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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ERIE INDEMNITY COMPANY

(Name of Registrant as Specified In Its Charter)

 

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD MAY 5, 2009

 

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

 

We will hold our annual meeting of shareholders at 9:30 a.m., local time, on Tuesday, May 5, 2009, 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 elect 12 persons to serve as directors until our 2010 annual meeting of shareholders and until their successors are elected;

 

2. To consider and act upon a proposal to approve certain amendments to our bylaws to change the timing of our annual meeting of shareholders and change our advance notice requirements relating to shareholder proposals;

 

3. To consider and act upon a proposal to approve the continuation of our Annual Incentive Plan, as restated, for the purpose of maintaining its qualification under Section 162(m) of the Internal Revenue Code of 1986 (the “Code”);

 

4. To consider and act upon a proposal to approve the continuation of our Long-Term Incentive Plan, as restated, for the purpose of maintaining its qualification under Section 162(m) of the Code; 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, 2008, are being sent to all holders of Class A common stock and Class B common stock as of the close of business on Friday, March 6, 2009, the record date established by our board of directors. Holders of Class B common stock will also receive a form of proxy in accordance with the Pennsylvania Business Corporation Law of 1988. 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

 

April   , 2009

Erie, Pennsylvania

 

NOTICE OF INTERNET AVAILABILITY OF ANNUAL MEETING MATERIALS

 

Important Notice Regarding the Availability of this Information Statement for the Annual Meeting of Shareholders to be held on May 5, 2009.

 

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 and our three property and casualty insurance subsidiaries. Our property and casualty insurance subsidiaries are Erie Insurance Company, or “Erie Insurance Co.,” Erie Insurance Company of New York, or “Erie NY,” and Erie Insurance Property & Casualty Company, or “EI P&C.” We sometimes refer to Erie Insurance Exchange as the “Exchange” and to the Exchange, its subsidiary and our three property and casualty insurance subsidiaries as the “Property and Casualty Group.” In addition, we hold investments in both affiliated and unaffiliated entities, including 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 78.37% of EFL’s Common Stock.

 

 

TABLE OF CONTENTS

 

 

Preliminary Information Statement Dated March   , 2009

ERIE INDEMNITY COMPANY

 

100 Erie Insurance Place
Erie, Pennsylvania 16530

 

 

INFORMATION STATEMENT

 

 

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 April   , 2009, is furnished to such holders to provide information regarding us and our 2009 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 2009 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, May 5, 2009 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 in accordance with the Pennsylvania Business Corporation Law of 1988, or the “BCL.”

 

Only holders of Class B common stock of record at the close of business on March 6, 2009 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 is otherwise provided in Sections 1756(b)(1) and (2) of the 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 and the proposals to amend our bylaws and approve the continuation of our Annual Incentive Plan, or “AIP,” and our Long-Term Incentive Plan, or “LTIP.” Abstentions and shares of Class B common stock held by nominees as to which we have not received voting instructions from the beneficial owner of, 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 March 6, 2009, we had 51,248,893 shares of Class A common stock outstanding, which are not entitled to vote on any matters to be acted upon at our 2009 annual meeting, and 2,551 shares of Class B common stock outstanding, which have the exclusive right to vote on all matters to be acted upon at our 2009 annual meeting.

 

There are two H.O. Hirt Trusts, one for the benefit of Susan Hirt Hagen, or “Mrs. Hagen,” and one for the benefit of F. William Hirt, or “Mr. Hirt,” until his death on July 13, 2007. The trust established for Mr. Hirt continues for the benefit of certain contingent beneficiaries as provided for in the trust agreement. The H.O. Hirt Trusts collectively own 2,340 shares of Class B common stock, which, because such shares represent 91.73% of the outstanding shares of Class B common stock entitled to vote at our 2009 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 2009 annual meeting, the individual trustees of the H.O. Hirt Trusts are Mrs. Hagen and Elizabeth A. Vorsheck, or “Mrs. Vorsheck,” and the corporate trustee is Sentinel Trust Company, L.B.A., or “Sentinel.”

 

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 both of the H.O. Hirt Trusts vote for the election of the 12 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. In addition, if at least a majority of the trustees then in office of the H.O. Hirt Trusts vote for the proposals to amend our bylaws and approve the continuation of the AIP and LTIP, such proposals will be approved even if all shares of Class B common stock other than those held by the H.O. Hirt Trusts do not vote for such proposals. 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.

We operate as a property and casualty insurer through our subsidiaries and also as a provider of management services to the Exchange. Since 1925, we have served as the attorney-in-fact for the policyholders of the Exchange. The Exchange is a reciprocal insurance exchange, which 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. 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.

 

The Property and Casualty Group writes personal and commercial lines of property and casualty insurance coverages exclusively through approximately 2,032 independent agencies comprised of more than 8,800 licensed representatives and pool their underwriting results. Our financial results are not consolidated with those of the Exchange. As a result of the Exchange’s 94.5% participation in the underwriting results of the Property and Casualty Group, the underwriting risk of the Property and Casualty Group’s business is largely borne by the Exchange.

 

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 72.3%, 72.2% and 83.6%, respectively, of our revenues for the three years ended December 31, 2006, 2007 and 2008. The management fee rate was 24.75% during 2006, and 25% during 2007 and 2008. Beginning January 1, 2009, the rate has been set at 25%.

 

The following table sets forth as of March 6, 2009 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 March 6, 2009 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 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 10% or greater shareholders, and our review of the statements of changes of ownership filed with us by our officers and directors and 10% or greater shareholders during 2008, we believe that all such filings required during 2008 were made on a timely basis, except that Elizabeth A. Vorsheck, a director, untimely (i) reported the acquisition of 66,000 shares of Class A common stock received on April 2, 2008, which shares were reported on a Form 5 Annual Statement of Changes in Beneficial Ownership filed on February 2, 2009; and (ii) filed a Form 4 Statement of Changes in Beneficial Ownership on November 24, 2008 to report the purchase of 5,000 shares of Class A common stock purchased on November 19, 2008.

