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 | Executive Vice President and Chief Financial Officer |
| Gregory L. Steiner | Executive Vice President, Kaman Corporation and President, Kaman Aerospace Group, Inc. |
| Steven J. Smidler | Executive Vice President, Kaman Corporation and President, Kaman Industrial Technologies Corporation |
| Candace A. Clark | Senior Vice President, Chief Legal Officer and Secretary |
Our fundamental objectives are to:
At the 2011 annual meeting, we asked shareholders to provide a non-binding advisory vote on our recommended executive compensation program ("Say on Pay" vote) and the frequency at which such an advisory vote on pay should occur ("Say on Frequency" vote). The Committee reviewed the results of the vote and concluded that the majority of shareholders agreed with our recommended executive compensation program last year with nearly 95% of votes cast in favor of the Board's recommendation if abstention votes and broker non-votes are disregarded.(1) Shareholders also overwhelmingly supported our recommendation regarding the Say on Frequency vote, which we proposed occur on an annual basis. Approximately 92% of the votes cast were in favor of the Board's recommendation if abstention votes and broker non-votes are disregarded.(2) On April 27, 2011, the company filed a Form 8-K reporting the results of the 2011 advisory votes on the Say on Pay and Say on Frequency proposals.(3) In considering the outcome of the 2011 advisory voting, the Committee interpreted the results to mean that the vast majority of shareholders agree with the company's executive compensation program. As such, the Committee took no action to modify the executive compensation program as a result of the vote.
We encourage shareholders to review this Compensation Discussion and Analysis and the accompanying compensation tables for a thorough explanation of our approach to executive compensation and how our named executive officers' actual pay has correlated with the company's financial performance. As we discuss herein, we believe that the compensation paid to our named executive officers for 2011 bears a direct and corresponding relationship to the company's 2011 financial performance.
_____________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 2012.
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. The Committee also amended the Stock Incentive Plan in February 2012 to prohibit the company from reducing the exercise price of awarded stock options or stock appreciation rights ("SARs"). The amendment also prohibits the cancellation of an outstanding option or SAR award in exchange for cash or another award having an exercise price less than the fair market value of the original awarded option or SAR. The only exception is in connection with a corporate transaction that includes, for example, a stock or cash dividend, stock split, recapitalization, reorganization, merger, consolidation or an exchange of shares.
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.
This chart compares our 2011 financial performance with the 50th and 75th percentile performance of the Russell 2000 companies for the period 2006 – 2010 (which is the period we use to evaluate our results for annual cash incentive awards):
In calculating the 2011 award percentage under our annual cash incentive plan, the Committee considered the company's actual financial results for 2011, which included the effects of a pension accounting change (described herein at page 26) and excluded from financial performance the impact of the costs related to acquisitions in 2011. This resulted in an annual incentive performance award factor of 173.3% of the target award. The exclusion of acquisition costs reflects the Committee's views that acquisitions are of vital importance to the company's long-term growth and that management should be encouraged to pursue acquisitions when appropriate. If these adjustments had not been made, the performance award factor would have been 171.3%. In connection with establishing the 2011 performance goals under the annual cash incentive award plan, the Committee reserved the authority to include the impact of the pension accounting change and exclude acquisition costs from the 2011 plan performance metrics within the first 90 days of 2011.
Our 2011 return on investment (ROI) performance and earnings per share (EPS) growth each exceeded the 75th percentile of the Russell 2000. We also achieved 108.9% of our plan earnings per share. Mr. Keating's base salary and target annual cash incentive for 2011 was approximately at the 72nd percentile of the competitive market for other chief executive officers at companies having similar revenue, as illustrated by the chart below:
Please see the discussion at page 22 for information about 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 (2009 – 2011) performance against the Russell 2000 companies for the same three-year period based on available data as of February 3, 2012. Approximately 19% of the Russell 2000 companies reported data as of February 3, 2012. As illustrated below, our performance was at the 37th percentile for compounded growth in EPS growth and at the 69th percentile for average return on investment. Total return to shareholders for this period was at the 52nd percentile. Based on these performance levels, we have accrued approximately $1.3 million for Mr. Keating's LTIP award for the 2009-2011 performance period. This amount represents approximately the 55th percentile of the competitive market for other chief executive officers in similar companies based on 2011 competitive market data. We will report the final figure earned by Mr. Keating (and our other named executive officers) for the 2009-2011 LTIP award and an update of the 3-Year Performance Period vs. Russell 2000 chart in an 8-K filing later this year once sufficient 2011 operating results for Russell 2000 companies become available and the Committee has approved the awards.
