Definitive Proxy Statement
Table of Contents

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.    )

Filed by the Registrant þ

Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement
¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
¨ Definitive Additional Materials
¨ Soliciting Material Pursuant to §240.14a-12

Pentair, Inc.

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

þ No fee required.
¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

 

 

  (2) Aggregate number of securities to which transaction applies:

 

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

  (4) Proposed maximum aggregate value of transaction:

 

 

 

  (5) Total fee paid:

 

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

 

  (3) Filing Party:

 

 

 

  (4) Date Filed:

 

 

 


Table of Contents

PENTAIR, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held April 25, 2012

To our Shareholders:

Our Annual Meeting of Shareholders will be held at the Thrivent Financial Auditorium, 625 4th Avenue South, Minneapolis, Minnesota, on Wednesday, April 25, 2012, at 10:00 a.m., for the following purposes:

 

  1. to elect three directors;

 

  2. to approve by advisory vote, the compensation of our named executive officers as disclosed in this proxy statement;

 

  3. to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for 2012;

and to transact such other business as may properly come before the Annual Meeting or any adjournment of the Annual Meeting. We are not aware of any items of other business to be presented at the Annual Meeting.

The Board of Directors has fixed the close of business on February 27, 2012 as the record date for determining the shareholders entitled to vote at the Annual Meeting. Accordingly, you are only entitled to vote if you were a shareholder of record at the close of business on that date. Our transfer books will not be closed.

Your vote is very important. To legally hold an Annual Meeting, a majority of the outstanding shares must be in attendance. We encourage you to vote your proxy as soon as possible. You may vote by Internet or telephone as described in the voting instructions in the accompanying materials and the Notice of Internet Availability of Proxy Materials. Alternatively, you may request a printed proxy to submit your vote as described in the voting instructions in the accompanying materials and the Notice of Internet Availability of Proxy Materials. Except with respect to shares of our stock you may hold through our Employee Stock Ownership Plan (“ESOP”), you will not receive printed proxy materials unless you request them, as instructed in the Notice of Internet Availability of Proxy Materials. You may vote in person at the Annual Meeting even if you submit your proxy by Internet, phone or mail.

By Order of the Board of Directors

Angela D. Lageson, Secretary

Minneapolis, Minnesota

March 9, 2012


Table of Contents

PROXY STATEMENT

FOR THE

ANNUAL MEETING OF SHAREHOLDERS OF

PENTAIR, INC.

TO BE HELD ON WEDNESDAY, APRIL 25, 2012

TABLE OF CONTENTS

 

       Page  

Questions and Answers on the Solicitation and Voting

       1   

Corporate Governance Matters

       5   

Proposal 1 — Election of Certain Directors

       11   

Compensation Discussion and Analysis

       17   

Compensation Committee Report

       31   

Executive Compensation

       32   

Summary Compensation Table

       32   

Grants of Plan-Based Awards

       34   

Outstanding Equity Awards at December 31, 2011

       35   

Option Exercises and Stock Vested

       37   

Pension Benefits

       37   

Nonqualified Deferred Compensation

       38   

Potential Payments Upon Termination or Change of Control

       39   

Risk Considerations in Compensation Decisions

       44   

Proposal 2 — Advisory Vote to Approve the Compensation of the Named Executive Officers

       45   

Director Compensation

       47   

Security Ownership

       50   

Proposal 3 — Ratification of Appointment of Deloitte  & Touche LLP as Our Independent Registered Public Accounting Firm for 2012

       52   

Audit Committee Disclosure

       52   

Audit Committee Report

       53   

Section 16(a) Beneficial Ownership Compliance

       53   

Shareholder Proposals for the 2012 Annual Meeting of Shareholders

       53   

Other Business

       54   

2011 Annual Report on Form 10-K

       54   

Reduce Duplicate Mailings

       54   


Table of Contents

PROXY STATEMENT

FOR THE

ANNUAL MEETING OF SHAREHOLDERS OF

PENTAIR, INC.

TO BE HELD ON WEDNESDAY, APRIL 25, 2012

This Proxy Statement, the accompanying proxy card and our Annual Report to Shareholders are being provided in connection with the solicitation by our Board of Directors (the “Board”) of your proxy to vote your shares at the Annual Meeting. The Board is soliciting your proxy to give all shareholders of record the opportunity to vote on matters that will be presented at the Annual Meeting. This Proxy Statement provides you with information on these matters to assist you in voting your shares.

We are mailing the Notice of Internet Availability of Proxy Materials on or before March 16, 2012 to shareholders of record of our Common Stock as of the close of business on February 27, 2012. The Notice of Internet Availability of Proxy Materials instructs shareholders of our Common Stock on how they may access our proxy materials, which include our Proxy Statement and Annual Report, over the Internet. Except with respect to shares you may hold through our Employee Stock Ownership Plan, you will not receive a printed copy of the proxy materials unless you request to receive these materials in hard copy by following the instructions provided in the Notice of Internet Availability of Proxy Materials. Instead, the Notice of Internet Availability of Proxy Materials will instruct you on how you may access and review all of the important information contained in the proxy materials. The Notice of Internet Availability of Proxy Materials also instructs how you may submit your proxy via telephone or the Internet. If you received a Notice of Internet Availability of Proxy Materials by mail and would like to receive a printed copy of our proxy materials, including a printed proxy card on which you may submit your vote by mail, you should follow the instructions for requesting such proxy materials in the Notice of Internet Availability of Proxy Materials.

QUESTIONS AND ANSWERS ON THE SOLICITATION AND VOTING

What is a proxy?

A proxy is your legal designation of another person (the “proxy”) to vote on your behalf. By voting your proxy, you are giving the persons named on the proxy card the authority to vote your shares in the manner you indicate on your proxy card. You vote your proxy by telephone or over the Internet as directed in the Notice of Internet Availability of Proxy Materials or the proxy card or, if you have requested or received a proxy card, by signing and submitting the proxy card by mail.

Why do I have more than one proxy card?

You may have multiple proxy cards if you hold your shares in different ways or accounts (for example, 401k accounts, joint tenancy, trusts, custodial accounts) or in multiple accounts. If your shares are held by a broker (in “street name”), you will receive your proxy card or other voting information from your broker, and you will return your proxy card or cards or otherwise vote your proxy as indicated in the materials you receive from your broker. You should vote your proxy for each separate account you have.

Who is qualified to vote?

You are qualified to receive notice of the Annual Meeting and to vote if you owned shares of our Common Stock at the close of business on our record date of February 27, 2012.

How many shares of Common Stock may vote at the Annual Meeting?

As of February 27, 2012, there were 98,738,021 shares of Common Stock outstanding and entitled to vote. Each share of Common Stock is entitled to one vote on each matter presented.

 

1


Table of Contents

What is the difference between a “shareholder of record” and a “street name” holder?

These terms describe how your shares are held. If your shares are registered directly in your name with Wells Fargo Bank, N.A., our transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage, bank, trust or other nominee on your behalf, you are a “street name” holder.

How do I vote my shares?

If you are a “shareholder of record,” you have three choices. You can vote your proxy:

 

   

over the telephone;

 

   

via the Internet; or

 

   

by signing and mailing in the proxy card.

Please refer to the specific instructions set forth in the Notice of Internet Availability of Proxy Materials or on the proxy card. For security reasons, our electronic voting system has been designed to authenticate your identity as a shareholder.

If you hold your shares in “street name,” your broker/banker/trustee/nominee will provide you with materials and instructions for voting your shares.

Can I vote my shares in person at the Annual Meeting?

If you are a “shareholder of record,” you may vote your shares in person at the Annual Meeting. If you hold your shares in “street name,” you must obtain a proxy from your broker, banker, trustee or nominee, giving you the right to vote the shares at the Annual Meeting.

What are the Board’s recommendations on how I should vote my shares?

The Board recommends that you vote your shares as follows:

 

Proposal 1 —    FOR the election of three nominees for election to our Board with terms expiring at the 2015 Annual Meeting of Shareholders.
Proposal 2 —    FOR approval of the compensation of our named executive officers as disclosed in this proxy statement.
Proposal 3 —    FOR the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2012.

What are my choices when voting?

Proposal 1 — You may cast your vote in favor of or against electing a nominee as a director, or you may elect to abstain from voting for any or all of the nominees.

Proposal 2 — You may cast your vote in favor of or against the proposal, or you may elect to abstain from voting your shares.

Proposal 3 — You may cast your vote in favor of or against the proposal, or you may elect to abstain from voting your shares.

How will my shares be voted if I do not specify how they should be voted?

If you submit your signed proxy without indicating how you want your shares to be voted, the persons named on the proxy card will vote your shares according to the Board’s recommendations that are listed above.

 

2


Table of Contents

As to any other business that may properly come before the Annual Meeting, the persons named on the proxy card will vote in accordance with their best judgment. We do not presently know of any other business.

If your shares are held in the name of a bank or brokerage firm, the bank or brokerage firm has the discretionary authority to vote your shares in connection with the ratification of our independent registered public accounting firm if you do not timely provide your proxy because this matter is considered “routine” under the New York Stock Exchange (“NYSE”) listing standards. For the election of directors and the proposal on the compensation of our named executive officers, the bank or brokerage firm has no discretionary authority to vote your shares.

If your shares are held in our Employee Stock Ownership Plan and you do not submit a proxy indicating how you want your shares to be voted, Fidelity Management Trust Company (or its designated affiliate) will vote your shares along with all other uninstructed shares in proportion to the voting by Employee Stock Ownership Plan shares for which instructed proxies were received.

What if I do not direct the custodian of my shares how to vote my shares?

If your shares are held by a custodian, such as a bank or brokerage firm, and you do not direct them how to vote, your shares may not be voted at all, or they may be voted only on Proposal 3, ratifying our independent registered public accounting firm for 2012.

We urge you to carefully consider all of the proposals and direct your custodian to vote your shares as you wish. Your custodian may not vote for or against directors without your direction. We are concerned that smaller shareholders may not direct their custodians to vote their shares, which could result in failure to have sufficient votes represented at our annual meeting to constitute a quorum. In the absence of a quorum, the annual meeting of shareholders could not be held as scheduled, and could be delayed.

Further, we believe that the proposals on the ballot for the election of directors and the compensation of our named executive officers are important to our company and its shareholders, and deserve careful consideration and voting by all shareholders.

How many shares of Common Stock constitute a quorum for the Annual Meeting?

As of February 27, 2012, 98,738,021 shares of Common Stock were outstanding. A majority of these shares will constitute a quorum at the Annual Meeting.

What vote is required to approve each proposal?

For election of directors, approval by a majority of all votes cast at the Annual Meeting is necessary for the election of each director. For approval of Proposals 2 and 3, each requires the affirmative vote of a majority of those shares present in person or represented by proxy and entitled to vote at the Annual Meeting. Although the outcome of the vote for Proposal 2 is non-binding, the Board and the Compensation Committee of the Board will review and consider the outcome of this vote when making future compensation decisions for our named executive officers.

How are abstentions and broker non-votes treated?

Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business at the Annual Meeting. Minnesota law and our Articles of Incorporation provide that abstentions are counted in determining the total number of the votes cast on proposals presented to shareholders, but that abstentions are not treated as votes in favor of proposals voted upon at the Annual Meeting. Broker non-votes are not counted for purposes of determining the total number of votes cast on proposals presented to shareholders.

 

3


Table of Contents

Can I change my vote after I have submitted my proxy?

Shareholders of record may revoke their proxy by doing one of the following:

 

   

by sending a written notice of revocation to our Secretary that is received before the Annual Meeting, stating that you revoke your proxy;

 

   

by delivering a later-dated proxy by telephone, on the Internet, or in writing so that it is received before the Annual Meeting in accordance with the instructions included in the proxy card(s); or

 

   

by attending the Annual Meeting and voting your shares in person.

If you hold your shares in street name, you must obtain a proxy from your broker, banker, trustee or nominee.

Who will count the votes?

Representatives from The Carideo Group, Inc. will count the votes and serve as our Inspectors of Election. The Inspectors of Election will be present at the Annual Meeting.

Who pays the cost of this proxy solicitation?

We pay the costs of soliciting proxies sought by the Board. Upon request, we will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses incurred by them in forwarding proxy materials to beneficial owners of shares of our Common Stock. Morrow & Co., 470 West Avenue, Stamford, Connecticut, is assisting us in the solicitation of proxies at a cost to us of $8,500, plus expenses.

 

4


Table of Contents

CORPORATE GOVERNANCE MATTERS

Board Governance

The Board has adopted and regularly reviews and, if appropriate, revises its Corporate Governance Principles and written charters for its Audit Committee, Compensation Committee, Governance Committee and International Committee in accordance with rules of the Securities and Exchange Commission (“SEC”) and the NYSE. We and our Board continue to be committed to the highest standards of corporate governance and ethics. The Board has adopted Pentair’s Code of Business Conduct and Ethics (“Code of Conduct”) and has designated it as the code of ethics for our Chief Executive Officer and senior financial officers. Copies of all of these documents are available, free of charge, on our website at http://www.pentair.com/About_Corporate_Governance.aspx.

Board Leadership Structure

Our Corporate Governance Principles, which can be found at http://www.pentair.com/resources/images/3609.pdf, describe our policies concerning:

 

   

Selection and Composition of the Board

 

   

Board Leadership

 

   

Board Composition and Performance

 

   

Responsibilities of the Board

 

   

Board Relationship to Senior Management

 

   

Meeting Procedures

 

   

Committee Matters

 

   

Leadership Development

We do not have a policy requiring the positions of Chairman of the Board and Chief Executive Officer to be held by different persons. Rather, the Board has the discretion to determine whether or not the positions should be combined or split. Since 2002, our Chief Executive Officer has also been the Chairman of the Board. The Board believes that this leadership structure has worked well for several reasons, among them:

 

   

We historically have had a super-majority of independent directors; only one or two officers of our company have served at any one time as directors (out of 10 or 11 members of the Board)

 

   

Our independent directors meet in executive session without the Chief Executive Officer present at every regular meeting of the Board

 

   

Our annual Board Assessment process addresses issues of Board structure and director performance

 

   

We have and have had since 2003 an independent member of the Board as our Lead Director

 

   

Our Lead Directors have served as an effective communication channel between the independent Board members and the Chief Executive Officer and among the independent Board members

Our Lead Director is selected by the Independent Directors on our Board. His role is to provide independent leadership to the Board, act as liaison between the non-management directors and our company, and ensure that the Board operates independently of management. The principle responsibilities assigned to the Lead Director include:

 

   

Chairing the Board in the absence of the Chief Executive Officer;

 

   

Presiding over all executive sessions of the Board;

 

5


Table of Contents
   

In conjunction with the Chairman of the Compensation Committee, giving annually the Board’s performance review of the Chief Executive Officer;

 

   

In conjunction with the Chairman, approving the agenda for Board meetings, including scheduling to assure sufficient time for discussion of all agenda items;

 

   

In conjunction with the Chairman and Committee Chairs, ensuring an appropriate flow of information to the Directors;

 

   

Holding one-on-one discussions with individual directors where requested by directors or the Board; and

 

   

Carrying out other duties as requested by the Board.

Board’s Role in Risk Oversight

At the direction of our Board of Directors, we have instituted an enterprise-wide risk management system to assess, monitor and mitigate risks that arise in the course of our business. The Board has determined that the Board of Directors as a whole, and not a separate committee, will oversee our risk management process. Each of our Board Committees has historically focused on specific risks within their areas of responsibility, but the Board believes that the overall enterprise risk management process is more properly overseen by all of the members of the Board. Our chief operating officer, general counsel and head of internal audit are the primary personnel responsible to the Board in the planning, assessment and reporting of our risk profile. The Board reviews an assessment of, and a report on, our risk profile twice a year.

Shareholder and Other Stakeholder Communication with the Board

If you are a shareholder or other stakeholder and wish to communicate with the Board, non-management directors as a group or any individual director, including the Lead Director, you may send a letter addressed to the relevant party, c/o Corporate Secretary, Pentair, Inc., 5500 Wayzata Boulevard, Suite 800, Minneapolis, MN 55416. The Board has instructed the Secretary to forward such communications directly to the addressee(s).

Committees of the Board

The Board has four standing committees: the Audit Committee, the Compensation Committee, the Governance Committee and the International Committee. The International Committee meets once or twice a year. The other committees generally hold meetings when the Board meets and additionally as needed. Management representatives attend each committee meeting. Independent directors generally also meet in executive session without management present at each meeting.

