SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Rule 14a-12

 

Waste Management, Inc.

(Name of Registrant as Specified In Its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

1001 Fannin Street, Suite 4000

Houston, Texas 77002

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

OF WASTE MANAGEMENT, INC.

 

Date and Time:

 

May 13, 2011 at 11:00 a.m., Central Time

 

Place:

 

The Maury Myers Conference Center

Waste Management, Inc.

1021 Main Street

Houston, Texas 77002

 

Purpose:

 

 

Only stockholders of record on March 16, 2011 may vote at the meeting.

 

Your vote is important. We urge you to promptly vote your shares by telephone, by the Internet or, if this Proxy Statement was mailed to you, by completing, signing, dating and returning your proxy card as soon as possible in the enclosed postage prepaid envelope.

 

LINDA J. SMITH

Corporate Secretary

 

March   , 2011

 

 

 

 

TABLE OF CONTENTS

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

 

WASTE MANAGEMENT, INC.

1001 Fannin Street, Suite 4000

Houston, Texas 77002

 

Our Board of Directors is soliciting your proxy for the 2011 Annual Meeting of Stockholders and at any postponement or adjournment of the meeting. We are furnishing proxy materials to our stockholders primarily via the Internet. On March   , 2011, we sent an electronic notice of how to access our proxy materials, including our Annual Report, to stockholders that have previously signed up to receive their proxy materials via the Internet. On March   , 2011, we began mailing a Notice of Internet Availability of Proxy Materials to those stockholders that previously have not signed up for electronic delivery. The Notice contains instructions on how stockholders can access our proxy materials on the website referred to in the Notice or request that a printed set of the proxy materials be sent to them. Internet distribution of our proxy materials is designed to expedite receipt by stockholders, lower the costs of the annual meeting, and conserve natural resources.

 

 

 

 

Our Board of Directors currently has eight members. Each member of our Board is elected annually. Mr. Pope is the Non-Executive Chairman of the Board and presides over all meetings of the Board, including executive sessions that only non-employee directors attend.

 

Stockholders and interested parties wishing to communicate with the Board or the non-employee directors should address their communications to Mr. John C. Pope, Non-Executive Chairman of the Board, c/o Waste Management, Inc., P.O. Box 53569, Houston, Texas 77052-3569.

 

We separated the roles of Chairman of the Board and Chief Executive Officer at our Company in 2004. The separation of the roles occurred in connection with our Board of Directors’ succession planning for the retirement of A. Maurice Myers, our then Chairman, Chief Executive Officer and President. At that time, our Board decided that when Mr. Myers retired, the Company should appoint separate individuals to serve as Chairman and as Chief Executive Officer.

 

We believe that having a Non-Executive Chairman of the Board is in the best interests of the Company and stockholders. Over the past several years, the demands made on boards of directors have been ever increasing. This is in large part due to increased regulation under federal securities laws, national stock exchange rules and other federal and state regulatory changes. More recently, on-going market challenges and economic conditions have increased the demands made on boards of directors. The Non-Executive Chairman’s responsibilities include leading full Board meetings and executive sessions, as well as ensuring best practices and managing the Board function. The Board named Mr. Pope Chairman of the Board due to his tenure with and experience and understanding of the Company, as well as his vast experience on public company boards of directors.

 

The separation of the positions allows Mr. Pope to focus on management of Board matters and allows our Chief Executive Officer to focus his attention on managing our business. Additionally, we believe the separation of those roles ensures the independence of the Board in its oversight role of critiquing and assessing the Chief Executive Officer and management generally.

 

Our executive officers have the primary responsibility for risk management within our Company. Our Board of Directors oversees risk management to ensure that the processes designed and implemented by our executives are adapted to and integrated with the Company’s strategy and are functioning as directed. The primary means by which the Board oversees our risk management structures and policies is through its regular communications with management. The Company believes that its leadership structure is conducive to comprehensive risk management practices, and that the Board’s involvement is appropriate to ensure effective oversight.

 

The Board of Directors and its committees meet in person approximately six times a year, including one meeting that is dedicated specifically to strategic planning. At each of these meetings, our President and Chief Executive Officer; Chief Financial Officer; and General Counsel are asked to report to the Board and, when appropriate, specific committees. Additionally, other members of management and employees are requested to attend meetings and present information, including those responsible for our Internal Audit, Environmental Audit, Human Resources, Government Affairs, Risk Management, Safety and Accounting functions. One of the purposes of these presentations is to provide direct communication between members of the Board and members of management; the presentations provide members of the Board with the information necessary to understand the risk profile of the Company, including information regarding the specific risk environment, exposures affecting the Company’s operations and the Company’s plans to address such risks. In addition to information regarding general updates to the Company’s operational and financial condition, management reports to the Board on a number of specific issues meant to inform the Board about the Company’s outlook and forecasts, and any impediments to meeting those or its pre-defined strategies generally. These direct

communications between management and the Board of Directors allow the Board to assess management’s evaluation and management of the risks of the Company.

 

Management is encouraged to communicate with the Board of Directors with respect to extraordinary risk issues or developments that may require more immediate attention between regularly scheduled Board meetings. Mr. Pope, as Non-Executive Chairman, facilitates communications with the Board of Directors as a whole and is integral in initiating the frank, candid discussions among the independent Board members necessary to ensure management is adequately evaluating and managing the Company’s risks. These intra-Board communications are essential in its oversight function. Additionally, all members of the Board are invited to attend all committee meetings, regardless of whether the individual sits on the specific committee, and committee chairs report to the full Board. These practices ensure that all issues affecting the Company are considered in relation to each other and by doing so, risks that affect one aspect of our Company can be taken into consideration when considering other risks.

 

The Company also initiated an enterprise risk management process several years ago, which is coordinated by the Company’s Internal Audit department, under the supervision of the Company’s Chief Financial Officer. This process initially involved the identification of the Company’s programs and processes related to risk management, and the individuals responsible for them. Included was a self-assessment survey completed by senior personnel requesting information regarding perceived risks to the Company, with follow-up interviews with members of senior management to review any gaps between their and their direct reports’ responses. The information gathered was tailored to coordinate with the Company’s strategic planning process such that the risks could be categorized in a manner that identified the specific Company strategies that may be jeopardized and plans could be developed to address the risks to those strategies. The Company then conducted an open-ended survey aligned with the objectives of the Company’s strategic goals with several individuals with broad risk management and/or risk oversight responsibilities. Included in the survey was the identification of the top concerns, assessment of their risk impact and probability, and identification of the responsible risk owner. Finally, a condensed survey of top risks was completed by approximately 200 senior personnel to validate the risks and the risk rankings.

 

The results of these efforts were reported to the Board of Directors, which is responsible for overseeing the design of the risk management process. Since its implementation, regular updates are given to the Board of Directors on all Company risks. In addition, the Audit Committee is responsible for ensuring that an effective risk assessment process is in place, and quarterly reports are made to the Audit Committee on all financial and compliance risks in accordance with New York Stock Exchange requirements.

 

The Board of Directors has determined that each of the following seven non-employee director candidates is independent in accordance with the New York Stock Exchange listing standards:

 

Pastora San Juan Cafferty
Frank M. Clark, Jr.
Patrick W. Gross
John C. Pope
W. Robert Reum
Steven G. Rothmeier
Thomas H. Weidemeyer

 

Mr. Steiner is an employee of the Company and, as such, is not considered an “independent” director.

