The Scotts Miracle-Gro Company

Proxy Statement for 2009 Annual Meeting of Shareholders

 

 

14111 Scottslawn Road

Marysville, Ohio 43041

December 19, 2008

 

 

Dear Fellow Shareholders:

 

The Annual Meeting of Shareholders of The Scotts Miracle-Gro Company will be held at 8:30 a.m., Eastern Time, on Thursday, January 22, 2009, at The Berger Learning Center, 14111 Scottslawn Road, Marysville, Ohio 43041. The formal Notice of Annual Meeting of Shareholders and Proxy Statement contain detailed information about the business to be conducted at the Annual Meeting.

 

On behalf of the Board of Directors and management, I invite you to attend the Annual Meeting.

 

The Board of Directors has nominated three directors for election, each to serve for a term of three years expiring at the 2012 Annual Meeting of Shareholders (Proposal Number 1). The Board of Directors recommends that you vote FOR each of the nominees.

 

This year, you are also being asked to ratify the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending September 30, 2009 (Proposal Number 2). The Board of Directors recommends that you vote FOR the ratification of this selection.

 

Only shareholders of record at the close of business on November 26, 2008, are entitled to receive notice of and to vote at the Annual Meeting.

 

Whether or not you plan to attend the Annual Meeting, please record your vote on the accompanying form of proxy and return it promptly in the postage-paid envelope provided. Alternatively, if you are a registered shareholder, you may transmit voting instructions for your Common Shares electronically via the Internet or telephonically by following the specific instructions on your form of proxy.

 

Sincerely,

 

James Hagedorn

Chief Executive Officer

and Chairman of the Board

 

14111 Scottslawn Road

Marysville, Ohio 43041

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held Thursday, January 22, 2009

 

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the “Annual Meeting”) of The Scotts Miracle-Gro Company (the “Company”) will be held at The Berger Learning Center, 14111 Scottslawn Road, Marysville, Ohio 43041, on Thursday, January 22, 2009, at 8:30 a.m., Eastern Time, for the following purposes:

 

 

Only shareholders of record at the close of business on Wednesday, November 26, 2008, the date established by the Company’s Board of Directors as the record date, are entitled to receive notice of and to vote at the Annual Meeting.

 

You are invited to attend the Annual Meeting. Whether or not you plan to attend, you may vote by completing, signing, dating and promptly returning the accompanying form of proxy. A return envelope, which requires no postage if mailed in the United States, has been provided for your use. Alternatively, if you are a registered shareholder, you may vote your Common Shares at the Annual Meeting by submitting your voting instructions electronically via the Internet or telephonically by following the specific instructions on your form of proxy. Voting your Common Shares by returning the accompanying form of proxy, electronically through the Internet or by telephone does not affect your right to vote in person if you attend the Annual Meeting and wish to revoke your previous vote.

 

By Order of the Board of Directors,

 

James Hagedorn

Chief Executive Officer

and Chairman of the Board

 

December 19, 2008

 

 

 

Proxy Statement for the
Annual Meeting of Shareholders of

THE SCOTTS MIRACLE-GRO COMPANY

To Be Held on Thursday, January 22, 2009

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

14111 Scottslawn Road
Marysville, Ohio 43041

 

 

PROXY STATEMENT

 

for

 

Annual Meeting of Shareholders

to be held on Thursday, January 22, 2009

 

 

GENERAL INFORMATION ABOUT VOTING

 

This Proxy Statement, along with the accompanying form of proxy, are being furnished in connection with the solicitation of proxies, on behalf of the Board of Directors of The Scotts Miracle-Gro Company (together with its corporate predecessors, as appropriate, the “Company”), for use at the Annual Meeting of Shareholders of the Company (the “Annual Meeting”) to be held at The Berger Learning Center, 14111 Scottslawn Road, Marysville, Ohio 43041, on Thursday, January 22, 2009, at 8:30 a.m., Eastern Time, and at any adjournment or postponement thereof. This Proxy Statement and the accompanying form of proxy are first being sent or given to shareholders of the Company on or about December 22, 2008.

 

Only holders of record of the Company’s Common Shares, without par value (“Common Shares”), at the close of business on Wednesday, November 26, 2008 (the “Record Date”) are entitled to receive notice of and to vote at the Annual Meeting. As of the Record Date, there were 65,373,940 Common Shares outstanding. Holders of Common Shares as of the Record Date are entitled to one vote for each Common Share held. There are no cumulative voting rights in the election of directors.

 

Under the Company’s Code of Regulations, the presence, in person or by proxy, of the holders of a majority of the outstanding Common Shares entitled to vote is necessary to constitute a quorum for the transaction of business at the Annual Meeting. Proxies reflecting abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum. Broker non-votes are those where broker/dealers, who hold their customers’ Common Shares in “street name,” sign and submit proxies for such Common Shares and fail to vote such Common Shares on some matters because they cannot vote on those matters without instructions from their customers.

 

A form of proxy for use at the Annual Meeting accompanies this Proxy Statement. You may ensure your representation at the Annual Meeting by completing, signing, dating and promptly returning the accompanying form of proxy. A return envelope, which requires no postage if mailed in the United States, has been provided for your use. Alternatively, shareholders holding Common Shares registered directly with the Company’s transfer agent, National City Bank, may transmit their voting instructions electronically via the Internet or by using the toll-free telephone number stated on the form of proxy. The deadline for transmitting voting instructions electronically via the Internet or telephonically is 11:59 p.m., Eastern Time, on January 21, 2009. The Internet and telephone voting procedures are designed to authenticate shareholders’ identities, allow

shareholders to give their voting instructions and confirm that such voting instructions have been properly recorded.

 

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

 

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

 

Proxies will be solicited by mail and may be further solicited by additional mailings, personal contact, telephone, facsimile or electronic mail by directors, officers and regular employees of the Company, none of whom will receive additional compensation for such solicitation activities. The Company will reimburse its transfer agent, National City Bank, as well as broker/dealers, financial institutions and other custodians, nominees and fiduciaries for their standard charges and expenses incurred in connection with forwarding proxy materials to the beneficial shareholders. The Company will bear the costs of preparing, assembling, printing and mailing this Proxy Statement, the accompanying form of proxy and any other related materials, as well as all other costs incurred in connection with the solicitation of proxies on behalf of the Board of Directors. However, if you provide voting instructions through the Internet, you may incur costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, which the Company will not reimburse.

 

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

 

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

 

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

Those Common Shares represented by properly executed forms of proxy, or properly authenticated voting instructions recorded through the Internet or by telephone, which are timely received prior to the Annual Meeting and not revoked, will be voted as specified by the shareholder. The Common Shares represented by valid proxies timely received prior to the Annual Meeting which do not specify how the Common Shares should be voted will be voted FOR the election as directors of the Company of each of the three nominees of the Board of Directors listed below under the caption “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS” and FOR the ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the fiscal year ending September 30, 2009 as described below under the caption “PROPOSAL NUMBER 2 — RATIFICATION OF THE SELECTION OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.” No appraisal rights exist for any action proposed to be taken at the Annual Meeting.

 

NOTICE REGARDING AVAILABILITY OF PROXY MATERIALS

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders of The Scotts Miracle-Gro Company To Be Held on Thursday, January 22, 2009: This Proxy Statement, a sample of the form of proxy card sent or given to shareholders by the Company and the Company’s 2008 Annual Report are available on the Company’s Internet website located at http://investor.scotts.com.

 

Our telephone number is (937) 644-0011 should you wish to obtain directions to our corporate offices in order to attend the Annual Meeting and vote in person. Directions to our corporate offices can also be found on the outside back cover page of this Proxy Statement.

 

There are currently 12 individuals serving on the Board of Directors, which is divided into three staggered classes, with each class serving three-year terms. The Class II directors hold office for terms expiring at the Annual Meeting, the Class III directors hold office for terms expiring in 2010 and the Class I directors hold office for terms expiring in 2011. On December 18, 2008, Arnold W. Donald, who currently serves as a Class II director, notified the Company that he had decided not to stand for re-election to the Board of Directors. Mr. Donald’s term as a director will expire at the Annual Meeting.

 

Because the Governance and Nominating Committee has not yet identified a qualified candidate to replace Mr. Donald, the Board of Directors is only presenting three candidates for election as Class II directors at the Annual Meeting — Thomas N. Kelly Jr., Carl F. Kohrt, Ph.D. and John S. Shiely — each of whom is currently serving as a Class II director. The nomination of each individual was recommended to the Board of Directors by the Governance and Nominating Committee.

