RAI Reynolds American (delisted)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934 (Amendment No.     )

 

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o   Preliminary Proxy Statement

o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ   Definitive Proxy Statement

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o   Soliciting Material Pursuant to §240.14a-12

 

REYNOLDS AMERICAN 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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March 25, 2011

 

Dear Shareholder:

 

You are cordially invited to attend the 2011 annual meeting of shareholders of Reynolds American Inc. The meeting will be held at 9:00 a.m. (Eastern Time), on Friday, May 6, 2011, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina.

 

The matters to be acted on at the annual meeting are described in the accompanying notice of meeting and proxy statement. Please give careful attention to these proxy materials.

 

Pursuant to rules promulgated by the Securities and Exchange Commission, we are providing to most of our shareholders access to our proxy materials over the Internet through a process informally called “e-proxy.” We believe these rules allow us to deliver proxy materials to our shareholders in a cost-efficient and an environmentally sensitive manner, while preserving the ability of shareholders to receive paper copies of these materials if they wish.

 

It is important that your shares be represented and voted at the annual meeting regardless of the size of your holdings. Whether or not you plan to attend the annual meeting, we encourage you to vote your shares in advance of the annual meeting by using one of the methods described in the accompanying proxy materials.

 

Attendance at the annual meeting will be limited to our shareholders as of the record date of March 14, 2011, and to guests of RAI, as more fully described in the proxy statement. Admittance tickets will be required. If you are a shareholder and plan to attend, you MUST pre-register for the meeting and request an admittance ticket no later than Wednesday, April 27, 2011, by writing to the Office of the Secretary, Reynolds American Inc., 401 North Main Street, P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. If your shares are not registered in your own name, evidence of your stock ownership as of March 14, 2011, must accompany your letter. You can obtain this evidence from your bank or brokerage firm, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk, not mailed to you in advance of the meeting.

 

We anticipate that a large number of shareholders will attend the meeting. Seating is limited, so we suggest that you arrive early. The auditorium will open at 8:30 a.m.

 

If you have questions or need assistance in voting your shares, please contact our Shareholder Services Department at (866) 210-9976 (toll-free).

 

Thank you for your support and continued interest in RAI.

 

Sincerely,

 

Thomas C. Wajnert
Chairman of the Board

Reynolds American Inc.
401 North Main Street
P.O. Box 2990
Winston-Salem, North Carolina 27102-2990

 

 

 

 

Notice of Annual Meeting of Shareholders
To be Held on Friday, May 6, 2011

 

 

 

 

March 25, 2011

 

To our Shareholders:

 

The 2011 annual meeting of shareholders of Reynolds American Inc. will be held at 9:00 a.m. (Eastern Time) on Friday, May 6, 2011, in the Reynolds American Plaza Building Auditorium at RAI’s corporate offices, 401 North Main Street, Winston-Salem, North Carolina. At the meeting, shareholders will be asked to take the following actions:

 

 

Only holders of record of RAI common stock as of the close of business on March 14, 2011, are entitled to notice of, and to vote at, the 2011 annual meeting of shareholders of RAI.

 

Whether or not you plan to attend the meeting, we urge you to vote your shares using a toll-free telephone number or the Internet, or by completing, signing and mailing the proxy card that either is included with these materials or will be sent to you at your request. Instructions regarding the different voting methods are contained in the accompanying proxy statement.

 

By Order of the Board of Directors,

 

McDara P. Folan, III
Secretary

Reynolds American Inc.
401 North Main Street
P.O. Box 2990
Winston-Salem, North Carolina 27102-2990

 

 

Proxy Statement

 

 

Table of Contents

 

 

The Board of Directors, sometimes referred to as the Board, of Reynolds American Inc. is soliciting your proxy to vote at our 2011 annual meeting of shareholders (or any adjournment or postponement of the annual meeting). (References in this proxy statement to “RAI,” “we,” “our,” or “us” are references to Reynolds American Inc.) This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the 2011 annual meeting. Please read it carefully.

 

In accordance with certain rules of the Securities and Exchange Commission, referred to as the SEC, we are making our proxy materials (consisting of this proxy statement, our 2010 Annual Report on Form 10-K and a letter from our Chairman of the Board and our President and Chief Executive Officer) available over the Internet, rather than mailing a printed copy of our proxy materials to every shareholder, which process we refer to as e-proxy. We began mailing a Notice of Internet Availability of Proxy Materials, referred to as the Notice, on or about March 25, 2011, to all shareholders entitled to vote, except shareholders who already had requested a printed copy of our proxy materials and except participants in our Savings Plan and SIP, defined below, to whom we began mailing proxy materials (including a proxy card) on or about March 25, 2011. More information about e-proxy is provided in the following set of questions and answers, including information on how to receive by mail, free of charge, paper copies of the proxy materials, in the event you received a Notice.

 

The date, time and place of our 2011 annual meeting are set forth below:

 

 

Attendance at our 2011 annual meeting will be limited to our shareholders as of the record date of March 14, 2011, referred to as the record date, and to pre-approved guests of RAI. All shareholder guests must be pre-approved by RAI and will be limited to spouses, persons required for medical assistance and properly authorized representatives of our shareholders as of the record date. Admittance tickets will be required to attend the meeting. If you are a shareholder and plan to attend, you MUST pre-register and request an admittance ticket for you (and any guest for whom you are requesting pre-approval) no later than Wednesday, April 27, 2011, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. If your shares are not registered in your own name, evidence of your stock ownership as of March 14, 2011, must accompany your letter. You can obtain this evidence from your bank or brokerage firm, typically in the form of your most recent monthly statement. An admittance ticket will be held in your name at the registration desk — not mailed to you in advance of the meeting. Proper identification will be required to obtain an admittance ticket.

 

The 2011 annual meeting is a private business meeting. In accordance with RAI’s Amended and Restated Bylaws, referred to as Bylaws, and North Carolina law, our Chairman of the Board has the right and authority to determine and maintain the rules, regulations and procedures for the conduct of the meeting, including, but not limited to, maintaining order and the safety of those in attendance, dismissing business not properly submitted, opening and closing the polls for voting and limiting time allowed for discussion of the business at the meeting. Failure to abide by the meeting rules will not be tolerated and may result in expulsion from the meeting. A copy of the meeting rules will be provided to all properly pre-registered shareholders and guests with their admittance ticket.

 

We anticipate that a large number of shareholders will attend the meeting. Seating is limited, so we suggest you arrive early. The auditorium will open at 8:30 a.m.

 

If you have a disability, we can provide reasonable assistance to help you participate in the meeting. If you plan to attend the meeting and require assistance, please write or call the Office of the Secretary of RAI no later than May 2, 2011, at P.O. Box 2990, Winston-Salem, North Carolina 27102-2990; telephone number (336) 741-5162.

 

At our 2011 annual meeting, shareholders will vote upon the matters outlined in the notice of meeting — (1) the election of directors, (2) an advisory vote on the compensation of our executive officers named in the 2010 Summary Compensation Table below, each officer named in such table referred to as a named executive officer, (3) an advisory vote regarding the frequency of future advisory votes on the compensation of our named executive officers, (4) approval of an amendment to our Amended and Restated Articles of Incorporation, referred to as the Articles of Incorporation, (5) ratification of the appointment of our independent auditors, and (6) three shareholder proposals, if such proposals are presented by their proponents at the meeting. Also, RAI’s management will report on RAI’s performance during the last fiscal year and respond to questions from shareholders.

 

The Board recommends a vote:

 

 

E-proxy refers to the process allowed under SEC rules permitting companies to make their proxy materials available over the Internet, instead of mailing paper copies of the proxy materials to every shareholder. We are using e-proxy to distribute proxy materials to most of our shareholders because it will be cost effective for RAI and our shareholders (by lowering printing and mailing costs), reduce the consumption of paper and other resources, and provide shareholders with more choices for accessing proxy information.

 

Yes. In addition to providing instructions on accessing the proxy materials on the Internet (by visiting a web site referred to in the Notice), the Notice has instructions on how to request paper copies by phone, e-mail or on the Internet. You will be sent, free of charge, printed materials within three business days of your request. Once you request paper copies, you will continue to receive the materials in paper form until you instruct us otherwise.

 

Yes. The e-proxy rules work in harmony with the existing rules allowing shareholders to consent to electronic delivery of proxy materials. If you have already registered to receive materials electronically, you will continue to receive them that way. If you have not already done so, but desire now to consent to electronic delivery, please see the question below “Can I receive future proxy materials from RAI electronically?”

 

Shareholders who owned RAI common stock at the close of business on March 14, 2011, the record date, are entitled to vote. As of the record date, we had 582,887,836 shares of RAI common stock outstanding. Each outstanding share of RAI common stock is entitled to one vote. The number of shares you own is reflected on your Notice and/or proxy card.

 

Yes. If your shares are registered directly in your name with RAI’s transfer agent (BNY Mellon Shareowner Services), then you are considered to be the shareholder “of record” with respect to those shares, and the Notice and/or these proxy materials are being sent directly to you by RAI. If your shares are held in the name of a bank, broker or other nominee, then you are considered to hold those shares in “street name” or to be the “beneficial owner” of such shares. If you are a beneficial owner, then the Notice and/or these proxy materials are being forwarded to you by your nominee who is considered the shareholder of record with respect to the shares.

 

A quorum of shareholders is necessary to hold a valid meeting. The holders of record, present in person or by proxy at the meeting, of a majority of the shares entitled to vote constitute a quorum. Once a share is represented for any purpose at the meeting, it is considered present for quorum purposes for the remainder of the meeting. Abstentions, shares that are withheld as to voting with respect to one or more of the director nominees and “broker non-votes” will be counted in determining the existence of a quorum. A “broker non-vote” occurs on an item when a nominee is not permitted to vote without instructions from the beneficial owner of the shares and the beneficial owner fails to provide the nominee with such instructions.

 

You may vote in person at our 2011 annual meeting or you may designate another person — your proxy — to vote your stock. The written document used to designate someone as your proxy also is called a proxy or proxy card. We urge you to vote your shares by proxy even if you plan to attend the annual meeting. You can always change your vote at the meeting. If you are a shareholder of record, then you can vote by proxy over the Internet by following the instructions in the Notice, or, if you request printed copies of the proxy materials by mail, you can also vote by mail or telephone.

If you are a beneficial owner and you want to vote by proxy, then you may vote by proxy over the Internet, or if you request printed copies of the proxy materials by mail, you can also vote by mail or by telephone by following the instructions in the Notice.

 

If you plan to attend the meeting and vote in person and you hold your shares directly in your own name, then we will give you a ballot when you arrive. However, if you hold your shares in street name, then you must obtain a legal proxy assigning to you the right to vote your shares from the nominee who is the shareholder of record. The legal proxy must accompany your ballot to vote your shares in person.

 

If you participate in the RAI 401k Savings Plan, referred to as the Savings Plan, or in the Puerto Rico Savings & Investment Plan, referred to as the SIP, then your proxy card will serve as voting instructions for the trustee of the Savings Plan or the custodian of the SIP for shares of RAI common stock allocated to your account under the Savings Plan or the SIP. Shares for which no instructions are received will be voted by the trustee of the Savings Plan and the custodian of the SIP in the same proportion as the shares for which instructions are received by each of them.

 

You may specify whether your shares should be voted for all, some or none of the director nominees. You also may specify whether your shares should be voted for or against, or whether you abstain from voting with respect to, each of the other proposals, except Item 3 which you may specify should be voted for one year, two years, three years or abstain.

 

If you sign and return a proxy card, one of the individuals named on the card (your proxy) will vote your shares as you have directed. If you are a shareholder of record and return a signed proxy card, or if you give your proxy by telephone or over the Internet, but do not make specific choices, your proxy will vote your shares in accordance with the Board’s recommendations listed above. Please see the discussion below under “How many votes are required to elect directors and adopt the other proposals?” for further information on the voting of shares.

 

If any other matter is presented at our 2011 annual meeting, then your proxy will vote in accordance with his or her best judgment. At the time this proxy statement went to press, we knew of no other matters that had been properly presented to be acted upon at the annual meeting.

 

Yes. You may revoke or change your proxy by:

 

 

The required number of votes depends upon the particular item to be voted upon:

 

 

 

 

We will retain an independent party, Broadridge Financial Solutions, Inc., to receive and tabulate the proxies, and to serve as the inspector of election to certify the results.

