April 10, 2007

 

Dear Stockholders:

 

You are cordially invited to attend Masco Corporation’s Annual Meeting of Stockholders on Tuesday, May 8, 2007 at 10:00 A.M. at our corporate headquarters in Taylor, Michigan. The following pages contain information regarding the meeting schedule and the matters proposed for your consideration and vote. Following our formal meeting, we expect to provide a review of our Company’s operations and respond to your questions.

 

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

 

On behalf of our entire Board of Directors, we thank you for your continued support of Masco Corporation and look forward to seeing you on May 8.

 

Sincerely,

 

Richard A. Manoogian

Chairman of the Board and

Chief Executive Officer

MASCO CORPORATION

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

     The purposes of the Annual Meeting are:

 

1. To elect three Class I Directors and to approve the appointment of one Class II Director;

 

2. To ratify the selection of PricewaterhouseCoopers LLP as independent accountants to audit Masco’s financial statements for 2007; and

 

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

 

Stockholders of record at the close of business on March 15, 2007 are entitled to vote at the meeting or any adjournment thereof. Whether or not you plan to attend the meeting, you can be sure that your shares are represented at the meeting by promptly voting your Proxy by telephone, by internet, or by completing, signing, dating and returning your Proxy Card in the enclosed postage prepaid envelope. Instructions for each of these methods are provided on the Proxy Card. You may withdraw your Proxy before it is voted if you do so in the manner specified in the Proxy Statement.

 

By Order of the Board of Directors

 

Eugene A. Gargaro, Jr.

Secretary

 

April 10, 2007

TABLE OF CONTENTS

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS OF
MASCO CORPORATION

 

May 8, 2007

 

The Board of Directors of Masco Corporation is soliciting the enclosed Proxy for use at the Annual Meeting of Stockholders of Masco Corporation to be held at its offices at 21001 Van Born Road, Taylor, Michigan 48180, on Tuesday, May 8, 2007 at 10:00 A.M., and at any adjournment. This Proxy Statement and the enclosed Proxy are being mailed or given to stockholders on or about April 10, 2007.

 

We are paying the expense of this solicitation, which will be by mail. Our executive officers and other employees of Masco may also solicit Proxies, without additional compensation, personally and by telephone and other means of communication. In addition, we have retained Morrow & Co., Inc. to assist in the solicitation of Proxies for a fee of $10,000, plus expenses. We will also reimburse brokers and other persons holding Masco common stock in their names or in the names of their nominees for their reasonable expenses in forwarding Proxies and Proxy materials to beneficial owners.

 

Stockholders of record at the close of business on March 15, 2007 are entitled to vote at the meeting. On that date, there were 387,423,635 shares of Masco common stock, $1 par value, outstanding and entitled to vote. Each share of outstanding Masco common stock entitles the holder to one vote. We will conduct the meeting if a majority of the outstanding shares is represented in person or by proxy. Broker non-votes and abstentions will be counted toward the establishment of the quorum. A broker “non-vote” occurs when the shares that a nominee holds for a beneficial owner are represented at the meeting, but are not voted on a proposal because the nominee has not been instructed by the beneficial owner how to vote on the proposal and does not have discretionary voting power to vote on the proposal.

 

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

 

The Board of Directors is divided into three classes. The term of office of the Class I Directors, consisting of Dennis W. Archer, Peter A. Dow, Anthony F. Earley, Jr. and Lisa A. Payne, expires at this meeting. Effective as of this meeting, Class I will consist of three Directors. The Board proposes the re-election of Messrs. Archer and Earley and the election of Ms. Payne, who was appointed to the Board in December 2006, as Class I Directors.

 

Effective as of this meeting, Class II will consist of four Directors whose term expires in 2008, and the Board has appointed Peter A. Dow to fill the vacancy, but his service is subject to stockholder approval at this Annual Meeting. The Board of Directors has made an exception to its age 72 retirement policy for Mr. Dow based on his leadership as chairman of the Organization and Compensation Committee, a position he has held since 2001, his involvement in executive succession planning and his service as chairman of a special board committee.

 

The terms of office of Class I, Class II and Class III Directors expire at the Annual Meeting of Stockholders in 2010, 2008 and 2009, respectively, or when their respective successors are elected and qualified. The Board of Directors expects that the persons named as proxies on the Proxy Card will vote the shares represented by each Proxy for the election of the above nominees as Directors unless a contrary direction is given. If prior to the meeting a nominee is unable or unwilling to serve as a Director, which the Board of Directors does not expect, the persons named as proxies will vote for such alternate nominee, if any, as may be recommended by the Board of Directors.

 

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

 

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

 

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

 

 

The Board of Directors continues to focus on Masco’s corporate governance principles and procedures and is committed to maintaining high standards of ethical business conduct and corporate governance for Masco. During 2006, we increased the size of the Board to ten and added another independent Director. We also enhanced our internet-based ethics and legal compliance training program for employees with an online certification system.

 

Masco’s Corporate Governance Guidelines require that a majority of our Directors qualify under the independence and experience requirements of applicable law and the New York Stock Exchange. For a Director to be considered independent, the Board must determine that the Director does not have any direct or indirect material relationship with Masco. The Board, pursuant to the recommendation of the Corporate Governance and Nominating Committee, adopted categorical independence standards in 2004 to assist it in making a determination of independence for Directors. Masco’s independence standards are posted on our website at www.masco.com.

 

The Board has made an affirmative determination that all of our non-employee Directors are independent. The independent Directors are Messrs. Archer, Denomme, Dow, Earley, Istock, Losh, Professor Johnston, Ms. Payne and Ms. Van Lokeren.

 

In making its independence determination for each non-employee Director, the Board reviewed all transactions, relationships and arrangements for the last three fiscal years involving each Director and the Company. With respect to Mr. Earley, the Board considered the annual amount of sales to Masco by the company where he serves as Chairman of the Board and Chief Executive Officer, and determined that the amount of sales in each fiscal year was below 2% of that company’s annual revenues.

 

With respect to Messrs. Archer, Earley, Dow and Ms. Payne, the Board considered the annual amount of Masco’s discretionary charitable contributions to charitable organizations where those individuals serve as a director, and determined that those individuals were not active in the day-to-day operations of the charitable organizations and that Masco’s contributions were significantly less than the greater of $1 million or 2% of the organizations’ respective revenues.

 

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

 

During 2006, the Board of Directors held six meetings and each Director attended at least 75% of the Board meetings and applicable committee meetings. It is the Company’s policy to encourage Directors to attend the Annual Meeting. All Directors attended the 2006 Annual Meeting of Stockholders.

