t72967_def14a.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A
 
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
 
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Lennox International Inc.

   
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  GRAPHIC
 
2140 Lake Park Blvd.
Richardson, Texas 75080
 
March 30, 2012
 
Dear Stockholders:
 
It is my pleasure to invite you to the 2012 Annual Meeting of Stockholders of Lennox International Inc. The meeting will be held at 1:00 p.m., local time, on Thursday, May 10, 2012, at the Lennox International Inc. Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080.
 
Under the Securities and Exchange Commission rules that allow companies to furnish proxy materials to stockholders over the Internet, Lennox has elected to deliver our proxy materials to the majority of our stockholders over the Internet.  This delivery process allows us to provide stockholders with the information they need, while at the same time conserving natural resources and lowering the cost of delivery.  On March 30, 2012, we mailed to our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to access our proxy statement for our 2012 Annual Meeting of Stockholders and fiscal 2011 annual report to stockholders.  The Notice also provides instructions on how to vote online or by telephone and includes instructions on how to receive a paper copy of the proxy materials by mail.
 
The accompanying Notice of Annual Meeting of Stockholders and proxy statement describe the items of business that will be discussed and voted upon during the meeting.
 
YOUR VOTE IS VERY IMPORTANT.  Whether or not you plan to attend the 2012 Annual Meeting of Stockholders, we urge you to vote and submit your proxy by the Internet, telephone or mail, pursuant to the instructions on your proxy card.  We encourage you to vote via the Internet.  It is convenient and saves the Company postage and other costs. Please use the website shown on your proxy card to vote through the Internet.  If you attend the meeting you will have the right to revoke the proxy and vote your shares in person.
 
I look forward to seeing you at the Annual Meeting of Stockholders. On behalf of management and our Board of Directors, I want to thank you for your continued support and confidence in 2012.
 
  Sincerely, 
   
  /s/ Richard L. Thompson    
  Richard L. Thompson 
  Chairman of the Board
 
 
 

 
 
GRAPHIC
 
2140 Lake Park Blvd.
Richardson, Texas 75080
March 30, 2012
 

 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 10, 2012
 

 
Notice is hereby given that the 2012 Annual Meeting of Stockholders of Lennox International Inc. will be held on Thursday, May 10, 2012 at 1:00 p.m., local time, at the Lennox International Inc. Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080, to:
 
 
elect three Class II directors to hold office for a three-year term expiring at the 2015 Annual Meeting of Stockholders;
 
 
ratify the appointment of KPMG LLP as our independent registered public accounting firm for the 2012 fiscal year;
 
 
conduct an advisory vote to approve the compensation of the named executive officers as disclosed in this Proxy Statement;
 
 
approve the Lennox International Inc. 2012 Employee Stock Purchase Plan; and
 
 
transact any other business that may properly come before the Annual Meeting of Stockholders in accordance with the terms of our Amended and Restated Bylaws.
 
The Board of Directors has determined that our stockholders of record at the close of business on March 16, 2012 are entitled to notice of, and to vote at, the Annual Meeting of Stockholders.
 
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 10, 2012.  This Proxy Statement and the Annual Report to Stockholders are available on our website at http://www.lennoxinternational.com/financials/financialreportproxy.htm and also at the website appearing on your proxy card.  A Proxy Statement, Proxy Card, and Annual Report to Stockholders, which includes our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, accompany this Notice.
 
Your Vote Is Important.  Whether or not you plan to attend the Annual Meeting of Stockholders, we urge you to vote and submit your proxy in order to ensure the presence of a quorum.
 
Most shareholders have a choice of voting on the Internet, by telephone or by mail. Please refer to the proxy card or other voting instructions included with these proxy materials for information on the voting method(s) available to you. If you vote by telephone or on the Internet, you do not need to return your proxy card.
 
  By Order of the Board of Directors,
   
  /s/ John D. Torres  
  John D. Torres
  Corporate Secretary
 
 
 

 
 
TABLE OF CONTENTS
 
    Page
     
GENERAL INFORMATION REGARDING THE 2012 ANNUAL MEETING OF STOCKHOLDERS
 
1
     
PROPOSAL 1:  ELECTION OF DIRECTORS
 
4
     
 
NOMINEES
 
5
       
 
DIRECTORS CONTINUING IN OFFICE
 
7
       
PROPOSAL 2: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
11
     
AUDIT COMMITTEE REPORT
 
12
     
CORPORATE GOVERNANCE
 
13
     
PROPOSAL 3: ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS
 
18
     
EXECUTIVE COMPENSATION
 
19
     
 
COMPENSATION DISCUSSION AND ANALYSIS
 
19
       
 
COMPENSATION COMMITTEE REPORT
 
29
       
 
SUMMARY COMPENSATION TABLE
 
30
       
 
FISCAL 2011 GRANTS OF PLAN-BASED AWARDS
 
32
       
 
OUTSTANDING EQUITY AWARDS AT FISCAL 2011 YEAR-END
 
33
       
 
FISCAL 2011 OPTION EXERCISES AND STOCK VESTED
 
35
       
 
RETIREMENT PLANS
 
36
       
 
FISCAL 2011 PENSION BENEFITS
 
38
       
 
FISCAL 2011 NONQUALIFIED DEFERRED COMPENSATION
 
39
       
 
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
 
40
       
DIRECTOR COMPENSATION
 
47
     
 
FISCAL 2011 DIRECTOR COMPENSATION
 
49
       
PROPOSAL 4: APPROVAL OF THE LENNOX INTERNATIONAL INC. 2012 EMPLOYEE STOCK PURCHASE PLAN
 
51
     
EQUITY COMPENSATION PLAN INFORMATION
 
54
     
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
55
     
OWNERSHIP OF COMMON STOCK
 
56
     
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
57
     
OTHER INFORMATION
 
58
     
 
 
-i-

 

GENERAL INFORMATION REGARDING THE 2012
ANNUAL MEETING OF STOCKHOLDERS
 
Meeting Date and Location
 
The 2012 Annual Meeting of Stockholders (the “Annual Meeting”) of Lennox International Inc. (also referred to in this Proxy Statement as the “Company,” “us,” “we,” or “our”) will be held on Thursday, May 10, 2012 at 1:00 p.m., local time, at the Company’s Corporate Headquarters, 2140 Lake Park Blvd., Richardson, Texas 75080. We began mailing this Proxy Statement and the accompanying Notice of Annual Meeting of Stockholders, Proxy Card and Annual Report to Stockholders, which includes our Annual Report on Form 10-K, to our stockholders on March 30, 2012 for the purpose of soliciting proxies on behalf of our Board of Directors (our “Board”).
 
Matters to be Voted On
 
At the meeting, you will be asked to vote on four proposals.  Our board recommends you vote “for” each of the director nominees, and “for” proposals 2, 3, and 4, as described below.
 
 
Proposal 1:  Election of three Class II directors to hold office for a three-year term expiring at the 2015 Annual Meeting of Stockholders.
 
 
Proposal 2:  Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for the 2012 fiscal year.
 
 
Proposal 3:  Advisory vote to approve the compensation of the named executive officers (“NEOs”) as disclosed in this Proxy Statement.
 
 
Proposal 4:  Approval of the Lennox International Inc. 2012 Employee Stock Purchase Plan.
 
Record Versus Beneficial Ownership of Shares
 
If your shares are registered directly in your name with our transfer agent, Computershare Shareowner Services LLC, you are considered, with respect to those shares, the “stockholder of record.” If you are a stockholder of record, we sent our proxy materials directly to you.
 
If your shares are held in a stock brokerage account or by a bank, you are considered the “beneficial owner” of shares held in street name. In that case, our proxy materials have been forwarded to you by your broker or bank, which is considered, with respect to those shares, the stockholder of record. Your broker or bank will also send you instructions on how to vote. If you have not heard from your broker or bank, please contact them as soon as possible.
 
Record Date and Number of Votes
 
The record date for the Annual Meeting is March 16, 2012. If you were a stockholder of record at the close of business on the record date, you may vote. At the close of business on the record date, there were 50,866,123 shares of our common stock outstanding and entitled to vote. Each share of common stock is entitled to one vote for each director nominee and one vote for each other proposal to be voted on.
 
Quorum and Vote Required
 
A quorum is required to transact business at the Annual Meeting. To achieve a quorum at the Annual Meeting, stockholders holding a majority of our outstanding shares entitled to vote must be present either in person or represented by proxy. Shares held by us in treasury will not count towards the calculation of a quorum. In the event a quorum is not present at the Annual Meeting, we expect the meeting will be adjourned or postponed to solicit additional proxies.
 
To be elected, our nominees for director must receive a plurality of the votes cast. This means that the three director nominees with the most “for” votes will be elected, regardless of whether any nominee receives a majority of the votes cast. If a quorum is present, ratification of our independent registered public accounting firm, approval of the advisory vote on the compensation of our named executive officers and approval of the Lennox International Inc. 2012 Employee Stock Purchase Plan require that the votes cast in favor of these proposals exceed the votes cast against these proposals.
 
 
1

 
 
Abstentions and Broker Non-Votes
 
If a broker or bank holds shares in “street name” (that is, in the name of a bank, broker, nominee or other holder of record) and the beneficial owner does not provide the broker or bank with specific voting instructions, (referred to as “broker non-votes”), the broker or bank generally has discretion to vote on routine matters but does not have discretion to vote on non-routine matters.
 
Pursuant to New York Stock Exchange (“NYSE”) rules, Proposal 1 (election of directors), Proposal 3 (advisory vote on the compensation of named executive officers) and Proposal 4 (approval of the Lennox International Inc. 2012 Employee Stock Purchase Plan) will be considered non-routine proposals for which your broker or bank may not exercise voting discretion if it does not receive voting instructions from you, and Proposal 2 (ratification of the appointment of our independent auditor) will be considered a routine proposal for which your broker or bank may exercise voting discretion even if it does not receive voting instructions from you.
 
Abstentions and broker non-votes, if applicable, will be included in determining whether a quorum is present, but will not be counted as votes “for” or “against” Proposals 1, 3 or 4.
 
Voting Procedures
 
Registered holders may vote in person at the Annual Meeting, via the Internet, by telephone, or, if they received a printed copy of these proxy materials, by mail.  If your shares are held in street name, you will receive instructions from the holder of record that you must follow in order for your shares to be voted.
 
A representative of Alliance Advisors LLC will tabulate the votes and act as inspector of election at the Annual Meeting. As discussed above, if you hold your shares in street name, it is critical that you cast your vote in order for it to be counted on Proposals 1, 3, and 4.
 
Changing Your Vote
 
You can change your vote on a proposal at any time before the Annual Meeting for any reason by revoking your proxy. For stockholders of record, proxies may be revoked by filing a written notice of revocation, bearing a later date than your proxy, with our Corporate Secretary at or before the Annual Meeting. Proxies may also be revoked by:
 
 
submitting a new written proxy bearing a later date than the Proxy Card you previously submitted prior to or at the Annual Meeting;
 
 
voting again by telephone or Internet before 11:59 p.m., Eastern Time, on May 9, 2012; or
 
 
attending the Annual Meeting and voting in person; however, attendance at the meeting will not in and of itself constitute a revocation of your proxy.
 
