DEF 14A 1 a2018proxystatement.htm DEF 14A 2018 PROXY STATEMENT Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
NorthWestern Corporation
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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This proxy statement contains information related to the solicitation of proxies by the Board of Directors (the Board) of NorthWestern Corporation d/b/a NorthWestern Energy (NorthWestern, the company, we, us, or our) in connection with our 2018 Annual Meeting of Shareholders. See the Proxy Statement Glossary on the inside back cover for additional definitions used in this proxy statement.
 



 
 
 
 
IMPORTANT VOTING INFORMATION

If you owned shares of NorthWestern Corporation common stock at the close of business on February 26, 2018 (the Record Date), you are entitled to one vote per share upon each matter presented at the annual meeting of shareholders to be held on April 25, 2018. Shareholders whose shares are held in an account at a brokerage firm, bank, or other nominee (
i.e., in “street name”) will need to obtain a proxy from the broker, bank, or other nominee that holds their shares authorizing them to vote at the annual meeting.

Your broker is not permitted to vote on your behalf on the election of directors and other matters to be considered at this shareholders meeting, except on the ratification of our appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2018, unless you provide specific instructions by completing and returning the voting instruction form or following the instructions provided to you to vote your shares via telephone or the internet. For your vote to be counted, you will need to communicate your voting decisions to your broker, bank, or other financial institution before the date of the annual meeting.

YOUR VOTE IS IMPORTANT

Your vote is important. Our Board strongly encourages you to exercise your right to vote. Voting early helps ensure that we receive a quorum of shares necessary to hold the annual meeting.

ASSISTANCE

If you have any questions about the proxy voting process, please contact the broker, bank, or other financial institution where you hold your shares. The Securities and Exchange Commission also has a website (www.sec.gov/spotlight/proxymatters.shtml) with more information about your rights as a shareholder. You also may contact our Investor Relations Department by phone at (605) 978-2945 or by email at
investor.relations@northwestern.com.
 
 
 
 
 
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON APRIL 25, 2018

The Notice of Annual Meeting, Proxy Statement, and 2017 Annual Report to
Shareholders are available on the internet at
www.proxyvote.com.
 
 
 
 
 
ATTENDING THE ANNUAL MEETING IN PERSON OR BY WEBCAST

Only shareholders of record or their legal proxy holders as of the record date or our invited guests may attend the annual meeting in person. If you wish to attend the annual meeting and your shares are held in street name at a brokerage firm, bank, or other nominee, you will need to bring your notice or a copy of your brokerage statement or other documentation reflecting your stock ownership as of the record date. You may be asked to provide photo identification, such as a driver’s license.

The annual meeting will be webcast (audio and slides) simultaneously with the meeting. You may access the webcast from our website at
NorthWesternEnergy.com under Our Company / Investor Relations / Presentations and Webcasts. A replay of the webcast will be available at the same location on our website through April 25, 2019.
 



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Notice of 2018 Annual Meeting and Proxy Statement

March 7, 2018

Dear Fellow NorthWestern Corporation Shareholder:

You are cordially invited to attend the
2018 Annual Meeting of Shareholders to be held on Wednesday, April 25, 2018, at 10:00 a.m. Mountain Daylight Time at the NorthWestern Energy NorthWestern Energy Montana Operational Support Office, 11 East Park Street, Butte, Montana.

At the meeting, shareholders will be asked to elect the Board of Directors, to ratify the appointment of our independent registered public accounting firm for 2018, to hold an advisory “say-on-pay” vote on the compensation of our named executive officers and to transact any other matters and business as may properly come before the annual meeting or any postponement or adjournment of the annual meeting. The proxy statement included with this letter provides you with information about the annual meeting and the business to be conducted.

YOUR VOTE IS IMPORTANT. We urge you to read this proxy statement carefully. Whether or not you plan to attend the annual meeting in person, we urge you to vote promptly through the internet, by telephone or by mail.

If you are unable to attend our annual meeting in person, we are pleased to offer an audio webcast of the meeting. The webcast can be accessed live on our website at
NorthWesternEnergy.com under Our Company / Investor Relations / Presentations and Webcasts, or you can listen to a replay of the webcast, which will be archived on our website at the above location for one year after the meeting.

Thank you for your continued support of NorthWestern Corporation.
 
 
 
Very truly yours,
 
 
 
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Robert C. Rowe
President and Chief Executive Officer



 
 
 
 
 
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proxy Statement Glossary (inside back cover)
 
 
 
 
 
 
 



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Notice
2018 Annual Meeting of Shareholders
Shareholders owning NorthWestern Corporation common stock at the close of business on the record date, or their legal proxy holders, are entitled to vote at the annual meeting. Only our shareholders, their legal proxy holders as of the record date, or our invited guests may attend the annual meeting in person. The annual meeting will be webcast (audio and slides) simultaneously with the meeting.
 
 
 
 
 
Meeting Date:
April 25, 2018
 
 
Meeting Time:
10:00 a.m. Mountain Daylight Time
 
Location:
NorthWestern Energy Montana Operational Support Office, 11 East Park Street, Butte, Montana
 
Record Date:
February 26, 2018
Annual Meeting Business:
On or about March 7, 2018, we mailed to our shareholders either (1) a Notice of Internet Availability of Proxy Materials, which indicates how to access our proxy materials on the internet, or (2) a copy of our proxy statement, a proxy card, and our 2017 Annual Report.
 
 
 
 
 
Board
Recommendation
 
 
 
Proposal
 
 
Page
 
1
Election of eight directors
 
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FOR each director nominee
 
 
2
Approval of Deloitte & Touche LLP as the Independent Registered Accounting Firm for 2018
 
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FOR
 
 
3
Advisory Vote to Approve Named Executive Officer Compensation
 
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FOR
 
By Order of the Board of Directors,
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Timothy P. Olson
Corporate Secretary



 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proxy Summary
Items of Business to Be Considered
at the Annual Meeting
 
 
 
 
Proposal
 
 
 
Board
Recommendation
Page
 
 
 
 
 
 
 
 
 
 
 
1
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FOR each director nominee
 
 
 
 
2
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FOR
 
 
 
 
3
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FOR
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 Executive Pay Overview
Alignment of Pay with Shareholder and Customer Interests
Our executive pay program is designed to align the long-term interests of our executives, shareholders, and customers. About 78 percent of the compensation of our chief executive officer, or CEO, and about 58 percent of the compensation of our other named executive officers is at risk in the form of performance-based incentive awards that use Board-established metrics and targets, based upon advice from the Board’s independent compensation consultant. Other than the addition of a safety training metric, the performance metrics did not change from the prior year. We also require our executives to retain meaningful ownership of our stock. This structure encourages our executives to focus on short- and long-term performance and provides a reward to our executives, shareholders, and customers when we achieve our financial and operating objectives. Our CEO to median employee pay ratio for 2017 was 23:1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Executive Pay Components at a Glance
 
 
 
 
 
 
Percent of Total Compensation
 
 
 
 
 
Component
Description
CEO
Other NEO Avg.
Changes in 2017
 
 
 
 
Base Salary
Fixed, paid in cash
Target middle of competitive range of peer group, with adjustments for trade area economics, turnover, tenure, and experience
22%
42%
One executive received 3.00 percent increase; CEO and remaining executives received 2.75 percent cost of living adjustment provided to all employees
 
 
 
 
Annual Cash Incentive
Variable, paid in cash
Based on net income, safety, reliability, and customer satisfaction metrics and individual performance
22%
18%
Updated performance targets; added safety training metric; CEO target opportunity increased to align with market median
 
 
 
 
Long-Term Incentive Program Awards
Variable, paid in equity
Based on earnings per share, return on average equity and relative total shareholder return performance over a three-year vesting period
44%
32%
Increased target opportunity for one executive to align with market median; no change to performance metrics; updated performance targets
 
 
 
 
Executive Retention / Retirement Program Awards
Variable, paid in equity
Based on net income performance over a five-year vesting period; paid over five-year period following separation from service
11%
9%
No change in 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Proxy Summary

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Against Incentive Targets
In 2017, we managed our business through warmer than average winter weather and achieved all-time high customer satisfaction and near all-time high safety performance, while providing shareholders a 17.4 percent return for the three‑year period ending December 31, 2017, which lagged our peer group. As a result, we achieved near target performance for our 2017 annual incentive awards and below target performance for our long-term incentive awards.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 Annual Cash Incentive Outcome
 
 
 
 
2015 Long-Term Incentive Program Vesting
 
 
 
 
Financial (55%) – % of Target Achieved
93
%
 
 
 
 
ROAE / Avg. Net Inc. Growth – % of Target Achieved
35
%
 
 
 
 
Safety (15%) – % of Target Achieved
107
%
 
 
 
 
Relative TSR – % of Target Achieved
10
%
 
 
 
 
Reliability (15%) – % of Target Achieved
95
%
 
 
 
 
Total Payout to Participants*
45
%
 
 
 
 
Customer Sat. (15%) – % of Target Achieved
116
%
 
 
 
 
 
 
 
 
 
 
 
Total Funding
99
%
 
 
 
 
* Each component weighted 50% for total payout
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholder Feedback on Executive Pay
At our 2017 annual meeting, our 2016 named executive officer pay program was approved by 99.2 percent of the votes cast. In light of the overwhelming approval from our shareholders, we have not changed the overall structure of our named executive officer pay program for 2017. We continue to use the same executive pay components and operate within the parameters previously approved by our shareholders.
2017 Corporate Governance Overview
Our Board has nominated eight individuals for election. We list all nominees on the following page in Proposal No. 1—Election of Directors.
Last year, shareholders elected our eight director nominees by at least 99 percent of the votes cast. Our ninth current Board member, Dr. E. Linn Draper, Jr., announced in February 2018 that he would be retiring as a Board member and would not be seeking re-election at this year’s annual meeting. As a result of his announcement, our Board has elected Mr. Stephen P. Adik, current chair of our Audit Committee, to serve as non-executive chair of the Board following Dr. Draper’s retirement, subject to Mr. Adik’s election to serve as a director at our 2018 annual meeting.
Each of our Board members and nominees is independent, with the sole exception of our CEO. Our Board currently is led by an independent non-executive chair, and our three Board committees – Audit; Compensation; and Governance – are chaired by and composed entirely of independent directors. Following Dr. Draper’s retirement, our Board will continue to be led by an independent non-executive chair. In addition, diversity is important to our Board, as reflected in the graphs below regarding our slate of nominees.
We made no material changes to our corporate governance practices in 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diverse Slate of Director Nominees
 
 
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3

Items of Business



 
 
 
 
 
 
 
 
 
 
 
 
Proposal No. 1
Election of Directors
 
 
 
 
The Board of Directors recommends you vote “FOR” each of the eight director nominees.
The Board of Directors recommends you vote 
“FOR” 
each of the
eight director 
nominees.
 
