PRELIMINARY PROXY MATERIALS DATED MARCH 9, 2010
SUBJECT TO COMPLETION

 

 

March   , 2010

 

Dear Fellow Stockholder:

 

Our 2010 Annual Meeting of Stockholders will be held at the Toy F. Reid Employee Center, located at 400 South Wilcox Drive, in Kingsport, Tennessee, on May 6, 2010, at 11:30 a.m. Doors to the meeting will open at 10:30 a.m. The business to be considered and voted upon at the meeting is explained in this proxy statement. A copy of Eastman’s 2009 Annual Report to Stockholders is also included with these materials.

 

Your vote is important for this year’s annual meeting, regardless of the number of shares you own. Signing and returning a proxy card or submitting your proxy by Internet or telephone in advance of the meeting will not prevent you from voting in person, but will assure that your vote is counted if you are unable to attend the meeting. Whether you choose to vote by proxy card or electronically by telephone or the Internet, I urge you to vote as soon as possible. If you are a record holder of Eastman stock, an admission ticket for the meeting is included with your proxy card or electronic form of proxy. Please bring this ticket with you if you plan to attend the meeting in person. If you received our proxy materials from a broker or bank and do not have an admission ticket but wish to attend the meeting, please call (423) 229-4647.

 

Thank you for your support of our Company.

 

Sincerely,

 

 

 

J. Brian Ferguson

Executive Chairman

 

 

EASTMAN CHEMICAL COMPANY

200 South Wilcox Drive

Kingsport, Tennessee 37662

(423) 229-2000

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 6, 2010

 

 

 

To Our Stockholders:

 

The 2010 Annual Meeting of Stockholders of Eastman Chemical Company (“Eastman” or the “Company”) will be held at the Toy F. Reid Employee Center, located at 400 South Wilcox Drive, Kingsport, Tennessee, on May 6, 2010, at 11:30 a.m., local time. The purposes of the meeting are:

 

 

Only stockholders of record at the close of business on March 10, 2010 are entitled to vote at the meeting. It is important that your shares be represented and voted at the meeting. Please vote by proxy in one of these ways:

 

 

Signing and returning the proxy card or submitting your proxy electronically by Internet or telephone does not affect your right to vote in person if you attend the meeting.

 

By order of the Board of Directors

 

 

Theresa K. Lee

Chief Legal Officer and Corporate Secretary

 

March   , 2010

 

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS OF

EASTMAN CHEMICAL COMPANY

TO BE HELD ON MAY 6, 2010

 

 

INFORMATION ABOUT THE MEETING AND VOTING

 

Proxy Statement and Annual Meeting

 

This proxy statement is dated March  , 2010 and is first being mailed and delivered electronically to Eastman stockholders, and made available on the Internet at the Company’s website (www.eastman.com) and at www.ReadMaterial.com/EMN, on or about March  , 2010. Our Board of Directors (the “Board”) is furnishing you this proxy statement in connection with its solicitation of proxies to be voted at the Annual Meeting of Stockholders of the Company to be held on May 6, 2010, and at any adjournments or postponements of the meeting. A proxy statement is a document that Securities and Exchange Commission (“SEC”) regulations require us to give you when we ask you to vote your stock by proxy. At the meeting, stockholders will be asked to consider and vote on the items of business listed and described in this proxy statement.

 

Voting By Proxy

 

A proxy is a legal designation of another person to vote the stock you own. That other person is called a proxy. If you designate someone as your proxy in a written document, that document is also called a proxy, a proxy card, or a form of proxy.

 

By completing and returning your proxy (either by returning the paper proxy card or by submitting your proxy electronically via the Internet, or by telephone), you appoint Curtis E. Espeland, the Company’s Chief Financial Officer, and Theresa K. Lee, the Company’s Chief Legal Officer and Corporate Secretary, to represent you at the meeting and direct them to vote your shares at the meeting according to your instructions. Shares of common stock represented by proxy will be voted by the proxy holders at the meeting in accordance with your instructions as indicated in the proxy. If you properly execute and return your proxy (in paper form or electronically by the Internet or telephone) but do not indicate any voting instructions, your shares will be voted in accordance with the recommendations of the Board as to the matters identified in this proxy statement and in the best judgment of the proxy holders as to any other matters.

 

If your shares are registered in your name, you are a stockholder of record. Stockholders of record may vote by proxy in one of three ways:

 

 

If you received via Internet the Important Notice Regarding Availability of Proxy Materials, follow the instructions on that notice to access an electronic form of proxy. The Internet and telephone voting procedures are designed to authenticate stockholder identities, to allow stockholders to give voting instructions, and to confirm that stockholders’ instructions have been recorded properly.

 

If your shares are held in “street name” through a broker, bank or other holder of record, you will receive instructions from that registered holder that you must follow in order for your shares to be voted for you by that record holder. Telephone and Internet voting may be offered to stockholders who own their shares through certain brokers and banks.

 

How to Revoke Your Proxy

 

You may revoke your proxy at any time before its exercise at the meeting by:

 

 

All written notices of revocation or other communications with respect to revocation of proxies should be sent to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Corporate Secretary, so that they are received before the meeting.

 

Record Date; Stockholders Entitled to Vote; Voting Rights

 

The record date for the 2010 Annual Meeting of Stockholders is March 10, 2010. Owners of record of common stock at the close of business on the record date are entitled to receive notice of the meeting and to vote at the meeting. The record date is established by the Board as required by Delaware law. If your shares are held in “street name” through a broker, bank or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the meeting.

 

On the record date, there were           shares of common stock issued and outstanding. Holders of common stock are entitled to one vote on each of the three director-nominees, and one vote on each other matter voted upon at the meeting for each share of common stock they hold of record on the record date.

 

Quorum

 

The presence, in person or by proxy, of the holders of a majority of the shares of common stock entitled to vote at the meeting is necessary to constitute a quorum to conduct business. Abstentions and “broker non-votes” will be counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when a registered holder (such as a broker or bank) holding shares in “street name” for a beneficial owner does not vote on a particular proposal because the registered holder does not have discretionary voting power for that particular item and has not received voting instructions from the beneficial owner. Banks and brokers which have not received voting instructions from their clients cannot vote on their clients’ behalf on the election of directors or on the stockholder proposal, but may vote their clients’ shares on the ratification of the appointment of independent auditors and the proposal to amend the Certificate of Incorporation.

 

Vote Required for Approval of Matters to be Considered

 

Each director who receives a majority of votes cast (number of shares voted “for” exceeds the number of shares voted “against”) will be elected as a director. With respect to the election of directors, stockholders may by proxy (1) vote “for” all three of the nominees, (2) vote “against” all three of the nominees, (3) vote “against” any individual nominee or nominees but vote “for” the other nominee(s), or (4) “abstain” from voting on one or more nominees. Shares not present, in person or by proxy, at the meeting and abstentions will have no effect on the outcome of the election of directors. Similarly, any broker non-votes are not considered to be votes cast and therefore will have no effect on the outcome of the election of directors.

 

The affirmative vote of a majority of the votes cast is required for each of the ratification of the appointment of independent auditors and the recommendation of the stockholder proposal. With respect to each of these items, stockholders may (1) vote “for,” (2) vote “against,” or (3) “abstain” from voting. Abstentions and broker non-votes are not considered to be votes cast and therefore will have no effect on the outcome of these proposals.

 

The affirmative vote of a majority of shares outstanding and entitled to vote at the meeting is required to approve the amendment to the Certificate of Incorporation to permit holders of 25% of shares to call a special meeting. Stockholders may (1) vote “for”, (2) vote “against”, or (3) “abstain” from voting on the proposed amendment. Abstentions and broker non-votes will have the same effect as a vote against the proposal to approve the amendment to the Certificate of Incorporation.

 

Proxy Solicitation Costs

 

We will bear the cost of soliciting proxies and the cost of the meeting. In addition to the solicitation of stockholders by mail and electronic means, proxies may be solicited by telephone, facsimile, personal contact, and similar means by our directors, officers, or employees, none of whom will be specially compensated for these activities. We have also contacted brokerage houses, banks, nominees, custodians, and fiduciaries which can be identified as record holders of common stock. Such holders, after inquiry by us, have provided certain information concerning beneficial owners not objecting to the disclosure of such information and the quantities of proxy materials and annual reports needed to supply such materials to beneficial owners, and we will reimburse such record holders for the expense of providing such beneficial ownership information and of mailing or otherwise delivering proxy materials and annual reports to beneficial owners. We have retained Georgeson Inc. to assist with the solicitation of proxies and vote projections for a fee of $18,500 plus reimbursement of out-of-pocket expenses.

