STEVEN J. MALCOLM

CHAIRMAN OF THE BOARD

 

To the Stockholders of The Williams Companies, Inc.

 

You are cordially invited to attend the 2007 annual meeting of stockholders of The Williams Companies, Inc. The meeting will be held on Thursday, May 17, 2007, 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. At the annual meeting we will provide a report on our operations, followed by a question-and-answer and discussion period.

 

Please note that 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.

 

We know that most of our stockholders are unable to attend the annual meeting in person. We solicit proxies so that you have an opportunity to vote on all matters that are scheduled to come before the annual 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. Regardless of the number of shares you own, your vote is important.

 

Our growth and success in 2006, and in future years, is underpinned by our values and our ability to reliably deliver natural gas from production areas to local utilities across the United States. Your company has achieved much over the past several years and we look forward to expanding our potential and creating value for all of our stakeholders.

 

Thank you for your continued interest in our company.

 

Very truly yours,

 

Steven J. Malcolm

 

Enclosures

April 10, 2007

 

TABLE OF CONTENTS

 

 

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

 

 

 

May 17, 2007

 

 

Please take notice that the annual meeting of stockholders of The Williams Companies, Inc. will be held at the time and place and for the purposes indicated below.

 

 

By order of the Board of Directors,

 

Brian K. Shore
Secretary

 

Tulsa, Oklahoma

April 10, 2007

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

 

PROXY STATEMENT
for

ANNUAL MEETING OF STOCKHOLDERS

May 17, 2007

 

 

 

 

Our Board of Directors (the “board”) solicits your proxy for the 2007 Annual Stockholders’ Meeting to be held at 11:00 a.m. Central Time on May 17, 2007 at the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, and at any postponement or adjournment of the meeting, for the purposes set forth in the “Notice of Annual Meeting of Stockholders.” 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.

 

Record Date and Stock Ownership

 

You may attend or vote at the annual meeting if you were a stockholder of record of our stock at the close of business on March 26, 2007 (the “record date”). If a broker holds your shares and you would like to attend the meeting, please bring a copy of your account statement or a proxy card, which you can obtain from your broker. The majority of the shares of common stock outstanding on the record date must be present in person or by proxy to have a quorum. On the record date, we had 598,418,364 shares of common stock outstanding. We made copies of this proxy statement available to stockholders beginning on April 10, 2007.

 

Submitting or Revoking your Proxy

 

Your vote is important. You may vote your shares in any one of the following ways:

 

 

When you complete and submit your proxy card, the persons named as proxies will vote the shares represented by your proxy in accordance with your instructions. When you submit a proxy card but do not fill out the voting instructions on the proxy card, the persons named as proxies will vote the shares represented by your proxy as follows:

 

 

You may revoke or change a proxy vote in one of the following ways: (1) by voting again by telephone or on the Internet; (2) prior to its exercise, by delivering written notice of revocation of your proxy vote to our secretary at One Williams Center, MD 47, Tulsa, Oklahoma 74172; (3) by executing and returning a later dated proxy; or (4) by attending the annual meeting and voting in person.

 

Matters to be Voted On

 

You will be voting on the following:

 

 

Requisite Votes

 

You will have one vote for every share of Williams’ common stock that you own on the record date. The matters discussed herein to be voted on at the annual meeting including the election of directors will be decided by a majority of the votes cast by the stockholders. However, other matters that may properly come before the annual meeting may require more than a majority vote under our by-laws, the laws of the state of Delaware, our restated certificate of incorporation, or other applicable laws.

 

The presence, in person or by proxy, of a majority of the outstanding shares of common stock entitled to vote at the annual meeting constitutes a quorum. You will be considered part of the quorum if you return a signed and dated proxy card, if you vote by telephone or the Internet, or if you vote in person at the annual meeting.

 

Abstentions and broker “non-votes” are counted as present and entitled to vote for determining a quorum. Broker “non-votes” are shares held by brokers or nominees over which the broker or nominee lacks discretionary power to vote and for which the broker or nominee has not received specific voting instructions from the beneficial owner. For purposes of determining the outcome of any matter as to which the broker has indicated on the proxy that it does not have discretionary authority to vote, those shares will be treated as not present and not entitled to vote with respect to that matter, even though those shares are considered present and entitled to vote for quorum purposes and may be entitled to vote on other matters.

 

Our restated certificate of incorporation, as amended, provides for three classes of directors of as nearly equal size as possible and further provides that the total number of directors shall be determined by resolution adopted by the affirmative vote of a majority of the board, except that the total number of directors may not be less than five nor more than 17. The term of each class of directors is normally three years, and the term of one class expires each year in rotation.

 

Four individuals, all of whom currently serve as directors, have been nominated for election for three-year terms as directors at the annual meeting. Eight directors will continue in office to serve pursuant to their prior elections. In order to maintain balance in the three classes of directors, as required by our by-laws, Dr. Kathleen B. Cooper, who was identified by our lead director, Mr. W.R. Howell, was appointed to the board in September 2006 as a Class III director. In accordance with the recommendation of the nominating and governance committee, the board proposes that the following nominees be elected:

 

 

The persons named as proxies in the accompanying proxy, who have been designated by the board, intend to vote, unless otherwise instructed in such proxy, for the election of Drs. Kathleen B. Cooper and Charles M. Lillis and Messrs. William R. Granberry and William G. Lowrie. Should any nominee named herein become unable for

any reason to stand for election as a director, the persons named in the proxy will vote for the election of such other person or persons as the nominating and governance committee may recommend. The board may propose to replace such nominee or, if none, the nominating and governance committee will recommend that the size of the board be reduced. We know of no reason why any of the nominees will be unavailable or unable to serve.

 

The names of the nominees and the directors whose terms of office will continue after the 2007 annual meeting, their principal occupations during the past five years, other directorships held and certain other information are set forth below.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF DIRECTORS NAMED IN PROPOSAL 1.

 

Standing for Election — Class III, Terms Expire May 2010

 

Kathleen B. Cooper, Age 62

 

Director since September 2006. Dr. Cooper is the dean of the College of Business Administration at the University of North Texas and has served in that capacity since October 2005. From 2001 - 2005, she was the under secretary for economic affairs at the U.S. Department of Commerce.

