STEVEN J. MALCOLM

CHAIRMAN OF THE BOARD

 

 

Dear Williams Stockholders:

 

 

You are cordially invited to attend the 2010 annual meeting of stockholders of The Williams Companies, Inc. The meeting will be held on Thursday, May 20, 2010, in the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, at 11:00 a.m., Central time. We look forward to greeting personally as many of our stockholders as possible at the annual meeting.

 

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

 

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

 

I know that most of our stockholders are unable to attend the annual meeting in person. However, it is important that your shares be represented and voted at the meeting. Whether or not you plan to attend, you can be sure your shares are represented by promptly voting and submitting your proxy by phone, by Internet, or by completing, signing, dating, and returning your proxy card in the enclosed postage-paid envelope.

 

Thank you for your continued interest in our Company.

 

Very truly yours,

 

 

Steven J. Malcolm

 

Enclosures

April 8, 2010

TABLE OF CONTENTS

 

THE WILLIAMS COMPANIES, INC.
One Williams Center

Tulsa, Oklahoma 74172

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

Details for the annual meeting of stockholders of The Williams Companies, Inc. are below:

 

 

Important Notice Regarding The Availability Of Proxy Materials For The Stockholder Meeting To Be Held On May 20, 2010:

 

The annual report and proxy statement are available at www.edocumentview.com/wmb.

 

By order of the Board of Directors,

 

 

La Fleur C. Browne
Corporate Secretary

 

Tulsa, Oklahoma

April 8, 2010

 

THE WILLIAMS COMPANIES, INC.

One Williams Center

Tulsa, Oklahoma 74172

 

 

 

 

 

We are providing this proxy statement as part of a solicitation by the Board of Directors (the “Board”) of The Williams Companies, Inc. for use at our 2010 annual meeting of stockholders and at any adjournment or postponement thereof. We will hold the meeting in the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, on Thursday, May 20, 2010, at 11:00 a.m., Central time.

 

As permitted by the rules of the Securities and Exchange Commission (“SEC”), we have elected to send you this full set of proxy materials, including a proxy card, and additionally to notify you of the availability of these proxy materials on the Internet. This proxy statement and our 2009 Annual Report are available at www.edocumentview.com/wmb, which does not have “cookies” that identify visitors to the site.

 

We expect to mail this proxy statement and accompanying proxy card to stockholders beginning on April 8, 2010.

 

Unless the context otherwise requires, all references in this proxy statement to “Williams,” the “Company,” “we,” “us,” and “our” refer to The Williams Companies, Inc. and its consolidated subsidiaries.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General

 

Our Board believes that strong corporate governance is critical to achieving our performance goals and to maintaining the trust and confidence of investors, employees, suppliers, business partners, regulatory agencies, and other stockholders.

 

Corporate Governance Guidelines

 

Our Corporate Governance Guidelines provide a framework for the governance of Williams as a whole and also address the operation, structure, and practice of the Board and its committees. The Nominating and Governance Committee reviews these guidelines at least annually.

 

Strategic Planning

 

During the year, the Board meets with management to discuss and approve strategic plans, financial goals, capital spending, and other factors critical to successful performance. The Board also conducts a mid-year review of progress on objectives and strategies. During Board meetings, directors review key issues and financial performance. The Board meets privately with the Chief Executive Officer (“CEO”) six times per year and meets in executive session at each regular Board meeting and additionally as required. Further, the CEO communicates regularly with the Board on important business opportunities and developments. In 2009, the Board held one of its regularly scheduled meetings at one of our field locations to further educate the directors about our operations.

 

Board/Committee/Director Evaluations

 

The Board and each of its committees conduct annual self-assessments. In addition, the Nominating and Governance Committee evaluates each individual director annually.

 

Chief Executive Officer Evaluation and Management Succession

 

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

 

Board Leadership Structure

 

The Board believes that the Company and its stockholders are best served at this time by a leadership structure in which a single leader serves as chairman and CEO and the Board has an independent lead director.

 

Combining the roles of chairman and CEO makes clear that the person serving in these roles has primary responsibility for managing the Company’s business, subject to the oversight and review of the Board. Under this structure, the chairman and CEO chairs Board meetings, where the Board discusses strategic and business issues. The Board believes that this approach is preferable because the CEO is the individual with primary responsibility for implementing the Company’s strategy, directing the work of other officers and leading implementation of the Company’s strategic plans as approved by the Board. This structure creates a single leader who is directly accountable to the Board and, through the Board, to stockholders, and enables the CEO to act as the key link between the Board and other members of management. In addition, Mr. Malcolm personally brings to the combined role of chairman and CEO a strong history with Williams. Since joining the Company in 1984, Mr. Malcolm performed roles of increasing responsibility related to business development, gas management and supply, and gathering and processing, before ultimately assuming the chief executive officer position in 2002.

 

Because the Board also believes that strong, independent Board leadership is a critical aspect of effective corporate governance, the Board has established the position of Lead Director. The Lead Director, who must be

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

 

The Board believes that having a single leader serving as Chairman and CEO, together with an experienced and engaged Lead Director, is the most appropriate leadership structure for the Board at this time. However, the Board maintains the flexibility to amend the Corporate Governance Guidelines should it determine in the future that the two roles should be separated based upon the Board’s assessment of the Company’s needs and leadership from time to time. The Board periodically reviews the Board structure and leadership as well as director succession planning.

 

Board oversight of Williams’ risk assurance process

 

We employ an annual risk assurance process that is designed to provide positive assurance to management and the Board that risks are effectively managed to enable achievement of strategic and operating objectives. The risk process is governed by the committees of the Board, our executive officers, and our risk subject matter experts. We utilize the Enterprise Risk Management (ERM) framework to identify the top risks to the Company considering our internal and external environments and objectives and to measure the likelihood of occurrence and potential impact of each risk. The Audit Committee annually reviews and provides feedback about the list of the top risks so identified. Such top risks are then further reviewed by the most appropriate Board committee. For example, the risk of “financial reporting and disclosure” is reviewed by the Audit Committee, the risk of “capital availability” is reviewed by the Finance Committee, and the risk of “ethics and compliance program” is reviewed by the Nominating and Governance Committee. Each Board committee annually considers a summary for each of its risks, including the definition, likelihood, and potential impact of each risk, the planned response to the risk, management’s assessment of the effectiveness of mitigation efforts, and a status report of any action required. For so long as any action is required for the planned response to a risk, such risk is reviewed at each committee meeting until management assesses the risk’s mitigation efforts as effective. Each committee provides feedback to management about the risk assurance process.

 

Executive Sessions of Non-Employee Directors

 

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

 

Director Independence

 

The Board has adopted director independence standards, as an attachment to our Corporate Governance Guidelines.

