STEVEN J. MALCOLM

CHAIRMAN OF THE BOARD

 

To the Stockholders of The Williams Companies, Inc.:

 

You are cordially invited to attend the 2009 annual meeting of stockholders of The Williams Companies, Inc. The meeting will be held on Thursday, May 21, 2009, in the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, at 11:00 a.m., Central time. We look forward to greeting personally as many of our stockholders as possible at the annual meeting.

 

The notice of the annual meeting and proxy statement accompanying this letter provide information concerning matters to be considered and acted upon at the annual meeting. At the annual meeting we will provide a report on our operations, followed by a question-and-answer and discussion period.

 

For security reasons, briefcases, backpacks, and other large bags are not permitted in the theater. All such items can be checked with security upon arrival at the theater.

 

We know that most of our stockholders are unable to attend the annual meeting in person. We solicit proxies so that you have an opportunity to vote on all matters that are scheduled to come before the annual meeting. Whether or not you plan to attend, you can be sure your shares are represented by promptly voting and submitting your proxy by phone, by Internet, or by completing, signing, dating, and returning your proxy card in the enclosed postage-paid envelope. Regardless of the number of shares you own, your vote is important.

 

Thank you for your continued interest in our Company.

 

Very truly yours,

 

Steven J. Malcolm

 

Enclosures

April 22, 2009

 

TABLE OF CONTENTS

 

 

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

 

 

 

 

May 21, 2009

 

 

The annual meeting of stockholders of The Williams Companies, Inc. will be held at the time and place and for the purposes indicated below.

 

 

By order of the Board of Directors,


La Fleur C. Browne
Corporate Secretary

 

Tulsa, Oklahoma

April 22, 2009

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

 

 

 

 

 

 

 

 

GENERAL

 

We are providing this proxy statement to you as part of a solicitation by the Board of Directors (the “Board”) of The Williams Companies, Inc. for use at our 2009 Annual Stockholders’ Meeting and at any adjournment or postponement thereof. We will hold the meeting at the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, on Thursday, May 21, 2009, at 11:00 a.m., Central time.

 

Pursuant to new rules promulgated by the Securities and Exchange Commission (“SEC”), we have elected to provide access to our proxy materials both by sending you this full set of proxy materials, including a proxy card, and by notifying you of the availability of our proxy materials on the Internet. This proxy statement and our 2008 Annual Report are available at http://www.edocumentview.com/wmb, which does not have “cookies” that identify visitors to the site.

 

We expect to mail this proxy statement and accompanying proxy card to stockholders beginning on or about April 22, 2009. Unless the context otherwise requires, all references in this proxy statement to “Williams,” the “Company,” “we,” “us,” and “our” refer to The Williams Companies, Inc. and its consolidated subsidiaries.

 

 

 

 

 

Our restated certificate of incorporation, as amended, provides for three classes of directors of as nearly equal size as possible and further provides that the total number of directors shall be determined by resolution adopted by the affirmative vote of a majority of the Board, except that the total number of directors may not be less than five nor more than 17. The term of each class of directors is normally three years, and the term of one class expires each year in rotation.

 

Each of the 2009 nominees for the office of director, Messrs Engelhardt, Green, Howell and Lorch were elected by Williams’ stockholders on May 18, 2006. The terms of Messrs Engelhardt, Green, Howell and Lorch expire this year. The persons named as proxies in the accompanying proxy, who have been designated by the Board, intend to vote, unless otherwise instructed in such proxy, for the election of Messrs. Engelhardt, Green, Howell, and Lorch. Should any nominee named herein become unable for any reason to stand for election as a director, the persons named in the proxy will vote for the election of such other person or persons as the Nominating and Governance Committee may recommend. The Board may propose to replace such nominee or, if none, the Nominating and Governance Committee may recommend that the size of the Board be reduced.

 

We have included below certain information about the nominees for election as directors as well as the directors who will continue in office after the annual meeting. Dr. Lillis, one of our directors, resigned from the Board effective March 18, 2009.

 

Director Nominees Whose Terms Expire At The Annual Meeting In 2012

 

Irl F. Engelhardt, Age 62, Class II

 

Director since 2005. Mr. Engelhardt has served as chairman of Patriot Coal Corporation since November 2007. He was chairman of Peabody Energy Corporation or its predecessor companies from 1993 to 2007, and chief executive officer from 1990 through 2005. He was also co-CEO of The Energy Group from 1997 to 1998 and chairman of Citizens Power from 1998 to 2000. Mr. Engelhardt is a director of Patriot Coal and Valero Energy Corporation and the former chairman of The Federal Reserve Bank of St. Louis.

 

William E. Green, Age 72, Class II

 

Director since 1998. Mr. Green is the founder of William Green & Associates, a Palo Alto, California law firm and has been with the firm since 1974. He is also the vice president, general counsel and secretary of AIM Broadcasting, LLC. He is a former trustee of Rochester Savings Bank. Mr. Green is a director of Philanthropic Ventures, Inc., Ramsell Holding Corporation and Flowers Heritage Foundation.

 

W.R. Howell, Age 73, Class II

 

Director since 1997. Mr. Howell is chairman emeritus of J.C. Penney Company, Inc. He was chairman of the board and chief executive officer of J.C. Penney from 1983 to 1996. He is a director of Pfizer, Inc. and Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas, non-public wholly-owned subsidiaries of Deutsche Bank AG.

 

George A. Lorch, Age 67, Class II

 

Director since 2001. Mr. Lorch is chairman emeritus of Armstrong Holdings, Inc. He was the chief executive officer and president of Armstrong World Industries, Inc from 1993 to 1994 and chairman of the board and chief executive officer from 1994 to 2000. From May 2000 to August 2000 he was chairman of the board and chief executive officer of Armstrong Holdings, Inc. Mr. Lorch is a director of Pfizer, Inc., Autoliv, Inc., HSBC Finance and HSBC North America Holding Co., non-public, wholly owned subsidiaries of HSBC LLC.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF DIRECTORS NAMED IN PROPOSAL 1.

 

Directors Continuing in Office

 

Directors Whose Terms Expire At The Annual Meeting In 2010

 

Kathleen B. Cooper, Age 64, Class III

 

Director since 2006. Dr. Cooper was appointed senior fellow of the Tower Center for Political Studies at Southern Methodist University in August 2007. For two previous academic years she was the dean of the College of Business Administration at the University of North Texas. From 2001 to 2005, she was an under secretary for economic affairs at the U.S. Department of Commerce. Dr. Cooper is a director of Texas Security Bank.

 

William R. Granberry, Age 66, Class III

 

Director since 2005. Mr. Granberry is a member of Compass Operating Company, LLC. From 1999 to 2004 he managed investments and consulted with oil and gas companies. He is a director of Legacy Reserves GP, LLC and Manor Park, Inc.

