EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Summary
This section explains our executive compensation program as it applies to our named executive officers (whose compensation information is contained in the tables following this discussion) as well as the role, responsibilities and philosophy of our Board’s Personnel & Compensation Committee (the “Committee” or the “committee”), which oversees the design and operation of the program. The named executive officers are:

Neal J. Keating	Chairman, President and Chief Executive Officer
William C. Denninger	Senior Vice President and Chief Financial Officer
Gregory L. Steiner	President, Kaman Aerospace Group, Inc.
Steven J. Smidler	President, Kaman Industrial Technologies Corporation
Candace A. Clark	Senior Vice President, Chief Legal Officer and Secretary

Our goals are to:

1. Increase shareholder value by motivating talented individuals to achieve the company’s annual and longer-term financial and strategic operational goals with compensation related to objective benchmarks and company performance.
2. Have a significant percentage of our senior executives’ incentive compensation tied to successful execution of strategic operational goals.
3. Have our named executive officers maintain a significant equity stake in the company to further align their interests with those of our other shareholders.
4. Assure that the benefits provided to the named executive officers are consistent both with practices of similar companies and shareholder interests.  
5. Respond appropriately in light of economic circumstances

The Pay Elements; Performance Metrics and Evaluation of Market Pay Practices
We have designed our executive compensation program to achieve these goals in a variety of ways with the intention of providing reasonable pay for a company of our size and incentive opportunities that challenge and correspondingly reward our executives when, and to the extent that, the company succeeds. First, we use a combination of pay elements, each of which over time is intended to approximate the market median compensation for each position. These elements include base salary, annual and longer-term cash incentive opportunities, and benefits. The opportunities afforded by each pay element are determined on the basis of comparison to objective criteria to assure consistency with companies of similar revenue size, which include national surveys and a sampling of the Russell 2000 companies recommended by the Committee’s independent consultant which approximate the company’s revenue size (but is not reflective of our unique combination of business segments in one organization).

Actual annual and longer-term incentive pay is then determined by comparing selected metrics of company financial and operational performance to the entire Russell 2000 index of companies. The Committee uses the Russell 2000 because it believes that this continues to be the most likely group that both current and potential shareholders would use to evaluate the company in making their investment decisions; this is largely due to the fact that our two business segments (Aerospace and Industrial Distribution) are so diverse from each other that it is not feasible to compare us to a peer group of companies. The Committee regularly reviews the continued appropriateness of using the Russell 2000 for comparison and has reconfirmed its use for 2011.

The financial performance metrics upon which annual and longer-term incentive opportunities are based are those that management uses to evaluate business performance. For corporate participants, annual incentive metrics include return on investment, growth in earnings per share, and growth in earnings per share compared to the company’s annual plan projection for earnings per share; for business segment participants, metrics include accomplishment of predetermined financial goals and other operational performance factors approved by the Committee. Longer-term incentive metrics are the same for corporate and business segment executives and consist of the company’s average return on investment, compounded growth in earnings per share and total return to shareholders over a three-year period. The weightings of these metrics in the overall determination of award payments differ for the annual cash incentive and longer-term incentive, as discussed below.

As discussed below, during the past few years, the Committee has taken a number of steps to assure that the benefits provided to the named executive officers more closely approximate the benefits that are provided to other employees.   These include the elimination of essentially all perquisites and phase out of the supplemental employees’ retirement plan in the same manner as the basic tax-qualified pension plan. In addition, the Committee has also aligned existing employment and change-in-control agreements for the named executive officers with current market practices.

How the Pay Elements Work in Practice
The pay elements of our executive compensation program are designed to work together in a way that results in above average compensation when the company achieves above average financial performance compared to the Russell 2000 index of companies. Set forth below are charts comparing our performance to the 50th and 75th percentiles of our market (as described above) for both annual and long-term incentive award determination purposes.

Annual Cash Incentive Awards.
This chart compares our 2010 financial performance with the 50th and 75th percentile performance of the Russell 2000 companies for the period 2005 – 2009 (which is the period we use to evaluate our results for annual cash incentive awards purposes):

Our 2010 return on investment (ROI) performance was at the 66th percentile of the Russell 2000 and earnings per share (EPS) growth was at the 71st percentile. These two factors combined with achieving 97% of our budgeted earnings per share resulted in Mr. Keating earning base salary and target annual cash incentive for 2010 at the 65th percentile as illustrated by the chart below:

Please see the discussion at page 25 for information on our independent consultant’s determination of the 50th and 75th percentile for this market comparison.

Performance Related to Long-Term Incentive Award Determination.
The following chart compares the Company's three year (2008 - 2010) performance against the Russell 2000 companies for the same three-year period based on available data as of February 1, 2011.   Approximately 20% of the Russell 2000 companies reported data as of February 1, 2011.   As illustrated below, our performance was at almost the 75th percentile for compounded growth in EPS growth and above the 75th percentile for average return on investment.  Total return to shareholders for this period was at the 40th percentile due in significant part to global economic difficulties in 2008.  Based on these performance levels, we have accrued approximately $1.8 million for Mr. Keating's LTIP award for the 2008-2010 performance period.  This amount represents approximately the 61st percentile of the competitive market for other chief executive officers in similar companies.   We will report the final figure earned by Mr. Keating (and our other named executive officers) for the 2008-2010 LTIP award and an update of the 3-Year Performance Period vs. Russell 2000 chart in an 8-K filing later this year once all 2010 operating results for Russell 2000 companies become available and the Committee has approved the awards.  

In addition, each of the other named executive officers’ target performance-based compensation (which is comprised of annual cash incentive and LTIP) was at least 60% of their total cash and stock-based compensation in 2010, up approximately 5 percentage points from 2009 (except for Mr. Smidler, who joined the company in December of 2009).

Our emphasis on goal achievement to drive incentive compensation is balanced by policies and plan features that emphasize alignment of the executive’s financial interest with those of company’s shareholders. These include the existence of stock ownership guidelines, the long-term incentive feature of the Stock Incentive Plan that requires executives to receive at least one-third of an award payment in company stock if stock ownership guidelines have not been met, and caps imposed upon total annual cash incentives and cash-based long-term incentive awards.   In February 2011, the committee also recommended, and the Board adopted, an anti-hedging policy which provides that no director or executive officer may speculate in company stock or debt securities, including hedging or any type of arrangement that would have a similar economic effect.

