Incentive and Deferred Compensation Plans

12 Months Ended

Dec. 31, 2022

Incentive and Deferred Compensation Plans

We have two incentive plans and two deferred compensation plans for our executives, senior vice presidents and other selected officers, and two deferred compensation plans for our outside directors.

Annual incentive plan

Our annual incentive plan ("AIP") is a bonus plan that pays cash to our executives, senior vice presidents and other selected officers annually. Participants can elect to defer up to 100% of the award under either the deferred compensation plan or the incentive compensation deferral plan. If the funding qualifier is met, plan participants are eligible to receive the incentive based upon attainment of corporate and individual performance measures, which can include various financial measures. The measures are established at the beginning of each year by the Executive Compensation and Development Committee of our Board of Directors ("ECDC"), with ultimate approval by the full Board of Directors. The corporate performance measures included the reported growth in direct written premium and statutory combined ratio of the Exchange and its property and casualty subsidiaries for all periods presented. For 2022 and 2021, growth in policies in force was also included as a performance measure.

Long-term incentive plan

Our long-term incentive plan ("LTIP") is a performance based incentive plan designed to reward executives, senior vice presidents and other selected officers who can have a significant impact on our long-term performance, and to further align the interests of such employees with those of our shareholders. The LTIP permits grants of performance shares or units, or phantom shares, to be satisfied with shares of our Class A common stock or cash payment as determined by the ECDC. Participants can elect to defer up to 100% of the award under the incentive compensation deferral plan. The ECDC determines the form of the award to be granted at the beginning of each performance period, which is generally a three-year period. The number of shares of our common stock authorized for grant under the LTIP is 1.5 million shares, with no one person able to receive more than 250,000 shares or the equivalent of $5 million during any one performance period. We repurchase our Class A common stock on the open market to settle stock awards under the plan. We do not issue new shares of common stock to settle stock awards. LTIP awards are considered vested at the end of each applicable performance period.

The LTIP provides the recipient the right to earn performance shares or units, or phantom stock, based on the level of achievement of performance goals as defined by us. Performance measures and a peer group of property and casualty companies to be used for comparison are determined by the ECDC. The performance measures for all periods presented were the reported growth in direct written premium and statutory combined ratio of the Exchange and its property and casualty subsidiaries and return on invested assets over a three-year performance period as compared to the results of the peer group over the same period. Because the award is based upon a comparison to results of a peer group over a three-year period, the award accrual is based upon estimates of probable results for the remaining performance period. This estimate is subject to variability if our results or the results of the peer group are substantially different than the results we project.

The fair value of LTIP awards is measured at each reporting date at the current share price of our Class A common stock. A liability is recorded and compensation expense is recognized ratably over the performance period.

At December 31, 2022, the plan awards for the 2020-2022 performance period, which will be granted as a cash award, were fully vested. Distributions will be made in 2023 once peer group financial information becomes available. The total estimated plan award based upon the peer group information as of September 30, 2022 is $5.4 million. At December 31, 2021, the fully vested cash awards for the 2019-2021 performance period that were not deferred totaled $3.8 million and were paid to participants in June 2022. At December 31, 2020, the fully vested cash awards for the 2018-2020 performance period that were not deferred totaled $10.9 million and were paid to participants in June 2021. At December 31, 2019, the fully vested cash awards for the 2017-2019 performance period that were not deferred totaled $7.4 million and were paid to participants in June 2020. The ECDC has determined that the plan awards for the 2021-2023 and 2022-2024 performance periods will be paid in cash.

The Exchange and its subsidiaries reimburse us for compensation costs of employees performing administrative services. Earned compensation costs are allocated to these entities and reimbursed to us in cash once the payout is made. The total compensation cost charged to operations related to these LTIP awards, net of forfeitures, was $3.4 million in 2022, $3.0 million in 2021, and $12.0 million in 2020. The related tax benefits recognized in income were $0.7 million in 2022, $0.6 million in 2021, and $2.5 million in 2020. The Exchange and its subsidiaries reimburse us for approximately 41% of the annual compensation cost of these plans. At December 31, 2022, there was $5.9 million of total unrecognized compensation cost for non-vested LTIP awards related to open performance periods. Unrecognized compensation is expected to be recognized over a period of two years.

Deferred compensation plan

Our deferred compensation plan allows executives, senior vice presidents and other selected officers to elect to defer receipt of a portion of their compensation and AIP cash awards until a later date. Employer 401(k) matching contributions that are in excess of the annual contribution or compensation limits are also credited to the participant accounts for those who elected to defer receipt of some portion of their base salary. Participants select hypothetical investment funds for their deferrals, which are credited with the hypothetical returns generated.

Incentive compensation deferral plan

We have an unfunded, non-qualified incentive compensation deferral plan for participants of the AIP and LTIP. Participants can elect to defer up to 100% of their annual AIP award and/or up to 100% of their LTIP award for each performance period. Deferred awards will be credited to a deferred stock account as credits denominated in shares of our Class A common stock until retirement or other separation from service. Participants are 100% vested at date of deferral. The shares are held in a rabbi trust, which was established to hold the shares earned under both the incentive compensation deferral plan and the deferred stock compensation plan for outside directors. The rabbi trust is classified and accounted for as equity in a manner consistent with the accounting for treasury stock. Dividends received on the shares in the rabbi trust are used to purchase additional shares. Vested share credits will be paid to participants from the rabbi trust upon separation from service in approximate equal annual installments of Class A shares for a period of three years. In 2022, the rabbi trust purchased 2,879 shares of our common stock in the open market at an average price of $173.52 for $0.5 million to satisfy the liability for the 2021 AIP awards and 4,167 shares at an average price of $178.45 for $0.7 million to satisfy the liability for the 2019-2021 LTIP performance period awards deferred under the incentive compensation deferral plan. In 2021, the rabbi trust purchased 2,570 shares of our common stock in the open market at an average price of $232.81 for $0.6 million to satisfy the liability for the 2020 AIP awards and 17,881 shares at an average share price of $191.25 for $3.4 million to satisfy the liability for the 2018-2020 LTIP performance period awards deferred under the incentive compensation deferral plan. In 2020, the rabbi trust purchased 3,934 shares of our common stock in the open market at an average price of $155.92 for $0.6 million to satisfy the liability for the 2019 AIP awards deferred under the incentive compensation deferral plan and 18,126 shares at an average price of $185.31 for $3.4 million to satisfy the liability for the 2017-2019 LTIP performance period awards deferred under the incentive compensation deferral plan.

Deferred compensation plans for outside directors

We have a deferred compensation plan for our outside directors that allows participants to defer receipt of a portion of their annual compensation until a later date. Participants select hypothetical investment funds for their deferrals, which are credited with the hypothetical returns generated.

We also have a deferred stock compensation plan for our outside directors to further align the interests of directors with those of our shareholders that provides for a portion of the directors' annual compensation in shares of our Class A common stock. Each director vests in the grant 25% every three months over the course of a year. Dividends paid by us are credited to each director's account and vest immediately. We do not issue new shares of common stock to directors. Our practice is to repurchase shares of our Class A common stock in the open market to satisfy these awards, which are held in the rabbi trust.

The rabbi trust purchased 6,048 shares of our common stock on the open market at an average price of $201.93 for $1.2 million in 2022, 5,238 shares at an average price of $212.41 for $1.1 million in 2021, and 7,401 shares at an average price of $201.78 for $1.5 million in 2020 to satisfy the liability of the stock compensation plan for outside directors. The shares are distributed to the outside director from the rabbi trust upon ending board service. Director compensation charged to operations related to these awards totaled $0.8 million in both 2022 and 2021, and $0.9 million in 2020.

The following table sets forth a reconciliation of beginning and ending balances of our deferred executive compensation liability as of December 31:


(in thousands)
	2022		2021		2020

Deferred executive compensation, beginning of the year	$	27,208	$	32,223	$	24,616
Annual incentive plan awards	6,305		6,768		5,619
Long-term incentive plan awards	3,417		3,471		12,381

Employer match and hypothetical earnings on deferred compensation	404		3,043		2,962
Total plan awards and earnings	10,126		13,282		20,962
Total plan awards paid	(10,413)		(16,647)		(10,121)
Compensation deferred	2,528		4,765		4,668
Distributions from the deferred compensation plans	(742)		(811)		(2,081)
Forfeitures (1)	—		(473)		(356)
Funding of rabbi trust for deferred stock compensation plan for outside directors	(1,221)		(1,113)		(1,493)
Funding of rabbi trust for incentive compensation deferral plan (2)	(1,726)		(4,018)		(3,972)
Deferred executive compensation, end of the year	$	25,760	$	27,208	$	32,223

(1) Forfeitures are the result of plan participants who separated from service and are recognized in the year they occur.

(2) In 2022, funding includes $0.5 million representing shares held back to satisfy tax withholding on rabbi trust distributions that reduced funding requirements for performance award deferrals.

Equity compensation plan

We also have an equity compensation plan ("ECP") designed to reward key employees, as determined by the ECDC or the chief executive officer, who can have a significant impact on our long-term performance, and to further align the interests of such employees with those of our shareholders. The ECP permits grants of restricted shares, restricted share units and other share based awards, to be satisfied with shares of our Class A common stock or cash. The ECDC determines the form of the award to be granted at the beginning of each performance period. The number of shares of our Class A common stock authorized for grant under the ECP is 100,000 shares, with no one person able to receive more than 10,000 shares in a calendar year. We do not issue new shares of common stock to satisfy plan awards. Share awards are settled through the repurchase of our Class A common stock on the open market. Restricted share awards may be entitled to receive dividends payable during the performance period, or, if subject to performance goals, to receive dividend equivalents payable upon vesting. Dividend equivalents may provide for the crediting of interest or hypothetical investment experience, payable after expiration of the performance period. Vesting conditions are determined at the time the award is granted and may include continuation of employment for a specific period, satisfaction of performance goals and the defined performance period, and the satisfaction of any other terms and conditions as determined to be appropriate. The ECP expires December 31, 2031, unless earlier amended or terminated by our Board of Directors.

To date, all awards have been satisfied with shares of our Class A common stock. In 2022, we purchased 1,786 Class A shares with an average share price of $190.68 and a market value of $0.3 million to satisfy the liability for the 2019 plan year. In 2021, we purchased 978 Class A shares with an average share price of $242.01 and a market value of $0.2 million to satisfy the liability for the 2018 plan year. In 2020, we purchased 1,787 shares with an average share price of $165.82 and a market value of $0.3 million to satisfy the liability for the 2017 plan year. The total compensation charged to operations related to these ECP awards was $0.8 million in 2022, $0.2 million in 2021, and $0.7 million in 2020. The Exchange and its subsidiaries reimburse us for earned compensation costs of employees performing administrative services, which can fluctuate each year based on the plan participants. The Exchange and its subsidiaries reimbursed us for approximately 3%, 33%, and 59% of the awards paid in 2022, 2021, and 2020 respectively. Unearned compensation expense of $1.3 million is expected to be recognized over a period of three years.