SCHEDULE 14A
(RULE 14a-101)

 

 

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

 

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Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o Preliminary Proxy Statement

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þ Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material Under Rule 14a-12

 

POLYONE CORPORATION

(Name of Registrant as Specified In Its Certificate)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

POLYONE CORPORATION

 

Notice of 2010

Annual Meeting of Shareholders

and Proxy Statement

 

 

 

March 29, 2010

 

 

Dear Fellow Shareholder:

 

You are cordially invited to attend the PolyOne Corporation Annual Meeting of Shareholders, which will be held at 9:00 a.m. on Wednesday, May 12, 2010, at LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio.

 

A Notice of the Annual Meeting and the Proxy Statement follow. Please review this material for information concerning the business to be conducted at the Annual Meeting and the nominees for election as Directors.

 

You will also find enclosed a proxy and/or voting instruction card and an envelope in which to return the card. Whether or not you plan to attend the Annual Meeting, please complete, sign, date and return your enclosed proxy and/or voting instruction card, or vote over the telephone or the Internet as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. Your vote is very important. You may, of course, withdraw your proxy and change your vote prior to or at the Annual Meeting, by following the steps described in the Proxy Statement.

 

I appreciate the strong support of our shareholders over the years and look forward to seeing you at the meeting.

 

Sincerely,

 

Stephen D. Newlin

Chairman, President and Chief Executive Officer
PolyOne Corporation

 

Please refer to the accompanying materials for voting instructions.

 

POLYONE CORPORATION

 

NOTICE OF ANNUAL MEETING

OF SHAREHOLDERS

 

 

The Annual Meeting of Shareholders of PolyOne Corporation will be held at the LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio at 9:00 a.m. on Wednesday, May 12, 2010. The purposes of the meeting are:

 

 

Shareholders of record at the close of business on March 15, 2010 are entitled to notice of and to vote at the meeting.

 

For the Board of Directors

 

Lisa K. Kunkle

Vice President, General Counsel
and Secretary

 

March 29, 2010

 

Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Shareholders to be held on May 12, 2010:

 

The proxy statement, proxy card and annual report to shareholders for the fiscal year ended December 31, 2009 are available at our internet website, www.polyone.com, on the “Investors Relations” page.

 

POLYONE CORPORATION
PolyOne Center
33587 Walker Road
Avon Lake, Ohio 44012

 

PROXY STATEMENT

Dated March 29, 2010

 

Our Board of Directors respectfully requests your proxy for use at the Annual Meeting of Shareholders to be held at the LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio at 9:00 a.m. on Wednesday, May 12, 2010, and at any adjournments of that meeting. This proxy statement is to inform you about the matters to be acted upon at the meeting.

 

If you attend the meeting, you may vote your shares by ballot. If you do not attend, your shares may still be voted at the meeting if you sign and return the enclosed proxy card. Common shares represented by a properly signed card will be voted in accordance with the choices marked on the card. If no choices are marked, the shares will be voted to elect the nominees listed on pages 3 through 7 of this proxy statement, to approve the PolyOne Corporation 2010 Equity and Performance Incentive Plan, to approve the PolyOne Corporation Senior Executive Annual Incentive Plan (Effective January 1, 2011) and to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2010. You may revoke your proxy before it is voted by giving notice to us in writing or orally at the meeting. Persons entitled to direct the vote of shares held by the following plans will receive a separate voting instruction card: The PolyOne Retirement Savings Plan and PolyOne Canada Inc. Retirement Savings Program. If you receive a separate voting instruction card for one of these plans, you must sign and return the card as indicated on the card in order to instruct the trustee on how to vote the shares held under the plan. You may revoke your voting instruction card before the trustee votes the shares held by it by giving notice in writing to the trustee.

 

Shareholders may also submit their proxies by telephone or over the Internet. The telephone and Internet voting procedures are designed to authenticate votes cast by use of a personal identification number. These procedures allow shareholders to appoint a proxy to vote their shares and to confirm that their instructions have been properly recorded. Instructions for voting by telephone and over the Internet are printed on the proxy cards.

 

We are mailing this proxy statement and the enclosed proxy card and, if applicable, the voting instruction card, to shareholders on or about April 5, 2010. Our headquarters are located at PolyOne Center, 33587 Walker Road, Avon Lake, Ohio 44012 and our telephone number is (440) 930-1000.

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of ten Directors. Each Director serves for a one-year term and until a successor is duly elected and qualified, subject to the Director’s earlier death, retirement or resignation. Our Corporate Governance Guidelines provide that all non-employee Directors will retire from the Board not later than the first Annual Meeting of Shareholders following the Director’s 70th birthday. In accordance with these Guidelines, Ms. Duff-Bloom will retire from the Board at the 2010 Annual Meeting of Shareholders. Following Ms. Duff-Bloom’s retirement, our Board will consist of nine Directors.

 

A shareholder who wishes to suggest a Director candidate for consideration by the Nominating and Governance Committee must provide written notice to our Secretary in accordance with the procedures specified in Regulation 12 of our Regulations. Generally, the Secretary must receive the notice not less than 60 nor more than 90 days prior to the first anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting. The notice must set forth, as to each nominee, the name, age, principal occupations and employment during the past five years, name and principal business of any corporation or other organization in which such occupations and employment were carried on, and a brief description of any arrangement or understanding between such person and any others pursuant to which such person was selected as a nominee. The notice must include the nominee’s signed consent to serve as a Director if elected. The notice must set forth the name and address of, and the number of our common shares owned by, the shareholder giving the notice and the beneficial owner on whose behalf the nomination is made and any other shareholders believed to be supporting such nominee.

 

Following are the nominees for election as Directors for terms expiring in 2011, a description of the business experience of each nominee and the names of other publicly-held companies for which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board to the conclusions that the nominee should serve as a Director, the Board also believes that all of our Director nominees are individuals of substantial accomplishment with demonstrated leadership capabilities. Each of our Directors also has the following personal characteristics, which are required attributes for all Board nominees: high ethical standards, integrity, judgment, and an ability to devote sufficient time to the affairs of our Company. Each of the nominees is a current member of the Board. The reference below each Director’s name to the term of service as a Director includes the period during which the Director served as a Director of The Geon Company (“Geon”) or M.A. Hanna Company (“M.A. Hanna”), each one of our predecessors. The information is current as of March 15, 2010.

 

Our Board of Directors recommends a vote FOR the election to the Board of each of the following nominees:

 

 

CORPORATE GOVERNANCE AND BOARD MATTERS

 

Director Independence

 

Our Corporate Governance Guidelines require that a substantial majority of the members of our Board of Directors be “independent” under the listing standards of the New York Stock Exchange (“NYSE”). To be considered “independent,” the Board of Directors must make an affirmative determination that the Director has no material relationship with us other than as a Director, either directly or indirectly (such as an officer, partner or shareholder of another entity that has a relationship with us or any of our subsidiaries), and that the Director is free from any business, family or other relationship that would reasonably be expected to interfere with the exercise of independent judgment as a Director. In each case, the Board of Directors considers all relevant facts and circumstances in making an independence determination.

 

A Director will not be deemed to be “independent” if, within the preceding three years:

 

(a) the Director was our employee, or an immediate family member of the Director was either our executive officer or the executive officer of any of our affiliates;

 

(b) the Director received, or an immediate family member of the Director received, more than $120,000 per year in direct compensation from us, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation was not contingent in any way on continued service);

 

(c) the Director is a current partner or employee of Ernst & Young LLP, our external auditor, or within the last three years was a partner or employee of Ernst & Young LLP who personally worked on our audit during that time;

 

(d) an immediate family member of the Director is a current partner of Ernst & Young LLP, our external auditor, or within the last three years was an employee of Ernst & Young LLP who personally worked on our audit during that time;

 

(e) the Director was employed, or an immediate family member of the Director was employed, as an executive officer of another company where any of our present executive officers serve on that company’s compensation committee; or

 

(f) the Director was an executive officer or an employee, or an immediate family member of the Director was an executive officer, of a company that makes payments to, or receives payments from, us for property or services in an amount which, in any single fiscal year, exceeds the greater of $1,000,000, or 2% of such other company’s consolidated gross revenues.