 

William R. Granberry, Age 64

 

Director since November 2005. Mr. Granberry is a member of Compass Operating Company, LLC, an oil and gas exploration, development and producing company with operations in West Texas and Southeast New Mexico. From 1999 through September 2004 he managed investments and consulted with oil and gas companies. Mr. Granberry was president and chief operating officer of Tom Brown, Inc. from 1996 to 1999. Tom Brown, Inc. was an oil and gas company with exploration, development, acquisition and production activities throughout the central United States.

 

Charles M. Lillis, Age 65

 

Director since 2000. Dr. Lillis is a co-founder and principal of LoneTree Capital Management LLC, a private equity investing group with headquarters in Denver, Colorado. He is also a co-founder and partner of Castle Pines Capital, a group providing creative financial solutions for distribution channels. Dr. Lillis served as the chairman of the board and chief executive officer of MediaOne Group, Inc. from its inception in 1995 through the acquisition of MediaOne by AT&T Corp., which was completed in 2000. Dr. Lillis is a director of SUPERVALU Inc., Medco Health Solutions, Washington Mutual and SomaLogic Inc.

 

William G. Lowrie, Age 63

 

Director since 2003. Mr. Lowrie is a retired deputy chief executive officer of BP Amoco PLC, where he spent his entire 33-year career holding various positions of increasing responsibility at Amoco. Mr. Lowrie also serves on the board of The Ohio State University Foundation.

 

Directors Continuing in Office

 

Irl F. Engelhardt, Age 60, Class II, Term Expires May 2009

 

Director since July 2005. Mr. Engelhardt has served as chairman of Peabody Energy Corporation or its predecessor companies since 1993, and as chief executive officer from 1990 to 2005. He serves on the boards of directors of Peabody Energy and Valero Energy Corporation and is chairman of The Federal Reserve Bank of St. Louis.

 

William E. Green, Age 70, Class II, Term Expires May 2009

 

Director since 1998. Mr. Green is founder of William Green & Associates, a Palo Alto, California law firm and has been with the firm since 1974. He also serves as vice president, general counsel and secretary of AIM

Broadcasting, LLC. He is a former trustee of Rochester Savings Bank. Mr. Green serves on the boards of Kids in Common, Inc. and Philanthropic Ventures, Inc.

 

W.R. Howell, Age 71, Class II, Term Expires May 2009

 

Director since 1997. Mr. Howell is chairman emeritus of J.C. Penney Company, Inc., a major retailer. He was chairman of the board and chief executive officer of J.C. Penney from 1983 to 1996. He is a director of American Electric Power Company, ExxonMobil Corporation, Halliburton Company and Pfizer, Inc. He is also a director of Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas, non-public wholly-owned subsidiaries of Deutsche Bank AG.

 

George A. Lorch, Age 65, Class II, Term Expires May 2009

 

Director since 2001. Mr. Lorch is chairman emeritus of Armstrong Holdings, Inc. From 1996 through April 2000, he served as chairman of the board and chief executive officer of Armstrong World Industries, Inc. He served as chairman of the board and chief executive officer of Armstrong Holdings, Inc. from May to August of 2000. Mr. Lorch serves on the boards of Pfizer, Inc., and Autoliv, Inc. He also serves on the boards of HSBC Finance and HSBC North America Holding Co., both UK entities of HSBC LLC London. Neither are publicly held companies.

 

Juanita H. Hinshaw, Age 62, Class I, Term Expires May 2008

 

Director since 2004. Ms. Hinshaw is the retired senior vice president and chief financial officer of Graybar Electric Company. She joined Graybar Electric Company in May 2000. Graybar Electric Company is an employee owned provider of electrical and telecommunications product distribution services. Prior to joining Graybar Electric Company, she was with Monsanto Company for fifteen years. She also serves on the board of directors of Insituform Technologies, Inc., IPSCO, Inc. and SYNERGETICS USA, INC.

 

Frank T. MacInnis, Age 60, Class I, Term Expires May 2008

 

Director since 1998. Mr. MacInnis is chairman of the board and chief executive officer of EMCOR Group, Inc., one of the world’s largest electrical and mechanical construction and facilities management groups, and has been since 1994. Mr. MacInnis is also chairman of the board and chief executive officer of ComNet Communications, Inc. He is also a director of ITT Inc. and the Greater New York Chapter of the March of Dimes.

 

Steven J. Malcolm, Age 58, Class I, Term Expires May 2008

 

Director since 2001. Mr. Malcolm was elected chief executive officer of Williams in January 2002 and chairman of the board in May 2002. He was elected president and chief operating officer of Williams in September 2001. Prior to that, he was an executive vice president of Williams since May 2001, president and chief executive officer of Williams Energy Services, LLC, a subsidiary of Williams, since December 1998 and the senior vice president and general manager of Williams Field Services Company, a subsidiary of Williams since November 1994. Mr. Malcolm also serves on the boards of BOK Financial Corporation and Bank of Oklahoma N.A.

 

Janice D. Stoney, Age 66, Class I, Term Expires May 2008

 

Director since 1999. Ms. Stoney retired as executive vice president of U S WEST Communications, Inc. in 1992. She also serves on the board of directors of Whirlpool Corporation, Gordman’s and Swanson Corp.

 

Our board takes corporate governance very seriously and is committed to sound corporate governance practices. The board of directors has the responsibility for establishing broad corporate policies and for our overall performance and the operation of the company by the chief executive officer (“CEO”) and other officers. Our directors have the responsibility of evaluating and approving our business strategies and financial objectives and for monitoring their successful execution. They are responsible for succession planning for management and assessing the performance of the CEO and setting compensation accordingly, as well as reviewing senior executive officers’

goals and compensation. Our directors focus on ensuring that we have the best management processes in place to run the company legally, ethically and successfully. The board is concerned about stockholder value, employee attitudes, customers, suppliers and the communities in which we operate. Our corporate governance guidelines are available on our website at http://www.williams.com and are also attached as Appendix A to this proxy statement.

 

The board understands and expects that a director who has a material change in his or her status including a change in his or her principal business association will promptly offer his or her resignation from the board in order to provide the nominating and governance committee the opportunity to assess each situation based on the individual circumstances and make a recommendation to the board as to whether to accept the resignation. The board is free to accept or reject the resignation.

 

Majority Vote Standard

 

The board has amended our by-laws to adopt a majority vote standard for the election of directors in uncontested elections. The board also revised our corporate governance guidelines to provide for director resignations in the event a director fails to receive a majority of the votes cast in an uncontested election. We hold an irrevocable resignation for each director. 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 tendered 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 tendered resignation, the nominating and governance committee shall recommend to the board whether to fill such vacancy or reduce the size of the board.

