March 14, 2008

 

Dear Fellow Stockholder:

 

Our 2008 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 1, 2008, 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 2007 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 37660

(423) 229-2000

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 1, 2008

 

 

 

To Our Stockholders:

 

The 2008 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 1, 2008, 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, 2008 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 14, 2008

 

PROXY STATEMENT

FOR

ANNUAL MEETING OF STOCKHOLDERS OF

EASTMAN CHEMICAL COMPANY

TO BE HELD ON MAY 1, 2008

 

 

INFORMATION ABOUT THE MEETING AND VOTING

 

Proxy Statement and Annual Meeting

 

This proxy statement is dated March 14, 2008 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 21, 2008. Our Board of Directors (the “Board”) is furnishing you this proxy statement to solicit proxies on its behalf to be voted at the Annual Meeting of Stockholders of the Company to be held on May 1, 2008, 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 Richard A. Lorraine, 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 banks and brokers.

 

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 2008 Annual Meeting of Stockholders is March 10, 2008. 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 77,544,913 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 three of the nominees, (2) vote “against” all three of the nominees, (3) vote “against” any individual nominee or nominees but vote “for” the other nominee(s), or (4) “abstain” from voting on one or more nominees. Shares not present 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 $17,000 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 2009 Annual Meeting

 

In accordance with rules of the SEC, if you wish to submit a proposal for presentation at Eastman’s 2009 Annual Meeting of Stockholders, it must be received by the Company at its principal executive offices on or before November 21, 2008 in order to be included in the Company’s proxy materials relating to its 2009 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 2008 Annual Meeting of Stockholders is first sent to stockholders on March 21, 2008, then such advance notice would be timely if delivered on or before February 4, 2009.

 

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. 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 2007, including consolidated financial statements for the year ended December 31, 2007, 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 the 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, 2007 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 currently in the class for which the term in office expires at the 2008 Annual Meeting; three of these four directors have been nominated for reelection for a new three-year term. Under the Board retirement and term limit policies, Donald W. Griffin, whose current term expires at the Annual Meeting, is not standing for re-election. The terms of the other eight directors continue after the meeting.

 

The stockholders are being asked to vote on the election of three directors to the class for which the term of office shall expire at the Annual Meeting of Stockholders in 2011 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 2007 Annual Meeting.  In August 2007, the Board elected Gary E. Anderson as a director.

 

Majority Vote Standard for Election of Directors.  The Company’s Bylaws provide that directors be elected by a majority vote of stockholders. If a nominee who is serving as a director is not reelected by a majority vote 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 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 2008, all nominees for director are currently serving on the Board.

 

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

 

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

 

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 2007. 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 2007 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-management 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-management 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 one of the executive officers and determined that such executive officer does not have a material interest in such employment relationship or transactions that creates a conflict of interest. The terms of such employment, including compensation and benefits, are in all respects according to standard Company policies and practices for professional employees. The executive officer’s son works in an organization that is not in the executive’s line of management and the executive has 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-management, 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 2007. 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 Ms. Hornbaker and Messrs. Anderson, Hernandez, and McLain each is an “audit committee financial expert” under applicable provisions of the New York Stock Exchange’s listing standards and of 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, 2007. 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 Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T, 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, 2007 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, Griffin, Kling, Raisbeck, and Wood. The Nominating and Corporate Governance Committee held four meetings during 2007. 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, Griffin, Kling, Raisbeck, and Wood. The Compensation Committee held seven meetings during 2007. 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 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, 2007 filed with the SEC and in this proxy statement.

 

Compensation and Management Development Committee

Michael P. Connors (Chair)

Stephen R. Demeritt

Donald W. Griffin

Lewis M. Kling

David W. Raisbeck

Peter M. Wood

 

Finance Committee.  All of the directors except Mr. Ferguson are members, and Mr. Raisbeck is the Chair, of the Finance Committee. The Finance Committee held four meetings during 2007. 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 Mr. Ferguson 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 2007. 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 2007. Directors who are also employees of the Company receive no Board or committee fees.

 

Director Compensation for Year Ended December 31, 2007

 

 

 

 

 

 

 

 

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, 2008.

