UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Service Corporation International

(Name of Registrant as Specified In Its Charter)

 

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Service Corporation International

 

Proxy Statement and 2009 Annual Meeting Notice

 

2009 Annual Meeting

 

Date: Wednesday, May 13, 2009

Time: 9:00 a.m. Houston time

Place: Newmark Group Auditorium

American Funeral Service Training Center

415 Barren Springs Drive

Houston, Texas 77090

 

Service Corporation International

1929 Allen Parkway, P.O. Box 130548

 

Dear Shareholder,

 

As the owner of shares of Service Corporation International, please accept my invitation to attend the Company’s Annual Meeting of Shareholders. It is scheduled for Wednesday, May 13, 2009, at 9:00 a.m. Houston time in the Newmark Group Auditorium of the American Funeral Service Training Center, 415 Barren Springs Drive, Houston, Texas. During the meeting, we will report on how our Company performed for its shareholders during 2008 and share with you our plans for the future. You will have an opportunity to ask questions, express your views, and meet members of SCI’s executive team and Board of Directors.

 

On behalf of the Board of Directors and our employees, I would like to express our appreciation for your continuing support. I look forward to greeting in person all shareholders who are able to join us at our Annual Meeting.

 

Sincerely,

 

R. L. Waltrip

Chairman of the Board

 

Service Corporation International

1929 Allen Parkway, P.O. Box 130548

Houston, Texas 77219-0548

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

May 13, 2009

 

To Our Shareholders:

 

The Annual Meeting of Shareholders of Service Corporation International (“SCI” or the “Company”) will be held in the Newmark Group Auditorium, American Funeral Service Training Center, 415 Barren Springs Drive, Houston, Texas at 9:00 a.m. Houston time on May 13, 2009 for the following purposes:

 

 

Only shareholders of record at the close of business on March 16, 2009 are entitled to notice of and to vote at the Annual Meeting. A majority of the outstanding shares entitled to vote is required for a quorum.

 

It is important that your shares be represented at the Annual Meeting regardless of the size of your holdings. Whether or not you expect to attend the Annual Meeting in person, we urge you to vote your shares at your earliest convenience in order to ensure a quorum at the meeting. Submitting your proxy now will not prevent you from voting your shares at the Annual Meeting if you desire to do so, as your proxy is revocable at your option.

 

By Order of the Board of Directors,

 

Gregory T. Sangalis

Senior Vice President, General Counsel and Secretary

Houston, Texas

April 1, 2009

 

TABLE OF CONTENTS

 

 

Service Corporation International

1929 Allen Parkway

P.O. Box 130548

Houston, Texas 77219-0548

 

PROXY STATEMENT

 

Proxy Voting: Questions & Answers

 

Q: Who is entitled to vote?

A: Shareholders of record who held common stock of SCI at the close of business on March 16, 2009 are entitled to vote at the 2009 Annual Meeting of Shareholders (the “Annual Meeting”). As of the close of business on that date, there were outstanding 250,942,790 shares of SCI common stock, $1.00 par value (“Common Stock”).

 

Q: What are shareholders being asked to vote on?

A: Shareholders are being asked to vote on the following items at the Annual Meeting:

 

 

The Company will also transact such other business as may properly come before the meeting. The affirmative vote of a majority of the total shares represented in person or by proxy and entitled to vote at the Annual Meeting is required for approval of each of the proposals.

 

Q: How do I vote my shares?

A: You can vote your shares using one of the following methods:

 

 

Internet and telephone voting are available 24 hours a day, and if you use one of those methods, you do not need to return a proxy card. Unless you are planning to vote at the meeting, your vote must be received on or before May 12, 2009.

 

Even if you submit your vote by one of the first three methods mentioned above, you may still vote at the meeting if you are the record holder of your shares or hold a legal proxy from the record holder. Your vote at the meeting will constitute a revocation of your earlier voting instructions.

 

Q: What if I want to vote in person at the Annual Meeting?

A: The Notice of Annual Meeting of Shareholders provides details of the date, time and place of the Annual Meeting, if you wish to vote in person.

Q: How does the Board of Directors recommend voting?

A: The Board of Directors recommends voting:

 

 

Although the Board of Directors does not contemplate that any nominee will be unable or unwilling to serve, if such a situation arises, the proxies that do not withhold authority to vote for directors will be voted for a substitute nominee(s) chosen by the Board.

 

Q: If I give my proxy, how will my stock be voted on other business brought up at the Annual Meeting?

A: By submitting your proxy, you authorize the persons named on the proxy card to use their discretion in voting on any other matters properly brought before the Annual Meeting. At the date hereof, SCI does not know of any other business to be considered at the Annual Meeting.