 

The Board has affirmatively determined that each of Mr. Cleveland, Dr. Cooper, Mr. Engelhardt, Mr. Granberry, Mr. Green, Ms. Hinshaw, Mr. Howell, Mr. Lorch, Mr. Lowrie, Mr. MacInnis, and Ms. Stoney is an “independent director.” In addition, the Board affirmatively determined that Charles M. Lillis, who resigned effective March 18, 2009, was an “independent director.” In so doing, the Board determined that each of these individuals met the “bright line” independence standards of the NYSE and our own director independence standards. In addition, the Board considered transactions and relationships between each director and any member of his or her immediate family on one hand, and Williams and its affiliates on the other, to confirm that those transactions and relationships do not vitiate the affected director’s independence. We discuss these relationships below.

 

Ms. Hinshaw is a director of Insituform Technologies, Inc., a company whose subsidiaries, Bayou Coating LLC, Bayou Companies LLC, and Insituform Technologies Inc. dba United Pipeline Systems provide services to Williams. In determining that the relationship was not material, the Board considered these facts: the relationship arises only because Ms. Hinshaw is a director of Insituform, that she has no material interest in any transactions between the subsidiaries and Williams, and that she had no role in any such transactions.

 

Mr. Howell is a director of Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas and a member of the America Advisory Board of Deutsche Bank AG. Deutsche Bank AG and Deutsche Bank

Securities Inc. provide services to Williams. In determining that this relationship was not material, the Board considered these facts: the relationship arises only because Mr. Howell is a director of Deutsche Bank entities, that he has no material interest in any transaction between Deutsche Bank and Williams, and that he had no role in any such transactions.

 

Mr. Lorch is a director of HSBC Finance Corporation and HSBC North America Holding Co. HSBC Bank (USA) and HSBC Business Solutions provide services to Williams. In determining that the relationship was not material, the Board considered these facts: the relationship arises only because Mr. Lorch is a director of HSBC, that he has no material interest in any transactions between HSBC and Williams, and that he had no role in any such transactions.

 

Mr. MacInnis is a director of ITT, whose subsidiary Gould Pumps Inc. provides services to Williams. In determining that the relationship was not material, the Board considered these facts: the relationship arises only because Mr. MacInnis is a director of ITT, that he has no material interest in any transactions between the ITT subsidiary and Williams, and that he had no role in any such transactions.

 

Mr. MacInnis also serves as chairman of the board and chief executive officer of EMCOR Group Inc., a company whose subsidiaries Integrated Solutions Group, Ohmstede Industrial Services Inc., Ohmstede Ltd, Ohmstede United Industrial Services, and Wasatch Electric provide services to Williams. In determining that the relationship was not material, the Board considered the fact that payments made by Williams to EMCOR subsidiaries did not exceed the greater of $1 million or 2% of either company’s consolidated gross revenues.

 

No member of our Board serves as an executive officer of any non-profit organization that has received contributions from Williams exceeding the greater of $1 million or 2% of such organization’s consolidated gross revenues in any single fiscal year of the preceding three years. Further, in accordance with our director independence standards, the Board determined that there were no discretionary contributions to a non-profit organization with which a director, or a director’s spouse, has a relationship that affects the director’s independence.

 

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

 

Transactions with Related Persons

 

The Board has adopted policies and procedures with respect to related person transactions as part of the Audit Committee charter. Any proposed related person transaction involving a member of the Board must be reviewed and approved by the full Board. Otherwise, the Audit Committee reviews proposed transactions with related persons, promoters, and certain control persons that are required to be disclosed in our filings with the SEC. If it is impractical to convene an Audit Committee meeting before a related person transaction occurs, the chairman of the committee may review the transaction alone. The Audit Committee or its chairman, in good faith, may approve only those related person transactions that are in, or not inconsistent with, Williams’ best interests and the best interests of our stockholders. No director may participate in any review, consideration or approval of any related person transaction with respect to which such director or any of his or her immediate family members is the related person. During 2009, there were no transactions that required review or approval by the Audit Committee or the full Board.

 

Majority Vote Standard

 

Our Board has adopted a majority vote standard for the election of directors in uncontested elections. Each of our directors has executed an irrevocable resignation that will become effective if he or she fails to receive a majority of the votes cast in an uncontested election and the Board accepts such resignation. If a director fails to receive the required votes for election, the Nominating and Governance Committee will act on an expedited basis to determine whether to accept the resignation. The Nominating and Governance Committee will then submit its recommendation for consideration by the Board. The Board will act on the recommendation and publicly disclose its decision within 90 days from the date of the certification of the election results. The Board expects the director whose tendered resignation is under consideration to abstain from participating in any decision regarding that resignation. The Nominating and Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s tendered resignation. If the Board accepts a director’s resignation, the

Nominating and Governance Committee will recommend to the Board whether to fill such vacancy or reduce the size of the Board.

 

Director Attendance at Annual Meeting of Stockholders

 

We have a policy that all Board members are expected to attend our annual meeting of stockholders. All of the then-current Board members attended the 2009 annual meeting of stockholders.

 

Communications with Directors

 

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

 

The current contact information is as follows:

 

The Williams Companies, Inc.

One Williams Center, MD 47

Tulsa, Oklahoma 74172

Attn: Lead Director

 

The Williams Companies, Inc.

One Williams Center, MD 47

Tulsa, Oklahoma 74172

Attn: Corporate Secretary

Email: lafleur.browne@williams.com

 

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

 

Code of Ethics

 

We have adopted a code of ethics specific to the CEO, Chief Financial Officer, and Chief Accounting Officer, which was filed with the SEC as Exhibit 14 to our annual report on Form 10-K for the year ended December 31, 2003. In addition, we have adopted a code of business conduct that is applicable to all employees and directors.

 

How to Obtain Copies of our Governance-Related Materials

 

The following documents are available on our website at www.williams.com from the Corporate Responsibility/Corporate Governance tab.

 

 

If you want to receive these documents in print, please send a written request to our corporate secretary at The Williams Companies, Inc., One Williams Center, MD 47, Tulsa, Oklahoma 74172.

 

Board Meetings

 

Board members actively participate in Board and committee meetings. Generally, materials are distributed one week in advance of each regular Board meeting so that members can be prepared for the discussion.

The full Board met 9 times in 2009. Further, the non-employee directors met 6 times without the chairman of the Board and CEO present. Each director attended at least 75% of the aggregate of the Board and applicable committee meetings held in 2009.

 

Board Committees

 

The Board has four standing committees — Audit, Compensation, Finance, and Nominating and Governance — as well as an ad hoc Litigation Committee. Each standing committee has a charter adopted by the Board. The standing committees report to the full Board at each regular Board meeting.

 

The Board elects each committee’s members and chairman annually. The chart below shows the composition of the standing committees and the number of committee meetings in 2009.

 

 

 

 

Audit Committee

 

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

 

 

 

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

 

Compensation Committee

 

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

 

 

The Compensation Committee has authority under its charter to retain, approve fees for, and terminate advisors, consultants, and agents as it deems necessary to assist in the fulfillment of its responsibilities. The Compensation Committee reviews the total fees paid to its outside advisors to ensure that the advisors maintain objectivity and independence when rendering advice to the Committee. The Compensation Committee has selected and retained Frederic W. Cook & Co., an independent executive compensation consulting firm, to:

 

 

The independent compensation consultant reports to the chairman of the Compensation Committee. Frederic W. Cook & Co. also provides competitive market data and advice to the Nominating and Governance Committee on non-employee director compensation. Frederic W. Cook & Co. does not provide any additional services to Williams.

