March 19, 2009

 

Dear Fellow Stockholder:

 

Our 2009 Annual Meeting of Stockholders will be held at the Toy F. Reid Employee Center, located at 400 South Wilcox Drive, in Kingsport, Tennessee, on May 7, 2009, at 11:30 a.m. Doors to the meeting will open at 10:30 a.m. The business to be considered and voted upon at the meeting is explained in the accompanying proxy materials (consisting of the Notice of Annual Meeting, the Proxy Statement, and the proxy card). A copy of Eastman’s 2008 Annual Report to Stockholders is also included with these materials.

 

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

 

Thank you for your support of our Company.

 

Sincerely,

 

 

 

J. Brian Ferguson

Chairman and Chief Executive Officer

 

EASTMAN CHEMICAL COMPANY

200 South Wilcox Drive

Kingsport, Tennessee 37662

(423) 229-2000

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 7, 2009

 

 

 

To Our Stockholders:

 

The 2009 Annual Meeting of Stockholders of Eastman Chemical Company (“Eastman” or the “Company”) will be held at the Toy F. Reid Employee Center, located at 400 South Wilcox Drive, Kingsport, Tennessee, on May 7, 2009, at 11:30 a.m., local time. The purposes of the meeting are:

 

 

Only stockholders of record at the close of business on March 10, 2009 are entitled to vote at the meeting. It is important that your shares be represented and voted at the meeting. Please vote by proxy in one of these ways:

 

 

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

 

By order of the Board of Directors

 

 

Theresa K. Lee

Chief Legal Officer and Corporate Secretary

 

March 19, 2009

 

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS OF

EASTMAN CHEMICAL COMPANY

TO BE HELD ON MAY 7, 2009

 

 

INFORMATION ABOUT THE MEETING AND VOTING

 

Proxy Statement and Annual Meeting

 

This proxy statement is dated March 19, 2009 and is first being mailed and delivered electronically to Eastman stockholders, and made available on the Internet at the Company’s website (www.eastman.com), on or about March 27, 2009. Our Board of Directors (the “Board”) is furnishing you this proxy statement in connection with its solicitation of proxies to be voted at the Annual Meeting of Stockholders of the Company to be held on May 7, 2009, and at any adjournments or postponements of the meeting. A proxy statement is a document that Securities and Exchange Commission (“SEC”) regulations require us to give you when we ask you to vote your stock by proxy. At the meeting, stockholders will be asked to consider and vote on the items of business listed in the accompanying Notice of Annual Meeting and described in more detail in this proxy statement.

 

Voting By Proxy

 

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

 

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

 

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

 

 

The Internet and telephone voting procedures are designed to authenticate stockholder identities, to allow stockholders to give voting instructions, and to confirm that stockholders’ instructions have been recorded properly.

 

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

 

How to Revoke Your Proxy

 

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

 

 

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

 

Record Date; Stockholders Entitled to Vote; Voting Rights

 

The record date for the 2009 Annual Meeting of Stockholders is March 10, 2009. Owners of record of common stock at the close of business on the record date are entitled to receive notice of the meeting and to vote at the meeting. The record date is established by the Board as required by Delaware law. If your shares are held in “street name” through a broker, bank or other holder of record, you must obtain a proxy, executed in your favor, from the holder of record to be able to vote in person at the meeting.

 

On the record date, there were 72,644,214 shares of common stock issued and outstanding. Holders of common stock are entitled to one vote on each matter voted upon at the meeting for each share of common stock they hold of record on the record date.

 

Quorum

 

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

 

Vote Required for Approval of Matters to be Considered

 

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

 

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

 

Proxy Solicitation Costs

 

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

 

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

 

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

 

Stockholder Proposals for the 2010 Annual Meeting

 

In accordance with rules of the SEC, if you wish to submit a proposal for presentation at Eastman’s 2010 Annual Meeting of Stockholders, it must be received by the Company at its principal executive offices on or before November 27, 2009 in order to be included in the Company’s proxy materials relating to its 2010 Annual Meeting of Stockholders. Any such proposal should be sent to Eastman Chemical Company, P.O. Box 431, Kingsport, Tennessee 37662-5280, Attention: Corporate Secretary.

 

In addition, our Bylaws require that a proposal to be submitted by a stockholder for a vote of the Company’s stockholders at an annual meeting of stockholders, whether or not also submitted for inclusion in the Company’s proxy materials, must be preceded by adequate and timely notice to the Corporate Secretary of the Company. To be adequate, the notice must set forth certain information specified in our Bylaws about the stockholder and the proposal. The Bylaws are available through the “Investors — Corporate Governance” section of the Company’s website, and also will be provided to any stockholder upon written request. To be timely, the notice must be delivered to the Corporate Secretary of the Company not less than 45 days prior to the day of the month on which the notice of the immediately preceding year’s annual meeting of stockholders was first sent to the stockholders of the Company. If, as expected, notice of the 2009 Annual Meeting of Stockholders is first sent to stockholders on March 27, 2009, then such advance notice would be timely if delivered on or before February 10, 2010.

 

Nominations by Stockholders for Election to the Board of Directors

 

Our Bylaws provide that nominations by stockholders of persons for election to the Board may be made by giving adequate and timely notice to the Corporate Secretary of the Company. To be adequate, the nomination notice must set forth certain information specified in our Bylaws about each stockholder submitting a nomination and each person being nominated. The Bylaws are available through the “Investors — Corporate Governance” section of the Company’s website, and also will be provided to any stockholder upon written request. To be timely, the nomination notice must be delivered to the Corporate Secretary of the Company not less than 45 days prior to the day of the month on which the notice of the immediately preceding year’s annual meeting of stockholders was first sent to the stockholders of the Company. If, as described above, the notice of the 2009 Annual Meeting of Stockholders is first sent to stockholders on March 27, 2009, then such notice would be timely if delivered on or before February 10, 2010. The Nominating and Corporate Governance Committee of the Board will consider persons properly and timely nominated by stockholders and recommend to the full Board whether such nominee should be included with the Board’s nominees for election by stockholders.

