The Scotts Miracle-Gro Company

Proxy Statement for 2010 Annual Meeting of Shareholders

 

 

14111 Scottslawn Road

Marysville, Ohio 43041

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held Thursday, January 21, 2010

 

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The Scotts Miracle-Gro Company (the “Company”) will be held at The Berger Learning Center, 14111 Scottslawn Road, Marysville, Ohio 43041, on Thursday, January 21, 2010, at 9:00 A.M., Eastern Time (the “Annual Meeting”), for the following purposes:

 

 

The Proxy Statement accompanying this Notice of Annual Meeting of Shareholders describes each of these items in detail. The Company has not received notice of any other matters that may be properly presented at the Annual Meeting.

 

Only shareholders of record at the close of business on Wednesday, November 25, 2009, the date established by the Company’s Board of Directors as the record date, are entitled to receive notice of, and to vote at, the Annual Meeting.

 

On or about December 11, 2009, the Company will mail to shareholders either: (1) a copy of the accompanying Proxy Statement, a form of proxy and the Company’s 2009 Annual Report or (2) a Notice of Internet Availability of Proxy Materials, which will indicate how to access the Company’s proxy materials on the Internet.

 

Your vote is very important. Please vote as soon as possible even if you plan to attend the Annual Meeting.

 

By Order of the Board of Directors,

 

James Hagedorn
Chief Executive Officer

and Chairman of the Board

 

December 11, 2009

 

Proxy Statement for the
Annual Meeting of Shareholders of

THE SCOTTS MIRACLE-GRO COMPANY

To Be Held on Thursday, January 21, 2010

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

14111 Scottslawn Road
Marysville, Ohio 43041

 

 

PROXY STATEMENT

 

for

 

Annual Meeting of Shareholders

to be held on Thursday, January 21, 2010

 

 

GENERAL INFORMATION ABOUT VOTING

 

This Proxy Statement, along with the form of proxy, are being furnished in connection with the solicitation of proxies, on behalf of the Board of Directors of The Scotts Miracle-Gro Company (together with its corporate predecessors, as appropriate, the “Company”), for use at the Annual Meeting of Shareholders of the Company (the “Annual Meeting”) to be held at The Berger Learning Center, 14111 Scottslawn Road, Marysville, Ohio 43041, on Thursday, January 21, 2010, at 9:00 A.M., Eastern Time, and at any adjournment or postponement thereof. Our telephone number is (937) 644-0011 should you wish to obtain directions to our corporate offices in order to attend the Annual Meeting and vote in person. Directions to our corporate offices can also be found on the outside back cover page of this Proxy Statement.

 

Only holders of record of the Company’s common shares, without par value (the “Common Shares”), at the close of business on Wednesday, November 25, 2009 (the “Record Date”) are entitled to receive notice of and to vote at the Annual Meeting. As of the Record Date, there were 65,980,395 Common Shares outstanding. Holders of Common Shares as of the Record Date are entitled to one vote for each Common Share held. There are no cumulative voting rights in the election of directors.

 

This year, the Company is furnishing proxy materials over the Internet to a number of its shareholders as permitted under the rules of the Securities and Exchange Commission (the “SEC”). Under these rules, many of the Company’s shareholders will receive a Notice of Internet Availability of Proxy Materials instead of a paper copy of the Notice of Annual Meeting of Shareholders, this Proxy Statement and the Company’s 2009 Annual Report. The Notice of Internet Availability of Proxy Materials contains instructions on how to access those documents over the Internet and how shareholders can receive a paper copy of the Company’s proxy materials, including the Notice of Annual Meeting of Shareholders, this Proxy Statement, the Company’s 2009 Annual Report and a form of proxy. All shareholders who do not receive a Notice of Internet Availability of Proxy Materials will receive a paper copy of the proxy materials by mail. The Company believes this new process will conserve natural resources and reduce the costs of printing and distributing proxy materials. Shareholders who receive a Notice of Internet Availability of Proxy Materials are reminded that the Notice is not itself a proxy card.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on January 21, 2010: The Notice of Annual Meeting of Shareholders, Proxy Statement and 2009 Annual Report are available at www.proxyvote.com. At www.proxyvote.com, shareholders can view the proxy materials, cast their vote and request to receive proxy materials in printed form by mail or electronically by e-mail on an ongoing basis.

 

If you received a paper copy of the proxy materials by mail, a form of proxy for use at the Annual Meeting is included. You may ensure your representation at the Annual Meeting by completing, signing, dating and promptly returning the form of proxy. A return envelope, which requires no postage if mailed in the United States, has been provided for your use. Alternatively, shareholders may transmit their voting

instructions electronically via the Internet or by using the toll-free telephone number stated on the form of proxy or the Notice of Internet Availability of Proxy Materials. The deadline for transmitting voting instructions electronically via the Internet or telephonically is 11:59 P.M., Eastern Time, on January 20, 2010. The Internet and telephone voting procedures are designed to authenticate shareholders’ identities, allow shareholders to give their voting instructions and confirm that such voting instructions have been properly recorded.

 

If you are a registered shareholder, you may revoke your proxy at any time before it is actually voted at the Annual Meeting by giving written notice of revocation to the Corporate Secretary of the Company, by revoking via the Internet site, by using the toll-free telephone number stated on the form of proxy or the Notice of Internet Availability of Proxy Materials and electing revocation as instructed or by attending the Annual Meeting and giving notice of revocation in person. You may also change your vote by choosing one of the following options: (1) executing and returning to the Company a later-dated form of proxy; (2) voting in person at the Annual Meeting; (3) submitting a later-dated electronic vote through the Internet site; or (4) voting by telephone at a later date by using the toll-free telephone number stated on the form of proxy or the Notice of Internet Availability of Proxy Materials. Attending the Annual Meeting will not, in and of itself, constitute revocation of a previously-appointed proxy.

 

If you hold your Common Shares in “street name” with a broker/dealer, financial institution or other nominee or holder of record, you are urged to carefully review the information provided to you by the holder of record. This information will describe the procedures you must follow in order to instruct the holder of record how to vote the “street name” Common Shares and how to revoke any previously-given voting instructions. If you hold your Common Shares in “street name” and do not provide voting instructions to your broker/dealer within the required time frame before the Annual Meeting, your Common Shares will not be voted by the broker/dealer for the election of directors or other non-routine matters but the broker/dealer will have the discretion to vote your Common Shares on routine matters, such as the ratification of the selection of the Company’s independent registered public accounting firm.

 

The Company will bear the costs of soliciting proxies on behalf of the Board of Directors and tabulating your votes. The Company has retained Broadridge Financial Solutions, Inc. to assist in distributing these proxy materials. Directors, officers and regular employees of the Company, personally, by telephone, by e-mail or otherwise, may solicit your votes without additional compensation. If you provide voting instructions through the Internet, you may incur costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, which the Company will not reimburse. The Company will reimburse its transfer agent, Wells Fargo Shareholder Services, as well as broker/dealers, financial institutions and other custodians, nominees and fiduciaries for forwarding proxy materials to shareholders, according to certain regulatory fee schedules.

 

If you participate in The Scotts Company LLC Retirement Savings Plan (the “RSP”) and Common Shares have been allocated to your account in the RSP, you will be entitled to instruct the trustee of the RSP how to vote such Common Shares. You may receive your form of proxy with respect to your RSP Common Shares separately. If you do not give the trustee of the RSP voting instructions, the trustee will not vote such Common Shares at the Annual Meeting.

 

If you participate in The Scotts Miracle-Gro Company Discounted Stock Purchase Plan (the “Discounted Stock Purchase Plan”), you will be entitled to vote the number of Common Shares credited to your custodial account (including any fractional Common Shares) on any matter submitted to the Company’s shareholders for consideration at the Annual Meeting. If you do not vote or grant a valid proxy with respect to the Common Shares credited to your custodial account, those Common Shares will be voted by the custodian under the Discounted Stock Purchase Plan in accordance with any stock exchange or other rules governing the custodian in the voting of Common Shares held for customer accounts.

 

Under the Company’s Code of Regulations, the presence, in person or by proxy, of the holders of a majority of the outstanding Common Shares entitled to vote is necessary to constitute a quorum for the transaction of business at the Annual Meeting. Proxies reflecting abstentions are counted for purposes of determining the presence or absence of a quorum. Broker non-votes, where broker/dealers, who hold their

customers’ Common Shares in “street name,” sign and submit proxies for such Common Shares and fail to vote such Common Shares on some matters because they cannot vote on those matters without instructions from their customers, are counted for the purposes of establishing a quorum based solely on matters of a routine nature.

 

The results of shareholder voting at the Annual Meeting will be tabulated by or under the direction of the inspector of election appointed by the Board of Directors for the Annual Meeting. Common Shares represented by properly executed forms of proxy returned to the Company prior to the Annual Meeting or represented by properly authenticated voting instructions timely recorded through the Internet or by telephone will be counted toward the establishment of a quorum for the Annual Meeting even though they are marked “For All,” “Withhold All,” “For All Except,” “For,” “Against” or “Abstain” or are not marked at all.

 

Those Common Shares represented by properly executed forms of proxy, or properly authenticated voting instructions recorded through the Internet or by telephone, which are timely received prior to the Annual Meeting and not revoked, will be voted as specified by the shareholder. The Common Shares represented by valid proxies timely received prior to the Annual Meeting which do not specify how the Common Shares should be voted will be voted FOR the election as directors of the Company of each of the four nominees of the Board of Directors listed below under the caption “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS,” to the extent permitted by applicable law, and FOR the ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending September 30, 2010 as described below under the caption “PROPOSAL NUMBER 2 — RATIFICATION OF THE SELECTION OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.” No appraisal rights exist for any action proposed to be taken at the Annual Meeting.

 

There are currently 12 individuals serving on the Board of Directors, which is divided into three staggered classes, with each class serving three-year terms. The Class III directors hold office for terms expiring at the Annual Meeting, the Class I directors hold office for terms expiring in 2011 and the Class II directors hold office for terms expiring in 2012.

 

At the Annual Meeting, four Class III directors will be elected. Three of the four individuals nominated by the Board of Directors for election as directors are currently serving as Class III directors — Mark R. Baker, Joseph P. Flannery and Katherine Hagedorn Littlefield. Patrick J. Norton’s term as a Class III director will expire at the Annual Meeting. The Board of Directors has nominated Adam Hanft for election as a Class III director. The nomination of each individual was recommended to the Board of Directors by the Governance and Nominating Committee (the “Governance Committee”).