 

The Compensation Committee chairman works with the Senior Vice President, Strategic Services and Administration, and Chief Administrative Officer (“CAO”) to determine the agenda for committee meetings. The CEO and the CAO are invited to attend the Compensation Committee meetings, though they leave the room during discussions of compensation actions that could affect them personally. Williams’ Human Resources department

supports the Compensation Committee in its duties and, along with the CEO, may perform certain functions regarding compensation programs. For more information on the Compensation Committee, please see the Compensation Discussion and Analysis in this proxy statement.

 

Finance Committee

 

The Finance Committee oversees Williams’ finances. Among other tasks, this committee:

 

 

Nominating and Governance Committee

 

The Nominating and Governance Committee:

 

 

Consideration of nominees.  The process for selecting a director nominee starts with a preliminary assessment of each candidate based upon his/her resume and other biographical and background information, and his/her willingness to serve. The Committee considers prior Williams Board performance and contributions for any director nominee who is a current or former Board member. A candidate’s qualifications are then evaluated against the criteria set forth in “Proposal 1 — Election of Directors,” as well as the specific needs of Williams at the time. Qualified candidates are interviewed by the chairman of the Board and at least one member of the Nominating and Governance Committee. Candidates may then meet with other members of the Board and senior management. At the conclusion of this process, if the Board and senior management determine that the candidate will be a good fit, the Nominating and Governance Committee recommends the candidate to the Board for election at the next annual meeting.

The Nominating and Governance Committee uses the same process to evaluate all candidates regardless of the source of the nomination. The Committee has in the past and may in the future engage third party consultants to identify and evaluate potential director nominees, as it deems appropriate.

 

Stockholder nominations.  The Nominating and Governance Committee will consider written recommendations from stockholders for director nominations. If you wish to nominate a candidate, please forward the candidate’s name and a detailed description of the candidate’s qualifications, a document indicating the candidate’s willingness to serve, and evidence that you own Williams’ stock to: Corporate Secretary, One Williams Center, MD 47, Tulsa, Oklahoma 74172. A stockholder wishing to nominate a candidate must also comply with the notice and other requirements described above under the question “May I propose actions for consideration at the 2011 meeting of stockholders?”

 

Our current restated certificate of incorporation provides for three classes of directors with each class of as nearly equal size as possible. The restated certificate of incorporation also provides that the Board must consist of between five and 17 members, with the actual number of directors at any time to be determined by the Board. The term of each class of directors is ordinarily three years, and the term of one class expires each year in rotation.

 

The 2010 nominees for the office of director — Dr. Cooper, Mr. Granberry, and Mr. Lowrie — were elected by Williams’ stockholders to a three-year term that expires this year. Unless otherwise instructed, the individuals designated by the Board as proxies intend to vote to elect Dr. Cooper, Mr. Granberry, and Mr. Lowrie. Should any of these nominees become unable for any reason to stand for election as a director, the designated proxies will vote to elect another nominee recommended by the Nominating and Governance Committee. Alternatively, the Board may choose to reduce its size.

 

Director and Nominee Experience and Qualifications.  At each of its regularly scheduled meetings, in satisfaction of our Corporate Governance Guidelines, the Nominating and Governance Committee evaluates the composition of the Board to assess the skills and experience that are currently represented on the Board, as well as the skills and experience that the Board will find valuable in the future, given the Company’s current situation and strategic plans. The Nominating and Governance Committee seeks a variety of occupational and personal backgrounds on the Board in order to obtain a range of viewpoints and perspectives and to enhance the diversity of the Board in such areas as geography, race, gender, ethnicity, and age. This assessment enables the Board to update (if necessary) the skills and experience it seeks in the Board as a whole, and in individual directors, as the Company’s needs evolve and change over time. For Board membership, the Nominating and Governance Committee considers the appropriate balance of experience, skills, and characteristics that best suits the needs of the Company and our stockholders. The Committee develops long-term Board succession plans to ensure that the appropriate balance is maintained.

 

The minimum qualifications and attributes that the Nominating and Governance Committee believes a director nominee must possess include:

 

 

In evaluating the director nominees and in reviewing the qualifications and experience of the directors continuing in office, the Nominating and Governance Committee considered a variety of factors. These include each nominee’s independence, financial literacy, personal and professional accomplishments, and experience in light of the needs of the Company. For incumbent directors, the factors also include past performance on the Board. Among other things, the Board has determined that it is important to have individuals with the following skills and experiences on the Board:

 

 

 

We have included below certain information about the nominees for election as directors as well as the directors who will continue in office after the annual meeting.

 

Nominees for Director Whose Terms Will Expire at the Annual Meeting in 2013

 

 

Director since 2006. Dr. Cooper has served as Senior Fellow of the Tower Center for Political Studies at Southern Methodist University since August 2007. From 2005 to 2007, she was the Dean of the College of Business Administration at the University of North Texas. From 2001 to 2005, she was the Under Secretary for Economic Affairs at the U.S. Department of Commerce. Dr. Cooper was at Exxon Mobil Corporation (an international oil and gas company) from 1990 to 2001, serving as Chief Economist the entire time and adding the position of Manager, Economics & Energy Division, Corporate Planning in 1999. Dr. Cooper also acted as Chief Economist for Security Pacific Bank (1981 to 1990) and United Banks of Colorado (1971 to 1981). Dr. Cooper served as a founding director of Texas Security Bank from 2008 through January 2010. She has participated in numerous professional and community service organizations, including Harvard University’s Higher Education Leadership Forum, the Oxford Energy Forum, and the International Women’s Forum.

 

As Senior Fellow of the Tower Center for Political Studies at Southern Methodist University, former Under Secretary for Economic Affairs at the U.S. Department of Commerce, and former executive of a Fortune 500 energy company, Dr. Cooper’s qualifications include industry, financial, and public policy and government experience.

 

 

Director since 2005. Mr. Granberry has been a member of Compass Operating Company LLC (a small, private oil and gas exploration, development, and producing company) since October 2004. From 1999 to 2004, as an independent consultant, he managed investments and consulted with oil and gas companies. From 1996 to 1999, Mr. Granberry was President and Chief Operating Officer of Tom Brown, Inc. (a public oil and gas company with exploration, development, acquisition, and production activities throughout the central United States). He has worked in the oil and gas industry in various capacities for 44 years, including as a manager of engineering at Amoco (a global energy company) and in executive positions for smaller independent energy companies. Mr. Granberry has served on committees and boards of industry organizations, including the Society of Petroleum Engineers, the American Petroleum Institute, and the Independent Producers Association of America. A start up Internet company, Just4Biz.com, where he served on the

board of directors and as interim chief executive officer for periods in 2000 and 2001, filed for bankruptcy in May 2001. He is a director of Legacy Reserves GP, LLC (an independent acquirer and developer of oil and natural gas properties) and Manor Park, Inc. (a Midland, Texas not-for-profit organization).