 

An “immediate family member” includes a Director’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such Director’s home.

 

A Director’s service as an executive officer of a not-for-profit organization will not impair his or her independence if, within the preceding three years, our charitable contributions to the

organization in any single fiscal year, in the aggregate, did not exceed the greater of $1,000,000 or 2% of that organization’s consolidated gross revenues.

 

The Board of Directors determined that J. Douglas Campbell, Carol A. Cartwright, Gale Duff-Bloom, Richard H. Fearon, Robert A. Garda (who retired during 2009), Gordon D. Harnett, Richard A. Lorraine, Edward J. Mooney, William H. Powell and Farah M. Walters are independent under the NYSE “independent director” listing standards. In making this determination, the Board reviewed significant transactions, arrangements or relationships that a Director might have with our customers or suppliers.

 

Lead Director

 

Our independent directors meet regularly in executive sessions. Our Corporate Governance Guidelines provide that the independent directors are to select a Lead Director to preside at executive sessions. The Lead Director acts as the key liaison between the independent directors and the Chief Executive Officer and is responsible for coordinating the activities of the other independent directors and for performing various other duties as may from time to time be determined by the independent directors. Mr. Harnett has served as our Lead Director since July 2007.

 

Board Leadership Structure

 

Mr. Newlin is the Chairman of our Board of Directors and our Chief Executive Officer. The Board of Directors believes that this leadership structure is appropriate for our company given the experience and active involvement of our independent directors, our corporate governance practices, and our Lead Director’s role. Having a Lead Director role helps to ensure greater communication between management and the independent directors, increases the independent directors’ understanding of management decisions and Company operations, and provides an additional layer of independent oversight of the Company. The Board of Directors believes that this approach serves to strike an effective balance between management and independent director participation in the board process. Combining the Chairman and Chief Executive Officer position gives the Company a clear leader and improves efficiencies in the decision-making process.

 

Board Attendance

 

The Board met seven times during 2009, the calendar year being our fiscal year. Each member of our Board attended at least 75% of the meetings held by our Board and the meetings held by the Committees of the Board on which such member served in 2009. Each Director is expected to attend the Annual Meeting of Shareholders. In 2009, nine of our Directors serving at that time attended the Annual Meeting of Shareholders.

 

Committees of the Board of Directors

 

As of the date of this proxy statement, our Board has ten directors and the following five committees: the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Environmental, Health and Safety Committee, and the Financial Policy Committee.

The following table sets forth the membership of the standing committees of our Board of Directors, as of the date of this proxy statement, and the number of times each committee met in 2009. The current function of each committee is described below.

 

 

X — Member

 

* — Chairperson

 

 

The Audit Committee meets with appropriate financial and legal personnel and independent auditors to review our corporate accounting, internal controls, financial reporting and compliance with legal and regulatory requirements. The Committee exercises oversight of our independent auditors, internal auditors and financial management. The Audit Committee appoints the independent auditors to serve as auditors in examining our corporate accounts. Our common shares are listed on the NYSE and are governed by its listing standards. All members of the Audit Committee meet the financial literacy and independence requirements as set forth in the NYSE listing standards. The Board of Directors has determined that Mr. Fearon meets the requirements of an “audit committee financial expert” as defined by the Securities and Exchange Commission.

 

The Compensation Committee reviews and approves the compensation, benefits and perquisites afforded our executive officers and other highly-compensated personnel. The Committee has similar responsibilities with respect to non-employee Directors, except that the Committee’s actions and determinations are subject to the approval of the Board of Directors. The Committee also has oversight responsibilities for all of our broad-based compensation and benefit programs and provides policy guidance and oversight on selected human resource policies and practices. To help it perform its responsibilities, the Committee makes use of PolyOne resources, including members of senior management in our human resources, legal and finance departments. In addition, the Committee directly engages the resources of Towers Watson (formerly Towers Perrin, the “Consultant”) as an independent outside compensation consultant to assist the Committee in assessing the competitiveness and overall appropriateness of our executive compensation programs. In 2009, the

Committee, assisted by the Consultant, analyzed competitive market compensation data relating to salary, annual incentives and long-term incentives. In analyzing competitive market data, the Committee reviewed data from a peer group of similarly-sized U.S. chemical companies and reviewed data from the Consultant’s Compensation Data Bank and other published surveys. The Consultant then assisted the Committee in benchmarking base salaries and annual and long-term incentive targets to approximate the market median. The Consultant assisted our human resources department in preparing tally sheets to provide the Committee with information regarding our executive officers’ total annual compensation, termination benefits and wealth accumulation. More detailed information about the compensation awarded to our executive officers in 2009 is provided in the “Compensation Discussion and Analysis” section of this proxy statement. The Consultant maintains regular contact with the Committee and interacts with management to gather the data needed to prepare reports for Committee review.

 

The Consultant did not provide us with services in excess of $120,000 that were in addition to the services provided in connection with its advice and recommendations on the amount or form of executive and director compensation.

 

The Compensation Committee reviews succession planning for the Chief Executive Officer and other executive officers and oversees the process by which the Board annually evaluates the performance of the Chief Executive Officer. All members of the Compensation Committee have been determined to be independent as defined by the NYSE listing standards.

 

The Nominating and Governance Committee recommends to the Board of Directors candidates for nomination as Director and advises the Board with respect to governance issues and directorship practices. All members of the Nominating and Governance Committee have been determined to be independent as defined by the NYSE listing standards.

 

The Nominating and Governance Committee will consider shareholder suggestions for nominees for election to our Board of Directors as described on page 3. The Committee uses a variety of methods for identifying and evaluating nominees for Directors, including third-party search firms, recommendations from current Board members and recommendations from shareholders. Nominees for election to the Board of Directors are selected on the basis of the following criteria:

 

 

While the Committee or the Board does not have a formal policy with respect to the consideration of diversity in identifying director nominees, they do consider diversity when evaluating potential Board nominees. We consider diversity to include race, gender and national origin, as well as differences in viewpoint, background, experience and skills. The Committee

believes that having a diverse Board leads to more innovation, more outside-the-box-thinking and better governance. In 2009, 30% of our Board members were female and diversity is a key characteristic that we will consider, and instruct any third party search firm we use to consider, in searches for future Board members.

 

The Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee expertise and the evaluations of other prospective nominees. The Committee has established these criteria that any Director nominee, whether suggested by a shareholder or otherwise, should satisfy. A nominee for election to the Board who is suggested by a shareholder will be evaluated by the Committee in the same manner as any other nominee for election to the Board. Finally, if the Committee determines that a candidate should be nominated for election to the Board, the Committee will present its findings and recommendation to the full Board for approval.

 

In past years, the Committee has used a third-party search firm, Russell Reynolds Associates, Inc., to identify possible candidates who meet the minimum and desired qualifications, to interview and screen such candidates (including conducting appropriate background and reference checks), to act as a liaison among the Board, the Committee and each candidate during the screening and evaluation process, and thereafter to be available for consultation as needed by the Committee. The Committee did not use Russell Reynolds Associates, Inc. in 2009, but may use them again in the future.

 

The Environmental, Health and Safety Committee exercises oversight with respect to our environmental, health, safety, security and product stewardship policies and practices and our compliance with related laws and regulations.

 

The Financial Policy Committee exercises oversight with respect to our capital structure, borrowing and repayment of funds, financial policies, management of foreign exchange risk and other matters of financial risk management, banking relationships and other financial matters.

 

The Board of Directors has adopted a written charter for each of the standing committees of the Board of Directors. These charters are posted and available on our investor relations internet website at www.polyone.com under the Corporate Governance page. The Board and each Committee conduct an annual self-evaluation.

