(Name of Registrant as Specified In Its Charter)

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

40 Lane Road
Fairfield, New Jersey 07004
(973) 882-9000

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held On May 1, 2008

 

To our Stockholders:

 

We are notifying you that our 2008 Annual Meeting of Stockholders will be held on May 1, 2008, at Covanta Holding Corporation, 40 Lane Road, Fairfield, NJ 07004, at 2:00 p.m. local time. At the meeting we will ask you to:

 

1. elect eleven directors to our Board of Directors, each for a term of one year;

 

2. approve an amendment to our Equity Award Plan for Employees and Officers to increase the number of shares of our common stock authorized for issuance thereunder by an additional 6,000,000 shares from 6,000,000 to 12,000,000 shares of common stock;

 

3. approve an amendment to our Equity Award Plan for Employees and Officers to increase the maximum award that a participant may receive in any calendar year from 300,000 shares of common stock to 250,000 shares of restricted stock and options to purchase 650,000 shares of common stock;

 

4. approve an amendment to our Equity Award Plan for Directors to increase the number of shares of our common stock authorized for issuance thereunder by an additional 300,000 shares from 400,000 to 700,000 shares of common stock;

 

5. ratify the appointment of Ernst & Young LLP, the independent registered public accountants, as our independent auditors for the 2008 fiscal year; and

 

6. consider such other business as may properly come before the Annual Meeting or any adjournment or postponement of the Annual Meeting.

 

Our Board of Directors has fixed the close of business on March 19, 2008 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement of the Annual Meeting. A complete list of these stockholders will be available at our principal executive offices prior to the Annual Meeting.

 

All stockholders are cordially invited to attend the Annual Meeting in person. Whether or not you expect to attend the meeting, please follow the instructions on the proxy card for voting by telephone or over the Internet or complete, date, sign and return the enclosed proxy card as promptly as possible in order to ensure your representation at the Annual Meeting. A return envelope (which is postage pre-paid if mailed in the United States) is enclosed for that purpose. Even if you have given your proxy, you may still vote in person if you attend the Annual Meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the Annual Meeting, you must obtain from that institution that is the record holder a proxy issued in your name and bring to the Annual Meeting.

 

By Order of the Board of Directors

 

Covanta Holding Corporation

 

 

Timothy J. Simpson
Secretary

 

Fairfield, New Jersey

April 1, 2008

 

COVANTA HOLDING CORPORATION
40 Lane Road
Fairfield, New Jersey 07004

 

PROXY STATEMENT

 

The enclosed proxy is solicited by the Board of Directors of Covanta Holding Corporation for use at the Covanta Holding Corporation 2008 Annual Meeting of Stockholders to be held on May 1, 2008, at 2 p.m. local time, or any adjournment or postponement of the Annual Meeting, for the purposes described in this proxy statement and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. This proxy statement and accompanying proxy card were mailed on or about April 1, 2008 to all stockholders entitled to vote at the Annual Meeting. Throughout this proxy statement when the terms “Covanta,” the “Company,” “we,” “our,” “ours” or “us” are used, they refer to Covanta Holding Corporation and we sometimes refer to our Board of Directors as the “Board.” Our subsidiary Covanta Energy Corporation is often referred to in this proxy statement as “Covanta Energy.”

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 1, 2008

 

The Covanta Holding Corporation Proxy Statement and Annual Report to Stockholders for the year
ended December 31, 2007 are available at www.covantaholding.com

 

What is the purpose of the Annual Meeting?

 

At the Annual Meeting, you will be asked to act upon the matters outlined in the accompanying Notice of Annual Meeting of Stockholders, including:

 

 

In addition, management will report on our performance and respond to questions from stockholders.

 

Who is entitled to vote at the Annual Meeting?

 

Holders of our common stock at the close of business on the record date, March 19, 2008, are entitled to vote their shares at the Annual Meeting. On that date there were 154,724,901 shares of our common stock outstanding and entitled to vote.

 

How many votes do I have?

 

You will have one vote for each outstanding share of our common stock that you owned on March 19, 2008 (the record date), as each outstanding share of common stock is entitled to one vote on each matter properly brought before the Annual Meeting.

How many votes must be present to hold the Annual Meeting?

 

The presence in person or by proxy of stockholders entitled to cast a majority of all of the votes entitled to be cast at the Annual Meeting, including shares represented by proxies that reflect abstentions, constitutes a quorum. Abstentions and broker non-votes are counted as present and entitled to vote for the purposes of determining a quorum. A “broker non-vote” occurs when a broker, bank or other holder of record holding shares for a beneficial owner does not vote on a particular proposal because that record holder does not have discretionary voting power for that particular proposal and has not received voting instructions from the beneficial owner. If there is not a quorum at the Annual Meeting, the stockholders entitled to vote at the Annual Meeting, whether present in person or represented by proxy, will only have the power to adjourn the Annual Meeting until there is a quorum. The Annual Meeting may be reconvened without additional notice to the stockholders, other than an announcement at the prior adjournment of the Annual Meeting, within 30 days after the record date, and a quorum must be present at such reconvened meeting.

 

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Co., you are considered, with respect to those shares, the “stockholder of record” or “record owner.” As a record owner, the Notice of Annual Meeting, Proxy Statement and 2007 Annual Report including our 2007 Annual Report on Form 10-K and proxy card, have been sent directly to you.

 

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the “beneficial owner” of shares held in street name. As a beneficial owner the Notice of Annual Meeting, Proxy Statement and 2007 Annual Report including our 2007 Annual Report on Form 10-K and proxy card have been sent to the holder of record of your shares. If you wish to attend the Annual Meeting and vote shares of our common stock held through a broker, bank or other nominee, you will need to obtain a proxy form from the institution that holds your shares and follow the voting instructions on that form.

 

How do I vote my shares at the Annual Meeting?

 

You may vote either in person at the Annual Meeting or by proxy. If you vote by proxy, you may still attend the Annual Meeting in person.

 

If you wish to vote in person at the Annual Meeting, please attend the meeting and you will be instructed there as to the balloting procedures. Please bring personal photo identification with you to the meeting. If you are a beneficial owner of shares, you must obtain a legal proxy from your broker, bank or other holder of record and present it to the inspectors of election with your ballot to be able to vote at the Annual Meeting in person.

 

If you wish to vote by proxy, you may vote by telephone or over the Internet by following the instructions included on your proxy card. Alternatively, you may properly execute, date and return the enclosed proxy to us by mail in the enclosed return envelope (which is postage pre-paid if mailed in the United States). The Internet and telephone voting facilities will close at 11:59 p.m. Eastern time on April 30, 2008. If you do this, your shares of common stock represented by the proxy will be voted by the proxy holders in accordance with your instructions. Anthony J. Orlando and Timothy J. Simpson are the proxy holders. If you are a beneficial owner of shares, you will need to obtain a proxy from the institution that holds your shares and follow the voting instructions on that form.

 

If you do not intend to vote in person at the Annual Meeting, please remember to submit your proxy to us prior to the Annual Meeting to ensure that your vote is counted.

 

Can I revoke my proxy or change my vote after I have voted?

 

Even after you have submitted your proxy, you may revoke your proxy or change your vote by doing one of the following before your proxy is exercised at the Annual Meeting:

 

If you are the record owner of shares and:

 

(1) deliver a written notice of revocation to our Secretary at Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004;

(2) submit a properly executed proxy bearing a later date; or

 

(3) attend the Annual Meeting and cast your vote in person.

 

To revoke a proxy previously submitted by telephone or over the Internet, you may simply vote again at a later date, using the same procedures, in which case the later submitted vote will be recorded and the earlier vote revoked. If you are the beneficial owner of shares and have submitted to the institution that holds your shares your proxy, you will need to contact that institution and follow its instructions for revoking a proxy.

 

Attendance at the Annual Meeting will not cause your previously submitted proxy to be revoked unless you cast a vote at the Annual Meeting.

 

What if I do not vote for some of the matters listed on the proxy?

 

If you properly execute, date and return a proxy to us without indicating your vote, in accordance with the Board’s recommendation, your shares will be voted by the proxy holders as follows:

 

 

In addition, if other matters are properly presented for voting at the Annual Meeting, or at any adjournment or postponement thereof, your proxy grants Messrs. Orlando and Simpson the discretion to vote your shares on such matters. The Board does not expect any additional matters to be presented for a vote at the Annual Meeting. If, for any unforeseen reason, any of the director nominees described in this proxy statement are not available as a candidate for director, then Messrs. Orlando and Simpson will vote the stockholder proxies for such other candidate or candidates as the Board may nominate.

 

How many votes are required to elect directors and to adopt the other proposals?

 

In the election for directors, the eleven nominees receiving the highest number of “FOR” votes cast in person or by proxy will be elected. A “WITHHOLD” vote for a nominee is the equivalent of abstaining. Abstentions and broker non-votes are not counted as votes cast for the purposes of, and therefore will have no impact as to, the election of directors. Although the director nominees with the highest number of “FOR” votes cast will be elected at the Annual Meeting, our Corporate Governance Guidelines contain a majority voting policy which requires any nominee for director in an uncontested election to tender his or her resignation to the Board if that nominee receives a greater number of “WITHHOLD” votes than “FOR” votes in any election. The Board’s Nominating and Governance Committee will consider the resignation offer and recommend to the Board the action to be taken with respect to the tendered resignation. The Board will act upon the Nominating and Governance Committee’s recommendation no later than 90 days following certification of the stockholder vote. A complete copy of our Corporate Governance Guidelines is posted on our website at www.covantaholding.com.

 

All proposals, other than the election of directors, require the affirmative “FOR” vote of a majority of those shares present and entitled to vote. An abstention as to any matter, when passage requires the vote of a majority of the votes entitled to be cast at the Annual Meeting, will have the effect of a vote “AGAINST.” Broker non-votes will not be considered, and will not be counted for any purpose in determining whether a matter has been approved.

Brokers, banks or other nominees have discretionary authority to vote shares without instructions from beneficial owners only on matters considered “routine” by the New York Stock Exchange, such as the election of directors and the ratification of the appointment of Ernst & Young LLP as our independent auditors addressed by proposals 1 and 5 in this proxy statement; therefore, your shares may be voted on proposals 1 and 5 if they are held in the name of a brokerage firm, even if you do not provide the brokerage firm with voting instructions. On non-routine matters, nominees do not have discretion to vote shares without instructions from beneficial owners and thus are not entitled to vote on such proposals in the absence of such specific instructions, resulting in a broker non-vote for those shares.

 

Representatives of American Stock Transfer & Trust Company, our transfer agent, will tabulate the votes and act as the inspector of the election at the Annual Meeting.

 

Can my shares be voted if I do not return my proxy and do not attend the Annual Meeting?

 

If you do not vote your shares and you are the beneficial owner of the shares, your broker can vote your shares on matters that the New York Stock Exchange has ruled are routine.

 

If you do not vote your shares and you are the record owner of the shares, your shares will not be voted.

 

Who pays the cost of solicitation of proxies for the Annual Meeting?

 

We will pay the cost of solicitation of proxies. In addition to the solicitation of proxies by mail, our directors, officers and employees may also solicit proxies personally, electronically or by telephone without additional compensation for such proxy solicitation activity. Brokers and other nominees who held our common stock on the record date will be asked to contact the beneficial owners of the shares that they hold to send proxy materials to and obtain proxies from such beneficial owners.

 

Although there is no formal agreement to do so, we may reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding this proxy statement to our stockholders.

 

BOARD STRUCTURE AND COMPOSITION

 

The Board is currently comprised of eleven directors. During 2007, the Board held six meetings and took action by unanimous written consent two times. Each director attended at least 75% of all meetings of the Board and those Board committees on which he or she served during 2007. We expect our Board members to attend the annual meetings of our stockholders. In May 2007, all of the then current directors attended our Annual Meeting of Stockholders other than Samuel Zell. The Board has adopted Corporate Governance Guidelines which, among other matters, describe the responsibilities and certain qualifications of our directors. Our Corporate Governance Guidelines are posted on our website at www.covantaholding.com. A copy also may be obtained by writing to our Vice President of Investor Relations at our principal executive offices.

 

Our Corporate Governance Guidelines include a Majority Voting Policy, which was adopted by the Board in February, 2007 and provides that in an uncontested election (i.e., an election where the only nominees are those recommended by the Board), any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election shall promptly tender his or her resignation to the Board for consideration in accordance with the procedures described in the Majority Voting Policy attached to our Corporate Governance Guidelines.

 

The Corporate Governance Guidelines also require that a majority of the Board qualify as independent within the meaning of the independence standards of the New York Stock Exchange. The applicable standards for independence to the Board are attached to our Corporate Governance Guidelines, referred to as the “Independence Standards.” These Independence Standards contain categorical standards that we have adopted to assist in making determinations of director independence required by New York Stock Exchange rules. These Independence Standards also describe certain relationships between directors and us that the Board has determined to be categorically immaterial.

In accordance with the Independence Standards, the Board undertook its annual review of director independence. During this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and us and our subsidiaries and affiliates. The Board also considered whether there were any transactions or relationships between directors, their organizational affiliations or any member of their immediate family, on the one hand, and us and our executive management, on the other hand. As provided in the Independence Standards, the purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent.

 

As a result of this review, the Board affirmatively determined that the following directors are independent of us and our management under the standards set forth in the Independence Standards: David M. Barse, Ronald J. Broglio, Peter C.B. Bynoe, Linda J. Fisher, Richard L. Huber, William C. Pate, Robert S. Silberman, Jean Smith and Clayton Yeutter, and that none of these directors had relationships with us except those that the Board has determined to be categorically immaterial as set forth in the Independence Standards. In making these determinations, the Board considered that in the ordinary course of business, transactions may occur between us and our subsidiaries and companies at which one or more of our directors are or have been officers. In each case, the amounts paid to these other companies in each of the last three years did not exceed the applicable thresholds set forth in the Independence Standards or the nature of the relationships with these other companies did not otherwise affect the independent judgment of any of such directors. The Board also considered charitable contributions to not-for-profit organizations of which directors or their immediate family members are affiliated, none of which exceeded the applicable thresholds set forth in the Independence Standards.

 

In connection with this review, the Board noted that Mr. Yeutter is senior advisor to the law firm of Hogan & Hartson LLP. Hogan & Hartson LLP has provided Covanta Energy with certain legal services for many years, including 2007. This relationship preceded our acquisition of Covanta Energy and Mr. Yeutter did not direct or have any direct or indirect involvement in the procurement, provision, oversight or billing of such legal services and does not directly or indirectly benefit from those fees. The Board has concluded that this relationship does not interfere with Mr. Yeutter’s exercise of independent judgment as a director or otherwise prevent him from meeting any of the Independence Standards as it does not constitute a “material relationship” to Mr. Yeutter, Hogan & Hartson, us or Covanta Energy and Mr. Yeutter qualifies as an independent director under applicable Securities and Exchange Commission, referred to as the “SEC,” rules and regulations and New York Stock Exchange listing standards.

 

Mr. Zell and Mr. Pate are executive officers of Equity Group Investments, L.L.C., referred to as “EGI.” EGI is affiliated with SZ Investments LLC, referred to as “SZ Investments,” a holder of approximately 15.0% of our common stock as of March 19, 2008, as described under “Equity Ownership of Certain Beneficial Owners.” The Board reviewed the independence of Mr. Pate. In particular, the Board examined not only the amounts paid to EGI and SZ Investments in connection with the financings and other relationships within the past three years, but also the subjective nature of Mr. Pate’s relationship with us, as our former non-executive Chairman of the Board. The Board determined that the amounts paid to EGI and SZ Investments did not exceed the applicable thresholds under New York Stock Exchange listing standards and under our Independence Standards and that these relationships do not interfere with Mr. Pate’s exercise of independent judgment as a director. Therefore, the Board concluded that Mr. Pate qualifies as an independent director under applicable SEC rules and regulations and New York Stock Exchange listing standards.