 

William G. Lowrie, Age 65, Class III

 

Director since 2003. Mr. Lowrie is a retired deputy chief executive officer of BP Amoco PLC, where he spent his entire 33-year career holding various positions of increasing responsibility at Amoco. Mr. Lowrie is a director of The Ohio State University Foundation.

 

Directors Whose Terms Expire At The Annual Meeting In 2011

 

Joseph R. Cleveland, Age 64, Class I

 

Director since 2008. Mr. Cleveland was the Chief Information Officer of Lockheed Martin Corporation from 2001 to 2008. He was also President of Lockheed Martin Enterprise Information Systems from 1995 to 2008.

 

Juanita H. Hinshaw, Age 64, Class I

 

Director since 2004. Ms. Hinshaw was senior vice president and chief financial officer of Graybar Electric Company from 2000 to 2005. Prior to joining Graybar Electric Company, she was with Monsanto Company for fifteen years. Ms. Hinshaw is a director of Insituform Technologies, Inc. and SYNERGETICS USA, INC.

 

Frank T. MacInnis, Age 62, Class I

 

Director since 1998. Mr. MacInnis has been chairman of the board and chief executive officer of EMCOR Group, Inc. since 1994. Mr. MacInnis is also chairman of the board and chief executive officer of ComNet Communications, Inc. He is a director of ITT Inc. and the Greater New York Chapter of the March of Dimes.

 

Steven J. Malcolm, Age 60, Class I

 

Director since 2001. Mr. Malcolm has been chairman of the board and chief executive officer of Williams since 2002. He was president and chief operating officer of Williams from September 2001 to 2002 and an executive vice president from May 2001 to September 2001. Mr. Malcolm was president and chief executive officer of Williams Energy Services, LLC, a subsidiary of Williams, from 1998 to 2001 and senior vice president and general manager of Williams Field Services Company, a subsidiary of Williams, from 1994 to 1998. Mr. Malcolm is a director of Williams Partners GP LLC, the general partner of Williams Partners L.P., Williams Pipeline GP LLC, the general partner of Williams Pipeline Partners L.P., BOK Financial Corporation and Bank of Oklahoma N.A.

 

Janice D. Stoney, Age 68, Class I

 

Director since 1999. Ms. Stoney retired as an executive vice president from U S WEST Communications, Inc. in 1992. Ms. Stoney is a director of Whirlpool Corporation.

 

General

 

Our Board is committed to sound corporate governance practices. Our Board believes that strong corporate governance is critical to achieving our performance goals, and to maintaining the trust and confidence of investors, employees, suppliers, business partners, regulatory agencies and other stockholders. Our Board has established broad corporate policies and has the responsibility for our overall performance and the operation of the Company by the Chief Executive Officer (“CEO”) and other officers.

 

Corporate Governance Guidelines

 

Our Corporate Governance Guidelines provide a framework for the governance of Williams and address the operation and structure of the Board, committees of the Board and other Board practices. The Corporate Governance Guidelines are reviewed at least annually by the Nominating and Governance Committee. The Corporate Governance Guidelines are available on our website at http://www.williams.com from the Corporate Responsibility/Corporate Governance/Guidelines tab.

 

Meeting Preparation and Participation

 

Our Board members actively participate in Board and committee meetings. Generally, materials are distributed to our Board members one week in advance of each regular Board meeting. To facilitate active participation, Board members are expected to review the materials in advance of the meetings.

 

Strategic Planning

 

During the year, the Board meets with management to discuss and approve strategic plans, financial goals, capital spending and other factors critical to successful performance. A mid-year review of progress on objectives and strategies is also conducted. During Board meetings, directors review key issues and financial performance. The Board meets privately with the CEO six times per year and meets in executive session at each regular Board meeting and additionally as required. Further, the CEO communicates regularly with the Board on important business opportunities and developments. In 2008, the Board also held one of its regularly scheduled meetings at one of our field locations to further the directors’ education about our operations.

 

Board/Committee/Director Evaluations

 

The Board and each of the Board committees conduct annual self-assessments. The Nominating and Governance Committee also conducts individual director evaluations of all directors on an annual basis.

 

Chief Executive Officer Evaluation and Management Succession

 

The Board annually sets the CEO’s performance goals and objectives and meets in executive session to assess the CEO’s performance. The Board maintains a process for planning orderly succession for the CEO and other executive officer positions and oversees executive officer development and succession.

 

Lead Director

 

Mr. W. R. Howell currently serves as the Lead Director. The Lead Director presides over executive sessions of the non-employee directors, consults with our chairman of the Board and our corporate secretary to establish an agenda for each Board meeting, oversees the flow of information to the Board and acts as liaison between the non-employee directors and management.

 

Executive Sessions of Non-Employee Directors

 

Non-employee directors meet without management present at each regularly scheduled Board meeting. Additional meetings may be called by the Lead Director in his discretion or at the request of the Board. The Lead Director presides over meetings of the non-employee directors.

 

Committees of the Board

 

In accordance with our by-laws, the Board annually elects from its members, the members and the chairman of each committee. The Board has adopted charters for each of the standing committees of the Board. The standing committees report to the full Board at each regular Board meeting.

 

Director Independence

 

The Board has adopted director independence standards, which are available as an attachment to our Corporate Governance Guidelines available on our website at http://www.williams.com from the Corporate Responsibility/Corporate Governance/Guidelines tab.

 

The Board has affirmatively determined that each of Mr. Cleveland, Dr. Cooper, Mr. Engelhardt, Mr. Granberry, Mr. Green, Ms. Hinshaw, Mr. Howell, Dr. Lillis, Mr. Lorch, Mr. Lowrie, Mr. MacInnis and Ms. Stoney is an “independent director” under the current Listing Standards of the NYSE and our director independence standards. In so doing, the Board determined that each of these individuals met the “bright line” independence standards of the NYSE and our director independence standards. In addition, the Board considered transactions and relationships between each director and any member of his or her immediate family and the Company and its affiliates and subsidiaries.

 

With respect to Mr. Howell, the Board considered the fact that Mr. Howell is a director of Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas, which provide services to us. In determining that the relationship was not material, the Board considered the fact that the relationship arises only from his position as a director, that he has no material interest in any of the transactions, that he had no role in any such transactions, and that such relationship would not bar independence under the NYSE Listing Standards or our director independence standards.

 

With respect to Mr. Lorch, the Board considered the fact that Mr. Lorch is a director of HSBC Finance Corporation and HSCB North America Holding Co., which provide services to us. In determining that the relationship was not material, the Board considered the fact that the relationship arises only from his position as a director, that he has no material interest in any of the transactions, that he had no role in any such transactions, and that such relationship would not bar independence under the NYSE Listing Standards or our director independence standards.

