UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934

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þ		Definitive Information Statement only
o		Confidential, for use of the Commission Only (as permitted by Rule 14c-5(d)(2)))

 

ERIE INDEMNITY COMPANY

(Name of Registrant as Specified In Its Charter)

 

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD APRIL 19, 2011

 

To the Holders of Class A Common Stock and
Class B Common Stock of ERIE INDEMNITY COMPANY:

 

We will hold our 86th annual meeting of shareholders at 9:30 a.m., local time, on Tuesday, April 19, 2011, at the Auditorium of the F.W. Hirt — Perry Square Building, 100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530 for the following purposes:

 

1. To approve amendments to our articles of incorporation to: (i) modify the corporate purposes clause; (ii) update our corporate registered address; and (iii) eliminate the requirement of a specific number of directors and provide that the size of the board of directors shall be governed by our bylaws;

 

2. To elect 13 persons to serve as directors until our 2012 annual meeting of shareholders and until their successors are elected and qualified;

 

3. To approve, on an advisory basis, the compensation of our named executive officers;

 

4. To select, on an advisory basis, the frequency of the shareholder advisory vote on the compensation of our named executive officers; and

 

5. To transact any other business that may properly come before our annual meeting and any adjournment, postponement or continuation thereof.

 

This notice and information statement, together with a copy of our annual report to shareholders for the year ended December 31, 2010, are being sent to all holders of Class A common stock and Class B common stock as of the close of business on Friday, February 18, 2011, the record date established by our board of directors. Holders of Class B common stock will also receive a form of proxy. Holders of Class A common stock will not receive proxies because they do not have the right to vote on any of the matters to be acted upon at our annual meeting.

 

Holders of Class B common stock are requested to complete, sign and return the enclosed form of proxy in the envelope provided, whether or not they expect to attend our annual meeting in person.

 

By order of our board of directors,

 

 

James J. Tanous

Executive Vice President,

Secretary and General Counsel

 

March 18, 2011

Erie, Pennsylvania

 

NOTICE OF INTERNET AVAILABILITY OF ANNUAL MEETING MATERIALS

 

Important Notice Regarding the Availability of our Information Statement for the Annual Meeting of Shareholders to be held on April 19, 2011.

 

Our information statement and annual report are available at http://www.erieindemnityinfostatement.com.

 

We Are Not Asking Holders of Our Class A Common Stock for a Proxy and
You Are Requested Not to Send Us a Proxy

 

ERIE INDEMNITY COMPANY

 

 

INFORMATION STATEMENT

 

 

 

Unless the context indicates otherwise, all references in this information statement to “we,” “us,” “our” or the “Company” mean Erie Indemnity Company. Erie Insurance Exchange, or the “Exchange,” has four property and casualty insurance subsidiaries: Erie Insurance Company, or “Erie Insurance Co.,” Erie Insurance Company of New York, or “Erie NY,” Erie Insurance Property & Casualty Company, or “EI P&C” and Flagship City Insurance Company, or “Flagship.” We sometimes refer to the Exchange and its property and casualty insurance subsidiaries as the “Property and Casualty Group.” We hold a 21.63% interest in the common stock (“EFL Common Stock”) of Erie Family Life Insurance Company, or “EFL,” a life insurance company. The Exchange owns the remaining 78.37% of EFL’s Common Stock.

 

 

TABLE OF CONTENTS

 

 

ERIE INDEMNITY COMPANY

 

100 Erie Insurance Place
Erie, Pennsylvania 16530

 

 

INFORMATION STATEMENT

 

INTRODUCTION

 

This information statement, which is first being mailed to the holders of our Class A common stock and our Class B common stock on or about March 18, 2011, is furnished to such holders to provide information regarding us and our 2011 annual meeting of shareholders. This information statement is also being furnished in connection with the solicitation of proxies by our board of directors from holders of Class B common stock to be voted at our 2011 annual meeting of shareholders and at any adjournment, postponement or continuation thereof. Our annual meeting will be held at 9:30 a.m., local time, on Tuesday, April 19, 2011 at the Auditorium of the F.W. Hirt — Perry Square Building, 100 Erie Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530. Holders of Class B common stock will also receive a form of proxy.

 

Only holders of Class B common stock of record at the close of business on February 18, 2011 are entitled to vote at our annual meeting. Each share of Class B common stock is entitled to one vote on each matter to be considered at our annual meeting. Except as otherwise provided in Sections 1756(b)(1) and (2) of the Pennsylvania Business Corporation Law of 1988, or “BCL,” in the case of adjourned meetings, a majority of the outstanding shares of Class B common stock will constitute a quorum at our annual meeting for the election of directors. Abstentions and shares of Class B common stock held by nominees as to which we have not received voting instructions from the beneficial owner, or other person entitled to vote such shares, and as to which the nominee does not have discretionary voting power, are considered outstanding shares of Class B common stock entitled to vote and such shares are counted in determining whether a quorum or a majority is present.

 

As of the close of business on February 18, 2011, we had 49,751,555 shares of Class A common stock outstanding, which are not entitled to vote on any matters to be acted upon at our 2011 annual meeting, and 2,546 shares of Class B common stock outstanding, which have the exclusive right to vote on all matters to be acted upon at our 2011 annual meeting.

 

There are three H.O. Hirt Trusts. Susan Hirt Hagen, or “Mrs. Hagen,” and Elizabeth Hirt Vorsheck, or “Mrs. Vorsheck,” both of whom are directors of the Company, are beneficiaries of the Trusts. Thomas B. Hagen and Jonathan Hirt Hagen, both directors of the Company, are contingent beneficiaries of the Trusts. The H.O. Hirt Trusts collectively own 2,340 shares of Class B common stock, which, because such shares represent 91.91% of the outstanding shares of Class B common stock entitled to vote at our 2011 annual meeting, is sufficient to determine the outcome of any matter submitted to a vote of the holders of our Class B common stock, assuming all of the shares held by the H.O. Hirt Trusts are voted in the same manner. As of the record date for our 2011 annual meeting, the individual trustees of the H.O. Hirt Trusts are Mrs. Hagen and Mrs. Vorsheck, and the corporate trustee is Sentinel Trust Company, L.B.A., or “Sentinel.” Mrs. Hagen and Mrs. Vorsheck are both candidates for re-election to the board at our 2011 annual meeting.

 

Under the provisions of the H.O. Hirt Trusts, the shares of Class B common stock held by the H.O. Hirt Trusts are to be voted as directed by a majority of trustees then in office. If at least a majority of the trustees then in office of each of the H.O. Hirt Trusts vote for the election of the 13 candidates for director named below, such candidates will be elected as directors even if all shares of Class B common stock other than those held by the H.O. Hirt Trusts do not vote for such candidates. We have not been advised as of the date of this information statement how the trustees of the H.O. Hirt Trusts intend to vote at our annual meeting.