 

Board Meetings

 

The full board met ten times in 2006. Further, the non-management directors met six times without the chairman of the board and chief executive officer present. No director attended fewer than 85% of the aggregate of the board and committee meetings held in 2006.

 

Our board members actively participate in board and committee meetings. Generally, materials are distributed to our board members one week in advance of each regular board meeting. To facilitate active participation, board members are expected to review the materials in advance of the meetings. The board and each of the board committees also conduct self-assessments. The nominating and governance committee also conducts individual director evaluations of all directors.

 

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. A mid-year review of progress on objectives and strategies is conducted. During board meetings, directors review key issues and financial performance. The board meets privately with the CEO six times per year and meets in executive session at each board meeting and additionally as required. The board assesses CEO performance and oversees executive officer development and succession. Further, the CEO communicates regularly with the members of the board via e-mail or fax on important business opportunities and developments. In 2006, the board also held two of its regularly scheduled meetings at one of our field locations to further the directors’ education about our operations.

 

Director Independence

 

The board of directors has adopted director independence standards, which are available on our website at http://www.williams.com and attached as Attachment A to our corporate governance guidelines attached as Appendix A to this proxy statement.

 

The board of directors has affirmatively determined that each of Dr. Cooper, Mr. Engelhardt, Mr. Granberry, Mr. Green, Ms. Hinshaw, Mr. Howell, Dr. Lillis, Mr. Lorch, Mr. Lowrie, Mr. MacInnis and Ms. Stoney is an “independent director” under the current listing standards of the New York Stock Exchange (“NYSE”) and our

director independence standards. In so doing, the board determined that each of these individuals met the “bright line” independence standards of the NYSE. In addition, the board considered transactions and relationships between each director and any member of his or her immediate family and the company and its affiliates and subsidiaries. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. The board considered the fact that Mr. Howell also serves on the boards of American Electric Power Company, Inc., ExxonMobil Corporation and Halliburton, each of which is a customer of ours or performs services for us. The board considered the fact that Dr. Lillis serves on the board of Medco Health Solutions, Inc., a company that provides services to the company. The board also considered the fact that Mr. Engelhardt also serves on the board of Valero Energy Corporation, which is a customer or performs services for us. The board noted that, since Messrs. Engelhardt and Howell and Dr. Lillis do not serve as executive officers and do not own a significant amount of stock of any of these companies, these relationships are not required to be reported under the caption “Certain Relationships and Related Transactions” in this proxy statement. Accordingly, the board concluded that these relationships are not material and affirmatively determined that all of the directors mentioned above are independent. Mr. Malcolm is not considered to be independent because of his employment as an executive officer of the company.

 

No member of our board of directors serves as an executive officer of any non-profit organization to which we made contributions within any single fiscal year of the preceding three years that exceeded the greater of $1 million or 2% of such organization’s consolidated gross revenues. Further, in accordance with the director independence standards, the nominating and governance committee 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 impact the directors’ independence.

 

Director Attendance at Annual Meeting of Stockholders

 

We have a policy regarding board member attendance at our annual meeting of stockholders. All board members are expected to attend our annual meeting of stockholders. All of the then-current board members attended the 2006 annual meeting of stockholders.

 

Lead Director

 

Mr. W. R. Howell currently serves as the lead director. The lead director presides over executive sessions of the independent directors, consults with our chairman of the board and our secretary to establish an agenda for each board meeting, oversees the flow of information to the board, acts as liaison between the independent directors and management and is available to consult and communicate with stockholders as appropriate.

 

Board Committees

 

The board has established standing committees to consider designated matters. The committees of the board are audit, compensation, finance, and nominating and governance. The board has also established an ad hoc litigation committee. In accordance with our by-laws, the board annually elects from its members the members and the chairman of each committee. The board has determined that each of the members of the audit committee, compensation committee, and nominating and governance committee is independent as defined by the rules of the NYSE. The standing committees report to the full board at each regular board meeting.

 

Board Committee Membership and Number of Meetings in 2006

 

The following is a description of each of the committees and committee membership as of December 31, 2006.

 

 

 

 

Audit Committee

 

Our board has determined that all members of the audit committee are financially literate as defined by the rules of the NYSE. The audit committee is governed by a written charter approved by the board. Among its duties and responsibilities, the audit committee is responsible for appointing, setting compensation and overseeing the work of Ernst & Young LLP, our independent auditors. It also discusses our earnings press releases and our policies with respect to risk assessment and management and has certain oversight responsibilities with respect to our internal auditor. Further, information regarding the functions performed by the audit committee is set forth in the “Report of the Audit Committee” included in this proxy statement and the audit committee charter. The audit committee charter is available on our website at http://www.williams.com and is attached as Appendix B to this proxy statement.

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditors.  The audit committee is responsible for appointing, setting compensation and overseeing the work of Ernst & Young LLP, our independent auditors. The audit committee has established a policy regarding pre-approval of all audit and non-audit services provided by Ernst & Young LLP.

 

On an ongoing basis, our management presents specific projects and categories of service to the audit committee for which advance approval is requested. The audit committee reviews those requests and advises management if the audit committee approves the engagement of Ernst & Young LLP. On a periodic basis, our management reports to the audit committee regarding the actual spending for such projects and services compared to the approved amounts. The audit committee may also delegate the ability to pre-approve audit and permitted non-audit services, excluding services related to the company’s internal control over financial reporting, to a subcommittee of one or more committee members, provided that any such pre-approvals are reported on at a subsequent audit committee meeting. In 2006, 100% of Ernst & Young LLP’s fees were pre-approved by the audit committee.

 

Our audit committee’s pre-approval policy with respect to audit and non-audit services is attached as Attachment A to Appendix B to this proxy statement.

 

Transactions with Related Persons.  The board has adopted written policies and procedures with respect to related person transactions. The policies and procedures are part of the audit committee charter. See Attachment C to the audit committee charter attached as Appendix B to this proxy statement. The audit committee is responsible for reviewing all transactions with related persons, promoters and certain control persons. The chair of the audit committee is responsible to review related person transactions in the event it is impractical to convene a committee meeting prior to entering into a related person transaction. The audit committee or the chair in good faith shall

approve only those related person transactions that are in, or not inconsistent with our best interests and the best interests of our stockholders. Any proposed related person transaction involving a member of the board of directors or our chief executive officer shall be reviewed and approved by the full board of directors.