Our Board is nominating eight people for election as directors at the annual meeting. All of the nominees currently serve as a director of our Board. After election, nominees will serve for one year, until the next annual meeting of shareholders (or until a successor is able to serve). Our nominees are listed below, and we provide additional background information and individual qualifications for each nominee in the Corporate Governance—Individual Directors section of this proxy statement, beginning on page 44.
 
 
Name
Occupation
Independent
Age
Director Since
Committee Membership
 
 
 
Stephen P. Adik
Retired Vice Chair, NiSource, Inc.
Yes
74
2004
Audit (Chair); Comp.
 
 
 
Anthony T. Clark
Senior Advisor, Wilkinson Barker Knauer, LLP; former Commissioner, FERC and NDPSC (and Chair)
Yes
46
2016
Gov.
 
 
 
 
 
Dana J. Dykhouse
CEO, First PREMIER Bank
Yes
61
2009
Comp. (Chair); Audit
 
 
 
 
 
Jan R. Horsfall
CEO, Maxletics Corporation
Yes
57
2015
Audit; Gov.
 
 
 
 
 
Britt E. Ide
President, Ide Energy & Strategy; Executive Director, Yellowstone Club Community Foundation
Yes
46
2017
Gov.
 
 
 
 
 
Julia L. Johnson
President, NetCommunications, LLC; former Commissioner and Chair, Florida PSC
Yes
55
2004
Gov. (Chair); Comp.
 
 
 
 
 
Robert C. Rowe
President and CEO,
NorthWestern Energy
No
62
2008
N/A
 
 
 
 
 
Linda G. Sullivan
Executive Vice President and CFO, American Water
Yes
54
2017
Audit
 
 
 
 
 
 
 
 
 
 
 

4

Items of Business

 
 
 
 
 
 
 
 
Unless you specifically withhold your authority to vote for the election of directors, the persons named in the accompanying proxy intend to vote “FOR” the election of each of the director nominees.
All nominees have advised the Board that they are able and willing to serve as directors. If any nominee becomes unavailable for any reason (which is not anticipated), the shares represented by the proxies may be voted for such other person or persons as may be determined by the holders of the proxies (unless a proxy contains instructions to the contrary). In no event will the proxy be voted for more than eight nominees.
Our Board values the diversity of its members. When selecting this slate of nominees, our Board concluded these nominees will provide insight from a number of perspectives, based on their diversity with respect to gender, age, ethnicity, skills and background, as well as location of residence. We believe these varied perspectives expand the Board’s ability to provide relevant guidance to our business.
Our Board also concluded that these individuals bring extensive professional experience from both within and outside our industry. This diversity of experience provides our Board with a broad collective skill set which is advantageous to the Board’s oversight of our company. While the industry-specific expertise possessed by certain of the nominees is essential, we also will benefit from the viewpoints of directors with expertise outside our industry. Thus, our Board recommends a vote “FOR” election of each of the nominees.
Vote Required

Directors will be elected by a favorable vote of a plurality of the shares of voting stock present and entitled to vote, in person or by proxy, at the annual meeting. You may vote “FOR” all of the nominees or you may “WITHHOLD AUTHORITY” for one or more of the nominees. Withheld votes will not count as votes cast for the nominee, but will count for purposes of determining whether a quorum is present. Shareholders do not have the right to cumulate their vote for directors. Abstentions or broker non-votes as to the election of directors will not affect the election of the candidates receiving a plurality of votes; however, under our Majority Plus Resignation Vote Policy described on page 49 of this proxy statement, if a nominee for director receives more “WITHHOLD AUTHORITY” votes than “FOR” votes, such nominee shall immediately tender his or her resignation under the procedures in the policy.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Thanking a retiring board member

In February 2018, Dr. E. Linn Draper, Jr., announced his intent to retire and not seek re-election to our Board at the end of his annual term on April 25, 2018. At his retirement, Dr. Draper will have served over 14 years as the Chair of our Board. As a respected leader in the energy and utility industry, his guidance has been immensely beneficial to both our company and shareholders. His leadership on our Board will be missed. We are grateful to have had his service.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5

Items of Business


 
 
 
 
 
 
 
 
Proposal No. 2
Ratification of Deloitte & Touche LLP,
as Independent Registered Public
Accounting Firm for 2018
 
 
 
 
 
 
 
 
 
 
Our Audit Committee oversees the integrity of our accounting, financial reporting and auditing processes. To assist with those responsibilities, the committee has appointed Deloitte & Touche LLP as our independent registered public accounting firm to audit our financial statements for 2018. The Board is asking you to ratify the committee’s decision at the annual meeting. Deloitte representatives will be present at the annual meeting. They will have the opportunity to make a statement and to respond to appropriate questions.
The Board values your input on the committee’s appointment of Deloitte, but approval by shareholders is not required by law. If shareholders do not ratify the appointment of Deloitte, the committee will reconsider its selection. Regardless of the voting result, the committee may appoint a new firm at any time if the committee believes a change would be in the best interests of the company and its shareholders.
 
 
The Board of Directors recommends you vote “FOR” 
Deloitte as our independent accounting firm.
 
 
 
 
 
 
 
Description of Fees

The table on the following page presents a summary of the fees Deloitte billed us for professional services for the fiscal years ended December 31, 2016 and 2017. As reflected in the table:
Audit fees are fees billed for professional services rendered for the audit of our financial statements, internal control over financial reporting, review of the interim financial statements included in quarterly reports, services in connection with debt and equity securities offerings, and services that are normally provided by Deloitte in connection with statutory and regulatory filings or engagements. For 2017, this amount includes estimated billings for the completion of the 2017 audit, which Deloitte rendered after year-end.
Audit-related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” There were no audit-related fees in fiscal 2016 and 2017.
Tax fees are fees billed for tax compliance, tax advice and tax planning.
All other fees are fees for products and services other than the services reported above. In fiscal years 2016 and 2017, there were no other fees.

 
 
 
 
 
 
 

6

Items of Business

 
 
 
 
 
 
 
 
 
 
 
 
 
Fee Category
2016
Fees
($)
 
2017
Fees
($)
 
 
 
 
 
 
Audit fees
1,350,850

 
1,382,084

 
 
 
 
 
 
Audit-related fees

 

 
 
 
 
 
 
Tax fees
325,400

 
85,221

 
 
 
 
 
 
All other fees

 
 
 
 
 
 
 
 
Total fees
1,676,250

 
1,467,305

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-approval Policies and Procedures
Rules adopted by the SEC in order to implement requirements of the Sarbanes-Oxley Act of 2002 require public company audit committees to pre-approve audit and non-audit services. Our Audit Committee follows procedures pursuant to which audit, audit-related, and tax services and all permissible non-audit services, are pre-approved by category of service. The fees are budgeted, and actual fees versus the budget are monitored throughout the year. During the year, circumstances may arise when it may become necessary to engage the independent public accountants for additional services not contemplated in the original pre-approval. In those instances, we will obtain the specific pre-approval of the Audit Committee before engaging the independent public accountants. The procedures require the Audit Committee to be informed of each service, and the procedures do not include any delegation of the Audit Committee’s responsibilities to management. The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated will report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Pursuant to the provisions of the Audit Committee Charter, before Deloitte is engaged to render audit or non-audit services, the Audit Committee must pre-approve such engagement. For 2017, the Audit Committee (or the Chair of the Audit Committee pursuant to delegated authority) pre-approved 100 percent of the tax fees.
 
 
Leased Employees
In connection with their audit of our 2017 annual financial statements, more than 50 percent of Deloitte’s work was performed by full-time, permanent employees of Deloitte.
Vote Required
The affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy and entitled to vote thereon is required to ratify the appointment of Deloitte. Brokers may vote a client’s proxy in their own discretion on this proposal. Abstentions will have the same effect as a vote against the proposal. Unless instructed to the contrary in the proxy, the shares represented by the proxies will be voted “FOR” the proposal to ratify the selection of Deloitte to serve as the independent registered public accounting firm for NorthWestern Corporation for the fiscal year ending December 31, 2018.
 
 
 
 
 
 
 
 
 
 
 

7

Items of Business


 
 
 
 
 
 
 
 
Proposal No. 3
Advisory Vote to Approve
Named Executive Officer Compensation
 
 
 
 
 
 
 
 
 
 
 
We would like your input as to how we pay our named executive officers, as required by Section 14A of the Exchange Act, through an advisory vote to approve named executive officer compensation (or a say-on-pay vote). Your vote will provide insight and guidance to us and our Board regarding your sentiment about our executive pay philosophy, policies and practices, as described in this proxy statement. Our Board will consider the guidance received by the say-on-pay vote when determining executive pay for the remainder of 2018 and beyond. We ask you to support our executive pay and vote in favor of the say-on-pay resolution.
Last year, through the say-on-pay vote, over 99 percent of the votes cast approved how we pay our named executive officers. In fact, since our first say-on-pay vote in 2011, at least 94 percent of the votes cast have approved our executive pay each year.
We view your voting guidance over the years as strong support for the way we pay our executives. Thus, in 2017, we left intact the executive pay program you previously approved and continued to use four components: base salary, annual cash incentive awards, long-term incentive awards, and retention/retirement awards. We did not change the design of these components. In fact, the only changes for 2017 from the 2016 program you approved, were (1) two and three quarter percent base salary increases (the same increase available to all employees) and (2) certain other adjustments to align with the market median.
If you would like additional information about what we do with our executive pay program, we have provided a more detailed discussion in the Compensation Discussion and Analysis section, or CD&A, starting on page 10 of this proxy statement, and the 2017 Executive Pay section, starting on page 32.
Our Human Resources Committee, or Compensation Committee, and our Board believe the company’s overall executive pay program is structured to reflect a strong pay-for-performance philosophy and aligns the long-term interests of our executives and our shareholders. Accordingly, the Board recommends that shareholders approve our executive pay program by voting “FOR” the following advisory resolution:
RESOLVED, that the compensation paid to the company’s named executive officers (as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and any related material disclosed in the company’s 2018 proxy statement) is hereby APPROVED.
 
