SCHEDULE 14A
(Rule 14a-101)
Schedule 14A Information

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

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JEFFRY N. QUINN

Chairman and Chief Executive Officer

 

March 8, 2011

 

Dear fellow stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders of Solutia Inc. on Monday, April 18, 2011. We will hold the meeting at 10:00 a.m., Central Time, at our world headquarters at 575 Maryville Centre Drive, St. Louis, Missouri 63141. You can find a map with directions to our headquarters near the back of the proxy statement that accompanies this letter.

 

We have elected to take advantage of Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their stockholders on the Internet. We believe that the rules will allow us to provide our stockholders with the information they need, while lowering the costs of delivery and reducing the environmental impact of the annual meeting. In order to further reduce the Company’s future costs, we encourage our stockholders to enroll for electronic delivery of their proxy material.

 

Your vote is important. Whether or not you plan to attend the annual meeting, I hope that you will vote as soon as possible. Please review the instructions on each of your voting options described in the proxy statement and the Notice of Internet Availability of Proxy Materials you received in the mail.

 

Thank you for your ongoing support of, and continued interest in, Solutia.

 

Sincerely,

JEFFRY N.QUINN

Chairman of the Board, President and Chief
Executive Officer

 

Solutia Inc. | 575 Maryville Centre Drive | St. Louis, MO 63141 | 314-674-1000

 

Notice of Annual Meeting of Stockholders
To be held on April 18, 2011

 

The Annual Meeting of Stockholders of Solutia Inc. will be held at our world headquarters at 575 Maryville Centre Drive, St. Louis, Missouri 63141 on Monday, April 18, 2011 at 10:00 a.m., Central Time. At the annual meeting, stockholders will consider the following proposals:

 

(1) to elect three directors to serve until the 2014 Annual Meeting of Stockholders;

 

(2) to hold an advisory vote on executive compensation;

 

(3) to hold an advisory vote on the frequency of the advisory vote on executive compensation;

 

(4) to ratify the appointment of our independent public accounting firm; and

 

(5) to transact any other business properly introduced at the meeting

 

For instructions on voting, please refer to the instructions on the Notice of Internet Availability of Proxy Materials you received in the mail, or if you received a hard copy of the proxy statement, on your enclosed proxy card.

 

By order of the Board of Directors

 

Miriam Rogers Singer

Vice President and Corporate Secretary

 

This proxy statement and the accompanying proxy card are being sent or made available on or about March 8, 2011.

 

TABLE OF CONTENTS

 

 

ABOUT THE PROXY MATERIALS AND THE ANNUAL MEETING

 

Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

 

In accordance with rules and regulations adopted by the Securities and Exchange Commission (“SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record, we are furnishing proxy materials, including this proxy statement and the Solutia Inc. 2010 Annual Report to Stockholders, by providing access to such documents on the Internet. Most stockholders will not receive printed copies of the proxy materials unless they request them. Instead, commencing on or about March 8, 2011, a Notice of Internet Availability of Proxy Materials (the “Notice”) was sent to most of our stockholders which will instruct you as to how you may access and review all of the proxy materials on the Internet. The Notice also instructs you as to how you may submit your proxy on the Internet. If you would like to receive a paper or email copy of our proxy materials, you should follow the instructions for requesting such materials in the Notice. We encourage our stockholders to sign up for electronic delivery of their proxy material.

 

Why am I receiving these materials?

 

Our Board of Directors (our “Board”) is soliciting proxies for the 2011 Annual Meeting of Stockholders, which will take place on April 18, 2011. In connection with the annual meeting, our Board of Directors is providing these proxy materials to you on the Internet or, upon your request, has delivered printed versions of these materials to you by mail. Stockholders are invited to attend the annual meeting and are requested to vote on the proposals described in this proxy statement.

 

What is included in these materials?

 

These materials include:

 

 

If you requested printed versions of these materials by mail, these materials also include the proxy card for the annual meeting.

 

What information is contained in these materials?

 

The information included in this proxy statement relates to the proposals to be voted on at the annual meeting, the voting process, the compensation of directors and our most highly paid executive officers and certain other required information.

 

What proposals will be voted on at the annual meeting?

 

There are four proposals scheduled to be voted on at the annual meeting:

 

 

What is the Solutia Board’s voting recommendation?

 

The Board recommends that you vote your shares as follows:

 

 

Who is entitled to vote at the Annual Meeting?

 

The close of business on February 24, 2011 was the record date for determining the holders of our common stock entitled to notice of and to vote at the annual meeting and any postponement or adjournment thereof. The Notice contains instructions on how to vote. On the record date, there were 121,893,667 shares of our common stock outstanding. Each stockholder is entitled to one vote for each share of common stock held as of the record date.

 

How many votes do I have?

 

You have one vote for each share of our common stock that you owned at the close of business on the record date. These shares include:

 

 

What is the difference between holding shares as a “stockholder of record” and as a beneficial owner?

 

If your shares are registered directly in your name with our transfer agent, you are considered, with respect to those shares, the “stockholder of record”, and the Notice, or if requested, these proxy materials are being sent to you directly by Solutia. As a stockholder of record, you have the right to grant your voting proxy directly to the persons named as proxy holders, Jeffry N. Quinn, our President, Chief Executive Officer and Chairman of the Board and Paul J. Berra, III, our Senior Vice President, Legal and Governmental Affairs and General Counsel, or to vote in person at the annual meeting. If you requested copies of the proxy materials, we have enclosed a proxy card for you to use. You may also vote on the Internet or by telephone, as described below under the heading “How can I vote my shares without attending the annual meeting?”

 

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of the shares held in “street name” and these proxy materials are being forwarded to you by your broker or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker, bank or other nominee on how to vote your shares and are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the annual meeting. Your broker, bank or nominee has enclosed a voting instruction card for you to use in directing your broker, bank or nominee as to how to vote your shares. You may also vote by Internet or by telephone, as described below under “How can I vote my shares without attending the annual meeting?”

 

How can I vote my shares in person at the annual meeting?

 

Shares held directly in your name as the stockholder of record may be voted in person at the annual meeting. If you choose to vote your shares in person at the annual meeting, please bring your enclosed proxy card and proof of identification. Even if you plan to attend the annual meeting, we recommend that you vote your shares in advance as described below so that your vote will be counted if you later decide not to attend the annual meeting.

 

Shares held in street name may be voted in person by you only if you obtain a signed legal proxy from your broker giving you the right to vote the shares.

How can I vote my shares without attending the annual meeting?

 

Whether you hold your shares directly as the stockholder of record or beneficially in “street name,” you may direct your vote without attending the annual meeting by proxy. You can vote by proxy over the Internet, or by telephone or by mail. Please follow the instructions provided in the Notice, or, if you request printed copies of the proxy materials, on the proxy card or voting instructions you receive.

 

Can I revoke my proxy or change my vote?

 

You may revoke a proxy or change your voting instructions at any time prior to the vote at the annual meeting. You may enter a new vote by using the Internet or the telephone or by mailing a new proxy card or new voting instruction card bearing a later date (which will automatically revoke your earlier voting instructions) or by attending the annual meeting and voting in person. Your attendance at the annual meeting in person will not cause your previously granted proxy to be revoked unless you specifically so request. Notify Miriam Rogers Singer, our Corporate Secretary, in writing before the annual meeting that you have revoked your proxy.