 

The individuals elected as Class II directors at the Annual Meeting will hold office for a three-year term expiring at the Annual Meeting of Shareholders of the Company to be held in 2012 and until their respective successors are duly elected and qualified, or until their earlier death, resignation or removal. The individuals named as proxies in the form of proxy solicited by the Board of Directors intend to vote the Common Shares represented by the proxies received under this solicitation for the Board of Directors’ nominees, unless otherwise instructed on the form of proxy. The Board of Directors has no reason to believe that any of the nominees will be unable or unwilling to serve as a director of the Company if elected. If any nominee who would have otherwise received the required number of votes becomes unable to serve or for good cause will not serve as a candidate for election as a director, the individuals designated as proxy holders reserve full discretion to vote the Common Shares represented by the proxies they hold for the election of the remaining nominees and for the election of any substitute nominee designated by the Board of Directors following recommendation by the Governance and Nominating Committee. The individuals designated as proxy holders cannot vote for more than three nominees for election as Class II directors at the Annual Meeting.

The following information, as of November 26, 2008, with respect to the age, principal occupation or employment, other affiliations and business experience during the last five years of each director or nominee for re-election as a director, has been furnished to the Company by each director or nominee. Except where indicated, each director or nominee has had the same principal occupation for the last five years.

 

Nominees Standing for Re-Election to the Board of Directors

 

 

Arnold W. Donald, whose term expires at the Annual Meeting, has decided not to stand for re-election. Mr. Donald, age 54, is the former President and Chief Executive Officer of the Juvenile Diabetes Research Foundation International, a charitable funder and advocate of type 1 (juvenile) diabetes research, a position he held from January 1, 2006 to February 28, 2008. Before joining the Juvenile Diabetes Research Foundation International in 2006, Mr. Donald founded Merisant Company, whose products include the sweeteners Equal^® and Canderel^®, where he held the position of Chairman of the Board and Chief Executive Officer from its inception in 2000 through June of 2003, and continued to serve as Chairman of the Board through 2005. He serves as a director of four other public companies: Crown Holdings, Inc.; Oil-Dri Corporation of America; The Laclede Group, Inc.; and Carnival Corporation. Mr. Donald has served as a director of the Company since 2000.

 

Recommendation and Vote

 

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

 

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

 

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

 

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

 

 

In determining that Mr. Donald qualifies as an independent director under the NYSE Rules and SEC Rules, the Board of Directors considered his service as a director of Scotts Miracle-Gro Foundation, an Ohio nonprofit corporation formed for charitable and educational purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “IRC”). The current primary activity of Scotts Miracle-Gro Foundation is to fund the “Miracle-Gro Cap Kids at COSI,” a program designed to provide academic and other support services to a select group of economically and socially disadvantaged students in the Columbus (Ohio) Public School District.

 

The Board of Directors determined that: (a) James Hagedorn is not independent because he is the Chief Executive Officer of the Company and beneficially owns more than 5% of the outstanding Common Shares; (b) Katherine Hagedorn Littlefield is not independent because she beneficially owns more than 5% of the outstanding Common Shares and is the sister of James Hagedorn; (c) Patrick J. Norton is not independent because, considering all the facts and circumstances, his advisory relationship with the Company, which commenced immediately following his retirement on January 1, 2003 and which ended on January 31, 2006, was believed to be too close in time to his employment to permit sufficient separation of interests; and (d) Mark R. Baker qualified as an independent director of the Company for the fiscal year ended September 30, 2008 (the “2008 fiscal year”), but is no longer independent because he was named President and Chief Operating Officer of the Company effective October 1, 2008.

 

The Board of Directors elected Karen G. Mills to serve as the Lead Independent Director on January 26, 2006, upon the recommendation of the Governance and Nominating Committee and with the support of management. Ms. Mills serves in this capacity at the pleasure of the Board of Directors and will continue to so serve until her successor is elected and qualified. As Lead Independent Director, Ms. Mills presides at the executive sessions of the non-management directors of the Company and of the independent directors of the Company.

 

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

 

The Board of Directors, taking into account the recommendations of the Governance and Nominating Committee, selects nominees to stand for election as directors. In considering Governance and Nominating

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

 

While, under the Company’s Corporate Governance Guidelines, in general, a director is not eligible to stand for re-election once he or she has reached the age of 72, the Governance and Nominating Committee and the Board of Directors will review individual circumstances and may from time to time choose to renominate a director who is 72 or older. Although he was then older than 72, the Board of Directors chose to nominate Joseph P. Flannery for re-election to the Board at the Company’s 2007 Annual Meeting of Shareholders because his expertise and knowledge made him a valuable candidate.

 

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

 

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

 

The Board of Directors believes it is important for shareholders of the Company and other interested persons to have a process pursuant to which they can send communications to the Board and its individual members, including the Lead Independent Director. Accordingly, shareholders and other interested persons who wish to communicate with the Board of Directors, the Lead Independent Director, the non-management directors as a group or any particular director may do so by addressing such correspondence to the name(s) of the specific director(s), to the “Lead Independent Director,” to the “Non-Management Directors” as a group or to the “Board of Directors” as a whole, and sending it in care of the Company to the Company’s principle corporate offices at 14111 Scottslawn Road, Marysville, Ohio 43041. All such correspondence should identify the author as a shareholder or other interested person, explain such person’s interest and clearly indicate to whom the correspondence is directed. Correspondence marked “personal and confidential” will be delivered to the intended recipient(s) without opening. Copies of all correspondence will be circulated to the appropriate director or directors. There is no screening process in respect of communications from shareholders and other interested persons.

 

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

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

 

The Board of Directors held 19 regularly scheduled or special meetings during the Company’s 2008 fiscal year. Each incumbent member of the Board of Directors attended at least 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings held by the committee(s) of the Board of Directors on which he or she served, in each case during the period of the 2008 fiscal year that such individual served as a director.

 

Although the Company does not have a formal policy requiring members of the Board of Directors to attend annual meetings of the shareholders, the Company encourages all incumbent directors and director nominees to attend each such annual meeting. All of the 12 then incumbent directors and director nominees attended the Company’s last annual meeting of shareholders held on January 31, 2008.

 

In accordance with the Company’s Corporate Governance Guidelines and applicable NYSE Rules, the non-management directors of the Company met in executive session (without management participation) in connection with each of the four regularly scheduled meetings of the Board of Directors held during the Company’s 2008 fiscal year. In addition, the independent directors of the Company meet in executive session as matters appropriate for their consideration arise but, in any event, at least once a year.

 

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

 

The Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is organized and conducts its business pursuant to a written charter adopted by the Board of Directors. A copy of the Audit Committee charter is posted under the “Corporate Governance” link on the Company’s Internet website at http://investor.scotts.com and is available in print to any shareholder of the Company or other interested person who requests it from the Corporate Secretary of the Company. At least annually, in consultation with the Governance and Nominating Committee, the Audit Committee evaluates its performance, reviews and assesses the adequacy of its charter and recommends to the Board of Directors any proposed changes thereto as may be necessary or desirable.

 

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

and NYSE Rules. Pursuant to its charter, the Audit Committee has the authority to engage and compensate such independent counsel and other advisors as the Audit Committee deems necessary to carry out its duties.

 

The Board of Directors has determined that each member of the Audit Committee satisfies the applicable independence requirements set forth in the NYSE Rules and under Rule 10A-3 promulgated by the Securities and Exchange Commission (the “SEC”) under the Exchange Act. The Board of Directors believes each member of the Audit Committee is qualified to discharge his or her duties on behalf of the Company and its subsidiaries and satisfies the financial literacy requirement of the NYSE Rules. The Board of Directors has determined that Stephanie M. Shern qualifies as an “audit committee financial expert” as that term is defined in the applicable SEC Rules. None of the members of the Audit Committee serves on the audit committee of more than two other public companies.

 

The Audit Committee met 13 times during the 2008 fiscal year.

 

The Audit Committee Report relating to the Company’s 2008 fiscal year begins on page 73 of this Proxy Statement.