 

Mr. Barse is the President and Chief Executive Officer of Third Avenue Management LLC, referred to as “Third Avenue,” a holder of approximately 5.7% of our common stock as of March 19, 2008, as described under “Equity Ownership of Certain Beneficial Owners.” The Board noted that although Mr. Barse was our President and Chief Operating Officer from July 1996 until July 2002, such prior service as our executive officer occurred more than three years ago and does not interfere with his exercise of independent judgment as a director. Further, the Board examined the amounts paid to Third Avenue and its affiliates in connection with the financings and other transactions within the past three years, and concluded that these transactions did not exceed the applicable thresholds under New York Stock Exchange rules and under our Independence Standards and that these relationships do not interfere with Mr. Barse’s exercise of independent judgment as a director. Therefore, the Board concluded that Mr. Barse qualifies as an independent director under applicable SEC rules and regulations and New York Stock Exchange listing standards.

Committees of the Board

 

Audit Committee.  The current members of the Audit Committee are Ms. Smith (Chair), Mr. Huber and Mr. Pate. Each of the members of the Audit Committee is an independent director under applicable New York Stock Exchange listing standards and applicable SEC rules and regulations. The Board has determined that each of the members of the Audit Committee qualifies as an “audit committee financial expert” under applicable SEC rules. Our Board has determined that Mr. Pate is a financial expert in part due to his “other relevant experience,” which experience includes Mr. Pate’s extensive investment banking experience involving the critical evaluation of financial statements as (a) a director of several public companies, (b) our former Chairman of the Board and (c) the investment manager of private capital. In this latter role, our Board has determined that he had oversight of the preparation, auditing or evaluation of financial statements in conjunction with numerous acquisitions in a variety of industries and in conjunction with raising of public fixed income and equity capital for associated corporations.

 

The Audit Committee operates under a written charter that was amended and restated by the Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the functions of the Audit Committee include assisting the Board in its oversight of the quality and integrity of our financial statements and accounting processes, compliance with legal and regulatory requirements, assessing and reviewing the qualifications and independence of our independent auditors and the performance of the independent auditors and overseeing our internal audit function. The Audit Committee has the sole authority to select, evaluate, appoint or replace our independent auditors and has the sole authority to approve all audit engagement fees and terms. The Audit Committee must pre-approve all permitted non-auditing services to be provided by the independent auditors, discuss with management and the independent auditors our financial statements and any disclosures and SEC filings relating thereto, recommend for stockholder approval the ratification of the independent auditors for us, review the integrity of our financial reporting process, establish policies for hiring of employees or former employees of the auditors and investigate any matters pertaining to the integrity of management.

 

The Audit Committee held five meetings during 2007.

 

Compensation Committee.  The current members of the Compensation Committee are Messrs. Barse (Chair), Silberman and Bynoe. Each of the members of the Compensation Committee qualifies as an independent director under applicable New York Stock Exchange listing standards and is considered to be a “non-employee director” under Rule 16b-3 of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act” in this proxy statement. Messrs. Silberman and Bynoe are “outside directors” under Section 162(m) of the Internal Revenue Code of 1986, as amended, which we refer to as the “Tax Code” in this proxy statement. Because Mr. Barse was previously an executive officer of ours, he does not qualify as an “outside director” solely for purposes of Section 162(m) of the Tax Code. Consequently, Mr. Barse recuses himself from voting in connection with any compensation matters in which Section 162(m) issues may arise, whether made by the Compensation Committee or the full Board. However, our Board has determined that Mr. Barse’s prior relationship does not interfere with his exercise of independent judgment as a director and noted that he qualifies as an independent director under applicable New York Stock Exchange listing standards.

 

The Compensation Committee operates under a written charter that was amended and restated by our Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Compensation Committee among other things, has the following authority:

 

(1) to review and approve the Company’s goals relating to the chief executive officer’s compensation, evaluate the chief executive officer’s performance under those goals and set the chief executive officer’s compensation;

 

(2) to evaluate, review and approve the compensation structure and process for our other officers and the officers of our subsidiaries;

 

(3) to evaluate, review and recommend to our board of directors any changes to, or additional stock-based and other incentive compensation plans;

(4) to engage independent advisors to assist the members of the Compensation Committee in carrying out their duties; and

 

(5) to recommend inclusion of the Compensation Discussion and Analysis in this proxy statement and our Annual Report on Form 10-K.

 

The Compensation Committee held five meetings during 2007 and took one action by unanimous written consent.

 

Nominating and Governance Committee.  The current members of the Nominating and Governance Committee are Mr. Yeutter (Chair), Ms. Smith and Mr. Broglio. Each of the members of the Nominating and Governance Committee qualifies as an independent director under applicable New York Stock Exchange listing standards.

 

The Nominating and Governance Committee operates under a written charter that was amended and restated by the Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Nominating and Governance Committee is responsible for assisting the Board in identifying qualified candidates to serve on the Board, recommending director nominees for the annual meeting of stockholders, identifying individuals to fill vacancies on the Board, recommending corporate governance guidelines to the Board, leading the Board in its annual self evaluations and recommending nominees to serve on each committee of the Board. The Nominating and Governance Committee, among other things, has the authority to evaluate candidates for the position of director, retain and terminate any search firm used to identify director candidates and review and reassess the adequacy of our corporate governance procedures.

 

The Nominating and Governance Committee held five meetings during 2007.

 

In identifying candidates for positions on the Board, the Nominating and Governance Committee generally relies on suggestions and recommendations from members of the Board, management and stockholders. In 2007, we did not use any search firm or pay fees to other third parties in connection with seeking or evaluating Board nominee candidates.

 

The Nominating and Governance Committee does not set specific minimum qualifications for director positions. Instead, the committee believes that nominations should be based on a particular candidate’s merits and our needs after taking into account the current composition of the Board. When evaluating candidates for the position of director, the Nominating and Governance Committee considers an individual’s skills, age, diversity, independence from us, experience in areas that address the needs of the Board and ability to devote adequate time to Board duties. Candidates that appear to best fit the needs of the Board and us are identified and unless such individuals are well known to the Board, they are interviewed and further evaluated by the Nominating and Governance Committee. Candidates selected by the Nominating and Governance Committee are then recommended to the full Board. After the Board approves a candidate, the Chair of the Nominating and Governance Committee extends an invitation to the candidate to join the Board.

 

The Nominating and Governance Committee will consider candidates recommended by stockholders if such recommendations are accompanied by relevant biographical information and are submitted in accordance with our organizational documents, New York Stock Exchange requirements and SEC rules and regulations, each as in effect from time to time. Candidates recommended by stockholders will be evaluated in the same manner as other candidates. Under our Amended and Restated By-Laws, any holder of 20% or more of our outstanding voting securities has the right, but not the obligation, to nominate one qualified candidate for election as a director. Provided that such stockholder adequately notifies us of a nominee within the time periods set forth in our applicable proxy statement, that individual will be included in our proxy statement as a nominee.

 

Finance Committee.  The current members of the Finance Committee are Mr. Silberman (Chair) and Messrs. Barse, Orlando and Pate.

 

The Finance Committee operates under a written charter that was amended and restated by the Board as of September 2007, a copy of which is available on our website at www.covantaholding.com, or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Finance Committee is responsible for assisting the Board in its oversight of our consideration of new financial commitments,

acquisitions, investment, and other transactions that are either material to our financial condition or prospects, or are otherwise not contemplated by our annual budget or business/financial plan. The Finance Committee is also responsible for establishing policies with respect to the issuance of dividends on our common stock, establishing guidelines for approvals for proposed transactions and spending authorization by our senior executives.

 

The Finance Committee held twelve meetings during 2007 and took one action by unanimous written consent.

 

Public Policy Committee.  The current members of the Public Policy Committee are Mr. Bynoe (Chair), Mr. Huber, Mr. Broglio, Ms. Fisher and Mr. Orlando.

 

The Public Policy Committee operates under a written charter, a copy of which is available on our website at www.covantaholding.com, or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Public Policy Committee is responsible for the assisting the Board in its oversight responsibilities for matters relating to public policy. The Public Policy Committee’s responsibilities include oversight of legislative and regulatory developments affecting our business, employee safety programs and procedures, community relations programs, political and charitable contributions by us, and other matters of public policy affecting our domestic and international business.

 

The Public Policy Committee held five meetings during 2007.

 

Executive Sessions of Non-Management Directors and Independent Directors

 

The non-management directors of the Board meet regularly in executive sessions without our management present. The independent directors also meet on occasion or as necessary in executive session. The Chairs of each of the committees together select a director to serve as the Chair of each executive session of independent directors. Stockholders wishing to communicate with the independent directors may contact them by writing to: Independent Directors, c/o Corporate Secretary, Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. Any such communication will be promptly distributed to the directors named in the communication in the same manner as described below in “Stockholder Communications with the Board.”

 

Communications with the Board

 

Stockholders and other interested parties can send communications to one or more members of the Board by writing to the Board or to specific directors or group of directors at the following address: Covanta Holding Corporation Board of Directors, c/o Corporate Secretary, Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. Any such communication will be promptly distributed by the Corporate Secretary to the individual director or directors named in the communication or to all directors if the communication is addressed to the entire Board.

 

Compensation of the Board

 

On an annual basis, at the Annual Meeting of Stockholders at which directors are elected, each non-employee director will be awarded 4,500 shares of restricted stock, which vest as follows: one-third vest upon the grant of the award, one-third will vest one year after the date of grant and the final one-third of the restricted shares will vest two years after the date of grant. Mr. Barse waived his right to receive equity awards for 2007 and has indicated his intention to waive his right to receive equity compensation in 2008. Non-employee directors also will receive an annual fee of $30,000. The Chairman of the Board will receive an additional annual fee of $15,000. In addition, the chairs of the Audit Committee and Compensation Committee will each receive an additional annual fee of $10,000 for such service and the chair of each of the other committees of the Board, including without limitation, the Nominating and Governance Committee, the Public Policy Committee and the Finance Committee will be entitled to receive an additional annual fee of $5,000 for such service. Non-employee directors will be entitled to receive a meeting fee of $2,000 for each Audit Committee meeting and $1,500 for each other committee meeting they attend. Directors who are appointed at a date other than the annual meeting of stockholders, will be entitled to receive a pro rata portion of the annual director compensation.

The following table sets forth the compensation paid to each of our non-employee directors for the year ended December 31, 2007.

 

Director Compensation for 2007

 

 

 

 

 

 

 

 

 

 

 

 

Director Stock Ownership Guidelines

 

Our Board believes that it is important for all of our directors to acquire and maintain a significant equity ownership position in our company. Accordingly, we have established stock ownership guidelines for our directors in order to specifically identify and align the interests of our directors with our stockholders. Accordingly, each director is required under our guidelines to hold at least 15,000 shares of our common stock. Directors are given five years to reach their target ownership levels and given that a majority of each director’s annual compensation is in the form of restricted stock vesting over a period of time, our guidelines provide that credit is given for unvested restricted stock holdings toward individual targets.

 

Policies on Business Conduct and Ethics

 

We have a Code of Conduct and Ethics for Senior Financial Officers and a Policy of Business Conduct. The Code of Conduct and Ethics applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting

Officer, Controller or persons performing similar functions. The Policy of Business Conduct applies to all of our and our subsidiaries’, directors, officers and employees. Both the Code of Conduct and Ethics and the Policy of Business Conduct are available on our website at www.covantaholding.com and copies may be obtained by writing to our Vice President of Investor Relations at our principal executive offices.

 

PROPOSAL NO. 1

 

ELECTION OF DIRECTORS

 

The Board is currently comprised of eleven directors. The Board, at the recommendation of the Nominating and Governance Committee, has nominated each of the following eleven individuals to serve as a director for a term of one year:

 

David M. Barse
Ronald J. Broglio
Peter C.B. Bynoe
Linda J. Fisher
Richard L. Huber
Anthony J. Orlando
William C. Pate
Robert S. Silberman
Jean Smith
Clayton Yeutter
Samuel Zell

 

Each of the nominees currently serves as a member of the Board. If elected to another term at this year’s Annual Meeting, each nominee will serve until the date of next year’s annual meeting or until his or her successor has been elected and qualified.

 

Each nominee has consented to serve as a member of the Board if elected or re-elected, as the case may be, for another term. Nevertheless, if any nominee becomes unable to stand for election (which the Board does not anticipate happening), each proxy will be voted for a substitute designated by the Board or, if no substitute is designated by the Board prior to or at the Annual Meeting, the Board will act to reduce the membership of the Board to the number of individuals nominated.

 

There is no family relationship between any nominee and any other nominee or any executive officer of ours. The information set forth below concerning the nominees has been furnished to us by the nominees.

 

The Board recommends that you vote “FOR” the election of each of the above named nominees to the Board. Proxies solicited by the Board will be voted “FOR” the election of each of the nominees named above unless instructions to the contrary are given.

 

Our Directors

 

David M. Barse has served as a director since 1996 and is Chairman of the Compensation Committee and a member of the Finance Committee. Mr. Barse’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Barse served as President and Chief Operating Officer from July 1996 until July 24, 2002. Since February 1998, Mr. Barse has served as President and, since June 2003, Chief Executive Officer of Third Avenue Management LLC, an investment adviser to mutual funds and separate accounts. From April 1995 until February 1998, he served as the Executive Vice President and Chief Operating Officer of Third Avenue Trust and its predecessor, Third Avenue Value Fund, Inc., before assuming the position of President in May of 1998 and Chief Executive Officer in September 2003. In 2001, Mr. Barse became Trustee of both the Third Avenue Trust and Third Avenue Variable Series Trust. Since June 1995, Mr. Barse has been the President and, since July 1999, Chief Executive Officer of MJ. Whitman, LLC and its predecessor, a full service broker dealer. Mr. Barse joined the predecessor of MJ. Whitman LLC and Third Avenue in December 1991 as General Counsel. Mr. Barse also presently serves as a trustee of Brooklyn Law School and as a director of ACA Holdings, Inc., a public financial insurance company. Mr. Barse is 45 years old.

Ronald J. Broglio has served as a director since October 2004 and is a member of the Nominating and Governance Committee and the Public Policy Committee. Mr. Broglio’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Broglio has been the President of RJB Associates, a consulting firm specializing in energy and environmental solutions, since 1996. Mr. Broglio was Managing Director of Waste to Energy for Waste Management International Ltd. from 1991 to 1996. Prior to joining Waste Management, Mr. Broglio held a number of positions with Wheelabrator Environmental Systems Inc. from 1980 through 1990, including Managing Director, Senior Vice President — Engineering, Construction & Operations and Vice President of Engineering & Construction. Mr. Broglio served as Manager of Staff Engineering and as a staff engineer for Rust Engineering Company from 1970 through 1980. Mr. Broglio is 67 years old.

 

Peter C. B. Bynoe has served as a director since July 2004 and is a member of the Compensation Committee and is Chairman of the Public Policy Committee. Mr. Bynoe’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Bynoe joined the law firm of DLA Piper US, LLP as a partner in 1995 and currently serves as Senior Counsel. As of February 1, 2008, Mr. Bynoe became Managing Director of Loop Capital Markets, a full-service investment banking firm based in Chicago. Mr. Bynoe has been a principal of Telemat Ltd., a consulting and project management firm, since 1982. Mr. Bynoe is a director of Rewards Network Inc., a provider of credit card loyalty and rewards programs, and Citizens Communication Corporation, a telephone, television and internet service provider. Mr. Bynoe is 57 years old.

 

Linda J. Fisher has served as a director since December 2007 and is a member of the Public Policy Committee. Ms. Fisher’s one-year term as a director will expire at the next annual meeting of stockholders. Ms. Fisher has been serving as Vice President, Safety, Health and Environment and Chief Sustainability Officer at E.I. du Pont de Nemours and Company in Wilmington, Delaware since 2004. Prior to joining DuPont, Ms. Fisher was Deputy Administrator of the United States Environmental Protection Agency. Ms. Fisher also serves on the Board of Directors of the Environmental Law Institute, an independent, non-partisan environmental education and policy research center, the Board of Trustees of The National Parks Foundation, the only national charitable partner of America’s national parks, the Board of Directors of RESOLVE, a public policy dispute resolution organization, and the Board of Directors for Resources for the Future, a nonprofit, nonpartisan organization that conducts independent research on environmental, energy and natural resource issues. Ms. Fisher is 55 years old.

