Illinois Tool Works Inc.
3600 West Lake Avenue
Glenview, Illinois 60026

 

Notice of Annual Meeting of Stockholders

Friday, May 7, 2010

3:00 P.M.

 

The Northern Trust Company

50 South LaSalle Street

Chicago, Illinois 60603

 

ITW is holding its 2010 Annual Meeting for the following purposes:

 

1. To elect the nine directors named in this proxy statement for the upcoming year;

 

 

3. To consider a stockholder proposal, if presented at the Annual Meeting; and

 

4. To conduct any other business as may be properly brought before the meeting.

 

The Board of Directors recommends that you vote FOR each of the director nominees, FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent registered public accounting firm for 2010 and AGAINST the stockholder proposal, if presented at the meeting.

 

Only stockholders of record at the close of business on March 9, 2010 are entitled to vote.

 

This year we are again furnishing materials for our 2010 Annual Meeting of Stockholders through the Internet. We believe the use of the Securities and Exchange Commission’s e-proxy rule will expedite stockholders’ receipt of our 2010 Proxy Statement and 2009 Annual Report, as well as lower the costs and reduce the environmental impact of our Annual Meeting.

 

By Order of the Board of Directors,
James H. Wooten, Jr.
Secretary

 

March 24, 2010

 

Illinois Tool Works Inc.

 

Proxy Statement

Table of Contents

 

 

This year, we are again using the e-proxy rule adopted by the Securities and Exchange Commission, or SEC, to furnish proxy materials, which include our annual report to stockholders and our Annual Report on Form 10-K, to many of our stockholders through the Internet.

 

 

 

 

Receiving Future Proxy Materials Electronically: Stockholders may also sign up to receive future proxy materials, including E-Proxy Notices, and other stockholder communications electronically instead of by mail. This will reduce our printing and postage costs and eliminate bulky paper documents from your personal files. To sign up to receive stockholder communications electronically, follow the instructions on your proxy card or E-Proxy Notice under “Vote by Internet” by going to www.proxyvote.com, entering your 12-digit control number (which appears on your proxy card or E-Proxy Notice) and, when prompted, indicate that you agree to receive such communications electronically in the future. In order to receive the communications electronically, you must have an e-mail account and access to the Internet.

 

Following are questions often asked by stockholders of publicly held companies. We hope that the answers will assist you in casting your vote.

 

What am I voting on?

 

We are soliciting your vote on:

 

 

4. Any other business as may be properly brought before the meeting.

 

Who may vote?

 

Stockholders at the close of business on March 9, 2010, the record date, may vote. On that date, there were 502,447,615 shares of ITW common stock outstanding.

 

How many votes do I have?

 

Each share of ITW common stock that you own entitles you to one vote.

 

How do I vote?

 

You may vote your shares in one of the following four ways:

 

1.		In person:		Attend our Annual Meeting, where ballots will be provided; or
2.		By telephone:		See the instructions at www.proxyvote.com; or
3.		By Internet:		See the instructions at www.proxyvote.com; or
4.		By mail:		If you received a printed copy of these proxy materials by mail, by signing, dating and mailing the enclosed proxy card.

 

If you hold your shares through a bank or broker that does not offer telephone or Internet voting, please complete and return your proxy card by mail.

 

When must I submit my vote by Internet or by phone?

 

If you vote by Internet or by phone, you must transmit your vote by 1:00 a.m., Central Time, on May 7, 2010.

 

If I hold shares through an ITW 401(k) Plan, when must I submit my vote?

 

Shares held through an ITW 401(k) plan must be voted by 11:59 p.m., Central Time, on May 5, 2010 in order to be tabulated in time for the meeting.

How does discretionary voting authority apply?

 

If you vote by proxy, the individuals named on the proxy card (your proxies) will vote your shares in the manner you indicate. If you do not indicate how you want to vote, you give authority to William F. Aldinger, Marvin D. Brailsford and Susan Crown to vote on the items discussed in these proxy materials and on any other matter that is properly raised at our Annual Meeting. If you do not indicate how you want to vote, your proxy will be voted FOR the election of each director nominee, FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm, AGAINST the stockholder proposal and FOR or AGAINST any other properly raised matter at the discretion of Ms. Crown and Messrs. Aldinger and Brailsford.

 

May I revoke my proxy?

 

You may revoke your proxy at any time before it is voted at our Annual Meeting in one of four ways:

 

 

2. Submit another proxy with a later date;

 

3. Vote by telephone or Internet after you have given your proxy; or

 

4. Vote in person at our Annual Meeting.

 

What does it mean if I receive more than one E-Proxy Notice or set of proxy materials?

 

Your shares are likely registered differently or are in more than one account. For each notice, proxy and/or voting instruction card or e-mail notification you receive that has a control number, you must vote to ensure that all shares you own are voted.

 

What constitutes a quorum?

 

The presence, in person or by proxy, of the holders of a majority of ITW shares entitled to vote at our Annual Meeting constitutes a quorum. Your shares will be considered part of the quorum if you return a signed and dated proxy card or if you vote by telephone or Internet. Abstentions and broker non-votes are counted as “shares present” at the meeting for purposes of determining if a quorum exists. A broker non-vote occurs when your bank, broker or other holder of record holding shares for you as the beneficial owner submits a proxy that does not indicate a vote as to a proposal because that holder does not have voting authority for that proposal and has not received voting instructions from you.

 

What vote is required to approve each proposal?

 

Election of Directors: Each nominee who receives a majority of the votes cast with respect to his or her election will be elected. A majority of the votes cast means that the number of shares voted “for” a director must exceed the number of shares voted “against” that director. Any nominee who fails to receive a majority of the votes cast for election is expected to tender his or her resignation in accordance with our Corporate Governance Guidelines as discussed more fully under “Corporate Governance Policies and Practices — Director Election” on

page 15. Abstentions and broker non-votes will not be votes cast and will have no effect on the election of directors. Please note that unlike previous years, brokers holding shares beneficially owned by their clients will no longer have the ability to cast votes with respect to the election of directors unless they have received voting instructions from their clients. If you are a beneficial owner, it is important that you provide instructions to your bank, broker or other holder of record so that your vote on the election of directors is counted.

 

Ratification of the Appointment of Independent Registered Public Accounting Firm: Although we are not required to submit the appointment of our independent registered public accounting firm to a vote of stockholders, we believe that it is appropriate to ask that you ratify the appointment. Ratification of the appointment of Deloitte & Touche LLP as ITW’s independent registered public accounting firm requires the affirmative vote of a majority of the shares present or represented by proxy at our Annual Meeting and entitled to vote. An abstention will have the effect of a vote against the ratification since it is one fewer vote for approval. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on this ratification, even if they do not receive voting instructions from you; therefore, no broker non-votes will occur with respect to this proposal.

 

Stockholder Proposal Requesting Reports on Political Contributions and Expenditures: Approval of this proposal requires the affirmative vote of a majority of the shares present or represented by proxy at our Annual Meeting and entitled to vote. An abstention will have the effect of a vote against this proposal since it is one fewer vote for approval, but a broker non-vote will have no effect.

 

How do I submit a stockholder proposal?

 

To be considered for inclusion in our proxy statement for our May 2011 Annual Meeting, a stockholder proposal must be received no later than November 24, 2010. Your proposal must be in writing and must comply with the proxy rules of the SEC. You should send your proposal to our Secretary at our address on the cover of this proxy statement.

 

You also may submit a proposal that you do not want included in the proxy statement, but that you want to raise at our May 2011 Annual Meeting. We must receive your proposal in writing on or after January 7, 2011, but no later than February 6, 2011. As detailed in the advance notice procedures described in our by-laws, for a proposal other than the nomination of a director to be properly brought before an annual meeting, your notice of proposal must include: (1) your name and address, as well as the name and address of the beneficial owner of the shares, if any; (2) the number of shares of ITW stock owned beneficially and of record by you and any beneficial owner as of the date of the notice (which information must be supplemented as of the record date); (3) a description of certain agreements, arrangements or understandings entered into by you or any beneficial owner with respect to the shares (which information must be supplemented as of the record date) or the business proposed to be brought before the meeting; (4) any other information regarding you or any beneficial owner that would be required under the SEC’s proxy rules and regulations; and (5) a brief description of the business you propose to be brought before the meeting, the reasons for conducting that business at the meeting, and any material interest that you or any beneficial owner has in that business.

How do I nominate a director?

 

If you wish to nominate an individual for election as a director at our May 2011 Annual Meeting, our Secretary must receive your written nomination on or after January 7, 2011, but no later than February 6, 2011. As detailed in the advance notice procedures described in our by-laws, for a nomination to be properly brought before an annual meeting, your notice of nomination must include: (1) your name and address, as well as the name and address of the beneficial owner of the shares, if any; (2) the number of shares of ITW stock owned beneficially and of record by you and any beneficial owner as of the date of the notice (which information must be supplemented as of the record date); (3) a description of certain agreements, arrangements or understandings entered into by you or any beneficial owner with respect to the shares (which information must be supplemented as of the record date); (4) the name, age and home and business addresses of the nominee; (5) the principal occupation or employment of the nominee; (6) the number of shares of ITW stock that the nominee beneficially owns; (7) a statement that the nominee is willing to be nominated and serve as a director; (8) a statement as to whether the nominee intends to tender his or her resignation in accordance with our Corporate Governance Guidelines; (9) an undertaking to provide any other information required to determine the eligibility of the nominee to serve as an independent director or that could be material to stockholders’ understanding of his or her independence; and (10) any other information regarding you, any beneficial owner or the nominee that would be required under the SEC’s proxy rules and regulations had our Board of Directors nominated the individual. Any nomination that you make must be approved by our Corporate Governance and Nominating Committee, as well as by our Board of Directors. The process for the selection of director candidates is described under “Corporate Governance Policies and Practices — Director Candidate Selection Process” on page 15.

 

Who pays to prepare, mail and solicit the proxies?

 

We will pay the cost of solicitation of proxies including preparing, printing and mailing this proxy statement and the E-Proxy Notice. We will also authorize brokers, dealers, banks, voting trustees and other nominees and fiduciaries to forward copies of the proxy materials to the beneficial owners of ITW common stock. Upon request, we will reimburse them for their reasonable expenses. In addition, our officers, directors and employees may solicit proxies in person, by mail, by telephone or otherwise.

 

Stockholders are being asked to elect the nine directors named in this proxy statement at our Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. See “Corporate Governance Policies and Practices” for more information regarding our candidate selection process. Each director will serve until the May 2011 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed. After over 42 years of distinguished service, Harold B. Smith is not a nominee for re-election and is retiring from the Board as of the date of the Annual Meeting. After over 11 years of distinguished service, William F. Aldinger is not a nominee for re-election at the Annual Meeting. Accordingly, Messrs. Smith and Aldinger are not included as nominees below for election at the Annual Meeting.

 

The Board intends to appoint Harold B. Smith as an emeritus director, effective upon his retirement as a board member, in order to continue to benefit from his wisdom, judgment and experience. Pursuant to our by-laws, an emeritus director serves as an advisor and consultant to the Board of Directors and may be appointed as advisor and consultant to committees of the Board. An emeritus director may be invited to attend Board and committee meetings and participate in discussions, but is not permitted to vote on matters brought before the Board or any committee and cannot be counted for the purpose of determining a quorum.

 

We will vote your shares as you specify on the proxy card, by telephone, by Internet or by mail. If you do not specify how you want your shares voted, we will vote them FOR the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares FOR that other person. The Board of Directors does not anticipate that any nominee will be unable to serve.

 

Each nominee for director brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a variety of areas. Set forth below is biographical information provided by the nominees as well as a description of the experiences, qualifications, skills and attributes that led the Corporate Governance and Nominating Committee and the Board to conclude that each nominee should serve as a director of the Company.

 

 

The Company’s Board of Directors met seven times during 2009. In addition to meetings of the full Board, directors attended meetings of Board committees. Non-employee directors, all of whom are independent, met five times in regularly scheduled executive sessions. The Chairmen of the Board of Directors’ standing committees rotated as the Chairman of executive sessions of the independent directors until the appointment of Robert S. Morrison as Lead Director on May 8, 2009. Thereafter, Mr. Morrison served as Chairman of the executive sessions.

 

As stated in the Company’s Corporate Governance Guidelines, the Board believes that it is in the best interests of the Company to examine whether the role of Chairman and Chief Executive Officer should be combined each time the Board elects a new chief executive officer. David Speer, our current Chairman and CEO, has over 31 years of service with the Company. Robert Morrison, our lead director, is an experienced director, having served on the boards of several major public companies, and is also a former CEO of several major public companies. Our lead director is the key liaison, and serves as an effective avenue for information flow between the CEO and the independent directors. He also promotes an appropriate balance between the powers of the CEO and the independent directors. Our Board believes that in light of the blend of experience and skills of our CEO and board, the lead director structure is the appropriate leadership structure for our Board at this time. Whether the same leadership structure will be selected when our CEO’s tenure with the Company ends is a matter that our Board believes should be evaluated at the time in light of the skills and experience of the new CEO and other relevant considerations.

 

The Board of Directors has standing audit, compensation, corporate governance and nominating, and finance committees. Under the terms of their charters, each member of the audit, compensation, and corporate governance and nominating committees must meet applicable New York Stock Exchange (“NYSE”) and SEC independence requirements. The Company encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2009, during the time they were serving, all of the directors attended at least 75% of the meetings of the Board and the committees on which they serve, and all of the directors then serving attended our 2009 Annual Meeting of Stockholders.

 

Audit Committee

 

 

The Audit Committee is responsible for the engagement of our independent registered public accounting firm and assists the Board with respect to matters involving and overseeing accounting, financial reporting and internal audit functions. In addition, the Committee is responsible for the integrity of the Company’s financial statements; compliance with legal and regulatory requirements; the independence and performance of ITW’s independent registered public accounting firm; and the performance of the Company’s internal audit function. Finally, the Audit Committee reviews and evaluates our policies and practices with respect to risk

assessment and risk management and steps taken by management to monitor and control such exposures. Additional information on the Committee and its activities is set forth in the “Audit Committee Report” on page 47.

 

Compensation Committee

 

 

The Compensation Committee establishes and oversees executive and director compensation policies, including issues relating to pay and performance, targeted positioning and pay mix. The Compensation Committee recommends to the other independent directors compensation for the chief executive officer, reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments. The Compensation Committee also is responsible for reviewing and evaluating risks arising from our compensation policies and practices and providing input to management on whether such policies and practices may have a material adverse effect on the Company.

 

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee engaged Frederic W. Cook & Co., an independent consultant (“Cook”), as its independent advisor to review the Company’s overall executive compensation program, review the peer group of companies used by the Compensation Committee for comparison purposes and assess our compensation governance process. Cook was asked to review materials relevant to the overall compensation of our executives and to meet with our management and members of the Compensation Committee in order to gain strategic insight into the Company’s compensation programs. On a limited basis, Company management has engaged Hewitt Associates LLC to provide competitive market data (including information with respect to the Company’s peer group companies). From time to time, the Compensation Committee reviews the materials provided by Hewitt Associates LLC to management.

 

Additional information on the Compensation Committee, its activities, its relationship with its compensation consultant and the role of management in setting compensation, is provided in the “Compensation Discussion and Analysis” beginning on page 21.

 

Corporate Governance and Nominating Committee

 

 

The Corporate Governance and Nominating Committee identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance

guidelines; oversees the evaluations of the performance and procedures of the Board and individual directors; and makes recommendations as to Board committees and Board size. On February 12, 2010, the Corporate Governance and Nominating Committee approved the retention of Russell Reynolds Associates, Inc. to assist it in identifying potential board candidates, as several of our directors are approaching retirement age. See “Corporate Governance Policies and Practices — Director Candidate Selection Process” below for a description of the director selection process.

 

Finance Committee

 

 

The Finance Committee reviews, evaluates and recommends management’s proposals to the Board relating to the Company’s financing, investment portfolio, real estate investments, and reviews and evaluates an annual summary of the funding and investment status of significant benefit plans sponsored by the Company globally. The Finance Committee also periodically reviews and evaluates risks arising from the Company’s investments, treasury function (such as derivatives and interest rates) and liquidity.

 

Board’s Role in Risk Oversight

 

The Board of Directors is responsible for the overall risk oversight of the Company. While the Board has delegated to the Audit Committee the responsibility to review and evaluate the Company’s overall risk policies and practices, the responsibility for the review and evaluation of risks relating to investments and other treasury functions has been delegated to the Finance Committee, and risks arising from the Company’s compensation policies and practices has been delegated to the Compensation Committee. Each of these committees reports their findings to the full Board, and the Compensation Committee is also charged with providing input to management on whether the Company’s compensation policies and practices may have a material adverse effect on the Company.

 

Starting in 2004, the Company performed an enterprise risk management review, which identified key business risks of the Company, including, but not limited to, business environment (including industry, market, sourcing, competition and operations), tax, acquisitions, legal (including product liability), financial, regulatory and investment risks. At each Audit Committee meeting, Company management gives a presentation on at least one of these risks, providing the Committee members an opportunity to discuss the risks and the risk mitigation processes. Certain risks are reviewed and discussed annually, while others are considered on a rotating basis. The Audit Committee reports its evaluation of each risk presentation to the full Board after each Audit Committee meeting.

 

The risk reviews conducted by the Compensation and Finance Committees are also reported to the full Board on a regular basis. The Company believes that because each of these committees is comprised of independent board members, the Chairman and Chief Executive Officer of the Company is subject to the risk oversight of independent directors.

 

General

 

We have long believed that good corporate governance is important to assure that the Company is managed for the long-term benefit of its stockholders. In that regard, we continuously review our corporate governance policies and practices not only for compliance with the provisions of the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for good corporate governance principles.

 

Our Board of Directors has adopted and annually reviews charters for our Audit, Compensation, and Corporate Governance and Nominating Committees. We maintain a corporate governance section on our website that includes the charters of these committees, the Company’s Corporate Governance Guidelines, the Company’s Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees) and the Company’s Code of Ethics for the Chief Executive Officer and key financial and accounting personnel. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our website. You can find this and other corporate governance information at www.itw.com. We also will provide copies of this information upon request.

 

Communications with Directors

 

Stockholders and other interested parties may communicate with any of our directors, including Robert S. Morrison, our lead director, or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to any of our directors c/o Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, IL, 60026, Attention: Secretary.

 

Board Independence

 

Our Board conducts an annual review as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence. A copy of the Company’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with the Company (directly or as a partner, stockholder or officer of an organization that has a material relationship with the Company).

 

The Board has determined that each of the current directors, except David B. Speer, has no material relationship with the Company other than as a director and is independent within the meaning of the Company’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Ms. Crown and Messrs. McCormack and Harold Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which the Company has a commercial banking relationship as described under “Certain Relationships and Related Transactions” on page 46; (2) Messrs. Aldinger, McCormack, Morrison, Skinner and Harold Smith serve as directors of companies that have an existing customer or supplier relationship with the Company; (3) Ms. Crown has an indirect interest in a company with which we conduct business; (4) Ms. Strobel serves as a director of a company that owns 4% of the Company’s common stock and as a director of a company with which we conduct business; and (5) Mr. David B.

Smith is the nephew of Harold B. Smith. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of the directors.

 

Director Qualifications

 

Our directors play a critical role in guiding the Company’s strategic direction and oversee the management of the Company. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of our stockholders, and personal integrity and judgment. Racial, ethnic and gender diversity are also considered in the director selection process, as well as diversity of experience and backgrounds, but there is no specific policy regarding Board diversity. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their duties and responsibilities to the Company.

 

Director Candidate Selection Process

 

The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific criteria or simply to fill a vacancy on the Board. At that time the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board endorsement of the selected candidate(s). Mr. David Smith was initially recommended to the Board by a non-management director.

 

Our by-laws permit stockholders to nominate directors for consideration at an annual meeting of stockholders. The policy of the Corporate Governance and Nominating Committee is to consider a properly submitted stockholder nomination for election as director. For a description of the process for submitting a director candidate in accordance with the Company’s by-laws, see “Questions and Answers — How do I nominate a director?” on page 6.

 

Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination.

 

Director Election

 

Our by-laws provide for the election of directors in uncontested elections by majority vote. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply.

If a nominee who is serving as a director is not elected at an annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons why stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to the Company and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but no director who failed to receive a majority of the votes cast will participate. We will disclose the results of the Committee’s review within 90 days of such annual meeting. At our 2009 Annual Meeting, each director received a majority of the votes cast for his or her election.

 

Annual Retainer and Chair Fees

 

In 2009, the annual cash retainer for non-employee directors is $135,000, and the annual fee for committee chairs is an additional $5,000, except for the Audit Committee chair, whose annual fee is $15,000. Non-employee directors are given the opportunity to elect annually to receive all or a portion of their annual retainer and chair fees in an equivalent value of ITW common stock pursuant to our Stock Incentive Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.

 

In recognition of the additional time and responsibility required of the chair of the Compensation Committee, effective January 1, 2010, the Compensation Committee chair fee was increased to $10,000.

 

Directors’ Deferred Fee Plan

 

Non-employee directors can defer receipt of all or a portion of their annual retainer and chair fees until retirement or resignation. Deferred fee amounts are credited with interest quarterly at current rates. A director can also elect to defer receipt of the ITW common stock received in lieu of a cash payment, in which case the deferred shares are credited as stock units to an account in the director’s name. The account receives additional credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in our Stock Incentive Plan), with any fractional shares paid in cash.

 

ITW Common Stock

 

The Company grants stock to its non-employee directors under our Stock Incentive Plan, which links this element of compensation to our long-term performance. Under our director compensation program, in 2009 non-employee directors received an annual stock grant equivalent in value to approximately $30,000, or 854 shares of stock.

 

The Compensation Committee, based on information provided by Cook, found that the equity portion of our outside director compensation was low in relation to total director compensation and that total director compensation was below median levels. Effective January 1,

2010, non-employees directors will receive an annual stock grant equivalent in value to $65,000. On that basis, on February 12, 2010, each non-employee director was granted 1,489 shares of stock.

 

Phantom ITW Stock

 

To tie a further portion of their compensation to our long-term performance, non-employee directors of the Company are awarded 1,000 units of phantom stock upon first becoming a director. The value of each unit equals the market value of one share of ITW common stock. Additional units are credited to a director’s phantom stock account in an amount equivalent to cash dividends paid on ITW stock. Accounts are adjusted for stock dividends, stock splits, combinations or similar changes. A director is eligible for a cash distribution from his or her account at retirement or upon approved resignation. Directors may elect to receive their phantom stock distribution in either a lump sum or in up to ten annual installments. Directors receive the value of their phantom stock accounts immediately upon a change of control.

 

Director Compensation in Fiscal Year 2009

 

The following table summarizes the compensation for our directors who served during 2009.

 

 

 

 

 

Directors and Executive Officers

 

The following table shows the amount of ITW common stock beneficially owned by the directors, the named executive officers, and all directors and executive officers as a group as of December 31, 2009. The “named executive officers” are our Chief Executive Officer, our Chief Financial Officer, the next three most highly-compensated executive officers who were serving at the end of the last fiscal year (based on total compensation, less the increase in pension value and nonqualified deferred compensation earnings) and one executive officer who retired in 2009. The “percent of class” calculation is based on 502,336,201 shares of ITW common stock outstanding as of December 31, 2009.

 

Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options that are exercisable currently or that become exercisable within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them.

 

The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2009. Phantom stock units are not transferable and have no voting rights. The units are not included in the “percent of class” calculation.

 

 

 

 

Other Principal Stockholders

 

This table shows, as of December 31, 2009, the only stockholder other than a director that we know to be a beneficial owner of more than 5% of ITW common stock. See “Certain Relationships and Related Transactions” for a description of the commercial banking services provided by The Northern Trust Company and its subsidiaries to the Company and the amount paid by the Company for these services.

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2009 and written representations from executive officers and directors, we believe that all filing requirements were timely met during 2009.

 

The Company is providing its annual report and its Annual Report on Form 10-K to stockholders who receive this proxy statement. The Company will provide copies of these reports to brokers, dealers, banks, voting trustees and their nominees for the benefit of their beneficial owners of record. Additional copies of this proxy statement, the annual report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, are available without charge upon written request to Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, IL, 60026, Attention: Secretary. You may also review Company SEC filings by visiting the Company’s website at www.itw.com.

 

Introduction

 

The Company emphasizes a total compensation approach in establishing individual executive compensation levels, with each element of compensation serving a specific purpose. The Company’s compensation program consists primarily of three elements: short-term cash compensation (base salaries and annual cash incentives), longer-term equity compensation (stock options, restricted stock and restricted stock units), and retirement benefits, as illustrated below:

 

 

 

The depth and breadth of economic recession in 2009 adversely affected the Company’s financial performance during the year. End market conditions in North America, Europe and Asia-Pacific were extremely challenging as both consumer and industrial markets were impacted by the worldwide recession. As a result, the Company’s revenues declined approximately 19% for 2009 versus the year-earlier period. In late 2008 and early 2009, management took aggressive steps to implement effective cost savings programs throughout the Company. As a result, the Company incurred $161 million of restructuring expense in 2009. Excluding the impact of first quarter impairment charges, these restructuring activities helped the Company move operating margins from 5.8% in the first quarter of 2009 to 12.7% in the fourth quarter of 2009. In addition, the Company’s increasing diversification of revenues — from both an end market and geographic basis — helped to mitigate the effects of the recession. Notably, the Company’s geographic mix has changed substantially since 1999. In 2009, the Company’s North American revenues constituted 48% of total revenues versus 67% of total revenues in 1999. Our Europe, Middle East and Africa region accounted for 34% of total Company revenues in 2009 versus 26% in 1999; and our Asia-Pacific and Other region accounted for 18% of total Company revenues in 2009 versus 7% in 1999. Finally, the Company generated free operating cash flow of

$1.9 billion for 2009. The Company continues to use free operating cash flow to reinvest in its businesses and technologies as well as acquire companies and technologies that both complement and add to its business portfolio.

 

In response to those economic conditions, the Compensation Committee made the following compensation decisions with respect to our named executive officers:

 

 

These changes do not adversely impact the Company’s flexibility to recognize and reward superior company, business unit and individual performance by differentiating the cash incentive and equity awards made to individual executives.

 

In making its executive compensation decisions and recommendations, the Compensation Committee is guided by the following factors:

 

 

See “Board of Directors and Its Committees — Compensation Committee” for more information about the function of the Compensation Committee.

Compensation Philosophy

 

Our compensation philosophy is reflective of our overall operating philosophy and management structure and is intended to:

 

 

Peer Companies

 

In 2007, we selected a group of comparable companies to benchmark executive pay, providing competitive market data to be used in establishing and recommending each element of compensation. This group was selected using the following criteria:

 

 

Every year the group is reviewed to ensure the appropriateness of the companies in the group. Additionally, in 2009, the Compensation Committee asked Frederic W. Cook & Co., or Cook, to review the peer group. After both reviews, no changes were made and the following 18 companies were retained as the peer group:

 

 

The nature of the Company’s highly decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes; however, we believe that the peer group selected provides relevant comparisons. While peer group data is not directly used to set any particular element of compensation, the Compensation Committee believes that in order to attract, retain and motivate our named executives, total compensation levels for these executives should be considered against the median peer group level over the long term.

 

Management’s Contributions to Our Growth

 

The Company’s decentralized management structure emphasizes line management. This structure allows us to give unusually substantial operating authority to executive officers and is

an important element in developing and retaining our senior managers and in creating high job satisfaction. The general managers of our businesses are empowered to make the decisions necessary to serve their customers and grow their businesses and are accountable for their business unit’s results. Our executive management’s role is to ensure that these decisions are carried out in accordance with our values and expectations for the near and long term and are, in general, in the best interests of our stockholders.

 

Use of Discretion in Setting Compensation

 

The Company’s compensation programs recognize the importance of ensuring that discretion as related to market conditions and both individual and business unit performance is provided to the Chief Executive Officer (the “CEO”) and Compensation Committee in determining compensation levels and awards. In setting base salaries and annual cash incentive award maximums, and in determining grants of longer-term equity awards, the CEO and Compensation Committee use judgment to align compensation with respect to both external data and an internal comparison of individual responsibilities, potential and achievement.

 

Compensation Decisions and Individual Compensation Levels

 

There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other named executive officers. However, the different levels of compensation for the named executive officers as shown in the Summary Compensation Table of this proxy statement reflect internal factors such as each executive’s scope of responsibility, impact on profitable growth, and breadth of experience, as well as external market data from the peer companies. On an annual basis, the CEO reviews the total compensation of senior executives and makes recommendations to the Compensation Committee based on his assessment of each executive’s individual performance and the peer company compensation information. The Compensation Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and information relative to compensation of CEOs of the peer companies. The Compensation Committee believes that it is appropriate to benchmark total compensation for the CEO to the levels of base salary, annual incentive, and longer-term incentives being provided to CEOs of comparable multinational and diversified industrial organizations previously described under “Peer Companies.”

 

Base Salary

 

In determining base salary, the CEO and the Compensation Committee consider the size and scope of the executives’ responsibilities and the median base salary of similar positions at our peer companies, as well as the executive officers’ past experience, performance and future potential. The Compensation Committee believes that the median base salary is an appropriate general reference point to use for encouraging solid performance. Base salaries are reviewed annually and adjustments are intended to recognize an executive officer’s performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility. Adjustments to base salary also take into account peer group information and such officer’s total compensation.

 

We have a common review process for base salary and incentive compensation for our senior executive officers. This process allows the Compensation Committee and the CEO to

review base compensation and discuss recommended changes considering individual contributions to overall financial and operating results for the year and to set objectives for the upcoming year.

 

In response to the deteriorating economic environment our businesses faced at the end of 2008, management recommended, and the Compensation Committee agreed, that there be no base salary increases in 2009 for any of our executive officers.

 

Annual Cash Incentives

 

We believe that generally, management should be rewarded for contributions to our overall financial success measured by income growth of their business unit, their group or the Company as a whole, as well as for individual accomplishments that contribute to the longer-term health of the business. Annual cash incentive awards are made under the stockholder-approved provisions of the ITW Executive Incentive Plan. The Compensation Committee considers recommendations from the CEO and approves annual cash incentives for our executive officers. The Compensation Committee determines and recommends for approval by the independent directors the award amount for the CEO.

 

The plan is designed around two elements: income performance (the “P” factor) and personal objectives (the “O” factor). The P factor weighting is 60% of each named executive officer’s potential award opportunity with the remaining 40% based on the O factor objectives. In addition, the weighting of the P factor for operating executives is 33% of corporate results and 67% of their respective businesses. These weightings are intended to emphasize the financial performance element and reinforce the increasing need to collaborate across businesses.

 

Participation in our Executive Incentive Plan is limited to those who have an impact on the profitable growth of the business or who have significant responsibility for a major element of business growth. The P factors are recommended by management and must be approved by the Compensation Committee annually. The individual O factors for the CEO are established by the Compensation Committee annually, and the individual O factors for each other named executive officer are recommended by the CEO and must be approved by the Compensation Committee.

 

Individual award maximums, expressed as percentages and applied to year-end base salary, are determined in accordance with the executive’s level of responsibilities and accountability. Both the P and O factors have a payout range of 0% to 100% of the maximum for the named executive officers. Although we generally do not establish any specific target or prescribed value in relation to peer groups, comparisons are made to median annual cash incentive levels in the peer group compensation data. The Company’s annual cash incentives are variable and structured to provide awards above these median levels only upon the achievement of exceptional financial results and individual performance objectives. Payments under the plan are made following the end of the fiscal year after approval by the Compensation Committee.

 

Income-Based Annual Cash Incentive (P Factor)

 

For 2007 and 2008, the P factor was calculated based on year-over-year income growth. This means that the current year income was compared to the prior year to measure the percentage of increase. Participants began to earn payment for the P factor once 80% of the applicable prior year income was achieved. At the 80% achievement level, the P factor award payout was 34% of the maximum payment. At the 100% achievement level, the payout was 75%

of the maximum payment. For the named executive officers, a maximum P factor payout of 100% would only occur when 115% achievement of prior year income was reached.

 

For 2009, a change was made in the calculation of the P factor. Instead of year-over-year increase in income, the basis for the P factor award calculation was 2009 income performance versus the annual plan target income for the Company as a whole and for the named executive officers’ respective businesses. This change acknowledged the extraordinarily difficult business environment in which many of our business units were operating. For the CEO, named executive officers and other elected officers, the P factor award maximum was reduced from 100% to 53% of year-end base salary. The award maximum of 53% for named executive officers would be earned upon 100% income achievement versus plan. The threshold payout remained 34% upon 80% income achievement. The following was the P factor calculation for 2009 for the Company as a whole and for the named executive officers’ respective businesses:

 

 

The 2009 P factors for Messrs. Speer and Kropp were entirely based on the 2009 income from continuing operations of the Company as a whole. For the other named executive officers, the P factor was based 67% on 2009 income achievement for their respective businesses and 33% on 2009 income achievement for the Company as a whole. The following table shows the respective income levels as planned and achieved in 2009 in connection with the determination of the P factor award for the named executive officers:

 

 

 

For 2010, as in years prior to 2009, the P factor will again be calculated by comparing current year income to the prior year to measure the percentage of increase.

 

Personal Objectives-Based Annual Cash Incentive (O Factor)

 

The O factors represent the personal objectives element of the annual cash incentive awards, and are more subjective than P factors. Relative weightings for the O factor objectives, which altogether represent 40% of the potential award opportunity, are established at the beginning of the year for each named executive. In early 2009, each executive submitted in writing his own proposed O factor objectives, as well as weightings assigned to each objective for that year. Each named executive other than the CEO discussed his proposed objectives and weightings with the CEO, and after these discussions had the opportunity to revise his proposal. The CEO used his judgment of each executive’s role and responsibilities, as well as the strategic goals of the Company, to review and approve the objectives before recommending them to the Compensation Committee. The Compensation Committee discussed these recommendations with the CEO prior to final approval. The CEO discussed his proposed O factor objectives and weightings for 2009 with the Compensation Committee. The Compensation Committee used its judgment and understanding of the strategic goals of the Company to review and approve the objectives and weightings of the CEO.

 

The following is a description of the 2009 objectives and weightings as approved. Mr. Speer’s objectives focused on leadership development/diversity (35%), innovation (35%), Board meeting effectiveness (10%) and acquisitions (20%). Mr. Kropp’s objectives focused on leadership development (45%), organization structure (30%) and acquisitions (25%). Mr. Hansen’s objectives focused on strategic tools (30%), innovation (40%) and leadership development (30%). Mr. Santi’s objectives focused on leadership development (35%), strategy for specified businesses (30%) and development plans (35%). Mr. Flaum’s objectives focused on leadership development (40%), emerging market growth (30%) and organizational structure and training system improvement for a specified business (30%). Mr. Gresh’s objectives focused on establishing a leadership development program (30%), strategy for specified businesses (30%) and leadership development/diversity (40%).

 

Following the end of the year, each named executive submitted a written self-appraisal with his own assessment of the level of achievement reached in 2009, expressed as a percentage, for each of his personal objectives. The self-appraisals of the named executives other than the CEO were reviewed by the CEO, and the CEO had collaborative discussions with each of these executives. The CEO used his judgment of each executive’s performance against the objectives, considering completion of objectives, relative weightings and the quality of the work performed, to reach his assessment of the achievement levels prior to submitting them for final approval by the Compensation Committee. Any adjustments made by the CEO to the self-scored achievement levels for 2009 were not material. The self-appraisal of the CEO for 2009 was reviewed by the Compensation Committee, which held collaborative discussions with the CEO and used its judgment of the CEO’s performance against his objectives to reach its assessment of the achievement levels. The Compensation Committee adjusted the CEO’s self-scored achievement

level from 85% to 90% because it thought his self-score for acquisitions did not take into account that he maintained the Company’s acquisition discipline in a very difficult environment. The independent directors approved the Compensation Committee’s recommendation. There were no pre-determined factors that were considered by the CEO or the Compensation Committee during this process.

 

The weighting for each objective was multiplied by the relevant achievement level, and the amounts so calculated were totaled to reach the O factor achievement percentage. Based on the Compensation Committee’s determination of the individual 2009 O factor objectives and actual achievements for Mr. Speer, and upon Mr. Speer’s recommendations for the other named executive officers, the following O factor achievement percentages were assigned: 90% for Mr. Speer; 93.5% for Mr. Kropp; 95% for Mr. Hansen; 90.5% for Mr. Santi; 90% for Mr. Gresh; and 80% for Mr. Flaum.

 

2009 Annual Cash Incentive Total Payouts

 

The total 2009 awards for the named executive officers ranged from 39% to 60% of the individual maximum award level, and were determined as follows:

 

 

 

The named executive officers may elect to defer 6% to 85% of their annual incentive award to their ITW Executive Contributory Retirement Income Plan (ECRIP) account. ECRIP is further described under “Nonqualified Deferred Compensation” elsewhere in this proxy statement. Also, under the terms of the ITW 2006 Stock Incentive Plan, an officer may elect to take up to 50% of the award in the form of ITW common stock.

 

Long-Term Incentives

 

We believe that ensuring the long-term growth and health of the business is a primary management responsibility. Therefore, a significant portion of an executive officer’s compensation should be directly linked to how ITW stock performs over time, encouraging decisions that consider the long-term perspective. Stock incentive awards are granted to executives and other key employees whose positions can truly affect the Company’s long-term performance.

 

The amount of the overall annual equity awards to the CEO is determined by the Compensation Committee in its discretion, subject to approval by the independent directors. Awards to the other named executives are recommended by the CEO to the Compensation

Committee for approval and are subject to the discretion of the CEO in making the recommendations, as well as of the Compensation Committee in approving the awards. The key factors in determining the overall annual equity awards have been the executive’s position and seniority and the historical grants made to Company executives in similar positions with similar seniority. Because the Compensation Committee and the CEO in their discretion may consider such factors as they deem relevant in determining an executive’s overall equity award, other factors may cause the award in any given year to differ from historical amounts.

 

2009 Annual Equity Awards

 

Stock incentive awards through 2008 were generally made in the form of stock options and used the number of shares to determine the award amount. With respect to the 2009 awards, the Compensation Committee considered the fact that the value of a stock option is complex and volatile while the value of a restricted stock grant is more understandable and less volatile, and that the Company was in a relatively small minority of companies who awarded only one type of grant under its stock incentive plan. The Committee consequently decided to include restricted stock units in the plan grants to senior executives and to rely on the value of the grants delivered as the basis for determining the overall award amounts. We continue to believe, however, that stock options are an effective incentive for participants on a long-term basis because the option loses its value entirely if the price of ITW’s common stock falls below the grant price.

 

Therefore, beginning in 2009, the overall annual stock incentive award for senior executives was split into two award types: two-thirds remaining in the form of stock options and the other one-third in the form of a restricted stock unit, or RSU. The Compensation Committee also determined that elected officers, including the named executive officers, should receive performance-based restricted stock units, or PRSUs, subject to a performance metric based on 2009 corporate income performance. PRSUs granted in 2009 (formerly referred to as qualified restricted stock units, or QRSUs) have a three-year cliff vesting requirement (i.e., no vesting until three years from grant date, at which time the entire award may vest) as well as a performance goal (see “Performance Goal for 2009” below) set at the beginning of the performance period.

 

Stock options are granted with an exercise price equal to the fair market value of the common stock on the date of grant and expire ten years after the grant date. This approach is designed to motivate the executive to contribute to the creation of stockholder value over the long term. We currently grant only non-qualified stock options because we believe that the tax benefits to the Company of non-qualified stock options outweigh the potential tax benefits to the named executive officers of incentive stock options. RSUs and PRSUs are granted based on the fair market value of one share of common stock on the date of grant.

 

Stock options vest over a specified period determined by the Compensation Committee. The 2009 stock options vest in equal installments over a four-year period ending in 2013. RSUs generally vest in full three years from the date of grant. PRSUs vest three years from the date of grant, subject to the achievement level of the performance goal. See “Performance Goal Changes for 2010” below. The Compensation Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined by the Compensation Committee, and forfeiture provisions upon any other termination of employment. Under change in control or certain divestiture conditions, all stock options become

vested and exercisable and all RSUs and PRSUs become vested and payable in cash. The Compensation Committee, in its sole discretion, may deem a stock option, RSU, or PRSU award to be immediately forfeited if the recipient is terminated for cause (as defined by the Committee), competes with the Company, or engages in conduct adversely affecting the Company.

 

The option award to the CEO increased from 400,000 in 2007 to 500,000 in 2008, and the option award to the CFO increased from 60,000 in 2007 to 70,000 in 2008, as part of the Compensation Committee’s consideration of the total compensation of our named executives as compared to the peer group median. For 2009, the value of the overall annual equity award was not changed; however, one-third of the annual equity awards was changed to PRSU’s and a new performance-based award, the BGIP award, was added as a component to the long-term incentive program, as described below. These changes were intended to bring total compensation closer to the median levels.

 

2009 BGIP Awards

 

In addition to changing the mix of the annual equity award in 2009, the Business Growth Incentive Plan, or “BGIP”, was created with the intention of establishing a cash incentive with three-year performance cycles to further incentivize our line executives to focus on a time horizon longer than one year. Due to the extremely adverse economic conditions at the time of the first BGIP awards, however, the 2009 BGIP awards were in the form of PRSUs (formerly referred to as qualified restricted stock units, or QRSUs), the terms of which are identical to the PRSUs granted as one-third of the overall 2009 annual equity award. The executives’ position and salary on grant date determined the amount of the award. The total compensation of our executives, viewed generally by position, relative to that of the peer group’s median, and the mix of compensation components of our executives relative to the peer group were also considerations in setting the percentage of base pay used for determining the maximum award amount. Only elected officers and group presidents, being the executives who are closest to the business in our decentralized structure and who have the biggest impact on operating performance, are eligible for the program. The maximum amount of the award for 2009 was based on position and salary on grant date as follows: 100% of base pay for the CEO; 75% for other elected officers and 40% for group presidents.

 

Performance Goal for 2009

 

The performance goal for all PRSUs granted in 2009 was based on corporate income performance for 2009 at the threshold level for an award under ITW’s annual incentive plan (80% of the Company’s planned 2009 income from continuing operations based on the annual plan approved by the Board of Directors). Due to the inability to reasonably set income performance goals in the extremely difficult business conditions present at the time of grant, the measure of income performance was limited to 2009 rather than for the three-year term of the PRSUs.

 

As reflected in the table on page 26 corporate income achievement for 2009 as a percent of 2009 annual plan income from continuing operations was 81.2%, after a downward adjustment by the Compensation Committee. As this exceeds the threshold level of 80%, the Compensation Committee determined that the income element of the performance goal had been met. The PRSU awards will therefore vest upon the executives’ fulfillment of the three-year service element of the award.

Performance Goal Changes for 2010

 

For 2010, the performance goal for the PRSU portion of the annual equity award will be based on cumulative EPS from continuing operations over a three-year performance period based on a sliding scale. The target is $6.50 cumulative EPS over the three-year performance period. If less than $4.50 cumulative EPS is achieved, none of these PRSUs will vest. If EPS growth is at or above the $4.50 threshold but below the $6.50 target, a portion of the awards will vest in proportion to the level of EPS achieved.

 

For 2010, the BGIP was renamed the Company-wide Growth Plan, or “CGP”, and the form of the award was changed to cash as originally intended. The performance goal for the 2010 CGP cash grant will be based 50% on revenue growth and 50% on average return on invested capital over a three-year performance period.

 

Timing of Long-Term Incentive Awards

 

The Compensation Committee meets in February of each year to consider and act with respect to long-term incentive awards for the executive officers for that fiscal year. The Compensation Committee’s February meeting follows the Company’s public release of its earnings results for the recently completed fiscal year. The Compensation Committee acts in compliance with the ITW 2006 Stock Incentive Plan, including the requirement that stock options may not be granted at less than 100% of the fair market value of ITW’s common stock on the date of grant. The exercise price of the awards granted at that meeting is based on the closing price of ITW’s stock on that date. We do not time grants for the purpose of enhancing the value of executive compensation.

 

Perquisites & Other Benefits

 

In general, we do not provide perquisites to our named executive officers that are not available to other employees. In 2008, however, we did provide reimbursement of up to $7,500 per year for financial, tax and estate planning services. This was taxable to the extent required by the Internal Revenue Service (“IRS”). These benefits were discontinued in 2009. No named executive officer received in excess of $10,000 in perquisites during 2009, so no perquisites are disclosed in the Summary Compensation Table.

 

Stock Ownership Guidelines

 

We believe that stock ownership is important because it links the interests of Company management and directors with those of our stockholders. Because of the importance of stock ownership, the Board of Directors and the Compensation Committee have adopted stock ownership guidelines for executive officers and directors that they and we believe are appropriate, reasonable and attainable given their responsibilities and compensation levels. As mentioned above, stock ownership relative to the guidelines is one of the factors considered in determining individual stock option awards. The recommended guidelines for stock ownership as a multiple of executive officers’ base pay salaries and of directors’ annual retainers are as follows: chief executive officer, five times; vice chairmen and executive vice presidents, three times; senior vice presidents, two times; vice presidents, one time; and non-employee directors, four times. The Compensation Committee recommends that an executive officer or non-employee director achieve the applicable ownership level within five years. The achievement of these guidelines is reviewed annually. All named executive officers and directors who have been in their positions for five or more years have either satisfied or exceeded the applicable stock

ownership guideline. We have a policy against options trading and short sales of ITW stock that applies to all recipients of Company equity-based grants (which group includes key employees and all officers and directors) and against any trading in derivatives linked to ITW stock that applies to all Company senior executive officers and directors.

 

Financial Restatements

 

We do not have a policy beyond the requirements of the Sarbanes-Oxley Act of 2002 to retroactively adjust compensation in the event of a restatement of financial or other performance results. We believe that this issue is best addressed when the need actually arises, taking into consideration the specific facts regarding the restatement.

 

Deductibility

 

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to the CEO and certain other executive officers employed at year-end. Certain performance-based compensation and deferred compensation are not included in compensation for purposes of the limit. The Compensation Committee recognizes its obligation to reward performance that increases stockholder value and exercises its discretion in determining whether or not to conform our executive compensation plans to the approach provided for in the Internal Revenue Code.

 

Potential Payments upon Termination or Change in Control

 

We do not have any plans or agreements that are specific and unique to executive officers regarding termination of employment or a change in control of the Company. However, we do have provisions contained in our pension plans, the 1996 and 2006 ITW Stock Incentive Plans, the Executive Incentive Plan, and the ECRIP that provide for retirement benefits, immediate vesting of unvested stock options and cash payouts of restricted stock and performance units in the event of a change in control or certain termination events. You can find further detail below under “Executive Compensation — Potential Payments Upon Termination or Corporate Change” on page 41.

 

This section of the proxy statement provides information regarding the compensation of our named executive officers.

 

Summary Compensation Table

 

 

 

 

 

 

Footnote 4 Table

 

 

 

Grants of Plan-Based Awards

 

The table below provides information regarding plan-based awards granted to our named executive officers during fiscal 2009 under the Executive Incentive Plan and the 2006 Stock Incentive Plan.

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End 2009

 

This table sets forth details, on an award-by-award basis, regarding the outstanding equity awards held by each of the named executive officers as of December 31, 2009.

 

 

 

 

Option Exercises and Stock Vested

 

This table provides information for each named executive officer concerning the exercise of stock options during fiscal 2009. The value realized upon the exercise of options is calculated using the difference between the option exercise price and the market price at the time of exercise multiplied by the number of shares underlying the option.

 

 

Pension Benefits

 

The following table provides information regarding participation by the named executive officers in pension benefit plans through our financial statement measurement date of December 31, 2009. Other than Mr. Flaum, no payments were made to a named executive officer under the plans in 2009.

 

 

 

ITW Retirement Accumulation Plan

 

We maintain the ITW Retirement Accumulation Plan (the “Pension Plan”) for the benefit of eligible employees of participating U.S. business units to provide a portion of the income necessary for retirement. The Pension Plan was closed to new entrants effective January 1, 2007. The Pension Plan is structured as a “pension equity plan” under which a participant accumulates certain percentages for each year during his or her years of plan participation. The accumulated percentages (from both columns shown below), when multiplied by final average annual pay (generally, salary and executive incentive payable in the years from the highest five out of the last ten complete calendar years of service), produce an amount that can be received as a lump sum payment or an actuarially equivalent lifetime annuity. For each year of credited service after December 31, 2000, percentages are structured as follows:

 

 

 

The Pension Plan’s normal retirement age is the later of age 65 or the fifth anniversary of employment if the participant was hired after age 60. A Pension Plan participant is vested after three years of employment.

 

Prior to 2001, the Pension Plan operated under a traditional annuity formula (a normal retirement benefit equal to 1% of final average pay and 0.65% of such pay in excess of covered compensation for each of the first 30 years of credited service plus 0.75% of average pay for any additional years). Accrued benefits as of December 31, 2000 under the traditional annuity formula were converted to an initial pension equity percentage by calculating the lump sum value of the normal retirement annuity and dividing by the average annual pay at that time. Anyone who had participated in the Pension Plan for five years as of December 31, 2000 and whose age plus vesting service equaled at least 50 years was entitled to additional pension equity credits of 4% of final average pay per year for up to 15 years of credited service.

 

As part of the transition to the pension equity formula, anyone who participated in the Pension Plan as of December 31, 2000, had at least five years of vesting service and had attained age 50 by that date, was entitled to a benefit under the pre-2001 formula if that benefit was more valuable than the benefits calculated under the new formula.

 

The Pension Plan adopted in 2001 does not provide for a specific early retirement age but, once a participant is vested, he or she can terminate employment and receive the lump sum

computed under the above formula or an actuarially equivalent immediate annuity benefit. The pre-2001 Pension Plan provided that upon attaining age 55 with at least 10 years of service, a participant could elect an early retirement pension. If the sum of the participant’s age and service at early retirement was at least 90, the portion of the benefit that is based solely on total average pay would not be reduced; otherwise, that portion would be reduced at the rate of 0.25% for each month early retirement occurred before the normal retirement date. The portion of the pre-2001 formula that was based on pay in excess of covered compensation was subject to reductions of 1/180th for each of the first 60 months prior to the normal retirement date and 1/360th for each additional month. Any lump sum elected under the pre-2001 formula would be computed as the actuarial present value of an early retirement benefit commencing no earlier than age 62. Messrs. Hansen, Flaum and Gresh are subject to alternative calculations under the pre-2001 Pension Plan formula.

 

Nonqualified Pension Plan

 

The Nonqualified Pension Plan is maintained to make up for benefits that cannot be paid under the tax-qualified Pension Plan due to Internal Revenue Code limitations on the amount of compensation that may be considered and the amount of benefit that may be payable. The Company has not considered granting additional years of service to executive officers under the plan and, therefore, does not currently have a policy on such grants. For the most part, the Nonqualified Pension Plan uses the same formulas and other computation elements as the Pension Plan with certain exceptions, including the following:

 

1. The Pension Plan uses net compensation after deferrals under the current ECRIP and the Nonqualified Pension Plan uses total eligible compensation (generally salary and non-equity incentive compensation).

 

2. The Nonqualified Pension Plan provides that a participant who leaves the Company, other than upon retirement, will forfeit any plan benefits based on eligible compensation above the maximum amount ($245,000 in 2009) that may be recognized under a tax-qualified plan.

 

3. In addition to the annuity and lump sum options available under the Pension Plan, a participant in the Nonqualified Pension Plan may elect to receive fixed monthly installments over 2 to 20 years.

Nonqualified Deferred Compensation

 

The following table sets forth information regarding participation by the named executive officers in the ECRIPs during fiscal year 2009. Other than Mr. Flaum, who retired on July 1, 2009 and therefore began receiving payments according to plan provisions and his pre-determined distribution elections, there were no withdrawals by, or distributions to, a named executive officer under the ECRIP in 2009.