 

Matters Raised at the Annual Meeting Not Included in this Proxy Statement

 

We do not expect any business to be acted upon at the meeting other than as described in this proxy statement. If, however, other matters are properly brought before the meeting, the persons appointed as proxies will have the discretion to vote or act on those matters for you according to their best judgment.

 

Stockholder Proposals for the 2011 Annual Meeting

 

In accordance with rules of the SEC, if you wish to submit a proposal for presentation at Eastman’s 2011 Annual Meeting of Stockholders, it must be received by the Company at its principal executive offices on or before November 25, 2010 in order to be included in the Company’s proxy materials relating to its 2011 Annual Meeting of Stockholders. Any such proposal should be sent to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Corporate Secretary.

 

In addition, our Bylaws require that a proposal to be submitted by a stockholder for a vote of the Company’s stockholders at an annual meeting of stockholders, whether or not also submitted for inclusion in the Company’s proxy materials, must be preceded by adequate and timely notice to the Corporate Secretary of the Company. To be adequate, the notice must set forth certain information specified in our Bylaws about the stockholder and the proposal. The Bylaws are available through the “Investors — Corporate Governance” section of the Company’s website, and also will be provided to any stockholder upon written request to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor Relations. To be timely, the notice must be delivered to the Corporate Secretary of the Company not less than 45 days prior to the day of the month on which the notice of the immediately preceding year’s annual meeting of stockholders was first sent to the stockholders of the Company. If, as expected, notice of the 2010 Annual Meeting of Stockholders is first sent to stockholders on March   , 2010, then such advance notice would be timely if delivered on or before February   , 2011.

 

Nominations by Stockholders for Election to the Board of Directors

 

Our Bylaws provide that nominations by stockholders of persons for election to the Board may be made by giving adequate and timely notice to the Corporate Secretary of the Company. To be adequate, the nomination notice must set forth certain information specified in our Bylaws about each stockholder submitting a nomination and each person being nominated. The Bylaws are available through the “Investors — Corporate Governance” section of the Company’s website, and also will be provided to any stockholder upon written request to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor Relations. To be timely, the nomination notice must be delivered to the Corporate Secretary of the Company not less than 45 days prior to the day of the month on which the notice of the immediately preceding year’s annual meeting of stockholders was first sent to the stockholders of the Company. If, as described above, the notice of the 2010 Annual Meeting of Stockholders is first sent to stockholders on March   , 2010, then such notice would be timely if delivered on or before February   , 2011. The Nominating and Corporate Governance Committee of the Board will consider persons properly and timely nominated by stockholders and recommend to the full Board whether such nominee should be included with the Board’s nominees for election by stockholders.

 

Annual Report to Stockholders, Annual Report on Form 10-K, and Corporate Governance Materials

 

Our Annual Report to Stockholders for 2009, including our consolidated financial statements for the year ended December 31, 2009, is being mailed and delivered electronically to stockholders, and made available on the Internet at the Company’s website and at www.ViewMaterial.com/EMN, concurrently with this proxy statement but does not form any part of any proxy solicitation material. The Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC is also available via the Internet at the Company’s website (www.eastman.com) and at the SEC’s website (www.sec.gov).

 

We also make available free of charge, through the “Investors — Corporate Governance” section of the Eastman website, the Company’s Corporate Governance Guidelines, the charters of each of the committees of the Board, and codes of business conduct and ethics for our directors, officers, and employees. Such materials are also available in print upon written request of any stockholder to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Investor Relations.

 

Communications to the Board of Directors

 

Stockholders, and other interested parties, may communicate with non-management directors in writing by directing such communications to the Chair of the Nominating and Corporate Governance Committee, Eastman Chemical Company, P.O. Box 1976, Kingsport, Tennessee 37662-5075 or by telephone toll free by calling 800-782-2515. Any communications concerning substantive Board or Company matters are promptly forwarded by the office of the Corporate Secretary to the Chair of the Nominating and Corporate Governance Committee, and the office of the Corporate Secretary keeps and regularly provides to the Chair of the Nominating and Corporate Governance Committee a summary of any communications received.

 

PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING

 

ITEM 1 — ELECTION OF DIRECTORS

 

The Company’s Certificate of Incorporation divides the Board into three classes, with the terms of office of the respective classes ending in successive years. Under the Company’s Bylaws, a director reaching age 70 during any term of office continues to be qualified to serve only until the next annual meeting of stockholders following his or her 70th birthday (or, if approved by unanimous action of the Board, until the next annual meeting following his or her 71st birthday). Unless additional terms of office are approved by the Board in certain circumstances, the maximum number of consecutive full three-year terms of office that may be served by any director (other than a director who is the Chief Executive Officer) is three.

 

Four directors are in the class for which the term in office expires at the 2010 Annual Meeting, and three of these four directors have been nominated for reelection for a new three-year term. Under the Board retirement and term limit policies, Peter M. Wood, whose current term expires at the 2010 Annual Meeting, is not standing for reelection. The terms of the other eight directors continue after the meeting.

 

Stockholders are being asked to vote on the election of three directors to the class for which the term of office shall expire at the 2013 Annual Meeting of Stockholders and their successors are duly elected and qualified. If any nominee is unable or unwilling to serve (which we do not anticipate), the persons designated as proxies will vote your shares for the remaining nominees and for another nominee proposed by the Board or, as an alternative, the Board could reduce the number of directors to be elected at the meeting.

 

Majority Vote Standard for Election of Directors.  The Company’s Bylaws provide that directors be elected by a majority of votes cast by stockholders. If a nominee who is serving as a director is not reelected by a majority of votes cast at a meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under the director election provision of our Bylaws, any incumbent director who does not receive a majority of votes cast in favor of reelection and whose successor has not been elected by stockholders would be required to offer to resign from the Board. The Nominating and Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board would act on the recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation would not participate in the Board’s decision. If a nominee who was not already serving as a director was not elected at an annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2010, all nominees for director are currently serving on the Board.

 

The nominees have been recommended to the Board of Directors by the Nominating and Corporate Governance Committee of the Board. The Board of Directors recommends that you vote “FOR” election of the three nominees identified below.

 

Set forth below is information about each director nominated for reelection or whose term in office will continue after the meeting.

 

The Board of Directors and Corporate Governance

 

The Board is elected by the stockholders to oversee management and to assure that the long-term interests of the stockholders are being served. The primary role of the Board is to maximize stockholder value over the long-term. Eastman’s business is conducted by its employees, managers, and officers, under the direction of the Chief Executive Officer and the oversight of the Board. The Nominating and Corporate Governance Committee of the Board periodically reviews and assesses the Company’s Corporate Governance Guidelines and governance practices.

 

The Board held five meetings during 2009. Each director attended at least 75% of the aggregate of the total number of meetings of the Board and the total number of meetings held by all committees of the Board on which he or she served. The Board meets before each annual meeting of stockholders, and the directors in attendance at such Board meeting attend the annual meeting of stockholders. All directors then in office attended the 2009 Annual Meeting of Stockholders.

 

Board Leadership Structure

 

The Chairman of the Board provides leadership to the Board and works with the Board to define its structure and activities in the fulfillment of its responsibilities. The Company believes that the members of the Board possess considerable experience and unique knowledge of the challenges and opportunities the Company faces, and therefore are in the best position to evaluate the needs of the Company and how best to organize the capabilities of our directors and senior executives to meet those needs. As a result, the Company believes that the decision as to who should serve as Chairman and as Chief Executive Officer, and whether the offices should be combined or separate, is properly the responsibility of the Board, to be exercised from time to time in appropriate consideration of then-existing facts and circumstances. Our Corporate Governance Guidelines provide the Board the flexibility to determine whether or not the separation or combination of the Chairman and Chief Executive Officer offices is in the best interests of the Company.

 

Our current Chief Executive Officer, James P. Rogers, was appointed to the Board on December 8, 2008, the date he was elected by the Board to serve as Chief Executive Officer of the Company (with such election being effective May 7, 2009). Our current Executive Chairman of the Board, J. Brian Ferguson, served as both our Chief Executive Officer and Chairman until May 7, 2009, at which time his appointment as Executive Chairman became effective. Given his recent years of service to Eastman, his significant breadth and depth of knowledge of the Company, and his current leadership in the chemical industry, as well as the efficiencies that his continued service to the Company provides, the Board deemed it appropriate that he continue to serve as Executive Chairman through 2010.

