USG Corporation
550 West Adams Street Chicago, Illinois 60661

 

Founded in 1902

 

April 3, 2009

 

Dear Fellow Stockholder:

 

It is a pleasure to invite you to the 2009 USG Corporation annual meeting of stockholders. The meeting will be held at 9:00 a.m., Chicago time, on Wednesday, May 13, 2009 at our corporate headquarters located at 550 West Adams Street, Chicago, Illinois 60661-3676. The attached Notice of Annual Meeting of Stockholders and Proxy Statement discuss the items scheduled for a vote by stockholders at the meeting.

 

This year, we are pleased to be using the U.S. Securities and Exchange Commission rule that allows companies to furnish proxy materials to their stockholders over the Internet. As a result, most of our stockholders will receive in the mail a notice regarding availability of the proxy materials for the annual meeting on the Internet instead of paper copies of those materials. The notice regarding availability of proxy materials contains instructions on how to access the proxy materials over the Internet. The notice also contains instructions on how stockholders can receive paper copies of the proxy materials, including a proxy or voting instruction form. We believe this new process should expedite stockholders’ receipt of proxy materials, lower the cost of our annual meeting and help to conserve natural resources.

 

It is important that your shares be represented at the annual meeting, whether or not you plan to attend the meeting. Please vote your shares over the Internet or by telephone. If you received paper copies of the proxy materials by mail, you may also vote by mail by following the instructions on the proxy or voting instruction form you received.

 

Please vote your shares as soon as possible. This is your annual meeting, and your participation is important.

 

Sincerely,

 

William C. Foote

Chairman of the Board

and Chief Executive Officer

USG CORPORATION
550 West Adams Street
Chicago, Illinois 60661-3676

 

NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS

 

The 2009 USG Corporation annual meeting of stockholders will be held at our corporate headquarters located at 550 West Adams Street, Chicago, Illinois 60661-3676 on Wednesday, May 13, 2009 at 9:00 a.m., Chicago time, for the following purposes:

 

1. to elect two directors for a three-year term;

 

2. to ratify the Audit Committee’s appointment of Deloitte & Touche LLP as our independent registered public accountants for the fiscal year ending December 31, 2009; and

 

3. to transact any other business that may properly come before the meeting or any adjournment or postponement thereof.

 

Pursuant to our By-laws, any matter to be presented for consideration at the meeting must have satisfied the procedural and legal requirements referred to in the accompanying proxy statement.

 

Only stockholders of record at the close of business on March 16, 2009 will be entitled to vote at the annual meeting.

 

An admission ticket (or other proof of stock ownership) and a form of photo identification will be required for admission to the annual meeting. If your shares are registered in your name and you received your proxy materials by mail, please mark the space on your proxy form if you plan to attend the annual meeting. An admission ticket is attached to your proxy form. If your shares are registered in your name and you received or accessed your proxy materials electronically over the Internet, click the appropriate box on the electronic proxy form or follow the telephone instructions when prompted and an admission ticket will be held for you at the registration desk at the annual meeting. If you hold shares through a broker, bank or other nominee, you will be required to present a current statement from that institution reflecting your ownership of shares of our stock, the notice regarding the availability of proxy materials you received or the non-voting portion of the voting instruction form you received.

 

By order of the Board of Directors,

 

Ellis A. Regenbogen

Vice President, Associate General Counsel

and Corporate Secretary

 

April 3, 2009

 

USG Corporation

550 West Adams Street

Chicago, Illinois 60661-3676

 

PROXY STATEMENT

 

The accompanying proxy is solicited on behalf of the Board of Directors for use at our annual meeting of stockholders to be held on Wednesday, May 13, 2009 in accordance with the accompanying notice. This proxy statement and the accompanying proxy were first made available to our stockholders on or about April 3, 2009.

 

 

 

 

Q:  What is a proxy statement?

 

 

 

 

 

 

 

 

 

 

 

 

Whether you hold shares directly as a stockholder of record or as a street name holder, you may direct how your shares are voted by proxy without attending the annual meeting. There are three ways to vote by proxy:

 

 

If you are a “street name” holder and you wish to vote your shares in person at the annual meeting, you must obtain a proxy from your broker, bank or other nominee giving you the right to vote your shares at the meeting. If you own share units through the USG Corporation Investment Plan, or Investment Plan, and you are also a stockholder of record, your proxy form will allow you to designate the manner in which you want both the shares registered in your name and the shares represented by your Investment Plan units voted at the annual meeting. If you own share units through the Investment Plan, but you do not own any shares of our common stock as a “stockholder of record,” you will be able to designate the manner in which you want the shares represented by those share units voted at the annual meeting by voting over the Internet, by telephone or by signing, dating and returning the proxy voting form you receive from Broadridge Financial Solutions, or Broadridge.

 

The Northern Trust Company, as trustee of the Investment Plan, or the Trustee, held 286,201 shares of our common stock on the record date. Only the Trustee, as of the record date, can vote the shares held by the Investment Plan. However, the Investment Plan provides that Investment Plan participants are entitled to instruct the Trustee how the shares allocated to their accounts under the Investment Plan are to be voted. The Investment Plan also provides that unallocated shares and shares for which no instructions are received by the Trustee will be voted by the Trustee in the same proportion as those shares for which instructions are received, unless otherwise required by law. Thus, Investment Plan participants will be exercising power and control as a named fiduciary of the Investment Plan not only over the shares allocated to their own accounts, but also over a portion of the undirected shares. By submitting voting instructions over the Internet, by telephone or by signing and returning the proxy voting form accompanying this proxy statement, an Investment Plan participant will be directing the Trustee to vote the shares allocated to his or her account under the Investment Plan, in person or by proxy, as instructed, at the annual meeting of stockholders. Investment Plan participants may revoke previously submitted voting instructions by filing with Broadridge Financial Solutions, 51 Mercedes Way, Edgewood, New York 11717, the Investment Plan proxy tabulator, either a written notice of revocation or a properly completed and signed proxy form bearing a later date.

 

 

 

If you sign and submit your proxy or voting instruction form without giving specific instructions on how to vote your shares, in accordance with the recommendation of the Board of Directors, the Proxy Committee will vote your shares in the following manner:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Abstentions are counted for purposes of determining whether a quorum is present, but they are not treated as votes cast. Accordingly, they do not affect the election of directors or any of the other matters specified in the notice of the annual meeting.

 

 

 

 

 

 

 

 

 

 

Important Notice Regarding the Availability of the Proxy Materials for the
Stockholder Meeting to be held on
May 13, 2009

 

This proxy statement and our 2008 annual report on Form 10-K are
available to you on the Internet at www.proxyvote.com.

 

PRINCIPAL STOCKHOLDERS

 

The following table provides information regarding the beneficial ownership of our common stock by all persons known by us to be the beneficial owner of more than 5% of our common stock on the record date. This information is based upon statements on Schedule 13D or 13G or Form 3 or 4 filed by those persons with the Securities and Exchange Commission.

 

 

 

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of 11 directors. The number of directors will be reduced to nine following the annual meeting. James C. Cotting, who has been a director since October 1987 and whose term as a director expires at the 2009 annual meeting, is not standing for re-election at the 2009 annual meeting in accordance with our director retirement guidelines. Keith A. Brown, who has been a director since May 1993 and whose term as a director also expires at the 2009 annual meeting, is also not standing for re-election.

 

Our directors are divided into three classes, with each class elected for a three-year term. Because Messrs. Brown and Cotting are not standing for re-election, only two directors comprise the class of directors to be elected at the annual meeting. The other two classes will be elected in 2010 and 2011.

 

The two candidates nominated by the Board for election as directors at the annual meeting are identified below. If either of those nominees becomes unavailable prior to the annual meeting, the Board will reduce the size of the Board to eliminate that position, nominate a candidate in place of the unavailable nominee, in which case all shares represented by proxies received by the Board will be voted for election of the substitute nominee, unless authority to vote for all candidates nominated by the Board is withheld, or leave the position vacant until a later date.

 

Director Independence

 

The listing standards of the New York Stock Exchange, or NYSE, require that a majority of our directors and all members of our Audit, Compensation and Organization and Governance Committees be independent. Our Corporate Governance Guidelines provide that, as a matter of policy, at least 80% of our directors should be independent in accordance with the NYSE listing standards and our By-laws and Corporate Governance Guidelines. Following the annual meeting, and until one or more additional directors who meet those independence criteria are elected to the Board, seven of our nine directors, or 78%, will be independent in accordance with those criteria.

 

Under the NYSE listing standards, a director is considered independent only if the Board “affirmatively determines that the director has no material relationship with . . . [us] (either directly or as a partner, stockholder or officer of an organization that has a relationship with . . . [us].” A director is not independent if the director does not meet certain standards specifically set out in the NYSE listing standards.

 

The independence standards in our Corporate Governance Guidelines provide that if a director (or any entity of which he or she is a director, officer or holder of 10% or more of the outstanding ownership interest) and we have any relationship that accounts for more than 1% of our or the other entity’s annual revenue and/or expenses, or a 5% ownership interest by one in the other, that director will not be independent. Members of legal, accounting or auditing firms providing services to us are also not independent under our By-laws.

 

Using the standards for determining the independence of its members described above, and based upon information provided by each of our directors and the recommendation of the Governance Committee of our Board of Directors, the Board has determined that each of our directors, except Mr. Foote, our Chairman and Chief Executive Officer, and Mr. Metcalf, our President and Chief Operating Officer, is independent as defined by the NYSE listing standards and our By-laws and Corporate Governance Guidelines.

 

In making this determination, the Board considered the following transactions, relationships and arrangements involving the directors identified below that are not otherwise required to be disclosed in this proxy statement under the Securities and Exchange Commission’s rules:

 

 

 

Director Nominees and Directors Continuing in Office

 

Set forth below is information regarding the nominees for election as directors and information regarding the current directors in each class continuing in office after the annual meeting.

 

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
FOR A THREE-YEAR TERM TO EXPIRE IN 2012

 

The Board of Directors recommends a vote FOR the election of both of the nominees for director.

 

JOSE ARMARIO, 49, has been Group President, McDonald’s Canada and Latin America of McDonald’s Corporation since February 2008. He became President, Latin America of McDonald’s Corporation in 2003. He previously served as Senior Vice President and International Relationship Partner for McDonald’s Corporation and as director of Ronald McDonald House Charities in Latin America. Mr. Armario is a director of the International Advisory Board and President’s Council of the University of Miami. He also is a director of the Council of the Americas — New York and The Chicago Council of Global Affairs and is a board member of the Mexican Chamber of Commerce. Mr. Armario has been a director since January 2007 and is a member of the Board’s Audit and Corporate Affairs Committees.

 

W. DOUGLAS FORD, 65, retired as Chief Executive, Refining & Marketing, of BP Amoco p.l.c. and Managing Director of BP p.l.c in 2002. He is a director of Air Products and Chemicals, Inc. and Suncor Energy Inc. He also is a Trustee of the University of Notre Dame. Mr. Ford has been a director since November 1996. He is Chair of the Board’s Corporate Affairs Committee and is a member of its Compensation and Organization and Governance Committees.

 

Directors Continuing in Office (Terms Expiring in 2010)

 

LAWRENCE M. CRUTCHER, 66, is a member of the Board of Advisors, and previously was Managing Director, of Veronis Suhler Stevenson, a private equity and structured capital fund manager. Mr. Crutcher has been a director since May 1993. He is Chair of the Board’s Governance Committee and is a member of its Audit and Finance Committees.

 

WILLIAM C. FOOTE, 58, has been our Chairman and Chief Executive Officer for more than the past five years. He was also our President until January 2006. Mr. Foote is Deputy Chairman of the Board of The Federal Reserve Bank of Chicago and a director of Walgreens Co., Kohler Co. and the National Association of Manufacturers. He is a Trustee of the Museum of Science and Industry in Chicago, a life Trustee of Northwestern Memorial Health Care and a member of the Civic Committee of The Commercial Club and the Business Roundtable. Mr. Foote has been a director since March 1994.

 

STEVEN F. LEER, 56, has been Chairman and Chief Executive Officer of Arch Coal, Inc., a coal producing company, since April 2006. Prior thereto, he was President and Chief Executive Officer of that company. Mr. Leer is a director of Norfolk Southern Corporation, the Western Business Roundtable and the Mineral Information Institute. He also is a director and past Chairman of the Center for Energy and Economic Development, the National Coal Council and the National Mining Association. He is a delegate to the Coal Industry Advisory Board of the International Energy Agency in Paris, a director of the Greater St. Louis Area Boy Scouts of America and a member of the boards of the National Association of Manufacturers and the Business Roundtable. Mr. Leer has been a

director since June 2005. He is Chair of the Board’s Compensation and Organization Committee and is a member of its Finance and Governance Committees.

 

JUDITH A. SPRIESER, 55, was the Chief Executive Officer of Transora, Inc., an information technology software and services company, until March 2005. Prior to founding Transora in 2000, she was Executive Vice President (formerly Chief Financial Officer) of Sara Lee Corporation. Ms. Sprieser is a director of Allstate Corporation, Intercontinentalexchange Inc., Reckitt-Benckiser PLC, Royal Ahold, N.V. and Adecco S.A., and is a member of the Board of Trustees of Northwestern University. Ms. Sprieser has been a director since February 1994. She is Chair of the Board’s Finance Committee and is a member of its Compensation and Organization and Governance Committees.

 

Directors Continuing in Office (Terms Expiring in 2011)

 

ROBERT L. BARNETT, 68, retired as Executive Vice President of Motorola, Inc. in 2005. He previously served as President and Chief Executive Officer, Commercial, Governmental and Industrial Solutions Sector, and President, Land Mobile Products Sector, of Motorola, Inc. Mr. Barnett is a director of Johnson Controls, Inc., Central Vermont Public Service Corporation and EF Johnson Technologies, Inc., and a director and Treasurer of the Lincoln Foundation for Performance Excellence. He is a Senior Baldridge Examiner and a licensed professional engineer. Mr. Barnett has been a director since May 1990. He is Chair of the Board’s Audit Committee and is a member of its Corporate Affairs and Governance Committees.

 

MARVIN E. LESSER, 67, has been Managing Partner of Sigma Partners, L.P., a private investment partnership, and President of Alpina Management, LLC, an investment advisor, for more than the past five years. He is a director of Golfsmith International Holdings, Inc. and St. Moritz 2000 Fund, Ltd. Mr. Lesser has been a director since May 1993. He is a member of the Board’s Audit and Compensation and Organization Committees.

 

JAMES S. METCALF, 51, is our President and Chief Operating Officer. Prior to assuming that position in January 2006, he was Executive Vice President and President, USG Building Systems, from February 2004. He is a director of Molex Incorporated. Mr. Metcalf has been a director since May 2008.

 

BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

 

Meetings of the Board of Directors

 

The Board held 11 meetings, and its committees held a total of 28 meetings, during 2008. Each director attended at least 75% of the meetings of the Board and the committees on which he or she served.

 

Two executive sessions of the Board are required to be held annually by our Corporate Governance Guidelines. One executive session was held in February 2008 and conducted by the Chair of the Compensation and Organization Committee to review Mr. Foote’s performance in 2007 and to consider his compensation for 2008. A second session was held in November 2008 and conducted by the Chair of the Governance Committee to review the results of the Board’s self evaluation process. Unscheduled executive sessions may be held at the request of one or more directors. Such an executive session was held in February 2008 and conducted by the Chair of the Compensation and Organization Committee to discuss compensation matters. The directors attending each executive session select a presiding director for that session.

 

Committees of the Board of Directors

 

The Board has five standing committees. They are the

 

 

 

Each committee has a charter that requires its members to be “independent” as defined in the New York Stock Exchange listing standards and our By-laws and Corporate Governance Guidelines. The following table indicates the current members of each Board committee.

 

 

 

 

Audit Committee

 

The Audit Committee’s responsibilities include

 

 

The Board of Directors has determined that each of the members of the Audit Committee is an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. The Board has also determined that each member of the Audit Committee is independent as defined by the applicable New York Stock Exchange and Securities and Exchange Commission rules. The Audit Committee met 10 times during 2008.

 

Compensation and Organization Committee

 

The Compensation and Organization Committee’s responsibilities include

 

 

The Compensation and Organization Committee met four times during 2008.

Corporate Affairs Committee

 

The Corporate Affairs Committee’s responsibilities include

 

 

The Corporate Affairs Committee met three times during 2008.

 

Finance Committee

 

The Finance Committee’s responsibilities include

 

 

The Finance Committee met seven times during 2008.

 

Governance Committee

 

The Governance Committee’s responsibilities include

 

 

The Governance Committee met four times during 2008.

 

Stockholder Nominee Recommendations and Criteria for Board Membership

 

The Governance Committee considers director nominee recommendations submitted by our stockholders. Director nominee recommendations from stockholders must be in writing and include a brief account of the nominee’s business experience during the past five years, including principal occupations and employment during that period and the name and principal business of any corporation or organization of which the nominee is a director. Stockholder director nominee recommendations should be sent to the Governance Committee, USG Board of Directors, c/o Corporate Secretary, 550 West Adams Street, Chicago, Illinois 60661-3676. Recommendations may be submitted at any time, but will not be considered by the Governance Committee in connection with an annual meeting unless received on or before the date prior to the annual meeting determined as provided in our By-laws. The director nominee recommendation submission deadline for the 2010 annual meeting of stockholders is described under “Deadline for Stockholder Proposals” on page 50 of this proxy statement.

Our process for reviewing and selecting new director nominees involves seeking out candidates who possess the background, skills and expertise to make a significant contribution to the Board, USG and our stockholders. Desired qualities for our directors, including those recommended for nomination by our stockholders, are described in our Corporate Governance Guidelines and on our website www.usg.com. Those qualities include high-level leadership experience in business activities, ability and willingness to contribute special competencies to Board activities and personal attributes such as integrity, willingness to apply sound and independent business judgment and assume broad fiduciary responsibility and awareness of a director’s vital contribution to our corporate image. Additional search criteria may be determined by the Governance Committee. Generally, to fill a vacancy or to add an additional director, the Governance Committee retains an executive search firm to assist in identifying and recruiting appropriate candidates. Any director candidate selected by this process or as a result of a stockholder recommendation is expected to meet with a number of directors, including the Chair of the Governance Committee, prior to any decision to nominate the candidate for election to the Board.

 

Communications with Directors

 

Stockholders and other interested parties may send communications to our directors as a group or individually by addressing them to the director or directors at USG Corporation, c/o Corporate Secretary, 550 West Adams Street, Chicago, IL 60661-3676. Stockholder communications will be reviewed by the Corporate Secretary for relevance to our business and then forwarded to the intended director(s), if appropriate. Stockholders may meet directors before or after the annual meeting. As a matter of policy, all directors are expected to attend the annual meeting. All directors attended the 2008 annual meeting.

 

Corporate Governance

 

Our By-laws, Corporate Governance Guidelines and Code of Business Conduct, and the charters of our Board committees, are posted on our website www.usg.com. A printed copy of those documents is available upon written request from the Corporate Secretary, USG Corporation, 550 West Adams Street, Chicago, IL 60661-3676.

 

In January 2006, in connection with the rights offering we effected to finance a portion of the payments required by our plan of reorganization, we entered into an equity commitment agreement with Berkshire Hathaway Inc., our largest stockholder, to provide a backstop commitment with respect to the rights offering. In connection with that commitment, Berkshire Hathaway acquired 6,969,274 shares of our common stock. We also entered into a shareholder’s agreement with Berkshire Hathaway pursuant to which it agreed to vote 469,274 of those shares, an additional 3,602,918 shares it has acquired subsequent to the rights offering and certain other shares it acquires in the future on all matters submitted to our stockholders, other than approval of a “poison pill,” in the same proportion as shares owned by all stockholders are voted. The shareholder’s agreement also includes restrictions on Berkshire Hathaway’s ownership of our common stock and acquisition proposals it may make.

 

In addition, we have a stockholder rights plan that became effective in January 2007 and was amended in December 2008 in an effort to protect our net operating loss carryforwards. Under the plan, as amended, if any person becomes the beneficial owner of 4.99% or more of our voting stock from December 5, 2008 through September 30, 2009, stockholders other than the 4.99% triggering stockholder will have the right to purchase additional shares of our common stock at half the market price, thereby diluting the triggering stockholder; provided that shareholders whose beneficial ownership, as of 4:00 p.m., New York City time, on December 4, 2008, exceeded 4.99% of the Company’s then-outstanding common shares are exempt under the plan so long as they do not acquire additional common shares, except as otherwise provided by agreements existing as of that time. Common shares that otherwise would be deemed to be “beneficially owned” under the plan by reason of ownership of our convertible notes (including ownership of the common shares into which the notes are convertible) are also exempted during the period in which the beneficial ownership threshold under the plan is 4.99%. After September 30, 2009, the beneficial ownership threshold level under the plan will revert to the 15% level in effect prior to amendment of the plan, unless the Board determines otherwise. The plan also provides that, during the seven-year standstill period under our shareholder’s agreement with Berkshire Hathaway, its (or certain of its affiliates) acquisition of shares of our common stock will not trigger the rights to the extent Berkshire Hathaway complies with the terms of the shareholder’s agreement and, following that seven-year standstill period, acquisitions of our

common stock by any of them will not trigger the rights unless Berkshire Hathaway or its affiliates acquire beneficial ownership of more than 50% of our voting stock on a fully diluted basis.

 

The rights plan will expire on January 2, 2017. However, our Board of Directors has the power to accelerate or extend the expiration date of the rights. In addition, a Board committee composed solely of independent directors will review the rights plan at least once every three years to determine whether to modify the plan in light of all relevant factors. The first such review is required by the end of 2009.

 

More information about, and copies of, the agreements referred to in this section and other related agreements are included in reports or statements we filed with the Securities and Exchange Commission on January 30, 2006, February 28, 2006, December 21, 2006 and December 5, 2008.

 

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth information as of the record date regarding beneficial ownership of our common stock by each director and nominee for director, each executive officer named in the Summary Compensation Table and all directors, nominees and executive officers as a group, including any shares held by executive officers through the Investment Plan.

 

 

 

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Policies and Procedures Regarding Related Party Transactions

 

Our Code of Business Conduct provides that all of our employees, including our executive officers, and our directors, must avoid “conflicts of interest” - situations where their personal interest may be inconsistent with our interest and may interfere with the employee’s or director’s objectivity in making business decisions on our behalf. A conflict of interest may exist, for example, when an employee, officer or director (or one of their family members) has a financial interest in a company with which we do business or if an employee, officer or director in a position to influence business dealings with a company (a) has a direct or indirect interest in that company that would reasonably be viewed as significant to that person and (b) the amount of business done between us and that company is significant.

 

All of our employees and directors are required to report conflicts of interest so that we may address the situation properly. After disclosure, some conflicts of interest can be resolved through implementing appropriate controls for our protection. Where an appropriately disclosed conflict of interest is minor and not likely to adversely impact us, we may consent to the activity. In other cases where appropriate controls are not feasible, the person involved will be requested not to enter into, or to discontinue, the relevant transaction or relationship.

 

All of our executive officers and other salaried employees are required to disclose actual or potential conflicts of interest in which they may be personally involved in an annual certification reviewed by our Internal Audit and Legal Departments. In addition, all of our executive officers are required to disclose actual or potential conflicts of interest by quarterly certifications. Employees who complete these certifications are also required promptly to report in writing to the Internal Audit Department any conflict of interest situations that arise during the period between certifications.

 

Conflict of interest situations reported by employees are addressed by our Business Ethics Committee made up of representatives from our Internal Audit, Legal and Human Resources Departments, and, where appropriate, by senior management. If the conflict of interest involves one of our executive officers, the situation will be addressed by our Board of Directors or the Audit Committee of the Board. Quarterly reports of conflicts of interest and the resolution of them are provided to our Compliance Committee, Chairman and Chief Executive Officer and President and Chief Operating Officer in accordance with our disclosure controls and procedures.

 

We recognize that directors may be connected with other organizations with which we have business dealings from time to time. Under our Corporate Governance Guidelines, it is the responsibility of each director to advise the Chairman of the Board and the Governance Committee of the Board, through its Chair, of any affiliation with public or privately held businesses or enterprises that may create a potential conflict of interest, potential embarrassment to us, or possible inconsistency with our policies or values. Directors are also to advise the Chairman of the Board and the Governance Committee in advance of accepting an invitation to serve on the board of another public company.

 

We annually solicit information from our directors in order to monitor potential conflicts of interest. In accordance with our Corporate Governance Guidelines, any actual or potential conflict of interest involving a director will be investigated by the Governance Committee, with management assistance as requested, to determine whether the affiliation or transaction reported impairs the director’s independence and whether it is likely to adversely impact us. If the Committee determines that the director’s independence would be impaired, or the affiliation or transaction would likely impact us adversely, the director would generally be asked not to enter into, or to discontinue, the reported relationship or to resign from the Board. In other circumstances, the Committee will generally determine what, if any, controls, reporting and/or monitoring procedures are appropriate for our

protection as a condition for approving the reported relationship or transaction. Relationships that give rise to potential conflicts of interest are generally not considered to adversely impact us if they are not required to be disclosed pursuant to Item 404(a) of the Securities and Exchange Commission’s Regulation S-K because

 

 

The foregoing policies and procedures apply to transactions involving our directors and executive officers and their immediate family members required to be reported under Item 404 (a) of Regulation S-K. Pursuant to a written directive issued by our Chairman and Chief Executive Officer, transactions required to be reported under that Item involving holders of more than 5% of our common stock are subject to review by an officer at the level of Executive Vice President or above to determine whether they are on an arm’s-length basis.

 

Compensation of all of our executive officers is approved by our Compensation and Organization Committee or the Board of Directors and compensation of our directors is approved by the Board.

 

Issuance of Convertible Senior Notes

 

In November 2008, we issued $400 million aggregate principal amount of 10% Contingent Convertible Senior Notes due 2018 to affiliates of Berkshire Hathaway Inc. and Fairfax Financial Holdings Limited. The notes are initially convertible into shares of our common stock at a conversion price of $11.40 per share. The conversion rate is subject to adjustment in certain events. The notes will mature on December 1, 2018 and are non-callable until December 1, 2013, after which we may elect to redeem all or part of the notes at stated redemption prices, plus accrued and unpaid interest. The notes bear cash interest at the rate of 10% per year.

 

In connection with the issuance of notes, we entered into separate securities purchase agreements and registration rights agreements with Berkshire Hathaway and Fairfax. Pursuant to the securities purchase agreements, Berkshire Hathaway and Fairfax have the right, for so long as they own any notes, to participate in any of our future issuances of common stock, subject to certain exceptions. In the event we issue common stock, Berkshire Hathaway and Fairfax may each purchase up to that portion of the common stock being issued that equals their ownership percentage in our common stock prior to such issuance (assuming conversion of their notes).

 

Under the registration rights agreements, we granted Berkshire Hathaway and Fairfax demand and piggyback registration rights with respect to all of the notes and shares of common stock held by them and specified affiliates from time to time. The registration rights agreements entitle each of Berkshire Hathaway and Fairfax to make three demands for registration of all or part of the notes or common stock held by them and their affiliates, subject to certain conditions and exceptions. The registration rights agreements also provide that, subject to certain conditions and exceptions, if we propose to file a registration statement under the Securities Act of 1933, as amended, with respect to an offering of securities on a form that would permit registration of the notes or shares of common stock that are held by Berkshire Hathaway, Fairfax or the specified affiliates, then we will offer Berkshire Hathaway, Fairfax and their specified affiliates the opportunity to register all or part of their notes or shares of common stock on the terms and conditions set forth in the applicable registration rights agreement. The registration rights agreement with Berkshire Hathaway amended and restated the registration rights agreement we entered into with Berkshire Hathaway in January 2006.

 

The securities purchase agreements and registration rights agreements were approved by our Board of Directors. More information about, and copies of, the agreements referred to in this section and other related agreements are included in a report we filed with the Securities and Exchange Commission on November 26, 2008.

Shareholder’s Agreement with Berkshire Hathaway

 

In connection with the equity commitment agreement we entered into with Berkshire Hathaway in January 2006, we entered into a shareholder’s agreement with Berkshire Hathaway pursuant to which Berkshire Hathaway agreed, among other things, that for a period of seven years following completion of our rights offering, except in limited circumstances, it will not acquire additional beneficial ownership of our voting securities if, after giving effect to the acquisition, it would own more than 40% of our voting securities on a fully diluted basis. Berkshire Hathaway further agreed that, during that seven-year period, it would not solicit proxies with respect to our securities or submit a proposal or offer involving a merger, acquisition or other extraordinary transaction unless the proposal or offer is

 

 

Under the shareholder’s agreement, for the same seven-year period, we agreed to exempt Berkshire Hathaway from our existing or future poison pills to the extent that Berkshire Hathaway complies with the terms and conditions of the shareholder’s agreement. If there is a shareholder vote on a poison pill that does not contain this agreed exemption, Berkshire Hathaway may vote without restriction all the shares it holds to approve or disapprove the proposed poison pill. On all other matters, Berkshire Hathaway is required to vote certain of the shares it owns as described under “Corporate Governance” on page 11 of this proxy statement. We and Berkshire Hathaway also agreed that, after the seven-year standstill period ends, during the time that Berkshire Hathaway owns our equity securities, Berkshire Hathaway will be exempted from our poison pills, except that our poison pills may require that Berkshire Hathaway does not acquire (although it may continue to hold) beneficial ownership of more than 50% of our voting securities, on a fully diluted basis, other than pursuant to an offer to acquire all shares of our common stock that is open for at least 60 calendar days.

 

The equity commitment agreement and shareholder’s agreement were approved by our Board of Directors.

 

Transactions with Principal Stockholders

 

We purchase products, principally fiberglass and insulation, and services, including newswire and pipeline services, from subsidiaries of Berkshire Hathaway in the ordinary course of our business. The aggregate amount of those purchases in 2008 was approximately $15.2 million. We purchase insulation from affiliates of Gebr. Knauf Verwaltungsgesellschaft KG, or Knauf, in the ordinary course of business. Those purchases aggregated approximately $17.1 million in 2008. We sold approximately $1.3 million of products to affiliates of Knauf in 2008. We are a partner with an affiliate of Knauf in a joint venture that manufactures and markets cement-based panels in Europe and the former Soviet Union. The joint venture had sales of approximately $34.5 million in 2008.

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Compensation Philosophy and Objectives

 

USG’s executive compensation philosophy is to provide a competitive total compensation package that aligns the interests of management with those of stockholders, motivates management to achieve our long-term strategic and annual operating objectives and enables us to attract and retain talented executives.

 

We align management’s interests with those of our stockholders by using equity-based long-term incentive awards, including awards that vest only upon the achievement of performance objectives, and by maintaining stock ownership guidelines. We also align management’s interests with those of stockholders by basing a significant portion of targeted annual incentive awards on our consolidated net earnings.

 

We motivate management to achieve our strategic growth and annual operating objectives by designing compensation programs that reward performance. Approximately 75% of compensation opportunity for our officers as a group is variable based on achievement of earnings, total stockholder return and annual operating targets and assessment of individual performance. The annual operating targets and individual performance objectives are selected to motivate management to achieve both short-term operating and long-term strategic objectives.

 

We attract and retain talented managers by ensuring that compensation opportunity is competitive in relation to similar positions in similar organizations. Our objective is to provide executive officers with the opportunity to earn total compensation between the 50th and 75th percentiles of a comparator group of companies. We also adjust compensation levels based on internal equity. We do this to appropriately reward the valued service of talented and experienced managers and to facilitate succession planning objectives.

We implement our executive compensation philosophy through the following programs:

 

 

In addition to these compensation programs, we provide two types of employment security agreements for our executive officers. Employment Agreements provide compensation if an executive officer is terminated without cause. Change-In-Control Severance Agreements provide executive officers compensation if there is a change in control and the executive officer is either terminated without cause or the executive leaves for “good reason,” as defined in the agreements. These agreements help us to attract and retain talented executives, protect our intellectual property, reduce the potential for employment litigation and avoid the loss of executives to our competitors and other corporations.

Committee Position on Incentives and Excessive Risk

 

The Compensation and Organization Committee, or Committee, of our Board of Directors believes that the design of our compensation programs encourages management not to take excessive risks to maximize earnings or meet performance objectives in a single year at the expense of our long-term objectives as a result of their balance between salary, short-term and long-term incentives. Our annual Management Incentive Program has a mix of financial, operating and individual performance elements. Our Long-Term Incentive Plan uses a variety of equity compensation awards (stock options, restricted stock units and performance shares) that have extended vesting periods and provide different incentives. Together with our stock ownership guidelines (discussed on page 26 of this proxy statement), this balanced array of incentives encourages management to achieve both short-term operating and long-term strategic objectives.

 

In February 2009, the Committee and our Board of Directors approved several additions to the annual Management Incentive Program for 2009 that are intended to further align that Program with shareholder interests, so that management will be encouraged not to take excessive risks. Those additions are:

 

 

The Committee and the Board also approved revised forms of equity award agreements that include similar “clawback” provisions.

 

Overview of 2008 Business Results and Performance-Based Compensation; Outlook for 2009

 

Our financial results for 2008 reflected the larger-than-anticipated contraction in the housing market, a downturn in commercial construction and the general economic recession. Since a significant portion of compensation opportunity for our executives varies based on financial and operating performance, actual compensation for 2008 was below targeted levels.

 

Forty percent of the target award under our annual Management Incentive Program is based on net earnings, and no payout was made under this segment of the Program for 2008. The balance of the target award is based on achievement of annual operating objectives and individual performance. The three elements of the Program (share of net earnings, annual operating objectives and individual performance) are independent of each other. Program participants have an opportunity to earn at least a partial payout by achieving operational targets and/or individual performance objectives, even if no payout is earned for the share of the earnings segment. In 2008, we were able to achieve and in some cases exceed a number of our annual operating objectives, which resulted in a partial payout under the 2008 annual Management Incentive Program averaging 57% of par for our named executive officers.

 

We designed the annual Management Incentive Program in recognition of the cyclical nature of our industry. The Committee believes this design provides management with a strong incentive to maximize operational performance at all points of the business cycle. During peak years, corporate earnings may be driven in part by market conditions, but strong operational and individual performance must be achieved to earn a maximum payout under the Program unless our net earnings exceed our historical record high. Similarly, at the bottom of the cycle, when (as now) market conditions provide less earnings opportunity or we incur a net loss, management still has strong incentive to maximize operational efficiency and productivity and to enhance our market leadership positions. The annual Management Incentive Program and the payouts for 2008 are discussed in more detail beginning on page 23 of this proxy statement.

 

Our common stock price declined significantly during 2008. Accordingly, all stock options awarded in 2006, 2007 and 2008 have an exercise price significantly above the market price of our common stock and are “out of the money”. These options will not provide realizable economic benefit to their holders until the market price exceeds the exercise price. Also, restricted stock units awarded in those years have a value substantially below the grant date value and our total return to shareowners was among the bottom group of the companies in the Dow Jones

U.S. Construction and Materials Index, which we use to determine the vesting of performance shares awarded to executive officers. Based on these results, we do not expect to meet the threshold necessary for vesting of performance shares awarded in 2007 and 2008.

 

Based on our view of the continued difficult market environment for our business, we have instituted a number of measures to reduce costs and create financial flexibility. Among the compensation measures approved by the Committee and Board in February 2009 was management’s proposal not to increase base salary or annual incentive award opportunity for executive officers in 2009. The Committee also approved equity awards under the Long-Term Incentive Plan which reflected a decrease in value of approximately 45% compared to awards granted in 2008 in anticipation of market practice in 2009 and in recognition of the significant decrease in the market price of our common stock.

 

Compensation and Organization Committee

 

Our executive compensation programs are overseen by the Committee. The Committee is comprised of independent directors as defined by the New York Stock Exchange’s listing standards. The current Committee members are Steven F. Leer (Chair), W. Douglas Ford, Marvin E. Lesser and Judith A. Sprieser. The Committee’s charter charges it with various accountabilities, including:

 

 

The Committee’s charter is reviewed at least annually. The charter can be found on our website www.usg.com.

 

Committee Calendar and Meetings

 

The Committee meets as necessary. Normally the Committee meets between four and six times a year. In 2008, the Committee held four meetings and also acted twice by unanimous written consent in lieu of a meeting. The agendas for meetings and the annual Committee calendar are developed by management in consultation with the Committee Chair. The Committee has retained a compensation consultant, and one or more of its representatives are usually in attendance at its meetings. The Committee periodically holds meetings or executive sessions to review matters with its compensation consultant without management present.

 

Management’s Role in Compensation

 

Our Human Resources Department is responsible for the administration of our executive compensation, benefits and related programs. The Senior Vice President, Human Resources is accountable for making proposals to the Committee for changes in compensation and benefit programs at the request of either management or the Committee. The Senior Vice President, Human Resources is also the primary management contact for the Committee Chair.

 

The Chairman and Chief Executive Officer, the Senior Vice President, Human Resources, the Senior Director, Executive Compensation, and the Director, Compensation usually attend Committee meetings to present matters for consideration by the Committee and to answer questions regarding those matters. Other executive officers and senior managers may attend meetings at the request of either management or the Committee to provide information and answer questions relevant to the Committee’s consideration of matters presented to it. Management’s consultant also attends these meetings to provide background and respond to questions.

 

The Chief Executive Officer recommends to the Committee changes in compensation for executive officers (other than himself) based on his assessment of each individual’s performance, contribution to our results and potential for future contributions to our success. The Committee meets in executive session without any members of

management present to review the performance and compensation of the Chief Executive Officer, to evaluate compensation proposals made by management and to make decisions with respect to those proposals.

 

Once each year (typically in July) management provides the Committee with an overview of all compensation and benefit plans pertaining to executive officers, including the purpose and cost of the programs and the value delivered to the participants by the programs. The Committee uses this information when evaluating subsequent compensation proposals by management and in developing its own proposals for changes to executive officer compensation.

 

The Chief Executive Officer and the Senior Vice President, Human Resources also lead an annual review for the Board of our management succession plans. This review provides the Committee and other Board members with information regarding the performance and potential of our management team that can be taken into account when executive compensation decisions are made.

 

Compensation Consultants

 

The Committee has retained Watson Wyatt Worldwide as a compensation consultant to provide the Committee with an independent review of USG’s executive compensation programs. Watson Wyatt was selected by the Committee and works under the direction of the Committee Chair. Watson Wyatt’s primary role is to provide an independent analysis of competitive market data and to assist the Committee in evaluating compensation proposals made by management. The Committee has also on occasion asked Watson Wyatt to assist it in developing the compensation package for our Chief Executive Officer.

 

Watson Wyatt does not provide advisory services to management. At the direction of the Committee Chair, Watson Wyatt may meet with management and/or management’s consultant to review management’s proposals prior to the Committee’s review. A representative of Watson Wyatt generally attends the Committee’s meetings. USG pays Watson Wyatt’s consulting fees after approval by the Committee Chair.

 

Management also uses consultants to provide analysis and advice with respect to executive compensation programs and practices. Management’s primary advisor for compensation-related matters is Exequity, LLP. Exequity assists management in analyzing competitive market practices and benchmark data and in developing proposals for review by the Committee. It does not provide any services to USG other than executive compensation consulting.

 

Management also contracts with Hewitt Associates to conduct an annual competitive review of our executive compensation pay practices against a comparator group of companies. The study assists management in comparing compensation levels for our executive officers to compensation levels of the comparator group. Hewitt does not assist management in formulating proposals for compensation changes for executive officers and does not attend Committee meetings. Hewitt provides other services to us related to the administration of our retirement, health and welfare benefit plans.

 

Setting Compensation Levels — Compensation Committee Annual Review

 

In February of each year, the Committee sets the level of each element of compensation for our executive officers. As part of this process, the Committee considers market competitiveness, current market conditions, performance for the prior year and internal equity.

 

Market Competitiveness

 

Since 2003, management has engaged Hewitt Associates to conduct an annual Executive Compensation Competitive Review to compare all elements of compensation for our executive officers to the compensation opportunity provided for similar positions by approximately 25 industrial and/or Chicago-based companies. Each executive officer’s position, including the Chief Executive Officer’s position, is compared to similar positions in this comparator group in terms of base salary, annual incentive, long-term incentive, the estimated value of benefits/perquisites and total compensation.

The study provides the Committee with market information that enables it to evaluate total compensation opportunity, the mix of fixed and variable compensation elements and how total compensation is divided between the various compensation elements. The Committee uses the information to evaluate recommendations made by management with respect to compensation of our executive officers other than the Chief Executive Officer and to develop its own recommendations with respect to the compensation of the Chief Executive Officer.

 

We select our comparator companies from among those for which data is available in Hewitt Associates’ Total Compensation Measurement data base, based on their similarity to USG in terms of industry, annual revenue, complexity of operations, business cyclicality and geographic location. They are the types of companies with which we compete for talent, and the median revenue of the group approximates our annual revenues. For the 2008 study, the companies included in the comparator group were:

 

 

We have designed our executive compensation package to be market competitive in total. Our objective is to provide executive officers with the opportunity to earn total compensation generally between the 50th and 75th percentiles of the comparator group, with above median actual compensation for above median performance. Executives who are new in a position may be below the median for one or more elements of compensation. To reward extraordinary accomplishments, to promote retention and/or to maintain internal equity, we may pay an element of compensation in excess of the 75th percentile. In circumstances where the scope of our executive’s position differs significantly from the scope of responsibility of similarly titled positions in the comparator group companies, the Committee may set compensation opportunity for that executive outside this range. The Committee is comfortable with setting one or more elements of an executive’s compensation opportunity below the 50th or above the 75th percentile because the Committee is primarily concerned with the competitiveness of our executive officers’ total compensation opportunity rather than the opportunity represented by any one individual element of compensation.

 

Total target net compensation (salary, annual incentive opportunity and long-term incentive opportunity) for each of the named executive officers (excluding Mr. Bosowski, who took retirement effective May 31, 2008) for 2008 was as follows:

 

 

Mr. Ferguson’s total compensation opportunity was targeted slightly above the 75th percentile for 2008 as a matter of internal equity to appropriately reflect his skills and contributions to our success relative to the skills and contributions of other named executive officers.

 

Performance

 

The Committee assesses the performance of the Chief Executive Officer in executive session at the February Committee meeting. This assessment is the basis for the Committee’s recommendations to the Board regarding the Chief Executive Officer’s compensation. The Chief Executive Officer conducts a similar assessment of the performance of the other executive officers and summarizes the results for the Committee when making his compensation recommendations to the Committee at the February Committee meeting.

The Committee’s determination of our executive officers’ base salary adjustments, Long-Term Incentive Plan awards and awards under the individual performance component of the annual Management Incentive Program is based on its assessment of each executive officer’s contribution to our overall financial results for the year and to the accomplishment of our annual operating objectives.

 

In making recommendations to the Board regarding 2008 compensation opportunity for our named executive officers, the Committee considered the named executive officers’ relative contribution to the primary objectives we developed as 2007 progressed. Those objectives included enhancing customer service, continuing to improve operating margins and reduce costs by improving operating efficiencies, making selective acquisitions and entering into joint ventures to grow our building products distribution and non-U.S. businesses, adjusting our workforce in response to market conditions and continuing to enhance our financial flexibility.

 

Among the accomplishments related to these objectives considered by the Committee in the context of increasingly difficult operating conditions were our achievement of record safety and customer satisfaction performance in 2007, our achievement of plant operating efficiency goals, the improved operating results for our Worldwide Ceilings segment, the implementation of operational restructuring activities that reduced wallboard capacity, overhead and other costs without adversely affecting operations, the acquisition and integration of California Whole Material Supply, Inc. to expand our building products distribution business, implementation of our joint venture arrangement with a leading Chinese building materials company to manufacture a complete line of ceiling tile and grid systems in China and the significant enhancement of our financial flexibility through accelerated receipt of a $1.1 billion tax refund related to our funding of the asbestos trust, a $422 million common stock offering at $48.60/share, a $500 million bond financing and completion of the tax incentive financing for our new corporate headquarters.

 

Internal Equity

 

The Committee also considers the level of compensation opportunity of executive officers based on its judgment of the relative importance of the responsibilities of each executive officer position to USG and each executive officer’s contribution to corporate results. In addition, adjustments may be made to further our longstanding succession planning philosophy of developing and promoting talent from within USG.

 

The benchmarking methodology and compensation philosophies applied by the Committee in determining the compensation of our Chief Executive Officer are the same as those applied in determining the compensation of our other executive officers. The Chief Executive Officer’s compensation is significantly higher than that of our other named executive officers based on our philosophy of paying market competitive compensation and reflects his broader accountability and the greater percentage of his total compensation that is performance-based. We do not set the compensation level of our executive officers as a multiple of the compensation of any other employee or group of employees.

 

Elements of Total Compensation

 

Our total compensation program consists of the following elements:

 

 

Base Salary

 

The starting point for determining base salaries for our executive officers is the annual Hewitt Executive Compensation Competitive Review. Individual salaries for our executive officers generally range between the 50th and 75th percentiles of the comparator group. Factors that warrant paying above the 50th percentile include individual performance, as assessed by the Chief Executive Officer (or in the case of the Chief Executive Officer, the Committee), unique skills or experience, retention considerations and length of service in the position or with

USG. Where the scope of an executive officer’s accountabilities is unique and cannot be reasonably compared to similar positions in the comparator group, we establish the percentile range based on a combination of available market data and internal equity. We do this so that the salary appropriately reflects the executive officer’s contribution and value to USG.

 

Annual Incentive

 

Our annual Management Incentive Program, or Program, provides a variable reward opportunity based on corporate net earnings, the achievement of objectives derived from the annual operating plan and, beginning in 2008, the assessment of each participant’s individual performance. The individual performance component was added to the Program to link each participant’s annual incentive compensation more closely to his or her impact on our financial and operational results for the year. We believe the first two components of the Program satisfy the currently applicable requirements of Internal Revenue Code Section 162(m) and the regulations promulgated thereunder regarding the deductibility of “performance-based” compensation in excess of $1 million paid to any of our named executive officers and that awards earned under those components of the Program in 2008 will be fully deductible as “performance-based” compensation. The individual performance component of the Program may in some years satisfy those requirements depending on the nature of the performance goals set for participants. We pay annual incentive awards in February following the year in which they are earned.

 

The target annual incentive opportunity for participants in the Program is expressed as a percentage of base salary. For 2008, the annual incentive opportunity for executive officers ranged from 45% of base salary to 125% of base salary for the Chief Executive Officer. Our Chief Executive Officer is eligible to receive a higher percentage annual incentive opportunity than our other executive officers in recognition of the broader scope of his responsibilities and impact on corporate performance, and based on market data regarding compensation of chief executive officers of the companies in our comparator group.

 

For 2008, the annual incentive award opportunity was comprised of the following segments that are designed to provide an incentive to maximize earnings and pursue operational excellence.

 

• Share of the Earnings:  40% of the annual Program award opportunity was based on a “share of the earnings” formula. We use a portion of our consolidated net earnings to fund a pool from which we pay awards to participants. Adjustments to net earnings may be made (with the Committee’s approval) for the impact of acquisitions and new accounting pronouncements and other specified matters.

 

We designed the share of the earnings concept to align our annual incentive awards with overall corporate results. As corporate performance (measured by consolidated net earnings) improves, more funds are allocated to the share of the earnings pool and participants receive larger awards. Similarly, if earnings decline, fewer funds are allocated to the pool resulting in lower awards for participants.

 

Due to the cyclical nature of our business, the allocation of consolidated net earnings to the pool is based on a schedule that is designed so that participants can earn 100% of the par award for this segment of the Program if consolidated net earnings in the current year are equal to 103% of the average of our consolidated net earnings for the prior seven years. The Committee and Board believe use of a rolling average is more reasonable than setting annual earnings targets, particularly when, as now, the housing market experiences significant volatility. We believe the design of the Program motivates managers to maximize financial results at all points of the business cycle.

 

No award under the share of the earnings portion of the Program is earned if we do not generate positive consolidated net earnings for the year and an award of approximately two times par could be earned if our consolidated net earnings exceed our historical record high. For 2008, we reported a consolidated net loss, and participants received no award for this segment of the Program.

 

• Operating Focus Targets:  40% of the annual Program award opportunity was based on the achievement of annual operating objectives, called operating focus targets. These targets are derived from our annual planning process and are measurable and verifiable. We use broad, high impact measures such as customer satisfaction, revenue/earnings growth, manufacturing cost and overhead that are designed to promote a balanced performance between operational and long-term growth objectives and to incentivize and reward key achievements

even if our net earnings performance does not merit a payout under the share of the earnings segment of the Program. Depending on achievement, the payout can range from zero to 200% for each measure.

 

The Committee approves the operating focus target measures and minimum, par and maximum performance levels for each measure early in the year. In February of the following year, the Committee reviews the prior year’s performance, including the degree of achievement of each of the operating focus targets and the computation of the share of the earnings formula, before it and the Board approve the payment of annual incentive awards.

 

In order to perform as efficiently as possible during 2008 and to support our long-term strategies, we identified the following key objectives on which to focus in 2008: extend our customer satisfaction leadership; improve efficiency and reduce costs; leverage our recent investments and acquisitions; and maintain financial flexibility. The operating focus targets for our named executive officers for 2008 were chosen to support these objectives. As a result of this focus, during 2008 we achieved record customer satisfaction performance, reduced overhead by $28 million compared to the prior year, improved the profitability of our ceilings businesses and took other actions to improve operating efficiency. These achievements contributed to the performance in relation to the 2008 operating focus targets for our named executive officers reflected in the table below, which also sets forth other information regarding those 2008 targets.

 

 

 

 

• Individual Performance:  20% of the annual Program opportunity was based on an assessment of each executive officer’s individual contribution to the accomplishment of our key operational objectives. As noted above, for 2008 those objectives were to extend our customer satisfaction leadership, improve efficiency and reduce costs, leverage our recent investments and acquisitions and maintain financial flexibility.

 

The payout under this segment of the Program can range from zero to 150% of par. The Committee’s assessment of the Chief Executive Officer’s performance at the February Committee meeting serves as the basis for its recommendation to the Board regarding the Chief Executive Officer’s payout under this segment of the Program. The Chief Executive Officer’s summary of his assessment of the performance of the other named executive officers at the Committee’s February meeting serves as a basis for the Committee’s recommendations to the Board with respect to payouts under this segment of the Program for other executive officers.

 

In making its assessment of the performance of our named executive officers in 2008, the Committee considered principally our accomplishment of near record safety performance, our achievement of plant operating efficiency goals, the enhancement of our financial flexibility through our issuance of $400 million of contingent convertible notes and our credit agreement amendment and management’s restructuring actions to quickly adjust to rapidly changing market conditions by reducing manufacturing and distribution capacity,

spending and staffing. The Committee concluded that this performance merited recognition under the individual performance segment of the Program.

 

Based on the Committee’s assessment, Messrs. Foote and Metcalf earned payouts of 125% of par, and all other named executive officers earned payouts of 100% of par, for this segment of the Program. Messrs. Foote and Metcalf earned a higher payout in recognition of their leading roles in improving the efficiency of our operating units and directing our restructuring actions.

 

For 2008, achievement for the operating focus target segment of the Program on an aggregate basis resulted in an earned payout equal to approximately 123% of par for our named executive officers. Combined with the payout under the individual performance segment of the Program, which averaged 110% of par for our named executive officers, and the 0% payout under the share of the earnings segment of the Program, the total earned payout for our named executive officers as a group for the 2008 Program was 71% of par (123% x 40% + 110% x 20%). At the suggestion of management, however, the payout under the Program to each of our named executive officers other than Mr. Bosowski was reduced to 57% of par. In consideration of that reduction, the Board approved awards for those named executive officers under our Long-Term Incentive Plan with commensurately increased grant date values to further align the interests of those executive officers with the interests of stockholders.

 

Over the past six years, the total payout under our annual Management Incentive Program for executive officers has varied from 45% to 162% of par, and has averaged approximately 100% of par.

 

Long-Term Incentive

 

Our equity-based Long-Term Incentive Plan, or Plan, was implemented in 2006. The purpose of the Plan is to align the interests of management with those of our stockholders, drive earnings and provide a competitive compensation opportunity that enables us to attract and retain talented managers. The Plan provides for the use of several types of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, performance shares, performance units and cash awards.

 

At their regularly scheduled meetings in February 2008, the Committee and Board approved awards under the Long-Term Incentive Plan for 2008. Each executive officer received an award with a grant date value between the 50th and 75th percentiles of the value of annual long-term incentive awards for similar positions in our comparator group companies, as measured by the Hewitt Executive Compensation Competitive Review.

 

For executive officers, one-half of the grant date value of the total award was provided in the form of non-qualified stock options. We used stock options to align management and stockholder interests by providing an opportunity for management to achieve meaningful levels of stock ownership, to create a strong incentive for management to grow our business and to provide the opportunity for competitive compensation based on long-term stock price appreciation. The options generally vest at a rate of 25% per year, and the exercise price of the options is the closing price of our common stock on the New York Stock Exchange on the date the option grants were approved by the Board.

 

One-quarter of the grant date value of the total award was provided in the form of RSUs that generally vest at a rate of 25% per year. We used RSUs for the same reasons we used stock options and also to promote retention of our management team. At grant, their value is equal to our stock price. Their value will increase if our stock price increases during the vesting period, which provides an incentive for management to maximize shareholder return. Because they also have some value even if the stock price does not increase or if it decreases, they promote retention throughout the business cycle.

 

The remaining one-quarter of the grant date value of the total award was provided in the form of performance shares. The actual number of performance shares to be issued can range from zero to 200% of the number of performance shares awarded, based on a comparison of our total stockholder return over the three-year vesting period ending December 31, 2010 to the total stockholder return for the companies in the Dow Jones U.S. Construction and Materials Index. Adjustments may be made to the Index to reflect changes in the companies included in the Index during the vesting period. We use this Index because it is comprised of companies that participate in the same or similar markets as our operating businesses and, therefore, provides an appropriate benchmark to measure the relative performance of our stock. We also use this Index in the performance graph included in our annual report

on Form 10-K. We used performance shares, and total stockholder return as the measure to determine the number of shares that vest, to motivate management to achieve our long-term objectives. The vesting schedule for our performance shares is as follows:

 

 

 

 

Stock Ownership Guidelines

 

We have stock ownership guidelines for our executive officers and other senior managers. Participants are expected to own at a minimum the lesser of their salary multiple or the fixed number of shares set forth below.

 

 

The guidelines were set at these levels to ensure management owns meaningful levels of stock, taking into account competitive market practice. We expect all participants to reach at least the minimum level of ownership by April 2012. Shares owned, performance shares that have vested and unvested restricted stock units count towards satisfaction of the guidelines. If a participant fails to meet or show progress toward meeting these ownership requirements, we may reduce or suspend future long-term incentive program awards to that participant. All of our current named executive officers meet or exceed their stock ownership guidelines.

 

Benefits and Perquisites

 

Broad-Based Retirement, Health and Welfare Benefits

 

We provide a comprehensive health and welfare package to all of our full-time employees. Our executive officers are eligible to participate in these plans on the same basis as other eligible employees. The package includes the following benefits:

 

 

We also provide plans for our more highly compensated employees, including our executive officers, that provide benefits to supplement those provided under our Investment Plan and Retirement Plan.

 

Supplemental Retirement Plan

 

Approximately 190 employees, including our executive officers, participate in the USG Corporation Supplemental Retirement Plan. This plan restores the benefits which otherwise would be delivered under the USG Corporation Retirement Plan but for the limits on pensionable compensation set by the Internal Revenue Service. The provisions of this plan mirror those of the Retirement Plan, including benefit formulas, definition of final average pay (without Internal Revenue Service limits) and the requirement for the contribution of 2% of pensionable earnings. Further information regarding our retirement plans and the present value of the qualified and supplemental pension benefits for our named executive officers appears under the heading “2008 Pension Benefits Table” beginning on page 38 of this proxy statement.

 

Deferred Compensation Plan

 

Approximately 60 employees, including one of our named executive officers, participate in the USG Corporation Deferred Compensation Plan. Due to the contribution limits set by the Internal Revenue Service applicable to the USG Corporation Investment Plan, this nonqualified plan is designed to allow highly compensated employees the opportunity to defer compensation (and thus current income tax) generally until after termination of employment with USG. We do not match deferred amounts. Those amounts are invested as directed by the participant into investment options that mirror those of the USG Corporation Investment Plan. We are obligated to pay the deferred amounts, plus or minus any accumulated earnings or losses on those amounts, to the participants following the termination of the deferral period. Further information regarding the deferred compensation plan for our named executive officers appears under the heading “2008 Nonqualified Deferred Compensation Table” on page 40 of this proxy statement.

 

Perquisites and Other Benefits

 

We make certain perquisites and other benefits available to our executive officers as part of providing them a competitive total compensation package and to facilitate their attention to the demands of our business. Executive officers are offered a company automobile (including office parking for our named executive officers), financial, estate planning and tax preparation services, personal liability and Executive Death Benefit Plan coverage, an annual medical examination, and on a limited basis, membership in luncheon clubs. In addition, for security reasons, Mr. Foote is provided with a home security system and company driver for certain occasions. The value of these benefits is described in more detail in the table titled “Supplemental Table” on page 32 of this proxy statement.

 

Employment Security and Potential Post Employment Payments

 

We provide all of our executive officers with two employment security arrangements — an employment agreement and a change-in-control severance agreement.

 

Employment Agreements

 

We provide these agreements to assist in attracting and retaining executives, to protect our assets and intellectual property and to reduce the potential for litigation related to termination of employment. By setting the terms for the involuntary termination of an executive officer in advance of the termination, these agreements facilitate the Board’s and the Chief Executive Officer’s ability to effectuate smooth transitions in the executive team. The employment agreements generally provide named executive officers with two years of salary and bonus and lump sum payments equal to the cost of continued medical benefits for 18 months and the present value of providing an additional two years of service and age credit under our retirement plans. The agreements provide these benefits only upon termination of the named executive officer’s employment without “cause.” We established

these benefit levels after reviewing competitive market practices for employment agreements used by similar types of organizations for executives at similar levels. We believe that the level of benefits provided by our agreements is in line with market practice for those companies that utilize employment agreements.

 

Consistent with our paying two years’ compensation as severance, the agreements include a requirement that after termination of employment, the executive officer will not compete with us for two years nor solicit our employees for three years. Executive officers are required to sign a release waiving potential claims against us before any payments are made.

 

Change-In-Control Severance Agreements

 

We provide these agreements to promote neutrality of our executive officers during potential change in control transactions so they will make the best decision for our stockholders, to retain the executive team in the event of a potential change in control transaction, to protect our intellectual property and to reduce the potential for litigation related to termination of employment. The agreements in effect for our named executive officers generally provide them with three years of salary and bonus and lump sum payments equal to the cost of continued medical benefits for 18 months and the present value of providing an additional three years of service and age credit under our retirement plans. The agreements provide these benefits only in the event that there is a change in control and a termination of the named executive officer’s employment by the Company without “cause” or by the executive for “good reason”. The definition of change in control is the same as in the Plan. Good reason includes, among other things, a reduction in salary or a material diminution in duties, responsibilities or total compensation. The agreements include a “modified gross up” provision. If the total amounts payable to the executive officer would constitute a “parachute payment” resulting in the imposition of an excise tax, the payment will be reduced to the extent necessary to avoid being a parachute payment, unless the reduction would be more than 10% of the total amounts payable. In that case, the payment will be increased to provide the executive officer a net after tax amount equal to the value of the excise tax imposed.

 

As with our employment agreements, we established these benefits after reviewing competitive market practices for change in control agreements used by similar types of organizations for similar purposes. We believe that the level of benefits provided by our change in control severance agreements is also in line with market practice for organizations that use change in control agreements.

 

In consideration of our paying severance compensation, these agreements include a requirement that after termination of employment, the named executive officer will not compete with us for one year nor solicit our employees for three years. Executive officers are required to sign a release waiving potential claims against us before any payments are made under these agreements.

 

Further information regarding the benefits our current named executive officers could receive under these agreements is provided in the tables titled “Potential Payments Upon Termination or Change in Control” beginning on page 40 of this proxy statement.

 

Tax and Accounting Implications

 

Management and the Committee reviewed and considered the deductibility of payments under our executive compensation programs under Internal Revenue Code Section 162(m) and the regulations promulgated thereunder. We believe that amounts payable under the share of earnings and operating focus target elements of the Program, gains from stock options and performance shares granted will be fully deductible “performance-based” compensation under Section 162(m). Compensation attributable to the vesting of RSUs and amounts paid under the individual performance element of the Program for 2008 are not “performance-based” compensation under Section 162(m). We also believe that all compensation we provided to our current named executive officers for 2008 is fully deductible, except in the case of Messrs. Foote and Metcalf to the extent that the aggregate of their salary, payout under the individual performance segment of the Program, taxable benefits and perquisites and compensation attributable to the vesting of RSUs exceeds $1 million.

 

Management and the Committee reviewed all executive compensation programs and arrangements under Internal Revenue Code Section 409A, related to the deferral of compensation, and the current and future year

accounting impact of the 2008 Long-Term Incentive Plan awards under Statement of Financial Accounting Standards No. 123(R) when it considered and approved those awards. During 2008, the employment and change-in-control agreements provided to our executive officers and various other compensation and benefit programs were amended to conform with the requirements of Section 409A.

 

COMPENSATION AND ORGANIZATION COMMITTEE REPORT

 

USG’s Compensation and Organization Committee has reviewed and discussed the Compensation Discussion and Analysis section with our management. Based on that review and discussion, the Compensation and Organization Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

THE COMPENSATION AND ORGANIZATION COMMITTEE

 

Steven F. Leer, Chair

Douglas Ford

Marvin E. Lesser

Judith A. Sprieser

 

2008 SUMMARY COMPENSATION TABLE

 

The Summary Compensation Table below reflects total compensation earned by or paid to our principal executive and financial officers and our other most highly compensated executive officers for the last three years. Information is provided for Mr. Cook only for 2007 and 2008 because he was not a named executive officer in 2006. Information is provided for Mr. Bosowski only for 2006 and 2008 because he was not a named executive officer in 2007.

 

 

 

SUPPLEMENTAL TABLE

 

 

Long-Term Incentive Plan

 

In August 2006, March 2007 and February 2008, awards of nonqualified stock options and restricted stock units were made under our Long-Term Incentive Plan, or LTIP. Awards of performance shares were also made under the LTIP in March 2007 and February 2008. The options generally vest at a rate of 20% or 25% per year beginning one year from the date of grant, or earlier in the event of death, disability, a change in control or retirement. They generally expire 10 years from the date of grant, or earlier in the event of death, disability or retirement. Individuals who retire will forfeit one-half of the unvested stock options awarded in 2006. Expense is recognized over the vesting period of the award unless accelerated due to retirement eligibility.

 

The restricted stock units generally vest at a rate of 25% per year beginning one year from the date of grant, except that a special retention award of restricted stock units made to Mr. Metcalf in March 2007 will vest in March 2012 and that restricted stock units may vest earlier in the event of death, disability or a change in control. Individuals who retire will forfeit one-half of the unvested units awarded in 2006. The remaining units will continue to vest in accordance with their terms. Expense is generally recognized over the vesting period of the award unless accelerated due to retirement eligibility.

 

The performance shares generally vest after three years from the date of grant based on our total stockholder return relative to the performance of the Dow Jones U.S. Construction and Materials Index for the three-year period, with adjustments to the Index to reflect changes in the companies included in the Index during the performance period. The number of performance shares earned will vary from zero to 200% of the number of performance shares awarded depending on that relative performance. Vesting will be pro-rated based on the number of full months employed during the performance period in the event of death, disability, retirement or a change in control, and pro-rated awards will be paid at the end of the three-year performance period. Each performance share earned will be settled in a share of our common stock. Expense is recognized over the period from the grant date to the end of the performance period.

 

Employment Agreements

 

We have entered into an employment agreement with each of our executive officers. These agreements have an initial term expiring on January 1, 2011. They include an automatic renewal feature that renews the agreements for successive one-year terms unless 120 days’ notice of termination is provided before expiration of the current term.

 

The employment agreements provide for minimum annual salaries, with the minimum annual salaries increased as approved by the Board of Directors, and for participation in all incentive and benefit programs

made available to similarly situated executives. They provide that an executive officer who is terminated without cause will be entitled to a lump sum severance payment equal to the sum of (1) two times the executive officer’s base salary and target annual incentive award, (2) the cost of continuing benefits for the executive officer for a period of 18 months and (3) the present value of the additional retirement benefits the executive officer would have been entitled to receive if he or she had an additional two years of age and credited service under our retirement plans.

 

The employment agreements also include a requirement that after termination of employment the executive officer will not compete with us for two years nor solicit our employees for three years. Executive officers are required to sign a release waiving potential claims against us before any severance payments are made to them under the employment agreements.

 

2008 GRANTS OF PLAN-BASED AWARDS TABLE

 

The 2008 Grants of Plan-Based Awards Table below reflects equity and non-equity incentive plan awards made to each of the named executive officers during 2008. Equity awards include restricted stock units (RSU), performance shares (PS) and nonqualified stock options (SO).