 

Since 1925, we have served as the attorney-in-fact for the policyholders of the Exchange. As a reciprocal insurance exchange organized under the laws of the Commonwealth of Pennsylvania, the Exchange is an unincorporated association of individuals, partnerships and corporations that agree to insure one another. Each applicant for insurance from the Exchange signs a subscriber’s agreement, which appoints us as the attorney-

in-fact for the subscriber (policyholder). As attorney-in-fact, we are required to perform certain services relating to the sales, underwriting and issuance of policies on behalf of the Exchange. We also provide management services to the Exchange, its property and casualty subsidiaries and EFL.

 

Throughout 2010, we also operated as a property and casualty insurer through our wholly-owned subsidiaries, Erie Insurance Co., Erie NY and EI P&C. On December 31, 2010, we sold all of the outstanding capital stock and voting shares of Erie Insurance Co., Erie NY and EI P&C to the Exchange. Under this new structure, all property and casualty insurance operations are owned by the Exchange, and we will continue to function as the management company. We also entered into an agreement to sell our 21.63% interest in EFL Common Stock to the Exchange. Upon completion of the sale, which is expected to occur on March 31, 2011, EFL will become a wholly-owned subsidiary of the Exchange.

 

The Property and Casualty Group writes personal and commercial lines of property and casualty insurance coverages exclusively through approximately 2,080 independent agencies comprised of more than 9,400 licensed agents. The underwriting results of the Property and Casualty Group are pooled. As a result of the Exchange’s 94.5% participation in the reinsurance pooling arrangement, the underwriting risk of the Property and Casualty Group’s business is largely borne by the Exchange. The sale of our insurance subsidiaries to the Exchange did not affect the pooling agreement, and had no impact on the subscribers (policyholders) of the Exchange, the Exchange’s independent insurance agents, or our employees.

 

Due to FASB Accounting Standards Codification No. 810, we are required to consolidate our financial statements with those of the Exchange when reporting to the Securities and Exchanges Commission, or “SEC.” This change to our financial reporting took effect on January 1, 2010. Accordingly, our first quarter 2010 Form 10-Q, filed on May 6, 2010, was the first filing under the new consolidation rules. This change affects the presentation of the financial reports; it does not change our financial results. For more information regarding this change to our financial reporting see the Form 8-K we filed with the SEC on May 6, 2010.

 

We charge the Exchange a management fee calculated as a percentage, limited to 25%, of the direct written premiums of the Property and Casualty Group. Management fees accounted for 83.6%, 81.4% and 75.7%, respectively, of our revenues for the three years ended December 31, 2008, 2009 and 2010. The management fee rate was 25% during 2008, 2009 and 2010, and beginning January 1, 2011, the rate has been set at 25%.

 

The following table sets forth as of February 18, 2011, the amount of our outstanding Class B common stock owned by shareholders known by us to own beneficially more than 5% of our Class B common stock.

 

 

 

 

The following table sets forth as of February 18, 2011, the amount of the outstanding shares of Class A common stock and Class B common stock beneficially owned by (i) each director and candidate for director nominated by our Nominating and Governance Committee, or “nominating committee,” (ii) each executive officer named in the Summary Compensation Table and (iii) all of our executive officers and directors as a group.

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” requires that the officers and directors of a corporation, such as us, that has a class of equity securities registered under Section 12 of the Exchange Act, as well as persons who own more than 10% of a class of equity securities of such a corporation, file reports of their ownership of such securities, as well as statements of changes in such ownership, with the corporation and the SEC. Based upon written representations we received from our officers and directors and shareholders owning more than 10% of any class of our stock, and our review of the statements of changes of ownership filed with us by our officers and directors and shareholders owning more than 10% of any class of our stock during 2010, we believe that all such filings required during 2010 were made on a timely basis.

 

We are proposing certain amendments to our articles of incorporation, our “articles,” to: (i) modify the corporate purposes clause; (ii) update our corporate registered address; and (iii) eliminate the requirement of a specific number of directors and provide that the size of the board of directors shall be governed by our bylaws. Each of these amendments is discussed below.

 

Following shareholder approval, the amendments will become effective upon the filing of articles of amendment with the Pennsylvania Department of State. We also intend to file a restatement of our articles to incorporate all amendments that are adopted by our shareholders at the annual meeting as well as all other amendments that have been adopted by our shareholders since the original filing of our articles in 1925.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE PROPOSED AMENDMENTS IN THIS PROPOSAL 1.

 

A. AMENDMENT TO MODIFY THE CORPORATE PURPOSES CLAUSE

 

Article 2nd of our original articles reads as follows: “Said corporation is formed for the purpose of conducting a general real estate and insurance agency and brokerage business in all the various branches thereof, the placing of surety bonds and the transaction of all such business as is necessary or incidental thereto.” Since the original filing of our articles in 1925, we have never operated as a real estate agency or brokerage, or otherwise engaged in the real estate business other than the purchase, sale or lease of real property incidental to the growth of our insurance business. Our business has consisted primarily of serving as the attorney-in-fact for the policyholders of the Exchange and providing management services to the Exchange, its subsidiaries and EFL.

 

At its meeting on February 24, 2011, our board of directors unanimously approved, and recommended for approval by our voting shareholders, an amendment to our articles that would replace the current Article 2nd in its entirety with the following: “2. The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the Commonwealth of Pennsylvania, including, but not limited to, the conduct of an insurance business, whether directly or indirectly, as attorney-in-fact for the subscribers at Erie Insurance Exchange or other reciprocal insurance exchanges, or manager or administrator for stock or mutual insurance companies or risk retention groups, or agent or broker for insurance underwriting entities, or other activities related to any of the foregoing businesses or purposes.” The proposed amendment will conform the corporate purposes clause to the types of business actually conducted by the Company, but will have no other effect on the Company or its shareholders.

 

The affirmative vote of a majority of the shares of Class B common stock cast at our annual meeting is required to approve the proposed amendment to our articles.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSED AMENDMENT TO MODIFY THE CORPORATE PURPOSES CLAUSE (ITEM 1A ON THE PROXY CARD).

 

B. AMENDMENT TO UDPATE THE COMPANY’S REGISTERED ADDRESS

 

Article 3rd of our original articles reads as follows: “The business of said corporation is to be transacted in The City of Erie, Pennsylvania.” Since 1925, our business has grown both in size and geographic area. We currently transact business in 11 states and the District of Columbia, primarily as attorney-in-fact for the Exchange and as a manager of the Exchange, its subsidiaries and EFL. Accordingly, we believe it would be appropriate to amend our articles to reflect that, although we remain headquartered in Erie, Pennsylvania, we regularly transact business within and outside the City of Erie, Pennsylvania.

 

At its meeting on February 24, 2011, our board of directors unanimously approved, and recommended for approval by our voting shareholders, an amendment to our articles that would replace the current Article 3rd in

its entirety with the following: “3. The address of the Corporation in the Commonwealth is 100 Erie Insurance Place, City of Erie, County of Erie, Pennsylvania 16530-0001. The Corporation shall be headquartered in the City of Erie, Pennsylvania, and the business of the Corporation may be transacted throughout the United States of America and in such other sovereign nations as the Board of Directors deems advisable.”

