UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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Temple-Inland Inc.
(Name of Registrant as Specified In Its Charter)

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

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Notice of Annual Meeting
of Stockholders
and
Proxy Statement

 

 

1300 MoPac Expressway South
Austin, Texas 78746

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held Friday, May 4, 2007

 

 

If you need help in voting your shares, please call D. F. King & Co., Inc., our proxy solicitation firm, at (800) 714-3312.

 

 

You are invited to attend the meeting in person. Whether or not you plan to attend, please mark your vote on the enclosed proxy card, sign it, date it, and return it by mail or vote by telephone or on the internet. By voting before the meeting, your vote will be counted and we will know there are enough stockholders voting to hold a meeting. If you want to change your vote at the meeting, you may ask us to return your proxy at the meeting by following the instructions in Voting Information — Your Voting Instructions.

 

Table of Contents

 

1300 MoPac Expressway South

Austin, Texas 78746

 

PROXY STATEMENT

FOR ANNUAL MEETING OF STOCKHOLDERS

 

VOTING INFORMATION

 

Our Board of Directors seeks your proxy for use in voting at our 2007 annual meeting of stockholders to be held on Friday, May 4, 2007, and at any later meeting if the annual meeting is adjourned or postponed. This proxy statement and proxy card were mailed beginning on April 4, 2007 to all holders of our common stock entitled to vote at the annual meeting.

 

We have enclosed with this proxy statement our 2006 Annual Report to Stockholders, which includes audited financial statements. The Annual Report does not constitute any part of the material for the solicitation of proxies.

 

At the annual meeting, the stockholders will be asked to vote on the following proposals:

 

Proposal No. 1:  To elect four (4) directors to our Board of Directors. These four directors will serve as directors until their terms expire or, if later, until replacement directors are elected who meet all necessary qualifications.

 

Proposal No. 2:  To amend Article III, Section 2 of our By-laws to provide that directors will be elected by the majority vote of our stockholders.

 

Proposal No. 3:  To amend Article V of our Certificate of Incorporation to eliminate certain supermajority vote requirements.

 

Proposal No. 4:  To amend Article VI, Section 3 of our Certificate of Incorporation to provide that directors appointed to fill vacancies or newly created directorships will be subject to election at the next annual meeting.

 

Proposal No. 5:  To ratify the Audit Committee’s appointment of Ernst & Young LLP as independent registered public accounting firm for the year 2007.

 

The proxy card is designed to permit each stockholder entitled to vote at the annual meeting to:

 

 

The telephone and internet voting instructions serve the same purpose as the proxy card. When your proxy card or telephone or internet vote specifies a choice with respect to a voting matter, the proxies will vote your shares as you have specified. If you do not specify a voting choice on your proxy card, the proxies will vote your stock:

 

 

 

Voting your proxy will not affect your right to attend the annual meeting and vote in person.

 

 

You have the right to revoke your proxy by:

 

 

We must receive your notice of revocation or later dated proxy at or prior to the annual meeting for it to be effective.

 

On March 27, 2007, the record date for determining which stockholders are entitled to vote at this annual meeting, there were           shares of common stock issued and outstanding and entitled to vote at the annual meeting. No other class of stock is entitled to vote.

 

The presence at the annual meeting, in person or by proxy, of the holders of           shares (a majority of the number of shares of common stock issued and outstanding and entitled to vote as of the record date) is required to constitute a quorum to transact business. Proxies marked “abstain” will be counted in determining the presence of a quorum. Broker “non-votes” are shares held by brokers or nominees for which voting instructions have not been received from the beneficial owners or the persons entitled to vote those shares and the broker or nominee does not have discretionary voting power under rules applicable to broker-dealers. Each of the proposals to be voted on at the annual meeting is an item on which brokerage firms may vote in their discretion on behalf of their clients, even if such clients have not furnished voting instructions. Accordingly, there will be no broker non-votes on any of the proposals to be presented at the annual meeting. In deciding all matters that come before the annual meeting, each holder of common stock as of the record date is entitled to one vote per share of common stock.

 

Election of the director nominees named in Proposal No. 1 requires the affirmative vote of a plurality of the total number of votes cast at the annual meeting by the holders of shares of common stock. Votes may be cast in favor of or withheld with respect to all of the director nominees, or any of them. Abstentions, will not be counted as having been voted and will have no effect on the outcome on the vote on the election of directors, except to the extent the failure to vote for a nominee results in another nominee receiving a larger number of votes. Stockholders may not cumulate votes in the election of directors.

 

The affirmative vote of a majority of the votes cast by stockholders entitled to vote at the annual meeting, voting together as a single class, is necessary for the approval of stockholder Proposal Nos. 2 and 5.

Abstentions will not be counted as having been voted and will have no effect on the outcome on the votes for Proposal Nos. 2 and 5. The affirmative vote of at least 80 percent of all outstanding shares of common stock is required for approval of Proposal Nos. 3 and 4. Failures to vote and abstentions will have the same effect as a vote against Proposal Nos. 3 and 4.

 

 

We have adopted a confidential voting policy which provides that stockholder proxies, ballots, and voting tabulations that identify your vote will not be disclosed to our directors, officers, or employees. There are a few exceptions to this policy, such as when you make a comment on your proxy vote or when we must determine the legality of a vote.

 

 

 

The name, address and stock ownership of each person or group of persons known by us to own beneficially more than five percent (5%) of the outstanding shares of our common stock as of March 27, 2007 follows.

 

 

 

 

The following table sets forth information regarding the beneficial ownership of our common stock as of March 27, 2007 by:

 

 

We determined beneficial ownership as reported in the table in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (which we will refer to in this Proxy Statement as the Exchange Act). Unless otherwise indicated, beneficial ownership includes both sole voting and sole dispositive power. Even though SEC rules require reporting of all the shares listed in the table, the directors and executive officers do not claim beneficial ownership of all of these shares. For example, a director or executive officer might not claim ownership of shares owned by a relative. Unless otherwise indicated, the table does not include any shares that may be held by pension and profit-sharing plans of the corporations or endowment funds of educational and charitable institutions for which various directors and officers serve as directors or trustees.

