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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.      )

Filed by the Registrant x                            Filed by a Party other than the Registrant ¨

Check the appropriate box:

LEGG MASON, INC.

(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

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100 Light Street

Baltimore, Maryland 21202

June 22, 2009

Dear Stockholder:

You are cordially invited to attend the Annual Meeting of Stockholders which will be held at The Center Club, 100 Light Street, 16th Floor, Baltimore, Maryland at 10:00 a.m. on Tuesday, July 28, 2009. On the following pages you will find the Notice of Annual Meeting and Proxy Statement.

Whether or not you plan to attend, it is important that your shares be represented and voted at the meeting. Please grant a proxy to vote your shares in one of three ways: via the Internet, telephone or mail. Instructions regarding Internet and telephone voting are included on the proxy card.

I hope that you will attend the meeting, and I look forward to seeing you there.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

Tuesday, July 28, 2009

To the Stockholders of

LEGG MASON, INC.:

The Annual Meeting of Stockholders of Legg Mason, Inc., a Maryland corporation, will be held at The Center Club, 100 Light Street, 16th Floor, Baltimore, Maryland, on Tuesday, July 28, 2009 at 10:00 a.m. to consider and vote upon:

The Board of Directors has fixed the close of business on May 29, 2009 as the date for determining stockholders of record entitled to notice of and to vote at the Annual Meeting.

Your attention is directed to the accompanying Proxy Statement and 2009 Annual Report to Stockholders.

June 22, 2009

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PROXY STATEMENT

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100 Light Street

Baltimore, Maryland 21202

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

Tuesday, July 28, 2009

The Board of Directors of Legg Mason, Inc. is soliciting the enclosed proxy from its stockholders. If you grant the enclosed proxy, you may revoke it at any time before we exercise it. We are soliciting proxies by mail and MacKenzie Partners, our proxy solicitors, and our officers, directors and other employees may also solicit proxies by telephone or any other means of communication. We will bear the cost of soliciting proxies, including a fee of $25,000, plus expenses, paid to MacKenzie Partners for their services. We may reimburse brokers, banks, custodians, nominees and other fiduciaries for their reasonable out-of-pocket expenses in forwarding proxy materials to their principals. We are first sending this proxy material to our stockholders on or about June 22, 2009.

To be entitled to notice of and to vote at the meeting, you must have been a stockholder of record at the close of business on May 29, 2009. As of the close of business on that date, we had outstanding and entitled to vote (1) 141,892,508 shares of our common stock, $.10 par value, each of which is entitled to one vote, and (2) 1,206,573 exchangeable shares, no par value, of one of our Canadian subsidiaries, each of which is exchangeable into one share of common stock and is entitled to one vote. The holders of common stock and exchangeable shares will vote together as a single class at the meeting.

You may vote your shares in one of four ways:

We must have a quorum of stockholders (at least 50% of all stockholders entitled to vote) present at the meeting either in person or represented by proxy in order for any business to be conducted. Directors are elected by a plurality of the votes cast by the holders of shares of common stock and exchangeable shares present in person or represented by proxy at the meeting. Abstentions and broker non-votes will not affect the plurality vote for the election of directors. The amendment to the Legg Mason, Inc. 1996 Equity Incentive Plan and approval to issue additional shares will be approved if it receives the affirmative vote of a majority of the votes cast on the proposal and the total votes cast on the proposal represent over 50% of all securities entitled to vote on the proposal. Therefore, if holders of more than 50% in interest of all securities entitled to vote on the proposal cast votes, abstentions and broker non-votes will not have any effect on the result of the vote. On the other hand, if holders of less than 50% in interest of all securities entitled to vote on the proposal cast votes, abstentions and broker non-votes will have the effect of a vote against the proposal. Each stockholder proposal will be approved if it receives the affirmative vote of a majority of the votes cast on the proposal. Abstentions and broker non-votes will not affect the majority vote for the stockholder proposals.

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ELECTION OF DIRECTORS

Our Board of Directors is divided into three classes. Each year, one class is elected to serve for a term of three years. Our stockholders will vote at this Annual Meeting for the election of five directors for the three-year term expiring at the Annual Meeting of Stockholders in 2012.

All nominees presently serve as directors. Our Board of Directors elected Mr. Huff as a director in June 2009 to fill a vacancy on the Board. Mr. Huff was assigned to the class of directors whose term expires in 2012. Under Maryland law, Mr. Huff must be elected by stockholders at this Annual Meeting in order to continue serving as a director.

Unless a stockholder withholds authority to vote, the persons named in the enclosed proxy will vote for the election of the nominees named. If any nominee is unable to serve, the persons named in the proxy may vote for a substitute nominee that they determine. Our Board of Directors has no reason to believe that any nominee will be unable to serve.

James E. Ukrop has been a director of Legg Mason since January 1985 and will continue to serve until the 2009 Annual Meeting of Stockholders.

The Board of Directors recommends a vote “FOR” the election of each nominated director.

Nominees for Director for the Term Expiring in 2012

Robert E. Angelica, age 62, has been a director of Legg Mason since February 2007 and is currently engaged in private investment activities. From 1999 through December 2006, Mr. Angelica served as the Chairman and Chief Executive Officer of the AT&T Investment Management Corporation, an asset management subsidiary of AT&T Inc.

Barry W. Huff, age 65, has been a director of Legg Mason since June 2009 and is currently engaged in private consulting. Since his retirement from Deloitte & Touche USA LLP (“Deloitte”), an accounting firm, in May 2008 until March 2009, Mr. Huff provided consulting services to Deloitte. From 1995 to May 2008, Mr. Huff served as Vice Chairman, Office of the Chief Executive Officer at Deloitte. Mr. Huff was recommended to the Nominating and Corporate Governance Committee by a non-management director of the Company and was one of a number of candidates considered by the Nominating and Corporate Governance Committee.