 

Q: Why is it important to vote via the internet or telephone, or send in my proxy card so that it is received on or before May 12, 2009?

A: The Company cannot conduct business at the Annual Meeting unless a quorum is present. A quorum will only be present if a majority of the outstanding shares of SCI common stock as of March 16, 2009 is present at the meeting in person or by proxy. It is for this reason that we urge you to vote via the internet or telephone or send in your completed proxy card(s) as soon as possible, so that your shares can be voted even if you cannot attend the meeting.

 

Q: Can I revoke my proxy once I have given it?

A: Yes. Your proxy, even though executed and returned, may be revoked any time prior to the time that it is voted at the Annual Meeting by a later-dated proxy or by written notice of revocation filed with the Secretary, Gregory T. Sangalis. Alternatively, you can attend the Annual Meeting, revoke your proxy in person, and vote at the meeting itself.

 

Q: How will the votes be counted?

A: Each properly executed proxy received in time for the Annual Meeting will be voted as specified therein, or if a shareholder does not specify how the shares represented by his or her proxy are to be voted, they will be voted for the nominees listed therein (or for other nominees as provided above) and for approval of the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm. Holders of SCI common stock are entitled to one vote per share on each matter considered at the Annual Meeting. In the election of directors, a shareholder has the right to vote the number of his or her shares for as many persons as there are to be elected as directors. Shareholders do not have the right to cumulate votes in the election of directors. Abstentions are counted towards the calculation of a quorum. An abstention has the same effect as a vote against a proposal, or in the case of the election of directors, as shares for which voting power has been withheld.

 

Q: What if my SCI shares are held through a bank or broker?

A: If your shares are held through a broker or bank, you will receive voting instructions from your bank or broker describing how to vote your stock. A “broker non-vote” refers to a proxy that votes on one matter, but indicates that the holder does not have the authority to vote on other matters. Broker non-votes will have the following effects at our Annual Meeting: for purposes of determining whether a quorum is present, a broker non-vote is deemed to be present at the meeting; for purposes of the election of directors and other matters to be voted on at the meeting, a broker non-vote will not be counted.

 

Q: How does a shareholder or interested party communicate with the Board of Directors, committees or individual directors?

A: Any shareholder or interested party may communicate with the Board of Directors, any committee of the Board, the non-management directors as a group or any director, by sending written communications addressed to the Board of Directors of Service Corporation International, a Board committee, the non-management

directors or such individual director or directors, c/o Secretary, Service Corporation International, 1929 Allen Parkway, Houston, TX 77019. All communications will be compiled by the Secretary of the Company and submitted to the Board of Directors (or other addressee) at the next regular Board meeting.

 

Q: What is the Company’s Web address?

A: The SCI home page is www.sci-corp.com. At the website, the following information is available for viewing. The information below is also available in print to any shareholder who requests it.

 

 

Q: How can I obtain a copy of the Annual Report on Form 10-K?

A: A copy of SCI’s 2008 Annual Report on Form 10-K is furnished with this proxy statement to each shareholder entitled to vote at the Annual Meeting. If you do not receive a copy of the Annual Report on Form 10-K, you may obtain one free of charge by writing to Investor Relations, P.O. Box 130548, Houston, Texas 77219-0548.

 

This Proxy Statement, the Notice of Annual Meeting of Shareholders and the enclosed proxy card are furnished to shareholders beginning on or about April 1, 2009.

 

The Board of Directors consists of eleven members and is divided into three classes, each with a staggered term of three years. At this year’s Annual Meeting, shareholders will be asked to elect four directors to the Board. These directors will be elected for three-year terms expiring in 2012. Set forth below are profiles for each of the four candidates nominated by the Nominating and Corporate Governance Committee of the Board of Directors for election by shareholders at this year’s Annual Meeting.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE FOLLOWING NOMINEES.

 

 

⁽¹⁾ Details are provided in the footnotes to the tables of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽²⁾ Includes 1,648,933 shares which may be acquired by Mr. R. L. Waltrip upon exercise of stock options exercisable within 60 days of March 16, 2009.

 

⁽¹⁾ Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

The following are profiles of the other continuing directors currently serving on the Board of SCI:

 

⁽¹⁾ Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽²⁾ Includes 1,072,900 shares which may be acquired by Mr. Ryan upon exercise of stock options exercisable within 60 days of March 16, 2009.

