Tenneco Inc.

500 North Field Drive

Lake Forest, Illinois 60045

(847) 482-5000

 

March 31, 2009

 

To the Stockholders of Tenneco Inc.:

 

 

The Annual Meeting of Stockholders of Tenneco Inc. will be held Wednesday, May 13, 2009, at 10:00 a.m., local time, at our headquarters located at 500 North Field Drive, Lake Forest, Illinois 60045.

 

Holders of common stock are entitled to vote at the Annual Meeting on the basis of one vote for each share held.

 

We are pleased to take advantage of Securities and Exchange Commission rules that allow us to furnish these proxy materials and our Form 10-K to stockholders on the Internet. We believe that posting these materials on the Internet enables us to provide stockholders with the information that they need more quickly, while lowering our costs of printing and delivery and reducing the environmental impact of our Annual Meeting.

 

A record of our activities for the year 2008 is contained in our Form 10-K, which you may access by following the instructions contained in our Notice of Internet Availability of Proxy Materials. We urge each stockholder who cannot attend the Annual Meeting to please assist us in preparing for the meeting by following the voting procedures contained in the Notice of Internet Availability of Proxy Materials, proxy card or voting instruction form.

 

Very truly yours,

GREGG M. SHERRILL

 

Chairman and Chief Executive Officer

Tenneco Inc.

500 North Field Drive

Lake Forest, Illinois 60045

(847) 482-5000

 

NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
May 13, 2009

 

The Annual Meeting of Stockholders of Tenneco Inc. will be held at our headquarters located at 500 North Field Drive, Lake Forest, Illinois 60045 on Wednesday, May 13, 2009, at 10:00 a.m., local time.

 

The purposes of the meeting are:

 

1. To elect ten directors for a term to expire at the 2010 Annual Meeting of Stockholders;

 

2. To consider and act upon a proposal to ratify the appointment of Deloitte & Touche LLP as independent public accountants for 2009;

 

3. To consider and act upon a proposal to amend the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of the Company’s common stock available for delivery under the plan by 2.3 million additional shares, with each share underlying an option counting as one share and each share underlying a full value award counting as 1.25 shares against the total plan availability; and

 

4. To consider and act upon such other matters as may properly be brought before the meeting, or any adjournment or postponement thereof.

 

The Board of Directors knows of no other matters at this time that may be brought before the meeting. Holders of common stock of record at the close of business on March 16, 2009 are entitled to vote at the meeting. A list of these stockholders will be available for inspection for 10 days preceding the meeting at our headquarters located at 500 North Field Drive, Lake Forest, Illinois 60045, and also will be available for inspection at the meeting.

 

We are pleased to take advantage of Securities and Exchange Commission rules that allow us to furnish these proxy materials and our Form 10-K on the Internet. Stockholders of record have been mailed a Notice of Internet Availability of Proxy Materials (the “Notice”), which provides stockholders with instructions on how to access the proxy materials and our Form 10-K, on the Internet, and, if they prefer, how to request paper copies of these materials. Plan participants who hold shares in their Tenneco 401(k) accounts and other stockholders who have previously requested paper copies of these materials may receive these materials by email or in paper. We believe that posting these materials on the Internet enables us to provide stockholders with the information that they need more quickly, while lowering our costs of printing and delivery and reducing the environmental impact of our Annual Meeting.

 

As a stockholder of Tenneco Inc., your vote is important. All stockholders are cordially invited to attend the Annual Meeting. Whether or not you are able to attend the Annual Meeting in person, it is important that your shares be represented. Please vote as soon as possible as instructed in the Notice of Internet Availability of Proxy Materials, proxy card or voting instruction form.

 

By Order of the Board of Directors

 

DAVID A. WARDELL

Corporate Secretary

 

Lake Forest, Illinois

March 31, 2009

 

 

March 31, 2009

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 13, 2009

 

The Board of Directors of Tenneco Inc. (which we refer to as we, us, our, Tenneco or our company) has made these proxy materials available to you on the Internet, or, upon your request, has delivered printed versions of these materials to you by mail. We are furnishing this proxy statement in connection with the solicitation by our Board of Directors of proxies to be voted at the Annual Meeting of Stockholders on May 13, 2009, or at any adjournment or postponement thereof. Holders of common stock of record at the close of business on March 16, 2009 will be entitled to vote at the Annual Meeting. Each share is entitled to one vote. At March 16, 2009, there were 46,905,047 shares of common stock outstanding and entitled to vote.

 

Pursuant to the “notice and access” rules adopted by the Securities and Exchange Commission, we have elected to provide stockholders access to our proxy materials over the Internet. Accordingly, we mailed a Notice of Internet Availability of Proxy Materials (the “Notice”) on March 31, 2009 to our stockholders of record. The Notice provides you with instructions regarding how to:

 

 

Plan participants who hold Tenneco shares in their 401(k) accounts and other stockholders who have previously requested paper copies of these materials may receive these materials by email or in paper. We elected to use electronic notice and access for our proxy materials because we believe this process will reduce our printing and mailing costs and, by reducing the amount of printed materials, will reduce the environmental impact of our annual stockholders’ meetings. Choosing to receive your future proxy materials by email will help us in these efforts. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.

 

BACKGROUND

 

In 1996, we were formed and spun off from the company that, at the time, was known as Tenneco Inc. After the spin-off, we held the former Tenneco Inc.’s automotive and packaging operations. In 1999, we spun off the packaging operations and, at that time, changed our name to “Tenneco Automotive Inc.” In October 2005, we returned to the name “Tenneco Inc.,” as we believe the name Tenneco better represents the continued expansion of our offerings through our commercial and specialty vehicle businesses.

 

ELECTION OF DIRECTORS

(Item 1)

 

Our Board of Directors currently comprises ten individuals, all of whom are proposed to be elected at this Annual Meeting to serve for a term to expire at the annual meeting of stockholders to be held in 2010 and until their successors are chosen and have qualified.

 

The persons named as proxy voters in the accompanying proxy card, or their substitutes, will vote your proxy for all the nominees, each of whom has been designated as such by the Board of Directors, unless otherwise indicated in your proxy. In the event that any nominee for director withdraws or for any reason is not able to serve as a director, we will vote your proxy for the remainder of those nominated for director (except as otherwise indicated in your proxy) and for any replacement nominee designated by the Compensation/Nominating/Governance Committee of the Board of Directors.

 

You may vote “For” or “Against” any or all of the director nominees, or you may “Abstain” from voting. Assuming a quorum, each director nominee receiving a majority of the votes cast at the Annual Meeting (in person or by proxy) will be elected as director. A “majority of the votes cast” means the number of “For” votes cast exceeds the number of “Against” votes cast. A proxy marked “Abstain” with respect to any director will not be counted in determining the total number of votes cast.

 

Brief statements setting forth the age (at March 16, 2009), the principal occupation, the employment during at least the past five years, the year in which first elected a director and other information concerning each nominee appears below.

 

The Board of Directors recommends that you vote FOR all of the nominees listed below.

 

Because Tenneco is a Delaware corporation, under Delaware law, if an incumbent director is not elected, that director remains in office until the director’s successor is duly elected and qualified or until the director’s death, resignation or retirement. To address this potential outcome, the Board adopted a director resignation policy in Tenneco’s By-Laws. Under this policy, the Board of Directors will nominate for directors only those incumbent candidates who tender, in advance, irrevocable resignations, and the Board has obtained such conditional resignations from the nominees in this year’s proxy statement. The irrevocable resignations will be effective upon the failure to receive the required vote at any annual meeting at which they are nominated for re-election and Board acceptance of the resignation. If a nominee fails to receive the required vote, the Compensation/Nominating/Governance Committee will recommend to the Board whether to accept or reject the tendered resignation. The Board will publicly disclose its decision within 90 days following certification of the stockholder vote. In addition, the director whose resignation is under consideration will not participate in the recommendation of the Compensation/Nominating/Governance Committee with respect to the resignation. If the Board does not accept the resignation, the director will continue to serve until the next annual meeting and until his or her successor is duly elected, or until his or her earlier resignation or removal. If the Board accepts the resignation, then the Board, in its sole discretion, may fill any resulting vacancy or may decrease the size of the Board.

