Libbey Inc.’s 2005 Report of the Compensation Committee

The following Report of the Compensation Committee and the performance graph included elsewhere in this proxy statement do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report or the performance graph by reference therein.

The Compensation Committee of the Board has furnished the following report on executive compensation for fiscal year 2004.

WHAT ARE THE OBJECTIVES OF THE COMPANY'S EXECUTIVE COMPENSATION POLICIES?

The Company's compensation program for executive officers is designed and administered to attract, retain and motivate highly qualified executives, and to align their interests with the long-term interests of the Company's stockholders, by providing appropriate, competitive compensation and financial rewards. The ultimate goal of the Company's executive compensation program is to increase stockholder value by providing the executives with appropriate incentives to achieve the Company's business objectives, particularly in light of the highly competitive business environment and industry in which the Company operates. The Compensation Committee believes that it can best accomplish this goal by structuring an executive compensation program that rewards executives for superior performance, as measured by financial and non-financial factors, including major compensation components that are linked directly to increases in recognized measures of stockholder value.

WHAT ARE THE COMPONENTS OF LIBBEY'S EXECUTIVE OFFICER COMPENSATION?

Executive officer compensation consists of annual base salary, annual cash incentive awards and long-term incentive compensation awards. Perquisites for executives are very limited and consist only of payment for annual executive physical examinations and for certain financial planning and tax preparation services. In 2004, only one of the named executive officers availed himself of the annual executive physical examination perquisite, at a total cost to the Company of approximately $1,181, and five of the named executive officers availed themselves of the tax preparation service perquisite, at a total cost to the Company of approximately $5,286 (including taxes payable with respect to this perquisite). None of the named executive officers utilized the financial planning service in 2004. Although the Company owns a fractional interest in aircraft for business use by the Company's employees, the Company's executive officers do not have personal access to those aircraft. Moreover, the Company does not provide its executive officers with automobiles or automobile allowances or club memberships or club allowances.

HOW ARE BASE SALARIES FOR LIBBEY'S EXECUTIVE OFFICERS DETERMINED?

The base salaries of Libbey's executive officers are set at levels intended to be competitive with companies within the industry and with companies of comparable size. The peer group used by the Company to compare executive officer compensation includes, but is not limited to, the peer group used by the Company to measure the performance of its stock as set forth under "Comparison of Cumulative Total Returns" below. Because there are few companies that have capital structures, size, diversity and scope of business that are comparable to the Company's, the Compensation Committee has expanded, for purposes of the compensation comparisons, the number of peer companies to fifteen companies, seven of which are, from a revenue perspective, larger and more diverse than the Company and eight of which are, from a revenue perspective, smaller than the Company. The Compensation Committee reviews base salaries annually and makes adjustments, in light of past individual performance as measured by both qualitative and quantitative factors and the potential for making significant contributions in the future, to ensure that salary levels remain appropriate and competitive. Individual factors are more significant than overall Company performance in a particular year in determining base salary levels and the rate of any increase in base salary levels. In performing this task and all of its other responsibilities for executive compensation, the Compensation Committee has sole authority to, and does, to the extent it deems necessary or desirable, retain and consult with outside professional advisors, although the Compensation Committee does not believe that it should accord undue weight to the advice of outside professional advisors.

HOW IS PERFORMANCE-BASED COMPENSATION DETERMINED?

The Compensation Committee believes that the executives' incentive compensation should be linked directly to achievement of specified financial and non-financial objectives by the Company. Accordingly, Company performance is more significant than individual performance in determining short-term and long-term incentive compensation payouts.

Each executive officer is eligible, under the Company's Senior Management Incentive Plan, for an annual cash incentive award in an amount up to a target percentage of the executive officer's base salary. The annual cash incentive award payments are made from a pool that is funded based upon Libbey's achievement of specified financial and non-financial performance measures determined early in the year to which the incentive payment relates. Depending upon the particular financial performance measure in question, funding levels range from 0% if the Company fails to achieve at least 80-95% of the targeted financial measure in question, to 50% if the Company achieves 90-97.5% of target, to 200% if the Company achieves 105-110% of target. The Compensation Committee relies heavily, but not exclusively, on the particular performance criteria established each year. The Compensation Committee exercises discretion in light of these measures and in view of its compensation objectives to determine overall funding and individual incentive award amounts. In no event may the incentive payments exceed 200% of the target amounts.

For 2004, the performance measures included components based upon income from operations (representing 30% of each executive officer's potential award), operating cash flow (representing 30% of each executive officer's potential award) and net sales (representing 20% of each executive officer's potential award), in each case as measured against the Company's annual budget. The 2004 incentive measures also included a discretionary component (representing 20% of each executive officer's potential award) based upon the respective executives' contributions to the Company's other financial and non-financial objectives, such as quality of service and products, customer satisfaction, adherence to or furtherance of the Company's legal and ethical policies, product development, market share, improvement in financial indicators of the Company's success other than the financial measures indicated above and effective response to adverse economic conditions or to events beyond the Company's control.

