DEF 14A 1 d317477ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨   Preliminary Proxy Statement
¨   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
¨   Definitive Additional Materials
¨   Soliciting Material under Rule 14a-12
PEPCO HOLDINGS, INC.
(Name of registrant as specified in its charter)
(Name of person(s) filing proxy statement, if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
x   No fee required.
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LOGO

 

March 28, 2012

 

Dear Pepco Holdings, Inc. Stockholder:

 

On behalf of the Board of Directors of Pepco Holdings, Inc., you are cordially invited to attend our 2012 Annual Meeting of Stockholders, to be held at our principal executive offices located at 701 Ninth Street, N.W., Edison Place Conference Center (second floor), Washington, D.C., on Friday, May 18, 2012 at 10:00 a.m. local time. Please note that the doors will open at 9:30 a.m.

 

You will find information regarding the matters to be voted upon at the Annual Meeting in the attached Proxy Statement. We have also enclosed our 2011 Annual Report to Stockholders along with the Proxy Statement. The Annual Report includes a discussion of our 2011 financial highlights and the significant progress Pepco Holdings, Inc. has made to execute on its strategic plan.

 

It is very important that your shares be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, please provide your proxy or voting instructions by mail, telephone or the Internet, all as described in the attached Proxy Statement. Please note that, as described in more detail in the attached Proxy Statement, submitting a proxy or voting instruction form will not prevent you from attending the Annual Meeting and voting in person.

 

I thank you for your continued investment in Pepco Holdings, Inc.

 

Sincerely,

 

LOGO

Joseph M. Rigby

Chairman, President and Chief Executive Officer


 

 

YOUR VOTE IS IMPORTANT.

PLEASE VOTE YOUR SHARES PROMPTLY.

YOU CAN VOTE YOUR SHARES ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE OR, IF YOU RECEIVED PRINTED PROXY MATERIALS, ALSO BY COMPLETING AND RETURNING

THE PROXY CARD OR VOTING INSTRUCTION FORM. IF YOU RECEIVED PRINTED MATERIALS, THE INSTRUCTIONS ARE PRINTED ON YOUR PROXY CARD OR VOTING INSTRUCTION FORM. IF YOU RECEIVED THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS, THE INSTRUCTIONS ARE

PROVIDED IN THAT NOTICE OF AVAILABILITY.

 

THANK YOU FOR ACTING PROMPTLY.

 

 

 


LOGO

 

701 Ninth Street, N.W.

Washington, D.C. 20068

 

Notice of Annual Meeting of Stockholders

 

March 28, 2012

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the “Annual Meeting”) of Pepco Holdings, Inc., a Delaware corporation (the “Company”), will be held at 10:00 a.m. local time on Friday, May 18, 2012 (the doors will open at 9:30 a.m.), at the Company’s offices located at 701 Ninth Street, N.W., Edison Place Conference Center (second floor), Washington, D.C. for the following purposes:

 

  1. To elect 12 directors to serve for a term of one year;

 

  2. To approve, on an advisory basis, the Company’s executive compensation;

 

  3. To consider and vote upon a proposal to approve the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan;

 

  4. To consider and vote upon a proposal to approve the performance goal criteria under the Pepco Holdings, Inc. Long-Term Incentive Plan;

 

  5. To consider and vote upon a proposal to approve the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan;

 

  6. To ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for 2012; and

 

  7. To transact such other business as may properly be brought before the Annual Meeting.

 

All holders of record of the Company’s common stock, par value $0.01 per share, at the close of business on Friday, March 23, 2012, will be entitled to vote on each matter submitted to a vote of stockholders at the Annual Meeting.

By order of the Board of Directors,
LOGO

JANE K. STORERO

Vice President and Secretary

 

 

 

IMPORTANT

 

You are cordially invited to attend the Annual Meeting in person.

 

Even if you plan to be present, you are urged to vote your shares promptly. You can vote your shares electronically via the Internet or by telephone or, if you received printed proxy materials, also by completing and returning the enclosed proxy card or voting instruction form. If you received printed materials, the instructions are printed on the proxy card or voting instruction form and included in the accompanying Proxy Statement. If you received the Notice of Internet Availability of Proxy Materials, the instructions are provided in that Notice of Availability.

 

If you attend the Annual Meeting, you may vote either in person or by proxy.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on May 18, 2012. The Company’s 2012 Proxy Statement and 2011 Annual Report to Stockholders are available at http://www.pepcoholdings.com.


    PAGE  

TABLE OF CONTENTS

 

Questions and Answers about the Annual Meeting

    1   

Proposal 1: Election of Directors

    7   

Nominees for Election as Directors

    8   

Board Review of Transactions with Related Parties

    17   

Board Meetings

    18   

Board Leadership Structure and Role in Risk Oversight

    18   

Board Committees

    20   

2011 Director Compensation

    23   

Security Ownership of Certain Beneficial Owners and Management

    25   

Section 16(a) Beneficial Ownership Reporting Compliance

    26   

Proposal 2: Advisory Vote to Approve Executive Compensation

    27   

Compensation/Human Resources Committee Report

    28   

Compensation Discussion and Analysis

    28   

Executive Compensation

    48   

Proposal 3: Approval of the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan

    70   

Proposal 4: Approval of Performance Goal Criteria Under the Pepco Holdings, Inc. Long-Term Incentive  Plan

    82   

Proposal 5: Approval of the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan

    89   

Material U.S. Federal Income Tax Consequences of Certain Compensation Plans

    95   

Equity Compensation Plan Information

    98   

Audit Committee Report

    99   

Proposal 6: Ratification of the Appointment of the Independent Registered Public Accounting Firm

    100   

Stockholder Proposals and Director Nominations

    102   

Other Matters Which May Come Before the Annual Meeting

    104   

Annex A - Pepco Holdings, Inc. 2012 Long-Term Incentive Plan

    A-1   

Annex B -  Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan

    B-1   

Annex C - Policy on the Approval of Services Provided By the Independent Auditor

    C-1   


PROXY STATEMENT

 

Annual Meeting of Stockholders

 

Pepco Holdings, Inc.

 

March 28, 2012

 

This Proxy Statement is being furnished by the Board of Directors (the “Board”) of Pepco Holdings, Inc. (“we”, “us”, “our”, the “Company,” “Pepco Holdings” or “PHI”) in connection with our solicitation of proxies to vote on the matters to be submitted to a vote of holders of our common stock, $0.01 par value per share (“common stock”), at our 2012 Annual Meeting of Stockholders (the “Annual Meeting”). Many stockholders will receive a printed copy of this Proxy Statement and a paper proxy card or voting instruction form. As described in more detail below, however, certain stockholders will instead receive a Notice of Internet Availability of Proxy Materials (the “Notice of Availability”) in order to access the proxy materials via the Internet rather than receiving a printed copy of this Proxy Statement and a paper proxy card or voting instruction form. The Notice of Annual Meeting, this Proxy Statement, any accompanying proxy card or voting instruction form and our 2011 Annual Report to Stockholders (the “Annual Report”), were first sent or given to stockholders of record on or about April 2, 2012.

 

The address of our principal executive offices is 701 Ninth Street, N.W., Washington, D.C. 20068.

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

 

When and where will the Annual Meeting be held?

 

The Annual Meeting will be held at 10:00 a.m. local time on Friday, May 18, 2012 (the doors will open at 9:30 a.m.), at the Company’s offices located at 701 Ninth Street, N.W., Edison Place Conference Center (second floor), Washington, D.C. 20068. To obtain directions to attend the Annual Meeting and, if you wish to do so, vote in person, please contact us by sending an e-mail to pepco@amstock.com. Admission to the Annual Meeting will be limited to our stockholders or their authorized proxies.

 

Do I need an admission ticket to attend the Annual Meeting in person?

 

Yes. In order to be admitted to the Annual Meeting, you must present an admission ticket, along with a valid form of government-issued photo identification, such as a driver’s license, that matches your name on the admission ticket.

 

If you received your proxy materials by mail, your admission ticket is attached to your proxy card. If you received your proxy materials by e-mail, your admission ticket is the e-mail, which you must print out and bring with you to the Annual Meeting. If you received a Notice of Availability, your admission ticket is the Notice of Availability. Photocopies will not be accepted. If you lose your admission ticket, please call American Stock Transfer & Trust Company at (866) 254-6502 (toll-free) to request a replacement.

 

If you hold your shares through a bank, brokerage firm or other nominee, then the original copy of your account statement, dated March 23, 2012 or later and showing your ownership of common stock, is your admission ticket. Photocopies will not be accepted. If you lose your original statement, please contact your bank or brokerage firm directly for a replacement statement.

 

Cameras, camera phones, cell phones, recording equipment, electronic devices, computers, large bags, briefcases and packages will not be permitted in the meeting room.

 

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Will the Annual Meeting be webcast?

 

A webcast of the Annual Meeting, including a slide presentation, can be accessed at our Web site, http://www.pepcoholdings.com/investors. An audio-only version will also be available. The access information for the webcast and audio-only presentations will be announced in a news release at a later date. The Annual Meeting webcast will be archived and available for 30 days after the Annual Meeting on our Web site (http://www.pepcoholdings.com) by first clicking on the link “Investor Relations” and then the link “Webcasts and Presentations.”

 

What matters will be voted on at the Annual Meeting?

 

1. Proposal 1: The election of 12 directors, each for a one-year term.

 

The Board recommends a vote “for” each of the 12 director candidates nominated by the Board and identified in Proposal 1 in this Proxy Statement.

 

2. Proposal 2: A vote to approve, on an advisory basis, the Company’s executive compensation.

 

The Board recommends a vote “for” this proposal.

 

3. Proposal 3: The approval of the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan (the “2012 LTIP”), a copy of which is attached as Annex A.

 

The Board recommends a vote “for” this proposal.

 

4. Proposal 4: The approval of the performance goal criteria under the Pepco Holdings, Inc. Long-Term Incentive Plan (the “LTIP”).

 

The Board recommends a vote “for” this proposal.

 

5. Proposal 5: The approval of the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan (the “Amended EICP”), a copy of which is attached as Annex B.

 

The Board recommends a vote “for” this proposal.

 

6. Proposal 6: The ratification of the appointment by the Audit Committee of the Board of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2012.

 

The Board recommends a vote “for” this proposal.

 

What is the quorum requirement?

 

In order to hold the Annual Meeting, the holders of a majority of the outstanding shares of our common stock, par value $0.01 per share, at the close of business on Friday, March 23, 2012 (the “record date”), must be present at the Annual Meeting either in person or by proxy.

 

Who is eligible to vote?

 

All stockholders of record as of the record date are entitled to vote at the Annual Meeting. As of the close of business on the record date, 227,839,251 shares of common stock were outstanding. Each outstanding share of common stock entitles the holder of record to one vote on each matter submitted to the vote of stockholders at the Annual Meeting.

 

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How do I vote shares registered in my own name?

 

If you own shares that are registered in your own name, you can attend the Annual Meeting and vote in person, or you can vote by proxy without attending the Annual Meeting. You can vote by proxy in any of the following ways:

 

   

Via the Internet: Go to http://www.voteproxy.com. If you received printed proxy materials, follow the instructions printed on your proxy card. If you received a Notice of Availability, follow the instructions provided in the Notice of Availability. If you vote via the Internet, you also can at that time elect to receive future proxy statements and annual reports electronically via the Internet rather than receiving printed proxy materials or the Notice of Availability by mail.

 

   

By Telephone: Call toll-free 1-800-PROXIES (1-800-776-9437). You can also vote by telephone by following the instructions provided on the Internet voting site or, if you received printed proxy materials, by following the instructions provided on your proxy card.

 

   

In Writing: If we mailed you a printed copy of this Proxy Statement and a paper proxy card, you can vote by completing, signing, dating and returning the proxy card in the enclosed postage-paid envelope.

 

The Internet and telephone voting facilities for stockholders of record will close at 5:00 p.m. Eastern time on May 17, 2012. Your signed proxy card or the proxy you grant via the Internet or by telephone will be voted in accordance with your instructions.

 

If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, your shares will be voted for the election of each of the Board’s director nominees; for the approval, on an advisory basis, of the Company’s executive compensation; for the approval of the 2012 LTIP; for the approval of the performance goal criteria under the LTIP; for the approval of the Amended EICP; and for the ratification of the Audit Committee’s appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2012.

 

How do I vote shares held through a brokerage firm, bank or other financial intermediary or nominee?

 

If you hold shares through a brokerage firm, bank or other financial intermediary or nominee (a practice known as holding shares “in street name”), you will receive from that intermediary or nominee a voting instruction form or other directions on how to direct the voting of your shares by the intermediary or nominee, which may include the ability to provide voting instructions via the Internet or by telephone. If you own your shares through an account with a brokerage firm that is a member of the New York Stock Exchange (“NYSE”) and you want to vote on any of the proposals to be submitted to a vote at the Annual Meeting (except the ratification of our independent registered public accounting firm), you MUST indicate how you wish your shares to be voted. Absent such instructions, the proxy submitted by the broker with respect to your shares will indicate that the broker is not able to cast a vote with respect to the matter, which is referred to as a “broker non-vote.”

 

Accordingly, it is important that you provide voting instructions to your broker, bank, financial intermediary or nominee if your shares are held in street name, so that your vote will be counted. If you hold your shares in street name and wish to vote in person at the Annual Meeting, you must obtain a proxy to vote your shares from the intermediary or nominee.

 

Why did I receive a Notice of Availability in the mail regarding the Internet availability of proxy materials this year instead of a paper copy of the proxy materials?

 

Under the “Notice and Access” rules approved by the Securities and Exchange Commission (the “SEC”), we are permitted to deliver this Proxy Statement and our Annual Report by providing access to the documents on the Internet instead of mailing printed copies. Accordingly, certain stockholders have received a Notice of Availability instead of printed copies of the proxy materials. The Notice of Availability instructs you on how to

 

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access and review all of the proxy materials on the Internet. The Notice of Availability also has instructions on how you may vote your shares. Beginning on the date of mailing of the Notice of Availability, stockholders will be able to access all of the proxy materials on a Web site referred to in the Notice of Availability. If you received a Notice of Availability and would like to receive free of charge a paper or electronic copy of our proxy materials, you may elect to do so by following the instructions in the Notice of Availability for requesting such materials.

 

If you previously requested paper copies of the proxy materials (and have not revoked that request) or if applicable regulations require delivery of printed proxy materials, you will receive a copy of the proxy materials, instead of the Notice of Availability.

 

Can I vote my shares by filling out and returning the Notice of Availability?

 

No. The Notice of Availability identifies the items to be voted on at the Annual Meeting, but you cannot vote by marking the Notice of Availability and returning it. The Notice of Availability provides instructions on how to vote via the Internet, by telephone, or by requesting and returning a paper proxy card or voting instruction form, or by submitting a ballot in person at the Annual Meeting.

 

Why did I receive an e-mail with links to the proxy materials instead of a paper copy of the proxy materials?

 

If you previously elected to access your proxy materials over the Internet, you will not receive a Notice of Availability or printed proxy materials in the mail. Instead, you have received an e-mail with links to the proxy materials and the online proxy voting site.

 

If you received a paper copy of the proxy materials or the Notice of Availability, you can eliminate all such future paper mailings by electing to receive an e-mail that will provide Internet links to these documents. Opting to receive all future proxy materials electronically will save us the cost of producing and mailing documents to you and will help us conserve natural resources. To request complete electronic delivery, please contact American Stock Transfer & Trust Company, our transfer agent, at 1-866-254-6502 (toll-free) or go to http://www.amstock.com. This election is not available for shares held through the Pepco Holdings, Inc. Retirement Savings Plan (the “Retirement Savings Plan”).

 

What does it mean if I receive more than one Notice of Availability or more than one set of proxy materials?

 

If you receive more than one Notice of Availability or more than one set of proxy materials, it is because your shares are registered in different names or with different addresses or are in more than one account. You must separately vote the shares shown on each Notice of Availability and proxy card that you receive in order for all of your shares to be voted at the Annual Meeting. To enable us to provide better stockholder service, we encourage stockholders to have all the shares they hold of record registered in the same name and under the same address.

 

How is stock in our Shareholder Dividend Reinvestment Plan voted?

 

Shares held through our Shareholder Dividend Reinvestment Plan (other than such shares that are also held through the Retirement Savings Plan) will be voted as described above in “How do I vote shares registered in my own name?” in accordance with your completed, signed and dated proxy card. If you own shares in the Dividend Reinvestment Plan and return a signed proxy card but do not indicate how you wish your shares to be voted as to a particular matter, your shares will be voted “for” that matter. Shares held by a participant in the Retirement Savings Plan through the Shareholder Dividend Reinvestment Plan are voted as set forth below under “How is stock in the Retirement Savings Plan voted?”

 

How is stock in the Retirement Savings Plan voted?

 

If you are a current or former employee who is a participant in the Retirement Savings Plan, you have received a printed copy of the proxy materials. The number of shares printed on the enclosed voting instruction form is the shares of common stock you hold through that plan. By completing, dating, signing and returning the

 

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voting instruction form or transmitting voting instructions via the Internet or by telephone, you will be providing the plan trustee with instructions on how to vote the shares of common stock held in your Retirement Savings Plan account. If you do not provide voting instructions for your plan shares on a matter, the plan trustee will vote your shares on that matter in proportion to the voting instructions given by all of the other participants in the plan. The Retirement Savings Plan is the successor plan to the (i) Potomac Electric Power Company Savings Plan for Bargaining Unit Employees, (ii) Potomac Electric Power Company Retirement Savings Plan for Management Employees (which itself is the successor to the Potomac Electric Power Company Savings Plan for Non-Exempt, Non-Bargaining Unit Employees; the Potomac Electric Power Company Retirement Savings Plan for Management Employees was formerly known as the Potomac Electric Power Company Savings Plan for Exempt Employees), (iii) Conectiv Savings and Investment Plan and the Conectiv PAYSOP/ESOP, and (iv) Atlantic Electric 401(k) Savings and Investment Plan-B.

 

How can I change my vote after I have returned my proxy card or granted a proxy via the Internet or by telephone?

 

If you own your shares in your own name or through the Shareholder Dividend Reinvestment Plan or the Retirement Savings Plan, you may revoke your proxy or voting instructions, regardless of the manner submitted, by:

 

   

sending a written statement to that effect to the Corporate Secretary of the Company before your proxy is voted;

 

   

submitting a properly signed proxy card or voting instruction form dated a later date;

 

   

submitting a later dated proxy or voting instruction form via the Internet or by telephone; or

 

   

voting in person at the Annual Meeting.

 

If you hold shares in street name, you should contact the intermediary or nominee for instructions on how to change your vote.

 

How are proxies being solicited and who pays for the costs involved?

 

We will bear the costs of solicitation of proxies, including the reimbursement of banks and brokers for certain costs incurred in forwarding proxy materials to beneficial owners. We have retained Phoenix Advisory Partners LLC in connection with this solicitation, at an anticipated cost to the Company of approximately $50,000, plus expenses. In addition to the use of the mails, our officers, directors and employees may solicit proxies personally, by telephone or facsimile or via the Internet. These individuals will not receive any additional compensation for these activities.

 

Why was only a single Notice of Availability and/or set of proxy materials mailed to households that have multiple holders of common stock?

 

To reduce the expense of delivering duplicate Notices of Availability and sets of proxy materials to multiple stockholders sharing the same address, the Company has adopted a procedure approved by the SEC called “householding.” This procedure saves printing costs and postage fees, and conserves natural resources.

 

Under this procedure, certain stockholders of record who have the same address and last name will receive only one copy of the Notice of Availability and/or set of proxy materials, unless one or more of the stockholders at that address has previously notified the Company that they want to receive separate copies. Each Retirement Savings Plan participant in any event will continue to receive a paper copy of all of the proxy materials.

 

Under these SEC rules, brokers and banks that hold stock for the account of their customers also are permitted to deliver a single copy of the proxy materials or Notice of Availability to two or more stockholders that share the same address. If you and other residents at your mailing address own shares of common stock

 

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through a broker or bank, you may have received a notice notifying you that your household will be sent only one copy of the proxy materials or the Notice of Availability. If you did not notify your broker or bank of your objection, you may have been deemed to have consented to the arrangement.

 

Regardless of whether you are a record holder or own your shares through a brokerage firm or bank, if you received a single set of proxy materials or a single Notice of Availability as a result of householding, and one or more stockholders at your address would like to have separate copies of these materials with respect to the Annual Meeting or in the future, please contact American Stock Transfer & Trust Company, the Company’s transfer agent:

 

By Telephone:

   1-866-254-6502 (toll-free)   

In Writing:

   American Stock Transfer & Trust Company   
   6201 15th Avenue   
   Brooklyn, NY 11219-9821   

 

If you own your shares through a brokerage firm or a bank, your notification should include the name of your brokerage firm or bank and your account number.

 

If you are a record holder of shares of common stock who is receiving multiple copies of the Company’s stockholder communications at your address and you would like to receive only one copy for your household, please contact American Stock Transfer & Trust Company at the telephone number or address set forth above. If you own your shares through a brokerage firm or a bank, please contact your broker or bank.

 

Where do I find your Corporate Business Policies, Corporate Governance Guidelines and Committee Charters?

 

We have adopted our Corporate Business Policies, which in their totality constitute our code of business conduct and ethics. These policies apply to all of our directors, employees and others working at the Company and its subsidiaries. The Board has also adopted Corporate Governance Guidelines and charters for the Audit Committee, the Compensation/Human Resources Committee (the “Compensation Committee”) and the Corporate Governance/Nominating Committee. The Board has also adopted charters for the Executive Committee and Finance Committee. Copies of these documents are available on our Web site at http://www.pepcoholdings.com/governance/index.html and also can be obtained by writing to: Corporate Secretary, 701 Ninth Street, N.W., Suite 1300, Washington, D.C. 20068.

 

How can I obtain more information about the Company?

 

Our Annual Report has been provided together with this Proxy Statement. You may also view the Annual Report by visiting our Web site at http://www.pepcoholdings.com. Information contained on our Web site is not a part of this Proxy Statement, and any Web site references contained in this Proxy Statement are not intended to be made through active hyperlinks.

 

Upon written request, we will furnish a copy of our 2011 Annual Report on Form 10-K (without exhibits), including the financial statements and the financial statement schedules contained in such report. We will furnish a copy of any exhibit to our Annual Report upon request and upon the payment of a reasonable fee equal to our reasonable expenses incurred in furnishing such exhibit. Any written requests with respect to our 2011 Annual Report on Form 10-K or an exhibit to such report should be addressed to our Corporate Secretary, Pepco Holdings, Inc., 701 Ninth Street, N.W., Washington, D.C. 20068, and must include a good faith representation that, as of March 23, 2012, the person making the request was a beneficial owner of common stock entitled to vote at the Annual Meeting.

 

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PROPOSAL 1: ELECTION OF DIRECTORS

 

Our Board currently consists of 12 members.

 

The Board, on the recommendation of the Corporate Governance/Nominating Committee, has nominated for re-election at the Annual Meeting Jack B. Dunn, IV, Terence C. Golden, Patrick T. Harker, Frank O. Heintz, Barbara J. Krumsiek, George F. MacCormack, Lawrence C. Nussdorf, Patricia A. Oelrich, Joseph M. Rigby, Frank K. Ross, Pauline A. Schneider and Lester P. Silverman, each of whom currently is a member of the Board, each to hold office for a one-year term that expires at our 2013 annual meeting of stockholders, and until his or her successor is elected and qualified.

 

What vote is required to elect the directors?

 

Under our bylaws, in an uncontested election of directors, each director shall be elected by a majority of the votes cast with respect to his or her election. Accordingly, at the Annual Meeting, a nominee will be elected as a director only if a majority of the votes cast with respect to the election of that director are cast “for” his or her election. In accordance with our bylaws, any incumbent nominee who does not receive a majority vote is required to resign from the Board no later than 90 days after the date of the certification of the election results. Shares that are the subject of a broker non-vote with respect to the election of directors will be treated as not cast, and therefore such shares will not be taken into account in determining the election of directors.

 

What happens if a nominee is unable to serve as a director?

 

Each nominee identified in this Proxy Statement has confirmed that he or she is willing and able to serve as a director. Should any of the nominees, prior to the Annual Meeting, become unavailable to serve as a director for any reason, the Board may either reduce the number of directors to be elected or select another nominee recommended by the Corporate Governance/Nominating Committee. If another nominee is selected, all proxies will be voted for that nominee.

 

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NOMINEES FOR ELECTION AS DIRECTORS

 

LOGO   

Jack B. Dunn, IV, age 61, since October 1995 has been Chief Executive Officer and since October 2004 has been President of FTI Consulting, Inc. (“FTI”), a publicly held multi-disciplined consulting firm with practices in the areas of corporate finance/restructuring, forensic and litigation consulting, economic consulting, technology and strategic and financial communications, located in West Palm Beach, Florida. He has served as a director of FTI since 1992 and served as its Chairman of the Board from December 1998 to October 2004. Mr. Dunn served as a director of Aether Systems, Inc., which became Aether Holdings, Inc., from 2002 to 2008. He served as a director of NexCen Brands, Inc. from June 8, 2002 through September 25, 2008. Mr. Dunn is also a limited partner in the Baltimore Orioles. He has been a director of the Company since May 21, 2004.

 

Mr. Dunn’s qualifications for election to the Board include his broad knowledge of corporate finance and his perspective and experience as an active Chief Executive Officer of a global business advisory firm with a particular emphasis on customer service. Mr. Dunn is Chief Executive Officer and President of FTI, a public company that specializes in assisting public companies in the areas of finance and governance, among others. Prior to joining FTI, Mr. Dunn spent over ten years with Legg Mason, Inc., a major regional investment banking firm, where he was managing director, senior vice president, a member of its broker/dealer’s board of directors and head of its corporate finance group. Prior to his investment banking career, Mr. Dunn practiced corporate and securities law.

LOGO   

Terence C. Golden, age 67, since 2000 has been Chairman of Bailey Capital Corporation in Washington, D.C. Bailey Capital Corporation is a private investment company. From 1995 until May 2000, Mr. Golden was President and Chief Executive Officer of Host Hotels and Resorts, Inc. He has been a director of Host Hotels and Resorts, Inc. since 1995. He also serves as a trustee and member of the Audit Committee of Washington Real Estate Investment Trust and as a member of the Federal City Council. He has been a director of the Company since August 1, 2002, and was a director of Potomac Electric Power Company (“Pepco”) from 1998 until it merged with Conectiv on August 1, 2002.

 

Mr. Golden’s qualifications for election to the Board include his extensive accounting and financial management experience, as well as his perspective and experience as a former CEO and Chief Financial Officer with responsibility for accounting, cash management, tax and corporate and project financing. From 1995 until May 2000, Mr. Golden was President and Chief Executive Officer of Host Hotels and Resorts, Inc., the lodging real estate company that includes among its holdings Marriott, Ritz-Carlton, Four Seasons, Hyatt, Hilton, Westin, W, Sheraton and Fairmont hotels. Mr. Golden served as the Chief Financial Officer of the Oliver Carr Company, one of the largest real estate companies in the mid-Atlantic region. Mr. Golden was also national managing partner of Trammell Crow Residential Companies, one of the largest residential development companies in the United States. Mr. Golden lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

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LOGO   

Patrick T. Harker, age 53, since 2007 has been President of the University of Delaware, Newark, Delaware. Concurrent with his appointment as President, Dr. Harker was appointed professor of Business Administration in the Alfred Lerner College of Business and Economics and a professor of Civil and Environmental Engineering in the University of Delaware’s College of Engineering. From 2000 to 2007, he was Dean of the Wharton School of the University of Pennsylvania and served as a Professor of Electrical and Systems Engineering in the University of Pennsylvania’s School of Engineering and Applied Science. Dr. Harker served as a Trustee of the Goldman Sachs Trust and Goldman Sachs Variable Insurance Trust from 2000 through September 2010; from 2004 to 2009 he was a member of the Board of Managers of the Goldman Sachs Hedge Fund Partners Registered Fund LLC. Dr. Harker has been a member of the Board of Trustees of Howard University since May 2009 and has also served as a director of Huntsman Corporation since March 2010. Dr. Harker was elected as a director of the Federal Reserve Bank of Philadelphia in January 2012. Dr. Harker has been a director of the Company since May 15, 2009.

 

Dr. Harker’s qualifications for election to the Board include his leadership skills and public and government affairs experience. As a Ph.D. in engineering and the former Dean of the Wharton School, Dr. Harker brings to the Board a unique blend of technical expertise and business knowledge. Through his experience on the Board of Trustees of the Goldman Sachs Trust, Dr. Harker also contributes a strong background in capital markets. Dr. Harker lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

Frank O. Heintz, age 68, is retired President and Chief Executive Officer of Baltimore Gas and Electric Company, the gas and electric utility serving central Maryland, a position he held from 2000 through 2004. From 1982 to 1995, Mr. Heintz was Chairman of the Maryland Public Service Commission, the state agency regulating gas, electric, telephone and certain water and sewerage utilities. Previously he served as agency head of the Maryland Employment Security Administration and was an elected member of the Maryland legislature. He has been a director of the Company since May 19, 2006. Mr. Heintz currently serves as Lead Independent Director.

 

Mr. Heintz’s qualifications for election to the Board include his perspective and experience as a former Chief Executive Officer of a regulated utility company and the regulatory, public policy and governmental affairs knowledge that he gained as a state public utility regulatory official. As President and Chief Executive Officer of Baltimore Gas and Electric Company, Mr. Heintz was responsible for overseeing the operations, finances, planning, and delivery of service to more than one million gas and electric customers. Additionally, as Executive Vice President of Constellation Energy, he participated in executive and board deliberations regarding the holding company’s diverse competitive lines of business. During Mr. Heintz’s 13 years as Chairman of the Maryland Public Service Commission, he became thoroughly knowledgeable about regulatory law, policy and process. As Executive Director of the American Gas Association’s caucus of local distribution companies, Mr. Heintz worked with numerous chief executive officers of gas utilities on matters of federal and state regulation, public policy, cost of capital and federal legislation affecting gas companies and holding companies. During the two decades of his regulatory and utility career, Mr. Heintz participated in many organizations that have broadened his

 

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   base of knowledge about the energy industry, utility operations, and state and federal regulations, including the National Association of Utility Regulators, the Edison Electric Institute, the American Gas Association, the U.S. Department of Energy’s National Petroleum Council and the Gas Research Institute.
LOGO   

Barbara J. Krumsiek, age 59, since 1997 has been President and Chief Executive Officer and since 2006 Chair of Calvert Investments, Ltd. Calvert is based in Bethesda, Maryland, and offers a range of fixed income, money market and equity mutual funds including a full family of socially responsible mutual funds. She serves as a trustee/director for 49 Calvert-sponsored mutual funds. She has been a director of the Company since May 18, 2007.

 

Ms. Krumsiek’s qualifications for election to the Board include her financial knowledge from an investor standpoint and her insights as a current Chief Executive Officer, including her familiarity with issues of compensation, risk assessment, and technology. Ms. Krumsiek has served as Chief Executive Officer of Calvert Investments, Ltd., an investment management and research firm, for 13 years, after 23 years of experience with Alliance Capital Management. In her capacity as CEO of Calvert, she has overseen all aspects of corporate operations, including strategic planning, compliance and risk management, financial management, financial statement preparation, and information technology. Ms. Krumsiek also has experience with environmental issues. Ms. Krumsiek lives and works in the Company’s operating territory, is a former Chair of the Greater Washington Board of Trade, and serves as a director for several other non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

George F. MacCormack, age 68, is retired Group Vice President, DuPont, Wilmington, Delaware, a position he held from 1999 through 2003. He was previously Vice President and General Manager (1998), White Pigments & Mineral Products Strategic Business Unit and Vice President and General Manager (1995), Specialty Chemicals Strategic Business Unit for DuPont. Mr. MacCormack also serves as a director of Fuel Tech, Inc., a position he has held since August 2011. He has been a director of the Company since August 1, 2002, and was a director of Conectiv from 2000 until it merged with Pepco on August 1, 2002.

