þ	No fee required.
o	Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

	(1)	Title of each class of securities to which transaction applies:

	(2)	Aggregate number of securities to which transaction applies:

	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

	(4)	Proposed maximum aggregate value of transaction:

	(5)	Total fee paid:

o	Fee paid previously with preliminary materials.
o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)	Amount Previously Paid:

	(2)	Form, Schedule or Registration Statement No.:

	(3)	Filing Party:

	(4)	Date Filed:

	1.	To fix the number of directors of Sherwin-Williams at 11 and to elect the 11 director nominees named in the attached Proxy Statement to hold office until the next Annual Meeting of Shareholders and until their successors are elected;
	2.	To approve the amendment and restatement of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan;
	3.	To ratify the appointment of Ernst & Young LLP as Sherwin-Williams’ independent registered public accounting firm;
	4.	To consider a shareholder proposal if presented at the Annual Meeting; and
	5.	To transact such other business as may properly come before the Annual Meeting.

About the Meeting			1
Corporate Governance			4
Election of Directors (Proposal 1)			8
Experience, Qualifications, Attributes and Skills of Directors and Nominees			10
Independence of Directors			11
2009 Director Compensation Table			13
Director Compensation Program			14
Board Meetings and Committee Membership			16
Audit Committee Report			20
Compensation Committee Report			20
Compensation Risk Assessment			20
Compensation Discussion and Analysis			21
Executive Compensation Tables			35
Equity Compensation Plan Information			43
Potential Payments Upon Termination or Change in Control			44
Approval of the Amendment and Restatement of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Proposal 2)			49
Ratification of Appointment of the Independent Registered Public Accounting Firm (Proposal 3)			62
Matters Relating to the Independent Registered Public Accounting Firm			62
Shareholder Proposal Relating to Majority Voting (Proposal 4)			63
Security Ownership of Management			66
Security Ownership of Certain Beneficial Owners			67
Section 16(a) Beneficial Ownership Reporting Compliance			68
Certain Relationships and Transactions with Related Persons			68
Shareholder Proposals for the 2011 Annual Meeting			69
Householding Information			69
Annual Report on Form 10-K			69
Appendix A — Director Independence Standards			A-1
Appendix B — 2006 Equity and Performance Incentive Plan (Amended and Restated as of April 21, 2010)			B-1

 

ABOUT THE MEETING

	•	the approval of the amendment and restatement of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan;
	•	the ratification of the appointment of Sherwin-Williams’ independent registered public accounting firm; and
	•	the consideration of a shareholder proposal if presented at the Annual Meeting.

1

2

	•	“FOR” fixing the number of directors at 11 and electing the 11 nominees for directors (Proposal 1);
	•	“FOR” approving the amendment and restatement of The Sherwin-Williams Company 2006 Equity and Performance Incentive Plan (Proposal 2);
	•	“FOR” ratifying the appointment of Ernst & Young LLP as Sherwin-Williams’ independent registered public accounting firm (Proposal 3); and
	•	“AGAINST” the shareholder proposal (Proposal 4).

3

	•	giving a revocation to our Senior Vice President, General Counsel and Secretary in writing, in a verifiable communication or at the Annual Meeting;
	•	returning a later signed and dated proxy card;
	•	entering a new vote on the Internet or telephone; or
	•	voting in person at the Annual Meeting.

	•	If you are a shareholder of record, or own your shares through our Stock Ownership and Automatic Dividend Reinvestment Plan or our Employee Stock Purchase and Savings Plan, an admission ticket is attached to your proxy card. Simply tear it off and bring it to the Annual Meeting.
	•	If you hold your shares in street name, we may ask you to provide proof of beneficial ownership as of the record date, such as a bank or brokerage account statement showing ownership on February 26, 2010, a copy of the voting instruction card provided by your broker or nominee, or similar evidence of ownership.

 

CORPORATE GOVERNANCE

4

5

6

	•	The award was based upon the achievement of financial results that were subsequently the subject of an accounting restatement due to the material noncompliance with any financial reporting requirement under the federal securities laws;
	•	The Board of Directors determines that the employee engaged in knowing or intentional fraudulent or illegal conduct that caused or partially caused the need for the restatement; and
	•	A lower amount would have been paid to the employee based upon the restated financial results.

7

ELECTION OF DIRECTORS (PROPOSAL 1)

8

9

10

 

 

The Board of Directors has adopted categorical Director Independence Standards to assist the Board of Directors in determining the independence of each director. To be considered independent, the Board of Directors must affirmatively determine that the director has no material relationship with Sherwin-Williams. In each case, the Board of Directors broadly considers all relevant facts and circumstances, including the director’s commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, and such other criteria as the Board of Directors may determine from time to time.

 

During the Board of Directors’ annual review of director independence, the Board of Directors considers transactions, relationships and arrangements between each director or an immediate family member of the director and Sherwin-Williams. The Board of Directors also considers transactions, relationships and arrangements between each director or an

immediate family member of the director and Sherwin-Williams’ senior management.

 

Under our Director Independence Standards, the following relationships are not considered to be material relationships that would impair a director’s independence:

 

 

A complete copy of our Director Independence Standards is attached as Appendix A.

 

Early this year, the Board of Directors performed its annual director independence review for 2010. As part of this review, the Board of Directors considered investments by Sherwin-Williams and a director in a private equity fund that invests in minority businesses. The Board of Directors does not believe this relationship impairs the independence of the director.

 

As a result of this review, the Board of Directors determined that 10 of our 11 current directors and director nominees are independent. In addition, all members of the Audit Committee, the Compensation and Management Development Committee, and the Nominating and Corporate Governance Committee are independent. The Board of Directors determined that Mrs. Kropf and Messrs. Anton, Boland, Hodnik, Kadien, McCullough, Mixon, Moll, Smucker and Stropki meet these standards and are independent and, in addition, satisfy the independence requirements of the New York Stock Exchange. Mr. Connor is not considered to be independent because of his position as Chairman and Chief Executive Officer of Sherwin-Williams.

 

The following table sets forth information regarding the compensation of our nonemployee directors for 2009. Mr. Connor, who is our Chairman and Chief Executive Officer, does not receive any additional compensation for services as a director.

 

		Fees Earned								Option				All Other
		or Paid in				Stock Awards				Awards				Compensation				Total
Name		Cash ($)(8)				($)(9,10)				($)(11)				($)(12,13)				($)
A. F. Anton			85,000				68,240				-0-				-0-				153,240
J. C. Boland(1)			100,000				68,240				-0-				5,000				173,240
D. E. Evans(2)			28,333				68,240				-0-				-0-				96,573
D. F. Hodnik			85,000				68,240				-0-				-0-				153,240
T. G. Kadien(3)			21,250				93,125				-0-				-0-				114,375
S. J. Kropf			85,000				68,240				-0-				-0-				153,240
R. W. Mahoney(2,4)			32,166				68,240				-0-				-0-				100,406
G. E. McCullough			85,000				68,240				-0-				-0-				153,240
A. M. Mixon, III(5)			92,667				68,240				-0-				5,000				165,907
C. E. Moll(6)			93,500				68,240				-0-				-0-				161,740
R. K. Smucker			85,000				68,240				-0-				-0-				153,240
J. M. Stropki, Jr.(7)			42,500				81,142				-0-				-0-				123,642

 

 

 

 

The Compensation and Management Development Committee is responsible for annually reviewing and approving the compensation for our nonemployee directors. All of our nonemployee directors are paid under the same compensation program. Officers of Sherwin-Williams who also serve as directors do not receive any additional compensation for services as a director.

 

We use a combination of cash and equity-based compensation to attract and retain our nonemployee directors. Compensation for our nonemployee directors consists of an annual cash retainer; an additional annual cash retainer for chairs of the Audit Committee, the Compensation and Management Development Committee, and the Nominating and Corporate Governance Committee; meeting fees; an annual grant of restricted stock; and other benefits.

 

Stock options are not currently a part of our nonemployee director compensation program. In addition, we do not provide retirement benefits to our nonemployee directors.

 

Director Fees.  For 2009, the cash and equity compensation program for our nonemployee directors consisted of the following:

 

 

 

For 2010, the annual cash retainers for the chair of the committees of the Board were increased to $21,000 for the Audit Committee, $15,000 for the Compensation and Management Development Committee and $11,000 for the Nominating and Corporate Governance Committee. In addition, the value of the annual grant of restricted stock was increased to approximately $95,000.

 

We reimburse all directors for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors and its committees.

 

Other Benefits.  We also pay the premiums for liability insurance and business travel accident insurance for all directors, including $225,000 accidental death and dismemberment coverage and $225,000 permanent total disability coverage, while the directors are traveling on Sherwin-Williams’ business.

 

Directors may also receive the same discounts as our employees on the purchase of products at Sherwin-Williams’ stores and are eligible to participate in our matching gifts programs on the same basis as employees. These programs provide for annual matches for gifts of up to $5,000 under the matching gifts to education program and $1,000 under the matching gifts for volunteer leaders program, as well as annual grants of up to $200 under the grants for volunteers program. Amounts of matching gifts and grants under these programs are included in the “All Other Compensation” column of the 2009 Director Compensation Table.

