UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Service Corporation International

(Name of Registrant as Specified In Its Charter)

 

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Service Corporation International

 

Proxy Statement and 2011 Annual Meeting Notice

 

2011 Annual Meeting

 

Date: Wednesday, May 11, 2011

Time: 9:00 a.m. Houston time

Place: York Distributors Association Auditorium

American Funeral Service Training Center

415 Barren Springs Drive

Houston, Texas 77090

 

Service Corporation International

1929 Allen Parkway, P.O. Box 130548

 

Dear Shareholder,

 

As the owner of shares of Service Corporation International, please accept my invitation to attend the Company’s Annual Meeting of Shareholders. It is scheduled for Wednesday, May 11, 2011, at 9:00 a.m. Houston time in the York Distributors Association Auditorium of the American Funeral Service Training Center, 415 Barren Springs Drive, Houston, Texas. During the meeting, we will report on how our Company performed for its shareholders during 2010 and share with you our plans for the future. You will have an opportunity to ask questions, express your views, and meet members of SCI’s executive team and Board of Directors.

 

On behalf of the Board of Directors and our employees, I would like to express our appreciation for your continuing support. I look forward to greeting in person all shareholders who are able to join us at our Annual Meeting.

 

Sincerely,

 

R. L. Waltrip

Chairman of the Board

 

Service Corporation International

1929 Allen Parkway, P.O. Box 130548

Houston, Texas 77219-0548

 

TABLE OF CONTENTS

PROXY STATEMENT	1
PROPOSAL 1 — ELECTION OF DIRECTORS	4
COMPENSATION DISCUSSION AND ANALYSIS	20
CERTAIN INFORMATION WITH RESPECT TO OFFICERS AND DIRECTORS	32
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION	46
CERTAIN TRANSACTIONS	46
VOTING SECURITIES AND PRINCIPAL HOLDERS	47
REPORT OF THE AUDIT COMMITTEE	50
PROPOSAL 2 — PROPOSAL TO APPROVE THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	51
PROPOSAL 3 — PROPOSAL TO APPROVE THE AMENDED AND RESTATED INCENTIVE PLAN	52
PROPOSAL 4 — PROPOSAL TO APPROVE THE AMENDMENT TO THE AMENDED AND RESTATED DIRECTOR FEE PLAN	58
PROPOSAL 5 — ADVISORY VOTE TO APPROVED NAMED EXECUTIVE OFFICER COMPENSATION	60
PROPOSAL 6 — VOTE ON THE FREQUENCY OF AN ADVISORY VOTE ON NAMED EXECUTIVE OFFICER COMPENSATION	60
OTHER MATTERS	61

 

Service Corporation International

1929 Allen Parkway

P.O. Box 130548

Houston, Texas 77219-0548

 

Even if you submit your vote by one of the first three methods mentioned above, you may still vote at the meeting if you are the record holder of your shares or hold a legal proxy from the record holder. Your vote at the meeting will constitute a revocation of your earlier voting instructions.

 

Q: What if I want to vote in person at the Annual Meeting?

 

A:  The Notice of Annual Meeting of Shareholders provides details of the date, time and place of the Annual Meeting, if you wish to vote in person.

 

Q: How does the Board of Directors recommend voting?

 

A:  The Board of Directors recommends voting:

 

 

Although the Board of Directors does not contemplate that any nominee will be unable or unwilling to serve, if such a situation arises, the proxies that do not withhold authority to vote for directors will be voted for a substitute nominee(s) chosen by the Board.

 

Q: If I give my proxy, how will my stock be voted on other business brought up at the Annual Meeting?

 

A:  By submitting your proxy, you authorize the persons named on the proxy card to use their discretion in voting on any other matters properly brought before the Annual Meeting. At the date hereof, SCI does not know of any other business to be considered at the Annual Meeting.

 

Q: Why is it important to vote via the internet or telephone, or send in my proxy card so that it is received on or before May 10, 2011?

 

A:  The Company cannot conduct business at the Annual Meeting unless a quorum is present. A quorum will only be present if a majority of the outstanding shares of SCI common stock as of March 14, 2011 is present at the meeting in person or by proxy. It is for this reason that we urge you to vote via the internet or telephone or send in your completed proxy card(s) as soon as possible, so that your shares can be voted even if you cannot attend the meeting.

 

Q: Can I revoke my proxy once I have given it?

 

A:  Yes. Your proxy, even though executed and returned, may be revoked any time prior to the time that it is voted at the Annual Meeting by a later-dated proxy or by written notice of revocation filed with the Secretary, Gregory T. Sangalis. Alternatively, you can attend the Annual Meeting, revoke your proxy in person, and vote at the meeting itself.

 

Q: How will the votes be counted?

 

A:  Each properly executed proxy received in time for the Annual Meeting will be voted as specified therein, or if a shareholder does not specify how the shares represented by his or her proxy are to be voted, they will be voted (i) for the nominees listed therein (or for other nominees as provided above), (ii) for approval of the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm, (iii) for

approval of the Amended and Restated Incentive Plan, (iv) for approval of the Amended and Restated Director Fee Plan, (v) for approval on an advisory basis of named executive officer compensation, and (vi) to abstain from voting on the proposal on the frequency of the advisory vote to approve named executive officer compensation. Holders of SCI common stock are entitled to one vote per share on each matter considered at the Annual Meeting. In the election of directors, a shareholder has the right to vote the number of his or her shares for as many persons as there are to be elected as directors. Shareholders do not have the right to cumulate votes in the election of directors. Abstentions are counted towards the calculation of a quorum. An abstention has the same effect as a vote against a proposal, or in the case of the election of directors, as shares for which voting power has been withheld.

 

Q: What if my SCI shares are held through a bank or broker?

 

A:  If your shares are held through a broker or bank, you will receive voting instructions from your bank or broker describing how to vote your stock. If you do not vote your shares, your broker or bank does not have the discretion to vote your shares on the proposals, except that they have the discretion to vote your shares for approval of Pricewaterhouse Coopers LLP as SCI’s independent registered public accounting firm for the 2011 fiscal year. A “broker non-vote” refers to a proxy that votes on one matter, but indicates that the holder does not have the authority to vote on other matters. Broker non-votes will have the following effects at our Annual Meeting: for purposes of determining whether a quorum is present, a broker non-vote is deemed to be present at the meeting; for purposes of the election of directors and other matters to be voted on at the meeting, a broker non-vote will not be counted.

 

Q: How does a shareholder or interested party communicate with the Board of Directors, committees or individual directors?

 

A:  Any shareholder or interested party may communicate with the Board of Directors, any committee of the Board, the non-management directors as a group or any director, by sending written communications addressed to the Board of Directors of Service Corporation International, a Board committee, the non-management directors or such individual director or directors, c/o Secretary, Service Corporation International, 1929 Allen Parkway, Houston, TX 77019. All communications will be compiled by the Secretary of the Company and submitted to the Board of Directors (or other addressee) at the next regular Board meeting.

 

Q: What is the Company’s Web address?

 

A:  The SCI home page is www.sci-corp.com. At the website, the following information is available for viewing. The information below is also available in print to any shareholder who requests it.

 

 

Q: How can I obtain a copy of the Annual Report on Form 10-K?

 

A:  A copy of SCI’s 2010 Annual Report on Form 10-K is furnished with this proxy statement to each shareholder entitled to vote at the Annual Meeting. If you do not receive a copy of the Annual Report on Form 10-K, you may obtain one free of charge by writing to Investor Relations, P.O. Box 130548, Houston, Texas 77219-0548.

 

This Proxy Statement, the Notice of Annual Meeting of Shareholders and the enclosed proxy card are furnished to shareholders beginning on or about April 1, 2011.

 

The Board of Directors consists of eleven members and is divided into three classes, each with a staggered term of three years. At this year’s Annual Meeting, shareholders will be asked to elect four directors to the Board. These directors will be elected for three-year terms expiring in 2014. Set forth below are profiles for each of the four candidates nominated by the Nominating and Corporate Governance Committee of the Board of Directors for election by shareholders at this year’s Annual Meeting. Directors are elected by a majority of votes cast.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE FOLLOWING NOMINEES.

 

 

⁽¹⁾  Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽²⁾  Includes 1,991,832 shares which may be acquired by Mr. Thomas L. Ryan upon exercise of stock options exercisable within 60 days of March 14, 2011.

 

 

⁽¹⁾  Details are provided in the footnotes to the tables of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

The following are profiles of the other continuing directors currently serving on the Board of SCI:

 

 

⁽¹⁾  Details are provided in the footnotes to the tables of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽²⁾  Includes 1,294,866 shares which may be acquired by Mr. R.L. Waltrip upon exercise of stock options exercisable within 60 days of March 14, 2011.

 

 

⁽¹⁾  Details are provided in the footnotes to the tables of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

⁽¹⁾  Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

 

⁽¹⁾  Details are provided in the footnotes to the table of director and officer shareholdings listed under “Voting Securities and Principal Holders”.

 

Board Composition and Meetings

 

The Board of SCI is comprised of a majority of independent directors. The Audit, Compensation and Nominating and Corporate Governance Committees of the Board are all comprised entirely of directors who are independent within the meaning of Securities and Exchange Commission (“SEC”) regulations and the listing standards of the New York Stock Exchange. The Board of Directors held four meetings in 2010. Each Board member attended at least 75% of the total number of meetings of the Board and Board committees on which he served. Although the Board does not have a policy on director attendance at annual meetings, all Board members attended the Company’s 2010 Annual Meeting of Shareholders.

 

Consideration of Director Nominees

 

The Nominating and Corporate Governance Committee considers candidates for Board membership suggested by its members and other Board members, as well as management and shareholders. The Committee may also retain a third-party executive search firm to identify candidates. A shareholder who wishes to recommend a prospective nominee for the Board should notify the Company’s Secretary in writing with whatever supporting material the shareholder considers appropriate. To be considered, the written recommendation from a shareholder must be received by the Company’s Secretary at least 120 calendar days prior to the anniversary of the date of the Company’s Proxy Statement for the prior year’s Annual Meeting of Shareholders.

 

Once the Nominating and Corporate Governance Committee has identified a prospective nominee, the Committee will consider the available information concerning the nominee, including the Committee’s own knowledge of the prospective nominee, and may seek additional information or an interview. If the Committee determines that further consideration is warranted, the Committee will then evaluate the prospective nominee against the standards and qualifications set out in the Company’s Corporate Governance Guidelines. Although the Guidelines do not specifically address diversity, the Committee considers diversity of experience, education, skills, background and other factors in the evaluation of prospective nominees. The Guidelines include the following:

 

 

The Committee also considers such other relevant factors as it deems appropriate, including the current composition of the Board, the balance of management and independent directors, the need for Audit Committee expertise and the evaluations of other prospective nominees. After completing this process, the Committee makes a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board determines the nominees after considering the recommendation and report of the Committee.

Director Independence

 

In August 2003, the Board adopted its Corporate Governance Guidelines. The Guidelines incorporate the director independence standards of the New York Stock Exchange. The portion of the Guidelines addressing director independence is as follows:

 

“3.1 Board Independence

 

The majority of the Board of Directors of SCI will be comprised of independent directors, meaning directors who have no material relationship with SCI (either directly or as a partner, shareholder, or officer of an organization that has a material relationship with SCI). In addition, the Audit, Compensation, and Nominating and Corporate Governance Committees of SCI will be comprised entirely of independent directors.

 

The Nominating and Corporate Governance Committee of SCI will review the independence of SCI’s directors on an ongoing basis to ensure that Board and Board committee composition is consistent with these principles and with the rules of the New York Stock Exchange and/or other applicable rules.”

 

Pursuant to the Guidelines, the Board undertook a review of director independence in February 2011. For this review, the Board considered the findings and recommendations of the Nominating and Corporate Governance Committee. The Board and the Committee considered transactions and relationships between each director or any member of his immediate family and the Company and its subsidiaries and affiliates, including those reported under “Certain Transactions” below.

 

As a result of this review, the Board affirmatively determined that all of the directors are independent of the Company and its management under the standards set forth in the Guidelines, with the exception of R. L. Waltrip, Thomas L. Ryan and W. Blair Waltrip. Messrs. R. L. Waltrip and Ryan are considered inside directors because of their employment as senior executives of the Company. Mr. W. Blair Waltrip is considered a non-independent director because he is the son of an executive officer, Mr. R. L. Waltrip.

 

Leadership Structure

 

Under the current leadership structure of the Board, the offices of Chairman of the Board and Chief Executive Officer are held by two people — R.L. Waltrip and Thomas L. Ryan, respectively. Prior to 2005, the two offices were held by Mr. R.L. Waltrip. In February 2005, the Board elected Mr. Ryan as Chief Executive Officer in accordance with the Company’s succession plan to transfer day-to-day operational responsibilities. The Company believes this leadership structure remains appropriate because it vests operational leadership in a maturing, dynamic and talented leader who has significant knowledge of the deathcare industry. Further, this structure retains the leadership services and vision of Mr. Waltrip, the founder of the Company and the most recognized icon in the industry, who has provided invaluable leadership to the Company for over 40 years.

 

Risk Oversight

 

The Board of Directors has assigned to the Nominating and Corporate Governance Committee the quarterly oversight responsibility for the Company’s enterprise risk management function. Management has the primary responsibility to identify risks and risk mitigation strategies and provides periodic reports to the Nominating and Corporate Governance Committee. The Audit Committee is responsible for oversight of major financial risks relating to the Company’s accounting matters and financial reporting compliance. The Compensation Committee has oversight of the risk assessment of the Company’s compensation programs. The Investment Committee has oversight of risks relating to the investment of trust funds. The Nominating and Corporate Governance Committee compiles risk assessments of the other committees and of management and periodically provides enterprise risk management reports to the Board.

 

 

 

 

 

Director Compensation

 

The following table sets forth director compensation for 2010. The table and following discussion apply to directors who are not employees (outside directors). Employees who are directors do not receive director fees or participate in director compensation.

 

 

 

 

Stock Award: Annual Retainer

 

Under the Amended and Restated Director Fee Plan, all outside directors receive an annual retainer of 10,000 shares of Common Stock of SCI or, at each director’s option, deferred Common Stock equivalents. The award is made once a year on the date of the Annual Meeting of Shareholders and is 100% vested on the date of grant. Accordingly, each outside director received 10,000 shares of Common Stock or deferred Common Stock equivalents on May 12, 2010. The fair market value of the award is set forth in the column “Stock Awards” in the table above. For dividends pertaining to a director’s deferred Common Stock equivalents, the dividends are reinvested in additional deferred Common Stock equivalents based on the fair market value of Common Stock on the dividend record date.

Meeting Fees

 

In addition to the annual retainer, all outside directors receive $10,000 for each Board meeting attended and receive a further attendance fee for each Committee meeting attended as follows: Audit Committee Chair $6,000, each other committee chair $5,000, Audit Committee members $4,000, and each other committee member $3,000. If the Company initiates a telephone Board or Committee meeting, a participating director is entitled to an attendance fee in an amount equal to 25% of the regular fee described in the preceding sentence. The total meeting fees for each director are set forth in column “Fees Earned or Paid in Cash” in the table above.

 

Directors may elect to defer all or any of their meeting fees by participating in the Executive Deferred Compensation Plan which is described hereinafter under “Certain Information with Respect to Officers and Directors — Executive Deferred Compensation Plan.” There are no Company contributions made for a director’s account in the plan. The director may have deferred fees invested in the funds available under the plan. Any earnings or losses on such deferred fees are not reported in the table above.

 

Directors’ Retirement Plan

 

Effective January 1, 2001, the Non-Employee Directors’ Retirement Plan was amended such that only years of service prior to 2001 are considered for vesting purposes. Non-employee directors who served on the Board prior to that time and were participants in the plan are entitled to receive annual retirement benefits of $42,500 per year for ten years, subject to a vesting schedule, based on their years of Board service. Retirement benefits vested in 25% increments at the end of five, eight, eleven and fifteen years of credited service, except that the benefits vest completely in the event of death while the participant is still a member of the Board or in the event of a change of control of SCI (as defined in the plan). The increases in the actuarial present values of benefits under the plan are reflected in the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the table above.

 

Use of Company Aircraft

 

Each outside director is allowed to use aircraft leased or financed by the Company under cancelable leases or financial arrangements for a maximum of 30 flight hours per year for personal reasons. The director must reimburse the Company for any such usage at an hourly rate pursuant to a time-sharing agreement governed by Federal Aviation Administration (“FAA”) Regulations. The Company also values such usage on the basis of the incremental cost to the Company of such use. The cost includes the average cost of fuel used, direct costs incurred such as flight planning services and food, and an hourly charge for maintenance of engine and airframe. For 2010, the incremental cost of personal use of Company aircraft, less the amounts reimbursed from the directors to the Company, is reflected in the column “All Other Compensation” in the table above.

 

Overview

 

This Compensation Discussion and Analysis has been prepared by our management and reviewed by the Compensation Committee of our Board of Directors. This discussion provides information and context regarding the compensation paid to our Chief Executive Officer, Chief Financial Officer, and the other three most highly-compensation executive officers in 2010, all of whom are collectively referred to as the “Named Executive Officers”. Our Named Executive Officers for 2010 were:

 

 

The Company’s executive compensation policies are designed to provide aggregate compensation opportunities for our executives that are competitive in the business marketplace and that are based upon Company and individual performance. Our foremost objectives are to:

 

 

Executive Summary

 

2010 Company Performance

 

The Company delivered strong financial results in 2010, including the following:

 

Key Features of Our Compensation Programs

 

Over the course of the past several years, acting in the interests of the stockholders, the Compensation Committee in conjunction with the Company’s management has adjusted the Company’s compensation programs toward performance based compensation. In addition, we have collectively modified or eliminated certain components of our programs to better align them with stockholders’ interests. The following are highlights of our compensation programs, including our emphasis on pay commensurate with performance and actions taken to align aspects of our programs with evolving standards.

 

	•	A significant portion of the compensation of our Named Executive Officers is directly linked to the Company’s performance, as demonstrated in the historical payouts related to our annual and long-term incentive plans; specifically:

	•	Annual Performance-Based Incentives Paid in Cash.   No annual incentive was paid to Named Executive Officers for 2008 because the Company did not meet applicable performance measures.

	•	Performance Units.   A major component of our long-term incentives, performance units paid out $-0- for each of the three year periods ending in 2008, 2009 and 2010 because the Company failed to meet the relative and absolute shareholder return requirements of the performance unit plan.
	•	Annual Base Salaries.   Based upon management’s recommendation, salary adjustments for Named Executive Officers were suspended for 2009 in light of the then-current financial crisis in the economy.

	•	Stock Retention Requirements.   In 2011, we established a policy which requires that an officer retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until that officer has met the stock ownership guidelines.
	•	Long-Term Disability.   Commencing in 2011, we are eliminating this Company-paid benefit for officers.
	•	Elimination of Tax Gross Ups.   In 2010, we eliminated the provisions in our executive employment agreements that provide for tax gross ups in the event of a change of control of the Company.
	•	Split Dollar Life Insurance.   All remaining compensation components of the Company’s legacy Split Dollar Life Insurance program were terminated in 2010.
	•	Club Memberships.   Commencing in 2010, we eliminated reimbursement of monthly dues for club memberships.
	•	Claw-Backs.   Commencing in 2008, the Company added claw-back provisions that are triggered in certain circumstances if fraud is involved. If triggered, the provisions would seek to claw-back annual performance-based incentives paid in cash, stock options, restricted stock and performance units.

 

Role of the Compensation Committee

 

The Compensation Committee reviews the executive compensation program of the Company to ensure that it is adequate to attract, motivate and retain well-qualified executive officers who will maximize shareholder returns and that it is directly and materially related to the short-term and long-term objectives of the Company and its

shareholders as well as the operating performance of the Company. To carry out its role, among other things, the Compensation Committee:

 

 

Compensation Philosophy and Process

 

The Company’s compensation philosophy as implemented through the Compensation Committee is to align executive compensation with the performance of the Company and the individual by using several compensation components for our executives. The components of our compensation program for our executives consist of:

 

 

In summary, our direct compensation provides a balanced approach to compensation and consists of the primary components illustrated below. The chart is a general representation and is not to scale for any particular executive:

 

 

Our overall compensation philosophy is to target our direct compensation for executives within the range of the market median of the Reference Group as discussed below, with opportunities to exceed the targeted compensation levels through annual performance-based incentives paid in cash and through long-term performance-based incentives. We believe these targeted levels are appropriate in order to motivate, reward, and retain our executives, each of whom have leadership talents and expertise that make them attractive to other companies.

Because we target the range for each component, each of the components of compensation is not affected by any decision respecting other components. However, the Compensation Committee does review overall compensation for reasonableness and comparability to the prior year’s compensation.

 

Compensation decisions are made by our Compensation Committee, based in part on input from independent consultants. In March 2010, the Compensation Committee completed a process to review proposals from several independent compensation consultants, following which it retained consultants from Hewitt Associates LLC (“Hewitt”) as independent advisors on executive compensation. This consultant engagement transitioned to Meridian Compensation Partners, LLC (“Meridian”) in October 2010 upon Meridian’s separation from Hewitt. Prior thereto, Towers Watson had served as our independent consultant. Meridian is retained by and reports directly to the Compensation Committee, which has the authority to approve Meridian’s fees and other terms of engagement. In addition, Clark Consulting is retained by and reports directly to the Compensation Committee and provides advice as to executive benefit programs such as executive life insurance benefits and deferred compensation arrangements. Annually, the Compensation Committee reviews the fee structure and services provided by their independent consultants in order to affirm their continuation as consultants or to assist the Compensation Committee in the selection of new consultants, if appropriate.

 

All of the services provided by Meridian during 2010 were to the Compensation Committee to provide advice on executive and director compensation. Meridian was formed on February 1, 2010 through a planned separation of a significant portion of the executive compensation consulting practice from Hewitt. Meridian’s fees for executive compensation consulting to the Compensation Committee in 2010 (including the period that Meridian was part of Hewitt) were $120,203. Hewitt (excluding Meridian) also provided services to the Company in 2010 unrelated to executive compensation, including benefits administration and consulting services, and received fees of $2,148,877 for those other services. The Compensation Committee did not review or approve the other services provided by Hewitt to the Company, as those services were approved by management in the normal course of business. Based on our relationship with the representatives of Meridian and considering that Meridian is an independent consulting firm, we believe that the consulting advice we receive from Meridian is objective.

 

In November of each year, our independent consultant presents to the Compensation Committee comparative data, including benchmarking results discussed below. For the Chairman and the CEO, the Compensation Committee is exclusively responsible for the final determination of all components of compensation but may request input or recommendations from Company management. For other Named Executive Officers (as defined below), the Compensation Committee receives additional recommendations from our CEO and our Vice President of Human Resources for base salary and long-term incentive compensation. In the first quarter of each year, the Compensation Committee reviews the data and recommendations and sets the compensation components of annual base salary, annual performance-based incentives and long-term incentives for that year.

 

After awards of compensation components are made in the first quarter of each year, the performance components of the officers’ compensation are determined based on corporate performance and not on individual performance, except that annual performance-based incentives for three of our operational officers (one of whom is a Named Executive Officer) include performance measures focused on the respective business segments under their management. The compensation components are designed to focus our senior leadership, which is responsible for the overall performance and results of the Company, to operate as a team with company-wide goals. This approach serves to align the compensation of our most senior leadership team with the performance of the Company. The Compensation Committee generally does not retain any discretion to increase or decrease awards absent attainment of the relevant performance goals. However, the Compensation Committee does reserve the right to reduce at its discretion the amounts of annual performance-based incentives paid in cash.

 

Benchmarking Tools

 

In reviewing the appropriate range of overall compensation and the appropriate ranges of the components of compensation for 2010, the Compensation Committee used benchmarking tools and surveys presented by Towers Watson. Competitive data from Towers Watson represented pay rates for similar positions in general industry companies having revenues of $1-$3 billion. We refer to those companies as the “Reference Group” or the “2010 Reference Group.” Where appropriate data are available, Towers Watson used regression analysis to

develop the compensation statistics used for comparison purposes. The names of the companies comprising the 2010 Reference Group are set forth on Annex A.

 

In connection with its 2010 selection of Meridian to serve as its independent consultant, the Compensation Committee wanted a fresh review of the composition of our peer group in light of the overall complexity of the Company’s business model. For example, the Compensation Committee also considers the fact that the Company sells preneed contracts (approximately $700 million in 2010) that build up our backlog but are not initially recognized or reported as revenues under GAAP. These preneed contracts are administered by the Company over long periods of time and the Company oversees the management and administration of approximately $3 billion in trust funds, the earnings of which are typically deferred under GAAP. In addition, the Compensation Committee considers that executive management oversees a people centric business of more than 20,000 employees, including 3,000 preneed sales personnel whose production does not initially impact revenues under GAAP. At the request of the Compensation Committee in 2010, Meridian developed a peer group of companies in which SCI is positioned near the median relative to revenue and enterprise value (the “2011 Reference Group”).

 

Annual Base Salaries

 

For 2010, we targeted the base salary levels of our Named Executive Officers within range of the median benchmark levels of the Reference Group. We believed that level was appropriate to motivate and retain our Named Executive Officers, who each have leadership talents and business expertise that make them attractive to other companies. In addition, when adjusting salaries, we may also consider the individual performance of the executive.

 

In the first quarter of 2010, the Compensation Committee made the following salary adjustments: Mr. Ryan received an increase of $50,000 to $950,000; Mr. Webb received an increase of $25,000 to $625,000; Mr. Tanzberger received an increase of $25,000 to $425,000; and Mr. Waring received an increase of $50,000 to $425,000. The Compensation Committee made these adjustments in recognition of the officers’ strong performance in a difficult economic environment and, in addition with respect to Mr. Waring, an increase in his job responsibilities.

 

Annual Performance-Based Incentives Paid in Cash

 

We use annual performance-based incentives paid in cash to focus our executive officers on financial and operational objectives that the Compensation Committee believes are primary drivers of our common stock price over time. In the first quarter of 2010 when the target annual performance-based incentive awards were established, we used the following performance measures for our Named Executive Officers:

 

 

1. Special accounting or restructuring charges

 

2. Litigation charges over $5 million

 

3. The cumulative effect of any changes in accounting principles

 

4. Any extraordinary gain or loss or correction of an error

 

5. Any gain, loss or impairment recorded in association with the sale of a business or real estate

 

6. The gain or loss associated with the early extinguishment of debt

 

7. Accounting charges or expenses relating to acquisitions

 

8. Currency gains or losses

 

 

 

 

(3) Utilizing the forecasted amounts of cash taxes paid in 2010 that relate to normal operating earnings

 

 

In addition to the above performance measures, we established the following performance measures which are applicable only to Mr. Waring and which are designed to provide focus on the business segment under his management.

 

 

For 2010, we weighted each of the performance measures as follows: 25% Normalized Earnings Per Share, 25% Consolidated Free Cash Flow, 25% Comparable Revenue Growth and 25% Comparable Sales Production Growth for all Named Executive Officers except for Mr. Waring. For Mr. Waring, we weighted the performance measures as follows: 25% Normalized Earnings Per Share, 25% Consolidated Free Cash Flow, 25% Comparable Segment Revenue Growth and 25% Comparable Segment Sales Production Growth. The Compensation Committee established the following performance targets based on these measures for the performance period from January 1 through December 31, 2010.

 

Normalized Earnings Per Share at $0.5373

Consolidated Free Cash Flow at $259,344,000

Comparable Revenue Growth at 0.35%

Comparable Sales Production Growth at 2.33%

Segment Targets applicable to Mr. Waring:

Comparable Segment Revenue Growth at 0.84%

Comparable Segment Sales Production Growth at 2.69%

 

The Compensation Committee established target performance-based incentive award levels for 2010 generally consistent with our overall compensation philosophy to recognize achievement for greater levels of performance and to motivate and retain the executive level talent. As such, if SCI achieves the performance targets established by the Compensation Committee, executive officers would receive incentive awards at this targeted level. Actual incentive awards are decreased or increased on the basis of SCI’s performance relative to the performance targets, subject to maximum award amounts of 200% of targeted incentive levels and an overall maximum limit of $4,000,000 per award. The maximum individual annual performance-based incentive award

that could have been achieved for 2010 was $1,900,000. The award is based on base salary on the last day of the measurement period.

 

The target awards for the Named Executive Officers for 2010 were as follows:

 

 

The targets above are within a range in which awards are decreased or increased based on SCI’s performance relative to the performance targets. After there was a $0 Annual Performance-Based Incentive for 2008, we widened the target range to establish a lower threshold to achieve a minimal Annual Performance-Based Incentive but with a higher bar to achieve a payout at or near the maximum award of 200% of the targeted incentive levels. We believe the wider target range is desirable in order to (i) maintain high morale of our officers, (ii) create an environment that promotes a focus on the Company’s long-term strategies for growth, and (iii) most importantly, discourage inappropriate risk taking decisions that may facilitate short-term rewards.

 

For 2010, SCI’s actual performance measured as a percentage of the targets of the performance measures was as follows: 107.5% of Normalized Earnings Per Share, 99.6% of Consolidated Free Cash Flow, 101.1% of Comparable Revenue Growth, 103.1% of Comparable Sales Production Growth and, respecting Segment targets applicable to Mr. Waring, 101.0% of Comparable Segment Revenue Growth and 107.1% of Comparable Segment Sales Production Growth. The payouts for performance exceeding each performance measure were leveraged to reflect the Compensation Committee’s expectation that superior performance would also contribute to increased shareholder values. Accordingly, actual performance measured against the performance measures resulted in (i) a 140.4% payout percentage for the Normalized Earnings Per Share performance measure, (ii) a 98.0% payout percentage for the Consolidated Free Cash Flow performance measure, (iii) a 128.6% payout percentage for the Comparable Revenue Growth performance measure, (iv) a 166.4% payout percentage for the Comparable Sales Production Growth performance measure, (v) a 124.5% payout percentage for the Comparable Segment Revenue Growth performance measure applicable to Mr. Waring, and (vi) a 200.0% payout percentage for the Comparable Segment Sales Production Growth performance measure applicable to Mr. Waring. As a result of the foregoing and giving effect to the weightings as described above, Messrs. Waltrip, Ryan, Webb and Tanzberger received annual performance-based incentives paid in cash at 133.3% of the target-based incentive award levels, and Mr. Waring received an annual performance-based incentive paid in cash at 140.7% of his target-based incentive award level. The actual dollar amounts of the payouts are set forth in footnote (2) to the Summary Compensation table below.

 

The Compensation Committee did not retain any discretion to increase the annual performance-based incentive award or payout absent attainment of the relevant performance goals for the Named Executive Officers. The Compensation Committee did retain the ability to lower the payouts in its sole discretion.

 

Long-Term Incentive Compensation

 

In 2010, our long-term incentive compensation program consisted of three components to provide greater balance and focus for the Named Executive Officers. Each form of long term incentive is designed to ensure that appropriate focus is given to driving the Company’s stock price appreciation, managing the ongoing operations and implementing strategy and ensuring superior total shareholder returns. The program consists of equal targeted expected value delivered for long-term incentives in the form of:

 

(i) Stock Options;

(ii) Restricted Stock; and

(iii) Performance Units.

The total targeted expected value of the three awards for each of our Named Executive Officers was generally established within range of the market median of the Reference Group. The market median of the Reference Group for each executive officer was based upon the position being evaluated and varied by position (for example, the value of an award for the position of President was higher than value of an award for the position of Senior Vice President). In addition to such range, the Compensation Committee considered other factors in establishing the total targeted expected value for each executive officer, including the individual performance of each executive officer, the job responsibilities of each executive officer and the overall Company performance in light of the then-current economic environment. Once the total targeted expected value of the three types of awards was established for each executive officer, we calculated and granted to the executive officer (i) the number of stock options which had a value equal to one third of the total targeted expected value, (ii) the number of shares of restricted stock which had a value equal to one third of the total targeted expected value, and (iii) the number of performance units which had a value equal to one third of the total targeted expected value.

