UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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LSI CORPORATION

(Name of Registrant as Specified In Its Charter)

 

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

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Notice of Annual Meeting of Stockholders

 

LSI Corporation will hold its Annual Meeting of Stockholders on Thursday, May 14, 2009, at 9:00 a.m., local time, at the company’s office located at 1621 Barber Lane, Milpitas, California 95035. We are holding the meeting for the following purposes:

 

1. To elect nine directors to serve for the ensuing year and until their successors are elected.

 

2. To ratify the Audit Committee’s selection of our independent auditors for 2009.

 

3. To approve our amended Incentive Plan.

 

4. To transact such other business as may properly come before the meeting and any adjournment or postponement thereof.

 

Holders of record of LSI common stock at the close of business on March 17, 2009, are entitled to notice of and to vote at the meeting.

 

We are using Securities and Exchange Commission rules that allow us to make our proxy statement and related materials available on the Internet. As a result, you may have received a “Notice of Internet Availability of Proxy Materials” instead of a paper proxy statement and financial statements. The rules provide us the opportunity to save money on the printing and mailing of our proxy materials and to reduce the impact of our annual meeting on the environment. We hope that you will view our annual meeting materials over the Internet if possible and convenient for you. If you would prefer to receive paper copies of our proxy materials, you can find information about how to request them in the notice you received.

 

Most stockholders can vote over the Internet or by telephone. You also can vote your shares by completing and returning a proxy card. If Internet and telephone voting are available to you, you can find voting instructions in the materials sent to you. You can revoke a proxy at any time prior to its exercise at the meeting by following the instructions in the enclosed proxy statement.

 

By Order of the Board of Directors,

 

Jean F. Rankin

Executive Vice President, General

Counsel and Secretary

 

 

March 31, 2009

 

CONTENTS

 

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 14, 2009:

 

This proxy statement, our 2008 annual report on Form 10-K and a letter to stockholders from our Chief Executive Officer are available at www.lsiproxy.com.

 

 

We are providing these proxy materials to our stockholders in connection with the solicitation of proxies by the Board of Directors of LSI Corporation to be voted at the Annual Meeting of Stockholders, to be held on Thursday, May 14, 2009, and at any meeting following postponement or adjournment of the annual meeting.

 

We invite you to attend the annual meeting, which will begin at 9:00 a.m., local time. The meeting will be held at our office located at 1621 Barber Lane, Milpitas, California 95035. Stockholders will be admitted beginning at 8:30 a.m. You will need an admission ticket and photo identification to enter the meeting.

 

If you are a stockholder of record, that is, you hold your shares in an account with our transfer agent, Computershare, or you have an LSI stock certificate, and received information about our annual meeting in the mail, you will find an admission ticket in the materials sent to you. If you are a stockholder of record, and received an e-mail describing how to view our proxy materials over the Internet and want to attend the meeting in person, write to us at LSI Corporation, 1110 American Parkway NE, Allentown, PA 18109, Attn: Response Center, or call us at 1-800-372-2447, to obtain an admission ticket.

 

If your shares are held in “street name,” that is, you hold your shares in an account with a bank, broker or other holder of record, and you plan to attend the meeting in person, you can obtain an admission ticket in advance by writing to us at LSI Corporation, 1110 American Parkway NE, Allentown, PA 18109, Attn: Response Center, and including proof that you are an LSI stockholder, such as a recent account statement.

 

We also will be webcasting the annual meeting. You can access the webcast at http://www.lsi.com/webcast. Information on our websites, other than our proxy statement and form of proxy, is not part of the proxy soliciting materials.

 

We are first distributing this proxy statement, the proxy card and voting instructions on or about March 31, 2009.

 

Instead of mailing paper proxy materials, we sent a “Notice of Internet Availability of Proxy Materials” to most stockholders this year. That notice provided instructions on how to view our proxy materials over the Internet, how to vote and how to request a paper copy of our proxy materials. We refer to that notice as the “Notice of Availability.” This method of providing proxy materials is permitted under rules adopted by the Securities and Exchange Commission. We hope that following this procedure will allow us to save money on the printing and mailing of those materials and to reduce the impact that our annual meeting has on the environment.

 

You are entitled to vote at the annual meeting all shares of our common stock that you held as of the close of business on March 17, 2009, which is the record date for the meeting. Each share is entitled to one vote on each matter properly brought before the meeting. For the election of directors, you may

“cumulate” your votes. You can find information about this procedure under “Other Voting Issues — Required Vote.”

 

On the record date, 648,762,316 shares of common stock were outstanding.

 

In accordance with Delaware law, a list of stockholders entitled to vote at the meeting will be available at the meeting, and for 10 days prior to the meeting, at 1621 Barber Lane, Milpitas, CA, 95035, between the hours of 9 a.m. and 4 p.m., local time.

 

Most stockholders can vote over the Internet or by telephone. You also can vote your shares by completing and returning a proxy card or, if you hold shares in “street name,” a voting instruction form. If Internet and telephone voting are available to you, you can find voting instructions in the Notice of Availability or in the materials sent to you. The Internet and telephone voting facilities will close at 11:59 p.m. eastern time on May 13, 2009. If you are a participant in our 401(k) plan, your voting instructions must be received by 11:59 p.m. eastern time on May 8, 2009. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

 

You can revoke your proxy (including any Internet or telephone vote) at any time before it is exercised by timely delivery of a properly executed, later-dated proxy or by voting in person at the meeting.

 

How you vote will in no way limit your right to vote at the meeting if you later decide to attend in person. If your shares are held in “street name” though, you must obtain a proxy, executed in your favor, from your broker or other holder of record, to be able to vote at the meeting.

 

All shares entitled to vote and represented by properly completed proxies received prior to the meeting and not revoked will be voted at the meeting in accordance with your instructions. If you return a signed proxy card without indicating how your shares should be voted on a matter and do not revoke your proxy, the shares represented by your proxy will be voted as the Board of Directors recommends.

 

If you hold your shares in “street name” (for example, through a broker), your shares may be voted even if you do not vote or attend the annual meeting. Under the rules of the New York Stock Exchange, member brokers who do not receive timely instructions from beneficial owners will be allowed to vote on the election of directors, the ratification of the Audit Committee’s selection of our independent auditors and the approval of our amended Incentive Plan.

 

If any other matters are properly presented at the annual meeting for consideration, including, among other things, consideration of a motion to adjourn the meeting to another time or place, the individuals named as proxies and acting thereunder will have discretion to vote on those matters according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. If the annual meeting is postponed or adjourned, your proxy will remain valid and may be voted at the postponed or adjourned meeting. You still will be able to revoke your proxy until it is voted. As of the date of this proxy statement, we did not know of any matters to be presented at the annual meeting other than those described in this proxy statement.

 

Quorum.  In order to conduct business at the meeting, we must have the presence, in person or by proxy, of the holders of a majority of the shares of common stock outstanding on the record date.

 

Required Vote.  In order for a nominee to be elected as a director, the nominee must receive more “For” votes than “Against” votes. In the election of directors, you may cumulate your votes and give one candidate a number of votes equal to the number of directors to be elected (nine) multiplied by the

number of votes to which your shares are entitled, or you may distribute your votes on the same principle among as many candidates as you see fit, provided that votes cannot be cast for more than nine candidates. In order to cumulate votes, you must give us notice prior to the voting of your intention to do so.