 

Mr. MacCormack’s qualifications for election to the Board include his insights as a former senior officer who held career leadership roles in technology, manufacturing, sales, business and mergers and acquisitions at a large publicly held corporation. As Group Vice President, Mr. MacCormack had corporate oversight responsibility for approximately 12,000 employees and a $6 billion revenue portfolio of capital and energy intensive global Strategic Business Units. He also had corporate oversight and governance responsibility as Chairman/Vice Chairman of the Board for four major joint ventures with international partners. Over the last 12 years of his career with DuPont, Mr. MacCormack was the lead executive on the sale of several significant chemical businesses, and was one of the senior executives responsible for the sale of the $5 billion Invista Fibers and Chemicals subsidiary company.

 

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LOGO   

Lawrence C. Nussdorf, age 65, since 1998 has been President and Chief Operating Officer of Clark Enterprises, Inc., a privately held investment and real estate company based in Bethesda, Maryland, whose interests include the Clark Construction Group, LLC, a general contracting company, of which Mr. Nussdorf has been Vice President and Treasurer since 1977. He served as a director of CapitalSource Inc. from March 2007 through April 2010. Since September 2010, Mr. Nussdorf has served as a director of SAIC, Inc. He has been a director of the Company since August 1, 2002, and was a director of Pepco from 2001 until it merged with Conectiv on August 1, 2002.

 

Mr. Nussdorf’s qualifications for election to the Board include his perspectives as a board member of two other NYSE companies and as a long-serving Chief Operating Officer and former Chief Financial Officer. In addition to being the current President and Chief Operating Officer of Clark Enterprises, Inc., Mr. Nussdorf served for over 30 years as Chief Financial Officer. He has been at the forefront of strategic and long-term planning, as well as all aspects of management, operations, and finance of multiple businesses, involving different asset classes. Mr. Nussdorf lives, works and serves as a director for several non-profit organizations in the Company’s operating territory and, therefore, has significant community ties within the region.

LOGO   

Patricia A. Oelrich, age 58, from 2001 to 2009 was Vice President, IT Risk Management for GlaxoSmithKline Pharmaceuticals (“GlaxoSmithKline”), a Global 100 public company. From 1995 to 2000, Ms. Oelrich served as Vice President, Internal Audit for GlaxoSmithKline. She was employed at Ernst & Young from 1975 to 1994, and was a partner from 1988 to 1994. She has been a director of the Company since May 21, 2010.

 

Ms. Oelrich’s qualifications for election to the Board include her perspectives on corporate governance, information technology, audit, compliance, and finance issues. Ms. Oelrich is a CPA and a Certified Information Systems Auditor. In her roles at GlaxoSmithKline, Ms. Oelrich has directed internal audit activities worldwide, established GlaxoSmithKline’s IT Risk Management Program, and participated in establishing GlaxoSmithKline’s Corporate Compliance and Corporate Risk Management Oversight Programs. As a partner at Ernst & Young, Ms. Oelrich was in charge of the Chicago Office Information Systems Audit and Security practice that provided internal audit services and security consulting to highly regulated industries, including the financial services, insurance and healthcare industries. She was also lead financial audit partner on various engagements.

 

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LOGO   

Joseph M. Rigby, age 55, is Chairman, President and Chief Executive Officer of the Company. He has been President and Chief Executive Officer of the Company since March 1, 2009. From March 2008 to March 2009, Mr. Rigby served as President and Chief Operating Officer of the Company and from September 2007 to March 2008, he served as Executive Vice President and Chief Operating Officer of the Company. He was Senior Vice President of the Company from August 2002 to September 2007 and Chief Financial Officer from May 2004 to September 2007. From September 2007 to March 2009, Mr. Rigby was President and Chief Executive Officer of the Company’s utility subsidiaries. He has been Chairman of the Company’s utility subsidiaries since March 1, 2009. Mr. Rigby has been a director and Chairman of the Company since May 15, 2009.

 

Mr. Rigby’s qualifications for election to the Board include his ability to provide unique insights as PHI’s current Chief Executive Officer, as well as his 33 years of experience with the Company, Company subsidiaries and in the utility industry. Because of the various positions he has held within the Company, Mr. Rigby has broad experience across operations, finance and human resources, including mergers and acquisitions. Mr. Rigby also lives and works in the Company’s operating territory, is Chairman of the Greater Washington Board of Trade and the United Way of the National Capital Area, and serves as a director for several non-profit organizations in the Company’s operating territory and therefore has significant community ties within the region.

LOGO   

Frank K. Ross, age 68, is retired managing partner for the mid-Atlantic Audit and Risk Advisory Services Practice and managing partner of the Washington, D.C. office of the accounting firm KPMG LLP, positions he held from July 1, 1996 to December 31, 2003. He currently teaches accounting at Howard University, Washington, D.C., and provides consulting services to its Center for Accounting Education. He is a director of Cohen & Steers Mutual Funds and serves as a director of 19 of these funds. Mr. Ross serves on The Greater Washington, D.C. Urban League and Howard University Math and Science Middle School boards. Mr. Ross was a director of NCRIC Group, Inc. from 2003 to 2005. He has been a director of the Company since May 21, 2004.

 

Mr. Ross’ qualifications for election to the Board include his extensive knowledge of accounting and strategy matters gained through his over 40 years of experience as an accountant and as a current director of 19 Cohen & Steers Mutual Funds. Mr. Ross also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

-12-


LOGO   

Pauline A. Schneider, age 68, joined the Washington office of the law firm of Orrick, Herrington & Sutcliffe LLP (“Orrick”) in September 2006. From 1985 to September 2006, she was with the law firm of Hunton & Williams. From October 2000 to October 2002, Ms. Schneider served as Chair of the Board of MedStar Health, Inc., a community-based healthcare organization that includes seven major hospitals in the Washington, D.C./Baltimore area. From 1998 to 2002, she chaired the Board of The Access Group, Inc., a non-profit student loan provider headquartered in Wilmington, Delaware. She continues her service on the Access Group board. From December 2003 to November 2010, she served as a director of Diamond Management and Technology Consultants. She has been a director of the Company since August 1, 2002, and was a director of Pepco from 2001 until it merged with Conectiv on August 1, 2002.

 

Ms. Schneider’s qualifications for election to the Board, in addition to her service on other public company and non-profit boards, include her experience in government and public affairs, as well as her experience as a transactional lawyer. As a partner at Orrick, Ms. Schneider’s practice focuses on transactional matters, including the representation of state and local governments and governmental instrumentalities on general obligation and revenue bond financings for airports, mass transit, water and sewers, hospitals, educational facilities, convention centers, sports arenas and general government projects. Before joining Hunton & Williams, she spent four years in the District of Columbia government, where she was director of the Office of Intergovernmental Relations. Prior to joining the District of Columbia government, Ms. Schneider worked for four years in the Carter White House in the Office of Intergovernmental Affairs/Secretary to the Cabinet. Ms. Schneider also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

Lester P. Silverman, age 65, is Director Emeritus of McKinsey & Company, Inc., having retired from the international management consulting firm in 2005. Mr. Silverman joined McKinsey in 1982 and was head of the firm’s Electric Power and Natural Gas practice from 1991 to 1999. From 2000 to 2004, Mr. Silverman was the leader of McKinsey’s Global Nonprofit Practice. Previous positions included Principal Deputy Assistant Secretary for Policy and Evaluation in the U.S. Department of Energy from 1980 to 1981 and Director of Policy Analysis in the U.S. Department of the Interior from 1978 to 1980. He is a trustee of and advisor to several national and Washington, D.C.-area non-profit organizations. Mr. Silverman also is a member of the board of directors of Logos Energy, Inc., an energy technology start-up company. He has been a director of the Company since May 19, 2006.

 

Mr. Silverman’s qualifications for election to the Board include his broad experience with the energy industry and extensive experience in government and public policy. Mr. Silverman was a consultant to electric and gas utilities for 23 years and has public policy experience in the energy field. Mr. Silverman also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

-13-


Which directors are “independent”?

 

The listing standards of the NYSE require that a majority of our directors be “independent” as defined by the NYSE. Applying these standards, the Board has determined that 11 of our current 12 directors, consisting of Messrs. Dunn, Golden, Harker, Heintz, MacCormack, Nussdorf, Ross and Silverman, and Mmes. Krumsiek, Oelrich and Schneider, qualify as independent.

 

For a director to be considered independent under the NYSE listing standards, (i) a director cannot have any of the disqualifying relationships enumerated by the NYSE listing standards, and (ii) the Board must also determine that the director does not otherwise have any direct or indirect material relationship with the Company. In accordance with the NYSE listing standards, the Board has adopted, as part of our Corporate Governance Guidelines, categorical standards to assist it in determining whether a relationship between a director and the Company is a direct or indirect material relationship such that it would impair the director’s independence. Our Corporate Governance Guidelines can be found on our Web site (http://www.pepcoholdings.com) under the link “Corporate Governance.” Under these standards, which are based on the disqualifying relationships enumerated by the NYSE listing standards, a director is not “independent” if any of the conditions specified are met:

 

  a. The director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer of the Company. The executive officers of the Company consist of the president, principal financial officer, controller, any vice president in charge of a principal business unit, division or function, any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. Officers of the Company’s subsidiaries are deemed to be officers of the Company if they perform such policy-making functions for the Company.

 

  b. The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).

 

  c. (i) The director is a current partner or employee of a firm that is the Company’s internal or external auditor; (ii) the director has an immediate family member who is a current partner of such a firm; (iii) the director has an immediate family member who is a current employee of such a firm and personally works on the Company’s audit; or (iv) the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on the Company’s audit within that time.

 

  d. The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee.

 

  e. The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues. Contributions to tax exempt organizations shall not be considered “payments” for purposes of this categorical standard, provided however that the Company shall disclose in its annual proxy statement any such contributions made by the Company to any tax exempt organization in which any independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year from the Company to the tax exempt organization exceed the greater of $1 million, or 2% of such tax exempt organization’s consolidated gross revenues.

 

  f. For purposes of considering the existence or materiality of a director’s relationship with the Company or the relationship with the Company of an organization with which the director is associated, payments for electricity, gas or other products or services made in the normal course of business at prices generally applicable to similarly situated customers shall not be included.

 

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  g. With respect to directors who are members of the Audit Committee, the following additional provisions are applicable:

 

  (i) A director who is a member of the Audit Committee may not accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any subsidiary of the Company, provided that, unless the rules of the NYSE provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service (provided that such compensation is not contingent in any way on continued service). The term “indirect acceptance” by a member of the Audit Committee of any consulting, advisory, or other compensatory fee includes acceptance of such fee by a spouse, a minor child or stepchild or a child or stepchild sharing a home with the member or by an entity in which such member is a partner, member, an officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and which provides accounting, consulting, legal, investment banking or financial advisory services to the Company or any subsidiary of the Company.

 

  (ii) A director who is an “affiliated person” of the Company or its subsidiaries (other than in his or her capacity as a member of the Board or a Board Committee) as defined by the SEC shall not be considered independent for purposes of Audit Committee membership. A director who beneficially owns more than 3% of the Company’s common stock will be considered to be an “affiliated person.”

 

In making independence determinations, the Board considered the following relationships in accordance with its procedures for evaluating related person transactions described below under the heading “Board Review of Transactions with Related Parties.”

 

Orrick rendered legal services to certain Company subsidiaries in 2011, 2010 and 2009, and continues to render services to certain Company subsidiaries in 2012 with respect to certain contract matters. Ms. Schneider, a partner in Orrick, has informed the Board that (i) she has not worked and will not work on any of these matters, (ii) she did not direct Orrick’s work on any of these matters, and (iii) Orrick’s representation has had no effect on the compensation she receives from Orrick. In determining that Ms. Schneider is an independent director, the Board examined the specific transactions that the Company’s subsidiaries have had with Orrick during 2011, 2010 and 2009, as well as the nature and substance of their ongoing relationships with Orrick, and concluded (without necessarily concluding that Ms. Schneider’s relationship as a partner in Orrick constituted a relationship covered by the Corporate Governance Guidelines) that (1) the relationships between Orrick and the Company’s subsidiaries were solely business relationships that did not convey to Ms. Schneider any special benefits, and (2) the fact that the amounts paid by the Company and its subsidiaries to Orrick in 2011, 2010 and 2009 were $95,650, $131,301, and $388,918, respectively, all of which were below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director has a specified relationship. For these reasons, the Board has determined that these business relationships do not disqualify Ms. Schneider as an independent director.

 

Mr. Dunn is President and Chief Executive Officer of FTI. In February 2008, Pepco Energy Services, Inc., a wholly-owned Company subsidiary (“Pepco Energy Services”), entered into a contract to supply electricity to FTI for the period March 2008 through March 2009. There has been no business or other relationship between FTI and the Company or any of its subsidiaries, including Pepco Energy Services, since that time. The Board determined that (1) the relationship between Pepco Energy Services and FTI was solely a business relationship which did not convey to Mr. Dunn any special benefits; (2) the amounts paid to Pepco Energy Services under the contract was below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director has a specified relationship; and (3) the amounts paid to Pepco Energy Services under the contract constituted

 

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payment for electricity made in the normal course of business at prices generally applicable to similarly situated customers. For these reasons, the Board determined that this business relationship does not disqualify Mr. Dunn as an independent director.

 

Dr. Harker is President of the University of Delaware (“UDel”). In each of UDel’s fiscal years ending June 2011, 2010 and 2009, Pepco Energy Services supplied natural gas to UDel under a gas master agreement. In each of UDel’s fiscal years ending 2011, 2010 and 2009, Delmarva Power & Light Company, a wholly-owned utility subsidiary of the Company (“DPL”), delivered, and in some cases also supplied, electricity and natural gas to various UDel accounts on terms specified in tariffs approved by the Delaware Public Service Commission. After examining the relationships between Pepco Energy Services and UDel and between DPL and UDel, the Board determined that (1) the relationships between Pepco Energy Services and UDel and between DPL and UDel were solely business relationships which did not convey to Dr. Harker any special benefits; (2) the total amounts UDel paid to Pepco Energy Services and DPL are below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director has a specified relationship; and (3) the amounts UDel paid to Pepco Energy Services and DPL, respectively, constitute payment for electric and gas made in the normal course of business at prices generally applicable to similarly situated customers. For these reasons, the Board determined that the business relationships between Pepco Energy Services and UDel and between DPL and UDel do not disqualify Dr. Harker as an independent director.

 

Mr. Nussdorf is President and Chief Operating Officer of Clark Enterprises, Inc. (“Clark Enterprises”). Clark Enterprises and its affiliates have purchased natural gas from Pepco Energy Services in 2011. The Board determined that (1) the relationship between Pepco Energy Services and Clark Enterprises or its affiliates was solely a business relationship which did not convey to Mr. Nussdorf any special benefits; (2) the amounts paid to Pepco Energy Services under the contract are below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director has a specified relationship; and (3) the amounts paid to Pepco Energy Services under the contract constituted payment for natural gas made in the normal course of business at prices generally applicable to similarly situated customers. For these reasons, the Board determined that this business relationship does not disqualify Mr. Nussdorf as an independent director.

 

In making independence determinations under the NYSE listing standards with respect to a director, the Board has where applicable reviewed whether, and to what extent, a director or certain related entities have purchased electricity or natural gas from any of the Company’s regulated utility subsidiaries at rates prescribed by applicable law or governmental authority. Where such purchases do not categorically disqualify the director from a determination of independence under the NYSE listing standards, the Board has determined that such relationships do not create a direct or indirect material relationship with the Company which would preclude a determination of independence.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR”

THE ELECTION OF EACH NOMINEE FOR DIRECTOR NAMED IN THIS PROXY STATEMENT

 

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BOARD REVIEW OF TRANSACTIONS WITH RELATED PARTIES

 

The Board has adopted the Procedure for Evaluating Related Person Transactions (the “Procedure”), which sets forth the procedure followed by the Board for reviewing and approving or ratifying transactions with related persons to ensure compliance with the Company’s Conflicts of Interest Business Policy, Corporate Governance Guidelines and applicable law. The Procedure can be found on the Company’s Web site (http://www.pepcoholdings.com) by first clicking on the link “Corporate Governance” and then the link “Business Policies.”

 

Under the Procedure, related persons include directors, director nominees and specified executives (collectively, “covered persons”), as well as specified immediate family members of covered persons. The Procedure generally applies to any current or proposed transaction involving the Company or any subsidiary in which any related person has or will have a direct or indirect interest. The Procedure requires that each covered person provide to the Corporate Secretary annually a completed questionnaire setting forth all business relationships and other affiliations that relate in any way to the business and other activities of the Company. Each covered person also must update the information provided in the questionnaire as necessary throughout the year.

 

When a related person transaction is contemplated, all of the material facts regarding the substance of the proposed transaction, including the material facts relating to the related person’s or other party’s relationship or interest, must be fully disclosed to the Corporate Governance/Nominating Committee (excluding any member of such committee who has an interest in the transaction). The disinterested members of the Corporate Governance/Nominating Committee will review the contemplated transaction and will then make a recommendation to the disinterested members of the Board. The standards considered by the Corporate Governance/Nominating Committee in evaluating a related party transaction include the following:

 

   

the related person’s relationship to the Company and interest in the transaction;

 

   

the material facts of the proposed related party transaction, including the proposed aggregate value of the transaction;

 

   

benefits or advantages to the Company of the proposed related transaction;

 

   

availability of other sources of comparable products or services which are the subject of the related party transaction;

 

   

an assessment of whether the proposed related party transaction is on terms and conditions that are comparable to terms available to an unrelated third party or to employees generally; and

 

   

any effect on a director’s independence if the transaction involves a director.

 

Approval of the transaction requires the affirmative vote of a majority of the disinterested directors voting on the matter after disclosure to the Board of all of the material facts of the transaction.

 

The Procedure generally requires that related person transactions be approved in advance. On occasion, however, it may be in the Company’s interest to commence a transaction before the Corporate Governance/Nominating Committee or Board has had an opportunity to meet, or a transaction may have commenced before it is discovered that a related person is involved with the transaction. In such instances, the Procedure requires that the covered person consult with the Chairman of the Corporate Governance/Nominating Committee to determine the appropriate course of action, which may include subsequent ratification by the affirmative vote of a majority of the disinterested directors. If the Chairman of the Corporate Governance/Nominating Committee is an interested director, the Procedure requires that the covered person consult with the Lead Independent Director to determine the appropriate course of action.

 

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BOARD MEETINGS

 

The Board held seven meetings during 2011. Each director attended at least 75% of the combined number of Board meetings and meetings of the Board Committees on which he or she served. The Board has adopted an attendance policy, set forth in the Corporate Governance Guidelines, under which attendance in person is required at all regularly scheduled stockholder, Board and Committee meetings (except where scheduled as a conference call) and is the preferred method of attendance at all special meetings. The Chairman has the authority to waive this requirement and allow participation by telephone if, in the Chairman’s opinion, it is in the Company’s best interests to do so. Each of the Company’s directors attended the 2011 annual meeting of stockholders.

 

At each Board meeting, time is set aside for the directors to meet in executive session without any management director or other management personnel present. The executive session of the Board is convened by the Lead Independent Director, whose responsibilities are described under “Board Leadership Structure and Role in Risk Oversight — Board Leadership Structure.”

 

BOARD LEADERSHIP STRUCTURE AND ROLE IN RISK OVERSIGHT

 

Board Leadership Structure.    Mr. Rigby serves as President and Chief Executive Officer of the Company and is also Chairman of the Board. Under the Company’s Corporate Governance Guidelines, if the person elected Chairman of the Board is not an independent director as defined in the Corporate Governance Guidelines, then the independent directors will, upon the recommendation of the Corporate Governance/Nominating Committee, also annually elect an independent director to serve as the Lead Independent Director. Mr. Heintz currently serves as Lead Independent Director. The purpose of the Lead Independent Director is to facilitate communication among the independent directors, the Board and management. The Lead Independent Director has the following responsibilities:

 

   

chairs executive sessions of the Board’s non-management directors and has authority to call meetings of the non-management directors;

 

   

determines the agenda for the executive sessions of the directors, and participates with the Chairman of the Board in establishing the agenda for Board meetings;

 

   

presides at Board meetings when the Chairman of the Board is not present;

 

   

coordinates feedback to the Chief Executive Officer and other members of management;

 

   

in consultation with the Chairman of the Board, consistent with Board policy, recommends to the Corporate Governance/Nominating Committee proposed committee assignments and chairmanships to be adopted at the annual organizational meeting of the Board, subject to the approval of the Board;

 

   

oversees the development of appropriate responses to communications from stockholders and other interested persons addressed to the non-management directors as a group;

 

   

on behalf of the non-management directors, retains such counsel or other advisors as they deem appropriate in the conduct of their duties and responsibilities; and

 

   

performs such other duties as the Board deems appropriate.

 

In 2009, when Mr. Rigby was elected Chairman of the Company, the Board examined the issue of separating the Chairman and Chief Executive Officer roles and concluded that it was preferable for the Company to continue combining the roles and continue electing a Lead Independent Director annually. The Corporate Governance/Nominating Committee reviews this matter annually and makes a recommendation regarding the separation of these positions to the Board. In January 2012, the Corporate Governance/Nominating Committee re-examined the issue of separating the Chairman and Chief Executive Officer roles and reached the conclusion that:

 

   

there was no firm evidence that financial performance would be improved by splitting the roles;

 

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dividing the roles may weaken the Company’s ability to effectively develop and implement strategy; and

 

   

as a matter of good governance, the Company already has measures in place to strengthen the Board’s independence (for example, the Board has elected a Lead Independent Director and, at each Board meeting, time is set aside for the directors to meet in executive session without any management director or other management personnel present).

 

The Corporate Governance/Nominating Committee recognized the need for oversight by an independent board of directors, but ultimately concluded that the utilization of a Lead Independent Director addresses any concern created by the same person acting as Chairman and Chief Executive Officer and also provides for a collaborative and effective leadership structure. The Board reviewed and concurred with the Corporate Governance/Nominating Committee’s conclusions. As a result, the Board determined that there was no need to separate the roles of Chairman and Chief Executive Officer at this time. The Corporate Governance/Nominating Committee will examine this issue annually, as well as more frequently if changing circumstances warrant further analysis.

 

The Board’s Role in Risk Oversight.    One of the responsibilities of the Board is the oversight of the Company’s risk management activities, which is discharged by the Board and through its standing Committees. In discharging this responsibility, the Board and its committees, with the assistance of management, identifies and evaluates the major risks faced by the Company and oversees and monitors the design and implementation of guidelines and programs to manage these risks.

 

The Audit Committee, as more fully described below under the heading “Board Committees — Audit Committee,” is responsible for assisting the Board in overseeing the Company’s accounting controls and the design and performance of the internal audit function. The Audit Committee also oversees the activities of the Risk Management Committee, the members of which consist of many of the Company’s senior executives and the business unit employees who manage the day-to-day risk management responsibilities for the Company. The Risk Management Committee meets at least six times a year. The Risk Management Committee’s areas of focus include competitive, economic, operational, financial (including accounting, credit, liquidity and tax), legal, regulatory, health, safety and environmental, political and reputational risks. The Company also has a Risk Working Group, composed of management employees across the organization, which is responsible for identifying and assessing new and emerging risk issues and developing mitigation strategies. The Risk Working Group reports monthly to the Risk Management Committee. The Audit Committee periodically discusses and reviews with management the Company’s risk assessment and risk management and also considers whether management has provided appropriate disclosure in the Company’s financial statements.

 

The Board and the Finance Committee discuss with management the Company’s risk mitigation profile as part of their review of the Company’s strategic and financing plans, including management’s consideration of risk management associated with strategic and financing plans and implementation of those plans.

 

Compensation Programs Risk Assessment. In 2010, management, using a framework provided by the Compensation Committee’s consultant, Pearl Meyer & Partners (“PM&P”), conducted a risk assessment of the Company’s compensation policies and practices for all employees, including executives, which management reviewed with the Compensation Committee and PM&P. Management conducted a risk assessment of the Company’s 2011 short-term and long-term incentive-based compensation which management reviewed with the Compensation Committee and PM&P. Each of these assessments sought to identify features of the Company’s compensation policies and practices that could encourage excessive risk-taking.

 

In order to focus employees on performance objectives that promote the best interests of the Company and its stockholders, short-term and long-term incentive-based compensation is linked to the achievement of measurable financial and business and, in the case of short-term incentives, individual performance goals. The risk assessments conducted by management found that these arrangements are coupled with compensation design

 

-19-


elements and other controls that discourage business decision-making that is focused solely on the compensation consequences. These compensation design elements and other controls include:

 

   

Strong enterprise-wide risk management policies and programs, which have undergone third-party risk assessments.

 

   

Cash incentives that are earned only if, in addition to the satisfaction of non-financial performance metrics, a corporate or business unit net earnings threshold is exceeded.

 

   

The absence of compensation arrangement features often identified as encouraging excessive risk-taking, such as:

 

   

an incentive compensation mix overly weighted toward annual incentives;

 

   

payout cliffs that might cause short-term business decisions to be made solely for the purpose of meeting payout thresholds; and

 

   

bonuses awarded upon completion of a task, while the income and risk to the Company from the task extend over a significantly longer period of time.

 

   

Program designs that provide a balanced mix of cash and equity and annual and long-term incentives.

 

   

Performance metrics, not all of which are financial in nature, such as safety, diversity and customer satisfaction.

 

   

No stock options.

 

   

Share ownership guidelines that are applicable to officers of the Company at the level of Vice President and above.

 

On the basis of its review of the Company’s compensation programs, management concluded, and advised the Compensation Committee, that the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

BOARD COMMITTEES

 

The Board has five separately designated standing Committees:

 

   

the Audit Committee;

 

   

the Compensation/Human Resources Committee;

 

   

the Corporate Governance/Nominating Committee;

 

   

the Executive Committee; and

 

   

the Finance Committee.

 

Each committee has a charter, which can be found on the Company’s Web site (http://www.pepcoholdings.com) under the link “Corporate Governance.”

 

Each of the Board committees (other than the Executive Committee) sets aside time to meet in executive session without management personnel present. The Compensation Committee regularly meets separately with its compensation consultant. The Audit Committee regularly meets separately with the Company’s General Auditor and the Company’s independent registered public accounting firm.

 

The Audit Committee held eight meetings in 2011. The Audit Committee represents and assists the Board in discharging its responsibility of oversight with respect to the accounting and control functions and financial statement presentation (but the existence of the Audit Committee does not alter the traditional roles and responsibilities of the Company’s management and its independent registered public accounting firm). The Audit Committee is responsible for, among other things, representing and assisting the Board in oversight of (i) the integrity of the Company’s financial statements, accounting and financial reporting processes and audits of the

 

-20-


Company’s consolidated financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the qualifications, independence and the retention, compensation and performance of the Company’s independent registered public accounting firm, and (iv) the design and performance of the Company’s internal audit function. The Audit Committee also reviews the Company’s guidelines and policies with respect to risk assessment, and has full power and authority to obtain advice and assistance from independent legal, accounting or other advisors as it may deem appropriate to carry out its duties.

 

Audit Committee members are Directors Golden, Harker, Krumsiek, Nussdorf, Oelrich and Ross (Chairman). The Board has determined that each of Directors Golden, Krumsiek, Nussdorf, Oelrich and Ross is an “audit committee financial expert” as defined by the rules of the SEC. The Board has determined that each member of the Audit Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

The Compensation/Human Resources Committee held nine meetings in 2011. The Compensation Committee evaluates annually the performance of the Company’s Chief Executive Officer (“CEO”) and, together with the other independent members of the Board, sets the compensation level of the CEO after taking into account the CEO’s annual evaluation and such other factors as they deem appropriate. The Compensation Committee reviews the performance of elected officers and other executives in the context of the administration of the Company’s executive compensation programs. The Compensation Committee, at the recommendation of the CEO, (i) approves the salaries for the executive officers, the heads of the business units, and all Vice Presidents and any other salary that exceeds the approval level of the CEO and (ii) exercises the powers of the Board with respect to the approval of the Company’s annual salary range and merit budget increases for all management employees. The Compensation Committee sets target award levels and approves payments for the executive officers and the heads of the business units pursuant to the Pepco Holdings, Inc. Annual Executive Incentive Compensation Plan (the “EICP”) and the stockholder-approved LTIP, and reviews other elements of compensation and benefits for management employees and makes recommendations to the Board as appropriate. The Compensation Committee also makes recommendations to the Board concerning the Company’s retirement and other benefit plans and oversees corporate workforce diversity issues. The Compensation Committee receives input on compensation matters from the CEO and from other members of management, as it deems appropriate.

 

Committee members are Directors Dunn (Chairman), Harker, Heintz, Krumsiek and Ross. The Board has determined that each member of the Compensation Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

The Corporate Governance/Nominating Committee held six meetings in 2011. The Corporate Governance/Nominating Committee’s duties and responsibilities include making recommendations to the Board regarding the governance of the Company and the Board, and helping ensure that the Company is properly managed to protect and enhance stockholder value and to meet the Company’s obligations to stockholders, customers, the industry and under the law. The Corporate Governance/Nominating Committee reviews and recommends to the Board candidates for nomination for election as directors, makes recommendations to the Board regarding Board structure, practices and policies, including Board committee chairmanships and assignments and the compensation of Board members, evaluates Board performance and effectiveness, and oversees the development of corporate strategy and structure, including management development, management succession, management performance criteria, and business plans and oversees corporate and government affairs. The Corporate Governance/Nominating Committee also oversees the technology and systems used by the Company with the goal of ensuring that they are adequate to properly run the business and for the Company to remain competitive.

 

Corporate Governance/Nominating Committee members are Directors Dunn, Heintz, MacCormack (Chairman), Nussdorf, Oelrich and Silverman. The Board has determined that each member of the Corporate Governance/Nominating Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

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The Executive Committee does not hold regularly scheduled meetings and did not hold any meetings in 2011. The Executive Committee has, and may exercise when the Board is not in session, all the powers of the Board in the management of the property, business and affairs of the Company, except as otherwise provided by law. Members of this committee are Directors Heintz (Chairman), Nussdorf , Rigby and Schneider.

 

The Finance Committee held six meetings in 2011. The Finance Committee oversees the financial objectives, policies, procedures and activities of the Company and considers the Company’s long-term and short-term strategic plans. The Finance Committee reviews with management the Company’s risk mitigation profile and reviews the Company’s insurance program. Finance Committee members are Directors Golden, Heintz, MacCormack, Schneider and Silverman (Chairman).

 

How do I send a communication to the Board or to a specific individual director?

 

The Company’s directors encourage interested parties, including employees and stockholders, to contact them directly and, if desired, confidentially or anonymously regarding matters of concern or interest, including concerns regarding questionable accounting or auditing matters. The names of the Company’s directors can be found on pages 8-13 of this Proxy Statement and on the Company’s Web site (http://www.pepcoholdings.com) under the link “Corporate Governance.” The Company’s directors may be contacted in writing either individually or as a group or partial group (such as all non-management directors), c/o Corporate Secretary, Pepco Holdings, Inc., 701 Ninth Street, N.W., Room 1300, Washington, D.C. 20068. If you wish your communication to be treated confidentially, please write the word “CONFIDENTIAL” prominently on the envelope and address it to the director by name so that it can be forwarded without being opened. A communication addressed to multiple recipients (such as to “directors,” “all directors,” “all non-management directors,” or “independent directors”) will necessarily have to be opened and copied by the Office of the Corporate Secretary in order to forward it to each director, and hence cannot be transmitted unopened, but will be treated as a confidential communication. If you wish to remain anonymous, do not sign your letter or include a return address on the envelope.

 

Communications from Company employees regarding accounting, internal accounting controls or auditing matters may be submitted in writing addressed to: Director, Internal Audit, Pepco Holdings, Inc., 701 Ninth Street, N.W., Room 8220, Washington, D.C. 20068 or by telephone to (202) 872-3341. Such communications will be handled initially by the Internal Audit Group, which will investigate the matter and report to the Audit Committee. If for any reason an employee does not wish to submit a communication to the Director, Internal Audit, the communication may be addressed to the Chairman of the Audit Committee using the procedure in the preceding paragraph for contacting a Company director, or by mail, telephone, facsimile or e-mail to the Company’s Ethics Officer, who will investigate the matter. Employees may also leave messages on the Company’s Ethics Officer’s hotline.

 

How much are the directors paid for their services?

