April 7, 2008

 

Dear Stockholders:

 

You are cordially invited to attend Masco Corporation’s Annual Meeting of Stockholders on Tuesday, May 13, 2008 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, we thank you for your continued support of Masco Corporation and look forward to seeing you on May 13.

 

Sincerely,

 

Richard A. Manoogian

Executive Chairman and

Chairman of the Board

 

MASCO CORPORATION

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Date:		May 13, 2008
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 four Class II Directors;

 

2. To ratify the selection of PricewaterhouseCoopers LLP as independent accountants to audit Masco’s financial statements for 2008; and

 

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

 

The Company recommends that you vote “For” all of the Director nominees and “For” the selection of PricewaterhouseCoopers LLP as independent accountants.

 

Stockholders of record at the close of business on March 14, 2008 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

 

Eugene A. Gargaro, Jr.

Secretary

 

April 7, 2008

 

 

 

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS OF

MASCO CORPORATION

 

May 13, 2008

 

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 13, 2008 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 7, 2008.

 

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., Inc. to assist in the solicitation of Proxies for a fee of $10,000, 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 14, 2008 are entitled to vote at the meeting. On that date, there were 362,339,136 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 been instructed by the beneficial owner how to vote on the proposal 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: Eugene A. Gargaro, Jr., 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 II Directors, consisting of Verne G. Istock, David L. Johnston, J. Michael Losh, Peter A. Dow and Timothy Wadhams, expires at this meeting. The Board proposes the re-election of Messrs. Istock and Losh and Professor Johnston. In July 2007, after Mr. Wadhams became the Company’s Chief Executive Officer, the Board appointed him to serve as a Class II Director, but his continuing service is subject to stockholder approval at the Annual Meeting. The Board is proposing the election of Mr. Wadhams as a Class II Director.

 

The term of Peter A. Dow expires effective as of this meeting, and Mr. Dow has expressed his desire to retire from the Board. Mr. Dow has served as a Director since 2001 and has chaired several Board committees. We wish to express our deep appreciation to Mr. Dow for his dedication to our Company and his diligent service as a Director.

 

The Board will consist of ten Directors upon Mr. Dow’s retirement from our Board. Upon election of the Class II 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 2009, 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 procedures 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 in 2004 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, Dow, Earley, Istock and Losh, Professor Johnston, Ms. Payne and Ms. Van Lokeren. 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 organizations’ respective 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.

 

During 2007, the Board of Directors held nine 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. All Directors attended the 2007 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 Eugene A. Gargaro, Jr., 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. Gargaro, at the above address.

 

The Audit Committee of the Board of Directors, currently consisting of Messrs. Archer, Denomme, Dow, Earley, Istock and Losh and Ms. Payne, held seven meetings during 2007. 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 Eugene A. Gargaro, Jr., Secretary, Masco Corporation, 21001 Van Born Road, Taylor, Michigan 48180.

 

The Organization and Compensation Committee of the Board of Directors, currently consisting of Messrs. Dow, Istock and Losh, Professor Johnston and Ms. Van Lokeren, held ten meetings during 2007. The Organization and 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 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, Earley and Istock, Professor Johnston and Ms. Van Lokeren, held five meetings during 2007. 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 Eugene A. Gargaro, Jr., 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 and in applicable rules of the Securities and Exchange Commission (“SEC”) regarding stockholder proposals. For a summary of these procedures, see “2009 Annual Meeting of Stockholders” below.

 

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”), which has the same material terms as the 1997 Non-Employee Directors Stock Plan that expired in 2007. 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 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 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 the date of 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 educational and cultural institutions up to an aggregate of $10,000 per year 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 2007. 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 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 2007 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 for 2007. 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.

2007 Director Compensation

 

 

 

 

The following table shows the beneficial ownership of Masco common stock as of February 29, 2008 by (i) each of the Directors, (ii) each person named in the “Summary Compensation Table,” (iii) all of our Directors and executive officers as a group, including Messrs. Barry and Foley 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.

 

 

 

 

Mr. Manoogian may be deemed a controlling person of Masco by reason of his significant ownership of Masco common stock and his positions as a Director and as Executive Chairman of Masco.

