Graphic Summary of 2010 Executive Compensation

 

     The following is a graphic summary of the 2010 compensation paid to Fulton’s Named Executive Officers as each element is described in the Summary Compensation Table on page 39.

Elements of Executive Compensation

 

     Fulton’s Executive compensation program currently provides a mix of base salary, cash incentive and equity based plans, as well as retirement benefits, health plans and other benefits as follows:

 

     Base Salary Base salary is a critical element of executive compensation because it provides the Executives with a consistent level of monthly income. Fulton seeks to provide the Executives with a level of cash compensation in the form of base salary appropriate for the person’s position, experience, responsibilities, and performance. Generally, Fulton, consistent with its compensation philosophy, seeks to set base salary for the Executives in line with the market median.

 

     In making recommendations to the Board of Directors regarding the appropriate levels of executive compensation for 2010, the HR Committee received a recommendation from its compensation consultant, the Hay Group, which considered compensation paid by members of the Comparator Peer Group to peer officers with similar job content and responsibilities to the Executives. With regard to the compensation paid to Mr. Smith, the HR Committee also considered his performance based on a scorecard that includes the attainment of certain performance goals, results of his management decisions, the earnings of Fulton during the previous year and other factors, such as the HR Committee members’ perspective of his overall performance. With regard to the compensation paid to the other Executives, the HR Committee considered information provided by Mr. Smith for Messrs. Wenger and Nugent and by Mr. Wenger for Messrs. Shreiner and Hill, which included an assessment of each Executive’s level of individual performance, attainment of performance goals, contribution to the organization and salary history during the past four years. The HR Committee also considered its own perceptions of the performance of each Executive. On March 14, 2010 the HR Committee recommended and the Board of Directors approved base salary adjustments effective April 1, 2010 and Fulton set the annual base salaries for Messrs. Smith, Wenger, Nugent, Shreiner and Hill at $813,586, $435,625, $505,735, $335,175 and $232,675, respectively.

 

     Based on Fulton’s performance in 2010 and a base salary increase recommendation presented by McLagan to the HR Committee, the Board of Directors on January 18, 2011 approved 2011 base salary increases for Messrs. Smith, Wenger, Nugent, Shreiner and Hill at $850,000, $525,000, $520,000, $375,000 and $260,000, respectively. These salary increases will be effective April 1, 2011.

 

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     Variable Plan The HR Committee believes that annual performance-based incentive bonuses are valuable in recognizing and rewarding individual achievement, and, by focusing more on performance pay opportunities for the Executives, it can more closely align Fulton’s compensation program with shareholder interests. As approved in 2006, Fulton’s Variable Plan is designed so that no incentive bonus is paid unless Fulton achieves a predetermined performance threshold metric. For 2010 a threshold performance target was established that required Fulton’s 2010 EPS growth to be in the top two-thirds of the Performance Peer Group in order for the Executives to be eligible for a payment under the Variable Plan. 1 The HR Committee at the time viewed this performance target as a reachable target, but not a target which guarantees payment of an incentive bonus. The HR Committee used the same threshold performance target from 2006 to 2009. The threshold performance target was achieved in 2006, 2009 and 2010 but not in 2007 and 2008.

 

     Under the Variable Plan, if the predetermined threshold performance metric is achieved, each Executive is eligible to receive a cash bonus equal to a percentage of base salary. Actual awards may be greater than or less than target, up to a predetermined maximum with the variability attributed to individual and company performance. These payouts are substantially based on scorecard results. Generally, performance factors that are more directly aligned with the interests of shareholders such as financial performance are given greater weight. Based upon the recommendation and market review of Fulton’s compensation consultant when the Variable Plan was approved originally, the HR Committee determined that the award amounts payable to the each Executive should be a percentage of the Executive’s base salary. For Mr. Smith, the 2010 threshold, target and maximum award percentages were 25%, 50% and 100%, and for the other Executives, the 2010 threshold, target and maximum award percentages were 17.5%, 35% and 60%. 2 The actual award percentage for each Executive is determined by the Executive’s individual scorecard results, as well as the HR Committee’s assessment of each Executive’s individual performance and overall contribution to Fulton for the award period.

