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
(Amendment No. 1)

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McAfee, Inc.

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McAfee, Inc.
3965 Freedom Circle
Santa Clara, California 95054

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD THURSDAY, JUNE 17, 2010

 

 

 

You are cordially invited to join us at the annual meeting of stockholders of McAfee, Inc. on Thursday, June 17, 2010, at 2:00 p.m. Pacific Daylight Time at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054.

 

Our 2010 annual meeting of stockholders will be held for the following purposes:

 

1. To elect three Class III directors for two-year terms;

 

2. To approve our 2010 Equity Incentive Plan;

 

3. To approve our 2010 Director Equity Plan;

 

4. To ratify the appointment of Deloitte & Touche LLP as our independent public accountants for the year ending December 31, 2010; and

 

5. To transact any other business as may properly come before the meeting or any adjournment or postponement of the meeting.

 

Only stockholders owning our shares at the close of business on April 27, 2010 are entitled to attend and vote at the meeting. For ten days prior to the meeting, a complete list of these stockholders will be available during ordinary business hours at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054.

 

It is important that your shares are represented and voted at the annual meeting. Whether or not you plan to attend the annual meeting, please complete, sign, date and promptly return the accompanying proxy in the enclosed postage-paid envelope or vote by telephone or the Internet by following the instructions on the proxy card. Returning the proxy does not deprive you of your right to attend the annual meeting.

 

If you plan to join us at the meeting, please go to http://investor.mcafee.com/annual-proxy.cfm to complete the registration form. The deadline for registration is June 11, 2010. All stockholders who attend the meeting will be required to present valid government-issued picture identification, such as a driver’s license or passport. Check-in will begin at 1:30 p.m. Pacific Daylight Time.

 

On behalf of our board of directors, I would like to thank you for your continued interest in McAfee. I look forward to seeing you at the annual meeting.

 

By order of our board of directors,

 

 

Mark D. Cochran

Executive Vice President,
Chief Legal Officer/General Counsel

Santa Clara, California

April 30, 2010

 

TABLE OF CONTENTS

 

McAfee, Inc.
3965 Freedom Circle
Santa Clara, California 95054

 

The accompanying proxy is solicited by our board of directors for use at the 2010 annual meeting of stockholders to be held on Thursday, June 17, 2010, at 2:00 p.m. Pacific Daylight Time at our corporate headquarters located at 3965 Freedom Circle, Santa Clara, California 95054, or any adjournment or postponement of the meeting. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.

 

We will bear the cost of soliciting proxies and we will reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to stockholders. We may use the services of our officers, directors, and others to solicit proxies, personally or by telephone, without additional compensation. We have engaged the firm of Morrow & Co., LLC, 470 West Ave, Stamford, Connecticut 06902, to assist us in the solicitation of proxies. We have agreed to pay Morrow & Co. a fee of $6,000 plus expenses for these services.

 

In some instances, we may deliver only one copy of this proxy statement to multiple stockholders sharing a common address. If requested in writing, we will promptly provide a separate copy of this proxy statement to a stockholder sharing an address with another stockholder. Requests in writing should be sent to our corporate secretary at our corporate headquarters. Stockholders sharing an address who currently receive multiple copies and wish to receive only a single copy should contact their broker or send a signed, written request to us at the address above.

 

These proxy solicitation materials will be mailed to all stockholders entitled to vote at the meeting, beginning on or about May 14, 2010.

 

We are mailing or otherwise delivering to you the proxy statement, proxy card and annual report on Form 10-K for the year ended December 31, 2009. These proxy materials are also available to you on the Internet. The proxy statement, proxy card and annual report on Form 10-K for the year ended December 31, 2009 are available at investor.mcafee.com. You may access your proxy card on the Internet by following the instructions on the proxy card included at the end of the proxy statement. Please note that you will not be required to provide any personal information, other than the identification number provided on the proxy card, to execute a proxy.

 

Who may vote?  You may vote if you own shares of our stock at the close of business on April 27, 2010 (the “record date”). As of the record date, there were 155,993,948 shares outstanding.

 

Can I revoke my proxy or change my vote?  Yes. Subject to any rules that your broker, trustee or nominee may have, if you are a stockholder whose shares are registered in your name, you may revoke your proxy or change your vote at any time before your proxy is voted at the annual meeting by:

 

 

If you hold your shares in “street name” (through a broker, bank or other nominee), you cannot revoke your proxy and will not be permitted to vote in person at the meeting unless you first obtain a legal proxy issued in your name from your broker, bank or other nominee (which is referred to as the “record holder”).

 

What is the minimum number of stockholders that must attend for the meeting to be valid?  The holders of a majority of the outstanding shares of our stock as of the record date must be present in person or by proxy for the meeting to be authorized to transact business. This minimum number of required shares is referred to as a “quorum.”

How many votes are required to approve an item of business?  Each of the three directors will be elected if he receives the affirmative vote of a majority of the shares of stock present or represented and voting for the election of directors at the meeting. Stockholders may not cumulate their votes, which means that they cannot allocate more than one vote to a director candidate for each share they hold. If a director nominee fails to receive the required number of votes for re-election, our board of directors (excluding the director in question) will, within 90 days after certification of the election results, decide whether to accept the director’s previously-submitted conditional resignation. Absent a legitimate business purpose for the director to remain on our board of directors, our board will accept the resignation.

 

All other proposals require the affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting.

 

We count abstentions for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of votes cast with respect to a proposal. Accordingly, abstentions on a given proposal generally will have the same effect as a vote against the proposal, except to the extent that abstentions do not contribute to the affirmative vote required. In the election of directors, a nominee will be elected if the votes cast “for” the nominee constitute a majority of the shares of common stock present or represented by proxy and voting at the meeting and also constitute at least a majority of the required quorum. We count broker non-votes (shares held by a broker for which the beneficial stockholder has not given specific voting instructions) for purposes of determining the presence or absence of a quorum for the transaction of business, but not for purposes of determining the number of votes cast with respect to the particular proposal. Thus, a broker non-vote is not deemed to be a vote cast and, accordingly, will not affect the outcome of the voting on the proposals at the meeting.

 

What is the effect of not casting my vote if my shares are held in street name?  If you hold your shares in street name it is critical that you cast your vote if you want it to count in the election of directors (Item 1 of this proxy statement). In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of directors, your bank or broker was allowed to vote those shares on your behalf in the election of directors as they felt appropriate. Recent changes in regulation were made to take away the ability of your bank or broker to vote your uninstructed shares in the election of directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote in the election of directors, no votes will be cast on your behalf. Similarly, your bank or broker will not have discretion to vote uninstructed shares on stockholder proposals (Items 2 and 3 of this proxy statement). Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of our independent registered public accounting firm (Item 4 of this proxy statement).

 

What is the deadline for making stockholder proposals for next year’s annual meeting of stockholders?  In order for stockholder proposals to be considered at the 2011 annual meeting, stockholders who wish to present proposals at that meeting must submit their proposals so that we receive them no later than April 18, 2011 but no earlier than March 19, 2011 (not less than 60 calendar days nor earlier than 90 calendar days before the one-year anniversary of the date of the preceding year’s annual meeting). If the date of next year’s annual meeting is changed by more than 30 days before or after the anniversary date of this year’s annual meeting, then our corporate secretary must receive the proposal by the close of business on the later of (i) 90 calendar days prior to next year’s annual meeting, or (ii) ten calendar days following the day on which we first publicly announce the date of next year’s annual meeting. For such a stockholder proposal to be included in our proxy statement and proxy card, we must receive it no later than February 18, 2011 (not less than 120 calendar days before the one-year anniversary of the date of the preceding year’s annual meeting), and also it will need to comply with the procedures set forth in our bylaws and Rule 14a-8 as promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding the inclusion of stockholder proposals in company-sponsored proxy materials. Proposals should be addressed to:

 

McAfee, Inc.
Attn: Corporate Secretary
3965 Freedom Circle
Santa Clara, CA 95054
Fax: (408) 346-5348

Under our bylaws, a stockholder’s notice of business to be brought before an annual meeting must set forth, as to each proposed matter: (1) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (2) the name and address, as they appear on our books, of the stockholder proposing such business and any Stockholder Associated Person (as defined below); (3) the class and number of shares held of record or beneficially owned by the stockholder or any Stockholder Associated Person and any derivative positions held or beneficially held by the stockholder or any Stockholder Associated Person; (4) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of the stockholder or any Stockholder Associated Person with respect to any of our securities, and a description of any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares), the effect of which is to mitigate loss to, or manage the risk or benefit from share price changes for, or increase or decrease the voting power of, the stockholder or any Stockholder Associated Person with respect to any of our securities; (5) any material interest of the stockholder or a Stockholder Associated Person in such business; and (6) a statement whether either the stockholder or any Stockholder Associated Person will deliver a proxy statement and form of proxy to holders of at least the percentage of our voting shares required under applicable law to carry the proposal. Stockholder’s must also supplement their notice no later than ten calendar days following the record date to disclose the information contained in items (3) and (4) above as of the record date. A “Stockholder Associated Person” of any stockholder is (x) any person controlling, directly or indirectly, or acting in concert with, that stockholder, (y) any beneficial owner of shares of stock owned of record or beneficially by that stockholder and on whose behalf the proposal or nomination, as the case may be, is being made, or (z) any person controlling, controlled by or under common control with that person referred to in the preceding items (x) and (y).

 

A stockholder desiring to recommend a nominee to the governance and nominations committee should review all of the requirements contained in our bylaws that address the process by which a stockholder submit a notice of business to be brought before an annual meeting. Our bylaws are available on our investor relations website at investor.mcafee.com under “Governance Documents.”

 

The rules of the Securities and Exchange Commission (“SEC”) establish a different deadline for submitting stockholder proposals that are not intended to be included in our proxy statement with respect to discretionary voting. The discretionary vote deadline for the 2011 annual meeting of stockholders is March 30, 2011 (45 calendar days prior to the anniversary of the mailing date of this proxy statement). If the date of next year’s annual meeting of stockholders is changed by more than 30 days from this year’s annual meeting, then notice must be received a reasonable time before we send our proxy materials for the 2011 annual meeting. If a stockholder gives notice of a proposal after the discretionary vote deadline, our proxy holders will be allowed to use their discretionary voting authority to vote against the stockholder proposal when and if the proposal is raised at our 2011 annual meeting of stockholders. We have not been notified by any stockholder of his or her intent to present a stockholder proposal from the floor at this year’s annual meeting of stockholders.

 

Proposal No. 1 — Election of Directors

 

The total number of authorized directors is ten, and we currently have ten board members. Our board of directors is divided into three classes, with three members in each of Classes I and III and four members in Class II. At our 2009 annual meeting, our stockholders approved our amended and restated certificate of incorporation to effect the gradual declassification of our board structure such that, from and after the 2012 annual meeting, all directors would be subject to annual election.

 

Director Qualifications

 

Our board of directors believes that it is necessary for each of the company’s directors to possess many qualities and skills. When searching for new candidates, the governance and nominations committee, working with the full board, considers the evolving needs of our board of directors and searches for candidates that fill any current or anticipated future gap. Our board also believes that all directors must possess a considerable amount of business

management (such as experience as a chief executive officer or chief financial officer) and educational experience. The governance and nominations committee considers a candidate’s management experience, judgment, background, stature, conflicts of interest, integrity, diversity and commitment to the goal of maximizing stockholder value when considering director candidates. With respect to the nomination of continuing directors for re-election, the individual’s contributions to our board are also considered. The process undertaken by the governance and nominations committee in recommending qualified director candidates is described below under “Board of Directors and Board Committees — Identification and Evaluation of Candidates for Board Membership.”

 

Director Nominees

 

Our board of directors has nominated three Class III directors for election to a two-year term at the 2010 annual meeting. All of the nominees for election at this meeting are currently directors. Messrs. O’Leary and Pangia were previously elected by the stockholders in 2008. Mr. Darcy was appointed to our board of directors in 2008.

 

If elected, Messrs. Darcy, O’Leary and Pangia each would serve as a Class III director until the annual meeting in 2012, or until his earlier death, resignation or removal from our board of directors. Each nominee will be elected as a director if he receives the affirmative vote of the holders of a majority of the shares of stock present or represented and voting for the election of directors at the meeting.

 

The following paragraphs provide information as of the date of this proxy statement about each nominee. The information presented includes information each director has given us about all positions he holds, his principal occupation and business experience for the past five years, and the names of other publicly-held companies of which he currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each nominee’s specific experience, qualifications, attributes and skills that led our board to the conclusion that he should serve as a director, we also believe that all of our director nominees have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated knowledge of the software industry and an ability to exercise sound judgment, as well as a commitment to our company and our board of directors. Finally, we value their significant experience on other public company boards of directors and board committees.

 

See “Directors, Executive Officers and Corporate Governance” below for additional detail regarding our board of directors, including the specific experience and qualifications of each member of our board of directors who is not currently up for election.

 

Thomas E. Darcy has been a director of our company since January 2008. Since August 2007, Mr. Darcy has served as executive vice president, chief financial officer and director of Tocagen Inc., a biopharmaceutical company. Mr. Darcy previously served as executive vice president for strategic projects at Science Applications International Corporation, a provider of scientific, engineering, systems integration and technical services and solutions, since November 2005, and retired in April 2007. Prior to that, Mr. Darcy served Science Applications International as corporate executive vice president beginning in December 2003, executive vice president beginning in October 2000, and as chief financial officer from October 2000 through November 2005. Prior to joining Science Applications International, Mr. Darcy was with the accounting firm currently known as PricewaterhouseCoopers LLP from 1973 to 2000, where he served as partner from 1985 to 2000. Mr. Darcy brings to our board of directors substantial financial expertise that includes extensive knowledge of the complex financial and operational issues facing large companies, and a deep understanding of accounting principles and financial reporting rules and regulations. Additionally, Mr. Darcy’s experience as an independent auditor provides our board with significant insight into the preparation of financial statements and knowledge of audit procedures.

 

Denis J. O’Leary has been a director of our company since July 2003. From 1993 to 2003, Mr. O’Leary was executive vice president of J.P. Morgan Chase & Co., having joined the bank in June 1978. During his career at J.P. Morgan Mr. O’Leary held a number of senior positions including director of finance, chief information officer, and head of retail branch banking. Mr. O’Leary currently serves on the board of directors of Fiserv, Inc. Mr. O’Leary is a business executive with significant expertise in finance and private investment. Mr. O’Leary’s long-term service on our board has provided him with valuable insight and institutional knowledge of our history and development.

Robert W. Pangia has been a director of our company since April 2001. Since 2003, Mr. Pangia has been a general partner and a managing member of Ivy Capital Partners, LLC, a private equity fund. From October 2007 to December 2009, Mr. Pangia served as chief executive officer of Highlands Acquisition Corp., an AMEX-traded special purpose acquisition company. Prior to 2003, Mr. Pangia was self-employed as a private investor. From 1987 to 1996, Mr. Pangia held a number of senior level management positions at PaineWebber Incorporated, including director of investment banking. Mr. Pangia currently serves on the board of directors of Biogen Idec Inc. Mr. Pangia served on the board of directors of ICOS Corporation from April 1991 until February 2007. Mr. Pangia’s service on other public company boards has provided him with valuable experience. Through Mr. Pangia’s private equity and investment banking experience, he brings extensive expertise in analyzing numerous aspects of a company’s business, including strategy, organizational design and planning as well as formulating and driving strategic direction and change.

 

Our board of directors recommends that you vote “for” the election of Messrs. Darcy, O’Leary and Pangia as Class III directors.

 

Proposal No. 2 — Approval of Our 2010 Equity Incentive Plan

 

Our board of directors believes that we must offer a competitive equity incentive program if we are to continue to successfully attract and retain the best possible candidates for positions of substantial responsibility within the company. Our current form of company-wide equity plan, the 1997 Stock Incentive Plan (the “1997 Plan”), was first adopted in 1997. Although we have amended the 1997 Plan from time to time, we believe it appropriate to adopt a new form of company-wide equity plan consistent with current best compensation practices. Accordingly, the compensation committee of our board of directors has adopted our 2010 Equity Incentive Plan (the “Plan”), subject to, and effective as of, approval from our stockholders at the 2010 annual meeting.

 

If stockholders approve the Plan, there will be no further grants of equity-based awards under the 1997 Plan. However, the 1997 Plan will continue to govern awards previously granted under it. In addition, forfeited or cancelled shares subject to awards under the 1997 Plan and certain stock plans assumed in connection with our acquisitions would return to the share reserve of the Plan. The maximum aggregate number of shares that may be issued under the Plan is 12,600,000 shares plus any shares available for issuance under the 1997 Plan. As of the record date, no benefits or amounts relating to the additional 12,600,000 shares have been received by, or allocated to, any individuals.

 

The Plan is also designed to allow us to deduct in full for federal income tax purposes the compensation recognized by our executive officers in connection with certain awards granted under the Plan. Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), generally denies a corporate tax deduction for annual compensation exceeding $1 million paid to the chief executive officer and other “covered employees” as determined under Section 162(m) of the Code and applicable guidance (“Section 162(m)”). However, certain types of compensation, including performance-based compensation, are generally excluded from this deductibility limit. To enable compensation in connection with stock options, stock appreciation rights and certain restricted stock grants, stock units, performance shares and performance units awarded under the Plan to qualify as “performance-based” within the meaning of Section 162(m), the Plan limits the sizes of such awards as further described below. By approving the Plan, our stockholders will be approving, among other things, eligibility requirements for participation in the Plan, performance measures upon which specific performance goals applicable to certain awards would be based, limits on the numbers of shares or compensation that could be made to participants. For a summary of the terms of the Plan, please see Appendix A to this proxy statement.

 

Our board of directors expects that the Plan will be an important factor in attracting, retaining and rewarding the high caliber employees essential to our success and in providing incentive to these individuals to promote the success of the company. The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

Our board of directors recommends a vote “for” the approval of our 2010 Equity Incentive Plan.

 

If stockholders do not approve the Plan we would soon be unable to continue making grants under our 1997 Plan. This would make it extremely difficult for us to attract and retain talent. If this proposal is approved, we expect to have an adequate number of shares to continue making grants consistent with recent practices for the next two to three years. The table below sets forth certain information relating to our equity plans and outstanding awards as of March 31, 2010, and as of that date after giving effect to the approval of the Plan.

 

 

 

 

Proposal No. 3 — Approval of Our 2010 Director Equity Plan

 

Equity-based incentives are vital to our ability to attract and retain outstanding and highly skilled individuals to serve on our board of directors. Our current form of director equity plan, the Amended and Restated 1993 Plan for Outside Directors (the “Prior Plan”), was first adopted in 1993. Although we have amended the Prior Plan from time to time, we believe it appropriate to adopt a new form of director equity plan consistent with current best compensation practices and with the form of the Plan described in Proposal No. 2 above. Accordingly, the compensation committee of our board of directors has adopted our 2010 Director Equity Plan (the “Director Plan”), subject to, and effective as of, approval from our stockholders at the 2010 annual meeting.

 

If stockholders approve the Director Plan, there will be no further grants of equity-based awards under the Prior Plan. However, the Prior Plan will continue to govern awards previously granted under it. In addition, forfeited or cancelled shares subject to awards under the Prior Plan would return to the Director Plan. The maximum aggregate number of shares that may be issued under the Director Plan is equal to the number of shares available for issuance under the Prior Plan. We are not asking for any increase in the maximum aggregate number of shares that may be granted under these plans. The formula and mechanics for determining the amount, timing and type of automatic equity grants to outside directors set forth in the proposed Director Plan are identical to those set forth in the Prior Plan. The sole purpose of this proposal is to adopt a new form of director equity plan consistent with current best compensation practices and with the form of the Plan described in Proposal No. 2 above. For a summary of the terms of the Director Plan, please see Appendix B to this proxy statement.

Our board of directors believes that the Director Plan is necessary so that we can continue to provide meaningful, long-term equity based incentives to present and future outside directors. With increasing workloads, greater exposure and more stringent independence standards, recruiting and retaining board members has become challenging. Concerns over executive compensation are drawing greater attention to corporate governance, board independence and board compensation. The SEC’s disclosure rules also bring greater visibility and scrutiny to board and executive compensation.

 

We believe that it is in the best interests of the company and our stockholders to have a new equity incentive plan for outside directors and are asking stockholders to approve the Director Plan. The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

Our board of directors recommends a vote “for” the approval of our 2010 Director Equity Plan.

 

Proposal No. 4 — Ratification of Independent Public Accountants

 

The audit committee of our board of directors has selected Deloitte & Touche LLP (“Deloitte”), an independent registered public accounting firm, to audit our financial statements for the year ending December 31, 2010. This selection is being presented to the stockholders for ratification at the meeting as a matter of good corporate practice, though the approval of the stockholders is not actually required. A representative of Deloitte is expected to attend the annual meeting in order to respond to appropriate questions from stockholders and will have the opportunity to make a statement if the representative so desires or to respond to appropriate questions from stockholders. Amounts presented below relate to services for the years ended December 31, 2009 and 2008 without regard to the timing of the actual payment for the services.

 

 

 

 

Our audit committee charter includes a requirement that the audit committee of our board of directors pre-approve the services provided by our independent public accountants, including both audit and non-audit services. The pre-approval of non-audit services performed by our independent public accountants includes making a determination that the provision of the services is compatible with maintaining the independence of our independent accountants. All of the services performed by Deloitte described above under the captions “Audit-Related Fees,” “Tax Fees” and “Other Fees” were pre-approved by our audit committee.

 

The affirmative vote of the holders of a majority of the shares of stock present or represented and voting at the meeting will be required to approve this proposal.

 

Our board of directors recommends a vote “for” ratification of the appointment of Deloitte & Touche LLP as our independent public accountants.

 

The names of our director nominees, continuing directors and current executive officers and related biographical information are set forth below.

 

Directors Nominees and Continuing Directors

 

Executive Officers

 

 

Director Biographies

 

Information pertaining to Messrs. Darcy, O’Leary and Pangia may be found in the section above entitled “Proposal No. 1 — Election of Directors.”

 

Carl Bass has been a director of our company since January 2008. Mr. Bass joined Autodesk, Inc, a design innovation technology company, in 1993 and currently serves as its chief executive officer, president and director. From 2004 to 2006, Mr. Bass served as chief operating officer. From 2002 to 2004, Mr. Bass served as senior executive vice president, design solutions group. From 2001 to 2002, Mr. Bass served as executive vice president, emerging business and chief strategy officer. Mr. Bass’ experience as chief executive officer and in various other executive roles at Autodesk has provided him with broad leadership and executive experience. Mr. Bass’ expertise contributes business operational knowledge and strategic planning skills, along with knowledge important to our corporate development and mergers and acquisitions activities.

 

Jeffrey A. Miller has been a director of our company since May 2008. He has served as president of JAMM Ventures Inc., a consulting and venture capital firm, since 2002. From 2002 to 2007, Mr. Miller also served as a venture partner with Redpoint Ventures, a venture capital firm focused on investments in information technology. Prior to his tenure at Redpoint, Miller served as chief executive officer of Documentum, Inc., a provider of content and storage management software, from 1993 to 2001. Mr. Miller served on the board of directors of Data Domain, Inc. from December 2003 until it was acquired by EMC Corp. in July 2009. His considerable experience in venture capital and extended tenure as chief executive officer of Documentum have provided him with a deep understanding of the software and technology industry. Mr. Miller also has significant experience in joint venture and mergers and acquisition transactions, which is experience that is valuable to our board of directors.

 

Anthony Zingale has been a director of our company since May 2008. Mr. Zingale currently serves as interim chief executive officer for Jive Software, Inc., where he has served on the board of directors since January 2008. He served as president, chief executive officer and director of Mercury Interactive, a provider of business technology optimization (BTO) solutions that included the quality, performance, availability and governance of enterprise software applications, from 2004 until it was acquired by Hewlett Packard at the end of 2006. Mr. Zingale joined the board of directors of Mercury Interactive in 2002. Mr. Zingale was a private investor from 2001 to 2004. From 2000 to 2001, Mr. Zingale served as president of Nortel Network’s billion-dollar eBusiness Solutions Group. Prior to that, Mr. Zingale served as president and chief executive officer of Clarify, a customer relationship management (CRM) provider, from 1997 until it was acquired by Nortel Networks in 2000. Mr. Zingale has a deep understanding of the software and technology industry. His experience as chief executive officer of Clarify, Mercury Interactive and Jive Software has provided him with broad leadership and executive abilities. Mr. Zingale’s outside board experience as director of several public companies enables him to provide valuable insight and guidance to our management team and board of directors.

Leslie G. Denend has been a director of our company since June 1995. From December 1997 to April 1998, Mr. Denend was president of our company. From 1993 to 1997, Mr. Denend was chief executive officer and president of Network General Corporation, which merged with McAfee Associates to form McAfee, Inc. Mr. Denend serves on the board of directors of Exponent, Inc., Verifone, Inc. and United Services Automobile Association (USAA). Mr. Denend’s service on several other boards of directors over his career, and his service on our board since 1995, have provided him with significant board-level experience, as well as valuable insight and institutional knowledge of our history and development. As a result, Mr. Denend is able to provide our management team and board of directors with essential strategic, operational and corporate governance guidance.

 

David G. DeWalt has served as our chief executive officer and president, and as a director, since April 2007. Prior to joining McAfee, Mr. DeWalt served as executive vice president and president customer operations and content management software, at EMC Corporation from 2005 to 2007 and as its executive vice president, EMC Software Group from 2003 to 2005. EMC is a provider of information infrastructure technology and solutions. Mr. DeWalt joined EMC in 2003 upon its acquisition of Documentum, Inc., where he served as its chief executive officer and president from 2001 to 2003. Prior to joining Documentum, Mr. DeWalt was founding principal and vice president of Eventus Software, a web content software company, where he was responsible for marketing and sales, consulting services and support, product management and business development. Mr. DeWalt currently serves on the board of directors of Polycom, Inc., a provider of telepresence, voice and video conferencing solutions. As our chief executive officer, Mr. DeWalt has superior knowledge of our business and brings to our board of directors unique insight and knowledge of our operations and strategic opportunities. Mr. DeWalt’s extensive executive experience with other publicly-traded software companies also enables him to provide critical guidance with respect to our mergers and acquisition transactions.

 

Lorrie M. Norrington has been a director of our company since December 2009. Ms. Norrington joined eBay, Inc, a provider of online marketplaces for the sale of goods and services and online payment services, in 2005 and currently serves as president, eBay marketplaces. From 2006 to 2008, Ms. Norrington served eBay as president, international marketplaces. From 2005 to 2006, Ms. Norrington served as chief executive officer of Shopping.com, an online comparison shopping business. Prior to that, Ms. Norrington worked for Intuit, Inc., a provider of business and financial management software solutions, from 2001 to 2005. From 2002 to 2005, Ms. Norrington served as executive vice president, small business and personal finance. From 2001 to 2002, Ms. Norrington served Intuit as senior vice president, small business. Prior to that, Ms. Norrington served in a variety of roles with General Electric Company over a twenty-year period. Ms. Norrington served on the board of directors of Shopping.com, Inc. from 2004 until March 2005. Ms. Norrington is a business executive of a publicly-traded company with substantial international experience. Ms. Norrington has a strong understanding of the issues we face as a global corporation expanding into new territories, and will provide valuable insight to our management team and board of directors.

 

Charles J. Robel has been a director of our company since June 2006 and has served as the non-executive chairman of our board of directors since October 2006. He served as a managing member and chief operating officer at Hummer Winblad Venture Partners, a venture capital fund, from 2000 to 2005. Mr. Robel began his career at PricewaterhouseCoopers LLP, from which he retired as a partner in 2000. Mr. Robel currently serves on the board of directors of Autodesk, Inc., DemandTec, Inc., a provider of optimization services for retailers and consumer products companies, and Informatica Corporation, a provider of enterprise data integration software. Mr. Robel served on the board of directors of Adaptec, Inc., a provider of innovative data storage hardware and software solutions, from March 2006 until December 2007. Mr. Robel’s extensive service as a board member of several other technology and software companies enables him to provide essential strategic and corporate governance leadership to our management team and board of directors. In addition, Mr. Robel brings to our board of directors substantial financial expertise that includes extensive knowledge of the complex financial and operational issues facing large publicly-traded companies, and a deep understanding of accounting principles and financial reporting rules and regulations.

 

Executive Officer Biographies

 

Information pertaining to Mr. DeWalt, who is both a director and an executive officer, may be found in the section above entitled “Director Biographies.”

Albert A. “Rocky” Pimentel has served as our chief financial officer and chief operating officer since May 2008. Prior to that, Mr. Pimentel served as executive vice president and chief financial officer of Glu Mobile, Inc., a publisher of mobile games, since 2004. Prior to joining Glu Mobile, Mr. Pimentel served as executive vice president and chief financial officer of Zone Labs, Inc., an end-point security software company, from 2003 until it was acquired in 2004 by Checkpoint Software, Inc. From 2001 to 2003, he served as a partner of Redpoint Ventures. Prior to joining Redpoint, he served as chief financial officer for WebTV Networks, Inc., a provider of set-top Internet access devices and services acquired by Microsoft Corporation, and LSI Logic Corporation, a semiconductor and storage systems developer. Mr. Pimentel currently serves on the board of directors of Seagate Technology LLC, a manufacturer of hard drives and storage solutions.

 

Mark D. Cochran has served as our executive vice president, chief legal officer/general counsel since September 2007. Prior to joining McAfee, Mr. Cochran served as vice president and general counsel of Hyperion Solutions Corporation, a provider of business performance management software, from 2005 to 2007. Prior to joining Hyperion, Mr. Cochran was vice president, general counsel and secretary of Brocade Communications Systems, Inc., a storage networking company, from 2003 to 2004. From 1999 to 2003, he served as vice president and general counsel at AvantGo, a provider of mobile enterprise software and now subsidiary of Sybase Inc.

 

Michael P. DeCesare was appointed executive vice president, worldwide sales operations in October 2007. Prior to that, Mr. DeCesare served as senior vice president, worldwide field operations of EMC Corporation, from 2004 to 2007, and as executive vice president of worldwide field operations for Documentum (then a division of EMC), from 2002 until 2004. Prior to joining Documentum, Mr. DeCesare served as executive vice president, worldwide sales and alliances, at Asera Inc., a provider of e-business infrastructure that accelerates implementation of enterprise software applications, from 2001 to 2002.

 

Todd W. Gebhart has served as our executive vice president and general manager, consumer, small and mobile business since 2008. Mr. Gebhart joined us in 1999 to lead our OEM, service provider and outsider sales teams. Mr. Gebhart assumed responsibility for our consumer business in 2002, our mobile business in 2004 and our small business in 2007. Prior to joining us, Mr. Gebhart was vice president of sales at Alaris, a provider of online video compression technology. Mr. Gebhart began his career at IBM where he held a variety of sales and management positions.

 

Keith S. Krzeminski has served as our chief accounting officer since March 2008. Mr. Krzeminski has also served as our senior vice president, finance since joining us in March 2007. Prior to that, Mr. Krzeminski served as senior vice president and chief financial officer of Home Interiors & Gifts, Inc., a marketer and manufacturer of home décor products, from 2005 to 2006. Before joining Home Interiors & Gifts, Mr. Krzeminski worked for Electronic Data Systems Corporation (“EDS”), a global information technology services company, where he served in several capacities during his six-year tenure. From 2004 to 2005, he served as vice president of planning and financial analysis. Mr. Krzeminski served as chief financial officer of EDS’ product lifecycle management software and services business, from 2003 to 2004. From 2002 to 2003, Mr. Krzeminski served as global finance director of EDS’ applications and information technology consulting business. Mr. Krzeminski joined EDS in 1999 as chief accounting officer, where he served until 2002.

 

Gerhard Watzinger has served as our executive vice president, worldwide strategy and business development and general manager, data protection, since 2008. Prior to that, Mr. Watzinger served as our senior vice president and general manager of our data protection business unit. Mr. Watzinger joined us in November 2007 upon our acquisition of SafeBoot, a provider of data protection software, where Mr. Watzinger served as chief executive officer from 2004 to 2007. From 2003 to 2004, Mr. Watzinger was the chief executive officer of Mascot Systems, a subsidiary of iGATE focused on offshore information technology operations. From 1998 to 2003, Mr. Watzinger served as senior vice president of iGATE’s staffing and solutions operations. Mr. Watzinger currently serves on the board of directors of Mastech, an information technology consulting and outsourcing company.

 

Our executive officers serve at the discretion of our board of directors. There are no family relationships among any of our directors and executive officers.

Board Leadership Structure and Board’s Role in Risk Oversight

 

Our board separated the positions of chairman of the board and chief executive officer in 2006 and elected Mr. Robel, a non-employee independent director, as non-executive chairman of our board of directors. Mr. Robel also serves as our “lead” independent director for presiding over executive sessions of our board of directors without management. Mr. DeWalt serves as our chief executive officer and president. Separating the positions of chairman of the board and chief executive officer allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the board to lead our board in its fundamental role of providing advice to and independent oversight of management. Our board recognizes the time, effort, and energy that our chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as our board’s oversight responsibilities continue to grow. While our bylaws and corporate governance guidelines do not require that our chairman and chief executive officer positions be separate, our board believes that having separate positions and having an independent outside director serve as chairman is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

 

Risk is inherent with every business and we face a number of risks, including strategic, financial, business and operational, legal and compliance and reputational. Management is responsible for the day-to-day management of risks the company faces, while our board of directors, as a whole and assisted by its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are appropriate and functioning as designed.

 

Our board of directors believes that full and open communication between management and the board of directors is essential for effective risk management and oversight. Our board meets with our chief executive officer and other senior management at quarterly board meetings to discuss strategy and risks facing the company. Periodically, senior management delivers presentations to our board or a board committee regarding strategic matters and matters involving material risk. Our board also holds strategic planning sessions with senior management to discuss strategies, key challenges, and risks and opportunities for the company.

 

While our board of directors is ultimately responsible for risk oversight, our board committees assist the board in fulfilling its oversight responsibilities in certain areas of risk. The audit committee assists our board in fulfilling its oversight responsibilities with respect to risk management in the areas of internal control over financial reporting and disclosure controls and procedures, legal and regulatory compliance, and discusses with management and the independent auditor guidelines and policies with respect to risk assessment and risk management. The audit committee discusses with management our major financial risk exposures and the steps management has taken to monitor and control such exposure. The compensation committee assists our board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs, and succession planning for our directors and executive officers. The nominating and governance committee assists our board in fulfilling its oversight responsibilities with respect to the management of risks associated with board organization, membership and structure, and corporate governance. We expect the responsibilities of the newly-formed classified matters committee to include reviewing with management our policies and practices with respect to risk management in the area of classified business activities. While board committees are responsible for assisting the board in evaluating certain risks and overseeing the management of such risks, our entire board of directors is regularly informed through management and committee reports about such risks and steps taken to manage and mitigate them.

 

Identification and Evaluation of Candidates for Board Membership

 

Director Selection Process

 

For nominations of directors to be elected at an annual meeting of stockholders, the governance and nominations committee identifies nominees by first evaluating the current members of our board of directors to determine whether they will be considered for re-nomination. The evaluation is based on their demonstrated performance as a member of our board and skills and experience relevant to our business. The committee balances the value of continuity of service by existing members of our board of directors with the value of the fresh perspective that a new board member would bring. If the governance and nominations committee decides that a new candidate should be sought, it will identify the desired skills and experience of a new nominee in light of the criteria below and any other factors the committee may deem appropriate. Current members of the governance and

nominations committee and board of directors are polled for suggestions for individuals meeting the criteria of the governance and nominations committee. The committee may engage third-party consultants to assist in identifying, evaluating and narrowing down the list of potential nominees. For nominations of directors to be appointed by our board of directors to fill a vacancy on our board, the committee follows a similar process to determine the desired skills and experience for a nominee, and to identify and evaluate candidates.

 

Our governance and nominations committee also elicits, receives and considers director candidates submitted by holders of greater than 5% of our common stock. In early 2010, our governance and nominations committee chairman met with our greater than 5% and several other significant stockholders to discuss board governance matters as well as the process and criteria associated with the nomination of directors. A 5% stockholder who wishes to recommend a prospective nominee for our board of directors should notify our corporate secretary or any member of the governance and nominations committee in writing with the information requested on our investor relations website at investor.mcafee.com under “Governance Documents — Corporate Governance Guidelines” along with whatever supporting material the stockholder considers appropriate.

 

In evaluating director nominees, the governance and nominations committee evaluates each individual in the context of our board of directors as a whole, with the objective of recommending individuals who will best represent the interests of our stockholders. Nominees for director are selected based on a range of criteria, including:

 

 

The governance and nominations committee may also consider other factors as it may deem are in our best interests and the best interests of our stockholders.

 

The governance and nominations committee also focuses on issues of diversity, such as diversity of professional experience, differences in viewpoints and skills, as well as gender, race and national origin, and education. The governance and nominations committee does not have a formal policy with respect to diversity; however, our board of directors and the governance and nominations committee believe that it is essential that the board members represent diverse viewpoints.

 

Stockholder Nominations

 

Any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as a director at a meeting only if timely notice of such stockholder’s intent to make such nomination is given in compliance with the requirements of our bylaws. The committee considers any nominee recommended by a stockholder if the nomination is submitted as described below.

 

In order to be considered timely for our 2011 annual meeting, written notice of a stockholder’s nominee must be received by our corporate secretary no later than April 18, 2011 but no earlier than March 19, 2011 (not less than 60 calendar days nor earlier than 90 calendar days before the one-year anniversary of the date of the preceding year’s annual meeting). If the date of next year’s annual meeting is changed by more than 30 days before or after the anniversary date of this year’s annual meeting, then our corporate secretary must receive the nominee by the close of business on the later of (i) 90 calendar days prior to next year’s annual meeting, or (ii) ten calendar days following

the day on which we first publicly announce the date of next year’s annual meeting. The notice must include as to each nominee:

 

 

A stockholder desiring to recommend a nominee to the governance and nominations committee should review all of the requirements contained in our bylaws that address the process by which a stockholder may nominate an individual to stand for election to our board of directors. Our bylaws are available on our investor relations website at investor.mcafee.com under “Governance Documents.”

 

Board of Directors Meetings and Board Committees

 

During 2009, our board of directors held six meetings. Each director, with the exception of Ms. Norrington, who joined our board of directors on December 1, 2009, attended at least 75% of all board and applicable committee meetings during 2009. Ms. Norrington attended the lone board meeting convened following the date of her appointment.

 

Our board of directors has determined that each of its members, other than Mr. DeWalt, is “independent” as defined under the New York Stock Exchange corporate governance standards, and has no material relationship with us. Ms. Norrington is the President of eBay Marketplaces. In the ordinary course of business, we entered into agreements with eBay, Inc. and its subsidiary PayPal, Inc. prior to the time she joined our board. During 2008 and 2009, eBay and PayPal paid us approximately $1.6 million and $500,000, respectively. During each of 2008 and 2009, we paid eBay and PayPal a total of approximately $500,000. Based upon the quantitative and qualitative characteristics of these arrangements, we do not believe that Ms. Norrington has a material relationship with us.

 

Our board of directors has a standing audit committee, compensation committee, governance and nominations committee and, since October 2009, a classified matters committee. Each of the audit, compensation, and governance and nominations committees has a written charter, which is available on our investor relations website at investor.mcafee.com under “Governance Documents,” or by calling or writing our corporate secretary at our corporate headquarters. The classified matters committee is currently developing its written charter and, following

its adoption, will become available on our investor relations website at investor.mcafee.com under “Governance Documents.”

 

Audit Committee

 

The audit committee reviews, acts and reports to our board of directors on various auditing, accounting and finance matters, including the appointment of our independent accountants, the scope of our annual audits, fees to be paid to the independent accountants, the approval of services to be performed by our independent accountants, the performance of our independent accountants and our accounting practices. The audit committee held ten meetings during 2009. Messrs. Darcy, Pangia and Robel served as members of the audit committee during 2009, with Mr. Darcy serving as chairman. Each of the current members of the audit committee has been designated by our board of directors as an audit committee “financial expert” (as defined under the SEC rules implementing Section 404 of The Sarbanes-Oxley Act of 2002).

 

Compensation Committee

 

The compensation committee is primarily responsible for reviewing and approving all executive officer compensation programs and decisions, administering our various equity compensation plans, and providing advice to our board of directors and management regarding other compensation and benefit programs. The compensation committee held eleven meetings during 2009. Messrs. Denend, Miller, O’Leary, and Zingale served as members of the compensation committee during 2009, with Mr. Denend serving as chairman.

 

Governance and Nominations Committee

 

The governance and nominations committee addresses issues relating to our board of directors and its committees, including identifying prospective director nominees, developing and recommending governance principles applicable to us, overseeing the evaluation of our board of directors and management, recommending nominees for our board committees and reviewing and approving all non-employee director compensation. The committee also reviews and provides guidance relating to broader corporate governance practices and initiatives. The governance and nominations committee held four meetings during 2009. Messrs. Bass, Robel, and Zingale served as members of the committee during 2009, with Mr. Robel serving as chairman.

 

Classified Matters Committee

 

In October 2009, our board of directors formed a new classified matters committee. The classified matters committee will be responsible for assisting our board of directors in overseeing management relating to business activities which, for purposes of national security, have been designated as classified by the United States government. We expect these responsibilities to include reviewing with management our policies and practices with respect to risk management in the area of classified business activities. The committee did not hold a meeting during 2009 and is currently developing a written charter. Messrs. Darcy and Robel will serve as members of the committee.

 

Communications with our Board of Directors

 

Stockholders and other interested parties who would like to communicate directly with our board of directors should send their communications in writing to our corporate secretary at our corporate headquarters at McAfee, Inc., 3965 Freedom Circle, Santa Clara, California, 95054. Our corporate secretary will review the communication and deliver it to the director or directors named in the correspondence, provided that it relates to our business and it is not determined to be inappropriate for consideration by our board of directors. If the communication requires a response, our corporate secretary will work with the appropriate director(s) to prepare and send a response.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file certain reports of ownership with the SEC. Such officers, directors and stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they

file. We believe that all reports required to be filed during 2009 pursuant to Section 16(a) of the Exchange Act by directors, executive officers and 10% beneficial owners were filed on timely basis.

 

Other Corporate Governance Matters

 

Our board of directors has adopted corporate governance guidelines, a code of business conduct and ethics, and a separate code of ethics that applies to our chief executive officer, chief financial officer, corporate controller and other senior finance organization employees (“CEO/Finance Code”). These guidelines and codes establish minimum standards of professional responsibility and ethical conduct. They can be viewed at investor.mcafee.com under “Governance Documents” or may be obtained without charge by writing our corporate secretary at our corporate headquarters. If we make any substantive amendments to the CEO/Finance Code or grant any waiver, including any implicit waiver, from a provision of the code to our chief executive officer, chief financial officer, corporate controller, or other senior finance organization employee subject to the code, we will disclose the amendment or waiver on that website or in a report on Form 8-K.

 

Our bylaws require our chairman of the board of directors to attend stockholder meetings. Although we do not have a formal policy regarding attendance by any other members of our board of directors at our annual meeting of stockholders, our other directors are encouraged to attend the meeting. All of our then-current board members, including our chairman of the board of directors, attended the 2009 annual meeting.

 

In October 2008, the compensation committee of our board of directors adopted stock ownership guidelines for our executive officers and directors. The target ownership levels are 90,000 shares by our chief executive officer, 20,000 shares by each of our Section 16 officers, and 5,000 shares by each of our non-employee directors. Shares are considered “owned” if they are owned outright, held in 401(k) accounts or acquired via our employee stock purchase plan. Our executive officers and directors should achieve the ownership target levels within five years, with interim targets of 40% of ownership target levels after two years, 60% of ownership target levels after three years, and 80% of ownership target levels after four years.

 

 

This compensation discussion and analysis explains our 2009 executive compensation programs and compensation paid under those programs. This discussion principally relates to the following “named executive officers” for 2009:

 

 

All significant executive compensation decisions are approved by the compensation committee of our board of directors. This committee consists of four non-employee directors who meet the independence requirements established by the SEC and the New York Stock Exchange.

 

Our success largely depends on our ability to attract and retain a talented and dedicated executive team, and competition for top talent in our market is fierce. We established cash and equity compensation targets for our named executive officers based on market comparables among our peer companies, scope of responsibility, individual executive performance against “key performance metrics” and relative compensation comparison among our own executives.

 

Cash compensation targets for our named executive officers were generally held flat, with the exception of a market-based increase paid to Mr. Cochran commensurate with his performance. We linked their cash bonuses to

company and/or individual performance against key performance metrics related to our strategic imperatives. We paid cash bonuses that ranged from 55 to 60% of the targeted amounts primarily because of lower growth in revenue and change in deferred revenue as compared to our internal business plan. We set a non-GAAP earnings per share target for the vesting and number of shares underlying performance based equity awards. Our non-GAAP earnings per share results met the target required for the maximum vesting related to these awards.

 

 

1.  Compensation Objectives and Philosophy

 

Our executive compensation programs have three primary objectives:

 

 

The compensation committee reviews total compensation for each named executive officer annually, and determines the appropriate amount and mix of compensation based on the following principles:

 

 

2.  Elements of Compensation

 

The compensation committee evaluates executive compensation with a goal of establishing a total compensation package that is competitive both in terms of structure and opportunity to that provided to executives in comparable companies. Accordingly, our executive officers’ compensation has three primary components:

 

 

Salaries are generally established based on market comparables among our peer companies. Performance-based cash bonuses and equity awards are linked to company and/or individual executive performance against “key performance metrics” that are established at least annually for each executive. The compensation committee also considers the competitive market position of our executive compensation and other factors, such as leadership effectiveness, integrity, innovation, and work ethic in determining bonus and equity awards. The size and timing of equity awards are determined based on all of these factors. Vesting is based on continued service and, for certain equity grants, on the achievement of performance metrics. When it makes executive compensation decisions, the compensation committee focuses on “total direct compensation” (the total compensation to be paid if all performance goals are fully met) as well as on specific elements of compensation.

The compensation committee relies primarily on performance-based compensation and equity to attract, reward and retain a talented and dedicated executive team and to ensure a strong connection between executive compensation and our financial performance. Base salaries are only a portion of total compensation, and perquisites are generally minimal, so these are not sufficient to attract or retain executives without using other compensation vehicles.

 

In addition to the primary components described above, in 2007 and 2008, the compensation committee worked with its outside consultants and legal counsel to conduct a complete review of change of control and retention compensation for our named executive officers and other officers in order to standardize terms within the executive team and to provide competitive-market based change of control and severance compensation. The compensation committee discussed industry best practices in designing the change of control and retention program described below and later in this proxy statement. The ultimate program was developed through numerous meetings of the compensation committee both in executive session and with the input of members of management. Because the change of control and retention agreements were designed to expire approximately every two years, the compensation committee evaluates the necessity for such agreements each year. In February of 2010, we renewed our change of control and retention agreements for an additional two-year period with each of our named executive officers, except with respect to Mr. Pimentel. As previously disclosed, Mr. Pimentel will be retiring later this year, the effective date of which has not been determined.

 

3.  Key Performance Metrics (KPMs) and Other Performance Criteria

 

Cash bonuses and equity compensation for executives are linked to performance assessments of actual performance against quarterly and/or annual key performance metrics (“KPMs”). Typically, KPMs include a combination of financial metrics, including revenue-related and profit-related objectives reflected in our internal business plan, because they are the most direct indicators of stockholder value creation. Financial metrics are drawn from our internal business plan, but may differ from the GAAP line items. These non-GAAP metrics exclude items that are not, in the compensation committee’s view, related to ongoing operating performance, such as restructuring charges, amortization expenses associated with purchased intangible assets, and non-cash stock-based compensation expense.

 

KPMs may also include, among others, quantitative measures of customer success and employee success — both of which have a less direct, but nonetheless significant, impact on stockholder value creation. KPMs typically also include operational goals that are specific to each executive’s respective area of responsibility.

 

Although performance against KPMs is the primary determinant of cash bonus and equity compensation, the compensation committee also evaluates certain subjective factors, including the following, when making its final compensation decisions:

 

 

4.  Base Salaries

 

Base salaries are intended to provide a fixed amount of cash compensation for services rendered during the year. We believe that setting base salaries that approximate the median base salaries at our peer companies assists us in hiring and retaining individuals in a competitive environment. In determining individual base salaries, the compensation committee also considers the scope of job responsibilities, individual contribution, business performance, overall job market conditions, current compensation levels, the Radford Executive Survey, and other relevant third-party compensation data provided by Compensia. As discussed below, in hiring many of the current named executive officers, base salaries above the median were used to attract qualified individuals during a different environment for the company.

5.  Cash Bonuses

 

Our executive cash bonus program provides cash bonus opportunities to executive officers. At the beginning of the year the compensation committee establishes cash bonus opportunities for each executive officer, designated as a percentage of base salary or as a variable target amount. The committee also establishes objective financial performance criteria that must be satisfied in order for the executive officers to be eligible to receive the maximum amount of their cash bonus opportunity. The compensation committee determines the amount of cash bonus each executive earns using the following process. To ensure that the deductibility of bonuses paid to our executive officers is not limited by Section 162(m) of the Internal Revenue Code and as a condition to the payment of any bonus amounts, the compensation committee first determines if the financial performance criteria are satisfied. If so, the executive officers are eligible to receive the maximum amount of their cash bonus opportunity (subject to the compensation committee’s discretion to reduce their bonuses). For 2009, the financial performance criteria consisted solely of non-GAAP earnings per share targets. Once eligibility is determined based on the financial performance criteria, the compensation committee assesses a number of factors to determine whether to reduce (or eliminate) the cash bonus opportunity. As described in greater detail below, these factors include, among other things, certain company and/or individual performance KPMs approved by the compensation committee.

 

Since 2008, the payment of executive bonuses has been conditioned solely on achieving objective performance criteria. To ensure the deductibility of bonuses paid under our executive bonus plan, the compensation committee may not increase any award beyond what is payable based on performance, although it retains the discretion to reduce (or eliminate) an award. We expect that all payments under the executive bonus plan will be tax deductible as “performance-based” for purposes of Section 162(m) of the Internal Revenue Code. See Section E below for a more detailed discussion of tax considerations relating to executive compensation.

 

During 2009, KPMs were generally set as quarterly targets, and performance against them was assessed on a quarterly basis. These quarterly checkpoints served as preliminary indicators of potential bonus payouts. Each quarter, 12.5% of each executive’s target annual bonus opportunity was eligible to be earned. The remaining 50% of the annual bonus opportunity was eligible to be earned after the completion of the year based on full-year performance against objectives. Because of timing considerations related to the establishment of the bonus targets, the compensation committee determined that, for 2009, the 12.5% that would ordinarily be eligible to be earned based on first quarter KPMs instead would be assessed and paid as part of the year-end assessment process.

 

6.  Equity Compensation in General

 

We regard equity compensation as a key compensation component, particularly for our executive officers, for whom equity compensation generally represents a majority of total direct compensation. Equity awards with multi-year vesting or performance measurement periods allow us to:

 

 

We grant a significant equity award to each executive when the executive is initially hired. In subsequent years, we grant annual refresher awards to supplement the initial award. The annual awards are generally granted during the first quarter, as part of our annual performance and compensation review process. The size of initial and follow-on awards varies among executives based on equity award practices among our peer group, the scope of their responsibilities, their performance against their KPMs and relative comparison of awards among our own executives.

 

7.  Stock Options, Restricted Stock Units and Performance Stock Units

 

Since 2006, we have been granting restricted stock units (“RSUs”) to our executive team and certain other key employees. In 2008, we began to use performance stock units (“PSUs”), which are RSUs with performance-based vesting, on a more widespread basis. We continued this practice in 2009 using a combination of RSUs and PSUs for

executives and certain other key employees. Management and the compensation committee believe that it is appropriate to use more performance-based awards for senior executives and key employees because they have more direct ability to drive performance that leads to increased stockholder value creation. By granting such individuals performance-based awards, we believe it will incentivize them to create stockholder value.

 

RSUs give an executive the right to receive a specified number of shares of our common stock, without cost if the executive remains employed with us for a specified period. Vesting of PSUs is contingent on the achievement of pre-established performance objectives. For RSUs that do not vest because an executive’s employment terminates, the unvested shares are never issued. Except with respect to Mr. DeCesare’s PSU award made pursuant to the terms of his offer letter agreement based on negotiation during the hiring process, for PSUs that do not vest because the performance criteria are not satisfied, the unvested shares are never issued. The vesting of equity awards held by our named executives may accelerate upon termination of employment in specified situations. For additional details, see the descriptions of individual change of control and severance arrangements for each named executive below and the section below entitled “Severance and Change of Control Benefits.”

 

Because full-value equity awards, such as RSUs and PSUs, do not require the recipient to purchase the underlying shares upon vesting, they provide immediate, meaningful and measurable economic value for executives as of the grant date and an incentive to remain with us at least through the vesting period. Moreover, these types of awards retain value, and encourage continued employment, regardless of short-term stock price fluctuations. In contrast, the entire economic value to executives of stock options depends on future stock price appreciation, so stock options have less perceived value if the stock price declines after the grant date. Because of these differences, full-value equity awards can deliver more immediate tangible value to executives than stock options, with significantly fewer shares and potentially less dilution for our stockholders.

 

The compensation committee typically determines the number of shares of stock subject to RSU and PSU grants taking into account peer company data, provided by its independent compensation consultants, on the value of annual grants. Although we do not strictly benchmark our equity grants to peer data, generally we seek to provide grants that have a value between the market median and 75th percentile but individual grant value may vary from this based on the subjective determination of the compensation committee. In addition, the compensation committee assesses an executive’s total holding power when making decisions regarding equity award grants. Total holding power measures the total vested and unvested equity compensation held by an executive and allows the compensation committee to determine whether the current equity holdings of an executive are sufficient for executive retention.

 

Recent RSU awards generally vest over three years, with the award vesting as to one-third of the underlying shares at the end of each year. These infrequent, but sizable vesting tranches create a strong incentive to continue employment with us over the vesting period. Although vesting of the awards is based solely on continued service, the size of the award to each executive was linked to the compensation committee’s subjective assessment of the performance of each recipient. In addition, because our stock price is key to the value of the RSUs (a higher stock price makes the shares issued in settlement of RSUs more valuable) part of the value of the RSUs will depend on the performance of the executive team and our company during the vesting period.

 

PSU awards to our executives vest as to one-third of the underlying shares on an annual basis based upon meeting pre-established performance metrics during the year. PSUs are generally granted in February with a certification by the compensation committee of the units earned and vested occurring the following January or February.

 

8.  Change of Control and Retention Arrangements

 

As described above, in 2008, we entered into individual change of control and retention agreements or a change of control protection plan with our executive officers to provide severance payments and other change of control benefits in the event of a termination of employment in specified situations. The compensation committee believes these arrangements are essential to attract and retain executives and promote stability and continuity in our senior management team. We believe that the stability and continuity provided by these arrangements are in the best interests of our stockholders. While these arrangements were scheduled to expire in February 2010, the compensation committee determined that it was appropriate to renew them for another two years until February 2012. This

decision was made based on their assessment, as advised by their independent compensation consultant, that such arrangements remain prevalent in the marketplace. For a summary of the terms and conditions of these individual change of control and retention agreements and the change in control protection plan, see the section below entitled “Severance and Change of Control Benefits.”

 

9.  Perquisites and Other Benefits

 

We do not view perquisites as a significant component of our executive compensation programs. As frequent travelers, all named executive officers are provided upgraded air travel because it results in them arriving at their destinations more rested and able to work. No perquisites are currently provided to any named executive officers. The compensation committee has occasionally approved perquisites in the past to accommodate specific, and usually temporary, circumstances of executives who do not reside near their work locations. See the “Summary Compensation Table” for more details. Our executive officers are eligible to participate in our benefit plans on the same terms as other full-time employees. These plans include medical and dental insurance, life insurance, vision, short-term disability insurance, a Section 401(k) plan, employee stock purchase plan and discounts on our products. In addition our executive officers receive long-term disability insurance benefits that are commensurate with the market for executive officers of comparable companies.

 

 

1.  Independent Compensation Committee Determines Executive Compensation

 

The compensation committee determines compensation for our named executive officers and sets compensation policy for all executive officers. All four members are independent under New York Stock Exchange and SEC definitions. Executive compensation is reviewed annually by the compensation committee in connection with executive performance evaluations. During the first quarter of each year, the compensation committee typically conducts an evaluation of our chief executive officer’s performance, utilizing formal individual input from each of our independent directors. The compensation committee also reviews the performance of our other named executive officers with our chief executive officer. The compensation committee then evaluates total current compensation to determine if any changes are appropriate based on the considerations explained throughout this compensation discussion and analysis. The compensation committee reviews and gives considerable weight to our chief executive officer’s compensation recommendations for our other named executive officers because of his direct knowledge of each of the executives’ performance and contributions. Our human resources and finance staff provide the compensation committee with information related to performance against KPMs and the financial accounting impact of compensation decisions. Although decisions are influenced by input received from Compensia and management, the compensation committee members make independent decisions based on their collective judgment.

 

2.  The Role of Consultants

 

During 2009, the compensation committee directly engaged the services of Compensia, an executive compensation consulting firm. No member of the compensation committee or any named executive officer has any affiliation with Compensia. Compensia reported directly to the chairman of the compensation committee on executive compensation matters.

 

In connection with specific compensation decisions, the compensation committee sought input from Compensia on a range of external market factors, including appropriate comparison companies for assessing our competitive market position, market survey data, and best practices for executive compensation arrangements. Although Compensia provided extensive data, it does not determine the amount or form of compensation for any executives. During 2009, Compensia attended most compensation committee meetings and was available for consultation with compensation committee members at other times.

 

In addition to the work that Compensia directly performed for the compensation committee, pursuant to the direction of the compensation committee it provided limited advice to management on bonus plan design for individuals who are not executive officers and with respect to equity grant guidelines for non-executive officers.

3.  The Role of Peer Groups and Competitive Data

 

With the assistance of Compensia, the compensation committee developed the group of peer technology companies to assess the competitive market position of our executive compensation. Peer companies were selected to include (i) our most direct business competitors; (ii) companies with whom we compete for talent; and (iii) software companies that are roughly comparable to us in terms of market capitalization and/or revenue. We seek to maintain stability in the peer group from year to year but make adjustments based on industry consolidation and our growth as a company. In 2009, we eliminated a number of peer companies that have been acquired over the past few years and added several peer companies to take into account our revenue performance and increase in size. This has contributed to a reduction in the size of the peer group. We also make occasional changes to ensure that the peer group continues to meet the selection criteria described above.

 

The following table identifies our peer companies, as used by the compensation committee in February 2009 for assessing the competitiveness of our compensation policies and practices, and provides information with respect to the revenue, net income, number of employees, and market capitalization of each of the peer companies, as compared to us.

 

Comparative Framework/Peer Companies

 

The information presented below is based on the four fiscal quarters ending December 31, 2008. Adobe Systems, CA, EA, and Symantec were not in the listed peer companies used in 2008, but were added to McAfee’s peer group list to take into account McAfee’s revenue performance and increase in size. As a result of this revenue performance and increase in size, we find ourselves competing with these companies for executive talent.

 

 

On an annual basis, Compensia provides reports to the compensation committee comparing compensation of our most senior executive officers to that of the most senior executive officers at our peer companies. Peer company data is derived from the Radford Executive Survey (which is focused on compensation in the technology sector), as adjusted by Compensia in its reasonable judgment based on changes to market conditions since the date of the survey data, and SEC filings by our peer companies. The compensation committee references total direct compensation between the market median and 75th percentile for purposes of understanding the competitive market for executive compensation. Rather than relying solely on this peer data, the compensation committee makes individual decisions based on what it believes is necessary and appropriate to attract, motivate and/or retain the executives under the particular circumstances in which the decision is made. These circumstances include but are not limited to the external competitive landscape. In light of the challenges we faced stemming from our 2006 stock option investigation, the compensation committee’s executive compensation decisions in hiring and seeking to retain the talented executives who are currently named executives resulted in top quartile total compensation for the named executives who were hired by the Company (other than Mr. Watzinger who was hired in connection with an acquisition) in order to attract the necessary executives to join us.

All of the equity awards granted during 2008 and 2009 to our employees, included our named executive officers, were approved by our compensation committee. Since 2007, we have operated under a formal equity granting policy that includes the grant policies and procedures:

 

 

 

1.  Overview

 

This section describes the executive compensation decisions made by our compensation committee for 2009. Except with respect to Mr. Cochran, none of our executive officers received a base salary increase in 2009. In February 2009, we granted a combination of RSUs and PSUs to our executive officers. With respect to the PSUs, the total number of underlying shares subject to the awards and the vesting conditions of such awards were based upon achievement of performance measures established by our compensation committee.

 

2.  PSU Vesting Criteria for 2009 Performance Period

 

With respect to PSUs granted to our named executive officers during 2009, vesting of the maximum number of PSUs allocated to the 2009 performance period was contingent upon the company achieving 2009 non-GAAP earnings per share of $2.26. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the maximum number of PSUs allocated to the 2009 performance period for grants to our named executive officers were earned and vested. The compensation committee prorates the number of PSUs earned and vested above or below the target level of performance achievement. Because our 2009 financial performance resulted in achievement in excess of the highest target level, no such proration was needed.

 

With respect to PSUs granted to our named executive officers during 2008, vesting of the PSUs allocated to the 2009 performance period was contingent upon the company achieving 2009 non-GAAP earnings per share of $2.05. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the PSUs allocated to the 2009 performance period were earned and vested. In contrast to the PSUs granted during 2009, the PSUs granted during 2008 do not provide for a prorated number of PSUs earned and vested above or below the target level of performance achievement.

 

Non-GAAP earnings per share financial targets are adjusted by the compensation committee for fluctuations in currency exchange rates, mergers and acquisitions and certain one-time charges, as appropriate. In 2009, the compensation committee adjusted the financial targets for fluctuations in currency exchange rates and also to exclude the financial impact of our acquisition of MX Logic, Inc. For purposes of comparing the financial targets against our financial results, the compensation committee adjusted our financial results to remove the benefit of an insurance settlement received during the first quarter related to historical litigation expenses. The compensation committee did not adjust the non-GAAP earnings per share financial targets in a way that increased the likelihood of their achievement.

 

3.  Key Performance Metrics and Cash Bonuses for 2009

 

Our board of directors approved the company’s strategic imperatives for 2009. The compensation committee then established 2009 KPMs for overall company performance as well as individual objectives for our chief

executive officer based on the company’s strategic imperatives for 2009. The compensation committee also identified specific measurement methods for each KPM. Our chief executive officer established 2009 KPMs for individual objectives for our other executive officers, in consultation with those executives, based primarily on the company’s strategic imperatives for 2009 and those KPMs are reviewed and approved by the compensation committee. Our chief executive officer also identified specific measurement methods for each KPM.

 

Our strategic imperatives for 2009 included the following:

 

(1) Extend our leadership position in corporate and consumer endpoint security;

 

(2) Establish and extend leadership in network security;

 

(3) Interlock our endpoint solutions with our network solutions; and

 

(4) Pursue new solution opportunities that build upon our multi-platform strategy of PCs, internet and mobile security.

 

As described above, the compensation committee determines the amount of cash bonus each executive earns using the following process. To ensure that the deductibility of bonuses paid to our executive officers is not limited by Section 162(m) of the Internal Revenue Code and as a condition to the payment of any bonus amounts, the compensation committee first determines if the financial performance criteria are satisfied. In March 2009, the compensation committee established financial performance criteria triggering eligibility for maximum cash bonus opportunities for our executive officers with respect to each of the second, third and fourth quarters of 2009 as well as for the full 2009 year. The maximum cash bonus opportunities for our executive officers equaled 175% of the individual target cash bonus amounts. The 2009 financial criteria triggering eligibility to receive the maximum cash bonus opportunities for our executive officers were as follows:

 

 

In accordance with Section 162(m), achievement of the objective financial performance criteria was substantially uncertain at the time the compensation committee established the criteria, in particular because of the uncertainty around the severity or length of time that adverse national and global economic and financial market conditions would persist. Our non-GAAP earnings per share performance for each of the second, third and fourth quarters of 2009 as well as for the full 2009 year exceeded the performance criteria established by the compensation committee in order to trigger eligibility for the maximum cash bonus opportunities.

 

Once the compensation committee determined that the executive officers were eligible for the maximum cash bonus opportunity, the compensation committee assessed other financial and operational factors at company-wide and individual levels to determine whether to reduce (or eliminate) the cash bonus opportunities. The financial and operational factors reviewed by the compensation committee included the following:

 

 

Following its review of these factors, the compensation committee determined to reduce the bonus payouts to our executive officers for each of the second, third and fourth quarters of 2009 as well as for the full 2009 year to amounts that ranged from 55% to 60% of the individual target cash bonus amounts. The primary reason for reducing the bonus payouts was attributed to lower growth in revenue and change in deferred revenue as compared to our internal business plan.

 

As previously discussed with respect to financial targets for PSUs, non-GAAP earnings per share financial targets are adjusted by the compensation committee for fluctuations in currency exchange rates, mergers and acquisitions and certain one-time charges, as appropriate. In 2009, the compensation committee adjusted the

financial targets for fluctuations in currency exchange rates and also to exclude the financial impact of our acquisition of MX Logic, Inc. For purposes of comparing the financial targets against our financial results, the compensation committee adjusted our financial results to remove the benefit of an insurance settlement received during the first quarter related to historical litigation expenses. The compensation committee did not adjust the non-GAAP earnings per share financial targets in a way that increased the likelihood of their achievement.

 

4.  Compensation for David G. DeWalt

 

Mr. DeWalt was hired as our new chief executive officer and president in April 2007. Mr. DeWalt did not receive a base salary increase in 2009. The compensation committee believed his 2008 base salary of $950,000 was still appropriate based upon market comparables among our peer companies and because of the uncertainty around the severity or length of time that adverse national and global economic and financial market conditions may persist. For the same reasons, Mr. DeWalt’s target cash bonus opportunity remained unchanged from 2008 at 111% of his base salary. Based on our achievement of our 2009 financial metrics described above and the compensation committee’s assessment of his individual performance against agreed upon KPMs, Mr. DeWalt received a cash bonus of $577,501, equal to 55% of his individual target cash bonus amount.

 

Also in February 2009, Mr. DeWalt was granted 104,295 RSUs, and 135,584 PSUs whose vesting was based upon achievement of certain 2009 non-GAAP earnings per share targets established by the compensation committee. The sizes of these awards were based on market comparables among our peer companies, scope of Mr. DeWalt’s responsibility, his individual executive performance against KPMs and relative compensation comparison among our other executives. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the full number of Mr. DeWalt’s PSUs allocated to the 2009 performance period were earned and vested. As a result, Mr. DeWalt vested as to 123,528 PSUs allocated to the 2009 performance period.

 

In addition to his letter agreement, Mr. DeWalt entered into a change of control and retention agreement with us in December 2008 (amended to correct an error in January 2009). As noted above, on February 16, 2010 we renewed this agreement for an additional two-year period through February 29, 2012. For a summary of the terms and conditions of this change of control and retention agreement, see the section below entitled “Severance and Change of Control Benefits.”

 

5.  Compensation for Mark D. Cochran

 

Mr. Cochran was hired as our general counsel in September 2007. Mr. Cochran’s 2009 base salary was $390,000, which reflected a $40,000 increase from 2008. The compensation committee adjusted Mr. Cochran’s base salary because, unlike the other members of the executive team, Mr. Cochran’s base salary was below the market median base salary. Because Mr. Cochran’s performance since he has been hired has been strong, the compensation committee determined that it would be appropriate to realign his base compensation to between the market median and 75th percentile. Mr. Cochran’s target cash bonus opportunity for 2009 remained unchanged from 2008, at 71% of his base salary. Based on our achievement of our 2009 financial metrics described above and the compensation committee’s assessment of his individual performance against agreed upon KPMs, Mr. Cochran received a cash bonus of $158,352, equal to 57% of his individual target cash bonus amount.

 

Also in February 2009, Mr. Cochran was granted 17,700 RSUs, and 23,010 PSUs whose vesting was based upon achievement of certain 2009 non-GAAP earnings per share targets established by the compensation committee. The sizes of these awards were based on market comparables among our peer companies, scope of Mr. Cochran’s responsibility, his individual executive performance against KPMs and relative compensation comparison among our other executives. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the full number of Mr. Cochran’s PSUs allocated to the 2009 performance period were earned and vested. As a result, Mr. Cochran vested as to 11,003 PSUs allocated to the 2009 performance period.

 

Additionally, on December 12, 2008 Mr. Cochran entered into a change of control and retention agreement with us. As noted above, on February 16, 2010 we renewed this agreement for an additional two-year period through

February 29, 2012. For a summary of the terms and conditions of this change of control and retention agreement, see the section below entitled “Severance and Change of Control Benefits.”

 

6.  Compensation for Michael P. DeCesare

 

Mr. DeCesare was hired as our executive vice president, worldwide sales operations in October 2007. Mr. DeCesare did not receive a base salary increase in 2009. The compensation committee believed his 2008 base salary of $600,000 was still appropriate based upon market comparables among our peer companies and because of the uncertainty around the severity or length of time that adverse national and global economic and financial market conditions may persist. For the same reasons, Mr. DeCesare’s target cash bonus remained unchanged from 2008 at 100% of his base salary. Based on our achievement of our 2009 financial metrics described above and the compensation committee’s assessment of his individual performance against agreed upon KPMs, Mr. DeCesare received a cash bonus of $331,875, equal to 55% of his individual target cash bonus amount.

 

Also in February 2009, Mr. DeCesare was granted 34,000 RSUs, and 44,200 PSUs whose vesting was based upon achievement of certain 2009 non-GAAP earnings per share targets established by the compensation committee. The sizes of these awards were based on market comparables among our peer companies, scope of Mr. DeCesare’s responsibility, his individual executive performance against KPMs and relative compensation comparison among our other executives. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the full number of Mr. DeCesare’s PSUs allocated to the 2009 performance period were earned and vested. As a result, Mr. DeCesare vested as to 34,734 PSUs allocated to the 2009 performance period.

 

Additionally, on December 12, 2008 Mr. DeCesare entered into a change of control and retention agreement with us. As noted above, on February 16, 2010 we renewed this agreement for an additional two-year period through February 29, 2012. For a summary of the terms and conditions of this change of control and retention agreement, see the section below entitled “Severance and Change of Control Benefits.”

 

7.  Compensation for Albert A. “Rocky” Pimentel

 

Albert A. “Rocky” Pimentel was hired as our chief financial officer and chief operating officer in May 2008. On February 10, 2010, Mr. Pimentel notified us of his intention to retire from his position as our chief financial and chief operating officer later during the year.

 

Mr. Pimentel did not receive a base salary increase in 2009. The compensation committee believed his 2008 base salary of $500,000 was still appropriate based upon market comparables among our peer companies and because of the uncertainty around the severity or length of time that adverse national and global economic and financial market conditions may persist. For the same reasons, Mr. Pimentel’s target cash bonus remained unchanged from 2008 at 100% of his base salary. Based on our achievement of our 2009 financial metrics described above and the compensation committee’s assessment of his individual performance against agreed upon KPMs, Mr. Pimentel received a cash bonus of $273,438, equal to 55% of his individual target cash bonus amount.

 

Also in February 2009, Mr. Pimentel was granted 13,000 RSUs, and 16,900 PSUs whose vesting was based upon achievement of certain 2009 non-GAAP earnings per share targets established by the compensation committee. The sizes of these awards were based on market comparables among our peer companies, scope of Mr. Pimentel’s responsibility, proximity to his new-hire awards, his individual executive performance against KPMs and relative compensation comparison among our other executives. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the full number of Mr. Pimentel’s PSUs allocated to the 2009 performance period were earned and vested. As a result, Mr. Pimentel vested as to 5,634 PSUs allocated to the 2009 performance period.

 

Additionally, on December 12, 2008 Mr. Pimentel entered into a change of control and retention agreement with us. This agreement expired on February 15, 2010 pursuant to its terms. As noted above, we did not renew our change of control and retention agreement with Mr. Pimentel in light of his pending retirement. The terms and conditions of Mr. Pimentel’s expired change of control and retention agreement are consistent with the terms and

conditions of the agreements with the Tier 2 Executives described in the section below entitled “Severance and Change of Control Benefits.”

 

8.  Compensation for Gerhard Watzinger

 

Gerhard Watzinger joined us in November 2007 as part of our acquisition of SafeBoot Holding BV and serves as our executive vice president, worldwide strategy and business development and general manager data protection. Mr. Watzinger did not receive a base salary increase in 2009. The compensation committee believed his 2008 base salary of $350,000 was still appropriate based upon market comparables among our peer companies and because of the uncertainty around the severity or length of time that adverse national and global economic and financial market conditions may persist. For the same reasons, Mr. Watzinger’s target cash bonus opportunity remained unchanged from 2008 at 100% of his base salary. Based on our achievement of our 2009 financial metrics described above and the compensation committee’s assessment of his individual performance against agreed upon KPMs, Mr. Watzinger received a cash bonus of $208,906, equal to 60% of his individual target cash bonus amount.

 

Also in February 2009, Mr. Watzinger was granted 21,700 RSUs, and 28,210 PSUs whose vesting was based upon achievement of certain 2009 non-GAAP earnings per share targets established by the compensation committee. The sizes of these awards were based on market comparables among our peer companies, scope of Mr. Watzinger’s responsibility, his individual executive performance against KPMs and relative compensation comparison among our other executives. Based on our 2009 non-GAAP earnings per share performance, the compensation committee certified that the full number of Mr. Watzinger’s PSUs allocated to the 2009 performance period were earned and vested. As a result, Mr. Watzinger vested as to 12,737 PSUs allocated to the 2009 performance period.

 

Additionally, on December 12, 2008 Mr. Watzinger entered into a change of control and retention agreement with us. As noted above, on February 16, 2010 we renewed this agreement for an additional two-year period through February 29, 2012. For a summary of the terms and conditions of this change of control and retention agreement, see the section below entitled “Severance and Change of Control Benefits.”

 

E.  Tax, Accounting and Other Considerations

 

Tax Deductibility of Compensation Expense.  Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation to certain executives that we may deduct as a business expense in any tax year unless, among other things, the compensation is performance-based and it is paid under a compensation plan that has been approved by our stockholders. During 2009, we designed our incentive compensation plans so that they qualify as performance-based compensation that is deductible under Section 162(m). We expect that all compensation payments under the bonus plan will be exempt from Section 162(m) and will therefore be tax deductible. Mr. Denend does not qualify as an outside director under Section 162(m) because he is a former officer of McAfee (although he is independent from the company under the New York Stock Exchange listing requirements and SEC rules). Mr. Denend abstains from making decisions with respect to compensation that could qualify as exempt from Section 162(m)’s limits. With respect to those decisions, the remaining independent members of the compensation committee act.

 

From time to time, the compensation committee may approve compensation that will not meet these requirements for deductibility in order to ensure competitive levels of total compensation for its executive officers.

 

Tax Implications for Executives.  Section 409A of the Internal Revenue Code (the “Code”) imposes additional income taxes on our employees who receive certain types of deferred compensation if the compensation does not meet the qualification requirements of Section 409A. We generally do not offer deferred compensation programs subject to Section 409A.

 

Section 4999 of the Code imposes an excise tax on payments to executives of severance or change of control compensation that exceeds the levels specified in Section 280G of the Code. Our named executive officers could potentially receive amounts that exceed the Section 280G limits as severance or change in control payments, but the compensation committee does not consider this potential impact in compensation program design.

Accounting Considerations.  The compensation committee also considers the accounting expense and cash flow implications of various forms of executive compensation. For base salary and cash bonuses, we record or accrue compensation expense in our financial statements in an amount equal to the dollar amount of the cash payment. Accounting rules require us to record an expense in our financial statements for equity awards as well, even though equity awards are not paid to employees in cash. All equity awards (stock options, RSUs and PSUs) result in compensation expense. The compensation committee believes that the advantages of equity awards, as described throughout this compensation discussion and analysis, more than outweigh the non-cash accounting expense associated with them.

 

Compensation Committee Report on Compensation Discussion and Analysis

 

The compensation committee of our board of directors has furnished the following report:

 

The compensation committee has reviewed and discussed the foregoing compensation discussion and analysis with management. Based on that review and discussion, the compensation committee has recommended to our board of directors that the compensation discussion and analysis be included in this proxy statement.

 

THE COMPENSATION COMMITTEE

 

Denis J. O’Leary

Jeffrey A. Miller

Anthony Zingale

 

Compensation Committee Interlocks and Insider Participation

 

No member of our compensation committee, other than Mr. Denend as described above, during 2009 has ever been an officer or employee of McAfee or of any of our subsidiaries or affiliates. During 2009, none of our executive officers served on the board of directors or on the compensation committee of any other entity, any officers of which served either on our board of directors or on our compensation committee.

 

Compensation Policies and Practices as They Relate to Risk Management

 

We have reviewed our compensation policies and practices for all employees and concluded that any risks arising from our policies and programs are not reasonably likely to have a material adverse effect on us.

 

This table summarizes the compensation earned by our named executive officers during 2009.

 

 

 

 

 

 

 

This table shows grants of plan-based awards made by us to our named executive officers during 2009.

 

 

 

 

This table shows outstanding equity awards for our named executive officers as of December 31, 2009.

 

 

 

 

This table shows all stock options exercised and value realized upon exercise, and all stock awards vested and value realized upon vesting for our named executive officers during 2009.

 

 

 

 

Severance and Change of Control Benefits

 

We have entered into agreements providing for severance and/or change of control benefits with each of our current named executive officers. These severance and change of control benefits are intended to attract and retain qualified executives and promote stability and continuity in our senior management team. We did not renew our change of control and retention agreement with Mr. Pimentel in light of his pending retirement. As a result, our agreement with Mr. Pimentel expired on February 15, 2010 pursuant to its terms. The terms and conditions of Mr. Pimentel’s expired change of control and retention agreement are consistent with the terms and conditions of the agreements with the Tier 2 Executives described below.

 

Agreement with Mr. DeWalt

 

Our agreement with Mr. DeWalt provides for certain severance benefits in the event we terminate Mr. DeWalt’s employment for other than “cause” or in the event that Mr. DeWalt resigns for “good reason.” The agreement provides for varying severance benefits based upon whether the termination occurs within 18 months following a “change of control” of McAfee, Inc. (the “Change of Control Period”). The severance payments provided to Mr. DeWalt by the agreement supersede any severance payments afforded Mr. DeWalt in any employment agreement he has with us. Pursuant to the agreement and subject to signing a standard release of claims, upon

Mr. DeWalt’s termination for other than cause or upon his resignation for good reason, he will be entitled to the following benefits:

 

Termination Other than During a Change of Control Period

 

 

Termination During a Change of Control Period

 

 

Additionally, in the event Mr. DeWalt is terminated for other than cause or resigns for good reason before a change of control but on or after a “potential change of control”, Mr. DeWalt will be entitled generally to the superior severance benefits provided by a termination during a Change of Control Period. A “potential change of control” would generally occur upon the execution of an agreement, approval by our board of directors, or public announcement for us to enter into a transaction that would be a change of control if such transaction is subsequently consummated. This benefit is only available if the change of control occurs.

 

Agreements with Messrs. Cochran, DeCesare and Watzinger (the “Tier 2 Executives”)

 

Our agreements with each Tier 2 Executive provide substantially the same terms and conditions as our agreement with Mr. DeWalt as described above. However, our agreements with each Tier 2 Executive provide different benefits from those of Mr. DeWalt as described below:

 

Termination Other than During a Change of Control Period

 

 

Termination During a Change of Control Period

 

 

 

Apart from the varied benefits described directly above, the benefits provided to a Tier 2 Executive upon a termination for other than cause or a resignation for good reason are generally the same as those provided to Mr. DeWalt, including the provision for benefits upon a potential change of control.

 

The table below reflects the amount of compensation to each of our current named executive officers in the event we terminate such officer’s employment for other than “cause” or the officer resigns for “good reason”, in each case based upon whether the termination occurs within 18 months following a “change of control” of McAfee, Inc. Regardless of the manner in which an executive’s employment terminates, the executive is entitled to receive amounts already earned during his term of employment, such as base salary earned through the date of termination and accrued vacation pay. The amounts shown assume that each termination was effective as of December 31, 2009, and thus includes amounts earned through the end of 2009. The value of stock-related compensation assumes that the value of our common stock is $40.57, which was the closing trading price on the last trading day of 2009. The value of continuing coverage under our welfare and fringe benefits plans reflects our actual cost for those benefits as of December 31, 2009. All of these amounts are estimates of the amounts that would be paid out to the executives upon their termination. The actual amounts can only be determined at the time the executives’ employment actually terminates.

 

 

 

 

We believe that compensation for non-employee directors should be a mix of cash and equity to reward directors for their service in fulfilling their oversight responsibilities. We do not provide Mr. DeWalt, our lone management director, with any additional compensation for his board service. The appropriate level and form of compensation for non-employee directors is reviewed annually. In 2009, the governance and nominations committee sought input from Compensia on a range of external market factors, including appropriate comparison companies for assessing our competitive market position, market data, and best practices for non-employee director compensation arrangements. Our board of directors reviewed the governance and nominations committee’s recommendations and then determined the amount of non-employee director compensation. Non-employee director fees for 2009 were as follows:

 

 

In February 2010, our board of directors modified the director fee structure, effective January 1, 2010, to eliminate fees for board and committee meetings (up to a predetermined number of meetings) and in lieu thereof, (i) increase the annual retainers for the chairman of the board and committee chairmen and (ii) establish an annual retainer for each committee member as follows:

 

 

Under our existing 1993 Stock Plan for Outside Directors, as amended, and proposed 2010 Director Equity Plan, each non-employee director is automatically granted upon joining our board an initial grant consisting of

(a) stock options having an aggregate Black-Scholes value of $200,000 on the grant date, and (b) stock units covering a number of shares having an aggregate fair market value of $200,000 on the grant date. Each year after the initial grant each director is entitled to receive an annual grant on the date of our annual meeting of stockholders consisting of (a) stock options having an aggregate Black-Scholes value of $100,000 on the grant date, and (b) stock units covering a number of shares having an aggregate fair market value of $100,000 on the grant date. All options under this plan are granted with an exercise price equal to the closing price of our common stock on the date of grant. The fair value of an option award is determined using the Black-Scholes option pricing model under ASC 718.

 

Stock options awarded in the initial grant vest as to 1/12 of the shares subject to the initial option each quarter over three years. Stock units awarded in the initial grant vest as to 1/3 of the shares on the earlier of (x) the anniversary of the date of grant, or (y) the date of the next annual meeting of stockholders at which a general election of directors is held, and as to 1/12 each quarter thereafter. Stock options awarded in the annual grant vest in their entirety upon the earlier of (x) the first anniversary of the date of grant, or (y) the date of the next annual meeting of stockholders at which a general election of directors is held. Stock units awarded in the annual grant vest in their entirety upon the earlier of (x) the anniversary of the date of grant, or (y) the date of the next annual meeting of stockholders at which a general election of directors is held. Vesting of all options and stock units granted under this plan is also subject to continuous service by the holder as a director on the vesting date. All options and stock units granted under this plan become fully exercisable in the event of certain mergers, sales of assets or sales of the majority of our voting stock.

 

Our employee directors are eligible to receive options and stock units and be issued shares of common stock directly under our 1997 Stock Incentive Plan and are eligible to participate in our 2002 Employee Stock Purchase Plan and, if an executive officer, to participate in our executive bonus plan.

 

The following table shows the compensation earned during 2009 by our non-employee individuals serving on our board of directors in 2009.

 

 

 

 

The following table shows as of the record date, the number of shares of our common stock owned by (i) our chief executive officer, (ii) each of our named executive officers, (iii) each of our directors, and (iv) each stockholder known by us as of December 31, 2009 to be the beneficial owner of more than 5% of our outstanding common stock.

 

 

 

 

Equity Compensation Plans

 

The number of securities to be issued upon exercise of all outstanding options and rights (including unvested stock units), the weighted average per share exercise price of such options, and the number of shares remaining available for issuance under all of our equity compensation plans as of March 31, 2010 are reflected in the following table.

 

 

 

 

In connection with the compensation committee’s approval of the 2010 Equity Incentive Plan, the committee irrevocably agreed to make no further grants of equity awards out of any existing stock compensation plans other than the 2010 Equity Incentive Plan (and automatic grants under our director equity plan).

 

MX Logic, Inc. 2002 Equity Incentive Plan

 

On September 1, 2009, we completed the acquisition of MX Logic, Inc., a Delaware corporation (“MX Logic”). In connection with the acquisition, we assumed the awards of stock under the MX Logic’s 2002 Equity Incentive Plan, as amended (the “MX Logic Plan”). In the event we merge with another entity or are involved in a similar change in control transaction, then unvested awards under the MX Logic Plan accelerate upon such transaction or can be exchanged for cash payment, unless they are assumed in the transaction. There are 56,159 shares of our common stock reserved for issuance under the MX Logic Plan, of which no shares were available for issuance as new grants as of March 31, 2010. In accordance with the proposed approval of our 2010 Equity Incentive Plan, if an award under the MX Logic Plan lapses or terminates without being exercised in full, such lapsed shares will return to the share reserve of our 2010 Equity Incentive Plan. This plan has not been approved by our stockholders.

Number of Awards Granted Annually for Past Three Fiscal Years

 

The following table sets forth information regarding stock option awards granted, restricted stock unit awards granted, performance stock units earned and issued, and our adjusted run rate utilizing the RiskMetrics Group methodology for each of the last three fiscal years.