* Three-year average return on investment
** Average annual compounded growth in earnings per share
*** Three-year total return to shareholders
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 61% of their total cash and stock-based compensation in 2011.
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 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 the Dodd-Frank Act, 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.
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:
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 9.
Following is more detailed information about our executive compensation program as it relates to our named executive officers:
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 2011) 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 Aon Hewitt 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-one (21) Russell 2000 companies having annual revenues similar to ours, which are also identified on Exhibit 1 to this proxy statement. The Committee reviewed the list of companies used in prior years and, in conjunction with its independent consultant, made certain changes. Four (4) of these companies were deleted from the list because they were either acquired or were no longer in the Russell 2000 in 2011. Six (6) new companies were added that are of comparable size and/or industry focus. 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.
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 2011 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 2011 were as follows:
| Neal J. Keating(1) | Base Salary | Target Annual Cash Incentive Award % |
| Market Median | $ 847,000 | 100 % |
| Kaman | $ 800,000 | 100 % |
| William C. Denninger(1) | Base Salary | Target Annual Cash Incentive Award % |
| Market Median | $ 432,400 | 65 % |
| Kaman | $ 492,540 | 60 % |
| Gregory L. Steiner(2) | Base Salary | Target Annual Cash Incentive Award % |
| Market Median | $ 385,200 | 63 % |
| Kaman | $ 382,875 | 60 % |
| Steven J. Smidler(2) | Base Salary | Target Annual Cash Incentive Award % |
| Market Median | $ 344,800 | 58 % |
| Kaman | $ 330,000 | 55 % |
| Candace A. Clark(2) | Base Salary | Target Annual Cash Incentive Award % |
| Market Median | $ 355,400 | 58 % |
| Kaman | $ 385,400 | 50 % |
The Committee increased the respective base salaries of Messrs. Keating, Steiner and Smidler for 2011 so that they more closely approximated the median of the competitive market for 2011. Additionally, based on the competitive analysis completed in 2011, the Committee set the 2012 target annual cash incentive award percentages for the named executive officers to the competitive levels shown in the table above except that Mr. Smidler's target annual incentive will be 60% and Ms. Clark's annual incentive target will be 55%. The increases for Mr. Smidler's and Ms. Clark's incentive targets were made in order to be competitive with the market for their positions.
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 27-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, the proportion of performance-based compensation for all named executives remained the same in 2010 and 2011, except for Mr. Smidler. Mr. Smidler's performance-based earnings increased in 2011 because he became eligible to participate in the long-term incentive feature of the Stock Incentive Plan.
| 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 | 25 % | 25 % | 50 % | 75 % |
| William C. Denninger | 36 % | 22 % | 42 % | 64 % |
| Gregory L. Steiner | 36 % | 22 % | 42 % | 64 % |
| Steven J. Smidler | 38 % | 21 % | 42 % | 63 % |
| Candace A. Clark | 39 % | 20 % | 41 % | 61 % |
| 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 | 25 % | 25 % | 50 % | 75 % |
| William C. Denninger | 36 % | 22 % | 42 % | 64 % |
| Gregory L. Steiner | 36 % | 22 % | 42 % | 64 % |
| Steven J. Smidler | 67 % | 33 % | — % | 33 % |
| Candace A. Clark | 39 % | 20 % | 41 % | 61 % |
* Percentages are based on target performance for the annual cash incentive and the long-term incentive elements of compensation.
The total compensation program for our named executive officers has consisted of the following elements:
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 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 and the Committee's own assessment. The Corporate Governance Committee solicits input from all independent directors in connection with the CEO performance assessment.
The 2011 salaries for the named executive officers are shown in the Summary Compensation Table that follows this Compensation Discussion and Analysis.
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 2011.
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.
