, 2008

 

Dear Shareholder:

 

On behalf of the Board of Directors and the management of CSX Corporation, I invite you to attend the 2008 Annual Meeting of Shareholders (the “Meeting”). The Meeting will be held at 10:00 a.m. (CDST) on Wednesday, June 25, 2008, at          , New Orleans, Louisiana.

 

We consider the votes of all shareholders important, no matter how many or how few shares you may own. Regardless of whether you plan to attend the Meeting, we encourage you to vote promptly, following the easy instructions on the enclosed WHITE proxy card. You may submit your vote by telephone, by Internet or by mail.

 

The Children’s Investment Master Fund (“TCI”) has provided notice that it intends to nominate and, together with 3G Capital Partners Ltd. and certain of their affiliates (the “TCI Group”), solicit proxies for an opposition slate of five nominees for election as directors at the Meeting. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF THE BOARD OF DIRECTORS’ NOMINEES ON THE ENCLOSED WHITE PROXY CARD. YOUR BOARD OF DIRECTORS URGES YOU NOT TO SIGN OR RETURN ANY BLUE PROXY CARD SENT TO YOU BY THE TCI GROUP.

 

At the Meeting, shareholders will be asked to approve the bylaw amendments adopted by the Board of Directors relating to the right of shareholders to request a special shareholder meeting, and will also consider two proposals by shareholders described in the enclosed proxy materials.

 

Your vote is extremely important. If you have questions or require any assistance with voting your shares, please call our proxy solicitor, Innisfree M&A Incorporated, toll-free at (877) 750-9497.

 

We look forward to seeing you at the Meeting.

 

Michael Ward

 

Chairman of the Board, President

and Chief Executive Officer

 

Jacksonville, Florida

          , 2008

 

To Our Shareholders:

 

The Annual Meeting of Shareholders of CSX Corporation (the “Meeting”) will be held at 10:00 a.m. (CDST) on Wednesday, June 25, 2008 at          , New Orleans, Louisiana, for the purpose of considering and acting upon the following matters:

 

 

 

 

 

 

 

The above matters are described in the proxy statement accompanying this notice (the “Proxy Statement”). You are urged, after reading the Proxy Statement, to vote your shares by proxy using one of the following methods: (a) vote by telephone or via the Internet using the instructions on your WHITE proxy card or (b) complete, sign, date and return your WHITE proxy card in the postage-paid envelope provided.

 

WE ALSO URGE YOU NOT TO VOTE OR SUBMIT ANY BLUE PROXY CARD SENT TO YOU BY THE TCI GROUP OR THEIR AFFILIATES. YOU CAN REVOKE ANY TCI GROUP PROXY CARD YOU MAY HAVE PREVIOUSLY SUBMITTED BY VOTING AND SUBMITTING THE ENCLOSED WHITE PROXY CARD.

 

Only shareholders of record at the close of business on April 21, 2008 will be entitled to vote, either by proxy or by ballot. This Proxy Statement is being mailed to those shareholders on or about          , 2008.

 

By Order of the Board of Directors

 

Ellen M. Fitzsimmons

Senior Vice President-Law and Public Affairs

and Corporate Secretary

Table of Contents

 

 

At our 2008 Annual Meeting of Shareholders (the “Meeting”), shareholders will act upon the matters outlined in the Notice of Meeting on page ii of this Proxy Statement, including the election of directors and ratification of the Independent Registered Public Accounting Firm (the “Independent Auditors”) of CSX Corporation (the “Company” or “CSX”).

 

On January 8, 2008, the Company received notice from The Children’s Investment Master Fund (“TCI”) stating its intention to nominate five persons for election to the Company’s Board of Directors at the Meeting. The Company does not know whether TCI, 3G Capital Partners Ltd. and their respective affiliates (the “TCI Group”) will in fact solicit proxies or nominate persons for election as directors at the Meeting. Nominations by TCI have NOT been endorsed by the CSX Board of Directors. We urge shareholders NOT to sign any blue proxy card that you may receive from the TCI Group. We are not responsible for the accuracy of any information provided by or relating to the TCI Group contained in any proxy solicitation materials filed or disseminated by the TCI Group or any other statements that they may otherwise make.

 

Your Board of Directors urges you to vote FOR our nominees for director: Donna M. Alvarado, Elizabeth E. Bailey, John B. Breaux, Steven T. Halverson, Edward J. Kelly, III, Robert D. Kunisch, John D. McPherson, David M. Ratcliffe, William C. Richardson, Frank S. Royal, Donald J. Shepard and Michael J. Ward.

 

The Meeting will be held at 10:00 a.m. (CDST) on Wednesday, June 25, 2008 at          , New Orleans, Louisiana. The facility is accessible to persons with disabilities. If you have a disability, we can provide reasonable assistance to help you participate in the Meeting upon request. If you would like to obtain directions to be able to attend the Meeting and vote in person, you can write to us at CSX Corporation, Office of the Corporate Secretary, 500 Water Street, C160, Jacksonville, FL 32202 or call us at (904) 366-4242.

 

The Board of Directors of CSX (the “Board”) is soliciting your vote on matters being submitted for shareholder approval at the Meeting.

 

Only shareholders of record at the close of business on April 21, 2008 (the “Record Date”) will be entitled to notice of, and to vote at, the Meeting or any adjournments or postponements thereof. On that date, there were issued and outstanding [     ] shares of common stock, the only class of voting securities of the Company.

 

A list of shareholders entitled to vote at the Meeting will be available for examination at CSX Corporation, 500 Water Street, Jacksonville, FL 32202 for ten days before the Meeting and at the Meeting.

 

At the Meeting, shareholders will vote on:

 

 

 

 

 

 

You will have one vote for every share of CSX common stock you owned at the close of business on the Record Date.

 

The Company’s bylaws provide that a majority of the outstanding shares of stock entitled to vote constitutes a quorum at any meeting of shareholders. If a share is represented for any purpose at the Meeting, it is deemed to be present for the transaction of all business. Abstentions, withheld votes and shares held of record by a broker or its nominee that are voted on any matter are included in determining the number of votes present. Broker shares that are not voted on any matter at the Meeting will not be included in determining whether a quorum is present.

 

Your vote is important — we urge you to vote by proxy even if you plan to attend the Meeting.

 

Election of Directors.  The Company’s state of incorporation is Virginia. Under Virginia law and the Company’s bylaws, in a contested election, directors are elected by a plurality of votes cast by the shares entitled to vote at a meeting at which a quorum is present. Because TCI has indicated that it will nominate candidates for election to the Board, we expect the number of nominees for election at the Meeting will exceed the number of directors to be elected at the Meeting, and the 2008 election of directors will be a contested election under the bylaws. This means that the twelve nominees for election as directors who receive the greatest number of votes cast at the Meeting will be elected. Only votes cast for a nominee will be counted. Unless indicated otherwise by your WHITE proxy card, if you return a validly executed WHITE proxy card or vote the WHITE proxy card by telephone or Internet, your shares will be voted FOR the twelve nominees named in this Proxy Statement. Instructions on the accompanying WHITE proxy card to withhold authority to vote for one or more of the nominees will result in those nominees receiving fewer votes but will not count as a vote against the nominees. Similarly, abstentions and broker non-votes will have no effect on the director election since only votes “For” a nominee will be counted.

 

Other Proposals.  For all other proposals, the proposal will be approved if the votes cast in favor of the proposal exceed the votes cast against the proposal. For further information on the voting procedures in the event that more than one proposal under Items 3 and 4 is approved, see “Special Shareholder Meeting Proposals” on page 50.

 

Abstentions and broker “non-votes” are not considered votes “for” or “against” any proposal and will have no effect on the outcome of any proposal.

 

You can vote either by proxy or by ballot. The shares represented by a properly executed WHITE proxy card will be voted as you direct.

 

We urge you to vote by doing one of the following:

 

 

 

 

If you want to vote by ballot, and you hold your CSX stock in street name (that is, through a bank or broker), you must obtain a proxy from your bank or broker and present that proxy when voting by ballot.

 

The Board recommends that you NOT sign or return any blue proxy card that may be sent to you by the TCI Group, even as a protest. Withholding authority to vote for TCI’s nominees on a blue proxy card that the TCI Group or their affiliates may send you is not the same as voting for the Company’s nominees.

 

Yes. A proxy may be revoked by a shareholder any time before it is voted by written notice delivered to CSX Corporation, Office of the Corporate Secretary, 500 Water Street, C160, Jacksonville, FL 32202, by timely receipt of a later-dated signed proxy card, by a later vote via the Internet or by telephone, or by voting by ballot.

 

If you have previously signed a blue proxy card that may have been sent to you by the TCI Group, you may change any vote you may have cast in favor of the TCI nominees and vote in favor of the Company’s director nominees by submitting a proxy by telephone or Internet, by signing, dating, and returning the enclosed WHITE proxy card in the postage-paid envelope provided or by voting by ballot. If you are a beneficial owner, or you hold your shares in “street name,” please check your voting instruction card or contact your bank, broker or nominee for instructions on how to change or revoke your vote.

 

If you are the beneficial owner of shares held in “street name” by a broker, the broker, as the record holder of the shares, is required to vote those shares in accordance with your instructions. If you do not give instructions to the broker, the broker will be entitled to vote the shares with respect to “discretionary” items but will not be permitted to vote the shares with respect to “non-discretionary” items (those shares are treated as “broker non-votes”). The approval of the bylaw amendment and each of the shareholder proposals are “non-discretionary” items.

 

If the TCI Group solicits proxies to elect TCI’s nominees to the Board at the Meeting, then the election of directors will also be a “non-discretionary” item for any brokerage accounts solicited by the TCI Group. As a result, if your shares are held in “street name” and the TCI Group provides you with proxy solicitation materials through your broker and you do not provide instructions as to how your shares are to be voted in the election of directors, your broker or other nominee will not be able to vote your shares in the election of directors, and your shares will not be voted for any of CSX’s nominees. We urge you to provide instructions to your broker or nominee so that your votes may be counted on this important matter. We urge you to vote your shares by following the instructions provided on the enclosed WHITE proxy card and returning the WHITE proxy card to your bank, broker or other nominee to ensure that your shares will be voted on your behalf.