For 2004, the Company did not achieve the desired performance targets with respect to income from operations and operating cash flow. However, the Company achieved over 100% of its performance target with respect to the net sales component. With respect to the discretionary component, the Compensation Committee considered the progress that the Company made in 2004 in implementing its strategic initiatives, including the Company's comprehensive realignment of its manufacturing platform, as approved by the Board and announced by the Company in August 2004, as well as the Company's expansion of its international manufacturing and distribution platforms. The Compensation Committee and the remainder of the Board firmly believe that implementation of the manufacturing platform realignment, which represents an aggressive effort to lower the Company's overall cost structure and strengthen the Company's position as a global producer and distributor of glass tableware, is critical to the Company's long-term competitiveness and profitability. Accordingly, the Compensation Committee believes that the difficult and demanding decisions and actions taken to implement the realignment should be recognized and taken into consideration in determining the payout levels under the discretionary component. However, the Compensation Committee also believes that consideration should be given to the negative near-term impact that these actions may have on the Company's financial performance measures. Accordingly, the Compensation Committee rewarded each executive officer for meeting the net sales component and for partially meeting the discretionary component of the annual incentive plan for 2004.

The following chart sets forth the resulting annual cash incentive awards made to the named executive officers for 2004:  

(1) Ms. Kovach served as Vice President, Associate General Counsel and Assistant Secretary of the Company from January 1, 2004 through June 30, 2004. She was promoted to Vice President, General Counsel and Secretary effective July 1, 2004, upon the retirement of Arthur H. Smith.

The Compensation Committee believes that an equity participation incentive plan is an important element of long-term compensation. The value of such plans for the executives is tied directly to stock price increases and thus provides strong incentives for increasing stockholder value. Long-term compensation consists of awards under The Amended and Restated 1999 Equity Participation Plan of Libbey Inc. as well as cash awards based upon performance against three-year goals under the Libbey Inc. Long-Term Incentive Compensation Plan ("LTIP").

The Amended and Restated 1999 Equity Participation Plan of Libbey Inc., approved by the stockholders in 2004, is a broad-based plan that covers executive officers and other management personnel and that permits the Company to grant stock options to incentivize employees and to provide additional flexibility, if circumstances of the Company's business and opportunities warrant, to grant other forms of equity-based compensation. The Compensation Committee bases the number of shares covered by option grants in large part upon the respective individuals' potential to contribute to the earnings growth of the Company. The Compensation Committee sets option exercise prices at market value on the date of grant in order to focus management's attention on sustaining earnings performance over an extended term. The Compensation Committee typically awards nonqualified stock options that vest over a 4-year period, with the first installment vesting one year from the date of grant. Because the executives may not exercise options until they vest, and because the exercise price of the options is the fair market value on the date of grant, the executives will not realize any benefit as a result of the options in the absence of Libbey stock price appreciation over a period of time.

The Compensation Committee also administers the LTIP, which is designed to pay a cash award equal to a percentage of the participant's base salary if the performance criteria established by the Compensation Committee are met over a rolling three-year award period. For the period 2002-2004, the performance criteria included a targeted aggregate increase of 36% in economic value added ("EVA(R)"(1)) of the Company for its consolidated operations and investments, including capital invested in the Company's joint ventures. However, no payouts were earned under the Libbey Long Term Incentive Plan with respect to 2004 because the Company did not meet the performance criteria of the plan. In fact, the LTIP performance criteria were not achieved during 2002 or 2003 and, as a result, there were no payouts pursuant to the LTIP during those years, either. Pending completion of a review by the Compensation Committee, with the assistance of Towers Perrin, its independent consultant, of the equity and long-term incentive compensation components of executive officer compensation, the Compensation Committee has suspended the LTIP. The review, which is not yet complete, includes consideration as to whether the LTIP is accomplishing its purpose and providing appropriate incentives to the executive officers. The review also includes consideration as to whether it would be appropriate and desirable to replace or augment stock option grants with restricted stock awards that would vest only if the executive officers were to remain with the Company for a specified period of time and only if the Company were to achieve certain specified performance targets.

HOW IS COMPENSATION FOR LIBBEY'S CHIEF EXECUTIVE OFFICER DETERMINED?