 

With respect to Dr. Lillis, the Board considered the fact that Dr. Lillis is a director of Medco Health Solutions, Inc., a company that provides services to us. In determining that this relationship was not material, the Board considered the fact that the relationship arises only from his position as a director, that he has no material interest in any of the transactions, that he had no role in any such transactions, and that such a relationship would not bar independence under the NYSE Listing Standards or our director independence standards.

 

With respect to Ms. Hinshaw, the Board considered the fact that Ms. Hinshaw is a director of Insituform Technologies, Inc. a company whose subsidiaries, Bayou Coating LLC and Bayou Companies LLC, provide services to us. In determining that the relationship was not material, the Board considered the fact that the relationship arises only from her position as a director, that she has no material interest in any of the transactions, that she had no role in any such transactions, and that the relationship would not bar independence under the NYSE Listing Standards or our director independence standards.

 

No member of our Board serves as an executive officer of any non-profit organization to which we made contributions within any single fiscal year of the preceding three years that exceeded the greater of $1 million or 2% of such organization’s consolidated gross revenues. Further, in accordance with our director independence

standards, the Board determined that there were no discretionary contributions to a non-profit organization with which a director, or a director’s spouse, has a relationship that impacts the director’s independence.

 

The Board determined that Mr. Malcolm is not independent because he is an executive officer of the Company.

 

Transactions with Related Persons

 

The Board has adopted written policies and procedures with respect to related person transactions. The policies and procedures are part of the Audit Committee charter. The Audit Committee is responsible for reviewing each transaction with related persons, promoters and certain control persons that are required to be disclosed in our filings with the SEC. The chair of the Audit Committee is responsible for reviewing related person transactions in the event it is impractical to convene an Audit Committee meeting prior to entering into a related person transaction. The Audit Committee or the chair, in good faith, shall approve only those related person transactions that are in, or not inconsistent with, our best interests and the best interests of our stockholders. Any proposed related person transaction involving a member of the Board shall be reviewed and approved by the full Board. During 2008, there were no transactions that required review or approval by the Audit Committee or the full Board in accordance with the policy.

 

Majority Vote Standard

 

Our Board has adopted a majority vote standard for the election of directors in uncontested elections. The Board also provides for director resignations in the event a director fails to receive a majority of the votes cast in an uncontested election. We hold an irrevocable resignation for each director. If a director fails to receive the required votes for election, the Nominating and Governance Committee will act on an expedited basis to determine whether to accept the resignation. The Nominating and Governance Committee will then submit its recommendation for consideration by the Board. The Board will act on the recommendation and publicly disclose its decision within 90 days from the date of the certification of the election results. The Board expects the director whose tendered resignation is under consideration to abstain from participating in any decision regarding that tendered resignation. The Nominating and Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s tendered resignation. If the Board accepts a director’s tendered resignation, the Nominating and Governance Committee shall recommend to the Board whether to fill such vacancy or reduce the size of the Board.

 

Director Attendance at Annual Meeting of Stockholders

 

We have a policy regarding Board member attendance at our annual meeting of stockholders. All Board members are expected to attend our annual meeting of stockholders. Twelve of the 13 of the then-current Board members attended the 2008 annual meeting of stockholders.

 

Communications with Directors

 

Any stockholder or other interested party may communicate with our directors, individually or as a group, by contacting our corporate secretary or the Lead Director. The contact information is maintained on the Investor page of our website at http://www.williams.com.

 

The current contact information is as follows:

 

The Williams Companies, Inc.
One Williams Center, MD 47
Tulsa, Oklahoma 74172
Attn: Lead Director

 

The Williams Companies, Inc.
One Williams Center, MD 47
Tulsa, Oklahoma 74172
Attn: Corporate Secretary
Email: lafleur.browne@williams.com

 

All such communications will be forwarded to the relevant director(s) except for solicitations or other matters not related to our Company.

 

Code of Ethics

 

We have adopted a code of ethics specific to the NEOs. The Code of Ethics for Senior Officers was filed with the SEC as Exhibit 14 to our annual report on Form 10-K for the year ended December 31, 2003. In addition, we have adopted a code of business conduct that is applicable to all employees and directors. The Code of Ethics for Senior Offices and the Williams Code of Business Conduct are available on the Company’s website at http://www.williams.com on the Corporate Responsibility/Corporate Governance/Ethics & Compliance Program tab.

 

How to Obtain Copies of our Governance-Related Materials

 

Copies of our Corporate Governance Guidelines, Code of Ethics for Senior Officers, the Williams Code of Business Conduct and the charters for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee are available on our website at http://www.williams.com on the Corporate Responsibility/Corporate Governance tab. Copies of these documents are also available in print to any stockholder who requests them by sending a written request to our corporate secretary at The Williams Companies, Inc., One Williams Center, MD 47, Tulsa, Oklahoma 74172.

 

Board Meetings

 

The full Board met 14 times in 2008. Further, the non-employee directors met six times without the chairman of the Board and CEO present. No director attended fewer than 75% of the aggregate of the Board and applicable committee meetings held in 2008.

 

Board Committees

 

The Board has four standing committees: Audit, Compensation, Finance and Nominating and Governance. The Board has also established an ad hoc Litigation committee. Each standing committee’s written charter, as adopted by the Board, is available on the Company’s website at http://www.williams.com.

 

Board Committee Membership and Number of Meetings in 2008

 

The following is a description of each of the committees, committee membership and number of committee meetings in 2008.

 

 

 

 

Audit Committee

 

Williams has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Audit Committee:

 

 

Our Board has determined that all members of the Audit Committee are “financially literate” as defined by the rules of the NYSE and that Ms. Juanita H. Hinshaw and Mr. Irl F. Engelhardt qualify as “audit committee financial experts” as defined by the rules of the SEC. No Audit Committee member serves on more than three public

company audit committees. Each member of the Audit Committee is independent within the meaning of the NYSE Listing Standards, Rule 10A-3 of the Exchange Act and the Company’s director independence standards.

 

Compensation Committee

 

The Compensation Committee oversees and directs the design and implementation of strategic compensation programs for our NEOs that align the interests of our NEOs with those of our stockholders. The Compensation Committee’s key responsibilities include:

 

 

Compensation decisions for executives, which include NEOs, are reviewed and approved by the Compensation Committee. The Compensation Committee has strategic and administrative responsibility to compensate NEOs effectively and in a manner consistent with our compensation strategy.

 

The Compensation Committee has retained the services of Frederic W. Cook & Co., an independent executive compensation consulting firm. The independent compensation consultant:

 

 

The independent compensation consultant was selected by the Compensation Committee and reports to the chairman of that Committee. The agenda for meetings of the Compensation Committee is determined by its Chairman with the Senior Vice President, Strategic Services and Administration and Chief Administrative Officer (“CAO”). The CEO and the CAO are invited to attend the Compensation Committee meetings, though they leave the room during discussions and deliberations of individual compensation actions affecting them personally. The Company’s Compensation and Benefits department supports the Compensation Committee in its duties and, along with the CEO, may be delegated authority to fulfill certain administrative duties regarding the compensation programs. The Compensation Committee has authority under its charter to retain, approve fees for and terminate advisors, consultants and agents as it deems necessary to assist in the fulfillment of its responsibilities. The Compensation Committee reviews the total fees paid to outside consultants by the Company to ensure that the consultant maintains its objectivity and independence when rendering advice to the Committee. For more information on the Compensation Committee, please see the Compensation Discussion and Analysis in this proxy statement.