 

To assist the Board in determining independence, the Board of Directors adopted categorical standards of director independence, which meet or exceed the requirements of the New York Stock Exchange. These standards specify certain relationships that are prohibited in order for the non-employee director to be deemed independent. In addition to these categorical standards, our Board makes a subjective determination of independence considering relevant facts and circumstances. The Board reviewed all commercial and non-profit affiliations of each non-employee director and the dollar amount of all transactions between the Company and

each entity with which a non-employee director is affiliated to determine independence. These transactions included the Company, through its subsidiaries, providing waste management services in the ordinary course of business and the Company’s subsidiaries purchasing goods and services in the ordinary course of business. The categorical standards our Board uses in determining independence are included in our Corporate Governance Guidelines, which can be found on our website. The Board has determined that each non-employee director candidate meets these categorical standards and that there are no other relationships that would affect independence.

 

Last year the Board held eight meetings and each committee of the Board met independently as set forth below. Each director attended at least 75% of the meetings of the Board and the committees on which he served. In addition, all directors attended the 2010 Annual Meeting of Stockholders. Although we do not have a formal policy regarding director attendance at annual meetings, it has been longstanding practice that all directors attend unless there are unavoidable schedule conflicts or unforeseen circumstances.

 

The Board appoints committees to help carry out its duties. In particular, Board committees work on key issues in greater detail than would be possible at full Board meetings. Each committee reviews the results of its meetings with the full Board, and all members of the Board are invited to attend all committee meetings. The Board has three separate standing committees: the Audit Committee; the Management Development and Compensation Committee (the “MD&C Committee”); and the Nominating and Governance Committee. Additionally, the Board has the power to appoint additional committees, as it deems necessary. In 2006, the Board appointed a Special Committee, as described below.

 

Mr. Gross has been the Chairman of our Audit Committee since May 2010. The other members of our Audit Committee are Ms. Cafferty and Messrs. Clark, Pope, Reum and Rothmeier. Each member of our Audit Committee satisfies the additional New York Stock Exchange independence standards for audit committees. Our Audit Committee held eight meetings in 2010.

 

SEC rules require that we have at least one financial expert on our Audit Committee. Our Board of Directors has determined that Mr. Gross, Mr. Rothmeier and Mr. Pope are Audit Committee financial experts for purposes of the SEC’s rules based on a thorough review of their education and financial and public company experience.

 

Mr. Gross was a founder of American Management Systems where he was principal executive officer for over 30 years. He has served as Chairman of The Lovell Group, a private investment and advisory firm, since 2001. Mr. Gross holds an MBA from the Stanford University Graduate School of Business, a master’s degree in engineering science from the University of Michigan and a bachelor’s degree in engineering science from Rensselaer Polytechnic Institute. Mr. Gross serves on four public company audit committees in addition to ours. The Board reviewed the time Mr. Gross spends on each company’s audit committee and the time he spends on other companies’ interests and determined that such service and time does not impair his ability to serve on our Audit Committee.

 

Mr. Rothmeier served in various leadership positions in the airline industry for approximately 16 years, including the positions of Chairman, CEO and CFO of Northwest Airlines. He founded Great Northern Capital, a private investment management, consulting and merchant banking firm, in 1993, where he continues to serve as Chairman and CEO. Mr. Rothmeier has a master’s degree in finance from the University of Chicago Graduate School of Business and a bachelor’s degree in business administration from the University of Notre Dame. Mr. Rothmeier serves on one public company audit committee in addition to ours.

 

Mr. Pope served in various financial positions, primarily in the airline industry, for approximately 17 years, including over nine years combined in CFO positions at American Airlines and United Airlines. He has a master’s degree in finance from the Harvard Graduate School of Business Administration and a bachelor’s

degree in engineering and applied science from Yale University. Mr. Pope serves on two public company audit committees in addition to ours.

 

Ms. Cafferty serves on one additional public company audit committee in addition to ours. Neither Mr. Clark nor Mr. Reum currently serves on the audit committees of other public companies.

 

The Audit Committee’s duties are set forth in a written charter that was approved by the Board of Directors. A copy of the charter can be found on our website. The Audit Committee generally is responsible for overseeing all matters relating to our financial statements and reporting, internal audit function and independent auditors. As part of its function, the Audit Committee reports the results of all of its reviews to the full Board. In fulfilling its duties, the Audit Committee, has the following responsibilities:

 

Administrative Responsibilities

 

 

Independent Auditor

 

 

Internal Audit

 

 

Financial Statements

 

 

The role of the Audit Committee is, among other things, to oversee the Company’s financial reporting process on behalf of the Board of Directors, to recommend to the Board whether the Company’s financial statements should be included in the Company’s Annual Report on Form 10-K and to select the independent auditor for ratification by stockholders. Company management is responsible for the Company’s financial statements as well as for its financial reporting process, accounting principles and internal controls. The Company’s independent auditors are responsible for performing an audit of the Company’s financial statements and expressing an opinion as to the conformity of such financial statements with generally accepted accounting principles.

 

The Audit Committee has reviewed and discussed the Company’s audited financial statements as of and for the year ended December 31, 2010 with management and the independent registered public accounting firm, and has taken the following steps in making its recommendation that the Company’s financial statements be included in its annual report:

 

 

The Committee has also discussed with the Company’s internal auditors and independent registered public accounting firm the overall scope and plans of their respective audits. The Committee meets periodically with both the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations and their evaluations of the Company’s internal controls over financial reporting.

 

The members of the Audit Committee are not engaged in the accounting or auditing profession and, consequently, are not experts in matters involving auditing or accounting. In the performance of their oversight function, the members of the Audit Committee necessarily relied upon the information, opinions, reports and statements presented to them by Company management and by the independent registered public accounting firm.

 

Based on the reviews and discussions explained above (and without other independent verification), the Audit Committee recommended to the Board (and the Board approved) that the Company’s financial statements be included in its annual report for its fiscal year ended December 31, 2010. The Committee has

also approved the selection of Ernst & Young as the Company’s independent registered public accounting firm for fiscal year 2011.

 

The Audit Committee of the Board of Directors

 

Patrick W. Gross, Chairman

Pastora San Juan Cafferty

Frank M. Clark, Jr.

John C. Pope

W. Robert Reum

Steven G. Rothmeier

 

Mr. Reum has served as the Chairman of our MD&C Committee since May 2004. The other members of the Committee are Messrs. Clark, Pope, Rothmeier and Weidemeyer. Each member of our MD&C Committee is independent in accordance with the rules and regulations of the New York Stock Exchange. The MD&C Committee met seven times in 2010.

 

Our MD&C Committee is responsible for overseeing all of our executive and senior management compensation, as well as developing the Company’s compensation philosophy generally. The MD&C Committee’s written charter, which was approved by the Board of Directors, can be found on our website. In fulfilling its duties, the MD&C Committee has the following responsibilities:

 

 

In overseeing compensation matters, the MD&C Committee may delegate authority for day-to-day administration and interpretation of the Company’s plans, including selection of participants, determination of award levels within plan parameters, and approval of award documents, to Company employees. However, the MD&C Committee may not delegate any authority under those plans for matters affecting the compensation and benefits of the executive officers.

 

For additional information on the MD&C Committee, see the Compensation Discussion and Analysis on page 22.

 

The MD&C Committee has reviewed and discussed the Compensation Discussion and Analysis, beginning on page 22, with management. Based on the review and discussions, the MD&C Committee

recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement.

 

The Management Development and Compensation
Committee of the Board of Directors

 

W. Robert Reum, Chairman

Frank M. Clark, Jr.

John C. Pope

Steven G. Rothmeier

Thomas H. Weidemeyer

 

During 2010, Messrs. Clark, Pope, Reum, Rothmeier and Weidemeyer served on the MD&C Committee. No member of the MD&C Committee was an officer or employee of Waste Management during 2010; no member of the MD&C Committee is a former officer of the Company; and during 2010, none of our executive officers served as a member of a board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or MD&C Committee. Mr. Pope entered into two open market transactions involving publicly traded debt of the Company, which are described below, under “Related Party Transactions.”

