Illinois Tool Works Inc.
3600 West Lake Avenue
Glenview, Illinois 60026

 

Notice of Annual Meeting of Stockholders

Friday, May 6, 2011

3:00 P.M.

 

The Northern Trust Company

50 South LaSalle Street

Chicago, Illinois 60603

 

ITW is holding its 2011 Annual Meeting for the following purposes:

 

1. To elect the ten directors named in this proxy statement for the upcoming year;

 

 

3. To hold an advisory vote on executive compensation;

 

 

5. To approve the Illinois Tool Works Inc. 2011 Cash Incentive Plan;

 

 

7. To conduct any other business as may be properly brought before the meeting.

 

The Board of Directors recommends that you vote “FOR” each of the director nominees, “FOR” items 2, 3, 5 and 6, and for “ONE YEAR” for item 4.

 

Only stockholders of record at the close of business on March 8, 2011 are entitled to vote.

 

YOUR VOTE IS IMPORTANT. Please return your proxy card or vote via the Internet or by telephone so that your shares will be voted and represented at the meeting, even if you plan to attend the meeting. Please note that brokers may not vote your shares on the election of directors or on items 3, 4, 5 or 6 above in the absence of your specific instructions as to how to vote.

 

The Company’s Annual Report to stockholders for fiscal year 2010 is enclosed with this proxy statement.

 

By Order of the Board of Directors,
James H. Wooten, Jr.
Secretary

 

March 23, 2011

 

Table of Contents

 

 

Illinois Tool Works Inc.

 

Proxy Statement

 

This year, we are again furnishing proxy materials, which include our 2010 annual report, to many of our stockholders through the Internet. If you received a Notice of Internet Availability of Proxy Materials (E-Proxy Notice) by mail or electronically, you will not receive a printed copy of the proxy materials unless you specifically request one. Instead, the E-Proxy Notice provides instructions on how you may access and review our proxy materials. The E-Proxy Notice also instructs you on how you may submit your proxy via the Internet. If you received the E-Proxy Notice and would still like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the E-Proxy Notice. On or about March 23, 2011, we will begin mailing printed copies of our proxy materials to all stockholders who previously submitted a valid election to receive all future proxy materials and other stockholder communications in written format, and sending the E-Proxy Notice to all other stockholders.

 

Receiving Future Proxy Materials Electronically: Stockholders may also sign up to receive future proxy materials, including E-Proxy Notices and other stockholder communications electronically, instead of by mail. This will reduce our printing and postage costs and eliminate bulky paper documents from your personal files. To sign up to receive stockholder communications electronically, follow the instructions on your proxy card or E-Proxy Notice under “Vote by Internet”. You will need the 12-digit number that is printed in the box marked by the arrow →, which appears on your proxy card or E-Proxy Notice. In order to receive the communications electronically, you must have an e-mail account and access to the Internet. If you own your shares through a broker or other nominee, you may contact them directly to request electronic access. Your consent to electronic access will be effective until you revoke it. You may revoke your consent by going to www.proxyvote.com and using the 12-digit number that is printed in the box marked by the arrow → to complete the revocation.

 

Following are questions often asked by stockholders of publicly held companies. We hope that the answers will assist you in casting your vote.

 

What am I voting on?

 

We are soliciting your vote on:

 

1. The election of the ten directors named in this proxy statement for the upcoming year;

 

 

3. An advisory vote on ITW’s executive compensation;

 

4. An advisory vote on the frequency of the advisory vote on executive compensation;

 

5. Approval of the Illinois Tool Works Inc. 2011 Cash Incentive Plan;

 

 

7. Any other business as may be properly brought before the meeting.

 

Who may vote?

 

Stockholders at the close of business on March 8, 2011, the record date, may vote. On that date, there were 498,664,852 shares of ITW common stock outstanding.

 

How many votes do I have?

 

Each share of ITW common stock that you own entitles you to one vote.

 

How do I vote?

 

You may vote your shares in one of the following four ways:

 

1.		In person:		Attend our Annual Meeting, where ballots will be provided; or
2.		By telephone:		See the instructions at www.proxyvote.com; or
3.		By Internet:		See the instructions at www.proxyvote.com; or
4.		By mail:		If you received a printed copy of these proxy materials by mail, by signing, dating and mailing the enclosed proxy card.

 

If you hold your shares through a bank or broker that does not offer telephone or Internet voting, please complete and return your proxy card by mail.

 

When must I submit my vote by Internet or by phone?

 

If you vote by Internet or by phone, you must transmit your vote by 1:00 a.m., Central Time, on May 6, 2011.

 

If I hold shares through an ITW 401(k) Plan, when must I submit my vote?

 

Shares held through an ITW 401(k) plan must be voted by 11:59 p.m., Central Time, on May 4, 2011 in order to be tabulated in time for the meeting.

How does discretionary voting authority apply?

 

Stockholders of Record. If you are a stockholder of record and you vote by proxy, the individuals named on the proxy card (your proxies) will vote your shares in the manner you indicate. If your proxy card does not indicate how you want to vote, your proxy will be voted FOR the election of each director nominee, FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, FOR approval of ITW’s executive compensation, for a frequency vote of ONE YEAR on executive compensation, FOR approval of the ITW 2011 Cash Incentive Plan, FOR re-approval of the performance factors and award levels under the 2011 Long-Term Incentive Plan, and FOR or AGAINST any other properly raised matter at the discretion of Ms. Crown and Messrs. Brailsford and Morrison.

 

Beneficial Owners. If your shares are held in a brokerage account or by a nominee, and you do not provide your broker or nominee with voting instructions, the broker or nominee may represent your shares at the meeting for purposes of obtaining a quorum, but may not exercise discretion to vote your shares at the meeting unless the proposal is considered a routine matter. The only matter being proposed for stockholder vote at the 2011 Annual Meeting that is considered a routine matter is the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm. As a result, your broker or nominee will not have discretion to vote on the election of directors, ITW’s executive compensation, the frequency of the vote on executive compensation, the ITW 2011 Cash Incentive Plan or the performance factors and award limits under ITW’s Long-Term Incentive Plan in the absence of voting instructions from you. If you are a beneficial owner, it is important that you provide instructions to your bank, broker or other holder of record so that your vote is counted.

 

May I revoke my proxy?

 

You may revoke your proxy at any time before it is voted at our Annual Meeting in one of four ways:

 

 

2. Submit another proxy with a later date;

 

3. Vote by telephone or Internet after you have given your proxy; or

 

4. Vote in person at our Annual Meeting.

 

What does it mean if I receive more than one E-Proxy Notice or set of proxy materials?

 

Your shares are likely registered differently or are in more than one account. For each notice, proxy and/or voting instruction card or e-mail notification you receive that has a 12-digit number, you must vote to ensure that all shares you own are voted.