 

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, 2007, 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 Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” 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, 2007, 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, 2007 be included in its Annual Report on Form 10-K for the year ended December 31, 2007 for filing with the Securities and Exchange Commission. The Audit Committee also reappointed, subject to stockholder approval, PricewaterhouseCoopers LLP as the Company’s independent auditors.

 

Thomas G. Denomme, Chairman

Dennis W. Archer

Peter A. Dow

Anthony F. Earley, Jr.

Verne G. Istock

J. Michael Losh

Lisa A. Payne

 

We are committed to maintaining executive compensation programs that are aligned with the long-term interests of our stockholders by attracting and retaining talented senior corporate executives and motivating them 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. We also maintain retirement programs for key employees. We provide limited perquisites for our executive officers, and they also participate in the same group benefits available to all corporate office employees. Our executive officers do not have employment or severance agreements.

 

During 2007, our executive leadership changed as Richard Manoogian transitioned from Chairman and Chief Executive Officer to Executive Chairman, a full-time position in which he remains active in corporate strategy and other business matters, and Alan Barry, our President and Chief Operating Officer, stepped down from his executive role effective November 30 in connection with his retirement. Our Board of Directors elected Timothy Wadhams, who was our Senior Vice President and Chief Financial Officer, as Chief Executive Officer effective July 1 and President and Chief Executive Officer effective December 1. Mr. Wadhams joined the Company in 1976, then transferred to an affiliate in 1984 where he remained until he returned in 2001. Donald J. DeMarie, Jr., who was Group President of our Installation and Other Services segment, was elected Executive Vice President effective July 1, and then succeeded Mr. Barry as Chief Operating Officer effective December 1. John G. Sznewajs, who was our Vice President — Corporate Development and Treasurer, assumed the additional position of Chief Financial Officer effective July 1. The “Compensation of Executive Officers” section shows specific information for the individuals who served as Chief Executive Officer or Chief Financial Officer at any time during 2007, as well as three other individuals who were executive officers as of December 31, 2007 and two retired executive officers. These eight individuals are referred to as the “named executive officers.”

 

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 shareholders. It is important that we retain executives who understand our organization, our business operations, and our corporate culture. 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 shareholder 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 (as was the case during 2007). 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 results in part from the exercise of discretion and prudent business judgment by senior management and by the Organization and Compensation Committee (the “Committee”) that oversees compensation programs.

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 industry’s economic cycles. Compensation programs are designed to reflect the value of the management team’s contributions to the Company and the Company’s current performance considering the impact of general economic and industry conditions.

 

Considering our compensation principles and our industries, 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 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 and attract and retain the executive talent we desire. This focus also evidences our emphasis on management stability and long-term retention.

 

 

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 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 2007 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 2007 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 engagement in competitive activities following termination of employment and to provide other significant protections that the Company has discretion to exercise. Depending on circumstances, we may require a participant to forfeit unvested equity awards upon voluntary or involuntary termination of employment or to return compensation.

 

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 are increasingly competing 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, or are other manufacturing companies. 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 those 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 has on occasion utilized 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. During 2007, the Committee asked Hewitt to review compensation for the various leadership transitions described above, specifically requesting advice about base salary, bonus and equity compensation of executive chairmen, chief executive officers, executive vice presidents and chief financial officers at comparable companies. Hewitt also advised the Committee with respect to the cash bonus and stock award opportunity levels and the number of stock options for the executives being promoted. In addition to the specific assignments from the Committee, 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. We have not requested and do 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 2007 was $15,750.

 

During 2007, we continued our practice of providing to the Committee a tally sheet that comprehensively summarizes the various components of total compensation for our Chief Executive Officer, Chief Financial Officer, President and Chief Operating 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, our costs for the foregoing and for perquisites and other benefits, and the annual costs under our qualified and non-qualified retirement plans. Our tally sheet allows the Committee to compare an executive’s compensation mix with those of our other executives. Although the Committee may review an executive’s compensation history, amounts actually realized by an executive from prior compensation are not necessarily considered in establishing current compensation.

 

In connection with the leadership transitions that occurred in 2007 and in addition to its review of the information specifically requested of Hewitt, the Committee reviewed reports prepared by our human resources department that showed the base salary, performance-based cash bonus and equity compensation for the specific executive filling a new position as well as for other executives who occupied the same or similar positions for the Company. The Committee also reviewed total compensation and the major components of compensation and the mix of components offered by our peer group for similar positions.