The Committee also introduced a claw back policy in 2010 applicable to the company’s CEO and chief financial officer and   Messrs. Keating and Denninger’s employment agreements were amended last year to reflect the policy. When SEC regulations are issued in final form to provide guidance on the requirements of a comprehensive “claw back” policy as required by recent federal legislation, the Board will establish a claw back policy.   This policy will immediately apply to all named executive officers as their employment agreements currently provide that each executive is bound by any claw back policy adopted by the company.

Actions to Modify Supplemental Pension/Perquisites/Management Agreements
The Committee has modified the supplemental pension plan, perquisites and management agreements provided to our named executive officers over the past few years consistent with market practice as follows:

• Phase Out of Pension Plan and Supplemental Retirement Plan. In early 2010, the Board closed the defined benefit pension plan to new hires and implemented a phase out plan for additional service and compensation to be included to determine benefit levels and service credits. At the same time, the Board determined that the supplemental retirement plan which applies to the named executive officers should also be phased out in the same manner to provide a consistent approach to all employees. (Mr. Smidler was not a participant in either plan because the Industrial Distribution segment had closed the pension plan to new hires in mid-2009.) However, the committee believes that the reduction in pension for the named executive officers would bring the total compensation package below the competitive median developed by its independent consultant. As a result, the Committee increased the targeted amount of performance-based compensation that can be earned by the named executive officers for the 2010-2012 LTIP performance period as discussed on page 38.
• Perquisites. Perquisites that were available to the named executive officers and other executives were eliminated for the named executive officers in early 2010, including medical expense reimbursement (up to $5,000 per year) and tax and estate planning reimbursement (up to $10,000 per year). The only remaining perquisite was a leased company vehicle.   In late 2010, the Committee replaced the leased vehicle policy with a monthly allowance for each executive as their vehicle leases expire. The executives are responsible for the acquisition, insurance and maintenance of their vehicles. Messrs. Keating, Denninger, and Smidler have already converted to the monthly allowance and Ms. Clark and Mr. Steiner will begin receiving the allowance during 2011. There are no other other perquisites or similar personal benefits provided to the named executive officers.
• Changes in Employment and Change in Control Agreements.   The Board believes that employment arrangements for top senior executives are an important tool for the attraction and retention of skilled management in the company’s two very competitive industries of aerospace and industrial distribution. Therefore, each of the named executive officers has an employment agreement and a change in control agreement (collectively the “management agreements”). Over time, the committee has modified the management agreements in accordance with the advice of its independent consultant to reflect current market practices.
  
  
  • In early 2010, the Committee notified the company’s executive officers that in the event their management agreements were renewed, it did not intend to provide an excise tax gross-up benefit. Since that time, the employment agreements for Messrs. Keating and Denninger and Ms. Clark have been subject to annual renewal and modified to remove any reference to excise tax gross-ups. The Committee will address the terms of each executive’s change in control agreement at the time it expires. The Committee also determined that no new management agreements would contain any excise tax gross-up benefit; therefore, no excise tax gross-up was provided in Mr. Smidler’s management agreements when he became president of Industrial Distribution in September 2010.
  • The Committee also determined in 2010 that upon renewal, all employment agreements would be modified to provide that the Committee may approve a retirement date prior to age 65 but not earlier than age 62 in order to assure that shareholder interests are served in the appropriate timing of senior executive succession in the future.
  • The Company believes that other provisions of the named executive officers’ management agreements are already consistent with market practices, including the existence of a so-called “double trigger” in order to receive severance payments upon a change of control; e.g., the need for both a change in control and termination of employment before any severance payments would be paid in a change of control situation. All management agreements contain executive obligations regarding confidentiality, non-competition and non-solicitation

Our Willingness to Respond to Economic Circumstances
Although salaries for our named executive officers are determined with reference to market surveys and a sampling of comparable Russell 2000 companies and therefore incorporate the effects of general economic conditions, we are also mindful of other actions that might be in the best interests of the company and its shareholders. We did not increase salaries for calendar year 2009 for corporate officers and business segment presidents, including each of the named executive officers (other than Mr. Smidler who did not join the company until December 2009) and corporate officers took a one-week furlough during that year. No additional amount was included to “make up” for the freeze in 2009 in determining any salary increase for named executive officers in 2010.  

Additional Information about the Committee
A detailed discussion of the Committee’s structure, roles and responsibilities and related matters and the role of the independent consultant are located under the caption “Personnel & Compensation Committee” on page 12.

Following is more detailed information about our executive compensation program as it relates to our named executive officers:

Our Comparison to External Market Practices
The Committee determines the threshold, target and maximum level of base salary, annual cash incentive and long term incentive targets for our named executive officers using a market report prepared biennially by the Committee’s independent consultant. As described above, the Committee has been advised by our independent consultant that our business segment diversity makes identification of a sensible peer group to benchmark compensation unworkable. Instead, the independent consultant’s market report (the most recent being in 2009) estimates the 25th percentile, 50th percentile and 75th percentile for base salary, annual cash incentive awards and the annualized cash value of long-term incentives using information for manufacturing companies contained in nationally recognized compensation surveys published by Hewitt Associates and Towers Watson, two large independent consulting firms. Exhibit 1 to this proxy statement identifies these surveys (which are not prepared at the company’s request), along with the number, type and size of the covered organizations. In all cases, the revenue size of organizations was adjusted by the independent consultant for each position to provide a more accurate view of the market data. This revenue-size adjustment was made utilizing a regression analysis applied to the scope of each position, generally based on revenue responsibility. In order to test the reliability of this information, the independent consultant evaluated the compensation levels of a sample of twenty-two (22) other Russell 2000 companies having annual revenues similar to ours, which are also identified on Exhibit 1 to this proxy statement. These are the companies that the company has sampled in prior years (except for one company that was acquired during 2009). Our independent consultant has advised the Committee that the data from this sample is consistent with the national compensation surveys when adjusted for company revenue size. During 2011, the independent consultant will update this market report.