 

PricewaterhouseCoopers LLP also served as the Company’s independent auditors for the years ended December 31, 2007 and 2006, and has billed the Company the following amounts for fees and related expenses for professional services rendered during 2007 and 2006:

 

Audit Fees:  $5.8 million, in the aggregate, for the year ended December 31, 2007 and $6.7 million, in the aggregate, for the year ended December 31, 2006 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:  $126,000, in the aggregate, for the year ended December 31, 2007 and $105,000, in the aggregate, for the year ended December 31, 2006 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 $185,000 for 2007 and $235,000 for 2006 for audits of their plan financial statements by PricewaterhouseCoopers LLP.

 

Tax Fees:  $1.7 million, in the aggregate, for the year ended December 31, 2007 and $1.3 million, in the aggregate, for the year ended December 31, 2006 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:  $17,600, in the aggregate, for the year ended December 31, 2007 and $17,600, in the aggregate, for the year ended December 31, 2006 for all services other than those covered above under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees.” “All Other Fees” for 2007 and for 2006 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, corporations with non-discrimination policies relating to sexual orientation have a competitive advantage to recruit and retain employees from the widest talent pool;

 

Employment discrimination on the basis of sexual orientation diminishes employee morale and productivity;

 

The company has an interest in preventing discrimination and resolving complaints internally so as to avoid costly litigation and damage its reputation as an equal opportunity employer;

 

Atlanta, Seattle, Los Angeles, and San Francisco have adopted legislation restricting business with companies that do not guaranteed equal treatment for lesbian and gay employees and similar legislation is pending in other jurisdictions;

 

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

 

A recent National Gay and Lesbian Taskforce study has found that 16%-44% of gay men and lesbians in twenty cities nationwide experienced workplace harassment or discrimination based on their 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;

 

A number of Fortune 500 corporations have implemented non-discrimination policies encompassing the following principles:

 

1) Discrimination based on sexual orientation and gender identity will be prohibited in the company’s employment policy statement.

 

2) The company’s non-discrimination policy will be distributed to all employees.

 

3) There shall be no discrimination based on any employee’s actual or perceived health condition, status, or disability.

 

4) There shall be no discrimination in the allocation of employee benefits on the basis of sexual orientation or gender identity.

 

5) Sexual orientation and gender identity issues will be included in corporate employee diversity and sensitivity programs.

6) There shall be no discrimination in the recognition of employee groups based on sexual orientation or gender identity.

 

7) Corporate advertising policy will avoid the use of negative stereotypes based on sexual orientation or gender identity.

 

8) There shall be no discrimination in corporate advertising and marketing policy based on sexual orientation or gender identity.

 

9) There shall be no discrimination in the sale of goods and services based on sexual orientation or gender identity, and

 

10) There shall be no policy barring on corporate charitable contributions to groups and organizations based on sexual orientation.

 

RESOLVED:  The Shareholders request that management implement equal employment opportunity policies based on the aforementioned principles prohibiting discrimination based on sexual orientation and gender identity.

 

STATEMENT:  By implementing policies prohibiting discrimination based on sexual orientation and gender identity, the Company will ensure a respectful and supportive atmosphere for all employees and 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 that is fully committed to complying with all applicable equal employment opportunity laws. The Board believes that the Company’s current policies and practices with respect to nondiscrimination fully achieve the objectives set out in this proposal without the need for additional specificity, and that further procedural changes to 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 comprehensive nondiscrimination policy and reputation for protecting equal opportunity in all aspects of employment benefits the Company, its stockholders, and employees.

 

We recognize the value of a diverse workforce and are dedicated to ensuring that the benefits that a diverse workplace provides maximize 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, adequately 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 ELECT EACH DIRECTOR ANNUALLY

 

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

 

RESOLVED:  Shareholders request that our Directors take the steps necessary to adopt annual election of each director in the most expeditious manner possible, in compliance with applicable law and in a manner so that each director shall have a term of equal length from the date of first implementation to the greatest extent possible.

 

This includes using all means in our Board’s power such as corresponding special company solicitations and one-on-one management contacts with major shareholders to obtain the vote required for formal adoption of this proposal topic. Also for such transition solely through direct action of our board if such transition is in compliance with applicable law.