 

⁽¹⁾ Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽¹⁾ Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽¹⁾ Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

Board Composition and Meetings

 

The Board of SCI is comprised of a majority of independent directors. The Audit, Compensation and Nominating and Corporate Governance Committees of the Board are all comprised entirely of directors who are independent within the meaning of Securities and Exchange Commission (“SEC”) regulations and the listing standards of the New York Stock Exchange. The Board of Directors held five meetings in 2008. Each Board member attended at least 75% of the total number of meetings of the Board and Board committees on which he served. Although the Board does not have a policy on director attendance at annual meetings, ten Board members attended the Company’s 2008 Annual Meeting of Shareholders.

 

Consideration of Director Nominees

 

The Nominating and Corporate Governance Committee considers candidates for Board membership suggested by its members and other Board members, as well as management and shareholders. The Committee may also retain a third-party executive search firm to identify candidates. A shareholder who wishes to recommend a prospective nominee for the Board should notify the Company’s Secretary in writing with whatever supporting material the shareholder considers appropriate. To be considered, the written recommendation from a shareholder must be received by the Company’s Secretary at least 120 calendar days prior to the anniversary of the date of the Company’s Proxy Statement for the prior year’s Annual Meeting of Shareholders.

 

Once the Nominating and Corporate Governance Committee has identified a prospective nominee, the Committee will consider the available information concerning the nominee, including the Committee’s own knowledge of the prospective nominee, and may seek additional information or an interview. If the Committee determines that further consideration is warranted, the Committee will then evaluate the prospective nominee against the standards and qualifications set out in the Company’s Corporate Governance Guidelines, including:

 

 

The Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee expertise and the evaluations of other prospective nominees. After completing this process, the Committee makes a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board determines the nominees after considering the recommendation and report of the Committee.

 

Director Independence

 

In August 2003, the Board adopted its Corporate Governance Guidelines. The Guidelines incorporate the director independence standards of the New York Stock Exchange. The portion of the Guidelines addressing director independence is as follows:

 

“3.1 Board Independence

 

The majority of the Board of Directors of SCI will be comprised of independent directors, meaning directors who have no material relationship with SCI (either directly or as a partner, shareholder, or officer of an organization that has a material relationship with SCI). In addition, the Audit, Compensation, and

Nominating and Corporate Governance Committees of SCI will be comprised entirely of independent directors.

 

The Nominating and Corporate Governance Committee of SCI will review the independence of SCI’s directors on an ongoing basis to ensure that Board and Board committee composition is consistent with these principles and with the rules of the New York Stock Exchange and/or other applicable rules.”

 

Pursuant to the Guidelines, the Board undertook a review of director independence in February 2009. For this review, the Board considered the findings and recommendations of the Nominating and Corporate Governance Committee. The Board and the Committee considered transactions and relationships between each director or any member of his immediate family and the Company and its subsidiaries and affiliates, including those reported under “Certain Transactions” below.

 

As a result of this review, the Board affirmatively determined that all of the directors are independent of the Company and its management under the standards set forth in the Guidelines, with the exception of R. L. Waltrip, Thomas L. Ryan and W. Blair Waltrip. Messrs. R. L. Waltrip and Ryan are considered inside directors because of their employment as senior executives of the Company. Mr. W. Blair Waltrip is considered a non-independent director because he is the son of an executive officer, Mr. R. L. Waltrip.

 

Board Committees

 

 

Board Committees (cont’d)

 

 

Board Committees (cont’d)

 

 

Board Committees (cont’d)

 

 

Board Committees (cont’d)

 

Director Compensation

 

The following table sets forth director compensation for 2008. The table and following discussion apply to directors who are not employees (outside directors). Employees who are directors do not receive director fees or participate in director compensation.

 

2008 Director Compensation Table

 

 

 

 

Stock Award: Annual Retainer

 

Under the Amended and Restated Director Fee Plan, all outside directors receive an annual retainer of 10,000 shares of Common Stock of SCI or, at each director’s option, deferred Common Stock equivalents. The award is made once a year on the date of the Annual Meeting of Shareholders and is 100% vested on the date of grant. Accordingly, each outside director received 10,000 shares of Common Stock or deferred Common Stock equivalents on May 14, 2008. The fair market value of the award is set forth in the column “Stock Awards” in the table above. For dividends pertaining to a director’s deferred Common Stock equivalents, the dividends are reinvested in additional deferred Common Stock equivalents based on the fair market value of Common Stock on the dividend record date.

 

Meeting Fees

 

In addition to the annual retainer, all outside directors receive $10,000 for each Board meeting attended and receive a further attendance fee for each Committee meeting attended as follows: Audit Committee Chair $6,000, each other committee chair $5,000, Audit Committee members $4,000, and each other committee member $3,000. If the Company initiates a telephone Board or Committee meeting, a participating director is

entitled to an attendance fee in an amount equal to 25% of the regular fee described in the preceding sentence. The total meeting fees for each director are set forth in column “Fees earned or paid in cash” in the table above.