 

The individuals elected as Class III directors at the Annual Meeting will hold office for a three-year term expiring at the 2013 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified, or until their earlier death, resignation or removal. The individuals named as proxy holders in the form of proxy solicited by the Board of Directors intend to vote the Common Shares represented by the proxies received under this solicitation for the Board of Directors’ nominees, unless otherwise instructed on the form of proxy or through the telephone or Internet voting procedures. The Board of Directors has no reason to believe that any of the nominees will be unable or unwilling to serve as a director of the Company if elected. If any nominee who would have otherwise received the required number of votes becomes unable to serve or for good cause will not serve as a candidate for election as a director, the individuals designated as proxy holders reserve full discretion to vote the Common Shares represented by the proxies they hold for the election of the remaining nominees and for the election of any substitute nominee designated by the Board of Directors following recommendation by the Governance Committee. The individuals designated as proxy holders cannot vote for more than four nominees for election as Class III directors at the Annual Meeting.

 

The following information, as of November 25, 2009, with respect to the age, principal occupation or employment, other affiliations and business experience during the last five years of each director or nominee

for election or re-election as a director, has been furnished to the Company by each director or nominee. Except where indicated, each director or nominee has had the same principal occupation for the last five years.

 

Nominees Standing for Election or Re-Election to the Board of Directors

 

 

Patrick J. Norton’s term as a Class III director expires at the Annual Meeting. Mr. Norton, age 59, retired on January 1, 2003, after having served as Executive Vice President and Chief Financial Officer of The Scotts Company since May 2000 and as interim Chief Financial Officer of The Scotts Company from February 2000 to May 2000. From January 1, 2003 until January 31, 2006, Mr. Norton acted as an advisor for the Company, primarily for the Scotts LawnService^® business. Mr. Norton is a director of one other public company, Greif, Inc. Mr. Norton serves as an independent director for two privately-held companies: Svoboda Capital Partners LLC; and Optronics, Inc. He is also a director of Scotts Miracle-Gro Foundation.

 

On December 18, 2008, Arnold W. Donald notified the Company that he had decided not to stand for re-election to the Board of Directors. Mr. Donald’s term as a Class II director expired at the Annual Meeting of Shareholders held on January 22, 2009. On January 21, 2009, Karen G. Mills, who had served as a Class I director, notified the Company that she was resigning from the Board of Directors, effective immediately.

 

Recommendation and Vote

 

Under Ohio law and the Company’s Code of Regulations, the four nominees for election as Class III directors receiving the greatest number of votes FOR election will be elected as directors of the Company. Common Shares represented by properly executed and returned forms of proxy or properly authenticated voting instructions recorded through the Internet or by telephone will be voted FOR the election of the Board of Directors’ nominees unless authority to vote for one or more of the nominees is withheld. Common Shares as to which the authority to vote is withheld and Common Shares represented by broker non-votes will not be counted toward the election of directors or toward the election of the individual nominees of the Board of Directors. The individuals designated as proxy holders cannot vote for more than four nominees for election as Class III directors at the Annual Meeting.

 

YOUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF ALL OF THE ABOVE-NAMED CLASS III DIRECTOR NOMINEES.

 

In accordance with applicable sections of the New York Stock Exchange (“NYSE”) Listed Company Manual (the “NYSE Rules”), the Board of Directors has adopted Corporate Governance Guidelines to promote the effective functioning of the Board and its committees. The Board of Directors, with the assistance of the Governance Committee, periodically reviews the Corporate Governance Guidelines to ensure they are in compliance with all applicable requirements and address evolving corporate governance issues. The Corporate Governance Guidelines are posted under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and are available in print to any shareholder of the Company or other interested person who requests them from the Corporate Secretary of the Company.

 

In consultation with the Governance Committee, the Board of Directors has reviewed, considered and discussed relationships, both direct and indirect, of each current director and each nominee for election or re-election as a director with the Company and its subsidiaries, including those listed under “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,” and the compensation and other payments each director and each nominee has, both directly and indirectly, received from or made to the Company and its subsidiaries, in order to determine whether such director or nominee satisfies the applicable independence requirements set forth in the NYSE Rules and the rules and regulations of the SEC (the “SEC Rules”). Based upon the recommendation of the Governance Committee and its own review, consideration and discussion, the Board of Directors has determined that of the following current members of the Board of Directors satisfy such independence requirements and are, therefore, “independent” directors:

 

 

In addition, based upon the recommendation of the Governance Committee and its own review, consideration and discussion, the Board of Directors has determined that Adam Hanft, who has been nominated for election as a director of the Company at the Annual Meeting, satisfies the applicable independence requirements set forth in the NYSE Rules and the SEC Rules. Also, the Board of Directors determined that each of former directors Karen G. Mills and Arnold W. Donald satisfied the applicable independence requirements set forth in the NYSE Rules and the SEC Rules during their periods of service which ended on January 21, 2009 and January 22, 2009, respectively.

 

In determining that Mr. Hanft would qualify as an independent director if elected, the Board considered that the Company has paid Mr. Hanft or companies controlled by him less than $120,000 for service on the Company’s Innovation & Technology Advisory Board and other advisory services during the 2009 fiscal year. In determining that Ms. Mistretta qualifies as an independent director, the Board of Directors considered that Ms. Mistretta was employed by Russell Reynolds during a portion of the 2009 fiscal year and has since retired, and that the Company and its subsidiaries used Russell Reynolds for executive employment searches and paid Russell Reynolds less than $120,000 in the 2009 fiscal year.

 

In determining that Mr. Donald qualified and Mr. Norton qualifies as an independent director under the applicable NYSE Rules and SEC Rules, the Board of Directors considered that Mr. Donald had been and Mr. Norton is a director of Scotts Miracle-Gro Foundation, an Ohio non-profit corporation formed for charitable and educational purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “IRC”). The current primary activity of Scotts Miracle-Gro Foundation is to fund the “Miracle-Gro Cap Kids at COSI,” a program designed to provide academic and other support services to a select group of economically and socially disadvantaged students in the Columbus (Ohio) Public School District. In determining that Mr. Norton qualified as an independent director, the Board also considered the terms of a letter agreement with the Company, dated November 5, 2002, and amended on October 25, 2005, whereby Mr. Norton has continued to participate in the Company’s group medical and dental plans by personally paying the full premium associated with these plans under the prevailing annual COBRA rates. As such, Mr. Norton’s participation results in no incremental cost to the Company. Pursuant to the terms of the agreement, Mr. Norton is entitled to continue to so participate until his 65th birthday on November 19, 2015.

 

The Board of Directors determined that: (a) James Hagedorn is not independent because he is the Chief Executive Officer of the Company and beneficially owns more than 5% of the outstanding Common Shares; (b) Katherine Hagedorn Littlefield is not independent because she beneficially owns more than 5% of the outstanding Common Shares and is the sister of James Hagedorn; and (c) Mark R. Baker is not independent because he is the President and Chief Operating Officer of the Company.

 

The Board of Directors elected Carl F. Kohrt, Ph.D. to serve as the Lead Independent Director on January 22, 2009, upon the recommendation of the Governance Committee and with the support of management. Dr. Kohrt serves in this capacity at the pleasure of the Board of Directors and will continue to so serve until his successor is elected and qualified. As Lead Independent Director, Dr. Kohrt presides at the executive sessions of the non-management directors of the Company and of the independent directors of the Company.

 

As described below, the Company has a standing Governance Committee that has responsibility for, among other things, providing oversight on the broad range of issues surrounding the composition and operation of the Board of Directors, including identifying candidates qualified to become directors and recommending director nominees to the Board of Directors.

 

The Board of Directors, taking into account the recommendations of the Governance Committee, selects nominees to stand for election as directors. In considering candidates for the Board of Directors, the Governance Committee evaluates the entirety of each candidate’s credentials and does not have any specific eligibility requirements or minimum qualifications that candidates must meet. The Governance Committee may consider any factors it deems appropriate when considering candidates for the Board of Directors, including a candidate’s: judgment; functional skills; diversity; strength of character; experience with businesses and organizations of comparable size or scope; experience as an executive of, or advisor to, a publicly-traded or private company; international experience; experience and skill relative to other members of the Board of Directors; specialized knowledge or experience; and desirability of the candidate’s membership on the Board of Directors and any committees of the Board of Directors.

 

While, under the Corporate Governance Guidelines, in general, a director is not eligible to stand for re-election once he or she has reached the age of 72, the Governance Committee and the Board of Directors will review individual circumstances and may from time to time choose to renominate a director who is 72 or older. Although he is older than 72, the Board of Directors has chosen to nominate Joseph P. Flannery for re-election to the Board of Directors at the Annual Meeting because his expertise and knowledge make him a valuable candidate.

 

The Governance Committee considers candidates for the Board of Directors from any reasonable source, including current director, management and shareholder recommendations, and does not evaluate candidates differently based on the source of the recommendation. Pursuant to its written charter, the Governance Committee has the authority to retain consultants and search firms to assist in the process of identifying and evaluating director candidates and to approve the fees and other retention terms of any such consultant or search firm.

 

Shareholders may recommend director candidates for consideration by the Governance Committee by giving written notice of the recommendation to the Corporate Secretary of the Company. The recommendation must include the candidate’s name, age, business address and principal occupation or employment, as well as a description of the candidate’s qualifications, attributes and other skills. A written statement from the candidate consenting to serve as a director, if so elected, must accompany any such recommendation.

 

The Board of Directors believes it is important for shareholders of the Company and other interested persons to have a process pursuant to which they can send communications to the Board of Directors and its individual members, including the Lead Independent Director. Accordingly, shareholders and other interested persons who wish to communicate with the Board of Directors, the Lead Independent Director, the non-management directors as a group or any particular director may do so by addressing such correspondence to the name(s) of the specific director(s), to the “Lead Independent Director,” to the “Non-Management Directors” as a group or to the “Board of Directors” as a whole, and sending it in care of the Company to the

Company’s principal corporate offices at 14111 Scottslawn Road, Marysville, Ohio 43041. All such correspondence should identify the author as a shareholder or other interested person, explain such person’s interest and clearly indicate to whom the correspondence is directed. Correspondence marked “personal and confidential” will be delivered to the intended recipient(s) without opening. Copies of all correspondence will be circulated to the appropriate director or directors. There is no screening process in respect of communications from shareholders and other interested persons.

 

In accordance with applicable NYSE Rules and SEC Rules, the Board of Directors has adopted The Scotts Miracle-Gro Company Code of Business Conduct and Ethics, which is available under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company.

 

All of the employees of the Company and its subsidiaries, including executive officers, and all directors of the Company are required to comply with the Company’s Code of Business Conduct and Ethics. The Sarbanes-Oxley Act of 2002 and the SEC Rules promulgated thereunder require companies to have procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and to allow for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Company’s procedures for addressing these matters are set forth in the Code of Business Conduct and Ethics.