 

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

 

Any interested party that wishes to communicate directly with the presiding Director or the non- management Directors as a group may send such communication to: Presiding Director, Masco Board of Directors, in care of Eugene A. Gargaro, Jr., Corporate Secretary, Masco Corporation, 21001 Van Born Road, Taylor, MI 48180. Stockholders may send communications to the full Board of Directors, in care of Mr. Gargaro, at the above address.

 

The Audit Committee of the Board of Directors, currently consisting of Messrs. Archer, Denomme, Dow, Earley, Istock, Losh and Ms. Payne, held seven meetings during 2006. The Audit Committee assists Board oversight of the integrity of our financial statements, the effectiveness of our internal controls over financial reporting, the qualifications, independence and performance of our independent public accountants, the performance of our internal audit function, and our compliance with legal and regulatory requirements, including employee compliance with our Code of Business Ethics.

 

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

 

Interested parties may send complaints relating to accounting, internal accounting controls or auditing matters to the Chairman of the Masco Audit Committee, in care of Eugene A. Gargaro, Jr., Corporate Secretary, Masco Corporation, 21001 Van Born Road, Taylor, MI 48180.

 

The Organization and Compensation Committee of the Board of Directors, currently consisting of Messrs. Dow and Istock, Professor Johnston, Mr. Losh and Ms. Van Lokeren, held six meetings during 2006. The Organization and Compensation Committee determines executive compensation, evaluates Masco’s management, determines and administers awards and options granted under our stock incentive plan and directs Masco’s succession planning process. This Committee exercised its authority to engage outside advisors and, for the past four years, has retained Hewitt Associates. Information on the Committee’s process and procedures for consideration and determination of executive compensation is presented in “Compensation Discussion and Analysis” below.

 

The Company’s Board of Directors, through its Organization and Compensation Committee, actively engages in succession planning for the Company’s senior management. As part of that process, the Committee has discussed with Mr. Manoogian, the Company’s Chairman and Chief Executive Officer, and Mr. Alan H. Barry, the Company’s President and Chief Operating Officer, their future intentions with respect to the Company. Mr. Barry has indicated his desire, if compatible with the needs of the Company, to step down as President when he reaches the Company’s normal retirement age of 65 in early 2008. Mr. Manoogian has expressed his willingness and intention to remain actively involved in the management of the Company’s businesses but his desire, if feasible, to transition from his role as Chief Executive Officer during 2007. As a result of these discussions, Mr. Manoogian has agreed to continue to serve on a full time basis, at the pleasure of the Board, as Executive Chairman or in a similar senior executive role, upon mutually acceptable compensatory arrangements, through 2012, with the expectation that his position as Chief Executive Officer would be transitioned during 2007 to Mr. Timothy Wadhams, the Company’s Senior Vice President and Chief Financial Officer. It is anticipated that Mr. Wadhams will assume full responsibilities of his new position in July. In exchange for Mr. Manoogian’s commitment to remain with the Company in one of the capacities described above, the Company has agreed to continue to make available to him the personal financial, tax,

accounting and administrative assistance comparable to the services currently provided (described herein under “Certain Relationships and Related Transactions—Other Related Party Transactions”) and for which Mr. Manoogian would continue to reimburse the Company for its incremental cost. In addition to receiving these reimbursed services and the personal use of comparable office space to what is currently provided, Mr. Manoogian will continue under this agreement, on the same basis as currently exists, to have access to usage of the Company’s aircraft and corporate automobile and driver as long as he continues as Executive Chairman or in a similar senior executive role or Chairman of the Board of Directors but thereafter, only upon reimbursement to the Company of the incremental cost of such usage.

 

The Corporate Governance and Nominating Committee of the Board of Directors, currently consisting of Messrs. Archer, Denomme, Earley and Istock, Professor Johnston and Ms. Van Lokeren, held five meetings during 2006. The Corporate Governance and Nominating Committee serves in an advisory capacity to the Board on the governance structure and conduct of the Board and has the responsibility for developing and recommending to the Board appropriate Corporate Governance Guidelines. In addition, the Committee identifies qualified individuals for nomination to the Board, recommends Directors for appointment to Board committees and evaluates current Directors for re-nomination to the Board or re-appointment to Board committees.

 

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

 

The Committee uses a number of sources to identify and evaluate nominees for election to the Board. It is the Committee’s policy to consider Director candidates recommended by stockholders. These candidates are evaluated at regular or special meetings of the Committee, and all candidates, including those recommended by stockholders, are evaluated against the same criteria as described above or any others established by the Committee or the Board. Stockholders wishing to have the Committee consider a candidate should submit the candidate’s name and pertinent background information to Eugene A. Gargaro, Jr., Corporate Secretary, Masco Corporation, 21001 Van Born Road, Taylor, MI 48180. Stockholders who wish to nominate Director candidates for election to the Board should follow the procedures set forth in our charter and in applicable SEC rules regarding stockholder proposals. For a summary of these procedures, see “2008 Annual Meeting of Stockholders” below.

 

Ms. Payne was recommended for consideration as a nominee for Director by the Company’s Chief Executive Officer and several of the non-management Directors.

 

Non-employee Directors receive an annual retainer of $80,000, of which one-half is paid in cash. In order to more closely align the compensation of non-employee Directors with long-term enhancement of stockholder value, the other half of the retainer is paid by means of restricted stock granted under the 1997 Non-Employee Directors Stock Plan (the “Directors Stock Plan”).

 

Grants of restricted stock vest in 20% equal annual installments over a five-year period. A new non-employee Director is given an initial grant of restricted stock valued at one-half of the Director’s total retainer for the initial five years of anticipated service on the Board (subject to adjustment for partial years). After full vesting of the initial grant, each non-employee Director thereafter receives an annual grant of restricted stock valued at one-half of the annual retainer. These annual grants vest over the succeeding five years.

 

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

 

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

 

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

 

We provide a few additional benefits to Directors. Non-employee Directors are eligible to participate in our matching gifts program (which is generally available to our employees) pursuant to which we will match gifts made to eligible educational and cultural institutions up to an aggregate of $10,000 per year for each participant. In addition, if space is available, a Director’s spouse is permitted to accompany the Director who travels to attend Board or committee meetings on Company aircraft. We have permitted, on an infrequent basis, non-employee Directors’ personal use of Company aircraft, although no such use occurred during 2006. Directors are also eligible to participate in our employee purchase program, which is generally available to our employees and enables them to purchase our products for their personal use at discounted prices. We consult with former Directors from time to time and have followed a practice of paying $50,000 per year to former Directors who make themselves available for consulting for two years after ending their service on the Board.