 

NOMINEES FOR THE ELECTION TO THE BOARD OF DIRECTORS

For One-Year Terms Expiring at the 2010 Annual Meeting of Stockholders

 

Charles W. Cramb — Mr. Cramb has been Vice Chairman, Chief Finance and Strategy Officer of Avon Products, Inc., a global manufacturer and marketer of beauty and related products, since September 2007. Mr. Cramb joined Avon in November 2005 as Executive Vice President, Finance and Technology and Chief Financial Officer. Mr. Cramb was Senior Vice President and Chief Financial Officer of The Gillette Company, a global manufacturer and marketer of a wide variety of consumer products, from 1997 until October 2005. He joined Gillette in 1970 and served in a number of financial positions. From 1976 to 1981, he held several key financial management positions in Gillette’s European operations, including Manager, Financial Services, Gillette Europe, and Financial Controller, Gillette Industries Limited, UK. From 1981 to 1995, he held a series of senior financial management positions in the United States, including Controller, International Operations; Vice President, Finance and Strategic Planning, Gillette North Atlantic Group; Assistant Controller, The Gillette Company; and Vice President, Finance, Planning and Administration, Diversified Group. From 1995 to 1997, he was Corporate Vice President and Corporate Controller. He is a director of Idenix Pharmaceuticals, Inc., where he is Chairman of the Audit Committee and a member of the Compensation Committee. Mr. Cramb was elected a director of our company in March 2003, is 62 years old and is the Chairman of the Audit Committee.

 

Dennis J. Letham — Mr. Letham serves as Executive Vice President, Finance and Chief Financial Officer of Anixter International Inc., overseeing all of the company’s finance, accounting, tax, human resource and internal audit activities in 50 countries. Prior to assuming his role as Chief Financial Officer in 1995, Mr. Letham served as Executive Vice President and Chief Financial Officer of Anixter, Inc., the principal operating subsidiary of Anixter International Inc., which he joined in 1993. Previously, he had a ten-year career with National Intergroup Inc., where he was Senior Vice President and Chief Financial Officer, as well as Vice President and Controller. From 1983 to 1989, Mr. Letham held a number of senior financial positions for National Intergroup Inc., including its wholly-owned subsidiary National Aluminum Corporation that included Vice President and Controller, Director of Corporate Accounting, and Manager for Internal Audit. Mr. Letham began his career at Arthur Andersen & Co. in 1973 where he held progressive responsibilities in the Audit Department. Mr. Letham holds a bachelors degree from Pennsylvania State University’s Accounting Honors program. He also is a Certified Public Accountant. Mr. Letham who is 57 years old was elected a director of our company in October 2007 and is a member of the Audit Committee.

 

Frank E. Macher — Mr. Macher has served as Chief Executive Officer of Finance Manufacturing Acquisition & Capital since 2008. Previously he served as President and Chief Executive Officer and as a member of the Board of Directors of Collins & Aikman Corporation, a global supplier of motor vehicle parts, from July 2005 until his retirement in January 2007. Mr. Macher served as Chief Executive Officer of Federal Mogul Corporation, a manufacturer of motor vehicle parts and supplies, from January 2001 to July 2003 and Chairman of Federal Mogul from October 2001 to his retirement in January 2004. From June 1997 to his retirement in July 1999, Mr. Macher served as President and Chief Executive Officer of ITT Automotive, a supplier of automotive components. From 1966 to his retirement in 1996, Mr. Macher was employed by Ford Motor Company, serving most recently as Vice President and General Manager of the Automotive Components Division. Mr. Macher is 68 years old and was named a director of our company in July 2000. Mr. Macher is a member of the Audit Committee.

 

Hari N. Nair — Executive Vice President and President — International — Mr. Nair was named our Executive Vice President and President — International effective March 2007. Previously, Mr. Nair served as Executive Vice President and Managing Director of our business in Europe, South America and India. Before that, he was Senior Vice President and Managing Director — International. Prior to December 2000, Mr. Nair was the Vice President and Managing Director — Emerging Markets. Previously, Mr. Nair was the Managing Director for Tenneco Automotive Asia, based in Singapore and responsible for all operations and development projects in Asia. He began his career with the former Tenneco Inc. in 1987, holding various positions in strategic planning, marketing, business development, quality and finance.

Prior to joining Tenneco, Mr. Nair was a senior financial analyst at General Motors Corporation focusing on European operations. Mr. Nair is 48 years old and became a director of our company in March 2009.

 

Roger B. Porter — Mr. Porter is the IBM Professor of Business and Government and the Master of Dunster House at Harvard University. Mr. Porter has served on the faculty at Harvard University since 1977. Mr. Porter also held senior economic policy positions in the Ford, Reagan and George H. W. Bush White Houses, serving as special assistant to the President and executive secretary of the Economic Policy Board from 1974 to 1977, as deputy assistant to the President and director of the White House Office of Policy Development from 1981 to 1985, and as assistant to the President for economic and domestic policy from 1989 to 1993. He is also a director of Zions Bancorporation, Pactiv Corporation, Extra Space Storage Inc. and Packaging Corporation of America. Mr. Porter is 62 years old and has been a director of our company since January 1998. Mr. Porter is the Chairman of the Compensation/Nominating/Governance Committee.

 

David B. Price, Jr. — Mr. Price has served as Chief Executive Officer, President and Founder of Birdet Price, LLC, an investment and consulting firm wholly-owned by Mr. Price, since July 2001. Previously, Mr. Price was President of Noveon Inc. from February 2001 until May 2001. Noveon, Inc. was formerly the Performance Materials segment of BF Goodrich Company prior to its sale to an investor group in February 2001. While with BF Goodrich Company from July 1997 to February 2001, Mr. Price served as Executive Vice President of the BF Goodrich Company and President and Chief Operating Officer of BF Goodrich Performance Materials. Prior to joining BF Goodrich, Mr. Price held various executive positions over a 25-year span at Monsanto Company, most recently serving as President of the Performance Materials Division of Monsanto Company from 1995 to July 1997. From 1993 to 1995, he was Vice President and General Manager of commercial operations for the Industrial Products Group and was also named to the management board of Monsanto’s Chemical Group. He is a director and Chairman of the YMCA of Greater St. Louis and a Director of St. Lukes Hospital in St. Louis. He is also a director of CH2M HILL. Mr. Price is 63 years old and was named a director of our company in November 1999. Mr. Price is a member of the Compensation/Nominating/Governance Committee.

 

Gregg M. Sherrill — Chairman and Chief Executive Officer — Mr. Sherrill was named our Chairman and Chief Executive Officer in January 2007. Mr. Sherrill joined us from Johnson Controls Inc., where he served since 1998, most recently as President, Power Solutions. From 2002 to 2003, Mr. Sherrill served as the Vice President and Managing Director of Europe, South Africa and South America for Johnson Controls’ Automotive Systems Group. Prior to joining Johnson Controls, Mr. Sherrill held various engineering and manufacturing assignments over a 22-year span at Ford Motor Company, including Plant Manager of Ford’s Dearborn, Michigan engine plant and Director of Supplier Technical Assistance. Mr. Sherrill is 56 years old and became a director of our company in January 2007.

 

Paul T. Stecko — Mr. Stecko has served as the Chief Executive Officer of Packaging Corporation of America since April 1999. From November 1998 to April 1999, Mr. Stecko served as President and Chief Operating Officer of Tenneco Inc. From January 1997 to November 1998, Mr. Stecko served as Chief Operating Officer of Tenneco Inc. From December 1993 through January 1997, Mr. Stecko served as Chief Executive Officer of Tenneco Packaging Inc. Prior to joining Tenneco Packaging Inc., Mr. Stecko spent 16 years with International Paper Company. He is a director of State Farm Mutual Insurance Company, American Forest and Paper Association and Smurfit Kappa Group, and is the Chairman of the Board of Packaging Corporation of America. Mr. Stecko is 64 years old and has been a director of our company since November 1998. Mr. Stecko is a member of the Compensation/Nominating/Governance Committee.

 

Mitsunobu Takeuchi — Mr. Takeuchi served as Chairman Emeritus of DENSO International America, Inc., the North American arm of Japan-based DENSO Corp., a worldwide supplier of advanced automotive systems and components, from 2004 until January 2006. Mr. Takeuchi joined DENSO in 1964 and rose through a series of sales and general manager positions in Japan and North America, with experience in both original equipment and aftermarket. He became President and Chief Executive Officer, DENSO International America in 1997, Chairman and Chief Executive Officer in 2002 and Chairman Emeritus in 2004. He served as a member of the Board of Directors of Denso Corporation from March 1995

until his retirement in June 2004. Mr. Takeuchi is a director of the Economic Club of Detroit and the Motor Equipment Manufacturers Association and a member and past president of the Japan Business Society of Detroit. Mr. Takeuchi is 67 years old and has been a director of our company since January 2006. Mr. Takeuchi is a member of the Audit Committee.

