Illinois Tool Works Inc.

3600 West Lake Avenue

Glenview, Illinois 60026

 

Notice of Annual Meeting of Stockholders

Friday, May 4, 2007

3:00 P.M.

The Northern Trust Company

50 South LaSalle Street

Chicago, Illinois

 

 

ITW is holding its 2007 Annual Meeting for the following purposes:

 

 

The Board of Directors recommends that you vote FOR each of the director nominees and FOR the ratification of the appointment of Deloitte & Touche LLP as ITW’s independent public accountants for 2007.

 

Stockholders of record on March 6, 2007 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 2006 is enclosed.

By Order of the Board of Directors,

James H. Wooten, Jr.

Secretary

 

March 23, 2007

Illinois Tool Works Inc.

 

Proxy Statement

Table of Contents

 

 

Annual Report on Form 10-K

 

You may review and download a copy of ITW’s Annual Report on Form 10-K for the year ended December 31, 2006, 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 form of proxy are first being sent to stockholders on or about March 23, 2007.

 

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 6, 2007, the record date, may vote. On that date, there were 559,624,025 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:

 

 

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 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:

 

 

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. 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 and the ratification of the appointment of our independent public accountants, even if they do not receive voting instructions from you. Therefore, no broker non-votes will occur as to these proposals.

 

What vote is required to approve each proposal?

 

Election of Directors: The ten nominees who receive the highest number of votes will be elected. However, any nominee who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election will tender his or her resignation in accordance with our Corporate Governance Guidelines as discussed more fully on page 10. If you do not want to vote your shares for a particular nominee, you may indicate that in the space provided on the proxy card or withhold authority as prompted during telephone or internet voting.

 

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.

 

How do I submit a stockholder proposal?

 

To be considered for inclusion in our proxy statement for the May 2008 Annual Meeting, a stockholder proposal must be received no later than November 24, 2007. 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 2008 Annual Meeting. If you submit that proposal after February 7, 2008, 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 2008 Annual Meeting, our Secretary must receive your written nomination by December 31, 2007. 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; and (6) 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 2008 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed.

 

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 five times during 2006. In addition to meetings of the full Board, directors attended meetings of Board committees. Non-management directors, all of whom are independent, met three 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 2006, all of the directors attended at least 89% of the meetings of the Board and the committees on which they serve, and all of the directors attended the 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 35.

 

Compensation Committee

 

 

The Compensation Committee establishes and oversees executive and director compensation policies; 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 on new incentive compensation and equity-based plans or amendments. Additional information on the Committee and its activities is set forth 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 and real estate investments.

 

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 will also 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. In particular, the Board considered that 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. The Board has concluded that these relationships do not impair the independence of Ms. Crown or Messrs. McCormack and Smith.

 

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

 

Our Corporate Governance Guidelines include a director election provision that requires any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “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 withheld votes for 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 more “for” votes than votes “withheld” will participate. We will disclose the results in a Form 8-K within 90 days of the Annual Meeting. At the 2006 Annual Meeting, each director received more “for” votes than “withheld” votes.

 

Annual Retainer and Attendance Fees

 

In 2006, the annual retainer for non-employee directors was $40,000, the fee for each Board or committee meeting attended was $2,000, and the annual fee for committee chairs was an additional $3,000, except for the Audit Committee chair, whose annual fee was $10,000. Non-employee directors are given the opportunity to elect annually to receive all or a portion of their annual retainer, chairman and meeting fees in an equivalent value of ITW common stock pursuant to the 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.

 

Effective January 1, 2007, our director compensation was revised as follows: the annual retainer fee was increased to $135,000; Board and committee meeting fees were eliminated; the Audit Committee chair fee was increased to $15,000 and all other committee chair fees were increased to $5,000.