 

The votes of all shareholders will be held in confidence from our directors, officers and employees, except:

 

 

Preliminary voting results will be announced at the 2011 annual meeting, and will be set forth in a press release that we intend to issue after the annual meeting. The press release will be available on our web site at www.reynoldsamerican.com . Final voting results will be published in a Current Report on Form 8-K, which we will file with the SEC within four business days after the 2011 annual meeting. A copy of this Current Report on Form 8-K will be available on our web site after its filing with the SEC.

 

Yes. Shareholders can elect to receive an e-mail that will provide electronic links to these materials in the future. If you are a registered shareholder, and have not already elected to view documents issued by us over the Internet, then you can choose to receive these documents electronically by following the appropriate prompts when you vote using the Internet. (If you hold your RAI common stock in nominee name, then you should review the information provided by your nominee for instructions on how to elect to view future proxy materials and annual reports using the Internet.) By choosing to receive shareholder materials electronically, you support us in our effort to control escalating printing and postage costs, and to protect the environment. We hope that our shareholders find this service convenient and useful. Costs normally associated with electronic access, such as usage and telephonic charges, will be your responsibility.

 

If you elect to view our annual reports and proxy materials using the Internet, we will send you a notice at the e-mail address provided by you explaining how to access these materials, but we will not send you paper copies of these materials unless you request them. We also may choose to send one or more items to you in paper form even though you elected to receive them electronically. Your consent to receive materials electronically rather than by mail will be effective until you revoke it by terminating your registration by going to the web site http://enroll.icsdelivery.com/rai , writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990, or calling us at (336) 741-5162. If at any time you would like to receive a paper copy of the annual report, proxy statement or other documents issued by us, you may request any of these documents by writing to the address above, calling us at (336) 741-5162 or going to our web site at www.reynoldsamerican.com .

 

By consenting to electronic delivery, you are stating to us that you currently have access to the Internet and expect to have access to the Internet in the future. If you do not have access to the Internet, or do not expect to have access in the future, please do not consent to electronic delivery because we may rely on your consent and not deliver paper copies of documents, including, for example, future annual meeting materials or other documents issued by us.

 

Yes. SEC rules allow us to send a single Notice or copy of our proxy materials to two or more of our shareholders sharing the same address, subject to certain conditions, in a process called “householding.” To take advantage of the cost savings offered by householding, we have delivered only one Notice or copy of proxy materials to multiple shareholders who share an address, unless we received contrary instructions from the impacted shareholders prior to the mailing date. We agree to deliver promptly, upon written or oral request, a separate copy of the Notice or proxy materials, as requested, to any shareholder at the shared address to which a single copy of those documents was delivered. If you prefer to receive separate copies of the Notice, proxy statement or Form 10-K, contact Broadridge Financial Solutions, Inc. at 1-800-542-1061, or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

 

If you are currently a shareholder sharing an address with another shareholder and wish to receive only one copy of future Notices, proxy statements and Annual Reports on Form 10-K for your household, please contact Broadridge at the above phone number or address.

 

We are soliciting this proxy on behalf of your Board of Directors and will bear the solicitation expenses. We are making this solicitation by mail, but our directors, officers and employees also may solicit by telephone, e-mail, facsimile or in person. We will pay for the cost of these solicitations, but these individuals will receive no additional compensation for their solicitation services. We will reimburse nominees, if they request, for their expenses in forwarding proxy materials to beneficial owners.

 

Yes, an alphabetical list of the names of all shareholders of record, as of the close of business on the record date, will be available for inspection by any shareholder or his or her representative, upon written demand, during the period from March 29, 2011, to May 6, 2011. This list can be viewed at RAI’s corporate offices located at 401 North Main Street, Winston-Salem, North Carolina 27101 between the hours of 8:30 a.m. and 5:00 p.m. Under applicable North Carolina law, a shareholder or his or her representative may, under certain circumstances and at the shareholder’s expense, copy the list during the period it is available for inspection. A shareholder desiring to inspect and/or copy the shareholder list should contact RAI’s Secretary at 401 North Main Street, Winston-Salem, North Carolina 27101 (phone: (336) 741-5162), to make necessary arrangements. In addition, we will make the shareholder list available for inspection to any shareholder or his or her representative during the 2011 annual meeting.

 

If you have any questions or need further assistance in voting your shares, please contact:

 

Reynolds American Inc.
Shareholder Services
P.O. Box 2990
Winston-Salem, NC 27102-2990
(866) 210-9976 (toll-free)

 

 

The business and affairs of RAI are managed under the direction of your Board of Directors. The Board currently consists of 11 directors who are divided into two classes of four directors and one class of three directors, with each class serving staggered terms of three years. The three Class I directors have a term ending on the date of the 2011 annual meeting, the four Class II directors, except as otherwise noted below, have a term ending on the date of the 2012 annual meeting, and the four Class III directors, except as otherwise noted below, have a term ending on the date of the 2013 annual meeting. Pursuant to our Articles of Incorporation, each class is to consist, as nearly as may reasonably be possible, of one-third of the total number of directors constituting the Board.

 

Each of the following persons currently serving on the Board as a Class I director has been nominated for re-election to such class at the 2011 annual meeting: Luc Jobin, Nana Mensah and John J. Zillmer. If re-elected at the 2011 annual meeting, such persons will hold office until the 2014 annual meeting or until their successors have been elected and qualified.

 

In addition to the foregoing persons nominated for re-election as Class I directors, John P. Daly and Daniel M. Delen have been nominated for re-election to Class II and Class III, respectively, at the 2011 annual meeting. Mr. Daly was first elected to serve at the Board’s December 2010 meeting, when he was elected to Class II. Mr. Delen was elected to Class III, in addition to his election as the President and Chief Executive Officer-Elect of RAI, effective January 2011. Although the terms of the other Class II and Class III directors end on the dates of the 2012 and 2013 annual meetings, respectively, Messrs. Daly’s and Delen’s current terms as Class II and Class III directors, respectively, are scheduled to expire on the date of the 2011 annual meeting because, under the law of North Carolina (the state in which RAI is incorporated), each of Messrs. Daly and Delen was elected to fill a vacancy on the Board. If re-elected at the 2011 annual meeting, Mr. Daly, like the other Class II directors, will hold office until the 2012 annual meeting, and Mr. Delen, like the other Class III directors, will hold office until the 2013 annual meeting.

 

Pursuant to the terms of the Governance Agreement, dated July 30, 2004, as amended, referred to as the Governance Agreement, by and among RAI, Brown & Williamson Holdings, Inc. (formerly known as Brown & Williamson Tobacco Corporation), referred to as B&W, and British American Tobacco p.l.c., the parent corporation of B&W and referred to as BAT, B&W has designated Mr. Daly as a nominee for re-election as a Class II director. (The material terms of the Governance Agreement relating to the nomination of directors are described below under “— Governance Agreement.”) The Board’s Corporate Governance and Nominating Committee, referred to as the Governance Committee, has recommended Messrs. Jobin, Mensah and Zillmer as nominees for re-election to the Board as Class I directors and Mr. Delen as a nominee for re-election to the Board as a Class III director. The other persons who have been designated by B&W pursuant to the Governance Agreement as directors of RAI are H.G.L. (Hugo) Powell (Class II director), Martin D. Feinstein (Class III director) and Neil R. Withington (Class III director). B&W has not yet exercised its right under the Governance Agreement to designate for nomination one additional person as a director.

 

As previously disclosed, two directors resigned from the Board during the 2010 fiscal year — Betsy S. Atkins, who resigned as a director effective June 17, 2010, and Nicandro Durante, who resigned as a director effective December 1, 2010. Both Ms. Atkins and Mr. Durante had been designated by B&W as directors pursuant to the Governance Agreement. In addition, Susan M. Ivey resigned from the Board effective February 28, 2011, coincident with her retirement as President and Chief Executive Officer of RAI.

 

Your proxy will vote for each of the nominees for directors unless you specifically withhold authority to vote for a particular nominee. If any such nominee is unable to serve, your proxy may vote for another nominee proposed by the Board, or the Board may reduce the number of directors to be elected.

 

Your Board of Directors recommends a vote FOR the election of each of the three Class I director nominees, the one Class II director nominee and the one Class III director nominee.

 

Certain biographical information regarding the persons nominated for election to the Board at our 2011 annual meeting and regarding the other persons serving on the Board is set forth below:

 

Director Nominees

 

Continuing Directors

 

 

In connection with the business combination transactions, collectively referred to as the Business Combination, consummated on July 30, 2004, pursuant to which, among other things, the U.S. cigarette and tobacco business of B&W was combined with the business of RJR Tobacco, RAI, B&W and BAT entered into the Governance Agreement, which sets forth the parties’ agreement regarding various aspects of the governance of RAI, including the nomination of RAI directors. As noted above, under “— Item 1: Election of Directors,” the Board currently consists of 11 persons. Under the terms of the Governance Agreement, the Board is nominated as follows:

 

 

The number of directors B&W is entitled to designate for nomination to the Board will be affected by the amount of RAI common stock which B&W owns. (As of the date of this proxy statement, B&W owns approximately 42% of RAI common stock.) Specifically, the Governance Agreement provides that designations by B&W will be subject to the following limitations prior to the recommendation of nominees by the Governance Committee:

 

 

In addition, the Governance Agreement provides that in no event will the number of directors designated by B&W divided by the total number of directors then comprising the Board, exceed the number of directors which B&W is then entitled to designate pursuant to the terms of the Governance Agreement divided by 12, rounded up to the nearest whole number.

 

For purposes of the Governance Agreement, an independent director means a director who would be considered an “independent director” of RAI under the NYSE listing standards, as such listing standards may be amended from time to time, and under any other applicable law that imposes as a condition to any material benefit to RAI or any of its subsidiaries, the independence of one or more members of the Board, excluding, in each case, requirements that relate to “independence” only for members of a particular committee or directors fulfilling a particular function. In no event will any person be deemed to be an “independent director” if such person is, or at any time during the three years preceding the date of determination was, a director, officer or employee of BAT or any of its subsidiaries, other than RAI and its subsidiaries, if applicable. In addition, no person will be deemed to be an “independent director” unless such person also would be considered to be an “independent director” of BAT under the NYSE listing standards, whether or not such person is in fact a director of BAT, assuming the NYSE listing standards were applicable to BAT. Under the Governance Agreement, the fact that a person has been designated by B&W for nomination will not by itself disqualify that person as an “independent director.”

 

Pursuant to the Governance Agreement, because the Board will include the number of directors designated by B&W in accordance with the terms of the Governance Agreement following the election of directors at the 2011 annual meeting (assuming that management’s entire slate of nominees is elected at the meeting), BAT and its subsidiaries will vote, pursuant to an irrevocable proxy, their shares of RAI common stock in favor of management’s slate of nominees (consisting of Messrs. Jobin, Mensah and Zillmer for Class I, Mr. Daly for Class II and Mr. Delen for Class III) at the 2011 annual meeting. Under the Governance Agreement, BAT and its subsidiaries will not be required to vote in favor of management’s slate of nominees at a particular shareholders’ meeting if a third party has made a material effort to solicit proxies in favor of a different slate of directors for that meeting.

 

The NYSE listing standards require that all listed companies have a majority of independent directors. For a director to be “independent” under the NYSE listing standards, the board of directors of a listed company must affirmatively determine that the director has no material relationship with the company, or its subsidiaries or affiliates, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company or its subsidiaries or affiliates. In accordance with the NYSE listing standards, RAI’s Board has adopted the following standards to assist it in its determination of director independence; a director will be determined not to be independent under the following circumstances:

 

 

The foregoing director independence standards are set forth in RAI’s Corporate Governance Guidelines, which can be found in the “Governance” section of our web site at www.reynoldsamerican.com , or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

 

The Board has determined that the following directors are independent within the meaning of the foregoing NYSE listing standards: Martin D. Feinstein, Luc Jobin, Holly K. Koeppel, Nana Mensah, Lionel L. Nowell, III, H.G.L. (Hugo) Powell, Thomas C. Wajnert and John J. Zillmer. In addition, the Board determined that Betsy S. Atkins was independent within the meaning of the NYSE listing standards during her tenure on the Board in 2010. None of the foregoing independent directors has any relationship with RAI, other than being a director and/or shareholder of RAI.