 

This topic won a 69% yes-vote average at 44 major companies in 2007. The Council of Institutional Investors www.cii.org recommends adoption of annual election of each director.

 

Arthur Levitt, Chairman of the Securities and Exchange Commission, 1993-2001 said: In my view it’s best for the investor if the entire board is elected once a year. Without annual election of each director shareholders have far less control over who represents them. Source: “Take on the Street” by Arthur Levitt.

 

The merits of adopting this proposal should also be considered in the context of our company’s overall corporate governance structure and individual director performance. For instance in 2007 the following structure and performance issues were reported (and certain concerns are noted):

 

 

1) Cumulative voting.

 

2) To act by written consent.

 

3) To call a special meeting.

 

 

Additionally:

 

 

The above concerns show there is room for improvement and reinforces the reason to take one step forward now to encourage our board to respond positively to this proposal.

 

Response of the Company

 

The Board first determined that a classified board structure — where the Board of Directors is divided into three classes and directors are elected to staggered three-year terms with one of the three classes being elected every year — was in the best interests of Eastman and its stockholders in 1994 when the Company became independent. Since then, the Board has remained committed to corporate governance policies that are in the particular best interests of the Company. The Board regularly reviews the Company’s governance structure, policies, and practices,

and makes changes that it determines are to the benefit of the Company and its stockholders. Recent changes include the implementation of majority voting in the election of directors in October 2006 and the repeal of the Company’s stockholder rights plan and redemption of the “poison pill” in December 2006. Management and the Board continue to believe that a classified board structure remains in the best interests of Eastman and its stockholders.

 

We believe that the election of directors by classes complements the implementation of the previously disclosed long-term strategy for creating stockholder value and assists the Company to recruit and retain more experienced directors while allowing an orderly evolution of the Board.

 

Given the cyclical nature of Eastman’s industry and the markets in which the Company operates, we believe our stockholders are uniquely positioned to benefit from a long-term strategy requiring commitment, stability, and vision. Our long-term strategy — to leverage our heritage of expertise and innovation in acetyl, polyester, and olefins chemistries to drive growth, meet increasing demand, and create new opportunities for the Company’s products in key markets — is furthered by continuity and stability in corporate governance and leadership. Eastman has recently announced, and is implementing, significant corporate actions in each of its business segments and in its industrial gasification projects to reposition the Company in key product and geographic markets. We believe that the classified board structure has helped, and will continue to help, to provide continuity and stability, enabling the development and implementation of the Company’s value creation strategy and continued focus on sustained performance rather than just short-term results.

 

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

 

Contrary to the general assertions of opponents of classified boards, Eastman’s classified board structure has not been a deterrent to orderly and significant change in the composition of the Board. Rather, over the last eight years the Nominating and Corporate Governance Committee has nominated at least one new director each year to serve on the Board. As a result, after 2000, over 90% of the members of the Board have been new to the Company. This orderly evolution of the Board is expected to continue due, in part, to the Company’s Bylaw provisions that require mandatory retirement and impose term limits on directors. And, as described under “Stock Ownership of Directors and Executive Officers,” stock ownership guidelines require each director to acquire and maintain a significant personal stake in the Company.

 

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

 

The Board of Directors recommends that you vote “AGAINST” 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, 2007 by each director, by each executive officer named in the Summary Compensation Table (under “Executive Compensation — Compensation Tables”), 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, 2007. 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, 2007.

 

 

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 their compensation, and the bases for the compensation of executive officers. The Compensation and Management Development Committee of the Board of Directors (“Compensation Committee”) establishes and administers the policies, programs, and procedures for evaluating, developing, and compensating our senior management.

 

We believe that our executive compensation program should:

 

 

 

 

 

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 and stock options) rather than cash, to create incentives for long-term performance and to promote alignment of executive pay with stockholder returns.

 

For 2007, 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 projects and research and development initiatives. Eastman’s objective is to leverage its heritage of expertise and innovation in acetyl, polyester, and olefins chemistries to drive growth, meet increasing demand, and create new opportunities for the Company’s products in key markets. The Company has recently announced and implemented significant corporate actions in each of its segments and in its industrial gasification projects to reposition the Company in key product and geographic markets.