 

The Board of Directors held 13 regularly scheduled or special meetings during the Company’s fiscal year ended September 30, 2009 (the “2009 fiscal year”). Each incumbent member of the Board of Directors attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by the committee(s) of the Board of Directors on which he or she served, in each case during the period of the 2009 fiscal year that such individual served as a director, with the exception of Stephanie M. Shern.

 

Although the Company does not have a formal policy requiring members of the Board of Directors to attend annual meetings of the shareholders, the Company encourages all incumbent directors and director nominees to attend each such annual meeting. All of the 11 then incumbent directors and director nominees attended the Company’s last Annual Meeting of Shareholders held on January 22, 2009.

 

In accordance with the Corporate Governance Guidelines and applicable NYSE Rules, the non-management directors of the Company regularly meet in executive session (without management participation). In addition, the independent directors of the Company meet in executive session as matters appropriate for their consideration arise but, in any event, at least once a year.

 

The Board of Directors has five standing committees: (1) the Audit Committee; (2) the Compensation and Organization Committee; (3) the Finance Committee; (4) the Governance and Nominating Committee; and (5) the Innovation & Technology Committee.

 

The Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Audit Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website at http://investor.scotts.com and is available

in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company. At least annually, in consultation with the Governance Committee, the Audit Committee evaluates its performance, reviews and assesses the adequacy of its charter and recommends to the Board of Directors any proposed changes thereto as may be necessary or desirable.

 

The Audit Committee is responsible for: (1) overseeing the accounting and financial reporting processes of the Company, including the audits of the Company’s consolidated financial statements, (2) appointing, compensating and overseeing the work of the independent registered public accounting firm employed by the Company, (3) establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, auditing matters or other compliance matters, (4) assisting the Board of Directors in its oversight of: (a) the integrity of the Company’s consolidated financial statements; (b) the Company’s compliance with applicable laws, rules and regulations, including applicable NYSE Rules; (c) the independent registered public accounting firm’s qualifications and independence; and (d) the performance of the Company’s internal audit function, and (5) undertaking the other matters required by applicable SEC Rules and NYSE Rules. Pursuant to its charter, the Audit Committee has the authority to engage and compensate such independent counsel and other advisors as the Audit Committee deems necessary to carry out its duties.

 

The Board of Directors has determined that each member of the Audit Committee satisfies the applicable independence requirements set forth in the NYSE Rules and under Rule 10A-3 promulgated by the SEC under the Exchange Act. The Board of Directors believes each member of the Audit Committee is qualified to discharge his or her duties on behalf of the Company and its subsidiaries and satisfies the financial literacy requirement of the NYSE Rules. The Board of Directors has determined that Stephanie M. Shern qualifies as an “audit committee financial expert” as that term is defined in the applicable SEC Rules. With the exception of Stephanie M. Shern, none of the members of the Audit Committee serves on the audit committee of more than two other public companies. While Mrs. Shern serves on the Audit Committee of three other public companies, the Board of Directors has determined that such simultaneous service does not impair Mrs. Shern’s ability to effectively serve on the Company’s Audit Committee.

 

The Audit Committee met 11 times during the 2009 fiscal year.

 

The Audit Committee report relating to the Company’s 2009 fiscal year begins on page 75 of this Proxy Statement.

 

The Compensation and Organization Committee (the “Compensation Committee”) is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Compensation Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and is available in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company. At least annually, in consultation with the Governance Committee, the Compensation Committee evaluates its performance, reviews and assesses the adequacy of its charter and recommends to the Board of Directors any proposed changes thereto as may be necessary or desirable.

 

The Compensation Committee reviews, considers and acts upon matters concerning salary and other compensation and benefits of all executive officers and other key employees of the Company and its subsidiaries, including the executive officers named in the Summary Compensation Table for 2009 Fiscal Year (the “NEOs”). As part of this process, the Compensation Committee determines the general compensation philosophy applicable to these individuals. In addition, the Compensation Committee advises the Board of Directors regarding executive officer organizational issues and succession plans. The Compensation Committee also acts upon all matters concerning, and exercises such authority as is delegated to it under the provisions of, any benefit or retirement plan maintained by the Company, and serves as the committee administering The Scotts Miracle-Gro Company Amended and Restated 1996 Stock Option Plan (the “1996 Plan”), The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan (the “2003 Plan”), The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (the “2006

Plan”), The Scotts Company LLC Amended and Restated Executive Incentive Plan (the “EIP”) and the Discounted Stock Purchase Plan.

 

Pursuant to its charter, the Compensation Committee has the authority to retain special counsel, compensation consultants and other experts or consultants as it deems appropriate to carry out its functions and to approve the fees and other retention terms of any such counsel, consultants or experts. During the 2009 fiscal year, the Compensation Committee engaged an independent consultant from Frederic W. Cook & Co. (“Fred Cook & Co.”) to advise the Compensation Committee with respect to best practices and competitive trends in the area of executive compensation, as well as ongoing legal and regulatory considerations. The consultant provided guidance to assist the Compensation Committee in its evaluation of the compensation recommendations submitted by management with respect to the Chief Executive Officer (“CEO”), the NEOs and other key management employees. Fred Cook & Co. did not provide consulting services directly to management. The role of Fred Cook & Co. is further described in the section captioned “Our Compensation Practices — Role of Outside Consultants” within the Compensation Discussion and Analysis regarding executive compensation for the 2009 fiscal year beginning on page 28 of this Proxy Statement.

 

The Board of Directors has determined that each member of the Compensation Committee satisfies the applicable independence requirements set forth in the NYSE Rules and qualifies as an outside director for purposes of IRC §162(m) and as a non-employee director for purposes of Rule 16b-3 under the Exchange Act.

 

The Compensation Committee met ten times during the 2009 fiscal year.

 

The Compensation Discussion and Analysis regarding executive compensation for the 2009 fiscal year begins on page 19 of this Proxy Statement. The Compensation Committee Report relating to the Company’s 2009 fiscal year appears on page 38 of this Proxy Statement.

 

The Finance Committee is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Finance Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and is available in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company. At least annually, in consultation with the Governance Committee, the Finance Committee evaluates its performance, reviews and assesses the adequacy of its charter and recommends to the Board of Directors any proposed changes thereto as may be necessary or desirable.

 

The Finance Committee oversees the financial strategies and policies of the Company and its subsidiaries. In discharging its duties, the Finance Committee: (1) reviews investments, stock repurchase programs and dividend payments; (2) oversees cash management and corporate financing matters; and (3) oversees the Company’s acquisition and divestiture strategies and the financing arrangements related thereto.

 

The Finance Committee met five times during the 2009 fiscal year.

 

The Governance Committee is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Governance Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and is available in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company. At least annually, the Governance Committee evaluates its performance, reviews and assesses the adequacy of its charter and recommends to the Board of Directors any proposed changes thereto as may be necessary or desirable.

 

The Governance Committee recommends nominees for membership on the Board of Directors and policies regarding the composition of the Board of Directors generally. The Governance Committee also makes recommendations to the Board of Directors regarding committee selection, including committee chairs and rotation practices, the overall effectiveness of the Board of Directors and of management (in the areas of

Board of Directors relations and corporate governance), director compensation and developments in corporate governance practices. The Governance Committee is responsible for developing a policy with regard to the consideration of candidates for election or appointment to the Board of Directors recommended by shareholders of the Company and procedures to be followed by shareholders in submitting such recommendations, consistent with any shareholder nomination requirements which may be set forth in the Company’s Code of Regulations and applicable laws, rules and regulations. In considering potential nominees for election or appointment to the Board of Directors, the Governance Committee conducts its own search for available, qualified nominees and will consider candidates from any reasonable source, including shareholder recommendations. The Governance Committee is also responsible for developing and recommending to the Board of Directors corporate governance guidelines applicable to the Company and overseeing the evaluation of the Board and management.

 

The Board of Directors has determined that each member of the Governance Committee satisfies the applicable independence requirements set forth in the NYSE Rules.

 

The Governance Committee met five times during the 2009 fiscal year.

 

The Innovation & Technology Committee is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Innovation & Technology Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website located at http://investor.scotts.com and is available in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company.

 

The Innovation & Technology Committee assists the Board of Directors in providing counsel to the Company’s senior management regarding strategic management of global science, technology and innovation issues and acts as the Board of Directors’ liaison to the Company’s Innovation & Technology Advisory Board, a board of experts which assists in carrying out the work of the Innovation & Technology Committee.

 

The Innovation & Technology Committee met four times during the 2009 fiscal year.

 

The Compensation Committee is currently comprised of Thomas N. Kelly Jr., Joseph P. Flannery, Carl F. Kohrt, Ph.D. and Nancy G. Mistretta. During the 2009 fiscal year, each of Arnold W. Donald, Karen G. Mills and Alan H. Barry also served at various times on the Compensation Committee. With respect to the 2009 fiscal year and from October 1, 2009 through the date of this Proxy Statement, there were no interlocking relationships between any executive officer of the Company and any entity, one of whose executive officers served on the Company’s Compensation Committee or Board of Directors, or any other relationship required to be disclosed in this section under the applicable SEC Rules.

 

 

The Board of Directors believes that non-employee director compensation levels should be competitive with similarly situated companies and should encourage high levels of ownership of the Company’s Common Shares. Accordingly, at the direction of the Board of Directors, the Company engaged a third-party consultant from Towers Perrin to conduct a benchmark study of the compensation structure for the Company’s non-employee directors for the 2008 calendar year (the “2008 Study”). For purposes of the 2008 Study, Towers Perrin compared each element of the non-employee directors’ compensation against two groups of similarly situated companies:

 

 

The survey information was compiled from definitive proxy statement filings for the respective companies. Based on the 2008 Study, the average compensation level for the Company’s non-employee directors (including both the cash and equity-based compensation elements) was above the 75th percentile when compared to the above-mentioned groups of companies. The Board determined to maintain the same compensation structure for the 2009 calendar year, as described below, and the 2008 Study was not updated for the 2009 calendar year.

 

The compensation structure for non-employee directors is established on a calendar year basis. Based on the findings of the 2008 Study discussed above, the Board of Directors established the non-employee director compensation for the 2009 calendar year to reflect a combination of annual cash retainers and equity-based compensation granted in the form of deferred stock units (“DSUs”), as follows:

 

 

 

 

In addition to the above compensation elements, non-employee directors also receive reimbursement of all reasonable travel and other expenses of attending Board of Directors meetings or other Company-related travel.

 

For the 2009 calendar year, the equity-based compensation for non-employee directors was granted in the form of DSUs. Each whole DSU represents a contingent right to receive one full Common Share.