 

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 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

 

Prior to September 8, 2008, Section 1405(c)(4) of the Holding Companies Act, which applies to us, provided 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 and who are not beneficial owners of a controlling interest in the voting stock of the insurer or any such entity. Such committee or committees must have responsibility for, among other things, nominating candidates for election as directors by the shareholders. On September 8, 2008 certain amendments to the Holding Companies Act became effective including the addition of Section 1405(c)(4.1) which eliminated the requirement that a director serving on a nominating committee not be a beneficial owner of a controlling interest in the voting stock of the insurer or of any entity controlling, controlled by or under common control with the insurer.

 

Throughout 2008, Section 3.09 of our bylaws was consistent with this statutory provision and provided that (i) our board of directors must appoint annually a nominating committee that consists of not less than three directors who are not officers or employees of us or of any entity controlling, controlled by or under common control with us and who are not beneficial owners of a controlling interest in our voting securities 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 22, 2008 our board of directors designated a nominating committee consisting of Jonathan Hirt Hagen, chair, Patricia A. Garrison-Corbin and Thomas W. Palmer. 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 or a beneficial owner of a controlling interest in our voting stock or any such entity. 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.”

 

Effective January 1, 2009, we amended Section 3.09 of our bylaws to eliminate the requirement that a director serving on our nominating committee not be a beneficial owner of a controlling interest in the voting stock of us or of any entity controlling, controlled by or under common control with the us.

 

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 nominating committee or (ii) by any holder of our Class B common stock. For a description of proposed changes to Section 2.07 of our bylaws, see “Proposal 2” in this information statement.

 

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, diversity, 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.

 

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 March 5, 2009 for the purpose 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 March 5, 2009 meeting that the size of our board of directors remain at 12 persons and that all directors as of such date be nominated for re-election.

 

On March 9, 2009, our board of directors accepted the report of our nominating committee, set the number of directors to be elected at our annual meeting at 12 and approved the nomination of J. Ralph Borneman, Jr., Terrence W. Cavanaugh, Patricia A. Garrison-Corbin, Jonathan Hirt Hagen, Susan Hirt Hagen, Thomas B. Hagen, C. Scott Hartz, Claude C. Lilly, III, Lucian L. Morrison, Thomas W. Palmer, Elizabeth A. Vorsheck and Robert C. Wilburn for election as directors by the holders of Class B common stock at our annual meeting. On March 11, 2009, we issued a press release and filed a current Report on Form 8-K with the SEC for the purpose of announcing publicly our nominating committee’s slate of director nominees in accordance with Section 2.07(a)(3) of our bylaws.

 

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. 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 names of the candidates for director nominated pursuant to the procedures discussed above, together with certain information regarding them, are as follows:

 

 

 

 

C  Denotes committee chairperson.

 

Our board of directors has determined that each of the following directors is an “independent director” as defined under the rules promulgated by NASDAQ:

 

Patricia A. Garrison-Corbin
Jonathan Hirt Hagen
Susan Hirt Hagen
Thomas B. Hagen
C. Scott Hartz
Claude C. Lilly, III
Lucian L. Morrison
Thomas W. Palmer
Elizabeth A. Vorsheck
Robert C. Wilburn

 

Our Board of Directors and its Committees

 

Our board of directors met seven times in 2008. The standing committees of our board of directors are our executive committee, our audit committee, our compensation committee, our nominating committee, our charitable giving committee, our investment committee, our strategy and technology committee and our exchange relationship committee.

 

Our executive committee, which did not meet during 2008, has the authority, subject to certain limitations, to exercise the power of our board of directors between regular meetings.

Our audit committee met nine times in 2008. 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 eleven times in 2008. 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, variable compensation, short- and long-term incentive plan awards, terms of employment, non-qualified retirement plans, severance benefits and perquisites of our chief executive officer and our 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 six times in 2008. Consistent with Section 1405(c)(4.1) of the Holding Companies Act and our bylaws, our nominating committee has responsibility for:

 

 

Our nominating committee operates pursuant to a written charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com.

 

All directors hold office until their respective successors are elected or until their earlier death, resignation or removal. Officers serve at the discretion of our board of directors, subject to the provisions of certain employment agreements discussed under “Executive Compensation — Agreements with Executive Officers.” There are no family relationships between any of our directors or executive officers, except that:

 

 

During 2008, 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.

 

Required Vote. Cumulative voting rights do not exist with respect to the election of directors. Of the 12 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” THE 12 CANDIDATES FOR DIRECTOR NOMINATED BY OUR NOMINATING COMMITTEE.

 

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 2008, eight of our directors attended our annual meeting.

 

Overview

 

Our executive compensation program is developed and monitored by our Executive Compensation and Development Committee (“Compensation Committee”). A complete description of the committee’s function and responsibilities is set forth in its charter, a copy of which may be viewed on our website at: http://www.erieinsurance.com. Our Compensation Committee determines the compensation philosophy and policies for our executive officers. In fulfilling this role, the committee is responsible for establishing principles that guide the design of compensation programs for all executives. In so doing, the committee reviews the performance results of each executive and establishes individual compensation levels. In accordance with SEC regulations we have determined our Named Executive Officers (“NEO”) as presented in our Summary Compensation Table. Although Douglas F. Ziegler is included hereafter as an NEO, as a senior vice president for our organization, his compensation is reviewed and set by our chief executive officer.