 

During 2011, each of the Company’s non-management directors was paid an annual cash retainer of $85,000, plus a fee of $2,000 for each Board or committee meeting attended. The Chairman of the Audit Committee received an additional annual cash retainer of $7,500 and a non-management director who chaired any one of the other standing committees of the Board received an additional annual cash retainer of $5,000. The director who served as Lead Independent Director received an annual cash retainer of $15,000 for service in that capacity. Non-management directors were permitted during 2011 to elect to receive their retainer payments and meeting fees in cash or shares of common stock, or to defer the receipt of their cash retainer under the terms of the Pepco Holdings, Inc. Revised and Restated Executive and Director Deferred Compensation Plan (the “PHI Deferred Compensation Plan”) as discussed in more detail below. Although under the terms of the LTIP, each non-management director is entitled to an annual grant of an option to purchase 1,000 shares of common stock, since 2003, the Board has determined not to make these grants.

 

The compensation of the non-management members of the Board is reviewed periodically by the Corporate Governance/Nominating Committee, which makes recommendations for changes, if any, to the Board for its approval. In December 2011, the Corporate Governance/Nominating Committee recommended, and the Board

 

-22-


approved, subject to the approval of the 2012 LTIP by stockholders at the Annual Meeting, a change in the compensation mix for non-management directors which would increase the annual retainer and provide for the payment of a portion of the annual Board retainer in common stock or certain common stock equivalents, such as restricted stock units, or RSUs. This change in the compensation mix is intended to more closely align the interests of the Company’s non-management directors with those of stockholders. As approved by the Board, the annual Board retainer is to be comprised of $50,000 in cash and $65,000 in common stock, to be paid in the form of equity awards under the 2012 LTIP. This change in the director compensation mix was recommended by PM&P, the Corporate Governance/Nominating Committee’s compensation consultant. As part of its review of director compensation, the Corporate Governance/Nominating Committee also recommended, and the Board approved, an increase in the annual committee chair and Lead Independent Director retainers to $10,000 and $25,000, respectively. These changes will be effective in May 2012. The $2,000 per meeting fee has not changed.

 

The following table sets forth the compensation paid by the Company to its non-management directors for the year ended December 31, 2011. During 2011, no director received any other compensation from the Company other than retainer and meeting fees as described in the table below.

 

2011 DIRECTOR COMPENSATION

 

Name

   Fees
Earned or
Paid in
Cash(1)
 

Jack B. Dunn, IV

   $ 132,000   

Terence C. Golden(2)

     125,000   

Patrick T. Harker

     129,000   

Frank O. Heintz

     153,308   

Barbara J. Krumsiek

     127,000   

George F. MacCormack

     128,000   

Lawrence C. Nussdorf(2)

     132,692   

Patricia A. Oelrich

     127,000   

Frank K. Ross

     140,500   

Pauline A. Schneider

     111,000   

Lester P. Silverman

     128,000   

 

(1) 

Consists of Board and committee cash retainer and meeting fees, which, under the terms of the Pepco Holdings, Inc. Non-Management Directors Plan (the “Directors Plan”), a director may elect to (i) receive in the form of cash or shares common stock, or (ii) defer under the terms of the PHI Deferred Compensation Plan. The directors listed in the table below elected to receive all or a portion of their 2011 Board and committee retainer and meeting fees in the form of shares of common stock and/or as a credit to the director’s account under the PHI Deferred Compensation Plan. Credits to the director’s PHI Deferred Compensation Plan account may be made to a prime rate interest account, an investment fund account determined by the Compensation Committee, or to a phantom share account that mirrors an investment in shares of common stock. For information on the PHI Deferred Compensation Plan, see “Deferred Compensation Plans — PHI Revised and Restated Executive and Director Deferred Compensation Plan.”

 

            Dollar Amount of PHI Deferred Compensation Plan Credit  

Name

   Shares of
Common Stock
     PHI Phantom
Share Account
     Interest Rate/Investment
Fund Accounts
 

Jack B. Dunn, IV

     —         $ —         $ 132,000   

Patrick T. Harker

     2,251         —           —     

Frank O. Heintz

     3,084         —           —     

George F. MacCormack

     —           —           64,000   

Patricia A. Oelrich

     1,350         —           —     

Frank K. Ross

     2,448         —           —     

Pauline A. Schneider

     —           42,500         42,500   

 

-23-


The following table sets forth, as of December 31, 2011 and March 23, 2012, the number of phantom shares (each corresponding to one share of common stock) held by non-management directors who participate in the PHI Deferred Compensation Plan. Phantom shares under the PHI Deferred Compensation Plan may be settled only in cash.

 

     Pepco Holdings
Phantom Shares as of
 

Name

   December 31,
2011
     March 23,
2012
 

Terence C. Golden

     —           502   

Barbara J. Krumsiek

     18,209         18,209   

George F. MacCormack

     5,827         5,827   

Lawrence C. Nussdorf

     4,200         4,200   

Pauline A. Schneider

     11,193         11,712   

Lester P. Silverman

     23,934         23,934   

 

(2) 

Each of Messrs. Golden and Nussdorf has an option to purchase 1,000 shares of common stock at an exercise price of $22.685 per share, which option is currently exercisable. Each option had a grant date fair value of $4.29 per share.

 

The Company provides non-management directors with travel accident insurance for Company-related travel and directors’ and officers’ liability insurance coverage, and reimburses them for travel, hotel and other out-of-pocket expenses incurred in connection with the performance of their duties as directors.

 

The Company also provides non-management directors with free parking in the Company’s headquarters building, which is also available for use by them other than in connection with the performance of their duties as directors. In addition, during 2011, Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events were made available to non-management directors for personal use when not being used by the Company for business purposes. There was no incremental cost to the Company for providing these benefits to non-management directors.

 

During 2011, each non-management director was required to own at least 7,500 shares of common stock or common stock equivalents, including phantom shares credited to the account of such director under the PHI Deferred Compensation Plan. Newly elected or appointed non-management directors were required to reach this ownership level within three years after the date of their election or appointment. As of December 31, 2011, each non-management director who had been a director for three years met this requirement.

 

In December 2011, the Corporate Governance/Nominating Committee recommended, and the Board approved, an increase in these director share ownership requirements in order to more closely align the interests of non-management directors with those of stockholders. Effective May 18, 2012, non-management directors will be required to own a minimum amount of common stock or common stock equivalents (including, without limitation, phantom shares under the PHI Deferred Compensation Plan and restricted stock units or other equity awards made under the 2012 LTIP) with a market value equal to four times the annual board cash retainer. Current non-management directors will have up to five years from the effective date of these requirements to reach the increased share ownership level. Newly elected directors will have five years from their election to meet this requirement.

 

-24-


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information as of March 23, 2012 regarding the beneficial ownership of common stock by:

 

   

each director;

 

   

each director nominee;

 

   

each executive officer named in the 2011 Summary Compensation Table (each, a “named executive officer” or “NEO”); and

 

   

all of the Company’s directors and executive officers as a group.

 

As of March 23, 2012, 227,839,251 shares of common stock were issued and outstanding. The number of shares beneficially owned by each stockholder is determined under rules and regulations promulgated by the SEC. The information does not necessarily indicate beneficial ownership for any other purpose. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options, warrants or other convertible securities or rights held by that person that are currently exercisable or exercisable within 60 days after March 23, 2012 are deemed to be presently outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person.

 

Unless otherwise noted below:

 

   

the address for each beneficial owner in the tables below is c/o Pepco Holdings, Inc., 701 Ninth Street, N.W., Washington, D.C. 20068; and

 

   

subject to applicable community property laws, to the Company’s knowledge, each person named in the tables below has sole voting and dispositive power over the shares shown as beneficially owned by that person.

 

Name of Beneficial Owner

   Shares of
Common Stock
Beneficially
Owned(1)
     Percentage of
Common Stock
Beneficially Owned
 

Jack B. Dunn, IV

     10,495         *   

Kirk J. Emge(2)

     64,895         *   

Terence C. Golden(3)(4)

     45,132         *   

Patrick T. Harker

     9,789         *   

Frank O. Heintz(5)

     17,282         *   

John U. Huffman

     35,732         *   

Anthony J. Kamerick

     69,422         *   

Barbara J. Krumsiek

     9,038         *   

George F. MacCormack

     11,282         *   

Lawrence C. Nussdorf(4)

     11,000         *   

Patricia A. Oelrich

     4,266         *   

Joseph M. Rigby

     171,389         0.1

Frank K. Ross

     17,539         *   

Pauline A. Schneider

     8,474         *   

Lester P. Silverman(6)

     7,000         *   

David M. Velazquez

     46,655         *   

All directors and executive officers as a group (21 persons)(7)

     651,607         *   

 

* Less than 1% (with respect to a named executive officer, less than 0.1%).

 

(1) 

Includes shares held under the Dividend Reinvestment Plan and the Retirement Savings Plan. Also includes time-based awards of restricted stock under the LTIP, as to which the person has voting power but not dispositive power. Does not include (i) shares of common stock underlying unvested RSUs granted under

 

-25-


  the LTIP or (ii) phantom shares credited to the account of a beneficial owner under the PHI Deferred Compensation Plan, as these interests do not confer either voting power or dispositive power.

 

(2) 

Includes 1,173 shares owned by Mr. Emge’s spouse. Mr. Emge disclaims beneficial ownership of these shares.

 

(3) 

Includes 11,600 shares owned by Mr. Golden’s spouse. Mr. Golden disclaims beneficial ownership of these shares.

 

(4) 

Includes an option to purchase 1,000 shares of common stock at an exercise price of $22.685 per share, which option is currently exercisable.

 

(5) 

Shares are owned through the Frank O. Heintz Trust of which Mr. Heintz is Trustee.

 

(6) 

Includes 1,000 shares owned by Mr. Silverman’s spouse. Mr. Silverman disclaims beneficial ownership of these shares.

 

(7) 

See responses to all footnotes above.

 

The following table sets forth the number and percentage of shares of common stock reported as beneficially owned by all persons known by the Company to own beneficially more than 5% of the common stock.

 

Name and Address of Beneficial Owner

   Shares of
Common Stock
Owned
     Percent of
Common Stock
Outstanding
 

BlackRock, Inc.

40 East 52nd Street

New York, NY 10022(1)

     11,467,336         5.1

State Street Corporation

One Lincoln Street

Boston, MA 02111(2)

     12,314,895         5.4

The Vanguard Group, Inc.

100 Vanguard Blvd.

Malvern, PA 19355(3)

     13,329,288         5.9

 

(1) 

This disclosure is based solely on information contained in a Schedule 13G, as filed with the SEC on February 9, 2012, by BlackRock, Inc.

 

(2) 

This disclosure is based solely on information contained in a Schedule 13G, as filed with the SEC on February 9, 2012, by State Street Corporation, in which it reported that it has shared voting and dispositive power over 12,314,895 shares of common stock.

 

(3) 

This disclosure is based solely on information contained in a Schedule 13G/A, as filed with the SEC on February 9, 2012, by The Vanguard Group, Inc., in which it reported that it has (i) sole dispositive power over 13,016,070 shares of common stock; (ii) sole voting power over 313,218 shares of common stock; and (iii) shared dispositive power over 313,218 shares of common stock.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and any beneficial owner of more than 10% of the common stock to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of the common stock. Based on a review of such reports filed during or with respect to 2011 and on written confirmations provided by its directors and executive officers, the Company believes that during 2011 all of its directors and executive officers filed on a timely basis the reports required by Section 16(a). The Company is not aware of any person or entity that beneficially owns more than 10% of the common stock.

 

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PROPOSAL 2: ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION

 

The Company is required to submit the approval of the compensation paid to the Company’s named executive officers as disclosed in this Proxy Statement pursuant to the rules of the SEC to its stockholders for a nonbinding, advisory vote. The disclosures related to compensation of the Company’s named executive officers include the Compensation Discussion and Analysis, the 2011 Summary Compensation Table, and the other related compensation tables and narrative disclosures in this Proxy Statement, all of which can be found on pages 28-69 of this Proxy Statement.

 

The Board believes that the Company’s executive compensation program, which is targeted at the 50th percentile of the competitive peer group range for each pay element, aligns compensation with the long-term interests of stockholders. The objective of our executive compensation is to attract, motivate and retain talented executives while promoting the interests of the Company and its customers and stockholders. The Board believes that the Company’s executive compensation philosophy and practices have resulted in executive compensation decisions that are appropriate and that have benefitted the Company and the stockholders over time.

 

As a result, the Company is asking stockholders to indicate their support for the Company’s executive compensation by voting “for” the following resolution:

 

RESOLVED, that the stockholders of Pepco Holdings, Inc. (the “Company”) approve, on an advisory basis, the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K of the Securities Act of 1933, as amended, including the Compensation Discussion and Analysis, the compensation tables and the narrative discussion in the Company’s 2012 Proxy Statement.”

 

Because the vote on this proposal is advisory, it will not be binding on the Company. However, both the Compensation Committee and the Board value the opinions expressed by stockholders in their vote on this matter and will take the outcome of the vote into account when considering the future compensation of the named executive officers.

 

You may vote “for” or “against” this proposal, or you may “abstain” from voting on this proposal. Approval of the proposal requires the affirmative vote of the holders of a majority of the common stock present and entitled to vote at the Annual Meeting.

 

Any shares that are the subject of an abstention with regard to the vote on this proposal will be considered present and entitled to vote. Accordingly, an abstention will have the same effect as a vote cast against the proposal. Shares that are the subject of a broker non-vote with respect to this proposal will be treated as not entitled to vote on the proposal, and therefore such shares will not be taken into account in determining whether the proposal is approved.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL 2.

 

-27-


COMPENSATION/HUMAN RESOURCES COMMITTEE REPORT

 

The Compensation Committee reviewed and discussed with the Company’s management the Compensation Discussion and Analysis (the “CD&A”) required by Item 402(b) of Regulation S-K. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in the Company’s Annual Report on Form 10-K and in this Proxy Statement.

 

Jack B. Dunn, IV, Chairman

Patrick T. Harker

Frank O. Heintz

Barbara J. Krumsiek

Frank K. Ross

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

The following is a brief overview of the more detailed discussion and analysis set forth in this CD&A, which focuses on compensation paid to our NEOs in 2011, who include:

 

   

Joseph M. Rigby, our Chairman, President and Chief Executive Officer;

 

   

Anthony J. Kamerick, our Senior Vice President and Chief Financial Officer;

 

   

David M. Velazquez, our Executive Vice President;

 

   

Kirk J. Emge, our Senior Vice President and General Counsel; and

 

   

John U. Huffman, the President and Chief Executive Officer of Pepco Energy Services, Inc.

 

In short, our executive compensation philosophy is straightforward: we reward our executives for their contribution to our performance and stockholder value by tying a significant portion of their total compensation directly to our short- and long-term performance. The primary elements of our NEOs’ total compensation are base salary, annual cash incentive awards and discretionary bonuses, RSUs (which are two-thirds performance-based), and retirement and other employee benefits. We have designed a compensation program that makes a substantial percentage of executive pay variable, subject to increase when corporate targets are achieved or exceeded and reduction when corporate targets are not achieved.

 

The following charts reflect the compensation mix for our CEO and all other NEOs:

 

LOGO    LOGO

 

-28-


LOGO    LOGO

 

Say on Pay

 

In 2011, we submitted our executive compensation program to a vote, on an advisory basis, of our stockholders and it received the support of approximately 91% of the shares of common stock present and eligible to vote at our 2011 annual meeting of stockholders. We pay careful attention to any feedback we receive from our stockholders regarding our executive compensation, including the say on pay vote. The Compensation Committee considered the results of this stockholder advisory vote in making its compensation decisions in 2011, and, as a result, determined to more closely align compensation to Company performance objectives.

 

In addition, at our 2011 annual meeting, stockholders indicated their preference, on an advisory basis, that the advisory vote on NEO compensation be held annually. In response, the Compensation Committee determined to hold an annual advisory vote on this matter.

 

2011 Business Results

 

During 2011, the Company made significant progress on executing its strategic plan to enhance stockholder value while continuing its commitment to improving the reliability of electric service and customer satisfaction. Key components of this plan effected during 2011 include:

 

   

making planned infrastructure investments;

 

   

filing rate cases in each jurisdiction to address, among other things, regulatory lag;

 

   

implementing a comprehensive plan to improve reliability and customer satisfaction;

 

   

launching an accelerated emergency improvement program to enhance storm response;

 

   

creating a smart grid and installing advanced technology, such as smart meters;

 

   

expanding our energy services business; and

 

   

pursuing technology and other practices that promote energy efficiency, energy conservation and environmental sustainability.

 

2011 Compensation Actions

 

Base Salary

 

For 2011, Messrs. Rigby and Velazquez did not receive salary increases due to customer reliability issues. Messrs. Kamerick and Emge received salary increases of 2.9% and 2.6%, respectively, in 2011 based on their performance in 2010. Mr. Huffman received a salary increase of 3.7% in 2011 based on his performance.

 

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Annual Incentive Plan Compensation and Discretionary Bonuses

 

Each of our NEOs received an award under the EICP based on the Company’s 2011 results. In addition, Mr. Velazquez received a $125,000 discretionary bonus in recognition of his strong leadership and efforts in implementing reliability enhancement measures and customer satisfaction initiatives in the Power Delivery business during 2011. Mr. Huffman also received a $10,000 discretionary bonus for 2011 in recognition of his role in the management of corporate communications.

 

Long-Term Incentive Plan

 

For our 2009 to 2011 performance period, performance-based awards were made under our LTIP, resulting in the vesting of common stock under these awards for each NEO.

 

Compensation Changes for 2011

 

To further align compensation received by our NEOs with the interests of our stockholders and to reinforce good corporate governance practices, the following changes to our executive compensation programs were made in 2011:

 

   

We entered into a new employment agreement with Mr. Rigby, which:

 

   

eliminated the excise tax gross-up related to change in control payments and the right to a pension supplement in the event of a termination without cause; and

 

   

further aligns his pay with our performance, particularly in the areas of reliability, customer service, Company reputation, “smart grid” deployment, succession planning and talent management and recruitment.

 

   

We started the practice of issuing awards of time-based RSUs (instead of restricted stock awards) under the LTIP, which accrue dividends that will not be paid unless the RSUs vest, and we continued that practice in 2012.

 

   

We adopted a corporate governance policy prohibiting the hedging of the economic risk associated with the ownership of our common stock by directors and employees.

 

   

We amended the PHI Deferred Compensation Plan to conform the terms of the plan to preferred practices and to clarify certain tax-related provisions.

 

   

We amended our defined benefit pension plan and our supplemental retirement plans, and approved a new supplemental retirement plan, all to align the Company’s retirement benefits both among existing plans and with current market practices.

 

   

We adopted a new long-term incentive plan, the 2012 LTIP, to replace the current LTIP which is due to expire in August 2012, to assist the Company in attracting, retaining and rewarding highly competent officers, key employees and non-employee directors.

 

   

We amended the EICP primarily to allow for the deductibility by the Company of performance-based compensation in excess of $1.0 million, as permitted under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Corporate Governance and Pay for Performance

 

Our 2011 compensation program was built upon the Company’s compensation governance framework and pay-for-performance philosophy, which includes the following features:

 

   

We have established a pay-for-performance environment by linking short-term and long-term incentive-based compensation to the achievement of measurable business and individual performance goals.

 

   

Our executive compensation programs continued to emphasize long-term performance over short-term performance, and variable over fixed compensation.

 

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We determine base salaries and base salary increases based on a NEO’s performance and position and the salary range for that position, using competitive market survey data.

 

   

We target compensation levels at approximately the 50th percentile of the competitive range for each pay element, assuming each NEO is fully performing in his or her position.

 

   

Long-term incentives are designed to align NEO focus with stockholders by measuring relative stock price performance, as well as to serve as a retention mechanism.

 

   

We use equity-based, long-term incentive compensation as a means to align the interests of our NEOs with those of our stockholders. To do this, we grant RSUs, two-thirds of which may vest based on performance over a three-year performance period. We have not granted stock options since 2003 and none of our NEOs holds any stock options.

 

   

We have a common stock ownership requirement for our officers, which each NEO has satisfied.

 

   

We incorporate goals into our short-term and long-term incentive plans that are intended to balance the interests of our stockholders, customers and employees.

 

   

We provide our NEOs with only limited perquisites and personal benefits, and we do not provide tax gross-ups on any perquisites.

 

   

We maintain a strong risk management program which includes our Compensation Committee’s ongoing evaluation and oversight of the relationship between our compensation programs and risk.

 

   

We may recoup certain incentive compensation payments to our Chief Executive Officer and Chief Financial Officer when required under the Sarbanes-Oxley Act of 2002. After final regulations and NYSE rules are adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act,” we intend to adopt a recoupment policy for our NEOs and other covered executives that complies fully with those regulations and rules.

 

Compensation Process and Independent Consultants

 

The Compensation Committee, the composition and responsibilities of which are described more fully in “Board Committees — Compensation/Human Resources Committee,” primarily is responsible for all executive compensation decisions with respect to each of the NEOs, except for the annual salary of the Chief Executive Officer, which is approved by all of the independent directors. To assist it in carrying out its responsibilities, the Compensation Committee requests and receives recommendations from the Chief Executive Officer with respect to the compensation packages of the other NEOs, including the selection and weighting of the specific performance objectives applicable to short-term and long-term incentive awards.

 

When structuring compensation arrangements for the NEOs and other executives, the Compensation Committee typically receives advice from its independent compensation consultant concerning pay mix and levels of compensation, as well as information with respect to the financial costs and tax and accounting consequences associated with the various elements of compensation. Since 2007, the Compensation Committee has engaged PM&P as its independent compensation consultant to advise the Compensation Committee on various executive compensation matters. Pursuant to this engagement, PM&P annually:

 

   

reviews our compensation philosophy;

 

   

advises the Compensation Committee on the construction and determination of a peer group of utility companies;

 

   

reviews proposed new salary ranges;

 

   

reviews the EICP and the LTIP;

 

   

provides advices on plan and award design;

 

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reviews proposed compensation plans or amendments to existing plans;

 

   

reviews the total executive compensation structure for the coming year;

 

   

attends the Compensation Committee meetings dealing with executive compensation, as requested;

 

   

presents comparative information and survey data to assist the Compensation Committee in its deliberations and decision-making concerning executive compensation;

 

   

advises senior management, as requested by the Compensation Committee, on executive compensation matters; and

 

   

compiles for the Compensation Committee various industry performance and other comparative information.

 

In addition, in 2011, PM&P provided advice to the Compensation Committee in connection with the employment agreement entered into with Mr. Rigby. While serving as the compensation consultant to the Compensation Committee, PM&P has not had any other relationships with the Company or any of its executives, nor does it provide services to the Company other than those relating to compensation matters.

 

Compensation Philosophy

 

The objective of our executive compensation program is to attract, motivate and retain talented executives while promoting the interests of the Company and its customers and stockholders. To achieve this objective, our executive compensation program is designed to:

 

   

provide executives with salaries, incentive compensation opportunities and other benefits that are competitive with comparable companies in our industry;

 

   

reward executives for the achievement by the Company and its business segments of targeted levels of operational excellence and financial performance and for the achievement of individual performance goals;

 

   

align the financial interests of our NEOs with those of the stockholders through equity-based, long-term incentive awards, as well as stock ownership requirements which require NEOs to hold common stock in an amount equal to between one and five times such person’s base salary; and

 

   

strike a careful balance between risk and compensation so as to not encourage executives to take excessive risk which could have a material adverse impact on our business and financial results.

 

Compensation Levels and Benchmarking

 

Compensation levels for executives are determined based on a number of factors, including the individual’s roles and responsibilities within the Company, the individual’s experience, pay levels in the marketplace for similar positions and performance of the individual and the Company as a whole.

 

The Compensation Committee assesses competitive market compensation practices using a number of sources. One of the primary ways the Compensation Committee evaluates the Company’s executive compensation arrangements relative to other companies is to compare the Company’s practices to a group of companies that are primarily electricity and natural gas distribution companies with a similar market capitalization. The composition of this group of peer companies is reassessed annually and its composition may be changed by the Compensation Committee from year to year to reflect corporate transactions or other events that may affect the comparability of one or more of the constituent companies. The Compensation Committee modified the Utility Peer Group by removing DPL, Inc., which was acquired in a merger prior to the end of the measurement period. For 2011, the Utility Peer Group consisted of the 18 companies listed below (the “2011 Utility Peer Group”). At December 31, 2011, the Company ranked at the 59th percentile in total assets and at the 22nd percentile in market capitalization relative to the companies that comprised the 2011 Utility Peer Group. It is intended that this group also will constitute the 2012 Utility Peer Group.

 

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2011 Utility Peer Group

 

Alliant Energy Corporation

Ameren Corporation

CenterPoint Energy, Inc.

CMS Energy Corporation

Consolidated Edison, Inc.

Great Plains Energy Incorporated

  

Northeast Utilities

NSTAR

NV Energy, Inc.

OGE Energy Corp.

PG&E Corporation

Pinnacle West Capital Corporation

  

PPL Corporation

SCANA Corporation

Teco Energy, Inc.

Westar Energy, Inc.

Wisconsin Energy Corporation

Xcel Energy Inc.

 

The Compensation Committee also uses tally sheets for each NEO to assist it in its annual compensation review process. The tally sheet, which is prepared by the Company, identifies each material element of the NEO’s compensation, including salary, short-term and long-term incentive compensation opportunities, pension accruals and other benefits, and shows the severance and other payouts to which the executive would be entitled under various employment termination scenarios. The tally sheet allows the Compensation Committee to review the totality of each NEO’s compensation.

 

Components of the Executive Compensation Program

 

The compensation program for the Company’s executives, including the NEOs, consists of the following components:

 

   

base salary;

 

   

annual cash incentive opportunities under the EICP and, where extraordinary efforts warrant, discretionary bonuses;

 

   

beginning in 2011, equity and incentive awards of time-based and performance-based RSUs (with dividend equivalents) issued under the LTIP (from 2006 to 2010, time-based restricted stock and performance stock was awarded);

 

   

retirement and deferred compensation programs;

 

   

health and welfare benefits; and

 

   

limited perquisites and personal benefits.

 

The following is a discussion of each component of executive compensation.

 

Base Salary.    The Compensation Committee considers adjustments to base salary levels annually and also may consider base salary adjustments in connection with promotions and other special circumstances. Mr. Rigby’s employment agreement with the Company provides for a minimum base salary that may be increased, but not subsequently decreased, during the term of the agreement.

 

The Compensation Committee, in order to provide consistency within the Company, has developed base salary levels for the NEOs and assigned a level to each position based primarily on the decision-making responsibility associated with the position. Each base salary level has a range, with the midpoint of the range fixed at approximately the median of the competitive range as determined by a market survey of salary levels for comparable positions. Each executive’s base salary is established within the range based on a combination of factors, including the executive’s level of experience, tenure with the Company in the position and performance.

 

The Compensation Committee annually considers adjustments to the base salary range for each salary level and to individual salaries. The process of setting an executive’s annual base salary begins with a review by the Compensation Committee of available information on salary levels of executives at other companies. If the information shows a change in the base salary range for a particular salary level, the Compensation Committee has the discretion to adjust the Company’s base salary range for that salary level by a corresponding percentage. If the information shows an increase in base salary levels, the Compensation Committee also may approve a

 

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percentage increase in the total base salary budget for the Company’s executive group (currently consisting of 51 executives) that corresponds to the market increase in salaries as shown by the comparative salary information. This increase, which is referred to as a “merit budget,” is available for allocation among the executive group in the form of base salary increases based on the Compensation Committee’s evaluation of the executive’s performance, length of service and any other factors that the Compensation Committee considers relevant. The Compensation Committee also may consider whether a further base salary adjustment for a particular executive is warranted based on the goal of generally paying an executive at the median of the competitive salary range for the executive’s position.

 

The Compensation Committee, and in the case of Mr. Rigby, the independent directors, have approved the following base salaries for the NEOs set forth below:

 

Name

   2012 Base Salary
Level
     2011 Base Salary
Level
     2010 Base Salary
Level
 

Joseph M. Rigby

   $ 985,000       $ 880,000       $ 880,000   

Anthony J. Kamerick

   $ 513,000       $ 498,000       $ 484,000   

David M. Velazquez

   $ 503,000       $ 484,000       $ 484,000   

Kirk J. Emge

   $ 400,000       $ 391,000       $ 381,000   

John U. Huffman

   $ 383,000       $ 365,000       $ 352,000   

 

2011 Base Salary Actions

 

In reviewing Mr. Rigby’s base salary for 2011, the Compensation Committee noted Mr. Rigby’s strong performance in executing our strategic plan to reposition the Company as fundamentally a regulated transmission and distribution company, the delivery of total stockholder return above the median of the Company’s utility peer group for 2010, the improvement in the Company’s credit profile, the execution of the Company’s Blueprint for the Future initiative and its regulatory and financing plans. The Compensation Committee also reviewed the data related to salary information for Mr. Rigby’s position provided by PM&P in relation to the Company’s utility peer group for 2010 and noted that it was 90.3% of the median salary for his position. The Compensation Committee, however, also noted the electric delivery reliability issues that the Company has experienced. For this reason, the Compensation Committee did not recommend a base salary increase for 2011. The independent directors concurred in this recommendation.

 

In reviewing the base salary of Mr. Velazquez for 2011, the Compensation Committee noted Mr. Velazquez’s work which resulted in strong financial performance by the Company’s operating utilities, continued progress on our Blueprint for the Future and Mid-Atlantic Power Pathway initiatives, completion of the line of business reorganization, execution of our labor strategy, and the development of our reliability enhancement plan. The Committee did not increase Mr. Velazquez’s base salary for 2011 due to the Company electric delivery reliability issues. Accordingly, Mr. Velazquez’s base salary remained at the 2010 level, which was at 101.9% of the midpoint of the range for his position.

 

The Compensation Committee increased Mr. Kamerick’s 2010 base salary by 2.9%. The Compensation Committee noted Mr. Kamerick’s strong performance in executing our strategic, financing and regulatory plans, the delivery of total stockholder return above the median of the 2010 Utility Peer Group, and the improvement in our credit and risk profile. The Compensation Committee also noted that Mr. Kamerick’s 2010 base salary was slightly above the midpoint for his position. The increase brought his base salary to 104.8% of the midpoint of the range for his position.

 

The Compensation Committee increased Mr. Emge’s base salary by 2.6% in 2011. The Compensation Committee noted Mr. Emge’s achievements during 2010, including development and execution of our regulatory plan, the successful sale of the Conectiv Energy business, and the continued strong legal department performance against benchmark metrics. The Compensation Committee also noted that Mr. Emge’s base salary was slightly above the midpoint for his position. The increase brought his salary to 104.3% of the midpoint of the range for his position.

 

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The Compensation Committee increased Mr. Huffman’s base salary by 3.7% in 2011. The Compensation Committee noted Mr. Huffman’s achievements in 2010, including overall financial performance for Pepco Energy Services above targeted levels, his leadership in continuing the transition of the retail energy supply business to a wind-down mode and the growth of the energy services component of the business. The Compensation Committee also noted that Mr. Huffman’s base salary was below the midpoint for his current position. The increase brought his base salary to 97.3% of the midpoint of the range for his position.

 

2012 Base Salary Actions

 

To establish base salaries for 2012, the Compensation Committee obtained from PM&P published data, compiled from the same sources as the salary structure information, which showed an average base salary budget increase of 3%. Based on this data, the Compensation Committee approved a merit budget increase equal to 3% of total base salaries, which it allocated among the executive group. Mr. Rigby’s 2012 base salary was set in the context of the negotiation of a new employment agreement between Mr. Rigby and the Company described in “Employment Agreement” below.

 

In recommending the increase in the base salary for Mr. Rigby to the independent directors in connection with entering into the new employment agreement, the Compensation Committee noted Mr. Rigby’s performance in executing our plans to improve and enhance reliability and customer service, and executing the Company’s business strategy, including regulatory, financing and smart grid plans. The Compensation Committee also recognized that Mr. Rigby’s strong leadership evidenced by his oversight of the Company through the reliability, customer service and reputational issues experienced by the Company has been key to the progress the Company has made to address these issues. As a result, the Compensation Committee intended to ensure that the implementation of the plans to improve reliability and customer satisfaction continues to progress under Mr. Rigby’s stewardship. The Compensation Committee also reviewed the data related to salary information for Mr. Rigby’s position provided by PM&P in relation to the Company’s 2011 Utility Peer Group and noted that it was below the median salary for his position.