 

Directors may elect to defer all or any of their meeting fees by participating in the Executive Deferred Compensation Plan which is described hereinafter under “Certain Information with Respect to Officers and Directors — Executive Deferred Compensation Plan.” There are no Company contributions made for a director’s account in the plan. The director may have deferred fees invested in the funds available under the plan. Any earnings or losses on such deferred fees are not reported in the table above.

 

Directors’ Retirement Plan

 

Effective January 1, 2001, the Non-Employee Directors’ Retirement Plan was amended such that only years of service prior to 2001 are considered for vesting purposes. Non-employee directors who served on the Board prior to that time and were participants in the plan are entitled to receive annual retirement benefits of $42,500 per year for ten years, subject to a vesting schedule, based on their years of Board service. Retirement benefits vested in 25% increments at the end of five, eight, eleven and fifteen years of credited service, except that the benefits vest completely in the event of death while the participant is still a member of the Board or in the event of a change of control of SCI (as defined in the plan). The increases in the actuarial present values of benefits under the plan are reflected in the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the table above.

 

Use of Company Aircraft

 

Each outside director is allowed to use aircraft leased or financed by the Company under cancelable leases or financial arrangements for a maximum of 30 flight hours per year for personal reasons. The director must reimburse the Company for any such usage at an hourly rate pursuant to a time-sharing agreement governed by Federal Aviation Administration (“FAA”) Regulations. The Company also values such usage on the basis of the incremental cost to the Company of such use. The cost includes the average cost of fuel used, direct costs incurred such as flight planning services and food, and an hourly charge for maintenance of engine and airframe. For 2008, the incremental cost of personal use of Company aircraft, less the amounts reimbursed from the directors to the Company, are reflected in the column “All Other Compensation” in the table above.

 

Overview

 

The Company’s executive compensation policies are designed to provide aggregate compensation opportunities for our executives that are competitive in the business marketplace and that are based upon Company and individual performance. Our foremost objectives are to:

 

 

Role of the Compensation Committee

 

The Compensation Committee of the Company reviews the executive compensation program of the Company to ensure that it is adequate to attract, motivate and retain well-qualified executive officers who will maximize shareholder returns and that it is directly and materially related to the short-term and long-term objectives of the Company and its shareholders as well as the operating performance of the Company. To carry out its role, among other things, the Compensation Committee:

 

 

Compensation Philosophy and Process

 

The Company’s compensation philosophy as implemented through the Compensation Committee is to match executive compensation with the performance of the Company and the individual by using several compensation components for our executives. The components of our compensation program for our executives consist of:

 

 

Our overall compensation philosophy is to target our direct compensation for executives within the range of the market median of the Comparison Group or the Reference Group as discussed below, with opportunities to exceed the targeted median compensation levels through annual performance-based incentives paid in cash and through long-term performance-based incentives. We believe these targeted levels are appropriate in order to motivate, reward, and retain our executives, each of whom have leadership talents and expertise that make them attractive to other companies. Because we target the range of the market median for each component, each of the components of compensation is not affected by any decision respecting other components. However, the Compensation Committee does review overall compensation for reasonableness and comparability to the prior year’s compensation.

 

Compensation decisions are made by our Compensation Committee, based in part on input from Towers Perrin, the Compensation Committee’s third-party independent consultant. Towers Perrin is retained by and reports

directly to the Compensation Committee, which has the authority to approve Towers Perrin’s fees and any other terms of engagement. Clark Consulting is retained by and reports directly to the Compensation Committee and provides advice as to executive benefit programs such as executive life insurance benefits and deferred compensation arrangements. Annually, the Compensation Committee reviews the fee structure and services provided by their compensation and benefits independent consultants in order to affirm their continuation as consultants or to assist the Compensation Committee in the selection of new consultants, if appropriate.

 

In November of each year, Towers Perrin presents to the Compensation Committee comparative data, including benchmarking results discussed below. For the Chairman and the CEO, the Compensation Committee is exclusively responsible for the final determination of all components of compensation but may request input or recommendations from Company management. For other Named Executive Officers (as defined below), the Compensation Committee receives additional recommendations from our CEO and our Vice President of Human Resources for base salary and long-term incentive compensation. In February, the Compensation Committee reviews the data and recommendations and sets the compensation components of annual base salary, annual performance-based incentives and long-term incentives for that year.

 

After awards of compensation components are made in February each year, the performance components of our compensation are determined based on corporate performance and not on individual performance, except that annual performance-based incentives for our two senior operational officers (one of whom is a Named Executive Officer) include performance measures focused on the respective divisions under their management. The compensation components are designed to focus senior leadership, which is responsible for the overall performance and results of the Company, to operate as a team with company-wide goals, except that our two senior operational officers do have certain division performance goals. This approach serves to align the compensation of our most senior leadership team with the performance of the Company. The Compensation Committee generally does not retain any discretion to increase or decrease awards absent attainment of the relevant performance goals. However, the Compensation Committee does reserve the right to reduce at its discretion the amounts of annual performance-based incentives paid in cash.

 

In summary, our direct compensation provides a balanced approach to compensation and consists of the primary components illustrated below. The chart is a general representation and is not to scale for any particular executive:

 

 

 

Not to scale.

Named Executive Officers

 

The summary compensation table in this proxy statement shows total compensation for our chief executive officer, our chief financial officer and the three next most highly compensated executive officers. The term “Named Executive Officers” in this discussion refers to those officers.

 

Benchmarking Tools

 

In reviewing the appropriate range of overall compensation and the appropriate ranges of the components of compensation for 2008, the Compensation Committee used benchmarking tools and surveys presented by Towers Perrin. The published and private survey sources consisted of Towers Perrin 2007 Executive Compensation Database and 2007 Long-Term Incentive Plan Report. Competitive data from the published/private survey sources represented pay rates for similar positions in general industry companies. We refer to those companies as the “Comparison Group.” Where appropriate data are available, Towers Perrin uses regression analysis to develop the compensation statistics used for comparison purposes. The names of the companies comprising the Comparison Group are set forth in Annex A attached to this proxy statement.

 

For periods after 2008, the Compensation Committee decided to limit the source of competitive data to a group of public companies in the Towers Perrin executive compensation database having revenues of $1-$3 billion (the “Reference Group”). These revenue levels correlate more closely to the size of the Company’s annual revenues than the revenue levels of the companies in the Comparison Group. Since the companies comprising the Reference Group change each year, any reference herein to a particular year’s Reference Group is prefaced by the applicable year (for example, the group used for 2009 is called the “2009 Reference Group”). The names of the companies comprising the 2009 Reference Group are set forth in Annex B attached to this proxy statement.

 

For 2008, the Compensation Committee utilized the 2008 Reference Group as the benchmarking group in the Performance Unit Plan. The names of the companies comprising the 2008 Reference Group are set forth in Annex C attached to this proxy statement. Prior to 2008, the Compensation Committee utilized the companies comprising the Value Line Diversified Companies Index (the “Value Line Group”) as the reference point for the Performance Unit Plan. The names of the companies comprising the Value Line Group are set forth in Annex D attached to this proxy statement.

 

Annual Base Salaries

 

We pay annual base salaries to our Named Executive Officers under employment agreements. Each November, we review the list of, and the terms and conditions of employment for, the Named Executive Officers and other officers with employment agreements in effect and determine whether to extend, modify or allow the agreements to expire. See “Certain Information with Respect to Officers and Directors — Executive Employment Agreements” below. These agreements provide that the base salaries of the Named Executive Officers may be increased at the sole discretion of the Compensation Committee.

 

We target the base salary levels of our Named Executive Officers within range of the 50th percentile because we believe that level is appropriate to motivate and retain our Named Executive Officers, who each have leadership talents and business expertise that make them attractive to other companies. In addition, when adjusting salaries, we may also consider the individual performance of the executive.

 

Effective January 1, 2008, the Compensation Committee increased Mr. Tanzberger’s salary $25,000 to $400,000 to move his salary close to the market median level of CFO salaries of the Comparison Group. The other Named Executive Officers did not receive a salary adjustment for 2008. The fact that some Named Executive Officers did not receive a salary increase in 2008 does not indicate dissatisfaction with their performance, but simply a recognition that their salary level was already at the target level.

 

For 2009, management recommended to the Compensation Committee that we suspend salary adjustments for the Named Executive Officers and the other officers in light of the current economic conditions regardless of relevant target levels. After consideration, the Compensation Committee agreed and no salary adjustments were made for 2009.

Annual Performance-Based Incentives Paid in Cash

 

We use annual performance-based incentives paid in cash to focus our executive officers on financial and operational objectives that the Compensation Committee believes are primary drivers of our common stock price over time. In February 2008 when the target annual performance-based incentive awards were established, we used the following performance measures for our Named Executive Officers:

 

 

 

2. The cumulative effect of any changes in accounting principles

 

3. Any extraordinary gain or loss or correction of an error

 

4. Any gain or loss recorded in association with the sale of a business or real estate

 

5. The gain or loss associated with the early extinguishment of debt

 

6. Currency gains or losses

 

 

 

 

 

 

In addition to the above performance measures, we established the following performance measures applicable only to Mr. Waring as follows:

 

 

For 2008, we weighted each of the performance measures as follows: 25% Normalized Earnings Per Share, 25% Consolidated Free Cash Flow, 25% Comparable Revenue Growth and 25% Comparable Sales Production Growth for all Named Executive Officers except for Mr. Waring. For Mr. Waring, we weighted the performance

measures as follows: 25% Normalized Earnings Per Share, 25% Consolidated Free Cash Flow, 25% Comparable Division Revenue Growth and 25% Comparable Division Sales Production Growth. The Compensation Committee established performance targets based on these measures for the performance period from January 1 through December 31, 2008. The targets for these specific performance measures were:

 

Normalized Earnings Per Share at $0.63

Consolidated Free Cash Flow at $274,400,000

Comparable Revenue Growth at 2.5%

Comparable Sales Production Growth at 7%

Division Targets applicable to Mr. Waring:

Comparable Division Revenue Growth at 2.5%

Comparable Division Sales Production Growth at 7%

 

The Compensation Committee established target performance-based incentive award levels for 2008 generally between the 50th and 75th percentile level of the Comparison Group for the Named Executive Officers. This is consistent with our overall compensation philosophy to target direct compensation of our Named Executive Officers within the range of the market median of the Comparison Group, to recognize achievement for greater levels of performance and to motivate and retain the executive level talent. As such, if SCI achieves the performance targets established by the Compensation Committee, executive officers would receive incentive awards at this targeted level. Actual incentive awards are decreased or increased on the basis of SCI’s performance relative to the performance targets, subject to maximum award amounts of 200% of targeted incentive levels. The maximum individual annual performance-based incentive award that could have been granted for 2008 was $4,000,000. The award is based on base salary on the last day of the measurement period.

 

For 2008, we did not meet the minimum requirements applicable to each performance measure. Accordingly, our officers did not receive any annual performance-based incentive payments for 2008.

 

The Compensation Committee did not retain any discretion to increase the annual performance-based incentive award or payout absent attainment of the relevant performance goals for the Named Executive Officers. The Compensation Committee did retain the ability to lower the payouts in its sole discretion.

 

For 2009, the Compensation Committee established in February 2009 target annual performance-based incentives between the 50th and 75th percentile level of the 2009 Reference Group for the Named Executive Officers, which results in target awards as follows:

 

 

For 2009, we will use performance measures substantially similar to the performance measures used in 2008. Normalized Earnings Per Share was modified to utilize a 33.5% effective tax rate and to exclude accounting charges or expenses relating to acquisitions. Consolidated Free Cash Flow was modified to exclude accounting charges or expenses relating to acquisitions.

 

We will weight each performance measures in the same manner as we did in 2008. The targets for the 2009 performance measures of Normalized Earnings Per Share and Consolidated Free Cash Flow are generally consistent with or within range of the guidance in the financial outlook for 2009 that we set forth in our Form 8-K furnished February 25, 2009. Actual incentive awards will be decreased or increased on a leveraged basis considering SCI’s performance relative to the performance targets, subject to maximum award amounts of 200% of targeted incentive levels which can only be realized if we exceed the upper ranges of our guidance for 2009.

Long-Term Incentive Compensation

 

In 2008, our long-term incentive compensation program consisted of three components to provide greater balance and focus for the Named Executive Officers and represents a competitive growing practice of using various types of long-term incentive devices. Each form of long term incentive is designed to ensure that appropriate focus is given to driving the Company’s stock price appreciation, managing the ongoing operations and implementing strategy and ensuring superior total shareholder returns. The program consists of equal targeted expected value delivered for long-term incentives in the form of:

 

(i) Stock Options;

(ii) Restricted Stock; and

(iii) Performance Units.

 

The total targeted expected value of the three awards for our Named Executive Officers was generally established within range of the market median of the Comparison Group. We believe that the grant of significant annual equity awards further links the interests of senior management and the Company’s shareholders. Therefore, the grant of stock options and the award of restricted stock are important components of annual compensation. Although the Compensation Committee does not consider current stock ownership levels in determining equity awards, we do annually review the ownership levels and progress towards established ownership guidelines, as discussed below.

 

Stock Options

 

The purpose of using stock options is to reward executive officers based on an increase in our stock price. In February of each year, the Compensation Committee sets the components of the long-term incentive compensation for that year. Stock options are granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date. Stock options vest at a rate of one third per year and have an eight-year term. The Compensation Committee establishes an economic value of stock options to be awarded and relies on Towers Perrin to calculate the number of stock options substantially equivalent to those economic values. For the February 2008 grant, Towers Perrin utilized a binomial option pricing rating model to determine the stock option grant amounts. Utilizing the Towers Perrin option valuing methodology allows for comparison of SCI option grants to market rates as reflected in the

 

Towers Perrin database. For 2009 grants, Towers Perrin changed its option valuation methodology and now uses the FAS 123R valuation methodology. This will provide grant valuations which align more closely to the valuations used for financial statement purposes.

