UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K/A

 

(Amendment No. 1)

 

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006   OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-14762

 

THE SERVICEMASTER COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

860 Ridge Lake Boulevard, Memphis, Tennessee 38120

(Address of principal executive offices, including zip code)

 

(901) 597-1400

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x      No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o       No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.          o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x              Accelerated filer  o                 Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o      No x

 

The aggregate market value of shares of common stock held by non-affiliates of the registrant as of June 30, 2006 was $2,971,030,007

 

The number of shares of the registrant’s common stock outstanding as of March 15, 2007 was 291,683,841

 

 

EXPLANATORY NOTE

 

On February 27, 2007, The ServiceMaster Company (the “Company”) filed its Annual Report on Form 10-K for the year ended December 31, 2006 with the Securities and Exchange Commission.  Because the Company has now determined that it will not file a definitive proxy statement which involves the election of directors within 120 days following the last day of its last fiscal year, the Company is providing Items 11 and 12 of Part III of Form 10-K in this Form 10-K/A filing.  Except as set forth herein, no other changes are made to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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ITEM 11. EXECUTIVE COMPENSATION

 

Compensation and Leadership Development Committee Report

 

The Committee has reviewed and discussed the Compensation Discussion and Analysis with the Company's management and based on its review and discussions, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K.

 

		Compensation and Leadership Development Committee
		Coleman H. Peterson, Chairman Betty Jane Hess David K. Wessner

 

Compensation Discussion and Analysis

This section provides information regarding the material elements of our 2006 compensation program for our principal executive officer, principal financial officer, the three most highly-compensated executive officers other than the principal executive officer and principal financial officer, and two executives whose employment terminated in 2006, including one former principal executive officer (“NEOs”).   The Compensation and Leadership Development Committee of our Board of Directors (the “Committee”) oversees the design and administration of our executive compensation program with the assistance of Frederic W. Cook & Company Inc., an independent consulting firm retained by the Committee.

Philosophy and Objectives of Our Compensation Program

                Executive Compensation Philosophy

 

                ServiceMaster’s compensation plans for executive officers are designed to:

 

·                  attract, motivate and retain highly qualified executives;

·                  align the interests of executive officers with those of the shareholders through the use of equity-based incentive awards that link a significant portion of compensation to stock performance; and

·                  link pay and performance by placing a significant portion of compensation at risk and subject to the achievement of financial goals and other critical performance criteria.

The objectives of our compensation program for our NEOs include ensuring alignment between performance achieved and compensation rewarded, and motivating achievement of both annual goals and sustainable long-term performance.  To meet these objectives, the Committee considers objective and subjective factors in structuring the compensation program for executive officers.  These factors include competitive pay practices, historical compensation levels, individual performance and potential, and internal compensation equity.  Competitive pay practices are collected from market data for base salary and total compensation.  In December 2005 the Committee approved the elements of our compensation program for 2006 and authorized a total market review that was conducted in 2006 to determine whether our compensation program is competitive and aligned appropriately.  Companies used for executive compensation pay comparison included a broad group of companies similar in size to ServiceMaster. 

 

In connection with this review, we developed in 2006 a peer group consisting of 69 service, retail and manufacturing companies with revenues ranging from one-half to two times our revenues.  The size of our peer group is in part a function of the breadth of our businesses, as we felt it necessary, in developing the peer group, to include companies that operate in each of the major sectors in which we operate businesses.  The companies in this new peer group are:

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Gannett Co		Interpublic Group of Cos.		NCR Corp
Starwood Hotels & Resorts Worldwide		Unisys Corp.		Tribune Co.
Quest Diagnostics Inc		Kelly Services Inc		Beazer Homes USA Inc
Avaya Inc		Hilton Hotels Corp		H&R Block Inc
United Stationers Inc		Fiserv Inc		Warner Music Group Corp
New York Times Co		Washington Group Intl Inc		Convergys Corp
DST Systems Inc		Brightpoint Inc		Chicago Bridge & Iron Co
American Greetings		Renal Care Group Inc		Ceridian Corp
Dunn & Bradstreet Corp		Equifax Inc		Advo Inc
Imation Corp		Covance Inc		Acxiom Corp
Gatx Corp		Dollar General Corp		CDW Corp
Blockbuster Inc		AutoZone Inc		Darden Restaurants Inc
Ross Stores Inc		Longs Drug Stores Corp		Big Lots Inc
Neiman-Marcus Group Inc		PetSmart Inc		Williams-Sonoma Inc
Retail Ventures Inc		Charming Shoppes Inc		Payless ShoeSource Inc
Dicks Sporting Goods Inc		Rent-a-Center Inc		Brown Shoe Co Inc
Pep Boys-Manny Moe & Jack		AnnTaylor Stores Corp		Tractor Supply Co
Spartan Stores Inc		Petco Animal Supplies Inc		Pier 1 Imports Inc
Phillips-Van Heusen Corp		Sherwin-Williams Co		Fortune Brands Inc
Black & Decker Corp		Dover Corp		Brunswick Corp
Avery Dennison Corp		Whirlpool		Ecolab Inc
Clorox Co		Alberto-Culver Co		Lennox International Inc
Hasbro Inc		Scotts Miracle-Gro Co		Walter Industries Inc

 

We used this new peer group in (i) establishing the compensation of Mr. Spainhour when he became our Chairman and CEO effective as of June 30, 2006, and (ii) in determining the increases in salary for Mr. Mrozek and Ms. Helmkamp upon their promotions to Vice Chairman and Group President, respectively, effective as of November 1, 2006.