The elements used to determine awards include:
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 2011 target performance award opportunity for each named executive officer was as follows:
| Named Executive Officer | 2011 Target Award Opportunity Expressed as % of Base Salary |
| Neal J. Keating | 100 % |
| William C. Denninger | 60 % |
| Gregory L. Steiner | 60 % |
| Steven J. Smidler | 55 % |
| Candace A. Clark | 50 % |
Performance Measures. The 2011 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 2006 – 2010 | 33 % |
| Growth in earnings per share (fully diluted) | Russell 2000 index for 2006 – 2010 | 33 % |
| Actual earnings per share (fully diluted) | 2011 business plan performance goal | 34 % |
In 2011, the Committee approved an annual incentive performance award factor of 173.3% of the target award. The calculation of the award factor was based on the company's actual performance for 2011, which included the effects of the pension accounting change and excluded the impact of the costs related to acquisitions occurring in 2011 from financial performance. The exclusion of acquisition costs reflects the Committee's views that acquisitions are of vital importance to the company's long-term growth and that management should be encouraged to pursue acquisitions when appropriate. If the adjustment had not been made, the performance award factor would have been 171.3%. In connection with establishing the 2011 performance goals under the annual cash incentive award plan, the Committee reserved the authority to include the impact of the pension accounting change and exclude acquisition costs from the 2011 plan performance metrics within the first 90 days of 2011.
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 re-evaluated the continued appropriateness of the five-year timeframe and concluded that it continued to be appropriate for the reasons stated above. 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 2012 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 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.
2011 Company Financial Performance. For 2011, the Committee based annual incentive awards on the company's actual performance for 2011, which included the effects of the pension accounting change and excluded the impact of the costs related to acquisitions occurring in 2011. The following tables show the relationship between the company's 2011 financial performance (as modified by the above-referenced performance measure adjustments) 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. The company's 2011 return on investment and growth in earnings per share results compared very favorably to the Russell 2000, and actual earnings per share exceeded the business plan projection, resulting in an overall corporate performance factor of 173.30%.
| 25th Percentile | Median | 75th Percentile | |
| Compounded EPS Growth | (8.9 )% | 3.7 % | 16.5 % |
| Average Return on Investment | (4.3 )% | 3.4 % | 8.9 % |
| Earnings per Share (fully diluted) | |||
| 2010 Actual | 2011 Plan | 2011 Actual | 2011 Modified |
| $ 1.36 | * $ 1.80 | $ 1.93 | $ 1.96 |
* The earnings per share reflects the retrospective application of the company's election in 2011 to change its method of recognizing pension expense. Previously, for its non-contributory qualified defined benefit pension plan, the company used the market-related value of plan assets reflecting changes in the fair value of plan assets amortized over a four-year period. Under the new accounting method, the market-related value of plan assets reflects the actual change in the fair value of plan assets for the year. While the historical policy of recognizing pension expense is considered acceptable under U.S. GAAP, the company believes that the new policy is preferable as it eliminates the delay in recognition of the change in fair value of plan assets for the calculation of market-related value of plan assets. For further information, see Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.
| 2011 Actual Results* |
Median Return For Prior 5-Year Period — Russell 2000 |
Percentage Of Factor Earned |
Weighting Factor |
% Of Target Award** |
|
| Return on Investment | 10.4 % | 3.4 % | 200.0 % | 33 | 66.0 % |
| Growth In Earning per share | 44.1 % | 3.7 % | 200.0 % | 33 | 66.0 % |
| Actual versus projected Earnings per share performance | 108.9 % | N/A | 121.4 % | 34 | 41.3 % |
| Corporate Performance Factor | 173.3 % |
* The 2011 Actual Results shown above are based on the following reconciled diluted earnings per share and invested capital:
| Modified Earnings: | In Millions | Per Diluted Share |
| Reported Earnings | $ 51.1 | $ 1.93 |
| Earnings from Acquisitions | 0.2 | 0.01 |
| Acquisition Costs, net of tax | 0.6 | 0.02 |
| Net Adjustments to Earnings | $ 0.08 | $ 0.03 |
| Modified Earnings | $ 51.9 | $ 1.96 |
| Modified Invested Capital: | ||
| Reported Shareholders' Equity | $ 373.1 | |
| Total Reported Debt | 205.2 | |
| Total Reported Invested Capital | 578.3 | |
| Acquisition Costs, net of tax | $ 0.6 | |
| Investment in 2011 Acquisitions | $ (82.5 ) | |
| Modified Invested Capital | $ 496.4 |
** This column represents the product of the Percentage of Factor Earned figures multiplied by the Weighting Factor.
2011 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. Among these goals were achievement of the company's 2011 plan for operating earnings, earnings per share, return on investment and free cash flow; strengthening the company's business development capabilities; strengthening and formalizing the company's management development program; continued implementation of strategic goal achievement processes across the Aerospace and Industrial Distribution segments; and refining strategic planning processes. The Board determined that Mr. Keating earned an additional 8% of 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 2011 individual goals related to assuring that the company had sufficient capital available to finance growth and acquisition strategies, preparations to comply with the evolving accounting and financial standards, the transition from the NASDAQ to the New York Stock Exchange, and mitigating the company's risks associated with a natural disaster, and the completion of a new back-up data center that was completed on time and within budget. Based on the extent to which the Committee determined that these goals were achieved, Mr. Denninger earned an additional 8% of his target award. Ms. Clark's 2011 goals related to the handling of all legal aspects of successfully closing four acquisitions in 2011, incorporation of the legal requirements of the Dodd-Frank Act, and other SEC regulations into the company's processes and procedures, and the successful resolution of other legal issues facing the company. Based on the extent to which the Board determined that these goals were achieved, Ms. Clark earned an additional 10% of her target award.
Actual 2011 Annual Cash Incentive Award Payments. Following are total annual cash incentive awards earned for calendar year 2011 for the Corporate named executive officers:
| Named Executive Officer | 2011 Cash Incentive Award |
Incentive Award Expressed as a Percentage of Base Salary |
| Neal J. Keating | $ 1,450,400 | 181.3 % |
| William C. Denninger | $ 535,785 | 108.8 % |
| Candace A. Clark | $ 353,219 | 91.7 % |
Performance Measures. The 2011 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:
| Performance Goal | Benchmark | Weighting |
| Plan return on investment | Target return on investment | 20 % |
| Actual return on investment | Plan return on investment | 20 % |
| Actual return on investment | Target return on investment | 40 % |
| Growth in segment operating income year over year | Operating income | 20 % |
Target return on investment performance goal is the average return on investment for the three previous calendar years (i.e., the average of 2008, 2009 and 2010 for the 2011 performance year). The plan 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 challenging 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:
| Total Points Earned |
Percent of Target Award Earned |
| Below 50 | — |
| 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.
2011 Actual Financial Performance. The following table illustrates the performance parameters and calculation method to determine Mr. Steiner's 2011 annual cash incentive payment. Mr. Steiner earned 150.1 points based on actual 2011 business segment results as measured against the described financial goals. Mr. Steiner's "other factors" related to achieving sales, operating income and cash flow targets; low cost manufacturing initiatives; accomplishing targeted acquisitions; and integration of Kaman's Goal Achievement culture of continuous improvement. For 2011, Mr. Steiner earned a total of 9 points (out of 20) for his achievements with respect to the other factors. Given the weightings described above, 2011 financial performance by the Aerospace segment and achievement of other segment performance factors resulted in a total of 159.1 points and a performance factor of 200% out of a maximum of 200%. Because the performance factor is capped at 200%, the "other factors" were not taken into account for Mr. Steiner's annual cash incentive award.
| Average Return on Investment ("ROI") | Operating Income (in millions) |
|||
| 2011 Target | 2011 Plan | 2011 Actual | 2010 | 2011 |
| 18.5 % | 25.0 % | 20.5 % | $ 67.2 | $ 80.4 |
| Performance % | Points Earned |
Performance Range | |||
| Plan vs. Target ROI | 135.1 % | 40.0 | 50% = 0 | 100% = 20 | 125% = 40 |
| Actual Performance vs Plan ROI | 82.0 % | 12.8 | 50% = 0 | 100% = 20 | 125% = 40 |
| Actual Performance vs Target ROI | 110.8 % | 57.3 | 50% = 0 | 100% = 40 | 125% = 80 |
| Growth in Operating Income | 19.8 % | 40.0 | 0% = 0 | 8% = 20 | 12% = 40 |
| Points Earned based on Financial Performance | 150.1 | ||||
| Other Factors (20 point maximum) | 9.0 | ||||
| Total Points Earned | 159.1 | ||||
Actual 2011 Cash Incentive Award Payments. Following is the total annual cash incentive award earned for calendar year 2011 for Mr. Steiner:
| Named Executive Officer | 2011 Cash Incentive Award |
Incentive Award Expressed as a Percentage of Base Salary |
| Gregory L. Steiner | $ 459,450 | 120 % |
For the 2012 plan year, the annual incentive plan compensation structure for Mr. Steiner will be modified by using a formula that is based on both Aerospace business segment results and overall corporate performance. The Aerospace segment performance will be weighted at 75% of the award and the corporate performance will be weighted at 25%. This structure illustrates that as a business segment President, Mr. Steiner is important not only to the success of the Aerospace business, but is also integral to the performance and success of the company overall. To further reflect the business segment and corporate alignment philosophy, Mr. Steiner was promoted in February 2012 to the position of Executive Vice President, Kaman Corporation in addition to his current position of President, Kaman Aerospace Group, Inc.