 

Jane L. Warner — Ms. Warner has served as Executive Vice President at Illinois Tool Works Inc., a global manufacturer of specialty products and equipment, since August 2007, where she has worldwide responsibility for its Global Finishing and Software businesses. Ms. Warner joined Illinois Tool Works Inc. in December 2005 as Group President of its Finishing and Click Commerce businesses. Prior to this, Ms. Warner was President of Plexus Systems, L.L.C., a provider of manufacturing information systems from June 2004 until December 2005 and an executive with Electronic Data Systems from 2000 through June 2004, where she was President of their Global Manufacturing Information Solutions Group. Ms. Warner served as Executive Vice President for first tier supplier Textron Automotive from 1994 through 1999, where she was President of its Kautex North America and Randall divisions. Previously, Ms. Warner held various positions over a 20-year span at General Motors Corporation which included General Superintendent and Assistant Chief Engineer. She was sponsored as a Sloan Fellow to Stanford University where she received a Master’s in Management. Ms. Warner is a board member of MeadWestvaco Corporation, where she sits on the Audit and Safety, Health and Environmental Committees and a member of the Board of Trustees for Kettering University where she is past Chair and serves on the Finance Committee. Ms. Warner is 62 years old and was named a director of our company in October 2004. Ms. Warner is a member of the Audit Committee and the Compensation/Nominating/Governance Committee.

 

CORPORATE GOVERNANCE

 

Overview

 

We have established a comprehensive corporate governance plan for the purpose of defining responsibilities, setting high standards of professional and personal conduct and assuring compliance with these responsibilities and standards. As part of its annual review process, the Board of Directors monitors developments in the area of corporate governance. Listed below are some of the key elements of our corporate governance plan. Many of these matters are described in more detail elsewhere in this proxy statement.

 

Independence of Directors (see pp. 7-8)

 

 

Audit Committee (see pp. 10-11 and p. 43)

 

 

Compensation/Nominating/Governance Committee and Subcommittee (see pp. 8-10 and p. 42)

 

 

Corporate Governance Principles

 

 

Stock Ownership Guidelines

 

 

 

Communications with Directors (see pp. 11-12)

 

 

Codes of Business Conduct and Ethics

 

 

Related Party Transactions Policy (see pp. 12-13)

 

 

Equity Award Policy

 

 

Personal Loans to Executive Officers and Directors

 

 

Our Audit Committee, Compensation/Nominating/Governance Committee and Executive Compensation Subcommittee Charters, Corporate Governance Principles, Stock Ownership Guidelines, Accounting Complaints Policy, Code of Ethical Conduct for Financial Managers, Statement of Business Principles, Policy and Procedures for Transactions with Related Persons, Equity Award Policy, Director Communications Policy and Audit/Non-Audit Services Policy may be accessed on our website at www.tenneco.com. The contents of the website are not, however, a part of this proxy statement. In addition, we will make a copy of any of these documents available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to or waivers of our Code of Ethical Conduct for Financial Managers and Statement of Business Principles by posting this information on our website at www.tenneco.com.

 

The Board of Directors and Its Committees

 

General.  Our Board of Directors currently comprises ten members, eight of whom are not officers of our company and two of whom are officers of our company. The Board of Directors believes that our ratio of outside directors to inside directors represents a commitment to the independence of the Board and a focus on matters of importance to our stockholders.

 

The Board of Directors has determined that all of our non-management directors are “independent” as that term is defined under the listing standards of the NYSE. As part of its analysis, the Board determined that none of the outside directors has a direct or indirect material relationship with us. Under written

guidelines adopted by the Board, the following commercial or charitable relationships are not considered to be material relationships that would impair a director’s independence:

 

 

No outside director has a relationship with us that is not within these guidelines.

 

In making its determinations, the Board of Directors considered the following relationships, all of which are within these guidelines: in the case of Mr. Letham, an ordinary course supply arrangement between our company and the company where he serves as executive vice president, finance and chief financial officer; in the case of Mr. Stecko, an ordinary course supply arrangement between our company and the company where he serves as chief executive officer; and in the case of Ms. Warner, an ordinary course supply arrangement between our company and the company where she serves as executive vice president.

 

During 2008, the Board of Directors held eight meetings. All of our directors who served in 2008 attended at least 75% of the aggregate of all meetings of the Board of Directors and all meetings of the committees of the Board held and on which the director served. The Board of Directors is scheduled to meet in executive session, without management, after every regularly scheduled Board meeting. Mr. Stecko acts as lead independent director to chair these executive sessions and as primary spokesperson in communicating matters arising out of these sessions to our management.

 

All of the directors attended last year’s annual meeting of the stockholders. The Board of Directors has a policy that, absent unusual circumstances, all directors attend our annual stockholder meetings.

 

The Board of Directors has the following standing committees, which have the responsibilities and authority described below.

 

Compensation/Nominating/Governance Committee and Subcommittee.  The members of the Compensation/Nominating/Governance Committee are Ms. Warner and Messrs. Price, Stecko and Porter, who is the Chairman of the Committee. The Compensation/Nominating/Governance Committee is comprised solely of outside directors who meet the independence standards for compensation and nominating committee members as set forth in the NYSE listing standards.

 

The Compensation/Nominating/Governance Committee has the responsibility, among other things, to:

 

 

It also has significant corporate governance responsibilities including, among other things, to:

 

 

The Compensation/Nominating/Governance Committee may form and delegate authority to subcommittees when appropriate and to the extent permitted by applicable law and the rules of the NYSE. Once a subcommittee of this committee is so formed, the committee may exercise any authority in its discretion that is granted to the subcommittee.

 

An Executive Compensation Subcommittee, consisting of all Compensation/Nominating/Governance Committee members except Mr. Stecko, was formed in 2005. This subcommittee has the responsibility of considering and approving equity-based compensation for our Chief Executive Officer and our other executive officers which is intended to qualify as “performance based compensation” under Section 162(m) of the Internal Revenue Code. This subcommittee does not have the authority to further delegate its responsibilities.

 

Each of the Compensation/Nominating/Governance Committee and its Executive Compensation Subcommittee operates pursuant to a written charter, the current versions of which were reaffirmed by the Board of Directors and the Compensation/Nominating/Governance Committee, respectively, in March 2009 as part of their annual review process. The Compensation/Nominating/Governance Committee held six meetings and the Executive Compensation Subcommittee held three meetings during 2008.

 

The Compensation/Nominating/Governance Committee engages Hewitt Associates, LLC as its regular outside compensation consultant. Hewitt reports directly to the Compensation/Nominating/Governance Committee and the scope of its assignment is to (i) assist in decision-making with respect to executive compensation, (ii) provide plan design advice, (iii) provide annual competitive market studies against which committee members can analyze executive compensation and (iv) apprise the committee members regarding best practices and pay levels in association with director compensation. For our director compensation, Hewitt prepares comparative market data and presents that information directly to the committee and the Board. The committee and the Board review this data and establish director compensation in consultation with Hewitt.

 

From time to time, the committees will review materials prepared by other consultants to assist it with specific compensation matters. For example, in 2006, management engaged Buck Consultants, a pension actuarial firm, to provide advice concerning the restructuring of Tenneco’s defined benefit and defined contribution retirement benefits plans for U.S. salaried and non-union hourly employees. This information was reviewed by the Compensation/Nominating/Governance Committee in connection with its decision to freeze future accruals under our defined benefits retirement plans at the end of 2006, as described under “Executive Compensation — Post-Employment Compensation — 2006 Changes in Defined Benefits.”

 

For a discussion of the role of our executive officers in the establishment of executive officer compensation, see “Executive Compensation — Compensation Discussion and Analysis.” Our executive officers do not participate in the process for establishing director compensation.

 

A report of the Compensation/Nominating/Governance Committee regarding executive compensation appears elsewhere in this proxy statement. For a more detailed discussion of the Compensation/

Nominating/Governance Committee’s processes and procedures for considering and determining executive compensation, see “Executive Compensation — Compensation Discussion and Analysis.”

 

Audit Committee.  The members of the Audit Committee are Ms. Warner and Messrs. Letham, Macher, Takeuchi and Cramb, who is the Chairman of the Committee. The Audit Committee is comprised solely of directors who meet all of the independence standards for audit committee membership as set forth in the Sarbanes-Oxley Act of 2002, and the SEC rules adopted thereunder, and the NYSE listing standards. The Board of Directors has designated Mr. Cramb and Mr. Letham as “audit committee financial experts” as that term is defined in the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

Management is responsible for our internal controls over the financial reporting process. The independent public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted audit standards and for issuing a report on its audit. The Audit Committee’s duty is to oversee and monitor these activities on behalf of the Board of the Directors. Specifically, the Audit Committee has the responsibility, among other things, to:

 

 

In fulfilling its responsibilities, the Audit Committee reviewed with management and the independent public accountants:

 

 

In addition, the Audit Committee has discussed our major risk exposures and the steps that management has taken to monitor and control such exposures. Management is required to advise the Committee of any instances of fraud relating to employees who have a significant role in our internal controls. The Committee was advised that management was not aware of any such instances of fraud.