In each case, the later submitted vote will be recorded and the earlier vote revoked. Any written notice of a revocation of a proxy should be sent to Lennox International Inc., 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Corporate Secretary. To be effective, the revocation must be received by our Corporate Secretary before the taking of the vote at the Annual Meeting.
 
If your shares are held in street name, you must follow the specific voting directions provided to you by your bank, broker, nominee or other holder of record to change or revoke any instructions you have already provided. Alternatively, obtain a proxy from your bank, broker or other holder of record and provide it with your vote at the Annual Meeting.
 
 
2

 
 
Other Business; Adjournments
 
We are not aware of any other business to be acted upon at the Annual Meeting. However, if you have voted by proxy and other matters are properly presented at the Annual Meeting for consideration in accordance with our Amended and Restated Bylaws (“Bylaws”), the persons named in the accompanying Proxy Card will have discretion to act on those matters according to their best judgment or the Board’s recommendation. In the absence of a quorum, stockholders representing a majority of the votes present in person or by proxy at the meeting may adjourn the meeting.
 
 
3

 
 
PROPOSAL 1:  ELECTION OF DIRECTORS
 
Our Bylaws provide that our Board may be composed of no less than three and no more than 15 members. The size of our Board has been fixed by our Board at 10 members, divided into three classes, with each class serving a three-year term.
 
Upon the recommendation of the Board Governance Committee, the Board has nominated three Class II directors for re-election to our Board to hold office for a three-year term expiring at the 2015 Annual Meeting of Stockholders. All Class III and Class I directors will continue in office, in accordance with their previous election, until the expiration of the terms of their classes at the 2013 and 2014 Annual Meeting of Stockholders, respectively. The process followed by the Board in nominating directors and the criteria considered for director nominees is described in the “Corporate Governance — Director Nomination Process and Nominee Criteria” section of this Proxy Statement.
 
We provide below biographical information for each nominee for Class II director and for each current director in the classes continuing in office following the Annual Meeting. For each director and director nominee, the information presented includes the positions held, principal occupation, and business experience as of March 26, 2012. The biographical description below for each director and director nominee also includes the specific experience, qualifications, attributes and skills that led to the Board’s conclusion that such person should serve as a director of the Company at this time, in light of our business and structure.
 
If you do not wish your shares to be voted for any particular nominee, you may withhold your vote for that particular nominee. If any nominee for Class II director becomes unavailable to serve, the persons named in the accompanying Proxy Card may vote for any alternate designated by the incumbent Board, upon the recommendation of the Board Governance Committee, or the number of directors constituting the Board may be reduced.
 
 
4

 
 
Nominees
 
The Board has nominated the following individuals for re-election as Class II directors for a three-year term expiring at the 2015 Annual Meeting of Stockholders:
 
graphic
John E. Major, 66, has served as a director of our Company since 1993. He is the Chairman of the Compensation and Human Resources Committee and a member of the Board Governance Committee. Mr. Major is President of MTSG, a company that provides consulting, management and governance services, which he formed in 2003. From 2003 to 2006, he served as CEO of Apacheta Corporation, a mobile wireless software company whose products are used to manage inventory and deliveries. From 2000 to 2003, he served as Chairman and CEO of Novatel Wireless, Inc., a leading provider of wireless Internet solutions. Prior to joining Novatel Wireless, Mr. Major served as President and CEO of Wireless Knowledge, Inc., a joint venture between Microsoft Corporation and QUALCOMM Inc., from 1998 through 1999. From 1997 to 1998, he served as Executive Vice President of QUALCOMM and President of its Wireless Infrastructure Division. Prior to joining QUALCOMM, Mr. Major served as Senior Vice President and Chief Technology Officer at Motorola, Inc., a manufacturer of telecommunications equipment. Prior to that he served as Senior Vice President and General Manager for Motorola’s Worldwide Systems Group of the Land Mobile Products Sector.
 
Mr. Major currently serves as the Chairman of the Board, Chairman of the Compensation Committee, and a member of the Nominating and Corporate Governance Committee of Broadcom Corporation, a semiconductor manufacturing company. He also serves on the Board of Directors, as Chairman of the Nominating and Corporate Governance Committee, and as a member of the Technology Committee and the Audit Committee of Littelfuse, Inc., a manufacturer of circuit protection devices. Mr. Major also serves on the Board of Directors, as Chairman of the Nominating and Corporate Governance Committee, and as a member of the Compensation Committee of ORBCOMM Inc., a satellite communications service provider. Mr. Major previously served on the Board of Directors of Verilink Corporation, a manufacturer of microwave communications products, from June 1996 to January 2007.
 
Mr. Major contributes substantial experience in product innovation, compensation programs, and mergers and acquisitions in his service as a director.
 
graphic
Gregory T. Swienton, 62, has served as a director of our Company since 2010. He is a member of the Compensation and Human Resources Committee and the Public Policy Committee. Mr. Swienton was appointed Chairman of Ryder System, Inc. in May 2002 having been named Chief Executive Officer in November 2000. Mr. Swienton joined Ryder as President and Chief Operating Officer in June 1999. Before joining Ryder, Mr. Swienton was Senior Vice President-Growth Initiatives of Burlington Northern Santa Fe Corporation (BNSF). Prior to that he was BNSF’s Senior Vice President-Coal and Agricultural Commodities Business Unit, and previously had been Senior Vice President of its Industrial and Consumer Units. He joined the former Burlington Northern Railroad in June 1994 as Executive Vice President-Intermodal Business Unit. Prior to joining Burlington Northern, Mr. Swienton was Executive Director-Europe and Africa of DHL Worldwide Express in Brussels, Belgium from 1991 to 1994, and prior to that, he was DHL’s Managing Director-Western and Eastern Europe from 1988 to 1990, also located in Brussels. For the five years prior to these assignments, Mr. Swienton was Regional Vice President of DHL Airways, Inc. in the United States. From 1971 to 1982, Mr. Swienton held various national account, sales and marketing positions with AT&T and Illinois Bell Telephone Company.
 
 
5

 
 
 
Mr. Swienton serves on the Board of Directors, as the Chairman of the Finance Committee and as a member of the Audit Committee of Harris Corporation, an international communications and information technology company. He also serves on the Board of Trustees of St. Thomas University in Miami.
 
As an active CEO, Mr. Swienton’s contributes extensive international business experience, deep expertise in global distribution and supply chain innovations, as well as experience in growth initiatives, in his service as a director.
 
GRAPHIC
Todd J. Teske, 47, has served as a director of our company since 2011.  He is a member of the Audit Committee and the Public Policy Committee.  In 2010, Mr. Teske became the Chairman, President and Chief Executive Officer of Briggs & Stratton Corporation, a world leader in gasoline engines for outdoor power equipment, portable generators, and lawn and garden powered equipment and related accessories.  Before becoming CEO of Briggs & Stratton in January 2010, he served as the company’s President and Chief Operating Officer, President of its power products business, head of corporate development and Controller.
 
Mr. Teske serves as the Chairman of the Board of Briggs & Stratton.  He also serves on the Board of Directors and as a member of the Audit and Compliance Committee and the Compensation and Corporate Governance Committee of Badger Meter, Inc., a leading innovator, manufacturer and marketer of flow measurement and control products.
 
As an active CEO and former corporate controller, Mr. Teske contributes extensive expertise in the areas of management, finance, accounting, manufacturing, and corporate governance in his service as a director.
 
THE BOARD RECOMMENDS A VOTE “FOR”
EACH OF THE ABOVE NOMINEES

 
6

 
 
Directors Continuing in Office
 
The following Class III directors’ terms will continue until the 2013 Annual Meeting of Stockholders:
 
graphic
Todd M. Bluedorn, 49, became Chief Executive Officer (“CEO”) and was elected as a director of our Company in April 2007. Prior to joining the Company, Mr. Bluedorn served in numerous senior management positions for United Technologies since 1995, including President, Americas — Otis Elevator Company; President, North America — Commercial Heating, Ventilation and Air Conditioning for Carrier Corporation; and President, Hamilton Sundstrand Industrial. He began his professional career with McKinsey & Company in 1992. A graduate of West Point with a B.S. in electrical engineering, Mr. Bluedorn served in the United States Army as a combat engineer officer and United States Army Ranger from 1985 to 1990. He received his MBA from Harvard University School of Business in 1992.
 
Mr. Bluedorn serves on the Board of Directors, the Governance Committee and the Compensation and Organization Committee of Eaton Corporation, a diversified industrial manufacturer.
 
Mr. Bluedorn possesses considerable industry knowledge and executive leadership experience. Mr. Bluedorn’s extensive knowledge of our Company and its business, combined with his drive for excellence and innovation, position him well to serve as CEO and a director of our Company.
 
graphic
C.L. (Jerry) Henry, 70, has served as a director of our Company since 2000. He is the Chairman of the Board Governance Committee and a member of the Audit Committee. Prior to his retirement, Mr. Henry served as Chairman, President, and CEO of Johns Manville Corporation, a leading manufacturer of insulation and building products, from 1996 to 2004. Mr. Henry served as Executive Vice President and CFO for E. I. du Pont de Nemours and Company, a global science and technology company, from 1993 to 1996.
 
Mr. Henry currently serves on the Board of Directors, as Chairman of the Audit Committee and as a member of the Compensation Committee of MWH, a firm providing water, wastewater, energy, natural resource, program management, consulting, and construction services to clients around the world.
 
As a former CEO and CFO, Mr. Henry contributes a broad knowledge of financial matters, strategy development, risk management, and mergers and acquisitions in his service as a director.
 
 
7

 
 
graphic
Terry D. Stinson, 70, has served as a director of our Company since 1998. He is a member of the Board Governance Committee and the Compensation and Human Resources Committee. Mr. Stinson currently serves as Group Vice President of AAR Corp., an international, publicly traded aerospace manufacturing and services firm. In addition, Mr. Stinson has served as CEO of his own consulting practice, Stinson Consulting, LLC, engaged in strategic alliances and marketing for the aerospace industry, since 2001. From 2002 to 2005, Mr. Stinson served as CEO of Xelus, Inc., a collaborative enterprise service management solution company. From 1998 to 2001, Mr. Stinson was Chairman and CEO of Bell Helicopter Textron Inc., the world’s leading manufacturer of vertical lift aircraft, and served as President from 1996 to 1998. From 1991 to 1996, Mr. Stinson served as Group Vice President and Segment President of Textron Aerospace Systems and Components for Textron Inc. Prior to that position, he was President of the Hamilton Standard Division of United Technologies Corporation, a defense supply company, since 1986.
 
Mr. Stinson previously served on the Board of Directors of Triumph Group, Inc., a company engaged in the manufacturing and repair of aircraft components, subassemblies and systems, from September 2003 to March 2008.
 