 

What constitutes a quorum?

 

The presence, in person or by proxy, of the holders of a majority of ITW shares entitled to vote at our Annual Meeting constitutes a quorum. Your shares will be considered part of the quorum if you return a signed and dated proxy card or if you vote by telephone or Internet. Abstentions and broker non-votes are counted as “shares present” at the meeting for purposes of determining if a quorum exists. A broker non-vote occurs when your bank, broker or other holder of record holding shares for you as the beneficial owner submits a proxy that does not

indicate a vote as to a proposal because that holder has not received voting instructions from you and, therefore, does not have voting authority for that proposal.

 

What vote is required to approve each proposal, assuming a quorum is present?

 

Election of Directors: The number of shares voted “for” a director must exceed the number of shares voted “against” that director.

 

Ratification of the Appointment of Independent Registered Public Accounting Firm: The affirmative vote of a majority of the shares present in person or by proxy must be cast in favor of this proposal.

 

Advisory (Non-Binding) Vote on ITW’s Executive Compensation: The affirmative vote of a majority of the shares present in person or by proxy cast in favor of this proposal will constitute approval by the stockholders.

 

Advisory (Non-Binding) Vote on the Frequency of the Advisory Vote on Executive Compensation: The frequency (i.e., every one, two or three years) receiving the greatest number of votes will be the frequency approved by the stockholders.

 

Approval of the ITW 2011 Cash Incentive Plan: The affirmative vote of a majority of the shares present in person or by proxy must be cast in favor of this proposal.

 

Re-approval of the Performance Factors and Award Limits Under the ITW 2011 Long-Term Incentive Plan: The affirmative vote of a majority of the shares present in person or by proxy must be cast in favor of this proposal.

 

What is the effect of a broker non-vote generally and on each proposal?

 

A broker non-vote occurs when a broker or other nominee does not receive voting instructions from the beneficial owner and does not have the discretion to direct the voting of the shares. Broker non-votes will be counted for purposes of calculating whether a quorum is present at the Annual Meeting, but will not be counted for purposes of determining the number of votes present in person or represented by proxy and entitled to vote with respect to a particular proposal. Broker non-votes will not, therefore, impact our ability to obtain a quorum. In addition, broker non-votes will not affect the outcome of a vote on a proposal that requires a plurality of the votes cast (i.e., the vote on frequency of the executive compensation vote) or the approval of a majority of the votes present in person or represented by proxy and entitled to vote (all other proposals).

 

What if I “abstain” from voting?

 

An abstention on the election of directors or the advisory vote on the frequency of the vote on executive compensation will have no effect on the outcome. An abstention on the other proposals will have the effect of a vote against those proposals.

 

How do I submit a stockholder proposal?

 

To be considered for inclusion in our proxy statement for our May 2012 Annual Meeting, a stockholder proposal must be received no later than November 24, 2011. Your proposal must be in writing and must comply with the proxy rules of the SEC. You should send your proposal to our Secretary at our address on the cover of this proxy statement.

 

You also may submit a proposal that you do not want included in the proxy statement, but that you want to raise at our May 2012 Annual Meeting. We must receive your proposal in

writing on or after January 7, 2012, but no later than February 6, 2012. As detailed in the advance notice procedures described in our by-laws, for a proposal other than the nomination of a director to be properly brought before an annual meeting, your notice of proposal must include: (1) your name and address, as well as the name and address of the beneficial owner of the shares, if any; (2) the number of shares of ITW stock owned beneficially and of record by you and any beneficial owner as of the date of the notice (which information must be supplemented as of the record date); (3) a description of certain agreements, arrangements or understandings entered into by you or any beneficial owner with respect to the shares (which information must be supplemented as of the record date) or the business proposed to be brought before the meeting; (4) any other information regarding you or any beneficial owner that would be required under the SEC’s proxy rules and regulations; and (5) a brief description of the business you propose to be brought before the meeting, the reasons for conducting that business at the meeting, and any material interest that you or any beneficial owner has in that business.

 

How do I nominate a director?

 

If you wish to nominate an individual for election as a director at our May 2012 Annual Meeting, our Secretary must receive your written nomination on or after January 7, 2012, but no later than February 6, 2012. As detailed in the advance notice procedures described in our by-laws, for a nomination to be properly brought before an annual meeting, your notice of nomination must include: (1) your name and address, as well as the name and address of the beneficial owner of the shares, if any; (2) the number of shares of ITW stock owned beneficially and of record by you and any beneficial owner as of the date of the notice (which information must be supplemented as of the record date); (3) a description of certain agreements, arrangements or understandings entered into by you or any beneficial owner with respect to the shares (which information must be supplemented as of the record date); (4) the name, age and home and business addresses of the nominee; (5) the principal occupation or employment of the nominee; (6) the number of shares of ITW stock that the nominee beneficially owns; (7) a statement that the nominee is willing to be nominated and serve as a director; (8) a statement as to whether the nominee intends to tender his or her resignation in accordance with our Corporate Governance Guidelines; (9) an undertaking to provide any other information required to determine the eligibility of the nominee to serve as an independent director or that could be material to stockholders’ understanding of his or her independence; and (10) any other information regarding you, any beneficial owner or the nominee that would be required under the SEC’s proxy rules and regulations had our Board of Directors nominated the individual. Any nomination that you make must be approved by our Corporate Governance and Nominating Committee, as well as by our Board of Directors. The process for the selection of director candidates is described under “Corporate Governance Policies and Practices — Director Candidate Selection Process” beginning on page 17.

 

Who pays to prepare, mail and solicit the proxies?

 

We will pay the cost of solicitation of proxies including preparing, printing and mailing this proxy statement and the E-Proxy Notice. We will also authorize brokers, dealers, banks, voting trustees and other nominees and fiduciaries to forward copies of the proxy materials to the beneficial owners of ITW common stock. Upon request, we will reimburse them for their reasonable expenses. In addition, our officers, directors and employees may solicit proxies in person, by mail, by telephone or otherwise.

 

Stockholders are being asked to elect the ten directors named in this proxy statement at our Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. See “Corporate Governance Policies and Practices” for more information regarding our candidate selection process. Each director will serve until the May 2012 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed. After over 14 years of distinguished service, Marvin D. Brailsford is not a nominee for re-election and is retiring from the Board as of the date of the Annual Meeting. Accordingly, Mr. Brailsford is not included as a nominee below for election at the Annual Meeting.

 

We will vote your shares as you specify on the proxy card, by telephone, by Internet or by mail. If you do not specify how you want your shares voted, we will vote them FOR the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares FOR that other person. The Board of Directors does not anticipate that any nominee will be unable to serve.