 

The affirmative vote of a majority of the shares of Class B common stock cast at our annual meeting is required to approve the proposed amendment to our articles.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSED AMENDMENT TO UPDATE THE COMPANY’S REGISTERED ADDRESS (ITEM 1B ON THE PROXY CARD).

 

C. AMENDMENT TO ELIMINATE THE REQUIREMENT OF A SPECIFIC NUMBER OF DIRECTORS
AND TO PROVIDE THAT THE SIZE OF OUR BOARD SHALL BE GOVERNED BY OUR BYLAWS

 

We are also proposing an amendment to our articles that would allow our bylaws to address the size of our board of directors, thereby correcting a discrepancy that exists between our articles and our bylaws with respect to setting the size of the board. When our original articles were filed on April 17, 1925, the incorporators included a provision fixing the size of the board of directors at fifteen. When our bylaws were first adopted on April 18, 1925, they contained a similar provision requiring that the Company have fifteen directors. Since 1925, several amendments to our bylaws have addressed the size of our board, but none of the amendments to our articles ever transferred such authority to regulate the size of the board to the bylaws. This proposed amendment to the articles will definitively allow our bylaws to establish the size of our board of directors.

 

Article 6th of our articles currently provides, in pertinent part, that “[t]he number of directors of said corporation is fixed at Fifteen...” At its meeting on February 24, 2011, our board of directors unanimously approved, and recommended for approval by our voting shareholders, an amendment to our articles that would replace the current Article 6th in its entirety with the following: “6. The number of directors of the Corporation shall be determined in accordance with the Corporation’s Bylaws, as may be amended from time to time.” Our bylaws provide that our board of directors shall consist of not less than 7, nor more than 16, directors, with the exact number to be fixed from time to time by resolution of our board of directors. The effect of this amendment would be to provide our board of directors with the ability to set the size of the board without having to obtain shareholder approval to do so.

 

The affirmative vote of a majority of the shares of Class B common stock cast at our annual meeting is required to approve the proposed amendment to our articles.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSED AMENDMENT TO ELIMINATE THE REQUIREMENT OF A SPECIFIC NUMBER OF DIRECTORS AND TO PROVIDE THAT THE SIZE OF OUR BOARD SHALL BE GOVERNED BY OUR BYLAWS (ITEM 1C ON THE PROXY CARD).

 

Introduction

 

The election of directors by the holders of our Class B common stock is governed by provisions of the Pennsylvania Insurance Holding Companies Act, or the “Holding Companies Act,” in addition to provisions of the BCL, the Pennsylvania Associations Code and our bylaws. The following discussion summarizes these statutory and bylaw provisions and describes the process undertaken in connection with the nomination of candidates for election as directors by the holders of Class B common stock at our annual meeting.

 

Background of our Nominating Committee

 

Section 1405(c)(4.1) of the Holding Companies Act provides that the board of directors of a domestic insurer must establish one or more committees comprised solely of directors who are not officers or employees

of the insurer or of any entity controlling, controlled by or under common control with the insurer. Such committee or committees must have responsibility for, among other things, recommending candidates to be nominated by the board of directors, in addition to any other nominations by voting shareholders, for election as directors by the voting shareholders. Section 1405(c)(5) of the Holding Companies Act provides that the above provisions shall not apply to a domestic insurer if the person controlling such insurer is an insurer or another business entity having a board of directors and committees thereof which already meet the requirements of Section 1405(c)(4.1). For purposes of the Holding Companies Act, we are deemed to control the Exchange, its subsidiaries and EFL, and our board of directors and its committees are in compliance with Section 1405(c)(4.1).

 

Section 3.09 of our bylaws is consistent with this statutory provision and provides that (i) our board of directors must appoint annually a nominating committee that consists of not less than three directors, each of whom is not an officer or employee of us or of any entity controlling, controlled by or under common control with us, and (ii) our nominating committee must, prior to each annual meeting of shareholders, determine and nominate candidates for the office of director to be elected by the holders of Class B common stock to serve terms as established by our bylaws and until their successors are elected.

 

In accordance with this bylaw provision, on April 20, 2010 our board of directors designated a nominating committee consisting of Jonathan Hirt Hagen, chair, Susan Hirt Hagen, Thomas W. Palmer and Elizabeth Hirt Vorsheck. Thomas B. Hagen is, ex officio, also a voting member of the nominating committee. Consistent with the Holding Companies Act, none of these persons is an officer or employee of us or of any entity controlling, controlled by or under common control with us. Each member of our nominating committee is an independent director as defined in the rules applicable to companies listed on the NASDAQ Global Select Market^®, or “NASDAQ.”

 

Nominating Procedures

 

Under Section 2.07(a) of our bylaws, nominations of persons for election to our board of directors may be made at any meeting at which directors are to be elected (i) by or at the direction of our board of directors upon the recommendation of our nominating committee or (ii) by any holder of our Class B common stock.

 

With respect to nominations by or at the direction of our nominating committee, except as is required by rules promulgated by NASDAQ, the SEC or the Holding Companies Act, there are no specific, minimum qualifications that must be met by a candidate for our board of directors, and our nominating committee may take into account such factors as it deems appropriate. Our nominating committee generally bases its nominations on our general needs as well as the specific attributes of candidates that would add to the overall effectiveness of our board of directors. Specifically, among the significant factors that our nominating committee may take into consideration are judgment, skill, experience with businesses and other organizations of comparable size, the interplay of the candidate’s experience with the experience of other directors, and the extent to which the candidate would be a desirable addition to our board of directors and any committee of our board of directors.

 

Although we do not have a formal policy or guidelines regarding diversity of membership of our board of directors, our corporate governance guidelines recognize the value of having a board that encompasses a broad range of skills, expertise, contacts, industry knowledge and diversity of opinion. Our board has not attempted to define “diversity” or otherwise require that the composition of our board include individuals from any particular background or who possess specific attributes.

 

In identifying and evaluating the individuals that it selects, or recommends that our board of directors select, as director nominees, our nominating committee utilizes the following process:

 

 

 

Actions Taken for Nominations

 

Our nominating committee met on February 19, 2011 for the purposes of evaluating the performance and qualifications of the current or proposed members of our board of directors and nominating candidates for election as directors by the holders of Class B common stock at our annual meeting.

 

Our bylaws provide that our board of directors shall consist of not less than 7, nor more than 16, directors, with the exact number to be fixed from time to time by resolution of our board of directors. Our nominating committee recommended at its February 19, 2011 meeting that the size of our board of directors remain at 13 persons and that all 13 incumbent directors as of such date be nominated to stand for re-election as directors by the holders of Class B common stock at our annual meeting.