 

     In early 2010, the HR Committee reviewed the scorecards for all the Executives and determined that the Executives should all be reviewed based on a uniform scorecard with similar category weightings, except for Mr. Shreiner who, due to his position as Senior Risk Officer, will have a scorecard with more of a focus on risk categories. As in prior years, each scorecard contained four critical performance factors, with each factor weighted according to importance. For 2010 the first factor was Superior Financial Performance that included five equally weighted sub-categories: Earnings Growth vs. Peers (EPS), Total Shareholder Return (5 year avg.), Core deposit growth vs. Peers, Loan Growth vs. Peers; and Efficiency Ratios. The second factor was Risk/Control/Liquidity that included the following equally weighted subcategories: Liquidity and Funding, Regulatory Compliance, Community Development, Capital Ratings; and Net Charge-offs to Average Loans. The third factor was Superior Customer Experience that included: Customer Satisfaction Index, Household Growth; and Fulton Partners. 3 The fourth performance factor was Superior Employee Engagement that included the following equally weighted subcategories: Management Succession, Corporate Diversity, Corporate Reward Strategy, Employee Engagement Survey Results; and Community Involvement.

 

     For all of the Executives, performance measurement criteria were established for each critical performance factor subcategory. While, for the most part, specific, objective measureable criteria were used, some scorecard subcategories require a subjective determination to be made by the HR Committee. For certain objectively measured performance categories scorecard results depended upon Fulton’s quartile ranking among its peers and all factors were rated with a scale of “Excellent Results” (1st Quartile and a numerical score of “4”), “What is Expected” (2nd Quartile and a numerical
____________________

 

1 For 2011, based on a recommendation by McLagan, the HR Committee has changed the threshold performance target to one that uses return on equity. There were two reasons for this recommendation. First, McLagan believed that using relative EPS growth can lead to abnormal results in certain circumstances, such as when earnings in a prior year are negative. Second, because Fulton’s scorecards already rely heavily on relative performance to peers, an absolute performance hurdle would balance the overall approach to determining incentives. However, while Fulton will use a return on equity performance hurdle as a threshold for the 2011 Variable Plan awards, a different threshold performance target may be used in future years.

 

2 The HR Committee, based on a recommendation by McLagan and starting with 2011 Variable Plan awards, has set the threshold, target and maximum award percentages at 37.5%, 75% and 150% for the CEO and 25%, 50% and 100% for the other Executives. The recommendation from McLagan was based, in part, upon a study showing that the 2009 total compensation for all of the Executives was below the median of the Combined Peer Group and below the 25th percentile of that peer group for all the Executives but the CFO.McLagan attributed this finding to a significantly more modest use of incentive compensation at Fulton than among peer banks. More specifically, both target annual incentives and actual equity awards made by Fulton in 2009 were found to be below the 25th percentile among peer companies that included Whitney Holding Corporation and Wilmington Trust Corporation as well as the others companies in the Combined Peer Group on page 29.

 

3 Fulton Partners measurement is related to the collection of fee income by certain business units.

 

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score of “3”), “Making Progress” (3rd Quartile and a numerical score of “2”), or “Below Expectations” (4th Quartile and a numerical score of “1”). The following is a tabular summary of the critical performance factors with the weights and the category average score achieved for the four critical performance factors on the 2010 Variable Plan scorecards.

 

     At its March 14, 2011 meeting, the HR Committee determined that Fulton had achieved the threshold performance target because Fulton’s 2010 EPS was in the top two-thirds of the Performance Peer Group. The HR Committee reviewed the overall 2010 performance and scorecard results for each Executive and determined that all of the Executives achieved a level of performance in 2010 that qualified them for a cash award at or above their target established under the Variable Plan. In addition to the scorecard results and information provided on individual critical performance factors for each Executive, in determining the Variable Plan award percentages for each Executive, the HR Committee also recognized the successful efforts of the Executives and their contributions to Fulton’s financial performance during 2010. Based on its consideration of these various factors including the scorecard average results in the above table, the HR Committee approved a 2010 award percentage of each of the Executive’s 2010 base salary of 60.5% for Mr. Smith, 38.85% for Mr. Shreiner and 42.35% for Messrs. Wenger, Nugent and Hill.

 

     In the following bonus chart the dollar amount of each individual Executive award is equal to the award percentage of the Executive’s base salary. However, because of its participation in the CPP until July 14, 2010, the Treasury Rules prohibit Fulton from paying the Executives (as well as the next ten most highly compensated employees) 100% of their respective Variable Plan awards. Approximately 54% of the awards, which relates to performance before July 14, 2010, have been forfeited due to the Treasury Rules. Fulton is permitted under the Treasury Rules to pay a portion of each individual’s Variable Plan award for the performance period from July 14 2010 to December 31, 2010, or approximately 46% of the entire 2010 Variable Plan award each Executive earned for 2010. The 2010 TARP prorated award amounts that have been paid are also reflected for each Executive under “Non-Equity Incentive Plan Compensation” for 2010 in the “Summary Compensation Table” on page 39 and in the chart and table below.