 

Board’s Oversight of Risk

 

Our Board of Directors oversees a company-wide approach to risk management that is designed to support the achievement of our strategic objectives and improve long-term organizational performance, which we believe will ultimately enhance shareholder value. The Board of Directors believes that risk management is not only understanding the risks we face and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us as an organization.

 

Our Board of Directors administers its risk oversight function directly and through its Audit Committee and Financial Policy Committee. The Audit Committee discusses with management our major financial risk exposures and the steps management has taken to monitor and control such exposures, including our risk assessment and risk management policies. The Audit Committee also receives an annual risk assessment report from our internal auditors. The Financial Policy Committee assists the Board of Directors in fulfilling its oversight and monitoring responsibilities to our shareholders relating to our capital structure, our borrowing and repayment of funds, financial policies, management of foreign exchange risk and other matters of financial risk management,

including the utilization of financial derivative products, insurance coverage strategies, banking relationships and other financial matters.

 

Our Board of Directors sets the appropriate “tone at the top” when it comes to risk tolerance and management by fostering a culture of risk-adjusted decision-making throughout the company. Our Board ensures that the risk management processes designed and implemented by our management team are adapted to the Board’s corporate strategy and are functioning as directed. The Board of Directors also participates in an ongoing effort to assess and analyze the most likely areas of future risk for the company by asking our management team to discuss the most likely sources of material future risks and how we are addressing any significant potential vulnerability.

 

Code of Ethics, Code of Conduct and Corporate Governance Guidelines

 

In accordance with applicable NYSE listing standards and Securities and Exchange Commission regulations, the Board of Directors has adopted a Code of Ethics, Code of Conduct and Corporate Governance Guidelines. These are also posted and available on our investor relations internet website at www.polyone.com under the Corporate Governance page.

 

In October 2007, the Board amended our Corporate Governance Guidelines to adopt a policy relating to majority voting. Pursuant to the policy, any nominee for election as a Director of the Board who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election in an election of Directors that is not a contested election is expected to tender his or her resignation as a Director to the Board promptly following the certification of the election results. Neither abstentions nor broker non-votes will be deemed to be votes for or withheld from a Director’s election for purposes of the policy, regardless of the new rules treating broker non-votes as withheld in uncontested elections of directors. The Nominating and Governance Committee (without the participation of the affected Director) will consider each resignation tendered under the policy and recommend to the Board whether to accept or reject it. The Board will then take appropriate action on each tendered resignation, taking into account the Nominating and Governance Committee’s recommendation. The Nominating and Governance Committee in making its recommendation, and the Board in making its decision, may consider any factors or other information that it considers appropriate, including the reasons (if any) given by shareholders as to why they withheld their votes, the qualifications of the tendering Director and his or her contributions to the Board and to PolyOne, and the results of the most recent evaluation of the tendering Director’s performance by the other members of the Board. The Board will promptly disclose its decision whether to accept or reject the Director’s tendered resignation and, if applicable, the reasons for rejecting the tendered resignation.

 

Communication with Board of Directors

 

Shareholders and other interested parties interested in communicating directly with the Board of Directors as a group, the non-management or independent Directors as a group, or with any individual Director may do so by writing to the Secretary, PolyOne Corporation, 33587 Walker Road, Avon Lake, Ohio 44012. The mailing envelope and letter must contain a clear notation indicating that the enclosed letter is either a “Shareholder-Board of Directors Communication” or an “Interested Party-Board of Directors Communication,” as appropriate.

 

The Secretary will review all such correspondence and regularly forward to the Board of Directors a log and summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deals with the functions of the Board or Committees of the Board or that she otherwise determines requires their attention. Directors may at any time review a log of all correspondence we receive that is addressed to members of the Board and request copies of any

such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the Audit Committee for such matters.

 

Director Compensation

 

In 2009, we paid our non-employee Directors an annual retainer of $135,000, quarterly in arrears, consisting of a cash retainer of $60,000 and an award of $75,000 in value of fully vested common shares. We grant the shares payable to the Directors quarterly and determine the number of shares to be granted by dividing the dollar value by the arithmetic average of the high and low stock price on the last trading day of each quarter. We pay individual meeting fees only as follows: fees of $2,000 for each unscheduled Board and committee meeting attended and fees of $1,000 for participation in each unscheduled significant telephonic Board and committee meeting. In addition, the Chairpersons of each committee receive a fixed annual cash retainer as follows: $5,000 for Environmental, Health and Safety, Nominating and Governance and Financial Policy Committees and $10,000 for Audit and Compensation Committees. These amounts are payable on a quarterly basis. We reimburse Directors for their expenses associated with each meeting attended.

 

Directors who are not our employees may defer payment of all or a portion of their compensation as a Director under our Deferred Compensation Plan for Non-Employee Directors. A Director may defer the compensation as cash or elect to have it converted into our common shares.

 

In 2009, we awarded shares to Directors under our Deferred Compensation Plan for Non-Employee Directors and our 2008 Equity and Performance Incentive Plan. Deferred compensation, whether in the form of cash or common shares, is held in trust for the participating Directors. Interest is earned on the cash amounts and dividends, if any, on the common shares deferred accrue for the benefit of the participating Directors.

 

2009 DIRECTOR COMPENSATION

 

 

 

			Option Awards					Stock Awards
			Number of
			Securities Underlying					Number of
			Unexercised Options					Deferred Shares
Name			(#)					(#)
J.D. Campbell				42,000					185,431
C.A. Cartwright				39,000					39,281
G. Duff-Bloom				42,000					67,626
R.H. Fearon				15,000					0
R.A. Garda(4)				39,000					0
G.D. Harnett				39,000					129,928
R.A. Lorraine				0					26,052
E.J. Mooney				0					74,515
W.H. Powell				0					31,421
F.M. Walters				42,000					46,012

 

 

BENEFICIAL OWNERSHIP OF COMMON SHARES

 

The following table shows the number of our common shares beneficially owned on March 15, 2010 (including options exercisable within 60 days of that date) by each of our Directors and nominees, each of the executive officers named in the Summary Compensation Table on page 37 and by all Directors and executive officers as a group.

 

 

 

The following table shows information relating to all persons who, as of March 15, 2010, were known by us to beneficially own more than five percent of our outstanding common shares based on information provided in Schedule 13Gs and 13Ds filed with the Securities and Exchange Commission:

 

 

 

Share Ownership Guidelines

 

In December 2009, we revised our share ownership guidelines for our non-employee Directors, executive officers and other elected corporate officers to better align their financial interests with those of our shareholders by requiring them to own a minimum level of our shares. These individuals are expected to make continuing progress towards compliance with the guidelines and to comply fully within five years of becoming subject to the guidelines. These policies, as they relate to our Named Executive Officers, are discussed in the “Compensation Discussion and Analysis” section of this proxy statement. In order to reflect the Board’s commitment to share ownership and better align the interests of our Board members with our shareholders, the required share ownership level for directors is 50,000 shares. For purposes of our guidelines, the following types of share ownership and equity awards are included as shares owned: shares directly held, shares and phantom shares held in our retirement plans and deferral plans, unvested restricted stock and restricted stock units, and earned performance shares. All Directors are required to retain 100% of all shares obtained through us, after the date of adoption of the guidelines (December 16, 2009), as compensation for services provided to us, such percentage to be calculated after any reduction in the number of shares to be delivered as a result of any taxes and exercise costs relating to the shares. This requirement to retain 100% of all shares obtained from us ceases once the Director has met the applicable ownership guideline.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our executive officers and Directors, and persons who own more than 10% of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, Directors and greater than 10% shareholders are required by Securities and Exchange Commission rules to furnish us with copies of all forms they file. Based solely on our review of the copies of such forms received by us and written representation from certain reporting persons, we believe that, during 2009 and until the date of this proxy statement, all Section 16(a) filing requirements applicable to our executive officers, Directors and 10% shareholders were satisfied, except for one Form 4 filing for each of our executive officers relating to an award of stock appreciation rights and restricted stock units on February 17, 2010, which were each made one day after the due date.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Introduction

 

Our executive compensation programs are approved and overseen by the Compensation Committee of the Board of Directors (the “Committee”), which is composed entirely of independent directors. The Committee has selected and retained an independent compensation consultant, Towers Watson (formerly Towers Perrin, the “Consultant”). The Committee works in conjunction with the Consultant and with input from members of senior management, principally the Chairman, President and Chief Executive Officer, the Chief Human Resources Officer, the Chief Financial Officer and the General Counsel.