 

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

 

The Compensation and Organization Committee reviews, considers and acts upon matters concerning salary and other compensation and benefits of all executive officers and other key employees of the Company and its subsidiaries, including the named executive officers. As part of this process, the Compensation and Organization Committee determines the general compensation philosophy applicable to these individuals. In addition, the Compensation and Organization Committee advises the Board of Directors regarding executive officer organizational issues and succession plans. The Compensation and Organization Committee also acts upon all matters concerning, and exercises such authority as is delegated to it under the provisions of, any benefit, retirement or pension plan maintained by the Company, and serves as the committee administering The Scotts Miracle-Gro Company Amended and Restated 1996 Stock Option Plan (the “1996 Plan”), The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan (the “2003 Plan”), The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (the “2006 Plan”), The Scotts Company LLC Amended and Restated Executive Incentive Plan (known throughout the 2008 fiscal year as The Scotts Company LLC Amended and Restated Executive/Management Incentive Plan) and the Discounted Stock Purchase Plan.

 

Pursuant to its charter, the Compensation and Organization Committee has the authority to retain special counsel, compensation consultants and other experts or consultants as it deems appropriate to carry out its functions and to approve the fees and other retention terms of any such counsel, consultants or experts. During the 2008 fiscal year, the Compensation and Organization Committee engaged an independent consultant from Frederic W. Cook & Co. to advise the Compensation and Organization Committee with respect to best practices and competitive trends in the area of executive compensation, as well as ongoing legal and regulatory considerations. The consultant provided guidance to assist the Compensation and Organization Committee in its evaluation of the compensation recommendations submitted by management with respect to the CEO, the NEOs and other key management employees. Frederic W. Cook & Co. was engaged as a consultant to the Compensation and Organization Committee and did not provide consulting services directly to management. The role of Frederic W. Cook & Co. is further described in the section captioned “Our Compensation Practices — Role of Outside Consultants” within the compensation discussion and analysis regarding executive compensation for the 2008 fiscal year.

The Board of Directors has determined that each member of the Compensation and Organization Committee satisfies the applicable independence requirements set forth in the NYSE Rules and qualifies as an outside director for purposes of IRC § 162(m) and a non-employee director for purposes of Rule 16b-3 under the Exchange Act. In addition, Mark R. Baker satisfied these independence requirements during the period he served as a member of the Compensation and Organization Committee (from October 1, 2007 to September 9, 2008).

 

The Compensation and Organization Committee met 10 times during the 2008 fiscal year.

 

The Compensation Discussion and Analysis regarding executive compensation for the 2008 fiscal year begins on page 19 of this Proxy Statement. The Compensation and Organization Committee Report relating to the Company’s 2008 fiscal year appears on page 37 of this Proxy Statement.

 

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

 

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

 

The Finance Committee met seven times during the 2008 fiscal year.

 

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

 

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

The Board of Directors has determined that each member of the Governance and Nominating Committee satisfies the applicable independence requirements set forth in the NYSE Rules. In addition, Mark R. Baker satisfied these independence requirements during the period he served as a member of the Governance and Nominating Committee (from October 1, 2007 to September 9, 2008).

 

The Governance and Nominating Committee met three times during the 2008 fiscal year.

 

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

 

The Innovation & Technology Committee was formed in May 2004 to assist the Board of Directors in providing counsel to the Company’s senior management regarding strategic management of global science, technology and innovations issues and to act as the Board of Directors’ liaison to the Company’s Innovation and Technology Advisory Board, a board of experts which assists in carrying out the work of the Innovation & Technology Committee.

 

The Innovation & Technology Committee met four times during the 2008 fiscal year.

 

The Compensation and Organization Committee is currently comprised of Arnold W. Donald, Joseph P. Flannery and Karen G. Mills. Both Mr. Donald and Mr. Flannery served on the Compensation and Organization Committee throughout the 2008 fiscal year. Ms. Mills served as an interim member of the Compensation and Organization Committee from September 9, 2008 through the end of the 2008 fiscal year. In addition, Mark R. Baker served on the Compensation and Organization Committee from October 1, 2007 through September 9, 2008. Mr. Baker was named the Company’s President and Chief Operating Officer, effective as of October 1, 2008. With respect to the 2008 fiscal year and from October 1, 2008 through the date of this Proxy Statement, there were no interlocking relationships between any executive officer of the Company and any entity, one of whose executive officers served on the Company’s Compensation and Organization Committee or Board of Directors, or any other relationship required to be disclosed under the applicable SEC Rules.

 

Benchmarking Board of Director Compensation:  The Board of Directors believes that non-employee director compensation levels should be competitive with similarly situated companies and should encourage high levels of ownership of the Company’s Common Shares. Accordingly, before setting the compensation structure for calendar year 2008, the Company engaged an independent consultant from Towers Perrin to conduct a benchmark study of the compensation structure for the Company’s non-employee directors. For purposes of the study, Towers Perrin compared each element of non-employee directors’ compensation against two groups of similarly situated companies:

 

 

The survey information was compiled from recent definitive proxy statement filings for the respective companies. Consistent with the Company’s performance-based pay philosophy, the compensation for the non-employee directors is more heavily weighted to long-term equity-based compensation than that of the comparison companies. Based on the benchmark study, the average compensation level for the Company’s non-employee directors for the 2007 calendar year approximated the 75th percentile when compared to the above-mentioned groups of companies; however, the Board of Directors believes the higher level of total pay is appropriate given the heavy weighting of long-term equity-based compensation.

 

Structure of Non-Employee Director Compensation:  The compensation structure for non-employee directors has historically been established on a calendar year basis. Based on the findings of the market compensation study discussed above, the Board of Directors restructured the non-employee director compensation for the 2008 calendar year to reflect a combination of annual cash retainers and equity-based compensation granted in the form of Deferred Stock Units (“DSUs”), as follows:

 

 

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

 

Equity-Based Compensation:  For the 2008 calendar year, the equity-based compensation for non-employee directors was granted in the form of DSUs. Each whole DSU represents a contingent right to receive one full Common Share.

Vesting and Settlement:  DSU grants for non-employee directors are typically approved by the Board of Directors at a meeting held on the date of the annual meeting of shareholders. The grant date is established as the first business day after the Board of Directors approves the grant. For calendar year 2008, DSUs were granted to the non-employee directors on February 4, 2008. In general, the DSUs granted to non-employee directors in calendar year 2008, including dividend equivalents converted to DSUs, vest on the third anniversary of the grant date, but are subject to earlier vesting or forfeiture in accordance with the terms of the applicable award agreement. Subject to the terms of the 2006 Plan, whole vested DSUs will be settled in Common Shares and fractional DSUs will be settled in cash as soon as administratively practicable, but in no event later than 90 days, following the earliest to occur of: (i) cessation of service as a director; (ii) death; (iii) the date of total disability; or (iv) the fifth anniversary of the grant date. Upon a change in control of the Company, each non-employee director’s outstanding DSUs will vest on the date of the change of control and settle as described above. Until the DSUs are settled, a non-employee director has none of the rights of a shareholder with respect to the Common Shares underlying the DSUs other than with respect to the dividend equivalents.

 

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

 

Deferral of Cash-Based Retainers:  The non-employee directors may elect, in advance, to receive up to 100% of their annual cash retainers in cash or stock units. If stock units are elected, the non-employee director receives a grant equal to the number determined by dividing the chosen dollar amount by the closing price of the Common Shares on the first trading day following the date of the annual meeting of shareholders. Final distributions of stock units are to be made in cash or Common Shares, as elected by the non-employee director, upon the date that the non-employee director ceases to be a member of the Board of Directors, or upon a “change in control” (as defined in the 2006 Plan), whichever is earlier. If stock units are to be settled in cash, the amount distributed will be calculated by multiplying the number of stock units to be settled in cash by the fair market value of the Common Shares as of the settlement date. If stock units are to be settled in Common Shares, the number of Common Shares distributed will equal the whole number of stock units to be settled in Common Shares, with the fair market value of any fractional stock units distributed in cash. Distributions may be made either in a lump sum or in installments over a period of up to ten years, as elected by the non-employee director. However, upon a change in control, each outstanding stock unit held by a non-employee director will be settled for a lump sum cash payment which is generally equal to the price per Common Share paid in conjunction with any transaction resulting in such change in control (the “change in control price”).

 

Other Benefits and Perquisites:  Pursuant to the terms of a letter agreement with the Company, dated November 5, 2002, and amended on October 25, 2005, Mr. Norton has continued to participate in the Company’s group medical and dental plans by personally paying the full premium associated with these plans under the prevailing annual COBRA rates. As such, Mr. Norton’s participation results in no incremental cost to the Company. Pursuant to the terms of the agreement, Mr. Norton is entitled to continue to do so until his 65^th birthday on November 19, 2015.