Performance Measures. The 2011 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.
| Performance Goal | Benchmark | Weighting |
| Plan return on investment | Target return on investment | 15 % |
| Actual return on investment | Plan return on investment | 15 % |
| Actual return on investment | Target return on investment | 30 % |
| Growth in segment operating income year over year | Operating income | 20 % |
| Growth in sales year over year | Sales | 20 % |
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 2008, 2009 and 2010 for the 2011 performance year). The plan 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 challenging 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 20 points.
Following is a conversion chart demonstrating how the total number of points is converted into a percentage of the target award:
| Total Points Earned |
Percent of Target Award Earned |
| Below 50 | — |
| 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.
2011 Actual Financial Performance. The following table illustrates the performance parameters and calculation method to determine Mr. Smidler's 2011 annual cash incentive payment. Mr. Smidler earned 184.1 points based on actual 2011 business segment results as measured against predetermined financial goals. Mr. Smidler's "other factors" related to successfully implementing Kaman's Goal Achievement culture of continuous improvement; achieving organic growth and market penetration; completing targeted acquisitions; executing organizational redesign; and achieving designated operating income and increases in the segment's net gross margin. For 2011, Mr. Smidler earned a total of 13.5 points (out of 20) for achievements with respect to the other factors. Given the weightings described above, 2011 financial performance by the Industrial Distribution segment and achievement of other segment performance factors resulted in a total of 197.6 points and a performance factor of 200% out of a maximum of 200%. Because the performance factor is capped at 200%, the "other factors" were not taken into account for Mr. Smidler's annual cash incentive award.
| Sales (in millions) |
Average Return on Investment ("ROI") | Operating Income (in millions) |
||||
| 2010 | 2011 | 2011 Target | 2011 Plan | 2011 Actual | 2010 | 2011 |
| $ 832.2 | $ 950.9 | 15.6 % | 20.0 % | 21.1 % | $ 30.3 | $ 48.1 |
| Performance % | Points Earned |
Performance Range | |||
| Plan vs. Target ROI | 128.2 % | 30.0 | 50% = 0 | 100% = 15 | 125% = 30 |
| Actual Performance vs Plan ROI | 105.5 % | 18.3 | 50% = 0 | 100% = 15 | 125% = 30 |
| Actual Performance vs Target ROI | 135.3 % | 60.0 | 50% = 0 | 100% = 30 | 125% = 60 |
| Growth in Operating Income | 59.1 % | 40.0 | 0% = 0 | 8% = 20 | 12% = 40 |
| Growth in Sales | 14.3 % | 35.8 | 0% = 0 | 8% = 20 | 16% = 40 |
| Points Earned based on Financial Performance | 184.1 | ||||
| Other Factors (20 point maximum) | 13.5 | ||||
| Total Points Earned | 197.6 | ||||
Actual 2011 Cash Incentive Award Payments. Following is the total annual cash incentive award earned for calendar year 2011 for Mr. Smidler:
| Named Executive Officer | 2011 Cash Incentive Award |
Incentive Award Expressed as a Percentage of Base Salary |
| Steven J. Smidler | $ 363,000 | 110 % |
For the 2012 plan year, the annual incentive plan compensation structure for Mr. Smidler will be modified by using a formula that is based on both Industrial Distribution business segment results and overall corporate performance. The Industrial Distribution segment performance will be weighted at 75% of the award and the corporate performance will be weighted at 25%. This structure illustrates that as a business segment President, Mr. Smidler is important not only to the success of the Industrial Distribution business, but is also integral to the performance and success of the company overall. To further reflect the business segment and corporate alignment philosophy, Mr. Smidler was promoted in February 2012 to the position of Executive Vice President, Kaman Corporation in addition to his current position of President, Kaman Industrial Technologies Corporation.
The Committee uses cash-based awards under the long-term incentive feature of the company's 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 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). The Committee retains the discretion to eliminate or decrease the amount payable to a participant with respect to any award.
