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Horace Mann Educators DEF 14A 2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant x Filed by a Party other than the Registrant ¨ Check the appropriate box:
Horace Mann Educators Corporation (Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box):
HORACE MANN EDUCATORS CORPORATION 1 Horace Mann Plaza Springfield, Illinois 62715-0001 ANNUAL MEETINGMay 21, 2008 Dear Shareholder: You are cordially invited to attend the Annual Meeting of your corporation to be held at 9:00 a.m. Central Daylight Saving Time on Wednesday, May 21, 2008 at the President Abraham Lincoln Hotel & Conference Center, 701 East Adams Street, Springfield, Illinois. We will present a report on Horace Manns current affairs and Shareholders will have an opportunity for questions and comments. We encourage you to read the proxy statement and vote your shares as soon as possible. You may vote via the Internet, by telephone or by completing and returning a proxy card. Specific voting instructions are set forth in the Proxy Statement, the Notice of Internet Availability of Proxy Materials and the proxy card. You may revoke your voted proxy at any time prior to the meeting or vote in person if you attend the meeting. We look forward to seeing you at the meeting. If you vote by proxy and do not plan to attend, let us know your thoughts about Horace Mann either by letter or by comment on the proxy card.
Springfield, Illinois April 9, 2008
HORACE MANN EDUCATORS CORPORATION 1 Horace Mann Plaza Springfield, Illinois 62715-0001 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The approximate availability date of the Proxy Statement and the accompanying proxy card is April 9, 2008. Your vote is important. Whether or not you plan to attend the Annual Meeting, the Board of Directors urges you to vote via the Internet, by telephone or by returning a proxy card. If you vote via the Internet or by telephone, do not return your proxy card. You may revoke your proxy at any time before the vote is taken at the Annual Meeting provided that you comply with the procedures set forth in the Proxy Statement which accompanies this Notice of Annual Meeting of Shareholders. If you attend the Annual Meeting, you may either vote by proxy or revoke your proxy and vote in person.
Table of Contents
GENERAL INFORMATION This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (the Board) of Horace Mann Educators Corporation (HMEC or the Company) of proxies from holders of the Companys common stock, par value $.001 per share (Common Stock). The proxies will be voted at the Annual Meeting of Shareholders to be held on Wednesday, May 21, 2008 at 9:00 a.m. Central Daylight Saving Time at the President Abraham Lincoln Hotel & Conference Center, 701 East Adams Street, Springfield, Illinois and through any adjournment or postponement thereof (the Annual Meeting). The mailing address of the Company is 1 Horace Mann Plaza, Springfield, Illinois 62715-0001 (telephone number 217-789-2500). This Proxy Statement and the accompanying proxy card are being first transmitted to shareholders of the Company (Shareholders) on or about April 9, 2008. The Board has fixed the close of business on March 26, 2008 as the record date (the Record Date) for determining the Shareholders entitled to receive notice of and to vote at the Annual Meeting. At the close of business on the Record Date, an aggregate of 40,623,637 shares of Common Stock were issued and outstanding, each share entitling the holder thereof to one vote on each matter to be voted upon at the Annual Meeting. The presence, in person or by proxy, of the holders of a majority of such outstanding shares is necessary to constitute a quorum for the transaction of business at the Annual Meeting. The Company, through bankers, brokers or other persons, also intends to make a solicitation of beneficial owners of Common Stock. At the Annual Meeting, Shareholders will be asked to (1) elect nine Directors to hold office until the next Annual Meeting of Shareholders and until their respective successors have been duly elected and qualified and (2) ratify the appointment of KPMG LLP, an independent registered public accounting firm, as the Companys auditors for the year ending December 31, 2008. Shareholders may also be asked to consider and take action with respect to such other matters as may properly come before the Annual Meeting. Copies of the Companys Annual Report on Form 10-K for the year ended December 31, 2007, including the Companys audited consolidated financial statements, were made available to known Shareholders on or about April 9, 2008. Electronic Access to Proxy Materials and Annual Report The Securities and Exchange Commission (SEC) has adopted a Notice and Access rule that allows companies to deliver a Notice of Internet Availability of Proxy Materials (Notice) to Shareholders in lieu of a paper copy of the proxy statement and related materials and the Companys Annual Report to Shareholders and Form 10-K (together the Proxy Materials). This Proxy Statement and the Companys 2007 Annual Report to Shareholders and Form 10-K are available on the Companys Web site at www.horacemann.com under Investors. Shareholders can elect to receive an e-mail message that will provide a link to those documents on the Internet. By opting to access your Proxy Materials via the Internet, you will save the Company the cost of producing and mailing documents to you, reduce the amount of mail you receive and help preserve environmental resources. Shareholders who have enrolled previously in the electronic access service will receive their Proxy Materials online this year. Shareholders of record may enroll in the electronic Proxy Materials access service for future Annual Meetings by registering online at www.proxyvote.com. Street name shareholders who wish to enroll for electronic access should review the information provided in the Proxy Materials mailed to them by their bank or broker.
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How to Vote
If you vote via the Internet or by telephone, your electronic vote authorizes the named proxies in the same manner as if you signed, dated and returned your proxy card. If you vote via the Internet or by telephone, do not return your proxy card. If your shares are held in street name (that is, in the name of a bank, broker or other holder of record), you will receive instructions from the holder of record that you must follow in order for your shares to be voted. Internet and/or telephone voting also will be offered to Shareholders owning shares through most banks and brokers. Participants in the Companys stock funds within the Companys Supplemental Retirement and Savings (401(k)) Plan can direct the trustee to vote their shares via the Internet as directed in the Notice, by telephone as provided on the Web site or proxy card, or by signing and returning a proxy card. Solicitation and Revocation The accompanying proxy is solicited by and on behalf of the Board. The persons named in the Form of Proxy have been designated as proxies by the Board. Such persons are Directors of the Company. Shares of Common Stock represented at the Annual Meeting by a properly executed and returned proxy will be voted at the Annual Meeting in accordance with the instructions noted thereon, or if no instructions are noted, the proxy will be voted in favor of the proposals set forth in the Notice of Annual Meeting. A submitted proxy is revocable by a Shareholder at any time prior to it being voted, provided that such Shareholder gives written notice to the Corporate Secretary at or prior to the Annual Meeting that such Shareholder intends to vote in person or by submitting a subsequently dated proxy. Attendance at the Annual Meeting by a Shareholder who has given a proxy shall not in and of itself constitute a revocation of such proxy. Further solicitation may be made by officers and other employees of the Company personally, by phone or otherwise, but such persons will not be specifically compensated for such services. Banks, brokers, nominees and other custodians and fiduciaries will be reimbursed for their reasonable out-of-pocket expenses in forwarding soliciting material to their principals, the beneficial owners of Common Stock. The costs of soliciting proxies will be borne by the Company. It is estimated these costs will be nominal. Shareholder Approval Shareholders are entitled to one vote per share of Common Stock on all matters submitted for consideration at the Annual Meeting. The affirmative vote of a majority of the shares of Common Stock represented in person or by proxy at the Annual Meeting is required for the election of Directors and the ratification of the appointment of KPMG LLP as the Companys independent registered public accounting firm for the year ending December 31, 2008. Abstentions may not be specified with regard to the election of Directors. On other matters, abstentions have the same effect as a vote against approval of the matter.
