Kaman

AR 13

Proxy

Proxy/Compensation Discussion and Analysis

Introduction

This section explains our executive compensation program as it applies to our "named executive officers" (those persons whose compensation is summarized in the tables immediately following this discussion), as well as the role, responsibilities and philosophy of the Personnel & Compensation Committee (the "Committee" or the "committee") of our Board of Directors, which oversees the design and operation of the program.

For 2013, our named executive officers were as follows:

Neal J. Keating Chairman, President and Chief Executive Officer
Robert D. Starr Senior Vice President and Chief Financial Officer
William C. Denninger Former Executive Vice President and Chief Financial Officer
Gregory L. Steiner Executive Vice President, Kaman Corporation and President,
Kaman Aerospace Group, Inc.
Ronald M. Galla Senior Vice President and Chief Information Officer
Shawn G. Lisle Senior Vice President and General Counsel

Mr. Denninger served as Executive Vice President and Chief Financial Officer of the Company until he retired effective as of June 30, 2013. Mr. Starr was appointed Senior Vice President and Chief Financial Officer effective as of July 1, 2013. Under applicable rules and regulations of the United States Securities and Exchange Commission (the "SEC"), both of these persons are required to be included as named executive officers. In addition, we have decided to discuss the compensation of Steven J. Smidler, the President of our Distribution Segment, even though he is not a named executive officer under applicable SEC disclosure rules. We have done so because he is responsible for the management of our largest operating segment and his compensation has been discussed in our proxy statements for the past several years.

In the discussion that follows, we begin with a brief description of some of the most significant actions that were taken with respect to the 2013 compensation of our named executive officers. We then discuss our compensation philosophy and describe the various elements of our executive compensation program, and the 2013 compensation of our named executive officers, including the annual cash incentive awards that were approved in February 2014 for 2013 performance. Next, we discuss a number of other compensation-related matters, including our use of employment and change in control agreements, our stock ownership guidelines for Directors and executive officers, and the material tax and accounting implications of our compensation program. We conclude by presenting the formal report of the Committee, which is required by applicable SEC rules and regulations.

As used in this section, all references to the "Committee" mean the Personnel & Compensation Committee of our Board of Directors, which oversees the design and operation of our executive compensation program. For more information about the Committee and its role and responsibilities, please see the discussion under the heading "Personnel & Compensation Committee" appearing on page 10 above.

2013 Compensation Highlights

Set forth below is a brief description of some of the most significant actions that were taken with respect to the determination of the 2013 compensation of our named executive officers and other members of our senior leadership team:

  • Adoption of New Metrics for our Annual Cash Incentive Plans. The Committee adopted new financial metrics for our annual cash incentive plans, as described in more detail below, in order to more closely align our annual cash incentives with operational goals and objectives.
  • Elimination of Subjective Performance Factors for Annual Incentive Awards. The Committee eliminated the ability of executive officers to enhance the payouts on their annual incentive awards through the achievement of personalized goals and objectives, limiting the determination of all such annual incentive awards to the achievement of objective metrics of Company financial performance, as described in more detail below.
  • Deferral of Base Salary Adjustments. Because of uncertain economic conditions and the difficult business environment existing at the end of 2012, the Committee, at the request of our Chief Executive Officer, elected to defer any 2013 salary increases for all named executive officers, including the Chief Executive Officer, and the other executive officers who report directly to the Chief Executive Officer until July 1, 2013. The 2013 salary increases for other officers were deferred until April 1, 2013. Similar deferrals are planned for 2014.
  • Elimination of all Excise Tax Gross-Ups in Change in Control Agreements. The Committee took action to eliminate the last remaining excise tax gross-up provisions that were set forth in Change in Control Agreements with our executive officers. The Company no longer has any such excise tax gross-up provisions.

Say on Pay Voting Results

For each of the past three years, we have asked our shareholders to cast a non-binding, advisory vote to approve the compensation paid to our named executive officers, and our shareholders have increasingly voted in favor of our compensation program. The results of the voting have been as follows:

(*) Represents the percentage of votes cast "FOR" and "AGAINST" the proposals, excluding broker non-votes and abstentions. If abstentions were to be counted, the percentage of votes cast "FOR" the proposals would have been 78.0%, 80.3% and 83.8% for 2011, 2012 and 2013, respectively.

The Committee has interpreted these results to mean that our shareholders generally support our executive compensation program. As such, the Committee has taken no specific actions to modify our executive compensation program as a direct result of these non-binding, advisory votes.

We encourage shareholders to review this Compensation Discussion and Analysis and the accompanying compensation tables for an explanation of our approach to executive compensation and a discussion of the correlation between the compensation paid to our named executive officers and the Company's financial performance. As discussed herein, we believe that the compensation paid, and to be paid, to our named executive officers for 2013 bears, and will bear, a direct and corresponding relationship to the Company's 2013 financial performance.

Our Compensation Philosophy and the Fundamental Objectives of our Compensation Program

The philosophy underlying our executive compensation program is to provide an attractive, flexible, and market-based total compensation program that is tied to the financial performance of the Company and is aligned with the interests of our shareholders. We strive to recruit and retain executive officers and other key employees who have the skills and talents that are necessary to deliver sustained financial performance that exceeds the median financial performance of the companies comprising the Russell 2000 index.