 

On February 24, 2011, our board of directors accepted the report and recommendation of our nominating committee, set the number of directors to be elected at our annual meeting at 13 and approved the nomination of J. Ralph Borneman, Jr., Terrence W. Cavanaugh, Jonathan Hirt Hagen, Susan Hirt Hagen, Thomas B. Hagen, C. Scott Hartz, Claude C. Lilly, III, Lucian L. Morrison, Thomas W. Palmer, Martin P. Sheffield, Richard L. Stover, Elizabeth Hirt Vorsheck and Robert C. Wilburn for election as directors by the holders of Class B common stock at our annual meeting. If elected, such persons would serve until our 2012 annual meeting of shareholders and until their successors are elected and qualified.

 

Candidates for Election

 

Unless otherwise instructed, the proxy holders will vote the proxies received by them for the election of the nominees named below. All of the nominees are currently directors of the Company. If a nominee becomes unavailable for any reason, it is intended that the proxies will be voted for a substitute nominee selected by our nominating committee. Our board of directors has no reason to believe the nominees named will be unable to serve if elected.

 

The biography of each director nominee below contains information regarding that person’s principal occupation, positions held with the Company, service as a director, committee assignments, business experience, other director positions currently held or held at any time during the past five years, involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes or skills that caused our nominating committee to conclude that the person should serve as a member of our board of directors:

 

 

 

 

C Denotes committee chairperson.

Our board of directors has determined that each of the following directors and director nominees satisfies the definition of an “independent director” as set forth in the rules promulgated by NASDAQ:

 

Jonathan Hirt Hagen

Susan Hirt Hagen

Thomas B. Hagen

C. Scott Hartz

Claude C. Lilly, III

Lucian L. Morrison

Thomas W. Palmer

Martin P. Sheffield

Richard L. Stover

Elizabeth Hirt Vorsheck

Robert C. Wilburn

 

Required Vote. Cumulative voting rights do not exist with respect to the election of directors. Of the 13 candidates for election as a director, only those who receive the affirmative vote of holders of a majority of the shares of Class B common stock will be elected or re-elected to our board of directors.

 

OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE CANDIDATES FOR DIRECTOR NOMINATED BY OUR NOMINATING COMMITTEE.

 

Introduction

 

Our board of directors is currently comprised of 13 members, all of whom were elected at our 2010 annual meeting to serve for a term of one year. Vacancies on our board of directors may be filled only by persons elected by a majority of the remaining directors, or by our voting shareholders, in accordance with our bylaws.

 

All directors hold office until their respective successors are elected and qualified, or until their earlier death, resignation or removal. There are no family relationships between any of our directors or executive officers, except for the following:

 

 

During 2010, each director attended more than 75% of the number of meetings of our board of directors and the standing committees of our board of directors of which such director was a member.

 

Board Leadership and Executive Sessions

 

The chairman of our board of directors is elected annually by the remaining directors on our board. In addition to presiding at all meetings of shareholders and of our board of directors, the chairman’s duties include setting priorities, establishing agendas for meetings of the board, providing board leadership, and communicating with the CEO on matters of strategic direction. The chairman also serves ex officio as a member of all other board committees of which he is not a designated member.

 

Since our incorporation in 1925, we have traditionally separated the positions of chairman of the board and chief executive officer of the Company. Although our board of directors has no specific policy regarding separation of these offices and our bylaws permit the chairman to serve as chief executive officer, our board has determined that separating these positions is currently in the best interest of the Company and our

shareholders. Given the length of time and different capacities in which our current chairman has served the Company, including as a prior chief executive officer, and his status as an independent director under NASDAQ rules, our board believes that separating these positions is an important component of our management succession plan, and allows our chairman to lead the board in its independent oversight of management and our CEO to focus on the day-to-day issues affecting our business.

 

A majority of the directors on our board meet the definition of an “independent director” under NASDAQ rules. Our independent directors meet in executive session without management directors or management present. These sessions generally take place prior to or following regularly scheduled board meetings. The directors met in such sessions five times during 2010.

 

Risk Oversight

 

Our board of directors oversees our risk management process. This oversight is primarily accomplished through the board’s committees and management’s reporting processes. We do not have a formal risk committee; however, our audit committee focuses on risk related to accounting, internal controls and financial and tax reporting. The audit committee also assesses economic and business risks and monitors compliance with ethical standards. Our Executive Compensation and Development Committee, or “compensation committee,” identifies and oversees risks associated with our executive compensation policies and practices, and our nominating committee identifies and oversees risks associated with director independence, related party transactions and the implementation of corporate governance policies.

 

Committees of Our Board

 

Our board of directors met five times in 2010. The standing committees of our board of directors are our executive committee, audit committee, compensation committee, nominating committee, charitable giving committee, investment committee, strategy committee and exchange relationship committee.

 

Our executive committee, which did not meet during 2010, has the authority, subject to certain limitations, to exercise the power of our board of directors between regular meetings.

 

Our audit committee met seven times in 2010. Consistent with Section 1405(c)(4) of the Holding Companies Act and the Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley,” our audit committee has responsibility for the selection of independent registered public accountants, reviewing the scope and results of their audit and reviewing our financial condition and the adequacy of our accounting, financial, internal and operating controls. Our audit committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

Our compensation committee met five times in 2010. Consistent with Section 1405(c)(4.1) of the Holding Companies Act and our bylaws, our compensation committee has responsibility for recommending to our board of directors, at least annually, the competitiveness and appropriateness of the salaries, short- and long-term incentive plan awards, terms of employment, non-qualified retirement plans, severance benefits and perquisites of our chief executive officer, executive vice presidents and such other named executives as required by rules of the SEC or NASDAQ listing standards, and such other responsibilities as our board of directors may designate. See Executive Compensation — Compensation Committee Interlocks and Insider Participation. Our compensation committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

Our nominating committee met two times in 2010. Consistent with Section 1405(c)(4.1) of the Holding Companies Act and our bylaws, our nominating committee has responsibility for identification of individuals believed to be qualified to become members of our board of directors and to recommend to our board of directors nominees to stand for election as directors; identification of directors qualified to fill vacancies on any committee of our board; and evaluation of the procedures and process by which each committee of our board of directors undertakes to self-evaluate such committee’s performance. Our nominating committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

Our shareholders may communicate with our board of directors through our secretary. Shareholders who wish to express any concerns to any of our directors may do so by sending a description of those concerns in writing addressed to a particular director, or in the alternative, to “Non-management Directors” as a group, care of our secretary at our headquarters, 100 Erie Insurance Place, Erie, Pennsylvania 16530. All such communications that are received by our secretary will be promptly forwarded to the addressee or addressees set forth in the communication.

 

Recognizing that director attendance at our annual meeting can provide our shareholders with an opportunity to communicate with directors about issues affecting us, we actively encourage our directors to attend our annual meeting. In 2010, all of our directors attended our annual meeting.