 

In order to give a significant voice to our non-management directors, our Corporate Governance Guidelines provide for executive sessions of our non-management directors at each regular meeting of our Board. These Guidelines specifically provide for the appointment of a presiding director to lead all executive sessions of non-management directors. In order to best manage such sessions, the presiding director of each such executive session is the Chair of the Committee with authority and expertise pertinent to the subject matters to be discussed or, if the subjects to be addressed do not directly pertain to one of the Committees, a presiding director is appointed by the Chairman of the Board on a rotating basis. The Executive Chairman and the Chairs of the Board Committees serve as liaisons between management and the independent directors, approve information to be sent to the Board and its Committees, approve meeting agendas, and have the authority to call meetings. Additionally, interested parties, including our stockholders, may communicate directly with non-management directors by mail or phone, with such communication being directed to the Chair of the Nominating and Corporate Governance Committee.

 

We believe that the foregoing structure, policies, and practices, when combined with the Company’s other governance policies and procedures, provide appropriate opportunities for oversight, discussion, and evaluation of decisions and direction from the Board.

 

Risk Oversight

 

The Board maintains oversight responsibility for the management of the Company’s risks, and oversees an enterprise-wide approach to risk management, designed to provide a holistic view of organizational objectives, including strategic objectives, to improve long-term organizational performance, to prioritize and manage identified risks, and to enhance stockholder value. A fundamental part of risk management is not only understanding the risks the Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The full Board reviews with management its process for managing enterprise risk. Additionally, the Audit Committee is charged with overseeing our risk management process each year, including ensuring that management has instituted processes to identify major risks and has developed plans to manage such risks and reviewing with management the identified most significant risks and management’s plans for addressing and mitigating the potential effects of such risks. During the Company’s risk management review process, risk is assessed throughout our entire business, and is reported to a management corporate risk committee comprised of members of our various business units and control functions. Risks that are identified as “high-level” risks are reported to the Audit Committee and thereafter assigned, as appropriate, to various of the Board’s Committees, or to the Board as a whole, for further review, analysis, and development of appropriate plans for management and mitigation of the identified risks.

 

While the Board maintains the ultimate oversight responsibility for risk management, each of the various Committees of the Board have been assigned responsibility for risk management oversight of specific areas. In particular, and in addition to its responsibility to conduct an annual assessment of the risk management process and report its findings to the Board, the Audit Committee maintains responsibility for overseeing risks related to the Company’s financial reporting, audit process, and internal controls over financial reporting and disclosure controls and procedures. The Finance Committee has oversight responsibility related to the Company’s financial position and financing activities, including such areas as raw material and energy costs and large capital projects. The Health, Safety, Environmental and Security Committee assists the Board in fulfilling its oversight responsibility with respect to health, safety, environmental and security issues that affect the Company and works closely with the Company’s legal and regulatory management with respect to such matters. In addition, in setting compensation, the Compensation and Management Development Committee endeavors to develop a program of incentives that encourage an appropriate level of risk-taking behavior consistent with the Company’s long-term business strategy and also reviews the leadership development of our employees. Finally, the Nominating and Corporate Governance Committee conducts an annual assessment of nominees to our Board and is charged with developing and recommending to the Board corporate governance principles and policies and Board Committees structure, leadership, and membership, including those related to, affecting, or concerning the Board’s and its Committees’ risk oversight.

 

Director Independence

 

The Board and its Nominating and Corporate Governance Committee have reviewed the standards of independence for directors established by applicable laws and regulations, including the listing standards of the New York Stock Exchange, and by the Company’s Corporate Governance Guidelines and have reviewed and evaluated the relationships of directors with the Company and its management. Based upon this review and evaluation, the Board has determined that none of the current non-employee members of the Board has a relationship with the Company or its management that would interfere with such director’s exercise of independent judgment, and that each non-employee member of the Board is an independent director.

 

In making this determination, the Nominating and Corporate Governance Committee and the Board reviewed and evaluated all direct and indirect transactions and relationships between the Company and non-employee directors and their affiliates and immediate family members. Under the New York Stock Exchange listing standards and the Corporate Governance Guidelines, an “independent” director is one who has “no direct or indirect material relationship with the Company or its management” and who:

 

 

Transactions with Directors, Executive Officers, and Related Persons

 

As described above, at least annually the Board reviews and evaluates all current and recent past transactions involving the Company in which non-management directors and their affiliates (including immediate family members and other firms, corporations, or entities with which the director has a relationship) have or had a direct or indirect interest. The Board also reviews any such transactions and relationships in which executive officers of the Company or members of their immediate families have or had an interest. In the most recent such review, the Board considered purchases and sales of products and services in the ordinary course of business to and from companies of which non-employee directors were executive officers. Each such transaction was below the thresholds of the categorical standards listed above and determined by the Board not to be a material transaction or relationship.

 

Written Company policies require approval by the Board (in the case of the Chief Executive Officer) or senior management (in the case of all other employees) of each transaction in which an employee has a direct or indirect financial or other personal interest, and restrict direct or indirect reporting relationships between immediate family member employees.

 

Board Committees

 

The Board has an Audit Committee, a Nominating and Corporate Governance Committee, a Compensation and Management Development Committee, a Finance Committee, and a Health, Safety, Environmental and Security Committee. All committee members are non-employee, independent directors. The written charter of each committee of the Board is available in the “Investors — Corporate Governance” section of the Company’s Internet website (www.eastman.com).

 

Audit Committee.  The members of the Audit Committee are Ms. Hornbaker (Chair) and Messrs. Anderson, Hernandez, Kling, and McLain. The Audit Committee held 10 meetings during 2009. The purpose of the Audit Committee is to assist the Board in fulfilling the Board’s oversight responsibilities relating to:

 

 

The Board of Directors has determined that each current member of the Audit Committee is “independent” and that each of Ms. Hornbaker and Messrs. Anderson, Hernandez, and McLain is an “audit committee financial expert” under applicable provisions of the New York Stock Exchange’s listing standards and the Securities Exchange Act of 1934. In making such determination, the Board took into consideration, among other things, the express provision in Item 407(d) of SEC Regulation S-K that the determination that a person has the attributes of an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on such person as a member of the Audit Committee and the Board of Directors, nor shall it affect the duties and obligations of other Audit Committee members or the Board.

 

Audit Committee Report

 

The Audit Committee has reviewed and discussed with the Company’s management and PricewaterhouseCoopers LLP, the Company’s independent auditors, the audited financial statements of the Company contained in the Company’s Annual Report to Stockholders for the year ended December 31, 2009. The Audit Committee has also discussed with the Company’s independent auditors the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

 

The Audit Committee has received and reviewed the written disclosures and the letter from PricewaterhouseCoopers LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding PricewaterhouseCoopers LLP’s communications with the Audit Committee concerning independence and has discussed with PricewaterhouseCoopers LLP their independence. The Audit Committee has also considered whether the provision of non-audit services to the Company by PricewaterhouseCoopers LLP is compatible with maintaining their independence.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC.

 

Audit Committee

Renée J. Hornbaker (Chair)

Gary E. Anderson

Robert M. Hernandez

Lewis M. Kling

Thomas H. McLain

 

Nominating and Corporate Governance Committee.  The members of the Nominating and Corporate Governance Committee are Messrs. Lance (Chair), Connors, Demeritt, Raisbeck, and Wood. The Nominating and Corporate Governance Committee held four meetings during 2009. The purpose of the Nominating and Corporate Governance Committee is to:

 

 

Director Nominations.  The Nominating and Corporate Governance Committee is responsible for reviewing and recommending to the Board potential directors who possess the skills, knowledge, and understanding necessary to be valued members of the Board in order to assist it in successfully performing its role in corporate oversight and governance. The Nominating and Corporate Governance Committee considers not only an individual director’s or possible nominee’s qualities, performance, and professional responsibilities, but also the then-current composition of the Board and the challenges and needs of the Board as a whole in an effort to ensure that the Board, at any time, is comprised of a diverse group of members who, individually and collectively, best serve the needs of the Company and its stockholders. In general, and in giving due consideration to the composition of the Board at that time, the desired attributes of individual directors, including those of any nominees of stockholders, are as follows:

 

 

 

 

The Nominating and Corporate Governance Committee will consider persons nominated by stockholders and recommend to the full Board whether such nominee should be included with the Board’s nominees for election by stockholders. The Board and the Nominating and Corporate Governance Committee have from time to time engaged the services of director search firms to assist in the identification of qualified potential director nominees.