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Please note that under the rules of the New York Stock Exchange (NYSE) brokers who hold shares of Common Stock in street name for customers have the authority to vote on certain items when they have not received instructions from beneficial owners. With respect to the matters to come before the Annual Meeting, if brokers are not entitled to vote without instructions and therefore cast broker non-votes, that will not affect the outcome of such matters. Other Matters Other than the matters set forth below, the Board has not received any Shareholder proposal by the deadline prescribed by the rules of the SEC, and otherwise knows of no other matters to be brought before the Annual Meeting. However, should any other matters properly come before the meeting, the persons named in the accompanying Form of Proxy will vote or refrain from voting thereon at their discretion. Proposal No. 1 - Election of Nine Directors The By-Laws of the Company provide for the Company to have not less than five nor more than fifteen Directors. The following nine persons currently are serving as Directors of the Company: Mary H. Futrell, Stephen J. Hasenmiller, Louis G. Lower II, Joseph J. Melone, Jeffrey L. Morby, Charles A. Parker, Gabriel L. Shaheen, Roger J. Steinbecker and Charles R. Wright. The terms of the current Directors expire at the Annual Meeting. Upon the recommendation of the Nominating & Governance Committee, the Board has nominated Dr. Futrell, Mr. Hasenmiller, Mr. Lower, Mr. Melone, Mr. Morby, Mr. Parker, Mr. Shaheen, Mr. Steinbecker and Mr. Wright (the Board Nominees) to hold office as Directors. The Nominating & Governance Committee has specifically found that Mr. Melone, although 76 years of age, should remain able to stand for re-election based on his expertise and experience. The proxies solicited by and on behalf of the Board will be voted FOR the election of the Board Nominees unless such authority is withheld as provided in the proxy. The Company has no reason to believe that any of the foregoing Board Nominees is not available to serve or will not serve if elected, although in the unexpected event that any such Board Nominee should become unavailable to serve as a Director, full discretion is reserved to the persons named as proxies to vote for such other persons as may be nominated. Each Director will serve until the next Annual Meeting of Shareholders and until his or her respective successor is duly elected and qualified. Board Nominees The following information, as of March 26, 2008, is provided with respect to each Board Nominee:
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All of the Board Nominees, except for Gabriel L. Shaheen and Charles R. Wright, were elected Directors at the last Annual Meeting of Shareholders of the Company held on May 23, 2007. Mr. Shaheen and Mr. Wright were elected as Directors by the Board on September 11, 2007. The Board recommends that Shareholders vote FOR the election of these nine nominees as Directors. Proposal No. 2 - Ratification of Independent Registered Public Accounting Firm The independent registered public accounting firm selected by the Audit Committee of the Board to serve as the Companys auditors for the year ending December 31, 2008 is KPMG LLP. KPMG LLP served in that capacity for the year ended December 31, 2007. A representative from KPMG LLP is expected to be present at the Annual Meeting. The representative will be given an opportunity to make a statement to Shareholders and is expected to be available to respond to appropriate questions from Shareholders. The Board recommends that Shareholders vote FOR the ratification of KPMG LLP, an independent registered public accounting firm, as the Companys auditors for the year ending December 31, 2008.
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EXECUTIVE OFFICERS Set forth below is certain information, as of March 26, 2008, with respect to certain executive officers of the Company and its subsidiaries who are not Directors of the Company (together with Louis G. Lower II, President and Chief Executive Officer, who is discussed above, the Executive Officers):
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BOARD OF DIRECTORS AND COMMITTEES There were nine members on the Board as of March 26, 2008. The Board met seven times during 2007. No Director of the Company attended fewer than 75% of the Board meetings and the committee meetings to which he or she was appointed and served during 2007. The Chairman of the Board presides over all executive sessions of the Board, including executive sessions of non-management Directors, and may be contacted as described in Communications with Directors or as detailed at www.horacemann.com, under InvestorsCorporate Governance. The Companys Corporate Governance Principles provide that the Board consist of a majority of directors who meet the criteria for independence required by the listing standards of the NYSE, as set forth in the NYSEs Rule 303A.02. Based on the independence requirements of the NYSE and after reviewing any relationships between the Directors and the Company or its management (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company or its management) that could impair, or appear to impair, the Directors ability to make independent judgments, the Board determined that none of its non-employee Directors have a material relationship with the Company, and therefore all of these Directors are independent. This independence question is analyzed annually in both fact and appearance to promote arms-length oversight. The non-employee Directors are Dr. Futrell, Mr. Hasenmiller, Mr. Melone, Mr. Morby, Mr. Parker, Mr. Shaheen, Mr. Steinbecker and Mr. Wright. Committees of the Board The standing committees of the Board consist of the Executive Committee, Compensation Committee, Nominating & Governance Committee, Investment & Finance Committee and Audit Committee. Each standing committee is governed by a charter which defines its role and responsibilities and which is available on the Companys Web site at www.horacemann.com, under InvestorsCorporate Governance. A printed copy of these charters may
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be obtained by Shareholders upon written request, addressed to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, C-120, Springfield, Illinois 62715-0001. The Board may also form ad hoc committees from time to time. The Executive Committee exercises certain powers of the Board during intervals between meetings of the Board and, as requested by the Chief Executive Officer, acts as a sounding board for discussing strategic and operating issues. The current members of this committee are Mr. Melone (Chairman), Mr. Lower, Mr. Morby, Mr. Parker and Mr. Steinbecker. The Executive Committee did not meet during 2007. The Compensation Committee reviews, approves and recommends the compensation of Executive Officers and Directors of the Company. The current members of this committee are Mr. Parker (Chairman), Dr. Futrell, Mr. Melone and Mr. Wright and each is independent under the listing standards of the NYSE. The Compensation Committee met five times during 2007. The Compensation Committee approves, and, in certain instances, recommends to the Board the salaries, bonuses, benefit plans and awards applicable to the Executive Officers and members of the Board. The Compensation Committee receives recommendations from management and has unrestricted access to the Companys personnel documents and to reports or evaluations of any independent specialists or advisors who are retained by the Company or the Compensation Committee to analyze the compensation, pension and other benefits of the Executive Officers and members of the Board. The Compensation Committee also has access to any other resources which it needs to discharge its responsibilities, including selecting, retaining and/or replacing, as needed, compensation and benefits consultants and other outside consultants to provide independent advice to the Compensation Committee. Additional information regarding the processes and procedures for the consideration and determination of Executive Officer and Director compensation is provided in Executive CompensationCompensation Discussion and Analysis. The Nominating & Governance Committee oversees succession planning and executive continuity issues relating to the senior management of the Company, including the Chief Executive Officer, and also recommends Director nominees to the Board. The Nominating & Governance Committee will consider Director nominees recommended by Shareholders. Nominations may be submitted in writing to Ann M. Caparrós, Corporate Secretary, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001 not later than January 2, 2009 in order for such proposal to be considered for inclusion in the Companys Proxy Statement and proxy relating to the 2009 Annual Meeting of Shareholders. There are no differences between the evaluation of nominees recommended by Shareholders and the evaluation of nominees recommended by members of the Nominating & Governance Committee. The Committee evaluates possible nominees to the Board on the basis of the factors it deems relevant, including the following:
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The Nominating & Governance Committee also develops and recommends to the Board corporate governance principles applicable to the Company. The current members of this committee are Mr. Melone (Chairman), Dr. Futrell, Mr. Hasenmiller, Mr. Parker and Mr. Wright and each is independent under the listing standards of the NYSE. The Nominating & Governance Committee met four times during 2007. The Investment & Finance Committee approves investment strategies, monitors the performance of investments made on behalf of the Company and its subsidiaries, and oversees issues and decisions relating to the Companys capital structure. The current members of this committee are Mr. Morby (Chairman), Mr. Hasenmiller, Mr. Lower, Mr. Parker, Mr. Shaheen and Mr. Steinbecker. The Investment & Finance Committee met four times during 2007. The Audit Committee oversees the accounting and financial reporting process, audits of the financial statements and internal operating controls of the Company. It meets with both the Companys management and the Companys independent registered public accounting firm. The current members of this committee are Mr. Steinbecker (Chairman), Mr. Hasenmiller, Mr. Morby and Mr. Shaheen and each is independent under the listing standards of the NYSE. No Audit Committee member serves on the audit committee of more than three other publicly traded companies. The Audit Committee met 12 times during 2007. The Board has determined that Mr. Steinbecker is a financial expert. Mr. Steinbecker retired in 2001 after a 35 year career with PricewaterhouseCoopers LLP where he was the partner responsible for the audits of many national and international companies, served as leader of the firms Southeast Regions consumer and industrial products business segment, and was managing partner of their Philadelphia and Denver practices. Report of the Audit Committee of the Board of Directors The Audit Committee oversees the Companys financial reporting process on behalf of the Board of Directors acting under a written charter which is provided as Appendix A to this Proxy Statement. The Audit Committee is composed of four Directors, each of whom is independent as defined by the New York Stock Exchange listing standards. Management has the primary responsibility for the Companys financial statements and its reporting process, including the Companys systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements in the Annual Report on Form 10-K with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and clarity of disclosures in the financial statements. The Audit Committee has discussed with our independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited consolidated financial statements with U.S. generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Companys accounting principles and such other matters as are required by Statement on Auditing Standards No. 61 (Communication with Audit Committees). In addition, the Audit Committee has received from the independent registered public accounting firm the written disclosures required by Independence Standards Board No. 1 (Independence Discussions with Audit Committees) and discussed with them their independence from the Company and its management taking into account the potential effect of any non-audit services provided by the independent registered public accounting firm. The Audit Committee discussed with the Companys internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and the independent registered public accounting firm, with and without management present, to discuss the results of their audits, their evaluations of the Companys internal controls, and the overall quality of the Companys financial reporting. The Audit Committee held 12 meetings during 2007. In reliance on the reviews and discussions referred to above, the Audit Committee approved that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31,