 

Accordingly, the Compensation Committee recommended to the independent directors an 11.9% increase in Mr. Rigby’s base salary, which would bring his base salary to 99.0% of the midpoint of the range for his position. The Compensation Committee also acknowledged that, under his new employment agreement, Mr. Rigby was relinquishing (or agreeing to a diminution of) certain significant rights, including severance payments, retirement payments, and rights to Section 280G gross-up payments. The independent directors concurred in this recommendation.

 

The Compensation Committee increased Mr. Velazquez’s salary by 3.9%. In approving the base salary increase for Mr. Velazquez, the Compensation Committee noted Mr. Velazquez’s work in executing our plans to improve and enhance reliability and customer service, the achievement of key initiatives related to the Smart Grid, implementing key organizational changes in the Power Delivery business, navigating the Company’s Hurricane Irene restoration efforts, and sound management of the operating utilities budget. It was also noted that Mr. Velazquez played a key role in various regulatory proceedings and public meetings. The Compensation Committee also noted that Mr. Velazquez’s 2011 base salary was slightly above the midpoint of the competitive range for his position. In light of the foregoing, the Compensation Committee recommended an increase in Mr. Velazquez’s base salary, which is at 103.7% of the midpoint of the range for his position.

 

The Compensation Committee increased Mr. Kamerick’s salary by 3.0%. In approving an increase for Mr. Kamerick, the Compensation Committee noted Mr. Kamerick’s strong performance in executing the Company’s strategic, financing and regulatory plans, and the Company’s strong credit and risk profile. The Compensation Committee noted that Mr. Kamerick’s 2011 salary was slightly above the midpoint of the competitive range for his position. However, in light of Mr. Kamerick’s strong performance in 2011, the Compensation Committee approved setting Mr. Kamerick’s salary at 105.8% of the midpoint of the competitive range for his position.

 

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The Compensation Committee increased Mr. Emge’s salary by 2.3%. In approving an increase for Mr. Emge, the Compensation Committee noted Mr. Emge’s achievements during 2011, including development and execution of the Company’s regulatory plan, including the filing of rate cases in each jurisdiction where the Company operates, and the continued strong legal department performance against benchmark metrics. The Compensation Committee noted that Mr. Emge’s 2011 salary was slightly above the midpoint of the competitive range for his position. Accordingly, the Compensation Committee approved setting Mr. Emge’s salary at 103.9% of the midpoint of the competitive range for his position.

 

The Compensation Committee increased Mr. Huffman’s salary by 4.9%. In approving an increase for Mr. Huffman, the Compensation Committee noted Mr. Huffman’s achievements in 2011, including the overall financial performance for Pepco Energy Services above targeted levels, his leadership in continuing the wind-down of the retail energy supply business, the growth of the energy services component of the business and his management of Corporate Communications on a temporary basis. The Compensation Committee noted that Mr. Huffman’s 2011 salary was below the midpoint of the competitive range for his current position and approved setting Mr. Huffman’s salary at 99.5% of the midpoint of the competitive range for his position.

 

Annual Cash Incentive Awards under the Executive Incentive Compensation Plan and Discretionary Bonuses.    In 2011, the Company provided its executives, including its NEOs, with an opportunity to receive an annual cash incentive award under the EICP. For each participating executive, a target short-term incentive opportunity is established which is a percentage of the executive’s base salary. Each executive’s EICP opportunity percentage is selected by the Compensation Committee and is intended to place the executive’s total cash compensation opportunity (consisting of base salary and target annual incentive compensation) at a level approximating the midpoint of the competitive range. Annual cash incentive awards are made under the EICP to the extent performance goals established by the Compensation Committee are achieved. The performance criteria used as the basis for awards and the specific targets can vary from year to year. The performance goals can consist entirely, or be a combination, of performance objectives for the Company as a whole or performance objectives for a particular business unit. Some executives also have individual performance objectives. The performance goals for the Company and the respective business units are selected to reward the executive for the achievement of targeted financial results and operational goals. Each executive’s goal allocation is designed to align the executive’s award opportunity with the executive’s management responsibilities. Generally, the financial targets are based on the Company’s annual financial plan. Other quantitative targets typically are set at levels that exceed the level of performance in prior years. The Compensation Committee retains the discretion, whether or not the established performance objectives are achieved, to adjust awards either up or down taking into account such factors and circumstances as it determines to be appropriate. In addition, from time to time, the Compensation Committee may award a discretionary cash bonus to a particular NEO for extraordinary efforts.

 

Under the EICP as in effect for 2011, each of the NEOs had the opportunity to earn a cash incentive award of between 0% and 180% of his base salary. The target levels of short-term incentive compensation as a percentage of base salary for each of the NEOs in 2011, which were the same as in 2010, were as follows:

 

Name

   Target as a
Percentage of Base Salary
 

Joseph M. Rigby

     100

Anthony J. Kamerick

     60

David M. Velazquez

     60

Kirk J. Emge

     60

John U. Huffman

     60

 

These 2011 award opportunities are shown in the 2011 Grants of Plan-Based Awards table on page 52 of this Proxy Statement under the heading “Estimated Future Payouts Under Non-Equity Incentive Plan Awards.” The target levels as a percentage of base salary for the NEOs remain the same for 2012.

 

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The performance goals in 2011 for Messrs. Rigby, Kamerick and Emge consisted entirely of corporate performance goals. These goals were: (i) Company net earnings relative to budgeted net earnings of $273.3 million (40%); (ii) Company free cash flow relative to budgeted free cash flow in the negative amount of $553.4 million (10%); (iii) utility customer satisfaction as measured by the results of customer surveys and other performance metrics (30%); (iv) leadership initiatives, including diversity as measured by the attainment of, or good faith efforts toward the attainment of, established affirmative action goals and safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%); and (v) the completion of certain key operational excellence projects (10%). Each award was subject to the condition that, if the Company’s net earnings relative to the budgeted net earnings goal was not achieved, no award would be made regardless of the extent to which the other performance goals were achieved.

 

The 2011 goals for Mr. Velazquez consisted entirely of Power Delivery performance goals. These goals were: (i) Power Delivery net earnings relative to budgeted net earnings of $233.8 million (as adjusted for rate orders) (30%); (ii) Power Delivery capital spending that is within or below the approved budgeted capital spending (less designated projects) and percent of priority projects completed (5%); (iii) Power Delivery operation and maintenance spending that is within or below the budgeted operation and maintenance spending of $767.1 million (5%); (iv) utility customer satisfaction and reliability as measured by the results of customer surveys and other metrics (40%); (v) diversity as measured by the attainment of, or good faith efforts toward the attainment of, established affirmative action goals (5%); (vi) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%); and (vii) the completion of certain key operational excellence projects (5%).

 

The 2011 performance goals for Mr. Huffman consisted entirely of Pepco Energy Services goals. These goals were: (i) Pepco Energy Services’ net earnings relative to budgeted net earnings of $25.3 million (excluding the net earnings of the Benning Road and Buzzard Point power plants) (55%); (ii) the net earnings of the Benning Road and Buzzard Point power plants (5%); (iii) bad debt write-offs as a percentage of revenues being within or below the approved budgeted percentage (5%); (iv) the achievement of at least $170.0 million in Pepco Energy Services contract signings (15%); (v) diversity as measured by the attainment of, or good faith efforts toward the attainment of, established affirmative action goals (10%); and (vi) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%).

 

In December 2011, the Compensation Committee received from PM&P an analysis of the Company’s total compensation for its executive officers relative to that of the 2011 Utility Peer Group and the utility industry in general. This analysis concluded that the short-term incentives for each of the NEOs were within the market median range of practices.

 

In 2012, the Compensation Committee modified the earnings that were the basis for the measurement of 2011 performance for Power Delivery to account for extraordinary weather events and changes in the internal allocation of expenses among subsidiaries, which allocations did not affect the total corporate results. Based on 2011 performance, the NEOs received the following awards in February 2012 under the EICP:

 

   

Messrs. Rigby, Kamerick and Emge received awards at the 85% level. This was based on the combination of (i) Company net earnings relative to budgeted net earnings below target and Company free cash flow relative to budgeted free cash flow significantly in excess of target, (ii) performance with respect to customer satisfaction and reliability below target, (iii) performance with respect to diversity slightly below target, (iv) completion of certain key operational excellence projects, and (v) performance with respect to fleet accidents above target and recordable injuries below the threshold.

 

   

Mr. Velazquez received an award at the 68.2% level based on (i) earnings above the threshold but less than target, (ii) customer satisfaction and reliability below target, (iii) recordable injuries below threshold, (iv) diversity slightly below target, (v) achievement of key operational excellence projects and the amount of capital expenditures above target, and operation and maintenance spending below threshold, (vi) completion of priority projects above target, and (vii) preventable fleet accidents better than target. The Compensation Committee also approved an additional discretionary cash bonus of

 

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$125,000 for Mr. Velazquez in recognition of the substantial progress made on improving reliability and customer satisfaction in 2011 which was in part attributable to Mr. Velazquez’s extraordinary efforts, as well as Mr. Velazquez’s strong leadership skills.

 

   

Mr. Huffman received an award at the 129.4% level based on the achievement of Pepco Energy Services goals as a result of a combination of Pepco Energy Services earnings, earnings from the power plants, bad debt write off and diversity significantly exceeding target, and Pepco Energy Services contract signings and safety metrics below target. The Compensation Committee also approved an additional discretionary $10,000 bonus for Mr. Huffman for his extraordinary efforts in helping manage corporate communications during 2011.

 

These awards are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table, except that the discretionary bonuses paid to Mr. Velazquez and Mr. Huffman are reflected in the “Bonus” column.

 

In December 2011, the Board approved amendments to the EICP to conform the EICP to current market practices, to clarify terminology, and to enable awards under the EICP to qualify as performance-based compensation under Section 162(m) of the Code. These amendments were effective as of January 1, 2012, but are subject to stockholder approval at the Annual Meeting. See “Proposal 5 — Approval of the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan” for additional information regarding the amendments to the EICP. The Compensation Committee’s discretion with respect to NEOs who are “covered employees” as defined under Section 162(m) of the Code (including the ability to adjust an award upward) will be eliminated or reduced as a result of these proposed amendments. As part of the amendments to the EICP described above, the Compensation Committee also modified the performance goal criteria under the EICP for all NEOs to more accurately reflect the Company’s current business objectives, including an increase in weightings of reliability and customer satisfaction goals.

 

Equity and Incentive Awards Under the LTIP.    Long-term equity and incentive awards are made to the NEOs and other executives under the LTIP. The Compensation Committee has adopted a target long-term equity and incentive opportunity for each executive officer that is a percentage of the executive’s salary and is designed to place the executive’s total direct compensation opportunity (consisting of salary, target annual cash incentive compensation and target long-term equity and incentive compensation) at a level targeting market median practices. Based on a PM&P total compensation analysis concluded in December 2010, the Compensation Committee increased the NEOs’ long-term incentive compensation targets commencing in January 2011 to make the long-term incentive opportunities consistent with market median practices for long-term incentive compensation. This adjustment in long-term incentive targets also had the effect of aligning the Company’s total compensation for its NEOs with the median range of practices for total compensation based upon the previously described PM&P analysis.

 

The target level of long-term incentive compensation as a percentage of salary for each of the NEOs in 2011 was as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby

     250

Anthony J. Kamerick

     125

David M. Velazquez

     125

Kirk J. Emge

     100

John U. Huffman

     100

 

Under the Company’s long-term equity and incentive compensation arrangements commencing in 2011, (i) two-thirds of an executive’s targeted long-term equity and incentive award opportunity was in the form of RSUs that vest to the extent that performance objectives are achieved over a three-year performance period (the “performance-based awards”) and (ii) one-third of the executive’s long-term award opportunity was in the form of RSUs that vest generally upon the completion by the executive of three years of employment from the date of

 

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the grant (the “time-based awards”). The primary objective of the grant of time-based awards is executive retention. The primary objectives of the grant of performance-based awards are to retain the executive and to align the financial interests of the executive with the interests of the Company’s stockholders.

 

Each RSU entitles the holder, beginning on the date of grant, to receive one share of common stock at the end of the restriction or performance period. Like the restricted stock awards prior to 2011, the time-based awards will be subject to forfeiture if the employment of the executive terminates before the end of the three-year restriction period. Unlike the time-based restricted stock awards, however, on which dividends are paid during the three-year vesting period when the Company pays a dividend on the common stock regardless of whether an award vests, in the case of RSU awards, when the Company pays a dividend on the common stock during the three-year vesting period, the participant will be credited with additional RSUs corresponding to the amount of the dividend. These additional RSU credits will be forfeited if the award does not vest. This treatment of dividend equivalents on the RSUs also applies to performance-based awards. The Compensation Committee has made this change because it decided to change the crediting of dividends so that the executive will only receive the benefit of dividends if an award is earned.

 

In December 2011, upon the recommendation of the Compensation Committee and advice from PM&P, the Board approved the 2012 LTIP, which will essentially replace the current LTIP expiring in 2012, subject to approval of the 2012 LTIP by stockholders at the Annual Meeting. The Board approved the 2012 LTIP to permit the Company to continue to grant stock-based compensation to executives, including NEOs, after the expiration of the LTIP and so that such executive compensation could continue to be aligned with Company performance and increases in stockholder value. See “Proposal 3 — Approval of the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan” for additional information regarding the 2012 LTIP.

 

Performance-Based Awards Under the LTIP

 

With respect to the performance stock awards under the LTIP for the three-year performance periods beginning prior to 2010, the performance targets for each participating executive were based on annual earnings and cash flow goals established for the Company as a whole and for its business units. The particular performance goals applicable to an executive depended on the executive’s position within the Company. The performance goals were established relative to the performance of the Company and its business units in the year immediately preceding the first year of the three-year period, and were set at levels that reflected year-to-year improvement over the three-year period. The objective of the Compensation Committee was to set target levels which, if achieved, would place the Company’s performance at the 75th percentile within the Utility Peer Group.

 

Payout of Awards for 2009 to 2011 Performance Period.    The following table sets forth the performance targets and actual results achieved by the Company for each year in the 2009 to 2011 LTIP performance cycle (in millions of dollars, except per share amounts).

 

     2009     2010      2011      Payout
Percentage
 
     Target      Actual     Target      Actual      Target      Actual     

LTIP Corporate Goals

                   

Earnings per share

   $ 2.02       $ 0.91     $ 2.11       $ 1.24       $ 2.20       $ 1.25         —     

Cash flow from operations per share

   $ 2.28       $ 2.80     $ 2.27       $ 3.73       $ 2.51       $ 2.99         200

LTIP Conectiv Energy Goals

                   

Earnings

   $ 126.4       $ 14.6     $ 131.4       $ —         $ 136.7       $ —           —     

Cash flow from operations

   $ 145.6       $ 178.1     $ 177.0       $ —         $ 168.3       $ —           67

LTIP Power Delivery Goals

                   

Earnings

   $ 260.1       $ 164.4     $ 270.5       $ 229.6       $ 281.3       $ 209.9         —     

Cash flow from operations

   $ 330.2       $ 513.1     $ 461.6       $ 635.9       $ 585.2       $ 702.8         200

LTIP Pepco Energy Services Goals

                   

Earnings

   $ 41.1       $ 39.8     $ 42.7       $ 35.7       $ 44.4       $ 41.6         78

Cash flow from operations

   $ 31.0       $ (5.0   $ 33.0       $ 169.5       $ 26.0       $ 100.3         133

 

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The earnings and earnings per share performance goals in the table above for 2011 reflect the Company’s adjusted net income and adjusted earnings per share as reported in its earnings release for the year ended December 31, 2011. Adjusted net income for this purpose is equal to net income from continuing operations, less mark-to-market losses at Pepco Energy Services and the impact of adopting a District of Columbia tax law change. The earnings and earnings per share performance goals in the table above for 2010 and 2009 reflect the Company’s net income from continuing operations, less certain special items as reported in the Company’s Annual Report on Form 10-K for the years ended December 31, 2009 and 2010.

 

Following the end of 2011, the Compensation Committee determined the payouts for the 2009 through 2011 performance period based on the extent to which the annual performance targets for each year over the term of the award were achieved:

 

   

Mr. Rigby was entitled to earn an award that was based entirely on LTIP Corporate Goals (consisting 75% of a Company earnings goal and 25% of a Company cash flow from operations goal). For the three-year period, the Company earnings were on average below target and the Company cash flow from operations was on average significantly above target. Based on this performance, Mr. Rigby earned 50% of the target number of shares of common stock.

 

   

Mr. Kamerick was entitled to earn an award that was based 84.8% on LTIP Corporate Goals and 15.2% on LTIP Corporate Services Goals (composed 90% of the LTIP Power Delivery Goals and 10% of the LTIP Pepco Energy Services Goals, each as defined below). Based on the Company results, combined with the Power Delivery and Pepco Energy Services results, as more fully described below, Mr. Kamerick earned 50.6% of the target number of shares of common stock.

 

   

Mr. Velazquez was entitled to earn an award that was based (i) 5.4% on LTIP Conectiv Energy Goals (consisting 37.5% of a Company earnings goal, 37.5% of a Conectiv Energy earnings goal, 12.5% of a Company cash flow from operations goal and 12.5% of a Conectiv Energy cash flow from operations goal) and (ii) 94.6% on LTIP Power Delivery Goals (consisting 37.5% of a Company earnings goal, 37.5% of a Power Delivery earnings goal, 12.5% of a Company cash flow from operations goal and 12.5% of a Power Delivery cash flow from operations goal). For the three-year period, (i) Power Delivery cash flow from operations was on average significantly above target and (ii) Power Delivery earnings were on average below target. Based on Power Delivery’s performance, Mr. Velazquez earned 49.1% of the target number of shares of common stock.

 

   

Mr. Emge was entitled to earn an award that was based entirely on LTIP Corporate Goals, as described for Mr. Rigby. Based on the Corporate Goals results, as described for Mr. Rigby, Mr. Emge earned 50% of the target number of shares of common stock.

 

   

Mr. Huffman was entitled to earn an award that was based entirely on LTIP Pepco Energy Services Goals (consisting 37.5% of a Company earnings goal, 37.5% of a Pepco Energy Services earnings goal, 12.5% of a Company cash flow from operations goal and 12.5% of a Pepco Energy Services cash flow from operations goal). Based on Pepco Energy Services’ results, combined with the Company results, Mr. Huffman earned 71.1% of the target number of shares of common stock.

 

For information on the number of shares awarded in 2012 to each NEO under awards for the 2009 to 2011 performance period, see footnote (1) to the 2011 Option Exercises and Stock Vested table on pages 54-55 of this Proxy Statement.

 

Grants of Awards for 2011 to 2013 Performance Period.    For performance-based awards granted under the LTIP for the three-year performance period beginning on January 1, 2011, the Compensation Committee utilized the Company’s total shareholder return relative to that of the 2011 Utility Peer Group as the sole performance goal applicable to all executives participating in the LTIP (“Relative TSR”). The Compensation Committee believes this performance measure balances the NEO’s overall incentive pay opportunities between goals for Company performance and the Company’s financial performance in relation to the Utility Peer Group and is representative of current compensation design trends and peer group practices. Relative TSR is calculated based

 

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on the sum of (i) the positive or negative change in the price of the Company’s common stock (calculated using as a starting price the average daily closing price per share during the fourth quarter of 2010 and as an ending price the average daily closing price per share during the fourth quarter of 2013) and (ii) the aggregate amount of dividends paid over the three-year period. The following table shows the percent of the target award that will be earned by a NEO based on the Relative TSR.

 

PHI’s Percentile of Relative

TSR vs. Peers

  

% of Target
Award Earned

90th or Above

   200%

75th

   150%

50th

   100%

25th

     25%

Below 25th

       0%

 

In addition, if the Company’s total shareholder return over the three-year period is negative, the payout will be capped at 100% of target, even though the Company’s performance compared to the 2011 Utility Peer Group would have allowed an award in excess of 100% of the target.

 

Awards will be pro-rated when performance falls between the specified levels. For example, for performance at the 62nd percentile, the award will be 125% of target. If, during the course of the three-year performance period, a significant event occurs, as determined in the sole discretion of the Compensation Committee, that the Compensation Committee expects to have a substantial effect on the Relative TSR performance objective during the period, whether related to the Company or one or more companies in the 2011 Utility Peer Group, the Compensation Committee may revise the performance objective (except with respect to an award to a “covered employee” as defined under Section 162(m) of the Code). See also “Material U.S. Federal Income Tax Consequences of Certain Compensation Plans — Certain Limitations on the Deductibility of Executive Compensation” and “Proposal 4 — Approval of Performance Goals under the Pepco Holdings, Inc. Long-Term Incentive Plan — Summary of Terms of LTIP — Tax Provisions.”

 

Performance-based awards are subject to forfeiture if the employment of the executive terminates before the end of the performance period, subject to certain exceptions described in “Executive Compensation — Termination of Employment and Change in Control Benefits.” When the Company pays a dividend on the common stock during the three-year performance period, the participant will be credited with additional RSUs corresponding to the amount of the dividend. These additional RSU credits will be forfeited if the award does not vest.

 

For further information on the performance-based awards granted to each NEO in 2011, see the 2011 Grants of Plan-Based Awards table on page 52 of this Proxy Statement.

 

Pursuant to the terms of his new employment agreement with the Company, Mr. Rigby is entitled to receive a series of three annual performance-based retention awards of 36,945 RSUs, to be granted each year over the term of the employment agreement, the vesting of which shall be contingent upon Mr. Rigby’s continued employment during each annual performance period and achievement of the performance goals established for the performance period covered by the award. The performance goals for each award are established at the beginning of the performance period and relate to the following performance goal criteria: (i) reliability of electric service to customers; (ii) residential customer satisfaction; (iii) “smart grid” deployment and customer benefits; (iv) improvement of Company reputation within its service territories; and (v) management recruitment and talent development.

 

Time-Based Awards Under the LTIP

 

Vesting of Time-Based Restricted Stock Awards.    The number of shares of common stock that vested as of January 24, 2011 under the terms of the time-based restricted stock awards originally granted under the LTIP on

 

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January 24, 2008, are shown in the 2011 Option Exercises and Stock Vested table on page 54 of this Proxy Statement in the column “Stock Awards — Number of Shares Acquired on Vesting.” Amounts of shares of common stock that vested as of January 22, 2012 and February 26, 2012 under the terms of the time-based restricted stock awards originally granted under the LTIP on January 22, 2009 and February 26, 2009 are shown in the table below. During the vesting period, each executive had all rights of ownership with respect to the shares, including the right to vote the shares and the right to receive dividends on the shares.

 

Named Executive Officer

   Number of Shares Vested in 2012
Under Time-Vested

Awards Granted in 2009
 

Joseph M. Rigby

     29,277   

Anthony J. Kamerick

     3,999   

David M. Velazquez

     7,855   

Kirk J. Emge

     5,623   

John U. Huffman

     5,479   

 

Granting of Time-Based RSU Awards in 2011.    The number of shares of time-based RSUs awarded to each of the NEOs under the LTIP in 2011 is shown in the 2011 Grants of Plan-Based Awards table on page 52 of this Proxy Statement in the column headed “All Other Stock Awards: Number of Shares of Stock or Units.” In each case, the 2011 time-based awards are subject to forfeiture if the employment of the executive terminates before January 27, 2014, subject to certain exceptions described below in “Executive Compensation — Termination of Employment and Change in Control Benefits.” During the vesting period, an executive does not own any shares of common stock and cannot vote the shares underlying the award. Each quarter, additional RSUs are granted as dividend equivalents, which are settled in shares of common stock if and when the time-based award vests. In the case of awards of restricted stock (which were granted prior to 2011), the executive was entitled to retain the dividends paid whether or not the shares vested.

 

In addition to the foregoing RSU grants, pursuant to the terms of his new employment agreement, Mr. Rigby received a time-based retention award of 73,891 RSUs, one-third of which vests on January 1, 2013 and the remaining two-thirds vest ratably on a day-to-day basis over the two-year period beginning January 1, 2013, in each case provided that Mr. Rigby remains employed by the Company. This award is intended to induce Mr. Rigby to remain in the employ of the Company during the term of the employment agreement.

 

Retirement Programs.    The Company’s retirement plans, consisting of both its tax-qualified retirement plan and supplemental retirement plans, are discussed in detail in the section entitled “Retirement Plans” following the Pension Benefits at December 31, 2011 table on page 55 of this Proxy Statement. Under the Pepco Holdings Retirement Plan, all employees of the Company and certain subsidiaries with at least five years of service (three years in the case of the Conectiv Cash Balance Subplan) are entitled to receive retirement benefits in accordance with the applicable benefit formula up to the maximum level that a qualified pension plan is permitted to provide consistent with regulations under the Code.

 

In July 2011, the Board approved amendments to the Pepco Holdings Retirement Plan in order to establish a more unified approach to the Company’s retirement programs and to further align the benefits offered under the Company’s retirement programs. The changes to the Pepco Holdings Retirement Plan were effective for retirements on or after July 1, 2011 and affect the retirement benefits payable to approximately 750 of the Company’s employees. All full-time employees of the Company and certain subsidiaries are eligible to participate in the Pepco Holdings Retirement Plan. For additional information regarding these amendments and a description of the effect of these amendments on the net present value of the named executive officers’ accumulated benefit under the Pepco Holdings Retirement Plan, see “Retirement Plans” and “Summary Compensation Table,” respectively.

 

The Company’s supplemental retirement plan provides retirement benefits to participating executives in addition to the benefits a participant is entitled to receive under the Pepco Holdings Retirement Plan to

 

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supplement benefits which participants forego due to certain limitations on benefit calculations imposed by the Code. If the benefit payment that otherwise would have been available under the applicable benefit formula of the Pepco Holdings Retirement Plan is reduced due to a contribution or benefit limit imposed by law, the participant in the Pepco Holdings Retirement Plan is entitled to a compensating payment under the supplemental retirement plan in which the individual participates. In addition, a participant in the Pepco Holdings Retirement Plan is entitled to either or both of the following enhancements to the calculation of the participant’s retirement benefit:

 

   

the inclusion of compensation deferred under the Company’s executive deferred compensation plans in calculating retirement benefits, and

 

   

to the extent not permitted by the Pepco Holdings Retirement Plan, the inclusion of annual cash incentive compensation received by the participant in calculating retirement benefits.

 

The supplemental retirement plan benefits applicable to the NEOs are described in the section entitled “Retirement Plans” following the Pension Benefits at December 31, 2011 table on page 55 of this Proxy Statement.

 

In July 2011, the Board also approved a new, nonqualified Supplemental Executive Retirement Plan (the “2011 SERP”) which replaced the Company’s pre-existing supplemental retirement plans, effective August 1, 2011. The principal purposes of the 2011 SERP are to provide competitive retirement benefits, to protect eligible participants against reductions in retirement benefits due to tax law limitations on qualified plans, to encourage the continued employment of the Company’s employees and to attract new employees to work for the Company, and to establish a more unified approach to the Company’s retirement programs. The establishment of the new 2011 SERP is consistent with the Company’s efforts to align retirement benefits for the Company and its subsidiaries with current market practices, as recommended by PM&P. The 2011 SERP resulted in increased supplemental benefits for certain NEOs which are described under “Retirement Plans — Executive Supplemental Retirement Plans — PHI 2011 Supplemental Executive Retirement Plan.” Where the pre-existing arrangements provide a greater benefit than the retirement benefit established under the 2011 SERP, that greater benefit will continue to apply to participants who participate in the existing plan. For all executives, the 2011 SERP provides for an annual benefit equal to 1.45% of the five-year average base pay and bonus multiplied by years of service, determined under the Company’s qualified defined benefit plan in which the executive participates. Under the terms of the new employment agreement entered into with Mr. Rigby, he is entitled to receive an increase in his benefit so that such benefit would be equal to 1.65% of such final average base pay and bonus multiplied by years of service. See “Retirement Plans — Executive Supplemental Retirement Plans — PHI 2011 Supplemental Executive Retirement Plan” and “Summary Compensation Table,” respectively, for additional information regarding the 2011 SERP and the effect of these changes on the benefits of our named executive officers under the 2011 SERP.

 

All employees of the Company, including the NEOs, are entitled to participate on the same terms as other eligible employees in the Company’s 401(k) savings plan (the “Retirement Savings Plan”). Participants in the Retirement Savings Plan receive a 100% Company-matching contribution on employee contributions up to 3% of annual salary and a 50% Company-matching contribution on employee contributions in excess of 3% of annual salary up to 6% of annual salary.

 

Health and Welfare Benefits.    Each of the NEOs participates in the Company’s health care, life insurance, and disability insurance plans on the same terms as other Company employees. With the exception of Company payment for an annual executive physical, the Company has no health or welfare plans, programs or arrangements that are available only to executives. Pursuant to the terms of the Company’s Change-in-Control Severance Plan, and subject to certain specified conditions and exceptions contained in that plan, upon a change in control, the Company will be required to make available to each named executive officer (other than Mr. Rigby) such medical, dental, group life and disability benefits that are at least at a level (and cost to the executive) substantially similar in the aggregate to the level of such benefits prior to the change in control. Pursuant to the terms of his employment agreement, Mr. Rigby is entitled to receive reimbursement from the Company for health insurance benefits for a period equal to the longer of one year following the termination of

 

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his employment agreement or the remaining term of the agreement. In the event of Mr. Rigby’s termination or resignation for good reason following a change in control, Mr. Rigby would be entitled to receive healthcare, life insurance and disability benefits comparable to what is provided to employees under the terms of his agreement for a period of 24 months.

 

Other Perquisites and Personal Benefits.    As more fully described in footnote (4) to the Summary Compensation Table on pages 49-50 of this Proxy Statement, the Company provides certain NEOs with limited perquisites and other personal benefits, including: (i) a car allowance, (ii) Company-paid parking, (iii) tax preparation and financial planning services, (iv) the cost of an annual executive physical, (v) certain club dues, (vi) personal use of Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events when not otherwise used for business purposes and (vii) reimbursement for spousal travel. The cost of these benefits is not significant in relation to an executive’s total compensation. We do not provide tax gross-ups to any NEO on any perquisites. These benefits generally are provided to ensure that the Company’s total compensation package is competitive with peer companies and to provide NEOs with certain limited benefits that are not inconsistent with such practices at other peer group companies. In February 2012, PM&P advised the Compensation Committee that the perquisites and other personal benefits provided to executives were modest in comparison to the market.

 

Deferred Compensation Plan.    Under the PHI Deferred Compensation Plan, which is described in greater detail in the section entitled “Deferred Compensation Plans” following the Nonqualified Deferred Compensation table on page 60 of this Proxy Statement, the NEOs and other executives are permitted to defer the receipt of all or any portion of their compensation, including incentive compensation. In addition, to the extent an executive is prevented from making a contribution to the Retirement Savings Plan due to qualified plan limitations imposed by the Code, the executive is entitled to defer the excluded amount under the PHI Deferred Compensation Plan and receive an additional credit under the PHI Deferred Compensation Plan equal to the matching contribution, if any, that the Company would have made with respect to the excluded amount under the Retirement Savings Plan. Balances under the PHI Deferred Compensation Plan with respect to an executive are credited on a monthly basis with an amount corresponding to, as elected by the executive, any or a combination of: (i) interest at the prime rate or (ii) the return that would have been earned had the account balance been invested in any one or a combination of the investment funds selected by the Compensation Committee. The PHI Deferred Compensation Plan is designed to allow participating executives to save for retirement in a tax-effective way. The Company funds its future financial obligations under the PHI Deferred Compensation Plan through the purchase of Company-owned life insurance policies and other investments.