Role of Executive Officers in Compensation Decisions

The Committee recommends to the Board of Directors for approval the compensation of the Chairman and CEO, including base salary, annual bonus incentives and long-term incentives.  The Chairman and CEO is not present during any discussions regarding his compensation.  The Chairman and CEO recommends to the Committee for approval the compensation of the remaining executive officers, including base salary, annual bonus incentives and long-term incentives.  The Committee, when determining compensation of the Chairman and CEO, and the Chairman and CEO, when determining compensation of the remaining executive officers, arrive at recommendations for compensation after considering market data, historical compensation levels, individual performance and potential, and internal pay equity.  The Committee can exercise its discretion in modifying any recommended adjustments or awards to executives.

The Elements of Our Compensation Program

This section describes the elements of our 2006 compensation program for NEOs, together with a discussion of what each element is designed to reward and why we choose to include each element in our compensation program.

Executive Officer Compensation Components

For 2006, the compensation package for executive officers consisted primarily of the following components:

·                  Annual Cash Compensation:

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·                  salary;

·                  incentive compensation under our Annual Bonus Plan (“ABP”); and

·                  incentive compensation under our Corporate Performance Plan (“CPP”).

·                  Long-term Equity Compensation:

·                  Stock-settled stock appreciation rights (“SARs”);

·                  restricted stock; and

·                  restricted stock units (“RSUs”).

Total Compensation

Total compensation is designed to support our executive compensation philosophy and is comprised of both annual and long-term compensation.  Annual compensation consists of salary and at-risk compensation under the ABP and CPP.  For executive officers, approximately 80% of total target compensation is annual compensation with more than 60% of target annual compensation being at-risk and designed to motivate achievement of annual performance goals.  ServiceMaster has historically focused on short term incentives to drive annual performance in support of the overall strategic direction set by the Board.  Long-term compensation consists of SARs, restricted stock and RSUs, which link the executive officers’ long-term economic interest to that of the shareholders.  Twenty percent of total target compensation is long-term compensation designed to align the interests of executives with those of our shareholders and to motivate achievement of sustainable long-term performance.  Less than 35% of total target compensation is fixed compensation designed to deliver competitive base salary pay practices.

2006 Total Compensation Mix

(1)             Consists of base salary.

(2)             Consists of awards under the ABP and CPP (assuming target achievement) and grants of SARs, restricted stock and RSUs.

(3)             Consists of base salary and awards under the ABP and CPP (assuming target achievement).

(4)             Consists of grants of SARs, restricted stock and RSUs.

(5)             Consists of awards under the ABP and CPP (assuming target achievement).

Annual Cash Compensation

Our 2006 compensation program for NEOs was designed such that approximately 80% of total target compensation would be delivered in the form of cash.  Cash compensation was paid in the form of salary and bonuses under our two annual performance-based non-equity incentive plans, the ABP and CPP.  Salary is included in the compensation package because an appropriate portion of NEO compensation should be fixed and would not, therefore, be subject to the attainment of performance targets.  Performance-based annual cash bonuses were included in the 2006 compensation package because they motivate our NEOs to pursue the annual performance targets the Committee believed were consistent with the overall strategic direction the Board has set for our company.  The components comprising the annual cash portion of total compensation are described below.

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Salary.  Base salary for NEOs for 2006 was generally fixed by the Committee at its meeting in December 2005 to be effective January 1, 2006.  Increases or decreases in salary on a year-over-year basis are dependent on the Committee’s assessment of company, business unit (“BU”) and individual performance and external competitive pay practices.  For executive officers with employment agreements, a minimum level of salary is sometimes specified in the agreement.  For 2006, the Committee approved an overall 3% salary increase.  Following such increases, base salary comprised less than 35% of total target compensation of all NEOs (other than Mr. Preston, who did not participate in our 2006 ABP or CPP and was not granted any SARs, restricted stock or RSUs in 2006).  Both the overall base increase percent and the percentage of total target compensation are consistent with market data.  In some cases, an individual salary was adjusted more or less than 3% to reflect market data or individual performance.

Salary Increase Table

(1)             Increase was a one time $9,000 adjustment to offset the elimination of a company car.  This practice is consistent with the company’s policy to eliminate company cars provided as perquisites.

Mr. Preston did not receive a salary increase for 2006.

Bonus Plans.  We had two cash bonus plans in 2006:  the annual bonus plan (“ABP”) and the corporate performance plan (“CPP”).  These plans provide cash compensation to NEOs if performance targets set by the Committee are met.  Target bonuses under each plan were designed to reward attainment of short-term performance

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targets supporting the overall strategic direction the Board set for our company.  Target bonuses under each plan for 2006 were established by the Committee based on the recommendation of Mr. Ward, our former Chairman and CEO, after considering market data, historical compensation levels, individual performance and potential, and internal pay equity.  The amount of 2006 cash compensation provided in the form of ABP and CPP bonuses was designed to exceed 60% of target annual compensation, assuming that performance targets were met.

In addition to awards under the ABP and CPP, Mr. Spainhour, who became Interim Chairman and CEO on May 16, 2006 and was named permanent Chairman and CEO on June 30, 2006, earned a guaranteed bonus of $151,233 (based on 150% of his salary as Interim Chairman and CEO) pursuant to the terms of his employment agreement.  This amount is included in the “Bonus” column of the Summary Compensation Table.

ABP

The table below sets forth information regarding the 2006 ABP, including the performance goals, the weight attached to each performance goal, the thresholds required for minimum payout and the payout as a percent of target bonus if the threshold, target or maximum performance is met.  The performance goals and relative weighting reflect the Committee’s objective of ensuring that a substantial amount of each NEO’s total compensation is tied to company-wide, business unit (“BU”) and individual performance goals.  In 2006, the Committee set earnings per share (“EPS”), revenue and BU net income performance targets under the ABP based on management’s business plan and budget for the coming year.  Generally, the Committee sets aggressive target payout levels consistent with the relative difficulty of achieving the budget performance levels set for the coming year.  For the company-wide measures of EPS and revenue, the Committee set threshold performance levels for 2006 at prior-year actual EPS and revenue achieved.  The maximum award is a function of threshold and target in that the relationship between performance and payout is consistent from threshold, through target, to the maximum.  Maximum payout reflects goals which can be attained only when business results are exceptional.  In the past three years, the company has exceeded target twice and fallen below target one time with performance well within the threshold and maximum in each year.

(1)             As further detailed in the table below, target bonus was 100% of base salary, with the exception of Mr. Ward, whose target bonus was 150% of base salary.

(2)             Mr. Spainhour’s goals were based on the six-month performance period beginning July 1, 2006.

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The following table sets forth information regarding the 2006 performance under the ABP, including the percent of performance target attained and the percent of target bonus earned.

(1)             Mr. Spainhour’s EPS and revenue targets were based on the six-month performance period beginning July 1, 2006.

(2)             Mr. Ward resigned from the Company effective as of May 15, 2006, and he did not receive an ABP payment for 2006.

 

CPP

The sole performance goal under the 2006 CPP was ServiceMaster pre-tax income.  The performance goal reflects the Committee’s objective of ensuring that a substantial amount of each NEO’s total compensation is tied to company-wide performance independent of BU and individual performance.  As with the ABP, in 2006, the Committee set the pre-tax income performance target under the CPP based on management’s business plan and budget for the coming year.  The budget and business plan are considered aggressive and create a financial stretch goal for the company.  The Committee also set threshold and maximum performance levels for 2006 approximately 20% below and above, respectively, the target performance level.  Generally, the Committee sets the target level such that the relative difficulty of achieving the target level is consistent from year to year and in support of the overall strategic direction the Board set for our company.  The maximum award target reflects goals which can be attained only when business results are exceptional.  In the past three years, the company has exceeded target twice and fallen below target one time with performance well within the threshold and maximum in each year.

Threshold and maximum bonus levels were set at 80% and 120% of target bonus, respectively, for each NEO.  The following table sets forth information regarding the 2006 CPP, including the target bonus and the amount of bonus earned based on achievement in 2006 of the respective ServiceMaster pre-tax income performance targets.

 

(1)    In lieu of participation in the CPP for 2006, Mr. Spainhour received a greater number of equity awards, on an annualized basis, than he otherwise would have received.

(2)    Mr. Ward resigned from the Company effective as of May 15, 2006, and he did not receive a CPP payment for 2006.

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Long-term Equity Compensation

Our 2006 compensation program for NEOs was designed such that approximately 20% of total target compensation would be delivered in the form of long-term equity compensation to align the interests of executives with those of our shareholders and to motivate achievement of sustainable long-term performance.  The percentage that the Committee selects for these purposes in a given year depends on the Committee’s assessment, for that year, of the appropriate balance between cash and equity compensation and the market competitiveness of such award values.  In making that assessment, the Committee considers factors such as the relative merits of cash and equity as a device for retaining and motivating NEOs.  Individual grant levels are based on historical compensation levels and internal compensation equity and adjusted if necessary to maintain a competitive position against total compensation values obtained from market data.  Long-term compensation was delivered in 2006 in the form of equity with a combination of stock settled stock appreciation rights (“SARs”) and restricted stock or restricted stock units (“RSUs”).  The Committee determined the equity compensation for each NEO (other than Mr. Spainhour) for 2006 in December 2005.

Equity awards to our NEOs are made pursuant to our 2003 Equity Incentive Plan (the “EIP”).  The EIP provides for awards in the form of stock options, SARs, restricted stock, RSUs, deferred stock units and performance share units.  In 2006, our NEOs received the target value of their equity awards in a combination of SARs or restricted stock or RSUs.

A description of the equity awards granted in 2006 under the EIP follows:

Stock Appreciation Rights.  SARs may become exercisable on the basis of the satisfaction of performance conditions established by the Committee or on the basis of the passage of time and continued employment.  SARs granted in February 2006 as part of the normal annual grant become exercisable on the basis of the passage of time and continued employment over a five-year period, with 20% becoming exercisable on each anniversary of the grant date, and generally have a ten-year term.  SARs will continue to vest after retirement only if the awards were granted (1) prior to February 13, 2004 to employees who have 15 years of service or have reached the age of 63 prior to retirement, or (2) on or after February 13, 2004 to employees who have 15 years of service or whose combined age and years of service is 65 upon retirement.  Mr. Mrozek is our only NEO who had 15 years of service at December 31, 2006.

All SARs are granted with a base price equal to the fair market value of our common stock on the date of grant, as determined by the average of the high and low transaction prices on the New York Stock Exchange on the date of the grant.  Re-pricing is expressly prohibited by our EIP.

Restricted Stock.  Restricted stock awards may vest on the basis of the satisfaction of performance conditions established by the Committee or on the basis of the passage of time and continued employment.  Restricted stock awards granted in February 2006 as part of the normal annual grant vest on the basis of the passage of time and continued employment over a five-year period, with restrictions lapsing on 20% of the shares on March 1 in each of the first five years following the grant date.  Pursuant to an agreement with Mr. Mrozek, any restriction period applicable to restricted stock held as of November 15, 2006 will lapse, and all shares will vest if Mr. Mrozek’s employment is terminated without cause or for good reason prior to December 31, 2007 or, after December 31, 2007 through December 31, 2008, Mr. Mrozek’s employment is terminated for any reason other than for cause.   Recipients of restricted stock receive dividends on, and may vote, the shares subject to a grant.  Shares of restricted stock may not, however, be sold or otherwise transferred prior to the lapse of the restrictions.

Restricted Stock Units.  RSUs convert into stock units when the restrictions lapse.  Unlike restricted stock, where shares of common stock are actually issued and outstanding, an RSU is a book-entry only unit representing one share of common stock for each RSU.  RSUs may vest on the basis of the satisfaction of performance conditions established by the Committee or on the basis of the passage of time and continued employment.  RSUs granted in February 2006 as part of the normal annual grant vest on the basis of the passage of time and continued employment over a five-year period, with restrictions lapsing on 20% of the units on each anniversary of the grant date.  Only Messrs. Mrozek and Ward were granted RSUs in 2006.  RSUs were granted in lieu of an equivalent number of shares of restricted stock.  The Committee decided to grant RSUs because RSUs allow the individual to defer recognizing taxable income until the underlying common stock is distributed after the individual’s termination of

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employment, which ensures that the taxable income will not be subject to the deduction limit under Section 162(m) of the Internal Revenue Code.  Pursuant to an agreement with Mr. Mrozek, any restriction period applicable to his RSUs held as of November 15, 2006 will lapse, and all shares will vest if Mr. Mrozek’s employment is terminated without cause or for good reason prior to December 31, 2007 or, after December 31, 2007 through December 31, 2008, Mr. Mrozek’s employment is terminated for any reason other than for cause.  Holders of RSUs do not have voting rights, but they are credited with payments equal to the amount of dividends that would be paid on an equivalent number of shares of common stock.  These dividend equivalent amounts are then deemed to be reinvested in book-entry stock units.

Practices Regarding the Grant of Equity Awards

The Committee has generally followed a practice of making all annual equity award grants to its employees, including the NEOs, on a single date each year.  Historically, the Committee has approved annual awards with a grant date that is one full business day after the press release announcing the prior year’s results of operations.  The Committee believes that it is appropriate that annual awards be made at a time when material information regarding our performance for the preceding year has been disclosed.  We do not otherwise have any program, plan or practice to time the grant of equity awards to any employees in coordination with the release of material non-public information.

While the bulk of our equity awards to NEOs and other employees have historically been made pursuant to our annual grant program, the Committee retains the discretion to approve awards to NEOs at other times, such as in connection with the initial hiring of a new officer, for retention purposes or otherwise.  For new employees, pursuant to a policy adopted in December 2006, the grant date is one full business day after the first press release by ServiceMaster after the date of hire that announces the most recent quarterly or annual results of operations.  Prior to the adoption of the December 2006 policy, the awards were granted at the date of hire.  For special recognition or incentive awards, the grant date is one full business day after the first press release by ServiceMaster after approval of the award that announces the most recent quarterly or annual results of operations. All equity awards made to our NEOs, or any of our other employees or directors, are made pursuant to our EIP. Prior to the adoption of the December 2006 policy, the awards were granted upon the approval date.

All stock options and SARs are granted with an exercise or base price equal to the fair market value of our common stock on the date of grant.  Fair market value is the average of the high and the low transaction prices of a share of our common stock as reported on the New York Stock Exchange Composite Transaction Tape on the date of grant.  We do not have any program, plan or practice of granting stock options or SARs and setting the exercise or base price based on the stock’s price on a date other than the grant date.  We do not have a practice of determining the exercise or base price of stock options or SARs by using average prices (or lowest prices) of our common stock in a period preceding, surrounding or following the grant date.  All equity awards granted to NEOs are approved by the Committee.

With respect to annual awards under our EIP, stock options and SARs awarded to NEOs generally begin vesting on the first anniversary of the grant date and vest 20% per year over 5 years.  Awards of restricted stock and RSUs to NEOs generally begin vesting on March 1 of the year following the grant date and vest 20% per year over 5 years.  Awards of restricted stock to directors are made in lieu of a portion of an annual cash retainer and vest 100% on March 1 of the year following the grant date.

Pursuant to the Company’s policy adopted in December 2006, with respect to equity awards for new hires, stock options and SARs generally begin vesting on the first anniversary of the date of hire and vest 20% per year over 5 years.  Awards of restricted stock generally begin vesting on the first March 1, May 10, August 10 or November 10 occurring on or after the first anniversary of the grant date and vest

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20% per year over 5 years. Prior to the adoption of the December 2006 policy, stock options, SARs, and restricted stock began vesting on the first anniversary of the grant date and vested 20% per year over 5 years, where the grant date was the date of hire.

Pursuant to the Company’s policy adopted in December 2006, with respect to equity awards granted for special recognition or incentive purposes, stock options and SARs generally begin vesting on the first anniversary of the grant date and vest 20% per year over 5 years.  Awards of restricted stock generally begin vesting on the first March 1, May 10, August 10 or November 10 occurring on or after the first anniversary of the grant date and vest 20% per year over 5 years. Prior to the adoption of the December 2006 policy, stock options and SARs vested in the same manner. Restricted stock and RSUs began vesting on the first anniversary of the grant date and vested 20% per year over 5 years.

In each of the above cases, alternate vesting schedules may be applied per the terms set forth in individual agreements as determined by the Committee.

Individual Grant Levels

Historically the Committee has granted the same level of equity awards from year to year.  However, in 2006, so that long-term compensation would approach 20% of target compensation for the NEOs as a group, the Committee increased the individual grant levels to several NEOs.  These increases resulted in maintaining the intended level of both long-term equity and total compensation.  The following table sets forth information regarding equity awards granted in 2006 to our NEOs, including the percent increase over 2005 and the number of SARs, shares of restricted stock and RSUs. 

(1)             In lieu of participation in the CPP for 2006, Mr. Spainhour received a greater number of equity awards, on an annualized basis, than he otherwise would have received.  The amount shown reflects a level prorated for one-half of the year corresponding with the amount of time in 2006 Mr. Spainhour served as our permanent Chairman and CEO.

Perquisites

We provide our executives with perquisites that the Committee believes are reasonable and consistent with the overall objectives of the compensation program to attract and retain highly qualified executives. The Committee reviews the perquisites provided to our NEOs on a regular basis, in an attempt to ensure that they continue to be appropriate in light of the Committee’s overall goal of designing a compensation program for NEOs that maximizes the interests of our shareholders.  The perquisites provided to our NEOs are membership in social and professional clubs, certain spousal travel, Company-provided vehicles and, for our CEO and CFO, personal use of Company aircraft.  These perquisites are provided by many companies with which we compete for management talent to their named executive officers and the Committee believes they facilitate retention and recruitment of executives.

The Committee has established a policy regarding personal use of the Company aircraft (the “Aircraft Policy”) by our CEO and CFO.  The Aircraft Policy provides that the CEO and CFO shall recognize taxable income for their personal use of the Company aircraft occurring in any year and shall reimburse the Company for personal use of the Company aircraft exceeding the designated limits set forth in the Aircraft Policy (up to fifty hours for the CEO, and up to twenty-five hours for the CFO).  Any amount so reimbursed to the Company shall be applied to reduce the individual’s taxable income accordingly.

Deferred Compensation

Employees, including the NEOs, are generally eligible to participate in the ServiceMaster Profit Sharing and Retirement Plan (“PSRP”).  The PSRP is a tax-qualified defined contribution plan pursuant to which employees

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are eligible to contribute up to 75% of their annual salary, subject to the limits prescribed by law.  Certain “highly compensated employees” (as defined in the IRS Code) may only contribute to the PSRP in a reduced amount; for 2006, this amount was up to 2% of their annual salary, subject to the limits prescribed by law.  All of the NEOs are “highly compensated employees” under the IRS Code and were therefore subject to these contribution limits in 2006.  For 2006, the Committee approved a discretionary employer match equal to 15% of employee contributions up to a maximum benefit of $2,860.

The ServiceMaster Deferred Compensation Plan (“DCP”) is a non-qualified supplemental plan designed to afford certain highly compensated employees the opportunity to defer additional amounts of compensation on a pretax basis, over and above the amounts allowed under the PSRP.  Deferred amounts are credited with earnings or losses based on the rate of return of mutual funds selected by the participants in the DCP.  We match amounts that are deferred by employees pursuant to the DCP.  Distributions are paid in accordance with the Plan. Distributions upon termination are payable no earlier than the six-month anniversary of the termination of employment with the Company.

Participants may defer 2% to 75% of compensation.  For 2006, the Committee approved a discretionary employer match equal to 65% of employee contributions up to a maximum benefit of $2,860.

The DCP is not funded by us, and participants have an unsecured contractual commitment from us to pay the amounts due under the DCP.  When such payments are due, the cash will be distributed from our general assets.

We provide this benefit because the Committee wishes to permit our employees to defer the obligation to pay taxes on certain elements of the compensation that they are entitled to receive.  The DCP permits them to do this while also receiving interest on deferred amounts, as described above.  We believe that provision of this benefit is important as a retention and recruitment tool as many if not all of the companies with which we compete for executive talent provide a similar plan to their senior employees.

Post-Termination Compensation

We have entered into agreements with Messrs. Spainhour and Mrozek which provide for certain payments and, for Mr. Mrozek, accelerated vesting of equity awards in the event of certain circumstances surrounding his termination of employment.  We have also entered into change in control severance agreements with each of the NEOs to secure their continued service and to ensure their dedication and objectivity in the event of a change in control or threatened change in control.  In addition to their change in control severance agreements, we have also entered into separation agreements with Messrs. Engel and Kaput in connection with the consolidation of our offices in Memphis.  Additional information regarding the severance provisions of these agreements, including the definition of key terms and a quantification of benefits that would have been received by the NEOs had termination occurred on December 31, 2006, is found under the heading “Potential Payments Upon Termination or Change-in-Control.”

We also had agreements with Mr. Ward and Mr. Preston which provided the amounts they received upon their separation from the Company in 2006.  Additional information regarding these payments may also be found under the heading “Potential Payments Upon Termination or Change-in-Control.”

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code limits ServiceMaster’s ability to deduct from its income compensation in excess of $1,000,000 paid to our NEOs. The limitation does not apply to qualified performance-based compensation, provided that certain conditions are satisfied, including the attainment of performance goals approved by ServiceMaster’s shareholders. The Company generally attempts to structure its compensation programs and, in particular, the ABP, CPP and EIP, to maximize deductibility under §162(m). Nevertheless, the Committee retains the discretion it deems necessary to compensate our NEOs in a manner commensurate with performance and competitive compensation levels even if as a result ServiceMaster is unable to deduct from its income all of the compensation paid to the NEOs.

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The table below details the total compensation that was paid or earned by each of the NEOs for the fiscal year ended December 31, 2006.

SUMMARY COMPENSATION TABLE

 

				Salary		Bonus		Stock Awards		Option/ SAR Awards		Non-Equity Incentive Plan Compensation ($)				All Other Compen- sation		Total
Name and Principal Position		Year		($)		($)		($) (2)		($) (3)		ABP		CPP		($) (5)		($)
J. Patrick Spainhour		2006		550,000		151,233	(1)	53,858		33,095		421,200		0	(4)	53,540		1,262,926
Chairman and Chief
Executive Officer(6)
Ernest J. Mrozek		2006		623,679		0		466,875		286,875		491,784		526,116		51,060		2,446,389
Vice Chairman and
Chief Financial Officer
Mitchell T. Engel		2006		442,250		0		153,915		254,042		366,695		247,584		39,260		1,503,746
Chief Marketing Officer
Jim L. Kaput		2006		425,000		0		160,036		175,159		354,501		247,584		1,080		1,363,360
Senior Vice President
and General Counsel
Katrina L. Helmkamp		2006		419,958		0		65,541		34,685		318,899		263,058		5,720		1,107,861
Group President
Steven C. Preston		2006		245,000		0		17,404		37,503		0		0		2,013,925		2,313,832
Former Executive
Vice President
Jonathan P. Ward		2006		473,156		0		62,155		88,152		0		0		4,180,481		4,803,944
Former Chairman and
Chief Executive Officer

(1)             Represents a guaranteed bonus for service as Interim Chairman and CEO from May 15, 2006 through June 30, 2006.

(2)             The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes during 2006 for restricted stock and restricted stock unit awards granted during and prior to 2006.  The assumptions used in the valuation of these awards are disclosed in the Shareholders’ Equity footnote to ServiceMaster’s audited financial statements for the fiscal year ended December 31, 2006 included in ServiceMaster’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2007. The fair value of these awards is equal to the value of the Company’s stock on the date of grant.

(3)             The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes during 2006 for stock options and stock appreciation rights granted during and prior to 2006.  The assumptions used in the valuations of these awards are included in the Shareholders’ Equity footnote to ServiceMaster’s audited financial statements for fiscal years ended December 31, 2001 through 2006, and included in ServiceMaster’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002, March 31, 2003, March 15, 2004, March 4, 2005, February 28, 2006 and February 27, 2007.

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(4)             Mr. Spainhour does not participate in our CPP.

(5)             Amounts included in this column include:

Name of NEO		Perquisites and Other Personal Benefits				Company Contributions to PSRP and DCP		Tax Payments		Company Contributions Under Employee Stock Purchase Plan		Severance Payments		Total
J. Patrick Spainhour			49,618	(a)		0		3,922		0		0		53,540
Ernest J. Mrozek			45,340	(b)		5,720		0		0		0		51,060
Mitchell T. Engel			18,196	(c)		5,720		0		15,344		0		39,260
Jim L. Kaput			0			0		0		1,080		0		1,080
Katrina L. Helmkamp			0			5,720		0		0		0		5,720
Steven C. Preston			0			0		0		0		2,013,925		2,013,925
Jonathan P. Ward			88,784	(d)		0		0		36,072		4,055,625		4,180,481

(a)             Includes personal use of corporate aircraft, auto related expenses and moving expenses ($28,174).

(b)            Includes personal use of corporate aircraft ($33,067), auto related expenses, company paid spousal travel, company provided lawn service and club dues and membership fees.

(c)             Includes auto related expenses, company paid spousal travel and club dues and membership fees.

(d)            Includes personal use of corporate aircraft ($66,705), auto related expenses, company paid spousal travel and club dues and membership fees.

The incremental cost of the use of company aircraft is calculated based on the variable operating costs to ServiceMaster, including fuel costs, mileage, trip-related maintenance, universal weather-monitoring costs, on-board catering, lamp/ramp fees and other miscellaneous variable costs. Fixed costs which do not change based on usage, such as pilot salaries, the lease costs of the company aircraft, and the cost of maintenance not related to trips are excluded.  The aggregate cost of other perquisites and personal benefits is measured on the basis of the actual cost to the Company.

Auto-related expenses include, and are valued according to the costs actually paid for lease, fuel, repairs and insurance.  Club dues are valued according to the amount actually reimbursed to the executive.  Moving expenses are valued according to the amount actually paid for the move including taxable (house hunting, fees) and non-taxable (enroute expenses including moving household goods) items.  Moving expense gross-up of taxes are valued according to the amount of taxes paid on behalf of the executive for taxable relocation expenses.

 

(6) Prior to being named Interim Chairman and CEO on May 16, 2006, and subsequently permanent Chairman and CEO on June 30, 2006, Mr. Spainhour earned $57,500 in the form of equity awards as compensation for service as a member of our Board of Directors.  For information relating to Mr. Spainhour’s compensation as a director prior to becoming an executive officer of ServiceMaster, see the 2006 Director Compensation Table.

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2006 GRANTS OF PLAN-BASED AWARDS

																					Grant
																					Date
											All Other			All Other							Fair
				Estimated Future Payouts Under							Stock			Option Awards:							Value of
				Non-Equity Incentive							Awards:			Number of							Stock and
				Plan Awards (1)							Number of			Securities			Base Price				SAR
				Threshold			Target		Maximum		Shares of Stock			Underlying			of SARs				Awards
Name		Grant Date		($)			($)		($)		or Units (3)			SARs (4)			($/Sh)				($) (5)
J. Patrick Spainhour (6)		ABP (1)			225,000		450,000		900,000
		8/2/2006										61,667									638,253
		8/2/2006													185,000			$	10.35		392,200
Ernest J. Mrozek		ABP (1)			311,840		623,679		748,415
		CPP (2)			476,000		595,000		714,000
		2/14/2006										37,500									466,875
		2/14/2006													112,500			$	12.45		286,875
Mitchell T. Engel		ABP (1)			218,500		437,000		524,400
		CPP (2)			224,000		280,000		336,000
		2/14/2006										18,333									228,246
		2/14/2006													55,000			$	12.45		140,250
Jim L. Kaput		ABP (1)			212,500		425,000		510,000
		CPP (2)			224,000		280,000		336,000
		2/14/2006										18,333									228,246
		2/14/2006													55,000			$	12.45		140,250
Katrina L. Helmkamp		ABP (1)			209,979		419,958		503,950
		CPP (2)			238,000		297,500		357,000
		2/14/2006										13,333									165,996
		2/14/2006													40,000			$	12.45		102,000
Jonathan P. Ward		ABP (1)			608,344		1,216,688		1,460,025
		CPP (2)			560,000		700,000		840,000
		2/14/2006										75,000									933,750
		2/14/2006													225,000			$	12.45		573,750

(1)             The amounts in this row represent potential earnings under the 2006 ABP.  The actual amounts earned by each of the NEOs under the 2006 ABP are shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. 

(2)             The amounts in this row represent potential earnings under the 2006 CPP.   The actual amounts earned by each of the NEOs under the 2006 CPP are shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. 

(3)             The amounts in this column represent (i) the number of shares of restricted stock granted to Messrs. Spainhour, Engel and Kaput and Ms. Helmkamp in 2006 and (ii) the number of RSUs granted to Messrs. Mrozek and Ward in 2006.

(4)             The amounts in this column represent the number of shares underlying SARs.  Mr. Ward’s SARs were cancelled upon his termination of employment on July 31, 2006.

(5)             The fair value of restricted stock and RSUs, as disclosed in the Shareholders’ Equity footnote to ServiceMaster’s audited financial statements for the fiscal year ended December 31, 2006 included in ServiceMaster’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2007, is equal to the value of the ServiceMaster’s common stock on the date of grant.  The assumptions used in the valuation of SARs granted in 2006 are also discussed in such footnote.

(6)             Prior to being named Interim Chairman and CEO on May 16, 2006, and subsequently permanent Chairman and CEO on June 30, 2006, Mr. Spainhour received a grant of 4,618 shares of restricted stock as compensation for his service as a member of our Board of Directors.  For information relating to Mr. Spainhour’s compensation as a director prior to becoming an executive officer of ServiceMaster, see the 2006 Director Compensation Table.

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Employment Agreement with J. Patrick Spainhour

On August 16, 2006, ServiceMaster entered into an employment agreement with J. Patrick Spainhour to serve as our Chairman and Chief Executive Officer effective as of June 30, 2006.  This employment agreement superseded the letter agreement dated May 15, 2006 pursuant to which Mr. Spainhour agreed to serve as our Interim Chairman and Chief Executive Officer.  The term of the employment agreement ends on December 31, 2008, with an automatic one-year renewal provision unless terminated by ServiceMaster or Mr. Spainhour.

The employment agreement provides Mr. Spainhour with an annual base salary of not less than $900,000.  Mr. Spainhour’s annual bonus target under the ABP is 100% of his salary, or $900,000, with a maximum payout of 200% of his salary, or $1,800,000.  The actual payouts under the ABP are subject to satisfaction of performance targets established by the Committee.  For 2006, Mr. Spainhour earned a guaranteed bonus of 150% of his salary (amounting to $151,233) as Interim Chairman and CEO pursuant to the May 15, 2006 letter agreement.

Mr. Spainhour was not eligible to participate in the 2006 CPP.  For 2006, in recognition of the fact that Mr. Spainhour was appointed permanent Chairman and CEO in mid-year, ServiceMaster granted Mr. Spainhour a reduced award of 185,000 SARs with a base price of $10.35 per SAR and 61,667 shares of restricted stock on August 2, 2006.  Commencing in 2007, Mr. Spainhour will be granted options or other long-term equity-based awards with a minimum value of $2,500,000.

Mr. Spainhour’s base salary, target annual bonus, equity awards and all other compensation are subject to approval each year by the Committee and Board of Directors.

ServiceMaster has also entered into a change in control severance agreement with Mr. Spainhour.  This agreement, as well as additional provisions of his employment agreement which provide for payments upon the termination of his employment, are discussed under “Potential Payments Upon Termination or Change-in-Control.”

Other Agreements

In addition to the agreements described above, we have entered into (i) separation agreements with Messrs. Engel and Kaput in connection with the consolidation of ServiceMaster’s Downers Grove, Illinois office with its Memphis, Tennessee office, and Mr. Preston in connection with the termination of his employment; and (ii) change-in-control severance agreements with each of the NEOs.  These agreements are further described under “Potential Payments Upon Termination or Change-in-Control.”

2006 Equity Awards

SARs.  SARs were granted in 2006 to each of the NEOs other than Mr. Preston.  These SARs become exercisable on the basis of the passage of time and continued employment over a five-year period, with 20% becoming exercisable on each anniversary of the grant date, and have a ten-year term.

Restricted Stock.  Shares of restricted stock were granted in 2006 to Messrs. Spainhour, Engel and Kaput and Ms. Helmkamp.  These restricted stock grants vest on the basis of the passage of time and continued employment over a five-year period, with restrictions lapsing on 20% of the shares on March 1 in each of the first five years following the grant date.  Pursuant to the agreement with Mr. Mrozek, described under “Potential Payments Upon Termination or Change-in-Control”, any restriction period applicable to restricted stock held as of November 15, 2006 will lapse, and all shares will vest if Mr. Mrozek’s employment is terminated (i) prior to December 31, 2007, without cause or for good reason, or (ii) after December 31, 2007 but on or before December 31, 2008, without cause or for any reason other than death or disability.

Restricted Stock Units.  Messrs. Mrozek and Ward received RSUs in 2006 in lieu of an equivalent number of shares of restricted stock.  RSUs granted in 2006 vest on the basis of the passage of time and continued employment over a five-year period, with restrictions lapsing on 20% of the units on each anniversary of the grant date in each of the first five years following the grant date.  Pursuant to the agreement with Mr. Mrozek, described under “Potential Payments Upon Termination or Change-in-Control”, any restriction period applicable to his RSUs

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held as of November 15, 2006 will lapse, and all RSUs will vest if Mr. Mrozek’s employment is terminated (i) prior to December 31, 2007, without cause or for good reason, or (ii) after December 31, 2007 but on or before December 31, 2008, without cause or for any reason other than death or disability.

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