The following table sets forth the compensation awarded to, or earned by, each of the non-employee directors of the Company for the 2008 fiscal year. Mr. Hagedorn, the Company’s Chief Executive Officer and Chairman of the Board, did not receive any additional compensation for his services as a director. Accordingly, Mr. Hagedorn’s compensation is reported in the section captioned “EXECUTIVE COMPENSATION” and is not included in the table below.

 

Non-Employee Director Compensation Table for 2008 Fiscal Year

 

 

 

 

 

										Aggregate Number of
										Common Shares
		Number of Common								Subject to Stock
		Shares Subject to				Fair Value on				Awards Outstanding
Name		DSUs Granted				Date of Grant				as of September 30, 2008*
Mark R. Baker			3,086			$	120,015				3,125
Arnold W. Donald			2,765			$	107,531				2,800
Joseph P. Flannery			2,443			$	95,008				2,474
Thomas N. Kelly Jr.			2,572			$	100,025				2,604
Carl F. Kohrt, Ph.D.			3,086			$	120,015				3,125
Katherine Hagedorn Littlefield			2,443			$	95,008				2,474
Karen G. Mills			3,150			$	122,504				3,189
Nancy G. Mistretta			2,765			$	107,531				2,800
Patrick J. Norton			2,122			$	82,525				2,149
Stephanie M. Shern			2,893			$	112,509				2,929
John S. Shiely			2,572			$	100,025				2,604

 

 

 

 

 

 

 

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

 

 

Simply stated, the culture of our Company is based on a strong bias for action and delivering results. Consistent with our high performance approach, our compensation programs are structured to promote a pay-for-performance culture with an orientation toward variable pay and an emphasis on long-term incentives.

 

Our compensation programs are designed to achieve the following objectives:

 

 

Management believes that flexibility is a key cultural attribute which enables the Company to maintain an edge in the competitive marketplace. The Company has adopted guiding principles that establish a framework for making compensation decisions preserving the flexibility needed to respond to the competitive market for executive talent. Our guiding principles for compensation are as follows:

 

 

To best promote the objectives of our executive compensation program, the Company relies on a mix of five principal short-term and long-term compensation elements. For the 2008 fiscal year, the elements of executive compensation were as follows:

 

 

 

The Compensation and Organization Committee (the “Compensation Committee”) has oversight responsibility for all elements of compensation granted to our Chief Executive Officer (“CEO”) and other key management employees, including the other Named Executive Officers (“NEOs”) listed in the Summary Compensation Table for 2008 Fiscal Year on page 38 of this Proxy Statement. For each such NEO, the Compensation Committee typically reviews each element of compensation, as well as the relative mix or weighting of elements, on an annual basis.

 

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

 

Base salaries of the NEOs are typically reviewed on an annual basis and benchmarked against the median salaries of similar positions within a relevant compensation peer group. Individual base salaries may be higher or lower than the benchmark depending on a number of organizational and individual qualities and characteristics, including the strategic importance of the individual’s job function to the Company, an NEO’s experience, competency, skill level, overall contribution to the success of our business and potential to make significant contributions to the Company in the future.

 

Base salary changes, if any, take effect in October, as well as on a facts and circumstances basis at the time of a promotion or other material change in an individual’s overall responsibilities.

 

For the 2008 fiscal year, the annual cash incentive compensation plans in which our NEOs participated were The Scotts Company LLC Amended and Restated Executive/Management Incentive Plan (the “EMIP”), The Scotts Company LLC Supplemental Incentive Plan (the “SIP”) and the Global Discretionary Pool, each of which is discussed below.

 

For the 2008 fiscal year, all NEOs and other key management employees were eligible to participate in the EMIP, which is designed to:

 

 

The EMIP provides annual cash incentive compensation opportunities based on various performance metrics related to the financial performance of the Company and its business units. An incentive target is established for each NEO as a percentage of base salary which may vary by position but is generally intended to approximate the market median of the relevant compensation peer group. For the 2008 fiscal year, the incentive target for all NEOs, other than the CEO, Mr. Hagedorn, was established at 55% of base salary. The incentive target for Mr. Hagedorn was set at 90% of base salary. The Compensation Committee believes the

incentive targets for all NEOs and Mr. Hagedorn are generally in line with those of our compensation peer groups.

 

The design and administration of the EMIP are generally intended to qualify compensation payable under the EMIP as performance-based compensation for purposes of IRC § 162(m) in order to maximize the tax deductibility of such compensation for the Company. Accordingly, the Compensation Committee oversees the operation of the EMIP, including approving the plan’s design for each fiscal year as well as approving the performance objectives and payout targets. At the end of each fiscal year, the Compensation Committee determines the extent to which the targets and objectives have been met and approves corresponding cash incentive payments. For the 2008 fiscal year, 75% of the total weighted payout (the non-discretionary portion) for the key management team that reports to the CEO was to be determined based directly on achievement of the performance metrics, with the remaining 25% placed into a pool to be awarded at the discretion of the CEO, subject to approval by the Compensation Committee, based on each NEO’s performance during the fiscal year. If the combined discretionary and non-discretionary payment awarded to any particular NEO was greater than what such NEO would have received based solely on the performance metrics (i.e., without respect to any discretionary adjustment), then the entire payment made to such NEO would not qualify as performance-based compensation for purposes of IRC § 162(m). The Compensation Committee deemed the potential loss of tax deductibility which could have resulted from such discretionary adjustments to be an acceptable tradeoff given its desire to add an individual level of accountability to the EMIP. As discussed below, since the Enterprise funding trigger was not met for the 2008 fiscal year, no payments (discretionary or non-discretionary) were made to the NEOs under the EMIP.

 

The Compensation Committee established an Enterprise “funding trigger” for the 2008 fiscal year to ensure that no incentive payouts (whether discretionary or non-discretionary) would be permitted under the EMIP unless the Company achieved a minimum Enterprise level (i.e., the Company on a consolidated basis) adjusted net income, which was set at $143.5 million for the 2008 fiscal year. If the funding trigger was not met, no payments would be made under the EMIP, even if the actual results for one or more of the performance measures exceeded the applicable minimum performance goal. If the funding trigger was met, each of the NEOs would be eligible to receive a payout based on the actual financial results achieved, subject to adjustment based on the NEO’s individual performance.

 

The EMIP Performance Metrics:  The performance metrics and relative weightings chosen for the EMIP in the 2008 fiscal year were designed to balance the entrepreneurial focus on individual business unit results with the overall Enterprise level financial performance. As discussed below, the performance metrics and relative weightings for the NEOs under the EMIP for the 2008 fiscal year differed based on each NEO’s primary span of control. For purposes of the EMIP, the performance metrics are defined as follows:

 

 

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

 

Subtract:  capital expenditures

 

Adjust for (add/subtract):  change in working capital, calculated using an average of 13 month-end balances. The use of a 13 month average was designed to focus management on continual management of working capital in contrast to the external reporting methodology of using beginning-of-year and end-of-year balances.

 

 

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

 

EMIP Measures for Corporate Officers
Mr. Hagedorn, Mr. Evans and Ms. Stump

 

For the 2008 fiscal year, the incentive awards for corporate level NEOs were based on two annual performance measures — adjusted net income and modified free cash flow — both of which were calculated at the Enterprise level. As reflected in the table below, for each performance measure, achievement of pre-defined minimum, target and maximum performance goals would result in compensation payouts of 50%, 100% and 250% of the NEO’s target incentive opportunity for the 2008 fiscal year, respectively. Actual payouts for performance results between the pre-defined performance goals would be calculated on a straight-line basis.

 

The target performance goals chosen for the Enterprise level NEOs were based on the Company’s budget for the 2008 fiscal year. The minimum performance goals were established based on the prior year actual performance for each metric, adjusted to reflect the pro forma impacts of our 2007 recapitalization, which returned in excess of $750 million to shareholders via a $245 million share repurchase completed in February 2007 and a special cash dividend of $8.00 per share approved by the Board of Directors on February 16, 2007 and paid on March 5, 2007 (the “Special Dividend”). The maximum performance goals were set at a level thought to be aggressive, but attainable. The Enterprise level performance goals and actual performance results for the 2008 fiscal year were:

 

 

Because the Enterprise funding trigger was not met for the 2008 fiscal year, no payouts were made under the EMIP to the corporate level NEOs.