 

Variable Plan Bonus Earned vs. TARP Forfeited

 

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1 For 2011, the HR Committee, based on a recommendation from McLagan, amended the Executives’ scorecards. Generally the 2011 scorecards are similar to the 2010 scorecards except that the weights used for each critical performance factor will be the same for each Executive. In addition, for 2011 the weights attributed to each factor were adjusted and Superior Financial Performance, Risk/Control/Liquidity, Superior Customer Experience, and Superior Employee Engagement critical performance factors will be weighted at 50%, 30%, 10% and 10%, respectively.

 

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     Options and Restricted Shares Fulton believes equity-based compensation aligns the interests of the Executives and other eligible officers with those of Fulton’s shareholders, and encourages them to “think like owners.” Therefore, equity awards are an appropriate means of motivating, rewarding and compensating the Executives and other key officers based on the future performance of Fulton. Pursuant to the 2004 Stock Plan approved by the Board of Directors on October 21, 2003, and by shareholders at the 2004 Annual Meeting, Fulton is authorized to award incentive stock options, non-qualified stock options and restricted stock for a period of ten years to key employees of Fulton, its affiliate banks and its other subsidiaries. Stock options and, more recently, a combination of stock options and restricted stock, have been the traditional award type for Fulton. However, during Fulton’s TARP Assistance Period the Treasury Rules permitted Fulton to only award restricted stock to the Executives and the next ten most highly compensated and eligible employees. Stock options awarded in years prior to 2009 enable the recipients to purchase common stock at the fair market value of the common stock on the designated grant date. The 2004 Stock Plan provides that the total number of shares available for grant in any calendar year in the form of stock options or restricted stock is to be determined based on the performance of Fulton, measured in terms of total shareholder return for the immediately preceding five-year period relative to the Performance Peer Group. This process for determining the number of shares available for grant in a particular year is stated in Section 5.04 of the 2004 Stock Plan, as follows:

 

The number of Shares available for Awards in any calendar year shall be determined depending upon the performance of the Corporation measured in terms of Total Shareholder Return (“TSR”) relative to a Peer Group, determined at the sole discretion of the HR Committee, for the five-year period immediately preceding the grant of the Award. The number of Shares available for Awards shall be determined in accordance with the following schedule:

 

     For 2010, the individual awards of restricted shares made to the Executives and the next ten most highly compensated and eligible employees on July 1, 2010, as well as the other eligible officers of Fulton that received either stock options and restricted stock or stock options only, were determined by the Board of Directors based on recommendations of the HR Committee and management. The HR Committee did not establish specific target levels for individual performance or corporate profitability for these equity awards in 2010 and, so long as the value of the award did not exceed one-third on the Executive’s annual compensation, the number of restricted shares awarded to each Executive was primarily at the discretion of the HR Committee. The Hay Group reviewed and recommended the 2010 award methodology to the HR Committee, and generally, based on grant value, the 2010 Executive awards were approximately the same percentage of all the equity awards available in 2010 based on grant value as compared to the equity awards they each received in prior years. Factors that the HR Committee considers in determining the number of options or restricted shares to be awarded to each Executive include the recommendation of the compensation consultant, the CEO’s recommendations for the other Executives, previous stock option and restricted stock awards to each Executive, Fulton’s performance and each Executive’s achievement of individual goals in their scorecard. In 2010, Fulton granted a total of 843,048 stock options and restricted shares, with 111,472 restricted shares granted to the Executives and the remaining 577,992 stock options and 153,584 restricted shares granted to other Fulton employees. 1 In accordance with the terms of the 2004 Stock Plan, restricted shares accrue dividends, which are reinvested in similarly restricted shares.
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1 Restricted shares listed are as of December 31, 2010 and exclude any accrued reinvested dividends.

 

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     In July 2010, Messrs. Smith, Wenger, Nugent, Shreiner and Hill received 37,557, 23,710, 19,758, 17,782 and 12,665 restricted shares, respectively. The Treasury Rules limited the value of the restricted stock award each Executive and the next ten most highly compensated and eligible employees could receive for 2010 performance, to no more than one-third of their annual compensation, as defined in the Treasury Rules. Consistent with the Treasury Rules’ prohibition of vesting restricted stock until CPP Funds are repaid, the 2010 restricted stock awards cannot fully vest until the later of three years after the date of the award or the date vesting is permitted under the Treasury Rules. The values of these restricted share awards are reflected in each of the Executive’s 2010 compensation in the “Summary Compensation Table” on page 39.