 

If you sign your WHITE proxy card but do not give voting instructions, the shares represented by that proxy will be voted as recommended by the Board. The Board recommends a vote FOR the election of the twelve director nominees named in this Proxy Statement, FOR Item 2, the ratification of Ernst & Young LLP as Independent Auditors for 2008, FOR Item 3, approval of the bylaw amendments adopted by the Board regarding special shareholder meetings, and AGAINST each of the shareholder proposals under Items 4 and 5.

 

If any other matters are properly presented at the Meeting for consideration, the persons named as proxies in the enclosed WHITE proxy card will have discretion to vote on those matters for you. On the date we filed this Proxy Statement with the Securities and Exchange Commission, the Board did not know of any other matter to be raised at the Meeting.

 

Votes are counted by inspectors of election appointed by the Company.

 

A shareholder who wants to submit a proposal to be included in the proxy statement for the 2009 Annual Meeting of Shareholders (the “2009 Meeting”) must send it to CSX Corporation, Office of the Corporate Secretary, 500 Water Street, C160, Jacksonville, FL, 32202, so that it is received on or before           unless the date of 2009 Meeting is changed by more than 30 days from June 25, 2009, in which case the proposal must be received a reasonable time before the Company begins to print and send its proxy materials for the 2009 Meeting.

 

A shareholder who wants to submit a proposal that will not be in the proxy statement but will be considered at the 2009 Meeting, pursuant to our bylaws, must send it to the principal executive offices of CSX so that it is received not earlier than the close of business on February 25, 2009, nor later than the close of business on March 27, 2009 unless the date of the 2009 Meeting is more than 30 days before or more than 70 days after June 25, 2009, in which case the proposal must be received not earlier than the 120th day prior to the date of the 2009 Meeting and not later than the close of business on the later of the 90th day prior to the date of the 2009 Meeting and the 10th day following the day on which the Company first publicly announces the date of the 2009 Meeting.

 

Yes, the Governance Committee of the Board will review recommendations as to possible nominees received from shareholders and other qualified sources. Shareholder recommendations should be in writing addressed to the Chair of the Governance Committee, CSX Corporation, 500 Water Street, Jacksonville, FL 32202, and should include a statement about the qualifications and experience of the proposed nominee, as discussed further below in Item 1: Election of Directors, Committees of the Board, Governance Committee.

 

Unless the polls have closed, your proxy will still be in effect and may be voted at the reconvened meeting. You will still be able to change or revoke your proxy with respect to any item until the polls have closed for voting on such item.

 

Yes, you will be issued an admission ticket at the Shareholder Registration Desk at the Meeting. If you hold shares in your name, please be prepared to provide proper identification, such as a driver’s license. If you hold your shares through a bank or broker, you will need proof of ownership, such as a recent account statement or letter from your bank or broker, along with proper identification.

 

Important Notice Regarding the Availability of Proxy Material for the Shareholder Meeting to Be Held on June 25, 2008. This Proxy Statement and the 2007 Annual Report are available on the Company’s Internet website (www.csx.com/          /          ).

 

If you hold your shares in more than one account, you will receive a WHITE proxy card for each account. To ensure that all of your shares are voted, please vote using each WHITE proxy card you receive. Remember, you may vote by telephone or Internet by signing, dating and returning the WHITE proxy card in the postage-paid envelope provided.

 

As previously noted, TCI has provided notice that it intends to nominate and solicit proxies for an opposition slate of five nominees for election as directors at the Meeting. As a result, you may receive proxy cards from both the TCI Group and the Company. To ensure that shareholders have the Company’s latest proxy information and materials to vote, the Board expects to conduct multiple mailings prior to the date of

the Meeting, each of which will include a WHITE proxy card. The Board encourages you to vote each WHITE proxy card you receive. Only your latest-dated proxy for each account will be voted.

 

THE BOARD URGES YOU NOT TO SIGN OR RETURN ANY BLUE PROXY CARD SENT TO YOU BY THE TCI GROUP. Even if you have previously signed a proxy card sent by the TCI Group, you have every right to change your vote by telephone, by Internet or by signing, dating and returning the WHITE proxy card in the postage-paid envelope provided.

 

If you have any questions, need assistance voting, or need additional copies of this proxy statement, please contact our proxy solicitor:

 

Innisfree M&A Incorporated

Shareholders Call Toll Free: (877) 750-9497

Banks and Brokers Call Collect: (212) 750-5833

 

On March 17, 2008, the Company filed a lawsuit against TCI, 3G and certain of their affiliates in the United States District Court for the Southern District of New York alleging violations of federal securities laws, including violations of Sections 13(d) and 14(a) of the Securities Exchange Act of 1934. The lawsuit alleges, among other things, that TCI and 3G have undisclosed plans with respect of CSX. The lawsuit further alleges that TCI and 3G have employed swap agreements in order to evade the filing requirements of Section 13(d) and that their Section 14(a) and Section 13(d) filings concerning their collective 12.3 percent swap position in CSX shares are materially misleading. The lawsuit further alleges that TCI’s and 3G’s disclosures in their Section 14(a) and Section 13(d) filings concerning their formation of a Section 13(d) group are false and misleading.

 

The complaint seeks an order (i) declaring that TCI and 3G failed to file disclosures as required by the Securities Exchange Act of 1934, (ii) directing TCI and 3G to file truthful and accurate Schedule 13D and Schedule 14A disclosures, (iii) enjoining TCI and 3G from acquiring additional shares of the Company until such truthful and accurate filings have been made, (iv) enjoining TCI and 3G from acquiring any Company shares referenced in swap arrangements to which they are party, (v) directing TCI and 3G to sell all Company shares acquired, and terminate all swaps referencing Company shares that TCI and 3G entered into, renewed or extended after the date by which TCI and 3G should have filed a Schedule 13D, and enjoining TCI and 3G from voting such shares at the Meeting, or alternatively, directing TCI and 3G to vote such shares in proportion with the votes of other shareholders of CSX, (vi) enjoining TCI and 3G from voting any proxies received prior to the date on which TCI’s and 3G’s filings complied with the requirements of Schedule 13D and Schedule 14A, as determined by the court, (vii) declaring that TCI’s and 3G’s notices with respect to the nomination of candidates for the Board and the two shareholder proposals are invalid as non-compliant with the Company’s bylaws, and (viii) granting leave to the Company to conduct expedited discovery regarding the above claims. TCI and 3G have stated that they believe the claims to be without merit and intend to defend themselves vigorously.

 

On April 4, 2008, TCI and 3G each filed substantially similar counterclaims against the Company and Michael Ward, chairman, president and CEO of CSX. The counterclaims allege, among other things, that (i) the 2007 long-term incentive plan target share awards to the Company’s named executive officers and over 600 other employees and the May 2007 stock grants to the Company’s non-employee directors under the CSX Corporation Stock Plan for Directors were made while the Board was in possession of material, non-public information, (ii) such awards and grants and the December 2007 stock grants to the Company’s non-employee directors were made in violation of the CSX Omnibus Incentive Plan, the Company’s insider trading policy, the code of ethics, the corporate governance guidelines and the bylaws, (iii) this proxy statement omits details regarding the bylaw amendments relating to shareholder requests for special meetings adopted in February 2008, which are the subject of Item 3, including the requirement that the request come from holders of record, the requirement that the requesting shareholders hold the shares through the date of the requested meeting and other procedural requirements, (iv) this proxy statement mischaracterizes the TCI special shareholder meeting

shareholder proposal, which is the subject of Item 4, and the purpose of the non-binding 2007 special shareholder meeting proposal, (v) the Company’s proxy materials mischaracterize the TCI Group’s intentions as seeking control and the TCI Group’s suggestions regarding limitations on capital spending, (vi) the Company’s proxy materials mischaracterize CSX’s reasons for filing the lawsuit, (vii) the February 2008 bylaw amendments violate Virginia law, and (viii) this proxy statement and our other proxy materials are materially false and misleading and violate Section 14(a) of the Securities Exchange Act of 1934 because they fail to disclose such alleged items and include such mischaracterizations.

 

TCI and 3G seek an order (i) declaring that the Company failed to file disclosures required by Section 14(a) of the Securities Exchange Act of 1934, (ii) directing the Company to file truthful and accurate Schedule 14A disclosures at the personal expense of the current directors, (iii) declaring that the Board was in violation of Company policies and the bylaws, (iv) directing that the February 2008 bylaw amendments are void under Virginia law, (v) enjoining Item 3 from being considered at the Meeting, (vi) enjoining the Company from voting any proxies received prior to the date on which this proxy statement is accurate and compliant, as determined by the court, (vii) enjoining the Company from committing violations of Rule 14a-9 promulgated under the Securities Exchange Act of 1934, and (viii) granting costs, including attorneys’ fees to TCI and 3G. The Company believes the TCI and 3G counterclaims are without merit and will defend against them vigorously.

 

The outcome of the litigation cannot be predicted.

 

 

Twelve directors are to be elected to hold office until the next Annual Meeting of Shareholders is held and their successors are elected. The proxy holders will cast votes on the WHITE proxy cards received by them, unless otherwise specified, FOR the election of the nominees named below. Each of the nominees named below is a current director standing for re-election and each was elected at the Annual Meeting of Shareholders held on May 2, 2007, except for Mr. John D. McPherson who is standing for election for the first time. Mr. Southwood J. Morcott is not standing for re-election as he has reached the mandatory retirement age of 70 set forth in the Company’s Corporate Governance Guidelines.

 

As of the date of this Proxy Statement, the Board has no reason to believe that any of the nominees named will be unable or unwilling to serve. There are no family relationships among any of these nominees or among any of these nominees and any executive officer, nor is there any arrangement or understanding between any nominee and any other person pursuant to which the nominee was selected.