 

Compensation and Management Development Committee.  The members of the Compensation and Management Development Committee (the “Compensation Committee”) are Messrs. Connors (Chair), Demeritt, Lance, Raisbeck, and Wood. The Compensation Committee held six meetings during 2009. The purpose of the Compensation Committee is to establish and administer the Company’s policies, programs, and procedures for evaluating, developing, and compensating the Company’s senior management. Among other things, the Compensation Committee discharges the Board’s responsibilities relating to compensation of the Company’s executive officers, reviews and approves the adoption of cash and equity-based incentive management compensation plans, and oversees the administration of the Company’s benefits plans.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” which appears later in this proxy statement. Based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC and in this proxy statement.

 

Compensation and Management Development Committee

Michael P. Connors (Chair)

Stephen R. Demeritt

Howard L. Lance

David W. Raisbeck

Peter M. Wood

 

Finance Committee.  All of the directors except Messrs. Ferguson and Rogers are members, and Mr. Anderson is the Chair, of the Finance Committee. The Finance Committee held four meetings during 2009. The purpose of the Finance Committee is to review with management and, where appropriate, make recommendations to the Board regarding the Company’s financial position and financing activities, including consideration of the Company’s financing plans, corporate transactions (including acquisitions and divestitures), capital expenditures, financial status of the Eastman Retirement Assistance Plan (the Company’s defined benefit pension plan), payment of dividends, and use of financial instruments, commodity purchasing, and other hedging arrangements and strategies to manage exposure to market risks.

 

Health, Safety, Environmental and Security Committee.  All of the directors except Messrs. Ferguson and Rogers are members, and Mr. McLain is the Chair, of the Health, Safety, Environmental and Security Committee. The Health, Safety, Environmental and Security Committee held two meetings during 2009. The purpose of the Health, Safety, Environmental and Security Committee is to review with management and, where appropriate, make recommendations to the Board regarding the Company’s policies and practices concerning health, safety, environmental, security and sustainability matters.

 

Director Compensation

 

The following table sets forth certain information concerning compensation of the Company’s non-employee directors for 2009. Directors who are also employees of the Company receive no Board or committee fees.

 

Director Compensation for Year Ended December 31, 2009

 

 

 

 

Director Retainer		$	90,000
“Event” Fee (Per Event)			1,500
Chair Retainer — Audit Committee			18,000
Chair Retainer — Compensation and Management Development Committee			12,000
Chair Retainer — Nominating and Corporate Governance Committee			9,000
Chair Retainer — Finance Committee			9,000
Chair Retainer — Health, Safety, Environmental and Security Committee			9,000
Audit Committee Member Retainer			9,000

 

 

 

ITEM 2 — RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Audit Committee of the Board of Directors has retained PricewaterhouseCoopers LLP to serve as independent auditors for the year ending December 31, 2010.

PricewaterhouseCoopers LLP also served as the Company’s independent auditors for the years ended December 31, 2009 and 2008, and has billed the Company the following amounts for fees and related expenses for professional services rendered during 2009 and 2008:

 

Audit Fees:  $4.8 million, in the aggregate, for the year ended December 31, 2009 and $5.6 million, in the aggregate, for the year ended December 31, 2008 for professional services rendered for the audits of the consolidated financial statements of the Company (including the audit of internal controls over financial reporting), statutory and subsidiary audits, issuance of comfort letters, and assistance with review of documents filed with the SEC.

 

Audit-Related Fees:  $110,700, in the aggregate, for the year ended December 31, 2009 and $63,500, in the aggregate, for the year ended December 31, 2008 for assurance and related services, including employee benefit plan audits, other audit procedures, and consultations concerning financial accounting and reporting standards. In addition, various employee benefit plans were billed for fees and related expenses of $203,000 for 2009 and $218,000 for 2008 for audits of their plan financial statements by PricewaterhouseCoopers LLP.

 

Tax Fees:  $1.1 million, in the aggregate, for the year ended December 31, 2009 and $1.5 million, in the aggregate, for the year ended December 31, 2008 for services related to tax compliance, including expatriate tax services and preparation of tax returns and claims for refunds, tax planning and tax advice, assistance with respect to tax audits, and requests for rulings for technical advice from tax authorities.

 

All Other Fees:  $12,375 , in the aggregate, for the year ended December 31, 2009 and $17,900, in the aggregate, for the year ended December 31, 2008 for all services other than those covered above under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees.” “All Other Fees” for 2009 and 2008 were for services related to technology access and conference fees.

 

All audit and non-audit services provided to the Company by the independent auditors are pre-approved by the Audit Committee or in certain instances by the Chair of the Audit Committee pursuant to delegated authority. At the beginning of each year, the Audit Committee reviews and approves all known audit and non-audit services and fees to be provided by and paid to the independent auditors. During the year, specific audit and non-audit services or fees not previously approved by the Audit Committee are approved in advance by the Audit Committee or by the Chair of the Audit Committee pursuant to delegated authority. In addition, during the year the Chief Financial Officer and the Audit Committee monitor actual fees to the independent auditors for audit and non-audit services.

 

The stockholders are being asked to ratify the Audit Committee’s appointment of PricewaterhouseCoopers LLP. If the stockholders fail to ratify this appointment, the Audit Committee may, but is not required to, reconsider whether to retain that firm. Even if the appointment is ratified, the Audit Committee in its discretion may direct the appointment of a different accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.

 

A representative of PricewaterhouseCoopers LLP is expected to attend the meeting and will have the opportunity to make a statement on behalf of the firm if he desires to do so. The representative is also expected to be available to respond to appropriate questions from stockholders.

 

The Board of Directors recommends that you vote “FOR” ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors.

 

ITEM 3 — APPROVAL OF AN AMENDMENT TO CERTIFICATE OF INCORPORATION TO
PERMIT HOLDERS OF 25% OF SHARES TO CALL A SPECIAL MEETING

 

The Company’s Certificate of Incorporation currently provides that a special meeting of stockholders may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board then in office. The Board is committed to sound corporate governance practices and is mindful of the approval by a majority of votes cast, although less than a majority of shares outstanding, at our 2009 Annual Meeting of Stockholders of a stockholder proposal to allow the holders of 10% of our outstanding common shares to call a special meeting. Following careful consideration of the implications of that proposal, the Board, upon the recommendation of the Nominating and Corporate Governance Committee, has determined that it is appropriate

to propose an amendment to the Company’s Certificate of Incorporation to allow the holders of not less than 25% of our outstanding common shares to call a special meeting.

 

The Board believes that establishing an ownership threshold of 25% of our outstanding common shares for the right to call a special meeting strikes a reasonable balance between ensuring accountability to stockholders and protecting against the risk that a small minority of stockholders could call special meetings in order to advance their own, potentially conflicting, interests that could be extremely disruptive to the conduct of the Company’s operations, require significant attention from our Board and management, create major confusion for other stockholders, and impose significant administrative and financial burdens on the Company. We believe that allowing holders of 25% of outstanding shares to call a special meeting, when added to our other existing governance mechanisms, will afford management and the Board the ability to respond to proposals and concerns of all stockholders, regardless of their level of share ownership.

 

The Company’s Bylaws also currently provide that a special meeting of stockholders may be called only by the Board. If this proposal is approved by stockholders, our Board will amend our Bylaws to allow the holders of not less than 25% of our outstanding common shares to call a special meeting of stockholders. In such event, the Bylaws will also be amended to provide for advance notice procedures for special meetings similar to those currently in place for stockholders to bring an item of business for an annual meeting.

 

The text of the proposed amendments to the Company’s Certificate of Incorporation and Bylaws, each marked to show the proposed changes, are attached as Appendix A to this proxy statement. If adopted by stockholders, the proposed amendment to the Certificate of Incorporation, and the related amendment to the Bylaws, will become effective upon filing of a certificate of amendment with the Secretary of State of Delaware. We anticipate that this filing would be made as promptly as reasonably practicable following the 2010 Annual Meeting.

 

The Board of Directors recommends that you vote “FOR” adoption of this proposal to approve an amendment to the Certificate of Incorporation to permit holders of 25% of shares to call a special meeting.

