UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(RULE 14a-101)

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The Timken Company Notice of the 2021 Annual Meeting of Shareholders and Proxy Statement

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

March 17, 2021

Dear Fellow Timken Shareholder:

Your Board of Directors is pleased to invite you to the 2021 Annual Meeting of Shareholders of The Timken Company to be held on Friday, May 7, 2021, at 10:00 a.m. local time. While we would have preferred to hold the meeting at the company’s world headquarters in North Canton, Ohio, we will conduct this year’s meeting in an online-only format, with attendance via the internet, due to the ongoing pandemic. We currently expect to resume holding in-person meetings in the future once it is safe to do so.

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 2021 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 2021 Annual Meeting of Shareholders.

Sincerely,

 

John M. Timken, Jr.

Chairman – Board of Directors

 

 

 

 

Engineered Bearings  |  Mechanical Power Transmission Products  |  Industrial Services

THE TIMKEN COMPANY

North Canton, Ohio

 

 

NOTICE OF 2021 ANNUAL MEETING OF SHAREHOLDERS

                                                                                      

The 2021 Annual Meeting of Shareholders of The Timken Company will be held on Friday, May 7, 2021, at 10:00 a.m. local time, in an online-only format, with attendance via the internet at the following address: www.cesonlineservices.com/tkr21_vm. You will not be able to attend this meeting in person due to the ongoing pandemic. We currently expect to resume holding in-person meetings in the future once it is safe to do so.

The meeting is being held for the following purposes:

 

Shareholders of record of common shares of The Timken Company at the close of business on February 22, 2021 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 2021 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 2021 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 6, 2021. 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/tkr21_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/tkr21_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 17, 2021

Important Notice Regarding the Availability of Proxy Materials for the 2021 Annual Meeting of Shareholders to be held on May 7, 2021: This Proxy Statement and our 2020 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.

2021 Annual Meeting of Shareholders

 

 

 

Date and Time:		Friday, May 7, 2021, at 10:00 a.m. local time
Location:		Online-only format, with attendance via the internet at the following address: www.cesonlineservices.com/tkr21_vm
Record Date:		February 22, 2021
Mail Date:		The approximate date our Proxy Statement and proxy card will be first sent or given to our shareholders is March 17, 2021.

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.		31
For		3.  Ratification of the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending December 31, 2021.		70
Against		4.  A shareholder proposal asking our Board to take the steps necessary to give holders in the aggregate of 10% of our outstanding common shares the power to call a special meeting of shareholders, if properly presented.		72

 

 

You can also scan the following QR code on your mobile device to access cesvote.com

 

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, 2021.

 

Committee Memberships

Name and Title

Age

Director     since

Independent

Audit

Compensation

Nominating &   Corporate Govemance

Other Public     Boards

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

61

2014

✓

✓

✓ Chair

–

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

67

2017

✓

✓

✓

–

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

55

2013

1

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

49

2021

✓

✓

✓

–

John A. Luke, Jr.   Chairman, WestRock Company

72

1999

✓

✓

✓

1

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

59

2014

✓

✓

✓

1

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

71

2015

✓

✓ Chair

✓

–

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

69

2014

✓

✓

✓ Chair

2

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

60

2003

✓

✓

✓

1

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

69

1986

✓ Independent Chairman

–

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

53

2002

–

Jacqueline F. Woods   Retired President, AT&T Ohio

73

2000

✓

✓

✓

–

Average Age / Median Tenure

63

7.5 years

 

2

Board Composition Overview

 

 

Gender and Ethnic Diversity		Refreshment		Independence
		Over Half   of our Board Refreshed within the last decade

Representative Skills and Attributes of the Board

 

 

		LEADERSHIP AND GOVERNANCE Senior leadership experience at a large organization, including current or former service as a public company officer (CEO, CFO, etc.) or military general, or other public company board service leading to valuable insight on corporate governance matters				MANUFACTURING/ENVIRONMENTAL MANAGEMENT Expertise in manufacturing operations and logistics and environmental management to drive operating performance through sustainable means
		HUMAN CAPITAL MANAGEMENT Expertise in talent management, public company compensation structures, key employee development and retention, and executive succession planning				FINANCIAL Experience in the finance function of an enterprise, including an in-depth understanding of financial management, financial reporting and capital allocation processes
		STRATEGY/M&A Responsibility for driving growth through innovative strategic initiatives and through acquisitions and other business combinations				MARKETING AND SALES Expertise in marketing, sales, and customer service at a scale relevant to the Company’s global business
		GOVERNMENTAL AND REGULATORY AFFAIRS Insight into managing governmental and regulatory affairs relevant to the Company’s business operations				GLOBAL BUSINESS 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
		RISK MANAGEMENT Experience with risk management and compliance oversight relevant to the exercise of fiduciary responsibilities

 

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   ✓ Code of Conduct for Directors, officers and employees   ✓ Strong focus on shareholder engagement – over 500 interactions with investors in 2020   ✓ 3 Audit Committee financial experts

 

4

Corporate Social Responsibility

 

 

At Timken, we aim to build a world that is more efficient and resilient for all our stakeholders. As such, we expanded upon our corporate social responsibility reporting in 2020 and further detailed our efforts to support our stakeholders as a socially responsible corporation. In 2021, we were named one of the World’s Most Ethical Companies® by Ethisphere® Institute for the eleventh time, one of America’s Most Responsible Companies by Newsweek and Statista and one of America’s Best Employers by Forbes magazine.   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/about/corporate-social-responsibility/.

 

 

5

2020 Performance Highlights

 

Timken delivered strong financial performance in 2020, despite the broad economic slowdown caused by COVID-19. Despite revenue declining approximately 7% to $3.51 billion in 2020, we achieved earnings per diluted share (“EPS”) of $3.72 and adjusted EPS of $4.10¹, down 21% and 11%, respectively, from last year’s record performance. We also generated strong net cash from operations of $578 million and free cash flow of $456¹ million, up 5% and 11%, respectively, from 2019. This cash generation allowed us to continue to invest in the business for future growth, reduce net debt and return cash to shareholders. The unwavering commitment of our employees allowed the Company to continue to operate safely and efficiently during this difficult and challenging period and deliver this high level of performance.

We have continued to create significant shareholder value by delivering total shareholder returns (“TSR”) of 40.3%, 19.1%, and 25.1% over the past one-, three-, and five-year periods, respectively. Our TSR for each of these three periods outpaced both the median of our 2020 compensation peer group and the S&P 500 Industrials over the same respective timeframes. In addition, our ten-year TSR of 11.0% exceeded the median of our 2020 compensation peer group but slightly lagged the S&P 500 Industrials (12.0%) over that timeframe. 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.

We achieved these results through the disciplined execution of our strategy, which is delivering improved performance and higher returns through the business cycle. Our strategy focuses on (1) driving organic growth 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.