 
As a former senior executive of two Fortune 500 companies, Mr. Stinson contributes extensive general management experience in technology-driven businesses, and a thorough knowledge of corporate governance, director recruitment and development, talent management, and strategy development in his service as a director.
 
graphic
Richard L. Thompson, 72, has served as a director of our Company since 1993. He served as Vice Chairman of the Board from February 2005 to July 2006 and was appointed Chairman of the Board in July 2006. Mr. Thompson served as Group President and Member of the Executive Office of Caterpillar Inc., a manufacturer of construction and mining equipment, from 1995 until his retirement in 2004. He joined Caterpillar in 1983 as Vice President, Customer Services. In 1989, he was appointed President of Solar Turbines Inc., a wholly-owned subsidiary of Caterpillar and manufacturer of gas turbines. From 1990 to 1995, he served as Vice President of Caterpillar, with responsibility for its worldwide engine business. Previously, he held the positions of Vice President of Marketing and Vice President and General Manager, Components Operations of RTE Corporation, a manufacturer of electrical distribution products.
 
Mr. Thompson serves on the Board of Directors, as Chairman of the Management Development and Compensation Committee and as a member of the Nominating and Corporate Governance Committee of Gardner Denver, Inc., a manufacturer of air compressors, blowers and petroleum pumps. He also serves on the Board of Directors, as Chairman of the Finance Committee, as a member of the Audit Committee and as a member of the Corporate Governance Committee of NiSource Inc., a natural gas and electric utility. In addition, he is a former Director of the National Association of Manufacturers, the nation’s largest industrial trade association.
 
 
As a former senior executive at a Fortune 50 company, Mr. Thompson contributes extensive experience leading international business units, engineering and product development, and a substantial knowledge of marketing and channel management, in his service as a director.
 
 
8

 
 
The following Class I directors’ terms will continue until the 2014 Annual Meeting of Stockholders:
 
graphic
Janet K. Cooper, 58, has served as a director of our Company since 1999. She is a member of the Audit Committee and the Public Policy Committee. From 2002 to 2008, Ms. Cooper served as Senior Vice President and Treasurer of Qwest Communications International Inc. From 2001 to 2002, she served as Chief Financial Officer (“CFO”) and Senior Vice President of McDATA Corporation, a global leader in open storage networking solutions. From 2000 to 2001, she served as Senior Vice President, Finance of Qwest. From 1998 to 2000, she served in various senior level finance positions at US West Inc., a regional Bell operating company, including Vice President, Finance and Controller and Vice President and Treasurer. From 1978 to 1998, Ms. Cooper served in various capacities with the Quaker Oats Company, including Vice President, Treasurer and Tax from 1997 to 1998 and Vice President, Treasurer from 1992 to 1997.
 
Ms. Cooper serves on the Board of Directors, as Chair of the Audit Committee and as a member of the Finance Committee of The TORO Company, a manufacturer of equipment for lawn and turf care maintenance. Ms. Cooper also serves on the Board of Directors, and as a member of the Audit Committee and the Capital Advisory Committee of MWH, a firm providing water, wastewater, energy, natural resource, program management, consulting, and construction services to clients around the world.
 
 
Ms. Cooper contributes a substantial financial background and extensive experience in capital markets, tax, accounting matters, and pension plan investments in her service as a director.
 
graphic
John W. Norris, III, 54, has served as a director of our Company since 2001. He is the Chairman of the Public Policy committee and a member of the Compensation and Human Resources Committee. Mr. Norris is a co-founder of Maine Network Partners and is the founding Chairman of the Environmental Funders Network. From 2000 to 2005, he served as the Associate Director of Philanthropy for the Maine Chapter of The Nature Conservancy. Mr. Norris was Co-Founder and President of Borealis, Inc., an outdoor products manufacturer, from 1988 to 2000 and served as an economic development Peace Corps Volunteer in Jamaica, West Indies from 1985 to 1987. Before joining the Peace Corps, Mr. Norris completed a graduate school internship at Lennox Industries Inc., a subsidiary of the Company, in 1983.
 
Mr. Norris contributes substantial experience and knowledge on environmental issues, non-governmental organizations, and organizational development in his service as a director.
 
 
 
9

 
 
graphic
Paul W. Schmidt, 67, has served as a director of our Company since 2005. He is the Chairman of the Audit Committee and a member of the Board Governance Committee. In early 2007, Mr. Schmidt retired from his position as Corporate Controller of General Motors Corporation, a position he held since 2002. He began his career in 1969 as an analyst with the Chevrolet Motor Division of General Motors and subsequently served in a wide variety of senior leadership roles for General Motors, including financial, product and factory management, business planning, investor relations and international operations. Mr. Schmidt also served as Director of Capital, Performance and Overseas Analysis in General Motors’s New York Treasurer’s Office.
 
Mr. Schmidt contributes a thorough knowledge of U.S. GAAP and extensive experience in financial statement preparation, accounting matters, and risk management, as well as manufacturing expertise, in his service as a director.
 
 
10

 

PROPOSAL 2:
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
 
The Audit Committee of the Board has appointed KPMG LLP to continue as our independent registered public accounting firm for the 2012 fiscal year. We are asking our stockholders to ratify the appointment of KPMG LLP as our independent registered public accounting firm. If our stockholders do not ratify the appointment, the Audit Committee will consider the reasons for such rejection and whether it should select a different firm; however, it is not required to do so. Even if the appointment is ratified, the Audit Committee, in its discretion, may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our stockholders.
 
A representative of KPMG LLP will be present at the 2012 Annual Meeting of Stockholders and will be available to respond to appropriate questions. The representative will also have an opportunity to make a statement at the meeting if he or she desires to do so.
 
THE BOARD RECOMMENDS A VOTE “FOR” THE RATIFICATION OF
KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE
2012 FISCAL YEAR.
 
Audit and Non-Audit Fees
 
The following table sets forth information as to the fees services rendered by KPMG LLP for each of the last two fiscal years (in thousands).
 
   
2011
   
2010
 
Audit Fees(1)
  $ 3,166     $ 3,299  
Audit-Related Fees(2)
    45       367  
Tax Fees(3)
    196       264  
All Other Fees
    0       0  
TOTAL
  $ 3,407     $ 3,930  
 

 
(1)
Represents fees billed for the audit of our financial statements included in our Annual Report on Form 10-K and review of financial statements included in our Quarterly Reports on Form 10-Q, the audit of our internal control over financial reporting and for services that are provided by KPMG LLP in connection with statutory regulatory filings or engagements.
 
(2)
Represents fees billed for assurance and related services reasonably related to the performance of the audit or review of our financial statements and internal control over financial reporting. Such services in 2011 consisted of due diligence work relating to a business acquisition.  Such services in 2010 consisted of providing a comfort letter in support of a bond offering and due diligence work relating to a business acquisition.
 
(3)
Represents fees billed for tax compliance, including review of tax returns, tax advice, and tax planning.
 
Audit Committee Approval of Audit and Non-Audit Services
 
The Audit Committee pre-approves all audit services provided by our independent registered public accountants. In addition, all non-audit services provided by KPMG LLP are pre-approved in accordance with our policy entitled “Use of External Audit Firm for Non-Attest Services.” The policy identifies services that are specifically prohibited by Securities and Exchange Commission (“SEC”) rules and states that these services may not be performed by our independent registered public accountants. For permissible non-audit services, the Audit Committee has delegated pre-approval authority to the Audit Committee Chairman. In addition, the Audit Committee has approved annual maximum amounts for tax advisory and tax return services. No engagements are commenced until the Audit Committee Chairman’s approval has been received. All approved services are reported to the full Audit Committee at each quarterly meeting.  In accordance with the foregoing, all services provided by KPMG LLP in 2011 were pre-approved by the Audit Committee.
 
 
11

 

AUDIT COMMITTEE REPORT
 
The Audit Committee maintains effective working relationships with the Board, management, the Company’s internal auditors and KPMG, LLP, the Company’s independent registered public accounting firm (the “Independent Accountants”). As set forth in the Audit Committee Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that our Company’s financial statements and disclosures are complete and accurate and in accordance with generally accepted accounting principles and applicable rules and regulations. The Independent Accountants are responsible for auditing the Company’s financial statements and expressing an opinion as to their conformity with generally accepted accounting principles and on the Company’s internal control over financial reporting.
 
The Audit Committee (1) has reviewed and discussed the Company’s audited financial statements for the year ended December 31, 2011 with the Company’s management and with the Independent Accountants; (2) has discussed with the Independent Accountants the matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T; and (3) has received the written disclosures and the letter from the Independent Accountants required by applicable requirements of the Public Company Accounting Oversight Board regarding the Independent Accountants’ communications with the Audit Committee concerning independence, and the Audit Committee has discussed with the Independent Accountants the Independent Accountants’ independence and considered whether the provision of non-audit services by the Independent Accountants to the Company is compatible with Independent Accountants’ independence.
 
Members of the Audit Committee rely, without independent verification, on the information provided to them and on the representations made by management and the Independent Accountants. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not assure that the audits of the Company’s financial statements have been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that the Company’s Independent Accountants are in fact “independent.”
 
Based upon the reviews and discussions described above, and subject to the limitations on the role and responsibilities of the Audit Committee referred to in this report and in the Audit Committee Charter, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
Submitted by the Audit Committee of the Board:
 
Paul W. Schmidt (Chairperson)
C. L. (Jerry) Henry
Janet K. Cooper
Todd J. Teske
 
 
12

 
 
CORPORATE GOVERNANCE
 
Director Independence
 
Our Corporate Governance Guidelines require that a majority of our directors be “independent,” and that the Compensation & Human Resources, Board Governance and Audit Committees consist exclusively of independent directors as independence is defined under the NYSE listing standards, the Securities and Exchange Act of 1934 and any other applicable laws or regulations regarding independence. No director qualifies as “independent” unless the Board of Directors affirmatively determines that the director has no material relationship with the Company.
 
Applying these standards, the Board has determined that a majority of our Board is independent and that all of the members of the Board’s standing committees consist exclusively of independent directors (see table below).
 
In making its determination as to the independence of our directors, the Board Governance Committee and the Board considered the following relationship:
 
 
Mr. Swienton serves as the Chairman and Chief Executive Officer of Ryder System Inc., which provides transportation and logistics services to the Company in the ordinary course of business.
 
Board Meetings and Leadership Structure
 
The Board currently is comprised of 10 members, including 9 independent directors.  Effective at the conclusion of the Annual Meeting, Mr. Bluedorn will serve as the Chairman of the Board and Chief Executive Officer (“CEO”). The Board has determined that Mr. Bluedorn’s position as Chairman will align well with the role he serves between management and the Board of Directors, providing the Board with the benefit of management’s perspective on our business strategy and all other aspects of the business as the Board performs its oversight role. In March 2012, the Board amended our Corporate Governance Guidelines to create a Lead Director position, and elected Richard L. Thompson, the current Chairman, to serve as Lead Director effective at the conclusion of the Annual Meeting. The Board believes the Lead Director position will provide helpful guidance to the independent directors in their oversight of management. The Lead Director, among other things, will preside at all meetings of the Board at which the Chairman is not present, including executive sessions of the independent directors, will serve as liaison between the Chairman and the independent directors, will assist the Chairman in planning agendas for Board meetings and will advise on the quality of the information provided to the Board.  The Lead Director will also have authority to call meetings of the independent directors, and, if requested by major shareholders, is available for consultation and direct communication.
 
The Board met 6 times in 2011. All directors attended in excess of 75% of the total number of meetings of the Board and committees of the Board on which they served. Our Corporate Governance Guidelines include a policy that Board members are expected to attend the annual meeting of stockholders. All of the individuals serving as directors at the time of our 2011 Annual Meeting of Stockholders attended the meeting, including each of the three Class II director nominees.
 