 

ITEM 4 — PROPOSAL REQUESTING THAT THE BOARD TAKE STEPS NECESSARY TO ELECT EACH DIRECTOR ANNUALLY

 

Stockholder Gerald R. Armstrong, 910 Sixteenth Street, No. 412, Denver, Colorado 80202-2917, owner of 98 shares of Eastman common stock, has given notice that he intends to submit the following proposal and supporting statement:

 

RESOLUTION

 

That the shareholders of EASTMAN CHEMICAL COMPANY ask our Company to take the steps necessary to reorganize the Board of Directors into one class with each Director being subject to election, or re-election, each year and to complete this proposed transition within one-year.

 

STATEMENT

 

This proposal received more than 58% support of shares at the 2008 annual meeting and proposals often receive higher votes on subsequent presentations.

 

The Council of Institutional Investors, www.cii.org, recommends that management adopt shareholder proposals upon receiving their first majority vote and adoption of annual election of each director.

 

The current practice of electing only one-third of the directors for three-year terms is not in the best interest of the corporation or its shareholders. Eliminating this staggered system increases accountability and gives shareholders the opportunity to express their views on the performance of each director annually. The proponent believes the election of directors is the strongest way that shareholders influence the direction of any corporation and our corporation should be no exception.

 

As a professional investor, the proponent has introduced the proposal at several corporations which have adopted it. In others, opposed by the board or management, it has received votes in excess of 70% and is likely to be reconsidered favorably.

The proponent believes that increased accountability must be given our shareholders whose capital has been entrusted in the form of share investments especially during these times of great economic challenge.

 

Arthur Levitt, former Chairman of The Securities and Exchange Commission said, “In my view, it’s best for the investor if the entire board is elected once a year. Without annual election of each director, shareholders have far less control over who represents them.”

 

While management may argue that directors need and deserve continuity, management should become aware that continuity and tenure may be best assured when their performance as directors is exemplary and is deemed beneficial to the best interests of the corporation and its shareholders.

 

The proponent regards as unfounded the concern expressed by some that annual election of all directors could leave companies without experienced directors in the event that all incumbents are voted out by shareholders.

 

In the unlikely event that shareholders do vote to replace all directors, such a decision would express dissatisfaction with the incumbent directors and reflect the need for change.

 

If you agree that shareholders may benefit from greater accountability afforded by annual election of all directors, please vote “FOR” this proposal.

 

Response of the Company

 

The Board first determined that a classified board structure — where the Board of Directors is divided into three classes and directors are elected to staggered three-year terms with members of one of the three classes being elected every year — was in the best interests of Eastman and its stockholders in 1994 when the Company became independent. Since then, the Board has remained committed to corporate governance policies that are in the particular best interests of the Company. The Board regularly reviews the Company’s governance structure, policies, and practices, and makes changes that it determines to be in the best interests of the Company and its stockholders. Recent changes include the implementation of majority voting in the election of directors and the repeal of the Company’s stockholder rights plan, as well as the current proposal for stockholders to approve an amendment to the Company’s Certificate of Incorporation to permit holders of a certain amount of our outstanding common shares to call a special meeting that is discussed in more detail under Item 3 above.

 

Management and the Board continue to believe that a classified board structure remains in the best interests of Eastman and its stockholders. We believe that the election of directors by classes complements the implementation of the previously disclosed long-term strategy for creating stockholder value and assists the Company to recruit and retain more experienced directors while allowing an orderly evolution of the Board.

 

Given the cyclical nature of Eastman’s industry and the markets in which the Company operates, we believe our stockholders are uniquely positioned to benefit from a long-term strategy requiring commitment, stability, and vision. Our long-term strategy — to leverage our heritage of expertise and innovation in acetyl, polyester, and olefins chemistries to be an outperforming chemical company through solid financial results from our core businesses and plans for profitable growth — is furthered by continuity and stability in corporate governance and leadership. We believe that the classified board structure has helped, and will continue to help, to provide continuity and stability, enabling the development and implementation of the Company’s value creation strategy and continued focus on sustained performance rather than just short-term results.

 

The classified Board structure has allowed the Company to attract and retain a diverse group of experienced directors who develop in-depth knowledge of Eastman’s industry, strategy, and affairs. Such knowledge and experience is especially important because of the complex nature of our business and strategy for growth and the interconnected strategies for our various businesses, product lines, and technologies.

 

Contrary to the general assertions of opponents of classified boards, Eastman’s classified board structure has not been a deterrent to orderly and significant change in the composition of the Board. Rather, over the last 10 years, the Nominating and Corporate Governance Committee has nominated a total of 12 new directors to serve on the Board. As a result, since 2000, all of the directors have been new to the Board. This orderly evolution of the Board is expected to continue due, in part, to the Company’s Bylaw provisions that require mandatory retirement and impose term limits on directors.

Finally, while a classified board may help prevent a third party from acquiring control of the Company without the cooperation of the Board, we believe such an effect is beneficial to the interests of our stockholders. A classified structure, along with other takeover preparedness measures, is a useful tool in ensuring that the Board would be able to obtain fair value for our stockholders in the event of an unsolicited takeover attempt. In fact, studies show that the premiums paid by bidders to stockholders of companies with structural defenses, including a classified board, are typically greater than premiums paid to stockholders of companies without these defenses.

 

The Board of Directors recommends that you vote “AGAINST” this proposal.

 

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

Common Stock

 

The table below sets forth certain information regarding the beneficial ownership of Eastman common stock as of December 31, 2009 by each director and by each executive officer named in the Summary Compensation Table (under “Executive Compensation — Compensation Tables” below), and by the directors, the named executive officers, and the other executive officers as a group.

 

 

 

 

 

Common Stock and Common Stock Units

 

As described elsewhere in this proxy statement, in addition to shares of Eastman common stock beneficially owned, certain executive officers and directors have units of common stock credited to their individual stock accounts in the Eastman Executive Deferred Compensation Plan (the “EDCP”) and in the Directors’ Deferred Compensation Plan (the “DDCP”), respectively.

 

Eastman has stock ownership guidelines for its directors and executive officers. These guidelines require such persons to acquire and maintain a stake in the Company valued at $250,000 for non-employee directors, five times annual base pay for the Chief Executive Officer, and two and one-half times annual base pay for the other executive officers named in the Summary Compensation Table. Common stock units are counted with certain shares of common stock beneficially owned (excluding certain shares that may be deemed beneficially owned under SEC rules, such as shares underlying options and shares over which the individual shares voting and investment power but in which the individual has no pecuniary interest) for purposes of the Company’s stock ownership guidelines. Common stock units represent hypothetical “investments” in Eastman common stock. The value of one common stock unit is equal to the market value of one share of Eastman common stock. Although the DDCP and EDCP allow common stock units to be paid out only in the form of cash, and not in shares of common stock, common stock units create essentially the same stake in the market performance of the Company’s common stock as do actual shares of common stock. The table below shows, for each director and each executive officer named in the Summary Compensation Table, and for the directors, the named executive officers, and the other executive officers as a group, the aggregate of the number of shares of common stock beneficially owned by such person and group, as set forth in the preceding table, and the number of common stock units credited to the stock accounts of such person and group as of December 31, 2009. The table below is included to provide a better indication of the stake of the named individuals, and of the group, with respect to Eastman common stock.

 

 

PRINCIPAL STOCKHOLDERS

 

The following table sets forth information about persons we know to be the beneficial owners of more than five percent of Eastman common stock as of December 31, 2009.

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This “Compensation Discussion and Analysis” is intended to provide context for the executive compensation information detailed in the tables and narrative in the remaining sections of this proxy statement under “Executive Compensation”. What follows is a summary of compensation objectives for executive officers, the relationship of corporate performance to executive compensation, and the bases for the compensation of executive officers. The Compensation and Management Development Committee of the Board of Directors (the “Compensation Committee”) establishes and oversees the administration of the policies, programs, and procedures for evaluating, developing, and compensating our senior management, and determines the components, structure, forms, terms, and amounts of the compensation of our executive officers.

 

Overview

 

The Compensation Committee believes that the compensation of the executive officers is appropriate based on Eastman’s performance and the competitive market. For 2009, the compensation of the executive officers named in the “Summary Compensation Table” below (the “named executive officers”) consisted of three principal elements: long-term stock-based awards in the form of performance share and restricted stock unit awards and stock option grants, annual variable cash pay, and base salary. The Company uses annual variable cash pay to tie executive compensation to attainment of key company and individual objectives, and uses long-term stock-based pay to link the executive compensation program and the long-term interests of the Company’s stockholders and to attract and retain an outstanding executive team. The Compensation Committee believes that this mix of executive pay components strikes an appropriate balance between the short- and long-term focus of the executives and the types of performance incented and risks encouraged, and aligns their interests with those of stockholders.