 

Overview

 

Our executive compensation program is developed and monitored by our compensation committee. The committee establishes the compensation philosophy and policies for our executive officers, which include our CEO and executive vice presidents. In fulfilling this role, the committee is responsible for establishing principles that guide the design of compensation programs for all executives. In so doing, it reviews the performance results of each executive and establishes individual compensation levels. The compensation committee engaged an outside consultant, Aon Hewitt, formerly Hewitt Associates, to assist with these duties in setting 2010 executive compensation. Although Aon Hewitt did not perform any additional services for our organization in 2010, we used Aon Risk Insurance Services, Inc. as our broker for our management liability insurance program and paid them $125,000 for these services in 2010.

 

The two primary corporate goals used for our performance plans in 2010 were the Property and Casualty Group’s statutory combined ratio and growth in direct written premium. We exceeded expectation on both corporate goals during 2010. Direct written premium increased by 4.5% in 2010 versus the target of 3.9%. This increase was primarily driven by a 3.3% increase in policies in force as we continue to have strong policyholder retention rates. The statutory combined ratio for 2010 was 99% versus the target of 101% which is the result of favorable prior year loss reserve development. This favorable prior year loss development improved the combined ratio by 4.8 points and resulted from improvements in severity trends on our personal auto line of business as well as certain commercial lines. Another key financial measurement is net operating income which was $163 million for 2010, an increase of 49% from 2009. This increase was primarily due to equity in earnings of limited partnerships in 2010 versus losses in 2009. Additional information regarding our financial results for the year ended December 31, 2010, is provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K filed with the SEC on February 24, 2011.

Named Executive Officers (NEOs)

 

In accordance with SEC regulations, our NEOs for 2010, as presented in our Summary Compensation Table, include the following:

 

 

Mr. Lucore retired from serving as our executive vice president of field operations on March 31, 2010. Although Mr. Ziegler is included hereafter as an NEO, as a senior vice president his compensation is reviewed and set by our chief financial officer.

 

Risk Management

 

We have a formal enterprise risk management program that falls under the leadership of our CFO. The purpose of this program is to promote risk-intelligent decision making and, in turn, increase the likelihood of achieving our corporate objectives. Our board of directors receives regular reports advising them of potential organizational risks and supporting mitigating policies.

 

The compensation committee evaluates risks associated with the annual and long-term incentive compensation programs for our executive and senior leader team each year to ensure that they do not negatively impact the value of the Company. The committee ensures that performance measures used in these programs align with our overall business strategy. One risk management tool is our stock retention requirement which is a prerequisite to continued participation in our annual incentive plan, or “AIP.” We believe that requiring executives to hold shares of our stock for an extended period of time discourages them from taking risks for short-term or immediate gain. In addition to the stock purchase and retention requirement, our compensation committee also has the ability to exercise discretion to reduce awards to any individual participant in the incentive plans. Finally, the committee balances compensation risk by comparing our property and casualty insurance results against a peer group in our long-term incentive plan, or “LTIP.” The committee closely monitors our results against those of our peers during the three-year performance period to see whether we are performing dramatically above or below the industry, which may be an indicator of inappropriate risk-taking by management.

 

Consistent with our pay-for-performance philosophy, we utilize annual variable pay programs for all other members of our management team and certain non-management employees. Approximately 900 of our 4,200 full-time employees participate in one of these programs. The corporate performance measures used in these programs are aligned with those used in the AIP for our executive and senior leaders. We believe this promotes alignment of efforts across the organization while minimizing conflict among management team members as they lead the organization to achieve operational goals each year. While the compensation committee does not directly oversee the variable pay programs, changes to compensation programs for all employees are communicated to the committee when they occur.

 

Compensation Philosophy

 

The goal of our executive compensation program is to attract, motivate, retain and reward executives in a fiscally responsible manner. To achieve this objective, we design executive compensation programs that encourage our executives to strive for performance that is better than the industry average. We provide a mix

of fixed and variable compensation that is intended to motivate our executives to execute on short and long-term objectives that build sustainable long-term value. We also believe our compensation program balances the interests of our primary stakeholders, our shareholders, with the policyholders of the Exchange.

 

Our variable compensation is tied to (1) each executive’s individual performance and (2) the overall performance of the company, thereby supporting our performance-based compensation philosophy. Because our executives have a greater ability to influence our financial performance through their decisions, the percentage of an executive’s total direct compensation (i.e., base salary, annual and long-term incentive plans) comprised of variable pay increases with their level of individual responsibility.

 

Base salary is a fixed level of income to our executives for the competencies and performance they demonstrate in their roles. Base salaries are linked to other compensation elements, including short- and long-term incentive plans. Targets in these plans are based upon a percentage of each executive’s base salary. Accordingly, we consider all elements of our executive compensation program when considering its potential to influence short- and long-term organizational success.

 

Setting Executive Compensation

 

As stated in the overview, our executive compensation program is developed and monitored by our compensation committee which establishes the compensation philosophy and policies for our executive officers, including our CEO and executive vice presidents. In fulfilling this role, the committee is responsible for establishing principles that guide the design of compensation programs for all executives. In so doing, it reviews the performance results of each executive and establishes individual compensation levels. The compensation committee engaged Aon Hewitt for recommendations concerning 2010 executive compensation. In setting 2010 executive compensation, the committee considered a formal report from Aon Hewitt which included an analysis of (1) market pay data collected from various published surveys from a broad group of property and casualty insurance companies and (2) data from publicly disclosed proxy materials of a select group of property and casualty insurance companies. Our compensation committee then considered the nature and extent of each executive’s skills, scope of responsibilities, performance and effectiveness in supporting our long-term goals.

 

In preparing the 2010 benchmark and survey data for our compensation committee’s consideration, the following methodology was used:

 

 

Executive Compensation Elements

 

We achieve our compensation objectives stated above by providing the following elements of executive compensation:

 

 

Base Salary

 

For 2010, the compensation committee approved the following base salary increases to recognize performance, change in responsibility and/or market comparables. Mr. Ziegler’s increase was in accordance with normal practices for other employees within our organization, since he is a senior vice president.

 

Base Salary

 

 

Annual Incentive Plan (AIP)

 

Our 2010 AIP payouts for our NEOs were based on the attainment of corporate and individual performance measures established at the beginning of 2010. With respect to the 2010 AIP, 80% of the award was based on corporate performance measures, while 20% was based upon individual performance measures for our CEO and executive vice presidents. For our senior vice presidents, 40% of the award was based on corporate performance measures, 40% was based upon divisional measures and the remaining 20% was based upon individual performance goals. Our compensation committee determined that linking annual incentive awards to individual performance for our executive and senior leadership team would result in increased differentiation of rewards and line of sight among participants.

2010 AIP Performance Measures and Weighting

 

 

 

 

Once the target percentages were determined, our compensation committee, after discussion with our board of directors, established appropriate AIP performance measures expected to drive strong organizational performance. Our board of directors and management reviewed our historical performance, operating goals and industry estimates to determine which areas needed to be incented to help us achieve our strategic objectives in the following year.

 

The compensation committee then set a minimum, or ‘threshold’, a target and a maximum for each performance measure. The maximum was intended to incent a participant’s performance to achieve a maximum performance payout. Results between the threshold and target provided a partial payout when a portion of the goal was achieved. The target goals for the growth and profitability measures were set at a level equal to or better than projected average industry performance.