 

     Under the 2004 Stock Plan, an option recipient who retires at age fifty-five or older with five or more years of consecutive employment as defined in the 2004 Stock Plan, may exercise his or her currently exercisable stock options for up to two years from the retirement date (but not beyond the date when the option would otherwise expire). For option or restricted stock recipients who retire at age sixty or older with ten or more years of consecutive employment as defined in the 2004 Stock Plan, unexercisable stock options become exercisable and unvested restricted stock grants become vested on the retirement date. Restricted shares awarded to the Executives in 2010 are subject to the restrictions of the Treasury Rules and therefore, are subject to a minimum two-year service requirement, and only vest upon retirement on or after July 1, 2012. Such retirees are able to exercise their options for up to two years from their retirement date (but not beyond the date when the option would otherwise expire). Upon a change in control, as defined in the 2004 Stock Plan, 1 options not previously exercisable become exercisable and unvested restricted stock vests. Generally under the 2004 Stock Plan, unexercisable stock options become exercisable and unvested restricted stock grants vest upon the death or disability of the Executive, and his or her authorized representative shall have a period of one year following such termination of employment to exercise any vested option granted, but such period of time shall not exceed the option’s original expiration date.

 

     Employee Stock Purchase Plan The ESPP was designed to advance the interests of Fulton and its shareholders by encouraging Fulton’s employees and the employees of its affiliate banks and other subsidiaries to acquire a stake in the future of Fulton by purchasing shares of the common stock of Fulton. Currently, Fulton limits payroll deduction and annual employee participation in the ESPP to $7,500. No Executive currently participates in the ESPP.

 

     Defined Contribution Plan – 401(k) Plan Fulton provides a qualified defined contribution plan to the Executives and other employees which is the Fulton Financial Corporation 401(k) Retirement Plan (the “401(k) Plan”) and provides for employer matching contributions that satisfy a non-discrimination “safe-harbor” available to 401(k) retirement plans. This safe-harbor employer matching contribution is equal to 100% of each dollar a participant elects to contribute to the 401(k) Plan, but the amount of contributions that are matched by Fulton is limited to 5% of eligible plan compensation.In addition, the Executives and certain employees are eligible for an additional employer profit sharing contribution under the 401(k) Plan, which for 2010 was equal to 5% of a participant’s eligible compensation.

 

     Deferred Compensation Agreements Fulton’s nonqualified deferred compensation plans include (1) the Fulton Deferred Compensation Plan, under which officers, directors and advisory board members can elect to defer receipt of fees and select management employees can elect to defer receipt of cash compensation, and (2) a series of essentially identical Supplemental Executive Retirement Plan Agreements entered into with a select group of senior managers, including the Executives, for the purpose of crediting them with full contributions each year equal to the contributions

 

1 “Change in Control” of the Corporation shall mean:
(a) a change in the Board during any twenty-four (24) month period ending on or after the effective date of the Plan, if the individuals who were directors of the Corporation at the beginning of the period cease during such period to constitute at least a majority of the Board;
(b) the acceptance and completion of a tender offer or exchange offer by any entity, person or group (including any affiliates of such entity, person or group, other than an Affiliate of the Corporation) for twenty-five percent (25%) or more of the outstanding voting power of all capital stock of the Corporation;
(c) the acquisition by any entity, person or group (including any affiliates of such entity, person or group) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Corporation’s capital stock entitled to twenty-five percent (25%) or more of the outstanding voting power of all capital stock of the Corporation;
(d) a merger, consolidation, division, share exchange, or any other transaction or a series of transactions outside the ordinary course of business involving the Corporation (a “Business Combination”), as a result of which the holders of the outstanding voting capital stock of the Corporation immediately prior to such Business Combination, excluding any shareholder who is a party to the Business Combination (other than the Corporation) or is such party’s affiliate as defined in the Exchange Act, hold less than seventy-five percent (75%) of the voting capital stock of the surviving or resulting corporation; or
(e) the transfer of substantially all of the assets of the Corporation other than to a wholly owned subsidiary of the Corporation.

 

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they would have otherwise been eligible to receive under the Fulton 401(k) Plan, if not for the Internal Revenue Code limits on the amount of compensation that can be taken into account under a tax-qualified retirement plan. Fulton’s deferred compensation contributions for the Executives in 2010 are stated in footnote 7 of the “Summary Compensation Table” on page 39. The deferred compensation plan accounts of each participant are held and invested under the Fulton Nonqualified Deferred Compensation Benefits Trust with FFA, a division of Fulton Bank, National Association serving as the Trustee. The participants are permitted to individually direct the investment of the deferred amounts into various investment options under the Nonqualified Deferred Compensation Benefits Trust.