 

The affirmative vote of the holders of a majority of the shares represented at the meeting is required to approve each of the other proposals.

 

Effect of Abstentions and Broker Non-Votes.  You may vote to “abstain” on any of the matters to be voted on at the meeting. In the election of directors, an abstention will have no effect. If you vote to “abstain” on any other proposal, it will have the effect of a vote against that proposal. If you vote to “abstain” on any proposal, your shares will be counted as present at the meeting for purposes of determining whether we can conduct business. Broker non-votes, if any, will count toward the quorum requirement but will not count as votes cast on any proposal.

 

LSI will pay the expenses of the preparation of the proxy materials and the solicitation by the Board of Directors of proxies. Proxies may be solicited on behalf of the company in person or by telephone, e-mail, facsimile or other electronic means by directors, officers or employees of the company, who will receive no additional compensation for soliciting proxies.

 

We have engaged The Proxy Advisory Group, LLC to assist us in the solicitation of proxies, for a fee of $12,500 plus expenses. In accordance with the regulations of the Securities and Exchange Commission and the New York Stock Exchange, we will reimburse brokerage firms and other custodians, nominees and fiduciaries for their expenses incurred in distributing proxy materials to beneficial owners of our stock.

 

In addition to sending Notices of Availability rather than full sets of paper proxy materials, we have adopted another practice approved by the Securities and Exchange Commission called “householding.” Under this practice, stockholders who have the same address and last name and do not participate in electronic delivery of proxy materials receive only one copy of our Notice of Availability or proxy materials at that address, unless one or more of those stockholders has notified us that they wish to receive individual copies. If you would like to receive a separate copy of this year’s Notice of Availability or proxy materials, please call 1-800-579-1639, or write to us at: LSI Corporation, 1110 American Parkway NE, Allentown, PA 18109, Attn: Response Center.

 

If you share an address with another LSI stockholder and would like to start or stop householding for your account, you can call 1-800-542-1061 or write to Householding Department, 51 Mercedes Way, Edgewood, NY 11717, including your name, the name of your broker or other holder of record, if any, and your account number(s). If you consent to householding, your election will remain in effect until you revoke it. If you revoke your consent, LSI will send you separate copies of documents mailed at least 30 days after receipt of your revocation.

 

You also can elect to view future proxy statements and annual reports over the Internet either by voting at http://www.proxyvote.com or by visiting http://www.icsdelivery.com/lsi. If you choose to view future proxy statements and annual reports over the Internet, next year you will receive an e-mail with instructions on how to view those materials and vote. Your election will remain in effect until you revoke it. Please be aware that, if you choose to access those materials over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

 

Allowing us to household annual meeting materials or electing to view them over the Internet will help us save on the cost of printing and distributing those materials.

 

Our business, property and affairs are managed under the direction of our Board of Directors. Members of the Board are kept informed about our business through discussions with our Chief Executive Officer and other officers, by reviewing materials provided to them and by participating in meetings of the Board and its committees.

 

The following individuals are currently members of the Board:

 

 

Mr. Reyes, who is not an employee of the company, is the Chairman of the Board. In addition to chairing Board meetings, he attends meetings of the standing committees of the Board. At those meetings, he provides advice and participates in discussions, even though he is not a formal member of the committees.

 

The Board has three standing committees:

 

 

In 2008, the Board held eight meetings. All incumbent directors attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the committees of the Board on which they served. At least quarterly, the non-management directors met in executive session without members of management. These sessions are presided over by our Chairman. To communicate directly with Mr. Reyes or any of the other non-management directors, follow the instructions described below under “Communications with Directors.”

 

The Board has adopted a charter for each of the three standing committees and corporate governance guidelines that address the make-up and functioning of the Board and those committees. The Board has also adopted a code of conduct that applies to all of our employees, officers and directors, as well as a separate code of conduct that applies only to our principal executive officers and senior financial officers. You can find links to these documents on our website at: http://www.lsi.com/governance. You also can

obtain this information in print by writing to LSI Corporation, 1110 American Parkway NE, Allentown, PA, 18109, Attention: Response Center, or by calling 1-800-372-2447.

 

Although we do not have a policy with respect to attendance by directors at annual meetings of stockholders, we customarily schedule a Board meeting on the same day as the annual meeting to encourage and facilitate director attendance at the annual meeting. Nine out of ten then serving directors attended our 2008 annual meeting.

 

The Board has determined that all the directors other than Abhijit Y. Talwalkar, our Chief Executive Officer, including those who serve on the committees listed above, are “independent” for purposes of Section 303A of the Listed Company Manual of the New York Stock Exchange, and that the members of the Audit Committee are also “independent” for purposes of Section 10A(m)(3) of the Securities Exchange Act of 1934. The Board used the criteria set out in Section 303A of the Exchange’s Listed Company Manual and Section 10A(m)(3) of the Securities Exchange Act in making those determinations. The Board also considered additional criteria applied by RiskMetrics Group in analyzing director independence. In addition, the Board determined that two directors who left the Board in 2008, James H. Keyes and Timothy Y. Chen, were independent while they were directors.

 

The Board based its determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and compensation history, affiliations and family and other relationships and on discussions with the directors. The Board also reviewed the relationships between LSI and companies with which our directors are affiliated. None of the relationships considered were outside of the criteria referred to in the preceding paragraph. Because of the importance of the company’s relationship with Seagate Technology, the Board did specifically consider the fact that Gregorio Reyes, the Chairman of the Board, is also a director of Seagate, but did not believe that his position with Seagate affected his independence from LSI’s management.

 

The Audit Committee reviews our accounting policies and practices, internal controls, financial reporting practices and risks faced by the business. The Audit Committee selects and retains our independent auditors to examine our accounts, reviews the independence of the independent auditors and pre-approves all audit and non-audit services performed by the independent auditors. The committee also reviews our financial statements and discusses them with management and our independent auditors before we file those financial statements with the Securities and Exchange Commission. The Audit Committee regularly meets alone with our management, our independent auditors and the head of our Internal Audit Department, and each of them has free access to the Audit Committee at any time. The committee met 13 times in 2008.

 

Messrs. Mancuso (Chair), Hill and O’Rourke are the members of the Audit Committee. The Board has determined that each of those individuals is financially literate and an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K under the Securities Exchange Act of 1934.

 

The Compensation Committee establishes our overall executive compensation strategy and administers our executive officer compensation program, including setting all aspects of our executive officers’ compensation. The committee also makes recommendations to the full Board concerning director compensation and provides oversight for our equity-based and incentive compensation plans and the

benefit plans for our broader employee population. The committee does not generally delegate its authority with respect to executive officer or director compensation, although it may delegate to the chairman of the committee the authority to approve exact wording for plans or policies approved by the committee. The committee met five times in 2008.

 

The committee evaluates the performance of the Chief Executive Officer with the other independent members of the Board. The committee evaluates the performance of other executive officers based on its interactions with those individuals and based on evaluations of their performance submitted to it by our Chief Executive Officer.

 

To assist in setting appropriate levels of compensation for executive officers, the committee receives advice from an outside consultant it engages. For 2008, the committee engaged Hewitt Associates LLC as its compensation consultant. For officers other than our Chief Executive Officer, the committee also receives advice and recommendations from our Chief Executive Officer and information from the head of our Human Resources organization.

 

The committee retains its outside consultant and we generally do not allow the consultant to perform any services for the company that are not requested by the committee. Hewitt has also advised the committee on director compensation issues.

