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.  )

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KB HOME

(Name of Registrant as Specified In Its Charter)

 

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

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KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

 

 

March 5, 2010

 

Dear Fellow Stockholder:

 

Your officers and directors join me in inviting you to attend the 2010 Annual Meeting of Stockholders of KB Home at 9:00 a.m., Pacific Time, on April 1, 2010 at The Wedgewood Ballroom at The Fairmont Miramar Hotel in Santa Monica, California.

 

The expected items of business for the meeting are described in detail in the attached Notice of 2010 Annual Meeting of Stockholders and Proxy Statement. We also will discuss our 2009 results and our plans for the future.

 

We look forward to seeing you on April 1.

 

Sincerely,

 

 

Jeffrey T. Mezger

President and Chief Executive Officer

 

Notice of 2010 Annual Meeting of Stockholders

 

 

 

 

 

By Order of The Board of Directors,

 

 

Wendy C. Shiba

Executive Vice President, General Counsel and Secretary

Los Angeles, California

March 5, 2010

Table of Contents

 

 

Due to space limitations at the Annual Meeting location, we must limit attendance to only stockholders of record on February 10, 2010, authorized proxy holders of stockholders of record on February 10, 2010, individuals who have been designated to present a stockholder proposal, and a few invited guests of the Board of Directors. Non-transferable admission tickets for the Annual Meeting will be distributed on a first-come, first-served basis, and we cannot guarantee admission for all stockholders. An admission ticket and picture identification (such as a valid driver’s license or passport) will be required to enter the Annual Meeting. A professional business dress code will be observed at the Annual Meeting.

 

If you are eligible and wish to attend the Annual Meeting, please send your request for an admission ticket in writing to William A. Richelieu, Assistant Corporate Secretary, KB Home, 10990 Wilshire Boulevard, 7th Floor, Los Angeles, California 90024. All requests must be in writing and received on or before Friday, March 19, 2010 and include the following information:

 

 

Please note any special assistance needs in your admission ticket request. Once your request is processed, an admission ticket will be sent to you by mail to the address given.

KB HOME
10990 Wilshire Boulevard
Los Angeles, California 90024
(310) 231-4000

 

Proxy Statement
for the
2010 Annual Meeting of Stockholders

 

Attending the Annual Meeting
Date:		Thursday, April 1, 2010
Place:		The Wedgewood Ballroom The Fairmont Miramar Hotel 101 Wilshire Boulevard Santa Monica, CA 90401
To Attend:		You must have an admission ticket and a valid photo ID, as described above on page i. A professional business dress code will be observed. Parking is available at the meeting location. You may be subject to a security check.
Note:		No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted at the Annual Meeting. Additional rules of conduct will apply at the meeting.

 

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	•	Audit and Compliance (“Audit Committee”)
	•	Management Development and Compensation (“Compensation Committee”)
	•	Nominating and Corporate Governance (“Nominating/Governance”)

 

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The Board believes that separate individuals should hold the positions of Chairman of the Board and Chief Executive Officer, and that the Chairman should not be an employee. The Board has been led by an independent Non-Executive Chairman since 2007. Under our Corporate Governance Principles, the Chairman of the Board is responsible for coordinating the Board’s activities, including the scheduling of meetings and executive sessions of the non-employee directors and the relevant agenda items in each case (in consultation with the Chief Executive Officer as appropriate). The Board believes this leadership structure has enhanced the Board’s oversight of and independence from our management, the ability of the Board to carry out its roles and responsibilities on behalf of our stockholders, and our overall corporate governance compared to our prior combined Chairman/Chief Executive Officer leadership structure.

 

The Board has delegated its risk oversight responsibilities to the Audit Committee as described below under the heading “Board Committee Responsibilities and Related Matters – Audit Committee.” In accordance with the Audit Committee’s Charter, each of our senior financial and accounting, legal and internal audit executives report directly to the Audit Committee regarding material risks to our business, among other matters, and the Audit Committee meets in executive sessions with each such executive and with representatives of our independent registered public accounting firm. The Audit Committee Chair reports to the full Board regarding material risks as deemed appropriate.

 

 

The chart below shows the current members of the standing Board Committees as of the date of this Proxy Statement and the number of meetings each Board Committee held during our 2009 fiscal year. Mr. Mezger does not serve on any Board Committees.

 

 

 

 

The Board has delegated certain responsibilities and authority to each Board Committee as described below. At each regularly scheduled Board meeting, each Board Committee Chair (or another designated Board Committee member) reports to the full Board on his or her Board Committee’s activities.

 

Audit Committee. The Audit Committee is responsible for general oversight of our (a) accounting and reporting practices; (b) internal control over financial reporting and disclosure controls and procedures; (c) audit process, including our independent registered public accounting firm’s qualifications, independence, retention, compensation and performance, and the performance of our internal audit department; and (d) compliance with legal and regulatory requirements and management of matters in which we have or may have material liability exposure. In addition, the Audit Committee may act for the Board to authorize us or our subsidiaries or affiliates to incur, guarantee or redeem debt or debt securities.

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The Audit Committee also oversees the preparation of a required report to be included in our annual proxy statement and is charged with the duties and responsibilities listed in its charter. The Audit Committee’s report is provided below under the heading “Audit and Compliance Committee Report.” The Audit Committee is a separately designated standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934.

 

The Board has determined that each current member of the Audit Committee is independent under our Corporate Governance Principles (as described below under the heading “Director Independence”), NYSE listing standards and Securities and Exchange Commission (“SEC”) rules. The Board has also determined that each current member of the Audit Committee is financially literate under NYSE listing standards, and that Ms. Lora qualifies as an “audit committee financial expert” under SEC rules.

 

Compensation Committee. The Compensation Committee is responsible for (a) the evaluation and compensation of our CEO; (b) the compensation of our senior executive management (other than our CEO), which consists of our CEO’s direct reports and any designated “executive officers” (as that term is defined in Rule 3b-7 of the Securities Exchange Act of 1934); (c) oversight of our efforts to attract, develop, promote and retain qualified senior executive management; and (d) the evaluation and determination of non-employee director compensation and benefits. The Compensation Committee oversees the preparation of the compensation discussion and analysis to be included in our annual proxy statement, recommends to the Board whether to so include the compensation discussion and analysis, provides an accompanying report to be included in our annual proxy statement, and is charged with the duties and responsibilities listed in its charter. The compensation discussion and analysis for this Proxy Statement is provided below under the heading “Compensation Discussion and Analysis,” and the Compensation Committee’s report is provided below under the heading “Management Development and Compensation Committee Report.”

 

The Board has determined that each current Compensation Committee member is independent under our Corporate Governance Principles and NYSE listing standards, is a “non-employee director” under SEC rules and is an “outside director” under Section 162(m) of the Internal Revenue Code (the “Code”).

 

Overview of Executive Officer and Non-Employee Director Compensation Processes and Procedures.  Under our By-laws, the Board has the authority to fix the compensation of our executive officers and non-employee directors. The Board has delegated this authority to the Compensation Committee as provided in the Compensation Committee’s charter. Per its charter, the Compensation Committee annually reviews and approves the goals and objectives relevant to our CEO’s compensation, evaluates his performance in light of those goals and objectives and other criteria, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves our CEO’s compensation based on the evaluation. The Compensation Committee also evaluates, in conjunction with our CEO, the performance of our senior executive management, and reviews and approves their compensation.

 

The Compensation Committee exercises the Board’s authority with respect to our employee compensation and benefits plans (including our employee equity compensation plans) and policies, except to the extent that the Board, in its discretion, reserves its authority. This delegation includes the authority to select eligible participants, recommend and approve grants and awards, set performance targets and other award eligibility criteria, approve an aggregate incentive pool for any annual or long-term incentive awards, interpret the plans’ terms, delegate certain responsibilities and adopt or modify as necessary any rules and procedures to implement the plans, including any rules and procedures that condition the approval of grants and awards. The Compensation Committee also periodically reviews our compensation and benefit plans and, from time to time, will recommend to the Board new material plans or modifications to existing plans. The Compensation Committee’s exercise of this authority, including specific considerations applied and determinations made, with respect to the compensation and benefits awarded to our named executive officers under our plans is discussed below under the heading “Compensation Discussion and Analysis.”

 

The Compensation Committee, from time to time, reviews and makes recommendations to the Board regarding non-employee director compensation and benefits consistent with the goals of recruiting the highest caliber directors to serve on the Board, aligning directors’ and stockholders’ interests, and fairly paying directors for the work required to serve stockholder interests given our size, scope and complexity of operations.

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In its oversight of executive officer and non-employee director compensation, the Compensation Committee seeks assistance from our management and has engaged an outside compensation consultant, Semler Brossy Consulting Group LLC (“Semler Brossy”), as further described below under the heading “Compensation Discussion and Analysis.” The Compensation Committee may delegate to a subcommittee or to our management any duties and responsibilities as the Compensation Committee deems to be appropriate and in our best interests, but it cannot delegate to our management the authority to grant equity-based awards.

 

Compensation Committee Interlocks and Insider Participation. All current Compensation Committee members served throughout our 2009 fiscal year. No member of the Compensation Committee during our 2009 fiscal year was part of a “compensation committee interlock” as described under SEC rules. In addition, none of our executive officers served as a director or member of the compensation committee of another entity that would constitute a “compensation committee interlock.”