Audit Committee

 

Role:   The Audit Committee is responsible, among other things, for assisting the Board with oversight of our accounting and financial reporting processes, oversight of our financing strategy, investment policies and financial condition, and audits of our financial statements. These responsibilities include the integrity of the financial statements, compliance with legal and regulatory requirements, the independence and qualifications of our external auditor and the performance of our internal audit function and of the external auditor. The Audit Committee is directly responsible for the appointment, compensation, terms of engagement (including retention and termination) and oversight of the work of the external auditor. The Audit Committee holds meetings periodically with our independent and internal auditors, the Board and management to review and monitor the adequacy and effectiveness of reporting, internal controls, risk assessment and compliance with our policies.
Meetings:   The Audit Committee held nine meetings in 2011.

 

6


Table of Contents
Members:   The members of the Audit Committee are Ronald L. Merriman (Chair), Leslie Abi-Karam, Jerry W. Burris, Charles A. Haggerty and David H. Y. Ho. All members have been determined to be independent under SEC and NYSE rules. Mr. Merriman is a member of the audit committees of Aircastle Limited, Realty Income Corporation and Haemonetics Corporation, each of which is a publicly-traded company. The Board has determined that Mr. Merriman’s service on the audit committees of three other public companies does not impair his ability to effectively serve as Chair of our Audit Committee.
Report:   You can find the Audit Committee Report under “Audit Committee Report” of this Proxy Statement.
Charter:   You can find the Audit Committee Charter at: http://www.pentair.com/resources/images/3613.pdf.
Financial
Experts:
 

 

The Board has unanimously determined that all members of the Audit Committee are financially literate under NYSE rules and at least one member has financial management expertise. In addition, the Board has determined that all members of the Audit Committee qualify as “audit committee financial experts” under SEC standards.

Compensation Committee
Role:   The Compensation Committee sets and administers the policies that govern executive compensation. This includes establishing and reviewing executive base salaries, administering the Executive Officer Performance Plan and administering equity-based compensation under the Omnibus Stock Incentive Plan. The Compensation Committee also sets the Chief Executive Officer’s compensation based on the Board’s annual evaluation of the Chief Executive Officer’s performance. The Committee has engaged Aon Hewitt (formerly Hewitt Associates), a human resources consulting firm, to aid the Committee in its annual review of our executive and director compensation programs for continuing appropriateness and reasonableness and to make recommendations regarding executive officer and director compensation levels and structures. In reviewing our compensation programs, the Committee also considers other sources to evaluate external market, industry and peer company practices. Aon Corporation, which merged with Hewitt Associates on October 1, 2010, has traditionally provided insurance brokerage and benefit administrative outsourcing services to us. For the year ended December 31, 2011, we paid Aon Corporation approximately $2.5 million for these services and Aon Hewitt approximately $144,000 for executive compensation consulting for the Committee. The decision to engage Aon Corporation for insurance brokerage and benefit administrative outsourcing services was made by management prior to the merger with Hewitt Associates and was not approved by the Board or the Committee. A more complete description of the Committee’s practices can be found under “Compensation Discussion and Analysis” under the headings “Compensation Committee Practices,” “Services of Compensation Consultant,” “Role of Executive Officers in Compensation Decisions,” “Setting Executive Compensation” and “Comparative Framework.”
Meetings:   The Compensation Committee held five meetings in 2011.
Members:   The members of the Compensation Committee are David A. Jones (Chair), Glynis A. Bryan, T. Michael Glenn and William T. Monahan. All members have been determined to be independent under NYSE rules.
Report:   You can find the Compensation Committee Report under “Compensation Committee Report” of this Proxy Statement.
Charter:   You can find the Compensation Committee Charter at:
http://www.pentair.com/resources/images/3612.pdf.

 

7


Table of Contents
Governance Committee
Role:   The Governance Committee is responsible for, among other things, identifying individuals qualified to become directors and recommending nominees to the Board for election at annual meetings of shareholders. In addition, the Governance Committee monitors developments in director compensation and, as appropriate, recommends changes in director compensation to the Board. The Governance Committee is also responsible for developing and recommending to the Board our corporate governance principles. Finally, the Governance Committee oversees public policy matters and compliance with our Code of Conduct.
Meetings:   The Governance Committee held five meetings in 2011.
Members:   The members of the Governance Committee are Glynis A. Bryan (Chair), T. Michael Glenn, David A. Jones and William T. Monahan. All members have been determined to be independent under NYSE rules.
Charter:   You can find the Governance Committee Charter at: http://www.pentair.com/resources/images/3611.pdf.
International Committee
Role:   The International Committee reviews the international aspects of our business operations and assists management in formulating growth, development and organizational strategies for our global business units.
Meetings:   The International Committee held one meeting in 2011.
Members:   The members of the International Committee are David A. Jones (Chair), David H. Y. Ho, Ronald L. Merriman, William T. Monahan and Randall J. Hogan.
Charter:   You can find the International Committee Charter at: http://www.pentair.com/resources/images/3610.pdf.

Compensation Committee Interlocks and Insider Participation

During 2011, we did not employ any member of the Compensation Committee as an officer or employee and there were no interlock relationships.

Independent Directors

The Board determines the independence of each director and nominee for election as a director. The Board makes these determinations in accordance with the NYSE rules for independence of directors and our categorical standards of independence included in the Corporate Governance Principles, which you can find at http://www.pentair.com/resources/images/3609.pdf. Based on these standards, the Board affirmatively determined that each of the following non-employee directors and non-employee director nominees is independent and has no material relationship with us, except as a director or shareholder:

 

(1) Leslie Abi-Karam   (6) David H. Y. Ho
(2) Glynis A. Bryan   (7) David A. Jones
(3) Jerry W. Burris   (8) Ronald L. Merriman
(4) T. Michael Glenn   (9) William T. Monahan
(5) Charles A. Haggerty  

 

8


Table of Contents

In addition, based on the NYSE standards and our categorical standards of independence included in the Corporate Governance Principles, the Board affirmatively determined that Randall J. Hogan is not independent because he is our Chief Executive Officer.

In determining the independence of directors, our Governance Committee considers circumstances where one of our directors also serves as a director or executive officer of a company that is our customer or supplier. The Governance Committee has reviewed each of these relationships, which are set forth below. In each case, the relationship involves sales to or purchases from the organization indicated which (i) amount to less than the greater of $1 million or 2% of that organization’s consolidated gross revenues during each of 2011, 2010 and 2009; and (ii) during all relevant years were not of an amount or nature that impeded the director’s exercise of independent judgment.

 

Director

  Relationships Considered
Leslie Abi-Karam   Executive Vice President and President, Mailing Solutions Management,
Pitney Bowes Inc.
Glynis A. Bryan   Chief Financial Officer, Insight Enterprises, Inc.
T. Michael Glenn   Executive Vice President – Market Development and Corporate Communications, FedEx Corporation
Charles A. Haggerty   Director, Deluxe Corporation
David A. Jones   Senior Advisor, Oak Hill Capital Partners
William T. Monahan   Director, The Mosaic Company

Policies and Procedures Regarding Related Person Transactions

Our Board has adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:

 

   

a “related person” means any of our directors, executive officers or five-percent shareholders or any of their immediate family members; and

 

   

a “related person transaction” generally is a transaction (including any indebtedness or a guarantee of indebtedness) in which we were or are a participant and the amount involved exceeds $50,000, and in which a related person had or will have a direct or indirect material interest.

Potential related person transactions must be brought to the attention of the Governance Committee directly or to the General Counsel for transmission to the Governance Committee. Disclosure to the Governance Committee should occur before, if possible, or as soon as practicable after the related person transaction is effected, but in any event as soon as practicable after the executive officer or director becomes aware of the related person transaction. The Governance Committee’s decision whether or not to approve or ratify a related person transaction is to be made in light of a number of factors, including the following:

 

   

whether the terms of the related person transaction are fair to us and on terms at least as favorable as would apply if the other party was not or did not have an affiliation with any of our directors, executive officers or five-percent shareholders;

 

   

whether there are demonstrable business reasons for us to enter into the related person transaction;

 

   

whether the related person transaction could impair the independence of a director under the Corporate Governance Principles’ standards for director independence; and

 

   

whether the related person transaction would present an improper conflict of interest for any of our directors or executive officers, taking into account the size of the transaction, the overall financial

 

9


Table of Contents
 

position of the director or executive officer, the direct or indirect nature of the interest of the director or executive officer in the transaction, the ongoing nature of any proposed relationship, and any other factors the Committee deems relevant.

We had no related person transactions during 2011. To our knowledge, no related person transactions are currently proposed.

 

10


Table of Contents

PROPOSAL 1

Election of Certain Directors

Information About Directors

Board Composition

Our Articles of Incorporation currently provide for a Board of eleven members. The Board is divided into three classes with directors serving three-year terms. The beginning date for each term is staggered so that, in any particular year, the term of only one class expires. Vacancies may be filled through appointment by the Board or through election by shareholders at a special meeting of shareholders called for that purpose. Any director appointed by the Board is required to stand for election at the next annual meeting of shareholders or next special meeting of shareholders called for that purpose. Incumbent directors Charles A. Haggerty, Randall J. Hogan and David A. Jones are standing for election at the Annual Meeting. There is one fewer nominee for election to the Board than there are available positions on the Board. Regardless of this vacancy, you may vote your shares only for the number of nominees for director named in this Proxy Statement.

Directors’ Attendance

The Board held seven meetings in 2011. In each of the regularly scheduled meetings, the independent directors in attendance also met in executive session, without the Chief Executive Officer or other management present. All directors attended at least 75% of the aggregate of all meetings of the Board and all meetings of the Committees on which they served during the fiscal year ended December 31, 2011. We expect our directors to attend our annual meetings of shareholders. In April 2011, all of the directors then in office attended the 2011 annual meeting of shareholders. William T. Monahan has served as the Board’s Lead Director since January 1, 2008 and acts as the presiding director for all executive sessions of the independent directors.

Director Qualifications

The Governance Committee searches for qualified candidates to be a director, reviews the qualifications of each candidate and recommends to the Board the names of qualified candidates to be nominated for election or re-election as directors. The Board reviews the candidates recommended by the Governance Committee and nominates candidates for election or re-election by the shareholders. The Governance Committee recognizes that the contribution of the Board will depend both on the character and capacities of the directors taken individually and on their collective strengths. With this in mind, the Governance Committee evaluates candidates in light of a number of criteria. Directors are chosen with a view to bringing to the Board a variety of experience and backgrounds and establishing a core of business advisers with financial and management expertise. The Governance Committee also considers candidates who have substantial experience outside the business community, such as in the public, academic or scientific communities.

When they consider possible candidates for appointment or election as directors, the Governance Committee and the Board are also guided by the following principles, found in our Board Governance Principles:

 

   

the Corporate Governance Principles and the rules adopted by the SEC and the NYSE require that at least a majority of the Board consist of independent directors;

 

   

each director should be chosen without regard to sex, sexual orientation, race, religion or national origin;

 

   

each director should possess the highest character and integrity and have an inquiring mind, vision and the ability to work well with others;

 

   

each director should be free of any conflict of interest which would violate any applicable law or regulation or interfere with the proper performance of the responsibilities of a director;

 

11


Table of Contents
   

each director should possess substantial and significant experience which would be of particular importance to us in the performance of the duties of a director and would increase the diversity of experience, expertise and training of the Board taken as a whole;

 

   

each director should have sufficient time available to devote to our affairs in order to carry out the responsibilities of a director; and

 

   

each director should be committed to enhancing long-term shareholder value and be willing and able to represent the balanced, best interests of the shareholders as a whole rather than the interests of a special interest group or constituency.

Our Board’s policies on director qualifications emphasize our commitment to diversity at the Board level – diversity not only of sex, sexual orientation, race, religion or national origin but also diversity of experience, expertise and training. The Governance Committee in the first instance is charged with observance of these director selection guidelines, and strives in reviewing potential candidates to assess the fit of his or her qualifications with the needs of the Board and our company at that time, given the then current mix of directors’ attributes. Board composition, director effectiveness and Board processes, including director recruitment and selection, are all subject areas of our annual Board Assessment.

Shareholder Nominees

Shareholders submitted to the Governance Committee no candidates for nomination for election as a director at the 2012 Annual Meeting. According to our By-Laws, a shareholder must give advance notice and furnish certain information in order to submit a nomination for election as a director. Any shareholder who wishes to present a candidate for consideration by the Governance Committee for election at the 2013 Annual Meeting should send a letter identifying the name of the candidate and summary of the candidate’s qualifications, along with the other supporting documentation described in Article 1, Section 10 of our By-Laws, to the Governance Committee. This letter should be addressed c/o Corporate Secretary, Pentair, Inc., 5500 Wayzata Boulevard, Suite 800, Minneapolis, MN 55416 no earlier than December 28, 2012 and no later than January 23, 2013 for consideration at the 2013 Annual Meeting. You may find a copy of our By-Laws on file with the SEC by searching the EDGAR archives at www.sec.gov/edgar/searchedgar/webusers.htm. You may also obtain a copy from us free of charge by submitting a written request to the Corporate Secretary, Pentair, Inc., 5500 Wayzata Boulevard, Suite 800, Minneapolis, MN 55416.

Election of Directors

The Board, upon recommendation of the Governance Committee, has nominated incumbent directors Charles A. Haggerty, Randall J. Hogan and David A. Jones for three-year terms that expire at the 2015 Annual Meeting of Shareholders. Seven directors have terms of office that do not expire at this time and we expect that they will continue to serve their full terms.

Biographies of the director nominees and continuing directors follow. These biographies include their ages; an account of their specific business experience; the names of publicly held and certain other corporations of which they also are, or have been within the past five years, directors; and a discussion of their specific experience, qualifications, attributes or skills that led to the conclusion that they should serve as directors.

Directors Standing For Election

For a Three-Year Term Expiring at the 2015 Annual Meeting of Shareholders

Charles A. Haggerty, director since 1994, age 70

Mr. Haggerty is currently Chief Executive Officer of LeConte Associates, LLC, a consulting and investment firm. Mr. Haggerty joined Western Digital Corporation, a maker of hard disc drives, in 1992, where he served as Chief Operating Officer until 1993, as Chief Executive Officer and Chairman of the Board from

 

12


Table of Contents

1993 until he retired in 2000. From 1964 to 1992, Mr. Haggerty served in various positions at International Business Machines Corporation. Mr. Haggerty is also a director of Imation Corp., Deluxe Corporation and LSI Corp, and formerly served as a director at Beckman Coulter, Inc. until 2011

Mr. Haggerty’s long record of service with Pentair as director and Lead Director, his familiarity with our company and our various businesses, his executive management experience, extensive service as a director at other public companies, as well as his interest and expertise in corporate governance issues give him a deep understanding of the role of the Board of Directors that is instrumental in maintaining the functionality of the Board. Mr. Haggerty has served as a member of each of our Board committees, which has given him a firm understanding of the impact on us of a wide range of business situations.

Randall J. Hogan, director since 1999, age 56

Since January 1, 2001, Mr. Hogan has been our Chief Executive Officer. Mr. Hogan became Chairman of the Board on May 1, 2002. From December 1999 through December 2000, Mr. Hogan was our President and Chief Operating Officer. From March 1998 to December 1999, he was Executive Vice President and President of our Electrical and Electronic Enclosures Group. From 1995 to 1997, he was President of the Carrier Transicold Division of United Technologies Corporation. From 1994 until 1995, he was Vice President and General Manager of Pratt & Whitney Industrial Turbines. From 1988 until 1994, he held various executive positions at General Electric Company. From 1981 until 1987, he was a consultant at McKinsey & Company. Mr. Hogan is also a director of Covidien plc. Mr. Hogan also served as a director of Unisys Corporation from 2004 to 2006.

Mr. Hogan has significant leadership experience both with us and predecessor employers demonstrating a wealth of operational management, strategic, organizational and business transformation acumen. His deep knowledge of business in general and our businesses, strengths and opportunities in particular, as well as his experience as a director in two other complex global public companies allow him to make significant contributions to the Board.

