingly, our President and Chief Executive Officer, our Chief Operating Officer and our Executive Chairman have the most potential compensation at risk of all of our executives.

 

Annual cash bonuses, shown in the “Non-Equity Incentive Plan Awards” column of the Summary Compensation Table, are determined under our annual cash bonus incentive compensation plan. These performance-based bonuses are directly tied to Company performance by linking executive officers’ annual cash bonus opportunities to a schedule of earnings per share targets. Under this program, an executive officer’s annual performance-based cash bonus opportunity depends upon our attained earnings for the year under a schedule of earnings per share targets. The maximum bonus opportunity is 300% of base salary for our President and Chief Executive Officer, 200% for our Executive Chairman and for our Chief Operating Officer and 130% (increased from 100% as noted above) for our other executive officers. There were no annual cash bonuses earned for 2008.

 

In the first quarter of each year, senior management and the Committee review the Company’s forecasted performance expectations for the year, taking into account general economic and industry market conditions, and as a result of that review, the Committee approves a graduated schedule of performance targets for purposes of both the annual cash bonus and the annual restricted stock incentive programs discussed below. Earnings per share has historically been selected as the only measure for determining incentive compensation because it reflects the Company’s overall financial performance for the year, although the annual restricted stock incentive program has also taken into consideration progress toward improvement in return on invested capital. Because of the importance of operating earnings to stockholder value, reported earnings per share is adjusted in establishing this schedule to exclude the effects of special charges, gains and losses from corporate divestitures, certain other non-operating income and expenses and the benefit resulting from any stock repurchases in excess of a predetermined amount. The Committee and senior management periodically review this metric, and determined to add an additional metric for 2009 and later years as discussed below. Although we do not set specific financial or operational goals within the areas of responsibility of our named executive officers, the Committee may exercise negative discretion to reduce bonuses regardless of the earnings target actually attained.

Under this graduated earnings per share schedule, as earnings per share change, the incentive bonus for an executive officer can vary between zero (if the Company fails to attain the minimum target) and, for performance at or above the upper end of the range, the maximum bonus opportunity as described above. The maximum bonus the Company would pay under this schedule is capped even if Company performance exceeds the maximum target, and regardless of increases in stockholder value. The Committee has adopted a policy that permits the Company at the Committee’s discretion to recover all or a portion of the performance-based cash bonuses paid to executive officers, if the earnings per share or other performance criteria upon which such bonuses were based were subsequently determined to be incorrect and, if properly determined or applied, would have reduced the size of the bonuses paid.

 

At the time the Committee established the 2008 bonus schedule early in the year, the Committee expected that the adverse impact of declining housing starts and decreased consumer spending for home improvement products would be even greater in 2008 than it had been in 2007, but did not anticipate the dramatic deterioration in general economic and market conditions that occurred in 2008. The schedule established for 2008 provided for bonuses ranging from the maximum opportunity level, if earnings per share (adjusted as described above) was at least $1.70, to 20% of the maximum opportunity level, if adjusted earnings per share was $0.70. Achieving the “target” award level shown below would entitle the executive to receive his target percentage; achieving the “maximum” award level shown below would entitle the executive to receive his maximum percentage. Since performance in 2008 did not exceed the “threshold” award level shown below, no cash bonus was earned.

 

PERFORMANCE SCHEDULE FOR 2008

 

 

Management and the Committee monitor the effectiveness and cost of our performance-based incentive compensation programs as part of their ongoing oversight of our compensation structure. After discussion with management and review by the Committee’s outside consultant, the Committee determined to modify the performance criteria for the annual cash and restricted stock incentive programs beginning in 2009. Earnings per share continues to represent an overall measure of corporate performance. However, cash flow is increasingly emphasized internally and externally. Maintaining strong cash flow is a fundamental strategy for the Company, and we believe it is a very important competitive advantage for our operating businesses as well as a key area of focus for the investment community. After its review, which included consideration of the potential impact of adding this metric, the Committee concurred with management’s conclusion that this emphasis should play a role in our incentive compensation structure. Consequently, cash flow has been added as a metric for purposes of determining annual bonuses both of cash and restricted stock in order to reinforce its importance with our key executives. For this purpose cash flow is defined as reported cash flow from operations, less any capital expenditures and prior to the payment of cash dividends, and is adjusted to exclude the effects of special charges, gains and losses from corporate divestitures and certain other non-operating income and expenses. At the same time, the Committee agreed with the recommendation to remove return on invested capital as an explicit consideration for the annual restricted stock bonus program in view of the addition of the cash flow metric, although the Committee can continue to consider this as well as other measures of Company and individual performance in exercising its discretion under all of our compensation arrangements. For 2009 each of the two performance metrics will be weighted 50%.