 

Restricted Stock

 

The purpose of using restricted stock with vesting provisions is to assist in retaining our executive officers and encouraging stock ownership. The restricted stock awards are made at the same time as the stock option grants, vest at a rate of one-third per year and are based on the estimated grant date value of the restricted shares.

 

Performance Units

 

The purpose of using performance units is to reward executive officers for effective management of the business over a multi-year period. In addition, the performance units allow executive officers to retain or build their SCI stock ownership by providing liquidity that can be applied to taxes associated with option exercises and restricted stock vestings. The performance unit component is settled in cash at the end of a three-year performance period. Each performance unit is valued at $1.00 and the actual payout may vary by a range of 0% to 200% of the targeted award established by the Compensation Committee. The Performance Unit Plan measures the 3 year total shareholder return (“TSR”) relative to the companies in the Reference Group. TSR is defined as $100 invested in SCI common stock on the first day of the performance cycle, with dividends reinvested, compared to $100 invested in each of the companies in the Reference Group, with dividend reinvestment during the same period. For grants in years prior to 2008, the Performance Unit Plan measured TSR relative to the companies in the Value Line Group.

For the 2006 – 2008 performance cycle, the closing stock price determinations as of December 31, 2005 and December 31, 2008 were used to calculate the awards due participants. For this performance cycle, the total SCI shareholder return was negative and the participants did not receive any award payout.

 

For the 2008 – 2010 performance cycle, the Compensation Committee granted performance units with performance awards ranging from 0% to 200% as set forth below in the “Grants of Plan-Based Awards” table. A target award is earned if SCI’s TSR relative ranking is at the 50th percentile of the TSR of the 2008 Reference Group and total SCI shareholder return is positive.

 

For the 2009 – 2011 performance cycle, the plan provisions for the grants covering the 2008 – 2010 performance cycle were utilized, except that the reference point is the 2009 Reference Group.

 

2009 Long-Term Incentive Awards

 

In February 2009, we awarded grants of stock options, restricted stock and performance units to Named Executive Officers as set forth in the table below. These amounts are not reflected in the compensation tables elsewhere in this proxy statement.

 

 

Provisions Regarding Claw-Backs

 

In November 2008, the Board of Directors adopted provisions for seeking the return (claw-back) from executive officers of cash incentive payments and stock sale proceeds in certain circumstances involving fraud. We added these provisions for the following elements of compensation awarded in 2009: annual performance-based incentives paid in cash, stock options, restricted stock and performance units. The provisions would be triggered if the Board of Directors determines that an officer has engaged in fraud that caused, in whole or in part, a material adverse restatement of the Company’s financial statements. In such an event, the Company would seek to recover from the offending officer the following:

 

 

If the officer contests the claw-back, the Company will promptly pay the officer’s reasonable legal fees and expenses; provided however, if the officer does not prevail in such contest, the officer will reimburse the Company for all such legal fees and expenses.

 

Stock Ownership Guidelines

 

In 2004, we established stock ownership guidelines for officers. Share ownership is generally achieved through open market purchases of SCI stock, shares acquired in the company sponsored 401(k) plan, vesting of restricted

stock and shares retained after exercise of stock options. The table below sets forth our current ownership guidelines for our officers.

 

 

At March 16, 2009, the Named Executive Officers had attained or exceeded their ownership guideline levels.

 

Employment Agreements; Termination Payment Arrangements

 

The Company has employment agreements with Messrs. R.L. Waltrip, Thomas L. Ryan, Michael R. Webb, Eric D. Tanzberger and Sumner J. Waring, III. These agreements have current terms expiring December 31, 2009. Annually, the Company may extend each agreement for an additional year unless notice of nonrenewal is given by either party.

 

For further discussion of these employment agreements, refer to “Certain Information with Respect to Officers and Directors — Executive Employment Agreements” below.

 

Our employment agreements and compensation plans have historically incorporated arrangements for certain payments upon change of control of the Company and for other terminations. We believe that these arrangements have been and are necessary to attract, motivate, reward and retain the broad-based management talent required to achieve our corporate directives. In the context of a possible takeover, we believe that change-in-control provisions (i) help focus our executives on strategic alternatives that would maximize shareholder value, and (ii) provide for personal financial security, thereby reducing a concern which could be a distraction for the executive. Our change-in-control and other termination payment arrangements do not affect decisions regarding other compensation elements. We structured the terms and payout of our arrangements based upon our historical practice and competitive considerations, including advice from Towers Perrin that such features were commonly used by publicly traded companies.