 

     Defined Benefit Pension Plans Fulton has not had an historical practice of using defined benefit pension plans to provide employees or the Executives with retirement benefits, but some defined benefit plans have been acquired in different merger transactions over time, and any such acquired plans were continued only for the plan participants. However, none of the Executives participate in the Affiliates’ Pension Plan.

 

     Survivors’ Benefit Life Insurance and Other Death Benefits Officers of Fulton and certain of its bank subsidiaries, who had been employed by Fulton for at least five years as of April 1, 1992, are eligible to participate in a survivors’ benefit program. This program provides the employee’s spouse, in the event of the employee’s death prior to retirement, with an annual income equal to the lesser of $25,000 or twenty-five percent of the employee’s final annual salary. This benefit is paid from the date of death until the employee’s sixty-fifth birthday subject to a minimum of ten annual payments having been made. Messrs. Smith, Wenger, Shreiner and Hill participate in this program because each was hired before April 1, 1992. Mr. Nugent was hired after April 1, 1992 and is not eligible for this benefit. The estates of the Executives are also eligible for a two times base salary payment (plus an amount equal to applicable individual income taxes due on such amounts) from Fulton pursuant to individual Death Benefit Agreements between Fulton and each Executive, should the Executive die while actively employed by Fulton. Upon the Executive’s retirement, the post retirement benefit payable upon the individual’s death is reduced to $5,000.

 

     Health, Dental and Vision Benefits Fulton offers a comprehensive benefits package for health, dental and vision insurance coverage to all full time employees, including the Executives, and their eligible spouses and children. Fulton pays a portion of the premiums for the coverage selected, and the amount paid varies with each health, dental and vision plan. All of the Executives have elected one of the standard employee coverage plans available.

 

     Retiree Benefit Payments Fulton does not provide post-retirement medical, dental and vision benefits to full time employees of Fulton and its affiliates who were hired or joined Fulton as a result of a merger after December 31, 1997. Employees who were hired or joined Fulton as a result of a merger prior to January 1, 1998, and who retire on or after the attainment of age sixty-five with at least ten years of full time service, are eligible for post-retirement benefits. Post-retirement benefits include health insurance coverage plus death benefits. The level of coverage and the cost to the retiree depends on the retiree’s date of retirement and completed years of full time service after attainment of age forty. As a result of their length of service with Fulton, the Executives are eligible to receive these post-retirement benefits at an annual cost to the Executive similar to other employees with similar years of service.

 

     Other Executive Benefits Fulton provides the Executives with perquisites and other personal benefits that the HR Committee believes are necessary to facilitate the Executives in conducting business and are reasonable and consistent with the overall compensation program for the CEO and the other Executives. In addition, these benefits enable Fulton to attract and retain talented senior officers for key positions, as well as provide the Executives and other senior officers with opportunities to be involved in their communities and directly interact with current and prospective customers of Fulton. The 2010 amounts are included in the All Other Income column of the “Summary Compensation Table” on page 39 of this proxy statement. The Executives are provided with company owned automobiles, club memberships and other executive benefits consistent with their office and position. Fulton does not have a direct or indirect interest in any corporate aircraft. Generally, the Executives travel on commercial aircraft, by train or in vehicles provided by Fulton. In addition, if spouses accompany an Executive when traveling on business or attending a corporate event, Fulton pays the travel and other expenses associated with spousal travel for the Executive. Fulton also includes spousal travel and personal vehicle use as part of the Executive’s reported W-2 income. These items are not “grossed up” by Fulton, and the Executive pays all income taxes on these executive benefit amounts. During Fulton’s TARP Assistance Period, these payments were also subject to the Fulton Expenditure Policy mandated by the Treasury Rules for items that exceed $25,000 and other benefits to prohibit excessive or luxury expenditures or expenditures that are not related to its business operations.

 

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     Employment Agreements

 

     Fulton believes that a company should provide reasonable severance benefits to employees. For most employees, Fulton has a policy that in general provides for severance benefits to be paid upon layoff or position elimination. These severance arrangements are intended to provide the Executives and other employees with a sense of security in making the commitment to dedicate their professional careers to the success of Fulton. With respect to the Executives and certain other employees, these severance benefits reflect the fact that it may be difficult for them to find comparable employment within a reasonable period of time. The levels of these benefits for the Executives in the event of change in control are discussed in footnote 6 in the table on page 45 under “Termination Without Cause or for Good Reason - Upon or After a Change in Control.”

