Illinois Tool Works Inc.

3600 West Lake Avenue

Glenview, Illinois 60026

 

Notice of Annual Meeting of Stockholders

Friday, May 2, 2008

3:00 P.M.

The Northern Trust Company

50 South LaSalle Street

Chicago, Illinois 60603

 

 

ITW is holding its 2008 Annual Meeting for the following purposes:

 

 

The Board of Directors recommends that you vote FOR each of the director nominees, FOR the reapproval of the performance factors and award limit under the Executive Incentive Plan and FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants for 2008.

 

Stockholders of record on March 4, 2008 are entitled to vote.

 

It is important that your shares are represented at the Annual Meeting whether or not you plan to attend. To be certain that your shares are represented, please sign, date and return the enclosed proxy card as soon as possible or vote by telephone or the internet by following the instructions on the proxy card. You may revoke your proxy at any time before it is voted at the Annual Meeting.

 

Our Annual Report for 2007 is enclosed.

By Order of the Board of Directors,
James H. Wooten, Jr.

Secretary

 

March 24, 2008

 

Illinois Tool Works Inc.

 

Proxy Statement

Table of Contents

 

 

You may review and download a copy of ITW’s Annual Report on Form 10-K for the year ended December 31, 2007, including schedules, that we filed with the Securities and Exchange Commission by accessing our website, www.itw.com, or you may request a paper copy by writing to: James H. Wooten, Jr., Secretary, Illinois Tool Works Inc., 3600 West Lake Avenue, Glenview, Illinois 60026.

 

This proxy statement and our Annual Report for 2007 are available at www.proxyvote.com.

 

This proxy statement and form of proxy are first being sent to stockholders on or about March 24, 2008.

 

Following are questions often asked by stockholders of publicly held companies. We hope that the answers will assist you in casting your vote.

 

What am I voting on?

 

We are soliciting your vote on:

 

 

Who may vote?

 

Stockholders at the close of business on March 4, 2008, the record date, may vote. On that date, there were 524,837,261 shares of ITW common stock outstanding.

 

How many votes do I have?

 

Each share of ITW common stock that you own entitles you to one vote.

 

How do I vote?

 

You may vote your shares in one of the following four ways:

 

1.		By mail:		Complete the proxy card and sign, date and return it in the enclosed envelope;
2.		By telephone:		Call the toll-free number on the proxy card, enter the 12-digit control number from the proxy card, and follow the recorded instructions;
3.		By internet:		Go to the website listed on the proxy card, enter the 12-digit control number from the proxy card, and follow the instructions provided; or
4.		In person:		Attend the Annual Meeting, where ballots will be provided.

 

If you hold your shares through a bank or broker that does not offer telephone or internet voting, please complete and return your proxy card by mail.

 

How does discretionary voting authority apply?

 

If you sign, date and return your proxy card, your vote will be cast as you direct. If you do not indicate how you want to vote, you give authority to Marvin D. Brailsford, Susan Crown and Harold B. Smith to vote on the items discussed in these proxy materials and on any other matter that is properly raised at the Annual Meeting. If you do not indicate how you want to vote, your proxy will be voted FOR the election of each director nominee, FOR the reapproval of the performance factors and award limit under the Executive Incentive Plan, FOR the ratification of the appointment of Deloitte & Touche LLP as our independent public accountants

and FOR or AGAINST any other properly raised matter at the discretion of Ms. Crown and Messrs. Brailsford and Smith.

 

May I revoke my proxy?

 

You may revoke your proxy at any time before it is voted at the Annual Meeting in one of four ways:

 

 

4. Vote in person at the Annual Meeting.

 

What does it mean if I receive more than one proxy card?

 

Your shares are likely registered differently or are in more than one account. You should sign and return all proxy cards to guarantee that all of your shares are voted.

 

What constitutes a quorum?

 

The presence, in person or by proxy, of the holders of a majority of ITW shares entitled to vote at the Annual Meeting constitutes a quorum. Your shares will be considered part of the quorum if you return a signed and dated proxy card or if you vote by telephone or internet. Abstentions and broker non-votes are counted as “shares present” at the meeting for purposes of determining if a quorum exists. A broker non-vote occurs when your bank, broker or other holder of record holding shares for you as the beneficial owner submits a proxy that does not indicate a vote as to a proposal because that holder does not have voting authority for that proposal and has not received voting instructions from you.

 

What vote is required to approve each proposal?

 

Election of Directors: Each nominee who receives a majority of the votes cast with respect to his or her election will be elected. A majority of the votes cast means that the number of shares voted “for” a director must exceed the number of shares voted “against” that director. Any nominee who fails to receive a majority of the votes cast for re-election is expected to tender his or her resignation in accordance with our Corporate Governance Guidelines as discussed more fully under “Corporate Governance Policies and Practices — Director Election” on page 10. Shares not present at the meeting and shares voting “abstain” have no effect on the election of directors. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on the election of directors, even if they do not receive voting instructions from you; therefore, no broker non-votes will occur.

 

Reapproval of the Performance Factors and Award Limit: A majority of the shares present or represented by proxy and having the power to vote at the Annual Meeting must reapprove the performance factors and award limit under the Executive Incentive Plan. An abstention will have the effect of a vote against the proposal since it is one fewer vote for approval. To the extent there are broker non-votes, they will have no effect since they are not considered shares entitled to vote.

Ratification of the Appointment of Independent Public Accountants:  Although we are not required to submit the appointment of our independent public accountants to a vote of stockholders, we believe that it is appropriate to ask that you ratify the appointment. Ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants requires the affirmative vote of a majority of the shares present or represented by proxy at the Annual Meeting and entitled to vote. An abstention will have the effect of a vote against the ratification since it is one fewer vote for approval. If you are a beneficial owner, your bank, broker or other holder of record is permitted to vote your shares on this ratification, even if they do not receive voting instructions from you; therefore, no broker non-votes will occur.

 

How do I submit a stockholder proposal?

 

To be considered for inclusion in our proxy statement for the May 2009 Annual Meeting, a stockholder proposal must be received no later than November 24, 2008. Your proposal must be in writing and must comply with the proxy rules of the Securities and Exchange Commission (“SEC”). You also may submit a proposal that you do not want included in the proxy statement, but that you want to raise at the May 2009 Annual Meeting. If you submit that proposal after February 7, 2009, then SEC rules permit the individuals named in the proxies solicited by our Board of Directors for that meeting to exercise discretionary voting power as to that proposal. You should send your proposal to our Secretary at our address on the cover of this proxy statement.

 

How do I nominate a director?