 

As a member of Compass Operating Company LLC, former President and Chief Operating Officer of Tom Brown, Inc., and with his varied experiences as an executive in the oil and gas industry, Mr. Granberry’s qualifications include industry, public policy and government, and operating experience.

 

 

Director since 2003. In 1999 Mr. Lowrie retired as Deputy Chief Executive Officer and director of BP Amoco PLC (a global energy company), where he spent his entire 33-year career. At Amoco, Mr. Lowrie held various positions of increasing responsibility, developing expertise in drilling, reservoir engineering, financial analysis of projects, and other skills related to the oil and natural gas exploration, production, and processing businesses. At various times in his Amoco tenure, Mr. Lowrie managed natural gas and natural gas liquids pipeline operations, hedging and other hydrocarbon price risk mitigation functions, international contract negotiations, petroleum product refining and marketing operations, environmental health and safety program design, and the development and execution of a process for managing capital investment projects. Mr. Lowrie also worked closely with all financial functions, internal and external auditors, and industry organizations such as the American Petroleum Institute. From 1995 to 1999, Mr. Lowrie served on the board of Bank One Corporation (now JP Morgan Chase), including on such board’s audit committee. He has attended the Executive Program at the University of Virginia. Mr. Lowrie is a director of The Ohio State University Foundation and a trustee of the South Carolina chapter of The Nature Conservancy.

 

As the former Deputy Chief Executive Officer of BP Amoco PLC, Mr. Lowrie’s qualifications include industry, financial, corporate governance, operating, and compensation experience.

 

Board of Directors’ Recommendation: THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF THE DIRECTORS NAMED IN PROPOSAL 1.

 

Directors Continuing in Office

 

Directors Whose Terms Expire at the Annual Meeting in 2011

 

 

Director since 2008. Mr. Cleveland was the Chief Information Officer of Lockheed Martin Corporation (an advanced technology company) from 2001 to 2008. Mr. Cleveland was responsible for Lockheed Martin’s information technology vision, consolidating its resources, implementing e-commerce initiatives, leveraging

economies of scale, and supporting its businesses. He was also President of Lockheed Martin Enterprise Information Systems from 1995 to 2008. From 2001 to 2008, Mr. Cleveland served as a director of Exostar (a joint venture formed to support the supply chain and security requirements of the aerospace and defense industry). Prior to the merger of Lockheed and Martin Marietta in 1995, Mr. Cleveland was Vice President and General Manager of Martin Marietta Internal Information Systems. From 1982 to 1986, Mr. Cleveland held an international assignment as Managing Director of GE Medical Systems Operations in Radlett, England. Mr. Cleveland began his career in 1970 as a member of General Electric Medical Systems’ engineering department. Mr. Cleveland is a member of the board of Aerospace Industries Association, the Florida High Tech Corridor Committee, and the Metro Orlando Economic Development Commission, among other civic and charitable organizations.

 

As the former Chief Information Officer of Lockheed Martin Corporation, a former Vice President of Martin Marietta, and multiple Executive operating positions with G.E., Mr. Cleveland’s qualifications include business operations and technology experience.

 

 

Director since 2004. Ms. Hinshaw is President and Chief Executive Officer of H&H Advisors (a financial consulting firm she founded in 2005). From 2000 to 2005 she was Senior Vice President and Chief Financial Officer of Graybar Electric Company (a distributor of electrical and communications products and provider of related supply chain management and logistics services), where she was responsible for the treasury, tax, auditing, and accounting areas. Ms. Hinshaw was a director of Graybar from 2000 to 2005. Prior to joining Graybar, she was with Monsanto Company (an agricultural company) for fifteen years, retiring as Monsanto’s Vice President and Treasurer in 1999. Ms. Hinshaw was a director of IPSCO (a supplier of steel products, tubular products, and coil processing services and products) from 2001 until the company was sold in 2007. Ms. Hinshaw is a director of Insituform Technologies Inc. (a provider of technologies and services for the rehabilitation of pipeline systems) and Synergetics USA, Inc. (which designs, manufactures, and markets instruments used for eye and neurosurgery).

 

As the President and Chief Executive Officer of a consulting firm, the former Senior Vice President and Chief Financial Officer of Graybar Electric Company, and the former Vice President and Treasurer of Monsanto Company, Ms. Hinshaw’s qualifications include financial and operating experience.

 

 

Director since 1998. Mr. MacInnis has been Chairman of the Board and Chief Executive Officer of EMCOR Group Inc. (an electrical and mechanical construction company and energy infrastructure service provider) since 1994, after he managed the reorganization and emergence from bankruptcy of its predecessor. Mr. MacInnis also is

Chairman of the Board and Chief Executive Officer of ComNet Communications, LLC (a provider of turnkey voice, data, and video infrastructure support). From 1981 to 1984, Mr. MacInnis served as Chairman and Chief Executive Officer of H.C. Price Construction (a builder of large diameter oil and gas pipelines). He has managed construction and operations all over the world, including in Tehran, Baghdad, Bangkok, the United Arab Emirates, London, the United States, and Canada. Mr. MacInnis has a law degree, having graduated from the University of Alberta Law School in 1971. He is a director of ITT Corporation (a high-technology engineering and manufacturing company) and the Greater New York Chapter of the March of Dimes.

 

As the Chairman and Chief Executive Officer of EMCOR Group Inc. and ComNet Communications, LLC, Mr. MacInnis’ qualifications include industry, financial, corporate governance, legal, operating, and compensation experience.

 

 

Director since 2001. Mr. Malcolm has served Williams in many capacities. He became Chairman of the Board in May 2002, Chief Executive Officer in January 2002, and President in September 2001. He was Chief Operating Officer from September 2001 to January 2002 and an Executive Vice President from May 2001 to September 2001. Mr. Malcolm was President and Chief Executive Officer of Williams Energy Services, LLC, a subsidiary of Williams, from 1998 to 2001, and Senior Vice President and General Manager of Williams Field Services Company, a subsidiary of Williams, from 1994 to 1998. Since joining Williams in 1984, he has performed roles of increasing responsibility related to business development, gas management and supply, and gathering and processing, before ultimately assuming the Chief Executive Officer position. Mr. Malcolm began his career at Cities Service Company in refining, marketing, and transportation services in 1970. Mr. Malcolm is also a director of several entities: Williams Partners GP LLC, the general partner of Williams Partners L.P.; Williams Pipeline GP LLC, the general partner of Williams Pipeline Partners L.P.; BOK Financial Corporation; and Bank of Oklahoma N.A. Mr. Malcolm serves on the boards of the YMCA of Greater Tulsa, St. John Medical Center, University of Tulsa Board of Trustees, Tulsa Metro Chamber of Commerce, and Tulsa Educare, and is a member of the American Petroleum Institute (Executive Committee), The Business Roundtable, the Oklahoma Business Roundtable, the National Petroleum Council, America’s Natural Gas Alliance (ANGA), the American Exploration & Production Council, and the 25 Year Club of the Petroleum Industry.

 

As Chairman, President and Chief Executive Officer of Williams, Mr. Malcolm’s qualifications include industry, financial, corporate governance, public policy and government, operating, and compensation experience.