 

     On May 30, 2006, Fulton’s Board of Directors approved, with the recommendation of Fulton’s compensation committee and the compensation consultant at the time, a form of employment agreement to be used for Fulton’s current and future senior executive officers, including its CEO, President, Chief Financial Officer and Senior Executive Vice Presidents (the “Employment Agreements”). Each Executive’s Employment Agreement commenced when the agreement was executed, does not have a specific term of years and continues until terminated. The Employment Agreements provide that the Executive is to receive a base salary, which is set annually, and is entitled to participate in Fulton’s incentive bonus programs as in effect from time to time. The Executive also is entitled to participate in Fulton’s retirement plans, welfare benefit plans and other benefit programs.

 

     In their Employment Agreements, Messrs. Smith and Nugent have agreed to restrictions on the sharing of confidential information as well as non-competition and non-solicitation covenants for two years. The Employment Agreements with Messrs. Wenger, Shreiner and Hill contain restrictions on the sharing of confidential information as well as non-competition and non-solicitation covenants for one year. The non-competition and non-solicitation covenants will not apply if the Executive leaves for good reason or if the Executive’s employment is terminated without cause, as defined in the Employment Agreements, and further outlined in the “Potential Payments Upon Termination and Golden Parachute Table” section on page 45.

 

     Effective November 12, 2008, the Employment Agreements were amended and restated solely for the purpose of bringing them into compliance with Internal Revenue Code Section 409A. In addition, as a result of Fulton’s CPP participation, the Executives each executed CPP Letter Agreements effective December 23, 2008, which requires, among other things, all Executive bonus and incentive compensation received during Fulton’s TARP Assistance Period to be subject to recovery or “clawback” by Fulton if it is determined that the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. The CPP Letter Agreements also prohibited certain severance payments to the Executives during Fulton’s TARP Assistance Period. To comply with the Treasury Rules, the Executives and certain other highly compensated employees, as defined in the Treasury Rules, also executed supplemental letter agreements in 2009. The form of the supplemental letter agreement that the Executives signed was an exhibit to a current report on Form 8-K that Fulton filed with the SEC on December 24, 2009. The majority of the provisions in the letter agreements no longer apply because Fulton’s TARP Assistance Period ended on July 14, 2010.

 

     Other Compensation Elements

 

     162(m) and Tax Consequences Although Fulton takes into account deductibility of compensation, tax deductibility is not a primary objective of its compensation programs. Section 162(m) of the Internal Revenue Code disallows the deductibility by Fulton of any compensation over $1 million per year paid to certain employees and the Executives unless certain criteria are satisfied. During the TARP Assistance Period this limit was further reduced to $500,000 by the Treasury Rules.

 

     409A Changes Section 409A of the Internal Revenue Code, effective January 1, 2005, defines what constitutes a “nonqualified deferred compensation plan,” conditions income tax deferrals under such plans on their compliance with certain distribution, acceleration, election and funding restrictions, and also imposes excise tax and interest penalties for noncompliance.In order to preserve intended tax deferrals and to avoid the imposition of excise taxes and interest penalties, Fulton has identified all such nonqualified deferred compensation plans it maintains and to the extent necessary, timely amended each, to meet the Section 409A requirements, and to alter the administration of each,

 

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where necessary, to comply with Section 409A. With respect to the Executives, in particular, the deferred compensation agreements and the Employment Agreements and other agreements summarized above have been amended and restated as of November 12, 2008 for Section 409A compliance.

 

     Discussion of Option Grant Timing Fulton does not have a formal policy as to when options are granted during the year.However, the HR Committee and Board of Directors historically have met in June of each year to consider and award options to the Executives and other officers. Fulton does not back date options or grant them retroactively, and does not coordinate option grants with the release of positive or negative corporate news. The 2004 Stock Plan does not permit the award of discounted options, the reload of stock options or the re-pricing of stock options. Pursuant to the terms of the 2004 Stock Plan, option prices are determined based on the average of the high and low trading price on the grant date. Historically, Fulton has granted options on or about July 1, as opposed to the date of the June meeting when action is taken by the HR Committee and Board of Directors to grant the awards.