 

 

 

 

We have not identified any person who failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. For this purpose, we only reviewed Forms 3, 4, and 5, amendments to these forms, and written representations supplied to us in lieu of Form 5 under the SEC’s Section 16 rules for the most recent fiscal year.

 

Our By-laws specify that the Board of Directors will establish by vote how many directors will serve on the Board. The By-laws also provide that the directors will be divided into three classes, which will as nearly as possible be equal in size. The Board of Directors has set the number of directors at thirteen (13), with two classes of four (4) directors each and one class of five (5) directors.

 

Directors are elected by a plurality of the votes cast by the stockholders at a meeting at which a quorum is present. Plurality means that the individuals who receive the largest number of votes cast are elected as directors up to the maximum number of directors to be chosen at the meeting. Consequently, any shares not voted (whether by abstention, broker non-votes or otherwise) have no impact in the election of directors.

 

 

Unless you specify otherwise on your proxy, the persons named in such proxy intend to vote for the election of the nominees listed below to serve as directors.

 

Directors will serve for a term of three (3) years, or until their replacements are duly elected and meet all requirements. All nominees are presently serving as directors. After review of their qualifications, the Nominating and Governance Committee recommended them as nominees to the full Board, and the full Board subsequently voted unanimously to recommend them to the stockholders as nominees. We did not pay a fee to any third party to identify or evaluate or to assist in identifying or evaluating potential nominees.

 

Nominees for Director to be Elected at the 2007 Annual Meeting of Stockholders

 

 

Each of the nominees has consented to being named in the proxy statement and to serve if elected. If any nominee becomes unavailable to serve, however, the persons named in the enclosed form of proxy intend to vote the shares represented by the proxy for the election of such other person or persons as may be nominated or designated by management, unless they are directed by the proxy to do otherwise.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS. CARLTON, DRAPER, JASTROW AND JOHNSON AS DIRECTORS OF TEMPLE-INLAND.

 

The following information is provided with respect to directors who will continue to serve as directors until the expiration of their terms.

 

Directors to Serve Until the 2008 Annual Meeting of Stockholders

 

Directors to Serve Until the 2009 Annual Meeting of Stockholders

 

 

Our Nominating and Governance Committee selects nominees on the basis of recognized achievements and their ability to bring various skills and experience to the deliberations of the Board, as described in more detail in the Corporate Governance Guidelines available on our website at www.templeinland.com. Nominees

must be independent as defined in the listing standards of the NYSE. Nominees must not have a prohibited conflict of interest with our business or ownership, including any regulatory conflicts due to our ownership of banking and financial services operations. Priority will be given to individuals with outstanding business experience and who currently serve or have served as the chief executive officer of a company.

 

Our Nominating and Governance Committee considers director candidates recommended by the directors. After reviewing a potential director’s qualifications, a suitable candidate will be invited to meet with the CEO and full board to determine if the candidate is a good fit with the rest of the Board.

 

Our Nominating and Governance Committee considers director candidates recommended by stockholders who are entitled to vote for the election of directors at the stockholders’ meeting and comply with the notice procedures described below. Pursuant to our By-laws, notice of a stockholder’s intent to nominate a candidate for the Board of Directors must contain certain specified information regarding the nominating stockholder and the nominee. Each notice must include the following information about the nominee:

 

 

Each notice must also include the following information about the nominating stockholder:

 

 

We may require any proposed nominee to furnish such other information as may reasonably be required by us to determine the eligibility of the proposed nominee to serve as a director.

 

Our Corporate Secretary must receive this information not less than 75 days nor more than 100 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. In the case of an annual meeting called for a date more than 50 days prior to such anniversary date or in the case of a special meeting of stockholders, the information must be received not later than the close of business on the 10^th day following the date on which notice of such annual meeting or special meeting is first mailed to stockholders or made public, whichever occurs first. On the last page, we have included the dates applicable to the next annual meeting of stockholders.

 

The Board of Directors has determined that the following Directors meet its independence standards, which are set forth in the Corporate Governance Guidelines on our website at www.templeinland.com: Afsaneh M. Beschloss, Donald M. Carlton, Cassandra C. Carr, E. Linn Draper, Jr., Larry R. Faulkner, James T. Hackett, Jeffrey M. Heller, James A. Johnson, W. Allen Reed, Richard M. Smith, Arthur Temple III, and Larry E. Temple. Mr. Jastrow, our Chairman, does not meet the independence standards because he is an employee and our CEO. The Board defines independence as meeting the requirements to be considered independent directors as defined under the current rules of the New York Stock Exchange. The Board has established the following additional guidelines to assist it in determining director independence:

 

1. If not otherwise prohibited by the rules of the NYSE, any commercial or charitable relationship that is not required to be reported in the proxy statement to stockholders will not be considered a material relationship that would impair a director’s independence.

 

2. To serve as a member of any committee of the Board, the director must meet any additional requirements of independence set forth in the committee’s charter or applicable law.

 

There were no material transactions or relationships between Temple-Inland and any director during 2006. In making its determination that all directors except Mr. Jastrow are independent, the Board considered all transactions with companies on which its directors are executive officers, but did not consider these transactions to be material because in each case they were less than 2% of our or the other company’s consolidated gross revenues.

 

In addition, the Board has considered that, from time to time, Guaranty Bank or one of its subsidiaries may make mortgage loans and/or provide home equity lines of credit to our directors, executive officers, or their immediate families. These mortgage loans and/or home equity lines of credit:

 

 

We may sell these mortgage loans and/or home equity lines of credit into the secondary market in the ordinary course of business.

 

Mr. Arthur Temple III is a director of Contractor’s Supplies, Inc., and members of Mr. Temple’s immediate family own approximately 11% of its outstanding capital stock. During 2006, in the ordinary course of business, subsidiaries of the Company sold building materials, lumber, and fiberboard to Contractor’s. Mr. Temple III is also a director, officer, and 662/3% stockholder of Demco Manufacturing Company. During 2006, in the ordinary course of business, Demco performed machinery repair services for subsidiaries of the Company. Mr. Temple III is an 8% partner in three partnerships, Diboll Leasing Company, DLCO, and DLCO I Ltd. that own and lease rail cars. During 2006, in the ordinary course of business, subsidiaries of the Company participated in transactions with DLCO and DLCO I Ltd. for rail car repairs, rail car rental, and management fees. The Board considered these transactions, but felt that they did not affect Mr. Temple III’s independence because he does not have a direct or indirect material interest in these transactions and they do not exceed the greater of $1 million or 2% of either company’s consolidated gross revenues.