 

Richard L. Huber has served as a director since July 2002 and is a member of the Audit Committee and the Public Policy Committee. Mr. Huber’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Huber served as Chairman and the Interim Chief Executive Officer of American Commercial Lines, Inc., a marine transportation and service company (“ACL”), from April 2004 until January 2005 and continues as a director of ACL and various subsidiaries and affiliates of ACL. Mr. Huber has been Managing Director, Chief Executive Officer and Principal of the direct investment group Norte-Sur Partners, a direct private equity investment firm focused on Latin America, since January 2001. Mr. Huber held various positions with Aetna, Inc. since 1995, most recently as the Chief Executive Officer, until February 2000. Mr. Huber has approximately 40 years of prior investment and merchant banking, international business and management experience, including executive positions with Chase Manhattan Bank, Citibank, Bank of Boston and Continental Bank. Mr. Huber is a member of the Board of Directors of ACCION International, a nonprofit microlending and microfinance organization. Mr. Huber is 71 years old.

 

Anthony J. Orlando has served as our President and Chief Executive Officer since October 2004. He has served as a director since September 2005 and is a member of the Public Policy Committee and our Finance Committee. Mr. Orlando’s one-year term as a director will expire at the next annual meeting of stockholders. Previously, Mr. Orlando had been President and Chief Executive Officer of Covanta Energy since November 2003. From March 2003 to November 2003 Mr. Orlando served as Senior Vice President, Business and Financial Management of Covanta Energy. From January 2001 until March 2003, Mr. Orlando served as Covanta Energy’s Senior Vice President, Waste-to-Energy. Previously, he served as Executive Vice President of Covanta Energy Group, Inc. Mr. Orlando joined Covanta Energy in 1987. Mr. Orlando is 48 years old.

 

William C. Pate has served as a director since 1999 and is a member of the Audit Committee and the Finance Committee. Mr. Pate’s one-year term as a director will expire at the next annual meeting of stockholders. He was our Chairman of the Board from October 2004 through September 2005. Mr. Pate is Managing Director of Equity

Group Investments LLC (“EGI”), a privately-held investment firm. Mr. Pate has been employed by EGI or its predecessor in various capacities since 1994. Mr. Pate also serves as a director of Exterran Holdings, Inc., a natural gas compression company. Mr. Pate is 44 years old.

 

Robert S. Silberman has served as a director since December 2004 and is the Chairman of the Finance Committee and a member of the Compensation Committee. Mr. Silberman’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Silberman has been Chairman of the Board of Directors of Strayer Education, Inc. since February 2003 and its Chief Executive Officer since March 2001. Strayer Education, Inc. is an education services company, whose main operating asset, Strayer University, is a leading provider of graduate and undergraduate degree programs focusing on working adults. From 1995 to 2000, Mr. Silberman served as President and Chief Operating Officer of CalEnergy Company, Inc., a California independent energy producer, and in other capacities. Mr. Silberman has also held senior positions within the public sector, including U.S. Assistant Secretary of the Army. Mr. Silberman is a member of the Council on Foreign Relations, a nonpartisan resource for information and analysis on foreign relations. Mr. Silberman is 50 years old.

 

Jean Smith has served as a director since December 2003 and is the Chairperson of the Audit Committee and a member of the Nominating and Governance Committee. Ms. Smith’s one-year term as a director will expire at the next annual meeting of stockholders. Ms. Smith has been a Managing Director of Plainfield Asset Management LLC, a investment manager for institutions and high net worth individuals, since 2006. Ms. Smith previously held the position of President of Sure Fit Inc., a provider of ready-made slipcovers and related accessories, from 2004 to 2006 and was a private investor and consultant from 2001 to 2004. Ms. Smith has more than 25 years of investment and international banking experience, having previously held the position of Managing Director of Corporate Finance for U.S. Bancorp Libra and positions with Banker’s Trust Company, Citicorp Investment Bank, Security Pacific Merchant Bank and UBS Securities. Ms. Smith is 52 years old.

 

Clayton Yeutter has served as a director since July 2002 and is Chairman of the Nominating and Governance Committee. Mr. Yeutter’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Yeutter is Senior Advisor to Hogan & Hartson LLP, a law firm in Washington, D.C., where he has had an international trade and agricultural law practice since 1993. From 1985 through 1991, Mr. Yeutter served in the Reagan Administration as U.S. Trade Representative and in the first Bush Administration as Secretary of Agriculture. Mr. Yeutter has served as Chief Executive Officer of the Chicago Mercantile Exchange from 1978 through 1985, as Chairman of the Board of Directors of Oppenheimer Funds, an institutional investment manager, and Chairman of the Board of Directors of Crop Solutions, Inc., a privately-owned agricultural chemical company. He presently serves as Chairman of the Board of Directors of ACL; a director of America First, a privately-owned investment management company; director of Neogen Corporation, a manufacturer of testing equipment for food safety and animal health; and and director of Chicago Climate Exchange, Inc., an integrated greenhouse gas emissions reduction, registry and trading system. Mr. Yeutter is 77 years old.

 

Samuel Zell has served as our Chairman of the Board since September 2005, and had also previously served as a director from 1999 to 2004, as our President and Chief Executive Officer from July 2002 to April 2004 and as our Chairman of the Board from July 2002 to October 2004. Mr. Zell’s one-year term as our Chairman and as a director will expire at the next annual meeting of stockholders. Mr. Zell has served as Chairman of the Board of Directors of EGI since 1999, and had been Chairman of the Board of Directors of its predecessor, Equity Group Investments, Inc., for more than five years. Mr. Zell has been the chairman and chief executive officer of Tribune Company, a media company, since December 2007. Until its sale in September 2007, Mr. Zell was a trustee and Chairman of the Board of Trustees of Equity Office Properties Trust, an equity real estate investment trust, commonly known as a “REIT,” primarily focused on office buildings, since October 1996, was its Interim President from April 2002 until November 2002 and was its and Interim Chief Executive Officer from April 2002 until April 2003. For more than the past five years, Mr. Zell has served as Chairman of the Board of Directors of Anixter International, Inc., a global distributor of electrical and cable systems; Chairman of the Board of Directors of Equity Lifestyle Properties, Inc. (previously known as of Manufactured Home Communities, Inc.), an equity REIT primarily engaged in the ownership and operation of manufactured home resort communities; Chairman of the Board of Trustees of Equity Residential Properties Trust, an equity REIT that owns and operates multi-family residential properties; and Chairman of the Board of Directors of Capital Trust, Inc., a specialized finance company. Mr. Zell is 66 years old.

 

PROPOSAL NO. 2

 

APPROVAL OF AMENDMENT TO THE EQUITY AWARD PLAN FOR EMPLOYEES AND
OFFICERS TO INCREASE THE NUMBER OF SHARES AVAILABLE FOR AWARDS

 

At the annual meeting, the stockholders will be asked to approve an amendment to our Equity Award Plan for Employees and Officers, referred to in this proxy statement as the “Equity Award Plan”. On February 21, 2008, our Board of Directors, upon the recommendation of the Compensation Committee, adopted an amendment, referred to herein as the “Amendment,” and directed that it be submitted to our stockholders for approval at the annual meeting. The Amendment will become effective when it is approved by our stockholders. The Amendment, if approved, would increase the number of shares of common stock available for issuance under the Equity Award Plan by 6,000,000 shares. The Board of Directors believes that the Equity Award Plan plays an important role in our efforts to attract and retain employees of outstanding ability and encourages these individuals to take into account the long-term interests of the Company and its stockholders.

 

The Equity Award Plan was originally approved by stockholders of the Company in October 2004 and amended by stockholders in September 2005 to increase the number of shares available for issuance to 6,000.000. When the Equity Award Plan was amended in September 2005, the Compensation Committee and the Board estimated that the number of shares proposed for issuance under the Equity Award Plan would enable the Compensation Committee to make awards under the Equity Award Plan for the following three years. The number of employees who have received awards under the Equity Award Plan has increased from approximately 100 employees in October 2004 to over 300 employees, with approximately 310 likely to be considered for awards in 2008. The Compensation Committee and the Board currently estimate that at current grant levels and our stock price, the additional 6,000,000 shares proposed for issuance under the Equity Award Plan would enable the Compensation Committee to make awards under the Equity Award Plan for at least the next three years.

 

Approval of the Amendment requires the affirmative vote of a majority of the shares of common stock represented at the meeting in person or by proxy and entitled to vote. In the event stockholder approval of the Amendment is not obtained, awards will continue to be made under the terms of the Plan as currently in effect.

 

EQUITY AWARD PLAN PRINCIPAL FEATURES

 

The principal features of the Equity Award Plan are summarized below. This summary is not complete, however, and is qualified by the terms of the Plan, as amended by the Amendment and by the amendment described in Proposal No. 3 of this proxy statement, a copy of which is attached to this proxy statement as Appendix A.

 

Shares Available Under the Equity Award Plan

 

On March 19, 2008 there were 917,713 shares remaining and available for issuance under the Equity Award Plan. The maximum aggregate number of shares of common stock available for issuance under the Equity Award Plan is currently 6,000,000, and is proposed to be increased by an additional 6,000,000 shares to 12,000,000 shares, subject to customary adjustments to prevent dilution. If the Amendment is approved, a total of 12,000,000 shares of the common stock will have been approved for issuance under the Equity Award Plan. Shares subject to an award may be authorized but unissued, or reacquired shares of common stock or treasury shares. If an award expires or becomes unexercisable without having been exercised in full, the unpurchased or forfeited shares which were subject to the award will become available for future grant under the Equity Award Plan. However, shares that have actually been issued under the Equity Award Plan will not be returned to the Equity Award Plan and will not be available for future distribution under the Equity Award Plan.

 

Equity Award Plan Administration

 

The Equity Award Plan is administered by the Compensation Committee of the Board, or another Board committee, comprised of two or more directors, each of whom qualifies as a “disinterested person” under Rule 16b-3 of the Exchange Act and at least two of whom constitute an “outside director” under Section 162(m) of the Tax Code. The Compensation Committee has the exclusive authority to determine the fair market value of the

common stock and to determine all other matters relating to awards under the Equity Award Plan, including the selection of individuals to be granted an award, the type of award, the number of shares of common stock subject to an award, and all terms, conditions, restrictions and limitations, if any, including, without limitation, vesting, acceleration of vesting, exercisability, termination, substitution, cancellation, forfeiture, or repurchase of an award and the terms of any instrument that evidences the award. The Compensation Committee also has exclusive authority to interpret the Equity Award Plan and its rules and regulations, and to make all other determinations deemed necessary or advisable under or for administering the Equity Award Plan. The Compensation Committee may, however, authorize any one or more of its members or an officer of the Company to execute and deliver documents on behalf of the Compensation Committee, or delegate to an officer the authority to make certain decisions under the Equity Award Plan. However, the Compensation Committee may not delegate its authority with regard to selecting persons subject to Section 16 of the Exchange Act for participation in the Equity Award Plan or granting awards to such persons.

 

Term

 

The Equity Award Plan became effective as of October 5, 2004, upon the approval by our stockholders and continues in effect for a term of 10 years, unless sooner terminated by the Board.

 

Eligibility

 

Awards under the Equity Award Plan may be granted to employees (including officers) of the Company, its subsidiaries and affiliates. In addition, an award under the Equity Award Plan may be granted to a person who is offered employment by the Company or a subsidiary or affiliate of the Company, provided that such award shall be immediately forfeited if such person does not accept such offer of employment within an established time period. If otherwise eligible, an employee who has been granted an award under the Equity Award Plan may be granted other awards. There are currently approximately 310 employees who are likely to be considered for awards under the Equity Award Plan in 2008 based on current grant criteria. Under the terms of the Equity Award Plan, all of our employees (including our subsidiaries and affiliates), approximately 3,500 employees as of December 31, 2007, were eligible to receive awards under the Equity Award Plan. Accordingly, it is not possible to estimate the number of additional employees who may become eligible to receive awards under the Equity Award Plan from time to time.

 

Limitations on Awards Granted to Participants

 

Currently, no participant in the Equity Award Plan may be granted awards in any calendar year with respect to more than 300,000 shares. If any award (or portion of an award) is cancelled, the shares subject to the cancellation will count toward this limit. However, we are proposing to increase the amount of shares which can be awarded in any calendar year to a participant to 250,000 shares of restricted stock and options to purchase 650,000 shares of common stock. Please see “Proposal No. 3” in this proxy statement on page 20 for a description of that proposed amendment to the Equity Award Plan.

 

Awards

 

The Equity Award Plan provides for awards to be made in the form of (a) incentive stock options, which are intended to qualify under Section 422 of the Tax Code, (b) non-qualified stock options, which are not intended to qualify under Section 422 of the Tax Code, (c) shares of restricted stock, (d) stock appreciation rights, (e) performance awards, and (f) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a stand alone, combination or tandem basis. Additional information about some of the types of awards is set forth below.

 

Restricted Stock

 

Awards of Restricted Stock; Restriction Period.  Shares of restricted stock may be issued either alone or in addition to other awards granted under the Equity Award Plan or cash awards made outside of the plan. The Compensation Committee may condition the grant of restricted stock upon the attainment of specific performance

goals of the recipient or us. During a restricted period set by the Compensation Committee, the recipient of restricted stock will not be permitted to sell, assign, transfer, pledge or otherwise encumber the shares of restricted stock. The Compensation Committee may provide for the lapse of such restrictions in installments or otherwise and may accelerate or waive such restrictions based on a period of service of the recipient, performance of the recipient or of the Company or such other factors as the Compensation Committee may determine.

 

Rights as a Stockholder.  Subject to any restrictions set forth in the award agreement, a recipient of restricted stock will possess all of the rights of a holder of our common stock, including the right to vote and receive dividends. However, unless otherwise determined by the Compensation Committee or as otherwise provided in the Equity Award Plan, cash dividends on the shares of common stock that are the subject of the award shall be automatically deferred and reinvested in additional restricted stock and dividends payable in common stock shall be paid in the form of restricted stock. The Compensation Committee may require that the certificates representing shares of restricted stock be held in custody by us until the restrictions have lapsed.

 

Termination of Employment.  Unless otherwise provided in an award agreement, upon termination of employment for any reason during the restricted period, the recipient will forfeit the right to the shares of restricted stock to the extent that the applicable restrictions have not lapsed at the time of such termination. Under our current award agreements, however, upon termination of employment by reason of death or disability, the recipient will retain the right to the shares of restricted stock vesting at the time and to the extent the performance measures are satisfied as if still employed by us.

 

Deferral of Restricted Stock.  A participant may elect, at the Compensation Committee’s sole discretion and in accordance with the terms of the Equity Award Plan, to defer receipt of shares of restricted stock until a future date (no later than termination of employment). If a participant makes such an election, then, subject to applicable law, the participant may be able to defer recognition of ordinary income until such shares are received.

 

Stock Options

 

Types.  Stock options may be granted under the Equity Award Plan in the form of incentive stock options or non-qualified stock options. Notwithstanding their designation, a participant’s incentive stock options will be treated as non-qualified stock options to the extent that more than $100,000 in aggregate fair market value of shares underlying such incentive stock options becomes exercisable for the first time during any calendar year.

 

Exercise Price.  The per share exercise price for shares underlying stock options will be determined by the Compensation Committee, provided that the exercise price must be at least equal to 100% of the fair market value per share of common stock on the date of grant. In the case of an incentive stock option granted to an employee who, at the time of grant, owns more than 10% of the total combined voting power of all classes of stock of the Company, the per share exercise price must be at least equal to 110% of the fair market value per share of common stock on the date of grant. As determined by the Compensation Committee pursuant to the Equity Award Plan, the “fair market value” of a share of common stock is the closing price of the stock, as reported by the New York Stock Exchange, as of the close of business on the date of the grant.

 

Term of Option; Vesting.  The term during which a stock option may be exercised will be determined by the Compensation Committee, provided that no stock option will be exercisable more than 10 years from the date of grant. In the case of an incentive stock option granted to an employee who, at the time of grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or its subsidiaries, the term of such stock option may not be more than five years. The Compensation Committee has full authority, subject to the terms of the Equity Award Plan, to determine the vesting period or limitation or waiting period with respect to any stock option granted to a participant or the shares purchased upon exercise of such option. In addition, the Compensation Committee may, for any reason, accelerate the exercisability of any stock option.

 

Method of Payment.  The Compensation Committee will determine the acceptable form and method of payment for exercising a stock option, provided that the acceptable form and method of payment for exercising an incentive stock option will be determined at the time of grant.

Cash-Out Option.  Upon receipt of written notice of exercise, the Compensation Committee may offer to buy out a participant’s options by paying a participant cash in an amount equal to the difference between the excess of the fair market value of such shares over the exercise price of the shares subject to the option.