 

DSU grants for non-employee directors are typically approved by the Board of Directors at a meeting held on the date of the annual meeting of shareholders. The grant date is established as the first business day after the Board of Directors approves the grant. For calendar year 2009, DSUs were granted to the non-employee directors on January 23, 2009. In general, the DSUs granted to non-employee directors in calendar year 2009, including dividend equivalents converted to DSUs, vest on the third anniversary of the grant date, but are subject to earlier vesting or forfeiture in the event of death, disability or retirement. Subject to the terms of the 2006 Plan, whole vested DSUs will be settled in Common Shares and fractional DSUs will be settled in cash as soon as administratively practicable, but in no event later than 90 days, following the earliest to occur of: (i) termination; (ii) death; (iii) disability; or (iv) the fifth anniversary of the grant date. Upon a change in control of the Company, each non-employee director’s outstanding DSUs will vest on the date of the change in control and settle as described above. Until the DSUs are settled, a non-employee director has none of the rights of a shareholder with respect to the Common Shares underlying the DSUs other than with respect to the dividend equivalents.

 

Each DSU (including dividend equivalents converted to DSUs) is granted with a related dividend equivalent, which represents the right to receive additional DSUs in respect of dividends that are declared and paid in cash in respect of the Common Shares underlying the DSUs, during the period beginning on the grant date and ending on the settlement date. Such cash dividends are converted to DSUs based on the fair market value of Common Shares on the date the dividend is paid. Dividends declared and paid in the form of Common Shares are converted to DSUs in proportion to the dividends paid per Common Share.

 

For the 2009 calendar year, the non-employee directors had the option to elect, in advance, to receive up to 100% of their quarterly cash retainers in cash or fully-vested DSUs. If DSUs are elected, the non-employee director receives a grant equal to the number determined by dividing the chosen dollar amount by the closing price of the Common Shares on the applicable grant date. Subject to the terms of the 2006 Plan, whole vested DSUs will be settled in Common Shares and fractional DSUs will be settled in cash as soon as administratively practicable, but no later than 90 days, following the earliest to occur of: (i) termination; (ii) death; (iii) disability; or (iv) the fifth anniversary of the grant date. Upon a change in control of the Company, each non-employee director’s outstanding DSUs will settle as described above. Until the DSUs are settled, a non-employee director has none of the rights of a shareholder with respect to the Common Shares underlying the DSUs other than with respect to the dividend equivalents. None of the non-employee directors elected to defer any portion of their calendar 2009 cash retainer.

 

The following table sets forth the compensation awarded to, or earned by, each of the non-employee directors of the Company for the 2009 fiscal year. Neither Mr. Hagedorn, the Company’s Chief Executive Officer and Chairman of the Board of Directors, nor Mr. Baker, the Company’s President and Chief Operating Officer, received any additional compensation for their services as a director. Accordingly, Mr. Hagedorn’s and Mr. Baker’s compensation is reported in the section captioned “EXECUTIVE COMPENSATION” and is not included in the table below.

 

Non-Employee Director Compensation Table for 2009 Fiscal Year

 

 

 

 

										Aggregate Number of
		Number of Common								Common Shares
		Shares Subject to								Subject to Stock
		DSUs Granted in				Fair Value on				Awards Outstanding
Name		2009 Fiscal Year				Date of Grant				as of September 30, 2009*
Alan H. Barry			2,432			$	75,027				2,449
Joseph P. Flannery			3,601			$	120,021				6,151
William G. Jurgensen			2,053			$	63,335				2,067
Thomas N. Kelly Jr.			3,751			$	125,021				6,438
Carl F. Kohrt, Ph.D.			3,901			$	130,020				7,115
Katherine Hagedorn Littlefield			3,601			$	120,021				6,151
Nancy G. Mistretta			3,601			$	120,021				6,483
Patrick J. Norton			2,851			$	95,024				5,064
Stephanie M. Shern			3,751			$	125,021				6,767
John S. Shiely			3,001			$	100,023				5,680

 

 

 

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The purpose of this Compensation Discussion and Analysis (the “CD&A”) is to provide insight to our shareholders about the compensation philosophy and objectives, guiding principles, policies and practices, that have been adopted by the Company to guide our decision-making concerning executive compensation. The CD&A is organized into the following topical areas:

 

 

Simply stated, the culture of our Company is based on a strong bias for action aimed at delivering results. We value and recognize high performance and our compensation programs are structured to promote a pay-for-performance culture with significant emphasis on variable pay in the form of both short-term and long-term incentives.

 

Our compensation programs are designed to achieve the following objectives:

 

 

Management believes that flexibility and adaptability are key cultural attributes enabling the Company to maintain an edge in the competitive marketplace. The Company has adopted guiding principles as a framework for making compensation decisions, preserving the flexibility needed to respond to the competitive market for executive talent. Our guiding principles for compensation are as follows:

 

 

To best promote the objectives of our executive compensation program, the Company relies on a mix of five principal short-term and long-term compensation elements. For the 2009 fiscal year, the elements of executive compensation were as follows:

 

 

The Compensation Committee has oversight responsibility for all elements of compensation granted to Mr. Hagedorn, our CEO, and other key management employees, including the other NEOs listed in the Summary Compensation Table for 2009 Fiscal Year beginning on page 39 of this Proxy Statement. For each such NEO, the Compensation Committee typically reviews each element of compensation, as well as the relative mix or weighting of elements, on an annual basis.

 

Consistent with the Company’s performance-based pay philosophy, base salary is not intended to deliver the majority of the total compensation to any of the NEOs or other key management employees. However, base salary, which is the primary fixed element of total compensation, serves as the foundation of the total compensation structure since most of the variable compensation elements are linked directly or indirectly to the base salary level.

 

Base salaries of the NEOs are typically reviewed on an annual basis and compared against the median salaries of similar positions within the Compensation Peer Group. Individual base salaries may be higher or lower than the benchmark based on a subjective assessment of organizational and individual qualities and characteristics, including the strategic importance of the individual’s job function to the Company as well as an NEO’s experience, competency, skill level, overall contribution to the success of our business and potential to make significant contributions to the Company in the future.

 

For the 2009 fiscal year, all NEOs and other key management employees were eligible to participate in the EIP which is designed to:

 

 

The EIP provides annual cash incentive compensation opportunities based on various performance metrics related to the financial performance of the Company and its business units. An incentive target is established for each NEO as a percentage of base salary which may vary by position but is generally intended to approximate the market median for similar positions within the Compensation Peer Group. For the 2009 fiscal year, the incentive target for Mr. Hagedorn was set at 100% of base salary, the incentive target for Mr. Baker was set at 75% of base salary and the incentive target for all other NEOs was set at 60% of base salary. The Compensation Committee believes the incentive targets for Mr. Hagedorn, Mr. Baker and the other NEOs compare favorably with those of our Compensation Peer Group for similar positions.

 

The design and administration of the EIP are generally intended to qualify the underlying payouts as performance-based compensation for purposes of IRC §162(m) in order to maximize the tax deductibility of

such compensation for the Company. Accordingly, the Compensation Committee oversees the operation of the EIP, which oversight includes approving the plan design for each fiscal year as well as approving the performance objectives and payout targets.

 

Payouts under the EIP are subject to the Company’s maintaining compliance with the quarterly debt/EBITDA ratio (“Leverage Ratio”) requirement under the Company’s senior secured credit facilities. As a result, if the Company is not in compliance with the Leverage Ratio requirement at the end of any quarter, then all, or any portion of the payments otherwise earned under the EIP, will be suspended to the extent necessary to maintain compliance with the Leverage Ratio requirement. Although the Company has been and remains in compliance with the Leverage Ratio requirement under its senior secured credit facilities, the Compensation Committee believes this feature ensures that management continues to be aligned with the interests of all key stakeholders, including the Company’s creditors.

 

The EIP Performance Metrics:  The performance metrics and relative weightings chosen for the EIP in the 2009 fiscal year were designed to balance the entrepreneurial focus on individual business unit results with the overall Corporate level financial performance. As discussed below, the performance metrics and relative weightings for the NEOs under the EIP for the 2009 fiscal year differed based on each NEO’s primary span of control. For purposes of the EIP, the performance metrics are defined as follows:

 

 

Add:  non-cash expenses (depreciation, amortization and stock-based compensation)

 

Subtract:  capital expenditures

 

Adjust for (add/subtract):  change in working capital (changes in accounts receivable, inventory, prepaid and other current assets, less accounts payable and accrued liabilities)

 

 

The Compensation Committee believes that the performance metrics should not be influenced by currency fluctuations and, therefore, where applicable, the EIP metrics reflect currency conversions based on budgeted exchange rates set at a fixed point in time, which is in contrast to actual exchange rates employed for currency conversions used for external reporting. As a result, there could be a difference between the Company’s reported financial results and the amounts used for purposes of calculating incentive payouts under the EIP.

 

EIP Measures for Corporate Officers
Mr. Hagedorn and Mr. Evans

 

For the 2009 fiscal year, the incentive awards for Corporate level NEOs were based on three annual performance measures — adjusted net income, free cash flow and ROIC — each of which was calculated at the consolidated Corporate level. The Compensation Committee believes these measures reflect key value drivers of the business and align management with shareholder interests. As reflected in the table below, for each performance measure, achievement of pre-defined minimum, target and maximum performance goals would result in compensation payouts of 50%, 100% and 250% of the NEO’s target incentive opportunity for the 2009 fiscal year, respectively. Actual payouts for performance results between the pre-defined performance goals would be calculated on a straight-line basis.

 

The target performance goals chosen for the Corporate level NEOs were based on the Company’s operating plan for the 2009 fiscal year. The minimum performance goals were established at a level which

approximated the 2008 fiscal year actual results. The target performance goals, which establish the performance criteria to achieve a payout of 100%, were based on achieving an earnings per share level equivalent to the 2008 fiscal year actual results and the maximum performance goals were set at a level thought to reflect aggressive, but attainable growth. The Corporate level performance goals and actual performance results for the 2009 fiscal year (with dollars in millions) were:

 

Corporate

 

 

 

Note: The Compensation Committee approved a recommendation by management to apply a discretionary reduction to the weighted payout percentage for the 2009 fiscal year. This reduction was primarily instituted in order to reflect an equitable sharing between shareholders and management of the financial impact related to inventory write-downs attributable to the Company’s Global Professional segment that arose late in the 2009 fiscal year. These inventory write-downs were necessitated by a significant decline in the market pricing and demand for professional grass seed in North America.

 

EIP Measures for Business Unit Officers
Mr. Baker, Mr. Sanders and Mr. Lopez

 

For the 2009 fiscal year, the incentive awards for NEOs with responsibility for operating at least one business unit (each, a “Business Unit Officer”) were based on the Global Operations measurement which was a combination of Corporate level performance measures and Consolidated Operating Group performance measures. As reflected in the table below, for each performance measure, achievement of pre-defined minimum, target and maximum performance goals would result in incentive compensation payouts of 50%, 100% and 250% of the NEO’s target incentive opportunity for the 2009 fiscal year, respectively. Actual payouts for performance results between the pre-defined performance goals would be calculated on a straight-line basis.