 

     Stock Ownership Guidelines Fulton believes that broad based stock ownership by directors, officers and employees is an effective method to align the interests of its directors, officers and employees with the interests of its shareholders. In 2009, Fulton adopted Corporate Governance Guidelines that included a formal share ownership guideline for directors and the Executives. Each director is encouraged to own at least $50,000 of Fulton common stock within three years of becoming a director. A similar guideline exists for the Executives, with a recommended amount of share ownership calculated as a portion of, or multiple of, the Executive’s base salary, depending upon position. Currently the Chief Executive Officer, President, Chief Financial Officer and the other two Executives are directed to own 2.0, 1.5, 1.5 and 1.0, times their base salary, respectively. Compliance with the stock ownership guidelines is determined annually based on stock ownership and the closing stock price as of December 31 of the prior year. Ownership excludes stock options and unvested restricted stock, but includes all other shares beneficially owned and included on the individual’s Form 4’s filed with the SEC, including shares held in retirement accounts, indirect ownership and jointly held shares. Once an Executive or director has achieved the ownership guideline, he or she remains in compliance with the ownership guidelines regardless of changes in base salary or stock price, as long as he or she retains the same number of shares or a higher amount. However, if an Executive were promoted to CEO, President or CFO with a salary increase, the Executive would have three years to satisfy the new stock ownership requirement for the new position and base salary.

 

     Senior Management Succession The topic of Senior Management succession is discussed and reviewed at least annually at Fulton. At the December 2010 Executive Committee meeting, senior officers in Fulton’s Human Resources department discussed and reviewed the succession planning processes used by management to identify successors for each Executive at Fulton.

 

Human Resources Committee Report

 

     The HR Committee reviewed and discussed the Compensation Discussion and Analysis with management at their March 14, 2011 meeting and, based on the review and discussions, the HR Committee recommended to the Board of Directors that the Compensation Discussion and Analysis above be included with or incorporated in Fulton’s Annual Report on Form 10-K for the year ended December 31, 2010, and the 2011 annual proxy statement, as applicable.

 

     As described above in the Compensation Discussion and Analysis section, during Fulton’s TARP Assistance Period, the HR Committee reviewed Fulton’s compensation policies and practices for all employees, including the Executives, and determined that the compensation programs in which the Executives participate were not designed in a way that would encourage them to take unnecessary and excessive risks, and that our compensation programs, in general, were not structured in a way that posed unnecessary risks and did not encourage the manipulation of reported earnings to enhance any employee’s compensation.

 

     In performing its compensation risk evaluation, the HR Committee also met with the senior risk officer regarding the material risks facing Fulton, and consulted with human resources personnel about the compensation plans. In addition, the HR Committee considered that the Treasury Rules limit the Executive’s 2010 annual cash incentive awards and 2010 equity awards, that each Executive’s incentive compensation is subject to forfeiture if it is determined that the payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria, and that the 2010 awards to the Executives under the Variable Plan and 2004 Stock Plan were required to be approved by the HR Committee and the Board of Directors.

 

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     Based on the foregoing, the HR Committee concluded in 2010 that the compensation plans in which the Executives participate did not encourage them to engage in unnecessary and excessive risks that threaten the value of Fulton, that Fulton’s employee compensation programs were not structured in a way that poses unnecessary risks and did not encourage the manipulation of reported earnings to enhance the compensation of any employee, and that Fulton’s compensation policies and practices did not create risks that are reasonably likely to have a material adverse effect on Fulton.

 

     Accordingly, the HR Committee certifies that during Fulton’s TARP Assistance Period: (1) it has reviewed with the senior risk officer the Fulton Executive compensation plans and has made all reasonable efforts to ensure that these plans do not encourage Fulton’s Executives to take unnecessary and excessive risks that threaten the value of Fulton; (2) it has reviewed with the senior risk officer the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Fulton; and (3) it has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of Fulton to enhance the compensation of any employee.

 

Human Resources Committee

 

Patrick J. Freer, Chair
Joe N. Ballard
Craig A. Dally
George W. Hodges
Donald W. Lesher, Jr.

 

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1 Represents the 2008, 2009 and 2010 base salary amounts earned for each of the Executives named in this table. On January 18, 2011, the HR Committee and Board approved base salary adjustments for the Executivesfor Messrs. Smith, Wenger, Nugent, Shreiner and Hill of $850,000, $525,000, $520,000, $375,000 and $260,000, respectively. These changes to annual base salary are effective April 1, 2011.