The compensation policies described above apply equally to the compensation of the Chief Executive Officer ("CEO"). The Compensation Committee is directly responsible for determining the salary level of the CEO and for all awards and grants to the CEO under the incentive components of the compensation program. The Compensation Committee believes that the challenges that the Company faces, particularly as a result of increasing foreign competition in the tableware industry, require that the CEO demonstrate significant leadership skills and innovation, as well as the willingness to take prudent risks. The challenges faced by the tableware industry are evidenced by the fact that, during the past three years, a number of Libbey's competitors, including companies that historically have been included in the Company's peer group, have experienced significant operational and financial problems and, as a result, have sought the protection of the bankruptcy laws or have undergone recapitalizations or been sold or otherwise divested. During that same period, the Company's operating performance has continued to place the Company among the world's leading glass tableware producers. Nevertheless, the Compensation Committee--and in fact the entire Board-recognizes that accomplishment of the Company's strategic initiatives is critical to the Company's future profitability and competitiveness. Accordingly, the Compensation Committee and the Board believe that these initiatives to restructure the Company's cost and manufacturing platform, and to execute the Company's strategy to expand its marketing and manufacturing internationally, are among the most significant efforts ever undertaken by the Company. Accordingly, the overall compensation package for the CEO is designed to motivate and reward the CEO for driving the Company to strengthen its competitive position in the worldwide glass tableware market, and a significant portion of the CEO's compensation is incentive-based, providing greater compensation as direct and indirect measures of stockholder value increase.

In 2004, the incentive components of the CEO's compensation package consisted of the annual incentive award, participation in the Libbey Inc. Long-Term Incentive Compensation Plan and stock options. The factors described above for all executive officers are also used in determining the level of awards, grants and payouts under these plans for the CEO.

The Compensation Committee believes that the CEO's compensation for 2004 was directly related to the size and the overall performance of the Company as measured by financial criteria and important qualitative factors related to the achievement by the Company of the strategic initiatives referred to above. No long-term incentive compensation, other than the grant of options, was paid to the CEO with respect to 2004.

WHAT ACTIONS HAS THE COMPENSATION COMMITTEE TAKEN TO ENSURE THAT EXECUTIVE COMPENSATION IS REASONABLE?

The Compensation Committee has reviewed benchmarking studies setting forth, with respect to the peer companies referred to under "How are base salaries for Libbey's executive officers determined?" above, the compensation paid by the peer companies to their respective chief executive officers and chief operating officers and other selected executives. Furthermore, the Compensation Committee has considered internal "pay equity"--in other words, the relative differences between the CEO's compensation and the compensation of the other named executive officers and other executive officers.

The Compensation Committee has reviewed tally sheets affixing dollar amounts to all components of the named executive officers' 2004 compensation, including salary, bonus, equity and long-term incentive compensation, realized and unrealized gains on stock option grants, the dollar value to the respective executives and cost to the Company of perquisites and other personal benefits, and the actual projected payout obligations under the Company's retirement plans, including the Company's Supplemental Executive Retirement Plan ("SERP," as described in "Retirement Plans" below) and executive savings plan, and under several potential severance and change-in-control scenarios. In that connection, it is important to note that neither the Compensation Committee nor the Board has granted any special "credits" to any of the named executive officers under the Supplement Executive Retirement Plan and that all payout obligations are based solely upon the actual periods of service of the respective named executive officers (35 years each in the case of Mr. Meier and Mr. Reynolds) to the Company and its former parent.

Based upon the tally sheets reviewed by the Compensation Committee, Mr. Meier would be entitled to the benefits set forth below if, on December 31, 2005, Mr. Meier's employment were terminated under the following three scenarios:

Termination for Good Reason or without Cause. If Mr. Meier were to terminate his employment for "good reason," or if the Company were to terminate his employment without "cause," in each case as defined in Mr. Meier's employment agreement described under "Employment Agreements" below, he would be entitled immediately to the following compensation:

• Mr. Meier would be entitled to payment of his base and incentive compensation through the date of termination, plus three times the sum of his annual base compensation at the rate then in effect. The Compensation Committee anticipates that decisions as to 2005 base compensation for each of Mr. Meier and the other named executive officers will be made on or about June 15, 2005. Based upon Mr. Meier's 2004 base compensation, the amount to which Mr. Meier would be entitled (exclusive of his base compensation through December 31, 2005) would be $1,656,125.
• Mr. Meier would be entitled to payment of three times his annual incentive award, payable at the lesser of his annual target or the average percentage of the target paid to all other officers.
• Mr. Meier would be entitled to payment of his long-term incentive compensation under any plan in effect as of December 31, 2005. As noted above, the Compensation Committee has suspended the LTIP pending completion of the committee's review of equity-based and long-term compensation.
• Mr. Meier would be entitled to continuation of his medical, prescription drug, dental and life insurance benefits for a period of 36 months.
• Mr. Meier would retain balances in the Company's 401(k) savings plan and the executive savings plan totaling $1,163,683 as of December 31, 2004, and he would be entitled to a lump sum or annual pension benefit under the Libbey Inc. Salaried Cash Balance Pension Plan ("Salary Plan") and the SERP. Based upon Mr. Meier's 35 years of service, his estimated lump sum payment under the Salary Plan and the SERP, as of December 31, 2005, is $5,396,899.
• Mr. Meier would be entitled immediately, and for a period of three years after termination, to exercise all stock options granted in prior years (all of which previously have been disclosed). The following table reflects the gain, if any, with respect to those stock options assuming that Libbey's common stock price on December 31, 2005 is equal to the lowest closing price of Libbey common stock during 2004 ($17.20 per share), the average closing price of Libbey common stock during 2004 ($23.75) and the highest closing price of Libbey common stock during 2004 ($30.65), respectively.