 

Deferral of Director Fees.  Directors may elect to defer all or a part of their retainer and meeting fees under our Director Deferred Fee Plan. The amounts deferred during 2009 are set forth in a footnote to the 2009 Director Compensation Table.

 

Deferred fees may be credited to a common stock account, a shadow stock account or an interest bearing cash account. The value of the shadow stock account reflects changes in the market price of our common stock and the payment of dividend equivalents at the same rate as dividends are paid on our common stock. The number of shares of common stock and shadow stock held by participating directors under the plan is set forth in a footnote to the 2009 Director Compensation Table.

 

Amounts deferred may be distributed either in annual installments over a period up to ten years or in a lump sum pursuant to a director’s payment election. Amounts credited to a shadow stock account are distributed in cash.

 

 

The Board of Directors held five meetings during 2009. Each director attended at least 75% of the meetings of the Board of Directors and committees on which he or she served. Each director is expected to attend, absent unusual circumstances, all annual and special meetings of shareholders. All directors except two attended the 2009 Annual Meeting of Shareholders.

 

The Board of Directors has established an Audit Committee, a Compensation and Management Development Committee, and a Nominating and Corporate Governance Committee. The Board of Directors has adopted a written charter for each committee. You can find a complete copy of each charter in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com. The following table sets forth the current membership of the committees.

 

				Compensation and		Nominating and
				Management		Corporate
Name		Audit		Development		Governance
A. F. Anton		x
J. C. Boland		Chair				x
D. F. Hodnik		x
T. G. Kadien		x
S. J. Kropf				x
G. E. McCullough		x
A. M. Mixon, III				Chair		x
C. E. Moll				x		Chair
R. K. Smucker				x		x
J. M. Stropki, Jr.				x

 

Audit Committee. The purpose of the Audit Committee is to assist the Board of Directors in fulfilling the Board of Directors’ oversight responsibilities on matters relating to:

 

 

The Audit Committee met five times during 2009. Each member of the Audit Committee is independent as defined in the corporate governance listing standards of the New York Stock Exchange, SEC regulations and our Director Independence Standards. The Board of Directors has determined that Messrs. Anton, Boland, Hodnik and McCullough are “audit committee financial experts,” as that term is defined by SEC regulations.

 

Mr. Boland serves on the audit committees of three other public companies. The Board of Directors, after full review and consideration of such service, determined that Mr. Boland’s simultaneous service on these other audit committees does not impair his ability to effectively serve on Sherwin-Williams’ Audit Committee.

 

Compensation and Management Development Committee. The purpose of the Compensation and Management Development Committee is to assist the Board of Directors in fulfilling the Board of Directors’ oversight responsibilities on matters relating to:

 

 

 

The Compensation Committee met six times during 2009. Each member of the Compensation Committee is independent as defined in the corporate governance listing standards of the New York Stock Exchange and our Director Independence Standards.

 

Process for Determining Director and Executive Compensation.  The Compensation Committee reports to the Board of Directors on all compensation matters regarding our directors, executives and other key salaried employees. The Compensation Committee annually reviews and approves the compensation for our directors, executives and other key salaried employees. The Compensation Committee does not generally delegate any of its authority to other persons, although it has the power to delegate authority to subcommittees. The Compensation Committee relies upon several members of our management and their staff, as well as an outside compensation consultant, in order to assist the Compensation Committee in performing its duties.

 

We strive to pay our directors and executives compensation that is competitive in the marketplace. In order to assist the Compensation Committee in determining compensation that is competitive, the Compensation Committee has engaged Towers Watson, an outside compensation consulting firm, as its compensation consultant. Towers Watson annually compiles information regarding the compensation that similar companies are paying to their directors and executives. Our Senior Vice President — HR and his staff usually work directly with Towers Watson to compile the market compensation information. We use that information as a starting point to set compensation levels for our directors and executives.

 

Role of the Compensation Consultant.  Towers Watson serves as an advisor to the Compensation Committee on compensation matters relating to our directors and executives. Towers Watson generally provides the Compensation Committee with market compensation data and makes recommendations with regard to the form and amount of director and executive compensation based on the market data. Towers Watson typically makes recommendations with regard to the base salary, annual cash incentive compensation and long-term equity incentive compensation for our Chief Executive Officer.

 

Towers Watson also from time to time identifies peer companies for benchmarking director and executive compensation, provides other market compensation information and analysis, assists with the development of, and changes to, compensation plans and programs, and attends Compensation Committee meetings.

 

From time to time, Towers Watson provides services to Sherwin-Williams in addition to services related to director and executive compensation. The aggregate fees paid to Towers Watson for providing these additional services during 2009 were less than $120,000.

 

Role of Management.  Several members of our management participate in the Compensation Committee’s executive compensation process. The Compensation Committee relies upon our Senior Vice President — HR and his staff for input in determining director and executive compensation levels. Towers Watson typically provides the requested market compensation information to our Senior Vice President — HR, and our Senior Vice President — HR typically meets with Towers Watson to discuss this information. Our Chief Executive Officer does not meet with Towers Watson on an individual basis. With regard to director compensation, Towers Watson also typically provides the Compensation Committee with recommendations of any changes to director compensation. Our Senior Vice President — HR may also make recommendations to the Compensation Committee of changes to director compensation based upon the market compensation information.

 

With regard to executive compensation, management generally makes recommendations to the Compensation Committee and plays a more active role in the compensation process. Management makes recommendations relating to the development of compensation plans and programs and changes to existing plans and programs.

Management also makes recommendations with respect to:

 

 

Prior to providing recommendations to the Compensation Committee at its formal meetings, our Senior Vice President — HR generally will meet with our Chief Executive Officer to review the recommendations, except for recommendations concerning our Chief Executive Officer’s compensation. Our Chief Executive Officer and our Senior Vice President — HR also may meet with the chair of the Compensation Committee prior to meetings to review the agenda for the meetings and the compensation recommendations. Our Chief Executive Officer and our Senior Vice President — HR generally attend all Committee meetings. Our Chief Executive Officer does not have the ability to call meetings. Our Senior Vice President — HR serves as secretary for the Compensation Committee at its meetings. Our Chief Executive Officer is excused from that part of the meeting during which the Compensation Committee discusses his annual performance evaluation and compensation.

 

Nominating and Corporate Governance Committee. The purpose of the Nominating and Corporate Governance Committee is to assist the Board of Directors in fulfilling the Board of Directors’ oversight responsibilities on matters relating to:

 

 

The Nominating Committee met three times in 2009. Each member of the Nominating Committee is independent as defined in the corporate governance listing standards of the New York Stock Exchange and our Director Independence Standards.

 

Director Qualifications.  The Nominating Committee seeks a diverse group of candidates who possess the appropriate characteristics, skills, experience and time to make a significant contribution to the Board of Directors, Sherwin-Williams and our shareholders. The Nominating Committee seeks input from senior management and other members of the Board of Directors to identify and evaluate potential director candidates. Each candidate is evaluated in the context of the Board of Directors as a whole, with the objective that the Board of Directors can best perpetuate Sherwin-Williams’ success and represent shareholders’ interests through the exercise of sound business judgment using the directors’ diversity of characteristics, skills and experiences, including diversity in gender, ethnicity and race. Each candidate shall have the highest personal and professional character and integrity, and shall have demonstrated exceptional ability and judgment in their respective endeavors. Candidates must possess sufficient time to effectively carry out their duties and responsibilities.

 

The Nominating Committee may, but typically does not, employ professional search firms (for which it would pay a fee) to assist it in identifying potential members of the Board of Directors with the desired skills and disciplines.

Diversity of Director Nominees.  In considering the composition of the Board of Directors as a whole, the Nominating Committee utilizes a diverse group of experiences, characteristics and skills, including diversity in gender, ethnicity and race, as described under the heading “Experience, Qualifications, Attributes and Skills of Directors and Nominees.” The Nominating Committee utilizes these factors when identifying, considering and recommending director nominees. On an ongoing basis, the Committee reviews the group of experiences, characteristics and skills of potential director candidates as part of its process of identifying individuals qualified to become Board members and recommending director nominees. The Committee also reviews the group of experiences, characteristics and skills of current directors, and utilizes its committee self-assessment questionnaires, to assess the Committee’s overall effectiveness in recommending a diverse group of director nominees as a whole.

 

Consideration of Candidates Recommended by Shareholders.  The Nominating Committee’s policy with respect to the consideration of director candidates recommended by shareholders is that the Nominating Committee will consider such candidates on the same basis and in the same manner as it considers all director candidates. Recommendations are required to include the following information:

 

 

You may find a complete description of these requirements under “Procedures for Shareholders to Recommend Director Candidates” in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com. Shareholders may submit recommendations, along with proof of shareholder status, in writing to Chairperson, Nominating and Corporate Governance Committee, c/o Corporate Secretary, The Sherwin-Williams Company, 101 West Prospect Avenue, 12th Floor, Midland Building, Cleveland, Ohio 44115.

 

 

Management has the primary responsibility for the integrity of Sherwin-Williams’ financial information and the financial reporting process, including the system of internal control over financial reporting. Ernst & Young LLP, Sherwin-Williams’ independent registered public accounting firm, is responsible for conducting independent audits of Sherwin-Williams’ financial statements and the effectiveness of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States) and expressing an opinion on the financial statements and the effectiveness of internal controls over financial reporting based upon those audits. The Audit Committee is responsible for overseeing the conduct of these activities by management and Ernst & Young LLP.

 

As part of its oversight responsibility, the Audit Committee has reviewed and discussed the audited financial statements, the adequacy of financial controls and the effectiveness of Sherwin-Williams’ internal control over financial reporting with management and Ernst & Young LLP. The Audit Committee also has discussed with Ernst & Young LLP the matters required to be discussed by Statement on Auditing Standards No. 114 (The Auditor’s Communication with those Charged with Governance). The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence. The Audit Committee also has discussed with Ernst & Young LLP that firm’s independence.

 

Based upon these reviews and discussions, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Sherwin-Williams’ Annual Report on Form 10-K for the year ended December 31, 2009 for filing with the Securities and Exchange Commission.

 

AUDIT COMMITTEE

J. C. Boland, Chairman

A. F. Anton

D. F. Hodnik

T. G. Kadien

G. E. McCullough

 

The Compensation and Management Development Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based upon this review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Sherwin-Williams’ Annual Report on Form 10-K for the year ended December 31, 2009 and this Proxy Statement.

 

COMPENSATION AND MANAGEMENT

DEVELOPMENT COMMITTEE

A. M. Mixon, III, Chairman

S. J. Kropf

C. E. Moll

R. K. Smucker

J. M. Stropki, Jr.

 

 

We conducted a risk assessment of our compensation policies and practices for our employees, including those related to our executive compensation programs. Towers Watson, an outside compensation consulting firm, assisted us in conducting the assessment.

 

The risk assessment included a detailed analysis of the risks associated with the mix between fixed and variable compensation, the design of annual and long-term incentive compensation, the number of shares of common stock subject to outstanding equity awards and reserved for future equity awards, the equity ownership and equity awards held by executives, severance and change of control agreements, and other employee benefits. The assessment included a qualitative analysis of various program designs and corporate governance processes, as well as a quantitative analysis of historical pay and performance outcomes. The assessment also considered mitigating factors such as our stock ownership guidelines and our Executive Compensation Adjustment and Recapture Policy.

 

We discussed the findings of the risk assessment with the Compensation and Management Development Committee. Based upon the assessment, we believe that our compensation policies and practices do not encourage excessive or unnecessary risk-taking and are not reasonably likely to have a material adverse effect on Sherwin-Williams.

COMPENSATION DISCUSSION AND ANALYSIS
Executive Summary

 

This Compensation Discussion and Analysis describes our compensation programs and how they apply to our executives, including:

 

 

We refer to these five executives as our “named executives,” and they are included in the Summary Compensation Table.

 

The major components of our executive compensation program are base salary, annual cash incentive compensation, long-term equity incentive compensation through stock options and restricted stock, and other employee and executive benefits. We benchmark our executive compensation against compensation paid at similar chemical, building product manufacturing and retail companies, as well as against compensation derived from an average of five general broad-based surveys of industrial companies of similar size to us. We use this market compensation information to ensure that our executive compensation program is competitive in comparison with our peers.

 

We also prepare and use tally sheets when approving changes in compensation for our named executives to allow us to review how a change in the amount of each compensation component affects total compensation and to review each named executive’s total compensation in the aggregate.

 

The unprecedented global economic conditions of the last few years impacted our decisions relating to compensation earned by our executives during 2009 and influenced the implementation of our executive compensation programs for 2010. However, even during these challenging economic times, the overall design of our compensation programs has remained the same. We design and manage our company-wide compensation programs to align with our overall business strategy and to create value for our shareholders. We believe it is important that our executive compensation programs are competitive, maintain a performance and achievement-oriented environment, and align the interests of our executives with those of our shareholders.

 

 

 

Overview of Our Executive Compensation Program

 

The Compensation Committee.  The Compensation and Management Development Committee assists our Board of Directors in fulfilling our Board of Directors’ oversight responsibilities to administer our executive compensation program. Each member of the Compensation Committee is independent as defined in the corporate governance listing standards of the New York Stock Exchange and our director independence standards.

 

The Compensation Committee reports to the Board of Directors on all compensation matters regarding our executives and other key salaried employees. You may learn more about the Compensation Committee’s responsibilities by reading the Compensation Committee’s charter, which is available in the “Corporate Governance” section on the “Investor Relations” page of our website at www.sherwin.com. We have also included additional information about the Compensation Committee, including the role of compensation consultant and management in the compensation setting process, under the heading “Board Meetings and Committee Membership — Compensation and Management Development Committee.”

 

Components of Compensation.  The major components of our executive compensation program, the primary purpose of each component and the form of compensation for each component are described in the following table.

 

Component		Primary Purpose		Form of Compensation
Base Salary		Provides base compensation for the day-to-day performance of job responsibilities.		Cash.
Annual Cash Incentive Compensation		Rewards performance during the year based on the achievement of annual performance goals.		Cash.
Long-Term Equity Incentive Compensation		Encourages improvement in the long-term performance of our company, thereby aligning the interests of our executives with the interests of our shareholders.		Stock options, which vest over a three-year period, and performance-based (which vests based upon the achievement of financial performance goals) and time-based restricted stock.
Other Employee And Executive Benefits		Provides a broad-based executive compensation program for employee retention, retirement and health.		Retirement and savings programs, health and welfare programs, and employee benefit plans, programs and arrangements generally available to all employees; limited perquisites, executive life insurance program and executive long-term disability program.

 

 

Compensation Objectives.  We design and manage our company-wide compensation programs to align with our overall business strategy and to create value for our shareholders. We believe it is important that our executive compensation programs:

 

 

The policies we use to make compensation decisions and the decisions we make are materially similar for all executives. These policies and decisions result in higher compensation levels for our Chairman and Chief Executive Officer primarily based upon the higher market compensation that is available for chief executive officers.

 

We compensate our executives principally by using a combination of fixed and performance-based compensation, annual and long-term compensation, and cash and stock-based compensation. We determine this mix by reviewing the mix available at the peer companies listed on the next page and the general survey data described below. We do not have a specific policy for the allocation of compensation between fixed and performance-based compensation, annual and long-term compensation, and cash and stock-based compensation.

 

The following table illustrates the allocation of the major compensation components for our named executives for 2009 in terms of this mix. The percentages reflect the amounts of 2009 salary and targeted annual cash incentive compensation and the aggregate grant date fair values of stock options and shares of restricted stock granted in 2009. Although the percentages differ for our named executives, an average of 76% of these major compensation components for our named executives is variable and tied to company performance.

 

 

 

Benchmarking — Our Starting Point

 

We offer our executives compensation that is intended to be competitive in the market. The Compensation Committee has retained Towers Watson, an outside compensation consulting firm, to identify annually the compensation paid to executives holding equivalent positions or having similar responsibilities at chemical, building product manufacturing and retail peer companies with comparable sales. Towers Watson also compiles compensation data derived from five general broad-based surveys of industrial companies of similar size to us. These surveys are sponsored by nationally recognized compensation consulting firms. Many of the peer companies, along with us, participate in the broad-based surveys, improving our compensation comparisons.

 

We calculate an average of (a) the compensation available at the peer companies and (b) the average compensation derived from the five general broad-based surveys. We refer to this average as “market” compensation. This market compensation provides a framework for us to determine the mix of compensation components and target compensation levels. We generally benchmark the target compensation that we pay to our executives to approximate the median market compensation. We benchmark against median market compensation because it allows us to attract and retain employees and helps us to manage the overall cost of our compensation program. We use this information only as a starting point, not as a determining factor, in setting compensation.

 

We review compensation paid at these peer companies because their size and business make them most comparable to us. We also believe these companies likely compete with us for executive talent. For compensation earned in 2009, these peer companies included the companies listed in the following table. The peer companies are regularly reviewed and changed from time to time to account for acquisitions, mergers and other business related changes, and the information is updated annually. The 2009 group of peer companies reflects the elimination of Rohm and Haas Company and American Standard Companies as a result of those companies having been acquired.

Air Products & Chemicals, Inc.		Eastman Chemical Co.		Newell Rubbermaid Inc.
Akzo Nobel, N.V.		Fortune Brands Inc.		Owens Corning
Ashland Inc.		Leggett & Platt Inc.		PPG Industries, Inc.
Avery Dennison Corporation		The Lubrizol Corporation		The Stanley Works
The Black & Decker Corporation		Masco Corporation		USG Corporation
Celanese Corporation		Mohawk Industries, Inc.		Weyerhaeuser Company

 

 

The market compensation information provided by Towers Watson includes base salary, annual cash incentive compensation, long-term equity incentive compensation and total direct compensation. We define total direct compensation as the sum of base salary, annual cash incentive compensation and long-term equity incentive compensation. We review total direct compensation to help us determine whether the principal compensation components that we pay to our executives are competitive in the aggregate.