The Audit Committee operates under a written charter, the current version of which was reaffirmed by the Board of Directors in March 2009 as part of its annual review process. The Audit Committee held twelve meetings in 2008. A report of the Audit Committee appears elsewhere in this proxy statement.

 

Consideration of Director Nominees.  The Compensation/Nomination/Governance Committee regularly assesses the size of the Board of Directors, the need for expertise on the Board of Directors and whether any vacancies are expected on the Board of Directors due to retirement or otherwise. The Committee’s process for identifying and evaluating nominees is as follows: In the case of incumbent directors, the Committee reviews annually such directors’ overall service to us during their term, including the number of meetings attended, level of participation, quality of performance and any transactions of such directors with us during their term. In the event that vacancies are anticipated, or otherwise arise, the Compensation/Nomination/Governance Committee considers various potential candidates for director which may come to its attention through a variety of sources, including current Board members, stockholders or other persons. In addition, from time to time the Committee will retain a professional search firm to assist it in identifying director candidates, for which the firm generally receives a fee. All candidates for director are evaluated at regular or special meetings of the Compensation/Nomination/Governance Committee. In evaluating and determining whether to recommend a person as a candidate for election as a director, the Compensation/Nomination/Governance Committee considers the qualification standards set forth in our Corporate Governance Principles, including: (1) personal and professional ethics, integrity and values; (2) an ability and willingness to undertake the requisite time commitment to Board functions; (3) independence pursuant to the guidelines set forth in the Corporate Governance Principles and applicable rules and regulations; (4) age, which must be less than 72; (5) the potential impact of service on the board of directors of other public companies, including competitors of our company; and (6) an absence of employment at a competitor of our company.

 

The Compensation/Nominating/Governance Committee will consider director candidates recommended by stockholders provided the procedures set forth below are followed by stockholders in submitting recommendations. The committee does not intend to alter the manner in which it evaluates candidates, including the minimum criteria set forth above, based on whether the candidate was recommended by a stockholder. A stockholder of our company may nominate persons for election to the Board of Directors at an annual meeting if the stockholder submits such nomination, together with certain related information required by our By-Laws, in writing to our Corporate Secretary at our principal executive offices not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting. In the event, however, that the date of the annual meeting is more than thirty days before or more than seventy days after that anniversary date, the notice must be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the meeting is first made. Following verification of the stockholder’s status, the Compensation/Nomination/Governance Committee will perform an initial analysis of the qualifications of the nominee pursuant to the criteria listed above to determine whether the nominee is qualified for service on our Board of Directors before deciding to undertake a complete evaluation of the nominee. Other than the verification of compliance with the procedures set forth in our By-Laws and stockholder status, and the initial analysis performed by the Compensation/Nomination/Governance Committee, a person nominated by a stockholder for election to the Board of Directors is treated like any other potential candidate during the review process by the Compensation/Nomination/Governance Committee.

 

Communications with the Directors.  Anyone who has a concern about our conduct, or about our accounting, internal accounting controls or auditing matters, may communicate that concern directly to the Board of Directors, our lead independent director (Mr. Stecko) or any other non-employee director or the Audit Committee. All such concerns will be forwarded to the appropriate directors for their review, and all concerns related to audit or accounting matters will be forwarded to the Audit Committee. All reported concerns will be simultaneously reviewed and addressed by our Chief Compliance Officer and General Counsel, or his or her designee (unless he or she is alleged to be involved in the matter at issue). The

status of all outstanding concerns addressed to the Board, the non-employee directors or the Audit Committee will be reported to the Board or the Audit Committee (as applicable) on a quarterly basis. The Board or any committee may direct special treatment, including the retention of outside advisors or counsel, for any concern addressed to them. Our corporate policies prohibit retaliatory action against any employee who raises concerns or questions in good faith about these matters.

 

Stockholders wishing to communicate with the Board of Directors, any outside director or the Audit Committee may do so by writing to our Corporate Secretary at 500 North Field Drive, Lake Forest, Illinois 60045. The Corporate Secretary will forward any communications as directed by the stockholder. We maintain a separate, internal system for the receipt of communications from employees.

 

Transactions with Related Persons

 

The Board of Directors has adopted its Policy and Procedures for Transactions with Related Persons. As a general matter, the policy requires the Audit Committee to review and approve or disapprove the entry by us or our subsidiaries into certain transactions with related persons. The policy only applies to transactions, arrangements and relationships where the aggregate amount involved could reasonably be expected to exceed $120,000 in any calendar year and in which a related person has a direct or indirect interest. A related person is:

 

 

If advance approval of a transaction subject to the policy is not obtained, it must be promptly submitted to the committee for possible approval, amendment, termination or rescission. In reviewing any transaction, the committee will take into account, among other factors the committee deems appropriate, whether the transaction is on terms no less favorable than terms generally available to a third party in similar circumstances and the extent of the related person’s interest in the transaction. The Board of Directors has delegated to the chair of the committee the authority to approve, disapprove or ratify any transaction with a related person in which the aggregate amount involved is expected to be less than $1,000,000.

 

The policy provides that the following transactions are pre-approved for the purposes of the policy:

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and beneficial owners of 10 percent or more of a registered class of our equity securities to file with the SEC initial reports of beneficial ownership (Form 3) and reports on changes in beneficial ownership (Form 4 or 5). SEC rules adopted pursuant to Section 16(a) require that such persons furnish us with copies of all such forms they file with the SEC.

 

Based solely upon our review of such forms furnished to us during 2008, and upon the written representations received by us from certain of our directors and executive officers that no Forms 5 were required, we believe that our directors, executive officers and 10% or greater stockholders complied with all Section 16(a) filing requirements on a timely basis during 2008.

 

OWNERSHIP OF COMMON STOCK

 

Management

 

The following table shows, as of March 16, 2009, the number of shares of our common stock, par value $.01 per share (the only class of voting securities outstanding), beneficially owned by: (1) each director and nominee for director; (2) each person who is named in the Summary Compensation Table below; and (3) all directors and executive officers as a group.

 

 

 

 

Certain Other Stockholders

 

The following table sets forth, as of March 16, 2009, certain information regarding the persons known by us to be the beneficial owner of more than 5% of our outstanding common stock (the only class of voting securities outstanding).

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Introduction

 

Our executive compensation philosophy, policies, plans and programs are under the supervision of the Compensation/Nominating/Governance Committee of our board of directors. In late 2005, the committee formed an Executive Compensation Subcommittee, which is responsible for making executive compensation determinations with respect to stock options and other equity-based compensation that may qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code. For a description of the composition, authority and responsibilities of the committee and subcommittee, see “Corporate Governance — The Board of Directors and Its Committees — Compensation/Nominating/Governance Committee and Subcommittee.” Unless the context requires otherwise, in this Compensation Discussion and Analysis when we refer to the “committee,” we are also referring to the subcommittee with respect to performance-based compensation under Section 162(m), and when we refer to “executives,” we are referring to the named executive officers whose compensation is shown in this proxy statement under “— Summary Compensation Table.”

 

Compensation Objectives

 

The basic philosophy underlying our executive compensation policies, plans and programs is that (1) executive and stockholder financial interests should be aligned as closely as possible, and (2) compensation packages should be based on delivering pay in line with performance.

 

Accordingly, our executive compensation program has been structured to:

 

 

Based on these objectives, our executive compensation program is designed to provide competitive levels of compensation derived from several sources: salaries; annual cash incentive awards; stock ownership opportunities through stock options and restricted stock; and other equity-based long-term compensation. We also offer other benefits typically offered to executives by major U.S. corporations, including defined benefit retirement plans (future benefit accruals under which were substantially eliminated for senior management in 2006 as described below), defined contribution retirement plans, perquisites, employment agreements (in limited cases), severance and change in control benefits and welfare benefits.

 

Compensation Process

 

In determining competitive compensation, the committee engages a nationally recognized compensation consulting firm that reports directly to the committee to maintain its independence. For more information regarding this consulting firm and the scope of its assignment, see “Corporate Governance — The Board of Directors and Its Committees — Compensation/Nominating/Governance Committee and Subcommittee.” For our Chief Executive Officer (CEO), the consulting firm generally provides market data regarding salary, annual cash incentive award targets, and long-term incentive compensation awards, and provides advice directly to the committee as it makes decisions with respect to compensation. For the other executives, our management formulates the initial recommendations regarding salary, annual cash incentive award targets and equity-based and other long-term incentive compensation awards. The

committee reviews the recommendations in light of market data prepared by the consulting firm. For other forms of compensation and benefits, management generally makes initial recommendations that are considered by the committee.