 

Our annual cycle for reviewing the various components of compensation provides an opportunity to evaluate and recognize executive performance, while strengthening the link between pay and performance, at least twice each year. The annual performance-based cash bonus and performance-based restricted stock awards are determined after the Committee reviews the Company’s financial performance for the prior calendar year. At mid-year we review fixed base salary and consider stock option grants. It is the Committee’s policy to consider the grant of stock options annually, since this results in a more evenly paced program without significant gaps in vesting dates. We believe this practice increases the program’s retention value by reducing the incentive for a participant to leave the Company when there is no vesting in the near-term.

 

The Masco Organization Review (“MOR”) program is also used by the Committee and the Company’s Chief Executive Officer and Chief Operating Officer as they review compensation for individual executives. MOR is part of our succession planning, and is the Company’s formal annual process for identifying and evaluating our key employees, including our executive officers. As part of this program, our 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 needs and progress, and potential for advancement. These assessments are provided to, and discussed with, the Committee and are considered by the Committee in connection with executive compensation determinations and promotions. The Committee considers similar factors in evaluating the Chief Executive Officer and Chief Operating Officer and in determining their compensation.

 

The Committee considers each component of executive compensation as part of its annual process, as it did in connection with the leadership transitions in 2007. As the Committee determines each of the various components
of compensation for the 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.

 

Annual cash compensation consists of base salary and a performance-based bonus opportunity. We generally do not grant discretionary ad hoc bonuses. Except for promotions, base salaries generally are reviewed annually and adjusted effective July 1 based on competitive factors and the MOR assessments described above. The Committee determines the compensation of our Executive Chairman, our President and Chief Executive Officer, and our Chief Operating Officer. These executives review reports prepared and compiled by our human resource department as well as the MOR assessments and propose specific base salary increases for the other executives, although no changes are made until they are reviewed and approved by the Committee. 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.

 

During the past several years, 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 three of the last five years, our executive officers did not receive increases in base salary, except in connection with promotions and changes in responsibilities (such as those described above under “Leadership Transitions”) or if salaries were determined to be well below the competitive market level. Mr. Manoogian’s base salary has not changed since 2003.

 

During 2007, the Committee considered the promotions of Mr. Wadhams to Chief Executive Officer, Mr. DeMarie to Executive Vice President and then to Chief Operating Officer and Mr. Sznewajs to Chief Financial Officer (in addition to his continuing responsibilities as Vice President — Corporate Development and Treasurer). In determining the appropriate corresponding compensation adjustments, the Committee reviewed the compensation history for each of the three executives, the compensation for the other Company executives who had previously occupied these or comparable positions, and market survey data using the peer group as well as a report prepared by our human resources department covering companies with over $5 billion in sales in Hewitt’s executive compensation survey. The Committee demonstrated its continuing commitment to pay-for-performance by establishing base salaries for Messrs. Wadhams and DeMarie at amounts less than their respective predecessors (and below the median base pay offered by our peers and companies in the Hewitt study) and by increasing the opportunity for both executives to earn greater variable compensation depending on Company performance. The Committee also increased Mr. Sznewajs’ base salary in light of his additional responsibilities and included him in the Supplemental Executive Retirement Plan. The Committee approved the relocation arrangements for Mr. DeMarie, which are discussed below in more detail. Each of these executives received additional equity awards as long-term incentives. Mr. Wadhams did not receive any additional compensation when he became President and Chief Executive Officer later in the year.

 

As a result of our emphasis on pay-for-performance, variable compensation now 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 approximately 67% to approximately 86% for Mr. Wadhams, and from 76% for his predecessor as Chief Operating Officer to 80% for Mr. DeMarie. The variable compensation for Mr. Manoogian and the other currently employed named executive officers remains at 80% and 67%, respectively. Accordingly, our Chief Executive Officer, our Executive Chairman and our Chief Operating Officer 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 actual earnings for the year under a schedule of earnings per share targets. The maximum bonus opportunity is 300% of base salary for our Chief Executive Officer, 200% for our Executive Chairman and for our Chief Operating Officer and 100% for our other executive officers. Mr. Barry, our former President and Chief Operating Officer, had a maximum bonus opportunity of 160%.