David A. Jones, director since 2003, age 62

Mr. Jones serves as the Chair of the International and Compensation Committees. Since 2008, Mr. Jones has been Senior Advisor to Oak Hill Capital Partners, a private equity firm. In April 2010, Mr. Jones was appointed to the board of directors of Dave & Buster’s Holdings, Inc., an owner and operator of high-volume restaurant/entertainment venues, and to the board of directors as the lead director of The Hillman Group, Inc., a distributor of fasteners, key duplication systems, engraved tags and related hardware items, both of which are privately owned by Oak Hill Capital Partners. Between 1996 and 2007, Mr. Jones was Chairman and Chief Executive Officer of Spectrum Brands, Inc. (formerly Rayovac Corporation), a global consumer products company with major businesses in batteries, lighting, shaving/grooming, personal care, lawn and garden, household insecticide and pet supply product categories. From 1996 to April 1998, he also served Rayovac as President. After Mr. Jones was no longer an executive officer of Spectrum Brands, it filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in March 2009 and exited from bankruptcy proceedings in August 2009. From 1995 to 1996, Mr. Jones was Chief Operating Officer, Chief Executive Officer, and Chairman of the Board of Directors of Thermoscan, Inc. From 1989 to 1994, he served as President and Chief Executive Officer of The Regina Company. Mr. Jones also served as a director of Simmons Bedding Company from 2000 to 2010, as a director of Spectrum Brands from 1996 to 2007, and as a director of Tyson Foods, Inc. from 1999 to 2005.

Mr. Jones’ extensive management experience with both public and private companies and private equity funds, coupled with his global operational, financial and mergers and acquisitions expertise, have given the Board invaluable insight into a wide range of business situations. Mr. Jones has served on each of our Board Committees, which has given him an understanding of the impact on us of a wide range of business situations.

 

13


Table of Contents

Directors Not Standing For Election

With a Three-Year Term Expiring at the 2014 Annual Meeting of Shareholders

Leslie Abi-Karam, director since 2008, age 53

Since 2008, Ms. Abi-Karam has been the Executive Vice President and President, Mailing Solutions Management of Pitney Bowes Inc., a global mailstream technology company. Between 2002 and 2008, Ms. Abi-Karam was the Executive Vice President and President, Document Messaging Technologies (DMT) of Pitney Bowes Inc. She is also responsible for all engineering, global supply chain and direct procurement operations, supplying products and sourcing for all commodity/spend management within Pitney Bowes worldwide. Between 2000 and 2002, Ms. Abi-Karam was President, Global Mail Creation and Mail Finishing, of Pitney Bowes Inc. She has been with Pitney Bowes since 1984 and has held various roles of increasing responsibility.

Ms. Abi-Karam brings to our Board significant experience in the management of global technology businesses. As a current operating leader, Ms. Abi-Karam faces many of the same challenges as our company and provides perspective on alternative solutions to common problems.

Jerry W. Burris, director since 2007, age 48

Mr. Burris has been President and Chief Executive Officer of Associated Materials, LLC, a manufacturer of professionally installed exterior building products, since September 2011. Between 2008 and 2011, he was President, Precision Components of Barnes Group Inc. from 2006 until 2008, Mr. Burris was the President of Barnes Industrial, a global precision components business within Barnes Group. Prior to joining Barnes Group, Mr. Burris worked at General Electric Company, a multinational technology and services conglomerate, where he served as president and chief executive officer of Advanced Materials Quartz and Ceramics in 2006. From 2003 to 2006, Mr. Burris was the general manager of global services for GE Healthcare. From 2001 to 2003, he led the integration of global supply chain sourcing for the Honeywell integration and served as the general manager of global sourcing for GE Industrial Systems. Mr. Burris first joined General Electric Company in 1986 in the GE Corporate Technical Sales and Marketing Program.

Mr. Burris brings to our Board significant experience in management of global manufacturing operations and related processes, such as supply chain management, quality control and product development. Mr. Burris provides the Board with insight into operating best practices and current developments in a variety of management contexts.

Ronald L. Merriman, director since 2004, age 67

Mr. Merriman serves as the Chair of the Audit Committee. He is the retired Vice Chair of KPMG, a global accounting and consulting firm, where he served from 1967 to 1997 in various positions, including as a member of the Executive Management Committee. He also served as Executive Vice President of Ambassador International, Inc., a publicly-traded travel services business, from 1997 to 1999; Executive Vice President of Carlson Wagonlit Travel, a global travel management firm, from 1999 to 2000; Managing Director of O’Melveny & Myers LLP, a global law firm, from 2000 to 2003; and Managing Director of Merriman Partners, a management advisory firm, from 2004 to 2010. He is also a director of Aircastle Limited, Realty Income Corporation and Haemonetics Corporation. Mr. Merriman also served as a director of Cardio Dynamics International from July 2003 to July 2005 and as a director of Corautus Genetics Inc. from April 2004 to May 2005.

Mr. Merriman’s extensive accounting and financial background has strengthened our Audit Committee and its processes over the past six years. In addition, his global experience and contributions to our International Committee have assisted us in our expansion into overseas markets.

 

14


Table of Contents

With a Three-Year Term Expiring at the 2013 Annual Meeting of Shareholders

T. Michael Glenn, director since 2007, age 56

Since 1998, Mr. Glenn has been the Executive Vice President – Market Development and Corporate Communications of FedEx Corporation, a global provider of supply chain, transportation, business and related information services. From 1994 to 1998, Mr. Glenn was Senior Vice President – Marketing and Corporate Communications of FedEx Express. Mr. Glenn is also a director of Renasant Corporation, and was formerly a director of Deluxe Corporation from 2004 to 2006.

Mr. Glenn brings extensive strategic, marketing and communications experience to our Board from his service as one of the top leaders at FedEx Corporation. He has been an active participant in the development of our strategic plans, and a strong proponent for strengthening our branding and marketing initiatives.

David H. Y. Ho, director since 2007, age 52

Mr. Ho has been a private investor since he retired in 2008, but has significant executive experience with global technology companies. From 2007 to 2008, he served as the Chairman of the Greater China Region for Nokia Siemens Network, a joint venture between Finland-based Nokia Corporation, a multinational telecommunications company, and Germany-based Siemens AG. Prior thereto, Mr. Ho held numerous executive positions with Nokia subsidiaries, including Nokia China Investment Limited, the Chinese operating subsidiary of Nokia Corporation, where he served as President between 2004 and 2007 and Senior Vice President, Networks—Greater China, between 2001 and 2004. Between 1983 and 2001, Mr. Ho held various senior positions with Nortel Networks and Motorola Inc. in Canada and China. Mr. Ho is also a director of Owens-Illinois Inc. (since 2008), Triquint Semiconductor (since 2010), and Dong Fang Electric Corporation, a Chinese State Owned Enterprise (since 2009), and was a director of 3Com Corporation from December 2008 through April 2010.

In addition to corporate governance training received as a result of his various directorships, Mr. Ho’s extensive experience in global markets, especially in China, has contributed greatly as we have expanded our presence throughout the world, particularly in the Asia-Pacific region. In addition, he brings to our Board significant management expertise in operations, mergers, acquisitions and joint ventures in the area.

Glynis A. Bryan, director since 2003, age 53

Ms. Bryan serves as the Chair of the Governance Committee. Since 2007, Ms. Bryan has been the Chief Financial Officer of Insight Enterprises, Inc., a leading provider of information technology products and solutions to clients in North America, Europe, the Middle East and the Asia-Pacific region. Between 2005 and 2007, Ms. Bryan was the Executive Vice President and Chief Financial Officer of Swift Transportation Co., a holding company which operates the largest fleet of truckload carrier equipment in the United States. Between 2001 and 2005, Ms. Bryan was the Chief Financial Officer of APL Logistics, the supply-chain management arm of Singapore-based NOL Group, a logistics and global transportation business. Prior to joining APL, Ms. Bryan spent 16 years with Ryder System, Inc., a truck leasing company, where she held a series of progressively responsible positions in finance. In her last assignment, Ms. Bryan was Senior Vice President of Ryder Capital Services, where she led the development of the firm’s capital services business. In 1999 and 2000, Ms. Bryan served as Senior Vice President and Chief Financial Officer of Ryder Transportation Services.

Ms. Bryan has extensive global financial and accounting experience in a variety of business operations, especially in logistics services. Ms. Bryan originally served on the Audit Committee of the Board for five years, and was selected in 2009 by the Board to serve as the Chair of the Governance Committee. Her familiarity with all aspects of Board responsibilities at Pentair will be critical in the future as governance and risk management processes continue to develop.

 

15


Table of Contents

William T. Monahan, director since 2001, age 64

Mr. Monahan serves as the Lead Director. In 2006, Mr. Monahan served as a director and the Interim Chief Executive Officer of Novelis, Inc., a global leader in aluminum rolled products and aluminum can recycling. From 1995 to 2004, Mr. Monahan was Chairman of the Board of Directors and Chief Executive Officer of Imation Corp., a manufacturer of magnetic and optical data storage media. Mr. Monahan is also a director of Hutchinson Technology, Inc., The Mosaic Company and Solutia Inc. and was a director of Novelis, Inc. from 2005 to 2007.

Mr. Monahan brings to our Board a wealth of global operational and management experience, as well as a deep understanding of our businesses gained as a member of our Board for ten years. Mr. Monahan has extensive service as a board member and chief executive officer at companies in a number of different industries; his broad international perspective on business operations has been instrumental as we become more global.

Under our Articles of Incorporation, election of directors requires the affirmative vote of a majority of all votes cast at the Annual Meeting. A nominee who does not receive a majority of the votes will not be elected to our Board of Directors. The Board has the power to appoint directors to vacant positions, as would arise with respect to a nominee who did not obtain the requisite majority vote. Any such appointee must stand for election at the next annual shareholders’ meeting or at the next special shareholders’ meeting called for that purpose.

If elected, each of the three director nominees standing for election at the Annual Meeting will serve on the Board until the Annual Meeting in 2015. If any of the three nominees should become unable to accept election, the persons named on the proxy card as proxies may vote for other person(s) selected by the Board or the named proxies. Management has no reason to believe that any of the three nominees for election named above will be unable to serve.

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH DIRECTOR NOMINEE.

 

16


Table of Contents

COMPENSATION DISCUSSION AND ANALYSIS

Overview of Compensation Program

The Compensation Committee (the “Committee”) of our Board sets and administers the policies that govern our executive compensation, including:

 

   

establishing and reviewing executive base salaries;

 

   

overseeing our annual incentive compensation plans;

 

   

overseeing our long-term equity-based compensation plan;

 

   

approving all awards under those plans; and

 

   

annually approving and recommending to the Board all compensation decisions for executive officers, including those for the Chief Executive Officer and the other officers named in the Summary Compensation Table below (collectively, the “Named Executive Officers”).

The Committee seeks to assure that compensation paid to the Named Executive Officers is fair, reasonable and competitive, and is linked to increasing long-term shareholder value. Only independent directors serve on the Committee.

2011 Say on Pay Vote

In April 2011 (after the 2011 executive compensation actions described in this Compensation Discussion and Analysis had taken place), we held our first advisory stockholder vote on the compensation of our named executive officers at our annual shareholders’ meeting, and, consistent with the recommendation of the Board, our shareholders approved the compensation of our named executive officers with more than 94% of votes cast in favor. Consistent with this strong vote of shareholder approval, we have not undertaken any material changes to our executive compensation programs in response to the outcome of the vote. In keeping with the recommendation of the Board, our shareholders also expressed a preference that future advisory stockholder votes on the compensation of our named executive officers be held on an annual basis and, as previously disclosed, the Board determined to hold an advisory vote on the compensation of the named executive officers every year until the next required advisory vote on the frequency of future advisory votes.

Compensation Philosophy and Objectives

The Committee believes that the most effective executive compensation program aligns executive initiatives with shareholders’ economic interests. The Committee seeks to accomplish this by rewarding the achievement of specific annual, longer-term and strategic goals that create lasting shareholder value. The Committee evaluates both executive performance and executive compensation to attract and retain superior executives in key positions at compensation levels competitive in the marketplace. To achieve the objectives stated below, the Committee provides executive compensation packages containing both cash and equity-based compensation components that reward performance as measured against established goals. The Committee’s specific objectives include:

 

   

to motivate and reward executives for achieving financial and strategic objectives;

 

   

to provide rewards commensurate with individual and Company performance;

 

   

to encourage innovation and growth;

 

   

to attract and retain top-quality executives and key employees; and

 

   

to align management and shareholder interests by encouraging employee stock ownership.

 

17


Table of Contents

To balance these objectives, our executive compensation program uses the following elements:

 

   

base salary, to provide fixed compensation competitive in the marketplace;

 

   

annual incentive compensation, to reward short-term performance against specific financial targets and individual goals;

 

   

long-term incentive compensation, to link management incentives to long-term value creation and shareholder return; and

 

   

retirement, perquisites and other benefits, to attract and retain executives over the longer term.

We discuss each of these components below under “2011 Compensation Program Elements” and “Changes in Compensation Program Mix for 2012.”

Compensation Committee Practices

The Committee meets regularly to review, discuss and approve executive compensation and employee benefit plan matters. To ensure it is able to address all of its responsibilities, the Committee establishes an annual agenda at the beginning of each year. In 2011, the Committee held five regular meetings. The Committee has scheduled five regular meetings for 2012. In addition to the regularly scheduled meetings, the Committee holds special meetings when necessary.

Committee members generally receive written materials several days prior to each regularly scheduled meeting. At the close of each regularly scheduled Committee meeting, the Committee conducts an executive session without management present. When appropriate, the Committee also meets in executive session at the close of special meetings. At the Committee’s request, the Committee’s external compensation consultant reviews committee meeting materials and attends meetings.

In making changes to our compensation programs, the Committee considers our compensation philosophy and objectives, as well as external market, industry and peer company practices. The Committee reviews each element of the executive compensation program annually for continuing appropriateness and reasonableness.

In December 2010 and February 2011, the Committee reviewed and approved executive salaries, equity plan incentive grants and performance measures and related targets for our annual incentive program for 2011. When reviewing proposed awards, the Committee considered our corporate performance for the year and the prior three-year period against the peer group of companies identified as the “Comparator Group” below under “Comparative Framework.” The Committee also considered our corporate performance compared to our strategic objectives. The Committee reviewed and approved equity grants for newly hired and promoted employees as required throughout the year. Committee actions relating to executive salaries, incentive awards and long-term compensation, as well as changes to our compensation programs, were submitted to the full Board for ratification and approval.

Services of Compensation Consultant

In 2011, the Committee retained AON Hewitt, an external compensation consultant (the “Compensation Consultant”), to advise the Committee on executive compensation issues. See “Corporate Governance Matters – Committees of the Board – Compensation Committee” for disclosure relating to services provided to us by affiliates of the Compensation Consultant.

The Committee provides the Compensation Consultant with preliminary instructions regarding the goals of our compensation program and the parameters of the competitive review of our executive compensation programs to be conducted by the Compensation Consultant. The Compensation Consultant provides the Committee with comparative market data on position-specific compensation structures, policies and programs

 

18


Table of Contents

based on analyses of relevant survey data and of the practices of the Comparator Group defined below under “Comparative Framework.” The Compensation Consultant also provides guidance on industry best practices and advises the Committee in determining appropriate ranges for base salaries, annual incentives and equity compensation for each senior executive position.

Role of Executive Officers in Compensation Decisions

At the request of the Committee, the Chief Executive Officer and the Senior Vice President, Human Resources, generally attend meetings of the Committee, but are not present in executive sessions and do not participate in deliberations of their own compensation. Our human resources group assists the Committee as requested on specific topics regarding compensation, as well as on specific recommendations for compensation for management throughout our company.

The Chief Executive Officer annually reviews with the Committee the performance of each executive officer (other than himself) and presents compensation recommendations based on these reviews to the Committee. The Committee reviews these recommendations with the Compensation Consultant and exercises its discretion in adopting, rejecting or changing them.

The Board and the Committee employ a formal rating process to evaluate the Chief Executive Officer’s performance. As part of this process, the Board reviews financial and other relevant data related to the performance of the Chief Executive Officer at each meeting of the Board throughout the year. At the end of the year, each independent director provides an evaluation and rating of the Chief Executive Officer’s performance in various categories. The Committee Chair submits a consolidated rating report and the Committee’s recommendations regarding the Chief Executive Officer’s compensation to the independent directors for review and ratification. The Lead Director chairs a discussion with the independent directors in executive session without the Chief Executive Officer present. From that discussion, the Committee finalizes the Chief Executive Officer’s performance rating. The Committee Chair and the Lead Director review the final performance rating results and commentary with the Chief Executive Officer. The Committee takes the performance rating and financial data into account in determining the Chief Executive Officer’s compensation and the Board’s adoption of goals and objectives for the Chief Executive Officer for the following year.

