UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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

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TOLL BROTHERS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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TOLL BROTHERS, INC.

250 Gibraltar Road

Horsham, Pennsylvania 19044

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

to be held on Wednesday, March 16, 2011

 

The 2011 Annual Meeting of Stockholders (the “Meeting”) of Toll Brothers, Inc. (the “Company”) will be held on Wednesday, March 16, 2011 at 12:00 noon EDT, at the offices of the Company, 250 Gibraltar Road, Horsham, Pennsylvania 19044, for the following purposes:

 

1. To elect the three directors nominated by the Board of Directors of the Company (the “Board”) and named in the proxy statement to hold office until the 2014 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified. (The terms of office of the other directors do not expire until 2012 or 2013.)

 

2. To ratify, in a non-binding vote, the re-appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the 2011 fiscal year.

 

3. To approve an amendment to the Company’s Second Restated Certificate of Incorporation, as amended, to provide for the annual election of all directors.

 

4. To approve, in an advisory and non-binding vote, the compensation of the Company’s named executive officers as disclosed in the proxy statement.

 

5. To recommend, in an advisory and non-binding vote, whether a non-binding stockholder vote to approve the compensation of the Company’s named executive officers should occur every one, two or three years.

 

6. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof.

 

The Board has fixed the close of business on January 18, 2011 as the record date for the Meeting. Only stockholders of record at that time are entitled to notice of and to vote at the Meeting and any adjournment or postponement thereof.

 

The enclosed proxy card is solicited by the Board. Reference is made to the attached proxy statement for further information with respect to the business to be transacted at the Meeting. The Board urges you to sign, date and return the enclosed proxy card promptly, although you are cordially invited to attend the Meeting in person. The return of the enclosed proxy card will not affect your right to vote in person if you do attend the Meeting.

 

Please note the admission policy and procedures regarding attendance at the Meeting, which are set forth on the next page.

 

By Order of the Board of Directors,

 

MICHAEL I. SNYDER

Secretary

 

February 1, 2011

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MARCH 16, 2011

 

The proxy statement and 2010 Annual Report of Toll Brothers, Inc. are available at:
https://materials.proxyvote.com/889478

 

ATTENDANCE AT ANNUAL MEETING — ADMISSION POLICY AND PROCEDURES

 

The Meeting will be held at our offices at 250 Gibraltar Road, Horsham, Pennsylvania 19044 and will begin promptly at 12:00 noon EDT. Directions to the Meeting are available at: www.tollcareercenter.com/directions. All attendees must present a valid photo identification to be admitted to the Meeting. Cameras (including cellular phones or PDAs with photographic capabilities), recording devices and other electronic devices, and the use of cellular phones or PDAs, will not be permitted at the Meeting. Representatives will be at the entrance to the Meeting and these representatives will have the authority, on the Company’s behalf, to determine whether the admission policy and procedures have been followed and whether you will be granted admission to the Meeting.

 

Admission Policy and Procedures

 

Attendance at the Meeting is limited to (A) stockholders who own shares directly with the Company (“record holders”); (B) stockholders whose shares are held for them by banks, brokerages or other intermediaries (“beneficial holders”); and (C) authorized representatives of entities who are beneficial holders. Beneficial holders must present evidence of their ownership, such as a letter from the bank, broker or other intermediary confirming ownership, or the relevant portion of a bank or brokerage firm account statement. In addition to any evidence required under (B), above, authorized representatives must present (1) a letter from the record holder certifying to the beneficial ownership of the entity they represent and (2) a letter from the entity certifying to their status as an authorized representative.

 

 

 

 

TABLE OF CONTENTS

 

TOLL BROTHERS, INC.

250 Gibraltar Road

Horsham, Pennsylvania 19044

 

PROXY STATEMENT
For
Annual Meeting of Stockholders
Wednesday, March 16, 2011

 

This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of Toll Brothers, Inc., a Delaware corporation, for use at the Toll Brothers, Inc. 2011 Annual Meeting of Stockholders (the “Meeting”), which will be held on the date, at the time and place, and for the purposes set forth in the foregoing notice, and any adjournment or postponement thereof. Any reference to “Toll Brothers” or any use of the terms “Company,” “we,” “us” or “our” in this proxy statement refers to Toll Brothers, Inc. This proxy statement, the foregoing notice and the enclosed proxy card are first being sent to our stockholders on or about February 1, 2011.

 

The Board does not intend to bring any matter before the Meeting except as specifically indicated in the notice and does not know of anyone else who intends to do so; however, if any other matters properly come before the Meeting, Messrs. Robert I. Toll and Douglas C. Yearley, Jr., or either of them, acting as your designated proxies, will vote or otherwise act thereon in accordance with his or their judgment on such matters.

 

If the enclosed proxy card is properly executed and returned to and received by us prior to voting at the Meeting, the shares represented thereby will be voted in accordance with the instructions marked thereon. If the enclosed proxy card is properly executed, returned and received by us prior to voting at the Meeting without specific instructions, Messrs. Robert I. Toll and Douglas C. Yearley, Jr., or either of them, acting as your proxies, will vote your shares “FOR” all nominees under Proposal One, vote “THREE YEARS” with respect to Proposal Five and “FOR” each of the other proposals.

 

Any proxy card may be revoked at any time before its exercise by notifying the Secretary in writing, by delivering a duly executed proxy card bearing a later date, or by attending the Meeting and voting in person.

 

Shares Entitled To Vote, Quorum and Required Vote

 

The record date fixed by our Board for the determination of stockholders entitled to notice of and to vote at the Meeting is January 18, 2011 (the “Record Date”). At the close of business on the Record Date, there were 166,735,842 shares of our common stock outstanding and eligible to vote at the Meeting. We have no other class of voting securities outstanding. At the Meeting, stockholders will be entitled to one vote for each share of common stock owned at the close of business on the Record Date. The presence at the Meeting, in person or by proxy, of persons entitled to cast the votes of a majority of such outstanding shares of common stock will constitute a quorum for consideration of the matters expected to be voted on at the Meeting. Abstentions and broker non-votes represented by submitted proxies will be included in the calculation of the number of the shares present at the Meeting for the purposes of determining a quorum. “Broker non-votes” means shares held of record by a broker that are not voted on a matter because the broker has not received voting instructions from the beneficial owner of the shares and lacks the authority to vote the shares in its discretion.

 

Proposal One:  Directors are elected by a plurality of the votes cast at the Meeting on this proposal and the three nominees who receive the most votes will be elected. Under the New York Stock Exchange (“NYSE”) rules, your brokerage firm or other nominee is not permitted to vote your shares with respect to Proposal One without specific instructions from you as to how to vote with respect to the election of each of the three nominees for director, because the election of directors is not considered a “routine” matter under the NYSE rules. Abstentions

and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of the election of directors.

 

Proposal Two:  To be approved, this proposal requires an affirmative vote of a majority of the votes cast. This means that the votes that our stockholders cast “FOR” this proposal must exceed the votes that our stockholders cast “AGAINST” this proposal at the Meeting. However, your vote will not be binding on the Board or the Company. Proposal Two is considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE have the authority under those rules to vote their customers’ shares on Proposal Two if the customers have not furnished voting instructions within a specified period of time prior to the Meeting. Abstentions will not be taken into account in determining the outcome of this proposal.

 

Proposal Three:  To be approved, this proposal requires an affirmative vote of the holders of at least 662/3% of the combined voting power of all shares of the Company entitled to vote generally in the election of directors, voting together as a single class. This means that the votes that our stockholders cast “FOR” this proposal must equal at least 662/3% of our outstanding shares of common stock. Proposal Three is considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE have the authority under those rules to vote their customers’ shares on Proposal Three if the customers have not furnished voting instructions within a specified period of time prior to the Meeting. Abstentions will have the effect of a negative vote on this proposal.

 

Proposal Four:  To be approved, this proposal requires an affirmative vote of a majority of the votes cast. This means that the votes that our stockholders cast “FOR” this proposal must exceed the votes that our stockholders cast “AGAINST” this proposal at the Meeting. Because your vote is advisory, it will not be binding on the Board or the Company. Proposal Four is not considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE will not be able to vote the shares of customers from whom they have not received voting instructions with regard to this proposal. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of this proposal.