In 2020, we put our strong cash generation to work in a balanced manner to strengthen our financial position and create value for our shareholders. We reduced total debt by $166 million and net debt by $276¹ million during the year. We allocated $122 million, or about 3.5% of our sales, to capital expenditures focused on growth and continuous improvement initiatives. We also paid out our 394th 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 $0.29/share in the fourth quarter, making 2020 the seventh consecutive year of annual dividend increases. In addition, we repurchased approximately 1.1 million shares of stock, or over 1% of our outstanding shares.

2020 also marked the release of our second corporate social responsibility report, which detailed our vision to build a more efficient, resilient world and introduced three focus areas we have identified to measure and advance our corporate social responsibility initiatives going forward – growing knowledge, advancing sustainability and promoting leadership.

See page 33 of the Proxy Statement for more details on the Company’s 2020 performance.

 

                                                 

¹ See Appendix A for reconciliations of adjusted EPS, free cash flow, and net debt to their most directly comparable GAAP financial measures. Free cash flow is defined as net cash from operations minus capital expenditures. These performance metrics used for external reporting may not correlate exactly to their corresponding compensation adjusted metrics due to slightly different adjustments (see pages 46 to 49 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 41 of the Proxy Statement 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.

 

7

2020 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 33 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
		Stock ownership requirements for executives (5x base salary for CEO and 2x-3x for the other named executive officers)				We do not re-price outstanding stock options and in 2020 we eliminated stock options from our long-term incentive mix
		“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				We do not provide excise tax gross-ups on perquisites or under named executive officer severance agreements
		Short-term and long-term incentives provided under shareholder-approved plans				We do not allow hedging or pledging of our shares
		Different metrics are used for short-term and long-term incentive plans and are designed to align pay with performance				We do not have single-trigger vesting
		We provide very limited perquisites				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 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.

 

Consistent, Strong Support of Named Executive Officer Compensation

 

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:

 

 

9

Our incentive compensation program payouts for performance periods ending in 2020 were aligned with performance:

 

●

There was an 80.2% payout under the annual cash incentive plan, which reflected below-target performance for 2020, due primarily to the negative impacts on revenue from COVID-19, partially offset by strong execution and the impact of cost reduction initiatives; and

●

There was a 185.1% payout for 2018-2020 performance-based restricted stock units, which reflected record three-year cumulative adjusted EPS over the cycle, including record adjusted EPS results in both 2018 and 2019, and strong average adjusted ROIC performance.

 

See pages 45 to 50 of the Proxy Statement for more details on the 2020 annual cash incentive plan and the 2018-2020 performance-based restricted stock units.

Impact of COVID-19

 

Throughout the COVID-19 pandemic, the Company has adhered to mandates and other guidance from local governments and health authorities, including the World Health Organization and the Centers for Disease Control and Prevention. The Company implemented risk mitigation plans across the enterprise designed to protect employees and reduce the risk of spreading the virus. Timken continued to operate and fill customer orders, adjusting production as required by local government directives and to reflect changes in global demand. Timken’s main priority has been the health and welfare of its employees and others in the communities where it does business.

During 2020, the Company took steps to reduce costs by implementing temporary salary reductions, work furloughs and other actions with respect to our global workforce to align its costs with near-term demand expectations. The impact of such cost-reduction initiatives on the compensation of our named executive officers (or “NEOs”) is discussed throughout the Compensation Discussion & Analysis (“CD&A”), in particular on page 36 in the Section titled Key 2020 Compensation Decisions.

 

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 2021 Annual Meeting of Shareholders to be held on Friday, May 7, 2021, 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 17, 2021.

Instructions for attending the online-only meeting are available in the accompanying Notice of 2021 Annual Meeting of Shareholders and under the section titled “Participation at the Annual Meeting” on page 76.

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 2022 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 12, 2021, 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 2021 Annual Meeting of Shareholders to serve for a term of one year expiring at the 2022 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, except for Ms. Lauber. Ms. Lauber was recommended to the Nominating and Corporate Governance Committee by an existing Director to fill a vacancy created when the Board approved an increase in its size from 11 to 12 Directors. Each of the nominees listed below 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

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE NOMINEES BELOW.

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, 2021:

 

Maria A. Crowe Age: 61 Director since 2014		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.   Ms. Crowe chairs our Nominating and Corporate Governance Committee and is a member of our Audit Committee.
Elizabeth A. Harrell Age: 67 Director since 2017		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.   Ms. Harrell is a member of our Compensation Committee and Nominating and Corporate Governance Committee.

 

12

Richard G. Kyle Age: 55 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 as Vice President of Manufacturing and was named President of the Aerospace and Mobile Industries segments in 2008. In 2012, he was named Group President with responsibility for the Aerospace and Steel segments as well as engineering and technology. In 2013, Mr. Kyle was named Chief Operating Officer, Bearings and Power Transmission.   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.
Sarah C. Lauber Age: 49 Director since 2021		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. From 2011 to 2015, Ms. Lauber was the Vice President, Financial Planning and Analysis at Regal Beloit Corporation, a manufacturer of electric motors, generators and controls, and mechanical motion control products. 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.   Ms. Lauber is a member of our Audit Committee and Compensation Committee.

 

13

John A. Luke, Jr. Age: 72 Director since 1999		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. Prior to his retirement, Mr. Luke led the process that resulted in MWV merging with Rock-Tenn Company to form WestRock Company, which created the second largest packaging company in the industry. Mr. Luke has served as a director of WestRock Company since 2015, currently serves as its Non-Executive Chairman and chairs its Executive Committee. 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, including as Non-Executive Chairman of WestRock Company and previously as Chair of the Conflicts Committee of Dominion Midstream GP, LLC.   Mr. Luke is a member of our Compensation Committee and Nominating and Corporate Governance Committee.
Christopher L. Mapes Age: 59 Director since 2014		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. From 2004 to 2011, he served as Executive Vice President of A. O. Smith Corporation, a global water technology company and manufacturer of residential and commercial water heating and water purification equipment, where he led the expansion and execution of the global strategy for its electrical products business. 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.   Mr. Mapes is a member of our Audit Committee and Nominating and Corporate Governance Committee.

 

14

James F. Palmer Age: 71 Director since 2015		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.   Mr. Palmer chairs our Audit Committee and is a member of our Compensation Committee.
Ajita G. Rajendra Age: 69 Director since 2014		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. Mr. Rajendra previously served A. O. Smith Corporation as President and Chief Operating Officer from 2011 to 2012 and as Executive Vice President from 2006 to 2011.   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.   Mr. Rajendra chairs our Compensation Committee and is a member of our Audit Committee.

 

15

Frank C. Sullivan Age: 60 Director since 2003		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 merger and acquisition opportunities.   Mr. Sullivan is a member of our Audit Committee and Nominating and Corporate Governance Committee.
John M. Timken, Jr. Age: 69 Director since 1986		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.   Mr. Timken serves as independent Chairman of the Board.

 

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Ward J. Timken, Jr.   Age: 53 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: 73 Director since 2000		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 corporate boards, including prior service as a member of the Audit Committee and as Chair of the Compensation & Leadership Development Committee of The Andersons, Inc.   Ms. Woods is a member of our Compensation Committee and Nominating and Corporate Governance Committee.