 

If you wish to nominate an individual for election as a director at the May 2009 Annual Meeting, our Secretary must receive your written nomination by December 31, 2008. Our by-laws require that your nomination include: (1) your name and address; (2) the name, age and home and business addresses of the nominee; (3) the principal occupation or employment of the nominee; (4) the number of shares of ITW stock that the nominee beneficially owns; (5) a statement that the nominee is willing to be nominated and serve as a director; (6) a statement that the nominee will tender his or her resignation in accordance with our Corporate Governance Guidelines; and (7) any other information regarding the nominee that would be required by the SEC to be included in a proxy statement had our Board of Directors nominated that individual. Any nomination that you make must be approved by our Corporate Governance and Nominating Committee, as well as by our Board of Directors.

 

Who pays to prepare, mail and solicit the proxies?

 

We will pay all of the costs of preparing and mailing this proxy statement and soliciting these proxies. We will ask brokers, dealers, banks, voting trustees and other nominees and fiduciaries to forward the proxy materials and our Annual Report to the beneficial owners of ITW common stock. Upon request, we will reimburse them for their reasonable expenses. In addition to mailing proxy materials, our officers, directors and employees may solicit proxies in person, by telephone or otherwise.

 

Stockholders are being asked to elect ten directors at the Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. Each director will serve until the May 2009 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed. After 12 years of distinguished service, Michael J. Birck is retiring from the Board as of the date of the Annual Meeting and is not standing for re-election.

 

We will vote your shares as you specify on the enclosed proxy card, by telephone or by internet. If you do not specify how you want your shares voted, we will vote them FOR the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares FOR that other person. The Board of Directors does not anticipate that any nominee will be unable to serve. The nominees have provided the following information about themselves:

 

 

ITW’s Board of Directors met six times during 2007. In addition to meetings of the full Board, directors attended meetings of Board committees. Non-employee directors, all of whom are independent, met four times in regularly scheduled executive sessions. The Chairmen of each of the Board of Directors’ standing committees rotate as the Chairman of executive sessions of the independent directors. The Board of Directors has standing audit, compensation, corporate governance and nominating, and finance committees. Under the terms of their charters, each member of the audit, compensation, and corporate governance and nominating committees must meet applicable New York Stock Exchange (“NYSE”) and SEC independence requirements. ITW encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2007, all of the directors attended at least 75% of the meetings of the Board and the committees on which they serve, and all of the directors attended the 2007 Annual Meeting of Stockholders.

 

Audit Committee

 

 

The Audit Committee is responsible for the engagement of our independent public accountants and assists the Board with respect to matters involving and overseeing: accounting, financial reporting and internal audit functions. The Committee also is responsible for the integrity of ITW’s financial statements; compliance with legal and regulatory requirements; the independence and performance of ITW’s independent public accountants; and the performance of ITW’s internal audit function. Additional information on the Committee and its activities is set forth in the “Audit Committee Report” on page 38.

 

Compensation Committee

 

 

The Compensation Committee establishes and oversees executive and director compensation policies, including issues relating to pay and performance, targeted positioning and pay mix. The Compensation Committee recommends to the other independent directors compensation for the Chief Executive Officer, reviews and approves the Chief Executive Officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments.

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. However, the Compensation Committee has not entered into any consulting agreement or requested that an independent consultant attend Committee meetings or specifically advise the Compensation Committee with respect to ITW’s compensation programs. On a limited basis, ITW management has engaged Hewitt Associates LLC to provide competitive market data (including information with respect to ITW’s peer group companies). From time to time, the Compensation Committee reviews the materials provided by Hewitt Associates LLC to management.

 

Additional information on the Compensation Committee and the role of management in setting compensation is provided in the “Compensation Discussion and Analysis” on page 16.

 

Corporate Governance and Nominating Committee

 

 

The Corporate Governance and Nominating Committee identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance guidelines; oversees the evaluation of the Board and management; and makes recommendations as to Board committees and Board size.

 

Finance Committee

 

 

The Finance Committee reviews, evaluates and recommends to the Board management’s proposals relating to ITW’s financing, investment portfolio, real estate investments, and the investment of assets associated with funded U.S. benefit plans and the risks associated with non-U.S. benefit plans.

 

General

 

We have long believed that good corporate governance is important to assure that ITW is managed for the long-term benefit of its stockholders. In that regard, we continuously review our corporate governance policies and practices not only for compliance with the provisions of the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for good corporate governance principles.

 

Our Board of Directors has adopted and annually reviews charters for our Audit, Compensation, and Corporate Governance and Nominating Committees. We maintain a corporate governance section on our website that includes the charters of these committees, ITW’s Corporate Governance Guidelines, ITW’s Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees) and ITW’s Code of Ethics for the Chief Executive Officer and key financial and accounting personnel. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our website. You can find this and other corporate governance information at www.itw.com. We also will provide copies of this information upon request.

 

Communications with Directors

 

Stockholders and other interested parties may communicate with any of our directors or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to the Independent Directors c/o the Corporate Secretary at our address on the cover of this proxy statement.

 

Board Independence

 

Our Board conducts an annual review as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence. A copy of ITW’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be considered independent unless the Board of Directors determines that the director has no material relationship with ITW (directly or as a partner, stockholder or officer of an organization that has a relationship with ITW).

 

The Board has determined that each of the current directors standing for re-election, except David B. Speer, has no material relationship with ITW other than as a director and is independent within the meaning of ITW’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Mr. Aldinger serves as a director of a company with which we conduct business; (2) Ms. Crown and Messrs. McCormack and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which ITW has a commercial banking relationship as described under “Ownership of ITW Stock — Other Principal Stockholders” on page 15; (3) Ms. Crown has an indirect interest in a company with which we conduct business; and (4) Ms. Strobel serves as a director of a company with which

we conduct business. The Board has concluded that these relationships do not impair the independence of the directors.

 

Director Candidates

 

Our by-laws permit stockholders to nominate directors for consideration at an annual stockholder meeting. The policy of the Corporate Governance and Nominating Committee is to consider a properly submitted stockholder nomination for election as director. For a description of the process for submitting a director candidate in accordance with ITW’s by-laws, see “Questions and Answers — How do I nominate a director?” on page 3.

 

Our directors play a critical role in guiding ITW’s strategic direction and oversee the management of ITW. Board candidates are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain highly qualified directors who have sufficient time to attend to their duties and responsibilities to ITW.

 

The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific criteria or simply to fill a vacancy on the Board. At that time the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board endorsement of the selected candidate(s).

 

Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination.

 

Director Election

 

At its February 2008 meeting, the Board of Directors amended our by-laws to provide for the election of directors in uncontested elections by majority vote in lieu of the plurality standard that had previously applied. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply.

 

If a nominee who is serving as a director is not elected at the Annual Meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons why stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to ITW and our Corporate Governance Guidelines. The Board will consider the Committee’s recommendation, but no director who failed to receive a majority of the votes cast will participate. We will disclose the results within 90 days of the Annual Meeting. At the 2007 Annual Meeting, each director received a majority of the votes cast for his or her election.