Frederic W. Cook & Co., the same independent compensation consultant that provides services to the Compensation Committee, also provides competitive market data and advice to the Nominating and Governance Committee on non-employee director compensation.

 

Each member of the Compensation Committee is independent within the meaning of the NYSE Listing Standards and the Company’s director independence standards.

 

Finance Committee

 

The Finance Committee provides oversight to the finance and investments functions of the Company. The Finance Committee:

 

 

Nominating and Governance Committee

 

The Nominating and Governance Committee:

 

 

Each member of the Nominating and Governance Committee is independent within the meaning of the NYSE Listing Standards and the Company’s director independence standards.

 

Consideration of nominees.  For Board membership, the Nominating and Governance Committee considers the appropriate balance of experience, skills and characteristics that best suits our needs and the needs of our stockholders. The Nominating and Governance Committee develops long-term Board succession plans to ensure that the appropriate balance is maintained. The process for electing director nominees entails making a preliminary assessment of each candidate based upon his/her resume and other biographical information, his/her willingness to

serve and other background information. This information is then evaluated against the criteria set forth below, as well as the specific needs of the Company at that time. Qualified candidates are interviewed by the chairman of the Board and at least one member of the Nominating and Governance Committee. Candidates may then meet with other members of the Board and senior management. At the conclusion of this process, if it is determined that the candidate will be a good fit, the Nominating and Governance Committee will recommend the candidate to the Board for election at the next annual meeting. If the director nominee is a current Board member, the Nominating and Governance Committee also considers prior Williams Board performance and contributions. The Nominating and Governance Committee uses the same process for evaluating all candidates regardless of the source of the nomination.

 

Qualifications of nominees.  The minimum qualifications and attributes that the Nominating and Governance Committee believes must be possessed by a director nominee include:

 

 

All of the director nominees are current elected members of the Board. The Nominating and Governance Committee has in the past and may in the future engage the assistance of third parties to identify and evaluate potential director nominees, as it deems appropriate.

 

Stockholder nominations.  The Nominating and Governance Committee will consider written recommendations from stockholders for director nominations. If you wish to nominate a candidate, please forward the candidate’s name and a detailed description of the candidate’s qualification, a document indicating the candidate’s willingness to serve and evidence of the nominating stockholder’s ownership of the Company’s shares to: Corporate Secretary, One Williams Center, MD 47, Tulsa, Oklahoma 74172. A stockholder wishing to nominate a candidate must also comply with the notice and other requirements described above under the question “May I propose actions for consideration at next year’s meeting of stockholders?”

 

The following table sets forth information as of December 31, 2008, concerning beneficial ownership by holders of five percent or more of our common stock. Unless otherwise indicated, the persons named have sole voting and investment power with respect to the shares listed.

 

 

 

The following table sets forth, as of February 27, 2009, the number of shares of our common stock beneficially owned by each of our directors and nominees for directors, by the NEOs and by all directors and executive officers as a group.

 

 

 

 

Section 16(a) of the Exchange Act requires the Company’s directors and certain of its officers to file reports of their ownership of the Company’s Common Stock and of changes in such ownership with the SEC and the NYSE. Regulations also require the Company to identify in this proxy statement any person subject to this requirement who failed to file any such report on a timely basis.

 

To the Company’s knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations from certain reporting persons, we believe that all of our officers, directors and greater than 10% stockholders complied with all Section 16(a) filing requirements applicable to them during the fiscal year ended December 31, 2008.

 

This Compensation Discussion and Analysis seeks to explain our executive pay program to our stockholders. We continuously work to ensure that the features of our pay program are fulfilling the objectives we established when designing them. The main objective of our executive pay program is to reward executives for creating value for stockholders, consistent with the Company strategy and the following pay principles:

 

 

We use different forms of pay to achieve our objectives. These forms of pay include base pay, annual cash incentives, long-term incentives in the form of equity, and benefits. Each form of pay accomplishes different objectives. Dividing the total pay awarded to NEOs among these various forms helps us to achieve a balance to better accomplish our goals and avoids placing too much value in any one element.

 

We follow a consistent process in determining the amounts of each form of pay for our NEOs. Our Compensation Committee plays a key role in this process by providing oversight and making decisions about executive pay. For NEOs other than the CEO, management and the CEO make recommendations to the Compensation Committee. NEOs other than the CEO have no role in setting pay for NEOs. The Compensation Committee has engaged an independent compensation consultant to advise it in making executive pay decisions for the CEO and the other NEOs.

 

When considering how much to pay and what form of pay should be used, our Compensation Committee considers internal equity and pay information from a group of comparator companies. To supplement that information, market data from executive compensation surveys is used to validate the reasonableness of the information gathered from the comparator group.

 

After the pay information has been reviewed and discussed, a range for base pay for each position is set. The actual base pay for each NEO can be set above or below the median for this range due to the experience, skills, and sustained performance of the individual NEO.

The target opportunity to earn annual cash incentives is also set after considering market data and internal equity. The actual cash incentive paid to NEOs varies based upon achievement of business goals and individual performance. We use Economic Value Added^® (EVA^®) as the measure of attainment of business goals.

 

We also grant long-term incentives to NEOs in the form of equity, including stock options, time-based restricted stock units and performance-based restricted stock units. Like the other forms of pay, a variety of factors, including the competitive market, the NEO’s impact on our Company, and the NEO’s performance, are used in determining the value of long-term incentives. Granting different forms of equity is intended to achieve different purposes, including aligning the interests of NEOs with the long-term interests of stockholders, facilitating executive ownership of Company stock, driving performance, and providing a retention element to our pay program.

 

We have adopted policies that further the goals of our executive pay program and also mitigate excessive risk taking by our NEOs, including a recoupment policy, stock ownership guidelines, and we discourage derivative transactions linked to our Company’s common stock. We do not enter into employment agreements with our NEOs, but we do provide a change in control program.

 

During 2008, we continued to focus on growing our business and creating stockholder value through our Game Plan for Growth strategy. Our pay program objective is to reward our NEOs and employees for successfully implementing our strategy. We use EVA^® as the tool to measure our success. We believe that EVA^® aligns NEOs and employees’ interests with stockholders’ interests. Improving EVA^® means creating sustainable value for our stockholders. Our NEOs and employees are rewarded for improving EVA^®.

