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TABLE OF CONTENTS

5875 LANDERBROOK DRIVE

CLEVELAND, OHIO 44124-4069

 

5875 LANDERBROOK DRIVE

CLEVELAND, OHIO 44124-4069

 

 

however, will not be treated as votes cast, so broker non-votes will not affect the outcome with respect to the requirement to obtain a majority of the votes cast. However, broker non-votes are considered to be entitled to vote and, therefore, could impair our ability to satisfy the requirement that votes cast represent at least 50% of the total voting power of all shares entitled to vote on proposal two. Although each of the advisory votes on executive compensation and how often the advisory vote will occur is non-binding, the advisory votes allow our stockholders to express their opinions regarding our executive compensation and how frequently an advisory vote on executive compensation should occur. Abstentions and broker non-votes are not counted for purposes of the advisory votes on executive compensation. As a result, if you own shares through a bank, broker-dealer or similar organization, you must instruct your bank, broker-dealer or other similar organization to vote in order for them to vote your shares, so that your vote can be counted for these proposals. In accordance with our Bylaws, the affirmative vote of the holders of a majority of the voting power of our stock that is present in person or represented by proxy and that is actually voted is required to approve all other proposals which are brought before the Annual Meeting. As a result, other than as set forth above with respect to proposals two, three and four, abstentions and broker non-votes in respect of any proposal will not be counted for purposes of determining whether a proposal has received the requisite approval by our stockholders.

 

In accordance with Delaware law and our Bylaws, we may, by a vote of the stockholders, in person or by proxy, adjourn the Annual Meeting to a later date or dates, without changing the record date. If we were to determine that an adjournment was desirable, the appointed proxies would use the discretionary authority granted pursuant to the proxy cards to vote in favor of such an adjournment.

 

BUSINESS TO BE TRANSACTED

 

 

Director Nominee Information

 

It is intended that shares represented by proxies in the enclosed form will be voted for the election of the nominees named in the following table to serve as directors for a term until the next annual meeting and until their successors are elected, unless contrary instructions are received. All of the nominees listed below presently serve as our directors and were elected at our 2010 annual meeting of stockholders. If an unexpected occurrence should make it necessary, in the judgment of the proxy holders, to substitute some other person for any of the nominees, shares represented by proxies will be voted for such other person as the proxy holders may select.

 

The disclosure below provides information as of the date of this proxy statement about each director nominee. The information presented is based upon information each director has given us about his age, all positions held, his principal occupation and business experience for the past five years, and the names of other publicly-held companies of which he currently serves as a director or has served as a director during the past five years. In addition, we have presented information regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board of Directors to the conclusion that he should serve as a director. We also believe that the nomination of each of our director nominees is in the best long-term interests of our stockholders, as each individual possesses the highest personal and professional ethics, integrity and values, and has the judgment, skill, independence and experience required to serve as members of our Board of Directors. Each individual has also demonstrated a strong commitment to service to the Company.

 

 

 

Nominating and Corporate Governance Committee

Dennis W. LaBarre
Richard de J. Osborne
Michael E. Shannon (Chairman)
David F. Taplin
John F. Turben

 

The Audit Review Committee held eight meetings in 2010. The Audit Review Committee has the responsibilities set forth in its charter with respect to:

 

 

The Board of Directors has determined that Michael E. Shannon, the Chairman of the Audit Review Committee, qualifies as an audit committee financial expert as defined in Section 407(d) of Regulation S-K under the Securities Exchange Act of 1934, which we refer to as the Exchange Act. Mr. Shannon is independent, as such term is defined in Section 303A.02 of the New York Stock Exchange’s listing standards and Rule 10A-3(b)(1) under the Exchange Act. Our Board of Directors believes that, in keeping with our high standards, all members of the Audit Review Committee should have a high level of financial knowledge. Accordingly, our Board of Directors has reviewed the membership of the Audit Review Committee and

determined that each member of the Audit Review Committee is independent as defined in Section 303A.02 of the New York Stock Exchange’s listing standards and Rule 10A-3(b)(1) under the Exchange Act, is financially literate as defined in Section 303A.07(a) of the New York Stock Exchange’s listing standards, has accounting or related financial management expertise as defined in Section 303A.07(a) of the New York Stock Exchange’s listing standards and, therefore, may qualify as an audit committee financial expert. No members of the Audit Review Committee serve on more than three public company audit committees.

 

The Compensation Committee held six meetings in 2010. The Compensation Committee has the responsibilities set forth in its charter with respect to the administration of our policies, programs and procedures for compensating our employees, including our executive officers and directors. Among other things, the Compensation Committee’s direct responsibilities include:

 

 

Consistent with applicable laws, rules and regulations, the Compensation Committee may, in its discretion, delegate all or a portion of its duties and responsibilities to one or more subcommittees of the Compensation Committee or, in appropriate cases, to our senior managers. The Compensation Committee retains and receives assistance in the performance of its responsibilities from an internationally recognized compensation consulting firm, discussed further below under the heading “Executive Compensation — Compensation Discussion and Analysis — Compensation Consultants.” Each member of the Compensation Committee is independent, as defined in the listing standards of the New York Stock Exchange.

 

The Nominating and Corporate Governance Committee held two meetings in 2010. The Nominating and Corporate Governance Committee has the responsibilities set forth in its charter. Among other things, the Nominating and Corporate Governance Committee’s responsibilities include:

 

 

 

The Nominating and Corporate Governance Committee will consider director candidates recommended by our stockholders. See “— Procedures for Submission and Consideration of Director Candidates” on page 10. In addition to the foregoing responsibilities, the Nominating and Corporate Governance Committee is responsible for reviewing our Corporate Governance Guidelines and recommending changes to the Corporate Governance Guidelines, as appropriate; overseeing evaluations of the Board of Directors’ effectiveness; and annually reporting to the Board of Directors the Nominating and Corporate Governance Committee’s assessment of our Board of Directors’ performance. Each member of the Nominating and Corporate Governance Committee is independent, as defined in the listing standards of the New York Stock Exchange. However, the Nominating and Corporate Governance Committee may, from time to time, consult with certain other members of the Taplin and Rankin families, including Alfred M. Rankin, Jr., regarding the composition of our Board of Directors.