 
The Board of Directors recommends you vote 
“FOR” 
the resolution approving
named
executive 
officer pay.
 
 
 
 
 
 
 
 
 
 
 

8

Items of Business

 
 
 
 
 
 
 
This advisory vote to approve named executive officer pay is not binding on the company. However, we and our Board will take into account the result of the vote when determining future executive pay arrangements.
At last year’s annual meeting of shareholders, more than a majority of our shareholders voted in favor of an annual advisory vote on executive compensation. Consistent with those voting results, the Board has determined that we will hold an annual advisory vote on executive compensation until the next required vote on the frequency of future shareholder votes on executive compensation, as required pursuant to Section 14A of the Exchange Act and the related rules and regulations. Under current rules and regulations, we will hold the next frequency vote in connection with our 2023 annual meeting of shareholders.
Vote Required
The affirmative vote of the holders of a majority in voting power of the shares of our common stock which are present in person or represented by proxy and entitled to vote thereon is required to approve the say-on-pay resolution set forth above. If your shares are held through a broker, bank, or other nominee and you do not vote your shares, your bank, broker, or other nominee may not vote your shares in this proposal. Assuming a quorum is present, broker non-votes or the failure to vote – either by not returning a properly executed proxy card or not voting in person at the annual meeting – will have no effect on the outcome of the voting on this proposal. Abstentions will have the same effect as a vote against the proposal. Unless instructed to the contrary in the proxy, the shares represented by the proxies will be voted “FOR” the proposal to approve, on an advisory basis, the pay of the company’s named executive officers, as set forth in the company’s 2018 proxy statement.
 
 
 
 
 
 
 

9

 

Executive Pay
Compensation Discussion and Analysis
The Compensation Discussion and Analysis (CD&A) explains how we pay our executives and how the Compensation Committee of our Board oversees executive pay, including the rationale and processes the Committee used to set executive pay in 2017. The CD&A summarizes the objectives and specific elements of our 2017 pay program, including cash, stock, and post-termination compensation. The CD&A, which may include forward-looking statements, should be read together with the compensation tables and related disclosures that follow this CD&A.
This CD&A is organized into the following sections:
 
 
 
 
 
 
Section
Summary
Page
 
 
Highlights of our 2017 executive pay program and results
 
 
How our pay and performance, relative to our peers, provides value to shareholders
 
 
Details about how our Board uses shareholder feedback to set pay
 
 
How our Compensation Committee governs our executive pay programs
 
 
How our Compensation Committee determined the amount of 2017 executive pay
 
 
Details about the different parts of 2017 executive pay
 
 
Information on other aspects of our pay program
 
 
 
 
 
 
CD&A Executive Summary
2017 Results
In 2017, we faced a number of challenges that required us to efficiently manage our business to achieve operational success and earnings in line with expectations. We worked safely in 2017 (nearly as safe as our all-time best safety year of 2016) and achieved our highest ever customer satisfaction ratings, both while providing our customers with reliable service. We also produced financial results in line with our announced expectations. However, primarily as a result of 2017’s regulatory headwinds, our shareholder return lagged our peer group.
 
 
 
 
 
 
 
 
 
 
 
 
2017 Basic Earnings Per Share
Our basic earnings per share declined 0.9 percent to $3.35 in 2017 from $3.40 in 2016, primarily due to a tax benefit included in 2016.
 
 
 
Total Shareholder Return
Our TSR was 17.4 percent for the three-year period ending December 31, 2017, ranking 12th of our 14-member peer group and trailing the peer group average (42.7 percent).
 
 
 
Dividend Yield
Our dividend of $2.10 per share provided a dividend yield of 3.5 percent based on our stock price at the end of 2017.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Safety
In 2017, we worked safely, with lost time and total recordable incident rates near all-time lows.
 
 
 
Reliability
The reliability of our electric and natural gas systems was at or slightly better than target.
 
 
 
Customer Service
Our JD Power rating for overall satisfaction results showed customer satisfaction at our highest level ever.
 
 
 
 
 
 
 
 
 
 
 
 


10

Compensation Discussion and Analysis

We achieved these strong operating results during 2017, while also:
Completing the first phase of a natural gas rate case in the state of Montana, which should conclude in 2018; and
Successfully accessing the (a) equity capital markets issuing approximately $53.7 million of common stock as part of an ongoing at-the-market equity program, and (b) debt capital markets to refinance outstanding indebtedness to lower interest costs by issuing $250 million of Montana First Mortgage Bonds at 4.03%, maturing in 2047.
The overall pay our executives receive ranks near the bottom of our peer group, which is identified on page 16 of this proxy statement. In summary, for 2016 (the most recent year for which peer group executive compensation is publicly available in the Summary Compensation Table for each respective company, excluding changes in pension value):
●    Our named executive officers had an average compensation per named executive officer that was less than all but three of the other 13 companies in our peer group ($1.19 million for us versus $1.44 million for the peer median).
    Our CEO’s total compensation was approximately 78 percent of the median total compensation (excluding change in pension value) of the CEOs in our peer group.
 
 
 
 
 
 
 
Named Executive Officers for 2017
 
 
 
Robert C. Rowe
 
 
 
President and Chief Executive Officer
 
 
 
Brian B. Bird
 
 
 
Vice President and Chief Financial Officer
 
 
 
Heather H. Grahame
 
 
 
Vice President - General Counsel / Regulatory & Federal Gov't Affairs
 
 
 
Curtis T. Pohl
 
 
 
Vice President - Distribution
 
 
 
Bobbi L. Schroeppel
 
 
 
Vice President - Customer Care, Communications and HR
 
 
 
 
 
 
We consider our executive pay program to be instrumental in helping us achieve our business objectives and effective in rewarding our executive officers for their role in achieving strong financial and operational performance. Based on our performance and our compensation outcomes, we are requesting your support of Proposal No. 3—Advisory Vote to Approve Named Executive Officer Compensation.
Our overarching philosophy is that we should structure executive pay to be consistent with our peers and to align the long-term interests of our executives, shareholders, and customers so that the pay appropriately reflects performance in achieving financial and non-financial operating objectives. To live up to this philosophy, we believe that a significant portion of an executive’s pay should be at risk in the form of performance-based incentive awards that are only paid if the individual and company performance targets are met.
Our executive pay program is designed to:
Attract and retain a high-quality executive team by providing competitive pay and benefits that reflect our financial operational size;
Reward executives for both individual and company performance (based on financial, reliability, customer care, and safety metrics) through performance-based, at-risk pay; and
Maximize long-term shareholder value by putting a significant emphasis on financial performance, reliability, safety, and customer satisfaction.


11

Compensation Discussion and Analysis


 
 
 
 
 
Our Pay Practices
 
 
 
 
 
 
Our executive pay program accomplishes our goals by incorporating certain pay practices while avoiding other, more problematic or controversial practices.
 
 
 
 
 
 
What We Do
 
 
Place a significant portion of executive pay at risk by granting incentive awards that are paid, if earned, based on continuing annual and long-term individual and company performance.
 
 
Utilize multiple performance metrics for long-term incentive awards that align executive and shareholder interests.
 
 
Target executive pay around the median of our peers, while also considering trade area economics, turn-over, tenure, experience, and other factors.
 
 
 
 
 
 
What We Don’t Do
 
 
Use employment or golden parachute agreements.
 
 
Provide change in control payments exceeding three times base salary and target bonus. Our only change in control provision appears in our Equity Compensation Plan and provides for the immediate vesting or cash payment of any unvested equity awards upon a change in control.
 
 
Grant stock options. No stock options are currently outstanding, and none have been issued under our Equity Compensation Plan.
 
 
Allow option repricing or liberal share recycling. These practices are expressly prohibited under our Equity Compensation Plan.
 
 
Promise multi-year guarantees for salary increases.
 
 
Provide perquisites for executives that differ materially from those available to employees generally.
 
 
Maintain a non-performance-based top hat plan or separate retirement plan available only to our executive officers. We do maintain a performance-based executive retirement / retention program, with five-year cliff vesting and a five-year payout period after the recipient’s separation from service.
 
 
Pay tax gross-ups to our executives.
 
 
Pay dividends or dividend equivalents on unvested performance shares or units.
 
 
Allow our executives or directors to hedge company securities.
 
 
 
 
 
Pay Package
For 2017, our executive pay package included the same components as in 2016 — base salary, annual cash incentive award, and two long-term stock incentive awards. All incentive awards (cash and stock; annual and long-term) were performance-based. Unlike many of our peers, we do not offer a non-performance-based supplemental executive retirement plan.
The table on the following page provides a high level summary of our 2017 executive pay package. Please see the Pay Components section later in this CD&A for a more detailed summary of how we pay our executives.