 

Directors’ Deferred Fee Plan

 

Non-employee directors can defer receipt of all or a portion of their annual retainer, chair and meeting fees until retirement or resignation. Deferred fee amounts are credited with interest 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. The stock units in a director’s account are distributed as shares of 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. At that time, each non-employee director of ITW other than Mr. Skinner, who became a director subsequent to the grant date, received an award of 900 restricted shares (prior to adjustment for our two-for-one stock split in May 2006), which vested as to 450 shares on each of January 3, 2005 and January 3, 2006. 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 $30,000. On that basis, on February 9, 2007, each non-employee director was granted 581 shares of stock, except Mr. Skinner, who did not receive a prior grant, received 1,353 shares of stock equivalent in value to $69,796.

 

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 2006

 

 

 

 

 

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, 2006. The “named executive officers” are our Chief Executive Officer, our Chief Financial Officer, 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), and our former Chairman. The “percent of class” calculation is based on 558,749,558 shares of ITW common stock outstanding as of December 31, 2006.

 

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, 2006. 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, 2006, 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 and trustee fees paid to The Northern Trust Company by ITW were approximately $891,000 in 2006.

 

 

 

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 2006 and written representations from executive officers and directors, we believe that all filing requirements were met during 2006, except that each of Robert Brunner, Roland Martel, David Parry and Sharon Brady were inadvertently late in filing a Form 3 due to a clerical error.

 

Introduction

 

The Compensation Committee is composed of independent directors committed to good governance. It reviews and approves annually all compensation decisions related to elected officers, including those for the chief executive officer and the other executive officers named in the Summary Compensation Table (the “named executive officers”). The Committee makes recommendations to the other independent directors to set the chief executive officer’s compensation, and reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers. Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors; however, the Committee has determined that it is not currently necessary for it to do so. On occasion, ITW engages Hewitt Associates LLC on a limited basis to provide data and other information regarding executive and director compensation to management, and from time to time, the Committee reviews materials provided by Hewitt Associates LLC to management. In making its executive

compensation decisions and recommendations, the Compensation Committee is guided by its charter and the following factors:

 

 

Compensation Philosophy

 

Our compensation philosophy is reflective of our overall operating philosophy and management structure. We are highly decentralized and believe in smaller autonomous business units focused on growing their businesses through exceptional customer relationships, and product and process innovation. The general managers of these 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, in general, in the best interests of our stockholders.

 

The elements of the compensation program are comprised of base salary, annual cash incentives and long-term stock incentives. The Compensation Committee reviews each element of our compensation package.

 

Peer Companies

 

In establishing and recommending base salaries, we have selected a group of comparable companies to benchmark executive pay. This group was selected using the following criteria:

 

 

The comparable companies selected for 2006 were: 3M; Caterpillar Inc.; Cooper Industries, Inc.; Danaher Corporation; Deere & Company; Dover Corporation; Eaton Corporation; Emerson Electric Company; Honeywell International; Ingersoll-Rand Company; ITT Industries, Inc.; Johnson Controls, Inc.; Masco Corporation; Parker Hannifin Corporation; Textron, Inc.; TRW Automotive; Tyco International and United Technologies. The Committee is comfortable that the peer group selected will provide relevant comparisons.

 

Base Salary

 

In determining base salary, the Committee generally considers the size and scope of the executives’ responsibilities and the median base salary of similar positions at our comparator companies, as well as the executive officers’ past experience, performance and future potential.

We target this median generally to ensure a competitive base salary that encourages solid performance year after year.

 

Annual Cash Incentives

 

The opportunity for above-median pay is provided through our annual cash incentives, consistent with our view that long-term value is created through consistent year-over-year improvement. 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.

 

We believe that management should be rewarded for contributions to our overall financial success measured by the income growth of their business unit, group or the corporation, as well as for individual accomplishments that contribute to the longer-term health of the business. Therefore, the ITW Executive Incentive Plan approved by stockholders is designed around two elements generally weighted equally: income growth/improvement (the “P” factor) and personal objectives (the “O” factor). The P factors are recommended by management and approved by the Committee annually. The individual O factors for the chief executive officer are determined by the Committee annually, and the individual O factors for each other participating executive officer are determined by the chief executive officer. Maximums are set in accordance with the level of responsibility and accountability and for the named executive officers range from 90 to 200 percent. Actual payment percentages for executive officers have averaged 90.7% of the maximum award over the last five years. The average award received by the named executive officers was 90.2% of the maximum award for the same period.