 

The Finance Committee held seven meetings in 2010. The Finance Committee reviews our financing and financial risk management strategies and those of our principal subsidiaries and makes recommendations to our Board of Directors on matters concerning finance.

 

The Executive Committee did not hold any meetings in 2010. The Executive Committee may exercise all of the powers of our Board of Directors over the management and control of our business during the intervals between meetings of our Board of Directors.

 

Our Board of Directors held eight meetings in 2010. In 2010, all of the directors attended at least 75 percent of the total meetings held by our Board of Directors and by the committees on which they served during their tenure.

 

Our Board of Directors has determined that, based primarily on the ownership of Class A Common and Class B Common by the members of the Taplin and Rankin families and their voting history, we have the characteristics of, and may be, a “controlled company,” as that term is defined in Section 303A of the listing standards of the New York Stock Exchange. Accordingly, our Board of Directors has determined that we could be characterized as a “controlled company.” However, our Board of Directors has elected not to make use at the present time of any of the exceptions to the requirements of the listing standards of the New York Stock Exchange that are available to controlled companies. Accordingly, at least a majority of the members of our Board of Directors is independent, as defined in the listing standards of the New York Stock Exchange. In making a determination as to the independence of our directors, our Board of Directors considered Section 303A of the listing standards of the New York Stock Exchange and broadly considered the materiality of each director’s relationship with us. Based upon the foregoing criteria, our Board of Directors has determined that the following directors are independent: Owsley Brown II, Dennis W. LaBarre, Richard de J. Osborne, Michael E. Shannon, Britton T. Taplin, David F. Taplin, John F. Turben and Eugene Wong.

 

In accordance with the rules of the New York Stock Exchange, our non-management directors are scheduled to meet in executive session, without management, once a year. The Chairman of the Compensation Committee presides at such meeting. Additional meetings of the non-management directors may be scheduled from time to time when the non-management directors believe such meetings are desirable. The determination of the director who should preside at such additional meeting will be made based upon the principal subject matter to be discussed at the meeting. A meeting of the non-management directors was held on February 9, 2011.

 

We hold a regularly scheduled meeting of our Board of Directors in conjunction with our annual meeting of stockholders. Directors are expected to attend the annual meeting of stockholders absent an appropriate excuse. All of our directors attended our 2010 annual meeting of stockholders.

We have adopted a code of ethics, entitled “Code of Corporate Conduct,” applicable to all of our personnel, including the principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions. Waivers of our code of ethics for our directors or executive officers, if any, may be disclosed on our website, by press release or by filing a Current Report on Form 8-K with the Securities and Exchange Commission, which we refer to as the SEC. We have also adopted Corporate Governance Guidelines, which provide a framework for the conduct of our Board of Directors’ business. The Code of Corporate Conduct, the Corporate Governance Guidelines and the Independence Standards for Directors, as well as each of the charters of the Audit Review Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, are available free of charge on our website at http://www.nacco.com, under the heading “Corporate Governance.” The information contained on or accessible through our website other than this Proxy Statement is not incorporated by reference into this Proxy Statement, and you should not consider such information contained on or accessible through our website as part of this Proxy Statement.

 

The Audit Review Committee reviews all relationships and transactions in which we and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest in such transactions. Our legal department is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions in order to enable the Audit Review Committee to determine, based on the facts and circumstances, whether we have or a related person has a direct or indirect material interest in the transaction. As set forth in the Audit Review Committee’s charter, in the course of the review of a potentially material related-person transaction, the Audit Review Committee considers:

 

 

Based on this review, the Audit Review Committee will determine whether to approve or ratify any transaction that is directly or indirectly material to us or a related person.

 

Any member of the Audit Review Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote with respect to the approval or ratification of the transaction; however, such director may be counted in determining the presence of a quorum at a meeting of the Audit Review Committee that considers the transaction.

 

Procedures for Submission and Consideration of Director Candidates

 

The Nominating and Corporate Governance Committee will consider stockholder recommendations for nominees for election to our Board of Directors if such recommendations are in writing and set forth the information listed below. Such recommendations must be submitted to NACCO Industries, Inc., 5875 Landerbrook Drive, Suite 300, Cleveland, Ohio 44124-4069, Attention: Secretary, and must be received at our executive offices on or before December 31 of each year in anticipation of the following year’s annual meeting

of stockholders. All stockholder recommendations for director nominees must set forth the following information:

 

 

There are no specific qualifications or specific qualities or skills that we require our directors to possess. In evaluating director nominees, the Nominating and Corporate Governance Committee will consider such factors as it deems appropriate, and other factors identified from time to time by our Board of Directors. The Nominating and Corporate Governance Committee will consider the entirety of each proposed director nominee’s credentials. As a general matter, the Nominating and Corporate Governance Committee will consider a diverse number of factors such as judgment, skill, ethics, integrity, values, independence, possible conflicts of interest, experience with businesses and other organizations of comparable size or character, the interplay of the candidate’s experience and approach to addressing business issues with the experience and approach of incumbent members of our Board of Directors and other new director candidates. The Nominating and Corporate Governance Committee’s goal in selecting directors for nomination to our Board of Directors is generally to seek a well-balanced membership that combines a diversity of experience and skill in order to enable us to pursue our strategic objectives.

 

The Nominating and Corporate Governance Committee will consider all information provided to it that is relevant to a candidate’s nomination as one of our directors. Following such consideration, the Nominating and Corporate Governance Committee may seek additional information regarding, and may request an interview with, any candidate who it wishes to continue to consider. Based upon all information available to it and any interviews it may have conducted, the Nominating and Corporate Governance Committee will meet to

determine whether to recommend the candidate to our Board of Directors. The Nominating and Corporate Governance Committee will consider candidates recommended by stockholders on the same basis as candidates from other sources.