 

The standing committees of the Board are the Audit and Finance Committee, referred to as the Audit Committee, the Compensation and Leadership Development Committee, referred to as the Compensation Committee, and the Governance Committee. All of the current standing committees of the Board are comprised of non-management directors, who are independent as defined by applicable NYSE listing standards as discussed above under “— Determination of Independence of Directors.” Pursuant to the Governance Agreement, each of the Board committees will have at least five members, though currently the Audit Committee has one vacancy, the Compensation Committee has two vacancies and the Governance Committee has one vacancy. The Governance Agreement also provides that the directors designated by B&W will have proportionate representation on each Board committee, with at least one director designated by B&W serving on each Board committee so long as any directors designated by B&W serve on the Board. At this time, B&W has agreed to only designate one of its two designees to serve on the Compensation Committee, and has not yet designated a replacement for Ms. Atkins, its prior designee on the Compensation Committee. Notwithstanding the foregoing, a director designated by B&W may not serve on any Board committee if such service would violate mandatory legal or exchange listing requirements or any other applicable law that requires committee member independence as a condition to a material benefit to RAI or any of its subsidiaries.

 

Each of the Board’s three standing committees operates in accordance with the terms of a written charter. Copies of each such charter can be found in the “Governance” section of our web site at www.reynoldsamerican.com , or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. Information regarding the current membership of each standing committee of the Board is set forth in the table below, and information regarding the activities of each standing committee of the Board is presented following the table.

 

 

 

 

In 2010, the Board also established an ad hoc committee, the Strategic Matters Review Committee, the purpose of which is to evaluate, and provide feedback regarding, strategic plans and initiatives proposed by management. Such committee met three times during 2010. The members of the Strategic Matters Review Committee are: Martin D. Feinstein, Luc Jobin, H.G.L. (Hugo) Powell and Thomas C. Wajnert (Chair).

 

The Audit Committee, established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, referred to as the Exchange Act, is responsible for assisting the Board of Directors in fulfilling its oversight responsibilities by overseeing:

 

 

The Audit Committee is directly responsible for the appointment, termination, compensation, retention, evaluation and oversight of the work of RAI’s independent auditors for the purpose of preparing or issuing an audit report or performing other audit, review or attestation services for RAI. The Audit Committee also serves as a qualified legal compliance committee, within the meaning of the Sarbanes-Oxley Act of 2002, responsible for, among other things, reviewing reports by RAI’s attorneys of any material violations of securities laws and any material breaches of fiduciary duties under applicable law.

General .   The Compensation Committee is responsible for:

 

 

As part of its responsibilities, the Compensation Committee:

 

 

The Compensation Committee is responsible for evaluating the Chief Executive Officer’s performance, with input from all members of the Board. Based on such evaluation, the Compensation Committee recommends to the independent directors for their approval any changes in the Chief Executive Officer’s annual compensation. For a discussion of the Compensation Committee’s policies relating to executive compensation, see “Executive Compensation — Compensation Discussion and Analysis” below.

Delegation .   Pursuant to the Compensation Committee charter, the Chair of the Committee has the authority to approve the compensation for persons at the Executive Vice President level or below (except for RAI’s Chief Financial Officer, RAI’s General Counsel and RJR Tobacco’s President) to the extent the Chair deems such approval necessary and appropriate under the circumstances, and if the Committee is not otherwise in session. In addition, the Compensation Committee may, in its discretion and as it considers appropriate, delegate such other of its powers and responsibilities to other subcommittees, or to committees comprised of officers or employees, except that grants to persons who are subject to the Section 16 reporting requirements may only be approved by a subcommittee comprised solely of two or more non-employee directors, and grants designed to be “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, referred to as the Code, may only be approved by a subcommittee comprised solely of two or more outside directors. In February 2010, the Compensation Committee delegated to a committee consisting of Ms. Ivey, as RAI’s President and Chief Executive Officer, and Lisa J. Caldwell, RAI’s Executive Vice President and Chief Human Resources Officer, the authority during the remainder of 2010 to approve, outside of the normal, annual grant cycle, long-term incentive grants under the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan, to persons at the Vice President level and below. Any such grants made under that delegated authority were required to have the same terms as the grants made to other employees as of March 1, 2010, and any such additional long-term incentive grants could not cause the maximum amount of the total 2010 long-term incentive grants approved by the Compensation Committee to be exceeded. See “Executive Compensation — Compensation Discussion and Analysis — Analysis of 2010 Compensation Decisions — Long-Term Incentive Compensation — Long-Term Incentive Opportunity — 2010 Long-Term Incentives” below for information regarding the general terms of the 2010 long-term incentive grants under the Omnibus Plan. In February 2011, the Compensation Committee made a similar delegation of authority to a committee consisting of Mr. Delen, as RAI’s President and Chief Executive Officer-Elect, and Ms. Caldwell for 2011 out-of-cycle long-term incentive grants under the Omnibus Plan to persons at the Vice President level and below.

Compensation Consultants .   Under its charter, the Compensation Committee has the sole authority to retain any compensation consultant for purposes of evaluating, and making recommendations with respect to, the compensation of our executive officers, as well as the sole authority to approve the terms of any such consulting arrangement, including the fees payable to the consultant. The Compensation Committee also has the sole authority to terminate any compensation consultant that it has retained. In addition to the retention of compensation consultants, the Compensation Committee has the authority, under its charter, to retain independent legal counsel or other independent advisors to assist the Committee in performing its duties.

 

In early 2010, Hewitt Associates spun off a part of its executive compensation consulting practice into a separate and independent entity called Meridian Compensation Partners, LLC, referred to as Meridian. For 2010, the Compensation Committee engaged Meridian to provide the Committee with recommendations regarding executive compensation in light of market practices and legal or regulatory considerations, and consistent with RAI’s needs and compensation philosophy. Meridian provided the Compensation Committee with market or benchmark data to assist the Committee in making determinations concerning senior management base salary, annual incentive target levels and long-term incentive target awards. A representative of Meridian attended each regular meeting of the Compensation Committee in 2010. During 2010, the Compensation Committee requested that Meridian work with RAI’s management in preparing appropriate executive compensation proposals for the Committee’s review and consideration; provide independent, candid advice to the Committee; and help ensure that the Committee receives the information and counsel necessary to make well-informed, reasoned decisions in the best interests of RAI’s shareholders on matters related to executive compensation. For 2011, the Compensation Committee has continued to engage Meridian as its independent compensation consultant.

 

In 2010, the Human Resources department of RAI engaged Hewitt Associates to provide compensation advice on matters pertaining to RAI executives whose compensation is not within the Compensation Committee’s scope of review.

 

In the event management of RAI or its operating subsidiaries desired to retain the same compensation consulting firm retained by the Committee to provide other compensation consulting services for positions at levels below those requiring the approval of the Committee, pursuant to procedures established by the Committee in February 2007, management of RAI and its operating subsidiaries would be required to obtain the prior approval of the Compensation Committee before engaging the same compensation consulting firm if management expected that the fees payable to such firm for consulting services provided at management’s direction would exceed $1 million for such engagement or in the aggregate during any fiscal year. The management of RAI and its operating subsidiaries did not engage Meridian for any compensation consulting services in 2010.

 

In 2010, the Governance Committee also engaged Meridian to assist in the evaluation of the compensation of RAI’s non-employee directors. For 2011, the Governance Committee has continued to engage Meridian for such work.

Compensation Committee Interlocks and Insider Participation .   An SEC rule requires RAI to disclose the existence of certain relationships involving any member of RAI’s Compensation Committee, on the one hand, and RAI, on the other hand. Such relationships, referred to as “compensation committee interlocks and insider participation” include, among other things, where

 

 

During 2010, there were no compensation committee interlocks or insider participation at RAI.

General .   The Governance Committee:

 

Director Nomination Process .   The Board is responsible for selecting its members, subject to shareholder approval and the relevant provisions of the Governance Agreement, but delegates the screening process to the Governance Committee with input from the Chairman of the Board, the Chief Executive Officer (if different from the Chairman of the Board) and the Lead Director (if there is one). The Governance Committee uses the following methods for identifying director nominees, other than incumbent directors being considered for re-election or nominees designated by B&W pursuant to the Governance Agreement:

 

 

In connection with its process of identifying, screening and recommending candidates for Board membership, the Governance Committee evaluates each potential candidate against the qualifications set forth in its committee charter and the Corporate Governance Guidelines, and reviews the appropriate skills and characteristics required of directors in the context of prevailing business conditions and the then-existing composition of the Board. The qualifications considered in the selection of director nominees include the following:

 

 

As stated in the Corporate Governance Guidelines, the objective of the director nomination process is to create a diverse Board that brings to RAI a variety of perspectives and skills derived from high quality business and professional experience. To that end, the Governance Committee considers the business experience and diversity of a candidate when considering director nominees. RAI’s current Board is comprised of four members with extensive experience in the tobacco industry and several other members with experience in consumer goods, finance and regulated industries. The Board’s diversity also is reflected by the fact that it counts a woman, two African Americans and four non-U.S. citizens among its members.

 

Additional policies regarding Board membership, as set forth in the Corporate Governance Guidelines, include the following:

 

 

Incumbent directors are reviewed for suitability for continued service on the Board by the Governance Committee and the full Board prior to their nomination for re-election.

 

Candidates are recommended to the full Board for nomination for election as directors only upon the affirmative vote of a majority of the members of the Governance Committee.

Shareholder Nominations to the Board .   Shareholders may recommend candidates for Board membership by submitting their recommendations in writing to the Office of the Secretary, Reynolds American Inc., P. O. Box 2990, Winston-Salem, North Carolina 27102-2990. The written recommendation must provide the following information:

 

 

The Governance Committee will evaluate any director candidate recommended by a shareholder based upon the facts and circumstances at the time of the receipt of such recommendation. Applicable considerations would include:

 

 

The Governance Committee will not alter the manner in which it evaluates a candidate based on whether the candidate was recommended by a shareholder or otherwise.

 

A shareholder also may nominate a person for election to the Board at the 2012 annual meeting of shareholders by providing notice and the other required information described in RAI’s Bylaws, in writing, to the Office of the Secretary, Reynolds American Inc., P. O. Box 2990, Winston-Salem, North Carolina 27102-2990, for receipt between October 27, 2011, and November 26, 2011. RAI’s Bylaws can be found in the “Governance” section of our web site at www.reynoldsamerican.com or may be obtained, free of charge, from the Office of the Secretary.

 

Under our Corporate Governance Guidelines, and subject to the applicable provisions of the Governance Agreement, the Board elects the Chairman of the Board and the Chief Executive Officer on an annual basis in the manner and based on the criteria that it deems appropriate and in the best interests of RAI and its shareholders given the circumstances at the time of such appointments. Similarly, the Board considers whether the roles of Chairman of the Board and Chief Executive Officer should be separate and whether the Chairman of the Board should be an independent director. In the event the Board decides to separate the roles of the Chairman of the Board and the Chief Executive Officer, and elect one of the independent directors as Non-Executive Chairman, such Non-Executive Chairman is expected to serve for at least three terms in succession. Under our Corporate Governance Guidelines, if the positions of Chairman of the Board and Chief Executive Officer are held by the same person, the independent directors may elect, upon nomination by the Governance Committee, an independent director to serve as Lead Director.

 

From January 1, 2006 until October 31, 2010, Ms. Ivey served as RAI’s Chairman of the Board, President and Chief Executive Officer. From May 6, 2008 until October 31, 2010, Mr. Wajnert served as RAI’s Lead Director. In October 2010, Ms. Ivey announced her retirement from RAI, effective February 28, 2011. At its October 12, 2010 meeting, the Board decided that Ms. Ivey’s retirement would be an opportune time to separate the roles of Chairman of the Board and Chief Executive Officer, and to elect a Non-Executive Chairman. Accordingly, on October 31, 2010, Ms. Ivey resigned as Chairman of the Board (but remained a member of the Board) and was succeeded by Mr. Wajnert as Non-Executive Chairman. On February 28, 2011, Ms. Ivey resigned from the Board and as President and Chief Executive Officer of RAI. She was succeeded as President and Chief Executive Officer by Mr. Delen.

 

The Board believes that the existing leadership structure, under which Mr. Wajnert serves as Non-Executive Chairman, and Mr. Delen serves as President and Chief Executive Officer, is the most appropriate and in the best interests of RAI and its shareholders at this time. Given RAI’s current needs and Mr. Delen’s newness to the Chief Executive Officer position, the Board believes this structure is optimal for RAI: it allows Mr. Delen to focus on the day-to-day operation of the business, in particular the implementation of RAI’s “total tobacco” strategy, while allowing Mr. Wajnert, the former Lead Director, to focus on leadership of the Board, including leading the Board in its review and assessment of the appropriateness of the long-term strategic plan and initiatives of RAI and its operating companies, the opportunities and risks that are inherent in such strategic plan, and the initiatives and risk control plans established to address such risks. Moreover, the Board believes Mr. Wajnert’s service as an independent Non-Executive Chairman will promote the Board’s consideration of diverse viewpoints and will facilitate communication between the Board and management.

 

Although the Board believes that this leadership structure is currently in the best interests of RAI and its shareholders, the Corporate Governance Guidelines provide the Board with the flexibility to elect the same individual to the position of Chairman of the Board and Chief Executive Officer if, in the future, the Board determines that returning to such a leadership structure would be appropriate.

 

The Corporate Governance Guidelines provide that each Board meeting agenda shall include time for an executive session with only directors and the Chief Executive Officer present, and an executive session with only non-employee directors present. In addition, the Corporate Governance Guidelines provide that at the Board meeting following each annual meeting of shareholders, the Board shall have an executive session with only independent directors present. The Non-Executive Chairman, if one has been elected, is responsible for presiding over executive sessions of the non-management directors and the independent directors. If a Lead Director has been appointed, then the Lead Director is responsible for presiding over such executive sessions. In the absence of the Non-Executive Chairman, or the Lead Director if one has been appointed, the Chair of the Governance Committee shall preside over executive sessions of the non-management directors and the independent directors. Similarly, if no Lead Director has been appointed, and the Chairman of the Board is an employee of RAI or a subsidiary of RAI, then the Chair of the Governance Committee shall preside over

executive sessions with only non-employee directors or independent directors present. As noted above, Mr. Wajnert served as Lead Director from May 6, 2008 through October 31, 2010. Effective November 1, 2010, he became the Non-Executive Chairman. Currently, Mr. Powell serves as the Chair of the Governance Committee.

 

During 2010, there were nine meetings of the Board. Each director attended at least 75% of the total meetings of the Board and committees of which he or she was a member. The Corporate Governance Guidelines provide that Board members are expected to attend annual meetings of shareholders, barring unavoidable circumstances that prevent attendance. All of our current directors who were directors on May 7, 2010, attended our annual shareholders’ meeting held on that date.

 

The Board, together with the Audit Committee and Compensation Committee, is primarily responsible for overseeing RAI’s risk management. The Non-Executive Chairman, if one has been elected, is responsible for leading the Board in its risk oversight role, particularly as to governance, critical enterprise, business management, external and reputational risks, and ensuring the Board understands and sets the company’s risk profile. The Non-Executive Chairman, with input from the Governance Committee, also coordinates with the Chairpersons of the Audit Committee and the Compensation Committee to ensure that their respective board committees are overseeing the management of the risks particular to their subject areas and are communicating the material information about such risks to the full Board so that it can view RAI’s risks on a fully integrated basis. On a semi-annual basis, management of RAI and its operating companies, under the direction of RAI’s chief risk officer, identifies and assesses significant risks. Each risk category, as well as the consolidated risk profile, is reviewed and discussed with the full Board or appropriate Board committee, based on the scope of the risk and the expertise needed for oversight. The Board is assigned and directly oversees risks that could have a broad impact on RAI, strategic risks, as well as any risk that could threaten a key growth strategy. The Compensation Committee is assigned and oversees risks that may require its specific expertise, such as human resources risks or compensation risks. Consistent with NYSE regulations, the Audit Committee is assigned and oversees management’s processes to identify, assess and manage risks. Additionally, the Audit Committee oversees risks that may require its specific expertise, such as financial reporting risks, as well as other risks that do not fit into one of the foregoing categories.

 

Although the Board and its committees oversee RAI’s risk management strategy, management is responsible for implementing and supervising day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks faced by RAI. At meetings of the Board, the Audit Committee or the Compensation Committee, as applicable, management reports on the specific categories of risk for which the Board or such committee is responsible. In particular, management discusses its assessment of and strategy for managing each category of risk. Each of the Audit Committee and the Compensation Committee also regularly reports to the Board with respect to the risk categories it oversees. These ongoing discussions enable the Board, the Audit Committee and the Compensation Committee to monitor RAI’s exposure to and mitigation of risk.

 

The existing Board leadership structure encourages communication between management, including the Chief Executive Officer and President, on the one hand, and the non-management directors, including the Non-Executive Chairman or Lead Director, as applicable, on the other hand. By fostering increased communication, we believe that the current Board leadership structure leads to the identification and implementation of effective risk management strategies.

 

We provide to our non-employee directors (other than Messrs. Daly, Durante and Withington, all of whom were full-time employees of BAT during 2010) compensation for their service on the Board in the form of retainers and meeting fees, and certain equity awards, all as described in greater detail below. See “— Payment for Services of Certain Board Designees” below for a discussion of the compensation RAI pays to BAT for the service of Messrs. Daly, Durante and Withington as directors of RAI. Our non-employee directors (other than Messrs. Daly and Withington, and while he was a director, Mr. Durante) are collectively referred to as Outside Directors. RAI does not compensate any director who is an employee of RAI or any of its subsidiaries in his or her capacity as a director, except that RAI does reimburse all directors for actual expenses incurred in connection with attendance at Board and committee meetings, including transportation, food and lodging expenses. If a guest accompanies a director on a trip to a Board meeting and the guest was not invited by RAI, then charges associated with that guest will not be reimbursed by RAI. Transportation, food and lodging expenses that are incurred by a guest and paid for by RAI will be imputed as income to the director. RAI also reimburses Outside Directors for the fees and expenses incurred by them in connection with their attendance at one director education program per year.

 

The Governance Committee, with the assistance of an outside compensation consultant, periodically evaluates and recommends to the full Board changes to the compensation program for RAI’s non-employee directors. In 2010, the Governance Committee used Meridian to evaluate and provide recommendations regarding the compensation program for the non-employee directors and the Non-Executive Chairman. No executive officer is involved in approving, or recommending changes to, any elements of the director compensation program.

 

The following table shows the annual compensation paid by RAI to the Outside Directors for their service on the Board during 2010.

 

2010 Director Compensation Table (1)

 

 

 

 

 

 

 

 

 

 

Under the Amended and Restated Deferred Compensation Plan for Directors of Reynolds American Inc., referred to as the DCP, Outside Directors may defer payment of their retainers and meeting fees until termination of service as a director or until a selected year in the future. Participating directors may elect, on an annual basis, to direct RAI to defer their retainers and meeting attendance fees in 25% increments to a cash account, a stock account or a combination of both. The plan provides that amounts deferred to a cash account earn interest at the prime rate as set by JPMorgan Chase Bank, and amounts deferred to a stock account mirror the performance of, and receive dividend equivalents based on, RAI common stock. Participating directors are entitled to receive a distribution, only in the form of cash, of their account balances either in full on the deferral date or in up to ten annual installments commencing on a selected future date.

 

RAI provides its Outside Directors with certain stock-based awards pursuant to the terms of the EIAP. Upon election to the Board, an Outside Director receives under the EIAP an initial grant of 3,500 deferred stock units or, at the director’s election, 3,500 shares of RAI common stock. Upon appointment as a Non-Executive Chairman of the Board, such director receives a grant of 3,500 deferred stock units or, at such person’s election, 3,500 shares of RAI common stock, so long as such director previously did not receive an initial grant upon his or her election to the Board. In addition, pursuant to the EIAP, prior to November 2010, each Outside Director received on the date of each annual meeting of shareholders (provided the Outside Director remained on the Board after the date of such meeting), a grant of 2,000 (or, in the case of a Non-Executive Chairman of the Board, 4,000) deferred stock units or, at the director’s election, 2,000 (or, in the case of a Non-Executive Chairman, 4,000) shares of RAI common stock. Pursuant to the anti-dilution provisions of the EIAP, as a result of RAI’s two-for-one split of its common stock effected in November 2010, referred to as the Stock Split, the number of deferred stock units and shares of common stock referenced in the preceding sentence were doubled. If RAI does not hold an annual meeting of shareholders in any year, then the annual award under the EIAP will be made to Outside Directors on the anniversary of the preceding year’s annual meeting of shareholders. Shares of RAI common stock awarded to Outside Directors in lieu of deferred stock units upon a director’s initial award or any annual award under the EIAP will not bear any transfer restrictions, other than any restrictions arising generally by virtue of federal and state securities laws. Each Outside Director also is entitled to receive a quarterly award of deferred stock units on the last day of each calendar quarter, with the number of units being equal to: $10,000 (or, in the case of a Non-Executive Chairman of the Board, $20,000) divided by the average closing price of a share of RAI common stock for each business day during the last month of such calendar quarter. If a director has served for less than the entire quarter, the number of units granted will be prorated based upon the period of such person’s actual Board service during the quarter.

 

The deferred stock units granted under the EIAP receive dividends at the same rate as RAI common stock, but the dividends are credited in the form of additional deferred stock units. The deferred stock units have no voting rights. For all grants made under the EIAP on or prior to December 31, 2007, distribution of a director’s deferred stock units will be made on (or commencing on) January 2 following his or her last year of service on the Board. For all grants under the EIAP after December 31, 2007, distribution of a director’s deferred stock units will be made in accordance with such director’s election(s) to receive his or her deferred stock units (1) on (or commencing on) January 2 following his or her last year of service on the Board, or (2) on (or commencing on) the later of January 2 of a year specified by such director and January 2 following his or her last year of service on the Board. At the election of the director, distributions may be made in one lump sum or in up to 10 annual installments. At the election of the director, the payment of the initial and annual deferred stock unit grants may be made in cash or in RAI common stock, which shares of stock will not bear transfer restrictions other than any restrictions arising generally by virtue of federal and state securities laws. Distribution of the deferred stock units received in connection with a quarterly award will be made only in cash. Cash distributions of deferred stock units generally are based on the average closing price of RAI common stock during December of the year preceding payment. Notwithstanding the foregoing, upon the death of a participating director (whether before or after ceasing to serve as a director), any deferred stock

units then outstanding in such director’s account will be distributed in a single lump sum cash amount to the director’s designated beneficiary or estate, as the case may be. Such distribution will be made after the end of the quarter in which the plan administrator is notified of the participant’s death and will be based upon the average closing price of RAI common stock during that month.

 

An aggregate of 2,000,000 shares of RAI common stock have been authorized for issuance under the EIAP. Shares relating to awards under the EIAP that are forfeited, terminated or settled in cash in lieu of stock will become available for future grants. The EIAP also affords its administrator, the Governance Committee, the discretion to grant Outside Directors options to acquire shares of RAI common stock. Any such options will have an exercise price equal to the per share closing price of RAI common stock on the date of grant, will vest and become exercisable in full six months after the date of grant and will have a ten-year term. No options were granted to Outside Directors in 2010, and no options currently are held by Outside Directors under the EIAP.

 

Matching Grants Program .   All Outside Directors are eligible to participate in a matching grants program sponsored by RAI and the Reynolds American Foundation. Pursuant to this program, RAI or the Reynolds American Foundation will match grants, on a one-for-one basis, that a director makes to an educational, art, cultural or charitable organization. The maximum, aggregate annual amount of the matching grants for each director is $10,000. The Reynolds American Foundation will provide a matching grant up to the first $4,000, and RAI will provide a matching grant up to the next $6,000, for each qualifying contribution made by an Outside Director. A director may participate in the matching grants program through the end of the calendar year in which the director terminates his or her service on the Board.

 

In consideration for the service of the two BAT employee directors on the Board, referred to as the BAT employee directors, RAI pays BAT an annual fee, paid on a quarterly basis, per director. Such amounts are paid to BAT in lieu of any other compensation (other than the reimbursement of certain expenses) to which

the BAT employee directors otherwise would be entitled in their capacities as members of RAI’s Board. For 2010, the amount of the annual fee for each of the two BAT employee directors was $215,020. As previously noted, Mr. Durante resigned from the Board on December 1, 2010 (at which time Mr. Daly commenced his service as a BAT employee director on the Board). For 2011, the annual fee for the Board service of each of Messrs. Daly and Withington will be $237,220.

 

After completion of five years of service as a member of RAI’s Board of Directors, each Outside Director is expected to hold and retain a minimum of 20,000 shares of RAI common stock. It is generally expected that a director will not dispose of RAI common stock during the first five years of service on the Board, unless the director holds and retains RAI common stock in excess of the minimum threshold level of 20,000 shares. For purposes of the foregoing ownership guidelines, RAI common stock includes:

 

 

These stock ownership guidelines do not apply to any director who is also an officer or employee of BAT so long as such director does not participate in any equity compensation plan made available to RAI’s non-employee directors. All directors with at least five years of service currently hold amounts in excess of the minimum threshold level, and those directors with less than five years of service are making progress in meeting the five-year minimum threshold goals.

 

RAI has adopted a Code of Conduct that applies to all directors, officers and employees of RAI and its subsidiaries, including RAI’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. All directors, officers and employees annually complete a certification of compliance with the Code of Conduct. The Code of Conduct is intended to constitute a “code of ethics” within the meaning of Item 406(b) of Regulation S-K. Any amendment to, or waiver from, a provision of RAI’s Code of Conduct (other than technical, administrative or other non-substantive amendments) that applies to any director or executive officer of RAI will be disclosed on our web site at www.reynoldsamerican.com , by distributing a press release or by filing a current report on Form 8-K with the SEC within four business days following the amendment or waiver. The Code of Conduct can be found in the “Governance” section of our web site at www.reynoldsamerican.com , or can be requested, free of charge, by writing to the Office of the Secretary, Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990.

 

Shareholders and other interested parties may communicate directly with the Board or individual members of the Board by submitting written correspondence to Reynolds American Inc., P.O. Box 2990, Winston-Salem, North Carolina 27102-2990. Shareholders and other interested parties may communicate directly with the non-management directors as a group by writing to the Non-Executive Chairman, if one has been elected, or if a Non-Executive Chairman has not been elected, to the Lead Director, or if a Lead Director has not been appointed, to the Chair of the Governance Committee at the foregoing address. Additional information on our procedures for the handling of communications from our shareholders and other interested parties is contained in our Corporate Governance Guidelines, which can be found in the “Governance” section of our web site at www.reynoldsamerican.com .

Stock Ownership of Principal Shareholders

 

We have been notified by the persons in the following table that they are beneficial owners (as defined by the rules of the SEC) of more than 5% of RAI common stock.

 

 

 

 

 

The following table indicates the number of shares of RAI common stock beneficially owned as of March 14, 2011, by each current director, each named executive officer and all directors and executive officers as a group, based on information provided to RAI by these individuals. In general, “beneficial ownership” includes those shares a director or executive officer has the power to vote, or the power to transfer, and stock options that are exercisable currently or become exercisable within 60 days. Except as described in the footnotes to the table, each person has sole investment and voting power over the shares for which he or she is shown as beneficial owner.

 

 

 

 

 

In addition to provisions relating to the nomination and election of directors to RAI’s Board, the Governance Agreement, among other things, prohibits BAT and its subsidiaries from acquiring, or making a proposal to acquire, beneficial ownership of additional shares of RAI common stock until the earlier of July 30, 2014 (the tenth anniversary of the Governance Agreement) and the date on which a significant transaction is consummated (such period is referred to as the Standstill Period). For purposes of the Governance Agreement, a significant transaction means any sale, merger, acquisition or other business combination involving RAI or its subsidiaries pursuant to which more than 30% of the voting power or the total assets of RAI would be received by any person or group. Under the Governance Agreement, BAT and its subsidiaries also are prohibited during the Standstill Period from taking certain actions, including, without limitation, participating in certain proxy solicitations with respect to RAI common stock and seeking additional representation on RAI’s Board. The Governance Agreement provides several exceptions to the foregoing prohibitions, including, without limitation, permitting BAT and its subsidiaries to acquire additional shares of RAI common stock in connection with certain BAT counteroffers made in response to a third party’s offer to enter into a significant transaction involving RAI.

 

The Governance Agreement also restricts the ability of BAT and its subsidiaries to sell or transfer shares of RAI common stock. Specifically, during the term of the Governance Agreement, BAT and its subsidiaries may not:

 

 

Notwithstanding these restrictions, B&W may transfer any of its shares of RAI common stock to BAT or its subsidiaries, and any such transferee may make similar transfers, provided the transferee agrees to be bound by the terms of the Governance Agreement and, provided further, that all shares of RAI common stock held by B&W and a permitted transferee will be taken into account for purposes of calculating any ownership thresholds applicable to B&W and/or its affiliates under the Governance Agreement. The Governance Agreement will terminate upon the occurrence of various events, including, without limitation, B&W’s ownership interest in RAI falling below 15%, and the election by BAT and B&W to terminate the Governance Agreement, which election may be made in the event of RAI’s material breach of certain provisions of the Governance Agreement (and RAI’s failure to cure such breach in a timely manner). In other cases, each of BAT and B&W, on the one hand, and RAI, on the other hand, may terminate certain provisions of the Governance Agreement upon the material breach of the Governance Agreement by the other (subject to the breaching party’s right to cure the breach in a timely manner), except that other provisions of the Governance Agreement will remain in effect.

In addition to the provisions of the Governance Agreement described in the preceding three paragraphs and under the heading “The Board of Directors” above, the Governance Agreement also grants BAT and its subsidiaries the right to have shares of RAI common stock held by them to be registered under the securities laws in certain circumstances, requires the approval of a majority of the directors designated by B&W to authorize certain issuances or repurchases of RAI securities, and requires the approval of B&W, as a shareholder of RAI, for RAI to effect certain transactions.

 

A copy of the Governance Agreement and Amendments No. 1 and No. 2 to the Governance Agreement are included as Exhibits 10.8, 10.9 and 10.10, respectively, to our 2010 Annual Report on Form 10-K.

 

Section 16(a) of the Exchange Act requires RAI’s directors and executive officers, and any persons holding more than 10% of RAI’s equity securities, to file with the SEC reports disclosing their initial ownership of RAI’s equity securities, as well as subsequent reports disclosing changes in such ownership. To RAI’s knowledge, based solely on a review of such reports furnished to it and written representations by certain reporting persons that no other reports were required, during the 2010 fiscal year, RAI’s directors, executive officers and greater than 10% beneficial owners complied with all Section 16(a) filing requirements.

Executive Compensation

 

The Board’s Compensation Committee, comprised solely of independent directors, is responsible for structuring and administering the compensation programs and plans in which named executive officers participate. Information regarding the Compensation Committee’s other duties, responsibilities and activities is set forth above under “Committees and Meetings of the Board of Directors — Compensation and Leadership Development Committee — General.” The table below lists the name, title and employer of each of our named executive officers for 2010:

 

 

 

 

RAI’s executive compensation program is structured to “pay for performance” upon achievement of annual and long-term performance goals designed to enhance shareholder value. In a year of economic and industry-related challenges, RAI and its operating companies delivered excellent performance, driving higher earnings and margins, and allowing us to return substantial value to our shareholders. In 2010, the successful execution of our business strategies focused on growth brand performance, while improving productivity and efficiency, resulted in growth in operating income, net income and earnings per share over 2009. Strong marketplace performance in 2010 saw us exceed all but one of our market share and volume targets and increase market share for all four key brands — Camel, Pall Mall, Grizzly and Natural American Spirit. Our ongoing commitment to enhance shareholder value was further demonstrated in a dividend increase of 8.9%, a two-for-one stock split and an increase in our dividend payout target from 75% to 80% of our net income.

 

For 2010, our named executive officers earned the following compensation based on Compensation Committee decisions after consideration of our strong performance against pre-established company goals and objectives:

 

 

 

In addition, our named executive officers own a significant amount of RAI common stock because of our stock ownership guidelines and have three years of outstanding long-term incentive grants that will pay out in RAI common stock. The value of these current and future shareholdings rose and fell in the same way and with the same impact that share value rose and fell for our other shareholders in 2010.

 

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

 

Our executive compensation programs serve two primary objectives — to attract, motivate, and retain exceptional management talent, and to reward our management for strong performance and the successful execution of our business plans and strategies. Consistent with these objectives, a meaningful portion of the annual compensation, and all of the long-term compensation, of each named executive officer is variable, or “at risk,” in that the receipt or value of that compensation depends upon the attainment of specific performance goals by RAI and/or its operating subsidiaries. This compensation structure aligns management’s interests with the long-term interests of our shareholders. In addition, our executive compensation programs are designed to provide adequate incentives to overcome the reluctance that some people may have to work in a controversial industry, such as the tobacco industry.

 

The Compensation Committee engages an independent compensation consultant who provides advice and counsel and reports directly to the Committee. In 2010, this consultant was Meridian Compensation Partners, LLC, referred to as Meridian. Throughout 2010, at the Compensation Committee’s direction, Meridian prepared, presented and made recommendations on peer group data, competitive market pay, compensation program structure and risk management, compensation components, general market trends and legislative and regulatory changes, which recommendations the Committee used in its compensation decision making process. In addition, at the Compensation Committee’s direction, management provided all materials prepared for Compensation Committee meetings to Meridian, and discussed the materials and recommendations with Meridian, in advance of each Compensation Committee meeting. A representative of Meridian attended each regular meeting of the Compensation Committee in 2010 and, at each such meeting, met with the Committee in executive session without management present at both the beginning and end of the meeting. Information regarding the Compensation Committee’s policy governing management’s use of compensation consultants is set forth above under “Committees and Meetings of the Board of Directors — Compensation and Leadership Development Committee — Compensation Consultants.”

 

In evaluating and determining appropriate levels of base salary and annual and long-term incentives for our named executive officers, the Compensation Committee annually reviews competitive peer group information showing the compensation paid to executives holding similar positions at a peer group of companies. The peer group used by the Compensation Committee for 2010 continued to consist of a combination of those companies that compete directly with our operating subsidiaries in the tobacco business — Altria Group, Inc., Lorillard, Inc. and Phillip Morris International Inc. — and certain companies outside of the tobacco industry that sell brand-focused consumer products and have annual revenues ranging from one-half to two times that of RAI. RAI’s revenues for 2009 were $8.4 billion, an amount that was between the overall peer group’s median annual revenues of $8.0 billion and average annual revenues of $9.8 billion. The peer group represents those companies, in terms of industry and relative revenue size, that RAI and its operating subsidiaries were most likely to compete against for senior executive talent in 2010.

 

In the fourth quarter of 2009, at the Compensation Committee’s direction, its independent compensation consultant reviewed and updated the 2009 peer group, using information from Hewitt Associate’s Total Compensation Measurement ^tm DataBase, to ensure that each of the companies continued to meet the Committee’s criteria for inclusion in the comparator group. For 2010, UST, Inc. and Wm. Wrigley Jr. Company were eliminated from the peer group as a result of being acquired by Altria Group, Inc. and Mars, Incorporated, respectively.

 

The peer group used by the Compensation Committee for its 2010 compensation decisions consisted of the following 33 companies operating in the food, beverage, tobacco or consumer products industries:

 

 

As in prior years, in September 2009 the Compensation Committee reviewed tally sheets for each of our named executive officers as part of its annual review of RAI’s executive compensation program. These tally sheets, prepared at the direction of the Compensation Committee by its independent compensation consultant with assistance from management, summarized for each such executive officer:

 

 

The tally sheets were updated in February and September of 2010 to reflect any changes resulting from any interim compensation actions, including promotions, salary adjustments and the proposed 2010 merit increases. The bi-annual reviews show the Compensation Committee the cumulative effect in value of its various executive compensation decisions, help the Committee see how making a change in one compensation program or element may impact another compensation program or element or an executive officer’s overall compensation, and prevent the Committee from making compensation decisions in isolation. In addition, the tally sheets help the Compensation Committee see the impact of stock price changes and performance leverage on the value of the long-term incentives and provide perspective on wealth accumulation from our compensation programs and the company’s obligations in the event of terminations of employment under various scenarios. After consideration of all the information, the Compensation Committee determined that our executive compensation program as it applied to each of the named executive officers continued to be consistent with our compensation objectives and made no material changes to the overall structure of the program or any individual element of pay.

 

Management plays an important but limited role in the process of setting the executive compensation for our named executive officers. Our Chief Executive Officer, with assistance from the Executive Vice President and Chief Human Resources Officer, and in consultation with the Compensation Committee’s independent consultant, develops compensation recommendations for the Committee’s consideration, including:

 

 

Our Chief Executive Officer also has an indirect role in determining the annual base salary merit increase for the other named executive officers by assigning each of them an individual annual performance rating. As discussed below, the amount of each named executive officer’s proposed base salary merit increase for the next year is determined based on his or her individual performance rating category and the specific merit increase amount for that rating category. The independent members of the Board, or the Compensation Committee for Mr. Payne, must then approve the proposed base salary increases for such named executive officers. As discussed below, the compensation of our Chief Executive Officer is determined by the Compensation Committee, after consultation with its independent compensation consultant, and recommended to the Board for approval. No executive officer has any role in determining the compensation of the Chief Executive Officer.

 

The structure, material components and objectives of our compensation program for the named executive officers did not materially change from 2009 to 2010. The Compensation Committee again designed the program to focus our named executive officers on achieving our short-term and long-term financial and strategic goals, and increasing shareholder value, while limiting excessive risk taking. The material components of the 2010 compensation program consisted of annual base pay and perquisites, an annual cash incentive, long-term incentive compensation, severance benefits payable under certain termination circumstances and retirement benefits. The 2010 compensation decisions related to each of these components is discussed and analyzed below, together with information about RAI’s other compensation policies and practices.

General .   We pay base salary because it is a standard element of pay for executive positions and is required for talent attraction and retention. When determining the annual base salary for each of our executive officers when he or she is first hired as, or promoted to become, an executive officer, we generally target the officer’s salary at the 50th percentile of those persons in the peer group holding a comparable position to provide competitive pay. We also consider the person’s experience and, in the case of a new hire, whether such person is employed elsewhere (and, if so, at what rate) when deciding to establish an executive officer’s initial salary either above or below the 50th percentile of the comparable peer group position.

 

The Compensation Committee approves the initial base salary for all executive officers at the senior vice president level and above, except for RAI’s Chief Executive Officer, Chief Financial Officer, General Counsel and RJR Tobacco’s President, which positions’ initial base salaries require the approval of the independent members of the Board based on the Committee’s recommendation. After an executive officer’s base salary is first set, he or she, like all other employees, is eligible to receive an annual base salary merit increase based on his or her individual performance rating in the same manner and under the same merit increase table generally applicable to all employees of RAI and its subsidiaries, as described below.

2010 Base Salary Decisions .   Each of our employees, including our named executive officers, established individual objectives for 2009 that were consistent with our fundamental core values (principled, creative, dynamic and passionate behavior) and our strategic and operational goals for the year. In February 2010, the Compensation Committee, with input from the Board, evaluated the performance of Ms. Ivey as to her individual objectives, and Ms. Ivey evaluated the performance of the other named executive officers, as to their individual objectives. Based on these evaluations, the Compensation Committee, in the case of Ms. Ivey, and Ms. Ivey, in the case of the other named officers, assigned the named executive officer a performance rating in one of five categories set forth below. In each case the assigned performance rating was not the result of any specific formulaic process or mathematical calculation. Instead, the Compensation Committee’s or Ms. Ivey’s subjective assessment of each named executive officer’s overall performance on his or her individual objectives during the year, rather than a calculated amount for each objective, drove the determination of the performance ratings. Depending on each named executive officer’s performance rating, he or she was eligible to receive a base salary merit increase, effective April 1, 2010, based on the following merit increase table approved by the Compensation Committee:

 

 

Under this merit increase table, all employees, including the named executive officers, receiving a rating in a particular category received the same merit increase. For 2010, management reviewed a market outlook and projected 2010 merit increase budget data for the food, beverage and tobacco industries in general. After reviewing such information and the company’s business outlook for 2010, management recommended, and the Committee approved, a target merit increase of 3.0%, an amount consistent with the median data for our industry and the same target merit increase as used in 2009.

 

Each named executive officer’s 2009 performance rating, merit increase factor (expressed as a percentage of such officer’s base salary immediately prior to such increase), 2010 base salary merit increase and 2010 base salary, effective April 1, 2010, as approved by the Board and Compensation Committee, are shown in the table below:

 

 

 

Salary Increase Limitations .   To ensure that base salary levels do not become too costly and do not escalate above a range that is competitive in the market, we generally impose a cap on the amount of the annual base salary of any salaried employee, including the base salary of any named executive officer. If the increase in annual base salary resulting from the annual merit review process, a change in responsibilities or a promotion would cause the base salary to exceed the 65th percentile for those persons in the peer group holding a comparable position, then the employee or named executive officer will receive (in the pay period immediately following the effective date of the increase) the amount of such excess in a lump sum cash payment. Any such lump sum cash payment is not taken into account for purposes of calculating amounts payable under the annual incentive plan, described below, but is considered in determining benefits under other plans, such as our defined contribution and defined benefit plans.

 

For 2010, Ms. Ivey’s base salary prior to any merit increase exceeded the 65th percentile cap. As a result, her entire 2010 merit increase was paid to her in the form of a lump sum. The 2010 merit increases for Messrs. Delen and Payne placed each of them above the 65th percentile cap for their respective positions and, as a result, the following portions of their 2010 merit increases in excess of the cap were paid to them in a lump sum: $25,800 for Mr. Delen and $600 for Mr. Payne.

Overview of Annual Incentive Opportunity .   A significant portion of each named executive officer’s annual compensation is linked directly to the attainment of specific corporate financial and operating targets. We believe that the named executive officers holding positions giving them the authority to make critical decisions affecting the overall performance of RAI should have a material percentage of their annual compensation contingent upon the performance of RAI and/or its operating subsidiaries. Moreover, the greater the responsibilities a particular named executive officer has, the greater his or her annual cash incentive opportunity should be.

 

The named executive officers’ annual cash incentives and annual base salaries, together, are targeted at the mid-point between the 50th and 75th percentiles of the peer group. The Compensation Committee and management believe that targeting to this level is consistent with our competitors in the tobacco industry and allows RAI to be competitive in the marketplace for executive talent. Further, in evaluating whether RAI’s annual incentive (or any other element of RAI’s executive compensation program) provides an adequate inducement to attract and retain highly qualified executive talent, the Compensation Committee is mindful of the reluctance that certain persons may have to work for RAI or its operating subsidiaries given the decline in the social acceptability of smoking and the controversial nature of the tobacco industry.

 

Each named executive officer is eligible to receive an annual cash incentive based on a target incentive opportunity expressed as a percentage of base salary, but the actual annual incentive payout may be higher or lower than the targeted amount, as explained in further detail below.

Annual Incentive for Named Executive Officers .   In 2010, the annual incentive cash opportunity for a specific group of executive officers, including the named executive officers, was provided under the shareholder-approved Omnibus Plan in order to allow us to take advantage of certain tax deductions for performance-based compensation under Section 162(m) of the Code. See “Other Compensation Policies — Deductibility of Compensation” below for additional information about our philosophy on structuring our executive compensation for tax purposes.

 

For 2010, our annual incentive program for our named executive officers involved a maximum performance metric based on our cash net income results for the year and designed to meet the requirements for qualified performance-based compensation under the Code. Achievement of the maximum performance metric established a maximum limitation on the dollar amount of the annual cash incentive that could be paid to each named executive officer for the 2010 performance period (specifically by establishing a maximum award pool that could be paid to each named executive officer). The Compensation Committee, using “negative discretion,” then paid a reduced annual cash incentive to each named executive officer after considering the performance of RAI and its operating companies measured by a set of underlying performance

metrics and targets designed to reflect in more detail the degree to which we achieved our specific business goals for the year.

2010 Annual Incentives .   In February 2010, the Board and Compensation Committee approved a performance formula based on RAI’s cash net income (which performance metric was previously approved by RAI’s shareholders) for determining the maximum annual incentive award pool for each named executive officer under the Omnibus Plan for 2010. Under the formula, the award pool for each of the named executive officers was determined based on the following percentages of RAI’s cash net income: Ms. Ivey = 0.40%; Mr. Adams = 0.15%; Mr. Delen = 0.20%; Ms. Lambeth = 0.15%; and Mr. Payne = 0.15%. For purposes of determining such award pools, the term “cash net income” means net income from continuing operations in the consolidated statement of income adjusted to eliminate the impact of non-cash items, such as depreciation, amortization, unrealized gains and losses, intangible asset impairments and other non-cash gains/losses included in net income (as reported in RAI’s 2010 Annual Report on Form 10-K). The maximum annual incentive payout that any named executive officer could receive for 2010 was limited to the award pool determined based on RAI’s 2010 cash net income and any award limitations contained in the Omnibus Plan.

 

In February 2010, the Board and Compensation Committee also approved the 2010 target annual incentive opportunity, denominated as a percentage of annual base salary, for each of the named executive officers. In contrast to the cash net income award pools established to set the maximum annual incentive payout amount for each named executive officer, the target annual incentive opportunity represented the value of the annual cash incentive that the Board and Compensation Committee expected, as of the beginning of the performance period, to pay out for target company performance during the performance period. The 2010 target annual incentive opportunity, expressed as a percentage of annual base salary and a dollar amount, for each of the named executive officers is set forth below under “— 2010 Annual Incentive Payouts.”

Overview of 2010 Underlying Performance Metrics .   For 2010, the Compensation Committee used the annual incentive performance metrics, referred to as the underlying performance metrics, set forth in the table below to guide its decisions on whether to use negative discretion to reduce the annual incentive awards based on the cash net income maximum award pools because such performance metrics were reflective of the overall performance of RAI and its operating companies and were believed to have a positive correlation with shareholder returns.

The table below summarizes the underlying performance metrics, and RAI’s performance on such metrics, considered by the Compensation Committee in determining the final annual incentive award payouts for the named executive officers for 2010.

 

 

 

Rationale for 2010 Underlying Performance Metrics .   For 2010, we used the same set of underlying performance metrics for employees of RAI and all of its operating companies in order to focus the entire organization on overall financial and marketplace performance and to further align the annual incentive program with the interests of RAI’s shareholders.

 

The 2010 annual incentive program continued to place significant emphasis on financial metrics tied to RAI’s overall earnings: operating income and net income. Although the combined weighting of these two financial metrics was reduced slightly for 2010, from 60% to 50%, the continued emphasis on operating

income and net income reflected the company’s focus on increasing profitability in its operating companies and the importance of creating shareholder value as such measures help to drive RAI’s common stock price. The net income measure also has a direct impact on the amount of dividends paid to RAI’s shareholders, given the Board’s stated policy of returning approximately 80% of RAI’s net income to shareholders in the form of dividends.

 

An increase in the combined weighting of RAI’s marketplace metrics — market share and shipment volume — from 40% to 50% reflected the company’s continuing focus on the key strategic growth areas for its operating companies. Since RJR Tobacco’s business is dependent on the U.S. cigarette business, and cigarette consumption in the U.S. has been declining and is expected to continue to decline, increasing the market share of its two growth brands remains a key factor to RJR Tobacco’s, and thus RAI’s, future success, and is a key element in RJR Tobacco’s brand portfolio strategy. Consistent with that strategy, the market share metrics continued to include RJR Tobacco’s two growth brands: Camel (including Camel smoke-free tobacco products) and Pall Mall, along with Total RJR Tobacco. For 2010, the Compensation Committee also continued to believe it was appropriate to include metrics relating to the performance of American Snuff Company, LLC (formerly known as Conwood Company, LLC), collectively with its affiliated companies referred to as ASC, and Santa Fe Natural Tobacco Company, Inc., referred to as SFNTC, for the following reasons: in the case of ASC, because of the significance moist snuff products have in connection with RAI’s strategy to become a total tobacco company; and in the case of SFNTC, because of the significance Natural American Spirit, a brand sold by SFNTC and referred to as NAS, has in connection with RAI’s strategy of promoting premium tobacco brands.

Performance Against 2010 Underlying Performance Metrics .   The 2010 thresholds, targets and maximums on the scoring grids (shown in the table above) for the underlying performance metrics were set based on management’s 2010 business plan and the past performance of RAI and its operating subsidiaries, and approved by the Compensation Committee in February 2010. Each target was established based upon the belief that the likelihood of actual performance exceeding the target was the same as the likelihood of actual performance not reaching the target. The foregoing approach strikes a proper balance, as a particular target should be set high enough so that executives are rewarded for achieving a level of performance that requires considerable collective effort, but not so unrealistically high that the compensation program ceases to be an effective incentive device.

 

For 2010, the targets for RAI’s operating income and net income were $2,518 million and $1,429 million, respectively, and the threshold and maximum for both metrics were set at 20% below and 20% above their respective targets. Although the preceding table does not include the 2010 actual market share and shipment volume targets, thresholds and maximums, given the competitively sensitive nature of that information, the 2010 market share targets for RJR Tobacco’s growth brands, Camel and Pall Mall, and ASC’s moist snuff and the shipment volume target for NAS, were set at or above the actual market share or shipment volume, as the case may be, achieved by each such performance metric in 2009. The target for Pall Mall, in particular, represented a significant increase over the 2009 market share. While RJR Tobacco’s cigarette brands, collectively, have experienced declining market share for several years, RJR Tobacco’s current brand portfolio strategy has addressed such decline by focusing on the long-term market share growth of its growth brands while managing its support brands for long-term sustainability and profitability. As a result of that strategy, the 2010 market share target for Total RJR Tobacco also represented an increase from the actual 2009 market share.

 

RAI’s 2010 adjusted operating income, reflecting the exclusions described above, of $2,549 million was above target. Similarly, RAI’s 2010 adjusted net income, reflecting the exclusions described above, of $1,456 million was above target. Camel’s 2010 market share performance was significantly above target, primarily due to share growth in Camel menthol. While Pall Mall’s 2010 market share performance was slightly below target due to an aggressive target, the brand’s performance represented a significant increase over its 2009 market share. Total RJR Tobacco’s 2010 market share performance also was slightly above target. The 2010 market share performance for ASC moist snuff was slightly above target, and the 2010 NAS shipment volume performance was significantly above target. Based on these results, the 2010 annual incentive score was 108%.

After a year-end review of the overall performance of RAI and its operating companies, which in the past has resulted in the Compensation Committee approving the discretionary reduction of annual incentive payouts, the Committee approved a discretionary addition to the 2010 annual incentive payout score of 10 percentage points for all plan participants in recognition of the significant marketplace accomplishments of RAI and the operating companies not already captured by the performance metrics under the annual incentive program, including increased market share for all four key growth brands and Pall Mall’s market leading growth. The 2010 annual incentive program final payout score was 118%.

2010 Annual Incentive Payouts .   At its February 2011 meeting, the Compensation Committee approved the annual incentive award pools generated by the pre-established performance formulas established for each named executive officer based on RAI’s 2010 cash net income of $1.5 billion. These award pools were the absolute maximum limitations on the dollar value of awards earned for the 2010 performance period. The Committee then exercised negative discretion to reduce the amount of the annual incentive cash award for each named executive officer and determined a final, actual annual cash incentive payout after consideration of the 2010 performance of RAI and its operating companies, as measured by the underlying performance metrics described above.

 

The table below shows each named executive officer’s annual incentive target (expressed as a percentage of 2010 base salary and in dollars) and the actual annual incentive payout (expressed as a percentage of annual incentive target, 2010 base salary and in dollars) for 2010:

 

 

 

 

We have eliminated many of the perquisites that previously had been offered to senior management. In 2010, we continued to provide to Ms. Ivey and Messrs. Adams and Payne an annual supplemental cash payment in lieu of participating in our former perquisites program, as described in more detail in footnote 10 to the 2010 Summary Compensation Table below. These supplemental cash payments are not taken into account in calculating incentives or benefits under any of our plans, including our defined contribution and defined benefit plans. With the exception of certain grandfathered executives, including Ms. Ivey and Messrs. Adams and Payne, RAI ceased providing such annual supplemental payments in 2004. (RAI instead provided non-grandfathered executives such as Ms. Lambeth and Mr. Delen with an annual financial planning allowance of $6,000.) To remain competitive in the market, in 2010, we also made available to our named executive officers and other executives the following other benefits: personal excess liability insurance of up to $10 million; an annual physical examination; and reimbursement of up to $30,000 for the cost of joining a country club. After a review of all perquisites in 2009, the tax gross-ups on the value of the personal excess liability insurance and the annual physical examination were eliminated.

 

Overview of Long-Term Incentive Opportunity .   An effective executive compensation program has an appropriate mix between short-term and long-term incentive compensation. As a result, RAI’s practice has been to award long-term incentive grants with a value dependent upon RAI’s performance over a three-year period, a measurement period commonly used by our peer group companies. The grant date value of long-term incentive grants to each of our named executive officers is targeted to be at the mid-point between the 50th and 75th percentiles of the peer group, with such values denominated as a multiple of the executive’s annual base salary. Targeting to this level is consistent with our competitors in the tobacco industry, allows RAI to be competitive in marketplace for executive talent, and recognizes the need to have incentive targets above the median to attract and retain highly qualified executive talent in the tobacco industry.

 

The Compensation Committee, at its first regularly scheduled meeting of the year, approves long-term incentive grants to key employees, and recommends to the Board for approval long-term incentive grants for RAI’s Chief Executive Officer, Chief Financial Officer, General Counsel and RJR Tobacco’s President. The actual grant date of the long-term incentive awards is generally effective in early March of each year, after the public announcement of RAI’s financial results, and after the filing with the SEC of RAI’s Annual Report on Form 10-K, for the prior year.

Long-Term Incentive for Named Executive Officers .   The 2010 long-term incentive opportunity for the same group of executive officers described under the annual incentive program, including the named executive officers, was provided in the form of three-year performance shares granted under the shareholder-approved Omnibus Plan, which allows us to take advantage of certain tax deductions for performance-based compensation under Section 162(m) of the Code. See “Other Compensation Policies — Deductibility of Compensation” below for additional information about our philosophy on structuring our executive compensation for tax purposes.

 

For 2010, as we described above for our annual incentive awards, the long-term incentive program for our named executive officers involved a maximum performance metric based on our cash net income results for a three-year performance period and designed to meet the requirements for qualified performance-based compensation under the Code. Achievement of the maximum performance metric will establish a maximum limitation on the dollar amount of the long-term incentive that can be paid to each named executive officer for the 2010-2012 performance period (specifically by establishing a maximum award pool for the performance shares that can be earned by each named executive officer). The Compensation Committee, using negative discretion, may then reduce that amount to a lesser actual amount of performance shares for each named executive officer after considering the performance of RAI and its operating companies measured by performance metrics and targets designed to reflect in more detail the degree to which we achieved our specific business goals for the three-year period, all as further discussed below. The reductions in payout values, if any, will not result in any increase in payout values for any other employee.

2010 Long-Term Incentives .    In February 2010, the Board and Compensation Committee approved a performance formula based on RAI’s cash net income for determining the maximum award pool for the performance shares granted to each named executive officer under the Omnibus Plan for 2010. Under the formula, the award pool of performance shares for each of the named executive officers was determined based on the following percentages of RAI’s cumulative cash net income for the 2010-2012 performance period: Ms. Ivey = 0.80%; Mr. Adams = 0.20%; Mr. Delen = 0.30%; Ms. Lambeth = 0.20%; and Mr. Payne = 0.20%. These pools will serve as the maximum limitation on the dollar amount of awards that can be paid to these named executive officers for the 2010-2012 performance period. The term “cash net income” is defined the same as for the annual incentive plan, except it is based on the amounts as reported in RAI’s Annual Reports on Form 10-K for the 2010, 2011 and 2012 fiscal years. The maximum amount of performance shares that any named executive officer can receive at the end of the 2010-2012 performance period also is limited by award limitations contained in the Omnibus Plan.

In February 2010, the Board and Compensation Committee also approved the 2010 target long-term incentive opportunity, denominated as a multiple of the executive’s current annual base salary, for each of the named executive officers. In contrast to the cash net income award pools established to set the maximum performance shares payout amount for each named executive officer, the target long-term incentive opportunity represents the value of long-term equity awards that the Board or Compensation Committee expected, as of the beginning of the performance period, to pay out for target company performance during the three-year performance period. The 2010 target long-term incentive multiples for each of the named executive officers remained unchanged from 2009.

 

The table below provides for each named executive officer the 2010 target long-term incentive opportunity, expressed as a multiple of annual base salary as of March 1, 2010, a dollar amount and a target number of performance shares.

 

 

 

2010 Long-Term Incentive Grants .   In February 2010, the Board and Compensation Committee approved long-term incentive grants under the Omnibus Plan, effective March 1, 2010, to the named executive officers for the January 1, 2010 to December 31, 2012 performance period. The 2010 long-term incentive grants were entirely in the form of performance shares, with the number of performance shares actually earned to be determined at the end of the three-year performance period.

 

The number of performance shares each named executive officer actually will receive, if any, will be determined at the end of the three-year performance period based first on the maximum payout limitation provided by the performance shares award pool generated under the pre-established cash net income formula. Then, the Compensation Committee may use negative discretion to reduce the number of performance shares actually earned to an amount consistent with the average of RAI’s scores under the annual incentive award program for each of the three years of the performance period, but no higher than 150% of target. In addition, if RAI fails to pay cumulative dividends for the three-year performance period of at least $10.80 per share (an amount equal to the dividend paid for the first quarter of the performance period times the number of quarters in the performance period) ($5.40 after the Stock Split), then the number of performance shares earned will be reduced by an amount equal to three times the percentage of the dividend underpayment for the three-year performance period, up to a maximum performance share reduction of 50%. Subject to the foregoing, the performance shares generally will vest on March 1, 2013, and will be paid in the form of shares of RAI common stock. At the time the performance shares vest, each grantee, including the named executive officers, also will receive a cash dividend equivalent payment equal to the aggregate amount of dividends per share declared and paid to RAI’s shareholders on RAI common stock during the period from the beginning of the performance period through the payment of the performance shares, multiplied by the number of performance shares actually earned by the grantee after the performance adjustments. For more information about the 2010 long-term incentive grants, see the narrative under the heading “ 2010 Long-Term Incentives ” following the 2010 Grants of Plan-Based Awards Table below.

Awarding long-term incentive compensation entirely in performance shares that are subject to the above conditions aligns the interests of senior management with long-term shareholder interests by:

 

 

Given the ever-changing regulatory environment faced by RAI’s operating companies, it has become increasingly difficult to make a projection of RAI’s earnings per share, referred to as EPS, three years into the future. The use of RAI’s annual incentive scores as the performance measure for participants in the long-term incentive program, including the executives of RAI’s operating subsidiaries, also ensures a unified focus on RAI’s overall performance.

 

During 2010, each of the named executive officers earned LTIP payouts for awards that had been made before 2010. One such grant consisted of restricted shares of RAI common stock granted under the LTIP on March 6, 2007, the vesting of which had been conditioned upon RAI’s payment of a minimum quarterly dividend of $0.75 per share (the amount of the last quarterly dividend declared by the Board prior to the grant date) during the period from the grant date through December 31, 2009. This dividend condition was satisfied, and the restricted stock vested on March 6, 2010. For more information regarding the restricted stock, see the 2010 Option Exercises and Stock Vested Table below.

 

In addition, each of the named executive officers earned three-year performance units originally granted on March 6, 2008, referred to as the 2008 LTIP performance units, the vesting of which was conditioned upon RAI’s payment of a minimum quarterly dividend of $0.85 per share (the amount of the last quarterly dividend declared by the Board prior to the grant date) ($0.425 after the Stock Split) during the period from the grant date through December 31, 2010. This dividend condition was satisfied, and the performance units vested on December 31, 2010. The number of vested units earned was determined based on RAI’s 2010 EPS performance compared to the pre-established 2010 EPS targeted goal of $5.39 ($2.695 after the Stock Split), with a threshold and maximum of $4.58 ($2.29 after the Stock Split), 15% below the target, and $6.20 ($3.10 after the Stock Split), 15% above the target, respectively. The Compensation Committee approved, in accordance with a pre-approved process that adjusts for unanticipated, unusual or non-recurring events and is consistent with the manner in which the EPS target was established, the impact of $113 million, after-tax, in incremental pension and post retirement expenses and the $19 million, after-tax, impact of the federal excise tax increase on certain products. RAI’s EPS (based on RAI’s 2010 adjusted net income), after the adjustments described above, was $5.43 ($2.715 after the Stock Split) and resulted in a 2010 EPS score of 105%. The number of vested performance units also was subject to adjustment by +/-10% based on RAI’s total shareholder return, referred to as TSR, over the three-year period ended December 31, 2010, compared to the TSR of the companies within the Standard and Poor’s Food and Beverage Index as of the grant date, plus Altria Group, Inc., Carolina Group (now known as Lorillard, Inc.) and UST, Inc. (subsequently eliminated due to its acquisition by Altria Group), referred to as the TSR comparator group. For the three-year period, RAI’s TSR was in the top third of the TSR comparator group and, as a result, the number of vested performance units was increased by 10%, resulting in a final payout score of 116% of target. The vested 2008 LTIP performance units were settled in cash in the first quarter of 2011. For more information on the payments in settlement of the 2008 LTIP performance units, see footnote 8 to the 2010 Summary Compensation Table below.

 

RAI maintains severance arrangements with its executives, including the named executive officers. RAI obtains several benefits important to the business by providing these severance arrangements, including post-employment restrictive covenants, such as non-competition and non-disclosure of confidential information, assistance with any future litigation, maintenance of a competitive executive compensation program and stability during uncertain times, particularly in the event of a threatened or pending change in control.