 

Each nominee for director brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a variety of areas. Set forth below is biographical information provided by the nominees, as well as a description of the experiences, qualifications, skills and attributes that led the Corporate Governance and Nominating Committee and the Board to conclude that each nominee should serve as a director of the Company.

 

 

The Company’s Board of Directors met five times during 2010. In addition to meetings of the full Board, directors attended meetings of Board committees. Non-employee directors, all of whom are independent, met five times in regularly scheduled executive sessions. Mr. Robert S. Morrison, our lead director, serves as the Chairman of executive sessions of the independent directors.

 

As stated in the Company’s Corporate Governance Guidelines, the Board believes that it is in the best interests of the Company to examine whether the role of Chairman and Chief Executive Officer should be combined each time the Board elects a new chief executive officer. David Speer, our current Chairman and CEO, has over 32 years of service with the Company. Robert Morrison, our lead director, is an experienced director, having served on the boards of several major public companies, and is also a former CEO of several major public companies. Our lead director is the key liaison, and serves as an effective avenue for information flow between the CEO and the independent directors. He also promotes an appropriate balance between the powers of the CEO and the independent directors. Our Board believes that in light of the blend of experience and skills of our CEO and board, the lead director structure is the appropriate leadership structure for our Board at this time. Whether the same leadership structure will be selected when our CEO’s tenure with the Company ends is a matter that our Board believes should be evaluated at that time in light of the skills and experience of the new CEO and other relevant considerations.

 

The Board of Directors has standing audit, compensation, corporate governance and nominating, and finance committees. Under the terms of their charters, each member of the audit, compensation, and corporate governance and nominating committees must meet applicable New York Stock Exchange (“NYSE”) and SEC independence requirements. The Company encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2010, during the time they were serving, all of the directors, except Mr. McCormack, attended at least 75% of the meetings of the Board and the committees on which they serve, and all of the directors then serving attended our 2010 Annual Meeting of Stockholders. Mr. McCormack, who attended 73% of the meetings, was unable to attend one board meeting and the two committee meetings held the same day.

 

Audit Committee

 

The Audit Committee is responsible for the engagement of our independent registered public accounting firm and assists the Board with respect to matters involving and overseeing accounting, financial reporting and internal audit functions. In addition, the Committee is responsible for the integrity of the Company’s financial statements, compliance with legal and regulatory requirements, the independence and performance of ITW’s independent registered public accounting firm, and the performance of the Company’s internal audit function. Finally, the Audit Committee reviews and evaluates our policies and practices with respect to risk assessment and risk management and steps taken by management to monitor and control such exposures. Additional information on the Committee and its activities is set forth in the “Audit Committee Report” beginning on page 52.

Compensation Committee

 

The Compensation Committee establishes and oversees executive compensation policies, including issues relating to pay and performance, targeted positioning and pay mix. The Compensation Committee recommends to the other independent directors compensation for the chief executive officer, reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments to any such existing plans. The Compensation Committee also is responsible for reviewing and evaluating risks arising from our compensation policies and practices and providing input to management on whether such policies and practices may have a material adverse effect on the Company.

 

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee engaged Frederic W. Cook & Co., an independent consultant (“Cook”), as its independent advisor to review the Company’s overall executive compensation program, review the peer group of companies used by the Compensation Committee for comparison purposes and assess our compensation governance process. Cook was asked to review materials relevant to the overall compensation of our executives and to meet with our management and members of the Compensation Committee in order to gain strategic insight into the Company’s compensation programs. On a limited basis, Company management has engaged Aon Hewitt and Towers Watson & Co. to provide competitive market data (including information with respect to the Company’s peer group companies). From time to time, the Compensation Committee reviews the materials provided by Aon Hewitt and Towers Watson & Co. to management.

 

Additional information on the Compensation Committee, its activities, its relationship with its compensation consultant and the role of management in setting compensation, is provided in the “Compensation Discussion and Analysis” beginning on page 24.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance guidelines; oversees the evaluations of the performance and procedures of the Board and individual directors; and makes recommendations as to Board committees and Board size. This committee also oversees and makes recommendations to the independent directors regarding director compensation. See “Corporate Governance Policies and Practices — Director Candidate Selection Process” below for a description of the director selection process.

 

Finance Committee

 

The Finance Committee reviews, evaluates and recommends management’s proposals to the Board relating to the Company’s financing, investment portfolio and real estate investments, and reviews and evaluates an annual summary of the funding and investment status of significant benefit plans sponsored by the Company globally. The Finance Committee also periodically reviews and evaluates risks arising from the Company’s investments, treasury function (such as derivatives and interest rates) and liquidity.

Committee Memberships

 

The following table shows the current membership of each committee and the number of meetings held by each committee during 2010:

 

 

 

Board’s Role in Risk Oversight

 

The Board of Directors is responsible for the overall risk oversight of the Company. While the Board has delegated to the Audit Committee the responsibility to review and evaluate the Company’s overall risk policies and practices, the responsibility for the review and evaluation of risks relating to investments and other treasury functions has been delegated to the Finance Committee, and risks arising from the Company’s compensation policies and practices has been delegated to the Compensation Committee. Each of these committees reports their findings to the full Board, and the Compensation Committee is also charged with providing input to management on whether the Company’s compensation policies and practices may have a material adverse effect on the Company.

In 2004, the Company performed an enterprise risk management review, which identified key business risks of the Company, including, but not limited to, business environment (including industry, market, sourcing, competition and operations), tax, acquisitions, legal (including product liability), financial, regulatory and investment risks and established a formal process for continuous review of such risks. At each Audit Committee meeting, Company management gives a presentation on at least one of these risks, providing the Committee members an opportunity to discuss the risks and the risk mitigation processes. Certain risks are reviewed and discussed annually, while others are considered on a rotating basis. The Audit Committee reports its evaluation of each risk presentation to the full Board after each Audit Committee meeting.

 

The risk reviews conducted by the Compensation and Finance Committees are also reported to the full Board on a regular basis. The Company believes that because each of these committees is comprised of independent board members, the Chairman and Chief Executive Officer of the Company is subject to the risk oversight of independent directors.

 

General

 

We have long believed that good corporate governance is important to assure that the Company is managed for the long-term benefit of its stockholders. Accordingly, we continuously review our corporate governance policies and practices not only for compliance with applicable law, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for good corporate governance principles and standards of behavior. In 2010, we adopted a new Global Anti-Corruption Policy, which supplements our Statement of Principles of Conduct and provides detailed guidance to our employees on prohibited actions under anti-bribery and anti-corruption laws. We also adopted a hedging policy that prohibits our key employees from hedging the risk of ownership in ITW stock and a clawback policy that provides for the recovery of incentive compensation payments from our senior officers in the event of an accounting restatement (whether or not based on misconduct) due to material noncompliance with financial reporting requirements.