 

Annual Retainer and Chair Fees

 

The annual retainer for non-employee directors is $135,000, and the annual fee for committee chairs is an additional $5,000, except for the Audit Committee chair, whose annual fee is $15,000. Non-employee directors are given the opportunity to elect annually to receive all or a portion of their annual retainer and chair fees in an equivalent value of ITW common stock pursuant to our Stock Incentive Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.

 

Directors’ Deferred Fee Plan

 

Non-employee directors can defer receipt of all or a portion of their annual retainer and chair fees until retirement or resignation. Deferred fee amounts are credited with interest quarterly at current rates. A director can also elect to defer receipt of the ITW common stock received in lieu of a cash payment, in which case the deferred shares are credited as stock units to an account in the director’s name. The account receives additional credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in the Stock Incentive Plan), with any fractional shares paid in cash.

 

ITW Common Stock

 

In 1995, the stockholders approved a plan whereby a portion of each non-employee director’s compensation may include the periodic grant of restricted ITW common stock, thereby directly linking another element of director compensation with ITW’s long-term performance. ITW last granted restricted shares under the plan in February 2004. Currently, there are no restricted shares granted under the plan that have not vested. ITW intends to continue to grant stock to each non-employee director under the Stock Incentive Plan. Effective January 1, 2007, non-employee directors will receive an annual stock grant equivalent in value to approximately $30,000, except that in 2007 Mr. Skinner, who had not received a prior grant, received a stock grant equivalent in value to approximately $69,796. On February 8, 2008, each non-employee director was granted 618 shares of stock.

 

Phantom ITW Stock

 

To tie a further portion of their compensation to our long-term performance, non-employee directors of ITW are awarded 1,000 units of phantom stock upon first becoming a director. The value of each unit equals the market value of one share of ITW common stock. Additional units are credited to a director’s phantom stock account in an amount equivalent to cash dividends paid on ITW stock. Accounts are adjusted for stock dividends, stock splits, combinations or similar changes. A director is eligible for a cash distribution from his or her account at retirement or upon approved resignation. When phantom stock is awarded, directors elect to receive the distribution in either a lump sum or in up to ten annual installments. Directors receive the value of their phantom stock accounts immediately upon a change of control.

 

Director Compensation in Fiscal Year 2007

 

The following table summarizes the compensation for our directors who served during 2007.

 

 

 

 

 

 

Directors and Executive Officers

 

The following table shows how much ITW common stock the directors, the named executive officers, and all directors and executive officers as a group beneficially owned as of December 31, 2007. The “named executive officers” are our Chief Executive Officer, our Chief Financial Officer, and the next three most highly compensated executive officers who were serving at the end of the last fiscal year (based on total compensation, less the increase in pension value and nonqualified deferred compensation earnings). The “percent of class” calculation is based on 530,096,729 shares of ITW common stock outstanding as of December 31, 2007.

 

Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options that are exercisable currently or that become exercisable within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them.

 

The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2007. Phantom stock units are not transferable and have no voting rights. The units are not included in the “percent of class” calculation.

 

 

 

Other Principal Stockholders

 

This table shows, as of December 31, 2007, the only stockholders other than a director that we know to be a beneficial owner of more than 5% of ITW common stock. We maintain a commercial banking relationship with The Northern Trust Company and its wholly owned subsidiaries. The Northern Trust Company is a wholly owned subsidiary of Northern Trust Corporation. Susan Crown, Robert C. McCormack and Harold B. Smith, directors of ITW, are also directors of Northern Trust Corporation and The Northern Trust Company. The commercial banking relationship between ITW and The Northern Trust Company may involve, but is not strictly limited to, the following services: creating and maintaining deposit accounts, credit services, investment banking services, payment and collection services, trade services, credit enhancement or payment guaranty, acting as agent or fiduciary, consulting services, risk management services, and broker dealer services. In addition, The Northern Trust Company serves as the trustee under ITW’s principal pension plans. The banking and trustee relationships with The Northern Trust Company are conducted in the ordinary course of business on an arms-length basis. Banking, investment management, trustee and other administrative fees paid to The Northern Trust Company by ITW were approximately $2.1 million in 2007.

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that ITW’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2007 and written representations from executive officers and directors, we believe that all filing requirements were met during 2007, except that Russell Flaum was inadvertently late in filing one Form 4 reporting two transactions and E. Scott Santi was inadvertently late in filing one Form 4 reporting five transactions.

 

Introduction

 

ITW emphasizes a total compensation approach in establishing individual executive compensation levels, with each element of compensation serving a specific purpose. ITW’s compensation program consists primarily of short-term cash compensation (base salaries and annual cash incentives), longer-term equity compensation (stock options), and retirement benefits. ITW retains the flexibility to recognize and reward superior company, business unit and

individual performance by differentiating the cash incentive and equity awards made to individual executives. In the course of 2007, we undertook a comprehensive review of our compensation program for senior management with the objective of confirming our approach to delivering total compensation. We focused on establishing compensation structures and the relative weightings for base salary, annual cash incentives, and longer-term incentives in delivering levels of total compensation that meet the objectives of being both performance based and market competitive.

 

In making its executive compensation decisions and recommendations, the Compensation Committee is guided by the following factors:

 

 

Compensation Philosophy

 

Our compensation philosophy is reflective of our overall operating philosophy and management structure and is intended to:

 

 

Peer Companies

 

We have selected a group of comparable companies to benchmark executive pay, providing competitive market data references to be used in establishing and recommending each element of compensation. This group was selected using the following criteria:

 

 

For 2007, the 18 companies comprising the peer group were:

 

 

The nature of ITW’s highly decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes, however, we believe that the peer group selected provides relevant comparisons.

 

Management’s Contributions to Our Growth

 

ITW’s management structure is decentralized and puts emphasis on line management. This structure allows us to give unusually substantial operating authority to executive officers and is an important element in developing and retaining our senior managers and in creating high job satisfaction. The general managers of our businesses are empowered to make the decisions necessary to serve their customers and grow their businesses and are accountable for their business unit’s results. Our executive management’s role is to ensure that these decisions are carried out in accordance with our values, principles and expectations for the near and long term and, are in general, in the best interests of our stockholders.

 

Use of Discretion in Setting Compensation

 

ITW’s compensation programs recognize the importance of ensuring that discretion as related to market conditions and both individual and business unit performance is provided to the Chief Executive Officer (the “CEO”) and Compensation Committee in determining compensation levels and awards. In setting base salaries and annual cash incentive award maximums, and in determining grants of stock options, the CEO and Compensation Committee use judgment to align compensation with respect to both external data and an internal comparison of individual responsibilities, potential and achievement.