 

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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://www.timken.com/about/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, such as significant transactions with related parties, be reported to our ethics and compliance office at ethics@timken.com. 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 in any way with our interests. While not every situation can be identified in a written policy, the Timken Policy Against Conflicts of Interest does specifically prohibit the following situations:

 

●

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

●

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

 

18

Conflicts of Interest, the Nominating and Corporate Governance Committee would review and, considering such factors as it deems appropriate under the circumstances, make a determination as to whether to grant a waiver to the policies for any such situation. Any waiver involving our Directors or executive officers would be promptly disclosed to shareholders. Additionally, the Nominating and Corporate Governance Committee would review and approve or ratify any transaction required to be reported pursuant to Item 404(a) of Regulation S-K of the Securities and Exchange Act of 1934, as amended (the “1934 Act”).

Board and Committee Meetings

 

The Board of Directors has an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee. During 2020, there were seven meetings of the Board of Directors, nine meetings of its Audit Committee, six meetings of its Compensation Committee and four meetings of its Nominating and Corporate Governance Committee. All Directors attended 75% or more of the meetings of the Board and its committees on which they served that were held following each Director’s appointment to the Board and their respective committees. It is our policy that all members of the Board of Directors attend the annual meeting of shareholders and, in 2020, all members then serving 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. Directors who are Timken employees do not receive any additional compensation for their service as Directors.

Due to the financial impact of COVID-19 on the Company, the Board approved temporary pay reductions for the Directors for the first three quarters of 2020. The Board took such actions to share in the cost reduction initiatives that impacted the Company’s global workforce. The temporary pay reductions included 50% reductions to both the annual retainer fees and independent Chairman fees during the first three quarters of 2020. Annual committee fees were not impacted by the temporary pay reductions.

Cash Compensation

Each nonemployee Director who served in 2020 was paid an annual retainer fee of $50,000 as base compensation for services as a Director, which was temporarily reduced in 2020 from $80,000 as

 

19

described above. In addition to base compensation, John M. Timken, Jr. received an annual fee of $62,500 for his service as the independent Chairman, which was also temporarily reduced in 2020 from $100,000 as described above. The following annual fees were paid for serving on a committee of the Board in 2020:

 

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. Neither base compensation for services as a Director nor fees for serving on a committee (chairperson or member) of the Board have been increased in the last seven years.

Equity Compensation

Each nonemployee Director serving at the time of our 2020 Annual Meeting of Shareholders on May 8, 2020 received a grant of 3,160 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. 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, 2020, all our Directors other than Ms. Harrell had met their stock ownership requirements. Ms. Harrell joined the Board in August 2017 and she is on track to achieve the ownership requirement within the five-year time frame. In addition, Ms. Lauber recently joined the Board in January 2021 and has not yet met her stock ownership requirements.

Compensation Deferral

Any Director may elect to defer the receipt of all or a specified portion of his or her cash fees 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 amount deferred can be invested in a cash fund or the 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 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 Company share fund.

2020 Director Compensation Table

The following table provides the compensation and benefits applicable to our nonemployee Directors for 2020:

 

20

Name (1)		Fees Earned or       Paid in Cash (2)		Stock       Awards (3)		All Other       Compensation (4)		Total
Maria A. Crowe		$82,500		$120,175		$2,716		$	205,391
Elizabeth A. Harrell		$65,000		$120,175		$3,844		$	189,019
John A. Luke, Jr.		$65,000		$120,175		$2,716		$	187,891
Christopher L. Mapes		$72,500		$120,175		$2,716		$	195,391
James F. Palmer		$87,500		$120,175		$2,940		$	210,615
Ajita G. Rajendra		$82,500		$120,175		$2,716		$	205,391
Frank C. Sullivan		$72,500		$120,175		$2,716		$	195,391
John M. Timken, Jr.		$112,500		$120,175		$2,716		$	235,391
Ward J. Timken, Jr.		$50,000		$120,175		$2,716		$	172,891
Jacqueline F. Woods		$65,000		$120,175		$2,716		$	187,891

 

(1)

Richard G. Kyle, our President and Chief Executive Officer (“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. Sarah C. Lauber is not included in this table or the table below as she started serving as a Director after December 31, 2020.

 

(2)

The amount shown for each Director reflects the Board-approved temporary pay reductions to annual retainer fees and independent Chairman fees for the Directors for the first three quarters of 2020 and is inclusive of fees deferred under the Director Deferred Compensation Plan. Annual committee fees were not impacted by the temporary pay reductions.

 

(3)

The amount shown for each Director consists of the grant date fair value of the award of 3,160 restricted stock units made on May 8, 2020. These restricted stock units vest 100% one year following the grant date. Ms. Harrell elected to defer the award made on May 8, 2020 under the Director Deferred Compensation Plan for distribution in the future. The amounts shown in this column are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 718.

 

(4)

All other compensation reflects cash dividend equivalents paid to the Directors in 2020 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 stock in 2020. Ms. Harrell elected to defer the award made on May 10, 2019 under the Director Deferred Compensation Plan for distribution in the future. The chart above includes cash dividend equivalents in the amount of $2,716 which were also deferred under the Director Deferred Compensation Plan.

 

21

As of December 31, 2020, unvested restricted shares and unvested restricted stock units were held by the nonemployee Directors as follows:

 

Name		Unvested Restricted Shares and   Unvested Restricted Stock Units
Maria A. Crowe		3,160
Elizabeth A. Harrell		3,960
John A. Luke, Jr.		3,160
Christopher L. Mapes		3,160
James F. Palmer		3,160
Ajita G. Rajendra		3,160
Frank C. Sullivan		3,160
John M. Timken, Jr.		3,160
Ward J. Timken, Jr. (1)		3,160
Jacqueline F. Woods		3,160

 

(1)

Additionally, Ward J. Timken, Jr. has 184,900 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://www.timken.com/about/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 included in the 2020 Summary Compensation Table, 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.

 

22

The agenda for meetings of the Compensation Committee is determined by its Chair with the assistance of the Executive Vice President – Human Resources and General Manager – Compensation, Human Resources. The meetings are regularly attended by the Chairman of the Board, the CEO, the Executive Vice President – Human Resources, the Vice President, General Counsel & Secretary, and the General Manager – Compensation, Human Resources. 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. 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 2020, WTW was paid approximately $245,000 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 $1.7 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.

 

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The Compensation Committee’s charter is available on the Corporate Governance section of our website at https://www.timken.com/about/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, see “Compensation Discussion and Analysis – Determining Compensation for 2020” on page 42.

Nominating and Corporate Governance Committee

We have a standing Nominating and Corporate Governance Committee that is responsible for, among other things, evaluating new Director candidates and incumbent Directors and recommending Directors to serve as members of our Board committees. Members of the Nominating and Corporate Governance Committee are 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://www.timken.com/about/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://www.timken.com/about/governance-documents/.