 

What is EVA^®?

 

EVA^® measures the value created by a company. Simply stated, it is the financial return in a given period less the capital charge for that period. The calculation we use is as follows:

 

 

Generating profits in excess of both operating and capital costs (debt and equity) creates positive EVA^®. If EVA^® is positive, value has been created. The objectives of our EVA^®-based incentive programs are to provide:

 

 

Using EVA^® creates a mind-set in our organization that all activities and incentives should focus on creating economic value for stockholders.

 

Game Plan for Growth

 

Our goal is to create sustainable growth and stockholder value by creating positive EVA^®. In order to accomplish this, in early 2006 we set ambitious three-year goals that we refer to as the Game Plan for Growth. The performance of our NEOs and other employees is measured by progress made towards these goals. Individual

adjustments within our annual cash incentive plan are based on each NEO’s contributions to the Game Plan for Growth. The goals to be achieved by 2009 were as follows:

 

 

Over the past three years, we have achieved or exceeded each of these goals except falling short of being included in the top 25 percent of comparable companies in total return to stockholders two out of three years. Our success in executing the Game Plan for Growth led to the creation of significant positive EVA^® and contributed to the following accomplishments in 2008:

 

 

 

Our Pay Philosophy throughout the entire organization is to be competitive in the marketplace while also considering the value a job provides to the Company. In doing so, we seek to motivate high performance that produces returns for stockholders that are higher than they would earn by investing in other companies. We believe linking EVA^® to what we pay NEOs helps ensure that the decisions we make are aligned with what is best for stockholders. Our pay programs also reward NEOs for the way they accomplish our goals to better ensure we reward the right behavior and the right results in the context of business and enterprise strategies while fostering a culture of collaboration and teamwork. This forms the basis of our pay-for-performance philosophy.

 

The principles of our pay philosophy influence the design and administration of our pay programs. Decisions about how we pay NEOs are based on these principles. The Compensation Committee uses several different types of pay that are linked to both our short-term and long-term performance in the executive pay program. Included are base pay, annual cash incentives, long-term incentives and benefits. The role of pay is to attract and retain the talent needed to drive stockholder value and help each of our businesses meet or exceed financial and operational performance targets. The chart below illustrates the linkage between the types of pay we use and our pay principles. Further, it creates an understanding of the amounts reported in the 2008 Summary Compensation Table in this Compensation Discussion and Analysis.

 

 

Mitigating Risk

 

Many elements of our executive compensation program serve to mitigate excessive risk taking. Several of the key factors include:

 

 

 

 

 

Our pay program is intended to motivate NEOs to achieve business objectives that generate stockholder returns while acting in ways that are consistent with our values.

 

Setting pay is an annual process that occurs during the first quarter of the year. A review is done to ensure that we are (1) paying competitively (2) paying equitably and (3) paying in a way that encourages and rewards for performance that exceeded expectations. We follow the underlying principles of our pay philosophy as shown in the chart below. The size of the circles in the chart denotes the degree to which the underlying factors of our pay principles impact the pay awarded to the NEOs.

 

When setting pay we determine a target pay mix (distribution of pay among different forms of pay) for the NEOs. The average target pay mix for all NEOs is illustrated below. Consistent with our pay-for-performance philosophy, the actual amounts paid, excluding benefits, are determined based on individual and Company performance. Because performance is a factor, the target and actual pay mix will vary specifically as it relates to the annual cash incentives.

 

 

Role of Management

 

In order to make pay recommendations, management provides the CEO with data from the annual proxy statements of companies in our comparator group along with pay information compiled from executive and industry related salary surveys that are nationally recognized. The survey data is used as a supplemental data point as well as a reference for validating the reasonableness of the information gathered from the comparator group.

 

Role of the CEO

 

Before making base pay and long-term incentive decisions, our CEO reviews the competitive market information for the other NEOs. After considering the market data, the CEO takes into account internal equity and individual performance and recommends base pay and long-term incentive awards to the Compensation Committee.

 

For our annual cash incentive plan, the CEO’s recommendation is based on EVA^® attainment with an adjustment for individual performance. Individual performance includes business unit EVA^® results for the business unit leaders, achievement of goals including those in the Game Plan for Growth, and demonstration of key leadership competencies (see leadership competencies in the section entitled “Base Pay” in this Compensation Discussion and Analysis). The modifications made are fairly modest. For 2008 the adjustments made to the NEOs annual cash incentive awards were on average less than 4%.

 

Role of the Other NEOs

 

Our other NEOs have no role in setting compensation for any of the NEOs.

 

Role of the Compensation Committee

 

For all NEOs, except the CEO, the Compensation Committee reviews the CEO’s recommendations, supporting market data, and individual performance assessments. Before the Compensation Committee determines the pay, their independent compensation consultant, Frederic W. Cook & Co., Inc., reviews all of the data and advises on the reasonableness of the pay recommendations.

For the CEO, the Board meets in executive session without management present to review the CEO’s performance. In this session, the Board reviews:

 

 

The Compensation Committee uses these evaluations and competitive market information provided by its independent compensation consultant to determine the CEO’s base pay, annual cash incentive target, long-term incentive amounts and performance adjustments to be made to his annual cash incentive payment.

 

Role of the Independent Compensation Consultant

 

In 2007, the Compensation Committee engaged Frederic W. Cook & Co., Inc. to assist it in determining or approving the compensation for our NEOs. Frederic W. Cook & Co., Inc. also assists the Nominating and Governance Committee with regard to determining nonemployee director compensation but otherwise does no other work for the Company. Please refer to the section “Corporate Governance and Board Matters — Board and Committee Structure and Meetings — Compensation Committee” of this proxy statement for a discussion of the independent compensation consultant.

 

To assist the Compensation Committee in discussions and decisions about compensation for our CEO, the Committee’s independent compensation consultant presents competitive market data that includes proxy data from the approved comparator group and published compensation data, using the same surveys and methodology used for our other NEOs (described in the “Role of Management” section in this Compensation Discussion and Analysis). Our comparator group is developed by the Committee’s independent compensation consultant, with input from management, and is approved by the Compensation Committee.

 

 

This year’s comparator group includes 18 companies (see below), consisting of a mix of both direct competitors and similar-sized companies within the broader energy industry.

 

 

Each year the Compensation Committee reviews the comparator group to validate the list of comparator companies and make any changes if appropriate. The 2007 comparator group continued to be appropriate in terms of size and business for Williams’ executive officer pay comparisons in 2008. However, KeySpan was acquired by National Grid in 2007 and, as a result, was no longer available for comparison going forward.

 

For 2009, the Compensation Committee approved a revised comparator group. The 2008 group consists of companies in the broader energy industry. The group used for 2009 pay decisions puts more focus on companies that work in the same industry segment and reflect where we compete for business and talent.