 

In 2009, the executive officers:

 

 

Management Compensation Philosophy and Program

 

Our Business.  Eastman is a global chemical company which manufactures and sells a broad portfolio of chemicals, plastics, and fibers products to customers throughout the world. The Company’s products and operations are managed and reported in five operating segments: the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment, the Fibers segment, the Performance Chemicals and Intermediates (“PCI”) segment, the Performance Polymers segment, and the Specialty Plastics segment. In addition to these segments, the Company

manages certain strategic initiatives at the corporate level, including various research and development initiatives. Eastman’s objective is to be an outperforming chemical company through solid financial results from its core businesses and its plans for profitable growth. Management believes that the Company can increase the revenues from its core businesses with increasing profitability through a balance of new applications for existing products, development of new products, and sales growth in adjacent markets and emerging geographic regions. These revenue and earnings increases are expected to result from organic initiatives and through acquisitions and joint ventures.

 

Our Compensation Philosophy.  The Company’s business strategy for value creating growth is to leverage the capabilities of its employees to innovate and execute its growth strategy while remaining focused on positive free cash flow generation. Our compensation philosophy supports this strategy by stressing the importance of pay for corporate and individual performance in meeting strategic and business goals for value creation and financial strength and flexibility, and maintains flexibility to meet changing employee, business, and market conditions. Our executive compensation program is designed to attract and retain a talented and creative team of executives who will provide disciplined leadership for the Company’s success in dynamic, competitive markets. The Company seeks to accomplish this by motivating executives with an appropriate mix of compensation elements described in more detail below.

 

Our Compensation Objectives.  With the management compensation program, our primary objectives are to:

 

 

Components of our Management Compensation Program and How Each Component Complements our Philosophy and Objectives.  Our management compensation program has three primary components:

 

The Compensation Committee, with the assistance of management and the Committee’s outside consultant, designs, administers, and assesses the effectiveness of all compensation elements against the market and our overall compensation philosophy. The table below describes each element and its primary links to the objectives of our compensation philosophy.

 

 

Each year, the Compensation Committee conducts a review of the relative mix of the compensation components to those of peer companies. As described below, the Company believes that a significant portion of our executives’ compensation should be at risk to business and individual performance, and that the at-risk amount should increase with the executive’s level of responsibility. There is also a need to ensure a balance between the short-term and long-term focus of the executives, and in the types of performance incented and risks encouraged, as well as to align their interests with those of stockholders, by providing a meaningful portion of their compensation in the form of stock-based pay.

 

Other Compensation and Benefits.  The Company’s executive officers also participate in benefits plans generally available to all other employees. We have also entered into change in control agreements with certain of our executive officers and provide a modest program of executive perquisites and personal benefits as further described in this Compensation Discussion and Analysis and the tables that follow.

Mix of Total Compensation.  The following charts illustrate the percentage of total compensation for our CEO and our other named executive officers on average, respectively, represented by each element of compensation for 2009. The CEO compensation is the performance share award payout for 2007-2009 to Mr. Ferguson and Mr. Rogers’ CEO base pay annualized and actual variable cash pay, option grant, and all other compensation.

 

 

 

 

Each component of pay plays an important role in accomplishing our compensation objectives:

 

 

 

Risk Analysis of Executive Compensation.  The balance of short-term and long-term compensation as devices to drive individual behaviors and risk management is carefully considered in the design and administration of the Company’s compensation programs. The management compensation program is structured so that a considerable amount of compensation of our executives is tied to the long-term performance of Eastman. We strive to avoid disproportionately large short-term incentives that could encourage unnecessary risk-taking which is not in the Company’s long-term interests. While a significant portion of our executive compensation is performance-based, we do not believe that our philosophy or objectives encourage unnecessary or excessive risk-taking. While risk is inherent in any strategy for growth, the Compensation Committee has focused our management compensation program on aligning the Company’s compensation with the long-term interests of Eastman, and has designed elements of our executive compensation program to discourage management decisions that could pose inappropriate long-term risks to the Company and its stockholders, as follows:

 

 

 

We believe that this combination of factors encourages our executives to manage Eastman and execute our strategy for growth in a prudent manner.

 

Review of 2009 Executive Compensation

 

The Compensation Committee reviewed overall compensation of the Chief Executive Officer and the other executive officers included in the Summary Compensation Table below (collectively referred to as the “named executive officers”) and determined each component of executive compensation for 2009 as described below.

 

The Compensation Committee also:

 

 

 

In connection with its review of external market data, the Compensation Committee has directly engaged Hewitt Associates (“Hewitt”) as its external compensation consultant. Under the terms of Hewitt’s engagement by the Compensation Committee, Hewitt reports to, and receives its direction from, the Compensation Committee, and a representative of Hewitt attends each meeting of the Compensation Committee as its advisor. Hewitt provides the Compensation Committee with third-party survey information used in setting short- and long-term compensation levels, perspective on emerging trends in compensation issues, and expertise in incentive compensation structure, terms, and design, and does not provide other non-executive compensation consulting services to the Company. The Company’s management also uses the services of several other outside firms for compensation analysis, third-party surveys, and management pay research and analysis.

Elements of our Executive Compensation

 

Annual Cash Compensation — Base Pay and Variable Pay

 

How Base Pay and Variable Pay Levels Are Determined.  For executive officers, targeted total cash compensation is intended to be competitive with comparable pay for similar jobs when target levels of corporate, organizational, and individual performance are achieved. The targeted levels of cash compensation are based upon information provided by Hewitt and publicly available information. For 2009, a significant portion of each executive officer’s pay was variable. Depending upon Company, organizational, and individual performance, executive officers could receive more or less than the target amount.

 

For 2009, the Compensation Committee compared total cash compensation levels for the Company’s executive officers with those of the following companies selected based upon industry, number of employees, revenues, number and type of commercialized products, and market capitalization:

 

 

As requested by the Compensation Committee, Hewitt provided benchmarking analysis of the comparable companies’ total cash compensation information, and also advised the Compensation Committee of general market cash compensation practices and trends. In determining each executive officer’s targeted total cash compensation, the Compensation Committee also applied its judgment in considering the competitive market for executive talent, comparative pay levels of each other executive officer, relative cash compensation of other jobs in the Company, and differences between the Company’s executive positions and those in the benchmark information. For 2009, the Compensation Committee set the targeted cash pay for executives within a range of 10% above or below the median level of the total cash compensation for comparable positions of the peer companies.

 

Base pay.  Other than increases in the base pay of Messrs. Rogers, Costa, and Lindsay for changes in job responsibilities, for 2009 the Committee did not increase the base pay of executives, consistent with the Company’s decision in December 2008 that the base salaries of employees for 2009 would not be increased from 2008 levels in response to the global recession and then-current business conditions. The base pay increases were based on review of market competitive pay levels. In March 2009 the Committee decreased the base pay of executives by five percent, consistent with the Company’s reduction of the base pay of employees, and in December 2009 the Committee restored the five percent base salary reduction, consistent with the restoration of the base pay of employees.

 

Variable Cash Pay — Unit Performance Plan.  For 2009, the variable portion of cash compensation paid to the executive officers was determined solely under the Unit Performance Plan (the “UPP”). The UPP is designed to determine a portion of the annual cash compensation of management level employees according to corporate performance and the attainment of certain individual objectives and expectations. The UPP is intended to provide an incentive for superior business and individual performance and to tie the interests of our management level employees, including our named executive officers, to the performance of our businesses and the interests of our stockholders.

 

The amount of the award pool from which UPP payouts are made is determined annually by the Compensation Committee, and is based upon annual performance of the Company. For 2009, the Compensation Committee determined that the appropriate measure of corporate performance under the UPP was earnings from operations because such measure would align with the Company’s business objectives for 2009. Annual performance goals are established such that the target level is deemed reached if corresponding Company performance goals for the year are achieved. In determining earnings from operations for the purpose of measuring performance, the UPP provides for adjustments by the Compensation Committee for certain cost, charge, and income items, typically the same as those excluded from operating earnings in the non-GAAP pro forma financial measures disclosed by the Company

in its public sales and earnings disclosures. The target level for 2009 earnings from operations ($500 million) corresponded to the Company’s operating earnings target under the annual business plan for 2009 as approved by the Board in late 2008.