 

Ms. Cafferty has served as the Chairperson of our Nominating and Governance Committee since May 2008. The other members of the Committee include Messrs. Gross, Pope and Weidemeyer. Each member of our Nominating and Governance Committee is independent in accordance with the rules and regulations of the New York Stock Exchange. In 2010, the Nominating and Governance Committee met four times.

 

The Nominating and Governance Committee has a written charter that has been approved by the Board of Directors and can be found on our website. It is the duty of the Nominating and Governance Committee to oversee matters regarding corporate governance. In fulfilling its duties, the Nominating and Governance Committee has the following responsibilities:

 

 

Potential director candidates are identified through various methods; the Committee welcomes suggestions from directors, members of management, and stockholders. From time to time, the Nominating and Governance Committee uses outside consultants to assist it with identifying potential director candidates.

 

For all potential candidates, the Nominating and Governance Committee considers all factors it deems relevant, such as a candidate’s personal and professional integrity and sound judgment, business and

professional skills and experience, independence, possible conflicts of interest, diversity, and the potential for effectiveness, in conjunction with the other directors, to serve the long-term interests of the stockholders. While there is no formal policy with regard to consideration of diversity in identifying director nominees, the Committee considers diversity in business experience, professional expertise, gender and ethnic background, along with various other factors when evaluating director nominees. The Committee uses a matrix of functional and industry experiences to develop criteria to select candidates. Before being nominated by the Nominating and Governance Committee, director candidates are interviewed by the Chief Executive Officer and a minimum of two members of the Nominating and Governance Committee, including the Non-Executive Chairman of the Board. Additional interviews may include other members of the Board, representatives from senior levels of management and an outside consultant.

 

The Nominating and Governance Committee will consider all potential nominees on their merits without regard to the source of recommendation. The Nominating and Governance Committee believes that the nominating process will and should continue to involve significant subjective judgments. To suggest a nominee, you should submit your candidate’s name, together with biographical information and his or her written consent to nomination to the Chairman of the Nominating and Governance Committee, Waste Management, Inc., 1001 Fannin Street, Suite 4000, Houston, Texas 77002, between October 31, 2011 and November 30, 2011.

 

The Board of Directors has adopted a written Related Party Transactions Policy for the review and approval or ratification of related party transactions. Our policy generally defines related party transactions as current or proposed transactions in excess of $120,000 in which (i) the Company is a participant and (ii) any director, executive officer or immediate family member of any director or executive officer has a direct or indirect material interest. In addition, the policy sets forth certain transactions that will not be considered related party transactions, including (i) executive officer compensation and benefit arrangements; (ii) director compensation arrangements; (iii) business travel and expenses, advances and reimbursements in the ordinary course of business; (iv) indemnification payments and advancement of expenses, and payments under directors’ and officers’ indemnification insurance policies; (v) any transaction between the Company and any entity in which a related party has a relationship solely as a director, a less than 5% equity holder, or an employee (other than an executive officer); and (vi) purchases of Company debt securities, provided that the related party has a passive ownership of no more than 2% of the principal amount of any outstanding series. The Nominating and Governance Committee is responsible for overseeing the policy.

 

All executive officers and directors are required to notify the General Counsel or the Corporate Secretary as soon as practicable of any proposed transaction that they or their family members are considering entering into that involves the Company. The General Counsel will determine whether potential transactions or relationships constitute related party transactions that must be referred to the Nominating and Governance Committee.

 

The Nominating and Governance Committee will review a detailed description of the transaction, including:

 

 

In determining whether to approve a related party transaction, the Nominating and Governance Committee will consider, among other things, whether:

 

 

 

Any member of the Nominating and Governance Committee who has an interest in a transaction presented for consideration will abstain from voting on the related party transaction.

 

The Nominating and Governance Committee’s consideration of related party transactions and its determination of whether to approve such a transaction are reflected in the minutes of the Nominating and Governance Committee’s meetings.

 

The following transactions considered by the Nominating and Governance Committee did not constitute related party transactions under our policy because the ownership of the debt securities was less than 2% of the outstanding principal amount of the series; however, we are disclosing them in accordance with SEC requirements:

 

In 2008, Mr. Steiner, President, Chief Executive Officer and a Director, purchased $300,000 principal amount of the Company’s 6.10% Senior Notes due March 2018 in an open-market transaction. Interest payments on the notes are made on March 15 and September 15 of each year, with the final interest payment made at maturity on March 15, 2018. In 2010, Mr. Steiner received interest payments in the amount of $18,300.

 

In 2009, Mr. Pope, Non-Executive Chairman of the Board, purchased an aggregate of $600,015 of our tax-exempt bonds in open-market transactions. Although he no longer owns such bonds, in 2010 he received interest payments on account of the bonds in the amount of $14,450. In 2010, Mr. Pope purchased an aggregate of $400,000 of our tax-exempt bonds in open-market transactions. Mr. Pope purchased $200,000 of such bonds in each of the remarketings that occurred in March 2010 and December 2010 when the interest rates were set at 2.875% and 2.65%, respectively. Mr. Pope received $2,875 in interest related to the bonds purchased in March 2010 and will receive future interest payments in accordance with the terms of the bonds.

 

The Company is not aware of any other transactions that would require disclosure.

 

The Board of Directors appointed a Special Committee in November 2006 to make determinations regarding the Company’s obligation to provide indemnification when and as may be necessary. The Special Committee consists of Mr. Gross and Mr. Weidemeyer. The Special Committee held no meetings in 2010.

 

Stockholders may obtain copies of our Corporate Governance Guidelines, the Charters of the Audit Committee, the MD&C Committee, and the Nominating and Governance Committee, and our Code of Conduct free of charge by contacting the Corporate Secretary, c/o Waste Management, Inc., 1001 Fannin Street, Suite 4000, Houston, Texas 77002 or by accessing the “Corporate Governance” section of the “Investor Relations” page on our website at http://www.wm.com.

 

Our non-employee director compensation program consists of equity awards and cash consideration. Compensation for directors is recommended annually by the Nominating and Governance Committee with the assistance of an independent third-party consultant, and set by action of the Board of Directors. The Board’s goal in designing directors’ compensation is to provide a competitive package that will enable the Company to attract and retain highly skilled individuals with relevant experience. The compensation also is designed to reward the time and talent required to serve on the board of a company of our size and complexity. The Board

seeks to provide sufficient flexibility in the form of compensation delivered to meet the needs of different individuals while ensuring that a substantial portion of directors’ compensation is linked to the long-term success of the Company.

 

Equity Compensation

 

Non-employee directors receive an annual grant of shares of Common Stock under the Company’s 2009 Stock Incentive Plan. There are no restrictions on the shares; however, non-employee directors are subject to ownership guidelines that establish a minimum ownership standard and require that all net shares received in connection with a stock award, after selling shares to pay all applicable taxes, be held during their tenure as a director and for one year following termination of Board service. The grant of shares is made in two equal installments and the number of shares issued is based on the market value of our Common Stock on the dates of grant, which are January 15 and July 15 of each year. In January 2010, the total annual equity grant to non-employee directors was valued at $110,000 and each director received a grant valued at $55,000 on January 15, 2010. In July 2010, the value of the annual grant was increased to $130,000 and, as a result, the grants to directors on July 15, 2010 were valued at $65,000. In addition to the annual grant, Mr. Pope receives a grant of shares valued at $100,000 for his service as Non-Executive Chairman of the Board, which is also awarded in two equal installments on January 15 and July 15 of each year. The grant date fair value of the awards is equal to the number of shares issued times the market value of our Common Stock on that date; there are no assumptions used in the valuation of shares.