 

EMIP Measures for Business Unit Officers
Mr. Sanders and Mr. Lopez

 

For the 2008 fiscal year, the incentive awards for NEOs with business unit responsibility were based on a combination of Enterprise level performance measures and business unit performance measures. As reflected in the tables below, for each performance measure, achievement of pre-defined minimum, target and maximum performance goals would result in incentive compensation payouts of 50%, 100% and 250% of the NEO’s target incentive opportunity for the 2008 fiscal year, respectively. Actual payouts for performance results between the pre-defined performance goals would be calculated on a straight-line basis.

 

The target performance goals chosen for the North America Total and International Total NEOs were based on each business unit’s budget for the 2008 fiscal year. The minimum performance goals for the North America Total business unit were established based on the prior year actual performance for each metric, adjusted to reflect the impact of certain adjustments for acquisitions and other non-recurring items. The minimum performance goals for the International Total business unit were established based on the prior year actual performance for each metric, adjusted to reflect the impact of certain non-recurring items and then increased to provide additional incentive to improve on the prior year performance. The maximum performance goals were set at levels thought to be aggressive, but attainable. The minimum, target and maximum performance goals for the Enterprise level components were the same as the performance goals

established for the corporate level NEOs as described above. The North America Total and International Total business unit officer performance goals and actual performance results for the 2008 fiscal year were:

 

North America Total (Mr. Sanders)

 

 

Because the Enterprise funding trigger was not met for the 2008 fiscal year, no payout was made under the EMIP to Mr. Sanders.

 

International Total (Mr. Lopez)

 

 

Because the Enterprise funding trigger was not met for the 2008 fiscal year, no payout was made under the EMIP to Mr. Lopez.

 

On May 5, 2008, the Company announced that it had lowered its earnings forecast for the 2008 fiscal year to a range that would fall below the adjusted net income funding trigger amount established for purposes of the EMIP. As a result, it was highly likely no amounts would be payable under the EMIP for the 2008 fiscal year. Due to the on-going economic uncertainty, the Compensation Committee concluded that the best interests of the Company and its stakeholders would be served by ensuring that meaningful incentives were nevertheless maintained for eligible employees to deliver financial results within the revised range of the Company’s guidance. Therefore, on May 19, 2008, it approved a SIP designed to provide a cash incentive compensation opportunity for the NEOs and other key management employees of the Company. To accomplish this objective, the Compensation Committee used an Enterprise level adjusted earnings per share funding trigger for the SIP, consistent with the May 5, 2008 guidance.

 

The performance measures under the SIP for the 2008 fiscal year consisted of adjusted earnings per share and modified free cash flow, both of which were calculated at the Enterprise level. As reflected in the table below, for each performance measure, achievement of pre-defined minimum and target performance goals would result in annual incentive compensation payouts of 50% and 100% of an NEO’s target incentive

opportunity for the 2008 fiscal year, respectively. Actual payouts for performance results between the pre-defined performance goals would be calculated on a straight-line basis. The Enterprise level performance goals and actual performance results for the 2008 fiscal year were:

 

 

Adjusted Earnings Per Share — Adjusted Net Income (calculated in the same manner as for the EMIP) divided by the weighted-average number of Common Shares outstanding during the 2008 fiscal year.

 

Modified Cash Flow — Calculated in the same manner as for the EMIP.

 

For each of the performance measures under the SIP, the Compensation Committee set the minimum performance goal to reflect the Company’s May 5, 2008 guidance. Under the SIP, the target performance goal was the same as the target performance goal originally established under the EMIP (i.e., without regard to the events described in the May 5, 2008 guidance). Participants were not eligible to receive incentive compensation under the SIP in an amount greater than their respective target incentive opportunity unless the Company achieved the performance goals originally contemplated under the EMIP. In the event that the Company’s actual performance for the 2008 fiscal year moved closer to the target performance goals originally established under the EMIP, the payouts under the SIP would be more in line with the original payouts contemplated under the EMIP. If the incentive compensation determined under the terms of the EMIP was greater than the incentive compensation payable under the SIP (which did not occur for the 2008 fiscal year), participants would have received the amount payable under the EMIP.

 

Since the performance goals were not approved by the Compensation Committee within the first 90 days of the 2008 fiscal year, as required by IRC § 162(m), the payouts made under the SIP did not qualify as performance-based compensation for purposes of IRC § 162(m).

 

In December 2007, the Compensation Committee approved a Global Discretionary Pool for the 2008 fiscal year which was designed to provide a means to award incentive compensation to EMIP eligible employees, on a discretionary basis, based upon their individual and/or business unit achievement. The Global Discretionary Pool would only be available in the event that the Enterprise funding trigger was not met.

 

When the SIP was approved in May 2008, the Compensation Committee retained the Global Discretionary Pool as a means to award incentive compensation on a discretionary basis in the event the Enterprise funding trigger under the SIP was not met.

 

The Global Discretionary Pool would have been funded in an amount not to exceed 25% of the target incentive opportunity for all participants under the EMIP in the aggregate. Pursuant to its terms and subject to approval by the Compensation Committee, the CEO would have had the discretion to grant awards to eligible employees based upon his assessment of individual performance.

 

No payouts were made under the Global Discretionary Pool for the 2008 fiscal year.

 

The Compensation Committee targets the economic value (equity award value) of long-term equity-based incentive awards at the 50^th percentile of the relevant compensation peer group. The target level is expressed as a multiple of base salary and may be delivered in any combination of options, stock appreciation rights

(“SARs”), restricted stock and/or performance shares. Consistent with the Company’s performance-based pay philosophy, the targeted economic value of individual equity-based incentive awards may be adjusted upward or downward from the 50^th percentile based on such factors as the overall performance level of the individual, years of service and the accumulated value of previous equity-based incentive awards.

 

For the 2008 fiscal year, the Company granted approximately 60% of the target equity award value in the form of non-qualified stock options (“NSOs”), with the remaining 40% granted in the form of restricted stock. The decision to use a combination of NSOs and restricted stock reflected competitive pay practices and allowed the Company to deliver the intended equity award value with fewer Common Shares underlying the awards granted. The specific numbers of Common Shares subject to NSOs and restricted stock awarded were determined as follows:

 

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

 

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

 

All NSOs and restricted stock awarded to the NEOs in the 2008 fiscal year were awarded subject to a three-year time-based cliff vesting provision. The restricted stock grants did not qualify as performance-based compensation for purposes of IRC § 162(m). As a result, the Company’s ability to deduct the full value of these awards at the time of vesting may be limited. Information regarding our equity grant practices, including the determination of exercise price, can be found in the section captioned “Other Executive Compensation Policies, Practices and Guidelines — Practices Regarding Equity-Based Awards” below.

 

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

 

As discussed below, the CEO was entitled to two additional perquisites in the 2008 fiscal year. First, consistent with the Board of Directors’ travel protocols which encourage Mr. Hagedorn to fly on a Company-owned aircraft for security reasons, a Company-owned airplane was made available to the CEO for personal use, subject to certain personal use guidelines established by the Compensation Committee (as fully described below in the section captioned “Our Compensation Practices — Setting Compensation Level for CEO”). Second, the CEO was entitled to Company reimbursement for a portion of his commuting expenses pursuant to these guidelines. For information concerning changes to the CEO’s aircraft perquisites that occurred after the end of the 2008 fiscal year, see the discussion in the section captioned “Recent Developments — Amendment to Compensation Package of James Hagedorn” below.

 

Since the imputed income value of certain non-cash perquisites, such as the aircraft perquisites provided to the CEO as discussed above and the Company-paid financial planning services, are required to be added to Form W-2, the Compensation Committee believes that it is appropriate to provide a tax gross-up to offset the tax obligation associated with these imputed income amounts.

 

The Scotts Company LLC Executive Retirement Plan (the “ERP”) is a non-qualified deferred compensation plan. The ERP provides executives, including the NEOs, the opportunity to (1) defer compensation above the specified statutory limits applicable to The Scotts Company LLC Retirement Savings

Plan (the “RSP”), a qualified 401(k) plan generally offered to all employees, and (2) defer compensation with respect to Executive Incentive Pay (as defined in the ERP) awarded to such executives. The ERP is an unfunded plan and is subject to the claims of the Company’s general creditors. During the 2008 fiscal year, the ERP consisted of four parts:

 

 

The Company matching contributions and Base Retirement Contributions to the ERP were based on the same contribution formulae as those used for the RSP. The Company matched the Compensation Deferral at 100% for the first 3% of eligible earnings contributed to the ERP and 50% for the next 2% of eligible earnings contributed to the ERP. The Company also made a Base Retirement Contribution in an amount equal to 2% of eligible earnings for all eligible executives, regardless of whether they made deferral elections under the ERP. This amount increased to 4% once an executive’s eligible earnings reached 50% of the Social Security wage base. Base Retirement Contributions were only made to the ERP once an executive exceeded the maximum statutory compensation allowable under the RSP (and/or with respect to all qualifying deferrals to the ERP).