 

Compensation Decisions and Individual Compensation Levels

 

There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other named executive officers. However, the different levels of compensation for the named executive officers as shown in the Summary Compensation Table of this proxy statement reflect internal factors such as each executive’s scope of responsibility, impact on profitable growth, and breadth of experience, as well as external market data from the peer companies. On an annual basis, the CEO reviews the total compensation of senior executives and makes recommendations to the Compensation Committee based on the peer company compensation information and his assessment of each executive’s individual performance. The Compensation Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and information relative to compensation of CEOs of the peer companies. The Compensation Committee believes that it is appropriate to benchmark total compensation for the CEO to the

levels of base salary, annual incentive, and longer-term incentives being provided to CEOs of comparable multinational and diversified industrial organizations, as previously described under “Peer Companies.”

 

Base Salary

 

In determining base salary, the CEO and the Compensation Committee consider the size and scope of the executives’ responsibilities and the median base salary of similar positions at our peer companies, as well as the executive officers’ past experience, performance and future potential. Using the median as a general reference provides an appropriate base salary that encourages solid performance year after year. Base salaries are reviewed annually and adjustments are intended to recognize an executive officer’s performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility. Adjustments to base salary also take into account peer group information and how base salary factors into achieving levels of total compensation.

 

The 2007 compensation program review followed the Compensation Committee’s approval in December 2006 of base salary increases that became effective during the course of 2007 on the respective anniversary dates for the CEO and for the other named executive officers. As part of the review, we moved to a common review date of January for base salary and incentive compensation opportunity changes for our senior executive officers. This process allows the Compensation Committee and the CEO to review base compensation and discuss recommended changes in December considering individual contributions to overall financial and operating results for the year and to set objectives for the upcoming year.

 

In December 2007, the Compensation Committee noted that the 2007 base salary for the CEO and the base salaries for the other named executive officers were below the median of the peer group comparisons and approved base salary adjustments that would become effective January 2008. These salary adjustments brought the base salaries of these executive officers closer to the median levels.

 

The 2007 calendar year compensation for the named executive officers is disclosed in the Summary Compensation Table on page 25 of this proxy statement.

 

Annual Cash Incentives

 

We believe that management should be rewarded for contributions to our overall financial success measured by the year-over-year income growth of their business unit, their group or ITW, as well as for individual accomplishments that contribute to the longer-term health of the business. Annual cash incentive awards are made under the stockholder-approved provisions of the ITW Executive Incentive Plan. The Compensation Committee considers recommendations from the CEO and approves annual cash incentives for our executive officers. The Compensation Committee determines and recommends for approval by the independent directors the award amount for the CEO.

 

The plan is designed around two elements: income growth (the “P” factor) and personal objectives (the “O” factor). For 2007 theses factors were weighted equally.

Participation in our Executive Incentive Plan is limited to those who have an impact on the profitable growth of the business or who have significant responsibility for a major element of business growth. The P factors are recommended by management and approved by the Compensation Committee annually. The individual O factors for the CEO are established by the Compensation Committee annually, and the individual O factors for each other named executive officer are recommended by the CEO and approved by the Compensation Committee.

 

Individual award maximums, expressed as percentages and applied to year-end base salary, are determined in accordance with the executive’s level of responsibilities and accountability. Although we generally do not establish any specific target or prescribed value, comparisons are made to median annual cash incentive levels in the peer group compensation data. ITW’s annual cash incentives are variable and structured to provide awards above these median levels only upon the achievement of exceptional financial results and individual performance objectives. For the 2007 plan year, the award maximums were 140% for Mr. Kropp and 200% for the other named executive officers. Payments under the plan are made following the end of the fiscal year after approval by the Compensation Committee.

 

For 2007, both the P and O factors had a payout range of 0% to 100% of the maximum for the named executive officers. For the 2007 P factor, income was compared to the prior year (2006) to measure the percentage of increase. Participants begin to earn payment for the P factor once 80% of the applicable prior year income is achieved. At the 80% achievement level, the P factor award payout is 34% of the maximum payment. At the 100% achievement level, the payout is 75% of the maximum payment. For the named executive officers, a maximum P factor payout of 100% only occurs when 115% achievement of prior year income is reached.

 

The objectives for O factors are more subjective than the P factors. For 2007, Mr. Speer’s objectives were focused on succession planning, leadership development, long-range business planning, and a review of ITW’s compensation program for senior executives. For the other named executive officers, 2007 objectives were generally focused on leadership development, emerging market growth initiatives, acquisition integration and succession planning. Each individual objective is assigned a relative weighting. At the end of the year, each named executive officer submits a written self-appraisal and overall score of achievement. For the named executive officers, other than the CEO, the appraisals are reviewed by the CEO. The self-appraisal for the CEO is reviewed by the Compensation Committee. These reviews consider completion of objectives, relative weightings and the quality of the work performed. Therefore, an element of judgment is involved in assigning individual levels of achievement for the O factors. A distinguished level of achievement provides a maximum 100% payment.

The following payout grid was used to determine the P factor award component for 2007 (for example, 75% of the maximum P factor award would be paid if 2007 income from continuing operations performance was 100% of prior year results):

 

 

The 2007 P factors for Messrs. Speer and Kropp were entirely based on the year-over-year percentage of increase in corporate income from continuing operations. For the other named executive officers, the P factor was based 75% on the year-over-year percentage of increase of the operating income for their respective businesses and 25% on the year-over-year percentage of increase of corporate income from continuing operations. The following table shows the respective earnings achieved in 2006 and 2007 considered in the determination of the P factor award for the named executive officers:

 

 

 

Based on the Compensation Committee’s review of the individual 2007 O factor objectives and actual achievements for Mr. Speer, and upon Mr. Speer’s recommendations for the other named executive officers, the following O factor percentages were assigned: 90% for Mr. Speer; 96% for Mr. Kropp; 95% for Mr. Hansen; 85% for Mr. Flaum; and 96% for

Mr. Zentmyer. The 2007 awards for the named executive officers ranged from 92.35% to 78.30% of the individual maximum award level, and were determined as follows:

 

 

 

The named executive officers may elect to defer 6% to 85% of their annual incentive award to their ITW Executive Contributory Retirement Income Plan (ECRIP) account. ECRIP is further described under “Nonqualified Deferred Compensation” elsewhere in this proxy statement. Also, under the terms of the ITW 2006 Stock Incentive Plan, an officer may elect to take up to 50% of the award in the form of ITW common stock.