 

For many years, we have recognized that having an ownership interest in the Company is critical to aligning the interests of the Company’s leadership and key employees with the interests of our stockholders. Accordingly, common stock has been a major part of long-term compensation for our executives and other key employees, and we have established minimum stock ownership requirements for our executives. Outstanding restricted stock awards and stock options have been granted under the Masco Corporation 2005 Long Term Stock Incentive Plan (the “2005 Plan”) or its predecessor, the 1991 Long Term Stock Incentive Plan (the “1991 Plan”). These two plans are referred to collectively as the “Long Term Incentive Plan.”

Under our annual restricted stock award program, shares are not granted unless they are earned by attaining annual performance targets. Once these performance-based restricted stock awards are granted, the potential benefit received by the participant is contingent and largely deferred because the shares (and our stock options) vest over an extended period of time. The length of our vesting schedule exceeds that of many other companies, including many in our peer group. Because of our lengthy vesting schedule and the accumulation of unvested shares over time, our program is designed so that the value ultimately realized from these awards depends on the long-term value of our common stock. The awards are designed to encourage retention and reduce voluntary separation because accumulated unvested shares are forfeited upon termination unless the Company waives the forfeiture. Unvested restricted shares are held in the participant’s name, and accordingly, the participant has the right to vote and receive dividends on the shares during the vesting period. Vesting generally occurs in ten percent installments over a ten-year period for restricted stock so the value ultimately realized by the executive may be more or less than the value at the time the shares were granted, depending upon the price of our common stock at the time of vesting. Vesting generally occurs in twenty percent installments over five years for options so the value ultimately realized by the executive from each option grant depends upon our stock price over a minimum period of five years and as long as ten years because options may be exercised up to ten years after the date of grant. Upon death, termination of employment due to permanent and total disability, or a change in control, all shares of restricted stock vest immediately and options become immediately exercisable, although after death options may only be exercised until the earlier of the expiration of their original term or one year after death. By design, our awards do not vest immediately on retirement. Instead, following retirement, options continue to become exercisable over the remaining vesting period. Under the terms of our restricted stock awards the number of shares that vest annually is adjusted when the participant turns age 66 so that awards are fully vested by the end of the year in which the participant turns 70. (Awards held by Mr. Manoogian in 2005 at the time we implemented this change continue to vest on their original longer-term schedule). The frequency, value and vesting terms of awards are designed to provide executives with the potential for significant accumulation of Company common stock over the course of their careers with Masco, but our executives also understand that the Company’s performance will continue to impact them financially even after their active careers with us end, thereby reinforcing their focus on the long-term enhancement of stockholder value.

 

The Company believes it continues to receive benefits from equity awards even after a participant leaves the Company because our award agreements also restrict participants from subsequently engaging in competitive and other activities that are adverse to our interests. Even though employees generally forfeit unvested awards of restricted stock and options upon termination of employment prior to retirement, under the terms of our awards a participant must observe a noncompetition covenant for a one-year period following termination of employment. If a participant violates this restriction, the agreement gives us the right to recover from the participant the net gain realized from awards which vested during the two years prior to termination. In addition, if a participant holds any unvested shares or unexercised options (including unvested installments) after employment terminates by retirement or otherwise, the value of such shares may be forfeited to us if the participant engages in any activity detrimental to the Company. Upon termination of employment (other than upon death or retirement or due to permanent and total disability), participants may exercise options, but only to the extent such options are then exercisable, within 30 days after voluntary termination and within three months after involuntary termination; however, any amounts realized by the participant upon exercise of options in these cases could be subject to the “clawback” provision. That provision allows us to require the participant to pay back to us the net gain realized upon the exercise of any installment of an option that became exercisable within two years prior to employment termination. We believe that these features not only improve our retention of executive talent, but also reduce the potential for harmful post-termination conduct.