(1) Represents the fair market value on the date of grant.

Termination by the Company for Cause. If, on or before December 31, 2005, the Company were to terminate Mr. Meier's employment for "cause," as defined under Mr. Meier's employment agreement described under "Employment Agreements" below, Mr. Meier would be entitled to his base compensation through the date of termination, but would not be entitled to any additional base or incentive compensation. He also would be entitled to his balances in the 401(k) savings plan and the executive savings plan and the pension benefits described under "Termination for Good Reason or without Cause" above. Mr. Meier would be entitled only to such medical coverage continuation as is required by law, and he would forfeit all unvested stock options granted in prior years. He would be entitled for a period of three years after termination to exercise stock options that previously had vested. The following table reflects the gain, if any, with respect to those vested stock options assuming that Libbey's common stock price on December 31, 2005 is equal to the lowest closing price of Libbey common stock during 2004 ($17.20 per share), the average closing price of Libbey common stock during 2004 ($23.75) and the highest closing price of Libbey common stock during 2004 ($30.65), respectively.  

(1) Represents the fair market value on the date of grant.

Termination following Change in Control.

If, prior to December 31, 2005, a "Change in Control" were to occur (as described under "Change in Control Agreements" below) and if, on December 31, 2005, Mr. Meier were to terminate his employment for "good reason," or if the Company were to terminate his employment without "cause," in each case pursuant to and as defined in Mr. Meier's change in control agreement, he would be entitled to the following benefits:

• Mr. Meier would be entitled to payment of his base compensation through the date of termination, plus three times the sum of his annual base compensation at the rate then in effect. The Compensation Committee anticipates that decisions as to 2005 base compensation for each of Mr. Meier and the other named executive officers will be made on or about June 15, 2005. Based upon Mr. Meier's 2004 base compensation, the amount to which Mr. Meier would be entitled (exclusive of his base compensation through December 31, 2005) would be $1,656,125.
• Mr. Meier would be entitled to payment of three times the greater of his target annual bonus or his annual bonus for 2004. Mr. Meier's target annual bonus is 60% of his base compensation. Based upon Mr. Meier's 2004 base compensation, his target annual bonus would be $318,250, which is greater than his annual bonus for 2004; accordingly, he would be entitled to $954,750.
• Mr. Meier would be entitled to his balances in the 401(k) savings plan and the executive savings plan, as well as the pension benefits described under "Termination for Good Reason or without Cause" above; however, the lump sum benefit would be increased by approximately $168,728. He also would be entitled to medical and health benefits for three years following termination, reduced to the extent comparable benefits are received from another employer, as well as outplacement and financial planning services.
• Mr. Meier would be entitled immediately, and for a period of three years after termination, to exercise all stock options granted in prior years (all of which previously have been disclosed). The estimated gain associated therewith is set forth in the table under "Termination for Good Reason or without Cause" above.
• The benefits payable to Mr. Meier are net of any applicable federal excise taxes.

Based upon this review, the Compensation Committee finds that the total compensation (and, in the case of severance and change-in-control scenarios, the potential payouts), in the aggregate, and the mix of components of that compensation, with respect to Mr. Meier and the other named executive officers to be reasonable and not excessive.

WHAT IS THE COMPENSATION COMMITTEE'S POLICY REGARDING DEDUCTIBILITY OF COMPENSATION?

Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, publicly-held corporations are prohibited from deducting compensation paid to the named executive officers, as of the end of the fiscal year, in excess of $1 million, unless the compensation is "performance-based." It is the Compensation Committee's policy that the compensation paid to executive officers qualify for deductibility to the extent not inconsistent with Libbey's fundamental compensation policies. In furtherance of this policy, the stockholders have approved The Amended and Restated 1999 Equity Participation Plan of Libbey Inc. to satisfy Section 162(m)'s performance-based compensation requirements.

William A. Foley, Chairman

Deborah G. Miller

Carol B. Moerdyk

Gary L. Moreau