 

We believe that the grant of significant annual equity awards further links the interests of senior management and the Company’s shareholders. Therefore, the grant of stock options and the award of restricted stock are important components of annual compensation. Although the Compensation Committee does not consider current stock ownership levels in determining equity awards, we do annually review the ownership levels and progress towards established ownership guidelines, as discussed below.

 

Stock Options

 

The purpose of using stock options is to provide to executive officers a reward whose value is directly attributable to their ability to increase the value of the business and our stock price. In February of each year, the Compensation Committee sets the components of the long-term incentive compensation for that year. Stock options are granted at an exercise price equal to 100% of the fair market value of SCI common stock on the grant date. Stock options vest at a rate of one third per year and have an eight-year term. The Compensation Committee establishes an economic value of stock options to be awarded and relies on its independent consultant to calculate the number of stock options substantially equivalent to those economic values.

 

Restricted Stock

 

The purpose of using restricted stock with vesting provisions is to assist in retaining our executive officers and encouraging stock ownership. The restricted stock awards are made at the same time as the stock option grants, vest at a rate of one-third per year and are based on the estimated grant date value of the restricted shares.

 

Performance Units

 

The purpose of using performance units is to reward executive officers for effective management of the business over a multi-year period. In addition, the performance units allow executive officers to retain or build their SCI stock ownership by providing liquidity that can be applied to taxes associated with option exercises and restricted stock vestings. The performance unit component is settled in cash at the end of a three-year performance period. Each performance unit has a value of $1.00 and the actual payout may vary by a range of 0% to 200% of the targeted award established by the Compensation Committee. The Performance Unit Plan measures the 3 year total shareholder return (“TSR”) relative to the public companies which are included in the Reference Group. TSR is defined as $100 invested in SCI common stock on the first day of the performance cycle, with dividends reinvested, compared to $100 invested in each of the companies in the Reference Group, with dividend reinvestment during the same period.

 

For the 2008 — 2010 performance cycle, the closing stock price determinations as of December 31, 2008 and December 31, 2010 were used to calculate the awards due participants. For this performance cycle, the total SCI shareholder return was negative and the participants did not receive any award payout.

 

For the 2010 — 2012 performance cycle, the Compensation Committee granted performance units with performance awards ranging from 0% to 200% as set forth below in the “Grants of Plan-Based Awards” table. A target award is earned if SCI’s TSR relative ranking is at the 50th percentile of the TSR of the 2010 Reference Group and total SCI shareholder return is positive.

This component of our long-term incentive program has historically rewarded executives for increasing the Company’s TSR relative to the companies in the Reference Group. However, because of our stock price decline during the economic downturn, there have been no Performance Unit Plan payouts for each of the three year periods ending in 2008, 2009 and 2010. We believe superior relative performance in a down year deserves a reward. Accordingly, we have modified the plan for 2011 so that payouts are capped at target (but not eliminated) if SCI experiences negative TSR but performs well in relation to the 2011 Reference Group.

 

Provisions Regarding Claw-Backs

 

In November 2008, the Board of Directors adopted provisions for seeking the return (claw-back) from executive officers of cash incentive payments and stock sale proceeds in certain circumstances involving fraud. For awards in and after 2009, we added these provisions for the following elements of compensation: annual performance-based incentives paid in cash, stock options, restricted stock and performance units. The provisions would be triggered if the Board of Directors determines that an officer has engaged in fraud that caused, in whole or in part, a material adverse restatement of the Company’s financial statements. In such an event, the Company would seek to recover from the offending officer the following:

 

 

 

At March 14, 2011, the Named Executive Officers had attained or exceeded their ownership guideline levels.

 

In February 2011, we established a policy to require that an officer retain all SCI stock acquired from grants of restricted stock and stock options (net of acquisition and tax costs and expenses) until that officer has met the ownership guidelines.

 

Employment Agreements; Termination Payment Arrangements

 

The Company has employment agreements with Messrs. R.L. Waltrip, Thomas L. Ryan, Michael R. Webb, Eric D. Tanzberger and Sumner J. Waring, III. These agreements have current terms expiring December 31,

2011. Annually, the Company may extend each agreement for an additional year unless notice of nonrenewal is given by either party.

 

The employment agreements articulate the terms and conditions of the officers’ employment with the Company including termination provisions and noncompetition obligations. Each November, we review the list of, and the terms and conditions of employment for, the Named Executive Officers and other officers with employment agreements in effect and determine whether to extend, modify or allow the agreements to expire.

 

In 2010, we amended our executive employment agreements to eliminate any obligation to pay tax gross ups in the event of a change of control of the Company. See “Elimination of Tax Gross Ups” below.

 

For further discussion of these employment agreements, refer to “Certain Information with Respect to Officers and Directors — Executive Employment Agreements” below.

 

Our employment agreements and compensation plans have historically incorporated arrangements for certain payments upon change of control of the Company and for other terminations. We believe that these arrangements have been and are necessary to attract, motivate, reward and retain the broad-based management talent required to achieve our corporate directives. In the context of a possible takeover, we believe that change-in-control provisions (i) help focus our executives on strategic alternatives that would maximize shareholder value, and (ii) provide for personal financial security, thereby reducing a concern which could be a distraction for the executive. Our change-in-control and other termination payment arrangements do not affect decisions regarding other compensation elements. We structured the terms and payout of our arrangements based upon our historical practice and competitive considerations, including advice from an independent consultant that such features were commonly used by publicly traded companies.

 

For further discussion of termination arrangements, refer to “Certain Information with Respect to Officers and Directors — Potential Payments Upon Termination” below.

 

Retirement Plans

 

We believe that financial security during retirement can be as important as financial security before retirement. We previously maintained a Supplemental Executive Retirement Plan for Senior Officers which ceased accruing benefits in 2000. In 2005, we implemented an Executive Deferred Compensation Plan for our executive officers which includes a Company contribution for retirement.

 

Our Supplemental Executive Retirement Plan for Senior Officers is a non-qualified plan under which our Named Executive Officers accrued benefits until December 31, 2000. No additional benefits will accrue after 2000. Each participant is entitled at age 60 to the annual payment of the full amount of his benefit.

 

To help retain and recruit executive level talent, the Company maintains a supplemental retirement and deferred compensation plan for its executive officers, the Executive Deferred Compensation Plan. This plan allows for an annual retirement contribution of 7.5% and a performance-based contribution targeted at 7.5%, with a range of 0% to 15% based on achievement of Company performance measures established in the first quarter of each year. These are the same performance measures described in the Annual Performance-Based Incentives Paid in Cash above. The percentages are applied to the combined eligible compensation of base salary and annual performance-based incentive paid in cash. The plan allows for individual deferral of base salary, annual performance-based incentives paid in cash, and long-term incentive program components payable in cash (performance unit awards). In 2010, we modified the plan to also allow future restricted stock grants to be deferred. The plan also allows for the restoration of Company matching contributions that are prohibited in the Company’s 401(k) plan

due to tax limits on contributions to qualified plans. In February 2011, the Company made the following contributions under the plan:

 

 

We also offer a 401(k) plan to our employees, including our executive officers. In 2001, the Company initiated the 401(k) Retirement Savings Plan for elective contributions by participants and matching contributions by the Company up to prescribed limits established by the Board of Directors and specific IRS limitations. Participants may elect to defer up to 50% of salary and bonus into the Plan subject to the annual IRS contribution limit of $16,500 excluding the $5,500 catch-up contributions for eligible for participants age 50 and older. The Company’s match ranges from 75% to 125% of employee deferrals based on their years of company service up. The match is applied to a maximum of 6% of an officer’s salary and annual performance-based incentive, subject to the IRS compensation limits.

 

Elimination of Tax Gross Ups

 

In 2010, the Compensation Committee decided to eliminate tax gross ups from our elements of compensation. We amended our Executive Deferred Compensation Plan so that we do not pay any FICA tax gross up amounts as reported in previous years under the category of “All Other Compensation” in the summary compensation table. In addition, we amended our executive employment agreements to eliminate any obligations to pay tax gross ups in the event of a change control of the Company.

 

Perquisites and Personal Benefits

 

We provide various personal benefits to our executive officers which are an expected component of the overall remuneration for executive talent, including:

 

 

 

Personal benefit amounts are not considered annual salary for bonus purposes, deferred compensation purposes or 401(k) contribution purposes.

 

Compensation Policies and Practices as They Relate to Risk Management

 

In February 2010, we reviewed the risks arising from the Company’s compensation policies and practices for its employees and made a determination that such risks are not reasonably likely to have a material adverse effect on the Company. At a meeting held February 9, 2010, the Compensation Committee of our Board of Directors reviewed and discussed compensation of Company employees, including the total potential maximum impact of the Company’s variable compensation, the safeguards embodied in the compensation plans and that the compensation plans and compensation metrics do not provide incentives for management to take undue risks. The Compensation Committee reached a consensus to recommend to the Nominating and Corporate Governance Committee of our Board of Directors that it make the determination referenced above. At a meeting also held on February 9, 2010, the Nominating and Corporate Governance Committee considered the above referenced compensation information and the above referenced recommendation of the Compensation Committee. As a result, the Nominating and Corporate Governance Committee made a determination that the risks arising from the Company’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on the Company.

 

In February 2011, we followed the risk assessment process described in the preceding paragraph and again reached a determination that the risks arising from the Company’s compensation policies and practices for its employees are not reasonably likely to have a material adverse effect on the Company.

 

 

 

Compensation

 

The following table sets forth information for the three years ended December 31, 2010 with respect to the Chief Executive Officer, the Chief Financial Officer and the three other most highly compensated executive officers of the Company. The determination as to which executive officers were most highly compensated was made with reference to the amounts required to be disclosed under the “Total” column in the table reduced by the amounts in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column.

 

 

 

 

 

 

 

 

In the table above, the four lines pertaining to each Named Executive Officer relate to the following:

 

 

The material terms of each such element of compensation are described previously in the “Compensation Discussion and Analysis.”

 

The performance units are settled in cash at the end of a three-year performance period. In addition, the performance units provide for pro rata vesting in the event of (i) death, (ii) disability, (iii) in the discretion of the Compensation Committee, retirement at age 60 with ten years of service or retirement at age 55 with 20 years of service, or (iv) termination by the Company not for cause. The pro rata vesting is determined by the number of months of service by the executive during the three-year performance period, divided by 36 (which is the number of months in a performance period). For a change of control of the Company, the performance units vest 100% and will be paid at target.

 

The restricted stock grants and stock option grants vest one-third per year. In addition, the restricted stock grants and stock option grants vest 100% in the event of (i) death, (ii) disability, (iii) in the discretion of the Compensation Committee, retirement at age 60 with ten years of service or retirement at age 55 with 20 years of service, (iv) termination by the Company not for cause, or (v) change of control of the Company.

 

Holders of restricted stock receive dividend payments at the same rate as holders of outstanding shares of SCI common stock.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information concerning unexercised options and restricted stock that has not vested as of the end our last completed fiscal year.