 

Our Compensation Committee regularly meets without officers or employees present to discuss executive compensation matters. Our Compensation Committee meets annually without the chief executive officer present and evaluates his performance compared to previously established company financial and personal, non-financial goals. Our Compensation Committee discusses its performance evaluation with the independent members of our board of directors in executive session before making appropriate compensation adjustments. Our chief executive officer annually evaluates the performance of our executive officers named in the Summary Compensation Table other than himself, and recommends to our Compensation Committee any merit increases to base salaries.

 

Overall Program Objectives

 

The goal of our executive compensation program is to attract, motivate, retain and reward executives in a fiscally responsible manner. To achieve these objectives, we design executive compensation programs that support our business strategy by clearly communicating our expectations of executives through goals that reward achievement. We also believe that our program is aligned with the interests of our primary stakeholders: our shareholders and the policyholders of the Erie Insurance Exchange (the “Exchange”). We structure our compensation program to align actual compensation with performance, delivering more compensation to executives when we achieve higher performance and thereby delivering increased value to our shareholders and policyholders of the Exchange, while delivering less compensation when we achieve lower financial performance results. The members of our Compensation Committee deliberate to ensure that thresholds, targets, weightings and maximum performance goals are sufficiently robust to warrant an incentive payout or a superior award.

 

We seek to achieve our objectives by providing several different elements of executive compensation:

 

 

 

Setting Executive Compensation

 

The Compensation Committee did not engage consultants for recommendations concerning the 2008 executive compensation. In setting 2008 executive compensation, our Compensation Committee used an internally-prepared analysis of (1) market pay data collected from various published surveys from a broad group of property/casualty insurance companies and (2) data from publicly disclosed proxy materials of a select group of property/casualty insurance companies. In preparing the 2008 benchmark and survey data for our Compensation Committee’s consideration, we used the following methodology:

 

 

Background

 

During 2008, we continued to rebuild and augment our executive management capabilities. At year’s end we had five Executive Officers on our Executive leadership team: Terrence W. Cavanaugh, our new President and CEO; Philip A. Garcia, Executive Vice President and Chief Financial Officer since 1997; James J. Tanous, Executive Vice President, Secretary and General Counsel since April 2007; Michael S. Zavasky, Executive Vice President — Insurance Operations; and George R. Lucore, Executive Vice President — Field Operations. Mr. Zavasky and Mr. Lucore were appointed Executive Vice Presidents in March of 2008. Mr. Zavasky and Mr. Lucore have served 31 and 34 years, respectively, with the Erie Insurance Group prior to filling these positions. Mr. Cavanaugh joined our organization on July 29, 2008 from the Chubb Group of Insurance Companies where he served in various capacities over his 33-year career there, last serving as Senior Vice President and Chief Operating Officer of Chubb’s surety business. Mr. Cavanaugh replaced our interim

president and CEO John Brinling. This Executive leadership team has volunteered to take no increase to their base pay for 2009 in order to demonstrate their commitment to the Company’s objective of managing expenses this year.

 

Executive Compensation Elements

 

Each element of compensation is set independently for each NEO against our peer group described above. As a result, the allocation of each compensation component varies by NEO. Each element is described in greater detail in the following discussion and analysis.

 

Base Salary

 

Purpose:  The purpose of the annual salary element is to provide base-level compensation considering an executive’s job responsibilities, individual performance and externally-competitive compensation levels.

 

Considerations:  Our Compensation Committee annually reviews and determines the base salaries of each of our executive officers. Our compensation program seeks to establish each NEO’s base salary range at the 50th percentile of the competitive market comprised of the companies in our peer group. In each case, the committee takes into account the base salary range for each executive based on job duties and authority. Individual base salary levels correlate to an executive’s years of experience and individual performance. This amount is not at risk and may be adjusted annually based on merit and external market conditions.

 

2008 Discussion and Analysis: All of our NEO base salaries were within the salary range set against our peer group in 2008. Mr. Brinling’s annual base pay was established in August 2007 at $815,626 under a separate employment agreement when he became our interim President and CEO. This annual salary was equivalent to that of the former President and CEO that Mr. Brinling replaced in his interim role. As such, no adjustment to his base pay was considered necessary by the Compensation Committee during his tenure in 2008. Mr. Tanous joined the organization as Executive Vice President, Secretary and General Counsel on April 30, 2007 with an annual salary of $375,000. The Compensation Committee, on Mr. Tanous’ suggestion, determined his base pay would not increase in 2008.

 

In determining 2008 base pay for Messrs. Garcia and Krahe it was determined that no increase would be granted as their employment agreements were expiring in December 2008. Mr. Ziegler did receive an increase to his base pay in 2008 of 6 percent in accordance with normal merit increase practices for Senior Vice Presidents of our organization.

 

Mr. Cavanaugh and Mr. Zavasky were new to the Executive leadership team in 2008. Mr. Cavanaugh joined the organization on July 29, 2008 as our President and CEO. In connection with his hiring, an independent review of base pay was performed by the committee as one element of Mr. Cavanaugh’s total compensation package considering such factors as Mr. Cavanaugh’s level of experience and market data for CEO positions of similar-sized organizations. Based upon this review by the Compensation Committee, Mr. Cavanaugh’s annual base pay was set at $700,000. Mr. Zavasky previously served as the organization’s Senior Vice President and Strategy Officer and was promoted to the position of Executive Vice President of Insurance Operations in March 2008. His annual base pay was set at $325,000 when considering his level of experience and new responsibilities in this role.

 

Annual Incentive Plan

 

Purpose:  The purpose of our Annual Incentive Plan, or “AIP,” is to align executive performance with our annual strategic goals while enhancing our shareholder value and promoting the health of the Exchange. We accomplish this objective by providing incentives in the form of an annual cash bonus to executives upon the attainment of certain performance goals.