 

Our 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 the new industrial gasification projects. The 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 maintains flexibility to meet changing employee, business, and market conditions.

 

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 risk 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 to align their interests with 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 participate in benefits plans generally available to all other employees. We have also entered into change in control agreements with certain of the executive officers and provide a modest program of executive perquisites and personal benefits as further described in this Compensation Discussion and Analysis and the tables that follow.

 

Mix of Total Compensation.  The following charts illustrate the percentage of total compensation for our CEO and our other named executive officers on average, respectively, represented by each element of compensation for 2007.

 

 

 

 

 

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

 

 

Review of 2007 Executive Compensation

 

The Compensation Committee reviewed overall compensation of the Chief Executive Officer and other named executive officers and determined each component of executive compensation for 2007 as described below.

 

The Compensation Committee also:

 

 

 

In connection with its review of external market data, the Compensation Committee has directly engaged Hewitt Associates (“Hewitt”) as its external compensation consultant. Under the terms of Hewitt’s engagement by the Compensation Committee, Hewitt reports to and receives its direction from the Compensation Committee and a representative of Hewitt attends each meeting of the Compensation Committee as its advisor. Hewitt provides the Compensation Committee with third-party survey information used in setting short- and long-term compensation levels, perspective on emerging trends in compensation issues, and expertise in incentive compensation structure, terms, and design. 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 intended to be competitive with comparable pay for similar jobs when target levels of corporate, organizational, and individual performance are achieved. The targeted levels of cash compensation are based upon information provided by the Compensation Committee’s compensation consultant and publicly available information. For 2007, 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 2007, the Compensation Committee compared total cash compensation levels for 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 analysis of this total cash benchmarking 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 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 2007, the Committee set the targeted cash pay for the executives within a range of 10% above or below the median level of the total cash compensation of the peer companies.

 

Base pay.  In early 2007, 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 2007.

 

Variable cash pay — Unit Performance Plan.  For 2007, 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 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 2007 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 pre-set goals established by the Compensation Committee. For 2007, 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 2007 earnings from operations ($615 million) corresponded to the Company’s operating earnings target under the annual business plan for 2007 as approved by the Board in late 2006. 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 GAAP 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 2006, the Compensation Committee evaluated the Company’s financial and strategic performance targets under its annual business plan for 2007 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 at or above the maximum. Linear interpolation is used to determine the awards if actual performance falls between any two stated points. The 2007 UPP threshold, target, and maximum adjusted earnings from operations targets for UPP award pool funding were:

 

 

Earnings from operations for 2007, as adjusted, were $669 million, resulting in a UPP award pool for all management level employees of $30.9 million, equivalent to 128% of aggregate target awards. The calculation of earnings from operations under the UPP for 2007 was adjusted to exclude the impact on financial results of asset impairments and restructuring charges in the Performance Polymers segments and CASPI segments and accelerated depreciation costs associated with previous asset shutdowns in the Performance Polymers and PCI segments. Results from the discontinued operations in the Performance Polymer segment, which are not included in GAAP earnings from continuing operations for 2007, were included in the calculation of earnings from operations under the UPP. These adjustments increased the calculated earnings from operations under the UPP by $165 million and resulted in a net increase of the UPP award pool for all participants of $13.9 million. The Compensation Committee may, in its discretion, adjust the award pool to reflect overall corporate performance and business and financial conditions; in 2007, 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 Committee’s assessment of his attainment of these objectives for 2007.

The other named executive officers participated in an organization consisting of all executive officers 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, but the sum of all individual awards within the organization cannot exceed the amount of the award pool allocated to the executive officers.

 

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 measurement of each executive officer’s performance against individual goals and expectations related to corporate and organizational performance compared to established earnings from operations targets and other performance targets and the officer’s contributions to improving financial results, executing strategies for value-creating growth, and building organizational capabilities to continue to deliver successful results. Considering recommendations from the Chief Executive Officer, the Compensation Committee approved payouts to the named executive officers.