 

Cash Compensation

 

All non-employee directors receive an annual cash retainer for Board service and additional cash retainers for serving as a committee chair. Directors do not receive meeting fees in addition to the retainers. The cash retainers are payable in two equal installments in January and July of each year. The payments of the retainers for each six-month period are not pro-rated, nor are they subject to refund. In July 2010, the Board increased the annual cash retainer for Board service and discontinued the cash retainers for committee service, other than for the committee chairs. The table below sets forth the cash retainers as of January 1, 2010 and as they are currently, after the July 2010 increase:

 

 

The table below shows the aggregate cash paid, and stock awards issued, to the non-employee directors in 2010 in accordance with the descriptions set forth above:

 

 

 

 

The first proposal on the agenda is the election of eight directors to serve until the 2012 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. The Board has nominated the eight director candidates named below, and recommends that you vote FOR their election. If any nominee is unable or unwilling to serve as a director, which we do not anticipate, the Board, by resolution, may reduce the number of directors that constitute the Board or may choose a substitute. Our By-laws provide that if any director nominee does not receive more than 50% of the votes cast for his election, he will tender his resignation to the Board of Directors. The Nominating and Governance Committee will then make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken.

 

The table below shows all of our director nominees; their ages, terms of office on our Board; experience within the past five years; and their qualifications we considered when inviting them to join our Board as well as nominating them for re-election. We believe that, as a general matter, our directors’ past five years of experience gives an indication of the wealth of knowledge and experience these individuals have and that we considered; however, we have also indicated the specific skills and areas of expertise we believe makes each of these individuals a valuable member of our Board.

 

Director Nominees

 

 

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH OF THE EIGHT NOMINEE DIRECTORS.

 

Our Board of Directors has adopted stock ownership guidelines for our non-employee directors that require each director to hold Common Stock or share-based instruments valued at five times his annual cash retainer, based on a $30.00 stock price. Non-employee directors other than Mr. Pope currently are required to hold 17,500 shares and Mr. Pope currently is required to hold approximately 34,200 shares. Directors have five years from the later of the date they join the Board or the effective date of an increase in the holding requirements to attain the required level of ownership. Ms. Cafferty, Mr. Pope and Mr. Clark have reached their required levels of ownership. The remaining non-employee directors have until July 2015 to reach their required level of ownership.

 

Our executive officers, including Mr. Steiner, are also subject to stock ownership guidelines, as described in the Compensation Discussion and Analysis on page 34 of this Proxy Statement.

 

The Stock Ownership Table below shows how much Common Stock each director nominee and each executive officer named in the Summary Compensation Table on page 37 owned as of March 16, 2011, our record date for the Annual Meeting, as well as the number owned by all directors and executive officers as a group. The table also includes information about restricted stock units, stock options and phantom stock granted under various compensation and benefit plans. We did not include information about performance share units granted to executive officers under our incentive compensation plans. Performance share units are settled in shares of our Common Stock based on the Company’s achievement of certain financial performance objectives during a three-year performance period. The actual number of shares the executives may receive at the end of the performance period will vary depending on the level of achievement of the Company’s financial objectives, and can vary from zero to two times the number of performance share units granted. Since the number of shares, if any, that will ultimately be issued pursuant to the performance share units is not known, we have excluded them from the table.

 

These individuals, both individually and in the aggregate, own less than 1% of our outstanding shares as of the record date.

 

Stock Ownership Table

 

 

 

 

The table below shows information for stockholders known to us to beneficially own more than 5% of our Common Stock based on their filings with the SEC through March 16, 2011.

 

 

 

 

 

The federal securities laws require our executive officers and directors to file reports of their holdings and transactions in our Common Stock with the SEC and the New York Stock Exchange.

 

Based on a review of the forms and written representations from our executive officers and directors, we believe that all applicable requirements were complied with in 2010, except that, due to an error by our plan administrator, each of Mr. Aardsma, Senior Vice President, Sales and Marketing, and Mr. Rush, Senior Vice President, Organic Growth, was late in filing a Form 4 to report the acquisition of phantom stock under the Company’s 409A Deferral Savings Plan.

 

The following is a listing of our current executive officers, other than Mr. Steiner, whose personal information is included in the Director Nominees section of this Proxy Statement on page 16, their ages and business experience for the past five years.

 

 

Executive Summary

 

The objective of our executive compensation program is to attract, retain, reward and incentivize exceptional, talented employees who will lead the Company in the successful execution of its strategy. The Company seeks to accomplish this goal by designing a compensation program that is supportive of and aligns with the strategy of the Company and the creation of stockholder value. Our MD&C Committee believes the executive compensation program for 2010 fulfilled its objective by helping the Company overcome a challenging business environment and achieve strong performance. Further, the MD&C Committee believes the compensation of the Company’s executive officers set forth in the Summary Compensation Table of this Proxy Statement, whom we refer to as the “named executive officers” or “named executives,” evidences our commitment to link executive pay with Company performance.

 

Our executive compensation program provides for a significant difference in total compensation in periods of above-target Company performance as compared to periods of below-target Company performance. We are pleased with the Company’s 2010 accomplishments, which reflect discipline in pricing, ability to control costs in our collection and disposal operations and continued production of strong cash flow. The Company generated revenues of $12.5 billion in 2010, compared with $11.8 billion in 2009, an increase of $724 million, or 6.1%. Our collection, landfill, and recycling businesses performed strongly, as each of these business lines increased both their operating earnings and operating margins compared with the prior year period, and for the full year 2010, we outpaced our long-term pricing objective of achieving price increases of at least 50 to 100 basis points above the consumer price index. Accordingly, the annual cash incentive awards for 2010 that are based on Company-wide performance metrics warranted an above-target payout. However, our emphasis on performance-based compensation may result in the loss of one or more significant components of the named executives’ target annual compensation. This was the case in 2010, as the threshold performance criteria were not met for performance share units that would have been earned for the three-year performance period ended December 31, 2010. The MD&C Committee is dedicated to the principle that executive compensation should be substantially linked to the performance of the Company.

 

In late 2010, the MD&C Committee considered the evolution of the strategy of the Company into a differentiation strategy to grow the Company through three long-term goals: know more about our customers and how to service them than anyone else; use conversion and processing technology to extract more value from the materials we manage; and continuously improve our operational efficiency. The MD&C Committee determined that, in light of the growth-focused strategy of the Company, it was necessary to review the Company’s overall executive compensation structure. Key considerations included:

 

 

As a result of these considerations and our growth-oriented strategy, we have made changes to our executive compensation program for 2011. As will be described in more detail in next year’s executive compensation discussion and analysis, these changes include:

 

 

 

The MD&C Committee recognizes that, while it is critical that the Company grow, it is equally critical that the Company grow in a way that rewards our stockholders. In furtherance of that goal, the MD&C Committee believes the 2011 executive compensation plan will best align our executive compensation structure with the overall Company strategy and will best motivate the performance we seek to reward.

 

Our Compensation Philosophy for Named Executive Officers

 

The Company’s compensation philosophy is designed to:

 

 

With respect to our named executive officers, the MD&C Committee believes that total direct compensation should be targeted at a range around the competitive median according to the following:

 

 

Highlights of 2010 Named Executive Officer Compensation

 

 

 

 

 

 

Key Elements of Our Compensation Program

 

Base Salary.  We pay base salaries to our named executives to provide them with sufficient, regularly paid income appropriate for their respective positions and responsibilities. The amounts of the base salaries we pay are meant to help us in attracting and retaining the best employees.

 

Annual Cash Bonus.  We grant annual cash bonuses pursuant to our 2005 Annual Incentive Plan. Our named executives’ bonuses are targeted at a percentage of base salary. Since 2007, our named executives’ bonuses have been earned based solely on the achievement of Company financial measures and could range from zero to 200% of target. We tie our named executives’ bonuses to the achievement of Company financial measures because these individuals have the highest level of decision making authority and, therefore, the most ability to influence the Company’s results of operations. As a result, we believe it is appropriate to put their entire bonus at risk based on whether the financial goals of the Company are achieved. Additionally, we believe this level of objective determination and transparency for these individuals’ compensation is appropriate and important to stockholders. In cases of individual performance that varies significantly from expectations, the MD&C Committee has the discretion to increase or decrease the calculated incentive payment by up to 25%, resulting in a modified payout for the named executive. This modifier has never been used for a named executive officer.