Our fundamental compensation objectives include the following:

  • 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. To accomplish this objective, we use an appropriate mix of pay elements, including salary, annual and long-term incentive opportunities and benefits. Overall, salary and benefits are determined based upon a comparison to the competitive market for our executives and a group of the Russell 2000 index companies that approximate our revenue size, while the annual and long-term incentive opportunities are directly related to the Company's financial performance compared to the Russell 2000 index companies.
  • Tie a significant percentage of our senior executives' incentive compensation to the successful execution of strategic operational goals. To accomplish this, we establish objective and measurable goals on an annual and longer-term (3 years) basis and compare actual performance to objective, measurable benchmarks. As a result, executives, especially our named executive officers, earn above average compensation when the Company achieves above average financial performance compared to the Russell 2000 index of companies.
  • Encourage our named executive officers to maintain a significant equity stake in the Company to further align their interests with those of our shareholders. We maintain meaningful stock ownership guidelines, described in more detail below, that are designed to align the financial interests of our officers, including our named executive officers, with those of our shareholders. To facilitate the accumulation of equity and the satisfaction of these guidelines, we allow up to 1/3 of a cash long-term incentive award payment to be paid in shares of Company stock if the Company's stock ownership guidelines have not been attained by a particular executive officer.
  • Protect against inappropriate risk taking. We use caps on potential awards for both annual and long-term incentives. The Committee also introduced a claw-back policy in 2010 that is reflected in the employment agreement of our Chief Executive Officer. The Committee intends to establish a broader claw-back policy covering all executive officers once the SEC issues final rules and the New York Stock Exchange issues listing conditions for the recovery of incentive compensation as required under the Dodd-Frank Act. In addition, the Company's Insider Trading Policy expressly prohibits Directors, executive officers and other designated employees from engaging in short-term or speculative transactions in Company securities, including, among others, (i) short sales of Company securities; (ii) publicly traded options, puts, calls or other similar derivative securities; (iii) hedging or similar monetization transactions, such as zero-cost collars and forward sale contracts; and (iv) holding Company securities in a margin account or pledging Company securities as collateral for a loan.
  • Provide compensation and benefits to our named executive officers consistent with practices of similar companies and also aligned with shareholder interests. To accomplish this objective, we have made the following changes in recent years:
    • Due to uncertain business conditions, potential adjustments in the base salaries of our CEO and his direct reports have been deferred for a period of six months, from January 1 to July 1. Potential adjustments in the annualized base salaries of other officers have been deferred from January 1 to April 1.
    • The Company closed its supplemental retirement plan to new executive officers in early 2010. Grandfathered participants may continue to earn credited service under this plan, but only compensation earned through calendar year 2010 counts toward the final average compensation that is used to calculate supplemental retirement benefits. This treatment is the same as that which applies to participants under our tax-qualified defined benefit pension plan.
    • Certain perquisites that were available to named executive officers and other executive officers were eliminated in early 2010, including medical expense reimbursement and tax and estate planning reimbursement. Further, leased Company vehicles were replaced with vehicle allowances.
    • We no longer provide excise tax gross-ups or "single trigger" change-in-control severance benefits. During 2013, the last of our change in control agreements containing pre-existing excise tax gross-up provisions were amended to eliminate these provisions. Our employment and change in control agreements include only "double trigger" change in control severance benefits, requiring both a change in control and a termination of employment (or other adverse impact) before any severance payments would be paid in the event of a change in control of the Company.

Our Compensation Program

The Pay Elements; Performance Metrics and Evaluation of Market Pay Practices

We have designed our executive compensation program to achieve the goals described above 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 compensation consultant which approximate the Company's revenue size (but none of which specifically reflects our combination of business segments).

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 Distribution) are so different from one another that it is not feasible to compare us to a specific peer group of companies. The Committee regularly reviews the continued appropriateness of using the Russell 2000 for comparison and has reconfirmed its use for 2014.

The financial performance metrics upon which annual and longer-term incentive opportunities have been based are those that management has used to evaluate business performance. For corporate participants (those who do not work primarily for one of our two business segments), annual incentive metrics have included return on investment, growth in earnings per share, and growth in earnings per share compared to corresponding amounts established with reference to the Company's annual profit plan. For business segment participants, annual incentive metrics have included the 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 have differed for the annual cash incentive and longer-term incentive, as discussed below.

How the Pay Elements Work in Practice

The pay elements of our corporate 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 tables comparing our performance to the 25th, 50th and 75th percentiles of our market (as described above) for both annual and long-term incentive award determination purposes.

Annual Cash Incentive Awards. The following table compares our 2013 financial performance, before the modifications described below, with the 25th, 50th and 75th percentile performance of the Russell 2000 companies for the five-year period 2008 - 2012 (which is the period we used to evaluate our results for annual cash incentive awards):

KAMAN (2013) VS. 5-YEAR RUSSELL 2000 (2008-2012)
EPS Growth (1) ROI (2)
25th Percentile (8.4)% (3.9)%
50th Percentile 2.9% 2.8%
75th Percentile 14.0% 8.1%
Kaman 3.4% 7.3%
Russell Percentile 51.1% 71.2%
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  1. Average annual compounded growth in earnings per share.
  2. Five-year average return on investment.