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2007 for filing with the SEC. The Audit Committee approved the selection of the Companys independent registered public accounting firm. AUDIT COMMITTEE ROGER J. STEINBECKER, Chairman STEPHEN J. HASENMILLER, JEFFREY L. MORBY, and GABRIEL L. SHAHEEN, Members Compensation Committee Interlocks and Insider Participation There are no Compensation Committee interlocks between the Company and other entities involving the Companys Executive Officers and Directors who serve as executive officers or directors of such other entities. During 2007, no member of the Compensation Committee was a current or former officer or employee of the Company. Director Education Each Director participates in at least one Institutional Shareholder Services accredited Director education program every two years. During 2007, Mr. Hasenmiller, Mr. Lower and Mr. Parker each participated in such programs. Director Compensation The compensation program for non-employee Directors is shown in the following table:
Non-employee Directors are required to hold shares of Common Stock in HMEC equal to two times their annual cash retainer. Until non-employee Directors meet this ownership requirement, they must retain all Common Stock
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equivalent units and restricted stock units granted as share-based compensation (net of taxes). All non-employee Directors have met the guidelines with the exception of Mr. Shaheen and Mr. Wright, who became Board members in September 2007 and have five years to meet this requirement. Employee Directors do not receive compensation for serving on the Board and are subject to separate stock ownership guidelines. See Executive CompensationCompensation Discussion and AnalysisStock Ownership and Holding Requirements. Director Compensation in 2007 The following table sets forth information regarding compensation earned by, or paid to, the non-employee Directors during 2007:
Communications with Directors The Company has established various processes to facilitate communications with the Board. Communications to non-employee Directors as a group or to the Chairman of the Board or to an individual Director may be submitted via regular mail addressed to the Board of Directors, c/o General Counsel, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-0001. Additionally, communications may be e-mailed to the Board of
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Directors, c/o the General Counsel, at hmecbofd@horacemann.com. The members of the Board are expected to be present at the Annual Meeting. The following members of the Board attended last years annual meeting of Shareholders: Dr. Futrell, Mr. Hasenmiller, Mr. Lower, Mr. Melone, Mr. Parker and Mr. Steinbecker. SPECIAL ADVISORY BOARD The Company maintains a special advisory board composed of leaders of education associations. The Company meets with the special advisory board at least annually. The education association leaders serving on the special advisory board receive a fee of $200 plus expenses for each special advisory board meeting attended. The special advisory board met one time in 2007. CODE OF ETHICS, CODE OF CONDUCT AND CORPORATE GOVERNANCE PRINCIPLES The Company has adopted a Code of Ethics and a Code of Conduct applicable to all employees, including the Chief Executive Officer, Chief Financial Officer, Controller and Directors (in their capacity as Directors of the Company). The Company has also adopted Corporate Governance Principles. The Codes and Principles are available on the Companys Web site at www.horacemann.com, under InvestorsCorporate Governance. A printed copy of the Codes and Principles may be obtained by Shareholders upon written request, addressed to Investor Relations, Horace Mann Educators Corporation, 1 Horace Mann Plaza, C-120, Springfield, Illinois 62715-0001.
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BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of shares of Common Stock by each person who is known by the Company to own beneficially more than 5% of the issued and outstanding shares of Common Stock, and by each of the Companys Directors, the Companys Chief Executive Officer, Chief Financial Officer and the other three highest compensated Executive Officers (collectively the Named Executive Officers), a recently retired Executive Officer who otherwise would have been a Named Executive Officer, and by all Directors and Executive Officers of the Company as a group. Information in the table is as of March 26, 2008, except that the number of shares of Common Stock beneficially owned by the 5% beneficial owners is as of December 31, 2007 based on information reported by such persons to the SEC. Except as otherwise indicated, to the Companys knowledge all shares of Common Stock are beneficially owned, and investment and voting power is held solely by the persons named as owners.
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Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Companys Executive Officers and Directors and other executives who beneficially own more than ten percent of the outstanding Common Stock, whom the Company refers to collectively as the Reporting Persons, to file reports of ownership and changes in ownership with the SEC. The Company has established procedures by which Reporting Persons provide relevant information regarding transactions in Common Stock to a Company representative and the Company prepares and files the required ownership reports. Based on a review of those reports and other written representations, the Company believes that, with the following 18 exceptions, there was full compliance with the reporting requirements under Section 16(a). Mr. Andrews, Ms. Caparros, Mr. Conklin, Mr. DAmbra, Mr. Hallman, Mr. Heckman, Mr. Joyner, Mr. Lower and Mr. Reynolds reported, but not on a timely basis, the March 7, 2007 acquisition (under the Long-term Incentive Plan) of stock options and deferred compensation Common Stock equivalent units and associated dividends on Form 4s. In addition, the same Executive Officers reported, but not on a timely basis, the earning of restricted stock units (under the Long-term Incentive Plan) in 2006 and 2007 and associated dividends on Form 4s. There were no late filings by non-employee Directors in 2007. Review, Approval or Ratification of Transactions with Related Persons The Board reviews issues involving potential conflicts of interest of its members and is responsible for reviewing and approving all related party transactions. The Board does not have a formal related party policy but it considers each related party transaction individually. Related Party Transactions The Company does not have any contracts or other transactions with related parties that are required to be reported under the applicable securities laws and regulations.
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Compensation Discussion and Analysis
Executive Summary This summary highlights information from this Compensation Discussion and Analysis section and may not contain all the information that is necessary to gain a full understanding of our policies and decisions. Please read the entire Compensation Discussion and Analysis section and compensation tables for a more complete understanding of our compensation program. The Compensation Committee of the Board of Directors (Committee) oversees the compensation program for our executive officers. Our programs are based on a link between pay and performance for our executive officers. Our programs include performance measures designed to drive sustained long-term shareholder value that align our executives interests with those of our shareholders. Further, our programs put a substantial portion of compensation at risk and awards are payable only in the event of performance by our executives which benefits our shareholders. Overall compensation includes base salary, annual cash incentives, long-term cash and equity incentive awards, and long-term equity awards. Incentive awards are earned upon the achievement of short-term and long-term business goals which are reviewed and approved by the Committee at the beginning of each performance period. Performance goals are structured to attain business growth while balancing that growth with productivity, profitability and capital management. Our compensation program does not include substantial non-performance based incentive compensation and the value of perquisites does not exceed $10,000 per executive officer. The Committee has and continues to place a greater emphasis on long-term equity performance incentives versus cash compensation. This has been done through a combination of stock option grants and performance-based cash and restricted share unit grants. However, beginning in 2008, the long-term incentive awards will be entirely equity based and not include a cash component. Providing incentives that facilitate stock ownership plus requiring executives to meet minimum stock ownership guidelines serves to further align our executives interest with our shareholders interests. The Committee recognizes the need to have market-competitive compensation opportunities to attract, retain, and reward high performing executive talent. Mercer, who has been the outside objective consultant to the Committee since 2004, annually benchmarks our executive compensation and compensation practices to the competitive market. Overall, our total target compensation is comparable to the market median, with above-target performance resulting in, total compensation greater than market median and below-target performance resulting in total compensation below market median. The Committee further believes that our compensation programs should reward performance that supports the Companys culture of integrity through compliance with applicable laws and regulations, our ethics policies, and our commitment to leadership and diversity. Our compensation programs are designed to reinforce these desired competencies and behaviors and recognize contributions to business success that are consistent with our core values and brand beliefs. Oversight of the Executive Compensation Program The Committee administers our executive compensation program. The members of the Committee are Dr. Futrell, Mr. Melone, Mr. Parker and Mr. Wright. Mr. Parker serves as the Committee chair. Consistent with the listing standards of the NYSE, the Committee is composed entirely of independent, non-employee Directors. A complete description of the Committees responsibilities and functions is set forth in its charter, which can be viewed on our Web site (www.horacemann.com). For additional information on the members of the Committee, see Matters to be ConsideredProposal No. 1 Election of Nine DirectorsBoard Nominees. For additional information on the structure, scope of authority, operation and availability of the charter of the Committee, see Board of Directors and CommitteesCommittees of the Board.