 

The following table shows 2006 compensation for our Directors, other than Mr. Manoogian, who is also a Masco employee and receives no additional compensation for his service as a Director. The amounts shown under “Stock Awards” and “Option Awards” are the amounts we are required to expense for accounting purposes rather than the value of awards granted for 2006. The variation in these amounts among our Directors reflects the expensing requirements of FAS 123R described below, under which expense accruals are calculated based, in part, on the proximity of the Director’s age to Masco’s normal employee retirement age of 65.

2006 Director Compensation

 

 

 

 

The following table contains information concerning beneficial ownership of Masco common stock as of March 15, 2007 by (i) each of the Directors, (ii) each of the executive officers named in the “Summary Compensation Table,” (iii) all of our current Directors and executive officers as a group (which excludes Mr. Doran since he retired in 2006), and (iv) all persons who we know are the beneficial owners of five percent or more of Masco common stock. Except as indicated below, each person exercises sole voting and investment power with respect to the shares listed.

 

 

 

 

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

 

The Audit Committee assists the Board of Directors in fulfilling its responsibility for oversight of the integrity of the Company’s financial statements, the effectiveness of the Company’s internal control over financial reporting, the qualifications, independence and performance of the Company’s independent accountants, the performance of the Company’s internal audit function, and compliance by the Company with legal and regulatory requirements and by employees and officers with the Company’s Code of Business Ethics. Management has the primary responsibility for the financial statements and the reporting process, including the Company’s system of internal control over financial reporting. In discharging its oversight responsibility as to the audit process, the Audit Committee reviewed and discussed with management the audited financial statements of the Company as of and for the year ended December 31, 2006, including a discussion of the quality and the acceptability of the Company’s financial reporting and disclosure controls and internal control over financial reporting, as well as the selection, application and disclosure of critical accounting policies.

 

The Audit Committee obtained from the Company’s independent accountants, PricewaterhouseCoopers LLP, the letter required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and discussed with the accountants any relationships that may impact their objectivity and independence and satisfied itself as to the accountants’ independence. The Audit Committee considered and determined that such accountants’ provision of non-audit services to the Company is compatible with maintaining the accountants’ independence. The Committee reviewed various matters with the accountants, who are responsible for expressing an opinion on the Company’s financial statements as of and for the year ended December 31, 2006, for expressing an opinion on the Company’s internal control over financial reporting and for attesting to management’s report on internal control over financial reporting, based on their audit. The Committee met with the accountants and discussed the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees,” including their judgment as to the quality and the acceptability of the Company’s financial reporting, internal control over financial reporting and such other matters as are required to be discussed with the Committee in accordance with the standards of the Public Company Accounting Oversight Board. The Committee also met with the accountants without management present.

 

Based on the above-mentioned reviews and discussions with management and the independent accountants, the Audit Committee recommended to the Board of Directors that the Company’s financial statements as of and for the year ended December 31, 2006 be included in its Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission. The Audit Committee also reappointed, subject to stockholder approval, PricewaterhouseCoopers LLP as the Company’s independent accountants.

 

Thomas G. Denomme, Chairman

Dennis W. Archer

Peter A. Dow

Anthony F. Earley, Jr.

Verne G. Istock

J. Michael Losh

Lisa A. Payne

 

We are committed to maintaining executive compensation programs that are aligned with the long-term interests of our stockholders and that will attract and retain talented senior corporate executives and motivate them to achieve our business objectives. Our compensation practices therefore stress long-term performance and long-term retention.

 

One of the critical responsibilities of the Board of Directors and senior management is to maintain a strong leadership team for our Company. We seek to attract and retain individuals who possess the outstanding personal qualities and experience that are essential to executive effectiveness and to the Company’s performance. These individuals are in demand from competitors within our industry as well as others, and they usually have alternative employment opportunities. While non-monetary motivation and needs are significant for these individuals, financial considerations are often critical and persuasive in career decisions. Consequently, we must offer responsibilities, opportunities and compensation programs that are attractive and at the same time compatible with our business operations and organization. As a result, we have a pragmatic compensation philosophy that recognizes that compensation is an important part of several key elements that must be managed in fulfilling the commitment to maintain a strong leadership team.

 

Our compensation philosophy takes into account the difficulty and lack of precision involved in identifying, isolating and measuring individual contributions to corporate performance. Although we use various performance metrics in the design and implementation of our compensation programs, we believe that the effectiveness of our executive compensation programs results in part from the exercise of discretion and prudent business judgment by senior management and by the Organization and Compensation Committee (the “Committee”) that oversees our compensation practices. Our executive compensation programs generally focus on corporate performance, but this is just one measure for evaluating executive performance. Because corporate performance may be affected by factors outside senior management’s control, an individual’s contribution may not be reflected in short-term corporate performance. Likewise, corporate performance for a particular year may not yet reflect the benefit of the implementation of business strategies that enhance long-term shareholder value. Individuals may also receive increases in base salary or special equity awards as a result of their individual contributions, increased responsibilities and promotions. In addition, our executive compensation programs provide for discretionary awards of restricted stock to senior management, other than our Chief Executive Officer and our President, as discussed below.

 

The nature of our relatively cyclical industry needs to be considered in designing and implementing executive compensation programs that reward executives for actions that benefit our stockholders’ long-term interests. Our leaders must include executives who are capable and motivated to manage our business through all phases of our industry’s economic cycles. Compensation programs are designed to reflect the value of the management team’s contributions to the Company and the Company’s current performance considered in the context of the impact of general economic and industry conditions on operating performance.

 

In light of our compensation philosophy and our industry, we have developed several guidelines for our executive compensation programs. These guidelines are summarized below. The application of these guidelines to our executive compensation programs is discussed in more detail in the remainder of this Compensation Discussion and Analysis.

 

Compensation Programs Should Emphasize Performance

 

Our executive compensation programs should be performance-oriented so that our executives’ interests align with those of our stockholders. We consider the relationship of compensation to our Company’s performance and the individual’s responsibilities and contributions to such performance.

 

Long-Term Focus Is Paramount

 

Compensation programs that have significant long-term focus and emphasize long-term corporate performance serve our commitment to maximize long-term stockholder value and attract the executive talent we desire. This focus also evidences our emphasis on management stability and long-term retention.