 

Audit Committee Financial Expert and Independence.  The board has determined that Ms. Juanita H. Hinshaw, Mr. Irl F. Engelhardt and Dr. Charles M. Lillis qualify as “audit committee financial experts” as defined by the rules of the SEC. All members of the audit committee are independent of management as defined by the rules of the NYSE.

 

Simultaneous Service on Audit Committees.  The board has determined that the simultaneous service on four public company audit committees by Ms. Juanita H. Hinshaw does not impair her service on our audit committee.

 

Compensation Committee

 

The compensation committee oversees and directs 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:

 

 

— Setting corporate goals and objectives for compensation;

 

 

 

 

 

A more complete description of the compensation committee’s responsibilities and functions is summarized in the compensation committee’s charter, which can be found on our website at http://www.williams.com. The charter provides that the compensation committee has full authority to engage independent advisors and consultants and provides for at least annual committee evaluations. The compensation committee charter does not provide for any delegation of the committee’s duties.

 

The compensation committee has retained the services of Mercer Human Resource Consulting, an independent executive compensation consulting firm to provide:

 

 

The consultant was selected by the compensation committee and, reports to the chairman of the compensation committee. The compensation committee has the authority to determine the scope of the consulting firm’s services and retains the right to terminate the consultant’s engagement at any time. Mercer Human Resource Consulting also performs limited compensation services for the company.

 

Consistent with the listing requirements of the NYSE, the compensation committee is composed entirely of independent, non-employee members of the board of directors. Each year, we review any and all relationships that each director may have with the company and the board of directors reviews the company’s findings. The board of directors has determined that none of the compensation committee members has any material business relationships with the company. During 2006, none or our executive officers served on the compensation committee (or any committee performing equivalent functions, or the board of directors, or any other entity whose executive officers served on the compensation committee or on our board of directors.

 

In most cases, our chief executive officer provides recommendations to the compensation committee on compensation issues involving our executive officers other than the CEO. The compensation committee, or in the case of the CEO, the independent members of the full board, makes the final decisions on material compensation issues for all or our executive officers, including the CEO. Further detail is provided in the section entitled “Compensation Discussion and Analysis.”

 

Finance Committee

 

The finance committee has the primary responsibility for overseeing appropriate alignment between our financing strategies and our business units’ operating plans and acquisitions or other investment opportunities, as well as reporting to the full board, as appropriate, that the key elements of our balance sheet are structured in a manner that allow the business units’ operating plans and investment opportunities to be executed.

 

A copy of the governing charter of the finance committee is available on our website at http://www.williams.com. The charter provides that the finance committee has full authority to engage independent advisors and consultants and provides for at least annual committee evaluations.

 

Nominating and Governance Committee

 

The nominating and governance committee’s governing charter is available on our website at
http://www.williams.com. The charter provides that the nominating and governance committee has full authority to engage independent advisors and consultants. The nominating and governance committee is responsible for identifying and recommending candidates to fill vacancies on the board as such vacancies occur, as well as the slate of nominees for election as directors by the stockholders at each annual meeting of stockholders. Additionally, the nominating and governance committee recommends to the board the individual to be the chairman of the board and CEO. The nominating and governance committee reviews and reports to the board on a periodic basis regarding matters of corporate governance. The nominating and governance committee is responsible for reviewing annually and making recommendations to the board as to whether each non-management director is independent as defined by the NYSE and our director independence standards and otherwise qualified in accordance with applicable law or regulation. The nominating and governance committee also is responsible for reviewing the compensation of non-management directors and recommending changes in non-management director compensation to the board of directors. The nominating and governance committee also reviews the continuing qualifications of incumbent directors including any changes to a director’s primary activity and all board committee charters for effective corporate governance. The nominating and governance committee evaluates annually the performance of the nominating and governance committee and the board as a whole. The code of business conduct and ethics is reviewed for compliance annually and changes are recommended to the board as necessary.

 

Mercer Human Resource Consulting, the same consultant that provides services to the compensation committee, also provides competitive market data and advice to the nominating and governance committee on non-management director compensation.

 

Consideration of nominees.  For board membership, the nominating and governance committee considers the appropriate balance of experience, skills and characteristics that best suits our needs and the needs of our stockholders. The nominating and governance committee develops long-term board succession plans to ensure that the appropriate balance is maintained. The nominating and governance committee is committed to nominating candidates that are independent as defined by the rules of the NYSE and our director independence standards. The nominating and governance committee also seeks to ensure that each member of the audit committee meets the financial literacy requirements of the NYSE and that at least one audit committee member qualifies as an “audit committee financial expert” under the SEC’s rules.

 

Qualifications of nominees.  The nominating and governance committee seeks director candidates with the following qualifications:

 

 

Stockholder nominations.  The nominating and governance committee will consider written recommendations from stockholders for director nominations. You should submit any recommendations to our secretary at One Williams Center, MD 47, Tulsa, Oklahoma 74172. In accordance with our by-laws, written recommendations from stockholders for director nominations for consideration at our 2008 annual meeting must be submitted between January 16, 2008, and February 15, 2008.

 

The recommendation must set forth:

 

 

The proposal must also set forth the following information as to the stockholder giving the notice:

 

 

 

The notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

 

Identification and evaluation of nominees.  The nominating and governance committee identifies candidates who meet the qualifications for selection as a nominee and possess the specific experience, skills and characteristics being sought based on input from board members and others. The nominating and governance committee has retained a search firm to assist the committee in identifying, recruiting and evaluating director candidates meeting the committee’s criteria. In 2006, the nominating and governance committee paid fees to the search firm to assist with identifying and evaluating director candidates including Dr. Kathleen Cooper.

 

In evaluating director candidates, regardless of the source of the nomination, the nominating and governance committee will consider:

 

 

Director candidates are evaluated by the nominating and governance committee by reviewing all available biographical information and qualifications and checking references. 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. Using all available information, the nominating and governance committee evaluates the candidates to determine if they are qualified to serve as a director and whether they should be recommended to the full board for nomination for election by the stockholders or appointed to fill a vacancy.

 

To date, the company has not received any stockholder recommendations for director nominees. The same evaluation process will be used by the nominating and governance committee to evaluate stockholder nominees.

