Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No.    )

Filed by the Registrant    x

Filed by a Party other than the Registrant    ¨

Check the appropriate box:

x    Definitive Proxy Statement

The McGraw-Hill Companies, Inc.

(Name of Registrant as Specified In Its Certificate)

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

Payment of Filing Fee (Check the appropriate box):

x    No fee required.

Notes:

Reg. §240.14a-101.

SEC 1913 (3-99)

Table of Contents

March 19, 2007

Dear Shareholder:

On behalf of our Board of Directors and management, we cordially invite you to attend our Annual Meeting of Shareholders on Wednesday, April 25, 2007. The Meeting will be held at our headquarters at 1221 Avenue of the Americas, New York, New York 10020-1095, at 11:00 a.m. (EDT). If you are unable to attend the Annual Meeting in New York, please join us via live Webcast on the Company’s Web site at www.mcgraw-hill.com.

The Notice of Meeting and Proxy Statement accompanying this letter describe the business we will consider at the Meeting. Your vote is very important. I urge you to vote to be certain your shares are represented at the Meeting even if you plan to attend. Most shareholders have a choice of voting over the Internet, by telephone or by using a traditional proxy card. Please refer to your proxy materials or the information forwarded by your bank, broker or other holder of record to see which methods are available to you.

I look forward to seeing you at the Meeting.

Harold McGraw III

Chairman of the Board, President and Chief Executive Officer

Table of Contents

Notice of Annual Meeting of Shareholders

To Be Held April 25, 2007

The Annual Meeting of Shareholders of The McGraw-Hill Companies, Inc. will be held on Wednesday, April 25, 2007, at 11:00 a.m. (EDT) at the Company’s headquarters at 1221 Avenue of the Americas, New York, New York 10020-1095. At the Meeting, shareholders will be asked to:

You may vote at the Meeting if you were a shareholder of the Company at the close of business on March 12, 2007, the record date for the Meeting.

By Order of the Board of Directors.

Scott L. Bennett

Senior Vice President, Associate General

Counsel and Secretary

New York, New York

March 19, 2007

Please sign and return the enclosed proxy card in the postage-paid envelope provided or, if you prefer, please follow the instructions on the enclosed proxy card for voting by telephone or via the Internet. You may access the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor  relations for further Internet voting instructions as well as to view the Proxy Statement and Annual Report online.

Table of Contents

The McGraw-Hill Companies, Inc.

Proxy Statement

2007 Annual Meeting of Shareholders

i

Table of Contents

The McGraw-Hill Companies, Inc.

Proxy Statement

2007 Annual Meeting of Shareholders

GENERAL INFORMATION

Why did I receive this Proxy Statement?

The Board of Directors of The McGraw-Hill Companies, Inc. (the “Company”, “we” or “us”) is soliciting proxies for the 2007 Annual Meeting of Shareholders (the “Annual Meeting” or “Meeting”) to be held on Wednesday, April 25, 2007, and at any adjournment of the Meeting. When the Company asks for your proxy, we must provide you with a Proxy Statement that contains certain information specified by law. This Proxy Statement summarizes the information you need in order to vote at the Meeting.

The Company’s 2006 Annual Report, Notice of Annual Meeting, Proxy Statement and proxy are being mailed to shareholders beginning on or about March 19, 2007.

What will I vote on?

Five items:

Will there be any other items of business on the agenda?

We do not expect any other items of business at the Annual Meeting. Nonetheless, if there is an unforeseen need, your proxy will give discretionary authority to the persons named on the proxy to vote on any other matters that may be brought before the Meeting. These persons will use their best judgment in voting your proxy.

Who is entitled to vote?

Shareholders as of the close of business on the record date, which is March 12, 2007, may vote at the Annual Meeting.

How many votes do I have?

You have one vote for each share of common stock you held on the record date.

What constitutes a quorum for the Annual Meeting?

A quorum is necessary to conduct business at the Annual Meeting. A quorum requires the presence at the Meeting of a majority of the outstanding shares entitled to vote, in person or represented by proxy. You are part of the quorum if you have voted by proxy. As of the record date, 351,333,654 shares of Company common stock were issued and outstanding.

How do I vote?

You can vote either in person at the Annual Meeting or by proxy without attending the Meeting. We urge you to vote by proxy even if you plan to attend the Meeting so we will know as soon as possible that enough votes will be present for us to hold the Meeting. If you attend the Meeting in person, you may vote at the Meeting and your earlier proxy will not be counted.

May I vote by telephone or via the Internet?

Yes. Instead of submitting your vote by mail using the enclosed proxy card, you may be able to vote on the Internet or by telephone. Please note that there are separate Internet and telephone voting arrangements depending on whether you hold your shares:

1

Table of Contents

If you are a registered shareholder, you may vote by telephone or via the Internet by following the instructions on your proxy card.

If you are a beneficial owner, please refer to the information forwarded by your bank, broker or other holder of record to see which options are available to you. Most brokers and banks offer voting by telephone and via the Internet as well as by mail.

If you vote via the Internet, you may incur costs, such as usage charges from Internet access providers and telephone companies. You will be responsible for these costs.

How do I vote my shares in the Dividend Reinvestment Plan?

If you participate in the Dividend Reinvestment Plan, any proxy you give will also govern the voting of all shares you hold in this Plan, unless you give us other instructions.

How do I vote my shares in the Company’s employee benefit plans?

If you received this Proxy Statement because you are an employee of the Company who participates in these plans and you have shares of common stock of the Company allocated to your account under these plans, you may vote your shares held in these plans as of March 12, 2007 by mail, by telephone or via the Internet. Instructions are provided on the enclosed proxy card from The Bank of New York, the Company’s transfer agent. The Bank of New York must receive your instructions by 1:00 p.m. (EDT) on April 23, 2007 in order to communicate your instructions to the plans’ Trustee, who will vote your shares. Any plan shares for which we do not receive instructions from the employee will be voted by the Trustee in the same proportion as the shares for which we have received instructions.

Can I revoke or change my vote?

Yes. If you are a shareholder of record, you have the right to revoke your proxy at any time before the Annual Meeting by sending a signed notice to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. If you want to change your vote at any time before the Meeting, you must deliver a later dated proxy by telephone, via the Internet or in writing. You may also change your proxy by voting in person at the Meeting.

If you are a beneficial owner, please refer to the information forwarded by your broker, bank or other holder of record for procedures on revoking or changing your proxy.

What are the costs of soliciting these proxies and who will pay them?

The Company will pay all costs of soliciting these proxies. In addition, some of our officers and employees may solicit proxies by telephone or in person. We will reimburse banks and brokers for the expenses they incur in forwarding the proxy materials to you. Georgeson Inc. is assisting us with the solicitation of proxies for a fee not to exceed $19,000 plus reimbursement for out-of-pocket expenses.

How many votes are required for the approval of each item?

2

Table of Contents

Are abstentions and broker non-votes part of the quorum?

Abstentions, broker non-votes and votes withheld for Director nominees count as “shares present” at the Annual Meeting for purposes of determining a quorum.

What are broker non-votes?

If your shares are held by a broker, the broker may require your instructions in order to vote your shares. If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two things can happen depending on the type of proposal. For the election of Directors and ratification of the Company’s independent Registered Public Accounting Firm for 2007, the broker may vote your shares in its discretion. For approval of the shareholder proposals, the broker may not vote your shares at all. When that happens, it is called a “broker non-vote”.

Who will count the vote?

Votes at the Annual Meeting will be counted by two independent inspectors of election appointed by the Board.

What if I do not vote for some or all of the matters listed on my proxy card?

If you are a registered shareholder and you return a signed proxy card without indicating your vote for some or all of the matters, your shares will be voted as follows for any matter you did not vote on:

How do I submit a shareholder proposal for the 2008 Annual Meeting?

The Company’s 2008 Annual Meeting is scheduled for April 30, 2008. There are two different deadlines for submitting shareholder proposals. First, if a shareholder wishes to have a proposal considered for inclusion in next year’s Proxy Statement, he or she must submit the proposal in writing so that we receive it by November 20, 2007. Proposals should be addressed to the Company’s Secretary, The McGraw-Hill

3

Table of Contents

Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. If you submit a proposal, it must comply with applicable laws, including Rule 14a-8 of the Securities Exchange Act of 1934.