 

The company performance measures for the NEOs are noted in the table below. See the 2010 AIP Performance Measures and Weighting table for the specific measures assigned to each NEO.

 

2010 Company Performance Measures

 

 

 

 

The committee believes these performance measures promote growth while maintaining a strong underwriting discipline (through the statutory combined ratio).

 

The following table describes the NEO individual goals, and Mr. Ziegler’s divisional goals, that account for the remaining portion of their AIP payouts.

 

 

The 2010 target and actual percentages for AIP awards earned are noted in the table below. AIP bonuses were paid on March 9, 2011.

 

2010 AIP Target and Actual Awards

 

 

 

 

The following table summarizes the results of the 2010 NEO individual goals and Mr. Ziegler’s divisional goals:

 

 

We continued to use a funding qualifier for the 2010 AIP. The compensation committee determined that it would be appropriate to first consider our overall financial results before a payout could be made based on our above property and casualty insurance measures. The funding qualifier is based on our net operating income (i.e., net income excluding realized gains or losses and impairments on investments and related taxes). Use of our net operating income helps to bring balance between shareholder interests and policyholder interests. In order for a payout to occur under the 2010 AIP, net operating income had to exceed $82 million, calculated as 75% of our 2009 net operating income. For 2010, our net operating income totaled $163 million, thereby exceeding the qualifier and funding the 2010 AIP.

Long-Term Incentive Plan (LTIP)

 

The purpose of our LTIP is to enhance our growth and profitability, and that of the Exchange, by providing longer term rewards to executives who are capable of having a significant impact on our performance. We accomplish this objective by providing eligible executives with incentives based on attainment of certain performance goals over three-year performance periods; performance is measured and compared to an industry peer group selected by the compensation committee.

 

For the 2010-2012 performance period under our LTIP, the peer group is comprised of the following companies: Allstate Insurance Group, American Family Insurance Group, Auto Owners Insurance Group, Cincinnati Insurance Companies, Country Financial, Farmers Insurance Group, Government Employees Insurance Group (GEICO), Grange Insurance Group, Liberty Mutual Insurance Companies, Nationwide Insurance Group, State Auto Insurance Companies, State Farm Insurance Group, Travelers Group and USAA Group. The compensation committee believes this peer group is representative of our competition as it comprises a large share of the industry’s property and casualty insurance premiums.

 

The tables below outline LTIP targets as a percentage of base salary, the criteria selected to ensure long-term sustainability and competitive positioning, as well as the weighting of the LTIP performance measures established by the compensation committee for the 2010-2012 performance period.

 

2010-2012 LTIP Targets

 

 

2010-2012 LTIP Performance Measures and Weighting

 

 

 

Given the nature of our business, underwriting profitability and return on investments are important to long-term financial strength. The Property and Casualty Group’s direct written premium growth is also important to our financial results as it is the primary driver of the management fee revenue we earn from the Exchange.

The 2008-2010 performance period is closed and participants have vested in those shares. Distribution of the shares will occur later in 2011 since computations require peer group data for the year ended December 31, 2010, which is not yet available. For this performance period, we have information on eleven of the twelve measurement quarters and expect the payout to be approximately 140% of target. See Executive Compensation — Outstanding Equity Awards table. Awards are expected to be paid in cash rather than stock for the 2009-2011 and 2010-2012 LTIP performance periods.

 

Executive Compensation Changes for 2011

 

In determining 2011 executive compensation, the committee used tally sheets prepared by management. The tally sheets set forth all components of the executive’s compensation, including base salary, annual and long-term incentive compensation, benefits, perquisites and retirement plan accruals. These tally sheets also contained a market review of each individual position. Based upon a review of this information and in recognition of performance, the compensation committee approved the following changes to executive compensation for 2011:

 

 

Policy on Recoupment of Officer Bonuses

 

The committee developed and our board of directors approved a “clawback” policy for our AIP and LTIP performance-based incentive compensation, effective July 1, 2009. To the extent permitted by law, our policy requires the reimbursement of all or a portion of any performance-based annual or long-term bonus paid to any officer after June 30, 2009 where (a) the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement, and (b) a lower payment would have been made to the officer based upon the restated financial results. In each such instance, the Company will, to the extent practicable, seek to recover the amount by which the officer’s bonus for the relevant period exceeded the lower payment that would have been made based on the restated financial results. We will not seek to recover bonuses paid more than two years prior to the date on which our board of directors was made aware of the need to restate our financial statements. We will continue to monitor regulatory requirements and adjust our policy as may be considered necessary.

 

We also have a policy which states that, to the extent permitted by law, officers are required to reimburse us for any performance-based annual or long-term bonus we paid to such officer after June 30, 2009 where the officer’s employment with us has been terminated for cause either prior to the payment of the bonus or within six months thereafter.

 

Stock Retention Program

 

Effective in 2009, we implemented an officers’ stock purchase and retention program that applies to all officers who participate in our AIP. Each participant is required annually to purchase shares of our Class A common stock, the aggregate purchase price of which must equal at least ten percent (10%) of the value of the

officer’s most recent AIP award. Shares of our Class A common stock previously acquired and shares purchased in an officer’s 401(k) savings plan do not count toward the minimum annual purchase requirement. However, shares of our Class A common stock acquired after 2009 by an officer under the Company’s 2004 LTIP, or under a similar plan or arrangement granted in lieu of the LTIP, may be used to satisfy these purchase requirements for 2010 and 2011. AIP participants are required to retain a portion of the stock purchased pursuant to this program until six months after the date on which such participant ceases to be an officer of the Company. 100% of any LTIP shares used to satisfy these purchase requirements must be retained until six months after the date on which such participant ceases to be an officer of the Company. The six-month post employment retention period does not apply in the event of the death of a participant.

 

The program provides that an officer who does not satisfy the minimum annual purchase requirement in any year shall not be eligible for an AIP award for the following year. Our board of directors retains the discretion to grant exceptions to the purchase and retention requirements, and to suspend the program entirely, where the application of these requirements would result in a hardship. The first year during which participants were required to purchase stock was 2010. Our NEOs satisfied this requirement for 2010.

 

Tax Implications of Executive Compensation

 

Section 162(m) of the Internal Revenue of 1986, or the “Code,” places a limit of $1.0 million on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers, subject to an exception for performance-based compensation that meets certain requirements. Our AIP and LTIP awards are performance-based and have been approved by our shareholders. As such, payments made under these plans are not included in the $1.0 million limit on deductible compensation. All of our compensation and individual incentive awards are subject to federal income, FICA and other tax withholdings as required by applicable law.

 

All compensation paid in 2010 to our NEOs is deductible under Section 162(m) of the Code. While our compensation committee strives to provide compensation opportunities to our executives in as tax-efficient a manner as possible, it recognizes that from time to time it may be in the best interest of our shareholders to provide non-tax deductible compensation.