 

Proposal Five:  A plurality of the votes cast at the Meeting will determine, in a non-binding vote, whether the advisory and non-binding vote to approve the compensation of our named executive officers will occur every three years, every two years or every one year. Because your vote is advisory, it will not be binding on the Board or the Company. Proposal Five is not considered a “routine” matter under the NYSE rules and, therefore, brokerage firms and nominees that are members of the NYSE will not be able to vote the shares of customers from whom they have not received voting instructions with regard to this proposal. Abstentions and broker non-votes represented by submitted proxies will not be taken into account in determining the outcome of this proposal.

Security Ownership of Principal Stockholders and Management

 

The following table sets forth beneficial ownership, as of the Record Date, of our common stock by: (1) each person known to us to be the beneficial owner of more than 5% of our common stock; (2) each of our directors, nominees for director and named executive officers; and (3) all of our directors and executive officers as a group. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.

 

 

 

 

At the Meeting, our stockholders will elect three directors to hold office until the 2014 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. The directors whose terms of office expire at the Meeting are Messrs. Robert I. Toll, Bruce E. Toll and Ms. Christine N. Garvey. Mr. Joel H. Rassman, a director since 1996 whose term of office was also due to expire at the Meeting, passed away in September 2010 after an extended illness; the Board has reduced the class of directors to serve until 2014 to three.

 

Our Board is currently divided into three classes serving staggered three-year terms, with the term of one class of directors expiring each year. As more fully described in Proposal Three, the Board has recommended that stockholders approve an amendment to the Company’s Second Restated Certificate of Incorporation, as amended, to provide for the annual election of directors beginning with the class of directors up for re-election at the 2012 Annual Meeting of Stockholders, continuing with the class of directors up for re-election at the 2013 Annual Meeting of Stockholders and culminating with the full Board up for re-election, for the first time as a group, at the 2014 Annual Meeting of Stockholders.

 

The Board, upon the recommendation of the Nominating and Corporate Governance Committee, has nominated Messrs. Robert I. Toll, Bruce E. Toll and Ms. Christine N. Garvey to serve again as directors until the 2014 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. Each nominee has indicated a willingness to continue to serve as a director. Should a nominee become unavailable to accept election as a director, the persons named in the enclosed proxy will vote the shares that such proxy represents for the election of such other person as the Board may nominate on the recommendation of the Nominating and Corporate Governance Committee.

 

Set forth below is certain information concerning each current director, each nominee for election as a director at the Meeting and each director whose current term of office will continue after the Meeting. Our directors’ experience and tenure as accomplished business leaders and their qualifications described below have led to the

conclusion that each provides the Company with unique perspective, insight and skills relative to our business strategy, structure and direction, and, therefore, should serve as a director of the Company.

 

 

Robert I. Toll, with his brother Bruce E. Toll, founded our predecessor’s operations in 1967. He has been a member of our Board since our inception in May 1986. He served as our Chief Executive Officer and Chairman of the Board from our inception until June 2010 when he assumed the new position of Executive Chairman of the Board.

 

Bruce E. Toll, the brother of Robert I. Toll, has been a member of our Board since our inception in May 1986 and served as our Chief Operating Officer until May 1998 and our President until November 1998. He is a member of the Public Debt and Equity Securities Committee. Mr. Toll is the founder and president of BET Investments, a commercial real estate company, and the owner of several automobile dealerships. From June 2006 through August 2009, Mr. Toll was the Chairman of Philadelphia Media Holdings, L.L.C., the parent company of the Philadelphia Inquirer and the Philadelphia Daily News, and from December 2007 through February 2009, he served on the board of directors of Fifth Street Finance Corp., a NYSE-listed company that lends to and invests in small and mid-sized companies. From 2000 until July 2006, Mr. Toll was a member of the board of directors of UbiquiTel, Inc.

 

Douglas C. Yearley, Jr. has been a member of our Board since June 2010. He joined us in 1990 as a direct report to the Chief Executive Officer specializing in land acquisitions from financial institutions. He has been an officer since 1994, holding the position of Senior Vice President from January 2002 until November 2005, and the position of Regional President from November 2005 until November 2009, when he was promoted to Executive Vice President. Since June 2010, he has been our Chief Executive Officer. Prior to joining us, Mr. Yearley practiced law in New Jersey as a commercial litigator.

 

Zvi Barzilay has been a member of our Board since June 1994. He joined our predecessor in 1980 as a Project Manager and was appointed a Vice President in 1983. He held the position of Executive Vice President from January 1992 until May 1998, when he was appointed to the additional position of Chief Operating Officer. Since November 1998, he has been our President and Chief Operating Officer.

 

Robert S. Blank has been a member of our Board since September 1986. He is a member of the Nominating and Corporate Governance Committee and the Public Debt and Equity Securities Committee. For more than the past five years, Mr. Blank has been Co-Chairman and Co-Chief Executive Officer of Whitney Communication Company and Senior Partner of Whitcom Partners. Whitney Communications Company and Whitcom Partners make investments in public and non-public companies. From August 2001 until June 2007, Mr. Blank was a member of the board of directors of Advanta Corp.

 

Edward G. Boehne has been a member of our Board since July 2000. He is the Chair of the Nominating and Corporate Governance Committee and a member of the Audit Committee. From 1981 until his retirement in May 2000, Mr. Boehne was the President of the Federal Reserve Bank of Philadelphia. Mr. Boehne is a member of the board of directors of Beneficial Mutual Bancorp, Inc., Penn Mutual Life Insurance Co. and AAA Mid-Atlantic,

Inc. Mr. Boehne is also a member of the board of directors of, and Senior Economic Advisor to, the Haverford Trust Company.

 

Richard J. Braemer has been a member of our Board since September 1986. He is the Chair of the Public Debt and Equity Securities Committee. Mr. Braemer is senior counsel at the law firm of Ballard, Spahr, Andrews & Ingersoll, LLP, where he was a partner from 1994 through 2008.

 

Christine N. Garvey has been a member of our Board since September 2009. She is a member of the Audit Committee. She was the Global Head of Corporate Real Estate Services at Deutsche Bank AG from 2001 to 2004. Prior to that, she served as Vice President of Worldwide Real Estate and Workplace Resources at Cisco Systems, Inc. and as Group Executive Vice President at Bank of America. She is also a member of the board of directors of HCP, Inc. and Maguire Properties, Inc. She has served as a member of the board of trustees of ProLogis since September 2005, when Catellus Development Corporation, where she had been a member of the board since 1995, merged into a subsidiary of ProLogis. Ms. Garvey served on the board of directors of Hilton Hotels Corporation through October 2007.

 

Carl B. Marbach has been a member of our Board since December 1991. He is the Chair of the Executive Compensation Committee and a member of the Audit Committee and the Public Debt and Equity Securities Committee. Since January 2004, Mr. Marbach has been President of Greater Marbach Airlines, Inc. and Florida Professional Aviation, Inc., companies that provide aviation and consulting services. From January 1995 to January 2004, Mr. Marbach was President of Internetwork Publishing Corp., an electronic publisher, which he founded.

 

Stephen A. Novick has been a member of our Board since January 2003. He is a member of the Executive Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Novick serves as Senior Advisor to The Andrea and Charles Bronfman Philanthropies, a private family foundation. Until December 2006, Mr. Novick was a consultant to Grey Global Group, a marketing communications company. From 1990 until his retirement in December 2004, Mr. Novick was Chief Creative Officer-Worldwide, and from April 2000 to December 2004 was Vice Chairman, of Grey Global Group. Mr. Novick is also a member of the board of directors of Ark Restaurant Corp.

 

Paul E. Shapiro has been a member of our Board since December 1993. He is the Chair of the Audit Committee and, effective as of December 15, 2010, a member of the Executive Compensation Committee. Since June 30, 2004, Mr. Shapiro has been Chairman of the Board of Q Capital Strategies, LLC, a life settlement company. From January 1, 2004 to June 30, 2004, Mr. Shapiro was Senior Vice President of MacAndrews & Forbes Holdings, Inc., a private holding company of operating businesses. From June 2001 to December 2003, Mr. Shapiro was Executive Vice President and Chief Administrative Officer of Revlon Inc.

 

Required Vote

 

Director nominees are elected by a plurality of the votes cast at the Meeting. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own “FOR” the election of each of the nominees named above. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.”

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF

ROBERT I. TOLL, BRUCE E. TOLL AND CHRISTINE N. GARVEY.

 

The Audit Committee re-appointed Ernst & Young LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending October 31, 2011.

 

Ernst & Young LLP has audited our consolidated financial statements since 1984. Representatives of Ernst & Young LLP are expected to be present at the Meeting, will be afforded the opportunity to make a statement if they desire, and are expected to be available to respond to appropriate questions.

 

We have been advised by Ernst & Young LLP that neither the firm, nor any member of the firm, has any financial interest, direct or indirect, in any capacity in us or our subsidiaries.

 

Audit and Non-Audit Fees

 

The following table sets forth the fees paid to Ernst & Young LLP for professional services for the fiscal years ended October 31, 2010 and 2009:

 

 

 

 

The Audit Committee meets and agrees upon the annual audit fee directly with our independent auditors. The Audit Committee also establishes pre-approved limits for which our management may engage our independent auditors for specific services. Any work that exceeds these pre-approved limits in a quarter requires the advance approval of the Audit Committee. Each quarter the Audit Committee reviews the matters worked on by the independent auditors during the previous quarter and establishes any pre-approved limits for the current quarter. All fees and services for fiscal 2010 were approved by the Audit Committee. The Audit Committee also reviewed and approved the compatibility of non-audit services, including tax services, with the independent registered public accounting firm’s independence. The Audit Committee reviewed the services provided by Ernst & Young LLP and approved the fees paid to Ernst & Young LLP for all services for fiscal 2010.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL TWO.

 

We disclosed in our proxy statement for the 2010 Annual Meeting of Stockholders that the Board would recommend at this Meeting that the stockholders approve measures that would permit us to take the necessary steps to ensure that all directors are elected annually, with such measures to be carried out in such a manner that would not affect the unexpired terms of any previously elected directors then in office.

 

After careful consideration and upon the recommendation of the Board’s Nominating and Corporate Governance Committee, the Board has approved an amendment to our Second Restated Certificate of Incorporation, as amended, to provide for the annual election of all directors, in the manner described below.

 

Article Five, Part III of our Second Restated Certificate of Incorporation, as amended, provides that the Board shall be divided into three classes serving three-year terms, with the term of one class of directors expiring each year. The Board has approved, and recommends for approval by the stockholders, a proposed amendment to the Second Restated Certificate of Incorporation, as amended (as set forth in Annex A), that would provide, if approved, for the annual election of directors. As the amendment would not shorten the existing term of a director, the directors who have been elected to three-year terms prior to the effectiveness of the amendment (including directors elected at this Meeting) will complete those terms. Accordingly, if the amendment is approved, directors will be elected annually, beginning with the election of the class of directors whose current term is set to expire at the 2012 Annual Meeting of Stockholders, continuing with the election of the class of directors whose current term is set to expire at the 2013 Annual Meeting of Stockholders, and culminating with the election of the entire Board for the first time at the 2014 Annual Meeting of Stockholders.

 

Required Vote

 

To be approved, the votes that our stockholders cast “FOR” this proposal must equal at least 662/3% of our outstanding shares of common stock. We have been advised that it is the intention of Mr. Robert I. Toll and Mr. Bruce E. Toll to vote the shares of common stock they each own in favor of approval of this proposal. See “Voting Securities and Security Ownership — Security Ownership of Principal Stockholders and Management.” The amendment, if adopted, would become effective upon the filing of a Certificate of Amendment with the Secretary of State of the State of Delaware incorporating the amendment, which we would expect to do as soon as practicable after the amendment is adopted.

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL THREE.

 

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934 (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the related rules of the SEC), we are including in this proxy statement a separate resolution, subject to stockholder vote, to approve, in a non-binding vote, the compensation of our named executive officers (“NEOs”) as disclosed on pages 18 to 42.

 

In considering their vote, stockholders may wish to carefully review our compensation policies and decisions regarding our NEOs as presented in Compensation Discussion and Analysis on pages 18 to 31.

 

Our Executive Compensation Committee (the “Compensation Committee”) has developed and maintained a compensation program that is intended to reward performance and encourage actions that drive success in our business strategy. In determining fiscal 2010 compensation for our NEOs, and as described in “Compensation Discussion and Analysis — Compensation Decision Making Process,” the Compensation Committee took note of the difficult conditions that continued to challenge the home building industry while also considering the significant transition that we experienced at the senior management level. The following notable areas of achievement in fiscal

2010 were among those noted by the Compensation Committee in light of the current economic condition of our industry and as a whole:

 

 

We believe that our Compensation Committee has developed NEO compensation that is incentivizing outstanding performance and achievements in light of the current economic condition of our industry and the economy as a whole.

 

Accordingly, we are asking our stockholders to approve, in a non-binding vote, the following resolution in respect of this Proposal Four:

 

“RESOLVED, that the stockholders approve, in a non-binding vote, the compensation of the Company’s named executive officers as disclosed on pages 18 to 42 in the Proxy Statement relating to the Company’s Annual Meeting of Stockholders to be held on March 16, 2011.”

 

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” PROPOSAL FOUR.

 

 

In accordance with the requirements of Section 14A of the Securities Exchange Act of 1934 (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the related rules of the SEC), we are including in this proxy statement a separate resolution to request our stockholders to recommend, in a non-binding vote, whether a non-binding stockholder vote to approve the compensation of our NEOs (that is, a vote similar to the non-binding vote in Proposal Four on pages 8 and 9) should occur every one, two or three years.

 

In considering their vote, stockholders may wish to carefully review the information presented in connection with Proposal Four on pages 8 and 9 and the information regarding our compensation policies and decisions regarding our NEOs presented in Compensation Discussion and Analysis on pages 18 to 31.

 

We believe a three-year frequency is most consistent with our approach to compensation. Our reasons include our beliefs that:

 

 

 

Accordingly, we are asking our stockholders to approve, in a non-binding vote, the following resolution in respect of this Proposal Five:

 

“RESOLVED, that the stockholders be requested to recommend, in a non-binding vote, whether a non-binding stockholder vote to approve the compensation of the Company’s named executive officers should occur every one, two or three years.”

 

THE BOARD RECOMMENDS THAT YOU VOTE “THREE YEARS” WITH RESPECT TO THE
FREQUENCY OF A NON-BINDING STOCKHOLDER VOTE TO APPROVE
THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.

 

 

We operate within a comprehensive plan of corporate governance for the purpose of defining independence, assigning Board committee responsibilities, setting high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. We regularly monitor developments in the area of corporate governance.

 

Director Independence

 

Under the NYSE rules and the standards adopted by the Board, a director is not “independent” unless the Board affirmatively determines that the director has no direct or indirect material relationship with us. In addition, the director must meet the requirements for independence set forth by the NYSE rules.

 

The Board has established categorical standards of director independence to assist it in making independence determinations. These standards, which are described below, set forth certain relationships between the Company and the directors, and their immediate family members or entities with which they are affiliated, that the Board, in its judgment, has determined to be material or immaterial in assessing a director’s independence. The standards applied by the Board in affirmatively determining whether a director is “independent” generally provide that a director is not independent if:

 

(1) the director is, or has been within the last three years, our employee or an immediate family member (defined as including a person’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone, other than domestic employees, who shares such person’s home) of, or is, or has been within the last three years, one of our executive officers;

 

(2) the director has received, or has an immediate family member who has received, during any 12-month period within the last three years, more than $120,000 per year in direct compensation from us, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service);

 

(3) (a) the director is a current partner or employee of a firm that is our internal or external auditor; (b) the director has an immediate family member who is a current partner of such a firm; (c) the director has an immediate family member who is a current employee of such a firm and who works on our audit; or (d) the director or an immediate family member was, within the last three years, a partner or employee of such a firm and personally worked on our audit within that time;

(4) the director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of our present executive officers at the same time serves or served on that company’s compensation committee;

 

(5) the director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to or received payments from us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or two percent of such other company’s consolidated gross revenues; and

 

(6) the director or an immediate family member is, or within the past three years has been, an affiliate of another company in which, in any of the last three years, any of our present executive officers directly or indirectly either:

 

(a) owned more than five percent of the total equity interests of such other company, or

 

(b) invested or committed to invest more than $900,000 in such other company.

 

The Board annually reviews the independence of all directors. The Board, in applying the above-referenced standards, has affirmatively determined that all of our directors are independent, other than Messrs. Robert I. Toll, Bruce E. Toll, Yearley and Barzilay. As part of the Board’s process in making such determination, each such director provided written assurances that (a) all of the above-cited objective criteria for independence are satisfied, and (b) he or she has no other “material relationship” with us that could interfere with his or her ability to exercise independent judgment.

 

Corporate Governance Guidelines

 

 

Board Meetings

 

 

Committees of the Board and Meetings

 

 

Audit Committee

 

 

 

Executive Compensation Committee

 

 

 

Nominating and Corporate Governance Committee

 

 

Public Debt and Equity Securities Committee

 

 

Consideration and Selection of Nominees for the Board

 

 

Risk Oversight

 

 

Codes of Business Conduct and Ethics

 

 

Leadership Structure

 

In connection with the appointments of Douglas C. Yearley, Jr. as Chief Executive Officer and Robert I. Toll as Executive Chairman of the Board, each effective June 16, 2010, the Board separated the roles of chief executive officer and chairman. As our Chief Executive Officer, Mr. Yearley is responsible for our day-to-day operations and for formulating and executing our long-term strategies in collaboration with the Board and Mr. Toll, as Executive Chairman of the Board. As Executive Chairman of the Board, Mr. Toll continues to play a key role and be actively involved in our business. He continues to chair the Board, act as a mentor and advisor to Mr. Yearley and be involved in planning our long-term business strategy. In the Board’s view, an appropriate leadership structure depends on the opportunities and challenges facing a company at a given time. The Board believes that the current leadership structure is appropriate for the Company at this time, as it enables us and the Board to continue to benefit from Mr. Toll’s vast experience, skills, expertise and knowledge of the Company.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of the Compensation Committee during the fiscal year ended October 31, 2010 has ever been an officer or employee of the Company or its subsidiaries.

Personal Loans to Executive Officers and Directors

 

We do not permit personal loans to or for the benefit of our directors or executive officers.

 

Director Attendance at Annual Meetings of Stockholders

 

It is the policy of our Board that all directors attend annual meetings of stockholders except where the failure to attend is due to unavoidable circumstances or conflicts discussed in advance by the director with the Executive Chairman of the Board. All members of the Board who were serving or standing for re-election attended our 2010 Annual Meeting of Stockholders.

 

Communication with the Board

 

Any person who wishes to communicate with the Board, or specific individual directors, including the chair of the independent directors meetings or the independent directors as a group, may do so by directing a written request addressed to such directors or director in care of the Office of the General Counsel, Toll Brothers, Inc., at the address appearing on the first page of this proxy statement. Communications directed to members of the Board who are management directors will be referred to the intended Board member(s) except to the extent that it is deemed unnecessary or inappropriate to do so pursuant to the procedures established by a majority of the independent directors. Communications directed to independent directors will be referred to the intended Board member(s) except to the extent that doing so would be contrary to the instructions of such independent directors. Any communication so withheld will nevertheless be made available to any independent director who wishes to review it.

 

Director Compensation

 

The Nominating and Corporate Governance Committee is responsible for evaluating and recommending compensation for non-management directors to the Board.

 

Elements of Director Compensation

 

Non-management directors are compensated in cash, stock options and restricted stock for their services as directors.

 

 

 

 

Equity compensation grants under the Director Plan to non-management directors during fiscal 2010 for services rendered during fiscal 2009 were made on December 21, 2009 (in the case of restricted stock) and on December 20, 2009 (in the case of stock options) and were as follows:

 

 

 

Other Director Compensation Arrangements

 

A new Advisory and Non-Competition Agreement (the “Advisory Agreement”) was entered into as of November 1, 2010 between the Company and Mr. Bruce E. Toll. The Advisory Agreement currently expires on October 31, 2016. The purpose of the Advisory Agreement is to provide us with the valuable and special knowledge, expertise and services of Mr. Bruce E. Toll, one of our co-founders and a director of the Company since our inception, on a continuing basis, as well as to provide that Mr. Toll does not engage in specified activities. The Advisory Agreement provides, among other things, that (a) we will retain Mr. Bruce E. Toll as Special Advisor to the Executive Chairman of the Board and the Chief Executive Officer until October 31, 2016, at a compensation rate of $675,000 for the first year of the term of the Advisory Agreement, with such compensation rate to be reduced by $75,000 in each of the remaining five years of the term of the Advisory Agreement, and (b) during the term of the Advisory Agreement, Mr. Bruce E. Toll will be entitled to receive the health plan benefits provided to our NEOs. Mr. Bruce E. Toll is a participant in the Company’s 401(k) retirement plan. Mr. Bruce E. Toll is also a participant in the SERP, which provides an annual benefit of $230,000 for 20 years, however, no payments are to be made to him under the SERP until the expiration of the term (or termination) of the Advisory Agreement. See “Executive Compensation Tables — Pension Benefits at October 31, 2010 — Supplemental Executive Retirement Plan” for a more detailed description of the SERP. During fiscal 2010, we provided Mr. Bruce E. Toll with other benefits having an estimated value of $7,404, which are described in greater detail under “Director Compensation Table” below. These benefits were reviewed by the Compensation Committee as part of its review of benefits and perquisites paid to our NEOs and were found to be reasonable and consistent with past practices.

Director Compensation Table

 

The following table sets forth information concerning the fiscal 2010 compensation awarded to or earned by our non-management directors. Management directors are not compensated for their service as directors. The compensation received by our management directors for their services as employees is shown in the Summary Compensation Table on page 32 of this proxy statement.

 

Director Compensation during Fiscal 2010

 

 

 

 

 

 

Executive Summary

 

This compensation discussion and analysis (“CD&A”) describes in detail each element of compensation that we pay or award to, or that is earned by, our named executive officers (“NEOs”). This CD&A includes a description of the principles underlying our executive compensation policies and our most important executive compensation decisions during our 2010 fiscal year, and provides our analysis of these policies and decisions. It is also intended to provide a context for the data we present in the compensation tables and related footnotes below, as well as the narratives that accompany the compensation tables.

 

Our 2010 fiscal year was notable for significant changes in several of our key leadership roles — changes that, in each instance, benefited from succession planning by the Board and our management. Our 2010 fiscal year NEOs were as follows:

 

Robert I. Toll, Executive Chairman of the Board (“Executive Chairman”) Mr. Toll served as our Chairman and Chief Executive Officer since our founding in 1967 until the appointment of Douglas C. Yearley, Jr. as Chief Executive Officer in June 2010, at which time he was appointed Executive Chairman, with the expectation that he will, among other things, maintain an active role in the strategic management of the Company;

 

Douglas C. Yearley, Jr., Chief Executive Officer (“CEO”) Mr. Yearley joined us in 1990 and served as Executive Vice President from November 2009 until June 2010, at which time he was appointed CEO;

 

Zvi Barzilay, President and Chief Operating Officer (“COO”) Mr. Barzilay joined us in 1980 and served in various senior management positions from 1983 to 1998, at which time he was appointed President and COO;

 

Martin P. Connor, Senior Vice President, Chief Financial Officer and Treasurer (“CFO”) Mr. Connor joined us in 2008, was appointed a Senior Vice President in December 2009 and from that time until his appointment as CFO and Treasurer in September 2010, he served as Senior Vice President and Assistant Chief Financial Officer; and

 

Joel H. Rassman, our former Executive Vice President, Chief Financial Officer and Treasurer  Mr. Rassman passed away in September 2010 after more than 25 years of outstanding contributions and dedicated service to the Company.

 

We are the nation’s leading builder of luxury single-family detached and attached home communities; master planned luxury residential, resort-style golf communities; and urban low-, mid- and high-rise communities, principally on land we develop and approve. We operate our own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, and landscape subsidiaries. We face intense competition from a number of other home builders in each market in which we operate. It is imperative to our success and long-term viability that our business continues to be managed by highly experienced, focused and capable executives

who possess the dedication to oversee our organization on a day-to-day basis and have the vision to anticipate and respond to market developments. It is also important that we concentrate on retaining and developing the capabilities of our emerging leaders to ensure that we continue to have an appropriate depth of executive talent.

 

In determining fiscal 2010 compensation for our senior executives, the Executive Compensation Committee of the Board (the “Compensation Committee”) took note of the difficult conditions that continued to challenge the home building industry, while also considering the transition that we experienced at the senior management level. As a result, the Compensation Committee sought to compensate our NEOs in a way that would enable us to retain them as our senior management team through the current downturn, appropriately recognize their individual experience, roles and skill sets and their efforts on behalf of the Company during fiscal 2010 and that would be consistent with our overall business objectives and our stockholders’ best interests. The Compensation Committee paid particular attention to the following notable areas of achievement in fiscal 2010 in light of the current economic condition of our industry and the economy as a whole:

 

 

Consistent with our historical compensation practices, our fiscal 2010 compensation program, which is discussed in detail in this CD&A, once again featured the following attributes:

 

 

 

Overview of Contents

 

In this CD&A, you will find details on, and discussion of, the following topics:

 

 

Compensation Governance

 

Role of Executive Officers

 

The Compensation Committee worked with management to establish meeting agendas and determine who should have been invited to attend meetings. Throughout the year, the Compensation Committee requested various types of information from management, including information about other home building companies and other companies in the home building industry. At various times during fiscal 2010, our chief financial officer was invited by the Compensation Committee to attend relevant portions of the Compensation Committee meetings in order to provide information and answer questions regarding the Company’s strategic objectives and financial performance related to the Compensation Committee’s functions. Our Executive Chairman, CEO and COO were also all available to members and meetings of the Compensation Committee. Our CEO submitted recommendations to the Compensation Committee regarding equity compensation, performance goals and overall compensation levels for the COO and chief financial officer. The Compensation Committee then exercised its discretion in determining actual awards to the COO and chief financial officer. The Executive Chairman submitted recommendations to the Compensation Committee regarding equity compensation, performance goals and overall compensation for the CEO; the Compensation Committee then acted independently in determining CEO compensation.

 

Use of Compensation Consultants

 

During fiscal 2010, the Compensation Committee engaged Compensation Advisory Partners LLC (“CAP”) to serve as its compensation consultant. CAP received instructions from, and reported to, the Compensation Committee on an independent basis. CAP was also authorized by the Compensation Committee to share with and request and receive from management specified information in order to prepare for meetings. The Compensation Committee requested CAP’s advice on a variety of issues, including compensation strategy, market comparisons, pay and performance alignment versus industry peers, executive pay trends, compensation best practices and potential compensation plan designs and modifications. The Compensation Committee met with CAP, both with and without one or more members of our management, on several occasions during fiscal 2010 and thereafter.

 

Compensation Philosophy and Objectives

 

The Board and the Compensation Committee believe that our ability to retain and motivate NEOs who possess the skills, experience and capacity to succeed in our competitive industry has been essential to the long-term success

of our Company and a significant factor in creating long-term value for our stockholders. Base salaries, annual incentive bonuses, long-term equity compensation and competitive benefits are the primary tools used to retain and motivate our NEOs to deliver superior performance and to enhance value to our stockholders. Our compensation philosophy recognizes the value of rewarding our NEOs for their past performance and motivating them to continue to excel in the future. The Compensation Committee has developed and maintains a compensation program that is intended to reward outstanding performance and encourage actions that successfully deliver on our business strategy.

 

The compensation policies for our NEOs are based on the philosophy that compensation should reflect both our Company’s financial and operational performance and the individual performance of the executive. The Compensation Committee also believes that long-term incentives should be a significant factor in the determination of compensation, particularly because the business of home building, including evaluating and purchasing land, planning the use of that land, obtaining approvals and completing development, and many of the other actions and decisions of our NEOs, require a long time horizon before we realize a tangible financial benefit.

 

The Compensation Committee’s primary objectives when setting compensation for our NEOs are:

 

 

 

Elements of Compensation

 

The Compensation Committee seeks to be creative, as well as cognizant of changing economic and industry conditions, in its choice of methods to achieve these objectives, using a variety of compensation elements described below.

 

 

Compensation Decision Making Process

 

The Compensation Committee reviews and determines base salary, incentive bonuses and long-term incentive compensation, as well as benefits and perquisites, on an annual basis. For compensation relating to fiscal 2010, the steps taken by the Compensation Committee to establish and award compensation to our NEOs were as follows:

 

 

Portions of the compensation decision-making process are more fully described below.

 

Establish Performance Goals

 

The Compensation Committee, when setting performance goals, reviews the Company’s financial condition, current industry and national economic factors, compensation practices and trends at other companies within our industry, and our market capitalization, and attempts to set goals that will effectively motivate the NEOs to achieve the Company’s most important business objectives, while limiting risk. The establishment of performance goals does not automatically entitle any NEO to a bonus or require that the Compensation Committee award a bonus if the relevant performance goals are met. Rather, the establishment of performance goals permits the Compensation Committee, in its discretion, to determine to award bonuses to our NEOs that will be tax-deductible by us if the performance goals are met. The Compensation Committee has historically awarded bonuses that were well below the maximum range of amounts payable under the related plans. The Compensation Committee reserves the

authority to reduce the minimum and maximum range of amounts payable and any resulting amounts payable to any participant based upon such facts and circumstances that the Compensation Committee deems relevant.

 

At the beginning of fiscal 2010, the Compensation Committee, mindful of the severe downturn the housing industry was continuing to experience, believed that the achievement of revenues was once again an important goal that each of our NEOs should focus on during fiscal 2010. At the same time, the Compensation Committee determined that Messrs. Yearley, Barzilay and Rassman would be participants in a new Senior Officer Plan for fiscal 2010, subject to stockholder approval at the 2010 annual meeting, and determined that potential bonuses for fiscal 2010 under the new Senior Officer Plan, would be conditioned upon our achievement of a specified level of net revenues in fiscal 2010. The Compensation Committee also determined that the total bonus payable to any participant for fiscal 2010 under the Senior Officer Plan would be subject to an $8.5 million cap. The Committee then established that eligibility for the full bonus available under the Senior Officer Plan and under the Plan Year Performance Bonus component of the Cash Bonus Plan would be conditioned upon our achievement of at least $900 million in consolidated revenues in fiscal 2010, and eligibility for 80% of the full bonus available under the Senior Officer Plan and under the Plan Year Performance Bonus component of the Cash Bonus Plan would be conditioned upon our achievement of at least $720 million in consolidated revenues in fiscal 2010. The Compensation Committee established $900 million in revenues as the goal after reviewing, among other things, market conditions, our backlog (homes under contract but not yet delivered) at the end of fiscal 2009, the average sales price of those homes, the number of homes in backlog which were projected to be delivered during fiscal 2010, and trends in cancellation rates and delivery delays that we were experiencing at the time.

 

Review Market Comparisons

 

Although the Compensation Committee does not believe that it is appropriate to establish compensation levels based solely on market comparisons or industry practices, it believes that information regarding pay practices at other companies is useful in two respects. First, marketplace information is one of the many factors that the Compensation Committee considers in assessing the reasonableness of compensation. Second, it recognizes that our compensation practices must be generally competitive for executive talent in the home building industry and the market overall. Additionally, the Compensation Committee recognizes that most of our NEOs have more tenure with our Company and more combined years of experience than most other executive teams in our industry. While the Compensation Committee factors peer compensation levels and practices into its compensation decisions, it does not target compensation at any particular point within a range established by a comparison of the financial performance or compensation levels of our peer companies.

 

When setting fiscal 2010 salaries, performance goals and ultimate bonus amounts, and equity compensation awards, the Compensation Committee, with assistance from our independent compensation consultant, compared our NEOs’ compensation against a peer group of publicly-traded home building companies. Based on these comparisons, which included the use of tally sheets, the Compensation Committee noted that, on a three-year basis, our compensation for the chief executive officer and chief operating officer positions was below, and for the chief financial officer position (when occupied by Mr. Rassman), was above, the Company’s relative performance level against the homebuilding peer group for fiscal 2010 (“Peer Group”). The Peer Group consisted of the following companies with whom the Compensation Committee believes we primarily compete for talent and market share.

 

 

Our independent compensation consultant also provided the Compensation Committee with compensation data for companies outside of the home building sector for the Compensation Committee’s consideration.

 

Review Company Performance

 

Throughout the fiscal year, the full Board monitored our financial performance in relation to our historical performance and, to the extent reliable data was available, in relation to our peers. The Compensation Committee

reviewed our performance data during the fiscal year, which it considered when making final fiscal 2010 compensation decisions.

 

Fiscal 2010 Compensation Elements

 

Total Cash Compensation

 

Total cash compensation (base salary and annual incentive bonus) paid to or earned by each of our NEOs for fiscal 2010 is set forth below. Details on total compensation, presented in the format required by the SEC, can be found in the Summary Compensation Table on page 32 of this proxy statement.

 

 

The amounts included in the “Base Salary” and “Total Fiscal 2010 Cash Compensation” columns for Mr. Rassman include $101,923 paid to his estate for accrued vacation days in connection with the termination of his employment upon his death on September 14, 2010.

 

Base Salary

 

For fiscal 2010, the Compensation Committee restored the annual base salary for Mr. Toll, who at the time was chief executive officer, to $1,300,000. Mr. Toll’s base salary had been reduced by 10% in fiscal 2009 in the interest of conserving our cash resources. Fiscal 2010 base salaries for Messrs. Barzilay and Rassman remained at $1,000,000, while Mr. Yearley’s base salary was set at $1,000,000, which represented an increase to his prior base salary in connection with his promotion to Executive Vice President in November 2009. When establishing annual base salaries, the Compensation Committee takes into account each NEO’s performance of his role and responsibilities and the compensation of comparable executives within our Peer Group. The Compensation Committee believes that its compensation objectives are more effectively met when the majority of an executive’s compensation package is comprised of performance-based bonuses and long-term incentive compensation, rather than fixed compensation such as base salaries. Except with respect to the restoration of Mr. Toll’s salary in fiscal 2010, the Compensation Committee has not raised Mr. Toll’s (as chief executive officer) base salary since fiscal 2004, Mr. Barzilay’s (as COO) since fiscal 2003 and Mr. Rassman’s (as chief financial officer) since fiscal 2005. In connection with the appointments in June 2010 of Messrs. Toll and Yearley to Executive Chairman and CEO, respectively, the Compensation Committee determined not to recommend any changes to Mr. Toll’s or Mr. Yearley’s base salaries, citing the Compensation Committee’s belief that Mr. Toll’s duties as Executive Chairman would require him to remain fully engaged in our day-to-day affairs and assume a mentoring and oversight role. In September 2010, upon the appointment of Mr. Connor to CFO, the Compensation Committee determined that an appropriate base salary for him would be $650,000.

 

Annual Incentive Bonus — Robert I. Toll

 

An annual incentive bonus is payable to Mr. Toll if and when earned under the terms of the stockholder-approved Cash Bonus Plan. Amounts payable under the Cash Bonus Plan are designed to be “performance-based” compensation and, therefore, exempt from the limitations on tax deductibility under Section 162(m) of the Code, as discussed below under “Tax and Accounting Implications.”

 

Description of the Cash Bonus Plan.  The Cash Bonus Plan was approved by our stockholders at the 2008 annual meeting. The purpose of the Cash Bonus Plan is to provide a tax-deductible, performance-based bonus for Mr. Toll, paid partly in accordance with a formula that is based on our financial success and partly on the basis of one or more performance goals, all as part of an integrated compensation program which is intended to assist us in motivating and retaining the leadership of our co-founder, Robert I. Toll.

The Cash Bonus Plan has two components — a Company performance component (“Company Performance Bonus”) and an individual performance component (referred to in the Cash Bonus Plan and this CD&A as the “Plan Year Performance Bonus”). The formula for determining the Company Performance Bonus is set forth in the Cash Bonus Plan and is equal to 2.0% of our pre-tax income before bonus for the applicable fiscal year.

 

The Plan Year Performance Bonus under the Cash Bonus Plan is determined on an annual basis by the Compensation Committee, based on the achievement of one or more performance goals established by the Compensation Committee at the beginning of each fiscal year based upon various business criteria as set forth in the Cash Bonus Plan. In no event can the total amount of the Plan Year Performance Bonus exceed the greater of $5.2 million or 1/10 of 1% of our gross revenues for the applicable fiscal year. The Compensation Committee, in its sole discretion, has the power to reduce or completely eliminate, but not increase, the Plan Year Performance Bonus.

 

Bonuses under the Cash Bonus Plan may be paid in cash, in shares of our common stock or both; the method of payment is determined by the Compensation Committee. In addition, in no event may the sum of the Company Performance Bonus and the Plan Year Performance Bonus (cash and fair market value of stock) exceed $8.5 million in any fiscal year.

 

Fiscal 2010 Company Performance Bonus Determination.  In fiscal 2010, we did not have pre-tax income; therefore, Mr. Toll was not entitled to a Company Performance Bonus under the terms of the Cash Bonus Plan.

 

Fiscal 2010 Plan Year Performance Bonus Determination.  At the beginning of fiscal 2010, the Compensation Committee established that eligibility for the full amount available to Mr. Toll under the Plan Year Performance Bonus was conditioned upon our achievement of at least $900 million in consolidated revenues in fiscal 2010, and eligibility for 80% of the amount available to Mr. Toll under the Plan Year Performance Bonus was conditioned upon our achievement of at least $720 million in consolidated revenues in fiscal 2010. The Compensation Committee met in October 2010 and determined that we had achieved at least $900 million in consolidated revenues (our actual fiscal 2010 consolidated revenues were $1.49 billion) during fiscal 2010 and, therefore, the maximum amount ($5.2 million) was available for the Plan Year Performance Bonus. The Compensation Committee then made a subjective evaluation of Mr. Toll’s overall performance during fiscal 2010, in light of the difficult industry conditions during this period, and concluded that he had performed exceptionally well in not only continuing to steer the Company through the worst downturn our industry has ever experienced, but also in effectively managing the transition of the role of chief executive officer to Mr. Yearley while remaining active in the Company’s strategic initiatives and day-to-day affairs. Specific Company performance factors noted by the Compensation Committee were: the increase in our net contracts during fiscal 2010, as compared to fiscal 2009; the decrease of our net loss from $775.8 million in fiscal 2009 to $3.4 million in fiscal 2010; the formation of Gibraltar Capital followed by its prompt consummation of a multi-billion dollar structured transaction; the maintenance of our strong balance sheet and significant liquidity; our increased land buying activities; the replacement of our expiring credit line with an $885 million bank credit facility unique to our industry; his selection to the 2010 All-Executive Team for the homebuilding industry by Institutional Investor magazine; and the Company’s recognition as the most admired homebuilding company by Fortune magazine. The Compensation Committee also determined that Mr. Toll’s performance in fiscal 2010 merited long-term incentive compensation awards, which were granted in December 2010 and are further described below under “Looking Ahead — Fiscal 2011 Compensation.”

 

Messrs. Yearley, Barzilay, Connor and Rassman

 

Description of Senior Officer Plan.  At the beginning of our 2010 fiscal year, the Board and the Compensation Committee developed the Senior Officer Plan as a replacement for the Executive Officer Bonus Plan. In doing so, they determined that the Senior Officer Plan should be sufficiently flexible to allow the Compensation Committee to make awards in appropriate amounts and with appropriate performance periods and performance goals to whichever officers the Compensation Committee designates as plan participants. The Senior Officer Plan, subsequently approved by our stockholders at the 2010 annual meeting, was in effect during fiscal 2010. The awards paid under the Senior Officer Plan are designed to be “qualified performance-based compensation” under Section 162(m) of the Code for participants.

 

The Senior Officer Plan is designed to permit us to pay participants incentive compensation based upon the achievement of one or more pre-established performance goals. At the time the Senior Officer Plan was adopted, the

Compensation Committee initially designated Messrs. Yearley, Barzilay and Rassman as participants. At the same time, the Compensation Committee concluded that it will not designate Robert I. Toll as a participant in the Senior Officer Plan as long as he is the participant in the Cash Bonus Plan. The Compensation Committee subsequently designated Mr. Connor as a participant in the Senior Officer Plan in connection with his appointment as CFO. At or after the end of each performance period, the Compensation Committee determines whether and to what extent the performance goals have been achieved and calculates the amount of the award to be paid to each participant, if any, based upon the levels of achievement of the relevant performance goals and the objective formula or method established with respect to such performance period. In order to ensure tax deductibility of all awards under the Senior Officer Plan, the Compensation Committee has established that no award payable under the Senior Officer Plan can exceed $8.5 million (the “Award Cap”). Additionally, in no event will the maximum aggregate amount payable to any participant with respect to awards that have performance periods that end in the same fiscal year exceed two times the Award Cap, regardless of the number of awards that would otherwise be payable in that fiscal year (the “Annual Payment Cap”). Awards that are limited under the Annual Payment Cap may not be carried over and paid during a subsequent fiscal year. The Compensation Committee has no discretion to increase the amount of any awards beyond the Award Cap or the Annual Payment Cap, as applicable, but may, in its sole discretion, reduce or completely eliminate an award based on such facts and circumstances as it deems relevant. Awards under the Senior Officer Plan may be paid in cash, equity or a combination of the two. The equity portion of any award under the Senior Officer Plan may be paid in shares of restricted stock, shares of unrestricted stock or restricted or unrestricted stock units, all of which will be issued from the Employee Plan or a successor plan. To the extent an award is settled with equity, the equity is valued as of the end of the performance period for the award.

 

Fiscal 2010 Performance Goal.  For fiscal 2010, the Compensation Committee established that eligibility for the full amount available to each of Messrs. Yearley, Barzilay, Connor and Rassman under the Senior Officer Plan was conditioned upon our achievement of at least $900 million in consolidated revenues in fiscal 2010 and eligibility for 80% of the amount available to each of Messrs. Yearley, Barzilay and Rassman under the Senior Officer Plan was conditioned upon our achievement of at least $720 million in consolidated revenues in fiscal 2010. The Compensation Committee met in October 2010 and determined that we had achieved the requisite consolidated revenues (our actual fiscal 2010 consolidated revenues were $1.49 billion) during fiscal 2010 and, therefore, the maximum amount was potentially available to each of Messrs. Yearley and Barzilay and, on a pro-rata basis, to Mr. Connor and the Estate of Joel H. Rassman, taking into consideration, in the cases of Messrs. Rassman and Connor, the period in fiscal 2010 during which each served in his respective office. In determining the actual bonus amounts to be paid, the Compensation Committee then made a subjective evaluation regarding the overall individual performance of each of Messrs. Yearley, Barzilay, Connor and Rassman during fiscal 2010, in light of the current difficult industry conditions, and noted that each executive had performed exceptionally well in fiscal 2010.

 

With respect to Mr. Yearley, the Compensation Committee particularly noted the following: his effective and seamless transition into the role of CEO during fiscal 2010; the decrease of our net loss from $755.8 million in fiscal 2009 to $3.4 million in fiscal 2010; the increase in our net contracts during fiscal 2010, as compared to fiscal 2009; our increased land buying activities; the maintenance of our strong balance sheet and significant liquidity; the replacement of our expiring credit line with an $885 million bank credit facility unique to our industry; and his role in the formation of, followed by the prompt consummation of a multi-billion dollar structured transaction by, Gibraltar Capital.

 

With respect to Mr. Barzilay, the Compensation Committee particularly noted the following: his continued oversight of the strategic expansion of the Company as we increased our land buying activities during fiscal 2010, including notable land acquisitions in Florida, North Carolina and Connecticut, and the purchase of a desirable development property in New York City; his instrumental role in leading us to an increase in net contracts in fiscal 2010, as compared to fiscal 2009; the decrease of our net loss from $755.8 million in fiscal 2009 to $3.4 million in fiscal 2010; and a 17% reduction in our general and administrative costs during fiscal 2010, as compared to fiscal 2009.

 

With respect to Mr. Connor, the Compensation Committee particularly noted the following: his effective transition into the role of CFO; his efforts in closing our new four-year $885 million bank credit facility in fiscal 2010, which distinguished us as the first public home builder to obtain a new unsecured credit facility since the beginning of the financial crisis in 2008; the decrease of our net loss from $755.8 million in fiscal 2009 to $3.4 million in fiscal 2010; the successful management of asset dispositions and related tax strategies; our continued

compliance with our debt covenants; a 17% reduction in our general and administrative costs during fiscal 2010; and his assumption of an executive leadership role with respect to risk management.

 

With respect to Mr. Rassman, the Compensation Committee cited his leadership role prior to his death in September 2010 in the negotiation of a new four-year $885 million bank credit facility in fiscal 2010, which, when consummated, distinguished us as the first public home builder to obtain a new unsecured credit facility since the beginning of the financial crisis in 2008; the decrease of our net loss from $755.8 million in fiscal 2009 to $3.4 million in fiscal 2010; our continued compliance with our debt covenants; a 17% reduction in our general and administrative costs during fiscal 2010; and his selection to the 2010 All-Executive Team for the homebuilding industry by Institutional Investor magazine.

 

The Compensation Committee believed that, by surpassing the established minimum financial performance goal and by individually performing in an outstanding manner in fiscal 2010, Messrs. Yearley, Barzilay, Connor and Rassman merited bonuses for fiscal 2010 performance of $1,000,000, $1,500,000, $200,000 and $1,000,000, respectively. The Committee also determined that such amounts were reasonable in light of current economic conditions and comparisons within our industry. In addition, the Compensation Committee believed the individual performances of Messrs. Yearley, Barzilay and Connor in fiscal 2010 merited long-term incentive compensation awards, which were granted in December 2010 and are further described below under “Elements of NEO Compensation for Fiscal Year 2011.”

 

Long-Term Incentive Compensation

 

The Compensation Committee does not use constant criteria from year to year in the granting of equity compensation. The Compensation Committee makes a subjective determination of the effectiveness of each NEO and the extent of his contributions to our success and, based on that determination, awards equity compensation.

 

Equity compensation to any of our employees, including our NEOs, may be either in the form of stock options, stock appreciation rights, stock awards or stock units (which may be restricted, unrestricted or performance-based), in accordance with the terms of our stockholder-approved Employee Plan.

 

Stock options for all employees, including NEOs, are granted and priced on December 20 of each year (or, if December 20 falls on a weekend, options are granted as of December 20 and priced on the immediately preceding or succeeding business day); all determinations with regard to such grants have been made in advance of that date. We grant equity compensation on a set date each year, and we do not time or plan the release of material, non-public information for the purpose of affecting the value of executive compensation.

 

The Compensation Committee’s primary purposes and objectives when granting equity compensation to our NEOs under the Employee Plan are to:

 

 

Stock Options.  During fiscal 2010, the Compensation Committee granted stock options to the NEOs (other than Mr. Toll), as set forth in the “Outstanding Equity Awards at October 31, 2010” table on page 35 in this proxy statement. These grants were awarded at the beginning of fiscal 2010 in recognition of the respective NEO’s service during fiscal 2009. The Compensation Committee chose to grant these options to Messrs. Yearley, Barzilay, Connor and Rassman in order to further the Compensation Committee’s objectives of motivating these NEOs to achieve long-term financial results — such as improved financial or other performance that may ultimately cause an increase in the market price of our stock. Because the options were granted with exercise prices equal to the fair market value of the underlying common stock on the date of the grant, any value that ultimately accrues to the

grantee is based entirely upon our future performance, as perceived by investors who establish the market price of our common stock. The Compensation Committee chose not to grant stock options to Mr. Toll in fiscal 2010; rather, it chose to award performance-based equity compensation to Mr. Toll, as further described below.

 

The term of these options is 10 years from the date of the grant and the options vest in equal amounts over a four year period, beginning on the first anniversary of the date of the grant. Options would continue to vest and be exercisable for the remainder of the 10-year term upon death, disability or (except in the case of Mr. Connor) retirement, and would fully vest upon a change of control of the Company. Mr. Rassman’s options continue to vest pursuant to their normal vesting schedule under the terms of the Employee Plan. In addition, all stock options, vested and unvested, granted to NEOs are subject to forfeiture in the event that, after the NEO retires or otherwise leaves our employ, the NEO competes with us.

 

Performance-Based Restricted Stock Unit.  During fiscal 2010, the Compensation Committee awarded Mr. Toll performance-based Restricted Stock Units (“RSUs”) relating to 200,000 shares of our common stock in lieu of granting stock options to him. The award was valued based on the closing price of our common stock on the NYSE on December 21, 2009. The RSU is performance-based and will only vest if (1) the average closing price of our common stock on the NYSE, measured over any 20 consecutive trading days ending on or prior to December 21, 2014, increases 30% or more over the closing price of our common stock on the NYSE on December 21, 2009 and (2) Mr. Toll continues to be employed by us or serve as a member of our Board until December 21, 2012. The performance-based RSUs will also vest if Mr. Toll dies or becomes disabled, or we experience a change of control prior to satisfaction of the aforementioned performance criteria. The Compensation Committee chose to award these performance-based RSUs and selected the increase in stock price and continued service as its vesting criteria in an effort to retain Mr. Toll to motivate him to continue to lead us in such a manner that will cause a sustained increase in our stock price and to further align his financial interests with those of our stockholders. As of the date of this proxy statement, none of the vesting criteria have been satisfied.

 

Benefits and Perquisites

 

We provide all of our employees (after 60 days of service with us), including our NEOs, with specified employee benefits. These include the opportunity to save for retirement through the Toll Brothers 401(k) Savings Plan (the “401(k) Plan”), which is more fully described below, and various health and welfare benefit programs, including medical, dental, life and long-term disability insurance. We share the cost of the above benefit programs with our employees. Our NEOs participate in these programs on the same terms as our other employees. These programs are intended to promote the health and financial security of our employees and are provided at competitive market levels to attract, retain and reward employees.

 

Retirement Benefits.  We provide various plans to meet the retirement needs of our NEOs. Retirement plans are an important part of the overall compensation scheme because we seek to provide our NEOs with the ability to plan for their future while keeping them focused on our present success.