 

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

 

Our Annual Report to Stockholders for 2008, including consolidated financial statements for the year ended December 31, 2008, is being mailed and delivered electronically to stockholders, and made available on the Internet at the Company’s website, concurrently with this proxy statement but does not form any part of any proxy solicitation material. This year’s Annual Report to Stockholders includes the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC. This information is also available via the Internet at the Company’s website (www.eastman.com), and the version of such report (with exhibits) filed with the SEC is available at the SEC’s website (www.sec.gov).

 

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

 

Communications to the Board of Directors

 

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

 

PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING

 

ITEM 1 — ELECTION OF DIRECTORS

 

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

 

Four directors are in the class for which the term in office expires at the 2009 Annual Meeting, and each of them has been nominated for reelection for a new three-year term. The terms of the other eight directors continue after the meeting.

 

The stockholders are being asked to vote on the election of four directors to the class for which the term of office shall expire at the Annual Meeting of Stockholders in 2012 and their successors are duly elected and qualified. If any nominee is unable or unwilling to serve (which we do not anticipate), the persons designated as proxies will vote your shares for the remaining nominees and for another nominee proposed by the Board or, as an alternative, the Board could reduce the number of directors to be elected at the meeting.

 

Director Changes Since the 2008 Annual Meeting.  In December 2008, the Board elected James P. Rogers as a director. The Board has unanimously extended the term of office of director Peter M. Wood, who reached age 70, until the expiration of his term at the 2010 Annual Meeting of Stockholders.

 

Majority Vote Standard for Election of Directors.  The Company’s Bylaws provide that directors be elected by a majority of votes cast by stockholders. If a nominee who is serving as a director is not reelected by a majority of votes cast at an annual meeting, under Delaware law the director would continue to serve on the Board as a “holdover director.” However, under the director election provision of our Bylaws, any incumbent director who does not receive a majority of votes cast in favor of reelection and whose successor has not been elected by stockholders would offer to resign from the Board. The Nominating and Corporate Governance Committee would then make a recommendation to the Board whether to accept or reject the resignation, or whether other action should be taken. The Board would act on the recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date the election results are certified. The director who tenders his or her resignation would not participate in the Board’s decision. If a nominee who was not already serving as a director was not elected at an annual meeting, under Delaware law that nominee would not become a director and would not serve on the Board as a “holdover director.” In 2009, all nominees for director are currently serving on the Board.

 

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

 

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

 

Information About the Board of Directors and Corporate Governance

 

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

 

The Board held seven meetings during 2008. Each director attended at least 75% of the aggregate of the total number of meetings of the Board (held during the period for which he or she was a director) and the total number of meetings held by all committees of the Board on which he or she served (during the period that he or she served).

 

The non-management directors meet in an “executive session” (i.e., without management) at each regularly scheduled Board meeting and at such other times as the Board or one or more committees of the Board may determine. The presiding director of each such executive session is the chair of the committee with authority and expertise pertinent to the subject matters to be discussed or, if the subjects to be addressed do not directly pertain to one of the committees, a presiding director is appointed by the Chairman of the Board on a rotating basis.

 

The Board meets before each annual meeting of stockholders, and the directors in attendance at such Board meeting attend the annual meeting of stockholders. All directors then in office attended the 2008 Annual Meeting of Stockholders.

 

Director Independence

 

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

 

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

 

 

 

Transactions with Directors, Executive Officers, and Related Persons

 

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

 

The Board also reviewed the employment by the Company as an engineer of the son of former executive officer Gregory O. Nelson, and determined that Dr. Nelson did not have a material interest in such employment relationship or transactions that created a conflict of interest. The terms of such employment, including compensation and benefits, were in all respects according to standard Company policies and practices for professional employees. Dr. Nelson’s son worked in an organization that was not in Dr. Nelson’s line of management and Dr. Nelson had no direct or indirect reporting relationship with his son.

 

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

 

Board Committees

 

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

 

Audit Committee.  The members of the Audit Committee are Ms. Hornbaker (Chair) and Messrs. Anderson, Hernandez, Lance, and McLain. The Audit Committee held nine meetings during 2008. The purpose of the Audit Committee is to assist the Board in fulfilling the Board’s oversight responsibilities relating to:

 

 

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

 

Audit Committee Report

 

The Audit Committee has reviewed and discussed with the Company’s management and PricewaterhouseCoopers LLP, the Company’s independent auditors, the audited financial statements of the Company contained in the Company’s Annual Report to Stockholders for the year ended December 31, 2008. The Audit Committee has also discussed with the Company’s independent auditors the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.

 

The Audit Committee has received and reviewed the written disclosures and the letter from PricewaterhouseCoopers LLP required by Public Company Accounting Oversight Board Rule 3526 (Communications With Audit Committees Concerning Independence), and has discussed with PricewaterhouseCoopers LLP their independence. The Audit Committee has also considered whether the provision of non-audit services to the Company by PricewaterhouseCoopers LLP is compatible with maintaining their independence.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC.