 

Objectives of our Comparator Group

 

To determine competitive total pay levels, we use our comparator group when we consider the amount and form of pay used by competitors as well as how competitors divide pay among the various forms. Through the use of

publicly available financial measures, we review our comparator group to validate the design of our incentive plans and test the pay and performance relationship of our NEOs.

 

Size Reflects Company’s Business and Complexity

 

We consider a range of revenues, assets, and market capitalization when selecting companies for our comparator group. This results in compensation that is appropriately scaled and reflects comparable complexities in business operations.

 

Industry and Business Operations Similarities

 

In order to provide reasonable performance comparisons, our comparator group companies operate within the same industry and/or face similar business challenges and opportunities. Business consolidation and unique operating models today create some challenges in identifying comparator companies. As a result, we take a broader view of comparability to include organizations that are similar in some, but not all, respects.

 

Sufficient Number of Companies

 

Our comparator group contains a sufficient number of companies to facilitate valid comparisons. We target 15 to 25 companies as the number of companies to use in order to have a valid comparator group.

 

The compensation data of our comparator group is the primary market data we use when benchmarking the competitive pay of our NEOs. Aggregate market data obtained from recognized third party executive compensation survey companies (e.g. Towers Perrin, Mercer, Hewitt) is used to supplement and validate comparator group market data. We typically obtain a range of annual revenues of the companies whose data is included in the aggregate analysis provided by the third party survey, but the identities of the specific companies included in the survey are not disclosed.

 

Because setting pay is not an exact science, the Compensation Committee uses comparator group data and compensation surveys as reference points in considering total pay packages for NEOs. Since this market data alone does not reflect the strategic competitive value of our roles within the Company, internal pay equity is also considered when making pay decisions. Because we take on an enterprise-wide perspective to promote collaboration and ensure our overall success, paying the NEOs equitably is important. Other considerations used when making pay decisions for the NEOs includes reviewing historical pay and tally sheets that include annual pay and benefit amounts. The Compensation Committee also reviews wealth accumulated over the past five years and the total aggregate value of all equity awards and holdings of the NEOs.

 

Base Pay

 

Base pay serves as the foundation of our pay program. We use base pay to compensate our NEOs for carrying out duties of their jobs. Most other major components of pay are determined based on a relationship to base pay, including annual and long-term incentives, termination payments, and retirement benefits.

 

Base pay for the NEOs, including the CEO, is set considering the market median, with potential individual variation from the median due to experience, skills, and sustained performance of the individual as part of our pay-for-performance philosophy. Performance is measured in two ways; through the “Right Results” obtained in the “Right Way.” Right Results is an assessment of the NEOs’ success in attaining their annual goals as they relate to the Game Plan for Growth, business unit strategies, and personal development plans. Right Way reflects the NEOs’ behavior as exhibited through our leadership competencies. The following table contains our twenty leadership competencies grouped within five key areas.

 

 

The base pay increases made in early 2008 as well as the percentage of the market median is shown below. We believe that both the ratio of base pay of our NEOs to the market median and the percent increase given are appropriate when we consider experience, skills, sustained performance and the amount of pay to be at risk.

 

 

Annual Cash Incentives — Target

 

We pay annual cash incentives to encourage and reward our NEOs for making decisions that improve our performance as measured by EVA^®.

 

Similar to base pay, the starting point to determine annual cash incentive targets (expressed as a percent of base pay) is competitive market information. The market information gives us an idea of what other companies target to pay in annual cash incentives for similar jobs. The internal value of the job is then considered before the target is set for the year. We define the internal value of a job to be how important the job is to executing our strategy compared to the importance of other jobs in the Company. The annual cash incentive targets as a percentage of base pay for the NEOs in 2008 are as follows:

 

Annual Cash Incentives — Actual

 

Since we implemented EVA^® in 2004, the annual cash incentive plan has been funded upon attainment of an established EVA^® target. Applying EVA^® measurement to this annual cash incentive process encourages management to make business decisions that help drive long-term stockholder value. To determine the funding of the annual cash incentive, we use the following calculation for each NEO:

 

 

Actual payments may be adjusted upwards to recognize individual performance that exceeded expectations, which include success toward our Game Plan for Growth and individual goals and successful demonstration of the leadership competencies discussed above. Payments may also be adjusted downwards if performance so warrants.

 

How We Set the EVA^® Goals

 

Setting the EVA^® goals for the annual cash incentive plan begins with an internal budgeting and planning process. The rigorous process includes an evaluation of the challenges and opportunities for the Company as well as each of our business units. The key steps in the process are as follows:

 

 

2008 EVA^® Goal for the Annual Cash Incentive Plan

 

The attainment percentage of EVA^® goals results in payment of annual cash incentives along a continuum between threshold and stretch levels, which corresponds to 0% through 200% of the NEO’s annual cash incentive target. As approved by the Compensation Committee, for every $108 million change in EVA^® the payout level increases/decreases by 100% up to a maximum of 400%. If EVA improvement exceeds 200%, any payout is placed in a reserve. Reserve payments are made annually if future performance thresholds are met, but in no event will the payout level exceed the capped level of 400%. Shown in the chart below are the EVA^® improvement goals for the 2008 annual cash incentive and the resulting payout level:

 

 

Based on EVA^® performance relative to the established goals, the Compensation Committee certified performance results of $212 million in EVA^® improvement and approved payment of the annual cash incentive plan at 160% of target. While our stock price declined late in the year primarily due to poor stock market performance and declining commodity prices, EVA^® results reflect our strong full year 2008 performance results.

 

How the Annual Cash Incentive Plan Works

 

If EVA^® exceeds our stretch goal of 200%, the annual cash incentive pool will fund up to a maximum of 400% of target for NEOs. Any award earned above 200% of target is not paid out in cash but instead is placed in a reserve, which is at risk for future performance. This means the reserve amounts will be paid only if future EVA^® threshold

levels are met. If threshold performance is not met, a portion of the reserve balance is subject to forfeiture. In years where threshold EVA^® performance is met, one-third of the reserve balance is paid in cash. If the NEO leaves due to retirement, death or long-term disability, reserve payments may be made to him at the same time payments are made to other NEOs. If the NEO leaves for any other reason, the reserve balance is forfeited at that point. No interest is applied to the reserve balance, and NEOs have no vested right to the balance.

 

The EVA^® Calculation

 

EVA^® is first calculated as previously discussed, NOPAT less Capital Charge. Our incentive program allows for adjustments to be made to EVA^® calculations to reflect extraordinary items. After an analysis of companies that utilize EVA^® as an incentive measure, we determined that it is standard practice to make adjustments to EVA^® calculations to create better alignment with stockholders.