 

Under current accounting rules, the cost related to restricted stock awards and options is fixed at the time of the grant. This expense is generally amortized for financial reporting purposes over the shorter of the applicable vesting period or the period then remaining to normal retirement age. Consequently, as an executive approaches retirement age, the amortization period for any new awards decreases. This results in an increase in the annual expense recognized by the Company for these awards, although the aggregate cost to the Company does not change. In this regard, awards to a participant, such as our Executive Chairman, who continues to actively serve the Company after normal retirement age, are expensed in full immediately upon grant even though the executive will only realize their value over a period of years. The Summary Compensation Table that follows below includes not only the amount of expense we recognized in 2008 for financial reporting purposes for new awards made during 2008 (including the

full expense for awards made during the year to participants who were retirement age or older), but because of transitional provisions of the accounting rules it also includes the expense we recognized in 2008 for outstanding equity awards granted prior to January 1, 2006 that were not required to be expensed immediately.

 

We have historically purchased a sufficient number of shares of Company common stock in the open market to offset any common share dilution resulting from restricted stock awards.

 

As part of its revision of compensation arrangements in early 2009, the Committee changed its pricing policy, effective in 2010, for annual equity grants in order to conform to the emerging consensus regarding best practices. Previously the Committee used the closing price on the date of grant of the equity awards; the Committee will continue to do so unless the grant date occurs within seven days prior to the release of the Company’s financial results. In that event, the grant will be made effective and the price of our common stock that is used for purposes of the grants will be the closing price at the end of the second trading day after the release of the results. This policy will become effective beginning in 2010.

 

For 2008, the Committee compared the Company’s performance with the scheduled earnings per share targets to determine the actual awards of restricted stock at its regularly scheduled meeting in February 2009. As with the cash bonuses described above, no performance-based awards of restricted stock were earned for 2008.

 

Due to SEC reporting requirements, the “Non-Equity Incentive Plan Awards” column in the Summary Compensation Table reflects the fact that no cash bonuses were earned for 2008 but does not permit us to show that restricted stock awards were not earned for 2008 performance. Instead, the “Restricted Stock Awards” column includes amounts expensed for performance-based restricted stock awards earned for 2007 performance granted in February 2008 (as well as certain expense relating to restricted stock awards granted in prior years). Also, the 2008 Grants of Plan Based Awards Table shows awards granted in February 2008 earned for 2007 performance. The Committee determined that 2007 adjusted earnings per share was $1.72, and that therefore awards of restricted stock valued at approximately 62% of the maximum award opportunity were appropriate in accordance with the performance formula approved in early 2007 by the Committee. Accordingly, these awards were granted to the named executive officers in February 2008. For these awards, the Committee did not take action to reduce the size of the grants that were calculated based on earnings per share.

 

As part of our annual restricted stock award program, members of the executive management group other than our President and Chief Executive Officer, our Chief Operating Officer and our Executive Chairman may receive an additional restricted stock award if recommended by our President and Chief Executive Officer and our Chief Operating Officer because of outstanding individual contribution and if the Committee concurs in the recommendation. The total value of all such awards cannot exceed 20% of the combined annual salaries of the executive management group (excluding the salaries of our President and Chief Executive Officer, our Chief Operating Officer and our Executive Chairman).

 

The Company has experienced significant declines in revenues, profit and cash flow over the course of the past two years reflecting the unprecedented conditions in the global economic and financial markets. The Company’s management responded by focusing intensively on cost reduction, rationalizing and right-sizing our businesses and, most importantly, emphasizing cash flow in order to sustain the Company’s business strategies and to position the Company to benefit from future opportunities that drive long-term growth. In addition to our aggressive actions to manage and reduce our cost structure and enhance cash generation, we have continued to invest in activities that we believe will position the Company for superior performance when our markets recover. These activities include strengthening our brands through innovation, new product development, initiatives to enhance our knowledge of customer and consumer requirements and preferences, efforts to improve our product quality, and incorporating sustainability into our operations and products. We are also driving to improve our operational performance and execution by emphasizing process and productivity improvements, simplifying our organizational structure, rationalizing supply chains and enhancing our talent management process.

 

It was apparent early in 2008 that no cash or restricted stock bonuses were likely to be earned under the specific annual incentive targets previously established, yet we believe that our management responded effectively under

extremely difficult circumstances with a high level of focus, intensity and energy. The success of the actions we are taking, and particularly the actions designed to benefit our future performance and competitive position, depends on the support and engagement of key employees. We believe it is important that we both recognize and encourage the significant commitment required during these challenging times. Consequently, Mr. Wadhams recommended to the Committee that the Committee consider a special discretionary equity grant to individuals in key leadership positions other than himself. The Committee approved a grant in early 2009, and determined that Mr. Wadhams should participate. These grants of restricted stock, which generally vest over ten years, were made to the following named executive officers: Mr. Wadhams — 101,000 shares; Mr. DeMarie — 84,000 shares; Mr. Sznewajs — 50,000 shares; Mr. Anderson — 38,000 shares. No award was made to Mr. Manoogian.

 

 

Stock options also reflect the Committee’s focus on compensation that is aligned with the interests of stockholders. Options are granted annually to key employees, including our executive officers and the leadership of our operating entities, in order to reinforce the goal of long-term share price appreciation.

 

In early 2008, the Committee reviewed its approach to granting stock options to assure that the Company’s compensation practices are competitive, particularly in light of the reduction of fixed salary as a percentage of total compensation. As a result of this review, including consultation with its independent expert, the Committee does not use a precise formula but rather determines option grants to the Company’s executive officers and key employees so that total compensation, including options (based on the option’s economic value at the time of grant using the Black-Scholes method), is competitive. In making these determinations, the Committee reviews data from the Company’s peer group as well as published data from Hewitt’s executive compensation surveys, although individual considerations also influence the value of the option grants. In May 2008, we granted options to our key employees (including all executive officers). The value at the time of grant for these options is presented in the last column of the “2008 Grants of Plan-Based Awards” table on page 27, although the actual value realized by these executives will depend on the market value of Masco common stock at a future date when the option is exercised.

 

Options are usually granted annually for participants, including the executive officers, at a regularly scheduled Committee meeting. In the past we have not granted stock options at a time when we were in possession of material non-public information, which if released would reasonably be expected to increase the price of our common stock, although we have had no formal policy to that effect. Options are granted at the current market price, so option holders only benefit from subsequent stock price appreciation.

 

The 2005 Plan prohibits the granting of restoration options, other than restoration options resulting from the exercise of certain outstanding options granted under the predecessor 1991 Plan. Such restoration options are granted only when a participant exercises an eligible option granted pursuant to the 1991 Plan and pays the exercise price by delivering shares of Company common stock. The restoration option is equal to the number of shares delivered by the participant and does not increase the number of shares covered by the original stock option. The exercise price of the restoration option is the fair market value of Company common stock on the date of its grant (which is the date the underlying option is exercised), so that the participant benefits only from subsequent increases in our stock price.

 

 

In order to reinforce the alignment of executives’ financial interests with long-term stockholder interests, the Board has established stock ownership guidelines for the executive management group, including the named executive officers, that require them to maintain a substantial interest in our common stock. This minimum investment requirement is designed to ensure that a meaningful amount of the executive officers’ personal net worth is invested in the Company. Unvested shares of restricted stock count towards achieving the requirement because of their current and potential benefit to the executives. The guidelines require stock ownership ranging from a minimum of two times base salary to five times base salary, which is required for our Executive Chairman and our President and Chief Executive Officer. The Committee generally reviews executive ownership of Company common stock annually. Executive share ownership has remained at the same levels, or in some cases increased in 2008 and early 2009.

 

As of March 26, 2009, our Executive Chairman and our President and Chief Executive Officer each met their ownership requirement of five times base salary. Mr. Manoogian, our Executive Chairman, currently owns stock worth 42 times his base salary.