The Committee determined the 2013 award percentage under our annual cash incentive plan based on the Company's actual financial results for 2013 after excluding costs related to acquisitions. This resulted in an annual incentive performance award factor of 128.6% of the target award. When making the annual incentive grant for 2013, the Committee approved the exclusion of acquisition and divestiture costs and certain long-term capital investments because the Committee believes that acquisitions are of vital importance to the Company's long-term growth and management should be encouraged to pursue acquisitions when appropriate and make capital investment decisions without regard to their near-term effect on compensation plans. If these adjustments had not been made, the performance award factor would have been 123.3%. The calculation of the performance award factor is further discussed starting on page 27.

Our actual 2013 return on investment (ROI) performance was in the 71st percentile and our actual 2013 earnings per share (EPS) growth was in the 51st percentile of the Russell 2000. We also achieved 90.9% of our plan earnings per share (before the modifications discussed above).

Mr. Keating's base salary and annual cash incentive award actually earned for 2013 each was moderately above the 50th percentile of the competitive market for other chief executive officers at companies having similar revenue, as illustrated by the chart below:

CEO BASE PAY & CASH BONUS VS. MARKET (1)
Base Salary Cash Bonus
25th Percentile $732,200 $527,500
50th Percentile $842,500 $849,800
75th Percentile $999,901 $1,273,638
Mr. Keating $900,000 $1,181,513
Russell Percentile 59 % 70 %
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  1. Amounts shown represent Mr. Keating's actual base salary and annual cash incentive award paid in respect of 2013, as compared to the annual base salaries and annual cash incentive awards paid to the CEOs of the Russell 2000 companies in respect of 2012, the most recent year for which data was available. Please see the discussion at page 24 for information about our independent compensation consultant's determination of the 25th, 50th and 75th percentile for this market comparison.

The annual cash incentive awards for Mr. Steiner, President of our Aerospace segment, and Mr. Smidler, President of our Distribution segment, are intended to create incentives for sales and operating income growth while generating a reasonable return on our investments and generating favorable free cash flow. Financial metric targets for each segment are recommended by the CEO and approved by the Committee. The financial metrics, targets and calculation of the performance award factors are further discussed below, starting on page 25.

Long-Term Incentive Awards. The following chart compares the Company's three-year (2011 - 2013) performance against the Russell 2000 companies for the same three-year period based data available as of January 31, 2014. We note that, as of this date, only 19% of the Russell 2000 companies had reported data, so these figures are subject to change prior to the final determination of our long-term incentive award payouts which is scheduled to occur in June 2014.

KAMAN (2011-2013) VS. 3-YEAR RUSSELL 2000 (2011-2013)
EPS Growth (1) ROI (2) TSR (3)
25th Percentile (0.5 )% 2.2 % 4.5 %
50th Percentile 10.8 % 5.6 % 42.9 %
75th Percentile 24.6 % 8.9 % 98.5 %
Kaman 16.9 % 8.1 % 44.3 %
Russell Percentile 61.1 % 68.9 % 50.6 %
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  1. Average annual compounded growth in earnings per share.
  2. Three-year average return on investment.
  3. Three-year total return to shareholders.

Based on the data currently available and as illustrated above, our performance was at the 69th percentile for average return on investment and at the 61st percentile for compounded EPS growth. Total return to shareholders for this period was slightly above the 50th percentile.

The award opportunities for our named executive officers for the 2011-2013 LTIP performance cycle are as follows:

Target Awards for 2011-2013 LTIP Performance Cycle
Named Executive Officer 2011 Base Salary Target Award Opportunity as a % of Base Salary Target Award(1)
Neal J. Keating $800,000 195% $1,560,000
Robert D. Starr (2) N/A N/A N/A
William C. Denninger $492,540 115% $566,421
Gregory L. Steiner $382,875 115% $440,306
Steven J. Smidler $330,000 110% $363,000
Ronald M. Galla $338,445 90% $304,601
Shawn G. Lisle (3) N/A N/A N/A
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  1. Reflects estimated value of LTIP awards at 100% of target. The amount of any payout actually made to Mr. Denninger will be pro-rated to reflect his retirement from the Company effective as of June 30, 2013.
  2. Mr. Starr did not receive an LTIP award for the 2011-2013 performance cycle. He began receiving LTIP awards in 2014.
  3. Mr. Lisle did not receive an LTIP award for the 2011-2013 performance cycle, but he did receive a one-year LTIP award for the 2013 performance cycle and a two-year LTIP award for the 2013-2014 performance cycle, which are described in more detail below.

Because Mr. Lisle first became eligible to receive LTIP awards during 2013, the Committee granted him a one-year LTIP award for the 2013 performance cycle and a two-year LTIP award for the 2013-2014 performance cycle, as well as the regular three-year LTIP award granted to the other named executive officers which is described in more detail below. See "Target Awards for 2013-2015 LTIP Performance Cycle." The target award opportunity for each of these awards is 90% of his base salary as of January 1, 2013, which was $285,000. The performance measures for the one-year and two-year awards are consistent with the performance measures for the three-year LTIP award and are based on average EPS growth, return on investment and total shareholder return. The payouts, if any, for these awards will be based on the Company's actual financial performance for each performance period, after excluding costs related to acquisitions and long-term capital investments. The Company's 2013 financial performance, as modified for the 2013 one-year LTIP award, is adjusted in the same manner as the Annual Cash Incentive Awards and can be found on page 27. The following chart compares the Company's one-year financial performance against the Russell 2000 companies for the same period based on data available as of January 31, 2014. Since only 19% of the Russell 2000 companies had reported through this date, these figures are subject to change prior to the final determination of Mr. Lisle's one-year 2013 award payout, which is scheduled to occur in June 2014.