The Committee’s policy is that the base salary, annual cash incentive targets, the annualized value of long-term incentives and other benefits (including perquisites and retirement programs) should each, over time, approximate the market median. As of the most recent comprehensive competitive compensation analysis by our independent consultant, our base salary and target incentive annual cash award opportunities for our named executive officers as compared to the median of the competitive market for 2009 were as follows:

Neal J. Keating(1)		Base Salary				Target Annual Cash Incentive Award %
Market Median			$ 795,000				100	%
Kaman			$ 725,000				100	%

 

William C. Denninger(1)		Base Salary				Target Annual Cash Incentive Award %
Market Median			$ 376,000				60	%
Kaman			$ 478,200				60	%

 

Gregory L. Steiner(2)		Base Salary				Target Annual Cash Incentive Award %
Market Median			$ 429,600				60	%
Kaman			$ 371,725				60	%

 

Steven J. Smidler(2)		Base Salary				Target Annual Cash Incentive Award %
Market Median			$ 335,600				48	%
Kaman			$ 330,000				55	%

Candace A. Clark(2)		Base Salary				Target Annual Cash Incentive Award %
Market Median			$ 332,400				50	%
Kaman			$ 374,170				50	%
(1) The market median figures for Messrs. Keating and Denninger are based upon the surveys and the sample of Russell 2000 companies referenced above.
(2) The market median figures for Messrs. Steiner and Smidler and Ms. Clark are based upon the surveys because these positions are not typically shown separately in the proxy statements of the sample Russell 2000 companies.

Based on the competitive analysis, for 2010 the committee set the target annual cash incentive award percentages for the named executive officers to the competitive levels shown above.   Our independent consultant has advised us that the 2010 market rates for the positions will likely be 2% to 5% higher than those shown above.

Annual cash incentive targets and annualized value of long-term incentives for each named executive officer approximate market medians. Currently, Messrs. Keating, Steiner and Smidler are positioned at or below the midpoint of their salary grades, while Mr. Denninger and Ms. Clark are positioned above the midpoint. Ms. Clark’s variation from the market median is primarily due to her 26-year length of service with the company while Mr. Denninger’s variation reflects his many years of experience as a chief financial officer in both the distribution and aerospace industries. Based on the manner in which the company manages base salaries, it is expected that actual and market salaries will converge over time. Since annual cash incentive targets, the annualized value of long-term incentive targets and retirement income formulas are applied to actual annual base salaries, total compensation levels may similarly differ from market median total compensation levels.

Our policy also results in a greater percentage of total compensation (excluding benefits) being based on performance-based total cash and stock-based compensation (excluding benefits) for the named executive officers. As the table below shows, 2010 total performance-related percentages for all these executives increased compared to prior year, except for Mr. Smidler who became president of Industrial Distribution on September 1, 2010 and is not yet a participant in the long-term incentive feature of the Stock Incentive Plan.  

Allocation of 2010 Total Cash and Stock-based Compensation

		Fixed				Performance-Based*
Name		Salary (% of Total)				Annual Cash Incentive (% of Total)				Long-Term Incentive (% of Total)				Total Performance Related (% of Total)
Neal J. Keating			29	%			24	%			47	%			71	%
William C. Denninger			41	%			20	%			39	%			59	%
Gregory L. Steiner			41	%			20	%			39	%			59	%
Steven J. Smidler			67	%			33	%			0	%			33	%
Candace A. Clark			41	%			20	%			39	%			59	%

Allocation of 2009 Total Cash and Stock-based Compensation

		Fixed				Performance-Based*
Name		Salary (% of Total)				Annual Cash Incentive (% of Total)				Long-Term Incentive (% of Total)				Total Performance Related (% of Total)
Neal J. Keating			29	%			24	%			47	%			71	%
William C. Denninger			41	%			20	%			39	%			59	%
Gregory L. Steiner			41	%			20	%			39	%			59	%
Steven J. Smidler			67	%			33	%			0	%			33	%
Candace A. Clark			41	%			20	%			39	%			59	%

	*	Percentages are based on target performance for the annual cash incentive and the long-term incentive elements of compensation.

Components of the Executive Compensation Program
The total compensation program for our named executive officers has consisted of the following elements:

• Base Salaries;
• Annual Cash Incentive Awards;
• Long-Term Incentives;
• Retirement and Other Benefits

While base salaries, long-term incentives, and retirement and other benefits generally are determined in similar ways for each of our named executive officers, different annual cash incentive awards apply to those named executive officers employed at Corporate Headquarters (Messrs. Keating and Denninger and Ms. Clark), Aerospace (Mr. Steiner) and Industrial Distribution (Mr. Smidler).

Base Salaries
Base salaries are a traditional pay element established initially based upon the individual’s professional experience and knowledge of his or her area of management responsibility. The Committee annually reviews and determines base salaries of the CEO and other named executive officers. Its determination regarding the CEO is subject to the Board’s approval. Adjustments to base salary are determined as follows: An overall salary increase budget guideline is developed, based on market data and the use of nationally recognized surveys of anticipated salary increases published by Towers Watson, Mercer, CompData Surveys, and World at Work. Within the overall budget guideline, a narrow range of salary adjustment percentages is then established for each salary grade, with slightly higher percentages for individuals who are below the grade midpoint and slightly lower percentages for individuals who are above the grade midpoint. Salary adjustments, if any, are then determined within this narrow range based upon an annual performance rating given to the named executive officer by Mr. Keating and recommended to the Committee. The performance rating determination is primarily based upon the officer’s level of substantive performance in executing each category of responsibilities as described in his or her position description.

The Committee’s recommendation to the Board regarding the CEO’s salary is made after consultation with the Corporate Governance Committee concerning its assessment of the CEO’s performance for the year. The Corporate Governance Committee solicits input from all independent directors in connection with the CEO performance assessment.

The 2010 salaries for the named executive officers are shown in the Summary Compensation Table that follows this Compensation Discussion and Analysis.