 

Considerations:  At the beginning of each year, our Compensation Committee evaluates a target AIP award expressed as a percentage of annual base salary for each executive. For 2008, the target AIP award was set at 55% of base salary for Mr. Garcia and Mr. Tanous. Mr. Zavasky became our Executive Vice President of Insurance Operations on March 1, 2008, at which time his target AIP award also became 55% as a percentage

of base pay. Mr. Ziegler’s target award was set at 50% of his base salary for 2008 in his role as Senior Vice President. Once the targeted percentages are evaluated, the Compensation Committee then establishes appropriate AIP performance measures after discussion with our board of directors that drive strong organizational performance. Our board of directors and management consider our current performance, including our strengths and performance gaps, to determine which areas need to be incented to help us achieve our strategic objectives for the year. The combination of benchmark insurance measures and our performance are the basis from which measures and targets are determined. With the appropriate measures selected, we apply an internal modeling analysis to each measure resulting in a statistical probability confidence range of attaining a target point for each measure. From this analysis, our Compensation Committee benchmarks target goals for each measure. The Compensation Committee then sets a maximum and minimum (or ‘threshold’) for each measure. The maximum is intended to incent a participant’s performance to achieve a maximum performance payout; the threshold provides a partial payout when a portion of the goal is achieved.

 

The AIP payouts have a cap of 200% of incentive target. In addition, the maximum annual AIP award payable in cash to any one executive under the AIP is $3.0 million. We typically pay AIP awards after the prior year’s audited financial results are available and our Compensation Committee certifies earned amounts.

 

2008 Discussion and Analysis:  The Compensation Committee agreed that growth and underwriting profitability should continue to be two major components of the 2008 AIP. This allowed our executive team to maintain a balanced objective in achieving positive corporate results. Thus, the company performance measures shared by the NEOs in 2008 were:

 

 

Individual targeted accomplishments were assigned to our president and CEO and each executive vice president for 2008 in addition to the company performance measures described above. Mr. Brinling, in his capacity as interim CEO, recommended target accomplishments for himself and the executive vice presidents based on the unique functional responsibilities of each with the Compensation Committee having the authority for final approval of these recommendations. For 2008, the bonus determination for our president and CEO and the executive vice presidents was weighted equally at 40% each for the two company performance measures with the remaining 20% weighted toward the achievement of the individual targeted accomplishments. The bonus determination for Mr. Ziegler was weighted equally at 50% for each performance measure.

 

The Compensation Committee also agreed that it should have the discretion to reduce the individual AIP award for our CEO and executive vice presidents as considered appropriate and as the circumstances applicable to each individual would warrant beginning with the 2009 payout. As a result, the 2008 AIP agreement for payments to the CEO and each executive vice president contained a provision to this effect.

 

Mr. Brinling resigned as our president and CEO effective July 29, 2008 and remained employed with us until September 30, 2008 to ensure a smooth transition. As a result, his 2008 AIP award was pro-rated for the nine months during which he was employed. Mr. Cavanaugh did not officially participate in the AIP for 2008 because his service began too late in the year to qualify. However, in accordance with his employment agreement, Mr. Cavanaugh received a payment outside the plan in 2009 using the same measurements and criteria that were used for Mr. Brinling. Mr. Cavanaugh’s target award outside of the plan is set at 65% of his base pay. This bonus is also an opportunity for Mr. Cavanaugh to be rewarded in his assisting our executives toward achieving the 2008 goals upon becoming our CEO. Mr. Cavanaugh’s award was not pro-rated for his partial year of service. The Compensation Committee determined that this was appropriate given Mr. Cavanaugh’s loss of bonus opportunity with his former employer.

Long-Term Incentive Plan

 

Purpose:  The purpose of our Long-Term Incentive Plan, or “LTIP,” is to enhance our growth and profitability and that of the Exchange and its affiliates 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 that are based on the attainment of certain performance goals over multi-year performance periods. These incentives take the form of restricted stock unit grants of our Class A Common Stock. We use stock in this plan to further align the interests of our executives with those of our shareholders. Beginning with the 2009 LTIP awards, cash grants will be used in lieu of actual restricted stock unit grants.

 

Considerations:  We had two LTIP plans in effect at December 31, 2008: an LTIP we adopted in 1997 (the “Pre-2004 LTIP”) and an LTIP we adopted in 2004 (the “2004 LTIP”). The Pre-2004 LTIP awards were determined based upon the achievement of predetermined financial performance goals compared to the actual growth in our retained earnings; this initial plan did not benchmark us against a peer group. The final payout under the Pre-2004 LTIP occurred on January 22, 2009. In 2004, after review by our Compensation Committee, we adopted the 2004 LTIP. The 2004 LTIP allowed us to better align our executives’ awards with our long-term goals by utilizing comparisons to a board-selected peer group. This design more closely ties rewards to performance outcomes for stronger reinforcement of desired behaviors. The 2004 LTIP award is based on the achievement of objective performance measures — adjusted combined ratio (statutory reported combined ratio for the 2008 — 2010 performance period), growth in direct written premiums, and total return on invested assets — over a three-year period compared to a peer group of property and casualty insurance companies that write predominantly personal lines insurance. The peer group we use for the 2004 LTIP has remained the same since the plan’s inception and consists of: Allstate Insurance Group, Farmers Insurance Group, Government Employees Insurance Group (GEICO), Nationwide Insurance Group, Progressive Group of Insurance Companies, State Farm Insurance Group and USAA Group. This peer group was selected because, as a group, it represents the majority of personal lines business written in the United States and is considered to be our competition in all the markets in which we do business. We calculate and pay actual awards earned after performance certification by our Compensation Committee following the performance period.