 

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 earnings per share schedule for purposes of the performance-based annual cash bonus. (This same schedule is also used in connection with the annual restricted stock incentive discussed below.) Earnings per share has been selected as the measure for determining incentive compensation because it reflects the Company’s overall financial performance for the year. The Committee and senior management also periodically review this metric. The calculation of earnings per share for financial reporting purposes is adjusted for certain transactions in order to focus primarily on the Company’s operating performance for compensation purposes. Consequently, in establishing this schedule, reported earnings per share is adjusted 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 stock repurchases in excess of a predetermined amount. 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. (As noted above we have not generally granted discretionary bonuses, although the Company could do so if circumstances warranted it, notwithstanding that the minimum target was not attained.) 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 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 2007 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 2007 than it had been in 2006. The schedule established for 2007 provided for bonuses ranging from the maximum opportunity level, if earnings per share (adjusted as described above) was at least $2.20, to 20% of the maximum opportunity level, if adjusted earnings per share was $1.15. This earnings per share range was broader and lower than the range for 2006 to reflect the greater uncertainties and deteriorating conditions for our industries. The Committee recognized that this could result in executives receiving larger bonuses for 2007 than they received for 2006 although 2007 attained earnings might be lower than in 2006. However, the Committee determined that the 2007 bonus opportunity schedule and lower earnings per share range would nonetheless appropriately correspond to the Company’s and management’s performance in light of the anticipated difficult conditions in the Company’s markets. The Committee retained the discretion to reduce bonuses otherwise payable in accordance with the schedule if the anticipated adverse conditions did not materialize. In early 2008, the Committee determined that adjusted earnings per share for 2007 was $1.72. Although the Company’s revenues for the year declined seven percent and were lower than had been forecasted when the bonus schedule was established at the beginning of the year, the Company was able to mitigate a portion of this revenue decline with headcount reductions and other cost containment actions. The Committee noted that the actions taken by management, which resulted in relatively flat gross margins in 2007 compared to 2006 and the generation of $980 million of free cash flow, were critical to attaining this level of earnings per share under these circumstances, and therefore, bonuses generally approximating 62% of the maximum bonus opportunity were appropriate. (The performance-based bonuses for 2006 and 2005 approximated on average 44% and 47.5%, respectively, of the maximum opportunity.) The bonuses for Messrs. Wadhams, DeMarie and Sznewajs were prorated to reflect the adjustments to their compensation that were effected during the year. Mr. Foley’s payment was prorated since he retired mid-year.

 

For many years, we have recognized that having an ownership interest in the Company is critical to aligning the financial interests of our 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.”

 

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. Our equity awards vest over an extended period of time that exceeds those of many other companies, including many in our peer group, and therefore, the value ultimately realized from these awards depends on the long-term value of our common stock. Unvested restricted shares are held in the participant’s name, and accordingly, the participant has the right to vote the shares and receive dividends. Vesting generally occurs in ten percent installments over a ten-year period for restricted stock and in twenty percent installments over five years for options, and options may be exercised up to ten years after the date of grant. Vesting is also generally contingent on continued employment with the Company. 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. The schedule for vesting of restricted stock awards is accelerated somewhat beginning in the year a participant turns age 66, except that the awards Mr. Manoogian held in 2005 at the time we implemented this change continue to vest on their original longer-term schedule. Thus, our executives know 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 (upon retirement or otherwise) 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 these 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. Consequently, the Summary Compensation Table that follows below includes not only the amount of expense we recognized in 2007 for financial reporting purposes for new awards made during 2007 (including the full expense for awards made during the year to participants who were retirement age or older), but it also includes the expense we recognized in 2007 for outstanding equity awards that were made in prior years.

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.

 

Our annual restricted stock award program, in which more than 2,000 of our key employees (including executive officers) participate, is performance-based with the lengthy vesting schedule described above. The program links the value of the initial stock grant opportunity to Company performance using the same schedule of earnings per share and award opportunity as a percentage of base salary as our cash incentive compensation plan, except that the Committee also considers progress made by the Company, in light of prevailing circumstances, toward long-term improvement in return on invested capital as a factor in determining the size of annual grants of restricted stock to executive officers. We believe that return on invested capital complements the earnings per share profitability measure because it reflects how efficiently we use our capital. After the year-end, when the Committee determines the level of target attainment, the Committee may exercise its negative discretion to reduce a portion of an award after it reviews the Company’s progress toward the Company’s long-term return on invested capital goal.