 

No Rights as a Stockholder.  Until a stock certificate evidencing issued shares for which a stock option is exercised, a participant shall have no right to vote or receive dividends or any other rights as a stockholder with respect to the shares of our common stock subject to such stock option, notwithstanding the exercise of such stock option.

 

Termination of Employment.  If a participant’s employment terminates by reason of a “disability” (as defined in the Equity Award Plan) or death, the vested portion of any stock option held by such person may generally be exercised for a period equal to the shorter of (a) twelve months from the date of termination or (b) the remaining term of the option. If a participant’s employment terminates by reason of disability or death, any incentive stock option which is exercised after the exercise period permitted by Section 422 of the Tax Code will be treated as a non-qualified stock option.

 

If a participant’s employment terminates by reason of “retirement” (as defined in the Equity Award Plan), the vested portion of any non-qualified stock option held by such person may generally be exercised for a period equal to the shorter of (a) three years from the date of termination or (b) the remaining term of the non-qualified stock option. The vested portion of any incentive stock option held by such person may generally be exercised for a period equal to the shorter of (x) three months from the date of termination or (y) the remaining term of the incentive stock option.

 

If a participant is terminated for “cause” (as defined in the Equity Award Plan), any unexercised portion of any option held by such person terminates immediately and will no longer be exercisable.

 

If a participant’s employment terminates for any reason other than disability, death, retirement or “cause,” the vested portion of any non-qualified stock option held by such person may generally be exercised for a period equal to the shorter of (a) one year from the date of termination or (b) the remaining term of the non-qualified stock option, and the vested portion of any incentive stock option held by such person may generally be exercised for a period equal to the shorter of (x) three months from the date of termination or (y) the remaining term of the incentive stock option.

 

Other Awards

 

Stock Appreciation Rights.  The Compensation Committee may grant a right to receive the excess of the fair market value of shares of Common Stock on the date the stock appreciation right is exercised over the fair market value of such shares on the date the stock appreciation right was granted. Such spread may, in the sole discretion of the Compensation Committee, be paid in cash or common stock or a combination of both. Stock appreciation rights may not be exercised earlier than six months from the date of their grant.

 

Performance Awards.  The Compensation Committee may grant performance awards based on the performance of a recipient over a specified period. Such performance awards may be awarded contingent upon future performance of the Company or its affiliates or subsidiary during that period. A performance award may be in the form of common stock (or cash in an amount equal to the fair market value thereof) or the right to receive an amount equal to the appreciation, if any, in the fair market value of common stock over a specified period. Performance awards may be paid, in the Compensation Committee’s discretion, in cash or stock or some combination thereof. Each performance award will have a maximum value established by the Compensation Committee at the time the award is made. Unless otherwise provided in an award or by the Compensation Committee, performance awards terminate if the recipient does not remain an employee of the Company, or its affiliates or subsidiaries at all times during the applicable performance period.

 

Other Stock-Based Awards.  The Compensation Committee may, in its discretion, grant other stock-based awards which are related to or serve a similar function to the awards described above.

Other Provisions

 

Non-Transferability of Awards.  Unless otherwise provided by the Compensation Committee in the award agreement, stock options, shares of restricted stock and other awards granted under the Equity Award Plan may not be sold, pledged, assigned or disposed of in any manner, except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined in the Tax Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder). During a participant’s lifetime, options and other awards under the Equity Award Plan may be exercised only by the participant, his or her guardian or legal representative, or an alternate payee pursuant to a qualified domestic relations order.

 

Termination and Amendment.  The Equity Award Plan provides that the Board may generally amend, alter, suspend or terminate the Equity Award Plan and the Compensation Committee may prospectively or retroactively amend any or all of the terms of awards granted under the Equity Award Plan, so long as any such amendment does not impair the rights of any recipient without the recipient’s consent. Stockholder approval is required for any material Equity Award Plan amendment or any amendment necessary to comply with Section 422 of the Tax Code or any other applicable laws or stock exchange requirements.

 

Antidilution Provisions.  Subject to any required action by the stockholders of the Company, the number of shares of common stock covered by each outstanding award (and the purchase or exercise price thereof), and the number of shares of common stock which have been authorized for issuance under the Equity Award Plan but as to which no awards have yet been granted (or which have been returned to the Equity Award Plan upon cancellation or expiration of an award) will be proportionately adjusted to prevent dilution or enlargement of rights in the event of any stock split, stock dividend, combination or reclassification of the common stock or other relevant capitalization change.

 

Prohibition on Loans to Participants.  The Company may not lend money to any participant under the Equity Award Plan for the purpose of paying the exercise or base price associated with any award or for the purpose of paying any taxes associated with the exercise or vesting of an award.

 

Certain Federal Income Tax Consequences

 

The following is a brief summary of the principal federal income tax consequences of the grant and exercise of stock options awarded under the Equity Award Plan and the subsequent disposition of shares acquired upon such exercise. Also discussed are the tax consequences of the receipt of restricted stock and certain other awards under the Equity Award Plan. This summary is based upon the provisions of the Tax Code as in effect on the date of this proxy statement, current regulations adopted and proposed thereunder and existing judicial decisions, as well as administrative rulings and pronouncements of the Internal Revenue Service (all of which are subject to change, possibly with retroactive effect). This summary is not intended to be exhaustive and does not describe all federal, state or local tax laws. Furthermore, the general rules discussed below may vary, depending upon the personal circumstances of the individual holder. Accordingly, participants should consult a tax advisor to determine the income tax consequences of any particular transaction or award.

 

Taxation of Incentive Stock Options.  A participant who is granted an incentive stock option does not recognize taxable income at the time the option is granted or upon its exercise, although the exercise is an adjustment item for alternative minimum tax purposes and may subject the participant to the alternative minimum tax. If the shares acquired upon exercise are sold after the expiration of two years from the grant of the option and one year after exercise of the option, any gain or loss is treated as long-term capital gain or loss. If these holding periods are not satisfied, the participant recognizes ordinary income at the time of disposition equal to the difference between the exercise price and the lower of (1) the fair market value of the shares at the date of the option exercise or (2) the sale price of the shares. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income is treated as long-term or short-term capital gain or loss, depending on the holding period. Unless limited by Section 162(m) of the Tax Code, we are generally entitled to a deduction in the same amount as the ordinary income recognized by the participant.

 

Taxation of Non-Qualified Stock Options.  In general, a participant will not recognize any income upon the grant of a non-qualified stock option. Upon the exercise of a non-qualified stock option, however, a participant

generally will recognize ordinary income in an amount equal to the excess of the fair market value of the non-qualified option stock on the date of exercise over the exercise price (i.e., the “spread”) and the Company will be entitled to a deduction in an equal amount, which may be limited by Section 162(m) of the Tax Code.

 

Upon subsequent sales of shares obtained through the exercise of non-qualified stock options, the participant may realize short-term or long-term capital gain or loss, depending upon the holding period of the shares, if such shares constitute capital assets in the participant’s hands. The gain or loss will be measured by the difference between the sales price and the tax basis of the shares sold. The tax basis for this purpose generally will be the sum of the exercise price and the amount of ordinary income recognized by the participant as a result of exercise.

 

Taxation of Restricted Stock.  In general, except in the case of a Section 83(b) election (as discussed below), a participant will not incur any tax upon the grant of shares of stock which are subject to a substantial risk of forfeiture. However, when the restrictions lapse or the shares become freely transferable, the participant will recognize ordinary income equal to the fair market value of the applicable shares at such time less the amount, if any, paid for such shares, unless the participant has made a Section 83(b) election with respect to such shares or has elected to defer receipt of such shares, as discussed below.

 

If a participant makes a Section 83(b) election within 30 days of a grant of restricted stock, the participant will recognize ordinary income at the time of grant in an amount equal to the difference between the fair market value of the restricted shares on the grant date and the amount, if any, paid for such restricted shares. If the participant makes such an election, he or she will not recognize any further income with respect to such shares solely as a result of a later lapse of the restrictions.

 

If a participant holds the restricted stock as a capital asset after the earlier of either (1) the vesting of such restricted stock or (2) the making of a timely Section 83(b) election with respect to such restricted stock, any subsequent gain or loss will be taxable as long-term or short-term capital gain or loss, depending upon the holding period. For this purpose, the basis in the restricted stock generally will be equal to the sum of the amount (if any) paid for the restricted stock and the amount included in ordinary income as a result of the vesting event or Section 83(b) election, as applicable; provided, however, that, if a participant forfeits restricted stock with respect to which a Section 83(b) election was made prior to vesting, the participant’s capital loss is limited to the amount (if any) paid for such restricted stock.

 

A participant who elects, at the Compensation Committee’s sole discretion and in accordance with the requirements of the Equity Award Plan, to defer receipt of shares of restricted stock generally will not be subject to tax until such time as the shares are received or otherwise made available (no later than termination of service). Such election must be made before the shares are issued to the employee and no later than 30 days after the award date and at least 12 months before any such shares could become vested. The amount of such taxable income will be the fair market value of the shares at the time when such shares are actually received or otherwise made available less the amount, if any, paid for such shares. Any subsequent gain or loss would be taxable as long-term or short-term capital gain or loss, depending upon the holding period, assuming such shares are held as a capital asset.

 

In general, at the time a participant recognizes ordinary income with respect to the restricted stock, the Company will be entitled to a deduction in an amount equal to the ordinary income recognized by the participant, which deduction may be limited by Section 162(m) of the Tax Code.

 

Taxation of Stock Appreciation Rights.  In general, a participant will not recognize taxable income at the time that a stock appreciation right is granted. Upon the exercise of a stock appreciation right, the holder generally will recognize ordinary income in an amount equal to the sum of the cash and the fair market value of any property received. Upon the exercise of a stock appreciation right, the Company generally will be entitled to a deduction equal to the amount of ordinary income that the participant is required to recognize as a result of the exercise, which deduction may be limited by Section 162(m) of the Tax Code.

 

Taxation of Other Stock Based Awards.  Other awards may be granted under the Equity Award Plan. Since the amount, character and timing of income recognized in connection with such awards will vary depending upon the specific terms and conditions of such awards, no information regarding the tax consequences of the receipt of such awards may be provided at this time.

Our Tax Impact from Awards.  We generally will be entitled to a tax deduction in connection with an award under the Equity Award Plan in an amount equal to the ordinary income realized by a participant at the time the participant recognizes such income (for example, the exercise of a non-qualified stock option) unless limited by Section 162(m) of the Tax Code. Special rules limit the deductibility of compensation paid to our named executive officers.

 

Tax Withholding

 

Our obligations under the Equity Award Plan are conditioned upon proper arrangements being in place with participants in the Equity Award Plan for the payment of withholding tax obligations. Unless otherwise determined by the Compensation Committee, withholding tax obligations may be settled with shares of common stock, including shares that are part of the award that gives rise to the withholding obligation.

 

The Board recommends that you vote “FOR” the approval of the Amendment. Proxies solicited by the Board will be voted “FOR” the approval of the Amendment unless instructions to the contrary are given.

 

PROPOSAL NO. 3

 

APPROVAL OF AMENDMENT TO THE EQUITY AWARD PLAN FOR EMPLOYEES AND
OFFICERS TO INCREASE THE MAXIMUM NUMBER OF SHARES INCLUDED
IN A SINGLE ANNUAL AWARD

 

At the annual meeting, the stockholders will be asked to approve a second amendment to our Equity Award Plan in addition to the amendment described in Proposal No. 2 in this proxy statement on page 14. Currently no participant in the Equity Award Plan may be granted awards in any calendar year with respect to more than 300,000 shares of our common stock. The amendment to the Equity Award Plan, referred to in this Proposal No. 3 as the “Second Amendment,” would increase the permitted number of shares underlying awards granted to any one participant from 300,000 shares to 250,000 shares of restricted stock and options to purchase 650,000 shares of our common stock in any calendar year. On February 21, 2008, our Board of Directors, upon the recommendation of the Compensation Committee, adopted the Second Amendment, and directed that it be submitted to our stockholders for approval at the annual meeting. The Second Amendment will become effective when it is approved by our stockholders, even if the Amendment described in Proposal No. 2 in this proxy statement is not approved by our stockholders.

 

The Equity Award Plan was originally approved by our stockholders in October 2004 and amended by stockholders in September 2005. The total number of shares outstanding was 72,824,307 shares as of September 30, 2004, with a market capitalization of approximately $0.55 billion. The annual 300,000 share limitation on individual awards represented approximately 0.4% of the total outstanding shares and was reasonable at the time of the adoption of the Equity Award Plan. Since that time, due to the growth of the Company, the number of outstanding shares has increased to 154,724,901 shares as of March 19, 2008, and our market capitalization has increased to $4.2 billion. As a result, the 300,000 limitation represents a much smaller percentage of our outstanding shares and capitalization and does not provide sufficient flexibility and discretion to the Compensation Committee to create appropriate equity incentives for all situations. The Compensation Committee and the Board believe that an increase in the annual limitation as proposed in the Second Amendment will enable us to continue to properly reward our executive officers and offer sufficient long-term equity incentives.

 

The annual limitation on the number of equity awards that any individual may receive in any year is included in the Equity Award Plan in order to comply with Section 162(m) of the Tax Code. Under Section 162(m) of the Tax Code, in order for compensation in excess of $1,000,000 paid in any year to any “covered employee” (defined by 162(m) of the Tax Code as a company’s chief executive officer or any of such company’s four other most highly compensated executive officers named in the proxy statement) to be deductible by us, such compensation must qualify as “performance-based.” Among the conditions for equity awards to qualify as “performance-based” is stockholder approval of the equity plan and a limitation on the number of awards that any individual may receive per year.

Approval of the Second Amendment requires the affirmative vote of a majority of the shares of common stock represented at the meeting in person or by proxy and entitled to vote. In the event stockholder approval of the Second Amendment is not obtained, awards may continue to be made under the terms of the Equity Award Plan as currently in effect.

 

EQUITY AWARD PLAN PRINCIPAL FEATURES

 

Solely for a description of the principal features of the Equity Award Plan, see “Shares Available Under the Equity Award Plan,” “Equity Award Plan Administration,” “Term,” “Eligibility,” “Limitations on Awards Granted to Participants,” “Awards,” “Other Provisions,” “Certain Federal Income Tax Consequences,” and “Tax Withholding” in Proposal No. 2 in this proxy statement beginning on page 14.

 

The Board recommends that you vote “FOR” the approval of the Second Amendment. Proxies solicited by the Board will be voted “FOR” the approval of the Second Amendment unless instructions to the contrary are given.

 

PROPOSAL NO. 4

 

APPROVAL OF AMENDMENT TO THE EQUITY AWARD PLAN FOR DIRECTORS

 

At the annual meeting, the stockholders will be asked to approve an amendment to our Equity Award Plan for Directors, referred to in this proxy statement as the “Directors Plan”. Under the amendment to the Directors Plan, referred to in this Proposal No. 4 as the “Directors Amendment”, the number of shares of common stock available for issuance under the Directors Plan would be increased by 300,000 shares. The Board of Directors believes that the Directors Plan plays an important role in our efforts to attract and retain non-employee directors of outstanding ability and encourages these individuals to take into account the long-term interests of the Company and its stockholders. On February 21, 2008, our Board of Directors, upon the recommendation of the Compensation Committee, adopted the Directors Amendment, and directed that it be submitted to our stockholders for approval at the annual meeting. The Directors Amendment will become effective when it is approved by our stockholders.

 

The Directors Plan was originally approved by our stockholders in October 2004 following our acquisition of Covanta Energy in March 2004. As of March 19, 2008 and prior to the anticipated automatic issuance of an aggregate of 40,500 shares of restricted stock following the annual meeting, there were 72,076 shares remaining and available for issuance under the Directors Plan. Unless additional shares are authorized, we will not have sufficient shares to make automatic awards at the next annual meeting of our stockholders. The Board and the Compensation Committee believe that the Directors Amendment is desirable in order to ensure that there will be a sufficient number of shares authorized for issuance under the Directors Plan to allow us to attract and retain non-employee directors. The Compensation Committee and the Board currently estimate that at current grant levels and our stock price, the additional 300,000 shares proposed for issuance under the Directors Plan would enable the Compensation Committee to make awards under the Plan for at least the next five years.

 

Approval of the Directors Amendment requires the affirmative vote of a majority of the shares of common stock represented at the meeting in person or by proxy and entitled to vote. In the event stockholder approval of the Directors Amendment is not obtained, awards may continue to be made under the terms of the Directors Plan as currently in effect

 

DIRECTORS PLAN PRINCIPAL FEATURES

 

The principal features of the Directors Plan are summarized below. This summary is not complete, however, and is qualified by the terms of the Directors Plan, a copy of which is attached to this proxy statement as Appendix B.

 

Shares Available Under the Directors Plan

 

The maximum aggregate number of shares of common stock available for issuance under the Directors Plan is currently 400,000, and is proposed to be increased by 300,000 shares to 700,000 shares subject to customary

adjustments to prevent dilution. Shares subject to an award may be authorized but unissued, or reacquired shares of our common stock or treasury shares. If an award expires or becomes unexercisable without having been exercised in full or is forfeited, the unpurchased or forfeited shares which were subject to the award will become available for future grant under the Directors Plan. However, shares that have actually been issued and not forfeited under the Directors Plan will not be returned to the Directors Plan and will not be available for future distribution under the Directors Plan.

 

Plan Administration

 

The Directors Plan is administered by the Compensation Committee of the Board, or another Board committee, comprised of two or more directors, each of whom qualifies as a “disinterested person” under Rule 16b-3 of the Exchange Act, provided that no director who is a member of the Compensation Committee will participate in any action of the Compensation Committee with respect to any claim or dispute involving such director. The Compensation Committee has the exclusive authority to determine the fair market value of the common stock and to determine all other matters relating to awards under the Directors Plan, including the selection of individuals to be granted an award, the type of award, the number of shares of our common stock subject to an award, and all terms, conditions, restrictions and limitations, if any, including, without limitation, vesting, acceleration of vesting, exercisability, termination, substitution, cancellation, forfeiture, or repurchase of an award and the terms of any instrument that evidences the award. The Compensation Committee also has exclusive authority to interpret the Directors Plan and its rules and regulations, and to make all other determinations deemed necessary or advisable under or for administering the Directors Plan. The Compensation Committee may, however, authorize any one or more of its members or an officer of the Company to execute and deliver documents on behalf of the Compensation Committee.

 

Term

 

The Directors Plan became effective as of October 4, 2004 upon the approval by our stockholders and continues in effect for a term of 10 years, unless sooner terminated pursuant to its provisions.

 

Eligibility

 

Awards under the Directors Plan may be granted to any duly elected director serving on the Board who is not also an employee of the Company or any subsidiary or affiliate of the Company. Directors who also serve as interim officers of the Company or any subsidiary or affiliate of the Company are not prohibited from receiving awards under the Directors Plan. While stockholders are being asked to elect eleven directors at the Annual Meeting (ten of whom are eligible to receive awards), it is not possible at this time to estimate the number of additional directors who may become eligible to receive awards under the Directors Plan from time to time.

 

Awards

 

The Directors Plan provides for awards to be made in the form of (a) stock options, which are not intended to qualify under Section 422 of the Code, (b) shares of restricted stock, (c) stock appreciation rights, or (d) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a stand alone, combination or tandem basis. Additional information about the various types of awards is set forth below.

 

Restricted Stock

 

Awards of Restricted Stock; Restriction Period.  Shares of restricted stock may be issued either alone or in addition to other awards granted under the Directors Plan or cash awards made outside of the Directors Plan. During a restricted period set by the Compensation Committee, the recipient of restricted stock will not be permitted to sell, assign, transfer, pledge or otherwise encumber the shares of restricted stock. The Compensation Committee may provide for the lapse of such restrictions in installments or otherwise and may accelerate or waive such restrictions based on a period of service of the recipient, performance of the recipient or of the Company or such other factors as the Compensation Committee may determine.

Rights as a Stockholder.  Subject to any restrictions set forth in the award agreement, a recipient of restricted stock will possess all of the rights of a holder of our common stock, including the right to vote and receive dividends. However, unless otherwise determined by the Compensation Committee or as otherwise provided in the Directors Plan, cash dividends on the shares of common stock that are the subject of the award shall be automatically deferred and reinvested in additional restricted stock and dividends payable in common stock shall be paid in the form of restricted stock. The Compensation Committee may require that the certificates representing shares of restricted stock be held in custody by us until the restrictions have lapsed.

 

Termination of Relationship as a Director.  Unless otherwise provided in an award agreement or under the Directors Plan, in the event a participant ceases to be a director for any reason during the restricted period, the recipient will forfeit the right to the shares of restricted stock to the extent that the applicable restrictions have not lapsed at the time of such termination. Pursuant to our current award agreements, however, in the event a participant ceases to be a director for any reason during the restricted period other than not being recommended for election for cause, the recipient will retain the right to the shares of restricted stock vesting at the time as if the recipient was still a member of out Board.

 

Deferral of Restricted Stock.  A participant may elect, at the Compensation Committee’s sole discretion and in accordance with the terms of the Directors Plan, to defer receipt of shares of restricted stock until a future date (no later than termination of service as a director). If a participant makes such an election, then, subject to applicable law, the participant may be able to defer recognition of ordinary income until such shares are received.

 

Stock Options

 

Awards.  The Compensation Committee may grant options in its sole discretion under the Directors Plan either alone, in combination or in tandem with any other awards under the Directors Plan.

 

Exercise Price.  The per share exercise price for shares underlying stock options will be determined by the Compensation Committee, provided that the exercise price must be at least equal to 100% of the fair market value per share of common stock on the date of grant. Under the Directors Plan, the “fair market value” of a share of common stock is the closing price of the stock, as reported by the New York Stock Exchange, on the date of the grant.

 

Term of Option; Vesting.  The term during which a stock option may be exercised will be determined by the Compensation Committee, provided that no stock option will be exercisable more than 10 years from the date of grant. The Compensation Committee has full authority to determine the vesting period or limitation or waiting period with respect to any stock option granted to a participant or the shares purchased upon exercise of such option. In addition, the Compensation Committee may, for any reason, accelerate the exercisability of any stock option.

 

Method of Payment.  The Compensation Committee will determine the acceptable form and method of payment for exercising a stock option.

 

Cash-Out Option.  Upon receipt of written notice of exercise, the Compensation Committee may offer to buy out a participant’s options by paying a participant cash in an amount equal to the difference between the excess of the fair market value of such shares over the exercise price of the shares subject to the option.

 

No Rights as a Stockholder.  Until a stock certificate evidencing issued shares for which a stock option is exercised, a participant shall have no right to vote or receive dividends or any other rights as a stockholder with respect to the shares of the Company’s common stock subject to such stock option, notwithstanding the exercise of such stock option.

 

Termination of Relationship as Director.  If a participant ceases to be a director other than for “cause” (as defined in the Directors Plan), the vested portion of any stock option held by such person may generally be exercised for a period equal to the shorter of (a) three years from the date of termination or (b) the remaining term of the option.

 

If a participant ceases to be a director by reason of death, the vested portion of any stock option held by such person may generally be exercised for a period equal to the shorter of (a) three years from the date of termination or (b) the remaining term of the option, unless the Compensation Committee determines otherwise.

If a participant is terminated for “cause,” any unexercised portion of any option held by such person terminates immediately and is no longer exercisable.

 

Other Awards

 

Stock Appreciation Rights.  The Compensation Committee may grant a right to receive the excess of the fair market value of shares of the Company’s common stock on the date the stock appreciation right is exercised over the fair market value of such shares on the date the stock appreciation right was granted. Such spread may, in the sole discretion of the Compensation Committee, be paid in cash or common stock or a combination of both. Stock appreciation rights may not be exercised earlier than six months from the date of their grant.

 

Other Stock-Based Awards.  The Compensation Committee may, in its discretion, grant other stock-based awards which are related to or serve a similar function to the awards described above.

 

Other Provisions

 

Non-Transferability of Awards.  Unless otherwise provided by the Compensation Committee in the award agreement, stock options, shares of restricted stock and other awards granted under the Directors Plan may not be sold, pledged, assigned or disposed of in any manner, except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined in the Tax Code or Title I of ERISA). During a participant’s lifetime, options and other awards under the Directors Plan may be exercised only by the participant, his or her guardian or legal representative, or an alternate payee pursuant to a qualified domestic relations order.

 

Termination and Amendment.  The Directors Plan provides that the Board may generally amend, alter, suspend or terminate the Directors Plan and the Compensation Committee may prospectively or retroactively amend any or all of the terms of awards granted under the Directors Plan, so long as any such amendment does not impair the rights of any recipient without the recipient’s consent. Stockholder approval is required for any material Directors Plan amendment or any amendment necessary to comply with Section 422 of the Tax Code or any other applicable laws or stock exchange requirements.

 

Antidilution Provisions.  Subject to any required action by our stockholders, the number of shares of common stock covered by each outstanding award (and the purchase or exercise price thereof), and the number of shares of common stock which have been authorized for issuance under the Directors Plan but as to which no awards have yet been granted (or which have been returned to the Directors Plan upon cancellation or expiration of an award) will be proportionately adjusted to prevent dilution or enlargement of rights in the event of any stock split, stock dividend, combination or reclassification of the common stock or other relevant capitalization change.

 

Prohibition on Loans to Participants.  We may not lend money to any participant under the Directors Plan for the purpose of paying the exercise or base price associated with any award or for the purpose of paying any taxes associated with the exercise or vesting of an award.

 

Certain Federal Income Tax Consequences

 

The following is a brief summary of the principal federal income tax consequences of the grant and exercise of stock options awarded under the Directors Plan and the subsequent disposition of shares acquired upon such exercise. Also discussed are the tax consequences of the receipt of restricted stock and certain other awards under the Directors Plan. This summary is based upon the provisions of the Tax Code as in effect on the date of this proxy statement, current regulations adopted and proposed thereunder and existing judicial decisions, as well as administrative rulings and pronouncements of the Internal Revenue Service (all of which are subject to change, possibly with retroactive effect). This summary is not intended to be exhaustive and does not describe all federal, state or local tax laws. Furthermore, the general rules discussed below may vary, depending upon the personal circumstances of the individual holder. Accordingly, participants should consult a tax advisor to determine the income tax consequences of any particular transaction.

 

Taxation of Non-Qualified Stock Options.  In general, a participant will not recognize any income upon the grant of a non-qualified stock option. Upon the exercise of a non-qualified stock option, however, a participant generally will recognize ordinary income in an amount equal to the excess of the fair market value of the non-

qualified option stock on the date of exercise over the exercise price (i.e., the “spread”) and the Company will be entitled to a deduction in an equal amount.

 

Upon subsequent sales of non-qualified option stock, the participant may realize short-term or long-term capital gain or loss, depending upon the holding period of the shares, if such shares constitute capital assets in the participant’s hands. The gain or loss will be measured by the difference between the sales price and the tax basis of the shares sold. The tax basis for this purpose generally will be the sum of the exercise price and the amount of ordinary income recognized by the participant as a result of exercise.

 

Taxation of Restricted Stock.  In general, except in the case of a Section 83(b) election (as discussed below), a participant will not incur any tax upon the grant of shares of stock which are subject to a substantial risk of forfeiture. However, when the restrictions lapse or the shares become freely transferable, the participant will recognize ordinary income equal to the fair market value of the applicable shares at such time less the amount, if any, paid for such shares, unless the participant has made a Section 83(b) election with respect to such shares or has elected to defer ownership of such shares, as discussed below.

 

If a participant makes a Section 83(b) election within 30 days of a grant of restricted stock, the participant will recognize ordinary income at the time of grant in an amount equal to the difference between the fair market value of the restricted shares on the grant date and the amount, if any, paid for such restricted shares. If the participant makes such an election, he or she will not recognize any further income with respect to such shares solely as a result of a later lapse of the restrictions.

 

If a participant holds the restricted stock as a capital asset after the earlier of either (1) the vesting of such restricted stock or (2) the making of a timely Section 83(b) election with respect to such restricted stock, any subsequent gain or loss will be taxable as long-term or short-term capital gain or loss, depending upon the holding period. For this purpose, the basis in the restricted stock generally will be equal to the sum of the amount (if any) paid for the restricted stock and the amount included in ordinary income as a result of the vesting event or Section 83(b) election, as applicable; provided, however, that, if a participant forfeits restricted stock with respect to which a Section 83(b) election was made prior to vesting, the participant’s capital loss is limited to the amount (if any) paid for such restricted stock.

 

A participant who elects, at the Compensation Committee’s sole discretion and in accordance with the requirements of the Directors Plan, to defer receipt of shares of restricted stock generally will not be subject to tax until such time as the shares are received or otherwise made available (no later than termination of service as a director). Such election must be made before the shares are issued to the director and no later than 30 days after the award date and at least 12 months before any such shares could become vested. The amount of such taxable income will be the fair market value of the shares at the time when such shares are actually received or otherwise made available less the amount, if any, paid for such shares. Any subsequent gain or loss would be taxable as long-term or short-term capital gain or loss, depending upon the holding period, assuming such shares are held as a capital asset.

 

In general, at the time a participant recognizes ordinary income with respect to the restricted stock, the Company will be entitled to a deduction in an amount equal to the ordinary income recognized by the participant.

 

Taxation of Stock Appreciation Rights.  In general, a participant will not recognize taxable income at the time that a stock appreciation right is granted. Upon the exercise of a stock appreciation right, the holder generally will recognize ordinary income in an amount equal to the sum of the cash and the fair market value of any property received. Upon the exercise of a stock appreciation right, the Company generally will be entitled to a deduction equal to the amount of ordinary income that the participant is required to recognize as a result of the exercise.

 

Taxation of Other Stock Based Awards.  Other awards may be granted under the Plan. Since the amount, character and timing of income recognized in connection with such awards will vary depending upon the specific terms and conditions of such awards, no information regarding the tax consequences of the receipt of such awards may be provided at this time.

New Plan Benefits

 

The Compensation Committee has determined the grants of awards to directors under the Directors Plan. Each year, each non-executive officer director will receive a grant of 4,500 shares of restricted stock, which will vest ratably over a period of two years following the date of grant. Based upon the proposed grant of awards by the Compensation Committee, the non-executive officer directors nominated for election at the Annual Meeting as a group would be entitled to receive restricted stock equal to 40,500 shares of common stock. However, the exact dollar value of the restricted stock granted will equal the market price of the common stock on the date of vesting of such awards, subject to any permissible deferral. Accordingly, the exact dollar value of these awards is not presently determinable. Because awards under the Directors Plan are discretionary, no awards, other than those described above, are determinable at this time.

 

The Board recommends that you vote “FOR” the approval of the Directors Amendment. Proxies solicited by the Board will be voted “FOR” the approval of the Directors Amendment unless instructions to the contrary are given.

 

Equity Compensation Plans

 

The following table sets forth information as of December 31, 2007 regarding the number of securities which could be issued upon the exercise of outstanding options, the weighted average exercise price of those options in the 1995 Stock and Incentive Plan, the Equity Award Plan and the Directors Plan, and the number of securities then remaining for future issuance under the Equity Award Plan and Directors Plan. Upon adoption of the Equity Award Plan and the Directors Plan in October 2004, we terminated any future issuances under the 1995 Stock Incentive Equity Award Plan. We do not have any equity compensation plans that have not been approved by our security holders.

 

 

PROPOSAL NO. 5

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Audit Committee has appointed Ernst & Young LLP, a registered independent accounting firm, as our independent auditors to audit our consolidated financial statements for the year ending December 31, 2008, subject to ratification of the appointment by our stockholders. During the 2007 fiscal year, Ernst & Young LLP served as our independent auditors and also provided certain tax and audit-related services. We have been advised by Ernst & Young LLP that neither it nor any of its members has any direct or indirect financial interest in us.

 

Although we are not required to seek stockholder ratification of this appointment, the Audit Committee and the Board believe it to be sound corporate practice to do so. If the appointment is not ratified, the Audit Committee will investigate the reasons for stockholder rejection and the Audit Committee will reconsider the appointment. Representatives of Ernst & Young LLP are expected to attend the Annual Meeting where they will be available to respond to appropriate questions and, if they desire, to make a statement.

 

The Audit Committee recommends a vote “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors. Proxies solicited by the Board will be voted “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors unless instructions to the contrary are given.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following tables set forth information, as of March 19, 2008 unless otherwise specified, concerning:

 

 

The number of shares beneficially owned by each entity, person, current director, director nominee or named executive officer is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the right to acquire within 60 days after the date of this table, through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole investment and voting power, or shares such powers with his or her spouse or dependent children within his or her household, with respect to the shares set forth in the following table. Unless otherwise indicated, the address for all current executive officers and directors is c/o Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004.

 

Equity Ownership of Certain Beneficial Owners

 

 

 

 

Equity Ownership of Directors and Management

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of our common stock and other of our equity securities. Executive officers, directors and greater than ten percent stockholders are required by Federal securities regulations to furnish us with copies of all Section 16(a) forms they file.

 

Based upon a review of filings with the SEC and/or written representations from certain reporting persons, we believe that all of our directors, executive officers and other Section 16 reporting persons complied during 2007 with the reporting requirements of Section 16(a).

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview

 

Our objective for named executive officer compensation is consistent with our objective for our business — to create long-term stockholder value. We have designed our compensation arrangements with our named executive officers to motivate and reward them for the creation of long-term growth opportunities and for continuing financial and operating performance, to create incentives for them to remain as productive long-term employees and generally to align their interests with those of our stockholders. We have also structured our compensation programs for named executive officers to place an increasing portion of their compensation “at risk” and subject to satisfaction of both objective and subjective performance measures and targets, with greater relative percentages for the most senior officers to reflect their respective areas and levels of responsibility for our performance.

 

Consistent with these objectives, the compensation paid to our named executive officers has reflected our performance over the past several years. Below we provide a more detailed explanation of the compensation and benefit programs for our named executive officers, including a description of our philosophy, plans and processes.

 

Compensation Philosophy and Objectives

 

The Compensation Committee believes that a significant portion of annual and long-term compensation paid to named executive officers should be closely aligned with our operating and financial performance on both a short-term and long-term basis. The goal of our executive compensation programs is to provide our named executive officers with compensation and benefits that are fair, reasonable and competitive in the marketplace. The programs are intended to help us recruit and retain qualified executives, and provide rewards that are linked to performance while also aligning the interests of these individuals with those of our stockholders.

 

Our incentive programs are generally egalitarian. We have no compensation or benefits programs which are available exclusively to named executive officers. Our philosophy is that in order to achieve a greater level of fairness and consistency across the organization, named executive officers should participate in the same compensation and benefits programs as are available to other officers and management-level employees. Accordingly, under our long-term incentive plan we granted awards of restricted stock and stock options during 2007 to 234 participants. Participants in the long-term incentive plan include both domestic and international employees, ranging from our Chief Executive Officer to plant operators in our facilities.

 

The Compensation Committee has the following objectives in designing the programs:

 

Performance

 

 

 

 

Alignment

 

 

Retention

 

 

Competitiveness and Benchmarking

 

We generally compete for employees and officers with utility companies, independent energy companies and, to a much lesser extent, waste disposal companies. In order to attract and retain qualified employees and officers, including named executive officers, the Compensation Committee generally targets compensation at the market median for base salary, total cash compensation, total direct compensation overall and benefits. In assessing the market median for purposes of determining target compensation, a “peer group” of selected companies with a range of sizes in the waste industries was assembled for inclusion in surveys reviewed by the Compensation Committee. The companies in the peer group in 2007 included the following: Waste Management, Inc., Allied Waste Industries, Inc., Republic Services, Inc., Tetra Tech, Inc., Waste Connections, Inc., Stericycle, Inc., and Casella Waste Systems, Inc. In reviewing compensation awards for 2007 and establishing compensation for 2008, the Compensation Committee expanded the peer group to a group of selected companies with a range of sizes in the waste, independent power and renewable energy industries and comprised of the following companies: Waste Management, Inc.; AES Corporation; Reliant Energy, Inc.; Allied Waste Industries, Inc.; NRG Energy, Inc.; Republic

Services, Inc.; Transalta Corporation; Waste Connections, Inc.; Stericycle, Inc.; Tetra Technologies, Inc.; Casella Waste Systems, Inc.; Waste Services, Inc.; Ormat Technologies, Inc.; and Sunpower Corporation.

 

Role of Compensation Consultants

 

Neither we nor the Compensation Committee has any contractual relationship with any compensation consultant who has a role in determining or recommending the amount or form of senior executive or director compensation. Periodically, through our human resources department, we have discussed compensation matters with compensation consultants, at Watson Wyatt Worldwide (“Watson Wyatt”). These consultants have provided assistance in developing compensation strategies and provided compensation advice in connection with Covanta Energy’s emergence from bankruptcy proceedings and our acquisition of the Covanta Energy and American Ref-Fuel businesses and its employees. Watson Wyatt has also provided periodic market intelligence and information regarding compensation levels at comparable companies.

 

Independently, the Compensation Committee has exercised its authority to engage the services of independent compensation advisors to assist in carrying out its duties. Beginning in 2004, the Compensation Committee periodically sought the advice of compensation consultants with Hewitt Associates, Inc. (“Hewitt”) to provide independent compensation advice on various aspects of executive compensation, including the compensation payable to our executive officers and other compensation matters. Hewitt took its direction solely from, and provided their reports solely to, the Compensation Committee. Billing by Hewitt was provided directly to, and approved for payment by, the Compensation Committee.

 

Following the move by the primary consultant utilized by the Compensation Committee from Hewitt to the Dallas office of Watson Wyatt in 2005, the Compensation Committee reviewed its relationship with its compensation consultant and elected to continue to work with its primary compensation consultant. In order to address the possible conflict of interest, however, the Compensation Committee directed that formal, written procedures be adopted and established within Watson Wyatt to maintain the independence of the Compensation Committee’s consultants. Consequently, formal written procedures were adopted and implemented prohibiting contact between management’s and the Compensation Committee’s consultants within Watson Wyatt, limiting access by management to the Compensation Committee’s independent consultants and continuing the prior reporting and billing arrangements.

 

Use of Consultants in Analysis of 2007 Compensation

 

In order to independently validate the proposed compensation recommendations of management, at the direction of the Compensation Committee, the Committee’s independent consultants in the Dallas office of Watson Wyatt, reviewed for the Compensation Committee at one of its February 2007 meetings and subsequently confirmed in a competitive market analysis provided to the Compensation Committee a comparison of the compensation of our senior officers with (1) companies in the utilities industry, which companies are identified in Appendix C, (2) companies in general industry, which companies are identified in Appendix D, and (3) the following seven industry peers: Waste Management, Inc.; Allied Waste Industries, Inc.; Republic Services, Inc.; Tetra Tech, Inc.; Waste Connections, Inc.; Stericylce Inc.; and Casella Waste Systems Inc., based upon the Dow Jones “DJ Waste & Disposal Services Index” which included providers of pollution control and environmental services for management, recovery and disposal of solid and hazardous waste materials, such as landfills and recycling centers and is used as a peer group in our stock performance graph. Watson Wyatt then adjusted the data to correspond to our projected 2007 revenue.

 

The Annual Compensation Process

 

In connection with this review, the Compensation Committee also has sought input and advice from its independent consultants at Watson Wyatt and, at its discretion, has sought and may continue to seek independent analysis of competitive compensation levels at the discretion and direction of the Compensation Committee. Other than our Chief Executive Officer working with our senior vice president of human resources, no executive officers are involved in making recommendations for executive officer compensation. No officers are involved in determining director compensation. Following the review process, the Compensation Committee approves the annual

base salary and incentive cash award targets for the upcoming year for the Chief Executive Officer, Chief Financial Officer and the other named executive officers and discusses the review process and compensation determinations with the non-management members of the Board.

 

At the same time, the Compensation Committee also approves:

 

 

In the first quarter of each year, typically in February, the Compensation Committee reviews management’s recommendations and our historical pay and performance information. In prior years, including 2007, the Compensation Committee’s review included approval of the value of restricted stock grants and the number of stock options, if any, in its February meeting. The number of shares to be issued under such grants of restricted stock and/or the exercise price of stock options were to be determined prospectively on a pre-determined and disclosed future effective date following the filing of our Annual Report on Form 10-K (i.e., March 17 or the first business day thereafter). To avoid any confusion over splitting the date of the authorization and award and to remove the possibility of extrinsic events in the interim period, beginning in 2008, the Compensation Committee adopted the policy of authorizing and granting equity awards as of the date of the Board of Directors meeting at which such awards are ratified by the non-management members of the Board of Directors upon the recommendation of the Compensation Committee, based upon the fair market value of our common stock as of the date of the award.

 

Periodically throughout the year, the Compensation Committee may discuss, as appropriate, the philosophy for the overall compensation packages, and decide whether changes should be made in the components of the package and/or the mix of the package or whether special awards are appropriate or desirable. Other than the promotions of Messrs. Simpson and Myones and an adjustment to their annual base salaries in November 2007, effective for the remainder of 2007 and 2008, to reflect their respective increases in responsibility, no such changes or special awards were made for any named executive officers in 2007. In determining non-equity incentive bonus payments, however, the Compensation Committee used the annual base salary of each such executive officer prior to such adjustment.

 

In 2007, the Compensation Committee used historic awards and tally sheets to assist in analyzing the named executive officers’ total compensation and various elements of their compensation, including salary, annual and long-term incentive payments and retirement benefits, as well as potential payments under change in control agreement provisions of their employment agreements. The tally sheets functioned as an additional macro level data point and long-term “check and balance” to the compensation process, which is typically more focused on the micro level and annual aspects of the individual components of compensation. The tally sheets also provided the Compensation Committee with information regarding the wealth accumulation of our executive officers in the form of cumulative equity awards and then current equity holdings. The Compensation Committee also examined equity wealth accumulation through its review of the compliance by the named executive officers with their respective stock ownership guidelines. Although the Compensation Committee has the authority to increase or decrease compensation based upon its review of tally sheets, it did not change any compensation based upon its review of tally sheets in 2007.

 

Components of Total Compensation

 

Our compensation and benefits package for named executive officers consists of direct compensation and company-sponsored benefit plans. Each component is designed to contribute to a total compensation package that is competitive and appropriately performance-based, and to create incentives for our named executive officers that coincide with our goals and intentions.

Direct Compensation

 

Direct compensation consists of a base salary and performance-based awards comprised of an annual incentive cash award and a long-term incentive award. Other than base salary, all elements of direct compensation include a component that is directly linked to our performance. By creating these links, we seek to achieve our objectives of performance-based, cost-effective compensation programs. Other than minimum annual base salaries provided in a named executive officer’s employment agreement, there are no formulas to determine annual base compensation.

 

Base Salary

 

 

Performance-Based Awards

 

In order to align the interests of our stockholders with our compensation plans, we tie significant portions of our named executive officers’ compensation to our annual financial and operating performance. Our performance-based awards are comprised of an annual incentive cash award and a long-term incentive equity award in the form of restricted stock vesting over a three year period. In addition, in 2007 we also gave special long-term incentive equity awards in the form of stock options vesting over a five year period. The Compensation Committee’s philosophy is that if our performance exceeds our internal targets and budgets, named executive officers can expect the level of their compensation to exceed a market median identified by the Compensation Committee. On the other hand, if our financial performance falls below these expectations, our approach is that named executive officers can expect their compensation to be adversely affected and fall below such market median. While the targets for performance-based awards are set annually (subject to adjustment by the Compensation Committee), other than target percentages of annual base salaries provided in a named executive officer’s employment agreement, there are no formulas to determine the amount or percentage of performance-based awards.

 

In 2007, our equity and non-equity incentive award programs used the Covanta Performance Measures, comprised of Adjusted EBITDA and free cash flow. These financial measures, which are non-GAAP financial measures, were calculated consistent with their respective definitions under our credit arrangements:

 

 

 

Annual Incentive Cash Awards

 

 

Covanta Performance Measures

 

For 2007, the Compensation Committee adopted “minimum,” “threshold,” “target” and “stretch” goals for each of the Covanta Performance Measures. Based on our budget, which was approved by our full Board in December 2006 for the upcoming 2007 calendar year, these levels were reviewed by the Compensation Committee and its independent compensation consultants in February 2007 and approved by the Compensation Committee for the full year 2007 performance on a prospective basis as part of the annual compensation process. The Compensation Committee also set a “target” bonus level for each of the named executive officers which was a stated percentage of such officer’s base salary. These target levels were 90% for the Chief Executive Officer, 70% for the Chief Financial Officer and ranging from 50% to 65% for the other named executive officers. We measured financial performance results with a percentage that is calculated from the difference between the “target” and actual level achieved, in accordance with the following:

 

 

Between the various levels, we calculated specific incentive cash award percentages as follows:

 

 

Financial results were capped at 200% of target levels for all named executive officers.

 

Under the structure of this series of performance goals, each percentage of performance below the target level results in a reduction in the amount of incentive cash awards that is greater than the relative amount of increases in such awards that would result from the same percentage of performance above the target level.

 

In order to assure that the intents and purposes of the compensation plans, including the annual incentive cash awards, are effectuated, the Compensation Committee retains the discretion to make adjustments to the results for any given year. Reasons for adjustments could include removing the effects of unanticipated events, such as unbudgeted accounting changes, project restructurings, balance sheet adjustments and similar items which unless excluded would produce unintended consequences that are inconsistent with the alignment of the interests of named executive officers with those of our stockholders and to provide financial incentives to named executive officers to effectively implement our business plan and goals.

 

Awards were determined in February 2008 with reference to our actual Adjusted EBITDA and free cash flow generated in the year ended December 31, 2007 compared to target levels for such measures set in February 2007 by the Compensation Committee for this purpose. After the Compensation Committee made certain adjustments to the performance measures of (1) Adjusted EBITDA in order to eliminate the negative effects of the timing for the receipt of business interruption insurance payments to us and (2) free cash flow to eliminate the negative impact due to timing for the receipt of business interruption insurance payments to us and the accelerated payment of certain liabilities by us, the 2007 actual Adjusted EBITDA performance was slightly below our target level and our actual free cash flow was slightly above our target level. As a result, aggregate performance in 2007 compared to target Covanta Performance Measures was 98%.

 

The following table summarizes the historical performance targets for the Covanta Performance Measures, the variances from targets for payout purposes, as calculated in accordance with the foregoing linear pro-rations (dollars in millions):

 

 

 

 

While budgets and operational targets are reset each year and reviewed and approved by the Board, the Compensation Committee seeks to set target levels of our financial performance for purposes of the annual incentive cash awards that are achievable if certain conditions are satisfied, including, in particular the following:

 

 

Consequently, our ability to achieve the “target” levels of the Covanta Performance Measures each year is heavily dependent not only upon factors within our control, but also upon other conditions over which we have no control. While there is substantial uncertainty with respect to achieving the target levels at the time that Covanta

Performance Measures are set and communicated, with our strong historical operating performance, the favorable energy, commodity and ferrous recovery market conditions that we have benefited from in recent years and the continued performance by third parties with whom we contract, we have in recent years consistently achieved the Covanta Performance Measures and our named executive officers have experienced a reasonable expectation of receiving, and have received, cash incentive award levels at or near the “target” levels for that portion of their respective awards that are based upon the Covanta Performance Measures.

 

Even with this strong performance and favorable market conditions, however, the “stretch” levels of the Covanta Performance Measures remain extremely difficult to obtain and maximum cash award levels have not been reached in prior periods. If we are able to avoid a material adverse impact to our business resulting from unforeseen events, our named executive officers are likely to continue to receive incentive cash awards at or near the “target” level. Covanta’s aggregate performance exceeded “target” levels for payout purposes in prior years and specifically exceeded “target” levels in 2006 by 132%, but fell just short of target in 2007 at 98%. We have never reached the “stretch” target levels set at 200% of “target” levels.

 

In addition, the Compensation Committee retains the authority and discretion to increase or decrease the size of any performance-based award or payout. The Compensation Committee did not exercise such authority and discretion in 2007.

 

Individual Performance Measures

 

We also measured the performance of our named executive officers in 2007 by their personal satisfaction of various individual performance goals, referred to as the “Individual Performance Measures.” These Individual Performance Measures, which were tied to the specific job and responsibilities of each named executive officer in 2007, were also set on a prospective basis in February 2007 by the Compensation Committee as part of its annual compensation process and communicated to the named executive officers. Although not directly tied to the Covanta Performance Measures, if we did not meet the “minimum” level of performance under the Covanta Performance Measures in 2007, then the incentive cash award pool would not have been funded and no incentive cash awards would have been payable for satisfaction of Individual Performance Measures.

 

The Individual Performance Measures were the basis upon which the individual portion of a named executive officer’s annual incentive cash award was determined. In 2007 we measured named executive officer’s performance through the following four major categories:

 

(1) operational excellence;

 

(2) asset management and growth strategy;

 

(3) improved capital structure; and

 

(4) process and management improvement.

 

The process and management improvement category was further broken down in 2007 in order to measure process improvements, people development and communications strategy.

 

These categories were generally similar to the categories measured in 2006 with the addition of improving our capital structure to reflect the benefits received by us from a simplified capital structure, which materially reduced our interest expense and increased our financial flexibility. These categories were generally chosen to reflect the different areas of importance to us in order to implement our business plan and enhance our value to our stockholders. Within these guidelines, the importance of each category varied significantly between each named executive officer and was weighted in order to best tie each such officer’s respective areas of responsibilities and ability to influence, control or impact results with the categories relating to such responsibilities. Accordingly, Individual Performance Measures were individually weighted for each of the named executive officers. For example, the Chief Operating Officer has the greatest relative responsibility for our operations, therefore, his compensation is more highly weighted and dependent upon the operational excellence category while our general counsel has relatively greater relative weights upon our performance within the asset management and growth strategy areas over which he has greater relative levels of participation and control. Determinations within each of

these categories are frequently subject to subjective judgments of both individual and, where applicable, business area performance.

 

As noted, within each of these major categories, individual performance was further measured by business goals specific to each named executive officer’s responsibilities. Among the specific goals incorporated into each named executive officer’s respective Individual Performance Measures were the following:

 

 

In determining achievement of these Individual Performance Measures, the Compensation Committee receives an initial assessment from our Chief Executive Officer of each named executive officer’s performance with respect to each of the Individual Performance Measure categories for the preceding year. This recommendation is then reviewed by the Compensation Committee in connection with its determination of each named executive officer’s incentive award. Many of the factors that influence determinations are subjective, are based upon positive and negative developments occurring during the prior year and vary from year to year based upon our goals and action undertaken or desired to be taken within such period. For 2007, the principal factors that influenced recommendations regarding named executive officers’ performance were the successful financings which improved our capital structure and the closing of transactions in furtherance of our growth strategy for our domestic and international businesses. Numerous other factors were taken into account, including operational performance, asset management, system enhancements and talent development. Based upon these Individual Performance Measures, as they applied to each named executive officer, respectively, and our overall financial and operating performance measured by the Covanta Financial Measures, the named executive officers earned non-equity incentive awards ranging from 110% to 120% of their individual targets (assumed to be 100%) in 2007. The following table compares the award earned by each of the named executive officers, as compared to their respective target bonus opportunity, in each of the last two years:

 

 

 

 

As described above, the foregoing awards are consistent with our financial and operating performance and consistent with the Compensation Committee’s philosophy that individual and company performance above targets would result in corresponding awards in excess of target bonus opportunities. However, also consistent with that philosophy, both the percentage against targets and actual amounts paid in non-equity incentive awards in 2007

were lower than similar awards in 2006 reflecting our overall financial performance that fell just short of applicable targets combined with management’s effective execution of individual objectives.

 

Long-Term Equity Incentive Awards

 

 

Equity awards are determined by the Compensation Committee in February of each year and are issued and have been priced historically on a specified date in the following month of March (i.e., March 17 or the first trading day thereafter) following filing of our audited financial statements and Annual Report on Form 10-K. The value of awards granted to each named executive officer reflects our overall performance for the prior year, the responsibilities of such officer and his individual performance. In February 2007, the Compensation Committee authorized equity awards of a fixed dollar amount to our named executive officers in the form of restricted stock, and at the same time established March 19, 2007 (a predetermined future date when the price of our common stock was not known or knowable at the time of the award) as the grant date on which the number of shares awarded would be determined. In February 2007, the Compensation Committee also authorized the grant of stock options to our named executive officers, with a grant date effective as of March 19, 2007, on which date the exercise price of such stock options was determined at the fair market value of our common stock on such date.

 

Beginning in February 2008 and in order to avoid confusion created by the division of the grant and effective date of awards and the possibility of intervening material events, the Compensation Committee adopted a new policy and began authorizing and granting awards on the date of the Board of Directors meeting at which the non-management and independent members of the Board, upon recommendation of the Compensation Committee, ratified the awards approved by the Compensation Committee. As in 2007, new grants were based upon the fair market value of our common stock on the effective date of such grant, which is defined as the closing price of our common stock on the New York Stock Exchange on such date.

 

The Compensation Committee does not have a specific policy or practice to time equity awards, including restricted stock or stock option grants to the release of material non-public information. However, the Compensation Committee may determine the value of a restricted stock award or number of stock options but not issue or

establish the number of shares of restricted stock or the exercise price of stock options while in possession of material non-public information, such as a material pending transaction. Our practice is not to accelerate or delay the disclosure of material non-public information, whether favorable or unfavorable, but to make such disclosures when appropriate or required by applicable securities laws. In order not to unduly benefit or harm officers and employees, we have postponed and would consider postponing the issuance of future awards until after the material non-public information has been publicly disclosed or is no longer considered to be material information. For example, in 2005 the Compensation Committee postponed the issuance of restricted stock awards to officers and employees, including named executive officers, after the February 2, 2005 announcement of our pending acquisition of the American Ref-Fuel business (that doubled our size) and our intention to commence a pro rata rights offering to existing stockholders to fund a significant portion of the purchase price. The awards were then issued in July 2005 following the disclosure of the closing of the acquisition and related rights offering and the dissemination of such information into the marketplace. We did not issue stock options in 2005.

 

 

In February 2007, the Compensation Committee adopted the Covanta Performance Measures for the year ended December 31, 2007 and the vesting criteria for all tranches of equity awards beginning in March 2008. As noted above, these are the same measures used to determine a portion of the annual cash incentive awards, but vesting of equity awards occurred on an all or nothing basis at 90% of the Adjusted EBITDA and 95% free cash flow “target” performance levels. The Compensation Committee and senior management believe that the Covanta Performance Measures reflect effective measures of the success of the operation of our business and our long-term financial success, and appropriately exposes management to downside performance risk if these metrics are not achieved.

 

Based upon our achievement of the Covanta Performance Measures during 2007, the portion of prior equity awards that were eligible during the first quarter of 2008 to vest based on achieving these levels of financial performance did vest. On an historical basis, we have satisfied applicable targets for equity award vesting as set forth in the following table, as measured in the first quarter in the year following the period of performance (in millions):

 

 

 

 

Employment Agreements

 

The Company has entered into employment agreements with each of its named executive officers which are substantially similar, except for specific levels of compensation and the term of severance for the Chief Executive Officer. The employment agreements set forth a general framework for compensation, and generally set minimum levels of compensation, job responsibilities and severance arrangements governing the obligations of the parties following a termination of employment as a result of “cause” “good reason” or “change in control.” These terms are

defined, and the implications of a termination of employment for any of these reasons is set forth below, under Employment Arrangements and Potential Payments Upon Termination or Change in Control in this proxy statement. The basic structure of the terms of the employment arrangements, including severance and change in control arrangements, with Messrs. Orlando, Klett, Simpson and Myones (all of whom were officers of Covanta Energy Corporation prior to its acquisition by us) were a result of negotiated employment agreements entered into in October 2004 with the severance arrangements intended to insure retention of senior management by providing senior management with financial security and stability following Covanta Energy’s emergence from bankruptcy and simultaneous acquisition by us. The timing and amount of the payout levels reflect arms-length negotiations and were structured on a deferred basis in order to provide significant economic incentives for continued compliance with the continuing non-competition, non-solicitation and confidentiality covenants in the employment agreements that survive termination of employment. The term of severance for our Chief Executive Officer is longer than the other named executive officers because it may take longer for a chief executive officer to find comparable employment with another company following termination of employment and we desired the benefits to us of extended non-competition and non-solicitation covenant periods. Finally, the employment agreement subsequently entered into with Mr. Pytosh in connection with his hiring was substantially similar to, and runs coincident in duration with, the employment agreements entered into by each of the other named executive officers.

 

CEO Compensation

 

In determining the compensation of Mr. Orlando, as the Chief Executive Officer, the Compensation Committee considered our operating and financial performance as a whole, as well as Mr. Orlando’s satisfaction of personal Individual Performance Measures. As in prior years, a very significant portion of Mr. Orlando’s compensation was tied to our performance. The Compensation Committee believes, and it has structured compensation accordingly, that the compensation of our named executive officers, and our Chief Executive Officer in particular, should have a very significant component which is not fixed but is “at risk” and performance-based. The Compensation Committee believes that the Chief Executive Officer has the most control and responsibility for our overall performance than any other officer and, accordingly, it is appropriate that the relatively greatest percentage of compensation be at risk and tied to our overall performance in order to best align his interests with those of our stockholders. Due to our strong performance over the past several years since acquiring Covanta Energy out of bankruptcy and promoting Mr. Orlando to be our Chief Executive Officer, consistent with the intents and purposes of the compensation structure, Mr. Orlando’s compensation has been materially higher than other named executive officers.

 

Mr. Orlando’s compensation package for 2007 consisted of an annual base salary of $550,000 and an incentive cash award of $545,000 awarded in February 2008, reflecting both our financial performance in 2007, which as discussed above fell just short of the target Covanta Performance Measures approved by the Compensation Committee, as well as our effective execution of his Individual Performance Measures in 2007. In addition, the Compensation Committee noted Mr. Orlando’s role in our successful recapitalization execution of growth initiatives and our continued operational and financial performance in setting his Compensation levels. The Compensation Committee authorized a restricted stock grant to Mr. Orlando valued at $600,000, effective as of March 19, 2007, vesting ratably over three years with 34% time-based and 66% performance-based.

 

Since we had generally not granted awards of stock options to our senior officers following an initial grant in 2004, most of which had already vested, the Compensation Committee authorized the award of stock options vesting over a period of five years in order to further align the interests of management with our stockholders and because their overall equity stakes and compensation were below their peers, as measured by general industry (normalized to our revenues), utilities industry (normalized to our revenues) and our selected group of peer companies, each as previously identified. Mr. Orlando, as our Chief Executive Officer, was granted an award of 270,000 stock options, the maximum then allowable under the terms of our equity award plan. The stock options were granted with an exercise price of $22.02 per share, reflecting the fair market value on the March 19, 2007 effective date of such grant.

 

Based upon our performance in 2007, we exceeded 90% of the free cash flow performance target and 95% of the Adjusted EBITDA performance target, which together comprise the target Covanta Performance Measures. Accordingly, all 39,807 shares of restricted stock eligible for vesting on February 28, 2008 and March 17, 2008

vested. In addition, options to purchase a total of 120,667 shares of common stock vested in accordance with their terms in the first quarter of 2008.

 

CFO Compensation

 

In determining the compensation of Mr. Pytosh, as the Chief Financial Officer, the Compensation Committee considered our operating and financial performance as a whole, as well as Mr. Pytosh’s satisfaction of personal Individual Performance Measures. Consistent with the Compensation Committee’s philosophy of aligning compensation with performance, a significant portion of Mr. Pytosh’s compensation, although at a relatively lower rate than our Chief Executive Officer, was tied to our performance. As the Chief Financial Officer, Mr. Pytosh has considerable control and responsibility for our financial performance and his compensation has been structured to provide that a significant component of his compensation is “at risk” and performance-based. Mr. Pytosh’s compensation has been structured so that if we perform at or above expectations, his compensation will be greater than other named executive officers (other than our Chief Executive Officer).

 

Mr. Pytosh’s compensation package for 2007 consisted of an annual base salary of $390,000 and an incentive cash award of $328,770, awarded in February 2008, reflecting both our performance in 2007, which as noted above fell just short of the target Covanta Performance Measures approved by the Compensation Committee by 2%, as well as our accomplishments in 2007 in the areas of improved capital structure and his efforts in financial reporting and acquisitions that supported our growth and asset management strategies. Specifically, the Compensation Committee took into account Mr. Pytosh’s satisfaction of personal management objectives in connection with our successful recapitalization which simplified our capital structure, materially reduced our interest expense and increased our financial flexibility to facilitate future growth.

 

Mr. Pytosh was granted an award of 150,000 stock options with an exercise price of $22.02 per share, reflecting the fair market value on the effective date of such grant, and 11,354 shares of restricted stock, both effective as of March 19, 2007.

 

As noted above, based upon our performance in 2007, all 10,450 restricted shares vested on March 17, 2008. In addition, options to purchase a total of 55,000 shares of common stock vested in accordance with their terms.

 

Executive Stock Ownership

 

Stock Ownership Guidelines:  Our Board believes that it is important for all of our officers, including our officers and officers of our subsidiary Covanta Energy, to acquire and maintain a substantial equity ownership position in our company. Accordingly, we have established stock ownership guidelines for our officers in order to specifically identify and align the interests of our officers with our stockholders and focus attention on managing our business as an equity owner. Since all of our officers are either recently hired or joined us in connection with our acquisition of Covanta Energy and since none of Covanta Energy’s officers had any equity ownership following Covanta Energy’s emergence from bankruptcy proceedings, our guidelines provide that credit is given for unvested restricted stock holdings toward individual targets. Officers are given five years to reach their target ownership levels from the date we adopted the stock ownership guidelines, if they were officers governed by such guidelines as of such date, or five years from the date they became an officer governed by the guidelines. Given the importance of continued significant stock ownership in aligning the interests of our officers with our stockholders and the significant appreciation in the trading price of our common stock, the Compensation Committee amended its stock ownership guidelines in February 2008 to increase the holdings by the Chief Executive Officer and the officers with the title of Executive Vice President and Covanta Energy Division Presidents. The new guidelines are as follows:

 

The Compensation Committee has the sole discretion and authority to modify the stock ownership guidelines at any time.

 

Insider Derivative and Short-Sale Trading Restrictions:  In order to avoid any appearance of a conflict of interest and to prevent opportunities for trading in violation of applicable securities laws, it is our policy that our employees, including our officers and directors, may not purchase or sell options on our common stock, nor engage in short sales with respect to our common stock. Also, we prohibit trading by employees, officers and directors in puts, calls, straddles, equity swaps or other derivative securities that are linked directly to our common stock. These prohibitions prevent our employees, officers and directors from hedging the economic risk inherent with their ownership of our common stock.

 

Perquisites

 

Consistent with our philosophy of providing the same forms of compensation throughout a broad spectrum of our managerial base we did not provide any perquisites to our named executive officers.

 

Benefit Plans

 

We provide company-sponsored insurance and retirement benefit plans to our named executive officers. Benefit programs for named executive officers are the same as those offered to our non-union employee base and are designed to offer financial security.

 

Insurance Plans

 

The core insurance package includes health, dental, disability, AD&D and basic group life insurance coverage.

 

Retirement Plans

 

We provide retirement benefits to named executive officers through a combination of qualified and non-qualified plans, as such terms are used and defined under the Tax Code. We believe these retirement plans are a cost-effective means of providing for long-term retention of our named executive officers. For more information on the retirement plans, see “Retirement Plans” under the “Executive Compensation” heading of this proxy statement.

 

Determining Benefit Levels

 

The Compensation Committee reviews benefit levels periodically to ensure that the plans and programs create the desired incentives for our employees, including named executive officers, which are generally competitive with the applicable marketplace, are cost-effective, and support our human capital needs. Benefit levels are not tied to company, business area or individual performance. In part due to the fact that we acquired Covanta Energy out of bankruptcy and its officers and employees had no surviving equity interests and the stock ownership guidelines that we have adopted for our officers and officers of our subsidiary, we have not reviewed or tied retirement benefits to gains realized upon the exercise of stock options or the sale of restricted stock.

 

Tax Considerations

 

We generally will be entitled to a tax deduction in connection with awards under the Equity Award Plan in an amount equal to the ordinary income realized by participants and at the time the participants recognize such income. Special rules limit the deductibility of compensation paid to our named executive officers. Under Section 162(m) of the Tax Code, the annual compensation paid to named executive officers will be deductible to the extent it does not exceed $1,000,000 or satisfies certain conditions set forth in Section 162(m) relating to performance-based plans.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based upon the review and discussions, the Compensation Committee has recommended to our Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated into our Annual Report on Form 10-K for the year ended December 31, 2007. This report is provided by the following independent directors, who comprise the Compensation Committee:

 

David M. Barse (chair)

Peter C. B. Bynoe

Robert S. Silberman

Summary Compensation Table For Year Ended December 31, 2007

 

The following table sets forth the compensation for the services in all capacities to us or our subsidiary companies for the years ended December 31, 2007 and 2006 of (a) our Chief Executive Officer, (b) our Chief Financial Officer, and (c) the three most highly compensated executive officers, other than the Chief Executive Officer and Chief Financial Officer, employed by us as of December 31, 2007, whose total annual salary and bonus exceeded $100,000, referred to as the “named executive officers” in this proxy statement:

 

 

 

 

 

 

 

 

Equity Award Plan

 

Our Equity Award Plan was originally approved by our stockholders in October 2004 and a subsequent amendment was approved by our stockholders on September 19, 2005 to increase the number of authorized shares available for issuance under the Equity Award Plan to 6,000,000 shares. This Equity Award Plan replaced our 1995 Stock and Incentive Plan, which was terminated in October 2004. The 1995 Stock and Incentive Plan now remains in effect only until all awards granted under it have been satisfied or expired.

 

The Equity Award Plan is administered by the Compensation Committee of our Board. Awards under the Equity Award Plan may be granted to employees (including officers) of the Company, its subsidiaries and affiliates. The Equity Award Plan provides for awards to be made in the form of (a) shares of restricted stock, (b) incentive stock options, (c) non-qualified stock options, (d) stock appreciation rights, (e) performance awards, or (f) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a stand alone, combination or tandem basis.

 

As of December 31, 2007 there were 1,519,538 shares of common stock available for grant under the Equity Award Plan and no participant may be granted in any calendar year awards with respect to more than 300,000 shares. As a result of the growth in the number of outstanding shares and our market capitalization, and in order to provide additional flexibility to the Compensation Committee to continue to structure equity awards to create appropriate equity incentives for current or future employees and officers, as set forth in Proposal No. 3, we are proposing, subject to approval by our stockholders, to increase this amount to 250,000 shares of restricted stock and options to purchase 650,000 shares of our common stock.

The following table provides information on both equity incentive awards that were made under our Equity Award Plan and incentive cash awards made during the year ended December 31, 2007.

 

Grants of Plan-Based Awards — 2007

 

 

 

 

The following table sets forth the outstanding equity awards held by each of our named executive officers as of December 31, 2007:

 

Outstanding Equity Awards at Fiscal Year-End 2007

 

 

 

 

The following table sets forth the option exercises and stock vesting for each of our named executive officers during the year ended December 31, 2007:

 

Option Exercises and Stock Vested During 2007

 

 

 

 

Retirement Plans

 

Pension Benefits

 

Covanta Energy Pension Plan

 

Messrs. Orlando, Klett, Simpson and Myones participate in the Covanta Energy Pension Plan, a tax-qualified defined benefit plan of Covanta Energy subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. The Covanta Energy Pension Plan became effective as of January 1, 1989 and was frozen effective December 31, 2005. This plan, which was maintained by Covanta Energy prior to and during its bankruptcy proceedings, is a qualified defined benefit plan covering all eligible domestic employees of Covanta Energy who had at least one year of service and were at least 21 years of age. Participants with five years of service, as defined by this plan, are entitled to annual pension benefits upon attainment of normal retirement age (65) equal to 1.5% of the participant’s highest average compensation during the five consecutive calendar years of employment out of the ten consecutive calendar years immediately preceding the participant’s retirement date or termination date, multiplied by his total years of service earned prior to January 1, 2002. For years of service earned after December 31, 2001, the benefit formula has been reduced to coordinate with social security. The reduced benefit is equal to 0.95% of the participant’s average compensation up to the 35-year average of the social security wage base in effect during the 35-year period ending on the last day of the calendar year in which the participant’s employment is terminated, plus 1.5% of the participant’s average compensation in excess of the 35-year average for each year of service earned after December 31, 2001 not to exceed 35 years of service. For each year of service exceeding 35 years earned after December 31, 2001, an additional benefit of 0.95% of final average compensation will be provided. Compensation includes salary and other compensation received during the year and deferred income earned, but does not include imputed income, severance pay, special discretionary cash payments or other non-cash compensation. The relationship of the covered compensation to the annual compensation shown in the Summary Compensation Table would be the Salary and Non-equity Incentive Award columns. A plan participant who is at least age 55 and who retires after completion of at least five years of eligible service receives a benefit equal to the amount the participant would have received if the participant had retired at age 65, reduced by an amount equal to 0.5% of the benefit multiplied by the number of months between the date the participant commences receiving benefits and the date the participant would have commenced to receive benefits if he had not retired prior to age 65.

 

Of our named executive officers, only Messrs. Orlando, Klett, Simpson and Myones participate in this plan because of their prior employment by Covanta Energy and satisfaction of the full year of service requirement for

participation. Effective upon freezing participation in this defined benefit plan on December 31, 2005, all employees, including the named executive officers noted above, who were active participants in the plan on that date were 100% vested and acquired a nonforfeitable right to the plan’s benefits as of such date. Pension benefits are provided to participants under several types of retirement options based upon years of continuous service and age. Retirement benefits are paid to pensioners or beneficiaries in the form of a straight life annuity or various forms of joint and survivor annuities. In calculating benefits to eligible employees, we take into account an individual employee’s average earnings over his or her highest five consecutive years of the last ten years of employment, and his or her total years of eligible service. While the participant’s pension benefits will reflect the highest average five consecutive year compensation level of their last ten years of employment, under the terms of the plan as frozen, we disregard all years of service after December 31, 2005 for purposes of determining the “total years of service” component of the calculated benefit. Compensation includes salary and other compensation received during the year and deferred income earned, but does not include imputed income, severance pay, special discretionary cash payments or other non-cash compensation.

 

Supplemental Benefit Plan

 

We provided to eligible employees, including Messrs. Orlando, Klett, Simpson and Myones, a non-qualified supplemental defined benefit plan, relative to the Covanta Energy Pension Plan. This plan provided a benefit equivalent to the Covanta Energy Pension Plan benefit for earnings above the IRS earnings cap, which was $225,000 in 2007.

 

This non-qualified plan was in effect since the inception of the Covanta Energy Pension Plan, continued in effect throughout Covanta Energy’s bankruptcy and was approved as part of its reorganization plan by creditors and the bankruptcy court. This plan represents an unfunded and unsecured obligation of Covanta Energy to pay its calculated benefit to retiring employees as and when they would otherwise be eligible to receive a benefit under the now-frozen qualified defined benefit plan. In connection with the freezing of the Covanta Energy Pension Plan, this plan also was frozen effective December 31, 2005 on the same terms as applicable to the related qualified plan.

 

The following table shows pension benefit information as of December 31, 2007 for the named executive officers under the Covanta Energy Pension Plan and the Covanta Energy Supplemental Benefit Plan. No pension benefits were paid to any of the named executive officers in the year ended December 31, 2007.

 

Pension Benefits 2007

 

 

 

 

Covanta Energy Savings Plan

 

The Covanta Energy Savings Plan is comprised of two components: The first component, which we provide to eligible employees, including named executive officers, is a qualified 401(k) retirement plan. All full-time and part-time employees not subject to a collective bargaining agreement are eligible to participate in this plan upon employment. Named executive officers may elect to contribute a fixed percentage of their earnings into this plan, up to the limit prescribed for 2007 by the IRS of $225,000 in annual earnings. We provide a matching contribution of 100% of the first 3% of an individual’s earnings, and 50% of the next 2% of such individual’s earnings up to the IRS limit. Our matching contributions are immediately vested.

 

The second component, which we provide eligible employees, including named executive officers, is a qualified defined contribution retirement plan. This plan became effective as of January 1, 2006 and was designed as an ongoing substitute for the pre-existing defined benefit plan which was frozen as of December 31, 2005. We contribute to this defined contribution plan an amount equal to 3% of an individual’s annual eligible compensation as defined in the plan document up to the social security wage base (which for 2007 was $97,500) and 6% of additional annual compensation up to the IRS limit, which was $225,000 in 2007. Contributions to the defined contribution plan vest in equal amounts over a five year period based on continued employment.

 

Employment Agreements and Potential Payments Upon Termination or Change in Control

 

Employment Agreements

 

In October 2004, we entered into employment agreements with our senior management team. Each of the employment agreements entered into at that time, as well as the employment agreement entered into with Mr. Pytosh as of September 1, 2006, are substantially similar, except for specific levels of compensation and the term of severance for the Chief Executive Officer. The employment agreements set forth a general framework for compensation, and generally set minimum levels of compensation, job responsibilities and severance arrangements governing the obligations of the parties following a termination of employment as a result of cause, good reason or change in control, as each term is defined below. The basic structure of the terms of the employment agreements, including severance and change in control arrangements, with Messrs. Orlando, Klett, Simpson and Myones (all of whom were officers of Covanta Energy Corporation prior to its acquisition by us) were a result of negotiated employment agreements entered into in October 2004 a short time after Covanta Energy Corporation’s emergence from bankruptcy proceedings and acquisition by us. The severance arrangements were intended to insure retention of senior management by providing senior management with financial security and stability following Covanta Energy Corporation’s emergence from bankruptcy and simultaneous acquisition by us. The timing and amount of the payout levels reflected arms-length negotiations and were structured on a deferred basis in order to provide significant economic incentives for continued compliance with the continuing non-competition, non-solicitation and confidentiality covenants in the employment agreements that survive termination of employment.

 

The severance period for Mr. Orlando, our Chief Executive Officer, is longer than our other named executive officer’s because of the belief of the Compensation Committee that it may take longer for a chief executive officer to find comparable employment opportunities with another company following termination of employment. In consideration for this increased severance period, however, we also obtained longer non-competition, non-solicitation of customers and non-solicitation of employees from our Chief Executive Officer reflecting both the longer period of payments and the greater perceived risk to us of his potential competitive activities post employment.

 

The employment agreement entered into by Mr. Pytosh was substantially similar to, and runs coincident in duration with, the employment agreements previously entered into by each of the other named executive officers.

Defined Terms in Employment Agreements

 

For purposes of each of the employment agreements described in this proxy statement, the terms “cause,” “change in control,” and “good reason” are defined as follows:

 

“Cause” shall mean that the executive has:

 

(a) been convicted of, or plead nolo contendere to, a felony or crime involving moral turpitude; or

 

(b) committed an act of personal dishonesty or fraud involving personal profit in connection with executive’s employment by us; or

 

(c) committed a material breach of any material covenant, provision, term, condition, understanding or undertaking set forth in his respective agreement; or

 

(d) committed an act which our Board of Directors has found to have involved willful misconduct or gross negligence on the part of the executive; or

 

(e) failed or refused to substantially perform the lawful duties of his employment in any material respect; or

 

(f) failed to comply with our lawful written rules and policies in any material respect;

 

each as subject to its applicable cure periods if such behavior or breach is capable of being cured.

 

“Change in Control” shall mean the occurrence of any of the following events, each of which shall be determined independently of the others:

 

(a) any “Person”, other than a holder of at least 10% of our outstanding voting power as of the date of the respective employment agreement, becomes a “beneficial owner” (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of a majority of our stock or the stock of Covanta Energy entitled to vote in the election of our directors or the directors of Covanta Energy. For purposes of this definition, the term “Person” is used as such term is used Sections 13(d) and 14(d) of the Exchange Act;

 

(b) the individuals who are our “Continuing Directors” cease to constitute a majority of the members of the Board. For purposes of this definition, “Continuing Directors” shall mean the members of the Board on the date of execution of the respective employment agreement, provided that any person becoming a member of the Board subsequent to such date whose election or nomination for election was supported by at least a majority of the directors who then comprised the Continuing Directors shall be considered to be a Continuing Director;

 

(c) our stockholders or the stockholders of Covanta Energy adopt and consummate a plan of complete or substantial liquidation or an agreement providing for the distribution of all or substantially all of our assets or the assets of Covanta Energy;

 

(d) either we or Covanta Energy is a party to a merger, consolidation, other form of business combination or a sale of all or substantially all of its assets, with an unaffiliated third party, unless our business or the business of Covanta Energy following consummation of such merger, consolidation or other business combination is continued following any such transaction by a resulting entity (which may be, but need not be, us or Covanta Energy, as the case may be) and our stockholders or the stockholders of Covanta Energy immediately prior to such transaction hold, directly or indirectly, at least a majority of the voting power of the resulting entity; provided, however, that a merger or consolidation effected to implement a recapitalization of us or Covanta Energy (or similar transaction) shall not constitute a Change in Control; or

 

(e) there is a Change in Control of us or Covanta Energy of a nature that is reported in response to item 5.01 of Current Report on Form 8-K or any similar item, schedule or form under the Exchange Act, as in effect at the time of the change, whether or not we or Covanta Energy, as the case may be, are then subject to such reporting requirements;

provided, however, that for purposes of each respective employment agreement a Change in Control shall not be deemed to occur if the Person or Persons deemed to have acquired control is or are a holder of at least 10% of our outstanding voting power as of the date of each respective employment agreement.

 

“Good Reason” shall mean the resignation of the executive from employment with us following the occurrence of one or more of the events set forth in clauses (a) through (f) below without the prior written consent of the executive, provided that, in connection with any event or events specified in clauses (a) through (e) below, (1) the executive delivers written notice to us of his intention to resign from employment due to one or more of such events, which notice specifies in reasonable detail the circumstances claimed to provide the basis for such resignation, and (2) such event or events are not cured by us within fifteen (15) days (or such longer reasonable period of time as is necessary to cure such event so long as we are diligently pursuing such cure) following delivery of such written notice:

 

(a) any reduction in the executive’s annual rate of base compensation other than a reduction in connection with a Board-approved redesign of the then current salary or bonus structure that affects all of Covanta Energy’s senior-level executives similarly;

 

(b) any reduction in the executive’s annual rate of base compensation that exceeds ten percent (10%) of the executive’s highest annual base compensation for any employment year (measuring a change in the target bonus by the change in the dollar amount equivalent represented by the target bonus and not by amounts actually paid);

 

(c) any removal by us of the executive from his position indicated in his respective employment agreement or the assignment to the executive of duties and responsibilities materially inconsistent and adverse with the duties indicated in his respective employment agreement, except in connection with termination of the executive’s employment for cause or disability;

 

(d) a relocation of the executive’s principal business location to a location that is fifty (50) miles or more from our current principal business office located at 40 Lane Road, Fairfield, New Jersey;

 

(e) Covanta Energy or we fail to comply with any of the material terms of the executive’s respective employment agreement; or

 

(f) the occurrence of a change in control pursuant to which Covanta Energy or us or any successor company, as the case may be, does not agree, as of the date of such change in control, to assume his respective employment agreement if the remainder of the term of employment is at least three (3) years or to renew his respective employment agreement with the executive for at least three (3) years.

 

Executive Officer Employment Agreements

 

Anthony J. Orlando was named our President and Chief Executive Officer effective October 5, 2004. Mr. Orlando continues to serve as the President and Chief Executive Officer of Covanta Energy, a position he has held since November 2003. We and Covanta Energy entered into a five-year employment agreement with Mr. Orlando that commenced on October 5, 2004. Pursuant to his employment agreement, Mr. Orlando was entitled to an initial base salary of $400,000 per year and an annual target bonus of 80% of his base salary, depending upon Covanta Energy’s achievement of certain financial targets and other criteria approved by our Board. Mr. Orlando also received a grant of 49,656 shares of restricted stock, valued at $360,000 at the date of grant, and options to purchase 200,000 shares of our common stock at a price of $7.43 per share pursuant to the Equity Award Plan. The restricted stock vested in equal installments over three years, with 50% of such shares vesting based upon continued employment and 50% upon Covanta Energy’s achievement of certain operating cash flow or other performance-based metrics of Covanta Energy as approved by the Board with the final tranche vesting on February 28, 2008.

 

Mr. Orlando’s employment is subject to non-compete, non-solicitation and confidentiality provisions as set forth in the employment agreement.

The following table shows the potential payments to Mr. Orlando upon his termination of employment or a change in control of the Company under his employment agreement or other plans or agreements of the Company assuming a termination or change of control occurred on December 31, 2007. The table (1) excludes vested account balances under the Covanta Energy Savings Plan and (2) the benefits set forth in the “Pension Benefits Table.”