 

At the committee’s request, in mid-2008, Hewitt presented the committee with information about various types of equity-based compensation, including the advantages and disadvantages of each type and trends regarding the use of different types of equity-based compensation.

 

In late 2007, the committee provided Hewitt with information about our executive officer compensation packages and instructed Hewitt to prepare comparisons of our compensation packages with those of the companies in the peer group described under “Compensation Discussion and Analysis,” which Hewitt did. Hewitt’s presentation also included information about the compensation practices of the companies in our peer group and general industry companies, including:

 

 

In early 2008, our Human Resources organization provided the committee with our CEO’s recommendations for base salary and equity compensation for executive officers other than the CEO and included comparisons with market data provided by Hewitt.

 

Our Human Resources organization also provided the committee with “tally sheets” showing all elements of each executive officer’s compensation in 2008, as well as information about each executive officer’s historical compensation, including the value at various stock prices of unvested stock options and restricted stock units held by the officer and base salary and bonus history. The information about equity awards provides information about the retention value of those awards for each officer.

 

During 2008, our Human Resources organization also provided the committee with statements showing what our executive officers would be entitled to receive in the event of an involuntary termination and, following a future change in control if one were to occur, what our executive officers would be entitled to receive in the event of an involuntary termination or a voluntary termination when the individual does not receive a similar level of responsibility or compensation, situations commonly referred to as “good reason.”

 

Our Nominating and Corporate Governance Committee is responsible for matters relating to the organization and membership of the Board and its committees and for other corporate governance issues. The committee:

 

 

The committee met four times in 2008.

 

The committee may retain, and in the past has retained, consultants to assist it in identifying and evaluating candidates to serve as directors of the company. Other directors may also identify candidates for the committee. For each candidate, the committee considers the individual’s likelihood to enhance the Board’s ability to manage and direct our affairs and business, including, when applicable, to enhance the ability of committees of the Board to fulfill their duties and satisfy any requirements imposed by law, regulation or stock exchange listing requirements. We do not, however, have any specific minimum requirements for candidates. When considering candidates for director, the committee takes into account a number of factors, including the following:

 

 

The committee will consider candidates for director suggested by stockholders applying the factors described above and considering the additional information described below. Stockholders wishing to suggest a candidate for director should write to the Corporate Secretary at the address indicated below, and include:

 

 

Before nominating a sitting director for re-election, the committee will consider the director’s past performance as a member of LSI’s Board of Directors.

 

In 2008, the committee retained a director search firm to assist it in identifying candidates for two director positions. The committee was seeking one candidate with experience in the area of financial reporting and another candidate with experience as a senior executive at a company that used the kind of technology developed by the company. The search firm identified a number of candidates for the committee, inquired whether the candidates would be interested in joining the Board and worked with the committee to narrow down the list of prospective candidates. As a result of the search, the committee selected, and the Board elected as directors, Mr. Strachan and Ms. Whitney. A non-management director recommended Mr. Strachan to the committee because of Mr. Strachan’s experience in the accounting profession. Our Chief Executive Officer recommended Ms. Whitney to the committee because of her experience with end-users of computer servers.

 

Under our by-laws, nominations for director may be made only by or at the direction of the Board, or by a stockholder of record at the time of giving notice who is entitled to vote and who delivers written notice along with the additional information and materials required by the by-laws to our Corporate Secretary not later than the 45th day or earlier than the 75th day before the one-year anniversary of the date that we released to stockholders the proxy statement for our previous year’s annual meeting. For 2010, our Corporate Secretary must receive this notice on or after January 15, 2010, and on or before February 14, 2010. You can obtain a copy of the full text of the by-law provision by writing to our Corporate Secretary, 1621 Barber Lane, Milpitas, CA 95035.

 

Individuals who want to communicate with our Board of Directors or any individual director can write to:

LSI Corporation
Board Administration
400 Connell Drive — Suite 5000
Berkeley Heights, NJ 07922

 

You also can send an e-mail to the appropriate e-mail address below:

 

 

 

Your communication should indicate that you are an LSI stockholder. The Corporate Secretary’s office will review each communication. Depending on the subject matter, that office will:

 

 

At each Board meeting, the Corporate Secretary presents a summary of all communications received since the last meeting and makes those communications available to the directors on request. The Board has approved this process.

 

The following directors served on the Compensation Committee for some or all of 2008: Messrs. Chen, Haggerty, Miner and Netravali and Ms. Whitney. None of these individuals has ever been an employee of LSI, none of them was involved in a transaction involving LSI that we are required to disclose under “related person transaction” rules and no “compensation committee interlocks” existed during 2008.

 

We pay directors who are not employees of the company cash retainers and grant them stock options. The table below provides details about these programs. Directors who are employees of the company receive no additional compensation for their service as a director.

 

 

Each non-employee director receives an option to purchase 30,000 shares of common stock when he or she first becomes a director. In addition, on April 1 of each year, each non-employee director automatically receives an option to purchase 30,000 shares of common stock, if on that date he or she has been a director for at least six months. Options granted to directors upon joining the Board become exercisable at the rate of 25% per year. Annual option grants become exercisable in full six months after the date of grant. Options granted to directors may be exercised only while the director serves on the Board, within 12 months after death or following termination of service on the Board as a result of total disability or within 90 days after the individual ceases to serve as a director of LSI for a reason other than death, total disability or misconduct, but in no event after the seven-year term of the option has expired. Options granted to directors before May 2008 had a maximum term of 10 years.

The table below summarizes the compensation we paid for 2008 to each person who served as a non-employee director at any time during 2008.

 

Director Compensation for 2008

 

 

 

 

 

 

 

The Audit Committee reviewed and discussed with management and PricewaterhouseCoopers LLP our audited financial statements for the year ended December 31, 2008. The Audit Committee has discussed with PricewaterhouseCoopers the matters required to be discussed under Statement on Auditing Standard No. 61 (Communication with Audit Committees), as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has received from PricewaterhouseCoopers the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with PricewaterhouseCoopers their independence.

 

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, for filing with the Securities and Exchange Commission.

 

Michael J. Mancuso, Chairman

Richard S. Hill

Matthew J. O’Rourke

SECURITY OWNERSHIP

 

The following table sets forth information about the beneficial ownership of LSI common stock as of March 3, 2009, by all persons known to us to be beneficial owners of more than five percent of our common stock, by all directors, nominees for director and executive officers named in the Summary Compensation Table and by all current directors and executive officers as a group. On March 3, 2009, 648,679,338 shares of our common stock were outstanding.

 

 

 

 

 

 

 

Nominees

 

Our Board of Directors currently consists of ten members. This year, Michael J. Mancuso has decided not to stand for re-election. We would like to thank Mr. Mancuso for his service on the Board since our merger with Agere and wish him well in the future. All directors are elected annually and serve until the next annual meeting or until their successors have been duly elected and qualified. The Board intends to reduce the size of the Board to nine directors, effective immediately prior to the annual meeting. Accordingly, stockholders will be electing nine directors at the meeting.

 

The Board of Directors expects all nominees named below to be available to serve as directors if elected. If any nominee named below is unable or declines to serve as a director at the time of the annual meeting, the proxies will be voted for a nominee designated by the current Board of Directors to fill the vacancy.

 

The following table provides information about the nominees for election as directors.