 

2008 Discussion and Analysis:  Target LTIP awards were established for each NEO at the beginning of 2008 utilizing a methodology similar to that used to set AIP awards for each NEO as described above. The performance measures selected reflect the strategic business objectives of the Property and Casualty Group. The 2008 awards were based on the statutory reported combined ratio, growth in direct written premiums and total return on invested assets of the Property and Casualty Group compared to the same performance measures of our peer group. Given the nature of our business, underwriting profitability is 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. In 2008, our Compensation Committee awarded long-term incentive compensation to each NEO in the form of restricted stock units. See the Summary Compensation Table, Supplemental Stock Awards Table, Grants of Plan Based Awards Table, Outstanding Equity Awards Table and Option Exercises and Stock Vested Table herein. For the 2008 performance period, the performance measures were weighted at 40% for statutory reported combined ratio, 40% for growth in direct written premiums and 20% for total return on invested assets for our president and CEO and each executive vice president. For Mr. Ziegler the weightings were adjusted as follows to reflect his responsibilities as chief investment officer: 20% for statutory reported combined ratio; 20% for growth in direct written premiums; and, 60% for total return on invested assets.

 

Based upon Mr. Brinling remaining employed with us until September 30, 2008, his 2008 LTIP award will be calculated using a shortened performance period that is deemed to end on December 31, 2008 and will be pro-rated for the portion of the 3-year performance period he served as CEO. Mr. Cavanaugh did not officially participate in the LTIP for the 2008 — 2010 performance period because his service began too late in the year to qualify. However, in accordance with his employment agreement, he will receive stock outside the plan using the same measurements and criteria that were used for Mr. Brinling. Mr. Cavanaugh’s award will be pro-rated to reflect the portion of the 3-year period he serves as our president and CEO.

All Other Compensation

 

As a result of entering into Amendment and Payment Designation Agreements in December 2007 with Messrs. Garcia, Morgan and Ziegler, as more fully described in our proxy dated March 24, 2008, lump-sum cash payments for the tax gross up on their supplemental retirement plan (“SERP”) benefits were made during 2008. These payments totaled $1,218,869, $270,790 and $742,575, respectively.

 

Mr. Morgan resigned from his position as Executive Vice President of Insurance Operations and remained employed with us until March 31, 2008. A severance agreement was signed containing certain termination provisions, including a single lump-sum payment of $1,875,000. Similarly, a separation agreement was entered into with Mr. Krahe upon his resignation from his position as Executive Vice President of Human Development and Leadership effective July 17, 2008. This agreement included a provision for a lump-sum payment to Mr. Krahe totaling $1,296,000. These lump-sum payments represented 2.75 times “covered pay” (base salary plus average of 3 prior years of AIP payout) as defined under the terms of Mr. Morgan and Mr. Krahe’s employment agreements in effect at the time they left the organization.

 

See also the “Agreements with Executive Officers” section below for additional information concerning the separation agreements with Mr. Morgan and Mr. Krahe.

 

Policy on Recoupment of Officer Bonuses

 

During 2008, the Compensation Committee considered the current practice for the design and implementation of “clawback” policies for future performance-based incentive compensation. Following a discussion of their findings, the Compensation Committee determined it was appropriate for us to adopt such a policy for our AIP and LTIP arrangements beginning on July 1, 2009. The policy was approved by our Board of Directors. 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 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.

 

The Board also approved a policy that we will, to the extent permitted by law, require the reimbursement of all of any performance-based annual or long-term bonus paid to any officer after June 30, 2009 where the officer’s employment with the Company has been terminated for cause either prior to the payment of the bonus or within six months thereafter.

 

Restricted Stock Units

 

The issuance of 16,000 shares of the Erie Indemnity Company’s Class A Common Stock was included as part of Mr. Cavanaugh’s employment agreement dated July 14, 2008. Under this provision, Mr. Cavanaugh will receive shares of stock under the following schedule: 1,600 shares on January 29, 2009, 3,200 shares on July 29, 2009, 4,800 shares on July 29, 2010 and 6,400 shares on July 29, 2011. This provision was made by the committee to compensate Mr. Cavanaugh for forfeiting any equity compensation from his previous employer that was not vested at the time of his departure.

 

Additional Benefits

 

We believe retirement benefits are an important part of a competitive reward opportunity, which enables us to attract and retain top-tier leadership talent. Accordingly, we maintain a tax-qualified defined benefit pension plan. The tax-qualified defined benefit pension plan is available to all of our salaried employees. We also provide a SERP to our NEOs in response to the Internal Revenue Code of 1986 (“the 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 a NEO is to normal retirement age, the shorter the discount period used in calculating the present value of the benefits.

 

Our defined benefit pension plan and SERP amounts reflected in the “Change in Pension Value” column within the Summary Compensation Table result from the use of various actuarial assumptions. One of the assumptions that can have a significant impact on the pension values is the discount rate selected. Upon completing our annual bond matching study with our independent consulting actuarial firm, Watson Wyatt, we supported the selection of a 6.06% discount rate for the 2009 pension and SERP expense for financial statement purposes and we used this same discount rate in determining the present value of benefits under these plans for each NEO.

 

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). Their participation in these benefit plans is on the same terms as all of our other employees.

 

Director Compensation

 

2008 Discussion and Analysis

 

The goals of our director compensation program are to attract and retain directors of outstanding competence and ability and reward them in a fiscally responsible manner. Director performance is a key influencing factor in organizational performance. Accordingly, director compensation is reviewed periodically and adjusted, as appropriate, to align the interests of directors with our strategic objectives. Our compensation for directors includes retainer fees, board and committee meeting fees, stock grants, and committee chair fees.