Annual Cash Incentives
Our annual cash incentive award plan (“Cash Bonus Plan”) is intended to reward employees for financial and operational performance that drives shareholder value and focus our organization on meeting or exceeding designated individual goals. The plan provides employees, including our named executive officers, the opportunity to earn cash awards based on the degree to which the company achieves pre-determined performance measures for the year. Each executive also has the opportunity to earn up to an additional 10% of his or her target award based upon the degree to which the executive actually achieved his or her individual performance goals set in early 2010.

Amounts paid under our Cash Bonus Plan (other than due to individual performance goals or with respect to employees hired during the year) are intended to qualify as “performance-based compensation” under Section 162(m) of the Code.  For 2010, the Committee approved a discretionary bonus of approximately $44,000 for Mr. Steiner that was not performance-based under Section 162(m) as explained below, but which did not affect the tax deductibility of Mr. Steiner’s compensation.

The elements used to determine awards include:

• an award opportunity (expressed as a percentage of base salary);
• performance measures (such as growth in earnings per share);
• a weighting for each performance measure toward the executive’s total award; and
• a performance goal for each performance measure (such as a particular earnings per share target).

Award Opportunities
The Committee establishes the target award opportunity for each named executive officer using the independent consultant’s market report and advice.   Positioning award targets at the market median reinforces the Committee’s strategy that annual cash incentive payments should exceed target levels only when financial performance exceeds the company’s targeted objectives. The 2010 target performance award opportunity for each named executive officer was as follows: 

Named Executive Officer		2010 Target Award Opportunity Expressed as % of Base Salary
Neal J. Keating		100	%
William C. Denninger		60	%
Gregory L. Steine		60	%
Steven J. Smidler		55	%
Candace A. Clark		50	%

Corporate Named Executive Officers

Performance Measures
2010 annual cash incentive awards for Messrs. Keating and Denninger and Ms. Clark were almost entirely determined by comparing the company’s degree of achievement of the following performance factors compared against the benchmark indicated:

Performance Measure	Benchmark	Weighting
Actual return on investment	Russell 2000 index for 2005-2009	33%
Growth in earnings per share (fully diluted)	Russell 2000 index for 2005-2009	33%
Actual earnings per share (fully diluted)	2010 business plan performance goal	34%

We use the five-year period for the Russell 2000 index primarily because many of the company’s military and commercial aerospace programs are longer-term in nature, the time period between sales efforts and actual revenues can be very long, and revenues are often not evenly spread from year to year. Further, because the Russell 2000 index includes companies in a variety of industries that may experience different business cycles, the Committee determined that averaging performance of these companies over a period of time provided a better comparison than just one year.   During 2011, the Committee will be re-evaluating the continued appropriateness of the five-year timeframe. We cannot include the last completed fiscal year in the analysis because sufficient data for the Russell 2000 index is not available until the June 2011 time frame. We use these performance measures because they are the metrics used by management and the Board to evaluate the company’s performance.

Company performance in the bottom quartile of the Russell 2000 earns no cash incentive award payment for the performance goal; performance at the median results in a cash incentive award at 100% of target for the performance goal; and performance at the top of, or above, the top quartile results in a maximum cash incentive award payment at 200% of the target for the performance goal. Interpolation is used to determine payments for financial performance between the 25th percentile up to median, and above median up to the 75th percentile.   This performance measurement methodology remains constant through the years although the performance of the Russell 2000 changes annually, thus increasing or decreasing the targets annually.

The company’s annual business plan is developed jointly by business segment and corporate senior management, incorporating revenue, earnings and cash flow generation goals that take into account global economic circumstances, market conditions, and existing or targeted business opportunities. The business plan is reviewed and approved by both the Finance Committee and the full Board. If the company’s actual earnings per share meet the business plan projection, the target award for this factor is earned. To the extent that actual earnings per share exceed the business plan projection, a greater award is earned, up to a maximum of 200% of target.

2010 Company Financial Performance
The following tables show the relationship between the company’s 2010 actual financial performance and each performance factor described above, the degree to which each performance factor was attained, the Russell 2000 index comparison for the 25th percentile, median and 75th percentiles, and the resulting corporate performance factor. While the company’s 2010 return on investment and growth in earnings per share results compared very favorably to the Russell 2000, actual earnings per share did not reach the business plan projection, resulting in a corresponding lower contribution to the overall corporate performance factor.  

Benchmark 5 Year Russell 2000 Performance — 2005 – 2009

	25th Percentile		Median		75th Percentile
Compounded EPS Growth	-8.4	%	4.3	%	18.1%
Average Return on Investment	-2.5	%	4.2	%	9.5%

 

Earnings per Share (fully diluted)
2009 Actual	2010 Plan		2010 Actual
$ 1.27	$ 1.51		$   1.47
		2010 Actual Results	Median Return For Prior 5-Year Period — Russell 2000	Percentage Of Factor Earned	Weighting Factor	% Of Target Award*
Return on Investment		7.5%	4.2 %	162.3 %	33	53.5%
Growth In Earning per share		15.7 %	4.3%	182.6 %	33	60.3%
Actual versus projected Earnings per share performance		97.4%	N/A	94.8 %	34	32.2%
Corporate Performance Factor						146.0%

*

This column represents the product of the Percentage of Factor Earned figures multiplied by the Weighting Factor figure.

2010 Individual Performance
Mr. Keating’s degree of individual goal attainment was determined by the Committee and the Board against specific measurable written goals established early in the year by the Board for his role as CEO and Chairman. These goals included achievement of the company’s 2010 plan for operating earnings, earnings per share, return on investment and free cash flow; completing the closure of the company’s basic pension plan and supplemental retirement plan; strengthening the company’s business development capabilities; strengthening and formalizing the company’s management development program; achievement of specific business unit operational goals; and effective management of time, subject matter and responsiveness to the Board as chairman. The Board determined that Mr. Keating earned a 5% addition to his target award based on performance against these goals.