John E. Koerner III, age 66, has been a director of Legg Mason since October 1990. Since 1995, he has been the managing member of Koerner Capital, LLC, a private investment company, or the President of its predecessor, Koerner Capital Corporation. Mr. Koerner is a director of Lamar Advertising Company.

Cheryl Gordon Krongard, age 53, has been a director of Legg Mason since January 2006 and is engaged in private investment activities. Ms. Krongard served as a senior partner of Apollo Management, L.P., a private investment company from January 2002 to December 2004. Ms. Krongard is a director of US Airways Group Inc.

Scott C. Nuttall, age 36, has been a director of Legg Mason since January 2008. Mr. Nuttall is a Member of the general partner of Kohlberg Kravis Roberts & Co. (“KKR & Co.”), a private equity firm, has been with KKR & Co. for over 12 years and is the head of KKR & Co.’s Global Capital and Asset Management Group. He is a director of Capmark Financial Group Inc., First Data Corporation, and KKR Financial Holdings LLC. Mr. Nuttall was nominated to serve on the Board pursuant to a

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Note Purchase Agreement under which we issued our 2.5% Senior Convertible Notes. Under the purchase agreement, KKR & Co. has the right to nominate one individual to the Board and the Compensation Committee for as long as KKR & Co. or its related parties own at least 50% of the outstanding notes and at least $625 million in notes remains outstanding.

Directors Continuing in Office

Directors whose terms will expire in 2011

Harold L. Adams, age 70, has been a director of Legg Mason since January 1988. He has been the Chairman Emeritus of RTKL Associates, Inc., an international architecture, engineering and planning firm, since April 2003. He is a director of Lincoln Electric Holdings, Inc. and Commercial Metals Company.

Mark R. Fetting, age 54, has been a director of Legg Mason since January 2008. Mr. Fetting was elected President and Chief Executive Officer of Legg Mason in January 2008 and Chairman of the Board in December 2008. He served as Senior Executive Vice President of Legg Mason since July 2004 and as Executive Vice President from July 2001 to July 2004. Mr. Fetting is a director of 14 funds within the Legg Mason Funds mutual funds complex and 24 funds within The Royce Funds mutual funds complex.

Margaret Milner Richardson, age 66, has been a director of Legg Mason since November 2003. She is currently engaged in private consulting and investment activities. Ms. Richardson is a director of Jackson Hewitt Tax Service Inc.

Kurt L. Schmoke, age 59, has been a director of Legg Mason since January 2002. Mr. Schmoke has been Dean of the School of Law at Howard University since January 2003. He is a director of The McGraw-Hill Companies, Inc.

Directors whose terms will expire in 2010

Dennis R. Beresford, age 70, has been a director of Legg Mason since September 2002. He is currently a professor at the University of Georgia, a position he has held since 1997. Mr. Beresford is a director of Kimberly-Clark Corporation and Federal National Mortgage Association.

W. Allen Reed, age 62, has been a director of Legg Mason since April 2006. He is a Senior Advisor for Aetos Capital, Inc., a real estate and private equity asset management company, and is engaged in private investment activities. From January 2006 to March 2006, Mr. Reed served as Chairman of the Board of General Motors Asset Management Corporation (“GMAMC”), the investment management subsidiary of General Motors Corporation, where he served as Vice President until March 2006. He also served as Chairman of the Board and Chief Executive Officer of General Motors Trust Bank, N.A. until March 2006; as Chief Executive Officer and President of GMAMC and General Motors Investment Management Corporation until December 2005; and as Chairman of the Board and Chief Executive Officer of General Motors Trust Company until March 2005. Mr. Reed is a director of Temple-Inland Inc. and 180 mutual funds in the Morgan Stanley mutual funds complex.

Nicholas J. St. George, age 70, has been a director of Legg Mason since July 1983. He is engaged in private investment activities.

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Roger W. Schipke, age 72, has been a director of Legg Mason since January 1991. He is engaged in private investment activities. Mr. Schipke was an Executive in Residence at the University of Louisville, College of Business and Public Administration from September 2002 to April 2008.

Committees of the Board—Board Meetings

Our Board of Directors has an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The current charters for these committees, as approved by our Board of Directors, are on, and may be printed from, our corporate website at www.leggmason.com under the “About Us—Corporate Governance” section. We will provide a copy of these charters, without charge, to any stockholder who provides a written request for a copy. Requests for copies should be addressed to the Corporate Secretary, Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and to the Corporate Secretary, Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter.

During the fiscal year ended March 31, 2009, our Board of Directors met 14 times, our Audit Committee met 5 times, our Compensation Committee met 5 times and our Nominating and Corporate Governance Committee met 5 times. While we have no formal policy on the matter, directors are generally expected to attend our Annual Meeting of Stockholders. All of our directors who were directors at the time attended our 2008 Annual Meeting of Stockholders. During fiscal year 2009, each of our directors attended at least 75% of the aggregate number of meetings of the Board of Directors and all Board committees on which he or she served that were held during the period in which he or she was a director except for Mr. Schmoke, who attended all regularly scheduled Board and committee meetings but was unable to attend several special meetings that were called on relatively short notice.

Audit Committee. Messrs. Beresford (Chairman), Angelica and Huff and Ms. Richardson are the members of our Audit Committee. The Audit Committee’s primary purpose is to oversee our financial accounting and reporting to stockholders. Its duties include:

Our Board of Directors has determined that Mr. Beresford qualifies as an “audit committee financial expert” as defined by the Securities and Exchange Commission (“SEC”). Our Board of Directors has also determined that all members of our Audit Committee are “independent” as defined in the New York Stock Exchange Listing Standards and the applicable SEC rules.