 

 

Director since 1999. Ms. Stoney served as Executive Vice President of US West Communications Group, Inc. from March 1991 until retiring in January 1993 after a 33-year career. Previously she served as the President, Consumer Division, of US West (the Denver-based parent company of Northwestern Bell Telephone Company, Mountain States Telephone & Telegraph Company, and Pacific Northwest Bell Telephone Company) from 1989 to 1991. Beginning in 1980, Ms. Stoney held officer positions at Northwestern Bell, including as its Chief Operating Officer and ultimately its President and Chief Executive Officer. Ms. Stoney was the 1994 Nebraska Republican nominee for the U.S. Senate. She served as a national vice-chair finance and the Nebraska chair finance for the Dole for President campaign in 1995 to 1996, and as a delegate to the 2000 and 2004 national Republican conventions. Ms. Stoney was a director of Gordmans (a chain of mid-western discount department stores) from 1998 to 2008, Bridges Investment Fund (a venture capital fund) from 1999 to 2006, and Swanson Corporation (a vending and food service corporation) from 1999 to 2006. Ms. Stoney has been a director of Whirlpool Corporation (a manufacturer of home appliances) since 1987. Through 22 years as a director in manufacturing, consumer products, retailing, and investment funds industries, Ms. Stoney has board experience with director searches, CEO and management succession, management development, executive compensation, and strategic planning. She has chaired compensation and audit committees for other entities. She has served on the Federal Reserve Bank, Tenth District, Omaha Branch and the Omaha Community Foundation.

 

As a former Executive Vice President of US West Communications Group, Inc., Chief Executive Officer of Northwestern Bell, and through her engagement in the political process, Ms. Stoney’s qualifications include corporate governance, public policy and government, operating, and compensation experience.

 

Directors Whose Terms Expire at the Annual Meeting in 2012

 

 

Director since 2005. Mr. Engelhardt has served as chairman of Patriot Coal Corporation (a producer and marketer of coal in the eastern United States) since November 2007. He was chairman of Peabody Energy Corporation (a private-sector coal company) or its predecessor companies from 1993 to 2007, and chief executive officer from 1990 through 2005. He was also co-CEO of The Energy Group (comprising Eastern Electricity in the United Kingdom, Peabody in the United States and Australia, and Citizens Power in the United States) from 1997 to 1998 and chairman of Citizens Power (a power marketer, formerly a subsidiary of Peabody) from 1998 to 2000. Mr. Engelhardt is a director of Patriot Coal and Valero Energy Corporation (an independent petroleum refiner and marketer) and the former chairman of The Federal Reserve Bank of St. Louis.

As Chairman of Patriot Coal Corporation, and former Chairman and Chief Executive Officer of Peabody Energy Corporation, Mr. Engelhardt’s qualifications include industry, financial, corporate governance, operating, and compensation experience.

 

 

Director since 1998. Mr. Green is the founder of William Green & Associates, a Palo Alto, California law firm, and has been with the firm since 1974. He is also the Vice President, General Counsel and Secretary of AIM Broadcasting, LLC. From 1971 to 1974, Mr. Green was Assistant General Counsel for Boise Cascade Corporation (which manufactures paper, corrugated containers, and wood products and distributes office products and building materials). From 1963 through 1971, Mr. Green was a member of the legal staff of Sybron Corporation (an equipment manufacturer for the brewing, chemical, food processing and dental equipment markets), serving as Associate Patent Counsel and Associate General Counsel. Mr. Green was employed by the Applied Research Laboratories of United States Steel Corporation as a chemist from 1957 to 1961 and as a patent coordinator from 1961 to 1963. He is a former trustee of Rochester Savings Bank. Mr. Green was Chairman of the City Planning Commission for Rochester, New York from 1966 to 1971 and a candidate for the New York State Assembly in 1968. Mr. Green is a director of Philanthropic Ventures, Inc. (a charitable foundation), Ramsell Holding Corporation (four healthcare companies, primarily performing pharmacy benefit management), Flowers Heritage Foundation (a nonprofit foundation), and Shiloh Energy Group Corporation (a developer of renewable energy systems).

 

As a member of the law firm Williams Green & Associates; Vice President, General Counsel and Secretary of AIM Broadcasting, LLC; and former Associate General Counsel for each of Boise Cascade Corporation and Sybron Corporation, Mr. Green’s qualifications include corporate governance and legal experience.

 

 

Director since 1997. Mr. Howell is Chairman Emeritus of J.C. Penney Company, Inc. (a major merchandise and services retailer). Mr. Howell started with J.C. Penney in 1958 as a management trainee, advancing through store management positions in Oklahoma, Texas and California before transferring in 1979 to J.C. Penney’s headquarters in New York, where he oversaw merchandising, marketing, and catalog operations. Ultimately he was Chairman of the Board and Chief Executive Officer of J.C. Penney from 1983 to 1995, when he relinquished the position of chief executive officer but continued to serve as chairman until January 1997. J.C. Penney’s sales rose from $12 billion to $21 billion during Mr. Howell’s chairmanship. Mr. Howell also managed J.C. Penney’s 1987 decision to move the company’s headquarters from New York to Dallas, Texas. Mr. Howell served as a director of ExxonMobil Corporation (an international oil and gas company) from 1982 to 2008. He also served on the boards of Pfizer Inc. (a research-based pharmaceutical company) from 2000 to 2009, Halliburton Company (a provider of oilfield

technologies and services) from 1991 to 2008, and American Electric Power (a electricity service provider, formerly Central & South West Corp.) from 1997 to 2008. Since 1986 he has served as a director of Deutsche Bank Trust Corporation (formerly known as Bankers Trust Corporation) and Deutsche Bank Trust Company Americas, non-public wholly-owned subsidiaries of Deutsche Bank AG (a financial service provider). Mr. Howell has also served on the Americas Advisory Board at Deutsche Bank AG since November 2008.

 

As the former Chairman and Chief Executive Officer of J.C. Penney, Mr. Howell’s qualifications include financial, corporate governance, operating, and compensation experience.

 

 

Director since 2001. Mr. Lorch is Chairman Emeritus of Armstrong Holdings, Inc., the holding company for Armstrong World Industries, Inc. (a manufacturer and marketer of floors, ceilings, and cabinets). He was the Chief Executive Officer and President of Armstrong World Industries, Inc. from 1993 to 1994 and Chairman of the Board and Chief Executive Officer from 1994 to 2000. From May 2000 to August 2000 he was Chairman of the Board and Chief Executive Officer of Armstrong Holdings, Inc. In December 2002, Armstrong World Industries, Inc. filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. Mr. Lorch has 20 years of sales and marketing experience at Armstrong, including 17 years experience as a head of operations, with responsibility for profit and loss statements, balance sheets, and stockholder relations. During his 21 years as a director in varied industries, Mr. Lorch has participated in CEO searches, succession planning, strategy development, takeover defense and offense, and director recruitment, and he has served on dozens of board committees. Mr. Lorch is a director of Pfizer, Inc. (a research-based pharmaceutical company); Autoliv, Inc. (a developer, manufacturer, and supplier of automotive safety systems); HSBC Finance and HSBC North America Holding Co., non-public, wholly-owned subsidiaries of HSBC LLC (a banking and financial services provider); and Masonite (a door manufacturer). Mr. Lorch also serves as an advisor to the Carlyle Group (a private equity firm).