Risk Oversight and Compensation Risk Analysis
 
The Board oversees the Company’s processes to manage risk at the Board and senior management levels. The Audit Committee oversees the guidelines and policies that govern the Company’s processes to assess and manage significant enterprise risk exposure. While the Board and Audit Committee oversee the Company’s risk management, our management is responsible for the development, implementation, and maintenance of our risk management processes. Management provides periodic reports to the Board and Board committees, as appropriate, on its assessment of strategic, operational, legal and compliance, and financial reporting risks to the Company. The Board and Board committees, as appropriate, review and consider the management reports provided on the Company’s enterprise risk and risk management strategy.
 
 
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We have reviewed the Company’s compensation policies and practices to determine if risks arising from those policies and practices are reasonably likely to have a material adverse effect on the Company. Based on such review, we have not identified any risks arising from our compensation policies and practices that are reasonably likely to have a material adverse effect on the Company. For our executive compensation programs, we incorporate short-term and long-term incentive programs for cash and equity awards that are designed to reward successful execution of our business strategy and achievement of desired business results. Additionally, we have stock ownership requirements and clawback provisions to align the interests of our executive officers with the interests of our stockholders. For non-executive employees, we use a variety of incentive compensation programs to motivate our employees to attain individual goals and support the financial performance of the Company. All of our incentive compensation plans are reviewed at least annually by senior management.
 
Board Committees
 
The standing committees of the Board are as follows: Audit, Board Governance, Compensation and Human Resources, and Public Policy. The Board has adopted charters for each of these committees which are available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Committee Charters.” Each of these Board committees is led by a different independent director and the members of each Board committee are all independent directors.
 
The following table provides current membership information for each of the Board committees and indicates which directors (who served during 2011) our Board determined are independent, as independence for directors is defined by the NYSE.
 
Name
   
Independent**
   
Audit
   
Board
Governance
   
Compensation
and Human Resources
   
Public
Policy
 
Richard L. Thompson                                                   
     X        —                —        —    
Todd M. Bluedorn                                                   
     —        —        —        —        —    
Janet K. Cooper                                                   
     X        X        —        —        X    
C.L. (Jerry) Henry                                                   
     X        X        X *      —        —    
John E. Major                                                   
     X        —        X        X *      —    
John W. Norris, III                                                   
     X        —        —        X        X *  
Paul W. Schmidt                                                   
     X        X *      X        —        —    
Terry D. Stinson                                                   
     X        —        X        X        —    
Gregory T. Swienton                                                   
     X        —        —        X        X    
Todd J. Teske                                                   
     X        X        —        —        X    
 

 
*
Committee Chairperson
 
**
In addition, the Board determined that James J. Byrne and Jeffrey D. Storey, M.D., both of whom left the Board during 2011, were independent.
 
Audit Committee
 
The Audit Committee acts pursuant to its written charter adopted by our Board. The Audit Committee assists the Board in fulfilling its oversight responsibilities relating to the integrity of our financial statements and related systems of internal controls, our compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications, independence and performance and the performance of our internal audit function. The Audit Committee also has the direct responsibility for the appointment, compensation, retention and oversight of our Independent Accountants.
 
The Board has determined that each Audit Committee member is independent, as independence for audit committee members is defined by the SEC and the NYSE, is “financially literate” as defined by the NYSE and has accounting or related financial management expertise. The Board has determined that Mr. Schmidt, Chairperson of the Audit Committee, is an audit committee financial expert as defined by the SEC. The Audit Committee met 10 times in 2011.
 
Board Governance Committee
 
The Board Governance Committee assists the Board by identifying individuals qualified to become Board members, developing qualification criteria for Board membership, making recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees, developing and recommending to the Board the Corporate Governance Guidelines and code of conduct applicable to our Company, developing our Company’s director education programs, and overseeing the evaluation of our Board. The Board has determined that each member of the Board Governance Committee is independent as independence for directors is defined by the NYSE. The Board Governance Committee met three times in 2011.
 
 
14

 
 
Compensation and Human Resources Committee
 
The Compensation and Human Resources Committee determines our compensation philosophy and oversees our compensation programs for our executive officers and the non-employee members of our Board. The Committee’s responsibilities include oversight of our short- and long-term incentive plans and our senior management succession plans. The Committee also reviews the funding requirements and investment policies for our defined benefit and defined contribution retirement plans, and the performance of investment funds, investment advisors and investment managers under those plans.
 
The Committee reports to the full Board on a regular basis and seeks Board approval for actions relating to Board compensation and, as of March 2012, the compensation of our CEO. Our CEO makes recommendations to the Committee with respect to various elements of executive compensation. See “Executive Compensation — Compensation Discussion and Analysis” for information concerning the Committee’s philosophy and objectives in overseeing executive compensation. The Board has affirmatively determined that each member of the Committee is independent as independence for compensation committee members is defined by the NYSE. The Board has also determined that each member of the Committee is a “non-employee director” for purposes of Section 16b-3 of the Exchange Act and is an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Committee met five times in 2011.
 
The Committee’s charter authorizes the Committee to retain third-party compensation consultants and to obtain advice and assistance from internal or external legal, accounting or other advisors. The Committee retains Frederic W. Cook & Co., Inc. (“Frederic W. Cook”) as its executive compensation consultant to provide objective analysis, advice and recommendations regarding the compensation of our executives and non-employee directors. See “Executive Compensation — Compensation Discussion and Analysis” for further information regarding our executive compensation programs and the scope of services provided by Frederic W. Cook.
 
Public Policy Committee
 
The Public Policy Committee is responsible for overseeing our Company’s environmental, health and safety issues, and our position on corporate social responsibility and public issues of significance that affect our stakeholders. The Board has determined that each Public Policy Committee member is independent, as independence for directors is defined by the NYSE. The Public Policy Committee met twice in 2011.
 
Director Nomination Process and Nominee Criteria
 
The Board is responsible for approving candidates for Board membership. The Board has delegated the director screening and recruitment process to the Board Governance Committee. In this capacity, the Board Governance Committee develops and periodically reviews the qualification criteria for Board membership, identifies new director candidates, and makes recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees. The Board Governance Committee typically retains a third-party search firm to assist in identifying and evaluating potential new director candidates. Qualifications required of individuals for consideration for Board membership will vary according to the particular areas of expertise, experience and skills being sought as a complement to the existing Board composition at the time of any vacancy.
 
Neither our Board nor our Board Governance Committee has a formal diversity policy. However, our Corporate Governance Guidelines provide that, when nominating new members to the Board, the Board will seek the best qualified candidates with consideration for diversity. This consideration may include diversity of experience, functional expertise and industry knowledge. Our Board of Director Qualification Guidelines further provide that the Board Governance Committee consider a candidate’s diversity of viewpoints in determining the particular qualifications desired for any new Board member.
 
 
15

 
 
According to our Board of Director Qualification Guidelines, the Board Governance Committee considers the following factors in evaluating directors, in addition to such other factors that the Board Governance Committee deems relevant:
 
 
Personal Characteristics:  leadership, integrity, interpersonal skills and effectiveness, accountability and high performance standards;
 
 
Business Attributes:  high levels of leadership experience in business, substantial knowledge of issues faced by publicly-traded companies, experience in positions demonstrating expertise, including on other boards of directors, financial acumen, industry and Company knowledge, diversity of viewpoints and experience in international markets and strategic planning;
 
 
Independence:  independence based on the standards established by the NYSE, the SEC and any other applicable laws or regulations;
 
 
Professional Responsibilities:  willingness to commit the time required to fully discharge his or her responsibilities, commitment to attend meetings, ability and willingness to represent the stockholders’ long and short-term interests, awareness of our responsibilities to our customers, employees, suppliers, regulatory bodies and the communities in which we operate and willingness to advance his or her opinions while supporting the majority Board decision, assuming questions of ethics or propriety are not involved;
 
 
Governance Responsibility:  ability to understand, and distinguish between, the roles of governance and management; and
 
 
Availability and Commitment:  availability based on the number of commitments to other entities existing or contemplated by the candidate.
 
The full text of our qualification guidelines can be found on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Board of Director Qualification Guidelines.”
 
When a vacancy occurs on the Board, the Board Governance Committee may recommend to the Board a nominee to fill the vacancy, or alternatively may recommend that the vacancy remain. The Board Governance Committee also evaluates and recommends to the Board nominees for election to our Board at our Annual Meeting.
 
Stockholder Nominations for Director
 
The Board Governance Committee considers nominees for election to the Board recommended by stockholders in the same manner as other candidates. A stockholder wishing to nominate a candidate for election to the Board at a meeting of the stockholders is required to give written notice to our Corporate Secretary of his or her intention to make a nomination in accordance with the terms of our Bylaws. We must receive the notice of nomination at least 60 days but no more than 90 days prior to the Annual Meeting of Stockholders, or if we give less than 70 days’ notice of the Annual Meeting date, the notice of nomination must be received within 10 days following the date on which notice of the date of the Annual Meeting was mailed or such public disclosure was made to our stockholders.
 
Pursuant to our Bylaws, the notice of nomination is required to contain certain information about both the nominee and the stockholder making the nomination, including information sufficient to allow the Board Governance Committee to determine if the candidate meets our qualification criteria for Board membership. The Board Governance Committee may require that the proposed nominee furnish additional information in order to determine that person’s eligibility to serve as a director. A nomination that does not comply with the above procedure will be disregarded. Stockholder nominees whose nominations comply with the foregoing procedure and who meet the criteria described above under the heading “Director Nomination Process and Nominee Criteria” and in our Corporate Governance Guidelines will be evaluated by the Board Governance Committee in the same manner as the Board Governance Committee’s nominees.
 
 
16

 
 
Stockholder Communications with Directors
 
The following is the process for stockholders to send communications to our Board. Stockholders may send written communications to the Board by email to directors@lennoxintl.com, or by regular mail to 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Board of Directors, c/o Corporate Secretary.
 
Stockholder communications received by the Corporate Secretary will be delivered to one or more members of the Board or management, as determined by the Corporate Secretary. Any allegations of accounting, internal controls or auditing-related complaints or concerns will be directed to the Chairman of the Audit Committee.
 
Interested parties may communicate with non-management directors of the Board by sending written communications to the addresses listed above to the attention of the Chairman of the Board.
 
Other Corporate Governance Policies and Practices
 
Code of Conduct
 
We have adopted a Code of Conduct that applies to all our directors and employees, including our senior financial and principal executive officers. Amendments to and waivers, if any, from our Code of Conduct as it pertains to our executive officers, will be disclosed on our website.  Our Code of Conduct is available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Code of Conduct.”
 
Corporate Governance Guidelines
 
We have adopted Corporate Governance Guidelines that are available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Corporate Governance Guidelines.”
 
Executive Session Meetings
 
In accordance with our Corporate Governance Guidelines, the independent members of our Board, all of whom are non-management directors, meet regularly in executive session without the presence of management. The Chairman of the Board has chaired the executive session meetings of our independent directors.  Effective at the conclusion of the Annual Meeting, the Lead Director will chair the executive session meetings of our independent directors.
 