 

What is the “quorum” requirement for the annual meeting?

 

The quorum requirement for holding the annual meeting and transacting business is a majority of the outstanding shares of our common stock that are present or represented at a meeting. The shares may be present in person or represented by proxy at the annual meeting. Both abstentions and broker non-votes are counted as present for the purpose of determining the presence of a quorum.

 

How are votes counted?

 

In the election of directors (Proposal No. 1), your vote may be cast “FOR” all of the nominees or your vote may be “WITHHELD” with respect to one or more of the nominees. For the advisory vote on executive compensation (Proposal No. 2) and the ratification of our independent public accounting firm (Proposal No. 4), your vote may be cast “FOR” or “AGAINST” or you may “ABSTAIN”. For the advisory vote on the frequency of the vote on executive compensation (Proposal No. 3), your vote may be cast for “ANNUAL”, “EVERY 2 YEARS” or “EVERY 3 YEARS” or you can “ABSTAIN”. If you “ABSTAIN”, it has the same effect as a vote “AGAINST” each of the other three options set forth in Proposal No. 3. If you sign your proxy card or broker voting instruction card with no further instructions, your shares will be voted in accordance with the recommendation of the Board.

 

Is my vote confidential?

 

Proxy instructions, ballots and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within Solutia or to third parties except (i) as necessary to meet applicable legal requirements; (ii) to allow for the tabulation of votes and certification of the vote and (iii) to facilitate a successful proxy solicitation by the Board. Occasionally, stockholders provide written comments on their proxy card, which are then forwarded to Solutia’s management.

 

Who will count the vote?

 

A representative of Broadridge Financial Solutions, Inc. will tabulate the vote and act as the inspector of elections.

 

What is the voting requirement to approve each proposal?

 

In the election for directors, (Proposal No. 1), the three persons receiving the highest number of “FOR” votes will be elected. If you indicate “WITHHELD” for a particular nominee on your proxy card, your vote will not count either “for” or “against” the nominee. Such abstentions are not counted in the election of directors and do not affect the outcome.

 

If a quorum is present, approval of Proposals No. 2, No. 3 and No. 4 requires the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting on that proposal at the

2011 Annual Meeting of Stockholders. Proposal Nos. 2 and 3 are advisory votes only and as discussed in more detail below; the voting results are not binding on us.

 

If you are a beneficial owner of Solutia shares and do not provide the stockholder of record with voting instructions, your beneficially owned shares may constitute broker non-votes. Broker non-votes may occur because certain beneficial holders of Solutia shares hold their shares in “street name” through a broker or other nominee. Under the rules of the New York Stock Exchange, the only item to be acted upon at our 2011 Annual Meeting of Stockholders with respect to which a broker or nominee will be permitted to exercise voting discretion is Proposal No. 4, the ratification of the appointment of Deloitte & Touche LLP to serve as our independent public accounting firm for fiscal year 2011. Therefore, if a beneficial holder of Solutia shares does not give the broker or nominee specific voting instructions on Proposal Nos. 1 through 3, the holder’s shares will not be voted on those items and a broker non-vote will occur. Broker non-votes will have no effect on the voting results for such proposals.

 

An abstention on any of Proposals Nos. 2, 3 or 4 identified above will have the effect of a vote against that proposal. With respect to Proposal No. 3 specifically, an abstention will have the effect of a vote against all three options of “ANNUAL”, “EVERY 2 YEARS” or “EVERY 3 YEARS” with respect to how often a non-binding vote on executive compensation should occur.

 

What does it mean if I receive more than one Notice, proxy or voting instruction card?

 

It means your shares are registered differently or are in more than one account. For all Notices you receive, please enter your vote by Internet for each control number you have been assigned. If you received paper copies of proxy materials, please provide voting instructions for all proxy and voting instruction cards you receive.

 

Where can I find the voting results?

 

We will publish the final results in a current report on Form 8-K within four business days of the annual meeting. You can obtain a copy of the Form 8-K by logging on to our website at www.solutia.com, by calling the SEC at 800-SEC-0330 for the location of the nearest public reference room, or through the EDGAR system at www.sec.gov. Information on our website does not constitute part of this proxy statement.

 

THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

 

Structure of the Board of Directors

 

Our Second Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws provide for a Board that is divided into three classes as equal in size as possible. The classes have three-year terms, and the term of one class expires each year in rotation at that year’s annual meeting. The size of the Board of Directors can be changed by a majority vote of its members and is currently set at nine members. Vacancies on the Board of Directors may be filled by a majority of the remaining directors. A director elected to fill a vacancy, or a new directorship created by an increase in the size of the Board of Directors, serves for the remainder of the full term of the class of directors in which the vacancy or newly created directorship occurred.

 

Director Biographies

 

The terms of three directors (Messrs. Monahan, Peiser and Quinn), Class III Directors, expire at the 2011 Annual Meeting. Our Governance Committee has recommended and the Board of Directors has nominated these three Class III directors for a three-year term that will expire in 2014. On February 24, 2011, our Board of Directors increased the size of our Board from eight to nine Directors and elected Mr. Edgar G. Hotard to fill the vacancy. Mr. Hotard was elected as a Class 1 director. The terms of Messrs. deVeer, Hotard and Smith, our Class I Directors, expire at the 2012 Annual Meeting and the terms of Messrs. Heffernan, Jagodinski and Rusnack, our Class II Directors, expire at the 2013 Annual Meeting. The following is a list of our directors and nominees for director.

 

 

Role of the Board; Corporate Governance Matters

 

The Board oversees the Company’s Chief Executive Officer (the “CEO”) and other senior executive management in the competent and ethical operation of our Company and assures that the long-term interests of the stockholders are being served. It is our policy to conduct our business with integrity and an unrelenting passion for providing the best value to our customers. All of our corporate governance materials, including the Corporate Governance Guidelines, our Code of Ethics for Senior Financial Officers, Code of Business Conduct and Ethics and Audit, Governance and Executive Compensation and Development Committee charters, are published under “Corporate Governance” in the Investors section of our website at www.solutia.com. These materials are also available in print to any stockholder upon request. Any person who wishes to obtain a copy of any of these documents may do so by writing to Investor Relations, Solutia Inc., 575 Maryville Centre Drive, St. Louis, Missouri 63141. The Board of Directors continually reviews these materials, Delaware law, the rules and listing standards of the New York Stock Exchange and SEC regulations, as well as best practices suggested by recognized governance authorities, and modifies the materials as warranted.

Board Leadership Structure

 

The Board believes that our CEO is best situated to serve as Chairman because he is the director most familiar with the Company’s business and industry, possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the Company and is thus best positioned to develop agendas that ensure that the Board’s time and attention are focused on the most critical matters. The Company’s independent directors bring experience, oversight and expertise from outside the company and industry, while the CEO brings company-specific experience and expertise. The Board believes that the combined role of Chairman and CEO facilitates information flow between management and the Board, which are essential to effective governance.

