UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.             )

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The Timken Company

 

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		John M. Timken, Jr. Chairman – Board of Directors   The Timken Company 4500 Mt. Pleasant Street NW North Canton, OH 44720

March 18, 2022

Dear Fellow Timken Shareholder:

Your Board of Directors is pleased to invite you to the 2022 Annual Meeting of Shareholders of The Timken Company to be held on Friday, May 6, 2022, at 10:00 a.m. local time. We will conduct this year’s meeting in an online-only format, with attendance via the internet, due to the ongoing pandemic.

This year, you are being asked to act upon four matters. Three of these matters (Proposals No. 1-3) have been unanimously recommended by your Board of Directors, while one of these matters (Proposal No. 4) is a shareholder proposal that is not supported by your Board of Directors. Details of these matters, along with the recommendations of your Board of Directors, are contained in the accompanying Notice of 2022 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 want to thank you for your continuous support of our business over the years and I look forward to strong participation and a similar vote of support at the 2022 Annual Meeting of Shareholders.

Sincerely,

 

John M. Timken, Jr.

Chairman – Board of Directors

 

Engineered Bearings   I   Mechanical Power Transmission Products   I   Industrial Services

THE TIMKEN COMPANY

North Canton, Ohio

 

 

NOTICE OF 2022 ANNUAL MEETING OF SHAREHOLDERS

 

 

The 2022 Annual Meeting of Shareholders of The Timken Company will be held on Friday, May 6, 2022, at 10:00 a.m. local time, in an online-only format, with attendance via the internet at the following web address: www.cesonlineservices.com/tkr22_vm. You will not be able to attend this meeting in person due to the ongoing pandemic.

The meeting is being held for the following purposes:

 

1.  Election of 12 Directors to serve for a term of one year;

2.  Approval, on an advisory basis, of our named executive officer compensation;

3.  Ratification of the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending December 31, 2022;

4.  Consideration of a shareholder proposal requesting that our Board take each step necessary so that each voting requirement in our charter and bylaws (that is explicit or implicit due to default to state law) that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws; and

5.  Consideration of such other business as may properly come before the meeting.

Shareholders of record of common shares of The Timken Company at the close of business on February 22, 2022 are the shareholders entitled to notice of and to vote at the meeting.

YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO PARTICIPATE IN THE ONLINE-ONLY 2022 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. Under New York Stock Exchange rules, if you hold your shares in “street name” through a brokerage account, your broker will NOT be able to vote your shares for you on most of the matters being considered at the 2022 Annual Meeting of Shareholders, including the election of Directors, unless you have given instructions to your broker prior to the meeting.

In order to attend the online-only meeting, you will need to pre-register by 10:00 a.m. Eastern Time on May 5, 2022. To pre-register for the meeting, please follow these instructions:

Registered Shareholders

If your shares are registered in your name with our transfer agent or you are a participant holding shares in a Timken-sponsored employee savings plan and you wish to attend the virtual meeting, go to www.cesonlineservices.com/tkr22_vm. Please have your Proxy Card or Notice of the Meeting, containing your 11-digit control number available and follow the instructions to complete your registration request.

Beneficial Shareholders (those holding shares through a stock brokerage account or by a bank or other holder of record)

Beneficial shareholders who wish to attend the virtual meeting may pre-register by visiting the website www.cesonlineservices.com/tkr22_vm. Please have available the voting instruction form, notice, or other communication from your broker, bank, or other holder of record that sets forth the control number provided to you and follow the instructions to complete your registration request.

After pre-registering for the meeting, shareholders will receive a confirmation email with a link and instructions for accessing the virtual Annual Meeting and submitting questions. Shareholders may review the rules of conduct for the virtual meeting or vote during the virtual Annual Meeting by following the instructions available on the meeting website.

Thank you for your continued support of The Timken Company.

 

		Hansal N. Patel
		Vice President, General Counsel & Secretary

March 18, 2022

Important Notice Regarding the Availability of Proxy Materials for the 2022 Annual Meeting of Shareholders to be held on May 6, 2022: This Proxy Statement and our 2021 Annual Report to Shareholders are available on the Investors section of our website https://investors.timken.com/.

TABLE OF CONTENTS

 

PROXY SUMMARY

This summary highlights certain information contained in the Proxy Statement. This summary does not contain all of the information that you should consider, and you should read the entire Proxy Statement before voting.

2022 Annual Meeting of Shareholders

 

 

Date and Time:		Friday, May 6, 2022, at 10:00 a.m. local time
Location:		Online-only format, with attendance via the internet at the following web address: www.cesonlineservices.com/tkr22_vm
Record Date:		February 22, 2022
Mail Date:		The approximate date our Proxy Statement and proxy card will be first sent or given to our shareholders is March 18, 2022.

Voting Matters and Board Voting Recommendations

 

 

Board   Recommends		Proposal		See   Page
For		1.  Election of 12 Directors to serve for a term of one year.		11
For		2.  Approval, on an advisory basis, of our named executive officer compensation.		33
For		3.  Ratification of the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending December 31, 2022.		74
Against		4.  A shareholder proposal requesting that our Board take each step necessary so that each voting requirement in our charter and bylaws (that is explicit or implicit due to default to state law) that calls for a greater than simple majority vote be eliminated, and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws.		76

 

 

1

Director Nominees

 

See Proposal No. 1 on page 11 of the Proxy Statement for more details on the 12 nominees for Director. The following information describes relevant information about each nominee as of March 1, 2022.

 

Committee Memberships

Name and Title

Age

Director     since

Independent

Audit

Compensation

Nominating &     Corporate Governance

Other Public     Boards

Maria A. Crowe   Retired President of Manufacturing Operations, Eli Lilly and Company

62

2014

✓

✓

✓ Chair

–

Elizabeth A. Harrell   Retired Major General, U.S. Air Force

68

2017

✓

✓

✓

–

Richard G. Kyle   President and Chief Executive Officer, The Timken Company

56

2013

1

Sarah C. Lauber   Chief Financial Officer & Secretary, Douglas Dynamics, Inc.

50

2021

✓

✓

✓

–

John A. Luke, Jr.   Retired Chairman, WestRock Company; Retired President and CEO MeadWestvaco Corporation

73

1999

✓

✓

✓

–

Christopher L. Mapes   Chairman, President and Chief Executive Officer, Lincoln Electric Holdings, Inc.

60

2014

✓

✓

✓

1

James F. Palmer   Retired Corporate Vice President and Chief Financial Officer, Northrop Grumman Corporation

72

2015

✓

✓ Chair

✓

–

Ajita G. Rajendra   Retired Executive Chairman, President and CEO A. O. Smith Corporation

70

2014

✓

✓

✓ Chair

2

Frank C. Sullivan   Chairman and Chief Executive Officer, RPM International Inc.

61

2003

✓

✓

✓

1

John M. Timken, Jr.   Chairman, Board of Directors, The Timken Company

70

1986

✓ Independent Chairman

–

Ward J. Timken, Jr.   Chief Executive Officer, McKinley Strategies, LLC

54

2002

–

Jacqueline F. Woods   Retired President, AT&T Ohio

74

2000

✓

✓

✓

–

Average Age / Median Tenure

64

8.5 years

 

2

Board Composition Overview

 

 

Gender and Ethnic Diversity		Oversight		Independence		Refreshment
		Three Audit Committee Financial Experts				Over Half   of our Board refreshed within the last decade

Representative Skills and Attributes of the Board

 

 

		RISK MANAGEMENT Experience with risk management and compliance oversight relevant to the exercise of fiduciary responsibilities				STRATEGY AND M&A Responsibility for driving growth through innovative strategic initiatives and through acquisitions and other business combinations
		GOVERNMENTAL AND REGULATORY AFFAIRS Insight into managing governmental and regulatory affairs relevant to the Company’s business operations				MARKETING AND SALES Expertise in marketing, sales, and customer service at a scale relevant to the Company’s global business
		GLOBAL OPERATIONS Service in a leadership role with multinational companies or in global markets, leading to a deep knowledge of global industry dynamics and international supply chain management

 

3

Corporate Governance Highlights    

 

The Timken Company is committed to strong corporate governance as evidenced by the following practices. See page 25 of the Proxy Statement for more details.

 

Board Independence		✓   10 of 12 Director nominees are independent   ✓   Independent Chair of the Board
Director Elections		✓   Commitment to Board refreshment and diversity – 7 new Directors (representing over half of our Board) added in the past decade   ✓   All standing committee members are independent   ✓   Declassified Board with annual Board elections   ✓   Directors are elected by a majority of votes cast, and our Majority Voting Policy requires any Director who fails to receive a majority of the votes cast in favor of his or her election to submit his or her resignation to the Board
Board Practices		✓   Stock ownership requirements for nonemployee Directors (5x cash retainer)   ✓   At each Board meeting, the independent Directors have the opportunity to conduct executive sessions   ✓   Annual Board, committee and Director evaluations   ✓   Over-boarding policy limits the number of public company boards a Director can serve on
Shareholder Rights		✓   Shareholder proxy access with 3/3/20/20 parameters   ✓   Special meetings may be called by shareholders holding 25% of the Company’s common shares
Other Best Practices		✓   Annual advisory vote on our named executive officer compensation   ✓   5 of 12 Directors are ethnically or gender diverse   ✓   Code of Conduct for Directors, officers and employees   ✓   Strong focus on shareholder engagement – over 400 interactions with investors in 2021   ✓   3 Audit Committee financial experts   ✓   Audit Committee or Board receives reports on cyber security threats and trends at least annually and receives regular updates on our information security program   ✓   Nominating and Corporate Governance Committee provides oversight for Corporate Social Responsibility (“CSR”) program

 

4

Corporate Social Responsibility    

 

In 2021, CSR remained a priority for Timken as we published our most recent CSR report. In consideration of our efforts, we were named one of the World’s Most Ethical Companies^® by Ethisphere^® Institute for the eleventh time, among America’s Most Responsible Companies by Newsweek and Statista and one of America’s Best Employers, America’s Best Employers for New Graduates and America’s Best Employers for Women by Forbes.

For more information regarding our corporate social responsibility program, please see page 25 of the Proxy Statement or our most recent corporate social responsibility report available on our website at https://www.timken.com/corporate-social-responsibility/.

 

 

5

2021 Performance Highlights

 

Timken delivered record-setting performance in 2021, despite the unprecedented supply chain challenges and inflationary pressures that accelerated during the year. The Company grew revenue and earnings significantly in 2021, with record revenue of $4.13 billion, an increase of approximately 18% from 2020, net income increasing approximately 30% to $369 million and adjusted earnings before interest, taxes, depreciation, and amortization (“EBITDA”) increasing approximately 9% to $718 million¹. We achieved record earnings per diluted share (“EPS”) of $4.79 and record adjusted EPS of $4.72¹, up 29% and 15%, respectively, from 2020. We also delivered an adjusted return on invested capital (“ROIC”) of 11.0%¹ in 2021, up from 9.9% last year. In addition, we generated net cash from operations of $387 million and free cash flow of $239¹ million in 2021.

We achieved these results through the continued execution of our corporate strategy, which is delivering improved performance and higher returns through the business cycle. Our strategy focuses on (1) driving organic growth and share gains in our core business by leading in product technology, innovation and service, (2) executing operational excellence initiatives across the enterprise to enhance performance, and (3) deploying capital to drive optimal returns for our investors.

We have continued to create significant shareholder value by delivering total shareholder returns (“TSR”) of 25.5%, 14.3%, and 12.1% over the past three-, five-, and ten-year periods, respectively. Our three-year and five-year TSR outpaced the median of our 2021 compensation peer group and also exceeded the S&P 500 Industrials over these respective timeframes, while our ten-year TSR was just slightly below our peer median and the S&P 500 Industrials. The S&P 500 Industrials comprises those companies included in the S&P 500 index that are classified as members of the Global Industry Classification Standard (“GICS”) industrials sector.

In 2021, we deployed capital in a disciplined and balanced manner to strengthen our competitive position, create value for our shareholders and further enhance our financial position. We allocated $148 million, or about 3.6% of our sales, to capital expenditures focused on growth and continuous improvement initiatives. We also paid out our 398th consecutive quarterly dividend, continuing one of the longest continuous dividend streaks on the New York Stock Exchange (the “NYSE”) and increased our quarterly dividend to $0.30/share in the second quarter, making 2021 the eighth consecutive year of higher annual dividends. In addition, we repurchased approximately 1.25 million shares of stock, or over 1.7% of our outstanding shares.

2021 also marked the release of our third annual CSR report, which detailed our vision to build a more efficient and resilient world. The report highlights how we continue to advance our corporate social responsibility initiatives by promoting a culture of problem solvers with a strong focus on sustainable products and practices across the Company, while maintaining a strong commitment to ethics.

See page 35 of the Proxy Statement for more details on the Company’s 2021 performance.

 

 

¹ See Appendix A for reconciliations of adjusted EPS, adjusted EBITDA, free cash flow, and adjusted ROIC to their most directly comparable GAAP financial measures. Free cash flow is defined as net cash from operations minus capital expenditures. Adjusted ROIC is defined as adjusted net operating profit after taxes (“ANOPAT”) divided by average invested capital. The performance metrics discussed above are used for external reporting and may not correlate exactly to their corresponding compensation adjusted metrics due to slight differences in methodology (see pages 48 to 52 for more details on how the compensation adjusted metrics are calculated).

 

6

Return to Shareholders

 

 

*TSR for the Company was calculated on an annualized basis and assumes quarterly reinvestment of dividends. The 10-year period takes into account the value of TimkenSteel Corporation (“TimkenSteel”) common shares distributed in the spinoff of TimkenSteel from the Company, which was completed on June 30, 2014 (the “Spinoff”).

**See page 43 of the Proxy Statement for the companies that are included in the compensation peer group for 2021.

***The S&P 500 Industrials comprises those companies included in the S&P 500 index that are classified as members of the GICS industrials sector.

 

7

2021 Executive Compensation Practices

 

We design our executive compensation plans and program to help us attract, motivate, reward and retain highly qualified executives who are capable of creating and sustaining value for our shareholders over the long term. See page 35 of the Proxy Statement for more details.

 

Objectives		Philosophy
Our executive compensation program is designed to:   ●   Align the interests of our executives and shareholders   ●   Reward sustained, strong business results   ●   Incentivize profitable growth and capital deployment discipline   ●   Attract, retain and motivate the best talent		Our executive compensation philosophy is built on the following principles:   ●   Recognizing that people are our most important resource   ●   Rewarding results linked to both short- and long-term performance (pay-for-performance)   ●   Positioning our pay to be competitive in the marketplace   ●   Focusing on increasing shareholder value

 

		What We Do				What We Do Not Do
✓		We utilize stock ownership requirements for executives (5x base salary for CEO and 2x-3x for the other named executive officers)		X		We do not re-price outstanding stock options
✓		We have “clawback” provisions that permit the recovery of executive compensation if an executive engages in conduct that is detrimental to the Company and results in restatement of financial results		X		We do not provide excise tax gross-ups on perquisites or under named executive officer severance agreements
✓		We use shareholder-approved plans to provide short-term and long-term incentives		X		We do not allow hedging or pledging of our shares
✓		We use different metrics for short-term and long-term incentive plans that are designed to align pay with performance		X		We do not have single-trigger vesting
✓		We provide very limited perquisites		X		We do not have employment agreements for our named executive officers

 

8

Pay-for-Performance

 

Our compensation program is designed to link pay and performance, which we believe has been demonstrated by the strong level of shareholder support we have received for our named executive officer compensation program through our annual “say-on-pay” vote over the last few years (as depicted below). A significant portion of the compensation of our named executive officers is equity based, which we believe aligns our executives’ interests with the interests of our shareholders.

 

The Company’s compensation program for executives is designed to link compensation with key financial and operational goals, some of which are short-term, while others take several years or more to achieve. The Company uses a balance of short-term and long-term incentives, as well as cash and non-cash compensation, to meet these objectives:

 

Our incentive compensation program payouts for performance periods ending in 2021 reflect good performance relative to a challenging cost and supply situation:

 

●

There was a 74.4% payout under the annual cash incentive plan, which reflected below-target performance for 2021, due primarily to lower than targeted free cash flow (driven mainly by higher working capital) and slightly lower earnings and operating margins as compared to target (driven mainly by higher operating costs to serve customers); and

●

There was a 92.7% payout for 2019-2021 performance-based restricted stock units, which reflected strong overall performance in a challenging environment, as the targets were set in early 2019, prior to the start of the COVID-19 pandemic. We achieved record adjusted EPS results in 2019 and 2021, and strong average adjusted ROIC performance over the period.

●

Despite the significant unforeseen impact of COVID-19, no adjustments or modifications were made to the financial performance metrics or targets for our 2019-2021 performance-based RSU cycle, which in part led to the below-target payout.

 

9

See pages 47 to 52 of the Proxy Statement for more details on the 2021 annual cash incentive plan and the 2019-2021 performance-based restricted stock units.

 

10

THE TIMKEN COMPANY

PROXY STATEMENT

The enclosed proxy is solicited by the Board of Directors (also referred to as the “Board”) of The Timken Company, an Ohio corporation (the “Company,” “Timken,” “we,” or “us”), in connection with the 2022 Annual Meeting of Shareholders to be held on Friday, May 6, 2022, at 10:00 a.m. local time in an online-only format, with attendance via the internet, and at any adjournments and postponements thereof, for the purpose of considering and acting upon the matters specified in the foregoing Notice.

The approximate date this Proxy Statement and proxy card will be first sent or given to our shareholders is March 18, 2022.

Instructions for attending the online-only meeting are available in the accompanying Notice of 2022 Annual Meeting of Shareholders and under the section titled “Participation at the Annual Meeting” on page 79.

The Board of Directors is not aware of matters other than those specified in the foregoing Notice that will be brought before the meeting for action. However, if any such matters should be properly brought before the meeting, the persons appointed as proxies may vote or act upon such matters according to their judgment.

PROPOSAL NO. 1: ELECTION OF DIRECTORS

We currently have 12 Directors. Pursuant to our Amended Regulations, all nominees for Director will stand for election for a one-year term to expire at the 2023 Annual Meeting of Shareholders. 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 Director’s qualifications and service record, as well as any reasons given by shareholders as to why they 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 on a Current Report on Form 8-K its decision, as well as the reasons for rejecting any tendered resignation, if applicable.

At its meeting on February 11, 2022, the Board approved a resolution, based on the recommendation of the Nominating and Corporate Governance Committee, nominating the 12 individuals set forth below to be elected Directors at the 2022 Annual Meeting of Shareholders to serve for a term of one year expiring at the 2023 Annual Meeting of Shareholders (or until their respective successors are elected and qualified). Each of the nominees previously was elected as a Director by our shareholders and each has consented to serve as a Director if elected.

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. Unless otherwise indicated on any proxy card, 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 below.

 

11

Nominees

 

The following information, obtained in part from the respective nominee and in part from our records, describes the background and select experience of each nominee as of March 1, 2022:

 

		Business Experience   Ms. Crowe served as President of Manufacturing Operations for Eli Lilly and Company, a global manufacturer of pharmaceutical products, a position she held from 2012 until her retirement in December 2017. Ms. Crowe joined Eli Lilly and Company in 1982, and previously served as its Senior Vice President of Global Drug Products from 2009 to 2012.   Qualifications   Ms. Crowe provides the Board with extensive experience in manufacturing, sourcing and procurement for a global manufacturing company. Ms. Crowe also brings valuable experience on production capacity expansion and innovation efforts.
Maria A. Crowe Age: 62 Director since 2014   Committees: · Compensation · Nominating and Corporate Governance (Chair)

 

		Business Experience   Ms. Harrell retired as a Major General in October 2006, serving more than 30 years with the U.S. Air Force. During her military career, she held a wide range of positions in the United States, Germany and South Korea, specializing in aircraft fleet maintenance and sustainment. After her retirement from the U.S. Air Force, Ms. Harrell was a consultant with The Spectrum Group until 2009 and a consultant to Northrop Grumman Corporation, a global security company and a provider of products, systems and solutions in the fields of aerospace, electronics, information systems, and technical services, until 2012.   Qualifications   Ms. Harrell’s extensive knowledge of aerospace technology, global supply chain management and government relations align with the Company’s growth priorities and are valuable to her service as a member of the Board.
Elizabeth A. Harrell Age: 68 Director since 2017   Committees: · Compensation · Nominating and Corporate Governance

 

12

Richard G. Kyle Age: 56 Director since 2013		Business Experience   Mr. Kyle was appointed President and Chief Executive Officer of The Timken Company in 2014. Mr. Kyle joined the Company in 2006 and has served in multiple leadership roles of increasing responsibility during his tenure with the Company.   Since 2015, Mr. Kyle has served as a director of Sonoco Products Company, a global provider of consumer packaging, industrial products, protective solutions, and display and packaging services, and as a member of its Audit, Executive Compensation and Governance and Nominating Committees.   Qualifications   Mr. Kyle has significant experience with global manufacturing organizations and has demonstrated the ability to lead change and growth. In addition to his role as Chief Executive Officer of the Company, Mr. Kyle’s strong engineering and operational background, coupled with his strategic perspective, provide valued skills to the Board.

 

		Business Experience   Ms. Lauber is Chief Financial Officer & Secretary of Douglas Dynamics, Inc., a premier manufacturer and upfitter of work truck attachments and equipment, a position she has held since August 2017. Prior to joining Douglas Dynamics, Inc., she served as the Senior Vice President and Chief Financial Officer of Jason Industries Inc., a diversified industrial company, from 2015 to 2017. Ms. Lauber has over 25 years of professional experience in various finance and strategic functions and began her career as an accountant at KPMG.   Qualifications   Ms. Lauber’s expertise leading the finance and accounting function of multiple publicly traded manufacturing companies and her experience with financial planning and acquisition integration makes her well-suited to serve on our Board.
Sarah C. Lauber Age: 50 Director since 2021   Committees: · Audit · Compensation

 

13

		Business Experience   Mr. Luke served as the Chairman and Chief Executive Officer of MeadWestvaco Corporation (“MWV”), a leading global producer of packaging and specialty chemicals, from the merger of Mead and Westvaco in 2002 until his retirement in 2015. Mr. Luke served as a director of WestRock Company from 2015 until 2022 when he retired as its Non-Executive Chairman. Mr. Luke previously served as a director of The Bank of New York Mellon Corporation from 2007 to 2018 and Dominion Midstream GP, LLC from 2017 to 2018.   Qualifications   Mr. Luke brings deep executive leadership experience to our Board, including expertise in leading large corporate transformations and evaluating and executing inorganic growth opportunities. Mr. Luke brings perspective gained from serving on several corporate boards.
John A. Luke, Jr. Age: 73 Director since 1999   Committees: · Compensation · Nominating and Corporate Governance

 

		Business Experience   Mr. Mapes is Chairman, President and Chief Executive Officer of Lincoln Electric Holdings, Inc., a global manufacturer of welding, cutting and joining products. He has held the position of Chairman since December 2013 and has been President and Chief Executive Officer since December 2012, after serving as Chief Operating Officer beginning in 2011. Mr. Mapes has been a director of Lincoln Electric Holdings, Inc. since 2010.   Qualifications   As a seasoned executive with extensive experience leading global manufacturing and distribution companies, Mr. Mapes understands the challenges of global growth and the complexity of managing international operations. In addition to his business management experience, Mr. Mapes has a law degree.
Christopher L. Mapes Age: 60 Director since 2014   Committees: · Audit · Nominating and Corporate Governance

 

14

		Business Experience   Mr. Palmer served as the Corporate Vice President and Chief Financial Officer of Northrop Grumman Corporation, a global security company and a provider of products, systems and solutions in the fields of aerospace, electronics, information systems and technical services, from March 2007 until February 2015 and as a Corporate Vice President of Northrop Grumman until his retirement in July 2015.   Qualifications   Mr. Palmer’s broad executive background in the aerospace and defense industry, his service as the chief financial officer of multiple large publicly traded companies, and his extensive experience with business acquisitions, debt financings and other complex transactions make him well qualified to serve as a member of the Board.
James F. Palmer Age: 72 Director since 2015   Committees: · Audit (Chair) · Compensation

 

		Business Experience   Mr. Rajendra served as Executive Chairman of A. O. Smith Corporation, a global water technology company and manufacturer of residential and commercial water heating and water purification equipment, from September 2018 until his retirement on May 1, 2020. He had held the position of Chairman since 2014 and was President and Chief Executive Officer from 2013 until 2018.   Qualifications   Mr. Rajendra has been a director of A. O. Smith Corporation since 2011 and has been a director of Donaldson Company, Inc. since 2010, where he is a member of the Corporate Governance Committee and Human Resources Committee. Mr. Rajendra’s extensive manufacturing and international experience leading businesses and negotiating acquisitions and joint ventures, along with his experience as a director of other publicly traded companies, provides valuable skills to the Board.
Ajita G. Rajendra Age: 70 Director since 2014   Committees: · Audit · Compensation (Chair)

 

15

		Business Experience   Mr. Sullivan has held the position of Chairman and Chief Executive Officer of RPM International Inc. (“RPM”), a world leader in specialty coatings, since 2008. Mr. Sullivan was appointed RPM’s Chief Executive Officer in 2002, prior to which he held the position of Chief Financial Officer since 1993. Mr. Sullivan has been a director of RPM since 1995 and chairs RPM’s Executive Committee.   Qualifications   Mr. Sullivan provides the Board with extensive financial expertise based on his years as a chief financial officer. In addition, as a chief executive officer and director of a multinational company, Mr. Sullivan brings invaluable executive experience on a wide array of issues, including strategic planning and the evaluation and execution of acquisition opportunities.
Frank C. Sullivan Age: 61 Director since 2003   Committees: · Audit · Nominating and Corporate Governance

 

		Business Experience   Mr. Timken is a private investor and a successful entrepreneur, who has been a significant shareholder of the Company for many years. Mr. Timken is co-founder of Amgraph Packaging, a national supplier of flexible package printing used by major food and beverage brands and private labels. His entrepreneurial activities and passion for business-building have included involvement in ventures ranging from injection molding, to ophthalmic laboratories, to logistics and trucking. He also has owned a cable television business and established one of the largest commercial mushroom farms in North America.   Qualifications   Mr. Timken’s ability as an investor to identify and help increase value across a range of industries, as well as his familiarity with the Company’s businesses, provides the Board with critical input in evaluating and making capital allocation decisions. Since joining the Board, he has played an important role in the Company’s strategic drive to add product lines that complement its bearing product portfolio.
John M. Timken, Jr. Age: 70 Director since 1986   Independent Chairman of the Board

 

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Ward J. Timken, Jr. Age: 54 Director since 2002		Business Experience   Mr. Timken co-founded McKinley Strategies, LLC, a political consulting firm, and has served as its Chief Executive Officer since January 2020. Prior to that, Mr. Timken served as Chairman, Chief Executive Officer and President of TimkenSteel, a leader in customized alloy steel products and services, from 2014 to 2019. TimkenSteel was previously a subsidiary of the Company that became an independent public company pursuant to a spinoff in 2014. Mr. Timken previously served as Executive Chairman of the Board of The Timken Company from 2005 to May 2014.   Qualifications   Mr. Timken provides the Board with relevant experience from having served in key leadership positions during his tenure with the Company. Mr. Timken’s broad-based experience and familiarity with our businesses, along with his understanding of the global industry dynamics across the Company’s markets, enable Mr. Timken to provide valuable input to the Board.
Jacqueline F. Woods Age: 74 Director since 2000   Committees: · Compensation · Nominating and Corporate Governance		Business Experience   Ms. Woods served as the President of Ameritech Ohio (subsequently renamed AT&T Ohio), a telecommunications company, until her retirement in 2000. At Ameritech Ohio, Ms. Woods also held various positions in finance, operations, marketing, sales and government affairs. Ms. Woods was inducted into the Ohio Women’s Hall of Fame in 1998. Ms. Woods served on the board of The Andersons, Inc. from 1999 to 2020.   Qualifications   Ms. Woods’ extensive executive management experience enables her to help guide the Board in making decisions in areas such as marketing, strategy development, corporate governance and compensation. In addition, her executive experience at a primarily consumer-oriented company provides a valuable perspective on customer service. Ms. Woods also brings perspective gained from her service as a member of other public company boards.