Whistleblower Procedures
 
The Audit Committee has established procedures for the handling of complaints regarding accounting, internal accounting controls, or auditing matters, including procedures for confidential and anonymous submission by our employees of concerns regarding such matters.
 
 
17

 
 
PROPOSAL 3:
ADVISORY VOTE TO APPROVE THE COMPENSATION OF THE NAMED EXECUTIVE OFFICERS
 
The Company’s stockholders are entitled to vote at the Annual Meeting to approve the compensation of the Company’s NEOs (“Say-on-Pay”), as disclosed in this Proxy Statement. The Say-on-Pay vote is a vote on the advisory resolution below, and it is not binding on the Company or the Board. Although the vote is non-binding, the Compensation and Human Resources Committee and the Board value the opinions of the stockholders and will consider the outcome of the vote when making future compensation decisions.
 
As described more fully in the Compensation Discussion and Analysis section of this Proxy Statement, the Company has designed its NEO compensation program to reward successful execution of our business strategy and achievement of desired business results, with a focus on creating alignment with the interests of our stockholders. Our program seeks to achieve these goals on an annual and long-term basis through a balanced combination of base pay, annual incentives and long-term incentives.
 
The Company also has several governance programs in place to align executive compensation with stockholder interests and mitigate risks in its plans. These programs include: stock ownership guidelines, prohibition of employee hedging of Company stock, and a clawback policy. These programs are discussed in detail in the Compensation Discussion and Analysis section of this Proxy Statement.
 
We are asking stockholders to approve the following advisory resolution at the Annual Meeting:
 
RESOLVED, that the compensation of the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.
 
The Say-on-Pay vote shall be approved if the votes cast in favor of the proposal exceed the votes cast against the proposal. Abstentions will not be counted as either votes cast for or against the proposal. If no voting specification is made on a properly returned or voted proxy card, the proxies named on the proxy card will vote FOR the approval of the compensation of the NEOs.
 
The Board of Directors recommends a vote FOR the approval of the compensation of the
NEOs as disclosed in this Proxy Statement.
 
 
18

 
 
EXECUTIVE COMPENSATION
 
Compensation Discussion And Analysis
 
Overview
 
This Compensation Discussion and Analysis (“CD&A”) describes the philosophy and objectives of the compensation programs for our NEOs. The Compensation and Human Resources Committee of the Board (the “Committee”) establishes and administers our executive compensation programs, practices and policies. The Committee receives input from management and its executive compensation consultant, and considers competitive practices, our business objectives, stockholder interests, regulatory requirements and other relevant factors to develop our executive compensation programs. The Committee reviews, modifies and approves, as appropriate, our executive compensation programs in an effort to provide market-competitive compensation for our executive officers.
 
The Committee also monitors the results of the Say-on-Pay vote and considers those results in determining compensation policies and decisions.  At our 2011 Annual Meeting, over 86% of votes cast on the Say-on-Pay resolution approved the compensation program described in our 2011 proxy statement.  We believe this result demonstrated strong stockholder support for our executive compensation program, and while the Committee did not implement changes to our executive compensation process as a result of the 2011 Say-on-Pay vote, it will continue to consider the outcome of advisory votes when considering future executive compensation actions.
 
Executive Compensation Philosophy and Key Objectives
 
Pay-for-Performance
 
We maintain a pay-for-performance compensation philosophy designed to reward successful execution of our business strategy and achievement of desired business results, with a focus on aligning compensation with the interests of our stockholders. When our financial results exceed expected performance, monetary rewards to our executive officers generally pay out at higher levels. When our financial results fall below expected performance, monetary awards to our executive officers generally pay out at lower levels.
 
Recent payouts under our short- and long-term incentive plans demonstrate the strong link between Company performance and actual payments made to our executives under these programs. In 2011, overall Company performance fell below expectations and, as a result, our NEOs in total experienced over an 85% decrease in annual incentive compensation payouts when compared to 2010. While shareholder return has increased approximately 10% over the past three years, the Company achieved only threshold levels of Return on Invested Capital and Company Core Net Income Growth for the 2009-2011 performance share unit (“PSU”) program, and accordingly, PSUs vested at approximately 50% of target.  The prior PSU program for the 2008-2010 performance period vested at 0%, and accordingly no shares were distributed to our NEOs in 2011 for this program.  These results are consistent with our pay-for-performance approach, which we believe motivates the type of results-oriented culture we strive to achieve at the Company.  The graph below further depicts our pay-for-performance philosophy by showing changes in annual CEO compensation (using Summary Compensation Table totals) versus changes in total shareholder return (“TSR”) over the last several years.
 
 graphic   $ amounts are in thousands.  TSR represents the change in a $100 investment from the end of fiscal year 2007  

 
19

 

Key Strategic Objectives
 
The strategic objectives of our executive compensation programs are to:
 
 
attract, retain and motivate top executive talent;
 
 
align executive compensation programs with the achievement of short-term and long-term business goals;
 
 
maintain market-competitive executive compensation programs; and
 
 
drive increased stockholder value by maintaining a strong alignment between pay and performance.
 
The following table lists each element of executive compensation and how the Committee believes it correlates to our compensation philosophy and key objectives.
 
Executive Compensation Elements
   
Attract
Top
Talent
   
Retain &
Motivate
Top
Talent
   
Achieve
Short-
Term
Goals
   
Achieve
Long-
Term
Goals
   
Maintain
Market
Competiveness
   
Pay for
Performance
 
Base Salary
   
ü
   
ü
               
ü
       
Short-Term Incentive Program
   
ü
   
ü
   
ü
         
ü
   
ü
 
Long-Term Incentive Program
                                                 
Performance Share Units
   
ü
   
ü
           
ü
   
ü
   
ü
 
Restricted Stock Units
   
ü
   
ü
                   
ü
         
Stock Appreciation Rights
   
ü
   
ü
   
ü
   
ü
   
ü
   
ü
 
Perquisites
   
ü
   
ü
                   
ü
         
Benefit Programs
   
ü
   
ü
                   
ü
         
 
Competitive Compensation
 
Market Analysis
 
To maintain a market-competitive program, the Committee uses benchmarking data when establishing executive compensation. Benchmarking against a representative peer group assists us in assessing the competitiveness of our executive compensation programs.
 
Our Company’s compensation peer group, as approved by the Committee, includes the following 15 companies (the “Compensation Peer Group”):
 
●   A. O. Smith Corporation
●   Flowserve Corporation
●   Rockwell Automation, Inc.
●   Acuity Brands, Inc.
●   Gardner Denver, Inc.
●   Snap-On Incorporated
●   Armstrong World Industries, Inc.
●   Kennametal Inc.
●   SPX Corporation
●   Briggs & Stratton Corporation
●   Owens Corning
●   The Timken Company
●   Dover Corporation
●   Pentair, Inc.
●   USG Corporation
 
The Committee selected the members of our Compensation Peer Group using the following criteria:
 
 
industry—building products, electrical components/equipment, household appliances and industrial machinery;
 
 
revenues of approximately 0.5 to 2.0 times our revenues;
 
 
business and product mix similar to ours; and
 
 
international presence and operations.
 
In 2011, the Committee analyzed the membership of the Compensation Peer Group based on the criteria described above, and adjusted the peer group by adding Rockwell Automation, Inc. and Pentair, Inc., and by removing Stanley Black & Decker Inc. and Universal Forest Products Inc. primarily due to the size of their revenues.
 
 
20

 
 
In addition to comparing our executive officer compensation to the compensation provided by our Compensation Peer Group, we also reference published compensation data from compensation databases and other studies of compensation trends and practices (with all such data and practices, including our Compensation Peer Group, collectively referred to as the “Market”).
 
Pay Positioning and Compensation Mix
 
For 2011, the Committee targeted base salary for our NEOs at the 50th percentile of the Market. The Committee set short-term incentive opportunities and long-term incentive planning values between the 50th – 65th percentiles of the Market and included stretch performance goals, allowing us to maintain a strong pay-for-performance link while attracting and retaining leadership talent.
 
The Committee granted a majority of total compensation to our NEOs in the form of non-cash long-term incentive awards. The graphs below illustrate the 2011 target compensation mix for the CEO and the average target compensation mix for the other NEOs.
graphic   graphic
We apply similar methodologies in setting compensation and determining the compensation mix for our CEO as we apply for our other NEOs, but our CEO’s target compensation mix has a greater percentage of “at-risk” performance-based incentive compensation than the target compensation mix of the other NEOs. The Committee established a different compensation mix for our CEO due to his greater influence on Company performance.
 
Process for Determining Named Executive Officer Compensation
 
Role of Management
 
The Committee obtains input from management when making executive compensation decisions. The CEO makes recommendations to the Committee with respect to all of the elements of compensation to be offered to each of the other executive officers. Recommendations are developed in consultation with the Chief Human Resources Officer and the Committee’s compensation consultant, and are accompanied by Market data. The Committee then determines and approves the final compensation elements and amounts to be provided to the Company’s executive officers. The CEO does not make any recommendations regarding his own compensation.
 
In March 2012, the Committee and the Board changed the process for approving CEO compensation.  As a result of this change, the independent members of the Board assumed direct responsibility for approving CEO compensation.  The Committee will continue to review proposed changes to CEO compensation and will make recommendations to the independent members of the Board for approval.
 
 
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Role of the Executive Compensation Consultant
 
In 2011, the Committee engaged Frederic W. Cook to provide analysis, advice and recommendations on executive compensation to the Committee. Frederic W. Cook does not otherwise provide any other services for our Company. At the Committee’s request, Frederic W. Cook performed the following services for the Committee in 2011:
 
 
reviewed and opined on our executive compensation philosophy;
 
 
reviewed and opined on our Compensation Peer Group;
 
 
provided and analyzed data for various elements of executive compensation;
 
 
reviewed and opined on our executive and Board compensation programs; and
 
 
presented executive compensation trends and regulatory updates to the Committee.
 
The Committee analyzed and considered the information provided by management and Frederic W. Cook to determine the appropriate program design and the level and mix of each compensation element for the NEOs.
 
Components and Analysis of 2011 Executive Compensation
 
Base Salary
 
In establishing each NEO’s annual base salary, the Committee considered salary data for the Market, each individual’s experience and responsibilities, our annual merit budget, achievement of performance objectives, internal equity and recommendations provided by the CEO for his direct reports.
 
The following table provides detail regarding 2011 and 2012 base salaries for each NEO.
 
Name
 
Title
   
2011
Annualized
Base Salary
   
Increase% Effective
April 1, 2012
   
2012
Annualized
Base Salary
 
Todd M. Bluedorn
 
Chief Executive Officer
    $ 930,000     5.4 %     $ 980,000  
Robert W. Hau
 
EVP, Chief Financial Officer
      455,000     3.3         470,000  
Harry J. Bizios
 
EVP, President and Chief Operating Officer, Commercial H&C
      387,000     3.4         400,000  
David W. Moon
 
EVP, President and Chief Operating Officer, Worldwide Refrigeration
      370,000     6.8         395,000  
Daniel M. Sessa
 
EVP, Chief Human Resources Officer
      405,000     3.7         420,000  
 
As discussed earlier, in setting NEO base salaries, the Committee used the 50th percentile of the Market as a guideline. The base salary was set within a reasonable range of this guideline for each NEO.
 