 

This report contains management’s discussion and analysis of the compensation awarded to, earned by, or paid to the following executive officers (the “Named Executive Officers”):

 

 

Executive Compensation Programs — Objectives and Overview

 

The objectives of our executive compensation programs are to: (1) attract, motivate and retain the management team who leads in setting and achieving the overall goals and objectives of our company; (2) foster a pay-for-performance culture by rewarding the achievement of specified financial goals and growth of our share price; and (3) align our goals and objectives with the interests of our shareholders by recognizing and rewarding business results through incentive programs.

 

While we believe that all components of total compensation (which are identified in the Summary Compensation Table) should be valued and considered when making decisions regarding pay, the primary focus of our executive compensation program is on base salary, annual incentive and long term incentives. We believe that compensation opportunities should be competitive with the compensation practices of the companies we compete with for executive talent and that total compensation should be fair to both employees and shareholders.

 

Our incentive programs focus on the critical performance measures that determine our company’s overall success. For positions with significant business unit responsibilities, incentive programs also emphasize success at the business unit level, which often leads to Named Executive Officers at comparable levels being paid differently across the organization. Our base salary and annual and long-term incentive opportunities are designed to reward executives for the efficient execution of their day-to-day responsibilities and attainment of short term results, balanced with the need for sustainable, long-term success.

The following table outlines the major elements of compensation in 2009 for our Named Executive Officers.

 

 

Setting the Level of Compensation

 

We have designed our compensation programs to be competitive with companies of comparable size and industry as well as companies with whom we compete for executive talent. The Committee obtains advice from the Consultant relating to competitive salaries and annual and long-term incentives, as well as other items of total compensation, including retirement benefits, health and welfare benefits and perquisites. Management and the Committee review the specific pay disclosures of the defined peer group of chemical companies as well as survey data of similarly-sized chemical and other companies, as provided by the Consultant. The Committee discusses and considers this information when making compensation decisions. This process is described in the “Compensation Oversight Processes” section of this report. The Committee manages compensation so as to align each of the pay elements with market practices.

 

The Committee targets base salaries around the median of observed market practice and sets annual and long-term incentive targets (incentive as a percent of salary) to approximate the market median. We believe the maximum potential annual incentive payouts (no award shall be greater than double the target award) are consistent with the typical market range around target awards.

 

Our actual awards of cash-settled performance units, stock-settled stock appreciation rights (SARs) and full value awards (in the form of performance shares or restricted stock units (RSUs)) are based on competitive long-term incentive market practices, market data, and an evaluation of an individual’s performance.

 

The global recession that began in the second half of 2008 and continued into 2009 had an impact on our business and on our executive compensation programs. As the global economy significantly eroded, it became clear that our executive compensation programs for 2009 needed to take into account the unprecedented nature of the economic conditions. We made significant compensation decisions, including deviations from our policy, history and/or design changes for 2009, as noted below, to reflect the challenges we faced. Additional details follow throughout this analysis.

 

 

 

 

 

 

The following table summarizes the allocation of the compensation opportunity at target that was granted in 2009 to the Named Executive Officers, based upon the primary elements of compensation (2009 base salary, annual incentive 2009 target opportunity, and long-term incentive grants made in 2009, including performance units that were to be earned based on 2009 performance and payable in 2012). The compensation opportunity is consistent with our overall pay-for-performance philosophy. Generally, employees at more senior levels in the organization, including the Named Executive Officers, have a greater proportion of their compensation tied to incentive compensation. Targeted pay opportunity levels typically align with the market in each individual pay element, however for 2009, each of the Named Executive Officers received long-term incentive compensation opportunities that were below target market opportunities.

 

Benchmarking Competitive Compensation

 

We regularly analyze competitive market compensation data relating to salary, annual incentives, and long term incentives. Periodically, we also analyze competitive market compensation data relating to retirement benefits and perquisites.

 

In analyzing competitive market data, we draw from two independent sources. First, we review proxy statement disclosures of a peer group of similarly sized U.S. chemical companies (listed below) to establish an estimate of market compensation for our most senior executives. This approach provides insight into explicit company practices at business competitors or companies facing similar operating challenges. However, it does not provide market information for positions below the senior management level, nor does it address competitors for talent outside the chemical industry.

 

Albemarle Corporation		Eastman Chemical Company		The Lubrizol Corporation
Arch Chemicals, Inc.		Ferro Corporation		RPM International Inc.
A. Schulman, Inc.		FMC Corporation		Spartech Corporation
Cabot Corporation		Georgia Gulf Corporation		The Valspar Corporation
Cytec Industries Inc.		H.B. Fuller Company

 

Second, we review data from Towers Watson’s Compensation Data Bank and other published surveys relating to the chemical industry or other applicable general industries, as provided by the Consultant, to augment the peer proxy analysis and provide a broader sense of market practices. To obtain comparability based on company size, the data either references a specific sample of companies or calibrates the pay of a broad sample of companies against company size. This data is used as one of several inputs into management’s and the Committee’s determination of market median compensation levels.

 

Elements of Compensation

 

The following discussion provides additional details about the main elements of compensation for the Named Executive Officers.

 

Base Salary

 

As described above, our policy is to target base pay at the market median but it allows actual pay levels to deviate from target based on performance, responsibility, experience and marketability unique to each individual. Based on the data provided by the Consultant, we have determined that the salaries of the Named Executive Officers range from 91% to 125% of the market median for comparable positions, with an average of 102% for all Named Executive Officers. For 2009, management recommended, and the Committee agreed, that the Named Executive Officers (and other corporate officers) would not receive any salary increases. For 2010, upon the recommendation of management, the Committee determined that no base salary increase would be provided to the CEO.

 

Annual Incentive

 

The Senior Executive Annual Incentive Plan (the “Annual Plan”) was approved by shareholders in 2005 and includes a set of performance measures that can be used in determining awards under the plan. We are requesting shareholder approval of a new Annual Plan at this year’s Annual Meeting and future annual incentive awards will be made under that plan, if approved. The Annual Plan determines how participants (including all Named Executive Officers) can earn annual cash awards. In 2009, the performance measures used for the corporate staff participants in the Annual

Plan (including Messrs. Newlin, Patterson and Smith) were company operating income (50% weighting) and consolidated working capital as a percentage of sales (50% weighting).

 

The performance measures used for Messrs. Rosenau and Baert as participants in the Annual Plan were business unit operating income (50% weighting), and consolidated working capital as a percentage of sales (50% weighting). The Committee chose these performance measures in order to drive profitability, promote working capital management, improve cash flow and support consistency in operational performance. Goals were generally designed to reward executives for the attainment of challenging but achievable annual business goals.

 

We established target annual incentive levels for 2009 consistent with our approach described above to approximate the market median. These targeted levels were set at 100% of salary earned for Mr. Newlin and 50% of salary earned during the year for each of the other Named Executive Officers.

 

Confronted with unprecedented economic conditions at the beginning of 2009, we set goals that focused our efforts on those factors critical to the on-going concern of our enterprise, including cash generation from working capital, cost containment, earnings improvement and the continued implementation of our overall strategy. For example, we were able to achieve maximum performance on our working capital as a percentage of sales metric and, as a result, reduced working capital by $117 million (working capital as defined in our annual incentive includes trade accounts receivable, inventory and trade accounts payable) in 2009. Further, on a consolidated basis, our performance under the operating income metric exceeded the maximum performance level. Given the depressed market in which we were operating at the beginning of 2009, we viewed this level of performance as extremely unattainable. Consumer confidence and industrial demand were at historically low levels and two of our largest end markets, housing and automotive, were particularly impacted by the depressed economic conditions, which collectively resulted in a 25% decline in sales in 2009 from 2008. The attainment levels of above-target to maximum performance for this metric in 2009 required exceptional performance across all disciplines and business units throughout the Company. The key elements that drove our improved operating income performance in 2009 were company-wide efforts to cut costs, prune unprofitable or high credit risk business, expand gross margins, and deploy lean six sigma initiatives.