Compensation Committee. Messrs. Schipke (Chairman), Koerner, Nuttall and Schmoke and Ms. Krongard are the members of our Compensation Committee. The Compensation Committee’s responsibilities include determining the compensation of our chief executive officer (subject to the approval of our non-employee directors), approving the compensation of our chief financial officer and

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our three other most highly compensated executive officers and recommending to our Board of Directors the compensation to be paid to our non-employee directors. The Compensation Committee also serves as the administrative committee of several of our employee benefit plans.

Our Board of Directors has determined that all of the members of our Compensation Committee are “independent” as defined in the New York Stock Exchange Listing Standards.

Nominating and Corporate Governance Committee. Messrs. Reed (Chairman), Adams, St. George and Ukrop (who is not standing for re-election) are the members of our Nominating and Corporate Governance Committee. This committee’s responsibilities include identifying qualified director nominees, nominating director candidates, recommending director committee assignments and developing and recommending to our Board of Directors corporate governance principles and a corporate code of conduct.

Our Board of Directors has determined that all of the members of our Nominating and Corporate Governance Committee are “independent” as defined in the New York Stock Exchange Listing Standards.

Compensation of Directors

The Compensation Committee annually reviews and recommends to our Board of Directors the compensation of our non-employee directors. As part of this review, the Committee consults with McLagan, a compensation consulting and research firm, to determine the reasonableness and adequacy of our non-employee director compensation. The following table outlines the cash compensation that is paid to our non-employee directors.

In addition to cash compensation, under the terms of the Legg Mason, Inc. Non-Employee Director Equity Plan, as amended (the “Director Equity Plan”), each of our non-employee directors receives, on the 31 ^st day after he or she is first elected as a director, and on the date of each subsequent Annual Meeting of Stockholders, his or her choice of:

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Restricted Stock Units granted under the Director Equity Plan are payable on a one-for-one basis in shares of common stock within 60 days of the date on which the recipient stops serving as a director of Legg Mason. The number of Restricted Stock Units credited to a director will be increased to reflect all dividends paid on common stock based on the market price of a share of common stock on the dividend payment date. The Director Equity Plan covers an aggregate of 625,000 shares of common stock.

Director Compensation Table

The following table provides information about the compensation earned by our non-employee directors in fiscal year 2009.

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As of March 31, 2009, our non-employee directors held the following unexercised stock options, all of which had exercise prices that were at or above the market price of our common stock, and Restricted Stock Units:

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CORPORATE GOVERNANCE

Corporate Governance Principles

Upon the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has adopted Corporate Governance Principles for our company. These Corporate Governance Principles address, among other things, the following key corporate governance topics: director qualification standards; director responsibilities; director access to management and, as necessary and appropriate, independent advisors; director compensation; director orientation and continuing education; management succession; and an annual performance evaluation of the Board of Directors. A copy of these Corporate Governance Principles is available on our corporate website at www.leggmason.com under the “About Us – Corporate Governance” section. We will provide a copy of the Corporate Governance Principles, without charge, to any stockholder who provides a written request for a copy. Requests for copies should be addressed to the Corporate Secretary, Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and to the Corporate Secretary, Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter.

Code of Conduct

Upon the recommendation of the Nominating and Corporate Governance Committee, our Board of Directors has adopted a corporate Code of Conduct that applies to all directors, officers and employees of Legg Mason and its subsidiaries. A copy of the Code of Conduct is available on our corporate website at www.leggmason.com under the “About Us – Corporate Governance” section. We intend to satisfy any disclosure requirement regarding any amendment to, or waiver of, our Code of Conduct by posting the information on our corporate website. We will provide a copy of the Code of Conduct, without charge, to any stockholder who provides a written request for a copy. Requests for copies should be addressed to the Corporate Secretary, Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and to the Corporate Secretary, Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter.

Independent Directors

The Board of Directors has made determinations as to the independence of each of our non-employee directors and concluded that Mses. Krongard and Richardson and Messrs. Adams, Angelica, Beresford, Huff, Koerner, Nuttall, Reed, St. George, Schipke, Schmoke and Ukrop qualify as independent directors under the standards promulgated by the New York Stock Exchange (“NYSE”). In reaching these conclusions, the Board applied our Policy Regarding Director Independence Determinations as adopted by the Board in accordance with the rules of the NYSE. A copy of the Policy Regarding Director Independence Determinations is available on our corporate website at www.leggmason.com under the “About Us – Corporate Governance” section.

In determining Mr. Huff’s independence, the Board reviewed his relationship as a former partner of a public accounting firm to which we, and certain funds managed by our subsidiaries, made payments in the ordinary course of business during fiscal year 2009 for providing consulting, tax and compliance services to us, and audit services to the funds. Mr. Huff was not personally involved in any of the services provided to us or the funds.

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Director Nomination Process

The Nominating and Corporate Governance Committee will consider all qualified candidates for seats on our Board of Directors identified by members of the Committee, by other members of the Board of Directors, by our management and by our stockholders.

The Board of Directors has set minimum qualification requirements for director nominees in our Corporate Governance Principles. Director nominees are required to possess a broad range of skills, expertise, industry or other knowledge and business or other experience that will be useful to the company. The Nominating and Corporate Governance Committee will review each candidate’s biographical information and determine whether the candidate meets these minimum qualification requirements. The Nominating and Corporate Governance Committee may retain, and pay fees to, a firm to identify potential directors and will typically retain, and pay fees to, a firm to conduct background investigations of candidates under consideration.

After the Nominating and Corporate Governance Committee has determined that a candidate meets the minimum qualification requirements, the Committee will determine whether to nominate the candidate to our Board of Directors. In making this determination, the Nominating and Corporate Governance Committee will consider a number of factors, including:

Application of these factors involves the exercise of judgment and cannot be measured in any mathematical or formulaic way.