Setting Executive Compensation

The Committee recognizes the importance of maintaining sound principles for developing and administering compensation and benefits programs. The Committee seeks to carry out its responsibilities by:

 

   

holding executive sessions (without management present) at every regular Committee meeting;

 

   

requiring clear communication of compensation policy and actions to executives and shareholders;

 

   

annually reviewing total annual compensation for all executive officers; and

 

   

establishing appropriate guidelines for executive change-in-control agreements.

Comparative Framework

In making its recommendations to the Board concerning executive officer compensation, the Committee annually reviews and evaluates our corporate performance and our executive officers’ compensation and equity ownership. The Committee also obtains and reviews comparative data from the Compensation Consultant and a number of third-party sources, including proxy statements, publicly available information and surveys by consulting firms.

The Committee uses external competitive benchmarks that it believes support the guiding principles outlined above for each element of compensation. For 2011, the market for assessing compensation was defined as comparable publicly traded companies that are headquartered in the U.S. and engaged in one or more

 

19


Table of Contents

manufacturing sectors (the “Comparator Group”). The Committee identified these companies as our Comparator Group based upon the analysis and recommendations of the Compensation Consultant. The Comparator Group consisted of business competitors, similarly structured broadly diversified organizations and competitors for executive talent: A. O. Smith Corporation, Amphenol Corporation, Cooper Industries plc, Crane Co., Danaher Corporation, Donaldson Company, Inc., Dover Corporation, Eaton Corporation, Flowserve Corporation, Hubbell Incorporated, ITT Corporation, Pall Corporation, Parker-Hannifin Corporation, Rockwell Automation, Inc., SPX Corporation and Thomas & Betts Corporation.

2011 Compensation Program Elements

For the fiscal year ended December 31, 2011, the principal components of compensation for Named Executive Officers were:

 

   

Base salary;

 

   

Annual incentive compensation;

 

   

Long-term incentive compensation;

 

   

Retirement and other benefits; and

 

   

Perquisites and other personal benefits.

The Committee reviews total compensation for executive officers and the relative levels of each of these forms of compensation, against the Committee’s goals to attract, retain and incentivize talented executives and to align the interests of these executives with those of our long-term shareholders.

Base Salaries

We provide Named Executive Officers with a fixed base salary. Focusing on the market value of each position, the Committee’s goal is to target approximately the 50th percentile (the “Midpoint”) of the Comparator Group for executives’ base salary ranges based on available market data. Market data include published survey data and proxy statement data for our Comparator Group. The Committee establishes each Named Executive Officer’s salary within a range of 20% of the Midpoint. Differences in base salaries among the Named Executive Officers and the extent to which a Named Executive Officer’s base salary is set at a level other than the Midpoint are decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility, experience and individual performance.

The Committee undertook its annual review of base salaries for the Named Executive Officers and other management personnel, in accordance with its normal procedures. Following a market review by the Compensation Consultant, the Committee, with the Board’s concurrence, approved annual merit increases to base salary for each executive officer effective January 1, 2012.

Annual Incentive Compensation Plan

To achieve the objective of providing competitive compensation to attract and retain top talent while linking pay to annual performance, we pay a portion of our executives’ cash compensation as incentive compensation tied to annual business performance as measured against annual goals established by the Committee. We pay cash annual incentive compensation to our executive officers, including the Named Executive Officers, under the Executive Officer Performance Plan (“EOPP”). The Committee has no discretion to increase formula-derived incentive compensation under the EOPP. For 2011, the only participants in the EOPP were our executive officers.

 

20


Table of Contents

For each EOPP participant, the Committee determined a percentage of that executive’s base salary as a targeted level of incentive compensation opportunity, based on the Committee’s review of the Compensation Consultant’s recommendations, relevant survey data and, in the case of Named Executive Officers other than the Chief Executive Officer, the recommendations of the Chief Executive Officer. Differences in target levels of incentive compensation opportunity among the Named Executive Officers are decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility and experience. An executive officer’s base salary multiplied by the incentive compensation opportunity percentage establishes the target incentive compensation for which the executive officer is eligible. The Committee determined incentive compensation targets in 2011 for all Named Executive Officers. These incentive compensation targets were as follows:

 

    

Target as a

    Percent of Salary    

 

    Target in    

Dollars

Randall J. Hogan

      150 %       1,597,500  

John L. Stauch

      80 %       383,430  

Michael V. Schrock

      100 %       564,826  

Frederick S. Koury

      60 %       241,018  

Angela D. Lageson

      60 %       195,000  

Actual incentive compensation awarded to each Named Executive Officer may range from 0 to 2 times the target, depending on actual Company and individual performance, as described below. The Committee approves performance goals (described below) for each year and sets each executive’s incentive compensation opportunity so that if we attain target performance levels, annual cash incentive levels will be between the 50th and 75th percentiles of our Comparator Group. If we attain superior performance levels, cash incentive compensation could exceed the 75th percentile of the Comparator Group; if we do not attain target performance levels for any of the goals, cash incentive compensation will be below the 50th percentile of our Comparator Group.

To establish the performance goals and related targets applied to EOPP payments for the Named Executive Officers, the Committee examined goals that were recommended by the Chief Executive Officer, after consultation with the Chief Financial Officer and certain other executive officers, and that were based solely on objectively determinable financial performance measures. The Committee then assessed these recommendations in light of comparable data of the Comparator Group and relevant survey data. In February 2011, the Committee established the performance goals for 2011 for the EOPP, which the Board then ratified. The EOPP performance goals that applied to the Named Executive Officers consisted of the following quantitative measures:

 

   

Operating income, which means the excess of revenues over expenses for normal operating activities. For 2011, the operating income threshold was $365.0 million, target was $385.0 million and maximum was $420.0 million, prior to adjustments specified in the EOPP.

 

   

Sales, which means sales excluding the impact of acquisitions and foreign currency exchange. For 2011, the sales threshold was $3.107 billion, target was $3.185 billion and maximum was $3.308 billion, prior to adjustments specified in the EOPP.

 

   

Free cash flow, which means cash from operating activities less capital expenditures, including both continuing and discontinued operations, plus proceeds from sale of property and equipment. For 2011, the free cash flow threshold was $205.0 million, target was $240.0 million and maximum was $275.0 million, prior to adjustments specified in the EOPP.

 

   

EBITDA, which means earnings before interest, depreciation and amortization. For 2011, EBITDA threshold was $350.0 million, prior to adjustments specified in the EOPP.

 

21


Table of Contents

The Committee believes that these performance goals correlate strongly with two primary corporate objectives: to improve the financial return from our businesses and to strengthen our balance sheet through cash flow improvement and debt reduction.

To provide an added performance incentive, the Committee determined that the amount of incentive compensation related to each performance goal other than EBITDA would be scaled according to the amount by which the measure exceeded or fell short of the target. The Committee also determined that the performance goals for operating income, sales and free cash flow should have a threshold level below which no incentive compensation would be earned, as detailed above. In the case of the operating income, sales and free cash flow, the amount of incentive compensation for each performance goal was scaled from 0.75 (at the threshold) to 2.0 times (at the maximum) the target according to a formula that was based solely on our corporate performance and was not subject to adjustment or discretion.

In the case of EBITDA, the Committee determined that attainment of this performance goal is a necessary, but not sufficient, condition to trigger an incentive compensation award. If the EBITDA threshold was not attained, no award would be made for this performance goal. However, if the EBITDA threshold was attained, the Named Executive Officer would be eligible for the EBITDA portion of the award. The Committee retained the discretion to reduce, but not to increase, the amount of any EBITDA-based award to a Named Executive Officer, based upon a strategy deployment factor (“SDF”). The SDF measures an individual executive’s performance against expectations in the attainment of corporate strategic goals set by the Board. The SDF is determined by the Committee for each Named Executive Officer based on its assessment of individual performance following consultation with the Chief Executive Officer.

The Committee determined that, for 2011, the performance measures applied to EOPP payments for all Named Executive Officers were to be weighted as follows: operating income: 40%; sales: 20%; free cash flow: 20%; and EBITDA: 20%. The actual incentive compensation of each Named Executive Officer was determined by multiplying the eligible target incentive compensation amount by a multiplier determined as noted above.

Operating income after adjustment for factors specified in the EOPP was $384.4 million, which exceeded the threshold but not the target. The incentive bonus percentage for the operating income measure amounted to 39.7% of each EOPP participant’s target bonus (40% weighting times 99.3%).

Sales after adjustment for factors specified in the EOPP were $3.210 billion, which exceeded the target but not the maximum. The incentive bonus percentage for the sales measure amounted to 24.1% of each EOPP participant’s target bonus (20% weighting times 120.5%).

Cash flow after adjustment for factors specified in the EOPP was $277.1 million, which exceeded the maximum. The incentive bonus percentage for the free cash flow measure amounted to 40.0% of each EOPP participant’s target bonus (20% weighting times 200%).

EBITDA after adjustment for factors specified in the EOPP was $503.6 million, higher than the $350.0 million threshold. The Committee determined that each Named Executive Officer’s performance in 2011 met or exceeded individual performance expectations, including after consideration of applicable SDFs. Based on this determination, the Committee exercised its discretion to reduce awards from the maximum based on each Named Executive Officer’s SDF, resulting in incentive bonus percentage for the EBITDA measure ranging from 21.6% to 23.1% of each EOPP participant’s target for this portion of the award (20% weighting times 108.0% to 115.5%).

Based on the foregoing, the Committee awarded EOPP incentive awards to the Named Executive Officers that are reflected in the “Non-Equity Incentive Plan Compensation” column under “Executive Compensation - Summary Compensation Table.”

 

22


Table of Contents

2011 Long-Term Incentive Compensation

The Committee emphasizes executive compensation that is tied to building and sustaining our Company’s value through stock performance over time. We provide long-term compensation to our executives to further the objectives of:

 

   

motivating and rewarding executives through share price appreciation;

 

   

encouraging innovation and growth;

 

   

aligning management and shareholder interests; and

 

   

attracting and retaining key executive talent.

In keeping with this philosophy, the Committee establishes long-term incentive compensation targets falling between the 50th and 75th percentiles of competitive compensation programs, based on the Committee’s assessment of both published survey data and data from our Comparator Group. If we build and sustain long-term shareholder value through superior performance, ongoing long-term incentive values may exceed the 75th percentile of our Comparator Group.

In 2011, the Committee awarded long-term incentive compensation under the 2008 Pentair, Inc. Omnibus Stock Incentive Plan (the “2008 Omnibus Plan”). As it does each year, the Committee used benchmark data (including compensation surveys, Comparator Group information and other data provided by the Compensation Consultant) to set competitive target dollar award levels for each Named Executive Officer and for each position or grade level. Differences in target dollar award levels among the Named Executive Officers were decided by the Committee based on various factors, including competitive conditions for the Named Executive Officer’s position within the Comparator Group and in the broader employment market, as well as the Named Executive Officer’s length of employment, level of responsibility, experience and individual performance. Individual awards generally range between 80 and 120 percent of the target award level, with actual award amounts determined by the Committee based on its assessment of both the executive’s individual performance against his or her individual performance goals in the previous year and Company performance in the previous year against our strategic plan.

The Committee approved the elements and mix of 2011 long-term incentive compensation under the 2008 Omnibus Plan. The Committee granted all Named Executive Officers a mix of the following components:

 

   

Stock options:  The Committee determined that it would grant ten-year stock options, with one third of the options vesting on each of the first, second and third anniversaries of the grant date, as in prior years. For the 2011 grant, stock options constituted one third of the long-term incentive award’s total value.

 

   

Restricted stock units:  The Committee determined that it would grant restricted stock units, with one-half of the restricted stock units vesting on each of the third and fourth anniversaries of the grant date, as in prior years. Each restricted stock unit represents the right to receive one share of our Common Stock upon vesting and includes one dividend equivalent unit, which entitles the holder to a cash payment equal to all cash dividends declared on a share of our Common Stock from and after the date of grant. An executive officer may elect to defer receipt of restricted stock units upon vesting under our Non-Qualified Deferred Compensation Plan. For the 2011 grant, restricted stock units constituted one third of the long-term incentive award’s total value.

 

   

Cash settled performance units:  For 2011, after review of our short- and long-term incentive plans and current market trends for executive compensation prepared by the Compensation Consultant, management and the Committee modified our compensation program to include cash-settled performance units as a part of long-term incentive compensation. The Committee determined that it would grant cash-settled performance units in 2011, reflecting the desire of the Committee to grant performance-based awards but also to limit the number of shares of our Common Stock that are

 

23


Table of Contents
 

issued pursuant to long-term incentive awards. Each performance unit entitles the holder to a cash payment following the end of a three-year performance period if we achieve specified Company performance goals established by the Committee pursuant to the 2008 Omnibus Plan. The performance goals selected by the Committee for the 2011 to 2013 period were 4% compounded annual revenue growth and 3% increase in return on invested capital, each as compared to 2010 and each weighted 50%.

Depending on cumulative Company performance over the three-year performance period, we will pay nothing if a threshold is not met, 50% of the target value if the threshold is met, 100% of the target value if the target is met and 200% of the target value if the maximum is met or exceeded. An executive officer may elect to defer receipt of the cash payment under our Non-Qualified Deferred Compensation Plan. For the 2011 grant, cash settled performance units constituted one third of the long-term incentive award’s total value.

The value of stock options and restricted stock units and a range of values for the cash settled performance units granted to the Named Executive Officers in 2011 is reflected in the table under “Executive Compensation - Grants of Plan-Based Awards Table.” The value of restricted shares that vested for each Named Executive Officer in 2011 and the value of options exercised by each Named Executive Officer in 2011 are shown in the table under “Executive Compensation - Option Exercises and Stock Vested.”

The Committee reviewed and approved the 2011 grants of long-term incentive compensation for executive officers in December 2010 effective on January 3, 2011. For all other recipients, in February 2011, the Committee reviewed and approved grants that were effective on March 2, 2011. The Committee reviews and approves all equity awards to newly hired or promoted executives at regular meetings throughout the year. As a rule, the Committee grants awards to newly hired or promoted executives that are effective the earlier of the 15th day of the month following the date of hire or promotion or the 15th day of the month following the date of the Committee meeting at which the grant is approved. If the 15th day of such month is a day on which the New York Stock Exchange is not open for trading, then the grant date will be the first day following the 15th day of such month on which the New York Stock Exchange is open for trading. The Committee has also given the Committee Chair and the Chief Executive Officer discretion to grant equity awards to newly hired or promoted executives as required throughout the year, within the guidelines of the long-term incentive plan. The Committee then ratifies these grants at its next meeting. All options are granted at fair market value based on the closing stock price on the effective day of grant.

Prior Long-Term Incentive Grants

In 2009, the Committee granted cash settled performance units to the Named Executive Officers. Each performance unit entitles the holder to a cash payment following the end of a three-year performance period, if we achieve specified Company performance goals set forth in the 2008 Omnibus Plan. The performance goals are selected by the Committee at the beginning of each year of the performance period. Depending on our actual performance during each year in the three-year performance period, we might pay a target of 100%, a threshold of 75%, a maximum of 125%, or a minimum of 0%, with respect to the cash settled performance units, contingent upon the participant’s remaining employed by us on the third anniversary of the grant date or having retired at or after age 60 with a minimum of ten years’ service. Eligible executive officers may elect to defer receipt of the cash payment under our Non-Qualified Deferred Compensation Plan.

For 2009, the Committee selected a performance metric of achievement of an EBITDA target equal to $434.9 million. In 2009, our EBITDA was below the target level at $357.9 million, or 82% of target. For 2010, the Committee selected a performance metric of achievement of an EBITDA target equal to $420.0 million. In 2010, our EBITDA was above the target level at $436.8 million, or 104% of target. For 2011, the Committee selected a performance metric of achievement of an EBITDA target equal to $485.0 million. In 2011, our EBITDA was above the target level at $522.9 million, or 108% of target. As a result, the cumulative three-year performance of these cash settled performance units was above the threshold but below target. Final payout will be made in 2012.

 

24


Table of Contents

Changes in Compensation Program Mix for 2012

The Committee believes that one of the strengths of our compensation program is its consistency; therefore, the Committee did not change in 2011 its compensation philosophy or objectives as described above under “Compensation Philosophy and Objectives.”