 

Our Board of Directors has adopted and annually reviews charters for our Audit, Compensation, and Corporate Governance and Nominating Committees. We maintain a corporate governance section on our website that includes the charters of these committees, the Company’s Corporate Governance Guidelines, the Company’s Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees), Global Anti-Corruption Policy and the Company’s Code of Ethics for the Chief Executive Officer and key financial and accounting personnel. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our website. You can find this and other corporate governance information at www.itw.com. We also will provide copies of this information upon request.

 

Communications with Directors

 

Stockholders and other interested parties may communicate with any of our directors, including Robert S. Morrison, our lead director, or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to any of our directors c/o Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, IL, 60026, Attention: Secretary. Relevant communications will be forwarded by the Secretary to the appropriate directors depending on the facts and circumstances outlined in the communication.

 

Board Independence

 

Our Board conducts an annual review as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence. A copy of the Company’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with the Company (directly or as a partner, stockholder or officer of an organization that has a material relationship with the Company).

 

The Board has determined that each of the current directors, except David B. Speer, has no material relationship with the Company other than as a director and is independent within the meaning of the Company’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has

broadly considered all relevant facts and circumstances including that: (1) Ms. Crown and Messrs. McCormack and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which the Company has a commercial banking relationship as described under “Certain Relationships and Related Transactions” beginning on page 51; (2) Messrs. Brailsford, McCormack, Morrison and Skinner serve as directors of companies that have an existing customer or supplier relationship with the Company; (3) Ms. Crown has an indirect interest in a company with which we conduct business; (4) Ms. Strobel serves as a director of a company that owns 4% of the Company’s common stock and as a director of a company with which we conduct business; (5) Mr. David B. Smith, Jr. is the nephew of Harold B. Smith; and (6) Messrs. Warren and Williams are employees of companies with which we conduct business as described under “Certain Relationships and Related Transactions” beginning on page 51. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of the directors.

 

Director Qualifications

 

Our directors play a critical role in guiding the Company’s strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of our stockholders, and personal integrity and judgment. Although there is no specific policy regarding Board diversity, racial, ethnic and gender diversity are also important factors considered in the director selection process. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain a diverse board composed of highly qualified directors who have sufficient time to attend to their duties and responsibilities to the Company. Of the eleven directors currently on our Board, two are women and three are African American.

 

Director Candidate Selection Process

 

The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific criteria or simply to fill a vacancy on the Board. At that time the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board endorsement of the selected candidate(s).

 

In February 2010, the Corporate Governance and Nominating Committee approved the retention of Russell Reynolds Associates, Inc. to assist it in identifying a diverse slate of potential board candidates, as several of our directors are approaching retirement age. Messrs. Warren and Williams were recommended to the Board by Russell Reynolds Associates, Inc.

 

Our by-laws permit stockholders to nominate directors for consideration at an annual meeting of stockholders. The policy of the Corporate Governance and Nominating Committee is to consider a properly submitted stockholder nomination for election as director. For a

description of the process for submitting a director candidate in accordance with the Company’s by-laws, see “Questions and Answers — How do I nominate a director?” on page 6.

 

Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination.

 

Director Election

 

Our by-laws provide for the election of directors in uncontested elections by majority vote. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply.

 

If a nominee who is serving as a director is not elected at an annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons why stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to the Company and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but no director who failed to receive a majority of the votes cast will participate. We will disclose the results of the Committee’s review within 90 days of such annual meeting. At our 2010 Annual Meeting, each director received a majority of the votes cast for his or her election.

 

Annual Retainer and Chair Fees

 

In 2010, the annual cash retainer for non-employee directors was $135,000, and the annual fee for committee chairs was an additional $5,000, except for the Audit Committee chair, whose annual fee was $15,000, and the Compensation Committee chair, whose annual fee was $10,000. Non-employee directors are given the opportunity to elect annually to receive all or a portion of their annual retainer and chair fees in an equivalent value of ITW common stock pursuant to our Illinois Tool Works Inc. 2006 Stock Incentive Plan (the “Incentive Plan”). The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.

Directors’ Deferred Fee Plan

 

Non-employee directors can defer receipt of all or a portion of their annual retainer and chair fees until retirement or resignation. Deferred fee amounts are credited with interest quarterly at current rates. A director can also elect to defer receipt of the ITW common stock to be received in lieu of a cash payment, in which case the deferred shares are credited as stock units to an account in the director’s name. The account receives additional credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in our Incentive Plan), with any fractional shares paid in cash.

 

ITW Common Stock

 

The Company grants stock to its non-employee directors under our Incentive Plan, which links this element of compensation to our long-term performance. Under our director compensation program, in 2010, non-employee directors, other than Messrs. Warren and Williams who became directors subsequent to the grant date, received an annual stock grant equivalent in value to approximately $65,000, or 1,489 shares of stock.

 

Phantom ITW Stock

 

To tie a further portion of their compensation to our long-term performance, non-employee directors of the Company are awarded 1,000 units of phantom stock upon first becoming a director. The value of each unit equals the market value of one share of ITW common stock. Additional units are credited to a director’s phantom stock account in an amount equivalent to cash dividends paid on ITW stock. Accounts are adjusted for stock dividends, stock splits, combinations or similar changes. A director is eligible for a cash distribution from his or her account at retirement or upon approved resignation. Directors may elect to receive their phantom stock distribution in either a lump sum or in up to ten annual installments. Directors receive the value of their phantom stock accounts immediately upon a change in control.

 

Director Compensation in Fiscal Year 2010

 

The following table summarizes the compensation for our directors who served during 2010.

 

 

 

 

Directors and Executive Officers

 

The following table shows the amount of ITW common stock beneficially owned by the directors, the named executive officers, and all directors and executive officers as a group as of December 31, 2010. The “named executive officers” are our Chief Executive Officer, our Chief Financial Officer and the next three most highly-compensated executive officers who were serving at the end of the last fiscal year (based on total compensation, less the increase in pension value and nonqualified deferred compensation earnings). The “percent of class” calculation is based on 497,744,301 shares of ITW common stock outstanding as of December 31, 2010.

 

Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options that are exercisable currently or that become exercisable within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them.

 

The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2010. Phantom stock

units are not transferable and have no voting rights. The units are not included in the “percent of class” calculation.

 

 

 

Other Principal Stockholders

 

This table shows, as of December 31, 2010, the only stockholders that we know to be beneficial owners of more than 5% of ITW common stock. See “Certain Relationships and Related Transactions” for a description of the commercial banking services provided by The Northern Trust Company and its subsidiaries to the Company and the amount paid by the Company for these services.