As a temporary measure due to weakness in our end markets and uncertainty surrounding the broader economy, the Committee reduced our CEO’s 2011 base salary by 18% and the base salary of our other NEOs by 12% during the last four months of 2011.  The actual base salary that appears in the Summary Compensation Table accounts for this four-month salary reduction.
 
On March 9, 2012, due to the increase in scope in our CEO’s duties to include the role of Chairman of the Board, and consistent with the philosophy of setting NEO base salary near the 50th percentile of the Market, the independent members of the Board approved an increase in our CEO’s annualized base salary to $980,000.  This increase will be effective May 10, 2012 rather than April 1, 2012 to coincide with his effective date as Chairman of the Board.
 
 
22

 
 
Short-Term Incentive Program
 
Our short-term incentive program is a cash-based program for our executive officers designed to reward the successful performance of our Company, our business units and each individual. The CEO proposes to the Committee for review and approval the financial metrics and performance goals that must be achieved for any payouts to be made under our short-term incentive program. The 2011 short-term incentive program is funded based on performance against the financial goals shown below. The final 2011 short-term incentive awards were based 85% on financial performance and 15% on each NEO’s individual performance.
 
Financial Performance.  The following table summarizes the performance goals and payout opportunities under our 2011 short-term incentive program, along with the actual Company and business unit performance for each metric.
 
2011 Short-Term Incentive Program Summary — Financial Performance
($ in millions)
 
Name
   
Metric
   
Weight
   
Threshold
   
Target
   
Maximum
   
Actual
 
All
   
Company Core Net Income(2)
    60 %     $ 133.8     $ 161.4     $ 185.6     $ 107.7  
     
Free Cash Flow(3)
    40 %     $ 95.9     $ 137.0     $ 178.2     $ 33.0  
Payout Opportunity as a % of Target
              50 %     100 %     225 %        
Mr. Bizios(1)
   
Segment Profit(4)
    70 %     $ 65.6     $ 75.0     $ 83.2     $ 70.4  
     
Segment Controllable Cash Flow(5)
    30 %     $ 33.9     $ 42.5     $ 51.1     $ 53.7  
Payout Opportunity as a % of Target
              50 %     100 %     225 %        
Mr. Moon(1)
   
Segment Profit(4)
    70 %     $ 68.0     $ 77.6     $ 86.1     $ 76.5  
     
Segment Controllable Cash Flow(5)
    30 %     $ 43.1     $ 54.0     $ 65.0     $ 51.5  
Payout Opportunity as a % of Target
              50 %     100 %     225 %        
 

 
(1)
All NEOs except Mr. Bizios and Mr. Moon are measured 100% on overall Company financial performance, which earned a 0% of target payout factor. Because Mr. Bizios is the President of our Commercial Heating and Cooling segment, his award is measured 50% on Commercial Heating and Cooling’s financial performance and 50% on overall Company financial performance. Commercial Heating and Cooling’s financial performance resulted in a 120.30% payout factor, which when blended with our Company financial performance factor of 0% resulted in an actual payout as a percentage of target of 60.15%. Because Mr. Moon is the President of our Refrigeration segment, his award is measured 50% on Refrigeration’s financial performance and 50% on overall Company financial performance. Refrigeration’s financial performance resulted in a 92.26% payout factor, which when blended with our Company financial performance factor of 0% resulted in an actual payout as a percentage of target of 46.13%.
 
(2)
We calculate company core net income, which is a non-GAAP financial measure within the meaning of Regulation G of the Exchange Act, as income from continuing operations, adjusted for 2011 restructuring charges,  acquisition expenses,  certain product quality adjustments, certain legal contingency adjustments, goodwill impairment, asset impairment, and unrealized gains on open futures contracts.
 
(3)
We calculate free cash flow, which is a non-GAAP financial measure, as net cash provided by operating activities less capital spending.
 
(4)
We calculate segment profit, which is a non-GAAP financial measure, as earnings from continuing operations before interest expense, other expenses, net and income taxes, adjusted for 2011 restructuring charges, acquisition expenses,  certain product quality adjustments, certain legal contingency adjustments, goodwill impairment, asset impairment,  and unrealized gains on open futures contracts.
 
(5)
We calculate controllable cash flow, which is a non-GAAP financial measure, as segment profit, defined above, less capital spending, plus or minus changes in accounts receivable, inventory and accounts payable.
 
Individual Performance.  The Committee uses individual performance to supplement financial performance in order to further align pay with performance. After an NEO’s short-term incentive payout is calculated based exclusively on Company financial performance as described above, that result may be decreased by as much as 15%, or increased by up to 33.75%, to recognize individual performance.  The individual performance component is measured against specific financial, operational, strategic, and leadership objectives established for each NEO in advance of the performance measurement period as part of our performance management process. After the end of the fiscal year, the CEO reviews with the Committee the extent of achievement of these objectives by each NEO. The Committee then determines and approves the individual performance component for each executive officer, including the CEO.
 
 
23

 
 
Targets and Payouts.  Under the short-term incentive program, target payout opportunities are determined as a percentage of base salary. The target payout opportunities are based on Market data using the 50th – 65th percentiles as a guideline. The Committee adjusted the CEO’s 2011 short-term incentive target payout opportunity to 125% from 120%, effective for fiscal year 2011. After this adjustment, each NEO’s target percentage fits within this guideline.
 
Based on analysis of the Market data and internal equity considerations, the Committee set the following short-term incentive targets for 2011. Based on actual financial and individual performance, the Committee approved the following 2011 payouts for each NEO.
 
2011 Short-Term Incentive Targets and Payouts
 
Name
   
2011 STI Target as a
% of Base Salary
   
2011 STI Target
   
2011 STI Payout
   
2011 STI Payout as a
% of Target
 
Mr. Bluedorn
    125 %     $ 1,077,125     0       0 %  
Mr. Hau
    70         303,135     0       0    
Mr. Bizios
    70         258,139     155,271       60.15    
Mr. Moon
    70         245,140     148,083       60.41    
Mr. Sessa
    70         269,885     0       0    
 
The Committee may, in its discretion, modify the short-term incentive program to account for unusual events or revised business objectives that occur during the performance period. The Committee did not make any such modifications in 2011.
 
We include the short-term incentive payments made to the NEOs for 2011, which were approved by the Committee and paid on March 15, 2012, in the Summary Compensation Table under “Non-Equity Incentive Plan Compensation.”
 
The Committee also provided Mr. Bluedorn, Mr. Hau and Mr. Sessa a one-time bonus based on their individual performance leading to our 2011 business results. These amounts are included in the “Bonus” column of the Summary Compensation Table.
 
Long-Term Incentive Program
 
We have a long-term incentive program designed to incent those employees who have principal responsibility for our long-term profitability. We believe participation in our long-term incentive program helps align the interests of our NEOs with the interests of our stockholders.
 
We use a mix of PSUs, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) in our long-term incentive program. PSUs and SARs, which are granted under the Lennox International Inc. 2010 Incentive Plan, as amended and restated (the “LII Incentive Plan”), reward performance, as measured by achievement of specified financial objectives for PSUs and stock price growth for SARs. RSUs help us to retain key members of management because of their time-based vesting. The Committee allocated the mix of elements in our long-term incentive program in a manner designed to drive Company performance, retain key talent, and provide competitive compensation.
 
 
24

 
 
For 2011, the long-term incentive allocations for our NEOs were as follows:
graphic   graphic
The Committee determines the grant date for all long-term incentive awards. The Committee generally grants awards on an annual basis at its regularly scheduled December meeting. Although awards may be granted in special circumstances or upon hire for certain executives, no out-of-cycle grants were made to any NEO in 2011. The Committee does not coordinate the grant date for any award with the release of material non-public information. The Committee sets the exercise price of our SARs at 100% of fair market value, which is defined as the average of the high and low NYSE trading prices of our common stock on the date of grant.
 
The target planning values under our long-term incentive program are based on publicly available Market data for similar executive officer positions using the 50th – 65th percentiles as a guideline. In December 2011, the Committee established the 2011 target planning values between the 50th – 65th percentiles of the Market which remained flat to the targets set in 2010. When determining the actual award sizes for each NEO, the Committee considered the NEO’s individual performance and potential, the NEO’s impact on the financial performance of our Company, internal equity, and the number of shares available for grant under the LII Incentive Plan.
 
Once the Committee determined the actual long-term incentive planning value for each NEO for the 2011 grants, 50% of the value was provided as PSUs, 30% as RSUs and 20% as SARs. The specific number of PSUs and RSUs granted was determined by dividing the corresponding planning value by the fair market value of our common stock on the NYSE averaged over the 30 calendar days ending on November 30, 2011. The specific number of SARs granted was determined by dividing the corresponding planning value by the Black-Scholes value of our common stock based on the 30 calendar day average of our common stock as of November 30, 2011. Although we determined the number of awards based on the 30 day average of our common stock as of November 30, 2011 for planning purposes, the grant date fair value and the SAR exercise price are determined on the actual date of grant.
 
 
25

 

 
The following table summarizes the planning values and number of awards granted for each NEO:
 
     
December 2011 Planning Value
   
Number of Awards Granted
 
Name
   
PSUs
   
RSUs
   
SARs
   
Total
   
PSUs(1)
   
RSUs(1)
   
SARs(2)
   
Total
 
Mr. Bluedorn
    $ 1,850,000     $ 1,110,000     $ 740,000     $ 3,700,000       58,226       34,935       83,146       176,307  
Mr. Hau
      425,000       255,000       170,000       850,000       13,376       8,026       19,101       40,503  
Mr. Bizios
      425,000       255,000       170,000       850,000       13,376       8,026       19,101       40,503  
Mr. Moon
      425,000       255,000       170,000       850,000       13,376       8,026       19,101       40,503  
Mr. Sessa
      425,000       255,000       170,000       850,000       13,376       8,026       19,101       40,503  
 

 
(1)
The number of PSUs granted and the number of RSUs granted were determined based on the average of the closing price of the Company’s common stock on the NYSE over the 30 calendar day period ending November 30, 2011 ($31.773).
 
(2)
The number of SARs granted was determined based on the Black-Scholes value of our common stock calculated using the 30 calendar day average of our common stock as of November 30, 2011 ($8.90).
 
PSUs.  To maintain our strong focus on Company performance, we granted 50% of the December 2011 long-term incentive award in the form of PSUs. PSUs generally vest at the end of a three-year performance period. If the threshold performance level has been achieved at the end of the performance period, the PSUs, to the extent earned, are distributed in the form of Company common stock. Dividends are not earned or paid on PSU awards during the three-year performance period. The Committee determines the measurement criteria annually, in consultation with the CEO, and in consideration of the financial metrics selected for the short-term incentive program as well as other metrics that enhance stockholder value. The Committee certifies the financial performance levels following the end of the performance period and the Company distributes any earned shares. We believe that the degree of difficulty in achieving these metrics is challenging.
 
The following table summarizes the key attributes of the PSUs granted in December 2008, which vested on December 31, 2011, and sets out financial performance goals and payout opportunities versus actual performance.
 