 

As the former Chief Executive Officer and President of Armstrong World Industries, Inc., Mr. Lorch’s qualifications include financial, corporate governance, operating, and compensation experience.

 

The following table sets forth information as of December 31, 2009, concerning beneficial ownership by holders of five percent or more of our common stock. Unless otherwise indicated, the persons named have sole voting and investment power with respect to the shares listed.

 

 

 

 

The following table sets forth, as of February 28, 2010, the number of shares of our common stock beneficially owned by each of our directors and nominees for directors, by the NEOs, and by all directors and executive officers as a group.

 

 

 

 

The following table sets forth, as of February 28, 2010, the number of shares of common units of Williams Partners L.P. beneficially owned by each of our directors and nominees for directors, by the NEOs, and by all directors and executive officers as a group.

 

 

 

 

The following table sets forth, as of February 28, 2010, the number of common units of Williams Pipeline Partners LP. owned by each of our directors and nominees for directors, by the NEOs and by all directors and executive officers as a group.

 

 

 

 

Section 16(a) of the Exchange Act requires the Company’s directors and certain of its officers to file reports of their ownership of Williams common stock and of changes in such ownership with the SEC and the NYSE. Regulations also require Williams to identify in this proxy statement any person subject to this requirement who failed to file any such report on a timely basis. Based solely on a review of the copies of such reports furnished to the Company and written representations from certain reporting persons, we believe that all of our officers, directors, and greater than 10% stockholders complied with all Section 16(a) filing requirements applicable to them during the fiscal year ended December 31, 2009.

 

The following individual executive profiles provide biographical information and summarize total targeted compensation for 2009 to our NEOs. These profiles are provided in addition to the detailed compensation tables required by the SEC.

 

 

Long-Term Incentives (LTI)
Performance-Based RSUs		$	2,760,000
Stock Options		$	2,760,000
Time-Based RSUs		$	0
Annual Incentive Plan (AIP) at Target		$	1,100,000
Base Pay		$	1,100,000
Retirement Benefits
Pension (year over year change)		$	163,541
Restoration Plan (year over year change)		$	1,236,255
401(k) Company Match		$	14,700

Voluntary Termination		$	0
Termination with Cause		$	0
Involuntary Termination without Cause		$	5,102,568
Retirement		$	10,297,261
Death or Disability		$	10,297,261
Change in Control		$	32,053,003

 

 

Long-Term Incentives (LTI)
Performance-Based RSUs		$	700,000
Stock Options		$	600,000
Time-Based RSUs		$	700,000
Annual Incentive Plan (AIP) at Target		$	450,000
Base Pay		$	600,000
Retirement Benefits
Pension (year over year change)		$	60,381
Restoration Plan (year over year change)		$	322,999
401(k) Company Match		$	14,700

Voluntary Termination		$	0
Termination with Cause		$	0
Involuntary Termination without Cause		$	3,752,377
Retirement		$	3,984,481
Death or Disability		$	5,283,631
Change in Control		$	13,561,666

 

 

 

Long-Term Incentives (LTI)
Performance-Based RSUs		$	595,000
Stock Options		$	510,000
Time-Based RSUs		$	595,000
Annual Incentive Plan (AIP) at Target		$	315,250
Base Pay		$	485,000
Retirement Benefits
Pension (year over year change)		$	121,556
Restoration Plan (year over year change)		$	306,311
401(k) Company Match		$	14,700

Voluntary Termination		$	0
Termination with Cause		$	0
Involuntary Termination without Cause		$	3,176,318
Retirement		$	3,407,289
Death or Disability		$	4,497,986
Change in Control		$	8,742,999

 

 

 

Long-Term Incentives (LTI)
Performance-Based RSUs		$	560,000
Stock Options		$	480,000
Time-Based RSUs		$	560,000
Annual Incentive Plan (AIP) at Target		$	325,000
Base Pay		$	500,000
Retirement Benefits
Pension (year over year change)		$	108,798
Restoration Plan (year over year change)		$	311,117
401(k) Company Match		$	9,800

Voluntary Termination		$	0
Termination with Cause		$	0
Involuntary Termination without Cause		$	2,762,219
Retirement		$	2,942,607
Death or Disability		$	3,947,044
Change in Control		$	8,210,669

 

 

Long-Term Incentives (LTI)
Performance-Based RSUs		$	560,000
Stock Options		$	480,000
Time-Based RSUs		$	560,000
Annual Incentive Plan (AIP) at Target		$	315,250
Base Pay		$	485,000
Retirement Benefits
Pension (year over year change)		$	84,470
Restoration Plan (year over year change)		$	209,325
401(k) Company Match		$	14,700

Voluntary Termination		$	0
Termination with Cause		$	0
Involuntary Termination without Cause		$	2,779,221
Retirement		$	2,959,608
Death or Disability		$	3,964,046
Change in Control		$	8,000,330

 

The role of compensation is to attract and retain the talent needed to drive stockholder value and to help each of our businesses meet or exceed financial and operational performance targets. Our compensation program objective is to reward our NEOs and employees for successfully implementing our strategy to grow our business and create long-term stockholder value. To that end, we use relative and absolute Total Shareholder Return (TSR) to measure long-term performance, and Economic Value Added (EVA^®)¹ to measure annual performance. We believe linking TSR and EVA^® to how we incent and pay NEOs helps ensure that the business decisions that are made are aligned with the long-term interests of our stockholders.

 

Our Pay Philosophy throughout the entire organization is to pay for performance, be competitive in the marketplace, and consider the value a job provides to the Company. Our compensation programs reward NEOs not just for accomplishing our goals, but also for how those goals are pursued. We strive to reward the right results and the right behaviors while fostering a culture of collaboration and teamwork.

 

The principles of our pay philosophy influence the design and administration of our pay programs. Decisions about how we pay NEOs are based on these principles. The Compensation Committee uses several different types of pay that are linked to both our short-term and long-term performance in the executive compensation program. Included are long-term incentives, annual cash incentives, base pay and benefits. The chart below illustrates the linkage between the types of pay we use and our pay principles.

 

 

For 2009, we continued to focus on creating stockholder value by delivering solid financial and operational performance despite the economic downturn. Like most energy businesses, we have felt the effects of reduced energy demand resulting in excess energy supply that has contributed to lower commodity prices. We responded quickly to the changing landscape and made plans to cut spending despite the very adverse conditions. We also took several actions, described below, to ensure that our executive pay program remains affordable and competitive in the current market and after market conditions improve.

 

As indicated above, significant consideration was given to the need to balance our pay philosophy and practices with affordability and sustainability. In order to maintain the balance, we continued to grant long-term incentives in the form of performance-based restricted stock units (RSUs), stock options, and time-based RSUs in 2009; however, the value granted to the NEOs was lower in 2009 than in 2008.