Prior to 2011, the company's practice had been to include new executive officer participants in the three-year LTIP award performance cycle that followed their hire date. This practice was followed with respect to Messrs. Keating, Denninger and Steiner, and resulted in no LTIP payment for at least three years after first becoming a participant. In the interim, new executives have received stock options and restricted stock grants. 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, and would be of similar value to the stock options and restricted stock awards previously granted to new executive officers.
As a result of the change described above, Mr. Smidler, who became an executive officer on September 1, 2010, received three separate LTIP awards in 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. One-third of the LTIP awards are expected to be paid in company stock if his stock ownership requirements are not met by the award payment date. In 2011, the Committee also granted LTIP Awards for the 2011-2013 performance period to Messrs. Keating, Denninger and Steiner and Ms. Clark.
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. As part of its review of the compensation programs in 2011, the Committee reviewed the weighting of these performance factors and determined that the relative weighting was still appropriate.
The financial measures and target performance goals used in the estimated calculation for the 2009 – 2011 performance period are as follows:
Our three-year average return on total investment is 7.5%, which represents the average for the three-year performance period shown on the following table.* The company defines total investment (capitalization) 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 Thousands) | |||
| 2011 | 2010 | 2009 | |
| Net Earnings | $ 51,142 | $ 35,611 | 24,995 |
| Total Equity | $ 373,071 | $ 362,670 | $ 312,900 |
| Total Debt | $ 205,207 | $ 148,423 | $ 63,635 |
| Total Capitalization | $ 578,278 | $ 511,093 | $ 376,535 |
| Return on investment | 8.8 % | 7.0 % | 6.6 % |
* As previously explained on page 26, the company made an accounting change in 2011 related to recognition of pension expense. Consequently, the values shown in the table above have been adjusted for years 2009, 2010 and 2011 to reflect the accounting change.
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:
| 2006 | 2007 | 2008 | 3 Year Average |
2009 | 2010 | 2011 | 3 Year Average |
|
| EPS | $ 1.19 | $ 1.60 | $ 1.49 | $ 1.43 | $ 0.97 | $ 1.36 | $ 1.93 | $ 1.42 |
Average Compounded Annual Growth = ($1.43 ÷ $1.42)1/3 – 1 = -0.23%.
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 2009 – 2011 is 62.1%.
The following table shows the estimated awards for the 2009-2011 performance period. The table reflects complete Russell 2000 Index data for 2009 and 2010; however, as of February 3, 2012, only 19% of Russell 2000 Index data is available for the 2011 fiscal year. Actual Russell 2000 performance for the 2009 – 2011 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 | 7.5 % | 3.3 % | 177.8 % | 40 % | 71.1 % |
| Average Annual Compounded Growth in Earnings per Share | (0.23 )% | 5.9 % | 62.2 % | 40 % | 24.9 % |
| Three-Year Total Return to Shareholders | 62.1 % | 53.9 % | 108.7 % | 20 % | 21.7 % |
| Total Estimated Award | 117.7 % | ||||
Financial performance below 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. (By contract, annual cash incentive awards are calculated using the Russell 2000 index for the five-year period preceding, but not including, the performance year.) LTIP grants made for the performance period January 1, 2011 through December 31, 2013 are shown in the "Grant of Plan-Based Awards in 2011 Fiscal Year" table on page 41.
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, 2009 – December 31, 2011 are not yet determinable and are not reflected in the Summary Compensation Table. The following table shows the estimated LTIP payment amounts for the 2009 – 2011 performance period for the named executive officers that received LTIP Awards for that performance period:
| Named Executive Officer | 2009 Base Salary |
Award Opportunity as a % of Base |
Target Award |
Performance Factor |
Estimated Awards |
| Neal J. Keating | $ 675,000 | 160 % | $ 1,080,000 | 117.7 % | $ 1,271,160 |
| William C. Denninger | $ 440,000 | 95 % | $ 418,000 | 117.7 % | $ 491,986 |
| Gregory L. Steiner | $ 335,000 | 95 % | $ 318,250 | 117.7 % | $ 374,580 |
| Candace A. Clark | $ 339,000 | 95 % | $ 322,050 | 117.7 % | $ 379,053 |
As described above, Mr. Smidler was granted a one-year LTIP award covering the 2011 performance cycle (January 1, 2011 through December 31, 2011). The values shown in the tables below are estimates based on only 19% of Russell 2000 Index data being available for the 2011 fiscal year as of February 3, 2012. Actual Russell 2000 performance for the 2011 performance cycle may be higher or lower than what is illustrated. Accordingly, we anticipate that the values and payment amount shown in the tables below likely will change after all Russell 2000 performance data is known. The company will disclose the actual payment to Mr. Smidler for the 2011 performance cycle when it is made, by filing a Form 8-K. As previously noted, one-third of Mr. Smidler's LTIP award is expected to be paid in company stock if his stock ownership requirements are not met by the award payment date.