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2010 and written representations from executive officers and directors, we believe that all filing requirements were timely met during 2010.

 

The Company is providing its annual report and its Annual Report on Form 10-K to stockholders who receive this proxy statement. The Company will provide copies of these reports to brokers, dealers, banks, voting trustees and their nominees for the benefit of their beneficial owners of record. Additional copies of this proxy statement, the annual report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, are available without charge upon written request to Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, IL, 60026, Attention: Secretary. You may also review Company SEC filings by visiting the Company’s website at www.itw.com.

 

Executive Summary

 

The Company emphasizes a total compensation approach in establishing individual executive compensation levels, with each element of compensation serving a specific purpose. In addition to paying a competitive base salary, we use a mix of different performance-based elements of compensation that reward different aspects of both Company and individual performance. The Company’s executive compensation program consists primarily of three elements: short-term cash compensation (base salaries and annual cash incentives), long-term incentive compensation (stock options, restricted stock units and cash), and retirement benefits, as illustrated below:

 

 

 

 

We believe that our compensation structure motivates our employees to achieve the highest levels of operating results. ITW achieved double-digit growth in total revenues and diluted income per share in 2010 compared to 2009 due to both an improving worldwide economy and the Company’s ability to focus on growth opportunities in key end markets. In 2010, total revenues increased 14% over 2009. Diluted income per share from continuing operations of $3.03 in 2010 was 57% higher than the prior year period. Operating margins for 2010 totaled 14.8%, a 480 basis point improvement compared to 2009. Based on the Company’s forecast assumptions at the beginning of 2010, ITW achieved higher-than-expected growth in a number of businesses. The automotive OEM, industrial packaging, welding and the electronics-related businesses all outperformed Company expectations as end markets recovered at faster-than-expected rates, and the Company delivered innovative product offerings into these improving markets. The construction and food equipment businesses, however, did not perform as well as expected due to continued weak demand in the North American residential and commercial construction categories and lower-than-expected customer capital expenditures in the food equipment category. Throughout its history, the Company has remained committed to a stable financial profile. In 2010, we maintained a strong balance sheet and solid credit ratings. The Company’s 2010 free operating cash flow remained strong at $1.3 billion, resulting in reinvestment in current businesses, acquisition of new businesses, dividend growth and opportunistically utilizing our ongoing share repurchase program. During the year, the Company also continued to build out its diversified geographic profile. In 2010, 58% of ITW’s revenues were derived from outside of the United States, with Europe accounting for 31% of revenues and Asia Pacific accounting for 16% of revenues. In 2000, the combined total of these two international regions accounted for 34% of the Company’s total revenues.

 

The Company’s highly decentralized operating style gives unusually substantial operating authority to the managers of our business units who are empowered to make the decisions necessary to serve their customers and grow their businesses and are accountable for their business unit’s results. Our executive management is responsible for ensuring that these decisions are carried out in accordance with our values and expectations for the near and long term and are, in general, in the best interests of our stockholders.

 

Our target pay mix is intended to create a strong correlation between corporate and business unit performance and the executive’s pay. The compensation elements based on corporate or business unit performance include our annual cash incentive, long-term cash incentive, and equity incentives. The largest single element of pay is delivered through equity awards with multi-year vesting schedules to align the interests of our executive officers with the long-term interests of the Company and its stockholders. The following table illustrates the allocation of our total direct compensation opportunity at target levels for 2010 between fixed and variable elements, as well as between short- and long-term elements.

 

 

 

The Compensation Committee and management regularly review best practices related to executive compensation. In addition, we have responded to both the economic environment and new government regulations. Recent examples of actions taken related to our named executive officers’ compensation are:

 

 

 

 

 

 

 

 

 

 

 

 

We believe these changes reflect good corporate governance in our compensation policies while continuing to recognize and reward superior company, business unit and individual performance.

 

In making its executive compensation decisions and recommendations, the Compensation Committee is guided by the following factors:

 

 

See “Board of Directors and Its Committees — Compensation Committee” for more information about the function of the Compensation Committee.

 

Compensation Philosophy

 

Our executive compensation philosophy is designed to deliver competitive total compensation, upon the achievement of individual and/or corporate performance objectives, which will attract, motivate and retain leaders who will drive the creation of stockholder value. It is reflective of our overall operating philosophy and is based on the following key elements:

 

 

 

 

 

Peer Companies

 

We have established a group of comparable companies to benchmark executive pay and provide competitive market data to be used in establishing and recommending each element of compensation. This group was selected using the following criteria:

 

 

Every year the group is reviewed to ensure the appropriateness of the companies in the group. Additionally, the Compensation Committee asked Cook to review the peer group in both 2010 and 2009. After both reviews, no changes were made and the following 18 companies were retained as the peer group:

 

 

The revenue median (as of the latest fiscal year end) of the peer group is $14.25 billion, and the median net income is $1.03 billion.

 

The nature of the Company’s highly decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes; however, we believe that the peer group selected provides relevant comparisons. While peer group data is not directly used to set any particular element of compensation, the Compensation Committee believes that in order to attract, retain and motivate our named executives, total compensation levels for these executives should be considered against the median peer group level over the long term.

 

Management’s Contributions to Our Growth

 

The Company’s decentralized structure emphasizes line management. This structure allows us to give unusually substantial operating authority to management and is an important element in developing and retaining our senior managers and in creating high job satisfaction. The general managers of our businesses are empowered to make the decisions necessary to serve their customers and grow their businesses and are accountable for their business unit’s results. Our compensation philosophy supports this business model by emphasizing appropriate

performance incentive programs. For example, general managers who grow operating income or achieve personal objectives through innovation are rewarded through the annual incentive program. Our executive management’s role is to ensure that these decisions are carried out in accordance with our values and expectations for the near and long term and are, in general, in the best interests of our stockholders.

 

Use of Discretion in Setting Compensation

 

The Company’s compensation programs recognize the importance of ensuring that discretion is provided to the Chief Executive Officer (the “CEO”) and Compensation Committee in determining compensation levels and awards. In setting base salaries and cash incentive award maximums, and in determining grants of longer-term equity awards, the CEO and Compensation Committee use judgment to align compensation with both external data and individual responsibilities, potential and achievement.

 

Compensation Decisions and Individual Compensation Levels

 

There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other named executive officers. However, the different levels of compensation for the named executive officers as shown in the Summary Compensation Table of this proxy statement reflect internal factors such as each executive’s scope of responsibility, impact on profitable growth, breadth of experience and length of Company service, as well as external market data from the peer companies. On an annual basis, the CEO reviews the total compensation of senior executives and makes recommendations to the Compensation Committee based on his assessment of each executive’s individual performance and the peer company compensation information. The Compensation Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and information relative to compensation of CEOs of the peer companies. The Compensation Committee believes that it is appropriate to benchmark the levels of base salary, annual incentive, and longer-term incentives of our CEO to the total compensation being provided to CEOs of comparable multinational and diversified industrial organizations previously described under “Peer Companies.”