The degree of individual goal attainment for Mr. Denninger and Ms. Clark was recommended to the Committee by Mr. Keating based upon his evaluation against specific measurable written goals established for each of them early in the year. Mr. Denninger’s 2010 individual goals related to implementing changes to the company’s pension plan and modifying its investment approach; coordinating financial due diligence in support of acquisitions; directing development of a master plan for more efficient use of company facilities; streamlining certain accounting processes; and developing an implementation plan for adoption of international financial reporting standards. Based on the extent to which the Board determined that these goals were achieved, Mr. Denninger earned an additional 9% of his target award. Ms. Clark’s 2010 goals related to developing a plan for improvements to the department functional alignment to better serve the company; implementation of a web portal for Board and committee meetings to reduce costs and improve efficiency; developing maximum fee arrangements where feasible for all outside counsel projects during the year; enhancing efficiency of acquisition support activities; and providing leadership and coordination in the management of company legal disputes. Based on the extent to which the Board determined that these goals were achieved, Ms. Clark earned an additional 9% of her target award.

Actual 2010 Annual Cash Incentive Award Payments  
Following are total annual cash incentive awards earned for calendar year 2010 for the Corporate named executive officers:

Business Segment Named Executive Officers

Aerospace Segment Named Executive Officer
Performance Measures. The 2010 annual cash incentive award for Mr. Steiner, president of the Aerospace segment, was calculated based on (i) predetermined financial goals for this business segment as recommended by the CEO and adopted by the committee; and (ii) performance relative to other factors described below. The financial goals and their weighting for this business segment were:

Target return on investment performance goal is the average return on investment for the three previous calendar years (i.e., the average of 2007, 2008 and 2009 for the 2010 performance year). The budgeted return on investment performance goal measures the business segment’s annual business plan versus the target return on investment.   This performance goal is included in order to incent management to develop both aggressive and realistic goals. Accomplishing just this performance goal alone is not sufficient to earn a cash incentive award.

There are also other performance goals (referred to below as “other factors”) for Mr. Steiner established by the committee based on the CEO’s recommendation.   The extent to which each of the performance goals is achieved, results in the earning of “points”. The Cash Bonus Plan requires that a minimum number of points be accumulated for a cash incentive award to be earned and the more points that are earned, the greater the cash incentive award. Varying point levels are assigned to each factor based upon the Committee’s assessment of the degree of attainment difficulty, after consultation with management. Possible point values ranged from 0 to 6 for each “other factor” with a maximum of 20 points.

Following is a conversion chart demonstrating how the total number of points is converted into a percentage of the target award:

CONVERSION CHART EXAMPLE
Total Points Earned		Percent of Target Award Earned
Below 50		0
50		20
60		30
70		45
80		60
90		80
100		100
110		120
120		140
130		160
140		180
150 & Above		200

Because the maximum percentage of target award earned is 200%, the maximum number of points available for each of the predetermined financial goals is 150. Interpolation is used to determine payments if the number of points falls between two stated levels of total points earned in this table.

2010 Actual Financial Performance. The following table illustrates the performance parameters and calculation method to determine Mr. Steiner’s 2010 annual cash incentive payment. Mr. Steiner earned 66.3 points based on actual 2010 business segment results as measured against the described financial goals. Mr. Steiner’s “other factors” related to achieving a signed contract for the sale/lease of the SH-2G(I) aircraft, profitability of the Wichita operation, establishing a low cost manufacturing facility, obtaining a signed purchase agreement for an acquisition and securing a production commitment from a significant customer for a specific program. For 2010, Mr. Steiner earned a total of 11 points (out of 20) for his achievements with respect to the other factors involving the Wichita operations (4 points), establishing a low cost manufacturing facility (3 points) and signing an acquisition purchase agreement (4 points). Given the weightings described above, 2010 financial performance by the Aerospace segment and achievement of other segment performance factors resulted in a total of 77.3 points and a performance factor of 56.0% out of a maximum of 200%.

		Average Return on Investment (“ROI”)															Operating Income (in millions)
		2010 Target				2010 Plan					2010 Actual						2009						2010
			21.5	%			23.9	%					18.1	%				$	75.0					$	67.2

 

Actual 2010 Cash Incentive Award Payments  
Following is the total annual cash incentive award earned for calendar year 2010 for Mr. Steiner:

A special one-time discretionary bonus of approximately $44,000 was also awarded to Mr. Steiner  and was specifically designated by the committee as non-performance based under Internal Revenue Code Section 162(m) because the committee determined that Mr. Steiner’s should be compensated for the company’s receipt of a $6.6 million payment related to the claim for “look-back” interest that we filed with the IRS in connection with the former Australia SH-2G program and gain on the sale of certain assets of the Aerospace segment during the year. These items are included in the company’s overall financial results.

Industrial Distribution Segment Named Executive Officer
Performance Measures. The 2010 annual cash incentive award for Mr. Smidler, president of the Industrial Distribution segment, was calculated based on (i) predetermined financial goals for this business segment as recommended by the CEO and adopted by the Committee for Mr. Smidler; and (ii) performance relative to other factors described below.

The target return on investment performance goal is established as the average return on investment for the three previous calendar years (i.e., the average of 2007, 2008 and 2009 for the 2010 performance year). The budgeted return on investment performance goal measures the business segment’s annual business plan versus the target return on investment. This performance goal is included in order to incent management to develop both aggressive and realistic goals. Accomplishing just this factor alone is not sufficient to earn a cash incentive award.

There are also other performance goals (referred to below as “other factors”) for Mr. Smidler’s performance that are established by the committee based on the CEO’s recommendation.   The extent to which each of these factors performance goals is achieved results in the earning of “points”. The Cash Bonus Plan requires that a minimum number of points be accumulated for a cash incentive award to be earned and the more points that are earned, the greater the cash incentive award. Varying point levels are assigned to each performance goal based upon the committee’s assessment of the degree of attainment difficulty, after consultation with management. Possible point values ranged from 0 to 6 for each “other factor” with a maximum of 80 points.

Following is a conversion chart demonstrating how the total number of points is converted into a percentage of the target award:

CONVERSION CHART EXAMPLE
Total Points Earned				Percent of Target Award Earned
	Below 50				0
	50				20
	60				30
	70				45
	80				60
	90				80
	100				100
	110				120
	120				140
	130				160
	140				180
	150 & Above				200

Because the maximum percentage of target award earned is 200%, the maximum number of points available for each of the predetermined financial goals is 150. Interpolation is used to determine payments if the number of points falls between two stated levels of total points earned in this table.