 

The performance measures and targets and the respective levels of achievement for each performance measure under the Annual Plan are set forth below.

 

 

In the Annual Plan:

 

 

The target awards for the Named Executive Officers under the Annual Plan and the actual amounts earned for 2009 performance are set forth below.

 

Executive			Target Award					Earned Award					% Attainment
S.D. Newlin			$	860,000				$	1,720,000					200.0%
R.M. Patterson				207,500					415,000					200.0%
R.M. Rosenau				167,500					314,398					187.7%
K.M. Smith				168,000					336,000					200.0%
B. Baert(1)				212,476					283,974					133.7%

 

 

For 2009, we modified achievement of threshold performance under the Annual Plan to result in payment of 30% of the targeted award (instead of 50%) for the performance goals, while maintaining the same standard level of threshold performance. Achievement of a performance goal at the target level would result in payment of 100% of the targeted award for that performance goal and achievement at the maximum level or greater would result in payment of 200% of the targeted award for that goal. The awards are interpolated if performance falls between the levels. The actual amount awarded to the Named Executive Officers for 2009 ranged from 133.7% of the targeted amount to 200.0% of the targeted amount. The actual amounts earned under the Annual Plan for 2009 are also included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.

 

The Annual Plan, as it applies to the Named Executive Officers, is structured to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). In order to qualify the amounts earned under the Annual Plan as “performance-based,” the Committee may exercise discretion only to reduce an award. The Annual Plan is structured so that achievement of the threshold level of performance in any of the measures described above will result in the funding of the plan at maximum. Actual awards are calculated using the Plan formula described above and if funded at maximum as described above, the maximum awards are reduced, as necessary, to deliver awards that are consistent with the attainment levels that were achieved for all other incentive plan participants. For a more detailed discussion of Section 162(m) of the Internal Revenue Code, see the “Tax Considerations” section of this report.

 

For 2010, in order to place a greater emphasis on profitable growth and as a critical measure of our operating performance, we increased the weighting for operating income from 50% to 65% and we reduced the weighting for working capital as a percentage of sales from 50% to a 35% weighting. Working capital as a percentage of sales continues to be an important measure of our performance and we will also continue to utilize it as the performance metric in the 2010 Long Term Incentive Plan. In addition, we returned the level of payment for achievement of threshold performance in the annual incentive to 50% of the targeted award for 2010 from 30% of the targeted award in 2009. We updated target annual incentive levels for certain Named Executive Officers for 2010 consistent with our approach to approximate the market median. We set these targeted levels at 55% or 60% of salary earned during the year for the Named Executive Officers except Mr. Newlin and Mr. Baert. We increased Mr. Newlin’s target annual incentive opportunity from 100% to 110%

of salary, in lieu of a salary increase for 2010, and to further promote our pay for performance culture. This also places more of his overall compensation at risk, based on performance against key metrics.

 

Long-Term Incentive

 

In May of 2008, our shareholders approved the 2008 Equity and Performance Incentive Plan (the “2008 Plan”), and this plan has been used to make awards in 2009 and 2010. We do not believe enough shares remain in this plan to fund SAR and RSU awards in 2011. For this reason, we will be asking shareholders to approve the 2010 Equity and Performance Incentive Plan at the Annual Meeting. See Proposal 2 in this proxy statement.

 

 

The 2008 LTIP design was intended to provide sufficient shares for three years of grants. Several factors made maintaining this plan design challenging for 2009, including the value of our stock price and the challenges associated with setting long-term performance goals in an unstable economy. If we had continued to follow our historical LTIP grant practices in 2009, that would have resulted in the majority of the available shares in the 2008 Plan being granted during 2009. Instead, the Committee decided to reduce the value of the long-term incentives in 2009 so that only 50% of the available shares under the 2008 Plan would be used, thereby ensuring there were sufficient shares remaining to also fund the 2010 LTIP. As a result, the values of the Named Executive Officers’ long-term incentive grants in 2009 were 38% below the target market median opportunity. This approach balanced the perspectives of shareholders and participants by providing additional shares to incent participants, but at a lower total targeted value than in 2008.

 

This change resulted in a 2009 grant that delivered award allocations that differed from our historical LTIP award allocations, causing a smaller percentage of the award to be allocated to equity and a larger percentage allocated to cash-based performance units. In March 2009, we granted long-term incentive awards under the 2008 Plan using three vehicles, with the allocation of the award values roughly as follows: 65% of the award’s value was allocated to performance units for the 2009 performance period, 14% was allocated to stock-settled SARs and 21% was allocated to Performance Shares.

 

• Cash-Settled Performance Units

 

The performance units granted in March 2009 will be paid in cash, consistent with past practice, and were based on achievement of performance goals relating to Company working capital as a percentage of sales for the one-year period from January 1, 2009 through December 31, 2009. We reduced the measurement period for performance units from three years to one year due to the challenges associated with setting long-term goals in an unstable economy and in order to focus on our near-term cash needs. Award attainment for the performance units is determined at the end of the measurement period but awards are not payable for three years, consistent with existing performance unit design in order to continue the award’s retention characteristics.

 

The Committee selected working capital as a percentage of sales as the performance measure in order to reinforce our focus on improving working capital and to align the measure with the Annual Plan. Generally, the Committee sets the target level for the performance measure consistent with the level established under the projections for our financial plan for the same measurement period. The Committee believed that the budgeted level reflected a challenging but obtainable target. Attainment of the targeted level of achievement for the performance measure would represent a significant improvement over the level attained in previous years. The Committee intended the targeted level to

be achievable, but a maximum level of performance would have required an extraordinary level of performance, which we believed at the time was possible but unlikely to be achieved. Because of the critical importance of driving performance on our working capital measure, we believed it was essential to focus our team on cash management and to reward them for exceptional performance in this area.

 

Upon achievement of the target performance level, a participant would earn a target-level award; attainment of only the threshold performance level would have earned 30% of the target award; and attainment of the maximum performance level earns the participant 200% of the target award. If our performance had fallen between the threshold and target or between target and maximum, earnings under the plan would be interpolated. If threshold performance had not been achieved, no award would be paid to the participants. For performance units granted in 2009, we were able to achieve a maximum level of performance as a result of the focus by our team on working capital, a measure we viewed as critical. We believe that providing this incentive to our participants was instrumental in driving the desired results. Management believes these improvements influenced the recovery of our stock price during the course of the year and positioned us well for future success.

 

We based the performance units on performance at the threshold, target, and maximum levels below. In achieving a 200% payout level by reducing our working capital, we and our shareholders reaped benefits in 2009, such as substantially higher cash flow and liquidity levels and a significant increase in stock price during the year. The 2009 performance unit awards are payable in 2012.

 

 

• Stock-Settled SARs

 

To continually reinforce our ongoing commitment to enhancing shareholder returns the Named Executive Officers received an award of SARs that, when exercised by the holder, are settled in our common shares. The SARs granted in March to all Named Executive Officers, have a base price of $1.43. All SARs granted in 2009 have an exercise term of seven years, which is shorter than market practice, and vest ratably over three years, if certain performance criteria are met. The performance criteria added as a condition of vesting for the 2009 SARs requires achievement of a 10%, 20%, and 30% premium over the grant price. All of the SARs granted in 2009 have met the pre-established stock price hurdles.

 

• Performance Shares

 

To promote share ownership and enhance the retention of our executives we granted Performance Shares in March to all Named Executive Officers. The Performance Shares vest in one-third increments when a 10%, 20% and 30% premium over the grant price is achieved over the three-year performance period, payable after three years. The Performance Shares granted to all Named Executive Officers were valued at $1.43 at the time of grant. All of the Performance Shares granted in 2009 have met the pre-established stock price hurdles.