 

¹ Economic Value Added^® (EVA^®) is a registered trademark of Stern, Stewart & Co.

Consistent with our commitment to provide a meaningful connection between pay and performance, we have granted performance-based RSUs to our NEOs since 2004. Performance-based RSUs granted in 2007 for the 2007-2009 performance period did not meet threshold targets set at the beginning of the period as a result of the global economic crisis. Therefore, in accordance with the design of the plan, these awards did not distribute to the NEOs. This resulted in each NEO losing a significant portion of pay that was targeted for 2007.

 

Each year, we set performance targets for our Annual Incentive Plan (AIP) during the first quarter. In early 2009, the economy and energy demand continued to decline while plan expectations and targets were being set. During midyear, energy prices stabilized and business conditions improved leading to financial performance which exceeded our expectations. To reward this performance that exceeded established targets, the AIP paid at 155% of target.

 

Considering the very difficult economic environment and the competitive position of our base pay, the NEOs and other Company officers did not receive base pay increases in 2009.

 

The Compensation Committee regularly reviews our existing pay programs to ensure we are able to attract and retain the talent needed to deliver the strong financial and operating performance necessary to create stockholder value. As part of this process, in 2009 we conducted extensive reviews of our long-term and annual incentive plans.

 

Our long-term incentive plan has been adjusted in two respects. First, we reviewed the performance metric used with our performance-based RSU awards. In prior years, the metric was EVA^® measured over three years. However, establishing a target level of performance for this metric at the beginning of 2009 would have been very difficult due to a declining economy and extraordinary uncertainties related to the commodity price environment. After this thorough review, we elected to use absolute and relative TSR as the metrics for the three-year performance-based RSUs. NEOs will earn their targeted performance-based RSUs for the 2009 to 2011 period only if we deliver real absolute TSR and also achieve solid TSR in relation to our comparator group of companies.

 

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

 

 

As to our annual incentive plan, we completed an analysis of the performance metric utilized in our Annual Incentive Plan (AIP). The purpose of this review was to determine if EVA^®, as described later, continues to be the most appropriate performance metric for our Company. The review consisted of:

 

 

As a result of the review, we confirmed a strong correlation between EVA^®, stock price performance, and other financial metrics. The review supported the continued use of EVA^® improvement as the performance metric in our AIP.

We also reviewed other design elements of the AIP, specifically the maximum amount payable under the plan and the reserve feature that allowed AIP awards above a certain level to be placed in reserve with payout contingent on future performance. We reviewed the prevalence among our comparator group and determined that the AIP’s maximum annual incentive pool funding for NEOs would be adjusted down to 250% of target and the incentive reserve be eliminated, beginning in 2009. Any existing reserve balance for NEOs will continue to be at risk and will be paid or reduced in accordance with previous plan provisions.

 

The economic and commodity price environment during the first part of 2009 made establishing a target level of performance very challenging. Recognizing these challenges and uncertainties, the AIP performance necessary to move from threshold to target was doubled in 2009. Likewise, the performance required to move from target to stretch was doubled. This design change attempts to keep the AIP as a meaningful performance incentive throughout the year but better ensures a payout significantly above target only occurs if we significantly exceed established performance targets.

 

As shown, we were very active in 2009 working to ensure that our pay programs continued to be aligned with our compensation philosophy, would continue to be affordable and competitive, would drive and motivate performance, and would align management with our stockholders during these uncertain times.

 

Although no compensation-related risk was identified as a top risk for 2009, the approach to determine if there were adverse compensation risk was similar to the process detailed in the “Corporate Governance and Board Matters — Corporate Governance — Board oversight of Williams’ risk assurance process” section of this proxy statement. After this thorough review and analysis, it was determined that we do not have material adverse compensation-related risks. Our compensation plans are effectively designed and functioning to reward positive performance and motivate NEOs and employees to behave in a manner consistent with our stockholder interests, business strategies and objectives, ethical standards and prudent business practices along with our Core Values & Beliefs that are the foundation on which we conduct business. Our Core Values & Beliefs can be found on our website at www.williams.com from the Who We Are tab. In fact, many elements of our executive pay program serve to mitigate excessive risk taking. For example:

 

 

 

 

 

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

 

In order to make pay recommendations, management provides the CEO with data from the annual proxy statements of companies in our comparator group along with pay information compiled from nationally recognized executive and industry related salary surveys. The survey data is used to confirm that pay practices among companies in the comparator group are aligned with the market as a whole.

 

Before recommending base pay adjustments and long-term incentive awards to the Compensation Committee, our CEO reviews the competitive market information related to each of our other NEOs while also considering internal equity and individual performance.

 

For our annual cash incentive plan, the CEO’s recommendation is based on EVA^® attainment with a potential adjustment for individual performance. Individual performance includes business unit EVA^® results for the business unit leaders, achievement of business goals, and demonstrated key leadership competencies (for more on leadership competencies, see the section entitled “Base Pay” in this Compensation Discussion and Analysis). The modifications made are fairly modest. For 2009 the adjustments made to the NEOs annual cash incentive awards were on average less than 2%.

 

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

 

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

 

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

 

 

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

 

Frederic W. Cook & Co., Inc., assists the Compensation Committee in determining or approving the compensation for our NEOs. Please refer to the section “Corporate Governance and Board Matters — Board and

Committee Structure and Meetings — Compensation Committee” of this proxy statement for a discussion of the independent compensation consultant.

 

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

 

We refer to publicly available data showing how much our comparator group pays, as well as how that pay is divided among base pay, annual incentive, equity, and other forms of compensation. This allows the Compensation Committee to ensure competitiveness and appropriateness of proposed compensation packages. When setting pay, the Compensation Committee uses market median information of our comparator group, as opposed to market averages, to ensure that the impact of any unusual events that may occur at one or two companies during any particular year is diminished from the analysis. If an event is particularly unusual and surrounds unique circumstances, the data is completely removed from the assessment.

 

Each year the Compensation Committee reviews the prior year’s comparator group to ensure that it is still appropriate. We made some changes for 2009. The 2008 group consisted of companies in the broader energy industry. In contrast, for 2009 we focused more on companies that work in the same industry segment and reflect where we compete for business and talent. The new comparator group is smaller than our prior group in terms of revenue, assets, and market capitalization.

The comparator group established for 2009 includes the following 20 companies, which comprise a mix of both direct competitors and companies whose primary business was similar to at least one of our business segments. We typically aim for a comparator group of 15 to 25 companies so our comparisons will be valid.

 

 

Companies in our comparator group have a range of revenues, assets, and market capitalization. Business consolidation and unique operating models today create some challenges in identifying comparator companies. Accordingly, we take a broader view of comparability to include organizations that are similar to us in some, but not all, respects. This results in compensation that is appropriately scaled and reflects comparable complexities in business operations.

 

Setting pay is an annual process that occurs during the first quarter of the year. A review is done to ensure that we are paying competitively, equitably and in a way that encourages and rewards performance that exceeded expectations.