 

You can find further detail about our Executive Incentive Plan below under “Executive Compensation — Grants of Plan-Based Awards” on page 22.

 

Long-Term Stock Incentives

 

Because we believe that ensuring the long-term growth and health of the business is a primary management responsibility, we believe that a portion of management compensation should be determined based on how our stock performs over time, encouraging decisions that consider the long term. 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. In keeping with our straight-forward approach to compensation, we have not historically used performance-based awards as they add an additional level of complexity. The award granted is a reflection of the size and scope of the executive’s position and is based upon individual performance and potential. Stock options are priced at the fair market value (the average of the highest and lowest trading prices) of ITW common stock on the day granted. In the future, the Compensation Committee will continue to determine the types of stock incentives that are appropriate.

 

For 2006, the Compensation Committee approved at its December 2005 meeting stock option awards to executive officers to be granted on February 1, 2006. For 2007, the Committee approved at its February 9 meeting stock option awards to executive officers to be granted the same day. The Committee expects that all future stock incentive awards will be approved by the Committee and granted on the same day using the fair market value of ITW’s stock on that date.

 

Perquisites & Other Benefits

 

In general, we do not provide perquisites to our executives that are not available to other employees. We do, however, provide the following:

 

 

No officer received in excess of $10,000 in perquisites during 2006, so no perquisites are disclosed in the Summary Compensation Table.

 

Stock Ownership

 

As previously discussed, we believe stock ownership is an important element of our pay package to promote decisions that consider the long term. As a result, 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. 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 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 position for five or more years have satisfied the guidelines.

 

Deductibility

 

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to each of the named 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 of control of the company. However, we do have provisions contained in specific nonqualified plans and the 2006 ITW Stock Incentive Plan that provide for compensation to all participants in those plans in the event of a change of control or certain termination events. You can find further detail below under “Executive Compensation — Potential Payments Upon Termination or Corporate Change” on page 30.

 

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 4 Table

 

 

 

 

Footnote 6 Table

 

 

 

 

Grants of Plan-Based Awards

 

The table below provides information regarding plan-based awards granted to our named executive officers during fiscal 2006 under the Executive Incentive Plan and the 1996 Stock Incentive Plan.

 

On December 8, 2005, the Compensation Committee approved stock option awards with a grant date of February 1, 2006 to the executive officers and certain other key employees. The exercise price of this grant was determined using the fair market value of our common stock on the grant date. These awards are reflected in the Summary Compensation, Grants of Plan-Based Awards and Outstanding Equity Awards at Fiscal Year-End tables.

 

The Executive Incentive Plan, as described above in the “Compensation Discussion and Analysis,” is composed of two factors generally weighted equally. The “P” factor (profit achievement) is based on income performance. The “O” factor (personal objectives) is based on the achievement of pre-determined personal goals. Bonus award program goals are set in January and payments for these goals are made following the end of the fiscal year.

 

Both factors have a payout range of 0 to 100 percent of the maximum. For the “P” factor, actual operating income is compared to plan or best prior year within the last five years to measure the percentage of achievement. At the 80% achievement level (compared to plan) the payment is 34% of the maximum payment. Participants begin to earn payment for the “P” factor once they attain 80% achievement of their established plan income levels; a target payout of 70% is realized when they reach 100% achievement of their established plan income levels. A maximum payout only occurs when 120% achievement of established plan income levels is reached. For 2007, the “P” factor calculation will be measured by growth in income versus the prior year.

 

“O” factors are less quantifiable, but are determined by measuring the individual’s performance against his or her goals in a given year. An element of judgment is involved in the Compensation Committee’s determination of payments for the “O” factors, considering completion of objectives and quality of the work performed. A distinguished level of achievement provides a maximum 100% payment.

 

The table below reflects the “threshold”, “target” and “maximum” cash incentive opportunity for the named executive officers set by the Compensation Committee in February 2006 for 2006 performance. Since there is no minimum achievement requirement for the “O” factors, the “threshold” estimated future payout is based only on the minimum “P” factor payout of 34%, which is realized upon achievement of 80% of plan. “Target” estimated future payout is based on a “P” factor payout of 70%, which is realized upon achievement of 100% of plan, and 85% achievement of the relevant “O” factors. “Maximum” estimated future payout is based on a “P” factor payout of 100%, which is realized upon achievement of 120% of plan, and 100% achievement of the relevant “O” factors.

 

Actual payments made under the Executive Incentive Plan, as approved by the Compensation Committee in February 2007 for achievement of 2006 performance, can be found in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 20.

 

 

 

Outstanding Equity Awards at Fiscal Year-End 2006

 

This table sets forth details, on an award-by-award basis, the outstanding equity awards held by each of the named executive officers as of December 31, 2006. 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 and the vesting of restricted stock during fiscal 2006.

 

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. The value realized on the vesting of restricted stock is calculated by multiplying the fair market value (the average of the highest and lowest trading prices) of our common stock on the vesting date by the number of shares vesting.

 

 

 

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, 2006.

 

 

ITW Retirement Accumulation Plan

 

The company maintains 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 over his or her years of plan participation. The accumulated percentages, when applied to components of final average annual pay (generally, salary and bonus payable in the year 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 later 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 prior 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 prior annuity 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 unrelated to average pay over covered compensation 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 benefit 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, Zentmyer and Farrell are subject to alternative calculations under the pre-2001 Pension Plan formula, and those calculations would result in benefits with a higher present value than the benefits payable at normal retirement set forth in the Pension Benefits Table above for Messrs. Hansen and Flaum.

 

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 ($220,000 in 2006) 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 for the first month of the prior quarter (the “AFR”).

 

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 2006.

 

 

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 bonus 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 2006, the crediting rate ranged from 5.81% to 6.32% for persons not yet retirement-eligible and 7.56% to 8.22% 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 above-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 bonus. The minimum deferral of either salary or bonus 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. Since Mr. Farrell retired on May 6, 2006 he is only included in the Retirement Prior to Age 65 section, which reflects the actual amounts determined as of his retirement date. 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 nonqualified plans, including the Executive Contributory Retirement Income Plans, the Retirement Accumulation Plan, the Nonqualified Pension Plan, the Executive Incentive Plan and the 1996 ITW Stock Incentive Plan. These plans provide for compensation to all participants in the plans in the event of a change of control or certain termination events.

 

Other than for Mr. Farrell, the information set forth below assumes the effective date of the termination event is the last business day of the fiscal year, December 29, 2006, and the non-equity incentive compensation is calculated at the maximum award value.

 

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, any nonqualified pension plan benefit shown is an early retirement subsidy provided under a grandfathered pension formula and is in addition to the amounts shown in the Pension Benefits table. In addition, if the named executive officer is not at least 62 years of age at that time, the stock options granted in February 2006 will not vest, but all other unvested stock options will. For purposes of the discussion below, the value of stock options accelerated upon termination was determined using the excess, if any, of $46.19 (the closing price of ITW common stock on December 29, 2006) over the option exercise price. The discussion below also assumes that all unvested and accelerated stock options are exercised upon the termination event.

 

Under voluntary termination, retirement or involuntary not for cause termination, the named executive officers would not receive any special payment under the Executive Incentive Plan. 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 of the named executive officer occurs prior to the last day of the fiscal year, no payouts are made under the Executive Incentive Plan.