We require executives to achieve the stock ownership necessary to meet the guidelines within three years of becoming subject to them. Mr. DeMarie became Chief Operating Officer in December 2007. He currently has stock worth 3.5 times his base salary and has until December 2010 to reach his required ownership of four times base salary. Mr. Sznewajs became Chief Financial Officer in July 2007. He currently has stock worth 2.8 times his base salary and has until July 2010 to reach his required ownership of three times base salary. Mr. Anderson has reached his required ownership of two times base salary.

 

Except for employee stock options granted under our Long Term Incentive Plan and other arrangements approved by our Board of Directors, our insider trading policy prohibits our senior management from engaging in transactions involving derivative securities relating to Company stock, such as put and call options, and in certain other arrangements, such as forward sales and short sales, which otherwise could have the effect of reducing or neutralizing their investment in Company common stock.

 

We provide a limited number of perquisites to our senior executives, which are reviewed by the Committee on a regular basis. We maintain aircraft for business purposes, and the Committee has evaluated our policies and valuation practices for personal use of Company aircraft. The Board has requested that Messrs. Manoogian, Wadhams and DeMarie use Company aircraft for both business and personal travel. Notwithstanding this requirement, personal use by these officers is considered a perquisite for SEC reporting purposes. As a result, personal use of the airplanes by Messrs. Manoogian, Wadhams and DeMarie accounts for substantially all of their total perquisites. Personal use of Company aircraft by our Executive Chairman and our Chief Operating Officer must be approved by the President and Chief Executive Officer, and his personal use must be approved by our Executive Chairman. Our President and Chief Executive Officer or our Executive Chairman may occasionally permit other executive officers to use Company aircraft, if available, for personal travel. The Committee, in turn, reviews the total personal usage of Company aircraft by all executive officers. Note 8 to the Summary Compensation Table describes how we calculate incremental cost for personal use of Company aircraft.

 

Our executive compensation and benefit programs (particularly our equity and retirement arrangements) are complex and have significant tax, legal and financial implications for participants. In order to assist our executives in achieving the benefit of these programs, our executive officers are eligible to participate in an estate and financial planning program. This program provides up to $10,000 per year for financial planning and tax preparation, with a carry-forward allowance to cover additional costs associated with the development of an estate and financial plan. As of January 2009, we have discontinued an enhanced health examination program for key employees, but continue to provide annual preventative diagnostic medical examinations under the health programs generally available to our corporate office employees. We pay the dues for certain clubs used for business purposes by our Executive Chairman. In a few cases, such clubs permit personal use by our Executive Chairman as well as by other Company employees, although the cost of such use is paid for personally by such individuals. A Company vehicle and driver are available for business and personal use by our Executive Chairman, and on occasion they have been used by other executives. Pursuant to our employee relocation policy and in a few other circumstances, we pay our employees, including executive officers, an amount to offset adverse income tax consequences attributable to arrangements that we intended to make available on a non-taxable basis.

 

The Company makes available to Mr. Manoogian the personal financial, tax, accounting and administrative assistance comparable to the services previously provided prior to his transitioning to Executive Chairman, and for which he continues to reimburse the Company for its incremental cost. In addition to these services and the personal use of office space comparable to what has been provided, Mr. Manoogian will continue to have use of the Company’s aircraft and corporate automobile and driver on a comparable basis as long as he is Executive Chairman or in a similar full-time senior executive role or serves as Chairman of the Board of Directors, but thereafter, only upon reimbursement to us for the incremental cost of such use.

 

We provide tax-qualified retirement benefits for many of our employees. These plans provide retirement income supplementing social security and an individual’s personal asset accumulation. In addition, we have

maintained for many years an unfunded Benefits Restoration Plan (“BRP”) for all eligible participants in our tax-qualified plans and a Supplemental Executive Retirement Plan (“SERP”) for a limited number of senior executives, which currently includes all of the named executive officers, to supplement the tax-qualified plan benefits they would otherwise receive upon retirement.