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The Committee has retained the services of an objective compensation consulting firm, Mercer, to provide information and advice on the competitive market for executive talent, evolving market practices in our industry and the general employment market, regulatory and other external developments, and our executive compensation philosophy and incentive program design. Mercer was selected as the consultant to the Committee due to its reputation and expertise in the compensation consulting arena and has served in this capacity since 2004. Mercer reports directly to the Committee, attends the Committee meetings and executive sessions of the Committee at the Chairs request and serves at the pleasure of the Committee. In addition, the Committee has the authority to hire other experts and advisors as it deems necessary. Mercer works with management to obtain necessary data and perspectives on the Companys strategic objectives, business environment, corporate culture, performance and other areas. This information is used by Mercer to formulate its recommendations related to compensation opportunities and design. Mercers findings and recommendations are reported directly to the Committee. The services provided by Mercer during 2007 are described in more detail throughout this analysis. Ernst & Young LLP also provides information to the Company and the Committee on matters related to health, welfare and retirement benefit programs. Management also supports the Committee by providing analysis and recommendations. When setting levels of executive compensation, the Committee requests, receives and incorporates the recommendations of the Chief Executive Officer (the CEO) regarding the performance of his direct reports and other Executive Officers. Members of the management team from the Human Resources division also attend and contribute to Committee meetings as relevant to the Committee agenda. The Committee discusses its fundamental views on compensation and guiding principles, as well as its expectations of the CEOs performance and goals, with the CEO. The Committee does not include the CEO or other members of management in the determination of the CEOs compensation. The Committee also reviews the performance and compensation for all individuals whose annual base salary is greater than $175,000 and are participants in the long-term incentive program. Guiding Principles The Committee believes it should pay and reward individual excellence and performance that leads to the attainment of the Companys goals. The Committee believes a competitive executive compensation program should attract, motivate and retain talented leaders who are critical to creating long-term shareholder value. Based on those beliefs, the Committee has established the following core principles that underlie our executive compensation program.
The Committee believes that a significant portion of an Executive Officers total compensation should be at risk. Generally, more than half of total pay for NEOs (salary plus target annual incentive plus target long-term incentives) is at risk, is variable from year to year, and demonstrates a strong link between pay and performance. See Executive Compensation ProgramOverall Mix and Structure below. 2. Compensation levels should be market competitive. The Committee believes a competitive compensation program is critical to attracting and retaining top executives. Consequently, when making compensation decisions, the Committee considers the compensation opportunities provided to similarly situated executives at comparable companies as well as how compensation is delivered (e.g., short-term vs. long-term and fixed vs. variable). The Committee reviews benchmark data from proxy statements of peer companies and survey data, and works with compensation consultants, including Mercer, to gain a clear understanding of the competitive market.
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We target compensation at the market median. If performance is superior, our executives can earn compensation that approximates the 75th percentile of the market. See Assessing Compensation Competitiveness below for a discussion of peer companies and the survey data. 3. Incentive compensation should be structured to drive long-term value creation and reward strong performance. Our executive compensation program includes significant cash-based and equity-based incentives intended to drive short-and long-term value creation. For 2007, the performance goals in our annual incentive program were tied to the annual objectives set forth in our business plan. They included earnings, revenue growth and goals for the business units as discussed in more detail under Executive Compensation ProgramOverall Mix and StructureAnnual Incentive Program and Annual Incentive Program Target Setting below. The performance goals for our non-option 2007-2008 long-term incentive awards are tied to earnings per share, total shareholder return and auto and property premium growth as discussed in more detail under Executive Compensation ProgramOverall Mix and StructureLong-term Incentive Program and Long-term Incentive Program Target Setting below. 4. Executive interests should be aligned with Shareholders. The Committee believes that it is in the best interests of the Company and its Shareholders for our executives to have a financial interest in the long-term results of their business decisions. Incentives should facilitate stock ownership and include performance measures that drive long-term sustained shareholder value. Consequently, the Company grants equity awards with multi-year vesting to encourage retention, allows deferrals of restricted stock unit awards, and maintains a deferred compensation plan that allows our executives to invest in Common Stock equivalent units. Our executives are also required to satisfy meaningful stock ownership requirements which are discussed under Stock Ownership and Holding Requirements below. We deliver approximately 50% of Mr. Lowers compensation in the form of equity awards. With respect to the other Named Executive Officers, approximately 30% to 36% of their compensation is delivered in equity. To further align the interests of management and Shareholders, the Company modified the 2007-2008 long-term incentive program to deliver at target 75% of total long-term incentive compensation in equity and will deliver at target 100% of 2008-2009 long-term incentive opportunity in equity. Assessing Compensation Competitiveness The Committee targets total direct compensation for the Named Executive Officerssalary and target annual and long-term incentive opportunitiesaround the median of the competitive market, while providing the opportunity for additional compensation if warranted by performance. To achieve this, the Committee considers the compensation provided to similarly situated executives at companies of similar size and with comparable lines of business to the Company. For the Named Executive Officers, the Committee uses only survey data. The survey data is based on similarly sized companies in the insurance industry (non-healthcare). The Committee also considers internal factors in setting compensation levels, including the individuals level of responsibility, contribution to the Company, internal pay equity and contribution to our success relative to other executives. For the CEO, the Committee reviews proxy statements for a group of peer companies for compensation paid and supplements this data with survey data. The insurance companies that comprised the peer group for assessing the CEOs compensation competitiveness for 2007 were: Amerus Group Co.; 21st Century Insurance Group; Delphi Financial Group, Inc.; State Auto Financial Corporation; Infinity Property and Casualty Corporation; Harleysville Group Inc.; Alfa Corporation; United Fire & Casualty Company; Direct General Corporation; EMC Insurance Group Inc. and PMA Capital Corporation. The Committee reviews the peer group with Mercer on a regular basis to ensure its appropriateness. Every year, Mercer provides the Committee with a comparison of the salary, annual incentives and long-term incentives of Mr. Lower with those of chief executive officers at the peer companies. As additional reference, the Committee may also review survey data. Based on this data, Mercer makes recommendations for the Committees
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consideration. For the other Named Executive Officers, Mercer provides survey data to Mr. Lower and he develops recommendations, which are reviewed with Mercer in advance of the applicable Committee meeting. The Committee then deliberates in executive session. The Committee, with the help of Mercer, also reviews the potential cost of each Named Executive Officers total compensation packageincluding base salary, annual incentive compensation, long-term incentive compensation, welfare and retirement benefits, overall equity accumulation and perquisitesunder several termination-of-employment scenarios, including a termination without cause, a resignation and a change in control. Executive Compensation Program We structure our program to deliver the majority of pay through incentives that drive both operating results and long-term value. The targeted compensation mix of total direct compensation for the Named Executive Officers at the beginning of 2007 is illustrated below. The mix of 2007 actual compensation varied as a result of actual incentives earned.