 

Additionally, one of the responsibilities of the Board is to work with management to develop strategic direction and hold management accountable for the execution of strategy once it is developed. The Board believes the combined role of Chairman and CEO, together with an independent Lead Director having the duties described below, is in the best interest of stockholders because it provides the appropriate balance between strategy development and independent oversight of management.

 

William T. Monahan, an independent director was selected by the Board to serve as the Lead Director for all meetings of the independent directors held in executive session. The Lead Director has the responsibility of presiding at all executive sessions of the Board, consulting with the Chairman and Chief Executive Officer on Board and committee meeting agendas, acting as a liaison between management and the non-management directors, including maintaining frequent contact with the Chairman and Chief Executive and advising him on the effectiveness of the board meetings, facilitating teamwork and communication between the independent directors and management.

 

Board Committees

 

Our current Board of Directors has the following three committees: Audit, Executive Compensation and Development (“ECDC”) and Governance. The table below contains information concerning the membership of each of the committees and the number of times the Board and each committee met during 2010. During 2010, each director attended at least 75% of the total number of meetings of the Board and of the committees on which he serves. In addition, all directors are expected to attend the 2011 Annual Meeting of Stockholders.

 

 

 

5  Chair  • Member

 

Governance Committee

 

The Governance Committee is responsible for the following items:

 

 

 

Executive Compensation and Development Committee

 

The Executive Compensation and Development Committee is responsible for the following items:

 

 

The report of the Executive Compensation and Development Committee can be found on page    of this proxy statement.

 

 

The Executive Compensation and Development Committee is comprised of five directors: Mr. Heffernan, Chair, and Messrs. deVeer, Hotard, Monahan and Rusnack. None of these individuals is a current or former officer or employee of ours or any of our subsidiaries, nor did any of these individuals have any reportable transactions with us or any of our subsidiaries during 2010. During 2010, none of our executive officers served as a director or member of the compensation committee (or equivalent thereof) of another entity, any of whose executive officers served as our director.

 

Audit Committee

 

The Audit Committee is responsible for the following items:

 

 

The Audit Committee is directly responsible for the appointment, compensation and oversight of the work of our independent registered public accounting firm.

 

The Board has also determined, in its judgment, that all members of the Audit Committee are “audit committee financial experts” and that each member of the Audit Committee is “financially literate.” The Board of Directors has determined that none of the members of the Audit Committee currently serves on the audit committees of more than three public companies. The report of the Audit Committee can be found on page 45 of this proxy statement.

 

The Board of Directors has determined in its judgment that the Audit Committee, Executive Compensation and Development Committee and Governance Committee are composed entirely of independent directors as defined in the New York Stock Exchange listing standards and operate under written charters adopted by the entire Board.

Board Oversight of Risk Management

 

The Board has an active role, as a whole and also at the committee level, in overseeing management of the Company’s risks. The Board regularly reviews information regarding our corporate strategy, business development, business operations and capital structure, as well as the risks associated with each. Each of the Board committees also considers risk within its areas of responsibilities and keeps the Board regularly informed through committee reports about such risks. The ECDC is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The Audit Committee oversees management of financial risks. The Governance Committee manages risks associated with the independence of the Board of Directors, including potential conflicts of interest, and reviews risks related to legal and regulatory compliance. We believe the Board’s administration of its risk oversight function has not affected the Board’s current leadership structure.

 

From time to time, the ECDC reviews the potential risks associated with the structure and design of our compensation programs. During 2010, at the request of our ECDC, our management undertook a comprehensive evaluation of our incentive compensation programs to assess whether any portion of these programs encourages excessive risk taking. Among the program features evaluated were the mix of fixed versus at-risk and cash-based versus equity-based compensation, the performance metrics at the Company, business unit and individual level, potential compensation volatility and the alignment between performance goals and the Company’s business strategy. The evaluation, which was presented to and reviewed by the ECDC, concluded that the Company’s compensation programs are effectively designed to mitigate risk without diminishing the incentivizing-nature of the compensation. Specific features of the compensation programs that mitigate risk include the following: caps limiting the amount that can be paid under our annual incentive plan; a balanced mix of cash versus equity and short-term versus long-term incentive opportunities; multiple performance metrics; staggered performance periods; ECDC discretion to raise or lower incentive payouts; management processes to oversee risk associated with each of our incentive programs; and stock ownership guidelines for executive officers.

 

In the “Compensation Discussion and Analysis” section of this proxy statement, we describe in more detail the features of our executive compensation programs designed to mitigate risk, along with the oversight provided by our ECDC, which reviews and approves the design, goals and payouts under our corporate short- and long-term incentive programs. Based on the assessment of management and our ECDC, we believe our compensation policies, programs and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

Director Independence

 

It is the Board of Directors’ objective to have an overwhelming majority of directors who are independent. We have adopted in our corporate governance guidelines the standards established by the New York Stock Exchange for determining whether a director is independent. These standards are attached to this proxy statement as Appendix A. The Board of Directors has determined, in its judgment, that the non-employee directors meet the New York Stock Exchange standards for independence. Other than Jeffry N. Quinn, our CEO, President and Chairman of the Board, each member of our Board of Directors satisfies the independence standards in the corporate governance guidelines. The independent members of the Board of Directors meet regularly without any members of management present. These sessions are normally held following or in conjunction with regular Board meetings. Mr. Monahan, our Lead Director, serves as the presiding director during executive sessions of non-management directors.

 

All members of our Audit, Executive Compensation and Development and Governance committees must be independent directors as defined by our corporate governance guidelines. Members of the Audit Committee must also satisfy a separate SEC independence requirement, which provides that they may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from us or any of our subsidiaries other than their directors’ compensation.

 

Code of Ethics for Senior Financial Officers

 

Our Board of Directors has adopted a Code of Ethics for Senior Financial Officers. This code applies to our CEO and the other senior officers who have financial responsibilities, including our chief financial officer, treasurer, controller and general counsel.

Related Party Transaction Policy and Procedures

 

We have written related party transaction policy and procedures. The Audit Committee of the Board of Directors is responsible for approving and ratifying related party transactions under our policy and procedures. The Audit Committee reviews the material facts of all Interested Transactions (as defined in our policy and procedures) that require the Audit Committee’s approval and either approves or disapproves of the entry into the Interested Transaction. If advance pre-approval of an Interested Transaction is not feasible, the Audit Committee considers the Interested Transaction at its next regularly scheduled meeting and if appropriate, the Interested Transaction is ratified. In 2010, the Audit Committee did not approve any related party transactions.

 

Under the policy, certain Interested Transactions have standing pre-approval including (i) employment of executive officers, (ii) director compensation, (iii) transactions where all shareholders receive proportional benefits, (iv) transactions involving competitive bids, (v) certain transactions with other companies where the related party’s only relationship is as an employee (other than an executive officer), director, or beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved does not exceed $1,000,000 or 2% of that company’s total annual revenues, (vi) regulated transactions and (vii) certain banking related services.