 

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Independence Determinations    

 

 

The Board of Directors has adopted the NYSE independence standards for determining the independence of our Directors. The Board has also adopted standards for categorically immaterial relationships to assist the Board in determining the independence of each Director. These standards include, but are not limited to:

 

●

if the Director is, or has an immediate family member who is, a partner, principal or member (or any comparable position) of, an executive officer or employee of, or a director of, any organization to which Timken made, or from which Timken received, immaterial payments for property or services in the current or any of the past three fiscal years;

 

●

if the Director, or an immediate family member of the Director, serves as an officer, director or trustee of a foundation, university, charitable or other not-for-profit organization, and Timken’s discretionary charitable contributions to the organization are immaterial, in the aggregate; or

 

●

if the Director serves on the board of directors of another company at which another Timken Director or executive officer also serves as a director.

A complete list and description of the categorically immaterial relationships is set forth in Appendix B to the Board of Directors General Policies and Procedures, which is available on the Corporate Governance Section of our website at https://investors.timken.com/corporate-governance/documents/.

 

The Board has determined that the following Director nominees meet these independence standards: Maria A. Crowe, Elizabeth A. Harrell, Sarah C. Lauber, John A. Luke, Jr., Christopher L. Mapes, James F. Palmer, Ajita G. Rajendra, 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, Jr. does not impair his independence.		10/12 members of our Board are independent

Related Party Transactions Approval Policy

 

 

Our Directors and executive officers are subject to our Standards of Business Ethics, which require that any potential conflicts of interest involving our Directors or executive officers, such as significant transactions with related parties, be reported to our Vice President, General Counsel & Secretary. Our Directors and executive officers also are 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, or appear to interfere, with our interests. While not every situation can be identified in a written policy, the Timken Policy Against Conflicts of Interest identifies the following situations as examples that may constitute a prohibited conflict of interest:

 

●

competing against the Company;

 

●

holding a significant financial interest in a company doing business with or competing with the Company;

 

●

accepting gifts, gratuities or entertainment from any customer, competitor or supplier of goods or services to the Company, except to the extent they are customary and reasonable in amount and not in consideration for an improper action by the recipient;

 

●

using for personal gain any business opportunities that are identified through a person’s position with the Company;

 

●

using the Company’s property, information or position for personal gain;

 

●

using the Company’s property other than in connection with our business;

 

●

maintaining other employment or a business that adversely affects a person’s job performance at the Company; and

 

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●

doing business on the Company’s behalf with a relative or another company employing or owned by a relative.

In the event of any potential conflict of interest, pursuant to the charter of the Nominating and Corporate Governance Committee, the Standards of Business Ethics and the Timken Policy Against Conflicts of Interest, the Nominating and Corporate Governance Committee would review, determine whether or not a conflict of interest exists and, if appropriate after considering such factors as it deems appropriate under the circumstances, grant a waiver or specify any mitigation actions to address the potential conflict. Waivers involving our Directors or executive officers will be promptly disclosed to shareholders in a manner consistent with applicable laws or regulations and in accordance with our applicable policies. Additionally, the Nominating and Corporate Governance Committee would review and approve or ratify any transaction required to be publicly reported to shareholders pursuant to Item 404(a) of Regulation S-K of the Securities and Exchange Act of 1934, as amended (the “1934 Act”), with such review to occur regardless of whether the materiality threshold of that provision is met.

Board and Committee Meetings

 

The Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. During 2021, there were seven meetings of the Board of Directors, nine meetings of its Audit Committee, three meetings of its Compensation Committee and three meetings of its Nominating and Corporate Governance Committee. All Directors attended 100% 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 2021, all members attended the meeting. At each regularly scheduled meeting of the Board of Directors, the independent Directors have the opportunity to meet separately in executive session.

Board Leadership Structure

 

The Board is led by independent Chairman John M. Timken, Jr., who was first elected to this position on May 13, 2014.

The Chairman oversees the planning of the annual Board calendar and, with the CEO and in consultation with the other Directors, schedules and sets the agenda for meetings of the Board and leads the discussions at such meetings and at executive sessions of the independent Directors. The Chairman also leads the Company’s annual meeting of shareholders and performs such other functions and responsibilities as set forth in the Board of Directors General Policies and Procedures or as requested by the Board from time to time.

The Board’s preferred governance structure is to separate the roles of Chair and CEO. Since 2014, the Chair of the Board has been independent. While recognizing that there is no single, generally accepted approach to providing Board leadership and that the Board’s leadership structure may vary in the future as circumstances warrant, the Board considers this balance of leadership between the two positions to be beneficial.

Director Compensation

 

Directors who are not Timken employees receive an annual retainer fee, annual committee fees (as applicable) and an annual equity award. The independent Chairman and each committee chairperson receive additional retainer fees. Richard G. Kyle, our President and Chief Executive Officer (“CEO”), does not receive any additional compensation for his service as a Director.

Cash Compensation

Each nonemployee Director who served in 2021 was paid an annual retainer fee of $80,000 as base compensation for services as a Director. In addition to base compensation, John M. Timken, Jr. received

 

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an annual fee of $100,000 for his service as the independent Chairman. The following additional annual fees were paid for serving on a committee of the Board in 2021:

 

Committee		Chairperson Fee		Member Fee
Audit		$30,000		$15,000
Compensation		$17,500		$7,500
Nominating &Corporate Governance		$17,500		$7,500

To the extent a Director served on the Board or any committee of the Board for only part of the year, such Director received a pro-rated portion of the applicable fees based on the amount of time served.

Equity Compensation

Each nonemployee Director serving at the time of our 2021 Annual Meeting of Shareholders on May 7, 2021 received a grant of 1,340 restricted stock units that vest after one year under The Timken Company 2019 Equity and Incentive Compensation Plan (the “Equity and Incentive Compensation Plan”). Upon a non-employee Director’s initial election to the Board, each such Director receives a grant of 2,000 restricted stock units under the Equity and Incentive Compensation Plan that vest one-fifth annually from the date of grant. Sarah C. Lauber received such a grant during 2021. Cumulative dividend equivalents are paid in cash upon vesting.

Holding Requirement

The Compensation Committee of the Board of Directors has adopted stock ownership requirements for nonemployee Directors equal to five times the annual cash retainer of $80,000, or the equivalent of $400,000 worth of common shares. Directors must meet this requirement within five years of becoming a Director of the Company. In determining whether a Director has met his or her individual ownership target, the Company considers shares owned by the Director and full-value equity awards held by the Director, including restricted shares and restricted stock units still subject to vesting conditions. As of December 31, 2021, all our Directors other than Ms. Lauber had met their stock ownership requirements. Ms. Lauber joined the Board in January 2021 and she is on track to achieve the ownership requirement within the five-year time frame.

Compensation Deferral

Any Director may elect to defer the receipt of all or a specified portion of their cash fees or their annual equity award until a specified point in the future in accordance with the provisions of the Director Deferred Compensation Plan, as amended and restated effective January 1, 2015 (the “Director Deferred Compensation Plan”). The cash amounts deferred can be invested in a cash fund or the hypothetical Timken common share fund. The cash fund provides for interest to be earned quarterly at a rate equal to the prime rate plus 1%. If cash fees are invested in the Timken common share fund, Directors may elect to receive cash in an amount equal to any dividend equivalents or reinvest such amounts in the Timken common share fund. Equity award deferrals are maintained in a separate account, which is credited with the number of shares that would otherwise have been issued or transferred and delivered to the Director. Such accounts are credited from time to time with amounts equal to dividends or other distributions paid on the number of shares reflected in such accounts.

 

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2021 Director Compensation Table

The following table provides the compensation and benefits applicable to our nonemployee Directors for 2021:

 

Name (1)		Fees Earned or         Paid in Cash		Stock     Awards (2)		All Other     Compensation (3)		Total
Maria A. Crowe		$112,500		$120,319		$3,602		$236,421
Elizabeth A. Harrell		$95,000		$120,319		$4,314		$219,633
Sarah C. Lauber		$100,183		$289,919		-		$390,102
John A. Luke, Jr.		$95,000		$120,319		$3,602		$218,921
Christopher L. Mapes		$102,500		$120,319		$3,602		$226,421
James F. Palmer		$117,500		$120,319		$3,602		$241,421
Ajita G. Rajendra		$112,500		$120,319		$3,602		$236,421
Frank C. Sullivan		$102,500		$120,319		$3,602		$226,421
John M. Timken, Jr.		$180,000		$120,319		$3,602		$303,921
Ward J. Timken, Jr.		$80,000		$120,319		$3,602		$203,921
Jacqueline F. Woods		$95,000		$120,319		$3,602		$218,921

 

(1)

Richard G. Kyle, our President and CEO, is not included in this table as he is an employee of the Company and receives no compensation for his services as a Director.

 

(2)

The amount shown for each Director includes the grant date fair value of the award of 1,340 restricted stock units made on May 7, 2021. These restricted stock units vest 100% one year following the grant date. Ms. Harrell elected to defer the award made on May 7, 2021 under the Director Deferred Compensation Plan for distribution in the future. For Ms. Lauber, the amount also includes the grant date fair value of the award of 2,000 restricted stock units made to her on January 8, 2021 in connection with her initial election to the Board, which restricted stock units vest one-fifth annually from the date of grant. The amounts shown in this column are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718.

 

(3)

All other compensation reflects cash dividend equivalents paid to the Directors in 2021 for unvested restricted stock units granted in the prior year and cash dividends paid to certain Directors for unvested restricted stock granted in connection with their initial election to the Board, in each case upon vesting of such restricted stock units or restricted shares in 2021. Ms. Harrell elected to defer her annual restricted stock unit awards granted in 2021 under the Director Deferred Compensation Plan for distribution in the future. The table above includes cash dividend equivalents in the amount of $3,602 which were also deferred by Ms. Harrell under the Director Deferred Compensation Plan.

As of December 31, 2021, unvested restricted shares and unvested restricted stock units were held by the nonemployee Directors as follows:

 

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Name		Unvested Restricted Shares and   Unvested Restricted Stock Units
Maria A. Crowe		1,340
Elizabeth A. Harrell		1,740
Sarah C. Lauber		3,340
John A. Luke, Jr.		1,340
Christopher L. Mapes		1,340
James F. Palmer		1,340
Ajita G. Rajendra		1,340
Frank C. Sullivan		1,340
John M. Timken, Jr.		1,340
Ward J. Timken, Jr. (1)		1,340
Jacqueline F. Woods		1,340

 

(1)

Additionally, Ward J. Timken, Jr. has 92,000 vested and unexercised stock options earned from his previous role as an employee and executive Chairman of the Board of The Timken Company from 2005 to May 2014.

Board Committees

 

Audit Committee

We have a standing Audit Committee that has oversight responsibility with respect to our independent auditor and the integrity of our financial statements. The Audit Committee is composed of James F. Palmer (Audit Committee Chair), Maria A. Crowe, Sarah C. Lauber, Christopher L. Mapes, Ajita G. Rajendra and Frank C. Sullivan. 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 NYSE and the rules of the Securities and Exchange Commission (the “SEC”). Our Board of Directors has determined that Sarah C. Lauber, James F. Palmer and Frank C. Sullivan qualify as Audit Committee financial experts.

The Audit Committee’s charter is available on the Corporate Governance section of our website at https://investors.timken.com/corporate-governance/documents/.

Compensation Committee

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 Ajita G. Rajendra (Compensation Committee Chair), Elizabeth A. Harrell, Sarah C. Lauber, John A. Luke, Jr., James F. Palmer 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 NYSE.

With the guidance and approval of the Compensation Committee, we have developed compensation programs for our executive officers, including the CEO and the other named executive officers, that are intended to align the interests of our executives and shareholders; reward executive management for sustained, strong business and financial results; and enable us to attract, retain and motivate the best talent. The Compensation Committee determines specific compensation elements for the CEO and considers and acts upon the CEO’s recommendations regarding the other executive officers.

The agenda for meetings of the Compensation Committee is determined by its Chair with the assistance of the General Manager – Compensation. The meetings are regularly attended by the Chairman of the Board, the CEO, the Vice President, General Counsel &

 

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Secretary, and the General Manager – Compensation. At each meeting, the Compensation Committee meets in executive session. The Chair of the Compensation Committee reports the Committee’s actions regarding compensation of executive officers to the full Board and the full Board acts on compensation matters for the CEO. Our Human Resources department supports the Compensation Committee in its duties and may be delegated certain administrative duties in connection with our compensation programs. The Compensation Committee has the sole authority to retain and terminate compensation consultants to assist in the evaluation of Director and executive officer compensation and the sole authority to approve the fees and other retention terms of any compensation consultants. The Compensation Committee has engaged Willis Towers Watson Public Limited Company (“WTW”), a global professional services firm, to conduct annual reviews of its compensation programs for the Company’s executive officers and Directors. WTW also provides information to the Compensation Committee on trends in executive compensation and other market data. WTW (or its predecessor) has provided executive consulting services to the Compensation Committee and other professional consulting services to the Company for over 20 years.

With respect to Director compensation, as stated above, the Compensation Committee annually engages WTW to conduct reviews of Director compensation, and the Committee may then recommend to the full Board changes in Director compensation that will enhance our ability to attract and retain qualified Directors.

During fiscal year 2021, WTW was paid approximately $200,000 for the executive and Director compensation consulting services it provided to the Compensation Committee. Other professional consulting services provided by WTW to the Company, which were requested by management, not approved by the Compensation Committee or the Board and not related to executive compensation, totaled approximately $1.75 million, most of which (greater than $1.6 million) related to retirement consulting and outsourcing of pension administration services.

The Compensation Committee has concluded that the advice it receives from WTW continues to be objective, unbiased and independent. The Compensation Committee’s careful oversight of the relationship with WTW with respect to compensation advice mitigates the risk that management potentially could misuse the actuarial engagement to influence WTW’s compensation work for the Compensation Committee. The Compensation Committee annually reviews the charges to the Company from WTW for executive and Director compensation advice and other services for the preceding three years, along with an estimate of services for the coming year. Additionally, WTW has adopted internal safeguards to ensure that its executive compensation unit is maintained separately from its actuarial business.

The Compensation Committee has assessed the independence of WTW, as required under the listing standards of the NYSE. The Compensation Committee also has considered and assessed relevant factors that could give rise to a potential conflict of interest with respect to WTW, specifically including the six consultant independence factors under Rule 10C-1(b)(4)(i) through (vi) under the 1934 Act. Based on this review, we are not aware of any conflict of interest regarding the work performed by WTW.