 

Performance units granted at the start of 2007, reflecting performance over the period 2007-2009, were eligible for payment following the conclusion of 2009. These performance units were based on achievement of company operating income performance goals over the three-year period. Performance levels during the period did not reach the threshold level of attainment and as a result, none of the Named Executive Officers received a payout of this award and the units expired.

 

 

All outstanding equity awards are set forth in the 2009 Outstanding Equity Awards at Fiscal Year-End table in this proxy statement.

 

 

We designed the awards granted in 2010 to maintain our focus on generating cash, promoting stock price appreciation, and enhancing retention.

 

The Committee determined that cash-settled performance units would again be granted in 2010 and that the performance units would be earned upon achievement of performance goals relating to working capital as a percentage of sales, consistent with the 2009 grants and the 2010 Annual Plan. The specific performance metrics are set forth in the table below. To focus on the near-term cash needs of the Company, performance will be measured over a one-year period (2010) and, to promote retention, the performance units will only be paid if the participant continues to be employed on the third anniversary of the date of grant. In addition, we modified the 2010 performance units such that the payout level for achievement of threshold performance was returned to 50% of the targeted award, the 2008 level, from 30% of the targeted award, the level used in 2009.

 

 

Further, the Committee determined that it would grant stock-settled SARs and full value stock awards (RSUs) to promote stock price appreciation and enhance retention. In determining the number of SARs and RSUs to be granted, the Committee returned to the approach that had been used in years prior to 2009. Our practice was to grant each participant a long-term incentive award with a target value based on market median and to determine the number of SARs and restricted stock units needed to deliver that pre-determined value.

 

For 2010, the long-term incentive awards consist of the following:

 

 

The terms of each component of the 2010 long-term incentive award are as follows:

 

 

 

Retirement Benefits

 

We offer a defined contribution retirement benefit to all U.S. employees through an Internal Revenue Code tax-qualified profit sharing/401(k) plan (the “Qualified Savings Plan”). The Qualified Savings Plan provides employees with individual retirement accounts funded by (1) an automatic Company-paid contribution of 2% of eligible earnings for all employees, (2) a Company-paid match on employee 401(k) contributions equal to dollar-for-dollar on the first 3% of earnings the employee contributes plus $0.50 per dollar on the next 3% of earnings the employee contributes, and (3) for certain employees, an additional automatic company-paid contribution (Transition Contribution) of up to 4% of eligible earnings. Of the Named Executive Officers, only Messrs. Rosenau and Smith received this contribution in the amount of 3.25% and 4.0%, respectively. Effective March 20, 2009, the additional automatic company-paid contribution was eliminated for all participants. The Internal Revenue Code limits employee contributions to the Qualified Savings Plan to $16,500 and earnings upon which employee/company contributions are based to $245,000 in 2009.

 

The PolyOne Supplemental Retirement Benefit Plan (the “Nonqualified Savings Plan”) is an unfunded, nonqualified plan that provides benefits similar to the Qualified Savings Plan, but without the Internal Revenue Code contribution and earnings limitations. Together these plans are intended to provide the Named Executive Officers with retirement income equivalent to that provided to all other employees under the Qualified Savings Plan. As a result, the Named Executive Officers can expect a retirement income that replaces a portion of their income while employed similar to that received by all other employees participating in the Qualified Savings Plan who are not impacted by the Internal Revenue Code limitations of the Qualified Savings Plan.

 

Mr. Baert is based outside the United States and does not participate in the Qualified Savings Plan or the Nonqualified Savings Plan. Mr. Baert relocated from our Belgium office to our Luxembourg office on September 1, 2009. Prior to that date, he participated in a standard defined contribution retirement benefit plan generally provided to all Belgium employees. Mr. Baert’s benefit in the Belgium pension plan is frozen and no further contributions will be made by us to this plan on his behalf. Due to the fact that he is over age 60 and has transferred to Luxembourg, the assets in this plan are now fully owned by Mr. Baert. Beginning September 1, 2009, Mr. Baert became a participant in the standard defined contribution retirement benefit plan provided to all Luxembourg employees. The plan provides employees with individual retirement accounts funded by (1) an automatic Company-paid contribution of 5% of base pay up to a salary limit plus 15% of base pay in excess of the salary limit (€100,000 for 2009), and (2) employee contributions up to the limit of €12,500 annually.

 

During 2008, the Committee reviewed the CEO’s total compensation package among the peer companies and across the broader general industry. The Committee determined that it was in the

best interests of the Company and our shareholders to provide a supplemental retirement benefit for Mr. Newlin that would be competitive with industry practices and serve as an additional retention vehicle. Thus, Mr. Newlin’s Letter Agreement (which provides for the terms of Mr. Newlin’s employment) was amended on July 16, 2008 to include certain retirement benefits. Specifically, the Letter Agreement was amended to provide that upon a Qualifying Separation from Service, Mr. Newlin will be entitled to annual supplemental retirement payments, payable in the form of a 15-year certain and continuous life annuity, conditioned upon Mr. Newlin’s execution of a release and waiver. If Mr. Newlin dies or incurs a Disability prior to a Qualifying Separation from Service, he or his designated beneficiary also will be entitled to certain supplemental retirement payments. Generally, Mr. Newlin will be considered to have a Qualifying Separation from Service if (1) he attains the age of 55 and has at least five years of service with the Company, serving as Chairman and Chief Executive Officer at the time of his retirement (provided that if the Board, in its sole discretion, has identified a suitable successor for the position of Chief Executive Officer, he only needs to be serving as Chairman at the time of his retirement) and the PolyOne Board of Directors, in its sole discretion, has identified a suitable successor to the position of Chief Executive Officer; or (2) Mr. Newlin’s employment is involuntarily terminated other than for serious cause or Mr. Newlin terminates employment for good reason following a change of control of the Company. Under the terms of the amended Letter Agreement, he will also be treated as a retiree for purposes of any SARs, RSUs, performance shares and performance units awarded to him as long-term incentive awards. In addition, he and his eligible dependents will have access to the same retiree medical benefits made available to all retirement eligible employees under our standard retiree medical benefit program, to the extent we continue to maintain such programs for the benefit of our retirees and their eligible dependents. Mr. Newlin will forfeit his rights to receive the supplemental retirement payments and retiree medical benefits if he engages in any conduct prohibited by his non-competition agreement or any acts that constitute fraud, embezzlement, and disclosure of confidential information or deliberate dishonesty.

 

Messrs. Rosenau and Smith are also eligible, along with certain other employees, to receive pension payments under a company-funded Internal Revenue Code qualified defined benefit pension plan as well as an unfunded, nonqualified defined benefit pension plan (the “Qualified Pension Plan” and “Nonqualified Pension Plan,” respectively). In addition, since becoming retirement eligible (55 years of age with 10 years of service), Messrs. Rosenau and Smith are eligible to receive certain retiree medical benefits for which they will be required to pay a portion of the cost. This plan will be phased out until its elimination in 2013. These plans existed prior to our formation in 2000 through the consolidation of Geon and M.A. Hanna and generally benefited all nonunion employees of Geon.

 

The amount of Messrs. Rosenau’s and Smith’s pension depends on a number of factors including monthly Final Average Earnings (“FAE”) and years of benefit service to us (“Benefit Service”). The Qualified Pension Plan provides a monthly lifetime benefit equal to 1.15% times FAE times Benefit Service plus 0.45% times FAE in excess of 2002 Covered Compensation (as defined by the Internal Revenue Code) times Benefit Service limited to 35 years.

 

The Nonqualified Pension Plan is similar to the Nonqualified Savings Plan in that it restores benefits lost in the Qualified Pension Plan due to Internal Revenue Code limitations on earnings and benefits. The Nonqualified Pension Plan benefit formula is the same as the Qualified Pension Plan except without the Internal Revenue Code qualified plan earnings limitations. The Nonqualified Pension Plan benefit is offset by the Qualified Pension Plan benefit.