 

Nomination Process for Election of Directors

 

The Governance Committee identifies, investigates and recommends prospective directors to the Board with the goal of creating a balance of knowledge, experience and capability. The Governance Committee identifies nominees by first evaluating the current members of the Board who are willing to continue in service, balancing the value of continuity of service by existing members with that of obtaining a new perspective. The Governance Committee believes that the continuing service of Board members promotes stability and continuity in the boardroom and gives us the benefit of their familiarity and insight into our business. Accordingly, it is generally the policy of the Governance Committee to nominate qualified incumbent directors who wish to continue in service, so long as such directors (i) satisfy the committee’s criteria for membership on the Board and (ii) in the opinion of the committee, will continue to make important contributions to the Board. If (i) any member of the Board does not wish to continue in service, (ii) the committee or the Board decides not to re-nominate a member for re-election or (iii) the size of the Board is increased, the committee generally will solicit suggestions for director candidates from all Board members and will likely, although it is not required to, engage a search firm to assist in identifying qualified candidates; where such a search firm is engaged, the Governance Committee is responsible for setting the fees and the scope of the engagement.

 

Candidates for director are reviewed in the context of the current composition of the Board, our operating requirements and the long-term interests of our stockholders. In conducting this assessment, the Governance Committee considers diversity as it deems appropriate given our current needs and the current needs of our Board to maintain a balance of knowledge, experience and capability. When considering diversity, the Governance Committee considers diversity as one factor, of no greater or lesser importance than other factors and considers diversity in a broad context of gender, race, age, business experience, skills, international experience, education, other public company board experience and other relevant factors. The Governance Committee believes that candidates for director should have certain minimum qualifications, including business experience, high moral character as well as the ability to read and understand basic financial statements; however, the committee retains the right to modify these minimum qualifications from time to time. The Governance Committee recommended the slate of directors proposed for election at the annual meeting, which was unanimously approved by the Board. The policy of the Governance Committee (and the Board generally) is to consider written nominations of candidates for election to the Board properly submitted by stockholders; however, it does not actively solicit such nominations. Pursuant to our Bylaws, stockholders must comply with certain procedures in connection with any nominations to the Board, which are summarized below under “Procedure for Nominations of Directors.” The Governance Committee does not intend to alter the manner in which it evaluates candidates, including the criteria set forth above, based on whether the candidate is recommended by a stockholder or otherwise.

Procedure for Nominations of Directors

 

Our Bylaws provide procedures for the nomination of directors. Our Bylaws provide that nominations for the election of directors may only be made by the Board or, if certain procedures are followed, by any stockholder who is entitled to vote generally in the election of directors. Any stockholder of record entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a meeting of stockholders only if written notice of such stockholder’s intent to make such nomination or nominations has been delivered to our Secretary at our principal executive offices not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which we first publicly announce the date of such meeting). Each such notice of a stockholder’s intent to nominate a director must set forth certain information as specified in our Bylaws and for the 2012 Annual Meeting of Stockholders must also be submitted in the time frame described below under “Stockholder Proposals for 2012 Annual Meeting”.

 

Director Compensation for the Year Ended December 31, 2010

 

During 2010 the ECDC asked Semler Brossy Consulting Group, its independent compensation consultant, to evaluate our non-employee director compensation program relative to market practice as compared with our Peer Group companies. Please see “Compensation Disclosure and Analysis” — “Determining Competitive Compensation” for information regarding our Peer Group. As a result of the evaluation, in April 2010, our ECDC made the following changes to our non-employee director compensation: (1) increased the annual cash board retainer from $50,000 to $60,000 effective as of July 1, 2010; (2) increased the annual equity retainer grant from $50,000 to $75,000 effective April 21, 2010; and (3) eliminated the initial equity grant effective as of November 1, 2010. The annual cash retainer for committee chairs and for committee membership did not change. The following table displays all components of compensation for current non-employee directors:

 

 

 

 

Our non-employee directors may elect to defer up to 100% of their cash retainer compensation and/or their equity retainer compensation pursuant to our Non-Employee Director Deferred Compensation Plan. Under the Plan, participants do not pay taxes on their deferral or on investment earnings on the deferral until the participant receives a distribution from the Plan. Distributions from the Plan are made in a lump sum within ninety days of a participant ceasing to be a director. Participants may choose to have their deferred cash retainer account credited annually with interest based on the Prime Rate as reported in the Wall Street Journal on the last business day of each year or have their account treated as if invested in our Common Stock. Deferred equity retainers are treated as invested in our Common Stock and are paid in shares of our Common Stock. Deferred restricted stock units are subject to the terms of the grant including vesting.

 

Directors who are our employees do not receive payment for their services as directors. Mr. Jeffry N. Quinn, our current Chairman of the Board is also our President and CEO. A Lead Director retainer is paid to the lead non-employee director if the Chairman of the Board is our employee. Our current Lead Director is William T. Monahan.

Director Stock Ownership Guidelines

 

Our directors are subject to stock ownership guidelines. The director ownership guidelines are set forth in the Board’s Corporate Governance Guidelines and provide that, within five years of becoming a director, each director shall own equity securities in the Company in the aggregate amount equal to four times the annual cash retainer. For purposes of computing the amount of securities owned by a director, restricted stock and restricted stock units are valued at the time of the grant and included in the computation. Unexercised stock options, if any, are not included.

 

Compensation of Non-Employee Directors — 2010

 

The following table shows the compensation of our non-employee directors for the year ended December 31, 2010:

 

 

 

 

Communicating with the Board of Directors

 

Interested parties may communicate with the full Board of Directors, the non-management directors as a group, or individual directors including our Lead Director, by sending written correspondence in care of Solutia Inc., 575 Maryville Centre Drive, P. O. Box 66760, St. Louis, MO 63166, Attention: Corporate Secretary. Financial and accounting matters may also be sent directly to the attention of the Chair of the Audit Committee in care of the Corporate Secretary at the above address. The Chair of the Governance Committee and his duly authorized agent(s) shall be responsible for reviewing interested party communications. Communication from interested parties shall be forwarded to the full Board or to the individual director(s) to whom the communication is addressed unless a communication is threatening, illegal or similarly inappropriate. Advertisements, solicitations for periodicals or other subscriptions, and other similar communications are not forwarded to directors.

 

BENEFICIAL STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PERSONS OWNING MORE THAN 5 PERCENT OF COMMON STOCK

 

The following table shows the amount of Solutia common stock beneficially owned as of February 28, 2011 (unless otherwise indicated) by each person known by Solutia to own beneficially more than 5% of our outstanding common stock, by each of our directors and nominees for director, by each of our Named Executive Officers and by all directors, nominees for director and executive officers of Solutia as a group. Unless otherwise indicated, each person has sole investment and voting power over the securities listed in the table. The business address for each of our directors and executive officers listed below is c/o Solutia Inc., 575 Maryville Centre Drive, St. Louis, MO 63141.

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors, executive officers and any persons beneficially holding more than ten percent of our common stock to report their ownership of common stock and any changes in that ownership to the SEC and the New York Stock Exchange. The SEC has established specific due dates for these reports, and we are required to report in this proxy statement any failure to file by these dates. Based solely on a review of the copies of the reports furnished to us and written representations that no other such statements were required, we believe that all such reports of our directors, executive officers and persons beneficially holding more than ten percent of our common stock were filed on a timely basis except Mr. Gary M. Glandon who had one late Form 4 filing in November 2010, with respect to reporting of option and restricted stock awards made to him under our Amended and Restated 2007 Management Long-Tem Incentive Plan. Such Form 4 was inadvertently filed 4 business days late.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Executive Summary

 

Introduction

 

The compensation of our executive officers, including our NEOs reflects the assessment by our ECDC of our performance and each executive’s contribution to our performance. The compensation decisions of our ECDC discussed and analyzed herein were made at three points during the year. On February 16, 2010, our ECDC set the performance measures and goals of our 2010 annual incentive plan; on April 21, 2010, our ECDC made grants to our executive officers under our long term incentive plan; and on February 23, 2011, our ECDC made adjustments to the base salaries of our executive officers and made awards to those officers under our 2010 annual incentive plan. Each of the decisions and the plans under which they were made are discussed herein.