 

This market compensation information is presented annually to the Compensation Committee. The Compensation Committee compares each named executive’s base salary, annual cash incentive compensation, long-term equity incentive compensation and total direct compensation to the median market compensation. The Committee may use its discretion to adjust a component of compensation above or below the median market compensation for reasons such as an executive’s performance, responsibilities, experience and tenure in his particular position, our company-wide performance, and the amount of an executive’s compensation in relation to other employees.

 

We do not have a formal policy of setting target compensation levels as a specific percentile of market compensation. In addition, the Compensation Committee did not increase or decrease the amount of any compensation component based upon the amount of any other

compensation component or its review of projected targeted total direct compensation.

 

The following table sets forth the projected total direct compensation for each of our named executives as a percent of the median market total direct compensation. For purposes of this table, projected total direct compensation includes 2010 base salary, 2010 targeted annual cash incentive compensation, the annual grant of stock options in October 2009 and the targeted value of the annual grant of shares of restricted stock in February 2010.

 

		Projected Targeted
		Total Direct Compensation
		as a Percentage of
Named Executive		Market Compensation
C. M. Connor			105	%
J. G. Morikis			112	%
S. P. Hennessy			107	%
S. J. Oberfeld			113	%
T. W. Seitz			118	%

 

The median total direct compensation paid by the peer companies reflects 2008 compensation because more current compensation amounts were not available at the time the Compensation Committee reviewed the information. The projected targeted total direct compensation for Messrs. Morikis, Oberfeld and Seitz materially exceeded median market compensation principally due to the values of our grants of stock options and restricted stock, as explained below. In addition, the projected targeted total direct compensation for Mr. Seitz materially exceeded market compensation due in part to his compensation being aligned with the other senior executives.

 

The actual amounts we pay our executives may vary from the targeted amounts based upon the achievement of company and individual performance goals. Individual components may be greater than or lesser than that targeted because we focus on the overall competitiveness of the entire compensation program.

 

Major Components of Our Executive Compensation Program

 

Base Salary.  Each executive salaried position at our company is assigned a salary grade that corresponds to a salary range with a minimum and maximum. We review the salary ranges against median market base salaries based upon the position and level of responsibility. The midpoint of the range generally approximates the median market salary paid for an equivalent or similar position at the peer companies and according to the general survey data. The Compensation Committee reviews and approves the base salary of each executive annually and at other times in connection with any promotion or other change in responsibility. Base salary is the only fixed component of our executives’ total direct compensation. Annual base salary increases are effective in March.

 

Annual salary increases are based, in part, on the overall annual salary budget guidelines for our company. We adopt annual salary guidelines for all of our employees as part of our annual operating process, which includes a range of merit salary increases. The maximum amount of the range is equal to the amount necessary to increase the salary of an employee (whose salary is below median market for his position, but who receives the highest performance rating) to an amount that approximates the median market salary for his position. For 2009, our salary budget included no merit salary increases for employees in upper level salary grades, which included our executives, due to our efforts to manage employee-related costs during this challenging global economic environment. For 2010, we adopted an overall 2.0% merit budget for annual salary increases with possible merit increases ranging from 0% to 6.5%.

 

In addition, each executive undergoes an annual performance review. The executive’s performance for the prior year is reviewed by his direct supervisor. With regard to the evaluation of our Chairman and Chief Executive Officer, each director provides ratings and comments for performance results, business strategy, developing a management team, and leadership. The results are reviewed by the Compensation Committee and by the non-management directors in executive session.

 

As part of this annual performance review, all salaried employees, including our executives, are assigned a performance rating that corresponds with a range of potential merit

increases. Increases are based upon the executive’s performance, responsibilities, experience and tenure in his particular position and our company-wide performance. These factors are not quantified or weighted in any objective manner. Instead, the Compensation Committee exercises its discretion and subjective judgment in assessing those factors and in approving a specific merit increase within the range.

 

In early 2010, the Compensation Committee performed its annual review of the base salaries of each executive. The Compensation Committee approved 2010 merit salary increases for our named executives, except for Mr. Connor. Mr. Connor elected to decline his merit salary increase for 2010 in light of the increase in his annual cash incentive compensation opportunity, as described below.

 

The following table sets forth the 2009 and 2010 base salaries and the percentage merit increases for our named executives. The table reflects a $37,000 increase to Mr. Morikis’ 2010 base salary to offset the elimination of the executive automobile program.

 

		% Merit Increase				2009				% Merit Increase				2010
Named Executive		for 2009				Base Salary ($)				for 2010				Base Salary ($)
C. M. Connor			0	%			1,221,987				0	%			1,221,987
J. G. Morikis			0	%			705,566				2.5	%			760,205
S. P. Hennessy			0	%			562,127				2.0	%			573,370
S. J. Oberfeld			0	%			512,999				2.0	%			523,259
T. W. Seitz			0	%			473,907				2.0	%			483,385

 

Annual Cash Incentive Compensation.  We pay annual cash incentive compensation to our executives under our shareholder-approved 2007 Executive Performance Bonus Plan. All of our executives participate in our Performance Plan. Our annual incentive compensation program is intended to motivate and compensate our executives for achieving annual performance goals. Our Performance Plan is designed so that our executives may earn higher than average annual cash incentive compensation for achieving above target business results and lower than average annual cash incentive compensation when target performance goals are not met.

 

The Compensation Committee annually reviews target and maximum annual cash incentive compensation levels for our executives as a percent of their salary. Target incentive awards are determined by using the median market annual cash incentive compensation, which generally equals the amount an executive could receive under our Performance Plan if he achieves a 100% average of his performance goals. The maximum incentive awards are determined by using the maximum annual cash incentive compensation available at the peer companies and according to the general survey data, which generally equals the amount an executive could receive if he achieves a 125% average of his performance goals. The Compensation Committee expects our executives to achieve, and provides appropriate incentives to exceed, the target levels of performance. The maximum levels of performance are intended to require significant effort to reach.

 

The following table sets forth the 2009 minimum, target and maximum cash incentive amount levels, as a percent of salary, for each named executive based upon the executive achieving an average of 0%, 100% and 125%, respectively, of his performance goals. We increased the target and maximum annual cash incentive levels that may be earned in 2010 for Mr. Connor (to 105% and 210%, respectively) to align those levels with the target and maximum annual cash incentive compensation available at the peer and survey companies.

		Incentive Amount as a
		Percentage of Salary
Named Executive		Minimum				Target				Maximum
C. M. Connor			0	%			95	%			190	%
J. G. Morikis			0	%			75	%			150	%
S. P. Hennessy			0	%			75	%			150	%
S. J. Oberfeld			0	%			60	%			120	%
T. W. Seitz			0	%			60	%			120	%

 

During 2009, the Compensation Committee approved the performance goals of all of our named executives. Our Chairman and Chief Executive Officer also approved the goals of our other named executives. Performance goals varied by executive and usually related to the

business unit or function for which such person has responsibility. Performance goals were weighted between 10% and 30%. Financial performance goals were generally weighted more heavily.

 

We set financial performance goals at levels that coincide with those established in our annual operating budget. The Compensation Committee reviews our annual operating budget, each financial objective therein and approves financial performance goals that are set at levels that are of the same magnitude as is set forth in our annual operating budget. In recent years, target levels for most of the financial performance goals have been set at levels that showed improvement over the prior year. Due to the global economic recession and the corresponding lower expectations for financial and operating results for 2009, many of the 2009 financial performance goals were not set at levels that showed improvement over 2008. The Compensation Committee believes that setting performance goals at these lower levels for 2009 appropriately matched incentive opportunities with performance expectations and the degree of difficulty of achieving them.

 

The following table shows for each named executive the 2009 performance goals, weightings, targets and actual results.