|
Company Performance |
Est. Russell Performance at 50th Percentile |
Estimated Percentage Earned |
Performance Weighting |
Estimated Award |
|
| Average Return on Investment* | 8.8 % | 5.6 % | 168.1 % | 40 % | 67.2 % |
| Growth in Earnings per Share** | 41.9 % | 17.8 % | 187.8 % | 40 % | 75.1 % |
| Total Return to Shareholders*** | (4.3 )% | (6.8 )% | 112.2 % | 20 % | 22.4 % |
| Total Estimated Award | 164.7 % | ||||
The table below shows Mr. Smidler's estimated LTIP payment amount for the 2011 performance cycle based on 19% of Russell 2000 Index data available for the 2011 fiscal year as of February 3, 2012. Any payment earned by Mr. Smidler under this award generally would not be made until June 2012, in order for the Committee to have the time necessary to collect and analyze more complete performance results of the Russell 2000 companies for the 2011 performance period. Because the amount earned by Mr. Smidler for the 2011 performance cycle is not yet determinable, it is not reflected in the Summary Compensation Table.
| Named Executive Officer |
2011 Base Salary |
Award Opportunity as a % of Base |
Target Award |
Performance Factor |
Estimated Awards |
| Steven J. Smidler | $ 330,000 | 110 % | $ 363,000 | 164.7 % | $ 597,861 |
* Average return on capital is the simple average of total return on capital achieved in the one (1) year 2011 performance cycle.
** Growth in earnings per share is calculated by taking the company's earnings per share for the 2011 performance cycle and computing the growth rate over the 2010 base period earnings per share. The base period earnings per share is the company's 2010 earnings per share from continuing operations.
*** Total return to shareholders is calculated on a dividends reinvested basis and will measure the change in value of an investment in company shares for the period January 1, 2011 through December 31, 2011.
The company offers a non-contributory tax qualified defined benefit pension plan ("pension plan") for most of its employees, including Messrs. Keating, Denninger and Steiner and Ms. Clark. Tax rules restrict the amount of benefit that can be accrued for higher paid employees under this plan. The company also maintains a non-tax qualified Supplemental Employees' Retirement Plan, which we refer to as the SERP. The SERP provides certain key executives, whose compensation is in excess of the limitations imposed by federal law on the tax qualified pension plan, with supplemental benefits based on eligible earnings, years of service and age at retirement. All of the named executive officers participate in the SERP except for Mr. Smidler who joined the company after the date on which the pension plan was closed to new employees of Kaman Industrial Technologies Corporation. The purpose of these plans is to provide a reasonable level of retirement income to participants taking into account pre-retirement earnings and length of service with the company.
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:
These changes apply equally to the SERP except that the SERP already provides for use of non-consecutive years of service for benefit calculations.
The change in the value of the tax-qualified pension plan and SERP benefits in 2011 is shown in the Summary Compensation Table at page 39 and the full value of these benefits at normal retirement age is shown in the Pension Benefits Table at page 44.
The company also sponsors a tax-qualified defined contribution plan ("401(k) plan") in which the named executive officers are eligible to participate. Participants generally may elect to contribute from 1% to 50% of their eligible compensation to the 401(k) plan in the form of pre-tax, after-tax or Roth contributions subject to certain limitations imposed by federal law. The company makes employer-matching contributions on a participant's pre-tax and Roth contributions in the amount of $1.00 for each $1.00 that a participant contributes, up to 5% of compensation subject to applicable limits imposed by federal tax law. As an example, if a participant contributes 5% of his or her compensation to the 401(k) plan, the company will make a 5% employer-matching contribution to the participant's account. Participants in the 401(k) plan are always vested in their own contributions. Employer-matching contributions vest upon a participant reaching 3 years of service with the company.