 

Under any termination scenario discussed below, executive officers in our nonqualified deferred compensation plans (“ECRIP”) 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 10 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 table shows the January 1, 2007 present value (calculated at a 5.8% discount rate) of the payments that would be made pursuant to the named executive officers’ previous elections if their termination of employment had occurred on (or before in the case of Mr. Farrell) 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 2006 (8.0758%) throughout the distribution period:

 

Nonqualified Deferred Compensation Payments

 

 

Voluntary Termination

 

Other than payments earned under the Executive Incentive Plan and the ECRIP discussed above, the named executive officers are not eligible for any payment upon voluntary termination.

 

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.

 

In addition to the payments under the ECRIP as mentioned above, retirement benefits may result pursuant to the Executive Incentive Plan, the 1996 Stock Incentive Plan and the Nonqualified Pension Plan. As discussed above, no amounts would be paid pursuant to the Executive Incentive Plan since the assumed termination date of December 29, 2006 is not the last day of the fiscal year. Under the 1996 Stock Incentive Plan, awards granted in December 2004 would vest for those who are at least 55 years of age, however, none of those options were in the money as of December 29, 2006. Awards granted under that plan in February 2006 would vest for those who are at least 62 years of age, however, none of the named executive officers serving as of December 29, 2006 were 62 years of age. For the Nonqualified Pension Plan, the

payments below reflect the present value of accumulated benefit under that plan that would have been payable as of December 29, 2006. The following table provides detail regarding these benefits:

 

 

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

 

As with voluntary termination, other than payments earned under the Executive Incentive Plan and the ECRIP discussed above, the named executive officers are not eligible for any payment upon involuntary not for cause termination.

 

Involuntary Termination upon a Corporate Change

 

Under the 1996 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, or (4) more than a 50% turnover in the membership of the Board of Directors under circumstances not approved by the then-current Board.

 

In the event of a Corporate Change under the Executive Incentive Plan, all named executive officers would be entitled to a lump sum earned compensation payment determined as if the participant had remained employed for the entire fiscal year, prorated for the number of days in the fiscal year that have elapsed as of the date of the Corporate Change. In addition, all of his or her unvested stock option awards received under the 1996 Stock Incentive Plan would

immediately vest. In addition to payments under the ECRIP as mentioned above, the named executive officers would be eligible for maximum payments under these plans as follows:

 

 

Disability or Death

 

In the event a named executive officer becomes permanently disabled or dies, in addition to payments under the ECRIP as mentioned above, under the Executive Incentive Plan they would be entitled to a lump sum earned compensation payment determined as if the participant had remained employed for the entire fiscal year, prorated for the number of days in the fiscal year that have elapsed as of the date of their permanent disability or death. In addition, all of his or her unvested stock option awards received under the 1996 Stock Incentive Plan would immediately vest. The named executive officers would be eligible for the same maximum payments under these plans as those referenced above under Involuntary Termination upon a Corporate Change.

 

Practices Regarding Related Transactions

 

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.

 

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. No member of the Audit Committee having an interest in a related-party transaction may participate in any decision regarding that transaction.

 

Consulting Agreement with W. James Farrell

 

ITW entered into a Consulting Agreement, dated as of May 8, 2006, with SLP LLC, an Illinois limited liability company (“SLP”), of which W. James Farrell, the former Chairman of ITW, is the sole owner. Pursuant to the agreement, SLP makes available to ITW the services of Mr. Farrell to provide management consulting services for an annual fee of $250,000, plus

reasonable expenses of up to $50,000 annually. In addition, ITW reimburses SLP for the rental of office space and provides office equipment at a cost of up to $30,000 and $15,000 annually, respectively, and provides an administrative assistant.

 

SLP is subject to a nondisclosure provision during the term of the agreement and for five years thereafter, as well as to a noncompetition provision during the term of the agreement and for two years thereafter. The agreement also provides for indemnification by ITW and by SLP under certain circumstances.

 

The agreement has an initial two-year term, with an option to extend on a monthly basis thereafter. ITW may terminate the agreement for failure to perform services, for breach of the nondisclosure or noncompetition provisions, or on any anniversary date upon 30-days’ written notice.

 

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