		2009 Annual Cash Incentive Performance Goals
						Actual
Named Executive		Performance Goals and Weightings		Target		Results
C. M. Connor		Earnings per share (weighted 30%)		$3.25		$3.78
J. G. Morikis		Net sales (weighted 20%, 20% and 10%, respectively)		$7.50 billion		$7.09 billion
S. P. Hennessy		After tax return on equity (weighted 20%, 10% and 10%, respectively)		23.98%		27.14%
		Free cash flow (weighted 10%, 10% and 20%, respectively)		$326.80 million		$605.30 million
		Consolidated working capital as a % of sales (weighted 10%)		12.32%		10.71%
		Earnings before interest, taxes, depreciation and amortization (weighted 10%, 20% and 20%, respectively)		$796.30 million		$833.75 million
S. J. Oberfeld		Paint Stores Group sales (weighted 20%)		$4.50 billion		$4.21 billion
		Paint Stores Group profit before taxes (weighted 20%)		$390 million		$469 million
		Paint Stores Group return on sales (weighted 20%)		8.70%		11.10%
		Paint Stores Group return on net assets employed (weighted 20%)		32.20%		41.99%
		Paint Stores Group working capital as a % to sales (weighted 20%)		15.13%		13.99%
T. W. Seitz		Earnings per share (weighted 20%)		$3.25		$3.78
		Net sales (weighted 20%)		$7.50 billion		$7.09 billion
		Operational excellence savings (weighted 15%)		$58 million		$68.25 million
		Raw material costs to adjusted budget (weighted 15%)		1.66%		6.69%
		Incremental annualized product cost savings (weighted 15%)		1.00		1.25
		Return on net assets employed (weighted 10%)		11.90%		13.93%
		Leadership and drive performance for excellence initiatives (weighted 5%)		1.00		1.10

 

We intend annual cash incentive amounts to be fully deductible for federal income tax purposes under Section 162(m) of the Internal Revenue Code. In order to achieve this, we establish an annual maximum payout amount against which payouts for achievements may be made to 162(m) participants. The maximum payout for 162(m) participants is based upon one or more of the performance measurements defined in our 2007 Executive Performance Bonus Plan. For 2009, the Compensation Committee approved 0.7% of earnings before interest, taxes, depreciation and amortization (EBITDA) as the amount of the maximum payout for 162(m) participants. We selected EBITDA as the method for determining the amount of the maximum payout because we consider EBITDA a useful measure of our operating profitability. We explain how we calculate EBITDA on page 33 of our 2009 Annual Report to Shareholders. For 2009, Sherwin-Williams’ EBITDA was $833.75 million. This amount resulted in a maximum payout of $5.84 million for the 162(m) participants. After the Compensation Committee determines the amount of the maximum payout, the Compensation Committee may exercise discretion to reduce, but not to increase, the amount of the actual award payable under the 2007 Executive Performance Bonus Plan based on company and individual performance goals as described below.

 

The Compensation Committee reviews and approves each named executive’s achievement of performance goals for the prior year and approves new performance goals for the current year. In determining the level of achievement of performance goals, the Compensation Committee may exercise its discretion whether to reflect or exclude the impact of changes in accounting standards or non-recurring items. In determining the level of achievement for certain 2009 financial performance goals, the Committee excluded the impact of asset impairment charges and a loss on the dissolution of a foreign subsidiary.

 

In recent years, the Compensation Committee had established a threshold goal to increase company earnings, and 75% of this earnings increase must have been achieved to have paid annual incentive compensation under our Performance Plan. Beginning in 2009, the Compensation Committee eliminated the threshold earnings goal so that participants focus their efforts on achieving their company and individual financial and operating performance goals, rather than putting too much emphasis on achieving just one threshold earnings goal.

 

The following table shows the actual annual incentive compensation amounts earned by our named executives during 2009.

 

		Annual Incentive Compensation
Named		Earned in 2009
Executive		Amount ($)				% of Salary
C. M. Connor			1,684,000				133%
J. G. Morikis			732,000				100%
S. P. Hennessy			636,000				113%
S. J. Oberfeld			444,000				83%
T. W. Seitz			437,000				90%

 

Long-term Equity Incentive Compensation.  We grant long-term equity incentive compensation in the form of stock options and restricted stock annually under our shareholder-approved 2006 Equity and Performance Incentive Plan. Our long-term equity compensation program is designed to focus the efforts of our employees on performance objectives that contribute to company success on a long-term basis, while serving important employee retention, recognition and management succession planning purposes. Our stock option program is the primary means in which we grant long-term stock compensation to a broad group of key employees based strictly upon increases in our stock price. Our restricted stock program is designed for a more select group of key employees and rewards participants based upon the achievement of financial performance goals and for the appreciation in our stock price.

 

When making equity grants, we begin by determining the median market value of long-term equity incentive compensation. For the 2009 grant of stock options and the 2010 grant of restricted stock, we generally kept grant values consistent with the prior year’s grant values. This resulted in these equity grant values exceeding the values indicated by the general survey data. The general survey data reflected grants made by companies during the current economic downturn, resulting in lower values compared to the previous year.

We allocate that value between stock options and restricted stock by targeting comparable values for stock options and restricted stock. We allocate the mix of stock options and restricted stock in this way because we want to equally reward the growth in the value of our common stock and the achievement of financial performance goals.

 

Long-term incentive opportunities are intended to be competitive with market long-term incentive opportunities. Therefore, we do not consider the amount of outstanding stock options and shares of restricted stock currently held by an executive when making awards of stock options and restricted stock.

 

We have used a consistent approach in granting stock options and restricted stock over the years. We grant stock options and restricted stock on an annual basis at regularly scheduled Compensation Committee meetings. We schedule the dates of these meetings approximately three years in advance. We typically grant restricted stock in February and stock options in October. We grant restricted stock and stock options in February and October so that our annual grants are made at different times of the year. Information relating to the stock options and shares of restricted stock granted to our named executives is set forth in the Summary Compensation Table and the 2009 Grants of Plan-Based Awards Table.

 

At each October Compensation Committee meeting, we grant stock options to all eligible employees. These grants are made typically on the same day that the Audit Committee approves our earnings release for the third quarter and a day or so before we release our third quarter earnings results. At each February Compensation Committee meeting, we grant restricted stock. This meeting typically occurs in the third week of February, approximately three or four weeks after we release our annual earnings results. We may also grant restricted stock and stock options at other regularly scheduled Compensation Committee meetings in connection with an employee’s initial hire, promotion and other events. The dates of these grants may occur shortly before we release our quarterly earnings results. We do not take into account our earnings results when determining the number of stock options or shares of restricted stock to be granted.

 

Stock Options.  The number of stock options granted to an executive is based upon the executive’s position and level of responsibility using comparable positions at the peer companies and according to the general survey data. We determine the specific number of stock options to be granted by calculating the Black-Scholes value of the stock options over a prior 90-day period. Black-Scholes is a generally accepted model used in estimating the value of stock options. We identify the minimum, median and maximum values of stock options granted by the peer companies and according to the general survey data. The Compensation Committee generally grants stock options to approximate median market value.

 

In accordance with the terms of our stock plan, the option exercise price for all stock options is equal to the average of the high and low market price of our common stock on the date options are granted. Accordingly, the exercise price may be higher or lower than the closing price of our common stock on that day. The Committee believes that the average of the high and low prices is a better representation of the fair market value of our stock and is less volatile than the closing price. We do not reprice stock options, and our stock plans do not contain reload features. Stock options typically vest at the rate of one-third per year for three years (beginning one year from the date of grant) and expire ten years from the date of grant. In October 2009, we granted stock options to all executives.

 

Restricted Stock.  We determine the granting of restricted stock in a manner similar to how we determine the granting of stock options. We identify the median value of restricted stock granted by the peer companies and according to the general survey data. The Compensation Committee generally grants restricted stock with a value higher than the median to allow our executives the opportunity to earn above target compensation for above target performance. Shares of restricted stock are subject to a “substantial risk of forfeiture” and vest in accordance with performance and time restrictions.

The number of shares of restricted stock that will vest at the end of the restriction period is based upon the achievement of performance goals. Performance goals are established so that less than 100% of the shares of restricted stock will vest if the target level of performance goals are not achieved and 100% of the shares will vest if the maximum level of performance goals are achieved or exceeded. The maximum level of performance is intended to require significant effort to reach. Up to 100% of the shares of restricted stock may be forfeited if the performance goals are not achieved.

 

In February 2009, the Compensation Committee approved the annual grant of restricted stock to our executives. The number of shares granted was equal to approximately 1.5 times the target value, and we correspondingly set above target goals higher making achievement of the goals more difficult to attain and providing a greater incentive for above target performance. In addition, the Compensation Committee granted additional shares of restricted stock to provide our named executives with an incentive to focus on delivering long-term value during the global economic slowdown. The Compensation Committee believes that the value of this grant of additional shares of restricted stock balances the recognition of no annual cash incentive compensation having been paid to our named executives for 2008 with the challenge of improving our financial performance.

 

The following table shows the number of shares of restricted stock granted to our named executives during 2009.

 

		Number of Shares of Restricted
		Stock Granted in 2009
Named Executive		Annual				Additional				Total
C. M. Connor			53,000				17,000				70,000
J. G. Morikis			21,000				9,000				30,000
S. P. Hennessy			15,500				8,500				24,000
S. J. Oberfeld			14,000				6,000				20,000
T. W. Seitz			7,500				5,000				12,500

 

 

The shares of restricted stock granted in 2008 and prior years vest at the end of four years. The shares of restricted stock granted in 2009 vest at the end of three years. The Compensation Committee reduced the vesting period from four years to three years to reflect current market practices. During the vesting period, executives beneficially own the shares of restricted stock.

 

The number of shares of restricted stock that will actually vest will range from 0% to 100% based upon our company’s achievement of specified financial performance goals. These goals measure average return on average equity and EBITDA over the vesting period.

 

 

The Compensation Committee selected these two performance measures because they reward our executives in achieving two important business objectives — earnings growth and improved return on resources provided by our shareholders. The Compensation Committee believes these objectives help us improve our long-term financial results and, therefore, are expected to increase shareholder value.

 

At the end of the vesting period, the Compensation Committee will review performance against the goals and determine the number of shares of restricted stock that will vest.

 

For the 2009 grant of restricted stock:

 

 

 

2009 and 2010 Vesting of Restricted Stock.  In February 2009, the Compensation Committee approved the vesting of 100% of the shares of restricted stock granted in February 2005. During that four-year period, Sherwin-Williams achieved at least a 17% average return on average equity and at least an 8% cumulative growth in EBITDA.

 

In February 2010, the Compensation Committee approved the vesting of 84.8% of the shares of restricted stock granted in February 2006. During that four-year period, Sherwin-Williams achieved a 30.8% average return on average equity and a 6.5% cumulative growth in EBITDA. The lower achievement resulted from decreased EBITDA during 2008 and 2009 due to the global recession.

 

2010 Restricted Stock Changes.  We changed some features of our restricted stock program beginning in 2010. Our annual grant of restricted stock now consists of two-thirds performance-based shares and one-third time-based shares. We made this change to reflect current market practices. With respect to the performance-based shares, the number of shares granted is equal to approximately 2 times the target value, and we correspondingly set above target goals higher making achievement of the goals more difficult to attain. We made this change to provide a greater incentive for above target performance. In addition, we changed the financial goals for performance-based restricted stock to average return on average equity and earnings per share over the three-year period. We added earnings per share as a performance goal because it is widely communicated and easily understood, and is a key measure used in evaluating the success of our company’s performance and in determining the market value of our common stock.

 

Other Arrangements, Policies and Practices

 

Perquisites.  We offer limited perquisites to our executives: personal use of the corporate aircraft, an executive automobile program (which is being phased out as automobile lease terms end) and relocation expenses. By the end of the first quarter of 2010, no named executive will participate in the executive automobile program. These perquisites represent a small portion of the total compensation paid to our executives. The incremental costs of these perquisites for 2009 are set forth in a footnote to the “All Other Compensation” column of the Summary Compensation Table.

 

Other Benefits.  We provide our named executives with various retirement and savings programs, health and welfare programs, and employee benefit plans, programs and arrangements generally available to all employees and other executive benefits. We annually review these items in connection with our preparation and review of the overall compensation packages of our named executives and in connection with our review of tally sheets. We also offer deferred compensation plans under which participating employees may elect to defer compensation on a pre-tax basis. None of our named executives participated in these deferred plans during 2009.

 

Other executive benefit programs include an executive life insurance program and an executive long-term disability program. The 2009 amounts for these programs are set forth in a separate table that is included in a footnote to the “All Other Compensation” column of the Summary Compensation Table.

 

The life insurance and long-term disability programs are designed to provide our named executives with life and disability benefits greater than the life and disability benefits available under the broad-based life insurance and

long-term disability programs that we offer to other employees due to benefit limitations within the broad-based programs.

 

Termination of Grantor Trust.  We terminated our grantor trust program effective December 31, 2009. During 2009, all of our named executives participated in our grantor trust program. We had initiated our grantor trust program in 2003 to provide those employees who had accumulated a significant retirement benefit in our deferred compensation plan with financial security equal to that provided under our qualified retirement plans. Since 2003, employees who had been eligible to participate in the grantor trust program had not been eligible to participate in our deferred compensation plan. Accordingly, the Compensation Committee also approved amendments to The Sherwin-Williams Company 2005 Deferred Compensation Savings and Pension Equalization Plan, including amendments that permit those executives to be eligible to participate in the Deferred Compensation Plan effective January 1, 2010. The Deferred Compensation Plan is a nonqualified plan that provides participating employees with the employer contributions the employees would have received under our qualified retirement plans, but for federal tax limitations. Amounts deferred are credited with market earnings based on the same investment choices available to all employees under our qualified retirement plans.

 

Under our grantor trust program, each participating employee established a brokerage account as part of an irrevocable individual trust. We made supplemental retirement compensation payments to these individual trusts through our regular bi-weekly payroll. The amount of the supplemental retirement compensation payment was equal to the employee contribution and the company contribution that the participating employee would otherwise have been permitted under our Deferred Compensation Plan if the employee had participated in such plan. The supplemental retirement compensation payment was immediately taxed as ordinary income to the employee in the current year upon the employee’s receipt of such payments.

 

A participant in our grantor trust program was entitled to invest funds held in his individual trust in various investments, such as stocks, bonds, mutual funds, money market funds and certificates of deposit. These investments included the same investments as were available under our Deferred Compensation Plan. To the extent a participant invested funds held in his trust in the same investments as were available under our Deferred Compensation Plan, the participant was entitled to receive an annual tax gross-up payment. The tax gross-up payment reimbursed the participant for the immediate tax recognized on the taxable interest and earnings of the trust earned in the previous calendar year. We did not gross-up the supplemental retirement compensation payments, nor did we gross-up the unrealized appreciation in the value of investments held in a trust.

 

Our grantor trust program was designed so that the supplemental retirement compensation payments and tax-gross-up payments would provide the participants with the same after-tax amount at retirement age as would have been provided under our Deferred Compensation Plan. We have set forth the amounts of the company contribution portion of the supplemental retirement compensation payments and the tax gross-up payments for 2009 for the named executives in a footnote to the “All Other Compensation” column of the Summary Compensation Table.

 

Internal Pay Equity.  The Compensation Committee broadly considers internal pay equity when setting compensation levels for executives with similar responsibilities, experience and tenure. However, the Compensation Committee has no specific policy and follows no established guidelines or formulas when comparing compensation levels among executives. In connection with grants of stock options and restricted stock, the Compensation Committee generally grants the same number of stock options and shares of restricted stock to employees who are in similar pay grades.

 

Use of Tally Sheets.  When approving changes in compensation for our named executives, we prepare a tally sheet for each named executive. Tally sheets set forth the dollar amounts of all components of each named executive’s current compensation, including salary, annual cash incentive compensation, long-term incentive compensation, retirement and savings programs, health and welfare programs

and other executive benefits, including perquisites.

 

The Compensation Committee uses tally sheets as a reference to ensure that its members understand the total compensation of our named executives. Tally sheets also allow the Compensation Committee and management to review, in one place, how a change in the amount of each compensation component affects each named executive’s total compensation and to review each named executive’s total compensation in the aggregate. Based upon its most recent review, the Compensation Committee determined that total compensation, in the aggregate, for each of our named executives to be consistent with the Compensation Committee’s expectations. The Compensation Committee did not increase or decrease the amount of compensation of our named executives solely based upon the review of tally sheets.

 

The Compensation Committee and management also reviewed potential payments to our named executives under termination and change in control scenarios including: normal and early retirement; death and disability; voluntary termination; involuntary (not for cause) termination; termination for cause; and termination following a change in control.

 

This review included potential severance payment obligations, potential values of accelerated shares of restricted stock and stock options, and projected payment obligations in connection with our retirement and savings programs, health and welfare plans, and other executive benefits. The Compensation Committee determined that the total potential payments, in the aggregate, for each of our named executives under each scenario to be reasonable and not excessive.

 

Tax and Accounting Considerations.  From time to time, we review the accounting and tax laws, rules and regulations that may affect our compensation programs. However, tax and accounting considerations have not significantly impacted the compensation programs we offer to our executives.

 

Section 162(m) of the Internal Revenue Code generally provides that certain compensation in excess of $1 million per year paid to a company’s chief executive officer and any of its four other highest paid executive officers is not deductible by a company unless the compensation qualifies for an exception. Section 162(m) provides an exception to the deductibility limit for performance-based compensation if certain procedural requirements, including shareholder approval of the material terms of the performance goal, are satisfied.

 

Under our 2007 Executive Performance Bonus Plan, we have the ability to pay non-discretionary annual cash incentive compensation to our named executives that will qualify for deductibility. Independent of our Performance Plan, the Compensation Committee retains the discretion to reward individual performance by paying executive compensation amounts that may not be deductible under Section 162(m). The Compensation Committee believes that its ability to exercise such discretion is in the best interests of Sherwin-Williams and our shareholders. The Compensation Committee did not approve the payment of any such discretionary bonus amounts for 2009 that are not deductible under Section 162(m).

 

Executive Compensation Adjustment and Recapture Policy.  We have a policy regarding the adjustment and recapture of compensation paid or payable to key employees and executives. Under the policy, employees who receive an award under our 2007 Executive Performance Bonus Plan are required to reimburse Sherwin-Williams in the event:

 

 

The reimbursement will be equal to the difference in the amount of the award prior to the restatement and the amount of the award determined using the restated financial results.

In addition, under our 2006 Equity and Performance Incentive Plan, (a) all stock awards will be cancelled and (b) the employee will be required to reimburse Sherwin-Williams for any economic gains received by the employee pursuant to a stock award during the one-year period preceding the Board of Director’s determination that the employee engaged in such conduct.

 

Severance Pay Agreements.  To ensure continuity and the continued dedication of our executives during any period of uncertainty caused by the possible threat of a takeover, we have entered into severance pay agreements with our executives, including each of our named executives. These severance pay agreements have not been a significant factor in setting compensation levels and have not affected the Compensation Committee’s decisions with respect to the compensation components.

 

In 2006, the Compensation Committee engaged Towers Watson to evaluate our then existing severance pay agreements to determine how these agreements compared to market practices. Towers Watson’s evaluation included a review of material terms of the agreements, including the change in control trigger threshold, severance pay single versus double triggers, severance pay multiples, continuation of retirement, health and welfare benefits, excise tax gross-ups, and the impact of Section 409A of the Internal Revenue Code.

 

Based upon this evaluation, the Compensation Committee approved a new form of severance agreement in February 2007, and we entered into new severance agreements with each of our executives. The Compensation Committee believes that the material terms of the severance agreements are consistent with market practices.

 

Potential cash severance payments are based upon a multiplier of base salary and annual cash incentive pay. Because Mr. Connor’s base salary and annual cash incentive pay are higher than that of our other named executives, Mr. Connor’s potential cash severance payment is correspondingly higher than that of our other named executives. Additional information regarding the severance agreements, including the estimated amounts payable to each named executive, is set forth under the heading “Potential Payments upon Termination or Change in Control.”

 

Policy Concerning Future Severance Agreements.  We adopted a policy in early 2010, which provides that we will not enter into any future severance agreements (including material amendments of existing agreements) with a senior executive providing for cash severance payments exceeding 2.99 times base salary and bonus without shareholder approval or ratification. For purposes of this policy, severance payments shall not include the acceleration of equity based awards, vacation pay, retirement benefits, health continuation coverage and outplacement services. In addition, future severance agreements will not provide for any tax gross-up payments.

 

Stock Ownership Guidelines.  We have established a minimum share ownership requirement for our directors, executive officers and operating presidents. We require each director who has served on the Board of Directors for at least five years to own a minimum of 10,000 shares of common stock. We require each executive and operating president who has served in such capacity for at least five years to own shares of common stock equal in value to a multiple of his base salary ranging from a low of three times to a high of five times. The requirements for our executives and operating presidents are as follows.

 

		Minimum Share
		Ownership as
		Multiple of
Title		Base Salary
Chief Executive Officer		5 times
Chief Operating Officer		4 times
Other Executives and Operating Presidents		3 times

 

For purposes of meeting this requirement, each equivalent share of common stock held under our benefit plans and each share of restricted stock is considered as a share of common stock. Stock options are not considered towards meeting the requirement. The Compensation Committee reviews compliance with these guidelines annually. All directors, executive officers and operating presidents have either met the guidelines or are pursuing plans to meet the guidelines.

 

 

The following table sets forth information regarding the compensation of our Chairman and Chief Executive Officer, our Senior Vice President — Finance and Chief Financial Officer and our other three highest paid executive officers (our “named executives”).

																										Change
																										in
																										Pension
																										Value
																										and
																						Non-Equity				Nonqualified
Name																						Incentive				Deferred				All
and														Stock				Option				Plan				Compensation				Other
Principal						Salary				Bonus				Awards				Awards				Compensation				Earnings				Compensation				Total
Position		Year				($)				($)				($)(1)				($)(2)				($)				($)(3)				($)(4)				($)
C. M. Connor			2009				1,268,986				-0-				2,147,367				1,918,725				1,684,000				-0-				476,732				7,495,810
Chairman and			2008				1,214,590				-0-				1,542,697				1,782,113				-0-				-0-				524,807				5,064,207
Chief Executive Officer			2007				1,161,047				-0-				2,438,543				1,621,870				1,544,000				-0-				540,064				7,305,524
J. G. Morikis			2009				732,703				-0-				920,300				767,490				732,000				-0-				241,374				3,393,867
President and			2008				701,295				-0-				609,903				712,845				-0-				-0-				223,132				2,247,175
Chief Operating Officer			2007				663,481				-0-				801,135				648,748				697,000				-0-				254,948				3,065,312
S. P. Hennessy			2009				561,632				-0-				736,240				613,992				636,000				-0-				193,585				2,741,449
Senior Vice President —			2008				535,863				-0-				448,458				513,248				-0-				-0-				197,075				1,694,644
Finance and			2007				503,617				-0-				562,200				486,561				604,000				-0-				193,997				2,350,375
Chief Financial Officer
S. J. Oberfeld			2009				532,729				-0-				613,533				552,593				444,000				-0-				153,728				2,296,583
President,			2008				493,225				-0-				448,458				513,248				-0-				-0-				187,869				1,642,800
Paint Stores Group			2007				459,272				-0-				562,200				486,561				276,000				-0-				249,720				2,033,753
T. W. Seitz			2009				487,711				-0-				383,458				322,346				437,000				163,213				497,321				2,291,049
Senior Vice President —			2008				448,177				-0-				243,961				299,395				-0-				62,165				295,676				1,349,374
Strategic Excellence			2007				422,093				-0-				421,650				291,937				339,000				85,979				258,036				1,818,695
Initiatives

 

 

The following table sets forth the aggregate grant date fair value for the shares of restricted stock reflected in this column assuming the highest level of performance conditions will be achieved.

 

		2009				2008				2007
C. M. Connor		$	3,221,050			$	2,314,045			$	3,048,178
J. G. Morikis			1,380,450				914,855				1,001,419
S. P. Hennessy			1,104,360				672,688				702,750
S. J. Oberfeld			920,300				672,688				702,750
T. W. Seitz		$	575,188			$	365,942			$	527,063

 

 

		2009				2008				2007
Risk-free interest rate			2.39	%			3.01	%			4.03	%
Expected life of options			5.27	years			5.24	years			4.67	years
Expected dividend yield of stock			2.69	%			2.41	%			1.80	%
Expected volatility of stock			0.319				0.321				0.279

 

		C. M. Connor				J. G. Morikis				S. P. Hennessy				S. J. Oberfeld				T. W. Seitz
Pension Plans ($)			13,800				13,800				13,800				13,800				2,450
Employee Stock Plan ($)			14,700				14,700				14,700				14,700				14,700
Grantor Trust — Supplemental Payments ($)			295,949				118,378				87,326				71,600				390,839
Grantor Trust — Tax Gross-ups ($)			59,101				10,529				4,160				23,482				15,562
Executive Life Insurance Plan ($)			85,800				49,430				41,900				27,485				52,000
Executive Disability Income Plan ($)			2,372				2,283				2,620				2,661				3,378
Charitable Matching Gifts ($)			-0-				-0-				-0-				-0-				5,000
Perquisites ($)			5,010				32,254				29,079				-0-				13,392
TOTAL ($)			476,732				241,374				193,585				153,728				497,321

 

Amounts do not include the incremental cost of our Business Travel Accident Insurance Plan, which provides coverage for all of our directors, executive officers and full-time salaried employees. The total aggregate premium in 2009 for this plan for all directors, executives and employees was $36,028.

 

Narrative Information Regarding the Summary Compensation Table.

 

Employment Agreements.  None of our named executives have entered into employment agreements with Sherwin-Williams.

 

Salary.  The salary amounts disclosed in the table are the amounts of base salary earned by our named executives during the indicated year. The salary amounts paid to our named executives during 2009 exceeded their base salaries because calendar year 2009 contained 27 bi-weekly pay periods instead of the usual 26. For 2009, salaries earned by our named executives accounted for the following percentages of their total compensation set forth in the table: Mr. Connor (17%), Mr. Morikis (22%), Mr. Hennessy (20%), Mr. Oberfeld (23%) and Mr. Seitz (21%). The percentages for 2009 are lower than the percentages for 2008 because no annual cash incentive compensation was earned or paid for 2008.

 

Stock and Option Awards.   Consistent with recently amended SEC rules, stock and option awards are required to be valued using the aggregate grant date fair value computed in accordance with Stock Compensation Topic (718) of the ASC. Accordingly, the values of stock and option awards for 2007 and 2008 disclosed in our 2007 and 2008 proxy statements have been recomputed to conform with the amended rules.

 

Salaried Employees’ Pension Investment Plan.  Mr. Seitz is the only named executive who participates in our Salaried Employees’ Pension Investment Plan. Information about this plan is set forth in the 2009 Pension Benefits Table and the accompanying narrative discussion.

 

2005 Deferred Compensation Savings and Pension Equalization Plan.  Our Deferred Compensation Plan is a nonqualified plan that provides participating employees with the employer contributions the employees would have received under our qualified retirement plans, but for federal tax limitations. Amounts deferred are credited with market earnings based on the same investment choices available to all employees under our qualified retirement plans. Our executives became eligible to participate in our Deferred Compensation Plan effective January 1, 2010.

 

2005 Key Management Deferred Compensation Plan.  Our Key Management Plan is a nonqualified deferred compensation plan pursuant to which employees who participate in our 2007 Executive Performance Bonus Plan or other identified employee groups may elect to defer on a pre-tax basis up to 100% of their base salary and bonus. None of our named executives participate in our Key Management Plan.

 

Perquisites.  The value of perquisites disclosed in the table is based upon the incremental cost of providing the benefit to the executive. During 2007, the Compensation and Management Development Committee eliminated most of the perquisites that we had provided to our executives. Accordingly, perquisites for 2009 for our named executives related only to our executive automobile program and personal use of corporate aircraft.

 

 

In addition, we purchase tickets to sporting and cultural events for business purposes. If not used for business purposes, the tickets are made available to our executives and other employees for personal use.

 

 

The following table sets forth information regarding the grants of annual cash incentive compensation, stock options and restricted stock during 2009 to our named executives.

 

																												All
																												Other								Grant
																												Option				Exercise				Date
																												Awards;				of				Fair
																												Number				Base				Value
																												of				Price				of
				Estimated Possible Payouts Under												Estimated Future Payouts Under												Securities				of				Stock
				Non-Equity Incentive Plan Awards(1)												Equity Incentive Plan Awards(2)												Underlying				Option				and
		Grant		Threshold				Target				Maximum				Threshold				Target				Maximum				Options				Awards				Option
Name		Date		($)				($)				($)				(#)				(#)				(#)				(#)(3)				($/Sh)(4)				Awards($)(5)
C. M. Connor		02/17/2009			-0-				1,205,537				2,411,074
		02/17/2009															18,200				46,667				70,000												2,147,367
		10/15/2009																											125,000				63.25				1,918,725
J. G. Morikis		02/17/2009			-0-				549,527				1,099,054
		02/17/2009															7,800				20,000				30,000												920,300
		10/15/2009																											50,000				63.25				767,490
S. P. Hennessy		02/17/2009			-0-				421,224				842,448
		02/17/2009															6,240				16,000				24,000												736,240
		10/15/2009																											40,000				63.25				613,992
S. J. Oberfeld		02/17/2009			-0-				319,638				639,275
		02/17/2009															5,200				13,333				20,000												613,533
		10/15/2009																											36,000				63.25				552,593
T. W. Seitz		02/17/2009			-0-				292,626				585,253
		02/17/2009															3,250				8,333				12,500												383,458
		10/15/2009																											21,000				63.25				322,346

 

 

The values of stock options set forth in this column are equal to the aggregate grant date fair value computed in accordance with Stock Compensation Topic (718) of the ASC, excluding the effect of estimated forfeitures. The values were calculated using a Black-Scholes option pricing model. The assumptions used in this model are set forth in the table to footnote 2 of the Summary Compensation Table.

 

Narrative Information Regarding the 2009 Grants of Plan-Based Awards Table.

 

Non-equity Incentive Plan Awards.  The non-equity incentive plan awards set forth in the table reflect annual cash incentive compensation that could have been earned by our named executives during 2009 under our 2007 Executive Performance Bonus Plan based upon the accomplishment of company and individual financial and operating performance goals.

 

Annual cash incentive compensation is payable as a percentage of salary. These percentages vary by named executive. The threshold, target and maximum amounts set forth in the table correspond to the named executive achieving an average of 0%, 100% and 125% of his performance goals, respectively. More information is set forth under the heading “Annual Cash Incentive Compensation” of “Compensation Discussion and Analysis.”

 

Restricted Stock.  We grant restricted stock pursuant to our 2006 Equity and Performance Incentive Plan. The shares of restricted stock granted in 2009 vest at the end of a three-year period based upon the achievement of financial performance goals. The number of shares of restricted stock that will actually vest at the end of the vesting period will range from 0% to 100% based upon achievement of the financial performance goals.

 

The threshold amounts set forth in the table correspond to our named executives receiving 26% of the shares of restricted stock granted, which is the number of shares that will vest for the minimum level of performance. No shares of restricted stock will vest if the threshold level of performance is not achieved.

 

The maximum amounts set forth in the table correspond to the Compensation Committee’s decision to grant a number of shares of restricted stock equal to 1.5 times the target value (and correspondingly setting above target goals higher making achievement of the goals more difficult to attain) in order to provide an incentive for above target performance. We have included more information about these performance goals under the heading “Long-term Equity Incentive Compensation” of “Compensation Discussion and Analysis.”

 

Shares of restricted stock will vest immediately upon the death or disability of the named executive or upon a change in control of Sherwin-Williams.

 

During the vesting period, the executives are the beneficial owners of the shares of restricted stock and possess all voting and dividend rights. Dividends are payable at the same rate as is paid on Sherwin-Williams common stock generally. During 2009, the quarterly dividend rate was $0.355 per share. In February 2010, the Board of Directors announced an increase in the quarterly dividend rate to $0.36 per share payable on March 12, 2010.

 

Stock Options.  We grant stock options pursuant to our 2006 Equity and Performance Incentive Plan. The option exercise price is equal to the market value of our common stock on the date options are granted. In accordance with the terms of the plan, the market value is equal to the average of the highest and lowest reported sale prices of our common stock on the date of grant.

 

Stock options vest in three equal installments on the first, second and third anniversary dates of the date of grant and have a term of ten years. Stock options become immediately exercisable in the event of the death or disability of the executive or in the event of a change in control of Sherwin-Williams. Stock options are not transferable other than by will or the laws of descent and distribution.

 

The following table sets forth information regarding the number of unexercised stock options and the number and value of unvested shares of restricted stock outstanding on December 31, 2009 for our named executives.

 

																						Stock Awards
																						Equity Incentive
		Option Awards																				Plan Awards:				Equity Incentive
						Number of				Number of												Number of				Plan Awards:
						Securities				Securities												Unearned				Market or Payout
						Underlying				Underlying												Shares,				Value of Unearned
						Unexercised				Unexercised				Option								Units or Other				Shares, Units or
						Options				Options				Exercise				Option				Rights That Have				Other Rights That
		Option				(#)				(#)				Price				Expiration				Not Vested				Have Not Vested
Name		Grant Date(1)				Exercisable				Unexercisable				($)				Date				(#)				($)(2)
C. M. Connor			10/18/2002				246,067				-0-				25.425				10/17/2012				59,000	(3)			3,637,350
			10/24/2003				200,000				-0-				31.20				10/23/2013				43,375	(4)			2,674,069
			10/20/2004				135,000				-0-				41.725				10/19/2014				43,000	(5)			2,650,950
			10/21/2005				175,000				-0-				43.595				10/20/2015				70,000	(5)			4,315,500
			10/18/2006				140,000				-0-				59.435				10/17/2016
			10/19/2007				66,667				33,333				63.44				10/18/2017
			10/14/2008				41,667				83,333				54.09				10/13/2018
			10/15/2009				-0-				125,000				63.25				10/14/2019
J. G. Morikis			10/21/2005				40,000				-0-				43.595				10/20/2015				28,700	(3)			1,769,355
			10/18/2006				50,000				-0-				59.435				10/17/2016				14,250	(4)			878,513
			10/19/2007				26,667				13,333				63.44				10/18/2017				17,000	(5)			1,048,050
			10/14/2008				16,667				33,333				54.09				10/13/2018				30,000	(5)			1,849,500
			10/15/2009				-0-				50,000				63.25				10/14/2019
S. P. Hennessy			10/20/2004				30,000				-0-				41.725				10/19/2014				15,000	(3)			924,750
			10/21/2005				40,000				-0-				43.595				10/20/2015				10,000	(4)			616,500
			10/18/2006				33,000				-0-				59.435				10/17/2016				12,500	(5)			770,625
			10/19/2007				20,000				10,000				63.44				10/18/2017				24,000	(5)			1,479,600
			10/14/2008				12,000				24,000				54.09				10/13/2018
			10/15/2009				-0-				40,000				63.25				10/14/2019
S. J. Oberfeld			10/19/2000				5,095				-0-				19.625				10/18/2010				13,500	(3)			832,275
			10/17/2001				4,114				-0-				24.305				10/16/2011				10,000	(4)			616,500
			10/18/2002				3,933				-0-				25.425				10/17/2012				12,500	(5)			770,625
			10/24/2003				3,205				-0-				31.20				10/23/2013				20,000	(5)			1,233,000
			10/20/2004				13,500				-0-				41.725				10/19/2014
			10/21/2005				16,000				-0-				43.595				10/20/2015
			10/18/2006				33,000				-0-				59.435				10/17/2016
			10/19/2007				20,000				10,000				63.44				10/18/2017
			10/14/2008				12,000				24,000				54.09				10/13/2018
			10/15/2009				-0-				36,000				63.25				10/14/2019
T. W. Seitz			10/20/2004				10,000				-0-				41.725				10/19/2014				17,500	(3)			1,078,875
			10/21/2005				27,707				-0-				43.595				10/20/2015				7,500	(4)			462,375
			10/18/2006				28,000				-0-				59.435				10/17/2016				6,800	(5)			419,220
			10/19/2007				12,000				6,000				63.44				10/18/2017				12,500	(5)			770,625
			10/14/2008				7,000				14,000				54.09				10/13/2018
			10/15/2009				-0-				21,000				63.25				10/14/2019