 

Role of Compensation Consultants

 

Cook is the Committee’s independent compensation consultant. In 2010, Cook provided analysis and advice on the compensation of the CEO, the CFO and the Vice Chairmen. To support the Committee’s annual review of our executive compensation, Cook conducted a marketplace review of the compensation we pay to our executive officers. Cook provided the Committee with relevant market data and alternatives to consider when making compensation decisions for the executive officers. Cook benchmarked our compensation against our peer companies. Towers Watson & Co. and Aon Hewitt also provided market data from general industry as an additional reference. Cook also performed a look-back review of pay and performance compared to our peers and assisted the Committee in its review of the Illinois Tool Works Inc. 2011 Cash Incentive Plan, Long-Term Incentive Plan, Change in Control Severance Compensation Policy and Incentive Compensation Recoupment Policy for senior management. Further, Cook reviewed the “Compensation Discussion and Analysis” and “Executive Compensation” sections for inclusion in this proxy statement.

Base Salary

 

In determining base salary, the CEO and the Compensation Committee consider the size and scope of the executives’ responsibilities, the executive officers’ past experience, performance, future potential and the median base salary of similar positions at our peer companies. The Compensation Committee believes that the median base salary is an appropriate general reference point to use for encouraging solid performance. Base salaries are reviewed annually and adjustments are intended to recognize an executive officer’s performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility. Adjustments to base salary also take into account peer group information and the officer’s total compensation.

 

We have a common annual review process beginning in December and concluding in February for base salary and incentive compensation for all of our senior executive officers. This process allows the Compensation Committee and the CEO to review base compensation and discuss recommended changes considering individual contributions to overall financial and operating results for the year and to set objectives for the upcoming year.

 

After freezing base salaries in 2009 at January 2008 levels, management recommended, and the Compensation Committee agreed, that base salaries be increased by 3% effective January 1, 2010.

 

Annual Cash Incentives

 

We believe that generally, managers should be rewarded for contributions to overall financial success measured by income growth of their business unit, their group or the Company as a whole, as well as for individual accomplishments that contribute to the longer-term health of the business. Achieving our annual business and financial objectives is important to executing our business strategy, and thus, delivering long-term value to stockholders.

 

Annual cash incentive awards are made under stockholder approved provisions of the ITW Executive Incentive Plan. The Compensation Committee considers recommendations from the CEO and approves annual cash incentives for our executive officers. The Compensation Committee determines and recommends for approval by the independent directors the award amount for the CEO.

 

The plan is designed around two elements: income performance (the “P” factor) and personal objectives (the “O” factor). The P factor weighting is 60% of each named executive officer’s potential award opportunity. The remaining 40% is based on the O factor objectives. In addition, the weighting of the P factor for operating executives is 33% of corporate results and 67% of their respective businesses. These weightings are intended to emphasize the financial performance element and reinforce the importance of collaborating across businesses.

 

Participation in our Executive Incentive Plan is limited to those who have an impact on the profitable growth of the business or who have significant responsibility for a major element of business growth. The P factors are recommended by management and must be approved by the Compensation Committee annually. The individual O factors for the CEO are established by the Compensation Committee annually, and the individual O factors for each other named executive officer are recommended by the CEO and must be approved by the Compensation Committee.

Maximum award limits are applicable to both portions of the award. Individual award maximums, expressed as percentages and applied to year-end base salary, are determined in accordance with the executive’s level of responsibilities and accountability. Both the P and O factors have a payout range of 0% to 100% of the maximum for the named executive officers. Although we generally do not establish any specific target or prescribed value in relation to peer groups, comparisons are made to median annual cash incentive levels in the peer group compensation data. The Company’s annual cash incentives are variable and structured to provide awards above the median levels only upon the achievement of exceptional financial results and individual performance objectives. Payments under the plan are made following the end of the fiscal year after approval by the Compensation Committee.

 

Income-Based Annual Cash Incentive (P Factor)

 

For 2010, the P factor was based on year-over-year income growth. Current year income was compared to the prior year to measure the percentage of increase. Elected officers earn a payment according to the scale below.

 

 

The 2010 P factors for Messrs. Speer and Kropp were based entirely on the 2010 income from continuing operations of the Company as a whole. For the other named executive officers, the P factor was based 67% on 2010 income achievement for their respective businesses and 33% on 2010 income achievement for the Company as a whole. The following table shows the respective income levels in connection with the determination of the P factor award for the named executive officers:

 

 

 

Personal Objectives-Based Annual Cash Incentive (O Factor)

 

The O factors represent the personal objectives element of the annual cash incentive awards, and are more subjective than P factors. In early 2010, each executive submitted in writing his own proposed O factor objectives and relative weighting. Each named executive other than the CEO discussed his proposed objectives and weightings with the CEO. The CEO used his judgment of each executive’s role and responsibilities, as well as the strategic goals of the Company, to review and approve the objectives before recommending them to the Compensation Committee. The Compensation Committee discussed these recommendations with the CEO prior to final approval. The CEO discussed his proposed O factor objectives and weightings for 2010 with the Compensation Committee. The Compensation Committee used its judgment and understanding of the strategic goals of the Company to review and approve the objectives and weightings of the CEO.

 

The following is a description of the 2010 objectives and weightings as approved. Mr. Speer’s objectives focused on leadership development/diversity/succession planning (50%), strategic business reviews (30%), and acquisitions (20%). Mr. Kropp’s objectives focused on leadership development (35%), financial reporting process (35%), and strategic analysis (30%). Mr. Hansen’s objectives focused on business unit portfolio management (25%), innovation (25%), growth strategy (20%), and leadership development (30%). Mr. Santi’s objectives focused on leadership development (70%) and innovation (30%). Mr. Gresh’s objectives focused on strategy for specified businesses (70%) and leadership development (30%).

 

Following the end of the year, each named executive submitted a written self-appraisal with his own assessment of the level of achievement reached in 2010, expressed as a percentage, for each of his personal objectives. The self-appraisals of the named executives other than the CEO were reviewed by the CEO, and the CEO had collaborative discussions with each of these executives. The CEO used his judgment of each executive’s performance against the objectives, considering completion of objectives, relative weightings and the quality of the work performed, to reach his assessment of the achievement levels prior to submitting them for final approval by the Compensation Committee. Any adjustments made by the CEO to the self-scored achievement levels for 2010 were not material. The self-appraisal of the CEO for 2010 was reviewed by the Compensation Committee, which held collaborative discussions with the CEO and used its judgment of the CEO’s performance against his objectives to reach its assessment of the achievement levels. The Compensation Committee recommended adjusting the CEO’s self-scored achievement level to 92.7% from 84.5% after discussing his accomplishments in diversity/leadership development initiatives, strategic business reviews and acquisitions/divestitures in light of the overall strong performance of the Company. The independent directors approved the Compensation Committee’s recommendation. There were no pre-determined factors that were considered by the CEO or the Compensation Committee during this process.