The Compensation Committee also plays an active role in our executive officer succession planning process. The Compensation Committee meets regularly with senior management to ensure that an effective succession planning 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. Each year, the Compensation Committee reviews and discusses potential successors for each of the executive officers with the full Board in executive session. In addition, at the end of each year, the Compensation Committee reviews the performance of each of the executive officers. The Compensation Committee is also periodically updated regarding more broad-based human capital focused initiatives such as pay equity studies and, alongside the remainder of the Board, employee engagement surveys.

The Compensation Committee’s charter is available on the Corporate Governance section of our website at https://investors.timken.com/corporate-governance/documents/. For more information regarding the role of management and the compensation consultants in determining or recommending the amount or form of executive compensation,

 

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see “Compensation Discussion and Analysis – Determining Compensation for 2021” on page 44.

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, recommending Directors to serve as members of our Board committees, and providing oversight of the Company’s CSR program. Members of the Nominating and Corporate Governance Committee are Maria A. Crowe (Nominating and Corporate Governance Committee Chair), Elizabeth A. Harrell, John A. Luke, Jr., Christopher L. Mapes, Frank C. Sullivan and Jacqueline F. Woods. Our Board of Directors has determined that all members of the Nominating and Corporate Governance Committee are independent as defined in the listing standards of the NYSE.

The Board of Directors General Policies and Procedures provide that the general criteria for Director candidates include, but are not limited to, the highest standards of integrity and ethical behavior, 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 search firms, professional associations and Director 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 Board’s diversity, is evaluated each time a candidate is considered. The Nominating and Corporate Governance Committee also is 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 size of the Board and whether any vacancies are expected due to retirement, refreshment or otherwise. The Nominating and Corporate Governance Committee seeks to maintain an appropriate mix of newer Directors who bring fresh perspectives with longer-tenured Directors who have deep knowledge of our global operations and long-term strategy. In the event that vacancies are anticipated or otherwise arise, the Committee considers potential Director candidates in accordance with the factors and criteria outlined above.

The Nominating and Corporate Governance Committee’s charter is available on the Corporate Governance section of our website at https://investors.timken.com/corporate-governance/documents/.

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 by the Nominating and Corporate Governance Committee as appropriate and are available on the Corporate Governance section of our website at https://investors.timken.com/corporate-governance/documents/.

 

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Shareholder-Recommended Director Candidates

Director candidates recommended by our shareholders will be considered by the Nominating and Corporate Governance Committee in accordance with the criteria outlined above. 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, 4500 Mt. Pleasant Street NW, North Canton, Ohio 44720. Such communication should include the proposed candidate’s qualifications, any relationship between the shareholder and the proposed candidate, and any other information that the shareholder considers useful for the Nominating and Corporate Governance Committee to consider in evaluating such candidate.

Shareholder-Nominated Director Candidates

Our Amended Regulations provide a “proxy access” right to permit any shareholder or a group of up to 20 shareholders owning 3% or more of the voting power entitled to vote in the election of Directors continuously for at least three years to nominate and include in our proxy materials Director nominees for election to the Board. A shareholder or shareholders, as applicable, can nominate up to the greater of (i) 20% of the total number of Directors on the Board, rounding down to the nearest whole number, and (ii) two Directors in accordance with the requirements set forth in our Amended Regulations. Under our Amended Regulations, requests to include shareholder-nominated candidates for Director in our proxy materials must be received no earlier than 150 days and no later than 120 days before the anniversary of the date that we issued our Proxy Statement for the previous year’s annual meeting of shareholders. Requests to include shareholder-nominated candidates for Director in our proxy materials related to the 2023 Annual Meeting of Shareholders must be delivered by certified mail, return receipt requested, to our Vice President, General Counsel & Secretary, c/o The Timken Company, 4500 Mt. Pleasant Street NW, North Canton, Ohio 44720, no earlier than October 19, 2022 and no later than November 18, 2022 in order to be timely. The  summary of this “proxy access” right set forth above is qualified in its entirety by our Amended Regulations.

Corporate Governance and Social Responsibility Highlights

 

The Nominating and Corporate Governance Committee regularly reviews trends and recommends best practices, initiates improvements, and plays a leadership role in maintaining the Company’s strong corporate governance structure and practices. The below table details the practices the Nominating and Corporate Governance Committee believes demonstrate the Company’s commitment to strong corporate governance and additional information about the Company’s corporate governance structure and practices can be found in the Board of Directors General Policies and Procedures, our Amended Regulations and our Amended Articles of Incorporation.

 

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Board Independence, Refreshment, Diversity and Experience

✓  Strongly independent Board (10 of 12 Director nominees are independent)

✓  Independent Chairman of the Board

✓  Commitment to Board refreshment and diversity – 7 new Directors (representing over half of our Board) added in the past decade

✓  5 of 12 Directors are ethnically or gender diverse

✓  3 Audit Committee financial experts

✓  6 current or former public company Chief Executive Officers currently serve on the Board

Shareholder Rights

✓  Shareholder proxy access with 3/3/20/20 parameters

✓  Special meetings may be called by shareholders holding 25% of the Company’s common shares

Other Strong Governance Practices

✓  Declassified Board – all Directors are elected annually

✓  Annual Board, Committee and Director evaluations

✓  Majority Voting Policy that requires any Director who fails to receive a majority of the votes cast in favor of his or her election to submit his or her resignation to the Board

✓  Over-boarding policy limits the number of public company boards a Director can serve on

✓  “Clawback” provisions permit recovery of executive compensation if an executive engages in conduct that is detrimental to the Company and that results in restatement of financial results

✓  Stock ownership requirements for Directors and executive officers

✓  Audit Committee or Board receives reports on cyber security threats and trends at least annually and receives regular updates on our information security program

✓  Strong focus on shareholder engagement – over 400 interactions with investors in 2021

The Nominating and Corporate Governance Committee also provides oversight of our CSR program, though the full Board of Directors as well as its other standing committees also play a role in advising on certain CSR-related topics such as human capital initiatives and risk oversight.

Oversight and Management of the Company’s CSR Program

 

		Provides oversight of our CSR program
		Champions our CSR efforts and liaises with the Nominating and Corporate Governance Committee on CSR developments
		Vice President, General Counsel & Secretary, Vice President, Human Resources, and Director – Corporate Communications provide management oversight and leadership to the steering committee
		Cross-functional team charged with monitoring and evaluating current and future CSR initiatives, recommending strategies, managing data collection processes, and reporting on Company progress
		Consists of leaders in operations, compensation and benefits, HR, communications, legal, environmental, supply chain and other key functional areas

 

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In 2021, we continued to expand upon our CSR program and further detailed our efforts to support our stakeholders as a socially responsible corporation. Our CSR program is guided by our core values of ethics and integrity, quality, teamwork and excellence. Our goal is to create real-world impact in three clearly defined areas: the pursuit and expansion of knowledge, sustainability, and leadership. These areas are aligned with our core competencies and focus our efforts towards achieving greater equity and efficiency for a world in motion. Some of the Company’s current initiatives that promote our three focus areas are set forth below:

 

Focus Area		Knowledge		Sustainability		Leadership
Certain Key Topics		Learning and Development; Diversity and Inclusion; Compensation, Benefits and Wellbeing		Product Stewardship; Energy, Emissions and Waste; Health, Safety and Mitigation		Ethics and Corporate Governance; STEM and Mentorship; Community and Charitable Giving
Initiatives		•  Enhancing diversity and inclusion initiatives to encourage global, diverse viewpoints   •  Deploying comprehensive employee surveys to inform efforts that increase associate engagement and satisfaction   •  Rewarding associates with strong wages and competitive benefits to recognize professional excellence and career progression   •  Investing in associate education, training and development programs to support a culture of learning		•  Embracing energy efficiency, pollution prevention, waste management and recycling programs at Timken global facilities to reduce our environmental footprint   •  Engineering innovative products that increase the energy efficiency of machinery and equipment and propel the renewable energy sector   •  Continuously improving our world-class safety programs to protect associate health and safety, resulting in record performance		•  Upholding strong corporate governance principles and practices to promote the interests of the Company and its stakeholders   •  Leading with and living our values every day, while operating ethically and responsibly in accordance with our Standards of Business Ethics   •  Building and investing in communities where we live and work through associate and corporate-led giving, partnership and volunteerism   •  Promoting and protecting recognized human rights in our local communities

 

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		CSR Report Highlights
Knowledge		40% of current participants in our U.S. bearing co-op program are ethnically or gender diverse.   Currently, we have three associate resource groups that are open to all associates, regardless of race, ethnicity, gender identity and age: Women’s International Network, Multicultural Association of Professionals, and Young Professionals Network   Examples of regular, formal training and development activities include:   • Harvard ManageMentor® Diversity, Inclusion and Belonging course for managers;   • Our Engaged Leader program, which provides learning opportunities to further our culture of connectedness and growth through consistent conversations and team meetings;   • The Signature Program, with whom we have collaborated since 2014 to augment development and support Timken female leaders in enriching their leadership capabilities; and   • The Operations Development Program, an accelerated training program designed to increase the internal pool of people prepared to take on our Company’s leadership positions.   We are also committed to providing competitive and equitable compensation based on the local markets in which we operate while supporting employee health. We conduct market studies around the world to ensure full-time associates receive competitive benefits relative to the markets where they work.
Sustainability		Through our industrial repair and service business, we recycle numerous tons of steel and copper each year from service parts that cannot be reused.
		Working with our supplier, Ranpak, one of the global leaders in environmentally friendly packaging, we are replacing plastic bubble dunnage with rigid paper dunnage that can be reused and recycled. So far, we have converted eight U.S. facilities to sustainable paper packaging and we are working on extending the program internationally.
		Over the last four years, our manufacturing facilities have implemented several programs recycling more than 1,000 metric tons of plastic.
		2020 represented our lowest recordable injury rate on record.
		From 2018 to 2020, our total waste generation has decreased by over 40% and our total waste to landfill has decreased by over 15%, despite adding more sites to the scope of our reporting.
		In 2020, renewable energy became our single largest end-market sector in terms of total sales and it remained so in 2021. The Company’s products, technology and innovation continue to support the global trend towards sustainability and meet customers’ evolving requirements for optimized reliability and performance. In addition, the Company has announced more than $75 million in capital investments through early 2022 to increase the Company’s renewable energy capabilities across its global footprint.
Leadership		Our corporate charitable giving focus areas for 2020 included associate giving, basic needs, education, and reputation and community building.
		In 2020, we gave in excess of $1.6 million in the U.S. alone to support basic needs, education, and community building.
		We have also committed to being a STEM partner for the I PROMISE School, a collaboration between the LeBron James Family Foundation and Akron Public Schools.
		We published our enterprise-wide human rights policy which details, amongst other items, our:
		• Stance against human trafficking and forced labor; • Care for the health and safety of our associates and others; • Embrace of diversity and intolerance of discrimination; • Commitment to competitive and equitable pay; • Respect for the principles of freedom of association and collective bargaining; • Promotion of the development of our communities; and • Support for access to clean water.

 

28

In consideration of our efforts, we were named one of the World’s Most Ethical Companies^® by Ethisphere^® Institute for the eleventh time, among America’s Most Responsible Companies by Newsweek and Statista and one of America’s Best Employers, America’s Best Employers for New Graduates and America’s Best Employers for Women by Forbes in 2021.

For more information regarding our corporate social responsibility program, please see our most recent corporate social responsibility report available on our website at https://www.timken.com/ corporate-social-responsibility/.

Shareholder Engagement in 2021

 

 

Risk Oversight

 

The Board of Directors primarily relies on its Audit Committee for oversight of the Company’s risk management. The Audit Committee regularly reviews issues that present particular risks to the Company, including those involving competition; economic conditions; planning and strategy; finance; sales and marketing; product technology and innovation; information technology and cybersecurity; facilities, operations and supply chain; environmental, health and safety; product warranty; talent management; and other matters. The full Board and other Committees also review certain of these issues as appropriate. The Board believes that this approach, supported by our leadership structure, provides appropriate checks and balances against undue risk taking.

 

29

Shareholder Communications

 

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, 4500 Mt. Pleasant Street NW, North Canton, Ohio 44720. Shareholders or interested parties also may submit questions, concerns or reports of misconduct through the Timken Helpline at 1-800-846-5363 and may remain anonymous. Such communications may be reviewed by the office of the Vice President, General Counsel & Secretary to ensure appropriate and careful review of the matter.

BENEFICIAL OWNERSHIP OF COMMON SHARES

The following table shows, as of January 1, 2022, the beneficial ownership of our common shares by each Director, nominee for Director and executive officer named in the 2021 Summary Compensation Table on page 58 of this Proxy Statement, and by all Directors, nominees for Director and executive officers as a group. Beneficial ownership of our common shares has been determined for this purpose in accordance with Rule 13d-3 under the 1934 Act 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 shares. Beneficial ownership as determined in this manner does not necessarily bear on the economic incidents of ownership of our common shares.

 

 

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(1)

Excludes Ronald J. Myers due to his retirement from the Company on November 30, 2021. At the time of his retirement, Mr. Myers possessed sole voting or investment power over 25,561 common shares.

 

(2)

The following table provides additional details regarding beneficial ownership of our common shares:

 

 

(a)

Includes shares that the individual named in the table has the right to acquire on or before March 1, 2022 through the exercise of stock options or the vesting of time-based restricted stock units pursuant to the Equity and Incentive Compensation Plan. Including those listed and other executive officers not individually listed in the table, all Directors, nominees for Director, and executive officers as a group have the right to acquire 737,595 shares on or before March 1, 2022 through the exercise of stock options or the vesting of time-based restricted stock units pursuant to the Equity and Incentive Compensation Plan. These shares have been treated as outstanding for the purpose of calculating the percentage of the class beneficially owned by such individual or group, but not for the purpose of calculating the percentage of the class owned by any other person.

 

(b)

Awarded as annual grants under the Equity and Incentive Compensation Plan or The Timken Company 2011 Long-Term Incentive Plan, as amended and restated as of February 13, 2015 (the “Predecessor Long-Term Incentive Plan”), which will not be issued until a later date under the Director Deferred Compensation Plan.

 

(3)

Includes 182,166 shares for which John M. Timken, Jr. has sole voting and investment power as trustee of three trusts created as the result of distributions from the estate of Susan H. Timken. Also includes 126,000 shares held in an irrevocable trust with his spouse as the sole lifetime beneficiary for which he disclaims beneficial interest.

 

(4)

Includes 55,965 shares beneficially owned by other executive officers not individually listed in the table. The number of shares beneficially owned by all Directors, nominees for Director and

 

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executive officers as a group has been calculated to eliminate duplication of beneficial ownership. This group consists of 17 individuals.

The following table gives information known to us about each beneficial owner of more than 5% of our common shares as of January 1, 2022, unless otherwise indicated below:

 

 

(1)

A Schedule 13G/A filed with the SEC on February 10, 2022, by The Vanguard Group, 100 Vanguard Blvd., Malvern, Pennsylvania 19355, indicated that it has sole voting power over 0 common shares, shared voting power over 37,895 common shares, sole investment power over 6,581,839 common shares, shared investment power over 91,142 common shares and aggregate beneficial ownership of 6,672,981 common shares.

 

(2)

A Schedule 13G/A filed with the SEC on February 1, 2022, by BlackRock, Inc., 55 East 52nd Street, New York, New York 10055, indicated that it has sole voting power over 5,425,615 common shares and sole investment power over 5,660,394 common shares.

 

(3)

A Schedule 13G/A filed with the SEC on February 14, 2022, by The Timken Foundation of Canton (the “Foundation”), 200 Market Avenue North, Suite 210, Canton, Ohio 44702, indicated that it has sole voting and investment power over 4,652,481 common shares. Ward J. Timken, Joy A. Timken, Ward J. Timken, Jr. and William R. Timken, Jr. are trustees of and share the voting and investment power with respect to shares held by the Foundation. All trustees disclaim any beneficial interest in such shares. The Foundation is an Ohio private charitable foundation that is independent of the Company.

 

(4)

A Schedule 13G filed with the SEC on January 28, 2022, by JPMorgan Chase & Co., 383 Madison Avenue, New York, New York 10179, indicated that it has sole voting power over 4,092,584 common shares, shared voting power over 0 common shares, sole investment power over 4,153,442 common shares, shared investment power over 72 common shares and aggregate beneficial ownership of 4,153,442 common shares.

 

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PROPOSAL NO. 2: SHAREHOLDER APPROVAL, ON AN

ADVISORY BASIS, OF OUR NAMED EXECUTIVE OFFICER COMPENSATION

We believe that our compensation programs for our named executive officers:

 

·

align the interests of executive management with those of our shareholders;

·

reward executive management for sustained, strong business and financial results; and

·

enable us to attract, retain and motivate the best talent.

As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act and Section 14A of the 1934 Act, we are asking you to approve, on an advisory (non-binding) basis, the following resolution at our 2022 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 Compensation Discussion and Analysis, 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 currently are 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 2023 Annual Meeting of Shareholders.

The affirmative vote of a majority of the votes cast on this matter is necessary for approval of this resolution. Abstentions and broker non-votes will not be counted for determining whether this resolution is approved.

 

 

33

COMPENSATION DISCUSSION AND ANALYSIS

TABLE OF CONTENTS

 

 

34

Executive Summary

 

This section provides a summary of our named executive officer compensation program, key compensation decisions, and performance targets and results for incentive plans in which our named executive officers participated for the year ended December 31, 2021. For 2021, our named executive officers (or “NEOs”) were:

 

·

Richard G. Kyle, President and CEO;

·

Philip D. Fracassa, Executive Vice President, Chief Financial Officer;

·

Christopher A. Coughlin, Executive Vice President, Group President;

·

Hansal N. Patel, Vice President, General Counsel & Secretary;

·

Andreas Roellgen, Vice President, Europe, Asia and Africa; and

·

Ronald J. Myers, former Executive Vice President, Human Resources.

Mr. Myers retired from his position as Executive Vice President, Human Resources effective as of November 30, 2021.

Executive Compensation Philosophy

We design our executive compensation plans and programs to help us attract, motivate, reward and retain highly qualified executives who are capable of creating and sustaining value for our shareholders over the long term. The structure of our programs enables us to provide a competitive compensation and benefits package while aligning senior executive interests with those of our shareholders. The following chart highlights the key considerations behind the development, review and approval of the compensation for our NEOs:

 

Objectives		Philosophy
Our executive compensation program is designed to:		Our executive compensation philosophy is built on the following principles:
· Align the interests of our executives and shareholders		· Recognizing that people are our most important resource
· Reward sustained, strong business results		· Rewarding results linked to both short- and long-term performance (pay-for-performance)
· Incentivize profitable growth and capital deployment discipline		· Positioning our pay to be competitive in the marketplace
· Attract, retain and motivate the best talent		· Focusing on increasing shareholder value

2021 Performance

 

Timken delivered record-setting performance in 2021, despite the unprecedented supply chain challenges and inflationary pressures that accelerated during the year. The unwavering commitment of our employees allowed the Company to continue to operate safely and effectively serve customers’ increased demand for Timken’s products and services – all while advancing our strategic initiatives.

In 2021, our financial performance benefited from strong demand across most end markets, as well as our operational excellence and outgrowth initiatives. We also made additional investments to increase our presence in growing sectors like renewable energy and marine, while continuing to optimize our manufacturing footprint to deliver higher returns through the business cycle. The Company grew revenue and earnings significantly in 2021, with record revenue of $4.13 billion, an increase of approximately 18% from 2020, net income increasing approximately 30% to $369 million and adjusted

 

35

EBITDA increasing approximately 9% to $718 million². We achieved record EPS of $4.79 and record adjusted EPS of $4.72², up 29% and 15%, respectively, from 2020. We also delivered an adjusted ROIC of 11.0%² in 2021, up from 9.9% last year. In addition, we generated net cash from operations of $387 million and free cash flow of $239² million in 2021.

 

Our Company’s performance during 2021, discussed throughout the Compensation Discussion and Analysis (the “CD&A”), resulted in below-target annual cash incentive compensation plan payouts for 2021, due to lower than targeted free cash flow (driven mainly by higher working capital) and slightly lower earnings and operating margins as compared to target (driven mainly by higher operating costs to serve customers). The number of performance-based restricted stock units earned for the 2019-2021 cycle were slightly below target, reflecting strong overall performance in a challenging environment, as the targets were set in early-2019, prior to the start of the COVID-19 pandemic. Our cumulative 2019-2021 EPS and adjusted EPS increased 61% and 50%² respectively, as compared with the 2016-2018 cycle which was used as the basis for setting the 2019-2021 targets. Average adjusted ROIC as compared across those same periods remained relatively consistent. See page 48 for details on annual cash incentive award decisions, and “2021 Long-Term Incentive Decisions” on page 50 for more details on long-term incentive award payouts. Overall, our NEO compensation for 2021 reflects our compensation objectives and demonstrates our commitment to pay our executives based upon the performance they deliver.

2021 also marked the release of our third annual corporate social responsibility report, which detailed our vision to build a more efficient and resilient world. The report highlights how we continue to advance our corporate social responsibility initiatives by promoting a culture of problem solvers with a strong focus on sustainable products and practices across the Company, while maintaining a strong commitment to ethics. See page 25 for more details on our most recent corporate social responsibility report.

Our commitment to creating long-term shareholder value is reflected in our disciplined and balanced approach to capital allocation. During 2021, we generated net cash from operations of approximately $387 million and free cash flow of $239² million. This cash generation allowed us to invest in the business for future growth and continue to return cash to shareholders. We invested approximately $148 million, or 3.6% of revenue, in capital expenditures to facilitate growth and improve the competitiveness of our business. We also returned $185 million in cash to shareholders through the payment of dividends and the repurchase of approximately 1.25 million shares of stock, or over 1.7% of our outstanding shares, during the year. In 2021, we paid out our 398^th consecutive quarterly dividend and increased our quarterly dividend to $0.30/share in the second quarter, continuing one of the longest continuous dividend streaks on the NYSE and making 2021 the eighth consecutive year of higher annual dividends. The Company also expanded its linear motion portfolio with the acquisition of Intelligent Machine Solutions (“iMS”). We ended the year with a strong balance sheet with total debt of $1.46 billion and net debt of $1.21² billion. Our net-debt-to-adjusted-EBITDA ratio of 1.7² times at December 31, 2021, is near the low-end of our 1.5 to 2.5 times targeted range and puts us in an excellent position to drive our strategy and create shareholder value in 2022 and beyond.

 

 

² See Appendix A for reconciliations of adjusted EPS, adjusted EBITDA, free cash flow, adjusted ROIC, net debt, and the ratio of net debt to adjusted EBITDA to their most directly comparable GAAP financial measures. Free cash flow is defined as net cash from operations minus capital expenditures. Adjusted ROIC is defined as ANOPAT divided by average invested capital. The performance metrics discussed above are used for external reporting and may not correlate exactly to their corresponding compensation adjusted metrics due to slight differences in methodology (see pages 48 to 52 for more details on how the compensation adjusted metrics are calculated).

 

36

		Based out of North Shores, Michigan, iMS is a manufacturer of industrial robotics and automation solutions, which expands the Company’s growing linear motion portfolio.

Strong execution of our strategy has created shareholder value by delivering TSR of 25.5%, 14.3%, and 12.1% over the past three-, five-, and ten-year periods, respectively. Our three-year and five-year TSR outpaced the median of our 2021 compensation peer group and also exceeded the S&P 500 Industrials over these respective timeframes, while our ten-year TSR was just slightly below our peer median and the S&P 500 Industrials. The S&P 500 Industrials comprises those companies included in the S&P 500 index that are classified as members of the GICS industrials sector.

 

*TSR for the Company was calculated on an annualized basis and assumes quarterly reinvestment of dividends. The 10-year period takes into account the value of TimkenSteel common shares distributed in the Spinoff.

**See page 43 for the companies that are included in the compensation peer group for 2020.

***The S&P 500 Industrials comprises those companies included in the S&P 500 index that are classified as members of the GICS industrials sector.

 

37

2021 Compensation Decisions and Actions

 

 

 

38

				Annual cash incentive opportunities were delivered under the Company’s shareholder-approved Equity and Incentive Compensation Plan. For additional details, see the “Annual Cash Incentive” section on page 47.
				Long-Term Incentives
				The NEOs received target grants of time-based restricted stock units and performance-based restricted stock units in 2021, with total grant values ranging from approximately $0.5 million to $4.4 million.
				Performance-based restricted stock units (which are based on adjusted ROIC and adjusted EPS performance achievements) were earned at 92.7% of target for the 2019-2021 performance period, which reflected strong overall performance in a challenging environment, as the targets were set in early-2019, prior to the start of the COVID-19 pandemic. We achieved record adjusted EPS results in 2019 and 2021, and strong average adjusted ROIC performance over the period.
				In February 2020, the Company made a one-time grant of 5,000 deferred shares to Mr. Myers under the Equity and Incentive Compensation Plan to promote the retention of Mr. Myers through the end of 2021. In September 2021, Mr. Myers notified the Company of his intention to retire on November 30, 2021. In connection with his retirement, on October 1, 2021, the Compensation Committee of the Board of Directors approved a modification to his award. Under the modification, instead of requiring Mr. Myers to remain employed by the Company until December 31, 2021 in order to earn the deferred shares, the Compensation Committee provided that, as long as Mr. Myers remained employed with the Company until November 30, 2021, then the deferred shares would continue to vest following Mr. Myers’ retirement from the Company as if he remained in continuous employment through December 31, 2021.
2022 Program Updates				Modifications to Annual Cash Incentive Metrics
				For the 2022 plan year, the Company has decided to replace the adjusted earnings before interest and taxes (“EBIT”) and adjusted EBIT margin metrics within the corporate annual cash incentive plan with adjusted EBITDA and adjusted EBITDA margin, respectively, which aligns with how the Company reports its financial results externally. Consistent with the Company’s prior weighting of adjusted EBIT and adjusted EBIT margin, adjusted EBITDA performance will be weighted 60% and adjusted EBITDA margin performance will be weighted 20% for purposes of determining payouts under the corporate annual cash incentive plan (with free cash flow continuing to have a 20% weighting). These changes will apply to all associates who participate in the corporate annual incentive plan, including the NEOs.
				Changes to the Compensation Peer Group Referenced for 2022 Executive Compensation
				In 2021, as part of its annual review of executive and director compensation, the Compensation Committee, in consultation with WTW, conducted a holistic review of the peer group utilized in 2021 and assessed whether any changes were needed for 2022. As a result of that review, the Company decided to replace eight of its current peers with eight new companies. See page 43 for more details regarding the changes to the 2022 peer group and the use of peer group and market data for our 2021 executive compensation program.

 

39

CEO Pay At-A-Glance

 

 

Target pay for 2021 for Mr. Kyle was determined by the Compensation Committee after consideration of the factors described below under “Determining Compensation for 2021.” The Compensation Committee considered the total compensation package in relation to the target established for the position, taking into account the scope of responsibilities for the particular position. Further details are provided on page 44.		Elements of our named executive officer compensation consist of base salary, annual cash incentive, long-term incentives that include time-based and performance-based restricted stock units, other primarily broad- based employee benefits and limited perquisites.

 

The chart below provides annualized targeted 2021 compensation levels for Mr. Kyle as compared to the median of our 2021 compensation peer group and general industry survey data. This data represents targeted compensation levels excluding the impact of “all other compensation” and pension value changes, which reflects how the Compensation Committee evaluated Mr. Kyle’s compensation levels when determining 2021 pay. When considering how compensation aligns with external pay data comparisons, we believe it is appropriate to consider total compensation without the impact of all other compensation and pension value changes (particularly as changes in pension value can be heavily impacted by external factors such as interest rates and changes to mortality assumptions and not just changes in the underlying benefit level or program design). The smaller year-over-year increase in actuarial pension values resulted from higher interest rates from the prior year measurement period, offset partially by an update to the marriage assumptions under the Excess Benefit Agreements for the remaining non-retired participants (Mr. Kyle, Mr. Fracassa and Mr. Coughlin) to reflect their current marital statuses. To better align with market practice, effective December 31, 2022, most U.S. participants, including Messrs. Coughlin, Fracassa and Kyle, will cease to accrue pension benefits under the Company’s defined benefit pension plans. See page 52 for more details.
		The Company’s Approach to Rewarding Performance
		Annual Cash Incentive
		· Reward achievement of short-term individual and corporate performance goals
		Time-Based Restricted Stock Units
		· Reward long-term shareholder value creation
		· Reinforce ownership in the Company
		· Support retention of executives
		· Align executive compensation with shareholder interests
		Performance-Based Restricted Stock Units
		· Reward long-term financial results that drive shareholder value
		· Reinforce ownership in the Company
		· Align executive compensation with shareholder interests

 

40

 

*See page 43 for more details on the companies in the peer group, which consists of U.S. industrial companies with median revenue of $3.12 billion (as of the time the benchmarking study was conducted).

**Survey data consists of pay practices of general industry companies in the WTW Executive Compensation Database adjusted to $3.8 billion in annual revenue via the use of regression analysis.

Aligning Pay with Performance

 

The Company’s success depends largely on the contributions of motivated, focused and energized employees all working to achieve our strategic and financial objectives. This understanding shapes our approach to providing a competitive compensation and benefits package to our CEO and the other NEOs.

Pay-for-performance is one of the principles that make up our executive compensation philosophy. To help ensure that we are adhering to this principle, we evaluate the degree of alignment of our total incentive compensation to our business results, including the level of adjusted EBIT, adjusted EBIT margin, free cash flow, adjusted ROIC and adjusted EPS, which we believe are key performance metrics that drive long-term TSR and cash generation that supports our capital allocation objectives.

The Company uses a balance of short- and long-term incentives as well as cash and non-cash compensation to meet these objectives. The elements of executive compensation provided to our NEOs for 2021 consisted of base salary, annual cash incentive, long-term incentives including time-based restricted stock units and performance-based restricted stock units, other primarily broad-based employee benefits, and limited perquisites. Our compensation program is designed to link pay and performance.

 

·

Program Design: 85% of the targeted total direct compensation for Mr. Kyle and between 64% and 76% of the targeted total direct compensation for the other NEOs is comprised of incentive-based pay:

 

41

 

 

·

Performance Assessment: Our Compensation Committee uses a comprehensive process to assess Company performance. We believe our plan and financial metrics focus management on the appropriate objectives for the creation of both short- and long-term shareholder value.

The Company’s incentive compensation program for executives is designed to link compensation with key financial and operating goals, some of which are short-term, while others take several years or more to achieve.

 

		Short-Term (Cash) Annual Incentive*		Long-Term   (Equity) Performance-Based Restricted Stock Units*   60% of NEO Annual Equity Grants		Long-Term (Equity)   Time-Based Restricted Stock Units   40% of NEO Annual Equity Grants
Objective		Short-term operational business priorities and shareholder value creation		Long-term strategic financial goals and shareholder value creation		Long-term shareholder value creation
Time Horizon and 2021 Metrics		One year   60% adjusted EBIT**   20% adjusted EBIT margin**   20% free cash flow		Three years   60% adjusted EPS   40% adjusted ROIC		Four-year vesting period (25% per year)

 

 

*See “Annual Cash Incentive” and “Long-Term Incentives: Performance-Based Restricted Stock Units” sections on pages 47 and 50, respectively, for more details.

**Will be replaced with adjusted EBITDA and adjusted EBITDA margin for the 2022 plan year.

Other key features of our executive compensation program include:

 

•

Stock ownership requirements: Our stock ownership guidelines require all senior executives to meet specific ownership targets based on position. This requirement aligns the interests of our executives with those of our shareholders. See page 55 for more information.

 

•

Clawback provisions: The Company maintains specific provisions regarding the recovery (“clawback”) of awards to deter certain types of conduct, including conduct that could affect the accuracy of the Company’s financial statements. See page 56 for more information.

 

42

Consideration of 2021 Say-on-Pay Vote

 

In evaluating the design of our executive compensation programs and the specific compensation decisions for each of our NEOs, the Compensation Committee considers shareholder input, including the advisory “say-on-pay” vote at our annual meeting, in addition to other factors. In 2021, over 97% of the votes cast approved the compensation for our NEOs described in our Proxy Statement for the 2021 Annual Meeting of Shareholders. From time to time, our shareholders have also engaged in discussions with the Company regarding elements of our compensation program and their feedback has generally been considered in making compensation decisions. Based on the strong level of shareholder support, the Compensation Committee did not make any changes to our compensation programs or policies that were specifically driven by the results of the say-on-pay vote or shareholder feedback.

Use of Peer Group and Market Data

 

The Company establishes compensation levels that are consistent with market practice and general internal equity considerations relative to base salaries, target annual cash incentive awards and long-term incentive grants, as well as with the Compensation Committee’s assessment of the appropriate pay element mix for the position.

In order to gauge the competitiveness of its compensation programs, the Company reviewed compensation practices and pay opportunities from general industry survey data, as well as from a selection of publicly traded peer companies. The Company attempts to position itself to attract and retain qualified senior executives in the face of competitive pressures in its relevant labor markets.

Specifically, in 2021, the Company used information regarding the pay practices of general industry companies in the WTW Executive Compensation Database, regressed to $3.8 billion in annual revenue, which was slightly below our expectations for 2021 revenue at the beginning of 2021, but aligned to our expectations for 2020 revenue, prior to the global outbreak of the COVID-19 pandemic. When running this regression analysis, the Company maintained the revenue figure at $3.8 billion due in part to continued uncertainty relating to the pandemic as well as supply chain challenges. The Company believes that revenue and operational footprint are appropriate indicators of the size and complexity of an organization, which should be reflected in determining compensation levels. The compensation data resulting from this analysis was a significant factor considered by the Compensation Committee with respect to its 2021 executive compensation decisions for our NEOs.

The Company also used a compensation peer group as an additional reference point when determining executive compensation. The 2021 peer group (used to set compensation levels for 2021), which is unchanged from our 2020 peer group, consisted of a select group of U.S. industrial companies that our Compensation Committee believed to be representative of the talent market in which we compete and consisted of the following companies:

 

Allison Transmission Holdings, Inc.		Dana Inc.		Nordson Corp.
Altra Industrial Motion Corp.		Flowserve Corp.		Regal Beloit Corp.*
American Axle & Manufacturing Holdings, Inc.		IDEX Corp.		Rexnord Corp.*
Carlisle Companies Inc.		ITT Inc.		Terex Corp.
Colfax Corp.		Kennametal Inc.		Trinity Industries, Inc.
Crane Co.		Meritor, Inc.		Triumph Group, Inc.

* As named prior to the Regal Beloit Corp. and Rexnord Process and Motion Control transaction.

While the Compensation Committee considered general industry and peer group data in determining the general competitiveness of executive compensation, market data is only one factor taken into consideration when determining the total compensation for our NEOs. The Compensation Committee also considered other factors listed in “Factors Guiding Our Decisions” on page 38.

 

43

Changes to the Compensation Peer Group Referenced for 2022 Executive Compensation

In 2021, as part of its annual review of executive and director compensation, the Compensation Committee, in consultation with WTW, reviewed the peer group utilized in 2021 and assessed whether any adjustments were needed to the peer group referenced for setting compensation levels in 2022. Factors taken into consideration when setting the 2022 compensation peer group included comparisons of various financial metrics, such as revenue and market capitalization, operational footprint, relevant end-user markets, and product portfolio of added companies compared to Timken’s current product portfolio. To account for the Company’s increased revenue and market capitalization compared to the median revenue size and median market capitalization of our current peer group, we made the following changes:

 

2021 Peer Group
Removed		Remaining for 2022		Added
Allison Transmission Holdings, Inc. American Axle & Manufacturing Holdings, Inc. Colfax Corp. IDEX Corp. Nordson Corp. Rexnord Corp.* Trinity Industries, Inc. Triumph Group, Inc.		Altra Industrial Motion Corp. Carlisle Companies Inc. Crane Co. Dana Inc. Flowserve Corp. ITT Inc. Kennametal Inc. Meritor, Inc. Regal Rexnord Corp. Terex Corp.		Agco Corp. Dover Corp. Fortive Corp. Gates Industrial Corporation plc Ingersoll Rand Inc. Oshkosh Corp. Westinghouse Air Brake Technologies Corp. Woodward, Inc.
		2022 Peer Group

* As named prior to the Regal Beloit Corp. and Rexnord Process and Motion Control transaction.

Determining Compensation for 2021

 

Role of the Compensation Committee

Each year, the Compensation Committee determines the appropriate level of compensation for our NEOs. As part of this process, the Compensation Committee reviews all of the components of compensation for the NEOs and determines if each individual’s total compensation is reasonable and consistent with the Company’s compensation philosophy. The Compensation Committee reviews each component of compensation individually and in total, references competitive market data including at the 50th percentile, and, after consideration of additional factors (for example, the executive’s responsibilities, experience level, tenure, performance in the position and Company performance, including TSR), may make adjustments to any element of a NEO’s compensation in establishing such executive’s total direct compensation.

The Compensation Committee then approves, with any modifications it deems appropriate, base salary ranges, target annual cash incentive award opportunities and long-term incentive grants for the Company’s NEOs.

In the course of this analysis and development of proposed total compensation packages, WTW, the Compensation Committee’s external compensation consultant, reviews the relevant information and discusses its findings with the Compensation Committee.

The compensation package for the CEO is determined by the Compensation Committee and approved by the independent Directors of the Board during executive session.

Role of the CEO and Management

The CEO, in consultation with executive compensation leadership and WTW, prepares compensation recommendations for the NEOs (other than the CEO) and presents these recommendations to the Compensation Committee. These recommendations are based on the CEO’s personal review of each

 

44

NEO’s performance, general internal equity considerations, job responsibilities and importance to our overall business strategy, as well as our compensation philosophy. Although these recommendations are given significant weight, the Compensation Committee retains full discretion when determining compensation for the NEOs.

As part of this process, individual elements of compensation provided to our NEOs are generally compared to general industry market data and peer group data as described above and the total compensation package is considered in relation to the target established for the position, taking into account the scope of responsibilities for the particular position. Total direct compensation (base salary, annual cash incentive and long-term incentive grants) also is evaluated in relation to the total compensation for positions with similar levels of responsibility derived from the general industry market data and peer group data described above.

Role of the Compensation Consultant

To add rigor in the review process and to inform the Compensation Committee of market trends, the Compensation Committee engages the services of WTW as our independent executive compensation consultant to analyze our executive compensation structure and plan designs, and to assess whether the compensation program is competitive and supports the Compensation Committee’s goal to align the interests of executive officers with those of shareholders. WTW also provides the Compensation Committee with market data, which the Compensation Committee generally references as a market check when determining compensation for non-employee Directors and executive officers.

For purposes of 2021 compensation decisions, WTW’s primary areas of assistance to the Compensation Committee were:

 

·

Gathering information related to current trends and practices in executive compensation in response to questions raised by the Compensation Committee and management;

 

·

Developing analyses that help evaluate and inform on how the compensation programs are working, including pay-for-performance analyses, peer group reviews and risk assessments;

 

·

Reviewing information developed by management for the Compensation Committee and providing its input on such information to the Compensation Committee;

 

·

Attending and participating in meetings with the Compensation Committee, as well as briefings with the Compensation Committee Chair and management prior to meetings; and

 

·

Reviewing with management and the Compensation Committee materials to be used in preparing the Company’s Proxy Statement.

The Compensation Committee has authorized WTW to interact with the Company’s management, as needed, on behalf of the Compensation Committee with respect to executive compensation matters. WTW also provides actuarial, pension administration and other services to the Company, which are unrelated to the work that WTW provides to the Compensation Committee. The WTW consultants who advise the Compensation Committee are different from the WTW employees who perform work for the Company in other areas. In order to maintain independence, WTW has adopted formal executive compensation consulting protocols that help to ensure that its advice to the Compensation Committee is fully objective and independent and that the business unit providing such advice remains separate from WTW’s other business units that provide advice to the Company’s management. For more information regarding fees paid to WTW by the Company in 2021 and the Compensation Committee’s assessment that there is no conflict of interest in the work performed by WTW with respect to executive compensation, see page 23 of the Proxy Statement.

 

45

Key Elements of the Executive Compensation Program

 

 

Type of Compensation		Link to Program Objectives		Key Features
Cash Compensation
Base Salary		A standard compensation element in executive compensation packages, offering market-competitive fixed compensation to attract and retain talent		Provides a consistent source of income
Annual Cash Incentive		A cash-based award that encourages executives to focus on achievement of specific annual corporate performance goals		Target incentive opportunity is set as a percentage of base salary, and awards are paid out based on achievement relative to annual performance metrics and targets
Long-Term Equity Incentives
Performance-Based Restricted Stock Units		Requires achievement of specified strategic financial and operating metrics over a three-year period that the Compensation Committee believes are highly correlated to driving long-term shareholder value; it also further aligns the long-term financial interests of our executives with those of our shareholders		Designed to reward executives for attainment of specified three-year corporate performance goals; value is delivered in equity to align with shareholder experience; cumulative dividend equivalents are paid in cash based on the actual number of shares delivered at the end of the three-year performance cycle
Time Based Restricted Stock Units		Rewards long-term shareholder value creation, enhances executive stock ownership and promotes retention		Four-year (25% per year) time vesting; value is delivered in equity to align with shareholder experience; cumulative dividend equivalents are paid in cash upon vesting
		Benefits
Retirement and Savings Benefits		An element of our benefits program that helps attract and retain executive talent		NEOs receive retirement and savings benefits through several plans: ·   Qualified and nonqualified defined contribution plans*; · ·   Qualified and nonqualified defined benefit plans*; and ·   Deferred compensation plan
Severance and Change in Control Agreements		Helps ensure NEOs remain focused on creating sustainable performance		Agreements help protect the Company and the NEOs from risks by providing: · ·   Economic stability; ·   Death or disability payments; and ·   Payments and benefits in the event of a qualifying termination of employment, including in connection with a change in control
Other Benefits		Keeps program competitive and provides health, disability and life insurance protection for executives		Perquisites are limited in amount and use

*See “Retirement Programs” on page 52 for NEO eligibility.

 

46

Analysis of 2021 Compensation

 

Base Salary

 

Base salaries for the NEOs are intended to reflect the scope of their responsibilities, the length of their experience performing those responsibilities and their performance. The Compensation Committee initially determines base salary ranges for the NEOs based on external general market and peer group data for salary practices for positions with similar levels of responsibility. The Compensation Committee also reviews base salaries for the NEOs annually in light of each officer’s experience, leadership, current salary and position in the salary range. The base salary decisions described below were made based on these considerations.
		Establishing Base Salaries   When establishing base salaries for NEOs, the Compensation Committee considers general industry data for comparable roles and peer group data as a general guideline.

2021 Base Salary Decisions

 

·

The Committee awarded base salary increases effective in March 2021 to each NEO, including the CEO.

·

The percentage increases shown below are in comparison to the base salaries approved in March 2020 for the CEO and other NEOs, and do not reflect the temporary salary reductions in 2020 taken in response to the significant unforeseen impact of COVID-19.

 

Executive Officer		2020 Target    Base Salary				2021 Target    Base Salary				Percent   Increase
Richard G. Kyle			$1,017,640				$1,041,046				2.3%
Philip D. Fracassa			$562,380				$575,315				2.3%
Christopher A. Coughlin			$562,194				$575,125				2.3%
Hansal N. Patel			$390,179				$420,223				7.7%
Andreas Roellgen*			$360,306				$378,682				5.1%
Ronald J. Myers			$408,288				$425,028				4.1%
*The conversion rate used for purposes of converting the Euros earned by Mr. Roellgen into U.S. Dollars was €1.00 = $1.1833 (the average monthly exchange rate for the calendar year)

Annual Cash Incentive

 

The Company’s annual cash incentive program provides the NEOs with the opportunity to earn additional compensation based on the achievement of annual corporate performance goals established by the Compensation Committee and approved by the Board. It is intended to focus the NEOs on specific performance goals in the applicable year. For all NEOs, the 2021 annual cash incentive opportunity was delivered through the shareholder-approved Equity and Incentive Compensation Plan.		Linking Compensation to Performance   The Compensation Committee established adjusted EBIT as the primary performance measure because it believes this measure is closely correlated with the creation of shareholder value.

 

47

In 2021, Mr. Kyle, as CEO, had an annual cash target award opportunity of 125% of base salary and the other NEOs had target award opportunities ranging from 55% to 80% of base salary. Annual cash incentive payouts for our NEOs were determined by:

 

·

Corporate performance (measured by adjusted EBIT, adjusted EBIT margin and free cash flow3); and

·

Individual performance (however, for 2021, annual cash incentive payments were not adjusted as a result of individual performance for any of the NEOs).

Specific factors that go into setting the targets include consideration of Company results for prior years, results for U.S. industrial peers, current market conditions, cyclicality and outlook, acquisitions, divestitures, working capital requirements, past targets and performance against those targets, and macro-economic factors.

Performance goals for the Company’s corporate annual cash incentive plan were set near the beginning of 2021. The 2021 adjusted EBIT target represents a 15% increase over actual 2020 adjusted EBIT results (using comparable exclusions) and approximately 5% lower than the 2020 adjusted EBIT target which was not achieved due to the impact of the COVID-19 pandemic.

The 2021 adjusted EBIT margin target of 14.4% was set at a level that was 30 basis points higher than the 2020 actual adjusted EBIT margin results of 14.1% and 80 basis points lower than the 2020 adjusted EBIT margin target of 15.2% which was not achieved due to the impact of the COVID-19 pandemic.

The 2021 free cash flow target of $415 million was set equal to the 2020 free cash flow target and 10% lower than 2020 free cash flow results as the Company expected higher working capital investment to support anticipated sales growth. This turned out to be the case and was compounded by higher operating costs associated with the impact from COVID-19, as free cash flow of $230 million in 2021 resulted in a 0% payout under the corporate annual cash incentive plan.

2021 Annual Performance Award Decisions

Under the corporate annual cash incentive plan, actual performance under each of the three financial metrics needed to reach the respective minimum threshold for that portion of the award to be payable. Performance targets and actual performance levels for the 2021 corporate annual cash incentive plan are shown in the table below. Straight-line interpolation is used to calculate actual payouts under the plan.

Corporate Annual Cash Incentive Plan

 

		Threshold		Target		Maximum		Actual
Adjusted EBIT (60% weighting)		$399M		$570M		$741M		$552M (94.7% payout)
Adjusted EBIT Margin* (20% weighting)		10.0%		14.4%		16.5%		13.4% (88.1% payout)
Free Cash Flow (20% weighting)		$249M		$415M		$581M		$239M (0.0% payout)
Plan Payout		é 50%		é 100%		é 200%		é 74.4% payout

*Adjusted EBIT Margin less than 8.5% would have resulted in zero payout for the plan. Between 8.5% and 10.0%, a payout under the Adjusted EBIT metric and/or Free Cash Flow metric would have been possible.

 

 

 

³ Based on adjusted earnings used for external reporting, further adjusted to exclude post-closing operating results of acquisitions. Free cash flow is defined as net cash provided by operating activities minus capital expenditures. See Appendix A for reconciliations of adjusted earnings and free cash flow as used for external reporting to their most directly comparable GAAP financial measures.

 

48

Actual performance for adjusted EBIT, adjusted EBIT margin, and free cash flow caused the 2021 corporate annual cash incentive plan to be scored at 74.4% for corporate participants, resulting in a 2021 cash award payout of 74.4% of the target opportunity for Messrs. Kyle, Fracassa, Coughlin, Myers, Patel and Roellgen. While payouts to other non-NEO participants in the corporate plan are subject to certain multipliers based upon individual performance, no such multipliers were applied to the 2021 cash award payouts for the NEOs. Mr. Myers’ award payout was prorated based on the number of months worked during the year, prior to his retirement on November 30, 2021. The corporate annual cash incentive plan metrics were chosen to drive short-term operational business priorities that the Compensation Committee believes will help deliver shareholder value over time. The targets for the corporate plan for 2021 were established at challenging levels when compared with 2020 results and the payouts are a reflection of strong results for 2021, relative to the inflationary environment and global supply chain challenges.

Long-Term Incentives

The Compensation Committee administers the Equity and Incentive Compensation Plan. Awards under the Equity and Incentive Compensation Plan can be made in the form of common shares, nonqualified stock options, incentive stock options, stock appreciation rights, performance shares, performance units, restricted shares, restricted stock units, deferred shares and dividend equivalents. All long-term incentives settle in equity to further align our executives’ long-term financial interests with those of our shareholders. In 2021, the Company granted to the NEOs under the Equity and Incentive Compensation Plan:

 

·

Performance-based restricted stock units that are earned based on the achievement of objective performance metrics measured over a three-year period and are intended to further align the long-term financial interests of our executives with those of our shareholders and link compensation to building long-term shareholder value; and

 

·

Time-based restricted stock units that vest 25% per year over four years and provide strong alignment between the interests of Company executives and 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 shares. For performance-based restricted stock units, the value of the grant is tied to both the Company’s share price and the achievement of financial metrics, while the value of time-based restricted stock units is directly linked to the Company’s share price.

In each case described above, an executive must remain employed by the Company for a specified period of time to earn the full value of an award, which aids the Company in retaining executives. In total, the Company believes that these grants 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 size of the long-term incentive grants and the allocation of grant value among the long-term incentive grant types are based on a combination of an analysis of market practice and the relative importance of the objectives behind each of the grants.

In February 2020, the Company made a one-time grant of 5,000 deferred shares to Mr. Myers under the Equity and Incentive Compensation Plan to promote the retention of Mr. Myers through the end of 2021. In September 2021, Mr. Myers notified the Company of his intention to retire on November 30, 2021. In connection with his retirement, on October 1, 2021, the Compensation Committee of the Board of Directors approved a modification to his award. Under the modification, instead of requiring Mr. Myers to remain employed by the Company until December 31, 2021 in order to earn the deferred shares, the Compensation Committee provided that, as long as Mr. Myers remained employed with the Company until November 30, 2021, then the deferred shares would continue to vest following Mr. Myers’ retirement from the Company as if he remained in continuous employment through December 31, 2021. Upon his retirement, Mr. Myers’ remaining unvested equity holdings were treated in accordance with the original terms of the respective grants. For additional details

 

49

regarding the treatment of unvested equity holdings upon an NEO’s retirement, see the “Retirement” section on page 68.

2021 Long-Term Incentive Decisions

 

For the annual grants made in February 2021, the target value to be delivered in performance-based restricted stock units and time-based restricted stock units was 425% of the base salary midpoint for Mr. Kyle, and between 115% and 220% of the base salary midpoint for the other NEOs. The allocation percentage between the two types of equity for NEOs receiving the annual grant was 60% performance-based restricted stock units and 40% time-based restricted stock units.		Driving Shareholder Return   Long-term incentive grants are intended to balance short-term operating objectives of the Company with long-term objectives and align the financial interests of our executives with those of our shareholders.

In determining the number of shares granted in 2021, the target value for each grant was converted to a number of shares based on the opening share price on the day of the grant.

For 2021, the Compensation Committee made long-term incentive grants at the first regularly scheduled meeting when the Compensation Committee determined all elements of the NEOs’ compensation for the year.

Performance-Based Restricted Stock Units

To further align the long-term interests of executive leadership with those of our shareholders, and to provide an incentive to achieve long-term financial and operating objectives, the Compensation Committee granted performance-based restricted stock units to key employees (including the NEOs) that vest based on the achievement of specified performance objectives. Performance-based restricted stock units also serve to both reward and retain executives, as the receipt of a payout is linked to performance and the value of the payout is linked to the share price when the shares vest. Cumulative dividend equivalents are paid in cash based on the actual number of shares delivered at the end of the performance cycle.

2021-2023 Performance-Based Restricted Stock Units Cycle

The performance metrics for performance-based restricted stock units granted in 2021 were cumulative adjusted EPS and adjusted ROIC for a three-year performance period (2021-2023). The Compensation Committee selected these metrics because it believed they are highly correlated to driving long-term shareholder value and key elements to achievement of the Company’s business strategy. Actual performance for adjusted EPS and adjusted ROIC is calculated based on fully adjusted earnings as used for external reporting in 2021 (net of taxes)⁴, with the ability to exclude the effect of material changes in accounting principles, methods, and/or significant changes in tax law that are not reflected in the plan. For the 2021-2023 performance-based restricted stock unit cycle, the adjusted EPS target reflected a 7% compound annual growth rate (“CAGR”) over actual 2020 adjusted EPS (using comparable adjustments), resulting in the cumulative adjusted EPS target for the 2021-2023 performance-based restricted stock unit cycle being set approximately 10% higher than the actual cumulative adjusted EPS results for the 2018-2020 cycle, which was the most recently completed cycle at the time the 2021-2023 target was established and was also record three-year performance at that time. The 7% targeted CAGR over 2020 actual adjusted EPS results was set at a level that required meaningful improvement over the cycle. The three-year target for adjusted ROIC was set equal to the actual average adjusted ROIC for the 2018-2020 cycle and 160 basis points higher than 2020 actual adjusted ROIC. The factors that go into setting the target include consideration of prior-year results for the Company as compared to results for U.S. industrial peers, current market conditions, cyclicality and outlook, acquisitions, divestitures, past targets and performance against those targets and other factors. The Company’s performance targets for the performance-based restricted stock units granted in 2021 are shown in the table below.

 

 

⁴ See Appendix A for reconciliations of adjusted EPS and adjusted ROIC as used for external reporting to their most directly comparable GAAP financial measures.

 

50

Straight-line interpolation is used to calculate payouts for these performance-based restricted stock units.

2021-2023 Performance-Based Restricted Stock Units Cycle: Metrics and Weightings

 

		Threshold		Target		Maximum
Three-Year Cumulative Adjusted   EPS (60% weighting)		$9.92		$14.17		$18.42
Adjusted ROIC* (40% weighting)		8.5% é		11.5% é		14.0% é
Plan Funding		50%		100%		200%

*Adjusted ROIC less than 7.5% will result in zero payout for the cycle. Between adjusted ROIC of 7.5% to 8.5%, a payout under the Three-Year Cumulative Adjusted EPS metric is possible.

For information about the specific performance-based restricted stock units awarded to the NEOs in 2021, see the “2021 Grants of Plan-Based Awards” table on page 61.

Results for the 2019-2021 Performance-Based Restricted Stock Units Cycle

In 2019, the NEOs received awards of performance-based restricted stock units to cover a three-year performance period (2019-2021).

The performance metrics for performance-based restricted stock units granted in 2019 were cumulative adjusted EPS and adjusted ROIC for the three-year performance period. The Compensation Committee selected these metrics because it believed they are highly correlated to driving long-term shareholder value and key elements to achievement of the Company’s business strategy. Actual performance for adjusted EPS and adjusted ROIC is calculated based on fully adjusted EPS as used for external reporting⁵, with the ability to exclude the effect of changes in accounting principles or methods that are not reflected in the plan. No such exclusions were applied to the 2019-2021 performance-based restricted stock unit cycle, and fully adjusted EPS and adjusted ROIC as used for external reporting were used to determine actual performance for the applicable compensation adjusted metrics.

The Compensation Committee believed that the targets for the performance-based restricted stock units granted in 2019 were appropriately challenging and that achievement would be supportive of shareholder value creation. The adjusted EPS target for the 2019-2021 performance-based restricted stock unit cycle reflected a 6% CAGR over actual 2018 adjusted EPS results which were 71% higher than the most recently completed cycle. The adjusted ROIC target for the 2019-2021 cycle was set 100 basis points higher than the 2018-2020 adjusted ROIC target and 30 basis points lower than the actual 2018-2020 average adjusted ROIC of 11.8%.

In terms of actual results for the cycle, adjusted EPS increased approximately 10% year-over-year in 2019, decreased approximately 11% year-over-year in 2020, due to the negative impact from the COVID-19 pandemic, and increased approximately 15% year-over-year in 2021. As a result, the performance-based restricted stock units were earned at 92.7% reflecting the difficulty of the targets set for the cycle as we achieved record three-year cumulative adjusted EPS over the period, including record adjusted EPS results in 2019 and 2021, and strong average ROIC performance. Moreover, as detailed on page 37 in the “2021 Performance” section, the Company’s three-year TSR outpaced the median of our 2021 compensation peer group and exceeded the S&P 500 Industrials over the timeframe, reflecting strong performance over this period.

The Company’s performance goals and actual calculated results for the 2019-2021 cycle are summarized in the table below. Straight-line interpolation is used to calculate actual payouts for these performance-based restricted stock units. Despite the significant unforeseen impact of COVID-19, no adjustments or modifications were made to the financial performance metrics or targets for our

 

 

⁵ See Appendix A for reconciliations of adjusted EPS and adjusted ROIC as used for external reporting to their most directly comparable GAAP financial measures.

 

51

2019-2021 performance-based RSU cycle. Payouts earned for the 2019-2021 PRSU awards reflect formulaic calculations based on metrics and targets established prior to the outset of the COVID-19 pandemic.

2019-2021 Performance-Based Restricted Stock Units Cycle: Metrics, Weightings and Actual Results

 

		Threshold		Target		Maximum		Actual
Three-Year Cumulative Adjusted EPS (60% weighting)		$8.00		$14.11		$18.34		$13.42
ROIC (40% weighting)		8.5% é		11.5% é		14.0% é		10.9% é
Plan Funding		50%		100%		200%		92.7%

Under accounting rules, performance-based restricted stock units are expensed over the vesting period using the fair value on the date of grant and adjusted quarterly to account for actual and anticipated performance.

Time-Based Restricted Stock Units

Time-based restricted stock units that were awarded in 2021 to each NEO vest 25% each year over a four-year period. Cumulative dividend equivalents are paid in cash upon vesting. For information about the specific number of time-based restricted stock units awarded to the NEOs in 2021, see the “2021 Grants of Plan-Based Awards” table on page 61.

Under accounting rules, time-based restricted stock units are expensed over the vesting period using the fair value on the date of grant.

Retirement Programs

The Company is transitioning away from defined benefit plans to the use of market-competitive defined contribution and employee savings plans for all eligible salaried employees, including the NEOs. The NEOs also participate in the Company’s nonqualified retirement programs based on eligibility.

Several years ago, the Company closed its primary defined benefit plan in the United States (the “Pension Plan”) to new entrants and ceased providing Excess Benefit Agreements to newly appointed officers. In 2018, the Company announced that, effective December 31, 2022, it will be freezing benefits under the Pension Plan. Mr. Coughlin participates in the Pension Plan and will cease to accrue benefits after December 31, 2022. Mr. Myers participated in the Pension Plan until his retirement on November 30, 2021. To align with this action, in 2018, the Compensation Committee approved the freezing of benefits under the Excess Benefit Agreements, also effective as of December 31, 2022 (Mr. Coughlin, Mr. Fracassa and Mr. Kyle have Excess Benefit Agreements and will cease to accrue benefits under these arrangements after December 31, 2022). During 2021, the Company made the decision to update the marriage assumptions under the Excess Benefit Agreements for the remaining non-retired participants (Mr. Kyle, Mr. Fracassa and Mr. Coughlin) to reflect their current marital statuses.

 

52

Due to the varying tenure of our NEOs and the transition of our retirement plans, our U.S.-based NEOs participate (or participated) in different programs based on their eligibility as follows:

 

Defined Benefit

Defined Contribution

Qualified

Nonqualified

Qualified

Nonqualified

Supplemental Pension Plan

SIP Plan Matching Contributions

Core DC Contribution

Post-Tax Savings Plan

Name

Pension Plan

Restoration Portion

Excess Benefit Agreement

Richard G. Kyle

✓

✓

✓

✓

Philip D. Fracassa

✓

✓

✓

✓

Christopher A. Coughlin

✓

✓

✓

✓

✓

Hansal N. Patel

✓

✓

✓

Ronald J. Myers

✓

✓

✓

✓

Because Mr. Roellgen is based in Colmar, France, he does not participate in the U.S. plans outlined above. A summary of the plans in which he participates is set forth below.

The following is a summary of the plans in which the NEOs other than Mr. Roellgen participate (or participated):

 

●

Qualified Pension Plan: The Pension Plan benefit replaces a targeted percentage of pre-retirement income, subject to limits on benefits and compensation imposed by the Internal Revenue Code (the “Code”). Eligible salaried employees whose age plus years of service equaled or exceeded 50 as of December 31, 2003 participate in the Pension Plan, which provides an annual benefit of 0.75% times Final Average Earnings times years of service. “Final Average Earnings” is based on the highest five non-consecutive years of eligible compensation over the 10 years preceding retirement. Eligible compensation includes base salary and annual cash incentive but excludes long-term incentives. The benefit is payable beginning at age 65 for the lifetime of the employee, with alternative forms of payment, including a lump sum option, available with actuarial adjustments. Participants may retire early if they meet certain eligibility requirements, with the benefit reduced if started before age 62. As of December 31, 2021, Mr. Coughlin is eligible for early retirement under this plan. Mr. Myers retired from the Company on November 30, 2021 and met the eligibility requirements to receive unreduced benefits under the plan.

 

●

Nonqualified Supplemental Pension Plan: The Supplemental Pension Plan benefit replaces a targeted percentage of pre-retirement income. There are two components to this plan:

 

(1)

Restoration Portion: A restoration portion restores benefits to affected Company employees that would otherwise be provided under the Pension Plan were it not for Code limits; and

 

(2)

Individual Excess Benefits Agreements: These arrangements are for legacy NEOs and provide for a benefit based on Final Average Earnings as described above with offsets for other Company-provided benefits.

Supplemental retirement benefits for NEOs who have an Excess Benefit Agreement will be calculated using a target benefit of 60% of Final Average Earnings, offset by the sum of: (a) an annuity which could be purchased at market rates with the value of Company matching contributions, any “Core DC” contributions available under the Company’s Savings and Investment Retirement Plan (the “SIP Plan”), and “Post-Tax Savings Plan” contributions, accumulated at an 8% interest rate until benefit commencement, and (b) any Company-provided defined benefit pensions. The net benefit after offsets is automatically paid as a lifetime annuity or an unadjusted 50% joint-and-survivor annuity depending on whether the executive is married when benefits commence. Alternatively, the executive can elect an actuarially equivalent lump sum.

 

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Participating NEOs ratably earn the 60% benefit over 10 years (15 years for Mr. Kyle) of Company service. All participating NEOs have at least five years of officer service and are therefore fully vested in this benefit to the extent it is earned. Participating NEOs can retire after age 55, but the benefit is reduced by 4% for each year benefits commence prior to age 62.

 

·

Qualified SIP Plan Matching Contributions: The SIP Plan is a savings plan which matches 100% on the first 3% of pay contributed by the employee plus 50% on the next 3%, subject to Code limits on compensation and contributions.

 

·

Qualified Core DC Contributions: Core DC contributions refer to non-matching Company contributions provided within the SIP Plan to eligible U.S.-based salaried employees not earning Pension Plan service. Contributions range from 1% to 4.5% of eligible compensation (up to Code limits) based on an employee’s age plus years of service. Employees impacted by the December 31, 2022 freezing of benefits under the Company’s primary U.S. defined benefit pension plan will be eligible to receive the Core DC contribution under the SIP Plan after December 31, 2022.

 

·

Nonqualified Post-Tax Savings Plan: The Post-Tax Savings Plan is intended to restore benefits that would be provided under the SIP Plan were it not for Code limits. Affected employees have the option each year of taking these contributions in taxable cash or to defer the amounts with interest credited at a market-based interest rate (prime + 1%).

Because Mr. Roellgen is based in Colmar, France, he does not participate in the U.S. plans outlined above. Instead, Mr. Roellgen participates in a legally required French Retirement Indemnity Plan (the “FRIP”) as well as the Timken Europe Supplementary Pension Plan with Defined Benefits (the “Europe Executive Plan”). The FRIP covers all French employees and pays a lump sum benefit based on service. The maximum FRIP benefit payable is six months of pay following 40 years of service. Mr. Roellgen’s benefits under the Europe Executive Plan are equal to 10% of his highest 3 years of pension earnings multiplied by the ratio of his years of service at December 31, 2012 to his years of service at retirement. The benefit is paid in the form of a 60% joint-and-survivor annuity. The Europe Executive Plan benefit vests only upon his retirement from the Company. While his accumulation of years of service was frozen under the Europe Executive Plan in 2012, his benefit continues to reflect compensation increases since 2012. Following the freeze of accumulation of years of service under the Europe Executive Plan, Mr. Roellgen commenced earning benefits under the Company’s French qualified defined contribution plan (the “French DC”). The French DC provides contributions of 4% of eligible compensation to certain employees under French law.

Deferred Compensation

The Company permits certain employees, including the U.S.-based NEOs, to participate in a 1996 Deferred Compensation Plan, as amended and restated effective January 1, 2019 (the “Deferred Compensation Plan”), that allows them to defer, on a pre-tax basis, the receipt of certain types of compensation until a specified point in the future. Eligible compensation includes salary, incentive compensation payable in cash, employee or Company 401(k) contributions and/or core defined contributions in excess of tax limits. Cash deferrals earn interest quarterly at a rate based on the prime rate plus 1%. All of the NEOs (other than Mr. Roellgen) were eligible to participate in the Deferred Compensation Plan during 2021, but none earned “above-market” or preferential interest, as defined by the SEC.    

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 Company’s general assets. In the event of a change in control of the Company, as defined in the Deferred Compensation Plan, participants are entitled to receive deferred amounts immediately. The Compensation Committee believes that providing employees with tax deferral opportunities aids in recruitment and retention.

 

54

Other Benefits

The NEOs are eligible to participate in benefit programs offered broadly to certain other employees, including health, disability and life insurance programs.

Additionally, Mr. Roellgen participates in the Timken European Stock Ownership Plan (the “TESOP”). The TESOP is a stock ownership plan established in accordance with French law that allows participants to make contributions to a fund with a corresponding company match of up to 1.4% (subject to certain legal limits) that invests a portion of the contribution in Company stock. Mr. Roellgen also participates in a legally required French profit-sharing plan that provides a modest benefit.

The NEOs also may receive certain limited perquisites, including executive physicals, access to corporate country club memberships (although personal expenses are not reimbursed), and travel for spouses when accompanying NEOs on business travel. Mr. Roellgen also receives reimbursement of Company car-related expenses in accordance with local benefits practices in France.

The Company does not provide 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 Company’s overall approach to executive compensation. The total cost of these benefits is a very small percentage of each NEO’s total compensation.

Severance Agreements

In addition to retirement payments, the Company provides termination-related payments through severance agreements with individual NEOs in the event of involuntary termination of employment without cause or, following a change in control, in the event of involuntary termination of employment without cause or termination of employment by the executive under certain circumstances. Severance agreements are provided based on competitive market practice and the Company’s desire to ensure some level of income continuity should an executive’s employment be terminated without cause or terminated under other qualifying circumstances.

The level of severance benefits reflects the Company’s perception of competitive market practice for the NEOs’ positions, based on an assessment by WTW. Severance pay was established as a multiple of base salary and actual annual cash incentive compensation. In the event of a qualifying termination of employment, an NEO would also be entitled to vesting of equity-based awards in accordance with the respective grant agreement, health and welfare benefits, outplacement services, and (in the event of a qualifying termination that follows a change in control) benefits under our retirement benefit programs. The types of severance benefits for which our NEOs are potentially eligible, and the potential benefit and compensation amounts, are further described and quantified below under “Potential Payments Upon Termination or Change in Control” on page 66 and in the “Termination Scenarios” table on page 70.

The severance agreements do not contain excise tax gross-up provisions.

Stock Ownership Guidelines

Stock ownership guidelines have been established for all senior executives (including the NEOs) and are intended to align the interests of executive management with those of our shareholders. These guidelines establish a specific ownership target for each of the NEOs.

In determining whether the executive met his or her individual ownership target for 2021, the Company considered shares owned by the executive and full-value equity awards held by the executive, including deferred shares and time-based restricted stock units (stock settled) still subject to vesting conditions. Performance-based shares/units are not counted towards ownership until they are vested, and shares that are subject to unexercised options are not counted towards ownership.

The stock ownership requirement is based on a multiple of base salary. Each NEO must meet this requirement within five years of becoming an NEO. The NEO must retain any net shares after tax until the ownership requirement is met. If ownership falls below the requirement due to a decline

 

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in share price, the expectation would be for the NEO to maintain net shares after tax with respect to vested equity awards until the ownership requirement is met. The stock ownership guidelines do not require purchasing shares on the open market, but rather maintaining net shares on future vestings. As of December 31, 2021, all NEOs currently serving at the Company exceeded their individual ownership targets.    

 

Officer Name		Stock Ownership Requirement – Multiple of Base Salary		Actual Stock Ownership – Multiple of Base Salary*
Mr. Kyle		5x		26.7x
Mr. Fracassa		3x		12.8x
Mr. Coughlin		3x		15.2x
Mr. Patel		2x		2.0x
Mr. Roellgen		2x		13.4x

* Calculated by multiplying the number of shares held by each NEO on December 31, 2021 by the daily average stock price for the year ending December 31, 2021 and dividing that product by each NEO’s 2021 base salary.

Anti-Hedging/Pledging Policies

The Company has adopted formal policies that prohibit our Directors, NEOs, other officers, and employees (and related persons) from pledging Company common shares or hedging the economic risk related to such stock ownership. In addition to prohibiting hedging transactions generally, the policies also expressly forbid use of the following types of hedging transactions: puts, calls, short sales, and the purchase of Company stock on margin.

Compensation Risk Assessment

The Compensation Committee regularly reviews the risk associated with the Company’s compensation programs. As part of this process, the Compensation Committee reviewed a comprehensive risk assessment conducted by WTW in 2020 and concluded that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company, and that several of our current practices effectively mitigate risk and promote performance. In 2021, the Compensation Committee discussed any year-over-year changes that could impact risk with WTW. The Compensation Committee and WTW concluded that no plan changes were implemented in 2021 that would materially affect the existing risk profile of the compensation programs, and that several of our current practices effectively mitigate risk and promote performance.

Clawback Provisions

The Company maintains specific provisions regarding the recovery of awards to deter certain types of conduct, including conduct that could affect the accuracy of the Company’s financial statements. These provisions apply to both short- and long-term incentive programs where, if personal misconduct or any fraudulent activity on the part of the executive leads to the restatement of Company financial results, the Company can clawback an award. In such cases, the Compensation Committee has discretion, based on applicable facts and circumstances, to cause the Company to seek to recover all or any portion of the equity-based or cash incentive paid or payable to the executive for some or all of the years covered by the restatement.

 

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