Mr. Joyner would have been a Named Executive Officer for 2007 had he not retired effective December 31, 2007. With the departure of Mr. Joyner at the end of 2007, Mr. Andrews is included as a Named Executive Officer. Upon his retirement, Mr. Joyner received the benefits he had accrued over his career under the qualified and non-qualified retirement plans. In addition, his stock options and restricted stock units became 100% vested as defined in the retirement provisions of his applicable grant agreements. Mr. Joyner will also receive post-retirement payments as outlined in his separation agreement. All amounts for Mr. Joyner are disclosed in the applicable tables. Base Salary Competitive base salaries are critical to attracting and retaining superior executive talent. The Committee seeks to pay salaries that approximate median industry salaries for executives of similar companies in like positions. However, in recruiting new candidates, these guidelines are sometimes exceeded to attract qualified candidates. There may also be instances where an existing executives compensation deviates from the median, either up or down, due to performance, compensation history, internal equity and/or retention risk. Salaries for Executive Officers are reviewed at least every 18 months. In addition to looking at peer company and survey data, the Committee reviews each executives performance, including the accomplishment of key corporate, strategic, operational and financial goals, managing personnel and meeting our ethical standards. In 2007, Mr. Reynoldss salary was increased from $370,000 to $400,000, Mr. Heckmans salary was increased from $384,000 to $410,000, Mr. Andrewss salary was increased from $200,016 to $214,000 and Mr. Joyners salary was increased from $200,004 to $220,000. Mr. Heckmans, Mr. Andrewss and Mr. Joyners increases were made consistent with the Companys policy of reviewing salaries for executives at least every 18 months and reflect the competitive market, the executives performance and their continuing contribution to the Companys success. In addition, at the time of his increase, Mr. Joyner was not a Named Executive Officer. Mr. Reynoldss increase was a reflection of the change in his scope of responsibilities upon assuming the position of EVP, Insurance Operations. Mr. Andrewss increase reflected his assumption of the oversight of Information Technology.
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Annual Incentive Program We have an annual incentive program which is designed to drive and reward strong performance over a one-year period. The annual incentive is a key part of our overall compensation structure and is directly linked to the Companys annual business plan. Under the Horace Mann Educators Corporation Incentive Compensation Plan and per the Committees charter, the Committee establishes Company-wide and business unit/division performance objectives every March, as well as threshold, target and maximum bonus opportunities for each Named Executive Officer. In setting these objectives and opportunities, the Committee considers, among other things, the strategic goals of the Company, corporate financial projections and the degree of difficulty in achieving the targets. It is the goal of the Committee to establish measurements and targets that are reasonable, but not easily achieved. As evidence of this, the Annual Incentive Program has generated awards ranging from 0% to 142.8% of target over the past 7 years, with an average of 92% for the seven-year period. The variability and average level of the awards earned confirms the Committees practice of establishing reasonable yet aggressive goals for the Companys Annual Incentive Program. The measures and targets are discussed with the CEO, other Executive Officers, other members of the Board and Mercer before they are set. Each March, the Committee also certifies performance and determines annual incentive award payouts for the prior year. Target incentive opportunities for the Named Executive Officers are intended to approximate the median of the bonuses paid to similarly situated executives in comparable, peer companies. Maximum incentive opportunities are set at 200% of target. Changes made to these opportunities, if any, generally take effect at the start of the next calendar year. Effective January 1, 2007, Mr. Lowers annual target opportunity was increased from 60% to 70% and Mr. Heckmans annual target opportunity was increased from 50% to 55% in recognition of their performance and impact on overall corporate results in 2006. Mr. Reynolds annual target opportunity was 50% for the period of January 1 through May 31, 2007 and increased to 55% for the period of June 1 through December 31, 2007. This change in opportunity was due to Mr. Reynolds assumption of the position of EVP, Insurance Operations. Threshold, target and maximum opportunities for 2007 are shown in the table in Grants of Plan-Based Awards.
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For 2007, all of the CEOs annual incentive opportunity was tied to Company-wide performance, while half of each of the other Named Executive Officers opportunity was tied to various business unit and/or division measures. The Committee believes that this split provides appropriate alignment between an executives compensation and the results he can most directly influence, while recognizing that the Company as a whole must perform well in order to deliver value to our shareholders. For 2007, the Companys annual performance measures and their weightings were as follows:
n/anot applicable
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Annual Incentive Program Target Setting The Committee established targets for the corporate performance measures in its March 2007 meeting. The targets for the Operating Earnings Per Share and Insurance Revenue measures were based on a review of market dynamics/trends and expectations of other companies in the industry as well as our financial plan in 2007. This was the basis of our 2007 earnings guidance, which was publicly disclosed in February 2007 in connection with our release of earnings for the year ended December 31, 2006. In addition, a qualitative corporate Operational Initiatives measure consisted of six initiatives including, but not limited to, the development of new marketing and distribution programs, information technology improvements, annuity sales and auto new business and productivity. Performance targets for the 2007 corporate measures were as follows:
Based on the 2007 performance of the Company (109.5% of target) and the business units (ranging from 80% of target to 122.6% of target) against the pre-established goals, the Committee approved an award of 109.5% of target for the CEO and 80% to 122.6% of target for the other Named Executive Officers. The annual incentives paid to the Named Executive Officers are shown in the Non-Equity Incentive Plan Payouts column of the Summary Compensation Table.
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Long-term Incentive Program The Company awards long-term incentives to executives and other key employees who can have the greatest impact on the Companys long-term success. Long-term incentives are intended to focus executives on driving operating performance as well as long-term value creation. They are also an effective vehicle for attracting and retaining executive talent. All long-term incentive grants are made under the Horace Mann Educators Corporation Amended and Restated 2002 Incentive Compensation Plan. In setting performance targets for the Long-term Incentive Program, the Committee considers, among other things, the strategic goals of the Company, financial projections, and the difficulty of meeting those goals and projections. Over the last 7 years, awards under the Long-term Incentive Program have ranged from 0% to 159.3%, with an annual average of 68.9% for the seven-year period as illustrated in the graph below:
The variability and average level of the awards earned confirms the Committees practice of establishing reasonable yet aggressive goals for the Companys Long-term Incentive Program. The intent of the program is to focus executives on shareholder value and key strategic objectives, while promoting retention and recognizing the market trend to deliver long-term incentives through a mix of compensation vehicles. We use cash incentives to deliver a portion of the opportunity in order to manage overall earnings per share dilution levels. However, to ensure that our executives interests were aligned with those of our Shareholders, our executives have been required to invest and hold one-third of any such cash payments in deferred stock units until their stock ownership requirements were met. This led to two-thirds of the total long-term incentive being delivered in equity. See Stock Ownership and Holding Requirements below. In 2007, we implemented a new Long-term Incentive Program with annual awards and a two-year performance period consisting of:
Under the 2007-2008 program, the Committee granted annual 2007 RSU and cash awards, with performance measured over 24 months beginning January 1, 2007 and ending on December 31, 2008. Stock option awards were also granted in 2007 but are earned under time-based vesting. The Committee believes that this design appropriately drives long-term performance and for the 2008-2009 performance period granted the full opportunity in equity (25% stock option and 75% RSUs). Stock option awards and RSU grants were made to all Named Executive Officers in 2007 as reflected in the table on page 29.
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In setting the dollar value of the long-term incentive opportunity for each Named Executive Officer, the Committee targets an amount that would achieve the Companys overall objective of positioning total compensation around the median of the market. The targeted annual values for the Named Executive Officers for the 2007-2008 performance period were as follows:
Long-term Incentive Program Target Setting The Committee established the Long-term Incentive Program measures and performance targets for the 2007-2008 performance period in its March 2007 meeting. Measures were weighted to reward performance based on achievement of financial goals (66.7%) and property casualty premium growth (33.3%). It is the Committees belief that all these measures impact shareholder value creation. For 2007-2008, the Long-term Incentive Program performance targets are as follows:
2007-2008 Long-term Incentive Program Grants and Awards Performance-Based Restricted Stock Units. The restricted stock units are an effective vehicle for rewarding executives based on performance and have a high value in promoting executive retention. As discussed above, restricted stock units were granted on March 6, 2007 for the 2007-2008 performance period and will be earned on December 31, 2008 based on the achievement of the two-year performance period targets. Under the 2007-2008 program, the restricted stock units earned are subject to an additional service-based vesting, which vest 50% per year for the subsequent two years. Once vested, the restricted stock units are subject to holding requirements until the executives stock ownership guidelines are met. See Stock Ownership and Holding Requirements below. From the date of grant, restricted stock units accrue dividends at the same rate as dividends paid to our Shareholders. These dividends are reinvested into additional restricted stock units. Target restricted stock unit opportunities for the 2007- 2008 performance period for the Named Executive Officers were established as 50% of the total long-term incentive opportunity in March 2007. On an annualized basis, the awards of restricted stock units ranged from approximately 44.6% to 64.0% of base salary, with the exception of the CEO whose target opportunity was approximately 85.9%. Maximum opportunities were set at 200% of target and threshold opportunities were set at 50% of target. The performance measures for the 2007-2008 performance periodgrowth in auto and property premium, earnings per share and total shareholder return relative to a peer group of insurance companieswere selected based on our 2007-2008 business plan and provide strong alignment with shareholder interests.
