Timken Company DEF 14A 2012
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
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Annual Meeting of
THE TIMKEN COMPANY
Canton, Ohio U.S.A.
TABLE OF CONTENTS
Ward J. Timken, Jr.
March 22, 2012
The 2012 Annual Meeting of Shareholders of The Timken Company will be held on Tuesday, May 8, 2012, at ten oclock in the morning at the corporate offices of the company in Canton, Ohio.
This year, you are being asked to act upon three matters. Details of these matters are contained in the accompanying Notice of 2012 Annual Meeting of Shareholders and Proxy Statement.
Please read the enclosed information carefully before voting your shares. Voting your shares as soon as possible will ensure your representation at the meeting, whether or not you plan to attend.
I appreciate the strong support of our shareholders over the years and look forward to a similar vote of support at the 2012 Annual Meeting of Shareholders.
Ward J. Timken, Jr.
The Timken Company
1835 Dueber Avneue, S.W.
P.O. Box 6927
Canton, OH 44706-0927 U.S.A.
THE TIMKEN COMPANY
NOTICE OF 2012 ANNUAL MEETING OF SHAREHOLDERS
The 2012 Annual Meeting of Shareholders of The Timken Company will be held on Tuesday, May 8, 2012, at 10:00 a.m., at 1835 Dueber Avenue, S.W., Canton, Ohio, for the following purposes:
Shareholders of record of The Timken Company common stock at the close of business on February 21, 2012, are the shareholders entitled to notice of and to vote at the meeting.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE 2012 ANNUAL MEETING OF SHAREHOLDERS, PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED OR VOTE YOUR SHARES ELECTRONICALLY THROUGH THE INTERNET OR BY TELEPHONE. VOTING INSTRUCTIONS ARE PROVIDED ON THE ENCLOSED PROXY CARD.
Effect of Not Casting Your Vote. If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in street name, and these proxy materials will be forwarded to you by your broker, bank or nominee who is considered the shareholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker, bank or nominee on how to vote and are also invited to attend the 2012 Annual Meeting of Shareholders. Your broker, bank or nominee will enclose a voting instruction card for you to use in directing the broker, bank or nominee regarding how to vote your shares. If you do not return the voting instruction card, the broker, bank or other nominee will determine if it has the discretionary authority to vote on the particular matter. Under applicable New York Stock Exchange rules, brokers have the discretion to vote only on any matters deemed by the New York Stock Exchange to be routine, such as the ratification of the selection of the Companys independent auditor (Item 2 of this Proxy Statement). The election of Directors (Item 1 of this Proxy Statement) and the shareholder advisory vote on named executive officer compensation (Item 3 of this Proxy Statement) are not considered to be routine matters, and your broker will not have discretion to vote on those matters unless you specifically instruct your broker to do so by returning your signed voting instruction card. If you do not provide voting instructions to your broker, your shares will not be voted for the election of any Director nominee or on any matter on which your broker does not have discretionary authority.
SCOTT A. SCHERFF
Corporate Secretary and
Vice President Ethics and Compliance
March 22, 2012
Important Notice Regarding the Availability of Proxy Materials for the 2012 Annual Meeting of Shareholders to be held on May 8, 2012: This Proxy Statement and our 2011 Annual Report to Shareholders are available on the Investors section of our website www.timken.com/investors.
THE TIMKEN COMPANY
The enclosed proxy is solicited by the Board of Directors of The Timken Company, an Ohio corporation (the Company, we, our, or us), in connection with the 2012 Annual Meeting of Shareholders to be held on May 8, 2012, at 10:00 a.m. local time at our corporate offices, and at any adjournments and postponements thereof, for the purpose of considering and acting upon the matters specified in the foregoing Notice. The mailing address of our corporate offices is 1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798. The approximate date on which this Proxy Statement and proxy card will be first sent or given to our shareholders is March 22, 2012.
The Board of Directors is not aware that matters other than those specified in the foregoing Notice will be brought before the meeting for action. However, if any such matters should be brought before the meeting, the persons appointed as proxies may vote or act upon such matters according to their judgment.
ELECTION OF DIRECTORS
We presently have eleven Directors who, pursuant to our Amended Regulations, are divided into three classes with four Directors in Class I, three Directors in Class II and four Directors in Class III. At the 2010 annual meeting, our shareholders approved an amendment to our Regulations that eliminates, over a three-year period, the classified structure of our Board of Directors. The Directors elected at the 2010 annual meeting were elected for a three-year term; Directors elected at the 2011 annual meeting were elected for a two-year term; and Directors elected at the 2012 annual meeting will be elected for a one-year term. At the 2013 annual meeting and thereafter, all Directors will stand for election for a one-year term. Accordingly, at the 2012 Annual Meeting of Shareholders, four Directors will be elected to serve in Class III for a one-year term to expire at the 2013 annual meeting. Candidates for Director receiving the greatest number of votes will be elected. Abstentions and broker non-votes (where a broker, other record holder, or nominee indicates on a proxy card that it does not have authority to vote certain shares on a particular matter) will not be counted in the election of Directors and will not have any effect on the result of the vote.
Pursuant to the Majority Voting Policy of the Board of Directors, any Director who fails to receive a majority of the votes cast in his or her election will submit his or her resignation to the Board of Directors promptly after the certification of the election results. The Board of Directors and the Nominating and Corporate Governance Committee will then consider the resignation in light of any factors they consider appropriate, including the Directors qualifications and service record, as well as any reasons given by shareholders as to why they voted against (or withheld votes from) the Director. The Board of Directors is required to determine whether to accept or reject the tendered resignation within 90 days following the election and to disclose its decision on a Current Report on Form 8-K, as well as the reasons for rejecting any tendered resignation, if applicable.
Subsequent to the 2012 Annual Meeting of Shareholders, assuming that all nominees are elected, we will continue to have eleven Directors who will be divided into three classes with four Directors in Class I, three Directors in Class II and four Directors in Class III.
If any nominee becomes unable, for any reason, to serve as a Director, or should a vacancy occur before the election (which events are not anticipated), the Directors then in office may substitute another person as a nominee or may reduce the number of nominees as they deem advisable.
ITEM NO. 1
ELECTION OF CLASS III DIRECTORS
The Board of Directors, by resolution at its February 10, 2012 meeting, based on the recommendation of the Nominating and Corporate Governance Committee of the Board, nominated the four individuals set forth below to be elected Directors in Class III at the 2012 Annual Meeting of Shareholders to serve for a term of one year expiring at the annual meeting in 2013 (or until their respective successors are elected and qualified). All of the nominees have been previously elected as a Director by our shareholders. Each of the nominees listed below has consented to serve as a Director if elected.
Unless otherwise indicated on any proxy, the persons named as proxies on the enclosed proxy card intend to vote the shares covered by such proxy card in favor of the nominees named below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES NAMED BELOW.
The following information, obtained in part from the respective nominees and in part from our records, describes the background and experience of each nominee as of January 6, 2012.
Joseph W. Ralston, 68, has served as Vice Chairman of The Cohen Group, an organization that provides clients with comprehensive tools for understanding and shaping their business, political, legal, regulatory and media environments, since 2003. General Ralston completed a distinguished 37-year Air Force career as Commander, U. S. European Command and Supreme Allied Commander Europe, NATO in 2003. Previously, General Ralston served as Vice Chairman of the Joint Chiefs of Staff, the nations second highest-ranking military officer. In his current role, General Ralston is in a position to keep our Board of Directors advised on the rapidly changing global political environment, as well as developments in the aerospace industry. As someone who was previously responsible for thousands of troops, General Ralston is familiar with complex human resource issues. Additionally, with the increased regulatory oversight of corporate governance, General Ralstons understanding of the political environment in Washington provides the Board with a valuable perspective on current legislative developments. He has served on the Board of Directors since 2003, and he also has served on the boards of Lockheed Martin Corporation and URS Corporation since 2003.
John P. Reilly, 68, retired as the Chairman, President and Chief Executive Officer of Figgie International, an international diversified operating company, in 1998. He has more than 30 years of experience in the automotive industry, where he has served as President and Chief Executive Officer of a number of automotive suppliers, including Stant Corporation and Tenneco Automotive. He has also held leadership positions at the former Chrysler Corporation and Navistar International and has served as President of Brunswick Corporation. His hands-on experience in the automotive industry provides our Board with a key resource in a significant sector in which we compete. He also brings his knowledge of financial and human resource issues gained through his 40 years of successful executive leadership to his role on the Board. He has served on the Board of Directors since 2006. Mr. Reilly also serves as a director and non-executive chairman of both Exide Technologies and Material Sciences Corporation, and he has been a director of each of those companies since 2004.
John M. Timken, Jr., 60, is a private investor who has been a successful entrepreneur for many years. A sample of Mr. Timkens ventures includes involvement in the cable television business and establishing one of the largest commercial mushroom farms in North America. He has also been associated with, and an investor in, among others, a trucking concern, a plastic injection molding business and a chain of ophthalmic laboratories. He is currently a director of a flexible packaging business of which he was one of the founders. Mr. Timken uses his substantial financial acumen and varied business background to bring a candid and challenging approach to interaction with our management and independent auditors. He has served on the Board of Directors since 1986. Mr. Timken is also a substantial long-term shareholder of the Company.
Jacqueline F. Woods, 64, retired as the President of Ameritech Ohio (subsequently renamed AT&T Ohio), a telecommunications company, in 2000. Prior to serving as President, she held positions in finance, operations, marketing, sales and government affairs in that company. Mrs. Woods was inducted into the Ohio Womens Hall of Fame in 1998. She brings an extensive, broad-based business background as the leader of a large company to her role on the Board and her experience at a primarily consumer-oriented company provides a valuable perspective on customer service. She has served on the Board of Directors since 2000, and she has served as a director of School Specialty, Inc. since 2006 and The Andersons, Inc. since 1999.