 

In this contested election of directors, the nominees receiving the greatest number of votes shall be elected, even if such votes do not constitute a majority.

 

Certain information regarding each Company nominee follows. Each nominee has consented to being named in this Proxy Statement and to serve if elected.

 

The Board recommends a vote FOR the following nominees.

 

 

RECOMMENDATION OF THE BOARD

 

THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF THE TWELVE NOMINEES NAMED HEREIN AS DIRECTORS.

 

If any of the nominees named above is not available to serve as a director at the time of the Meeting (an event which the Board does not now anticipate), the proxies will be voted for the election as director of such other person or persons as the Board may designate, unless the Board, in its discretion, reduces the number of directors.

 

The Board annually evaluates the independence of each of its directors and, acting through its Governance Committee, the performance of each of its directors. The Board has determined that ten of the twelve nominees for election as directors are independent under the listing standards of the New York Stock Exchange (“NYSE”). In making this determination, the Board considered transactions or relationships, if any, between each director or nominee or his or her immediate family and the Company or its subsidiaries, as well as the listing standards. The purpose of this review was to determine whether any such relationships or transactions were material and thus inconsistent with a determination that the director or nominee is independent.

 

During its deliberations, the Board specifically considered the Company’s relationship with the Southern Company, a producer and provider of electric power. Mr. Ratcliffe, a director and a nominee, currently is the Chairman of the Board, President and Chief Executive Officer of the Southern Company. CSX Transportation, a wholly-owned subsidiary of CSX, delivers coal to generating plants operated by subsidiaries of the Southern Company. As a result of fuel surcharges by CSX to the Southern Company resulting from increased fuel costs in 2007, revenue received from the Southern Company exceeded the thresholds set forth in the NYSE listing standards regarding director independence.

 

As a result of its review, the Board affirmatively determined, based on its understanding of any relationships or transactions, and consistent with the NYSE listing standards, that each of the director nominees is independent, other than Messrs. Ratcliffe and Ward.

 

The Board is committed to governance principles and practices that facilitate fulfilling its fiduciary duties to shareholders and to the Company. The Board has adopted Corporate Governance Guidelines that reflect the high standards that those who deal with the Company as employees, investors, customers, vendors or in other capacities can and should expect. Key corporate governance principles observed by the Board and the Company include:

 

 

 

 

CSX’s Corporate Governance Guidelines, Code of Ethics, the charters of each standing committee, and policies adopted by the Board are available on the Company’s Internet website at investors.csx.com under the heading “Corporate Governance”. Shareholders may also request a free copy of any of these documents by writing to CSX Corporation, Office of the Corporate Secretary, 500 Water Street, C160, Jacksonville, FL 32202.

 

Any waivers of or changes to the Code of Ethics that apply to our directors or executive officers will be disclosed on CSX’s Internet website (www.csx.com). There were no such waivers or changes in 2007.

 

Shareholders who wish to communicate with the Board generally, or with a particular director, may forward appropriate correspondence to CSX Corporation, Office of the Corporate Secretary, 500 Water Street, C160, Jacksonville, FL 32202.

 

Pursuant to procedures established by the non-management directors of the Board, the Office of the Corporate Secretary will forward appropriate correspondence to the Board or a particular director. Appropriate correspondence generally includes any legitimate, non-harassing inquiries or statements. Interested parties who wish to communicate directly with non-management directors may forward correspondence to CSX Corporation, the Presiding Director, CSX Board of Directors, 500 Water Street, C160, Jacksonville, FL 32202.

 

CSX operates under a Code of Ethics that requires all employees, officers, and directors, without exception, to avoid engagement in activities or relationships that conflict, or would be perceived to conflict, with the Company’s interests or adversely affect its reputation. It is understood, however, that certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure of the transaction, following review and approval to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to CSX than could be obtained from an unrelated person.

 

The Audit Committee is responsible for reviewing and approving, as appropriate, all transactions with related persons. CSX has not adopted written procedures for reviewing related person transactions, but generally follows the procedures described below.

 

CSX considers a “Related Person” to be: (i) any person who is, or at any time since the beginning of the last fiscal year was, a director or executive officer or a nominee to become a director; (ii) any person who is known to be the beneficial owner of more than 5% of any class of CSX’s voting securities; (iii) any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse,

sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner; and (iv) any firm, corporation or other entity in which any of the foregoing persons is employed or is a partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest.

 

A “Related Person Transaction” is a transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) in which CSX (including any of its subsidiaries) was, is or will be a participant, the amount involved exceeds $120,000 in any fiscal year, and in which any Related Person had, has, or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity).

 

On an annual basis in response to the annual Directors’ and Officers’ Questionnaire, each director and executive officer shall submit to the Corporate Secretary a description of any current or proposed Related Person Transactions. Any person nominated to stand for election as a director or appointed as a director or an executive officer shall submit the information described above in response to a Questionnaire prepared by the Corporate Secretary. Directors and executive officers are expected to notify the Corporate Secretary of any updates to the list of Related Person Transactions during the year. If Related Person Transactions are identified, those transactions are reviewed by the Audit Committee.

 

The Audit Committee will evaluate Related Person Transactions based on:

 

 

In connection with the review and approval or ratification, if appropriate, of any Related Person Transaction, the Audit Committee will consider whether the transaction will be a conflict of interest or give the appearance of a conflict of interest. In the case of any Related Person Transaction involving an outside director or nominee for director, the Audit Committee will also consider whether the transaction will compromise the director’s status as an independent director as prescribed in the NYSE listing standards.

 

 

During 2007, there were ten meetings of the Board. Each director attended 75% or more of the meetings of the Board and the meetings of the committees on which he or she served.

 

The non-management directors meet alone in executive session at each Board meeting. Non-management directors are all those who are not Company officers. These executive sessions are chaired by a Presiding Director who is an independent director selected annually by the Governance Committee. Mr. Kelly currently serves as the Presiding Director. In addition, the non-management directors have periodic special meetings without management in connection with regularly scheduled Board meetings. In accordance with the CSX Corporate Governance Guidelines, the independent directors (when different than non-management directors) meet in executive session at least once a year.

 

While the Company does not have a formal policy regarding director attendance at Annual Meetings of Shareholders, the Company encourages directors to attend. Every director attended the 2007 Annual Meeting of Shareholders.

 

 

CSX has five standing committees: the Audit Committee, the Compensation Committee, the Finance Committee, the Governance Committee, and the Public Affairs Committee. Each of these committees has a written charter approved by the Board, a copy of which can be found on the Company’s Internet website at

investors.csx.com under the heading “Corporate Governance”. In addition, the Board has an Executive Committee, which is discussed below. The members of the committees are identified in the following table.

 

 

Executive Committee

 

The Executive Committee meets only as needed and has authority to act for the Board on most matters during the intervals between Board meetings. The Executive Committee has six members, consisting of the Chairman of the Board and the chairs of each of the five standing committees. The Committee did not meet in 2007.

 

Audit Committee

 

The Audit Committee selects the Independent Auditors and submits its choice to the shareholders for ratification. Its primary functions include oversight of the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, the Independent Auditors’ qualifications and independence, and the performance of the Independent Auditors and the Company’s internal audit function.

 

Specifically, the Committee retains, appoints, oversees and approves compensation of the Company’s Independent Auditors, reviews the scope and methodology of the Independent Auditors’ proposed audits, reviews the Company’s financial statements, and monitors the Company’s internal control over financial reporting by, among other things, discussing certain aspects thereof with the Independent Auditors and management. The Audit Committee is responsible for the approval of all services performed by Ernst & Young LLP. The Chairman of the Audit Committee has the authority to approve all engagements that will cost less than $250,000 and, in such cases, will report any approvals to the full Committee at the next scheduled meeting. All engagements expected to cost $250,000 or more require pre-approval of the full Committee. In addition, it is Company policy that tax and other non-audit services should not equal or exceed base audit fees plus fees for audit-related services. Finally, the Committee maintains procedures for the receipt and treatment of complaints regarding the Company’s accounting, internal accounting controls or auditing matters.

 

The Audit Committee has five members, each of whom the Board has determined to be independent pursuant to the independence standards promulgated by the NYSE and the Securities and Exchange Commission (“SEC”). The Committee held six meetings in 2007.

 

The Board has determined that the Company has at least one audit committee financial expert, as that term is defined by SEC rules and regulations, serving on the Audit Committee. Mr. Shepard is the Committee’s financial expert and is independent pursuant to the standards promulgated by the NYSE and the SEC. Please refer to the Report of the Audit Committee below for additional information regarding the Audit Committee.

Compensation Committee

 

The primary functions of the Compensation Committee are to: (i) establish the Company’s philosophy with respect to executive compensation and benefits; (ii) periodically review the Company’s compensation practices and policies, benefit plans, and perquisites applicable to all employees and executives to ensure consistency with the Company’s compensation philosophy; (iii) assure that the Company’s benefit plans, practices, programs and policies maintained for employees and directors comply with all applicable laws; (iv) in consultation with the Board, review and approve corporate goals and objectives relevant to compensation and benefits for the CEO, and evaluate the CEO’s performance in light of those goals and objectives, and, either as a committee or together with the other independent directors, as directed by the Board, set the level of compensation of the CEO based on such evaluation; (v) review and recommend approval of management compensation and Company compensation plans, including benefits for key employees as determined by the Committee from time to time; (vi) establish performance objectives for certain executives, and certify the attainment of those objectives in connection with the payment of performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code (“Section 162(m)”); and (vii) review the Compensation Discussion and Analysis section of the Proxy Statement and, as appropriate, recommend to the Board for approval the inclusion of the Compensation Discussion and Analysis section in the Company’s Annual Report on Form 10-K and Proxy Statement. In addition, the Committee monitors the administration of certain executive and management compensation and benefit programs.

