STEVEN J. MALCOLM
CHAIRMAN OF THE BOARD

 

To the Stockholders of The Williams Companies, Inc.

 

You are cordially invited to attend the 2008 annual meeting of stockholders of The Williams Companies, Inc. The meeting will be held on Thursday, May 15, 2008, in the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, at 11:00 a.m., Central time. We look forward to greeting personally as many of our stockholders as possible at the annual meeting.

 

The notice of the annual meeting and proxy statement accompanying this letter provide information concerning matters to be considered and acted upon at the annual meeting. At the annual meeting we will provide a report on our operations, followed by a question-and-answer and discussion period.

 

Please note that for security reasons briefcases, backpacks, and other large bags are not permitted in the theater. All such items can be checked with security upon arrival at the theater.

 

We know that most of our stockholders are unable to attend the annual meeting in person. We solicit proxies so that you have an opportunity to vote on all matters that are scheduled to come before the annual meeting. Whether or not you plan to attend, you can be sure your shares are represented by promptly voting and submitting your proxy by phone, by Internet or by completing, signing, dating and returning your proxy card in the enclosed postage-paid envelope. Regardless of the number of shares you own, your vote is important.

 

This is our 100^th year in business. Those of us at Williams today are honored to be part of the company’s continuing success, and inspired by the possibilities for our future. As Williams enters its second century of business, we have abundant opportunities to grow the company and the capacity to deliver that growth. We look forward to delivering strong performance results during 2008 and beyond.

 

Thank you for your continued interest in Williams.

 

Very truly yours,

 

Steven J. Malcolm

 

Enclosures

April 9, 2008

 

TABLE OF CONTENTS

 

 

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

May 15, 2008

 

 

Please take notice that the annual meeting of stockholders of The Williams Companies, Inc. will be held at the time and place and for the purposes indicated below.

 

 

By order of the Board of Directors,

 

Brian K. Shore
Secretary

 

Tulsa, Oklahoma

April 9, 2008

THE WILLIAMS COMPANIES, INC.
One Williams Center
Tulsa, Oklahoma 74172

PROXY STATEMENT
for

ANNUAL MEETING OF STOCKHOLDERS

May 15, 2008

 

 

Our Board of Directors (the “board”) solicits your proxy for the 2008 Annual Stockholders’ Meeting to be held at 11:00 a.m. Central Time on May 15, 2008 at the Williams Resource Center Theater, One Williams Center, Tulsa, Oklahoma, and at any postponement or adjournment of the meeting, for the purposes set forth in the “Notice of Annual Meeting of Stockholders.” Unless the context otherwise requires, all references in this proxy statement to “Williams,” “the company,” “we,” “us,” and “our” refer to The Williams Companies, Inc. and its consolidated subsidiaries.

 

Record Date and Stock Ownership

 

You may attend or vote at the annual meeting if you were a stockholder of record of our stock at the close of business on March 24, 2008 (the “record date”). If a broker holds your shares and you would like to attend the meeting, please bring a copy of your account statement or a proxy card, which you can obtain from your broker. The majority of the shares of common stock outstanding on the record date must be present in person or by proxy to have a quorum. On the record date, we had 586,228,700 shares of common stock outstanding. We made copies of this proxy statement available to stockholders beginning on April 9, 2008.

 

Submitting or Revoking your Proxy

 

Your vote is important. You may vote your shares in any one of the following ways:

 

 

When you complete and submit your proxy card, the persons named as proxies will vote the shares represented by your proxy in accordance with your instructions. When you submit a proxy card but do not fill out the voting instructions on the proxy card, the persons named as proxies will vote the shares represented by your proxy as follows:

 

 

You may revoke or change a proxy vote in one of the following ways: (1) by voting again by telephone or on the Internet; (2) prior to its exercise, by delivering written notice of revocation of your proxy vote to our secretary at One Williams Center, MD 47, Tulsa, Oklahoma 74172; (3) by executing and returning a later dated proxy; or (4) by attending the annual meeting and voting in person.

Matters to be Voted On

 

You will be voting on the following:

 

 

Requisite Votes

 

You will have one vote for every share of our common stock that you own on the record date. The matters discussed herein to be voted on at the annual meeting including the election of directors will be decided by a majority of the votes cast by the stockholders. However, other matters that may properly come before the annual meeting may require more than a majority vote under our by-laws, the laws of the state of Delaware, our restated certificate of incorporation, or other applicable laws.

 

The presence, in person or by proxy, of a majority of the outstanding shares of common stock entitled to vote at the annual meeting constitutes a quorum. You will be considered part of the quorum if you return a signed and dated proxy card, if you vote by telephone or the Internet, or if you vote in person at the annual meeting.

 

Abstentions and broker “non-votes” are counted as present and entitled to vote for determining a quorum. Broker “non-votes” are shares held by brokers or nominees over which the broker or nominee lacks discretionary power to vote and for which the broker or nominee has not received specific voting instructions from the beneficial owner. For purposes of determining the outcome of any matter as to which the broker has indicated on the proxy that it does not have discretionary authority to vote, those shares will be treated as not present and not entitled to vote with respect to that matter, even though those shares are considered present and entitled to vote for quorum purposes and may be entitled to vote on other matters.

 

Our restated certificate of incorporation, as amended, provides for three classes of directors of as nearly equal size as possible and further provides that the total number of directors shall be determined by resolution adopted by the affirmative vote of a majority of the board, except that the total number of directors may not be less than five nor more than 17. The term of each class of directors is normally three years, and the term of one class expires each year in rotation.

 

Five individuals, all of whom currently serve as directors, have been nominated for election for three-year terms as directors at the annual meeting. Eight directors will continue in office to serve pursuant to their prior elections. Mr. Joseph R. Cleveland, who was identified by Michael P. Johnson, our former senior vice president and chief administrative officer, was appointed to the board in March 2008, and will be standing for election as a Class I director. In accordance with the recommendation of the nominating and governance committee, the board proposes that the following nominees be elected:

 

 

The persons named as proxies in the accompanying proxy, who have been designated by the board, intend to vote, unless otherwise instructed in such proxy, for the election of Mesdames Juanita H. Hinshaw and Janice D. Stoney and Messrs. Joseph R. Cleveland, Frank T. MacInnis and Steven J. Malcolm. Should any nominee named herein become unable for any reason to stand for election as a director, the persons named in the proxy will vote for the election of such other person or persons as the nominating and governance committee may recommend. The

board may propose to replace such nominee or, if none, the nominating and governance committee will recommend that the size of the board be reduced. We know of no reason why any of the nominees will be unavailable or unable to serve.

 

The names of the nominees and the directors whose terms of office will continue after the 2008 annual meeting, their principal occupations during the past five years, other directorships held and certain other information are set forth below.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF DIRECTORS NAMED IN PROPOSAL 1.

 

Standing for Election — Class I

 

Joseph R. Cleveland, Age 63, Class I, Term Expires May 2008

 

Director since 2008. Mr. Cleveland is the former Chief Information Officer of Lockheed Martin Corporation, which is engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services. He held that position from 2001 to 2008. He also served as President of Lockheed Martin Enterprise Information Systems from 1995 to 2008.

 

Juanita H. Hinshaw, Age 63, Class I, Term Expires May 2008

 

Director since 2004. Ms. Hinshaw is the retired senior vice president and chief financial officer of Graybar Electric Company. She joined Graybar Electric Company in May 2000. Graybar Electric Company is an employee owned provider of electrical and telecommunications product distribution services. Prior to joining Graybar Electric Company, she was with Monsanto Company for fifteen years. She also serves on the board of directors of Insituform Technologies, Inc. and SYNERGETICS USA, INC.

 

Frank T. MacInnis, Age 61, Class I, Term Expires May 2008

 

Director since 1998. Mr. MacInnis is chairman of the board and chief executive officer of EMCOR Group, Inc., one of the world’s largest electrical and mechanical construction and facilities management groups, and has been since 1994. Mr. MacInnis is also chairman of the board and chief executive officer of ComNet Communications, Inc. He is a director of ITT Inc. and the Greater New York Chapter of the March of Dimes.

 

Steven J. Malcolm, Age 59, Class I, Term Expires May 2008

 

Director since 2001. Mr. Malcolm was elected chief executive officer of Williams in January 2002 and chairman of the board in May 2002. He was elected president and chief operating officer of Williams in September 2001. Prior to that, he was an executive vice president of Williams since May 2001, president and chief executive officer of Williams Energy Services, LLC, a subsidiary of Williams, since December 1998 and the senior vice president and general manager of Williams Field Services Company, a subsidiary of Williams, since November 1994. Mr. Malcolm serves as a director of Williams Partners GP LLC, the general partner of Williams Partners L.P., and as a director Williams Pipeline GP LLC, the general partner of Williams Pipeline Partners L.P. Mr. Malcolm also serves on the boards of BOK Financial Corporation and Bank of Oklahoma N.A.

 

Janice D. Stoney, Age 67, Class I, Term Expires May 2008

 

Director since 1999. Ms. Stoney retired as executive vice president of U S WEST Communications, Inc. in 1992. Previously she held the positions of president — chief executive officer and chief operating officer of Northwestern Bell Telephone Company where she spent her 33 year career. Ms. Stoney serves on the boards of Whirlpool Corporation, worlds largest appliance manufacturer and Gordman’s, a non-public retailer.

Directors Continuing in Office

 

Irl F. Engelhardt, Age 61, Class II, Term Expires May 2009

 

Director since 2005. Mr. Engelhardt has served as chairman of Patriot Coal Corporation since November 2007. He served as chairman of Peabody Energy Corporation or its predecessor companies from 1993 to October 2007, and as chief executive officer from 1990 through 2005. He also served as co-CEO of The Energy Group from 1997 to May, 1998 and chairman of Citizens Power from 1998 to 2000. He serves on the boards of directors of Patriot Coal and Valero Energy Corporation and is chairman of The Federal Reserve Bank of St. Louis.

 

William E. Green, Age 71, Class II, Term Expires May 2009

 

Director since 1998. Mr. Green is founder of William Green & Associates, a Palo Alto, California law firm and has been with the firm since 1974. He also serves as vice president, general counsel and secretary of AIM Broadcasting, LLC. He is a former trustee of Rochester Savings Bank. Mr. Green serves on the boards of Philanthropic Ventures, Inc., Ramsell Holding Corporation and Flowers Heritage Foundation.

 

W.R. Howell, Age 72, Class II, Term Expires May 2009

 

Director since 1997. Mr. Howell is chairman emeritus of J.C. Penney Company, Inc., a major retailer. He was chairman of the board and chief executive officer of J.C. Penney from 1983 to 1996. He is a director of American Electric Power Company, ExxonMobil Corporation, Halliburton Company and Pfizer, Inc. He is also a director of Deutsche Bank Trust Corporation and Deutsche Bank Trust Company Americas, non-public wholly-owned subsidiaries of Deutsche Bank AG.

 

George A. Lorch, Age 66, Class II, Term Expires May 2009

 

Director since 2001. Mr. Lorch is chairman emeritus of Armstrong Holdings, Inc. From 1993 through 1994 he served as chief executive officer and president and from 1994 through April 2000, he served as chairman of the board and chief executive officer of Armstrong World Industries, Inc. He served as chairman of the board and chief executive officer of Armstrong Holdings, Inc. from May to August of 2000. Mr. Lorch serves on the boards of Pfizer, Inc., and Autoliv, Inc. He also serves on the boards of HSBC Finance and HSBC North America Holding Co., both UK entities of HSBC LLC London. Neither are publicly held companies.

 

Kathleen B. Cooper, Age 63, Class III, Term Expires May 2010

 

Director since 2006. Dr. Cooper was appointed senior fellow of the Tower Center for Political Studies at Southern Methodist University in August of 2007. For two previous academic years she served as dean of the College of Business Administration at the University of North Texas. From May 2001 until August 2005, she served as under secretary for economic affairs at the U.S. Department of Commerce.

 

William R. Granberry, Age 65, Class III, Term Expires May 2010

 

Director since 2005. Mr. Granberry is a member of Compass Operating Company, LLC, an oil and gas exploration, development and producing company with operations in West Texas and Southeast New Mexico. From 1999 through September 2004 he managed investments and consulted with oil and gas companies. He is a director of Legacy Reserves GP, LLC.

 

Charles M. Lillis, Age 66, Class III, Term Expires May 2010

 

Director since 2000. Dr. Lillis is a co-founder and principal of LoneTree Capital Management LLC, a private equity investing group with headquarters in Denver, Colorado. He is also a co-founder and partner of Castle Pines Capital, a group providing financial solutions for high technology distribution channels. Dr. Lillis served as the chairman of the board and chief executive officer of MediaOne Group, Inc. from its inception in 1995 through the acquisition of MediaOne by AT&T Corp., which was completed in 2000. Dr. Lillis is a director of SUPERVALU Inc., Medco Health Solutions, Washington Mutual and SomaLogic Inc.

William G. Lowrie, Age 64, Class III, Term Expires May 2010

 

Director since 2003. Mr. Lowrie is a retired deputy chief executive officer of BP Amoco PLC, where he spent his entire 33-year career holding various positions of increasing responsibility at Amoco. Mr. Lowrie also serves on the board of The Ohio State University Foundation.

 

Our board takes corporate governance very seriously and is committed to sound corporate governance practices. The board of directors has the responsibility for establishing broad corporate policies and for our overall performance and the operation of the company by the chief executive officer (“CEO”) and other officers. Our directors have the responsibility of evaluating and approving our business strategies and financial objectives and for monitoring their successful execution. They are responsible for succession planning for management and assessing the performance of the CEO and setting compensation accordingly, as well as reviewing senior executive officers’ goals and compensation. Our directors focus on ensuring that we have the best management processes in place to run the company legally, ethically and successfully. The board is concerned about stockholders, employees, customers, suppliers and the communities in which we operate. Our corporate governance guidelines are available on our website at http://www.williams.com.

 

Our board understands and expects that a director who has a material change in his or her status including a change in his or her principal business association will promptly offer his or her resignation from the board in order to provide the nominating and governance committee the opportunity to assess each situation based on the individual circumstances and make a recommendation to the board as to whether to accept the resignation. The board is free to accept or reject the resignation.

 

Majority Vote Standard

 

Our board has adopted a majority vote standard for the election of directors in uncontested elections. The board also provides for director resignations in the event a director fails to receive a majority of the votes cast in an uncontested election. We hold an irrevocable resignation for each director. If a director fails to receive the required votes for election, the nominating and governance committee will act on an expedited basis to determine whether to accept the resignation. The nominating and governance committee will then submit its recommendation for consideration by the board. The board will act on the recommendation and publicly disclose its decision within 90 days from the date of the certification of the election results. The board expects the director whose tendered resignation is under consideration to abstain from participating in any decision regarding that tendered resignation. The nominating and governance committee and the board may consider any factors they deem relevant in deciding whether to accept a director’s tendered resignation. If the board accepts a director’s tendered resignation, the nominating and governance committee shall recommend to the board whether to fill such vacancy or reduce the size of the board.

 

Board Meetings

 

The full board met thirteen times in 2007. Further, the non-management directors met six times without the chairman of the board and chief executive officer present. No director attended fewer than 85% of the aggregate of the board and applicable committee meetings held in 2007.

 

Our board members actively participate in board and committee meetings. Generally, materials are distributed to our board members one week in advance of each regular board meeting. To facilitate active participation, board members are expected to review the materials in advance of the meetings. The board and each of the board committees also conduct self-assessments. The nominating and governance committee also conducts individual director evaluations of all directors.

 

During the year, the board meets with management to discuss and approve strategic plans, financial goals, capital spending and other factors critical to successful performance. A mid-year review of progress on objectives and strategies is conducted. During board meetings, directors review key issues and financial performance. The board meets privately with the CEO six times per year and meets in executive session at each regular board meeting

and additionally as required. The board assesses CEO performance and oversees executive officer development and succession. Further, the CEO communicates regularly with the members of the board via e-mail or fax on important business opportunities and developments. In 2007, the board also held one of its regularly scheduled meetings at one of our field locations to further the directors’ education about our operations.

 

Director Independence

 

The board of directors has adopted director independence standards, which are available on our website at http://www.williams.com.

 

The board of directors has affirmatively determined that each of Mr. Cleveland, Dr. Cooper, Mr. Engelhardt, Mr. Granberry, Mr. Green, Ms. Hinshaw, Mr. Howell, Dr. Lillis, Mr. Lorch, Mr. Lowrie, Mr. MacInnis and Ms. Stoney is an “independent director” under the current listing standards of the New York Stock Exchange (“NYSE”) and our director independence standards. In so doing, the board determined that each of these individuals met the “bright line” independence standards of the NYSE. In addition, the board considered transactions and relationships between each director and any member of his or her immediate family and the company and its affiliates and subsidiaries. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. The board considered the fact that Mr. Howell also serves on the boards of American Electric Power Company, Inc., ExxonMobil Corporation, Pfizer Inc., and Halliburton, each of which is a customer of ours or performs services for us. The board considered the fact that Mr. Lorch also serves on the board of Pfizer Inc. which provides products to us. The board considered the fact that Dr. Lillis serves on the board of Medco Health Solutions, Inc., a company that provides services to us. The board also considered the fact that Mr. Engelhardt also serves on the board of Valero Energy Corporation, which is a customer or performs services for us. The board noted that, since Messrs. Engelhardt, Lorch, Howell and Dr. Lillis do not serve as executive officers and do not own a significant amount of stock of any of these companies, these relationships are not required to be reported under the caption “Certain Relationships and Related Transactions” in this proxy statement. Accordingly, the board concluded that these relationships are not material and affirmatively determined that all of the directors mentioned above are independent. Mr. Malcolm is not considered to be independent because of his employment as an executive officer of the company.

 

No member of our board of directors serves as an executive officer of any non-profit organization to which we made contributions within any single fiscal year of the preceding three years that exceeded the greater of $1 million or 2% of such organization’s consolidated gross revenues. Further, in accordance with the director independence standards, the nominating and governance committee determined that there were no discretionary contributions to a non-profit organization with which a director, or a director’s spouse, has a relationship that impact the directors’ independence.

 

Director Attendance at Annual Meeting of Stockholders

 

We have a policy regarding board member attendance at our annual meeting of stockholders. All board members are expected to attend our annual meeting of stockholders. All of the then-current board members attended the 2007 annual meeting of stockholders.

 

Lead Director

 

Mr. W. R. Howell currently serves as the lead director. The lead director presides over executive sessions of the independent directors, consults with our chairman of the board and our secretary to establish an agenda for each board meeting, oversees the flow of information to the board, acts as liaison between the independent directors and management and is available to consult and communicate with stockholders as appropriate.

 

Board Committees

 

The board has established standing committees to consider designated matters. The committees of the board are audit, compensation, finance, and nominating and governance. The board has also established an ad hoc litigation committee. In accordance with our by-laws, the board annually elects from its members the members and the chairman of each committee. The board has determined that each of the members of the audit committee,

compensation committee, and nominating and governance committee is independent as defined by the rules of the NYSE. The standing committees report to the full board at each regular board meeting.

 

Board Committee Membership and Number of Meetings in 2007

 

The following is a description of each of the committees and committee membership as of December 31, 2007.

 

 

 

 

Audit Committee

 

Our board has determined that all members of the audit committee are financially literate as defined by the rules of the NYSE. The audit committee is governed by a written charter approved by the board. Among its duties and responsibilities, the audit committee is responsible for appointing, setting compensation and overseeing the work of Ernst & Young LLP, our independent auditors. It also discusses our earnings press releases and our policies with respect to risk assessment and management and has certain oversight responsibilities with respect to our internal auditor. Further, information regarding the functions performed by the audit committee is set forth in the “Report of the Audit Committee” included in this proxy statement and the audit committee charter. The audit committee charter is available on our website at http://www.williams.com.

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditors.  The audit committee is responsible for appointing, setting compensation and overseeing the work of Ernst & Young LLP, our independent auditors. The audit committee has established a policy regarding pre-approval of all audit and non-audit services provided by Ernst & Young LLP.

 

On an ongoing basis, our management presents specific projects and categories of service to the audit committee for which advance approval is requested. The audit committee reviews those requests and advises management if the audit committee approves the engagement of Ernst & Young LLP. On a periodic basis, our management reports to the audit committee regarding the actual spending for such projects and services compared to the approved amounts. The audit committee may also delegate the ability to pre-approve audit and permitted non-audit services, excluding services related to the company’s internal control over financial reporting, to a subcommittee of one or more committee members, provided that any such pre-approvals are reported on at a subsequent audit committee meeting. In 2007, 100% of Ernst & Young LLP’s fees were pre-approved by the audit committee.

Our audit committee’s pre-approval policy with respect to audit and non-audit services is available on our website at http://www.williams.com.

 

Transactions with Related Persons.  The board has adopted written policies and procedures with respect to related person transactions. The policies and procedures are part of the audit committee charter. The audit committee is responsible for reviewing each transaction with related persons, promoters and certain control persons whether or not the transaction would be disclosable in our proxy statement and regardless of the dollar value of such transaction. The chair of the audit committee is responsible for reviewing related person transactions in the event it is impractical to convene a committee meeting prior to entering into a related person transaction. The audit committee or the chair in good faith shall approve only those related person transactions that are in, or not inconsistent with our best interests and the best interests of our stockholders. Any proposed related person transaction involving a member of the board of directors or our chief executive officer shall be reviewed and approved by the full board of directors. During 2007, there were no transactions that required review or approval by the audit committee in accordance with the policy.

 

Audit Committee Financial Expert and Independence.  The board has determined that Ms. Juanita H. Hinshaw, Mr. Irl F. Engelhardt and Dr. Charles M. Lillis qualify as “audit committee financial experts” as defined by the rules of the SEC. All members of the audit committee are independent of management as defined by the rules of the NYSE and the SEC.

 

Simultaneous Service on Audit Committees.  No audit committee member serves on more than three public company audit committees.

 

Compensation Committee

 

The compensation committee oversees and directs the design and implementation of strategic compensation programs for our executive officers that align the interests of our executive officers with those of our stockholders. The compensation committee’s key responsibilities include:

 

 

 

 

 

 

A more complete description of the compensation committee’s responsibilities and functions is included in the compensation committee’s charter, which can be found on our website at http://www.williams.com. The charter provides that the compensation committee has full authority to engage independent advisors and consultants and provides for at least annual committee evaluations. The compensation committee charter does not provide for any delegation of the committee’s duties.

The compensation committee has retained the services of Frederic W. Cook & Co., an independent executive compensation consulting firm to provide:

 

 

The consultant was selected by the compensation committee and reports to the chairman of the compensation committee. The compensation committee has the authority to determine the scope of the consulting firm’s services and retains the right to terminate the consultant’s engagement at any time. Frederic W. Cook & Co. does not perform any services for the company.

 

Consistent with the listing requirements of the NYSE, the compensation committee is composed entirely of independent, non-employee members of the board of directors. Each year, we review any and all relationships that each director may have with the company and the board of directors reviews the company’s findings. The board of directors has determined that none of the compensation committee members has any material business relationships with the company. During 2007, none or our executive officers served on the compensation committee (or any committee performing equivalent functions) or the board of directors, of any other entity whose executive officers served on the compensation committee or on our board of directors.

 

In most cases, our chief executive officer provides recommendations to the compensation committee on compensation issues involving our executive officers other than the CEO. The compensation committee, or in the case of the CEO, the independent members of the full board, makes the final decisions on material compensation issues for all or our executive officers, including the CEO. Further detail is provided in the section entitled “Compensation Discussion and Analysis.”

 

Finance Committee

 

The finance committee has the primary responsibility for overseeing appropriate alignment between our financing strategies and our business units’ operating plans and acquisitions or other investment opportunities, as well as reporting to the full board, as appropriate, that the key elements of our balance sheet are structured in a manner that allow the business units’ operating plans and investment opportunities to be executed.

 

A copy of the governing charter of the finance committee is available on our website at http://www.williams.com. The charter provides that the finance committee has full authority to engage independent advisors and consultants and provides for at least annual committee evaluations.

 

Nominating and Governance Committee

 

The nominating and governance committee’s governing charter is available on our website at http://www.williams.com. The charter provides that the nominating and governance committee has full authority to engage independent advisors and consultants. The nominating and governance committee is responsible for identifying and recommending candidates to fill vacancies on the board as such vacancies occur, as well as the slate of nominees for election as directors by the stockholders at each annual meeting of stockholders. Additionally, the nominating and governance committee recommends to the board the individual to be the chairman of the board and CEO. The nominating and governance committee reviews and reports to the board on a periodic basis regarding matters of corporate governance. The nominating and governance committee is responsible for reviewing annually and making recommendations to the board as to whether each non-management director is independent as defined by the NYSE and our director independence standards and otherwise qualified in accordance with applicable law or regulation. The nominating and governance committee also is responsible for reviewing the compensation of non-management directors and recommending changes in non-management director compensation to the board of

directors. The nominating and governance committee also reviews the continuing qualifications of incumbent directors including any changes to a director’s primary activity, and all board committee charters for effective corporate governance. The nominating and governance committee evaluates annually the performance of the nominating and governance committee and the board as a whole. The code of business conduct and ethics is reviewed for compliance annually and changes are recommended to the board as necessary.

 

Frederic W. Cook & Co., the same consultant that provides services to the compensation committee, also provides competitive market data and advice to the nominating and governance committee on non-management director compensation.

 

Consideration of nominees.  For board membership, the nominating and governance committee considers the appropriate balance of experience, skills and characteristics that best suits our needs and the needs of our stockholders. The nominating and governance committee develops long-term board succession plans to ensure that the appropriate balance is maintained. The nominating and governance committee is committed to nominating candidates that are independent as defined by the rules of the NYSE and our director independence standards. The nominating and governance committee also seeks to ensure that each member of the audit committee meets the financial literacy requirements of the NYSE and that at least one audit committee member qualifies as an “audit committee financial expert” under the SEC’s rules.

 

Qualifications of nominees.  The nominating and governance committee seeks director candidates with the following qualifications:

 

 

Stockholder nominations.  The nominating and governance committee will consider written recommendations from stockholders for director nominations. You should submit any recommendations to our secretary at One Williams Center, MD 47, Tulsa, Oklahoma 74172. In accordance with our by-laws, written recommendations from stockholders for director nominations for consideration at our 2009 annual meeting must be submitted between January 15, 2009 and February 14, 2009.

 

The recommendation must set forth:

 

 

The proposal must also set forth the following information as to the stockholder giving the notice:

 

 

 

The notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

 

Identification and evaluation of nominees.  The nominating and governance committee identifies candidates who meet the qualifications for selection as a nominee and possess the specific experience, skills and characteristics being sought based on input from board members and others. The nominating and governance committee has retained a search firm to assist the committee in identifying, recruiting and evaluating director candidates meeting the committee’s criteria.

 

In evaluating director candidates, regardless of the source of the nomination, the nominating and governance committee will consider:

 

 

Director candidates are evaluated by the nominating and governance committee by reviewing all available biographical information and qualifications and checking references. Qualified candidates are interviewed by the chairman of the board and at least one member of the nominating and governance committee. Candidates may then meet with other members of the board and senior management. Using all available information, the nominating and governance committee evaluates the candidates to determine if they are qualified to serve as a director and whether they should be recommended to the full board for nomination for election by the stockholders or appointed to fill a vacancy.

 

To date, the company has not received any stockholder recommendations for director nominees. The same evaluation process will be used by the nominating and governance committee to evaluate stockholder nominees.

 

Stock Ownership Guidelines

 

The board recommends that all directors, consistent with their responsibilities to the stockholders of the company as a whole, hold an equity interest in the company by acquiring and holding company stock with a value equivalent to three times the annual director retainer, exclusive of committee or committee chair fees, paid to each director in the company’s most recently completed full fiscal year. Non-management directors should satisfy this standard within the later of five years from the date the director joins the board or the adoption of the policy in November 2005. The board also recommends that all executive officers, consistent with their responsibilities to the stockholders of the company as a whole, hold an equity interest in the company. Accordingly, the chief executive officer should acquire and hold company stock with a value equivalent to five years’ base salary. Each other executive officer of the company should acquire and hold company stock with a value equivalent to three years’ base salary. Executive officers should satisfy this standard within the later of five years from the date of becoming an executive officer or the adoption of the policy in November 2005. All executive officers were in compliance with the stock ownership guidelines upon adoption. All directors, with the exception of the directors appointed after 2003, are in compliance with the stock ownership guidelines.

Communications with Directors

 

Any stockholder or other interested party may communicate with our directors, individually or as a group, by contacting our secretary or the lead director. The contact information is maintained on the Investor page of our website at http://www.williams.com.

 

The current contact information is as follows:

 

The Williams Companies, Inc.

One Williams Center, MD 47

Tulsa, Oklahoma 74172

Attn: Lead Director

 

The Williams Companies, Inc.

One Williams Center, MD 47

Tulsa, Oklahoma 74172

Attn: Corporate Secretary

Email: brian.shore@williams.com

 

All such communications will be forwarded to the relevant director(s) except for solicitations or other matters not related to our company.

 

Other Corporate Governance Information

 

We have established a program for new director orientation. The orientation program includes private meetings with senior management for each business segment to ensure that the new director becomes familiar with our businesses.

 

We have adopted a guideline limiting the number of public boards on which our directors may serve to no more than five (including our board). All directors are in compliance with the guideline.

 

We have adopted rules of conduct that are applicable to our in-house and outside attorneys who are practicing before the Securities and Exchange Commission (“SEC”) on our behalf.

 

We have also established disclosure committees that are designed to ensure full and timely disclosure of information in all public filings.

 

We believe the corporate governance guidelines and other steps taken by the board and the company help ensure sound governance practices.

 

Compensation of Directors

 

Management directors receive no additional compensation for serving on the board or board committees. For their service non-management directors effective May 17, 2007, received $110,000 annual retainer, ($75,000 paid in cash and $35,000 paid in stock) and 3,000 restricted stock units. The chairpersons of the compensation, finance, litigation, and nominating and governance committees will also receive an additional annual retainer of $10,000. The chairperson of the audit committee will also receive an additional annual retainer of $15,000. In addition, the lead director will receive a retainer of $20,000. Members of the litigation committee will receive an additional annual retainer of $10,000 as a special committee project fee. The litigation committee was formed in 2005 to address certain litigation issues such as the shareholder lawsuit and other securities lawsuits.

 

In 2007, the board of directors voted to compensate the members of the litigation committee $10,000.00 annually retroactive to 2005. For their time spent on the litigation committee Mr. Green, Ms. Hinshaw, and Dr. Lillis and Mr. Lorch received an additional committee fee of $20,000. This reflects an annual amount of $10,000 for service in 2005 and 2006. Mr. Lorch received an additional $20,000 for serving as the committee chairperson during these years. Because the fees were not approved until 2007, the litigation committee had no vested right to the amounts paid for 2005 and 2006 service.

The compensation received by each director in 2007 is outlined in the table below:

 

Director Compensation for Fiscal Year 2007

 

 

 

 

 

 

 

 

The aggregate number of stock options outstanding at fiscal year end is as follows:

 

Outstanding Awards as of Fiscal Year End 2007

 

 

Executive Summary

 

This Compensation Discussion and Analysis seeks to explain our executive pay program to our stockholders. We continuously work to ensure that the features of our pay program are fulfilling the objectives we established when designing them. The main objective of our executive pay program is to reward executives for creating value for stockholders, consistent with company strategy and the following pay principles:

 

 

We use different forms of pay to achieve our objectives. These forms of pay include base pay, benefits, annual cash incentives, and long-term incentives in the form of equity. Each form of pay accomplishes different objectives. Dividing the total pay awarded to executives among these various forms helps us to achieve a balance to better accomplish our goals.

 

We follow a consistent process in determining the amounts of each form of pay for our executives. Our compensation committee plays a key role in this process by providing oversight and making decisions about executive pay. For executives other than the CEO, management and the CEO make recommendations to the compensation committee. Named executive officers other than the CEO have no role in setting pay for executive officers. The compensation committee has engaged an independent compensation consultant to advise it in making executive pay decisions for the CEO and the other named executive officers.

When considering how much to pay and what form of pay should be used, our compensation committee considers pay information from a group of comparator companies and market data from executive compensation surveys along with internal equity.

 

After the pay information has been reviewed and discussed, a range for base pay for each position is set. The actual base pay for each executive officer can be set above or below the median for this range due to the experience, skills, and sustained performance of the individual executive.

 

The target opportunity to earn annual cash incentives is also set after considering market data and internal equity. The actual cash incentive paid to executives varies based upon achievement of business goals and individual performance. We use Economic Value Added^® (EVA^®) as the measure of attainment of business goals.

 

We also grant long-term incentives to executives in the form of equity, including stock options, time-based restricted stock units and performance-based restricted stock units. Like the other forms of pay, a variety of factors, including the competitive market, the executive’s impact on our company, and the executive’s performance, are used in determining the value of long-term incentives. The different forms of equity granted achieve different purposes, including aligning the interests of executives with the interests of stockholders, facilitating executive ownership of company stock, driving performance, and encouraging executives to stay with our company.

 

We have adopted policies to further the goals of our executive pay program, including a recoupment policy, stock ownership guidelines, and a prohibition on derivative transactions linked to our company’s common stock. We do not enter into employment agreements with our executive officers, but we do provide a change in control program.

 

Objective of our Pay Programs

 

We focus on growing our business and creating stockholder value through our Game Plan for Growth strategy. Our pay program objective is to reward our executives and employees for successfully implementing our strategy. We use Economic Value Added^® (EVA^®) as the tool to measure our success. We believe that EVA^® is the best performance metric over the long-term to align employees’ interests with stockholders’ interests. Improving EVA^® means creating sustainable value for our stockholders. Our executives and employees are rewarded for improving EVA^®.

 

What is EVA^®?

 

Simply stated, EVA^® measures the value created by a company, specifically the financial return in a given period less the capital charge for that period. The calculation we use is as follows:

 

 

Generating profits in excess of both operating and capital costs (debt and equity) creates positive EVA^®. If EVA^® is positive, value has been created. Using EVA^® creates a mind set in our organization that all activities and incentives should focus on creating economic value for stockholders.

 

Game Plan for Growth

 

Our goal is to create sustainable growth in EVA^® and stockholder value. In early 2006, we set ambitious three-year goals that we refer to as the Game Plan for Growth. The performance of our named executive officers and other employees is measured by progress made towards these goals. The goals to be achieved by 2009, some of which have already been met, are as follows:

 

 

 

Our Pay Philosophy

 

Our Pay Philosophy is to be competitive in the marketplace while also considering the value a job provides to the company. In doing so, we seek to motivate high performance that produces returns for stockholders that are higher than they would earn by investing in other companies. We believe linking EVA^® to what we pay executives helps ensure that the decisions we make are aligned with what is best for stockholders. Our pay programs also reward executives for the way they accomplish our goals to better ensure we reward the right behavior and the right results in the context of business and enterprise strategies while fostering a culture of teamwork. This forms the basis of our pay-for-performance philosophy.

 

The following principles of our pay philosophy influence the design and administration of our executive pay programs. This includes decisions about how pay should be divided among base pay, annual cash incentives, and long-term incentives:

 

 

The compensation committee administers our pay programs by directing the design and implementation of executive pay. The role of the compensation committee is to align the interests of our named executive officers with those of our stockholders. Please refer to the compensation committee section for a discussion of the process followed by the compensation committee.

Types of pay we use and what it means to the named executive officers

 

As discussed above, decisions about how we pay executives are based on the principles that we have established. The compensation committee uses several different types of pay that are linked to both our short-term and long-term performance in the executive pay program. The types of pay that are a part of our executive pay program are base pay, annual cash incentives, long-term incentives (equity) and benefits. The role of pay is to attract and retain the talent needed to drive stockholder value and help each of our businesses meet or exceed financial and operational performance targets. The chart below illustrates the relationship between the types of pay and our ability to engage the talent needed to achieve stockholder value and performance targets. The size of the circles in the chart denotes the degree to which the types of pay impact employee commitment and engagement. To us, sustainability is meeting basic needs and providing security for the executive officers. Competitiveness recognizes the executive’s talent that is brought to the job in hopes that they don’t go elsewhere to work. We believe that collaboration is the key driver of employee commitment and development, and performance and value creation gives the executive officers the opportunity to be rewarded for the contributions that they make.

 

 

Why we use each type of pay and what it means to the company

 

Base Pay

 

Base pay serves as the foundation of our pay program. We use base pay to compensate our named executive officers for carrying out activities of their job. Most other major components of pay are determined based on a relationship to base pay, including annual and long-term incentives, termination payments, and retirement benefits.

 

Annual Cash Incentives

 

We pay annual cash incentives to encourage and reward our named executive officers for making decisions that improve company performance as measured by EVA^®.

 

Long-Term Incentives

 

Long-term incentives are paid in the form of equity and include stock options, time-based restricted stock units and performance-based restricted stock units. We pay long-term incentives to align executives with stockholder interests. We do this by giving executives an ownership stake in the company, encouraging sustained long-term performance, and encouraging executives to remain employed by the company.

Benefits

 

Consistent with the compensation committee’s philosophy to maximize pay at risk, our executives receive very few perquisites (perks) or supplemental benefits. The perks they receive are as follows:

 

 

The Pay Setting Process

 

Setting pay is an annual process that occurs during the first quarter of the year. A review is done to ensure that we are (1) paying competitively (2) paying equitably and (3) paying in a way that encourages and rewards for superior performance. We follow the underlying principles of our pay philosophy as shown in the chart below. The size of the circles in the chart denotes the degree to which the underlying factors of our pay principles impact the pay awarded to the executive officers.

 

When setting pay we determine a target pay mix (distribution of pay among different forms of pay) for the executive officers. The average target pay mix and the average of the actual pay mix for all named executive officers are illustrated below. Consistent with our pay-for-performance philosophy, the actual amounts paid, excluding benefits, are determined based on individual and company performance. Because performance is a factor, the target and actual pay mix will vary specifically as it relates to the annual cash incentives. In 2007, company performance exceeded the predetermined target resulting in cash incentive payments at two times the target amount.

 

 

Compensation Recommendations and Decisions

 

Role of Management

 

In order to make pay recommendations, management provides the CEO with proxy data from companies in our comparator group along with pay information compiled from executive and industry related salary surveys that are nationally recognized. The survey data is used as a reference for validating the reasonableness of the information gathered from the comparator group.

 

Role of the CEO

 

Before making base pay and long-term incentive decisions, our CEO reviews the competitive market information for the other named executive officers. After considering the market data, the CEO takes into account internal equity and individual performance (see Game plan for Growth section) and recommends base pay and long-term incentive awards.

 

For our annual cash incentive program, the CEO’s recommendation is based on EVA^® attainment and an adjustment for individual performance. Individual performance includes business unit EVA^® results for the business unit leaders and performance of key executive competencies (see executive competencies in the following base pay section of how we determine amounts for pay elements). The modifications made are fairly modest, and for 2007 incentives were less than 17% of target.

 

Role of the Other Named Executive Officers

 

Our other executive officers have no role in setting compensation for any named executive officers.

 

Role of the Compensation Committee

 

For all named executive officers, except the CEO, the compensation committee reviews the CEO’s recommendations, supporting market data, and individual performance assessments. Before the compensation committee determines the pay their consultant reviews all of the data and advises on the reasonableness of the pay recommendations.

For the CEO, the full board meets in executive session without management present to review the CEO’s performance. In this session, the board reviews:

 

 

The compensation committee uses these evaluations and competitive market information provided by its independent consultant to determine the CEO’s base pay, long-term incentive amounts and performance adjustments to be made to his annual incentive payment.

 

Role of the Independent Compensation Consultant

 

The compensation committee’s consultant is Frederic W. Cook & Co., Inc. In July 2007, the compensation committee engaged Frederic W. Cook & Co., Inc. to assist them in determining or recommending the compensation for our executive officers. Frederic W. Cook & Co., Inc. does no other work for us. Please refer to the compensation committee section for a discussion of independent compensation consultants.

 

To assist the compensation committee in pay discussions and decisions, the committee’s independent consultant presents competitive market data that includes published compensation data, using the same surveys and methodology used for the other executive officers (described in the “Role of Management” section), and proxy data from the approved comparator group. Our comparator group is developed by the committee’s consultant, with input from management, and is approved by the committee.

 

This year’s comparator group includes 19 companies (see below), consisting of a mix of both direct competitors and similar-sized companies within the broader energy industry.

 

 

Each year the committee reviews the comparator group to validate the list of comparator companies and make any changes if appropriate. The comparator group for 2007 changed from 2006 to better reflect our lines of business and the markets in which we operate.

 

Objectives of our Comparator Group

 

To determine competitive total pay levels, we use our comparator group to consider the amount and form of pay used by competitors as well as how competitors divide pay among various forms. Through use of publicly available financial measures, we review our comparator groups to validate the design of our incentive plans and test the pay and performance relationship of our named executive officers.

Size Reflects Company’s Business and Complexity

 

We consider a range of revenues, assets, and market capitalization when selecting companies for our comparator group. This results in compensation that is appropriately scaled and reflects comparable complexities in business operations.

 

Industry and Business Operations Similarities

 

In order to provide reasonable performance comparisons, our comparator group companies operate within the same industry and/or face similar business challenges and opportunities. Business consolidation and unique operating models today create some challenges in finding true comparator companies. As a result, we take a broader view of comparability to include organizations that are similar in some, but not all, respects.

 

Sufficient Number of Companies

 

Our comparator group contains a sufficient number of companies to facilitate valid comparisons. We target 15 to 25 companies as the number of companies to use in order to have a valid comparator group.

 

How we determine the amount for each type of pay

 

The compensation data of our comparator group is the primary market data we use when benchmarking the competitive pay of our named executive officers. Aggregate market data obtained from recognized third party executive compensation survey companies (e.g. Towers Perrin, Mercer, Hewitt) is used to validate comparator group market data. We typically obtain a range of annual revenues of the companies whose data is included in the aggregate analysis provided by the third party survey, but the identities of the specific companies included in the survey are not disclosed.

 

Because setting pay is not an exact science, the compensation committee uses comparator group data and compensation surveys as reference points in considering total pay packages for named executive officers. Other considerations used when making pay decisions for the executive officers include considering historical pay and reviewing tally sheets that include annual pay and benefit amounts as well as wealth accumulated over the past five years and the total aggregate value of all equity awards and holdings of the named executive officers.

Base Pay

 

Base pay for the named executive officers, including the CEO, is set considering the market median, with potential individual variation from the median due to experience, skills, and sustained performance of the individual as part of our pay-for-performance philosophy. Performance is measured by attainment of established goals from our game plan for growth and the executive competencies that we have established for our named executive officers. The following table contains our twenty executive competencies grouped within five key leadership areas.

 

 

The 2007 base pay for our named executive officers as a percentage of the market median is shown below. We believe that the ratio of base pay of our named executive officers to the market median is appropriate when we consider experience, skills, sustained performance and the amount of pay to be at risk.

 

 

Annual Cash Incentives — Target

 

Similar to base pay, the starting point to determine annual cash incentive targets (expressed as a percent of base pay) is competitive market information. The market information gives us an idea of what other companies pay in annual cash incentives for similar jobs. The internal value of the job is then considered before the target is set for the year. We define the internal value of a job to be how important the job is to executing our strategy compared to the importance of other jobs in the company. The annual cash incentive targets as a percentage of base pay for the named executive officers in 2007 are as follows:

 

Annual Cash Incentives — Actual

 

Since we implemented EVA^®, the annual incentive program has been funded upon attainment of an established EVA^® target. Applying EVA^® measurement to this annual incentive process encourages management to make capital decisions that help drive long-term stockholder value. To determine the funding of the annual incentive, we use the following calculation for each named executive officer:

 

 

Actual payments are adjusted to recognize individual performance to include success toward our game plan for growth and individual goals and successful demonstration of the executive competencies discussed above.

 

How we set the EVA^® goals

 

Setting the EVA^® goal for the annual incentive plan begins with an internal budgeting and planning process. The process includes an evaluation of the challenges and opportunities for the company as well as each of our business units. The key steps in the process and a flow chart illustrating the process are below:

 

 

Establishing EVA Goal Targets

 

 

2007 EVA^® goal for the annual incentive plan

 

The attainment percentage of EVA^® goals results in a payout level of annual incentives along a continuum between threshold and stretch levels between 0% and 200% of the named executive officer’s annual incentive target. As approved by the compensation committee, for every $108 million improvement in EVA^® the payout level increases by 100% up to a maximum of 400%. If EVA^® improvement exceeds the stretch level of 200%, any payout is reserved and will only be paid if future performance targets are met, but in no event will the payout level ever exceed 400%. Shown in the chart below are the EVA^® improvement goals for the 2007 annual cash incentive and the resulting payout level:

 

 

Based on EVA^® performance relative to the established goals, the compensation committee certified performance results of $133 million in EVA^® and approved payment of the Annual Incentive Plan at 197% of target.

Our success in executing the game plan for growth contributed to significant accomplishments in 2007, including:

 

 

How the annual incentive plan works

 

If EVA^® exceeds our stretch goal, the annual incentive pool will fund up to a maximum of 400% of target for executive officers. Any award earned above 200% of target is not paid out in cash but instead is placed in a reserve, which is at risk for future performance. This means the reserve amounts will be paid only if future EVA^® threshold levels are met. The purpose of the reserve is to ensure EVA^® performance in a single year is sustained over a longer period of time. In years where threshold EVA^® performance is met, one-third of the reserve balance is paid in cash. If the executive leaves other than for retirement, death, or long-term disability, the reserve balance is forfeited. This feature provides a retention element to the program. No interest is applied to the reserve balance, and executives have no vested right to the balance.

 

The EVA^® calculation

 

Our incentive program allows for adjustments to be made to EVA^® calculations to reflect extraordinary items. After an analysis of companies that utilize EVA^® as an incentive measure, we determined that it is standard practice to make adjustments to EVA^® calculations to create better alignment with stockholders.

 

When determining which adjustments are appropriate, we are guided by the principle of ensuring that incentive payments do not result in unearned windfalls or undue penalties to executives. In other words, we make adjustments to ensure executive officers are not rewarded for positive results they did not take action to create nor are they penalized for unusual circumstances outside their control. We believe the adjustments improve the alignment of incentives with stockholder value creation and ensure EVA^® as an incentive measure effectively encourages executives to take actions to create value for stockholders. The categories of adjustments to our EVA^® calculation are:

 

 

We have retained our independent accountants to perform certain agreed-upon procedures related to our EVA^® calculations and provide a report to our management. The agreed upon procedures include:

 

 

 

In addition to these agreed-upon procedures, management as well as the compensation committee’s outside consultant test our relative performance on various measures, including total stockholder return, earnings per share and cash flow, to an industry comparator group to ensure our EVA^® performance is consistently delivering stockholder value. The compensation committee uses this analysis to validate our EVA^® results.

 

Annual incentives are designed to satisfy the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code and are therefore a tax deductible expense.

 

Long-Term Incentives

 

To determine the value for long-term incentives granted to executive officers each year we consider the following factors:

 

 

The current allocation and design of our long-term incentive program has been the same over the past three years. We continue to award a larger portion of the equity in performance-based restricted stock units and a smaller portion of the equity in the form of time-based restricted stock units and stock options. The long-term incentive mix for the CEO differs from the other named executive officers due to the desire to have 100 percent of his long-term incentives be performance-based. Because the CEO has a greater ability to influence financial results, the committee considers it appropriate that 100% of his long-term incentives are directly tied to performance based upon our pay-for-performance philosophy.

 

Shown below is the long-term incentive mix in 2007.

 

 

The primary objectives for each plan are shown below.

 

Stock Option Awards

 

Stock options have value only to the extent the price of our common stock on the date of exercise exceeds the price at the time the options were granted (in other words, the stock price must increase for stock options to have value).

 

Time-Based Restricted Stock Units

 

Time-Based Restricted Stock Unit grants were introduced in 2002, primarily as a retention device during a period of uncertainty and instability in our executive population. We continue to use this type of equity for retention purposes due to continued volatility in the industry and executive movement. In addition to retention, time-based restricted stock units facilitate stock ownership.

 

Performance-Based Restricted Stock Units

 

To further strengthen the relationship between pay and performance, the performance-based restricted stock units are earned only upon our attaining specific EVA^® goals and the named executive officer’s continued employment.

 

The following chart illustrates how the performance-based shares would payout as a result of performance against set EVA^® goals.

 

 

EVA^® created over a three-year period is used as a long-term performance measure to further drive and reinforce actions leading to desired EVA^® results and to extend this focus over multiple years. This longer-term EVA^® focus is intended to help achieve sustained financial improvement and align with longer-term stockholder interest.

 

In developing three-year performance goals the compensation committee considers circumstances facing the company and each business unit, as well as challenges facing the industry. Achieving EVA^® goals is required for these awards to be earned. Our intent is to establish three-year EVA^® goals where each year the probability or level of difficulty to achieve target is consistent. In setting these goals, we expect that the performance will be at the threshold level (to achieve a minimum payout) about 10-20% of the time, that the performance will be at the stretch level (to achieve a maximum or 200% payout) about 10-20% of the time, and that performance will be at the target level (to achieve a 100% payout) about 70-80% of the time.

 

For awards granted in 2007, the three-year performance measure is the cumulative EVA^® goals for 2007 through 2009. The cumulative EVA^® goal was set during the first quarter of 2007 and will be certified at the end of the period when the compensation committee reviews progress toward EVA^® goals over the three year period. When calculating EVA^® performance over the three-year period, the compensation committee will consider adjustments using a process and criteria similar to that described under Annual Cash Incentives EVA^® calculation section. However, individual performance is not considered in determining the actual number of shares earned.

Grant Practices

 

We typically make our annual equity grant in February or early March of each year. The compensation committee meets at least two days after the annual earnings release to approve the grants. The compensation committee approves all equity grants to executive officers and the grant date for such awards is on or after the date of such approval in order to ensure the market has time to absorb material information disclosed at the time of the earnings release and reflect that information in the stock price.

 

The grant date for off-cycle grants for individuals that are not executive officers, for reasons such as retention or new hires, is the first business day of the month following the approval of the grant. The purpose of this approach is to remove option grant timing from the influence of the release of material information

 

Accounting and Tax Treatment

 

When designing all aspects of pay we consider the impact of accounting and tax treatment, but the primary driver of program design is the support of business objectives. Stock options and performance-based restricted stock units are intended to satisfy the requirements for performance-based compensation as defined in Section 162(m) of the Internal Revenue Code and are therefore considered a tax deductible expense. Time-based restricted stock units do not qualify as performance-based and may not be fully deductible.

 

Additional Executive Compensation Policies

 

In addition to establishing the pay elements described above, we have adopted a number of policies to further the goals of the executive compensation program, particularly with respect to strengthening the alignment of our executive officers’ interests with stockholder long-term interests.

 

Recoupment Policy

 

In January 2008, the compensation committee approved a recoupment policy to allow the company to recover incentive-based compensation from executive officers in the event we are required to restate our financial statements due to fraud or intentional misconduct. The policy provides the board of directors discretion to determine situations where recovery of incentive pay is appropriate.

 

Stock Ownership Guidelines

 

In 2005, the board adopted stock ownership guidelines for all executive officers. All executive officers, consistent with their responsibilities to the stockholders as a whole, must hold an equity interest in the company. Specifically the CEO must own an amount of stock equal to at least five years’ base pay. Other executive officers must own stock equal to at least three years’ base pay. New executives are allowed five years from the date of election, promotion to executive officer, or commencement of employment as an executive officer to accumulate the required shares. Once the requirement is met, the individual is considered to be in compliance if the executive continues to hold the number of shares or value necessary to fulfill the requirement.

 

Annually the compensation committee reviews the guidelines for competitiveness and alignment with best practice and monitors the executive officers’ progress toward meeting the guidelines. The compensation committee maintains discretion to modify the guidelines in special circumstances of financial hardship such as illness of the executive or a family member. All executive officers complied with the guidelines upon their adoption in 2005 and continue to own, on average, more than 10 times the amount of what is required under the guidelines.

 

Derivative Transactions

 

Our insider trading policy prohibits all executive officers from entering into derivative transactions such as short sales where the value is based on the performance or price of our common stock.

Employment Agreements

 

Under our business philosophy, in general, we do not enter into employment agreements with our executive officers. This enables us to remove an executive officer prior to retirement when it is in the best interests of the company. The compensation committee exercises judgment and considers the circumstances surrounding the departure when deciding if a severance package is appropriate. If it is determined that a severance package is appropriate, the compensation committee takes into consideration the executive’s term of employment, past accomplishments, reasons for separation from the company, and competitive market practice. The only pay or benefits an employee has a right to receive upon termination of employment are those that have already vested or which vest under the terms in place when equity was granted. For example, the terms of our time-based restricted stock units provide that the vesting accelerates in the event of an executive’s death or termination without cause.

 

Change in Control Agreements

 

Our change in control program provides severance benefits for our named executive officers if, within two years following a change in control of Williams, their employment is terminated (1) involuntarily other than for cause, death, disability, or the sale of a business, or (2) voluntarily for good reason. Our program includes a double trigger (requires both a change in control and termination of named executive officer’s employment) for benefits and equity vesting. This double trigger creates security for the executives but does not provide an incentive for the executive to leave the company. Our program is designed to encourage the executive officers to focus on the best interest of stockholders by alleviating concerns about compensation and benefits under a potential change in control. Once again, our program is not designed to provide compensation advantages to executives for executing a transaction but to protect executives from a potentially detrimental impact on their individual financial security.

 

In May 2002, the compensation committee approved the following change in control program for the executive           officers:

 

 

Our compensation committee reviews our change in control benefits annually to ensure they are consistent with competitive practice. As part of the review, calculations are performed to determine the overall program costs to the company if a change in control event were to occur and all covered named executive officers were terminated as a result. An assessment of competitive norms including the reasonableness of the elements of compensation received is used to validate benefits levels for a change in control. In reviews of the change in control program to date, our compensation committee has concluded that the current benefits provided are appropriate and critical to attracting and retaining executive talent.

 

 

 

By the members of the compensation committee of the board of directors:

 

— Kathleen B. Cooper

 

— W. R. Howell, chairman

 

— George A. Lorch

 

— Frank T. MacInnis

 

— Janice D. Stoney

 

The following table sets forth certain information with respect to the compensation of the chairman of the board, president and chief executive officer (CEO), the chief financial officer (CFO) and the three most highly compensated executive officers other than the CEO and CFO, based on total compensation excluding change in pension value and nonqualified deferred compensation earned during fiscal year 2007.

 

2007 Summary Compensation Table

 

 

 

Stock Awards

 

 

The assumptions used to value the stock awards can be found in our Annual Report on Form 10-K for the year-ended December 31, 2007.

 

Option Awards

 

 

The assumptions used to value the option awards can be found in our Annual Report on Form 10-K for the year-ended December 31, 2007.

 

Non-equity Incentive Plan

 

 

 

The annual cash incentive and reserve amounts paid in 2008 as it relates to 2007 performance are as follows:

 

 

Pension and Non-Qualified Deferred Compensation

 

 

All Other Compensation

 

 

Perquisites include financial planning services, home security for the CEO and personal use of the company aircraft with occasional family members accompanying executive officers on business trips. The incremental cost method was used to calculate the personal use of company aircraft. The incremental cost calculation includes such items as fuel, maintenance, weather and airport services, pilot meals, pilot overnight expenses, aircraft telephone and catering. The amount of perquisites for Mr. Hill and Mr. Malcolm is included because the aggregate amount exceeds $10,000 for 2007. Value of perquisites is not included for other named executive officers because the aggregate amount does not exceed $10,000. The perquisites for Messrs. Hill and Malcolm are valued as follows:

 

 

 

 

Notable Items

 

The compensation committee considers the compensation of CEOs from similarly-sized comparator companies when setting Mr. Malcolm’s pay. It is the competitive norm for CEOs to be paid more than other named executive officers. In addition, the committee believes the difference in pay between the CEO and other named executive officers is consistent with our compensation philosophy (summarized in the CD&A), which considers the external (market) and internal value of each job to the company along with the incumbent’s experience and performance of the job in setting pay. The CEO’s job is different from the other named executive officers’ because the CEO has ultimate responsibility for performance results and is accountable to the board of directors and stockholders. Consequently, the committee believes it is appropriate for the CEO’s pay to be higher.

 

Mr. Chappel’s base pay, annual incentive target and long-term incentive amounts for 2006 and 2007 are higher than other named executive officers (other than the CEO) because of the impact of his role and market data. Because Mr. Chappel directly interfaces with stockholders and has greater accountability to stockholders his pay is greater than that of the other named executive officers, excluding the CEO.

 

For 2006 and 2007, Mr. Hill and Mr. Wright have similar pay with the exception of Mr. Hill’s long-term equity award. Mr. Hill receives more long-term equity because he is the President of our Exploration and Production business unit and the market for Exploration and Production executives is extremely tight. We recognize the need to remain competitive, therefore, Mr. Hill receives larger long-term incentive amounts that are comparable to other exploration and production executives in our comparator group.

The following table sets forth certain information with respect to the grant of stock options, restricted stock units and awards payable under the company’s annual incentive program during the last fiscal year to the named executive officers.

 

Grants of Plan Based Awards in Fiscal Year 2007