The remaining seven Directors, named below, will continue to serve in their respective classes until their terms expire in 2013. The following information, obtained in part from the respective Directors and in part from our records, describes the background and experience of each Director as of January 6, 2012.
John M. Ballbach, 51, has served as President and Chief Executive Officer of VWR International, LLC, a leading global laboratory supply company, since 2005 and was appointed Chairman of the Board of that company in 2007. Mr. Ballbach joined the Valspar Corporation in 1990 and progressed through a series of management positions to become its President and Chief Operating Officer from 2002 until 2004. Mr. Ballbachs global perspective and experience in supply chain management are particularly helpful to the Board as we continue to sharpen our focus on growth opportunities in diverse industrial markets with strong aftermarket potential. He has served on the Board of Directors since 2009.
Phillip R. Cox, 64, has been the President and Chief Executive Officer of Cox Financial Corporation, a financial services company that he founded, for over 35 years. In addition to his service on our Board of Directors since 2004, Mr. Cox is currently non-executive Chairman of Cincinnati Bell, and he has served as a director there since 1993. He also has served as a director of Touchstone Mutual Funds since 1994 and Diebold, Incorporated since 2005. Mr. Cox formerly served as a director of Duke Energy Corporation from 2006 to 2008, and prior to its merger with Duke Energy, Cinergy Corp. from 1994 to 2005. With his life-long background of dealing with financial matters, Mr. Cox brings significant acumen to the Board.
James W. Griffith, 58, has served as the President and Chief Executive Officer of The Timken Company (the CEO) since 2002. Mr. Griffith joined the Company in 1984 and has held positions as plant manager, Vice President of Manufacturing in North America and Managing Director of our business in Australia. From 1996 to 1999, he led our automotive business in North America and our bearing business activities in Asia and Latin America. He was elected President and Chief Operating Officer in 1999. Since that time, Mr. Griffith has led a transformation of the Company focused on continuously increasing value for customers and our shareholders. With Mr. Griffiths broad experience and deep understanding of the Company, and as the CEO, he is a key Director for us. He has served on the Board of Directors since 1999. He also has been a director of Goodrich Corporation since 2002.
John A. Luke, Jr., 63, is the Chairman and Chief Executive Officer of MeadWestvaco Corporation, a leading global producer of packaging, coated and specialty papers, consumer and office products and specialty chemicals. He has held that position since 2003. Mr. Luke worked in a number of areas of Westvaco Corporation earlier in his career, including treasury, marketing and international sales, before joining its executive ranks in 1990. He led the process of merging the Westvaco Corporation with the Mead Corporation in 2002 to create MeadWestvaco Corporation, a large transformative transaction. As Chief Executive Officer of a company that was founded by his ancestors in 1888, Mr. Luke brings an under-standing of the evolution of a family business into a global corporation. Mr. Lukes leadership of a large, public global company and his experience in dealing with the issues facing such a company make him well-positioned for his role as a Director. He has served on the Board of Directors since 1999. Mr. Luke also has served as a director of The Bank of New York Mellon Corporation since 2007 and MeadWestvaco Corporation since 2002.
Frank C. Sullivan, 51, has held the position of Chairman and Chief Executive Officer of RPM International Inc., a world leader in specialty coatings, since 2008. He was appointed RPMs Chief Executive Officer in 2002, prior to which he held positions in sales and corporate development before becoming Chief Financial Officer in 1993. He held various positions in the areas of commercial lending and corporate finance in the banking industry before joining RPM in 1987. With Mr. Sullivans extensive financial background, he serves
as the financial expert for our Audit Committee. As Chief Executive Officer of a major public company, Mr. Sullivan possesses invaluable experience to deal with the wide range of issues facing us, and he is particularly knowledgeable in the area of acquisitions due to the substantial level of activity by RPM in that area. Grandson of the founder of RPM, Mr. Sullivan also brings to the Board knowledge and understanding of the evolution of a family business into a large public company. He has served on the Board of Directors since 2003, and he has been a director of RPM International, Inc. since 1995.
Ward J. Timken, 69, currently serves as President of The Timken Foundation of Canton, a private charitable foundation that promotes civic betterment through capital fund grants. He has held that position since 2004. The Timken Foundation is not affiliated with The Timken Company. During his 36-year career with the Company before retiring in 2003, Mr. Timken worked in steel operations, corporate development and human resources. For many years he was responsible for community relations and was regarded as the face of the company in plant locations globally. He traveled extensively during his career, becoming very familiar with our global manufacturing operations, and he brings a wealth of knowledge regarding our history and capabilities to his position as a member of the Board of Directors. He has served on the Board since 1971. Mr. Timken is also a substantial long-term shareholder of the Company. Ward J. Timken is the father of Ward J. Timken, Jr. and the cousin of John M. Timken, Jr.
Ward J. Timken, Jr., 44, is Chairman of the Board of Directors of The Timken Company (the Chairman). He has held that position since 2005. In his previous position as President of our Steel Business, he led the business in 2004 to 2005 to record levels of profitability at the time and positioned it for even better subsequent performance. He also served as our Corporate Vice President from 2000 to 2003 and was responsible for strategy development. He played a pivotal role in the acquisition and integration of The Torrington Company in 2003, the largest acquisition in our history. His other positions at the Company included key postings in Europe and Latin America in the 1990s. Before joining us in 1992, he opened and managed the Washington, D.C. office of McGough & Associates, a Columbus, Ohio-based government affairs consulting firm. Mr. Timkens broad-based experience has given him an excellent understanding of our business that positions him to provide outstanding leadership as the Chairman. He has served on the Board of Directors since 2002. Mr. Timken is also a substantial long-term shareholder of the Company.
The Board of Directors has adopted the independence standards of the New York Stock Exchange listing requirements for determining the independence of Directors. The Board has determined that the following continuing Directors and Director nominees meet those independence standards: John M. Ballbach, Phillip R. Cox, John A. Luke, Jr., Joseph W. Ralston, John P. Reilly, Frank C. Sullivan, John M. Timken, Jr., and Jacqueline F. Woods. With respect to John M. Timken, Jr., the Board determined that his family relationship to Ward J. Timken and Ward J. Timken, Jr. does not impair his independence.
Related Party Transactions Approval Policy
Our Directors and executive officers are subject to our Standards of Business Ethics, which requires that any potential conflicts of interest, such as significant transactions with related parties, be reported to our General Counsel. Our Directors and executive officers are also subject to the Timken Policy Against Conflicts of Interest, which requires that an employee or Director avoid placing himself or herself in a position in which his or her personal interests could interfere in any way with our interests. While not every situation can be identified in a written policy, the Timken Policy Against Conflicts of Interest does specifically prohibit the following situations:
In the event of any potential conflict of interest, pursuant to the charter of the Nominating and Corporate Governance Committee and the provisions of the Standards of Business Ethics and the Timken Policy Against Conflicts of Interest, the Nominating and Corporate Governance Committee would review and, considering such factors as it deems appropriate under the circumstances, make a determination as to whether to grant a waiver to the policies for any such situation. Any waiver would be promptly disclosed to shareholders.
During 2011, the Company made purchases of electric motor repair services in the ordinary course of business from Hannon Electric Company (HEC) totaling approximately $296,000. The wife and two minor children of Christopher A. Coughlin, our President Process Industries, have minority interests in HEC and Mr. Coughlins father-in-law and mother-in-law are the majority owners of HEC. The Nominating and Corporate Governance Committee determined that the payments to HEC during 2011 were de minimis, both to HEC and the Company, that the terms of the purchases from HEC were no more favorable to HEC than terms generally available to any other third-party supplier to the Company, and that Mr. Coughlin exercises no influence over the Companys relationship with HEC.
Board and Committee Meetings
The Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. During 2011, there were eight meetings of the Board of Directors, ten meetings of its Audit Committee, three meetings of its Compensation Committee and three meetings of its Nominating and Corporate Governance Committee. All nominees for Director and all continuing Directors attended 75 percent or more of the meetings of the Board and its committees on which they served. It is our policy that all members of the Board of Directors attend the annual meeting of shareholders and in 2011 all members attended the meeting. At each regularly scheduled meeting of the Board of Directors, the nonemployee Directors and the independent Directors also meet separately in executive sessions.
Each nonemployee Director who served in 2011 was paid at the annual rate of $80,000 for services as a Director. At its meeting on February 10, 2012, the Board of Directors approved an additional annual fee of $10,000 for the Lead Director (as defined below) beginning January 1, 2012. In addition to base compensation, the following fees are paid for serving on a committee of the Board.
Each nonemployee Director serving at the time of our Annual Meeting of Shareholders on May 10, 2011, received a grant of 3,100 shares of our common stock under The Timken Company 2011 Long-Term Incentive Plan (the Long-Term Incentive Plan) following the meeting. The shares received are required to be held by each nonemployee Director until his or her departure from the Board of Directors. Upon election to the Board, each new nonemployee Director receives a grant of 2,000 restricted shares of our common stock under the Long-Term Incentive Plan, which vest one-fifth annually over a five-year period. No such grants were made in 2011.
The Compensation Committee of the Board of Directors has adopted stock ownership guidelines that require Directors to own 8,000 shares of our common stock. As of December 31, 2011, all of our Directors met their ownership requirements.
Any Director may elect to defer the receipt of all or a specified portion of his or her cash and/or stock compensation in accordance with the provisions of the Director Deferred Compensation Plan. Pursuant to the plan, cash fees can be deferred and paid at a future date requested by the Director. The amount will be adjusted based on investment crediting options, which include interest earned quarterly at a rate based on the prime rate plus one percent or the total shareholder return of our common stock, with amounts paid either in a lump sum or in installments in cash. Stock compensation can be deferred to a future date and paid either in a lump sum or installments and is payable in shares plus a cash amount representing dividend equivalents during the deferral period.
2011 DIRECTOR COMPENSATION TABLE
The following table provides details of nonemployee Director compensation in 2011:
A portion of the compensation for the Directors until 2005 included stock option grants. As of December 31, 2011, the following individuals had the following number of outstanding options and unvested restricted shares:
BOARD LEADERSHIP STRUCTURE
Our senior leadership is shared between two executive positions the CEO and the Chairman. Both leaders are actively engaged on significant matters affecting the Company, such as long-term strategy. The CEO focuses on all aspects of our operation, while the Chairman has a greater focus on our governance, including oversight of the Board of Directors. The positions of CEO and Chairman have been separate for over 80 years, with limited exceptions. We believe this balance of shared leadership between the two positions is a strength for us. It also provides the opportunity for consistent leadership as either person could assume the duties of the other should the need arise on an emergency basis.
Our independent Directors annually select a lead Director (Lead Director) whose duties include: (a) developing agendas for, and presiding over, the executive sessions of the independent Directors; (b) reporting the results of the executive sessions to the CEO and Chairman; (c) providing feedback as required to the other Directors on the issues discussed with the CEO and Chairman; (d) serving as a liaison with the CEO, Chairman and the independent Directors; (e) presiding at all meetings of the Board at which the Chairman is not present; (f) approving information sent to the Board; (g) approving agendas for Board meetings; (h) approving Board meeting schedules to ensure that there is sufficient time for discussion of all agenda items; (i) calling meetings of the independent Directors; and (j) ensuring that he or she is available for consultation and direct communications with major shareholders as appropriate. At the executive session of the independent Directors on December 9, 2011, the independent Directors elected Joseph W. Ralston, chairman of the Nominating and Corporate Governance Committee, to serve as Lead Director until the Annual Meeting of Shareholders in 2012. At that time, the independent Directors will elect a Lead Director to serve for the following year until the Annual Meeting of Shareholders in 2013.
The Board of Directors primarily relies on its Audit Committee for oversight of the Companys risk management. The Audit Committee regularly reviews issues that present particular risks to the Company, including those involving competition, customer demands, economic conditions, planning, strategy, finance, sales and marketing, products, information technology, facilities and operations, supply chain or legal matters. The full Board also reviews these issues as appropriate. The Board believes that this approach, supported by our senior leadership structure, provides appropriate checks and balances against undue risk taking.
We have a standing Audit Committee that has oversight responsibility with respect to our independent auditors and the integrity of our financial statements. The Audit Committee is composed of Frank C. Sullivan (Audit Committee Chairman), John M. Ballbach, Phillip R. Cox, John P. Reilly, and John M. Timken, Jr. Our Board of Directors has determined that each member of the Audit Committee is financially literate and independent as defined in the listing standards of the New York Stock Exchange. Our Board of Directors has determined that Frank C. Sullivan qualifies as the Audit Committee financial expert.
The Audit Committees charter is available on our website at www.timken.com/investors/governance.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed with management and our independent auditors the audited financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The Audit Committee has also discussed with our independent auditors the matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
The Audit Committee has received and reviewed the written disclosure and the letter from our independent auditors required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the Audit Committee concerning independence, has discussed with our independent auditors such independent auditors independence, and has considered the compatibility of non-audit services with the auditors independence.
Based on the review and discussions referred to above, the Audit Committee recommended to our Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission.
Frank C. Sullivan (Audit Committee Chairman)
John M. Ballbach
Phillip R. Cox
John P. Reilly
John M. Timken, Jr.
We have a standing Compensation Committee that establishes and administers our policies, programs and procedures for compensating our senior management and Board of Directors. Members of the Compensation Committee are John A. Luke, Jr. (Compensation Committee Chairman), Joseph W. Ralston, John P. Reilly, and Jacqueline F. Woods. Our Board of Directors has determined that all members of the Compensation Committee are independent as defined in the listing standards of the New York Stock Exchange.
With the guidance and approval of the Compensation Committee, we have developed compensation programs for our executive officers, including the CEO and the other executive officers named in the Summary Compensation Table, that are intended to enable us to attract, retain and motivate superior quality executive management; reward executive management for financial performance and the achievement of strategic objectives; and align the financial interests of executive management with those of our shareholders. The Compensation Committee determines specific compensation elements for the CEO and the Chairman and considers and acts upon recommendations made by the CEO and the Chairman regarding the other executive officers.
The agenda for meetings of the Compensation Committee is determined by its Chairman with the assistance of the Senior Vice President Human Resources and Organizational Advancement. The meetings are regularly attended by the Chairman, CEO, Senior Vice President Human Resources and Organizational Advancement, and Vice President Total Rewards. At each meeting, the Compensation Committee meets in executive session. The Chairman of the Compensation Committee reports the Committees actions regarding compensation of executive officers to the full Board of Directors. Our Human Resources and Organizational Advancement department supports the Compensation Committee in its duties and may be delegated certain administrative duties in connection with our compensation programs. The Committee has the sole authority to retain and terminate compensation consultants to assist in the evaluation of Director or executive officer compensation and the sole authority to approve the fees and other retention terms of any compensation consultants. The Compensation Committee has engaged Towers Watson, a global professional services firm, to conduct annual reviews of its total compensation programs for executive officers and, from time-to-time, to review the total compensation of Directors. Towers Watson also provides information to the Compensation Committee on trends in executive compensation and other market data.
With respect to Director compensation, as stated above, the Compensation Committee periodically engages Towers Watson to conduct reviews of total Director compensation, and the Committee then recommends to the full Board of Directors changes in Director compensation that will enhance our ability to attract and retain qualified Directors.
In January 2010, the firm of Towers Watson was created by the merger of Towers Perrin and Watson Wyatt. Towers Perrin had served as an advisor to the Compensation Committee for close to 20 years and was directly engaged by and accountable to the Committee. Watson Wyatt had been our long-time independent actuary. During fiscal 2011, Towers Watson was paid $270,000 for executive compensation advice and $2,454,000 for actuarial and other services to us and our benefit plans.
The Compensation Committee has concluded that the advice received by the Committee from Towers Watson continues to be objective, unbiased, and independent. The Committees careful oversight of the relationship with Towers Watson with respect to compensation advice mitigates the possibility that management could potentially misuse the actuarial engagement to influence Towers Watsons compensation work for the Committee. The Committee annually reviews the charges to the Company from Towers Watson for executive compensation advice and other services for the preceding three years along with an estimate of services for the coming year. Additionally, Towers Watson has adopted internal safeguards to ensure that its executive compensation unit is maintained separately from its actuarial business.
The Compensation Committee also plays an active role in our executive officer succession planning process. The Committee meets regularly with senior management to ensure that an effective succession process is in place and to discuss potential successors for executive officers. As part of this process, executive officer position profiles are updated to highlight the key skills required to meet future demands, and potential successors are evaluated and development plans are reviewed. At the end of each year, the Committee reviews the performance of the executive officers and potential successors. The Committees succession planning activities are discussed with the full Board in executive session.
The Compensation Committees charter is available on our website at www.timken.com/investors/governance.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis (the CD&A) for the year ended December 31, 2011 with our management. Following the review and discussion referred to above, the Compensation Committee recommended to our Board of Directors, and our Board approved, the inclusion of the CD&A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and this Proxy Statement for filing with the Securities and Exchange Commission.
John A. Luke, Jr. (Compensation Committee Chairman)
Joseph W. Ralston
John P. Reilly
Jacqueline F. Woods
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
We have a standing Nominating and Corporate Governance Committee that is responsible for, among other things, evaluating new Director candidates and incumbent Directors and recommending Directors to serve as members of our Board committees. Members of the Nominating and Corporate Governance Committee are Joseph W. Ralston (Nominating and Corporate Governance Committee Chairman), John A. Luke, Jr., Frank C. Sullivan and Jacqueline F. Woods. Our Board of Directors has determined that all members of the Committee are independent as defined in the listing standards of the New York Stock Exchange.
Director candidates recommended by our shareholders will be considered in accordance with the criteria outlined below. In order for a shareholder to submit a recommendation, the shareholder must deliver a communication by registered mail or in person to the Nominating and Corporate Governance Committee, c/o The Timken Company, 1835 Dueber Avenue, S.W., P.O. Box 6932, Canton, Ohio 44706-0932. Such communication should include the proposed candidates qualifications, any relationship between the shareholder and the proposed candidate, and any other information that the shareholder would consider useful for the Nominating and Corporate Governance Committee to consider in evaluating such candidate.
The Board of Directors General Policies and Procedures provide that the general criteria for Director candidates include, but are not limited to, the highest integrity and ethical standards, the ability to provide wise and informed guidance to management, a willingness to pursue thoughtful, objective inquiry on important issues before the Company, and a range of experience and knowledge commensurate with our
needs as well as the expectations of knowledgeable investors. The Nominating and Corporate Governance Committee utilizes a variety of sources to identify possible Director candidates, including professional associations and Board member recommendations. In evaluating candidates to recommend to the Board of Directors, the Nominating and Corporate Governance Committee considers factors consistent with those set forth in the Board of Directors General Policies and Procedures, including whether the candidate enhances the diversity of the Board. Such diversity includes professional background and capabilities, knowledge of specific industries and geographic experience, as well as the more traditional diversity concepts of race, gender and national origin. The attributes of the current Directors and the needs of the Board and the Company are evaluated whenever a Board vacancy occurs, and the effectiveness of the nomination process, including whether that process enhances the Boards diversity, is evaluated each time a candidate is considered. The Nominating and Corporate Governance Committee is also responsible for reviewing the qualifications of, and making recommendations to the Board of Directors for, Director nominations submitted by our shareholders. All Director nominees are evaluated in the same manner by the Nominating and Corporate Governance Committee, without regard to the source of the nominee recommendation.
The Nominating and Corporate Governance Committee also plans for Director succession. The Committee regularly reviews the appropriate size of the Board and whether any vacancies are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Committee considers potential Director candidates. As part of this process, the Committee assesses the skills and attributes of our Board as a whole and of each individual Director and evaluates whether prospective candidates possess complementary skills and attributes that would strengthen our Board.
The Nominating and Corporate Governance Committees charter is available on our website at www.timken.com/investors/governance.
Our code of business conduct and ethics, called the Standards of Business Ethics, and our corporate governance guidelines, called the Board of Directors General Policies and Procedures, are reviewed annually by the Nominating and Corporate Governance Committee and are available on our website at www.timken.com/investors/governance.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table shows, as of January 6, 2012, the beneficial ownership of our common stock by each continuing Director, nominee for Director and executive officer named in the Summary Compensation Table on page 28 of this Proxy Statement, and by all continuing Directors, nominees for Director and executive officers as a group. Beneficial ownership of our common stock has been determined for this purpose in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and is based on the sole or shared power to vote or direct the voting or to dispose or direct the disposition of our common stock. Beneficial ownership as determined in this manner does not necessarily bear on the economic incidents of ownership of our common stock.
The following table gives information known to us about each beneficial owner of more than 5 percent of our common stock as of January 6, 2012, unless otherwise indicated below.
The Companys success depends largely on the contributions of motivated, focused and energized people all working to achieve our strategic objectives. This understanding shapes our approach to providing a competitive total compensation package to our CEO and the other executive officers named in the Summary Compensation Table (the named executive officers) that:
The Company uses a balance of short-term and long-term incentives as well as cash and non-cash compensation to meet these objectives. The elements of executive compensation consist of base salary, annual incentives, long-term incentives including performance units, stock options and performance shares, retirement income programs and other benefits. Each element of compensation meets one or more of the objectives described above.
2011 Business Performance
The Compensation Committee believes that our executive compensation for 2011 was consistent with our compensation objectives and demonstrates a long-standing focus on pay for performance at all levels. The reported executive compensation reflects changes made to target opportunities to track market practices, payments commensurate with our strong operating performance and changes in the accounting value of pension obligations.
The combined effect of the actions taken by management in recent years to improve both the Companys market exposure and its internal operating performance drove the Company to record levels of sales and profitability in 2011. Sales for 2011 were $5.2 billion, an increase of 28 percent over 2010. Earnings per diluted share for 2011 were $4.59, up 65 percent over 2010. In addition, the Company maintained its considerable liquidity and strong balance sheet.
2011 Target Pay Adjustments
The Compensation Committee approved the following pay changes with respect to executive compensation targets for the named executive officers in 2011:
Salary: The CEO received a base salary increase of 3.9 percent in 2011. The other named executive officers received base salary increases ranging from 2.5 percent to 3.7 percent, which is within the range of salary adjustments for all Company employees. The base salary increases were made to maintain alignment with market practice and were effective March 1, 2011. See Base Salary below.
Annual Performance Award: The target annual bonus opportunities for the CEO and the Chairman for 2011 were increased from 100 percent to 115 percent of base salary to better align the targets with market practice. The target opportunities for the other named executive officers remained unchanged for 2011. See Annual Performance Award below.
Long-Term Incentives: The named executive officers received target long-term incentive awards in 2011 with values ranging from approximately $1.1 million to $4.8 million. The target value of performance shares and nonqualified stock options was increased in 2011 for the CEO and the Chairman to better align with market practice. See Long-Term Incentives below.
CEO Total Pay: The CEOs target pay for 2011 positioned his total pay package slightly below the 50th percentile as defined using the process described below in the Pay Setting Process section of this CD&A.
The table below shows the year-to-year change in targeted compensation for the CEO in 2011 compared to 2010:
2011 Incentive Compensation
In addition to total shareholder return, there are a variety of factors that we believe reflect Company performance over both short-term and long-term periods. These factors include earnings before interest and taxes as a percentage of beginning invested capital (EBIT/BIC), return on invested capital and earnings per share, among other things. The Company achieved record operating results with respect to a number of these factors during 2011. These results drove the following incentive compensation awards for performance periods ending on December 31, 2011:
Long-Term Realized Pay
While most individual pay decisions are based on an annual timetable, the Compensation Committee takes a longer-term view of how pay and performance are linked for executives. In addition, the Committee primarily focuses on the pay realized by executives as a result of performance, not just the values we are required to report in the Summary Compensation Table and its supporting tables. The values in those tables, while important, only tell a portion of the story as they reflect accounting values of different program elements, not realized values. In addition, in the case of pension values, they are influenced by factors such as changes in interest rates, not just changes in the underlying benefit levels or program design.
The table below shows the value of realized compensation for the CEO from 2009 through 2011, as well as the performance of the Company on the primary incentive metrics tracked by the Company. While not a substitute for the Summary Compensation Table, this table provides what we believe is an accurate depiction of the relationship between pay and performance at the Company, and shows strong alignment between the two. During this time period, the Company increased shareholder wealth by over $2 billion through increases in stock price and the payment of dividends.
In addition, during 2011, as a result of a decline in the Companys stock price during the year, the aggregate value of the outstanding stock options, restricted shares and performance shares granted to the CEO between 2008 and 2010 declined by approximately $5.8 million. This decline in value, which does not include the decline in value of the other shares owned by the CEO, further reinforces the performance orientation of our program and the alignment of interests between our executives and our shareholders.
The primary differences between the total amounts shown in this table and in the Summary Compensation Table is that this table reflects actual gains from option exercises and stock vesting as opposed to the grant date fair value of stock and options awards, and this table does not reflect increases in pension values and perquisites and certain other compensation amounts that are shown in the Summary Compensation Table.
Governance Actions in 2011
In addition to these pay actions, the Company also made changes to strengthen its compensation programs to reflect best practices in governance of executive pay:
Alignment of Pay and Performance
The Compensation Committee recognizes that 2011 was an outstanding year for the Company, despite challenging economic conditions in many of the markets served by the Company. Although the Companys total shareholder return for 2011 underperformed total shareholder return in 2010 and 2009, the Compensation Committee recognizes that actions taken by management in recent years drove the Company to reach the record levels of sales and profitability seen in 2011. As a result, realized pay was aligned with these strong results. In addition, the Companys three-year annualized total shareholder return of 28 percent and five-year annualized total shareholder return of 8.2 percent demonstrate that the Company is creating long-term value for its shareholders that is aligned with pay increases over these periods. The Compensation Committee also believes that the compensation decisions made in light of the Companys strong performance, as well as the longer-term implication of past and present compensation decisions, demonstrate a strong, sustained commitment to paying for performance.
Executive Compensation Program Design
The Company designs its executive compensation programs to ensure they are aligned with competitive market practices, the Companys emphasis on meeting its performance aspirations and the creation of long-term shareholder value. Based on a review of the compensation programs and policies that apply to all Company employees, the Compensation Committee has determined that such programs and policies are not reasonably likely to have a material adverse effect on the Company. Additionally, in establishing and reviewing the executive compensation programs, the Compensation Committee considers whether the programs encourage unnecessary or excessive risk taking and has determined that they do not. The Compensation Committee also considered the result of the 2011 advisory, non-binding say-on-pay vote in connection with the discharge of its responsibilities. Because a substantial majority of our shareholders approved the compensation for our named executive officers described in our Proxy Statement for the 2011 Annual Meeting of Shareholders, the Compensation Committee determined that no changes to our compensation programs were warranted as a result of the shareholder advisory vote. As described above under Executive Summary, however, our Compensation Committee did take action during 2011 to strengthen our executive compensation programs and to continue to build a pay-for-performance culture.
In order to gauge the competitiveness of its compensation programs, the Company periodically reviews survey data from nationally recognized consulting firms. Collectively, these databases reflect the pay practices of hundreds of companies from a range of industries. The Company attempts to position itself to attract and retain qualified senior executives in the face of competitive pressures in its relevant general labor markets. In 2011, the Company used information regarding the pay practices of companies in these databases with revenues adjusted (via the use of regression analysis) to reflect a company of Timkens revenue size. Specifically, the Company uses both the Towers Watson Executive Compensation Database and the Aon Hewitt US Total Compensation Measurement Executive Survey. A combined list of the companies in these databases is attached to this Proxy Statement as Appendix B. The Company believes that revenues are an appropriate indicator of the size and complexity of an organization, which should be reflected in determining compensation levels. Furthermore, the Company views general industrial companies of comparable size as the relevant market for the Companys senior executive talent. In light of the survey data gathered and the relative positioning of Timkens executives to the competitive market, the Compensation Committee elected to make nominal adjustments to targeted compensation levels for certain executives as described above under 2011 Target Pay Adjustments.
Guidelines for salaries, annual incentives and long-term incentive grants are based on the 50th percentile of the general industry data for each position. The Company may provide target compensation above or below the 50th percentile for a particular position based on internal factors such as the executives operating responsibilities, experience level, retention risk and tenure and performance in the position. The Company establishes compensation levels in this way for two main reasons. First, this approach sets fair and reasonable pay levels needed to attract and retain qualified executives. Second, it requires excellent performance for pay that is higher than that provided by the majority of companies in the comparison group.
The Company establishes target compensation levels that are consistent with market practices relative to base salaries, annual incentive awards and long-term incentive grants, along with the Compensation Committees assessment of the appropriate mix for the position. Current compensation is structured to provide needed personal liquidity, focus executives on short-term priorities and dampen the impact of a volatile stock market. Providing a significant portion of executive compensation in the form of long-term compensation strengthens the alignment of executives to the long-term performance of the Company and provides a balance against short-term decision making.
The Companys incentive compensation programs for executives are designed to link compensation performance with the full spectrum of our business goals, some of which are short-term, while others take several years or more to achieve:
The mix between current and long-term or cash and non-cash compensation varies by management level. For example, the CEO and the Chairman receive more of their total target compensation in the form of long-term compensation relative to the other named executive officers. For both, target compensation consists of approximately 40 percent in current compensation and 60 percent in long-term compensation, made up of approximately:
Target compensation for the other named executive officers is approximately 45 percent in current compensation and 55 percent in long-term compensation, with approximately 65 percent in cash and 35 percent in non-cash compensation. Positions lower in the organization have a greater emphasis on current, cash denominated pay. This reflects the Companys view that more senior executives should have a more significant incentive to focus on and drive long-term performance, while priorities for executives lower in the organization are more heavily focused on shorter-term operational results.
Cash is used for both current and long-term compensation, while non-cash compensation (i.e., share-based awards) is generally used only for long-term compensation. Cash compensation includes base salary, annual incentive awards and performance units, which are cash-based awards typically payable at the end of three years subject to attainment of certain corporate performance targets. Non-cash compensation includes stock option grants and performance share grants. Compensation tied to equity is intended to align the recipients interests with those of our shareholders, as changes in stock price have a meaningful impact on the recipients personal wealth.
The CEO and the Senior Vice President Human Resources and Organizational Advancement, in consultation with Towers Watson, the Compensation Committees external compensation consultant, prepare compensation recommendations for the named executive officers (other than the CEO and the Chairman) and present these recommendations to the Compensation Committee. The compensation packages for the CEO and the Chairman are determined by the Compensation Committee (with input from the Chairman on the performance and pay recommendations for the CEO) and approved by the independent members of the Board of Directors during executive session.
The Company compares each element of compensation provided to its executive officers to market data and considers the total compensation package in relation to the target established for the position, taking into account the scope of responsibilities for the particular position. Total compensation (base salary, annual incentives and long-term incentive grants) is evaluated in relation to the total compensation of comparable positions derived from the general market data. For example, the amount of Mr. Griffiths compensation is higher than the other named executive officers because it reflects the competitive market for CEO services, and not because of compensation policies different from those applied to the other named executive officers.
In the course of this analysis and development of proposed total compensation packages, the Compensation Committees external compensation consultant reviews the relevant information and discusses their findings with the Committee. As part of this process, the Compensation Committee reviews all the components of compensation for the named executive officers and determines that each individuals total compensation is reasonable and consistent with the Companys compensation philosophy. The Compensation Committee may also consider additional factors, such as the executives operating responsibilities, experience level, retention risk and tenure and performance in the position, and make adjustments to a particular element of an executives compensation. The Compensation Committee then approves, with any modifications it deems appropriate, base salary ranges, target annual performance award opportunities and long-term incentive grants for the Companys executive officers. The amount of past compensation realized or potentially realizable does not directly impact the level at which current and long-term pay opportunities are set, though the Compensation Committee does consider this information in its deliberations.
The Company analyzes the overall expense arising from aggregate executive compensation, as well as the accounting and tax treatment of such programs. The Company has addressed the impact of Section 162(m) of the Internal Revenue Code by obtaining shareholder approval of the Senior Executive Management Performance Plan and the Long-Term Incentive Plan and by structuring certain grants under the Long-Term Incentive Plan as performance-based compensation. All named executive officers participated in the Senior Executive Management Performance Plan for 2011. The Compensation Committee considers the deductibility of compensation and benefits for Federal income tax purposes, along with other relevant factors, when determining executive compensation practices.
As described above, the Compensation Committee engages an external compensation consultant in connection with its oversight of the design, development and implementation of the Companys executive pay programs. During 2009, the Compensation Committee established a multi-year agreement with Towers Watson to provide this service. In 2011, Towers Watsons primary areas of assistance were:
The Compensation Committee has authorized Towers Watson to interact with the Companys management, as needed, on behalf of the Compensation Committee.
Analysis of 2011 Compensation
Base salaries for the named executive officers are intended to reflect the scope of their responsibilities, the length of their experience performing those responsibilities and their performance. The Compensation Committee determines base salary ranges for executive officers using external surveys of salary practices for positions with similar levels of responsibility. The Compensation Committee also reviews base salaries for the named executive officers annually in light of each officers experience, leadership, current salary and position in the salary range.
Following this review process in 2011, the Compensation Committee decided to increase the base salary for the CEO by 3.9 percent. The other named executive officers received base salary increases ranging from 2.5 percent to 3.7 percent. The base salary increases were consistent with base salary increases implemented throughout the Company.
Annual Performance Award
The Companys Senior Executive Management Performance Plan provides the named executive officers with the opportunity to earn annual incentive compensation based on the achievement of corporate performance goals established by the Compensation Committee and approved by the Board of Directors. It is intended to focus the named executive officers on specific performance goals in the current year.
The Senior Executive Management Performance Plan is structured to comply with Section 162(m) of the Internal Revenue Code. In order to qualify the amounts earned under the plan as performance-based, the Compensation Committee can exercise discretion only to reduce an award. As a result, performance at target levels results in the plan being funded above the level of the Companys other annual incentive plans. This provides the Compensation Committee with the flexibility to determine actual awards under the Senior Executive Management Performance Plan for the named executive officers that are consistent with the awards made to other annual incentive plan participants, which has been the historical practice.
For 2011, the Senior Executive Management Performance Plan provided both the CEO and the Chairman a target award opportunity of 115 percent of base salary. The Plan provided the other named executive officers a target award opportunity of 70 percent to 75 percent of base salary. Target award opportunity levels for executive officers were determined by the Compensation Committee based on external surveys of practices for positions with similar levels of responsibility. The actual awards could be higher or lower than the target opportunity based on the results for each performance measure and the extent to which the Compensation Committee uses discretion to reduce the awards.
The Company used two performance measures for funding this plan for 2011: (1) corporate EBIT/BIC (calculated to exclude the effects of acquisitions and divestitures above $50 million in size, changes in tax laws or accounting principles, non-cash impairments, changes in other comprehensive income and any amounts received under the Continued Dumping and Subsidy Offset Act); and (2) working capital as a percentage of sales. Corporate EBIT/BIC constituted 80 percent of the total award calculation and working capital as a percentage of sales constituted 20 percent. The Compensation Committee established corporate EBIT/BIC as the primary performance measure because it believes this measure is closely correlated with the creation of shareholder value. Working capital as a percentage of sales was used to focus the named executive officers on managing working capital.
The Companys 2011 performance goals, associated plan funding levels, and actual calculated performance are summarized in the following table:
Senior Executive Management Performance Plan - 2011
The EBIT/BIC target level for 2011 was significantly higher than the 2010 target and the highest target in the history of the plan, despite ongoing uncertainty in most of the Companys global markets. The actual calculated corporate EBIT/BIC was 25.7 percent, which exceeded the maximum level, while the ratio of working capital to sales was 24.0 percent, or slightly better than target. As a result, the Senior Executive Management Performance Plan was eligible to be funded at 243.4 percent of target. The Compensation Committee determined the actual annual incentive award for each named executive officer based on the calculated award, as a percentage of target opportunity, under the Companys annual incentive plan for management level employees other than the named executive officers. As a result, the 2011 cash payout under the Senior Executive Management Performance Plan equaled 173 percent of the target opportunity for each of the named executive officers.
The Compensation Committee administers the Long-Term Incentive Plan, which is approved by our shareholders. Awards under the Long-Term Incentive Plan can be made in the form of non-qualified stock options, incentive stock options, appreciation rights, performance shares, performance units, restricted shares, restricted stock units and deferred shares. In 2011, the Company utilized three different types of long-term incentive grants for the named executive officers:
In total, the Company believes that these three grant types provide a balanced focus on shareholder value creation and retention of key managers over the course of a full business cycle. These grants also serve to balance the short-term operating focus of the Company and align the long-term financial interests of executive management with those of our shareholders.
The value of each type of long-term incentive grant is linked directly to the performance of the Company or the price of its common stock. For performance units, payouts are entirely contingent on the attainment of corporate performance targets, based on the Companys three-year strategic plan. In the case of stock options, the recipient recognizes value only to the extent that the stock price rises above the market price of the stock at the time the option is granted. As for performance shares, receipt of the shares is dependent upon achievement of a certain level of performance and the value of the shares is directly related to the stock price and the dividends paid by the Company. In each case, an executive must remain employed by the Company for a minimum of three years (four years for stock options and performance shares) to earn the full value of any award, which aids the Company in retaining executives.
The allocation of grant value among the three long-term incentive grant types is based on a combination of market practice, internal equity considerations and the relative importance of the objectives behind each of the three grants (i.e., reward attainment of multi-year performance goals, provide value tied to stock price appreciation and foster stock ownership). For the CEO and the Chairman, greater emphasis is placed on the stock option component, reflecting the Committees belief that the CEO and the Chairman, more than other officers, are directly accountable for long-term shareholder value creation.
When determining the size of the stock option and performance share grants in recent years, the Committee concluded that using the stock price at a single point in time did not reflect the longer term value of the stock. As a result, the Compensation Committee used the average price over the last six months of the year prior to the grant date in determining the number of shares granted. The resulting grants reflect reported compensation that may be higher or lower than target levels as a result of differences between the stock price on the date of grant used for reporting purposes and the average price used to determine the size of the grants. The Company has used this averaging practice the past three years, with the net effect over that period being aggregate grant values that were below our targeted values.
The Compensation Committee typically grants performance units, stock options and performance shares at the first regularly scheduled meeting of each year, when the Committee determines all elements of the officers compensation for the year. Board and Committee meetings are generally scheduled at least a year in advance. Approval of grants for newly hired or promoted executives during the course of the year occur at the Compensation Committee meeting immediately following the hiring or promotion.
The named executive officers have received awards of performance units at the start of three-year performance periods, and the awards are designed to focus the officers efforts on the Companys medium-term performance goals. A new three-year performance cycle starts on January 1 of each year. Cash payouts for performance units are typically made by March following the end of each performance cycle. Performance units act as a strong incentive for the named executive officers to achieve the Companys medium-term financial and strategic objectives. They also encourage retention, as they are subject to forfeiture if the officer voluntarily leaves the Company before the end of the three-year period.
For each of the performance cycles described below, the Compensation Committee established two performance measures: (1) return on invested capital (ROIC); and (2) earnings per share (EPS). The Compensation Committee selected these goals because it believes they are key components of shareholder value creation and highly correlated to achievement of the Companys business strategy. Each measure was weighted equally because they are viewed as equally important for these performance cycles. For the 2009 to 2011 performance cycle, actual performance is calculated to exclude the effects of changes in tax laws or accounting principles. For the 2010 to 2012 and 2011 to 2013 performance cycles, actual performance is calculated to exclude the effects of changes in tax laws or accounting principles, non-cash impairments, changes in other comprehensive income and any amounts received under the Continued Dumping and Subsidy Offset Act.
2009 to 2011 Performance Cycle
The Compensation Committee establishes a target payout opportunity for the performance units for each named executive officer, determined as a percentage of the officers base salary in effect on January 1 in the first year of the period. For the 2009 to 2011 cycle, the CEO and the Chairman had a target payout opportunity of 100 percent and the other named executive officers had target payout opportunities from 50 percent to 80 percent of their January 1, 2009 base salaries. These target percentages were determined to provide the appropriate allocation of value among the long-term incentives, as described above.
The Companys performance goals, associated plan funding levels and actual calculated results for the 2009 to 2011 cycle are summarized in the following table:
Performance Units - 2009 to 2011 Cycle
For the 2009 to 2011 cycle, actual calculated performance exceeded the target level for both measures and the CEO and the Chairman each received a cash payment equal to 146 percent of their January 1, 2009 base salaries and the other named executive officers received cash payments equal to 73 percent to 117 percent of their January 1, 2009 base salaries.
2010 to 2012 Performance Cycle
The severe economic downturn in 2009 significantly affected performance units covering multiple performance cycles. There were no payouts for the 2007 to 2009 cycle or the 2008 to 2010 cycle and at the time the 2010 to 2012 cycle was approved, the probability of achieving the targets for the 2009 to 2011 cycle was believed to be remote. Recognizing the challenges of setting multi-year performance goals in an uncertain environment, while at the same time desiring to strengthen the incentive to achieve the Companys strategic objectives and to encourage retention of senior management, the Compensation Committee structured the performance units for the 2010 to 2012 performance cycle to provide an opportunity for a payout to be earned in each year of the cycle.
As in the past, the specific performance targets for each measure are tied to the Companys internal, confidential three-year strategic plan. Given the uncertain environment at the time the targets were established, the Compensation Committee believed that the targets for the 2010 to 2012 cycle were very challenging, but achievable. The target payout opportunity for the performance units granted in 2010 was 100 percent of base salary (as of January 1, 2010) for the CEO and the Chairman and ranged from 60 percent to 80 percent of base salary (as of January 1, 2010) for the other named executive officers.
Funding (as a percentage of target) for the 2010 to 2012 performance cycle is as follows:
The Companys performance goals and actual calculated results for the 2011 component of the 2010 to 2012 cycle are summarized in the following table:
2010 to 2012 Performance Units 2011 Performance Goals
Based on these results, the CEO and the Chairman each received a cash payment equal to 100 percent of their January 1, 2010 base salaries and the other named executive officers received cash payments equal to 60 percent to 80 percent of their January 1, 2010 base salaries.
2011 to 2013 Performance Cycle
In 2011, the Compensation Committee returned to the approach used prior to 2010 under which the entire performance award is paid at the end of the three-year cycle. As in the past, the specific performance targets for each measure are tied to the Companys internal, confidential three-year strategic plan. As a result, at the time the targets were established, the Compensation Committee believed that the targets for the 2011 to 2013 cycle were very challenging, but achievable. For the performance units granted in 2011, the CEO and the Chairman have a target payout opportunity of 100 percent and the other named executive officers have target payout opportunities from 70 percent to 80 percent of their January 1, 2011 base salaries, as reflected in the 2011 Grants of Plan-Based Awards Table below.
Under the accounting rules, performance units result in variable accounting, whereby the Companys expense equals the value paid to the executives. As such, the ultimate expense is not determinable until the end of the three-year performance period. When the executives earn and receive a payout, the Company receives a corresponding tax deduction.
Key Employees (including the named executive officers) receive nonqualified stock options that:
The Compensation Committee believes that this structure helps the Company retain executives and focus attention on longer-term performance. Stock options are an effective motivational tool because they only
have value to the extent the stock price on the date of exercise exceeds the exercise price on the grant date. They are an effective element of compensation and retention, however, only if the stock price grows over the term of the award. For information about the specific number of stock options awarded to each of the named executive officers, see the 2011 Grants of Plan-Based Awards Table below.
Under accounting rules, the fair value of the stock options on the grant date is expensed over the vesting period in the year the options become vested. When executives exercise stock options, they are taxed at ordinary income tax rates (subject to withholding) and the Company receives a corresponding tax deduction.
Performance shares are equity grants that are forfeited if a specified performance objective is not achieved. Performance shares serve to both reward and retain executives, as the receipt of the shares is linked to performance and the value of the shares is linked to the stock price when the shares vest.
The performance objective for performance shares granted in 2011 was corporate EBIT/BIC of 4 percent or better in any single year during the four-year vesting period. This performance objective was met in 2011 and the shares converted to time-based vesting, with 25 percent of the award vesting on the first anniversary of the grant and an additional 25 percent vesting on each of the next three anniversaries. For information about the specific number of performance shares awarded to each of the named executive officers, see the 2011 Grants of Plan-Based Awards Table below.
Under accounting rules, the grant date fair value of the performance shares is expensed over the service/vesting period based on the shares that are earned, provided the performance metric is met. The executives are taxed at ordinary income tax rates (subject to withholding) when the shares vest, and the Company receives a corresponding tax deduction.
Stock Ownership Guidelines
Stock ownership guidelines have been established for all senior executives and are intended to align the interests of executive management with those of our shareholders by requiring executives to be subject to the same long-term stock price volatility our shareholders experience. These guidelines establish the following specific ownership target for each of the named executive officers: Mr. Griffith 100,000 shares; Mr. Timken 80,000 shares; Mr. Eisenberg 33,000 shares; Mr. Miraglia 28,000 shares; and Mr. Coughlin 28,000 shares. The Company considers all shares owned by the executive, including restricted shares and performance shares still subject to forfeiture but not including shares that are subject to unexercised options, in determining whether the executive has met ownership targets. As of December 31, 2011, the named executive officers all exceeded their ownership targets. The Company has a formal policy that prohibits hedging the economic risk related to such stock ownership.
Retirement Income Programs
The Companys retirement income programs are an important retention tool. The Company maintains both qualified and nonqualified retirement income programs. The named executive officers participate in qualified plans on the same terms and conditions as all other salaried employees and also participate in the Companys nonqualified retirement income programs. The Company currently provides nonqualified retirement income through two types of plans:
Although the policies and procedures underlying the Companys retirement income programs are the same for all participants, the age and length of service (including service as an officer of the Company) of each participant can have a significant effect on their benefit calculation because the programs have changed over time. In addition, because benefits under the Companys retirement income programs are based on base salary and cash annual incentive compensation for the five highest non-consecutive years (out of the final ten years), pension values can increase significantly as salary and cash annual incentive compensation increases. Pension values are also influenced by external factors such as the current environment of low interest rates, which have caused pension values to increase.
The value of the nonqualified retirement income programs is quantified each year and these programs are periodically reviewed for their competitiveness. To date, the value of these programs has not had a significant impact on decisions regarding salary, annual incentive awards or long-term incentive grants.
In addition to retirement payments, the Company provides termination-related payments in the event of involuntary termination without cause and involuntary termination without cause following a change in control.
The Company provides payments in the event of involuntary termination without cause through severance agreements with individual executives. Severance agreements are provided based on competitive market practice and the Companys desire to ensure some level of income continuity should an executives employment be terminated without cause. The Company believes that providing for such income continuity results in greater management stability and lower unwanted management turnover.
Severance agreements also provide for termination payments following involuntary termination without cause following a change in control. These provisions are based on competitive practice and are designed to ensure that executives interests remain aligned with shareholders should a potential change of control occur. They are also intended to provide some level of income continuity should an executives employment be terminated without cause. The Company believes, as stated above, that providing for such income continuity results in greater management stability and lower unwanted management turnover.
The level of severance benefits under the applicable scenario reflects the Companys perception of competitive market practice for the named executive officers positions, based on an assessment by Towers Watson. Severance pay was established as a multiple of base salary and actual annual incentive compensation, based on competitive market practice. Specific dollar values were not targeted by the Compensation Committee, although the Compensation Committee did review tally sheets that showed the estimated cost of such benefits under various scenarios. The amounts of potential payouts are indicated in the Termination Scenarios table on page 38.
The Company maintains a Deferred Compensation Plan that allows certain employees, including the named executive officers, to defer receipt of all or a portion of their salary, employee contributions and Company match that would otherwise be directed to the Post-Tax Savings Plan and/or incentive compensation payable in cash or common shares until a specified point in the future. Cash deferrals earn interest quarterly at a rate based on the prime rate plus one percent. None of the named executive officers earned above-market interest, as defined by the Securities and Exchange Commission.
The Deferred Compensation Plan is not funded by the Company, and participants have an unsecured contractual commitment by the Company to pay the amounts due under the plan. When such payments are due, they will be distributed from the Companys general assets. In the event of a change in control in the Company, as defined in the plan, participants are entitled to receive deferred amounts immediately. The Compensation Committee believe that providing employees with tax deferral opportunities aids in the attraction and retention of such employees.
The value of deferred compensation amounts is quantified each year and this program is periodically reviewed for its competitiveness. To date, the value of deferred compensation has not had a significant impact on decisions regarding salary, annual incentive awards or long-term incentive grants.
The Companys executive officers, including all of the named executive officers, are eligible to participate in a number of broad-based benefit programs, including health, disability and life insurance programs. The named executive officers may also receive certain perquisites including term life insurance coverage, financial counseling and tax preparation, access to corporate country club memberships (although personal expenses are not reimbursed), and home security systems. The value of these benefits is reflected in the All Other Compensation column in the Summary Compensation Table below. Beginning January 1, 2011, the Company no longer provides tax gross-ups for these benefits to executives. These benefits are intended to provide executives with a competitive perquisite program that is reasonable and consistent with the Companys overall approach to executive compensation. The total cost of these benefits is a small percentage of each named executive officers total compensation.
2011 SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for our named executive officers for 2011:
Performance share grants for each of the named executive officers require the Company to achieve a performance objective for at least one year during the four-year vesting period. Upon attainment of the performance objective, the grants convert to time vesting for all shares. The 2011 performance share grants required the Company to achieve a performance objective of EBIT/BIC of 4 percent or better and this objective was achieved in 2011.
2011 GRANTS OF PLAN-BASED AWARDS
The following table sets forth information concerning certain grants made to our named executive officers during 2011:
OUTSTANDING EQUITY AWARDS AT 2011 YEAR-END
The following table sets forth information concerning unexercised options and stock that has not vested for each of our named executive officers as of December 31, 2011:
2011 OPTION EXERCISES AND STOCK VESTED
The following table sets forth information with respect to the exercise of stock options by and vesting of stock-based awards for our named executive officers during 2011:
During 2003, the Company moved from a defined benefit retirement program (the Qualified Plan) to a core defined contribution retirement income program for all new salaried employees hired on or after January 1, 2004, as well as for current salaried employees whose age plus years of service with the Company equaled less than 50 as of December 31, 2003. Salaried employees whose age plus years of service equaled or exceeded 50 as of December 31, 2003 participate in a defined benefit plan with a formula of 0.75 percent per year of service times average earnings, including base salary and cash annual incentive compensation, for the highest five non-consecutive years of the ten years preceding retirement (Final Average Earnings). For all employees in a defined benefit plan as of December 31, 2003, the formula in effect at the time of service, using Final Average Earnings at retirement, would be applied to such service.
The benefit is generally payable beginning at age 65 for the lifetime of the employee, with alternative forms of payment available with actuarial adjustments. Participants may retire early from the Qualified Plan if they meet any of the following eligibility requirements:
In addition, participants age 55 with at least 15 years of service may retire and receive the portion of their Qualified Plan benefit attributable to service earned after 2003. As of December 31, 2011, Messrs. Griffith and Miraglia were the only named executive officers who were eligible for early retirement.
Benefits for service after December 31, 1991 are reduced for early commencement at a rate of 3 percent per year before age 60 for the portion of the benefit attributable to service earned between 1992 and 2003, and 4 percent per year before age 62 for the portion of the benefit attributable to service earned after 2003.
Supplemental Pension Plan
Consistent with the retirement income program changes the Company implemented for its salaried employees generally, the Company also reviewed and modified its SERP effective January 1, 2004. Supplemental retirement income benefits under the SERP will be calculated using a target benefit of 60 percent of Final Average Earnings, offset by any defined benefit plan payments provided by the Company and the aggregate earnings opportunity provided by any Company contributions under the core defined contribution program, the SIP Plan and the Post-Tax Savings Plan. To receive 100 percent of the supplemental benefit, the officer must have at least ten years of Company service. Benefits will be prorated for Company service of less than ten years. The supplemental benefit will vest after five years of service as an officer of the Company, with normal retirement being considered as of age 62. Early retirement at age 55 with at least 15 years of Company service will be available, but if benefits are commenced early, they will be reduced by 4 percent per year for each year of early commencement prior to age 62.
For both the Qualified Plan and the SERP, only actual years of service are counted in calculating pension benefits, except in the case of involuntary termination without cause, in which case up to two additional years of service will be credited.
2011 PENSION BENEFITS TABLE
The following table sets forth the number of years of credited service and actuarial value of the defined benefit pension plans for our named executive officers as of December 31, 2011:
2011 NONQUALIFIED DEFERRED COMPENSATION
The table below sets forth information regarding Deferred Compensation Plan contributions, earnings and withdrawals during 2011 and the account balances as of December 31, 2011 for our named executive officers:
We maintain a Deferred Compensation Plan that allows certain employees, including the named executive officers, to defer receipt of all or a portion of their salary, employee contributions and Company match that would otherwise be directed to the Post-Tax Savings Plan and/or incentive compensation payable in cash or shares of common stock until a future time they have specified. Cash deferrals earn interest quarterly at a rate equal to the prime rate plus one percent. Restricted share deferrals, which were previously allowed under the plan, earn dividend equivalents (cash equivalent to the value of dividends that would be paid on restricted shares) and interest on those dividend equivalents at the aforementioned rate. The Deferred Compensation Plan is not funded by the Company and participants have an unsecured contractual commitment by the Company to pay the amounts due under the plan. When such payments are due, they will be distributed from the Companys general assets. In the event of a change in control in the Company, as defined in the plan, participants are entitled to receive deferred amounts immediately.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
We have entered into severance agreements with each of the named executive officers that provide for compensation in the event of termination of employment under certain circumstances (the Severance Agreements). In addition, the named executive officers are entitled to post-termination payments or benefits under agreements entered into under the Long-Term Incentive Plan and under our retirement and benefit plans under certain circumstances. The following circumstances would trigger post-termination payments to the named executive officers: change in control followed by certain events described below, involuntary termination without cause, retirement, permanent disability and death. All scenarios are assumed to have a December 31, 2011 effective date.
Change In Control
Under the Severance Agreements with the named executive officers, when certain events occur, such as a reduction in the officers responsibilities or termination of the officers employment without cause following a change in control of the Company (as provided in the Severance Agreements), the officer will be entitled to receive payment in an amount, grossed-up for any excise taxes payable by the individual, equal to a multiple of three times the sum of the officers annual base salary and the greater of: (1) the officers target annual amount of incentive compensation for the year in which the officer terminates employment; or (2) the officers target annual amount of incentive compensation for the year in which the change in control occurs. In addition, the officer would receive a lump sum amount representing the SERP benefit.
The lump sum amount is determined by calculating the benefit under the Qualified Plan and the SERP assuming the officer continued to earn service for three additional years with annual earnings during those three years equal to the compensation described above. The lump sum amount is reduced by the lump sum equivalent of the benefit payable from the Qualified Plan. This lump sum is determined based on mortality table and interest rate promulgated by the IRS under Section 417(e)(3) of the Internal Revenue Code.
The officer would also receive certain benefits based on contributions that would have been made to the SIP Plan and the Post-Tax Savings Plan during the three-year period. Any unvested equity-based grants would vest and become nonforfeitable. The officer has five years to exercise all stock options. In the event of a change in control, the amounts payable under the Severance Agreements become secured by a trust arrangement.
At its meeting on December 9, 2010, the Compensation Committee of the Board of Directors approved a new form of Severance Agreement that eliminates the excise tax gross-up provision for new participants or existing participants moving into higher-level positions. This new form agreement provides that the participant will receive the best net benefit of either: (1) paying all excise taxes incurred by a change-in-control benefit, without a gross-up by the Company; or (2) accepting a change-in-control benefit that is no greater than the excise tax threshold. With Mr. Coughlins appointment to the position of President Process Industries, he entered into the new form of Severance Agreement containing this provision.
The Company pays no severance, benefits, perquisites or vesting of any equity-based grants in the case of a voluntary termination.
Involuntary Termination With Cause
The Company provides no severance, benefits, perquisites or vesting of any equity-based grants in the case where an officer is terminated by the Company with cause. As provided in the Severance Agreements, termination with cause can occur only in the event that the officer has done any of the following: an intentional act of fraud, embezzlement or theft in connection with his duties with the Company; intentional wrongful disclosure of secret processes or confidential information of the Company or a Company subsidiary; or intentional wrongful engagement in any Competitive Activity (as defined in the Severance Agreements) which would constitute a material breach of the officers duty of loyalty to the Company.
If the Company terminates an officers employment for cause, no benefit is payable from any of the nonqualified pension plans.
Involuntary Termination Without Cause
In the case of an involuntary termination without cause, each named executive officer is entitled to severance equal to 1.5 times the sum of the officers base salary and highest annual incentive compensation during the preceding five years (not to exceed target), except the Chairman and the CEO, who are entitled to severance of two times the sum of base salary and highest annual incentive compensation during the preceding five years (not to exceed target). In consideration for providing severance benefits, the Company receives confidentiality and non-compete covenants from the named executive officers, as well as a release of liability for all claims against the Company.
The values shown on the table below for the retirement benefits are payable in the same form and manner as discussed in the narrative following the Pension Benefits Table. For purposes of involuntary termination without cause, the benefit is determined and payable as described in the Pension Benefits discussion on pages 33 and 34, but with two additional years of service credit.
Retirement infers retirement with the Companys consent, which means either: (1) retirement of the named executive officer prior to age 62, if the Compensation Committee of the Board of Directors determines that such retirement is for the convenience of the Company; or (2) retirement of the named executive officer on or after age 62.
In addition to retirement benefits shown in the 2011 Pension Benefits Table (which are not shown in the following table of Termination Scenarios), benefits for named executive officers who retire with the Companys consent include: prorated payouts of performance units, accelerated vesting of earned, equity-based LTIP awards granted prior to 2009, and SERP adjustments to retirement benefits if retiring prior to age 62. For equity-based LTIP awards granted since 2009, there is no acceleration of vesting for retirement; rather normal vesting continues as if the officer had remained in the continuous employ of the Company.
Death or Permanent Disability
Permanent Disability occurs if a named executive officer qualifies for permanent disability benefits under a disability plan or program of the Company or, in the absence of a disability plan or program of the Company, under a government-sponsored disability program.
Benefits for officers who die while actively employed are payable to the surviving spouse from the defined benefit pension plans at the officers normal retirement date (or on a reduced basis at an early retirement date) if the officer had at least five years of service. The benefit is equal to 50 percent of the benefit payable if the officer had terminated employment on the date of his death, survived to the payment date (as elected by spouse), elected the 50 percent joint and survivor form of payment and died the next day. If the executive has at least 15 years of service at time of death, the benefit is equal to 50 percent of the accrued benefit at time of death payable immediately, but with any applicable early commencement reduction.
All equity-based LTIP grants immediately vest in the event of death or permanent disability. In the case of disability, the employee has up to five years to exercise stock options. There is a one-year expiration period in the case of death for the survivor to exercise stock options.
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth information as of December 31, 2011 regarding the Long-Term Incentive Plan. Under the Long-Term Incentive Plan, we have made equity compensation available to Directors, officers, and other employees of the Company. The Long-Term Incentive Plan has been approved by our shareholders.
ITEM NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee of the Board of Directors has selected Ernst & Young LLP, an independent registered public accounting firm, to perform the audit of our financial statements and our internal control over financial reporting for the 2012 fiscal year. Ernst & Young has acted as our independent accounting firm for many years.
The selection of Ernst & Young as our independent auditors is not required to be submitted to a vote of our shareholders for ratification. However, the Board of Directors believes that obtaining shareholder ratification is a sound governance practice. If our shareholders fail to vote on an advisory basis in favor of the selection of Ernst & Young, the Audit Committee will reconsider whether to retain Ernst & Young and may retain that firm or another firm without re-submitting the matter to our shareholders. Even if the shareholders ratify the appointment, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interest.
The affirmative vote of a majority of the votes cast on this matter is necessary to ratify the appointment of Ernst & Young. Abstentions will not be counted for determining whether this matter is approved.
Representatives of Ernst &Young are expected to be present at the 2012 Annual Meeting of Shareholders. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE INDEPENDENT AUDITORS FOR THE 2012 FISCAL YEAR.
Set forth below are the aggregate fees billed by Ernst & Young for professional services rendered to us in 2011 and 2010.
The Audit Committee has adopted policies and procedures requiring pre-approval of all audit and non-audit services provided by the independent auditor. Other than audit and non-audit services pre-approved in connection with the annual engagement of the independent auditor, all services to be provided by the independent auditor must be pre-approved by the Audit Committee. Requests for pre-approval must contain sufficient detail to ensure the Audit Committee knows precisely what services it is being asked to pre-approve so that it can make a well-reasoned assessment of the impact of the service on the auditors independence. Additionally, the Audit Committee has pre-approved the provision of a limited number of specific services that do not require further action by the Audit Committee. The Audit Committee has delegated its pre-approval authority to one of its members who must report any pre-approval decisions to the full Audit Committee at its next scheduled meeting. All of the services described above under Audit-related fees and Tax fees were approved by the Audit Committee in accordance with its pre-approval policies and procedures.
ITEM NO. 3
NAMED EXECUTIVE OFFICER COMPENSATION
We believe that our compensation programs for our named executive officers:
As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act and Section 14A of the Exchange Act, we are asking you to cast an advisory (non-binding) vote on the following resolution at our 2012 Annual Meeting of Shareholders:
RESOLVED, that the compensation of the named executive officers as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the CD&A, the compensation tables and any related material disclosed in this Proxy Statement, is hereby APPROVED.
As an advisory vote, this resolution is not binding on us. However, the Compensation Committee, which is responsible for designing and administering our executive compensation program, values the opinions expressed by our shareholders in their vote on this proposal and will consider the outcome of the vote when making future compensation decisions for our named executive officers. We are currently conducting this advisory vote, commonly known as a say-on-pay vote, every year, and expect to hold the next say-on-pay vote in connection with our 2013 Annual Meeting of Shareholders.
The affirmative vote of a majority of the votes cast is necessary for approval of the resolution. Abstentions and broker non-votes will not be counted for determining whether the resolution is approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and Directors, and persons who own more than 10 percent of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange, and to provide us with copies of such reports. We are required to disclose any failure by any of the above-mentioned persons to file timely Section 16 reports.
Based solely upon its review of the copies of such reports furnished to us, or written representations that no forms were required to be filed, we are not aware of any instances of noncompliance, or late compliance, with such filings during the year ended December 31, 2011, by our executive officers, Directors, or 10 percent shareholders.
SUBMISSION OF SHAREHOLDER PROPOSALS
We must receive by November 22, 2012 any proposal of our shareholders intended to be presented at the 2013 Annual Meeting of Shareholders and to be included in our proxy materials related to the 2013 Annual Meeting of Shareholders pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. Such proposals should be submitted by certified mail, return receipt requested. Proposals of shareholders submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 in connection with the 2013 Annual Meeting of Shareholders (Non-Rule 14a-8 Proposals) must be received by us by February 5, 2013 or such proposals will be considered untimely under Rule 14a-4(c) of the Securities Exchange Act of 1934. Our proxy related to the 2013 Annual Meeting of Shareholders will give discretionary authority to the proxy holders to vote with respect to all Non-Rule 14a-8 Proposals received by us after February 5, 2013.
Shareholders or interested parties may send communications to the Board of Directors, to any standing committee of the Board, or to any Director, in writing c/o The Timken Company, 1835 Dueber Avenue, S.W., P.O. Box 6932, Canton, Ohio 44706-0932. Shareholders or interested parties may also submit questions, concerns or reports of misconduct through the Timken Helpline at 1-800-846-5363 and may remain anonymous. Communications received may be reviewed by the office of the General Counsel to ensure appropriate and careful review of the matter.
On the record date of February 21, 2012, there were 97,967,587 outstanding shares of our common stock, each entitled to one vote upon all matters presented to the meeting. The presence in person or by proxy of not less than 50 percent of such shares shall constitute a quorum for purposes of the 2012 Annual Meeting of Shareholders.
The enclosed proxy is solicited by the Board of Directors, and the entire cost of solicitation will be paid by the Company. In addition to solicitation by mail, our officers and other employees, without extra remuneration, may solicit the return of proxies by any means of communication. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting material to the beneficial owners of shares held of record by them and will be reimbursed for their expenses. We have retained Georgeson Shareholder Communications, Inc. to assist in the solicitation of proxies for a fee not to exceed $11,000 plus reasonable out-of-pocket expenses.
Shares represented by properly executed proxies will be voted at the meeting in accordance with the shareholders instructions. In the absence of specific instructions, the shares will be voted FOR the election of Directors as indicated under Item No. 1, FOR Item No. 2 and FOR Item No. 3, and, as to any other business as may be properly brought before the 2012 Annual Meeting of Shareholders and any adjournments or postponements thereof, in the discretion of the proxy holders.
You may revoke your proxy at any time before the 2012 Annual Meeting of Shareholders by a later dated proxy received by us or by giving notice to us either in writing or at the meeting.
Corporate Election Services, Inc. (CES) will be responsible for tabulating the results of shareholder voting. CES will submit a total vote only, keeping all individual votes confidential. Representatives of CES will serve as inspectors of election for the 2012 Annual Meeting of Shareholders. Under Ohio law and our Amended Articles of Incorporation and Amended Regulations, properly executed proxies marked abstain will be counted for purposes of determining whether a quorum has been achieved at the 2012 Annual Meeting of Shareholders, but proxies representing shares held in street name by brokers that are not voted with respect to any proposal will not be counted for quorum purposes.
The Securities and Exchange Commission permits companies to send a single set of annual disclosure documents to any household at which two or more shareholders reside, unless contrary instructions have been received, but only if we provide advance notice and follow certain procedures. In such cases, such shareholders continue to receive a separate notice of the meeting and proxy card. This householding process reduces the volume of duplicate information and reduces printing and mailing expenses. We have not instituted householding for shareholders of record; however, a number of brokerage firms may have instituted householding for beneficial owners of our common stock held through such brokerage firms. If your family has multiple accounts holding shares of our common stock, you already may have received householding notification from your broker. Please contact your broker directly if you have any questions or require additional copies of the annual disclosure documents. The broker will arrange for delivery of a separate copy of this Proxy Statement or our Annual Report on Form 10-K for the year ended December 31, 2011 promptly upon your written or oral request. You may decide at any time to revoke your decision to household and thereby receive multiple copies.
After April 1, 2012, we will furnish to each shareholder, upon written request and without charge, a copy of our Annual Report on Form 10-K for the year ended December 31, 2011, including financial statements and schedules thereto, filed with the Securities and Exchange Commission. Requests should be addressed to Scott A. Scherff, Corporate Secretary and Vice President Ethics and Compliance, The Timken Company, 1835 Dueber Avenue, S.W. GNE-01, Canton, Ohio 44706-2798.
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