 

In February 2010, our ECDC established financial measures and strategic goals under our 2010 annual incentive plan, which was approved by our stockholders at our 2010 annual meeting. The awards granted under the 2010 annual incentive plan in February, 2011 reflect the Company’s performance versus those goals as well as the contribution of each of the executive officers.

 

In April, the ECDC granted equity awards under the long term incentive plan in accordance with equity grant guidelines that had been previously adopted by the ECDC. The long term incentive plan was also approved by our stockholders at our 2010 annual meeting. Grants under the long term incentive plan in April, 2010 were in part influenced by decisions made by the Company and the ECDC in 2009 which, because of the global recession, included suspending the annual incentive plan, freezing base salary increases, and eliminating the Company matching contributions to our savings and investment plan (our 401(k) plan). The equity grants for 2010 consisted of a mix of stock options, restricted and performance shares

 

Our Named Executive Officers

 

For 2010, Solutia’s Named Executive Officers (our “NEOs”) are the following individuals:

 

 

Our Performance for 2010

 

The Company achieved strong financial performance in 2010 and we believe our employees, including our NEOs were instrumental in helping us achieve these results. Key highlights of our 2010 performance include the following:

 

 

 

Compensation Philosophy and Objectives

 

Our philosophy for compensating executives is to motivate and reward exceptional performance on a company and individual basis. Our program is designed to capture many aspects of performance including annual financial and strategic results, relative performance against our industry and longer-term shareholder value creation. We provide a competitive level of total compensation at target that can vary substantially for performance above and below target so as to attract and retain executives qualified to execute our business objectives and our strategy and to motivate them to contribute to our short-term and long-term success.

 

In addition to company performance, as described above, compensation levels for our NEOs reflect factors such as each NEO’s leadership ability, overall knowledge and experience in his particular segment of our business, the competitive compensation environment for such individual, that person’s unique skills and his expected future contribution to the success of the Company. The ECDC’s approach to compensation includes efforts to ensure that compensation policies and practices are consistent with effective risk management. We believe our compensation philosophy reflects a responsible balance of competitive compensation, sound risk management and accountability to stockholders.

 

 

¹ We define EBITDA to mean earnings from continuing operations before interest expense, loss on debt extinguishment, income taxes, depreciation and amortization, less net income attributable to non-controlling interests. We define Adjusted EBITDA to mean EBITDA less certain gains and losses that affect comparability, cost overhang associated with the sale of our Integrated Nylon business and the shutdown of our Primary Accelerators business and non-cash stock compensation expense. We define adjusted EBITDA margin to mean adjusted EBITDA as a percentage of net sales. We define adjusted Earnings Per Share to mean total earnings, as adjusted for certain gains and losses that affect comparability, divided by the number of outstanding company shares.

The following chart illustrates the general framework of the ECDC’s weighting of the elements of compensation at target for 2010 for our CEO and the interplay of the performance measurements for at-risk compensation:

 

 

The Role of our ECDC, our Compensation Consultant and our Management

 

Role of our ECDC.

 

The ECDC oversees the development and administration of our executive compensation program, including its underlying philosophy and related policies. The ECDC determines all compensation for our executive officers, including our NEOs. The ECDC’s responsibilities include reviewing and establishing base salaries and incentive opportunities, equity compensation, executive perquisites and any other form of executive compensation for the NEOs including our CEO. The ECDC also reviews its decision relating to our CEO’s compensation with the independent members of our Board and oversees the performance evaluation of our CEO.

 

Role of our Compensation Consultant.

 

Under the ECDC’s charter, the ECDC has the authority to select, retain and compensate one or more executive compensation consultants and/or other experts as it deems necessary to carry out its responsibilities. Since 2009, the ECDC has retained Semler Brossy Consulting Group (“Semler Brossy”) as its independent compensation consultant to ensure that it would receive independent advice on its compensation programs and decisions.

 

At the ECDC’s request, Semler Brossy provides research and market data regarding executive compensation and advises the ECDC on all principal aspects of executive compensation, including market practices, compensation program design and related subjects. Semler Brossy reports directly to the ECDC, although its personnel may meet with management from time to time to gather information or to obtain management’s perspective on executive compensation matters. A consultant from Semler Brossy attends relevant parts of the ECDC meetings in person or by phone. Semler Brossy does not provide any other services to us.

Role of Management.

 

Our CEO participates in ECDC meetings at the ECDC’s request to provide:

 

 

Our CEO has no role in determining his own compensation.

 

Our human resources department is responsible for managing and implementing the day-to-day aspects of our executive compensation program established by the ECDC. Our Senior Vice President and Chief Human Resources Officer serves as the primary management liaison to the ECDC.

 

Determining Competitive Compensation

 

To make decisions regarding the compensation of each executive, the ECDC reviews the executive’s performance and accomplishments over the prior year with our CEO. The CEO makes recommendations to the ECDC about base salary increases and any variations for senior executives in the applicable annual bonus or equity grant value guidelines adopted by the ECDC, except with respect to his own compensation. The ECDC takes into account the competitive compensation environment, our performance and each executive’s performance, as well as internal equity considerations within the Company.

 

For the CEO, the ECDC reviews the factors described above as well as reviews evaluations from all of the independent directors and a self assessment by the CEO. This information is reviewed by the full Board in executive session without the CEO’s participation to provide a basis for determining CEO compensation as well as to provide constructive feedback to our CEO.

 

Role of Peer Companies and Use of Market Data:  With the assistance of Semler Brossy, the ECDC identified a group of peer companies to use for comparison purposes for our executive compensation for 2010. Our peer group remains the same as the group we used in 2009, which consists of 14 similarly sized publicly traded specialty chemical and performance materials companies (the “Peer Group”). The following companies comprise the Peer Group:

 

 

The ECDC reviews compensation pay levels and practices at the Peer Group companies to inform the Committee’s decision making process so it can set total compensation levels that it believes are reasonably competitive. The ECDC does not target or benchmark any specific percentage or range of total compensation or any individual compensation element for the NEOs relative to the Peer Group. Rather, the ECDC uses the Peer Group information merely as a guide to determine whether we are generally competitive in the market. The ECDC also reviews general industry survey data from companies of similar size to us as another reference point to determine competitiveness with the market.

 

Elements of Executive Compensation Program

 

The direct compensation of our executives is comprised of three principal elements: (1) base salary, (2) annual cash incentives and (3) long-term incentives in the form of equity awards. We also provide perquisites of relatively limited value for the convenience of our executives so that their time can be most effectively directed toward Company matters. The ECDC, as part of its evaluation of the overall compensation of each NEO, reviews these

elements individually and total compensation as a whole in the form of tally sheets and compares each against competitive compensation data.