 

The weighting for each objective was multiplied by the relevant achievement level, and the amounts so calculated were totaled to reach the O factor achievement percentage. Based on the Compensation Committee’s determination of the individual 2010 O factor objectives and actual achievements for Mr. Speer, and upon Mr. Speer’s recommendations for the other named executive officers, the following O factor achievement percentages were assigned: 92.7% for Mr. Speer; 92.25% for Mr. Kropp; 90% for Mr. Hansen; 92% for Mr. Santi; and 92% for Mr. Gresh.

2010 Annual Cash Incentive Total Payouts

 

The total 2010 awards for the named executive officers ranged from 96% to 97% of the individual maximum award level, and were determined as follows:

 

 

 

The named executive officers may elect to defer 6% to 85% of their annual incentive award to their ITW Executive Contributory Retirement Income Plan (ECRIP) account. ECRIP is further described under “Nonqualified Deferred Compensation” elsewhere in this proxy statement. Also, under the terms of the ITW 2006 Stock Incentive Plan (currently renamed the 2011 Long-Term Incentive Plan), an officer may elect to take up to 50% of the award in the form of ITW common stock.

 

Long-Term Incentives

 

We believe that ensuring the long-term growth and health of the business is a primary management responsibility. Therefore, a significant portion of an executive officer’s compensation should be directly linked to key metrics, such as EPS, revenue and ROIC, and to ITW’s stock performance over time, encouraging decisions that consider the long-term perspective. Long-term incentive awards are granted to executives and other key employees whose positions can truly affect the Company’s long-term performance.

 

The value of the overall long-term incentive grant to the CEO is determined by the Compensation Committee using its discretion, subject to approval by the independent directors. Awards to the other named executives are recommended by the CEO to the Compensation Committee for approval and are subject to the discretion of the CEO in making the recommendations, as well as of the Compensation Committee in approving the awards. The key factors in determining the awards have been the executive’s position and seniority and the historical grants made to Company executives in similar positions with similar seniority. In addition, although we generally do not establish any specific target or prescribed value in relation to peer groups, comparisons are made to median long-term incentive levels in the peer group compensation data. Because the Compensation Committee and the CEO in their discretion may consider such factors as they deem relevant in determining an executive’s overall award, other factors may cause the award in any given year to differ from historical amounts.

 

Stock incentive awards through 2008 were generally made in the form of stock options. The Compensation Committee considered the fact that the Company was in a relatively small minority of companies who awarded only one type of grant under its stock incentive plan, and in

2009, we introduced performance-based restricted stock units, or PRSUs, into our program. In 2010, we introduced a long-term cash incentive.

 

We continue to believe, however, that stock options are an effective incentive for senior executives on a long-term basis because the option loses its value entirely if the price of ITW’s common stock falls below the grant price. Therefore, in 2010, two-thirds of the stock-based grants were in the form of stock options and the other one-third in the form of PRSUs. The long-term cash incentive is the smallest portion of the three types of long-term incentive grants. In summary, the weighting of the total target values of the 2010 long-term incentive stock and cash grants are as follows:

 

 

The Compensation Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined by the Compensation Committee, and forfeiture provisions upon other termination of employment. The Compensation Committee, in its sole discretion, may deem a stock option, RSU, or PRSU award to be immediately forfeited if the recipient is terminated for cause (as defined by the Committee), competes with the Company, or engages in conduct adversely affecting the Company.

 

2010 Stock Option Awards

 

The 2010 stock options vest in equal installments over a four-year period ending in 2014. Stock options are granted with an exercise price equal to the fair market value of the common stock on the date of grant and expire ten years after the grant date. We currently grant only non-qualified stock options because we believe that the tax benefits to the Company of non-qualified stock options outweigh the potential tax benefits to the named executive officers of incentive stock options.

 

2010 PRSU Awards

 

PRSUs vest three years from the date of grant, subject to the achievement level of the performance goal set at the beginning of the performance period. PRSUs are granted based on the fair market value of one share of common stock on the date of grant.

 

For PRSUs granted in 2010, the performance goal for the PRSU’s is based on cumulative EPS from continuing operations over a three-year performance period (2010 through 2012) based on a sliding scale. The target is $6.50 cumulative EPS over the three-year performance period. If less than $4.50 cumulative EPS is achieved, none of these PRSUs will vest. If EPS growth is at or above the $4.50 threshold but below the $6.50 target, a portion of the awards will vest in proportion to the level of EPS achieved.

 

2010 Long-Term Cash Awards

 

For 2010, an annual long-term cash award with three-year performance cycles, the Company-wide Growth Plan, or “CGP”, was added to the mix of long-term incentives with a corresponding reduction in the value of PRSU’s granted. The total compensation of our

executives and the mix of compensation components of our executives relative to the peer group were considerations in setting the percentage of base pay used in determining the target award amounts. Only elected officers, other officers reporting to the CEO and group presidents, being the executives who are closest to the business in our decentralized structure and who have the biggest impact on operating performance, are eligible for the program. The target amount of the award for 2010 was based on position and salary on grant date as follows: 100% of base pay for the CEO; 75% for other elected officers and 40% for group presidents and other officers.

 

For 2010, the performance goal for the 2010 CGP cash grant was based 50% on compound annual revenue growth and 50% on average return on invested capital over a three-year performance period (2010 through 2012). The payout at the end of the performance period will be based on the following sliding payout scale:

 

 

Timing of Long-Term Incentive Awards

 

The Compensation Committee meets in February of each year following the Company’s public release of its earnings results for the recently completed fiscal year to consider and act with respect to long-term incentive awards for the executive officers. In 2010 the long-term grants were in compliance with the ITW 2006 Stock Incentive Plan, including the requirement that stock options may not be granted at less than 100% of the fair market value of ITW’s common stock on the date of grant. The exercise price of the awards granted at that meeting is based on the closing price of ITW’s stock on that date. We do not time grants for the purpose of enhancing the value of executive compensation.

