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

 

Notice of Annual Meeting of Stockholders

Friday, May 8, 2009
3:00 P.M.

 

The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60603

 

 

ITW is holding its 2009 Annual Meeting for the following purposes:

 

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

 

 

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 2009 and AGAINST the stockholder proposal, if presented at the meeting.

 

Only stockholders of record at the close of business on March 10, 2009 are entitled to vote.

 

We have elected to furnish materials for our 2009 Annual Meeting of Stockholders through the Internet. We believe the use of the United States Securities and Exchange Commission (the “SEC”) e-proxy rule will expedite stockholders’ receipt of our 2009 Proxy Statement and 2008 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 25, 2009

 

Illinois Tool Works Inc.

 

Proxy Statement

Table of Contents

 

 

 

In accordance with rules and regulations adopted by the SEC, instead of mailing a printed copy of our proxy materials, including our annual report to stockholders, to each stockholder of record, we may now generally furnish proxy materials, including our annual report to stockholders, to our stockholders on 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. 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:

 

 

Who may vote?

 

Stockholders at the close of business on March 10, 2009, the record date, may vote. On that date, there were 499,198,657 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 8, 2009.

 

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 6, 2009 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 Marvin D. Brailsford, Susan Crown and Harold B. Smith 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. Brailsford and Smith.

 

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 13. Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on the election of directors, even if they do not receive voting instructions from you; therefore, no broker non-votes will occur.

 

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.

 

Stockholder Proposal Urging the Board of Directors to Seek Stockholder Approval of Any Future Extraordinary Retirement Benefits for Senior Executives:  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 the 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 2010 Annual Meeting, a stockholder proposal must be received no later than November 25, 2009. 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 2010 Annual Meeting. We must receive your proposal in writing on or after January 8, 2010, but no later than February 7, 2010. 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 2010 Annual Meeting, our Secretary must receive your written nomination on or after January 8, 2010, but no later than February 7, 2010. 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 Candidates” on page 13.

 

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 ten 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. Each director will serve until the May 2010 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed.

 

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. The nominees have provided the following information about themselves:

 

 

ITW’s Board of Directors met six times during 2008. 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 each of the Board of Directors’ standing committees rotate as the Chairman of executive sessions of the independent directors. 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. ITW encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2008, 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 attended our 2008 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. The Committee also is responsible for the integrity of ITW’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 ITW’s internal audit function. Additional information on the Committee and its activities is set forth in the “Audit Committee Report” on page 43.

 

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.

 

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee has engaged Frederick W. Cook & Co., an independent consultant (“Cook”), to provide an independent and objective assessment of the design and award levels under the ITW 2006 Stock Incentive Plan. Cook was asked to review materials relevant to the overall compensation of our executives and to meet with our management in order to gain strategic insight into ITW’s compensation programs. On a limited basis, ITW management has engaged Hewitt Associates LLC to provide competitive market data (including information with respect to ITW’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” on page 19.

 

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 evaluation of the Board and management; and makes recommendations as to Board committees and Board size. See “Corporate Governance Policies and Practices — Director Candidates” 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 ITW’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 ITW globally.

 

General

 

We have long believed that good corporate governance is important to assure that ITW 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, ITW’s Corporate Governance Guidelines, ITW’s Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees) and ITW’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 or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to the Independent Directors c/o the Corporate Secretary at 3600 West Lake Avenue, Glenview, IL, 60026.

 

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 ITW’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 ITW (directly or as a partner, stockholder or officer of an organization that has a material relationship with ITW).

 

The Board has determined that each of the current directors standing for re-election, except David B. Speer, has no material relationship with ITW other than as a director and is independent within the meaning of ITW’s Categorical Standards for Director Independence and the listing standards of the NYSE. Mr. Michael J. Birck, whose term as director expired on May 2, 2008, was also determined by the Board to be independent during the term of his directorship. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Mr. Aldinger served as a director of a company with which we conduct business; (2) Ms. Crown and Messrs. McCormack and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which ITW has a commercial banking relationship as described under “Ownership of ITW Stock — Other Principal Stockholders” on page 18; (3) Ms. Crown has an

indirect interest in a company with which we conduct business; and (4) Ms. Strobel serves as a director of a company with which we conduct business. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of the directors.

 

Director Candidates

 

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 ITW’s by-laws, see “Questions and Answers — How do I nominate a director?” on page 6.

 

Our directors play a critical role in guiding ITW’s strategic direction and oversee the management of ITW. 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. 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 ITW.

 

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).

 

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 ITW 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 within 90 days of such annual meeting. At our 2008 Annual Meeting, each director received a majority of the votes cast for his or her election.