 

Mr. W. Allen Reed retired as Chairman of General Motors Asset Management Corporation, or GMAM, in April 2006. The Board has considered that, from time to time, Guaranty Bank or one of its subsidiaries participated in syndicated financing transactions with General Motors Asset Management Corporation or an affiliate of GMAM.

 

The Board considered the fact that the Company has mineral interests that are leased by Anadarko Petroleum Corporation, whose CEO is James T. Hackett, or an affiliate of Anadarko, but felt that it did not affect his independence because he does not have a direct or indirect material interest in these transactions and they do not exceed the greater of $1 million or 2% of either company’s consolidated gross revenues.

 

There is no family relationship between any of the nominees, continuing directors and executive officers of Temple-Inland. Arthur Temple III and Larry E. Temple are not related.

 

We maintain a written policy and procedures for the review, approval, or ratification of any related party transactions that we are required to report under this section of the proxy statement. A related party, for purposes of our policy, means (i) any person who is, or at any time since the beginning of our last fiscal year was, a director or executive officer or a nominee for director, (ii) any person known to be the beneficial owner of more than 5% of our common stock, and (iii) any immediate family member of the foregoing persons.

 

Under the related party transaction policy, any transaction, arrangement or relationship between us and a related party must be reviewed by the Nominating and Governance Committee, except that the following transactions, arrangements or relationships are pre-approved under the policy:

 

 

We will only enter into transactions with related parties if they are in the best interest of the Company. The Nominating and Governance Committee will also consider whether the transaction is entered into on an arms length basis, whether it conforms to our Standards of Business Conduct and Ethics, and whether it impacts a director’s independence under applicable stock exchange rules. A director is not allowed to approve or vote on a related party transaction involving him/herself or his or her family members.

 

Leslie K. O’Neal is our Vice President and Secretary. Her spouse was employed by a subsidiary of Temple-Inland prior to the time that she became an executive officer and he retired last year. His compensation for 2006 was $52,910 salary and $102,518 in retirement benefits. This transaction was not reviewed under our related party transaction policy because the relationship was disclosed to the Board each year under our Standards of Business Conduct and Ethics, the Compensation Committee and Board approved the retirement plan in which he participates, and Ms. O’Neal did not participate in any decisions affecting her spouse’s compensation or employment, all of which were considered adequate controls.

 

We did not identify any transactions where the related party policies and procedures did not require review, approval or ratification or where the policies and procedures were not followed.

 

The Board performs a number of its functions through committees. All members and the chairman of our Audit Committee, Management Development and Executive Compensation Committee, and Nominating and Governance Committee are independent directors under the NYSE listing standards. Each committee’s charter expressly provides that the committee has the sole discretion to retain, compensate, and terminate its advisors. Current copies of the charters of our Audit Committee, Management Development and Executive Compensation Committee, and the Nominating and Governance Committee are available on our website at www.templeinland.com.  

 

A description of the functions of the Board committees and the members serving on these committees follows:

 

The Audit Committee assists the Board in its oversight of:

 

 

 

The Audit Committee has the sole authority to retain, compensate, and terminate the independent registered public accounting firm. The Board of Directors has determined that there is at least one audit committee financial expert serving on the Audit Committee, James T. Hackett, who is an independent director. In addition, the Board of Directors has determined, in its business judgment, that all members of the Audit Committee are financially literate and independent as defined in the NYSE corporate governance standards. The members of the Audit Committee are Mr. Hackett (Chairman), Ms. Beschloss, Dr. Carlton, Ms. Carr, Dr. Faulkner, Mr. Heller, Mr. Smith, and Mr. L. Temple. During 2006, the Audit Committee met nine (9) times.

 

The Management Development and Executive Compensation Committee (which we will refer to in this Proxy Statement as the Compensation Committee) is responsible for:

 

 

The Vice President and Secretary, Executive Vice President, and Chief Executive Officer recommend executive compensation amounts and programs to the Compensation Committee. Hewitt Associates LLC, a compensation consultant, is engaged by the Compensation Committee to provide market data regarding executive compensation and advice about proposed compensation programs and amounts. The Compensation Committee obtains specific data from Hewitt Associates on an annual basis and at other times upon request. The Compensation Committee also invites a Hewitt Associates representative to attend meetings of the committee from time to time. The Compensation Committee meets with the Hewitt Associates representative in executive session periodically. Once the full Board approves any compensation recommendations of the Compensation Committee, administration of the compensation programs is delegated to the Vice President and Secretary.

 

The members of the Compensation Committee are Mr. Johnson (Chairman), Ms. Carr, Dr. Draper, Mr. Hackett, and Mr. Heller, all of whom are independent as defined in the NYSE corporate governance standards. During 2006, the Compensation Committee met four (4) times.

 

There are no Compensation Committee interlocks among the members of the Board and no member of the Compensation Committee has a transaction reported under Certain Relationships and Related Transactions.

 

The Nominating and Governance Committee:

 

 

 

The Vice President and Secretary, Executive Vice President, and Chief Executive Officer recommend director compensation amounts and programs to the Nominating and Governance Committee. Hewitt Associates LLC, a compensation consultant, is engaged by the Nominating and Governance Committee to provide market data regarding director compensation and advice about proposed director compensation programs and amounts. The Nominating and Governance Committee obtains specific data from Hewitt Associates on an annual basis and at other times upon request. The Nominating and Governance Committee also invites a Hewitt Associates representative to attend meetings of the committee from time to time. The Nominating and Governance Committee meets with the Hewitt Associates representative in executive session periodically. Once the full Board approves any director compensation recommendations of the Nominating and Governance Committee, administration of the compensation programs is delegated to the Vice President and Secretary.

 

The members of the Nominating and Governance Committee are Mr. Reed (Chairman), Ms. Beschloss, Dr. Carlton, Dr. Faulkner, Mr. Smith, Mr. Temple III, and Mr. L. Temple, all of whom are independent as such term is defined in the NYSE corporate governance standards. During 2006, the Nominating and Governance Committee met four (4) times.

 

The Executive Committee may exercise all the authority of the Board of Directors in the management of the business and affairs of the Company except:

 

 

The members of the Executive Committee are the Chairman of the Board, who serves as Chairman of the Executive Committee, and the Chairman of each standing committee of the Board: Mr. Jastrow, Mr. Hackett, Mr. Johnson, and Mr. Reed. During 2006, the Executive Committee did not meet.

 

During 2006, the Board of Directors met four (4) times. Each director attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by all committees of the Board on which he or she served. Health permitting, all Board members are expected to attend our annual meeting of stockholders. In 2006, all Board members attended the annual meeting of stockholders, except Ms. Beschloss. The Board holds regularly scheduled executive sessions of the Board with only non-management directors present. A session with only independent directors was held in conjunction with each of the four (4) regularly scheduled Board meetings in 2006. The Chairmen of the Audit, Compensation, and Nominating and Governance Committees serve as presiding director to lead non-management executive sessions of the Board on a two-year rotation cycle.

 

Stockholders and other interested parties may communicate with non-management directors by forwarding their written comments to an independent third party that has agreed to forward the comments to the presiding director with a copy to our General Counsel. As of the date of this proxy statement, such independent third party is The Network and such comments may be sent to:

The Network

333 Research Court

Norcross, GA 30092

Attention: Call Center — Temple-Inland

 

Alternatively, interested parties may send an email to The Network at www.tnwinc.com/webreport.

 

The current presiding director is James T. Hackett. Any changes in the presiding director or the independent third party for purposes of communicating with the presiding director after publication of this proxy statement will be posted on our website at www.templeinland.com.

 

The Director compensation program is designed in recognition of the time commitment and preparations required for Directors to fulfill their responsibilities and to better align Director compensation with stockholder returns. Alignment with stockholders is emphasized through stock ownership requirements, an annual phantom stock grant, and the ability to receive phantom shares in lieu of fees. The Director Retirement Plan that previously existed was frozen in 2000. The current program consists of the following compensation components:

 

 

No cash compensation was paid to the Directors in 2006. To further align the interest of the Board with stockholders, we offer a phantom stock match of 133% if Directors agree to defer all or a portion of their fees until they retire from Board service. In 2006 all of the Directors elected to defer their fees until retirement.

 

Our director fee schedule is as follows:

 

Director Fee Schedule

 

Temple-Inland

 

 

Guaranty Bank

(Guaranty Bank is a subsidiary of Temple-Inland that has outside directors on its board.
Three of the Temple-Inland directors also serve on the Guaranty Bank board.
The following fees are paid in cash by Guaranty.)

 

 

Directors may retire at any time, but must retire by the annual meeting following their 72nd birthday. Directors are reimbursed for expenses incurred in attending Board and committee meetings, including those for travel, food and lodging.

 

Directors receive a grant of 20,000 options at the time of their initial election to the Board. Options are granted at fair market value on the grant date, which is the date of the board meeting at which the director is elected. The option vests in 3 installments: 8,000 shares on the first anniversary, 8,000 shares on the second anniversary, and 4,000 shares on the third anniversary of the date of election. The option term is ten years. We do not have any program, plan or practice to time option grants to our directors in coordination with the release of material non-public information. We do not set the grant date of stock option grants to new directors in coordination with the release of material non-public information. We do not time our release of material nonpublic information for the purpose of affecting the value of director compensation.

 

We have computed the value of our director compensation program as shown in the following chart in accordance with SEC requirements. The fair value of restricted stock, performance stock units, and stock options was determined in accordance with Statement of Financial Accounting Standards No. 123(R). Fair value of the option awards was determined using the Black-Scholes-Merton option pricing model.

Assumptions used in the SFAS 123(R) calculation are described in Note 6 — Share-Based Compensation to the Consolidated Financial Statements contained in our 2006 Form 10-K. SFAS 123(R) requires us to calculate the value of the phantom shares acquired through deferral of fees and match using the stock price on the date the fees are earned. However, directors do not receive any payment until they retire. At retirement, a director receives actual shares of common stock and cash equal in value to the phantom stock shares held in his or her account. The value of the shares and cash received on the date the director retires may be different than the value of phantom shares received at the time the fee is earned. Mr. Jastrow receives no compensation for his service as a director other than his employee pay.

 

 

 

 

 

At fiscal year end 2006, the directors held the following aggregate number of phantom shares in the Fee Deferral Plan: Ms. Beschloss — 25,467; Dr. Carlton — 25,240; Ms. Carr — 16,969; Dr. Draper — 15,971; Dr. Faulker — 9,764; Mr. Hackett — 47,470; Mr. Heller — 19,467; Mr. Johnson — 37,279; Mr. Reed — 41,475; Mr. Smith — 1,657; Mr. Temple III — 35,626; and Mr. L. Temple — 42,188.

 

For additional information see the section entitled “Fee Deferral Plan.”

 

 

Directors are required to hold Temple-Inland stock valued at five times their annual retainer fee under the Board’s stock ownership guidelines. This stock ownership policy is contained in our Corporate Governance Guidelines, which are available on our website at www.templeinland.com. Shares of stock owned by the directors and their immediate family members count toward this requirement. Phantom shares also count toward this requirement. All directors meet the stock ownership requirements, except for Mr. Smith, who has five years from his November 2006 election to comply with the ownership guidelines.

 

Directors may participate in a fee deferral plan that encourages stock ownership by granting a match of 133% in the form of phantom stock units on amounts deferred until retirement. The number of phantom stock units is determined by dividing the deferred amount by the fair market value of Temple-Inland’s stock on the date deferred.

 

Dividend equivalents are credited on the phantom stock equal to the amount of dividends Temple-Inland pays on stock. The dividend equivalents are reinvested in more shares of phantom stock. At retirement, the director will receive stock for fees deferred through 2005 and cash for fees deferred beginning in 2006 in payment of the phantom stock units. Cash payments will be based on the fair market value of the stock on the payment date. Fair market value in all cases is equal to the closing price of Temple-Inland stock on the NYSE on the applicable date. Payment may be taken in a lump sum or in up to 15 annual installments.