Base Salaries

The Committee undertook its annual review of base salaries for the Named Executive Officers and other management personnel, in accordance with its normal procedures. Following a market review by the Compensation Consultant, the Committee, with the Board’s concurrence, approved annual merit increases to base salary for each executive officer effective January 1, 2012.

Annual Incentive Compensation

The Committee also reviewed the Company’s cash incentive plans and approved performance measures and goals for 2012. The Committee determined that operating income, sales and cash flow generation would be the three primary operating measures used to determine cash incentive compensation amounts for 2012. These measures correlate strongly with two primary corporate objectives: to improve the financial return from our businesses, and to strengthen our balance sheet through cash flow improvement and debt reduction. In addition, the Committee also approved an EBITDA target to be used with SDFs in assessing individual performance for the year. The performance measures (and related target amounts) applicable to all Named Executive Officers for 2012 will be weighted as follows: operating income 40%, sales 20%, free cash flow 20% and EBITDA 20%.

No changes are being made in the administration of the EOPP, the setting of incentive compensation opportunity targets, the methodology for calculating actual incentive compensation payouts or the Committee’s procedures for reviewing and approving awards under the plan, as described above under “Annual Incentive Compensation Plan.”

Long-Term Incentive Compensation

The Committee approved in December 2011 the elements and mix of long-term incentive compensation for 2012 under the 2008 Omnibus Plan. The Committee granted all Named Executive Officers a mix of the following components: stock options, restricted stock units and cash settled performance units.

 

   

Stock options:  The Committee determined that it would grant ten-year stock options, with one third of the options vesting on each of the first, second and third anniversaries of the grant date, as in prior years. The stock options for the 2012 grant constitute one-third of the long-term incentive award’s total value.

 

   

Restricted stock units:  The Committee determined that it would grant restricted stock units. Unlike past grants, the Committee imposed a performance condition on the restricted stock units which requires the Company to meet a specified threshold goal for free cash flow in 2012. If such goal is achieved, then consistent with past practice, one-half of the restricted stock units vest on each of the third and fourth anniversaries of the grant date. Each restricted stock unit represents the right to receive one share of our Common Stock upon vesting and includes one dividend equivalent unit, which entitles the holder to a cash payment equal to all cash dividends declared on a share of our Common Stock from and after the date of grant. An executive officer may elect to defer receipt of restricted stock units upon vesting under our Non-Qualified Deferred Compensation Plan. For the 2012 grant, restricted stock units constituted one third of the long-term incentive award’s total value.

 

   

Cash settled performance units:  The Committee determined that it would also grant cash settled performance units in 2012 from a bonus pool that is established only if the Company meets a specified threshold goal for free cash flow in 2012. From this bonus pool, each participant,

 

25


Table of Contents
 

including the Named Executive Officers, is granted cash settled performance units. Each performance unit entitles the holder to a cash payment following the end of a three-year performance period, if we achieve specified Company performance goals on metrics set forth in the 2008 Omnibus Plan. The performance goals selected by the Committee for the 2012 to 2014 performance period were revenue growth and return on invested capital, each weighted 50%.

Subject to establishment of the bonus pool and depending on cumulative Company performance over the three-year performance period, we will pay nothing if a threshold is not met, 50% of the target value if the threshold is met, 100% of the target value if the target is met and 200% of the target value if the maximum is met. An executive officer may elect to defer receipt of the cash payment under our Non-Qualified Deferred Compensation Plan. For the 2012 grant, the value of cash settled performance units awarded constituted one-third of the long-term incentive award’s total value.

Stock Ownership Guidelines

The Committee and the Board have established stock ownership guidelines for the Named Executive Officers and other executives to motivate them to become significant shareholders and to further encourage long-term performance and growth. The Committee monitors our executives’ compliance with these stock ownership guidelines and periodically reviews the definition of “stock ownership” to reflect the practices of companies in the Comparator Group. For 2011, “stock ownership” included stock owned by the officer both directly and indirectly, the pro-rated portion of unvested restricted stock, restricted stock units, and shares held in our employee stock ownership plan or our employee stock purchase plan. The Committee determined that, over a period of five years from appointment, certain executives should accumulate and hold Common Stock equal to a multiple of base salary as follows:

 

Executive Level  

    Stock Ownership Guidelines    

(as a multiple of salary)

Chief Executive Officer

  5x base salary

President, Chief Operating Officer;

Executive Vice President and Chief Financial Officer

  3x base salary

Senior Vice President, Human Resources;

Senior Vice President and General Counsel

  2.5x base salary

Other key executives

  2x base salary

Stock Ownership for the Currently-Serving Named Executive Officers as of December 31, 2011

 

    

Share

    Ownership    

 

12/31/11

    Market Value ($) (1)    

 

Ownership

    Guideline ($)    

 

Meets

    Guideline    

Randall J. Hogan

      625,420         20,820,232         5,325,000         Yes  

John L. Stauch

      99,115         3,299,538         1,437,864         Yes  

Michael V. Schrock

      194,999         6,491,517         1,694,478         Yes  

Frederick S. Koury

      58,330         1,941,806         989,400         Yes  

Angela D. Lageson

      11,283         375,611         812,500         No (2 ) 

 

(1) The amounts in this column were calculated by multiplying the closing market price of our Common Stock on December 30, 2011 (the last trading day of our most recently completed fiscal year) of $33.29 by the number of shares owned.

(2) Mrs. Lageson was appointed to her position with the Company in February 2010, and will have five years from her appointment to meet the stock ownership requirement.

 

26


Table of Contents

Retirement and Other Benefits

The Named Executive Officers and other executives and employees participate in the Pentair, Inc. Pension Plan, the Pentair, Inc. Retirement Savings and Stock Incentive Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan. We also provide other benefits such as medical, dental and life insurance and disability coverage to employees, including the Named Executive Officers. We aim to provide employee and executive benefits at levels that reflect competitive market levels at the 50th percentile of similar benefits given by our Comparator Group.

The Pentair, Inc. Pension Plan, the Pentair, Inc. Retirement Savings and Stock Incentive Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan were all amended in 2008 to comply with final regulations under Internal Revenue Code Section 409A. As a result of these amendments, benefits vested prior to January 1, 2005 are separated from benefits earned after January 1, 2005, and may offer different distribution or other options to participants as described below.

The Pentair, Inc. Pension Plan

The Pentair, Inc. Pension Plan (the “Pension Plan”) is a funded, tax-qualified, noncontributory defined-benefit pension plan that covers certain employees, including the Named Executive Officers. Participation in the Pension Plan is restricted to those Named Executive Officers and other employees who were hired on or before December 31, 2007. Benefits under the Pension Plan are based upon an employee’s years of service and highest average earnings in any five-year period during the ten-year period preceding the employee’s retirement (or, in the case of an employee with more than five years but less than ten years of service, during any five-year period preceding the employee’s retirement). No additional benefits may be earned under the Pension Plan after December 31, 2017. Benefits under the Pension Plan are payable after retirement in the form of an annuity.

Compensation covered by the Pension Plan for the Named Executive Officers equals the amounts set forth in the “Salary” column under “Executive Compensation - Summary Compensation Table” and 2010 incentive compensation paid in March 2011 set forth in the “Non-Equity Incentive Plan Compensation” column under “Executive Compensation - Summary Compensation Table.” The amount of annual earnings that may be considered in calculating benefits under the Pension Plan is limited by law. For 2011, the annual limitation was $245,000.

Benefits under the Pension Plan are calculated as an annuity equal to the sum of:

 

   

1.0 percent of the participant’s highest final average earnings multiplied by years of service; and

 

   

0.5 percent of such earnings in excess of Primary Social Security compensation.

Years of service under these formulas cannot exceed 35. Contributions to the Pension Plan are made entirely by us and are paid into a trust fund from which the benefits for all participants will be paid.

The Pentair Supplemental Executive Retirement and Restoration Plan

The Pentair, Inc. Supplemental Executive Retirement Plan (“SERP”) and the Pentair, Inc. Restoration Plan (“Restoration Plan”) are unfunded, nonqualified defined benefit pension plans for all executive officers and other key executives selected by the Committee who were hired or became a participant on or before December 31, 2007. Benefits under these two Plans vest upon the completion of five years of benefit service (all service following initial participation). These Plans are combined for all administrative, accounting and other purposes. Each of the Named Executive Officers participates in the SERP and each of the Named Executive Officers other than Mrs. Lageson participates in the Restoration Plan. All Named Executive Officers other than Mrs. Lageson are fully vested in these Plans.

Benefits under the SERP are based upon the number of an employee’s years of service following initial participation and the highest average earnings for a five calendar-year period (ending with retirement). Benefits vested as of December 31, 2004, are payable after retirement in the form of either a 15-year certain annuity or, at

 

27


Table of Contents

the participant’s option, a 100% joint and survivor annuity. Benefits earned after December 31, 2004, are payable after retirement in the form of a 15-year certain annuity. Compensation covered by the SERP and the Restoration Plan for the Named Executive Officers equals the amounts set forth in the 2011 “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation - Summary Compensation Table.”

Benefits under the SERP are calculated as:

 

   

final average compensation as defined above; multiplied by

 

   

benefit service percentage, which equals 15% multiplied by years of benefit service.

As discussed above, the Pension Plan limits retirement benefits for compensation earned in excess of the annual limitation imposed by Internal Revenue Code Section 401(a)(17), which was $245,000 in 2011. The Restoration Plan is designed to provide retirement benefits based on compensation earned by participants in excess of this annual limitation. The only participants in the Restoration Plan are those executive officers and other selected key leaders who participate in the SERP and who otherwise qualify for participation in the Restoration Plan. Restoration Plan benefits are combined and administered with those payable under the SERP and are paid in the same manner and at the same time.

Benefits under the Restoration Plan are calculated as:

 

   

final average compensation as defined above, less compensation below the annual limitation amount in each year; multiplied by

 

   

earned benefit service percentage (which is weighted based on age at the time of service), in accordance with the following table:

 

    

Service Age

   Percentage
 

Under 25

      4%
 

25-34

   5.5%
 

35-44

      7%
 

45-54

      9%
 

55 or over

    12%

The benefit percentages calculated above are added and the resulting percentage is multiplied by the covered compensation amount. Benefits vested as of December 31, 2004 are payable after retirement in the form of a 15-year certain annuity or, at the participant’s option, a 100% joint and survivor annuity. Benefits earned after December 31, 2004 are payable after retirement in the form of a 15-year certain annuity. No additional benefits may be earned under the Restoration Plan after December 31, 2017.

The present value of the combined accumulated benefits for the Named Executive Officers under both the SERP and the Restoration Plan is set forth in the table under “Executive Compensation - Pension Benefits.”

The Pentair Retirement Savings and Stock Incentive Plan

The Pentair Retirement Savings and Stock Incentive Plan (“RSIP/ESOP Plan”) is a tax-qualified 401(k) retirement savings plan, with a companion Employee Stock Ownership Plan (“ESOP”) component. Participating employees may contribute up to 50 percent of base salary and incentive compensation on a before-tax basis and 15 percent of compensation on an after-tax basis, into their 401(k) plan (“RSIP”). We normally match an amount equal to one dollar for each dollar contributed to the RSIP by participating employees on the first one percent, and 50 cents for each dollar contributed to the RSIP by participating employees on the next five percent, of their regular earnings. In addition, after the first year of employment, we contribute to the ESOP an amount equal to 1 1/2 % of cash compensation (salary and incentive compensation) for each participant in the RSIP, to incent employees to make contributions to our retirement plan. The RSIP/ESOP Plan limits the amount of cash compensation considered for contribution purposes to the maximum imposed by Internal Revenue Code Section 401(a)(17), which was $245,000 in 2011.

 

28


Table of Contents

Participants in the RSIP/ESOP Plan are allowed to invest their account balances in a number of possible mutual fund investments. Our Common Stock is not a permitted investment choice under the RSIP. We make ESOP contributions in our Common Stock. Participants may sell and immediately reinvest stock contributions within the ESOP into any other investment vehicles offered under the RSIP/ESOP Plan. In addition, ESOP balances, but not RSIP balances, may be reinvested into the Company’s Common Stock, effective in 2009.

Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for the Plan. We do not guarantee or subsidize any investment earnings under the Plan.

Amounts deferred, if any, under the RSIP/ESOP Plan by the Named Executive Officers are included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation - Summary Compensation Table.” Pentair matching contributions allocated to the Named Executive Officers under the RSIP/ESOP Plan are included in the “All Other Compensation” column under “Executive Compensation - Summary Compensation Table.” Matching contributions are generally made a year in arrears.

Medical, Dental, Life Insurance and Disability Coverage

Employee benefits such as medical, dental, life insurance and disability coverage are available to all U.S.-based participants through our active employee plans. In addition to these benefits to active employees, we provide post-retirement medical, dental and life insurance coverage to certain retirees in accordance with the legacy Company plans which applied at the time the employees were hired. We provide up to one and a half times annual salary (up to $1,000,000) in life insurance, and up to $10,000 per month in long-term disability coverage. The cost of the active employee benefits in 2011 for the Named Executive Officers was as follows:

 

Officer

   Cost of
Benefits  ($)
 

Randall J. Hogan

     14,577   

John L. Stauch

     14,731   

Michael V. Schrock

     14,282   

Frederick S. Koury

     13,788   

Angela D. Lageson

     13,582   

The value of these benefits is not required to be included in the Summary Compensation Table since they are made available to all of our U.S. salaried employees.

Other Paid Time-Off Benefits

We also provide vacation and other paid holidays to all employees, including the Named Executive Officers, which we have determined to be comparable to those provided at other large companies.

Deferred Compensation

We sponsor a non-qualified deferred compensation program, called the Sidekick Plan, for our U.S. executives within or above the pay grade that has a midpoint annual salary of $164,400 in 2011. This plan permits executives to defer up to 25% of their base salary and 75% of their annual cash incentive compensation. We normally make contributions in two tranches to the Sidekick Plan on behalf of participants similar to our contributions under the RSIP/ESOP Plan with respect to each participant’s contributions from that portion of his or her income above the maximum imposed by Internal Revenue Code Section 401(a)(17), which was $245,000 in 2011, but below the Sidekick Plan’s compensation limit of $700,000.

Participants in the Sidekick Plan are allowed to invest their account balances in a number of possible mutual fund investments. Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for the Plan. We do not guarantee or subsidize any investment earnings under the Plan, and our Common Stock is not a permitted investment choice under the Plan.

 

29


Table of Contents

Amounts deferred, if any, under the Sidekick Plan by the Named Executive Officers are included in the “Salary” and “Non-Equity Incentive Plan Compensation” columns under “Executive Compensation - Summary Compensation Table.” Our contributions allocated to the Named Executive Officers under the Sidekick Plan are included in the “All Other Compensation” column under “Executive Compensation - Summary Compensation Table.”

Perquisites and Other Personal Benefits

We provide Named Executive Officers with a perquisite program (the “Flex Perq Program”) under which the Named Executive Officers receive a cash perquisite allowance in an amount that the Committee believes is customary, reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. The Committee periodically reviews market data provided by the Compensation Consultant to assess the levels of perquisites provided to Named Executive Officers.

For 2011, the total aggregate annual allowance under the Flex Perq Program was $35,000 for the Chief Executive Officer and the President and Chief Operating Officer, and $30,000 for all other participants. In addition to the allowance provided under the Flex Perq Program, we provided reimbursement for an annual executive physical and related expenses for the Chief Executive Officer and President and Chief Operating Officer.

These amounts are included in the “All Other Compensation” column under “Executive Compensation – Summary Compensation Table” and are set forth in more detail in footnote 5 to that table.

Severance and Change-in-Control Benefits

We provide severance and change-in-control benefits to selected executives to provide for continuity of management upon a threatened or completed change in control. These benefits are designed to provide economic protection to key executives following a change in control of our company so that our executives can remain focused on our business without undue personal concern. We believe that the security that these benefits provide helps our key executives to remain focused on our on-going business and reduces the key executive’s concerns about future employment. We also believe that these benefits allow our executives to consider the best interests of our company and its shareholders due to the economic security afforded by these benefits.

We provide the following severance and change-in-control benefits to our executive officers:

 

   

We have entered into agreements with our key corporate executives and other key leaders, including all Named Executive Officers, that provide for contingent benefits upon a change in control.