In addition, the Company’s By-Laws provide that any shareholder wishing to nominate a candidate for Director or to propose any other business at the Annual Meeting must give the Company written notice no earlier than December 27, 2007 and no later than January 28, 2008. This notice must comply with applicable laws and the Company’s By-Laws. Copies of the By-Laws are available to shareholders free of charge on request to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. You may also download the By-Laws from the Corporate Governance section of the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations.

Can I view future proxy materials online instead of receiving them by mail?

Yes. If you are a shareholder of record or own Company shares through one of the Company’s employee benefit plans, you may, if you wish, view future Proxy Statements and Annual Reports online. If you elect this feature, you will receive an e-mail notice which will include the Web address for viewing the materials online. The e-mail notice will also include instructions so you can vote your proxy online or by telephone. If you have more than one account, you may receive separate e-mails for each account. Costs normally associated with electronic delivery, such as usage and telephone charges, as well as any costs incurred in printing documents, will be your responsibility.

At any time during the year, shareholders of record or owners of Company shares through one of the Company’s employee benefit plans may give consent to view future Proxy Statement and Annual Report materials online. During the 2007 proxy voting period, the Internet voting system will automatically prompt shareholders for their consent. For other times during the year, go to https://www.proxyconsent.com/mhp. The enrollment site reviews the basic information and terms. You will be prompted to provide an e-mail address so we can contact you when proxy materials are available online. You will receive confirmation by e-mail indicating your preference for electronic delivery.

If you are a beneficial owner, please contact your broker, bank or other holder of record for procedures on how to consent to view materials online instead of receiving them by mail.

What are the benefits of electronic delivery?

Electronic delivery helps the environment and saves the Company money by reducing printing and mailing costs. It will also make it convenient for you to view your proxy materials and vote your shares online. If you have shares in more than one account, it is also an easy way to eliminate receiving duplicate copies of proxy materials.

What are the costs of electronic delivery?

The Company charges nothing for electronic delivery. You may, of course, incur expenses associated with Internet access such as telephone charges or charges from your Internet service provider.

May I change my mind later?

Yes. You may discontinue electronic delivery at any time. Shareholders of record may resume mail delivery of the Proxy Statement and Annual Report by going to https://www.proxyconsent.com/mhp and revoking your election. You will receive a confirmation by e-mail indicating your preference to resume mail delivery.

If you are a beneficial owner, please contact your broker, bank or other holder of record for procedures on how to revoke your consent and resume delivery of materials by mail.

Will I receive a copy of the Company’s Annual Report?

Unless you previously elected to view our Annual Report via the Internet, we mailed our 2006 Annual Report to shareholders beginning on or about March 19, 2007.

What is “householding”?

We have adopted “householding”, a procedure under which beneficial owners who have the

4

Table of Contents

same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of our Annual Report and Proxy Statement unless one or more of these shareholders notifies us that they wish to continue receiving individual copies. This procedure reduces duplicate mailings and thus reduces our printing costs and postage fees. Shareholders who participate in householding will continue to receive separate proxy cards. Householding does not affect dividend check mailings.

What if I want to receive a separate copy of the Proxy Statement or Annual Report?

If you wish to receive a separate copy of the 2006 Annual Report or this Proxy Statement, please call us toll-free at (866) 436-8502, or send an e-mail to investor_relations@mcgraw-hill.com, or write to: Investor Relations, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095. We will promptly deliver to you the documents you requested.

Where can I find the voting results?

We will publish the voting results in our Form 10-Q for the Second Quarter of 2007, which we will file with the SEC on or about July 27, 2007. To view our Form 10-Q online, go to the

Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations, and click on the SEC Filings link located in the Digital Investor Kit.

What should I do if I want to attend the Annual Meeting?

All shareholders of the Company may attend the Annual Meeting. The Meeting will be held on April 25, 2007 on the second floor of the Company’s headquarters at 1221 Avenue of the Americas, New York, New York 10020-1095, and will begin promptly at 11:00 a.m. (EDT). You may be asked to present photo identification before being admitted to the Meeting. If you have questions about attending the Meeting, you may call Investor Relations toll-free at (866) 436-8502, or send an e-mail to investor_relations@mcgraw-hill.com.

Can shareholders and other interested parties communicate directly with our Board? If so, how?

Yes. You may communicate directly with one or more members of the Board by writing to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095, or by sending an e-mail to the Company’s Secretary at corporate_secretary@mcgraw-hill.com. The Company’s Secretary will then forward all questions or comments directly to our Board or a specific Director, as the case may be.

5

Table of Contents

BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

The Company’s business and affairs are overseen by our Board pursuant to the New York Business Corporation Law and our Restated Certificate of Incorporation and By-Laws. Under the Company’s Restated Certificate of Incorporation, the members of the Board are grouped into three classes. The three classes are as equal in number as possible. One class is elected at each Annual Meeting to hold office for a three-year term beginning on the date of the Meeting.

New members are assigned to classes upon initial appointment so that the size of each class is as nearly equal as possible. The four Director nominees standing for election at this year’s Annual Meeting, Ms. Hilda Ochoa-Brillembourg and Messrs. Pedro Aspe, Robert P. McGraw and Edward B. Rust, Jr., are currently serving as Directors of the Company. All four of the Director nominees are being nominated for three-year terms that will expire in 2010.

Shareholders are being asked to consider at this Annual Meeting a shareholder proposal requesting the annual election of each Director. Your Board unanimously recommends that you vote against this proposal. For additional information about this shareholder proposal, please see pages 54 through 56 of this Proxy Statement.

Mr. Harold W. McGraw, Jr., a Director from 1954 to 1988, Chairman of the Board from 1976 to 1988, and Chief Executive Officer from 1975 to 1983, retired from the Board after the 1988 Annual Meeting in accordance with the Board’s retirement age policy. However, in recognition of Mr. McGraw’s past service and contributions to the Company and to assure his continued close association with the Board and the Company, the Board elected Mr. McGraw permanently to the position of Chairman Emeritus.

Director Independence

The Board has determined that all of the Company’s Directors, with the exception of Messrs. Harold McGraw III (the Company’s Chairman of

the Board, President and Chief Executive Officer) and Robert P. McGraw (the brother of Harold McGraw III), have met the independence requirements of the New York Stock Exchange, based upon the application of objective categorical standards adopted by the Board. To be considered independent, a Director must have no material relationship (other than as a Director) with the Company, or any of its subsidiaries, either directly or as a partner, shareholder or officer of an organization that has a material relationship with the Company or any of its subsidiaries. In making independence determinations, the Board broadly considers all relevant facts and circumstances. In accordance with the Company’s Corporate Governance Guidelines, a Director will not be an independent Director of the Company if:

6

Table of Contents

For purposes of sub-paragraphs (i) through (v) above, an “immediate family member” includes a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law and anyone (other than domestic employees) who shares such person’s home. Individuals who are no longer immediate family members as a result of legal separation or divorce, or those who have died or become incapacitated are not taken into consideration with respect to the determination of a Director’s independence.

Additional Information Regarding Director Independence

In making its independence determinations with respect to our Directors, the Board considered the following transactions that the Company engages in from time to time with organizations in which our independent Directors serve as executive officers or otherwise have a material interest:

7

Table of Contents

All of these transactions are entered into in the ordinary course of business and on terms that are substantially equivalent to those prevailing at the time for comparable transactions with other similarly situated customers or vendors of the Company.

In making its independence determinations with respect to our Directors, the Board reviews the materiality of these transactions not only from the standpoint of the applicable Director but also from the standpoint of the organizations in which they serve. Based on this review, the Board has concluded that these transactions do not interfere with the ability of each such Director to exercise independent judgment in carrying out his or her Board responsibilities.

Annual Meeting Attendance

It is the Company’s policy that, subject to illness or an unavoidable schedule conflict, all Directors will attend and be introduced at the Annual Meeting. All of our Directors attended the 2006 Annual Meeting.

Presiding Director

On February 28, 2007, the Board appointed Ms. Linda Koch Lorimer, the Chair of the Nominating and Corporate Governance Committee, as the Presiding Director of the Board for the period February 28, 2007 through April 30, 2008. In her capacity as the Presiding Director, Ms. Lorimer presides at regularly scheduled executive sessions of the Board at which only non-management Directors are present. Shareholders and other interested parties may communicate with Ms. Lorimer by sending a letter to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095 or by sending an e-mail message to the Company’s Secretary at corporate_secretary@mcgraw-hill.com. The Company’s Secretary will then forward your letter or e-mail to Ms. Lorimer.

8

Table of Contents

Directors’ Biographies

Class of 2010

The following four Director nominees are currently serving as Directors of the Company and have been nominated to stand for re-election at the Annual Meeting to serve three-year terms that will expire at the 2010 Annual Meeting. Please see pages 1 through 3 and page 53 of this Proxy Statement for voting information.

		Pedro Aspe, age 56, has been since 2006 Co-Chairman of Evercore Partners, Inc., a leading investment banking boutique, and since 1996 Chairman of the Board and Chief Executive Officer of Protego Asesores, S.A. de C.V., a leading investment banking advisory firm in Mexico. From 1996 to 2000, Dr. Aspe was Chairman of the Board of Vector Casa de Bolsa, S.A. de C.V., an investment banking firm in Mexico. Dr. Aspe has been since 1995 a professor at the Instituto Tecnológico Autónomo de México located in Mexico City. Dr. Aspe has held a number of positions with the Mexican government and was the Secretary of Finance and Public Credit of Mexico from 1988 through 1994. Dr. Aspe is a Director of the Carnegie Corporation and of Televisa located in Mexico City. Dr. Aspe is a member of the Advisory Board of Stanford University’s Institute of International Studies and the Visiting Committee of the Department of Economics of MIT. Dr. Aspe also sits on the Advisory Board of Marvin & Palmer. Dr. Aspe has served as a Director of the Company since 1996 and is Chair of the Audit Committee and a member of the Executive and Financial Policy Committees.

		Robert P. McGraw, age 52, has been Chairman and Chief Executive Officer of Averdale International, LLC since 1999. Prior to that, Mr. McGraw was Executive Vice President of the Professional Publishing Group of the Company from 1989 to 1998. He was Executive Vice President of the Healthcare Group from 1987 to 1989, and Group Vice President of that same group from 1985 to 1987. Prior to that, he served in several key positions in the Health Professions Division of the Company: General Manager from 1983 to 1985; Editorial Director from 1982 to 1983; and Editor from 1979 to 1982. He joined the Company in 1976 as a sales representative for McGraw-Hill Higher Education. Mr. McGraw has served as a Director of the Company since 1995 and is a member of the Financial Policy Committee. (a)

9

Table of Contents

		Hilda Ochoa-Brillembourg, age 62, is the founder and has been since 1987 the President and Chief Executive Officer of Strategic Investment Group, a group of affiliated investment management firms, and Director of Emerging Markets Investment Corporation and Emerging Markets Management, LLC. From 1976 to 1987, she was Chief Investment Officer of the Pension Investment Division at the World Bank. Prior to joining the World Bank, she served as an independent consultant in the fields of economics and finance, as a lecturer at the Universidad Catolica Andres Bello in Venezuela and as Treasurer of the C.A. Luz Electrica de Venezuela in Caracas. Ms. Ochoa-Brillembourg is a Director of General Mills, Inc., the World Bank/International Monetary Fund Credit Union and the Harvard Management Company, Inc. Ms. Ochoa-Brillembourg is Founding Chair of the Youth Orchestra of the Americas and a Trustee and Executive Committee member of the Washington National Opera. She is Vice Chairman, Group of 50, of the Carnegie Endowment for International Peace. She is also a Trustee and Co-Chair of the National Relations Committee of the National Symphony Orchestra and an Advisory Board member of the Rockefeller Center for Latin American Studies at Harvard University. Ms. Ochoa-Brillembourg has served as a Director of the Company since 2004 and is a member of the Audit and Financial Policy Committees.

		Edward B. Rust, Jr., age 56, has been since 1987 Chairman of the Board and Chief Executive Officer of State Farm Insurance Companies, the largest insurer of automobiles and homes in the United States. Mr. Rust was also President of State Farm Insurance Companies from 1985 to 1998, and was re-elected President in 2007. Mr. Rust is a Director of Helmerich & Payne, an oil and gas drilling company, and Caterpillar Inc., a manufacturer of construction and mining equipment. Mr. Rust is a Trustee for Illinois Wesleyan University. Additionally, he was a member of President George W. Bush’s Transition Advisory Team Committee on Education. Mr. Rust is Co-Chairman of Business Roundtable. Mr. Rust has served as a Director of the Company since 2001 and is a member of the Audit and Compensation Committees.

10

Table of Contents

Class of 2008

The following four Directors will continue in office until the 2008 Annual Meeting:

		Sir Winfried Bischoff, age 65, has been since 2000 Chairman of Citigroup Europe, which represents the European businesses of Citigroup, Inc., a global financial services firm. He is also a member of Citigroup, Inc.’s Management Committee. Sir Winfried Bischoff was Chairman of Schroders plc, an international investment banking and asset management firm headquartered in Great Britain, from 1995 to 2000. Prior to that, Sir Winfried Bischoff was Chairman of J. Henry Schroder Co. (the London investment bank of Schroders plc) from 1983 to 1995 and Group Chief Executive of Schroders plc from 1984 to 1995. He is a Director of Eli Lilly and Company and Land Securities plc. Sir Winfried Bischoff has served as a Director of the Company since 1999 and is Chair of the Financial Policy Committee and a member of the Executive and Compensation Committees.

		Douglas N. Daft, age 64, was Chairman of the Board and Chief Executive Officer of The Coca-Cola Company from 2000 until his retirement from the company in 2004. Mr. Daft joined The Coca-Cola Company in 1969 in its Sydney, Australia office, and subsequently held various positions with the company throughout Asia. Mr. Daft moved to the company’s Atlanta, Georgia headquarters in 1991 to assume responsibility for the company’s Asia and Pacific regions and thereafter assumed responsibility for the company’s Middle East and African regions as well. Mr. Daft was appointed President and Chief Operating Officer of the company in 1999 and Chairman and Chief Executive Officer in 2000. Mr. Daft is a Director of Wal-Mart Stores, Inc. and Sistema-Hals (the Russian real estate, construction and development company). Mr. Daft is an advisory board member for Longreach, Inc. (a Japan-based private equity firm) and Thomas H. Lee Partners. Mr. Daft is also a member of the European Advisory Council for N.M. Rothschild & Sons Limited; an overseer board member for the International Business School of Brandeis University; a member of the Board of Governors of Thunderbird, The Garvin School of International Management in Arizona; Chairman of the Advisory Board for the Churchill Archives Center, Churchill College, Cambridge; and a Patron of the American Australian Association. Mr. Daft has served as a Director of the Company since 2003 and is a member of the Audit and Compensation Committees.

11

Table of Contents

		Linda Koch Lorimer, age 55, has been Vice President and Secretary of Yale University since 1995, having returned to Yale as Secretary of the University in 1993. She was President of Randolph-Macon Woman’s College from 1987 to 1993 and was Associate Provost of Yale University from 1983 to 1987. She is a Director of Sprint Nextel Corporation. Ms. Lorimer is the former Chairman of the Board of the Association of American Colleges and Universities and the Women’s College Coalition. Ms. Lorimer is a Director of Yale-New Haven Hospital and a Trustee of Hollins University. Ms. Lorimer has served as a Director of the Company since 1994 and is Chair of the Nominating and Corporate Governance Committee and a member of the Compensation and Executive Committees. She also serves as the Presiding Director of the Company’s Board of Directors.

		Harold McGraw III, age 58, has been Chairman of the Board since 2000 and President and Chief Executive Officer of the Company since 1998. Prior to that, Mr. McGraw had been President and Chief Operating Officer of the Company since 1993. He was Executive Vice President, Operations, of the Company from 1989 to 1993. Prior to that, he was President of the McGraw-Hill Financial Services Company, President of the McGraw-Hill Publications Company, Publisher of Aviation Week & Space Technology magazine and Vice President, Corporate Planning. Before joining the Company in 1980, he held financial positions at the GTE Corporation. Mr. McGraw serves on the Boards of Directors of ConocoPhillips and United Technologies Corporation. He is Chairman of Business Roundtable and Chairman of the Emergency Committee for American Trade (ECAT). He is a member of The Business Council. He serves on the Board of the National Council on Economic Education and is on the Board of Trustees of Carnegie Hall as well as the Board of The New York Public Library. He also is a member of the Boards of the National Organization on Disability, The National Academy Foundation and Hartley House. Mr. McGraw has served as a Director of the Company since 1987 and is Chair of the Executive Committee. (a)

12

Table of Contents

Class of 2009

The following three Directors will continue in office until the 2009 Annual Meeting:

		James H. Ross, age 68, was Deputy Chairman of National Grid Transco plc, a public UK company with interests in electricity and gas transmission and distribution in the United Kingdom, the United States, Argentina, Zambia and Australia, from 2002 to 2004. Prior to that, Mr. Ross was Chairman of National Grid Group plc from 1999 to 2002. From 1996 to 2002, Mr. Ross was Chairman of The Littlewoods Organisation, a private company in Great Britain operating in the retail home shopping and leisure businesses. Mr. Ross was Chief Executive and Deputy Chairman of Cable & Wireless plc, an international provider of telecommunications services, between 1992 and 1995. He was a Managing Director of British Petroleum plc, which engages in all phases of the petroleum business, from 1991 to 1992, and Chairman and Chief Executive Officer of BP America Inc., a subsidiary of British Petroleum plc, from 1988 to 1992. Mr. Ross is a Director of Prudential plc, Schneider Electric and Datacard Inc. He is also the Chairman of the Leadership Foundation for Higher Education in the United Kingdom. Mr. Ross has served as a Director of the Company since 1989 and is a member of the Audit and Nominating and Corporate Governance Committees.

		Kurt L. Schmoke, age 57, has been the Dean of the Howard University School of Law since 2003. Prior to that, he was a partner at the Washington, D.C. based law firm of Wilmer Cutler & Pickering from 2000 through 2002. Mr. Schmoke served three terms as the Mayor of Baltimore from 1987 until 1999. Mr. Schmoke served as the State’s Attorney for Baltimore City from 1982 until 1987. Mr. Schmoke is a Director of Legg Mason, Inc. He is a Trustee of The Carnegie Corporation of New York and Howard Hughes Medical Institute, a private philanthropic group. Mr. Schmoke is also a member of the Council on Foreign Relations. Mr. Schmoke was named to President Jimmy Carter’s domestic policy staff in 1977. Mr. Schmoke has served as a Director of the Company since 2003 and is a member of the Financial Policy and Nominating and Corporate Governance Committees.

13

Table of Contents

		Sidney Taurel, age 58, has been Chairman and Chief Executive Officer of Eli Lilly and Company, a pharmaceutical company, since 1999. He was also its President from 1996 through 2005. Mr. Taurel joined Eli Lilly in 1971 and held management positions in the company’s operations in Brazil and Europe before becoming President of Eli Lilly International Corporation in 1986. He was elected a Director of Eli Lilly and Company in 1991, became Executive Vice President in 1993, and President and Chief Operating Officer in 1996. He has served as President and CEO since June 1998, adding the role of Chairman of the Board in January 1999. Mr. Taurel is a Director of IBM. He is a member of The Business Council and Business Roundtable, and a Director of Pharmaceutical Research and Manufacturers of America. He is a Member of the Board of Overseers of the Columbia Business School, a founder of the International School of Indiana, and a Trustee of the Indianapolis Museum of Art. Mr. Taurel is also a Director of the RCA Tennis Championships. In February 2003, President Bush appointed Mr. Taurel to the President’s Export Council. Mr. Taurel has served as a Director of the Company since 1996 and is Chair of the Compensation Committee and a member of the Executive and Nominating and Corporate Governance Committees.

(a) Messrs. Harold McGraw III and Robert P. McGraw are brothers and the sons of Mr. Harold W. McGraw, Jr.

Corporate Governance Materials

The following corporate governance materials are available and can be viewed and downloaded from the Corporate Governance section of the Company’s Investor Relations Web site at www.mcgraw-hill.com/investor_relations: (i) the Company’s Restated Certificate of Incorporation; (ii) the Company’s By-Laws; (iii) the Company’s Corporate Governance Guidelines; (iv) Board Committee Charters for the Company’s Audit, Compensation, Executive, Financial Policy and Nominating and Corporate Governance Committees; (v) the Code of Business Ethics applicable to all Company employees; (vi) the Code of Ethics applicable to the Company’s Chief Executive Officer and Senior Financial Officers; (vii) the Code of Business Conduct and Ethics for Directors applicable to all the Company’s Directors; and (viii) the Audit Committee’s Policy concerning Employee Complaint Procedures regarding Accounting and Auditing Matters. A copy of these materials is available to shareholders free of charge on request to the Company’s Secretary, The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, New York 10020-1095.

14

Table of Contents

Committees of the Board of Directors

The Company has standing Nominating and Corporate Governance, Audit and Compensation Committees. The Chair of each Committee reports to the full Board as appropriate from time to time. Each Committee has a Charter that is reviewed by the Nominating and Corporate Governance Committee on a regular basis. In addition to these three standing Committees, the Board has an Executive Committee and a Financial Policy Committee. A brief description of the Nominating and Corporate Governance, Audit and Compensation Committees follows.

Nominating and Corporate Governance Committee

The functions performed by the Nominating and Corporate Governance Committee include, among other matters:

Additional information about the Nominating and Corporate Governance Committee follows:

15

Table of Contents

Audit Committee

The Company has an Audit Committee that has been established by the Board of Directors for the purpose of overseeing the accounting and financial reporting processes of the Company and the audits of the Company’s financial statements. The Audit Committee’s duties include, among other matters, assisting the Board’s oversight of:

Additional information about the Audit Committee follows:

Compensation Committee

The Compensation Committee’s duties include, among other matters:

Additional information about the Compensation Committee follows:

16

Table of Contents

Processes and Procedures for Determining Executive and Director Compensation

Processes and Procedures for Determining Executive Compensation. The Compensation Committee is composed of five Directors, all of whom meet the independence requirements of the New York Stock Exchange. The Board of Directors appoints the Committee Chair and determines the composition of the Committee members.

The Committee is responsible for approving all matters concerning the Company’s total compensation philosophy, including the conducting of periodic reviews of the philosophy to ensure it supports the Committee’s objectives and shareholder interests. The Committee is responsible for administering and interpreting the Key Executive Short-Term Incentive Compensation Plan, the Employee Stock Incentive Plans and all other compensation and benefits plans in which the Company’s senior management participate.

The Committee has sole authority to retain and terminate all external consultants and to commission surveys or analyses that it determines necessary to fulfill its responsibilities. Additionally, the Committee has sole authority to approve the fees of the external consultants. The Committee utilizes the services of Frederic W. Cook & Co. as its external compensation advisor for all matters concerning the Company’s senior management compensation programs.

The Committee annually reviews and approves the corporate goals and objectives for the Chief Executive Officer’s compensation, evaluates the Chief Executive Officer’s performance in light of those goals and objectives, establishes the Chief Executive Officer’s total compensation and refers its recommendations to the independent Directors of the Board of Directors for ratification.

The Committee annually reviews and approves the individual compensation actions for the direct reports to the Chief Executive Officer and for approximately 30 other senior executives. Below this level, the Committee approves the overall design of the total executive compensation program and delegates the discretion to approve individual compensation decisions to the Chief Executive Officer. The other named executive officers recommend compensation actions for the senior executives in their organizations and these compensation actions are then approved by the Chief Executive Officer.

Processes and Procedures for Determining Director Compensation. The Nominating and Corporate Governance Committee is comprised of four Directors, all of whom meet the independence requirements of the New York Stock Exchange. The Board of Directors appoints the Committee Chair and determines which Directors serve on the Committee.

The Committee is solely responsible for determining all matters concerning compensation for the independent members of the Board. It is not authorized to delegate its authority to determine Director compensation. All compensation recommendations by the Committee are submitted to the full Board for review and approval. Directors who are employees of the Company do not receive any compensation for their Board services.

The Committee has sole authority to directly retain external consultants and to commission surveys or analyses that it determines necessary to fulfill its responsibilities.

Executive officers play no role in determining the amount or form of Director compensation.

The Committee annually reviews the competitiveness of the Company’s Director compensation using survey data covering U.S. public companies in the publishing, information and media, and financial industries as well as data on similarly sized U.S. public companies from general industry.

17

Table of Contents

Compensation Committee Report

The Compensation Committee has reviewed and discussed with Company management the Compensation Discussion and Analysis found on pages 24 through 31 of this Proxy Statement, and based on this review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K and this Proxy Statement.

The foregoing report has been furnished on behalf of the Board of Directors by the members of its Compensation Committee.

Sidney Taurel (Chairman)

Sir Winfried Bischoff

Douglas N. Daft

Linda Koch Lorimer

Edward B. Rust, Jr.

18

Table of Contents

Membership and Meetings of the Board and Its Committees

In 2006, no Director attended fewer than 75 percent of the aggregate of the total number of meetings of the Board and the Committees on which he or she served. Current Committee membership and the number of meetings of the full Board and each Committee held during 2006 are shown in the table below.

In 2006, the non-management Directors met in executive sessions twice without any member of management present. Mr. Robert P. McGraw, who is not an independent Director as defined in the rules of the New York Stock Exchange due to his familial relationship with Mr. Harold McGraw III, the Company’s Chairman, President and Chief Executive Officer, was not present at one of these non-management Director executive sessions.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee has served as one of our officers or employees at any time. None of our executive officers serves as a member of the compensation committee of any other company that has an executive officer serving as a member of our Board of Directors. None of our executive officers serves as a member of the board of directors of any other company that has an executive officer serving as a member of our Board’s Compensation Committee.

19

Table of Contents

Indemnification

Each Director and certain of our executive officers have entered into an indemnification agreement with the Company which provides indemnification for judgments and amounts paid in settlement and related expenses to the fullest extent permitted under the applicable provisions of the New York Business Corporation Law. This indemnification will be reduced to the extent that a Director or executive officer is indemnified by the Company’s Directors’ and Officers’ liability insurance. The Company has for many years carried Directors’ and Officers’ liability insurance coverage. The Company’s current insurance coverage was purchased for the period December 31, 2006 to December 31, 2007 for an annual premium of approximately $2,015,000. The Company has purchased this coverage from National Union Fire Insurance Company of Pittsburgh, PA; Federal Insurance Company; Great American Insurance Companies; and Liberty Mutual Insurance Co. This coverage, subject to a number of standard exclusions and certain deductibles, indemnifies the Directors and officers of the Company and its subsidiaries for liabilities or losses incurred in the performance of their duties up to an aggregate sum of $100,000,000. No sums have been paid under this coverage to the Company or any Directors or officers nor have any claims for reimbursement been made under this policy.

20

Table of Contents

Audit Committee Report

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board. All of the members of the Committee are independent Directors in accordance with the listing standards of the New York Stock Exchange. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Board has adopted a written Charter for the Audit Committee.

In this context, the Committee has met and held discussions with management and the Company’s independent Registered Public Accounting Firm. Management represented to the Committee that it is responsible for the financial reporting process, including the system of internal controls, for the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles and for the report on the Company’s internal controls over financial reporting. The Committee has reviewed and discussed the consolidated financial statements with management and the Company’s independent Registered Public Accounting Firm, which review included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. The Committee also discussed with management the process used to support the certifications required by the Sarbanes-Oxley Act of 2002 and to support management’s annual report on the Company’s internal controls over financial reporting. The Committee discussed with the independent Registered Public Accounting Firm matters required to be discussed by Statement on Auditing Standards No. 61 as amended by Statement on Auditing Standards No. 90 (Communication with Audit Committees) as adopted by the Public Company Accounting Oversight Board (PCAOB), and PCAOB Auditing Standard No. 2 (an Audit of Internal Control over Financial Reporting in Conjunction with an Audit of Financial Statements).

In addition, the Committee has reviewed and discussed with the Company’s independent Registered Public Accounting Firm the firm’s independence from the Company and its management. The Audit Committee received from the independent Registered Public Accounting Firm the written disclosures and the letter regarding its independence as required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) as adopted by the PCAOB.

The Committee has also considered whether the provision of services by the Company’s independent Registered Public Accounting Firm, Ernst & Young LLP, not related to the audit of the financial statements referred to above, is compatible with maintaining Ernst & Young LLP’s independence.

The Committee discussed with the Company’s internal auditors and independent Registered Public Accounting Firm the overall scope and plans for their respective audits. The Committee met with the internal auditors and independent Registered Public Accounting Firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls and the overall quality of the Company’s financial reporting.

In reliance on the reviews and discussions referred to above, the Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission. The Committee and the Board also have recommended, subject to shareholder ratification, the selection of Ernst & Young LLP as the Company’s independent Registered Public Accounting Firm for 2007.

Pedro Aspe (Chairman)

Douglas N. Daft

Hilda Ochoa-Brillembourg

James H. Ross

Edward B. Rust, Jr.

21

Table of Contents

Transactions With Related Persons

Under SEC rules, we are required to disclose material transactions with the Company in which “related persons” have a direct or indirect material interest. Related persons include any Director, nominee for Director, or executive officer of the Company, and any immediate family members of such persons. The term “transaction” is broadly defined under SEC rules to include any financial transaction, arrangement or relationship, including any indebtedness transaction or guarantee of indebtedness.

Based on information available to us and provided to us by our Directors and executive officers and other than the Aircraft Time Sharing Agreement referred to below, we do not believe that there were any such material transactions in effect since January 1, 2006, or any such material transactions proposed to be entered into during 2007.

As noted on pages 31 and 35 of this Proxy Statement, for security reasons, Mr. Harold McGraw III is required to use Company provided aircraft for all air travel. When using Company provided aircraft for personal travel, Mr. McGraw is required to reimburse the Company for the equivalent of first class commercial airfare for himself and for each passenger traveling with him. Mr. McGraw and the Company have entered into an Aircraft Time Sharing Agreement, dated as of September 15, 2004, which provides for such reimbursement. The Compensation Committee of the Company’s Board of Directors has approved this Agreement. During 2006, Mr. McGraw made payments of $122,569 under this Agreement.

The Company’s Board of Directors has adopted a written policy that requires the Board’s Nominating and Corporate Governance Committee to

review and approve any related party transactions. At each calendar year’s first regularly scheduled meeting of the Nominating and Corporate Governance Committee, management is required to present to the Committee specific information with respect to any such transaction expected to be entered into or continued during that calendar year. After reviewing this information, the Committee will approve such transaction only if the following two conditions are met: (1) the transaction must be in the best interests (or not inconsistent with the best interests) of the Company and its shareholders; and (2) the transaction must be entered into by the Company on terms that are comparable to those that would be obtained in an arm’s length transaction with an unrelated third party. If any additional related party transactions are proposed to be entered into subsequent to the Committee’s first calendar year meeting, management is required to present such transactions to the Committee for approval or ratification at a subsequent meeting of the Committee.

22

Table of Contents

EXECUTIVE COMPENSATION

This section contains information on various aspects of compensation of the Company’s executives. In particular, it contains information regarding the cash and equity compensation of the “named executive officers”. The named executive officers of the Company include the Chief Executive Officer (“CEO”), Mr. Harold McGraw III, and the Chief Financial Officer (“CFO”), Mr. Robert J. Bahash. The named executive officers also include the Company’s three most highly compensated executive officers other than the CEO and CFO who were serving as executive officers at the end of the Company’s last completed fiscal year, which ended on December 31, 2006. Mr. Deven Sharma, who served as an executive officer of the Company in his capacity as Executive Vice President, Global Strategy of the Company from January 1, 2006 through October 31, 2006, was not serving as an executive officer of the Company on December 31, 2006. Effective November 1, 2006, Mr. Sharma was appointed Executive Vice President, Investment Services and Global Sales of Standard & Poor’s, a division of the Company. The information provided for Mr. Sharma in the Summary Compensation Table found on page 32 of this Proxy Statement covers the full fiscal year of the Company.

23

Table of Contents

Compensation Discussion and Analysis

Objectives, Principles and Practices

Our compensation program for senior executives, including the named executive officers, is administered by the Compensation Committee. Information about the Compensation Committee and its members can be found on pages 10 through 12, 14 and 16 through 19 of this Proxy Statement.

The main objectives of our executive compensation program are as follows:

The following principles shaped the design and implementation of our compensation program for 2006:

24

Table of Contents

The Executive Compensation Program

Elements and Key Design Aspects. Our executive compensation program consists of the following elements:

As described in greater detail below, individual base salaries, annual cash incentive awards and long-term incentive grant amounts are determined within the framework of the executive’s position and responsibility, individual performance and future leadership potential, as determined by the executive’s manager, or by the Compensation Committee in the case of the CEO and other senior executives, as well as with regard to the external marketplace.

Our executive compensation program for the approximately 30 executives below the CEO consists of two broad executive compensation base salary bands and cash and stock incentive pools for annual bonuses and long-term equity awards. Each executive compensation base salary band is reviewed annually and adjusted approximately every three to five years, depending on market conditions, to remain competitive with the external market. The program is designed to pay median levels (50^th percentile) of competitive compensation for target levels of achievement, pay below median for achievement below target, and pay third quartile (75^th percentile) or above compensation for significantly higher levels of achievement versus target goals. Competitive benchmark compensation survey market data, covering base salaries, annual incentive payments and equity awards, are derived annually from various third-party survey sources, including surveys conducted by Towers Perrin and the Hay Group covering the media, financial services and general industries, to ensure that our executive compensation program remains competitive within our core businesses of publishing, information and media, and financial services as well as general industry.

Each year, compensation decisions covering base salary, annual incentives and stock-based awards are primarily driven by assessments of individual and Company performance. Comparisons are also made to the compensation survey data and prior year equity grants. However, individual annual and long-term incentive payments from preceding years are not used as factors in determining recommendations for the total compensation opportunity for an upcoming year.

The CEO position is not included in the salary bands or incentive pools that cover other senior executives. Instead, the Compensation Committee establishes his base salary, target annual incentive and stock-based awards to be competitive against market reference points for the media and financial services industries.

As noted more fully below and in other sections of this Proxy Statement, a significant portion of the compensation paid to our named executive officers is aligned closely with shareholder interests since it is payable in equity and based on growth in earnings per share. Approximately 80% of our CEO’s 2006 compensation opportunity was variable with the payment or value of the awards subject to the achievement of an annual double-digit earnings per share growth goal for the cash bonus opportunity; achievement of a three-year earnings per share growth goal for the Restricted Performance Share Award; and, in the case of Stock Option grants, future increases in the Company’s stock price. For the other named executive officers, the variable percentages of 2006 compensation opportunities ranged from 60% to 70% of total compensation. We believe that this incentive design provides strong motivation to focus on creating shareholder value.

Base Salaries. The base salaries of our named executive officers are based on a review of the competitive median marketplace for equivalent executive positions and an assessment of the executives’ individual performance evaluated under our Performance Management Program. The Company uses a global Performance Management Program that measures goals, behaviors and competencies to determine

25

Table of Contents

individual performance ratings. Those rated at lower levels are not eligible for base salary increases or annual incentive payments unless and until performance improves to meet their manager’s expectations. Apart from the direct reports to the CEO, two levels of management approval are required to finalize the annual performance ratings. The Compensation Committee determines the performance level of the CEO and reports its findings and recommendations to the independent members of the Board of Directors in executive session each December.

Base salary merit increases for our other named executive officers are recommended annually by the CEO and are reviewed and approved by the Compensation Committee. The base salary increases for the CEO and the other named executive officers are effective on January 1 of each year.

Annual Incentives. Our annual bonus program has an incentive pool design. The Committee establishes the annual incentive target for the CEO in consultation with its independent adviser, Frederic W. Cook & Co. Separate target pools are established for the other named executive officers and other senior executives. The size of the annual incentive pools are updated each year by adjusting the prior year’s pool for changes in headcount and the average of the merit increase budgets set for the upcoming year. At the beginning of each Plan year, the Committee approves a performance goal and payout schedule for the incentive pool based on earnings per share growth over the prior year’s earnings per share. The 2006 goal, established by the Compensation Committee, was a double-digit growth target that paid 100% of the pool dollars for the achievement of 10% growth in earnings per share. The pool was earned on a straight line basis from 0% to 100% for growth between 0% and 10% (for example, 5% growth in earnings per share funded 50% of the target pool). Further, the incentive pool can exceed 100% payment for earnings per share growth in excess of 10%. Growth above 10%, up to 15%, resulted in pool funding up to a maximum of 200% of the target pool with straight line achievement between 10% and 15% (for example, 12.5% growth in earnings funded 150% of the target pool). To calculate the amount of the incentive pool that was earned for the year, the Compensation Committee determined earnings per share growth based on the diluted earnings per share reported in our audited financial statements, subject to adjustments for items that the Compensation Committee determined to exclude, in writing, at the time the performance goals were initially established.

The reported 2006 diluted earnings per share were adjusted for incentive compensation purposes using a definition of earnings per share approved by the Compensation Committee at the beginning of the Plan year. Under this definition, the expense impact of the elimination of the restoration stock option feature (described on pages 34 and 35 of this Proxy Statement) and the impact of the restructuring expenses recognized in the third and fourth quarters were excluded. For purposes of calculating the incentive pool for 2006, the Compensation Committee determined that the adjusted 2006 earnings per share growth exceeded the 15% growth target established for the Award, thereby resulting in the maximum pool funding of 200% of target.

Following the determination of the payment percentage for the 2006 incentive pool, the CEO recommended to the Compensation Committee the approval of the amount of individual incentive payments for the other named executive officers based on his evaluations of their demonstrated leadership performance under the Company’s Performance Management Program and his assessments of their individual performance and contributions to the achievement of pre-established goals and financial results. Separately, the Compensation Committee determined the incentive payment for the CEO using the same criteria noted above and reviewed the incentive payment amount with the independent members of the Board of Directors. The annual incentive payments for the named executive officers for 2006 are shown in the Summary Compensation Table on page 32 of this Proxy Statement.

In accordance with the performance-based compensation requirements of Section 162(m) of the Internal Revenue Code, our annual incentive awards for the named executive officers are designed to be deductible by the Company.

26

Table of Contents

As approved at our annual shareholders meeting in 2005, the maximum payment for each named executive officer from the pool in any year may not exceed 0.5% (0.7% in the case of the CEO) of our adjusted net income for the year. For this purpose, net income is based on the after-tax income reported in our audited financial statements, with adjustments for charges for restructurings, discontinued operations and extraordinary items and other unusual or non-recurring items of loss or expense, and for unbudgeted tax and accounting changes and losses and expenses from acquisitions or divestitures during the year. Further, the Compensation Committee may reduce payments using negative discretion to exclude items of non-recurring special gain or income. Our incentive payments for 2006 performance, paid in 2007, were within these limits.

Long-Term Stock-Based Incentives. Our long-term equity incentive component for the named executive officers’ compensation consists of annual awards of restricted performance shares (“RPS”) and stock options. These awards are intended to align the interests of our senior executives with those of our shareholders, to promote executive share ownership, and in the case of the RPS awards, to provide additional performance incentives based on three-year growth in earnings per share.

Beginning in 2006, the Compensation Committee, based on advice from its external compensation consultant, Frederic W. Cook & Co., changed the established mix of RPS awards and stock options to place greater emphasis on the RPS component, to reduce the number of shares granted annually and to recognize the impact of the SFAS 123(R) accounting regulations that require the expensing of stock option shares. We believe that combined grants of options and RPS awards provide an appropriate balance between risk and potential reward and act as effective retention tools for superior performers.

The 2006 and 2007 stock grant mix guidelines, determined by the Compensation Committee, were as follows:

The Compensation Committee and its external compensation advisor, Frederic W. Cook & Co., believe that the CEO should have a greater portion of long-term incentive compensation tied to stock option grant awards to provide greater upside and downside leverage based on stock price performance.

The 2006 long-term incentive dollar grant value pools for awards were established for our various business segments based on the 2005 dollar grant value for long-term incentives, adjusted for changes in headcount and the salary budget increases for the upcoming year. Using the 2006 grant guidelines, managers then reviewed the individual performance evaluation rating for each participant, assessed their individual contributions during the prior year and made assessments about each individual’s future potential contributions to determine the total dollar amount of each individual’s 2006 long-term incentive award.

The award amounts were then converted to share awards using the stock grant mix guidelines, the stock’s fair market value on the April 3, 2006 grant date to determine the number of RPS award shares and a stock option’s “fair value” on the grant date using a lattice-based stock option pricing model to determine the number of option award shares.

The 2007 stock grant values were approved by the Committee at its December 2006 meeting. The 2007 grant price will be established on April 2, 2007, which is the first business day of April, and the date we grant annual stock awards.

Restricted Performance Shares. RPS awards are granted annually and vest at the end of a three-year award cycle based on achievement of cumulative diluted earnings per share growth during the cycle, vesting in full for target achievement of 10% cumulative compound annual growth as established by the Compensation Committee. Additional shares are issued for above-target growth, up to a maximum of 200% of the shares awarded for achievement at or above 15% growth in earnings per share. Additionally, the Compensation Committee determined that the awards are subject to forfeiture

27

Table of Contents

if the minimum performance goal does not exceed 5% growth during the award cycle, with partial vesting of awards for growth between 5% and 9.9%.

For purposes of determining achievement under the awards, the Compensation Committee determined earnings per share growth based on adjusted diluted earnings per share as described for the annual bonus awards above and an additional adjustment to recognize the impact of SFAS 123(R) stock option expense for the 2006 Plan year. The Company previously granted restricted performance shares in 2004, for the 2004-2006 award cycle, and in 2005, for the 2005-2007 award cycle, as described on pages 32 through 34 of this Proxy Statement, and in 2006, for the 2006-2008 award cycle, as described below. In addition, as described below, the Compensation Committee approved a new grant covering the 2007-2009 award cycle earlier this year using the same double-digit earnings per share growth performance goals described above.

Based on the three-year adjusted earnings per share growth for the period 2004-2006 and the performance goal and payment schedule established by the Compensation Committee at the beginning of the award cycle, the payment for the 2004 restricted performance share award was 200% of target.

Stock Options. Stock options are granted annually and provide the right to purchase shares of our common stock at the grant date fair market value of the shares. Options are designed to directly link the executive’s compensation to value creation for shareholders, as the amount each individual ultimately receives from the option depends solely on the increase in value of the shares from the date of grant through the exercise date. Each stock option grant becomes exercisable in two equal annual installments commencing one year after grant and has a ten-year term.

The named executive officers’ awards for 2007 were approved by the Compensation Committee in December 2006 using the same grant mix as their awards for 2006. The 2007 awards will be made on April 2, 2007, based on the closing price of our common stock on that date.

Under the new accounting standard, RPS awards are recorded using fixed grant date accounting and the expense associated with the awards may be reversed if they are not earned in accordance with the performance goals established for each award. Further, our increased use of RPS awards may result in reduced future dilution levels, as we anticipate that fewer total shares will be issued pursuant to annual awards.

Under its current annual grant procedures, the Compensation Committee established the first business day of April each year as the grant date for equity awards to all our executives, including the named executive officers, beginning in 2001. The first business day of April grant date was selected to align with the common base salary increase review date used by the Company for all employee base salary increases, except those made to the approximately top 30 executives on January 1 of each year. Given the large number of employees receiving stock-based awards, it was determined that adopting a universal grant date to occur each year on the first business day in April – following the Company’s employee performance review process – would enable management to complete the employee performance reviews, communicate to employees, and result in a common stock grant price and award date that linked all equity award recipients together.

Effective January 1, 2007, the grant price of our stock options became the closing price on the New York Stock Exchange on the grant date. Prior to 2007, fair market value was determined as the average of the high and low trading prices on the New York Stock Exchange on the grant date. The Compensation Committee will now use the closing price on the grant date in light of the new SEC proxy disclosure rules that may require additional disclosure where the grant price is other than the closing price on the grant date.

The stock-based awards made to our named executive officers are taxable at the time of vesting in the case of RPS awards, and at the time of exercise in the case of stock options.

28

Table of Contents

The table below shows the 2006 and 2007 target compensation amounts, including base salary, annual incentive bonus target and the value of the long-term incentive equity based awards for the named executive officers, as approved by the Compensation Committee.

2006-2007 Compensation

Section 162(m) of the Internal Revenue Code limits the amount of compensation paid to each named executive officer that may be deducted by the Company to $1 million in any year. There is an exception to the $1 million limitation for performance-based compensation that meets certain requirements. Our annual cash bonuses, equity-based compensation awards and long-term incentive compensation meet those requirements and are fully deductible. However, we do not have a policy requiring that all compensation be deductible. In 2006, approximately $289,000 of the compensation paid to the CEO was not deductible by the Company. It was comprised of the portion of the CEO’s base salary above $1 million, payments of dividend equivalents made on outstanding unearned restricted performance shares and imputed income on Company-provided perquisites. While these amounts were in excess of the $1 million threshold, the Compensation Committee believes that the CEO may receive these compensation payments as current income in the year earned rather than be deferred until after his retirement from the Company. None of the other named executive officers earned non-deductible compensation in 2006.

Equity Ownership. We are committed to ensuring that our executive officers have a significant ownership stake in order to strengthen the alignment of our executives’ interests with those of our shareholders. The direct stock ownership and the dollar value of these owned shares for the named executive officers are shown on the accompanying table along with the value of the owned shares expressed as a multiple of each executive’s base salary. This is a common method for measuring executive stock ownership, and typical stock ownership guidelines call for shares owned having a value ranging between two and five times base salary.

As a result of the significant ownership interest held by most of the named executive officers, except for Mr. Marcus who is relatively new to his current position and will begin showing increased ownership in future years, including the interests acquired under our long-term incentive program, we have not established formal stock ownership guidelines for our executive officers. As part of our most recent review of the executives’ shareholdings in the Company, the Compensation Committee determined that the named executive officers owned a sufficient amount of shares, as expressed as a percentage of base salary, and that there was no need to adopt formal ownership guidelines.

29

Table of Contents

At the close of 2006, our named executive officers owned shares of our common stock valued at the following multiples of the executive’s base salary:

Stock Ownership for Named Executive Officers

All named executive officers are required by our trading policies to obtain prior approval from the Company’s Legal Department and the CEO before purchasing or selling any of our shares, including sales in connection with stock option exercises.

Retirement and Other Post-Employment Benefits. In connection with their retirement or other terminations of employment, the named executive officers will generally be eligible to receive benefits under our savings and retirement plans and, depending on the circumstances of an executive’s termination, severance benefits and accelerated vesting of annual and long-term incentive awards. In addition, the named executive officers can receive the same level of benefits under the Senior Executive Severance Plan if they resign for any reason during the 30-day window period following one year after a change-in-control as they would on a termination without cause or for good reason. Permitting a termination by an executive during a window period is designed to provide incentives for our executives to remain available

to an acquirer for a one-year transition period following a change-in-control. Management believes this feature serves the best interests of the Company and its shareholders since the executive, in order to satisfy the prerequisite for guaranteed severance benefits, will render impartial advice and services during the period leading to the completion of the change-in-control and during a critical transition period following a change-in-control. These post- termination benefits are described in detail beginning on page 43 of this Proxy Statement.