 

Additional Benefits

 

We believe retirement benefits are an important part of a competitive reward opportunity that enables us to attract and retain top-tier leadership talent. Accordingly, we have maintained a tax-qualified defined benefit pension plan since 1946. The tax-qualified defined benefit pension plan has been available to all of our salaried employees since that time. We also provide a SERP to our NEOs in response to Code, which limits the maximum annual pension award that can be paid to any eligible employee. As illustrated in the Pension Benefits table, an older NEO can produce a significantly higher present value compared to a younger, more highly paid NEO. This result occurs primarily because the nearer an NEO is to normal retirement age, the shorter the discount period used in calculating the present value of the benefits. See also Executive Compensation — Pension Plan.

 

We maintain a deferred compensation plan in which executives are eligible to participate. This plan is an unfunded, non-qualified, deferred compensation arrangement created for a select group of management and highly compensated employees. Two of our NEOs participated in this plan in 2010. See Executive Compensation — Nonqualified Deferred Compensation.

 

Our executives also participate in the broad-based benefit plans offered generally to all of our full-time employees (e.g., 401(k) plan, health insurance and other employee benefits). Executive participation in these benefit plans is on the same terms as all of our other employees.

 

Agreements with Executive Officers

 

We have an employment agreement with Mr. Cavanaugh, our president and CEO. Because Mr. Cavanaugh joined us mid-career, his employment agreement was developed to provide him with a minimum level of

financial security. Terms of Mr. Cavanaugh’s agreement are included in Executive Compensation — Agreements with Executive Officers. Termination scenarios for all of our NEOs, with the exception of Mr. Lucore, are included in Executive Compensation — Potential Termination or Change in Control Payments.

 

The following table sets forth the compensation during 2010, 2009 and 2008 for our NEOs. Compensation disclosed herein is for services rendered in all capacities to us, EFL, the Exchange and their subsidiaries and affiliates. Compensation is allocated among us, the Exchange, EFL and their subsidiaries and affiliates according to an estimated proportion of the executives’ time dedicated to the affairs of the various entities. Our share of total compensation expense for the NEOs in 2010, 2009 and 2008 was 55.6%, 54.4% and 56.2%, respectively. Amounts indicated are pre-individual income taxes.

 

Summary Compensation Table

 

 

 

 

Stock Awards: Long-Term Incentive Plans

 

The 2004 LTIP, administered by our compensation committee, became effective March 2, 2004 and was amended and restated effective January 1, 2009. The restatement of the LTIP added a new form of award that provides for payment in cash and/or stock, and expands the list of performance measures that can be used to

establish performance goals. Awards for the 2010-2012 and 2009-2011 performance period are expected to be cash payments. For these performance periods, the LTIP’s specified performance criteria have not yet been satisfied and amounts have not been earned. Disclosure of the target and maximum award amounts for the 2010-2012 performance period appear in the Grants of Plan-Based Awards Table rather than the “Stock Awards” column of the Summary Compensation Table because the award is payable in cash. Awards for the 2008-2010 performance period are payable in shares of Class A common stock and amounts shown in the Summary Compensation Table for 2008 reflect the grant date fair value of these awards as further described below.

 

For 2008, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $52.08 on April 7, 2008, the date our compensation committee formally approved the 2004 LTIP performance goals for the 2008-2010 performance period. For this performance period, Mr. Cavanaugh was not an official participant in the LTIP, however, he will receive stock payments outside the plan equal to the amount he would have earned if he were a participant, pro-rated to reflect his service during the three-year performance period. Additionally, Mr. Cavanaugh was awarded 16,000 restricted stock units which will be earned ratably through July 2011; he will be paid dividends on these shares equal to the then-prevailing dividend rate per share multiplied by the number of shares that have not yet been issued. For Mr. Cavanaugh, the grant date fair value of the award was calculated by multiplying the target equity incentive plan award by the closing share price of $42.62 on July 14, 2008, the date of Mr. Cavanaugh’s employment agreement.

 

The 2008-2010 performance period is closed and participants vested in those shares on December 31, 2010. However, distribution of the shares will not occur until later in 2011 since computations require peer group data for the year ended December 31, 2010, which is not yet available. Accordingly, the amounts are reported in the Outstanding Equity Awards table.

 

Change in Pension Value and Non-Qualified Deferred Compensation Earnings

 

The Summary Compensation Table includes the net change in the present value of accrued benefits from December 31, 2009 to December 31, 2010 under our pension plan, a tax-qualified defined benefit pension plan, and our SERP, a non-qualified defined benefit arrangement. The present value information presented utilizes assumptions consistent with those used for fiscal year 2010 disclosure under FASB Accounting Standards Codification 715, “Compensation — Retirement Plans.” Discount rates used for December 31, 2008, 2009 and 2010 were 6.06%, 6.11%, and 5.69%, respectively (5.00% post-retirement discount rate for our SERP for 2008 and 2009 and 5.19% for 2010).

 

There are no above-market or preferential non-qualified deferred compensation earnings to disclose in this column. See the Nonqualified Deferred Compensation section for a description of the investment funds and earnings.

All Other Compensation

 

The following table provides details of the amounts presented in the All Other Compensation column.

 

Supplemental Table for All Other Compensation

 

 

 

Grants of Plan-Based Awards

 

The following table summarizes awards that were eligible to be earned during 2010 under our AIP and LTIP plans.

 

Grants of Plan-Based Awards Table for 2010

 

 

 

 

An executive’s target award is established by our compensation committee. The target number of performance units for each executive is based on a competitive total direct compensation target opportunity and an agreed-upon target pay mix. When our compensation committee approves target awards, it also approves the performance measures, performance goals and the calibration of shares and/or cash awarded at performance levels above and below the target performance goals. Our compensation committee has the ability to exercise discretion to reduce awards to any individual participant in the incentive plans, and we have a policy for recoupment of officer bonuses. See Compensation Discussion and Analysis.

 

Under the 2004 LTIP, the actual cash award paid to an executive at the end of a performance period may be more or less than the executive’s target. However, the cash award paid to an executive may not exceed $3 million at the end of a performance period. See also “Incentive Plans and Deferred Compensation,” in the notes to consolidated financial statements contained in our 2010 annual report.

Outstanding Equity Awards

 

The following table details outstanding equity awards at December 31, 2010. Ms. Dall did not have any outstanding equity awards at December 31, 2010.

 

Outstanding Equity Awards at December 31, 2010

 

 

 

 

All shares in the above table were valued using the closing share price of $65.47 at December 31, 2010. All shares noted are outstanding under the 2004 LTIP with the exception of Mr. Cavanaugh’s. In accordance with Mr. Cavanaugh’s employment agreement, he was not eligible to officially participate in the 2008-2010 LTIP performance period but his award was calculated using the same LTIP targets, measures and percentages. Mr. Cavanaugh’s 6,400 units of restricted stock will be issued to him in July 2011.