 

Stock Ownership Guidelines

 

The board recommends that all directors, consistent with their responsibilities to the stockholders of the company as a whole, hold an equity interest in the company by acquiring and holding company stock with a value equivalent to three times the annual director retainer, exclusive of committee or committee chair fees, paid to each director in the company’s most recently completed full fiscal year. Non-management directors should satisfy this standard within five years from the date the director joins the board or the adoption of the policy in November 2005. The board also recommends that all executive officers, consistent with their responsibilities to the stockholders of the company as a whole, hold an equity interest in the company. Accordingly, the chief executive officer should acquire and hold company stock with a value equivalent to five years’ base salary. Each other executive officer of the company should acquire and hold company stock with a value equivalent to three years’ base salary. Executive officers should satisfy this standard within five years from the date of becoming an executive officer or the adoption of the policy in November 2005. All executive officers were in compliance with the stock ownership guidelines upon adoption. All directors, with the exception of the directors appointed after 2003, are in compliance with the stock ownership guidelines.

 

Communications with Directors

 

Any stockholder or other interested party may communicate with our directors, individually or as a group, by contacting our secretary or the lead director. The contact information is maintained on the Investor page of our website at http://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: brian.shore@williams.com

 

All such communications will be forwarded to the relevant director(s) except for solicitations or other matters not related to our company.

 

Other Corporate Governance Information

 

We have established a program for new director orientation. The orientation program includes private meetings with senior management for each business segment to ensure that the new director becomes familiar with our businesses.

 

We have adopted a guideline limiting the number of public boards on which our directors may serve to no more than five (including our board). All directors were in compliance with the guideline upon adoption.

 

We have adopted rules of conduct that are applicable to our in-house and outside attorneys who are practicing before the Securities and Exchange Commission (“SEC”) on our behalf.

 

We have also established disclosure committees that are designed to ensure full and timely disclosure of information in all public filings.

 

We believe the corporate governance guidelines and other steps taken by the board and the company help ensure sound governance practices.

 

Compensation of Directors

 

Management directors receive no additional compensation for serving on the board or board committees. For their service, non-management directors receive $110,000 annual retainer, half paid in cash and half in stock and a stock option grant of 6,000 shares. The chairpersons of the compensation, finance, and nominating and governance committees also receive an annual retainer of $10,000. The chairperson of the audit committee also receives an annual retainer of $15,000. In addition, the lead director receives a retainer of $20,000. The compensation received by each director in 2006 is outlined in the table below:

 

 

 

 

Subject to shareholder approval of the 2007 Incentive Plan, for their service non-management directors effective May 17, 2007, will receive $110,000 annual retainer, ($75,000 paid in cash and $35,000 paid in stock retainer) and 3,000 restricted stock units. The chairpersons of the compensation, finance and nominating and governance committees will also receive an additional annual retainer of $10,000. The chairperson of the audit committee will also receive an additional annual retainer of $15,000. In addition, the lead director will receive a retainer of $20,000.

 

The following table sets forth certain information with respect to the outstanding equity awards held by the directors at the end of 2006.

 

Outstanding Awards as of Fiscal Year End 2006

 

 

Introduction

 

We are focused on expanding the business and executing our strategy for growth and value creation. Our executive compensation program is designed to attract, retain, and motivate key talent with the leadership and skills necessary for successful implementation of our strategy and long-term success of our company.

 

Effective in 2004 we adopted Economic Value Added (EVA^®) as a management tool. We believe that EVA^® aligns management’s interests closely with the interests of stockholders and is the best driver of stockholder value at this time for our company. Stated simply, EVA^® is the difference between profits from operations and the opportunity cost associated with the capital employed in those operations. We believe that over time improvement in EVA^® corresponds with growth in stockholder value.

 

EVA^® is part of our culture and has created improved financial discipline including allocation of capital, which has proved beneficial in positioning the company for future growth and creating value for our stockholders. Through our emphasis on EVA^®, our operating managers consider both the earnings and cash flow they generate and the associated capital required. Specifically our focus on EVA^® has strengthened our ability to:

 

 

To be effective as a management tool we believe EVA^® must be part of the culture and be incorporated into management reporting, operations, and compensation.

 

In addition to financial performance and other business objectives, our executives must demonstrate high ethical standards, take actions in the interest of the entire company, and build both the future leadership team and business.

 

Our executive compensation program is administered by the compensation committee of our board of directors. The role of the compensation committee is to oversee and direct the design and implementation of strategic compensation programs aligning the interests of our executive officers with those of our stockholders. Please refer to the compensation committee section for a discussion of the process followed by the compensation committee.

 

The Company’s Executive Compensation Philosophy

 

The compensation committee uses several different compensation elements that are linked to both our short- and long-term performance in the executive compensation program.

 

The following principles influence the design and administration of our executive compensation program:

 

Compensation should reinforce our business objectives and values

 

Compensation programs should reinforce our business strategy and long-term stockholder value creation. As discussed above we believe a focus on EVA^® improvement drives desired outcomes. Additionally compensation programs should support and reward achieving business objectives consistent with our core values.

 

A significant portion of an executive officer’s total compensation should be variable based on performance

 

A significant portion of a named executive officer’s compensation should be tied not only to company performance, but also business unit and individual performance against both financial and non-financial goals and objectives When our performance is better than the objectives established for the relevant performance period, executive officers should be paid more than the initial target award (typically set at the competitive median). When our performance does not meet key objectives, incentive award payments should be less than target.

 

Incentive compensation should balance short-term, intermediate, and long-term performance

 

The design of our executive compensation program seeks to strike a balance between achieving strong short-term, or annual, results and ensuring our long-term viability and success. The mix of components varies each year based on competitive market conditions and strategic business needs.

 

Incentives should align interest of executives with stockholders

 

Incentives should be designed to link the interest of named executive officers to our stockholders. This should be accomplished through performance measures that drive long-term value creation and programs that facilitate executive stock ownership.

 

Compensation opportunity should be competitive

 

To attract and retain executive talent, named executive officers should have market competitive compensation opportunities. Actual compensation earned should be dependent on performance.

 

Material Elements of the Executive Compensation Program

 

The material elements of our executive compensation program are:

 

 

Base Salary.  Base salary serves as the foundation of our compensation program. Most other major components of compensation are determined based on a relationship to base salary, including annual and long-term incentives, termination payments, and retirement benefits. Base salary is the part of cash compensation paid to a named executive officer based upon that officer’s responsibilities, experience, sustained individual performance, and contributions to the company.