 

If a director chooses cash payment on a current basis instead of deferring their fees, they do not receive a match. The annual phantom stock grant is not matched, but does earn dividend equivalents that are reinvested until retirement.

 

For example, suppose a director defers the following fees in 2006:

 

 

The director does not get any payment until retirement.

 

Directors may retire at any time, but must retire by the annual meeting following their 72nd birthday. There is no retirement plan for directors except for a plan that was frozen in 2000. Under that plan, the following directors will receive at retirement $35,000 per year for the following number of years as a retirement benefit: Mr. Johnson — 1 year; Mr. Reed — 1 year; Mr. Temple III — 17 years; and Mr. L. Temple — 10 years. Retirement benefits will be paid to the surviving spouse if the director does not live to receive the full payment, and terminate if the spouse does not live to receive the remaining payment. This plan was discontinued in 2000 and no additional accruals will be made under this plan.

 

Both the directors’ fee deferral plan and the frozen directors’ retirement plan contain provisions for accelerating payment in the event the director’s service terminates due to a change in control, along with a gross-up provision in the event the director is required to pay excise tax on the accelerated payment.

 

In 2006, the Temple-Inland Foundation, a tax-exempt foundation funded by contributions from Temple-Inland, made a $5,000 donation to a charity or educational institution chosen by each director. Directors are also eligible for the Foundation’s matching gifts program, which matches donations made by employees and directors 3-for-1 for the first $1,000; 2-for-1 for the next $1,000; and 1-for-1 for the next $1,000, for total possible matching donations of up to $6,000 per person. Dr. Faulkner, Mr. Temple III and Mr. L. Temple also serve on the Guaranty Bank board. In 2006, Guaranty Bank made a $2,500 donation to a charity or educational institution chosen by each of its directors.

 

 

Directors are covered under our business travel accident insurance policy for $100,000 while traveling on our business. Directors are also covered under our director and officer liability insurance policies for claims alleged in connection with their service as a director. We have entered into indemnification agreements with each of our directors agreeing to indemnify them to the fullest extent permitted by law for claims alleged in connection with their service as a director.

 

Compensation Discussion and Analysis

 

Our executive compensation philosophy is that a significant part of our executives’ compensation is tied to our performance. This helps motivate our executives to drive performance. Our key objective is to maximize long-term stockholder value by maximizing return on investment (ROI). Companies able to generate ROI that exceeds their cost of capital create value for stockholders. Your Board of Directors and your management team are committed to a focused strategy and execution of strategic initiatives to maximize ROI.

 

Our strategy and execution continue to deliver results. The charts below show (a) our ROI over the last 4 years compared with a weighted industry peer group and (b) our total shareholder return over the last 4 years compared with an industry peer group and the S&P 500:

 

ROI versus Weighted Peer Group ROI*

 

 

* Weighted by company investment

 

Comparison of 4 Year Cumulative Total Return

Assumes Initial Investment of $100

 

Peer Group Includes:

 

Abitibi-Consolidated Inc.

 

Bowater Inc.

 

Caraustar Industries Inc.

 

Domtar Inc.

 

International Paper Co.

 

Longview Fibre Co.

 

MeadWestvaco Corporation

 

Packaging Corp. of America

 

Smurfit-Stone Container Corp.

 

Weyerhaeuser Co.

 

The peer group consists of companies that compete with us in the paper and forest products industry. We periodically adjust the peer group to reflect mergers, consolidations, and similar restructurings. In computing ROI, we define ROI as operating income, adjusted for significant unusual items divided by parent company total assets, less certain assets and certain current liabilities. In computing the weighted peer group ROI, we use the definition above and sum the adjusted operating income for the peers divided by the sum of the adjusted total assets for the peers.

 

Our governance practices divide responsibility for compensation oversight into 3 levels:

 

 

Our policy for setting the timing of stock option grants does not allow executives to have any role in choosing the price of their options or other stock awards. We do not “back date,” “spring load” or reprice options or other stock awards. Our general practice is to make annual grants each year at the February board meeting. The Compensation Committee approves awards, including the specific number of shares granted to specific individuals, which are ratified by the full Board and valued at the closing price of our common stock

on the NYSE on the Board meeting date. On occasion, newly hired high-level employees may be granted awards by the Compensation Committee in connection with the start of their employment other than at the February board meeting. Any such grants are ratified by the full Board and are priced at the closing price of our common stock on the NYSE on the date of the Board meeting at which the award is approved. We do not have any program, plan or practice to time option grants or other stock awards in coordination with the release of material non-public information nor do we time the release of material nonpublic information for the purpose of affecting the value of executive compensation.

 

Our executive compensation program is designed to attract, retain, and motivate key executives to maximize ROI and performance. We provide a competitive compensation package, including:

 

 

Cash bonuses are considered on an annual basis based on overall and segment ROI. Stock awards reward long-term performance and align our executives’ interests with stockholders by encouraging stock ownership. Both cash bonuses and long-term stock awards are designed to align the executives’ interests with our business strategy and motivate performance to maximize ROI. Stock awards also help retain executives because they contain forfeiture provisions if the executive terminates employment other than for retirement, death or disability. Retirement and health and welfare benefits help to retain executives. We designed retirement formulas to reward long-term service. Change in control agreements help ensure that our executives continue to work in the best interest of our stockholders and help alleviate concerns during any potential change in control situations that might otherwise lead the executives to work somewhere else.

Why do some reports show our compensation as high, low, or average?

 

Because our pay is heavily performance-driven, we believe you should examine all of the factors used in any analysis. We have no control over the companies selected by others for comparison purposes. The peer group we use consists of companies that compete with us in the paper and forest products industry and is the same or similar peer group used by many analysts covering the paper and forest products industry. In reviewing reports, you should always look to see which companies are selected for comparison purposes. In some cases, reports may use companies for comparison purposes that do not produce the same types of products or compete in the same industries as us. In other cases, the comparator companies may be much larger or smaller than us, or have much higher debt or a different capital structure.

 

Yes. The Compensation Committee currently uses Hewitt Associates LLC (Hewitt) as its compensation consultant. Hewitt provides annual market and other specific information on executive pay and also attends Compensation Committee meetings on request of the Committee. The Compensation Committee periodically meets in executive session with Hewitt. Hewitt also serves as consultant to the Nominating and Governance Committee on director compensation.