KAMAN (2013) vs. 1-YEAR RUSSELL 2000 (2013)
EPS Growth (1) ROI TSR
25th Percentile (17.0 )% 1.6 % 13.2%
50th Percentile 7.3 % 5.3 % 35.8 %
75th Percentile 26.3 % 9.2 % 67.4 %
Kaman 4.9 % 7.3 % 9.9 %
Russell Percentile 47.5 % 62.8 % <25.0%

The Summary Compensation Table does not include any amounts that have been accrued as expenses in relation to the three-year 2011-2013 LTIP performance period or, in the case of Mr. Lisle, the one-year 2013 LTIP performance period. We will report the actual amounts earned and paid to Mr. Keating and our other named executive officers in respect of these awards in a Current Report on Form 8-K, which will be filed with the SEC later this year after the Committee has received sufficient 2013 operating results for Russell 2000 companies and certified the extent to which the Company achieved the performance goals established for the awards. Based on the preliminary data available as of January 31, 2014, discussed above, we have accrued the following amounts in respect of these awards: Mr. Keating - $2,340,000, Mr. Denninger - $708,000 (pro-rated to reflect his retirement effective as of June 30, 2013), Mr. Steiner - $660,000, Mr. Smidler - $544,000, Mr. Galla - $457,000, and Mr. Lisle - $256,000. Since only 19% of the Russell 2000 companies had reported their results as of January 31, 2014, the actual payouts, as finally determined by the Committee, may be more or less than these amounts.

Our Compensation Policies

Set forth below 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 compensation consultant. As described above, the Committee has been advised by our independent compensation consultant that our business segment diversity makes identification of a sensible peer group to benchmark compensation unworkable. Instead, the independent compensation consultant's market report (the most recent having been prepared in 2013) 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 compensation level for each position was adjusted by the independent compensation consultant to reflect the revenue level of the organization 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 compensation consultant evaluated the compensation levels of a sample of twenty-two (22) Russell 2000 companies having annual revenues similar to ours, which are also identified in Exhibit 1 to this proxy statement. The Committee reviewed the list of companies used in prior years and, in conjunction with its independent compensation consultant, made certain changes as appropriate. Our independent compensation 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 2013 comprehensive competitive compensation analysis by our independent compensation consultant, our base salary and target incentive annual cash award opportunities (as a percentage of base salary) for our named executive officers as compared to the median of the competitive market for 2013 were as follows:

Base Salary Target Annual Cash Incentive Award %
Kaman Market Median Kaman Market Median
Neal J. Keating(1) $900,000 $842,500 105% 100%
Robert D. Starr(1) $330,000 $414,708 60% 63%
William C. Denninger(2) N/A N/A N/A N/A
Gregory L. Steiner(3) $422,300 $412,000 65% 64%
Steven J. Smidler(3) $355,350 $397,800 65% 60%
Ronald M. Galla(3) $357,313 $335,600 55% 46%
Shawn G. Lisle(3) $315,000 $366,600 55% 55%
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  1. The market median figures for Messrs. Keating and Starr are based upon the surveys and the sample of Russell 2000 companies referenced above.
  2. Mr. Denninger was not included in the 2013 comprehensive competitive compensation analysis because he had previously announced his intention to retire from the Company effective as of June 30, 2013.
  3. The market median figures for Messrs. Steiner, Smidler, Galla and Lisle are based solely upon the surveys because these positions are not typically shown separately in the proxy statements of the sample Russell 2000 companies.

Annual cash incentive targets and annualized value of long-term incentives for each named executive officer approximate market medians. The current annual base salaries of Messrs. Keating and Steiner are positioned at or slightly above the market medians for their positions. Mr. Galla's variation from the market median is primarily due to his 28-year length of service with the Company, and Messrs. Starr and Lisle's variation from the market median reflects the fact that both were recently appointed to their positions. 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 significant percentage of total compensation (excluding benefits) being based on performance. Set forth below is the allocation of total direct compensation (excluding benefits) for target performance for each of our named executive officers for 2013.

Fixed Performance-Based(1)
Name Salary
(% of Total)
Annual
Cash Incentive
(% of Total)
Long-Term
Incentive(2)
(% of Total)
Total
Performance
Related
(% of Total)
Neal J. Keating 21% 22% 57% 79%
Robert D. Starr 47% 27% 26% 53%
William C. Denninger 32% 20% 48% 68%
Gregory L. Steiner 32% 20% 48% 68%
Steven J. Smidler 32% 20% 48% 68%
Ronald M. Galla 41% 22% 37% 59%
Shawn G. Lisle 41% 22% 37% 59%
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  1. Percentages are based on target performance for the annual cash incentive and the long-term incentive elements of compensation.
  2. For all executives other than Mr. Starr, long-term incentive compensation consists of LTIP awards. Mr. Starr's 2013 long-term incentive compensation consists of nonqualified stock options and restricted stock awards.
Components of the Executive Compensation Program

The total compensation program for our named executive officers consists of the following elements:

  • Base Salaries;
  • Annual Cash Incentive Awards;
  • Long-Term Incentives; and
  • 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, Starr, Denninger (until his retirement), Galla and Lisle), Aerospace (Mr. Steiner) and 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 regularly reviews and adjusts the base salaries of the CEO and the other named executive officers. Its determination regarding the CEO is subject to the Board's ratification and 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 Meridian, AonHewitt, Towers Watson 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 base salary adjustment 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.