 

The Compensation Committee has four members, all of whom are “outside directors” within the meaning of regulations promulgated pursuant to Section 162(m) and are independent pursuant to the independence standards promulgated by the NYSE. The Committee held four meetings in 2007. Please refer to the Compensation Discussion and Analysis section of this Proxy Statement for additional information regarding the functions and operations of the Compensation Committee.

 

For additional information regarding the functions of the Compensation Committee, please see “Role of the Compensation Committee” on pages 17-18.

 

Finance Committee

 

The Finance Committee provides general oversight and review of financial matters affecting the Company, including the monitoring of corporate debt, cash flow, and the assets and liabilities maintained by the Company and its affiliates in conjunction with employee benefit plans, including monitoring the funding and investment policies and performances of the assets. This four-member Committee held five meetings in 2007.

 

Governance Committee

 

The Governance Committee of the Board identifies individuals qualified to become board members and recommends candidates for election to the Board. In addition, the Committee develops criteria regarding director qualification and reviews and recommends changes in Board composition, committee structure, and director compensation. The Committee develops, recommends and monitors corporate governance principles and conducts regular evaluations of director performance and of the effectiveness of the Board as a working group. The Governance Committee also reviews significant changes in corporate structure, succession in senior management, and other internal matters of broad corporate importance.

 

The Committee has five members and is composed solely of independent directors pursuant to the independence standards promulgated by the NYSE. The Committee held six meetings in 2007.

 

The Governance Committee generally identifies nominees for directors based upon outside research and suggestions from directors and officers of the Company. The Committee will also consider persons recommended by shareholders of the Company in selecting director nominees. Potential nominees suggested by shareholders will be evaluated by the Committee on the same basis as individuals identified directly by the Committee or from other sources. As a group, the Board is expected to represent a broad diversity of experience in business matters and to be able to assess and evaluate the role and policies of the Company in

the face of changing conditions in the economy, regulatory environment and customer expectations. While there is not a formal list of qualifications, nominees for Board membership are expected to be prominent individuals with demonstrated leadership ability and to possess outstanding integrity, values and judgment. Nominees must be willing to devote the substantial time required to carry out the duties and responsibilities of directors. In addition, each Board member is expected to represent the broad interests of the Company and its shareholders as a group, and not any particular constituency. The Committee uses these and other relevant criteria to evaluate potential nominees.

 

Shareholders who wish to nominate a director nominee should do so in accordance with the nomination provisions of the Company’s bylaws. In general, a shareholder nomination for the 2009 Meeting should be delivered to the Company at least 90 days but no more than 120 days prior to the first anniversary of this year’s Meeting date unless the date of the 2009 Meeting is more than 30 days before or more than 70 days after such anniversary, in which case the proposal must be received not earlier than the 120th day prior to the date of the 2009 Meeting and not later than the close of business on the later of the 90th day prior to the date of the 2009 Meeting and the 10th day following the day on which the Company first publicly announces the date of the 2009 Meeting. Nominations should be accompanied by a description of the proposed nominee’s qualifications and experience and his or her consent to serve if elected. A shareholder’s notice regarding any such nomination should also indicate the nominating shareholder’s name and address and the class and number of shares that he or she owns along with all other information required under Article I, Section 11(a)(ii) of the Company’s bylaws.

 

Public Affairs Committee

 

The Public Affairs Committee reviews and makes recommendations concerning the Company’s practices and programs designed to address important public policy issues that may impact the Company, its shareholders, and the general public. This four-member Committee held four meetings during 2007.

 

The Board periodically, but at least once every three years, reviews and sets the compensation for non-management directors based on the recommendation of the Governance Committee. Director compensation includes both cash and stock-based components. In recommending the amount and form of director compensation, the Committee considers, among other factors, the level of compensation necessary to attract and retain qualified, independent directors. The most recent review of the compensation for non-management directors occurred in 2007, and resulted in no changes in the overall compensation structure.

 

During 2007, each non-employee director received an annual retainer of $75,000, at least 50% of which was payable in CSX stock pursuant to the CSX Corporation Stock Plan for Directors (the “Stock Plan”). The Chair of each Board committee other than the Audit Committee received an additional $10,000. The Chair of the Audit Committee received an additional $15,000, and each member of the Audit Committee also received an additional $5,000. The stock component was paid to directors on May 2, 2007 and, pursuant to the terms of the Stock Plan, was determined using the average of the high and low price per share on May 1, 2007, the day before the 2007 annual meeting of shareholders, of $43.32. On December 15, 2007, each non-employee director also received a grant of 5,000 shares of CSX common stock, which had a market value of $217,625 (based on an average of the high and low price per share on the date of grant of $43.525) and was required to be deferred. This is consistent with the Board’s historical practice followed since 2003 of awarding a grant of 5,000 shares to each non-employee director at the Board’s December meeting. Directors also are eligible to receive other compensation and benefits as discussed below. With the exception of participation in the CSX Directors’ Matching Gift Program (“Matching Gift Program”), Mr. Ward does not receive compensation for his services as a director.

 

During 2007, each director was eligible to defer all or a portion of his or her director’s fees, including cash compensation and stock, under the CSX Directors’ Deferred Compensation Plan (the “Directors’ Plan”). Deferrals are subject to Section 409A of the Internal Revenue Code (“Section 409A”). Deferrals of director

fees and other awards earned prior to 2005 are not subject to Section 409A. Those deferrals will continue to be administered in accordance with the terms of the Directors’ Plan in effect as of December 31, 2004.

 

Cash deferrals may be credited to an unfunded account and invested in various investment choices or deferred as shares of CSX common stock. The investment choices parallel the investment options offered to employees under CSX’s 401(k) plan. Stock deferrals are automatically held as outstanding shares in a rabbi trust, with dividend equivalents credited in the form of shares.

 

The following table summarizes the compensation earned by each of the non-employee directors in 2007. No stock option awards were made to the directors in 2007.

 

 

 

 

Stock Ownership Guidelines

 

The Board has adopted Stock Ownership Guidelines to better align the interests of non-employee directors with the interests of shareholders. These guidelines require that all non-employee directors own shares of CSX common stock. Within five years of election to the Board, a non-employee director is expected

to acquire and hold an amount of CSX common stock equal in value to five times the amount of such non-employee director’s annual retainer. Moreover, non-employee directors may only dispose of shares held in excess of 1.2 times the applicable ownership threshold. If the annual retainer increases, the non-employee directors will have five years from the time of the increase to acquire any additional shares needed to satisfy the guidelines. Further information on the Stock Ownership Guidelines is available on CSX’s website at investors.csx.com under the heading “Corporate Governance”.

 

Charitable Gift Plan

 

All CSX directors elected before 2004 are eligible to participate in the CSX Directors’ Charitable Gift Plan (“Gift Plan”), which is partially funded by CSX-owned life insurance policies. Under the Gift Plan, if a director serves for five consecutive years, CSX will make contributions totaling $1 million on his or her behalf to charitable institutions designated by the director. Contributions to designated charities are made in installments, with $100,000 payable upon the director’s retirement and the balance payable in installments of $100,000 per year, starting at the time of the director’s death.

 

Matching Gift Plan and Other Benefits

 

Directors may participate in the CSX Directors’ Matching Gift Program (“Matching Gift Program”), which is considered an important part of CSX’s philanthropy and community involvement. CSX will match $2 for every $1 that a director contributes to organizations that qualify for support under CSX guidelines, up to a maximum annual CSX contribution of $50,000 per director. During 2007, 42 philanthropic organizations in areas served by the Company received $501,000 under the Matching Gift Program. The matching amounts are included in the directors’ compensation table on page 15.

 

Other Benefits

 

CSX makes available to directors personal excess liability insurance at no expense to the directors. In addition, directors are entitled to certain discounts (not to exceed an aggregate of $10,000 per director) when visiting The Greenbrier, a CSX-owned resort. During 2007, the value of the excess liability insurance and the discounts described above varied by director but did not exceed $3,815 for any director.

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and on the discussion described below, the Compensation Committee recommended to the full Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Compensation Committee

 

William C. Richardson, Chairman

Robert D. Kunisch

Frank S. Royal

Donald J. Shepard

 

Executive Summary

 

The Compensation Discussion and Analysis (“CD&A”) describes and analyzes the compensation of our Chief Executive Officer, Michael J. Ward, and our other named executive officers. The development of compensation programs and benefit plans for senior executives, along with specific compensation decisions for the named executive officers, is the responsibility of the Compensation Committee of the Board (the “Committee”). The Committee is assisted in this responsibility by an independent compensation consultant, whose duties and responsibilities are detailed in this document. The Committee utilizes benchmark data, both from a peer group of U.S. railroads and from a broad survey of comparably-sized general U.S. companies, to assist in determining pay programs and in making compensation decisions on individual named executive officers.

 

The purpose of CSX’s executive compensation program is to attract and retain talented, high-performing executives with specialized experience and expertise in a highly competitive industry subject to substantial government oversight. It is intended to reward recent performance, incentivize future performance, and align the long-term interests of executives with those of shareholders. It does so by utilizing direct pay — base salary and short- and long-term incentives — and indirect pay. These are outlined in detail beginning on page 20.

 

The CD&A emphasizes the Company’s commitment to a pay-for-performance compensation philosophy. For senior executives, 75% or more of their compensation depends on meeting or exceeding performance standards established by the Committee. No payments are made under the Company’s short- and long-term incentive compensation plans if performance threshold targets are not achieved. In establishing the Company’s incentive compensation plans, the Committee selects performance measures designed to enhance shareholder value. The discussion set forth in the sections below will provide further detail on the design and effectiveness of the Company’s overall incentive compensation programs.

 

In 2007, the Company had improved performance along almost all financial measures. This resulted in a payout of 90% under our performance-based annual incentive compensation plan, and 151.1% under our performance-based long term incentive compensation plan.

 

The CD&A is divided into five sections in order to help explain and analyze CSX’s compensation philosophy, policies and programs, how they are administered, how they operated in 2007, and how understanding them can contribute to a better understanding of CSX and its management. The sections of our CD&A include:

 

 

 

Role of the Compensation Committee

 

The Committee is specifically responsible for establishing compensation and benefits programs, as well as plans for the Company’s senior executives — the CEO and his senior team — which includes the named executive officers in this Proxy Statement.

 

The Committee is comprised solely of independent directors, and its membership currently consists of William C. Richardson, Committee Chair, Donald J. Shepard, Frank S. Royal, and Robert D. Kunisch. The members of the Committee are recommended by the Governance Committee and elected by the Board annually. For more information and discussion of the Committee and the independence of its members, see page 13.

The Committee is responsible for determining the form, amount and mix of compensation elements, setting and reviewing performance goals and achievements, and determining payouts. With regard to Mr. Ward’s compensation, the Committee performs these functions with input from the Senior Vice President — Human Resources and Labor Relations (“SVP — Human Resources”) and the independent outside consultant (discussed below) and with regard to the other named executive officers, the Committee consults with Mr. Ward, the SVP — Human Resources and the independent outside consultant, but in all cases has responsibility for final compensation decisions.

 

The Committee strives to maintain an effective balance between short-term and long-term business objectives, employing its understanding of the Company, the industry and the current and likely future business environment. Accordingly, the Committee endeavors to structure short-term and long-term incentive plans that reward performance based on achievement of different, but complementary, strategic and financial objectives. The Committee believes this balanced approach motivates management’s efforts to drive strong outcomes in both the current and future environment.

 

In establishing individual executive compensation opportunities and awarding actual payments, the Committee considers analysis and recommendations from its independent compensation consultant, competitive practices, the CEO’s recommendations (for his subordinates), established plans and internal practices. However, the Committee ultimately applies its judgment in establishing incentive opportunities and determining appropriate payouts for executives. The Committee does not rely solely on guidelines or formulas, or short-term changes in business performance. Key factors affecting these determinations include:

 

 

 

To assist in discharging its responsibilities, the Committee employs a variety of internal and external professional resources such as CSX human resources (“Human Resources”), legal, finance, tax, and accounting professionals. Pursuant to the Committee charter, the Committee has the authority to select, retain, and terminate a compensation consultant used to assist in the evaluation of the CEO’s or any senior executive’s compensation and benefits. The Committee formally reviews and evaluates the performance and independence of its independent compensation consultant annually.

 

Independent Compensation Consultant

 

The Committee retains an independent compensation consultant to provide the Committee with independent, objective analysis and professional opinions on executive compensation matters. This consultant, Semler Brossy Consulting Group, LLC (the “Consultant”), reports directly to the Chairperson of the Committee and performs no other work for the Company or for any employee of the Company. The Consultant generally attends all meetings of the Committee where evaluations of the effectiveness of overall executive compensation programs are conducted or where compensation for executive officers is analyzed or approved. The Consultant is paid on an hourly fee basis, such hourly rate approved by the Committee annually. The performance and the independence of the Consultant is reviewed on an annual basis by the Committee, at which time they make a

determination as to the renewal of the Consultant’s annual contract. The Consultant has been the independent compensation consultant for the Committee since 2003.

 

Duties and Responsibilities

 

In 2007, the Consultant’s role included:

 

 

The performance of the Consultant’s duties in 2007 required an understanding of all relevant CSX internal factors such as:

 

 

Role of the CEO in Compensation Decisions

 

The CEO reviews compensation comparison benchmark data, as more fully discussed on page 22, for members of his senior executive team (excluding data on his position). Using this data, he considers information on individual performance and scope of responsibility and makes individual compensation recommendations to the Compensation Committee for the senior executive team, other than himself. These recommendations include possible salary adjustments, generally made only every other year (biennially) and adjustments to the annual incentive compensation (or SEIP, as defined below) payout for each member of the executive team based on his or her individual performance during the previous year.

 

The CEO does not establish targets for performance-based compensation plans, as this is a role of the Committee. The CEO also does not make recommendations and he is not present when the Committee discusses his individual compensation.

 

Philosophy and purpose of CSX’s Executive Compensation Program

 

CSX operates in a highly competitive industry subject to substantial government oversight in which a company’s success depends on having highly skilled management with specialized expertise in addition to more general managerial talents. The Committee believes therefore that in the joint interests of the Company’s

success and the long-term value of our shareholders, it is important for us to appropriately value the quality, skills and dedication of the senior executive officers. The executive compensation program is designed to reflect that position. To that end, the compensation program is structured to:

 

 

The Committee then evaluates the success of the compensation program and makes changes to the program as appropriate.

 

CSX uses a variety of compensation tools to achieve these goals including: (i) direct pay — base salary, short-term and long-term incentives, and (ii) indirect pay — employee benefits, including retirement and certain post-employment benefits, nonqualified deferred compensation plans, and perquisites.

 

The Company’s compensation decisions are premised on the following two key principles:

 

 

Performance-based Compensation

 

In light of the Committee’s belief that the talents and experience of management play a key role in the Company’s success, the Committee has structured the Company’s compensation program to recognize those talents while rewarding actual performance results. A substantial portion of the executive officers’ potential compensation depends upon achievement of preset financial and strategic objectives. For example, in 2007, base salary was targeted to comprise only 15% to 25% of direct compensation. Thus, 75% to 85% of a named executive officer’s take-home pay was at risk — meaning that if the Company did not meet or exceed certain predetermined threshold performance levels, the executive would not receive a payout under either the short-term or long-term incentive programs. In this regard, 100% of CSX’s short-term and long-term incentive compensation is performance-based, which is unique among the Class I railroads.

 

Senior Executive Incentive Plan (“SEIP”) — this refers to the Company’s shareholder approved plan for annual cash incentives to be paid to the Company’s named executive officers while preserving the Company’s tax deduction under Internal Revenue Code (the “Code”) Section 162(m). The SEIP is 100% performance-based.

 

Management Incentive Compensation Plan (“MICP”) — this refers to the Company’s annual cash bonus plan for eligible employees other than the named executive officers and is discussed in detail in the Elements of CSX’s 2007 Compensation Program. The plan is 100% performance-based and requires attainment of both financial and strategic objectives. No payout is made under the MICP unless a preset operating income level is achieved regardless of strategic achievement.

 

Long-term Incentive Plan — this refers to the Company’s equity-based long-term incentive plans (“LTIPs”) whose philosophy is discussed below, as well as in detail in the Elements of CSX’s 2007 Compensation Program. The plans are also 100% performance-based and require improvement in operating ratio during a 3-year cycle (or for the 2006-2007 LTIP, a 2-year cycle), as measured in the final year. For named executive officers, other measurements are also considered as explained below. No payout is made unless a preset operating ratio is attained.

 

Use of Performance Grants

 

CSX’s pay for performance philosophy underlies the long-term incentive decisions of the Committee. CSX has not issued stock options since 2003 and has changed its long-term compensation approach to focus exclusively on performance-based grants designed to reward performance over multi-year periods and which are payable only upon the achievement of preestablished performance targets. The key reasons for this important change included:

 

 

 

CSX’s shareholder-approved plans allow for the use of a variety of long-term vehicles, including options and restricted stock. At this point in the Company’s business, the Committee believes the exclusive use of performance grants is appropriate. Performance grants are described in more detail on pages 25-29.

 

Results of performance-based compensation philosophy

 

Incentive payouts have reflected the Company’s performance philosophy and have tracked substantial performance improvements and sharpened focus and commitment to significant improvements in operational performance and customer service since the current executive team was established in 2004. The impact of the Company’s performance-based compensation philosophy can be seen, for example, in the annual incentive payout table on page 24.

 

Following disappointing results in 2003, which resulted in no bonuses being paid to executives, operations, service and financial performance began to rebound in 2004, as the Company undertook a restructuring that reduced management staff by approximately 20%. This restructuring also prepared the Company to effectively meet increasing demand for railroad and intermodal services. As a result of the restructuring and other productivity initiatives, 2004 performance showed progress marked by an operating income improvement from $651 million to $993 million.

 

In 2005, the Company continued the momentum built in 2004 and recorded operating income of $1.549 billion, which exceeded its target of $1.31 billion by 18%. This result was delivered despite the negative impact of Hurricane Katrina, which constrained operations and resources for several months during the year.

 

In 2006, CSX’s marked improvement continued and was defined by substantial growth in pricing and revenue. The CSX team also made improvements in safety, customer service and productivity. Against this background, more than $150 million of capacity expansion and facility improvement projects were completed for high-growth areas. CSX delivered further shareholder value by increasing dividends 54 percent and by repurchasing $465 million of common stock. Share price increased by 36%, the highest increase among the Class I railroads.

 

In 2007, the Company was able to continue its improvement with pricing initiatives leading to substantial revenue growth, despite weakening traffic volume. The Company also made significant safety, service, and productivity gains, which included an industry-leading 17% reduction in personal injury frequency and a 4.5% increase in train velocity. The Company also achieved a 7.6% improvement in equipment dwell, a measure of asset utilization. Since 2004, the Company delivered productivity improvements exceeding $400 million. In 2007, the Company also enhanced shareholder value by increasing quarterly dividends by 50% and by repurchasing $2.1 billion of common stock under its previously authorized $3 billion share repurchase program. In the first quarter of 2008, the Company repurchased approximately $300 million of additional shares of common stock under this program, and on March 17, 2008, announced an increase in this authorization by approximately $2.4 billion, bringing the total remaining authorization to $3 billion. CSX intends to complete this recently increased repurchase program by the end of 2009. During 2007, the CSX share price increased by 28%.

 

The Committee believes its compensation philosophy has contributed to the Company’s ability to attract and retain a highly qualified, performance-driven management team, which has played a key role in producing

stronger, safer and more efficient business operations. From the beginning of 2004 through the end of 2007, CSX’s stock price increased approximately 145%, and net cash provided by operating activities increased by $126 million.

 

Competitive Compensation: Benchmarking and Competitive Comparisons

 

The Committee’s Consultant prepares or reviews in detail all competitive data for the Committee.

 

In 2007, Human Resources contracted with Towers Perrin, an executive compensation consulting firm, to assist in gathering and analyzing market data for compensation paid for similar positions by other large companies and railroads. The general industry comparisons are to service companies of similar size and market capitalization to CSX, with financial companies excluded from the comparisons. The Committee reviews this data with its Consultant when making compensation decisions.

 

The Committee also reviews competitive pay and performance data on specific peer groups of U.S. railroads as well as competitive pay data from broad surveys of general U.S. companies. For 2007, the peer group for pay and performance was comprised of the other major U.S. railroads (BNSF, Norfolk Southern, and Union Pacific). In some cases, where available, performance data may include the Canadian railroads or broader railroad survey data. The peer group analysis always includes a view of the relative size and performance of each railroad. It is noteworthy that peer rail companies still currently use options and time-vested restricted stock as primary components of their compensation programs. As previously mentioned, CSX’s incentive program — direct compensation other than base salary — is 100% performance-based.

 

Further to our principle of having compensation practices that are competitive with reasonable market standards, competitive data from the railroad peer group and the broad survey of general U.S. companies is analyzed from several perspectives. Both targeted and actual payouts are considered. When reviewing the general industry group of companies, data at both the 50th and 75th percentile of compensation is considered. Final decisions are based on this data, along with the scope of the individuals’ responsibilities and their individual performance. General industry comparisons include 127 companies that have revenues between $6 billion and $15 billion. The comparison group excludes financial services and the banking industry because they generally pay in excess of market rates for similar-sized companies.

 

In addition, in 2007, we shifted our payout practices under our LTIPs going forward so that those payments are made annually with respect to the preceding three-year period rather than every other year. Our two-year plan was designed to provide a biennial (every other year) payout for a two-year performance period. Under our new LTIP payout practices, named executive officers and eligible management employees are eligible for a payout each year based on the performance in the last year of the three-year performance period.

 

Accounting, Tax and Dilution Considerations

 

As discussed, a significant portion of each named executive officer’s compensation is performance-based. Code Section 162(m) imposes a $1 million limit on the amount that CSX may deduct for compensation paid to the named executive officers. However, performance-based compensation paid under a plan that has been approved by shareholders is excluded from the $1 million limit if, among other requirements, the compensation is payable only upon attainment of preestablished objective performance goals and the Committee that establishes such goals consists only of outside directors.

 

The Committee and the Board have considered the Code Section 162(m) requirements. While the tax effect of any compensation arrangement is a key factor to be considered, the effect is evaluated by the Committee in light of CSX’s overall compensation philosophy and objectives. CSX’s compensation program for named executive officers has both objective and discretionary elements. Generally, the Committee wishes to maximize CSX’s federal income tax deductions for compensation expense and, therefore, has structured the short-term and long-term incentive elements of executive compensation to meet the requirements for deductibility under Code Section 162(m). Nonetheless, the Committee believes that there are circumstances in which the provision of compensation that is not fully deductible may be more consistent with CSX’s compensation philosophy and objectives and may be in the best interests of CSX and its shareholders. The

Committee’s ability to exercise discretion and to retain flexibility in this regard may, in certain circumstances, outweigh the advantages of qualifying all compensation as deductible under Code Section 162(m).

 

The Committee believes that the compensation of executive officers has been appropriately structured and administered so that a substantial component of total compensation is dependent upon, and directly related to, CSX’s performance and total returns to its shareholders. In developing the Company’s executive pay programs, the Committee also considers the accounting, tax and shareholder dilution costs of specific executive compensation programs, and seeks to balance the earnings, tax, and dilution impact of executive compensation plans with the attraction, retention and motivation value, and performance requirements of the plans.

 

Analysis of Elements of CSX’s 2007 Compensation Program

 

The Committee made its decisions concerning the specific compensation elements and total compensation paid or awarded to CSX’s named executive officers within the framework discussed below and after consultation with the Consultant. The total compensation plan consisted of the following key elements:

 

Direct Compensation

 

 

Indirect Compensation

 

 

Total direct compensation consists of base salary plus annual and long-term incentives. The objective is to provide total pay opportunities that are competitive with those provided by peer companies in the railroad industry and general industry, with actual payment dependent upon results. In its efforts to achieve this objective, the Committee considers the appropriate balance between incentives for short-term and long-term performance and compensation paid to the executives’ peers. The Committee also considers the competitiveness of indirect compensation (pension and other benefits and perquisites). In all cases, the Committee bases its specific decisions and judgments on whether each individual payment or award would provide an appropriate incentive and reward for individual performance that is consistent with the objective of our compensation program and sustains and enhances long-term shareholder value.

 

Base Salary

 

The Committee determines a salary for each named executive officer based on its assessment of the individual’s experience and abilities. Salary increases are based on performance and contribution to CSX’s performance. For purposes of recruiting and retention, base salaries are targeted at approximately the median of salaries paid for similar positions by the peer group and general U.S. comparison companies. Generally, base salary is approximately 15-25% of the named executive officers’ targeted total direct compensation, which reflects CSX’s philosophy that a substantial portion of the total compensation should be at risk and consist of performance-based cash and equity incentives that link to CSX’s financial and nonfinancial results. Base salary may represent a larger or smaller percentage of total direct compensation if actual performance under the incentive plans discussed below exceeds or falls short of performance targets.

 

In accordance with the Committee’s philosophy, the Committee did not provide for any base salary adjustments in 2007 (including for Mr. Ward). It will review base salary in 2008 under its approach to review base salary biennually rather than annually. Base salaries for the named executive officers remain competitive with the median salaries of the peer group and general U.S. comparison companies.

Annual Incentives

 

The SEIP provides the vehicle for annual incentives to be paid to the Company’s named executive officers while preserving the Company’s tax deduction under Code Section 162(m). Under this shareholder-approved plan, the maximum amount payable is equal to the lesser of: (i) 0.3% of operating income for the CEO and 0.2% of operating income for each other named executive officer, and (ii) $3,000,000. The Committee may adjust this amount downward in its sole discretion. In 2007, as in prior years, the Committee has exercised this downward discretion by utilizing the same methodology and performance achievement used under the MICP.

 

Applying the methodology utilized under the MICP, each named executive officer has a bonus opportunity expressed as a percent of base salary earned during the year. This is known as the target incentive opportunity, which represents a competitive bonus opportunity based on a 100% payout of the MICP. The final payout is then adjusted to reflect individual performance.

 

The Committee then reviews the Company’s performance for that year against the preestablished and preapproved performance goals for the Company for that year. The performance goals are split between: (i) the financial measurement — operating income — which, at a given level, can result in a payment between 0% and 120% of the named executive officer’s target incentive opportunity, and (ii) the strategic measurements that can result in a payment between 0% and 40% of the named executive officer’s target incentive opportunity (achievement of a threshold level of operating income is required for payment of any bonus regardless of strategic achievement). These strategic measures include rail operations, safety, governance, people development, plus additional financial metrics including revenue, earnings per share, operating ratio, cash flow, and the performance of subsidiaries.

 

The chart below illustrates the Company’s historical operating income and the percentage payout under the MICP since 2000. Prior to that time, annual incentive payments were based on different operating measurements.

 

 

 

 

The Committee establishes aggressive goals for payment of annual incentives and strictly adheres to achievement of those goals when approving awards. Targeted payouts require marked improvement from the previous year’s target. The chart below illustrates the improvement percentage required from year-to-year to achieve a target payout.

 

 

Payment for 2007

 

The target incentive opportunity as a percent of salary for the named executive officers in 2007 was 120% for Mr. Ward, 90% for Messrs. Munoz, Gooden and Ingram, and 80% for Ms. Fitzsimmons.

Based on the achievement of financial targets in 2007, and the assessment by the Committee of thirty-seven separate strategic measures (the general categories of which are described above), the Committee approved an overall payout of 90%, with adjustments made for individual performance. The payouts are reported as 2007 “Non-equity Incentive Plan Compensation” in the Summary Compensation Table. As in prior years, the payout for the named executive officers was substantially less than the maximum available to each individual under the SEIP.

 

Long-Term Incentives

 

Long-term performance-based compensation is intended to enhance the linkage of executive compensation to the creation of shareholder value by providing incentives based on performance measures that have historically driven long-term shareholder value. Annual long-term incentive grants for named executive officers are competitive with those for similar positions at peer companies and general industry, and are earned only upon the achievement of preestablished goals. Long-term incentive compensation is approved in the form of performance grants and is paid out in the form of shares of CSX common stock pursuant to the shareholder approved CSX Omnibus Incentive Plan (“Omnibus Plan”). The payout to the executives — and to over 600 additional management employees — is dependent on the Company’s performance against preestablished goals. Thus, the value of the payout is dependent on the number of performance grants earned — which are subsequently paid out in shares of CSX common stock upon approval of the Committee — and the share price of the CSX common stock at the time of payout.

 

CSX’s first performance grants-based LTIP was established for the 2004-2005 period. Currently, the Company has two long-term incentive cycles running — the 2006-2008 LTIP and the 2007-2009 LTIP. (The Company’s 2006-2007 LTIP was paid out in January 2008 and is discussed below along with payouts shown on page 37 in the Options Exercised and Stock Vested Table.) CSX implemented a 3-year LTIP in 2006, a 3-year LTIP in 2007 and intends to implement a new 3-year LTIP in each succeeding year. Consequently, there will be three overlapping plans in place at any given time resulting in an annual incentive payout opportunity at the expiration of each plan. The Committee meets several times over a period of several months, including with the independent Consultant, to discuss and review, among other things, the business plan for the years covered by the LTIP, various features of the proposed LTIP, and how the LTIP and annual incentives fit within the total executive compensation program. Beginning with the 2006-2007 and 2006-2008 LTIPs, the Committee adopted the practice of granting target awards at the May meeting of the Committee, which is the first regular meeting following receipt in April by the Committee and the Board of the Company’s business plan for the upcoming three-year period, upon which the LTIP targets are based.

 

At the time each LTIP is established, an initial number of performance grants is established for each participant representing a number of performance grants that have an initial dollar value (based on the then-current market price) determined in consultation with the independent Consultant, using the criteria described above. As discussed below, actual payouts under the LTIP do not occur until January of the year following the last year in the LTIP period, and can vary significantly from the LTIP target awards in terms of both the number of shares paid out and the value of the payout.

 

The long-term incentive opportunities are designed to emphasize performance that is substantially within management’s direct control, while also linking the payout’s value to share price by paying in CSX common stock. In 2006, after consideration of various financial measures, including free cash flow and return on invested capital, the Committee selected surface transportation operating ratio as the performance target for the LTIPs because surface transportation operating ratio:

 

 

 

In the outstanding LTIPs, operating ratio will be measured in the final year of the cycle against the preestablished goal set by the Committee at the beginning of the cycle. Under the LTIPs, operating ratio is defined as annual Surface Transportation operating expenses divided by Surface Transportation revenue of CSX’s rail and intermodal businesses, adjusted by excluding nonrecurring items that are disclosed in the Company’s financial statements.¹ Also, since the price of oil has a material impact on operating ratio, at the time of implementation of the LTIPs, provision was made for adjustment of the operating ratio targets by a predetermined amount if the per barrel cost of oil changes significantly.

 

The range of payouts under the LTIPs, if any, will primarily depend on the actual level of operating ratio achieved versus preestablished targets. As discussed below under each LTIP, for named executive officers, the number of shares paid out may be adjusted for earnings per share or “EPS” (measured in the final year of 2006-2008 LTIP) or cumulative operating income (for the 2007-2009 LTIP) of up to a 20% increase or decrease in the payout. In addition, for named executive officers, the payout is also subject to a discretionary downward adjustment of up to 30% based on strategic performance achieved under the LTIP. In exercising its downward discretion for LTIP payouts for the named executive officers, the Committee takes into account other factors, including but not limited to the potential total value of the individual and aggregate payouts based on both the achievement of preestablished performance measures and the Company’s share price at the time of Committee approval of any payouts. For example, in January 2008, the Committee exercised its downward discretion for the payouts under the 2006-2007 LTIP even though a majority of the strategic goals were achieved and despite the fact that EPS results were higher than the preestablished target. The net result was that no upward adjustment was made to the named executive officers’ payouts. Allowing for variations in actual performance and the exercise of the Committee’s downward discretion, the number of shares of CSX common stock comprising the payouts for named executive officers at the end of the performance cycle can range from 0% to 240% of the target number of shares on the date of the grant.

 

Awards are also subject to forfeiture if employment terminates before payout for any reason other than death, disability, or retirement. If employment terminates due to death, disability, or retirement, participants receive a prorated portion of any payout based on the time period they were an active participant in the plan. Change-in-control provisions that may affect vesting under the Omnibus Plan are discussed below.

 

2006-2007 LTIP

 

This LTIP is a two-year plan approved and implemented in May 2006, and was paid out in January 2008. The payout reflected a biennial LTIP award (covering years 2006 and 2007). This LTIP was the last of the 2-year cycle plans and served as the transition to the 3-year design discussed above. Therefore the payouts reflected in the “Option Exercises and Stock Vested” table cover payments for two years. The amount in the Stock Award column of that table that covers LTIP payments should be divided by two to determine the annualized payment. The prior two-year cycle plan was the 2004-2005 plan which paid out in January 2006. The 2006-2007 awards were based upon a 2007 operating ratio of 77.8% (adjusted from 77.6% to exclude nonrecurring items). In accordance with the preestablished targets, the Committee approved a payout of 151.1% of the targeted award.

 

 

¹ In first quarter of 2008, the Company reclassified items within “Other Operating Income” and certain items within “Other Income” into the Rail segment as disclosed in the Company’s Form 10-Q filed with the SEC on April 16, 2008. For purposes of the 2006-2008 and 2007-2009 LTIPs, surface transportation operating ratio will continue to be calculated in the same manner as it has been calculated for prior periods.

Target level of difficulty

 

The following chart illustrates the Company results necessary to attain the preestablished financial goals set in early 2006 by using the Company’s business plan. For instance: (i) to achieve a threshold payout, an operating ratio improvement of 60 basis points (or 0.6 percentage points) over the 2005 operating ratio was needed, (ii) to achieve a target payout, an operating ratio improvement 2.2 percentage points was needed, and (iii) to achieve a maximum payout, an operating ratio improvement of 7 full percentage points was needed.

 

Alignment of 2006-2007 LTIP Targets with the Long Term Business Plan

 

 

The table below illustrates the CEO’s various payout possibilities — below threshold, at target, and at maximum — given various prices of CSX common stock.

 

Table of Potential 2006 — 2007 LTIP Payout — CEO

 

 

 

 

If the threshold performance goal (operating ratio) is not achieved, no payout under the LTIP will result regardless of the occurrence of stock price appreciation.

 

As part of the LTIP design, and approved when the LTIP was established, adjustments to the operating ratio targets are made if the average price of fuel significantly increased or decreased in 2007. The anticipated fuel price when developing the original operating ratio targets was $61. However, in 2007, the average fuel price paid by CSX was $72.28. Therefore, in accordance with the preset adjustments contained in the LTIP,

the threshold, targeted and maximum goals for operating ratio were adjusted to 81.85%, 80.25% and 75.45% respectively.

 

The awards to the executive team, including the named executive officers, were further subject to adjustments based on the achievement of preestablished earnings per share targets (excluding nonrecurring items and adjusted downward for share repurchases) in the final year. The achievement of this measure could have produced up to a 20% increase or decrease in the payout generated by the operating ratio measure. The LTIP further provided the Committee with discretion to reduce awards by up to 30% based upon its assessment of management’s achievement of preestablished strategic goals including safety, corporate responsibility, and other operating goals. The Committee exercised its downward discretion for the payouts under the 2006-2007 LTIP even though a majority of the strategic goals were achieved and EPS results were higher than the preestablished target. The net result was that no upward adjustment was made to the named executive officers’ payouts.

 

2006-2007 LTIP — Actual Payout

 

The actual payout was at a payout percentage of 151.1% of target. The stock price on the day the award was approved was $41.18. (This payout was under the biennial program — the payout amount includes incentive compensation for both 2006 and 2007.)

 

2006-2008 LTIP

 

This LTIP is a three-year plan approved and implemented in May 2006. It is the first three-year plan implemented and has been followed by another three-year plan (the 2007-2009 LTIP discussed below) in accordance with the Committee’s desire to have three overlapping plans in place at any given time. As mentioned above, a new three-year LTIP implemented in each successive year creates an incentive payout opportunity on an annual basis.

 

Surface Transportation operating ratio is the primary measurement, but the awards to the executive team, including the named executive officers, are further subject to adjustments based on the achievement of preestablished earnings per share targets (excluding nonrecurring items and adjusted for share repurchases) in the final year. The achievement of this measure can produce up to a 20% increase or decrease in the payout generated by the operating ratio measure. The Committee also has discretion to reduce LTIP awards by up to 30% based on its assessment of management’s achievement of preestablished strategic goals, including safety, corporate responsibility, people development, and preestablished operating goals. The performance targets for the 2006-2008 LTIP have been set with similar target levels of difficulty as fully illustrated in the 2006-2007 LTIP section. The target level requires improvement over the prior year.

 

2007-2009 LTIP

 

In May 2007, the Committee approved and implemented the 2007-2009 LTIP. Operating ratio is the primary measurement for this plan, but the awards to the executive team, including the named executive officers, are further subject to adjustments based on the achievement of a preestablished three-year cumulative operating income target. The Committee decided to utilize cumulative operating income in this LTIP instead of EPS primarily because operating income (i) requires consistent, continuous operating improvements, (ii) since 1990, has had a higher correlation to stock price than EPS, and (iii) eliminates the need to annually adjust EPS to reflect the Company’s share repurchase program. The achievement of this measure can produce up to a 20% increase or decrease in the payout generated by the operating ratio measure. The Committee also has discretion to reduce LTIP awards by up to 30% based on its assessment of management’s achievement of preestablished strategic goals, including safety, corporate responsibility, people development, and preestablished operating goals. The performance targets for 2007-2009 LTIP have been set with similar target levels of difficulty as fully illustrated in the 2006-2007 LTIP section. The target level requires improvement over the 2006-2008 LTIP target.

Claw Back Provision

 

The 2007-2009 LTIP contains a provision for senior management (Vice Presidents and above) that requires the repayment to the Company of any award received if within the two-year period following the receipt of the award, the employee violates certain conditions including (i) leaving CSX and working for a competitor in a similar capacity as the participant has functioned during the past five years at CSX, or (ii) engaging in other types of conduct that puts the Company at a competitive disadvantage. The claw back also requires that, where due to accounting irregularities, the Company is required to restate its financial statements, amounts in excess of the otherwise proper award be repaid to the Company.

 

Consideration for Noncompete Agreement

 

Senior management (Vice Presidents and above) also were required to enter into formal noncompete agreements with the Company as a condition for participation in the 2007-2009 LTIP. The noncompete restrictions are similar to those contained in the claw back provision and generally extend for a period of 18 months following separation from employment.

 

Perquisites

 

In 2007, approximately 40 members of senior management, including the named executive officers, were provided an annual perquisite allowance of $15,000. This allowance is paid in lieu of any car allowance or usage charge, any country club or lunch club memberships, and any outside tax preparation work. Executive officers are expected to utilize their private cars at their expense, for Company use as required, and utilize private club memberships for business purposes. Financial planning services, excess liability insurance and annual physicals were made available to the executive officers and were valued at approximately $16,000 for each executive officer. Additionally, approximately 165 members of senior management, including the named executive officers, were eligible to receive discounts of 50% (not to exceed an aggregate of $10,000 per eligible employee) at The Greenbrier, a CSX-owned resort in West Virginia.

 

For security reasons, since Mr. Ward became CEO in 2003, he has been required to travel by Company aircraft at all times, and a home security system has been provided to him. For 2007, Mr. Ward’s Company-mandated aircraft usage was $105,922. All other executive team members are entitled to occasional private air travel and, other than Mr. Ward, the maximum incremental cost to CSX for any one named executive officer in 2007 was $16,578.

 

More information on our aircraft and other perquisites, including specific details about perquisites afforded to each named executive officer, is available at pages 33-34.

 

Nonqualified Deferred Compensation Plans

 

CSX maintains nonqualified deferred compensation plans, in compliance with Code Section 409A, for the benefit of its executives and certain other employees. The types of compensation eligible for deferral include base salary, short-term incentive compensation (annual bonus), and LTIP awards. The interest earned on these deferrals is at market rates for all of the named executive officers.

 

The purpose of the nonqualified deferred compensation plan is to provide executives with the opportunity to:

 

 

 

 

Cash deferrals are hypothetically invested, as elected by the participant, among the investment funds or benchmarks that are available under the 401(k) plan. Stock deferrals are automatically held as outstanding shares in a rabbi trust. Dividend equivalents are either credited in the form of shares, or received as cash in

connection with stock deferrals made prior to 2005. For stock deferrals made in 2005, or any time thereafter, dividend equivalents are credited in the form of shares.

 

Beginning with deferrals made on or after January 1, 2005, distribution of deferred amounts plus earnings to participants who are “key employees” will not be made for at least six months following separation from service for those who elected a distribution at separation. Key employees are generally the 50 highest paid officers.

 

Post-Employment Arrangements

 

Retirement Compensation

 

CSX’s retirement benefits consist of two components: a defined benefit pension plan and a 401(k) plan. CSX also sponsors a post-retirement health and welfare plan for employees hired before January 1, 2003. The Company stopped providing the post-retirement health and welfare plan for employees, including executive officers, hired on or after January 1, 2003, as a cost-saving measure and because providing these benefits was no longer necessary to remain competitive in the labor market.

 

The retirement income components described above are provided to the named executive officers under the following plans, which are fully described on pages 38-43:

 

 

Other Post-Employment Compensation

 

With the exceptions discussed in the “Post-Termination and Change in Control Payments” section, the Company does not generally provide for any special termination of employment payments or benefits that favor the named executive officers in scope, terms or operation. Payments are generally available to all salaried employees whose positions are eliminated, pursuant to the terms of CSX’s Severance Plan, which pays benefits based upon years of service. The benefits range from one month of base pay (if one to three years of service has been attained) to one year of base pay (if at least 34 years of service has been attained).

 

Change-in-Control Agreements

 

CSX has entered into change-in-control agreements with each of the named executive officers (“Change-in-Control Agreements”). We believe these agreements help provide continuity of management in the event of a change in control of CSX. CSX also has a goal of ensuring management objectivity in the face of a potential transaction and believes this program accomplishes that goal. Overall, CSX views this program as a key element of a competitive executive compensation program that can attract and retain the type of high quality talent the Company needs from its executives, and we have designed the provisions to be in line with market practice.

 

A detailed description of the Change-in-Control Agreements is set forth on pages 43-48 under the section entitled “Post-Termination and Change-in-Control Payments.”

Severance Agreements

 

In response to a shareholder proposal presented at last year’s annual meeting by the Trust for the International Brotherhood of Electrical Workers’ Pension Benefit Fund regarding the level of severance benefits provided to executives in the event of severance from the Company, the Board adopted, in December 2007, a new policy for severance benefits payable to “senior executives” (defined as named executive officers within the meaning of the Securities Exchange Act of 1934) for agreements entered into with a senior executive on or after December 12, 2007. The new policy was developed through full discussion and agreement with the shareholder and specifically was designed to cover new agreements. Thus, none of the existing agreements, including automatic self-renewing agreements, are covered by this new policy. The new policy limits the payment of severance benefits, without shareholder approval, to 2.99 times base salary plus bonus, as defined in the policy. Severance benefits for named executives are paid only in the event of termination following a change in control. (As discussed above, certain equity awards are immediately payable upon a change in control under the shareholder-approved Omnibus Plan.) Further, tax gross-up payments are available only on payments unrelated to the severance. The policy is available on the Company’s Internet website at investors.csx.com under the heading “Corporate Governance”.

 

Health and Welfare Benefits

 

CSX provides health and welfare benefits to the named executive officers on the same terms available to eligible employees. This includes a variety of medical plan options from which to choose, including dental benefits under a preferred provider plan. The Company also provides basic life insurance and accidental death and dismemberment (“AD&D”) insurance coverage to all management employees, each of which is equal to two times their respective annual salary. Both life and AD&D benefits were capped at $1,000,000 effective January 1, 2006, but employees who already had coverage in excess of $1,000,000 retained the prior cap of $3,000,000. The Company also provides to the named executive officers salary continuance in the event of short-term disability plus long-term disability (“LTD”) insurance, travel accident insurance, and vacation based on length of service (again on the same basis as all other management employees).

 

Restricted Stock

 

From time to time, the Committee may award shares of restricted stock. Generally, CSX makes such awards in connection with attracting and, through the use of multi-year vesting schedules, retaining certain executive officers. CSX did not grant any restricted stock awards to any of the named executive officers in 2007. In addition, as part of its new stock ownership guidelines, the Company adopted a one-year holding period requirement applicable to all restricted stock for executive team members. Thus, following completion of the vesting period, named executive officers must wait one year before disposing of any restricted stock.

 

Other Employee Agreements

 

CSX occasionally enters into employment agreements with named executive officers. In general, these agreements are offered in connection with recruiting executive officers when CSX deems it advisable to provide employment security to new hires. Agreements of this type exist to provide severance pay and related benefits to Messrs. Ingram and Munoz, both of whom were recruited and hired from outside CSX three and four years ago, respectively. None of the other named executive officers currently has an employment agreement with CSX.

 

Additional information regarding these agreements is set forth on page 34 in the “Employment Agreements” section.

  Stock Ownership Guidelines

 

CSX believes that, to link the interests of executive officers to those of its shareholders, it is important that executive officers hold an ownership position in CSX common stock. To achieve this linkage, CSX has established the following formal stock ownership guidelines. These guidelines are generally at or above the stock ownership guidelines of the comparison companies. Senior executive officers must retain 100% of net shares issued until the guidelines are achieved, guidelines must be achieved within five years, and such officers may dispose of shares held in excess of 1.2 times the applicable ownership threshold. All of the named executive officers currently exceed these ownership guidelines. The requirements are as follows:

 

 

The Summary Compensation Table shows the amount and type of compensation received, as well as granted, in 2007 for the CEO, the CFO, and the next three most highly-paid executive officers.

 

 

 

 

Employment Agreements

 

CSX currently has employment agreements in place with Mr. Munoz and Mr. Ingram, which were entered into in 2003 and 2004, respectively, when each joined CSX. Mr. Ward, Mr. Gooden and Ms. Fitzsimmons do not have formal employment agreements in place, but rather, along with Mr. Munoz and Mr. Ingram, have their compensation reviewed and approved annually by the Committee and are all eligible to participate in the SEIP, LTIPs and all other elements of compensation discussed in the Compensation Discussion and Analysis section. The agreements for Messrs. Munoz and Ingram provide for certain benefits, which are discussed below on pages 43-44. The agreements do not provide for a specific duration of employment, but relate primarily to the provision of benefits upon separation.

 

Mr. Munoz

 

Under the terms of an agreement entered into in May 2003, Mr. Munoz is employed as Executive Vice President and CFO of CSX. The agreement provides for an annual base salary of no less than $500,000. The agreement also provides for an annual target bonus of 90% of his base salary. Upon joining CSX, Mr. Munoz received a stock option grant of 250,000 shares, which vest ratably over three years starting in 2006. As of December 28, 2007, Mr. Munoz is two-thirds vested — the final third vests May 7, 2008. In addition, Mr. Munoz was granted 50,000 shares of restricted stock in which he is fully vested. Mr. Munoz is also entitled to participate in employee benefit plans and to receive perquisites generally made available to senior executives of CSX.

 

Mr. Ingram

 

Pursuant to an agreement entered into in March 2004, Mr. Ingram is employed as Executive Vice President and Chief Operating Officer of CSX Transportation. The agreement provides for an annual base salary of no less than $450,000 and an annual target bonus of 90% of his base salary. Mr. Ingram is also entitled to participate in employee benefit plans and to receive perquisites generally made available to senior executives of CSX. If Mr. Ingram’s employment is terminated for any reason other than cause, he is eligible for a special pension benefit described in the narrative following the Pension Benefits Table.

 

The Grants of Plan-Based Awards Table is a supporting table to the Summary Compensation Table.

 

 

 

 

As described above in the Compensation Discussion and Analysis, the Summary Compensation Table and Grants of Plan-Based Awards Table reflect that a substantial portion of the total compensation paid to each named executive officer is at risk and consists of performance-based cash and equity incentives that link each named executive officer’s pay to CSX’s financial and non-financial results.

 

The table below presents information pertaining to all outstanding equity awards held by the named executive officers as of December 28, 2007, and their potential value based on CSX’s closing price on December 28, 2007 of $44.27. Outstanding equity awards are comprised of vested and unvested stock options, unvested restricted stock, and outstanding LTIP grants.

 

 

 

 

 

The table below presents the stock options exercised and restricted stock that vested for each of the named executive officers during 2007, the number of shares paid from the 2006-2007 LTIP, and the value realized from each.

 

 

 

 

 

As reflected by the Pension Benefits Table, and as described below, CSX maintains defined benefit plans (qualified and nonqualified) under which the named executive officers are entitled to benefits: the CSX Pension Plan and the Special Retirement Plan for CSX Corporation and Affiliated Corporations.