 

The Committee compares 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, which is held without regard to the timing of any communication of any material non-public information. In determining the number of shares of restricted stock to be awarded, the Committee uses the closing price of Company common stock on the date of the grant. As with the cash bonus described above, adjusted earnings per share for 2007 were determined to be $1.72. As a result of the earnings per share, in February 2008 the named executive officers (other than Messrs. Barry and Foley) received awards of restricted stock valued at approximately 62% of the maximum award opportunity as compared to 44% for 2006 and 47.5% for 2005. In determining the awards for 2007, the Committee did not exercise its discretion to reduce the awards from the scheduled amount. These awards granted for 2007 performance are not reflected in the tables below as 2007 compensation because they were made in 2008, and therefore, no expense was recognized in 2007. Since Messrs. Barry and Foley were retired at the time of the award, they received cash in lieu of a restricted stock award, prorated in the case of Mr. Foley, for the partial year of service. Their cash amounts are shown in the “Bonus” column of the Summary Compensation Table.

 

As part of our annual restricted stock award program, members of the executive management group other than our Executive Chairman, our Chief Executive Officer and our Chief Operating Officer may receive an additional restricted stock award if recommended by our 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 Executive Chairman, our Chief Executive Officer and our Chief Operating Officer). None of the named executive officers received discretionary awards under this program in 2007, although Mr. Sznewajs did receive an additional award of 6,500 shares in 2008. Messrs. Wadhams, DeMarie and Sznewajs also received awards of restricted stock in connection with their promotions in 2007, and Mr. Foley received an additional award in May 2007.

 

Stock options also reflect the Committee’s focus on compensation that is aligned with the interests of stockholders. Options are granted annually to approximately 600 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 2003, the Committee approved guidelines for granting stock options that contemplate annual grants of options to purchase Masco common stock having an approximate face value (using the closing stock price on the date of grant multiplied by the number of shares subject to the option) that is a multiple of base salary. For our Chief Executive Officer the multiple is eight, and for our Chief Operating Officer the multiple is six. The multiple for our Executive Chairman has been eight, but he has requested that it be reduced each year commencing in 2008. The multiple for all other executive officers is three times base salary. In accordance with these guidelines, in May 2007 we granted options to our key employees (including all executive officers).

 

Options are usually granted annually for participants, including the executive officers, at a regularly scheduled Committee meeting. We have not in the past 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 no formal policy to that effect. Options are granted at the fair market value on the date of grant using the closing stock sale 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 addition to the annual stock options that were granted in May 2007, the Committee also granted Messrs. Wadhams, DeMarie and Sznewajs stock options in connection with their promotions.

 

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 remain at risk by maintaining a substantial interest in our common stock. This minimum investment requirement is designed to assure that a meaningful amount of the executive officers’ personal net worth is invested in the Company. We require executives to achieve the share ownership necessary to meet the guidelines within three years after becoming subject to the guidelines. Each of the Company’s executive officers has already met this goal. 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 Chief Executive Officer. The Committee generally reviews executive ownership of Company common stock annually. As of February 29, 2008, when the closing price was $18.69, our current executive officers’ ownership of Company common stock ranged from four to nine times base salary, and our Executive Chairman held 77 times his base salary in Company common stock.

 

In order for Mr. Manoogian to exercise stock options or to receive restricted stock when it vests under our programs, he is required by federal law to file at least every five years a notification and report form pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Committee determined that the Company should pay the filing fee, since otherwise Mr. Manoogian would not receive the same benefit from the equity compensation components as other employees at the Company. Accordingly, “Other Compensation” for Mr. Manoogian in the Summary Compensation Table includes the filing fee paid on his behalf during 2007.

 

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 of the Company, 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 their risk in holding 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 and, before his retirement, Mr. Barry, 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, DeMarie and Barry 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 Chief Executive Officer, and his personal use must be approved by our Executive Chairman. Our 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 that follows 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. We have also established a health examination program for key employees, including executive officers, to encourage annual preventative diagnostic medical examinations. 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. Mr. DeMarie was the only named executive officer who received an additional amount to offset income taxes that primarily resulted from a part of his relocation expenses being taxed as compensation.

 

Mr. Manoogian, who joined Masco in 1958, was only our second Chairman and Chief Executive Officer in the Company’s 79 year history, succeeding his father who founded Masco in 1929. The Committee considered this unusual situation in its discussions with Mr. Manoogian regarding the leadership transitions and compensation for his continued service. Mr. Manoogian agreed to continue to serve on a full-time basis, at the pleasure of the Board, as Executive Chairman or in a similar senior executive role, upon mutually acceptable compensatory arrangements, through 2012. In exchange for Mr. Manoogian’s commitment to remain as a senior executive, we agreed to continue to make available to him the personal financial, tax, accounting and administrative assistance comparable to the services previously provided and for which he would continue 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.

 

It is the Company’s practice to reimburse employees, including executives, who relocate their principal residence at the Company’s request so that such employees are not financially disadvantaged as a result of such relocation. In connection with his promotion from Group President to Executive Vice President in 2007, Mr. DeMarie relocated from the headquarters of our Masco Contractor Services companies in Florida to our corporate offices in Michigan. We paid the moving costs and a relocation allowance and arranged for the purchase of his Florida house, part of which resulted in amounts being considered compensation to him for federal income tax purposes. See the “All Other Compensation” column of the Summary Compensation Table.

 

We provide 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 Supplemental Executive Retirement Plan for a limited number of senior executives, which currently includes all of the named executive officers, to supplement the benefits they would otherwise receive upon retirement. At the time the supplemental plan was established, the Board of Directors reviewed information about plans offered by a cross-section of other manufacturing companies. The features and benefit levels for our plans were within the range of, and comparable to, others at that time. As stated above, the Committee regularly reviews information with respect to benefits under these plans. The plans in which our executive officers participate are described below under “Compensation of Executive Officers — Retirement Plans.”

 

In December 2007, the Committee determined that it was appropriate to provide such a supplemental executive retirement arrangement to Mr. Sznewajs, who has assumed increasing responsibility at the Company. As with other senior executives, the Committee considered Mr. Sznewajs’ expanded role, and that in aligning executives’ cash compensation with shareholders’ interests an increasingly significant portion of compensation is performance-based and not otherwise covered by our retirement programs (or any employment agreement, severance arrangement or voluntary non-qualified deferred compensation plan).

In February 2008, the Committee agreed to amend the supplemental executive retirement arrangements for Messrs. Wadhams and DeMarie to provide that the amount of the regular year-end cash bonus to be taken into account for purposes of the plan formula be limited to 60% of the maximum bonus opportunity for that year. The amendment to Mr. DeMarie’s plan also provides for vesting of benefits to begin prior to the attainment of age 50 (up to a maximum of 50% vesting by age 50), which is consistent with such plans extended to other senior executives of the Company.

 

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 Supplemental Executive Retirement Plan 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.

 

After a change in control, participants in these two plans 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 exceeds certain thresholds. Although we do not intend to cause adverse tax consequences to participants, under the Internal Revenue 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 or the Supplemental Executive Retirement Plan 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 a 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, 2007, appears below in “Compensation of Executive Officers — Change in Control and Termination.”

 

Section 162(m) of the Internal Revenue 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, and consequently in some circumstances 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 this objective, 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, Chairman

Peter A. Dow

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 the individuals who served as our principal executive officer (Messrs. Manoogian and Wadhams) or principal financial officer (Messrs. Wadhams and Sznewajs) during 2007, 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 for 2006 and 2007, 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 2006 and 2007 and for Messrs. Barry and Foley in 2007 in connection with their retirements) 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 (i.e., cash bonuses paid early in 2008 but earned for 2007 Company performance are reported in this table as 2007 compensation).

 

2007 Summary Compensation Table

 

 

 

The following table sets forth information concerning the potential payouts under our 2007 performance-based cash incentive program and grants of restricted stock and options to the named executive officers in 2007. The grant date set forth below is the date that the Committee or Board granted the award.

 

2007 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 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 other than for Messrs. Wadhams, DeMarie and Sznewajs. The stock options granted in 2007 (other than the restoration options) 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, 2007 (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, 2007 ($21.61 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.

 

2007 Outstanding Equity Awards at Fiscal Year-End