 

For 2008, the P factor payout for the 2008 awards will again be based on the year-over-year percentage of increase in income, but the weighting will be changed to 60% of each named executive officer’s potential award opportunity with the remaining 40% based on the O factor objectives. In addition, the weighting of income for operating executives will change to 33% of corporate results and 67% of their respective businesses. These changes are intended to place greater emphasis on the financial performance element and reinforce the increasing need to collaborate across businesses. Messrs. Speer’s and Kropp’s maximum P factors will remain 100% based on the year-over-year percentage of increase of corporate income from continuing operations. Additionally, the award maximum for Mr. Kropp will be increased to 150% of salary to bring that award closer to the CFO of the peer group median. The award maximums of 200% of salary will remain unchanged for the other named executive officers.

 

Long-Term Stock Incentives

 

We believe that ensuring the long-term growth and health of the business is a primary management responsibility. Therefore, a significant portion of an executive officer’s compensation should be directly linked to how ITW stock performs over time, encouraging decisions that consider the long-term perspective. Stock incentive awards have generally been made in the form of stock options and are granted to a relatively small number of executives whose positions can truly affect the company’s long-term performance. We believe that, at this time, in comparison to other forms of non-performance based stock incentives, stock options more effectively incent participants on a long-term basis since the greater the increase in stock price, the greater the value of the option to the participant. If the price of ITW’s common stock falls below the grant price, the option has no value to the participant.

 

The Compensation Committee approves awards of stock options to the named executive officers in conjunction with an annual equity award program review. Award amounts for the named executive officers, other than the CEO, are recommended by the CEO based on a number

of factors, including the executive officer’s position, performance, and ability to influence ITW’s long-term growth and profitability over a period of years. The Compensation Committee also reviews the compensation values and types of equity awards for peer company positions, although it does not establish any specific target or prescribed values to be achieved in relation to the peer company data. The executive’s level of prior equity awards and level of stock ownership relative to established stock ownership guidelines as described below are also considered in the review. Applying the same considerations, the Compensation Committee recommends to the independent directors for approval the number of stock options to be awarded to the CEO.

 

Stock options are granted with an exercise price equal to the fair market value of the common stock on the date of grant and expire ten years after the grant date. This approach is designed to motivate the executive to contribute to the creation of stockholder value over the long term. We currently grant only non-qualified stock options because we believe that the tax benefits to ITW of non-qualified stock options outweigh the potential tax benefits to the named executive officers of incentive stock options.

 

Stock options vest over a specified period determined by the Compensation Committee. The 2007 stock options vest in equal installments over a four-year period ending in 2011. The Compensation Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined by the Compensation Committee, and forfeiture provisions upon any other termination of employment. Under change in control or certain divestiture conditions, all stock options become vested and exercisable. The Compensation Committee, in its sole discretion, may deem a stock option award to be immediately forfeited if the recipient is terminated for cause (as defined by the Committee), competes with ITW, or engages in conduct adversely affecting ITW.

 

The Compensation Committee approved at its February 2007 meeting stock option awards to executive officers and certain other key employees under the provisions of the ITW 2006 Stock Incentive Plan. Stock options granted in 2007 to the named executive officers are shown in the Grants of Plan-Based Awards table presented elsewhere in this proxy statement.

 

At its February 2008 meeting, the Compensation Committee granted the following number of stock options, with a four-year vesting period ending in 2012, to the named executive officers: Mr. Speer: 500,000; Mr. Kropp: 70,000; Mr. Hansen: 200,000; Mr. Flaum: 80,000; and Mr. Zentmyer: 80,000.

 

Timing of Stock Option Awards

 

The Compensation Committee currently meets in February of each year to consider and act with respect to stock option awards for the executive officers for that fiscal year. The Compensation Committee’s February meeting follows ITW’s public release of its earnings results for the recently completed fiscal year. The Compensation Committee acts in compliance with the ITW 2006 Stock Incentive Plan, including the requirement that stock options may not be granted at less than 100% of the fair market value of ITW’s common stock on the date of grant. At its February 2008 meeting, the Board amended the Stock Incentive Plan to change the definition of fair market value from the average of the high and low trading prices on the grant date to the closing price on the grant date. The exercise price of the options granted at that meeting was

based on the closing price of ITW’s stock on that date. We do not time grants of stock options for the purpose of affecting the value of executive compensation.

 

Perquisites & Other Benefits

 

In general, we do not provide perquisites to our named executive officers that are not available to other employees. We do, however, provide the reimbursement of up to $7,500 per year for financial, tax and estate planning services. This is taxable to the extent required by the Internal Revenue Service (“IRS”). No named executive officer received in excess of $10,000 in perquisites during 2007, so no perquisites are disclosed in the Summary Compensation Table.

 

Stock Ownership Guidelines

 

We believe that stock ownership is important because it links the interests of ITW’s management and directors with those of our stockholders. Because of the importance of stock ownership, the Board of Directors and the Compensation Committee have adopted stock ownership guidelines for executive officers and directors that they and we believe are appropriate, reasonable and attainable given their responsibilities and compensation levels. As mentioned above, stock ownership relative to the guidelines is one of the factors considered in determining individual stock option awards. The recommended guidelines for stock ownership as a multiple of executive officers’ base pay salaries and of directors’ annual retainers are as follows: chief executive officer, five times; vice chairman and executive vice presidents, three times; senior vice presidents, two times; vice presidents, one time; and non-employee directors, four times. The Compensation Committee recommends that an executive officer or non-employee director achieve the applicable ownership level within five years. The achievement of these guidelines is reviewed annually. All named executive officers and directors who have been in their positions for five or more years have either satisfied or exceeded the applicable stock ownership guideline. We do not have a policy regarding hedging the economic risk of this ownership.

 

Financial Restatements

 

We do not have a policy beyond the requirements of the Sarbanes-Oxley Act of 2002 to retroactively adjust compensation in the event of a restatement of financial or other performance results. We believe that this issue is best addressed when the need actually arises, taking into consideration the specific facts regarding the restatement.

 

Deductibility

 

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to the CEO and certain other executive officers employed at year end. Certain performance-based compensation and deferred compensation are not included in compensation for purposes of the limit. The Compensation Committee recognizes its obligation to reward performance that increases stockholder value and exercises its discretion in determining whether or not to conform our executive compensation plans to the approach provided for in the Internal Revenue Code.

Potential Payments upon Termination or Change in Control

 

We do not have any plans or agreements that are specific and unique to executive officers regarding termination of employment or a change in control of the company. However, we do have provisions contained in our pension plans, the 1996 and 2006 ITW Stock Incentive Plans, the Executive Incentive Plan, and the ECRIP that provide for retirement benefits, immediate vesting of unvested stock options or certain payments to participants in those plans in the event of a change in control or certain termination events. You can find further detail below under “Executive Compensation — Potential Payments Upon Termination or Corporate Change” on page 33.