 

Base salary levels, as well as annual and long-term incentive opportunities, are determined using competitive market information as a starting point. We develop competitive market data from nationally recognized third-party executive compensation surveys in our industry, as well as general industry for positions where the compensation committee believes the company competes more broadly for executive talent. The committee’s compensation

consultant reviews the market data provided by management, and also provides information on compensation levels and incentive program design from our industry comparator group. Our comparator group is developed by the committee’s consultant, with input from management, and is approved by the committee. This year’s comparator group includes 21 companies, consisting of a mix of both direct competitors and similar-sized companies (in terms of annual revenues) within the broader energy industry. Each year the committee reviews the comparator group to validate the list of comparator companies and make any changes if appropriate.

 

The CEO reviews the competitive market information for the other named executive officers and develops recommended salary levels based on market data, internal equity, and individual performance. Internal equity means maintaining an appropriate relationship between the compensation levels for the named executive officers. The compensation committee reviews the CEO’s recommendations, supporting market data, individual performance information, and approves compensation for each executive. Market data for the CEO is provided by the compensation committee’s outside consultant. Any base salary change made by the compensation committee is developed and approved in executive session without management present, taking into consideration the competitive market and performance. Base salaries for the named executive officers, including the CEO, are set comparable to the market median, with potential individual variation from median due to experience, skills, and contribution as part of our pay-for-performance philosophy.

 

Annual Cash Incentives.  Over the past several years as we have improved our financial health, annual cash incentives have been a key component to support implementation of EVA^® and our business strategy. Annual cash incentives are intended to provide incentives to our named executive officers to make decisions that drive performance on an annual basis, and translate to EVA^® improvement, which leads to enhanced stockholder value.

 

Similar to base salary, the starting point to determine annual cash incentive opportunity (expressed as a percent of base salary) is competitive market information. Using the published survey and comparator group information described under Base Salary, the CEO, in conjunction with Human Resources, develops recommended annual incentive targets based on competitive market information, internal equity and individual performance. The compensation committee reviews and discusses the CEO’s recommendations and approves the annual incentive targets for the other named executive officers. Based on competitive market information provided by the compensation committee’s outside consultant, the compensation committee determines, in executive session without management present, the annual incentive opportunity for the CEO. Annual incentive targets are set consistent with the market median with above-median compensation opportunity for exceptional performance.

 

Since we implemented EVA^® the annual incentive program has been funded upon attainment of an established EVA^® improvement target. Applying EVA^® measurement to this annual incentive process encourages management to make and apply capital decisions that help drive long-term stockholder value. EVA^® is based on the idea of economic profit, namely, that earning profits from an economic as opposed to an accounting perspective requires that a company cover not only all its operating expenses but also all its capital costs. These capital costs include elements such as interest payments and the opportunity cost of equity capital. There are two main components of EVA^®: Net Operating Profit after Taxes (NOPAT) and a capital charge.

 

The general NOPAT calculation begins with segment profit, which is then adjusted for items such as general corporate expense, capitalized interest, interest income on investments, minority interest, equity allowance for funds used during construction, dividend and other income, and income from discontinued operations, and then an economic tax rate is applied. NOPAT may also be adjusted for other items to eliminate unearned windfalls or undue penalties that are not within management’s control. Examples of these adjustments include certain gains, losses and impairments related to assets, unrealized gains and losses from mark-to-market accounting, commodity prices, construction work-in-progress, and other unusual items. Examples of other unusual items include certain litigation matters, natural disasters, and early debt retirement expense.

 

The capital charge has two primary components: capital employed and the cost of capital. Capital employed is multiplied by the cost of capital to compute a capital charge. The general capital employed calculation begins with total assets and subtracts all non-interest bearing liabilities and minority interest. Other adjustments are then made. Examples of these other adjustments include certain cumulative gains or losses on asset sales, mark-to-market accounting, construction work-in-progress, and other unusual items. The cost of capital includes the after-tax cost

of debt and the cost of equity. We use a model, known as the Capital Asset Pricing Model, as an input in estimating the cost of capital.

 

Determination of EVA^® improvement goals for the annual incentive plan begins with our internal planning process and evaluation of the challenges and opportunities for the company as well as each of our business units. EVA^® improvement goals are presented to the compensation committee which reviews and approves them at the beginning of each fiscal year.

 

Shown in the chart below are the EVA^® improvement goals for the 2006 annual cash incentive and the resulting payout level:

 

 

Based on the significant improvement in EVA^®, the compensation committee certified performance results of $234 million in EVA improvement and approved a payout level at 198% of target. The strong EVA^® performance was reflected in:

 

 

The annual incentive pool funds up to a maximum of 400% of target for executive officers. Any award earned above 200% of target is placed in a reserve. The reserve amounts will be paid only if future EVA^® threshold levels are met. The purpose of the reserve is to ensure EVA^® improvements in a single year are sustained over a longer period of time. In years where threshold EVA^® performance is met, one-third of the reserve balance is paid in cash. No interest is applied to the reserve balance and the balance is forfeited if the executive leaves other than for retirement, death, or long-term disability, which provides a retention element to the program.

 

Actual awards earned by our named executive officers are based on our EVA^® improvement and an assessment of individual performance. The CEO reviews the individual performance of each named executive officer which includes business unit EVA^® improvement for the business unit leaders and performance of key executive competencies. Executive competencies address how our executives accomplish their objectives, such as how they communicate both inside and outside the organization, effectiveness in building successful teams and potential successors, and other areas of leadership. The CEO may modify the individual awards either up or down based on overall performance and accomplishment of an individual’s executive competencies. The modifications made are fairly modest and in 2006 were less than 25% of target. The compensation committee reviews the CEO’s

recommendations, discusses individual performance, and approves annual incentive payments for the named executive officers.

 

The full board meets in executive session without management present each year to review the CEO’s performance. The session, which is led by the lead director, is conducted without the CEO present. In this session, the board reviews:

 

 

The compensation committee uses this evaluation to make similar adjustments to the CEO’s annual cash incentive award. This review and determination is made in executive session without management present. The compensation committee also has discretion to reduce any annual incentive award if it believes that a reduction is appropriate.

 

We and the compensation committee recognize that EVA^® is a complex financial measure and believe it has been a major contributor to our recent financial success. In any incentive program, there are adjustments to the calculations to reflect extraordinary items. When determining which adjustments are appropriate, we are guided by the principle of ensuring that incentive payments do not result in unearned windfalls or undue penalties. We believe the adjustments improve the alignment of incentives with stockholder value creation. The categories of adjustments to the EVA^® calculation are:

 

 

Examples of unusual items include certain litigation matters, natural disasters, and early debt retirement expenses.