 

   

The EOPP provides that, upon a change in control, each EOPP participant is entitled to receive any outstanding and unpaid award for the year before the change of control as well as an award for the then-current year calculated on the basis of the executive’s base salary immediately before the change in control and assuming that the year’s EOPP targets have been attained.

 

   

The 2008 Omnibus Plan and its predecessors provide that, upon a change in control, all outstanding options granted under such plans that are unvested become fully vested.

 

   

The 2008 Omnibus Plan and its predecessors provide that, upon a change in control, all restrictions applicable to outstanding shares of restricted stock granted under such plans shall automatically lapse and any dividends declared but unpaid with respect to such restricted stock shall be paid to the executive within 10 days of the date of the change in control.

 

   

The 2008 Omnibus Plan and its predecessors provide that, upon a change in control, all restrictions applicable to outstanding restricted stock units and dividend equivalent units granted under such plans shall automatically lapse and any dividends declared but unpaid with respect to such dividend equivalent units shall be paid to the executive within 10 days of the date of the change in control.

 

30


Table of Contents
   

The 2008 Omnibus Plan provides that, upon a change in control, all cash settled performance units for which the performance period has not expired will be cancelled in exchange for a cash payment equal to the amount that would have been due under such awards if the performance goals measured at the time of the change in control were to continue to be achieved at the same rate through the end of the performance period, or if higher, assuming the target performance goals had been met at the time of the change in control.

 

   

Upon certain types of terminations of employment (other than a termination following a change in control), severance benefits may be paid to the Named Executive Officers at the discretion of the Committee.

We explain these benefits more fully below under “Executive Compensation - Potential Payments Upon Termination Or Change In Control.”

Retention Agreements

We entered into a Confidentiality and Non-Competition Agreement dated as of January 6, 2005, with Michael Schrock, our President and Chief Operating Officer. The Confidentiality and Non-Competition Agreement requires Mr. Schrock to devote his full-time and energy to furthering our business and prohibits Mr. Schrock, during or after his term of employment, from disclosing or using, for his own benefit or the benefit of another party, confidential information that he may learn or acquire during his employment. The Confidentiality and Non-Competition Agreement also contains a covenant against competition by Mr. Schrock for two years following his last day of employment with us. It does not contain severance provisions.

Impact of Tax Considerations

Section 162(m) of the Internal Revenue Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to each of our five most highly paid executive officers. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements, including periodic shareholder approval of the benefit plans under which we pay such performance-based compensation. Annual cash incentive compensation generally is performance-based compensation meeting those requirements and, as such, is fully deductible.

The Committee also considers the impact of other tax provisions, such as the restrictions on deferred compensation set forth in Section 409A of the Internal Revenue Code, and attempts to structure compensation in a tax-efficient manner, both for the Named Executive Officers and for our company. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Committee has not adopted a policy requiring all compensation to be deductible.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into our Annual Report on Form 10-K for the year ended December 31, 2011.

THE COMPENSATION COMMITTEE:

David A. Jones, Chair

Glynis A. Bryan

T. Michael Glenn

William T. Monahan

 

31


Table of Contents

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The table below summarizes the total compensation paid to or earned by each of the Named Executive Officers for the fiscal years ended December 31, 2009, 2010 and 2011.

 

(a)   (b)   (c)     (d)   (e)     (f)     (g)     (h)     (i)     (j)  

Name and

Principal Position

  Year  

Salary

($)

   

Bonus

($)

 

Stock

Awards

($) (1)

   

Option
Awards

($) (2)

   

Non-Equity
Incentive Plan
Compensation

($) (3)

   

Change in
Pension Value
and Non-
Qualified
Deferred
Compensation
Earnings

($) (4)

   

All Other

Compensation

($) (5)

   

Total
Compensation

($)

 

Randall J. Hogan

Chairman and Chief Executive Officer

  2011     1,065,000      -     1,738,763        1,716,495        3,943,764        3,113,217        209,934        11,787,173   
  2010     991,055      -     2,717,399        3,420,504        2,209,062        777,775        202,415        10,318,210   
  2009     936,693      -     1,955,544        1,706,806        1,264,536        1,138,773        186,633        7,188,985   
                                                                 

John L. Stauch

Executive Vice President and Chief Financial Officer

  2011     479,288      -     557,067        549,943        1,117,448        532,629        118,847        3,358,222   
  2010     461,945      -     893,516        1,124,721        541,769        313,823        89,274        3,425,048   
  2009     454,000      -     1,618,536        524,258        319,616        274,029        98,333        3,288,772   
                                                                 

Michael V. Schrock

President and Chief Operating Officer

  2011     564,826      -     759,643        749,922        1,653,256        1,129,507        140,288        4,997,442   
  2010     541,688      -     1,191,366        1,499,629        804,948        677,442        114,232        4,829,305   
  2009     535,000      -     770,048        698,813        470,800        550,917        158,454        3,184,032   
                                                                 

Frederick S. Koury

Senior Vice President, Human Resources

  2011     401,696      -     320,728        316,630        711,260        547,585        88,051        2,385,950   
  2010     391,880      -     514,453        647,569        354,103        236,871        61,915        2,206,791   
  2009     388,000      -     355,324        331,110        214,176        236,751        87,276        1,612,637   
                                                                 

Angela D. Lageson (6)

Senior Vice President, General Counsel and Secretary

  2011     325,000      -     236,339        233,312        328,464        218,795        63,656        1,405,566   
                                                               
                                                               

 

(1) The amounts in column (e) represent the aggregate grant date fair value, computed in accordance with Accounting Standards Codification 718 (“ASC 718”) (formerly referred to as SFAS No. 123(R)), of restricted stock and restricted stock units granted during each year. Assumptions used in the calculation of these amounts are included in footnote 14 to our audited financial statements for the fiscal year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2012.

 

(2) The amounts in column (f) represent the aggregate grant date fair value, computed in accordance with ASC 718, of stock options granted during each year. Assumptions used in the calculation of these amounts are included in footnote 14 to our audited financial statements for the fiscal year ended December 31, 2011 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 21, 2012.

 

(3) The amounts in column (g) with respect to 2011 reflect cash awards to the named individuals pursuant to awards under the EOPP in 2011, which were determined by the Compensation Committee at its February 20, 2012 meeting and, to the extent not deferred by the executive, paid shortly thereafter as well as awards to the named individuals pursuant to cash settled performance units granted in 2009.

 

(4) The amounts in column (h) reflect the increase in the actuarial present value of the Named Executive Officer’s accumulated benefits under all of our pension plans determined using interest rate and mortality rate assumptions consistent with those used in our financial statements.

 

32


Table of Contents
(5) The table below shows the components of column (i), which include perquisites and other personal benefits; the Company match under the Sidekick Plan, RSIP/ESOP Plan and the Employee Stock Purchase Plan; Company-paid life insurance premiums; and dividends on restricted stock unit awards:

 

     (A)     (B)     (C)     (D)     (E)     (F)  
Name  

Perquisites
under the
Flex Perq
Program

($)(a)

   

Other
Perquisites
and Personal
Benefits

($)(b)

   

Matches
under Defined
Contribution
Plans

($)(c)

   

Matches
under the
Employee
Stock
Purchase Plan

($)

   

Life

Insurance
Premiums

($)

   

Dividends on
Restricted Stock
Unit Awards

($)

 

Mr. Hogan

    35,000        6,993        43,575        -        4,902        119,464   

Mr. Stauch

    30,000        1,037        41,884        1,800        1,203        42,923   

Mr. Schrock

    35,000        1,023        43,575        2,250        4,112        54,327   

Mr. Koury

    30,000        5,794        26,730        -        1,501        24,026   

Mrs. Lageson

    30,000        -        19,789        -        524        13,343   

 

  (a) The amount shown in column (A) for each individual reflects amounts paid to or for the benefit of each Named Executive Officer under the Flex Perq Program, which is designed to provide corporate officers and other key executives with an expense allowance for certain personal and business-related benefits.

 

  (b) The amount shown in column (B) includes travel and related expenses for such individual’s spouse or companion in conjunction with a Board meeting, reimbursement for costs associated with an annual executive physical and related travel expenses for Mr. Hogan and reimbursement for costs associated with an annual executive physical for Mr. Koury.

 

  (c) The amount shown in column (C) for each individual reflects amounts contributed by us to the RSIP/ESOP Plan or the Sidekick Plan with respect to salary deferrals in 2010 that were paid in 2011.

 

(6) Mrs. Lageson became a named executive officer in 2011. She was not a named executive officer in 2009 or 2010.

 

33


Table of Contents

GRANTS OF PLAN-BASED AWARDS

 

                   Estimated Future Payouts Under
Non- Equity Incentive Plan
Awards (2) (3)
    Estimated Future Payouts
Under Equity Incentive
Plan Awards
                           
(a)   (b)     (c)     (d)     (e)     (f)     (g)   (h)   (i)   (j)     (k)     (l)     (m)  
Name   Grant
Date
    Compensation
Committee
Approval
Date (1)
    Threshold
($)
   

Target

($)

    Maximum
($)
    Threshold 
(#)
 

Target 

(#)

  Maximum 
(#)
 

All Other
Stock
Awards:
Number
of Shares
of Stock
or Units

(#)(4)

   

All Other
Option
Awards:
Number of
Securities
Underlying
Options

(#)(5)

   

Exercise
or Base
Price of
Option
Awards

($/sh)

    Grant Date
Fair Value
of Stock
and Option
Awards
($)(6)
 
Randall J. Hogan     1/3/11        12/13/10                                            47,019                        1,738,763   
      1/3/11        12/13/10                                                    171,324        36.98        1,716,495   
      1/3/11        12/13/10        858,333        1,716,666        3,433,332                                               
                      1,198,125        1,597,500        3,195,000                                               
                         
                                                                                     
John L. Stauch     1/3/11        12/13/10                                            15,064                        557,067   
      1/3/11        12/13/10                                                    54,890        36.98        549,943   
      1/3/11        12/13/10        275,000        550,000        1,100,000                                               
                      287,573        383,430        766,860                                               
                         
                                                                                     
Michael V. Schrock     1/3/11        12/13/10                                            20,542                        759,643   
      1/3/11        12/13/10                                                    74,850        36.98        749,922   
      1/3/11        12/13/10        375,000        750,000        1,500,000                                               
                      423,620        564,826        1,129,652                                               
                         
                                                                                     
Frederick S. Koury     1/3/11        12/13/10                                            8,673                        320,728   
      1/3/11        12/13/10                                                    31,603        36.98        316,630   
      1/3/11        12/13/10        158,333        316,666        633,332                                               
                      180,764        241,018        482,036                                               
                         
                                                                                     
Angela D. Lageson     1/3/11        12/13/10                                            6,391                        236,339   
      1/3/11        12/13/10                                                    23,287        36.98        233,312   
      1/3/11        12/13/10        116,667        233,333        466,666                                               
                      146,250        195,000        390,000                                               

 

(1) The Compensation Committee’s practices for granting options and restricted stock units, including the timing of all grants and approvals therefor, are described under “Compensation Discussion and Analysis – 2011 Long-Term Incentive Compensation.”

 

(2) The amounts shown in column (d) to which no grant date applies reflect the total of the threshold payment levels for each element under our EOPP. This amount is 75% of the target amounts shown in column (e). The amounts shown in column (f) are 200% of such target amounts. These amounts are based on the individual’s current salary and position. Any amounts payable under the EOPP would be paid in March 2012, based on Company performance in 2011.

 

(3) The amounts shown in column (d) as having been granted on January 3, 2011, reflect the total of the threshold payment levels for awards of cash settled performance units granted in 2011 under the 2008 Omnibus Plan which are 50% for 2011 of the target amounts shown in column (e). The amounts shown in column (f) are 200% of such target amounts. These amounts are based on the individual’s current salary and position. Any amounts payable with respect to performance units would be paid in March, 2014, based on cumulative Company performance for the period 2011 to 2013.

 

(4) The amounts shown in column (j) reflect the number of restricted stock units granted to each Named Executive Officer in 2011.

 

(5) The amounts shown in column (k) reflect the number of options to purchase Common Stock granted to each Named Executive Officer in 2011.

 

(6) The amounts shown in column (m) reflect the grant date fair value of the awards of restricted stock units and stock options computed in accordance with ASC 718.

 

34


Table of Contents

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2011

 

     Option Awards     Stock Awards
Name  

Number of

securities

underlying
unexercised
options

(#)

Exercisable

   

Number of

securities

underlying
unexercised
options

(#)

Unexercisable

   

Equity
incentive
plan
awards:

Number of
securities
underlying
 unexercised 
unearned
options

(#)

 

Option
exercise
price

($)(1)

   

Option
expiration

date

   

Number
of

shares

of stock
or units
that have
not been
vested

(#)(2)

   

Market
value of
shares of
stock or
units that
have not
vested

($)(3)

   

Equity
incentive
plan
awards:

Number of
 unearned 
shares
that have
not
vested

(#)

 

Equity
incentive
plan
awards:

Market
or payout
value of
unearned
shares
that have
not
vested

($)

Randall J.
Hogan
                                        211,896        7,054,018           
      295,630        -                     22.8800        1/2/2014                           
      275,000        -                     40.9500        1/6/2015                           
      200,000        -                     34.2800        1/3/2016                           
      319,775        -                     30.0500        1/3/2017                           
      115,624        -                     35.9900        1/2/2013                           
      333,250        -                     34.1800        1/2/2018                           
      206,192        103,096 (4)          24.7800        1/2/2019                           
      120,857        241,715 (5)          33.3800        1/4/2020                           
      -                 171,324 (6)          36.9800        1/3/2021                           
John L.
Stauch
                                        112,681        3,751,150           
      121,000        -                     33.0100        2/15/2017                           
      12,500        -                     31.5600        3/1/2017                           
      112,500        -                     34.1800        1/2/2018                           
      63,333        31,667 (4)          24.7800        1/2/2019                           
      39,740        79,480 (5)          33.3800        1/4/2020                           
      -                 54,890 (6)          36.9800        1/3/2021                           
Michael V. Schrock                                         93,174        3,101,762           
      73,602        -                     22.8800        1/2/2014                           
      60,000        -                     40.9500        1/6/2015                           
      29,786        -                     41.4300        1/2/2012                           
      17,991        -                     41.4300        1/2/2013                           
      7,951        -                     41.4300        1/2/2014                           
      68,000        -                     34.2800        1/3/2016                           
      110,000        -                     30.0500        1/3/2017                           
      10,132        -                     36.7800        1/2/2013                           
      134,000        -                     34.1800        1/2/2018                           
      83,333        41,667 (4)          24.7800        1/2/2019                           
      52,986        105,974 (5)          33.3800        1/4/2020                           
      -                 74,850 (6)          36.9800        1/3/2021                           

 

35


Table of Contents
     Option Awards     Stock Awards
Name  

Number of

securities

underlying
unexercised
options

(#)

Exercisable

   

Number of

securities

underlying
unexercised
options

(#)

Unexercisable

   

Equity
incentive
plan
awards:

Number of
securities
underlying
 unexercised 
unearned
options

(#)

 

Option
exercise
price

($)(1)

   

Option
expiration

date

   

Number
of

shares

of stock
or units
that have
not been
vested

(#)(2)

   

Market
value of
shares of
stock or
units that
have not
vested

($)(3)

   

Equity
incentive
plan
awards:

Number of
 unearned 
shares
that have
not
vested

(#)

 

Equity
incentive
plan
awards:

Market
or payout
value of
unearned
shares
that have
not
vested

($)

Frederick S. Koury                                         41,843        1,392,953           
      2,185        -                    22.8800        1/2/2014                           
      25,000        -                    40.9500        1/6/2015                           
      27,777        -                    34.2800        1/3/2016                           
      45,139        -                    30.0500        1/3/2017                           
      70,000        -                    34.1800        1/2/2018                           
      40,000        20,000 (4)          24.7800        1/2/2019                           
      22,880        45,762 (5)          33.3800        1/4/2020                           
      -                31,603 (6)          36.9800        1/3/2021                           
Angela D. Lageson                                         16,237        540,530           
      7,863        -                    41.1200        3/1/2015                           
      5,793        -                    41.1700        3/1/2016                           
      6,431        -                    31.5600        3/1/2017                           
      5,597        -                    32.4000        3/3/2018                           
      6,419        3,210 (7)          19.1300        3/3/2019                           
      8,333        16,667 (8)          34.2300        3/2/2020                           
      -                23,287 (6)          36.9800        1/3/2021                           

 

(1) The exercise price for all stock option grants is the fair market value of our Common Stock on the date of grant.