 

The Corporate level performance goals for the Business Unit Officers were the same as the performance goals established for the Corporate level NEOs, as described above. The target performance goals chosen for the Consolidated Operating Group performance measures were based on the combined operating plan for all of the Company’s business units for the 2009 fiscal year. The minimum performance goals for the Consolidated Operating Group were established based on the 2008 fiscal year actual performance for each metric, adjusted to reflect the normalization of incentive payouts and the impact of certain non-recurring items. The target performance goals were established at a level that reflected historical growth rates for the respective business units and the maximum performance goals were set at levels thought to reflect aggressive, but attainable growth. The Business Unit Officer performance goals and actual performance results for the 2009 fiscal year (with dollars in millions) were:

Global Operations

 

Note: The Compensation Committee approved a recommendation by management to apply a discretionary reduction to the weighted payout percentage for the 2009 fiscal year. This reduction was primarily instituted in order to reflect an equitable sharing between shareholders and management of the financial impact related to inventory write-downs attributable to the Company’s Global Professional segment that arose late in the 2009 fiscal year. These inventory write-downs were necessitated by a significant decline in the market pricing and demand for professional grass seed in North America.

 

Long-term incentive compensation is an integral part of total compensation for Company executives and directly ties rewards to performance that is intended to create and enhance shareholder value. The Compensation Committee targets the grant value (equity award value) of long-term equity-based incentive awards at the 50th percentile of the Compensation Peer Group. The target level is expressed as a multiple of base salary and may be delivered in any combination of options, stock appreciation rights (“SARs”), restricted stock, restricted stock units (“RSUs”) and/or performance shares. Consistent with the Company’s performance-based pay philosophy, the targeted grant value of individual equity-based incentive awards may be adjusted upward or downward from the 50th percentile based on factors such as the overall performance level of the individual, the overall contribution of the individual to the success of the business, years of service and the potential of the individual to make significant contributions to the Company in the future.

 

For the 2009 fiscal year, with respect to the NEOs other than Mr. Hagedorn, the Company granted approximately 70% of the target equity award value in the form of non-qualified stock options (“NSOs”), with the remaining 30% granted in the form of restricted stock or RSUs. With respect to Mr. Hagedorn, the Company granted approximately 55% of the target equity award value in the form of NSOs, with the remaining 45% granted in the form of RSUs. The decision to use a combination of NSOs and restricted stock/RSUs reflected competitive pay practices as compared to the Compensation Peer Group and allowed the Company to deliver the intended equity award value with fewer Common Shares underlying the awards granted. The specific numbers of Common Shares subject to NSOs and restricted stock/RSUs awarded were determined as follows:

 

Target Option Award value / Black-Scholes value per NSO = number of Common Shares subject to NSOs awarded

 

Target Stock Award value / fair market value per share = number of Common Shares underlying Restricted Stock/RSUs awarded

All NSOs and restricted stock/RSUs awarded to the NEOs in the 2009 fiscal year were awarded subject to a three-year, time-based cliff vesting provision. For the 2009 fiscal year, the Company began a transition to RSUs in lieu of restricted stock. Specifically, the Company granted RSUs in lieu of restricted stock to non-U.S.-based NEOs and to U.S.-based associates that were age 50 or above at the time of the grant. The decision to use RSUs was intended to minimize potential unintended tax consequences for those associates approaching early retirement age. The restricted stock/RSU grants did not qualify as performance-based compensation for purposes of IRC §162(m). As a result, the Company’s ability to deduct the full value of these awards at the time of vesting may be limited. Information regarding our equity grant practices, including the determination of exercise price, can be found in the section captioned “Other Executive Compensation Policies, Practices and Guidelines — Practices Regarding Equity-Based Awards” below.

 

In the 2008 fiscal year, as the Company was facing a number of challenging circumstances, including rising commodity costs and a sharp decline in the market value of its Common Shares. As a result, the majority of the Company’s outstanding NSOs decreased significantly in value. In response to these circumstances, the Company commenced a strategy to retain key executive talent. In furtherance of this strategy, the Compensation Committee authorized grants of discretionary retention awards to Mr. Evans and Mr. Sanders, each of which had a grant date value of $1.0 million, in the form of deferred compensation under The Scotts Company LLC Executive Retirement Plan (the “ERP”). A similar retention award with an equal value was approved with respect to Mr. Lopez and is more fully described below.

 

Consistent with the terms of the ERP, each executive officer who was granted a retention award had the right to elect an investment fund, including a Company stock fund, against which the retention award will be benchmarked. Mr. Evans and Mr. Sanders each elected the Company stock fund as the investment fund against which their respective retention awards will be benchmarked.

 

The retention awards granted to Mr. Evans and Mr. Sanders are subject to the terms of a special retention award agreement, which provides that each executive officer’s interest in the retention award vests as follows:

 

Each retention award is subject to forfeiture if the executive officer is terminated for cause at any time or the executive officer engages in certain actions prohibited by the retention award agreement within 180 days before or 730 days after the executive officer’s employment is terminated for any reason. In the event of forfeiture, the executive officer must repay any amount previously distributed from the executive officer’s retention award account under the ERP.

 

Each retention award agreement provides for distribution of the retention award, to the extent vested, to the executive officer as follows:

 

 

Since the retention award accounts for Mr. Evans and Mr. Sanders are benchmarked against the Company stock fund, distributions will be made in whole Common Shares, plus cash for any fractional share.

 

On November 4, 2008, the Compensation Committee also granted to Mr. Lopez a discretionary retention award in the form of RSUs. Because Mr. Lopez is a French citizen and, therefore, not eligible to participate in the ERP, the RSU award is not subject to the terms of the ERP, and is instead governed by the terms of the Company’s 2006 Plan and the applicable award agreement. The RSU award was granted pursuant to an award agreement that contains terms and conditions substantially similar to the form of retention award agreement approved by the Compensation Committee for Mr. Evans and Mr. Sanders, including the terms and conditions relating to vesting, forfeiture and distribution.

 

The Company maintains traditional health and welfare benefits and the RSP, a qualified 401(k) plan, that are generally offered to all employees (subject to basic plan eligibility requirements) and are consistent with the types of benefits offered by other large corporations, as referenced by the Compensation Peer Group. In addition to these traditional benefits, the Company offers certain executive level perquisites to key executives which are designed to be competitive with the compensation practices of corporations in the Compensation Peer Group, including comprehensive annual physical examinations, a car allowance of $1,000 per month, except for Mr. Baker who receives a car allowance of $1,167 per month, and annual financial planning services valued at approximately $4,000 per year.

 

In addition to the above executive perquisites that are available to all NEOs, Mr. Hagedorn and Mr. Baker are entitled to limited personal use of Company aircraft (owned or leased), at their own expense (with certain exceptions for the 2009 fiscal year as noted below). Specifically, Mr. Hagedorn has an option to purchase, with his own funds, up to 100 flight hours per year for personal use and Mr. Baker has an option to purchase, with his own funds, up to 50 flight hours per year for personal use. Both Mr. Hagedorn and Mr. Baker purchase their respective flight hours at the Company’s incremental direct operating cost per flight hour so there is no incremental cost to the Company associated with providing this perquisite, other than the partial loss of a tax deduction of certain aircraft-related costs as a result of any personal use of Company aircraft. Since Company aircraft are used primarily for business travel, the determination of the direct operating cost per flight hour excludes the fixed costs which do not change based on usage, such as pilots’ salaries, the purchase cost of Company aircraft and the cost of maintenance not related to personal trips. In order to facilitate the ability for Mr. Hagedorn and Mr. Baker to purchase personal flight hours on Company aircraft, each of Mr. Hagedorn and Mr. Baker has entered into an arm’s-length aircraft “time sharing agreement” with

the Company, which is more fully described in the section captioned “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

 

For the 2009 fiscal year, the Compensation Committee approved limited Company-paid aircraft perquisites for certain commuting and personal flights that Mr. Hagedorn made on Company aircraft prior to executing the time sharing agreement in December 2008. Since the imputed income value of these aircraft perquisites is required to be added to Mr. Hagedorn’s Form W-2 compensation, the Compensation Committee believes that it is appropriate to provide a tax gross-up to offset the tax obligation associated with this imputed income amount. The value of these limited aircraft perquisites, as well as the related tax gross-up, are included in the table captioned “All Other Compensation (Supplements Summary Compensation Table)” beginning on page 42 of this Proxy Statement. As an additional perquisite, each of Mr. Hagedorn and Mr. Baker has access to the services of the Company’s aviation mechanics and pilots in circumstances involving commuting flights on personal aircraft. Since the Company’s aviation mechanics and pilots are paid on a salary basis, there is no incremental cost to the Company for providing this perquisite. See section captioned “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” for further discussion of related party transactions involving aviation mechanics and pilots.

 

In connection with the commencement of Mr. Baker’s employment and subsequent relocation to the Central Ohio area in October 2008, the Compensation Committee approved a limited Company-paid commuting perquisite covering the first six months of Mr. Baker’s employment. Since the value of this perquisite is required to be added to Mr. Baker’s Form W-2 compensation, the Compensation Committee believes it is appropriate to provide a tax gross-up to offset the tax obligation associated with this imputed income amount. The value of these limited aircraft perquisites, as well as the related tax gross-up, are included in the table captioned “All Other Compensation (Supplements Summary Compensation Table).”

 

The ERP is a non-qualified deferred compensation plan, which provides executives, including the NEOs, the opportunity to: (1) defer compensation above the specified statutory limits applicable to the RSP and (2) defer compensation with respect to any Performance Award (as defined in the ERP) or other bonus awarded to such executive officers. The ERP is an unfunded plan and is subject to the claims of the Company’s general creditors. During the 2009 fiscal year, the ERP consisted of five parts:

 

 

The Company Matching Contributions and Base Retirement Contributions to the ERP were based on the same contribution formulae as those used for the RSP. The Company matched the Compensation Deferral at 100% for the first 3% of eligible earnings contributed to the ERP and 50% for the next 2% of eligible earnings contributed to the ERP. Performance Award Deferrals to the ERP are not eligible for Company

Matching Contributions. The Company also made a Base Retirement Contribution in an amount equal to 2% of eligible earnings for all eligible executive officers, regardless of whether they made deferral elections under the ERP. This amount increased to 4% once an executive officer’s eligible earnings reached 50% of the Social Security wage base. Base Retirement Contributions were made to the ERP once an executive officer exceeded the maximum statutory compensation allowable under the RSP and with respect to all qualifying deferrals to the ERP.