 

When determining which adjustments are appropriate, we are guided by the principle of ensuring that incentive payments do not result in unearned windfalls or undue penalties to NEOs. In other words, we make adjustments to ensure NEOs are not rewarded for positive results they did not take action to create nor are they penalized for certain unusual circumstances outside their control. We believe the adjustments improve the alignment of incentives with stockholder value creation and ensure EVA^® is an incentive measure that effectively encourages NEOs to take actions to create value for stockholders. The categories of adjustments to our EVA^® calculation are:

 

 

Management as well as the Compensation Committee’s outside independent compensation consultant test our relative performance on various measures, including total stockholder return, earnings per share and cash flow, to the industry comparator group to ensure our EVA^® performance is consistently delivering stockholder value. The Compensation Committee uses this analysis to validate our EVA^® results.

 

The annual cash incentive plan satisfies the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and is therefore a tax deductible expense. For payments under our annual cash incentive plan to be considered performance-based compensation under Section 162(m), the Compensation Committee can only exercise negative discretion relative to actual performance when determining the amount to be paid. In order to ensure compliance with Section 162(m), the Compensation Committee has established a target in excess of the maximum individual payout allowed to NEOs under our annual cash incentive plan. Reductions are made each year and are not a reflection of the performance of the NEOs but rather ensure flexibility with respect to paying based upon performance.

 

Long-Term Incentives

 

Long-term incentives are provided in the form of equity and include stock options, time-based restricted stock units and performance based restricted stock units. We provide long-term incentives to reward performance and align NEOs with long-term stockholder interests by giving NEOs an ownership stake in the Company, encouraging sustained long-term performance, and providing a retention element.

 

To determine the value for long-term incentives granted to NEOs each year we consider the following factors:

 

 

 

The allocation of our long-term incentive program for 2008 is shown in the chart below. The long-term incentive mix for the CEO differs from the other NEOs due to the desire to have 100% of his long-term incentives be performance-based. Because the CEO has a greater ability to influence financial results, the Compensation Committee considers it appropriate that 100% of his long-term incentives are directly tied to performance based upon our pay or-performance philosophy.

 

 

The primary objectives for each type of equity awarded are shown below. The size of the circles in the chart denotes the degree to which the equity type aligns with our objectives.

 

 

As shown above, performance-based awards and stock options have the strongest stockholder alignment. Because of this, we believe that it is necessary the NEOs have a greater portion of their long-term incentive mix tied to these equity vehicles.

 

Stock Option Awards

 

For participants, stock options have value only to the extent the price of our common stock on the date of exercise exceeds the price at the time the options were granted (in other words, the stock price must increase for stock options to have value).

 

Time-Based Restricted Stock Units

 

Time-Based Restricted Stock Unit grants were introduced in 2002, primarily as a retention device during a period of uncertainty and instability in our executive population. We continue to use this type of equity for retention purposes due to continued volatility in the industry and executive movement. In addition to retention, time-based restricted stock units facilitate stock ownership.

Performance-Based Restricted Stock Units

 

To further strengthen the relationship between pay and performance, the performance-based restricted stock units are earned only upon our attaining specific EVA^® goals and the NEO’s continued employment. Shown in the chart below are the EVA^® improvement goals for the performance-based restricted stock units for the 2006 to 2008 performance period and the resulting payout level:

 

 

Based on EVA^® performance relative to the established goals, the Compensation Committee certified performance results of $440 million in EVA^® improvement for the 2006 to 2008 performance period and approved payment of the performance-based restricted stock units at 150% of target.

 

EVA^® created over a three-year period is used as a long-term performance measure to further drive and reinforce actions leading to desired EVA^® results and to extend this focus over multiple years. This longer-term EVA^® focus is intended to help achieve sustained financial improvement and align with longer-term stockholder interest.

 

In developing three-year performance goals the Compensation Committee considers circumstances facing the Company and each business unit, as well as challenges facing the industry. Achieving EVA^® goals at a minimum or the threshold level is required for these awards to begin to be earned. Our intent is to establish three-year EVA^® goals where each year the probability or level of difficulty to achieve target is consistent. In setting these goals, we expect that the performance will be at or below the threshold level (to achieve no payout) about 10-20% of the time, that the performance will be at or above the stretch level (to achieve a maximum or 200% payout) about 10-20% of the time, and that performance will range between the threshold level to stretch level (to achieve a 0% to 200% payout) about 70-80% of the time.

 

For awards granted in 2008, the three-year performance measure is the cumulative EVA^® goals for 2008 through 2010. The cumulative EVA^® goals were set during 2008 and will be certified at the end of the period when the Compensation Committee reviews progress toward EVA^® goals over the three-year period. When calculating EVA^® performance over the three-year period, the Compensation Committee will consider adjustments using a process and criteria similar to that described under “Annual Cash Incentives — The EVA^® Calculation” in this Compensation Discussion and Analysis. However, individual performance is not considered in determining the actual number of shares earned.

 

Grant Practices

 

We typically make our annual equity grant in February or early March of each year. The Compensation Committee meets at least two days after the annual earnings release to approve the grants. The Compensation Committee approves all equity grants to NEOs and the grant date for such awards is on or after the date of such approval in order to ensure the market has time to absorb material information disclosed at the time of the earnings release and reflect that information in the stock price.

 

The grant date for off-cycle grants for individuals that are not NEOs, for reasons such as retention or new hires, is the first business day of the month following the approval of the grant. The purpose of this approach is to remove option grant timing from the influence of the release of material information.

 

Accounting and Tax Treatment

 

We consider the impact of accounting and tax treatment when designing all aspects of pay, but the primary driver of program design is the support of business objectives. Stock options and performance-based restricted stock units are intended to satisfy the requirements for performance-based compensation as defined in Section 162(m) of

the Code and are therefore considered a tax deductible expense. Time-based restricted stock units do not qualify as performance-based and may not be fully deductible.

 

Benefits

 

Consistent with the Compensation Committee’s philosophy to maximize pay at risk, our NEOs receive very few perquisites (perks) or supplemental benefits. The perks they receive are as follows:

 

 

In addition to establishing the pay elements described above, we have adopted a number of policies to further the goals of the executive compensation program, particularly with respect to strengthening the alignment of our NEOs’ interests with stockholder long-term interests.

 

Recoupment Policy

 

In 2008, the Compensation Committee approved a recoupment policy to allow the Company to recover incentive-based compensation from NEOs in the event we are required to restate our financial statements due to fraud or intentional misconduct. The policy provides the Board discretion to determine situations where recovery of incentive pay is appropriate.

Stock Ownership Guidelines

 

In 2005, the Board adopted stock ownership guidelines for all NEOs. All NEOs, consistent with their responsibilities to the stockholders as a whole, must hold an equity interest in the Company. Specifically, the CEO must own an amount of stock equal to at least five years’ base pay. Other NEOs must own stock equal to at least three years’ base pay. New NEOs are allowed five years from the date of election, promotion to NEO, or commencement of employment as an NEO to accumulate the required shares. Once the requirement is met, the individual is considered to be in compliance if the NEO continues to hold the number of shares to maintain the value necessary to fulfill the requirement.