Our Amended and Restated Bylaws provide written procedures by which stockholders may recommend nominees to our Board of Directors. The Nominating and Corporate Governance Committee will consider nominees recommended by our stockholders under the same procedure used for considering nominees recommended by other directors or management. The Nominating and Corporate Governance Committee will consider nominee recommendations from stockholders for the next annual meeting of stockholders if it receives the recommendation no later than the 120^th day prior to the first anniversary of the mailing date of our prior year’s proxy statement (i.e., by February 22, 2010 for a recommendation in 2010). Stockholders who would like to propose a director candidate for election to our Board of Directors at an annual meeting of stockholders must send written notice to our Corporate Secretary between the 150^th day and 5:00 p.m., Eastern Time, on the 120^th day prior to the first anniversary of the mailing date of our prior year’s proxy statement (i.e., between January 22, 2010 and February 22, 2010 for nomination in 2010). If we advance or delay our annual meeting by more than 30 days from the first anniversary of the preceding year’s annual meeting, notice must be delivered between the 150^th day prior to the date of the annual meeting and 5:00 p.m., Eastern Time, on the later of the 120^th day before the meeting or the tenth day following the day on which we publicly announce the date of the meeting. Notice from a stockholder nominating a director must include the following:

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We may require that a proposed director nominee furnish other information to enable the Nominating and Corporate Governance Committee to determine the nominee’s eligibility to serve. The Nominating and Corporate Governance Committee will consider a nomination as it deems appropriate in its discretion. However, a nomination that does not comply with requirements discussed above may not be considered. Any nominations should be addressed to the Corporate Secretary, Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and to the Corporate Secretary, Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter.

Policies and Procedures Regarding Related Party Transactions

Under our written policies and procedures regarding related party transactions, the Nominating and Corporate Governance Committee must approve all related party transactions between us or one of our subsidiaries and a director, executive officer or immediate family member of a director or executive officer that would be required to be disclosed in our proxy statements. The policy also authorizes the Chair of the committee to approve, or reject, proposed related party transactions subject to ratification by the full committee at its next regularly scheduled meeting.

Executive Sessions

Executive sessions of our non-management directors are held in conjunction with each regular Board of Directors meeting and may be held at other times as circumstances warrant. Our independent directors annually elect a Lead Independent Director to chair these executive sessions. W. Allen Reed currently serves as the Lead Independent Director.

Communications

All interested parties who wish to communicate with our Board of Directors, the Lead Independent Director or our non-management directors as a group may do so by addressing their written correspondence to the director or directors, c/o Corporate Secretary, Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and c/o Corporate Secretary, Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter. Our Corporate Secretary will forward all correspondence received from stockholders or other interested parties to the director or directors to whom it is addressed.

The Audit Committee has developed procedures for receiving and handling complaints or concerns about our financial statements, internal controls or other financial or accounting matters. Any such complaints or concerns should be sent by mail to the Chairman of the Audit Committee, c/o Legg Mason, Inc., 100 Light Street, Baltimore, Maryland 21202 prior to July 31, 2009 and c/o Legg Mason, Inc., 100 International Drive, Baltimore, Maryland 21202 thereafter.

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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the ownership of Legg Mason common stock as of May 29, 2009 by each of our directors, each individual named in the Summary Compensation Table, all of our executive officers and directors as a group, and each person who, to the best of our knowledge, beneficially owned more than five percent of the outstanding common stock.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

The compensation programs for our executive officers, including those named in the compensation tables of our proxy statements (we refer to these individuals as the “named executive officers”), are designed to attract, motivate and retain the management talent we need to maintain and strengthen our position in the asset management business and to achieve our business objectives. Many of our business objectives tend to require significant lead time to accomplish, increasing our need for a stable and talented management team. In addition, the ability to hire talented employees is critical to succeeding in the asset management industry. To achieve our business goals, including growing our business, we must attract and retain top employees, including executive officers.

We are engaged in a very competitive business. Due to the nature of the industry, asset management personnel and management have significant career mobility and, as a result, the competition for experienced and talented employees in the industry is great. This competition impacts the design and implementation of all of our compensation programs, including those for executive officers.

Compensation Philosophy and Principles

In designing and implementing our compensation programs for named executive officers, we are guided by three basic principles.

Link Compensation to Performance

We believe that compensation levels should reflect performance—both the performance of the recipient and the performance of Legg Mason. As a result, we emphasize incentive compensation that is variable in nature and the amount of which is determined after the end of each fiscal year. Making a significant portion of each executive officer’s compensation variable, and thus subject to reduction or increase based on corporate and individual performance during the year, helps link compensation levels to performance.

Maintain Competitive Compensation Levels

We try to offer programs and levels of compensation that are competitive with those offered by comparable companies in our industry in order to attract, retain and motivate our executive officers. Our compensation must be competitive to engage new and retain current employees. To support this principle, the Compensation Committee of our Board of Directors (the “Committee”) annually reviews compensation survey data to assess the competitiveness of our compensation programs for named executive officers. The Committee uses this data as one factor in determining the appropriate levels of compensation for our executive officers.

Support Retention and Align Interests with Stockholders

In designing and implementing our compensation programs for named executive officers, we seek to implement programs that will encourage them to remain with us and to increase stockholder value. Providing competitive compensation is one way to promote this principle. Another way is through granting long-term equity awards each year. Our named executive officer compensation programs

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typically involve two types of long-term equity awards: restricted stock and stock options. Each long-term equity award vests over a three to five year period and, subject to a few exceptions, is forfeited if the recipient terminates his or her employment prior to vesting. Since the recipient will forfeit unvested equity awards if he or she terminates employment, the costs to the employee of doing so are increased, thus creating a disincentive to leave. In addition, the long-term equity awards increase in value as our stock price increases, and provide the named executive officer with an opportunity to build up a significant investment in Legg Mason common stock. Thus, equity awards help align the interests of the named executive officer recipients with other stockholders.