 

All accounts under the ERP are bookkeeping accounts and do not represent claims against specific assets of the Company. Each participant directs the portion of future credits to the participant’s ERP accounts that will be, as well as the existing balance of the participant’s ERP accounts that is, credited to one or more benchmarked investment funds, including a Company stock fund and mutual fund investments, which are substantially consistent with the investment options permitted under the RSP. Accordingly, there were no above-market or preferential earnings on investments associated with the ERP for any of the NEOs for the 2009 fiscal year.

 

As permitted by the terms of the ERP, the Company has established a rabbi trust to assist with discharging obligations under the ERP. The assets of the rabbi trust remain at all times the assets of the Company, subject to the claims of its creditors.

 

The Scotts Company LLC Excess Benefit Plan for Non Grandfathered Associates (the “Excess Pension Plan”) is an unfunded plan that provides benefits which cannot be provided under The Scotts Company LLC Associates’ Pension Plan (the “Associates’ Pension Plan”) due to specified statutory limits. The Associates’ Pension Plan was frozen effective December 31, 1997 and, therefore, no additional benefits have accrued after that date under the Excess Pension Plan for participating executive officers. Continued service taken into account for vesting purposes under the Associates’ Pension Plan is, however, recognized with respect to the entitlement to, and the calculation of, subsidized early retirement benefits under the Excess Pension Plan. Based on his tenure, Mr. Hagedorn is the only NEO who participates in the Excess Pension Plan. For further details regarding the Excess Pension Plan, see the discussion in the section captioned “EXECUTIVE COMPENSATION — EXECUTIVE COMPENSATION TABLES — Pension Benefits Table.”

 

The Compensation Committee has oversight responsibility for all elements of executive compensation for our CEO and other key management employees, including the NEOs. As part of its responsibility, the Compensation Committee is responsible for evaluating the CEO’s performance and setting the CEO’s annual compensation. In setting the CEO’s compensation, the Compensation Committee considers:

 

 

In addition to setting the compensation of the CEO and approving the compensation recommendations for the NEOs and other key management employees, the Compensation Committee is also responsible for administering all equity-based incentive plans to achieve the objectives of the compensation program within the framework approved by our shareholders. Under the terms of these plans, the Compensation Committee has sole discretion and authority to determine the size and type of all equity-based awards, as well as the period of vesting and all other key terms and conditions of the awards.

With respect to the annual incentive compensation plans the Compensation Committee has responsibility for approving the overall plan design, as well as the performance metrics, performance goals and payout levels proposed by management.

 

During the 2009 fiscal year, the Compensation Committee engaged an independent consultant from Fred Cook & Co. to advise the Compensation Committee with respect to best practices and competitive trends in the area of executive compensation, as well as ongoing regulatory considerations. The consultant provided guidance to assist the Compensation Committee in its evaluation of the compensation recommendations submitted by management with respect to the CEO, the NEOs and other key management employees. Fred Cook & Co. did not provide any consulting services directly to management.

 

During the 2009 fiscal year, the Company engaged consultants from Hewitt Associates, Inc. and Towers Perrin. These firms worked directly with management to advise the Company on best practices and competitive trends, as well as ongoing regulatory considerations, with respect to executive compensation. In addition, the firms advised the Company with respect to the development of the Compensation Peer Group, including providing the compensation benchmark data for such group. Where applicable, the firms statistically adjusted the Compensation Peer Group data to more closely reflect the size of the Company. Neither firm provided consulting services directly to the Compensation Committee.

 

The Compensation Committee previously approved a customized Compensation Peer Group, which was developed in cooperation with the Company’s compensation consultants (Hewitt Associates, Inc. and Towers Perrin) during the 2008 fiscal year for the purpose of enabling the Company to benchmark the total compensation packages of the CEO and other NEOs. The Compensation Peer Group contains highly regarded consumer products-oriented companies that the Company typically competes with to attract and retain executive talent and consisted of the following companies:

 

 

The Compensation Committee believes this Compensation Peer Group reflects the pay practices of the broader consumer products industry, and is reflective of the size and complexity of the Company. In general, the Compensation Peer Group reflects companies that range between $1.4 billion and $6.5 billion of annual revenues, with a median annual revenue slightly above the Company’s revenue for the 2009 fiscal year.

 

On an annual basis, management prepares and furnishes to the Compensation Committee a comprehensive statement, known as a “Tally Sheet,” reflecting the value of each element of compensation for the current fiscal year as well as executive perquisites and other benefits provided to the NEOs and other key management employees. The Tally Sheets present the total value of all current compensation elements based on a target level of performance for the plans in which the NEOs participate.

 

The Tally Sheets provide perspective to the Compensation Committee on the overall level of executive compensation and wealth accumulation, as well as the relationship between short-term and long-term compensation elements, and how each element relates to our compensation philosophy and guiding principles. The Tally Sheets are instructive for the Compensation Committee when compensation decisions are being evaluated, particularly in connection with compensation decisions made in connection with promotions, special retention issues and separations from the Company.

 

While the Compensation Committee retains full oversight and approval authority for all elements of executive compensation, management, including the CEO, plays a significant role in the compensation-setting process.

 

The CEO is responsible for conducting annual performance reviews and establishing performance objectives for all of the other NEOs, who in turn are responsible for conducting reviews and establishing performance objectives for other key management employees. As mentioned above, the Compensation Committee establishes the annual performance objectives for the CEO and completes an annual assessment of his performance. The Compensation Committee believes that the performance evaluation and goal-setting process is critical to the overall compensation-setting process, because the personal performance level of each NEO is one of the most heavily weighted factors considered by the Compensation Committee when making compensation decisions.

 

In conjunction with the Company’s outside consultants from Hewitt Associates, Inc. and Towers Perrin, management conducts annual market surveys of the base salary levels, short-term incentives and long-term incentives for the CEO and each of the NEOs and other key management employees. Management’s goal in conducting these surveys is to better understand competitive compensation programs and trends, as reflected by the Company’s Compensation Peer Group, as well as the level and mix of compensation elements. The Compensation Committee considers the survey information to help ensure that executive compensation levels are competitive with the Company’s Compensation Peer Group, which facilitates our ability to retain and motivate key executive talent.

 

The CEO and the Executive Vice President, Global Human Resources make specific recommendations to the Compensation Committee with respect to each element of executive compensation for the NEOs, other than the CEO. These recommendations are based on their assessment of the competitive market trends, as referenced by the Compensation Peer Group, and the performance level of the individual NEO. The Compensation Committee, with the assistance of its compensation consultant, independently evaluates these recommendations taking into account the competitive market data, the overall performance level of each NEO and our compensation guiding principles.

 

Once a year, the Compensation Committee completes an evaluation of the CEO’s performance with respect to the Company’s goals and objectives and makes its report to the Board of Directors. Based on this assessment, consistent with the terms of its charter, the Compensation Committee set the CEO’s annual compensation for the 2009 fiscal year, including base salary, annual incentive compensation, long-term equity-based compensation and perquisites and other benefits. When evaluating Mr. Hagedorn’s total level of compensation for the 2009 fiscal year, the Compensation Committee considered information including:

 

 

Effective October 1, 2008, the Compensation Committee approved a change to Mr. Hagedorn’s annual compensation package which increased his base salary from $600,000 to $1.0 million. The change was intended to incorporate the approximate value of Company-paid personal aircraft usage and commuting

perquisites directly into his cash-based compensation (including a change to his target incentive opportunity described below). With the acknowledgment and understanding of the Board of Directors, Mr. Hagedorn had been awarded these perquisites since assuming the CEO role in 2001. From the time he first joined the Company in 1995 following the Scotts/Miracle-Gro merger, Mr. Hagedorn has commuted between his family home in New York and the Company’s headquarters in Marysville, Ohio. With the approval of Mr. Hagedorn’s compensation package for the 2009 fiscal year, Company-paid aircraft perquisites have been discontinued. However, Mr. Hagedorn has an option to purchase, with his own funds, up to 100 flight hours per year on Company aircraft, as more fully described above in the section captioned “Elements of Executive Compensation — Executive Perquisites and Other Benefits (short-term compensation element)”. See the section captioned “Recent Developments” for a discussion of a compensatory commuting allowance that the Compensation Committee approved for Mr. Hagedorn, effective at the beginning of the 2010 fiscal year.

 

After the change described above, Mr. Hagedorn’s base salary was slightly below the median of his peers as reflected in the Compensation Peer Group.

 

As part of the revised compensation structure that the Compensation Committee approved for Mr. Hagedorn, his target incentive opportunity for purposes of the EIP was increased from 90% to 100% of his base salary for the 2009 fiscal year. After the change, Mr. Hagedorn’s target incentive opportunity, expressed as a percentage of base salary, was below the target incentive opportunity of his peers as reflected in the Compensation Peer Group.

 

For the 2009 fiscal year, Mr. Hagedorn’s target incentive compensation opportunity under the EIP was directly attributable to attainment of annual performance measures established at the Corporate level and approved by the Compensation Committee. Under the EIP, the measures used to determine Mr. Hagedorn’s incentive compensation for the 2009 fiscal year, which were the same measures used for other Corporate level NEOs, were adjusted net income (70% weighting), free cash flow (20% weighting) and ROIC (10% weighting).

 

A description of the specific performance goals and the payout levels associated with each performance measure is included above in the section captioned “Elements of Executive Compensation — Annual Cash Incentive Compensation Plan (short-term compensation element)” and in conjunction with the Summary Compensation Table for 2009 Fiscal Year beginning on page 39 of this Proxy Statement and the narrative accompanying the table captioned “Grants of Plan-Based Awards for 2009 Fiscal Year” beginning on page 46 of this Proxy Statement.

 

For the 2009 fiscal year, the Compensation Committee maintained the grant value for Mr. Hagedorn’s equity-based compensation at approximately $3.0 million. This positions his long-term compensation at the 40th percentile when compared to his peers reflected in the Compensation Peer Group. Based on the revised compensation structure approved for the 2009 fiscal year, Mr. Hagedorn’s total direct compensation (salary, annual cash-based incentive compensation and long-term equity-based compensation) was below the 50th percentile of his peers, as reflected in the Compensation Peer Group.

 

Of the long-term compensation value, approximately 55% of the grant value of Mr. Hagedorn’s long-term equity-based compensation was awarded in the form of NSOs and the remaining 45% was awarded in the form of RSUs. Both the NSOs and the RSUs are subject to three-year, time-based cliff vesting. The Compensation Committee’s decision to award a mix of NSOs and RSUs reflects a balance between rewarding Mr. Hagedorn for future share price appreciation while attempting to mitigate dilution to existing shareholders since a grant of RSUs requires considerably fewer Common Shares than a grant of NSOs, while delivering the same grant value.