 

Base Salaries:  Base salary for our CEO is determined by our ECDC and, for our NEOs other than the CEO, by our ECDC with input from our CEO.

 

Base salaries are designed to comprise a lesser portion of our executives’ total direct compensation than targeted at-risk compensation (i.e., cash incentive and equity pay). Generally, annual base salary increases for all executives are based on the individual’s performance, competitiveness of the current salary, our overall salary increase pool and, with respect to executives other than the CEO, the recommendations by the CEO to the ECDC. The effective date of any increase in executives’ base salaries is generally on or about January 1st of each year.

 

Annual Cash Incentives:  The 2010 annual incentive plan (the “AIP”) provides short-term performance-based cash incentives to reward virtually all of our employees for the achievement of corporate and, if applicable, specific business unit financial and strategic measures. The AIP is based on a bonus pool concept meaning that the annual cash bonuses are funded based on the results of corporate (enterprise) and business unit performance. Each participant in the AIP has a target bonus level expressed as a percentage of the participant’s base pay. The sum of all the target bonuses constitutes the total pool available for bonuses at a target level of performance. The actual bonus pool is determined based upon our performance against the specific financial and strategic goals established by our ECDC. The maximum funding factor is 2x meaning that the maximum bonus pool cannot exceed two times the sum of all target bonuses.

 

Every participant’s AIP award is comprised of an objective portion and a discretionary portion. The objective portion, expressed as a percentage of the participant’s target bonus opportunity, is based solely on Company performance. Accordingly, under any specific performance scenario, assuming a minimum threshold pool funding level of performance is achieved, the fixed portion serves as a minimum bonus the participant is entitled to receive if the other eligibility criteria set forth in the AIP are satisfied. Due to the 2x funding factor limitation discussed above, the maximum objective portion an individual can receive is 2x the objective portion at a target performance level.

 

The discretionary portion is based upon an assessment of the participant’s performance and can range from 0% upwards. Since the maximum bonus a participant can receive under the plan is 300% of their target bonus depending upon company performance, this serves as a limitation on the discretionary portion of a participant’s bonus.

 

Our NEOs have the following target bonus opportunities, expressed as a percentage of base salary: Mr. Quinn: 150%, Messrs. Sullivan and Voss: 100% and Messrs. DeBolt and Berra: 75%. The maximum bonus our NEOs can be awarded under the plan is three times their target bonus. Our NEOs participate at the enterprise level as the goals applicable to them are Company measures and not business unit specific measures. The objective portion of our NEOs’ target bonus is 75% and the discretionary portion is 25%.

 

Based upon company performance, the actual objective portion of the NEO’s bonus can range from zero (if minimum thresholds are not met) to 150% of their target bonus provided the maximum pool funding level of 2x is reached. In other words, at 2x performance level, our NEOs will receive, at a minimum, a bonus of 150% of their target bonuses, assuming all other eligibility criteria are met.

 

The discretionary portion of the NEO’s bonus can range from zero up to an amount equal to the objective portion which would be 150% of an NEO’s target bonus if maximum funding of the bonus pool is achieved. As a result, in cases of strong individual performance as assessed by the ECDC, the discretionary portion of an NEO’s actual award can be as high as 50% of their actual bonus award. Any bonus awarded above target funded amount for the CEO does not count against the pool so as to allow the ECDC to provide payouts to the CEO without disproportionately reducing the payouts for other participants.

The following illustrates the calculation of the potential maximum award under the AIP at the 2x performance level for our NEOs:

 

 

Under the AIP, the ECDC (1) establishes the minimum corporate threshold required to fund the AIP; (2) establishes the performance measures; (3) establishes the minimum, target and maximum performance goals and (4) makes an assessment of performance versus those pre-established goals.

 

Long-term Equity Awards:  Equity-based awards are provided to our executives under the Amended and Restated Solutia Inc. 2007 Management Long Term Incentive Plan (the “Equity Incentive Plan”) which was approved by our stockholders in 2010. Such long-term incentive awards are designed to reward the creation of stockholder value, align executives’ interests with those of our stockholders and retain outstanding talent, all at a reasonable cost to stockholders. The maximum number of shares of common stock with respect to which awards may be granted under the Equity Incentive Plan during any year to any executive is 1,500,000 shares. The maximum value of any cash incentive award that may be granted to any participant in any 12-month period is $7,500,000.

 

Other Compensation and Perquisites:  We froze our U.S. pension plan in 2004. As a result, only interest credits are being applied to the accounts. See “Pension Benefits” on page 41 for more information about our retirement plan and the benefits that our NEOs would be entitled to receive thereunder.

 

Our use of perquisites is limited. We believe that the perquisites we provide generally allow our executives to work more efficiently and, in the case of tax, financial and estate planning services, help them optimize the value received from our compensation and benefits programs. Additionally, our CEO is allowed personal use of aircraft in which we own fractional interests for domestic travel, which allows him maximum flexibility to manage his work schedule. These perquisites are not subject to tax gross-up.

 

Our executives also participate in compensation and benefit programs generally available to all U.S. employees, such as our 401(k) Retirement Program and our medical, dental, vision, supplemental life and disability insurance programs. Our executives are also eligible to participate in our Solutia Inc. Savings and Investment Restoration Plan (the “Restoration Plan”). Under the Restoration Plan, an eligible employee can elect to defer up to 35% of eligible pay. The Company matches deferrals under the Restoration Plan in the same fashion as it matches contributions under our Savings and Investment Plan above the IRS maximum recognizable compensation under a qualified plan, i.e. $245,000 for 2010. See “The 2010 Company Match for the Savings and Investment Plan” below for a discussion of the Company’s matching policy under the Savings and Investment Plan.

Determining Mix of Pay

 

Base Salary:  Base salary is a critical element of executive compensation as it is the only element of compensation that is fixed and provides our executives with a monthly income.

 

Our ECDC reviews the base salaries of our executive officers, including the NEOs, each year. The amount of any change is then based primarily on the executive officer’s performance, the level of his responsibilities, an assessment of the executive officer’s long-term potential with Solutia, internal equity considerations and the competitiveness of base salary and total target compensation based on market conditions. Our ECDC’s review of these factors is subjective and the importance of each factor in the ECDC’s decision-making varies based on the individual.

 

The ECDC discussed base salary increases for our executive officers, including our NEOs at its meeting on February 4, 2011 and approved such increases at its meeting on February 23, 2011. In determining the appropriate base salary increases for the NEOs, the ECDC considered and discussed among things: 1) recommendations from our CEO based on 2010 performance (other than for his base salary); 2) internal equity considerations; 3) the relative position of base salary to the median market data considering time in position and performance; 4) the base salary as a component of overall direct compensation; and 5) retention risk of each NEO.

 

In determining the base salary increase of our CEO, the ECDC considered the following: 1) our performance in 2010 relative to our peer companies; 2) relative position to the market considering time in position and performance; 3) the base salary as a component of overall direct compensation; and 4) retention risk of our CEO.

 

The annual base salary and percent increase for 2010 and 2011 are set forth below:

 

 

Compensation At Risk

 

We believe that there should be a strong relationship between pay and performance (both financial results and stock price), and our executive compensation program reflects this belief. Additionally, we believe a higher percentage of pay is at-risk at more senior levels in the organization. In particular, the AIP and equity awards represent a significant portion of our executive compensation program, as shown by the chart below, and this variable compensation is considered at-risk as it is directly dependent upon the achievement of pre-established performance measures and stock price appreciation.

The following chart illustrates the allocation of 2010 target direct total compensation among base salary, cash incentives and equity compensation elements for the CEO, the average of our Executive Vice Presidents and the average of our Senior Vice Presidents that are NEOs:

 

 

The 2010 AIP Program

 

In designing the AIP, the ECDC established a comprehensive measurement framework using financial results, quality of results and strategic initiatives as performance goals and established a minimum level of corporate performance that must be met in order to award payouts under the AIP

 

Our ECDC established that the financial performance measures for the AIP, each weighted at 25% were: Revenue from Consolidated Continuing Operations; Earnings per Share, and Working Capital as a percentage of Sales.

 

The ECDC also established minimum, target and maximum levels of achievement for each of the performance measures for the enterprise level as follow:

 

 

 

 

Our ECDC established the appropriate minimum, target and maximum levels of achievements for the financial targets based on several factors, including the following:

 

 

Our management had established an aggressive budget for 2010 in terms of revenue growth, margin enhancement and cash flow generation with consideration paid to the fact that 2009 represented a year of record EBITDA and EBITDA margin performance for the Company.

 

 

Our ECDC considered the global economic outlook when setting financial targets. At the time of its decision (in late 2009 and early 2010) the economic downturn of 2008 was in the early stage of recovery and there was considerable concern of a double dip recession.

 

 

The ECDC set financial targets in line with the Company’s strategy of aggressively growing revenue, while maintaining top tier margins and continuing to de-leverage the balance sheet using cash generated from operations.

 

Accordingly, our ECDC established the targets for Revenue from Continuing Operations (“Revenue”), Earnings Per Share — Continuing Operations (“Earnings Per Share”) and Working Capital as a percentage of Sales at 108%, 127% and 109%, respectively, of 2009 actual performance. The minimum targets were set as an improvement over 2009 actual financial results, except for Revenue, which was set below 2009 Revenue in light of the potential for a significant downturn in the economy. The maximum targets were established at aggressive levels in comparison to both 2009 actual performance results and the 2010 budget, to ensure that at maximum payout levels, there was significant shareholder value created. The threshold payout for these measures was established by our ECDC at 0.5x with a maximum of 2.5x

 

Our ECDC also established corporate-wide thresholds related to the Company’s liquidity position (after consideration for the payout under the 2010 AIP) and an EBITDA threshold related to covenants within our credit facility. To the extent these thresholds were not met, funding for the 2010 AIP would be curtailed unless and until these thresholds were met. If necessary, the entire funding pool would be eliminated.

 

In addition to the financial measures, our ECDC also established specific strategic initiatives as performance measures under the 2010 AIP, weighted at 25%. The following are the enterprise strategic measures approved by our ECDC:

 

 

The threshold payout for these strategic measures was established by our ECDC at 0.5x with a maximum of 1.5x. Performance against these targets is assessed by the ECDC and is a subjective determination.

 

The minimum, target and maximum amounts for each of our NEOs can be found in the table entitled “Grants of Plan-Based Awards for the Year Ended December 31, 2010” in the columns under “Estimated Possible Payouts Under Non-Equity Incentive Plan Awards.”

 

2010 Performance

 

Our performance against the 2010 AIP financial and strategic measures resulted in maximum 2x funding of our 2010 AIP for the enterprise.

As shown below, our performance was 115%, 158% and 111% over target for Revenue, Earnings Per Share and Working Capital as a percentage of Sales, respectively.

 

 

 

 

Our strong performance for 2010 included revenue growth of 21% compared to 2009, which was a reflection of market growth rates and the Company’s strong positioning and product expansion. This positioning and expansion occurred in both established and key growth markets such as China, continued end market diversification with the addition of ethylene vinyl acetate encapsulants to the photovoltaic market, and further penetration into the electronics sector with our Flexvue branded products. Our adjusted Earnings Per Share (“EPS”), increased by 28% compared to 2009, reflecting a growth rate higher than that of Revenue. EPS growth was aided by an increase in revenue and end market diversification, the continuation of various cost reduction and cost avoidance activities initiated in 2009, and the shutdown and/or divestiture of low margin businesses during the year.

 

During 2010, we also focused on improving our balance sheet and carried out initiatives related to capital expenditure efficiency and working capital improvement (working capital is defined as accounts receivable plus inventory less accounts payable). This focus allowed us to lower working capital as a percentage of sales to 19.2%, a historically low level. As a result of the working capital focus and the earnings profile, our free cash flow (defined as cash from operations less capital expenditures) increased 53% over 2009, improving to $230 million from $150 million.

 

We significantly improved our capital structure during 2010. We completed a $1.45 billion refinancing during the year, which lowered interest costs, extended maturities and significantly improved our financial and strategic flexibility. As part of this refinancing, we transitioned from an asset-backed revolving credit facility to a cash flow-based revolving credit facility, which increased our operating flexibility. As a result of the cash flow performance and the improved credit facility terms, we obtained a credit rating upgrade during 2010 from both S&P and Moody’s, the two rating agencies that cover us. Further, during 2010, we made $76 million in voluntary prepayments of our term loan to further improve our capital structure.

 

Our financial performance, coupled with such actions as our strong execution on our Vistasolar and Novomatrix acquisitions, increased our stock price from $12.70 on December 31, 2009 to $23.08 on December 31, 2010.

 

Additionally, our ECDC assessed the key accomplishments of our strategic initiatives and determined that the funding of the portion of the bonus pool based on strategic measures would be at 1.5x.

 

Accordingly, funding at the 2x maximum resulted in the maximum payout of the fixed portion of the 2010 AIP awards to our NEOs. Our ECDC approved the payment of the fixed portion of the 2010 AIP to all participants in December, 2010 and approved the discretionary portion of the bonuses for the NEOs at its meeting on February 23, 2011.

In considering the award of the discretionary bonuses to our NEOs, our ECDC, in addition to considering our performance as outlined above, also took into consideration our performance relative to our Peer Group. Our revenue and adjusted EBITDA growth is in the top half of our Peer Group over one and two year periods. Our total shareholder return for 2010 is 81%, which is the highest increase within our Peer Group, an approximately 25% higher return than our peer with the second highest total shareholder return. Our adjusted EBITDA margin percentage placed us in the top quarter of our Peer Group for each quarter of 2010.

 

Our ECDC awarded the maximum bonus allowed under the 2010 to Mr. Quinn, our CEO. In doing so, the ECDC considered, in addition to our financial performance, the performance under the strategic measures and the other considerations outlined above, Mr. Quinn’s leadership in advancing our innovation and technology initiatives, in promoting and advancing the further development of our high performance culture and the introduction of our new brand platform focusing on ingenuity, productivity and performance. Messrs. Sullivan and Voss were also awarded the maximum bonus allowed under the 2010 AIP in recognition of their contributions to the results discussed above. Please see the “Summary Compensation Table” for the amounts paid to our NEOs under the 2010 AIP.