 

The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for directors. The Nominating and Corporate Governance Committee regularly reviews the appropriate size of our Board of Directors and whether any vacancies on our Board of Directors are expected due to retirement or otherwise. In the event vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee may consider various potential candidates. Candidates may be recommended by current members of our Board of Directors, third-party search firms or stockholders. No search firm was retained by the Nominating and Corporate Governance Committee during the past fiscal year. The Nominating and Corporate Governance Committee generally does not consider recommendations for director nominees submitted by individuals who are not affiliated with us. In order to preserve its impartiality, the Nominating and Corporate Governance Committee may not consider a recommendation that is not submitted in accordance with the procedures set forth above.

 

Board Leadership Structure and Risk Management

 

Through our holding company structure, we operate a diverse group of businesses spanning the following four principal industries: lift trucks, small appliances, specialty retail and mining. Due to the diversity of our businesses, including in terms of their products, customers, operations, geographical scope, risks and structure, the Board of Directors believes that our Chief Executive Officer is the most appropriate person to serve as our Chairman because he possesses in-depth knowledge of the issues, opportunities and challenges facing each of our principal businesses. Because of this knowledge and insight, he is in the best position to effectively identify strategic opportunities and priorities and to lead the discussion for the execution of the Company’s strategies and achievement of its objectives. As Chairman, our Chief Executive Officer is able to:

 

 

This board leadership structure also enhances the effectiveness of the boards of directors of our subsidiaries, which have parallel structures and provide oversight at the strategic and operational business unit level. Each director who serves on our Board of Directors is also a member of each subsidiary’s board of directors, which integrates our Board of Directors with the boards of our subsidiaries. Our Chief Executive Officer serves as the Chairman of each subsidiary’s board of directors, which provides a common and consistent element that enables these subsidiary boards of directors to function effectively and efficiently as well as in an independent, informed basis for exercising effective oversight, including risk oversight. The Board of Directors believes that the combined role of Chairman and Chief Executive Officer promotes strategic development and execution at each of the subsidiaries, which is essential to effective governance. We do not assign a lead independent director but the Chairman of our Compensation Committee presides at the regularly scheduled meetings of non-management directors.

The Board of Directors oversees our risk management. The full Board of Directors (as supplemented by the appropriate board committee in the case of risks that are overseen by a particular committee) regularly reviews information provided by management in order for the Board of Directors to oversee the risk identification, risk management and risk mitigation strategies. Our board committees assist the full Board of Directors’ oversight of our material risks by focusing on risks related to the particular area of concentration of the relevant committee. For example, our Compensation Committee oversees risks related to our executive compensation plans and arrangements, our Audit Review Committee oversees the financial reporting and control risks, our Finance Committee oversees financing and other financial risk management strategies and our Nominating and Corporate Governance Committee oversees risks associated with the independence of the Board of Directors and potential conflicts of interest. Each committee reports on these discussions of the applicable relevant risks to the full Board of Directors during the committee reports portion of the Board of Directors meeting. The full Board of Directors incorporates the insight provided by these reports into its overall risk management analysis.

 

Certain Business Relationships

 

Dennis W. LaBarre, one of our and our principal subsidiaries’ directors, is a partner in the law firm of Jones Day. Jones Day provided legal services on our behalf and on behalf of our principal subsidiaries during 2010 on a variety of matters, and it is anticipated that such firm will provide similar services in 2011. The fees for the legal services rendered to us and our principal subsidiaries by Jones Day approximated $14.3 million for the year ended December 31, 2010, a substantial portion of these fees were related to the previously disclosed Applica litigation that was settled in 2011. Mr. LaBarre does not receive any direct compensation from legal fees we pay to Jones Day and these legal fees do not provide any material indirect compensation to Mr. LaBarre.

 

J.C. Butler, Jr., one of our executive officers, is the son-in-law of Alfred M. Rankin, Jr. In 2010, Mr. Butler’s total compensation from us was $1,149,771, which includes annual compensation, long-term compensation and all other compensation.

 

Director Compensation

 

The following table sets forth all compensation of each director for services as our directors and as directors of our principal subsidiaries for 2010, other than Alfred M. Rankin, Jr. In addition to being a director, Mr. Rankin is also Chairman, President and Chief Executive Officer of the Company and Chairman of each of NMHG, NA Coal, HBB and KC. Mr. Rankin does not receive any compensation for his services as a director. Mr. Rankin’s compensation for services as one of our executive officers is shown in the Summary Compensation Table on page 52.

 

 

 

 

Description of Material Factors Relating to the Director Compensation Table

 

Effective January 1, 2009, director compensation was reduced by 10% to reflect economic and business conditions. Effective January 1, 2010, the Company restored 5% of the reduction in director compensation and the remaining 5% was restored effective July 1, 2010 in response to the partial economic recovery and our forecasted 2010 financial performance.

 

As of July 1, 2010, each non-employee director received the following annual compensation for service on our Board of Directors and on our subsidiaries’ boards of directors:

 

 

The retainers are paid quarterly in arrears and the meeting fees are paid following each meeting. Each director is also reimbursed for expenses incurred as a result of attendance at meetings. We also occasionally make our private aircraft available to directors for attendance at meetings of our Board of Directors and our subsidiaries’ boards of directors.

 

Under the Non-Employee Directors’ Plan, as of July 1, 2010, each director who was not an officer of the Company or of any of our subsidiaries received $30,000 of his $55,000 retainer in whole shares of Class A Common. Any fractional shares were paid in cash. The actual number of shares of Class A Common issued to a director is determined by the following formula:

 

the dollar value of the portion of the $30,000 retainer that was earned by the director each quarter
divided by
the average closing price of shares of Class A Common on the New York Stock Exchange for each week during such quarter.