 

The financial measures chosen for our named executive officers’ bonus calculations are those that we believe drive behaviors that increase value to our stockholders and are appropriately measured on an annual basis, and performance targets are designed to be challenging, yet achievable. In order for named executives to be eligible for an annual cash bonus in 2010, certain minimum pricing improvement targets were required to be met. This performance “gate” was intended to ensure that employees were maintaining discipline in executing our pricing programs. Annual cash bonuses were further dependent on (i) income from operations as a percentage of revenues, which is meant to motivate employees to control and lower costs, operate efficiently and drive our pricing programs, thereby increasing our income from operations margin, and (ii) income from operations, net of depreciation and amortization, which is an indication of our ability to generate cash flows before interest and taxes. We believe the ability to grow our cash flow is an important metric to our stockholders and drives stockholder value.

 

Long-Term Equity Incentives.  We grant annual equity awards to our named executive officers under our 2009 Stock Incentive Plan. For several years, it has been our practice to grant performance share units with a performance period of three years to motivate our named executive officers to act in a manner that can increase the value of the Company over time. The number of performance share units granted to our named executive officers corresponds to an equal number of shares of Common Stock. At the end of the three-year performance period for each grant, the Company will deliver a number of shares ranging from 0% to 200% of the initial number of units granted, depending on the Company’s three-year performance against a pre-established ROIC target and subject to the general payout and forfeiture provisions. ROIC in our plan is defined generally as net operating profit after taxes divided by capital. Capital is comprised of long-term debt, noncontrolling interests and stockholders’ equity, less cash. Since 2007, performance share units earn dividend equivalents, which are paid out based on the number of shares actually awarded, if any, at the end of the performance period. Recipients can defer receipt of the shares issuable under their performance share unit awards until a specified date or dates they choose. Deferred amounts are not invested, nor do they earn interest, but deferred amounts do earn dividend equivalents during deferral. Deferred amounts are paid out in shares of Common Stock at the end of the deferral period.

 

We believe that the profitable allocation of capital is critical to the long-term success of the Company. Using ROIC as a measure for incentive compensation purposes ensures that decisions are made with the best long-term interests of the Company in mind. ROIC is an indicator of our ability to generate returns for our stockholders. We believe that earnings growth is important and an appropriate measure for our annual bonuses. However, creating value over time is also important, and we therefore chose the three-year performance period

for our long-term incentive compensation. We believe that using a three-year average of ROIC incentivizes our named executive officers to ensure the strategic direction of the Company is being followed and forces them to balance the short-term incentives awarded for growth with the long-term incentives awarded for value generated.

 

In 2010, the MD&C Committee decided to re-introduce stock options as a component of the equity compensation awarded to our named executive officers in order to direct focus on increasing the market value of our Common Stock. Stock options were granted in the first quarter of 2010 in connection with the annual grant of long-term equity awards at a regularly scheduled MD&C Committee meeting.

 

Post-Employment Compensation.  The compensation our named executives receive post-employment is based on provisions included in individual equity award agreements, retirement plan documents and employment agreements. We enter into employment agreements with our named executive officers because they provide a form of protection for the Company through restrictive covenant provisions. They also provide the individual with the protection that he will be treated fairly in the event of a termination not for cause or under a change-in-control situation. The change-in-control provision included in each named executive officer’s agreement requires a double trigger in order to receive any payment in the event of a change-in-control situation. First, a change-in-control must occur, and second the individual must terminate his employment for good reason or the Company must terminate his employment without cause within six months prior to or two years following the change-in-control event. We believe providing a change-in-control protection ensures impartiality and objectivity of our named executive officers in the context of a change-in-control situation and protects the interests of our stockholders.

 

In August 2005, the MD&C Committee approved an Executive Officer Severance Policy. The policy generally provides that after the effective date of the policy, the Company may not enter into severance arrangements with its executive officers, as defined in the federal securities laws, that provide for benefits, less the value of vested equity awards and benefits provided to employees generally, in an amount that exceeds 2.99 times the executive officer’s then current base salary and target bonus, unless such future severance arrangement receives stockholder approval. The policy applies to all of our named executive officers.

 

Deferral Plan.  Each of our named executive officers is eligible to participate in our 409A Deferred Savings Plan. The plan allows all employees with a minimum base salary of $170,000 to defer up to 25% of their base salary and up to 100% of their annual bonus (“eligible pay”) for payment at a future date. Under the plan, the Company matches the portion of pay that cannot be matched in the Company’s 401(k) Savings Plan due to IRS limits. The Company match provided under the 401(k) Savings Plan and the Deferral Plan is dollar for dollar on the first 3% of eligible pay, and fifty cents on the dollar for the next 3% of eligible pay. Participants can contribute the entire amount of their eligible pay to the Deferral Plan. Contributions in excess of the 6% will not be matched but will be tax-deferred. Company matching contributions begin in the Deferral Plan once the employee has reached the IRS limits in the 401(k) plan. Funds deferred under this plan are allocated into accounts that mirror selected investment funds in our 401(k) plan, although the funds deferred are not actually invested in the funds. We believe that providing a program that allows and encourages planning for retirement is a key factor in our ability to attract and retain talent. Additional details on the plan can be found in the Nonqualified Deferred Compensation table and the footnotes to the table on page 42.

 

Perquisites.  We have eliminated all perquisites for our named executive officers.

 

Based on a periodic security assessment by an outside consultant, for security purposes, the Company requires the Chief Executive Officer to use the Company’s aircraft for business and personal use. Use of the Company’s aircraft is permitted for other employees’ personal use only with Chief Executive Officer approval in special circumstances, which seldom occurs. The value of our named executives’ personal use of the Company’s airplanes, if any, is treated as taxable income to the respective executive in accordance with IRS regulations using the Standard Industry Fare Level formula. This is a different amount than we disclose in the Summary Compensation Table, which is based on the SEC requirement to report the incremental cost to us of their use.

How Named Executive Officer Compensation Decisions are Made

 

The MD&C Committee meets several times each year to perform its responsibilities as delegated by the Board of Directors and as set forth in the MD&C Committee’s charter. These responsibilities include evaluating and approving the Company’s compensation philosophy, policies, plans and programs for our named executive officers.

 

In the performance of its duties, the MD&C Committee regularly reviews the total compensation, including the base salary, target annual bonus award opportunities, long-term incentive award opportunities and other benefits, including potential severance payments for each of our named executive officers. At a regularly scheduled meeting each year, the MD&C Committee reviews our named executives’ total compensation and compares that compensation to the competitive market, as discussed below. In the first quarter of each year, the MD&C Committee meets to determine salary increases, if any, for the named executive officers; verifies the results of the Company’s performance for annual incentive and performance share unit calculations; reviews the individual annual incentive targets for the current year as a percent of salary for each of the named executive officers; and makes decisions on granting long-term equity awards.

 

Compensation Consultant.  The MD&C Committee uses several resources in its analysis of the appropriate compensation for the named executive officers. The MD&C Committee employs an independent consultant to provide it advice relating to market and general compensation trends. The consultant is selected and hired by the MD&C Committee. The MD&C Committee also uses the services of its independent consultant for data gathering and analyses, which it uses for its discussions of and decisions on the named executive officers’ compensation. The MD&C Committee has retained Frederic W. Cook & Co., Inc. as its independent consultant since 2002. The Company makes regular payments to Frederic W. Cook for its services around executive compensation, including meeting preparation and attendance, advice, best practice information, as well as competitive data. Such payments are submitted to the chair of the MD&C Committee.

