DEF 14A
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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.     )

Filed by the Registrant x Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

International Paper Company

 

(Name of Registrant as Specified In Its Charter)

 

 

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

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

  (1) Title of each class of securities to which the transaction applies:

 

 

 

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  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

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¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

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LOGO

6400 Poplar Avenue

Memphis, Tennessee 38197

JOHN V. FARACI

Chairman and Chief Executive Officer

April 2013

Dear Shareowners,

It is my pleasure to invite you to attend this year’s Annual Meeting of Shareowners, which will be held on May 13, 2013, in White Plains, New York. As in the past, we are coming together to consider important matters affecting the Company. Whether or not you plan to attend the meeting, I encourage you to review the enclosed information and vote your shares.

In 2012, International Paper generated record cash from operations and delivered our second best earnings per share since 1995, despite an uneven global economic environment. With industry-leading margins in our industrial packaging business and record earnings generated by IP Russia, International Paper shareowners can be pleased with the Company’s 2012 performance. Moreover, we made excellent progress against our strategic earnings drivers around the globe including a new paper machine in China, a new biomass boiler in Brazil and the repurposing of our mill in Franklin, Virginia. Today, International Paper stands well-positioned for a step-change in 2013 earnings.

As always, a large part of our success stems from the guidance and leadership of International Paper’s Board of Directors. This year, we welcomed Ilene Gordon, Chairman, President and CEO of Ingredion Incorporated, to the Board in June. We also thanked Alberto Weisser and Lynn Elsenhans for a combined 11 years of service, as both chose to resign this year.

We value your ongoing participation and support of International Paper. We remain committed to creating long-term value for you and to becoming the best paper and packaging company in the world.

Sincerely,

 

LOGO

John Faraci


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LOGO

NOTICE OF ANNUAL MEETING OF SHAREOWNERS

To the Owners of Common Stock of International Paper Company:

 

Date:

Monday, May 13, 2013

Time:

11:00 a.m. EDT

Place:

The Ritz-Carlton, Westchester
  Three Renaissance Square
  White Plains, New York 10601

 

Items of Business:

Company Proposals:

 

  ¨ Item One: Elect the ten (10) nominees named in the attached proxy statement as directors for a one-year term.

 

  ¨ Item Two: Ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2013.

 

  ¨ Item Three: Approve an amendment to our Restated Certificate of Incorporation regarding shareowner action by written consent.

 

  ¨ Item Four: Vote on a non-binding resolution to approve the compensation of our named executive officers, as discussed under the heading “Compensation Discussion & Analysis.”

 

  Shareowner Proposal:

 

  ¨ Item Five: Vote on a shareowner proposal concerning a policy on accelerated vesting of equity awards of senior executives upon a change in control, if properly presented at the meeting.

 

  Consider any other business properly brought before the meeting.

 

Record Date:

March 19, 2013. Holders of record of International Paper common stock, par value $1.00 per share, at the close of business on that date, are entitled to vote at the meeting.

By order of the Board of Directors,

 

LOGO

SHARON R. RYAN

Senior Vice President, General Counsel and

Corporate Secretary

April 11, 2013


Table of Contents

TABLE OF CONTENTS

 

Information About Our Annual Meeting

     1   

Voting Procedures and Annual Meeting Attendance

     2   

Communicating With the Board

     6   

Matters to be Acted Upon at the 2013 Annual Meeting

     7   

Item 1—Company Proposal to Elect Ten Directors

     7   

Item 2—Company Proposal to Ratify Deloitte  & Touche LLP as the Company’s Independent Registered Public Accounting Firm for 2013

     8   

Item  3—Company Proposal to Amend Our Restated Certificate of Incorporation Regarding Shareowner Action by Written Consent

     8   

Item  4—Company Proposal to Vote on a Non-Binding Resolution to Approve the Compensation of Our Named Executive Officers

     10   

Item  5—Shareowner Proposal Concerning a Policy on Accelerated Vesting of Equity Awards of Senior Executives upon a Change in Control

     11   

Our Board of Directors

     13   

Directors Standing for Election (Term Expiring in 2014)

     13   

Information About Our Corporate Governance

     15   

Our Commitment to Sound Corporate Governance Principles

     15   

Our Board Committees

     23   

Transactions with Related Persons

     28   

Section 16(a) Beneficial Ownership Reporting Compliance

     28   

Director Compensation

     29   

Compensation Discussion & Analysis

     33   

Additional Information about Our Executive Compensation

     66   

Ownership of Company Stock

     82   

Appendix A—Proposed Charter Amendment

     A-1   

Appendix B—Proposed By-Law Amendment

     B-1   

Index of Tables

        

Non-Employee Director Compensation

     31   

Summary Compensation Table

     66   

Grants of Plan-Based Awards

     68   

Outstanding Equity Awards

     70   

Option Exercises and Stock Vested

     72   

Pension Benefits

     73   

Non-Qualified Deferred Compensation

     76   

Potential Payments Upon Retirement

     78   

Potential Payments Upon Involuntary Termination Without Cause

     78   

Potential Payments Upon Termination With Cause

     79   

Potential Payments Upon Change in Control

     80   

Security Ownership of Certain Beneficial Owners

     82   

Security Ownership of Management

     83   

Equity Compensation Plan Information

     84   


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LOGO

PROXY STATEMENT

2013 Annual Meeting of Shareowners

Information About Our Annual Meeting

This proxy statement is furnished in connection with the solicitation of proxies by International Paper Company on behalf of the Board of Directors for the 2013 Annual Meeting of Shareowners. Distribution of this proxy statement and proxy form is scheduled to begin on or about April 11, 2013.

The 2013 annual meeting will be held on Monday, May 13, 2013, at 11:00 a.m. EDT at The Ritz-Carlton, Westchester, located at Three Renaissance Square in White Plains, New York, 10601.

At the 2013 annual meeting, shareowners will vote on the following matters, as well as any other business properly brought before the meeting:

Item One: Elect the ten (10) nominees named in this proxy statement as directors for a one-year term. The Board recommends a vote FOR each of the nominees.

Item Two: Ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2013. The Board recommends a vote FOR this proposal.

Item Three: Amend our Restated Certificate of Incorporation regarding shareowner action by written consent. The Board recommends a vote FOR this proposal.

Item Four: Vote on a non-binding resolution to approve the compensation of our named executive officers, as disclosed under the heading “Compensation Discussion & Analysis.” The Board recommends a vote FOR this proposal.

Item Five: Vote on a shareowner proposal concerning a policy on accelerated vesting of equity awards of senior executives upon a change in control, if properly presented at the meeting. The Board recommends a vote AGAINST this proposal.

Information about these items may be found beginning on page 7 of this proxy statement.

The Board has designated John V. Faraci, our Chairman and Chief Executive Officer (“CEO”), Carol L. Roberts, Senior Vice President and Chief Financial Officer (“CFO”), and Sharon R. Ryan, Senior Vice President, General Counsel and Corporate Secretary, as proxies in connection with the 2013 annual meeting. With respect to any other matter that properly comes before the annual meeting, these proxies will vote as recommended by the Board, or, if no recommendation is given, at their discretion.

Shareowners of record of International Paper common stock at the close of business on March 19, 2013, the record date, or their duly authorized proxy holders, are entitled to vote on each matter submitted to a vote at the 2013 annual meeting and at any adjournment or postponement of the annual meeting. There were 443,664,987 common shares outstanding on March 19, 2013. Each common share is entitled to one vote on each matter to be voted on at the 2013 annual meeting.

A list of shareowners as of the record date will be available for inspection and review upon request of any shareowner to the Corporate Secretary at the address on page 6 of this proxy statement. We will also make the list available at the annual meeting.

Important Notice Regarding the Availability of Proxy Materials for the Shareowner Meeting to be Held on May 13, 2013:

This proxy statement, a form of proxy and our annual report to shareowners is available for viewing and printing at the following Web site: materials.proxyvote.com/460146

 

LOGO

Vote by telephone

If you choose to vote by telephone, you may call the toll-free number on your proxy card. You will need to have the 12-digit control number printed on your proxy card.

 

LOGO

Vote on the Internet

If you choose to vote via the Internet, follow the instructions for accessing the Web site on your proxy card. You will need to have the 12-digit control number printed on your proxy card.

 

LOGO

Vote by mail

If you choose to vote by mail, simply mark, sign and date your proxy card and return it in the postage prepaid envelope that was included with the proxy card.

 

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Voting Procedures and Annual Meeting Attendance

 

How many votes must be present to hold the annual meeting?

Holders of International Paper common stock, present in person or represented by proxy, representing one-third of the number of votes entitled to be cast upon any proposal to be considered at the meeting (at least 147,888,329 votes) are required to hold the 2013 annual meeting. If you properly vote on any proposal, your shares will be included in the number of shares to establish a quorum for the annual meeting. Shares held of record and represented by proxy cards marked “abstain,” or returned without voting instructions, will be counted as present for the purpose of determining whether the quorum for the annual meeting is satisfied. In addition, if you hold shares through a bank or brokerage account, your shares will be counted as present for the purpose of determining whether the quorum for the annual meeting is satisfied, even if you do not provide voting instructions to your bank or brokerage firm.

We urge you to vote by proxy even if you plan to attend the meeting. That will help us to know as soon as possible that we have enough votes to hold the meeting. Returning your proxy card will not affect your right to revoke your proxy or to attend the 2013 annual meeting and vote in person.

How many votes must be present to consider each of the proposals?

The presence, in person or by proxy, of holders of record of International Paper common stock representing one-third of the number of votes entitled to be cast on a specific proposal is required to consider that proposal at the annual meeting. Even if a quorum is established for the annual meeting, it is possible that a quorum may not be established for a specific proposal presented at the annual meeting.

How do I vote my shares?

You may vote at the annual meeting by proxy or in person.

If you are a holder of record (that is, if your shares are registered in your own name with our transfer agent), you have several options. You may vote by telephone, on the Internet or by attending the meeting and voting in person. In addition, you may vote by mail using the enclosed proxy card.

If you hold your shares in street name (that is, if you hold your shares through a broker, bank or other holder of record), you received this proxy statement and a voting instruction card from your broker, bank or other holder of record. This voting instruction card explains which voting options are available to you. As the beneficial owner of shares held in street name, you have the right to direct your bank or broker how to vote your shares, and it is required to vote your shares in accordance with your instructions. If you do not give instructions to your bank or brokerage firm, it will nevertheless be entitled to vote your shares with respect to “routine” items, but it will not be permitted to vote your shares with respect to “non-routine” items. In the case of a non-routine item, your shares will be considered “broker non-votes” on that proposal. If you want to vote in person at the annual meeting, you must obtain a power of attorney or proxy from your broker, bank or other holder of record authorizing you to vote. You must bring this power of attorney or proxy to the meeting.

How do I attend the annual meeting?

All shareowners as of the record date, March 19, 2013, or their duly authorized proxy holders, are welcome to attend the annual meeting. If you are voting by mail, by telephone or via the Internet, but still wish to attend the meeting, follow the instructions on your proxy card or via the Internet (www.proxyvote.com) to tell us that you plan to attend. When you arrive at the meeting, please look for the registration desk, where you will be asked for photo identification in order to be admitted.

If you hold your shares in street name and you decide to attend, you must bring to the annual meeting a copy of your bank or brokerage statement evidencing your ownership of International Paper common stock as of the record date. Please go to the registration desk and provide the bank or brokerage statement, as well as your photo identification, in order to be admitted.

 

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What happens if the annual meeting is postponed or adjourned?

Your proxy will still be valid and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.

If I hold shares in an International Paper employee benefit plan, how do I vote my shares?

International Paper employees may hold shares of Company common stock in one of our employee benefit plans, including the:

 

  Ÿ  

International Paper Company Savings Plan;

 

  Ÿ  

International Paper Company Long-Term Incentive Compensation Plan (“LTICP”); or

 

  Ÿ  

International Paper Company 2009 Incentive Compensation Plan (“2009 ICP”).

If you hold shares in our Savings Plan, you may instruct the trustee, State Street Bank and Trust Company, to vote your shares in the Company Stock Fund by returning the proxy/voting instruction card included with this mailing or by providing voting instructions by telephone or on the Internet as explained on the voting instruction card. If you do not return the proxy/voting instruction card or provide voting instructions, or if your instructions are unclear or incomplete, the trustee will vote your shares at its discretion.

If you hold shares of restricted stock under our Performance Share Plan or a restricted stock grant pursuant to the LTICP or 2009 ICP, you may also vote these shares. The process is the same as voting shares of common stock, described above under the heading “How do I vote my shares?” However, if you do not vote your shares, they will not be counted as there is no trustee for the LTICP or 2009 ICP to vote the shares on your behalf.

Can I change or revoke my proxy?

Yes, you may change your vote or revoke your proxy at any time at or before the annual meeting. If you are a holder of record, you may change your vote or revoke your proxy through any of the following means:

 

  Ÿ  

by casting a new vote by telephone or on the Internet prior to the annual meeting, or by properly completing and signing another proxy card with a later date and returning the proxy card prior to the annual meeting;

 

  Ÿ  

giving written revocation to our Corporate Secretary prior to the annual meeting directed to the address on page 6 of this proxy statement, or at the meeting; or

 

  Ÿ  

voting in person at the annual meeting.

Your presence at the annual meeting will not in itself revoke your proxy; you must obtain a ballot and vote at the annual meeting to revoke your proxy.

If you hold your shares in street name, you may change your voting instructions by contacting your broker, bank or other holder of record prior to the annual meeting or by voting in person at the annual meeting pursuant to a power of attorney or proxy from your bank or broker.

What if I do not indicate my vote for one or more of the matters on my proxy card?

If you are a registered shareowner and you return a proxy card without indicating your vote, your shares will be voted as follows:

 

  Ÿ  

for the Company’s proposal to elect the ten (10) nominees named in this proxy statement to the Company’s Board of Directors in Item 1;

 

  Ÿ  

for the Company’s proposal to ratify the appointment of the Company’s independent registered public accounting firm for 2013 in Item 2;

 

  Ÿ  

for the Company’s proposal to amend our Restated Certificate of Incorporation regarding shareowner action by written consent in Item 3;

 

  Ÿ  

for the Company’s proposal to approve the compensation of our named executive officers in Item 4; and

 

  Ÿ  

against the shareowner proposal concerning a policy on accelerated vesting of equity awards of senior executives upon a change in control in Item 5.

 

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If you are a registered shareowner and you do not return a proxy card or vote at the annual meeting, your shares will not be voted and will not count toward the quorum requirement to hold the annual meeting. Your shares that are not voted will not affect the outcome of any of the proposals.

If your shares are held through our Savings Plan, and you do not provide instructions, the trustee for the plan will vote your shares at its discretion.

If your shares are held in street name and you do not give your bank or broker instructions on how to vote, your shares will be counted toward the quorum requirement for the annual meeting. The failure to instruct your bank or broker how to vote will have one of three effects on the proposals for consideration at the annual meeting, depending upon the type of proposal. For all items to be voted on, other than Item 2 to ratify our independent registered public accounting firm for 2013, absent instructions from you, the bank or broker may not vote your shares at all and your shares will be considered broker non-votes. For Item 2, however, the broker may vote your shares at its discretion. For Item 1, a broker non-vote will have no effect on the outcome of the election of directors. For Items 3, 4 and 5, a broker non-vote will have the same effect as a vote against the proposal.

Will my vote be confidential?

Yes. Your vote is confidential and will not be disclosed to our directors or employees.

Will the Company’s independent registered public accounting firm be present at the annual meeting?

Yes, representatives of Deloitte & Touche LLP (“Deloitte & Touche”) will attend the meeting. They will be available during the meeting to answer your questions and they will have the opportunity to make a statement, if they desire to do so. The Audit and Finance Committee of our Board has approved the appointment of Deloitte & Touche as our independent registered public accounting firm for 2013, and this decision has been ratified by all members of our Board.

 

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For directions to the meeting, please see the map at the end of this proxy statement.

Need to change future proxy delivery options?

If you hold your shares in street name and wish to receive separate copies of future annual reports and proxy statements or if you currently receive multiple copies of our annual report and proxy statement and would like to receive a single copy, please send your written request to:

Broadridge Financial Solutions, Inc.

Householding Dept.

51 Mercedes Way

Edgewood, NY 11717

or call (800) 542-1061

Will our directors attend the annual meeting?

Yes. The Company’s Corporate Governance Guidelines state that directors are expected to attend our annual meeting.

Do any shareowners beneficially own more than 5 percent of our common stock?

Yes. According to public filings, there are four entities that beneficially own more than 5 percent of our common stock:

 

  Ÿ  

BlackRock, Inc.;

  Ÿ  

State Street Corporation, as trustee of various International Paper employee benefit plans and as trustee and discretionary adviser to third party trusts and employee benefit plan related accounts;

  Ÿ  

T. Rowe Price Associates, Inc., as investment adviser to third parties; and

  Ÿ  

Wellington Management Company, LLP, as investment adviser to third parties.

For further information about these shareowners, please see “Ownership of Company Stock.”

Who will be soliciting proxies on our behalf?

The Company pays the cost of preparing proxy materials and soliciting your vote. Proxies may be solicited on our behalf by our directors, officers or employees by telephone, electronic or facsimile transmission or in person. We have hired Alliance Advisors, LLC to solicit proxies for an estimated fee of approximately $17,500, plus expenses.

What is householding?

We have adopted “householding,” a procedure by which shareowners of record who have the same address and last name and do not receive proxy materials electronically will receive only one copy of our annual report and proxy statement unless one or more of these shareowners notifies us that they wish to continue receiving individual copies. This procedure saves us printing and mailing costs. Shareowners will continue to receive separate proxy cards.

We will deliver promptly, upon written or oral request, a separate copy of this proxy statement and our 2012 annual report to a shareowner at a shared address to which a single copy of the documents was delivered. To request separate copies of our proxy statements or annual reports, either now or in the future, please send your written request to Investor Relations, International Paper, 6400 Poplar Avenue, Memphis, TN 38197, or call (800) 332-8146. You may also submit your request on our Web site, www.internationalpaper.com, under the “Investors” tab at the top of the page and then under the “Financial Requests” link.

 

 

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Communicating With the Board

 

 

How do I communicate with the Board?

You may communicate with our entire Board, the independent directors as a group, the Presiding Director, or any one of the directors by writing to Ms. Sharon R. Ryan, Senior Vice President, General Counsel, and Corporate Secretary, at the address set forth to the right. Ms. Ryan will forward all communications relating to International Paper’s interests, other than business solicitations, advertisements, job inquiries or similar communications, directly to the appropriate director(s).

In addition, as described in detail under “Information About Our Corporate Governance,” our Office of Ethics and Business Practice has a HelpLine that is available 24 hours a day, seven days a week, to receive calls, e-mails, and letters to report a concern or complaint, anonymous or otherwise.

LOGO

Direct all Board correspondence to:

Corporate Secretary

International Paper

6400 Poplar Avenue

Memphis, TN 38197

 

All contacts that raise concerns or allegations of impropriety relating to our accounting, internal controls or other financial or audit matters are immediately forwarded to the chair of our Audit and Finance Committee. All such matters are investigated and responded to in accordance with the procedures established by our Audit and Finance Committee.

How do I submit a shareowner proposal for consideration at the 2014 Annual Meeting?

Our 2014 annual meeting is currently scheduled for May 12, 2014. If you wish to submit a proposal to be included in the 2014 proxy statement, you must submit your proposal in writing so that we receive it by December 5, 2013. Proposals should be sent to the Corporate Secretary at the address listed above.

If you would like to present your proposal at the 2014 annual meeting, but you do not meet the deadline for inclusion in the proxy statement, our By-Laws require that you notify us of your proposal between January 12, 2014, and February 11, 2014. Your notice should be sent to the Corporate Secretary.

You must be a shareowner of record on the date you submit your proposal and on the record date for determining shareowners entitled to vote at the 2014 annual meeting. You must also meet the minimum share ownership requirements set forth by the Securities and Exchange Commission (“SEC”) in order to be eligible to submit a shareowner proposal. Your proposal must conform to the notice requirements in Article I, Section 7, of our By-Laws.

How do I nominate a candidate for director at the 2014 Annual Meeting?

Shareowner nominations for directors may be submitted to the Corporate Secretary at the address listed above. Our By-Laws require that the director nomination be received between January 12, 2014, and February 11, 2014.

As in the case of submitting a shareowner proposal, you must be a shareowner of record on the date you submit your nomination and on the record date for determining shareowners entitled to vote at the 2014 annual meeting. You must also meet the minimum share ownership requirements set forth by the SEC in order to be eligible to nominate a director candidate. Your director nomination must conform to the notice requirements in Article II, Section 9, of our By-Laws.

Our By-Laws are available at www.internationalpaper.com, under the “Company” tab at the top of the page and then under the “Governance” link. A paper copy is available at no cost by written request to the Corporate Secretary.

 

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Matters to be Acted upon at the 2013 Annual Meeting

 

 

Company Proposals

Item 1 — Company Proposal to Elect Ten Directors

 

The Board of Directors currently consists of ten members. Each of the ten current directors has been nominated by the Board for reelection by shareowners at the annual meeting. Information about these nominees may be found on pages 13-14 of this proxy statement. All ten nominees, if elected, will hold office until the earlier of:

 

  (i) our 2014 annual meeting and the date a qualified successor has been elected, or
  (ii) death, resignation or retirement.

There are no other nominees competing for their seats on the Board. This means we have a non-contested election. Shares may not be voted cumulatively and cannot be voted for a greater number of persons than the number of nominees named in this proxy statement.

Under our Restated Certificate of Incorporation, directors in non-contested elections are elected by an affirmative majority of votes cast. You can vote “for” or “against” a nominee, or you may “abstain” from voting with respect to a nominee.

Abstentions” will have no effect on the vote. If you hold your shares in street name, your failure to indicate voting instructions to your bank or broker will cause your shares to be considered broker non-votes not entitled to be cast with respect to Item 1 and will have no effect on the vote.

Majority vote for directors:

Each director must receive a majority of votes cast “for” his or her election.

If a director does not receive a majority of votes cast “for” his or her election, he or she must submit a letter of resignation, and the Board, through its Governance Committee, will decide whether to accept the resignation.

 

We do not know of any reason why any nominee would be unable to, or for good cause would not serve as a director if elected. If, prior to the election, a nominee is unable or unwilling to serve, the shares represented by all valid proxies will be voted for the election of such other person as the Board may nominate, except for proxies voted “abstain” with respect to the original nominee.

Our Board of Directors unanimously recommends that you vote FOR each of the following nominees:

 

  Ÿ  

David J. Bronczek

  Ÿ  

Ahmet C. Dorduncu

  Ÿ  

John V. Faraci

  Ÿ  

Ilene S. Gordon

  Ÿ  

Stacey J. Mobley

  Ÿ  

Joan E. Spero

  Ÿ  

John L. Townsend, III

  Ÿ  

John F. Turner

  Ÿ  

William G. Walter

  Ÿ  

J. Steven Whisler

 

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Item 2 — Company Proposal to Ratify Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for 2013

 

Our Board of Directors has ratified the selection of Deloitte & Touche by our Audit and Finance Committee to serve as the Company’s independent registered public accounting firm for 2013. We are asking shareowners to ratify the selection of Deloitte & Touche. To ratify the selection of our independent registered public accounting firm, the affirmative vote of a majority of a quorum at the annual meeting is required.

You may vote “for” or “against” the ratification of the selection of our independent registered public accounting firm, or you may “abstain” from voting. “Abstentions” will have the same effect as a vote against this proposal because they are considered votes present for purposes of a quorum on the vote.

There will be no broker non-votes associated with this proposal, as the ratification of our independent registered public accounting firm is a routine matter. As a result, if your shares are held in street name and you do not give your bank or broker instructions on how to vote, your shares will be voted by the broker in its discretion.

Although ratification is not required by our By-Laws or otherwise, the Board is submitting the selection of Deloitte & Touche to our shareowners for ratification because we value our shareowners’ views on the Company’s independent registered public accounting firm. Our Audit and Finance Committee will consider the outcome of this vote in its decision to appoint an independent registered public accounting firm, but is not bound by the shareowners’ vote. Even if the selection of Deloitte & Touche is ratified, the Audit and Finance Committee may change the appointment at any time during the year if it determines that a change would be in the best interest of the Company and its shareowners.

Our Board of Directors unanimously recommends that you vote FOR the ratification of Deloitte & Touche as the Company’s independent registered public accounting firm for 2013.

Item 3 — Company Proposal to Amend Our Restated Certificate of Incorporation Regarding Shareowner Action by Written Consent

 

Our Board of Directors recommends that the Company’s shareowners adopt an amendment to the Company’s Restated Certificate of Incorporation (the “Charter”) to permit shareowners to act by written consent by the same approval threshold that would be applicable if the action were taken at an annual or special meeting of shareowners. Therefore, shareowners holding at least 20 percent of the voting power of the outstanding capital stock could request that the Board set a record date for the action by written consent. This amendment to the Charter is necessary to allow shareowners to act by consent with less than unanimous vote (the default rule under the New York Business Corporations Law).

This proposal responds to the vote of shareowners at the 2012 and 2011 annual meetings in favor of shareowner proposals requesting the right for any shareowner to initiate a process to act by written consent with less than unanimous vote. In 2012 and 2011, the Board opposed the shareowner written consent proposals because it believed that matters that are sufficiently important to be submitted for shareowner approval should be brought before all shareowners at a meeting. The Company also noted that shareowners already had the ability to call special meetings which ensured that all shareowners would have the opportunity to discuss matters and vote on such actions at a meeting. However, the Company has taken the vote of shareowners at the 2012 and 2011 annual meetings into consideration, along with feedback from our shareowners expressing concern about shareowner rights to act by written consent without appropriate safeguards. The Board is now proposing a Charter amendment that enhances the ability of shareowners to act by written consent, while, at the same time, seeking to address many of the concerns expressed by our shareowners.

The Charter amendment allows shareowners, holding at least 20 percent of the voting power of the outstanding capital stock entitled to vote on an action, the right to request that the Board set a record date for determining the shareowners entitled to express consent on such action. Once such a record date is set and the appropriate

 

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procedures contained in the Charter and the Company’s By-Laws (the “By-Laws”) are satisfied, shareowners would be able to act by written consent. The 20-percent threshold that the Board has proposed (for shareowners to initiate the process for action by written consent) was decided on after receiving feedback from our shareowners. Furthermore, the 20-percent threshold is consistent with the 20-percent threshold that must be met for our shareowners to call a special meeting. The latter provision was added to the By-Laws after a Company proposal was approved at the 2010 annual meeting by the affirmative vote of 99 percent of our shareowners. The Board believes that the threshold for acting by written consent and calling a special meeting should be the same, so there should be no advantage to proceeding in one way versus the other. The Board chose 20 percent as the ownership threshold to initiate a special meeting of shareowners in order to strike an appropriate balance between competing interests –enhancing the ability of shareowners to initiate shareowner action that is not recommended by the Board and the risk that a lower threshold would subject shareowners to numerous actions that may only be relevant to particular constituencies. The same considerations apply where shareowners are seeking to act by written consent in lieu of a meeting. The Board believes that action by written consent is not a matter to be taken lightly and therefore procedural and other safeguards are necessary to protect all shareowners. This is especially so since shareowners would not have the same opportunity to discuss the proposed action and listen to all viewpoints that they would have if the action were taken at a meeting. Moreover, overseeing the solicitation, delivery and examination of written consents and ensuring effective communication of information among shareowners about the relevant subject matter also involves significant management commitment of time and focus, and imposes substantial legal and administrative cost.

In the interest of promoting fairness and inclusiveness, and to maintain a consistent procedure for shareowners to take actions not approved by the Board, the Charter amendment and related amendments to the By-Laws also contain certain other procedural and informational requirements that will be applicable if shareowners seek to take action by written consent, including: (i) a requirement that shareowners must solicit consents in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (without reliance on the exemption contained in Rule 14a-2(b)(2) under the Exchange Act), in order to ensure that a proxy statement will be publicly filed and all shareowners are fully informed about the action, (ii) a requirement that no shareowner may submit his or her consent until 50 days after the applicable record date, so that all shareowners are given time to fully consider and discuss the action before it becomes effective, and (iii) procedures and timing requirements to enable the Board to call a special meeting to vote on the action if it believes that such a meeting would best facilitate shareowner discussion and participation with respect to the matter.

Under the Charter amendment, the Board will not be obligated to set a record date for an action by written consent if (i) the record date request does not comply with the Charter and By-Laws, (ii) such action is not a proper subject for shareowner action under applicable law, (iii) the request for a record date for such action is received by the Company during the period commencing 90 days prior to the first anniversary of the date of the immediately preceding annual meeting and ending on the date of the next annual meeting or the period from the time notice of any special meeting is first given to shareholders and ending on the date of such meeting, (iv) an annual or special meeting of shareowners was held not more than 30 days before such request for a record date was received by the Secretary of the Company, (v) an item of business that is substantially similar (“Similar Item”) will be brought before a meeting of the shareowners that is to be called by the Company within 40 days after the request for a record date is received and held as soon as practicable thereafter, or (vi) such record date request or any solicitation of consents to such action was made in a manner that involved a violation of Regulation 14A under the Exchange Act or other applicable law (collectively, the “Procedural Requirements”). For purposes of this paragraph, the nomination, election or removal of directors shall be deemed to be a Similar Item with respect to all actions involving the nomination, election or removal of directors, changing the size of the Board of Directors and filling of vacancies and/or newly created directorships resulting from any increase in the authorized number of directors. The Board of Directors shall determine in good faith whether a record date is required to be set under the provisions of the Charter and By-Laws.

For an action by written consent to be effective, consents signed by the requisite number of shareowners must be delivered to the Company within 60 days of the earliest dated consent delivered in the manner required by the Charter and By-Laws and not later than 120 days after the record date.

 

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The Board has also adopted a corresponding amendment to the By-Laws, to be effective upon the approval by shareowners of the Company’s proposal to amend the Charter. This amendment also requires shareowners requesting the establishment of a record date to provide certain information, to make certain representations and to comply with certain requirements relating to the proposed action and their ownership of the Company’s stock (the “Informational Requirements”). The amendment also provides for the appointment of Inspectors of Election to perform a ministerial review of the validity of consents and revocations. As discussed above, the Board believes both rights, action by written consent and calling a special meeting, should be parallel. Therefore, the proposed amendments make the initiation right with a 20-percent threshold parallel in the Charter, and also make substantially similar Procedural Requirements and Informational Requirements applicable for shareowners calling a special meeting.

The complete text of the proposed Charter amendment is set forth in Appendix A and the proposed By-Law amendment is set forth in Appendix B.

The amendment to our Charter under this Item 3 requires the affirmative vote of a majority of our outstanding shares of common stock. If the amendment to the Charter is approved, then it will become effective upon filing with the New York Department of State, which filing would be made promptly after the annual meeting.

Our Board of Directors unanimously recommends that you vote FOR this proposal.

Item 4 — Company Proposal to Vote on a Non-Binding Resolution to Approve the Compensation of Our Named Executive Officers

 

Our Board of Directors is seeking your approval of the compensation of our Named Executive Officers (“NEOs”), as disclosed pursuant to Item 402 of Regulation S-K under the Exchange Act, including the Compensation Discussion & Analysis, related compensation tables and narrative disclosure. This vote is non-binding. To approve this proposal, the affirmative vote of a majority of a quorum at the annual meeting is required.

You may vote “for” or “against” this proposal, or you may “abstain” from voting. “Abstentions” will have the same effect as a vote against this proposal because they are considered votes present for purposes of a quorum on the vote.

If you hold your shares in street name, your failure to indicate voting instructions to your bank or broker will cause your shares to be considered broker non-votes not entitled to vote with respect to Item 4. Broker non-votes will have the same effect as a vote against this proposal.

Our Board seeks your approval of the compensation of our NEOs, who are listed in the Summary Compensation Table on page 66 of this proxy statement. Information describing the compensation of our NEOs is provided in the Compensation Discussion & Analysis section, the accompanying tables and narrative contained in this proxy statement beginning on page 33 of this proxy statement.

Our Board asks shareowners to approve the following (non-binding) advisory resolution:

“Resolved, that the compensation paid to the Company’s Named Executive Officers, disclosed pursuant to Item 402 of Regulation S-K under the Exchange Act, including the Compensation Discussion & Analysis, the related compensation tables and narrative disclosure, in this proxy statement is hereby approved.”

Our Board of Directors unanimously recommends that you vote FOR the approval of the compensation of our Named Executive Officers as disclosed pursuant to Item 402 of Regulation S-K under the Exchange Act.

 

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Proposal Submitted by our Shareowners

Item 5 — Shareowner Proposal Concerning a Policy on Accelerated Vesting of Equity Awards of Senior Executives upon a Change in Control

 

We expect the following shareowner proposal to be presented at the annual meeting. Upon request, we will promptly provide any shareowner with the name, address and number of shares held by the shareowner making this proposal. The Company is not responsible for the contents of this shareowner proposal or any supporting statement.

The shareowner proposal will be approved if a majority of a quorum at the annual meeting is voted “for” the proposal. You may vote “for” or “against” the shareowner proposal, or you may “abstain” from voting. “Abstentions” will have the same effect as a vote against this shareowner proposal, because they are considered votes present for purposes of a quorum. If you hold your shares in street name, your failure to indicate voting instructions to your bank or broker will cause your shares to be considered broker non-votes not entitled to vote with respect to Item 5. Broker non-votes will have the same effect as a vote against this proposal.

“Proposal 5 — Limit Accelerated Executive Pay

Resolved: The shareholders ask the board of directors to adopt a policy that in the event of a change in control (as defined under any applicable employment agreement, equity incentive plan or other plan), there shall be no acceleration of vesting of any equity award granted to any senior executive, provided, however, that the board’s Compensation Committee may provide in an applicable grant or purchase agreement that any unvested award will vest on a partial, pro rata basis up to the time of the senior executive’s termination, with such qualifications for an award as the Committee may determine.

For purposes of this Policy, “equity award” means an award granted under an equity incentive plan as defined in Item 402 of the SEC’s Regulation S-K, which addresses executive compensation. This resolution shall be implemented so as not affect any contractual rights in existence on the date this proposal is adopted.

Under executive pay plans, our company’s highest paid executives can receive “golden parachute” pay after a change in control. It is important to retain the link between executive pay and company performance, and one way to achieve that goal is to prevent windfalls that an executive has not earned.

The vesting of equity pay over time is intended to promote long-term improvements in performance. The link between executive pay and long-term performance can be severed if such pay is made on an accelerated schedule. This proposal is particularly important due to the lack of best practices in giving our executives their pay. John Faraci, our CEO had a potential $68 million entitlement for a change in control. William Steiner and Ray T. Chevedden have submitted proposals on this topic to major companies.

This proposal should also be evaluated in the context of our Company’s overall corporate governance as reported in 2012:

GMI/The Corporate Library, an independent investment research firm, rated our company “High Concern” in Executive Pay - $15 million for our CEO John Faraci. Mr. Faraci also had $35 million in his accumulated pension.

Annual incentive pay for our highest paid executives consisted of a bonus pool with actual bonus amounts subjectively determined by our executive pay committee. Moreover, our executive pay committee was free to increase the bonus pool by 25%. Subjective elements could undermine pay for performance. In addition, the Performance Share Plan, intended as long-term incentive pay, was based on three one-year and one three-year performance periods. GMI said this was not long-term.

We supported a shareholder right to act by written consent by votes greater than 51% in both 2011 and 2012. Our corporate governance committee was out to lunch when these votes came in. This committee was under the leadership of Stacey Mobley. Joan Spero, involved with the Delta Airlines bankruptcy, was also on this committee.

Please encourage our directors to respond positively to this proposal to protect shareholder value:

Limit Accelerated Executive Pay — Proposal 5.”

[End of Shareowner Proposal]

 

 

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Position of Your Company’s Board of Directors

The Board of Directors and its Governance Committee, with input from the Board’s Management Development and Compensation Committee, have thoughtfully considered this proposal and, as described below, the Board has approved the concept of “double-trigger” acceleration of equity-award vesting for the Company’s senior executives, thereby adopting the most important aspect of the proposal. The Board has concluded, however, that adoption of the entire proposal as drafted would not be in the best interests of the Company or our shareowners.

The Board opposes implementation of this entire proposal as drafted, but has decided to make a significant change to our change-in-control arrangements that addresses most of the concerns raised in the proposal. As further described in the “Compensation Discussion and Analysis” section of this proxy statement, in February 2013, the Board approved amending our change-in-control agreements with senior executives to move from a “single-trigger” to a “double-trigger” approach to acceleration of vesting of equity awards. This change will be implemented in our form change-in-control agreement by the end of 2013 and subsequently reflected in all existing and future agreements. The double-trigger requirement that there is both a change in control and a qualifying termination of employment (i.e., involuntary termination without cause or departure for “good reason”) in order for equity awards to accelerate is widely recognized as a good governance practice, as it prevents senior executives from receiving an automatic windfall in the event of a change in control and serves as an incentive for the senior executives to continue with the Company through and after a change in control in order to receive the benefit of their unvested equity awards.

We also believe it is worth emphasizing the support our shareowners have shown for our existing executive compensation program (even prior to the change described above), as indicated by the May 2012 approval of our “Say-on-Pay” proposal by 98 percent of votes cast by shareowners. We believe this overwhelming support affirms our responsiveness to shareowners through the many executive compensation plan design changes we made in 2011 for 2012. These changes are summarized in the “Compensation Discussion and Analysis” section of this proxy statement.

The Board, along with the Management Development and Compensation Committee, will continue to review our executive compensation policies in light of evolving practices. At this time, however, the Board opposes the proposal as drafted. We believe that it is in the best interests of our shareowners to provide our senior executives with some form of accelerated vesting of their equity awards, which are a fundamental element of their remuneration, if they experience a qualifying termination after a change in control. We believe that one of the essential purposes of providing our executives with equity-based awards is to align their interests with those of our shareowners. Providing our senior executives with the protection of some form of acceleration of vesting of their equity awards in the event of their qualifying termination after a change in control furthers this purpose by enabling our executives to avoid distractions and potential conflicts of interest that could otherwise arise when a potential change-in-control transaction is being considered. We believe that the benefits of securing our key employees’ compensation entitlement in the event of a qualifying termination after a change in control outweigh the costs and concerns raised by the proponent.

In sum, the Board believes that the current structure of the Company’s executive compensation program (especially in light of the change to “double-trigger” acceleration of vesting of equity awards to be implemented in 2013) is appropriate and effective, aligning the interests of our executives with those of the Company’s shareowners. We believe that our executive compensation program, as a whole, is consistent with market practice and provides us with the ability to compete for, attract and retain talented executives. Adoption of this proposal as drafted would disadvantage the Company from a competitive standpoint, and would potentially impact our ability to deliver maximum value to our shareowners.

For the foregoing reasons, we recommend that you vote against this proposal.

Our Board of Directors unanimously recommends that you vote AGAINST this proposal.

 

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Our Board of Directors

Directors Standing for Election — Term Expiring in 2014

 

The following ten individuals are nominated for election at the 2013 annual meeting. Each of these nominees is standing for election to serve a term that will expire in 2014.

 

         
  LOGO    

David J. Bronczek, 58, president and chief executive officer of FedEx Express, the world’s largest express transportation company and a subsidiary of FedEx Corporation, since February 2000. Mr. Bronczek started with FedEx in 1976 and, prior to being named president, served as executive vice president and chief operating officer of FedEx Express. He also serves on the Strategic Management Committee of FedEx Corporation. A native of Cleveland, Ohio, Mr. Bronczek graduated from Kent State University. Mr. Bronczek was appointed by former President George W. Bush to the National Infrastructure Advisory Council. He is a member of the Board of Governors of the International Air Transport Association (IATA); a board member for Airlines for America; a member of the Board of Governors for National Safe Kids Campaign; and a board member for the Smithsonian’s National Air and Space Museum. He is also a member of Memphis Tomorrow. Director since October 9, 2006.

         
         
  LOGO    

Ahmet C. Dorduncu, 59, chief executive officer of Akkök Group, a financial and industrial conglomerate located in Turkey, since January 2013. Mr. Dorduncu served as chief executive officer of Sabanci Holding, another financial and industrial conglomerate located in Turkey, from 2005 to 2010. He also served from 2006 to 2010 as chairman of the board of Olmuksa, an industrial packaging business joint venture between Sabanci Holding and International Paper. Sabanci Holding is the parent company of the Sabanci Group, a leading Turkish financial and industrial company. Director since March 6, 2011.

         
  LOGO    

John V. Faraci, 63, chairman and chief executive officer of International Paper, since November 2003. Earlier in 2003, he was elected president of International Paper, and he previously served as executive vice president and chief financial officer from 2000 to 2003. From 1999 to 2000, he was senior vice president – finance and chief financial officer. From 1995 to 1999, he was chief executive officer and managing director of Carter Holt Harvey Ltd., a former majority-owned subsidiary of International Paper located in New Zealand. Mr. Faraci is a member of the board of directors of United Technologies Corporation, PPG Industries, Inc., and the National Fish and Wildlife Foundation. He also serves on the board of the Moscow School of Management, is chairman of the Brazil – U.S. Business Council, and is U.S. section chair for the U.S. – Brazil CEO Forum. He is a trustee of Denison University and The American Enterprise Institute. Director since February 11, 2003.

         
         
  LOGO     Ilene S. Gordon, 59, chairman, president and chief executive officer of Ingredion Incorporated (formerly Corn Products International, Inc.), a publicly traded global ingredient solutions company, since May 2009. Ms. Gordon is also a member of the board of directors of Ingredion Incorporated, Arthur J. Gallagher & Co., a publicly traded international insurance brokerage and risk management business, and World Business Chicago, a not-for-profit economic development organization. Ms. Gordon previously served as president and chief executive officer of Rio Tinto’s Alcan Packaging, a multinational company engaged in the production of flexible and specialty packaging, from 2006 until 2009, and in various senior executive roles at Alcan Packaging and its affiliate and predecessor companies from 1999 until 2006. Prior to 1999, Ms. Gordon was employed for 17 years with Tenneco Inc., a conglomerate, in a variety of management positions, including vice president and general manager leading its folding carton business. Additionally, during the past five years, Ms. Gordon served on the board of directors of United Stationers, Inc., a publicly traded wholesale distributor of business products. Director since October 1, 2012.
     
         
         
  LOGO     Stacey J. Mobley, 67, retired in June 2008 as senior vice president, chief administrative officer and general counsel of DuPont, a global science company, and a member of DuPont’s Office of the Chief Executive. Mr. Mobley was with DuPont for 35 years and had senior management responsibility for legal and governmental affairs. Since November 2008, Mr. Mobley has served as senior counsel, Dickstein Shapiro LLP, a multi-service law firm. He is a director of Nuclear Electric Insurance Ltd. and serves on the board of trustees of Howard University. He previously served as a director of Hewitt Associates Inc. (through October 2010) and Wilmington Trust Company (through April 2010). Director since July 7, 2008.
     
     
     
     
     
     

 

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  LOGO     Joan E. Spero, 68, an adjunct senior research scholar at Columbia University’s School of International and Public Affairs since November 2010. Ms. Spero is also a member of the board of directors of Citigroup and International Business Machines Corporation. Ms. Spero previously served as Undersecretary of State for Economic, Business and Agricultural Affairs of the U.S. Department of State from 1993 until 1996, and as Ambassador to the United Nations for Economic and Social Affairs of the U.S. Department of State from 1980 until 1981. Ms. Spero held various leadership positions at American Express Company from 1981 until 1993, served as President of the Doris Duke Charitable Foundation from 1997 to 2008, and was a visiting scholar at the Foundation Center from 2009 until 2010. Additionally, during the past five years, Ms. Spero served on the board of directors of ING Groep N.V. and First Data Corporation. Ms. Spero is a trustee of the International Center for Transitional Justice and the Wisconsin Alumni Research Foundation, and a trustee (emeritus) of Columbia University, Amherst College and the Council on Foreign Relations. Director since June 10, 2011.
     
         
  LOGO     John L. Townsend, III, 57, is a Senior Advisor to Tiger Management, LLC, an investment management business. From 2010 to 2012, Mr. Townsend served as Managing Partner and Chief Operating Officer of Tiger Management, LLC. Mr. Townsend is also a member of the Riverstone Group, a private investment fund. Mr. Townsend was previously employed by Goldman Sachs & Co. from 1987 to 2002 and was a general partner from 1992 to 1999 and a managing director from 1999 to 2002. Mr. Townsend is a director of Belk, Inc., a department store retailer. Director since March 13, 2006.
         
  LOGO    

John F. Turner, 71, former Assistant Secretary of State for Oceans and International and Scientific Affairs from November 11, 2001, to July 8, 2005. He received the Department of State’s Distinguished Honor Award from Secretary of State Colin Powell in January 2005. Prior to serving in the Department of State, Mr. Turner was president and chief executive officer of The Conservation Fund. Between 1989 and 1993, he was director of the U.S. Fish and Wildlife Service. Mr. Turner also served in the Wyoming State Legislature for 19 years and is a past president of the Wyoming State Senate. Mr. Turner is a director of American Electrical Power, Inc., Peabody Energy Company, Ashland Inc., and The Bank of Jackson Hole. He was a visiting professor at the University of Wyoming in the School of Environment & Natural Resources in 2007 and 2008, and is a managing partner in a family business, The Triangle X Ranch, in Wyoming. Director since July 11, 2005.

     
         
  LOGO     William G. Walter, 67, retired chairman of FMC Corporation, an agriculture, specialty and industrial chemical company, a position he held from 2001 to September 2010. Mr. Walter also served as FMC’s president and chief executive officer from 2001 until December 2009. Mr. Walter served as executive vice president of FMC Corporation from 2000 to 2001 and vice president and general manager of FMC’s Specialty Chemicals Group from 1997 to 2000. Mr. Walter is a member of the board of the New York Life Insurance Company. Director since January 1, 2005.
         
  LOGO     J. Steven Whisler, 58, retired as chairman and chief executive officer of Phelps Dodge Corporation, an international mining company, upon its merger with Freeport Copper and Gold, Inc. in March 2007. Mr. Whisler served as chairman and chief executive officer of Phelps Dodge Corporation from May 2000 until March 2007, and served on the board of Phelps Dodge Corporation from 1995 through March 2007. Mr. Whisler is a director of CSX Corporation and the Brunswick Corporation. He is also a director of the C.M. Russell Museum. Director since December 11, 2007.
         

 

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Information about Our Corporate Governance

Our Commitment to Sound Corporate Governance Principles

 

We believe that good corporate governance is critical to achieving business success. Our Board has adopted Corporate Governance Guidelines that reflect its commitment to sound governance practices. In addition, each of our Board committees has its own charter to assure that our Board fully discharges its responsibilities to our shareowners. Our Board regularly reviews its Corporate Governance Guidelines and committee charters and makes changes from time to time to reflect developments in the law and the corporate governance area. Our Restated Certificate of Incorporation permits the size of our Board to range from nine to 18 members. Currently, the size of our Board is ten members. Our Board maintains four standing committees, each of which is described in detail below, as well as an Executive Committee, which is comprised of the chair of each of the standing committees.

Our Corporate Governance Guidelines and our Board committee charters are available at www.internationalpaper.com under the “Company” tab at the top of the page and then under the “Governance” link. A paper copy is available at no cost by written request to the Corporate Secretary at the address on page 6 of this proxy statement.

In each of the areas discussed below, we have embraced sound principles, policies and procedures to ensure that our Board and our management goals are aligned with our shareowners’ interests.

Code of Conduct

Our Board has adopted a Code of Conduct (Fourth Edition) that applies to our directors, officers and all employees to ensure that we conduct business in a legal and ethical manner. Our Code of Conduct is available at www.internationalpaper.com, under the “Company” tab at the top of the page and then under the “Ethics at IP” link. A paper copy is available at no cost by written request to the Corporate Secretary.

Our Office of Ethics and Business Practice is located at our global headquarters in Memphis, Tennessee. If an employee, customer, vendor or shareowner has a concern about ethics or business practices of the Company or any of its employees or representatives, he or she may contact the Office of Ethics and Business Practice in person, via mail, e-mail, facsimile or telephone. Our Code of Conduct explains that there are multiple other channels for an employee to report a concern, including to his or her manager, human resource professional or legal counsel, or to our internal audit department.

Our HelpLine is also available 24 hours a day, seven days a week, to receive calls from anyone wishing to report a concern or complaint, anonymous or otherwise. Our HelpLine contact information can be found at www.internationalpaper.com, under the “Company” tab at the top of the page, then under the “Ethics at IP” link, then under “How Can We Help You?” on the right side.

All HelpLine contacts are immediately provided to the Office of Ethics and Business Practice for further action and for a response to the person making the contact. Any report to any one of our multiple channels for reporting concerns that raises a concern or allegation of impropriety relating to our accounting, internal controls or other financial or audit matters is immediately forwarded to the Office of Ethics and Business Practice, which is then responsible for reporting such matters, unfiltered, to the chair of our Audit and Finance Committee. All such matters are investigated and responded to in accordance with the procedures established by the Audit and Finance Committee to ensure compliance with the Sarbanes-Oxley Act of 2002.

Risk Oversight

As set forth in the Company’s Corporate Governance Guidelines, the Board exercises oversight of the Company’s strategic, operational and financial matters, as well as compliance and legal risks. The Board is responsible for assuring appropriate alignment of its leadership structure and oversight of management with the interests of shareowners and the communities in which the Company operates. Pursuant to delegated authority as permitted by the Company’s By-Laws, Corporate Governance Guidelines, and committee charters, the Board’s four standing committees oversee certain risks, and the Audit and Finance Committee coordinates the risk

 

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oversight role exercised by various committees and management. The Company’s Corporate Governance Guidelines provide the foundation upon which the Board oversees a working system of principled goal setting and effective decision making, with the objective of establishing a vital, agile, and ethical corporate entity that provides value to the shareowners who invest in the Company and to the communities in which it operates.

Board Leadership Structure

Our Board has no policy with respect to the separation of the offices of Chairman and CEO. We currently combine the role of Chairman and CEO, coupled with an independent Presiding Director whose authority, duties and responsibilities are set forth in the Corporate Governance Guidelines. The Board believes that combining the position of Chairman and CEO is appropriate to further strengthen the Company’s governance structure by promoting unified leadership and direction for the Company, fostering accountability and allowing for a single, clear focus for management to execute the Company’s strategy and business plans.

The Board believes that consideration of this issue is part of the Company’s succession planning. The Board will continue to evaluate this structure going forward in light of factors and considerations prevailing at the time to determine whether the CEO should also serve as Chairman.

Director Independence Determination Process and Standards

Annually, our Board determines the independence of directors based on a review conducted by the Governance Committee and the General Counsel. The Governance Committee and the Board evaluate and determine each director’s independence under the NYSE Listed Company Manual’s independence standards and the Company’s Director Qualification Criteria and Independence Standards, which are consistent with, but more rigorous than, the NYSE standards.

Under SEC rules, the Governance Committee is required to analyze and describe any transactions, relationships or arrangements not specifically disclosed in this proxy statement that were considered in determining our directors’ independence. To facilitate this process, the Governance Committee reviews directors’ responses to our annual Directors’ and Officers’ Questionnaire, which requires disclosure of each director’s and his or her immediate family’s relationships to the Company, as well as any potential conflicts of interest.

In this context, the Governance Committee considered the relationships described below. Based on its analysis of the relationships and our independence standards, the Governance Committee concluded and recommended to our Board that none of these relationships impaired the independence of any director, including

 

  Ÿ  

The service by former director Alberto Weisser on the North American Agribusiness Advisory Board sponsored by Rabobank Nederland. Rabobank Nederland is an entity to which International Paper is indebted. Mr. Weisser does not serve as an executive officer of Rabobank Nederland, nor did he receive compensation from Rabobank Nederland.

 

  Ÿ  

Non-profit and charitable organization affiliations of our directors. None of our directors serve as an executive officer of any organization to which we make charitable contributions.

 

  Ÿ  

Service by several of our directors as an executive officer at a company with whom we may do business. The Governance Committee determined that the commercial relationships involving routine, arms-length purchases and sales transactions between International Paper and these companies were not material under our independence standards. These standards provide that payments to or payments from the Company to a company for which a director serves as an executive officer, for property or services that are less than the greater of $750,000 or 1.75 percent of such other company’s consolidated gross revenues, are not considered a material relationship that would impair the director’s independence. We provide additional details about these relationships below.

 

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Transactions Considered in Analysis of Director Independence

 

Director   Name of Employer   Business  Relationship
(including affiliated
companies)
 

Dollar Amount of
Routine Sales
Transactions

(approximate)

  Amount  exceeds
greater of $750,000
or 1.75% of other
company’s gross
revenues?

David J. Bronczek

  FedEx Express, a subsidiary of FedEx Corporation  

Routine sales to

FedEx Corp.

  $204,500,963 in total, representing 0.735% of International Paper’s gross revenues in 2012   No
    Routine purchases from FedEx Corp.   $19,385,677 in total, representing less than 0.045% of FedEx’s gross revenues in 2012   No

Ilene S. Gordon

 

Ingredion Incorporated

(formerly Corn Products International, Inc.)

 

Routine sales to

Ingredion Incorporated

 

$414,812 in total,

representing less than 0.001% of International Paper’s gross revenues in 2012

  No
    Routine purchases from Ingredion Incorporated   $45,586,516 in total, representing less than 0.698% of Ingredion’s gross revenues in 2012   No

Alberto Weisser

(resigned as director effective May 7, 2012)

  Bunge Ltd.  

Routine sales to

Bunge Ltd.

  $9,425,365 in total, representing 0.034% of International Paper’s gross revenues in 2012   No

Director Qualification Criteria and Independence Standards

Our Board has adopted Director Qualification Criteria and Independence Standards, which it uses to evaluate incumbent directors being considered for reelection at each annual meeting, as well as to evaluate director-candidates. As noted in our Director Qualification Criteria and Independence Standards, neither the Governance Committee nor the Board has any specific minimum qualifications expected of qualified directors, although we do expect candidates to have ample experience and a proven record of professional success, leadership and the highest level of personal and professional ethics, integrity and values.

It is the policy of our Board that a majority of its members be independent from the Company, its management and its independent registered public accounting firm. Based on the Governance Committee’s review of our current directors, our Board has determined that each of our non-employee directors is independent: David J. Bronczek; Ahmet C. Dorduncu; Ilene S. Gordon; Stacey J. Mobley; Joan E. Spero; John L. Townsend, III; John F. Turner; William G. Walter; and J. Steven Whisler. We have one employee-director, our Chairman, Mr. Faraci, who is not independent. Each committee of the Board is comprised entirely of independent directors.

Further, the Governance Committee concluded and recommended to our Board, and our Board determined, that each of our non-employee directors meets the independence requirements for service on our Audit and Finance Committee, the Management Development and Compensation Committee and the Governance Committee.

Lynn Laverty Elsenhans resigned as a director effective March 7, 2012, Alberto Weisser did not stand for reelection at the 2012 annual meeting and resigned as a director effective May 7, 2012, and Christopher E. Kubasik resigned as a director effective November 9, 2012. Our Board had previously affirmatively determined that each of these former directors was independent.

 

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Diversity of our Directors

Our Board and the Governance Committee have assembled a Board comprised of experienced directors who are currently, or have recently been, leaders of major companies or institutions, are independent thinkers and have a wide range of expertise and skills. The Board, through its Governance Committee, seeks directors with a mix of backgrounds and experiences that will enhance the quality of its deliberations and decisions. The criteria considered by the Board and the Governance Committee include a person’s skills, current and previous occupations, other board memberships and professional experiences in the context of the needs of the Board. The Governance Committee Charter specifically directs the Committee to seek qualified candidates with diverse backgrounds, including but not limited to such factors as race, gender, and ethnicity. The satisfaction of these criteria is implemented and assessed through ongoing consideration of directors and nominees by the Governance Committee and the Board, as well as through the Board’s annual self-evaluation process.

Additionally, the Board believes that its membership should include individuals with a diverse background in the broadest sense, and is particularly interested in maintaining a mix that includes the following backgrounds:

 

  Ÿ  

Accounting and finance;

 

  Ÿ  

Environmental affairs and sustainability;

 

  Ÿ  

International operations;

 

  Ÿ  

Legal;

 

  Ÿ  

Manufacturing;

 

  Ÿ  

Marketing;

 

  Ÿ  

Public policy;

 

  Ÿ  

Public service;

 

  Ÿ  

Senior management level leadership in a comparable company or organization;

 

  Ÿ  

Strategic planning;

 

  Ÿ  

Supply chain; and

 

  Ÿ  

Technology.

Our Director Qualification Criteria and Independence Standards may be found at www.internationalpaper.com under the “Company” tab at the top of the page and then under the “Governance” link.

 

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Specific Qualifications and Experience of our Directors

We describe below for each director and nominee the specific experience, qualifications, attributes or skills that led our Board to conclude that such person should serve as a director of the Company in light of the Company’s business.

 

Director    Significant Experience   Rationale
     
David J. Bronczek   

Ÿ    Current CEO

Ÿ   International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ    Strategic Planning

Ÿ   Supply Chain

Ÿ    Technology

Ÿ   Marketing

  As president and CEO of FedEx Express, a subsidiary of FedEx Corp., Mr. Bronczek brings critical business insight to a large, diversified company with international operations. Mr. Bronczek has served in many capacities at FedEx Corporation, beginning his career in operations in 1976. His experience includes serving as senior vice president of Europe, the Middle East and Africa (EMEA), which is a region of strategic importance to International Paper’s business as well.
     
Ahmet C. Dorduncu   

Ÿ    Former CEO

Ÿ   Manufacturing

Ÿ    International Operations

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Supply Chain

Ÿ   Technology

Ÿ    Marketing

  As chairman of Akkök Group and retired chairman and CEO of Sabanci Holding, two leading financial and industrial conglomerates, Mr. Dorduncu brings vast experience in international operations for a non-U.S. manufacturing company. He also has financial expertise that adds to the strength of our Board. His knowledge of regions of key importance to the Company brings even greater perspective to our Board.
     
John V. Faraci   

Ÿ    Current CEO

Ÿ   Manufacturing

Ÿ    International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Supply Chain

Ÿ   Technology

Ÿ    Marketing

  Under Mr. Faraci’s leadership, International Paper has successfully executed a major transformation plan, focusing and repositioning the Company on our core global papers and packaging business, which resulted in record free cash flow in 2008 and 2009, and near record earnings per share in 2011. Mr. Faraci has developed a thorough understanding of all aspects of the Company’s businesses, leading the strategic decisions that continue to strengthen the Company. He has served International Paper as its CEO since 2003, with previous experience as executive vice president and CFO. He also has experience in overseas operations, having served as CEO of Carter Holt Harvey, a former subsidiary located in New Zealand. He has been with International Paper for more than 35 years. His service on the boards of publicly traded United Technologies Corporation and PPG Industries, Inc. gives him additional experience upon which he can draw as Chairman of our Board.
     
Ilene S. Gordon   

Ÿ    Current CEO

Ÿ   Diversity

Ÿ    Manufacturing

Ÿ   International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ   Finance, Accounting

Ÿ    Strategic Planning

Ÿ   Supply Chain

Ÿ    Technology

Ÿ   Marketing

  As chairman, CEO and president of Ingredion Incorporated (formerly Corn Products International, Inc.), Ms. Gordon brings senior management expertise and leadership capabilities, as well as broad understanding of the operational, financial and strategic issues facing public companies. Her previous experience at Rio Tinto’s Alcan Packaging includes manufacturing, supply chain and marketing. She has experience with operations overseas, including South America, Asia Pacific and Europe. Ms. Gordon brings strong financial expertise to our Board and our Audit and Finance Committee.
     
Stacey J. Mobley   

Ÿ    Diversity

Ÿ   Manufacturing

Ÿ    International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ    Strategic Planning

Ÿ   Supply Chain

Ÿ    Legal

  Having served with DuPont for 35 years, including senior management responsibility for legal and government affairs, Mr. Mobley brings a deep understanding of legal compliance and oversight of a diversified, publicly traded company. Mr. Mobley’s service on other public company boards allows him to bring current insight into governance and other significant issues facing public companies. These experiences give Mr. Mobley a strong background upon which to draw as chair of our Governance Committee.

 

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Director    Significant Experience   Rationale
     
Joan E. Spero   

Ÿ    Diversity

Ÿ   Environment, Public Policy, Public Service

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Marketing

  Having served in various positions with the U.S. Department of State, Ms. Spero brings government relations depth and perspective to the Board which is a critical perspective as we work constructively with governments around the world. Ms. Spero also served in leadership positions at American Express and, as a result, brings business insight to a large, diversified company with international operations. Her service on other public company boards gives her experience with corporate governance issues and a broad range of strategic and tactical business matters.
     
John L. Townsend, III   

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

  Mr. Townsend brings strong financial acumen to our Board with his current experience working with private investment funds, as well as his previous experience as general partner and managing director for Goldman Sachs & Co. Mr. Townsend’s financial background, experience with the investment community and knowledge of financial markets makes him well qualified to serve as the chair of our Audit and Finance Committee.
     
John F. Turner   

Ÿ    Former CEO

Ÿ   International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Supply Chain

Ÿ   Technology

Ÿ    Marketing

  Mr. Turner brings government relations depth and perspective to our Board, having served as Assistant Secretary of State for Oceans and International and Scientific Affairs. His experience in academia and the Conservation Fund also gives him a broader perspective on current issues in sustainability and forest resources, which are critical issues to the Company. His service on other public company boards give him experience and oversight of manufacturing, natural resource conservation and production as well as a broad range of strategic and tactical business matters. He actively supplements his financial background through director education courses with a focus on auditing, finance and budgeting responsibilities. These experiences give Mr. Turner a strong background upon which to draw as chairman of our Public Policy and Environment Committee.
     
William G. Walter   

Ÿ    Former CEO

Ÿ   Manufacturing

Ÿ    International Operations

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Technology

Ÿ   Marketing

  Mr. Walter is an experienced business leader, having served from 2001 to 2009 as chairman and CEO of FMC Corporation, a large, publicly traded, manufacturing company with international operations. Mr. Walter continued to serve as FMC’s chairman through September 2010. Mr. Walter brings senior management experience, leadership capabilities, strong financial knowledge and business acumen to our Board, including as a member of our Audit and Finance Committee and Management Development and Compensation Committee.
     
J. Steven Whisler   

Ÿ    Former CEO

Ÿ   Manufacturing

Ÿ    International Operations

Ÿ    Environment, Public Policy, Public Service

Ÿ    Finance, Accounting

Ÿ   Strategic Planning

Ÿ    Supply Chain

Ÿ   Legal

  Prior to its acquisition in March 2007, Mr. Whisler served as chairman and CEO of Phelps Dodge Corporation, a large, publicly traded, manufacturing company with international operations. He also served as General Counsel of Phelps Dodge and, as a result, has a deep understanding of the governance, compliance and regulatory issues facing public companies. His service on other public company boards further augments his range of knowledge and allows him to draw on various perspectives and viewpoints in his role as our Presiding Director and as chair of our Management Development and Compensation Committee.

Director Nomination Procedures

During 2012, there have been no changes to the procedures by which shareowners may recommend Board nominees. The Governance Committee did not receive any recommended nominees from a shareowner or group of shareowners that beneficially own more than 5 percent of our common stock.

 

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Our Board applies the same criteria in evaluating candidates nominated by shareowners as those recommended by other sources, including the Governance Committee. The Governance Committee historically has engaged Egon Zehnder International, a business leadership recruiting firm, to identify potential director-candidates to the Board.

Board of Directors’ Policies and Practices

Resignation Policies

We have two policies relating to director resignation. The first applies when a director has a substantial change in his or her principal occupation, and the second applies in relation to a director who does not receive a majority of shares voted in favor of his or her election. We describe each policy below.

First, if a director’s principal occupation changes substantially, he or she is required to tender his or her resignation for consideration by the Governance Committee. The Governance Committee then recommends to the Board whether or not to accept the resignation using the Director Qualification Criteria and Independence Standards. In accordance with this policy, Lynn Laverty Elsenhans tendered her resignation from the Board, which was accepted effective March 7, 2012, and Christopher E. Kubasik tendered his resignation from the Board, which was accepted effective November 9, 2012.

Second, our Restated Certificate of Incorporation was amended in 2008 to provide for majority voting of directors in non-contested elections. Pursuant to our By-Laws, any director nominee in a non-contested election who fails to receive the requisite majority of votes cast “for” his or her election must tender his or her resignation, and the Board, working through the Governance Committee, will determine whether or not to accept the resignation. In 2012, no director was required to tender a resignation under this policy.

Mandatory Retirement Policy

Our Board revised its mandatory retirement policy in 2010. Under the revised policy, a director is required to retire from our Board effective December 31 of the year in which he or she attains the age of 72. In 2012, no director was required to retire under this policy.

Orientation and Continuing Education

Our new directors participate in a director orientation that includes written materials and presentations by Company employees who are subject matter experts, as well as meetings with senior management, our independent registered public accounting firm and both the Company’s and the Management Development and Compensation Committee’s compensation consultants. New directors visit several of our facilities and meet with employees. Continuing education occurs at Board and committee meetings, with specific topics of interest covered by management or outside experts. Directors are also offered the opportunity to attend director education programs provided by third parties. From time to time, directors visit a facility or significant operation, or attend meetings of Company officers, and at each Board meeting, they meet informally with senior leaders of the Company.

Board, Committee and Annual Meeting Attendance

The Board met 13 times during 2012, with an average attendance rate of 90 percent. Each director attended 75 percent or more of the aggregate number of meetings of the Board and committees on which he or she served. As expected by our Corporate Governance Guidelines, all those who were directors at the time of the 2012 annual meeting were in attendance at the 2012 annual meeting.

Executive Sessions of Non-Management and Independent Directors

After regularly scheduled face-to-face meetings and, if needed, after telephonic meetings, non-management and independent directors of our Board meet in executive session without management present, chaired by the Presiding Director. If non-management directors are not independent, then the Presiding Director will also chair an executive session of independent directors at least once annually. In 2012, executive sessions were held at every regularly scheduled face-to-face Board meeting. Independent directors may engage, at the Company’s expense, independent legal, financial, accounting and other advisors as they may deem appropriate, without obtaining management approval.

 

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Role of the Presiding Director

The Presiding Director is elected by the independent directors for a term of not less than one year. The Presiding Director has authority to call meetings of independent directors. He may consult and directly communicate with certain shareowners if requested. The duties of the Presiding Director include:

 

  Ÿ  

Determining a schedule and agenda for regular executive sessions in which independent directors meet without management present, and presiding over these sessions;

 

  Ÿ  

Presiding over meetings of the Board in the event the Chairman is not present;

 

  Ÿ  

Serving as liaison between the Chairman and independent directors;

 

  Ÿ  

Approving agendas of the Board and meeting schedules to assure there is ample discussion time;

 

  Ÿ  

Approving information sent to the Board; and

 

  Ÿ  

Organizing the process for evaluating the performance of the Chairman and CEO not less than annually in consultation with the Management Development and Compensation Committee.

Annual Board and Committee Self-Assessment

In accordance with a procedure established by the Governance Committee, our Board conducts an annual self-assessment of its own and its committees’ performance. The assessment is based on confidential, individual interviews with each independent director, conducted by the General Counsel.

Separately, an assessment of individual Board members is conducted by the Governance Committee and the Chairman of the Board prior to their nomination for election by shareowners, in accordance with the Director Qualification Criteria and Independence Standards discussed above.

 

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Our Board Committees

 

As described above, in order to fulfill its responsibilities, the Board has delegated certain authority to its committees. The Board has four standing committees and one Executive Committee. Our four standing committees are: (i) Audit and Finance; (ii) Governance; (iii) Management Development and Compensation; and (iv) Public Policy and Environment. The Executive Committee meets only if a quorum of the full Board cannot be convened and there is an urgent need to meet.

Each committee has its own charter, and each charter is reviewed annually by each committee to assure ongoing compliance with applicable law and sound governance practices. The Governance Committee assesses the Executive Committee Charter. Committee charters are available at www.internationalpaper.com under the “Company” tab at the top of the page and then under the “Governance” link. A paper copy is available at no cost by written request to the Corporate Secretary.

Committee Assignments

Independent Board members are assigned to one or more committees. The Governance Committee recommends any changes in assignments to the entire Board. Committee chairs are rotated periodically, usually every three to five years.

Governance Committee

Meetings. Meeting agendas are developed by the Governance Committee chair in consultation with committee members and senior leaders, who regularly attend the meetings.

Responsibilities. The Governance Committee is responsible for assuring the Company abides by sound corporate governance principles, including compliance with the Company’s Certificate of Incorporation, By-Laws, and Corporate Governance Guidelines, and reviewing conflicts of interest, including related person transactions under our Related Person Transactions Policy and Procedures. The committee also serves as the Board’s nominating committee, responsible for identifying and recommending individuals qualified to become Board members and for evaluating directors being considered for re-election. The committee is also responsible for assuring that shareowner communications, including shareowner proposals, are addressed appropriately by the Board or Company management. The committee also recommends non-employee director compensation, and assists the Board in its annual self assessment.

Audit and Finance Committee

Meetings. Meeting agendas are developed by the Audit and Finance Committee chair in consultation with committee members and senior management, who regularly attend the meetings. On a regular basis, the committee holds an executive session without members of management, and it also meets privately with representatives from our independent registered public accounting firm, and separately with each of the Chief Financial Officer, General Counsel, and Director of Internal Audit.

Responsibilities. The Audit and Finance Committee assists our Board in monitoring the integrity of our financial statements and financial reporting procedures, reviewing the independent registered public accounting firm’s qualifications and independence, overseeing the performance of our internal audit function and independent registered public accounting firm, coordinating our compliance with legal and regulatory requirements relating to the use and development of our financial resources, and monitoring the risk of financial fraud involving management and ensuring that controls are in place to prevent, deter and detect fraud by management.

 

Governance Committee

Current Members

Stacey J. Mobley (Chairman)

Joan E. Spero

John F. Turner

J. Steven Whisler

Eight Meetings in 2012

Attendance Rate

97 percent

All Members are Independent

Audit and Finance Committee

Current Members

John L. Townsend, III (Chairman)

Ahmet C. Dorduncu

Ilene S. Gordon

William G. Walter

12 Meetings in 2012

Attendance Rate

96 percent

All Members are Independent

 

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Audit and Finance Committee Report

The following is the report of the Audit and Finance Committee with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2012.

The Audit and Finance Committee assists the Board of Directors in its oversight of the Company’s financial reporting process and implementation and maintenance of effective controls to prevent, deter and detect fraud by management. The Audit and Finance Committee’s responsibilities are more fully described in its charter, which is accessible on the Company’s Web site at www.internationalpaper.com under the “Company” tab at the top of the page and then under the “Governance” link and the “Board of Directors” section. Paper copies of the Audit and Finance Committee charter may be obtained, without cost, by written request to Ms. Sharon R. Ryan, Corporate Secretary, International Paper Company, 6400 Poplar Avenue, Memphis, TN 38197.

In fulfilling its oversight responsibilities, the Audit and Finance Committee has reviewed and discussed the Company’s annual audited and quarterly consolidated financial statements for the 2012 fiscal year with management and Deloitte & Touche LLP (“Deloitte & Touche”), the Company’s independent registered public accounting firm. The Audit and Finance Committee has discussed with Deloitte & Touche the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board (United States) in Rule 3200T. The Audit and Finance Committee has received the written disclosures and the letter from Deloitte & Touche required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with Deloitte & Touche its independence from the Company and its management. The Audit and Finance Committee has also considered whether the provision of non-audit services by Deloitte & Touche is compatible with maintaining the firm’s independence.

The Board has determined that the following members of the Audit and Finance Committee are audit committee financial experts as defined in Item 407(d)(5)(ii) of Regulation S-K: John L. Townsend, III, Ilene S. Gordon and William G. Walter. The Board has determined that each member of the Audit and Finance Committee meets the independence and financial literacy requirements for audit committee members set forth under the listing standards of the NYSE and our independence standards.

Based on the review and discussions referred to above, the Audit and Finance Committee recommended to the Company’s Board of Directors that the Company’s audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

The Audit and Finance Committee has approved and selected, and the Board of Directors has ratified, Deloitte & Touche as the Company’s independent registered public accounting firm for 2013.

Audit and Finance Committee

John L. Townsend, III, Chairman

 

Ilene S. Gordon

Ahmet C. Dorduncu

 

William G. Walter

 

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The Company’s Independent Registered Public Accounting Firm

The Audit and Finance Committee is responsible for engaging the Company’s independent registered public accounting firm, and has evaluated the qualifications, performance and independence of Deloitte & Touche, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates. Based on this evaluation, the Audit and Finance Committee has approved and selected, and the Board has ratified, Deloitte & Touche as the Company’s independent registered public accounting firm for 2013.

Deloitte & Touche’s reports on the consolidated financial statements for each of the three fiscal years in the period ended December 31, 2012, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

Independent Auditor Fees

The Audit and Finance Committee engaged Deloitte & Touche to perform an annual integrated audit of the Company’s financial statements, which includes an audit of the Company’s internal controls over financial reporting, for the years ended December 31, 2011 and December 31, 2012. The total fees and expenses paid to Deloitte & Touche are as follows (in thousands):

 

    

2011

($)

   

2012

($)

 

Audit Fees

    14,082        14,752   

Audit-Related Fees

    1,009        5,914   

Tax Fees

    1,579        1,180   

All Other Fees

    2,157        28   

Total Fees

    18,827        21,874   

Services Provided by the Independent Auditors

All services rendered by Deloitte & Touche are permissible under applicable laws and regulations, and are pre-approved by the Audit and Finance Committee. For a complete copy of International Paper’s “Guidelines of International Paper Company Audit and Finance Committee for Pre-Approval of Independent Auditor Services,” please write to Ms. Sharon R. Ryan, or visit us on our Web site, www.internationalpaper.com, under the “Company” tab, then the “Governance” link.

Pursuant to rules adopted by the SEC, the fees paid to Deloitte & Touche for services provided are presented in the table above under the following categories:

 

1. Audit Fees — These are fees for professional services performed by Deloitte & Touche for the audit and review of our annual financial statements that are normally provided in connection with statutory and regulatory filings or engagements, comfort letters, consents and other services related to SEC matters. Audit fees in both years include amounts related to the audit of the effectiveness of internal controls over financial reporting.

 

2. Audit-Related Fees — These are fees for assurance and related services performed by Deloitte & Touche that are reasonably related to the performance of the audit or review of our financial statements. This includes employee benefit and compensation plan audits, accounting consultations on divestitures and acquisitions, attestations by Deloitte & Touche that are not required by statute or regulation, consulting on financial accounting and reporting standards, and consultations on internal controls and quality assurance audit procedures related to new or changed systems or work processes.

 

3. Tax Fees — These are fees for professional services performed by Deloitte & Touche with respect to tax compliance, tax advice and tax planning. This includes consultations on preparation of original and amended tax returns for the Company and its consolidated subsidiaries, refund claims, payment planning, and tax audit assistance. Deloitte & Touche has not provided any services related to tax shelter transactions, nor has Deloitte & Touche provided any services under contingent fee arrangements.

 

4. All Other Fees — These are fees for other permissible work performed by Deloitte & Touche that do not meet the above category descriptions. The services relate to various consultations that are permissible under applicable laws and regulations, which are primarily related to engagements to provide advice, observations, and recommendations regarding operations, infrastructure and distribution to be considered by the Company.

 

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Public Policy and Environment Committee

Current Members

John F. Turner (Chairman)

David J. Bronczek

Ahmet. C. Dorduncu

Stacey J. Mobley

Joan E. Spero

Four Meetings in 2012

Attendance Rate

90 percent

All Members are Independent

Executive Committee

Current Members

John V. Faraci (Chairman)

Stacey J. Mobley

John L. Townsend, III

John F. Turner

J. Steven Whisler

No Meetings in 2012

Management Development and Compensation Committee

Current Members

J. Steven Whisler (Chairman)

David J. Bronczek

Ilene S. Gordon

John L. Townsend, III

William G. Walter

Five Meetings in 2012

Attendance Rate

86 percent

All Members are Independent

Public Policy and Environment Committee

Meetings. Meeting agendas are developed by the Public Policy and Environment Committee chair in consultation with committee members and senior leaders, who regularly attend the meetings.

Responsibilities. The Public Policy and Environment Committee has overall responsibility for the review of contemporary and emerging public policy issues, as well as technology issues pertaining to the Company. The committee reviews the Company’s health and safety policies, as well as environmental policies, including the Office of Sustainability policies, to ensure continuous improvement and compliance. The committee also reviews the Company’s policies and procedures for complying with its legal and regulatory obligations, including the Code of Conduct, and charitable and political contributions.

Executive Committee

The Executive Committee may act for our Board, to the extent permitted by law, if Board action is required and a quorum of our full Board cannot be convened on a timely basis in person or telephonically. The Chairman of our Board and the chair of each Board committee are members of the Executive Committee.

Management Development and Compensation Committee

The Management Development and Compensation Committee is responsible for overseeing our overall compensation programs and approving compensation of our senior management (other than the CEO). The committee is responsible for conducting performance evaluations of the Chairman and CEO not less than annually, in accordance with the process organized by the Presiding Director, and recommending compensation of the CEO to the independent directors based on such evaluations. The committee is also responsible for discussing with Company management the required disclosure under Item 407(e)(5) of Regulation S-K, including the Compensation Discussion & Analysis that is prepared as part of this proxy statement, and for recommending that it be included in our proxy statement. The committee is responsible for ensuring that we have in place policies and programs for the development of senior leaders and succession planning. The committee acts as the oversight committee with respect to our retirement and benefit plans for senior officers and must approve significant changes to the retirement and benefit plans for our employees. With respect to those plans, the committee may delegate authority for both day-to-day administration and interpretation of the programs, except as it may impact our senior leaders or the CEO.

 

Meetings. Meeting agendas are developed by the Management Development and Compensation Committee chair in consultation with committee members and senior leaders, who regularly attend the meetings. An executive session without management present is held at each meeting.

The committee’s independent compensation consultant is Frederic W. Cook & Co., Inc. (“Cook”). Cook regularly attends the committee’s meetings.

 

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Role of Independent Consultant. The committee engaged Cook, commencing in mid-2011, to serve as its independent, external compensation consultant. The committee has sole authority for retaining and terminating Cook, as well as approving the terms of engagement, including fees. Cook works exclusively for the committee and provides no services to the Company. Cook is expected to achieve the following objectives:

 

  Ÿ  

Attend meetings of the Management Development and Compensation Committee as requested;

 

  Ÿ  

Acquire adequate knowledge and understanding of our compensation philosophy and incentive programs;

 

  Ÿ  

Provide advice on the direction and design of our executive and director compensation programs;

 

  Ÿ  

Provide insight into the general direction of executive compensation within Fortune 250 companies; and

 

  Ÿ  

Facilitate open communication between our management and the Management Development and Compensation Committee, assuring that both parties are aware and knowledgeable of ongoing issues.

Assessment and Management of Compensation Related Risk. Beginning in 2009, the committee committed to completing an annual risk assessment to evaluate the Company’s compensation programs. In 2012, at the committee’s request, Cook conducted a risk assessment to determine if the Company’s compensation plans and programs encourage: unnecessary or excessive enterprise-wide risks; manipulation of financial measures to impact compensation; or behavior that focuses on short-term results at the expense of long-term value creation. The results of this 2012 review proved that the Company’s programs continue to be aligned with the interests of shareowners, appropriately reward pay for performance, and do not promote unnecessary or excessive risk. Based on this evaluation, the committee concluded that the Company’s executive compensation program appropriately aligns compensation with long-term shareowner value creation and avoids short-term rewards for decisions that could pose long-term risks to the Company as a result of the following factors:

 

  Ÿ  

Our compensation mix is appropriately balanced and incentive compensation is not overly weighted toward short-term performance at the expense of long-term value creation;

 

  Ÿ  

Our short-term incentive compensation award pool is appropriately capped, thereby limiting payout potential;

 

  Ÿ  

Our long-term incentive compensation is based entirely on performance shares, which are less leveraged than stock options and, unlike time-based restricted stock awards, reward both Company performance and stock price;

 

  Ÿ  

Our performance is measured against absolute and relative metrics to ensure quality and sustainability of Company performance;

 

  Ÿ  

We have adopted several programs that serve to mitigate potential risk, including officer stock ownership requirements, clawback policies in our incentive compensation programs, and non-compete and non-solicitation agreements to deter behavior that could be harmful to the Company either during or after employment; and

 

  Ÿ  

The committee maintains strict controls over the Company’s equity granting practices, and our incentive compensation plan prohibits option re-pricing.

Compensation Committee Interlocks and Insider Participation

The members of the Management Development and Compensation Committee during 2012 were Mr. J. Steven Whisler, Chairman, Mr. David J. Bronczek, Ms. Lynn Laverty Elsenhans, Ms. Ilene S. Gordon, Mr. John L. Townsend, III, Mr. William G. Walter, and Mr. Alberto Weisser. No member of the Management Development and Compensation Committee was, during the fiscal year, an officer or employee of the Company or was formerly an officer of the Company. Please refer to the discussion below related to “Transactions with Related Persons,” for additional information requiring disclosure by us under Item 404 of Regulation S-K under the Exchange Act for members of the Company’s Management Development and Compensation Committee.

In addition, no executive officer of the Company served as a member of the compensation committee (or its equivalent) of another entity, or as a director of another entity, one of whose executive officers served on our Management Development and Compensation Committee. No executive officer of the Company served as a member of the compensation committee (or its equivalent) of another entity, one of whose executive officers served as one of our directors.

 

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Transactions with Related Persons

 

Transactions Covered. Our Board has adopted a written policy and procedures for review and approval or ratification of transactions involving the Company and “related persons” (directors and executive officers and their immediate family members or shareowners owning 5 percent or greater of our outstanding common stock and their immediate family members).

The policy covers any related person transaction that meets the minimum threshold for disclosure in the proxy statement under the SEC’s rules (specifically, any transaction involving us in which:

 

  (i) the amount involved exceeded $120,000, and

 

  (ii) a related person had a direct or indirect material interest).

Related Person Transaction Review Procedures. Related person transactions are approved in advance by the Governance Committee whenever possible, or must be ratified as promptly as possible thereafter. We disclose in our proxy statement any transactions that are found to be directly or indirectly material to a related person.

Prior to entering into a transaction, a related person must provide the details of the transaction to the General Counsel, including the relationship of the person to the Company, the dollar amount involved, and whether the related person or his or her family member has or will have a direct or indirect interest in the transaction. The General Counsel evaluates the transaction to determine if the Company or the related person has a direct or indirect material interest in the transaction. If so, then the General Counsel notifies the CEO and submits the facts of the transaction to the Governance Committee for its review. The Governance Committee may approve a transaction only if these review procedures have been followed, and the Governance Committee determines that the transaction is not detrimental to the Company and does not violate the Company’s Conflict of Interest Policy.

Related Person Transactions. Please see the table on page 17 of this proxy statement under the heading “Transactions Considered in Analysis of Director Independence” for a description of related person transactions during 2012.

 

Our Related Person Transaction procedures are available at www.internationalpaper.com under the “Company” tab at the top of the page and then under the “Governance” link. A paper copy is available at no cost by written request to the Corporate Secretary.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our directors and certain officers, as well as persons who own more than 10 percent of our common stock, to file with the SEC initial reports of beneficial ownership on Form 3, and reports of subsequent changes in beneficial ownership on Forms 4 or 5. Based solely on our review of these forms, and certifications from our executive officers and directors that no other reports were required for such persons, we believe that all directors and officers complied with the filing requirements applicable to them for the fiscal year ended December 31, 2012.

 

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Director Compensation

 

Compensation Philosophy

Our compensation program for non-employee directors is guided by the following principles. We believe our director compensation program should:

 

  Ÿ  

Provide total compensation comprising both cash and equity that targets the median level of compensation paid by our Compensation Comparator Group (“CCG”) listed in the Compensation Discussion & Analysis section of this proxy statement;

 

  Ÿ  

Align the interests of our directors with the interests of our shareowners;

 

  Ÿ  

Attract and retain top director talent; and

 

  Ÿ  

Be flexible to meet the needs of a diverse group of directors.

Each element of director compensation discussed below is recommended by the Governance Committee and approved by our Board.

Stock Ownership Requirements

Our director stock ownership policy was revised in May 2010 to require that our directors hold equity of the Company valued at two times (2X) the annual Board retainer (which, through April 30, 2013, requires ownership of Company stock equivalent to $440,000). Directors have until 2014 to meet this requirement, or, in the case of directors elected in 2010 or later, four years from the date of their election. We believe this helps align the interests of our directors with the interests of our shareowners. As of December 31, 2012, all directors who were required to meet the ownership levels held the requisite amount of equity.

Elements of Our Director Compensation Program

For the May 2012 – April 2013 performance year, compensation for our non-employee directors consists of:

 

  Ÿ  

An annual retainer fee that is a mix of cash and equity;

 

  Ÿ  

Committee chair fees, a Presiding Director fee, and an Audit and Finance Committee member fee, as applicable; and

 

  Ÿ  

Life insurance, business travel accident insurance, and liability insurance.

We evaluate the reasonableness and appropriateness of the total compensation paid to our directors in comparison to peer companies who comprise our CCG. We target our director compensation at the median of our CCG.

Annual Compensation

The annual retainer fees for the May 2012 – April 2013 performance year are shown in the table below. A director’s annual compensation is $220,000, approximately 40 percent of which is payable in cash and 60 percent of which is payable as equity. A director may elect to convert all or 50 percent of his or her cash retainer fee into shares of restricted stock. In order to encourage director stock ownership, a director who makes this election receives a 20 percent premium in additional shares of restricted stock. Six of the 12 non-employee directors who served during 2012 elected to receive stock in lieu of all or 50 percent of the cash retainer fee and received the applicable premium.

Directors may also elect to defer receipt of their equity retainer fee until January of the calendar year following retirement. Directors who make this election receive restricted stock units (“RSUs”) in lieu of restricted stock. Four of the 12 non-employee directors who served during 2012 elected to defer payment of all or a portion of their equity compensation until retirement. Elections with regard to form of payment and deferrals are made in December preceding each performance year.

We use the closing market price of the Company’s common stock on the day preceding our annual meeting in May to award the equivalent number of shares for the $130,000 equity retainer and restricted stock elected by our directors in lieu of their cash retainer fee. RSUs are settled in cash based on the closing price of the Company’s common stock as of December 31 of the year of the director’s retirement.

 

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Directors earn dividends on their shares of stock and RSUs, which they may elect to receive either as cash or in the form of additional shares of restricted stock or RSUs. Dividends are paid to the director at the time the underlying award is vested or settled.

In addition, each committee chair receives a fee for his or her service in such role. For 2012, Messrs. Mobley, Townsend, Turner, and Whisler each received a committee chair fee. Members of our Audit and Finance Committee also receive an additional fee for their services on this committee. For 2012, Messrs. Dorduncu, Kubasik, Walter and Weisser and Ms. Gordon each received all or some pro-rated portion of an Audit and Finance Committee member fee. As Presiding Director, Mr. Whisler also received a Presiding Director fee for 2012.

 

Type of Fee  

2012-2013 Fee Amount

($)

      
Board Fees             
Cash Retainer   $ 90,000      
Equity Retainer   $ 130,000      
Committee Fees             
Audit and Finance Committee Chair   $ 25,000      
Audit and Finance Committee Member   $ 10,000      
Management Development and Compensation Committee Chair   $ 15,000      
Governance Committee Chair   $ 15,000      
Public Policy and Environment Chair   $ 15,000      
Presiding Director Fee   $ 15,000      

Directors’ Charitable Award Program

Directors who joined our Board on or before July 1, 2007, are eligible to participate in our charitable award program. Under this program, the Company will make a charitable donation in the aggregate amount of $1 million in the director’s name in 10 equal annual installments following the director’s death to the eligible colleges or universities selected by the director. This program was closed to new participants effective July 1, 2007.

Insurance and Indemnification Contracts

We provide life insurance in the amount of $10,500 to each of our non-employee directors, and travel accident insurance in the amount of $500,000 that covers a director if he or she dies or suffers certain injuries while traveling on Company business.

We provide liability insurance for our directors, officers and certain other employees at an annual cost of approximately $5 million. The primary underwriters of coverage, which was renewed in 2012 and extends to June 15, 2013, are XL Specialty Insurance Company and ACE American Insurance Company.

Our By-Laws provide for standard indemnification of our directors and officers in accordance with New York law. We also have contractual arrangements with our directors that indemnify them in certain circumstances for costs and liabilities incurred in actions brought against them while acting as our directors.

 

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Our Analysis

We believe our director compensation program appropriately compensates our directors for their time and commitment to the Company and is consistent with our compensation philosophy as shown below.

 

Our Director Pay

Principles

  

Our 2012 Director Pay

Policies and Practices

þ      Target compensation at median of CCG

  

•   Maintained mix of cash and equity in line with CCG

þ      Align the interests of our directors with the interests of our shareowners

  

•   Paid 60 percent of compensation in the form of equity to ensure that directors, like shareowners, have a personal stake in the Company’s financial performance

þ      Attract and retain top director talent

  

•   Compensated directors competitively, based on a cross-section of similar companies (CCG)

þ      Maintain flexibility to meet the needs of a diverse group of directors

  

•   Continued to allow directors to choose between cash and equity and to elect to defer their fees until retirement

Non-Employee Director Compensation Table

The following table provides information on 2012 compensation for non-employee directors. This table shows fiscal year 2012 compensation based on the SEC’s compensation disclosure requirements. Since we pay our directors on a May to April performance year, the amounts in the table below show differences among directors because (i) each director makes an individual election to receive his or her fees in cash and/or equity; (ii) each director makes an individual election to defer compensation; (iii) certain directors receive committee chair fees, a Presiding Director fee, and/or member fees; and (iv) directors may join our Board on different dates, so their compensation is prorated for the year.

 

Name of Director   Fees Earned or
Paid in Cash
($)(1)
     Stock
Awards
($)(2)
    All Other
Compensation
($)(3)
    Total
($)
 

David J. Bronczek

    45,000         184,009        18,332        247,341   

Ahmet C. Dorduncu

    100,921         129,998        -        230,919   

Lynn Laverty Elsenhans (resigned 3/7/12)

    22,500         -        -        22,500   

Ilene S. Gordon (effective 10/1/12)

    -         144,681        -        144,681   

Christopher E. Kubasik (resigned 11/9/12)

    -         206,660 (4)      -        206,660   

Stacey J. Mobley

    105,000         129,998        -        234,998   

Joan E. Spero

    1,340         237,987        -        239,327   

John L. Townsend, III

    114,996         129,998        18,332        263,326   

John F. Turner

    105,000         129,998        18,332        253,330   

William G. Walter

    -         247,979        18,332        266,311   

Alberto Weisser (resigned 5/7/12)

    33,332         -        -        33,332   

J. Steven Whisler

    -         267,996        -        267,996   

 

(1) As described above, certain directors elected to receive shares of restricted stock in lieu of cash and therefore had no cash compensation during 2012.

 

(2) The value of stock awards shown in the “Stock Awards” column is based on grant date fair value calculated under Financial Accounting Standards Board (“FASB”) ASC Topic 718. The grant date fair value of the equity awards shown in the “Stock Awards” column is based on the closing price of the Company’s common stock on the last business day immediately preceding the first day of the performance year.

 

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Directors who elect to defer their equity retainer fee receive RSUs rather than restricted stock.

Restrictions on shares awarded to our directors under our current compensation plan lapse one year from the date of grant, and then are freely transferable, subject to our director stock ownership requirement and securities regulations. RSUs are not transferable until a director’s retirement from the Board, death or disability. The cash value of RSUs is paid in January following retirement, death or disability. The following table shows the aggregate number of unvested shares of restricted stock and RSUs outstanding as of December 31, 2012, for each non-employee director.

 

Name of Director  

Aggregate Number of Shares
Outstanding That Have Not
Vested

(#)

David J. Bronczek

  10,113

Ahmet C. Dorduncu

  4,046

Lynn Laverty Elsenhans (resigned 3/7/12)

  -

Ilene S. Gordon (effective 10/1/12)

  4,503

Christopher E. Kubasik (resigned 11/9/12)

  -

Stacey J. Mobley

  4,046

Joan E. Spero

  14,653

John L. Townsend, III

  4,046

John F. Turner

  4,046

William G. Walter

  79,320

Alberto Weisser (resigned 5/7/12)

  -

J. Steven Whisler

  60,040

Total

  184,813

 

(3) Represents the annual expense of our charitable award program. We determine the total annual expense to the Company by using assumptions related to each current and retired director who participates in the program. We take into account each director’s age, years of service on our Board, and mandatory retirement age. We make a standard mortality assumption for all directors and use a discount rate of 6 percent. For directors who served in 2012, the aggregate accrued liability increased by $73,330, which was allocated ratably to those directors eligible to participate in the program based on the number of months each served. Non-employee directors vest in the program upon the earliest of (i) serving on our Board for at least 10 years, (ii) retiring from our Board at the mandatory retirement age, or (iii) in the event of disability or death. Directors derive no financial benefit from our charitable award program. We finance the program in part through life insurance policies, of which we are the beneficiary. We expect to receive an income tax deduction when we make the designated charitable awards. The amounts shown do not include the cost for each director of a $10,500 life insurance policy and a $500,000 business travel accident policy, the cost of which is less than $10,000 for each director. Likewise, the amounts shown do not include the value of dividends earned on each director’s shares of stock and RSUs, as the value of expected dividends is reflected in the aggregate grant date fair value of each director’s equity awards, which are disclosed in the “Stock Awards” column.

 

(4) 3,704 shares were cancelled as a result of Mr. Kubasik’s resignation from the Board, representing the unearned portion of his 2012 compensation.

 

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Compensation Discussion & Analysis (“CD&A”)

 

Executive Summary

In 2012, despite economic challenges around the globe and against the backdrop of slow global growth, International Paper (“IP” or the “Company”) generated strong cash flow and solid overall financial results. We are returning more cash to our shareowners (with a 14 percent dividend increase in 2012), aggressively reducing our debt, and investing for the future. We are successfully integrating Temple-Inland, leveraging our international presence and continuing to invest in critical, long-term projects as part of our global strategy to position the company for continued strong free cash flow generation and greater-than-cost-of-capital returns. This robust performance and potential future growth are partially reflected in our stock price – which increased 35 percent in 2012 and 49 percent over the last three years, as illustrated graphically in our 2012 annual report to shareholders.

In this CD&A, we discuss the compensation paid to our executive officers who are identified as Named Executive Officers (“NEOs”) in the 2012 Summary Compensation Table found on page 66 of this proxy statement. The executive compensation program discussed in this CD&A applies to all of our executive officers: our Chief Executive Officer (“CEO”) and 12 Senior Vice Presidents, whom we refer to as our Senior Leadership Team (“SLT”).

We also describe our pay-for-performance philosophy, key design principles and the governance policies that reinforce these principles. Our objective is to design an executive compensation program that encourages all of our leaders to produce outstanding financial results and create sustainable long-term value for our shareowners.

We embrace three key design principles that reinforce our pay-for-performance philosophy:

 

  Ÿ  

We target our executives’ pay at the median level of our Compensation Comparator Group (“CCG”), and in our long-term incentive plan – representing the greatest percentage of total targeted compensation for our NEOs – we require above-median Company performance, relative to our ROI Peers and TSR Peers, for executives to receive a target payout.

 

  Ÿ  

To assure that our executives are focused on producing outstanding financial results, our short-term incentive compensation (“STI”) and long-term incentive compensation (“LTI”) programs use a combination of the following three performance measures:

(1) Cash Flow from Operations;

(2) Return on Investment (“ROI”); and

(3) Total Shareholder Return (“TSR”).

 

  Ÿ  

The Management Development and Compensation Committee of the Board of Directors (the “Committee”) conducts an annual risk assessment to ensure our incentive plans do not motivate excessive risk taking, as described under the heading “Assessment and Management of Compensation Related Risk” on page 27.

Responsiveness to Shareowners – Say-on-Pay Consideration

In May 2012, our “Say-on-Pay” proposal received the overwhelming approval of 98 percent of votes cast by our shareowners (up from 73 percent in 2011). The Committee interpreted this strong level of support as affirmation of our responsiveness to shareowners through the plan design changes made in 2011 for 2012 (summarized in the following chart).

While our executive compensation program was approved by nearly all of our voting shareowners, the Committee and management remain firmly committed to addressing shareowner concerns and continuing to strengthen our pay-for-performance correlation, as well as the overall architecture of our executive compensation program. As an example, in February 2013, the Committee and the Board approved amending our change-in-control agreements with officers, including the NEOs, to move from a “single-trigger” to a “double-trigger” approach for acceleration of vesting of our equity awards. This change will be implemented in our form change-in-control agreement by the end of 2013 and subsequently reflected in all existing and future agreements. The

 

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double-trigger requirement that there is both a change in control and a qualifying termination of employment (i.e., involuntary termination without cause or departure for “good reason”) in order for equity awards to accelerate is widely recognized as a good governance practice, as it prevents officers from receiving an automatic windfall in the event of a change in control and serves as an incentive for the officers to continue with the Company through and after a change in control in order to receive the benefit of their unvested equity awards.

We continue to engage:

 

  Ÿ  

our investors to gain insight into their views on our executive compensation program; and

 

  Ÿ  

proxy advisory firms, as needed, regarding the analytics used to derive their voting recommendations.

The Committee and management will continue to use the annual “Say-on-Pay” vote as a guidepost for shareowner sentiment and will continue to respond to shareowner feedback.

 

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Table of Contents

Summary of 2012 Plan Design Changes

 

Program Element   Design Change   Rationale

Peer Groups

     

Compensation

Comparator Group

(“CCG”)

 

Ÿ   Added: PPG Industries

 

Ÿ    Removed: Occidental Petroleum

 

Ÿ    Added Market Cap as “modifier” in selection process

 

Ÿ   PPG Industries’ compensation approach is more closely aligned with the Company

     
ROI Peer Group  

Ÿ   Added: Boise, Inc., Fibria Celulose and Klabin

 

Ÿ    Removed: Temple-Inland Inc.

 

Ÿ    Creates more robust peer groups of global companies and provides more stability in the rank-based payout

 

Ÿ    Temple-Inland Inc. was acquired by the Company in February 2012

TSR Peer Group  

Ÿ   Added: Fibria Celulose and Klabin

 

Ÿ    Removed: M-real Corp., Norske Skog, Resolute Forest Products (formerly AbitibiBowater), Svenska Cellulosa Aktiebolaget (SCA), and Temple-Inland Inc.

 

Variable Compensation

     

Management

Incentive Plan

(“MIP”)

 

Ÿ   For 2012, performance achievement was based on:

 

-   50% Cash Flow from Operations (replacing Free Cash Flow), and

 

-   50% Absolute ROI

 

Ÿ   Using Cash Flow from Operations eliminates the concern that capital spending might be delayed to achieve MIP payout to the long-term detriment of the business

     

Performance Share Plan

(“PSP”)

 

Ÿ   For 2012, performance achievement was measured over a single, three-year period instead of four segmented measurement periods

 

Ÿ   Number of units granted was aligned with market-based accounting values to ensure delivery of the intended LTI target value

 

Ÿ    Award scales adjusted to reflect modified peer groups

 

Ÿ    Enhances long-term nature of program

 

Ÿ    Reduces complexity of program

 

Ÿ    Better aligns with compensation best practices

 

Ÿ    Maximum payout consistent with market practice

     
Both MIP and PSP  

Ÿ   ROI Stretch Goal, providing an additional incentive payout of 30%, was eliminated. Maximum payout was reduced to 200%

 

Ÿ   Better aligns with compensation best practices and goal was achieved in 2011

Executive Benefits

       
     

Change in Control

Agreements

 

Ÿ   Severance multiple, additional years of pension credit, and benefit continuation period were reduced from 3X to 2X for future agreements with SVPs; 3X multiple was retained for succeeding CEO(s)

 

Ÿ   Reducing the multiple is consistent with compensation best practices

     

Unfunded Supplemental

Retirement Plan for

Senior Managers

(“SERP”)

 

Ÿ   SERP closed to new participants, effective January 1, 2012

 

Ÿ   Declining prevalence of SERP in the market

Other Governance Matters

     
Officer Stock Ownership  

Ÿ   Stock ownership guidelines were modified to replace four-year grace period with 50% stock retention requirement, effective January 1, 2013

 

Ÿ   Ensures that executives are continually and steadily building a minimum level of equity ownership

NOTE: the above changes are discussed in detail throughout the remainder of this CD&A.

 

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As shown in the table below, we have organized our CD&A to explain how the amounts paid to our NEOs are tied directly to our Company’s performance.

 

Part I:

  

How We Design Our Executive Compensation Program to Pay for Performance

Explains our philosophy and demonstrates that our CEO’s pay is appropriately tied to Company performance, describes how the Committee uses benchmarking to guide its decision making, and how the Committee, consultants and executive officers participate in the development of our program

   Page 36

Part II:

  

Elements of Our Executive Compensation Program

Describes each element of our program and explains how our incentive compensation plans are designed

   Page 41

Part III:

  

NEO Compensation

Details the rationale for the Committee’s compensation decisions in 2012 related to the NEOs, describes each NEO’s individual, pre-established performance objectives, and compares the actual amounts paid to his or her targeted compensation

   Page 51

Part IV:

  

Other Governance and Compensation Related Matters

Discusses the governance policies that reinforce our pay-for-performance philosophy and limit executive benefits, including, among others, our stock ownership requirements and clawback features of our incentive plans

   Page 62

Part V:

  

Additional Information about Our Executive Compensation

Provides detailed information about our NEO compensation for 2010, 2011 and 2012 in the Summary Compensation Table and other tables

   Page 66

Part I: How We Design Our Executive Compensation Program to Pay for Performance

Executive Compensation Philosophy

Our executive compensation program continues to be designed to attract, retain and motivate our SLT to deliver Company performance that builds long-term shareowner value. To achieve our objectives, our program is designed around two guiding principles:

 

Compensation Principles    Rationale

Pay for performance

   We reward achievement of specific goals that improve our financial performance and drive strategic initiatives to ensure sustainable long-term profitability.

Pay at risk

   We believe that a significant portion of an executive’s compensation should be specifically tied to Company and individual performance.

 

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Pay for Performance – CCG Analysis

The Committee reviews our CEO’s actual pay in relation to the Company’s performance to ensure alignment. While there are many companies to which we could compare ourselves based on industry, revenue or other criteria, we conduct our pay-for-performance review against our CCG because it is the group against which we benchmark our program design and targeted pay levels.

Each point on the chart below represents a CCG CEO’s three-year realizable compensation (the cash compensation actually paid plus the economic value of equity-based grants) relative to his or her company’s three-year performance in Total Shareholder Return (“TSR”) over the period 2009-2011.

Compared to our CCG, our CEO earned at the 60th percentile while the Company delivered the highest TSR among our peer group. The Committee believes this graph clearly illustrates a strong pay-for-performance correlation, especially when compared year over year. The Company’s TSR advanced from the 40th percentile to the highest within our CCG (100th percentile) while our CEO’s realizable compensation only moved from the 30th percentile to the 60th percentile, reflecting the Company’s principles-based approach to executive compensation.

 

LOGO

 

 

This graph is based on the 2012 proxy filings of our CCG.

 

Total Shareholder Return reflects share price appreciation, adjusted for dividends and stock splits.

 

Realizable pay consists of:

  1) actual base salary paid over the three-year period,
  2) actual STI payouts over the three-year period, and
  3) LTI determined as shown below, with equity awards based on December 31, 2011 market value for each company:
  a. in-the-money value of stock options granted over the three-year period;
  b. service-based restricted stock awards granted over the three-year period;
  c. performance share awards:
  i) Actual shares earned using actual performance achievement for grant cycles beginning and ending between 2009 and 2011; and
  ii) Target shares granted over the three-year period assuming target performance, for performance cycles that have not yet been completed.
  d. performance cash awards:
  i) Actual cash paid using actual performance achievement for grant cycles beginning and ending between 2009 and 2011; and
  ii) Target cash levels provided over the three-year period assuming target performance, for performance cycles that have not yet been completed
 

The graph reflects CEO compensation for each company regardless of who actually served in the CEO role. This allows us to compare CEO compensation for a full three-year period for each company and focuses on the CEO position rather than specific individuals. Three companies (Caterpillar, Goodyear Tire & Rubber, and Schlumberger) experienced a change in personnel in the CEO position during the time frame of 2009-2011.

 

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Pay at Risk – 2012 Total Target Compensation Mix

The chart below demonstrates our commitment to pay at risk. For 2012, 88 percent of our CEO’s target compensation and, on average, 78 percent of other NEOs’ target compensation was based on Company performance and was therefore at risk. Importantly, base salary comprises a relatively small portion of our NEOs’ compensation and is the only component of their Total Direct Compensation (defined below) that is not tied to Company performance.

 

LOGO

 

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Peer Group Benchmarking

The Committee benchmarks our compensation program against our CCG to assure that our pay levels remain competitive. We strive for consistency by retaining as many of the same companies in this group as possible from year to year. Changes are made to assure sufficient or appropriate data on which to base compensation decisions.

Our CCG consists of 20 publicly traded companies selected by the Committee. For 2012, Occidental Petroleum was replaced by PPG Industries, as PPG’s compensation approach appears more closely aligned with the Company. CCG companies are selected utilizing the following criteria:

 

  Ÿ  

Competition for executive talent;

 

  Ÿ  

Comparable annual revenue, with market capitalization used as a modifier, as appropriate;

 

  Ÿ  

Global geographic presence; and

 

  Ÿ  

Complexity of business operations.

We believe our approach produces a more appropriate comparison than an industry peer group, such as one based on Global Industry Classification Standard (GICS) codes, because our industry peer group does not provide a sufficient number of companies that are of a comparable size and complexity. Additionally, our executives are aggressively recruited by businesses outside our limited industry peer group and we recruit from outside this group as well.

The Committee reviews an analysis of the pay levels of each member of our SLT to comparable positions at CCG companies. Towers Watson provides data in order to compare the three elements of Total Direct Compensation (“TDC”):

 

  Ÿ  

Base salary;

 

  Ÿ  

Short-term incentive compensation; and

 

  Ÿ  

Long-term incentive compensation.

The Committee targets TDC at the median level (50th percentile) of our CCG. In our 2011 review, both our CEO and our SLT in aggregate had target TDC levels that were 91 percent of the CCG survey median.

The Committee, in conjunction with its consultant, Frederic W. Cook & Co., Inc. (“Cook”), uses this analysis as a frame of reference when setting pay levels. Actual compensation paid to our SLT will vary from benchmark medians based on factors such as:

 

  Ÿ  

Position scope and responsibilities;

 

  Ÿ  

Individual performance; and

 

  Ÿ  

Internal equity.

 

IP’s Targeted TDC = CCG Median
(50th percentile)

2012 Compensation Comparator Group (“CCG”)

 

(Revenues shown were used in late 2011 to benchmark pay for 2012)

 

     

Revenues
(in billions)

(1)

3M Company

   $29.2

Alcoa Inc.

   $24.6

Bunge Limited

   $55.0

Caterpillar Inc.

   $55.7

Dow Chemical Company

   $59.7

E.I. DuPont de Nemours

   $37.4

Eaton Corp.

   $15.7

Emerson Electric Company

   $24.2

FedEx Corp.

   $40.4

Goodyear Tire & Rubber Company

   $22.2

Hess Corp.

   $37.7

Honeywell International Inc.

   $36.1

Johnson Controls, Inc.

   $40.8

Kimberly-Clark Corp.

   $20.7

Lockheed Martin Corp.

   $47.0

PPG Industries, Inc.

   $14.7

Schlumberger Limited

   $37.6

United States Steel Corp.

   $19.4

Whirlpool Corp.

   $18.8

Xerox Corp.

   $22.6
   

25th Percentile

   $21.8

50th Percentile

   $32.7

75th Percentile

   $40.5
   

International Paper Company

   $26.2

IP Percent Rank

   43.9%

IP Rank

   12 of 21
   

Including Temple-Inland Pro-Forma

   $30.1

Percent Rank

   48%

Rank

   11 of 21
      

(1)    Most recently reported four quarters as of October 31, 2011

 

 

 

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Role of the Management Development and Compensation Committee

The Committee is responsible for the Company’s executive compensation program, including the design elements of our program. The Committee approves:

 

  Ÿ  

Our compensation benchmarking process, as well as the companies used for comparison to ensure reasonableness and stability;

 

  Ÿ  

Overall effectiveness of our executive compensation program to ensure the design achieves our objectives;

 

  Ÿ  

Performance metrics and their respective weighting, as well as the companies against which we compare our relative performance;

 

  Ÿ  

SLT compensation, based on recommendations from the CEO; and

 

  Ÿ  

An annual evaluation of risk as it pertains to our Company-wide compensation plans and programs.

In addition, in a process directed by the Presiding Director, the Committee approves the CEO’s annual objectives and performance achievement, and recommends CEO compensation to the independent directors. The Committee reviews CEO performance semi-annually. The Committee recommends the CEO’s annual incentive award and base salary merit increase to the Board based on its assessment of his performance achievement. All elements of CEO pay are approved by the independent directors of the Board.

Role of Compensation Consultants

The Committee engaged Cook, commencing in mid-2011, to serve as its independent, external compensation consultant, including during 2012. The Committee relies on Cook to inform its decision-making process and has sole authority for retaining and terminating its consultant, as well as approving the terms of engagement, including fees. Cook works exclusively for the Committee and provides no services to the Company. Accordingly, the Committee has determined the firm to be independent from the Company. The Company retains Towers Watson to advise on program design, provide and analyze benchmarking data, apprise management of evolving practices and trends, and perform other consulting services as needed.

Role of Executive Officers in Compensation Decisions

The CEO makes recommendations to the Committee concerning the strategic direction of our executive compensation program. The Committee works closely with Mr. Paul Karre, Senior Vice President, Human Resources and Communications, who is responsible for making recommendations to the Committee concerning program design and administration, and with Ms. Sharon Ryan, Senior Vice President, General Counsel and Corporate Secretary, who provides legal advice to the Committee concerning disclosure obligations, governance and its oversight responsibilities.

Annually, the CEO reviews the performance of SLT members against their individual, pre-established performance objectives and discusses his assessment with the Committee. Each NEO’s pre-established objectives incorporate both qualitative and quantitative measures. In this way, measurement of individual performance differs from measurement of Company performance, which is based exclusively on quantitative measures. Based on each NEO’s year-end performance evaluation, the CEO, in consultation with Mr. Karre, recommends to the Committee any base salary increase and annual incentive award payment. Ultimately, the Committee takes into account the CEO’s recommendation, as well as input from its compensation consultant, in approving each SLT member’s compensation. The CEO does not participate in any Committee meetings or deliberations that involve his own compensation.

 

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Part II: Elements of Our Executive Compensation Program

Overview

The primary elements of our executive compensation program are base salary, short-term (annual) incentive compensation under our Management Incentive Plan (“MIP”), long-term incentive compensation under our Performance Share Plan (“PSP”), and benefits.

Total Direct Compensation (“TDC”)

TDC is the combination of fixed and variable compensation. Other compensation elements, such as benefits, are not part of TDC, but the Committee reviews these elements also.

LOGO

 

Base Salary

Base salary represents the only fixed element of TDC. The Committee considers base salary merit increases annually based on individual performance, while taking into account whether market-based adjustments are necessary. Annual merit increases are effective April 1. In February 2012, the Committee concluded that, in spite of outstanding individual and Company performance, no further merit-based salary adjustments were necessary in light of our CCG benchmarking data. Accordingly, in April 2012, none of the NEOs received base salary adjustments.

The following table shows, for each NEO, the annual base salary in effect during all of 2012 and the annual base salary effective April 2013. Mr. Faraci received a merit-based adjustment while Ms. Ryan received both a merit- and market-based adjustment reflecting her additional time in her role and better aligning her pay to our CCG.

 

     2012
Annual
Base Salary
    April 2013
Increase
   

Current

Annual

Base Salary

 

Mr. Faraci

  $ 1,391,000        4.2   $ 1,450,000   

Ms. Roberts

  $ 720,000             $ 720,000   

Ms. Laschinger

  $ 615,000             $ 615,000   

Mr. Nicholls

  $ 710,000             $ 710,000   

Ms. Ryan

  $ 485,000        9.3   $ 530,000   

Variable Compensation: Overview and How We Assess Performance

We do not have guaranteed bonuses. Variable compensation is pay at risk and it is tied directly to both Company and individual performance. Company performance is based on the achievement of specific financial goals described below. Individual performance is rewarded upon achievement of specific pre-established objectives or priorities.

 

Element    IP Incentive Plan / Program    2012 Performance Metrics
     

Short-term Incentive Plan

   Management Incentive Plan or MIP    Cash Flow from Operations

Absolute ROI

     

Long-term Incentive Plan

   Performance Share Plan or PSP    ROI Relative to Peers

TSR Relative to Peers

Other equity awards, including awards of stock and service-based restricted stock/units, may be granted from time to time under limited circumstances to address specific recruitment, retention or other recognition efforts. In addition, stock options and executive continuity awards granted in past years remain outstanding; these programs have since been discontinued.

 

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How and Why We Chose Our Performance Metrics and Peer Groups

Our incentive compensation plans are designed around achievement of pre-established performance objectives that will drive improved financial performance of the Company. The Committee annually evaluates the appropriateness of the performance metrics, and makes adjustments based on the financial objectives most critical to the Company’s success. We explain below why the Committee chose the performance metrics we use for our incentive compensation plans.

 

 

2012 ROI PEER GROUP

 

Boise

Domtar Inc

Fibria Celulose

Klabin

Metsa Board (formerly M-real Corp)

MeadWestvaco Corp

Mondi Group

Packaging Corporation of America

RockTenn Company

Smurfit Kappa Group

Stora Enso Corp

UPM-Kymmene Corp

 

2012 TSR PEER GROUP

 

Alcoa Inc

Domtar Inc

Dow Chemical Company

E.I. DuPont de Nemours & Co

Fibria Celulose

Klabin

MeadWestvaco Corp

Mondi Group

Packaging Corporation of America

RockTenn Company

S&P 100 Index

S&P Basic Materials Index

Sappi Limited

Smurfit Kappa Group

Stora Enso Corp

United States Steel Corp

UPM-Kymmene Corp

 

 

Cash Flow from Operations1 is a measure of a company’s ability to generate cash and is an important indicator of its stock value. Focusing our leaders on generating cash flow is important to maintain a strong balance sheet, pay dividends, repay debt, maintain our assets and make investments for future growth.

Return on Investment (“ROI”)2 measures a company’s profitability and is an indicator of a company’s ability to use its assets and resources to generate returns on invested capital. Earning an ROI target that is equal to or greater than our cost of capital is necessary for the Company to create long-term value for our shareowners.

Total Shareholder Return (“TSR”)3 reflects share price appreciation and dividends paid. TSR can be used to compare the performance of companies’ stocks over time, and we measure our relative TSR position over a three-year period against our TSR Peer Group. This is a key financial measure that aligns our long-term incentive pay with creating value for our shareowners.

Why We Use Different Peer Groups

In the chart below, we explain why we use different peer groups for compensation benchmarking and measuring Company performance in our incentive plans.

 

Peer Group    Composition    Rationale

CCG

  

Includes 20 companies from many industries

 

(Companies range in size from approximately 0.5 to 2.0 times IP’s revenue, which puts us in the mid-range)

   These are the companies against which we are likely to compete for executive talent

ROI Peers

   Includes global industry competitors    These are the companies against which we compete for customer business

TSR Peers

   Broader cross-section of basic materials companies engaged in global manufacturing and capital-intensive businesses    These are the companies against which we compete for investment dollars, and two indices: the S&P 100 and the S&P Basic Materials Index

 

1 

For purposes of the incentive compensation plans discussed here, Cash Flow from Operations is calculated as cash flow from discontinued and continuing operations as well as cash flow from special items, and is shown in the Company’s Statement of Cash Flow as “Cash Provided by (Used for) Operations.” Cash flow as a result of pension contributions, alternative fuel mixture tax credits or other unanticipated, highly unusual items may, at the Committee’s discretion, be excluded in the calculation of “Cash Flow from Operations” for purposes of determining achievement of this cash flow metric. Specifically, related to the 2012 MIP plan, the following conditions also apply: The financial results of Temple-Inland’s Building Products business (which the Company is holding for sale) were excluded from the Cash Flow from Operations calculation. In addition, the cash impact of one-time costs associated with the Temple-Inland acquisition (e.g., fees, settlements, costs to achieve synergies, etc.) was excluded from this metric.

 

2 

For purposes of the incentive compensation plans discussed here, ROI is calculated as after-tax operating earnings (including both earnings from continuing and discontinued operations up through the date of sale) before the impact of special items, divided by average capital employed. Capital employed is total assets, less short-term, non-interest-bearing liabilities. The ROI metric excludes the impact of special items, such as gains or losses associated with asset sales, asset impairments, restructuring costs, and significant out-of-period or “one-off” items. Income received due to alternative fuel mixture tax credits and from cellulosic biofuel tax credits is excluded from the calculation of ROI for purposes of determining achievement of the ROI metric because we have classified them as special items. We calculate International Paper’s ROI and our peer companies’ ROI using the same methodology. Specifically, relating to the 2012 MIP plan, the following condition applies: The financial results of Temple-Inland’s Building Products business (which the Company is holding for sale) were excluded from the ROI calculation.

 

3 

For purposes of the incentive compensation plans discussed here, TSR is calculated as the change in the Company’s common stock price during the performance period plus the impact of any dividends paid and reinvested during the performance period. For all companies in our TSR Peer Group, both the beginning and ending common stock prices used are the average closing price of the 20 trading days immediately preceding the beginning and ending of the performance period. We calculate International Paper’s TSR and our peer companies’ TSR using the same methodology.

 

 

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The Committee has approved a modification to the definition of the return on investment metric for use in the Company’s incentive compensation plans, beginning with the 2013 MIP and PSP. The return on investment metric will be defined as “return on invested capital” (“ROIC”), rather than the previously used “return on capital employed” definition (described above in footnote 2). This change is intended to more closely align the Company’s executive compensation program with the interests of the investment community, as most investors and stock analysts use ROIC as the primary measure for our returns versus the cost of capital.

Management Incentive Plan (“MIP”)

Overview

The MIP is an annual, cash-based incentive plan designed to motivate employees to achieve our most critical short-term financial goals. In 2012, the MIP award pool, described below, was distributed among approximately 3,300 employees.

2012 Company Performance Metrics and Performance Achievement

The Company continued its focus on absolute ROI, but shifted from Free Cash Flow to Cash Flow from Operations for the 2012 MIP. Using Cash Flow from Operations eliminates the concern that capital spending might be delayed to achieve an MIP payout to the long-term detriment of the business. The Committee believes that the combination of these metrics will continue to focus our leaders on improving the Company’s ROI, as well as its cash generation capabilities. The chart below describes the specific design elements.

 

2012

MIP Performance Metrics

 

Metric

Weight

 

Threshold
Performance

Payout %

 

Target

Performance

Payout %

 

Maximum

Performance

Payout %

         

Absolute ROI

  50%  

4.9% ROI

50%

 

6.5% ROI

100%

 

8.5% ROI

200%

         

Cash Flow from Operations

  50%  

Achieve $2.4B

50%

 

Achieve $3.2B

100%

 

Achieve $3.8B

200%

The Committee believes that our MIP performance targets should motivate management to achieve results that will drive superior investor returns. The demanding nature of our performance objectives was evidenced in the Committee’s determination of our MIP achievement for 2012. Despite a stock price appreciation of 35%, and relative ROI results in 2012 that exceeded the median of our industry peers, we did not achieve the targeted levels of Absolute ROI and Cash Flow from Operations previously approved by the Committee. Consequently, the Committee evaluated the Company’s 2012 financial performance achievement and approved an overall performance rating of 87.6% of target, as illustrated below.

 

2012

MIP Performance Metrics

 

Metric

Weight

   

Actual

Performance

Attainment

  Target Award
Earned
 

Weighted

Target Award
Earned

       

Absolute ROI

    50   6.08% ROI   86.8%   43.4%
       

Cash Flow from Operations (A)

    50   $3.02B   88.4%   44.2%
   

Total Company Performance

  

          87.6%
   

Board of Directors’ Discretionary Funding

  

          0.0%
   

Total Company Payout Percent

  

          87.6%

(A)  In accordance with the 2012 MIP plan document, the Committee excluded the following items in determining sources and uses of cash for purposes of calculating performance achievement under the Cash Flow from Operations metric:

 

  (i) $0.37 billion Temple-Inland one-time acquisition cash cost; and

 

  (ii) $0.31 billion cash received from asset monetizations.

 

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2012 Award Pool Calculation

The Company’s MIP target award pool is equal to the sum of each MIP-eligible employee’s target award, based on his or her position level in the Company. To calculate the award pool, the target award pool is multiplied by the Company’s 2012 performance achievement of 87.6 percent, resulting in an award pool of approximately $86.5 million.

The Committee has the discretion to decrease the award pool and has done so on several occasions in the past. However, consistent with our philosophy that management should be rewarded for delivering outstanding financial results, the Committee also has limited discretion to increase the award pool by no more than 25 percent, provided that the total final award pool does not exceed the maximum amount permitted under the 2012 MIP, which is 200 percent of target. The Committee did not exercise its discretion to decrease or increase the 2012 MIP award pool.

Individual MIP Awards

For all MIP-eligible employees, their respective awards are based on Company performance, as modified by individual performance. The CEO has discretion to recommend an award above the calculated award in recognition of exceptional individual performance beyond what is captured in explicit individual objectives.

Additionally, individual MIP awards made to the SLT are capped at $10 million because they are made pursuant to a plan approved by our shareowners in 2009 for the purpose of qualifying as performance-based compensation under Internal Revenue Code (“Code”) Section 162(m).

The MIP award paid to each of our NEOs is described in Part III.

Performance Share Plan (“PSP”)

Overview

The PSP is a long-term, equity-based incentive plan designed to motivate employees to create long-term shareowner value. PSP awards are granted in performance-based restricted stock units (“PSUs”) annually to approximately 1,300 management-level employees based on position level in the Company and satisfactory performance evaluations. PSP awards are earned over three years based on the Company’s performance achievement in relative ROI and relative TSR. Awards are paid in shares of Company stock. The number of shares ultimately paid includes the reinvestment of dividends earned on such shares during the three-year performance period.

Under the PSP, the actual number of shares paid to each employee is based solely on Company performance achievement that has historically been measured in four separate segments: three one-year segments, and one three-year segment. The Committee approves the Company’s performance achievement at the end of each segment, and the resulting award is “banked” for each employee.

Commencing with the 2012 grant, performance achievement is no longer measured using a segmented approach, but instead measured over a single, three-year performance period just as Segment 4 was measured for prior PSP grants. By replacing the “segmented approach” performance will no longer be “banked.” While eliminating segmentation makes it more difficult to predict the payout, the Committee believes this refinement to the PSP:

 

  Ÿ  

enhances the long-term nature of the program;

 

  Ÿ  

reduces complexity of the program;

 

  Ÿ  

better aligns with compensation best practices, recognizing company performance in long-term incentive plans is not typically measured in one-year increments; and

 

  Ÿ  

more closely correlates with the Company’s pay-for-performance philosophy on compensation.

 

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The Committee does not have discretion to adjust the performance achievement upward for any segment, but may adjust it downward in the event the Company experiences negative ROI or negative TSR.

 

LOGO

NOTE: The 2011 PSP grant will continue to have segmented performance measurement and will continue to be “banked.”

Company Performance Metrics and Objectives

In 2012, the PSP continued to focus on relative performance in ROI and TSR as shown below. Our officers’ awards are more heavily weighted to TSR, as compared to other employees’ awards. We believe that our most senior leaders, who more directly influence the strategic direction of the Company, should have a greater percentage of their PSP awards tied to TSR, as it aligns their pay with the long-term interests of the Company and our shareowners.

 

     

2012-2014 PSP

Performance Metrics

 

 

Metric Weight

 

 

Performance Objective

 
  Officers    

Non- 

Officers 

 

 

Threshold

Payout %

   

Target

Payout %

   

Maximum

Payout %

 

ROI Relative to Peers

  50%     75%    

 

 

 

 

Rank 9 of 13

25%

 

  

  

 

 

 

 

 

Rank 6 of 13

100%

 

  

  

 

 

 

 

 

 

Rank 1 of 13

200%

 

 

  

  

 

TSR Relative to Peers

  50%     25%      

 

Rank 13 of 18

25%

  

  

 

 

 

 

 

Rank 9 of 18

100%

 

  

  

 

 

 

 

 

 

Rank 1 of 18

200%

 

 

  

  

 

Payout Calculation

Based on market data, each PSP participant has a target award based on his or her position level. The actual number of shares paid may be higher or lower than the target award, based solely on the Company’s performance achievement. Possible payouts under the 2012 PSP range from 0 percent to 200 percent of the target award.

2010 – 2012 PSP Payout

For the 2010 – 2012 PSP, the performance achievement approved by the Committee in February 2013 is shown in the chart below. The 2010 PSP grant included a stretch goal with a possible additional 30 percent added (resulting in a maximum possible payout of 230 percent) if the Company had achieved ROI equal to or greater than 8 percent. This stretch goal was designed as an incentive for our leaders to achieve cost of capital returns. The stretch goal was eliminated from plan design commencing with the 2012 PSP grant.

 

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The 2010 – 2012 PSP award paid to each of our NEOs is described in Part III.

 

2010–2012 PSP

Performance
Metrics

 

Metric Weight

for Officers

 

Segment One

(2010)

 

Segment Two

(2011)

 

Segment Three

(2012)

 

Segment Four

(2010-2012)

         

ROI Relative to Peers

  50%   Ranked 3 of 11

65%

  Ranked 4 of 10B

50%

  Ranked 4 of 9BD

50%

  Ranked 4 of 9BD

50%

         

TSR Relative to Peers

  50%   Ranked 17 of 19A

0%

  Ranked 3 of 19BC

82.5%

  Ranked 6 of 19BD

65%

  Ranked 5 of 18BCD

70%

         

 Absolute ROI Stretch Goal 

  + 30%   Not achieved   Achieved + 30%   Not achieved   Not achieved
   

Total Segment Performance

  65.0%   162.5%   115.0%   120.0%
   

2010–2012 PSP Payout for Officers

      115.6%*    

A – AbitibiBowater and Smurfit Stone removed from peers due to bankruptcy.

B – Smurfit Stone removed from peers due to acquisition by Rock Tenn.

C – AbitibiBowater removed from peers due to bankruptcy.

D – Temple-Inland removed from peers due to acquisition by IP.

* Ms. Ryan was not an officer during 2010 when this PSP award was granted, so her award had the non-officer metric weighting of 75% for relative ROI and 25% for relative TSR, which resulted in a payout of 115.3% of target.

Other Equity Awards

Grants of Stock and Restricted Stock / Units

Other types of equity awards, such as grants of stock, restricted stock awards (“RSAs”) or restricted stock units (“RSUs”) are used infrequently for purposes of recruitment, retention or recognition. Vesting provisions for these awards vary on a case-by-case basis, but in all cases are forfeited if the participant voluntarily terminates employment prior to vesting. Ms. Laschinger received an RSA grant of 25,000 shares during 2012 for retention and recognition purposes.

Discontinued Stock Option Program

We moved away from using stock options as part of our long-term incentive program for officers in 2004 and for all other employees in 2005. We now instead rely solely on performance-based equity awards under the PSP. Stock options were previously awarded semi-annually with an exercise price equal to the closing price of our common stock on the date immediately preceding Committee approval.

Although no new stock options have been granted since 2005, the program allows employees with outstanding options to obtain additional options, provided they exercise using the stock-swap method. This feature, referred to as a “reload,” allows a participant to receive up to a maximum of three automatic grants of additional options. Reloads are only available on the number of shares tendered to cover the purchase price of the shares.

Participants, including our NEOs, continue to hold previously awarded outstanding stock options. Options remain exercisable for their full 10-year term, unless an employee is terminated or voluntarily leaves (other than in the event of death, disability or retirement eligibility), in which case the options expire immediately or within 90 days after termination, depending on the date the stock options were granted. All outstanding options for our NEOs, described in the “Outstanding Equity Awards” table, will expire by October 2014.

Discontinued Executive Continuity Awards Program (“ECAs”)

This award program has been discontinued. In the past, we awarded Executive Continuity Awards (“ECAs”) to certain senior officers to encourage employment through retirement. No ECAs have been granted since 2000. As of December 31, 2012, the CEO held the only outstanding ECAs (further described in the “Outstanding Equity Awards” table), which vested on February 16, 2013.

Health Benefits

Health benefits are offered to all U.S. salaried employees and the Company pays approximately half of the costs to provide those benefits. The NEOs participate in the same health and retirement programs as other U.S. salaried

 

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employees. We do not offer any supplemental health care benefits to the SLT. Employees who annually earn more than $150,000 pay 25 percent more, on average, for comparable plans than employees who annually earn less than $75,000.

The Company continues to review its benefit programs, including active and retiree health benefits, to determine if changes are necessary or advisable.

Retirement Benefits

The Company provides attractive retirement benefits that help the Company remain competitive in the market for top talent. In addition to our tax-qualified 401(k) savings plan and, if applicable, the Deferred Compensation Savings Plan, we provide retirement benefits to our U.S. salaried employees, including the SLT, as follows:

 

  Ÿ  

For employees hired prior to July 1, 2004: retirement benefits are provided under the Retirement Plan and the Pension Restoration Plan.

 

  Ÿ  

For employees hired on or after July 1, 2004: retirement benefits are provided through a retirement savings account funded by the Company through the Salaried Savings Plan.

We offer the Pension Restoration Plan to supplement the Retirement Plan for employees whose compensation is greater than the limits set by the Internal Revenue Service (“IRS”) for qualified retirement plans. Absent this plan, certain employees would not achieve a retirement benefit commensurate with their earnings during the course of their careers with us.

Members of the SLT may receive their non-qualified pension benefits under the Unfunded Supplemental Retirement Plan for Senior Managers (“SERP”). We have offered the SERP since 1983 to recruit and retain senior and mid-career executives. The benefit formula was reduced for all new entrants into the program after June 30, 2004.

SERP participants become vested upon reaching age 55 with five years of service and, once vested, are eligible to receive their SERP benefit following retirement at the earlier of age 55 with 10 years of service or age 65 with five years of service. As described following the “Pension Benefits” table on page 73, SERP benefits are calculated under one of two formulas, depending on the dates of the participant’s employment and SERP eligibility.

The SERP was closed to new participants, effective January 1, 2012, due to the declining prevalence of this benefit in the market.

Retiree Medical Benefits

The Company provides retiree medical benefits to U.S. salaried employees who have not yet reached age 65, including our SLT, who are eligible to begin receiving retirement benefits under the Retirement Plan or who are at least age 55 and have 10 years of service when they terminate employment. The Company does not provide retiree medical benefits beyond age 65, but does offer assistance in enrolling in such benefits through the individual market. The Company no longer subsidizes the cost of these benefits for employees who were hired on or after January 1, 2004. For employees whose years of age and service were equal to or greater than 60 on January 1, 2004, the Company continues to offer a limited subsidy. Mr. Faraci and Ms. Roberts are each eligible for the Company subsidy because they met the age and service requirements on January 1, 2004.

We also offer a Retiree Medical Savings Plan (“RMSP”) to U.S. salaried employees. Upon reaching age 45, employees may contribute to an RMSP account, and the contributions are credited with a Company match. Amounts contributed to the RMSP may be used to reimburse the cost of retiree medical coverage. Each of the NEOs is eligible to participate in the RMSP.

Salaried Savings Plan (“SSP”) and Deferred Compensation Savings Plan (“DCSP”)

The Company maintains a tax-qualified Salaried Savings Plan (“SSP”), a Code Section 401(k) plan, for U.S. salaried employees. Under the SSP, participants may defer compensation for retirement up to the limits set by the IRS.

 

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In addition, the Company offers an unfunded, non-qualified Deferred Compensation Savings Plan (“DCSP”) for employees whose compensation is higher than the compensation limit set by the IRS for tax-qualified plans. The DCSP permits additional deferrals up to 85 percent of compensation, including base salary and MIP, beyond the contribution limits set by the IRS.

Deferred amounts under both the SSP and DCSP are credited with Company matching contributions equal to 70 percent of the participant’s contributions up to 4 percent of their compensation, plus 50 percent of contributions up to an additional 4 percent of compensation.

Amounts deferred in the DCSP earn returns based on investment options modeled after the investment funds in the SSP elected by the participant. Details regarding the DCSP follow the “Non-Qualified Deferred Compensation” table on page 76.

Salaried Employee Severance Plan

The Company provides severance to employees who are involuntarily terminated. SLT members participate in the same Salaried Employee Severance Plan that covers all U.S. salaried employees. The plan provides a lump-sum payment equal to two weeks’ salary for every year or partial year of service. Under certain circumstances, supplemental severance may be paid. Supplemental severance is limited by the Board policy described on page 63.

Employees are eligible for severance if they are terminated through no fault of their own and sign a termination agreement acceptable to the Company. The termination agreement includes confidentiality provisions, as well as restrictive covenants, as appropriate.

Executive Perquisites

The Company presently offers no perquisites to our NEOs other than:

 

  Ÿ  

the CEO’s limited personal use of Company aircraft and automobile, which is described in Part IV;

 

  Ÿ  

standard benefits and perquisites under our Global Mobility Policy, which establishes many of the benefits and perquisites provided to employees who serve or have served as expatriates, and are disclosed in Part V; and

 

  Ÿ  

benefits granted to grandfathered participants in 2008 in our Executive Supplemental Life Insurance Program (“ESIP”), which are described below.

Executive Supplemental Life Insurance (“ESIP”)

This SLT benefit was closed to new participants effective January 1, 2008, and thus Ms. Ryan and two other SLT members do not have this benefit. The ESIP provides an individually owned, permanent life insurance policy with a pre-retirement death benefit equal to two times annual salary and a cash value accumulation designed to provide a post-retirement death benefit equal to one times final salary. The Company pays the full premium cost, and participants are responsible for the income tax due on the premiums.

Change-in-Control Agreements

The Company has entered into change-in-control agreements with certain executives that provide severance and other benefits in the event of a change in control of the Company. Our Board believes that maintaining change-in-control agreements is a sound business practice that protects shareowner value prior to, during and after a change in control, and allows us to recruit and retain top executive talent. Our program is only available to the SLT, except for those vice presidents grandfathered in the program as of February 2008. Each member of the SLT is covered by the same form of agreement.

We believe that this program aligns executive and shareowner interests by enabling leaders of the Company to focus on the interests of shareowners and other constituents when considering a potential change in control, without undue concern for their own financial and employment security.

In the Board’s ongoing oversight of this program, the Board modified the program in 2010, to eliminate the excise tax gross-up provision, replacing it instead with a “best net” calculation. Under this “best net” approach, the Company will, prior to making any payments, perform a calculation comparing:

 

  (i) the net benefit after payment of excise tax by the executive that would be applied, and

 

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  (ii) the resulting net benefit if the payment had been limited to the extent necessary to avoid the imposition of an excise tax

to determine the higher resulting “net” benefit payable under the agreement. Benefits are not payable unless an irrevocable release of any employment-related claims is signed. This change reflects a best practice in the marketplace. In no event will the Company pay a gross-up for excise taxes.

Benefits Available Upon Termination of Employment Following Change in Control

As shown in greater detail in the “Potential Payments Upon Change in Control” table in Part V, our change-in-control agreements provide the following benefits to the SLT only if there has been a qualifying termination of employment: they are terminated by the new employer, or by the employee for “good reason” within two years of a change in control of the Company. The following benefits are payable under the NEOs’ current change-in-control agreements only if both a change in control and qualifying termination of employment occur (“double trigger” benefits):

 

  Ÿ  

Cash severance payment equal to three times the sum of base salary plus target MIP;

 

  Ÿ  

Prorated MIP for the year of termination of employment (based on target achievement if the employee is terminated in the same year as the change in control, or based on actual achievement if the employee is terminated in the year following the change in control);

 

  Ÿ  

SERP participants whose benefit is calculated under Formula A will receive a benefit equal to the higher of (i) 50 percent of compensation, or (ii) the SERP benefit that would be paid absent a change in control but with three additional years of service and age. SERP participants whose benefit is calculated under Formula B will receive their benefit calculated under the Pension Restoration Plan that would be paid absent a change in control, but with three additional years of service and age; and

 

  Ÿ  

Medical and dental insurance for three years, and retiree medical coverage, if eligible.

Beginning in 2012, for change-in-control agreements with future non-CEO SLT members, the cash severance payment multiple has been reduced to two times (from three times) the sum of base salary plus target MIP, and the additional years of pension credit and the benefit continuation period have been reduced to two years (from three years).

Benefits Available upon Change in Control

Currently, the following benefits are payable upon a change in control and do not require termination of employment:

 

  Ÿ  

All equity awards vest and become unrestricted, as follows:

 

   

All PSP shares vest and the full value of all PSP awards is paid for all performance periods – including those not yet completed (which are paid at target)

 

   

Service-based restricted stock awards vest and become unrestricted; and

 

  Ÿ  

SERP participants whose benefit is calculated under Formula A will vest in their benefit and the minimum benefit will increase from 25 percent of compensation to 50 percent of compensation.

We have offered these limited single-trigger benefits for the purpose of:

 

  Ÿ  

Maintaining our competiveness in attracting and retaining executive talent;

 

  Ÿ  

Ensuring that our executives receive the benefit of their efforts prior to a change in control and are not penalized with a loss of equity compensation; and

 

  Ÿ  

Further aligning the interests of our executives with our shareowners, since the risk of losing equity compensation could create a conflict of interest for our executives if the Company were pursuing a change-in-control transaction.

In light of the difficulty in determining relative performance achievement in our PSP following a change in control of the Company, we provide for payment of PSP awards for completed performance periods at actual

 

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achievement and for not-yet-completed performance periods at target. Further, in light of the seniority of our covered executives, and their proximity to retirement age, we believe that increasing their pension protection provides appropriate retirement security in their employment following a change in control.

As described elsewhere in this proxy statement, in February 2013, the Committee and the Board approved amending our change-in-control agreements with officers, including the NEOs, to move from a “single-trigger” to a “double-trigger” approach for acceleration of vesting of equity awards. This change will be implemented in our form change-in-control agreement by the end of 2013 and subsequently reflected in all existing and future agreements.

 

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Part III: NEO Compensation

Overview

In this Part III, we describe the Committee’s 2012 compensation decisions with respect to each NEO, other than the CEO, and its recommendations to the Board concerning the CEO. We also include a description of each NEO’s accomplishments considered by the Committee when making its compensation decisions. In the compensation review used to establish our 2012 TDC levels, our CEO’s target TDC was 91 percent of the CCG median, and our NEOs, in aggregate, had target TDC levels that were 86 percent of the CCG median.

Comparison of CEO’s Compensation to Other NEOs’ Compensation

We do not have a policy that would dictate a specific ratio of CEO compensation to other NEOs or the SLT. Generally, we base our compensation decisions on principles of internal equity and external market competitiveness. The difference that exists between our CEO’s compensation and our other NEOs is based on the complexity of the CEO’s leadership responsibilities for the global enterprise.

2012 Targeted Compensation Mix versus 2012 Actual “Realized” Compensation

We illustrate targeted compensation versus actual “realized” compensation (excluding stock option exercises in 2012) in the individual graphs for each NEO below.

The “Target” column includes:

 

  (i) 2012 actual base salary paid;

 

  (ii) 2012 target MIP; and

 

  (iii) the target value of the 2010-2012 PSP granted in 2010.

The “Actual” column represents what we believe is the appropriate way to illustrate actual pay earned, and includes:

 

  (i) 2012 actual base salary paid;

 

  (ii) 2012 MIP paid in February 2013; and

 

  (iii) 2010-2012 PSP valued and paid in February 2013.

In comparing the following charts to the Summary Compensation Table, you will see that the value shown for the “equity awards” differs. Equity awards granted in 2012 are shown in the Summary Compensation Table, while equity awards valued and paid in 2013 for performance or service periods ending in 2012 are shown in the following charts. We value the equity awards for the 2010-2012 PSP in the following charts based on the closing price ($42.60) of the Company’s common stock on February 8, 2013, which is the trading day immediately preceding the date the Committee approved payout of the PSP award.

 

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John V. Faraci

Chairman of the Board and Chief Executive Officer

LOGO

 

John V. Faraci has over 38 years of service with the Company and has served as Chairman and CEO since November 2003. Earlier in 2003, he was elected President of International Paper, and he served as Executive Vice President and Chief Financial Officer from 2000 to 2003. From 1999 to 2000, he was Senior Vice President and Chief Financial Officer. From 1995 to 1999, he was Chief Executive Officer and Managing Director of Carter Holt Harvey Ltd., a former majority-owned subsidiary of International Paper located in New Zealand.

 

 
2012 Compensation Decisions

Element of

Compensation

  Compensation Amount   Rationale
2012 Actual Base Salary Paid  

$1,391,000

(no base salary increase in 2012)

 

No base salary adjustment was deemed necessary in 2012 in light of our CCG benchmarking data.

 

2012 MIP Award  

$1,784,500

 

(87.6% combined
Company and individual
performance achievement)

 

Mr. Faraci’s MIP payout was based on the Company’s financial performance and his individual achievements. Among the achievements considered by the Committee in its CEO evaluation and its compensation recommendations to the Board were:

 

Ÿ     Led the Company to generate strong cash flow and solid overall financial results, as well as significantly improved total shareholder return, despite economic challenges around the globe.

 

Ÿ    Successfully executed important strategic matters, such as integrating Temple-Inland, leveraging international presence (with recent transactions in Brazil and Turkey, for example), and investing in critical, long-term capital projects across the globe.

 

Ÿ    Proactively and effectively led CEO succession process, including overseeing smooth transition of SLT members into key new roles.

 

Ÿ     Continued to improve shareowner engagement through successful Investor Day conference and targeted investor outreach efforts.

 

2010-2012 PSP Payout   330,965 shares, including
reinvested dividends
(valued at $14,099,109)
  PSP payout of 115.6% is based solely on the Company’s performance achievement in relative ROI and relative TSR described in Part II.

 

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The chart below compares Mr. Faraci’s 2012 actual compensation paid against targeted compensation levels.

 

LOGO

For details regarding stock options exercised by Mr. Faraci during 2012 (which are not reflected in the chart above), see the “Option Exercises and Stock Vested in 2012” table on page 72 of this proxy statement.

 

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Carol L. Roberts

Senior Vice President and Chief Financial Officer

LOGO   Carol L. Roberts has over 31 years of service with the Company. She has served as our CFO since November 2011. Prior to this, she led our Industrial Packaging Group (“IPG”) business, which represents a significant part of the Company’s overall business. Ms. Roberts began her career with International Paper in 1981 as an Associate Engineer at a mill in Mobile, Alabama. Ms. Roberts was named Vice President of our Industrial Packaging business in 2000 and was named Senior Vice President in late 2005.
 
2012 Compensation Decisions
Element of Compensation   Compensation Amount   Rationale
2012 Actual Base Salary Paid  

$720,000

(incorporates 2.9% increase effective January 2012)

 

Ms. Roberts received a base salary increase effective January 2012 to reflect the change in her leadership role. No further base salary adjustment was deemed necessary in 2012 in light of our CCG benchmarking data.

 

2012 MIP Award  

$618,000

 

(102.4% combined
Company and individual
performance achievement)

 

Ms. Roberts’ MIP payout was based on the Company’s financial performance and her individual achievements. Among the achievements considered by the Committee were:

 

Ÿ     Transitioned smoothly and effectively into the CFO role, developing increasing credibility and rapport with investors and the Board and within the Company’s finance organization.

 

Ÿ    Communicated effectively with investors, especially with respect to the Company’s long-term strategy.

 

Ÿ     Executed excellent cash management and allocation decisions, including returning more cash to shareowners (a 14% dividend increase in 2012), aggressively reducing debt, and investing for the future.

 

2010-2012 PSP Payout   71,524 shares, including
reinvested dividends
(valued at $3,046,922)
  PSP payout of 115.6% is based solely on the Company’s performance achievement in relative ROI and relative TSR described in Part II.

 

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The chart below compares Ms. Roberts’ 2012 actual compensation paid against targeted compensation levels.

 

LOGO

For details regarding stock options exercised by Ms. Roberts during 2012 (which are not reflected in the chart above), see the “Option Exercises and Stock Vested in 2012” table on page 72 of this proxy statement.

 

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Mary A. Laschinger

Senior Vice President, President – xpedx

LOGO

   Mary A. Laschinger has over 20 years of service with the Company. She has served as President – xpedx since January 2010 and as a Senior Vice President of the Company since January 2008. She previously served as Vice President and President – IP Europe, Middle East, Africa, and Russia from November 2005 through December 2007.
 
2012 Compensation Decisions
Element of Compensation    Compensation Amount    Rationale
2012 Actual Base Salary Paid   

$615,000

(incorporates 8.1% increase effective January 2012)

  

Ms. Laschinger received a base salary increase effective January 2012 to reflect her increased experience leading our xpedx business and better align her pay with comparable positions within our CCG companies. No further base salary adjustment was deemed necessary in 2012 in light of our CCG benchmarking data.

 

2012 MIP Award   

$349,800

 

(74.2% combined
Company and individual
performance achievement)

  

Ms. Laschinger’s MIP payout was based on the Company’s financial performance and her individual achievements. Among the achievements considered by the Committee were:

 

Ÿ     Executed strategic initiatives to reposition xpedx business for future.

 

Ÿ     Strengthened xpedx in key leadership positions.

 

Ÿ     Successfully restructured xpedx’s warehouse network and built a strategic sourcing capability to enhance profitability.

 

2010-2012 PSP Payout   

53,676 shares, including reinvested dividends

(valued at $2,286,598)

   PSP payout of 115.6% is based solely on the Company’s performance achievement in relative ROI and relative TSR described in Part II.

 

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The chart below compares Ms. Laschinger’s 2012 actual compensation paid against targeted compensation levels.

 

LOGO

For details regarding stock options exercised by Ms. Laschinger during 2012 (which are not reflected in the chart above), see the “Option Exercises and Stock Vested in 2012” table on page 72 of this proxy statement.

 

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Tim S. Nicholls

Senior Vice President, Printing & Communications Papers and IP Latin America (former CFO)

LOGO    Tim S. Nicholls has over 21 years of service with the Company. Mr. Nicholls served as our CFO from December 2007 through November 2011, when he assumed responsibility of our Printing and Communication Papers (“P&CP”) and Latin American businesses. Mr. Nicholls previously served as Vice President and Executive Project Leader of IP Europe during 2007, and Vice President and CFO of IP Europe from 2005 to 2007. He was also President of Weldwood (formerly a wholly owned subsidiary of International Paper headquartered in Vancouver, Canada) from 2002 to 2005.
 
2012 Compensation Decisions
Element of Compensation    Compensation Amount    Rationale
2012 Actual Base Salary Paid   

$710,000

(no base salary increase in 2012)

  

No base salary adjustment was deemed necessary in 2012 in light of our CCG benchmarking data.

 

2012 MIP Award   

$412,500

 

(68.3% combined
Company and individual
performance achievement)

  

Mr. Nicholls’ MIP payout was based on the Company’s financial performance and his individual achievements. Among the achievements considered by the Committee were:

 

Ÿ     Transitioned smoothly and effectively from CFO into new role leading global P&CP business.

 

Ÿ     Strengthened P&CP business in key leadership positions.

 

Ÿ     Led successful execution of key strategic projects, including entry into IP Orsa corrugated packaging joint venture in Brazil and repurposing of Franklin, VA paper mill for fluff pulp production.

 

2010-2012 PSP Payout   

80,575 shares, including reinvested dividends

(valued at $3,432,495)

   PSP payout of 115.6% is based solely on the Company’s performance achievement in relative ROI and relative TSR described in Part II.

 

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The chart below compares Mr. Nicholls’ 2012 actual compensation paid against targeted compensation levels.

 

LOGO

 

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Sharon R. Ryan

Senior Vice President, General Counsel and Corporate Secretary

LOGO    Sharon R. Ryan has 25 years of service with the Company. Ms. Ryan was appointed to the position of Senior Vice President, General Counsel and Corporate Secretary in November 2011, following her service as Acting General Counsel and Corporate Secretary since May 2011 and Vice President since February 2011. Ms. Ryan previously served in a variety of legal roles, including as Chief Ethics and Compliance Officer (beginning in 2009), Associate General Counsel – Corporate Law, and General Counsel of various business divisions within the Company.
 
2012 Compensation Decisions
Element of Compensation    Compensation Amount    Rationale
2012 Actual Base Salary Paid   

$485,000

 

(no base salary increase in 2012)

  

No base salary adjustment was deemed necessary in 2012 in light of our CCG benchmarking data.

 

2012 MIP Award   

$342,800

 

(85.2% combined
Company and individual
performance achievement)

  

Ms. Ryan’s MIP payout was based on the Company’s financial performance and her individual achievements. Among the achievements considered by the Committee were:

 

Ÿ     Obtained regulatory approval for and successfully closed Temple-Inland acquisition and subsequent divestiture of containerboard mills, and successfully resolved significant Temple-Inland legal contingencies.

 

Ÿ     Established and enhanced a strong working relationship with the Board.

 

Ÿ     Strengthened the global legal department in key leadership positions with a focus on augmenting the ethics and compliance function.

 

2010-2012 PSP Payout   

7,398 shares, including
reinvested dividends

(valued at $315,155)

   PSP payout of 115.3% is based solely on the Company’s performance achievement in relative ROI and relative TSR described in Part II (with non-officer metric weighting of 75% for relative ROI and 25% for relative TSR, as Ms. Ryan was not an officer during 2010 when this PSP award was granted).

 

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The chart below compares Ms. Ryan’s 2012 actual compensation paid against targeted compensation levels.

 

LOGO

For details regarding stock options exercised by Ms. Ryan during 2012 (which are not reflected in the chart above), see the “Option Exercises and Stock Vested in 2012” table on page 72 of this proxy statement.

 

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Part IV: Other Governance and Compensation Related Matters

Insider Trading and Anti-Hedging/Anti-Pledging Policies

The Company has adopted comprehensive and detailed policies that regulate trading in Company securities by our insiders, including SLT and Board members. These policies include information regarding trading “blackout” periods and explain when transactions in Company securities are permitted. The policies also set forth certain types of transactions that are strictly prohibited, including:

 

  Ÿ  

publicly traded options, such as puts, calls and similar instruments, and short sales;

 

  Ÿ  

hedging and monetization transactions, such as zero-cost collars and forward-sale contracts; and

 

  Ÿ  

margin accounts and pledges.

Rule 10b5-1 Trading Plans

SLT members are permitted to establish trading plans established under Section 10b5-1 of the Exchange Act during certain open trading windows when the executive does not possess any material, non-public information about the Company. The purpose of these plans is to permit the executive to diversify his or her holdings of Company stock during periods in which the executive would otherwise be unable to buy or sell such stock because he or she possessed material, non-public information about the Company. In consultation with his or her financial advisor, each executive enters into his or her own pre-determined plan, which includes specific instructions for the broker to exercise stock options and/or sell Company stock on the open market. Any such trading plan must be submitted in writing to the Company’s General Counsel for review and approval prior to its effective date and must meet certain requirements, including:

 

  Ÿ  

no purchases or sales of Company securities may be made outside of the plan, once in effect;

 

  Ÿ  

the plan must run for at least one year and no more than 18 months (but can end prior to that time if all sales or purchases have been completed);

 

  Ÿ  

a plan may not be voluntarily terminated prior to its expiration date without the General Counsel’s pre-approval or when the executive possesses any material, non-public information about the Company, and a new plan may not be established until at least 180 days after any such voluntary termination;

 

  Ÿ  

the first trade under the plan cannot occur until 30 days after execution of the plan; and

 

  Ÿ  

execution of the plan is disclosed in an SEC filing.

Mr. Faraci is our only SLT member who currently has a 10b5-1 trading plan.

Officer Stock Ownership and Retention Requirements

All of our officers are expected to own shares of our common stock with a minimum market value based on a multiple of base pay. This policy is intended to align our officers’ interests with those of our shareowners and encourage long-term shareowner value creation by requiring officers to have a significant equity stake in the Company. Our stock ownership requirements are based on position level:

 

Position Level   

Ownership

Requirement

 

Chief Executive Officer

     5x base pay   

Senior Vice President

     2x base pay   

Vice President

     1x base pay   

Effective January 1, 2013, officers are required to retain fifty percent of their net shares paid under any Company long-term incentive plan or program, such as shares paid out under the PSP and vested RSA shares, until their ownership requirements are satisfied. Prior to this date, officers were simply encouraged (but not required) to retain stock awards paid under the PSP and had a grace period of four years from their election, appointment or promotion to meet the ownership requirement. The Committee made this modification to ensure that executives are continually and steadily building a minimum level of ownership in the Company. Stock ownership is reviewed annually by the Committee to assure compliance. As of our last annual evaluation, all SLT members were in compliance.

 

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Board Policy on Personal Use of Company Aircraft and Vehicle

The Board continues to believe that the CEO should use Company aircraft and a Company vehicle for business continuity and efficiency purposes. Use of the Company aircraft allows the CEO to be available at all times for business needs, whether on business or personal travel. Pursuant to Board resolutions and his Time Sharing Agreement, Mr. Faraci is required to reimburse the Company for the incremental cost of personal use of the aircraft above $75,000, excluding travel relating to recent health issues of an immediate family member.

The Company also provides the CEO with the use of a vehicle and driver. Mr. Faraci reimbursed the Company for all costs associated with the personal use of the vehicle itself in 2012. The value of personal use of the driver that the CEO does not reimburse is imputed income to him (not grossed up for taxes), and is disclosed in the “All Other Compensation” table in Part V.

Clawback or Forfeiture of Incentive Awards

Both MIP and PSP awards are subject to a clawback provision contained in our plan documents. Under this clawback provision, if the Company’s financial statements are restated as a result of errors, omission, or fraud, the Committee may, in its discretion, based on the facts and circumstances surrounding the restatement, require some or all participants to return all or a portion of their awards to the Company.

In addition, both MIP and PSP awards may be forfeited in the event a participant engages in conduct that is detrimental to the business interest or reputation of the Company. Additionally, an SLT member who does not provide one-year’s notice of retirement may forfeit his or her MIP and PSP awards.

Non-Competition and Non-Solicitation Agreements

The Company maintains Non-Competition and Non-Solicitation Agreements with leaders of the Company to protect confidential information and trade secrets from unauthorized use or disclosure. Each of our NEOs has entered into a Non-Competition Agreement and a Non-Solicitation Agreement. Violation of these agreements results in clawback or forfeiture of incentive compensation awards.

Board Policy on (Non-CIC) Severance Agreements with Senior Officers

A supplemental severance payment to the CEO must be approved by the independent directors of the Board. A supplemental severance payment to any other executive officer must be approved by the Committee. Moreover, pursuant to a 2005 Board policy, in the absence of a change in control, the supplemental severance, plus severance under the Salaried Employee Severance Plan, may not exceed two times base salary plus target MIP for the year in which the termination occurs. This limit does not apply to other benefits that may be payable, such as restricted stock, PSP, retirement benefits, or post-termination benefits that are available to employees generally, such as continued medical and dental benefits. Any severance amount greater than the amount described above must be approved in advance by our shareowners.

Prohibition on Repricing

We do not backdate or reprice equity grants. Our incentive compensation plan provides that stock options may not be repriced, directly or indirectly, without the prior consent of the Company’s shareowners. The exchange of an “underwater” option (i.e., an option having an exercise price in excess of the current market value of the underlying stock) for another award or for cash would be considered an indirect repricing and, therefore, would require the prior consent of our shareowners.

Equity Grant Practices

The Company does not have any program, plan or practice to time, and has not timed, equity grants in coordination with the release of material non-public information. The Company does not grant equity awards based on our stock price.

Annual equity grants (including pro rata grants for promotions and employees hired in the prior year) under the PSP are approved at the Committee’s meeting in December. Having a pre-determined annual grant date minimizes any concern that grant dates could be selectively chosen based upon market price at any given time.

 

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Service-based restricted stock awards are used infrequently, and may be granted anytime during the year by Mr. Karre (as delegated by the Board) within parameters approved by the Committee. An award to an SLT member requires approval by the Committee (or by the Board for an award to the CEO).

Deductibility of Executive Compensation

The goal of the Committee is to comply with the provisions of Section 162(m) of the Code, which allows the Company to take an income tax deduction for compensation up to $1 million and for certain compensation exceeding $1 million paid in any taxable year to a “covered employee” as that term is defined in the Code. We generally structure incentive compensation plans with the objective that amounts paid under those plans will be tax deductible, and the plans must be approved by the Company’s shareowners. However, the Committee may elect to provide incentive compensation outside the requirements of Section 162(m) when necessary to achieve its compensation objectives. Each element of incentive compensation earned by our NEOs in 2012 qualified as performance-based compensation under Section 162(m).

Accounting for Stock-Based Compensation

The Company withholds PSP shares payable to a participant at the statutory minimum withholding rate to pay the participant’s federal taxes. However, SLT members may elect to have additional shares withheld (up to 85 percent of the earned award) for payment of taxes. Because we offer this option to our SLT, their PSP awards are considered “liability” awards for accounting purposes. This means that we re-measure the amount of the PSP liability at fair market value at each quarterly balance sheet date with the resulting income or expense recorded by the Company in the quarter. The accounting treatment of stock-based compensation is not determinative of the type, timing, or amount of any particular grant made to our employees.

Summary of 2013 Plan Design Changes

 

Program Element   Design Change   Rationale

Variable Compensation

     
Both MIP and PSP  

Ÿ   Beginning with the 2013 MIP and PSP, the return on investment metric will be defined as “Return on Invested Capital” (“ROIC”), replacing the previously used return on investment calculation of “Return on Capital Employed.”

 

Ÿ   More closely aligns with the interests of the investment community, as most investors and stock analysts use ROIC as the primary measure for our returns versus the cost of capital

Executive Benefits

     
Change-in-Control Agreements  

Ÿ   By the end of 2013, our change-in-control agreements will be amended to move from a “single-trigger” to a “double-trigger” approach A for acceleration of vesting of equity awards

 

-   (NOTE: this change will be reflected in all existing and future agreements)

 

-   A This “double-trigger” approach requires both (1) a change in control and (2) a qualifying termination of employment (i.e., involuntary termination without cause or departure for “good reason”) in order to receive the benefit of their unvested equity awards

 

Ÿ    The double-trigger requirement is widely recognized as a good governance practice

 

Ÿ   Prevents officers from receiving an automatic windfall in the event of a change in control

 

Ÿ    Serves as an incentive for the officers to continue with the Company through and after a change in control

 

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Compensation Committee Report

On behalf of the Board of Directors, the Management Development and Compensation Committee of the Board of Directors, referred to as the Committee, oversees the Company’s compensation programs. In fulfilling its oversight responsibilities, the Committee has reviewed and discussed the Compensation Discussion and Analysis included in this proxy statement with the Company’s executive officers.

Based on the review and discussions referred to above, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and its proxy statement on Schedule 14A filed in connection with the Company’s 2013 Annual Meeting of Shareowners.

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such laws.

Management Development and Compensation Committee

 

J. Steven Whisler, Chairman

David J. Bronczek

Ilene S. Gordon

  

John L. Townsend, III

William G. Walter

 

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Part V: Additional Information about Our Executive Compensation

 

The following tables in this Part V provide detailed information regarding compensation for our NEOs.

Summary Compensation Table

The table below shows base salary, stock awards under our PSP and, if applicable, RSA program, cash awards under our MIP, the change in pension value, and all other compensation to our NEOs for the years ended December 31, 2010, 2011, and 2012.

 

Name and Principal Position    Year      Salary
($)
     Stock
Awards
($)(1)
     Non-Equity
Incentive Plan
Compensation
($)(2)
     Change in
Pension
Value
($)(3)
     All Other
Compensation
($)(4)(5)
    

Total

($)

 

John V. Faraci

     2012         1,391,000         8,852,190         1,784,500         4,030,693         368,908         16,427,291   

Chairman of the Board and

Chief Executive Officer (Principal Executive Officer)

     2011         1,374,375         9,001,717         2,500,000         3,196,058         335,563         16,407,713   
     2010         1,308,725         7,424,073         2,250,000         5,545,920         652,395         17,181,113   

Carol L. Roberts

     2012         720,000         2,021,011         618,000         2,745,057         102,091         6,206,159   

Senior Vice President and

Chief Financial Officer (Principal Financial Officer)

     2011         694,750         1,994,330         865,000         1,700,440         110,932         5,365,452   
     2010         679,000         1,604,367         1,073,500         1,597,086         58,619         5,012,572   

Mary A. Laschinger

     2012         615,000         2,430,558         349,800         1,070,865         78,042         4,544,265   

Senior Vice President

     2011         561,750         1,534,923         575,000         882,652         72,761         3,627,086   

President xpedx

                                                              

Tim S. Nicholls

     2012         710,000         2,021,011         412,500         1,705,285         65,820         4,914,616   

Senior Vice President

     2011         695,000         2,283,612         825,000         1,259,008         153,366         5,215,986   

Printing & Communications Papers and IP Brazil

     2010         650,000         1,807,380         782,800         803,277         138,552         4,182,009   

Sharon R. Ryan

     2012         485,000         2,281,295         342,800         1,047,822         46,380         4,203,297   

Senior Vice President

                                  

General Counsel and Corporate Secretary

                                                              

 

(1) A discussion of the assumptions used in calculating these values for the 2012 fiscal year may be found in Note 17 to our audited financial statements beginning on page 85 of our annual report on Form 10-K filed with the SEC on February 26, 2013. The value shown for 2012 includes the aggregate grant date fair value of each NEO’s 2012-2014 PSP award (and, for Ms. Ryan, the aggregate grant date fair value of a pro-rated 2011-2013 PSP award she received in January 2012) computed in accordance with FASB ASC Topic 718 based on the probable satisfaction of the performance conditions at January 1, 2012, for such award (i.e., 100 percent of target). The maximum value of the 2012-2014 PSP awards (and for Ms. Ryan, the maximum value of her 2012-2014 PSP award and pro-rated 2011-2013 PSP award combined) based on achieving maximum Company performance is as follows: Mr. Faraci: $17,704,379; Ms. Roberts: $4,042,022; Ms. Laschinger: $3,103,617; Mr. Nicholls: $4,042,022; and Ms. Ryan: $4,839,462.

 

(2) Represents the amount earned under the MIP based on Company and individual performance during the year shown, which is paid in February of the following year.

 

(3) Amounts shown in this column represent the change in accruals under our Retirement Plan, Pension Restoration Plan, and SERP as shown in the “Pension Benefits” table. Importantly, the change in pension value is not currently paid to an executive as compensation, but is a measurement of the change in value of the pension from the prior year. Changes in value arise from additional benefit accruals for another year of service, changes in pensionable compensation, the decrease in the discount period and the impact of a change in the discount rate from the prior year’s measurement. The discount rate used is the same as the rate used by the Company for financial statement disclosure as of the end of the fiscal year. This rate is based on economic conditions at year end.

The NEOs do not receive “preferential or above market” earnings on non-qualified deferred compensation. Accordingly, there is no amount included in this column for this type of earnings credit.

 

(4)

The value of dividends expected to be paid on each NEO’s PSP awards is reflected in the aggregate grant date fair value of such PSP awards (computed in accordance with FASB ASC Topic 718), which are

 

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  disclosed in the “Stock Awards” column. Accordingly, the value of dividends earned and paid on PSP payouts during the years shown are not included as “All Other Compensation.” As a result, “All Other Compensation” amounts are restated for prior years to reflect the exclusion of amounts for dividends realized. These amounts were incorrectly included as “All Other Compensation” in prior years.

 

(5) A breakdown of the “All Other Compensation” amounts for 2012 is shown in the following table:

 

Name  

Company
Matching
Contribution

 

($)(a)

   

Group Life
Insurance

 

($)(b)

   

ESIP

 

($)(c)

   

Corporate
Aircraft and
Vehicle

 

($)(d)

   

Directors’
Charitable
Award
Program

 

($)(e)

   

Company
Matching
Gift

 

($)(f)

   

Amount
Related to
Overseas
Assignment

 

($)(g)

   

Total

 

($)(h)

 

John Faraci

    186,768        6,713        36,556        114,534        18,332        6,005        -        368,908   

Carol Roberts

    76,080        3,473        16,490        -        -        6,048        -        102,091   

Mary Laschinger

    54,245        2,967        14,018        -        -        6,000        812        78,042   

Tim Nicholls

    33,607        3,427        18,974        -        -        9,000        812        65,820   

Sharon Ryan

    43,680        2,340        -        -        -        360        -        46,380   

 

  (a) Represents the Company match to the NEO’s contribution to the Salaried Savings Plan and Deferred Compensation Savings Plan, as shown in the “Non-Qualified Deferred Compensation Plan” table.

 

  (b) Represents the Company’s annual premium payment for the NEO’s group life insurance benefit.

 

  (c) Represents the amount paid by the Company for the NEO’s executive supplemental insurance program (“ESIP”).

 

  (d) Includes $104,515 of aggregate incremental cost to the Company of Mr. Faraci’s personal travel on Company aircraft. Pursuant to Board resolutions and his Time Sharing Agreement, Mr. Faraci reimbursed the Company for the incremental cost of personal use of the aircraft above $75,000, excluding travel relating to recent health issues of an immediate family member. We calculate the incremental cost of personal use of the Company aircraft based upon the per mile variable cost of operating the aircraft multiplied by the number of miles flown for personal travel by Mr. Faraci. The variable operating costs include fuel, maintenance, airway fees, user fees, communication, crew expenses, supplies and catering. We impute into Mr. Faraci’s income the value of personal use of the aircraft in accordance with IRS regulations, minus the amounts he reimbursed during the calendar year. Mr. Faraci receives no tax gross-up on this imputed income.

Also includes $10,019 for the value of personal use of a driver for a vehicle provided by the Company to Mr. Faraci. Mr. Faraci reimbursed the Company for all costs associated with the personal use of the vehicle itself in 2012. The value of personal use of the driver that he did not reimburse is imputed income to him (not grossed up for taxes).

 

  (e) Represents a ratable share of the Company’s total annual non-cash expense of the charitable award program described under “Director Compensation” attributable to directors who served during 2012. Mr. Faraci is eligible to participate in this program as a member of our Board. Mr. Faraci does not receive any other compensation as a member of our Board. The legacy director charitable award program was closed to new directors as of July 1, 2007.

 

  (f) Represents the Company’s 60-percent match of each NEO’s donation to the United Way of America as part of a Company-wide campaign.

 

  (g) Represents standard amounts payable under our Global Mobility Policy for expatriates. For Ms. Laschinger, represents payment of tax preparation fees relating to her overseas assignment, which ended in 2009. For Mr. Nicholls, represents payment of tax preparation fees relating to his overseas assignment, which ended in 2008.

 

  (h) Represents the sum of columns (a) through (g).

 

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Grants of Plan-Based Awards During 2012

The table below shows payout ranges for our NEOs under the 2012 MIP and 2012-2014 PSP, described in our CD&A. There were no stock options granted to our NEOs in 2012.

 

Name  

Committee
Action

Date

(1)

    Grant Date    

Estimated Possible Payouts

Under Non-Equity

Incentive Plan Awards

   

Estimated Future Payouts

Under Equity

Incentive Plan Awards

   

All Other
Stock
Awards:

Number of
Shares of
Stock

(#)(3)

   

Grant

Date

Fair
Value of
Stock

and

Option
Awards

($)(4)

 
      Threshold
($)
    Target
($)
    Maximum
($)(2)
    Threshold
(#)
    Target
(#)
    Maximum
(#)
     

John Faraci

                    509,275        2,037,100        4,074,200                                           
    12/13/2011        1/1/2012                                33,587        268,696        537,392                8,852,190   

Carol Roberts

                    150,950        603,800        1,207,600                                           
    12/13/2011        1/1/2012                                7,668        61,345        122,690                2,021,011   

Mary Laschinger

                    117,900        471,600        943,200                                           
    12/13/2011        1/1/2012                                5,888        47,103        94,206                1,551,808   
    2/13/2012        3/1/2012                                                        25,000        878,750   

Tim Nicholls

                    150,950        603,800        1,207,600                                           
    12/13/2011        1/1/2012                                7,668        61,345        122,690                2,021,011   

Sharon Ryan

                    100,600        402,400        804,800                                           
    12/13/2011        1/1/2012                                5,154        41,232        82,464                2,281,295   

 

  (1) The 2012-2014 PSP grant was approved by the Committee for all NEOs (except Mr. Faraci, whose grant was approved by the full Board) at its December meeting, effective the first business day of the following calendar year.

 

  (2) Non-equity incentive plan awards are intended to qualify as performance-based compensation under Code Section 162(m) and are awarded pursuant to the 2009 Incentive Compensation Plan approved by our shareowners. The maximum individual award under the Section 162(m) plan is capped at $10 million.

 

  (3) The amount shown in this column reflects a restricted stock award to Ms. Laschinger, which vests on December 31, 2014.

 

  (4) The amounts shown in this column reflect the grant date fair value of the 2012-2014 PSP awards (and, for Ms. Ryan, the grant date fair value of a pro-rated 2011-2013 PSP award she received in January 2012) computed in accordance with FASB ASC Topic 718 based on the probable satisfaction of the performance conditions at January 1, 2012 for such awards (i.e., 100 percent of target), as explained in further detail in the narrative following this table. The grant date fair value of the restricted stock award is based on the closing price of the Company’s common stock on the date immediately preceding the effective date of the grant.

Narrative to the Grants of Plan-Based Awards Table

Estimated Possible Payouts under Non-Equity Incentive Plan Awards

These columns show the threshold, target and maximum payouts under the 2012 MIP. The actual amount paid is shown in the Summary Compensation Table.

The amount shown in the “Threshold” column is the amount that would be paid under the 2012 MIP if the Company achieved the minimum performance level required in at least one performance metric: Absolute ROI or Cash Flow from Operations. Since each metric is evenly weighted at 50 percent, a threshold payout at 50 percent would result in weighted performance achievement of 25 percent (or one-half of 50 percent). Minimum performance in at least one objective is required to fund an MIP award pool.

The amount shown in the “Maximum” column is the possible payout for each NEO based on maximum Company performance achievement (excluding any special recognition award that may be recommended by the CEO for exceptional individual performance, which awards are funded and limited by the aggregate MIP award pool). The amount is based on maximum Company performance of 200 percent.

 

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Estimated Future Payouts under Equity Incentive Plan Awards

These columns show the threshold, target and maximum payouts under the 2012-2014 PSP.

The amount shown in the “Threshold” column is the number of shares each NEO would receive if the Company achieved the minimum performance level in either Relative ROI or Relative TSR to achieve a payout of 12.5 percent (which represents 25 percent threshold for either metric, which is weighted at 50 percent).

The amount shown in the “Maximum” column is the possible number of shares each NEO would receive based on maximum Company performance of 200 percent.

Grant Date Fair Value of Stock and Option Awards

With the exception of Ms. Laschinger’s restricted stock award and Ms. Ryan’s pro-rated 2011-2013 PSP award, the amounts shown in this column reflect the grant date fair value of the awards granted to each NEO under the 2012-2014 PSP computed in accordance with FASB ASC Topic 718 based on the probable satisfaction of the performance conditions at January 1, 2012 for such awards (i.e., 100 percent of target). For the ROI component of the awards, the grant date fair value is based on the closing price of our common stock on the date immediately preceding the grant date. Valuing TSR is more complicated because the value must take into account the probable expense of the 2012-2014 PSP based on our expected future performance relative to the other companies in our TSR Peer Group. The market value of the TSR component is based on a Monte Carlo simulation as prescribed by FASB ASC Topic 718.

The amount ultimately paid to PSP participants may or may not be the same amount as the value shown in the table due to two factors: (1) the ultimate number of shares paid to our PSP participants will vary based on the relative performance of the Company to the other companies in our TSR and ROI Peer Groups; and (2) the value of the PSP award received by each participant is based on the fair value of the Company’s stock as of the effective date of the award.

 

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Outstanding Equity Awards at December 31, 2012

The following table shows the outstanding equity awards held by our NEOs as of December 31, 2012.

 

     Option Awards     Stock Awards  
Name   Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)(1)
   

Option
Exercise
Price

($)

    Option
Expiration
Date
   

Number

of Shares or
Units of Stock
That Have Not
Vested (#)

   

Market Value
of

Shares or
Units of Stock
That Have Not
Vested

($)(2)

   

Equity
Incentive Plan
Awards:

 

Number of
Unearned
Shares, Units

or Other

Rights That

Have Not
Vested

(#)

   

Equity
Incentive Plan
Awards:

 

Market or
Payout Value

of Unearned

Shares, Units
or Other
Rights That
Have Not
Vested

($)(2)

 

John Faraci

                            591,091 (3)      23,549,061        447,848 (4)      17,842,267   
      48,000        39.14        10/14/2013                                   

Carol Roberts

                            123,935 (5)      4,937,581        101,094 (6)      4,027,605   
      11,000        39.14        10/14/2013                                   

Mary Laschinger

                            119,629 (7)      4,766,016        77,692 (8)      3,095,266   
      6,000        39.14        10/14/2013                                   

Tim Nicholls

                            140,588 (9)      5,601,030        106,574 (10)      4,245,902   
      9,000        39.14        10/14/2013                                   

Sharon Ryan

                            26,586 (11)      1,059,173        66,730 (12)      2,658,521   
      6,000        40.62        10/11/2014                                   
      5,500        38.41        5/10/2014                                   
      6,750        39.14        10/14/2013                                   

 

(1) We moved away from stock options for executive officers in 2004. All outstanding unvested options were vested by the Company on July 12, 2005. Therefore, no NEO had any unearned or unexercisable options as of December 31, 2012.

 

(2) The market value is calculated based on the closing price of our common stock on December 31, 2012 of $39.84.

 

(3) Includes (i) an executive continuity award of 16,000 shares of restricted stock awarded for retention purposes that vested on February 16, 2013, based on attaining the age and service requirements, and 7,553 reinvested dividends on those shares. The executive continuity award program provided for a tandem grant of stock options and restricted stock in a 5:1 ratio (five options to one share). Upon vesting, the values of both the restricted shares and the stock options was calculated and Mr. Faraci was then entitled to receive either the shares or the options (he received the shares). The amount shown also includes (i) 525,608 shares of restricted stock awarded under the PSP that have been “banked” for 2010 and 2011, but remain unpaid until the end of the applicable, full three-year performance period, and (ii) 41,930 shares acquired in respect of reinvested dividends.

 

(4) The amount shown includes the following shares of restricted stock that remain subject to open PSP performance periods: (i) 159,400 shares awarded under the 2011-2013 PSP and (ii) 268,696 shares awarded under the 2012-2014 PSP and (iii) 19,752 reinvested dividends on those shares.

 

(5) Includes (i) 114,790 shares of restricted stock awarded under the PSP that have been “banked” for 2010 and 2011, but remain unpaid until the end of the applicable, full three-year performance period, and (ii) 9,145 shares acquired in respect of reinvested dividends.

 

(6) The amount shown includes the following shares of restricted stock that remain subject to open PSP performance periods: (i) 35,315 shares awarded under the 2011-2013 PSP and (ii) 61,345 shares awarded under the 2012-2014 PSP and (iii) 4,434 reinvested dividends on those shares.

 

(7) Includes (i) 87,084 shares of restricted stock awarded under PSP that have been “banked” for 2010 and 2011, but remain unpaid until the end of the applicable, full three-year performance period, (ii) 6,928 shares acquired in respect of reinvested dividends and (iii) a restricted stock award of 25,000 shares that will vest December 31, 2014 and 617 reinvested dividends on those shares.

 

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(8) The amount shown includes the following shares of restricted stock that remain subject to open PSP performance periods: (i) 27,180 shares awarded under the 2011-2013 PSP and (ii) 47,103 shares awarded under the 2012-2014 PSP and (iii) 3,409 reinvested dividends on those shares.

 

(9) Includes (i) 130,223 shares of restricted stock awarded under the PSP that have been “banked” for 2010 and 2011, but remain unpaid until the end of the applicable, full three-year performance period, and (ii) 10,365 shares acquired in respect of reinvested dividends.

 

(10) The amount shown includes the following shares of restricted stock that remain subject to open PSP performance periods: (i) 40,438 shares awarded under the 2011-2013 PSP and (ii) 61,345 shares awarded under the 2012-2014 PSP and (iii) 4,791 reinvested dividends on those shares.

 

(11) Includes (i) 25,253 shares of restricted stock awarded under the PSP that have been “banked” for 2010 and 2011, but remain unpaid until the end of the applicable, full three-year performance period, and (ii) 1,333 shares acquired in respect of reinvested dividends.

 

(12) The amount shown includes the following shares of restricted stock that remain subject to open PSP performance periods: (i) 23,306 shares awarded under the 2011-2013 PSP and (ii) 41,232 shares awarded under the 2012-2014 PSP and (iii) 2,192 reinvested dividends on those shares.

 

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Option Exercises and Stock Vested in 2012

The following table shows the amounts received upon the exercise of stock options in 2012 and the vesting in 2012 of shares previously awarded under the PSP or our other restricted stock programs as described in our CD&A.

 

     Option Exercises     Stock Awards  
Name  

Number of
Shares Acquired
on Exercise

(#)

    Value
Realized
on Exercise
($)(1)
   

Number of
Shares Acquired
on Vesting

(#)(2)

    Value
Realized
on Vesting
($)(3)
 

John Faraci

    90,500        290,870        284,495        9,061,166   

Carol Roberts

    15,000        37,374        55,948        1,781,944   

Mary Laschinger

    10,000        30,405        37,571        1,196,636   

Tim Nicholls

    -        -        63,434        2,020,373   

Sharon Ryan

    4,500        13,725        7,031        223,937   

 

(1) Because the shares were sold immediately upon exercise of each of these options, the value realized on exercise of the option is the difference between the actual sales price and the exercise price of the option.

 

(2) Amounts shown represent shares of restricted stock and shares acquired in respect of reinvested dividends under the PSP that vested on February 13, 2012.

 

(3) Represents the value of the vested shares based on our closing stock price on the date immediately preceding the vesting date of the award: $31.85 for each share.

 

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Pension Benefits in 2012

The following table shows the present value of benefits payable to our NEOs under our Retirement Plan, Pension Restoration Plan, or SERP at December 31, 2011 and December 31, 2012. The change in the present value of the accrued benefit is shown in the “Change in Pension Value” column of the Summary Compensation Table for 2012.

All of our NEOs are eligible for a benefit calculated under the Retirement Plan. The NEOs are also eligible for a benefit that is calculated under the Pension Restoration Plan formula. All of the NEOs are eligible for a benefit under the SERP formula. We amended the SERP to comply with Section 409A of the Code, effective January 1, 2008. As amended, the benefit under SERP Formula A is paid from the SERP, even if the applicable formula that determines the benefit is the formula under the Pension Restoration Plan. As a result of this change, the pension benefits shown below for Mr. Faraci are shown as coming from the SERP rather than the Pension Restoration Plan. This differs from the pension benefits shown for Ms. Roberts, Ms. Laschinger, Mr. Nicholls and Ms. Ryan, who became eligible for the SERP after July 1, 2004, and whose benefit is therefore calculated under SERP Formula B. Under Formula B, the portion of the benefit that is earned prior to SERP eligibility is paid under the Pension Restoration Plan, and the portion earned following SERP eligibility is paid from the SERP. No NEO received payments of a retirement benefit in 2012.

 

Name   Plan Name  

Number of

Years of

Credited

Service in

2012

(#)

   

12/31/2011

Present Value of

Accumulated

Benefit

($)(1)

   

12/31/2012

Present Value of

Accumulated

Benefit

($)(2)

 

John Faraci

 

Retirement Plan

    38.33        1,672,698        1,890,441   
 

Pension Restoration Plan

    38.33                 
 

SERP

    38.33        33,316,539        37,129,489   
 

      Total

            34,989,237        39,019,930   

Carol Roberts

 

Retirement Plan

    31.5        943,030        1,252,112   
 

Pension Restoration Plan

    31.5        610,820        769,795   
 

SERP

    31.5        5,107,952        7,384,952   
 

      Total

            6,661,802        9,406,859   

Mary Laschinger

 

Retirement Plan

    20.33        576,559        780,880   
 

Pension Restoration Plan

    20.33        441,044        556,719   
 

SERP

    20.33        1,983,541        2,734,410   
 

      Total

            3,001,144        4,072,009   

Tim Nicholls

 

Retirement Plan

    21.25        541,137        740,422   
 

Pension Restoration Plan

    21.25        426,986        543,915   
 

SERP

    21.25        2,520,659        3,909,730   
 

      Total

            3,488,782        5,194,067   

Sharon Ryan

 

Retirement Plan

    24.50        743,475        988,017   
 

Pension Restoration Plan

    24.50        494,282        617,984   
 

SERP

    24.50        326,980        1,006,558   
 

      Total

            1,564,737        2,612,559   

 

(1) The calculation of the present value of accumulated benefits as of December 31, 2011, assumes a discount rate of 5.10 percent for annuity payments and deferral periods and 2.60 percent for lump sum payments. The calculation further assumes benefit commencement at the earliest age at which the NEO would be entitled to an unreduced benefit (the earlier of age 61 and completion of 20 years of service or age 62 and completion of 10 years of service). For individuals who are already eligible for an unreduced benefit, we use their age as of the end of the fiscal year.

 

(2) The calculation of the present value of accumulated benefits as of December 31, 2012, assumes a discount rate of 4.10 percent for annuity payments and deferral periods and 1.60 percent for lump sum payments. The assumptions regarding the benefit commencement date are the same as described in footnote (1).

 

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Narrative to Pension Benefits Table

Retirement Plan of International Paper Company

Our Retirement Plan is a funded, tax-qualified plan that covers all U.S. salaried employees hired prior to July 1, 2004. U.S. employees hired on or after July 1, 2004, are eligible for a Company-paid retirement savings account in our Salaried Savings Plan and DCSP in lieu of participation in the Retirement Plan. All of our NEOs were hired prior to July 1, 2004 and are eligible to participate in the Retirement Plan.

We calculate the benefit under the Retirement Plan at the rate of 1.67% of the participant’s average pensionable earnings received over the highest five consecutive calendar years of the last 10 calendar years, multiplied by his or her years of service, then reduced by a portion of Social Security benefits. We include as pensionable earnings the participant’s base salary plus MIP awards that were not deferred, up to the maximum limit set by the IRS.

International Paper Company Pension Restoration Plan for Salaried Employees

Our supplemental retirement plan for our salaried employees is an unfunded, non-qualified plan that covers all U.S. salaried employees hired prior to July 1, 2004. This plan augments our Retirement Plan by providing retirement benefits based on compensation that is greater than the limits set by the IRS. We include as eligible compensation under this plan the participant’s base salary plus MIP awards, including amounts deferred. All of our NEOs were hired prior to July 1, 2004 and are eligible to participate in the Pension Restoration Plan.

We calculate the benefit under the Pension Restoration Plan in the same manner as the Retirement Plan, then reduce the benefit by the amount payable under the Retirement Plan.

The International Paper Company Unfunded Supplemental Retirement Plan for Senior Managers

Our SERP is an alternative retirement plan available to certain senior executives, including the NEOs. The SERP was closed to new participants, effective January 1, 2012. SERP benefits vest once the participant reaches age 55 and has completed five years of service. The normal form of payment is a lump sum. We calculate benefits under the SERP under one of two formulas based on the participant’s date of eligibility for SERP participation. Benefits are payable under the SERP on the later of the participant’s retirement date or the date six months following separation from service. We define “retirement date” as the date the participant reaches the earlier of age 55 with 10 years of service or age 65 with five years of service.

A participant who has announced retirement at least 12 months in advance has the right to lock-in a discount rate used to determine the amount of the lump sum payment based on the average for the month in which they choose to lock-in. Mr. Faraci has locked-in the discount rate under this provision.

 

  Ÿ  

Participants eligible to participate prior to July 1, 2004 (Formula A):

 

    We calculate benefits under this formula as the greatest of (i) the sum of the benefits under our Retirement Plan and Pension Restoration Plan; (ii) the lesser of 3.25% of eligible compensation, defined below, multiplied by the participant’s years of service or 50% of eligible compensation, with both amounts reduced by a portion of Social Security benefits; or (iii) 25% of eligible compensation. The benefit payable under the SERP is reduced by the benefits payable under the Retirement Plan. In calculating benefits under (ii) and (iii), we include as eligible compensation the sum of (a) the participant’s highest annual base salary during any of the three consecutive calendar years prior to retirement and (b) the participant’s target MIP for the year of retirement. The benefit for Mr. Faraci is calculated under SERP Formula A.

 

  Ÿ  

Participants eligible to participate on or after July 1, 2004 (Formula B):

 

    We calculate benefits under this formula at the same rate as our Retirement Plan and Pension Restoration Plan. Participants are eligible to receive a lump sum payment of the benefit earned for service after becoming eligible in the SERP; the benefit earned prior to SERP eligibility remains payable as an annuity. The benefit for Ms. Roberts, Ms. Laschinger, Mr. Nicholls and Ms. Ryan is calculated under SERP Formula B.

 

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In the event of termination for cause, an executive whose SERP benefit is calculated under Formula A would forfeit the right to receive a lump sum benefit under the SERP, and his or her vested retirement benefits under the Retirement Plan and the Pension Restoration Plan would be paid as an annuity.

Policies with Regard to Granting Additional Years of Service

Our change in control agreements described in our CD&A provide three years of age and three years of service to be added to the calculation of retirement benefits in the event of termination of an NEO’s employment following a change in control.

Eligibility for Early Retirement Benefits

Normal retirement under our Retirement Plan and Pension Restoration Plan is age 65.

Participants, including the NEOs, are eligible for early retirement under the Retirement Plan, the Pension Restoration Plan and the SERP at age 55 with 10 years of service. However, a participant’s accrued benefit is reduced by 4% for each year that the participant retires before reaching age 62. Participants are eligible for an unreduced benefit once they reach age 61 and have completed at least 20 years of service with us.

As of December 31, 2012, Mr. Faraci is eligible for early retirement; his benefit would be unreduced based on age and years of service.

Ms. Roberts is currently vested in the retirement plans, but she will not be eligible for early retirement (or vested in the SERP benefit) until 2015.

Ms. Laschinger is currently vested in the retirement plans, but she will not be eligible for early retirement (or vested in the SERP benefit) until 2015.

Mr. Nicholls is currently vested in the retirement plans, but he will not be eligible for early retirement (or vested in the SERP benefit) until 2016.

Ms. Ryan is currently vested in the retirement plans, but she will not be eligible for early retirement (or vested in the SERP benefit) until 2014.

 

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Non-Qualified Deferred Compensation in 2012

The following table shows contributions in 2012 by the Company and each of our NEOs to the DCSP, which is our non-qualified deferred compensation plan, and each NEO’s DCSP account balance as of December 31, 2012. The account balance includes amounts deferred by the NEO in December 2012, which were actually credited to his or her account in January 2013.

 

Name  

Executive
Contributions
in Last

Fiscal Year

($)(1)