 

The periodic review of director compensation is the responsibility of our Compensation Committee and our board of directors. In undertaking this responsibility, the Compensation Committee reviews compensation surveys of the financial services industry. The committee also engages, from time to time, independent advisors who provide supplemental data that is considered in setting director compensation levels. After reviewing the data, the Compensation Committee formulates a recommendation for review by our board of directors.

 

Our Compensation Committee determined that the elements of our directors’ compensation were appropriately positioned and would not be changed from the prior year. The annual cash retainer is $30,000 and the annual stock-based pay is $40,000.

 

We make adjustments to maintain each director’s compensation at market median or about the 50th percentile of our peer group. Added responsibilities or additional duties, such as committee chairperson or chairman of the board, may cause variations in each director’s total compensation earned. See also the Director Compensation Table for 2008.

 

Director Education Program

 

We offer a director education program which provides each director with access to various resources to assist him or her with enhancing the skills and strategies that drive effective directorship. We pay for the cost of each director’s membership in the National Association of Corporate Directors, underwrite the cost of attendance at certain educational seminars and conferences, and provide subscriptions to relevant business news journals, magazines and on-line resources.

 

Agreements with Executives Including Termination and Change in Control

 

Our Compensation Committee periodically reviews the use and material terms of employment agreements with our key executives.

 

Salary and benefits expected under various termination scenarios are disclosed below for the NEOs who were employed as of December 31, 2008. If any of the NEOs terminated his employment due to disability, no compensation or benefits would be awarded in addition to amounts already disclosed in the Summary Compensation Table. We developed the compensation and benefit amounts disclosed in the table below

considering a termination date of December 31, 2008 and they represent only payments estimated in addition to the other compensation disclosed herein.

 

 

 

 

 

 

 

 

In addition to the items disclosed in the table above, in the case of “Involuntary Without Cause” and “Voluntary With Good Reason” terminations, the agreements with Mr. Garcia and Mr. Ziegler provide continuing coverage for all purposes for a period of three years for Mr. Garcia and a period of two years for Mr. Ziegler after the date of termination of employment for the executive and his eligible dependents under all of our benefit plans in effect as of the date of termination of employment.

 

The agreements with Mr. Garcia and Mr. Ziegler also provide for certain additional payments by us. In the event that any payment or distribution by us to or for the benefit of the executive, whether paid or payable pursuant to the terms of their agreements or otherwise, is determined to be subject to the excise tax imposed by Section 4999 of the Code as an excess parachute payment, as that term is used and defined in Sections 4999 and 280G of the Code, the executive is entitled to receive an additional payment (a “gross-up payment”) in an amount equal to the then current rate of tax under Section 4999 multiplied by the total of the amounts so paid or payable, including the gross-up payment, which are deemed to be a part of an excess parachute payment.

 

As previously noted, part of Mr. Cavanaugh’s employment agreement includes an award of 16,000 shares of the Erie Indemnity Company’s Class A common stock to be issued as follows: 10% six months after date of hire; 20% on the first anniversary of the date of hire; 30% on the second anniversary of the date of hire; and the final 40% on the third anniversary of the date of hire. If he is terminated for “Cause” or voluntarily leaves the company for other than “Good Reason”, Mr. Cavanaugh forfeits any unissued shares. If he leaves the company as a result of death, permanent disability or termination without “Cause” or termination for “Good Reason”, he retains all previously issued shares and any unissued shares will be issued on the first day of the seventh month following termination of employment. Mr. Cavanaugh will be paid dividends on these shares equal to such dividend per share multiplied by the number of shares that have not yet been issued.

 

Stock Purchase and Retention Program

 

In 2005, our board of directors approved an executive stock ownership program that required our then incumbent chief executive officer and executive vice presidents to attain a certain level of ownership of our Class A common stock within a prescribed period of time. As of June 25, 2008, Mr. Garcia was the only remaining executive officer subject to the executive stock ownership program.

 

On December 9, 2008, our board of directors terminated the executive stock ownership program and replaced it with an officers’ stock purchase and retention program. This program 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. 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; however, the six-month post employment retention period does not apply in the event of the death of a participant.

 

Except for shares acquired under our LTIP that are applied to an officer’s purchase requirement, officers who purchase an amount of our Class A common stock in excess of the minimum annual purchase requirement may carry forward the value of the additional shares purchased and apply it toward any minimum annual purchase requirement for the following year or years. 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 Compensation Committee 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 will be required to purchase stock will be 2010.

 

Tax Implications of Executive Compensation

 

Section 162(m) of 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 to the $1.0 million limitation for performance-based compensation meeting 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 incentive awards and individual incentive awards are subject to federal income, FICA and other tax withholdings as required by applicable law.

 

We believe all compensation paid in 2008, 2007 and 2006 to our NEO’s is tax-deductible under Section 162(m) of the Code, except for certain amounts related to the payout of Mr. Ziegler’s SERP benefits in 2008 and the 2007 settlement of Mr. Brinling’s SERP benefit following his retirement and prior to his re-employment. While our Compensation Committee intends to continue 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 interests of our shareholders to provide non-tax deductible compensation.

 

The following table sets forth the compensation during 2008, 2007 and 2006 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 various entities. Our share of total compensation expense in 2008, 2007 and 2006 was 55.8%, 52.8% and 52.7%, respectively. Amounts indicated are pre-individual income taxes.

 

Summary Compensation Table

 

 

 

 

Salary

 

Salary includes all paid time off such as vacation and company holidays.

Bonus

 

The bonus column includes signing, retirement and special merit bonuses, as well as terminated vacation payouts. Mr. Tanous received a signing bonus of $100,000 upon his joining the Company in April 2007.