 

The detailed discussion of the Company’s retirement program in “Retirement Plans” on page 30 describes plans as they exist prior to our recently announced major change effective January 1, 2010 to freeze, and to eliminate prospectively thereafter any further accruals under our defined benefit pension plans. Participants who are not fully vested in these plans at January 1, 2010 will be able to continue vesting as their employment continues after that date. The decision to transition our retirement programs away from the defined benefit pension model is consistent with the Company’s ongoing emphasis on compensation which is more closely linked with performance. This change reflects ongoing competitive trends in compensation among our peers, and enhances the Company’s ability to better control the variability and risk of cost fluctuations inherent in traditional defined benefit pension plans.

 

As noted, continued vesting in frozen benefits will be permitted; consequently, two recently promoted executives (Messrs. DeMarie and Sznewajs) and two other executives covered by the SERP will not be fully vested in the frozen SERP benefit unless they continue employment with the Company over the next several years (Messrs. DeMarie and Sznewajs for another seven and twelve years, respectively, after January 1, 2010). Offsets to the SERP from the Company’s underlying plans (as described in detail below in “Other Non-Qualified Deferred Compensation — SERP”) will be frozen as well as of January 1, 2010.

 

The named executive officers and other senior executives who are SERP participants have taken a leadership role in this significant curtailment of defined benefit retirement and disability benefits. Although the Company will realize cost savings in freezing its pension plans, the savings will be largely reinvested in our tax-qualified defined contribution plans. In the salaried 401(k) savings plan, in which the named executive officers participate on the same terms as many other salaried employees, an employer matching contribution will be implemented. In addition, provisions designed to stimulate employee participation in various other Company 401(k) savings plans will also be funded, including other matching formulae and automatic enrollment features. Finally, the named executive officers also participate in the tax-qualified Future Service Profit Sharing Plan and related BRP on the same terms as many other salaried employees, which will be modified to make cash bonuses eligible (in addition to base salary, as currently provided) for the annual discretionary Company contribution. We believe these changes will encourage employees to save for their own retirement, and link the Company’s retirement contribution to performance-based compensation.

 

Unlike the practices at a number of other companies, our executives do not have employment or severance contracts or voluntary non-qualified deferred compensation plans, nor do they have agreements entitling them to additional salary, bonus, or new equity grants following a change in control of the Company. However, if a change in control occurs, regardless of any subsequent continuation or termination of employment, all participants under our equity plans fully vest in any outstanding awards and all participants under our SERP fully vest, receive an acceleration of a lump-sum equivalent payment and may receive an enhanced benefit accrual. A “change in control” under the plans occurs only if, during any 24-month period, the individuals who were incumbent Directors at the beginning of the period cease for any reason to constitute a majority of the Board of Directors. For this purpose, individuals who became Directors after the beginning of the period with the approval of at least two-thirds of the incumbent Directors are considered as incumbents. However, regardless of any such approval, individuals will not be considered incumbent if they become Directors within one year after certain unauthorized tender offers for or acquisitions of 25% or more of the combined voting power of all outstanding voting securities of the Company or, under the equity compensation programs, as a result of certain actual or threatened election contests not by or on behalf of the Board.

 

The SERP and the BRP were amended in October 2008 to add an alternate change in control definition compliant with Internal Revenue Code (the “Code”) Section 409A. The BRP, which previously had no change in control provision, also added a provision requiring full vesting of otherwise unvested benefits, at the time of any change in control or alternate change in control.

 

After a change in control or alternate change in control, participants in the SERP and the BRP and the Long Term Incentive Plan may be considered to have received “golden parachute payments” to the extent the aggregate of

all amounts received as a result of the change in control or alternate change in control exceeds certain thresholds. Although we do not intend to cause adverse tax consequences to participants, under the Code, “golden parachute payments” are subject to a 20% excise tax, in addition to normally applicable income and other payroll taxes. If a participant, including any named executive officer, under the Long Term Incentive Plan, the SERP or the BRP becomes entitled to receive payments that trigger the application of the excise tax, we will make an additional cash payment to the participant that will generally make the participant whole for such excise tax. The tally sheet used by the Committee to review executive compensation notes our obligations to the executives under these programs in the event of any change in control.

 

Additional information concerning the effect of a change in control, including amounts that would have been payable if a change in control occurred as of December 31, 2008, appears below in “Compensation of Executive Officers — Change in Control and Termination.”