 

All accounts under the ERP are bookkeeping accounts and do not represent claims against specific assets of the Company. Each participant directs the portion of future credits to the participant’s ERP account that will be, as well as the existing balance of the participant’s ERP account that is, credited to one or more benchmarked investment funds, including a Company stock fund and mutual fund investments, which are substantially consistent with the investment options permitted under the RSP. Accordingly, there were no above-market or preferential earnings on investments associated with the ERP for any of the NEOs for the 2008 fiscal year.

 

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

 

See the section captioned “Recent Developments — Approval of Retention Awards to NEOs” below for a discussion of (1) the amendment to the ERP approved by the Compensation Committee to authorize the grant of retention awards under the ERP, and (2) the retention awards granted to certain of the NEOs, each of which occurred after the end of the 2008 fiscal year.

 

The Scotts Company LLC Excess Benefit Plan for Non Grandfathered Associates (the “Excess Pension Plan”) is an unfunded plan that provides benefits which cannot be provided under The Scotts Company LLC Associates’ Pension Plan (the “Associates’ Pension Plan”) due to specified statutory limits. The Associates’ Pension Plan was frozen effective December 31, 1997 and, therefore, no additional benefits have accrued after that date under the Excess Pension Plan for participating executives. Continued service taken into account for vesting purposes under the Associates’ Pension Plan is, however, recognized with respect to the entitlement to, and the calculation of, subsidized early retirement benefits under the Excess Pension Plan. For further details

regarding the Excess Pension Plan, see the discussion in the section captioned “EXECUTIVE COMPENSATION — EXECUTIVE COMPENSATION TABLES — Pension Benefits Table.”

 

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

 

 

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

 

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

 

During the 2008 fiscal year, the Compensation Committee engaged an independent consultant from Frederic W. Cook & Co. to advise the Compensation Committee with respect to best practices and competitive trends in the area of executive compensation, as well as ongoing legal and regulatory considerations. The consultant provided guidance to assist the Compensation Committee in its evaluation of the compensation recommendations submitted by management with respect to the CEO, the NEOs and other key management employees. Frederic W. Cook & Co. was engaged as a consultant to the Compensation Committee and did not provide consulting services directly to management.

 

During the 2008 fiscal year, the Company engaged consultants from Hewitt Associates, Inc. and Towers Perrin. These firms worked directly with management to advise the Company on best practices and competitive trends, as well as ongoing legal and regulatory considerations, with respect to executive compensation. In addition, the firms advised the Company with respect to the development of the relevant compensation peer groups, including providing the compensation benchmark data for such groups. Where applicable, the firms statistically adjusted the relevant peer group data to more closely reflect the size of the Company. Each firm was engaged by the Company to consult with management and did not provide consulting services directly to the Compensation Committee.

 

Prior to the 2008 fiscal year, the Company utilized a compensation peer group that consisted of approximately 60 consumer-oriented companies as a reference for determining competitive total compensation packages for the CEO, NEOs and other key management employees. During the fiscal year ended September 30, 2007 (the “2007 fiscal year”), at the direction of the Compensation Committee and in conjunction with the Company’s compensation consultants, a new, more focused compensation peer group was

developed with the goal of enabling the Company to more closely benchmark the total compensation packages of the CEO and other NEOs with the types of companies that the Company typically competes with to attract and retain executive talent. This customized compensation peer group (the “Primary Compensation Peer Group”), which was approved by the Compensation Committee and used by management and the Compensation Committee for the 2008 fiscal year, consisted of the following companies:

 

 

The Compensation Committee believes this Primary Compensation Peer Group of highly regarded consumer-oriented companies reflects the pay practices of the broader consumer products industry, and is more reflective of the size and complexity of the Company. In general, the Primary Compensation Peer Group reflects companies that range between $1.3 billion and $6.5 billion of annual revenues. The Company’s annual revenues are slightly below the median revenues of the Primary Compensation Peer Group.

 

The Primary Compensation Peer Group was used as the benchmark for all NEOs for which a comparable job match could be found. A secondary peer group (the “Secondary Compensation Peer Group”), consisting of approximately 200 companies between $1.0 billion and $6.0 billion, excluding utilities and financial services companies, was used as the benchmark for all NEO positions without a comparable match in the Primary Compensation Peer Group. To account for the wide range of companies included in the survey, the data was statistically adjusted by an outside company to more closely reflect the relative size and complexity of the Company. The Primary Compensation Peer Group was used for Mr. Hagedorn, Mr. Evans and Ms. Stump, while the Secondary Compensation Peer Group was used for Mr. Sanders and Mr. Lopez.

 

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

 

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

 

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

 

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

 

In conjunction with the Company’s outside consultants, management conducts annual market surveys of the base salary levels, short-term incentives and long-term incentives for the CEO and each of the NEOs and

other key management employees. Management’s goal in conducting these surveys is to better understand competitive compensation programs and trends, as reflected by the Company’s compensation peer groups, as well as the level and mix of compensation elements. The Compensation Committee considers the survey information to help ensure that executive compensation levels are competitive with the Company’s compensation peer groups, which facilitates our ability to retain and motivate key executive talent.

 

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

 

The Compensation Committee completed an evaluation of the CEO’s performance with respect to the Company’s goals and objectives and made its report to the Board of Directors. Based on this assessment, consistent with the terms of its charter, the Compensation Committee set the CEO’s annual compensation for the 2008 fiscal year, including base salary, annual incentive compensation, long-term equity-based compensation and perquisites and other benefits. When evaluating Mr. Hagedorn’s total level of compensation for the 2008 fiscal year, the Compensation Committee considered information including:

 

 

When establishing Mr. Hagedorn’s compensation for the 2008 fiscal year, the Compensation Committee considered the value of the CEO’s perquisites and other benefits, including his ability to use a Company-owned aircraft for commuting and other personal use, and the Company’s reimbursement of a portion of his other commuting expenses. For purposes of benchmarking his compensation against peers reflected in our Primary Compensation Peer Group, the anticipated value of his aircraft perquisites was considered as part of a hypothetical base salary to ensure that his equivalent total direct compensation (base salary, short-term cash-based incentives and equity-based compensation) would be around the 50^th percentile of our Primary Compensation Peer Group. Consistent with this analysis, Mr. Hagedorn’s base salary remained unchanged for the 2008 fiscal year, and the Compensation Committee (1) approved a new $300,000 guideline for Mr. Hagedorn’s annual commuting perquisite (including both the reimbursement of commuting hours on Mr. Hagedorn’s personal aircraft and the direct operating costs of commuting on Company-owned aircraft) and (2) maintained a guideline of 100 total hours of personal use (including both occupied hours and ferry hours) of Company-owned aircraft. The combined total of these perquisites was valued at approximately $600,000 which, when combined with his base salary, approximates the 50^th percentile of base salary of peers reflected in our Primary Compensation Peer Group.

 

In order to monitor compliance with the guidelines established for Mr. Hagedorn’ aircraft perquisites, the Compensation Committee reviewed quarterly updates regarding Mr. Hagedorn’s aircraft use. Although Mr. Hagedorn’s commuting expenses exceeded the approved guidelines by approximately $63,000 in the 2008 fiscal year, the hours of his personal use of the Company-owned aircraft were well below the approved guidelines. In the aggregate, the value attributable to Mr. Hagedorn’s personal use of the Company-owned aircraft and the amount of Mr. Hagedorn’s reimbursable commuting expenses in the 2008 fiscal year did not exceed the combined guidelines approved by the Compensation Committee for these perquisites.

 

Mr. Hagedorn’s target incentive opportunity for purposes of the EMIP, as well as the SIP, was 90% of his base salary for the 2008 fiscal year, which was intentionally set at a high level relative to the other NEOs. This put a greater percentage of his total compensation at risk, consistent with our performance-oriented pay philosophy, and was slightly below the target incentive opportunity, expressed as a percentage of base salary, of his peers as reflected in the Primary Compensation Peer Group.