 

Stock Awards: Long-Term Incentive Plans (LTIP)

 

In 2004, our Compensation Committee recommended the adoption of the 2004 LTIP and, in accordance with the Code and NASDAQ rules, the holders of our Class B common stock approved the 2004 LTIP at our 2004 annual meeting. The 2004 LTIP became effective March 2, 2004. Our Compensation Committee administers the 2004 LTIP. Our Compensation Committee is authorized to grant restricted performance shares to participants. Restricted performance shares represent a right to receive shares of Class A common stock based on the achievement, or the level of achievement, during a specified performance period of one or more performance goals established by our Compensation Committee at the time of the award. At the time restricted performance shares are granted, our Compensation Committee specifies in writing:

 

 

Following completion of the applicable performance period, our Compensation Committee will determine whether the applicable performance goals were achieved, or the level of such achievement, and the number of shares, if any, earned by the participant based upon such performance. We will then issue to the participant the number of restricted shares of Class A common stock earned pursuant to the award for the relevant performance period. If a participant ceases to be an employee prior to the end of a performance period by reason of death, disability or normal or early retirement (as defined in our qualified pension plan for employees), the participant may receive all or such portion of his or her award as may be determined by our Compensation Committee in its discretion; however, a participant will not receive less than the total number of restricted shares of Class A common stock earned pursuant to such participant’s award based upon performance during a performance period that is deemed to end on the last day of the year in which employment terminates. If a participant ceases to be an employee of us or our subsidiaries and affiliates prior to the end of a performance period for any reason other than death, disability or normal or early retirement, the participant may receive all or such portion of his or her award as may be determined by our Compensation Committee in its discretion. A participant who is terminated for cause is not entitled to receive payment of any award for any performance period. The maximum number of shares of Class A common stock that may be earned under the 2004 LTIP by any single participant during any one calendar year is 250,000 shares.

 

Prior to the 2004 LTIP, we had a Pre-2004 LTIP, whose last performance period of 2003-2005 became fully vested at December 31, 2008. The Pre-2004 LTIP was designed to enhance our growth and profitability by providing the incentive of long-term rewards to key employees who are capable of having a significant impact on our performance, to attract and retain employees of outstanding competence and ability and to further align the interests of such employees with those of our shareholders. Each participant was granted awards of phantom share units under the Pre-2004 LTIP based upon a target award calculated as a percentage of the participant’s base salary. The total value of any phantom share units was determined at the end of the performance period based upon the growth in our retained earnings. Each participant was then entitled to receive restricted shares of Class A common stock equal to the dollar value of the phantom share units at the end of the performance period.

Stock Awards: Restricted Stock Units

 

As part of Mr. Cavanaugh’s employment agreement, he was awarded 16,000 shares of the Erie Indemnity Company’s Class A Common Stock to be issued ratably through July 29, 2011. Mr. Cavanaugh will be paid dividends on these shares equal to such dividend per share multiplied by the number of shares that have not yet been issued. The value of these restricted stock units, as presented in the table below, totaling $602,080 was determined using a market value of our Class A Common Stock at December 31, 2008.

 

The table below sets forth, with respect to the amounts shown in the “Stock Awards” column of the Summary Compensation Table above, the dollar amount of the change in our recorded estimates for open performance periods under the 2004 LTIP, the change in market value for unvested shares under the Pre-2004 LTIP, as well as the restricted stock units issued to Mr. Cavanaugh.

 

Supplemental Stock Awards Table

 

 

 

 

 

Non-Equity Incentive Plan Compensation: Annual Incentive Plan (AIP)

 

The AIP is a performance-based incentive plan that pays annual cash bonuses to our executive officers, senior vice presidents and regional vice presidents. The cost of the plan is charged to operations as the compensation is earned over the performance period of one year. Amounts reported in the Summary Compensation Table for the AIP represent the estimated amounts payable for the 2008 performance period. On February 21, 2008, our board of directors accepted and ratified the certification of the performance goals for the 2007 AIP awards. On April 7, 2008, they established the performance goals for the AIP for 2008 and for the 2004 LTIP for the 2008-2010 performance period.

 

Under our deferred compensation plan, executives can elect to defer 100% of their AIP amounts earned. Deferral elections must be made before the beginning of the calendar year for which each bonus is earned. Deferred amounts, if any, are also reported in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Mr. Cavanaugh did not officially participate in the 2008 AIP because his service began too late in the year to qualify. However, he will receive a payment outside the plan as outlined in his employment agreement. This agreement gives him credit for a full year of service and guarantees a minimum bonus amount of $455,000. The amount disclosed for Mr. Cavanaugh in the Summary Compensation Table is the current estimate of the amount expected to be paid to him.

 

Mr. Brinling’s 2008 AIP bonus is pro-rated for his partial year of service. Mr. Morgan and Mr. Krahe forfeited their 2008 AIP bonus upon termination.

 

Mr. Brinling and Mr. Tanous did not officially participate in the 2007 AIP because service began too late in the year to qualify. However, they did receive payments outside the plan pro-rated for a partial year of service.

 

Pension Plan

 

Change in Pension Value and Non-Qualified Deferred Compensation Earnings

 

The Summary Compensation Table above includes the net change in the present value of accrued benefits from December 31, 2007 to December 31, 2008 under our retirement plan, a tax-qualified defined benefit pension plan, and our SERP, a non-qualified defined benefit arrangement.

 

We calculated the present values using assumptions consistent with those disclosures under FAS 87, “Employers’ Accounting for Pensions,” including for December 31, 2006, 2007 and 2008 discount rates of 6.25%, 6.62% and 6.06%, respectively, (5% post-retirement discount rate for our SERP).

 

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

The Pension Benefits Table includes the present value of accrued benefits under our defined benefit pension plan and our SERP as of December 31, 2008. With the exception of Mr. Cavanaugh and Mr. Tanous, each NEO is 100% vested in our retirement plan.