 

We have retained our independent accountants to perform certain agreed-upon procedures related to our EVA^® calculations and provide a report to our management. The agreed upon procedures include comparing components of the EVA^® calculation to our established guidelines and procedures, recalculating certain amounts related to our EVA^® calculations, and comparing certain amounts used in our EVA^® calculations to our underlying books and records.

 

In addition to these agreed-upon procedures, management as well as the compensation committee’s outside consultant test our relative performance on various measures, including total stockholder return, to an industry comparator group to ensure improvements in EVA^® performance are consistently delivering stockholder value. The compensation committee uses these analyses to test our EVA^® improvement targets.

 

Annual incentives are designed to satisfy the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code and are therefore a tax deductible expense.

 

Long-Term Incentives.  The purpose of long-term incentives is to align pay with stockholder return, drive sustained performance, create significant and consistent incentives for executive retention, and promote stock ownership.

 

To determine the annual grant value for long-term incentives we consider the following factors:

 

 

 

Long-term incentive levels for the named executive officers other than the CEO are recommended by the CEO based on competitive market data, discussed under Base Salary, and internal equity. The compensation committee approves all grants for the named executive officers and determines the grants for the CEO based on market data provided by its outside compensation consultant. In addition to the market data the compensation committee considers performance, compensation mix, and the resulting total direct compensation levels. In general long-term incentive grant values are set consistent with the market median with opportunity for above-median realized compensation when warranted by performance.

 

When determining compensation mix, we believe that the majority of compensation should be variable based on performance and should include equity which links executives to stockholders. Shown below is the mix for 2006 target total direct compensation:

 

 

The long-term incentive program balances a focus on stock price appreciation and operating and financial performance. It includes three forms of long-term incentive, stock options, performance-based restricted stock units and time-based restricted stock units, to achieve this balance and meet our objectives for the program. The current mix and design has evolved over the past three years from a larger portion of the mix in time-based restricted stock units to a greater emphasis on performance-based equity. The long-term incentive mix for the CEO differs from the other named executive officers due to the desire to have 100% of his long-term incentive directly performance-based. Shown in the chart below is the approximate long-term incentive mix in 2006, as well as the performance drivers and objectives for each plan:

 

 

 

 

To determine the actual number of shares for each form of equity, we calculate the number of shares first by determining the total dollar value of equity to be granted based on the target incentive as a percent of base salary. We then divide that total dollar value among different forms of equity (stock options, time-based restricted stock units, and performance-based restricted stock units) based upon the mix of long-term incentives approved by the compensation committee. We convert dollar value to a number of restricted stock units by dividing the dollar value

by the 20-day moving average of the stock price calculated five days prior to the grant date, and we do the same for stock options using a Black-Scholes value for the stock options.

 

Stock options have value only to the extent the price of our common stock on the date of exercise exceeds the exercise price. Stock options granted in 2006 become exercisable in three equal annual installments beginning one year after the grant date.

 

We typically grant equity compensation in February or early March of each year.

 

The grant date of equity compensation is at least two days after the release of year-end earnings, or the compensation committee meeting where the grants are approved if that meeting is after the earnings release. The grant date for off-cycle grants for individuals that are not executive officers, for reasons such as retention or new hires, is the first business day of the month following the approval of the grant. The purpose of this approach is to remove option grant timing from the influence of the release of material information. The compensation committee approves all equity grants to executive officers and the grant date for such awards is on or after the date such approval is obtained taking into consideration the influence of the release of material information.

 

To further strengthen the relationship between pay and performance, the performance-based restricted stock units are earned only upon our attaining specific EVA^® improvement goals and the named executive officer’s continued employment. Actual performance against EVA^® improvement goals between threshold and stretch levels would result in executives earning between 0% (threshold achievement) and 200% (stretch achievement) of the target shares. Unearned units would be forfeited at the end of the three year performance period.

 

Three-year EVA^® improvement is used as a long-term performance measure to further drive and reinforce actions leading to desired EVA^® results and to extend this focus over multiple years. This longer-term EVA^® focus is intended to help achieve sustained financial improvement and align with longer-term stockholder interest.

 

In developing three-year performance expectations the committee considers circumstances facing the company and each business unit, as well as challenges facing the industry. EVA^® improvement is required for these awards to be earned. 2006 was the first year we implemented a program with three-year EVA^® goals. Our intent is to establish three-year goals each year where the probability or level of difficulty to achieve target is consistent. In setting these goals, we expect that the performance will be at the threshold level (to achieve a minimum payout) about 10-20% of the time, that the performance will be at the stretch level (to achieve a maximum or 200% payout) about 10-20% of the time, and that performance will be at the target level (to achieve a 100% payout) about 70-80% of the time.

 

For awards granted in 2006, three-year performance will be the cumulative EVA^® improvement for 2006 through 2008, as approved by the compensation committee at the end of the period. When calculating EVA^® performance the adjustments and discretion described under Annual Cash Incentives will apply to this program. Individual performance is not included in determining the actual number of shares earned.

 

Time-based restricted stock unit awards provide for the future receipt of shares of our common stock and will be earned by an executive officer only if the individual continues to be employed by the company. These grants were introduced in 2002, primarily as a retention device during a period of uncertainty and instability in our executive population. We continue to utilize this type of equity primarily for retention purposes due to continued volatility in the industry and executive movement, but as mentioned above have gradually reduced its importance over the past three years. In addition to retention, time-based restricted stock units facilitate stock ownership.

 

During the three-year performance period for performance-based restricted stock units and the vesting period for time-based restricted stock units, each unit entitles the recipient to receive quarterly payments from the company equal to the quarterly dividends on one share of our common stock. For restricted stock unit awards made in 2007 and thereafter, the recipients will not be entitled to receive similar dividend equivalents.

 

When designing all aspects of compensation we consider the impact of accounting and tax treatment, but the primary driver of program design is the support of business objectives. Stock options and performance-based restricted stock units are intended to satisfy the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code and are therefore considered a tax deductible expense. Time-based restricted stock units do not qualify as performance-based and therefore are not fully deductible.

 

Other Benefits.  Consistent with the compensation committee’s philosophy to maximize pay at risk, our executives do not receive a large number of perquisites or supplemental benefits. Perquisites for the named executive officers include financial planning services and limited personal use of the company aircraft. Financial planning benefits are provided to reduce the distraction to named executive officers of managing personal finances and complex compensation programs. Personal use of company aircraft is intended to enhance productivity during travel time and for security reasons for the CEO.