 

Annual Retainer and Chair Fees

 

The annual 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.

 

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 the Stock Incentive Plan), with any fractional shares paid in cash.

 

ITW Common Stock

 

ITW grants stock to its non-employee directors under the Stock Incentive Plan, which links this element of compensation to our long-term performance. Under the current director compensation program, non-employee directors receive an annual stock grant equivalent in value to approximately $30,000. On February 8, 2008, each non-employee director was granted 618 shares of stock. On February 13, 2009, each non-employee director was granted 854 shares of stock.

Phantom ITW Stock

 

To tie a further portion of their compensation to our long-term performance, non-employee directors of ITW 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 2008

 

The following table summarizes the compensation for our directors who served during 2008.

 

 

 

 

Directors and Executive Officers

 

The following table shows how much ITW common stock the directors, the named executive officers, and all directors and executive officers as a group beneficially owned as of December 31, 2008. The “named executive officers” are our Chief Executive Officer, our Chief Financial Officer, and 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). The “percent of class” calculation is based on 499,114,971 shares of ITW common stock outstanding as of December 31, 2008.

 

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, 2008. 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, 2008, the only stockholders other than a director that we know to be a beneficial owner of more than 5% of ITW common stock. We maintain a commercial banking relationship with The Northern Trust Company and its wholly-owned subsidiaries. The Northern Trust Company is a wholly-owned subsidiary of Northern Trust Corporation. Susan Crown, Robert C. McCormack and Harold B. Smith, directors of ITW, are also directors of Northern Trust Corporation and The Northern Trust Company. The commercial banking relationship between ITW and The Northern Trust Company may involve, but is not strictly limited to, the following services: creating and maintaining deposit accounts, credit services, investment banking services, payment and collection services, trade services, credit enhancement or payment guaranty, acting as agent or fiduciary, consulting services, risk management services, and broker dealer services. In addition, The Northern Trust Company serves as the trustee under ITW’s principal pension plans. The banking and trustee relationships with The Northern Trust Company are conducted in the ordinary course of business on an arms-length basis. Banking, investment management, trustee and other administrative fees (including share repurchase fees) paid to The Northern Trust Company by ITW were approximately $2.4 million in 2008.

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that ITW’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 2008 and written representations from executive officers and directors, we believe that all filing requirements were met during 2008.

 

Introduction

 

ITW emphasizes a total compensation approach in establishing individual executive compensation levels, with each element of compensation serving a specific purpose. ITW’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. ITW retains the flexibility to recognize and reward superior company, business unit and individual performance by differentiating the cash incentive and equity awards made to individual executives. During 2008, we continued our review of our compensation program for senior management. We focused on establishing compensation structures and the relative weightings for base salary, annual cash incentives, and longer-term incentives that meet the objectives of being both performance-based and market competitive in delivering total compensation.

 

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

 

We have 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:

 

 

For 2008, the 18 companies comprising the peer group were:

 

 

The nature of ITW’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.

 

Management’s Contributions to Our Growth

 

ITW’s management structure is decentralized and puts emphasis on 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

 

ITW’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, as 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. Using the median as a general reference provides an appropriate base salary that encourages solid performance year after year. 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 how base salary factors into achieving levels of total compensation.

 

The 2008 compensation program review followed the Compensation Committee’s approval in December 2007 of base salary increases that became effective in January 2008 for the CEO and for the other named executive officers. We have a common review date of January for base salary and incentive compensation opportunity changes for our senior executive officers. This process allows the Compensation Committee and the CEO to review base compensation and

discuss recommended changes in December considering individual contributions to overall financial and operating results for the year and to set objectives for the upcoming year.

 

In December 2007, the Compensation Committee noted that the 2007 base salary for the CEO and the base salaries for the other named executive officers were below the median of the peer group comparisons and approved base salary adjustments that became effective January 2008. These salary adjustments brought the base salaries of these executive officers closer to the median levels. The 2008 calendar year compensation for the named executive officers is disclosed in the Summary Compensation Table on page 29 of this proxy statement.

 

In response to the deteriorating economic environment our businesses faced in 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 management should be rewarded for contributions to our overall financial success measured by income growth of their business unit, their group or ITW, 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 growth (the “P” factor) and personal objectives (the “O” factor). For 2007, these factors were weighted equally. For 2008, the P factor weighting was changed to 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 income for operating executives was changed to 33% of corporate results and 67% of their respective businesses. These changes were intended to place greater emphasis on 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 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 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. Although we generally do not establish any specific target or prescribed value, comparisons are made to median annual cash incentive levels in the peer group compensation data. ITW’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. For the 2008 plan year, the award maximums were 150% for Mr. Kropp and 200% for the other named executive officers. Payments under the plan are made following the end of the fiscal year after approval by the Compensation Committee.

Both the P and O factors have a payout range of 0% to 100% of the maximum for the named executive officers. For the 2008 P factor, income was compared to the prior year (2007) to measure the percentage of increase. Participants begin to earn payment for the P factor once 80% of the applicable prior year income is achieved. At the 80% achievement level, the P factor award payout is 34% of the maximum payment. At the 100% achievement level, the payout is 75% of the maximum payment. For the named executive officers, a maximum P factor payout of 100% only occurs when 115% achievement of prior year income is reached.

 

The objectives for O factors are more subjective than the P factors. For 2008, Mr. Speer’s objectives were focused on succession planning, leadership development, acquisitions, divestitures, and a review of ITW’s strategy in emerging markets. For the other named executive officers, 2008 objectives were generally focused on leadership development, emerging market growth initiatives, acquisition integration and succession planning. Each individual objective is assigned a relative weighting. At the end of the year, each named executive officer submits a written self-appraisal and overall score of achievement. For the named executive officers, other than the CEO, the appraisals are reviewed by the CEO. The self-appraisal for the CEO is reviewed by the Compensation Committee. These reviews consider completion of objectives, relative weightings and the quality of the work performed. Therefore, an element of judgment is involved in assigning individual levels of achievement for the O factors. A distinguished level of achievement provides a maximum 100% payment.

 

The following payout grid was used to determine the P factor award component for 2008 (for example, 75% of the maximum P factor award would be paid if 2008 income from continuing operations performance was 100% of prior year results):

 

 

The 2008 P factors for Messrs. Speer and Kropp were entirely based on the year-over-year percentage of increase in corporate income from continuing operations. For the other named executive officers, the P factor was based 67% on the year-over-year percentage of increase of the operating income for their respective businesses and 33% on the year-over-year percentage of increase of corporate income from continuing operations. The following table

shows the respective earnings achieved in 2007 and 2008 considered in the determination of the P factor award for the named executive officers:

 

 

 

Based on the Compensation Committee’s review of the individual 2008 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: 88.8% for Mr. Speer; 97.0% for Mr. Kropp; 96.5% for Mr. Hansen; 85.5% for Mr. Flaum; and 100.0% for Mr. Zentmyer.

 

The total 2008 awards for the named executive officers ranged from 87.0% to 70.3% 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.

 

For 2009, for operating executives, emphasis will be placed on working capital goals in setting O factor goals. In addition, a change will be made in the calculation of the P factor for 2009. Instead of year-over-year increase in income, the basis for P factor award calculation will be income performance versus the annual plan for most of our businesses. This change acknowledges the extraordinarily difficult business environment in which many of our business units are currently operating and provides a real incentive to achieve plans that are realistic in today’s economic climate. For the CEO, named executive officers and other elected officers, the

P factor award maximum will be reduced from 100% to 53%. The award maximum will be achieved upon 100% attainment of income performance versus plan. The threshold payout will remain 34% upon 80% attainment of income performance versus plan. As a result, the P factor calculation for 2009 will be as follows:

 

 

 

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 have generally been made in the form of stock options and are granted to a relatively small number of executives whose positions can truly affect the company’s long-term performance. As described below, beginning in 2009, restricted stock units also constitute a portion of the stock-based incentive awards. The Compensation Committee considered the fact that the value of restricted stock units is more understandable and less volatile than that of stock options and that ITW was in a relatively small minority of companies who awarded only one type of grant under the stock incentive plan. The Committee consequently decided to add a restricted stock unit element to the plan grants. We continue to believe, however, that stock options are an effective incentive for participants on a long-term basis since the greater the increase in stock price, the greater the value of the option to the participant. If the price of ITW’s common stock falls below the grant price, the option has no value to the participant. Restricted stock units, therefore, will constitute only one-third of the total equity grant to our executives.

 

The Compensation Committee approves awards of stock options and restricted stock units to the named executive officers in conjunction with an annual equity award program review. Award amounts for the named executive officers, other than the CEO, are recommended by the CEO based on a number of factors, including the executive officer’s position, performance, and ability to influence ITW’s long-term growth and profitability over a period of years. The Compensation Committee also reviews the compensation values and types of equity awards for peer company positions, although it does not establish any specific target or prescribed values to be achieved in relation to the peer company data. The executive’s level of prior equity awards

and level of stock ownership relative to established stock ownership guidelines as described below are also considered in the review. Applying the same considerations, the Compensation Committee recommends to the independent directors for approval the number of stock options and restricted stock units to be awarded to the CEO.

 

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 ITW of non-qualified stock options outweigh the potential tax benefits to the named executive officers of incentive stock options. Restricted stock units 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 2008 stock options vest in equal installments over a four-year period ending in 2012. Restricted stock units generally vest in full three years from the date of grant. 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 restricted stock units become vested and payable in cash. The Compensation Committee, in its sole discretion, may deem a stock option or restricted stock unit award to be immediately forfeited if the recipient is terminated for cause (as defined by the Committee), competes with ITW, or engages in conduct adversely affecting ITW.

 

At its February 2008 meeting, the Compensation Committee approved stock option awards to executive officers and certain other key employees under the provisions of the ITW 2006 Stock Incentive Plan. Stock options granted in 2008 to the named executive officers are shown in the “Grants of Plan-Based Awards” table on page 31.

 

In our 2008 compensation review for senior management, we focused our analysis on our long-term incentive program with the objective of ensuring that our structure is both performance based and market competitive. As described under “Board of Directors and Its Committees — Compensation Committee,” our Compensation Committee engaged Cook to assist in this analysis. As a result of our review, we have adopted a portfolio approach to our long-term incentive rewards program that provides for targeted performance goals at both the Company and the business unit level. Performance metrics chosen are those that are critical to ITW’s long-term success, such as revenue and income growth. We expect that using performance metrics will promote longer-term considerations in executive decision making. The value of the annual equity award for senior executives (which had been 100% stock options) has been split into two award types: two-thirds will remain in the form of stock options; and the other one-third will be in the form of a full-value equity award.

 

In addition to changing the mix of the annual equity award, the Business Growth Incentive Plan (the “BGIP”) was created in 2009. The BGIP is a mid-term incentive plan with three-year performance cycles and was created to incentivize our line executives to focus on a time horizon longer than one year using metrics under their control. 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 is 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.

 

For 2009, both the full-value equity award and the mid-term incentive plan are in the form of qualifying (performance based) restricted stock units. Both awards have a three-year cliff vesting requirement. In addition, for the CEO and the other named executive officers, these awards have performance goals that have been set at the beginning of the performance period. The performance goal for these awards is based on corporate income performance for 2009 at the threshold level for an award under ITW’s annual incentive plan (80% of ITW’s planned 2009 income from continuing operations based on the annual plan approved by the Board of Directors). If either the vesting requirement or the performance goal is not reached, the award will be forfeited.

 

Rather than the number of shares granted, which can fluctuate widely in value, we will be emphasizing the value of the grants delivered as the basis for determining the award amounts. The mix of the components of the program will vary based on level of responsibility. For the CEO and the other named executive officers, a majority of the long-term incentive compensation will continue to be delivered in the form of stock options. All of these awards will be made pursuant to the ITW 2006 Stock Incentive Plan. At its February 2009 meeting, the Compensation Committee granted awards, consisting of stock options and qualifying restricted stock units, having the following values on the grant date, to the named executive officers who are serving in 2009:

 

 

Timing of Long-Term Incentive Awards

 

The Compensation Committee currently 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 ITW’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 was 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 the reimbursement of up to $7,500 per year for financial, tax and estate planning services. This is 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 2008, 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 ITW’s 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 do not have a policy regarding hedging the economic risk of this ownership.

 

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 or certain payments to participants in those plans 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 37.

 

This section of the proxy statement provides information regarding the compensation of our named executive officers. Each of the following tables reflects the two-for-one split of our common stock effected on May 18, 2006.

 

Summary Compensation Table

 

 

 

Footnote 2 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 2008 under the Executive Incentive Plan and the 2006 Stock Incentive Plan.

 

 

Outstanding Equity Awards at Fiscal Year-End 2008

 

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, 2008. As of that date, there were no unvested stock awards held by any executive officer; however, outstanding option awards are set forth below.

 

 

 

Option Exercises and Stock Vested

 

This table provides information for each named executive officer concerning the exercise of stock options during fiscal 2008. No named executive officer had any unvested restricted stock in 2008. 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, 2008. No payments were made to a named executive officer under the plans in 2008.

 

 

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 latter 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 Zentmyer 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. ITW 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 ITW, other than upon retirement, will forfeit any plan benefits other than those attributable to any deferred compensation that reduces Pension Plan considered compensation below the maximum amount ($230,000 in 2008) 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 2008. There were no withdrawals by, or distributions to, a named executive officer under the ECRIP in 2008.