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

 

24

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 2022 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 18, 2021 and no later than November 17, 2021 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. Among the practices the Nominating and Corporate Governance Committee believes demonstrate the Company’s commitment to strong corporate governance are the following:

 

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

 

✓

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” policy permits clawback of executive compensation if an executive engages in conduct that is detrimental to the Company and results in restatement of financial results

 

✓

Stock ownership requirements for Directors and executive officers

 

✓

Strong focus on shareholder engagement – over 500 interactions with investors in 2020

 

25

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.

The Nominating and Corporate Governance Committee also oversees our corporate social responsibility and sustainability program. In 2020, we expanded upon our corporate social responsibility reporting and further detailed our efforts to support our stakeholders as a socially responsible corporation. Going forward, we will continue to drive our sustainability initiatives by measuring them against three focus areas — to grow knowledge, to advance sustainability and to promote leadership. Some of the Company’s current initiatives that promote our three focus areas are set forth in the chart below:

 

    

 

In 2020, renewable energy became our single largest end-market sector in terms of total sales, evidencing our commitment to sustainability. 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 recently announced more than $75 million in capital investments through early 2022 to increase the Company’s renewable energy capabilities across its global footprint. These investments will include implementation of advanced automation and manufacturing technologies designed to support long-term growth in this space.
In consideration of our efforts, we were named one of the World’s Most Ethical Companies® by Ethisphere® Institute for the eleventh time, one of America’s Most Responsible Companies by Newsweek and Statista and one of America’s Best Employers by Forbes magazine 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/about/corporate-social-responsibility/.

 

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Shareholder Engagement

 

 

 

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 also reviews these issues as appropriate. The Board believes that this approach, supported by our leadership structure, provides appropriate checks and balances against undue risk taking.

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.

 

27

BENEFICIAL OWNERSHIP OF COMMON SHARES

The following table shows, as of January 1, 2021, the beneficial ownership of our common shares by each Director, nominee for Director and executive officer named in the 2020 Summary Compensation Table on page 55 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.

 

*

Percent of class is less than 1%.

 

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(1)

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, 2021 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 1,077,968 shares on or before March 1, 2021 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.

 

(2)

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.

 

(3)

Includes 57,847 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 executive officers as a group has been calculated to eliminate duplication of beneficial ownership. This group consists of 18 individuals.

 

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The following table gives information known to us about each beneficial owner of more than 5% of our common shares as of January 1, 2021, unless otherwise indicated below:

 

 

(1)

A Schedule 13G/A filed with the SEC on February 10, 2021, 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 46,133 common shares, sole investment power over 6,135,505 common shares, shared investment power over 102,471 common shares and aggregate beneficial ownership of 6,237,976 common shares.

 

(2)

A Schedule 13G/A filed with the SEC on February 1, 2021, by BlackRock, Inc., 55 East 52nd Street, New York, New York 10055, indicated that it has sole voting power over 5,315,161 common shares and sole investment power over 5,547,346 common shares.

 

(3)

A Schedule 13G/A filed with the SEC on February 12, 2021, 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.

 

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PROPOSAL NO. 2: SHAREHOLDER ADVISORY VOTE TO

APPROVE 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 2021 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 2022 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.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL, ON AN ADVISORY BASIS, OF OUR NAMED EXECUTIVE OFFICER COMPENSATION.

 

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COMPENSATION DISCUSSION AND ANALYSIS

TABLE OF CONTENTS

 

 

32

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, 2020. For 2020, our 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;

●

Ronald J. Myers, Executive Vice President, Human Resources; and

●

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

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:   ●  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

2020 Performance

 

Timken delivered strong financial performance in 2020, despite the broad economic slowdown caused by COVID-19. The unwavering commitment of our employees allowed the Company to continue to operate safely and efficiently during this difficult and challenging period and deliver a high level of performance.

In 2020, our financial performance compared favorably with other industrial companies, as we benefited from strong operational execution, including cost reduction initiatives, and the diversity of our business, which has been bolstered in recent years by acquisitions and our efforts to increase our presence in growing sectors like renewable energy. We achieved these results while remaining focused on the safety and welfare of our employees and other stakeholders and serving many essential industries. Throughout this period, Timken demonstrated its ability to execute through challenging conditions, as evidenced by our strong operating margin performance. Despite revenue declining 7% to $3.51 billion in 2020, Timken achieved EPS of $3.72 and adjusted EPS of $4.10¹, down 21% and 11%,

 

 

² See Appendix A for reconciliations of adjusted EPS, adjusted ROIC, free cash flow, and net debt to their most directly comparable GAAP financial measures. Adjusted ROIC is calculated as adjusted net operating profit after taxes divided by average invested capital. Free cash flow is defined as net cash from operations minus capital expenditures. These performance metrics used for external reporting may not correlate exactly to their corresponding compensation adjusted metrics due to slightly different adjustments (see pages 46 to 49 for more details on how the compensation adjusted metrics are calculated).

 

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respectively, from last year’s record performance. We generated strong net cash from operations of $578 million and free cash flow of $456² million, up 5% and 11%, respectively, from 2019. In addition, we generated an adjusted ROIC of 9.9%² in 2020. The cash generation allowed us to continue to invest in the business for future growth, reduce net debt and return cash to shareholders.

 

Our Company’s performance during 2020, discussed throughout the CD&A, resulted in below-target annual cash incentive compensation plan payouts for 2020, mainly as a result of adjusted earnings before interest and taxes (“EBIT”) declining in 2020 versus 2019. The above-target number of performance-based restricted stock units earned for the 2018-2020 cycle reflect record three-year cumulative EPS and adjusted EPS performance and strong average adjusted ROIC during this period. Our cumulative 2018-2020 EPS and adjusted EPS increased 236% and 89% respectively, as compared with the 2015-2017 cycle which was used as the basis for setting the 2018-2020 targets. Average adjusted ROIC as compared across those same periods increased 160 bps. See page 46 for details on annual cash incentive award decisions, and “2020 Long-Term Incentive Decisions” on page 48 for more details on long-term incentive award payouts. Overall, our NEO compensation for 2020 reflects our compensation objectives and demonstrates our long-standing commitment to pay our executives based upon the performance they deliver.

2020 also marked the release of our second corporate social responsibility report, which detailed our vision to build a more efficient, resilient world and introduced three focus areas we have identified to measure and advance our corporate social responsibility initiatives going forward – growing knowledge, advancing sustainability and promoting leadership. 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 multi-faceted and balanced approach to capital allocation. We generated strong net cash from operations of approximately $578 million and free cash flow of $456² million. This strong cash generation allowed us to invest in the business for future growth, reduce net debt, and continue to return cash to shareholders. We invested approximately $122 million, or 3.5% of revenue, in capital expenditures to grow and improve the competitiveness of our business, while further strengthening our leadership position in bearings with the acquisition of Aurora Bearing Company. In addition, we returned $136 million in cash to shareholders through the payment of dividends and the repurchase of approximately 1.1 million shares of stock, or over 1% of our outstanding shares, during the year. In 2020, we paid out our 394^th consecutive quarterly dividend and increased our quarterly dividend to $0.29/share in the fourth quarter, continuing one of the longest continuous dividend streaks on the NYSE and making 2020 the seventh consecutive year of annual dividend increases. Timken allocated the remainder of its cash flow to reduce leverage. We reduced total debt by $166 million and net debt by $276² million during the year, and we ended 2020 with a net-debt-to-adjusted-EBITDA ratio that was well within our 1.5 to 2.5 times target for leverage. This improved financial position will help enable the Company to continue to drive its strategy and create shareholder value in 2021 and beyond.