 

For the 2008 fiscal year, under both the EMIP and the SIP, 100% of Mr. Hagedorn’s target incentive compensation opportunity was directly attributable to attainment of annual performance measures established at the Enterprise level and approved by the Compensation Committee. Under the EMIP, the measures used to determine Mr. Hagedorn’s incentive compensation for the 2008 fiscal year, which were the same measures used for other corporate level NEOs, were adjusted net income (50% weighting) and modified free cash flow (50% weighting). Under the SIP, the measures used to determine Mr. Hagedorn’s incentive compensation for the 2008 fiscal year, which were the same measures used for all other NEOs, were adjusted earnings per share (75% weighting) and modified free cash flow (25% weighting).

 

A description of the specific performance goals and the payout levels associated with each performance measure are discussed above in the section captioned “Elements of Executive Compensation — Annual Cash Incentive Compensation Plans (short-term compensation element)” and in conjunction with the Summary Compensation Table for 2008 Fiscal Year beginning on page 38 of this Proxy Statement.

 

For the 2008 fiscal year, the Compensation Committee established the target value for Mr. Hagedorn’s equity-based compensation at approximately $3.0 million. This positions his long-term compensation at the 30^th percentile when compared to his peers reflected in the Primary Compensation Peer Group, and the value of Mr. Hagedorn’s total direct compensation was below the 50^th percentile of that peer group.

 

Of the long-term compensation value, approximately 60% of the economic value of Mr. Hagedorn’s long-term equity-based compensation was granted in the form of NSOs and the remaining 40% was granted in the form of restricted stock awards. Both the NSOs and the restricted stock are subject to three-year, time-based cliff vesting. The Compensation Committee’s decision to award a mix of NSOs and restricted stock reflects a balance between rewarding Mr. Hagedorn for future share price appreciation while attempting to mitigate the dilution to existing shareholders since a grant of restricted stock requires considerably fewer Common Shares than a grant of NSOs, while delivering the same economic value measured as of the time of grant.

 

See the section captioned “Recent Developments — Amendment to Compensation Package of James Hagedorn” below for a discussion of certain changes to Mr. Hagedorn’s compensation package that took effect after the end of the 2008 fiscal year.

 

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

 

 

Consistent with our performance-oriented pay philosophy, the compensation structure for the NEOs, other than the CEO, is allocated to deliver approximately one-third of the annual compensation opportunity in the form of fixed pay (i.e., base salary) and the remaining two-thirds in the form of variable pay (i.e., annual

incentive compensation and long-term equity-based compensation). The Compensation Committee believes that this pay mix is generally in line with the pay mix of our compensation peer groups.

 

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

 

For the 2008 fiscal year, the base salary increases awarded to Mr. Sanders, Mr. Lopez and Ms. Stump were between 3% and 5% of their previous base salary rates, which was consistent with the general range of increases awarded to all other associates of the Company, based on their respective levels of performance. Mr. Evans received a 10% increase in his base salary rate, which reflected both his overall performance level as well as the fact that his base salary level was well below the level of his peers as reflected in our Primary Compensation Peer Group.

 

For purposes of the EMIP, as well as the SIP, the target incentive opportunity for the NEOs, other than the CEO, was maintained at 55% of base salary for the 2008 fiscal year, which put less of their total pay at risk than that of the CEO, and was slightly lower than the comparable percentage of short-term cash-based incentives offered to similarly situated executives as reflected in the applicable compensation peer group.

 

For the 2008 fiscal year, under both the EMIP and the SIP, the target incentive compensation opportunity was directly attributable to attainment of annual performance measures which were approved by the Compensation Committee. For purposes of the EMIP, the performance measures were established at the Enterprise level for corporate level NEOs and at the business unit level for NEOs with business unit responsibility. For purposes of the SIP, the performance measures were based on attainment of Enterprise level performance measures, regardless of whether the NEO had business unit responsibility. The specific performance measures and the relative weightings for each NEO are summarized in the tables below.

 

EMIP

 

 

SIP

 

A description of the specific performance goals and the payout levels associated with each performance measure are discussed above in the section captioned “Elements of Executive Compensation — Annual Cash Incentive Compensation Plans (short-term compensation element)” and in conjunction with the Summary Compensation Table for 2008 Fiscal Year beginning on page 38 of this Proxy Statement and the narrative accompanying the table captioned “Grants of Plan-Based Awards for 2008 Fiscal Year” beginning on page 43 of this Proxy Statement.

 

For the 2008 fiscal year, the target value of the equity-based compensation for each of the NEOs was determined by the Compensation Committee based on a multiple that was generally between 0.8 and 1.5 times the NEO’s respective base salary rate. The specific equity-based award granted to each NEO was determined based on an assessment of the NEO’s overall performance level as well as the NEO’s expected contributions to the business. Consistent with the Company’s compensation philosophy of strongly linking rewards to shareholder value creation and to motivate long-term performance, the equity-based compensation awarded to Mr. Evans approximated the 50^th percentile of the peers reflected in the Primary Compensation Peer Group, while the equity-based compensation awarded to Mr. Sanders, Mr. Lopez and Ms. Stump approximated the 75^th percentile of the applicable compensation peer group.

 

Approximately 60% of the economic value of the long-term equity-based compensation granted to the NEOs was in the form of NSOs and the remaining 40% was granted in the form of restricted stock. Both the NSOs and the restricted stock are subject to three-year, time-based cliff vesting. The Compensation Committee’s decision to award a mix of NSOs and restricted stock reflects a balance between rewarding the NEOs for future share price appreciation while attempting to mitigate the dilution to existing shareholders since a grant of restricted stock requires considerably fewer Common Shares than a grant of NSOs while delivering the same economic value measured as of the time of grant.

 

In general, the total direct compensation (based upon target levels of performance) for Mr. Evans was below the 50^th percentile of peers reflected in our Primary Compensation Peer Group, which the Compensation Committee believed was appropriate given that Mr. Evans was just beginning his second year in his role as Executive Vice President and Chief Financial Officer. The total direct compensation (based upon target levels of performance) for Ms. Stump was between the 50^th and 75^th percentile of peers reflected in the Primary Compensation Peer Group and the total direct compensation (based upon target levels of performance) for Mr. Sanders and Mr. Lopez approximated the 75^th percentile of peers reflected in the Secondary Compensation Peer Group. The Compensation Committee believes that the total direct compensation for each of these individuals was appropriate in view of the overall compensation philosophy and recognized the value of each of these individuals to the Company as a whole.

 

On October 30, 2007, in recognition of Mr. Sanders’ ongoing commitment to the Company, the Compensation Committee approved the award of up to 40,000 performance shares in the aggregate, which included up to 10,000 performance shares for the 2008 fiscal year performance period, up to 10,000 performance shares for the 2009 fiscal year performance period and up to 20,000 performance shares for the 2010 fiscal year performance period. Issued pursuant to a Special Performance Share Award Agreement (with Related Dividend Equivalents) under the 2006 Plan, each performance share represents the right to receive one full Common Share if the applicable performance goals are satisfied. On December 20, 2007, the Compensation Committee established the final performance goal for the 2008 fiscal year performance period to be based upon the results of North America Total, which included, in addition to the North America consumer business, Scotts LawnService^® and Smith & Hawken^®. The performance criteria which were established for the 2008 fiscal year performance period provided for performance shares to be earned ratably — 5,000 performance shares (threshold) would be earned if at least 80% of the 2008 fiscal year EBTA budget for North America Total were achieved and 10,000 performance shares (maximum) would be earned if 99% or more of such 2008 fiscal year EBTA budget were achieved. Performance shares would be earned on a

straight-line basis for performance between threshold and maximum. If the threshold performance goal was not satisfied, none of the performance shares for the 2008 fiscal year performance period would be awarded.

 

Based on the actual level of North America Total EBTA achieved for the 2008 fiscal year, which was $277.4 million, representing 80.1% of the budget, Mr. Sanders earned 5,038 performance shares for the 2008 fiscal year performance period.

 

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

 

Grants of option awards and/or stock awards are typically approved on an annual basis at a regularly scheduled meeting of the Compensation Committee. The grant date is established as the date of the Compensation Committee action. In certain instances, an equity-based award may be granted to a new hire as of the later of the date such grant is approved by the Compensation Committee or the date employment commences. The Company does not have any program, plan or practice to time annual equity-based awards to our executives in coordination with the release of material non-public information.