 

The total UPP award pool is determined as the aggregate of the UPP payouts for each participant if the individual’s organizational and individual performance were at target levels, multiplied by a “performance factor” determined by actual corporate performance compared to the pre-set performance goals. In addition, the Committee may, in its discretion, adjust the award pool to reflect overall corporate performance and business and financial conditions; for 2009, the total Company award pool was not so adjusted.

 

At the end of 2008, the Compensation Committee evaluated the Company’s financial and strategic performance targets under the Company’s annual business plan for 2009 and set the UPP payout “performance factor” multipliers at 0% of aggregate target payouts if earnings from operations were below 71% of the target level; at 100% of aggregate target payouts if earnings from operations were equal to the target; and at 200% of aggregate target payouts if earnings from operations were at or above the maximum, as shown in the following table. Linear interpolation is used to determine the “performance factor” and award pool if actual performance falls between the threshold and target or between the target and maximum levels. The 2009 UPP threshold, target, and maximum adjusted earnings from operations targets for UPP award pool funding were:

 

 

Earnings from operations for 2009, as adjusted, were $517 million, resulting in a “performance factor” of 1.12 and a UPP award pool for all management level employees, including the named executive officers, of $25.4 million. The calculation of earnings from operations under the UPP for 2009 was adjusted to exclude the impact on financial results of net asset impairments and restructuring charges for the Company’s discontinuance of its Beaumont, Texas, industrial gasification project and for severance resulting from a reduction in force. These adjustments, which were the same as those excluded from operating earnings in the non-GAAP pro forma financial measures disclosed by the Company and were consistent with the Compensation Committee’s past practice, increased the calculated earnings from operations under the UPP by $200 million. Without the adjustments, earnings from operations would have been below the threshold for UPP award pool funding.

 

The Chief Executive Officer, in consultation with the other executive officers, determined the allocation of the overall UPP award pool to the various organizations within the Company based on their assessment of the performance of each organization relative to objectives established at the beginning of the performance year. The Compensation Committee determines the portions of the overall UPP award pool to the CEO and to the executive officers as a group. In 2009, the named executive officers (other than the CEOs) participated in an organization consisting of all executive officers directly reporting to the Chief Executive Officer. Mr. Ferguson (until May 7, 2009) and Mr. Rogers (beginning May 7, 2009) participated in the UPP in an organization established for the Chief Executive Officer.

 

Once each organization’s portion of the overall award pool was determined, management within each organization (the Chief Executive Officer in the case of the named executive officers other than the CEO and, in the case of the Chief Executive Officer, the Compensation Committee) allocated the organization’s portion of the Company award pool for individual payouts, based upon individual performance against financial, organizational, and strategic performance objectives and expectations established at the beginning of the performance year (described below for the CEOs and the other named executive officers).

 

For each executive officer, including the named executive officers, the Compensation Committee established a target UPP incentive opportunity based upon a peer company review, and expressed as a percentage of base salary. The individuals with the greatest overall responsibility for corporate performance had larger incentive opportunities in comparison to their base salaries in order to weight their overall pay mix more heavily towards

performance-based compensation. For the named executive officers, the target annual incentive opportunities for 2009 were as follows:

 

The Compensation Committee established individual financial, organizational, and strategic performance objectives and expectations for Mr. Ferguson and Mr. Rogers for their respective service as CEO, and determined their pool allocations and payouts (equal to 107% and 108% of their respective target variable pay amounts) based upon the Compensation Committee’s assessment of their respective performance against these objectives for 2009 as described below.

 

The portion of the overall 112% of target UPP award pool allocated to the other named executive officers was $1.415 million (equal to 109% of their aggregate individual target variable pay amounts), with their individual payouts based upon the CEO’s assessment of each executive’s individual performance compared to their objectives as described below.

 

For 2009, the following corporate performance target objectives were established for the CEOs and the other named executive officers, with no specific weighting among the objectives, and actual performance against these objectives was assessed by the Compensation Committee (for the CEOs) and by the CEO and the Compensation Committee (for the other named executive officers) in determining the amounts of the individual payouts from the respective award pools:

 

 

 

 

Additionally, each of the named executive officers had individual performance commitments targeted to each executive’s area of responsibility, with no specific weighting among the commitments, and actual performance as

assessed by the Compensation Committee (for the CEOs) and by the CEO and the Compensation Committee (for the other named executive officers), as follows:

 

 

 

 

The Compensation Committee determined that, based upon the actual corporate performance against targets as listed above, each executive’s individual performance and leadership that resulted in this performance was satisfactory and met or exceeded expectations for purposes of determining his or her allocated individual portion of the respective award pools (107% and 108% of Mr. Ferguson’s and Mr. Rogers’ respective CEO individual target variable pay amounts and 109% of the other named executives’ aggregate individual target variable pay amounts).

 

Additionally, the Compensation Committee evaluated each executive’s performance against his or her individual commitments as described above and concluded that each executive’s individual performance in these areas was overall at or above target performance for purposes of determining their individual portions of the respective award pools.

 

Based upon the amount of the UPP award pool allocated to the CEOs and to the other named executive officers, respectively, as described above, and the assessments of the CEOs’ and other executives’ individual performance against established goals and expectations as described above, the Compensation Committee determined the amounts of the individual payouts from the allocated portions of the UPP award pools based upon the Committee’s and the CEO’s judgment of overall Company performance, each individual executive’s overall contribution and leadership, and external business conditions and circumstances, as follows:

 

Stock-Based Incentive Pay

 

Equity-Based Compensation Program.  Equity-based compensation is designed to facilitate stock ownership in order to link senior managers’ pay to long-term return to other stockholders. Important elements of the current executive equity-based compensation program are:

 

 

How Stock-Based Incentive Pay Levels Were Determined.  The Compensation Committee established the value and mix of total stock-based incentive pay for 2009 by considering recommendations from Hewitt based on long-term compensation surveys of the following manufacturing, industrial, and chemical companies of comparable size in the same market as the Company for executive talent:

 

 

As requested by the Compensation Committee, Hewitt provided benchmarking analysis of this long-term stock-based compensation information, and also advised the Compensation Committee of general market stock-based incentive compensation practices and trends.

 

Stock options and performance shares were awarded so that total stock-based incentive compensation for 2009 approximated the mid-range of total stock-based compensation of the compared companies. The current values of total stock-based incentive pay for 2009 ranged from 34% to 65% of total compensation for the named executive officers.

 

The Compensation Committee also considered the estimated value of all outstanding unvested, unexercised, and unrealized stock-based awards in determining stock-based incentive pay levels. The Committee made no changes to award levels based on the review of outstanding awards.

 

Stock Options.  In 2009, the Compensation Committee determined to deliver approximately 40% of each executive officer’s stock-based equity value as stock options. In determining the size of option awards, the Compensation Committee used the services of Hewitt to derive values of options using a variation of the Black-

Scholes option-pricing model. Computation of the value of option awards is comparable to values determined under FASB ASC Topic 718 and reported in the “Grants of Plan Based Awards” table below.

 

Long-Term Performance Shares.  In 2009, the Company awarded performance shares for the 2010 - 2012 performance period to each executive officer, representing approximately 60% of each executive officer’s stock-based equity value, to provide incentives for exceeding internal financial objectives and external return objectives versus a peer group of companies.

 

In 2007, the Compensation Committee revised the percentage of long-term performance shares to overall stock based pay in order to reduce the Company’s “burn rate” (generally defined as the total number of shares subject to all equity awards granted during the year divided by the total number of shares outstanding at the end of the year) and to reduce its “overhang” (generally defined as the number of shares subject to granted and outstanding equity awards plus the number of shares reserved for future awards, divided by the sum of total shares outstanding, granted and outstanding equity awards, and shares reserved for future awards).

 

For performance shares, performance is determined by comparing the Company’s multi-year performance as measured against a return on capital target established at the beginning of the three year performance period, and the Company’s total return to stockholders (change in stock price plus dividends declared during the performance period, assuming reinvestment of dividends) relative to a peer group of industrial companies comprising the Standard and Poor’s “Materials Sector” from Standard and Poor’s Super Composite 1500 Index. The return on capital target is established considering corporate and strategic business plans and expectations for the performance period. Performance relative to the total return to stockholders target is determined by the Company’s quintile placement relative to the peer group of industrial companies at the end of the three year performance period. If earned, awards are paid after the end of the performance period in unrestricted shares of Eastman common stock.