A select group of highly compensated management employees, including the named executive officers, are eligible to participate in our non-qualified Deferred Compensation Plan, which permits pre-tax deferrals of up to 50% of a participant's base salary and up to 100% of his or her annual cash incentive award. The company makes matching contributions on deferrals in the amount of 25% of a participant's deferrals for the plan year, up to a maximum of 2.5% of base salary plus the annual cash incentive award less the maximum allowable match under the 401(k) plan. The company also makes supplemental deferred compensation contributions to eligible participants equal to 10% of the amount of which a participant's compensation exceeds the maximum allowable allowable compensation limit for purposes of tax-qualified plan, which for 2012 is $250,000. Prior to 2012, participants in the SERP were not eligible to receive supplemental deferred compensation contributions; however, starting in 2012, SERP participants will be eligible for such contributions in recognition of the significant changes made to the pension plan and SERP in 2010. We estimate the liability for making supplemental deferred compensations contributions to the named executive officers in 2012 will be approximately $290,000. Mr. Smidler received supplemental deferred compensation contributions in 2011 as he did not participate in the SERP. Participant accounts under the Deferred Compensation Plan are credited with interest at a predetermined crediting rate equal to 120% of the applicable federal long-term rate compounded monthly in effect for the month of October prior to the beginning of the applicable plan year. A participant must be actively employed on the crediting date (i.e., January 1 following the applicable plan year) to receive matching and supplemental deferred compensation contributions. Deferrals and all company contributions and earnings are 100% vested. 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.
Mr. Smidler, who joined the company in December 2009 and was appointed as an executive officer on September 1, 2010, did not receive an LTIP award for the 2010 - 2012 performance period given the timing of his appointment. Instead, the Committee granted Mr. Smidler equity awards in 2011 under the 2003 Stock Incentive Plan in recognition of his performance in 2010, which consisted of 6,010 restricted stock shares and 15,820 stock options. The Committee also made restricted stock awards to Messrs. Denninger and Steiner in 2011 under the 2003 Stock Incentive Plan for 18,200 shares and 14,150 shares respectively. The restrictions for the shares granted to Messrs, Denninger and Steiner lapsed immediately, but the net after-tax shares are subject to a three-year holding period from the date of grant. The Summary Compensation Table provides additional information about these awards. The immediate lapse of restrictions was approved by the Committee so that the stock awards could be included in the executive's taxable income in 2011, and therefore also included in the base amounts for Messrs. Denninger and Steiner to calculate any excise tax liability should they receive excess parachute payments, as defined by Internal Revenue Code Section 280G, upon a qualifying termination event related to a change of control. This action should help to mitigate the company's financial exposure for tax gross-up payments that could be imposed in 2012 if such events should occur.
The company provides relatively few perquisites for the named executives. As explained above, all vehicle leases have ended for the named executive officers. Each executive officer now receives a vehicle allowance. In addition, starting in 2012, the company will pay for an annual physical examination for the named executives as described at page 21. The Summary Compensation Table provides information regarding the incremental cost of perquisites for the named executive officers for the portion of 2011 during which any were in place. In addition, the company maintains one corporate aircraft, which was used solely for business purposes in 2011, except for limited spousal travel to accompany executives on business trips.
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 45. 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 also restrict the circumstances under which an executive would be entitled to an IRC Section 280G tax gross-up payment and contain provisions such that payments under the agreements are exempt from, or comply with, the requirements of IRC Section 409A.
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 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 took these actions in light of evolving market practices for change in control agreements. Since 2010, the employment agreements for all named executive officers, except Mr. Smidler, have been modified to remove excise tax gross-up benefits. Ms. Clark's change in control agreement was renewed by the Board and was amended effective January 1, 2012, to remove the provision for excise tax gross-ups. The Committee will address the terms of the change in control agreements for the other executive officers when those agreements expire.
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 the Dodd-Frank Act.
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 48.
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 curent annual cash retainer of $45,000. 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 (fewer than 10 individuals) | 2 times salary |
| All Other Corporate Officers (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. Messrs. Keating, Denninger and Steiner and Ms. Clark met stock ownership requirements during 2011. Mr. Smidler, who joined the company in December 2009, is making progress toward compliance.
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, 2011 was $27.32 and was used for the final determination of compliance for 2011.
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. 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 2011, the compensation paid to Mr. Keating exceeded the Section 162(m) limit due to the vesting of previously granted restricted stock awards, and Mr. Steiner exceeded the Section 162(m) limit due to a restricted stock award grant in 2011. Mr. Keating's compensation exceeded the Section 162(m) limit by $641,723 and Mr. Steiner's compensation exceeded the limit by $87,877.
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.
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, 2011.
Richard J. Swift, Chair
Brian E. Barents
E. Reeves Callaway III
A. William Higgins
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.