 

Prior to the inception of the Executive Severance Plan (described below under “— Executive Severance Plan”), RAI entered into a standard form of severance agreement, referred to as the severance agreement, with each of Ms. Ivey and Messrs. Adams and Payne. As indicated above, Ms. Ivey retired from RAI on February 28, 2011, and did not receive any severance benefits under her severance agreement.

 

Under the terms of the severance agreement, if the executive’s employment is involuntarily terminated other than for “cause” or if the executive terminates his employment for “good reason,” then he will receive two years base salary plus target bonus, and benefit continuation for three years. These amounts were determined to be competitive at the time the severance agreement was approved. The base salary and target bonus amounts under the severance agreement are payable in a lump sum. No executive is entitled to receive severance benefits if the executive retires or otherwise voluntarily terminates his or her employment unless such termination satisfies the agreement’s definition of “good reason.”

 

Pursuant to the severance agreement, each of Messrs. Adams and Payne also is entitled to certain benefits upon a change of control of RAI. See the Potential Payments Upon Termination of Employment and/or a Change of Control Table below, and related footnotes, for further information about these change in control benefits, and for definitions of “cause,” “good reason” and “change of control.”

 

In 2006, the Compensation Committee undertook a comprehensive review of RAI’s severance and change of control benefits offered to executives. Based on such review, RAI determined to revise these benefits for persons who at any time after July 1, 2006, are newly hired or promoted into executive level positions, and adopted the Executive Severance Plan, referred to as the ESP. Such executives participate in the ESP, instead of being offered benefits under a severance agreement. As a result, Mr. Delen, who joined RJR Tobacco in January of 2007, participates, and Ms. Lambeth, who joined RAI in September of 2006, participated, in the ESP and are not parties to a severance agreement.

 

The severance and change of control benefits under the ESP are similar to, but not the same as, the benefits payable under the severance agreement. Although both serve the same objectives, the ESP was designed to be more consistent with prevailing executive compensation practices. RAI also has greater flexibility to amend, if appropriate, the terms of the ESP than the terms of the severance agreement. Under the terms of a severance agreement, RAI generally is not able to amend such agreement without the consent of the individual executive who is a party to the agreement. In contrast, RAI is free to amend the ESP without the consent of the participants in the plan, except that any modification to the ESP adopted by RAI during either the two-year period after a change in control or the one-year period prior to a change in control, and any modification reducing the benefits of an executive already receiving benefits under the ESP, will not be enforceable against a participant, unless he or she agrees to the modification in writing.

 

The benefits payable under the ESP generally are less generous than the benefits which an executive otherwise would have been entitled to under a severance agreement. Under the ESP, upon a qualifying termination, a participant who is a “Tier II Executive” for purposes of the Plan (including Ms. Lambeth and Mr. Delen) is entitled to receive an amount equal to one and one-half times his or her base salary and target bonus, payable in a lump sum, plus 6 months of company-subsidized COBRA continuation coverage for health plans. Upon certain qualifying terminations in connection with a change in control, a participant at

Ms. Lambeth’s or Mr. Delen’s job level would be entitled to receive an amount equal to two times base salary and target bonus, payable in a lump sum, and 6 months of company-subsidized COBRA continuation coverage for health plans.

 

The Compensation Committee periodically reviews the ESP to maintain its competitiveness and adapt it to the needs of the Company. In 2009, amendments to the ESP:

 

 

For further information about the benefits under the ESP, see the Potential Payments Upon Termination of Employment and/or a Change of Control Table below, and related footnotes.

 

The payment of benefits to any named executive officer pursuant to his or her severance agreement or the ESP is conditioned upon the executive complying with certain non-compete and confidentiality obligations owing to RAI and its subsidiaries, and cooperating with RAI and its subsidiaries in the prosecution or defense of any litigation.

 

As indicated above, Ms. Lambeth’s employment with RAI terminated on December 31, 2010, and she was eligible for general severance benefits under the ESP. For additional information on Ms. Lambeth’s severance benefits, see the Potential Payments Upon Termination of Employment and/or a Change of Control Table below, and related footnotes.

 

Generally, the retirement benefits provided by RAI and its subsidiaries, summarized below, are targeted to replace approximately one-third of an employee’s final annual cash compensation, provided that the employee retires at age 55 or older with at least 30 years of service. We expect each employee, upon retirement, to be responsible for replacing the remainder of his or her final cash compensation through a combination of personal savings and social security benefits.

 

RAI sponsors a defined contribution plan which is qualified under Sections 401(a) and 401(k) of the Code, and which is available generally to eligible employees of RAI and certain of its operating subsidiaries, including the named executive officers. RAI also sponsors non-qualified excess benefit plans which provide benefits to those employees, including the named executive officers, whose benefits under the 401(k) plan are limited by virtue of certain provisions of the Code. Under the foregoing plans, RAI provides a matching contribution in an amount equal to either 50% or 100% (depending upon, among other things, whether an individual is eligible to participate in one of RAI’s defined benefit plans) of the first 6% of a participant’s pre-tax contribution. In addition to the matching contribution, RAI contributes on behalf of each eligible participant in the 401(k) plan an amount ranging from 3% to 9% of such participant’s annual cash compensation. The eligibility to receive such supplemental contribution and the amount of such contribution depend upon, among other factors, whether an employee participates in certain of our defined benefit plans and the employee’s years of service. All of the named executive officers, other than Ms. Ivey, are eligible to receive RAI’s supplemental contribution under the 401(k) plan. See footnote 10 to the 2010 Summary Compensation Table below for additional information regarding RAI’s contributions to the accounts of the named executive officers under the foregoing plans. In addition to such plans, the named executive officers, other than Ms. Lambeth and Mr. Delen, participate in certain noncontributory defined benefit retirement plans maintained by RAI. Subject to certain limited exceptions, employees hired on or after January 1, 2004, are not eligible to participate in these defined benefit plans. Ms. Ivey participates in a B&W retirement plan, the obligations of which, with respect to Ms. Ivey and certain other former B&W employees, were assumed by RAI in connection with the Business Combination. See “— Retirement Benefits” below for more information about the defined benefit plans in which the named executive officers participate.

 

In special circumstances, the Compensation Committee may approve a recommendation from the Chief Executive Officer to pay a discretionary cash award to an executive officer, in addition to the annual incentive compensation described above under “— Annual Compensation,” to reward substantial achievement or significant contributions, particularly when such contributions are not reflected in the annual performance metrics. In 2010, the Compensation Committee approved a special discretionary cash award of $50,000 to Mr. Payne in connection with his receipt of the Chairman’s Award for significant contributions to RAI’s success. Such cash award was paid to Mr. Payne in February 2010.

 

The Board believes that executives, such as the named executive officers, whose business decisions have a profound and direct impact on the operations and results of RAI, should have a reasonable equity stake in RAI. Further, the greater the responsibilities an executive has, the greater his or her equity stake should be. As a result, the Board established stock ownership guidelines for the named executive officers and other senior management. (We also maintain stock ownership guidelines for our directors, which are described above under “The Board of Directors — Equity Ownership Guidelines.”) Pursuant to the current stock ownership guidelines for the named executive officers, which became effective as of January 1, 2006, each executive is expected to own, within seven years after the later of January 1, 2006, and his or her appointment as an executive officer, an amount of RAI common stock valued at a multiple of his or her annual base salary, which during 2010 were as follows — three times annual base salary for Ms. Ivey, two and one-half times annual base salary for Ms. Lambeth and Messrs. Adams and Delen, and two times annual base salary for Mr. Payne. Unvested shares of restricted stock or performance shares are not counted toward satisfaction of the stock ownership guidelines. The Compensation Committee is responsible for approving any amendments to the executive stock ownership guidelines and annually reviews each executive’s progress towards satisfying the stock ownership guidelines. For 2010, management reviewed the status of all executive officers in meeting the stock ownership guidelines and certified to the Compensation Committee that all executive officers already had met, or were making reasonable progress towards meeting, the stock ownership guidelines in a timely manner. If any executive were to fail to satisfy the applicable stock ownership guidelines, then the Compensation Committee would consider such failure as one factor in determining the extent to which such executive should receive any stock-based awards in the future.

 

All executive officers, including the named executive officers, are subject to a securities trading policy under which hedging transactions are prohibited. RAI’s Code of Conduct provides that directors and employees may not engage in put or call options, short selling or similar activities involving RAI stock. These prohibitions protect against speculative trading by our executives.

 

Commencing in 2009, we have included recoupment, or “clawback,” provisions in our annual and long-term incentive programs and related agreements with our employees. These provisions provide that, in the event all or any portion of an award under any of the incentive compensation programs has been computed using financial information or performance metrics later found to be materially inaccurate, the Compensation Committee, in its sole discretion, can recoup the excess of the amount paid out over the amount that would have been paid had such financial information or performance metric been fairly stated at the time the payout was made. Additionally, consistent with statutory requirements, including the Sarbanes-Oxley Act of 2002, and principles of responsible oversight, and depending on the specific facts of each situation, the Compensation Committee would review all performance-based compensation where a restatement of our financial results for a prior performance period could affect the factors determining payment of an incentive award. Our long-term

incentive agreements also provide that, if we determine that a grantee has violated any of the confidentiality, non-compete or assistance obligations in the agreement, then effective on the date the violation began, any unvested performance shares are forfeited and cancelled, and the Compensation Committee, in its sole discretion, can recoup any performance shares previously paid under the agreement.

 

Section 162(m) of the Code generally disallows a federal income tax deduction to publicly traded companies for compensation paid to certain executives to the extent such compensation exceeds $1 million per executive in any fiscal year. Compensation that satisfies the Code’s requirements for performance-based compensation is not subject to that deduction limitation. As discussed above, the annual and long-term incentive compensation for our named executive officers has been designed to meet the requirements for qualified performance-based compensation.

 

Although the Compensation Committee plans to continue taking actions intended to limit the impact of Section 162(m) of the Code, the Committee also believes that the tax deduction is only one of several relevant considerations in setting compensation. The Committee believes that the tax deduction limitation should not be permitted to compromise RAI’s ability to design and maintain executive compensation arrangements that will attract and retain the executive talent to compete successfully. Accordingly, achieving the desired flexibility in the design and delivery of compensation may result in compensation that in certain cases is not deductible for federal income tax purposes.

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with RAI’s management. Based on that review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and in RAI’s 2010 Annual Report on Form 10-K.

 

Respectfully submitted,

 

Holly K. Koeppel
Nana Mensah (Chair)
Thomas C. Wajnert (Former Chair)
John J. Zillmer

 

At the direction of the Compensation Committee, and with the assistance of the Committee’s independent compensation consultant, management annually conducts a comprehensive review and evaluation of the risks arising from the compensation policies and practices applicable to all of our employees, including our named executive officers. This risk assessment is conducted under our overall enterprise risk management process and includes a detailed qualitative and quantitative analysis of the risks related to the compensation architecture for all employees.

 

Under the enterprise risk management process, each element of our compensation architecture is analyzed for risks related to such element of compensation, including any links between behaviors and/or decisions driving compensation amounts and changes in RAI’s risk profile. Further, each element is reviewed to identify specific controls and/or attributes mitigating or aggravating such risks.

 

Risk mitigating controls and attributes identified during the risk assessment completed in November 2010 included both entity level risk controls (such as our corporate governance structure, approval authority guidelines and risk authority guidelines) and compensation risk controls and attributes (such as the oversight of the executive compensation programs by the Compensation Committee, the mixture of annual and long-term incentives, the use of performance-based annual and long-term incentives, the use of multiple performance measures in both the annual and long-term incentive programs, the mix of financial and marketplace metrics in the annual incentive program, maximum payout caps on annual and long-term incentive awards, stock ownership guidelines, Compensation Committee discretion (including negative discretion) regarding targets and payouts, and recoupment and anti-hedging policies). Finally, the likelihood and potential impact of the compensation risks were assessed during the November 2010 risk assessment.

 

The findings of the November 2010 comprehensive compensation risk assessment, including a summary of the extensive risk mitigating controls and attributes identified in our compensation policies and practices, were reviewed by management with the Compensation Committee and its independent compensation consultant in November 2010. Based on the results of this compensation risk assessment, the Compensation Committee concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on our company.

 

The following table shows the annual and long-term compensation paid or accrued by RAI and its subsidiaries to RAI’s Chief Executive Officer, Chief Financial Officer and its other three most highly compensated executive officers for the fiscal years ended December 31, 2010, 2009 and 2008.

2010 Summary Compensation Table