 

In addition to services related to executive compensation, the consultant also provides the Board of Director’s Nominating and Governance Committee information and advice related to director compensation. The Nominating and Governance Committee takes these recommendations into consideration when recommending compensation of the independent directors. Frederic W. Cook has no other business relationships with the Company and receives no other payments from the Company. In February 2008, the MD&C Committee adopted a written policy to ensure the independence of any compensation consultants utilized by the MD&C Committee for executive compensation matters. Pursuant to the policy, no compensation consultant engaged by the MD&C Committee to assist in determining or recommending the compensation of executive officers or independent directors of the Board of Directors may be engaged by management of the Company to provide any other services unless first approved by the MD&C Committee. Since the adoption of the policy, no engagements have been proposed to the MD&C Committee for approval.

 

Role of CEO.  Mr. Steiner also plays a part in determining compensation, as he assesses the performance of the named executive officers reporting to him and reports these assessments with recommendations to the MD&C Committee. Personnel within the Company’s People Department assist the MD&C Committee by working with the independent consultant to provide information requested by the MD&C Committee and assisting it in designing and administering the Company’s incentive programs.

 

Peer Company Comparisons.  One of the data sources used by the MD&C Committee is compensation information of a comparison group of companies. The purpose of the comparisons of our named executives’ compensation with executives at other companies is to gauge the competitive market. This market is relevant for attracting and retaining key talent and also for ensuring that the Company’s compensation practices are aligned with general practices. Each of our named executive officers has been promoted to his current position from within the Company.

For purposes of establishing the 2010 executive compensation program, the independent consultant provided the MD&C Committee with a competitive analysis of total direct compensation levels and compensation mixes for our executive officers, using information from:

 

 

The comparison group of companies is initially recommended by the independent consultant prior to the actual data gathering process, with input from management. The composition of the group is evaluated and a final comparison group of companies is approved by the MD&C Committee each year. The selection process for the comparison group begins with all companies in the Standard & Poor’s North American database that are publicly traded U.S. companies in 17 different Global Industry Classifications. These industry classifications are meant to provide a collection of companies in industries that share similar characteristics with Waste Management. The companies are then limited to those with at least $5 billion in annual revenue to ensure appropriate comparisons, and further narrowed by choosing those with asset intensive domestic operations, as well as those focusing on transportation and logistics. Finally, we focus on companies that identify us as a peer. Companies with these characteristics are chosen because the MD&C Committee believes that it is appropriate to compare our executives’ compensation with executives that have similar responsibilities and challenges at other companies. The comparison group used for consideration of 2010 compensation is composed of the companies listed below:

 

 

The market and the comparison group data are blended when composing the competitive analysis, when possible, such that each data source is weighted 50%. The competitive analysis shows that the Company’s named executives’ total direct compensation opportunities are positioned in the median range of the compensation of the executives comprising the competitive analysis. For competitive comparisons, the MD&C Committee has determined that total direct compensation packages for our named executive officers within a range of plus or minus twenty percent of the median total compensation of the competitive analysis is appropriate. In making these determinations, total direct compensation consists of base salary, target annual bonus, and the annualized grant date fair value of long-term equity incentive awards. When the competitive analysis was reviewed in 2009 and 2010, it showed that none of our named executive officers’ total direct compensation was above the median for their peers in the competitive analysis.

 

Allocation of Compensation Elements and Tally Sheets.  The MD&C Committee considers the forms in which total compensation will be paid to executive officers and seeks to achieve an appropriate balance between base salary, annual cash incentive compensation and long-term incentive compensation. The MD&C Committee determines the size of each element based primarily on comparison group data and individual and Company performance. The percentage of compensation that is contingent on achievement of performance criteria typically increases in correlation to an executive officer’s responsibilities within the Company, with at-risk performance-based incentive compensation making up a greater percentage of total compensation for our most senior executive officers. Additionally, as an executive becomes more senior, a greater percentage of the executive’s compensation shifts away from short-term to long-term incentive awards.

The MD&C Committee uses tally sheets to review the compensation of our named executive officers, which show the cumulative impact of all elements of compensation. These tally sheets include detailed information and dollar amounts for each component of compensation, the value of all equity held by each named executive, and the value of welfare and retirement benefits and severance payments. Tally sheets provide the MD&C Committee with the relevant information necessary to determine whether the balance between long-term and short-term compensation, as well as fixed and variable compensation, is consistent with the overall compensation philosophy of the Company. This information is also useful in the MD&C Committee’s analysis of whether total direct compensation provides a compensation package that is appropriate and competitive. Tally sheets are provided to the full Board of Directors.

 

The following charts display the allocation of total 2010 compensation among base salary, annual cash incentive at target and long-term incentives at target for our Chief Executive Officer and for Messrs. Harris, Trevathan and Woods, on average. These charts reflect the MD&C Committee’s 2010 desired total mix of compensation for Senior Group Vice Presidents, which includes approximately 40% of total compensation relating to long-term equity, while long-term equity comprises almost 65% of Mr. Steiner’s total compensation.

 

 

In the process of establishing the 2011 executive compensation program, the MD&C Committee determined that the compensation of our Senior Group Vice President position was weighted too heavily in favor of short-term incentives in comparison to our peers. As a result, the MD&C Committee has revised the allocation of 2011 targeted compensation of Senior Group Vice Presidents that are named executives as shown below to shift emphasis toward long-term incentives:

 

Senior Group Vice Presidents (average)

2011 Target Compensation

 

 

Internal Pay Equity.  The MD&C Committee considers the differentials between compensation of the individual named executive officers, as well as the additional responsibilities of the President and Chief Executive Officer compared to the other executive officers. Internal comparisons are also made between executive officers and their direct reports. The MD&C Committee confirms that the compensation paid to executive officers is reasonable compared to that of their direct reports, while recognizing that an executive’s actual total compensation, as a multiple of the total compensation of his or her subordinates, will increase in periods of above-target performance and decrease in times of below-target performance.

 

Tax Matters.  The MD&C Committee complies with the performance-based compensation exemption under Section 162(m) of the Internal Revenue Code when appropriate. Section 162(m) generally limits a

company’s ability to deduct compensation paid in excess of $1 million during any fiscal year to the Chief Executive Officer or any of the other named executive officers unless the excess amount is performance-based. Throughout the following discussion we have noted the programs that are designed to meet the Section 162(m) requirements.

 

Risk Assessment.  The MD&C Committee also seeks to structure compensation that will provide sufficient incentives for named executive officers to drive results while avoiding unnecessary or excessive risk taking that could harm the long-term value of the Company. The MD&C Committee believes that the following measures help achieve this goal:

 

 

During 2010, the MD&C Committee reviewed the Company’s assessment of compensation risk of the Company’s incentive plans, which was conducted with guidance from the independent compensation consultant. The MD&C Committee concluded that our compensation policies do not create risks that are reasonably likely to have a material adverse effect on the Company.

 

Named Executives’ 2010 Compensation Program

 

Base Salary — Each of our named executive officers is party to an employment agreement approved by our MD&C Committee that provides for a base salary that, once increased, may not be reduced. The MD&C Committee’s annual decisions regarding base salaries generally relate to merit increases, if any, as each of our named executive officers has been in his current role for several years. In determining annual merit increases, the Company looks at competitive market data for cost of labor increases and considers executives’ individual performance and impact on the Company. In early 2009, the MD&C Committee determined that because of economic conditions, no named executive officers would receive an annual merit increase; however, that salary freeze was lifted for all Company employees in 2010, and each of Mr. Steiner and Mr. Simpson received a 2% increase in base salary, in line with the Company-wide budget. The base salaries of the Group Senior Vice Presidents were determined to be on the high side of our target range around the competitive median, and as a

result, none of the Group Senior Vice Presidents that are named executives received an increase in base salary. The table below shows the 2010 base salary for each of our named executive officers:

 

 

Annual Cash Bonus — The percentages of base salary targets for the annual bonuses of the named executive officers were set when the individuals were promoted to their current roles. These target percentages are reviewed annually to ensure they are still appropriate given the competitive market and the individuals’ responsibilities and performance. Additionally, each year the MD&C Committee determines the financial measures that will be used for the named executives’ bonus determinations and sets the threshold, target and maximum measures necessary for bonus payments. The MD&C Committee makes these determinations based on what it believes are most likely to both drive and reward performance that is beneficial to the Company and stockholders.

 

The annual bonus plan is designed to comply with the performance-based compensation exemption under Section 162(m) of the Code by allowing the MD&C Committee to set performance criteria for payments, which may not exceed the predetermined amount of 0.5% of the Company’s pre-tax income per participant.

 

In 2010, the MD&C Committee continued an action it took in early 2009 to emphasize the Company’s pricing excellence, wherein we focus on ensuring we receive appropriate pricing for all of our services. We are committed to our pricing program and we do not intend to accept volumes at prices that do not provide strong operating margins. As a result, the MD&C Committee included a feature to our annual bonus plan that requires minimum pricing improvement targets to be achieved in order for employees to be eligible to receive a bonus. Upon achievement of the Corporate pricing improvement measure, all named executive officers would be bonus eligible. If the Corporate measure was not met, field-based named executive officers, which include Mr. Harris, Mr. Trevathan and Mr. Woods, would still be eligible for a bonus payment to the extent his respective Group pricing improvement measure was met. The Company met the Corporate pricing improvement target and as a result, each of the named executives was eligible to receive his 2010 annual bonus payment, as calculated based on the income from operations margin and income from operations excluding depreciation and amortization performance metrics set forth below. The pricing improvement targets, shown in the table below, were a weighted average rate per unit increase, based on commercial, residential and industrial collection operations; transfer stations; and municipal solid waste and construction and demolition volumes at our landfills.

 

 

 

 

For purposes of 2010 annual cash bonuses for corporate-level employees, including Messrs. Steiner, Simpson and O’Donnell, performance is measured using the Company’s consolidated results of operations. The table below sets forth the Company-wide performance measures set by the MD&C Committee for the corporate-level named executive officers’ bonuses earned in 2010. Each of the performance measures was assigned equal weight.

 

 

The 2010 annual cash bonuses of Messrs. Harris, Trevathan and Woods were calculated using (i) the Company’s consolidated results of operations for measuring income from operations margin and (ii) their respective field-based results of operations for measuring income from operations excluding depreciation and amortization. We believe using field-based results for this measure is appropriate because it ties our field-based named executive officers’ compensation directly to the success or failure of operations over which they have direct control. Each of the two performance measures was assigned equal weight; however, in the case of Messrs. Trevathan and Woods, the measure “income from operations excluding depreciation and amortization” was comprised of two separate equally-weighted calculations. The first calculation was based solely on results of operations for their respective Group; the second calculation was based on results of operations for their respective Group, as integrated with operations of our Wheelabrator subsidiary that are not a component of the Group’s calculated results for financial reporting purposes, but which are located physically within the Group’s geographic area. This calculation, which we refer to as the Group’s “integrated” performance measure, is intended to encourage the large geographic Groups to support and collaborate with Wheelabrator’s operations in their area. The following table sets forth the “income from operations excluding depreciation and amortization” performance measure, on a stand alone and an integrated basis, as set by the MD&C Committee for the respective Groups of Messrs. Harris, Trevathan and Woods:

 

 

The MD&C Committee believes that the 2010 financial performance measures were goals that appropriately drove behaviors to create performance and results, in particular focusing on generating profitable revenue, cost cutting and cost control, and making the best use of our assets. When setting performance measure goals each year, the MD&C Committee looks to the Company’s historical results of operations and analyses and forecasts for the coming year. Specifically, the MD&C Committee considers expected revenue based on analyses of pricing and volume trends, as affected by operational and general economic factors; expected wage, maintenance, fuel and other operational costs; and expected selling and administrative costs. Based on this information and in light of general economic conditions and indicators in early 2010, the MD&C Committee determined that the target performance under the annual bonus plan should be increased as compared to the prior year’s target and actual performance. The MD&C Committee discussed the effects the recessionary environment was having on the Company’s results of operations and the challenges that the Company was facing in 2010, but determined the improvement in performance targeted by the performance measures was reasonable and appropriate for 2010.

In determining whether Company financial performance measures have been met, the MD&C Committee has discretion to make adjustments to the calculations for unusual or otherwise non-operational matters that it believes do not accurately reflect results of operations expected from management for bonus purposes. In 2010, actual results were adjusted to exclude the effects of: (i) revisions of estimates associated principally with remedial liabilities at closed sites; (ii) the accounting effect of changes in ten-year Treasury rates, which are used to discount remediation reserves; (iii) expense charges incurred as a result of employees of five bargaining units agreeing to our proposal to withdraw them from an under-funded multiemployer pension plan; and (iv) an increase in litigation reserves on account of a case on appeal. Adjustments are not made to forgive poor performance, and the MD&C Committee considers both positive and negative adjustments to results. Adjustments are made to ensure that rewards are aligned with the right business decisions and are not influenced by potential short-term gain or impact on bonuses. Adjusting for certain items, like those discussed herein, avoids creating incentives for individuals to fail to take actions that are necessary for the longer-term good of the Company in order to meet short-term goals.

 

As adjusted for the items noted above, the Company’s income from operations as a percentage of revenue was 17.65%. This measure made up half of the performance metrics for all of our named executives and was 0.25% above the target performance level. Income from operations excluding depreciation and amortization for 2010, also as adjusted, was $3,403 million on a Company-wide basis. This measure, which exceeded the target performance level by $39 million, made up the remainder of the performance metrics for the 2010 annual cash bonus of Messrs. Steiner, Simpson and O’Donnell. The remainder of the performance metrics for the 2010 annual cash bonus of Mr. Harris was calculated using income from operations excluding depreciation and amortization for the Midwest Group, which was $872 million and exceeded maximum level performance. The remainder of the performance metrics for the 2010 annual cash bonus of Mr. Trevathan was calculated using income from operations excluding depreciation and amortization for the Southern Group, on a stand-alone basis and an integrated basis, which were $1,129 million and $1,239 million, respectively. The performance of the Southern Group on both of these measures fell slightly short of target. The remainder of the performance measures for the 2010 annual cash bonus of Mr. Woods was calculated using income from operations excluding depreciation and amortization for the Western Group, on a stand-alone basis and an integrated basis, which were $808 million and $821 million, respectively. The performance of the Western Group on both of these measures also fell short of target, but exceeded threshold performance levels.

 

 

 

 

Long-Term Equity Incentives — Long-term equity incentives are a key component of our named executive officers’ compensation packages. Our equity awards are designed to hold individuals accountable for long-term decisions by rewarding the success of those decisions. The MD&C Committee continuously evaluates the components of its programs. In determining which forms of equity compensation are appropriate, the MD&C Committee considers whether the awards granted are achieving their purpose; the competitive market; and accounting, tax or other regulatory issues, among others. In determining the appropriate awards for the named executives’ 2010 long-term incentive grant, the MD&C Committee decided to grant both performance share units and stock options to its named executive officers. The MD&C Committee determined that equally dividing the awards between performance share units that use ROIC to focus on improved asset utilization and stock options that focus on increasing the market value of our stock would appropriately incentivize our named executives.

Performance Share Units — Performance share units are granted to our named executive officers annually to align compensation with the achievement of our long-term financial goals and to build stock ownership. Performance share units provide an immediate retention value to the Company because there is unvested potential value at the date of grant. Each annual grant of performance share units has a three-year performance period, and grants are forfeited if the executive voluntarily terminates his employment.