 

Our policy is to provide salary, annual cash incentive payments and long-term incentive compensation to executives based on performance that is competitive and at market levels with comparable companies when financial and qualitative targets are met (i.e. 50th percentile for target performance). In making its determinations regarding these elements of compensation, the committee regularly reviews data regarding compensation practices at other companies that it determines to be relevant to compensation matters affecting our company. Historically, we have not regularly engaged in any form of benchmarking regarding other elements of compensation. As described below, however, we did examine some benchmarking data in connection with our 2006 decision to substantially eliminate future accruals to our defined benefit retirement plans and were provided with advice regarding market practices when determining to amend and restate our change in control plan in 2007.

 

The benchmarking information we use in establishing salary, annual cash incentive payments and equity-based incentive compensation typically includes the most recently available data regarding companies believed to be comparable to our company in terms of industry (automotive parts manufacturing), size (total revenues, number of employees) and/or other factors. For 2008 compensation determinations, specific data was reviewed regarding a comparison group of eighteen companies selected to reflect a balance of automotive sector and other traditional manufacturing companies. The data was weighted based on the size of revenues of the comparison companies. The following is a list of these companies and a description of why the committee believes they are appropriate for the comparison group:

 

 

In addition, with respect to the executives other than our CEO, the committee reviewed aggregate data regarding a broader group of durable goods manufacturers (that were not specifically identified to the committee). This data was prepared by the consulting firm and compared targeted and actual

compensation paid by these companies to their executive officers in specified positions to the compensation we pay to executives in the same or similar positions.

 

Consistent with our compensation objectives described above, our executive compensation program is designed to be typical of the compensation programs that companies of similar size and in similar industries offer to their executive officers. In addition to looking at the competitiveness of the elements of pay, the committee uses “tally sheets” to review the total amount of compensation and benefits provided to the executive officers annually as well as over a period of years. The tally sheets also help the committee consider pay decisions in the context of an executive’s total compensation.

 

Traditionally, our CEO and senior human resources executive annually review with the committee the annual salary, incentive plan target and long-term and stock-based compensation for each of our executives and other key management personnel (excluding the CEO). The committee approves that plan with any changes that the committee deems appropriate. The compensation that is developed for each of these executives is based on competitive market data and on the CEO’s subjective recommendations regarding the executive’s overall contributions. Traditionally, the committee also reviews separately and sets the salary, incentive plan target and long-term and stock-based compensation of the CEO based on competitive market data as well as the committee’s assessment of the CEO’s past performance and anticipated future contributions.

 

Design and Elements of Compensation

 

Our compensation program generally provides that, as an executive’s level of responsibility increases, a greater portion of his or her potential total compensation is based on corporate performance and varies in accordance with the market price of our common stock. This results in greater potential variability in the individual’s total compensation from year-to-year. In designing and administering the components of the executive compensation program, the committee strives to balance short and long-term incentive objectives and to employ prudent judgment when establishing performance criteria, evaluating performance and determining actual incentive payments.

 

The following is a description of each element of our executive compensation program, along with a discussion of the decisions of and action taken by the committee with respect to each such aspect of compensation for 2008.

 

Salary and Bonus/Non-Equity Incentive Plan Compensation

 

An executive’s basic annual cash compensation package consists primarily of a base salary and payments under the Tenneco Value Added Incentive Compensation Plan, which we call the TAVA Plan. The TAVA Plan provides for annual incentive payments based on objective and subjective determinations regarding corporate performance. These elements of compensation are customary within our industry.

 

The 2008 salary levels established for our executives were designed to be, in general, in the 50th percentile range when compared to the salaries set by the companies in the compensation surveys reviewed as described above. For 2008, the committee’s standard merit increase for executives and other senior managers was 3.5%, although the average executive increase was approximately 15% due to adjustments to reflect promotions and to place the executive at the 50th percentile compared to his counterpart at comparable companies. The following table shows the base salary for each named executive officer as of December 31, 2007 and December 31, 2008 and the reasons for any increase during 2008:

 

The TAVA Plan target payment levels established for our executives for 2008 were also designed to be, in general, in the 50th percentile range when compared to target levels for similar payments set by the companies in the compensation surveys reviewed as described above. Like executives at peer companies, under the TAVA Plan our executives had the potential to earn payouts above or below the targeted 50th percentile based on our actual corporate performance.

 

The current annual performance goal for the TAVA Plan was developed, initially, by Stern Stewart & Co., an independent consulting firm with expertise in EVA^® based incentive programs (EVA^® is defined as net operating profit after taxes minus the annual cost of capital and is a registered trademark of Stern Stewart & Co.). The firm developed the goal as part of a multi-year recommendation to the committee made in early 2006. The firm’s recommended performance goals were reviewed by the committee. The committee approved the goals with any changes the committee determined appropriate. At the conclusion of each year, the committee approves incentive award payments to executives based on the degree of achievement of the goals established for that year and on judgments of performance as follows: (i) 75% of an individual’s award is determined through a formula tied to our corporate achievement of pre-established EVA^® objectives, and (ii) 25% of an individual’s award is based on the committee’s discretionary determination of corporate performance.

 

We use EVA^® as the performance metric for the TAVA Plan because we believe strong EVA^® performance is highly correlated with strong stockholder returns and that making business decisions based on EVA^® balances cash-oriented results and earnings-oriented results. We continue to base 25% of an individual’s bonus on the committee’s discretionary determination of corporate performance because the committee believes that it needs to retain flexibility to respond to circumstances where EVA^® performance alone does not address performance made by our company for a particular year or where the committee determines that other factors should be considered in establishing bonuses.

 

The 25% portion of an individual’s payout that is discretionary under the TAVA Plan is non-formulaic and is determined by the committee based on factors which take into account, but are not limited to, the relative performance of our company versus our peers in key strategic and operational areas. The factors considered may change from year to year.

 

For 2008, the targeted level of EVA^® improvement that would have resulted in an executive receiving an EVA^®-based bonus equal to 100% of his targeted bonus amount was an improvement of $13 million over EVA^® for 2007. While there is no maximum payout, the potential payouts typically range from zero to two times targeted bonus based upon the actual EVA^® growth in relation to the targeted improvement. For 2008, EVA^® would have needed to improve $37 million over EVA^® for 2007 for an executive to have received an EVA^®-based bonus equal to two times his targeted bonus amount.

 

For 2008 performance, no cash awards were made under the TAVA Plan. As described above, our corporate performance against EVA^® objectives accounted for 75% of each executive’s 2008 TAVA Plan award potential. Our EVA^® performance for 2008 was a significant decline which resulted in no payments being earned in respect of this portion of executives’ TAVA Plan awards. Payout of the remaining 25% of each executive’s TAVA Plan award is discretionary and is determined by the committee based on the various subjective factors described above. Weighing these factors for 2008, the committee determined that no discretionary bonus would be paid to any executive for 2008.

 

In making its determinations that no discretionary bonuses be awarded for 2008, the committee considered in particular Tenneco’s overall financial performance, market conditions and stock price performance.

 

Long-Term and Stock-Based Incentives

 

Our long-term and stock-based incentive plans have been designed to align a significant portion of executive compensation with stockholder interests. The current plan — the 2006 Long-Term Incentive Plan — permits a variety of awards including stock options, restricted stock, stock equivalent units and performance units.

These awards are based on an analysis of competitive levels of similar awards. As an individual’s level of responsibility increases, a greater portion of variable performance-related compensation will be in the form of long-term and stock-based awards.

 

The committee has implemented a long-term and stock-based compensation program for our executives that is comprised of (1) stock options which generally vest in 1/3 increments over three years, (2) awards of restricted stock which vest in 1/3 increments over three years, and (3) cash-settled long-term performance units (“LTPUs”) which are payable based on the level of total stockholder return. These LTPUs were, as described below, adopted by the committee in 2007 as a replacement for the company’s prior cash-settled stock equivalent units (“SEUs”). Each year, the committee reviews previously granted long-term and stock based awards for our executives, typically at its meeting held in January.

 

Prior to 2007, the committee granted executives cash-settled SEUs that were payable based on the level of EVA^® improvement and stock price appreciation. These awards generally covered a three-year period but a portion of the award was payable annually. Based on its review of the effectiveness and purpose of the plan and competitive market data, the committee determined to eliminate the SEU program beginning in 2007. The committee adopted in its place the LTPU program. The LTPUs are denominated in units and are payable based on the level of total stockholder return (stock price appreciation adjusted for any dividends) during the performance period. The total stockholder return is applied against a multiplier that determines the percentage of the awarded units that is earned based on that level of total stockholder return. The value of a unit is equal to the company’s average closing stock price during a ten-day period after the announcement of the company’s earnings for the last year of the performance period. The LTPUs, in general, are payable at the end of a three-year performance cycle. For 2007 and 2008, the committee granted special LTPUs covering only a one-year period as part of the phase in to the new program.