 

These shares are fully vested on the date of grant, and the director is entitled to all rights of a stockholder, including the right to vote and receive dividends. However, the shares cannot be assigned, pledged, hypothecated or otherwise transferred by the director, voluntarily or involuntarily, other than:

 

 

The foregoing restrictions on transfer lapse upon the earliest to occur of:

 

 

In addition, each director has the right under the Non-Employee Directors’ Plan to receive shares of Class A Common in lieu of cash for up to 100% of the balance of his retainers and meeting attendance fees. The number of shares issued is determined under the same formula stated above. However, these Voluntary Shares are not subject to the foregoing transfer restrictions.

 

Director Compensation Program for 2011

 

The Compensation Committee periodically evaluates and recommends changes to our compensation program for directors. In 2010, the Compensation Committee used the Hay Group consulting firm to evaluate and provide recommendations regarding our director compensation program. Our Board of Directors adopted certain recommendations and made changes effective January 1, 2011.

 

The revised director compensation program is structured in a similar manner to the 2010 program. However, the retainers paid to each non-employee director for service on our Board of Directors were increased from $55,000 ($30,000 of which is paid in the form of shares of Class A Common) to a retainer of $80,000 ($45,000 of which will be paid in the form of shares of Class A Common). The Compensation Committee and our Board of Directors expect to review the compensation program at the end of 2011 to determine if any further increases or additional changes are warranted.

 

Subject to stockholder approval, the Non-Employee Directors’ Plan will be amended and restated, effective May 11, 2011 so that the number of shares of Class A Common available for issuance pursuant to awards under the plan is 100,000 shares, which was the amount of Class A Common authorized when the Non-Employee Directors’ Plan was originally adopted in 1992. The amendment and restatement was adopted by our Board of Directors subject to stockholder approval in accordance with Section 303A.08 of the New York Stock Exchange’s listing standards.

 

unless the context requires otherwise, establish and oversee the administration of our policies, programs and procedures for compensating our employees, including our executive officers. Each Compensation Committee consists solely of independent directors.

 

The Compensation Committee’s direct responsibilities include:

 

 

 

 

Compensation Consultants

 

The Compensation Committee receives assistance and advice from the Hay Group, an internationally-recognized compensation consulting firm. These consultants are engaged by and report to the Compensation Committee. The consultants also provide advice and discuss compensation issues directly with management.

Throughout 2010, the Hay Group prepared, presented and made recommendations regarding substantially all aspects of compensation for the directors and senior management employees, including the Named Executive Officers. For 2010, the Hay Group was engaged to:

 

 

At the direction of the Compensation Committee, all Hay point recommendations for new senior management positions and/or changes to current positions are determined by the Hay Group through the consistent application of the Hay point methodology, which is a proprietary method that takes into account the know-how, problem solving and accountability requirements of the position.

 

Representatives of the Hay Group attended two of the Compensation Committee meetings in 2010 and, at those meetings, met with the Compensation Committee in executive session without management present. The Hay Group did not provide any other services to us or the Compensation Committee in 2010.

 

Hay Group’s All Industrials Survey — Salary Midpoint

 

As a starting point for setting target total compensation, the Compensation Committee directed the Hay Group to use their proprietary survey of a broad group of domestic industrial organizations from almost all segments of industry ranging in size from under $150 million to over $5 billion in annual revenues, which we refer to as the All Industrials survey. Organizations that satisfy the consultant’s quality assurance controls voluntarily participate in the All Industrials survey by submitting data to the consultant. For 2010, participants in the All Industrials survey included 247 parent organizations and 317 independent operating units representing almost all segments of industry, including the light and heavy manufacturing, consumer products and mining segments.

 

The Compensation Committee chose this particular survey as its benchmark for the following reasons:

 

 

Using the proprietary Hay point methodology discussed above under the heading “— Compensation Consultants,” the Hay Group compares positions of similar scope and complexity with the data obtained in the

All Industrials survey. The Hay Group then derives a median salary level for each Hay point level, including those positions occupied by the Named Executive Officers, which is targeted at the 50 ^th percentile of the All Industrials survey. We refer to the 50 ^th percentile median target as the salary midpoint. The Compensation Committee uses 100% of the salary midpoints recommended by the Hay Group for all positions at NACCO and HBB and for senior management positions at KC. However, the Compensation Committee uses 95% of the salary midpoints for senior management positions at NA Coal and 97.5% of the salary midpoints for all positions at NMHG. Because salary midpoints are based on each Hay point level, all of the employees at a particular Hay point level at a particular company have the same salary midpoint. This process assures internal equity in pay among the executives across all business units.

 

Executive officers’ compensation levels are set at (or slightly below) the salary midpoint recommended by the Hay Group because the Compensation Committee believes that the use of salary midpoints ensures that the compensation program provides sufficient compensation to attract and retain talented executives and maintain internal pay equity, without overcompensating our executive officers.

 

The salary midpoint provided by the Hay Group is then used to calculate the total target compensation of all senior management employees, including the Named Executive Officers.

 

Compensation Policies and Objectives — Total Target Compensation

 

The guiding principle of the compensation program for senior management employees, including Named Executive Officers, is the maintenance of a strong link between an employee’s compensation, individual performance and the performance of the Company or the subsidiary for which the employee has responsibility. The primary objectives of our compensation program are:

 

 

In addition, due to the unique nature of our holding company structure, the Compensation Committee attempts to maintain consistency in compensation among all of the Company’s subsidiaries.

 

The Compensation Committee establishes comprehensively defined “target total compensation” for each senior management employee following rigorous evaluation standards to ensure internal equity. Target total compensation is determined explicitly in dollar terms as the sum of: (i) salary midpoint, as determined by the Hay Group, (ii) target cash in lieu of perquisites, (iii) target short-term incentives, and (iv) target long-term incentives. The target cash in lieu of perquisites, short-term incentives and long-term incentives are all determined by multiplying each employee’s salary midpoint by a specified percentage of that midpoint, as determined by the Hay Group for each Hay salary grade.