 

Total Compensation Must Be Competitive

 

The strong demand for executive talent requires us to maintain compensation programs that, in the aggregate, can compete with compensation packages available to such individuals for alternative positions. The breadth and diversity of our organization, the number of business units and service centers and the nature of our industry require us to seek, develop and retain strong executives who will remain committed to our Company. Competitive compensation also reduces costly and disruptive executive turnover.

 

Compensation Programs Must Be Flexible

 

We evaluate our executive compensation programs in the aggregate. In order to adapt and respond to individual circumstances and dynamic business conditions, we use a variety of components that permit flexibility for establishing executive compensation packages. We also recognize the importance of preserving for the Committee and senior management the ability to exercise discretion and judgment with respect to our compensation programs. Consistent with our desire for flexibility, we have not offered executives the security of employment contracts.

 

Components

 

The Committee, and ultimately the full Board of Directors, have final authority for our executive compensation programs. The Company’s compensation programs are generally broad-based and applicable to all of our key employees, including executive officers. These programs are principally developed and administered by senior management, with direction, independent supervision and approval by the Committee, which also establishes compensation policies. Our compensation arrangements for key employees consist of several components, each of which is designed to serve a specific purpose, as described below. Our current arrangements generally consist of a combination of fixed base salary, a performance-based annual cash bonus, a performance-based annual long-term incentive award of restricted common stock, and an annual stock option grant. More than 2,000 of our employees participate in the restricted stock award program, with each participant having an assigned target grant level, and approximately 600 of our key employees receive annual grants of stock options. We also maintain tax-qualified and non-qualified retirement programs for key employees, and executive officers participate in a limited number of other benefit arrangements, which the Committee also reviews on a regular basis.

 

Base salary is a major factor in the formula for the performance-based cash bonus and the performance-based restricted stock awards, as well as for options and retirement benefits. The fixed salary is intended to satisfy executives’ requirements for current compensation and is not typically adjusted on account of Company performance, although on occasion salaries have been frozen or reduced. The annual cash bonus is performance-based and focuses on Company performance.

 

The restricted stock award program is also performance-based, and it has a significant long-term focus because the awards are subject to a lengthy vesting schedule, which is generally ten years. Prior to normal retirement age (65), vesting is contingent on continued employment. This long-term focus is reinforced by the continuation of an extended (but somewhat accelerated) vesting schedule even after an executive reaches normal retirement age, although vesting is no longer contingent on employment. Consequently, our executives understand that the value they ultimately receive depends on our long-term corporate performance and its effect on the long-term value of our common stock.

 

Our current stock option program has similar benefits since an executive realizes value only from the future appreciation of our common stock. Grants of stock options are usually considered annually and generally have a vesting schedule of five years. Options also support long-term focus by executives since recipients generally have up to ten years to exercise their options.

 

Comparative Compensation

 

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

 

The peer companies are:

 

 

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

 

We use a variety of resources in addition to publicly available data and published compensation surveys in order to establish compensation levels. Even though management utilizes the services of outside compensation experts, the Committee has exercised its authority to retain its own advisors and, accordingly, has separately engaged for the past four years Hewitt Associates, a global human resources consulting firm, to provide the Committee with independent advice on executive compensation matters. We have not requested and do not intend to request the firm to provide other services for the Company, other than the purchase of annual compensation surveys. The cost of these surveys in 2006 was $12,625. Hewitt Associates meets with the Committee in executive sessions without management, assists the Committee in its review of compensation by the peer group and advises the Committee on its implementation of our compensation philosophy. In addition, during the past year Hewitt Associates met with the full Board to discuss executive compensation issues.

 

During 2006, we continued our practice of providing to the Committee a tally sheet that comprehensively summarizes the various components of total compensation for our Chief Executive Officer, our Chief Financial Officer, the other named executive officers and selected other executives. The tally sheet, which is provided early in each calendar year, includes base salary, annual cash bonus, long-term incentive compensation, dividends on unvested shares of restricted stock, our cost for the foregoing and for perquisites and other benefits, and the annual cost under our qualified and non-qualified retirement plans.

 

Our annual cycle for reviewing the various components of compensation provides an opportunity to evaluate and recognize individual executive performance, while strengthening the link between pay and performance at least

twice per year. The annual performance targets for the cash bonus and restricted stock award programs are established during the first quarter of each year. After the Company’s financial performance for the year has been determined, the annual performance-based cash bonus and performance-based restricted stock awards are determined. At mid-year we review fixed base salary and consider stock option grants. It is the Committee’s policy to consider the grant of stock options annually, since this results in a more evenly paced program without significant gaps in vesting dates. We believe this practice increases the program’s retention value by reducing the incentive for a participant to leave the Company when there is no vesting in the near-term.

 

The different components of executive compensation are discussed in more detail below. As the Committee determines the various components of compensation for the Chief Executive Officer, the President, the Chief Financial Officer and the other named executive officers, it also considers each of the other components, including the perquisites compared to companies in the peer group, as well as the total compensation.

 

Annual cash compensation consists of base salary and a performance-based bonus opportunity. Discretionary ad hoc bonuses are generally not utilized. Except for promotions, base salaries generally are reviewed annually and adjusted effective July 1 based on competitive factors. During the past several years, we have reduced the percentage of total compensation represented by fixed salary and have increased the variable performance-based compensation opportunities in order to more closely align executive compensation with stockholders’ interests. As a result of this strategy, in recent years the fixed salary portion of compensation as a percentage of the total of salary and maximum cash bonus and incentive stock award opportunities has been reduced to approximately 20% for Mr. Manoogian, 24% for Mr. Barry, and 33% for the other named executive officers.

 

The Committee determines the compensation of the Chief Executive Officer and the President. Our Chief Executive Officer and our President propose specific base salary increases for the other executives, although no changes are made until they are reviewed and approved by the Committee. Our Chief Executive Officer’s base salary has remained the same since 2003. In 2006, other executive officers generally received a modest increase in base salary of 3.5%, except for Mr. Wadhams, whose base salary increased approximately 11.9% to reflect his individual performance and his increasing responsibility within the Company.

 

Annual cash bonuses, shown in the “Non-Equity Incentive Plan Awards” column of the Summary Compensation Table, are determined under our annual cash bonus incentive compensation plan. These performance-based bonuses are directly tied to Company performance by linking executive officers’ annual cash bonus opportunities to earnings per share targets. Under this program, the percentage of an executive’s annual performance-based cash bonus opportunity depends upon our actual earnings for the year compared to the scheduled earnings per share target. The percentage of cash compensation tied to Company performance increases for our Chief Executive Officer and President in light of their greater responsibilities for the Company’s performance. As a result, the maximum bonus opportunities for our Chief Executive Officer and our President are 200% and 160%, respectively, of base salary and, for the Company’s other executive officers, 100% of base salary. Accordingly, our Chief Executive Officer and our President have the most potential cash compensation at risk.