 

Compensation Mix

 

At-Risk Versus Fixed Compensation.    Consistent with our pay for performance strategy, the percentages of each NEO’s short-term and long-term equity and incentive compensation opportunities relative to the executive’s salary as established by the Compensation Committee are designed to reflect the Compensation Committee’s view that, as the level of an executive’s responsibility increases, the percentage of the executive’s compensation that is at risk and tied to Company, business unit or individual performance likewise should increase. The following table shows the allocation of each NEO’s total salary and short-term and long-term equity and incentive compensation opportunities between fixed and at-risk compensation (at the target level) for 2011:

 

Name

   Fixed
Compensation
    At-Risk
Compensation
 

Joseph M. Rigby

     22     78

Anthony J. Kamerick

     35     65

David M. Velazquez

     35     65

Kirk J. Emge

     38     62

John U. Huffman

     38     62

 

Short-Term Versus Long-Term Equity and Incentive Compensation.    The Compensation Committee also believes that with increasing seniority, a larger percentage of an executive’s compensation opportunity should be

 

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in the form of long-term equity and incentive compensation. This reflects the view of the Compensation Committee that the senior executives should have a greater focus on developing and implementing the Company’s long-term strategic goals. The following table shows the allocation between each NEO’s target short-term and long-term equity and incentive compensation opportunities (each at the target level) for 2011:

 

Name

   Short-Term
Incentive
Opportunity
    Long-Term
Equity and Incentive
Opportunity
 

Joseph M. Rigby

     29     71

Anthony J. Kamerick

     32     68

David M. Velazquez

     32     68

Kirk J. Emge

     38     62

John U. Huffman

     38     62

 

Employment Agreement

 

Effective January 1, 2012, the Company entered into an employment agreement with Mr. Rigby, which agreement replaces the employment agreement entered into with Mr. Rigby in 2008. The Company’s independent directors, based upon the recommendation of the Compensation Committee and advice from PM&P, approved the employment agreement. The employment agreement provides for, among other benefits, a series of three one-year performance-based RSU awards to be granted over the term of the employment agreement intended to further align Mr. Rigby’s compensation with improvements in the Company’s service reliability, “smart grid” and customer satisfaction goals, as well as initiatives related to succession planning and talent management as established by the Compensation Committee. The employment agreement also provides for a time-based retention award of RSUs designed to ensure Mr. Rigby’s continued employment with the Company during the three-year term of the agreement. The employment agreement provides that Mr. Rigby’s annual annuity benefit under the 2011 SERP will be augmented to an amount equal to 1.65% of Mr. Rigby’s five-year average base pay and bonus multiplied by years of service as determined under the PHI Subplan (for all other executives, the 2011 SERP provides for an annual benefit equal to 1.45% of the five-year average base pay and bonus multiplied by years of service). At December 31, 2011, the value of this benefit to Mr. Rigby was $817,837. In entering into the employment agreement, Mr. Rigby agreed to relinquish certain rights under the prior employment agreement, including tax gross-up provisions applicable in the event of a change in control of the Company and a lump sum supplemental retirement benefit that was payable in cash equal to the present value of such benefit that would have been obtained by adding three additional years of age and three additional years of service, which would have been payable to Mr. Rigby upon termination of his employment with the Company without cause or a resignation by Mr. Rigby under specified circumstances. For additional information regarding the terms of the employment agreement with Mr. Rigby, see “Executive Compensation — Employment Agreement.”

 

Severance and Change in Control Benefits

 

Mr. Rigby’s employment agreement provides for severance payments and other benefits if his employment is terminated other than for “cause” or he voluntarily terminates his employment for “good reason,” whether or not such termination is in connection with a change in control of the Company. These provisions are generally designed to provide assurance to the executive that, if his employment is actually or constructively terminated by the Company, he will receive for a period of time thereafter the compensation and benefits that he would have received had the termination not occurred. These benefits also address the concern that the fear of job loss might influence the executive when considering strategic opportunities that may include a change in control of the Company. Unlike his prior agreement, the new employment agreement with Mr. Rigby provides that the amount of the severance payment declines over the three-year term of the agreement. The specific benefits to which Mr. Rigby is entitled are described in detail under the section entitled “Termination of Employment and Change in Control Benefits.”

 

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The Company also maintains a Change-in-Control Severance Plan in which the NEOs, other than Mr. Rigby, participated as of December 31, 2011. Under this plan, which is described in “Termination of Employment and Change in Control Benefits,” if, within one year following a change in control, a participating executive’s employment is terminated by the Company without “cause” or is terminated by the executive for “good reason,” the executive will be entitled to receive, among other things, a severance payment equal to 1.5, two or three times the salary and target annual cash incentive award for the year in which termination occurs, depending upon the executive’s position. See “Executive Compensation — Termination of Employment and Change in Control Benefits — Change-in-Control Severance Plan” for additional information regarding this plan. The purpose of the plan is to ensure that the participating executives are able to stay focused on their responsibilities to the Company in a change in control situation and are not distracted by the uncertainty of their continued employment.

 

Deductibility of Executive Compensation Expenses

 

Under Section 162(m) of the Code, a public company is prohibited from deducting for federal income tax purposes compensation in excess of $1.0 million paid to the Company’s principal executive officer and the Company’s three highest compensated executive officers (other than the principal executive officer or the principal financial officer), except that this prohibition does not apply to compensation that qualifies as “performance-based compensation.” Under Section 162(m) of the Code, the LTIP’s performance goal criteria must be approved by stockholders once every five years to permit the Company’s potential federal income tax deduction for such performance-based compensation. The performance goal criteria with respect to the LTIP were last approved by our stockholders when the LTIP was originally adopted in 2002. As a result, the Company did not deduct for federal income tax purposes compensation paid to these covered employees in excess of $1.0 million pursuant to Section 162(m) of the Code for payments made in tax years 2010 through 2012 with respect to performance-based awards granted under the LTIP. Subject to stockholder approval of performance goal criteria under the LTIP at the Annual Meeting as discussed in “Proposal 4 — Approval of Performance Goal Criteria Under the Pepco Holdings, Inc. Long-Term Incentive Plan” with respect to performance-based awards granted under the LTIP in 2012, the payment of shares of common stock upon the vesting of such awards, if determined solely by reference to the achievement of pre-established performance objectives, would qualify as performance-based compensation. Time-based restricted stock and time-based RSU awards under the LTIP do not qualify as performance-based compensation because the awards vest on the basis of continued employment, rather than pre-established performance objectives.

 

Because the EICP had not been approved by our stockholders, awards under the EICP in 2011 did not qualify as performance-based compensation even when the payment of awards was based on the achievement of pre-established performance objectives. Following the approval of the amendments to the EICP by stockholders at the Annual Meeting, awards under the EICP (as proposed to be amended) would qualify as performance-based compensation, so long as the payment of awards under the EICP is based on the achievement of pre-established performance objectives determined in accordance with the EICP’s terms.

 

Stock Ownership Requirements

 

To further align the financial interests of the Company’s executives with those of the stockholders, the Board in 2005 adopted stock ownership requirements for officers of the Company. The requirements, which are expressed as a multiple of salary, are a function of the executive’s seniority:

 

Chief Executive Officer, President

     5 times salary   

Executive Vice President

     3 times salary   

Senior Vice President

     2 times salary   

Vice President

     1 times salary   

 

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Each officer had until the later of December 31, 2010, or five years after the date of his or her election as an officer, to attain the required ownership level. An individual who is appointed as an officer or is promoted to a position with a higher stock ownership requirement has five years from the date of appointment or promotion to attain the applicable stock ownership level. Shares of common stock owned through the Retirement Savings Plan, unvested shares of restricted stock, and the number of shares of common stock underlying RSU awards (plus accrued dividends) are considered owned by the executive for the purpose of meeting the ownership requirement. Each of Messrs. Rigby, Kamerick, Velazquez and Emge meets the stock ownership requirement applicable to him. Mr. Huffman is not subject to a stock ownership requirement because he is not a Company officer; however, he nevertheless meets the stock ownership requirement at the level of three times his salary.

 

Prohibition on Hedging of Economic Risk

 

Because hedging transactions can result in the misalignment of the ownership interest of directors, officers and employees relative to that of the Company’s stockholders, the Board has determined that no director, officer or employee of the Company (including executives) may engage in any hedging or similar transactions that have the effect of reducing or eliminating the investment risks associated with any of the Company’s securities owned by such person. This prohibition applies whether the securities have been acquired from the Company or have been purchased by the holder in the market.

 

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EXECUTIVE COMPENSATION

 

The 2011 Summary Compensation Table sets forth compensation information for the Company’s (i) principal executive officer, (ii) principal financial officer, and (iii) three other most highly compensated executive officers employed as of December 31, 2011, determined on the basis of their total compensation for 2011 (excluding the amounts under the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in this table). The information in this table includes compensation paid by the Company or its subsidiaries.

 

2011 Summary Compensation Table

 

Name and Principal Position

  Year     Salary     Bonus     Stock
Awards(1)
    Option
Awards
    Non-Equity
Incentive
Plan
Compen-
sation(2)
    Change in
Pension
Value and
Nonqualified
Deferred
Compen-

sation
Earnings(3)
    All Other
Compen-

sation(4)
    Total
Compen-

sation
 

Joseph M. Rigby

    2011      $ 880,000      $ —        $ 2,264,926      $     —        $ 748,000      $ 2,511,103      $ 757,729      $ 7,161,758   

Chairman, President and Chief Executive Officer

    2010      $ 880,000      $ —        $ 1,941,743      $ —        $ —        $ 588,975      $ 140,586      $ 3,551,304   
    2009      $ 795,833      $ —        $ 1,426,036      $ —        $ —        $ 742,945      $ 151,183      $ 3,115,997   

Anthony J. Kamerick

    2011      $ 498,000      $ —        $ 640,881      $ —        $ 253,980      $ 1,532,675      $ 217,328      $ 3,142,864   

Senior Vice President and Chief Financial Officer

    2010      $ 484,000      $ —        $ 533,982      $ —        $ 338,026      $ 844,732      $ 69,113      $ 2,269,853   
    2009      $ 383,166      $ —        $ 327,754      $ —        $ —        $ 771,948      $ 54,818      $ 1,537,686   

David M. Velazquez

    2011      $ 484,000      $ 125,000      $ 622,851      $ —        $ 198,053      $ 2,517,536      $ 233,286      $ 4,180,726   

Executive Vice President

    2010      $ 484,000      $ —        $ 533,982      $ —        $ —        $ 118,719      $ 62,091      $ 1,198,792   
    2009      $ 423,500      $ —        $ 398,823      $ —        $ 248,549      $ 131,214      $ 137,771      $ 1,339,857   

Kirk J. Emge

    2011      $ 391,000      $ —        $ 402,535      $ —        $ 199,410      $ 789,255      $ 174,935      $ 1,957,135   

Senior Vice President and General Counsel

    2010      $ 381,000      $ —        $ 357,291      $ —        $ 266,090      $ 471,012      $ 79,497      $ 1,554,890   
    2009      $ 350,000      $ —        $ 298,936      $ —        $ —        $ 386,176      $ 76,251      $ 1,111,363   

John U. Huffman

    2011      $ 365,000      $ 10,000      $ 375,763      $ —        $ 283,386      $ 343,194      $ 165,733      $ 1,543,076   

President and Chief Executive Officer, Pepco Energy Services(5)

    2010      $ 352,000      $ —        $ 330,104      $ —        $ 242,669      $ 84,705      $ 184,784      $ 1,194,262   
    2009      $ 341,000      $ —        $ 291,246      $ —        $ 271,913      $ 48,928      $ 71,975      $ 1,025,062   

 

(1) 

The amount shown for each year is the aggregate grant date fair value as determined in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 (excluding the effect of estimated forfeitures) of awards of time-based restricted stock, time-based RSUs and performance-based awards, as applicable, granted during that year. For a discussion of the assumptions made in determining the aggregate grant date fair value of these awards, see Note (14), “Stock-Based Compensation, Dividend Restrictions, and Calculations of Earnings Per Share of Common Stock – Stock-Based Compensation” in the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2011. The values shown assume that each performance-based award will vest at 100% of the target level at the end of the three-year performance period and that each award of time-based restricted stock or time-based RSUs, as applicable, will vest in full at the end of the three-year service period. For a further description of these stock-based awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Equity and Incentive Awards Under the LTIP.”

 

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Two-thirds of an executive’s yearly LTIP awards were performance-based and one-third was time-based. Assuming vesting of performance-based awards granted in 2011, 2010 and 2009 at the maximum level of 200% of target, the grant date fair value of these performance-based awards would have been as follows:

 

     Grant Date Fair Value (Maximum Level)
of Performance-Based Awards Granted in
 

Name

   2011      2010      2009  

Joseph M. Rigby

   $ 3,019,902       $ 2,751,602       $ 1,901,379   

Anthony J. Kamerick

     854,508         756,694         437,007   

David M. Velazquez

     830,468         756,694         531,762   

Kirk J. Emge

     536,714         506,298         398,594   

John U. Huffman

     501,030         467,784         388,316   

 

The amounts shown in the tables above do not include the effect of any dividend equivalents granted with the performance-based awards.

 

(2) 

Consists of awards under the EICP. For a further description of these awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Annual Cash Incentive Awards Under the Executive Incentive Compensation Plan.”

 

(3) 

Consists of the aggregate annual increase in the actuarial present value of the executive’s accumulated benefits under all defined benefit and actuarial pension plans. None of the named executive officers received “above-market earnings” (as defined by SEC regulations) under any of the Company’s nonqualified deferred compensation plans. As a result of certain changes to the Pepco Holdings Retirement Plan, the net present value of the accumulated benefit of Messrs. Velazquez and Huffman thereunder as of December 31, 2011 increased by $2,428,454 and $228,733, respectively. As a result of the establishment of the 2011 SERP and the execution of Mr. Rigby’s employment agreement in December 2011 (which took effect on January 1, 2012), the net present value of Mr. Rigby’s accumulated benefit under the 2011 SERP as of December 31, 2011 increased by $2,008,412. See “Retirement Plans” and “Pension Benefits at December 31, 2011.”

 

(4) 

The totals shown in this column for 2011 consist of:

 

(a) Dividends paid on unvested shares of restricted stock awards held by the executive: Mr. Rigby — $68,618; Mr. Kamerick — $17,784; Mr. Velazquez — $18,658; Mr. Emge — $12,881; Mr. Huffman — $12,207. For a further description of these payments, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Equity and Incentive Awards Under the LTIP.”

 

(b) The market value of dividend equivalents credited quarterly during 2011 on each common stock dividend payment date with respect to unvested time-based and performance-based awards granted under the LTIP (assuming that each performance-based award will vest at 100% of the target level): Mr. Rigby — $616,166; Mr. Kamerick — $162,136; Mr. Velazquez — $167,759; Mr. Emge — $114,370; and Mr. Huffman — $108,301. These dollar amounts were computed based upon the closing market price of a share of common stock on December 30, 2011.

 

(c) Company-paid premiums on a term life insurance policy: Mr. Rigby — $1,975; Mr. Kamerick — $1,118; Mr. Velazquez — $1,086; Mr. Emge — $877; and Mr. Huffman — $819.

 

(d) Company matching contributions under the Retirement Savings Plan: Mr. Rigby — $11,025; Mr. Kamerick — $11,025; Mr. Velazquez — $11,025; Mr. Emge — $8,568; and Mr. Huffman — $11,025.

 

(e) Company matching contributions on deferred compensation: Mr. Rigby — $25,117; Mr. Kamerick — $5,891; Mr. Velazquez — $6,538; Mr. Emge — $7,258; and Mr. Huffman — $2,145. For a further discussion of these matching contributions, see “Deferred Compensation Plans — PHI Deferred Compensation Plan.”

 

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(f) The following perquisites and other personal benefits paid in 2011 (all amounts shown reflect cash payments made by the Company, except as otherwise stated)

 

Name

   Car
Allowance*
     Parking      Tax
Preparation
Fee
     Financial
Planning
Fee
     Executive
Physical
Fee
     Club
Dues
     Spousal
Travel
 

Joseph M. Rigby

   $ 11,700       $ 2,400       $ 2,500       $ 10,820       $ 800       $ 2,308       $ 4,300   

Anthony J. Kamerick

     11,700         2,400         2,500         —           —           2,308         466   

David M. Velazquez

     11,700         2,400         2,500         10,820         800         —           —     

Kirk J. Emge

     11,700         2,400         2,500         10,820         —           450         3,111   

John U. Huffman

     11,700         6,216         2,500         10,820         —           —           —     

 

  * Consists of a non-accountable expense allowance to compensate executives for business use of their automobiles.

 

In addition, in 2011, Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events were made available to employees, including the executive officers listed in the Summary Compensation Table, for personal use when not being used by the Company for business purposes. There was no incremental cost to the Company for providing these benefits.

 

(5) 

For Mr. Huffman, the amount shown for 2010 in the column headed “All Other Compensation” includes a payment in the amount of $100,000 paid in consideration of his agreement to remain an employee through December 31, 2010.

 

Employment Agreement

 

During 2011, the Company was a party to an employment agreement with Mr. Rigby (the “Prior Agreement”), which in December 2011 was replaced by a new employment agreement effective as of January 1, 2012 (the “New Agreement”). The Prior Agreement provided for Mr. Rigby’s employment through August 1, 2013, and was to automatically extend for a period of one year on each August 1 thereafter, unless either the Company or Mr. Rigby elected not to extend the Prior Agreement by notice given not later than three months prior to August 1 in the year preceding the expiration date. The material terms of the Prior Agreement included:

 

   

an annual salary in an amount not less than his base salary in effect as of August 1, 2002, with the condition that, if at any time and during the term of the Prior Agreement his annual base salary was increased, his salary could not have been subsequently decreased during the remainder of the term of the Prior Agreement;

 

   

incentive compensation as determined by the Board under plans applicable to senior executives of the Company; and

 

   

participation, in a manner similar to other senior executives, in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs provided by the Company for its executives or employees.

 

Effective January 1, 2012, the Company entered into the New Agreement with Mr. Rigby, which provides for his employment with the Company through December 31, 2014. The Company’s independent directors, based upon the recommendation of the Compensation Committee and advice from its independent compensation consultant, authorized the execution and delivery of the New Agreement with Mr. Rigby. The New Agreement provides for terms, including performance-based retention awards of RSUs, intended to further align Mr. Rigby’s compensation with improvements in the Company’s service reliability, “smart grid” technology and customer satisfaction goals. The New Agreement also provides for awards with performance goal criteria related to succession planning and talent management as established by the Compensation Committee, and eliminates certain provisions identified by the Compensation Committee as problematic pay practices.

 

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The material terms of the New Agreement are as follows:

 

   

an annual salary of $985,000, subject to annual review by the Board, with the condition that, if at any time and during the term of the New Agreement his annual base salary is increased, his salary will not be subsequently decreased during the remainder of the term of the New Agreement;

 

   

incentive compensation under plans applicable to senior executives of the Company, if the Board determines in good faith that Mr. Rigby’s performance merits payment of such compensation;

 

   

participation, in a manner similar to other senior executives, in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs (including insurance coverage) provided by the Company for its executives or employees, except that under the terms of the New Agreement, Mr. Rigby’s annual minimum annuity benefit under the 2011 SERP will be augmented to an amount equal to 1.65% of Mr. Rigby’s five-year average base pay and bonus multiplied by years of service as determined under the PHI Subplan (for all other executives, the 2011 SERP provides for an annual benefit equal to 1.45% of the five-year average base pay and bonus multiplied by years of service);

 

   

a time-based retention award of 73,891 RSUs, one-third of which vests on January 1, 2013 and the remaining two-thirds of which vest ratably on a day-to-day basis over the two-year period beginning January 1, 2013, in each case provided that Mr. Rigby remains employed by the Company;

 

   

a series of three annual performance-based retention awards of 36,945 RSUs each, to be granted each year over the term of the New Agreement, the vesting of which shall be contingent upon Mr. Rigby’s continued employment during each annual performance period and achievement of the performance goals established for the annual performance period covered by the award;

 

   

as more fully described below under the heading “Termination of Employment and Change in Control Benefits,” various payments and other benefits in connection with the termination of his employment; and

 

   

provisions intended to satisfy the compensation recovery provisions of both the Dodd-Frank Act and the Sarbanes-Oxley Act of 2002.

 

Mr. Rigby is required to hold the vested RSUs attributable to both the time-based and the performance-based retention awards under the New Agreement until his employment with the Company terminates, except that he may elect to surrender vested RSUs as permitted by the New Agreement to satisfy applicable tax withholding obligations. All vested RSUs will be credited with dividend equivalents in the form of additional fully-vested RSUs.

 

Relationship of Salary and Bonus to Total Compensation

 

The following table sets forth the 2011 salary of each of the named executive officers as a percentage of the executive’s total compensation, as set forth in the Summary Compensation Table:

 

Name

   Salary as a Percentage
of Total Compensation
 

Joseph M. Rigby

     12.3

Anthony J. Kamerick

     15.8

David M. Velazquez

     11.6

Kirk J. Emge

     20.0

John U. Huffman

     23.7

 

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2011 Grants of Plan-Based Awards

 

The following table provides certain information regarding plan-based awards granted to each of the named executive officers in 2011, including award opportunities granted under the EICP in 2011 to each named executive officer.

 

           Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(1)
    Estimated Future Payouts
Under Equity
Incentive Plan Awards(2)
    All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units

(#)
    Grant
Date Fair
Value of
Stock and
Option
Awards

($)(3)
 

Name

  Grant
Date
    Threshold
($)
    Target
($)
    Maximum
($)
    Threshold
Number
of  Shares

(#)
    Target
Number
of
Shares

(#)
    Maximum
Number
of  Shares

(#)
     

Joseph M. Rigby

                 

Executive Incentive Compensation Plan(4)

    1-27-11        440,000        880,000        1,584,000        —          —          —          —          —     

LTIP — Time-based RSU award(5)

    1-27-11        —          —          —          —          —          —          40,073        754,975   

LTIP — Performance-based RSU award(6)

    1-27-11        —          —          —          20,037        80,146        160,292        —          1,509,951   

Anthony J. Kamerick

                 

Executive Incentive Compensation Plan(4)

    1-27-11        149,400        298,800        537,840        —          —          —          —          —     

LTIP — Time-based RSU award(5)

    1-27-11        —          —          —          —          —          —          11,339        213,627   

LTIP — Performance-based RSU award(6)

    1-27-11        —          —          —          5,670        22,678        45,356        —          427,254   

David M. Velazquez

                 

Executive Incentive Compensation Plan(4)

    1-27-11        145,200        290,400        522,720        —          —          —          —          —     

LTIP — Time-based RSU award(5)

    1-27-11        —          —          —          —          —          —          11,020        207,617   

LTIP — Performance-based RSU award(6)

    1-27-11        —          —          —          5,510        22,040        44,080        —          415,234   

Kirk J. Emge

                 

Executive Incentive Compensation Plan(4)

    1-27-11        117,300        234,600        422,280        —          —          —          —          —     

LTIP — Time-based RSU award(5)

    1-27-11        —          —          —          —          —          —          7,122        134,178   

LTIP — Performance-based RSU award(6)

    1-27-11        —          —          —          3,561        14,244        28,488        —          268,357   

John U. Huffman

                 

Executive Incentive Compensation Plan(4)

    1-27-11        109,500        219,000        394,200        —          —          —          —          —     

LTIP — Time-based RSU award(5)

    1-27-11        —          —          —          —          —          —          6,648        125,248   

LTIP — Performance-based RSU award(6)

    1-27-11        —          —          —          3,324        13,297        26,594        —          250,515   

 

(1) 

The “threshold” amount represents overall performance at the 50% level (meaning no award is made if performance is below the 50% level relative to the target), the “target” amount represents overall performance at the target (100%) level, and the “maximum” amount represents overall performance at or above the 180% level relative to the target.

 

(2) 

The “threshold” number of shares represents achievement of Relative TSR at the 25th percentile, the “target” number of shares represents achievement of Relative TSR at the 50th percentile, and the “maximum” number of shares represents achievement of Relative TSR at or above the 90th percentile.

 

(3) 

Represents the grant date fair value, as determined in accordance with FASB ASC Topic 718 (excluding the effect of estimated forfeitures), of time-based RSUs and performance-based RSUs granted under the LTIP. The grant date fair value of each performance-based RSU award has been calculated using the target number of shares that the named executive officer is entitled to receive, consistent with the estimate of aggregate compensation cost to be recognized over the service period in accordance with ASC Topic 718.

 

(4) 

For a further description of these awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Annual Cash Incentive Awards Under the Executive Incentive Compensation Plan and Discretionary Bonuses.”

 

(5) 

Time-based RSU awards vest on the third anniversary of the date of grant if the executive is employed by the Company on that date, subject to the acceleration of vesting under certain circumstances as described in “Termination of Employment and Change in Control Benefits.”

 

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(6) 

Performance-based RSU awards vest if the executive is employed by the Company at the end of the performance period and the Compensation Committee has determined that the performance targets are met at least at the minimum level of performance, subject to the acceleration of vesting under certain circumstances as described below in “Termination of Employment and Change in Control Benefits.” For a further discussion of these awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Equity and Incentive Awards Under the LTIP — Performance-Based Awards Under the LTIP.”

 

The following table provides certain information regarding outstanding equity awards of each of the named executive officers at December 31, 2011. None of the NEOs had outstanding option awards at December 31, 2011.

 

Outstanding Equity Awards at December 31, 2011

 

Name

   Stock Awards  
   Number of
Shares or
Units of Stock
That Have
Not Vested
(#)(1)
     Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(2)
     Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not Vested
(#)(3)
     Equity Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares, Units or
Other
Rights That
Have Not  Vested

($)(2)
 

Joseph M. Rigby

           

Awarded 1-27-11

     42,346         859,624         84,695         1,719,309   

Awarded 2-25-10

     —           —           77,001         1,563,120   

Awarded 1-28-10

     34,258         695,437         —           —     

Awarded 2-26-09

     16,518         335,315         40,005         812,102   

Awarded 1-22-09

     12,759         259,008         30,903         627,331   

Anthony J. Kamerick

           

Awarded 1-27-11

     11,982         243,235         23,965         486,490   

Awarded 2-25-10

     —           —           21,174         429,832   

Awarded 1-28-10

     9,421         191,246         —           —     

Awarded 6-13-09

     3,047         61,854         7,381         149,834   

Awarded 2-26-09

     1,079         21,904         2,611         53,003   

Awarded 1-22-09

     2,920         59,276         7,072         143,562   

David M. Velazquez

           

Awarded 1-27-11

     11,646         236,414         23,290         472,787   

Awarded 2-25-10

     —           —           21,210         430,563   

Awarded 1-28-10

     9,421         191,246         —           —     

Awarded 2-26-09

     2,376         48,233         5,756         116,847   

Awarded 1-22-09

     5,479         111,224         13,270         269,381   

Kirk J. Emge

           

Awarded 1-27-11

     7,527         152,798         15,053         305,576   

Awarded 2-25-10

     —           —           14,170         287,651   

Awarded 1-28-10

     6,304         127,971         —           —     

Awarded 1-22-09

     5,623         114,147         13,619         276,466   

John U. Huffman

           

Awarded 1-27-11

     7,025         142,608         14,051         285,235   

Awarded 2-25-10

     —           —           13,089         265,707   

Awarded 1-28-10

     5,824         118,227         —           —     

Awarded 1-22-09

     5,479         111,224         13,270         269,381   

 

(1) 

Consists of awards of time-based restricted stock and RSUs granted under the LTIP. Such awards vest on the third anniversary of the grant date if the named executive officer is employed by the Company on that date, subject to the acceleration of vesting under certain circumstances. See “Termination of Employment and Change in Control Benefits.” Amounts with respect to time-based RSU awards include additional RSUs

 

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  credited to an executive when the Company pays a dividend on the common stock during the three-year vesting period, and the shares of common stock underlying such credited RSUs are earned if and only to the extent that an award vests.

 

(2)

Calculated by multiplying the number of shares shown in the immediately preceding column by $20.30, the closing market price of a share of common stock on December 30, 2011, the last trading day of the year.

 

(3)

Consists of performance-based awards under the LTIP. The awards made in 2009, 2010 and 2011 entitle the named executive officer to earn shares of common stock to the extent pre-established performance objectives are satisfied for, respectively, (i) the three-year performance period beginning on January 1, 2009 and ending on December 31, 2011; (ii) the three-year performance period beginning on January 1, 2010 and ending on December 31, 2012; and (iii) the three-year performance period beginning on January 1, 2011 and ending on December 31, 2013. For each of the performance periods, the named executive officer is eligible to earn a number of shares of common stock ranging from 25% (50% with respect to performance-based awards granted in 2009) to 200% of the target performance award depending on the extent to which the performance objective is achieved, assuming that the named executive officer is employed by the Company at the end of the performance period. For each named executive officer, this number reflects the number of shares that would be earned if the target level of performance is achieved because performance for the last completed fiscal year or years over which performance is measured with respect to their awards exceeded the threshold, but not the target, level of performance. For further discussion of the terms of the 2011 RSU awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Equity and Incentive Awards Under the LTIP — Performance-Based Awards Under the LTIP — Grants of Awards for 2011 to 2013 Performance Period.”

 

These amounts include the effect of dividend equivalents associated with these awards, and the shares of common stock underlying such dividend equivalents are earned if and only to the extent that an award vests.

 

The following table provides certain information regarding restricted stock granted in January 2008 and performance stock awards held by the named executive officers that vested during 2011 with respect to the 2008 to 2010 performance period. No options were exercised by the NEOs in 2011.

 

2011 Option Exercises and Stock Vested

 

Name

   Stock Awards  
   Number of
Shares
Acquired on
Vesting(1)
     Value Realized
on  Vesting(2)
 

Joseph M. Rigby

     6,770       $ 125,516   

Anthony J. Kamerick

     6,392       $ 119,949   

David M. Velazquez

     3,271       $ 60,644   

Kirk J. Emge

     8,158       $ 153,044   

John U. Huffman

     10,186       $ 190,992   

 

(1) 

Consists of both shares of common stock earned under performance stock awards with a performance period from January 1, 2008 to December 31, 2010 (which vested in February 2011) and shares of common stock vested (as of January 22, 2011) under time-based restricted stock awards granted in January 2008.

 

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The number of shares of common stock (i) earned under performance stock awards (including related dividend equivalents) with a performance period from January 1, 2009 to December 31, 2011 (which vested on February 23, 2012) and (ii) vested (as of February 26, 2012) under time-based restricted stock awards granted in January and February 2009, are as follows (applying the assumptions stated in this footnote and in footnote (2) immediately below):

 

Name

   Stock Awards  
   Number of
Shares
Acquired on
Vesting
     Value Realized
on Vesting
 

Joseph M. Rigby

     70,493       $ 1,403,355   

Anthony J. Kamerick

     14,037       $ 279,530   

David M. Velazquez

     18,715       $ 372,516   

Kirk J. Emge

     13,539       $ 269,455   

John U. Huffman

     16,447       $ 327,441   

 

(2)

Represents the aggregate market value of the shares realized on vesting, calculated by multiplying the vested number of shares by the average of the low and high trading prices of a share of common stock on the vesting date (or on the last trading day prior thereto).

 

The following table provides certain information regarding pension benefits for each of the named executive officers at December 31, 2011.

 

Pension Benefits

at December 31, 2011

 

Name

  

Plan Name(1)

  Number of Years
of Credited

Service
  Present
Value of
Accumulated
Benefits(2)
    Payments
During Last
Fiscal Year
 

Joseph M. Rigby

   Conectiv Cash Balance Subplan   32 yrs., 11 mos.   $ 1,994,602      $ —     
   2011 SERP/Conectiv SERP   32 yrs., 11 mos.   $ 3,934,718        —     
   Contractual benefit(3)   32 yrs., 11 mos.   $ 817,837        —     

Anthony J. Kamerick

   Pepco General Retirement Subplan   40 yrs., 0  mos.(4)   $ 2,022,063        —     
   2011 SERP/Executive Retirement Plan   41 yrs., 2 mos.   $ 3,859,475        —     

David M. Velazquez

   Conectiv Cash Balance Subplan   30 yrs., 6 mos.   $ 908,700        —     
   2011 SERP/Conectiv SERP   30 yrs., 6 mos.   $ 2,288,107        —     

Kirk J. Emge

   Pepco General Retirement Subplan   25 yrs., 2 mos.   $ 1,108,396        —     
   2011 SERP/Executive Retirement Plan   25 yrs., 2 mos.   $ 1,795,254        —     

John U. Huffman

   PHI Subplan   6 yrs., 0 mos.   $ 123,442        —     
   2011 SERP/Executive Retirement Plan   6 yrs., 0 mos.   $ 411,755        —     

 

(1)

For participants in a pre-existing supplemental retirement plan prior to August 1, 2011, the 2011 SERP provides a minimum supplemental retirement benefit equal to the amount, if any, by which the executive’s benefit calculated under the 2011 benefit formula exceeds the supplemental retirement benefit provided under the pre-existing plan. Where the pre-existing plan provides for a greater benefit, the executive will receive the benefit provided for under the pre-existing plan.