 

With the Compensation Committee’s approval, Temple-Inland retains Hewitt to prepare the change in control calculations for disclosure in the proxy statement and to model the number of shares to be requested for new stock plans. From time to time in the past, Hewitt occasionally performed limited assignments for Temple-Inland regarding non-executive employees on a non-exclusive basis along with other compensation consultants. Different representatives of Hewitt performed these assignments who do not report to the Hewitt

representative who works with the Compensation Committee. Hewitt was not retained for any such assignments in 2006.

 

Yes, tally sheets for each of the named executive officers are reviewed by the Compensation Committee and the full Board for compensation each year. These tally sheets list the executive’s salary, proposed bonus and stock awards, and the 401(k) matching contribution, retirement, health and welfare benefits. In addition, the Compensation Committee and Board review a wealth accumulation chart with respect to the CEO.

 

Our policy is to obtain the maximum possible tax deduction for compensation paid to executive officers, but we may forego all or some portion of a deduction to conform to our compensation goals and objectives. Our Compensation Committee adopted a policy requiring the deferral of any compensation that exceeds $1 million for the named executives. This is the maximum permissible deduction under Section 162(m) of the Internal Revenue Code (without regard to certain exceptions for performance based and certain other types of compensation). Pay is deferred and paid at a later date when the maximum deduction under Section 162(m) may be taken. Except for amounts that are not material, all compensation paid in 2006 should qualify for a deduction under Section 162(m). In 2006, our Compensation Committee revised the policy to waive mandatory deferral of pay related to vesting of restricted stock units (except for the CEO) and payment of dividends on restricted stock and performance stock units.

 

For accounting purposes, salaries, bonuses, the fair value of stock based compensation and other benefits are charged to expense as earned. For tax purposes, salaries, bonuses and other benefits are taken as a tax deduction when paid to the executive or contributed to a tax-qualified retirement plan subject to the Section 162(m) limitation described above. For tax purposes, stock based compensation awards are generally taken as a tax deduction when the award is vested or exercised by the executive.

 

Our Compensation Committee which is composed entirely of independent, outside directors establishes and administers compensation programs and philosophies. Our Vice President and Secretary, Executive Vice President, and Chief Executive Officer work closely with the Compensation Committee and recommend executive compensation amounts, except that the CEO does not participate in discussions regarding his own compensation. These executives consult with the other executive officers about compensation amounts for executives and other employees who report to them. The Compensation Committee has final approval of all compensation amounts or formulas applicable to benefit plans in which executive officers participate.

 

The Compensation Committee establishes, administers, and approves bonus programs for non-executive employees and approves the aggregate amount of bonus pools for each business segment. Each executive officer recommends individual bonus amounts for employees under his or her direction, and the Executive Vice President or Group Vice President in charge of the applicable business segment approves the individual amounts.

 

The Compensation Committee approves all stock award recipients and the amount of each award. No executive is involved in setting the exercise price of the awards.

 

The Compensation Committee has delegated to the Chief Executive Officer the responsibility for approving health and welfare programs for all employees. Executive officers participate in the same health and welfare programs as other salaried employees. Our benefit programs require executives who earn more to pay more for their benefits.

 

The Compensation Committee has also delegated to certain of our executive officers the responsibility to maintain the tax qualification status of the retirement and 401(k) plans, to approve retirement and 401(k) plan

provisions and formulas applicable to employees who are not executive officers, and to oversee the administration of all of the plans.

 

In addition, an investment committee, whose members are executive officers, oversees the investment of retirement plan assets and 401(k) plan fund choices. The investment committee reports annually to the Board.

 

The full Board completes an evaluation of the CEO each year, which is compiled confidentially by Hewitt and provided to the Compensation Committee. Factors evaluated include ROI and other financial and non-financial performance measures and objectives, including leadership, strategic planning, financial results, succession planning, human resources/EEO, communications, external relations, ethics, and board relations.

 

The Compensation Committee and full Board determine CEO pay with assistance from Hewitt. The Compensation Committee discusses CEO pay in executive session and reports its recommendations to the Board. The Board approves all actions with respect to the CEO’s compensation.

 

Generally speaking, each element of compensation is evaluated independently to determine whether it is competitive within the industries with which we compete, or within the market as a whole. Each element of compensation is described in more detail in the following pages.

 

Certain types of pay that have very long-term goals, such as retirement, are monitored for competitiveness annually but the formula is rarely changed. Only salary and bonus are taken into account for retirement formula purposes.

 

Other types of pay, such as salary, short-term incentives, and long-term incentives, are monitored for competitiveness annually. Individual amounts granted under these programs may vary from year to year based on competitive practices and/or stock prices, but the overall programs are changed less frequently.

 

Once a year, the Compensation Committee views a tally sheet that shows all elements of pay as a total. The Compensation Committee and board also view the charts shown in the proxy statement during the same meeting in which annual compensation decisions are made. Although the Compensation Committee has not established specific preset allocation formulas to determine the proportion of each type of pay in relation to other types of pay, it generally tries to maintain a balance between the different types of pay:

 

Year to year, the allocation may vary, but the overall mix is strongly weighted to pay for performance. For the CEO, the 2006 mixture was weighted as follows:

 

 

 

In keeping with our focus on performance, Mr. Jastrow was awarded only performance stock units for his long-term incentive compensation in 2007; he was not awarded any options or restricted stock units. In addition, the mix of long term incentive awards for other senior executives was weighted more toward performance stock units. Performance stock units may be paid at 100% if top quartile performance is achieved or 75% if second quartile performance is achieved. No payment will be made if performance is not in the top two quartiles compared with our peer group.