 

In January 2008, the committee granted awards of the type described above to our executives as set forth under the “Executive Compensation” section of this Proxy Statement. Based on the committee’s assumptions regarding future corporate performance, interest rates and other factors, the 2008 grants were designed, in general, to place our executives at approximately the 50th percentile range when compared to the value of similar awards granted by peer companies to their executives. In making its determinations for 2008, the committee also considered factors such as internal pay equity and common stock dilution. Our executives have the opportunity for the value actually realized from these awards to be above or below the 50th percentile based on our actual corporate performance.

 

For the LTPUs granted in 2008, the committee’s target level of stockholder return for 2008 and the 2008 to 2010 period was a 10% annualized rate of return. An executive would earn a percentage of LTPUs based on the actual level of stockholder return as set forth in the table below. In each case, as described above, the value of the units at the time of payment is based on an average of the then prevailing stock prices.

 

 

For 2008 performance, no cash payout was made under the one-year LTPUs as our total stockholder return for 2008 was negative. Based upon this performance, award holders earned no units.

 

In January 2009, the committee granted stock option and restricted stock awards to our executives. The limited number of shares remaining available under our 2006 Long-Term Incentive Plan, combined with the significant decline in our stock price due to the unprecedented market conditions (a result of which was to require more shares to be granted to deliver targeted value), constrained these awards. Accordingly, based on the committee’s assumptions regarding future corporate performance, interest rates and other factors, the 2009 awards are expected to place our executives at significantly less than the

50th percentile range we have historically targeted. In January 2009, the committee also considered whether to award further LTPUs. Because of the uncertainties surrounding market conditions and our company’s anticipated performance, the committee did not grant any LTPU awards in January 2009, but intends to revisit the issue later in 2009.

 

Allocation Among Forms of Compensation

 

In general, we allocate between currently paid compensation and long-term compensation (excluding retirement benefits) based on the benchmarking data analyzed as described above. Our preference in establishing equity-based incentives is to deliver as much value in awards that result in the issuance of stock as possible (specifically, options and restricted stock). However, since emerging as a stand alone company in 1999, we have been constrained in the amount of stock available for issuance under our equity incentive plans. As a result, we have used the SEU and LTPU awards to deliver to our executives the overall value we intend to deliver based on the benchmarking described above, payable in cash rather than stock. Awards deliverable in stock are then allocated between options and restricted stock in line with the market data described above.

 

Actual Versus Targeted Compensation Levels

 

As mentioned above, we generally target executive pay to be near the median target pay for similarly situated executives at comparable companies. However, we expect that, as a result of our corporate performance in 2008, our executives’ salaries and equity-based awards granted in 2008, after giving effect to the absence of TAVA Plan and LTPU payouts, will be below the market median of actual compensation received by executives at the companies in the compensation surveys reviewed by the committee.

 

Employment Agreements

 

In January 2007, Gregg M. Sherrill joined us as our CEO. We entered into an employment agreement with him that is described under “— Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.” Employment agreements are customary for chief executive officers and necessary to attract the highest quality candidates. In January 2007, we paid Mr. Sherrill a bonus of $1,325,000 and granted him 125,000 shares of restricted stock that vest in three equal installments, subject to his continued employment, in order to compensate him for the income he was foregoing from his former employer by accepting our offer. These types of signing inducements are customary for chief executive officers.

 

In general, we do not have employment agreements with our other executive officers. However, for historical reasons there are a few exceptions. In late 1999, we emerged as an independent, stand-alone public company focused solely on our automotive operations. The separation transactions caused substantial changes in our management, as the senior management of the automotive operations became the executive officers of our company and the previous executive officers resigned. In addition, the separation transactions left us with a highly leveraged balance sheet in an extremely competitive industry that historically has faced cycles of exceptionally difficult operating conditions.

 

In the face of these challenges, we recognized the importance of ensuring the continuation of top-notch managerial talent and the risk our executives were taking in light of our balance sheet and the cyclicality of the automotive industry. As a result, at that time, we entered into employment agreements with our then top eight executive officers. In addition to our recognition of the importance of these agreements as a recruiting and retention tool, they were consistent with the types of employment agreements historically offered by the consolidated Tenneco Inc. and were viewed as customary. Since then, five of these officers have left our employ and, in most cases, other managers have been promoted into positions vacated by them. Other than with respect to our CEO who was hired in January 2007, we have not, however, extended these type of employment agreements to these employees. For 2008, we had two executives, Mr. Nair and Mr. Jackson, with employment agreements that established various terms and conditions of their employment as described under “— Narrative Disclosure to Summary

Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.” Both of these agreements were entered into in connection with the series of transactions in 1999 that resulted in the separation of Tenneco Inc.’s automotive, packaging and administrative services businesses. We also still employ one other executive officer with whom we entered into an employment agreement in 1999.

 

Retirement Plans

 

For those executives hired before April 1, 2005, we offered defined benefit retirement plans that we believed were customary for the automotive industry and were consistent with similar plans maintained by the consolidated Tenneco Inc. prior to our becoming a stand-alone public company in 1999. These plans included a customary tax-qualified retirement plan that was generally available to all U.S.-based salaried employees and provided benefits as described under “— Post Employment Compensation.” In addition, we maintained a supplemental executive retirement plan, which we call the “SERP,” that provided benefits as described under “— Post Employment Compensation — Tenneco Supplemental Retirement Plan.”

 

We also offer to our executives and other U.S.-based salaried employees customary, tax-qualified defined contribution retirement (ESOP/401(k)) plans that provide benefits as described under “— Summary Compensation Table.” Prior to January 1, 2009, we provided a 50% company match on an executive’s contributions (up to 8% of salary), which we established to be in line with prevailing practices for major U.S. corporations. In addition to this matching contribution, we also provide a company contribution equal to 2% of salary for persons hired on or after April 1, 2005. We established this company contribution when we closed our defined benefit retirement plans to new participants in 2005. We decided to do this because, in general, companies in our industry have been eliminating traditional defined benefit retirement plans from compensation packages being offered to new employees.

 

At the time of the 1999 separation transactions, five employees were considered to be of key importance to our successful transition to being a stand-alone company and were granted participation in a key executive pension plan, which we call the “KEPP.” The KEPP provided benefits as described under ‘‘— Post Employment Compensation — Tenneco Supplemental Pension Plan.” We modeled the KEPP after the key executive pension plan maintained by the former consolidated Tenneco Inc. prior to the separation transactions.

 

In August 2006, we froze, effective December 31, 2006, our defined benefit retirement plans for certain employees and replaced them with additional benefits under defined contribution retirement plans. Prior earned benefits under the defined benefit retirement plans were, however, preserved. With the exception of certain officers who had employment contracts providing for specified benefits (all of whom voluntarily accepted a benefits reduction as described below), this freeze impacted all U.S.-based salaried employees (including executives) and non-union hourly employees who participated in any of the plans.

 

To address the loss of future benefits associated with the freeze, we amended our existing qualified defined contribution retirement plans, effective January 1, 2007, to provide for additional annual company contributions in amounts that increase with the employee’s age. These additional contributions, which we refer to as “DB Replacement Contributions,” are payable for each employee who ceased to accrue benefits or whose benefits were otherwise modified under any defined benefit retirement plan in connection with the freeze. In addition, effective January 1, 2007 we implemented an unfunded non-qualified defined contribution retirement plan. In general, our executives and other senior managers are eligible to participate in this new plan, with allocations under the plan calculated the same as under the applicable existing defined contribution retirement plan (as amended), except that (i) the compensation limit in Section 401(a)(17) of the Internal Revenue Code is disregarded and awards under the TAVA Plan or any successor plan are included in calculating compensation, and (ii) there is an offset for the DB Replacement Contributions.

 

Under the terms of his employment agreement, our CEO is entitled to 150% of the standard age-graded benefit under the non-qualified defined contribution retirement plan. In addition, in December 2007, the committee granted our Chief Financial Officer an enhanced benefit equal to 200% of the standard age-graded benefit under the non-qualified defined contribution retirement plan. The committee granted these enhanced benefits based on competitive data provided by our compensation consultant.

We decided to freeze our defined benefit retirement plans consistent with an industry trend towards eliminating traditional defined benefits. We decided to offer additional defined contribution retirement benefits to remain competitive in the overall employment marketplace. Specifically, the committee reviewed information presented by Buck Consultants, a pension actuarial firm, regarding the industry trends in retirement compensation, the cost savings to our company of a revised retirement compensation structure and the degree of benefit replacement to be achieved through new defined contribution retirement plans.

 

Two of our executives — Hari N. Nair and Timothy E. Jackson — had employment agreements that provided for their participation in the SERP and/or KEPP. As a result, we did not freeze the KEPP and SERP for these officers. Instead, each such executive voluntarily agreed to a reduction in his retirement benefit payable under those plans and to an offset to benefits payable under those plans for DB Replacement Contributions received under the existing or new defined contribution plans. The benefits reduction increases to a maximum of 5% of the benefit that would have otherwise been paid, depending on the officer’s age at retirement.

 

Perquisites

 

In keeping with the competitive practice of providing perquisites, each of our executives received a perquisite allowance in an amount between $30,000 and $50,000 for 2008. The perquisite allowance was designed to control our costs and to give flexibility to management. Each executive may spend his perquisite allowance on those items he deems appropriate.

 

Severance Benefits

 

We maintain a Severance Benefit Plan that applies to all salaried, full-time employees with at least one month of service who are terminated by us in connection with a reduction in force or similar layoff. The benefits payable under this plan are described under “— Other Potential Post-Employment Compensation — Other Severance Benefits.” This plan was originally adopted in the 1990s based on prevailing practices at other major U.S. corporations and, after several amendments, we continue to believe it reflects these prevailing practices.

 

Except for our CEO, if any of our executives with an employment agreement (Messrs. Nair and Jackson) is terminated by us other than in connection with a change in control or for death, disability or cause, he will be paid two times the total of his then current salary and bonus for the immediately preceding year, all outstanding stock-based awards will be vested, subject to approval by our board of directors, his stock options will remain exercisable for at least 90 days and he will receive one year of post-termination health and welfare benefits. We established these severance benefits at the time of the 1999 separation transaction based on the severance offered by the former consolidated Tenneco Inc.

 

Under his employment agreement, we have agreed to pay our CEO two times his then current salary if we terminate his employment other than for disability, cause or in connection with a change in control. We view these benefits as customary and a key element of the recruiting and retention of executives in light of company and industry specific factors. See “— Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table — Employment Agreements.”

 

Change in Control Plan

 

We maintain a Change in Control Severance Benefit Plan for Key Executives to enable us to retain and motivate highly qualified employees by eliminating, to the maximum practicable extent, any concern that their job security or benefit entitlements will be jeopardized by a “change in control” of our company. Benefits are payable under the plan as described in “— Other Potential Post-Employment Compensation — Change in Control Severance Benefit Plan for Key Executives.”

 

We adopted a version of the plan in connection with the 1999 separation transactions based substantially on the change in control benefits offered by the former consolidated Tenneco Inc. We

viewed these benefits as a key element of the recruiting and retention of executives and other senior management at the time in light of company and industry specific factors. For executives with employment agreements, other than our CEO, the terms of this plan as to entitlement to cash payments and the vesting of awards continue to apply.

 

In 2007, the committee reevaluated our plan in light of current market conditions and practices. While the committee continued to believe that a change in control program was necessary to keep executive decision-making objective and neutral to potential job loss, for executive retention during a transaction and to provide and maintain a competitive total compensation package, the committee determined that changes should be made to the plan so that the plan did not exceed current “median” market practices. The principal differences between the amended and restated change in control plan adopted in 2007 and our prior change in control plan are (i) it applies to far fewer individuals (applies to nine top executives, which is 46 fewer than the prior plan), (ii) it redefines what constitutes a “change in control” (more limited in scope), (iii) it no longer provides that awards under the plan or any similar benefit plan or compensation arrangement or program will be treated as exercisable, earned at target and vested immediately upon the happening of a change in control and (iv) it removes the provision previously allowing certain executives voluntarily separating from the company following a change in control to be paid benefits under the plan.

 

Equity Award Policy

 

Our board of directors has adopted a formal policy regarding compensatory awards in the form of our common stock or any common stock derivative, such as options, stock appreciation rights and stock equivalent units. Under the policy, in general, equity awards must be approved by the committee or the full board of directors. Typically, the committee will make annual awards that it determines to be appropriate at its meeting held in January. The committee also has the authority to make interim awards in its discretion. The strike price of any option or stock appreciation right must be the fair market value of a share of our common stock on the date of grant as determined under the 2006 Long-Term Incentive Plan (which is the average of the highest and lowest sales price of a share of our common stock on the date of grant).

 

Our policy also permits a committee of management to make awards in certain cases. The management committee consists of our CEO, General Counsel and Senior Vice President of Global Administration (or their respective designees). The management committee has the authority to make equity awards to (i) newly hired employees and (ii) employees who are promoted during the course of a year. The awards can be made only in amounts necessary to provide the employee with awards consistent with the amount of awards most recently made to employees of the same salary grade level, pro-rated based on when the employee was hired or promoted. The awards are pro-rated to and take effect on the first day of the calendar quarter beginning after the employee’s hire or promotion date, as applicable, and any strike price for an option or stock appreciation right will be the fair market value of a share of our common stock on that date. The total number of shares that the management committee can issue under this board of directors policy is 100,000. The management committee is not authorized to make awards to new or promoted employees whom we would typically consider to be at the most senior management or executive officer level.

 

Stock Ownership Guidelines

 

We maintain stock ownership guidelines that apply to all of our directors and our senior officers. The individual guidelines are:

 

 

The committee may, from time to time, temporarily suspend or reevaluate and revise participants’ guidelines to give effect to changes in our common stock price or other factors the committee deems relevant. Shares that count towards satisfaction of the guidelines include: (i) shares owned outright by the participant or an immediate family member that shares the same household; (ii) shares held in our defined contribution plans; (iii) restricted stock issued by us, whether or not vested; (iv) shares underlying vested options granted by us; and (v) shares or share equivalent units underlying deferred compensation of executives or deferred fees paid to directors.

 

Participants are required to achieve their guideline within five years of becoming subject to the guidelines. The committee has the authority to review each participant’s compliance (or progress towards compliance) with the guidelines from time to time. In its discretion, the committee may impose conditions, restrictions or limitations on any non-compliant participant as the committee determines to be necessary or appropriate.

 

Impact of Regulatory Requirements on Compensation

 

Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a publicly-traded corporation may deduct for compensation paid to the CEO or one of the company’s other three most highly compensated executives who is employed on the last day of the year. Non-discretionary “performance-based compensation,” as defined under Internal Revenue Service rules and regulations, is excluded from this $1 million limitation.

 

In late 2005, the committee established the Executive Compensation Subcommittee, comprised of all committee members except Mr. Stecko. The subcommittee considers and approves compensation for the CEO and our other executive officers that is intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code.

 

Our compensation programs are structured to support organizational goals and priorities and stockholder interests. The committee has not in the past had, and does not currently have, a policy requiring all compensation to be deductible under Section 162(m). Amounts payable under the TAVA Plan do not qualify for the performance-based compensation exemption under Section 162(m), as the committee retains discretion in making bonus awards. In addition, the TAVA Plan was not submitted to stockholders for approval. Additionally, our restricted stock is not considered performance-based compensation under Section 162(m) because it vests solely on the basis of the individual’s continued employment over a defined period of time. The subcommittee makes grants of LTPUs and stock option awards that are generally designed to incorporate the applicable requirements for “performance-based compensation” under IRS rules and regulations. However, we seek to preserve the tax deductibility of executive compensation only to the extent practicable and consistent with our overall compensation philosophies.

 

We do not make compensation determinations based on the accounting treatment of any particular type of award.

Summary Compensation Table

 

The following table shows the compensation that we paid, for 2008, to: (1) our Chief Executive Officer; (2) our Chief Financial Officer; and (3) each of our next three most highly compensated executive officers who were serving at the end of 2008 based on total compensation less the increase in actuarial value of defined benefits and any above market or preferential earnings on non tax-qualified deferred compensation. We refer to these individuals collectively as the “Named Executives.” The table shows amounts paid to the Named Executives for all services provided to our company and its subsidiaries.

 

Summary Compensation Table

 

 

 

(Notes continued on following page.)

 

 

										Registrant
		Perquisites								Contributions
		and Other				Tax				to Defined
		Personal				Reimbursements				Contribution
Name		Benefits (a)				(Gross-ups)				Plans (b)
Mr. Sherrill		$	55,687			$	1,675			$	259,453
Mr. Trammell			50,959				6,172				108,780
Mr. Nair			51,536				—				65,467
Mr. Yanos			47,376				5,352				49,117
Mr. Jackson			30,300				134				53,575

 

 

 

Grants of Plan-Based Awards During 2008

 

The following table shows certain information regarding grants of plan-based awards we made to the Named Executives during 2008.

 

Grants of Plan-Based Awards During 2008

 

 

 

 

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Bonus and Non-Equity Incentive Plan Awards

 

Amounts reflected in the Summary Compensation Table under the column entitled “Bonus” and “Non-Equity Incentive Plan Compensation” are payments under the Tenneco Value Added Incentive Plan (“TAVA Plan”). Under the TAVA Plan, (i) 25% of an individual’s bonus is based on the Compensation/Nominating/Governance committee’s discretionary determination of performance (reflected in the “Bonus” column) and (ii) 75% of an individual’s bonus is tied to our achievement of pre-established EVA^® objectives (reflected in the “Non-Equity Incentive Plan Compensation” column). A discussion of why EVA^® is used as the performance metric for the TAVA plan can be found in “— Compensation Discussion and Analysis — Design and Elements of Compensation — Salary and Bonus/Non-Equity Incentive Plan Compensation.”

 

The annual performance goal for the TAVA Plan was developed, initially, by Stern Stewart & Co., an independent consulting firm with expertise in EVA^®-based incentive programs. The firm’s recommended performance goals are reviewed by the committee. The committee approves the goals with any changes the committee determines appropriate. At the conclusion of each year, the committee approves incentive award payments to executives based on the degree of achievement of the goals established for that year and on judgments of performance as follows: (i) 75% of an individual’s award is tied to our corporate achievement of pre-established EVA^® objectives, and (ii) 25% of an individual’s award is based on the committee’s discretionary determination of corporate performance. EVA^® is after-tax operating profit minus the annual cost of capital and is a registered trademark of Stern Stewart & Co.

 

The 25% portion of an individual’s payout that is discretionary under the TAVA Plan is determined by the committee based on factors which take into account, but are not limited to, the relative performance of our company versus our peers in key strategic and operational areas. The factors considered may change from year to year.

 

See “— Compensation Discussion and Analysis” for a discussion of specific determinations under the TAVA Plan for 2008.

 

Despite the absence of any TAVA Plan payout for 2008 performance, a payment of $16,490 for Mr. Trammell, $23,593 for Mr. Nair, $13,532 for Mr. Yanos and $13,914 for Mr. Jackson was paid in early 2009 in respect of amounts held in the individual’s bonus bank. After giving effect to those payments, $32,979, $47,185, $27,065 and $27,827 remained credited to the bonus bank of Messrs. Trammell, Nair, Yanos and Jackson, respectively.

 

Stock Awards

 

Amounts reflected in the Summary Compensation Table under the column entitled “Stock Awards” represent awards of restricted common stock, long term performance units (2007 and 2008 awards) and stock equivalent units (2006 award) granted to each Named Executive under our 2006 Long-Term Incentive Plan. See “— Grants of Plan Based Awards During 2008.”

 

Our restricted stock awards vest one-third per year during the three years after the grant date, subject to the officer’s continued employment. Subject to the terms of any employment agreement, the unvested portion of these awards is generally forfeited by a participant if his or her employment is terminated other than due to death, disability or retirement. All restrictions lapse upon death, disability or retirement.

 

As discussed in “— Compensation Discussion and Analysis,” we decided to eliminate our stock equivalent units (“SEUs”) beginning in 2007 replacing them with cash-settled long term performance units (“LTPUs”) which are payable based on the level of total stockholder return. The LTPUs are denominated in units and are payable based on the level of total stockholder return (stock price appreciation adjusted for any dividends) during the performance period. The total stockholder return is applied against a multiplier that determines the percentage of the awarded units that is earned based on that level of total stockholder return. The value of a unit is equal to the company’s average stock price during a ten-day period after the announcement of the company’s earnings for the last year of the performance period. The LTPUs, in

general, are payable at the end of a three-year performance cycle. For 2007 and 2008, the committee granted special LTPUs covering only a one-year period as part of the phase in to the new program. Subject to the terms of any employment agreement, units evidenced by this award are generally forfeited by a participant if his or her employment is terminated other than due to death, disability or retirement, unless the committee determines otherwise. In the event of termination due to death, disability or retirement, all units initially awarded are deemed 100% earned and paid out in cash at our prevailing stock price at the time.

 

Option Awards

 

Amounts reflected in the Summary Compensation Table under the column entitled “Option Awards” represent awards of nonqualified options to purchase common stock granted to each Named Executive under our 2006 Long-Term Incentive Plan. See “— Grants of Plan Based Awards During 2008.” The awards vest one-third per year during the three years after the grant date and have a seven-year term. Subject to the terms of any employment agreement, the unexercised portion of these awards is generally forfeited by a participant on the date his or her employment is terminated other than due to death, disability or retirement. In the event of death, disability or retirement, the options become fully exercisable and remain exercisable for a period specified in the applicable award agreement.

 

Employment Agreements

 

In January 2007, we entered into an agreement with Mr. Sherrill that sets forth certain terms and conditions of his employment with our company. The agreement provides that, under our Change in Control Severance Benefit Plan for Key Executives, Mr. Sherrill’s cash payment in connection with a change in control termination will equal three times the total of his then current base salary plus his highest target bonus. See “— Post-Employment Compensation — Other Potential Post-Employment Compensation” for a discussion of the other benefits afforded under the Change in Control Severance Benefit Plan for Key Executives. The agreement also provides that, other than in connection with a change in control, if Mr. Sherrill’s employment is terminated by us other than for disability or cause, he will be paid two times his then current annual salary. The employment agreement also provides for participation in an excess non-qualified defined contribution plan which, prior to offset for amounts contributed under the qualified plan, is equal to 150% of the standard age-graded benefit under the plan and for participation in other benefit plans we offer our employees generally.

 

Mr. Nair and Mr. Jackson are party to agreements with us that set forth certain terms and conditions of their employment with our company. Each of the employment agreements provides that, under our Change in Control Severance Benefit Plan for Key Executives, the relevant Named Executive’s cash payment in connection with a change in control termination would equal three times the total of his then current base salary plus the higher of (i) his highest annual target bonus over the prior three years and (ii) his average bonuses for the prior three years. Each of the employment agreements also provides that, other than in connection with a change in control, if the relevant Named Executive’s employment is terminated by us other than for death, disability or nonperformance of duties, he will be paid two times the total of his then current salary and bonus for the immediately preceding year, all outstanding stock-based awards would be vested, subject to Board approval, his stock options would remain exercisable for at least 90 days and he would receive one year of post-termination health and welfare benefits. Pursuant to the terms of their employment agreements, Messrs. Nair and Jackson are guaranteed a minimum annual base salary/minimum annual target bonus as follows: Mr. Nair, $414,000/$273,000 and Mr. Jackson, $327,600/$161,000. The employment agreements also provide for participation in benefit plans we offer to our employees generally, as well as continued participation in supplemental retirement benefit plans as described under “— Post-Employment Compensation.”

Outstanding Equity Awards at December 31, 2008

 

The following table shows certain information regarding the outstanding equity awards held by the Named Executives at the end of 2008.

 

Outstanding Equity Awards at December 31, 2008

 

 

 

 

						Number of								Number of
Name		Option Vesting Date				Options Vesting				Stock Vesting Date				Shares Vesting
Mr. Sherrill			1/15/2009				40,000				1/15/2009				21,667
			1/16/2009				33,333				1/15/2009				41,666
			1/15/2010				40,000				1/16/2009				18,333
			1/16/2010				33,333				1/15/2010				21,667
			1/15/2011				40,000				1/15/2010				41,667
											1/16/2010				18,333
											1/15/2011				21,666
Mr. Trammell			1/15/2009				9,333				1/15/2009				4,667
			1/16/2009				5,000				1/16/2009				5,000
			1/16/2009				8,000				1/16/2009				4,000
			1/15/2010				9,333				1/15/2010				4,667
			1/16/2010				8,000				1/16/2010				4,000
			1/15/2011				9,334				1/15/2011				4,666
Mr. Nair			1/15/2009				11,667				1/15/2009				8,333
			1/16/2009				5,000				1/16/2009				5,000
			1/16/2009				8,000				1/16/2009				4,000

						Number of								Number of
Name		Option Vesting Date				Options Vesting				Stock Vesting Date				Shares Vesting
			1/15/2010				11,667				1/15/2010				8,333
			1/16/2010				8,000				1/16/2010				4,000
			1/15/2011				11,666				1/15/2011				8,334
Mr. Yanos			1/15/2009				5,000				1/15/2009				2,500
			1/16/2009				3,333				1/16/2009				3,333
			1/16/2009				5,333				1/16/2009				2,667
			7/15/2009				1,167				7/15/2009				583
			1/15/2010				5,000				1/15/2010				2,500
			1/16/2010				5,334				1/16/2010				2,666
			7/15/2010				1,166				7/15/2010				584
			1/15/2011				5,000				1/15/2011				2,500
			7/15/2011				1,167				7/15/2011				583
Mr. Jackson			1/15/2009				5,000				1/15/2009				2,500
			1/16/2009				1,666				1/16/2009				1,667
			3/17/2009				1,666				1/16/2009				2,400
			1/16/2009				5,133				3/6/2009				219
			3/6/2009				164				3/17/2009				1,333
			1/15/2010				5,000				1/15/2010				2,500
			1/16/2010				5,134				1/16/2010				2,400
			3/6/2010				165				3/6/2010				220
			1/15/2011				5,000				1/15/2011				2,500