December 2008 PSU Grant
(for the January 1, 2009 — December 31, 2011 Performance Period)
 
Metric (1)
   
Weight
 
Measurement Period
 
Threshold
   
Target
   
Maximum
   
Actual
 
Return on Invested Capital (“ROIC”)
    50 %  
3-year weighted average (20% lowest year, 40% other two years)
  15 %     19 %     23 %     15.4 %  
Company Core Net Income Growth
    50 %   
3-year compound annual growth rate
  -10 %     6 %     12 %     -10.0 %  
Payout as a % of Target Award
              50 %     100 %     200 %     52.5 %  
 

 
(1)
Company core net income and the net operating profit after tax component of ROIC were adjusted for 2011 restructuring charges,  acquisition expenses,  certain product quality adjustments, certain legal contingency adjustments, goodwill impairment, asset impairment, unrealized gains on open futures contracts, pension settlements and curtailments, and certain other employment-related costs.
 
In 2011, NEOs earned a 52.5% of target payout for the PSUs granted in December 2008. The payout value is reflected in the Fiscal 2011 Option Exercises and Stock Vested Table in the “Stock Awards — Value Realized on Vesting” column.
 
 
26

 

The following table summarizes the key attributes of the PSUs granted in December 2011. The Committee established the ROIC performance goals based on its assessment of desired return relative to the cost of capital as well as historical and projected ROIC outcomes. Similarly, the Committee set our Company core net income growth performance goals based on historical results, projected outcomes of that measure, and expected market conditions.
 
December 2011 PSU Grant
(for the January 1, 2012 — December 31, 2014 Performance Period)
 
Metric
 
Weight
 
Rationale for
Selection
 
Measurement Period
 
Threshold
   
Target
   
Maximum
 
ROIC
   50 %  
Measures
efficient use of
capital; higher
ROIC correlates
to greater cash
flow
 
Three-year weighted
average (20% lowest year,
40% other two years)
 
No payout occurs unless ROIC exceeds LII’s cost of capital
 
Company Core
Net Income
Growth
  50 %  
Measures
profitability;
higher Company
core net income
correlates with
higher earnings
per share
Three-year compound
annual growth rate
 
Maximum payout requires mid-teens core net income
compound annual growth rate
 
Payout as a % of Target Award
    50 %     100 %     200 %  
 
The PSUs granted to our NEOs in 2011 are included in the Fiscal 2011 Grants of Plan-Based Awards Table in the “Estimated Future Payouts Under Equity Incentive Plan Awards” column.
 
RSUs.  To support our retention efforts, the Committee granted the NEOs 30% of the December 2011 long-term incentive award in the form of RSUs. RSUs generally vest and are distributed in shares of our common stock three years following the date of grant if the recipient remains an employee of the Company and all other conditions of the award are met. Dividends are not earned or paid on RSUs during the three-year vesting period. The number of shares underlying RSUs granted to our NEOs in 2011 is included in the Fiscal 2011 Grants of Plan-Based Awards Table in the “All Other Stock Awards: Number of Shares of Stock or Units” column.
 
SARs.  To incentivize NEOs to grow our business and deliver increased returns to our stockholders, the Committee granted the NEOs 20% of the December 2011 award in the form of SARs. SARs vest in one-third increments on each anniversary of the date of grant. Upon the exercise of vested SARs, the increase, if any, between the fair market value of our common stock on the date of grant and the fair market value on the date the SAR is exercised is paid in Company common stock. SARs granted in 2011 expire seven years from the date of grant. The number of SARs granted to our NEOs in 2011 is included in the Fiscal 2011 Grants of Plan-Based Awards Table in the “All Other Option Awards: Number of Securities Underlying Options” column.
 
Perquisites
 
We believe providing reasonable perquisites is a market-competitive practice to attract and retain top executive talent. However, rather than offering individual perquisites, we provide a monthly cash stipend to allow each NEO more flexibility and choice. Our NEOs have full discretion on how the cash stipend is spent and it is not tracked by the Company after the money is paid. In addition, we offer the installation of Company products and equipment at each NEO’s home to promote our brand to both business and personal guests.
 
Benefit Programs
 
To attract and retain top executive talent and as a market-competitive practice, we provide certain benefit programs to our NEOs that are in addition to those provided to our general employee population. The following table summarizes the additional benefit programs in place during 2011 and the purpose of each program. The aggregate change in the actuarial present value of accumulated pension benefits (as shown in the Summary Compensation Table) that accrued during 2011 under our Supplemental Retirement Plan is mostly due to changes in the valuation discount rate.
 
 
27

 
 
Additional Benefit Programs Offered to NEOs in 2011
 
Plan
 
Type
 
Purpose
Supplemental Retirement Plan
 
Non-Qualified Defined Benefit
 
Provide market-competitive executive level retirement benefit opportunity by providing higher accruals and permitting accruals that otherwise could not occur because of the Code limitations on compensation.
Life Insurance Plan
 
Company-Sponsored Life Insurance
 
Provide market-competitive executive level life insurance benefits; minimum of $3 million in coverage for CEO and minimum of $1 million for other NEOs.
 
Additional Information Regarding Executive Compensation
 
Following are descriptions of other agreements and policies that are important to a stockholder’s understanding of the Company’s overall executive compensation program structure.
 
Employment Agreements and Change in Control Agreements
 
We have employment agreements and change in control (“CIC”) agreements with each NEO that have been reviewed and approved by the Committee. We believe employment agreements are necessary to attract and retain top executive talent and for financial and business planning purposes. We believe CIC agreements are necessary to (1) retain key executives during periods of uncertainty; (2) enable executives to evaluate, negotiate and execute a CIC transaction more objectively; (3) encourage executives to remain focused on running the business rather than seeking other employment in the event of a possible CIC; (4) preserve stockholder value by providing continuity of management during a transition period; and (5) provide benefit to the Company in the form of restrictive covenants.
 
Since we pay compensation under our CIC agreements only if defined triggering events occur, we evaluate compensation to be provided under these agreements in isolation from the rest of the executive’s compensation package. Our employment agreements and CIC agreements, and the potential costs associated with each, are discussed in detail under “Potential Payments Upon Termination or Change in Control.”
 
Stock Ownership Guidelines
 
The Company has stock ownership guidelines for the CEO and other executive officers. We believe stock ownership by executives helps align the interests of the executives with the interests of our stockholders and motivates the executives to build long-term stockholder value. For purposes of the guidelines, ownership includes shares of Company common stock and RSUs that have not yet vested, but does not include unvested performance-based PSUs or SARs.
 
The following chart sets forth as of December 31, 2011, for each NEO, the stock ownership requirements as a percentage of base salary, the total number of shares counted toward the stock ownership requirements, the value of the shares counted toward the stock ownership requirements as a percentage of base salary and the deadline for compliance with the stock ownership requirements:
 
           
Current Level of Stock Ownership
     
Name
   
Ownership
Requirement as a % of
Base Salary
   
Total Number of
Shares
   
Stock Ownership as % of
Base Salary (1)
   
Deadline for
Compliance with Stock
Ownership Guidelines
Mr. Bluedorn
    500 %     177,249       774 %    
December 31, 2014
Mr. Hau
    300       30,166       269      
December 31, 2014
Mr. Bizios
    300       72,517       761      
December 31, 2014
Mr. Moon
    300       68,379       751      
December 31, 2014
Mr. Sessa
    300       45,465       456      
December 31, 2014
   

 
(1)
Based on the average daily closing price for 2011 of $40.61.
 
 
28

 
 
The Committee oversees and administers the stock ownership guidelines. In the event an executive officer fails to meet the guidelines by the compliance deadline, the Committee will determine any appropriate action or corrective measures to be taken.
 
Clawback Policy
 
Our Company has adopted a formal incentive compensation clawback policy for the CEO and other executive officers. Under this policy, in the event of any fraud or misconduct that results in a restatement of our Company’s financial results within three years of the filing of the original financial results, the Committee has the right to recoup and cancel cash and equity-based incentive compensation of each person involved in such fraud or misconduct.
 
Prohibition on Hedging Policy
 
The Company’s Insider Trading Policy prohibits directors, executive officers and all other employees from trading in any interest, security or position relating to the future price of Company securities, such as a put, call, swap, short sale, hedge or any other type of derivative security.
 
Tax and Accounting Implications
 
Section 162(m) Compliance
 
The Committee carefully considers the income tax consequences to our Company when analyzing our executive compensation programs. Section 162(m) of the Code limits a Company’s ability to deduct compensation paid in excess of $1 million to certain NEOs, unless the compensation meets certain stockholder-approved performance requirements. The Committee has designed several elements of our executive compensation programs to qualify for the “performance-based” exemption. For example, our short-term incentive program, PSUs and SARs are performance-based and exempt from the limitations imposed by Section 162(m) of the Code. If granting awards or providing other executive compensation is consistent with Market data, our compensation philosophy or our strategic business goals, the Committee may provide executive compensation that is not fully deductible. For example, our awards of RSUs meet our objective of key talent retention, but do not meet the performance-based exemption.
 
Nonqualified Deferred Compensation
 
In addition to the non-qualified Supplemental Retirement Plan discussed previously, our Company also maintains a frozen non-qualified Profit Sharing Restoration Plan. Both of these deferred compensation plans are administered in compliance with Section 409A of the Code.
 
Accounting for Stock-Based Awards
 
When developing each element of NEO compensation, the Committee considered the accounting consequences (in accordance with the requirements of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation — Stock Compensation (“FASB ASC Topic 718”)) of the program design and award levels. The Committee reviewed accounting cost models and structured our executive compensation programs in a manner that considered the cost and benefits of the various program elements.
 
Compensation Committee Report
 
The Compensation and Human Resources Committee has reviewed and discussed the foregoing CD&A with management. Based on this review and discussion, the Committee recommended to the Board that the CD&A be included in this Proxy Statement and incorporated by reference in our Annual Report on Form 10-K for fiscal year ended December 31, 2011, which was filed with the SEC on February 16, 2012.  Submitted by the Compensation and Human Resources Committee of the Board:
 
John E. Major (Chairperson)
John W. Norris, III
Terry D. Stinson
Gregory T. Swienton
 
 
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Summary Compensation Table
 
The following table provides information regarding the total compensation of each of the Company’s NEOs for the fiscal year ended December 31, 2011. The table also sets forth fiscal 2009 and fiscal 2010 compensation information for the Company’s NEOs where applicable.
 