 

(2)

Represents the actuarial present value of the executive’s accumulated pension benefit calculated as of December 31, 2011, assuming the executive retires at the earliest time he may retire under the applicable plan without any benefit reduction due to age. The valuation method and all material assumptions applied in

 

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  calculating the actuarial present value are set forth in Note (10), “Pension and Other Postretirement Benefits,” to the Company’s consolidated financial statements which are included in the Annual Report that accompanies this Proxy Statement.

 

(3)

Represents the net present value of accumulated benefits provided under Mr. Rigby’s new employment agreement, which was executed in December 2011 effective as of January 1, 2012.

 

(4)

The number of years of credited service under this plan is capped at 40 years. The number of actual years of service with the Company and its predecessors for Mr. Kamerick under this plan is 41 years, 2 months.

 

Retirement Plans

 

The Company’s retirement plans and benefits are described below.

 

Pepco Holdings Retirement Plan

 

The Pepco Holdings Retirement Plan consists of several subplans. Each of the named executive officers participates in one or more of the Pepco General Retirement Subplan, the Conectiv Cash Balance Subplan or the PHI Subplan.

 

Conectiv Cash Balance Subplan

 

Most non-unionized employees who were employed (i) by Conectiv on August 1, 2002, or (ii) by the Company in the Conectiv service territory prior to December 31, 2004, are eligible to participate in the Conectiv Cash Balance Subplan, including Messrs. Rigby and Velazquez. Under the Conectiv Cash Balance Subplan, a record-keeping account in a participant’s name is credited with an amount equal to a percentage (which varies depending on the participant’s age at the end of the plan year) of the participant’s total pay, consisting of base pay, overtime and bonuses. Also, participants in the Atlantic City Electric Retirement Plan, in which Mr. Rigby participated, and the Delmarva Retirement Plan, in which Mr. Velazquez participated, who had at least ten years of credited service as of December 31, 1998, the inception date of the Conectiv Cash Balance Subplan, are eligible to receive additional transition credits until the participant’s combined years of service under the prior plan and the Conectiv Cash Balance Subplan total 35.

 

Participants employed on the inception date of the Conectiv Cash Balance Subplan were credited with an initial cash balance equal to the present value of their annuity benefits as of that date earned under the Atlantic City Electric Retirement Plan or the Delmarva Retirement Plan. Each participant’s account balance is supplemented annually with interest credits equal to the prevailing 30-year U.S. Treasury bond rate. Benefits become vested after three years of service. When a participant terminates employment (regardless of age), the amount credited to his or her account, at the election of the participant, is converted into one of several actuarially equivalent annuities selected by the participant or is paid to the participant in a lump sum (which cannot exceed 6.5 times the participant’s final average compensation). For 2011, Mr. Rigby had a Company credit percentage of 10%, and through 2014, receives an annual transition credit of 4%, of total pay. For 2011, Mr. Velazquez had a Company credit percentage of 10%, and through 2016, receives an annual transition credit of 3% of total pay. At December 31, 2011, the net present value of Mr. Velazquez’s accumulated benefit under the Conectiv Cash Balance Subplan was $610,477. Had Mr. Velazquez retired on that date, that balance, at his election, would have been converted into one of several actuarially equivalent annuities or would have been paid to him in a lump sum.

 

The Conectiv Cash Balance Subplan also provides for certain “grandfathered” rights that existed under the Delmarva Retirement Plan and under the Atlantic City Electric Retirement Plan, which apply to employees who had either 20 years of credited service or had attained age 50 on or before January 1, 1999. Under these grandfathering provisions, eligible employees are assured a minimum retirement benefit calculated for all years

 

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of service up to December 31, 2008, according to their original benefit formula under the applicable plan. Mr. Rigby, who was a participant in the Atlantic City Electric Retirement Plan, is the only named executive officer eligible to receive these grandfathered benefits.

 

The present value of Mr. Rigby’s accumulated benefits under the Conectiv Cash Balance Subplan at December 31, 2011, as shown in the Pension Benefits table on page 55 of this Proxy Statement, reflects the value of his benefits under the Conectiv Cash Balance Subplan. At December 31, 2011, the net present value of Mr. Rigby’s accumulated benefit under the Conectiv Cash Balance Subplan was $2,590,373. Had Mr. Rigby retired on December 31, 2011, that balance, at his election, would have been converted into one of several actuarially equivalent annuities or would have been paid to him in a lump sum.

 

On July 28, 2011, the Board approved revisions to the Conectiv Cash Balance Subplan and the PHI Subplan in order to establish a more unified approach to PHI’s retirement programs and to further align the benefits offered under its retirement programs. The revisions provide participants in the Conectiv Cash Balance Subplan the greater of the benefit under the Conectiv Cash Balance Subplan or a benefit calculated using the PHI Subplan formula. In determining the benefit under the PHI Subplan, the participants’ prior years of service are taken into account. These revisions are effective for employees who retire on or after July 1, 2011 and apply to all employees who are participants in the Conectiv Cash Balance Subplan, including Messrs. Rigby and Velazquez. As of December 31, 2011, Mr. Rigby’s benefits under the Conectiv Cash Balance Subplan exceed those under the PHI Subplan (which is described below). Mr. Velazquez’s benefits under the PHI Subplan formula exceed his benefits under the Conectiv Cash Balance Subplan as of that date.

 

PHI Subplan

 

Persons who become employees of the Company on or after January 1, 2005 are eligible to participate in the PHI Subplan, including Mr. Huffman. The plan provides participating employees who have at least five years of service with retirement benefits based on the participant’s average salary for the final five years of employment and the number of years of credited service under the plan at the time of retirement. Normal retirement age is 65. Participants who have reached age 55 and who have ten years of credited service are eligible for retirement benefits prior to normal retirement age, at a benefit level that is reduced from the benefit level at normal retirement age by 3% for each year that the early retirement date precedes the normal retirement date. A participant may retire with full benefits at age 62 and with 20 years of service. Benefits under the plan are paid in the form of a monthly annuity selected by the participant from among several available annuity options.

 

Pepco General Retirement Subplan

 

All employees who were employed (i) by Pepco on August 1, 2002, or (ii) by the Company in the Pepco service territory prior to December 31, 2004, are eligible to participate in the Pepco General Retirement Subplan, including Messrs. Kamerick and Emge. The plan provides participating employees who have at least five years of service with retirement benefits based on the participant’s average salary for the final three years of employment and the number of years of credited service under the plan at the time of retirement. Normal retirement age under the Pepco General Retirement Subplan is 65. Participants who have reached age 55 and have at least 30 years of credited service are eligible for early retirement without any reduction in benefits. Participants who have reached age 55 and who have ten years of credited service are eligible for retirement benefits prior to normal retirement age, at a benefit level that is reduced from the benefit level at normal retirement age by 2% for each year that the early retirement date precedes the normal retirement date. Plan benefits are partially offset by the Social Security benefits received by the participant. Benefits under the plan are paid in the form of a monthly annuity selected by the participant from among several available annuity options. Mr. Kamerick is eligible for retirement under the plan without any reduction in benefits and Mr. Emge is eligible for early retirement with reduced benefits. If Mr. Emge had retired on December 31, 2011, the actuarial net present value of his retirement benefit under the Pepco General Retirement Subplan as of that date would have been $1,258,790.

 

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Executive Supplemental Retirement Plans

 

PHI 2011 Supplemental Executive Retirement Plan

 

Effective August 1, 2011, the Company adopted the PHI 2011 Supplemental Executive Retirement Plan, or the 2011 SERP, a new, nonqualified supplemental executive retirement plan. The 2011 SERP replaces the Executive Retirement Plan and the Conectiv Supplemental Retirement Plan (each as described below) as the supplemental retirement plan for new employees of PHI and its subsidiaries hired on or after August 1, 2011. The 2011 SERP also includes provisions that may augment the supplemental retirement benefits to which participants in the pre-existing plans, including each of the named executive officers, are entitled.

 

The principal purposes of the 2011 SERP are to provide competitive retirement benefits, to protect eligible participants against reductions in retirement benefits due to the qualified plan limitations (as defined below), to encourage the continued employment of and to attract new employees to work for the Company, and to establish a more unified approach to the Company’s retirement programs. The establishment of the 2011 SERP is consistent with the Company’s efforts to align retirement benefits provided by the Company and its subsidiaries with current market practices, as recommended by the Compensation Committee’s independent compensation consultant.

 

The benefit formula under the 2011 SERP is 1.45% times years of credited service times final average pay (as determined in accordance with the terms of the 2011 SERP). Benefits under the 2011 SERP are calculated without reduction for limitations placed by the Code on the computation of retirement benefits under a qualified benefit plan (the “qualified plan limitations”). These limitations cap both the amount of the annual retirement benefit and the amount of compensation that may be used to calculate the annual benefit and exclude from the benefit calculation compensation that is deferred under the terms of a nonqualified plan. Under the 2011 SERP, the supplemental retirement benefit is calculated by including in final average pay the average of the three highest awards under the EICP within the five consecutive years immediately preceding retirement. Accordingly, if a participating executive’s retirement benefit under the Pepco Holdings Retirement Plan is reduced by the qualified plan limitations or Pepco Holdings Retirement Plan final average pay formula does not include EICP payments, the 2011 SERP will pay a supplemental retirement benefit equal to the difference between (i) the participant’s actual benefit under the Pepco Holdings Retirement Plan and (ii) the participant’s benefit as calculated under the terms of the 2011 SERP.

 

For participants in the pre-existing supplemental retirement plans, the 2011 SERP provides a minimum supplemental retirement benefit equal to the amount, if any, by which the executive’s benefit calculated under the 2011 benefit formula exceeds the supplemental retirement benefit provided under the pre-existing plan. Where the pre-existing plan provides for a greater benefit, the executive will receive the benefit provided for under the pre-existing plan.

 

Generally, a participant will become vested in the 2011 SERP upon the later of attaining age 65 or being credited with five years of service. Earlier vesting is permitted under the 2011 SERP when a participant attains age 55 or older and is credited with at least ten years of service under the 2011 SERP.

 

The 2011 SERP formula, including its application to participant’s in the pre-existing supplemental retirement plans, is designed to provide executives with retirement benefits that in the aggregate target median peer group retirement benefits based upon the research provided by PM&P, the Compensation Committee’s independent compensation consultant. Eligibility for participation in the 2011 SERP is determined by the Compensation Committee. Because the 2011 SERP is a nonqualified supplemental retirement plan, participation is limited to certain members of the Company’s management.

 

Generally, the only form of benefit intended to be provided under the 2011 SERP is a lifetime annuity, subject to certain exceptions, including after a change of control of the Company, in which case the benefit will be paid in a lump sum. Also, benefits under the 2011 SERP will be paid in a lump sum payment to any participant in the 2011 SERP who also participates in the Conectiv SERP (which itself pays benefits in the form

 

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of a lump sum) or to any participant in the 2011 SERP who does not participate in any other supplemental executive retirement plan, but only if the value of the benefit payable under the 2011 SERP is considered to be “de minimis” under the Code. Benefit payment will commence immediately following the participant’s separation from service.

 

Executive Retirement Plan

 

The Executive Retirement Plan is a nonqualified supplemental retirement plan that combines two different retirement structures: the Supplemental Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure The Executive Retirement Plan was closed to new participants effective August 1, 2011, and has been replaced by the 2011 SERP. The Executive Retirement Plan serves the same purpose as the 2011 SERP, as discussed above. Messrs. Kamerick, Emge and Huffman are participants in the Executive Retirement Plan.

 

Supplemental Benefit Structure

 

An executive’s benefit under the Supplemental Benefit Structure is an amount equal to the additional retirement benefit the executive would have received under the Pepco Holdings Retirement Plan, if the qualified plan limitations (as discussed in the description of the 2011 SERP above) were not taken into account in calculating the executive’s benefit. Benefits under the Supplemental Benefit Structure are payable in the form of a monthly annuity following the termination of a participant’s employment.

 

Executive Performance Supplemental Retirement Benefit Structure

 

An executive’s benefit under the Executive Performance Supplemental Benefit Structure is the additional retirement benefit the executive would have received under the Pepco Holdings Retirement Plan if in calculating the executive’s benefit the average of the highest three annual incentive awards in the last five consecutive years had been added to the executive’s average salary over the final three years of his employment. The Executive Performance Supplemental Retirement Benefit Structure has had the effect of making retirement benefits for participants in the Pepco General Retirement Subplan and the PHI Subplan more comparable to the retirement benefits received by participants in the Conectiv Cash Balance Subplan, which takes into account bonuses in calculating retirement benefits. Benefits under the Executive Performance Supplemental Retirement Structure are payable only to executives who remain employed through age 59, unless the termination of the executive’s employment follows a change of control of the Company. Benefits are paid in the form of a monthly annuity, except that if the employment of a participant terminates following a change in control, the payments due will be paid in a lump sum amount equal to the present value of the annuity payments to which the participant otherwise would be entitled. If Mr. Emge had retired on December 31, 2011, he would have been entitled to receive a benefit under this structure.

 

Conectiv Supplemental Executive Retirement Plan

 

The Conectiv Supplemental Executive Retirement Plan (the “Conectiv SERP”) is a nonqualified supplemental retirement plan that provides a supplemental retirement benefit equal to the additional retirement benefit a participating executive would have received under the Conectiv Cash Balance Subplan of the Pepco Holdings Retirement Plan, if the qualified plan limitations were not taken into account in the benefit calculation. As participants in the Conectiv Cash Balance Subplan, Messrs. Rigby and Velazquez participate in the Conectiv SERP. In the case of Mr. Rigby, the Conectiv SERP benefit is based on his grandfathered benefit under the Atlantic City Electric Retirement Plan calculated without taking the qualified plan limitations into account. The benefit under the Conectiv SERP is payable in a lump sum following the termination of a participant’s employment. If Messrs. Rigby and Velazquez had retired on December 31, 2011, the net present value of each of their retirement benefits as of that date under the Conectiv SERP would have been $3,246,506 and $157,877, respectively.

 

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Nonqualified Deferred Compensation

 

The following table provides certain information regarding the nonqualified deferred compensation benefits of each of the named executive officers at December 31, 2011.

 

Nonqualified Deferred Compensation

at December 31, 2011

 

Name

   Executive
Contributions
in Last Fiscal
Year(1)
     Registrant
Contributions
in Last Fiscal
Year(2)
     Aggregate
Earnings
in Last
Fiscal
Year
    Aggregate
Withdrawals/
Distributions
     Aggregate
Balance at
Last Fiscal
Year
End(3)
 

Joseph M. Rigby

             

Conectiv Deferred Compensation Plan

   $ —         $ —         $ 65,776     $ 1,350,000       $ 494,248   

PHI Revised and Restated Executive and Director Deferred Compensation Plan

   $ 33,733       $ 25,117       $ 21,519       —         $ 635,291   

Anthony J. Kamerick

             

PHI Revised and Restated Executive and Director Deferred Compensation Plan

   $ 57,628       $ 5,891       $ 19,221     $ —         $ 639,838   

David M. Velazquez

             

PHI Revised and Restated Executive and Director Deferred Compensation Plan

   $ 8,840       $ 6,538       $ 695     $ —         $ 28,375   

Kirk J. Emge

             

PHI Revised and Restated Executive and Director Deferred Compensation Plan

   $ 48,755       $ 7,258       $ (7,719   $ —         $ 360,105   

John U. Huffman

             

PHI Revised and Restated Executive and Director Deferred Compensation Plan

   $ 2,921       $ 2,145       $ 520     $ —         $ 23,282   

 

(1)

All amounts shown are included in the “Salary” column of the Summary Compensation Table for the year 2011, located on page 48 of this Proxy Statement.

 

(2)

All amounts shown are included in the “All Other Compensation” column of the Summary Compensation Table for the year 2011.

 

(3)

Includes the following amounts reported as compensation in the Summary Compensation Table in years prior to 2011:

 

  (a) PHI Deferred Compensation Plan: Mr. Rigby — $454,526; Mr. Kamerick — $153,332; Mr. Emge — $79,816; Mr. Huffman — $3,120, Mr. Velazquez — $0.

 

  (b) Conectiv Deferred Compensation Plan: Mr. Rigby — $21,468.

 

Deferred Compensation Plans

 

The Company maintains the following deferred compensation plans in which one or more of the named executive officers participate.

 

PHI Revised and Restated Executive and Director Deferred Compensation Plan

 

Under the PHI Deferred Compensation Plan, participating executives (including each of the named executive officers) and directors (including each of the Company’s non-employee directors) are permitted to defer the receipt of all or any portion of their compensation, including, in the case of executives, incentive

 

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compensation. In addition, to the extent an executive is precluded from making contributions to the Retirement Savings Plan, a tax-qualified 401(k) plan, due to limitations imposed by the Code, the executive is eligible to defer under the PHI Deferred Compensation Plan an amount equal to the contribution the executive is prevented from contributing to the Retirement Savings Plan and receive an additional credit under the PHI Deferred Compensation Plan equal to the matching contribution, if any, that the Company would have made to the executive’s account under the Retirement Savings Plan. Under the terms of the Retirement Savings Plan, employees can contribute to the Retirement Savings Plan up to 6% of their annual salary, with the Company matching 100% of the employee’s contribution up to 3% of salary and 50% of any contributions in excess of 3% of salary up to 6% of salary.

 

Under the PHI Deferred Compensation Plan, the Company credits to each participant’s account on a monthly basis an amount corresponding to, as elected by the participant, any or a combination of: (i) the interest at the prime rate that would have been paid on an amount equal to the participant’s account balance, (ii) an amount equal to the return that the participant would have earned had his or her account balance been invested in any one or a combination of the investment funds selected by the Compensation Committee, or (iii) an amount equal to the return the participant would have earned had the account balance been invested in shares of common stock (the “phantom shares account”).

 

Payment of benefits under the PHI Deferred Compensation Plan begins when selected by the participant among various options, but subject to any limitation necessary to comply with the requirements of Section 409A of the Code.

 

Eligibility of executives to participate in the PHI Deferred Compensation Plan is determined by the Company’s Chief Executive Officer (and, in the case of the Chief Executive Officer, by the Board).

 

In December 2011, the Board approved an amendment to the PHI Deferred Compensation Plan to clarify the deferral and payment elections under the PHI Deferred Compensation Plan’s 401(k) wraparound provisions (provisions that permit deferral of salary in excess of the Code’s contribution limits on 401(k) plans), require Compensation Committee approval prior to any modification to a director deferral election that is credited in phantom shares of common stock, and make other changes to simplify and clarify the provisions of this plan.

 

Conectiv Deferred Compensation Plan

 

Prior to the merger of Pepco and Conectiv, Conectiv maintained the Conectiv Deferred Compensation Plan under which participating executives were permitted to defer the receipt of all or any portion of their compensation, including incentive compensation, and to receive employer matching credits on deferrals corresponding to contributions the executive was precluded from making to the Conectiv tax-qualified 401(k) plan due to limitations imposed by the Code. On August 1, 2002, employee deferrals and matching employer credits under the Conectiv Deferred Compensation Plan were discontinued.

 

Prior to August 1, 2002, participant deferrals and employer matching contributions were credited to a deferred compensation account and were deemed invested, as elected by the executive, in any of the investment options available to participants under the Conectiv tax-qualified 401(k) plan as of August 1, 2002. Employer matching contributions were credited to an employer matching account in the form of Conectiv common stock equivalents, which at the time of the merger were converted into Company common stock equivalents on which additional credits were made when cash dividends were paid on the common stock based on the number of shares that could be purchased with the cash dividend. Of the named executive officers, only Mr. Rigby maintains an account balance under the Conectiv Deferred Compensation Plan.

 

Distributions under the Conectiv Deferred Compensation Plan commence at a time selected by the executive at the time of deferral from among various options.

 

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Termination of Employment and Change in Control Benefits

 

The following is a description of the Company’s plans and arrangements that provide for payments to the named executive officers, following or in connection with the termination of the executive’s employment, a change in control of the Company or a change in the executive’s responsibilities.

 

Employment Agreement

 

As of January 1, 2012, Mr. Rigby’s employment agreement provides him with specified benefits if his employment is terminated under various circumstances, as described below. These benefits replace in their entirety the termination benefits that Mr. Rigby was eligible to receive under his prior employment agreement.

 

Termination by the Company Other than for Cause

 

If at any time during the term of his employment agreement, the Company terminates Mr. Rigby’s employment, other than for cause, Mr. Rigby will be entitled to:

 

   

Payment of unpaid salary and accrued vacation pay through the date of termination, as well as any earned and unpaid bonus for the year prior to the year in which the termination occurs;

 

   

Subject to execution and delivery of an irrevocable release of claims:

 

   

if the termination date is prior to January 1, 2013, a lump sum severance payment equal to three times the sum of (i) his annual base salary in effect on the date of the termination of employment and (ii) the higher of (A) his target annual bonus under the EICP for the year in which the termination of employment occurs or (B) the highest annual bonus received under the EICP during the three calendar years preceding the calendar year in which the termination of employment occurs (the sum of (i) and (ii) above is referred to as the “Calculation Amount”);

 

   

if the termination date is on or after January 1, 2013 but on or prior to December 31, 2014, a lump sum cash payment equal to the product of (i) three times Calculation Amount and (ii) a fraction (A) the numerator of which is 730 minus the number of days that have elapsed from and including January 1, 2013, through the day immediately prior the termination date and (B) the denominator of which is 730; and

 

   

a lump sum payment in cash equal to a pro-rated portion of Mr. Rigby’s target annual bonus under the EICP for the year in which the termination occurs;

 

   

Vesting in full of the unvested portion of the time-based retention award provided under his employment agreement;

 

   

Vesting in full of the outstanding performance-based retention awards under his employment agreement to the extent that the performance goals are achieved;

 

   

With respect to the unvested portion of all other time-based restricted stock or RSU awards under the LTIP (or any successor plan), (i) for awards that would have vested had Mr. Rigby remained employed by the Company for the remainder of the three-year term of his employment agreement, the vesting of each such award in full on the date his employment terminates, or (ii) for awards that would have vested in full after the last day of the three-year term of his employment agreement, the vesting of each such award on a pro-rated basis for the length of his service up to the date of termination, except if such termination occurs within one year following a change of control (as defined in the employment agreement), the award will vest in full; and

 

   

With respect to the unvested portion of all performance-based restricted stock or RSU awards under the LTIP (or any successor plan), (i) if the performance period ends within the three-year term of his employment agreement, the vesting of each such award in full, if and to the extent the performance goals are achieved, or (ii) if the performance period ends after the last day of the three-year term of his employment agreement, the vesting of each such award (to the extent earned based on performance

 

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through the end of the performance period) on a pro-rated basis for the length of his service up to the date of termination; except that, in either case, if a termination occurs within one year following a change of control, each outstanding performance award shall vest on the date Mr. Rigby’s employment terminates and the amount of the award shall be determined on the assumptions that (i) Mr. Rigby had remained employed through the end of the performance period and (ii) the target level of performance had been achieved.

 

For purposes of these provisions, “cause” is defined as:

 

   

intentional fraud or material misappropriation with respect to the business or assets of the Company;

 

   

the persistent refusal or willful failure to perform substantially duties and responsibilities to the Company after notice of, and an opportunity to remedy, such failure have been given; or

 

   

conduct that constitutes disloyalty to the Company or that materially damages the property, business or reputation of the Company.

 

Voluntary Resignation for Good Reason

 

If, at any time during the term of his employment agreement, Mr. Rigby terminates his employment for “good reason”, he will receive under his employment agreement the same benefits that he would have received had the Company terminated his employment without cause as described above. A termination for “good reason” will occur if:

 

   

his base salary is reduced (other than a reduction consistent and proportional with the overall reduction, due to extraordinary business conditions, in the compensation of all other senior executives of the Company);

 

   

he is not considered in good faith for incentive awards under the Company’s plans in which senior executives are eligible to participate;

 

   

the Company fails to provide him with retirement, fringe and supplemental benefits in a manner similar to other senior executives;

 

   

the Company relocates Mr. Rigby’s place of employment to a location further than 50 miles from Washington, D.C. (other than the Washington, D.C. or Wilmington, Delaware metropolitan areas), or

 

   

he is removed from the position of Chief Executive Officer (other than due to his disability).

 

Resignation or Termination of Employment Due to Disability, Death or for Cause

 

Upon Mr. Rigby’s resignation (other than for good reason) or upon his death or disability (which shall be deemed to have occurred if he becomes entitled to long-term disability benefits under the Company’s disability plan or policy), or in the event of termination of his employment for cause prior to termination of his employment agreement, Mr. Rigby will not be entitled to further compensation under his employment agreement, except for salary, vacation pay and annual bonus earned but not paid prior to such termination and awards or benefits to which he may be entitled under the Company’s benefit plans. The retention awards provided under Mr. Rigby’s employment agreement will be forfeited if Mr. Rigby’s employment with the Company ends prior to the completion of the applicable vesting period or performance period, other than in the case of the termination of his employment due to death or disability, or his retirement with the consent of the Board. In each such case, the unvested portion of the time-based retention award will vest in full upon termination of employment, and the then-outstanding performance-based retention award will vest at the end of the performance period to the extent that the performance goals are achieved. In the event of a termination of Mr. Rigby’s employment for cause, the unvested portion of the time-based retention award and the entire then-outstanding performance-based retention award will be forfeited.

 

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Health Insurance and Related Benefits

 

For a period equal to the greater of (i) one year following the termination of Mr. Rigby’s employment and (ii) the remainder of the three-year term of his employment agreement, the Company will reimburse Mr. Rigby for the cost of purchasing a health insurance policy comparable to the Company-sponsored healthcare plan in which he was enrolled immediately prior to the termination of his employment to the extent the Company is not otherwise providing or paying for such coverage, including under his employment agreement.

 

If, during the three-year term of his employment agreement, Mr. Rigby’s employment is terminated by the Company other than for cause or Mr. Rigby terminates his employment for “good reason,” each following a change of control (as defined in his employment agreement), for 24 months after such termination, the Company will, in its discretion, either:

 

   

provide Mr. Rigby with healthcare, life insurance and disability benefits no less favorable than those benefits as in effect immediately prior to such termination; or

 

   

reimburse Mr. Rigby for the cost of obtaining such benefits.

 

However, Mr. Rigby will not be entitled to any of the foregoing healthcare insurance and related benefits if applicable law precludes the Company from providing such benefits to him because the Company is not providing comparable benefits to other employees or former employees.

 

Change-in-Control Severance Plan

 

Under the Company’s Change-in-Control Severance Plan, if, within one year following a change in control, a participating executive’s employment is terminated by the Company without “cause” or the executive terminates his or her employment for “good reason,” the executive will be entitled to the following termination benefits:

 

   

a severance payment equal to the sum of executive’s salary and target annual bonus for the year in which the termination occurs, multiplied by a benefit factor of 1.5, 2 or 3, depending upon the executive’s position;

 

   

a prorated portion (based on the number of days the executive was employed during the year) of the executive’s target annual bonus for the year;

 

   

a lump sum supplemental retirement benefit paid in cash equal to the difference between (i) the present value of the executive’s vested retirement benefit accrued at the time of termination under the Pepco Holdings Retirement Plan and any excess or supplemental retirement plan in which the executive is a participant and (ii) the benefit the executive would be entitled to receive under such plans assuming that the executive was the number of years older and had been credited with the number of years of service equal to the executive’s benefit factor;

 

   

for a period of time equal to the executive’s benefit factor, medical, dental, group life and disability benefits that generally are at least at a level substantially similar to the level in effect prior to the change in control; and

 

   

a gross-up payment in an amount equal to the amount of all excise taxes imposed upon compensation payable upon termination of employment and the additional taxes that result from such payment, such that the aggregate net payments received by the executive would be the same as they would have been had such excise tax not been imposed.

 

The receipt of the benefits under the Change-in-Control Severance Plan is contingent upon the execution by the employee of (i) a general release and a non-disparagement agreement and (ii) a covenant agreeing not to compete against the Company or solicit its employees, each in form and substance satisfactory to the Company. Of the named executive officers, Messrs. Kamerick and Velazquez (each with a benefit factor of 3) and Emge

 

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and Huffman (each with a benefit factor of 2) are participants in the Change-in-Control Severance Plan. Mr. Rigby does not participate in the Change-in-Control Severance Plan.

 

LTIP

 

For a summary of the specific provisions of the LTIP governing termination of employment or change in control, see “Proposal 4: Approval of Performance Goal Criteria Under the Pepco Holdings, Inc. Long-Term Incentive Plan — Summary of Terms of the LTIP.” In the case of Mr. Rigby, the application of the provisions of the LTIP governing the disposition of awards in connection with a termination of his employment (other than in the case of retirement, death or disability) is superseded by the provisions of the New Agreement, which are more fully described above under the heading “Termination of Employment and Change in Control Benefits — Employment Agreement — New Agreement.”

 

2012 LTIP

 

For a summary of the specific provisions of the 2012 LTIP governing termination of employment or change in control, see “Proposal 3: Approval of the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan — Summary of Terms of the 2012 LTIP.”

 

EICP

 

Under the EICP, if a participant retires, dies or becomes disabled prior to the end of a plan year, the participant is entitled to a pro-rated portion of the award to which the participant otherwise would be entitled based on the portion of the year that the participant was employed. If the employment of the participant terminated for any other reason during the plan year, the participant is entitled to an award only to the extent provided for in his employment agreement or under the Change-in-Control Severance Plan.

 

For a summary of the specific provisions of the Amended EICP governing termination of employment or change in control, see “Proposal 5: Approval of the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan — Termination Events.”

 

Retirement Plan Benefits

 

Messrs. Kamerick and Emge are participants in the Pepco General Retirement Subplan of the Pepco Holdings Retirement Plan and Messrs. Rigby and Velazquez are participants in the Conectiv Cash Balance Subplan of the Pepco Holdings Retirement Plan. Mr. Huffman is a participant in the PHI Subplan of the Pepco Holdings Retirement Plan. For a description of the benefits provided under these defined benefit retirement plans and under the corresponding supplemental retirement plans following termination of employment, see “Retirement Plans.”

 

Deferred Compensation Plans

 

Each of Messrs. Rigby, Kamerick, Velazquez, Emge and Huffman is a participant in the PHI Deferred Compensation Plan. Mr. Rigby also is a participant in the Conectiv Deferred Compensation Plan. For a discussion of the payments to which they are entitled to under these plans following a termination of employment, see “Deferred Compensation Plans.”

 

Quantification of Termination of Employment Benefits

 

The following discussion quantifies the benefits that each of Messrs. Rigby, Kamerick, Velazquez, Emge and Huffman would have been entitled to receive under the Company’s compensation plans and, in the case of Mr. Rigby, under the terms of his new employment agreement, if his employment had terminated on December 30, 2011 (the last business day of the Company’s last completed fiscal year), under specified circumstances. The following discussion regarding Mr. Rigby assumes that his new employment agreement was

 

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in effect, and the time-based retention award and the 2012 performance-based retention award thereunder were granted, each as of December 30, 2011. The following discussion does not include benefits that would be received by the named executive officers under the Company’s defined benefit retirement plans and corresponding supplemental retirement plans and arrangements and under the Company’s deferred compensation plans, the benefits under which are described above in “Retirement Plans” and “Deferred Compensation Plans.”

 

Following a Change in Control, the Termination of an Executive’s Employment by the Company Other Than for Cause or the Executive’s Voluntary Resignation for Good Reason

 

If, as of December 30, 2011, the employment of the executive following a change in control had been terminated by the Company other than for cause, or (i) in the case of Mr. Rigby, he had voluntarily terminated his employment for “good reason” (as defined in Mr. Rigby’s employment agreement), and (ii) in the case of Messrs. Kamerick, Velazquez, Emge and Huffman, each had voluntarily terminated his employment for “good reason” (as defined in the Change-in-Control Severance Plan) within one year following the change in control in accordance with the terms of the Change-in-Control Severance Plan and the LTIP, the executive would have received the benefits described in the table below. The benefit in the column headed “Section 280G Gross-Up Payment” is the payment the executive would have received had the executive incurred an excise tax under Section 4999 of the Code.

 

    Severance
Payment
    EICP
Payment(1)
    Lump Sum
Supplemental
Retirement
Benefit
Payment
    Accelerated
Vesting of
Time-
Based
Restricted
Stock and
RSUs(2)
    Accelerated
Vesting of
Performance-
Based
RSUs(3)
    Welfare
Plan
Benefit
Payment
    Section
280G

Gross-
Up

Payment
    Healthcare
and

Related
Benefits
    Total  

Joseph M. Rigby(4)

  $ 6,023,654      $ 985,000      $ —        $ 3,649,372      $ 5,471,845      $ —        $ —        $ 25,644      $ 16,155,515   

Anthony J. Kamerick

  $ 2,390,400      $ 298,800      $ 1,438,688      $ 327,629      $ 795,098      $ 54,765      $ 2,048,563      $ —        $ 7,353,943   

David M. Velazquez

  $ 2,323,200      $ 290,400      $ 2,935,962      $ 348,190      $ 543,666      $ 51,174      $ 2,535,846      $ —        $ 9,028,438   

Kirk J. Emge

  $ 1,251,200      $ 234,600      $ 655,487      $ 239,481      $ 570,086      $ 25,644      $ 990,712      $ —        $ 3,967,210   

John U. Huffman

  $ 1,168,000      $ 219,000      $ 273,066      $ 227,295      $ 364,344      $ 35,202      $ 672,424      $ —        $ 2,959,331   

 

(1)

Represents the award that would be received (i) with respect to Mr. Rigby, assuming that he had received, in accordance with the provisions of his new employment agreement, an award opportunity in 2011 under the EICP to earn 100% of his initial base salary under that agreement assuming target-level performance occurred in 2011, and (ii) with respect to each other named executive officer, under each such executive’s EICP award opportunity assuming target-level performance occurred in 2011.

 

(2)

Represents the market value on December 30, 2011 (the last trading day of 2011) of unvested time-based restricted stock and time-based RSU awards granted under the LTIP that would vest and become non-forfeitable immediately upon the date of termination of employment in the case of Mr. Rigby, and, in the case of each other named executive officer, if the termination of the named executive officer’s employment occurred within one year following the change in control. The market value calculations were based on a price of $20.30 per share of common stock, the closing market price of the common stock on December 30, 2011. These amounts include the following number of additional shares that the named executive officer is entitled to receive upon vesting under the terms of his LTIP awards as a result of dividend equivalents on such awards: Mr. Rigby — 2,273 shares; Mr. Kamerick — 197 shares; Mr. Velazquez — 192 shares; Mr. Emge — 124 shares; and Mr. Huffman — 115 shares.

 

(3)

Represents the market value on December 30, 2011 of shares of common stock issuable under performance-based awards granted under the LTIP which (i) in the case of each named executive officer except Mr. Rigby, the named executive officer would be entitled to receive at the end of each respective performance period in accordance with the terms of the LTIP or the award agreement, as the case may be, and (ii) Mr. Rigby would be entitled to receive (A) with respect to his initial performance-based retention award granted under his employment agreement, at the end of the performance period to the extent that the Compensation Committee then determines that the award’s performance goals have been achieved, and (B) with respect to all other performance-based awards granted to Mr. Rigby under the LTIP, immediately upon the date of such termination, if such termination occurs within one year following a change in control, and assuming that he had remained employed with the Company through the

 

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  end of the performance period and the target level of performance had been achieved. These amounts include the following number of additional shares that the named executive officer is entitled to receive upon vesting under the terms of his LTIP awards as a result of dividend equivalents on such awards: Mr. Rigby — 25,388 shares; Mr. Kamerick — 4,956 shares; Mr. Velazquez — 3,732 shares; Mr. Emge — 3,684 shares; and Mr. Huffman — 2,563 shares.

 

(4) 

Mr. Rigby’s severance payment amount includes accrued but unpaid vacation pay through the date of his termination in the amount of $113,654. This amount has been calculated based upon the maximum number of eligible vacation days in accordance with the Company’s vacation policy.

 

Termination of the Executive’s Employment by the Company Other than for Cause and Not Following a Change in Control

 

If, as of December 30, 2011, the employment of each named executive officer, other than Mr. Rigby, had been terminated by the Company other than for cause and not following a change in control, each such named executive officer would have been entitled to his retirement benefits and the payment of deferred compensation, and all unvested awards under the LTIP and the EICP would have been forfeited, except that such termination of employment would have been treated under the LTIP, with respect to Mr. Kamerick, as a normal retirement, and with respect to Mr. Emge, as an early retirement at the Company’s request, and as a retirement of both such executive officers under the EICP. As a result, unless otherwise determined by the Compensation Committee, in the cases of Messrs. Kamerick and Emge (i) each of the unvested portions of their time-based restricted stock and RSU awards under the LTIP would have vested on a prorated basis for service on or before December 30, 2011, and (ii) each of the unvested portions of their performance-based awards under the LTIP would have vested on a prorated basis, taking into account factors including, but not limited to, service during the period prior to termination and the performance of the executive before his employment ceased. Furthermore, each of Messrs. Kamerick and Emge would have been eligible to receive a prorated award under the EICP. The value of these accelerated awards to Messrs. Kamerick and Emge as of December 30, 2011 would have been equal to the amounts shown in the appropriate columns of the table above.

 

Under the terms of Mr. Rigby’s employment agreement, if on December 30, 2011 the Company had terminated Mr. Rigby’s employment other than for cause or if Mr. Rigby had terminated his employment for “good reason,” in each case other than following a change in control, Mr. Rigby would have been entitled to receive his retirement benefits, the payment of his deferred compensation, and each of the benefits shown as payable to Mr. Rigby in the table above, except that the amount of Mr. Rigby’s healthcare and related benefits would have been reduced to $10,898.

 

Voluntary Resignation or Retirement by the Executive

 

If as of December 30, 2011, Mr. Kamerick had resigned his employment with the Company (other than for good reason following a change in control), he would have been eligible to receive his retirement benefits and the payment of deferred compensation. Mr. Kamerick would also have been entitled to receive the EICP and LTIP benefits shown in the table above.

 

If, as of December 30, 2011, Mr. Emge had resigned his employment with the Company (other than for good reason following a change in control), he would receive his retirement benefits and the payment of deferred compensation. Mr. Emge also would have been entitled to receive the EICP benefits shown in the table above. Absent any determination by the Compensation Committee to the contrary, the unvested portion of Mr. Emge’s awards under the LTIP would have been forfeited.

 

If either Messrs. Velazquez or Huffman had resigned from the Company (other than for good reason following a change in control) as of December 30, 2011, he would not have been entitled to any benefits, other than retirement benefits and the payment of deferred compensation.

 

Under his employment agreement, if Mr. Rigby had resigned his employment with the Company on December 30, 2011 (other than for good reason), he would have been entitled to receive accrued vacation pay

 

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through the date of termination (in the amount of $113,654) and any earned and unpaid annual bonus with respect to 2010. If the Board consented to Mr. Rigby’s retirement, (i) the unvested portion of the time-based retention award under his employment agreement would have vested in full (with a benefit value to Mr. Rigby of $1,499,987 as of December 30, 2011), and (ii) the unvested portion of the outstanding performance-based retention award under his employment agreement would vest in full at the end of the performance period if the Compensation Committee determines that the performance goals have been achieved (with a benefit value to Mr. Rigby of $749,984 as of December 30, 2011 assuming such performance was achieved at target). Mr. Rigby would also have been entitled to receive the EICP benefits shown in the table above. Absent any determination by the Compensation Committee to the contrary, the unvested portion of Mr. Rigby’s awards under the LTIP (other than with respect to the retention awards under his employment agreement) would have been forfeited. Mr. Rigby’s rights in respect of all other awards and benefits to which he may be entitled would be determined in accordance with the terms and conditions of the Company plans or arrangements under which such awards or benefits are provided.

 

Termination of Employment Due to Death or Disability

 

If, as of December 30, 2011, a named executive officer’s employment (other than Mr. Rigby’s) had terminated because of his death or disability, such executive (or his estate) would have been entitled to receive his retirement benefits and the payment of his deferred compensation. For all named executive officers (other than Mr. Rigby with respect to his retention awards under his employment agreement), under the terms of the LTIP, unless otherwise determined by the Compensation Committee (i) a pro-rata portion of each outstanding time-based restricted stock or RSU award issued to the named executive officer would have immediately vested based upon such executive’s service during the period (with a benefit value to Mr. Rigby of $1,321,255 as of December 30, 2011), and (ii) a pro-rata portion of the shares of common stock issuable under each performance-based award for any then-uncompleted performance periods would have vested, taking into account factors including, but not limited to, service during the period prior to termination and the performance of the executive before his employment ceased (with a benefit value to Mr. Rigby of $3,054,563 as of December 30, 2011 assuming such performance was achieved at target). The value of these accelerated awards to each of the named executive officers, other than Mr. Rigby, are as shown in the table above. In addition, under the terms of the EICP, each named executive officer would have been entitled to a pro-rata portion of his award based on the portion of the year for which he was employed (as shown in the table above). No named executive officer would have been entitled to any severance payment or supplemental retirement benefit payment.

 

Under his employment agreement, if Mr. Rigby’s employment terminated due to death or disability as of December 30, 2011, Mr. Rigby would not have been entitled to receive any additional compensation other than (in addition to the applicable amounts described above) (i) accrued vacation pay through the date of termination (in the amount of $113,654), (ii) any earned and unpaid annual bonus for 2010, (iii) vesting in full of the unvested portion of the time-based retention award under his employment agreement (with a benefit value to Mr. Rigby of $1,499,987 as of December 30, 2011), and (iv) vesting in full of the unvested portion of each of the performance-based retention awards under his employment agreement if the performance goals associated therewith are determined to have been met at the end of the respective performance period (with a benefit value to Mr. Rigby of $749,984 as of December 30, 2011 assuming such performance was achieved at target). Mr. Rigby’s rights in respect of all other awards and benefits to which he may be entitled would be determined in accordance with the terms and conditions of the Company plans or arrangements under which such awards or benefits are provided.

 

Termination for Cause

 

If, as of December 30, 2011, the employment of a named executive officer (other than Mr. Rigby) had been terminated for cause, the named executive officer would not have been entitled to any benefits, other than his retirement benefits and the payment of his deferred compensation. Under his employment agreement, Mr. Rigby would not have been entitled to receive any additional compensation other than accrued vacation pay through the

 

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date of termination (in the amount of $113,654), and any earned and unpaid annual bonus for 2010. Mr. Rigby’s rights in respect of all other awards and benefits to which he may be entitled would be determined in accordance with the terms and conditions of the Company plans or arrangements under which such awards or benefits are provided.

 

For each named executive officer, all unvested awards under the LTIP and the EICP would have been forfeited in the event of a termination of employment for cause.

 

Compensation Committee Interlocks and Insider Participation

 

During the 2011 fiscal year, the Compensation Committee consisted of Messrs. Dunn, Harker, Heintz and Ross, and Ms. Krumsiek. No person who served as a member of the Compensation Committee during the fiscal year ended December 31, 2011, was a current or former officer or employee of the Company, or engaged in certain transactions with us required to be disclosed as “related party transactions” under regulations of the SEC. There were no compensation committee “interlocks” during the fiscal year ended December 31, 2011, which generally means that none of our executive officers served as a director or member of the compensation committee of another entity, one of whose executive officers served as a member of the Board or as a member of the Compensation Committee.

 

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PROPOSAL 3: APPROVAL OF THE PEPCO HOLDINGS, INC. 2012 LONG-TERM INCENTIVE PLAN

 

The Board has unanimously approved the Pepco Holdings, Inc. 2012 Long-Term Incentive Plan (the “2012 LTIP”), which will provide for long-term incentives to attract, retain and reward highly competent officers and key employees of PHI and its subsidiaries, as well as directors of PHI who are not employees or officers of PHI or any subsidiary. The 2012 LTIP was adopted by the Board in December 2011 subject to the approval of our stockholders at the Annual Meeting.

 

Background of and Reasons for the Proposal

 

Under the LTIP, we are authorized to grant stock-based compensation to officers and key employees of PHI and its subsidiaries. The terms of the LTIP provide that awards may be made under the LTIP until August 1, 2012, although the LTIP will continue to remain in effect until all outstanding awards are settled or expire. As of March 23, 2012, there were 5,234,141 shares of common stock remaining available for future grants under the LTIP and an aggregate of 2,437,145 shares of common stock reserved for issuance pursuant to outstanding awards under the LTIP.

 

The Board believes that stock-based compensation increases stockholder value and contributes significantly to our success by enabling us to attract and retain the services of employees (including executive officers) of exceptional ability. Because we believe that our success is primarily dependent upon the judgment, interest and special efforts of these individuals, we wish to continue to provide stock-based incentive awards to recruit, motivate and retain these individuals to increase stockholder value and to foster providing reliable service to our customers. The Board also intends to continue to attract and retain non-employee directors of exceptional ability and experience by having greater flexibility to grant different types of stock-based compensation to our non-employee directors.

 

Accordingly, on December 15, 2011, the Board adopted the 2012 LTIP, subject to approval of the 2012 LTIP by our stockholders at the Annual Meeting. Stockholder approval is being sought for two reasons. First, the listing requirements of the NYSE require that we obtain stockholder approval of any new equity compensation plan. Second, such stockholder approval is required to satisfy one of the conditions for payments made pursuant to awards granted under the 2012 LTIP to be “performance-based compensation” under Section 162(m) of the Code.

 

The 2012 LTIP is intended to increase PHI stockholder value by providing for long-term incentives to attract, retain and reward highly competent officers and key employees of PHI and its subsidiaries, as well as to non-employee directors of PHI, all of whom the Board believes are primarily responsible for the continued growth, development and financial success of PHI and its subsidiaries, so that we can continue to perform profitably while providing reliable service to our customers. The 2012 LTIP is also designed to provide opportunities for officers and key employees of PHI and its subsidiaries, and non-employee directors of PHI, to receive awards consisting of, based upon or valued with respect to, shares of our common stock, thereby helping us to align further these individuals’ interests with those of our stockholders.

 

We cannot grant additional awards under the LTIP after its August 1, 2012 expiration date, although outstanding awards under LTIP will thereafter remain in effect in accordance with their terms. If the stockholders do not approve Proposal 3 at the Annual Meeting, then, commencing August 1, 2012, we would be unable to attract, motivate and reward our officers, key employees and non-employee directors for positive performance by providing them with awards of equity compensation.

 

Summary of Terms of the 2012 LTIP

 

The following summary of the material terms of the 2012 LTIP is qualified in its entirety by the terms and conditions set forth in the copy of the 2012 LTIP attached as Annex A to this Proxy Statement.

 

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Administration

 

The Compensation Committee will generally be the administrator of the 2012 LTIP and has sole authority to generally make all determinations advisable for the administration of the 2012 LTIP in order to achieve its stated objectives. The 2012 LTIP provides that, in lieu of the Compensation Committee, the Board may elect to assume responsibility for and perform any or all of the functions of the Compensation Committee under the 2012 LTIP, except that (1) the Compensation Committee must carry out any function that is related to a performance-based award covered by Section 162(m) of the Code, and (2) the Board will administer director awards under the 2012 LTIP (as discussed in more detail below under “Director Awards”). Throughout the remainder of this section, unless the context indicates otherwise, we refer to the “Compensation Committee” to mean either the Compensation Committee or the Board, as appropriate.

 

The Compensation Committee will designate officers and key employees who will be granted awards under the 2012 LTIP, and will designate non-employee directors who will be granted director awards, as well as the size and types of awards, the terms and conditions pursuant to which awards are granted, exercised or forfeited, and the form and content of the award agreements representing such awards. The Compensation Committee will be authorized to establish, administer and waive terms, conditions and performance goals of outstanding awards and to accelerate the vesting or exercisability of awards, in each case, subject to limitations contained in the 2012 LTIP. In the case of any award intended to be eligible for the performance-based compensation exception under Section 162(m) of the Code, the Compensation Committee will exercise its discretion consistent with the requirements for qualifying the award for that exception. The Compensation Committee will determine all questions of interpretation and application of the 2012 LTIP. The Compensation Committee’s determinations will be final and binding on a participant and not subject to further appeal.

 

Except as noted above, the Compensation Committee must be comprised of two or more members of the Board, each of whom must be an “outside director” within the meaning of the regulations promulgated under Section 162(m) of the Code and a “non-employee director” within the meaning of Rule 16b-3 promulgated under the Exchange Act. Currently, the members of the Compensation Committee are Messrs. Dunn (Chairman), Harker and Heintz, Ms. Krumsiek, and Mr. Ross, each of whom is an “outside director” and a “non-employee director” as described above.

 

Limits on Awards

 

The number of shares of common stock that may be issued under the 2012 LTIP may not exceed, in the aggregate, 8,000,000 shares. Of the aggregate number of shares eligible for issuance under the 2012 LTIP, the number of shares of common stock that may be issued pursuant to incentive stock options, or ISOs, is 8,000,000. The shares of common stock that may be issued under the 2012 LTIP will be either authorized and unissued shares or previously issued shares that have been reacquired and are held as treasury stock. For purposes of determining the number of shares of common stock available for issuance under the 2012 LTIP, whenever an award lapses, is cancelled or forfeited, is delivered or surrendered to us as part or full payment for the exercise of an option, or the rights of the participant to whom an award was granted terminate (except with respect to an option that lapses due to the exercise of a related stock appreciation right, or SAR), the shares subject to such award will again be available for future awards under the 2012 LTIP. The total number of shares available to be issued under the 2012 LTIP will be appropriately adjusted in the event of any change in the outstanding shares of common stock by reason of any dividend or split, recapitalization, reorganization, combination, division or exchange of shares, or other similar changes in the common stock.

 

Participation

 

The Compensation Committee may grant awards under the 2012 LTIP to officers or key employees of PHI or any subsidiary, including such officers or employees who are members of the Board. The Compensation Committee may also grant director awards under the 2012 LTIP to directors of PHI who are not employees or officers of PHI or any subsidiary. However, only employees of the Company and its subsidiaries will be eligible

 

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to receive ISOs under the 2012 LTIP. As of March 23, 2012, approximately 62 persons are eligible to participate in the 2012 LTIP.

 

Term of the 2012 LTIP

 

If the 2012 LTIP is approved by stockholders at the Annual Meeting, the effective date of the 2012 LTIP will be the date of the Annual Meeting. Unless earlier terminated by the Board, the 2012 LTIP shall terminate on the tenth anniversary of the effective date, but the 2012 LTIP shall remain in effect thereafter solely to settle all matters related to the payment of outstanding awards and the termination of the 2012 LTIP.

 

Restricted Stock and Restricted Stock Unit Awards

 

General

 

Restricted stock awards are shares of common stock that are awarded to a participant subject to the satisfaction of the terms and conditions established by the Compensation Committee. During a specified period of time, or restriction period, shares of restricted stock bear a legend prohibiting the sale, transfer, pledge, assignment or hypothecation of the shares until the expiration of the restriction period. Upon issuance to the participant of shares of restricted stock, the participant will have the right to vote such shares, and, unless otherwise provided in the award agreement, to receive the dividends paid on such shares.

 

A restricted stock unit, or RSU, is a contractual right to receive upon vesting of the RSU an amount payable in cash or shares of common stock, as determined by the Compensation Committee. No shares of common stock are issued to the participant on the date of grant of an RSU, and the participant does not have any voting or dividend rights with respect to shares underlying an RSU award until any shares of common stock are issued to the participant (although the Compensation Committee may award dividend equivalents in connection with the grant of an RSU).

 

In general, awards of restricted stock or RSUs will be issued without the payment of any consideration by the participant. Such awards may be time-based or performance-based. Time-based awards vest taking into account only the period of time that the participant performs services for PHI or any subsidiary after the date of grant. Performance-based awards require the satisfaction of performance objectives, criteria or other requirements in order for the award to vest, in addition to continued employment with PHI or a subsidiary. Each award of restricted stock and RSUs shall be subject to such other terms and conditions consistent with the 2012 LTIP as shall be determined by the Compensation Committee and set forth in an award agreement.

 

Vesting and Forfeiture

 

Time-Based Awards.    At the time a time-based award of restricted stock or RSUs is granted, the Compensation Committee will, in its discretion, establish a restriction period applicable to such award. Each award may have a different restriction period. Upon completion of the restriction period with respect to a restricted stock award, all restrictions will lapse and a new certificate or certificates for the shares will be issued to the participant without the restrictive legend. The lapse of restrictions with respect to a time-based award of RSUs shall cause the award to be paid as provided in the award agreement.

 

If a participant ceases employment or service as a director during the restriction period, the award of time-based restricted stock or RSUs will be forfeited as provided below:

 

   

Termination of employment by the participant (other than retirement) or by PHI or a subsidiary for cause (as defined in the 2012 LTIP): 100% of the award will be forfeited upon the date of termination.

 

   

Termination of employment without cause (other than retirement) or due to disability or death: A proportional amount of the award will be forfeited, based on the length of service during the restriction period. The restriction period will be deemed to expire immediately with respect to the unforfeited portion of the award. However, the Compensation Committee may modify this result if it determines that special circumstances warrant such modification.

 

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Retirement: If the Compensation Committee has determined that a participant has retired, the Compensation Committee will determine how much, if any, of the award shall be forfeited, and the restriction period will be deemed to expire immediately with respect to the unforfeited portion of the award.

 

Performance-Based Awards.    At the time a performance-based award of restricted stock or RSUs is granted, the Compensation Committee will establish both a restriction period and a performance period applicable to such award. The performance period is the period during which performance relative to defined objectives is measured to determine whether the award will vest in whole or in part. Each award may have different restriction and performance periods, and performance periods may overlap.

 

No later than 90 days after the beginning of a performance period, the Compensation Committee must determine one or more performance objectives associated with the performance-based award of restricted stock or RSUs, as well as the number of shares of restricted stock or the number of RSUs that comprise the award. As soon as practicable after the end of the performance period, the Compensation Committee will determine whether and to what extent the target performance objectives were achieved and whether the other material terms of the award were satisfied. A performance-based restricted stock or RSU award may be forfeited as provided below:

 

   

Failure to achieve performance objectives: The Compensation Committee will, based on its determination of whether the performance objectives were achieved, determine whether and how much of the performance-based award will vest.

 

   

Termination of employment by a participant, or by PHI or a subsidiary for cause: 100% of the unvested portion of the award will be forfeited upon the date of termination.

 

   

Termination of employment without cause (other than retirement) or due to disability or death: A proportional amount of the award will be forfeited, based on the participant’s length of service during the restriction period. However, the Compensation Committee may modify this result if it determines that special circumstances warrant such modification.

 

   

Retirement: If the Compensation Committee has determined that a participant has retired, the Compensation Committee will determine how much of the award shall be forfeited, if any.

 

Notwithstanding the foregoing, the restriction period will not lapse with respect to the unforfeited portion of any performance-based award until the Compensation Committee determines whether the performance objectives for that award were achieved. If the Compensation Committee determines with respect to a restricted stock award that common stock may be retained as a result of achieving the performance objectives, PHI will issue to the participant a new share certificate without the restrictive legend. With respect to an award of RSUs, PHI will make a payment to the participant in cash, shares of common stock, or a combination thereof, in accordance with the terms of the award agreement or as otherwise determined by the Compensation Committee. Unless the Compensation Committee determines otherwise, payment will be made in full no later than the 15th day of the third month after the end of the first calendar year in which the RSU is no longer subject to a “substantial risk of forfeiture” within the meaning of Section 409A of the Code.

 

Stock Options and SARs

 

General

 

Under the 2012 LTIP, a stock option award gives the participant the right, during a specified period of time, or “option period,” to purchase a specified number of shares of common stock in the future at a set exercise price, with such other terms and conditions as specified in the 2012 LTIP or in a stock option agreement between the Company and the participant.

 

Under the 2012 LTIP, a SAR is an award that gives a participant the right to receive from the Company, during a specified period of time, or “exercise period,” an amount in cash, common stock, or a combination thereof, equal to (1) the number of shares for which the SAR is exercised, multiplied by (2) the excess of (A) the

 

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fair market value of a share of the common stock on the trading day preceding the exercise date over (B) the exercise price of the SAR (which must be greater than or equal to the fair market value of a share of common stock on the date of grant). SARs may be granted under the 2012 LTIP alone or together with specific stock options granted under the 2012 LTIP.

 

Duration

 

Subject to certain exceptions, the latest date on which a participant may exercise an option or SAR will be the first to occur of (1) ten years after the date of grant, (2) the expiration of the option period or exercise period, as the case may be, or (3) the effective date of any termination (as defined under the 2012 LTIP) of the participant. However, under the Code, an ISO that is granted to a participant who beneficially owns 10% or more of the common stock may not be exercised after the fifth anniversary of the date of grant.

 

In the event of a participant’s retirement (as determined by the Compensation Committee) or disability (as defined in the 2012 LTIP), the option or SAR will lapse as provided under the first to occur of either clauses (1) or (2) above. In the event of a participant’s death, the option or SAR will lapse at the end of the option period or exercise period. However, in the event of the retirement (as determined by the Compensation Committee), disability or death of a participant, the Compensation Committee may extend an option period or an exercise period, but not beyond the tenth anniversary of the date of grant, if it determines that special circumstances warrant such an extension, except that the Compensation Committee may not extend the option period of an ISO if the extension would cause the ISO to no longer be treated as an incentive stock option under the Code.

 

To the extent that a SAR is issued in tandem with an option and either the SAR or the option is exercised, the other component of the tandem award will be deemed to have lapsed immediately upon such exercise.

 

Vesting

 

The Compensation Committee shall determine the option period or exercise period with respect to an option or SAR. No option or SAR may be exercised after it lapses. An option may be exercised in whole or in part at any time, except as otherwise provided in the 2012 LTIP or in the stock option agreement. In the case of an ISO, the aggregate fair market value of common stock for which all ISOs held by a participant are first exercisable in any calendar year may not exceed $100,000, or such other amount as determined under the Code.

 

A SAR issued in tandem with an option will be exercisable to the extent the related option is exercisable. No such SAR or option may be exercisable during the six-month period after their respective dates of grant except in the case of the participant’s disability or death. Nonetheless, in the event of a tender offer for the common stock or the submission of a proposal to PHI’s stockholders to merge or consolidate PHI with another company, the Compensation Committee may, in its sole discretion, declare any outstanding option or SAR to be immediately exercisable.

 

Option Price; Exercise Price

 

The per share option price (or in the case of a SAR, the exercise price), will be set by the Compensation Committee, but may not be less than 100% (110% in the case of an ISO granted to a 10% stockholder) of the fair market value of a share of common stock on the date of grant.

 

Payment of Option Price; Settlement of SARs

 

Upon exercise, the option price may be paid in the form of cash, or, if permitted by the stock option agreement, by delivery of other shares of common stock, or any combination thereof. The stock option agreement may provide that, in lieu of tendering the option price in cash, the participant will receive the number of shares subject to an exercise, less such amount of shares having a fair market value equal to the aggregate option price. If the stock option agreement permits payment of the option price by delivery of other shares of common stock, such shares must have been held by the participant for at least six months.

 

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The Compensation Committee may direct in the award agreement that, upon exercise of a SAR, payment in settlement of the SAR will be in cash, shares of common stock, or a combination thereof.

 

Failure to Exercise a SAR

 

In the event that a participant fails to exercise a SAR by the end of the last day of the exercise period (or the last day of the option period, for a SAR issued in tandem with an option), then, to the extent that the SAR is exercisable, the SAR will be deemed to have been exercised by the participant on the last day of the exercise period or option period, as applicable. However, a SAR will not be deemed to have been exercised if its exercise price or option price, as the case may be, is less than the fair market value of a share of common stock on the last day of the exercise period or option period.

 

Performance Shares and Performance Units

 

A performance share award represents a contractual right to receive one share of common stock based upon achievement of specified performance objectives. A performance unit award is a similar contractual right to receive an amount to be determined by the Compensation Committee, which may be in the form of, among other things, cash, property or other shares. No shares of common stock are issued to the participant when a performance share or performance unit award is granted, and the participant does not receive any voting or dividend rights with respect to shares underlying such awards until shares of common stock are actually issued to the participant (although the Compensation Committee may award dividend equivalents in connection with the grant of these awards).

 

The Compensation Committee will determine the performance period and performance objectives, and the extent to which such awards vest, in substantially the same manner as required for performance-based RSUs. Each award of performance shares is payable solely in common stock. An award of performance units will be payable when determined by the Compensation Committee. A performance share or performance unit award will also be forfeited under the same conditions as performance-based RSUs.

 

Unrestricted Stock Awards

 

The 2012 LTIP permits grants of unrestricted stock awards. These are grants of common stock that are not subject to time-based or performance-based conditions. An award of unrestricted stock will not be subject to any restriction on sale or other transfer by a participant, other than any restrictions that may be required by applicable law.

 

Director Awards

 

Subject to such terms and conditions as may be established by the Board, including without limitation in connection with any minimum standards or requirements for participation or ownership of common stock established or approved by the Board, the Board may grant one or more director awards, in lieu of some or all of such director’s cash compensation. Director awards may consist of grants of options, SARs, restricted stock, RSUs, performance shares, performance units or unrestricted stock. Director awards may be made to any PHI director who is not an employee of PHI or any subsidiary thereof. The Board shall determine the date of the director award and number of shares of common stock subject thereto. Except as otherwise provided in the 2012 LTIP with respect to a director award, all of the applicable provisions of the 2012 LTIP with respect to a particular type of award shall apply to a director award.

 

Deferral of Awards under the 2012 LTIP

 

The 2012 LTIP provides that the Compensation Committee may establish at any time and from time to time, such rules, guidelines and procedures as the Compensation Committee shall deem appropriate pursuant to which any one or more participants would be required or permitted to elect to defer to a later date the time at which any payment or settlement of any award shall occur. Furthermore, the Compensation Committee may authorize in respect of any award the payment or settlement of which has been deferred the accrual of interest equivalent

 

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credits or dividend equivalents during the deferral period to be paid at such times and on such terms and conditions as the Compensation Committee shall establish. However, no deferral or election to defer shall be authorized if such deferral or election would cause adverse tax consequences under Section 409A of the Code. These deferral rights are in addition to any deferrals necessary or desirable to comply with Section 162(m) of the Code.

 

In December 2011, a deferral program was established under the 2012 LTIP, whereby non-employee directors were permitted to make, on or before December 31, 2011, an irrevocable election to defer the receipt of common stock subject to any RSUs, performance shares or performance units that may be granted to eligible directors under the 2012 LTIP. The deferral program permits an eligible director to defer the receipt of any common stock that may be payable pursuant to the vesting of a director award (and any associated dividend equivalents) until (1) the date the director ceases to be a director of PHI, (2) the January 31 after the date the director ceases to be a director of PHI, or (3) a specified date on or after January 31, 2015. Such deferred payments will be made in a lump sum solely in shares of common stock. Dividend equivalents shall be credited, when and as paid as dividends by the Board, in additional units of the same type and tenor as the stock-based award. The deferral program was approved by the Board subject to stockholder approval of the 2012 LTIP at the Annual Meeting.

 

Dividend Equivalents

 

The 2012 LTIP provides that dividend equivalents may be granted without consideration from the participant in conjunction with the grant or deferral of restricted stock awards, RSU awards, performance share awards, performance unit awards or any director awards (other than a director award in the form of an option or SAR). Dividend equivalents with respect to a performance-based award will normally be granted during a performance period associated with that award, except they may be granted under a performance-based restricted stock award in conjunction with the award of additional shares of common stock if the target performance objectives are exceeded (subject to compliance with Section 162(m) of the Code).