 

This section of the proxy statement provides information regarding the compensation of our named executive officers. Each of the following tables reflects the two-for-one split of our common stock effected on May 18, 2006.

 

Summary Compensation Table

 

 

 

 

Footnote 2 Table

 

 

 

 

Footnote 4 Table

 

 

 

 

Grants of Plan-Based Awards

 

The table below provides information regarding plan-based awards granted to our named executive officers during fiscal 2007 under the Executive Incentive Plan and the 2006 Stock Incentive Plan.

 

 

 

Outstanding Equity Awards at Fiscal Year-End 2007

 

This table sets forth details, on an award-by-award basis, regarding the outstanding equity awards held by each of the named executive officers as of December 31, 2007. As of that date, there were no unvested stock awards held by any executive officer; however, outstanding option awards are set forth below.

 

 

 

Option Exercises and Stock Vested

 

This table provides information for each named executive officer concerning the exercise of stock options during fiscal 2007. No named executive officer had any unvested restricted stock in 2007. The value realized upon the exercise of options is calculated using the difference between the option exercise price and the market price at the time of exercise multiplied by the number of shares underlying the option.

 

 

Pension Benefits

 

The following table provides information regarding participation by the named executive officers in pension benefit plans through our financial statement measurement date of September 30, 2007. No payments were made to a named executive officer under the plans in 2007.

 

 

 

ITW Retirement Accumulation Plan

 

We maintain the ITW Retirement Accumulation Plan (the “Pension Plan”) for the benefit of eligible employees of participating U.S. business units to provide a portion of the income necessary for retirement. The Pension Plan was closed to new entrants effective January 1, 2007. The Pension Plan is structured as a “pension equity plan” under which a participant accumulates certain percentages for each year during his or her years of plan participation. The accumulated percentages (from both columns shown below), when multiplied by final average annual pay (generally, salary and executive incentive payable in the years from the highest five out of the last ten complete calendar years of service), produce an amount that can be received as a lump sum payment or an actuarially equivalent lifetime annuity. For each year of credited service after December 31, 2000, percentages are structured as follows:

 

 

 

The Pension Plan’s normal retirement age is the latter of age 65 or the fifth anniversary of employment if the participant was hired after age 60. A Pension Plan participant is vested after five years of employment.

 

Prior to 2001, the Pension Plan operated under a traditional annuity formula (a normal retirement benefit equal to 1% of final average pay and 0.65% of such pay in excess of covered compensation for each of the first 30 years of credited service plus 0.75% of average pay for any additional years). Accrued benefits as of December 31, 2000 under the traditional annuity formula were converted to an initial pension equity percentage by calculating the lump sum value of the normal retirement annuity and dividing by the average annual pay at that time. Anyone who had participated in the Pension Plan for five years as of December 31, 2000 and whose age plus vesting service equaled at least 50 years was entitled to additional pension equity credits of 4% of final average pay per year for up to 15 years of credited service.

 

As part of the transition to the pension equity formula, anyone who participated in the Pension Plan as of December 31, 2000, had at least five years of vesting service and had attained age 50 by that date, was entitled to a benefit under the pre-2001 formula if that benefit was more valuable than the benefits calculated under the new formula.

The Pension Plan adopted in 2001 does not provide for a specific early retirement age but, once a participant is vested, he or she can terminate employment and receive the lump sum computed under the above formula or an actuarially equivalent immediate annuity benefit. The pre-2001 Pension Plan provided that upon attaining age 55 with at least 10 years of service, a participant could elect an early retirement pension. If the sum of the participant’s age and service at early retirement was at least 90, the portion of the benefit that is based solely on total average pay would not be reduced; otherwise, that portion would be reduced at the rate of 0.25% for each month early retirement occurred before the normal retirement date. The portion of the pre-2001 formula that was based on pay in excess of covered compensation was subject to reductions of 1/180th for each of the first 60 months prior to the normal retirement date and 1/360th for each additional month. Any lump sum elected under the pre-2001 formula would be computed as the actuarial present value of an early retirement benefit commencing no earlier than age 62. Messrs. Hansen, Flaum and Zentmyer are subject to alternative calculations under the pre-2001 Pension Plan formula.

 

Nonqualified Pension Plan

 

The Nonqualified Pension Plan is maintained to make up for benefits that cannot be paid under the tax-qualified Pension Plan due to Internal Revenue Code limitations on the amount of compensation that may be considered and the amount of benefit that may be payable. ITW has not considered granting additional years of service to executive officers under the plan and, therefore, does not currently have a policy on such grants. For the most part, the Nonqualified Pension Plan uses the same formulas and other computation elements as the Pension Plan with certain exceptions, including the following:

 

1. The Pension Plan uses net compensation after deferrals under the current Executive Contributory Retirement Income Plan and the Nonqualified Pension Plan uses total eligible compensation (generally salary and non-equity incentive compensation).

 

2. The Nonqualified Pension Plan provides that a participant who leaves ITW without having retired will forfeit any plan benefits other than those attributable to any deferred compensation that reduces Pension Plan considered pay below the maximum pay ($225,000 in 2007) that may be recognized under a tax-qualified plan.

 

3. For those who are entitled to an alternative benefit under the Pension Plan’s traditional annuity formula in effect prior to 2001, the Nonqualified Pension Plan will convert that benefit to a lump sum at an interest rate equal to 120% of the long-term Applicable Federal Rate (the “AFR”) for the first month of the prior quarter.

 

4. In addition to the annuity and lump sum options available under the Pension Plan, a participant in the Nonqualified Pension Plan may elect to receive fixed monthly installments over up to 20 years calculated using the AFR.

Nonqualified Deferred Compensation

 

The following table sets forth information regarding participation by the named executive officers in our Executive Contributory Retirement Income Plans (“ECRIP”) during fiscal year 2007. There were no withdrawals by, or distributions to, a named executive officer under the ECRIP in 2007.

 

 

 

In 1985, ITW established an Executive Contributory Retirement Income Plan (the “1985 ECRIP”), which offered designated executives an opportunity to defer a portion of their salary and executive incentive earned in 1985 through 1989 to a deferred compensation account, to receive the matching contributions they would otherwise receive if such deferrals had been made under our tax-qualified Savings and Investment Plan (in lieu of any matching contributions under that plan) and to receive a rate of interest on the account equal to 130% of the monthly Moody’s Corporate Bond Yield Average if their employment ended due to death, disability or retirement after age 55 with at least ten years of service (five years if over age 65). The account was to be credited with 100% of the monthly Moody’s Corporate Bond Yield Average if the executive left employment before death, disability or retirement. During 2007, the crediting rate ranged from 5.85% to 6.24% for persons not yet retirement eligible and 7.60% to 8.12% for those who were retirement eligible.