 

The Qualified Pension Plan and Nonqualified Pension Plan were frozen to new entrants effective December 31, 1999. Benefit Service was frozen effective December 31, 2002 in both plans

and, effective March 20, 2009, earnings under both plans were frozen for all participants. We decided to freeze these plans following a comprehensive retirement benefits review, during which the Committee examined whether our retirement programs were consistent with company goals, including fairness to all associates and competitiveness in the marketplace. With this change, we have a single and competitive retirement plan for our U.S.-based employees.

 

Messrs. Patterson and Baert do not participate in a defined benefit plan.

 

Perquisites

 

We provide certain perquisites to the Named Executive Officers, which we believe are competitive with the companies with which we compete for executive talent. Historically, these perquisites for those Named Executive Officers based in the United States include a monthly car allowance (except for Mr. Patterson), reimbursement of expenses for financial planning and tax preparation, an annual physical examination, and group insurance providing excess liability umbrella insurance coverage in an amount equal to $5 million. In 2009, we also provided a tax gross up for imputed income on the receipt of reimbursement for financial planning and tax preparation and excess liability insurance. For Mr. Baert, perquisites typical and competitive with companies in Europe include a company provided automobile, meal and entertainment allowance, reimbursement of expenses for financial planning and tax preparation, and group insurance providing excess liability umbrella insurance coverage in an amount equal to $5 million. The specific amounts attributable to perquisites for 2009 for the Named Executive Officers are disclosed in the Summary Compensation Table.

 

In order to align more closely with market practice, we made several changes to the perquisites provided to the Named Executive Officers based in the United States that were effective beginning January 1, 2010:

 

 

The benefit allowance and reimbursement of expenses for financial planning and tax preparation in 2010 and future years will be treated as taxable income and are the responsibility of the Named Executive Officers. We made no other changes to perquisites.

 

Mr. Patterson was eligible for reimbursement of his relocation expenses under our standard relocation plan. During 2009, we reimbursed Mr. Patterson for a portion of the amount he experienced as a loss on the sale of his former residence. Details of these amounts are provided in the footnotes to the “All Other Compensation” column in the Summary Compensation Table.

 

We believe that the perquisites we provide are consistent with market practices for senior executives and further our goals to attract and retain our leaders.

 

We also provide other benefits such as medical, dental and life insurance and disability coverage to each U.S.-based Named Executive Officer, which are identical to the benefits provided to all other eligible U.S.-based employees. Medical, dental and life insurance coverage for Mr. Baert is identical to the benefits provided to all other Luxembourg-based employees. We also provide vacation and paid holidays to all employees, including the Named Executive Officers. The Named Executive Officers are eligible for the following vacation: Mr. Newlin — five weeks, Mr. Patterson — four weeks, Mr. Rosenau — six weeks, Mr. Smith — five weeks, and Mr. Baert — 26 days.

We do not provide or reimburse for personal country club memberships for any Named Executive Officer. We do maintain a corporate membership to a country club that is used for customer entertainment and other business purposes. We pay the monthly dues for this membership and incur expenses only for these business purposes. Any personal use of this facility by a Named Executive Officer is at the officer’s personal expense, with no incremental cost to us.

 

Compensation Oversight Processes

 

Salary Adjustments

 

During the first quarter, the Committee typically reviews executive compensation marketplace data provided by the Consultant. The resulting report benchmarks our executive compensation compared to our peer group and the market in general. In January 2009, we decided to freeze executive salaries due to the uncertain economic conditions, which negated the need for this review. In addition, the Committee reviews tally sheets that contain information regarding the executives’ total annual compensation, termination benefits and wealth accumulation. A more detailed description of the tally sheets is provided under the heading “Review of Tally Sheets.”

 

In the first quarter of the calendar year, based upon individual performance and results achieved, the Chief Executive Officer typically recommends for the Committee’s review and approval specific salary adjustments for each of the executive officers, including the Named Executive Officers. The Chief Executive Officer makes his recommendations in conjunction with the marketplace data and input provided by the Consultant. He does not participate in any discussions with the Committee involving his own compensation. The Committee sets the target compensation at or near the median, with adjustments to account for our specific facts and circumstances. In 2009, management recommended and the Committee agreed that due to the deteriorating global economy and in an attempt to manage costs, Named Executive Officers as well as other officers of the Company would have their base salaries frozen for 2009.

 

For 2010, upon the recommendation of management, we determined again that no base salary increase would be provided to the CEO. It was the Committee’s desire that the CEO be rewarded for achievement of specific performance objectives that would advance our profitability and, as a result, the Committee approved an increase in Mr. Newlin’s target opportunity under the Annual Plan in lieu of a salary increase. See “Plan-Based Awards” below.

 

Plan-Based Awards

 

In the fourth quarter, the Committee typically reviews period-to-date performance and estimates of incentive payouts for the in-progress performance periods. In the first quarter of the following year, the Committee evaluates actual performance against pre-set goals and determines earnings under just-completed plan periods. Generally, the Committee approves payouts based on pre-set performance criteria and will not exercise discretion to increase an award. The Committee, however, has exercised its discretion to reduce an award.

 

In addition, annually the Committee and management typically review competitive total compensation data provided by the Consultant. Management uses the data to develop recommendations for eligibility, award opportunities, performance measures and goals for the plan periods to commence the subsequent year for the Committee’s review. The Committee approves final terms of the Annual Plan in the fourth quarter and the Long-Term Incentive plan in the first quarter. For 2010, this review took place in the fourth quarter of 2009 for both plans. In order to align compensation more closely with the market median and to focus the participants on the performance goals critical to our success, the Committee approved an increase in the target annual

incentive opportunity for certain Named Executive Officers. The Committee increased the target annual incentive opportunity for Mr. Patterson from 50% to 60%, and the target annual incentive opportunity for Messrs. Rosenau and Smith from 50% to 55%. Target incentive opportunities for the LTIP will return to the levels that were in place in 2008 because we reduced 2009 grants significantly in recognition of the decline in our stock price and general market conditions.

 

In order to recognize Mr. Newlin’s role in transforming PolyOne into a specialty company and to reinforce the Committee’s philosophy of performance oriented pay, the Committee approved an increase in his target annual incentive opportunity from 100% to 110% for 2010. In the Committee’s judgment, the total compensation package provided to Mr. Newlin, as described under the heading “Employment Agreement with the Chief Executive Officer” below, is appropriate in order to fairly compensate and retain our Chief Executive Officer.

 

Review of Tally Sheets

 

The Committee and management annually review and consider tally sheets in connection with compensation decisions. Tally sheets, including all components of compensation, are reviewed by the Committee to determine the reasonableness of the compensation of our executive officers. Tally sheets are created collaboratively by the Consultant and our Human Resources department.

 

The tally sheets provide information regarding the Named Executive Officers’ as well as other officers’ total annual compensation, termination benefits and wealth accumulation. Total annual compensation includes: salary, annual incentive, long-term incentive, perquisites, and retirement benefits. This information is comparable to the amounts reported in the Summary Compensation Table. Payments under various forms of termination are reviewed and disclosed elsewhere in this proxy statement.

 

Tax Considerations

 

Cash compensation, such as base salary or annual incentive compensation, is taxable to the recipient as ordinary income when earned, unless deferred under a company-sponsored deferral plan. Deferrals under tax-qualified plans, such as a 401(k) plan, do not affect our current tax deduction. Deferrals under supplemental executive deferral plans delay our tax deduction until the deferred amount (and any accumulation thereon) is paid. Stock-settled SARs are generally taxable as ordinary income when exercised and performance shares, RSUs and performance units are generally taxable when paid. We realize a tax deduction at that time. The Committee does review potential tax implications before making decisions regarding compensation.

 

Management and the Committee are aware of Section 162(m) of the Internal Revenue Code, which generally limits the deductibility of executive pay in excess of one million dollars, and which specifies the requirements for the “performance-based” exemption from this limit. The Committee generally manages our incentive programs to qualify for the performance-based exemption. It also reserves the right to provide compensation that does not meet the exemption criteria if, in its sole discretion, it determines that doing so advances our business objectives. We believe the compensation paid to our Named Executive Officers in 2009 is fully deductible.

 

Accounting Considerations

 

When reviewing preliminary recommendations and in connection with approving the terms of a given incentive plan period, management and the Committee review and consider the accounting implications of a given award, including the estimated expense and/or dilutive considerations. Depending upon the type of accounting treatment associated with an incentive plan design,

management and the Committee may alter or modify the incentive award due to the accounting treatment if the award (and the related accounting consequences) were to adversely affect our financial performance.

 

Employment Agreement with the Chief Executive Officer

 

On February 6, 2006, we entered into an agreement with Mr. Newlin, under which he agreed to serve as our Chairman, President and Chief Executive Officer. The agreement provided for specified awards intended to serve as an inducement to join the company, for Mr. Newlin’s initial base salary and for his participation in our various long-term incentive and benefit plans in effect during the term of his employment.

 

In addition, the agreement provides for certain payments upon termination of Mr. Newlin’s employment, as described more fully in the “Potential Payments Upon Termination or Change-of-Control” section of this proxy statement. In October, 2007, this agreement was amended to ensure that any payments made pursuant to the agreement were in compliance with Section 409A of the Internal Revenue Code.

 

Mr. Newlin’s agreement also provides for a supplemental retirement benefit, as described more fully in this Compensation Discussion and Analysis under the heading “Retirement Benefits.”

 

Employment Agreement with Bernard Baert

 

In connection with the change in location for our European headquarters, PolyOne Luxembourg S.a.R.L. (“PolyOne Luxembourg”), our wholly owned subsidiary located in Luxembourg, entered into an employment contract with Bernard Baert, effective September 1, 2009.

 

Among other things, the agreement provides that Mr. Baert will be entitled to a monthly base salary of €24,708, daily meal vouchers and the use of a company car. Under the agreement, Mr. Baert may also be eligible to participate in our Annual Plan and will be included in a defined contribution benefits cafeteria plan established by PolyOne Luxembourg. Pursuant to the terms of the agreement, Mr. Baert has agreed not to compete with us or with PolyOne Luxembourg for a period of twelve months after termination of the agreement.

 

Mr. Baert’s agreement provides for certain payments upon termination of Mr. Baert’s employment, as described more fully in the “Potential Payments Upon Termination or Change-of-Control” section of this proxy statement.

 

Termination Payments for Other Named Executive Officers

 

Effective May 25, 2006, the Committee approved the PolyOne Corporation Executive Severance Plan (the “Executive Severance Plan”) that is designed to provide severance protection to certain officers who are expected to make substantial contributions to our success and thereby provide for stability and continuity of operations. All of the Named Executive Officers participate in the Executive Severance Plan except Messrs. Newlin and Baert. Under the terms and conditions of the Executive Severance Plan, officers are entitled to receive Severance Payments upon their involuntary termination of employment for reasons other than cause, death or disability. The plan details and estimates of these payments are provided in the “Potential Payments Upon Termination or Change-of-Control” section of this proxy statement. These severance benefits are contingent upon our receipt of a signed release of all claims against us and signed non-compete, non-solicitation and non-disparagement agreements.

Change of Control Payments

 

We have entered into management continuity agreements (“Continuity Agreements”) with all of our elected corporate officers, including each of the Named Executive Officers. These agreements are designed to provide severance protection should a change of control of PolyOne occur and the executive officer’s employment be terminated either by us without cause or by the executive for good reason (as defined in the agreements). Generally, a change of control will be deemed to have occurred if (1) any person becomes the beneficial owner of 25% or more of the combined voting power of our outstanding securities (subject to certain exceptions); (2) there is a change in the majority of our Board of Directors; (3) certain corporate reorganizations occur where the existing shareholders do not retain more than 60% of the common shares and combined voting power of the outstanding voting securities of the surviving entity; or (4) there is shareholder approval of a complete liquidation or dissolution of PolyOne.

 

These agreements are intended to provide for continuity of management in the event of a change of control. The agreements are automatically renewed each year unless we give prior notice of termination of the Continuity Agreement. The agreements provide that covered executive officers could be entitled to certain severance benefits. The details of the severance payments and benefits are provided in the “Potential Payments Upon Termination or Change-of-Control” section of this proxy statement.

 

In order to provide additional protection in the event of a change of control, our equity awards and annual incentive provide for accelerated benefits in the event of a change of control. In addition, the terms of the performance units provide that in the event of a change of control, the participant is entitled to 100% of the performance units. In the event of a change of control and a termination of the executive’s employment by us without cause or by the executive for good reason (as defined in the agreements), the SARs remain exercisable for their full term. These change of control provisions affect all participants in those programs, including the Named Executive Officers.

 

Compensation Policies

 

Timing with Respect to Equity Award Grants

 

In prior years, the base price of SARs has been set according to our practice as outlined in the 2005 Equity and Performance Incentive Plan based on the average of the high and low price of our common shares on the trading day immediately before the day the award was approved by the Committee. Effective with the approval of the 2008 Equity and Performance Incentive Plan, the practice was changed to set the base price of SARs (and the exercise price of any options granted) as the closing price of our common shares on the date of grant. Further, if we are in possession of material information that has not been publicly disclosed, the Committee will not grant equity awards until all such information is available to the public.

 

Stock Ownership Guidelines

 

In order to better align their financial interests with those of shareholders, we believe our executives should own a meaningful number of our shares. We have adopted share ownership guidelines specifying a minimum level of share ownership for all executives, including all Named Executive Officers. The specific levels of share ownership for the Named Executive Officers are noted in the following table. Executives are expected to accumulate the specified shares within five

years of their becoming subject to the policy. The applicable guidelines are reduced after age 55 by 10% of the original level of ownership each year for five years.

 

In general, shares counted toward required ownership include shares directly held and shares held in our benefit or deferral plans (including RSUs, performance shares that have met the applicable performance criteria, and phantom shares under our nonqualified deferral plan). We amended our guidelines to add a stock retention component, which requires that executives retain half of all shares issued as compensation (net of taxes). This new feature became effective December 16, 2009. After age 55, the 50% retention requirement is reduced 10% each year for five years. These guidelines and retention requirements apply until the executive retires.

 

 

Note: Ownership targets have been reduced by 20% for Mr. Newlin and 50% for Mr. Baert, according to the applicable guideline pertaining to age reduction as discussed above. Mr. Newlin and Mr. Patterson have been with the Company less than five years and are not yet required to reach 100% of the full share ownership guideline (360,000 shares for Mr. Newlin and 100,000 shares for Mr. Patterson). The share ownership target for Mr. Newlin has been reduced to reflect he has been with the Company for four years and the share ownership target for Mr. Patterson has been reduced to reflect he has been with the Company for two years.

 

Repayment of Earned Incentives upon Restatement of Financial Results

 

We have adopted a policy that is consistent with the requirements of the Sarbanes-Oxley Act of 2002, which requires the Chief Executive Officer and Chief Financial Officer to reimburse us for any awards received during the twelve-month period following the release of financial results that subsequently require an accounting restatement due to material noncompliance with any financial reporting requirement if they are subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002.

 

Conclusion

 

Our executive compensation programs are competitive in the marketplace and linked to our performance. These programs allow us to attract and retain high-caliber executives. We believe the design of our compensation plans and the relative mix of compensation elements successfully motivates our executives and aligns both the short-term and long-term interests of employees and shareholders.

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth the compensation earned by, and the compensation opportunity granted to, our principal executive officer, our principal financial officer, and our other three most highly compensated executive officers during the fiscal year ended December 31, 2009 and the prior two fiscal years, if applicable.

 

 

 

2009 GRANTS OF PLAN-BASED AWARDS