 

(2) With respect to 41,667 of the restricted stock units of Mr. Stauch, 100% of the restrictions lapse on the fourth anniversary of the grant date. With respect to 14,779 shares of restricted stock granted to Mr. Hogan and 9,500 shares of restricted stock granted to Mr. Schrock, restrictions on the restricted stock lapse upon the earlier to occur of the following (i) retirement and (ii) January 2, 2012. With respect to the following amounts of restricted stock shares, the restrictions will lapse on March 3, 2012: Mr. Hogan: 4,899 shares; Mr. Stauch: 1,182 shares; Mr. Schrock: 1,741 shares; and Mr. Koury: 758 shares. For all other awards of restricted stock or restricted stock units, the restrictions with respect to 50% of the shares will lapse on the third anniversary of the grant date and the restrictions on the remaining 50% of the shares will lapse on the fourth anniversary of the grant date.

 

(3) The amounts in this column were calculated by multiplying the closing market price of our Common Stock on December 30, 2011 (the last trading day of our most recently completed fiscal year) of $33.29 by the number of unvested restricted stock or restricted stock units.

 

(4) These options will vest on the third anniversary of the grant date, January 2, 2009.

 

(5) One half of these options will vest on each of the second and third anniversaries of the grant date, January 4, 2010.

 

(6) One-third of the options will vest on each of the first, second and third anniversaries of the grant date, January 3, 2011.

 

(7) These options will vest on the third anniversary of the grant date, March 3, 2009.

 

(8) One half of these options will vest on each of the second and third anniversaries of the grant date, March 2, 2010.

 

36


Table of Contents

OPTION EXERCISES AND STOCK VESTED TABLE

The following table shows a summary of the stock options exercised by the Named Executive Officers in 2011 and the restricted stock or restricted stock units vested for the Named Executive Officers during 2011.

 

Name                       Option awards      Stock awards  
   Number of
shares
acquired on
exercise (#)
     Value
realized on
exercise
($)(1)
     Number of
shares
acquired on
vesting (#)
    

Value
realized on
vesting

($)(2)

 

Randall J. Hogan

     244,706         4,013,545         34,454         1,275,921   

John L. Stauch

     -         -         18,557         695,289   

Michael V. Schrock

     16,991         165,832         21,241         786,136   

Frederick S. Koury

     40,119         698,242         10,507         388,829   

Angela D. Lageson

     -         -         1,765         65,035   

 

(1) Reflects the amount calculated by multiplying the number of options exercised by the difference between the market price of our Common Stock on the exercise date and the exercise price of options.

 

(2) Reflects the amount calculated by multiplying the number of shares vested by the market price of our Common Stock on the vesting date.

PENSION BENEFITS

Listed below are the number of years of credited service and present value of accumulated pension benefits as of December 31, 2011 for each of the Named Executive Officers under the Pentair, Inc. Pension Plan, the Pentair, Inc. Supplemental Executive Retirement Plan and the Pentair, Inc. Restoration Plan, which are described in detail under “Compensation Discussion and Analysis – Retirement and Other Benefits.” The disclosed amounts are actuarial estimates only and do not necessarily reflect the actual amounts that will be paid to the Named Executive Officers, which will only be known at the time that they become eligible for payment.

 

Name   Plan name     Number of  
years
credited
service (#)
   

  Present value  
of

accumulated
benefit ($)(1)

    Payments
  during last  
fiscal year
($)
 

Randall J. Hogan

  Pentair, Inc. Pension Plan     14          333,212        -   
    Pentair, Inc. Supplemental Executive Retirement Plan       14          11,011,217        -   

John L. Stauch

  Pentair, Inc. Pension Plan     5          73,606        -   
  Pentair, Inc. Supplemental Executive Retirement Plan     5          1,394,224        -   

Michael V. Schrock

  Pentair, Inc. Pension Plan     14          380,186        -   
  Pentair, Inc. Supplemental Executive Retirement Plan     13          4,217,958        -   

Frederick S. Koury

  Pentair, Inc. Pension Plan     8          145,716        -   
    Pentair, Inc. Supplemental Executive Retirement Plan     8          1,581,689        -   

Angela D. Lageson

  Pentair, Inc. Pension Plan     9          112,533        -   
  Pentair, Inc. Supplemental Executive Retirement Plan     2          289,479 (2)       -   

 

  (1) The Supplemental Executive Retirement Plan benefits, which include amounts under the Restoration Plan, are payable following retirement at age 55 or later in the form of an annuity. The actuarial present values above were calculated using the following methods and assumptions:

 

   

The Pension Plan present values were based on the accrued benefit payable at age 65 and were calculated as of December 31, 2011.

 

   

Present values for the Pension Plan are based on a life-only annuity. Present values for the Supplemental Executive Retirement Plan are based on a 180-month-certain only annuity.

 

37


Table of Contents
   

The present value of Pension Plan benefits as of December 31, 2011 was calculated assuming a 5.05% interest rate and the male and female RP2000 mortality table, projected 15 years for post-retirement decrements with no pre-retirement mortality used.

 

   

The present value of Supplemental Executive Retirement Plan benefits as of December 31, 2011 was calculated assuming a 5.05% interest rate.

 

  (2) Mrs. Lageson’s benefits under the Supplemental Executive Retirement Plan are not vested, but will vest upon the completion of five years of benefit service (all service following initial participation).

The actual amount of pension benefits ultimately paid to a Named Executive Officer may vary based on a number of factors, including differences from the assumptions used to calculate the amounts.

NONQUALIFIED DEFERRED COMPENSATION TABLE

The following table sets forth the contributions, earnings, distributions and 2011 year-end balances for each of the Named Executive Officers under our Sidekick Plan described under “Compensation Discussion and Analysis – Retirement and Other Benefits – Deferred Compensation.” Contributions we make to the Sidekick Plan are intended to make up for contributions to our RSIP/ESOP Plan (including our matching contributions) for cash compensation above the maximum imposed by Internal Revenue Code Section 401(a)(17), which was $245,000 in 2011. Because the Internal Revenue Code does not permit contributions on amounts in excess of that limit under a tax-qualified plan, the Sidekick Plan is designed to permit matching contributions on compensation in excess of the maximum imposed by Internal Revenue Code Section 401(a)(17). We make these matching contributions to the Sidekick Plan on amounts in excess of the maximum imposed by Internal Revenue Code Section 401(a)(17), but below the $700,000 compensation limit contained in our Sidekick Plan (such contributions by a Named Executive Officer, “Covered Sidekick Compensation”).

 

Name  

Executive
Contributions in
2011

($)

   

Registrant

Contributions in
2011

($)

   

Aggregate

Earnings/(Loss)
in 2011

($)

   

Aggregate
Withdrawals/

  Distributions  

($)

 

Aggregate

Balance at
  December 31,  
2011

($)

 

Randall J. Hogan

    210,416        31,325        (83,405   -     1,854,080   

John L. Stauch

    165,981        29,634        (10,355   -     581,455   

Michael V. Schrock

    78,488        31,325        26,743      -     1,623,929   

Frederick S. Koury

    50,866        23,055        (34,619   -     503,345   

Angela D. Lageson

    38,127        7,539        (4,139   -     161,552   

The amounts set forth in the column “Executive Contributions in 2011” reflect the amount of cash compensation each Named Executive Officer deferred in 2011 under the Sidekick Plan.

The amounts set forth in the column “Registrant Contributions in 2011” are the totals of contributions we made in 2011 under the Sidekick Plan for the account of each Named Executive Officer. These amounts, in addition to contributions we made under the RSIP/ESOP Plan, are included in the “Summary Compensation Table” in the column labeled “All Other Compensation” above. The contributions we made are derived from some or all of the following sources:

 

   

Matching contributions equal to one dollar for each dollar contributed up to one percent of Covered Sidekick Compensation, and 50 cents for each incremental dollar contributed up to six percent, deferred in 2010 by each Named Executive Officer; we normally make these contributions one year in arrears.

 

   

A discretionary contribution of up to 1 1/2% of Covered Sidekick Compensation earned in 2010 for each Named Executive Officer; we normally make these contributions one year in arrears.

 

38


Table of Contents

The amounts set forth in the column “Aggregate Earnings/(Loss) in 2011” reflect the amount of investment earnings realized by each Named Executive Officer on the mutual fund investments chosen that are offered to participants in our RSIP/ESOP Plan and Sidekick Plan. Fidelity Investments Institutional Services Co. provides these investment vehicles for participants and handles all allocation and accounting services for these plans. We do not guarantee or subsidize any investment earnings in either Plan.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Except for the following items, we have no agreements, arrangements, or plans that entitle executive officers to severance, perquisites, or other enhanced benefits upon termination of their employment; such payments or benefits (other than following a change in control) would be in the discretion of the Compensation Committee.

 

   

Restricted stock vesting: Restriction periods on grants of restricted stock under the Pentair, Inc. Omnibus Stock Incentive Plan approved by our shareholders in 2004 and terminated in May 2008 (the “2004 Omnibus Plan”) automatically lapse upon the retirement of a Named Executive Officer who has also attained 10 years of service and age 55. The value of unvested restricted stock granted prior to 2009 under the 2004 Omnibus Plan is reflected in the “Outstanding Equity Awards at December 31, 2011” table above. As of December 31, 2011, Mr. Hogan and Mr. Schrock were the only Named Executive Officers who had attained 10 years of service and age 55.

 

   

Stock option vesting: Upon the retirement of a Named Executive Officer who has also attained 10 years of service and age 60, unvested options granted under the 2008 Omnibus Plan continue to vest according to the schedule in effect prior to retirement and, once vested, remain exercisable until the earlier of the expiration or the five-year anniversary of the Named Executive Officer’s retirement date. All such options are reflected in the “Stock Option Vesting” column of the table under the heading “Quantification of Compensation Payable upon Change in Control” below. As of December 31, 2011, no Named Executive Officers had attained the age of 60.

 

   

Restricted stock unit vesting: Restriction periods on grants of restricted stock units under the 2008 Omnibus Plan automatically lapse upon the retirement of a Named Executive Officer who has also attained 10 years of service and age 60. The value of such restricted stock units granted in 2011 is reflected in the “Outstanding Equity Awards at December 31, 2011” table above. As of December 31, 2011, no Named Executive Officers had attained the age of 60.

 

   

Cash settled performance unit vesting: Upon the retirement of a Named Executive Officer who has also attained 10 years of service and age 60, cash settled performance units granted under the 2008 Omnibus Plan vest. Payments to retired Named Executive Officers will be based upon actual Company performance to the date of expiration of the performance period, and will be paid in the year following the expiration. As of December 31, 2011, no Named Executive Officers had attained the age of 60.

 

   

Certain benefits upon a change in control described under the heading “Change in Control Agreements” below.

Change in Control Agreements

We have entered into agreements with certain key corporate executives and business division leaders, including all Named Executive Officers, that provide for contingent benefits upon a change in control. These agreements are intended to provide for continuity of management upon a completed or threatened change in control. The agreements provide that covered executive officers could be entitled to certain severance benefits following a change in control. If, following such a change in control, the executive officer is involuntarily terminated for any reason, other than for disability or for cause, or if such executive officer terminates his or her employment for good reason, then the executive officer is entitled to certain severance payments.

 

39


Table of Contents

Under these agreements, a “change in control” is deemed to have occurred if:

 

   

any person is or becomes the beneficial owner of securities representing 20% (or 30% in the cases of Mr. Stauch and Mrs. Lageson) or more of our outstanding shares of Common Stock or combined voting power;

 

   

a majority of our board of directors changes in a manner that has not been approved by at least two-thirds of the incumbent directors or successor directors nominated by at least two-thirds of the incumbent directors;

 

   

we consummate a merger, consolidation or share exchange with any other entity (or the issuance of voting securities in connection with a merger, consolidation or share exchange) which our shareholders have approved and in which our shareholders control less than 50% of combined voting power after the merger, consolidation or share exchange; or

 

   

we consummate a plan of complete liquidation or dissolution or an agreement for the sale or disposition of all or substantially all of our assets which our shareholders have approved.

Under these agreements, the term “cause” means:

 

   

engaging in intentional conduct that causes us demonstrable and serious financial injury;

 

   

conviction of a felony; or

 

   

continuing willful and unreasonable refusal by an officer to perform his or her duties or responsibilities.

Under these agreements, the term “good reason” means:

 

   

a breach of the agreement by us;

 

   

any reduction in an officer’s base salary, percentage of base salary available as incentive compensation or bonus opportunity or benefits;

 

   

an officer’s removal from, or any failure to reelect or reappoint him or her to serve in, any of the positions held with us on the date of the change in control or any other positions to which he or she is thereafter elected, appointed or assigned, except in the event that such removal or failure to reelect or reappoint relates to our termination of an officer’s employment for cause or by reason of disability;

 

   

a good faith determination by an officer that there has been a material adverse change in his or her working conditions or status relative to the most favorable working conditions or status in effect during the 180-day period prior to the change in control, or, to the extent more favorable to him or her, those in effect at any time while employed after the change in control, including but not limited to a significant change in the nature or scope of his or her authority, powers, functions, duties or responsibilities or a significant reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements, but in each case excluding for this purpose an isolated, insubstantial and inadvertent event not occurring in bad faith that we remedy within 10 days after receipt of notice thereof;

 

   

relocation of an officer’s principal place of employment to a location more than 50 miles from his or her principal place of employment on the date 180 days prior to the change in control;

 

   

imposition of a requirement that an officer travel on business 20% in excess of the average number of days per month he or she was required to travel during the 180-day period prior to the change in control;

 

40


Table of Contents
   

our failure to cause a successor to assume an officer’s agreement; or

 

   

only in the case of the Chief Executive Officer, a voluntary termination for any reason within 30 days following the first anniversary of any change in control.

The benefits under these agreements include:

 

   

upon any change in control:

 

   

incentive compensation awards for the year in question to be paid at target under the EOPP for Named Executive Officers(1);

 

   

immediate vesting of all unvested stock options and termination of all restrictions on restricted stock awards issued under the 2004 Omnibus Plan or 2008 Omnibus Plan, without regard to either plan’s forfeiture provisions(1);

 

   

cash settled performance awards to be paid at one-third of target if the award cycle has been in effect less than 12 months, at two-thirds of the then-current value if the award cycle has been in effect for between 12 and 24 months, and at the then-current value if the award cycle has been in effect for 24 months or more months, in each case as if all performance or incentive requirements and periods had been satisfied(1); and

 

   

in certain cases, reimbursement of any excise taxes triggered by payments to the executive and any additional taxes on this reimbursement.

(1) Benefits pursuant to these compensation plans are also applicable to all other participants.

 

   

upon termination of the executive by us other than for death, disability or cause or by the executive for good reason, after a change in control:

 

   

severance payable upon termination in an amount equal to 300% (for the Chief Executive Officer) or 250% (for the other Named Executive Officers) of annual base salary plus the greater of the executive’s target bonus for the year in question or bonus received in the prior year;

 

   

replacement coverage for Company-provided group medical, dental and life insurance policies for up to three years;

 

   

the cost of an executive search agency not to exceed 10% of the executive’s annual base salary;

 

   

the accelerated accrual and vesting of benefits under the SERP (for those executives who have been made participants of such plan); and for executives having fewer than seven years of participation in the SERP, up to three additional years of service can be credited, up to a maximum of seven years of service; and

 

   

up to $15,000 in fees and expenses of consultants and legal or accounting advisors.

In the case of each Named Executive Officer, the agreement also requires the executive to devote his or her best efforts to us or our successor during the three-year period, to maintain the confidentiality of our information during and following employment and to refrain from competitive activities for a period of one year following termination of employment with us or our successor.

Change in Control Provisions of Incentive Plans

The EOPP also contains provisions that apply in the event of a change in control. For the year in which a change in control occurs, awards for such year are determined by using the participants’ annual base salary as in effect immediately before the change in control and by assuming the performance goals for that year have been attained at target levels. Such awards must be paid to the participant within 10 days of the change in control.

 

41


Table of Contents

In addition, certain requirements are modified or eliminated, including the requirement that a participant remain employed through the end of the applicable incentive period, completion of an annual audit, review and approval by the Compensation Committee. The EOPP also includes a provision that eliminates the Compensation Committee’s discretion to reduce awards.