 

Effective October 1, 2008, Mark R. Baker was elected to serve as President and Chief Operating Officer of the Company. While Mr. Baker remains on our Board of Directors, he resigned from his positions as Chair of the Governance Committee as well as a member of the Compensation Committee and excused himself from participation, discussions or voting with regard to matters before those committees concerning his prospective employment and election as an officer of the Company.

 

In approving Mr. Baker’s employment agreement and the elements of his compensation package, the Compensation Committee considered the following factors:

 

 

At the time Mr. Baker was being recruited to lead the Company’s operating units, he was already established as an experienced chief executive officer with a unique perspective of the home center business, the major distribution channel for the Company’s products. Mr. Baker also had specific experience with the Company based on his tenure on the Board of Directors. In developing a compensation package to attract Mr. Baker to the Company, the Compensation Committee also considered the compensation level that Mr. Baker enjoyed at his prior employer. Based on this assessment, the Compensation Committee determined to position Mr. Baker’s total compensation package somewhere between that of a chief executive officer and a chief operating officer, as indicated by the market data from our Compensation Peer Group.

 

In addition to establishing the appropriate base salary level, short-term incentives and long-term incentives, Mr. Baker’s hiring package included several one-time pay elements. These one-time pay elements included a sign-on equity grant and a transition bonus that were designed to keep Mr. Baker whole relative to the opportunity for similar compensation elements that he forfeited from his prior employer upon accepting an offer to join the Company.

 

The elements of Mr. Baker’s compensation package are explained in more detail below.

 

Under the terms of his employment agreement, Mr. Baker receives an annual base salary of $900,000, which base salary is to be reviewed at least annually by the Compensation Committee to determine whether and to what extent it will be adjusted. As previously indicated, the determination to set Mr. Baker’s base salary at this level was based on an assessment of the magnitude of his responsibility in the organization and an attempt to position his pay level between that of our CEO and Mr. Baker’s direct reports.

 

Mr. Baker’s employment agreement provided him with a one-time transition bonus of $850,000, which was intended to compensate Mr. Baker for the value of the short-term incentive payment that he forfeited from his prior employer. As part of his hiring package, Mr. Baker also received a sign-on equity grant of 36,000 shares of restricted stock. The sign-on grant was intended to compensate Mr. Baker for the value of unvested equity awards that he forfeited from his prior employer, as well as to improve the overall value of Mr. Baker’s employment offering. The vesting of the sign-on equity grant was coordinated with the initial three-year term of Mr. Baker’s employment agreement. Accordingly, 12,000 shares, as well as the related deferred cash dividends, were to vest on September 30, 2009 (and subsequently vested), September 30, 2010

and September 30, 2011, respectively. Mr. Baker is also eligible for annual equity-based grants in addition to the sign-on grant that he received upon joining the Company.

 

Mr. Baker’s employment agreement also provided a one-time lump-sum relocation bonus of $500,000, which was intended to provide for Mr. Baker’s relocation to the Central Ohio area. The relocation bonus, less applicable taxes, was paid to Mr. Baker at the commencement of his employment. In addition to the relocation bonus, the Compensation Committee approved a limited commuting benefit for Mr. Baker which was intended to facilitate his transition to the Central Ohio area. Specifically, Mr. Baker’s commuting perquisite, which includes a tax gross-up benefit, permits Mr. Baker to commute from his primary residence in Minnesota to the Central Ohio area on Company aircraft. This commuting perquisite was limited to the first six months of his employment, at no cost to Mr. Baker. See the section captioned “Recent Developments” for a discussion of a compensatory commuting allowance that the Compensation Committee approved for Mr. Baker, effective at the beginning of the 2010 fiscal year.

 

For purposes of the EIP, as contemplated by his employment agreement, the target incentive opportunity for Mr. Baker was equal to 75% of his base salary.

 

For the 2009 fiscal year, Mr. Baker’s target incentive compensation opportunity under the EIP was directly attributable to attainment of annual performance measures which were approved by the Compensation Committee. The performance measures were established at the Corporate level and at the Consolidated Operating Group level for Mr. Baker. Under the EIP, the measures used to determine Mr. Baker’s incentive compensation for the 2009 fiscal year, which were the same measures used for other Business Unit Officers, were: (a) Corporate level measures — adjusted net income (20% weighting), free cash flow (10% weighting) and ROIC (10% weighting); and (b) Consolidated Operating Group level measures — EBITDA (50% weighting) and change in working capital, less capital expenditures (10% weighting).

 

A description of the specific performance goals and the payout levels associated with each performance measure is included above in the section captioned “Elements of Executive Compensation — Annual Cash Incentive Compensation Plan (short-term compensation element)” and in conjunction with the Summary Compensation Table for 2009 Fiscal Year beginning on page 39 of this Proxy Statement and the narrative accompanying the table captioned “Grants of Plan-Based Awards for 2009 Fiscal Year” beginning on page 46 of this Proxy Statement.

 

For the 2009 fiscal year, under the terms of his employment agreement, Mr. Baker was entitled to receive long-term equity-based compensation awards with a value of $1.2 million on the date of grant. This positions his long-term compensation above the 75th percentile when compared to his peers reflected in the Compensation Peer Group. Mr. Baker’s total direct compensation (based upon target levels of performance), which exceeds the 75th percentile of the peers reflected in the Compensation Peer Group, evidences the overall compensation level that the Compensation Committee deemed appropriate to recruit Mr. Baker from his prior employer.

 

Approximately 70% of the grant value of Mr. Baker’s long-term equity-based compensation was awarded in the form of NSOs and the remaining 30% was awarded in the form of RSUs. Both the NSOs and the RSUs are subject to three-year, time-based cliff vesting. The Compensation Committee’s decision to award a mix of NSOs and RSUs reflects a balance between rewarding Mr. Baker for future stock appreciation while attempting to mitigate dilution to existing shareholders since a grant of RSUs requires considerably fewer Common Shares than a grant of NSOs, while delivering the same grant value.

 

The Compensation Committee strives to deliver a competitive level of total compensation to each of the NEOs by evaluating and balancing the following objectives:

 

 

Consistent with our performance-oriented pay philosophy, the compensation structure for the NEOs, other than the CEO, is designed to deliver approximately one-third of the annual compensation opportunity in the form of fixed pay (i.e., base salary) and the remaining two-thirds in the form of variable pay (i.e., annual incentive compensation and long-term equity-based compensation). The Compensation Committee believes that this pay mix is generally in line with the pay mix for similar positions within our Compensation Peer Group.

 

Based on their assessment of the individual performance of each NEO, the CEO and the Executive Vice President, Global Human Resources submit compensation recommendations to the Compensation Committee for each NEO. These recommendations address all elements of compensation, including base salary, annual incentive compensation, long-term equity-based compensation and perquisites and other benefits. In evaluating these compensation recommendations, the Compensation Committee considers information such as the Company’s financial performance as well as the compensation of similarly situated executive officers as determined by reference to the benchmark data for the Compensation Peer Group.

 

For the 2009 fiscal year, the base salary increases awarded to Mr. Evans and Mr. Lopez (who received his merit increase in the form of a lump-sum cash payment) were between 4% and 8% of their previous base salary rates, which was consistent with the general range of increases awarded to all other associates of the Company, based on an assessment of their respective levels of performance for the 2008 fiscal year. The base salary increase awarded to Mr. Sanders, which was approximately 19% of his previous base salary rate, reflected a determination by the Compensation Committee to increase Mr. Sanders’ overall compensation level based on his personal performance and to better differentiate his compensation based on his overall level of responsibility.

 

For purposes of the EIP, the target incentive opportunity for the NEOs, other than Mr. Hagedorn and Mr. Baker, was equal to 60% of base salary for the 2009 fiscal year, which put less of their total pay at risk than that of Mr. Hagedorn and Mr. Baker, and was slightly lower than the comparable percentage of short-term cash-based incentives offered to similarly situated executive officers as reflected in the Compensation Peer Group.

 

For the 2009 fiscal year, the target incentive compensation opportunity under the EIP was directly attributable to attainment of annual performance measures which were approved by the Compensation Committee. For purposes of the EIP, the performance measures were established at the Corporate level for Mr. Evans and at the Corporate level and the Consolidated Operating Group level for Mr. Sanders and

Mr. Lopez. The specific performance measures and the relative weightings for each of Mr. Evans, Mr. Sanders and Mr. Lopez are summarized in the table below.

 

 

 

A description of the specific performance goals and the payout levels associated with each performance measure is included above in the section captioned “Elements of Executive Compensation — Annual Cash Incentive Compensation Plan (short-term compensation element)” and in conjunction with the Summary Compensation Table for 2009 Fiscal Year beginning on page 39 of this Proxy Statement and the narrative accompanying the table captioned “Grants of Plan-Based Awards for 2009 Fiscal Year” beginning on page 46 of this Proxy Statement.

 

The Company supports a compensation philosophy of strongly linking rewards to shareholder value creation and to motivating long-term performance. For the 2009 fiscal year, the target value of the equity-based compensation for each of the NEOs was determined by the Compensation Committee based on a multiple that was generally between .6 and 1.3 times the NEO’s respective base salary rate. The specific equity-based award granted to each NEO was determined based on a subjective assessment of the NEO’s overall performance level as well as the NEO’s expected contributions to the business. Based on the market value of the Company’s Common Shares at the time of the grant, the grant value of the equity-based compensation awarded to the NEOs for the 2009 fiscal year was lower than in prior years and was considerably below the market median of the peers reflected in the Compensation Peer Group.

 

Approximately 70% of the grant value of the long-term equity-based compensation awarded to the NEOs was in the form of NSOs and the remaining 30% in the form of restricted stock. Both the NSOs and the restricted stock are subject to three-year, time-based cliff vesting. The Compensation Committee’s decision to award a mix of NSOs and restricted stock reflects a balance between rewarding the NEOs for future share price appreciation while attempting to mitigate the dilution to existing shareholders since a grant of restricted stock requires considerably fewer Common Shares than a grant of NSOs while delivering the same grant value.

 

In general, the total direct compensation (based upon target levels of performance) for each of Mr. Evans, Mr. Sanders and Mr. Lopez was below the median of peers reflected in our Compensation Peer Group largely due to the reduced value of the equity-based compensation awarded for the 2009 fiscal year as discussed above.