 

2011 Plan Changes

 

The Board approved an amendment and restatement of the 2006 Stock Incentive Plan, including a change in the name of the plan to the 2011 Long-Term Incentive Plan, effective for all awards under the plan on or after January 1, 2011. The amendments include provisions to: (i) change the vesting provisions upon a change in control to a double trigger from a single trigger for awards that are replaced or continued in connection with a change in control, (ii) prohibit the purchase of underwater options, (iii) provide that awards under the plan are subject to any Company policy regarding the recovery of erroneously awarded incentive-based compensation, (iv) restrict dividends and other distributions (other than quarterly cash dividends in the case of awards that are subject only to service-based vesting) on shares subject to unvested restricted stock awards to the same extent that restrictions apply to the underlying awards unless otherwise provided by the Committee, (v) impose a minimum vesting period of three years for restricted stock awards (one year for performance-based stock awards), (vi) impose a maximum term of 10 years for stock appreciation rights, (vii) change the limitation on options that may be granted in any calendar year to a single participant to 1,000,000 from 500,000, and (viii) make other non-material changes relating to plan administration or clarification.

Perquisites & Other Benefits

 

In general, we do not provide perquisites to our named executive officers that are not available to other employees. No named executive officer received perquisites during 2010, so no perquisites are disclosed in the Summary Compensation Table.

 

Stock Ownership Guidelines

 

We believe that stock ownership is important because it links the interests of Company management and directors with those of our stockholders. Because of the importance of stock ownership, the Board of Directors and the Compensation Committee have adopted stock ownership guidelines for executive officers and directors. The recommended guidelines for stock ownership as a multiple of executive officers’ base salaries and of directors’ annual retainers are as follows: chief executive officer, six times; vice chairmen and executive vice presidents, three times; senior vice presidents, two times; vice presidents, one time; and non-employee directors, four times. The Compensation Committee recommends that an executive officer or non-employee director achieve the applicable ownership level within five years. The achievement of these guidelines is reviewed annually. All named executive officers and directors who have been in their positions for five or more years have either satisfied or exceeded the applicable stock ownership guideline. The Board believes that its stock ownership guidelines are appropriate, reasonable and attainable given the responsibilities and compensation levels of our executive officers and directors and has not imposed a requirement that our executive officers and directors hold their shares for a particular length of time.

 

In 2010, we formalized a policy against options trading and short sales of ITW stock that applies to all recipients of Company equity-based grants (which group includes key employees and all officers and directors) and against any trading in derivatives linked to ITW stock that applies to all Company senior executive officers and directors.

 

Financial Restatements

 

Effective in 2011, we adopted our Incentive Compensation Recoupment Policy (a “clawback”). This policy covers all executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934. Under the policy, the Committee will require reimbursement of incentives paid to elected officers where the payment was predicated upon the achievement of certain financial results with respect to the applicable performance period that were subsequently the subject of a material restatement other than a restatement due to changes in accounting policy. The amount the Committee requires to be reimbursed is equal to the excess of the gross incentive payment made over the gross payment that would have been made if the original payment had been determined based on the restated financial results. Further, following a material restatement of our financial statements, we will seek reimbursement of compensation and profits from trading in Company stock received by our Chief Executive Officer and Chief Financial Officer to the extent required under Section 304 of the Sarbanes-Oxley Act of 2002.

 

Deductibility

 

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to the CEO and certain other executive officers employed at year-end.

Certain performance-based compensation and deferred compensation are not included in the compensation total for purposes of the limit. The Compensation Committee recognizes its obligation to reward performance that increases stockholder value and exercises its discretion in determining whether or not to conform our executive compensation plans to the approach provided for in the Internal Revenue Code.

 

Potential Payments upon Termination or Change in Control

 

For 2010, we did not have any plans or agreements that are specific and unique to executive officers regarding termination of employment or a change in control of the Company. However, we do have provisions in our pension plans, the 1996 and 2006 ITW Stock Incentive Plans, the Executive Incentive Plan, and the ECRIP that provide for retirement benefits, and for grants prior to 2011, immediate vesting of unvested stock options and cash payouts of restricted stock and performance units in the event of a change in control or certain termination events. You can find further detail below under “Executive Compensation — Potential Payments Upon Termination or Corporate Change” beginning on page 46.

 

For 2011, as part of the annual review, we updated the change in control provisions in our executive compensation programs except for the retirement plans. The 2011 updated versions of these plans were filed with the Securities and Exchange Commission on Form 8-K on December 16, 2010. For prospective awards under the 2011 Long-Term Incentive Plan and the 2011 Executive Incentive Plan, payment of incentives that are continued or replaced would occur only following both a change in control and termination of employment (a “double-trigger”). In addition, for annual and long-term incentives, the payment amount was changed to the target amount (or actual achievement, if greater) from the maximum award amount.

 

Finally, effective in 2011, the Company established the “double trigger” Change-In-Control Severance Compensation Policy (“Severance Policy”) for elected officers, under which, upon an actual or constructive termination following a change in control, participants shall be entitled to receive two times annual cash compensation (base pay plus the average of the last three years annual incentive bonus payments). In addition, with respect to any annual or long-term cash incentives that are continued or replaced after a change in control, participants in the Severance Policy upon a double trigger will receive: (i) a pro-rata annual bonus award payable at the target amount (or actual achievement amount if greater), and (ii) a pro-rata long-term cash incentive award at the target amount (or actual achievement amount if greater). The payments provided under the Severance Policy are reduced by any severance payments payable pursuant to any other agreement, policy, program or arrangement with the Company (other than cash received in lieu of stock incentives), are not grossed-up for taxes and were set by the Compensation Committee at levels deemed consistent with market practice. The Company believes that it is important to maintain severance and change in control benefits in order to attract and retain executive talent, to avoid costly and potentially protracted separation negotiations, to ensure continuity of management in the event of an actual or threatened change in control and to protect our executive officers’ investment in the Company. The Severance Policy was filed with the Securities and Exchange Commission on Form 8-K on December 16, 2010.

 

This section of the proxy statement provides information regarding the compensation of our named executive officers.

 

Summary Compensation Table

 

 

 

Footnote 4 Table

 

 

 

Grants of Plan-Based Awards

 

The table below provides information regarding plan-based awards granted to our named executive officers during fiscal 2010 under the Executive Incentive Plan and the 2006 Stock Incentive Plan (renamed the 2011 Long-Term Incentive Plan).

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End 2010

 

This table sets forth details, on an award-by-award basis, of the outstanding equity awards held by each named executive officer as of December 31, 2010.

 

 

 

Option Exercises and Stock Vested

 

This table provides information for each named executive officer who exercised stock options during 2010. The value realized upon the exercise of options is calculated using the difference between the option exercise price and the market price at the time of exercise multiplied by the number of shares underlying the option. No named executive officers had stock awards vest in 2010.

 

 

Pension Benefits

 

The following table provides pension benefit information for each named executive officer through our financial statement measurement date of December 31, 2010.