Components of Compensation Program

Base Salary

Base salaries provide our named executive officers with a monthly income that is set at the beginning of a fiscal year and generally does not decline from year to year. The non-variable nature of base salaries provides named executive officers with a reliable minimum amount of compensation. We believe competitive base salaries are important in attracting and retaining talented executives, and in fostering a career orientation. Consistent with common practices in the asset management industry, the Committee usually sets base salaries for named executive officers at levels that should make up a low percentage of total compensation. This approach is consistent with linking compensation to performance since most of an executive’s compensation is paid through variable incentive awards.

The Committee reviews, but does not necessarily increase, the base salaries of our named executive officers annually and will typically consider:

In considering base salary levels, the Committee does not utilize any specific weighting of these factors. While the Committee conducts annual reviews of base salary amounts, in many years it may elect not to increase a named executive officer’s base salary. This is usually done to limit base salary increases and reinforce the philosophy that the bulk of compensation should normally come from variable incentive awards.

Incentive Compensation

In addition to base salaries, we provide executive officers with annual incentive compensation awards typically paid as cash bonuses and grants of restricted stock. Awards are made after each fiscal year and are based, in part, on our overall performance, and the responsibilities, individual performance and contribution of the recipient. Incentive awards are generally tied to performance and will usually constitute the largest portion of annual compensation paid to executive officers.

In most years, the Committee grants most incentive awards under our Executive Incentive Compensation Plan to ensure tax deductibility under Section 162(m) of the federal tax code. This plan provides for an executive bonus pool based on our net income (before the bonuses are deducted). This plan generated no bonus pool for fiscal year 2009 because we did not have net income. For the reasons discussed below under “Compensation Decisions for Fiscal Year 2009—Chief Executive Officer,” primarily because the lack of a bonus pool resulted from two expense items, the Committee elected to pay fiscal year 2009 incentive compensation that was not under the plan.

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After the end of each fiscal year, the Committee approves actual incentive awards to each executive. Our full Board, excluding inside directors, must also approve the award to our CEO. The Committee’s fiscal year 2009 incentive award decisions for our named executive officers are discussed below under the heading “Compensation Decisions for Fiscal Year 2009.” Annual incentive awards are made in cash bonuses and, in most cases, grants of restricted stock. The restricted stock portion is discussed below under “Long-Term Incentive Awards.”

As is the case for fiscal year 2009, the Committee will occasionally award discretionary incentive awards to named executive officers that are not made under the executive incentive plan. The Committee awards these bonuses when the recipient was not named as a participant in the plan at the beginning of the fiscal year or when the Committee determines that the recipient should receive an incentive award larger than the amount available to the executive under the plan.

Long-Term Incentive Awards

Long-term incentive awards are intended to encourage retention of key employees and to reinforce the importance of building long-term value for our stockholders. Although our equity incentive plan provides the flexibility to issue many different types of long-term incentive awards, the Committee typically issues only stock options and restricted stock to our named executive officers. All long-term incentive awards issued for fiscal year 2009 were from our stockholder-approved Legg Mason, Inc. 1996 Equity Incentive Plan.

Stock Options

Stock options are rights to purchase a specified number of shares of Legg Mason common stock at a pre-determined price. Because the exercise price of an option (the price at which the shares may be purchased) is fixed, an option becomes more valuable as the price of our common stock increases. Alternatively, an option receipient will not receive any value from a stock option if the price of our common stock decreases below the exercise price of the option. Therefore, stock option grants are intended to focus management’s attention on long-term stock price appreciation. Stock options are also a valuable retention tool because our option grants usually become exercisable (vest) over a period of time and, with a few limited exceptions, unvested options are forfeited if the recipient’s employment terminates. The options granted to our named executive officers in fiscal 2009:

The Committee granted stock options for fiscal year 2009 to our named executive officers at the Committee’s regular quarterly meeting on July 21, 2008, at the same time it granted options to other senior employees. The July Committee meeting was chosen as the day to grant stock options because Legg Mason has historically granted stock options on the day of the July Committee meeting. We do not have any program, plan or practice to time option grants with the release of material non-public information. Because we grant options on the Committee meeting day, the company may be in possession of material non-public information when options are granted. If the company is in possession of material non-public information, either favorable or unfavorable, when options are granted, the Committee does not take the information into consideration in determining option award

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amounts. The Committee also awarded stock options to Messrs. Odenath and Sullivan in October 2008 as a portion of their sign-on bonuses and to Mr. Odenath in May 2009 as a portion of his incentive award for fiscal year 2009.

Restricted Stock

Restricted stock are shares of our common stock that may not be transferred, and are subject to forfeiture, over a specified period. A portion of the restricted stock the Committee awarded our named executive officers was part of their annual incentive awards. We believe paying a portion of incentive compensation in restricted stock is more aligned with stockholder interests than paying awards entirely in cash. The other portion was awarded as an additional long-term incentive award or, in certain cases, as part of a sign-on bonus. The restricted stock granted to our named executive officers for fiscal year 2009 may not be transferred, and, subject to a few exceptions, will be forfeited if the recipient’s employment ends before the shares have vested. Restricted shares vest in either one-quarter increments at the end of each of the four years, or one-third increments at the end of each of the three years, after grant. Because of forfeiture if the recipient’s employment ends before the shares have vested, restricted stock serves as a valuable retention tool.

Other Compensation

Our named executive officers may participate, on an elective basis, in three other compensation plans. Two of these plans, our Profit Sharing and 401(k) Plan and our Employee Stock Purchase Plan, are generally available to all employees¹. Under the Profit Sharing and 401(k) Plan, employees may set aside a portion of their compensation for retirement on a pre-tax basis. The company matched up to $5,000 contributed for each employee in fiscal year 2009. The company also may elect to make annual profit sharing contributions to employee accounts. However, no contributions were made for fiscal year 2009. During fiscal year 2009, Messrs. Fetting, Daley and Bain received $5,000 under the Profit Sharing and 401(k) Plan in matching dollars. Our Employee Stock Purchase Plan allows U.S.-based employees, including named executive officers, to elect to apply up to 10% of their income, to an annual maximum of $22,700, to purchase shares of our common stock. The company contributes to the plan 10% of the contributions of each employee, which are used to purchase common stock for the employee. During fiscal year 2009, Messrs. Abbaei and Daley participated in our Employee Stock Purchase Plan.

Our phantom stock plan is a non-qualified deferred compensation plan available only to select employees, including named executive officers, based on responsibilities and compensation levels. Under the plan, participants may elect to defer up to $60,000 in annual compensation on a pre-tax basis. Amounts deferred are deemed invested in “phantom” shares of our common stock at a price of 90% of the market price on the deemed investment date. Dividends paid on our common stock are credited to the “phantom” stock at 95% of the market price on the dividend payment date. Amounts deferred are distributed in shares of our common stock after the participant’s employment with Legg Mason has terminated. During fiscal year 2009, Messrs. Abbaei and Bain were the named executive officers who actively participated in this plan.

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Implementation of Named Executive Officer Compensation Programs

Role of Compensation Committee and Non-Employee Directors

The Committee is responsible for overseeing and implementing our named executive officer compensation programs. The Committee’s roles include:

Our full Board, excluding inside directors, must approve the Committee’s determinations regarding CEO compensation.

Role of Management

Our management, under the leadership of our CEO, plays an important role in establishing and maintaining our named executive officer compensation programs. Management’s role includes recommending plans and programs to the Committee, implementing the Committee’s decisions regarding the plans and programs and assisting and administering plans in support of the Committee. Our CEO also provides information on the individual performance of the other named executive officers and makes annual recommendations to the Committee on compensation levels for all other named executive officers.

Role of Compensation Consultant

The Committee’s charter gives it the authority to retain compensation consultants and other advisors to assist it in performing its duties. For fiscal 2009, the Committee retained McLagan, a well-regarded firm that specializes in the financial services sector and provides market compensation data and trends of relevant competitors. As directed by the Committee, McLagan participates in Committee meetings, provides counsel on compensation-related issues and, in particular, provides advice with respect to annual base salaries and incentive compensation awards for our executive officers. In fiscal year 2009, McLagan advised the Committee that the annual incentive awards it awarded, or approved for, our named executive officers were reasonable in light of competitive market practices. McLagan also assists the Committee by providing comparative market data on compensation practices and programs based on an analysis of competitors and provides guidance on industry trends, best practices and market and regulatory developments.

In assisting the Committee, McLagan has assembled a list of relevant public and private competitor firms to use in comparing compensation programs. McLagan maintains the confidentiality of the pay practices and pay information of each individual competitor within the group by providing us with unattributed information about the group as a whole. The companies on the list are AllianceBernstein, Barclays Global Investors, Blackrock Financial Management, BNY Mellon, The Capital Group Companies, Deutsche Asset Management, Eaton Vance Management, Federated Investors, Fidelity Investments, Franklin Templeton Investments, Invesco Ltd., Janus Capital Group, JP Morgan Asset Management, MFS Investment Management, Morgan Stanley Investment Management, Neuberger Berman, Nuveen Investments, PIMCO Advisors, Putnam Investments, State Street Global Advisors, T. Rowe Price Associates, UBS Global Asset Management and The Vanguard Group. The Committee and McLagan use this group of relevant competitors to (1) compare our

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compensation programs with those of our competitors and (2) compare the compensation levels of our named executive officers to the compensation levels of comparable officers of companies in the group.

Tax Deductibility of Annual Compensation

Section 162(m) of the Internal Revenue Code limits tax deductions for certain annual compensation in excess of $1,000,000 paid to individuals named in the summary compensation tables of public company proxy statements. An exception to this limitation is for compensation based on the attainment of objective performance criteria that have, among other things, been approved by stockholders. Our Executive Incentive Compensation Plan is designed to qualify for this exception and permit the full deductibility of compensation awarded under the plan, including restricted stock awards. Another exception to this deductibility limit covers stock options.

The Committee intends to continue to pursue compensation programs that are designed to be fully deductible. However, when circumstances warrant, such as during fiscal year 2009 for the reasons described below under “Compensation Decisions for Fiscal Year 2009—Chief Executive Officer,” the Committee may award discretionary incentive awards to named executive officers that are not fully deductible under Section 162(m) as the Committee must balance the effectiveness of executive compensation plans with the materiality of reduced tax deductions.

Compensation Decisions for Fiscal Year 2009

The following table shows the named executive officer compensation for fiscal year 2009 that was awarded or approved by the Committee. Mr. Abbaei is excluded from the table because he was not an employee for the entire fiscal year. This table differs from the Summary Compensation Table below primarily in that it includes the award date value of equity awards made for fiscal year 2009 rather than including, as required by SEC rules, the compensation expense recognized in our financial statements for equity awards (which includes amounts for awards made in prior years that vested during fiscal year 2009).

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Chief Executive Officer

In April 2008, the Committee established, and our non-employee directors approved, a fiscal year 2009 base salary of $500,000 for Mr. Fetting. This is the same base salary established for Mr. Fetting when he became Chief Executive Officer in January 2008. In considering this base salary, the Committee considered the factors discussed above under “Components of Compensation Program—Base Salary.” The Committee decided not to adjust Mr. Fetting’s base salary for fiscal year 2009 because the salary amount was consistent with the Committee’s objectives.

In June 2008, the Committee decided that Mr. Fetting would be awarded no more than 21% of the bonus pool under our Executive Incentive Compensation Plan for fiscal year 2009. In April 2009, the Committee considered the annual incentive award for fiscal year 2009 for Mr. Fetting. The Committee noted that, since Legg Mason had a net loss for the fiscal year, there was no bonus pool under the Executive Incentive Compensation Plan. The Committee recognized, however, that the net loss resulted primarily from two items—the $1.4 billion in charges (net of taxes and related expense reductions) resulting from support for money market funds, including purchasing and reselling at a loss securities issued by structured investment vehicles, and $860 million (net of taxes) of goodwill and intangible asset impairment charges. If those two items are excluded, Legg Mason would have had net income, and the plan would have produced a total bonus pool large enough to accommodate the annual incentive awards made. Although the terms of the plan do not explicitly provide for the exclusion of those items, the Committee considered the items to be extraordinary expenses. The Committee ultimately decided to make incentive awards after considering the nature of the two large expense items, management contributions during an unprecedented period, market compensation levels for senior officers and the disappointing financial results for which management is ultimately responsible.

The Committee then considered Legg Mason’s performance in fiscal year 2009, and compared the performance measures to the performance metrics for competing asset management companies. The performance statistics considered by the Committee included: the amount of net outflows in assets under management, the changes in assets under management, the investment performance of certain key products managed by Legg Mason’s subsidiaries, the changes in the company’s revenues, pre-tax loss and earnings per share over the last two fiscal years, and changes in the trading price of Legg Mason common stock.

The Committee also took into account subjective measures of Mr. Fetting’s responsibilities and performance during fiscal year 2009, including:

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In addition, the Committee considered advice from McLagan as to compensation levels of chief executive officers of relevant competitor asset management firms and the reasonableness of the amount of the award the Committee was considering. Because our March 31 fiscal year-end is later than the fiscal year-ends of many competitors, McLagan is able to provide recent and up-to-date data about market practices. Taking these factors into account, the Committee established an incentive award of $1.36 million for Mr. Fetting (30% of which was paid in shares of restricted stock and the remainder in cash). Our Board, excluding inside directors, approved this award.

The $1.36 million incentive award to Mr. Fetting is 52% less than Mr. Fetting’s $2.83 million incentive award for fiscal year 2008. Mr. Fetting’s total compensation awarded for fiscal year 2009, including the other long-term incentive awards discussed below, was approximately 29% less than his total compensation for the prior fiscal year. Despite the fact that Mr. Fetting’s individual performance during the year was strong, the Committee felt that these reductions were appropriate and consistent with its principle of linking pay to performance after taking into account the company’s performance metrics discussed above. Mr. Fetting’s incentive award was lower than the awards of most of the other named executive officers based on Mr. Fetting’s recommendations and a greater emphasis placed on corporate metrics in determining Mr. Fetting’s compensation.

In addition to the shares of restricted stock issued as part of Mr. Fetting’s annual incentive award, the Committee also awarded Mr. Fetting in July 2008 20,000 shares of restricted stock and options to purchase 60,000 shares of common stock. These awards were made as part of the Committee’s usual practice of issuing long-term incentive awards in July. The Committee made these awards after taking into consideration the responsibilities of Mr. Fetting as Chief Executive Officer of Legg Mason; the number of unvested options, options that had exercise prices above the market price for our stock and shares of restricted stock held by Mr. Fetting; and Mr. Fetting’s individual performance.

Other Named Executive Officers

In April 2008, the Committee approved fiscal year 2009 base salaries of $350,000 for Mr. Bain and $250,000 for Messrs. Abbaei and Daley. In approving these base salaries, the Committee considered the factors discussed above under “Components of Compensation Program—Base Salary,” including the recommendations of Mr. Fetting. The Committee elected not to adjust the base salaries of any of these officers because it felt that their base salaries were consistent with the Committee’s objectives.

Effective September 2008, Legg Mason hired Messrs. Odenath and Sullivan. As part of the agreements reached in hiring them, it was agreed that they would each receive base salaries during the remainder of fiscal year 2009 and, in the case of Mr. Odenath, fiscal year 2010 as well, at the annual rate of $350,000.

In November 2008, Mr. Abbaei’s employment with Legg Mason terminated. At the time his employment ended, Mr. Abbaei was awarded $1.77 million in cash incentive compensation for fiscal year 2009. The award was a pro rata percentage of the cash portion of his fiscal year 2008 incentive award based on the percentage of the fiscal year that he was employed.

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In March 2009, Mr. Bain’s employment with Legg Mason terminated. Mr. Bain’s annual incentive award for fiscal year 2009 of $2.7 million in cash was agreed with Mr. Bain in connection with the termination of his employment. The award was approximately equal to Mr. Bain’s incentive award for fiscal year 2008, although the fiscal year 2009 award was paid entirely in cash since Mr. Bain’s employment was ending. Of the $2.7 million incentive award, $1 million had been paid in October 2008 as an interim incentive award. As part of the agreements reached when his employment ended, Mr. Bain agreed to not compete for a 6-month period and to forfeit his 20,000 outstanding performance shares, 80% of which otherwise would have continued vesting, subject to certain conditions, notwithstanding the termination of his employment.

In April 2009, the Committee approved the annual incentive awards for Messrs. Daley, Odenath and Sullivan. In approving these awards, the Committee considered the recommendations of Mr. Fetting, the Legg Mason performance measures that it considered in establishing Mr. Fetting’s incentive award, in the case of Mr. Daley, his historical incentive awards, in the case of Messrs. Odenath and Sullivan, the minimum incentive award amounts for fiscal year 2009 that were agreed when they were hired and subjective factors about each executive officer including:

In addition, the Committee considered accomplishments of the management team during the fiscal year, including:

The Committee also considered advice from McLagan as to compensation levels at relevant competitor asset management firms and the reasonableness of the award that the Committee was considering approving for each officer. Taking these factors into account, the Committee approved an incentive award of $1.2 million for Mr. Daley. Messrs. Odenath and Sullivan received the minimum incentive amounts provided in their agreements of $5.9 million and $2.5 million, respectively.

The incentive award for Mr. Daley was paid primarily in cash and 20% in shares of restricted stock. This incentive award represented a slight reduction from the incentive award Mr. Daley received for fiscal year 2008. Mr. Daley’s total compensation awarded for fiscal year 2009, including the other long-term incentive awards discussed below, was approximately 18% less than his total compensation for the prior fiscal year. The Committee believes that these award amounts are appropriate based on the corporate performance measures discussed above and taking into account Mr. Fetting’s evaluation of Mr. Daley’s valuable performance as CFO during this particularly difficult fiscal year.

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The incentive awards to Mr. Odenath and Sullivan were paid 58% and 62% in cash and 21% and 38% in shares of restricted stock, respectively. In addition, 21% of the incentive award to Mr. Odenath was paid in stock options. These incentive awards were equal to the minimum incentive award amounts agreed with these individuals in connection with them being hired in September 2008.

In addition to the shares of restricted stock issued as part of their annual incentive awards, the Committee also awarded in July 2008 options to purchase 35,000, and 30,000 shares of common stock and 9,850 and 8,450 shares of restricted stock to Messrs. Bain and Daley, respectively. These awards were made as part of the Committee’s usual practice of issuing long-term incentive awards in July. The Committee made these long-term incentive awards based on Mr. Fetting’s recommendations after taking into consideration the levels of responsibility of each officer; the number of unvested options held by each officer; and the individual performance of each officer. Mr. Bain’s long-term incentive award was forfeited under its terms when his employment ended at the end of the fiscal year.

In October 2008, the Committee awarded Messrs. Odenath and Sullivan 236,072 and 70,822 stock options and 114,787 and 50,641 shares of restricted stock, respectively. The awards were made under the terms of the agreements reached in hiring these individuals. The awards were sign-on bonuses, intended primarily to replace equity forfeited at their prior employers.

Summary Compensation Table

The following table summarizes the total compensation during the fiscal year ended March 31, 2009 of our Chief Executive Officer, our Chief Financial Officer, each of our three other most highly compensated executive officers during the fiscal year and one former executive officer whose employment terminated during the fiscal year. This table differs from the table above under “Compensation Discussion and Analysis—Compensation Decisions for Fiscal Year 2009” primarily in that it includes the compensation expense recognized in our financial statements for equity awards (which includes amounts for awards made in prior years that vested during fiscal year 2009) as required by SEC rules, rather than including the award date value of equity awards made for fiscal year 2009 and includes one former executive officer whose employment ended during the fiscal year.

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Grants of Plan-Based Awards

The following table provides information concerning each plan-based award granted for the fiscal year ended March 31, 2009 to our named executive officers.

Dividends are paid on shares of restricted stock at the same time, and in the same amounts, as dividends are paid on other outstanding shares of our common stock.

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The actual value realized, if any, on stock option exercises will be dependent on overall market conditions, our future performance and the future prices of our common stock. There can be no assurances that the actual value realized will approximate the amount calculated under the valuation model.

Employment-Related Agreements

On August 29, 2008, we entered into a two-year agreement with Mr. Odenath providing for him to be hired as Senior Executive Vice President beginning September 2008. Mr. Odenath is a seasoned executive who was hired to head our Americas division. Pursuant to the agreement, Mr. Odenath is entitled to receive an annual base salary of $350,000; total cash compensation of no less than $3,750,000 for fiscal year 2009; and a deferred compensation award of no less than $2,500,000 in May 2009, split equally in value between stock options and restricted stock. The agreement also provides for a minimum incentive award amount for fiscal year 2010. These compensation guarantees will terminate if Mr. Odenath resigns or is terminated for cause prior to March 31, 2010. In addition, as a sign-on bonus, we agreed to make a one time award of stock options with a value of $2,500,000 and an award of restricted stock with a value of $1,700,000 to Mr. Odenath in October 2008. If Mr. Odenath’s employment terminates other than for cause or he resigns prior to the full vesting of the one time grant of stock options and restricted stock, the unvested portion of each award will either be accelerated or paid out in cash, at our election. Under the terms of the agreement, we also provided temporary housing in Baltimore for six months. The agreement also required that Mr. Odenath not compete with us for a period of one year after termination of his employment.

On August 25, 2008 we entered into an agreement with Mr. Sullivan providing for him to be hired as Senior Executive Vice President-Chief Administrative Officer beginning in September 2008. Pursuant to the agreement, Mr. Sullivan was entitled to receive minimum incentive compensation for fiscal year 2009 equal to the incentive award that he received and is described above. In addition, the letter provided for Mr. Sullivan to receive, as a sign-on bonus, the stock options and shares of restricted stock that were awarded to him in October 2008 and are described in the Grants of Plan-Based Awards table above, intended primarily to replace equity forfeited at his prior employer.

In March 2009, in connection with the termination of Mr. Bain’s employment, we agreed to pay him the fiscal year 2009 incentive award described above, he agreed to not compete for a six-month period and to forfeit his outstanding performance shares.

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Outstanding Equity Awards at March 31, 2009

The following table provides information as of March 31, 2009 about the outstanding equity awards held by our named executive officers.