Amounts paid to the named executive officers in respect of their 2013 base salaries are shown in the Summary Compensation Table that follows this Compensation Discussion and Analysis. At the request of the CEO, the Committee has elected to defer any 2014 salary increases for the named executive officers until at least July 1, 2014 due to uncertain business conditions.

Annual Cash Incentive Awards. Our annual cash incentive award plans are designed to reward employees for financial and operational performance that drives shareholder value and focus our organization on meeting or exceeding designated individual goals. The plans provide employees, including our named executive officers, with the opportunity to earn cash awards based on the degree to which the Company achieves pre-determined performance measures for the year. Amounts paid to our named executive officers under our annual cash incentive plans are intended to qualify as "performance-based compensation" under Section 162(m) of the Code.

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).

Individual Award Opportunities. The Committee establishes the target annual cash incentive award opportunity for each named executive officer using the independent compensation 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 2013 target performance award opportunity for each named executive officer was as follows:

Named Executive Officer 2013 Target Award
Opportunity Expressed as %
of Actual Base Salary
Neal J. Keating 105 %
Robert D. Starr 60%
William C. Denninger 65 %
Gregory L. Steiner 65 %
Steven J. Smidler 65 %
Ronald M. Galla 55 %
Shawn G. Lisle 55 %

Corporate Named Executive Officers. The 2013 annual cash incentive awards for Messrs. Keating, Starr, Denninger, Galla and Lisle were determined solely by comparing the Company's degree of achievement with respect to the following performance factors, as compared against the benchmark indicated:

Performance Measure Benchmark Weighting
Actual return on investment Russell 2000 index for 2008 - 2012 33 %
Growth in earnings per share (fully diluted) Russell 2000 index for 2008 - 2012 33 %
Actual earnings per share (fully diluted) 2013 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 provides a better comparison than just one year. During 2013, the Committee re-evaluated the continued appropriateness of the five-year time-frame 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 approximately the June 2014 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 in the top quartile, or above, 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 the median, and above the 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 modified earnings per share meets at least 70% of the business plan projection, a 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.

For 2013, the Committee based annual incentive awards on the Company's modified financial performance for 2013 (actual results modified as per original award opportunity to exclude the impact of costs relating to acquisitions). The following tables show the relationship between the Company's 2013 modified 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. As set forth below, the Company's 2013 modified return on investment and growth in adjusted earnings per share results compared favorably to the Russell 2000, and modified earnings per share was 92.2% of the business plan projection, resulting in an overall corporate performance factor of 128.6%.

BENCHMARK 5 YEAR RUSSELL 2000 PERFORMANCE: 2008 - 2012
25th Percentile Median 75th Percentile
Compounded EPS Growth (8.4)% 2.9% 14.0%
Average Return on Investment (3.9)% 2.8% 8.1%
COMPANY PERFORMANCE VS. PLAN
Earnings per Share (fully diluted)
2012 Actual 2013 Plan 2013 Actual 2013 Modified
$ 2.03 $ 2.31 $ 2.10 $ 2.13
ANNUAL INCENTIVE AWARD CALCULATIONS
2013
Modified Results*
Median
Return For
Prior 5-Year
Period -
Russell 2000
Percentage
Of Factor Earned
Weighting
Factor
% Of
Target Award**
Return on Investment 7.3% 2.8% 184.9% 33% 61.0%
Growth In Earning per share 4.9% 2.9% 118.0% 33% 38.9%
Actual versus projected Earnings per share performance 92.2% N/A 84.4% 34% 28.7%
Corporate Performance Factor 128.6%
_______________

* The 2013 Modified Results shown in each of the preceding tables are based on the following reconciled diluted earnings per share and invested capital amounts:

Reconciliation of Diluted Earnings Per Share and Invested Capital
Modified Earnings: In Millions Per Diluted Share
Reported Earnings $57.1 $2.10
Acquisition Costs, net of tax $0.7 $0.03
Net Adjustments to Earnings $0.7 $0.03
Modified Earnings $57.8 $2.13
Modified Invested Capital:
Reported Shareholders' Equity $511.3
Total Reported Debt $275.2
Total Reported Invested Capital $786.5
Acquisition Costs, net of tax $0.7
Modified Invested Capital $787.2

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

The following are the total annual cash incentive awards earned for calendar year 2013 for each of the Corporate named executive officers:

Named Executive Officer 2012 Cash
Incentive
Award
Incentive Award
Expressed as a
Percentage of
Base Salary
Neal J. Keating $1,181,513 135%
Robert D. Starr $226,336 77.6%
William C. Denninger(1) $211,065 83.6%
Ronald M. Galla $251,186 70.7%
Shawn G. Lisle $212,190 70.7%
_______________
  1. Pro-rated for performance through June 30, 2013, the date on which Mr. Denninger retired from the Company.

Aerospace Segment Named Executive Officers. The 2013 annual cash incentive award for Mr. Steiner, President of our Aerospace segment, was calculated based 25% on corporate performance and 75% on predetermined financial goals for this business segment as recommended by the CEO and adopted by the Committee, which excludes the impact of the segment's investment in the India joint venture. The financial performance goals and their weighting for this business segment were:

Financial Performance Goal Weighting
Actual average return on investment vs. target 20%
Growth in segment sales from prior year 30%
Growth in segment operating profit from prior year 40%
Segment controllable cash flow vs. Plan 10%

Target return on investment performance is the average return on investment for the three previous calendar years (i.e., the average of 2010, 2011, and 2012 for the 2013 performance year). The segment controllable cash flow represents cash flow that is controlled by the segment and does not include the effect of income taxes. Therefore, the starting point is operating income, rather than net earnings, and ignores the impact of income tax expense and changes in income tax assets and liabilities.

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%
116 120%
132 140%
148 160%
164 180%
180 & Above 200%

Interpolation is used to determine payments if the number of points falls between two stated levels of total points set forth in the table.

The table below illustrates the performance parameters and calculation method used to determine Mr. Steiner's 2013 annual cash incentive payment. Mr. Steiner earned 80.1 points based on actual 2013 business segment results as measured against the described financial goals. Given the weightings described above, 2013 financial performance by the Aerospace segment resulted in a correlating performance factor of 60.2% out of a maximum of 200%.

Segment Sales
(in millions)
Segment Operating Income
(in millions)
Segment Controllable Cash Flow
(in millions)
2012 2013 % Growth 2012 2013 % Growth 2013 Plan 2013 Actual % Achieved
$ 580.8 $ 614.0 5.7% $ 89.1 $ 102.6 15.1% $ 102.4 $ 78.0 76.2%
Target Performance % Points Earned Target Range
Actual vs Target ROI* (3-Year Avg.) 19.6% 110.2% 19.3 50% = 0 112.5% = 20 130.0% = 40
Growth in Operating Income 15.0% 15.1% 40.8 2.5% = 0 15.0% = 40 20.0% = 80
Growth in Segment Sales 9.0% 5.7% 14.8 2.5% = 0 9.0% = 30 15.0% = 60
Controllable Cash Flow vs Plan 100.0% 76.2% 5.2 50% = 0 100.0% = 10 120.0% = 20
80.1 100 200

* 2013 target and actual average ROI is calculated based on operating income and average investment, modified to exclude certain long-term investments made in 2013. 2013 actual average ROI was 21.6%.

Since 25% of Mr. Steiner's annual cash incentive award is based on Corporate's performance, Mr. Steiner's annual cash incentive award factor is 77.4%. Set forth below is the total annual cash incentive award earned for calendar year 2013 for Mr. Steiner:

Named Executive Officer 2013 Cash
Incentive
Award
Incentive Award
Expressed as a
Percentage of
Base Salary
Gregory L. Steiner $209,365 50.3%

Distribution Segment Named Executive Officers. The 2013 annual cash incentive award for Mr. Smidler, President of our Distribution segment, was calculated based 25% on corporate performance and 75% on predetermined financial goals for this business segment as recommended by the CEO and adopted by the Committee, which excludes certain long-term capital investments. The financial performance goals and their weighting for this business segment were:

Financial Performance Goal Weighting
Actual average return on investment vs. target 30%
Growth in segment sales from prior year 20%
Growth in segment operating profit from prior year 40%
Segment controllable cash flow vs. Plan 10%

Target return on investment performance is the average return on investment for the three previous calendar years (i.e., the average of 2010, 2011, and 2012 for the 2013 performance year). The segment controllable cash flow represents cash flow that is controlled by the segment and does not include the effect of income taxes. Therefore, the starting point is operating income, rather than net earnings, and ignores the impact of income tax expense and changes in income tax assets and liabilities.

The total number of points is then converted into a percentage of the target award, using the conversion chart set forth on the preceding page.

The following table illustrates the performance parameters and calculation method used to determine Mr. Smidler's 2013 annual cash incentive payment. Mr. Smidler earned 0% of his target award based on actual 2013 business segment results as measured against predetermined financial goals.

Segment Sales
(in millions)
Segment Operating Income
(in millions)
Segment Controllable Cash Flow
(in millions)
2012 2013 % Growth 2012 2013 % Growth 2013 Plan 2013 Actual % Achieved
$1,012.1 $1,067.9 5.5% $50.5 $43.3 (14.3)% $40.5 $27.7 68.5%
Target Performance % Points Earned Target Range
Actual vs Target ROI* (3-Year Avg.) 18.1% 69.1% 11.5 50% = 0 100% = 30 125% = 60
Growth in Operating Income 15% (14.3)% 0 2.5% = 0 15% = 40 25% = 80
Growth in Segment Sales 10% 5.5% 8.0 2.5% = 0 10% = 20 15% = 40
Controllable Cash Flow vs Plan 100% 68.5% 3.7 50% = 0 100% = 10 115% = 20
23.2 100 200

* 2013 target and actual average ROI is calculated based on operating income and average investment from continuing operations and excludes the Distribution segment's Canadian operations, which were disposed in 2012. 2013 actual average ROI of 12.5% was modified to exclude certain long-term investments made in 2013.

Since 25% of Mr. Smidler's annual cash incentive award is based on Corporate's performance, Mr. Smidler's annual cash incentive award factor is 32.2%. Set forth below is the total annual cash incentive award earned for calendar year 2013 for Mr. Smidler:

Named Executive Officer 2013 Cash
Incentive
Award
Incentive Award
Expressed as a
Percentage of
Base Salary
Steven J. Smidler $73,292 20.9%

Long-Term Incentives. The Committee uses cash-based awards under the long-term incentive features of the Company's stock incentive plans ("LTIP awards") in order 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 established at the beginning of the performance period. 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 stock ownership guidelines, in which case, up to one-third of the earned award may 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 received stock options and restricted stock grants instead of LTIP awards. 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. 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.

In 2013, the Committee granted LTIP awards for the 2013-2015 performance period to Messrs. Keating, Denninger, Steiner, Smidler, Galla and Lisle. Because Mr. Lisle first became eligible to receive LTIP awards during 2013, the Committee also granted him a one-year LTIP award for the 2013 performance period and a two-year LTIP award for the 2013-2014 performance period. When approving these awards, the Committee determined that the award criteria would be based on the Company's actual financial performance for the performance period after excluding costs relating to acquisitions and certain long-term capital investments and after making certain other adjustments approved by the Committee. The award opportunities for the named executive officers for the 2013-2015 LTIP performance period are as follows:

TARGET AWARDS FOR 2013-2015 LTIP PERFORMANCE CYCYLE
Named Executive Officer 2013 Base Salary(1) Target Award Opportunity as a % of Base Salary Target Award(2)
Neal J. Keating $850,000 275% $2,337,500
Robert D. Starr (3) โ€” โ€” โ€”
William C. Denninger(4) $505,000 150% $757,500
Gregory L. Steiner $410,000 150% $615,000
Steven J. Smidler $345,000 150% $517,500
Ronald M. Galla $348,598 90% $313,738
Shawn G. Lisle (5) $285,000 90% $256,500
________________
  1. Reflects base salary as of the date of grant.
  2. Reflects estimated value of LTIP awards at 100% of target.
  3. Mr. Starr did not receive an LTIP award for the 2013-2015 performance cycle.
  4. Mr. Denninger's actual LTIP award payout will be prorated to reflect his retirement effective as of June 30, 2013.
  5. The target award opportunities for Mr. Lisle's one-year LTIP award for the 2013 performance cycle and two-year LTIP award for the 2013-2014 performance cycle were also valued at 90% of his base salary.

The Committee used the following performance measures and weightings for the LTIP awards set forth above, 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 2013, the Committee reviewed the weighting of these performance factors and determined that the relative weightings for future grants would be as follows:

Performance Factor Weighting
Three-year average return on investment 33%
Average annual compounded growth in earnings per share 33%
Three-year total return to shareholders 34%

The financial measures and target performance factors used in the estimated calculation for the 2011 - 2013 performance period are as follows:

Three-year average return on investment. Our three-year average return on total investment is 8.1%, which represents the average for the three-year performance period 2011 - 2013 shown in the following table. The Company defines total investment (capitalization) as total shareholders' equity plus total long-term bank debt (including current portion). Return on investment is net earnings divided by total investment as follows:

(In Millions)
2013 2012 2011
Net Earnings $57.1 $55.0 $51.1
Total Equity $511.3 $420.2 $373.1
Total Debt $275.2 $259.6 $205.2
Total Capitalization $786.5 $679.8 $578.3
Return on investment 7.3 % 8.1 % 8.8 %

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:

2008 2009 2010 3 Year
Average
2011 2012 2013 3 Year
Average
EPS $1.49 $0.97 $1.36 $1.27 $1.93 $2.07 $2.10 $2.03

Average Compounded Annual Growth = ($2.03 รท $1.27)1/3 - 1 = 16.9%.

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 2011 - 2013 was 44.3%.

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 contrast, 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, 2013 through December 31, 2015 are shown in the "Grant of Plan-Based Awards in 2013 Fiscal Year" table on page 38.

The financial measures and target performance factors used to calculate Mr. Lisle's one-year 2013 LTIP award are the same performance measures and weightings used for the three-year 2013-2015 awards discussed above, except that, in granting the one-year 2013 LTIP award, the Committee approved the use of modified financial performance factors excluding the impact of costs relating to acquisitions and certain long-term capital investments. For this award, the growth in earnings per share is 4.9% based on the modified earnings per share of $2.13 with a return on investment of 7.3% and a total shareholder return of 9.9%. The modified earnings per share is based on the same adjustments used to calculate the 2013 Annual Cash Incentive Award for the Corporate named executive officers, which is discussed on page 27.

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, 2011 - December 31, 2013 are not yet determinable and are not reflected in the Summary Compensation Table. The Company will disclose actual payments for the performance period when they are made by filing a Current Report on Form 8-K.

Retirement Benefits. The Company sponsors a tax-qualified defined contribution plan (the "401(k) plan"), in which our 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 generally 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. Participants in the 401(k) plan are always vested in their own contributions. Employer-matching contributions vest when a participant acquires three years of service with the Company.

Our named executive officers are also 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. In addition, the Company makes supplemental deferred compensation contributions to eligible participants equal to 10% of the amount by which a participant's compensation exceeds the maximum allowable compensation limit for purposes of a tax-qualified plan, which for 2013 was $250,000. The supplemental deferred compensation earned by our named executive officers in 2013 is included in the "All Other Compensation" section of the Summary Compensation Table on page 36. Participant accounts under the Deferred Compensation Plan are credited with interest at a rate equal to 120% of the applicable federal long-term rate 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 42.

Finally, some of our named executive officers have accrued benefits under a Supplemental Employee's Retirement Plan (SERP), which is now closed to new participants. The SERP generally provides benefits that the Company was unable to provide under a tax qualified defined benefit pension plan due to federal tax law limits. See the discussion under the heading "Pension Benefits" beginning on page 41 for more information about the SERP.

Other Benefits. The Company provides relatively few perquisites for our named executive officers, consisting primarily of a vehicle allowance, an annual physical examination and executive life insurance. The Summary Compensation Table provides information regarding the incremental cost of perquisites for the named executive officers for 2013.

Employment Agreements and Change in Control Arrangements

The Company currently has employment agreements with Messrs. Keating, Steiner, Smidler and Galla and change in control agreements with each of our named executive officers, except for Mr. Denninger whose change in control agreement terminated upon the effective date of his retirement. Mr. Denninger also had an employment agreement until he retired from the Company. The terms and conditions of the agreements are described beginning on page 43.

The Committee has entered into employment agreements with certain named executive officers in order to encourage valuable and talented executives to remain with the Company, discourage competitors from attempting to hire those executives, and 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 employment agreements and change in control agreements with Mr. Keating (and with Mr. Denninger until he retired from the Company) 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. The Committee intends to establish a claw-back policy for all executive officers after the SEC issues final rules and the New York Stock Exchange issues listing conditions for the recovery of incentive compensation as required under the Dodd-Frank Act.

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 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 three times their current annual cash retainer. For 2013, the stock ownership requirement was $180,000, based on an annual cash retainer of $60,000. Directors who do not meet the ownership guidelines must hold shares received pursuant to their annual equity grants (net of any shares used to satisfy income tax withholding requirements) for a period of three years or until the guidelines are met, whichever is earlier.

The stock ownership guidelines for senior management require all covered executives to retain shares having a value equal to one-third of the net after-tax value of any equity award granted under the Company's equity-based compensation plans, until they achieve and continue to maintain the following stock ownership levels:

President and CEO 3 times salary
Participants in the LTIP 2 times salary
All Other Corporate Officers 1 times salary

The Committee reviews the stock ownership levels of executives subject to these guidelines on a quarterly basis, and the Corporate Governance Committee reviews the stock ownership levels of all non-employee Directors. In determining whether the guidelines have been achieved at any particular point, exercisable stock options are not included and the price of the Company's stock is 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, 2013, was $39.73 and was used for the final determination of compliance for 2013.

As of December 31, 2013, each named executive officer other than Messrs. Starr and Lisle, and each non-employee Director other than Mr. Kuechle, had achieved their targeted stock ownership amounts. Messrs. Starr and Lisle are new to their respective positions, and the Committee has determined that they are progressing satisfactorily toward their respective guidelines. Mr. Kuechle was first elected to the Board during 2013, and he too is progressing satisfactorily toward his applicable ownership guideline. For more information about the stock holdings of our Directors and named executive officers, please see "Stock Ownership of Directors and Executive Officers" on page 16 above.

Risk Assessment of Compensation Policies and Practices

During 2013, management, including the Company's Internal Audit Department, reviewed existing incentive compensation programs in which executives who are not named executive officers participate in order to confirm that such programs do not create risks that are reasonably likely to have a material adverse effect on the Company. Incentive compensation programs exist at our corporate headquarters and at both the Aerospace and Distribution segments and no particular business carries a significant portion of the Company's overall risk profile. Stock incentive awards are also available under the Company's incentive compensation plans for executives recommended by senior management at each business segment and at our corporate headquarters. These awards are determined based upon parameters developed by the Personnel & Compensation Committee's independent compensation consultant and all awards are reviewed and approved by the Personnel & Compensation Committee. The cash incentive compensation program for corporate executives is subject to performance parameters and dollar limitations with supervisor recommendations reviewed and approved by the Senior Vice President - Human Resources and Chief Human Resources Officer and the Chief Executive Officer. Cash incentive programs at the Aerospace segment tend to be discretionary in nature with review and approval of all recommendations by the division senior management as well as the Aerospace segment President. Cash incentive programs at the Distribution segment tend to be based upon degree of attainment of specific financial performance goals which, overall, are developed on a basis consistent with the segment's longer-term financial goals. These programs are subject to review by the segment's chief human resources officer and the segment President. On the basis of this review, management has concluded that the Company's existing incentive programs applicable to non-named executive officers do not create risks that are reasonably likely to have a material adverse effect on the Company.

Short Sales, Hedging and Pledging

The Company's Insider Trading Policy expressly prohibits Directors, executive officers and other designated employees from engaging in short-term or speculative transactions in Company securities, including, among others, (i) short sales of Company securities; (ii) publicly traded options, puts, calls or other similar derivative securities; (iii) hedging or similar monetization transactions, such as zero-cost collars and forward sale contracts; and (iv) holding Company securities in a margin account or pledging Company securities as collateral for a loan.

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. The Committee generally intends that short and long-term cash incentive awards qualify for this exemption, but, in particular instances, the Committee may authorize compensation that may not be deductible due to this limitation, such as time-based restricted stock awards and bonuses for individual performance based on subjective determination of performance. Shareholders approved the 2013 Management Incentive Plan on April 17, 2013, thereby allowing the Committee to continue to provide incentive compensation that will qualify for favorable tax treatment.

Context of This Discussion

To the extent that the foregoing discussion contained future individual or Company performance targets and goals, they were disclosed solely to facilitate a better understanding of the Company's executive compensation program. Such performance targets and goals should not be deemed to be statements of management's expectations or estimates of results or other guidance. We strongly encourage investors not to apply these statements in other contexts.

Personnel & Compensation Committee Report

The Personnel & Compensation 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, 2013.

Personnel & Compensation Committee

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 Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such statutes, except to the extent that the Company specifically incorporates the report by reference therein.