12

Compensation Discussion and Analysis

Component
Description
Why we include
this component
How we
determine amount
Decisions for 2017
Reason for
Change
Base
Salary
Short-term fixed cash compensation
Provide a base level of compensation for executive talent
Target middle of competitive range of peer group, with adjustments for trade area economics, turnover, tenure, and experience
One executive received a three percent increase, and our CEO and remaining executives received the two and three-quarters percent increase generally provided to all employees
To remain market competitive and provide cost of living adjustment
Annual
Cash
Incentive
Short-term variable cash compensation, based on corporate performance against annually established metrics (financial, safety, reliability, and customer satisfaction) and individual performance
Motivate employees to meet and exceed annual company objectives that are part of our strategic plan
Target middle of competitive range of peer group, with adjustments for trade area economics, turnover, tenure, and experience
Increased target opportunity for our CEO; updated performance targets; and added a safety training metric
To increase the compensation opportunity for our CEO to align with market median
Performance Unit Awards under
Long-Term Incentive Program (LTIP)
Long-term variable, equity compensation, paid following three-year vesting period if financial performance metrics (EPS, ROAE, and TSR) are achieved
Provide market-competitive, performance-based compensation opportunities while aligning interests of executives and shareholders
Market survey of similar peer group roles and responsibilities and assessment of the strategic value of each position
Increased target opportunity for one executive and updated performance targets
To increase the compensation opportunity for strategic positions to align with market median
Restricted Share Grants under Executive Retention / Retirement Program (ERRP)
Long-term variable, equity compensation, with corporate performance metrics over a five-year vesting period; paid over five-year period following separation from service
In lieu of a non-performance based supplemental retirement benefit, provide market-competitive, performance-based compensation opportunity that aligns interests of executives and shareholders, while encouraging retention and the continuity of our strategic plan
Peer group and competitive survey data and judgment on internal equity of positions and scope of responsibilities, as well as an assessment of the strategic value of each position
There were no changes to the ERRP restricted share grants
Not applicable
Pay for Performance
Our Compensation Committee has designed our pay program to align pay with performance. Our executives are rewarded for providing value to shareholders and for performing relative to our peer group, which is identified on page 16 of this proxy statement.
Value Provided to Shareholders
Over the past three years, we have provided value to our shareholders, with total shareholder return (including reinvestment of dividends) of 17.4 percent, average EPS growth of 3.7 percent, and return on average equity of 9.8 percent.
These results we achieved for our shareholders are consistent with the results obtained under our incentive plans. With respect to our annual cash incentive plan for 2017, our net income achieved 93.4 percent of target and our customer satisfaction results were at an all-time high, while our safety performance was near our all-time high. These operational successes resulted in a funding of our annual cash incentive plan at 99 percent of target for 2017.
The grants of long-term performance units that were made in 2015 pursuant to the LTIP vested on December 31, 2017. The performance measures associated with those grants were measured over a three-year vesting period and were tied to EPS growth, ROAE, and TSR. The company had solid results over the three-year vesting period with respect to the LTIP metrics, attaining 3.7 percent average EPS growth, 9.8 percent ROAE, and 14.4 percent TSR (12th highest of our 14-member peer group when calculated as required by the LTIP). Based on these results, the LTIP awards paid out at 44.9 percent of target.


13

Compensation Discussion and Analysis


The chart below shows the total return on an investment made over that same three-year vesting period and highlights our stock price performance with the S&P 500 and our peer group. The chart below shows our TSR of 17.4 percent, assuming reinvestment of dividends. However, the calculation required by the LTIP results in a TSR of 14.4 percent for the same period. The difference in these TSRs is the method of calculation required by the terms of our LTIP, which uses a 20-day average stock price at the beginning and end of the performance period and does not assume reinvestment of dividends.
THREE-YEAR TSR
a20183yrtsrgrapha02.jpg
The charts below provide another depiction of pay for performance and the value we provide to shareholders by illustrating the directional relationship between the compensation of our CEO and company performance over a five-year period based on the three performance metrics utilized in our LTIP performance units.
5-YEAR CEO PAY ALIGNMENT
 VS. EPS
VS. ROAE
VS. CUMULATIVE TSR
ceotoeps2017a02.jpg
ceotoroae2017f.jpg
ceototsr2017a02.jpg
EPS reflects diluted earnings per average share of our common stock. TSR illustrates the growth of $100 invested in our common stock on December 31, 2012, assuming reinvestment of dividends. CEO Compensation is total compensation (excluding change in pension value) as published in the proxy statement Summary Compensation Table.
Performance Relative to Our Peers
Relative to our peers, our CEO pay is generally aligned with performance. For the three-year period ending December 31, 2017, our TSR was the 12th highest in our peer group (according to SNL Financial and assuming reinvestment of dividends), while our CEO’s compensation was the ninth highest of our peer group (based on the three most recently available years of compensation data as disclosed in the proxy statement summary compensation tables of our peers). In addition, the aggregate compensation provided to our named executive officers and the pay multiple of our CEO to the second highest paid named executive officer both lag the median of our peer group.


14

Compensation Discussion and Analysis

We also provide value to shareholders by maintaining a relatively small executive team, which reduces overall executive compensation. We currently have eight members on our executive team. As of February 26, 2018, ten of our peers have larger executive teams of nine or more members; while, two of our peers have fewer than eight executive officers. We believe that having a relatively small executive team creates efficiencies and a stronger team that is more effective as a group.
The pay-for-performance charts and tables below reflect relative values for CEO pay and TSR that are expressed as a percentile of the range between the highest and lowest values. The charts and tables demonstrate a strong CEO pay for performance alignment over the past three years. Our CEO is generally being compensated at a lower level than the CEOs of most of our peers, while delivering similar value to our shareholders relative to our peers.
Datapoints within the shaded pay-for-performance alignment band reflect an alignment of pay and performance. Datapoints to the left and above the band suggest lower pay for higher performance; while those to the right and below the band suggest higher pay for lower performance.
CEO PAY FOR PERFORMANCE VS. PEERS
1-YEAR
 
 
3-YEAR
 
 
 
 
payvperf1yr2017f.jpg
 
 
payvperf3yr2017f.jpg
Relative 1-Year CEO Pay*
 
Relative 1-Year TSR*
 
Relative 3-Year CEO Pay*
 
Relative 3-Year TSR*
Great Plains Energy
100%
 
Avista Corp.
100%
 
PNM Resources Inc.
100%
 
Otter Tail Corporation
100%
Vectren Corporation
96%
 
Vectren Corporation
89%
 
Vectren Corporation
94%
 
Avista Corp.
100%
Black Hills Corporation
92%
 
Great Plains Energy
71%
 
Avista Corp.
83%
 
Vectren Corporation
90%
PNM Resources Inc.
89%
 
El Paso Electric Co.
70%
 
Black Hills Corporation
73%
 
El Paso Electric Co.
81%
Avista Corp.
82%
 
PNM Resources Inc.
67%
 
Great Plains Energy
72%
 
IDACORP, Inc.
81%
OGE Energy Corp.
79%
 
ALLETE, Inc.
62%
 
Portland General Electric
60%
 
ALLETE, Inc.
81%
IDACORP, Inc.
74%
 
IDACORP, Inc.
53%
 
IDACORP, Inc.
58%
 
MGE Energy Inc.
78%
Portland General Electric
62%
 
Otter Tail Corporation
41%
 
OGE Energy Corp.
46%
 
PNM Resources Inc.
78%
El Paso Electric Co.
50%
 
NorthWestern Energy
30%
 
NorthWestern Energy
36%
 
Portland General Electric
50%
NorthWestern Energy
42%
 
Portland General Electric
29%
 
El Paso Electric Co.
34%
 
Great Plains Energy
41%
ALLETE, Inc.
28%
 
OGE Energy Corp.
10%
 
ALLETE, Inc.
28%
 
Black Hills Corporation
37%
Otter Tail Corporation
25%
 
Black Hills Corporation
7%
 
Otter Tail Corporation
20%
 
NorthWestern Energy
24%
MGE Energy Inc.
—%
 
MGE Energy Inc.
—%
 
MGE Energy Inc.
—%
 
OGE Energy Corp.
—%
 
 
 
 
 
 
 
 
 
*Relative CEO pay and TSR are expressed as a percentile of the range between the highest and lowest values.
Source: CEO Pay for the one-year period is the 2016 total compensation and for the three-year period is the 2014-16 total compensation, as published in the 2015, 2016, and 2017 proxy statement Summary Compensation Tables for each respective company. We have excluded any change in pension value from the total compensation calculation because its inclusion could lead to inconsistent comparisons from company to company based upon differing pension plan provisions, length of employee tenure, and other factors. Total Shareholder Return is from SNL Financial for the one- and three-year periods ended December 31, 2017, and assumes reinvestment of dividends. We have excluded the CEO compensation and TSR for one of our peers, Westar Energy, Inc., from this presentation due to a pending merger transaction and the related lack of proxy statement compensation disclosure.



15

Compensation Discussion and Analysis


As with our CEO’s total compensation package, the total compensation provided to our named executive officers, as a group, relative to our peers also demonstrates a strong pay-for-performance alignment for our shareholders. As shown in the charts below, our named executive officer group lags the median total compensation provided to our peer group named executive officers. The summary also depicts that the multiple of our CEO’s compensation compared with our next most highly compensated named executive officer has lagged our peer group median until recently.
NAMED EXECUTIVE OFFICER PAY VS. PEERS
 
 
PAY MULTIPLE OF CEO TO SECOND HIGHEST PAID NAMED EXECUTIVE OFFICER
 
 
 
 
neovpeers2017dr1.jpg
 
 
ceoto2ndhp2017dr1.jpg
Source: Total compensation (excluding change in pension value) as published in the proxy statement summary compensation table for each respective company. We excluded change in pension value because its inclusion could lead to inconsistent comparisons from company to company based upon differing pension plan provisions, length of employee tenure, and other factors.
 
 
Our 2017 Peer Group
 
Our Compensation Committee selects the members of our peer group and periodically examines whether peers continue to meet the criteria for inclusion described below. As part of this process, the Compensation Committee receives advice from its independent compensation consultant and selects a peer group that includes companies that: (1) maintain a regulated utility industry perspective, emphasizing operational excellence and customer satisfaction as a means to create shareholder value; (2) are referenced as relevant comparisons by other companies, the analyst community, and their advisors; and (3) have similar revenue, market capitalization and return-based measures of performance.

For 2017, based on these criteria and the advice of its independent compensation consultant, our Compensation Committee did not make any changes to our peer group.
 
 
 
 
 
2017 Peer Group

ALLETE, Inc.
Avista Corp.
Black Hills Corporation
El Paso Electric Co.
Great Plains Energy Incorporated
IDACORP, Inc.
MGE Energy Inc.
NorthWestern Energy                          OGE Energy Corp.
Otter Tail Corporation
PNM Resources Inc.
Portland General Electric Company
Vectren Corporation
Westar Energy, Inc.
 
Market Capitalization  (1)
 
Revenue (2)
 
peer2017marketcap.jpg
 
peer2017revenue.jpg
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Market capitalization range of our peer group as of February 9, 2018.
 
 
 
(2) Range of total revenues for our peer group over the four most recent publicly available fiscal quarters.
 