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Total shareholder return for the 2007-2008 performance period is required to be at or above the 25th percentile of peers to earn an award. At the 25th percentile, participants can earn 50% of their target award and at the peer group median, participants can earn their target award. If total shareholder return is at or above the 75th percentile of peers, 200% of the target award can be earned. Participants will not earn any award on any component of the Long-term Incentive Program (other than stock options) until the end of the 2007-2008 performance period. Restricted stock units earned for the 2007-2008 performance period will fully vest on December 31, 2010. Performance-Based Cash Incentives. As with performance-based restricted stock units, performance-based cash incentives are granted every year and are earned based on the same goals as the performance-based restricted stock units. These awards will become fully vested at December 31, 2008 and will be paid in the first quarter of 2009. (The target cash opportunities for the 2007-2008 performance period for the Named Executive Officers were established as 25% of the total long-term incentive opportunity in March 2007. They ranged from approximately 22.3% to 32% of base salary with the exception of the CEO, whose target opportunity was approximately 42.9%. Maximum opportunities were set at 200% of target and threshold opportunities were set at 50% of target. Stock Options. We believe that stock options provide strong alignment with Shareholder interests, as participants do not realize any increase in value unless our stock price appreciates. Stock options granted under the Long-term Incentive Program have an exercise price equal to the closing stock price on the date of grant, vest ratably over a four-year period and have a seven-year term. In determining the number of stock options to grant, we divided 25% of the total target long-term incentive opportunity by the Black-Scholes value of an option. For additional information regarding assumptions used for these valuations, see the Companys Annual Report of Form 10-K Notes to Consolidated Financial StatementsNote 1Summary of Significant Accounting PoliciesStock Based Compensation. Timing of Equity Grants. Since 1991, the Committee has granted long-term incentives only at its regularly scheduled Board meetings. The Company uses the closing stock price on the date of the grant to determine the exercise price for stock options. For regularly scheduled annual awards or for awards pursuant to the Long-term Incentive Program, the grant effective date is the approval date of the applicable resolution or as otherwise specified in the duly authorized resolution. For other awards, the grant effective date is the first business day of the next securities trading window established by the Company following the approval date. In no circumstance will the grant effective date precede the approval date of a given award. Restricted Stock Units (time-based vesting). In isolated situations, the Company may use targeted restricted stock unit grants for executive attraction and retention purposes, which vest based on time. As of the time of this Proxy Statement, no Named Executive Officers have ever received time-based vesting restricted stock units. Stock Ownership and Holding Requirements Our executives are required to satisfy meaningful stock ownership requirements. These stock ownership requirements were established in 1998 and the executives are generally expected to achieve them within 10 years of becoming subject to the requirement. For the CEO, the minimum ownership requirement is five times base salary. For the other Named Executive Officers, the minimum requirement is three times base salary. This stock ownership may be achieved by direct ownership or beneficial ownership through a spouse or child. The following types of beneficial ownership are considered in determining stock ownership: direct ownership of Horace Mann stock, Horace Mann stock held in the Company 401(k) Plan, Horace Mann Common Stock equivalents in the employee deferred compensation plan and restricted stock units (vested and unvested). Under the 2007-2008 Long-term Incentive Program, executives are required to defer receipt of their Restricted stock units until the stock ownership guidelines are met. As of December 31, 2007, the CEO held stock valued at 439% of his base salary and the remaining Named Executive OfficersMr. Heckman, Mr. Reynolds, Mr. Andrews, Mr. DAmbra and Mr. Joynerwere at 281%, 224%, 189%, 123% and 197% of their base salary, respectively. As of March 15, 2008, the CEO has met his stock
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ownership guidelines and held stock valued at 554% of his base salary. The remaining Named Executive OfficersMr. Heckman, Mr. Reynolds, Mr. Andrews, Mr. DAmbra and Mr. Joynerwere at 344%, 328%, 264%, 175% and 192% of their base salary, respectively, as of March 15, 2008. Retirement Plans Executive Officers participate in our Company-wide retirement plans, an excess defined contribution plan and a supplemental retirement plan. Each of these plans includes a Company contribution and the amounts contributed for each Named Executive Officer are included in the Summary Compensation Table. The Companys intent is to provide plans that are customarily offered within our industry to enhance our ability to attract and retain employee talent. With the exception of the CEO, who receives a defined benefit arrangement per his employment agreement, only Mr. Joyner participates in the supplemental retirement plan and the Companys defined benefit program because those plans were frozen prior to all other Named Executive Officers joining the Company. Deferred Compensation To further encourage ownership of its Common Stock, the Company maintains a non-qualified deferred compensation plan which allows executives to defer their long-term cash incentives into deferred stock units. Deferred stock units accrue dividends at the same rate as dividends paid to our Shareholders. These dividend equivalents are reinvested into additional deferred stock units. No other investment options are provided. Perquisites and Personal Benefits The Company does not offer perquisites or executive benefits that exceed $10,000 annually in the aggregate to any individual. The Company does offer key executives membership to a private dining club in Springfield, IL as well as memberships to airline clubs (airport lounge facilities). Tax Implications Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1,000,000 paid for any fiscal year to the corporations chief executive officer and four other most highly compensated executive officers as of the end of the fiscal year. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met. The annual and long-term incentive programs are designed to permit full deductibility and the Committee expects all 2007 compensation to be fully deductible. However, the Committee believes that Shareholder interests are best served by not restricting the Committees discretion and flexibility in developing compensation programs, even though such programs may result in certain non-deductible compensation expenses. Accounting for Stock-Based Compensation Effective January 1, 2006, the Company began accounting for stock-based payments, including its stock options and restricted stock units, in accordance with the requirements of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123(R), Share-Based Payment. Employment and Change in Control Agreements Effective February 1, 2000, the Company entered into an employment agreement with Mr. Lower employing him as the Companys President and Chief Executive Officer. The term of that agreement expired on December 31, 2000 but is subject to an annual evergreen renewal which extends the agreement an additional year on each September 1, so long as neither Mr. Lower nor the Company, prior to September 1, has notified the other that the agreement will not so extend. Its current expiry date is December 31, 2008. The agreement provides for an annual
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salary of not less than $500,004 and for Mr. Lower to participate in the Companys short and long-term incentive plans. Mr. Lower received a stock grant of 10,000 shares of Common Stock and options to purchase a total of 750,000 shares of Common Stock, which have vested. The Company also agreed to pay annual retirement benefits of $180,000 to Mr. Lower during his lifetime. The agreement contains provisions relating to Mr. Lowers death, disability or other termination of his employment. In addition, the agreement provides that if, within three years after a Change of Control of the Company, as defined therein, Mr. Lowers employment with the Company is actually or constructively terminated, Mr. Lower will be paid a lump-sum cash amount equal to the sum of (i) three times the greater of his highest annual cash compensation from the Company or $1,200,000 and (ii) the actuarially determined present value of Mr. Lowers retirement benefits calculated as if he had been employed by the Company until the date which is three years after the Change in Control. Mr. Lowers insurance benefits are also continued for three years and there is an excise tax gross-up provision payment sufficient to negate any effect on him of excise and related taxes attributable to the benefits received under the agreement. The Company has change in control (CIC) agreements with certain executives which provide for payments and other benefits which are described in Potential Payments upon Termination or Change in Control below. These agreements, which provide severance protection in a change in control, are intended to provide certain of our Executive Officers with a level of security consistent with market practices. The change-in-control protections also help to mitigate some of the conflicts an executive may be exposed to in a potential acquisition or merger situation and serve to insure a more stable transition if a corporate transaction were to occur. The practices we have in place are structured to maintain market competitiveness and allow for successful recruitment of key executives. In addition, if an executive is terminated following a change in control, or terminates for death or retirement, long-term incentives will vest (performance-based awards that are still subject to performance conditions will vest pro-rata based on target performance). However, nonvested stock options of executives who retire (defined as leaving the Company after attaining either age 55 with 10 years of service or age 65 with 5 years of service) cannot be exercised until after the one-year anniversary of retirement. These provisions are described in more detail in Potential Payments upon Termination or Change in Control.