 

The 2008-2010 performance period is closed and participants vested in those shares on December 31, 2010. However, distribution of the shares will not occur until later in 2011 since computations require peer group data for the year ended December 31, 2010, which is not yet available. Accordingly, the amounts are reported in this table rather than the Option Exercises and Stock Vested During Fiscal Year 2010 table below.

Option Exercises and Stock Vested

 

The following table details stock vested during 2010. We do not offer option awards to our executives. Ms. Dall and Mr. Lucore did not vest in any shares during 2010.

 

Option Exercises and Stock Vested During 2010

 

 

In accordance with his employment agreement, Mr. Cavanaugh was awarded stock in the form of restricted stock units. On July 29, 2010, 4,800 shares were awarded to him using a $48.75 share price, which is the average of the high and low stock price on that date.

 

For Messrs. Zavasky and Ziegler, the number of shares acquired upon vesting relates to the 2004 LTIP performance period of 2007-2009. The shares were valued using a $44.48 share price, which was the average of the high and low stock price on July 1, 2010, the date the shares were awarded. For this performance period, Mr. Tanous was not an official participant in the LTIP, however, he did receive a stock payment outside the plan equal to the amount he would have earned if he were a participant, pro-rated to reflect his service during the three-year performance period.

 

Pension Plan

 

The Pension Benefits table below includes the present value of accrued benefits under our defined benefit pension plan and our SERP as of December 31, 2010. Messrs. Zavasky, Ziegler and Lucore are 100% vested in our pension plan. Messrs. Cavanaugh, Zavasky and Lucore are 100% vested in our SERP plan.

 

The present value information presented in the Pension Benefits table utilizes assumptions consistent with those used for fiscal year 2010 disclosure under FASB Accounting Standards Codification 715, “Compensation — Retirement Plans,” including a 5.69% discount rate as of December 31, 2010 (5.19% post-retirement discount rate for our SERP) and assumes a retirement age of 65 and no pre-retirement decrements for our pension plan and our SERP.

Pension Benefits at December 31, 2010

 

 

 

 

Normal retirement age under both our pension plan and our SERP is age 65 because that is the earliest time that an executive could retire and commence benefit payments under the plans without any benefit reduction due to age.

 

Under our pension plan, the executive’s final average earnings are the average of the executive’s highest 36 consecutive months of compensation during his final 120 months of employment. Under our SERP, the executive’s final average earnings are the average of the executive’s highest 24 consecutive months of compensation during the executive’s final 120 months of employment. For this purpose, compensation includes base salary and a lump sum paid in lieu of a merit increase but excludes bonuses, deferred compensation plan payments and severance pay under any severance benefit plan. An executive’s compensation that exceeds annual limits imposed by the Code is excluded in computing benefits derived under our pension plan but included in computing benefits due under our SERP.

 

Each executive’s “credited service” is generally defined as the executive’s years of employment with us as a covered employee, up to a maximum of 30 years. Messrs. Zavasky and Lucore completed more than 30 years of service.

 

For purposes of determining the number of years of credited service that will be used to calculate the amount of the executive’s benefit, the executive, as well as all other employees, earns a full year of credited service for a partial year of employment as a covered employee.

 

Supplemental plan service in our SERP means employment with us as both a covered employee and SERP participant.

Our pension plan’s benefit formula at normal retirement age is 1.0% of the executive’s final average earnings up to the social security-covered compensation level (an amount published each year by the Social Security Administration) plus 1.5% of the final average earnings in excess of the social security covered compensation level with the resulting sum multiplied by the executive’s years of credited service, up to a maximum of 30 years. Our pension plan’s benefit is accrued in the form of a single life annuity with optional actuarially-equivalent forms of payment available.

 

The SERP’s benefit formula at normal retirement age is equal to 60% of SERP final average earnings, reduced proportionately for less than 30 years of credited service. This benefit is accrued in the form of a 10-year certain and life annuity. The executive’s benefit that is payable under our pension plan is subtracted from our SERP benefit. For purposes of this offset, such monthly benefits which are payable in a form other than a 10-year certain and life thereafter annuity are converted to a monthly benefit which is the actuarial equivalent of a 10-year certain and life thereafter annuity. A lump sum is the only available form of payment from the SERP.

 

Each executive may become eligible for a SERP benefit only in the event that:

 

 

 

Executives in our pension plan and our SERP are eligible for early retirement after attaining age 55 and completing at least 15 full years of service as a covered employee. The executive’s early retirement benefit under these plans is reduced by 0.25% for each complete calendar month up to 60 months and 0.375% for each complete calendar month in excess of 60 months by which the executive’s early retirement benefit commencement date precedes such executive’s normal retirement date. Messrs. Ziegler, Zavasky and Lucore satisfied the plans’ eligibility requirements for early retirement.

 

See also “Postretirement Benefits,” in the notes to consolidated financial statements included in our 2010 annual report that describes plan assumptions in more detail.

 

Nonqualified Deferred Compensation

 

We maintain a deferred compensation plan in which executives are eligible to participate. The deferred compensation plan is an arrangement whereby the participants can elect to defer receipt of a portion of their compensation until a later date. Executives may elect to defer up to 100% of their annual salary and up to 100% of any cash award under our AIP. Those participating in the plan select hypothetical investment funds for their deferrals and are credited with the hypothetical returns generated. This plan is an unfunded, non-qualified, deferred compensation arrangement created for a select group of our management and highly compensated employees.

 

Executives identify:

 

 

 

The following table summarizes NEO contributions, our contributions, credited earnings, withdrawals and the aggregate balance as of December 31, 2010. Ms. Dall, Mr. Tanous and Mr. Lucore did not have any nonqualified deferred compensation in 2010.

 

Nonqualified Deferred Compensation Table for 2010

 

 

 

 

With the exception of the T. Rowe Price Science and Technology Fund, the plan’s hypothetical investment funds mirror investment options that are offered to the executives in our tax-qualified 401(k) plan. As in our 401(k) plan, executives participating in our deferred compensation plan may exchange investment funds daily. The return credited to their deferred compensation plan accounts is determined by the investment results of the hypothetical investment funds selected.

 

Agreements with Executive Officers

 

We have an employment agreement with Mr. Cavanaugh, our president and CEO. Because he joined us mid-career, his employment agreement was developed to provide him with a minimum level of financial security during his term. The compensatory provisions of Mr. Cavanaugh’s agreement include the following:

 

 

 

 

Unless terminated earlier as provided for in the document, Mr. Cavanaugh’s employment agreement expires December 31, 2011. For a discussion of compensation payable to Mr. Cavanaugh under various termination scenarios, see the Termination and Change in Control Table.

 

Potential Termination or Change in Control Payments

 

Potential salary and benefits payments expected under various termination scenarios are disclosed below for the NEOs who were employed as of December 31, 2010. We developed the compensation and benefit

amounts disclosed in the table below considering a termination date of December 31, 2010. Amounts represent only payments estimated in addition to the other compensation disclosed herein.

 

Termination and Change in Control Table