 

Salaries are maintained at competitive levels considering the performance and longevity of the employee’s service. To ensure that our compensation remains competitive, the Compensation Committee from time to time reviews information from independent surveys of comparative companies. Since the market for executive talent extends beyond any particular industry, the survey data include both companies in the industry as well as companies outside the industry. For example, in 2006 the group of comparative companies included Bemis Company, Inc., Boise Cascade Corporation, International Paper Company, Martin Marietta Materials, Inc., MeadWestvaco Corporation, Owens Corning, Packaging Corporation of America, Pactiv Corporation, Potlatch Corporation, PPG Industries, Inc., Rohm and Haas Company, Smurfit-Stone Container Corporation, Sonoco Products Company, Texas Industries, Inc., Trinity Industries, Inc., Vulcan Materials Company, and Weyerhaeuser Company. At the request of the Compensation Committee, Hewitt uses data from these companies to establish the relationship between revenues and compensation from which a market value of pay can be calculated for a specific revenue size, using a statistical technique known as regression analysis. Surveys that indicate base salaries for most of our named executive officers were generally in the mid-ranges of the applicable comparative companies. Salaries are reviewed periodically and were increased in 2006 to remain competitive to the mid-range and to reflect changes in individual officers’ responsibilities. In making its salary decisions, the Compensation Committee places its emphasis on the particular executive’s experience, responsibilities, and performance. No specific formula is applied to determine the weight of each factor. The Compensation Committee has historically followed a policy of using incentive bonus awards rather than base salary to reward outstanding performance.

 

Bonuses are based largely on the ROI of the group or business segment in which the individual is a key employee. For administrative officers, such as the CEO, CFO and Executive Vice President, bonuses are based on our consolidated ROI. The employee’s personal performance and the degree to which the employee’s actions have laid the groundwork for future earnings and ROI are also factors considered by the Compensation Committee. ROI performance of the business segment is given greater weight than other business accomplishments in determining bonus payments. The types and relative importance of specific financial and other business factors vary among the executives depending on their positions and the particular operations or functions for which they are responsible. For example, executives may be given a bonus for accomplishing specific objectives or projects, including successful completion of acquisitions, divestitures, or restructurings.

 

Under a stockholder-approved plan designed to qualify for an exemption under Internal Revenue Code Section 162(m), the Compensation Committee established a potential maximum bonus award to the Chief Executive Officer for 2006 equal to the cash value of 172,500 phantom shares and a potential maximum bonus award to each other named executive officer equal to the cash value of 150,000 phantom shares. Under the

bonus formulas, each of the executive officers was eligible to receive a bonus payment if performance met pre-established ROI or earnings criteria. The Compensation Committee has designed a program that provides for acceleration of bonuses to the extent we exceed estimated cost of capital. No bonus is paid unless a certain threshold is met, then bonuses are paid at a straight line progression until cost of capital is reached. To the extent cost of capital is reached, there is an acceleration factor — higher bonuses are possible after cost of capital is achieved. The Compensation Committee retained discretion to pay less than the amount indicated by the bonus formula. The Compensation Committee reviewed actual ROI and earnings after the end of the year and determined in its business judgment the size of each executive’s actual award.

 

We grant 3 types of stock awards to executive officers:

 

 

A dollar value is established for the stock awards in consultation with Hewitt after reviewing competitive market data for similar executives at other companies inside and outside the paper and forest products industries. This dollar value may be at or above the mid-range of what other companies may offer in any given year.

 

Restricted stock units contain a minimum ROI threshold. Performance stock units are awarded in addition to the other stock awards. Performance stock units are only paid if our ROI performance is in the top half compared to our peer companies as listed under the ROI table. No performance stock units are paid if performance is below the top half compared to the peer group.

 

The Compensation Committee also considers previous grants, tenure, and responsibilities of the executive. In the case of a new key executive, or an executive assuming new responsibilities, an initial grant may be made above targeted levels.

 

The stock awards have the following terms:

 

 

In 2006, our Stock Incentive Plan and all outstanding awards were amended to provide for equitable adjustment in the event of stock splits or other equity restructurings. Awardees generally will receive the same adjustment stockholders receive. Previously, such adjustments were discretionary, but in practice were always made to keep employees whole.

 

Yes. Our Compensation Committee has approved and the Board has ratified the payment of regular quarterly dividends on restricted stock units equivalent to dividends paid on our common stock. These units are treated by us as owned by the executive on the grant date and are subject to forfeiture if the executive leaves before the vesting period is over or minimum ROI criteria is not met. Therefore, the executive receives the benefit of dividends until such time as he or she forfeits the stock units. In that way, the executive is treated as though he or she is a stockholder (though without voting rights), which aligns his or her interest to our stockholders. It is also a retention incentive, because executives will have to weigh the possibility of losing the dividends if they do not stay through the vesting period.

 

Regular quarterly dividends are not paid on performance stock units granted in 2007 or later. For performance stock units granted before 2007, Regular quarterly dividends are paid on the targeted number of shares.

 

Yes. To further align executives’ financial interests with those of our stockholders, the Compensation Committee adopted minimum stock ownership guidelines for these executives:

 

Value of Ownership of Stock as a Multiple of Annual Salary

 

 

Shares owned by the executive and his or her immediate family members count toward the ownership guidelines. Shares held in the 401(k) plan, restricted stock and performance stock units also count toward the total.

 

The named executive officers all meet the stock ownership guidelines.

 

Yes. Executive officers identified in our Annual Report on Form 10-K (i.e., our Section 16 officers) are required to hold 100 percent of the net shares acquired through the exercise of options in Temple-Inland stock until they meet our ownership guidelines. The Compensation Committee maintains discretion to reduce or eliminate future long-term incentive awards for an executive who is not making adequate progress toward meeting the stock ownership guidelines or does not retain the required level of net shares acquired through the exercise of options in Temple-Inland stock.

 

No. Gains from exercising stock options, the vested value of restricted stock units or performance stock units, or dividends on restricted stock units or performance stock units are not considered in setting other benefits such as life insurance, disability benefits, or retirement benefits.

 

Yes. Executive officers may defer all or part of their bonus under our phantom stock arrangement. There is no above-market or preferential earnings on deferred compensation. The executive must decide to defer in the year prior to the year in which he or she earns the bonus. For example, by the end of 2006, an executive could decide to defer the bonus he or she might earn working in 2007. The 2007 bonus is otherwise actually determined in February 2008.

 

When a bonus is approved, the dollar amount of the bonus is divided by the fair market value of our common stock on the NYSE on the board meeting date when the bonus is approved. For example, suppose an executive defers $24,000 of his bonus under the plan. On the date of the Board meeting, the fair market value of the stock is $40. We make a book entry of 600 phantom shares to the phantom account ($24,000 ¸ $40 = 600 shares).