 

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

 

Although the Compensation Committee reviews relevant data as it designs compensation packages, setting pay is not an exact science. Since market data alone does not reflect the strategic competitive value of various roles within

the Company, internal pay equity is also considered when making pay decisions. Because we take on an enterprise-wide perspective to promote collaboration and ensure our overall success, paying the NEOs equitably is important. Other considerations when making pay decisions for the NEOs include historical pay and tally sheets that include annual pay and benefit amounts, wealth accumulated over the past five years, and the total aggregate value of the NEOs’ equity awards and holdings.

 

Company and individual goals also influence the amount of compensation that is awarded to the NEOs. Individual goals are established for the NEOs that align directly to the Company’s purpose and direction, including our “3Ps to Prosperity” strategy. After successfully accomplishing the goals set out in the Game Plan for Growth, we focused our priorities on how to grow our business and create stockholder value. During these times of weakness in the economy and energy markets, our strong performance in the following areas is key to our success:

 

 

 

 

 

 

 

Our success in executing the 3Ps to Prosperity strategy led to the improvement of EVA^® and contributed to the following accomplishments in 2009:

 

 

 

 

 

 

 

 

 

 

 

 

When setting pay, we determine a target pay mix (distribution of pay among base pay, annual incentive, equity, and other forms of compensation) for the NEOs. The target pay mix for all NEOs can be found in the Named Executive Officer Profile section included in this proxy statement. Consistent with our pay-for-performance philosophy, the actual amounts paid, excluding benefits, are determined based on individual and Company performance. Because performance is a factor, the target and actual pay mix will vary specifically as it relates to the annual cash incentives.

 

Long-term incentives, annual cash incentives, base pay, and benefits accomplish different objectives.

 

We award long-term incentives to reward performance and align NEOs with long-term stockholder interests by providing NEOs an ownership stake in the Company, encouraging sustained long-term performance, and providing an important retention element to their compensation program. Long-term incentives are provided in the form of equity and may include performance based restricted stock units, stock options, and time-based restricted stock units. Unlike the majority of our comparator companies, we award a significant portion of the annual long-term award in the form of performance-based restricted stock units. We believe this better aligns our NEOs interests with long-term stockholders by requiring that stated targets are met prior to earning these awards.

 

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

 

 

 

The allocation of our long-term incentive program for 2009 is shown below. The long-term incentive mix for the CEO differs from the mix for the other NEOs. Since the CEO has more opportunity to influence our financial results, the Compensation Committee considers it appropriate that 100% of his long-term incentives are directly tied to the performance of the Company’s stock price.

 

 

The primary objectives for each type of equity awarded are shown below. The size of the circles in the chart indicates how closely each equity type aligns with each objective.

 

 

2009 Performance-Based Restricted Stock Units

 

Performance-based restricted stock unit awards further strengthen the relationship between pay and performance and over time will more closely link the long-term pay of our NEOs to the experience of our long-term stockholders. The performance-based restricted stock units awarded in 2009 will be earned only if we attain specific TSR targets.

 

We believe it is important to measure TSR on both an absolute and a relative basis. In absolute terms, we want to ensure we are delivering a suitable return to stockholders. Additionally, we believe awards should be influenced by how our TSR compares to the TSR of companies in our comparator group. The majority of our comparator companies do not have performance-based equity grants, but we believe this approach allows us to emphasize the importance of delivering value to the stockholder while also performing well against our comparator group of companies. It also ensures that our NEOs will only have the opportunity to earn an award that significantly exceeds targeted levels when we produce strong absolute and relative TSR results. Shown in the chart below are the absolute

and relative TSR targets for the performance-based restricted stock unit awards for the 2009 to 2011 performance period and the continuum that will determine the resulting potential payout level:

 

 

2007 Performance-Based Restricted Stock Units

 

Since the performance cycle for our 2007 performance-based RSUs ended in 2009, the following is a chart of the threshold, target, and stretch goals that were established in early 2007.

 

 

As discussed earlier in the Compensation Discussion and Analysis, we did not attain threshold performance during the three-year period as a result of the global economic crisis. No performance-based RSU awards that were granted in 2007 will be paid out under this plan. This resulted in each NEO losing a significant portion of pay that was targeted for 2007. The performance goals for this award were set during a less volatile time based on market guidance and expectations for our Company’s performance.

 

  Stock Option Awards

 

For recipients, stock options have value only to the extent the price of our common stock is higher on the date the options are exercised than it was on the date the options were granted. Most of the companies in our comparator group grant stock options to their NEOs.

 

  Time-Based Restricted Stock Units

 

We introduced time-based restricted stock unit grants in 2002, primarily to encourage NEOs to stay with the Company during a period of uncertainty and instability in our executive population. We continue to use this type of equity to retain executives due to continued volatility in the industry and the general economy. Time-based restricted stock units also facilitate stock ownership. The use of time-based restricted stock units is also consistent with the practices of our comparator group of companies. Most of the companies in our comparator group grant time-based RSUs to their NEOs.

  Grant Practices

 

The Compensation Committee typically approves our annual equity grant in February or early March of each year shortly after the annual earnings release. The grant date for awards is on or after the date of such approval to ensure the market has time to absorb material information disclosed in the earnings release and reflect that information in the stock price. Our grant practices in 2009 were consistent with prior years.

 

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

 

We pay annual cash incentives to encourage and reward our NEOs for making decisions that improve our performance as measured by EVA^®. EVA^® measures the value created by a company. Simply stated, it is the financial return in a given period less the capital charge for that period. The calculation we use is as follows:

 

 

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

 

 

The starting point to determine annual cash incentive targets (expressed as a percent of base pay) is competitive market information, which gives us an idea of what other companies target to pay in annual cash incentives for similar jobs. We also consider the internal value of each job - i.e., how important the job is to executing our strategy compared to other jobs in the Company- before the target is set for the year. The annual cash incentive targets as a percentage of base pay for the NEOs in 2009 are as follows:

 

 

For NEOs, the annual cash incentive plan is funded when we attain an established level of EVA^® performance. Applying EVA^® measurement to this annual cash incentive process encourages management to make business decisions that help drive long-term stockholder value. To determine the funding of the annual cash incentive, we use the following calculation for each NEO:

 

 

Actual payments may be adjusted upwards to recognize individual performance that exceeded expectations, such as success toward our 3Ps to Prosperity and individual goals and successful demonstration of the leadership competencies discussed below. Payments may also be adjusted downwards if performance warrants.

 

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

 

 

2009 EVA^® Goal for the Annual Cash Incentive Plan

 

The attainment percentage of EVA^® goals results in payment of annual cash incentives along a continuum between threshold and stretch levels, which corresponds to 0% through 250% of the NEO’s annual cash incentive target. The chart below shows the EVA^® improvement goals for the 2009 annual cash incentive and the resulting payout level. It is important to note that setting the EVA^® goal for 2009 was more challenging than in previous years. 2008 was a record year with strong Company performance including EVA^® improvement. When the global financial crisis hit, our profitability was cut and the cost of capital increased. This was reflected in both our lower EVA^® and stock price.