 

With certain exceptions, the 1985 ECRIP account is paid in monthly installments over 15 years following a death, disability or retirement event and in a lump sum following any other

termination of employment. Messrs. Speer and Hansen were designated as eligible for the 1985 ECRIP.

 

In 1993, ITW established a new Executive Contributory Retirement Income Plan (the “Current ECRIP” and, together with the 1985 ECRIP, the “ECRIP”), which has most of the same features as the 1985 ECRIP. All of the named executive officers are eligible for the Current ECRIP. The Current ECRIP has a limit on the amount of interest under the monthly Moody’s Corporate Bond Yield Average that would be recognized (12% annualized), a return of deferral feature whereby an individual could elect to receive a return of the principal amount deferred after a period of at least five years, and options for payment following death, disability or retirement in a lump sum or in monthly installments over 2 to 20 years.

 

A Current ECRIP participant can defer up to 50% of his or her salary and up to 85% of his or her executive incentive. The minimum deferral of either salary or executive incentive is 6%, which results in the 3.5% maximum matching contribution on either component under the Savings and Investment Plan formula. In addition to the foregoing matching contributions under the Savings and Investment Plan, deferrals under the Current ECRIP reduce the compensation that may be recognized for that plan and for the tax-qualified Pension Plan.

 

Potential Payments upon Termination or Corporate Change

 

The following describes the potential payments upon termination or a change of control of ITW for the named executive officers. ITW does not maintain any individual plans or agreements with regard to the treatment of executive officers for termination or change of control purposes. The compensation payouts described below are provided under specific plans, including the Executive Contributory Retirement Income Plans, the Retirement Accumulation Plan, the Nonqualified Pension Plan, the Executive Incentive Plan and the ITW 1996 and 2006 Stock Incentive Plans. These plans provide for compensation to all participants in the plans in the event of a change of control or certain termination events.

 

The information set forth below assumes the effective date of the termination event is the last business day of the fiscal year, December 31, 2007.

 

In the event of involuntary termination upon a corporate change, death or disability, all unvested stock options held by the named executive officers would immediately vest. In the event of a termination due to early retirement, as no named executive officer was at least 62 years of age at that time, the stock options granted in February 2006 and 2007 will not vest, but all other unvested stock options will vest for each named executive officer other than Mr. Kropp, who is not eligible for early retirement. The following amounts are the value of stock options accelerated upon termination, determined using the excess, if any, of $53.54 (the closing price of ITW common stock on December 31, 2007) over the option exercise price and assuming that all unvested and accelerated stock options are exercised upon the termination event: Mr. Speer, $480,750; Mr. Hansen, $240,375; Mr. Flaum, $128,200; and Mr. Zentmyer, $128,200.

 

The Executive Incentive Plan provides that if a participant is employed as of the last day of the fiscal year, he or she would receive any amounts earned under the Executive Incentive Plan for that fiscal year. If the termination of employment other than for death, disability or retirement occurs prior to the last day of the fiscal year, a participant forfeits his or her award;

however, the Compensation Committee has the discretion to award an amount prorated for the portion of the fiscal year that the participant was employed. As discussed in more detail above in “Compensation Discussion and Analysis — Annual Cash Incentives,” actual amounts earned based on performance by the named executive officers in 2007 were as follows: Mr. Speer, $1,781,000; Mr. Kropp, $368,053; Mr. Hansen, $800,496; Mr. Flaum, $590,114; and Mr. Zentmyer, $660,672.

 

As discussed above under the “Pension Benefits — ITW Retirement Accumulation Plan” on page 30, employees meeting certain age and service conditions were entitled to the greater of the pension benefit under the pension equity formula or a benefit under the pre-2001 formula. The latter formula provides a potential for a so-called “early retirement subsidy” to the extent that the early reduction adjustments do not reflect an actuarial equivalence between the benefit at early payment and the normal retirement benefit. Messrs. Hansen, Flaum and Zentmyer are subject to those alternate calculations. Under any termination scenario discussed below, as of December 31, 2007, the named executive officers are eligible for the following amounts under the Pension Plan and the Nonqualified Pension Plan:

 

 

Under any termination scenario discussed below, executive officers in the ECRIP, our nonqualified deferred compensation plans, would be entitled to payments of their account balances either in a lump sum or in a series of installments they may elect with respect to distributions commencing after age 55 and the completion of at least ten years of service. Unless an ECRIP participant meeting the latter requirement elected prior to termination to defer commencement of such payments to a later date, payments commence as of the first of the month following termination.

 

The following amounts show the January 1, 2008 present value (calculated at a 6.25% discount rate) of the payments that would be made pursuant to plan terms and the named executive officers’ previous elections if their termination of employment had occurred on the last business day of the fiscal year, assuming the 130% of Moody’s crediting rate on their ECRIP account(s) remained at the average rate credited in 2007 of 8.0563% throughout the distribution period: Mr. Speer, $4,872,305; Mr. Kropp, $371,134; Mr. Hansen, $3,568,211; Mr. Flaum, $2,297,705; and Mr. Zentmyer, $2,151,644.

 

Voluntary Termination (prior to age 55 or less than 10 years of service)

 

Mr. Kropp is the only named executive officer eligible for voluntary termination. As noted above, he would be eligible to receive payments under the Executive Incentive Plan, the Pension Plan, and the ECRIP.

Retirement Prior to Age 65 (minimum 55 years of age and 10 years of service)

 

All of the named executive officers, other than Mr. Kropp, are eligible for retirement benefits if they retire prior to age 65 because they are at least 55 years of age and have 10 years of service. As noted above, they would be eligible to receive payments under the Executive Incentive Plan, 1996 Stock Incentive Plan, Pension Plan, Nonqualified Pension Plan, and the ECRIP.

 

Normal Retirement (65 years of age and 10 years of service)

 

None of the named executive officers are eligible for termination benefits for normal retirement as none have reached the age of 65.

 

Involuntary Not for Cause Termination

 

The named executive officers would be eligible to receive payments shown above, in the case of Mr. Kropp, under “Voluntary Termination,” or in the case of each other named executive officer, under “Retirement Prior to Age 65.”

 

Involuntary Termination upon a Corporate Change

 

Under the ITW 1996 and 2006 Stock Incentive Plan and the Executive Incentive Plan, a Corporate Change is defined as (1) a dissolution, (2) a merger, consolidation, reorganization or similar transaction after which the stockholders immediately prior to the effective date thereof hold less than 70% of the outstanding common stock of the surviving entity, (3) a sale of all or substantially all of ITW’s assets (specified for purposes of the 2006 Stock Incentive Plan as assets with a gross fair market value of at least 40% of the total gross fair market value of all of ITW’s assets), or (4) more than a 50% turnover in the membership of the Board of Directors under circumstances not approved by the then-current Board.