 

For further discussion of termination arrangements, refer to “Certain Information with Respect to Officers and Directors — Potential Payments Upon Termination” below.

 

Retirement Plans

 

We believe that financial security during retirement can be as important as financial security before retirement. We previously maintained a Cash Balance Plan and a Supplemental Executive Retirement Plan for Senior Officers, both of which ceased accruing benefits in 2000. In 2005, we implemented an Executive Deferred Compensation Plan for our executive officers which includes a Company contribution for retirement.

 

Our Cash Balance Plan was a defined benefit plan under which our Named Executive Officers accrued benefits until December 31, 2000. No further contributions were made by the Company, but plan accounts continued to accrue interest. In August of 2006, the Board of Directors authorized the termination of the Cash Balance Plan. In 2007, the participant’s account balances were distributed to participants in the form of an annuity or a rollover to the Company’s 401(k) Plan or an IRA at the participant’s election.

 

Our Supplemental Executive Retirement Plan for Senior Officers is a non-qualified plan under which our Named Executive Officers accrued benefits until December 31, 2000. No additional benefits will accrue after 2000. Each participant is entitled at age 60 to the annual payment of the full amount of his benefit.

 

To help retain and recruit executive level talent, the Company maintains a supplemental retirement and deferred compensation plan for its executive officers, the Executive Deferred Compensation Plan. This plan allows for an annual retirement contribution of 7.5% and a performance-based contribution targeted at 7.5%, with a range of 0% to 15% based on achievement of Company performance measures established in the first quarter of each year.

These are the same performance measures described in the Annual Performance-Based Incentives Paid In Cash above. The percentages are applied to the combined eligible compensation of base salary and annual performance-based incentive paid in cash. The plan allows for individual deferral of base salary, annual performance-based incentives paid in cash, and long-term incentive program components payable in cash (performance unit awards). The plan also allows for the restoration of Company matching contributions that are prohibited in the Company’s 401(k) plan due to tax limits on contributions to qualified plans. In February 2009, the Company made the following contributions under the plan:

 

 

We also offer a 401(k) plan to our employees, including our executive officers. In 2001, the Company initiated the 401(k) Retirement Savings Plan for elective contributions by participants and matching contributions by the Company up to prescribed limits established by the Board of Directors and specific IRS limitations as a replacement for the Cash Balance Plan. Participants may elect to defer up to 50% of salary and bonus into the Plan subject to the annual IRS contribution limit of $15,500 excluding the $5,000 catch-up contributions for eligible for participants age 50 and older. The Company’s match ranges from 75% to 125% of employee deferrals based on their years of company service up. The match is applied to a maximum of 6% of an officer’s salary and annual performance-based incentive.

 

Perquisites and Personal Benefits

 

We provide various personal benefits to our executive officers which are generally provided by other companies and become an expected component of the overall remuneration for executive talent, including:

 

 

Personal benefit amounts are not considered annual salary for bonus purposes, deferred compensation purposes or 401(k) contribution purposes.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

COMPENSATION COMMITTEE

 

Alan R. Buckwalter, III (Chairman)

Anthony L. Coelho

Malcolm Gillis

Victor L. Lund

John W. Mecom, Jr.

 

 

Compensation

 

The following table sets forth information for the three years ended December 31, 2008 with respect to the Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated executive officers of the Company. The determination as to which executive officers were most highly compensated was made with reference to the amounts required to be disclosed under the “Total” column in the table reduced by the amounts in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column.

 

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

The assumptions made for quantifying the present value of the benefits are set forth in note 15 to the consolidated financial statements included in the SCI 2008 Annual Report on Form 10-K. Each executive’s account in the Cash Balance Plan was 0 in 2008 since the plan was liquidated in 2007. For 2007 and 2006, Mr. Waltrip’s accounts experienced declines because he received payments under both plans in 2006 (including his last payment under the SERP for Senior Officers) and under the Cash Balance Plan in 2007. The actuarial present value of his account (i) in the Cash Balance Plan decreased $24,020 in 2006 and $7,875 in 2007, and (ii) in the SERP for Senior Officers decreased $1,082,807 in 2006, which concluded his participation in the plan. Regarding Mr. Tanzberger, the actuarial present value of his account in the SERP for Senior Officers decreased $219 in 2008.

(4) All Other Compensation includes the following:

 

2008 All Other Compensation

 

 

 

 

Grants of Plan-Based Awards

 

The following table sets forth plan-based awards granted in 2008.

 

Grants of Plan-Based Awards