 

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Execution of our strategy has created shareholder value by delivering TSR of 40.3%, 19.1%, and 25.1% over the past one-, three-, and five-year periods, respectively. Our TSR for each of these three periods outpaced both the median of our 2020 compensation peer group and the S&P 500 Industrials over the same respective timeframes. In addition, our ten-year TSR of 11.0%, which reflects the alignment of our strategy with long-term shareholder value creation, exceeded the median of our 2020 compensation peer group of 7.6% but slightly lagged the S&P 500 Industrials (12.0%) over that same timeframe. 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 41 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.

 

35

2020 Compensation Decisions and Actions

 

 

 

36

		●   Other NEOs: Mr. Coughlin, Mr. Myers, and Mr. Roellgen received a base salary increase of 1.9%, 5.0% and 6.1%, respectively, in March 2020. Mr. Fracassa did not receive a base salary increase in 2020.
		●   To partially mitigate the financial impact to the Company from COVID-19 the Board approved certain temporary reductions to the base salaries for each of the Company’s NEOs, which reductions were gradually eased between April and July of 2020. For April, the Board approved a 90% reduction in base salary for the CEO and a 75% reduction in the salaries for the other NEOs. For May and June, our CEO’s salary was reduced by 50%, while the other NEOs’ salaries were reduced by 25%. In July, all NEO salaries (including the CEO’s) were reduced by 10%. The timing of these reductions was meant to align with when the Company expected to experience its greatest revenue declines associated with COVID-19, due in part to government restrictions on operations and customer shutdowns during those months. In total, during 2020 the CEO’s base pay for 2020 was reduced by 16.7% and the other NEO’s base pay for 2020 was reduced by 11.3% as a result of the temporary reductions.
		No Modification to Targets or Plan Designs due to COVID-19   Despite the significant unforeseen impact of COVID-19, no adjustments or modifications were made to the plan design, financial performance metrics or targets for our 2020 annual cash incentive plan or our three outstanding performance-based RSU cycles. Awards earned for both the 2020 annual cash incentive plan and 2018-2020 PRSU awards reflect formulaic calculations based on goals established prior to the global pandemic.
		Annual Cash Incentive   Based on the Company’s 2020 performance, annual cash incentive awards were paid at 80.2% of target for the NEOs, reflecting below-target performance for this time period. Annual cash incentive awards were calculated using unreduced base pay for the NEOs, consistent with other employees eligible for annual cash incentive plan awards, in recognition of NEO and employee commitment, strong Company performance during a difficult operating environment in 2020 and the impact of the temporary reduction to base salaries.   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 45.
		Long-Term Incentives   The NEOs received target grants of time-based restricted stock units and performance-based restricted stock units in 2020, with grant values ranging from approximately $0.4 million to $4.4 million.   Performance-based restricted stock units (which are based on adjusted ROIC and adjusted EPS performance achievements) were earned at 185.1% of target for the 2018-2020 performance period, which reflected record three-year cumulative adjusted EPS during this period, including record adjusted EPS for each of 2018 and 2019, and strong average adjusted ROIC performance.   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. These shares

 

37

		vest in full on December 31, 2021, contingent on continued employment with the Company.
2021 Program Updates		No Anticipated Modifications to Plan Designs due to COVID-19   Timken does not currently anticipate making any adjustments or modifications to the plan designs or financial performance metrics due to the impact from COVID-19 in 2021.

CEO Pay At-A-Glance

 

 

Target pay for 2020 for Mr. Kyle was determined by the Compensation Committee after consideration of the factors described below under “Determining Compensation for 2020.” 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 42.				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 2020 compensation levels for Mr. Kyle (after adding back COVID-19 related base salary reductions that were not contemplated when Mr. Kyle’s 2020 target compensation was originally established) as compared to the median of our 2020 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 2020 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). This was the case in 2020 as the year-over-year increase in actuarial pension values was primarily driven by the decline in interest rates from the prior year measurement period. However, the Committee does consider how the pension program aligns with market practice and in 2018, the Company announced that, effective December 31, 2022, most U.S. participants, including Messrs. Coughlin, Fracassa, Kyle and Myers, will cease to accrue pension benefits under the Company’s defined benefit pension plans. See page 50 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

 

38

* See page 41 for more details on the companies in the peer group, which consists of U.S. industrial companies with median revenue of $3.35 billion.

**Survey data consists of pay practices of certain companies adjusted to $3.8 billion 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 2020 consisted of base salary, annual cash incentive, long-term incentives including time-based restricted stock units and performance-based restricted stock units, and other primarily broad-based employee benefits. Our compensation program is designed to link pay and performance.

 

39

●

Program Design: 85% of the targeted total direct compensation for Mr. Kyle and between 62% and 76% of the targeted total direct compensation for the other NEOs is comprised of incentive-based pay:

 

 

●

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*		Long-Term   (Equity)   Time-Based Restricted   Stock Units
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 2020   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 (1/4 per year)

*See “Annual Cash Incentive” and “Long-Term Incentives: Performance-Based Restricted Stock Units” sections on pages 45 and 48, respectively, for more details.

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 53 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 54 for more information.

 

40

Consideration of 2020 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 2020, approximately 96% of the votes cast approved the compensation for our NEOs described in our Proxy Statement for the 2020 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 this 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.

 

 

41

Determining Compensation for 2020

 

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 50^th 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 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 executive officers.

In 2020, WTW’s primary areas of assistance to the Compensation Committee were:

 

42

●

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

 

●

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 2020 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.

 

43

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 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 50 for NEO eligibility.

 

44

Analysis of 2020 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.

2020 Base Salary Decisions:

 

●

Base salary decisions were reviewed and approved by the Compensation Committee in early February prior to the global pandemic. Decisions were taken to maintain alignment with the Company’s compensation philosophy and median market practice.

●

CEO: Mr. Kyle received a base salary increase of 3.0% in March 2020; and

●

Other NEOs: Mr. Coughlin, Mr. Myers, and Mr. Roellgen received a base salary increase of 1.9%, 5.0% and 6.1%, respectively, in March 2020. Mr. Fracassa did not receive a base salary increase in 2020.

●

Temporary Salary Reductions: To help mitigate the financial impact to the Company from COVID-19, the Board approved certain temporary reductions to the base salaries for each of the Company’s NEOs, which reductions were gradually eased between April and July of 2020. For April, the Board approved a 90% reduction in base salary for the CEO and a 75% reduction in the salaries for the other NEOs. For May and June, our CEO’s salary was reduced by 50%, while the other NEOs’ salaries were reduced by 25%. In July, all NEO salaries (including the CEO’s) were reduced by 10%. The timing of these reductions was meant to align with when the Company expected to experience its greatest revenue declines associated with COVID-19, due in part to government restrictions on operations and customer shutdowns during those months. In total, during 2020 the CEO’s base pay for 2020 was reduced by 16.7% and the other NEO’s base pay for 2020 was reduced by 11.3% as a result of the temporary reductions.

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 2020 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.

 

45

In 2020, Mr. Kyle, as CEO, had an annual cash target award opportunity of 120% of base salary and the other NEOs had target award opportunities ranging from 50% to 75% of base salary in 2020. Annual cash incentive awards were calculated using unreduced base pay for the NEOs, consistent with other employees eligible for annual cash incentive plan awards, in recognition of NEO and employee commitment, strong Company performance during a difficult operating environment in 2020 and the impact of the temporary reduction to base salaries. 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 2020, 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 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 macro-economic factors.

Performance goals for the Company’s corporate annual cash incentive plan were set near the beginning of 2020. The 2020 adjusted EBIT target was set approximately 4% higher than the 2019 adjusted EBIT target and represents a 6% increase over actual 2019 adjusted EBIT results (using comparable exclusions).

The 2020 adjusted EBIT margin target of 15.2% was set at a level that was 110 basis points higher than the 2019 adjusted EBIT margin target of 14.1% and equal to the 2019 actual adjusted EBIT margin results of 15.2%.

The 2020 free cash flow target of $415 million was set at a level that was approximately 34% higher than the 2019 free cash flow target and 2% higher than 2019 free cash flow results.

2020 Annual Performance Award Decisions

Under the corporate annual cash incentive plan, actual performance under the three financial metrics need to reach the respective minimum threshold for that portion of the award to be payable. Performance targets and actual performance levels for the 2020 corporate annual cash incentive plan are shown in the table below. Straight-line interpolation is used to calculate actual payouts under the plan. Despite the significant unforeseen impact of COVID-19, no adjustments or modifications were made to the financial performance metrics or targets for our 2020 annual cash incentive plan. Awards earned for the 2020 annual cash incentive plan reflect formulaic calculations based on metrics and targets established prior to the outset of the global pandemic.

Corporate Annual Cash Incentive Plan

 

		Threshold		Target		Maximum		Actual
Adjusted EBIT (60% weighting)		$421M		$601M		$781M		$495M   (70.6% payout)
Adjusted EBIT Margin* (20% weighting)		10.0%		15.2%		16.5%		14.1%   (89.4% payout)
Free Cash Flow**(20% weighting)		$291M		$415M		$540M		$456M   (100.0% payout)
		h		h		h		h
Plan Payout		50%		100%		200%		80.2% 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.

 

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**For 2020, Adjusted EBIT did not exceed the prior year’s actual results, therefore the payout under the Free Cash Flow metric was capped at 100%, even though the metric achieved 133.0% of the target, in accordance with the plan design.

Actual performance for adjusted EBIT, adjusted EBIT margin, and free cash flow caused the 2020 corporate annual cash incentive plan to be scored at 80.2% for corporate participants, resulting in a 2020 cash award payout of 80.2% of the target opportunity for Messrs. Kyle, Fracassa, Coughlin, Myers, 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 2020 cash award payouts for the NEOs. 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 2020 were established at more challenging levels than 2019 results and the payouts are a reflection of strong results for 2020, despite the negative financial impact to the Company from COVID-19.

Long-Term Incentives

The Compensation Committee administers the Equity and Incentive Compensation Plan, which was approved by our shareholders at our 2019 annual meeting and succeeds the Predecessor Long-Term Incentive Plan, under which no further grants will be made. Awards under the Equity and Incentive Compensation Plan can be made, and under the Predecessor Long-Term Incentive Plan could 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 2020, 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 over a three-year period of strategic, financial and operating metrics 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 and operating 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 also 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. These shares vest in full on December 31, 2021, contingent on continued employment with the Company.                

 

47

2020 Long-Term Incentive Decisions

 

For the annual grants made in February 2020, 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 105% and 215% 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 2020, 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 2020, 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.

2020-2022 Performance-Based Restricted Stock Units Cycle

The performance metrics for performance-based restricted stock units granted in 2020 were cumulative adjusted EPS and adjusted ROIC for a three-year performance period (2020-2022). 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 (net of taxes)⁴, with the ability to make adjustments 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 2020-2022 performance-based restricted stock unit cycle, the adjusted EPS target reflected a 6% compound annual growth rate (“CAGR”) over actual 2019 adjusted EPS (using comparable exclusions), which was a record at the time, resulting in the cumulative adjusted EPS target for the 2020-2022 performance-based restricted stock unit cycle being set approximately 36% higher than the actual cumulative adjusted EPS results for the 2017-2019 cycle, which was the most recently completed cycle at the time the 2020-2022 target was established and was also record three-year performance at that time. The 6% targeted CAGR over 2019 actual adjusted EPS results was set at a level that required meaningful improvement over the cycle. The three-year target for adjusted ROIC reflected a 30 basis point increase over the target for the 2019-2021 cycle and a 10 basis point increase over the actual ROIC for the 2017-2019 cycle. 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 2020 are shown in the table below. Straight-line interpolation is used to calculate payouts for these performance-based restricted stock units. Despite the significant unforeseen impact of COVID-19, no adjustments or modifications have been made to the financial performance

 

                                                 

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.

 

48

metrics or targets for our 2020-2022 performance-based RSU cycle, which metrics and targets were established prior to the global pandemic.

2020-2022 Performance-Based Restricted Stock Units Cycle: Metrics and Weightings

 

		Threshold		Target		Maximum
Three-Year Cumulative Adjusted EPS (60% weighting)		$10.87		$15.52		$20.18
Adjusted ROIC* (40% weighting)		8.5%		11.8%		14.0%
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 2020, see the “2020 Grants of Plan-Based Awards” table on page 57.

Results for the 2018-2020 Performance-Based Restricted Stock Units Cycle

In 2018, the NEOs received awards of performance-based restricted stock units to cover a three-year performance period (2018-2020).

The performance metrics for performance-based restricted stock units granted in 2018 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 make adjustments to exclude the effect of changes in accounting principles or methods that are not reflected in the plan. For the 2018-2020 performance-based restricted stock unit cycle, no adjustments were made to fully adjusted EPS as used for external reporting to determine the applicable compensation adjusted metrics.

The Compensation Committee believed that the targets for the performance-based restricted stock units granted in 2018 were appropriately challenging and that achievement would be supportive of shareholder value creation. The adjusted EPS target for the 2018-2020 performance-based restricted stock unit cycle reflected an 8% CAGR in each case over actual 2017 adjusted EPS results which was 45% higher than the most recently completed cycle. The adjusted ROIC target for the 2018-2020 cycle was set equal to the actual 2017 adjusted ROIC of 10.5%.

In terms of actual results for the cycle, adjusted EPS increased approximately 59% year-over-year in 2018, increased approximately 10% year-over-year in 2019 and decreased approximately 11% year-over-year in 2020 due in part to the impacts from COVID-19. As a result, the performance-based restricted stock units were earned at 185.1% reflecting record three-year cumulative adjusted EPS performance over the cycle, including record adjusted EPS results in 2018 and 2019, and strong average adjusted ROIC performance. Moreover, as detailed on page 35 in the “2020 Performance” section, the Company’s three-year TSR exceeded both the median of its 2020 compensation peers and the S&P 500 Industrials reflecting very strong performance over this period.

The Company’s performance goals and actual calculated results for the 2018-2020 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 2018-2020 performance-based RSU cycle. Payouts earned for the 2018-2020 PRSU awards reflect formulaic calculations based on metrics and targets established prior to the outset of the global pandemic.

 

                                                     

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.

 

49

2018-2020 Performance-Based Restricted Stock Units Cycle: Metrics, Weightings and Actual Results

 

		Threshold		Target		Maximum		Actual
Three-Year Cumulative Adjusted EPS (70% weighting)		$5.53		$9.22		$11.99		$12.88
ROIC (30% weighting)		8.0%		10.5%		12.5%		11.5%
Plan Funding		50%		100%		200%		185.1%

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 2020 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 2020, see the “2020 Grants of Plan-Based Awards” table on page 57.

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 has been 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 and Mr. Myers participate in the Pension Plan and will cease to accrue benefits after December 31, 2022). 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).

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:

 

Name

Defined Benefit

Defined Contribution

Qualified

Nonqualified

Qualified

Nonqualified

Pension Plan

Supplemental Pension Plan

SIP Plan Matching Contributions

Core DC Contribution

Post-Tax Savings Plan

Restoration Portion

Excess Benefit Agreement

Richard G. Kyle

✓

✓

✓

✓

Philip D. Fracassa

✓

✓

✓

✓

Christopher A. Coughlin

✓

✓

✓

✓

✓

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.

 

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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, 2020, Mr. Coughlin and Mr. Myers are both eligible for early retirement under this 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 Benefits 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 and “Core DC” contributions made under the Company’s Savings and Investment Retirement Plan (the “SIP Plan”), and “Post-Tax Savings Plan” contributions, in each case using assumed contribution rates and assuming earnings were 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.

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 contribution refers 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

 

51

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 (currently 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 2020, 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.

Other Benefits

The NEOs are eligible to participate in benefit programs offered 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 nominal 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.

 

52

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 62 and in the “Termination Scenarios” table on page 66.

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 2020, 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 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, 2020, all NEOs exceeded their individual ownership targets.

 

Officer     Name		Stock Ownership Requirement – Multiple of Base Salary		Actual Stock Ownership – Multiple of Base Salary*
Mr. Kyle		5x		15.1x
Mr. Fracassa		3x		8.0x
Mr. Coughlin		3x		8.3x
Mr. Myers		3x		3.9x
Mr. Roellgen		2x		6.6x

* Calculated by multiplying the number of shares held by each NEO on December 31, 2020 by the daily average stock price for the year ending December 31, 2020 and dividing that product by each NEO’s 2020 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

 

53

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.

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.

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the CD&A for the year ended December 31, 2020 with our management. Based on the review and discussion referred to above, the Compensation Committee recommended to our Board, and our Board approved, the inclusion of the CD&A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and this Proxy Statement for filing with the SEC.

Ajita G. Rajendra (Compensation Committee Chair)

Elizabeth A. Harrell

Sarah C. Lauber

John A. Luke, Jr.

James F. Palmer

Jacqueline F. Woods

 

54

EXECUTIVE COMPENSATION

2020 Summary Compensation Table

 

The following table sets forth information concerning compensation for our NEOs for 2020, 2019 and 2018, as applicable:

 

Name and Principal Position		Year		Salary (2)				Stock Awards  (3)				Option Awards (4)				Non-Equity Incentive Plan Compensation (5)				Change in Pension Value and Nonqualified Deferred Compensation Earnings (6)				All Other Compensation (7)				Total
Richard G. Kyle		2020			$843,093				$4,421,376				-				$974,914				$4,448,000				$576,880				$11,264,263
President & CEO		2019			$981,667				$3,095,955				$1,326,112				$1,459,000				$4,434,000				$582,517				$11,879,251
		2018			$941,667				$2,913,413				$1,248,177				$1,982,811				$1,303,000				$331,204				$8,720,272
Philip D. Fracassa		2020			$499,112				$1,226,319				-				$338,373				$1,399,000				$174,084				$3,636,888
Executive Vice President and Chief		2019			$558,775				$778,515				$333,624				$519,049				$1,699,000				$188,155				$4,077,118
Financial Officer		2018			$536,459				$706,586				$302,526				$705,993				$202,000				$194,194				$2,647,758
Christopher A. Coughlin		2020			$497,200				$1,332,379				-				$337,210				$1,150,000				$167,245				$3,484,034
Executive Vice President, Group		2019			$548,175				$911,640				$390,385				$509,203				$1,664,000				$167,120				$4,190,523
President		2018			$527,917				$911,976				$390,248				$694,752				$0				$104,786				$2,629,679
Ronald J. Myers		2020			$359,115				$846,092				-				$208,615				$498,000				$65,509				$1,977,331
Executive Vice President, Human		2019			$386,353				$350,385				$150,167				$283,249				$545,000				$58,969				$1,774,123
Resources		2018			$372,075				$289,109				$123,995				$359,084				$132,000				$51,647				$1,327,910
Andreas Roellgen (1)		2020			$304,998				$395,074				-				$136,003				$315,000				$55,845				$1,206,920
Vice President, Europe, Asia and		2019			$309,520				$191,700				$81,670				$172,509				$267,000				$58,903				$1,081,302
Africa

 

(1)

Mr. Roellgen’s compensation is generally based in Euros. The conversion rate used for purposes of converting the Euros earned by Mr. Roellgen into U.S. Dollars for purposes of the Change in Pension Value and Nonqualified Deferred Compensation Earnings column was €1.00 = $1.2216, which was the applicable exchange rate as of December 31, 2020. For all other columns in this table, the conversion rate used for purposes of converting the Euros earned by Mr. Roellgen into U.S. Dollars was €1.00 = $1.1415 (the average monthly exchange rate for the calendar year), which approach we believe provides a reasonable representation of his compensation by accounting for currency exchange fluctuations that occurred throughout the calendar year.

 

(2)

To help mitigate the financial impact to the Company from COVID-19, the Board approved temporary reductions to the base salaries for each of the Company’s NEOs. See the “2020 Base Salary Decisions” section on page 45 for additional details.

 

(3)

The amounts shown in this column for 2020 include the grant date fair market value of time-based restricted stock units granted in 2020. See the description of time-based restricted stock units on page 50. Additionally, this column includes the grant date fair market value of the performance-based restricted stock units for the 2020-2022 performance cycle at target. See the description of the performance-based restricted stock units on page 48. Should performance equal or exceed the maximum goals for these performance-based restricted stock units, the grant date fair value for such awards would be: Mr. Kyle - $5,305,652; Mr. Fracassa - $1,471,583; Mr. Coughlin - $1,598,855; Mr. Myers - $673,481; and Mr. Roellgen - $474,619.

For Mr. Myers, the amount shown in this column also includes the grant date fair value of a one-time grant of 5,000 deferred shares made to Mr. Myers on February 6, 2020. These shares vest in full on December 31, 2021, contingent on continued employment with the Company.

The amounts shown in this column are computed in accordance with FASB ASC Topic 718.

 

(4)

Nonqualified stock options were eliminated from our long-term incentive award mix in 2020.

 

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(5)

The amounts shown in this column for 2020 represent actual cash award payouts under the annual cash incentive plan for 2020 performance. Annual incentive compensation payouts were calculated using unreduced base pay, consistent with other employees eligible for annual cash incentive plan awards. For more information, see page 37.

 

(6)

The amounts shown in this column for 2020 represent the difference between the accumulated benefit amounts shown in the 2020 Pension Benefits Table as of December 31, 2020 and those amounts calculated as of December 31, 2019. See “2020 Pension Benefits Table” on page 61 for a description of how the amounts as of December 31, 2020 were calculated. For U.S.-based NEOs, the amounts as of December 31, 2019 were calculated in the same manner as the December 31, 2020 amounts, except that discount rates of 3.51% for nonqualified plans and 3.52% for qualified plans were used (compared to discount rates of 2.81% for the 2020 amounts for nonqualified benefits and 2.85% for the 2020 amounts for qualified benefits). For Mr. Roellgen, the amounts as of December 31, 2019 were calculated in the same manner as 2020 amounts, except that a discount rate of 0.75% was used (compared to a discount rate of 0.25% for 2020). Values were determined assuming no probability of termination, retirement, death, or disability before age 62, the earliest age unreduced pension benefits are payable from the applicable plans in each case. A measurement date of December 31, 2020 was used for all NEOs. The year-over-year increase in actuarial pension values was primarily driven by the decline in interest rates over the year.

Several years ago, the Company closed the Pension Plan to new entrants and ceased providing Excess Benefit Agreements to newly appointed officers. Effective December 31, 2022, the Company is freezing benefits under both the Pension Plan and the Excess Benefit Agreements. See the “Retirement Programs” section on page 50 for additional details.

 

(7)

The amounts shown in this column for 2020 are detailed in the following table:

 

Name		Annual Company Contribution to SIP, Core DC, and/or French DC (a)					Annual Company Contribution to Post-Tax Savings Plan (b)					Executive Physicals					Personal Use of Company Country Club Memberships (c)					Personal and Spousal Travel and Related Expenses (d)					Cash Dividend Equivalents (e)					Life Insurance (f)
Richard G. Kyle		$24,225					$181,333					$2,238					$10,915					$1,102					$352,222					$4,845
Philip D. Fracassa		$24,225					$67,240					$2,854					-					-					$78,349					$1,416
Christopher A. Coughlin		$12,825					$32,463					$1,291					$5,830					$764					$110,096					$3,976
Ronald J. Myers		$12,825					$16,081					-					-					-					$33,918					$2,685
Andreas Roellgen		$19,236					-					-					-					-					$20,813					$1,985

 

(a)

“SIP” refers to the Savings and Investment Retirement Plan, which is the Company’s primary U.S. qualified defined contribution plan for eligible salaried employees, under which the Company makes matching contributions and “Core DC” contributions to the accounts of eligible U.S. salaried employees. Messrs. Kyle, Fracassa, Coughlin, and Myers received SIP matching contributions during 2020. Messrs. Kyle and Fracassa received Core DC contributions during 2020. “French DC” refers to the Company’s French qualified defined contribution plan under which Mr. Roellgen received contributions. See the “Retirement Programs” section on page 50 for plan details.

 

(b)

The “Post-Tax Savings Plan” is the Company’s non-tax qualified restoration plan for eligible U.S. salaried employees whose contributions and benefits in qualified retirement plans are limited by Section 415 of the Code.

 

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(c)

The amounts shown for personal use of country club memberships reflect prorated amounts of Company-paid annual membership dues in 2020 that relate to personal use by the NEOs. There are no incremental costs to the Company for personal use, as just one annual payment is made to cover membership dues for both business use and personal use, but all personal expenses are allocated to, and borne by, the NEOs.

 

(d)

The amounts shown for personal and spousal travel include actual and estimated incremental travel expenses for personal use of the Company aircraft and for when a spouse accompanied an NEO on business travel. No tax gross-ups on the related imputed income are paid.

 

(e)

Reflects cumulative dividend equivalents paid in cash in 2020 upon vesting for applicable time-based restricted stock units and performance-based restricted stock units.

 

(f)

The amounts shown represent the actual premiums paid by the Company for term life insurance (which is provided by the Company for all eligible employees at a level equal to one times their annual salary) and long-term disability insurance.

 

(g)

This column reflects Mr. Roellgen’s Company car benefit as well as Company contributions into his TESOP.

2020 Grants of Plan-Based Awards

 

The following table sets forth information concerning certain grants made to our NEOs during 2020:

 

Name		Grant Date		Estimated Possible Payouts Under Non-Equity Incentive Plan Awards						Estimated Future Payouts Under Equity Incentive Plan Awards						All Other Stock Awards: Number of Shares of Stock or Units		Grant Date Fair Value of Stock and Option Awards (5)
				Threshold		Target		Maximum		Threshold		Target		Maximum
Richard G.		02/10/2020 RSUs (1)														33,350		$1,768,551
Kyle		02/10/2020 CSTIP (2)		$121,524		$1,215,240		$2,430,480
		02/10/2020 Perf RSUs (3)								10,005		50,025		100,050				$2,652,826
Philip D.		02/10/2020 RSUs (1)														9,250		$490,528
Fracassa		02/10/2020 CSTIP (2)		$42,179		$421,785		$843,570
		02/10/2020 Perf RSUs (3)								2,775		13,875		27,750				$735,791
Christopher A.		02/10/2020 RSUs (1)														10,050		$532,952
Coughlin		02/10/2020 CSTIP (2)		$42,034		$420,335		$840,671
		02/10/2020 Perf RSUs (3)								3,015		15,075		30,150				$799,427
Ronald J.		02/06/2020 Def Shrs (4)														5,000		$285,300
Myers		02/10/2020 RSUs (1)														4,225		$224,052
		02/10/2020 CSTIP (2)		$26,004		$260,040		$520,081
		02/10/2020 Perf RSUs (3)								1,270		6,350		12,700				$336,741
Andreas		02/10/2020 RSUs (1)														2,975		$157,764
Roellgen		02/10/2020 CSTIP (2)		$16,953		$169,529		$339,058
		02/10/2020 Perf RSUs (3)								895		4,475		8,950				$237,309

 

(1)

The “RSUs” amounts shown reflect the time-based restricted stock units granted to each NEO in 2020 under the Equity and Incentive Compensation Plan. See the description of time-based restricted stock units on page 50.

 

(2)

The “CSTIP” amounts shown reflect payout opportunities at threshold, target and maximum performance levels under the annual cash incentive plan design for 2020. Threshold is reflected

 

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