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Summary Compensation Table The following table sets forth information regarding compensation paid to, or earned by, the Companys Chief Executive Officer, Chief Financial Officer and four other most highly compensated executive officers (our Named Executive Officers or NEOs) during 2007 and 2006. Mr. Joyner would have been a Named Executive Officer for 2007 had he not retired effective December 31, 2007. With the departure of Mr. Joyner at the end of 2007, Mr. Andrews is included as a Named Executive Officer.
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Detail of All Other Compensation The following table sets forth information regarding all other compensation paid to, or earned by, the Named Executive Officers during 2007. Perquisites and personal benefits are discussed in detail under Compensation Discussion and AnalysisPerquisites and Personal Benefits.
Grants of Plan-Based Awards The following table sets forth information concerning the grant of the 2007 annual incentive and the grant of the 2007 Long-term Incentive (LTI) for the 2007-2008 performance period. Actual payouts for the 2007 Annual Incentive Plan (AIP) are included in the Summary Compensation Table. Payouts for the 2007 Long-term Incentive grant and the determination of the actual RSUs earned will not occur until after the completion of the 2007-2008 performance period.
n/anot applicable
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Outstanding Equity Awards at Fiscal Year End The following table sets forth information regarding the value of the Named Executive Officers equity award holdings at December 31, 2007.
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Option Exercises and Stock Vested There were no options exercised by the Named Executive Officers in 2007 and with the exception of Mr. Joyner, none of their restricted stock vested in 2007. Mr. Joyners restricted stock units vesting was due to his retirement on December 31, 2007.
Pension Benefits The following table illustrates the total pension benefits available to the CEO as of December 31, 2007 under the non-qualified defined benefit pension plan as defined by his employment agreement. It also illustrates Mr. Joyners total pension benefits available as of December 31, 2007 under the qualified and non-qualified defined benefit plans. The defined benefit plans (qualified and non-qualified) sponsored by the Company were amended to freeze participation to those who were hired prior to January 1, 1999. As all other Named Executive Officers were hired subsequent to that date, they are not eligible to participate in the defined benefit plans. The CEOs employment agreement provides an annual retirement defined benefit payment of $180,000 upon his completion of service through or after January 1, 2004.
n/a - not applicable
The aggregate monthly annuity benefit under the qualified retirement plans are determined by multiplying the participants years of service under the plan, times the average of the highest 36 months of earnings while under the plan, times 2%, offset by 50% of the participants primary social security benefit at age 65. Eligible earnings under the qualified retirement plans are subject to IRS Section 415 limitation. The ESERP plan is a non-qualified excess plan which replaces only the benefits lost under the qualified plan on earnings in excess of the Section 415 limits. Mr. Joyner ceased accruing any additional benefits due under these plans effective March 31, 2002.
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Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans The following table sets forth information regarding participation by the Named Executive Officers in the Companys nonqualified savings and deferred compensation plans as of December 31, 2007. The Company offers a nonqualified deferred compensation program to key executives, which allows them to defer receipt of compensation. Certain executives are allowed to defer up to 100% of their long-term cash incentive and restricted stock unit awards. The only investment vehicle offered is HMECs deferred stock units. Contributions and earnings are for the year ended December 31, 2007 and the aggregate balance is as of December 31, 2007. The Company also sponsors an unfunded excess pension plan, the Nonqualified Money Purchase Pension Plan (NQMPPP), which covers only the base salary compensation in excess of the Section 415 limit, which in 2007 was $225,000. The NQMPPP accounts are established for the executives at the time their compensation exceeds the Section 415 limit and are credited with an amount equal to 5% of the excess, with the exception of Mr. Joyner, who is eligible for a 7% contribution. In addition, the NQMPPP accounts are credited with the same rate of return as the qualified plan sponsored by the Company for all employees.
Potential Payments upon Termination or Change in Control The following table sets forth payments and other benefits Named Executive Officers are entitled to receive for termination due to death or disability; termination for cause; voluntary termination; termination without cause or constructive termination prior to a change in control; and termination without cause or constructive termination following a change in control. An overview of benefits available under each scenario is provided below and should be read with the footnotes accompanying the table. These calculations are an estimate only for purposes of this Proxy Statement. Death or DisabilityNo executives receive any cash payments, with the exception of the CEO, who, at death per his employment agreement, receives a payment equal to his annual salary plus target annual and long-term bonus. The treatment of long-term incentives is as follows:
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For disability:
For death:
For disability:
For death:
Termination for Cause or Voluntary TerminationExecutives forfeit all unpaid and unvested awards. However, given the CEO is retirement eligible at December 31, 2007, he will vest in his equity upon a voluntary termination. Termination Without Cause or Constructive Termination Absent a Change in ControlWith the exception of the CEO, all Named Executive Officers receive the Companys standard severance program which is 2 weeks of salary for each year of service, with a maximum payment of 48 weeks of salary. Per his employment agreement, the CEO receives 2 times his annual salary, bonus and long-term incentive and, as he is retirement eligible, would vest in his equity awards. In addition, the CEO receives continuation of health benefits for 2 years. Termination Without Cause or Constructive Termination Following a Change in Control
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Payments on an actual change in control may differ based on factors such as transaction price, timing of employment termination and payments and changes in compensation.