 

Pension Benefits Table

 

 

 

 

 

The present value information presented in the Pension Benefits Table utilizes assumptions consistent with those used for fiscal year 2008 disclosure under FAS 87, including a 6.06% discount rate as of December 31, 2008 (5% post-retirement discount rate for our SERP) and assumes retirement at age 65 for our retirement plan and our SERP and no pre-retirement decrements.

 

Normal retirement age under both our retirement 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, unless the executive is covered by an employment agreement that provides for unreduced benefits.

 

Under our retirement 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 retirement plan but included in computing benefits due under our SERP.

 

Each executive’s “credited service” is generally defined as the executive’s years of continuous employment with us as a covered employee, up to a maximum of 30 years. Mr. Zavasky and Mr. Brinling have 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. The Pension Benefits Table reflects the recognition of a full year of credited service for a partial year of employment as of December 31, 2008.

 

Executive service in our SERP means employment with the Company as both a covered employee and a senior vice president or higher-ranking executive.

 

Our retirement 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 retirement 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 retirement 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. Optional actuarially-equivalent forms of payment are available under our SERP. The SERP has been amended to provide that, effective January 1, 2009, a lump sum is the only available form of payment.

 

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

 

 

 

 

 

 

Executives in our retirement 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. Mr. Ziegler and Mr. Zavasky have satisfied the plans’ eligibility requirements for early retirement.

 

See also “Postretirement Benefit Plans,” in the notes to consolidated financial statements included in our 2008 annual report that describes plan assumptions in more detail.

 

All Other Compensation

 

Supplemental Table for All Other Compensation

 

 

 

Agreements with Executive Officers

 

On October 11, 2007, we entered into an arrangement with John J. Brinling, Jr. regarding his compensation and benefits for serving as our interim President and CEO. Mr. Brinling held this position until his resignation on July 29, 2008. The material terms of Mr. Brinling’s compensation arrangement included an annual salary of $815,626 and bonus payments calculated using the criteria of the Company’s Annual and Long-term Incentive Plans on a pro-rated basis for any portion of a calendar year that Mr. Brinling served as president and CEO. In addition, and in lieu of Mr. Brinling’s participation in the Company’s pension plans, we credited an amount equal to a certain percentage of his salary to a hypothetical account which will be paid to him on or about April 1, 2009.

 

On July 14, 2008, we entered into an employment agreement with our current president and CEO, Terrence W. Cavanaugh. 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 “Compensation Discussion and Analysis — Agreements with Executives Including Termination and Change in Control.”

 

On April 30, 2007, we entered into an employment agreement with James J. Tanous, an executive vice president who also serves as our secretary and general counsel. Under the terms of his agreement, Mr. Tanous is entitled to the following compensation:

 

 

 

The term of Mr. Tanous’ agreement expires April 29, 2010. For a discussion of compensation payable to Mr. Tanous under various termination scenarios, see “Compensation Discussion and Analysis — Agreements with Executives Including Termination and Change in Control.”

 

In 2007, we had substantially identical Officer Employment Agreements with four of our senior officers (Philip A. Garcia, Executive Vice President and Chief Financial Officer; Michael J. Krahe, former Executive Vice President of Human Development and Leadership; Thomas B. Morgan, former Executive Vice President — Insurance Operations; and Douglas F. Ziegler, Senior Vice President, Treasurer and Chief Investment Officer). Each of these agreements was amended in December of 2005, as more fully described in our proxy statement dated March 16, 2007, and further amended in December of 2007, as more fully described in a current Report on Form 8-K filed by us on January 3, 2008. Each of the Officer Employment Agreements provided that its term would expire on December 11, 2008, unless earlier terminated in accordance with its terms.

 

In connection with its review of the Officer Employment Agreements for purposes of determining what changes were needed to comply with recently adopted changes to the federal tax laws regarding deferred

compensation, and in the context of structuring a former president and CEO’s post-employment arrangement, our board of directors decided that it would not renew or extend the term of the Officer Employment Agreements for these four senior officers nor replace them with new agreements. Accordingly, the Company and each of the four senior officers named above entered into an Amendment and Payment Designation Agreement dated December 31, 2007, which (a) confirmed that each of the Officer Employment Agreements would expire on December 11, 2008, unless sooner terminated, (b) confirmed the continuation of certain provisions that provide post-expiration protection to each senior officer, and (c) set a specific date and method of payment of SERP benefits, as required by the new tax rules on deferred compensation.

 

During 2008, the Officer Employment Agreements, as amended by the Amendment and Payment Designation Agreements, expired or were terminated as follows:

 

 

 

 

 

 

 

On June 25, 2008, we entered into an Executive Retention Agreement with Mr. Garcia which was described in a current Report on Form 8-K filed by us on June 26, 2008. The Retention Agreement provides for the resolution of all matters related to Mr. Garcia’s continued employment during the retention period, as well as obligations of the Company to Mr. Garcia under his employment agreement, the Pre-2004 LTIP, the 2004 LTIP, the SERP and the our Deferred Compensation Plan. The material compensatory provisions of Mr. Garcia’s retention agreement are as follows:

 

 

Additional Executive Compensation Policies

 

Nonqualified Deferred Compensation

 

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 our management and highly compensated employees. Three of our NEO’s participated in this plan during 2008.

 

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.

Executives identify:

 

 

The following table summarizes NEO contributions, our contributions, credited losses, withdrawals and the aggregate balance as of December 31, 2008. Mr. Cavanaugh and Mr. Tanous do not have any nonqualified deferred compensation.

 

Nonqualified Deferred Compensation Table

 

 

 

 

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.

Grants of Plan-Based Awards Table