 

In the first quarter of each year, the Committee approves a graduated earnings per share schedule for that year taking into account general economic and industry market conditions and the Company’s forecasted performance expectations for the year. Earnings per share has been selected as a measure that generally reflects Company performance, although the Committee and senior management also periodically review this metric. The calculation of earnings per share for financial reporting purposes is adjusted for certain transactions prior to evaluating Company performance for compensation purposes. Consequently, in establishing the schedule for determining annual performance-based cash bonuses, reported earnings per share is adjusted to exclude the effects of special charges, gains and losses from corporate divestitures, certain other non-operating income and expenses and the benefit resulting from stock repurchases in excess of a predetermined amount.

 

Under this graduated earnings per share schedule, as earnings per share change, the incentive bonus for an executive officer can vary between zero (if the Company fails to attain the minimum target) and, for attainment of stretch goals, the maximum bonus opportunity as described above.

 

The maximum bonus the Company would pay under this program is capped regardless of whether Company performance exceeds the maximum target, as it did for 2004, and regardless of increases in stockholder value. The Committee has adopted a policy that permits the Company to recover all or a portion of the performance-based cash bonus paid to executive officers, if the earnings per share or other performance criteria upon which such bonus was based were subsequently determined to be incorrect, and if properly determined or applied would have reduced the size of the bonus paid.

 

The schedule established for 2006 provided for bonuses ranging from the maximum opportunity level if earnings per share, adjusted as described above, attained or exceeded $2.55 to 20% of the maximum opportunity level if adjusted earnings per share were at least $2.00. During 2006 after a relatively strong first half, our businesses were adversely affected by declining housing activity, a decrease in consumer spending and continued increases in commodity costs. Adjusted earnings per share were determined to be $2.24, which principally excludes the impact of goodwill and financial investment impairment charges as well as expenses related to profit improvement initiatives in the Company’s plumbing and cabinet businesses. The executive officers, including Mr. Manoogian, received cash bonuses generally approximating 44% of the maximum bonus opportunity, compared with the performance-based cash bonuses for 2005 and 2004 when executives received on average 47.5% and 100%, respectively, of the maximum amount.

 

Company common stock is a major part of long-term compensation for key employees. Restricted stock awards and stock options have been granted under the Masco Corporation 2005 Long Term Stock Incentive Plan (the “2005 Plan”) and its predecessor the 1991 Long Term Stock Incentive Plan (the “1991 Plan”). These two plans are referred to collectively as the “Long Term Incentive Plan.” The frequency, value and vesting terms of awards are designed to provide executives with the potential for significant accumulation of Company common stock over the course of their careers with Masco. We believe this design reinforces our executives’ focus on the long-term enhancement of stockholder value and serves the objective of retaining key employees.

 

Our equity awards vest over an extended time period and therefore the value ultimately realized from these awards depends on the long-term value of our common stock. Vesting generally occurs over a ten-year period for restricted stock and a five-year period for options, and options may be exercised up to ten years after the date of grant. Vesting is also generally contingent on continued employment with the Company. By design, our awards do not vest immediately on retirement. Instead, following retirement, options continue to vest over any remainder of the five-year vesting period, and the schedule for vesting of restricted stock awards is accelerated somewhat beginning in the year a participant turns age 66. Thus, our executives know that their management of the Company will continue to impact them financially even after their active careers with us end, thus reinforcing our executives’ focus on the long-term enhancement of stockholder value. The “Restricted Stock” and “Stock Options” sections below contain additional details regarding vesting of equity awards.

 

The Company believes it continues to receive benefits from our equity awards even after a participant leaves the Company (upon retirement or otherwise) because our award agreements restrict participants from subsequently engaging in competitive and other activities that are adverse to our interests. In order to protect the Company’s goodwill, each participant is prohibited from competitive activities for one year following termination of employment. In addition, if a participant violates this restriction, the agreement gives us the right to recover from the participant the net gain realized from these awards during the two years prior to termination. In addition, if at any time after termination of employment (including retirement) a participant engages in any activity detrimental to the Company, any unexercised options including unvested installments and unvested restricted stock may be forfeited. We believe that these features not only improve our retention of executive talent, but also reduce the potential for harmful post-termination conduct.

 

Under current accounting rules, the cost related to restricted stock awards and options is fixed in relation to the value of Company common stock at the time of grant. Under the requirements of FAS 123R, this expense is

generally amortized for financial reporting purposes over the shorter of the applicable vesting period or the period to our normal retirement age. Consequently, for financial reporting purposes as an executive approaches retirement age, the amortization period for outstanding awards and any new awards decreases, and therefore the annual amount of expense recognized by the Company for outstanding awards and new awards generally increases. In this regard, awards to a participant, such as our Chief Executive Officer, who continues to actively serve the Company after normal retirement age, are expensed in full immediately upon grant even though such awards remain subject to vesting requirements, and the executive will only realize their value over a period of years. Consequently, the Summary Compensation Table in the section “Compensation of Executive Officers” includes not only the amount of expense we recognized in 2006 for financial reporting purposes for new awards made during 2006 (including the full expense for awards made during the year to participants who were retirement age or older), but it also includes the expense we recognized in 2006 for all of the outstanding equity awards that were made in prior years, even if these earlier awards were reflected in the executive compensation reported in prior Proxy Statements. The Summary Compensation Table does not, however, reflect restricted stock awards granted for Company performance for 2006, since those awards were not granted until February 2007.

 

Our tax deduction for restricted stock awards is based on the fair market value of the stock when the restricted stock awards vest, and in the case of options, the tax deduction is based on the fair market value of the stock in excess of the exercise price only at the time options are exercised. The fair market value upon vesting of restricted stock or upon exercise of an option may differ from the fair market value of the stock on the date of grant that is used to calculate our expense for financial reporting purposes. Consequently, the tax benefit resulting from these programs, and therefore their after-tax cost to the Company is based on our share price at the time of vesting, in the case of restricted stock, and at the time of exercise, in the case of options. We have historically purchased a sufficient number of shares of Company common stock in the open market to offset any common share dilution resulting from restricted stock awards.