Name and Principal Position
   
Year
   
Salary
($)
   
Bonus
($)(1)
   
Stock
Awards
($)(2)
   
Option Awards
($)(3)
   
Non-Equity Incentive Plan Compensation
($)
   
Change
in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)(4)
   
All
Other
Compensation
($)(5)
   
Total
($)
 
Todd M. Bluedorn
   
2011
      861,700       107,713       2,960,377       781,107       0       917,728       46,335       5,674,960  
Chief Executive Officer
   
2010
      867,000       0       2,873,155       745,475       1,897,065       485,880       47,545       6,916,120  
     
2009
      828,000       0       2,564,885       669,826       880,000       243,389       46,010       5,232,110  
Robert W. Hau
   
2011
      433,050       60,627       680,091       179,442       0       454,977       45,347       1,853,535  
Executive Vice President
   
2010
      436,250       0       649,351       168,478       556,821       0       555,450       2,366,350  
and Chief Financial Officer
   
2009
      103,030       425,000       956,262       164,749       69,909       0       86,489       1,805,439  
Harry J. Bizios
   
2011
      368,770       0       680,091       179,442       155,271       422,360       46,945       1,852,880  
Executive Vice President,
President and Chief
Operating Officer, Commercial H&C
   
2010
      372,750       0       649,351       168,478       489,939       214,209       47,347       1,942,075  
David W. Moon
   
2011
      350,200       0       680,091       179,442       148,083       394,464       45,316       1,797,597  
Executive Vice President,
                                                                       
President and Chief Operating Officer,
Worldwide Refrigeration
                                                                       
Daniel M. Sessa
   
2011
      385,550       53,977       680,091       179,442       0       256,989       45,380       1,601,430  
Executive Vice President
   
2010
      388,444       0       649,351       168,478       495,802       145,711       45,705       1,893,492  
and Chief Human Resources Officer
2009
      377,775       0       630,864       164,749       247,998       80,257       45,060       1,546,703  
 

 
(1)
The 2011 amounts reported in the “Bonus” column for Mr. Bluedorn, Mr. Hau and Mr. Sessa represent a one-time bonus for their individual performance leading to our 2011 business results.  The 2009 amount reported in the “Bonus” column for Mr. Hau represents a one-time sign on bonus.
 
(2)
The amounts shown represent the grant date fair value of the aggregate amount of all stock awards (prior to any assumed forfeitures related to service-based vesting conditions, where applicable) for each year, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, in connection with RSUs and PSUs granted under the LII Incentive Plan. Assumptions used in calculating these amounts are described in Note 17 to our audited financial statements for the fiscal year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on February 16, 2012. Amounts for PSUs reflect the most probable outcome for the awards at December 31, 2011 valued at the date of grant in accordance with FASB ASC Topic 718. If the PSUs were valued at maximum performance levels, the total PSU value at grant date would equal:
 
Name
   
Year
 
PSU Value at Maximum
Performance Levels ($)
 
Todd M. Bluedorn
   
2011
    3,700,495    
     
2010
    3,591,433    
     
2009
    3,206,114    
Robert W. Hau
   
2011
    850,098    
     
2010
    811,689    
     
2009
    788,572    
Harry J. Bizios
   
2011
    850,098    
     
2010
    811,689    
David W. Moon
   
2011
    850,098    
Daniel M. Sessa
   
2011
    850,098    
     
2010
    811,689    
     
2009
    788,572    
 
(3)
The amounts shown represent the grant date fair value of the aggregate amount of all SAR awards (prior to any assumed forfeitures related to service-based vesting conditions, where applicable) for each year, in accordance with FASB ASC Topic 718, in connection with SARs granted under the LII Incentive Plan. Assumptions used in calculating these amounts are included in Note 17 to our audited financial statements for the fiscal year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on February 16, 2012.
 
 
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(4)
The amounts shown represent the aggregate change in the actuarial present value of accumulated pension benefits that accrued during the applicable year under our Supplemental Retirement Plan and frozen Consolidated Pension Plan, each as discussed below, as a result of changes in the valuation discount rate, changes in compensation, and an additional one year of service. No above-market interest on nonqualified deferred compensation was earned.
 
(5)
The amounts shown include perquisites and other compensation. The following table identifies the separate amounts attributable to each category of perquisites and other compensation in 2011 for each NEO.
 
     
Perquisites
   
Other Compensation
       
Name
   
Cash
Stipend
   
Company
Equipment
and Installation
   
Matching
Charitable
Contributions
   
Term Life
Insurance
Premiums
   
Retirement
Contributions
   
Other
   
Total
 
Todd M. Bluedorn
    $ 30,000                     $ 1,635       $ 14,700             $ 46,335  
Robert W. Hau
      30,000                        647         14,700               45,347  
Harry J. Bizios
      30,000             $ 1,000         582         14,700     $ 663         46,945  
David W. Moon
      30,000                       616         14,700               45,316  
Daniel M. Sessa
      30,000     $ 205                 475         14,700               45,380  
 
The values attributable to each item listed above are calculated as follows:
 
 
Cash Stipend — based on actual cash paid to each NEO in lieu of individual perquisites.
 
 
Company Equipment and Installation — Company equipment is based on the purchase price of the equipment, adjusted in accordance with our employee rebate program, and installation of such equipment is based on the incremental cost for installation paid by our Company in 2011.
 
 
Matching Charitable Contributions — we offer an employee matching charitable contribution program to all employees to promote our community values by matching gifts up to $1,000 per year. The value for this table is based on contributions made on the NEO’s behalf and accrued in 2011.
 
 
Term Life Insurance Premiums — our NEOs participate in the same life insurance programs as our general employee population; however, all are guaranteed minimum coverage of $1 million or, in the case of Mr. Bluedorn, minimum coverage of $3 million. The amounts shown are based on the incremental cost paid in 2011 on behalf of each NEO for Basic Life and Basic Accidental Death and Dismemberment over and above the premiums we would otherwise pay under our life insurance programs for other employees.
 
 
Retirement Contributions — based on Company contributions made under our qualified 401(k) Plan in 2011.
 
 
31

 
 
Fiscal 2011 Grants of Plan-Based Awards
 
The following table provides information regarding short-term incentive awards and long-term incentive awards (PSUs, RSUs and SARs) granted under the LII Incentive Plan to our NEOs in 2011.
 
           
Estimated Possible
Payouts Under
Non-Equity Incentive Plan
Awards(1)
   
Estimated Future Payouts
Under Equity Incentive Plan

Awards(2)
   
All
Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
(3)
   
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
(4)
   
Exerciseor
Base
Price of
Option
Awards
($/Sh)
(5)
   
Closing
Market
Price on
Dateof
Grant
($/Sh)
   
Grant
Date
Fair
Value
of Stock
and Option
Awards
($)
(6)
 
Name
   
Grant
Date
   
Threshold ($)
   
Target
($)
   
Max.
($)
   
Threshold (#)
   
Target
(#)
   
Max.
(#)
                               
Todd M. Bluedorn
          538,563       1,077,125       2,423,531                                                  
     
12/8/11
                        29,113       58,226       116,452                               1,850,248  
     
12/8/11
                                          34,935                         1,110,129  
     
12/8/11
                                                83,146       34.06       33.65       781,107  
Robert W. Hau
          151,568       303,135       682,054                                                  
     
12/8/11
                        6,688       13,376       26,752                               425,049  
     
12/8/11
                                          8,026                         255,042  
     
12/8/11
                                                19,101       34.06       33.65       179,442  
Harry J. Bizios
          129,070       258,139       580,813                                                  
     
12/8/11
                        6,688       13,376       26,752                               425,049  
     
12/8/11
                                          8,026                         255,042  
     
12/8/11
                                                19,101       34.06       33.65       179,442  
David W. Moon
          122,570       245,140       551,565                                                  
     
12/8/11
                        6,688       13,376       26,752                               425,049  
     
12/8/11
                                          8,026                         255,042  
     
12/8/11
                                                19,101       34.06       33.65       179,442  
Daniel M. Sessa
          134,943       269,885       607,241                                                  
     
12/8/11
                        6,688       13,376       26,752                               425,049  
     
12/8/11
                                          8,026                         255,042  
     
12/8/11
                                                19,101       34.06       33.65       179,442  
 

 
(1)
The amounts shown represent award opportunities under our short-term incentive program for 2011. The actual awards were paid on March 15, 2012 in the amounts included in the Summary Compensation Table.
 
(2)
The amounts shown represent the number of PSUs granted, which to the extent earned, will vest and be distributed in shares of our common stock at the end of the three-year performance period ending December 31, 2014.
 
(3)
The amounts shown represent the number of RSUs granted, which vest and will be distributed in shares of our common stock on the third anniversary of the date of grant.
 
(4)
The amounts shown represent the number of SARs granted, which vest in one-third increments on each anniversary of the date of grant and expire seven years from the date of grant.
 
(5)
The amounts shown reflect the exercise price of SARs granted, based on the average of the high and low NYSE trading prices of our common stock on the date of grant.
 
(6)
The amounts shown represent the grant date fair values of PSUs, RSUs and SARs, calculated in accordance with FASB ASC Topic 718. The grant date fair value for SARs was determined using the Black-Scholes valuation model. The grant date fair value for the RSU and PSU awards equals the dividend-discounted value of our common stock on the date of grant. The assumptions used to calculate the grant date fair values of such awards are set forth below.
 
     
Assumptions
   
FMV Based on
Average High/
Low NYSE Trading

Prices on Date of
Grant ($)
    Grant Date
Fair Value
 
                       
Risk Free Interest Rate
(%)
 
Grant Date  
Award
 
Volatility
(%)
   
Expected Life
(Years)
   
Dividend Yield
(%)
  Per Share
($)
12/8/2011
RSU
              2.32             34.06       31.7770    
12/8/2011
PSU
              2.32              34.06       31.7770    
12/8/2011
SAR
  41.94       4.07       2.39       0.62       34.06       9.3944    

 
32

 
 
Outstanding Equity Awards at Fiscal 2011 Year-End
 
The following table provides information regarding all outstanding equity awards held by our NEOs as of December 31, 2011.
 
     
Option/SAR Awards(1)
   
Stock Awards
 
Name
   
Number of
Securities
Underlying
Unexercised
Options/
SARs(#)
Exercisable(1)
   
Number of
Securities
Underlying
Unexercised
Options/
SARs (#)
Unexercisable(1)
   
Option/
SAR
Exercise
Price
($/Sh)(2)
   
Option/
SAR
Expiration
Date
   
Number of
Shares or
Units of
Stock
That Have
Not
Vested
(#)(3)
   
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($)(4)
   
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)(5)
   
Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not
Vested
($)(4)
 
Todd M. Bluedorn
      48,025       0       35.820    
12/08/13
      86,241       2,910,634       143,736       4,851,090  
        81,437       0       34.520    
12/06/14
                                 
        103,976       0       28.240    
12/11/15
                                 
        40,730       20,366       36.935    
12/10/16
                                 
        18,070       36,142       46.780    
12/09/17
                                 
        0       83,146       34.060    
12/08/18
                                 
Robert W. Hau
      10,018       5,009       36.935    
12/10/16
      30,166       1,018,103       33,609       1,134,304  
        4,084       8,168       46.780    
12/09/17
                                 
        0       19,101       34.060    
12/08/18
                                 
Harry J. Bizios
      5,452       0       29.355    
12/09/12
      22,384       755,471       33,609       1,134,304  
        17,062       0       30.845    
12/08/13
                                 
        20,359       0       34.520    
12/06/14
                                 
        25,994       0       28.240    
12/11/15
                                 
        10,018       5,009       36.935    
12/10/16
                                 
        4,084       8,168       46.780    
12/09/17
                                 
        0       19,101       34.060    
12/08/18
                                 
David W. Moon
      2,717       0       29.355    
12/09/12
      20,742       700,039       33,609       1,134,304  
        17,062       0       30.845    
12/08/13
                                 
        20,359       0       34.520    
12/06/14
                                 
        25,994       0       28.240    
12/11/15
                                 
        10,018       5,009       36.935    
12/10/16
                                 
        4,084       8,168       46.780    
12/09/17
                                 
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