The 2004 Omnibus Plan provides that, upon a change in control, unless otherwise provided in an agreement between us and the executive that discusses the effect of a change in control on the executive’s awards:

 

   

all outstanding options granted under the 2004 Omnibus Plan that are unvested become fully vested; and

 

   

all restrictions applicable to outstanding shares of restricted stock granted under the Plan shall automatically lapse and any dividends declared but unpaid with respect to such restricted stock shall be paid to the executive within 10 days of the date of the change in control.

The 2008 Omnibus Plan provides that, upon a change in control, unless otherwise provided in an agreement between us and the executive that discusses the effect of a change in control on the executive’s awards:

 

   

all outstanding options granted under the 2008 Omnibus Plan that are unvested become fully vested;

 

   

all restrictions applicable to outstanding shares of restricted stock granted under the 2008 Omnibus Plan shall automatically lapse and any dividends declared but unpaid with respect to such restricted stock shall be paid to the executive within 10 days of the date of the change in control;

 

   

all restrictions applicable to outstanding restricted stock units and dividend equivalent units granted under the 2008 Omnibus Plan shall automatically lapse and any dividends declared but unpaid with respect to such dividend equivalent units shall be paid to the executive within 10 days of the date of the change in control; and

 

   

all cash settled performance units for which the performance period has not expired will be cancelled in exchange for a cash payment equal to the amount that would have been due under such awards if the performance goals measured at the time of the change in control were to continue to be achieved at the same rate through the end of the performance period, or if higher, assuming the target performance goals had been met at the time of the change in control.

Benefits pursuant to these compensation plans are also applicable to all other participants.

 

42


Table of Contents

Quantification of Compensation Payable upon Change in Control

The amount of compensation payable to each Named Executive Officer upon a change in control and termination of the executive by us other than for death, disability or cause or by the executive for good reason after a change in control is shown below. The amounts shown assume that such termination was effective as of December 31, 2011, and thus are estimates of the amounts that would be paid out to the executives upon a change in control or their termination following a change in control. The actual amounts to be paid out can only be determined at the time of such change in control or executive’s separation.

 

Executive  

Cash
Termination
Payment

(2)

 

Stock Option
Vesting

(1)

 

Restricted
Stock and
Restricted
Stock Unit
Vesting

(1)

 

Cash
settled
Perform-
ance Unit
Vesting

(1)

 

SERP
& Related
Pension

(2)

 

Incentive

Compen-
sation

(1)

 

Outplace-
ment

(2)

 

Legal &
Account-

ing
Advisors
(2)

  Medical,
Dental,
Life
Insurance
(2)
 

Total:
Change in
Control

(1)

 

Excise Tax
Gross Up

(2)

 

Total:
Change in
Control
Followed by
Termination

(2)

Randall J.
Hogan
      $9,822,186         $877,347         $7,054,018         $572,222         -         $1,597,500         $50,000         $15,000         $43,731         $10,101,087         -         $20,032,004  

John L.

Stauch

      $2,552,643         $269,486         $3,751,150         $183,333         402,100         $383,430         $47,929         $15,000         $28,061         $4,587,399         $1,770,637         $9,403,769  
Michael V. Schrock       $3,424,435         $354,586         $3,101,762         $250,000         -         $564,826         $50,000         $15,000         $42,845         $4,271,174         -         $7,803,454  
Frederick S. Koury       $1,889,498         $170,200         $1,392,953         $105,555         -         $241,018         $40,170         $15,000         $41,363         $1,909,726         (47,324       $3,848,433  
Angela D. Lageson       $1,420,173         $45,454         $540,530         $77,778         $366,045         $195,000         $32,500         $15,000         $27,163         $858,762         $994,453         $3,714,096  

 

(1) Triggered solely upon a change of control.

 

(2) Triggered only upon a change in control and a termination of the executive officer by us other than for death, disability or cause or by the executive for good reason.

The amounts above assume that:

 

   

our Common Stock was valued at $33.29, the closing market price for our Common Stock on December 30, 2011;

 

   

outplacement services fees are the maximum possible under the change in control agreements (10% of annual base salary) for each executive officer, except for Mr. Hogan and Mr. Schrock, for which outplacement services are assumed to be $50,000;

 

   

legal and accounting advisor fees are the maximum possible under the change in control agreements for each executive officer; and

 

   

medical, dental and life insurance coverage will continue for three years after termination at the current cost per year for each executive.

Under certain circumstances, as reflected above, we may pay to an executive covered by a change in control agreement an excise tax gross up. In determining the amount of any such gross up included in the tables above, we made the following material assumptions: an excise tax rate of 20% under Section 280G of the Internal Revenue Code, a combined federal and state individual tax rate of 41.9%, and we would be able to overcome any presumption that grants of stock options or restricted stock units in 2011 were made in contemplation of a change in control pursuant to regulations promulgated under the Internal Revenue Code. In addition, no excise tax gross up will be made if the portion of the payments treated as “parachute payments” received by an executive in the event of a change in control can be reduced by not more than 10% and escape an excise tax. In that event, the payments will be reduced to the highest qualifying amount and no gross up will be paid. Furthermore, it was assumed that no value will be attributed to any non-competition agreement. At the time of any such change in control, a value may be attributed, which would result in a reduction of amounts subject to the excise tax.

 

43


Table of Contents

Risk Considerations in Compensation Decisions

The Committee believes that payment for performance is an important part of its compensation philosophy, but recognizes the risk that incentivizing specific measures of performance may pose to the performance of the Company as a whole if personnel were to act in ways designed primarily to maximize their compensation. Therefore the Committee annually reviews several factors in establishing compensation programs, setting compensation levels and selecting target measures for variable compensation programs.

 

   

The relative values of base salaries, annual cash bonuses and long-term equity grants for employees

 

   

The mix of incentive target performance measures for each business and for the Company as a whole under the Company’s annual cash bonus programs

 

   

The relative weighting of target performance measures for each business and the Company as a whole

 

   

The impact of these performance measures on the Company’s financial results

 

   

The likelihood that achievement of performance metrics could have material adverse impacts on Company financial performance in succeeding fiscal periods

 

   

The relative significance of each of the Company’s businesses to its overall financial performance

 

   

The extent to which performance measures are not directly reflected in audited financial statements

 

   

The balance between the achievement of short-term objectives and longer-term value creation

The Committee will continue to assess our executive management programs to align employee interests with those of long-term shareholder interests.

 

44


Table of Contents

PROPOSAL 2

Advisory Vote to Approve the Compensation of the Named Executive Officers

Executive compensation is an important matter to us, the Board and the Compensation Committee and to our shareholders. As required by Section 14A of the Securities Exchange Act of 1934, we are asking our shareholders to vote, on a non-binding, advisory basis, on a resolution approving the compensation of the Named Executive Officers as disclosed under “Compensation Discussion and Analysis” and the compensation tables and narrative discussion under “Executive Compensation” contained in this Proxy Statement.

As we describe in detail under “Compensation Discussion and Analysis” and the compensation tables and narrative discussion under “Executive Compensation” contained in this Proxy Statement, we have designed our executive compensation programs to align executive and shareholder interests by rewarding the achievement of specific annual, longer-term and strategic goals that create long-term shareholder value. We utilize our executive compensation programs to provide competitive compensation within our peer group that will motivate and reward executives for achieving financial and strategic objectives, provide rewards commensurate with performance to incentivize the Named Executive Officers to perform at their highest levels, encourage innovation and growth, attract and retain the Named Executive Officers and other key executives and align our executive compensation with shareholders’ interests through the use of equity-based incentive awards.

The Compensation Committee has overseen the development and implementation of our executive compensation programs in line with these compensation objectives. The Compensation Committee also continuously reviews, evaluates and updates our executive compensation programs to ensure that we provide competitive compensation that motivates the Named Executive Officers to perform at their highest levels while increasing long-term value to our shareholders. With these compensation objectives in mind, the Compensation Committee has taken compensation actions including the following:

 

   

Linking the annual cash incentive for the Named Executive Officers to performance goals that correlated strongly with two primary corporate objectives of improving the financial return from our businesses and strengthening our balance sheet through cash flow improvement and debt reduction.

 

   

Having a significant portion of total compensation consist of annual and longer-term incentives, including the cash annual incentive and restricted stock units, stock option grants and cash settled performance units, that are at risk if certain performance goals are not satisfied or are subject to our future performance.

 

   

Requiring executive officers to maintain certain stock ownership levels through the establishment of stock ownership guidelines.

 

   

Generally limiting perquisites to a limited annual cash allowance and not providing tax reimbursements on such perquisites.

The Compensation Committee’s compensation actions like those described above demonstrate our continued commitment to align executive compensation with shareholders’ interests while providing competitive compensation to attract, motivate and retain the Named Executive Officers and other key executives. We will continue to review and adjust our executive compensation programs with these goals in mind to ensure the long-term success of our company and generate increased long-term value to our shareholders.

The Board and the Compensation Committee request the support of our shareholders for the compensation of the Named Executive Officers as disclosed in this Proxy Statement. This advisory vote to approve the compensation of the Named Executive Officers gives our shareholders the opportunity to make their opinions known about our executive compensation programs. As we seek to align our executive compensation

 

45


Table of Contents

programs with the interests of our shareholders while continuing to retain key talented executives that drive our company’s success, we ask that our shareholders approve the compensation of the Named Executive Officers as disclosed in this Proxy Statement. Accordingly, for the reasons we discuss above, the Board and the Compensation Committee recommend that shareholders vote in favor of the following resolution:

RESOLVED, that the shareholders approve, on an advisory basis, the compensation of the Named Executive Officers as disclosed pursuant to Item 402 of Regulation S-K, including under “Compensation Discussion and Analysis” and the compensation tables and narrative discussion under “Executive Compensation” contained in the Proxy Statement.”

This vote on the compensation of the Named Executive Officers is advisory and not binding on us, the Board or the Compensation Committee. Although the outcome of this advisory vote on the compensation of the Named Executive Officers is non-binding, the Board and the Compensation Committee will review and consider the outcome of this vote when making future compensation decisions for the Named Executive Officers.

 

EACH OF THE BOARD AND THE COMPENSATION COMMITTEE UNANIMOUSLY

RECOMMENDS A VOTE “FOR” PROPOSAL 2.

 

46


Table of Contents

DIRECTOR COMPENSATION

We use a combination of cash and equity-based incentive compensation to attract and retain qualified directors. Compensation of our directors reflects our belief that a significant portion of directors’ compensation should be tied to long-term growth in shareholder value.

Mr. Hogan, our only employee-director, is not and will not be separately compensated for service as a member of the Board. Non-employee director compensation for 2011 was as set forth below.

Annual Retainers

Annual retainers for non-employee directors’ service on the Board and Board Committees are as follows:

 

Board Retainer

   $ 40,000   

Lead Director Supplemental Retainer

     20,000   

Audit Committee Chair Supplemental Retainer

     20,000   

Compensation Committee Chair Supplemental Retainer

     10,000   

Governance Committee Chair Supplemental Retainer

     5,000   

International Committee Chair Supplemental Retainer

     5,000   

Audit Committee Retainer

     9,000   

Other Committee Retainer (per committee)

     4,000   

Attendance Fees

For Board meetings, we paid each director $2,000 for personal attendance and $500 for attendance by telephone (or video conference). For committee meetings lasting less than two hours, we paid directors $1,500 for personal attendance ($2,000 for committee Chairs), and $500 for attendance by telephone (or video conference). For committee meetings lasting longer than two hours, we paid the directors $2,500 ($3,000 for committee Chairs) for personal attendance and $1,000 for attendance by telephone (or video conference). For our management’s annual strategic planning meeting, we paid each director $2,000 for personal attendance and $500 for attendance by telephone.

Deferred Compensation

Under the Pentair, Inc. Compensation Plan for Non-Employee Directors, our non-employee directors may elect to defer payment of all or a portion of their annual retainers and meeting fees in the form of share units. The value of a share unit is equal to the market value of a share of Common Stock. Share units carry no voting or investment power. We currently match 15% of the amount of any annual retainer that is deferred. A portion of our directors’ fees also may be paid directly in the form of share units under the equity compensation provisions of the Plan; however, no director was paid in that manner in 2011.

Equity Awards

Non-employee directors also receive a grant of options and restricted stock units under the 2008 Omnibus Plan as a part of their compensation. Options granted are exercisable at the closing price of our stock on the date of grant, have a ten-year term and vest in one-third increments on the first, second and third anniversaries of the grant date. Restricted stock units granted vest in one-third increments on each of the first, second and third anniversaries of the grant date. Each restricted stock unit represents the right to receive one share of our Common Stock upon vesting and includes one dividend equivalent unit, which entitles the holder to all cash dividends declared on a share of our Common Stock from and after the date of grant. Non-employee directors may elect to defer receipt of restricted stock units upon vesting under our Compensation Plan for Non-Employee Directors. All of our non-employee directors received option and restricted stock unit grants in 2011. Future grants of equity awards for non-employee directors will also be made under the 2008 Omnibus Plan, including those granted in January 2012.

 

47


Table of Contents

Stock Ownership Guidelines

Within five years after election, non-employee directors are expected to acquire and hold our Common Stock or stock equivalents having a value equal to five times the annual board retainer for non-employee directors.

Stock Ownership for the Currently-Serving Directors as of December 31, 2011

 

     Share
Ownership
   

12/31/11

Market Value ($)(1)

   

Ownership

Guideline ($)

    

Meets

Guideline

 

Leslie Abi-Karam

    3,622        120,576        200,000         No(2 ) 

Glynis A. Bryan

    13,730        457,072        200,000         Yes   

Jerry W. Burris

    6,281        209,094        200,000         Yes   

T. Michael Glenn

    8,584        285,761        200,000         Yes   

Charles A. Haggerty

    167,355        5,571,248        200,000         Yes   

David H. Y. Ho

    12,719        423,416        200,000         Yes   

David A. Jones

    33,241        1,106,593        200,000         Yes   

Ronald L. Merriman

    13,204        439,561        200,000         Yes   

William T. Monahan

    42,328        1,409,099        200,000         Yes   

 

  (1) Based on the closing market price for our Common Stock on December 30, 2011 of $33.29.

 

  (2) Ms. Abi-Karam became a director in February 2008 and will have five years from the commencement of service as a director to meet the stock ownership requirement.

Director Compensation Table

The table below summarizes the compensation that we paid to non-employee directors for the fiscal year ended December 31, 2011.

 

(a)   (b)     (c)     (d)     (e)   (f)   (g)     (h)  
Name (1)  

Fees Earned or
Paid in Cash

($)(2)

   

Stock
Awards

($)(3)

   

Option
Awards

($)(4)

   

Non-Equity
Incentive Plan
Compensation

($)

 

Change in
Pension Value
and Deferred
Compensation
Earnings

($)

 

All Other
Compensation

($)(5)

   

Total

($)

 

Leslie Abi-Karam

    76,500        43,045        42,501      -   -     2,229        164,275   

Glynis A. Bryan

    86,700        43,045        42,501      -   -     -        172,246   

Jerry W. Burris

    83,350        43,045        42,501      -   -     1,845        170,741   

T. Michael Glenn

    79,600        43,045        42,501      -   -     -        165,146   

Charles A. Haggerty

    83,850        43,045        42,501      -   -     -        169,396   

David H. Y. Ho

    94,450        43,045        42,501      -   -     -        179,996   

David A. Jones

    114,300        43,045        42,501      -   -     5,405        205,251   

Ronald L. Merriman

    117,475        43,045        42,501      -   -     357        203,378   

William T. Monahan

    107,500        43,045        42,501      -   -     -        193,046   

 

(1) Randall Hogan, our Chief Executive Officer, is not included in this table as he is our employee and receives no compensation for his services as a director. The compensation received by Mr. Hogan as our employee during and for 2011 is shown under “Executive Compensation – Summary Compensation Table.”

 

48


Table of Contents
(2) The directors’ deferred receipt of 2011 cash compensation in the form of share units under our Compensation Plan for Non-Employee Directors is as follows:

 

Name   2011 Fees Deferred ($)   Share Units
Purchased with 2011
Deferred Fees
  Number of  Deferred
Share Units Held Under
Compensation Plan for
Non-Employee
Directors as of 12/31/11
(a)

Leslie Abi-Karam

      -         -         3,163  

Glynis A. Bryan

      55,200         1,513         12,380  

Jerry W. Burris

      56,350         1,545         6,281  

T. Michael Glenn

      41,600         1,147         6,584  

Charles A. Haggerty

      83,850         2,312         77,200  

David H. Y. Ho