 

Restricted Stock

 

For many years, we have granted restricted stock awards to a broad group of eligible key employees. Restricted stock awards granted under the Long Term Incentive Plan generally vest in ten percent annual installments over a period of ten years from the date of grant. Awards held by participants age 66 or older vest in not more than five annual installments, except that the awards Mr. Manoogian held in 2005 at the time we implemented this change continue to vest on their original longer-term schedule. In general, vesting is contingent on continued employment with the Company. The Long Term Incentive Plan provides, however, that shares continue to vest upon retirement on or after normal retirement age, and that all shares vest immediately upon death, permanent and total disability or the occurrence of certain events constituting a change in control of the Company. Unvested restricted shares are held in the participant’s name, and accordingly, the participant has the right to vote the shares and receive dividends. Any employee who receives a restricted stock award must observe a noncompetition covenant for a one-year period following termination of employment. In addition, if any unvested awards continue to vest after a participant’s employment terminates by retirement or otherwise, the value of such shares may be forfeited to us if the participant engages in activity detrimental to the Company.

 

Our annual restricted stock award program for key employees (including executive officers) links the value of stock grant opportunity to Company performance in the same manner as our cash incentive compensation plan, except that the Committee also considers long-term improvement in return on invested capital as a factor in determining the size of annual grants of restricted stock to executive officers. After the year-end, the Committee may exercise its negative discretion to reduce the size of the award if it is not satisfied with the Company’s progress in improving return on invested capital, regardless of the level of targeted earnings per share that is achieved. We believe that return on invested capital complements the earnings per share profitability measure. The return on invested capital reflects how efficiently we use our capital. Although restricted stock awards are based on Company performance, we believe that a long vesting period, which exceeds those of many other companies, including many in our peer group, increases executive retention and provides incentives for increasing stockholder value on a long-term basis. As under our cash incentive compensation plan, the maximum opportunity levels for restricted stock awards under this program (as a percentage of base salary) are 200% for our Chief Executive Officer, 160% for our President and 100% for our other executive officers.

 

The Committee compares the Company’s performance with the scheduled earnings per share targets to determine the actual awards of restricted stock at its regularly scheduled meeting in February, which is held without regard to the timing of any communication of any material non-public information. In determining the number of shares of restricted stock that are awarded, the Committee uses the closing price of Company common stock on the date of the grant, as compared with the prior practice of using a price between the high and low sale prices on the date of grant. As a result of the Company’s performance in 2006, the named executive officers (other than Mr. Doran) received awards of restricted stock valued at approximately 44% of the maximum award opportunity as compared to 47.5% for 2005 and 100% for 2004. Since Mr. Doran retired in 2006, he received cash in lieu of a restricted stock award prorated for the partial year of service.

 

As part of our annual restricted stock award program for key employees, the Chief Executive Officer or President can recommend additional restricted stock awards for the executive management group, including other named executive officers, if warranted by outstanding individual contribution. The total value of all such awards cannot exceed 20% of the combined annual salaries of the executive management group, excluding the salaries of the Chief Executive Officer and the President, who are not eligible to receive such additional awards. No such awards were granted in 2006.

 

Stock Options

 

Stock options also reflect the Committee’s focus on long-term, equity-based compensation that is aligned with the interests of stockholders and provide incentive for future performance. Historically, we granted stock options to a limited group of key employees, including the leadership of our various operating entities, to strive for a common goal of overall share price appreciation. In 2003, the Committee approved guidelines for granting stock options (including grants to executive officers), anticipating that annual awards would approximate 1% of our outstanding shares.

 

Options granted since February 2000 vest in equal annual installments of 20% over a five-year period and remain exercisable until ten years from the grant date. Options granted before that time also had a ten-year term, but vested annually on a different schedule. See note 1 to the “Outstanding Equity Awards at Fiscal Year-End” table below. Upon retirement, options continue to vest and remain exercisable as if employment continued. Rights under option grants are not accelerated upon retirement. Options become immediately exercisable upon a death, permanent and total disability or a change in control, although upon death options may only be exercised until the earlier of the expiration of their original term or one year after death. Upon other termination of employment, participants may exercise options but only to the extent such options are then exercisable, within 30 days for voluntary termination and 3 months for involuntary termination; however, any amounts realized by the participant upon exercise of options in these cases could be subject to the clawback feature described below.

 

The option grant guidelines for annual option grants utilize a multiple of base salary. For our Chairman and Chief Executive Officer and our President, the multiples are eight and six, respectively. The multiple for all other executive officers is three times base salary. In accordance with these guidelines, in July 2006 we granted options to approximately 600 key employees (including all executive officers and Mr. Manoogian) as part of the Committee’s strategy to utilize options as an important component of our long-term incentive compensation for key employees.

 

Options are granted annually for participants, including the executive officers, at a regularly scheduled Committee meeting. We have not in the past granted stock options at a time when we were in possession of material non-public information, which if released would reasonably be expected to increase the price of the our common stock, although we have no formal policy to that effect. Options are granted at the fair market value on the date of grant, so option holders only benefit from subsequent stock price appreciation. In determining the exercise price on the grant date, the Committee uses the closing stock sale price on the date of grant, as compared with the prior practice of using a price between the high and low sale prices on the date of grant. The 2005 Plan prohibits the granting of restoration options, other than restoration options resulting from the exercise of certain outstanding options granted under the predecessor 1991 Plan. Such restoration options are granted only when a participant exercises an eligible option granted pursuant to the 1991 Plan and pays the exercise price by delivering shares of Company common stock. The restoration option is equal to the number of shares delivered by the participant and does not increase the number of shares covered by the original stock option. The exercise price of the restoration

option is the fair market value of Company common stock, also now determined based on the closing sale price on the date of grant, so that the participant benefits only from subsequent increases in our stock price.

 

Our stock option agreements include a “clawback” provision under which we may require the participant to pay back to us the net gain realized upon the exercise of any installment of the option that became exercisable within two years prior to employment termination (except in the event of normal retirement, death or disability). We believe that this feature enhances the retention aspects of our equity compensation arrangements.

 

In order to reinforce the alignment of executives’ interests with long-term stockholder interests, the Board has established stock ownership guidelines for the executive management group, including named executive officers, that require them to remain at risk by maintaining a substantial interest in our common stock. This minimum personal investment requirement is designed to assure that a meaningful amount of the executive officers’ personal net worth is invested in the Company. We require our executives to achieve the share ownership necessary to meet the guidelines within three years after becoming subject to the guidelines. Unvested shares of restricted stock count towards achieving the requirement, since those shares are registered in the executive’s name, although they may not be transferred or sold. The guidelines require stock ownership ranging from a minimum of two times base salary to five times base salary, which is required for our Chief Executive Officer. At least annually, the Committee reviews executive ownership of Company common stock. As of December 31, 2006, when the closing price was $29.87, executive ownership of Company common stock ranged from six to ten times average base salary, and our Chief Executive Officer held 94 times his base salary in Company common stock.

 

Except for employee stock options granted under our Long Term Incentive Plan and other arrangements permitted by law and approved by our Board of Directors, our insider trading policy prohibits our senior management from engaging in transactions involving derivative securities of the Company, such as put and call options, and in certain other arrangements, such as forward sales and short sales, including transactions intended to reduce their risk of holding Company common stock.

 

We provide a limited number of perquisites to our senior executives. We maintain aircraft for business purposes, and the Committee has evaluated our policies and valuation practices for personal use of Company aircraft. The Board has requested for security purposes that Messrs. Manoogian and Barry use Company aircraft for both business and personal travel and, notwithstanding this requirement, personal use by these officers is considered a perquisite for SEC reporting purposes. As a result, personal use of the airplanes by Messrs. Manoogian and Barry account for approximately 90% of their total perquisites. Upon approval of the Chief Executive Officer or President, our other executive officers may also on occasion use Company aircraft, if available, for personal travel.

 

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

 

We provide retirement benefits for many of our employees. These plans provide retirement income supplementing social security and individual asset accumulation. In addition, we have implemented an unfunded Supplemental Executive Retirement Plan for a limited number of senior executives, including all of the named executive officers, to supplement the benefits they would otherwise receive upon retirement. Information with respect to benefits under these plans is included in the data reviewed by the Committee. The plans in which our executive officers participate are described below under “Compensation of Executive Officers — Retirement Plans.”

 

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

 

After a change in control, the accelerated payment or cash-out of awards may be considered to be “golden parachute payments” if in aggregate such payments exceed certain thresholds. Although we do not intend to cause adverse tax consequences to participants, under the Internal Revenue Code, “golden parachute payments” are subject to a 20% excise tax, in addition to normally applicable income and other payroll taxes. If a participant, including any named executive officer, under the Long Term Incentive Plan or the Supplemental Executive Retirement Plan becomes entitled to receive payments that trigger the application of the excise tax, we will make an additional cash payment to the participant that will generally make the participant whole for such excise tax. Based on our assessment, no excise tax would have been payable by the Company to any named executive officer if a change in control had occurred as of December 31, 2006. The tally sheet used by the Committee to review executive compensation includes our obligations to the executives under these programs in the event of a change in control.

 

Additional information concerning the effect of a change in control appears below in “Compensation of Executive Officers — Change in Control and Termination.”

 

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

 

We have designed our executive compensation programs to meet our objectives of attracting, retaining and motivating key executive talent and aligning our executives’ interests with maximizing long-term stockholder value. We recognize individual contributions in the context of overall Company performance, as we seek to retain

talented executives in a challenging business environment. We believe that we have a competitive, performance-driven compensation program that accomplishes these objectives.

 

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

 

Peter A. Dow, Chairman

Verne G. Istock

David L. Johnston

J. Michael Losh

Mary Ann Van Lokeren

 

The following table summarizes the annual and long-term compensation of our Chief Executive Officer, our Chief Financial Officer, the three other highest paid current executive officers, and a retired executive officer whose total compensation, determined pursuant to SEC requirements, results in his inclusion in this table (collectively, the “named executive officers”) for 2006. The amounts shown under “Restricted Stock Awards” and “Stock Options” are the amounts we are required to expense in 2006 for accounting purposes, including amounts relating to awards that were granted in prior years. The variation between the value of the awards granted for 2006 and the amounts indicated below is primarily due to the expensing requirements of FAS 123R described in the footnotes below, under which expense amounts are based, in part, on the proximity of the individual’s age to Masco’s normal retirement age of 65. Since five of the six individuals named below are within two years of normal retirement age or older, the amounts shown in the table significantly exceed the value of the restricted stock awards and stock options actually granted for 2006.

 

2006 Summary Compensation Table

 

 

 

 

The following table sets forth information concerning the grants of restricted stock and options to the named executive officers in 2006. The grant date set forth below is the date that the Committee or Board granted the award.

 

2006 Grants of Plan-Based Awards

 

 

 

 

The “Compensation Discussion and Analysis” describes the performance-based cash bonuses, performance-based stock awards and options, including the proportion of fixed salary to variable compensation, and the targets for performance-based compensation. Although awards under the Plan generally vest in equal annual installments of 10% over a period of ten years, because of their ages at the date of grant, as described in the “Compensation Discussion and Analysis,” the vesting of these awards will accelerate for each of these named executive officers other than Mr. Wadhams. The stock options granted in 2006 vest in five equal annual installments commencing on the first anniversary of the date of grant and remain exercisable until ten years from the date of grant.

 

The following table shows for each of the named executive officers as of December 31, 2006 (i) each stock option outstanding, (ii) the aggregate number of unvested shares of restricted stock, and (iii) the market value of such shares based on the closing price of Masco common stock on December 29, 2006, the last trading day of the year ($29.87 per share). The value realized upon vesting of the restricted shares will depend on the value of Masco common stock on the date of vesting.

 

2006 Outstanding Equity Awards at Fiscal-Year-End

 

 

 

 

The following table shows the number of shares acquired and the value realized by each of the named executive officers during 2006 in connection with the exercise of stock options and the vesting of restricted stock.

 

2006 Option Exercises and Stock Vested

 

 

 

 

 

We have a qualified profit sharing plan and a qualified pension plan that cover many salaried employees, including the executives. As in many other companies, we also maintain a complementary non-qualified Benefits Restoration Plan, which has both defined benefit and defined contribution components, to restore for participants benefits which otherwise would be limited by Internal Revenue Code provisions applicable to the tax-qualified plans. As described below, the named executive officers are also covered by the non-qualified Supplemental Executive Retirement Plan which supplements, but is integrated with the benefits provided under, our other retirement plans.