The following table sets forth target total compensation for the Named Executive Officers, as recommended by the Hay Group and approved by the Compensation Committee for 2010:

 

 

 

In addition to the target total compensation shown on the table above, we provide employees with qualified and nonqualified retirement benefits that are designed to provide a competitive rate of income during retirement, with the opportunity for additional income in the form of profit sharing benefits if a particular business unit (other than NA Coal) attains superior results. However, during 2010 these additional profit sharing benefits were frozen at NACCO and NMHG.

 

The design of our compensation program offers opportunities for employees to earn truly superior compensation for outstanding results. It also includes significantly reduced compensation for results that do not meet or exceed the previously established performance targets for the year. In years when we have weaker financial results, payouts under the incentive compensation plans will generally be lower. In years when we have stronger financial results, payouts under the incentive compensation plans will generally be greater. We believe that our program encourages Named Executive Officers to earn incentive pay significantly greater than 100% of target over time by delivering outstanding managerial performance.

 

In most years, incentive compensation payments made to the Named Executive Officers exceed their base salary plus perquisite allowance for the year and the actual total compensation received exceeds the All Industrials survey median target total compensation for the year. See “— Hay Group’s All Industrials Survey — Salary Midpoint.” In 2010, this was true for all of the Named Executive Officers because all business units performed close to or above target performance level.

 

Overview of Executive Compensation Methodology

 

We seek to achieve the foregoing policies and objectives through a mix of base salaries and incentive plans. Base salaries are set at levels appropriate to allow the incentive plans to serve as significant motivating factors. The Compensation Committee carefully reviews each of these components in relation to our performance.

 

Incentive-based compensation plans are designed to provide significant rewards for achieving or surpassing annual operating and financial performance objectives, as well as to align the compensation interests of the senior management employees, including the Named Executive Officers, with our long-term interests.

The Compensation Committee views the various components of compensation as related but distinct. While a significant percentage of total target compensation is allocated to incentive compensation as a result of the policies and objectives discussed above, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. The Compensation Committee does not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. Rather, the Compensation Committee reviews information provided by the Hay Group from their All Industrials survey to determine the appropriate level for each component and mix of compensation.

 

The Compensation Committee reviews and takes into account all elements of executive compensation in setting policies and determining compensation levels. In this process, the Compensation Committee reviews “tally sheets” with respect to target total compensation for the Named Executive Officers and other senior management employees. The tally sheets list each officer’s title, Hay points, salary midpoint, base salary, perquisite allowance, short-term and long-term incentive compensation targets and target total compensation for the current year, as well as those that are being proposed for the subsequent year.

 

In November, 2009, the Compensation Committee reviewed the tally sheets for each of our Named Executive Officers to help decide whether it should make changes to the 2010 compensation program. Although the Committee determined that the overall program continued to be consistent with our compensation objectives, it made the following adjustments for 2010:

 

 

Components of Named Executive Officers’ Compensation . As discussed above, compensation for senior management employees primarily includes the following components:

 

 

Target total compensation is supplemented by retirement benefits, which consist mainly of the qualified plans and restoration nonqualified deferred compensation arrangements described below, and other benefits, such as health and welfare benefits. In addition, from time to time, the Compensation Committee may award discretionary cash and equity bonuses to employees, including the Named Executive Officers.

 

Base Salary . The Compensation Committee fixes an annual base salary intended to be competitive with the marketplace to recruit and retain talented senior management employees. Base salary is intended to provide employees with a set amount of money during the year with the expectation that they will perform their responsibilities to the best of their ability and in our best interests.

Each year, the Compensation Committee determines the base salary for each senior management employee, including the Named Executive Officers, by taking into account the employee’s individual performance for the prior year and the relationship of the employee’s prior year’s base salary to the new salary midpoint for the employee’s Hay point level. The Committee also takes into account any other relevant information, including:

 

 

The potential for larger salary increases exists for individuals with lower base salaries relative to their salary midpoint and/or superior performance. The potential for smaller increases or even no increase exists for those individuals with higher base salaries relative to their salary midpoint and/or who have performed poorly during the performance period.

 

Due to economic and business conditions that existed in 2009 and 2010, the Compensation Committee took the following actions with respect to 2010 base salaries for Named Executive Officers:

 

 

The following table sets forth the salary midpoint, salary range and base salary for each Named Executive Officer for 2010, as well as the percentage of increase from the 2009 base salary, taking into account the reductions and restorations described in the previous paragraph:

 

 

 

Cash in Lieu of Perquisites . In addition to providing other very limited perquisites in unique circumstances, target levels of perquisites for senior management employees are converted into fixed dollar amounts and paid in cash ratably throughout the year. This approach recognizes that perquisites are largely just another form of compensation, albeit separate and distinct from salary and incentive compensation. The

amount of the perquisite allowance for 2010 is calculated based on a specified percentage of the executive’s salary midpoint.

 

The applicable percentages were determined by the Hay Group based on a study it conducted comparing the relationship between the value of executive officers’ perquisites and the salary midpoint for the position. At the direction of the Compensation Committee, the Hay Group used data from its proprietary Benefits Report, which contains employee benefits data from a survey conducted by the Hay Group. For 2010, the organizations that submitted information for the Benefits Report included 852 organizations or operating units representing almost all areas of industry, including the light and heavy manufacturing, consumer products and mining segments, as well as other organizations from the health care, service and financial sectors. Consistent with the use of the All Industrials survey, the Compensation Committee determined that the Benefits Report was an appropriate benchmark because using a broad-based survey reduces volatility and lessens the impact of cyclical upswings or downturns in any industry that could otherwise affect the survey results in a particular year.