 

The Compensation Committee reviewed Mr. Ferguson’s performance against his 2007 financial, organizational, and strategic objectives approved by the Board in early 2007. The Compensation Committee determined Mr. Ferguson’s UPP award in recognition of his and the Company’s performance in the areas of corporate revenue and earnings, financial discipline, cost reduction, asset and product portfolio restructuring and growth strategy development, meeting financial targets, operational excellence, achieving milestones in executing growth strategy initiatives, achieving customer and market milestones, optimizing core businesses, enhancing human resource objectives related to organization, staffing, and corporate culture initiatives, and managing and continually improving internal controls and corporate governance practices.

 

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 2007 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 analysis of this long-term stock-based pay benchmarking 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 pay for 2007 approximated the mid-range of total stock-based compensation of the compared companies. The current values of total stock-based incentive pay for 2007 ranged from 45% to 66% 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 2007, the Company determined to deliver 40% of the individual executive officer’s stock-based equity value as stock options. In determining the size of option awards, the 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.

 

Long-Term Performance Shares.  In 2007, the Company awarded performance shares for the 2008 -2010 performance period to each executive officer, representing 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. Previously, performance shares represented 50% of each executive officer’s annual stock-based equity value and options represented 50% of each executive officer’s annual stock-based equity value.

 

Performance is determined by comparing the Company’s multi-year performance as measured against a return on capital target established at the beginning of the three year performance period, and the Company’s total return to stockholders (change in stock price plus dividends declared during the performance period, assuming reinvestment of dividends) relative to a peer group of industrial companies comprising the Standard and Poor’s “Materials Sector” from Standard and Poor’s Super Composite 1500 Index. The return on capital target corresponds to the Company’s target under the annual business plan as approved by the Board. Performance relative to the total return to stockholder 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 Committee reviewed and certified performance results and approved a payout of shares to the executive officers under performance shares previously awarded for the 2005-2007 performance period. The following tables

show the targets and the payout matrix for the 2005-2007 performance shares corresponding to return on capital and total stockholder return targets:

 

 

 

Payouts under the 2005-2007 performance shares for the named executive officers ranged from 76,000 shares for the Chief Executive Officer to 7,030 shares, and represented 190% 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 6.3% in excess of the return on capital target.

 

Stock-Based Compensation Award Practices.  The Compensation Committee has historically granted 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 options and other stock-based awards annually in the fall, and to set effective dates for option grants on the third business day after the next release of quarterly financial results. This assures that the market price of the underlying common stock, and thus the exercise price of the options, reflects such results. During 2006 the Compensation Committee and the Audit Committee reviewed the Company’s past and current option grant practices and concluded that such practices, including Compensation Committee actions and oversight, timing, administration, recordkeeping, and accounting, have been and are appropriate and consistent with legal and accounting requirements and good practice.

 

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.

 

The Company paid certain one-time relocation expenses and costs for Mr. Costa, and he 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, particularly 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 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 Agreements” 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 in general, we consider these severance protections an important part of our executives’ compensation and consistent with competitive practices.

 

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 outstanding stock-based pay awards in the event of his termination without “cause” or his resignation for “good reason”, for 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 compensation 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 Agreements” 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 maintaining the flexibility to compensate the 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). The UPP allows the Compensation Committee to require, and certain stock-based awards under the Omnibus Plan not qualifying as deductible compensation require, the deferral of compensation into the Executive Deferred Compensation Plan to the extent that payout or vesting would result in the recipient receiving compensation in excess of the $1 million cap under Section 162(m).

 

A portion of each named executive officer’s compensation for 2007 was non-deductible to the Company under Section 162(m). The Compensation Committee determined not to require deferral of any of the non-deductible compensation. The anticipated amount of the Company’s taxes for non-deductible compensation in 2007 is $3 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 also structured deferred compensation arrangements to comply 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. The Compensation Committee has taken several actions to structure its deferred compensation arrangements so that they do not give rise to taxable income or excise taxes or penalties to executive officers under Section 409A.

 

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 for the last two completed years concerning compensation of Eastman Chemical Company’s Chief Executive Officer, Chief Financial Officer, and the Company’s three other most highly compensated executive officers for the year ended December 31, 2007.

 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

The following table sets forth certain information regarding grants in 2007 to the individuals named in the Summary Compensation Table of non-equity incentive awards, equity incentive awards, and all other non-incentive stock and option awards.

 

Grants of Plan-Based Awards