 

Section 162(m) of the Code limits deductibility of annual compensation in excess of $1 million paid to certain highly compensated employees, which includes our named executive officers, unless this compensation qualifies as “performance-based.” The stock options and, in most situations, annual cash bonus and annual restricted stock award grants to the executive officers under the performance-based schedule described above qualify under Section 162(m) and are therefore deductible. The Committee, however, continues to believe that it is in the Company’s interest to retain flexibility in its compensation programs. Consequently in some circumstances, including the special restricted stock grant made in early 2009 as described above, the Company has paid and intends to continue to pay compensation that exceeds the limitation of Section 162(m).

 

We recognize the importance of attracting, retaining and motivating key executive talent in order to meet our objectives of maximizing corporate performance and thereby creating long-term stockholder value. Although we believe we have competitive, performance-driven compensation programs that accomplish these objectives, we continuously monitor and adjust the design and implementation of these programs to ensure they are effective in the marketplace for such talent in light of changing business conditions.

 

The Organization and Compensation Committee, which is responsible for overseeing the Company’s executive compensation programs, has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Masco’s Proxy Statement.

 

Mary Ann Van Lokeren, Chairperson
Anthony F. Earley, Jr.
Verne G. Istock
David L. Johnston
J. Michael Losh

 

The following table reports compensation information for certain of our executive officers as required by SEC regulations. Information is reported for our principal executive officer and principal financial officer (Messrs. Wadhams and Sznewajs) during 2008, the three other highest paid current executive officers, and two retired executive officers, each of whose total compensation requires his inclusion in this table (collectively, the “named executive officers”).

 

With reference to the equity compensation reported below, SEC regulations require the table to show the expense to the Company for restricted stock awards and stock options as determined under the complex financial reporting requirements of FAS 123R regardless of the value actually realized (or realizable) by our executives and regardless of the year for which these equity awards were granted. In most instances, each row in the table therefore shows expense recognized by the Company in the subject year for a portion of each of the restricted stock awards and stock options that were made to the executive in such year as well as over a number of prior years. Consequently, the expense for the year shown in the table is not limited to awards made in that year. Moreover, none of the expense for the year shown in the table corresponds to the performance year for which our performance-based restricted stock awards are made since they are granted after year-end. Further, the expense for each award and option is generally spread over the shorter of the vesting period or the period remaining until normal retirement age for the executive, regardless of whether the executive actually retires. As a result, the portion of new awards and options that constitutes expense in each year increases as executives approach retirement age. Awards and options granted to an executive at or after reaching retirement age (which is the case for Mr. Manoogian in all three years and for Mr. Gargaro after March, 2007) are fully expensed and reflected in the table in the year of grant.

 

In contrast to the year required to report equity awards discussed above, the year for which annual cash bonuses are reported in the table (as shown in the column “Non-Equity Incentive Plan Awards” and described above in our “Compensation Discussion and Analysis”) does correspond to the performance year for which the cash bonus is earned.

2008 Summary Compensation Table

 

 

 

 

The following table sets forth information concerning the potential payouts under our 2008 performance-based cash incentive program and grants of restricted stock and options to the named executive officers in 2008.

 

2008 Grants of Plan-Based Awards

 

 

 

 

The “Compensation Discussion and Analysis” describes the performance-based cash bonuses, performance-based stock awards and options, including the proportion of variable compensation to total compensation, and the targets for performance-based compensation. Although restricted stock awards granted under our Long Term Incentive Plan generally vest in equal annual installments of 10% over a period of ten years, because of their ages at the date of grant, as described in the “Compensation Discussion and Analysis,” these awards will vest over shorter periods for Messrs. Manoogian, Leekley and Gargaro. The stock options granted in 2008 vest in five equal annual installments commencing on the first anniversary of the date of grant and remain exercisable until ten years from the date of grant.

 

The following table shows for each of the named executive officers as of December 31, 2008 (i) each stock option outstanding, (ii) the aggregate number of unvested shares of restricted stock, and (iii) the market value of such shares based on the closing price of Masco common stock on December 31, 2008 ($11.13 per share). The value realized upon vesting of the restricted shares will depend on the value of Masco common stock on the date of vesting.

 

2008 Outstanding Equity Awards at Fiscal Year-End