 

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

 

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

 

 

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

 

 

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

 

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

 

The Company’s ability to deduct certain elements of compensation paid to each of the NEOs is generally limited to $1 million annually, under IRC § 162(m). This non-deductibility is generally limited to amounts that do not meet certain technical requirements to be classified as “performance-based” compensation. To ensure the maximum tax deduction allowable, the Company attempts to structure its cash-based incentive programs to qualify as performance-based compensation under IRC § 162(m). For the 2008 fiscal year, none of the NEOs, other than the CEO, had non-performance-based compensation in excess of $1 million.

 

The Company accounts for stock-based compensation, including option awards and stock awards, in accordance with SFAS 123(R). Prior to making decisions to grant equity-based awards, the Compensation Committee reviews pro forma expense estimates, as well as an analysis of the potential dilutive effect such awards could have on existing shareholders. Where appropriate, the proposed level of the equity-based awards may be adjusted to balance these objectives.

 

Decisions regarding the design, structure and operation of the Company’s incentive plans, including the EMIP, the SIP and the equity-based incentive plans, contemplate an appropriate balance between the underlying objectives of each plan and the resulting accounting and tax implications to the Company. While we view preserving the tax deductibility of executive compensation as an important objective, there are instances where the Compensation Committee has approved design elements that may not be fully tax-deductible, but are accepted as trade-offs that support the achievement of other compensation objectives. For example, based on the desire to add a level of individual accountability to the team oriented measurements in the EMIP, a 25% discretionary element was included in the design for the 2008 fiscal year, even though the use of such discretion had the potential to limit the Company’s tax deduction with respect to such payment.

 

Due to the timing of the establishment of the SIP within the 2008 fiscal year, the payouts made under the SIP did not qualify as performance-based compensation for purposes of IRC § 162(m). However, when it established the SIP in May 2008, the Compensation Committee concluded that the best interests of the Company and its stakeholders would be served by ensuring that meaningful incentives were maintained for eligible employees to deliver financial results within the revised range of the Company’s guidance, as described in the Company’s May 5, 2008 earnings release.

 

For the 2008 fiscal year, the Company granted approximately 60% of the target equity award value in the form of NSOs, with the remaining 40% granted in the form of restricted stock. While the restricted stock does not qualify as performance-based compensation for purposes of IRC § 162(m), the decision to use a combination of NSOs and restricted stock reflected competitive pay practices and allowed the Company to deliver the intended equity award value with fewer Common Shares underlying the awards granted and to balance the overall market risk associated with the equity-based compensation for each NEO.

 

Effective October 1, 2008, Mark R. Baker was elected to serve as President and Chief Operating Officer of the Company. Mr. Baker will remain on our Board of Directors, but resigned from his positions as a

member and Chair of the Governance and Nominating Committee as well as a member of the Compensation Committee. Mr. Baker had recused himself from participation, discussions or voting with regard to matters before those committees concerning his prospective employment and election as an officer of the Company.

 

Mr. Baker executed an employment agreement with The Scotts Company LLC, an Ohio limited liability company and a wholly-owned subsidiary of the Company (“Scotts LLC”), on September 9, 2008. The terms of Mr. Baker’s employment agreement are discussed below in the section captioned “EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS” beginning on page 50 of this Proxy Statement. In approving the elements of Mr. Baker’s compensation package, the Compensation Committee considered the following factors, among others:

 

 

Effective October 1, 2008, the Compensation Committee approved a revised compensation structure for Mr. Hagedorn. The new structure, which increased Mr. Hagedorn’s base salary to $1.0 million, is designed, among other things, to incorporate the approximate value of the personal aircraft usage and commuting perquisites that Mr. Hagedorn had received in the past as part of his overall compensation package directly into his base salary. Accordingly, future Company-paid aircraft perquisites have been discontinued. However, the Board of Directors maintains travel protocols which encourage Mr. Hagedorn to fly on Company-owned aircraft for reasons of security. Therefore, in order to permit Mr. Hagedorn to continue to retain the option of using Company-owned aircraft for commuting and other personal use, the Compensation Committee granted Mr. Hagedorn an option to purchase, with his own funds, up to 100 flight hours per year for personal use (including ferry hours incurred as a result of Mr. Hagedorn’s use of the aircraft) at the Company’s incremental direct operating cost per flight hour. In order to implement this arrangement, Mr. Hagedorn and the Company have entered into an arm’s-length aircraft “time sharing agreement” which is more fully described in the section captioned “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.”

 

In addition to establishing a new base salary rate, the Compensation Committee approved an increase in Mr. Hagedorn’s incentive target from 90% to 100% of his base salary and maintained the target value of his annual equity-based compensation at approximately $3.0 million, which value is established annually as of the date of grant. Based on the revised compensation structure, Mr. Hagedorn’s total direct compensation will be slightly below the 50th percentile of his peers, as reflected in the Primary Compensation Peer Group. In addition, the Compensation Committee adjusted the mix of Mr. Hagedorn’s equity-based compensation for the 2009 fiscal year to reflect a higher proportion of option awards versus stock awards to optimize the amount of Mr. Hagedorn’s compensation that the Company can deduct for income tax purposes as performance-based compensation under IRC § 162(m).

 

On October 8, 2008, the Compensation Committee approved an amendment to the ERP to authorize grants of discretionary retention awards under the ERP. Following its approval of this amendment, the Compensation Committee approved the granting of retention awards to certain key management employees of the Company, including Mr. Evans, Mr. Sanders and Ms. Stump. Consistent with the terms of the ERP, each executive officer who was granted a retention award has the right to elect an investment fund, including a Company stock fund, against which the retention award will be benchmarked. Mr. Evans, Mr. Sanders and

Ms. Stump elected the Company stock fund as the investment fund against which their respective retention awards will be benchmarked.

 

The retention awards approved by the Compensation Committee with respect to the executive officers identified above, as well as the retention award approved with respect to Mr. Lopez (described below), were each in the amount of $1.0 million. These awards reflected the Compensation Committee’s belief that retaining the institutional knowledge and overall talent possessed by the Company’s key executive officers puts the Company in the best position to ensure that it continues to successfully achieve both its short-term and long-term goals during challenging economic times. The retention awards serve to further the Company’s stated objective to retain the necessary leadership talent to sustain and expand upon its unique competencies and capabilities.

 

Each retention award was granted subject to the terms of a retention award agreement, a form of which the Compensation Committee approved prior to its approval of the individual retention awards. The retention award agreement provides that each executive officer’s interest in the retention award vests as follows:

 

 

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

 

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

 

 

Distributions will be paid in cash to the extent the vested retention award account is benchmarked against an investment fund other than the Company stock fund. To the extent the vested retention award account is

benchmarked against the Company stock fund, distributions will be made in whole Common Shares, plus cash for any fractional share.

 

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

 

On November 4, 2008, the Compensation Committee approved a one-time payment of $125,000 to Mr. Sanders in recognition of his continuing service in light of the recent organizational changes.

 

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

 

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

 

Arnold W. Donald, Chair

Joseph P. Flannery

Karen G. Mills (interim member since 9/8/08)

Mark R. Baker (member until 9/8/08)

 

For the 2008 fiscal year, the Company had the following NEOs that are subject to this disclosure: James Hagedorn, who served as Chief Executive Officer throughout the 2008 and 2007 fiscal years; David C. Evans, who served as Chief Financial Officer throughout the 2008 and 2007 fiscal years; Barry W. Sanders, who served as the Company’s Executive Vice President, North America throughout the 2008 fiscal year and for part of the 2007 fiscal year; Claude L. Lopez, who was appointed as an executive officer on October 1, 2007 and served as the Company’s Executive Vice President, International and Chief Marketing Officer throughout the 2008 fiscal year; and Denise S. Stump, who served as the Company’s Executive Vice President, Global Human Resources throughout the 2008 and 2007 fiscal years. Each of Mr. Hagedorn, Mr. Evans, Mr. Sanders, Mr. Lopez and Ms. Stump serves pursuant to an employment agreement as described below in the section captioned “EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS — Employment Agreements.”

 

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

 

Summary Compensation Table for 2008 Fiscal Year

 

 

 

 

 

The following table shows the detail for column (i), All Other Compensation, of the Summary Compensation Table for 2008 Fiscal Year.

 

All Other Compensation (Supplements Summary Compensation Table)

 

 

 

 

 

 

 

The following table sets forth information concerning equity-based awards made to the NEOs during the 2008 fiscal year as well as the range of potential payouts under the EMIP and the SIP, each a non-equity incentive plan, with respect to performance goals for the 2008 fiscal year.

 

Grants of Plan-Based Awards for 2008 Fiscal Year