 

Each dividend equivalent will entitle the participant to receive an amount equal to the dividend paid with respect to a share of common stock on each dividend payment date from the date of grant to the date the dividend equivalent lapses. The Compensation Committee may direct the payment of such amount at such times and in such form and manner as determined by the Committee, but no payment shall be made as to any dividend equivalent associated with a performance-based award under the 2012 LTIP, unless the Compensation Committee has determined that the target performance objectives with respect thereto have been achieved or exceeded. If granted in connection with a time-based award, a dividend equivalent will lapse on the date established by the Compensation Committee on the date of grant of the dividend equivalent. With respect to performance-based awards, each dividend equivalent will lapse when the Compensation Committee determines that the target performance objectives with respect to a performance-based award have not been achieved or exceeded.

 

Change in Control

 

If a participant has a “qualifying termination” (as defined in the 2012 LTIP), the participant will be eligible to receive an accelerated payout or accelerated vesting of an award as described below. For purposes of this provision, a “qualifying termination” means the termination by PHI or any subsidiary of the participant as an employee or the removal of the participant as a director, or a participant terminating his or her employment with PHI or any subsidiary for good reason (as defined in the 2012 LTIP) within 12 months following a change in control involving PHI. The effect of a change in control on a participant’s outstanding award will be as follows:

 

   

unvested time-based restricted stock or RSUs will immediately vest and become free of restrictions;

 

   

options and SARs will be immediately exercisable in full;

 

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a percentage of unvested performance-based restricted stock and RSUs will immediately vest and become free of restrictions, with such percentage equaling a fraction, the numerator of which is the number of days of the performance period that have elapsed as of the date of the change in control (or, in the case of a qualifying termination for good reason, as of the date of such qualifying termination) and the denominator of which is the total number of days in the performance period, assuming that all target performance objectives shall have been achieved at the 100% level; and

 

   

unvested performance shares and performance units will be paid out on an accelerated basis, based on the number of performance shares and/or performance units subject to the target performance objectives as established on the date of grant, pro rated based on the number of months of the performance period that have elapsed as of the payout date, and assuming that target performance objectives were achieved at the 100% level.

 

Any accelerated payout described above will be made within 30 days after the date of the qualifying termination, except as provided below. The accelerated option period or exercise period will begin on the date of the participant’s termination. If the original award provided for a payout in common stock, any accelerated payout will be made in common stock. With respect to any compensation that is subject to Section 409A of the Code, the accelerated payout will not be made until the participant separates from service within the meaning of Section 409A of the Code, and, in the case of participant who is a “specified employee” (as determined under Section 409A of the Code), any payment that would otherwise be made within six months after the participant’s separation from employment will be paid in the seventh month following the participant’s separation.

 

Changes in Capitalization

 

In the event of any change in the outstanding shares of common stock by reason of any stock dividend or split, recapitalization, reorganization, combination, division or exchange of shares, or other similar changes, appropriate adjustments shall be made in the shares of common stock previously awarded to the participants, the option price per share for options and the exercise price for SARs. Moreover, the aggregate number of shares of common stock which may be awarded pursuant to the 2012 LTIP (both as to any individual participant and in the aggregate) shall be adjusted appropriately. Additional shares of common stock issued to a participant as the result of any such change shall bear the same restrictions as the shares of common stock to which they relate.

 

Transferability of Awards

 

Awards under the 2012 LTIP generally may not be sold, assigned or otherwise transferred except:

 

   

to the extent specifically mandated and directed by applicable state or federal statute;

 

   

as requested by a participant (or by any person entitled to such benefit pursuant to the terms of the 2012 LTIP), and approved by the Compensation Committee, to satisfy income tax withholding obligations;

 

   

if requested by a participant and approved by the Compensation Committee, a participant may transfer an option (other than an ISO) for no consideration to a transferee permitted under the 2012 LTIP, subject to such terms and conditions as the Compensation Committee may impose;

 

   

by will or the laws of descent and distribution; and

 

   

as otherwise permitted by the 2012 LTIP.

 

Clawback Provisions

 

If a participant under the 2012 LTIP is subject to the clawback provisions of either the Sarbanes-Oxley Act of 2002 or is covered under a policy adopted by PHI in accordance with rules promulgated by the SEC under the Dodd-Frank Act, an award agreement shall require the participant to comply with all provisions and requirements of such clawback rules.

 

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Amendment and Termination

 

The Board may at any time and from time to time alter, amend, suspend, or terminate the 2012 LTIP, in whole or in part, but it cannot take any action that, without the consent of the participant to whom any outstanding award was previously granted, adversely affect the rights of such participant concerning such award, except to the extent that such termination, suspension, or amendment of the 2012 LTIP or the award:

 

   

is required by law (including as required to comply with Section 409A of the Code); or

 

   

is deemed by the Board necessary in order to comply with the requirements of Section 162(m) of the Code or Rule 16b-3 under the Exchange Act.

 

Without approval of the stockholders of the Company, the Board may not amend the 2012 LTIP by:

 

   

increasing the total number of shares of common stock which may be issued under the 2012 LTIP or the maximum number of shares with respect to options, SARs and other awards that may be granted to any individual under the 2012 LTIP (including, without limitation, the maximum number of shares of common stock subject to certain awards to any person who is or may be a “covered executive” as defined under Section 162(m) of the Code);

 

   

modifying the requirements as to eligibility for awards under the 2012 LTIP; and

 

   

permitting, either through the amendment of the 2012 LTIP or any award agreement, options, SARs or other awards encompassing rights to purchase common stock to be repriced, replaced or regranted through cancellation, or by decreasing the option price of an outstanding option or the exercise price of an outstanding SAR, or the purchase price of any other outstanding award that encompasses the right to purchase common stock.

 

Tax Provisions Under the 2012 LTIP

 

Section 409A of the Code

 

Awards under the 2012 LTIP are intended either to be exempt from the rules of Section 409A of the Code or to satisfy those rules, and the 2012 LTIP shall be construed accordingly. However, if any award under the 2012 LTIP does not qualify for favorable tax treatment under Section 409A of the Code or any provision of federal, state, local or foreign law, the Company shall not be liable to any participant for any tax the participant might owe as a result of the grant, holding, vesting, exercise or payment of any award.

 

Section 162(m) of the Code

 

If a performance-based award under the 2012 LTIP is granted to an executive officer of PHI or any subsidiary who, for a given performance period, is (or would be if the participant remained employed until the last day of the performance period), or in the opinion of the Compensation Committee, is likely to be, a “covered employee” within the meaning of Section 162(m) of the Code, the Compensation Committee may intend that an award to such a covered executive is to qualify as “performance-based compensation” under Section 162(m) of the Code. In that case, the Compensation Committee would be required to establish performance objectives that comply with Section 162(m) of the Code.

 

Business Criteria under the 2012 LTIP for Performance Objectives

 

The performance objectives for any performance-based award that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code must be based on one or more business criteria that relate to the individual, groups of individuals, a product or service line, business unit, division or subsidiary or the Company as a whole, individually or in any combination (each of which business criteria may be relative to a specified goal, to historical performance of the Company or a product or service line, business unit, division or

 

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subsidiary, or to the performance of any other corporation or group of corporations or a product or service line, business unit, division or subsidiary thereof). Performance objectives will be based on one or more of the following criteria:

 

   

gross, operating or net earnings before or after income taxes;

 

   

earnings per share;

 

   

book value, as defined in the 2012 LTIP, or book value of any other security;

 

   

cash flow per share;

 

   

return on equity;

 

   

return on investment;

 

   

return on assets, employed assets or net assets;

 

   

total stockholder return (expressed on a dollar or percentage basis);

 

   

return on cash flow;

 

   

internal rate of return;

 

   

cash flow return on investment;

 

   

improvements in capital structure;

 

   

residual income;

 

   

gross income, profitability or net income, including gross margins;

 

   

the price of any Company security;

 

   

sales to customers (expressed on a dollar or percentage basis);

 

   

the retention of customers (expressed on a dollar or percentage basis);

 

   

an increase in the Company’s or a subsidiary’s residential customer satisfaction or responsiveness ratings (based on a survey conducted by an independent third party) and reputation within service territories;

 

   

economic value added (defined to mean net operating profit minus the cost of capital);

 

   

market value added (defined to mean the difference between the market value of debt and equity, and economic book value);

 

   

market share;

 

   

level of expenses, including without limitation capital expenditures;

 

   

combined ratio;

 

   

payback period on investment;

 

   

net present value of investment;

 

   

management recruitment and talent development;

 

   

metrics regarding execution on business or operating initiatives, such as the deployment of “Smart Grid” technology and related customer benefits;

 

   

safety (including, for example, criteria relating to numbers of reported injuries, preventable accidents and vehicular accidents);

 

   

diversity (including, for example, presenting at and attending Company- or subsidiary-sponsored diversity events, and expenditures made to minority-owned businesses);

 

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compliance with applicable electric service reliability metrics (including without limitation outage frequency, outage duration, frequency of momentary interruptions, average frequency of customer interruptions, and average number of momentary interruptions per customer);

 

   

environmental compliance;

 

   

compliance with financial and regulatory controls;

 

   

ethical behavior;

 

   

bad debt collections, expenses or losses;

 

   

budget achievement;

 

   

risk management; and

 

   

relative performance (as measured by one or more of the foregoing performance objectives) against other individuals in similar companies operating in targeted areas.

 

A performance-based award to a covered executive that is intended to comply with Section 162(m) of the Code will not be paid unless the applicable performance objectives have been satisfied. The Compensation Committee must certify in writing as to the satisfaction of the applicable performance objectives prior to the payment of such a performance-based award. The Compensation Committee, in its sole discretion, may reduce (but not increase) the amount of any such performance-based award to a covered executive. No covered executive may receive options, SARs, awards of performance-based restricted stock or RSUs, awards of performance units or performance shares, where the aggregate number of shares subject to or underlying such awards exceeds 5,000,000 during the ten-year period during which awards may be made under the 2012 LTIP. Subject to avoiding adverse tax consequences under Section 409A of the Code, the Compensation Committee, in its sole discretion, may defer payment of a participant’s benefit under the 2012 LTIP if and to the extent that the sum of the participant’s 2012 LTIP benefits, plus all other compensation paid or payable to the participant for the fiscal year in which such benefit would otherwise be paid, exceeds the maximum amount of compensation that the Company may deduct under Section 162(m) of the Code with respect to the participant for the year. If deferred by the Compensation Committee, such award benefit will be paid in the first fiscal year of the Company in which the sum of such benefit and all other compensation paid or payable to the participant does not exceed the maximum amount of compensation deductible by the Company under Section 162(m) of the Code.

 

Awards to be Made Under the 2012 LTIP

 

The Board approved the 2012 LTIP on December 15, 2011, subject to stockholder approval of the 2012 LTIP at the Annual Meeting. All awards to be granted under the 2012 LTIP are at the future discretion of the Compensation Committee. To date, the Compensation Committee has not granted any awards under the 2012 LTIP, and has not made any determination to do so. As a result, it is not possible at present to specify the benefits that will be received by or allocated to any participant thereunder.

 

On March 23, 2012, the closing price of the common stock was $18.88 per share as reported on the NYSE.

 

Material U.S. Federal Income Tax Consequences of the 2012 LTIP

 

For a discussion of the material U.S. federal income tax consequences of the 2012 LTIP, please see the section entitled “Material U.S. Federal Income Tax Consequences of Certain Compensation Plans” beginning on page 95 of this Proxy Statement.

 

Required Vote

 

Under our bylaws, approval of the 2012 LTIP will require the affirmative vote of a majority of the shares of common stock present and entitled to vote at the Annual Meeting. Under the Code, approval of the 2012 LTIP

 

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will require the affirmative vote of a majority of the votes cast on the proposal. Any shares that are the subject of an abstention with regard to the vote on this proposal will be considered present and entitled to vote. Accordingly, an abstention will have the same effect as a vote cast against the proposal. Shares that are the subject of a broker non-vote with respect to this proposal will be treated as not entitled to vote on the proposal, and therefore such shares will not be taken into account in determining whether the proposal is approved.

 

Under the NYSE’s rules, approval of the 2012 LTIP at the Annual Meeting will also require the affirmative vote of the holders of a majority of the votes cast on the proposal, where the total number of votes cast represents over 50% of all shares of common stock entitled to vote on the proposal. Under the NYSE’s rules, an abstention is treated as a vote cast against the proposal. The NYSE considers shares that are the subject of a broker non-vote with respect to this Proposal 3 as not entitled to vote on the proposal, and accordingly broker non-votes would not be taken into account in determining whether votes representing over 50% of all shares of common stock entitled to vote on the proposal have been cast.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL 3.

 

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PROPOSAL 4: APPROVAL OF PERFORMANCE GOAL CRITERIA UNDER THE

PEPCO HOLDINGS, INC. LONG-TERM INCENTIVE PLAN

 

Background of and Reasons for the Proposal

 

In accord with Section 162(m) of the Code and the regulations under that section, we are requesting stockholders to reapprove the performance goal criteria set forth in the Company’s Long-Term Incentive Plan (“LTIP”). Specifically, under Section 162(m) of the Code, the LTIP’s performance goal criteria must be approved by stockholders every five years to permit the Company’s potential deduction for the payment of performance-based compensation in excess of $1.0 million to certain of our executive officers.

 

The objective of the LTIP is to increase stockholder value by providing a long-term incentive to retain and reward officers and key employees of the Company and its subsidiaries, who are mainly responsible for the continued growth, development and financial success of the Company and its subsidiaries. Furthermore, the LTIP is intended to assist in further aligning the interests of participants with those of the Company’s stockholders. The Board believes that re-approval of the LTIP’s performance goal criteria is desirable and necessary to meet the Company’s objectives of attracting, motivating and retaining these employees.

 

You are NOT being asked to approve any amendments to the LTIP.

 

Summary of Terms of the LTIP

 

Set forth below is a summary of the principal features of the LTIP relevant to the approval of the business criteria related to performance goals thereunder, including a description of such criteria.

 

Participation and Awards

 

The LTIP generally provides for the grant to officers and key employees of the Company and its subsidiaries of awards of restricted stock, RSUs, stock options, performance units, SARs, dividend equivalents and unrestricted stock. As of March 23, 2012, approximately 51 persons are eligible to participate in the LTIP. In January 2012, certain of our executive officers were granted awards under the LTIP subject to approval of our stockholders of the performance goal criteria established by the Compensation Committee. See “— New Plan Benefits.”

 

Administration

 

The LTIP is generally administered by the Compensation Committee. The Compensation Committee must be comprised solely of two or more directors, each of whom is a “non-employee director” for the purpose of Rule 16b-3 under the Exchange Act, and an “outside director” as defined under Section 162(m) of the Code.

 

The Compensation Committee determines all questions of interpretation and application of the LTIP and the terms and conditions pursuant to which awards are granted, exercised or forfeited under the LTIP. The Compensation Committee is empowered to make all determinations advisable for the administration of the LTIP to achieve its stated objective.

 

The Compensation Committee establishes and administers terms and conditions of outstanding awards, and can reduce or increase awards already granted, in each case, subject to limitations contained in the LTIP. In the case of any award intended to qualify as performance-based compensation under Section 162(m) of the Code, the Compensation Committee establishes performance goals within the timelines required by Section 162(m) of the Code, sets performance goals based on one or more of the business criteria established in the LTIP, and certifies the satisfaction of the performance goals prior to the payment of any such performance based award.

 

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Limits on Awards

 

The number of shares of common stock subject to awards under the LTIP may not exceed, in the aggregate, 10,000,000 shares. As of March 23, 2012, there were 5,234,141 shares of common stock remaining available for future grants under the LTIP and 2,437,145 shares of common stock have been reserved for issuance pursuant to outstanding awards under the LTIP. The Compensation Committee may adjust the shares of common stock awarded to participants by reason of any stock dividend or split, recapitalization, combination or exchange of shares or other similar changes in the common stock. The LTIP provides that any shares subject to an award or portion of an award that is terminated, surrendered or cancelled will generally be available for future awards under the LTIP. It is intended that shares of common stock used to fund awards under the LTIP may be authorized but unissued shares, treasury shares or shares purchased on the open market (including through private purchases).

 

Eligibility

 

The Compensation Committee may grant one or more awards under the LTIP to officers or key employees of PHI and its subsidiaries from time to time. Eligible persons who receive awards under the LTIP are referred to in this section as participants.

 

Term of the LTIP

 

Awards may be granted under the LTIP for a period of ten years, commencing August 1, 2002. The LTIP will continue in effect until all matters relating to the payment of outstanding awards and the administration of the LTIP have been settled, but no new awards may be granted under the LTIP on or after August 1, 2012. The Board at any time may alter, amend, suspend or terminate all or any part of the LTIP in its sole discretion; except that the Board cannot adversely affect the rights of any participant in an outstanding award without the participant’s consent unless such action is required by law (including for compliance with Section 409A of the Code) or the Board deems the action necessary in order to comply with the requirements of Section 162(m) of the Code or Rule 16b-3 under the Exchange Act.

 

Restricted Stock, RSUs and Performance Units

 

Restricted stock awards are shares of common stock that are awarded to a participant subject to the satisfaction during a stated restriction period of the terms and conditions established by the Compensation Committee and subject to forfeiture if any conditions to vesting are not satisfied during such period. Receipt of a restricted stock award does not require payment of consideration by the participant. During the restriction period, a recipient of restricted stock will have the right to vote the shares, and unless otherwise provided in the award agreement, to receive the cash dividends distributable with respect to such shares. Once a restriction period has elapsed, assuming all conditions to vesting have been met, the participant will receive a new certificate representing the shares of common stock as to which the restrictions have expired, which will be issued without any restrictive legends. Unless otherwise directed by the Compensation Committee, a participant must waive all rights to make an election under Section 83(b) of the Code to report the value of the restricted stock as income on the grant date.

 

An RSU is a contractual right issued on the date of grant, but no common stock is issued to the participant at that time. Receipt of an RSU award does not require payment of consideration by the participant. The holder of an RSU does not have the rights of a stockholder and cannot vote or receive dividends from the grant of the RSU, unless the Compensation Committee provides the holder with dividend equivalents. RSUs are granted subject to a restriction period similar to awards of restricted stock. When a restriction period has elapsed with respect to an RSU, the participant will receive a payment in cash, common stock or a combination of cash and common stock as determined by the Compensation Committee.

 

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A performance unit is a contractual right to receive a payment in cash, common stock or a combination of cash and common stock as determined by the Compensation Committee, upon the attainment during a performance period of one or more performance objectives. No payment is due by the participant in connection with the grant. The holder of a performance unit does not have the rights of a stockholder and cannot vote or receive dividends from the grant of the performance unit (unless dividend equivalents are granted with the performance unit).

 

The Compensation Committee establishes the terms and conditions of each grant, including the restriction period (which will be not less than one and not more than ten years). Vesting is determined by the Compensation Committee and may be time-based or performance-based. For performance-based awards, the Compensation Committee establishes for each award the performance period, the performance objectives (among specified business criteria with respect to awards that are intended to comply with Section 162(m) of the Code), the target award and any other performance criteria, as well as whether the criteria has been satisfied and to what extent. Each award is independent of one another, the performance criteria for each award may vary from participant to participant, and the Compensation Committee may decide in its sole discretion to increase or reduce awards (a) during the course of the performance period if significant events are expected to have a substantial effect on the performance objective (except if such adjustment would prevent the award from satisfying Section 162(m) of the Code), or (b) based on the extent to which the participant has failed to meet or exceeded the performance criteria.

 

In the event a participant ceases employment during a restriction period, the award will be forfeited if the participant’s employment is terminated for any reason other than because of retirement (as determined by the Compensation Committee), “disability” (as defined under the LTIP) or death. If the participant’s employment has been terminated due to disability or death, the removal of restrictions or payment under an award will be prorated taking into account service during the period and, with respect to performance-based awards, other factors including, but not limited to, the performance of the participant during the portion of the performance period before employment ceased. In the event of the participant’s retirement, the award will be completely forfeited, except that the Compensation Committee may, in the award agreement or otherwise, provide for the lapse of the restriction period in whole or in part in its sole discretion. In the case of the disability or death of a participant, the Compensation Committee may modify the foregoing effects if it determines in its sole discretion that special circumstances warrant such modification.

 

Tax Provisions Under the LTIP

 

Section 409A of the Code

 

Awards under the LTIP are intended either to be exempt from the rules of Section 409A of the Code or to satisfy those rules and shall be construed accordingly. Although the Compensation Committee intends to administer the LTIP so that awards will be exempt from, or will comply with, the requirements of Section 409A of the Code, the Company does not warrant that any award under the LTIP will qualify for favorable tax treatment under Section 409A of the Code or any other provision of federal, state, local or foreign law. The Company shall not be liable to any participant for any tax the participant might owe as a result of the grant, holding, vesting, exercise or payment of any award under the LTIP.

 

Section 162(m) of the Code

 

If a performance-based award under the LTIP is granted to an executive officer of the Company or any subsidiary who, in the opinion of the Compensation Committee, for a given performance period, is or is likely to be, a “covered employee” within the meaning of Section 162(m) of the Code, the Compensation Committee shall establish performance objectives with respect to an award no later than the earlier of (1) 90 days after the beginning of the performance period or (2) the date on which 25% of the performance period of the award will have elapsed.

 

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The performance goal criteria in the LTIP were approved by our stockholders when the LTIP was originally adopted in 2002. As a result, the Company did not deduct for federal income tax purposes compensation paid to these executives in excess of $1.0 million pursuant to Section 162(m) of the Code for tax years 2010 through 2012 with respect to performance-based awards granted under the LTIP.

 

Performance Goal Business Criteria Under the LTIP

 

For performance-based awards under the LTIP that are intended to qualify as performance-based compensation under Section 162(m) of the Code, the performance goals for such awards must be based on one or more business criteria that relate to the individual, groups of individuals, a product or service line, business unit, division or subsidiary or the Company as a whole, individually or in any combination (each of which business criteria may be relative to a specified goal, to historical performance of the Company or a product or service line, business unit, division or subsidiary, or to the performance of any other corporation or group of corporations or a product or service line, business unit, division or subsidiary thereof). These performance goals will be based on one or more of the following criteria:

 

   

gross, operating or net earnings before or after income taxes;

 

   

earnings per share;

 

   

book value per share;

 

   

cash flow per share;

 

   

return on equity;

 

   

return on investment;

 

   

return on assets, employed assets or net assets;

 

   

total stockholder return (expressed on a dollar or percentage basis);

 

   

return on cash flow;

 

   

internal rate of return;

 

   

cash flow return on investment;

 

   

improvements in capital structure;

 

   

residual income;

 

   

gross income, profitability or net income;

 

   

the price of any Company security;

 

   

sales to customers (expressed on a dollar or percentage basis);

 

   

retention of customers (expressed on a dollar or percentage basis);

 

   

an increase in the Company’s or a subsidiary’s customer satisfaction ratings (based on a survey conducted by an independent third party);

 

   

economic value added (defined to mean net operating profit minus the cost of capital);

 

   

market value added (defined to mean the difference between the market value of debt and equity, and economic book value);

 

   

market share;

 

   

level of expenses;

 

   

combined ratio;

 

   

payback period on investment; and

 

   

net present value of investment.

 

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Limitations on Awards Under the Code

 

An executive of the Company determined by the Compensation Committee to be or likely to be a “covered employee” as defined under Section 162(m), may not receive any performance-based award under the LTIP in excess of $3,000,000, either in cash or fair market value of common stock (as determined on the grant date and based on the type of award), for any three-year period. In addition, no covered employee may receive stock options, SARs, shares of performance-based restricted stock or performance-based RSUs covering in the aggregate more than 5,000,000 shares of common stock for the ten-year period during which awards under the LTIP may be made. The Compensation Committee is empowered to reduce (but not increase) the amount of any covered executive’s performance-based award, and can also defer payment of a benefit under the LTIP to the extent any payment exceeds the annual maximum amount that is deductible to the Company under Section 162(m) of the Code until the first fiscal year in which the covered executive’s LTIP benefit and all other compensation paid or payable to him or her is fully deductible under Section 162(m). The LTIP provides that the Compensation Committee shall defer payment when the award is subject to Section 409A of the Code, unless otherwise provided in the award agreement.

 

Change in Control

 

A participant whose employment is terminated, resigns as a director or terminates his or her employment for “good reason” (as defined in the LTIP) within 12 months following a change in control is entitled to accelerated payout or accelerated option period or exercise period as provided in the LTIP with respect to any existing award. All restricted stock awards will be subject to accelerated removal of restrictions prorated for the number of months of the restriction period that have elapsed and, with respect to performance-based restricted stock, assuming that target performance levels have been achieved. A participant will be entitled to an accelerated payout of performance units, prorated based on the number of months of the performance period that have elapsed, and assuming that target performance levels were achieved. Payment of certain awards on an accelerated basis may be delayed to comply with Section 409A of the Code.

 

Dividend Equivalents

 

A dividend equivalent is an award under the LTIP entitling the participant to receive a payment in an amount equal to the dividends actually paid on shares of common stock from the grant date until the dividend equivalent lapses. Dividend equivalents may be granted under certain conditions in conjunction with a restricted stock award, an RSU award or a performance unit award. Dividend equivalents may be granted under a performance-based restricted stock award in conjunction with additional shares of common stock issued if the target performance award objectives are exceeded. Receipt of a dividend equivalent award does not require any payment, and the holder of a dividend equivalent does not have any other rights of a stockholder. When dividend equivalents are earned, the participant will receive payment when and as determined by the Compensation Committee.

 

Amendment and Termination

 

The Board may at any time and from time to time alter, amend, suspend or terminate the LTIP, in whole or in part, but it cannot take any action that, without the consent of the participant to whom any outstanding award was previously granted, adversely affects the rights of such participant concerning such award, except to the extent that such termination, suspension or amendment of the LTIP or the award:

 

   

is required by law (including as required to comply with Section 409A of the Code); or

 

   

is deemed by the Board necessary in order to comply with the requirements of Section 162(m) of the Code or Rule 16b-3 under the Exchange Act.

 

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New Plan Benefits

 

The following table sets forth the amount of performance-based RSU awards that were granted in January 2012 to executive officers of the Company who are covered employees under Section 162(m) of the Code, which awards were granted subject to approval by our stockholders of the performance goal criteria in the LTIP. Awards under the LTIP are made in the sole discretion of the Compensation Committee, and the amount of future actual awards under the LTIP cannot be determined at this time. The amounts set forth in the table below are not necessarily indicative of awards that may be earned in the future.

 

Name and Position

   Number of  Units(1)  

Joseph M. Rigby

Chairman, President and Chief Executive Officer

     80,128   

Anthony J. Kamerick

Senior Vice President and Chief Financial Officer

     —     

Kirk J. Emge

Senior Vice President and General Counsel

     13,030   

David M. Velazquez

Executive Vice President

     20,482   

John U. Huffman

President and Chief Executive Officer, Pepco Energy Services

     12,477   

All executive officers as a group (10 persons)

     126,117   

All non-executive directors as a group (11 persons)(2)

     —     

All non-executive officer employees as a group (41 persons)(3)

     —     

 

(1) 

The amounts set forth in the table above represent performance-based RSU awards granted by the Compensation Committee in January 2012 under the LTIP, subject to stockholder approval of the performance goal criteria in the LTIP. Each amount set forth in the table above reflects the number of shares of common stock that would be received under an award if the participant remains employed by the Company at the end of the three-year performance period and the award vests at 100% of the target level. If stockholder approval is not obtained, these awards will be forfeited. These amounts do not include an aggregate of 200,487 shares of common stock underlying performance-based RSUs granted in January 2012 under the LTIP but were not conditioned on obtaining stockholder approval of the LTIP performance goal criteria.

 

(2) 

No person in this group received a performance-based RSU award in January 2012 under the LTIP.

 

(3) 

No person in this group was a covered employee under Section 162(m) of the Code who received a performance-based RSU award in January 2012, which award was granted subject to stockholder approval of the performance goal criteria in the LTIP.

 

On March 23, 2012, the closing price of the common stock was $18.88 per share as reported on the NYSE.

 

Material U.S. Federal Income Tax Consequences of the LTIP

 

For a discussion of the material U.S. Federal income tax consequences of the LTIP, please see the section entitled “Material U.S. Federal Income Tax Consequences of Certain Compensation Plans” beginning on page 95 of this Proxy Statement.

 

Required Vote

 

Under our bylaws, approval of the performance goal criteria under the LTIP will require the affirmative vote of a majority of the shares of common stock present and entitled to vote at the Annual Meeting. Under the Code, approval of this proposal will require the affirmative vote of a majority of the votes cast on the proposal. Any

 

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shares that are the subject of an abstention with regard to the vote on this proposal will be considered present and entitled to vote. Accordingly, an abstention will have the same effect as a vote cast against the proposal. Shares that are the subject of a broker non-vote with respect to this proposal will be treated as not entitled to vote on the proposal, and therefore such shares will not be taken into account in determining whether the proposal is approved.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL 4.

 

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PROPOSAL 5: APPROVAL OF THE PEPCO HOLDINGS, INC.

AMENDED AND RESTATED ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN

 

Background of and Reasons for the Proposal

 

On December 15, 2011, the Board unanimously approved the Pepco Holdings, Inc. Amended and Restated Annual Executive Incentive Compensation Plan, or the “Amended EICP,” which will replace in its entirety the terms of the EICP, effective as of January 1, 2012. We are seeking stockholder approval of the Amended EICP and the performance goal criteria set forth therein because such approval is required to satisfy one of the conditions for payments made under the Amended EICP to qualify as “performance-based compensation” under Section 162(m) of the Code. Under this Code section, the Company is prohibited from deducting for federal income tax purposes compensation in excess of $1.0 million paid to certain of its executive officers, except for compensation that qualifies as “performance-based compensation” thereunder.

 

The Amended EICP is a cash-based incentive program designed to align executive compensation with the performance of PHI and its subsidiaries. The Amended EICP is also intended to, among other things, reinforce a high-performance culture at PHI by tying executive compensation to measurable achievement of participants. Awards under the Amended EICP to a participant who is a “covered employee” within the meaning of Section 162(m) of the Code (such persons are also sometimes referred to in this Proposal 5 as “covered executives”) are intended to qualify as “performance-based compensation,” eligible for the exception to the non-deductibility provision of Section 162(m) of the Code described above.

 

The Amended EICP is intended to continue to seek to align executive compensation with the performance of PHI and its subsidiaries, and to accomplish the following objectives:

 

   

to link annual corporate and business priorities with performance goals;

 

   

to reinforce a high-performance culture by tying executive compensation to measurable accountabilities and achievement;

 

   

to recognize and reward team and individual performance; and

 

   

to provide a variable and competitive award opportunity as part of an overall compensation program to enable PHI to attract, retain and motivate key employees.

 

We have selected participants in the Amended EICP and assigned them opportunities and performance goals with respect to the 2012 calendar year, subject to stockholder approval of the Amended EICP at the Annual Meeting. If the stockholders do not approve this proposal at the Annual Meeting, then we would be unable to award any amounts to these participants upon the achievement of these performance goals in 2012, and in management’s view, we would lose a key part of our compensation program and a means to attract, motivate and reward executives and key employees for their positive performance.

 

Summary of the Amended EICP

 

The following summary of the material terms of the Amended EICP is qualified in its entirety by reference to the copy of the Amended EICP attached as Annex B to this Proxy Statement.

 

Plan Administration

 

The Amended EICP will be administered by the Compensation Committee or the Board (or its designee), except that, to the extent required for an award to a covered executive to qualify as “performance-based compensation” under Section 162(m) of the Code, the Amended EICP shall be administered by the Compensation Committee, which must consist solely of two or more “outside directors” as defined under Section 162(m) of the Code. Throughout the remainder of this section, unless the context indicates otherwise, we refer to the “Compensation Committee” to mean either the Compensation Committee or the Board (or its designee), as appropriate.

 

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The Compensation Committee will select the persons eligible to participate in the Amended EICP, approve performance goals, approve target payout levels and maximum award opportunities, approve the proportion of each award among categories of performance goals, determine whether awards should be made to participants and establish future service requirements as a condition to vesting in full of an award. The Compensation Committee has the discretion to adjust or eliminate awards and to make such other determinations and interpretations and take such actions as it deems necessary or desirable. The term “award” (as used throughout this Proposal 5) refers to a cash incentive payment made to a participant under the Amended EICP.

 

Effective Date and Termination