 

Qualified Pension Plan

 

At normal retirement age (65), participants will receive for life (with five years certain) a monthly benefit equal to 1/12^th of the participant’s Final Average Compensation (equal to the average of the highest five consecutive January 1 annual base salary rates) times a maximum of 30 years of credited service times 1.1%, with a small additional annual benefit for credited service prior to July 1, 1971. Vesting occurs after five full years of employment, and all of the named executive officers are fully vested. The qualified Pension Plan benefit amounts set forth in the table below are not subject to reduction for social security benefits or for other offsets, except to the extent that pension or equivalent benefits are also payable under a prior affiliate’s plan (see footnote (1) to the table). Each of the named executive officers who is younger than 65 would be eligible for a reduced early retirement benefit which is available to any plan participant age 55 or older who is vested. Reduction factors for pension commencement prior to age 65 (applicable both to the qualified Pension Plan and to the defined benefit portion of the Benefits Restoration Plan) are 5/9 and 5/18 of one percent reduction for each month, respectively for the months from ages 60 to 65, and for the months from ages 55 to 60, for a total early commencement reduction of 50% at age 55. A disability benefit equal to the accrued benefit is payable to a participant disabled after ten or more years of service. There are no “premium” early retirement subsidies available under these plans for the named executive officers.

 

Benefits Restoration Plan

 

The defined benefit portion of the non-qualified Benefits Restoration Plan is similar to the qualified Pension Plan. As noted below in footnote (1) to the table, the payment timing, form, early retirement and other options for this Plan are the same as for the qualified Pension Plan.

 

The Company maintains a tax qualified profit sharing plan for a number of its employees, including the named executive officers. Contributions are discretionary, may not exceed 7% of base salary, and for 2006 such contributions along with the book entry allocations described below, are included with “All Other Compensation” in the Summary Compensation table. Under the defined contribution portion of the Benefits Restoration Plan the Company makes allocations for each participant, including the named executive officers, reflecting defined contribution amounts utilizing base salary that would exceed the Internal Revenue Code’s limitations applicable to our qualified profit sharing plan, together with amounts reflecting pro-forma earnings on prior years’ allocations. These allocations are maintained in book entry form in a Company account in each participant’s name. The Plan limits Company contributions made to the qualified profit sharing plan plus the allocations in excess of qualified plan limitations which are made to the Benefits Restoration Plan, to a combined maximum of 7% of base salary. The pro-forma earnings are credited to the book entry accounts based on the performance reported by the several Fidelity Freedom Fund^® offerings which are available to all plan participants in our qualified profit sharing plan. These book entry allocations are not funded. Payouts from this portion of the Benefits Restoration Plan are available on the same basis as distributions from the Company’s qualified profit sharing plan, which may include a lump sum, or an installment payment option following termination although, the qualified profit sharing plan also permits such distributions after attainment of age 591/2 and prior to termination. The following table shows for each named executive officer (A) the amount of the book entry allocation to the participant’s Benefits Restoration Plan account made by the Company for 2006, (B) the amount of pro-forma earnings credited to the participant’s account, and (C) the account’s ending balance at the date shown.

 

2006 Nonqualified Deferred Compensation Plan
Defined Contribution Portion of the Benefits Restoration Plan

 

 

We offer no other plans of deferred compensation which would permit the election of deferrals of cash compensation by the executive officers other than the qualified 401(K) savings plan to which participants (including the named executive officers) but not the Company may make pre-tax contributions.

 

Supplemental Executive Retirement Plan

 

Many of our executive officers have been employed by us, a company acquired by us or a prior Company affiliate for the majority of their careers. In lieu of any employment agreements, severance arrangements or voluntary non-qualified deferred compensation plans, we have implemented an unfunded Supplemental Executive Retirement Plan for a limited number of senior executives, including all of the named executive officers, to supplement the benefits they would otherwise receive upon retirement. Each of the named executive officers is fully accrued and vested in this benefit. Provided no change in control has occurred, participants are required to refrain from activities negatively impacting the Company’s business following termination of employment.

 

Beginning at retirement on or after age 65, participants in the Supplemental Executive Retirement Plan are to receive annually for life an amount which, when integrated with benefits from our other retirement plans (and, for most participants, any retirement benefits payable by reason of employment by prior employers) equals up to 60% (currently based on an accrual rate of 4% per year for up to 15 years of service) of the average of the participant’s highest three years’ cash compensation received from us (base salary and regular year-end cash bonus, not in excess

of 60% of that year’s maximum bonus opportunity). The bonus actually paid in excess of this 60% limitation can be used in calculating cash compensation received in earlier or later years.

 

This Plan provides for no early retirement benefit prior to age 65, and benefits under the Plan are not payable in a lump sum, other than in the case of a change in control as described below. Generally, participants who terminate employment with Masco with more than five years’ service before age 65 become entitled to receive their accrued benefit reduced by a vesting schedule that provides for no more than 50% vesting upon attainment of age 50 and 100% vesting no earlier than age 60. Such vested benefit is not payable until age 65 and is subject to certain offsets for amounts earned from prior or future employers.

 

The plan provides a disability benefit payable to a participant who has been employed at least two years and becomes disabled while employed with us. The disability benefit is paid until age 65 (integrated with Company paid long-term disability insurance) and is equal to 60% of the annual salary and bonus (up to 60%) in effect at the time of disability. At age 65, payments revert to a calculation based on the high three year average compensation (as described above) and the benefit percentage earned at the time of disability, increased (if less than 60%) by the period of disability.

 

A surviving spouse will receive reduced benefits. A participant receiving benefits and his or her surviving spouse may also receive supplemental medical benefits. The estimated present value at December 31, 2006 of future medical benefits, is $247,132 for Mr. Barry; $254,207 for Mr. Doran; $254,208 for Mr. Foley; $238,943 for Mr. Leekley; $190,662 for Mr. Manoogian and $210,858 for Mr. Wadhams.

 

The plan is unfunded, except that following a change in control the payment of accrued benefits on a present value basis plus an amount for any related excise taxes resulting from such plan payment and certain other Company payments is mandatory. No such payment of excise taxes would have been required if a change in control had occurred as of December 31, 2006. See “Change in Control” below.

 

Benefits payable under the Supplemental Executive Retirement Plan are reduced by integration with Company-funded benefits under our other retirement plans (as well as, in most cases, by offsets for benefits payable by reason of prior employment). Consequently, amounts payable under our qualified Pension Plan, the qualified profit sharing plan and both the defined benefit and defined contribution portions of the Benefits Restoration Plan reduce the benefits otherwise payable pursuant to the Supplemental Executive Retirement Plan. The present value amounts for the Supplemental Executive Retirement Plan shown in the table have been reduced to reflect the integrations and offsets referred to above. The following table shows the estimated present value of December 31, 2006 accumulated benefits in the pension plans described above for each of the named executive officers.

2006 Pension Plan Table