 

Named executive officers participate in our qualified retirement program on the same terms as our other employees. The Internal Revenue Code limits the pension benefits based on the annual compensation limit that can be accrued in tax-qualified defined benefit plans, such as our pension plan. Any reduction in an executive officer’s pension benefit accrual due to these limits will be compensated for under an unfunded supplemental retirement plan. Our executive retirement program is purely a restoration plan to provide proportional level retirement benefits to those provided to other employees. Because there is no benefit enhancement incorporated in the program, the benefit formula does not consider gains from option or stock awards for executive officers, which is consistent with the treatment for all employees.

 

Additional Executive Compensation Policies

 

In addition to establishing the compensation elements described above, we have adopted a number of policies to further the goals of the executive compensation program, particularly with respect to strengthening the alignment of our executive officers’ interests with stockholder long-term interests.

 

Stock Ownership Guidelines

 

In 2005, the board adopted stock ownership guidelines for all executive officers. All executive officers, consistent with their responsibilities to the stockholders as a whole, must hold an equity interest in the company. Specifically the CEO must own an amount of stock equal to at least five years’ base salary. Other executive officer ownership must equal at least three years’ base salary.

 

Shares owned outright, unvested performance-based and time-based restricted stock units count as owned for purposes of this program. Existing executives have five years from the adoption of the guidelines to accumulate the required shares. New executives are allowed five years from the date of election, promotion to executive officer, or commencement of employment as an executive officer to accumulate the required shares. Once the requirement is met, the individual is considered to be in compliance if the executive continues to hold the number of shares or value necessary to fulfill the requirement.

 

Annually the compensation committee reviews the guidelines for competitiveness and alignment with best practice and monitors the executive officers’ progress toward meeting the guidelines. The compensation committee maintains discretion to modify the guidelines in special circumstances of financial hardship such as illness of the executive or a family member. All executive officers complied with the guidelines upon their adoption in 2005.

 

Derivative Transactions

 

Our insider trading policy prohibits all executive officers from entering into derivative transactions such as short sales where the value is based on the performance or price of our common stock.

 

Employment Agreements

 

Under our business philosophy, in general, we do not enter into employment agreements with our executive officers. This policy enables us to remove an executive officer prior to retirement whenever it is in the best interests of the company, with full discretion to decide on a severance package for that individual (excluding vested benefits). When an executive officer is removed from his or her position, the compensation committee exercises its business judgment in approving an appropriate severance arrangement for the individual in light of all relevant circumstances, including his or her term of employment, past accomplishments, reasons for separation from the company, and competitive market practice.

 

Change-in-Control Agreements

 

Our change-in-control program provides severance benefits for our named executive officers if, within two years following a change in control of Williams, their employment is terminated (1) involuntarily other than for cause, death, disability, or the sale of a business, or (2) voluntarily for good reason. Our program includes a double trigger (requires both a change-in-control and termination of named executive officer’s employment) for benefits and equity vesting to create security for the executives but not provide an incentive to leave the company. We have this program to provide security to our named executive officers during periods of change-in-control so that they focus on the business and we retain those individuals during that period and the transition to new ownership.

 

Each year the compensation committee reviews the change-in-control program and the value of potential awards. This analysis and assessment of competitiveness is conducted by an outside compensation consulting firm (not the compensation committee’s consultant). The review in 2006 found the current program to be within competitive norms for design and cost.

 

Section 162(m)

 

Section 162(m) of the Internal Revenue Code generally limits deductions by publicly held corporations for federal income tax purposes to $1 million of compensation paid to each of the executive officers listed in the corporation’s summary compensation table unless such excess compensation is “performance based” as defined in Section 162(m). In order for compensation to qualify as “performance based,” among other requirements, the performance goals must be (a) approved by stockholders and (b) set (and in the case of options, the options must be granted) by a compensation committee consisting solely of two or more outside directors (as defined in Section 162(m)). The committee generally intends to grant awards under the proposed 2007 Incentive Plan to the CEO and those executives expected to be the other four highest compensated officers each year in a manner consistent with the terms of Section 162(m) and the performance-based exception, so that such awards will not be subject to the $1 million limit. The committee will review from time to time in the future the potential impact of Section 162(m) on the deductibility of executive compensation. However, the committee intends to maintain the flexibility to take actions that we consider to be in the best interests of the company and our stockholders and which may be based on considerations in addition to tax deductibility.

 

Total Compensation

 

In addition to the competitive review summarized under each element of compensation, further steps are taken to evaluate total compensation including:

 

 

Additional detail on these efforts and the compensation committee’s process can be found in “Corporate Governance-Board Committees-Compensation Committee” elsewhere in this proxy.

 

Based on these analyses the compensation committee determines whether the overall compensation program is reflective of our guiding principles and supports our business strategy.

 

 

 

By the members of the compensation committee of the board of directors:

 

— Kathleen B. Cooper

— W. R. Howell, chairman

— George A. Lorch

— Frank T. MacInnis

— Janice D. Stoney

 

The following table sets forth certain information with respect to the compensation of the chairman of the board, president and CEO, the chief financial officer and the three most highly compensated executive officers other than the CEO and CFO, based on total compensation excluding change in pension value and nonqualified deferred compensation earned during fiscal year 2006, for their services with us in all capacities during the 2006 fiscal year.

 

2006 Summary Compensation Table

 

 

 

Stock Awards

 

 

The assumptions used to value the stock awards can be found in Note 13 to the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2006.

 

Option Awards

 

 

The assumptions used to value the option awards can be found in Note 13 to the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year-ended December 31, 2006.

 

Non-equity Incentive Plan

 

 

The amount paid in 2007 is related to the 2006 bonus as well as a portion of the remaining reserves and is as follows:

 

 

Pension and Non-Qualified Deferred Compensation

 

 

All Other Compensation

 

 

The following table sets forth certain information with respect to the grant of stock options, restricted stock units and awards payable under the company’s annual incentive program during the last fiscal year to the named executive officers.

 

Grants of Plan Based Awards in Fiscal Year 2006

 

 

 

Non-Equity Incentive Awards

 

 

Equity Incentive Awards

 

 

The following table sets forth certain information with respect to the outstanding equity awards held by the named executive officers at the end of 2006.

 

Outstanding Equity Awards at 2006 Fiscal Year End