Certain payments that would be provided in connection with a change-in-control may be classified as “excess parachute payments” under IRC Section 280G and may not be deductible as compensation by the Company. In addition, IRC Section 4999 imposes an excise tax on executives that receive an excess parachute payment equal to 20% of such amount, which is not reimbursed or “grossed up” by the Company.

Health and Welfare and Other Fringe Benefits. The Company provides a uniform healthcare benefits program for all domestic U.S. employees, including the named executive officers, to provide security for employees and their families. The employee healthcare contributions are differentiated by salary levels, with the higher paid employees paying a greater share of the total costs. We provide no supplemental executive healthcare benefits other than a Company paid physical examination for the named executive officers and approximately 45 other senior executives. Additionally, approximately 200 executives participate in the Management Supplemental Death and Disability Benefits Plan, which provides a supplemental long-term disability benefit equal to 50% of the executive’s monthly earnings, as defined in the Plan, less other Company paid benefits and Social Security benefit payments.

Perquisites and Other Benefits. We provide the following perquisites, which we believe are reasonable and competitive, to the named executive officers in order to enable them to conduct Company business more effectively and

30

Table of Contents

to allow greater focus on the demands of their positions:

Additionally, pursuant to a third-party security study undertaken for the Company, the CEO is required by the Company to use Company provided aircraft for all air travel. When using Company provided aircraft for personal travel, the CEO and any passengers traveling with him are required to reimburse the Company for the equivalent of first class commercial airfare. The CEO is also provided a Company car and personal driver and maintenance on a home security system. We believe these security costs are legitimate business expenses, but we recognize that they convey a personal benefit. As such, the incremental cost to the Company for providing them is reported in our Summary Compensation Table on page 32 of this Proxy Statement.

We believe that the caliber and motivation of the Company’s named executive officers, other executives and key employees and the quality of their leadership make a significant difference in the performance of the Company. Further, we believe that compensation should vary with the Company’s financial performance so that executives are well rewarded when performance exceeds the rigorous performance goals established by the Compensation Committee, and that there should be commensurate risks to compensation when performance does not meet these goals. In our view, we believe that the Company’s executive compensation program is meeting the goals and objectives outlined in this Report.

31

Table of Contents

Summary Compensation Table

The following table contains information concerning compensation paid to the named executive officers for services rendered in all capacities to the Company in 2006:

32

Table of Contents

Grants of Plan-Based Awards Table

The following table includes each grant of an award made to the named executive officers in 2006 under any equity-based plan of the Company:

Additional Information Concerning the Summary Compensation Table and

Grants of Plan-Based Awards Table

The following disclosures supplement the information provided in the Summary Compensation Table found on page 32 of this Proxy Statement and the above Grants of Plan-Based Awards Table.

Bonus Column. The amounts shown in the Bonus Column of the Summary Compensation Table represent the cash awards paid under the Company’s Key Executive Short-Term Incentive Compensation Plan. Under this Plan, annual incentives are payable for the achievement of annual financial performance goals established by the Compensation Committee and for individual performance and contribution. The corporate performance goal is based on double-digit diluted earnings per share growth. The earned incentive pool amounts are based on actual performance versus the performance goals established for minimum, target and maximum pool achievement. Under these goals, target achievement results in 100% pool funding, the maximum pool funding is 200% of the target incentive pool, and below target achievement may range down to zero pool funding. Based on the Company’s 2006 diluted earnings per share growth exceeding the 15% growth target established by the Compensation Committee at the beginning of the year, the corporate pool funded at 200%.

Stock Awards Column. The amounts shown in the Stock Awards Column of the Summary Compensation Table represent the amount

of the grant date fair value of the performance-based Long-Term Incentive Restricted Performance Shares granted under the 2002 Stock Incentive Plan at $57.81, the average of the high

33

Table of Contents

and low prices on the grant date of April 3, 2006 that is recognized for financial reporting purposes for 2006. Under this Plan, Restricted Performance Share awards vest at the end of a three-year award cycle, with payment ranging up to a maximum of 200% of the shares awarded based on the achievement of cumulative compound diluted earnings per share growth goals established by the Compensation Committee of the Board of Directors at the beginning of each award cycle. The Restricted Performance Share awards are subject to forfeiture if the minimum performance goal is not attained or if a named executive officer’s employment is terminated for certain reasons before the shares become vested. During the award cycle, the named executive officers receive dividends on and have the right to vote the awarded shares. Based on the cumulative compound earnings per share growth for the 2004-2006 award cycle exceeding the 15% growth target established by the Compensation Committee at the beginning of the cycle, the 2004 Award paid out at 200%. A new grant on the same terms was made in 2006 covering the 2006-2008 performance. In the event of a change-in-control of the Company, as discussed on pages 43 through 47 of this Proxy Statement, all of the financial goals are deemed to have been satisfied and the named executive officers would receive the target amount no later than the normal maturity date of the award. In addition, dividend equivalent payments equal to the dividend paid on the Company’s common stock were paid in cash in 2006 on the Restricted Performance Shares.

Option Awards Column. The amounts shown in the Option Awards Column of the Summary Compensation Table represent the amount of the grant date fair value of stock options granted pursuant to the Company’s 2002 Stock Incentive Plan that is recognized for financial reporting purposes for 2006. Under this Plan, these grants were for nonqualified stock options, one-half of which vest on the first anniversary of the grant and the remaining one-half on the second anniversary of the grant. In the event of a change-in-control of the Company, as discussed on pages 43 through 47 of this Proxy Statement, the options become fully vested. Stock options provide the named executive officers with the right to purchase shares of the Company’s common stock at its market value on the date of the grant. Each stock option grant has a ten-year maximum term. This column also includes RSO grants as further described below. The following breakdown indicates the value of the annual awards and any RSO awards for each named executive officer:

For 2006, the Compensation Committee utilized a pool concept for the option grants to introduce a greater flexibility into the program to differentiate and recognize individual performance and future potential. Effective in 2006, the Compensation Committee has revised the stock-based incentive award program to downweight the role stock options play in the total long-term incentive mix and to upweight the role of Restricted Performance Shares.

Restoration Stock Option (“RSO”) Grants. The Compensation Committee approved a stock option enhancement in 1997 called a Restoration Stock Option (“RSO”). If shares of the Company’s common stock were delivered in payment of the exercise price of a stock option, as opposed to the use of cash or “cashless exercises”, an RSO was granted equal to the number of shares used to exercise the stock option. The expiration date of these RSO grants (which were made pursuant to the 2002 Stock Incentive Plan) remains the last day the underlying grant was exercisable. Additionally, if shares were withheld to satisfy the tax obligation on the realized gain, the RSO will include shares equal to the number of shares withheld for taxes. RSO grants were nonqualified, and were first exercisable six months after the date of grant at the market value on the date of grant of the RSO. Only one RSO was granted for each original stock option granted. In the event of a change-in-control of the Company, as discussed on pages 43 through 47 of this Proxy Statement, all options would become fully vested. The Compensation Committee voted to terminate this RSO feature effective as of March 30, 2006.

34

Table of Contents

RSO grants were approved under a standing resolution at the time the original underlying stock option award was granted.

Fair Market Value of Common Stock. As previously discussed, effective January 1, 2007, the fair market value of the Company’s common stock for determining the exercise price of stock options will be set at the closing price of the Company’s common stock on the New York Stock Exchange on the date of grant. Prior to January 1, 2007, fair market value was determined as the average of the high and low trading prices of the Company’s common stock on the New York Stock Exchange on the date of grant. The Compensation Committee approved this change in order to comply with SEC rules which require additional disclosure of any grant price other than the closing price. The Company believes this change minimizes the administrative expense of this program and thereby reduces the cost to the Company and its shareholders.

All Other Compensation Column. The amounts shown in the All Other Compensation Column of the Summary Compensation Table include the items described below.

35

Table of Contents

Outstanding Equity Awards at Fiscal Year-End

The following table contains information concerning unexercised options, stock that has not vested, and equity incentive plan awards outstanding on December 31, 2006 for each of the named executive officers:

36

Table of Contents