 

401(k) Savings Plan.  All employees, including our NEOs, after 60 days of service with us, are eligible to participate in the 401(k) Plan. The 401(k) Plan is a qualified retirement savings plan under Section 401(k) of the Code. Participants in the 401(k) Plan may contribute a portion of their compensation, subject to Internal Revenue Service (“IRS”) regulations and specified limitations applicable to “highly compensated employees,” as such term is defined in the Code. After a year of service, we may match a portion of each participant’s contribution and also may make an annual discretionary contribution to each active participant’s account. All of the NEOs are participants in the 401(k) Plan. In January 2009, as an additional cash-conservation measure, we suspended the matching 401(k) contribution for all employees, including the NEOs.

 

Supplemental Executive Retirement Plan (“SERP”).  We also maintain a SERP, which provides retirement benefits to our NEOs. The Board’s intention when adopting the SERP was to provide competitive retirement benefits, to protect against reductions in retirement benefits due to tax law limitations on qualified plans and to encourage continued employment or service with us. For a discussion of the material terms of the SERP, please see “Executive Compensation Tables — Pension Benefits at October 31, 2010 — Supplemental Executive Retirement Plan.”

Perquisites.  Perquisites did not constitute a material portion of the compensation paid to our NEOs for fiscal 2010. We provide our NEOs with limited perquisites and personal benefits that we and the Compensation Committee believe are consistent with our executive compensation philosophy and objectives. Each fiscal year, the Compensation Committee reviews and approves those perquisites which are to be provided to our NEOs. The Compensation Committee believes the perquisites for fiscal 2010 — which included auto and gas allowances, insurance, and tax and financial statement preparation as more fully described in the Summary Compensation Table in this proxy statement — are reasonable and consistent with our past practices and consistent with general practices in our industry.

 

Deferred Compensation Plan.  Our NEOs may elect to defer receipt of all or part of their cash compensation pursuant to the Toll Bros., Inc. Nonqualified Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is open to certain management and highly compensated employees; all NEOs are eligible to participate in the Deferred Compensation Plan. Under the Deferred Compensation Plan, NEOs may elect, prior to the beginning of the year, to defer a portion of their cash compensation during any calendar year. They may select a fixed payment date or dates for payment of the deferred amounts, or elect to have such amounts paid upon termination of employment. We have the right under the Deferred Compensation Plan to make discretionary contributions for the benefit of any participant in the plan. We did not make any discretionary contributions under the Deferred Compensation Plan for any NEO in fiscal 2010.

 

Interest earned during fiscal 2010 on any NEO deferred compensation is included under “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the Summary Compensation Table in this proxy statement, and further information about NEO deferred compensation is contained in the Nonqualified Deferred Compensation at October 31, 2010 table in this proxy statement.

 

Employment Agreements, Change of Control Provisions and Severance Payments

 

Other than a 1988 agreement (the “Rassman Agreement”) with our former chief financial officer, Joel H. Rassman (described below), none of our NEOs has an employment agreement with us. We do not have a severance plan for our NEOs. Our equity compensation plans and our SERP provide for the acceleration of specified benefits in the event we experience a change of control.

 

Agreement with Joel H. Rassman

 

Under the terms of the Rassman Agreement, we paid Mr. Rassman’s widow $166,667 (two months of Mr. Rassman’s base salary) in connection with his death in September 2010.

 

Change of Control Provisions

 

We have no change of control agreements relating to employment benefits or discrete benefits that arise simply from the change of control or severance related thereto; however, under our equity compensation plans and our SERP, awards and benefits are generally subject to special provisions upon a defined “change of control” transaction. Upon a change of control, any outstanding options, restricted stock, deferred cash or other plan awards will generally immediately vest and any restrictions will immediately lapse. Under the SERP, if there is a change of control of the Company, all participants in the SERP shall be fully vested in their SERP benefits and potentially eligible for a lump sum payout.

 

Tax and Accounting Implications

 

Tax Regulations.  Section 162(m) of the Code generally disallows a tax deduction to a public company for compensation over $1 million paid to specified “covered employees” (its chief executive officer and to any of its three other most highly-compensated executive officers other than its chief financial officer). Performance-based compensation will not be subject to the deduction limitation if certain requirements set forth in the Code and applicable Treasury Regulations are met. We generally structure our compensation plans for our NEOs to comply with the performance-based compensation exemption requirements of Section 162(m) of the Code; however, since corporate objectives may not always be consistent with the requirements for full deductibility, the Board and the Compensation Committee may award non-deductible compensation to our NEOs as they deem appropriate.

Accounting Considerations.  When making decisions about executive compensation, the Compensation Committee also considers how elements of compensation will impact our financial results. We accrue our NEOs’ salaries and cash bonus awards as an expense when earned by the NEO. For equity compensation grants, Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 718 “Compensation-Stock Compensation” (“ASC 718”) requires us to recognize compensation expense for all share-based payment arrangements based upon the grant date fair value of those awards and period of vesting. In the Summary Compensation Table contained in this proxy statement, we are required to show the grant date fair value of the equity awards made to our NEOs in each fiscal year and to include this amount as part of the NEOs’ total compensation. This number, while required by the SEC rules and important for understanding the impact of granting equity on our financial statements, may not accurately represent the value received by the NEO. For example, stock options have a compensation expense for accounting purposes, but do not have any value to an NEO unless the market value of our stock increases above the exercise price of the stock option. In fact, options granted over the past five years to our NEOs were “under water” as of October 31, 2010 (that is, the exercise price of these options was higher than the closing price of our common stock on the NYSE on October 31, 2010). Similarly, stock awards and units fluctuate in value based on the market price of our common stock and may be worth more or less than the associated grant date fair value. Performance-based stock awards and units, which do have grant date fair value, may never have any value to the recipient because the performance criteria may never be met.

 

Looking Ahead — Fiscal 2011 — Compensation

 

Base Salaries.  In October 2010, the Compensation Committee determined that our NEOs would not receive base salary increases. Accordingly, our NEOs will receive the same base salaries in fiscal 2011 as they had received in fiscal 2010.

 

Annual Incentive Bonuses.  Pursuant to the terms of the Cash Bonus Plan, Mr. Toll will be entitled to a Company Performance Bonus under the Cash Bonus Plan for fiscal 2011 equal to 2.0% of our fiscal 2011 income before taxes and will be eligible to receive a Plan Year Performance Bonus, which will be determined by evaluating Mr. Toll’s performance in light of one or more performance goals established by the Compensation Committee in a manner consistent with prior periods. Similarly, pursuant to the terms of the Senior Officer Plan, Messrs. Yearley, Barzilay and Connor will be eligible to receive annual incentive bonuses for fiscal 2011 based upon our achievement of one or more performance goals established by the Compensation Committee in a manner consistent with prior periods.

 

Long-Term Incentive Compensation.  The Compensation Committee met in December 2010 and decided to grant options to acquire 100,000 shares of common stock to Mr. Toll, options to acquire 120,000 shares of common stock to each of Messrs. Yearley and Barzilay, and options to acquire 20,000 shares of common stock to Mr. Connor. Such grants were made as of December 20, 2010, have an exercise price equal to the closing price of our common stock on the NYSE on December 20, 2010 and will vest in equal installments over four years. The Compensation Committee also determined to award performance-based RSUs to some of our NEOs relating to 200,000 shares to Mr. Toll, 100,000 shares to Mr. Yearley, and 6,000 shares to Mr. Connor, respectively. The RSUs were valued based on the closing price of our common stock on the NYSE on December 20, 2010. Each RSU will only vest if the average closing price of our common stock on the NYSE, measured over any 20 consecutive trading days ending on or prior to December 20, 2015, increases 30% or more over the closing price of our common stock on the NYSE on December 20, 2010, and provided Mr. Toll, Mr. Yearley and Mr. Connor, as applicable, continues to be employed by us, or, in the case of Messrs. Toll and Yearley, serve as a member of our Board until December 20, 2013. Each RSU would also vest upon death or disability of the grantee, or if we experience a change of control prior to satisfaction of the performance criteria.

 

The Executive Compensation Committee has reviewed and discussed with our management the Compensation Discussion and Analysis section of this proxy statement. Based on such review and discussion, the Executive Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010.

 

Respectfully submitted by the members of the Executive Compensation Committee of the Board of Directors.

 

Carl B. Marbach (Chair)

Stephen A. Novick

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards During Fiscal 2010

 

 

 

 

Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table

 

Please see the “Compensation Discussion and Analysis” section of this proxy statement for a detailed description of the fiscal 2010 equity and bonus awards and the amounts of salary and bonus in proportion to total compensation with respect to each NEO.

Outstanding Equity Awards at October 31, 2010