 

 

There are no family relationships between or among any of our directors or executive officers. Messrs. Hill, Mancuso and Netravali joined our Board in 2007 as designees of Agere Systems in connection with our merger with Agere.

 

Mr. Haggerty has served as President and Chief Executive Officer of LeConte Associates, a consulting and investment firm, since January 2000. From 1993 to 2000, Mr. Haggerty was Chairman, President and Chief Executive Officer of Western Digital Corporation, a maker of hard drives for digital information storage. Previously he was with IBM Corporation, where he served in various general management roles including marketing, product development and operations capacities during a 28-year career. He serves on the boards of Beckman Coulter, Inc., Deluxe Corporation, Imation Corporation and Pentair, Inc.

 

Mr. Hill has been Chief Executive Officer and a director of Novellus Systems, Inc., a supplier of integrated circuit manufacturing equipment, since 1993 and has been Chairman of its board of directors since 1996. Before joining Novellus, Mr. Hill spent 12 years at Tektronix, Inc., where he held a variety of positions, including President of Tektronix Development Company, Vice President of the Test and Measurement Group and President of Tektronix Components Corporation. Prior to joining Tektronix, he held engineering

management and engineering positions at General Electric, Motorola and Hughes Aircraft Company. Mr. Hill is a director of Arrow Electronics, Inc. and the University of Illinois Foundation.

 

Since January 2009, Mr. Miner has been a managing director of Pivotal Investments LLC, a venture capital fund. From April 2003 to June 2005, Mr. Miner was the President of Intel Capital, a venture capital organization of Intel Corporation, a microprocessor manufacturer, and a Corporate Vice President of Intel. He retired from Intel in June 2005, concluding 22 years of service in various sales, engineering, marketing and general management roles.

 

Since November 2004, Mr. Netravali has been Managing Partner of OmniCapital Group LLC, a venture capital firm. From January 2002 to April 2003, Mr. Netravali was Chief Scientist for Lucent Technologies Inc., a provider of services, systems and software for communications networks. From June 1999 to January 2002, Mr. Netravali was President of Bell Labs as well as Lucent’s Chief Technology Officer and Chief Network Architect. Mr. Netravali currently serves on the board of Level 3 Communications Inc.

 

Mr. O’Rourke was a partner with the accounting firm Price Waterhouse LLP (a predecessor firm of PricewaterhouseCoopers LLP) from 1972 until his retirement in June 1996. Since his retirement, Mr. O’Rourke has been an independent business consultant.

 

Mr. Reyes has been a private investor and management consultant since 1994. He co-founded Sunward Technologies in 1985 and served as Chairman and Chief Executive Officer until 1994. Mr. Reyes is a director of Dialog Semiconductor Plc and Seagate Technology.

 

Mr. Strachan retired from Ernst & Young LLP in December 2008. During 2008, he was a member of Ernst & Young’s America’s Executive Board, which oversaw the firm’s strategic initiatives in North and South America. From 2007 to December 2008, he was a member of Ernst & Young’s U.S. Executive Board, which oversaw partnership matters in the U.S. for the firm. From 2000 through December 2008, he was Vice Chairman and Area Managing Partner for Ernst & Young offices between San Jose, California and Seattle, Washington, and was responsible for oversight of the firm’s operations in that area. He began his career at Ernst & Young in 1976.

 

Mr. Talwalkar has been our President and Chief Executive Officer and a member of our Board of Directors since May 2005. Prior to joining LSI, Mr. Talwalkar was employed by Intel Corporation, a microprocessor manufacturer. At Intel, he was Corporate Vice President and Co-General Manager of the Digital Enterprise Group from January 2005 until May 2005, Vice President and General Manager of Intel’s Enterprise Platform Group from May 2004 to January 2005, and Vice President and General Manager of Intel’s Platform Products Group, within Intel’s Enterprise Platform Group, from April 2002 through May 2004.

 

Ms. Whitney is retired from IBM, where she most recently served from 2001 to 2007 as General Manager, IBM System x, IBM’s x86-based server division. She began her career at IBM in 1972.

 

Other Director

 

Mr. Mancuso, who will not be standing for re-election, has been Vice President and Chief Financial Officer of Computer Sciences Corporation, a provider of information technology and business process outsourcing and information technology and professional services, since December 2008. Previously, he was Chief Financial Officer of General Dynamics from 1994 to 2006. Mr. Mancuso is a director of SPX Corporation and The Shaw Group Inc.

 

Board Recommendation

 

The Board of Directors unanimously recommends a vote “FOR” the election of each of the nominees listed above as a director of the company.

 

The Audit Committee has selected PricewaterhouseCoopers LLP, an independent registered public accounting firm, to audit our consolidated financial statements for the 2009 fiscal year. A representative of PricewaterhouseCoopers is expected to be present at the annual meeting, will be permitted to make a statement if desired and will be available to answer appropriate questions. The Audit Committee has considered whether the non-audit services provided by PricewaterhouseCoopers are compatible with maintaining the independence of PricewaterhouseCoopers and has concluded that the independence of PricewaterhouseCoopers is maintained and is not compromised by the services provided.

 

The following table presents the fees billed by PricewaterhouseCoopers to LSI for 2008 and 2007.

 

 

 

 

Under its charter, the Audit Committee must pre-approve all engagements of the independent auditors unless an exception to such pre-approval requirement exists under applicable law. Each year, the committee approves the retention of the independent auditors to audit our financial statements, including proposed fees, before the filing of the preceding year’s annual report on Form 10-K. At the beginning of the year, the committee will evaluate other known potential engagements of the independent auditors, including the scope of the work proposed to be performed and the proposed fees, and approve or reject each engagement, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditors’ independence from management. At each subsequent meeting, the committee will receive updates on the services actually provided by the independent auditors, and management may present additional services for approval. Typically, these would be services that would not have been known at the beginning of the year, such as due diligence for an acquisition.

 

Under the committee’s charter, the Chairman of the committee has the authority to evaluate and approve engagements on behalf of the committee in the event that a need arises for pre-approval between committee meetings. This might occur, for example, if we proposed to execute a financing transaction on an accelerated schedule. If the Chairman approves any engagements under this authority, he will report that approval to the full committee at the next committee meeting. In 2008 and 2007, all engagements of our independent auditors were approved in accordance with our pre-approval requirements.

 

Board Recommendation

 

The Board of Directors recommends a vote “FOR” the ratification of the selection of PricewaterhouseCoopers LLP as LSI’s independent auditors for 2009.

 

We are asking stockholders to approve the amended LSI Corporation Incentive Plan. We link participating employees’ cash incentive compensation under the plan to the company’s performance in a way intended to enable us to receive a federal income tax deduction for that compensation. The Compensation Committee of the Board of Directors has approved the amended Incentive Plan, subject to approval from stockholders at the annual meeting. If approved by stockholders, the amended plan will be applicable for performance periods beginning on or after the date of the annual meeting.

 

If stockholders do not approve the amended Incentive Plan, no bonuses will be paid under the plan for performance periods that begin on or after the date of the annual meeting. Also, we may not be entitled to a federal income tax deduction for some or all cash incentive compensation, if any, paid to our Chief Executive Officer and several other executive officers for those performance periods if the officer’s total compensation exceeds $1 million for any year.

 

The principal changes we are proposing to the Incentive Plan are:

 

 

Plan Description

 

The following is a description of the material terms of the amended Incentive Plan.

 

Purpose

 

The plan is intended to motivate and reward participants by making a significant portion of their cash compensation directly dependent upon achieving the company’s objectives. The plan accomplishes this by providing participants with cash award payments for achieving performance goals established under the plan.

 

Compensation paid under the Incentive Plan also is designed to qualify as “performance-based” compensation under Section 162(m) of the Internal Revenue Code. Under Section 162(m), we may not receive a federal income tax deduction for compensation paid to our Chief Executive Officer or any of the other three most highly compensated executive officers, excluding our Chief Financial Officer, to the extent that any of them receives more than $1 million in any year unless it qualifies as performance-based compensation under Section 162(m). Payments under the plan are intended to qualify as performance-based compensation, thereby permitting us to receive a federal income tax deduction for those payments.

 

Administration, Amendment and Termination

 

The plan may be administered by either the Compensation Committee of the Board of Directors or a sub-committee of the Compensation Committee consisting of at least two members of the Board of Directors who qualify as “outside directors” for purposes of Section 162(m). Subject to the terms of the plan, the administrator has sole discretion to select the participants, determine the terms and conditions of each award, including the target amount and the performance goals, and, at any time, to reduce or eliminate any award.

 

The administrator may, in its discretion, amend, suspend or terminate the plan at any time and for any reason. However, no amendment, suspension or termination may impair the rights of a participant under a previously specified award without the participant’s consent and no amendment or modification

may result in an increase in the amount of compensation payable under an award. To the extent necessary or advisable under applicable law, amendments to the plan will be subject to stockholder approval.

 

Eligibility

 

Any employee of LSI or any of its affiliates is eligible to participate in the plan. The administrator will determine which employees actually participate in the plan. We expect that our executive officers will typically be the only participants in the plan. As of March 18, 2009, we had eight executive officers and 5,310 employees.

 

Awards

 

Awards may be granted over performance periods covering a fiscal year, or any longer or shorter period determined by the administrator. For each performance period, the administrator will determine each participant’s performance goals and target award. The administrator also will establish a payout formula that (1) is based on a comparison of actual performance to the performance goals and (2) provides for a payment less than, equal to, or in excess of a participant’s target award to the extent actual performance falls below, meets or exceeds the previously established performance goals. The administrator has discretion to reduce or eliminate, but not to increase, an award at any time, and no participant may receive more than $9 million under the plan over any period of three consecutive fiscal years. Currently, the maximum award permitted under the plan for any participant is $3 million in any fiscal year.

 

Awards will be paid following the determination of the amount of the award for a performance period, and in compliance with Section 409A of the Internal Revenue Code. Awards will be paid in cash. In the event a participant’s employment terminates for any reason other than the participant’s death or total and permanent disability, no award will be paid to that participant for the performance period in which the termination occurs. In the event a participant’s employment terminates by reason of the participant’s death or total and permanent disability, the administrator will determine the extent, if any, to which the participant or the participant’s estate will receive the award for the performance period in which such a termination occurs.

 

Performance Goals

 

In determining the performance goals applicable to an award, the administrator may choose one or more of the following:

 

 

Performance goals may differ from participant to participant, from performance period to performance period and from award to award. Any criteria used may be measured, as applicable:

 

 

 

The administrator may also include or exclude from any GAAP measures any elements that would normally be excluded or included in the GAAP measures, whether or not such determinations result in any performance goal being measured on a basis other than GAAP.

 

U.S. Federal Income Tax Consequences

 

Under present U.S. federal income tax law, participants will recognize ordinary income equal to the amount of an award received under the plan in the year of receipt. That income will be subject to applicable income and employment tax withholding by the company. If and to the extent that payments under the plan satisfy the requirements of Section 162(m) or the total non-performance-based compensation of the participant for the year does not exceed $1 million, and if the payments under the plan otherwise satisfy the requirements for deductibility under federal income tax law, we will receive a deduction equal to the amount of the payments.

 

Awards to be Granted to Certain Individuals and Groups

 

Awards under the plan are determined based on actual future performance. As a result, we cannot determine the actual amounts of future awards at this time. Because our executive officers are eligible to receive awards under the plan, our executive officers have an interest in this proposal. Although we currently do not intend to grant cash incentive awards outside of the plan to employees who are participants in the plan, we may do so in the future.

 

The recent global economic decline has had a significant, negative impact on our results and outlook. As a result, the Compensation Committee had not established a bonus program under the Incentive Plan for 2009 as of the date of this proxy statement. In mid-2009, the committee intends to reconsider whether, in light of then-existing economic conditions, it would be appropriate to establish a bonus program under the plan.

 

Board Recommendation

 

The Board of Directors recommends a vote “FOR” the approval of the amended Incentive Plan.

 

 

 

 

You can find additional information about our equity compensation plans in note 3 to the financial statements included in our annual report on Form 10-K for the year ended December 31, 2008.

 

Overview

 

Our compensation program is intended to provide all of our executive officers with a comprehensive compensation package that will motivate them to drive both short-term and long-term business success while at the same time allowing us to attract, retain and reward talented individuals to lead the business.

 

In light of these objectives, we followed the following guidelines in designing our executive officer compensation program:

 

 

Our Compensation Committee is responsible for the executive compensation program. In 2008, the committee made a number of changes to the program. These changes include terminating our Chief Executive Officer’s employment agreement, adopting a single set of severance arrangements for executive officers, adopting a policy on recoupment of compensation, replacing individual perquisites for executive officers with a cash allowance and changing our vacation program for executive officers. The changes are described in greater detail below under “Compensation Program Changes in 2008.”

 

The committee believed that we made significant progress in 2008 on our financial and operational priorities before the economic downturn began in late 2008. Management had successfully refocused the business on the storage and networking markets and the company’s financial performance was on track to reach our long-term goals for a number of financial metrics. In order to reward our executive officers for that improvement, and recognizing that our actual revenue and non-GAAP operating income for the year exceeded our plan, the committee chose to pay meaningful bonuses to our executive officers.

 

In early 2009, the committee considered establishing a bonus program for 2009, but chose not to in light of then-existing economic conditions. At that time, the committee also chose not to adjust the base salary of any executive officer even though it felt that doing so would be appropriate in several cases. The committee does intend to reconsider both of these matters in the middle of the year in light of economic conditions at the time.

 

Our Benchmarking Practices

 

In analyzing our executive officer compensation programs, the Compensation Committee reviews information prepared by Hewitt, the committee’s consultant, about the executive compensation practices of a designated peer group of companies. Our peer group includes companies in industry groups similar to the ones in which we conduct business and which, at the time the peer group was selected, ranged in

market capitalization from about one-third to three times our market capitalization. This group of companies was recommended by Hewitt and reviewed and approved by the Compensation Committee and includes:

 

 

The benchmarking studies conducted by Hewitt provided information for each of base salary, target bonus and equity compensation, as well as total compensation. Where Hewitt was not able to obtain information about the compensation practices of a sufficient number of companies in our peer group, Hewitt also presented information about our compensation practices compared to those of a larger number of high-tech companies that participated in the Radford Executive Survey. In these cases, the committee based its compensation decisions on comparisons between our practices and those of the companies in our designated peer group for which data was available, and used the comparison with the larger number of high-tech companies as additional information.

 

Compensation Elements

 

Our executive officer compensation program includes the following types of pay:

 

 

Except for benefits available to employees generally, the Compensation Committee reviews each element of executive compensation separately and total compensation as a whole. The committee determines the appropriate mix of elements with a view to furthering our compensation objectives and to ensure that, with respect to base salary, target bonus and equity compensation, we remain competitive with the executive officer compensation practices of our designated peer group of companies.

 

In determining the extent of the use and the weight of each element of compensation, the committee considers the effect and importance of each element in meeting our compensation objectives. For example, base salary, executive perquisites and generally available benefits allow us to remain competitive in the marketplace in order to continue to attract top talent. We structure our bonus incentives to reward executive officers for achieving organizational performance goals and consider individual performance when determining the actual amount to be paid. In determining the target bonus incentive opportunity we provide, we seek to stay competitive in the marketplace.

Cash Compensation

 

We typically set base salaries and target bonus percentages for individual officers when we hire them or when we promote them from other positions at the company. We review base salaries and target bonus percentages annually and at other times if individual circumstances make doing so appropriate. We would consider whether to change these amounts in the following situations:

 

 

Equity Compensation

 

Our equity incentives include stock options and restricted stock units that are multi-year awards intended to provide incentives to our executive officers to increase stockholder value and to continue to serve as an employee of LSI until their options become exercisable or their restricted stock units vest. We believe that the use of restricted stock units in addition to stock options helps further our retention goals.

 

We typically grant equity awards to employees broadly in early March of each year. We make other grants during the year principally for new hires and for retention. We generally make these grants at the beginning of each month and at regularly scheduled board meetings. We do not decide when to make equity grants based on our plans for the public release of material information and do not time our release of material information to the public based on when we make equity grants. Our Compensation Committee may take action to grant awards on a future date. This reduces the number of restricted stock unit vesting events we have. It also enables all employees to have the same grant date for equity awards that are part of our annual grant program. Under that program, awards for different groups of employees may be approved on different days.

 

Total Compensation Opportunity

 

The committee generally considers whether a proposed mix of all of the elements of a compensation package meets our compensation objectives when taken as a whole. In determining levels of executive compensation, the committee reviews and considers existing equity awards but does not have a formal policy concerning the impact of grants made in the past on future compensation.

 

In 2008, we targeted total compensation opportunity, including base salary, target bonus and equity compensation, in the 3rd quartile, that is between the 50th and 75th percentiles, of our designated peer group. The committee also sought to have each element of compensation, with stock options and restricted stock units being considered together for this purpose, fall within the 3rd quartile of our designated peer group. The committee generally targeted base salaries at the 50th percentile of our designated peer group and weighted more of the total compensation opportunity toward variable, incentive compensation (at-risk pay). The actual level provided to any individual depended on a number of factors, including individual performance, experience, value to the business and competitive conditions.

Perquisites

 

In 2008, we provided our officers with a package of perquisites to offer market-competitive compensation and to attract top executive talent. Executive officers other than those who joined us from Agere received:

 

 

In 2008, we provided executive officers who joined us from Agere, including Messrs. Stroh and Micallef, with perquisites consistent with Agere’s compensation program. Those benefits included a $1,400 a month car allowance and a $10,000 per year financial counseling allowance and a tax gross-up on the financial counseling allowance. The car allowance was not provided to Mr. Micallef because we reimbursed him for his actual transportation expenses as part of his international assignment.

 

Severance Benefits

 

We believe that reasonable severance arrangements can be beneficial both for officers and for the company. By providing post-employment certainty, they enable employees to focus more energy on the company’s business, particularly in times of uncertainty. Having a pre-determined amount of compensation that an executive officer will receive following a termination of employment may also reduce the amount of cost and effort we must expend in individual negotiations.

 

Company-wide Benefits

 

Our executive officers also are eligible to participate in the health and welfare programs that we make available to our employees generally, although with higher benefit levels in the case of life insurance and accidental death and dismemberment insurance. They can also participate in our 401(k) program and our employee stock purchase plan on the same terms as other employees.

 

Compensation Program Changes in 2008

 

In 2008, we made a number of changes in our compensation program for executive officers. These changes are described below.

 

Termination of Mr. Talwalkar’s Employment Agreement

 

When we hired Mr. Talwalkar to be our Chief Executive Officer in May 2005, we entered into an employment agreement with him, which he negotiated as part of his compensation package. The agreement had an initial term of two years and automatically renewed for additional one-year periods

unless either Mr. Talwalkar or the company decided not to renew it. We terminated the agreement in May 2008. The agreement provided for Mr. Talwalkar’s initial compensation and severance benefits in the event of his involuntary termination from the company other than for cause or after a change in control if his role at the company was materially diminished.

 

To give Mr. Talwalkar time to decide whether to move to the Milpitas, California, area, we also provided him with a housing and commuting allowance for two years. To give him additional time to decide whether to relocate to the Milpitas area, we extended this benefit until May 2009, notwithstanding the termination of the agreement. We will not extend it further. Under this arrangement, we provide him with $5,000 per month, an amount the Compensation Committee believed reasonable based on housing costs near our headquarters in Milpitas, and pay his reasonable commuting costs. We also provide a tax gross-up on these amounts. In 2008, we reduced the amount of the gross-up from an amount, which when added to the payments resulted in him retaining approximately the amount of the payments after paying applicable taxes, to an amount equal to the amount of tax we estimate he would pay on the payments. As mentioned above, this arrangement and the related tax gross-up will end in May 2009.

 

Revision of Severance Arrangements

 

At the beginning of 2008, we had a number of different arrangements in place providing severance benefits for our executive officers. Mr. Talwalkar had severance arrangements in his employment agreement. Other executive officers who did not join us from Agere had individual contracts that could provide severance benefits following a change in control of LSI. And executive officers who joined us from Agere had the benefit of a severance plan adopted by Agere.

 

In order to eliminate individually negotiated severance arrangements and to provide one consistent benefit for all of our executive officers, we adopted a severance policy for our executive officers in May 2008. You can find a description of this policy below under “Executive Compensation — Change-in-Control and Termination Arrangements.” This policy has applied to Mr. Talwalkar since his employment agreement terminated in May 2008 and to other executive officers who did not join us from Agere since their change-in-control contracts expired in November 2008, and applies to executive officers who joined us from Agere beginning in April 2009 when the agreement we made in connection with the Agere merger to maintain benefit levels for two years ends.

 

Adoption of Policy on Recoupment of Compensation

 

In 2008, we adopted a policy under which we can require an executive officer or our controller to repay cash bonuses and equity awards if we must make a material restatement of our financial statements as a result of the individual’s intentional misconduct. We believe it important for the company to have a contractual right to recover compensation in these situations and are requiring executive officers to agree to this policy when we award them stock options.

 

Change to Perquisite Program

 

We unified our perquisite programs effective at the beginning of 2009, and no longer provide individual perquisites. Instead, we provide an annual cash allowance to our executive officers. Making this change is reducing the burden of administering individual programs while providing our executives the flexibility to use the money for those services that are most important to them. The amount of the allowance is $25,000 per year for our Chief Executive Officer and $20,000 per year for each of the other executive officers. We do not provide a tax gross-up on these amounts.

Change to Vacation Policy

 

Effective at the beginning of 2009, we eliminated the accrual of a specific number of vacation days by our executive officers. Instead, we will allow officers to take a reasonable amount of vacation time consistent with the needs of the business. We believe this will reduce the company’s expenses because we will not accrue for unused vacation time in the future and will reduce our exposure to payouts of unused vacation time when officers terminate employment in the future. In connection with this change, in late 2008 we did pay our executive officers the value of their accrued and unused vacation time when we terminated the old program.

 

2008 Compensation Decisions

 

Base Salary

 

The committee re-evaluated the base salaries of the executive officers identified in the Summary Compensation Table, who we refer to as our named executive officers, in February 2008. Noting that the salaries of Messrs. Talwalkar, Look and Richardson were within the 3rd quartile of salaries for similar positions in our designated peer group, the committee determined not to change their base salaries. Noting that their base salaries were below the median in our designated peer group, the committee increased the salaries of Messrs. Micallef and Stroh to amounts that approximate the median, consistent with its goal of targeting base salaries at the 50th percentile of the designated peer group.

 

Bonus Incentives

 

The committee also reviewed the target bonus percentages of the named executive officers in February 2008. At that time, the committee noted that Mr. Talwalkar’s target bonus percentage placed him at approximately the median of our designated peer group. In order to provide Mr. Talwalkar with an increased incentive to improve the company’s performance, it increased his target bonus percentage from 100% of his base salary to 125% of his base salary, which placed him within the 3rd quartile of our comparison group. The committee believed that the target bonus percentages of the other named executive officers were at appropriate levels and did not change them.

 

The committee established a bonus program for employees in February 2008. Under that program, if in 2008 we achieved non-GAAP operating income of at least $156 million and revenue of at least $2.32 billion, we would create a bonus pool equal to a percentage of our non-GAAP operating income to be used to pay bonuses to executive officers. At the time the program was established, the Board-approved plan for 2008 estimated that non-GAAP operating income would be $263 million and revenue would be $2.579 billion.

 

Non-GAAP operating income excludes impairment of goodwill and other intangible assets, stock-based compensation, amortization of acquisition-related intangibles, restructuring of operations and other items, net, purchase accounting effect on inventory, loss on write-down of debt/equity securities, gain on repurchase of convertible subordinated notes and acquired in-process research and development.

 

Under the program, if non-GAAP operating income for 2008 was at least the amount in the Board-approved plan for 2008 and revenue was at least 105% of the amount in the plan for 2008, then the bonus pool would have been funded using an increasing percentage of non-GAAP operating income. The percentage would have leveled off once non-GAAP operating income reached $325 million. The size of the bonus pool would have been capped when non-GAAP operating income reached $417 million. The committee included the requirement that revenue be higher than the Board-approved plan before the rate of bonus funding could increase in order to reduce the risk that management would cut expenses, at the cost of losing future business, in order to earn larger bonuses. The amount of revenue required before the rate of bonus funding could increase was $2.708 billion.

For 2008, our actual non-GAAP operating income was $298 million and our actual revenue was $2.677 billion, each of which exceeded the Board-approved plan for the year. According to the original bonus program, this level of performance would have resulted in aggregate bonus funding for the company equal to 41.3% of the sum of eligible employees’ target bonuses. For each of our named executive officers, an amount equal to this percentage of their target bonus is shown in the Summary Compensation Table in the column labeled “Non-Equity Incentive Plan Compensation.” Any bonus paid above this percentage of target is shown in the “Bonus” column.

 

Recognizing that the requirement to achieve 105% of “plan” revenue was set very early in the year, before the global economic deterioration began, that for the first three quarters of the year the company was on track to exceed this level of performance, that the company’s performance for the year had exceeded its revenue plan and was close to the 105% of “plan” level, that management had continued to invest in the business and that applying the requirement would not serve its original purpose, the Compensation Committee provided aggregate funding for bonuses in an amount equal to 51.5% of the sum of eligible employees’ target bonuses. This level of funding prorated the increased funding that would have been provided for had revenue been at least 105% of plan based on the level of achievement of greater than “plan” revenue rather than making it “all or none.” In determining the actual bonus amounts for named executive officers, the committee used this level as a baseline.

 

The committee determined the actual amount of each executive officer’s bonus for 2008 in early 2009. The committee considered a number of factors in deciding to pay bonuses for 2008, notwithstanding the decline in our stock price in 2008 and the then-current economic environment. These factors included:

 

 

Based on the economic environment, the committee did not, however, establish a bonus program for 2009 at that time.

 

The actual bonus for each named executive officer other than Mr. Talwalkar reflected the contribution of the individual’s functional area to achievement of corporate goals that were set at the beginning of the year as well as a subjective evaluation of the executive’s performance. These goals included:

 

 

Mr. Talwalkar’s actual bonus was set based on the level of achievement of all of these goals as well as a qualitative evaluation of his management of the company. The committee did not assign any specific weight to any particular goal and considered all the goals in totality in establishing actual bonus payouts. The actual bonuses for named executive officers other than Mr. Stroh were above the level of corporate-wide funding (84%-108% of target compared to funding of 51.5% of target). This is because the committee sought to allocate a greater portion of amounts available for bonuses to those individuals who were our top performers.

 

In setting Mr. Stroh’s bonus for 2008, the committee also took into account the fact that Mr. Stroh’s position was eliminated in early 2009 and the fact that Mr. Stroh would be receiving severance benefits, including payment of base salary and bonus at target for two years and acceleration of unvested restricted stock units granted by Agere.

 

The following table shows, for each named executive officer, the individual’s target bonus percentage, the approximate percentage of their target bonus represented by their actual bonus and their actual bonus:

 

 

Equity Awards

 

Mr. Talwalkar.  In February 2008, the committee awarded Mr. Talwalkar stock options covering 1.6 million shares and 300,000 restricted stock units. The awards were intended to provide Mr. Talwalkar with a substantial incentive to remain with the company and continue the work of repositioning the company begun in 2007, including the Agere merger and integration, the focusing of the company’s business on storage and networking products, the sale of our Consumer and Mobility businesses and the determination to exit our semiconductor and storage systems assembly and test activities.

 

The committee weighted more of the total value of the awards towards stock options based on its belief that more of our Chief Executive Officer’s equity compensation should depend on the company’s stock price improving and less on simply remaining with the company through the vesting period of restricted stock units. These awards resulted in Mr. Talwalkar’s long-term equity opportunity falling within the 3rd quartile of our designated peer group.

 

In February 2009, we granted Mr. Talwalkar an option covering 1.9 million shares. The committee determined the size of the award based on the company’s long-term financial results and its desire to provide Mr. Talwalkar with an incentive to remain with the company and continue improving its financial performance. The committee chose not to award any restricted stock units in 2009 to any named executive officer because it wanted any compensation realized from equity awards to result from an improved stock price and not merely remaining with the company.

 

The stock option granted in 2009 to Mr. Talwalkar covers more shares than the options granted to him in 2008 because we did not award him restricted stock units this year. He received an option in 2009 covering a number of shares equal to the sum of the number of shares covered by the options granted to him in 2008 and the number of restricted stock units he received in 2008. The committee noted that

because of our lower stock price in early 2009 compared to early 2008, the 2009 award had less overall grant date value than the award granted in 2008.

 

The stock options we awarded to Mr. Talwalkar in 2008 and 2009 become exercisable in four equal annual installments and the restricted stock units we awarded him in 2008 vest in three equal annual installments, in each case starting on the first anniversary of the grant date. We reduced the vesting term of restricted stock units awarded as part of our annual performance evaluation process in 2008 for executive officers from four years to three years to increase the value of the awards to our executive officers.

 

Other Named Executive Officers.  In February 2008, we granted Messrs. Look, Micallef, Richardson and Stroh the equity awards shown in the following table:

 

 

The stock options shown in the table above become exercisable in four equal annual installments and the restricted stock units vest in three equal annual installments. The amount of the awards was determined by the Compensation Committee following a recommendation from our Chief Executive Officer and review by Hewitt, the committee’s outside consultant. The value of the awards was intended to be competitive with our designated peer group and reflected a number of other factors, including individual performance, the challenges facing each executive officer’s business and other equity awards held.

 

In some cases, the committee weighted the overall award more heavily to restricted stock units to ensure that value would be delivered to people in roles we felt were critical to our future success and to reduce the total usage of shares for our equity compensation program. The committee also noted the 200,000 share option award and 100,000 restricted stock unit award received by Mr. Stroh, and the 100,000 share option award and 50,000 restricted stock unit award received by Mr. Micallef, in each case that had been made for retention purposes in 2007 following the Agere merger. As a result, the awards to Messrs. Stroh and Micallef covered fewer shares than they would have had the retention awards not been made. The committee also believed that people running product businesses were more critical to our future success and generally awarded them larger equity awards than we awarded to other executive officers.

 

The committee considered all these factors as a whole, and did not assign any particular weight to any specific factor or increase or decrease any award by a specific amount as a result of any specific factor.

 

In February 2009, we granted Messrs. Look, Micallef and Richardson the equity awards shown in the following table.

 

 

As was the case with the stock option the committee awarded Mr. Talwalkar in 2009, the stock options granted in 2009 to these officers cover more shares than the options granted to them in 2008 because we did not award them restricted stock units this year and, in the case of Mr. Look, as

compensation for the additional responsibilities he took on when he became our Chief Administrative Officer in early 2009. Each of Messrs. Micallef and Richardson received an option in 2009 covering a number of shares equal to the sum of the number of shares covered by the option granted to him in 2008 and the number of restricted stock units he received in 2008.

 

Other Compensation Matters

 

Relationship of Mr. Talwalkar’s Compensation to that of Other Executive Officers

 

Mr. Talwalkar’s salary, target bonus opportunity and equity awards are each greater than those of our other executive officers because the Compensation Committee believes that the Chief Executive Officer has the ability to make decisions and take actions that will have a greater impact on the company’s performance than the decisions made and the actions taken by the other executive officers.

 

Impact of the Agere Merger

 

Messrs. Micallef and Stroh joined LSI in April 2007, in connection with the Agere merger. We believed that the success of the merger as well the success of the company going forward depended on retaining a number of talented individuals from Agere, including Messrs. Micallef and Stroh. As a result, we entered into retention agreements with these individuals to encourage them to stay with the company and contribute to its future success. These agreements provided that Messrs. Micallef and Stroh would receive, if they stayed with LSI, the following:

 

 

The restricted stock units shown in the table vest in two equal annual installments and the stock options shown in the table become exercisable in four equal annual installments. The vesting of the restricted stock units was intended to coincide roughly with the timing of the post-merger cash payments to provide a strong, two-year retention vehicle.

 

In January 2009, we restructured our business to simplify our structure and reduce expenses, combining our businesses that make semiconductors into one organization. As part of this restructuring, Mr. Stroh left the company. As a result, he will not receive the 2009 cash payment described above and the restricted stock units and stock options shown in the table, to the extent they were unvested when he left, were terminated.

 

In connection with the Agere merger, we agreed that for a period of two years from the completion of the merger, we would provide Agere employees with levels of compensation and benefits that were substantially equivalent, in the aggregate, to those provided by Agere just before we agreed to merge. As a result of this agreement, we have provided Messrs. Micallef and Stroh with severance benefits and perquisites consistent with Agere’s programs just before the merger was completed, although they did agree to different severance benefits in the event of a change in control of LSI. See “Executive Compensation — Change-in-Control and Termination Agreements” for more information about their severance arrangements.

 

International Assignment Arrangements

 

Mr. Micallef is the head of our operations group and manages our relationships with our major vendors, including our manufacturing partners. Because many of the operations of our major manufacturing vendors are in the Asia Pacific region, Mr. Micallef, a U.S. resident, is currently based in Singapore. In connection with his assignment there, we are providing him with payments and reimbursements, including reimbursement of

duplicate housing costs, tuition assistance, a premium for serving overseas, moving and transportation payments and tax reimbursements and gross-ups, that are intended to allow him to work in a country other than his home country and not experience a reduction in his standard of living. The tax reimbursements and gross-ups are intended to result in Mr. Micallef paying about the same amount of taxes he would have paid had he continued to work in the U.S. We provide the tax reimbursements and gross-ups in this context because we do not want him to suffer financially when he is serving in Singapore at the company’s request.

 

While we believe that the primary purpose of the payments and reimbursements is to avoid Mr. Micallef being disadvantaged by the assignment, we cannot conclude that all of the payments and reimbursements are non-compensatory. Rather than attempt to determine which are compensatory and which are not, we have simply assumed that all of them were compensatory for purposes of the Summary Compensation Table.

 

Stock Ownership Guidelines

 

We do not currently have any stock ownership guidelines for our directors or executive officers. The Compensation Committee has discussed with Hewitt the benefits and drawbacks of stock ownership guidelines and periodically reconsiders the subject, but has determined not to implement stock ownership guidelines at this time. We do not allow executive officers to hedge either outstanding equity awards they hold or LSI stock they hold.

 

Accounting and Tax Considerations

 

In designing our executive compensation programs, we consider the accounting and tax effects that each component of the program will or may have on the company and our executive officers. For incentive-based compensation, the Compensation Committee considers the desirability of having that compensation qualify for deductibility for tax purposes under Section 162(m) of the Internal Revenue Code. That law provides that non-performance-based compensation in excess of $1 million paid to certain executive officers is not deductible by the company for tax purposes. We are asking our stockholders to approve our amended Incentive Plan at the annual meeting so that compensation paid under that plan can be deductible under Section 162(m).

 

The Compensation Committee balances the desirability of having compensation qualify for deductibility with our need to maintain flexibility in compensating executive officers in a manner designed to promote our goals. As a result, the Compensation Committee has not adopted a policy that all compensation must be deductible. For example, the restricted stock units granted to our executive officers in 2008 are not designed to qualify for this deduction because we believe that the uncertainty as to vesting that would result from making those awards require meeting a performance test in order to vest would substantially reduce the retention value of providing those awards.

 

The Compensation Committee of the Board of Directors of LSI has reviewed and discussed the “Compensation Discussion and Analysis” section of this proxy statement with management. Based on this review and discussion, the Compensation Committee has recommended to the Board of Directors that the “Compensation Discussion and Analysis” section be included in this proxy statement.

 

Charles A. Haggerty, Chairman

John H.F. Miner

Arun Netravali

Susan Whitney (member of the committee beginning November 12, 2008)

 

The following table sets forth information about the compensation earned by our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers in 2008.

 

 

 

 

 

 

 

 

 

 

The stock options reported in the Grants of Plan-Based Awards for 2008 table have a seven-year term and become exercisable at the rate of 25% per year, beginning on the first anniversary of the grant date. The restricted stock units reported in that table vest at the rate of one-third per year, beginning on the first anniversary of the grant date.

 

The following table provides information as of December 31, 2008, on the holdings of stock options and restricted stock units by the executive officers listed in the Summary Compensation Table.