 

Annually the Compensation Committee reviews the guidelines for competitiveness and alignment with best practice and monitors the NEOs’ progress toward meeting the guidelines. The Compensation Committee maintains discretion to modify the guidelines in special circumstances of financial hardship such as illness of the NEO or a family member. All NEOs complied with the guidelines upon their adoption in 2005 and continue to own at least what is required under the guidelines.

 

Derivative Transactions

 

Our insider trading policy applies to transactions in positions or interests whose value is based on the performance or price of our common stock. Because of the inherent potential for abuse, Williams discourages employees and directors from entering into short sales or use of equivalent derivative securities. In addition, our insider trading policy requires that officers, directors, and certain key employees seeking to enter into such a transaction obtain pre-clearance.

 

Employment Agreements

 

We do not enter into employment agreements with our NEOs. We can remove a NEO prior to retirement when it is in the best interests of the Company.

 

Termination and Severance Arrangements

 

The NEOs are not covered under a severance plan; however the Compensation Committee exercises judgment and considers the circumstances surrounding the departure when deciding if a severance package is appropriate. If it is determined that a severance package is appropriate, the Compensation Committee takes into consideration the NEO’s term of employment, past accomplishments, reasons for separation from the Company, and competitive market practice. The only pay or benefits an employee has a right to receive upon termination of employment are those that have already vested or which vest under the terms in place when equity was granted. Please refer to the “Change in Control Agreements” section in this proxy statement for further discussion of termination provisions.

 

Change in Control Agreements

 

Our change in control program provides severance benefits for our NEOs. Our program includes a double trigger (requires both a change in control and termination of NEO’s employment) for benefits and equity vesting. While a double trigger for equity is not the competitive norm of our comparator group, this practice creates security for the NEOs but does not provide an incentive for the NEO to leave the Company. Our program is designed to encourage the NEOs to focus on the best interest of stockholders by alleviating their concerns about a possible detrimental impact to their compensation and benefits under a potential change in control, not to provide compensation advantages to NEOs for executing a transaction.

 

Our Compensation Committee reviews our change in control benefits annually to ensure they are consistent with competitive practice and aligned with our compensation philosophy. As part of the review, calculations are performed to determine the overall program costs to the Company if a change in control event were to occur and all covered NEOs were terminated as a result. An assessment of competitive norms including the reasonableness of the elements of compensation received is used to validate benefit levels for a change in control. In reviews of the change in control program to date, our Compensation Committee has concluded that the current benefits provided are appropriate and critical to attracting and retaining executive talent.

The following chart details the benefits received if an NEO were to be terminated following a change in control as well as an analysis of those benefits as it relates to the Company, stockholders, and the NEO. Please also see the “Change in Control Agreements” section in this proxy statement for further discussion of our change in control program.

 

 

 

Certain changes to our executive pay program have been made for 2009. Specifically, there have been changes made to our comparator group, maximum funding for our annual cash incentive plan, long-term incentive mix, and the metric used for the three-year performance-based restricted stock unit award.

 

2009 Comparator Group

 

As discussed earlier, each year the Compensation Committee reviews the comparator group to validate the list of comparator companies and make any changes if appropriate. For 2009, in addition to the comparator company criteria discussed earlier, companies were chosen if their primary business was similar to at least one of our business segments and the size of the company was similar to ours. We also made adjustments for companies that had been acquired in 2008. The comparator group for 2009 consists of the following:

 

 

2009 Annual Cash Incentive Plan

 

After review of the annual cash incentive plan, the Compensation Committee approved a change to reduce the maximum annual cash incentive pool funding from 400% to 250% and eliminated the incentive reserve for the plan beginning in 2009.

 

2009 Long-term Incentive Mix

 

In order to motivate and incent NEOs to increase stockholder value and restore some retention that has been lost due to the current economic conditions, we changed the allocation of stock awards in our long-term incentive plan for our NEOs, excluding the CEO, in 2009. We continue to deliver a larger portion of equity in performance-based awards and stock options because they have the strongest stockholder alignment. Shown below is the long-term incentive mix for 2009.

 

 

2009 Performance-based Restricted Stock Unit Metric

 

Setting a three-year EVA^® performance goal for our performance-based restricted stock units would be difficult in 2009 considering significant uncertainty surrounding the current economic environment. While we will maintain our focus on creating stockholder value through EVA^® in our annual cash incentive plan, we will use three-year relative and absolute Total Shareholder Return (TSR) metrics for our performance-based restricted stock unit awards. This design change has allowed us to remain committed to ensuring a long-term performance focus as part of our equity program.

 

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussions with management, we recommend to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

By the members of the Compensation Committee of the Board of Directors:

 

— W. R. Howell, Chairman

— Kathleen B. Cooper

— William R. Granberry

— George A. Lorch

— Frank T. MacInnis

— Janice D. Stoney

 

 

The following table sets forth certain information with respect to the compensation of the NEOs, based on total compensation excluding change in pension value and nonqualified deferred compensation earned during fiscal year 2008.

 

 

 

 

The grant date fair value of awards granted in 2008 can be found in the “Grants of Plan Based Awards in 2008” table. Beginning with equity grants made in 2007, the restricted stock units do not include the right to payment of dividends.

 

The assumptions used to value the stock awards can be found in our Annual Report on Form 10-K for the year-ended December 31, 2008.

 

 

The assumptions used to value the option awards can be found in our Annual Report on Form 10-K for the year-ended December 31, 2008.

 

The annual cash incentive and reserve amounts paid in 2009 as it relates to 2008 performance are as follows:

 

 

 

 

Notable Items

 

The Compensation Committee considers the compensation of CEOs from similarly-sized comparator companies when setting Mr. Malcolm’s pay. It is the competitive norm for CEOs to be paid more than other NEOs. In addition, the Compensation Committee believes the difference in pay between the CEO and other NEOs is consistent with our compensation philosophy (summarized in the Compensation Discussion and Analysis), which considers the external (market) and internal value of each job to the Company along with the incumbent’s experience and performance of the job in setting pay. The CEO’s job is different from the other NEOs because the CEO has ultimate responsibility for performance results and is accountable to the Board and stockholders. Consequently, the Compensation Committee believes it is appropriate for the CEO’s pay to be higher.

 

Mr. Chappel’s base pay, annual cash incentive target and long-term incentive amounts for 2008 are higher than other NEOs (other than the CEO) because of the impact of his role and market data. Because Mr. Chappel directly interfaces with stockholders and has greater accountability to stockholders his pay is greater than that of the other NEOs, excluding the CEO.

 

The following table sets forth certain information with respect to the grant of stock options, restricted stock units and awards payable under the Company’s annual cash incentive plan during the last fiscal year to the NEOs.