 

Audit Committee

Renée J. Hornbaker (Chair)

Gary E. Anderson

Robert M. Hernandez

Howard L. Lance

Thomas H. McLain

 

Nominating and Corporate Governance Committee.  The members of the Nominating and Corporate Governance Committee are Messrs. Demeritt (Chair), Connors, Kling, Raisbeck, and Wood. The Nominating and Corporate Governance Committee held four meetings during 2008. The purpose of the Nominating and Corporate Governance Committee is to:

 

 

Director Nominations.  The Nominating and Corporate Governance Committee is responsible for reviewing and selecting potential directors who possess the skills, knowledge, and understanding necessary for the Board to successfully perform its role in corporate governance. The Nominating and Corporate Governance Committee considers not only an individual director’s or possible nominee’s qualities, performance, and professional responsibilities, but also the then-current composition of the Board and the challenges and needs of the Board as a whole at that time. In general, the desired attributes of individual directors, including those of any nominees of stockholders, are as follows:

 

 

 

 

The Nominating and Corporate Governance Committee will consider persons nominated by stockholders and recommend to the full Board whether such nominee should be included with the Board’s nominees for election by

stockholders. The Board and the Nominating and Corporate Governance Committee have from time to time engaged the services of director search firms to assist in the identification of qualified potential director nominees.

 

Compensation and Management Development Committee.  The members of the Compensation and Management Development Committee (the “Compensation Committee”) are Messrs. Connors (Chair), Demeritt, Kling, Raisbeck, and Wood. The Compensation Committee held seven meetings during 2008. The purpose of the Compensation Committee is to establish and administer the Company’s policies, programs, and procedures for evaluating, developing, and compensating the Company’s senior management. Among other things, the Compensation Committee discharges the Board’s responsibilities relating to compensation of the Company’s executive officers, reviews and approves the adoption of cash and equity-based incentive management compensation plans, and oversees the administration of the Company’s benefits plans.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” which appears later in this proxy statement. Based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC and in this proxy statement.

 

Compensation and Management Development Committee

Michael P. Connors (Chair)

Stephen R. Demeritt

Lewis M. Kling

David W. Raisbeck

Peter M. Wood

 

Finance Committee.  All of the directors except Messrs. Ferguson and Rogers are members, and Mr. Raisbeck is the Chair, of the Finance Committee. The Finance Committee held four meetings during 2008. The purpose of the Finance Committee is to review with management and, where appropriate, make recommendations to the Board regarding the Company’s financial position and financing activities, including consideration of the Company’s financing plans, corporate transactions (including acquisitions and divestitures), capital expenditures, financial status of the Eastman Retirement Assistance Plan (the Company’s defined benefit pension plan), payment of dividends, and use of financial instruments, commodity purchasing, and other hedging arrangements and strategies to manage exposure to market risks.

 

Health, Safety, Environmental and Security Committee.  All of the directors except Messrs. Ferguson and Rogers are members, and Mr. Hernandez is the Chair, of the Health, Safety, Environmental and Security Committee. The Health, Safety, Environmental and Security Committee held two meetings during 2008. The purpose of the Health, Safety, Environmental and Security Committee is to review with management and, where appropriate, make recommendations to the Board regarding the Company’s policies and practices concerning health, safety, environmental and security matters.

 

Director Compensation

 

The following table sets forth certain information concerning compensation of the Company’s non-employee directors for 2008. Directors who are also employees of the Company receive no Board or committee fees.

 

Director Compensation for Year Ended December 31, 2008

 

 

 

 

 

 

ITEM 2 — RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Audit Committee of the Board of Directors has retained PricewaterhouseCoopers LLP to serve as independent auditors for the year ended December 31, 2009.

 

PricewaterhouseCoopers LLP also served as the Company’s independent auditors for the years ended December 31, 2008 and 2007, and has billed the Company the following amounts for fees and related expenses for professional services rendered during 2008 and 2007:

 

Audit Fees:  $5.6 million, in the aggregate, for the year ended December 31, 2008 and $5.8 million, in the aggregate, for the year ended December 31, 2007 for professional services rendered for the audits of the consolidated financial statements of the Company (including the audit of internal controls over financial reporting), statutory and subsidiary audits, issuance of comfort letters, and assistance with review of documents filed with the SEC.

 

Audit-Related Fees:  $63,500, in the aggregate, for the year ended December 31, 2008 and $126,000, in the aggregate, for the year ended December 31, 2007 for assurance and related services, including employee benefit plan audits, other audit procedures, and consultations concerning financial accounting and reporting

standards. In addition, various employee benefit plans were billed for fees and related expenses of $218,000 for 2008 and $214,000 for 2007 for audits of their plan financial statements by PricewaterhouseCoopers LLP.

 

Tax Fees:  $1.5 million, in the aggregate, for the year ended December 31, 2008 and $1.7 million, in the aggregate, for the year ended December 31, 2007 for services related to tax compliance, including expatriate tax services and preparation of tax returns and claims for refunds, tax planning and tax advice, assistance with respect to tax audits, and requests for rulings for technical advice from tax authorities.

 

All Other Fees:  $17,900, in the aggregate, for the year ended December 31, 2008 and $17,600, in the aggregate, for the year ended December 31, 2007 for all services other than those covered above under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees.” “All Other Fees” for 2008 and for 2007 were for services related to technology access and conference fees.

 

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

 

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

 

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

 

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

 

ITEM 3 — PROPOSAL REQUESTING THAT MANAGEMENT REVISE EMPLOYMENT
NONDISCRIMINATION POLICY TO PROHIBIT “DISCRIMINATION BASED ON
SEXUAL ORIENTATION AND GENDER IDENTITY”

 

Stockholder New York City Pension Funds has given notice that it intends to submit the following proposal and supporting statement:

 

Whereas:  Eastman Chemical Corporation, does not explicitly prohibit discrimination based on sexual orientation and gender identity in its written employment policy;

 

Over 88% of the Fortune 500 companies have adopted written nondiscrimination policies prohibiting harassment and discrimination on the basis of sexual orientation, as have more than 98% of Fortune 100 companies, according to the Human Rights Campaign; over 30% now prohibit discrimination based on gender identity;

 

We believe that corporations that prohibit discrimination on the basis of sexual orientation and gender identity have a competitive advantage in recruiting and retaining employees from the widest talent pool;

 

According to a June, 2008 survey by Harris Interactive and Witeck-Combs, 65% of gay and lesbian workers in the United States reported facing some form of job discrimination related to sexual orientation; an earlier survey found that almost one out of every 10 gay or lesbian adults also reported that they had been fired or dismissed unfairly from a previous job, or pressured to quit a job because of their sexual orientation;

Twenty states, the District of Columbia and more than 160 cities and counties, have laws prohibiting employment discrimination based on sexual orientation; 12 states and the District of Columbia have laws prohibiting employment discrimination based on sexual orientation and gender identity;

 

Minneapolis, San Francisco, Seattle and Los Angeles have adopted legislation restricting business with companies that do not guarantee equal treatment for gay and lesbian employees;

 

Our company has operations in, and makes sales to institutions in states and cities that prohibit discrimination on the basis of sexual orientation;

 

National public opinion polls consistently find more than three quarters of the American people support equal rights in the workplace for gay men, lesbians and bisexuals; for example, in a Gallup poll conducted in May, 2007, 89% of respondents favored equal opportunity in employment for gays and lesbians.

 

Resolved:  The Shareholders request that Eastman Chemical Corporation amend its written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and gender identity and to substantially implement the policy.

 

Supporting Statement:  Employment discrimination on the basis of sexual orientation and gender identity diminishes employee morale and productivity. Because state and local laws are inconsistent with respect to employment discrimination, our company would benefit from a consistent, corporate wide policy to enhance efforts to prevent discrimination, resolve complaints internally, and ensure a respectful and supportive atmosphere for all employees. Eastman Chemical Corporation will enhance its competitive edge by joining the growing ranks of companies guaranteeing equal opportunity for all employees.

 

Response of the Company

 

Eastman is an equal opportunity employer fully committed to complying with all applicable equal employment opportunity laws and to having a workplace that is free from any harassment or discrimination. The Board of Directors believes that the Company’s current policies and practices with respect to nondiscrimination have allowed us to fulfill these commitments and fully achieve the objectives set out in this proposal without the need for additional specificity. The Board of Directors further believes that additional procedural changes to the Company’s employment nondiscrimination policies would only divert resources and management time and attention from the overall goal of creating a truly nondiscriminatory workplace.

 

Our corporate equal employment opportunity policy provides that “Eastman Chemical Company will not discriminate against, or tolerate harassment of, any employee or applicant for employment because of race, color, religion, sex, age, disability, national origin, or sexual orientation.” The Company’s nondiscrimination policy applies to “all matters pertaining to employment, such as recruiting, hiring, training, on-the-job treatment, and promotion”.

 

The Company selects and evaluates employees only on the basis of their job performance and business-related talents and capabilities and corporate business needs. We believe that the Company’s current nondiscrimination policy reflects our commitment and ongoing efforts to provide all employees with a workplace that is free of discrimination and harassment, and that our existing policies achieve those objectives.

 

Contrary to implications in the proposal, the Company does not believe that it suffers any competitive disadvantage in recruiting or retaining employees or in customer relationships as a result of its employment practices or the language contained in its nondiscrimination policy. The Company has no indication that discrimination on the basis of sexual orientation or gender identity is practiced within the Company, nor has the Company received notice from its employees, customers, or suppliers that the Company’s employment policies or practices jeopardize its relationship with any of them. In contrast, we believe that our existing comprehensive nondiscrimination policy and reputation for protecting equal opportunity in all aspects of employment benefits the Company, its stockholders, and employees, as well as the Company’s other stakeholders.

 

We recognize the value of a diverse workforce, and are dedicated to ensuring that the benefits of such diversity maximizes the full potential of our employees, customers, vendors, and communities. We believe that our current

policy against discrimination, and our procedures to ensure that discrimination does not occur, position the Company to achieve these results.

 

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

 

ITEM 4 — PROPOSAL REQUESTING THAT THE BOARD TAKE STEPS NECESSARY TO GIVE HOLDERS OF 10% OF OUTSTANDING COMMON STOCK THE RIGHT TO CALL SPECIAL MEETINGS

 

Stockholder Ray T. Chevedden has given notice that he intends to submit the following proposal and supporting statement:

 

RESOLVED, Shareowners ask our board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special shareowner meetings. This includes that such bylaw and/or charter text will not have any exception or exclusion conditions (to the fullest extent permitted by state law) that apply only to shareowners but not to management and/or the board.

 

Statement of Ray T. Chevedden

 

Special meetings allow shareowners to vote on important matters, such as electing new directors, that can arise between annual meetings. If shareowners cannot call special meetings, management may become insulated and investor returns may suffer. Shareowners should have the ability to call a special meeting when a matter is sufficiently important to merit prompt consideration.

 

This proposal topic also won impressive support (based on 2008 yes and no votes) at the following companies:

 

 

The merits of this Special Shareowner Meetings proposal should also be considered in the context of the need for further improvements in our company’s corporate governance and in individual director performance. In 2008 the following governance and performance issues were identified:

 

 

Annual election of each director.

 

To call a special meeting.

 

To act by written consent.

 

A complete simple majority vote standard.

 

An independent Chairman.

 

A Lead Director.

 

Cumulative voting.

 

 

 

Lewis Kling

 

Michael Connors

 

David Raisbeck

 

 

Robert Hernandez		ACE Limited (ACE)
Michael Connors		Information Services Group (III) F-rated
Brian Ferguson		FPL Group (FPL)
Howard Lance		Harris Stratex Networks (HSTX)
Lewis Kling		Flowserve (LS)

 

The above concerns shows there is need for improvement. Please encourage our board to respond positively to this proposal.

 

Response of the Company

 

The Company is a Delaware corporation and, consistent with Delaware General Corporation Law, the Company’s Certificate of Incorporation provides that a special meeting of stockholders may be called by the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. The Board of Directors believes this to be an appropriate corporate governance provision for a public company of the Company’s size because it allows the Company’s directors, consistent with their fiduciary obligations, to exercise their business judgment to determine when it is in the best interests of stockholders to convene a special meeting. The Board of Directors does not believe it is in the best interests of the Company to allow holders of only 10% of the Company’s outstanding common stock to have an unlimited ability to call special meetings for any purpose at any time. Enabling a small minority of stockholders to call special meetings could significantly disrupt the conduct of the Company’s business by diverting the attention of the members of the Board, senior management and others from the operations of the Company, empower a minority of stockholders at the expense of our stockholder majority, and impose substantial administrative burdens and financial costs on the Company.

 

The Board of Directors believes that enabling a small minority of stockholders to call special meetings in order to advance their own, potentially conflicting, interests could be extremely disruptive to the conduct of the Company’s operations, and require significant attention from our Board and management, and could create major confusion for other stockholders. Special meetings of stockholders impose significant administrative and financial burdens on the Company and should be extraordinary events that only occur when either fiduciary obligations or strategic concerns require that the matters to be addressed cannot wait until the Company’s next annual meeting.

 

Among other things, the process of convening a special meeting requires the involvement of outside advisors, the preparation of required disclosure documents, and printing, mailing and meeting costs, as well as the significant time commitments by members of the Board and senior management. These burdens are exacerbated by the potential for multiple, possibly conflicting, meetings throughout the year to address special interests not beneficial to the majority of our stockholders. Further, such a mechanism may encourage activity in our stock that is undertaken solely for purposes of meeting the required minority ownership threshold.

 

The Company’s annual stockholder meeting currently provides stockholders with a full and fair opportunity to communicate with other stockholders and raise appropriate questions and concerns, including through the inclusion of stockholder proposals (such as this one) in our proxy statement, as well as to vote on important matters, including the election of directors. Additionally, the Board regularly reviews the Company’s governance structure, policies,

and practices, and makes changes that it determines are to the benefit of the Company and its stockholders. Recent such changes include the implementation of majority voting in the election of directors and repeal of the Company’s stockholder rights plan and redemption of the “poison pill”. The Board of Directors believes that the Company’s existing corporate governance mechanisms strike the appropriate balance between ensuring accountability to stockholders and enabling the Board and management to manage and run the Company in an effective and efficient manner.

 

Further, contrary to the proponent’s suggestion that stockholders are prevented from considering important matters in a timely manner, the Delaware General Corporation Law requires that certain corporate actions, such as a takeover bid, merger, consolidation, or sale of substantially all of the Company’s assets, be approved by its stockholders. Thus, if a major corporate action requiring stockholder approval that is supported by the Board of Directors were to occur at a time other than contemporaneous with an annual meeting of stockholders, the Board would exercise its right to call a special meeting of stockholders to vote upon the matter. Also, stockholder approval is required by law or regulation for a number of other matters, including the adoption of, or material amendment to, certain new equity compensation plans, amendments to the Company’s Certificate of Incorporation, and the annual election of directors. Accordingly, the Board of Directors does not believe that approval of the proposal is necessary or advisable.

 

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

 

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

Common Stock

 

The table below sets forth certain information regarding the beneficial ownership of Eastman common stock as of December 31, 2008 by each director, by each executive officer and each former executive officer named in the Summary Compensation Table (under “Executive Compensation — Compensation Tables” below), and by the directors, the named executive officers, and the other executive officers as a group.

 

 

 

 

 

 

Common Stock and Common Stock Units

 

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

 

Eastman has stock ownership guidelines for its directors and executive officers. These guidelines require such persons to acquire and maintain a stake in the Company valued at $200,000 for non-employee directors, five times annual base pay for the Chief Executive Officer, and two and one-half times annual base pay for the other executive officers named in the Summary Compensation Table. Common stock units are counted with certain shares of common stock beneficially owned (excluding certain shares that may be deemed beneficially owned under SEC rules, such as shares underlying options and shares over which the individual shares voting and investment power but in which the individual has no pecuniary interest) for purposes of the Company’s stock ownership guidelines. Common stock units represent hypothetical “investments” in Eastman common stock. The value of one common stock unit is equal to the market value of one share of Eastman common stock. Although the DDCP and EDCP allow common stock units to be paid out only in the form of cash, and not in shares of common stock, common stock units create essentially the same stake in the market performance of the Company’s common stock as do actual shares of common stock. The table below shows, for each director and each executive officer named in the Summary Compensation Table, and for the directors, the named executive officers, and the other executive officers as a group, the aggregate of the number of shares of common stock beneficially owned by such person and group, as set forth in the preceding table, and the number of common stock units credited to the stock accounts of such person and group as of December 31, 2008. The table below is included to provide a better indication of the stake of the named individuals, and of the group, with respect to Eastman common stock.

 

 

PRINCIPAL STOCKHOLDERS

 

The following table sets forth information about persons we know to be the beneficial owners of more than five percent of Eastman common stock as of December 31, 2008.

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview

 

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

 

Our executive compensation program is designed to:

 

 

 

 

 

To achieve these objectives, the Compensation Committee has designed the executive compensation program so that total direct compensation (consisting of base compensation and both annual and long-term incentive compensation) is earned largely based on attaining pre-established strategic and tactical objectives, outperforming our competitors, stock appreciation, and individual achievement. Our long-term incentive programs are sized and structured so that a significant portion of total direct compensation is in the form of stock-based pay (performance shares, stock options, and restricted stock units) rather than cash, to create incentives for long-term performance and to promote alignment of executive pay with stockholder returns.

 

For 2008, the executive officers:

 

 

The Compensation Committee believes that the compensation of the executive officers is appropriate based on Eastman’s performance and the competitive market.

Management Compensation Philosophy and Program

 

Our Business.  Eastman is a global chemical company which manufactures and sells a broad portfolio of chemicals, plastics, and fiber products to customers throughout the world. The Company’s products and operations are managed and reported in five operating segments: the Coatings, Adhesives, Specialty Polymers, and Inks (“CASPI”) segment, the Fibers segment, the Performance Chemicals and Intermediates (“PCI”) segment, the Performance Polymers segment, and the Specialty Plastics (“SP”) segment. In addition to these segments, the Company manages certain strategic initiatives at the corporate level, including industrial gasification and research and development initiatives. Eastman’s objective is to leverage its heritage of expertise and innovation in acetyl, polyester, and olefins chemistries to meet long-term demand and create new opportunities for the Company’s products in key markets. The Company has recently completed a number of restructuring actions and announced growth initiatives in each of its segments, and continues to make progress in industrial gasification, to reposition the Company in key product and geographic markets. Eastman will continue to invest in growth initiatives, subject to economic conditions and its financial and liquidity position.

 

Our Compensation Philosophy.  The Company’s business strategy for value creating growth is to leverage the capabilities of its employees to innovate and execute in two main areas — growth initiatives in existing core businesses and industrial gasification, while maintaining its current emphasis on positive free cash flow generation. Our compensation philosophy supports this strategy by stressing the importance of pay for corporate and individual performance in meeting strategic and business goals for value creation and financial strength and flexibility, and maintains flexibility to meet changing employee, business, and market conditions.

 

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

 

 

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

 

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

 

 

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

 

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

Mix of Total Compensation.  The following charts illustrate the percentage of total compensation for our CEO and the other named executive officers serving at December 31, 2008 on average, respectively, represented by each element of compensation for 2008.

 

 

 

 

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

 

 

 

Review of 2008 Executive Compensation

 

The Compensation Committee reviewed overall compensation of the Chief Executive Officer and the other executive officers included in the Summary Compensation Table below (collectively referred to as the “named executive officers”) and determined each component of executive compensation for 2008 as described below.

 

The Compensation Committee also:

 

 

 

During 2008, the Board considered and approved succession planning decisions and executive management changes, including the appointment of a new Chief Executive Officer, creation of the position of Executive Chairman, appointment of a new Chief Financial Officer upon the retirement of the former Chief Financial Officer, and other executive appointments and changes in responsibilities related to these retirements, appointments, and changes and to the retirement of the Executive Vice President and Polymers Business Group Head. As part of the executive succession planning decisions and management changes in 2008, the Compensation Committee:

 

 

 

In connection with its review of external market data, the Compensation Committee has directly engaged Hewitt Associates (“Hewitt”) as its external compensation consultant. Under the terms of Hewitt’s engagement by the Compensation Committee, Hewitt reports to and receives its direction from the Compensation Committee, and a representative of Hewitt attends each meeting of the Compensation Committee as its advisor. Hewitt provides the Compensation Committee with third-party survey information used in setting short- and long-term compensation levels, perspective on emerging trends in compensation issues, and expertise in incentive compensation structure, terms, and design. The Company’s management also uses the services of several outside firms, including Hewitt, for compensation analysis, third-party surveys, and management pay research and analysis. Management’s use of the Compensation Committee’s consultant is limited to advice on emerging trends and competitive compensation practices.

 

Elements of our Executive Compensation

 

Annual Cash Compensation — Base Pay and Variable Pay

 

How Base Pay and Variable Pay Levels Are Determined.  For executive officers, targeted total cash compensation is designed to be competitive with comparable pay for similar jobs when target levels of corporate, organizational, and individual performance are achieved. The targeted levels of cash compensation are based upon information provided by the Compensation Committee’s compensation consultant and publicly available information. For 2008, a significant portion of each executive officer’s pay was made variable. Depending upon Company, organizational, and individual performance, executive officers could receive more or less than the target amount.

 

For 2008, the Compensation Committee compared total cash compensation levels for the Company’s executive officers with those of the following companies selected based upon industry, number of employees, revenues, number and type of commercialized products, and market capitalization:

 

 

As requested by the Compensation Committee, Hewitt provided benchmarking analysis of the comparable companies’ total cash compensation information, and also advised the Compensation Committee of general market cash compensation practices and trends. In determining each executive officer’s targeted total cash compensation, the Compensation Committee also applied its judgment in considering the competitive market for executive talent, comparative pay levels of each other executive officer, relative cash compensation of other jobs in the Company, and differences between the Company’s executive positions and those in the benchmarking information. For 2008, the Compensation Committee set the targeted cash pay for executives within a range of 10% above or below the median level of the total cash compensation for comparable positions of the peer companies.

 

Base Pay.  In early 2008, after reviewing market competitive pay levels and the targeted total cash compensation of the executive officers, the Compensation Committee determined that base pay increases were

appropriate for the executive officers because of their base pay relative to the mid-range of companies surveyed. In addition to external comparisons, the Compensation Committee considered the Chief Executive Officer’s recommendations for adjustments to the annual base salaries of other executive officers, the impact of base pay increases on the mix of short- and long-term compensation and total compensation, and the cash compensation level of each executive officer relative to that of each other executive officer. As a result, annual base salaries for our executive officers were increased by 3% to 13% for 2008. The Committee also increased the base pay of executives with new or additional responsibilities as described under “Review of 2008 Executive Compensation” based on the same criteria and factors.

 

Other than base pay adjustments for changes in job responsibilities, for 2009, the Committee did not increase the base pay of executives, consistent with the Company’s decision in December 2008 that the base salaries of employees for 2009 will not be increased from 2008 levels. In March 2009, the Committee decreased the base pay of executives by five percent, consistent with the Company’s reduction of the base pay of employees beginning March 30, 2009.

 

Variable Cash Pay — Unit Performance Plan.  For 2008, the variable portion of cash compensation paid to the executive officers was determined solely under the Unit Performance Plan (the “UPP”). The UPP is designed to determine a portion of the annual cash compensation of management level employees according to corporate performance and the attainment of certain individual objectives and expectations. The UPP is intended to provide an incentive for superior business and individual performance and to tie the interests of our executive officers to the performance of our businesses and the interests of our stockholders.

 

The Compensation Committee establishes a market-based target UPP incentive opportunity for each executive officer expressed as a percent of base salary. The individuals with the greatest overall responsibility for corporate performance have larger incentive opportunities in comparison to their base salaries in order to weight their overall pay mix more heavily towards performance-based compensation. For the named executive officers, the target annual incentives for 2008 were as follows:

 

 

The amount of the award pool from which UPP payouts are made to management-level employees is determined by annual performance of the Company versus goals established by the Compensation Committee. For 2008, the measure of corporate performance under the UPP was earnings from operations. Annual performance goals are established such that the target level is reached if corresponding Company performance goals for the year are achieved. The target level for 2008 earnings from operations ($643 million) corresponded to the Company’s operating earnings target under the annual business plan for 2008 as approved by the Board in late 2007. In determining earnings from operations for the purpose of measuring performance, the UPP provides for adjustments by the Compensation Committee for certain charges, income items, or other events, typically the same as those

excluded from operating earnings in the non-GAAP pro forma financial measures disclosed by the Company in its public sales and earnings disclosures.

 

At the end of 2007, the Compensation Committee evaluated the Company’s financial and strategic performance targets under its annual business plan for 2008 and set the UPP payout multipliers at 0% of aggregate target payouts if earnings from operations were below the threshold; at 100% of aggregate target payouts if earnings from operations were equal to the target; and at 200% of aggregate target payouts if earnings from operations were above the maximum. Linear interpolation is used to determine the awards if actual performance falls between any two stated points. The 2008 UPP threshold, target, and maximum adjusted earnings from operations targets for UPP award pool funding were:

 

 

Earnings from operations for 2008, as adjusted, were $558 million, resulting in a UPP award pool for all management level employees of $19.3 million, equivalent to 77% of aggregate target awards. The calculation of earnings from operations under the UPP for 2008 was adjusted to exclude the impact on financial results of asset impairments and restructuring charges, accelerated depreciation costs associated with asset shutdowns in the Performance Polymers and PCI segments, and other operating income from the sale of certain mineral rights at an operating manufacturing site. These adjustments increased the calculated earnings from operations under the UPP by $39 million and resulted in a net increase of the UPP award pool for all participants of $2.7 million. The Compensation Committee may, in its discretion, adjust the award pool to reflect overall corporate performance and business and financial conditions; in 2008, the total Company award pool was not so adjusted.

 

The Compensation Committee established individual financial, organizational, and strategic performance objectives and expectations for Mr. Ferguson, and determined his payout considering his allocated portion of the total UPP award pool and the Compensation Committee’s assessment of his attainment of these objectives for 2008.

 

The other named executive officers participated in a UPP unit consisting of all executive officers directly reporting to the Chief Executive Officer. The amount of the Company award pool allocated to the executive officers was determined by aggregating their individual target variable pay amounts, multiplied by a “performance factor” corresponding to their overall performance compared to pre-established targets related to organizational results and personal performance objectives. An actual individual award could exceed an individual’s target award, based on the CEO’s assessment of individual and organizational performance.

 

For 2008, Mr. Ferguson’s individual performance objectives and expectations as approved by the Board in early 2008 were as follows:

 

Annual business plan and financial commitments

 

 

Key Strategic Initiatives

 

 

Systems, Processes, Initiatives to Stimulate Growth Beyond Key Strategic Initiatives

 

 

Capabilities, Effectiveness and Efficiency

 

 

The individual performance objectives and expectations for the other named executive officers were driven by and accordingly derived from the CEO’s performance objectives and expectations described above. Each individual named executive’s corporate performance objectives were the same as those for the CEO, with organizational and individual goals and expectations targeted to each executive’s area of responsibility.

 

Following determination by the Compensation Committee of the total amount of the Company award pool available to the executive officers as a group, the Chief Executive Officer assessed individual performance against established goals and expectations for each other named executive officer and determined the amounts of the individual payouts from the portion of the allocated award pool. The Chief Executive Officer’s assessment was based upon evaluation of each executive officer’s performance against individual goals and expectations related to corporate and organizational performance. Considering recommendations from the Chief Executive Officer, the Compensation Committee approved payouts to the other named executive officers.

 

The Compensation Committee reviewed Mr. Ferguson’s performance against his financial, organizational, and strategic objectives as described above. Based upon its evaluation of corporate and individual performance, the Compensation Committee determined that Mr. Ferguson and the other named executives did not meet the earnings targets for corporate financial performance and the objectives for certain strategic initiatives because of the global financial crisis and recessionary business conditions, and that he and the other executives met or exceeded the pre-established objectives and expectations for the other areas of performance. Mr. Ferguson’s UPP payout was 77% of his target award amount, and the payouts to the other named executives ranged from 73% to 83% of their respective target award amounts.

 

Special Retirement Payment.  The Compensation Committee, as part of the Board’s development and approval of executive succession planning and executive management changes, approved a cash payment of $900,000 to Dr. Nelson in connection with his accelerated retirement. The amount of this payment was based upon the value of Dr. Nelson’s estimated additional compensation had he retired on December 31, 2008 rather than August 1, 2008.

Stock-Based Incentive Pay

 

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

 

 

How Stock-Based Incentive Pay Levels Were Determined.  The Compensation Committee established the value and mix of total stock-based incentive pay for 2008 by considering recommendations from its compensation consultant based on long-term compensation surveys of the following manufacturing, industrial, and chemical companies of comparable size in the same market as the Company for executive talent:

 

 

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

 

Stock options and performance shares were awarded so that total stock-based incentive compensation for 2008 approximated the mid-range of total stock-based compensation of the compared companies. The current values of total stock-based incentive pay for 2008 ranged from 38% to 62% of total compensation for the named executive officers.

 

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

 

Stock Options.  In 2008, the Company determined to deliver approximately 40% of each executive officer’s stock-based equity value as stock options. In determining the size of option awards, the Compensation Committee used the services of its compensation consultant to derive values of options using a variation of the Black-Scholes

option-pricing model. Computation of the value of option awards is comparable to values determined under FAS 123R and reported in the “Grant of Plan-Based Awards” table below.

 

Long-Term Performance Shares.  In 2008, the Company awarded performance shares for the 2009 -2011 performance period to each executive officer, representing approximately 60% of each executive officer’s stock-based equity value, to provide incentives for exceeding internal financial objectives and external return objectives versus a peer group of companies.

 

For the 2006-2008 performance period, performance was determined by comparing the Company’s multi-year performance as measured against a return on capital target established at the beginning of the three year performance period, and the Company’s total return to stockholders (change in stock price plus dividends declared during the performance period, assuming reinvestment of dividends) relative to a peer group of industrial companies comprising the Standard and Poor’s “Materials Sector” from Standard and Poor’s Super Composite 1500 Index. The return on capital target is established considering corporate strategic and business plans and expectations for the performance period. Performance relative to the total return to stockholders target is determined by the Company’s quintile placement relative to the peer group of industrial companies at the end of the three year performance period. If earned, awards are paid after the end of the performance period in unrestricted shares of Eastman common stock.

 

The Compensation Committee reviewed and certified performance results and approved a payout of shares to the executive officers under performance shares previously awarded for the 2006-2008 performance period. The following tables show the targets and the payout matrix for the 2006-2008 performance shares corresponding to return on capital and total stockholder return targets:

 

 

 

Payouts under the 2006-2008 performance shares for the named executive officers ranged from 45,330 shares for the Chief Executive Officer to 3,200 shares, and represented 100% of the target award (of a possible 300% of the target award) based upon the Company’s total stockholder return ranking in the third quintile of the compared companies and an average return on capital of .81% in excess of the return on capital target.

 

Restricted Stock Unit Awards.  As discussed under “Review of 2008 Executive Compensation”, the Compensation Committee made special restricted stock unit awards to Messrs. Rogers and Costa and to one other executive officer in connection with the Board’s succession planning decisions in December 2008. These awards were designed to serve as retention incentives for these executives and, in the case of Mr. Rogers, as an incentive to his performance in the area of management and leadership development.

 

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

Executive Perquisites and Personal Benefits

 

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

 

 

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

 

Mr. Costa receives an annual personal travel allowance under his employment agreement. The Compensation Committee approved Mr. Costa’s perquisites and personal benefits and the other compensation terms of his employment agreement when he was hired in 2006.

 

Executive Termination and Change in Control Agreements

 

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

 

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

 

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

 

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

 

Tax Treatment of Executive Officer Compensation

 

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

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

 

A portion of each named executive officer’s compensation for 2008 was non-deductible to the Company under Section 162(m). The anticipated amount of the Company’s taxes for non-deductible compensation in 2008 is approximately $1 million. The Compensation Committee will continue to retain the discretion to pay non-deductible amounts. The Compensation Committee believes that such flexibility best serves the interests of the Company and its stockholders by allowing the Committee to recognize and motivate executive officers as circumstances warrant.

 

The Company has structured its deferred compensation arrangements with the intention of complying with the limitations and restrictions of Internal Revenue Code Section 409A. Section 409A applies to any plan or arrangement that provides for the deferral of compensation, and, unless certain requirements are met, amounts deferred under deferred compensation arrangements will be currently includible in income and subject to an excise tax.

 

Reimbursement of Certain Compensation Following Restatements

 

Pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, a Company policy governs the process for reimbursement by the Chief Executive Officer and the Chief Financial Officer of any bonus or other incentive-based or equity-based compensation received during the 12-month period following public disclosure of an accounting restatement due to material noncompliance by the Company with any financial reporting requirements as the result of misconduct. In addition, our 2007 Omnibus Long-Term Compensation Plan requires reimbursement of certain amounts following public disclosure of an accounting restatement due to material noncompliance by the Company with any financial reporting requirement as a result of misconduct.

 

Compensation Tables

 

The following Summary Compensation Table sets forth information concerning compensation of the individuals serving as Eastman’s Chief Executive Officer and Chief Financial Officer during 2008, and the Company’s four other most highly compensated executive officers for the year ended December 31, 2008.

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

 

The following table sets forth certain information regarding grants in 2008 to the individuals named in the Summary Compensation Table of non-equity incentive awards, equity incentive awards, and other stock and option awards.

 

Grants of Plan-Based Awards