 


16

Compensation Discussion and Analysis

Say-on-Pay Results
At our annual meeting in 2017, our shareholders continued to show strong support of our executive pay program, with 99.2 percent of the votes approving the say-on-pay resolution.
Those 2017 voting results occurred after the Compensation Committee took action to approve 2017 pay. Nevertheless, the Compensation Committee and the Board reviewed that feedback from shareholders when establishing executive pay for 2018. The Compensation Committee believes the results from our 2017 annual meeting affirm our shareholders’ continuing support of the company’s approach to executive pay. Thus, the Compensation Committee made no substantive changes to executive pay for 2018.
How we set pay
Compensation Committee
The Compensation Committee, composed entirely of independent directors, is responsible for the oversight of:
Pay, benefits, and other employment matters for executives;
Stock-based pay plans for employees;
The election and appointment of executive officers and other corporate officers;
CEO performance; and
Director pay.
The Compensation Committee considers several factors when it sets executive pay — all of which ultimately influence our executive pay program.
 
 
 
 
 
 
 
 
 
 
 
 
Align Interests.
Provide pay that aligns management (and employee) interests with those of shareholders and customers.
 
 
 
Peer Comparison.
Establish overall pay approximating the median of our peer group and applicable position comparisons.
 
 
 
Attract Talent.
Set pay that will attract talent from both within and outside the utility industry.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Economic Circumstances.
Set pay based on economic circumstances, including turnover and retention considerations.
 
 
 
Pay for Performance.
Tie all components of incentive pay to the company’s short-and long-term financial and operational performance.
 
 
 
No Executive Perks.
Executives participate in same benefits plans available to all non‑union employees, with no additional perquisites, other than executive physicals.
 
 
 
 
 
 
 
 
 
 
 
 
Independent Compensation Consultant
To help determine executive pay, the Compensation Committee retains an independent pay consultant, Willis Towers Watson, for advice regarding the general competitive landscape and trends in executive and director pay. While the Compensation Committee meets with the consultant from time to time, the chair of the Compensation Committee also communicates directly with the consultant in between Committee meetings. The consultant advises the Committee on several matters including (1) competitive analysis (including in relation to our peer group), (2) incentive plan design, (3) updates on trends in executive and director compensation, (4) peer group composition, and (5) other compensation-related matters as requested by the Committee.
Decision-Making Process and Role of Executive Officers
The Compensation Committee works with Willis Towers Watson to analyze competitive market data to determine appropriate base salary levels, annual incentive target levels, and long-term incentive target levels for all of our executives, paying particular attention to applicable comparisons with our peer group. When making comparisons to the peer group, the Compensation Committee seeks to establish compensation levels that approximate the median of our peer group. After determining appropriate levels, the Compensation Committee


17

Compensation Discussion and Analysis


recommends both CEO and executive officer pay to the Board for approval. The CEO is not a member of the Compensation Committee and does not vote on Board matters concerning executive pay.
With respect to our CEO’s pay, the Compensation Committee conducts an annual performance assessment of the CEO and determines appropriate adjustments to all elements of his pay based on his individual performance and the company’s performance. The Compensation Committee then considers our CEO’s preference: having a larger percentage of his pay be at risk in the form of performance-based compensation and his overall pay to be below the median of his peers.
For the other executive officers, the CEO and CFO make recommendations to the Compensation Committee for all elements of pay based on individual performance, market data from our peer group and published survey data. The Compensation Committee reviews, discusses, modifies, and approves, as appropriate, these recommendations.
The diagram below summarizes the Compensation Committee’s annual process for setting executive pay, which begins in July and concludes the following February.
 
 
 
 
 
 
 
 
 
 
July
Review and discuss timeline for setting executive pay
 
 
 
October
Review materials from independent compensation consultant:
 
 
 
 
 
 
 
Executive pay overview
 
 
 
 
 
 
 
Peer compensation analysis
 
 
 
 
 
 
 
Preliminary design of annual and long-term incentive opportunities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December
Evaluate overall executive pay program:
 
 
 
February
Finalize executive pay:
 
 
Review preliminary five-year financial plan
 
 
 
Review final five-year financial plan
 
 
Approve upcoming annual incentive plan grants
 
 
 
Approve executive pay
 
 
Review proposed long-term incentive grants
 
 
 
Approve long-term incentive program grants
 
 
Approve annual executive retention / retirement grants
 
 
 
Review performance metrics results for prior year and approve payouts for current annual incentive plan and vesting of long-term incentive program
 
 
 
 
 
 
 
 
 
 
At each of its regularly scheduled meetings throughout the year, the Compensation Committee reviews the company’s performance under all outstanding annual and long-term incentive plans.
Targeted Pay and Competitive Analysis
Pay Philosophy
We target base salary, annual cash incentive awards, and long-term equity grants, as well as total pay, to be market competitive for our executive officers. Our Compensation Committee believes that the best proxy to determine market competitiveness of pay is the median of our peer group, including individual pay components, as well as total pay. However, because comparative data is one of several tools that are used in determining executive officer compensation, competitiveness of compensation may fluctuate based on a number of factors, including:
The level of achievement of our pre-established performance goals;
Our TSR compared against our peer group;
Individual performance and scope of job responsibilities;
Internal equity considerations;
Market competitiveness and internal executive turnover; and
The executive’s industry and position experience and tenure.
To align the long-term interests of our executives, shareholders, and customers, our Compensation Committee uses performance-based incentive awards to place a significant component of each executive’s pay at risk. According to


18

Compensation Discussion and Analysis

our Compensation Committee’s independent compensation consultant, our relative TSR performance metric that is part of our long term incentive program is set at a higher level, and is more difficult to achieve, than our peers. This structure encourages our executives to focus on both short- and long-term performance and provides a reward to our executives, shareholders, and customers when we achieve our financial and operating objectives.
The target pay mix for our named executive officers changed slightly in 2017 from 2016. As part of the overall 2017 pay package, our Compensation Committee increased the targeted annual incentive opportunity for our CEO and the targeted long-term incentive opportunity for one of our named executive officers as described below in the 2017 Long-Term Incentive Program Performance Unit Grants section. As a result, the percentage of at-risk pay component of the target pay mix increased for our named executive officers, as a whole, to 67 percent in 2017 from 66 percent in 2016.
 
percent of pay at risk increased for 2017
For our CEO, 78 percent of the overall targeted pay in 2017 (base salary plus targeted annual and long-term incentives) relates to performance-based incentive awards. For our named executive officers other than the CEO, that percentage averages 58 percent. The charts below depict the target total pay mix for our CEO and the average of our other named executive officers.
CEO PAY MIX
 
 
OTHER NAMED EXECUTIVE OFFICER
AVERAGE PAY MIX
 
 
 
 
donutceo2017dr1.jpg
 
 
donutneo2017dr1.jpg
Charts represent target level for each component of compensation.
Independent Compensation Consultant Data and Analysis
As a component of the Compensation Committee’s review of executive pay, Willis Towers Watson provides an analysis of the pay levels of our peer group, as well as published survey data that focuses on the energy and utility industry, which is size-adjusted based on our revenues for appropriate market comparison. In 2017, the published survey data included the Willis Towers Watson Compensation DataBank, William M. Mercer’s Executive Benchmark Database and Willis Towers Watson Survey Report on Top Management Compensation. The peer group data is a primary basis for setting pay for our CEO and CFO because these positions are common among our peers. Both the peer group and survey data are analyzed and considered in setting pay levels for the remaining named executive officers because these positions or division of responsibilities may not be common among each of our peers.
For long-term incentive purposes, Willis Towers Watson performs its analysis using the published survey data and focuses on companies in the energy services industry, specifically with annual revenues less than $3 billion. The Compensation Committee considers the responsibilities of the job performed by each of our executive officers and his or her performance, and adjusts each executive’s targeted pay amounts accordingly. As further detailed below, internal comparison with other officer positions also is considered.
In addition to these efforts, Willis Towers Watson prepares an analysis of market data compiled from the Willis Towers Watson Compensation DataBank for energy services executives. The analysis examines the target direct compensation opportunity for energy services executives, including base salary, target annual incentives, and the expected value of long-term incentives. Using regression analysis, Willis Towers Watson size-adjusts the data to reflect our revenue scope.


19

Compensation Discussion and Analysis


We also conducted a separate analysis of the 2016 executive pay of the 13 other companies in our peer group. This internal analysis, which was based on proxy data, examined base salary, bonus, other annual compensation, equity awards, and non-equity incentive plan compensation (and excluded change in pension value). Using this analysis, our named executive officers had average pay of $1.19 million in 2016, which was less than all but three of the companies in our peer group; while the peer group median had average pay per named executive officer of approximately $1.44 million. For 2016, our CEO’s total pay was approximately 78 percent of the median total pay of CEOs in our peer group.
These analyses demonstrate that, on average, our highest paid employees are paid at a level that is below the median of our peer group and industry. We also are cognizant of prevailing economic conditions, internal pay equity, and executive turnover, which our Compensation Committee takes into account when determining executive compensation.
CEO Pay Ratio and Wealth Accumulation
We believe executive pay must be internally consistent and equitable to motivate our employees to create shareholder value. We are committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay our executive officers receive and the pay our non-managerial employees receive. The Compensation Committee reviewed a comparison of CEO pay (base salary and incentive pay) to the pay of all our employees in 2017. The compensation for our CEO in 2017 was approximately 23 times the median pay of our full-time employees as compared to 22 times in 2016, using the same methodology.
23:1
CEO Pay Ratio
Our CEO to median employee pay ratio is calculated in accordance with Item 402(u) of Regulation S-K. We identified the median employee by examining the 2017 total cash compensation for all individuals (excluding our CEO) who were employed by us on December 15, 2017, the last day of our payroll year (last year, we also used the last day of our payroll year). We included all employees, whether employed on a full-time, part-time, or seasonal basis. We did not make any assumptions, adjustments, or estimates with respect to total cash compensation, and we did not annualize the compensation for any full-time employees that were not employed by us for all of 2017. We believe the use of total cash compensation for all employees is a consistently applied compensation measure because we do not widely distribute annual equity awards to employees. Approximately seven percent of our employees receive annual equity awards.
Our determination of the median employee yielded two median employees because we had an even number of employees. After identifying the two median employees based on total cash compensation, we calculated annual total compensation for each such employee using the same methodology we use for our named executive officers as set forth in the 2017 Summary Compensation Table later in this proxy statement and selected the employee with the lower total compensation to compute the ratio.
 
 
 
 
 
 
 
 
 
 
CEO to Median Employee
 
 
 
 
Pay Ratio
 
 
 
 
President
and CEO
 
Median Employee
 
 
Base Salary
$
607,232

 
$
81,939

 
 
Stock Awards
1,497,280

 

 
 
Non-Equity Incentive Plan Compensation
605,836

 
3,363

 
 
Change in Pension Value and Nonqualified Deferred Compensation Earnings (1)
94,609

 
9,617

 
 
All Other Compensation
43,322

 
29,580

 
 
TOTAL
$
2,848,279

 
$
124,499

 
 
 
 
 
 
 
 
CEO Pay to Median Employee Pay Ratio
23

:
1
 
 
(1)    These amounts are attributable to a change in the value of each individual’s defined benefit pension account balance and do not represent earned or paid compensation. Pension values are dependent on many variables including years of service, earnings, and actuarial assumptions.
 
 
 
 
 
 
 
 


20

Compensation Discussion and Analysis

The Compensation Committee reviews annually the wealth accumulation of our executives, considering all of the elements of total pay each executive officer receives during the prior five-year period, including base salaries, annual cash incentive payouts, the value of long-term incentive awards and any special payments made to an individual executive. The Compensation Committee also reviews the projected value of each executive officer’s accumulated equity grants over the subsequent five-year period based upon various stock appreciation and “stay to normal retirement” scenarios. This is done to analyze not only the amount of pay each executive officer has accumulated to date, but also to better understand how current equity grants may affect the amount of wealth executive officers accumulate in the future.
Pay Components
 
 
 
 
 
The primary pay components for our executive officers in 2017 were:
 
 
Base Salary;
 
 
Annual performance-based cash incentive awards; and
 
 
Long-term performance-based equity incentive awards in the form of performance units and ERRP restricted share units.
 
 
 
 
 
The Compensation Committee believes these pay components align the interests of our executives and our shareholders by basing a significant portion of total pay on performance and achievement of our short- and long-term goals. The specific mix among the individual components reflects market comparisons (primarily with respect to the median of our peer group) and individual position and performance. Base salary represents 22 percent of our CEO’s targeted total pay and, on average, 42 percent of our other named executive officers’ targeted total pay. Performance-based awards (annual and long-term incentive) represent the remaining portion of targeted pay.
The Compensation Committee also believes that our executive pay program appropriately mitigates the risk associated with incentive-based pay. The Compensation Committee has designed the entire program and the metrics under our annual and long-term performance-based incentive awards to curb inappropriate risk taking. For example, we do not offer guaranteed bonuses. In addition, our annual and long-term performance-based incentive awards utilize multiple performance metrics which vary from plan to plan, and rewards under those plans are aligned with the interests of our shareholders. If our shareholders benefit from our performance, our executive officers are rewarded. Our ERRP restricted share units also benefit our long-term succession and strategic plan by providing for payment only after the recipient leaves employment with us, and then over a five-year period. Furthermore, we have limited severance packages, we do not maintain a non-performance-based supplemental executive retirement plan, and our retirement, healthcare, and welfare benefit programs for executives are generally the same as for all employees and are discussed in the 2017 Executive Pay section of this proxy statement. Finally, we maintain stock ownership guidelines for our executives. In light of these pay practices, the Compensation Committee believes that our executive pay program appropriately address the risks associated with performance-based incentives.
Base Salary
The general guideline for determining salary levels for our executive officers, including the CEO, is to be around the median of our peer group, adjusted for other factors such as trade area economics, turn-over, tenure, and experience. Adjustments from peer group levels are made based on experience in the position, industry experience, and individual performance and responsibilities. While we are cognizant of the competitive range, our primary goal is to compensate our executives at a level that best achieves our pay philosophy, whether or not this results in actual pay for some positions that may be higher or lower than the market median. We find that survey results for particular positions can vary from year to year. Thus, we consider market trends for certain positions over a period of several years rather than a one-year period in setting pay for such positions.
The Compensation Committee considers adjustments to base salaries for the executive officers on an annual basis. For 2017, the Compensation Committee felt that an increase to the base salaries of our executive officers in line with the increases provided to our employees generally was reasonable in light of the company’s operating results in 2016. To remain competitive with the market, the Compensation Committee also considered the effect of such increased salaries for our executive officers in relation to the median of our peer group. The table following this


21

Compensation Discussion and Analysis


paragraph sets forth the base salaries for our named executive officers. The base salary adjustments for 2017 were effective April 1, 2017.
 
 
Annualized Base Salary
 
Increase
(%)
 
 
2016
 
2017
 
Name
 
($)
 
($)
 
Robert C. Rowe
 
595,578
 
611,956
 
2.75
Brian B. Bird
 
411,951
 
423,280
 
2.75
Heather H. Grahame
 
360,714
 
370,634
 
2.75
Curtis T. Pohl
 
279,922
 
287,620
 
2.75
Bobbi L. Schroeppel
 
258,068
 
265,810
 
3.00
Annual Cash Incentive Awards
The overall design of our 2017 annual cash incentive plan was the same as the 2016 plan. The plan uses financial (net income) and operational (safety, reliability, and customer care) performance metrics to motivate employees to meet and exceed annual company objectives that are a part of our strategic plan. All regular, non-union employees, including executive officers, participate in the same annual incentive plan; while our union employees participate in a separate, but similar, management-designed program.
Each participating employee has a targeted annual cash incentive award, expressed as a percentage of base salary. Actual payouts for awards reflect the company’s performance against the metrics, as well as the employee’s individual performance. No portion of the annual cash incentive award is guaranteed.
The Compensation Committee calculates the actual payout pursuant to the following formula, which reflects four factors:
(1)
 
(2)
 
(3)
 
(4)
 
 
Base
Salary
x
Individual Target Incentive
(% of Base Salary)
x
Plan
Funding
Percentage
(performance vs. metrics)
x
Individual Performance Multiple
=
Individual Payout
For example, the Compensation Committee calculated the annual incentive payout for our CEO in 2017 as follows:
$611,956
x
100%
x
99%
x
1
=
$605,836
(1) Base Salary
Base salary is the first component in the calculation of the annual cash incentive award. Base salary is described in the Base Salary section immediately preceding this Annual Cash Incentive Awards discussion.
(2) Individual Target Incentive
Each year, the Compensation Committee approves an annual incentive target, expressed as a percentage of base salary, for each executive. The target opportunity for our executive officers is derived in part from peer group and competitive survey analysis data and in part by the Compensation Committee’s judgment on the internal equity of the positions, scope of job responsibilities, and each executive’s industry experience and tenure. Potential adjustments to the annual incentive target for the executive officers are considered by the Compensation Committee on an annual basis.


22

Compensation Discussion and Analysis

In 2017, the Compensation Committee adjusted the target incentive opportunity for our chief executive officer only, increasing the opportunity to 100 percent from 80 percent in 2016. The Compensation Committee believed this increase was appropriate to align his incentive opportunity with his peers. The table to the right sets forth the 2017 annual incentive target opportunity for our named executive officers.
 
 
 
2017
 
Name
 
Base Salary
 
Target Incentive Opportunity
(% of base salary)
 
Target Incentive Opportunity ($)
 
Robert C. Rowe
 
$611,956
 
100%
 
$611,956
 
Brian B. Bird
 
$423,280
 
50%
 
$211,640
 
Heather H. Grahame
 
$370,634
 
45%
 
$166,785
 
Curtis T. Pohl
 
$287,620
 
40%
 
$115,048
 
Bobbi L. Schroeppel
 
$265,810
 
35%
 
$93,034
(3) Plan Funding Percentage
Before each annual incentive plan year begins, management proposes specific performance targets for the plan’s financial and operational measures. The Compensation Committee considers the proposed targets, and the Compensation Committee and the Board approve final targets. Following the end of the plan year, the Compensation Committee reviews data submitted by management regarding company performance against each of the specific performance targets and determines the degree to which each performance measure was met during the year, subject to Board approval. The aggregate percentage of financial and operational measures met during the year represents the plan funding percentage for the annual incentive plan.
For our executives, the funding (as a percentage of target) under the annual incentive plan has ranged from 80 percent to 125 percent for the five previous years, as set forth in the table to the right.
 
Historical Funding of Annual Cash Incentive
(as a percentage of target)
 
2012
2013
2014
2015 (1)
2016
 
98%
108%
125%
80%
113%
 
(1) Due to a work-related fatality in 2015, the funding level of the annual cash incentive for executives was 80% (for non-executive employees, the plan was funded at 88%).
The Compensation Committee may use discretion in increasing or decreasing the plan funding percentage from actual performance due to specific facts and circumstances, such as current economic conditions as well as unusual one-time events that significantly impact financial or non-financial results. The Compensation Committee exercises this discretion only for unusual, non-operational items.
For many years, including 2017, the annual incentive plan has used four categories of performance measures to determine the plan funding percentage – financial, safety, reliability, and customer satisfaction. The relative weightings of these measures are set forth in the graphic to the right.
In order for any awards under the 2017 annual incentive plan to be earned and paid out, the company must attain at least 90 percent of the budgeted net income target, which coincides with the threshold net income target for the plan. This metric for determining performance against our financial goal is derived from our audited financial statements. However, the Compensation Committee, in its discretion, may consider certain items or events as unusual when determining performance against the metric and make what it deems to be appropriate adjustments. There were no adjustments in 2017. In addition, the 2017 annual incentive plan provided that the lost-time incident rate portion of the safety metric would be forfeited in the event of a work-related fatality, unless the Compensation Committee determined that no actions on the part of the employee or the Company contributed to the incident.
 
Annual Incentive Plan Metrics
 
pieanninc2017a06.jpg
We continued to achieve high levels of customer satisfaction in 2017, achieving our highest ever J.D. Power overall customer satisfaction score, which was an increase over our previously highest score in 2016. The table on the following page shows the associated performance metrics (including threshold, target, and maximum levels),


23

Compensation Discussion and Analysis


weighting and plan payout percentage for each of the 2017 performance measures, which resulted in the plan funding at 99 percent of target for our named executive officers.


2017 Annual Incentive Plan Information
Performance Measures

Weight
(% of Total Plan Payout)
 
Performance Level
 
Target % Achieved
 
Final Funding % of Total
Threshold
 
Target
 
Maximum
 
Actual Achieved




 

 

 

 

 

 

   Financial (55%) (1)



 

 

 

 

 

 

      Net Income ($ in millions)

55
%
 
$148.4
 
$
164.9

 
$
181.4

 
$162.7
 
93.4
%
 
51.3




 

 

 

 

 

 

   Safety (15%) (2)


 

 

 

 

 

 

Lost Time Incident Rate

5
%
 
0.70

 
0.55

 
0.30

 
0.51

 
108.0
%
 
5.4

Total Recordable Incident Rate

5
%
 
2.00

 
1.70

 
1.40

 
1.92

 
63.3
%
 
3.2

Safety Training Completion
 
5
%
 
93.0
%
 
96.0
%
 
99.0
%
 
99.2
%
 
150.0
%
 
7.5




 

 

 

 

 

 

   Reliability (15%) (3)


 

 

 

 

 

 

SAIDI (excluding major event days)

5.0
%
 
122.00

 
107.00

 
94.00

 
114.96

 
73.5
%
 
3.7

SAIDI (including major event days)

5.0
%
 
191.00

 
130.00

 
103.00

 
131.81

 
98.5
%
 
4.9

Gas – Leaks per 100 Miles of Main

2.5
%
 
7.50

 
6.00

 
4.20

 
4.20

 
150.0
%
 
3.8

Gas – Damages per 1000 Locates

2.5
%
 
2.50

 
2.10

 
1.70

 
2.30

 
75.0
%
 
1.9

 


 

 

 

 

 

 

   Customer Satisfaction (15%) (4)


 

 

 

 

 

 

JD Power Residential Electric and
Gas Survey Performance Ranking

5
%
 
650.00

 
688.00

 
692.00

 
696.60

 
150.0
%
 
7.5

Operational Performance –
Customer Survey by Flynn Wright

5
%
 
33.73
 
37.48
 
41.23
 
37.54
 
100.8
%
 
5.0

Reputational Perceptions –
Customer Survey by Flynn Wright

5
%
 
33.16

 
36.84

 
40.52

 
36.54

 
95.9
%
 
4.8

 



 


 


 


 


 


 

 



 


 


 
TOTAL FUNDING PERCENTAGE
 
 
99.0
%
(1)
Financial. The net income target is based upon the Board approved budget for the plan year, and the actual achieved is determined by what is reported in our annual report on Form 10-K for the plan year.
(2)
Safety. Safety performance regarding Lost Time Incident Rate and Total Recordable Incident Rate is calculated according to Occupational Safety and Health Administration (OSHA) standards. OSHA specifically defines what workplace injuries and illnesses should be recorded and, of those recorded, which must be considered lost time incidents. The threshold level for the safety measures represents our five-year average performance for these metrics, which is significantly above our Edison Electric Institute (EEI) peer group average; the target level is significantly above our peer group average and represents a 15 percent improvement over our five-year average performance for lost time incident rate and total recordable incident rate; and the maximum represents first quartile performance for our EEI peer group and a significant improvement over historical company performance. Safety Training Completion includes completion of assigned safety training for all employees through an internal education portal, and is calculated by dividing the difference of total courses assigned less total courses overdue by the total courses assigned.
(3)
Reliability. SAIDI (excluding major event days). System Average Interruption Duration Index (SAIDI) is a system reliability index used by us and participating Institute of Electrical and Electronic Engineers, Inc. (IEEE), utilities to measure the duration of interruptions on a utility’s electric system. SAIDI indicates the total duration of interruption for the average customer during a predefined period of time. The threshold level for SAIDI, excluding major event days, represents a 20 percent improvement of the five-year average performance for IEEE medium-sized utilities; the target level represents a 20 percent improvement over the difference between the company’s five-year average results and the maximum level; and the maximum level is the five-year average of first quartile performance of IEEE medium-sized utilities.
SAIDI (including major event days). The threshold for SAIDI, including major event days, represents a 20 percent improvement of the five-year average performance for IEEE medium-sized utilities; the target level represents a 20 percent improvement over the gap between the company’s five-year average results and the maximum level; and the maximum level is equal to the company’s best SAIDI, including major event days, in the last five years.
Damages per 1000 Locates. This natural gas reliability metric assesses the effectiveness of the company’s programs to prevent damage to its natural gas system. The threshold level represents the company’s five-year average and is approximately 10 percent better than second quartile performance as reported in a leak reporting survey conducted by the American Gas Association (AGA); the target level represents a twenty percent improvement over the company’s five-year average; and the maximum level represents a 35 percent improvement over the company’s five-year average.
Leaks per 100 Miles of Main. This natural gas reliability metric assesses the overall performance of the company’s natural gas system. The threshold level represents a level 50 percent better than second quartile average performance as reported by the AGA; the target level represents the company’s five-year average, which is first quartile performance; and the maximum level represents a 30 percent improvement over the company’s five-year average, well into first quartile performance.


24

Compensation Discussion and Analysis

(4)
Customer Satisfaction. J.D. Power. One customer satisfaction metric is measured by the broadly utilized J.D. Power residential electric and gas customer satisfaction surveys and studies, which include the following components: communications, corporate citizenship, billing and payment, price, power quality and reliability (electric) or field service (gas) and customer service. The threshold level represents the company’s five-year average; the target level is an improvement of one point over our best ever score, which we achieved in 2016; and the maximum level is a five point improvement over our 2016 best ever score, which would be first quartile performance based on 2016 data.
Flynn Wright Surveys. The remaining two customer satisfaction metrics are measured based on the results of a 2017 customer tracking survey conducted on our behalf by Flynn Wright, a full service advertising, marketing, public relations, web design, interactive and research advertising agency. For both of these metrics, the threshold level is set ten percent below target; the target level represents our average score for three waves of surveys from Fall 2016 to Fall 2017; and the maximum level is set at ten percent above target.
(4) Individual Performance Multiple
After the Compensation Committee determines the plan funding percentage, the committee determines an individual performance multiple for each executive, which is factored into the incentive payout calculation. To make this determination, the Compensation Committee analyzes the total mix of available information, as well as actual performance measured against pre-established goals.
The company’s successes in 2017 were due to the substantial efforts of our executive officers and many other employees across all departments of the company. As a result of the factors noted above, the Compensation Committee determined that it was appropriate to award each named executive officer (and the other executive officers) the annual cash incentive award as provided by the 2017 annual cash incentive plan, without the addition of any performance multiplier. Actual 2017 annual cash incentive awards for the named executive officers are reflected in the following table.
 
2017
Name
Base Salary
 
Target Cash Incentive, as % of Base Salary
 
Funding Percentage
 
Individual Performance Multiple
 
Actual Cash Incentive, as % of Base Salary
 
Cash Incentive Award
 ($)
Robert C. Rowe
$
611,956

 
100%
 
99%
 
1.00
 
99.0%
 
$
605,836

Brian B. Bird
$
423,280

 
50%
 
99%
 
1.00
 
49.5%
 
$
209,524

Heather H. Grahame
$
370,634

 
45%
 
99%
 
1.00
 
44.6%
 
$
165,117

Curtis T. Pohl
$
287,620

 
40%
 
99%
 
1.00
 
39.6%
 
$
113,898

Bobbi L. Schroeppel
$
265,810

 
35%
 
99%
 
1.00
 
34.7%
 
$
92,103

 
 
 
 
Clawback of Annual Cash Incentive Awards
 
Although we have not adopted a formal clawback policy, the annual cash incentive awards are specifically made subject to any formal clawback policy that we may adopt in the future.
 
 
 
Long-Term Performance-Based Equity Incentive Awards
We have used our Equity Compensation Plan to provide for the award of long-term, performance-based equity incentive awards to our executive officers. These performance-based awards help us achieve our compensation philosophy of being market competitive while simultaneously aligning the interests of our executives and shareholders.
The Equity Compensation Plan authorizes several types of stock-based awards, including restricted stock and a variety of performance-based awards. In 2017, the Compensation Committee granted two types of long-term, equity incentive awards to our executives under the Equity Compensation Plan: (1) LTIP performance units with cliff vesting after a three-year performance period; and (2) a smaller award of ERRP restricted share units with cliff vesting after a five-year performance period and a payout over five years following the executive’s separation from service with the company. All of these 2017 awards are performance-based and payable, if and when earned, in shares of our common stock.
LTIP Performance Units. The Compensation Committee determines the terms and restrictions applicable to grants of LTIP performance units. After the company’s financial results are available for the prior year, the


25

Compensation Discussion and Analysis


Compensation Committee approves the annual grant of LTIP performance units to our executive officers (and approximately 115 other participants in 2017). The awards of LTIP performance units are intended to provide a link between executive officer compensation and long-term shareholder interests as reflected in changes in our stock price, and to motivate and reward achievement of pre-established corporate financial goals and relative TSR. The Compensation Committee believes that making an annual grant of LTIP performance units motivates our executive officers (and the other participants) to focus on long-term, sustainable improvement in shareholder value because the award payout is tied to financial performance and continued service over a three-year period with cliff vesting at the end of such period, and the ultimate value delivered is dependent upon the value of our stock.
During the performance periods summarized in the table below, the performance measures for the LTIP awards included (1) a combined financial metric comprised of ROAE and either average EPS or net income growth, contributing 50 percent of the payout, and (2) TSR relative to our peer group, also contributing 50 percent of the payout. The table below shows, for the past five completed performance periods, to the overall payout (expressed as a percentage of target).
Historical Funding of LTIP (as a percentage of target)
2011-2013
2012-2014
2013-2015
2014-2016
2015-2017
92.5%
168.4%
167.3%
108.3%
44.9%
ERRP Restricted Share Units. In 2011, the Compensation Committee made the first annual grants of ERRP restricted share units. The Compensation Committee instituted the practice of granting ERRP restricted share units to bring the long-term incentive component of our executives’ compensation in line with the median of our peers, while simultaneously encouraging retention with the five-year cliff vesting component and providing retirement benefits. The ERRP share units also encourage succession planning and continuity of our strategic plan through the five-year payout of vested awards following the executive officer’s separation from service with the company. The key distinction between these awards and the non-performance-based supplemental executive retirement plans that certain of our peers and many other companies provide is that our ERRP restricted share units are earned based upon company performance.
The number of ERRP restricted share units that the Compensation Committee has granted annually has been considerably fewer than the grants of performance units. Like the performance units described above, these restricted share units are intended to provide a link between executive officer compensation and retirement planning and long-term shareholder interests and to motivate and reward achievement of pre-established corporate financial goals. The Compensation Committee believes that an annual grant of restricted share units motivates our executive officers to focus on long-term, sustainable improvement in our business because (1) vesting of the award is tied to financial performance and continued service over a five-year period and (2) payout of the vested award occurs over a five-year period following the executive officer’s separation from service with the company. On December 31, 2016, the first ERRP grants vested.
2017 Long-Term Incentive Program Performance Unit Grants
In February 2017, the Compensation Committee approved grants of LTIP performance units subject to a three-year performance period with cliff vesting at the end of such period. The target long-term equity opportunities for each executive officer are derived from peer group and competitive survey data and from the Compensation Committee’s judgment on the internal equity of the positions and scope of job responsibilities. To determine the target value of each executive officer’s LTIP performance unit awards, the Compensation Committee considered the range for comparable roles within our peer group, with consideration given to the strategic value of each position. Based on these considerations, in 2017, the Compensation Committee increased the targeted opportunity (expressed as a percentage of base salary) associated with the LTIP awards for one of our named executive officers to better align with the market median.
Each executive officer’s targeted opportunity is converted into specific LTIP performance unit grants by dividing the total targeted value (the targeted percentage of base salary) by the weighted average fair value of a share of our stock on the grant date, less the present value of expected dividends. The resulting calculation represents the number of LTIP performance units that were granted and will vest on December 31, 2019, if all performance goals are met at the target performance level.


26

Compensation Discussion and Analysis

The target equity opportunities (value at target and number of shares) for the 2017 grants of LTIP performance units are shown in the table to the right. The table also compares the target opportunities (expressed as a percentage of base salary) applicable to the 2016 and 2017 awards.
 
 
 
 
Target LTIP Performance Unit Opportunity for 2017
 
 
2016
 
2017
 
2017
 
 
 
Name
Base Salary
(%)
 
Base Salary
(%)
 
Value at Target
 ($)
 
LTIP Stock Awards (1)
 
Robert C. Rowe
200%
 
200%
 
1,191,156

 
24,821

 
Brian B. Bird
100%
 
100%
 
411,951

 
8,584

 
Heather H. Grahame
80%
 
80%
 
288,571.2

 
6,013

 
Curtis T. Pohl
60%
 
60%
 
167,953.2

 
3,500

 
Bobbi L. Schroeppel
40%
 
50%
 
129,034

 
2,689

 
 
 
 
 
 
 
 
 
 
(1) Based on a weighted average grant date fair value of $47.99, which was calculated using the closing stock price of $57.40 on February 16, 2017, less the present value of expected dividends
After the performance period, the Compensation Committee calculates the actual company performance relative to the performance goals and determines the number of LTIP performance units that vest based on such performance. Depending on performance, the exact number of units that vest will vary from zero to 200 percent of the target award. In addition, the value of the award on payout will depend on the market price of our common stock on the date of payout.
The performance goals for these awards are independent of each other and are equally weighted. Vesting of awards is also contingent on maintaining investment grade secured and unsecured credit ratings. The following table summarizes the performance measures for the 2017 LTIP performance unit awards.
Performance Measures — 2017-2019

Threshold

Target

Maximum
Financial Goals – 50%






   ROAE

9
%

9.60
%

10.2
%
  Simple Average EPS Growth

0.4
%

2.4
%

4.4
%
TSR – 50%

 
 
 
 
 
   Relative Average vs. Peers

13th


6th


1st

In general, based on a market analysis conducted by Willis Towers Watson, our performance levels for relative TSR are established at levels higher than our peers and the market. For example, according to this market analysis, we use a ranking of 1st for maximum, while the market uses 3rd; we use a ranking of 6th for target, while the market uses 8th; and our threshold of 13th pays at ten percent, and 9th pays at 50 percent, while the market threshold of 12th pays at 50 percent.
The ROAE and simple average EPS growth levels are tied to management performance as these goals relate to revenue enhancement and cost containment. TSR is determined by our common stock price change and dividends paid over the performance period. We then compare our TSR with the total shareholder returns achieved by our peers over the same three-year period and determine our ranking.
2017 Executive Retention / Retirement Program Restricted Share Unit Grants
In December 2017, the Compensation Committee approved performance-based ERRP restricted share unit grants. These restricted share unit awards are subject to a five-year performance and five-year cliff vesting period and, once vested, will be paid out in shares of the company’s common stock over a five-year period after a recipient has separated from service with the company.
Our overall compensation program does not provide any non-performance-based supplemental executive retirement benefit. The Compensation Committee designed and implemented the ERRP in lieu of a traditional supplemental executive retirement plan which is not performance-based but is offered by many of our peers and other companies to increase overall competitiveness. The ERRP restricted share units help to achieve our compensation philosophy of being market competitive while aligning the interests of our executives and shareholders. It also promotes retention through the five-year cliff vesting component and benefits succession planning and continuity of our strategic plan through its five-year payout following separation from service.


27

Compensation Discussion and Analysis


The long-term equity opportunity for the ERRP is derived from peer group and competitive survey data and from the Compensation Committee’s judgment on the internal equity of the positions and scope of job responsibilities. To determine the value of each executive officer’s ERRP restricted share unit award, the Compensation Committee considered the range for comparable roles within our peer group, with consideration given to each position’s strategic value, and the overall long-term equity opportunity offered to that group. For 2017, the Compensation Committee reviewed the equity incentive opportunities provided to our peer group to analyze whether the targeted ERRP restricted share unit awards to our executive officers approximated the peer group median. Based on its review, the Compensation Committee determined that no changes were required for the 2017 ERRP restricted share unit awards.
The target equity opportunities for the 2017 ERRP restricted share unit grants to our named executive officers, based on a percentage of base salary, are shown in the table below. The 2017 grants offered the same targeted opportunity that was provided by the 2016 ERRP grants. Each executive officer’s 2017 award value was converted into specific equity grants by dividing the total potential value of the award by the fair market value of a share of our stock on the grant date. This represents the number of restricted share units that will vest on December 31, 2022, if the company’s net income for three of the five calendar years 2018 – 2022 exceeds the company’s net income for 2017. The value of the award on the grant date, as reflected in the below table, is based on the closing market price of our stock on the grant date, less the present value of expected dividends. If earned, the value of the award on payout will depend on the market price of our common stock on the date of payout.
 
 
 
 
2017 Target ERRP Opportunity
Name
 
2017
Base Salary ($)
 
Award % of
Base Salary (%)
 
Value at Grant Date
 ($)
 
ERRP
 Stock Awards (1) (#)
Robert C. Rowe
 
$611,956
 
50.0%
 
305,978

 
5,862

Brian B. Bird
 
$423,280
 
25.0%
 
105,820

 
2,027

Heather H. Grahame
 
$370,634
 
20.0%
 
74,127

 
1,420

Curtis T. Pohl
 
$287,620
 
20.0%
 
57,524

 
1,102

Bobbi L. Schroeppel
 
$265,810
 
15.0%
 
39,872

 
764

(1)
Based on a grant date fair value of $52.20, which was calculated using the closing stock price of $62.12 on December 12, 2017, less the present value of expected dividends, calculated using a 2.18 percent five-year Treasury rate and assuming quarterly dividends of $0.525 for the five-year vesting period, based on announced planned dividend of $2.20 per share for 2017.
Vesting of 2015 Long-Term Incentive Program Performance Unit Grants in 2017
In February 2015, the Compensation Committee approved grants of LTIP performance units, subject to a three-year performance period. The 2015 LTIP performance unit grants vested on December 31, 2017. The performance goals were independent of each other and equally weighted. The following table summarizes the performance measures which governed these 2015 grants.
Performance Measures — 2015-2017
 
Threshold
 
Target
 
Maximum
 
Actual
Financial Goals – 50%
 
 
 
 
 
 
 
 
   ROAE
 
9.0
%
 
9.6
%
 
10.2
%
 
9.8
%
   Average EPS Growth
 
0.4
%
 
2.4
%
 
4.4
%
 
3.7
%
Market Goal – 50%
 
 
 
 
 
 
 
 
   Relative TSR Average vs. Peers
 
13th

 
6th

 
1st

 
12th

Depending upon actual company performance relative to these performance goals, the exact number of shares that could have vested ranged from zero to 200 percent of the target award. As summarized above in the 2017 Long-Term Incentive Program Performance Unit Grants section, our relative TSR metrics are established at levels higher than our peers according to a market analysis conducted by the Compensation Committee’s independent compensation consultant. At the conclusion of the performance period, the Compensation Committee calculated the company’s performance relative to these goals during the three-year performance period to determine the vesting percentage for the 2015 LTIP performance unit grants.
For the financial goals related to the 2015 LTIP performance unit grants, ROAE was 9.8 percent and average EPS growth was 3.7 percent. This financial performance resulted in a 34.9 percent vesting percentage for that half of the


28

Compensation Discussion and Analysis

program. For our market goal, TSR was 14.4 percent, resulting in a ranking of 12th with respect to our peers, and contributing 10.0 percent with respect to that half of the program.
For purposes of our LTIP, we calculate TSR by comparing the average closing price for a share of common stock of us and our peers during the period beginning 10 days prior to the end of the performance period and ending 10 days after the performance period plus the cumulative dividends earned during the performance period, to the average closing price of a share of common stock of us and our peers during the period beginning 10 days prior to the start of the performance period and ending 10 days after the start of the performance period. Our Compensation Committee believes that calculating relative TSR using the 20-day average share price around the beginning and end of the performance period results in a more accurate reflection of return for the period that is less impacted by stock market activity on the first and last days of the performance period.
Based on the Compensation Committee’s calculation of these performance measures, the 2015 LTIP performance unit grants vested at 44.9 percent. The table to the right summarizes the performance results with respect to each
of the performance measures applicable to the 2015 LTIP performance unit grants and the corresponding contributions to the vesting percentage.
 
 
 
 
 
 
 
 
 
Performance Measures — 2015-2017
 
Result
 
Weight
 
Vesting
 
Financial Goals – ROAE and Average Net Income Growth
 
69.8
%
 
50
%
 
34.9
%
 
Market Goal – TSR
 
20.0
%
 
50
%
 
10.0
%
 
 
 
 
 
TOTAL

 
44.9
%
The table below summarizes the number of shares awarded for the 2015 LTIP performance unit grants and the number of shares paid out in 2017 with respect to such grants for our named executive officers, based on the vesting percentage of 44.9 percent approved by the Compensation Committee.
 
 
Vesting of 2015 Performance Unit Grants