n/a - not applicable
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These calculations are estimates for proxy disclosure purposes only. Payments on an actual change in control may differ based on factors such as transaction price, timing of employment termination and payments, changes in compensation, and reasonable compensation analyses.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on our review of, and the discussions with management with respect to, the Compensation Discussion and Analysis, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement. COMPENSATION COMMITTEE CHARLES A. PARKER, Chairman MARY H. FUTRELL, JOSEPH J. MELONE and CHARLES R. WRIGHT, Members
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EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2007 regarding outstanding awards and shares remaining available for future issuance under the Companys equity compensation plans (excluding 401(k) plans, ESOPs, and similar tax-qualified plans):
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Independent Registered Public Accounting Firm The independent registered public accounting firm selected by the Audit Committee to serve as the Companys auditors for the year ending December 31, 2008 is KPMG LLP. KPMG LLP served in that capacity for the year ended December 31, 2007. Audit Fees The aggregate fees billed for professional services rendered by KPMG LLP for the audit of the Companys annual financial statements for the year ended December 31, 2007, the audit of the Companys internal control over financial reporting as of December 31, 2007, the reviews of the financial statements included in the Companys quarterly reports on Forms 10-Q for the year ended December 31, 2007 and services in connection with the Companys statutory and regulatory filings for the year ended December 31, 2007 were $1,567,700. The aggregate fees billed for professional services rendered by KPMG LLP for the audit of the Companys annual financial statements for the year ended December 31, 2006, the audit of the Companys internal control over financial reporting as of December 31, 2006, the reviews of the financial statements included in the Companys quarterly reports on Forms 10-Q for the year ended December 31, 2006 and services in connection with the Companys statutory and regulatory filings for the year ended December 31, 2006 were $1,657,500. Fees in 2006 included $74,750 related to the Companys issuance of its 6.85% Senior Notes due 2016. Audit-related Fees The aggregate fees billed for assurance and related services rendered by KPMG LLP that are reasonably related to the audit and review of the Companys financial statements for the years ended December 31, 2007 and 2006, exclusive of the fees disclosed under Audit Fees above, were $108,400 and $122,900, respectively. In 2007 and 2006, KPMG LLP prepared SAS No. 70 reports on the Companys annuity operations. Tax Fees The aggregate fees billed for tax compliance, consulting and planning services rendered by KPMG LLP during the years ended December 31, 2007 and 2006 were $0 and $0, respectively. All Other Fees The aggregate fees billed for all other services, exclusive of the fees disclosed above relating to audit, audit-related and tax services, rendered by KPMG LLP during the years ended December 31, 2007 and 2006 were $0 and $0, respectively. Consideration of Non-audit Services Provided by the Independent Registered Public Accounting Firm The Audit Committee approves in advance any significant audit and all non-audit engagements or services between the Company and the independent registered public accounting firm other than prohibited non-auditing services as defined by regulatory authorities. The Audit Committee may delegate to one or more of its members the authority to approve in advance all significant audit and all non-audit services to be provided by the independent registered public accounting firm so long as it is presented to the full Audit Committee at the next regularly scheduled meeting. Pre-approval is not necessary for de minimis audit services as long as such is presented to the full Audit Committee at the next regularly scheduled meeting. The Audit Committee approved all of the above listed expenses. KPMG LLP did not provide any non-audit related services in 2007. Copies of Annual Report on Form 10-K The Company will furnish, without charge, a copy of its most recent Annual Report on Form 10-K filed with the SEC to each person solicited hereunder who mails a written request to Investor Relations, Horace Mann Educators
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Corporation, 1 Horace Mann Plaza, C-120, Springfield, Illinois, 62715-0001. The Company also will furnish, upon request, a copy of all exhibits to the Annual Report on Form 10-K. In addition, the Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and all amendments to those reports are available free of charge through the Companys Internet Web site, www.horacemann.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The EDGAR filings of such reports are also available at the SECs Web site, www.sec.gov. Shareholder Proposals for 2008 Annual Meeting of Shareholders Any proposals of Shareholders intended to be presented for inclusion in the Companys Proxy Statement and Form of Proxy for the next Annual Meeting of Shareholders scheduled to be held in 2009 must be received in writing by Ann M. Caparrós, Corporate Secretary, Horace Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois, 62715-0001 not later than January 2, 2009 in order for such proposal to be considered for inclusion in the Companys Proxy Statement and Form of Proxy relating to the 2009 Annual Meeting of Shareholders. In the event that any proposal of a Shareholder is presented at the 2009 Annual Meeting of Shareholders other than in accordance with the procedures set forth in Rule 14a-8 under the Securities Exchange Act of 1934, as amended, proxies solicited by the Board for such meeting will confer upon the proxy holders discretionary authority to vote on any matter so presented of which the Company does not have notice prior to February 26, 2009. We encourage you to vote your shares as soon as possible.
Springfield, Illinois April 9, 2008
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HORACE MANN EDUCATORS CORPORATION CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS Organization This charter governs the operations of the Audit Committee (Committee). The Committee shall be appointed by the Board and shall comprise at least three directors. All Committee members shall be independent of management and the Company. Members of the Committee shall be considered independent if they have no material relationship with the Company and do not receive any consulting, advisory or other compensatory fees from the Company, other than for services in the members capacity as a member of the Board or the Committee. All Committee members shall be financially literate, or shall become financially literate within a reasonable period of time after appointment to the Committee, and at least one member of the Audit Committee shall have accounting or related financial management expertise and be considered a financial expert under applicable law. Statement of Policy The Committee shall provide assistance to the Board in fulfilling its oversight responsibility to the shareholders, the investment community, and others relating to the Companys financial statements and the financial reporting process, the systems of internal accounting and financial controls, the internal audit function, the annual independent audit of the Companys financial statements, and the legal compliance and ethics programs as established by management and the Board. In so doing, it is the responsibility of the Committee to maintain free and open communication among the Committee, the independent auditors, the internal auditors and management of the Company. In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Company and the power and funding to retain outside counsel, or other experts for this purpose. Responsibilities and Processes The primary responsibility of the Committee is to prepare the report that the rules of the Securities and Exchange Commission require be included in the Companys annual proxy statement and to assist the Boards oversight of (1) the integrity of the Companys financial statements, (2) the Companys compliance with legal and regulatory requirements, (3) the independent auditors qualifications and independence and (4) the performance of the Companys internal audit function and independent auditors. The Committee shall also be directly responsible for the appointment, compensation and oversight of the Companys independent auditors, including the resolution of disagreements between management and the auditor regarding financial reporting. Management is responsible for preparing the Companys financial statements, and the independent auditors are responsible for auditing those financial statements. The Committee in carrying out its responsibilities believes its policies and procedures should remain flexible, in order to best react to changing conditions and circumstances. The Committee should take the appropriate actions to set the overall corporate tone for quality financial reporting, sound business risk practices, and ethical behavior. The following shall be the principal recurring processes of the Committee in carrying out its responsibilities. The processes are set forth as a guide with the understanding that the Committee may supplement them as appropriate. The Committee shall:
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HA-C00359 (Mar. 08)
HORACE MANN EDUCATORS CORPORATION 1 HORACE MANN PLAZA SPRINGFIELD, IL 62715 VOTE BY INTERNETwww.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 p.m. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS If you would like to reduce the costs incurred by Horace Mann Educators Corporation in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years. VOTE BY PHONE1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 p.m. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Horace Mann Educators Corporation, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: HRCMN1 KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. HORACE MANN EDUCATORS CORPORATION Vote On Directors 1. Election of Directors. Nominees: 01) Mary H. Futrell 06) Charles A. Parker 02) Stephen J. Hasenmiller 07) Gabriel L. Shaheen 03) Louis G. Lower II 08) Roger J. Steinbecker 04) Joseph J. Melone 09) Charles R. Wright 05) Jeffrey L. Morby For Withhold For All To withhold authority to vote for any individual All All Except nominee(s), mark For All Except and write the number(s) of the nominee(s) on the line below. Vote On Proposals For Against Abstain 2. Ratification of the appointment of KPMG LLP, an independent registered public accounting firm, as the Company's auditors for the year ending December 31, 2008. 3. To consider and take action with respect to such other matters as may properly come before the Annual Meeting or any adjournment or adjournments thereof. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROVIDED TO BROADRIDGE. (NOTE: Please sign exactly as your name(s) appear(s) hereon. All holders must sign. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. If a corporation, please sign in full corporate name, by authorized officer. If a partnership, please sign in partnership name by authorized person.) For address changes and/or comments, please check this box and write them on 0 the back where indicated. MATERIALS ELECTION As of July 1, 2007, SEC rules permit companies to send you a Notice that proxy information is available on the Internet, instead of 0 mailing you a complete set of materials. Check the box to the right if you want to receive a complete set of future proxy materials by mail, at no cost to you. If you do not take action you may receive only a Notice. Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
ANNUAL MEETING OF SHAREHOLDERS OF HORACE MANN EDUCATORS CORPORATION May 21, 2008 Please date, sign and mail your proxy card in the envelope provided as soon as possible Important Notice Regarding Internet Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Form 10-K are available at www.proxyvote.com. Please detach and mail in the envelope provided HORACE MANN EDUCATORS CORPORATION PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS MAY 21, 2008 The undersigned Shareholder of Horace Mann Educators Corporation (the "Company") hereby appoints Joseph J. Melone and Louis G. Lower II or any of them, with full power of substitution, proxies to vote at the Annual Meeting of Shareholders of the Company (the "Meeting"), to be held on May 21, 2008 at 9:00 a.m. at the President Abraham Lincoln Hotel & Conference Center, 701 East Adams Street, Springfield, Illinois, and at any adjournment thereof and to vote all shares of Common Stock of the Company held or owned by the Undersigned as directed on the reverse side and in their discretion upon such other matters as may come before the Meeting. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3 IF NO INSTRUCTION TO THE CONTRARY IS INDICATED OR IF NO INSTRUCTION IS GIVEN AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES ON PROPOSAL 3. Address Changes/Comments: (If you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.) (TO BE SIGNED ON OTHER SIDE.) |