 

The MD&C Committee determined the number of units that were granted to each of the named executives in 2010 by establishing a targeted dollar amount value for the award. The values chosen were based primarily on the comparison information for the competitive market, including an analysis of the named executives’ responsibility for meeting the Company’s strategic objectives. Once dollar values of targeted awards were set, those values were divided by the average of the high and low price of our Common Stock over the 30 trading days preceding the MD&C Committee meeting at which the grants were approved to determine the target number of performance share units granted. The dollar value of the awards and corresponding number of performance share units are shown in the table below:

 

 

The table below shows the required achievement of the ROIC performance measure and the corresponding potential payouts under our performance share units granted in 2010:

 

 

The threshold, target and maximum measures are determined based on an analysis of historical performance and current projections and trends. The MD&C Committee uses this analysis and modeling of different scenarios related to items that affect the Company’s performance such as yield, volumes and capital to set the performance measures. As with the consideration of targets for the annual bonus, the MD&C Committee carefully considered several material factors affecting the Company for 2010 and beyond, including the continued impact of the recessionary economy and economic indicators for future periods. Given these factors, the MD&C Committee determined that the target for ROIC for the 2010 award should be an improvement from 2009 target and actual ROIC, but that it should not be as high as the targets established in 2007 and 2008.

 

The table below shows the performance measures, the achievement of those measures and the corresponding payouts for the performance share units that have been granted since 2007:

 

 

 

As reflected in the table above, the performance period for performance share units granted in 2008 ended on December 31, 2010. The calculation of ROIC for the three-year performance period for purposes of such performance share units was 17.1%, and the calculation of EPS for the three-year performance period for purposes of such performance share units was $6.29. As a result, the threshold performance criteria were not met and no performance share units were earned in 2010.

 

In evaluating appropriate financial measures for the 2009 and 2010 grants to named executives, the MD&C Committee decided to retain only ROIC, rather than an equal split between ROIC and EPS measures. This decision was primarily a result of the MD&C Committee’s determination that such grants should subject named executives to the same measures as all other employees that are granted equity awards and that the most appropriate long-term financial measure for our Company’s employees generally is ROIC.

 

Our performance share unit awards are intended to meet the qualified performance-based compensation exception under Section 162(m). Modifications were made to the terms of awards granted in 2007 and later to allow for payouts under those awards to be fully deductible under Section 162(m).

 

Stock Options — Stock options were granted in the first quarter of 2010 in connection with the annual grant of long-term equity awards at a regularly scheduled MD&C Committee meeting in order to direct focus on increasing the market value of our Common Stock. The MD&C Committee believes use of stock options is appropriate to support the growth strategy of the Company. The number of options granted to the named executive officers was based on a dollar value of compensation decided by the MD&C Committee; the actual number of stock options granted was determined by assigning a value to the options using an option pricing model, and dividing the dollar value of compensation by the value of each option. The stock options will vest in 25% increments on the first two anniversaries of the date of grant and the remaining 50% will vest on the third anniversary. The exercise price of the options is the average of the high and low market price of our Common Stock on the date of grant, or $33.49, and the options have a term of 10 years. We account for our employee stock options under the fair value method of accounting using a Black-Scholes methodology to measure stock option expense at the date of grant. The fair value of the stock options at the date of grant is amortized to expense over the vesting period.

 

Other Compensation Policies and Practices

 

Stock Ownership Requirements — All of our named executive officers are subject to stock ownership guidelines. We instituted stock ownership guidelines because we believe that ownership of Company stock demonstrates a commitment to, and confidence in, the Company’s long-term prospects and further aligns employees’ interests with those of our stockholders. We believe that the requirement that these individuals maintain a portion of their individual wealth in the form of Company stock deters actions that would not benefit stockholders generally. Additionally, the guidelines contain holding period provisions that generally require Senior Vice Presidents and above to hold all of their shares and Vice Presidents to hold 50% of their shares for at least one year, even after required ownership levels have been achieved. We believe these holding periods discourage these individuals from taking actions in an effort to gain from short-term or otherwise fleeting increases in the market value of our stock.

 

The MD&C Committee regularly reviews its ownership guidelines to ensure that the appropriate share ownership requirements are in place, and the guidelines were revised in late 2010 to increase the ownership requirements. The stock ownership guidelines vary dependent on the individual’s title and are expressed as a fixed number of shares. Ownership requirements range from three to five times the named executive’s 2010 base salary. The number of shares required to be owned is determined based on a $33.50 stock price. Shares owned outright, deferred stock units, and phantom stock held in the 401(k) plan and in the Deferral Plan count toward meeting the targeted ownership requirements. Restricted stock shares, restricted stock units and performance share units, if any, do not count toward meeting the requirement until they are vested or earned.

The following table outlines the ownership requirements for the named executive officers currently serving:

 

 

 

 

The Nominating and Governance Committee also establishes ownership guidelines for the independent directors and performs regular reviews to ensure all independent directors are in compliance.

 

Policy Limiting Death Benefits and Gross-up Payments — The Company recently adopted a new “Policy Limiting Certain Compensation Practices,” which generally provides that after the effective date of the policy, the Company will not enter into new compensation arrangements that would obligate the Company to pay a death benefit or gross up-payment to an executive officer unless such arrangement receives stockholder approval. The policy is subject to certain exceptions, including benefits generally available to management-level employees and any payment in reasonable settlement of a legal claim. Additionally, “Death Benefits” under the policy does not include deferred compensation, retirement benefits or accelerated vesting or continuation of equity-based awards pursuant to generally-applicable equity award plan provisions.

 

Insider Trading — The Company maintains an insider trading policy that prohibits executive officers from engaging in most transactions involving the Company’s Common Stock during periods, determined by the Company, that those executives are most likely to be aware of material, non-public information. Executive officers must clear all of their transactions in our Common Stock with the Company’s General Counsel’s office to ensure they are not transacting in our securities during a time that they may have material, non-public information. Additionally, it is our policy that executive officers are not permitted to engage in transactions that reduce or cancel the risk of an investment in our Common Stock, such as puts, calls and other exchange-traded derivatives, or hedging activities that allow a holder to own a covered security without the full risks and rewards of ownership.

Executive Compensation

 

We are required to present compensation information in the tabular format prescribed by the SEC. This format, including the tables’ column headings, may be different from the way we describe or consider elements and components of compensation internally. We have provided the following information because we believe it may be useful to an understanding of the tables presented in this section. The CD&A contains a discussion that should be read in conjunction with these tables to gain a complete understanding of our executive compensation philosophy, programs and decisions.

 

 

The value of stock awards and stock options included in the tables is the aggregate grant date fair value calculated in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 718. In the case of performance share units, the value is based on what we believe the most probable outcome is at the date of grant, and excludes the effect of forfeitures. Stock options have been valued using an option valuation model. The grant date fair values in the tables are based on the “grant date” for accounting purposes, which generally is the date on which the material terms of the awards have been communicated to the named executives. The MD&C Committee determines the dollar value of equity awards at a meeting that precedes the date of grant. The number of performance share units to be granted is based on a thirty day trailing average of the market price of our Common Stock. The number of stock options to be granted is determined by assigning a value to the options using an option pricing model and dividing the dollar value of compensation by the value of each option.

 

 

 

 

 

 

 

 

 

Mr. Steiner is required by us to use the Company aircraft for all travel, whether for personal or business purposes. We calculated this amount based on the incremental cost to us, which includes fuel, crew travel expenses, on-board catering, landing fees, trip related hangar/parking costs and other variable costs. We own or operate our aircraft primarily for business use; therefore, we do not include the fixed costs associated with the ownership or operation such as pilots’ salaries, purchase costs and non-trip related maintenance.

 

Information concerning Mr. O’Donnell’s severance payment can be found on page 49.

 

Grant of Plan-Based Awards in 2010

 

 

 

 

 

Outstanding Equity Awards at December 31, 2010