 

The Compensation Committee reviewed and certified performance results and approved a payout of shares to the executive officers under performance shares previously awarded for the 2007-2009 performance period. The following tables show the targets and the payout matrix for the 2007-2009 performance shares corresponding to return on capital and total stockholder return targets:

 

 

 

Payouts under the 2007-2009 performance share awards for the named executive officers ranged from 57,200 shares to 4,160 shares, and represented 130% of the target award (of a possible 300% of the target award) based upon the Company’s total stockholder return ranking in the 2nd quintile of the compared companies and an average return on capital of 0.08% in excess of the return on capital target. Measurement of return on capital under performance shares is based on reported GAAP earnings, and does not exclude charges or other items excluded in the non-GAAP pro-forma financial measures disclosed by the Company.

 

Restricted Stock Unit Award.  The Compensation Committee made a special restricted stock unit award to Mr. Espeland. This award was designed to serve as a retention incentive and as recognition and incentive for his performance in the area of financial management and to promote stability in the financial organization’s disciplined

leadership of the Company’s strategy for profitable growth. The Committee set the value and the terms of this award to be consistent with recent similar retention awards to executive officers.

 

Stock-Based Compensation Award Practices.  The Compensation Committee has historically granted stock options with an exercise price equal to the market price of the underlying stock at the grant date, and on the date of its authorization of grants has set a grant date that is on or after the date of approval of the grant by the Compensation Committee. The Compensation Committee’s recent practice has been to grant stock options and other stock-based awards annually in the fall, and to set effective dates for stock option grants on the third business day after the next release of quarterly financial results. This is designed to ensure that the market price of the underlying common stock, and thus the exercise price of the options, reflects such results.

 

Executive Perquisites and Personal Benefits

 

The Company provides limited executive perquisites and personal benefits designed to provide a level of personal and financial security for our executives. The Compensation Committee annually reviews the types and values of perquisites provided, the imputation to the executives of taxable income for the provided perquisites, and tax treatment of the perquisites to the Company and executives. Perquisites and personal benefits provided to executives for 2009 were:

 

 

In addition, in considering time demands on the Chief Executive Officer, the Compensation Committee has authorized the personal use of corporate aircraft by the Chief Executive Officer, and his family when traveling with him, whenever possible for business and personal travel.

 

In 2009 the Compensation Committee eliminated personal financial counseling, estate planning, and tax preparation; reimbursement for the cost of taxes for imputed income related to the home security system; and the personal travel allowance for Mr. Costa which was approved under the terms of his employment agreement when he was hired in 2006. The Committee increased Mr. Costa’s annual base salary in the amount of $43,000 as partial replacement of the annual personal travel allowance and increased the annual base salary of each of the executive officers in the amount of $10,000 as partial replacement of the personal financial counseling, estate planning, and tax preparation executive perquisite.

 

Executive Termination and Change in Control Agreements

 

The Company believes that severance protections in the context of a change in control transaction can play a valuable role in attracting and retaining key executive officers. Accordingly, we provide such protections for certain of our executive officers. Detailed information regarding these change in control agreements and the benefits they provide is included in the “Termination and Change-in-Control Arrangements” section of this proxy statement.

 

The Compensation Committee evaluates the level of severance benefits payable to each such officer on a case-by-case basis, and considers these severance protections an important part of executives’ compensation and consistent with practices of peer companies.

 

Eastman believes that the occurrence, or potential occurrence, of a change in control transaction will create uncertainty regarding the continued employment of our executive officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage our executive officers to remain employed with the Company during an important time when their prospects for continued employment following the transaction are often uncertain, we provide certain of our named executive officers with severance benefits if their employment is terminated by the Company without “cause” or by the executive for “good reason” in connection with a change in control.

In addition, Mr. Costa’s employment agreement provides for a cash severance payment and vesting of certain outstanding stock-based compensation awards in the event of his termination without “cause” or his resignation for “good reason”, and for certain circumstances in addition to those covered by the executive change in control severance agreements. The Compensation Committee approved Mr. Costa’s termination arrangements and the other terms of his employment agreement when he was hired in 2006. Detailed information regarding the termination provisions of Mr. Costa’s employment agreement is included in the “Termination and Change-in-Control Arrangements” section of this proxy statement.

 

Tax Treatment of Executive Officer Compensation

 

The Compensation Committee intends to preserve the Company’s ability to deduct compensation paid to the Company’s Chief Executive Officer and other executive officers to the extent possible while also maintaining the flexibility to compensate such officers in accordance with the Company’s compensation policies.

 

Section 162(m) of the Internal Revenue Code generally limits the deductibility to the Company of annual compensation (other than qualified “performance-based” compensation) in excess of $1 million paid to certain of the Company’s executive officers. Base salaries, variable compensation under the UPP, any bonus payments outside the UPP, and stock and stock-based compensation payable other than solely based on corporate performance conditions are generally subject to the $1 million limit on deductible compensation. Compensation attributable to stock options granted and performance shares awarded beginning in 2009 under the Company’s 2007 Omnibus Long-Term Compensation Plan qualifies for deductibility under Section 162(m).

 

A portion of each named executive officer’s compensation for 2009 was non-deductible to the Company under Section 162(m). The anticipated amount of the Company’s taxes for non-deductible compensation in 2009 is approximately $2 million. The Compensation Committee will continue to retain the discretion to pay non-deductible amounts. The Compensation Committee believes that such flexibility best serves the interests of the Company and its stockholders by allowing the Committee to recognize and motivate executive officers as circumstances warrant.

 

Reimbursement of Certain Compensation Following Restatements

 

Pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, a Company policy governs the process for reimbursement by the Chief Executive Officer and the Chief Financial Officer of any bonus or other incentive-based or equity-based compensation received during the 12-month period following public disclosure of an accounting restatement due to material noncompliance by the Company with any financial reporting requirements as the result of misconduct. In addition, our 2007 Omnibus Long-Term Compensation Plan requires reimbursement of certain amounts from awards following public disclosure of an accounting restatement due to material noncompliance by the Company with any financial reporting requirement as a result of misconduct if the award recipient knowingly or grossly negligently engaged in or failed to prevent the misconduct. Company officers and directors are prohibited from use of derivative financial instruments to hedge or mitigate their exposure to changes in the market price of Eastman common stock.

 

Compensation Tables

 

The following Summary Compensation Table sets forth information concerning compensation of the individuals serving as Eastman’s Chief Executive Officer and Chief Financial Officer during 2009, and the Company’s three other most highly compensated executive officers for the year ended December 31, 2009.

 

Summary Compensation Table

 

 

 

 

						Annual Company				Reimbursement
						Contributions to				for Payment of
		Perquisites and				Defined				Taxes on
		Other Personal				Contribution				Compensation and
Name		Benefits($)				Plans($)				Benefits($)
J. B. Ferguson			$35,000				$90,812				$1,098
J. P. Rogers			44,646				60,096				8,428
C. E. Espeland			16,981				30,514				2,953
M. J. Costa			94,146				33,954				3,918
R. C. Lindsay			11,003				32,071				185
T. K. Lee			12,473				32,489				397

 

 

		Perquisites and Other Personal Benefits
		Personal
		Use of				Umbrella				Home								Personal
		Corporate				Liability				Security				Financial				Travel
		Aircraft				Insurance				System				Counseling				Allowance
Name		($)				($)				($)				($)				($)
J. B. Ferguson		$	29,035			$	392			$	729			$	4,844			$	0
J. P. Rogers			12,429				987				20,511				10,719				0
C. E. Espeland			0				789				6,892				9,300				0
M. J. Costa			1,643				789				10,894				5,820				75,000	*
R. C. Lindsay			0				789				514				9,700				0
T. K. Lee			0				789				1,104				10,580				0

 

 

 

 

As described in the “Compensation Discussion and Analysis” section preceding these tables under “Executive Compensation”, the Compensation Committee has eliminated the personal travel allowance and personal financial counseling, estate planning, and tax preparation executive perquisites. The Compensation Committee also eliminated reimbursement for the cost of taxes associated with imputed income for home security systems and non-business flights on corporate aircraft.

 

 

The following table sets forth certain information regarding grants in 2009 to the individuals named in the Summary Compensation Table of non-equity incentive awards, equity incentive awards, and all other non-incentive stock and option awards.

 

Grants of Plan-Based Awards