 

We also pay a match on the deferred compensation equal to 2% of the amount deferred multiplied by the number of years of deferral. The maximum match is 20%. A match is vested if the executive has worked for Temple-Inland for 3 years. There is a minimum deferral period of 5 years. In the above example, if the executive deferred a bonus for 5 years, he or she would have a match of 2% X 5 years =10% X 600 shares= 60 shares.

 

During the 5 year deferral, the 660 shares in the phantom stock account earn dividends equal to the dividends paid on our stock. The dividends are used to purchase more shares of phantom stock.

 

In 5 years, we would pay the executive (either in cash or actual stock depending on the time of the deferral) 660 shares of stock plus any shares earned as dividends.

 

Phantom shares do not confer any voting rights.

 

As noted above, executives can also be required to defer part of their salary or bonus to the extent it exceeds $1 million. Executives were awarded bonuses under a stockholder-approved plan with performance-based criteria that exempted the bonuses from the $1 million deduction limitation. During 2006, none of the executives deferred their salary or bonuses. Several executives continued to earn dividends on amounts that were deferred in previous years, which are included in the Summary Compensation Table set out below. Executives may also defer any restricted stock or performance stock units that vest. Mr. Jastrow has deferred receipt of previously granted restricted stock and performance stock units until retirement.

 

Yes. The named executive officers receive the same tax-qualified retirement benefits as other salaried employees within their business segments. All of the named executives participate in a defined benefit plan.

 

Yes. Early retirement may be taken at age 55 or later if the employee has five years of service, but benefits are reduced for each year prior to age 62 by factors ranging from 3% to 6% based on years of service. Under the Supplemental Executive Retirement Plan (described below), a designated executive can retire with actuarial reduction of benefits of 5% per year for each year before age 60 if he has attained age 55 and has 20 years of service. The table below lists the executives who are eligible for early retirement and the projected monthly payment in the form of a joint and 50% survivor annuity assuming each retired on January 1, 2007:

 

 

Instead of the monthly amount listed above, Mr. Jastrow could receive payment in the form of a $6,793 joint and 50% survivor annuity for his tax-qualified benefit and a lump sum of $9,234,892 for his nonqualified benefit.

 

Yes. The Internal Revenue Code limits the amount of compensation that can be used in calculations under a tax-qualified defined benefit retirement plan. In 2006, this limit was $220,000. As a result, any retirement benefits that cannot be paid under our tax-qualified defined benefit plan due to these limitations are paid under a SERP, which is not a tax qualified plan. The SERP also provides unreduced retirement at age 60 with 15 years of service for designated executives, including Mr. Jastrow, Mr. Levy, Mr. Maley, and Mr. Simons. Under this plan, the designated executive’s retirement benefits from all retirement plans will be at least equal to 50% of the executive’s final average compensation for the highest five years out of the last ten years of employment. Benefits are reduced for early retirement, which may be taken at age 55 with 20 years of service, by 5% for each year prior to age 60. Benefits may be taken by designated executives in a lump sum amount or a monthly annuity amount. The lump sum is calculated based on the 30-year Treasury rate set in the previous November. This supplemental plan is unfunded and contains a provision for acceleration of payment in the event of a change in control. The SERP is a valuable incentive to attract executives who are leaving career-based retirement plans at other companies. It is also a valuable retention tool for existing executives who must meet service criteria to qualify for the plan. Mr. Levy formerly participated in a defined contribution plan and SERP when he worked for the Financial Services segment. His balance under the defined contribution plan and SERP will offset any amount he receives under the defined benefit plan and SERP.

 

No. Extra years of credited service are granted only under our change in control agreements with executive officers and our CEO employment agreement but not for any other reason.

 

Yes. We offer 401(k) plans to all of our salaried and non-union hourly employees. For each dollar that an employee contributes to his or her 401(k) savings account, we contribute a match of $1 up to 3% of the employee’s compensation. For each $1 that an employee contributes of his or her next 3% of pay, we contribute 50 cents. There is a maximum match of $4,000 each year. The match is vested 34% after 1 year of employment, 67% after 2 years, and fully vested after 3 years of employment.

 

Yes. We offer the same health and welfare benefits to all salaried employees. These benefits include medical benefits, dental benefits, vision benefits, life insurance, salary continuation for short-term disability, long-term disability insurance, accidental death and dismemberment insurance, dependent care spending account, health care spending account, health savings account, and other similar benefits. Because these benefits are offered to a broad class of employees, the cost is not required by SEC rules to be included in the Summary Compensation Table set out below. The named executive officers generally pay more for their medical benefits than other employees who receive less compensation. Executives and other salaried employees may participate in a post-retirement health plan that provides access to health coverage. We pay a one-time contribution equal to $600 per year of service up to 2004 under a frozen plan for this coverage. Once the employee exhausts this contribution, he or she must pay the full cost for coverage.

 

No, we do not have a plan or policy to provide severance benefits to executives whose employment terminates. Generally speaking, severance is a matter that is individually negotiated with the executive and the amount depends on the circumstances of his or her departure. The CEO is the only executive who has an employment agreement with pre-established severance benefits, other than the change in control agreements discussed below. In return for the post-employment benefits, the CEO agreed not to compete with our company for two years after his departure.

 

If an executive leaves under circumstances that call into question whether any compensation amounts paid to him or her were validly earned, we would pursue any legal rights we deemed appropriate under the circumstances.

 

Yes. During a potential change in control, we do not want executives leaving to pursue other employment out of concern for the security of their jobs or being unable to concentrate on their work. To enable executives to focus on the best interest of our stockholders, we offer change in control agreements that provide severance benefits to executives whose employment terminates as a result of a change in control. Except for long-term incentive compensation and for the CEO’s agreement, all agreements require a “double trigger” of both a change in control and a termination of employment before any benefits are paid. Vesting of long-term incentive compensation is accelerated when there is a change in control event. The CEO agreement provides for a limited window of time during which the CEO can leave the organization with full benefits following a change in control.

 

 

The following table summarizes all compensation earned in 2006 by our Chief Executive Officer, our Chief Financial Officer, and the three most highly compensated executive officers other than our Chief Executive Officer and our Chief Financial Officer who were serving as executive officers at year-end 2006: