Founded in 1902      

 

March 30, 2007

 

Dear Fellow Stockholder:

 

It is a pleasure to invite you to the USG Corporation annual meeting of stockholders. The meeting will be held at 9:00 a.m., Chicago time, on Wednesday, May 9, 2007 at our new corporate headquarters located at 550 West Adams Street, Chicago, Illinois 60661-3676. The attached Notice of Annual Meeting and Proxy Statement explain all items scheduled for a vote by stockholders at the meeting.

 

It is important that your shares be represented at the annual meeting, whether or not you plan to attend the meeting. Please vote your shares using the enclosed proxy form if you are a registered stockholder or the voting instruction form provided by your broker, bank or other nominee if your shares are held through an institution. It is not necessary for you to return your proxy form or voting instruction form by mail if you vote by Internet or telephone.

 

If you are a registered stockholder and plan to attend the annual meeting, please mark that space on the enclosed proxy form to let us know your plans. You will be required to present the detachable top portion of the proxy form to gain admission to the meeting. If you hold shares through a broker, bank or other nominee, you will be required to present a current statement from that institution reflecting your ownership of shares of our stock or the non-voting portion of the voting instruction form you receive from that institution.

 

Please vote your shares as soon as possible. This is your annual meeting, and your participation is important.

 

Sincerely,

 

William C. Foote

Chairman of the Board

and Chief Executive Officer

USG CORPORATION
550 West Adams Street
Chicago, Illinois 60661-3676

 

NOTICE OF ANNUAL MEETING
OF STOCKHOLDERS

 

The USG Corporation 2007 annual meeting of stockholders will be held at our new corporate headquarters located at 550 West Adams Street, Chicago, Illinois 60661-3676 on Wednesday, May 9, 2007 at 9:00 a.m., Chicago time, for the following purposes:

 

1. to elect four directors for a three-year term;

 

2. to ratify the Audit Committee’s appointment of Deloitte & Touche LLP as independent registered public accountants for the fiscal year ending December 31, 2007; and

 

3. to transact any other business that may properly come before the meeting or any adjournment or postponement thereof.

 

Pursuant to our By-laws, any matter to be presented for consideration at the meeting must have satisfied the procedural and legal requirements referred to in the accompanying proxy statement.

 

Only stockholders of record at the close of business on March 12, 2007 will be entitled to vote at the annual meeting.

 

By order of the Board of Directors,

 

Ellis A. Regenbogen

Corporate Secretary

 

March 30, 2007

 

USG Corporation
550 West Adams Street
Chicago, Illinois 60661-3676

 

PROXY STATEMENT

 

The accompanying proxy is solicited on behalf of the Board of Directors for use at our annual meeting of stockholders to be held on Wednesday, May 9, 2007 in accordance with the accompanying notice. This proxy statement and the accompanying proxy are first being mailed to our stockholders on or about March 30, 2007.

 

 

Q:  What is a Proxy Statement?

 

 

Q:  Who is entitled to vote at the Annual Meeting?

 

 

Q:  How do I vote?

 

 

If you are a “stockholder of record,” you have three alternative ways to vote in addition to attending the annual meeting in person:

 

 

If you hold your shares in “street name,” your broker, bank or other nominee will provide you with materials and instructions for voting your shares. If you are a “street name” holder and you wish to vote your shares at the annual meeting, you must obtain a proxy from your broker, bank, or other nominee giving you the right to vote your shares at the meeting. If you own share units through the USG Corporation Investment Plan, or Investment Plan, and you are also a stockholder of record, your proxy form will allow you to designate the manner in which you want both the shares registered in your name and the shares represented by your Investment Plan units voted at the annual meeting. If you own share units through the Investment Plan, but you do not own any shares of our common stock as a “stockholder of record,” you will receive a proxy voting form from Computershare that will contain instructions for you to follow to designate the manner in which you want the shares represented by those share units voted at the annual meeting.

 

The Northern Trust Company, as trustee of the Investment Plan, held of record 241,225 shares of our common stock on the record date. The Trustee intends to vote those shares in accordance with instructions given by Plan participants. Unallocated shares and shares for which no instructions are received by the Trustee will be voted

by the Trustee in the same proportion as those shares for which instructions are received, unless otherwise required by law. Investment Plan participants may revoke previously submitted voting instructions by filing with Computershare Document Services, Attn: Proxy Unit, 7600 South Grant Street, Burr Ridge, IL 60527, the Trustee’s tabulating agent, either a written notice of revocation or a properly completed and signed proxy form bearing a later date.

 

Q:  What does it mean to vote by proxy?

 

 

If you sign and return your proxy form, but do not include specific instructions on how to vote your shares, in accordance with the recommendation of the Board of Directors, the Proxy Committee will vote your shares in the following manner:

 

 

Q:  What happens if other matters are presented at the Annual Meeting?

 

 

Q:  What are my choices when voting?

 

 

Q:  What if I submit a proxy and later change my mind?

 

 

Q:  What vote is required to approve each matter?

 

 

Q:  What constitutes a quorum?

 

 

Q:  How are “broker non-votes” and abstentions treated?

 

 

Abstentions are counted for purposes of determining whether a quorum is present, but they are not treated as votes cast. Accordingly, they do not affect the election of directors or any of the other matters specified in the notice of the annual meeting.

 

Q:  What if I receive more than one proxy form?

 

 

Q:  Who will count the vote?

 

 

Q:  Who pays the cost of this solicitation?

 

 

Q:  What if I have a question regarding my shares or my mailing address?

 

 

PRINCIPAL STOCKHOLDERS

 

The following table provides information regarding the beneficial ownership of our common stock by all persons known by us to be the beneficial owner of 5% or more of our common stock on the record date. This information is based upon statements on Schedule 13D or 13G filed by those persons with the Securities and Exchange Commission or information otherwise available to us.

 

 

 

 

PROPOSAL 1 — ELECTION OF DIRECTORS

 

Our Board of Directors currently consists of 13 directors divided into three classes. Two classes have four members and one has five members. Each class is elected for a three-year term. One class of four directors will be elected at the annual meeting. The other two classes will be elected in 2008 and 2009.

 

The four director candidates nominated by the Board for election at the annual meeting are identified below. If any of those nominees becomes unavailable prior to the annual meeting, the Board will reduce the size of the Board to eliminate that position, nominate a candidate in place of the unavailable nominee, in which case all shares represented by proxies received by the Board will be voted for election of the substitute nominee, unless authority to vote for all candidates nominated by the Board is withheld, or leave the position vacant until a later date.

 

Director Independence

 

The listing standards of the New York Stock Exchange, or NYSE, require that a majority of our directors be independent and that all members of our Audit Committee, Compensation and Organization Committee and Governance Committee be independent. Our Corporate Governance Guidelines provide that, as a matter of policy, at least 80% of our directors should be independent in accordance with the NYSE listing standards and our By-laws and Corporate Governance Guidelines.

 

Under the NYSE listing standards, a director is considered independent only if the Board “affirmatively determines that the director has no material relationship with . . . [us] (either directly or as a partner, stockholder or officer of an organization that has a relationship with . . . [us]).” A director is not independent if the director does not meet certain standards specifically set out in the NYSE listing standards.

 

The independence standards in our Corporate Governance Guidelines provide that if a director (or any entity of which he or she is as a director, officer or holder of 10% or more of the outstanding ownership interest) and we have any relationship that accounts for more than 1% of our or the other entity’s annual revenue and/or expenses, or a 5% ownership interest by one in the other, that director will not be independent. Members of legal, accounting or auditing firms providing services to us are also not independent under our By-laws.

 

Using the standards for determining the independence of its members described above, and based upon information provided by each of our directors and the recommendation of the Governance Committee of our Board of Directors, the Board has determined that each of our directors, except Mr. Foote, our Chairman and Chief Executive Officer, is independent as defined by the NYSE listing standards, our By-laws and our Corporate Governance Guidelines.

 

In making this determination, the board considered the following transactions, relationships and arrangements involving the directors identified below that are not otherwise required to be disclosed in this proxy statement under the Securities and Exchange Commission’s rules:

 

 

Director Nominees and Directors Continuing in Office

 

Set forth below is information regarding the nominees for election as directors and information regarding the current directors in each class continuing in office after the annual meeting. John B. Schwemm, who has been a director since May 1988 and whose term as a director expires in 2009, has announced his intention to retire as a director at the annual meeting.

 

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
FOR A THREE-YEAR TERM TO EXPIRE IN 2010

 

The Board of Directors recommends a vote FOR the election of all of the nominees for director.

 

LAWRENCE M. CRUTCHER, 64, is a member of the Board of Advisors of Veronis Suhler Stevenson, a private equity fund manager. Mr. Crutcher has been a director since May 1993. He is Chair of the Board’s Governance Committee and is a member of the Board’s Audit, Corporate Affairs and Finance Committees.

 

WILLIAM C. FOOTE, 55, is our Chairman and Chief Executive Officer. Mr. Foote is a director of Walgreens Co., Kohler Co., The Federal Reserve Bank of Chicago and the National Association of Manufacturers. He is a Trustee of the Museum of Science and Industry in Chicago, a life Trustee of Northwestern Memorial Health Care and a member of the Civic Committee of The Commercial Club and the Business Roundtable. Mr. Foote has been a director since March 1994.

 

STEVEN F. LEER, 54, is Chairman and Chief Executive Officer of Arch Coal, Inc., a coal producing company. Mr. Leer is a director of Norfolk Southern Corporation, the Western Business Roundtable and the Mineral Information Institute. He also is a director and past Chairman of the Center for Energy and Economic Development, the National Coal Council and the National Mining Association. He is a delegate to the Coal Industry Advisory Board of the International Energy Agency and District Chairman of the New Horizons District, Greater St. Louis Area Roundtable and on the board of the National Association of Manufacturers and the Business Roundtable. Mr. Leer has been a director since June 2005 and is a member of the Board’s Finance and Governance Committees.

 

JUDITH A. SPRIESER, 53, is the former Chief Executive Officer of Transora, an information technology software and services company. Prior to founding Transora in 2000, she was Executive Vice President (formerly Chief Financial Officer) of Sara Lee Corporation. Ms. Sprieser is a director of Allstate Corporation, Intercontinentalexchange Inc., Reckitt-Benckiser PLC and Royal Ahold, N.V., and is a member of the Board of Trustee’s of Northwestern University. Ms. Sprieser has been a director since February 1994. She is Chair of the Board’s Finance Committee and is a member of its Audit, Compensation and Organization and Governance Committees

 

Directors Continuing in Office (Terms Expiring in 2008)

 

ROBERT L. BARNETT, 66, is the retired Executive Vice President of Motorola Corporation. He previously served as President and Chief Executive Officer, Commercial Governmental and Industrial Solutions Sector, and President, Land Mobile Products Sector of Motorola. Mr. Barnett is a director of Johnson Controls, Inc., Central Vermont Public Service Corporation, and a director and Treasurer of the Lincoln Foundation for Performance Excellence. He is a Senior Baldridge Examiner, a licensed professional engineer and a member of the Institute of Electrical and Electronics Engineers. Mr. Barnett has been a director since May 1990. He is Chair of the Board’s Audit Committee and is a member of its Corporate Affairs and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

 

DAVID W. FOX, 75, is the retired Chairman and Chief Executive Officer of Northern Trust Corporation and The Northern Trust Company, a banking and financial services firm. Mr. Fox is a former director of The Federal Reserve Bank of Chicago and the Chicago Central Area Committee. He is a director of Miami Corporation, a Trustee of Equitable Advisors Trust and AXA Enterprises Funds Trust, a former Public Governor and past Chairman of the Chicago Stock Exchange, a director and past Chairman of Northwestern Memorial Hospital and a life trustee of the Adler Planetarium, The Orchestral Association and DePaul University. Mr. Fox has been a director

of the Corporation since May 1987. He is a member of the Board’s Compensation and Organization, Finance and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

 

VALERIE B. JARRETT, 50, is President and Chief Executive Officer, and previously was Managing Director and Executive Vice President, of The Habitat Company, a private residential developer and property manager. Ms. Jarrett is Chairman of the Board of the Chicago Stock Exchange, Inc. and CHX Holdings, Inc. She is also Vice Chairman of the University of Chicago Medical Center and the Executive Council of the Chicago Metropolis 2020. She is a director of Navigant Consulting, Inc., RREEF America, II, The Federal Reserve Bank of Chicago, The Joyce Foundation, the Local Initiative Support Corporation and The Metropolitan Planning Council. Ms. Jarrett is a Trustee of The University of Chicago, the Museum of Science and Industry and Window to the World Communications, Inc. Ms. Jarrett has been a director since August 1998. She is Chair of the Board’s Compensation and Organization Committee and is a member of its Corporate Affairs and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

 

MARVIN E. LESSER, 65, is Managing Partner of Sigma Partners, L.P., a private investment partnership, and President of Alpina Management, LLC, an investment advisor. He is a director of Pioneer Companies, Inc., Golfsmith International Holdings, Inc. and the St. Moritz 2000 Fund, Ltd. Mr. Lesser has been a director since May 1993. He is a member of the Board’s Audit, Compensation and Organization, and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

 

Directors Continuing in Office (Terms Expiring in 2009)

 

JOSE ARMARIO, 47, is President, Latin America of McDonald’s Corporation. He previously served as Senior Vice President and International Relationship Partner for McDonald’s Corporation and as director of Ronald McDonald House Charities in Latin America. Mr. Armario is a director of the International Advisory Board and President’s Council of the University of Miami. He also is a director of the Council of the Americas — New York and The Chicago Council of Global Affairs and is a board member of the Mexican Chamber of Commerce. Mr. Armario has been a director since January 2007 and is a member of the Board’s Governance Committee.

 

KEITH A. BROWN, 55, is President of Chimera Corporation, a private management holding company. He also is a director of Myers Industries, Inc. and a Trustee of Nova Southeastern University and the Burton D. Morgan Foundation. Mr. Brown has been a director of the Corporation since May 1993. He is a member of the Board’s Audit, Corporate Affairs, Finance and Governance Committees and chairs the Governance Committee’s Nominating Subcommittee.

 

JAMES C. COTTING, 73 is the retired Chairman and Chief Executive Officer of Navistar International Corporation, a truck and diesel engine manufacturing and financial services firm. Mr. Cotting has been a director since October 1987. He is a member of the Board’s Corporate Affairs, Finance and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

 

W. DOUGLAS FORD, 63, is the retired Chief Executive, Refining & Marketing, of BP Amoco p.l.c. and Managing Director of BP p.l.c. He was Executive Vice President of its predecessor, Amoco Corporation. He is a director of Air Products and Chemicals, Inc. and Suncor Energy Inc. He also is a Trustee of the University of Notre Dame. Mr. Ford has been a director since November 1996. He is Chair of the Board’s Corporate Affairs Committee and is a member of its Compensation and Organization and Governance Committees and of the Governance Committee’s Nominating Subcommittee.

BOARD OF DIRECTORS AND CORPORATE GOVERNANCE

 

Meetings of the Board of Directors

 

The Board held 11 meetings, and its committees held a total of 38 meetings, during 2006. Each director attended at least 75% of the Board meetings and 75% of the meetings of the Board committees on which he or she served.

 

Two executive sessions of the Board are required annually by our Corporate Governance Guidelines. One executive session was held in February 2006 and conducted by the Chair of the Compensation and Organization Committee to review Mr. Foote’s performance in 2005 and to consider his compensation for 2006. A second session was held in November 2006 and conducted by the Chair of the Governance Committee to review the results of the Board’s self evaluation process. Unscheduled executive sessions may be held at the request of one or more directors. The directors attending each executive session select a presiding director for that session.

 

Committees of the Board of Directors

 

The Board has five standing committees. They are the

 

 

Each committee has a charter that requires its members to be “independent” as defined in the New York Stock Exchange listing standards and our By-laws and Corporate Governance Guidelines. The following table indicates the current members of each Board committee.

 

 

 

 

Audit Committee

 

The Audit Committee’s ongoing responsibilities include

 

 

The Board of Directors has determined that each of the members of the Audit Committee is an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. The Board has also determined that each member of the Audit Committee is independent as defined by the applicable New York Stock Exchange and Securities and Exchange Commission rules. The Audit committee met 11 times during 2006.

 

Compensation and Organization Committee

 

The Compensation and Organization Committee’s responsibilities include

 

 

The Compensation and Organization Committee met 13 times during 2006.

 

Corporate Affairs Committee

 

The Corporate Affairs Committee’s responsibilities include

 

 

The Corporate Affairs Committee met four times during 2006.

 

Finance Committee

 

The Finance Committee’s responsibilities include

 

 

 

The Finance Committee met five times during 2006.

 

Governance Committee

 

The Governance Committee’s responsibilities include

 

 

The Governance Committee met three times, and its Nominating Subcommittee met twice, during 2006.

 

Stockholder Nominee Recommendations and Criteria for Board Membership

 

The Nominating Subcommittee considers director nominee recommendations submitted by our stockholders. Director nominee recommendations from stockholders must be in writing and include a brief account of the nominee’s business experience during the past five years, including principal occupations and employment during that period and the name and principal business of any corporation or organization of which the nominee is a director. Stockholder director nominee recommendations should be sent to the Nominating Subcommittee, USG Board of Directors, c/o Corporate Secretary, 550 West Adams Street, Chicago, Illinois 60661-3676. Recommendations may be submitted at any time, but will not be considered by the Nominating Subcommittee in connection with an annual meeting unless received on or before the date prior to the annual meeting determined as provided in our By-laws. The director nominee recommendation submission deadline for the 2008 annual meeting of stockholders is described under “Deadline for Stockholder Proposals” on page 39 of this proxy statement.

 

Our process for reviewing and selecting new director nominees involves seeking out candidates who possess the background, skills and expertise to make a significant contribution to the Board, USG and our stockholders. Desired qualities for our directors are described in our Corporate Governance Guidelines and include high-level leadership experience in business activities, ability and willingness to contribute special competencies to Board activities and personal attributes such as integrity, willingness to apply sound and independent business judgment and assume broad fiduciary responsibility and awareness of a director’s vital contribution to our corporate image, as well as any search criteria determined by the Governance Committee. Generally, to fill a vacancy or to add an additional director, the Nominating Subcommittee retains an executive search firm to assist in identifying and recruiting appropriate candidates. Any director candidate selected by this process is expected to meet with a number of directors, including the chair of the Nominating Subcommittee, prior to any decision to nominate the candidate for election to the Board. This process was used in selecting Mr. Armario to join the Board this year.

 

Communications with Directors

 

Stockholders and other interested parties may send communications to our directors as a group or individually by addressing them to the director or directors at USG Corporation, c/o Corporate Secretary, 550 West Adams Street, Chicago, IL 60661-3676. Stockholder communications will be reviewed by the Corporate Secretary for relevance to our business and then forwarded to the intended director(s), if appropriate. Stockholders may meet directors before or after the annual meeting. As a matter of policy, all directors are expected to attend the annual meeting. All directors attended the 2006 annual meeting.

 

Corporate Governance

 

Our By-laws, Corporate Governance Guidelines and Code of Business Conduct, and the charter of each of our Board committees, are posted on our website www.usg.com. A printed copy of those documents is available upon written request from the Corporate Secretary, USG Corporation, 550 West Adams Street, Chicago, IL 60661-3676.

 

As described in more detail under “Certain Relationships and Related Transactions,” in January 2006, in connection with the rights offering we completed to finance a portion of the payments required by our plan of reorganization, we entered into an equity commitment agreement with Berkshire Hathaway Inc., our largest stockholder, to provide a backstop commitment with respect to the rights offering. In connection with that commitment, Berkshire Hathaway acquired 6,969,274 shares of our common stock. We also entered into a shareholder’s agreement with Berkshire Hathaway pursuant to which it agreed to vote 469,274 of those shares and certain other shares it acquired or acquires subsequent to entering into the equity commitment agreement on all matters submitted to our stockholders, other than approval of a “poison pill,” in the same proportion as shares owned by all stockholders are voted. The shareholder’s agreement also includes restrictions on Berkshire Hathaway’s ownership of our common stock and acquisition proposals it may make.

 

In addition, we adopted a new stockholder rights plan that became effective on January 2, 2007. Under the plan, if any person acquires beneficial ownership of 15% or more of our voting stock, stockholders other than the 15% triggering stockholder will have the right to purchase additional shares of our common stock at half the market price, thereby diluting the triggering stockholder. The plan also provides that, during the seven-year standstill period under our shareholder’s agreement with Berkshire Hathaway, its (or certain of its affiliates) acquisition of shares of our common stock will not trigger the rights to the extent Berkshire Hathaway complies with the terms of the shareholder’s agreement and, following that seven-year standstill period, acquisitions of our common stock by any of them will not trigger the rights unless Berkshire Hathaway or its affiliates acquire beneficial ownership of more than 50% of our voting stock on a fully diluted basis.

 

The rights plan will expire on January 2, 2017. However, our Board of Directors has the power to accelerate or extend the expiration date of the rights. In addition, a Board committee comprised solely of independent directors will review the rights plan at least once every three years to determine whether to modify the plan in light of all relevant factors.

 

More information about, and copies of, the agreements referred to in this section and other related agreements are included in reports or statements we filed with the Securities and Exchange Commission on January 30, 2006, February 28, 2006 and December 21, 2006.

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

 

The following table sets forth information as of the record date regarding beneficial ownership of our common stock by each director and nominee for director, each executive officer named in the 2006 Summary Compensation Table and all directors, nominees and executive officers as a group, including any shares held by executive officers through the Investment Plan.

 

 

 

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Berkshire Hathaway Agreements

 

Equity Commitment Agreement

 

As discussed under “Board of Directors and Corporate Governance — Corporate Governance” on page 11 of this proxy statement, in January 2006 we entered into an equity commitment agreement with Berkshire Hathaway pursuant to which it committed to purchase from us at $40.00 per share, all of the shares of our common stock offered in our rights offering that were not issued pursuant to the exercise of rights, up to a total commitment of $1.8 billion. We paid Berkshire Hathaway a non-refundable fee of $67 million for this commitment and agreed to pay certain of its costs and expenses relating to its entry into this commitment and related agreements.

 

In August 2006, in connection with completion of the rights offering, we issued 6,969,274 shares of our common stock to Berkshire Hathaway in accordance with its equity commitment for a total purchase price of $278,770,960. These shares include 6.5 million shares underlying rights distributed to Berkshire Hathaway in connection with shares it beneficially owned and 469,274 shares underlying rights distributed to other stockholders that were not exercised.

 

Shareholder’s Agreement

 

In connection with the equity commitment agreement, we entered into a shareholder’s agreement with Berkshire Hathaway pursuant to which Berkshire Hathaway agreed, among other things, that for a period of seven years following completion of the rights offering, except in limited circumstances, it will not acquire additional beneficial ownership of our voting securities if, after giving effect to the acquisition, it would own more than 40% of our voting securities on a fully diluted basis. Berkshire Hathaway further agreed that, during that seven-year period, it would not solicit proxies with respect to our securities or submit a proposal or offer involving a merger, acquisition or other extraordinary transaction unless the proposal or offer is

 

 

Under the shareholder’s agreement, for the same seven-year period, we agreed to exempt Berkshire Hathaway from our existing or future poison pills to the extent that Berkshire Hathaway complies with the terms and conditions of the shareholder’s agreement. If there is a shareholder vote on a poison pill that does not contain this agreed exemption, Berkshire Hathaway may vote without restriction all the shares it holds to approve or disapprove the proposed poison pill. We and Berkshire Hathaway also agreed that, after the seven-year standstill period ends, during the time that Berkshire Hathaway owns our equity securities, Berkshire Hathaway will be exempted from our poison pills, except that our poison pills may require that Berkshire Hathaway does not acquire (although it may continue to hold) beneficial ownership of more than 50% of our voting securities, on a fully diluted basis, other than pursuant to an offer to acquire all shares of our common stock that is open for at least 60 calendar days.

 

Registration Rights Agreement

 

In connection with the equity commitment agreement, we and Berkshire Hathaway entered into a registration rights agreement granting Berkshire Hathaway demand and piggyback registration rights with respect to its shares of our common stock. The registration rights agreement entitles Berkshire Hathaway and specified affiliates to make three demands for registration of all or part of their common stock, subject to certain conditions and exceptions. The registration rights agreement also provides that, subject to certain conditions and exceptions, if we propose to file a registration statement under the Securities Act of 1933, as amended, with respect to an offering of equity securities on a form that would permit registration of shares of our common stock held by Berkshire

Hathaway or the specified affiliates, then we will offer Berkshire Hathaway and its affiliates the opportunity to register all or part of their shares on the terms and conditions set forth in the registration rights agreement.

 

The Equity Commitment Agreement, Shareholder’s Agreement and Registration Rights Agreement were all approved by our Board of Directors.

 

Policies and Procedures Regarding Related Party Transactions

 

Our Code of Business Conduct provides that all of our employees, including our executive officers, and our directors, must avoid “conflicts of interest” — situations where their personal interest may be inconsistent with our interest and may interfere with the employee’s or director’s objectivity in making business decisions on our behalf. A conflict of interest may exist, for example, when an employee, officer or director (or one of their family members) has a financial interest in a company with which we do business or if an employee, officer or director in a position to influence business dealings with a company (a) has a direct or indirect interest in that company that would reasonably be viewed as significant to that person and (b) the amount of business done between us and that company is significant.

 

All of our employees and directors are required to report conflicts of interest so that we may address the situation properly. After disclosure, some conflicts of interest can be resolved through implementing appropriate controls for our protection. Where an appropriately disclosed conflict of interest is minor and not likely to adversely impact us, we may consent to the activity. In other cases where appropriate controls are not feasible, the person involved will be requested not to enter into, or to discontinue, the relevant transaction or relationship.

 

All of our executive officers and other salaried employees are required to disclose actual or potential conflicts of interest in which they may be personally involved in an annual certification reviewed by our Internal Audit and Legal Departments. In addition, all of our executive officers are required to disclose actual or potential conflicts of interest by quarterly certifications. Employees who complete these certifications are also required promptly to report in writing to the Internal Audit Department any conflict of interest situations that arise during the period between certifications.

 

Conflict of interest situations reported by employees are addressed by our Business Ethics Committee comprised of representatives from our Internal Audit, Legal and Human Resources Departments, and, where appropriate, by senior management. If the conflict of interest involves one of our executive officers, the situation will be addressed by our Board of Directors or the Audit Committee of the Board. Quarterly reports of conflicts of interest and the resolution of them are provided to our Compliance Committee, Chairman and Chief Executive Officer and President and Chief Operating Officer in accordance with our disclosure controls and procedures.

 

We recognize that directors may be connected with other organizations with which we have business dealings from time to time. Under our Corporate Governance Guidelines, it is the responsibility of each director to advise the Chairman of the Board and the Governance Committee of the Board, through its Chair, of any affiliation with public or privately held businesses or enterprises that may create a potential conflict of interest, potential embarrassment to us, or possible inconsistency with our policies or values. Directors are also to advise the Chairman of the Board and the Governance Committee in advance of accepting an invitation to serve on the board of another public company.

 

We annually solicit information from our directors in order to monitor potential conflicts of interest. In accordance with procedures approved at a meeting of our Governance Committee, any actual or potential conflict of interest involving a director will be investigated by the Governance Committee, with management assistance as requested, to determine whether the affiliation or transaction reported impairs the director’s independence and whether it is likely to adversely impact us. If the Committee determines that the director’s independence would be impaired, or the affiliation or transaction would likely impact us adversely, the director would generally be asked not to enter into, or to discontinue, the reported relationship or to resign from the Board. In other circumstances, the Committee will generally determine what, if any, controls, reporting and/or monitoring procedures are appropriate for our protection as a condition for approving the reported relationship or transaction. Relationships that give rise to potential conflicts of interest are generally not considered to adversely impact us if they are not required to be disclosed pursuant to the SEC’s compensation disclosure requirements because

 

 

 

Compensation of all of our executive officers is approved by our Compensation and Organization Committee or the Board of Directors and compensation of our directors is approved by the Board.

 

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Compensation Philosophy

 

USG’s executive compensation philosophy is to provide a competitive total compensation package that aligns the interests of management with those of shareholders, motivates management to profitably achieve our strategic growth and annual operating objectives and enables us to attract and retain talented executives. Consistent with this philosophy, we designed the elements of our total compensation package to meet the following objectives:

 

 

Compensation and Organization Committee

 

Our executive compensation programs are overseen by the Compensation and Organization Committee of our Board of Directors. The Committee is comprised of independent directors as defined by the New York Stock Exchange’s listing standards. The current Committee members are: Valerie B. Jarrett (Chair), W. Douglas Ford, David W. Fox, Marvin E. Lesser, John B. Schwemm and Judith A. Sprieser. The Committee’s charter charges it with various accountabilities, including:

 

 

The Committee’s charter is reviewed at least annually. The charter can be found on our website www.usg.com.

 

Committee Calendar and Meetings

 

The Committee is scheduled to meet on a regular basis at least four times each year, in February, May, July and November. In 2006, due to the number of compensation items related to our emergence from Chapter 11, the Committee held nine additional meetings. The agenda for meetings and the annual Committee calendar are developed by management in consultation with the Committee Chair.

 

Management’s Role in Compensation

 

Our Human Resources Department is responsible for the administration of our executive compensation, benefit and related programs. The Senior Vice President, Human Resources is accountable for making proposals to the Committee for changes in compensation and benefit programs at the request of either management or the Committee. The Senior Vice President, Human Resources is also the primary management contact for the Committee Chair.

 

The Chairman and Chief Executive Officer recommends to the Committee increases or changes in compensation for executive officers (other than himself) based on his assessment of each individual’s performance, contribution to USG’s results and potential for future contributions to our success.

 

Management attendees at Committee meetings usually include the Chairman and Chief Executive Officer, the Senior Vice President, Human Resources, the Director, Executive Compensation, the Director, Compensation and the Corporate Secretary, who acts as secretary for the meetings. Management’s compensation consultant, the Chief Financial Officer, the Controller, the General Counsel and other senior managers attend meetings periodically at the request of either management or the Committee.

 

Compensation Advisors and Consultants

 

The Committee has retained Watson Wyatt Worldwide as a compensation consultant to provide the Committee with an independent review of USG’s executive compensation programs. Watson Wyatt was selected by the Committee and works under the direction of the Committee Chair. Watson Wyatt does not provide advisory services to management, although at the request of the Committee Chair it may review management proposals prior to the Committee’s review. A representative of Watson Wyatt generally attends the Committee’s meetings. USG pays Watson Wyatt’s consulting fees after approval by the Committee Chair.

 

Management also uses consultants to provide analysis and advice with respect to executive compensation. Management’s primary advisors for compensation and related matters are Hewitt Associates, Exequity, LLP, McDermott, Will and Emery and Jones Day. The Committee periodically meets with its advisors and management’s compensation consultants without management present.

 

Elements of the Total Compensation Package Impacted by Chapter 11

 

In late 2000 and early 2001, potential asbestos-related liabilities created significant uncertainty within USG and the building materials industry. To address this uncertainty, management proposed several changes to our compensation and benefit programs that were initially approved by the Committee and the Board of Directors, and subsequently approved by creditors and the U.S. Bankruptcy Court.

 

The changes were made to

 

 

Among the most significant changes were

 

 

Our successful emergence from Chapter 11 provided management and the Committee the opportunity to review and revise our compensation and benefit programs, including our annual management incentive plan, long-term incentive plan and employment and change in control severance arrangements. Management and the Committee used this opportunity to develop new programs and arrangements that they believed would be

 

 

In addition, in February 2006 the Committee recommended and the Board approved special cash awards to Messrs. Foote, Fleming and Ferguson in the amounts of $1,000,000, $500,000 and $500,000, respectively. These awards were made for exceptional leadership and performance throughout our Chapter 11 proceedings and to recognize the successful conclusion of those proceedings, which resulted in the preservation of ownership for our stockholders. These amounts are included in the Bonus column of the “2006 Summary Compensation Table” on page 25 of this proxy statement.

 

Setting Compensation Levels — Benchmarking

 

To implement our philosophy of providing a competitive compensation opportunity, since 2003 management has engaged Hewitt Associates to conduct an annual Executive Compensation Competitive Review. The objective of this study is to compare all elements of compensation for the approximately 15 USG executive officers to the compensation opportunity provided for similar positions by approximately 25 industrial and/or Chicago-based companies. Each position included in the study, including the Chief Executive Officer, is compared to similar

positions in this comparator group in terms of base salary, annual incentive, long-term incentive, the estimated value of benefits and perquisites and total compensation.

 

We selected our comparator companies from among those for which data is available in Hewitt’s Total Compensation Measurement data base, based on their similarity to USG in terms of industry, annual revenue, complexity of operations and geographic location. They are the types of companies with which we compete for talent, and the median revenue of the group approximates our annual revenues. For the 2006 study, the companies included in the comparator group were:

 

 

The results of the study are presented annually to the Committee. The Committee uses the information to evaluate recommendations made by management with respect to compensation of our executive officers other than the Chief Executive Officer and to develop its own recommendations with respect to the compensation of the Chief Executive Officer. The study provides the Committee with market information that enables it to evaluate (and adjust where appropriate) total compensation opportunities, the mix of fixed and variable compensation elements and how total compensation is divided between the various compensation elements.

 

Elements of Total Compensation

 

Our total compensation program consists of the following elements:

 

 

Base Salary

 

The starting point for determining base salaries for our executive officers is the annual Hewitt Executive Compensation Competitive Review, which provides market data regarding the competitiveness of our salary structure. In general, the median of the comparator group companies is considered to be the “market rate” for each position. Individual salaries for our executive officers generally range between the 50th and 75th percentile of the comparator group.

 

Factors that warrant paying above the market rate include individual performance, as assessed by the Chief Executive Officer (or in the case of the Chief Executive Officer, the Committee), unique skills or experience, retention considerations and length of service in the position or with USG.

 

Where the scope of an executive officer’s accountabilities is unique and cannot be reasonably compared to similar positions in the comparator group, we establish a market rate based on a combination of the available market data and internal equity. We do this so that the salary appropriately reflects the officer’s contributions and value to USG.

 

The Committee and the Board review salaries for all executive officers on an annual basis in February and changes, if any, are made effective March 1. In some cases, a promotion or new hire will result in salary action at other times during the year.

 

Annual Incentive

 

The purpose of our annual Management Incentive Program is to provide a variable reward opportunity based on earnings and the achievement of objectives that are derived from the annual operating plan and important levers in impacting overall results. Management believes that the program satisfies the requirements of Internal Revenue Service Code Section 162(m) and the regulations promulgated thereunder regarding the deductibility of “performance-based” compensation in excess of $1 million paid to any of our executive officers named in the 2006 Summary Compensation Table, or named executive officers, and that awards earned under this program in 2007 will be fully deductible as “performance-based compensation”.

 

Participants in the annual Management Incentive Program include all executive officers and approximately 260 other managers. Each participant’s target annual incentive opportunity is expressed as a percentage of base salary. In 2006, the annual incentive opportunity for executive officers ranged from 40% of base salary to 110% of base salary for the Chief Executive Officer. The annual incentive opportunity for our Chief Executive Officer has been increased to 125% of base salary for 2007. We pay annual incentive awards in cash in February following the year in which they are earned.

 

For 2006 and 2007, the annual incentive award opportunity is comprised of the following two equally weighted segments that are designed to provide an incentive to pursue operational excellence and maximize earnings:

 

Strategic Focus Targets:  We base 50% of the total potential annual Management Incentive Program award opportunity on the achievement of annual operating objectives that support our strategic goals. These objectives, called strategic focus targets, are derived from our annual planning process and are measurable and verifiable. The Committee approves the strategic focus targets and target, minimum and maximum performance levels for each of them early in the year. Depending on achievement, the payout can range from 0 to 200% for each target. The following table sets forth information regarding the 2006 strategic focus targets for our named executive officers.

 

 

 

 

Share of the Earnings:  We base 50% of the total annual Management Incentive Program award opportunity on a “share of the earnings” formula. We use a portion of our adjusted consolidated net earnings to fund a pool from which we pay awards to participants. Adjustments to net earnings have been made in the past (with the Committee’s approval) for asbestos related charges, bankruptcy expenses and the impact of acquisitions and new accounting pronouncements. For 2006, the allocation of earnings to the share of the earnings pool was $9,724,200.

 

We designed the share of the earnings concept to align our annual incentive awards with overall corporate results. As corporate performance (measured by adjusted consolidated net earnings) improves, more funds are allocated to the share of the earnings pool and participants receive larger awards. Similarly, if earnings decline, less funds are allocated to the pool resulting in lower awards for participants. We believe this plan design motivates managers to maximize financial results and avoids the difficulty of attempting to set appropriate earnings targets, particularly when the housing markets are experiencing significant volatility.

 

In February of each year, the Committee reviews the prior year’s performance and compares it to the relevant strategic focus targets and the share of the earnings formula before it and the Board approves the payment of annual

incentive awards. The Committee has not used discretion under the annual Management Incentive Program to adjust awards for executive officers, nor has the Committee approved any revision of strategic focus targets for executive officers after they were approved in February. Our Management Incentive Plan approved by our stockholders in May 2006 and effective beginning with 2007 does not give the Committee discretion to increase annual incentive awards for our executive officers.

 

In 2006, achievement under the strategic focus target segment of the program on an aggregate basis resulted in a payout equal to approximately 100% of target for our executive officers. The share of the earnings component resulted in a payout equal to approximately 182% of target for executive officers for that portion of the plan. The total payout for executive officers for the 2006 program was 141% of target. Over the past ten years, the total payout under our annual management incentive programs has varied from 0 to 169% percent of target, and has averaged approximately 108% of target, for executive officers.

 

Long Term Incentive Programs

 

Chapter 11 Related Long-Term Incentive Plans

 

Prior to the Chapter 11 filing, our long-term incentive program provided awards in the form of stock options and performance-based restricted shares. During Chapter 11, we substituted cash-based retention plans for the prior equity-based program. These cash-based plans were the 2001 Key Employee Retention Plan, the 2004 Key Employee Retention Plan and the 2006 Corporate Performance Plan. We developed and implemented these plans to promote the retention of management and, in the case of the 2004 Key Employee Retention Plan and the 2006 Corporate Performance Plan, also to motivate management to maximize adjusted consolidated net earnings. Approximately 250 managers participated in these plans that provided an aggregate annual cash award ranging from 30% of base salary for the lowest level of participation to 170% percent of base salary for the Chief Executive Officer.

 

These plans provided that a portion of the awards would be paid in the year following the period for which they were earned. The final payment under the 2004 Key Employee Retention Plan, which was variable based on 2005 adjusted consolidated net earnings, was made to participants in July 2006. The amounts we paid to our named executive officers under the 2004 Key Employee Retention Plan in 2006 are included in the Bonus column in the 2006 Summary Compensation Table. The Corporate Performance Plan became effective on January 1, 2006 and expired upon our emergence from Chapter 11 on June 20, 2006. Participants receive pro-rated awards, based upon the length of time we were in Chapter 11 during 2006. The first pro-rated payment was made to participants in January 2007 and the final pro-rated payment will be made to participants in July 2007. This final payment is variable based on our 2006 adjusted consolidated net earnings. The amounts paid to our named executive officers under the Corporate Performance Plan in January 2007 are included in the Bonus column in the 2006 Summary Compensation Table and the amounts payable to them under the Plan in July 2007 are included in the Non-Equity Incentive Plan Compensation column of that table.

 

Long-Term Incentive Plan

 

As we concluded our Chapter 11 proceedings, management developed, and the Committee and Board approved, a new equity-based, long-term incentive plan to be implemented upon emergence from Chapter 11. The plan, our Long-Term Incentive Plan, was approved by our stockholders in May 2006. The purpose of the Long Term Incentive Plan is to align the interests of management with those of our stockholders, drive earnings growth and provide a competitive compensation opportunity that enables us to attract and retain talented managers. The plan provides for the use of several types of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and cash awards.

 

2006 Special Long-Term Incentive Awards

 

We made the initial awards under the Long-Term Incentive Plan in August 2006 shortly after we emerged from Chapter 11 and completed our rights offering. Each participant received an award with a grant date value of approximately twice the annual value (generally between the 50th and 75th percentiles) of long-term incentive awards for similar positions in our comparator group companies, as measured by the Hewitt Executive

Compensation Competitive Review. We valued the grants at this level to recognize the successful conclusion of our Chapter 11 proceedings, to provide strong incentive to grow our business and to create opportunity for immediate and significant alignment with our stockholders.

 

For executive officers, one-half of the grant date value of the total award was provided in the form of non-qualified stock options and the other half was provided in restricted stock units. We used stock options to align management and stockholder interests by providing an opportunity for management to own meaningful levels of stock, to create a strong incentive for management to grow our business and to provide the opportunity for competitive compensation based on long-term stock price appreciation. We used restricted stock units to achieve these objectives and, in addition, to promote the retention of the talented management staff that had successfully led USG through the Chapter 11 process.

 

The options generally vest at a rate of 20% per year beginning one year from the date of grant or earlier in the event of death, disability or a change in control. They generally expire ten years from the date of grant, or earlier in the event of death, disability or retirement. The restricted stock units generally vest at a rate of 25% per year beginning one year from the date of grant, except that they may vest earlier in the case of death, disability or a change in control. We utilized restricted stock units rather than restricted shares to avoid creating immediate tax liability for award recipients who are eligible to retire.

 

The Board approved the grants on August 8, 2006. The exercise price of the options was $46.17, which was the closing price of our common stock on the New York Stock Exchange on that day. The Committee selected August 8th in advance as the day to consider approving the grants based on management’s and the Committee’s belief that this would allow the financial markets time to analyze our second quarter financial results, which were released on July 24, 2006, and would allow trading of our common stock for more than a full trading week subsequent to the expiration of our rights offering.

 

In March 2007, the Committee and Board approved equity awards under our Long-Term Incentive Plan for 2007. Each participant received an award with a grant date value approximately equal to the annual value (generally between 50th and 75th percentiles) of long-term incentive awards for similar positions in our comparator group companies, as measured by the Hewitt Executive Compensation Competitive Review.

 

For executive officers, one-half of the grant date value of the total award was provided in the form of non-qualified stock options. The options have essentially the same terms as the options granted in 2006, except that they will generally vest at a rate of 25% per year. The exercise price of the options is the closing price of our common stock on the New York Stock Exchange on the date the option grants were approved by the Board.

 

One-quarter of the grant date value of the total award was provided in the form of restricted stock units that have essentially the same terms as the restricted stock units granted in 2006. The remaining 25% of the grant date award value was provided in the form of performance shares. The performance shares will vest after three years. The actual number of performance shares to be issued can range from 0 to 200% of the number of performance shares awarded, based on a comparison of our total stockholder return over the three-year vesting period compared to the total shareholder return for the companies in the Dow Jones U.S. Construction and Materials Index.

 

The Committee and Board also approved special retention awards for certain of our executive officers. These awards were made in the form of restricted stock units that vest after five years.

 

Stock Ownership Guidelines

 

In March 2007, consistent with our philosophy of aligning the interests of management with those of our stockholders, the Committee approved management’s proposal to reinstitute stock ownership guidelines for our executive officers and other senior managers. The requirements are expressed as a multiple of salary and a fixed number of shares. Participants are expected to own at a minimum the lesser of their salary multiple or the fixed number of shares. The ownership guidelines are as follows:

 

 

We expect all participants to reach the minimum level of ownership within five years if they have not already done so. Shares owned, performance shares that have vested, and unvested restricted stock units count towards satisfaction of the guidelines. If a participant fails to meet or show progress toward meeting these ownership requirements, we may reduce or suspend future long-term incentive program awards to that participant.

 

Benefits and Perquisites

 

Broad-Based Health and Welfare Benefits

 

We provide a comprehensive health and welfare package to all of our full-time employees. Our executive officers are eligible to participate in these plans on the same basis as other eligible employees. The package includes the following benefits:

 

 

We also provide plans for our more highly compensated employees, including our executive officers, that provide benefits to supplement those provided under our Investment Plan and Retirement Plan.

 

Supplemental Retirement Plan

 

Approximately 200 employees, including our executive officers, participate in the USG Corporation Supplemental Retirement Plan. This plan is designed to provide the participants with a pension benefit based on pensionable compensation in excess of the limit set for the Retirement Plan by the Employee Retirement Income Security Act of 1974, or ERISA. The provisions of the supplemental plan mirror those of the Retirement Plan, including benefit formulas and the requirement for the contribution of 2% of pensionable earnings. Further information regarding our retirement plans and the present value of the qualified and supplemental pension benefits for our named executive officers appears under the heading 2006 Pension Benefits Table beginning on page 30 of this proxy statement.

 

Supplemental Deferred Compensation Plan

 

In November 2006, the Committee and Board approved management’s proposal to implement a supplemental deferred compensation plan effective April 1, 2007.

 

Perquisites and Other Benefits

 

We provide certain perquisites and other benefits to our executive officers as part of providing them a competitive total compensation package and to facilitate their attention to the demands of our business. Executive officers are provided a company automobile (including office parking for our named executive officers), financial and estate planning and tax preparation services, personal liability and Executive Death Benefit Plan coverage, membership in luncheon clubs and an annual medical examination. In addition, for security reasons, Mr. Foote is provided with a home security system and company driver for certain occasions. The value of these benefits is described in more detail in the table titled “Supplemental Table” on page 26 of this proxy statement.

 

Employment Security and Potential Post Employment Payments

 

We provide all of our executive officers with two employment security arrangements — an employment agreement and a change in control severance agreement.

 

Employment Agreements:  We provide these agreements to assist in attracting and retaining executives, to protect our assets and intellectual property and to reduce the potential for litigation related to termination of employment. The employment agreements generally provide named executive officers with two years of salary and benefits upon termination of their employment by us without cause.

 

The employment agreements have an initial term of two years and will be automatically extended for one-year terms unless 90 days’ notice is provided before expiration of the current term. They include a requirement that after termination of employment, the executive officer will not compete with us for two years nor solicit our employees and customers for three years. Executive officers are required to sign a release waiving potential claims against us before any payments are made.

 

Change In Control Severance Agreements:  We provide these agreements to promote neutrality by our executive officer with regard to a potential change in control transaction so they make the best decision for our stockholders, to retain the executive team in the event of a potential change in control transaction, to protect the Corporation’s intellectual property and other assets, and to reduce the potential for litigation related to termination of employment. The change in control severance agreements generally provide named executive officers three years of salary and benefits if there is both a change in control and a termination of their employment by us without “cause” or by them for “good reason”. Good reason includes, among other things, a reduction in salary or a material diminution in duties, responsibilities or total compensation.

 

The change in control severance agreements have an initial term of two years and will be automatically extended for one-year terms unless 90 days’ notice is provided before expiration of the current term. They include a requirement that after termination of employment, the executive officer will not compete with us for two years nor solicit our employees and customers for three years. Executive officers are required to sign a release waiving potential claims against us before any payments are made. The definition of change in control is the same as in our Long-Term Incentive Plan.

 

Further information regarding the benefits our named executive officers could receive under these agreements is provided in the tables titled “Potential Payments Upon Termination or Change in Control” beginning on page 32 of this proxy statement.

 

Tax and Accounting Implications

 

Management and the Committee reviewed and considered the deductibility of payments under our executive compensation programs under Internal Revenue Code Section 162(m) and the regulations promulgated thereunder. Management and the Committee believe the compensation paid and gains from non-qualified stock options granted in 2006 will be tax deductible. While management and the Committee will continue to review and consider the tax

deductibility of our compensation programs, the Committee and the Board may approve programs or awards that do not meet the deductibility requirements of Section 162(m) in order to achieve our compensation objectives.

 

Management and the Committee reviewed all executive compensation programs and arrangements under Internal Revenue Code Section 409A and the current and future year accounting impact of the 2006 and 2007 Long-Term Incentive Plan awards under Statement of Financial Accounting Standards No. 123(R) when it considered and approved those awards.

 

COMPENSATION AND ORGANIZATION COMMITTEE REPORT

 

USG’s Compensation and Organization Committee has reviewed and discussed the Compensation Discussion and Analysis section with our management. Based on that review and discussion, the Compensation and Organization Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

THE COMPENSATION AND ORGANIZATION COMMITTEE

 

Valerie B. Jarrett, Chair

W. Douglas Ford

David W. Fox

Marvin E. Lesser

John B. Schwemm

Judith A. Sprieser

2006 SUMMARY COMPENSATION TABLE

 

The Summary Compensation Table below reflects total compensation earned by or paid to our principal executive and principal financial officers and our other three most highly compensated executive officers for 2006.

 

																																	Change in
																																	Pension
																																	Value and
																																	Nonqualified
																												Non-Equity					Deferred
																		Stock					Option					Incentive Plan					Compensation					All Other
Name and Principal								Salary					Bonus					Awards					Awards					Compensation					Earnings					Compensation					Total
Position			Year					($)					($)(1)					($)(2)					($)(3)					($)(4)					($)(5)					($)(6)					($)
William C. Foote, Chairman and Chief Executive Officer				2006				$	1,078,333				$	1,902,452				$	3,205,632				$	2,919,071				$	2,333,171				$	803,293				$	59,158				$	12,301,110
Richard H. Fleming, Executive Vice President and Chief Financial Officer				2006					497,500					903,027					642,142					583,814					714,262					586,759					44,172					3,971,676
James S. Metcalf, President and Chief Operating Officer				2006					540,000					403,020					248,680					217,087					847,463					185,070					42,457					2,483,777
Edward M. Bosowski, Executive Vice President and Chief Strategy Officer; President, USG International				2006					452,000					351,005					642,142					583,814					645,693					273,768					36,795					2,985,217
Stanley L. Ferguson, Executive Vice President and General Counsel				2006					397,500					821,015					479,703					437,545					571,410					214,669					50,271					2,972,113

 

 

SUPPLEMENTAL TABLE

 

 

2006 Corporate Performance Plan (CPP) and 2004 Key Employee Retention Plan (KERP)

 

The 2006 Corporate Performance Plan, or CPP, provided that it would be in effect for eligible participants from January 1, 2006 through December 31, 2006, or through and including the effective date of our emergence from Chapter 11, whichever occurred first. The CPP provides our participants with two cash payments equal in the aggregate to a targeted percentage of their annual base salary. The first payment was made in January 2007. The second payment will be made in July 2007 and is subject to a performance adjustment based on our 2006 adjusted consolidated net earnings. Depending on our net earnings, the July 2007 payment could be increased to as much as 150% of its targeted amount. Because the CPP ended upon our emergence from Chapter 11 on June 20, 2006, awards earned under the CPP were prorated through that date, subject to the final adjustment. The CPP was the successor to our 2004 Key Employee Retention Plan, under which final awards were paid in 2006.

 

Long-Term Incentive Plan

 

In August 2006, initial awards of non-qualified stock options and restricted stock units were made under our Long-Term Incentive Plan. The restricted stock units generally vest at a rate of 25% per year beginning one year from the date of grant, except that they may vest earlier in the event of death, disability or a change in control. Individuals who retire will forfeit one-half of the unvested units awarded. The remaining units will continue to vest in accordance with their terms. Expense is recognized over the period from the grant date to the date of retirement eligibility.

 

The options generally vest at a rate of 20% per year beginning one year from the date of grant or earlier in the event of death, disability or a change in control. They generally expire 10 years from the date of grant, or earlier in the event of death, disability or retirement. Individuals who retire will forfeit one-half of the unvested stock options awarded. The remaining options will continue to vest in accordance with their terms. Expense is recognized over the period from the grant date to the date of retirement eligibility.

 

Employment Agreements

 

We have entered into an employment agreement with each of our executive officers. These agreements have an initial term expiring on December 31, 2008. They include an automatic renewal feature that renews the agreements for successive one-year terms unless 90 days’ notice of termination is provided before expiration of the current term.

 

The employment agreements provide for minimum annual salaries, with the minimum annual salaries increased as approved annually by the Board of Directors, and for participation in all incentive and benefit programs made available to similarly situated executives. They provide that an executive officer who is terminated without cause will be entitled to a lump sum severance payment equal to the sum of (1) two times the executive officer’s annual salary and par annual incentive award, (2) the cost of continuing benefits for the executive officer for a period of 18 months and (3) the present value of the additional retirement benefits the executive officer would have been entitled to receive if he or she had an additional two years of age and credited service under our retirement plans.

 

The employment agreements also include a requirement that after termination of employment the executive officer will not compete with us for two years nor solicit our employees and customers for three years. Executive officers are required to sign a release waiving potential claims against us before any severance payments are made to them under the employment agreements.

2006 GRANTS OF PLAN-BASED AWARDS TABLE

 

The 2006 Grants of Plan-Based Awards Table below reflects equity and non-equity incentive plan awards made to each of the named executive officers during 2006. We did not grant equity awards during our Chapter 11 proceedings.

 

 

 

2006 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

 

The 2006 Outstanding Equity Awards At Fiscal Year-End Table below reflects options and other equity awards held by each of the named executive officers at December 31, 2006. We did not grant equity awards during our Chapter 11 proceedings.