 

The named executive officers are eligible to receive payments under the Pension Plan, the Nonqualified Pension Plan, and the ECRIP, as mentioned above. In addition, as set forth in the table below, under the Executive Incentive Plan, they would be entitled to a lump sum payment representing the maximum P factor and O factor awards payable for the fiscal year, and all of their unvested stock option awards received under the ITW 1996 and 2006 Stock Incentive Plans would immediately vest.

 

 

Disability or Death

 

In the event a named executive officer becomes permanently disabled or dies, the named executive officer would be eligible for the same maximum payments under these plans as those described above under “Involuntary Termination upon a Corporate Change.”

 

The following table provides information as of December 31, 2007 about ITW’s existing equity compensation plans, the 1996 Stock Incentive Plan and the 2006 Stock Incentive Plan.

 

 

 

The Compensation Committee of the Board of Directors hereby furnishes the following report to the stockholders of the Corporation in accordance with rules adopted by the Securities and Exchange Commission.

 

We have reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based on our review and discussions, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and the Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007.

 

This report is submitted on behalf of the members of the Compensation Committee:

 

William F. Aldinger, Chairman

Susan Crown

Robert S. Morrison

James A. Skinner

 

Practices Regarding Related Transactions

 

We review related-party transactions in accordance with our Statement of Principles of Conduct, by-laws and Corporate Governance Guidelines rather than a separate written policy. A related-party transaction is a transaction involving ITW and any of the following persons: a director, director nominee or executive officer of ITW; a holder of more than 5% of ITW common stock; or an immediate family member or person sharing the household of any of these persons.

 

Our Statement of Principles of Conduct states that our directors, officers and employees must avoid engaging in any activity, such as related-party transactions, that might create a conflict of interest or a perception of a conflict of interest. These individuals are required to raise for consideration any proposed or actual transaction that they believe may create a conflict of interest. Our by-laws provide that no related-party transaction is void or voidable solely because a director has an interest if (1) the material facts are disclosed to or known by the Board of Directors and the transaction is approved by the disinterested directors or an appropriate Board committee comprised of disinterested directions, (2) the material facts are disclosed to or known by the stockholders and the transaction is approved by the stockholders, or (3) the transaction is fair to ITW as of the time it is approved. Our Corporate Governance Guidelines provide that the Board will apply established Categorical Standards for Director Independence in making its independence determinations. Under the standards, certain relationships between ITW and a director would preclude a director from being considered independent.

 

On an annual basis, each director and executive officer completes a Directors’ and Officers’ Questionnaire, which requires disclosure of any transactions with ITW in which he or she, or any member of his or her immediate family, has a direct or indirect material interest. The Corporate Governance and Nominating Committee reviews these Questionnaires and discusses any related-party transaction disclosed therein.

 

In addition, under its charter, the Audit Committee is responsible for reviewing, approving, ratifying or disapproving all proposed related-party transactions that, if entered into, would be required to be disclosed under the rules and regulations of the SEC. In reviewing related-party transactions, the Audit Committee considers the factors set forth in our Statement of Principles of Conduct, by-laws and Corporate Governance Guidelines as well as other factors, including ITW’s rationale for entering into the transaction, alternatives to the transaction, whether the transaction is on terms at least as fair to ITW as would be the case were the transaction entered into with a third party, and the potential for an actual or apparent conflict of interest. No member of the Audit Committee having an interest in a related-party transaction may participate in any decision regarding that transaction.

 

The Audit Committee of the Board of Directors is composed of five independent directors, as defined in the listing standards of the New York Stock Exchange. In addition, the Board of Directors has determined that all Audit Committee members are “financially literate” and that Messrs. Birck, Davis, McCormack and Skinner meet the Securities and Exchange Commission criteria of “audit committee financial expert”. The Audit Committee operates under a written charter adopted by the Board of Directors, which was most recently reviewed by the Committee in February 2008.

 

The Committee is responsible for providing oversight to ITW’s financial reporting process through periodic meetings with ITW’s independent public accountants, internal auditors and management in order to review accounting, auditing, internal control and financial reporting matters. The Committee is also responsible for assisting the Board in overseeing: (a) the integrity of ITW’s financial statements; (b) ITW’s compliance with legal and regulatory requirements; (c) the independent public accountants’ qualifications, independence and performance; and (d) the performance of ITW’s internal audit function. ITW’s management is responsible for the preparation and integrity of the financial reporting information and related systems of internal controls. The Committee, in carrying out its role, relies on ITW’s senior management, including senior financial management, and ITW’s independent public accountants.

 

We have reviewed and discussed with senior management the audited financial statements included in the 2007 Annual Report to Stockholders. Management has confirmed to the Committee that the financial statements have been prepared in conformity with generally accepted accounting principles.

 

We have reviewed and discussed with senior management their assertion and opinion regarding internal controls included in the 2007 Annual Report to Stockholders as required by Section 404 of the Sarbanes-Oxley Act of 2002. Management has confirmed to the Committee that internal controls over financial reporting have been appropriately designed, and are operating effectively to prevent or detect any material financial statement misstatements. We have also reviewed and discussed with Deloitte & Touche LLP, ITW’s independent public accountants, its audit and opinion regarding ITW’s internal controls as required by Section 404, which opinion is included in the 2007 Annual Report to Stockholders.

 

We have reviewed and discussed with Deloitte & Touche LLP the matters required to be discussed by the Statement on Auditing Standards No. 61 (Communications with Audit Committee) under which Deloitte & Touche LLP must provide us with additional information regarding the scope and results of its audit of ITW’s financial statements. This information includes: (1) Deloitte & Touche LLP’s responsibility under generally accepted auditing standards; (2) significant accounting policies; (3) management judgments and estimates; (4) any significant audit adjustments; (5) any disagreements with management; and (6) any difficulties encountered in performing the audit.

 

We have received from Deloitte & Touche LLP a letter providing the disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) with respect to any relationships between Deloitte & Touche LLP and ITW that in its professional judgment may reasonably be thought to bear on independence. Deloitte &

Touche LLP has discussed its independence with us, and has confirmed in the letter that, in its professional judgment, it is independent of ITW within the meaning of the federal securities laws.

 

The Committee also discussed with ITW’s internal auditors and independent public accountants the overall scope and plans for their respective audits. The Committee meets periodically with the internal auditors and independent public accountants, with and without management present, to discuss the results of their examinations, their evaluations of ITW’s internal controls, and the overall quality of ITW’s financial reporting.

 

Based on the reviews and discussions described above, we have recommended to the Board of Directors that the audited financial statements included in ITW’s 2007 Annual Report to Stockholders be included in ITW’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007.

 

Michael J. Birck, Chairman

Marvin D. Brailsford

Don H. Davis, Jr.

Robert C. McCormack

James A. Skinner