 

For this study, the Compensation Committee did not seek identical comparisons or specific dollar amounts. Rather, it merely requested an indication of the cost of perquisites that would represent a reasonable competitive level of perquisites for our various executive positions, which are reflected in the Hay points assigned to each position.

 

The table below sets forth the percentages of salary midpoints paid in lieu of perquisites, as determined by the Hay Group. The Compensation Committee approved the use of these recommendations for each of the Named Executive Officers for 2010. These amounts were paid in cash ratably throughout the year. This approach satisfied our objective of providing competitive total compensation to its Named Executive Officers while recognizing that many perquisites are largely just another form of compensation.

 

 

Incentive Compensation of Named Executive Officers

 

Applicable Incentive Compensation Plans . One of the principles of our compensation program is that senior management employees, including Named Executive Officers, are compensated based on the performance of the subsidiary for which the employee has responsibility or, in the case of employees of NACCO, our performance as a whole. See “— Compensation Policies and Objectives — Total Target Compensation.”

 

Due to the unique nature of our holding company structure, this means that the incentive compensation of the senior management employees who are employed by the Company is based on the aggregate performance of our four subsidiaries — NMHG, NA Coal, HBB and KC. However, the incentive compensation

of senior executives who are employed by a subsidiary of the Company is based solely on the performance of that particular subsidiary.

 

The table below identifies the employer of each of the Named Executive Officers, as well as the name of each of the incentive compensation plans in which the Named Executive Officer participated during 2010:

 

 

Overview . A significant portion of the compensation of each Named Executive Officer is linked directly to the attainment of specific corporate financial and operating targets. The Compensation Committee believes that the Named Executive Officers should have a material percentage of their compensation contingent upon the performance of the Company and/or its subsidiaries.

 

The performance criteria and target performance levels for the incentive plans are established within the Compensation Committee’s discretion, and are generally based upon management’s recommendations as to the performance objectives of the particular business for the year. Two types of performance targets are used in the incentive compensation plans:

 

 

Each Named Executive Officer is eligible to receive a short-term cash incentive payment and a long-term incentive award based on a target incentive amount that is expressed as a percentage of salary midpoint. However, the final, actual payout may be higher or lower than the targeted amount, as explained in further detail below.

 

Design of Incentive Program: Use of ROTCE and Underlying Performance Metrics . Section 162(m) of the Internal Revenue Code, which we refer to as Code Section 162(m), provides that we may not deduct compensation of more than $1 million that is paid to the Named Executive Officers (other than Mr. Schilling) unless that compensation consists of “qualified performance-based compensation.” The performance-based exception to Code Section 162(m) requires that deductible compensation be paid under a plan that has been

approved by our stockholders. In order to comply with Code Section 162(m), we obtained stockholder approval in 2010 of the following incentive compensation plans, which we collectively refer to as the 162(m) Plans:

 

 

See “— Tax and Accounting Implications — Deductibility of Executive Compensation” on page 49 for additional information about our philosophy on structuring our incentive compensation plans for tax purposes.

 

In order to ensure that the incentive compensation payments to the Named Executive Officers under the 162(m) Plans would count as qualified performance-based compensation and would be deductible under Code Section 162(m), the Compensation Committee adopted performance targets under the 162(m) Plans that were designed to meet the requirements for qualified performance-based compensation under Code Section 162(m). Specifically, for 2010, the Compensation Committee adopted minimum and maximum ROTCE performance targets under each of the 162(m) Plans. In each case, ROTCE is calculated as described below or in the same manner as described below under “— Incentive Compensation of Named Executive Officers — ROTCE Methodology and Explanation,” including the adjustments for non-recurring and special items.

 

For each 162(m) Plan, we establish a payment pool based on actual results against the maximum ROTCE performance targets. The chosen minimum ROTCE target must be met in order for any payment to be permitted, and any payment pool to be created, under a particular 162(m) Plan. The maximum ROTCE target is used to establish a maximum limit, and a maximum payment pool, for awards that can be paid to each participant under a particular 162(m) Plan for the 2010 performance period. For 2010, ROTCE results were at or above the applicable maximum ROTCE target and resulted in a maximum payment pool of 150% of target under all 162(m) Plans (200% under the NACCO Long-Term Plan).

 

The Compensation Committee then considered actual results against underlying financial and operating performance measures for each of our subsidiaries and exercised “negative discretion,” as permitted under Code Section 162(m), to determine the final, actual incentive compensation payment for each participant. These underlying financial and operating performance measures reflect the achievement of our specified business goals for 2010 (for those targets that are based on the subsidiaries annual operating plans) or for future years (for those targets that are based on long-term goals), as further described below.

 

ROTCE Methodology and Explanation . For 2010, a substantial portion of the short-term incentive compensation and long-term incentive compensation for our employees depended on the extent to which our ROTCE performance met long-term financial objectives. The Compensation Committee views the ROTCE performance targets as stockholder protection rates of return. They reflect the Compensation Committee’s belief that our stockholders are entitled to at least a certain rate of ROTCE for each of our subsidiaries and the Company overall. Accordingly, as a measure of protection for our stockholders, performance against the

ROTCE rates of return, rather than based on cyclical movements in our stock price, should determine the payouts for a portion of our incentive compensation plans.

 

The ROTCE targets used for incentive compensation purposes reflect our long-term corporate objectives. They are not based on ROTCE operating targets established by management and contained in our five-year long-range business plan or the long-term subsidiary financial objectives (although there is a connection between them). The ROTCE performance targets that were established by the Compensation Committee to determine the final, actual incentive compensation payments under the 2010 incentive compensation plans represent the financial performance that the Compensation Committee believes we should deliver over the long-term, not the performance expected in the current year or the near-term.