 

2 The HR Committee did not award any bonus payments in 2008, 2009 or 2010 to the Executives.

 

3 Amounts represent the grant date fair values of the restricted stock awards. There were no forfeitures of restricted stock during 2008, 2009 and 2010 by any of the Executives. The per-share fair value of shares awarded in 2008, 2009 and 2010 was $9.965, $5.27 and $9.475, respectively, which is equal to the average of the high and low trading prices of Fulton stock on July 1, 2008, July 1, 2009 and July 1, 2010, the date the shares were awarded. The number of 2008 restricted stock shares awarded to Messrs. Smith, Wenger, Nugent, Shreiner and Hill was 3,266, 1,704, 2,556, 1,704 and 1,704, respectively. The number of 2009 restricted stock shares awarded to Messrs. Smith, Wenger, Nugent, Shreiner and Hill was 21,550, 11,243, 16,865, 11,243 and 11,243, respectively. The number of 2010 restricted stock shares awarded to Messrs. Smith, Wenger, Nugent, Shreiner and Hill was 37,557, 23,710, 19,758, 17,782 and 12,665, respectively.

 

4 Amounts represent the grant date fair values of the options. The per-option fair value of options granted in 2008 was $0.905. Discussion of the significant assumptions used to determine these fair values can be found in Note M “Stock-Based Compensation Plans and Shareholders’ Equity,” which starts on page 91 in the Notes to Consolidated Financial Statements, located in the Fulton Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2010. The number of 2008 options granted to Messrs. Smith, Wenger, Nugent, Shreiner and Hill was 19,734, 10,296, 15,444, 10,296 and 10,296, respectively. There were no option awards in 2009 and 2010 because the Treasury Rules prohibited Fulton from making any option awards to the Executives. There were no forfeitures of options during 2008 or 2009 by any of the Executives. The 2000 grant expired in 2010, including the following number of options by Executive: Smith – 30,580; Wenger – 13,295; Nugent – 28,679; Shreiner – 16,333; Hill – 9,497.

 

5 No Non-Equity Incentive Plan Compensation cash payments were paid to the Executives for 2008 because Fulton did not achieve its 2008 performance threshold established for the Variable Plan. Amounts listed for 2009 and 2010 are prorated awards approved by the HR Committee on March 15, 2010 and March 14, 2011 for 2009 and 2010 performance, respectively, pursuant to Fulton’s Variable Plan. The Executive awards were

 

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for performance at or above target amounts under the Variable Plan. The initial 2009 awards for Messrs. Smith, Wenger, Nugent, Shreiner and Hill were $452,433, $153,000, $192,426, $114,450 and $81,720, respectively. However, the 2009 awards were reduced by approximately 55% to reflect the portion of the 2009 performance period occurring after June 15, 2009 as required by the Treasury Rules. The initial 2010 awards for Messrs. Smith, Wenger, Nugent, Shreiner and Hill were $480,214, $179,988, $208,955, $127,040 and $96,135, respectively. However, the 2010 awards were reduced by approximately 54% to reflect the portion of the 2010 performance period occurring before the repayment of CPP Funds on July 14, 2010 as required by the Treasury Rules. A further description of the reduction of the 2009 and 2010 Variable Plan awards can be found on page 31.

 

6 Fulton has determined that the Executives did not receive above-market earnings on their nonqualified deferred compensation accounts and therefore such earnings are not required to be reported in this table column for 2008, 2009 and 2010. All participants in the nonqualified deferred compensation plan, which also includes senior managers other than the Executives, are permitted to select various investment options listed in footnote 2 of the “Nonqualified Deferred Compensation Table” on page 44. The rate of return for an individual participant’s account is based on the performance of the various standard investment options selected by each participant.

 

7 All Other Compensation includes Fulton’s payments for Qualified Profit Sharing Plan Contributions, Qualified Employer Matching Contributions, Nonqualified Profit Sharing Plan Contributions, Nonqualified Employer Matching Contributions, club membership fees, use of company provided automobiles, certain travel expenses where spouses traveled with the executives and attended Fulton events, plus other personal benefits received by the Executive. The methodology to calculate the aggregate incremental cost of perquisites and other personal benefits was to use the amount disbursed for the items. Where a benefit involved assets owned by Fulton, an estimate of the incremental cost was used. For 2010, amounts for vehicles include the cost of related items attributed to the company provided vehicle including depreciation, gasoline, maintenance and annual insurance premium estimate of $849 for each vehicle on Fulton’s corporate auto policy. The “Other Perquisites” column includes spousal travel, employee service awards paid to all employees for achieving certain years of service and other small benefits that individually are less than ten percent of all perquisites received by the Executive. The breakdown and total of all other compensation for each Executive for 2008, 2009 and 2010 is shown in the following table:

 

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