2010 Actual Financial Performance.
The following table illustrates the performance parameters and calculation method to determine Mr. Smidler’s 2010 annual cash incentive payment. Mr. Smidler earned 135.4 points based on actual 2010 business segment results as measured against predetermined financial goals. Mr. Smidler’s “other factors” related to implementing Kaman’s Goal Achievement culture of continuous improvement and a monthly reporting and review process; achieving organic growth and market penetration by retaining significant national accounts; expanding by 5% the number of customers doing more than a designated minimum of annual sales; completing acquisitions that would add an incremental $100 million of annualized sales; executing the segment’s organizational redesign; and increasing the segment’s net gross margin. For 2010, Mr. Smidler earned a total of 68 points (out of 80) for achievements with respect to the other factors involving the Kaman Goal Achievement Process (20 points), organic growth and market penetration (12 points), acquired growth and profitability (12 points),   executing Industrial Distribution’s organizational redesign (16 points) and increasing Industrial Distribution’s net gross margin (8 points). Given the weightings described above, 2010 financial performance by the Industrial Distribution segment and achievement of other segment performance factors resulted in a total of 203.4 points and a performance factor of 200% out of a maximum of 200%.

 

Actual 2010 Cash Incentive Award Payments  
Following is the total annual cash incentive award earned for calendar year 2010 for Mr. Smidler.   Mr. Smidler’s target annual incentive opportunity increased from 50% to 55% on September 1, 2010 when he became President of the segment. His total award for 2010 utilizes the increased incentive opportunity percentage only for the September 1, 2010 – December 31, 2010 period.

Named Executive Officer	2010 Cash Incentive Award	Incentive Award Expressed as a Percentage of Base Salary
Steven J. Smidler	$321,000	97.3%

Long-Term Incentives (“LTIP”)
The Committee uses cash-based awards under the company’s long-term incentive feature of the Stock Incentive Plan (“LTIP”) to focus executive officers on long-term performance. LTIP Awards are based on the company’s actual performance during a three-year performance period with respect to performance measures selected under the company’s Stock Incentive Plan. The payment amount for completed performance periods is determined by a comparison of the company’s financial performance for the three-year period with performance of the Russell 2000 Index for the same period. Payments attributable to completed performance periods are made in cash unless a participant has not yet achieved his or her required stock ownership level under the company’s guidelines, in which case, up to one-third of the earned award will be paid in the form of company stock. These awards are intended to qualify as performance-based compensation in accordance with the requirements of Internal Revenue Code Section 162(m).

In 2010, the Committee granted cash LTIP Awards for the performance period 2010 – 2012 in lieu of equity grants for Mr. Keating and Ms. Clark because each of them already own a significant personal equity position in the company and have met their stock ownership requirements.   Messrs. Denninger and Steiner who both joined the company in 2008 were granted cash LTIP Awards for the 2010 – 2012 performance period and also received restricted stock awards of 8,580 and 6,530 respectively and stock option grants of 24,300 and 18,490 shares, respectively, during 2010. Mr. Smidler did not become an executive officer until September 1, 2010 and thus was not a participant in the 2010-2012 LTIP performance period.

It has been the company’s practice to include new executive officer participants in the three-year LTIP award performance cycle that follows their hire date. This has resulted in no LTIP payment for at least three years after first becoming a participant. In the interim, these new executives have received stock options and restricted stock grants as described above. In February 2011, the Committee determined that, as a better means of relating a new executive’s incentive compensation to the company’s performance against the Russell 2000 companies, it would utilize LTIP awards with one and two year performance cycles in addition to the traditional three-year performance cycle, beginning in 2011. These LTIP awards would correspondingly use one, two and three-year Russell 2000 index performance periods to determine the LTIP payment. These awards would be of similar value as, and would replace, stock options and restricted stock awards for new executive officers, beginning with the award year during which these LTIP awards are made. As a result, Mr. Smidler, who joined the company in December 2009, will participate in three separate LTIP award cycles beginning January 2, 2011 covering the periods January 1, 2011 through December 31, 2011, January 1, 2011 through December 31, 2012, and January 1, 2011 through December 31, 2013. He will receive stock option and restricted stock grants in February 2011, attributable to performance in the 2010 award year; he will not receive such grants for the 2011 award year and in the future.

The Committee uses the following performance measures and weightings based on its determination of their importance as indicators of the company’s long-term success:

Performance Factor		Weighting
Three-year average return on investment		40	%
Average annual compounded growth in earnings per share		40	%
Three-year total return to shareholders		20	%

The Committee chooses the Russell 2000 Index companies for long-term financial performance comparison for much the same reason that it does for annual cash incentive awards – the Committee believes that these are the type of companies against which an investor would likely compare the company’s performance in considering investment decisions. This performance measurement methodology remains constant through the years although the performance of the Russell 2000 changes annually, thus increasing or decreasing the targets annually.

The financial measures and target performance goals used in the estimated calculation for the 2008 – 2010 performance period are as follows:

Three-year average return on investment
Our three-year average return on total investment is 8.6%, which represents the average for the three-year performance period shown on the following table. The company defines total investment as total shareholder equity plus total long-term debt (including current portion). Return on investment is net earnings divided by total investment as follows:

						(In Millions)
		2010				2009				2008
Net Earnings			$     38,324				$     32,649				35,107
Total Equity			$ 362,670				$ 312,900				$ 274,271
Total Debt			$ 148,423				$     63,635				$     94,165
Total Investment			$ 511,093				$ 376,535				$ 368,436
Return on investment			7.5%				8.7%				9.5%

Average Annual Compounded Growth in Earnings per Share
Our average annual compounded growth in diluted earnings per share represents the average diluted earnings per share growth rate over the three-year performance period, which is calculated as follows:

		2005		2006		2007		3 Year Average		2008		2009		2010		3 Year Average
EPS		$0.22		$1.01		$1.46		$0.90		$1.38		$1.27		$1.47		$1.37

Average Compounded Annual Growth = ($1.37 ÷ $0.90)^1/3 – 1 = 15.03%.

Three-Year Total Return to Shareholders
Return to shareholders combines share price appreciation and dividends reinvested. The total return to shareholders is based on a computation that is obtained from Standard & Poor’s Compustat, an independent research service. The company’s total return to shareholders for the performance period from 2008 – 2010 is -14.6%; this performance reflects the significant global economic difficulties that began in 2008 resulting in an almost 50% decline in that year.   The total return to shareholders for the two-year period 2009 and 2010 is approximately 69%.

The following table shows the estimated awards for the 2008-2010 performance period.   The table reflects complete Russell 2000 Index data for 2008 and 2009 however, as of February 1, 2011, only 18.8% of Russell 2000 Index data is available for the 2010 fiscal year. Actual Russell 2000 performance for the 2008 – 2010 performance period may be higher or lower than what is illustrated. The company will disclose actual payments for the performance period when they are made, by filing a Form 8-K.  

		Company Performance			Est. Russell Performance at 50th Percentile			Estimated Percentage Earned			Performance Weighting			Estimated Award
Three-year Average Return on Investment			8.6 %			2.0%			200.0%			40%			80.0%
Average Annual Compounded Growth in Earnings per Share			15.03%			1.7%			197.1%			40%			78.8%
Three-Year Total Return to Shareholders			-14.6%			-0.6%			55.7%			20%			11.1%
Total Estimated Award															169.9%

Financial performance in the 1st quartile results in no award payment; performance at the median results in an award payment at 100% of target; and performance at the top of, or above, the 3rd quartile results in a maximum award payment at 200% of the target. Interpolation is used to determine payments for financial performance within these quartiles. The methodology for determining the financial targets remains the same year to year, although the actual targets vary for each performance period based on the three-year performance of the Russell 2000 companies. Grants made for the performance period beginning on January 1, 2010 through December 31, 2012 are shown in the “Grant of Plan-Based Awards” table on page 42.

Payments earned, if any, are generally made in June of the year following the end of the performance period. This payment date gives the committee time to collect and analyze more complete performance results of the Russell 2000 companies for the performance period. As explained above, amounts earned for the performance period January 1, 2008 – December 31, 2010 are not yet determinable and are not reflected in the Summary Compensation Table. The following table shows the estimated LTIP payment amounts for the 2008 – 2010 performance period for the named executive officers that received LTIP Awards for that performance period:

Estimated Long-Term Performance-Based Cash Award — 2008 – 2010

Named Executive Officer	2008 Base Salary		Award Opportunity as a % of Base			Target Award			Performance Factor			Estimated Awards
Neal J. Keating	$675,000		160	%		$1,080,000			169.9	%		$1,834,920
Candace A. Clark	$339,000		95	%		$322,050			169.9	%		$547,163

Retirement Benefits
The company offers a tax qualified defined benefit pension plan (“pension plan”) for most of its employees including the named executive officers. Tax rules restrict the amount of benefit that can be accrued for higher paid employees under this plan. The company maintains a Supplemental Employees’ Retirement Plan, which we refer to as the SERP, to pay the difference in retirement benefits between what the officer would be entitled to receive from the company’s qualified pension plan, but for government imposed restrictions, and what is actually received from the qualified plan. The purpose of these plans is to provide a reasonable level of retirement income taking into account pre-retirement earnings and length of service with the company. In recent years, maintenance of the company’s pension plan has become an increasingly greater use of the company’s cash resources due to the continued implementation of the federal Pension Protection Act funding legislation and the effect of economic conditions upon interest rates. In order to balance the increasing costs of maintaining the pension plan with our interest in providing a long-term savings vehicle for our employees, in early 2010 the Board approved closing the pension plan to all new hires on or after March 1, 2010 and continued it for then existing employees with the following changes:

• Changes in pay were taken into account for benefit calculation purposes until the end of calendar year 2010, after which no further changes will be taken into account.
• The benefit formula was improved to use the highest five years out of the last ten years of service up to December 31, 2010, whether or not consecutive.
• Years of service (as defined by the pension plan) will continue to count for accruing benefits under the pension plan through December 31, 2015 – this will provide employees with several years’ time for planning and executing alternative retirement savings strategies and will moderate the transition for those participants already near retirement age.

These changes apply equally to the SERP in which the named executive officers participate (with the exception of Mr. Smidler because Industrial Distribution closed the pension plan to new employees before Mr. Smidler joined the company) except that the SERP already provides for use of non-consecutive years of service for benefit calculations. As a result of the SERP changes, participating executives will realize a reduced retirement income. The Committee also determined in early 2010 that the reduction would result in a less than competitive total compensation package and that there should be a reallocation of the reduction to performance-based elements of the total compensation package in the best interests of shareholders. Therefore, the Committee approved increases to the 2010 LTIP award targets for each participant, including the named executive officers.  LTIP awards are a feature of the Company’s 2003 Stock Incentive Plan. The Company, with the assistance of its actuaries, has estimated that if the new target LTIP award is earned each year, the additional LTIP payment would be substantially equivalent to the retirement benefit that would have been earned but for the suspension of the SERP. If the LTIP performance goals are not met, the amount earned pursuant to the new LTIP targets would be less than that which would have been received under the SERP.

The change in the value of the tax-qualified pension plan and SERP benefits in 2010 is shown in the Summary Compensation Table at page 41 and the full value of these benefits at normal retirement age is shown in the Pension Benefits Table at page 44.

Effective January 1, 2011, the company has doubled the matching contributions under its 401(k) plan to $1.00 for each $1.00 that a participant contributes as a pre-tax 401(k) contribution, up to 5% of compensation (not to exceed the tax law limit on compensation ($245,000 for 2011)). If a participant saves 5% of his or her compensation, the company will match it with another 5% for a total savings of 10%. Participants in the 401(k) plan are always vested in their own contributions and upon reaching 3 years of service with the company, they will also be vested in all employer-matching contributions.

Other Benefits
A select group of highly compensated management employees, including the named executive officers, are eligible to participate in our Deferred Compensation Plan, which permits deferral of certain types of compensation. The plan does not provide for above-market returns. For more information about the Deferred Compensation Plan, please refer to “Non-Qualified Deferred Compensation Plan” following the Non-Qualified Deferred Compensation Plan Table, below at page 45. As explained above, in February 2010, all perquisites with the exception of institution of a vehicle allowance in place of a leased company vehicle were ended for the named executive officers. The Summary Compensation Table provides information regarding the incremental cost of perquisites for the named executive officers for the portion of 2010 during which they were in place. In addition, the company maintains one corporate aircraft, which was used solely for business purposes in 2010, except for limited spousal travel to accompany executives on business trips.

Employment Agreements and Change in Control Arrangements
The company has entered into employment agreements and change in control agreements with our named executive officers. The terms and conditions of the agreements are described beginning on page 46. The Committee has extended employment agreements for the named executive officers in order to encourage the retention of valuable executive talent, discourage competitors from attempting to hire those executives, and to protect the company in the event that an executive departs by strictly prohibiting the disclosure of confidential information, limiting the executive’s ability to compete with the company after employment termination, requiring the signing of a release agreement before the payment of severance benefits and imposing reasonable post-employment cooperation obligations. The Committee believes that the change in control agreements serve the interests of our company and its shareholders by ensuring that if a hostile or friendly change of control is ever under consideration, our executives will be able to advise our board of directors about the potential transaction in the best interests of shareholders, without being unduly influenced by personal considerations.

The current agreements restrict the circumstances under which an executive would be entitled to an IRC Section 280G tax gross-up payment, require a signed release in exchange for severance benefits in all events, and contain provisions such that payments under the agreements are exempt from, or comply with, the requirements of IRC Section 409A. The Committee will address the terms of each executive’s change in control agreement at the time that it expires.

In early 2010, the Committee notified the company’s executive officers that in the event their management agreements were renewed, it did not intend to provide an excise tax gross-up benefit. The Committee took this action in light of evolving market practices for change in control agreements. The company will address the terms of each executive officer’s control agreement at the end of its term. Additionally, no future employment or change in control agreement entered into with any other officers will contain a company obligation to make a Section 280G tax gross-up payment; which is reflected in Mr. Smidler’s agreements. The employment agreements and change in control agreements for Messrs. Keating and Denninger also provide the company with a right to ‘‘claw back’’ compensation paid or received, or to be paid or received, by these officers relating to Incentive Compensation (as defined in the agreements) awards made on or after January 1, 2010 with respect to fiscal periods beginning with 2010 where there is a Mandatory Restatement (as defined in the agreements) of the company’s financial statements for fiscal 2010 or any year thereafter that arises directly from the fraudulent or knowing, intentional misconduct of the officer. This ‘‘claw back’’ provision will be modified and added to all executive officer management agreements when the SEC issues final regulations to provide guidance on specific claw back requirements of recent federal legislation.

The employment and change in control agreements for Mr. Keating are essentially the same as the agreements entered into by the other named executive officers, except for differences reflecting Mr. Keating’s position as President and CEO. Information regarding each of the named executive officers’ agreements and the payments that would be received under different termination circumstances is set forth below under the caption “Payments Made Due to Qualifying Employment Termination on or After a Change In Control” at page 49.

Stock Ownership Guidelines for Directors and Executive Officers
Since 2006, the Board has maintained stock ownership guidelines for both non-employee directors and corporate management. The Board believes that the directors and senior management should have a significant equity position in the company and that these guidelines further the Board’s interest in encouraging a longer-term focus in managing the company.

Under the guidelines, non-employee directors are required to have an ownership multiple of 3 times their annual cash retainer of $45,000 in 2010. Directors who do not meet the ownership guidelines must hold shares received pursuant to restricted stock grants (with such shares being netted for the income tax effect thereof) for a period of 3 years or until the guidelines are met, whichever is earlier. The stock ownership guidelines for senior management require covered executives to retain one-third of the net after-tax gain realized under equity-based compensation awards granted after the adoption of the guidelines, until they achieve and continue to maintain the following stock ownership levels:

President and CEO	3 times salary
Participants in the LTIP under the 2003 Stock Incentive Plan (generally, fewer than 10 individuals)	2 times salary
All Other Corporate Officers (generally, about 10 individuals	1 times salary

The Committee reviews stock ownership levels of executives subject to these guidelines on a quarterly basis. Exercisable stock options are not included in the determination of compliance with the ownership levels set forth above. Mr. Keating and Ms. Clark met stock ownership requirements during 2010; the other named executive officers are making progress toward compliance and have each been associated with the company for less than three years.

In determining whether the guidelines have been achieved at any particular point, the price of the company’s stock will be the higher of (i) the then current market value determined by the closing price on the date of the determination; or (ii) the closing price on February 21, 2006, which was $21.13. The closing price of the stock on December 31, 2010 was $29.07 and was used for the final determination of compliance for 2010.

Material Tax and Accounting Implications of the Program
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation paid in excess of $1 million for any fiscal year to the company’s CEO and the three other most highly compensated executive officers (excluding the Chief Financial Officer). However, “performance-based compensation” that meets certain requirements under Section 162(m) is exempt from this deduction limitation. Except as specifically noted above in the case of the special discretionary bonus to Mr. Steiner, the Committee structures incentive compensation such as annual cash incentive awards (under its Cash Bonus Plan) and cash-based LTIP awards (under its Stock Incentive Plan) to qualify for this exemption. In 2010, Mr. Keating’s compensation exceeded the Section 162(m) limit by $481,000 due to the vesting of previously granted restricted stock awards.

Context of This Discussion
If this discussion has contained future individual or company performance targets and goals, they are disclosed in the limited context of the company’s executive compensation program, so you should not consider them to be statements of management expectations or estimates of results or other guidance. We specifically encourage investors not to apply these statements in other contexts.

Personnel & Compensation Committee Report
The Committee has reviewed and discussed this Compensation Discussion and Analysis with management and concurs with its contents. Based on this review and discussion, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the company’s proxy statement on Schedule 14A and incorporated in its annual report to the SEC on Form 10-K for the year ended December 31, 2010.

Personnel & Compensation Committee
 
Richard J. Swift, Chair
Brian E. Barents
E. Reeves Callaway III
Thomas W. Rabaut

This report shall not be deemed to be incorporated by reference by any general statement incorporating this proxy statement by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, as amended, and shall not otherwise be deemed filed under such statutes.