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POLYONE CORPORATION

 

Notice of 2011

Annual Meeting of Shareholders

and Proxy Statement

 

 

 

March 21, 2011

 

 

Dear Fellow Shareholder:

 

You are cordially invited to attend the PolyOne Corporation Annual Meeting of Shareholders, which will be held at 9:00 a.m. on Wednesday, May 11, 2011, at the LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio.

 

A Notice of the Annual Meeting and the Proxy Statement follow. Please review this material for information concerning the business to be conducted at the Annual Meeting and the nominees for election as Directors.

 

You will also find enclosed a proxy and/or voting instruction card and an envelope in which to return the card. Whether or not you plan to attend the Annual Meeting, please complete, sign, date and return your enclosed proxy and/or voting instruction card, or vote over the telephone or the Internet as soon as possible so that your shares can be voted at the meeting in accordance with your instructions. Your vote is very important. You may, of course, withdraw your proxy and change your vote prior to or at the Annual Meeting, by following the steps described in the Proxy Statement.

 

I appreciate the strong support of our shareholders over the years and look forward to seeing you at the meeting.

 

Sincerely,

 

Stephen D. Newlin

Chairman, President and Chief Executive Officer

PolyOne Corporation

 

Please refer to the accompanying materials for voting instructions.

 

POLYONE CORPORATION

 

 

NOTICE OF ANNUAL MEETING

OF SHAREHOLDERS

 

 

The Annual Meeting of Shareholders of PolyOne Corporation will be held at the LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio at 9:00 a.m. on Wednesday, May 11, 2011. The purposes of the meeting are:

 

 

Shareholders of record at the close of business on March 14, 2011 are entitled to notice of and to vote at the meeting.

 

For the Board of Directors

 

Lisa K. Kunkle

Vice President, General Counsel

and Secretary

 

March 21, 2011

 

Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Shareholders to be held on May 11, 2011:

 

The proxy statement, proxy card and annual report to shareholders for the fiscal year ended December 31, 2010 are available at our internet website, www.polyone.com, on the “Investors Relations” page.

POLYONE CORPORATION
PolyOne Center
33587 Walker Road
Avon Lake, Ohio 44012

 

PROXY STATEMENT

Dated March 21, 2011

 

Our Board of Directors respectfully requests your proxy for use at the Annual Meeting of Shareholders to be held at the LACENTRE Conference and Banquet Facility, Champagne C Ballroom, 25777 Detroit Road, Westlake, Ohio at 9:00 a.m. on Wednesday, May 11, 2011, and at any adjournments of that meeting. This proxy statement is to inform you about the matters to be acted upon at the meeting.

 

If you attend the meeting, you may vote your shares by ballot. If you do not attend, your shares may still be voted at the meeting if you sign and return the enclosed proxy card. Common shares represented by a properly signed card will be voted in accordance with the choices marked on the card. If no choices are marked, the shares will be voted to elect the nominees listed on pages 3 through 7 of this proxy statement, to approve, by non-binding vote, our named executive officer compensation for the fiscal year ending December 31, 2010, to recommend, by non-binding vote, that future advisory votes on named executive officer compensation occur every year and to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011. You may revoke your proxy before it is voted by giving notice to us in writing or orally at the meeting. Persons entitled to direct the vote of shares held by the following plans will receive a separate voting instruction card: The PolyOne Retirement Savings Plan and PolyOne Canada Inc. Retirement Savings Program. If you receive a separate voting instruction card for one of these plans, you must sign and return the card as indicated on the card in order to instruct the trustee on how to vote the shares held under the plan. You may revoke your voting instruction card before the trustee votes the shares held by it by giving notice in writing to the trustee.

 

Shareholders may also submit their proxies by telephone or over the Internet. The telephone and Internet voting procedures are designed to authenticate votes cast by use of a personal identification number. These procedures allow shareholders to appoint a proxy to vote their shares and to confirm that their instructions have been properly recorded. Instructions for voting by telephone and over the Internet are printed on the proxy cards.

 

We are mailing this proxy statement and the enclosed proxy card and, if applicable, the voting instruction card, to shareholders on or about March 28, 2011. Our headquarters are located at PolyOne Center, 33587 Walker Road, Avon Lake, Ohio 44012 and our telephone number is (440) 930-1000.

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of nine Directors. Each Director serves for a one-year term and until a successor is duly elected and qualified, subject to the Director’s earlier death, retirement or resignation. Our Corporate Governance Guidelines provide that all non-employee Directors will retire from the Board not later than the first Annual Meeting of Shareholders following the Director’s 70th birthday.

 

A shareholder who wishes to suggest a Director candidate for consideration by the Nominating and Governance Committee must provide written notice to our Secretary in accordance with the procedures specified in Regulation 12 of our Regulations. Generally, the Secretary must receive the notice not less than 60 nor more than 90 days prior to the first anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting. The notice must set forth, as to each nominee, the name, age, principal occupations and employment during the past five years, name and principal business of any corporation or other organization in which such occupations and employment were carried on, and a brief description of any arrangement or understanding between such person and any others pursuant to which such person was selected as a nominee. The notice must include the nominee’s signed consent to serve as a Director if elected. The notice must set forth the name and address of, and the number of our common shares owned by, the shareholder giving the notice and the beneficial owner on whose behalf the nomination is made and any other shareholders believed to be supporting such nominee.

 

Following are the nominees for election as Directors for terms expiring in 2012, a description of the business experience of each nominee and the names of other publicly-held companies for which he or she currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that the nominee should serve as a Director, the Board also believes that all of our Director nominees are individuals of substantial accomplishment with demonstrated leadership capabilities. Each of our Directors also has the following personal characteristics, which are required attributes for all Board nominees: high ethical standards, integrity, judgment, and an ability to devote sufficient time to the affairs of our Company. Each of the nominees is a current member of the Board. The reference below each Director’s name to the term of service as a Director includes the period during which the Director served as a Director of The Geon Company (“Geon”) or M.A. Hanna Company (“M.A. Hanna”), each one of our predecessors. The information is current as of March 14, 2011.

 

Our Board of Directors recommends a vote FOR the election to the Board of each of the following nominees:

 

 

CORPORATE GOVERNANCE AND BOARD MATTERS

 

Director Independence

 

Our Corporate Governance Guidelines require that a substantial majority of the members of our Board of Directors be “independent” under the listing standards of the New York Stock Exchange (“NYSE”). To be considered “independent,” the Board of Directors must make an affirmative determination that the Director has no material relationship with us other than as a Director, either directly or indirectly (such as an officer, partner or shareholder of another entity that has a relationship with us or any of our subsidiaries), and that the Director is free from any business, family or other relationship that would reasonably be expected to interfere with the exercise of independent judgment as a Director. In each case, the Board of Directors considers all relevant facts and circumstances in making an independence determination.

 

The Board of Directors determined that J. Douglas Campbell, Carol A. Cartwright, Gale Duff-Bloom (who retired during 2010), Richard H. Fearon, Gordon D. Harnett, Richard A. Lorraine, Edward J. Mooney, William H. Powell and Farah M. Walters are independent under the NYSE “independent director” listing standards. In making this determination, the Board reviewed significant transactions, arrangements or relationships that a Director might have with our customers or suppliers. In making this determination with respect to Mr. Fearon, the Board determined that the sales of products by the Company to Eaton Corporation, of which Mr. Fearon serves as an executive officer, did not create a material relationship or impair the independence of Mr. Fearon because Mr. Fearon receives no material direct or indirect benefit from such transactions, which were undertaken in the ordinary course of business. For 2010, the amount paid to the Company from sales to Eaton Corporation was less than 0.2% of the Company’s consolidated revenues.

 

Lead Director

 

Our independent directors meet regularly in executive sessions. Our Corporate Governance Guidelines provide that the independent directors are to select a Lead Director to preside at executive sessions. The Lead Director acts as the key liaison between the independent directors and the Chief Executive Officer and is responsible for coordinating the activities of the other independent directors and for performing various other duties as may from time to time be determined by the independent directors. Mr. Harnett has served as our Lead Director since July 2007.

 

Board Leadership Structure

 

Mr. Newlin is the Chairman of our Board of Directors and our Chief Executive Officer. The Board of Directors believes that this leadership structure is appropriate for our company given the experience and active involvement of our independent directors, our corporate governance practices, and our Lead Director’s role. Having a Lead Director role helps to ensure greater communication between management and the independent directors, increases the independent directors’ understanding of management decisions and Company operations, and provides an additional layer of independent oversight of the Company. The Board of Directors believes that this approach serves

to strike an effective balance between management and independent director participation in the board process. Combining the Chairman and Chief Executive Officer position gives the Company a clear leader and improves efficiencies in the decision-making process.

 

Board Attendance

 

The Board met seven times during 2010, the calendar year being our fiscal year. Each member of our Board attended at least 75% of the meetings held by our Board and the meetings held by the Committees of the Board on which such member served in 2010. Each Director is expected to attend the Annual Meeting of Shareholders. In 2010, nine of our Directors serving at that time attended the Annual Meeting of Shareholders.

 

Committees of the Board of Directors

 

As of the date of this proxy statement, our Board has nine directors and the following five committees: the Audit Committee, the Compensation Committee, the Nominating and Governance Committee, the Environmental, Health and Safety Committee, and the Financial Policy Committee.

 

The following table sets forth the membership of the standing committees of our Board of Directors, as of the date of this proxy statement, and the number of times each committee met in 2010. The current function of each committee is described below.

 

 

X — Member

 

* — Chairperson

 

The Audit Committee meets with appropriate financial and legal personnel and independent auditors to review our corporate accounting, internal controls, financial reporting and compliance with legal and regulatory requirements. The Committee exercises oversight of our independent auditors, internal auditors and financial management. The Audit Committee appoints the independent auditors to serve as auditors in examining our corporate accounts. Our common shares are listed on the NYSE and are governed by its listing standards. All members of the Audit Committee meet the financial literacy and independence requirements as set forth in the NYSE listing standards. The Board of Directors has determined that Mr. Fearon meets the requirements of an “audit committee financial expert” as defined by the Securities and Exchange Commission.

 

The Compensation Committee reviews and approves the compensation, benefits and perquisites afforded our executive officers and other highly-compensated personnel. The Committee has similar

responsibilities with respect to non-employee Directors, except that the Committee’s actions and determinations are subject to the approval of the Board of Directors. The Committee also has oversight responsibilities for all of our broad-based compensation and benefit programs and provides policy guidance and oversight on selected human resource policies and practices. To help it perform its responsibilities, the Committee makes use of PolyOne resources, including members of senior management in our human resources, legal and finance departments. In addition, the Committee directly engages the resources of Towers Watson (the “Consultant”) as an independent outside compensation consultant to assist the Committee in assessing the competitiveness and overall appropriateness of our executive compensation programs. In 2010, the Committee, assisted by the Consultant, analyzed competitive market compensation data relating to salary, annual incentives and long-term incentives. In analyzing competitive market data, the Committee reviewed data from a peer group of similarly-sized U.S. chemical companies and reviewed data from the Consultant’s Compensation Data Bank and other published surveys. The Consultant then assisted the Committee in benchmarking base salaries and annual and long-term incentive targets to approximate the market median. The Consultant assisted our human resources department in preparing tally sheets to provide the Committee with information regarding our executive officers’ total annual compensation, termination benefits and wealth accumulation. More detailed information about the compensation awarded to our executive officers in 2010 is provided in the “Compensation Discussion and Analysis” section of this proxy statement. The Consultant maintains regular contact with the Committee and interacts with management to gather the data needed to prepare reports for Committee review.

 

The Committee periodically reviews the relationship with our compensation consultant, Towers Watson, including the level and quality of services provided, as well as, fees for those services. In addition, expenses for other consulting services provided to the Company by Towers Watson, that are not related to executive compensation, are monitored to ensure that executive compensation consultant independence is maintained. The Consultant did not provide us with services in excess of $120,000 that were in addition to the services provided in connection with its advice and recommendations on the amount or form of executive and director compensation.

 

The Compensation Committee reviews succession planning for the Chief Executive Officer and other executive officers and oversees the process by which the Board annually evaluates the performance of the Chief Executive Officer. All members of the Compensation Committee have been determined to be independent as defined by the NYSE listing standards.

 

The Nominating and Governance Committee recommends to the Board of Directors candidates for nomination as Director and advises the Board with respect to governance issues and directorship practices. All members of the Nominating and Governance Committee have been determined to be independent as defined by the NYSE listing standards.

 

The Nominating and Governance Committee will consider shareholder suggestions for nominees for election to our Board of Directors as described on page 3. The Committee uses a variety of methods for identifying and evaluating nominees for Directors, including third-party search firms, recommendations from current Board members and recommendations from shareholders. Nominees for election to the Board of Directors are selected on the basis of the following criteria:

 

 

 

While the Committee or the Board does not have a formal policy with respect to the consideration of diversity in identifying director nominees, they do consider diversity when evaluating potential Board nominees. We consider diversity to include race, gender and national origin, as well as differences in viewpoint, background, experience and skills. The Committee believes that having a diverse Board leads to more innovation, outside-the-box-thinking and better governance. In 2010, approximately 25% of our Board members were female and diversity is a key characteristic that we will consider, and instruct any third party search firm we use to consider, in searches for future Board members.

 

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. The Committee has established these criteria that any Director nominee, whether suggested by a shareholder or otherwise, should satisfy. A nominee for election to the Board who is suggested by a shareholder will be evaluated by the Committee in the same manner as any other nominee for election to the Board. Finally, if the Committee determines that a candidate should be nominated for election to the Board, the Committee will present its findings and recommendation to the full Board for approval.

 

In 2010 and in past years, the Committee used a third-party search firm, Russell Reynolds Associates, Inc., to identify possible candidates who meet the minimum and desired qualifications, to interview and screen such candidates (including conducting appropriate background and reference checks), to act as a liaison among the Board, the Committee and each candidate during the screening and evaluation process, and thereafter to be available for consultation as needed by the Committee.

 

The Environmental, Health and Safety Committee exercises oversight with respect to our environmental, health, safety, security and product stewardship policies and practices and our compliance with related laws and regulations.

 

The Financial Policy Committee exercises oversight with respect to our capital structure, borrowing and repayment of funds, financial policies, management of foreign exchange risk and other matters of financial risk management, banking relationships and other financial matters.

 

The Board of Directors has adopted a written charter for each of the standing committees of the Board of Directors. These charters are posted and available on our website at www.polyone.com under “Corporate Governance” on our investor relations page. The Board and each Committee conduct an annual self-evaluation.

 

Board’s Oversight of Risk

 

Our Board of Directors oversees a company-wide approach to risk management that is designed to support the achievement of our strategic objectives and improve long-term organizational performance, which we believe will ultimately enhance shareholder value. The Board of Directors

believes that risk management is not only understanding the risks we face and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us as an organization.

 

Our Board of Directors administers its risk oversight function directly and through its Audit Committee, Financial Policy Committee and Environmental, Health and Safety Committee. The Audit Committee discusses with management our major financial risk exposures and the steps management has taken to monitor and control such exposures, including our risk assessment and risk management policies. The Audit Committee also receives an annual risk assessment report from our internal auditors. The Financial Policy Committee assists the Board of Directors in fulfilling its oversight and monitoring responsibilities to our shareholders relating to our capital structure, our borrowing and repayment of funds, financial policies, management of foreign exchange risk and other matters of financial risk management, including the utilization of financial derivative products, insurance coverage strategies, banking relationships and other financial matters. The Environmental, Health and Safety Committee periodically reviews with management the significant risks or exposures faced by the Company relating to safety, health, environmental, security and product stewardship standards and practices.

 

Our Board of Directors sets the appropriate “tone at the top” when it comes to risk tolerance and management by fostering a culture of risk-adjusted decision-making throughout the company. Our Board ensures that the risk management processes designed and implemented by our management team are adapted to the Board’s corporate strategy and are functioning as directed. The Board of Directors also participates in an ongoing effort to assess and analyze the most likely areas of future risk for the company by asking our management team to discuss the most likely sources of material future risks and how we are addressing any significant potential vulnerability.

 

The Board of Directors believes that its leadership structure, as discussed on pages 7 through 8, supports the risk oversight function of the Board of Directors.

 

Code of Ethics, Code of Conduct and Corporate Governance Guidelines

 

In accordance with applicable NYSE listing standards and Securities and Exchange Commission regulations, the Board of Directors has adopted a Code of Ethics, Code of Conduct and Corporate Governance Guidelines. These are also posted and available on our website at www.polyone.com under “Corporate Governance” on our investor relations page.

 

In October 2007, the Board amended our Corporate Governance Guidelines to adopt a policy relating to majority voting. Pursuant to the policy, any nominee for election as a Director of the Board who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election in an election of Directors that is not a contested election is expected to tender his or her resignation as a Director to the Board promptly following the certification of the election results. Neither abstentions nor broker non-votes will be deemed to be votes for or withheld from a Director’s election for purposes of the policy, regardless of the rules treating broker non-votes as withheld in uncontested elections of directors. The Nominating and Governance Committee (without the participation of the affected Director) will consider each resignation tendered under the policy and recommend to the Board whether to accept or reject it. The Board will then take appropriate action on each tendered resignation, taking into account the Nominating and Governance Committee’s recommendation. The Nominating and Governance Committee in making its recommendation, and the Board in making its decision, may consider any factors or other information that it considers appropriate, including the reasons (if any) given by shareholders as to why they withheld their votes, the qualifications of the tendering Director and his or her

contributions to the Board and to PolyOne, and the results of the most recent evaluation of the tendering Director’s performance by the other members of the Board. The Board will promptly disclose its decision whether to accept or reject the Director’s tendered resignation and, if applicable, the reasons for rejecting the tendered resignation.

 

Communication with Board of Directors

 

Shareholders and other interested parties interested in communicating directly with the Board of Directors as a group, the non-management or independent Directors as a group, or with any individual Director may do so by writing to the Secretary, PolyOne Corporation, 33587 Walker Road, Avon Lake, Ohio 44012. The mailing envelope and letter must contain a clear notation indicating that the enclosed letter is either a “Shareholder-Board of Directors Communication” or an “Interested Party-Board of Directors Communication,” as appropriate.

 

The Secretary will review all such correspondence and regularly forward to the Board of Directors a log and summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, deals with the functions of the Board or committees of the Board or that she otherwise determines requires their attention. Directors may at any time review a log of all correspondence we receive that is addressed to members of the Board and request copies of any such correspondence. Concerns relating to accounting, internal controls or auditing matters are immediately brought to the attention of our internal audit department and handled in accordance with procedures established by the Audit Committee for such matters.

 

Director Compensation

 

In 2010, we paid our non-employee Directors an annual retainer of $135,000, quarterly in arrears, consisting of a cash retainer of $60,000 and an award of $75,000 in value of fully vested common shares. We grant the shares payable to the Directors quarterly and determine the number of shares to be granted by dividing the dollar value by the arithmetic average of the high and low stock price on the last trading day of each quarter. We pay individual meeting fees only as follows: fees of $2,000 for each unscheduled Board and committee meeting attended and fees of $1,000 for participation in each unscheduled significant telephonic Board and committee meeting. In addition, in the first two quarters of 2010, the Chairpersons of each committee received a fixed annual cash retainer (payable on a quarterly basis) as follows: $5,000 for the Environmental, Health and Safety, Nominating and Governance and Financial Policy Committees and $10,000 for the Audit and Compensation Committees. Effective as of the third quarter of 2010, the annual cash retainer for the Chairpersons of the following committees was amended to be as follows: $7,500 for the Environmental, Health and Safety, Nominating and Governance and Financial Policy Committees and $15,000 for the Audit Committee. In addition, we instituted an annual retainer of $10,000 for our Lead Director, effective as of the third quarter of 2010. We reimburse Directors for their expenses associated with each meeting attended.

 

Directors who are not our employees may defer payment of all or a portion of their compensation as a Director under our Deferred Compensation Plan for Non-Employee Directors. A Director may defer the compensation as cash or elect to have it converted into our common shares.

 

In 2010, we awarded shares to Directors under our Deferred Compensation Plan for Non-Employee Directors and our 2008 and 2010 Equity and Performance Incentive Plans. Deferred compensation, whether in the form of cash or common shares, is held in trust for the participating Directors. Interest is earned on the cash amounts and dividends, if any, on the common shares deferred accrue for the benefit of the participating Directors.

 

2010 DIRECTOR COMPENSATION

 

 

 

			Option Awards					Stock Awards
			Number of
			Securities Underlying					Number of
			Unexercised Options					Deferred Shares*
Name			(#)					(#)
J.D. Campbell				24,000					117,174
C.A. Cartwright				24,000					29,552
G. Duff-Bloom				6,000					0
R.H. Fearon				15,000					0
G.D. Harnett				24,000					80,998
R.A. Lorraine				0					33,061
E.J. Mooney				0					81,524
W.H. Powell				0					38,430
F.M. Walters				24,000					26,770

 

 

2010 Option Exercises

 

			Option Awards
			Number of
			Shares					Value
			Acquired on					Realized on
			Exercise					Exercise
Name			(#)					($)
J.D. Campbell				15,000					18,075
C.A. Cartwright				15,000					9,225
G. Duff-Bloom				33,000					82,847
R.H. Fearon				0					0
G.D. Harnett				15,000					32,025
R.A. Lorraine				0					0
E.J. Mooney				0					0
W.H. Powell				0					0
F.M. Walters				15,000					18,825

 

 

BENEFICIAL OWNERSHIP OF COMMON SHARES

 

The following table shows the number of our common shares beneficially owned on March 14, 2011 (including shares the individuals have a right to acquire within 60 days of that date) by each of our Directors and nominees, each of the executive officers named in the Summary Compensation Table on page 35 (the “Named Executive Officers”) and by all Directors and executive officers as a group.

 

 

 

 

The following table shows information relating to all persons who, as of March 14, 2011, were known by us to beneficially own more than five percent of our outstanding common shares based on information provided in Schedule 13Gs and 13Ds filed with the Securities and Exchange Commission:

 

 

 

Share Ownership Guidelines

 

In December 2009, we revised our share ownership guidelines for our non-employee Directors, executive officers and other elected corporate officers to better align their financial interests with those of our shareholders by requiring them to own a minimum level of our shares. These individuals are expected to make continuing progress towards compliance with the guidelines and to comply fully within five years of becoming subject to the guidelines. These policies, as they relate to our Named Executive Officers, are discussed in the “Compensation Discussion and Analysis” section of this proxy statement. In order to reflect the Board’s commitment to share ownership and

better align the interests of our Board members with our shareholders, the required share ownership level for directors is 50,000 shares. For purposes of our guidelines, the following types of share ownership and equity awards are included as shares owned: shares directly held, shares and phantom shares held in our retirement plans and deferral plans, unvested restricted stock and restricted stock units, and earned performance shares. All Directors are required to retain 100% of all shares obtained through us, after the date of adoption of the guidelines (December 16, 2009), as compensation for services provided to us, such percentage to be calculated after any reduction in the number of shares to be delivered as a result of any taxes and exercise costs relating to the shares. This requirement to retain 100% of all shares obtained from us ceases once the Director has met the applicable ownership guideline.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires that our executive officers and Directors, and persons who own more than 10% of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, Directors and greater than 10% shareholders are required by Securities and Exchange Commission rules to furnish us with copies of all forms they file. Based solely on our review of the copies of such forms received by us and written representation from certain reporting persons, we believe that, during 2010 and until the date of this proxy statement, all Section 16(a) filing requirements applicable to our executive officers, Directors and 10% shareholders were satisfied.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Introduction

 

In this section of the proxy statement, we discuss in detail our executive compensation program for 2010 for our Named Executive Officers. This discussion and analysis includes a description of the principles underlying our executive compensation policies and our most important executive compensation decisions for 2010, and provides analysis of these policies and decisions. The following disclosure also gives context for the data we present in the compensation tables below and the narratives that accompany the compensation tables.

 

The following five individuals are our Named Executive Officers for 2010, as that term is defined by the Securities and Exchange Commission:

 

 

Executive Summary

 

Fiscal 2010 Performance

 

In late 2009 and early 2010, we were confronted with uncertainty regarding the extent of a global economic recovery. The housing and automotive markets remained at historically low levels, raw material costs were rising, and income from our Sunbelt joint venture was substantially below its prior year results. Despite these conditions, in early 2010 our Board of Directors approved an annual operating plan designed to position us for stability and continued growth. The plan assumed that we would achieve a 40% improvement in operating results through focused execution of our well-defined strategy, which consists of: specialization, globalization, commercial excellence and operational excellence.

 

While depressed demand and marketplace uncertainty provided significant headwinds in 2010, we focused on generating new business, creating efficiencies and innovating new solutions. As a result of our intense focus on strategy and execution, in 2010, each of our business platforms attained record-setting levels of operating income or profitability, our revenue climbed 27%, our stock price improved 67% and our diluted earnings per share rose 252%. Overall operating income for 2010 was 121% higher than the prior year. Working capital as a percentage of sales was 9.6% — which we consider to be world-class performance. At the end of 2010, we had $378 million in cash, $506 million in available liquidity, an improved credit rating, and limited near-term debt maturities, positioning us well to fund operating expenses and pursue acquisitions designed to further accelerate our transformation. Throughout 2010, we demonstrated our ability to meet and surpass our goals and objectives, with a record-setting year on a number of different measures.

Fiscal 2010 Pay Implications

 

We determined in 2010 that the best method of motivating our Named Executive Officers to create and maximize shareholder value was to focus our Senior Executive Annual Incentive Plan (the “Annual Plan”) on operating income improvement and working capital management, and to link payments under the Long-Term Incentive Plan to improvements in our working capital and creating shareholder value. The performance unit component of the Long-Term Incentive Plan is earned when the pre-established financial goal, working capital as a percentage of sales, is achieved. Performance was based on a one-year period in 2010 and awards are payable in cash after three years (i.e., in early 2013) contingent on the individual’s continued employment with the Company over the time period in order to enhance retention.

 

Due to our exceptional overall performance in 2010, the performance targets for the Annual Plan were substantially exceeded, and many of our business units achieved record-breaking results. As a result of surpassing the operating income and working capital as a percentage of sales goals, the Compensation Committee, which we refer to as the Committee in this Compensation Discussion and Analysis section of the proxy statement, approved a 200% of target payout under the Annual Plan. The Company also significantly exceeded the one-year performance targets set for the performance units granted in 2010, resulting in awards at the 200% of target attainment level.

 

In addition, after awarding reduced levels of Long-Term Incentive Plan grants in 2009 due to the decline in our stock value and limited share availability, 2010 Long-Term Incentive Plan awards were granted at levels consistent with the market median of our peer group. We also reinstated salary adjustments in mid-2010, after base salaries for employees, including the Named Executive Officers, were frozen in 2009. Economic conditions had improved and we believed that salary adjustments were necessary in order to maintain a competitive compensation position in the market. Each Named Executive Officer received a modest salary adjustment in mid-2010, with the exception of the Chief Executive Officer, who received no salary adjustment. Instead, the Committee increased Mr. Newlin’s target annual incentive opportunity from 100% to 110% in order to leverage his variable compensation opportunity by placing a greater portion of his pay at risk.

 

In total, the Committee believes that the compensation actions and outcomes for 2010 strongly reflect and reinforce the Company’s compensation philosophy, and in particular the emphasis on performance and alignment with shareholder interests.

 

The following discussion should be read together with the information presented in the compensation tables, the footnotes and the narratives to those tables and the related disclosures appearing elsewhere in this proxy statement.

 

Compensation Philosophy and Objectives

 

Our executive compensation programs are linked to our achievement of strategic operating and financial goals and designed to be competitive in the marketplace. Our executives are rewarded for performance that meets or exceeds our strategic goals, without encouraging excessive risk-taking that could have a detrimental impact on our long-term results and the interests of our shareholders. We believe the design of our compensation plans and the relative mix of compensation elements successfully motivate our executives to improve our overall corporate performance and the profitability of the specific business unit for which they are responsible, thus maximizing shareholder value. The main objectives of our executive compensation programs are to:

 

 

 

Setting 2010 Executive Compensation Levels

 

Compensation Consultant

 

Our executive compensation programs are approved and overseen by the Committee, which is composed entirely of independent directors. For 2010, the Committee selected and retained an independent compensation consultant, Towers Watson, to assist the Committee in assessing the competitiveness and overall appropriateness of our executive compensation programs. The Committee worked in conjunction with Towers Watson and with input from members of senior management.

 

As described below, Towers Watson assisted the Committee in approximating base salaries and annual and long-term incentive targets in accordance with the market median, and assisted our human resources department in preparing tally sheets to provide the Committee with information regarding our Named Executive Officers’ total annual compensation, termination benefits and wealth accumulation.

 

Competitive Market Pay Information and Benchmarking

 

We have designed our compensation programs to be competitive with companies of comparable size and industry with whom we compete for executive talent. We annually analyze competitive market compensation data relating to salary, annual incentives, and long term incentives. The Committee generally manages individual components of compensation and target total compensation relative to the median (50^th Percentile) of the competitive market data. However, the Committee considers many other factors, including the responsibilities, performance, contributions and experience of the named executive officer, including compensation in relation to other employees. As a result, the Company does not set total direct compensation or the component parts at levels to achieve a mathematically precise market position. We periodically analyze competitive market compensation data relating to retirement benefits and perquisites, most recently in 2009. The Committee obtains advice and recommendations from Towers Watson in these areas of total compensation.

 

In analyzing competitive market data for the purpose of determining the market median, we draw from two independent sources. We first review proxy statement disclosures of a peer group of similarly-sized U.S. chemical companies to establish an estimate of market compensation for our senior executives. This approach provides insight into specific company practices at business competitors or companies facing similar operating challenges.

 

In 2010, with the guidance of Towers Watson, we conducted a review of our peer group to ensure it consisted of appropriate companies to which we should be compared. Multiple factors were taken into consideration during the review including: company revenue between $1.03 billion — $4.12 billion, total asset size between $0.70 billion — $2.78 billion and number of employees between 1,950 — 7,800, as well as whether each potential peer company had a global presence and a specialty chemical focus. We also looked at the frequency with which these companies were used as peers by other companies in our industry, and which companies had identified us as a peer. In addition, we considered whether they were in the same SIC code as PolyOne and whether we

compete with them for talent. Each of the companies recommended for the new peer group met a majority of the criteria that were established. Based on this review and management’s recommendation, for 2010, the Committee approved the addition of six companies to the peer group and the removal of one company from our previous peer group of 14 companies. This resulted in a new peer group consisting of the following 19 companies, which better reflects our transformation into a global and specialty chemical company:

 

 

In order to augment the peer proxy analysis and provide a broader sense of market practices, we also review data from Towers Watson’s Executive Compensation Data Base, Towers Watson’s Top Management Compensation Survey and Mercer’s Executive Compensation Survey relating to the chemical industry and other applicable general industries, as provided by Towers Watson. To obtain comparability based on company size, the data either references a specific sample of companies or calibrates the pay of a broad sample of companies against company size. This data is used as one of several inputs into management’s and the Committee’s determination of market compensation levels.

 

Review of Named Executive Officer Compensation

 

Management and the Committee annually review the specific pay disclosures of our peer group and the broad-based survey data provided by Towers Watson described above. Management uses this data to develop recommendations for the Committee’s review regarding eligibility, award opportunities, performance measures and goals for the plan periods commencing in the following year. The Committee discusses and considers this information when making compensation decisions and aligning each of the pay elements with our compensation objectives and relative market practices.

 

The Committee and management annually review and consider tally sheets, which are developed collaboratively by Towers Watson and our Human Resources department, to determine the reasonableness of the compensation of our Named Executive Officers. The tally sheets provide information regarding each Named Executive Officer’s base salary, annual incentives, long-term incentives, perquisites, retirement benefits and wealth accumulation.

 

Based upon individual performance and results achieved, the Chief Executive Officer typically recommends for the Committee’s review and approval specific base salary adjustments for each of the other Named Executive Officers. The Chief Executive Officer makes his recommendations in conjunction with the marketplace data and input provided by Towers Watson. He does not participate in any discussions with the Committee involving his own compensation. With guidance from Towers Watson and based on a rigorous review of the prior year’s performance, the Committee determines the appropriate base salary for the Chief Executive Officer.

 

For Annual Plan purposes, during the fourth quarter, the Committee typically reviews plan performance and estimates the incentive payouts for the applicable plan period. In the first quarter of the following year, the Committee determines actual performance against pre-established goals and approves plan attainment levels. Our awards of cash-settled performance units, stock-settled

stock appreciation rights (“SARs”), and full value awards (in the form of performance shares or restricted stock units (“RSUs”)) are determined in the first quarter based on competitive long-term incentive market practices, market data, and an evaluation of individual performance.

 

Pay for Performance

 

We believe that the majority of each Named Executive Officer’s compensation should be linked directly to our performance and the creation of shareholder value. The following chart compares cumulative total shareholder return on our common shares against the cumulative total return of the S&P 500 Index and the S&P Mid Cap Chemicals Index for the five year period, December 31, 2005 to December 31, 2010, assuming in each case a fixed investment of $100 and reinvestment of all dividends. Our five-year performance has exceeded the S&P 500 Index and has kept pace with the S&P Mid Cap Chemicals Index.

 

 

 

We believe that the returns to shareholders shown in this graph indicate that our pay-for-performance philosophy, compensation plan design and selected metrics have resulted in performance that has provided increased value to our shareholders and that the compensation of our Named Executive Officers is appropriate given both the fiscal 2010 and long-term performance of Polyone.

 

Our executive compensation programs are also designed to recognize an executive’s scope of responsibilities, leadership ability, and effectiveness in achieving key performance goals and objectives. As an executive’s level of responsibility within PolyOne increases, so does the percentage of total compensation that is linked to performance in the form of variable compensation.

 

The following table summarizes the allocation of the compensation opportunity at target, or “pay mix” that was granted in 2010 to the Named Executive Officers, based upon the primary elements of compensation (base salary, annual incentive opportunity, and long-term incentive opportunity). Both the annual incentive and long-term incentive opportunity represent the variable

compensation portion of each Named Executive Officer’s total compensation opportunity, consistent with our overall pay-for-performance philosophy.

 

 

Our incentive programs focus on the critical performance measures that determine our overall success and reward executives for the attainment of sustainable, long-term success. For positions with significant business unit responsibilities, annual incentive programs also emphasize success at the business unit level, which may lead to Named Executive Officers at comparable levels being paid differently.

 

Our executive compensation programs play a material role in our ability to drive strong financial results that exceed expectations. We believe that providing incentive plan opportunities to our executives that are based upon achieving strategic goals and objectives are instrumental in driving desired results.

 

2010 Executive Compensation Elements

 

The following table outlines the major elements of 2010 total compensation for our Named Executive Officers:

 

 

The following discussion analyzes the main elements of compensation for the Named Executive Officers, including specific decisions relating to 2010.

 

Base Salary

 

Merit adjustments were reinstated during 2010 after base salaries for Named Executive Officers, as well as our other officers, had been frozen in 2009. As noted earlier, management recommended again for 2010 that no base salary adjustment would be provided to the Chief Executive Officer. Instead, the Committee increased Mr. Newlin’s target annual incentive opportunity in order to tie a greater portion of his pay to our performance. The Committee considered the recommendation of the Chief Executive Officer in determining the salary adjustments for each of the other Named Executive Officers. The primary factors used in determining the adjustment amounts were each executive’s individual performance and the relative position of their salary to the market median for their role. The Committee approved the following base salaries for the Named Executive Officers, with salary changes effective in May 2010:

 

Named Executive Officer			2009 Base Salary					2010 Base Salary					Adjustment %
Stephen D. Newlin			$	860,000				$	860,000					0%
Robert M. Patterson			$	415,000				$	430,000					3.6%
Kenneth M. Smith			$	336,000				$	344,000					2.4%
Thomas J. Kedrowski			$	322,000				$	333,000					3.4%
Bernard Baert			$	392,931				$	401,683					2.2%

 

Based on the data provided by Towers Watson, we determined that the 2010 salaries of the Named Executive Officers range from 93% to 111% of the market median for comparable positions, with an average of 103% for all Named Executive Officers.

Annual Incentive

 

The Annual Plan was originally approved by shareholders in 2005 and includes a defined set of performance measures that can be used in determining awards under the plan. Annual awards for 2010 were made under the Annual Plan. We received shareholder approval of a new Annual Plan at the 2010 Annual Meeting, and future annual awards will be made under that plan.

 

Consistent with our approach to use the market median as a reference point and reward our Named Executive Officers for achievement of specific performance objectives that would advance our profitability, the Committee approved the following target annual incentive levels for the Named Executive Officers for 2010 as follows:

 

 

For 2010, we continued to use the following performance measures for the Annual Plan: operating income and working capital as a percentage of sales. The Committee chose to use the same performance measures as those used in 2009 in order to continue to drive profitability, promote working capital management, improve cash flow and drive efficiency in our operations, all of which we believe lead to maximizing shareholder value. We selected these performance measures for the Annual Plan as they were the most critical elements of PolyOne’s performance for 2010. In the Annual Plan, these measures are defined as:

 

 

In order to place a greater emphasis on profitable growth and as a critical measure of our operating performance, for 2010 we increased the weighting on operating income from 50% to 65% and we reduced the weighting on working capital as a percentage of sales from 50% to 35%. Mr. Baert is the only Named Executive Officer with responsibility for business unit specific results within the international region, and his incentive opportunity under the Annual Plan is based on operating income for that region. The performance measures and weightings used for the Named Executive Officers in the 2010 Annual Plan were as follows:

 

Even when faced with uncertain economic conditions at the beginning of 2010, we set aggressive goals that focused our efforts on those factors that we believe were critical to our on-going success, including profitable growth, earnings improvement, cash generation from working capital, efficiencies in our operations and the continued implementation of our overall strategy. In 2010, we were able to achieve maximum performance on our working capital as a percentage of sales metric by achieving 9.6%, which is considered world-class performance, and represents an improvement of 20.7% over 2009. In addition, on a consolidated basis, our performance and results under the operating income metric exceeded the maximum performance level and was 170.7% higher than the prior year. We viewed the targeted level of performance as very challenging to achieve, and hence the actual level of performance reflects superlative results. The attainment levels of above-target to maximum performance for this metric in 2010 required exceptional performance across all disciplines and business units.

 

The performance measures and targets, and the respective levels of achievement for each performance measure, under the Annual Plan for 2010 are set forth below. Payouts are capped at 200% of a participant’s award amount at target.

 

 

The actual amounts earned by the Named Executive Officers under the Annual Plan are set forth in the Non-Equity Incentive Plan Compensation column of the 2010 Summary Compensation Table.

 

The Annual Plan, as it applies to the Named Executive Officers, is structured to comply with Section 162(m) of the Internal Revenue Code. A more detailed discussion of Section 162(m) of the Internal Revenue Code appears in the “Tax Considerations” section below.

 

Long-Term Incentive

 

In May 2008, our shareholders approved the 2008 Equity and Performance Incentive Plan (the “2008 Plan”), which was used to make equity incentive awards in 2010. Our shareholders approved the 2010 Equity and Performance Incentive Plan (the “2010 Plan”) at the 2010 Annual Meeting. Our 2011 Long-Term Incentive Plan grants will be made under the 2010 Plan.

 

Long-Term Incentive Plan targets are established with consideration of market median levels for each Named Executive Officer’s position and are intended to reward them for achievement of specific performance objectives.

 

Awards Granted in 2010

 

In February 2010, we granted long-term incentive awards under the 2008 Plan using three vehicles, with the allocation of the award values roughly as follows: 36% of the award’s value was allocated to performance units for the 2010 performance period, 30% was allocated to stock-settled SARs and 34% was allocated to RSUs. We chose this mix in order to provide balance between the relative values of the three components and efficiently use the shares available under the 2008 Plan.

Cash-Settled Performance Units

 

The performance units granted in February 2010 will be paid in cash, consistent with past practice, and were based on achievement of performance goals relating to our working capital as a percentage of sales during 2010. The Committee selected working capital as a percentage of sales as the performance measure in order to reinforce our focus on improving working capital. In 2010, we again elected to use a one-year measurement period for performance units in order to sustain our working capital performance attained in 2009, continue our focus on generating cash and in acknowledgement of the significant continued economic uncertainty at the time the goals were set. The attainment level for the performance units is determined at the end of the measurement period, but awards generally do not become vested for three years, in order to serve as a retention vehicle.

 

Upon achievement of the target performance level, a participant would earn the target amount of performance units; attainment of only the threshold performance level would earn 50% of the target award; and attainment of the maximum performance level or greater earns the participant 200% of the target award. If final performance falls between the threshold and target or between target and maximum, earned award amounts under the plan would be interpolated. If threshold performance is not achieved, no award would be paid to the participants. For performance units granted in 2010, we were able to achieve working capital as a percentage of sales equal to 9.6%, which equated to a maximum level of performance. We believe this level of performance influenced the improvement in our stock price during the course of the year, benefiting both PolyOne and our shareholders, and positioned us well for future success. Performance goals at the threshold, target, and maximum levels for the 2010 performance units are shown below.

 

 

The performance unit amounts at maximum for the Named Executive Officers under the Long-Term Incentive Plan are set forth in the 2010 Grants of Plan-Based Awards table.

 

Stock-Settled SARs

 

To continually reinforce our ongoing commitment to enhancing shareholder value, the Named Executive Officers received an award of SARs that, when exercised by the holder, are settled in our common shares. Each SAR granted to our Named Executive Officers in February 2010 has a base price of $7.99, the closing market price of our common stock on the date of grant. All SARs granted in 2010 vest in equal installments over three years and have an exercise term of seven years. The exercise term is shorter than market practice in an effort to control dilution.

 

Restricted Stock Units

 

To promote share ownership and enhance the retention of our executives, we granted RSUs in February 2010 to all Named Executive Officers. The RSUs vest on the third anniversary of the grant date.

 

Awards Granted in Prior Years

 

In February 2011, the Committee approved the payout of performance units granted at the start of 2008 for performance during the period 2008-2010. These performance units were based on achievement of performance goals related to our earnings per share over the three-year period. The

Named Executive Officers received a cash award based on an attainment of 110.3% of the target level performance for this goal.

 

 

All equity awards outstanding as of December 31, 2010 are set forth in the Outstanding Equity Awards at 2010 Fiscal Year-End Table in this proxy statement.

 

Retirement Benefits

 

We offer the following retirement benefits to eligible employees and certain Named Executive Officers as specified. Additional details of these plans, as they apply to the Named Executive Officers, are included in the narrative to the 2010 Pension Benefits Table.

 

 

Employment Agreements with Named Executive Officers

 

Messrs. Newlin and Baert are party to employment agreements with us, as described below. We do not maintain employment agreements with any of the other Named Executive Officers, although each of our Named Executive Officers is party to a Continuity Agreement, as described in “Potential Payments Upon Termination or Change-in-Control” below.

 

Mr. Newlin

 

On February 6, 2006, we entered into an agreement with Mr. Newlin, under which he serves as our Chairman, President and Chief Executive Officer. We entered into this agreement in order to attract Mr. Newlin to PolyOne and set the terms of his employment. The agreement provided for specified equity awards, intended to serve as an inducement to join PolyOne, for Mr. Newlin’s initial base salary and for his participation in our various long-term incentive and benefit plans in effect during the term of his employment. In addition, the agreement provides for certain payments upon

termination of Mr. Newlin’s employment, as described more fully in “Potential Payments Upon Termination or Change-in-Control” below. In July 2008, Mr. Newlin’s agreement was amended to provide for a supplemental retirement benefit, as described above and more fully in the narrative for the 2010 Pension Benefits Table.

 

Mr. Baert

 

In connection with the change in location for our European headquarters, PolyOne Luxembourg s.à r.l., our wholly owned subsidiary located in Luxembourg, entered into an employment agreement with Bernard Baert, effective September 1, 2009. It is customary in Luxembourg that we maintain an agreement with each of our employees, including Mr. Baert. Among other things, the agreement provides that Mr. Baert will be entitled to a monthly base salary of €24,708, daily meal vouchers and the use of a company car. Under the agreement, Mr. Baert may also be eligible to participate in our Annual Plan and will be included in a defined contribution benefits cafeteria plan established by PolyOne Luxembourg. Pursuant to the terms of the agreement, Mr. Baert has agreed not to compete with us for a period of twelve months after termination of the agreement. Mr. Baert’s agreement provides for certain payments upon termination of Mr. Baert’s employment, as described more fully in the “Potential Payments Upon Termination or Change-in-Control” section of this proxy statement.

 

Perquisites

 

We provide minimal perquisites to the Named Executive Officers, which we believe are necessary to compete for executive talent. These perquisites for the Named Executive Officers based in the United States consist of a monthly benefit allowance, reimbursement of expenses for financial planning and tax preparation, and an annual physical examination. The perquisites for Mr. Baert, which are typical and competitive with companies in Europe, include a PolyOne-provided automobile, meal and entertainment allowance, and reimbursement of expenses for financial planning and tax preparation. The specific amounts attributable to perquisites for 2010 for the Named Executive Officers are disclosed in the 2010 Summary Compensation Table.

 

We made several changes to the perquisites provided to the Named Executive Officers based in the United States that were effective beginning January 2010. We eliminated the car allowance, cancelled the excess liability insurance coverage, and eliminated tax gross-ups on all perquisites and replaced them with a benefit allowance. We intend that benefit allowances will not be provided to new executives. The benefit allowance and reimbursement of expenses for financial planning and tax preparation in 2010 and future years will be treated as taxable income to the Named Executive Officers. These changes were made in response to market trends that indicated companies were reducing or eliminating these types of benefits.

 

Mr. Newlin and Mr. Kedrowski were eligible for reimbursement of their relocation expenses under our standard relocation plan. During 2010, we reimbursed Mr. Newlin and Mr. Kedrowski for moving expenses and also provided them with a tax gross-up on all or a portion of these amounts. Details of these amounts are set forth in the All Other Compensation column of the 2010 Summary Compensation Table.

 

We also provide other benefits such as medical, dental and life insurance and disability coverage to each U.S.-based Named Executive Officer, which are identical to the benefits provided to all other eligible U.S.-based employees. Medical, dental and life insurance coverage provided to Mr. Baert is identical to the benefits provided to all other Luxembourg-based employees. We provide vacation and paid holidays to all employees, including the Named Executive Officers. The Named Executive Officers were eligible for the following vacation in 2010: Mr. Newlin — five

weeks, Mr. Patterson — four weeks, Mr. Smith — five weeks, Mr. Kedrowski — four weeks and Mr. Baert — 26 days.

 

2011 Total Compensation

 

For 2011, the Committee’s review and approval of final terms for both the Annual Plan and the Long-Term Incentive Plan took place in the fourth quarter of 2010. The Committee also reviewed the compensation levels for our Named Executive Officers and compared them to the peer group proxy data and survey data provided by Towers Watson.

 

2011 Base Salaries

 

In recognition of the significant role Mr. Newlin played in transforming PolyOne into a high-performing company, the Committee approved an adjustment to Mr. Newlin’s annual base salary, effective January 1, 2011, from $860,000 to $950,000. Prior to this adjustment, Mr. Newlin’s base salary had not changed since March 2008. In the Committee’s judgment, the total compensation package provided to Mr. Newlin, as described under the heading “Employment Agreements with Named Executive Officers” above, is appropriate in order to fairly compensate and retain Mr. Newlin.

 

In January 2011, Mr. Patterson was promoted to Executive Vice President and Chief Financial Officer, taking on additional responsibilities of supporting the growth of our global businesses in Asia. As a result, the Committee approved an adjustment to his annual base salary, from $430,000 to $475,000 in order to recognize his increased responsibilities.

 

2011 Annual Incentive

 

In light of Mr. Patterson’s promotion, an increase in his target incentive opportunity under the Annual Plan was also approved from 60% to 65%. This change was made to keep Mr. Patterson’s annual incentive target in line with the market median in recognition of his new level of responsibilities.

 

The Committee determined that we will fundamentally maintain the same design as 2010 for the Annual Plan. Performance measures will continue to be operating income and working capital as a percentage of sales with current weightings maintained. For Named Executive Officers who have responsibility for a business unit, the working capital measure will be applied to relate only to the working capital performance for their specific business unit, as opposed to the consolidated number for the Company. Having the executive be accountable for the specific performance of the applicable business unit will more closely align the executive’s responsibilities with his 2011 Annual Plan award. We believe that the established goals for the 2011 Annual Plan are challenging, yet achievable upon exceeding 2010 performance levels.

 

2011 Long-Term Incentive Plan

 

We are maintaining the same plan design with RSUs, SARs and performance units in 2011. In 2009 and 2010, we had one-year performance periods for performance units, and in 2011, we are returning to a three-year performance period (2011-2013). The Committee determined that cash-settled performance units would be earned upon achievement of an earnings per share performance goal. To promote retention, the performance units will only be earned if the performance goal is achieved and the participant continues to be employed at the time the awards are paid in 2014, except in the case of death, disability and retirement.

Further, the Committee determined that it would grant stock-settled SARs and full value RSUs to promote stock price appreciation, increase shareholder value and enhance retention. In determining the number of SARs and RSUs to be granted, the Committee used the market median as a reference point in determining the value of the Named Executive Officers’ long-term incentive awards.

 

For 2011, the long-term incentive award design and critical components are summarized as follows:

 

 

In order to align compensation more closely with the market and to focus participants on the long-term performance goals critical to our success and that of our shareholders, the Committee approved an adjustment to the target Long-Term Incentive Plan opportunity for the Named Executive Officers during the first quarter of 2011, as follows:

 

 

Tax Considerations

 

Cash compensation, such as base salary or annual incentive compensation, is taxable to the recipient as ordinary income when earned, unless deferred under a Company-sponsored deferral plan. Deferrals under tax-qualified plans, such as a 401(k) plan, do not affect our current tax deduction. Deferrals under supplemental executive deferral plans delay our tax deduction until the deferred amount (and any accumulation thereon) is paid. Stock-settled SARs are generally taxable as ordinary income when exercised and performance shares, RSUs and performance units are generally

taxable when paid. We realize a tax deduction at that time. The Committee reviews potential tax implications before making decisions regarding compensation.

 

Management and the Committee are aware of Section 162(m) of the Internal Revenue Code, which generally limits the deductibility of executive pay in excess of one million dollars for certain Named Executive Officers, and which specifies the requirements for the “performance-based” exemption from this limit. The Committee generally manages our incentive programs to qualify for the performance-based exemption. It also reserves the right to provide compensation that does not meet the exemption criteria if, in its sole discretion, it determines that doing so advances our business objectives.

 

Accounting Considerations

 

When reviewing preliminary recommendations and in connection with approving the terms of a given incentive plan period, management and the Committee review and consider the accounting implications of a given award, including the estimated expense and/or dilutive considerations. Depending upon the type of accounting treatment associated with an incentive plan design, management and the Committee may alter or modify the incentive award due to the accounting treatment if the award (and the related accounting consequences) were to adversely affect our financial performance.

 

Executive Compensation Governance

 

Stock Ownership and Retention Guidelines

 

In order to better align the financial interests of our executives with those of our shareholders, we believe our executives should own a meaningful number of shares of PolyOne stock. We have adopted share ownership guidelines specifying a minimum level of share ownership for all executives, including all Named Executive Officers. The specific levels of share ownership for the Named Executive Officers are noted in the following table. These levels were established in 2010 when, given the sustained impact of volatile stock prices on ownership guidelines, we changed from a value that was a multiple of an executive’s salary to a fixed number of shares. The retention requirement was also added at this time. The share requirements for each level were determined with the help of Towers Watson and represent what was determined at the time to be a reasonable number of shares. Executives are expected to accumulate the specified shares within five years of their becoming subject to the policy.

 

In general, shares counted toward required ownership include shares directly held and shares held in our benefit or deferral plans (including RSUs, performance shares that have met the applicable performance criteria, and phantom shares under our nonqualified deferral plan). Our guidelines include a stock retention component, which requires that executives retain half of all shares granted as compensation (net of taxes) after December 16, 2009. After age 55, the 50% retention requirement is reduced 10% each year for five years, allowing individuals who are close to retirement the opportunity to diversify their portfolios. These guidelines and retention requirements apply until the executive retires.

 

Note: Ownership targets have been reduced by 30% for Mr. Newlin, 10% for Mr. Smith and 50% for Mr. Baert according to the applicable guideline pertaining to age reduction as discussed above. Mr. Patterson and Mr. Kedrowski have been with PolyOne less than five years and are not yet required to reach 100% of the full share ownership guideline (100,000 shares). The share ownership target for Mr. Patterson has been reduced to reflect that he has been with PolyOne for three years and the share ownership target for Mr. Kedrowski has been reduced to reflect that he has been with PolyOne for four years.

 

Timing with Respect to Equity Award Grants

 

We have adopted a policy with respect to the timing of the grant of equity awards, which provides that equity awards are granted pursuant to approval by the Board or the Committee or, pursuant to authority delegated by the Board or the Committee to the Chief Executive Officer. Such grants generally should be made at times when the Company is not in a “blackout period,” which is the period of time that is in close proximity to the release of financial or material non-public information or at other times when the Company is not in possession of material non-public information. The policy further provides that, to the extent practicable, annual grants to existing employees should be approved at regularly scheduled meetings and that the grant price for any stock option or stock appreciation right shall not be less than the fair market value of the Company’s common shares on the date of grant (which is defined as the closing price of our common shares on the date of grant).

 

Clawback Policy

 

We have adopted a policy that is consistent with the requirements of the Sarbanes-Oxley Act of 2002, which requires the Chief Executive Officer and Chief Financial Officer to reimburse us for any awards received during the twelve-month period following the release of financial results that subsequently require an accounting restatement due to material noncompliance with any financial reporting requirement if they are subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act. If necessary, we plan to modify our policy to comply with the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), when the SEC promulgates implementing rules and regulations.

 

Hedging Policy

 

Our Securities Trading Policy currently provides that, consistent with our philosophy to encourage long-term investments, directors, officers and certain other employees of PolyOne are prohibited from engaging in any speculative transactions involving our securities, including buying or selling puts or calls, short sales, or margin purchases of our securities. If necessary, we plan to modify our policy to comply with the provisions of the Dodd-Frank Act when they are finalized.

 

2010 SUMMARY COMPENSATION TABLE

 

The following table sets forth the compensation earned by, and the compensation opportunity granted to, our principal executive officer, our principal financial officer, and our other three most highly compensated executive officers, during the fiscal years ended December 31, 2010, December 31, 2009 and December 31, 2008.