 

Nominating/Governance Committee. The Nominating/Governance Committee is responsible for (a) providing oversight of our corporate governance policies and practices; (b) identifying, evaluating and recommending to the Board individuals who are qualified to become directors; and (c) performing ongoing assessments of the Board’s size, operations, structure, needs and effectiveness. The Nominating/Governance Committee also reviews and makes recommendations to the full Board on proposed changes to our Certificate of Incorporation and By-laws, periodically assesses and recommends action with respect to stockholder rights plans and other stockholder protections, reviews and approves or ratifies (as applicable) “related party transactions,” as further described below under the heading “Certain Relationships and Related Party Transactions,” and is charged with the duties and responsibilities listed in its charter.

 

The Board has determined that each current member of the Nominating/Governance Committee is independent under our Corporate Governance Principles and NYSE listing standards.

Director Qualifications

Selected Director Attributes

•   Personal qualities, accomplishments and reputation in the business community

•   Financial literacy, financial and accounting expertise and significant business, academic or government experience in leadership positions or at senior policy-making levels

•   Geographical representation in areas relevant to our business

•   Diversity of background and personal experience

•   Fit of abilities and personality with those of current and potential directors in building a Board that is effective, collegial and responsive to the needs of our business

•   Independence and an absence of conflicting time commitments

 

We believe that a substantial majority of our directors should be independent. To be independent, the Board must affirmatively determine that a director does not have any material relationship with us based on all relevant facts and circumstances.

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The Board makes independence determinations annually based on information supplied by directors and other sources, the Nominating/Governance Committee’s prior review and recommendation, and certain categorical standards contained in our Corporate Governance Principles. These standards are consistent with NYSE listing standards. The Board has determined that all non-employee directors who served during our 2009 fiscal year and all current director nominees are independent under the Board’s director independence standards. Accordingly, Messrs. Bollenbach, Burkle, Finchem, Jastrow, Johnson, McCaffery, Moonves, and Nogales and Ms. Lora are independent. In addition, the Board has determined that all of the Board Committees are entirely composed of independent directors.

 

In making its independence determinations, the Board considered radio and billboard advertising expenditures we made at market rates with CBS Corporation (at which Mr. Moonves serves as President and Chief Executive Officer). These expenditures were made in the ordinary course of our business and the business of CBS Corporation and fell well within the categorical independence standards contained in our Corporate Governance Principles. Mr. Moonves was deemed to not have a direct or indirect material interest in the expenditures, and did not participate in the transactions in an individual capacity.

 

The Nominating/Governance Committee is responsible for identifying and evaluating director candidates based on the perceived needs of the Board at the time made. Director candidate identification and evaluation may occur at regular or special meetings of the Nominating/Governance Committee and at any point during the year. The general qualifications for director candidates are described above under the heading “Director Qualifications,” and attributes that the Nominating/Governance Committee may consider are described above in the box titled “Selected Director Attributes.” Among other attributes, the Nominating/Governance Committee may consider a director candidate’s diversity of background and personal experience. In this context, diversity may encompass a candidate’s particular race, ethnicity, national origin and gender, geographic residency, educational and professional history, community or public service, expertise or knowledge base and/or other tangible and intangible aspects of the candidate’s constitution in relation to the personal characteristics of current directors and other potential director candidates. The Nominating/Governance Committee does not have a formal policy specifying how diversity of background and personal experience should be applied in identifying or evaluating director candidates, and a candidate’s background and personal experience, while important, does not necessarily outweigh other attributes or factors the Nominating/Governance Committee may consider in evaluating any particular candidate. A director candidate’s background and personal experience, however, will be significant in the Nominating/Governance Committee’s candidate identification and evaluation process to help ensure that the Board remains sensitive and responsive to the needs and interests of our homebuyers and other stakeholders. As part of its annual self-evaluation under our Corporate Governance Principles, the Board considers whether the level of diversity of its members is appropriate, and the Nominating/Governance Committee takes the outcome into account when identifying and evaluating director candidates.

 

The Nominating/Governance Committee has retained professional search firms from time to time to assist it with recruiting potential director candidates to the Board based on criteria the Nominating/Governance Committee provides to the firm. These firms help identify, evaluate and select director candidates and are typically paid an agreed upon fee plus expenses for their work. Current directors or other persons may recommend candidates to the Nominating/Governance Committee.

 

Any security holder may recommend a director candidate for the Nominating/Governance Committee’s consideration by submitting the candidate’s name and qualifications to us in care of the Corporate Secretary at the address listed above under the heading “Corporate Governance Highlights.” Director candidates recommended by a security holder are considered in the same manner as any other recommended candidates.

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The Board sets non-employee director compensation based on recommendations from the Compensation Committee. Mr. Mezger is not paid for his service as a director. The Compensation Committee has retained Semler Brossy to assist it with designing our compensation and benefit programs, including our non-employee director compensation program.

 

2003 Director Plan

 

Until July 9, 2009, non-employee director compensation was provided under our 2003 Non-Employee Directors Stock Plan (“2003 Director Plan”), and each non-employee director serving on the Board on the date of our last Annual Meeting (April 2, 2009) received compensation under the terms of the 2003 Director Plan. All compensation described below under “Director Compensation During Fiscal Year 2009” was provided under the terms of the 2003 Director Plan. The key components of the 2003 Director Plan are set forth below.

 

 

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2009 Director Plan

 

On July 9, 2009, the Board adopted a new non-employee director compensation program – the 2009 Non-Employee Directors Compensation Plan (“2009 Director Plan”). The terms of the 2009 Director Plan are filed as an exhibit to our Annual Report. Similar to the 2003 Director Plan, the 2009 Director Plan provides non-employee directors with an annual retainer and equity-based compensation composed of stock options and stock units. The 2009 Director Plan also provides retainers for Board Committee Chairs and for Board Committee members, and meeting fees payable for attendance at Board or Board Committee meetings, beginning on the third additional meeting of the Board or of a Board Committee above its number of regularly scheduled meetings, subject to approval by the Non-Executive Chairman of the Board (as to Board meetings) or the relevant Board Committee Chair (as to Board Committee meetings). The Non-Executive Chairman of the Board is not eligible for any Board Committee-related retainers.

 

Under the 2009 Director Plan, non-employee directors may elect to receive cash retainers and meeting fees in the form of stock units. 2009 Director Plan stock units and stock options vest one year after the date of grant, and stock options have a 10-year term. A non-employee director cannot exercise vested 2009 Director Plan stock options until the director has met the non-employee director stock ownership requirement or, if earlier, has left the Board. A non-employee director can elect to receive payout of 2009 Director Plan stock units upon leaving the Board or, if the director has met the non-employee director stock ownership requirement, immediately after the one-year vesting date or at a specified date after the stock units vest, but before the director leaves the Board. The non-employee director stock ownership requirement is described below under the heading “Stock Ownership Requirements.” Stock options and stock units granted under the 2009 Director Plan are settled in cash unless payment in shares of our common stock is approved by our stockholders.

 

As of the date of this Proxy Statement, no compensation has been provided to our non-employee directors under the 2009 Director Plan. The Board has established the following compensation under the 2009 Director Plan for the 2010 Director Year: (a) an $80,000 annual retainer; (b) a grant of stock options and stock units, with each valued at $67,500 on the date of grant; (c) Board Committee Chair retainers of $25,000 (Audit Committee), $18,000 (Compensation Committee) and $10,000 (Nominating/Governance Committee); (d) Board Committee member retainers of $10,000 (Audit Committee), $7,000 (Compensation Committee) and $5,000 (Nominating/Committee); and (e) meeting fees, if any, of $1,500 per eligible meeting. The differences between the various Board Committee Chair retainers and Board Committee member retainers reflect the Board’s judgment of each Board Committee’s respective workload.

 

Chairman Retainer

 

Mr. Bollenbach is paid an additional annual cash retainer of $300,000 for his service as the Non-Executive Chairman of the Board. He may keep any retainer payment if removed from the Board without cause.

 

Expenses

 

We pay the non-employee directors’ expenses, including travel, accommodations and meals, for attending Board and Board Committee meetings and our annual stockholders meetings and any other activities related to our business.

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Director Compensation During Fiscal Year 2009

 

 

 

 

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Listed below are each non-employee director’s total 2003 Director Plan stock unit and stock option holdings as of February 26, 2010.

 

 

 

Directors’ Legacy Program. We established a Directors’ Legacy Program in 1995 to recognize our and our directors’ interests in supporting worthy educational institutions and other charitable organizations. In making adjustments to our philanthropic activities, the Board elected in 2007 to close the program to new participants. Messrs. Bollenbach, Johnson and Mezger do not participate in the program. Under the program, we will make a charitable donation on each participating director’s behalf of up to $1,000,000. Directors vest in the full donation in five equal annual installments of $200,000, and therefore must serve on the Board for five consecutive years to donate the maximum amount. A participating director may allocate the donation to up to five qualifying institutions or organizations. Donations are paid in ten equal annual installments directly to designated organizations after a participating director’s death with proceeds from the life insurance policies we maintain on each participating director’s life. Participating directors and their families do not receive any proceeds, compensation or tax savings associated with the program.

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At the Annual Meeting, the Board will present as nominees and recommend to stockholders that Messrs. Bollenbach, Finchem, Jastrow, Johnson, McCaffery, Mezger, Moonves and Nogales and Ms. Lora each be elected as a director to serve for a one-year term ending at our 2011 Annual Meeting of Stockholders. Each nominee is currently a director, has consented to being nominated and has agreed to serve as a director if elected. Each nominee is standing for re-election. Should any of these nominees become unable to serve as a director prior to the Annual Meeting, the persons named as proxies on the proxy cards for the Annual Meeting will, unless otherwise directed, vote for the election of such other person as the Board may recommend in place of such nominee.

 

Mr. Burkle has decided to not seek re-election and will retire from the Board effective as of the date of the Annual Meeting, when his current term as a director expires. On the date of the Annual Meeting, following the election of directors, the Board will have nine members.

 

Vote Required

 

Under our By-laws, the election of each director nominee will require a majority of votes cast at the Annual Meeting to be in favor of the nominee (i.e., the votes cast for a nominee’s election must exceed the votes cast against the nominee’s election).

 

Consistent with this director election standard, our Corporate Governance Principles require that each director nominee in an uncontested election at an annual meeting of stockholders receive more votes cast for than against his or her election or re-election in order to be elected or re-elected to the Board. An “uncontested election” is one in which no director candidates on the ballot were nominated by a stockholder in accordance with our By-laws. This election is an uncontested election.

 

Our Corporate Governance Principles also provide that a director nominee who fails to win election or re-election to the Board in an uncontested election is expected to tender his or her resignation from the Board. If an incumbent director fails to receive the required vote for election or re-election in an uncontested election, the Nominating/Governance Committee will act promptly to determine whether to accept the director’s resignation and will submit its recommendation for consideration by the Board. The Board expects the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation. The Nominating/Governance Committee and the Board may consider any factors they deem relevant in deciding whether to accept a director’s resignation.

 

Your Board recommends a vote FOR the election to the Board of each of the nominees.

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A brief summary of each current director’s and director nominee’s principal occupation, recent professional experience, certain specific qualifications identified as part of the Board’s determination that each such individual should serve on the Board, and directorships at other public companies for at least the past five years, if any, is provided below.

 

 

 

 

 

 

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The Audit Committee has appointed Ernst & Young LLP as our independent registered public accounting firm to audit our consolidated financial statements for our fiscal year ending November 30, 2010. During our 2009 fiscal year, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other audit-related services, as further discussed below under the heading “Independent Auditor Fees and Services.” Representatives of Ernst & Young LLP are expected to attend the Annual Meeting, be available to respond to appropriate questions and, if they desire, make a statement.

 

Although we are not required to do so, we are seeking stockholder ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm as a matter of good corporate governance. If Ernst & Young LLP’s appointment is not ratified, the Audit Committee will reconsider whether to retain Ernst & Young LLP, but still may retain them. Even if the appointment is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in our and our stockholders’ best interests.

 

Vote Required

 

Approval of the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2010 requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting.

 

Your Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for our fiscal year ending November 30, 2010.

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We are asking for approval of the KB Home 2010 Equity Incentive Plan (the “2010 Plan”), which will allow us to grant equity-based compensation to our employees, consultants and non-employee directors. Upon approval of the 2010 Plan by our stockholders, no further awards will be made under our 2001 Stock Incentive Plan (the “2001 Plan”), which is currently our only active equity compensation plan. The 2001 Plan will otherwise expire in accordance with its terms on April 5, 2011.

 

The 2010 Plan is being submitted to a vote of the stockholders in order to comply with NYSE rules and to allow us to deduct for federal income tax purposes the “performance-based compensation” that is paid under the 2010 Plan, as permitted by Section 162(m) of the Code. Stockholder approval will also allow us to grant incentive stock options under the 2010 Plan.

 

A copy of the 2010 Plan can be found in the accompanying Attachment A, and the following summary of the 2010 Plan’s material terms is qualified in its entirety by reference to the full text. Stockholders are urged to read the full 2010 Plan as set forth in Attachment A.

 

Summary of the 2010 Plan

 

The purpose of the 2010 Plan is to attract, motivate and retain the services of employees, consultants and non-employee directors by enabling them to participate in our growth and financial success through the ownership of equity-based awards, and to align their individual interests to those of our stockholders. The 2010 Plan will become effective only upon approval by our stockholders.

 

Size of the Share Pool. The 2010 Plan authorizes the issuance of 3,500,000 shares of our common stock. This includes the unused capacity that will be rolled-over from the 2001 Plan and that will become subject to the terms of the 2010 Plan. This pool of shares may be used for all types of awards under a fungible pool formula. This formula provides that the authorized share limit will be reduced by (a) one share for every one share subject to a stock option, stock appreciation right (“SAR”) or other similar award, and (b) 1.78 shares for every one share subject to a restricted stock award or other similar “full-value” awards.

 

Key Terms. The 2010 Plan authorizes the Compensation Committee (or, if our Board determines, another committee of independent directors of the Board, which in either case we will refer to in this proposal as the “Committee”) to grant awards and otherwise administer and interpret the 2010 Plan, and any award agreements and general programs adopted thereunder. The 2010 Plan also incorporates a broad range of other leading compensation and governance terms, including the following:

 

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Eligibility. All employees, non-employee directors and consultants of KB Home and its affiliates are eligible to receive awards under the 2010 Plan, as determined by the Committee or the Board. As of the date of this proxy statement, we have nine non-employee directors and approximately 1,000 employees and consultants who are eligible to participate in the 2010 Plan.

 

Administration. Unless the Board assumes the role of the Committee or otherwise limits the Committee’s authority, the Committee has the power to make grants of awards under the 2010 Plan, to determine the types, sizes, price, timing and vesting restrictions of awards, and to administer and interpret the 2010 Plan. The Committee shall also have the limited power to delegate certain of its powers and responsibilities under the 2010 Plan, subject to the restrictions described above, and only to the extent consistent with our equity-based award grant policy (as described below under the heading “Equity-Based Award Grant Policy”) and applicable law.

 

Types of Awards. The 2010 Plan authorizes the grant of stock options, shares of restricted stock, SARs, restricted stock units, stock payments and general performance-based awards. Following is a brief description of each type of award:

 

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Cancellation, Forfeiture, Expiration or Cash Settlement of Awards. If an award expires or is canceled, forfeited or settled for cash, then any shares subject to such award may, to the extent of such expiration, cancellation, forfeiture or cash settlement, be used again for new grants under the 2010 Plan. However, as noted above, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligation pursuant to any award may not be used again for new grants. Any shares that again become available for grant will be added back in the same manner in which they were initially deducted (i.e., one-for-one or 1.78-for-one).

 

Performance-Based Compensation. Awards may be granted to employees who are “covered employees” under Section 162(m) of the Code that are intended to be “performance-based compensation” so as to preserve the tax deductibility of the awards for federal income tax purposes. These performance-based awards may be either equity or cash awards, or a combination of both. Holders are only entitled to receive payment for a Section 162(m) performance-based award for any given performance period to the extent that pre-established performance goals set by the Committee are satisfied. These pre-established performance goals must be based on one or more of the following performance criteria which are the same criteria our stockholders approved last year for our Annual Incentive Plan for Executive Officers:

 

 

With respect to particular performance-based awards, the Committee is permitted to make certain equitable and objectively determinable adjustments to the performance goals, provided that any awards that are intended to qualify as “performance-based compensation” must be made in accordance with the requirements of Section 162(m) of the Code. Upon certification of achievement of the performance goals for a particular performance period set forth in an award that is intended to qualify as “performance-based compensation,” the Committee may reduce or eliminate, but not increase, the amount specified in the original award. Generally, a holder of a performance-based award must be employed by or providing services to us throughout an applicable performance period in order to be eligible to receive any payment pursuant to an award that is intended to qualify as “performance-based compensation.”

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Payment Methods. Holders may satisfy any payment obligations associated with awards with (a) cash or a check, (b) shares of our common stock issuable pursuant to the award or held for a sufficient period of time (and without encumbrances) and having a fair market value equal to the required payment, or (c) other acceptable property or legal consideration, as determined by the Committee.

 

Transferability. No award may be transferred other than to certain permitted transferees by will or the laws or descent and distribution or, with the consent of the Committee, pursuant to a domestic relations order.

 

Adjustments. Equitable adjustments to the terms of the 2010 Plan and any awards will be made as necessary to reflect any stock splits, spin-offs, extraordinary stock dividends or similar transactions.

 

Substitute Awards. The 2010 Plan provides for “substitute awards” to be issued if we assume or substitute awards under the 2010 Plan for outstanding equity awards previously granted by another company, whether in connection with a merger, combination, consolidation, acquisition or other corporate transaction. Certain equitable exceptions apply to the terms of the 2010 Plan in order to facilitate the issuance of such awards.

 

Amendment and Termination. The Board or the Committee may terminate, amend or modify the 2010 Plan. However, the additional approval of our stockholders will be required to (a) increase the number of shares of our common stock available for grant, (b) reduce the exercise price of any option or SAR, (c) cancel an option or SAR in exchange for cash or any other award that has a lower exercise price or that provides additional value to the holder, (d) materially modify the requirements for eligibility to participate in the 2010 Plan, (e) materially increase the benefits accruing to participants in the 2010 Plan, or (f) make other material changes that require stockholder approval under applicable stock exchange rules.

 

Term. No new awards may be granted under the 2010 Plan following the tenth anniversary of its approval by our stockholders.

 

Federal Income Tax Consequences

 

If a holder is granted a nonqualified stock option under the 2010 Plan, the holder should not have taxable income on the grant of the option. Generally, the holder should recognize ordinary income at the time of exercise in an amount equal to the fair market value of a share of our common stock at such time, less the exercise price paid. The holder’s basis in the common stock for purposes of determining gain or loss on a subsequent sale or disposition of such shares generally will be the fair market value of our common stock on the date the holder exercises such option. Any subsequent gain or loss generally will be taxable as a capital gain or loss. We generally should be entitled to a federal income tax deduction at the time and for the same amount as the holder recognizes ordinary income.

 

A holder of an incentive stock option will not recognize taxable income upon grant. Additionally, if the applicable employment-related requirements are met, the holder will not recognize taxable income at the time of exercise. However, the excess of the fair market value of our common stock received over the option price is an item of tax preference income potentially subject to the alternative minimum tax. If any of the requirements for incentive stock options under the Code are not met, the incentive stock option will be treated as a nonqualified stock option and the tax consequences described above for nonqualified stock options will apply. Once an incentive stock option has been exercised, if the stock acquired upon exercise is held for a minimum of two years from the date of grant and one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value on the date of sale and the exercise price) upon disposition of the stock will be treated as a long-term capital gain or loss, and we will not be entitled to any deduction. If the holding period requirements are not met, the excess of the fair market value on the date of exercise over the exercise price (less any diminution in value of the stock after exercise) will be taxed as ordinary income and we will be entitled to a deduction to the extent of the amount so included in the income of the holder. Appreciation in the stock subsequent to the exercise date will be taxed as long term or short term capital gain, depending on whether the stock was held for more than one year after the exercise date.

 

The current federal income tax consequences of other awards authorized under the 2010 Plan generally follow certain basic patterns: SARs are taxed and deductible in substantially the same manner as nonqualified stock options; restricted stock subject to a substantial risk of forfeiture results in income recognition equal to the excess of the fair market value over the price paid, if any, only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant through an election under Section 83(b) of the Code); RSUs, stock-based performance awards and other types of awards are generally subject to tax at the time of payment based on the fair market value of the award on that date. Compensation otherwise effectively

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deferred is taxed when paid. In each of the foregoing cases, we will generally have a corresponding deduction at the time the holder recognizes income, subject to Section 162(m) of the Code with respect to covered employees.

 

Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to covered employees in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. Qualified “performance-based compensation” is disregarded for purposes of the deduction limitation. The 2010 Plan has been designed to meet the requirements of Section 162(m) of the Code, but it is possible that compensation attributable to awards under the 2010 Plan (when combined with all other types of compensation received by a covered employee from us or because of other factors) may not comply with all of the requirements of Section 162(m) of the Code, thereby preventing us from taking a deduction.

 

2010 Plan Benefits

 

No determination has been made as to the types or amounts of awards that will be granted to specific individuals under the 2010 Plan. Information on equity-based awards recently granted under our existing plans to each of our named executive officers is provided below under the headings “Summary Compensation Table” and “Grants of Plan-Based Awards During Fiscal Year 2009.” Information on equity-based awards recently granted under our existing non-employee director compensation plan to each of our non-employee directors is provided above under the heading “Director Compensation During Fiscal Year 2009.”

 

Vote Required

 

Approval of the 2010 Plan requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. To meet NYSE listing standards, however, more than 50% of the outstanding shares of our common stock must cast a vote on this proposal.

 

 

Your Board recommends that you vote FOR this proposal to approve the KB Home 2010 Equity Incentive Plan.

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The Central Laborers’ Pension, Welfare and Annuity Funds, P.O. Box 1267, Jacksonville, IL 62651, the beneficial owner of 1,470 shares of our common stock, has notified us that it intends to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponent’s supporting statement.

 

Stockholder Proposal

 

RESOLVED: That the shareholders of KB Home (“Company”) request that the Board of Director’s Executive Compensation Committee adopt a Pay for Superior Performance principle by establishing an executive compensation plan for senior executives (“Plan”) that does the following:

 

 

Proponent’s Supporting Statement

 

We feel it is imperative that executive compensation plans for senior executives be designed and implemented to promote long-term corporate value. A critical design feature of a well-conceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance. The pay-for-performance concept has received considerable attention, yet all too often executive pay plans provide generous compensation for average or below average performance. We believe the failure to tie executive compensation to superior corporate performance has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.

 

We believe that the Pay for Superior Performance principle presents a straightforward formulation for senior executive incentive compensation that will help establish more rigorous pay for performance features in the Company’s Plan. A strong pay and performance nexus will be established when reasonable incentive compensation target pay levels are established; demanding performance goals related to strategically selected financial performance metrics are set in comparison to peer company performance; and incentive payments are awarded only when median peer performance is exceeded.

 

We believe the Company’s Plan fails to promote the Pay for Superior Performance principle in several important ways. Our analysis of the Company’s executive compensation plan reveals the following features that do not promote the Pay for Superior Performance principle:

 

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We believe a plan designed to reward superior corporate performance relative to peer companies will help moderate executive compensation and focus senior executives on building sustainable long-term corporate value. We urge shareholders to vote FOR our proposal.

 

Recommendation of the Board AGAINST the Proposal

 

Your Board recommends a vote AGAINST this proposal, which stockholders rejected by significant margins at both the 2008 annual meeting and the 2009 annual meeting. Your Board continues to believe that the proposal does NOT establish a pay-for-performance plan and, therefore, it does not serve the best interests of KB Home or its stockholders.

 

Your Board shares the proponent’s view that executive incentive compensation should appropriately reward performance that creates and sustains enterprise and stockholder value, and believes that KB Home’s current executive compensation philosophy and programs reflect an appropriate pay-for-performance orientation. These are discussed in detail below under the heading “Compensation Discussion and Analysis.”

 

By requiring KB Home to set incentive compensation targets “at or below peer group median,” however, your Board believes implementing this proposal would seriously undermine incentive pay’s role in promoting value creation for KB Home’s stockholders. Your Board also believes implementation of the proposal would severely impair KB Home’s ability to attract, motivate and retain high-caliber executive talent. Offering only average or below-average pay for delivering above-average results is extremely unlikely to provide an incentive for an individual to join or stay with KB Home, or motivate them to deliver superior results. This is particularly true in the current difficult operating environment for the homebuilding industry.

 

Your Board continues to believe this proposal fails to accomplish what its proponent asserts is a “critical design feature of a well-conceived executive compensation plan” – “a close correlation between the level of pay and the level of corporate performance.” In our view, limiting incentive compensation to a level below the level of performance required to earn it actually creates an unhealthy disconnect between pay and performance. Therefore, your Board believes the executive compensation approach in this proposal is clearly not “well-conceived” based on the proponent’s own standards.

 

Your Board believes that KB Home’s current executive compensation programs and practices, as further discussed below under the heading “Compensation Discussion and Analysis,” provide primarily performance-based pay consistent with the proponent’s compensation “principle,” while enabling KB Home to remain competitive in attracting, motivating and retaining quality executive talent and a solid management team. As a result, your Board does not believe that adopting this proposal is necessary or desirable for KB Home or its stockholders.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The New York City Employees’ Retirement System, the New York City Teachers’ Retirement System and the New York City Police Pension Fund, collectively the beneficial owners of 185,194 shares of our common stock, have notified us that they intend to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal or the proponents’ supporting statement.

 

Stockholder Proposal

 

RESOLVED – the shareholders of KB Home recommend that the board of directors adopt a policy requiring that the proxy statement for each annual meeting contain a proposal, submitted by and supported by Company Management, seeking an advisory vote of shareholders to ratify and approve the board Compensation’s Committee Report and the executive compensation policies and practices set forth in the Company’s Compensation Discussion and Analysis.

 

Proponent’s Supporting Statement

 

Investors are increasingly concerned about mushrooming executive compensation especially when it is insufficiently linked to performance. In 2009, shareholders filed close to 100 “Say on Pay” resolutions. Votes on these resolutions averaged more than 46% in favor, and more than 20 companies had votes over 50%, demonstrating strong shareholder support for this reform.

 

Investor, public and legislative concerns about executive compensation have reached new levels of intensity. A 2009 report by The Conference Board Task Force on Executive Compensation, noting that pay has become a flashpoint, recommends taking immediate and credible action “in order to restore trust in the ability of boards to oversee executive compensation” and calls for compensation programs which are “transparent, understandable and effectively communicated to shareholders.”

 

An Advisory Vote establishes an annual referendum process for shareholders about senior executive compensation. We believe this vote would provide our board and management useful information about shareholder views on the company’s senior executive compensation especially when tied to an innovative investor communication program.

 

Over 25 companies have agreed to an Advisory Vote, including Apple, Ingersoll Rand, Microsoft, Occidental Petroleum, Hewlett-Packard, Intel, Verizon, MBIA and PG&E. And nearly 300 TARP participants implemented the Advisory Vote in 2009, providing an opportunity to see it in action.

 

Influential proxy voting service RiskMetrics Group, recommends votes in favor, noting: “RiskMetrics encourages companies to allow shareholders to express their opinions of executive compensation practices by establishing an annual referendum process. An advisory vote on executive compensation is another step forward in enhancing board accountability.”

 

A bill mandating annual advisory votes passed the House of Representatives, and similar legislation is expected to pass in the Senate. However, we believe companies should demonstrate leadership and proactively adopt this reform before the law requires it.

 

We believe existing SEC rules and stock exchange listing standards do not provide shareholders with sufficient mechanisms for providing input to boards on senior executive compensation. In contrast, in the United Kingdom, public companies allow shareholders to cast a vote on the “directors’ remuneration report,” which discloses executive compensation. Such a vote isn’t binding, but gives shareholders a clear voice that could help shape senior executive compensation.

 

We believe voting against the election of Board members to send a message about executive compensation is a blunt, sledgehammer approach, whereas an Advisory Vote provides shareowners a more effective instrument.

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We believe that a company that has a clearly explained compensation philosophy and metrics, reasonably links pay to performance, and communicates effectively to investors would find a management sponsored Advisory Vote a helpful tool.

 

Recommendation of the Board AGAINST the Proposal

 

Your Board recognizes the importance of communicating with stockholders about executive pay. Because your Board believes this proposal would not enhance its interaction with stockholders, however, it recommends a vote AGAINST the proposal, which stockholders rejected at KB Home’s 2009 annual meeting.

 

Your Board takes stockholders’ views seriously and is committed to maintaining an open dialogue on KB Home’s business and affairs. In the past few years, your Board has adopted a number of corporate governance reforms in response to sound stockholder suggestions and as best practices. It has also enhanced the transparency of corporate governance processes and decision-making. For example, your Board believes the “Compensation Discussion and Analysis” below provides a considerable amount of information on KB Home’s executive pay philosophy, programs and determinations, and on the Board’s oversight of those subjects.

 

Stockholders have many ways to communicate directly to the Board and to management their specific ideas or concerns regarding executive pay or other matters. These include contacting the Board, the Compensation Committee, and/or individual directors through the Corporate Secretary, as described above under the heading “Corporate Governance Highlights,” and contacting KB Home’s investor relations professionals. Your Board believes these are effective channels for stockholders to fully express their views on executive pay or corporate governance.

 

As with last year’s proposal, the proponents do not explain how the proposed advisory vote would specifically benefit KB Home and its stockholders over current communication channels or otherwise strengthen KB Home’s corporate governance or the Board’s oversight of executive pay. After careful consideration, your Board believes the proposed “up-or-down” advisory vote would not be helpful because it would not provide useful information or actionable feedback. In addition, compared to the ways stockholders may currently communicate with the Board, your Board believes the proposed advisory vote (if adopted) could actually hinder constructive dialogue with stockholders about executive pay.

 

The outcome of an advisory vote would not identify the particular aspects of executive pay that stockholders like or don’t like, nor specify what should be changed, if anything. It would also not provide any information on why stockholders voted “for” or “against” the Compensation Committee’s Report and the executive compensation policies and practices set forth in the Compensation Discussion and Analysis. Without knowing the reasons for a particular outcome or having any way to assess the likely diverse, and possibly conflicting, stockholder preferences and motivations, your Board could not, consistent with its fiduciary duties to all stockholders, effectively respond to stockholders who voted one way or the other. Accordingly, your Board believes the proposed advisory vote would not help it or the Compensation Committee carry out their executive pay oversight role or improve KB Home’s corporate governance.

 

Moreover, given the significant legislative and regulatory momentum to establish a mandatory advisory vote for all U.S. public companies, your Board believes it is prudent and in the best interests of stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The New York City Fire Department Pension Fund and the New York City Board of Education Retirement System, collectively, the beneficial owners of 10,505 shares of our common stock, have notified us that they intend to present a proposal at the Annual Meeting. The proposal is set forth below, along with the recommendation of the Board that you vote AGAINST the proposal. We accept no responsibility for the accuracy of the proposal.

 

Stockholder Proposal

 

WHEREAS, in 2002, United States Congress, the Securities and Exchange Commission, and the stock exchanges, recognizing the urgent need to restore public trust and confidence in the capital markets, acted to strengthen accounting regulations, to improve corporate financial disclosure, independent oversight of auditors, and the independence and effectiveness of corporate boards; and

 

WHEREAS, we believe these reforms, albeit significant steps in the right direction, have not adequately addressed shareholder rights and the accountability of directors of corporate boards to the shareholders who elect them; and

 

WHEREAS, we believe the reforms have not addressed a major concern of institutional investors — the continuing failure of numerous boards of directors to adopt shareholder proposals on important corporate governance reforms despite the proposals being supported by increasingly large majorities of the totals of shareholder votes case for and against the proposals;

 

WHEREAS, the Board of Directors of our company has not adopted shareholder proposals that were supported by majority votes;

 

NOW, THEREFORE, BE IT RESOLVED: That the shareholders request the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or by-laws) to establish an engagement process with the proponents of shareholder proposals that are supported by a majority of the votes cast, excluding abstentions and broker non-votes, at any annual meeting.

 

In adopting such a policy, the Board of Directors should include the following steps:

 

 

Recommendation of the Board AGAINST the Proposal

 

Your Board is committed to communicating with stockholders and being responsive to their concerns, and believes that it has established appropriate processes to consider all stockholder proposals. Your Board also believes that it has a demonstrated history of reaching out to stockholders on matters of corporate governance and in particular to stockholders whose proposals have received majority support. Accordingly, your Board believes this proposal to establish a rigid and formal engagement process is unnecessary and would not be in the best interests of stockholders.

 

The Nominating/Governance Committee, which is composed entirely of independent directors, carefully considers all stockholder proposals submitted for a vote at an annual stockholders meeting and makes recommendations to the Board on whether to adopt or oppose them (in whole or in part) based on the best

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interests of all stockholders. It also reconsiders stockholder proposals that receive majority or substantial support at an annual stockholders meeting. Applicable considerations include, among others (a) the appropriateness of the proposal, (b) applicable requirements of KB Home’s Certificate of Incorporation and By-laws, (c) existing and pending legal requirements, including requirements under applicable state corporate law, (d) potential fit or conflict with existing policies, procedures and practices, (e) the impact of implementing the proposal on KB Home’s overall operations, and (f) whether the proposal is likely to appropriately accomplish its stated goals and objectives. This evaluation process may include direct communication with a proponent, as the Nominating/Governance Committee believes is appropriate. Your Board believes the mandatory engagement process set forth in this proposal would not enhance its process for evaluating stockholder proposals.

 

In addition, stockholders have several ways to communicate with the Board, including contacting the Board through the Corporate Secretary (as described above under the heading “Corporate Governance Highlights”), and your Board welcomes any stockholder input on the proposals that are voted on at an annual stockholders meeting.

 

A critical concern about this proposal is that a proponent of a qualifying proposal may not represent the views of most stockholders, including those who cast a vote in favor of the proposal. Stockholders who vote in favor of a proposal may have very different reasons for doing so, which is not addressed by the proposed process. Moreover, your Board believes that all stockholders should have an equal opportunity to advocate and provide information in support of a stockholder proposal if they choose to do so. Special treatment for the proponent undercuts this equal opportunity commitment. This proposal would also effectively disenfranchise stockholders who exercise their legitimate right to affirmatively abstain from voting on a proposal, further demonstrating that this proposal would not serve the best interests of all stockholders.

 

Notwithstanding the proponent’s claims, your Board has proactively engaged with proponents of proposals that received majority support at an annual stockholders meeting. In 2008, your Board adopted a policy to limit senior executive severance benefits to 2.99 times base salary plus bonus in response to a proposal that received majority support at that year’s annual stockholders meeting. In shaping the executive severance policy, your Board, KB Home senior management and outside advisors sought the proponent’s input. In addition, with stockholder support, your Board has adopted a number of leading corporate governance reforms in the last few years, including eliminating “fair price” and supermajority voting provisions from KB Home’s by-laws, and electing a Non-Executive Chairman of the Board.

 

In 2009, the proponent of this proposal submitted a proposal to establish a non-binding advisory vote on named executive officer compensation. Although a majority of votes cast were in favor, the proposal failed to achieve the affirmative vote of the majority of shares of our common stock present and represented at the 2009 annual stockholders meeting, the applicable standard under our by-laws. Based on this outcome and given the significant legislative and regulatory momentum underway at the time of the 2009 meeting and through to the present time to establish a mandatory advisory vote for all U.S. public companies, your Board continues to believe that it is in the best interests of all stockholders to evaluate adopting an advisory vote mechanism when definitive rules are established. Given that context, and in light of your Board’s current approach to and history of considering stockholder proposals and reaching out to stockholders, your Board believes that the formal engagement process advocated by this proposal would have a needless adverse impact on Board-stockholder interaction with respect to corporate governance matters and should not be implemented.

 

Vote Required

 

Approval of this stockholder proposal requires the affirmative vote of the majority of shares of common stock present or represented, and entitled to vote thereon, at the Annual Meeting. However, the proposal is a request to the Board to consider a matter. If the proposal passes, the Board may consider, in its business judgment, whether to take the requested action or not, but it is not legally obligated to do so.

 

Your Board recommends that you vote AGAINST this proposal.

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The following table shows, as of February 26, 2010, the beneficial ownership of our common stock by each current director and each of the current executive officers named below in the “Summary Compensation Table,” and by all current directors and executive officers as a group. Except as stated in footnote (d) to the table, beneficial ownership is direct and each director and executive officer has sole voting and investment power over his or her shares.

 

 

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The following table shows each person or entity known to us as of February 26, 2010 to be the beneficial owner of more than five percent of our common stock:

 

 

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We have established stock ownership requirements for our non-employee directors and senior management to better align their interests with those of our stockholders. Our Corporate Governance Principles require each of our non-employee directors to own at least $250,000 in value of our common stock or common stock equivalents within five years of joining the Board. For these purposes, a common stock equivalent means any instrument granted to a non-employee director as compensation for the director’s service on the Board reflecting the right to receive a share of our common stock (other than by means of a right to purchase) or a cash payment equal to the value of a share of our common stock.

 

Our Executive Stock Ownership Policy applies to members of our senior management team and requires executives at various levels to own from 6,000 to 150,000 shares, depending on position. Executives are expected to demonstrate meaningful progress toward satisfying their ownership requirement and to comply fully within five years of becoming subject to the policy, or be subject to consequences for non-compliance. The policy, as applied to our named executive officers, is discussed in additional detail below under the heading “Equity Stock Ownership Policy.”

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The Management Development and Compensation Committee of the Board of Directors has reviewed and discussed the following “Compensation Discussion and Analysis” with KB Home management. Based on this review and discussion, the Management Development and Compensation Committee recommended to the Board of Directors that the “Compensation Discussion and Analysis” be included in this Proxy Statement.

 

Management Development and Compensation Committee

Michael G. McCaffery, Chair

Stephen F. Bollenbach

Timothy W. Finchem

Luis G. Nogales

 

The primary objectives of our executive compensation and benefit programs are to attract, motivate and retain a talented management team to execute our KBnxt operational business model. We believe the core Built-to-Order^tm principles of our KBnxt operational business model and our related strategic initiatives provide us with a distinct competitive advantage over other homebuilders. Within this framework, we design named executive officer (“NEO”) and other senior executive compensation and benefits to reward individual contributions to the achievement of our KBnxt strategic goals and sustainable enterprise value. We believe this approach establishes a clear alignment of executive and stockholder interests. In addition, the Compensation Committee will adjust NEO and other senior executive compensation and benefits to the extent it believes is appropriate to take into account recent and expected overall company performance, and broader industry and economic conditions.

 

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In our 2009 fiscal year, general economic conditions remained weak and we continued to face challenging and volatile business conditions. Amid significant uncertainty regarding the timing and extent of any meaningful rebound in many housing markets and the overall economy, our primary strategic goals for the year were generating cash and maintaining a strong balance sheet; restoring the profitability of our homebuilding operations; and positioning our business to capitalize on a housing market recovery when it occurs. We believe we made substantial progress in 2009 towards achieving each of these goals.

 

We sustained the financial strength and flexibility we had entering 2009, ending the year with $1.29 billion of cash, cash equivalents and restricted cash and a lower overall debt level compared to year-end 2008. With regard to profitability, we significantly narrowed our net loss to $101.8 million in 2009 from $976.1 million in 2008, despite the difficult market conditions. With regard to positioning our business for future growth, we continued our nationwide roll-out of affordable, value-engineered new product designs, particularly our The Open Series line, which helped us generate a year-over-year increase in net orders compared to our 2008 results. We also strategically re-entered the Washington, D.C. metropolitan market and continued to adjust our operational infrastructure to focus resources on the markets we see as having strong long-term growth prospects. Our Annual Report provides further details on our 2009 fiscal year performance. Given the tough and uncertain business conditions, we structured our 2009 executive compensation and benefit programs to retain and motivate, in a cost-effective manner, our senior executive management team to promote optimal execution on our primary strategic goals. Below is additional information and analysis regarding our 2009 programs and the specific arrangements we have with our NEOs.

 

 

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Base Salaries. Base salary is a fixed element of compensation for our CEO and our other NEOs. The Compensation Committee annually reviews and may approve NEO base salary adjustments based on a number of factors, including each NEO’s experience and specific responsibilities; individual performance and expectations; our current and expected financial and operational results; equity of salary relative to our executives who are at the same internal management level; market rates to ensure competitiveness; our general budgetary guidelines for base salary increases as set by the Compensation Committee; and our overall financial and operational results. Based on its subjective weighing of these considerations, the Compensation Committee maintained our salary levels at the 2008 rates for all NEOs as well as other senior management. The CEO recommended, and the Compensation Committee agreed, that salary increases for 2009 would be made only to retain non-executive employees and consist only of market-level merit increases or adjustments to address below-market salaries.

 

Annual Incentives. For 2009, each of our NEOs, except Mr. Silcock, was eligible for an annual incentive if at least one of two objective performance goals was achieved. The Compensation Committee, however, had the discretion to reduce or eliminate the actual payout of annual incentives based on our overall performance, an NEO’s individual performance, or other factors, including the factors described above under the heading “Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources.” In approving the terms of the annual incentives for our NEOs, which was done at the beginning of 2009, the Compensation Committee sought to balance the need to retain and appropriately motivate our NEOs with the objective of containing overall compensation expense given the business environment. These annual incentives are described below. Mr. Silcock, who joined us in September, was eligible for a guaranteed bonus, as described below under the heading “Guaranteed Bonus.”

 

Each NEO was eligible to receive an annual incentive only if (a) our pretax loss did not exceed $350 million for 2009, excluding inventory impairments and other non-recurring items, or (b) our operating cash flow for 2009 was equal to or above negative $100 million, with the achievement of each of these independent performance goals determined in accordance with U.S. generally accepted accounting principles. If neither goal was achieved, our NEOs were not eligible to receive any annual incentive payout. If either performance goal was achieved, each NEO, except for Ms. Marlett, was eligible to receive their respective maximum annual incentive payout, subject to the Compensation Committee exercising downward discretion (as described above under the heading “Annual Incentives”) in determining the actual payout relative to each NEO’s respective threshold, target and maximum payout levels, which are described below. For Ms. Marlett, if either performance goal was achieved, she was eligible to receive an annual incentive payout in relation to her threshold, target and maximum payout levels described below based primarily on our actual pretax earnings and cash flow results and in part on her personal performance, subject to the Compensation Committee exercising downward discretion in determining the actual payout. Ms. Marlett’s annual incentive was structured differently from the other NEOs’ because she was not a designated executive officer at the time the Compensation Committee approved annual incentives for 2009. The structure of Ms. Marlett’s annual incentive was consistent with those the Compensation Committee approved for executives at her internal management level.

 

The Compensation Committee approved the performance goals to match the NEOs’ annual incentives to our 2009 strategic goals of generating cash and maintaining a strong balance sheet and restoring the profitability of our homebuilding operations. The specific parameters of each performance goal were based on our outlook at the time the annual incentives were approved, which reflected our expectations of an extremely difficult and volatile housing market and recessionary economic conditions throughout 2009. In addition, our corresponding strategic initiatives contemplated lower overall homes delivered and revenues compared to prior years as a result of repositioning and streamlining our operations and our nationwide roll-out of new product designs. Based on this outlook, the Compensation Committee determined that each of the performance goals was substantially uncertain to be met and would, to the extent achieved, represent a strong performance result for the year.

 

For the 2009 annual incentives, the Compensation Committee approved potential threshold, target and maximum payout levels for our CEO and for each of our NEOs equal in each case to a specified percentage of their annual base salary. For our CEO, the payout levels were 50%, 200% and 400%, respectively. For

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Ms. Shiba, the payout levels were 23%, 90% and 180%, respectively. For Messrs. Hollinger and Masuda, the payout levels were 20%, 80% and 160%, respectively. For Ms. Marlett, the payout levels were 20%, 80% and 148%, respectively. The annual incentive payout levels for our NEOs corresponded to each executive’s respective internal management level. The Compensation Committee believes the relatively higher potential payouts that it approved for our CEO’s annual incentive compared to the annual incentives it approved for our other NEOs appropriately reflect Mr. Mezger’s unique and critical role in setting and directly overseeing the implementation of our overall operating strategy and significant related strategic initiatives, his broader responsibilities for driving our overall financial and operational performance, and his wide-ranging internal and external duties across all areas of our business.

 

The Compensation Committee determined that both objective performance metrics for the 2009 NEO annual incentives were achieved, with a 2009 pretax loss, excluding inventory impairments and other non-recurring items, of $67.2 million and 2009 operating cash flow of $349.9 million. Based on these results, each NEO was eligible for an annual incentive payout at the NEO’s respective maximum payout level as follows: Mr. Mezger $4.0 million; Ms. Shiba $822,600; Mr. Hollinger $584,000; Ms. Marlett $481,000; and Mr. Masuda $496,000. The maximum payout amount for Ms. Marlett also includes her achieving the personal performance component of her annual incentive, as further discussed in the paragraph below.

 

In approving the NEOs’ actual annual incentive payouts, the Compensation Committee on a subjective basis took into account the strong performance we achieved relative to the goals set at the beginning of the year and also determined that each NEO delivered strong individual performance in a challenging business environment. With respect to Mr. Mezger, the Compensation Committee, with the Board’s approval, considered the significant and effective leadership he provided in directing the progress made towards achieving our key strategic goals for 2009, which encompassed, among other things, implementing a successful nationwide roll-out of new product designed to meet current homebuyer needs and interests; measurably improving profit margins and maintaining balance sheet strength and flexibility by managing and reducing costs, land inventory and debt levels; and positioning the organization, geographically and operationally, to achieve future growth as housing market conditions improve.

 

For our NEOs other than our CEO, the Compensation Committee, based in large part on the CEO’s evaluation of them, found that Ms. Shiba provided excellent oversight of our governance, ethics and compliance programs and significant support to the achievement of key financial and operational initiatives, and successfully resolved a number of material litigation matters; Mr. Hollinger provided critical leadership and oversight of our accounting and financial reporting process in serving as our principal financial officer for most of the year, in addition to his duties as our Chief Accounting Officer; Mr. Masuda played a key role in restructuring our debt to reduce the overall amount and extend its maturity, and in helping us to maintain a strong and liquid balance sheet; and Ms. Marlett successfully led our sales and marketing organization to achieve year-over-year net order growth and drove the consumer launch of our new product and new communities, which were instrumental in our 2009 results. Ms. Marlett was determined to have achieved the maximum potential payout under the personal performance component of her annual incentive, and this is reflected in the amount noted above for Ms. Marlett. The Compensation Committee did not apply any specific weighting or formula with respect to the foregoing considerations in determining our NEOs’ final annual incentive payouts.

 

Despite the strong operational and individual performance in 2009, given our overall financial results for the year and business conditions, the Compensation Committee used its discretion to reduce the annual incentive payouts to our NEOs to the following amounts: Mr. Mezger $2,750,000; Ms. Shiba $411,300; Mr. Hollinger $390,000; Ms. Marlett $300,000; and Mr. Masuda $250,000.

 

Guaranteed Bonus. Mr. Silcock received a guaranteed bonus of $200,000 for the 2009 fiscal year that was agreed to when he was hired in September.

 

Long-Term Incentives. We provide long-term incentives to our NEOs that consist primarily of grants of equity-based vehicles settled in cash or stock. Because these awards vest over a three-year time horizon and the value of these incentives is tied to the share price of our common stock, we believe they are performance-based and establish an alignment of NEO and stockholder interests over a long-term horizon. Other objectives the Compensation Committee considered in deciding on the grant vehicles and parameters for our 2010 fiscal year long-term incentives included that the plan be sustainable over time and varied market conditions; reward

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recipients for strong performance in delivering financial and operational results that drive stockholder value creation while reflecting expected position-based contributions and responsibilities; and balance and align stockholder and management interests. These other objectives are reflected in the types and mix of long-term incentives granted and the vesting conditions applied to the grants, as described below. We typically grant long-term incentives in October each year, in conjunction with a regularly scheduled Compensation Committee meeting, for the following fiscal year. Accordingly, the 2010 fiscal year long-term incentives were granted in October 2009.

 

In 2007 and 2008, the Compensation Committee granted to our NEOs cash-settled SARs and phantom shares as long-term incentives because at the time the grants were made there were a limited number of shares of common stock that were available for grant under our existing stockholder-approved equity compensation plans. Except for their cash-settled payout, the SARs and phantom shares granted in 2007 and 2008 mirror the attributes of common stock options and shares of restricted common stock, respectively. With the return in 2009 of a significant number of shares to our existing stockholder-approved equity compensation plans, as discussed in our Annual Report, the Compensation Committee granted 2010 fiscal year long-term incentives to our NEOs and other senior executives and employees in the form of common stock options and shares of restricted common stock.

 

As with the annual base salaries and annual incentives it approved for 2009, the Compensation Committee determined that the 2010 fiscal year long-term incentives should be oriented to emphasize, in a cost-effective manner, the retention and motivation of our top executive talent, those who are critical in driving long-term, sustainable value for our stockholders. In reaching this determination, the Compensation Committee considered that the retention value of our past long-term incentive awards is very low given the sustained downturn in the homebuilding industry and the general economy. This downturn has caused the price of our common stock to fall significantly below the exercise price of most of our outstanding employee stock options. The Compensation Committee also considered that our executives did not exercise options when they could, but instead held options through the downturn. The Compensation Committee believes it is appropriate for executives to have a stake in our long-term success that aligns with rebuilding our market value. To address these circumstances and promote retention while containing compensation expense, the Compensation Committee approved 2010 fiscal year long-term incentives at grant date values that roughly approximated the grant date values for the 2009 fiscal year long-term incentives, although the NEO grants were all slightly less than those made a year ago.

 

Based on these considerations and objectives, the Compensation Committee, with input from Semler Brossy and our CEO (as to our other NEOs and other senior management), granted to our NEOs a combination of common stock options and shares of restricted common stock. The specific amounts granted to our CEO and to the other NEOs are shown below under the heading “Grants of Plan-Based Awards During Fiscal Year 2009.”

 

For each NEO, the number of 2010 fiscal year long-term incentives granted was based on the fair value of the award on the grant date, October 1, 2009, and on a total value the Compensation Committee approved for the NEO, of which, except for our CEO (as discussed below), 75% was allocated to common stock options and 25% was allocated to shares of restricted common stock. The Compensation Committee approved the 75%/25% allocation between common stock options and shares of restricted common stock to establish a strong link between the NEOs’ and stockholders’ interests in long-term value creation as the value of each common stock option increases with increases in the share price of our common stock. At lower management levels, to promote retention the allocation between common stock options and shares of restricted common stock was weighted more towards shares of restricted common stock (from 50% to 100% of the overall grants to individual recipients) and restricted cash grants at the lowest levels of management participants.

 

Mr. Mezger’s long-term incentive value was set at $3,500,000 based on the Compensation Committee’s view that it would appropriately compensate and motivate Mr. Mezger to continue to provide effective leadership and strong performance in developing and executing our long-term business strategy during the current housing market downturn, as the Compensation Committee felt he had in 2009 (see discussion above under the heading “Annual Incentives” with respect to the determination of Mr. Mezger’s 2009 annual incentive payout). Mr. Mezger’s long-term incentive consisted solely of stock options based on the Compensation Committee’s determination that they provide, compared to other equity-based instruments, the best alignment

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of his interests with those of our stockholders’ to meet the present challenges for the homebuilding industry and to enhance our performance relative to other homebuilders over the longer term.

 

For our other NEOs, the Compensation Committee considered a total long-term incentive value set within a range of 100% to 200% of current base salary based on their internal management level. Within this range, the Compensation Committee subjectively approved a dollar value for each NEO based on a number of factors, including the above-described objectives for the 2010 long-term incentives, the NEO’s individual current and expected future performance and role, overall potential compensation cost, and the factors described above under the heading “Executive Compensation Decisions – Participants, Factors, Component Mix, and Data Sources.” Based on these considerations, the Compensation Committee approved for each NEO other than our CEO the following total long-term incentive values: Ms. Shiba $675,000; Mr. Hollinger $650,000; Ms. Marlett $450,000; Mr. Masuda $350,000; and Mr. Silcock $1,200,000 (which he forfeited upon his termination of employment with us).

 

As with the 2009 fiscal year long-term incentives, all 2010 fiscal year long-term incentives were granted without performance-vesting requirements. This is largely because the Compensation Committee believed it could not set meaningful and sustainable long-term performance targets due to a continued uncertain outlook for the housing market and the overall economy. Given the importance of motivating and retaining top executive talent in a difficult business environment, and the Compensation Committee’s view that common stock options are inherently performance-based and performance-motivating incentives that appropriately align the interests of executives and stockholders, the Compensation Committee determined that performance-vesting requirements would not be productive in driving financial and operational results over the performance period for the 2010 fiscal year long-term incentives.

 

CEO Performance Shares. On July 12, 2007, the Compensation Committee granted to Mr. Mezger under his Employment Agreement a long-term incentive award of 54,000 performance shares. The performance shares were to vest, if at all, based on our total stockholder return (“TSR”) over a three-year measurement period ending November 30, 2009, relative to our peer group, as shown in the chart below. Payouts are linearly interpolated between the percentiles indicated below.

 

 

On January 21, 2010, the Compensation Committee determined that our TSR for purposes of the performance shares fell into approximately the 46th percentile. Accordingly, the Compensation Committee approved Mr. Mezger’s vesting in 48,492 shares of the total 54,000 performance shares originally granted. The amount of any cash dividends that were paid on our common stock during the three-year performance period, were equally and contemporaneously paid to Mr. Mezger on the 54,000 performance shares.

 

To further strengthen the alignment of our CEO’s interests with those of our stockholders, the Compensation Committee has adopted a policy to make the vesting of a majority of any future grants of equity compensation to our CEO contingent on the achievement of one or more long-term objective performance metrics. The metrics may include earnings growth and cash flow or any of the other performance criteria provided in the proposed KB Home 2010 Equity Incentive Plan, which are described above under the heading “Proposal 3: Approve the KB Home 2010 Equity Incentive Plan – Performance-Based Compensation.”

 

Benefits. The majority of our health and welfare benefits are made available to all full-time employees, including our NEOs. During 2009, as in years past, our NEOs also received a supplemental benefit that reimburses them for any qualified out-of-pocket medical, dental and vision expenses which exceed amounts payable under the medical, dental and vision plans. In addition, our NEOs were provided with certain death benefits and participated in our Deferred Compensation Plan and Retirement Plan, each as described below under the heading “Post-Termination Arrangements.” These benefits are offered to attract key executive talent and to promote retention. Mr. Mezger participates in a program under which he is credited with a specific number of vacation hours that remains fixed throughout his employment with us, regardless of actual vacation

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time taken. When his employment with us ends, he is entitled to receive a payout of these vacation hours that is based on his then-current annual base salary.

 

Perquisites. In 2007, we discontinued substantially all perquisites to our NEOs, including automobile allowances, company-paid automobile fuel cards, and reimbursement of expenses for automobile insurance, annual financial planning and tax preparation services, and one-time estate planning services. On a few occasions in 2009, family members accompanied NEOs on business trips on a company-chartered aircraft; however, we did not incur any additional incremental cost for this travel. In one instance in 2009, a portion of a company-chartered aircraft business trip for our CEO was deemed to be for a personal purpose, and we incurred an incremental cost of $11,568 for this travel. From time to time, we also made available to our employees, including our NEOs, for their personal use, tickets to certain sporting events purchased as a season subscription for business purposes. We did not incur any additional incremental costs with such use and we have discontinued the practice. In connection with Ms. Shiba’s hiring and relocation from Cleveland to Los Angeles, we agreed to pay for certain relocation expenses and to provide her with a monthly housing cost differential amount through December 2008. In 2009, Ms. Shiba received $86,763 under this arrangement. This amount includes reimbursements related to the sale of her home in Cleveland. In connection with Mr. Silcock’s hiring and relocation from Connecticut to Los Angeles in September 2009, we agreed to reimburse his relocation expenses in accordance with our internal policies and to provide him an allowance of $5,000 per month for temporary housing for up to six months. In 2009, Mr. Silcock received $4,570 under this arrangement.

 

 

Severance Arrangements. Mr. Mezger’s Employment Agreement provides him with certain severance benefits, discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

 

Following a review of executive severance policies at peer homebuilding companies and other similarly sized public companies, the Compensation Committee adopted an Executive Severance Plan in 2007 for non-change in control situations. All of our current NEOs participate in the plan. The plan provides a specified severance benefit ranging from one to two times salary and bonus depending on a participant’s internal management level, as discussed further below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

 

In July 2008, following stockholder approval of an advisory proposal, we adopted a policy under which we will obtain stockholder approval before paying severance benefits to an executive officer under a future severance arrangement in excess of 2.99 times the executive officer’s then-current base salary and target bonus. Future severance arrangements do not include severance arrangements existing at the time we adopted the policy or any severance arrangement we assume or acquire unless, in each case, the severance arrangement is changed in a manner that materially increases its severance benefits. We adopted this policy to underscore our intent to continue to remain below the 2.99 times limit in our future severance arrangements.

 

Other Payments Due Upon Termination of Employment and/or a Change in Control. In addition to the severance arrangements mentioned above, we maintain a Change in Control Severance Plan (“CIC Plan”) that provides participants with certain severance benefits upon a change in control and accelerated vesting of equity awards and benefits under our Death Benefit Only Plan (if a participant also participates in that plan). All of our current NEOs participate in the CIC Plan. The objectives of the CIC Plan are to enable and encourage our management to focus its attention on obtaining the best possible deal for our stockholders in a change in control scenario and to make objective evaluations of all possible transactions, without being distracted by the possible impact such transactions may have on job security and benefits; to promote management continuity; and to provide income protection in the event of involuntary loss of employment. In addition, in the event we experience a change in control, there is accelerated vesting of any unvested benefits under our Deferred Compensation Plan and our Retirement Plan, each of which is discussed below under the heading “Retirement Programs,” and certain of our employee benefit plans, including our equity compensation plans. The payments to which our NEOs may be entitled on termination of their employment and/or if we experience a change in control is further discussed below under the heading “Potential Payments upon Termination of Employment or Change in Control.”

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Death Benefits. Our Death Benefit Only Plan, in which Messrs. Mezger and Hollinger and Ms. Marlett participate, provides a death benefit to the participant’s designated beneficiary of $1 million (plus an additional gross-up amount sufficient to pay taxes on the benefit and the additional amount). We closed the Death Benefit Only Plan to new participants beginning in 2004, and only term life insurance, with a $750,000 benefit level payable to an executive’s designated beneficiaries, has been made available to incoming eligible executives. We maintain this term life insurance benefit for Ms. Shiba and Mr. Masuda, and provided it to Mr. Silcock during 2009. We also maintain a life insurance death benefit for Mr. Mezger of $400,000.

 

Retirement Programs. Our 401(k) Savings Plan, a qualified defined contribution plan, is the only program we offer to all full-time employees that provides post-employment benefits. Our current NEOs and certain other senior executives also participate in an unfunded nonqualified Deferred Compensation Plan, which allows pretax contributions of base salary and annual incentive compensation. We provide a dollar-for-dollar match of Deferred Compensation Plan and 401(k) Savings Plan contributions of up to an aggregate amount of six percent of a participant’s base salary. NEO deferrals under the Deferred Compensation Plan are shown below under the heading “Non-Qualified Deferred Compensation During Fiscal Year 2009.” We offer the Deferred Compensation Plan to give participating executives the ability to defer amounts above the contribution limits applicable to our 401(k) Savings Plan.

 

We maintain a Retirement Plan for certain executives that has been closed to new participants since 2004. Messrs. Mezger and Hollinger and Ms. Marlett participate in the Retirement Plan. The Retirement Plan provides each vested participant with a specific annual dollar amount for 20 years commencing following the later of the participant’s reaching age 55; the tenth anniversary of the date the participant commenced his or her participation; or the termination of the participant’s employment with us. Mr. Mezger’s original annual benefit amount under the Retirement Plan was $450,000. For the other NEO participants, the original annual benefit amount under the Retirement Plan was $100,000. For each participant, the annual benefit amount is increased by the same annual cost-of-living adjustments that are applied to federal social security benefits, starting with the plan year ending November 30, 2006. Vesting generally requires five years of participation and, once vested, the participant is entitled to his or her full benefit. Details of NEO participation in the Retirement Plan are provided below under the heading “Pension Benefits During Fiscal Year 2009.”

 

Other Material Tax and Accounting Implications of the Executive Compensation Program

 

Section 162(m) of the Code generally disallows a tax deduction for compensation over $1 million paid to our highest paid executives unless it is qualifying performance-based compensation. We generally design compensation plans in order to maintain federal tax deductibility for executive compensation under Section 162(m) of the Code, and the Compensation Committee considers the potential Section 162(m) impact when approving the compensation paid to our NEOs. The Compensation Committee recognizes the need to balance tax deductibility benefits with the need to provide effective compensation packages that enhance enterprise and stockholder value creation, however, and will approve compensation that may not be deductible under Section 162(m) of the Code where it believes it is in our and our stockholders’ best interests to do so.

 

 

Equity Stock Ownership Policy. We have had an executive stock ownership policy since 1998. It is designed to encourage, and has encouraged, our executives to increase their ownership of our common stock over time and to align their interests with our stockholders’ interests. In February 2008, the Compensation Committee amended the policy, as described below.

 

The policy identifies specific levels of stock ownership that designated executives are expected to achieve. The targeted stock ownership levels for our NEOs range from 20,000 to 150,000 shares, depending on position. Executives subject to the policy have five years to achieve these ownership levels and must make meaningful progress every year towards the achievement of these ownership levels. Survey data and multiples of average base salaries per level were used to determine the ownership expected for each position. Share ownership may include shares owned outright by a designated executive, shares owned indirectly through our 401(k) Savings Plan and 60% of unvested restricted stock grants or phantom share rights. Phantom share rights are included so that executives subject to the policy would not be penalized for the limited number of shares that were available for grant under our existing stockholder-approved equity compensation plans at the time the policy was amended. It is assumed that executives will use the cash proceeds they receive from the vesting

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of phantom shares to increase their ownership of our common stock. Once required ownership levels are achieved, they must be maintained throughout the executive’s employment. Our policy provides both financial incentives to achieve ownership requirements as well as material consequences for non-compliance. The Compensation Committee may, from time to time, reevaluate and revise the ownership requirements to account for material changes in stock price. Our NEOs are currently in compliance with the policy.

 

Equity-Based Award Grant Policy. In February 2007, the Compensation Committee adopted a policy that is designed to enhance the process by which we grant equity-based awards, including stock options, SARs, phantom shares and restricted stock, by governing the timing of equity-based awards and establishing certain internal controls over the grant of such awards, as described below.

 

The policy requires that the Compensation Committee (or the Board) approve all grants of equity-based awards, and their terms. The policy does not permit any delegation of granting authority to our management. The grant date of any equity-based award will be the date on which the Compensation Committee met to approve the grant unless a written resolution sets a later date. The exercise price of any stock option award will not be less than the closing price of our common stock on the NYSE on the grant date. All equity-based award grants made in 2009 were made in compliance with the policy and were approved at regularly-scheduled Compensation Committee meetings in January and October 2009, as discussed above under the heading “Long-Term Incentives.”

 

Recovery of Compensation.  Under his Employment Agreement, our CEO is required to repay certain bonus and incentive- or equity-based compensation he receives if we are required to restate our financial statements as a result of his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002.

 

																															Change in
																															Pension Value
																															and
																															Nonqualified
																										Non-Equity					Deferred
																Stock					Option					Incentive Plan					Compensation					All Other
			Fiscal			Salary					Bonus					Awards					Awards					Compensation					Earnings					Compensation					Total
Name and Principal Position			Year			($)					($)(a)					($)(b)					($)(b)					($)(c)					($)(d)					($)(e)					($)
Jeffrey T. Mezger President and Chief Executive Officer			2009			$	1,000,000				$	0				$	1,137,076				$	3,310,337				$	2,750,000				$	747,377					$83,699					$9,028,489
			2008				1,000,000					0					1,069,341					4,593,443					2,750,000					141,666					70,482					9,624,932
			2007				1,000,000					6,000,000					4,181,624					3,743,258					97,500					388,632					972,604					16,383,618
Wendy C. Shiba† Executive Vice President, General Counsel and Secretary			2009				457,000					0					106,230					252,918					411,300					0					122,982					1,350,430
			2008				456,417					400,000					41,580					41,832					0					0					310,357					1,250,186
William R. Hollinger Senior Vice President and Chief Accounting Officer			2009				365,000					0					152,833					259,498					390,000					205,116					31,348					1,403,795
			2008				363,750					0					106,947					58,853					370,000					25,877					29,784					955,211
			2007				347,083					350,000					123,273					107,703					483,000					83,116					121,111					1,615,286
Wendy L. Marlett† Senior Vice President, Sales, Marketing and Communications			2009				325,000					0					142,069					184,657					300,000					189,507					27,398					1,168,631
Kelly K. Masuda Senior Vice President and Treasurer			2009				310,000					0					98,441					162,796					250,000					0					23,732					844,969
			2008				308,958					0					81,186					41,372					250,000					0					20,932					702,448
			2007				296,771					100,000					78,837					85,238					355,500					0					96,459					1,012,805
Former NEO
Raymond P. Silcock*			2009				136,538					200,000					16,667					87,272					0					0					6,276					446,753

 

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