 

On October 30, 2007, in recognition of Mr. Sanders’ ongoing commitment to the Company, the Compensation Committee approved the award of up to 40,000 performance shares in the aggregate, which included up to 10,000 performance shares for the 2008 fiscal year performance period, up to 10,000 performance shares for the 2009 fiscal year performance period and up to 20,000 performance shares for the 2010 fiscal year performance period. Issued pursuant to a Special Performance Share Award Agreement (with

Related Dividend Equivalents) under the 2006 Plan, each performance share represents the right to receive one full Common Share if the applicable performance goals are satisfied. Based on performance criteria established by the Compensation Committee with respect to the 2008 fiscal year, Mr. Sanders achieved 5,038 of a possible 10,000 performance shares. On December 22, 2008, the Compensation Committee established the final performance goal for the 2009 fiscal year performance period to be based upon the results of North America Total, which consisted of the North America consumer business and Scotts LawnService^®. The performance criteria which were established for the 2009 fiscal year performance period provided for performance shares to be earned ratably — 5,000 performance shares (threshold) would be earned if the EBITDA achievement for the 2009 fiscal year for North America Total was at least $380.5 million (100% of the actual EBITDA results achieved in the 2008 fiscal year) and 10,000 performance shares (maximum) would be earned for achieving a North America Total EBITDA performance of at least $397.3 million (the budget for the 2009 fiscal year). Performance shares would be earned on a straight-line basis for performance between threshold and maximum. If the threshold performance goal was not satisfied, none of the performance shares for the 2009 fiscal year performance period would be awarded.

 

Based on the actual level of North America Total EBITDA achieved for the 2009 fiscal year, which was $468.9 million, representing more than 100% of the budget, Mr. Sanders earned 10,000 performance shares, which was the maximum amount for the 2009 fiscal year performance period.

 

In general, all employees are eligible to receive grants of equity-based awards; however, the Compensation Committee typically limits participation to the CEO, the NEOs and other key management employees. The decision to include certain key management employees in the annual equity-based awards is reflective of competitive market practice and serves to reward those individuals for their past and future positive impact on our business results.

 

Grants of option awards and/or stock awards are typically approved on an annual basis at a regularly scheduled meeting of the Compensation Committee. The grant date is established as the date of the Compensation Committee action. The Company does not have any program, plan or practice to coordinate the timing of annual equity-based awards to our executive officers with the release of material, non-public information.

 

The exercise price for each NSO is equal to the closing price of the Common Shares on the grant date, as reported on NYSE. If the grant date is not a trading day on NYSE, the exercise price is equal to the closing price on the next succeeding trading day.

 

The Compensation Committee has established stock ownership guidelines, which vary by position, for the CEO and the other NEOs. The purpose of these guidelines is to align the interests of each NEO with the long-term interests of the shareholders by ensuring that a material amount of each NEO’s accumulated wealth is maintained in the form of Common Shares. The minimum target levels of stock ownership established by position are as follows:

 

 

The Compensation Committee believes that these stock ownership guidelines are generally more stringent than the practices of our Compensation Peer Group since we include the annual target EIP opportunity (in addition to base salary) when establishing the minimum amount of stock ownership desired, while most of the other members of our Compensation Peer Group look only at multiples of base salary. For purposes of achieving the desired level of stock ownership, the following forms of equity-based holdings are included:

 

 

 

According to the Company’s stock ownership guidelines, each NEO has five years from the date of hire or promotion to fully reach the appropriate ownership guideline for his or her position.

 

To protect the interests of the Company and its shareholders, subject to applicable law, all equity-based awards and all amounts paid under the EIP contain recoupment provisions (known as clawback provisions) designed to enable the Company to recoup Common Shares or other amounts earned or received under the terms of an equity-based award or the EIP based on subsequent events, such as violation of non-compete covenants or engaging in conduct that is deemed to be detrimental to the Company (as outlined in the underlying plan and/or award agreement).

 

The Company’s ability to deduct certain elements of compensation paid to each of the NEOs is generally limited to $1.0 million annually, under IRC §162(m). This non-deductibility is generally limited to amounts that do not meet certain technical requirements to be classified as “performance-based” compensation. To ensure the maximum tax deduction allowable, the Company attempts to structure its cash-based incentive program to qualify as performance-based compensation under IRC §162(m). For the 2009 fiscal year, Mr. Hagedorn had non-performance-based compensation in excess of $1.0 million, attributed to his base salary level and the income associated with the vesting of restricted stock awards that were granted in prior years. Mr. Baker had non-performance-based compensation in excess of $1.0 million, attributed to his base salary level and the value of one-time bonuses (a signing bonus and a relocation bonus) that he negotiated as part of his hiring package. None of the other NEOs had non-performance-based compensation in excess of $1.0 million.

 

The Company accounts for stock-based compensation, including option awards and stock awards, in accordance with GAAP. Prior to making decisions to grant equity-based awards, the Compensation Committee reviews pro forma expense estimates for the awards, as well as an analysis of the potential dilutive effect such awards could have on existing shareholders. Where appropriate, the proposed level of the equity-based awards may be adjusted to balance these objectives.

 

Decisions regarding the design, structure and operation of the Company’s incentive plans, including the EIP and the equity-based incentive plans, contemplate an appropriate balance between the underlying objectives of each plan and the resulting accounting and tax implications to the Company. While we view preserving the tax deductibility of executive compensation as an important objective, there are instances where the Compensation Committee has approved design elements that may not be fully tax-deductible, but are accepted as trade-offs that support the achievement of other compensation objectives.

 

For the 2009 fiscal year, the Company awarded approximately 70% of the target grant value of equity-based long-term compensation in the form of NSOs, with the remaining 30% in the form of restricted stock/RSUs. While the restricted stock/RSUs do not qualify as performance-based compensation for purposes of IRC §162(m) because they vest without regard to performance, the decision to use a combination of NSOs and restricted stock/RSUs reflected competitive pay practices and allowed the Company to deliver the intended grant value with fewer Common Shares underlying the awards granted and to balance the overall market risk associated with the equity-based compensation for each NEO.

 

For the 2009 fiscal year, the Compensation Committee approved a change to Mr. Hagedorn’s annual compensation package to increase his cash-based compensation by an amount intended to correspond to the approximate value of the personal aircraft usage and commuting perquisites that, to varying degrees, Mr. Hagedorn had been awarded since assuming the CEO role in 2001. Since first joining the Company in 1995 following the Scotts/Miracle-Gro merger, Mr. Hagedorn has commuted between his family home in New York and the Company’s headquarters in Marysville, Ohio. In connection with the modification for the 2009 fiscal year with limited exceptions due to timing, Mr. Hagedorn personally paid for all of his personal use of Company aircraft and commuting expenses. As circumstances unfolded throughout the 2009 fiscal year, the increase in Mr. Hagedorn’s cash-based compensation proved to be insufficient to compensate Mr. Hagedorn for the value of his prior commuting perquisite due to the increased income tax obligation associated with the change in his cash-based compensation. Accordingly, the Compensation Committee revisited the structure of Mr. Hagedorn’s compensation with respect to the 2010 fiscal year. In connection with this review, the Compensation Committee sought to adopt a relatively cost neutral approach to re-value the components of Mr. Hagedorn’s compensation package to be equitable to both parties.

 

In lieu of further increasing Mr. Hagedorn’s cash-based compensation to compensate him for the prior commuting perquisite, the Compensation Committee has determined to provide Mr. Hagedorn with a compensatory monthly commuting allowance of $20,000, beginning in the 2010 fiscal year. For safety and security reasons, the Board of Directors-approved CEO/COO Travel Guidelines (the “Travel Guidelines”) provide that Mr. Hagedorn may use either personal aircraft or Company aircraft for commuting purposes and the commuting allowance is intended to offset the annual costs associated with Mr. Hagedorn’s compliance with the Travel Guidelines. Mr. Hagedorn will continue to retain the option to purchase, with his own funds, up to 100 flight hours per year on Company aircraft for personal and commuting purposes, which is more fully described in the section captioned “Elements of Executive Compensation — Executive Perquisites and Other Benefits (short-term compensation element)”.

 

Mr. Baker was hired as the Company’s President and Chief Operating Officer in October 2008. At the time of his hire, it was contemplated that Mr. Baker and his family would relocate to the Central Ohio area from Minnesota within the first year of his employment. Since that time, Mr. Baker and his wife, in consultation with members of the Board of Directors, have determined to maintain their primary residence in Minnesota in order to allow their youngest child to graduate from his current high school. As a result, Mr. Baker will continue to commute from Minnesota to Central Ohio for the next several years. In light of his standing with the Company, the Board has determined to accommodate Mr. Baker’s decision to continue to commute for the next several years.

 

In recognition of the fact that he will continue to commute between Minnesota and Ohio for the next several years, the Compensation Committee has determined to provide Mr. Baker with a compensatory monthly commuting allowance of $35,000, beginning in the 2010 fiscal year. For safety and security reasons, the Travel Guidelines provide that Mr. Baker may, at his own expense, use either personal aircraft or Company aircraft for commuting purposes. The commuting allowance is intended to offset the annual costs associated with Mr. Baker’s compliance with the Travel Guidelines. Mr. Baker will continue to retain the option to purchase, with his own funds, up to 50 flight hours per year on Company aircraft for personal and commuting purposes.

 

In an effort to mitigate the cost increase to the Company associated with providing the commuting allowance, Mr. Baker agreed to restructure his total compensation package to reduce the minimum grant date value of his long-term equity-based compensation by $240,000 per year, beginning in the 2010 fiscal year. The Compensation Committee believes that the approved approach is fair and equitable to the Company and Mr. Baker.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors (and the Board of Directors approved) that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Submitted by the Compensation Committee of the Board of Directors of the Company:

 

Thomas N. Kelly Jr., Chair

Joseph P. Flannery

Carl F. Kohrt, Ph.D.

Nancy G. Mistretta

 

For the 2009 fiscal year, the Company had the following NEOs that are subject to this disclosure:

 

 

Each of Mr. Hagedorn, Mr. Baker, Mr. Evans, Mr. Sanders and Mr. Lopez serves pursuant to an employment agreement as described below in the section captioned “EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS — Employment Agreements.”

 

The following table summarizes the total compensation paid to, awarded to or earned by each of the NEOs of the Company for the 2009, 2008 and 2007 fiscal years, as applicable. The amounts shown include all forms of compensation provided to the NEOs by the Company, including amounts which may have been deferred. Since the table includes equity-based compensation costs and changes in the actuarial present value of the NEOs’ accumulated pension benefits, the total compensation amounts may be greater than the compensation that actually was paid to the NEOs during the 2009, 2008 and 2007 fiscal years.

 

Summary Compensation Table for 2009 Fiscal Year

 

 

 

All Other Compensation Table (Supplements Summary Compensation Table)

 

The following table shows the detail for the column captioned “All Other Compensation ($)” of the Summary Compensation Table for 2009 Fiscal Year:

 

 

 

 

The following table sets forth information concerning equity-based awards made to the NEOs during the 2009 fiscal year as well as the range of potential payouts under the EIP, a non-equity incentive plan, with respect to performance goals for the 2009 fiscal year.

 

Grants of Plan-Based Awards for 2009 Fiscal Year