 

The members of the Compensation Committee consider the following factors together with their general knowledge of each of our industries and businesses, including the historical results of operations and financial positions of the subsidiaries and the Company overall, to determine the ROTCE performance targets for the Company and the subsidiaries:

 

 

The Compensation Committee reviews these factors annually and, unless the Compensation Committee concludes that changes in these factors warrant an increase or decrease in the ROTCE performance targets, the ROTCE performance targets generally remain the same from year to year. The ROTCE performance targets have been adjusted in the past from time to time. When made, these periodic adjustments generally have reflected:

 

 

The ROTCE targets that were used in the 162(m) Plans to establish the minimum and maximum incentive payment pools for tax deductibility purposes were reduced in 2010 from the general ROTCE targets that were in effect under certain incentive plans in 2009 and prior years. However, the ROTCE targets that were used in the other incentive compensation plans, and the underlying ROTCE targets that were used by the Compensation Committee using negative discretion to determine final, actual payouts for participants under the 162(m) Plans, remained essentially unchanged from the targets that were used in 2009 and prior years.

 

After our year-end financial results are finalized, actual ROTCE performances are compared against the ROTCE performance targets and, using the pre-established formulas, used to determine both (i) the

maximum payment pool under the 162(m) Plans for the year and (ii) the final, actual incentive compensation payouts under the incentive plans for the year. As a result, ROTCE serves as both a metric for tax deductibility to establish maximum potential incentive amounts and as a metric for underlying performance to determine final incentive compensation payout amounts. ROTCE is calculated for both of these purposes as follows:

 

Earnings Before Interest After-Tax after adjustments
divided by
Total Capital Employed after adjustments

 

Earnings Before Interest After-Tax is equal to the sum of interest expense, net of interest income, less 38% for taxes, plus net income from continuing operations attributable to stockholders, which we refer to as net income. Total Capital Employed is equal to (i) the sum of the average debt and average stockholders’ equity less (ii) average consolidated cash. For purposes of the NACCO Short-Term Plan and NACCO Long-Term Plan, average debt, stockholders’ equity and consolidated cash are calculated by taking the sum of the balance at the beginning of the year and the balance at the end of each of the next twelve months divided by thirteen.

 

ROTCE is calculated from the Company or subsidiary financial statements using average debt, average stockholders’ equity and average cash based on the sum of the balance at the beginning of the year and the balance at the end of each quarter divided by five, which is then adjusted for any non-recurring or special items.

 

Following is the calculation of our consolidated ROTCE for purposes of the NACCO Short-Term Plan and NACCO Long-Term Plan for 2010:

 

 

Adjustments to the ROTCE calculation under our incentive plans are non-recurring or special items that are generally established by the Compensation Committee at the time the ROTCE targets are set. For 2010, the ROTCE adjustments related to:

 

 

 

The Compensation Committee determined that these non-recurring or special items would be incurred in connection with improving our operations and, as a result, these items should not adversely affect incentive compensation payments, as the actions or events were beneficial to us or were generally not within the employees’ control. Other examples of adjustments that have been made in the past include the after-tax impact of costs related to reductions in force, product recall expenses, tangible or intangible asset impairment charges and penalties.

 

We do not disclose the ROTCE performance targets that were established by the Compensation Committee for purposes of the 2010 incentive compensation plans because they would reveal competitively sensitive long-term financial information, as well as our long-range business plans, to both our competitors and our customers. The Compensation Committees expected that the minimum and maximum ROTCE targets established under the Code Section 162(m) Plans would be met in 2010, but such targets were not so low that the result was guaranteed. However, the Compensation Committees did not expect that the other ROTCE targets (with the exception of the ROTCE targets under the NA Coal and HBB plans) would be met in 2010.

 

Short-Term Incentive Compensation

 

In General . All of our short-term incentive compensation plans, which we refer to as short-term plans, follow the same basic pattern for award determination:

 

 

 

For 2010, the short-term plans were designed to provide target short-term incentive compensation to the Named Executive Officers of between 40% and 100% of salary midpoint, depending on the Named Executive Officer’s position.

 

The table below shows the short-term target awards and payouts approved by the Compensation Committee for each Named Executive Officer for 2010:

 

 

 

As described in more detail below, the Compensation Committee considered the factors described above under “— Overview of Executive Compensation Methodology” and adopted performance criteria and target performance levels upon which the short-term plan awards were based.

 

Refer to “— Employment and Severance Agreements and Change in Control Payments” below for a description of the impact of a change in control on short-term plan awards.

NMHG Short-Term Incentive Compensation . The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the NMHG Short-Term Plan to determine final, actual incentive compensation payments:

 

 

 

HBB Short-Term Incentive Compensation . The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the HBB Short-Term Plan to determine final, actual incentive compensation payments:

 

 

 

NA Coal Short-Term Incentive Compensation . The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the NA Coal Short-Term Plan to determine final, actual incentive compensation payments:

 

 

 

 

NACCO Short-Term Incentive Compensation . For 2010, the short-term incentive compensation for NACCO employees, including Messrs. Rankin and Schilling, was based on performance against specific business objectives of the subsidiaries for the year, as identified in each subsidiary’s short-term plan. The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the NACCO Short-Term Plan, to determine final, actual incentive compensation payments:

 

 

 

 

Long-Term Incentive Compensation

 

In General . The purpose of each of our long-term incentive compensation plans is to enable senior management employees to accumulate capital through future managerial performance, which the Compensation Committee believes contributes to the future success of our businesses. Our long-term incentive compensation plans generally require long-term commitment on the part of our senior management employees, and cash withdrawals or stock sales are generally not permitted for a number of years. Rather, the awarded amount is effectively invested in the Company for an extended period to strengthen the tie between stockholders’ and the Named Executive Officers’ long-term interests.

 

The Compensation Committee believes that awards under our long-term plans promote a long-term focus on our profitability due to the holding periods under the long-term plans. Those individual Named Executive Officers who have a greater impact on our long-term strategy receive a higher percentage of their compensation as long-term compensation. The executives employed by NACCO are the only long-term plan participants who are entitled to receive equity-based compensation. The Compensation Committee does not consider a Named Executive Officer’s long-term incentive awards for prior periods when determining the value of a long-term incentive award for the current period because it considers those prior awards to represent compensation for past services.