 

The 2010 Equity Grants under the Equity Incentive Plan

 

In 2010, our ECDC established equity grant guidelines under which annual equity grants will be valued. Under the guidelines, the equity grant value for each plan participant is expressed as a percentage of the participant’s base salary. The equity grant values for our NEOs are as follows: Mr. Quinn: 225%; Messrs. Sullivan and Voss: 150% and Messrs. DeBolt and Berra: 120%. The ECDC retains discretion to adjust an equity grant value 30% above or below a participant’s guideline. Additionally, the ECDC adopted a share granting approach that includes: (1) determining the number of time-vested restricted stock and performance shares to grant based on the average closing price of our common stock for the 90 calendar days preceding the grant; (2) determining the aggregate number of options to grant in any given year based on a pre-defined range of 0.6% and 0.8% of our outstanding common shares; and (3) providing the ECDC with discretion to adjust the pre-defined option range in any given year if our stock price changes significantly. We believe this approach balances providing appropriate grant date value to the participant and dilution to the stockholders.

 

On April 21, 2010 after approval by our stockholders of our Equity Incentive Plan and in accordance with the equity grant guidelines adopted by the ECDC, the ECDC approved grants of stock options, restricted stock awards and performance shares under the Equity Incentive Plan to certain executives, including our NEOs as shown below:

 

 

The program uses a portfolio of equity vehicles, consistent with our philosophy of a balanced performance measurement framework, to measure stock price appreciation, provide protection against stock price volatility and reward relative out-performance against a group of other specialty chemical companies.

 

The ECDC exercised its discretion to increase the equity grant value to Messrs. Quinn, Voss, DeBolt and Berra by 30%, 30%, 15% and 10%, respectively and the full Board increased Mr. Sullivan’s equity grant value by 43% in recognition of each of their leadership in executing on the Company’s key strategic initiatives and achieving the Company’s strong financial results.

 

The terms of the grants are as follows:

 

 

 

The 2010 Company Match for the Savings and Investment Plan and Savings and Investment Restoration Plan (the “Restoration Plan”)

 

On January 1, 2010, the Company reinstated matching contributions under the Company’s Savings and Investment Plan (our 401(k) Plan) for all of the Company’s eligible employees. To further align pay with performance, the ECDC approved bifurcating the Company contribution into two components: a Basic Match and a Performance Match. Under the Basic Match, the Company matches in cash 50% of the first 7% of eligible pay contributed by an employee to the Savings and Investment Plan, for a maximum Basic Match of 3.5% of the employee’s eligible pay. Thereafter, under the Performance Match, the Company may match up to 6.5% of an employee’s eligible pay contributed to the Savings and Investment Plan, depending on how the Company performs. The Company matches deferrals under the Restoration Plan in the same fashion as it matches contributions under our Savings and Investment Plan. The enterprise financial performance measures established by the ECDC under the AIP are used to determine the Performance Match. At the Company’s discretion, the Performance Match may be made in cash or in Company common stock. For 2010, the Performance Match was made at 5.98% and contributed to the Savings and Investment Plan in cash.

 

Other Compensation Policies

 

Employment Agreements:  Messrs. Quinn, Sullivan, Voss and DeBolt are parties to employment agreements with us which specify payments upon termination for various causes. In the event of a “not for cause” termination (as defined in the respective employment agreements), these executives are entitled to receive various amounts based on multiples of their base salary and annual bonuses and to receive executive outplacement services. Mr. Berra participates in the Company’s Executive Separation Pay Plan under which he is entitled to receive separation pay upon an involuntary termination. Both the employment agreements and the Executive Separation Pay Plan provide for four months continuation of health coverage at active employee contribution rates. See the sections entitled “Employment Agreements with Named Executive Officers” and “Potential Payments Upon Termination of Employment or Change-in-Control” for a description of the material terms of the employment agreements and the Executive Separation Pay Plan and an estimate of the benefits that our NEOs would be entitled to receive pursuant to their respective employment agreements under various employment termination scenarios.

 

Stock Ownership Guidelines:  In October 2008, stock ownership guidelines that require our NEOs to own shares of our common stock took effect. The ECDC adopted these guidelines on the belief that our executive officers should have a meaningful ownership stake in the Company that will align their interests with our stockholders and encourage a long-term perspective in managing our Company. The stock ownership requirements for the following NEOs are:

 

 

Executives, including our NEOs have five years to achieve these ownership requirements. Shares owned outright, as well as restricted stock, count towards meeting the ownership requirement. As of December 31, 2010, the value of the stock owned by our NEOs met or exceeded the guidelines.

 

Our Policies With Respect to the Granting of Stock Options

 

Timing of Grants. Stock options are granted to executives on the day the grants are approved by our ECDC as part of its regularly scheduled Committee meetings. The equity grants made in 2010 were made in April, following stockholder approval of our Equity Incentive Plan. Beginning in 2011, our ECDC made and intends in the future to

make equity grants at its regular Committee meeting in February to align the grants with our annual performance management process. For our newly hired executives, stock options are generally granted as of the date of hire.

 

Option Exercise Price. The exercise price of a newly granted option (that is, not an option assumed in, or granted in connection with, an acquisition) is the closing price on the NYSE on the date of grant.

 

Re-Pricing of Options. Under the terms of the Equity Incentive Plan, the ECDC is precluded from amending or replacing any previously granted option in a transaction that constitutes a “re-pricing” under NYSE rules without stockholder approval.

 

Tax Deductibility of Compensation and Section 409A

 

Under Section 162(m) of the Internal Revenue Code, publicly-held corporations generally may not take a tax deduction for compensation in excess of $1 million paid to any named executive officer during any fiscal year. There is an exception to the $1 million limitation for performance-based compensation meeting certain requirements. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, our ECDC has not adopted a policy requiring all compensation to be deductible. However, the ECDC considers deductibility under Section 162(m) with respect to compensation arrangements for executive officers. In 2010, none of our NEOs received taxable cash compensation that we could not deduct by reason of Section 162(m). Section 409A of the U.S. tax code generally changes the tax rules that affect most forms of deferred compensation that were not earned and vested prior to 2005. The ECDC takes Section 409A into account in determining the form and timing of compensation paid to our executive officers.

 

Compensation Clawbacks

 

The New York Stock Exchange is expected to revise its listing standards in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act to require listed issuers to adopt and disclose clawback policies. Under such policies, an accounting restatement due to material noncompliance with any financial reporting requirements under the securities laws will trigger a clawback. The Company will be required to recover any erroneously awarded compensation payments that would not have been made had the restated accounting numbers been used. Any payments made to current or former executive officers during the three-year period preceding the date of a restatement will be subject to the policy. Our existing incentive compensation plans will be reviewed and updated for consistency with the clawback policy when it is adopted.

 

Executive Compensation and Development Committee Report

 

The ECDC has reviewed and discussed the Compensation Discussion and Analysis with management and based on the review and discussions, the ECDC recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

James P. Heffernan, Chairman

Robert K. deVeer, Jr.

William T. Monahan

William C. Rusnack

 

The following table shows information about the compensation of our principal executive officer and principal financial officer, the three other most highly compensated executive officers who were serving as executive officers at December 31, 2010.