 

All of the long-term incentive compensation plans, which we refer to as long-term plans, follow the same basic pattern for award determination:

 

 

For 2010, the long-term plans were designed to provide target long-term incentive compensation to the Named Executive Officers of between 57.50% and 316.25% depending on the Named Executive Officer’s position.

The table below shows the long-term target awards and payouts approved by the Compensation Committee for each Named Executive Officer for 2010:

 

 

 

 

Due to the nature of the NMHG, HBB and NA Coal Long-Term Plans, the awards and payments under the plans are described in both the Grants of Plan-Based Awards Table on page 56 and the Nonqualified Deferred Compensation Table on page 61. Also refer to “— Employment and Severance Agreements and Change in Control Payments” below for a description of the impact of a change in control on long-term plan awards.

 

NMHG and HBB Long-Term Incentive Compensation — Summary . The long-term compensation for NMHG and HBB executives is initially based on the applicable subsidiary’s consolidated ROTCE performance, which reflects the Compensation Committee’s belief that our stockholders are entitled to at least a certain rate of ROTCE for each subsidiary and that performance against that rate of return should determine the long-term incentive compensation payouts under the NMHG and HBB long-term plans.

 

At the beginning of 2010, the Compensation Committee set a consolidated ROTCE performance target and a performance period of one year for the awards under the NMHG Long-Term Plan, and the Hamilton Beach Brands, Inc. Long-Term Incentive Compensation Plan (Effective January 1, 2010), which is referred to as the HBB Long-Term Plan. Because the consolidated ROTCE performance target is based on the stockholder protection rate of return rather than the subsidiary’s current-year annual operating plan, it is possible that in any given year the expected actual level of performance for the year could be higher or lower than the consolidated ROTCE performance target for that year.

 

Consistent with the methodology used for our short-term 162(m) Plans, we establish a payment pool based on actual results against the maximum ROTCE performance targets. For 2010, because ROTCE results were above the maximum consolidated ROTCE performance target, the NMHG and HBB Long-Term Plans each had a maximum payment pool of 150%. The maximum consolidated ROTCE performance target under each plan for 2010 was reduced from the targets that were in effect in prior years due to the Compensation Committee’s expectations regarding the time it would take the Company to recover from the severe economic downturn that began in late 2008. Although the Compensation Committee expected that the applicable maximum ROTCE targets would be met in 2010, the targets were not set so low that the result was guaranteed.

 

The Compensation Committee then considers actual results against underlying financial and operating performance measures for NMHG or HBB, as applicable, and exercises “negative discretion,” as permitted under Code Section 162(m), to determine the final, actual long-term incentive compensation payment for each participant out of the maximum payment pool. These underlying financial and operating performance measures reflect the achievement of specified business goals for 2010, as further described below. For more information about our use of ROTCE performance targets for tax deductibility purposes, see “— Incentive Compensation of Named Executive Officers — Design of Incentive Program: Use of ROTCE and Underlying Performance Metrics” above.

 

The awards granted under both plans are subject to the following rules:

 

 

 

Due to the nature of the NMHG Long-Term Plan and the HBB Long-Term Plan, the awards under the plans are described in both the Grants of Plan-Based Awards Table on page 56 and the Nonqualified Deferred Compensation Table on page 61.

 

NMHG Long-Term Incentive Compensation . The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the NMHG Long-Term Plan to determine final, actual incentive compensation payments:

 

 

 

 

HBB Long-Term Incentive Compensation . The following table summarizes the performance criteria established by the Compensation Committee for 2010 under the HBB Long-Term Plan to determine final, actual incentive compensation payments:

 

 

 

 

NA Coal Long-Term Incentive Compensation . The NA Coal Long-Term Plan for Years 2006 to 2015 has a ten-year term and is in effect from 2006 through 2015. The plan uses economic value of income of current and new projects as the performance criteria because the NA Coal Compensation Committee believes it is a more accurate reflection of the rate of return in NA Coal’s business, where a substantial portion of revenue is based on long-term contracts and projects. As described below, awards under the NA Coal Long-Term Plan also generally have a holding period of ten years.

 

NA Coal Long-Term Plan awards are based on a formula consisting of three component targets: new project factor (40%); annual factor (30%); and cumulative factor (30%). Each of these components is described in detail below.

 

 

 

If the NA Coal Compensation Committee determines in any year, which we refer to as an Adjustment Year, that a new project has provided significantly less net income appreciation than originally expected, then the amount of any prior award previously attributed to that project as the result of a prior year’s New Project Factor will reduce the New Project Factor in the Adjustment Year, which we refer to as the New Project Adjustment. If the New Project Adjustment is large enough, it is possible for participants to receive negative awards in a given year.

 

At the start of each year during the ten-year term of the NA Coal Long-Term Plan, participants are granted dollar denominated award targets. Award targets are based on a percentage of each participating executive’s salary midpoint. For 2010, the award target was designed to provide target compensation of 105% of salary midpoint for Mr. Benson, based on the recommendation of the Hay Group.

 

Following the end of the year, final awards for each participant are determined by adjusting the award target by the Annual Factor, the Cumulative Factor and the New Project Factor. In addition, the New Project Adjustment is made, if applicable. The NA Coal Compensation Committee, in its discretion, may also increase or decrease awards under the plan and may approve the payment of awards where business unit performance would otherwise not meet the minimum criteria set for payment of awards.

 

For 2010, payments were initially calculated in accordance with a formula that is based on the pre-established performance goals described above. In 2010, the NA Coal Compensation Committee used negative discretion in calculations relating to the new Liberty Mine in Mississippi due to the fact that the completion of the project is still contingent on resolving legal challenges to regulatory approvals.

The awards for Mr. Benson and other eligible NA Coal employees were based on the performance criteria and final performance results shown in the following table: