Audit Committee Member (ex officio)| Compensation Committee Member (ex officio) | | Corporate Governance Committee Member (ex officio) | | | | |
| | | | | | | Nominees for Director | | | | | | Madeleine W. Ludlow | | Age: 64 | | Director Since: 2004 | | Committees: Corporate Governance Committee Chair | | Compensation Committee Member | | | | Since 2011, Ms. Ludlow has been the founder and managing director of West Capital Advisors, LLC, which provides consultingstrategic and development advisory services regarding investmentsfor corporate innovation in private equity transactions. From 2009 to January 2011, she was a principal of Market Capital Partners LLC and from 2005 to 2009 was a principal of LudlowWard Capital Advisors, LLC, both of which were Ohio-based investment banking firms serving middle market companies. Ms. Ludlow was the chair, chief executive officer, and president of Cadence Network, Inc., a web-basedan internet-based provider of utility expense management services from 2000 to 2004. She was formerly the vice president and chief financial officer of Cinergy Corp. Ms. Ludlow is the founder and managing director of West Capital Advisors, LLC, which provides strategic and development advisory services for corporate innovation. She also serves on the board and chairs the audit committee of the Ohio National Fund, Inc., a registered investment company with 25 separate investment funds. Ms. Ludlow also is the board chair of the Greater Cincinnati Energy Alliance, a non-profit that facilitates investment in energy efficiency and renewable energy projects.
Ms. Ludlow, an audit committee financial expert within the meaning of the SEC rules, brings deep experience with and a sophisticated understanding of investment banking, finance and finance.accounting. She was a senior executive at a public utility and has worked closely with entrepreneurial and diversified businesses. | | Madeleine W. Ludlow | | | Age: 66 | | | Susan K. Nestegard | | Age: 58 | | Director Since: 20182004 | | Corporate Governance Committee Chair | Committee: Compensation Committee Member | | | | | | | | Ms. Nestegard has been, since July 2017, an advisor for True Wealth Ventures, a venture capital fund focusing on investments in women-led businesses in high-growth markets where women are the primary customers. She was president of global healthcare of Ecolab, Inc. (NYSE:ECL), a global supplier of water, hygiene, and energy services, from 2010 to 2012; executive vice president, global healthcare from 2008 to 2010; and senior vice president, research, development, and engineering, and chief technical officer from 2003 to 2008. Ms. Nestegard has more than 20 years of experience with 3M Company (NYSE:MMM) in product development and business unit management, driving revenue expansion through innovation. Also an individual innovator, Ms. Nestegard holds 26 patents in her name. Ms. Nestegard is a director and auditgovernance committee member of Hormel Foods, Inc. (NYSE:HRL). She served on the audit committee of Hormel Foods, Inc. from 2009 to 2019. Ms. Nestegard currently serves as an advisory board member of Contec, Inc. a global manufacturer of contamination control products designed for cleaning in controlled manufacturing environments. From 2013 to 2017, sheMs. Nestegard served as a director and audit committee member of American Capital, Ltd, a private equity and global asset management company that merged, in 2017, into Ares Capital Corporation. From 2013 to 2017, Ms. Nestegard was also a director of Alcami Corporation, a pharmaceutical company based in Wilmington, North Carolina, and, in 2014, she served as the company's interim chief executive officer. Ms. Nestegard brings extensive business experience, inincluding audit committee experience, strategy development, a background in innovation and disruptive technologies, and mergers and acquisitions.acquisitions experience. She has a demonstrated passion for supporting women in sciences and corporate leadership. | | Susan K. Nestegard | | Age: 60 | | | |
| | | | | Nominees for Director | | | | | | Douglas C. Neve | | Age: 63 | | Director Since: 20072018 | | Committees: AuditCompensation Committee Member
| | Corporate Governance Committee Member | | | | |
| | | | | | | Nominees for Director | | | | Mr. Neve provides financial consulting services. He is the former executive vice president and chief financial officer of Minneapolis-based Ceridian Corp., a multinational human resources company, where he worked from February 2005 until March 2007. He is a certified public accountant who, prior to February 2005, was an audit partner with Deloitte & Touche LLP, a public accounting firm. Mr. Neve serves as a director, chair of the audit committee, and member of the executive committee of Tyndale House Publishing, Inc. Mr. Neve is an audit committee financial expert within the meaning of the SEC rules andrules. He brings to the Company his knowledge of public accounting, corporate reporting, and risk management. His financial
Mr. Neve's background includes broad experience as an executive of a publicly traded company.company as well as experience as a director, an audit committee member and chair, a compensation committee member, and a governance committee member for publicly traded and privately held corporations, as well as public and non-profit entities. | | Douglas C. Neve | | Age: 65 | | | | | | Bethany M. Owen | | Age: 53 | | Director Since: 20192007 | | Audit Committee Member | | Corporate Governance Committee Member | | | | | Ms. Nick served as president and chief executive officer of Dairyland Power Cooperative from December 2014 until her retirement in July 2020. From 2012 to 2014, she served as president of Minnesota Energy Resources Corporation and president of Michigan Gas Utilities Corporation, subsidiaries of what was then Integrys Energy Group (NYSE:TEG) and is now WEC Energy Group Inc. (NYSE:WEC). From 2007 to 2012 Ms. Nick was a senior vice president of energy delivery and customer service at Wisconsin Public Service Company and President of Upper Peninsula Power Company, also subsidiaries of what was then Integrys Energy Group and is now WEC Energy Group Inc. From 1999 to 2007, Ms. Nick held multiple positions, including vice president of corporate services from 2004 to 2007, with what was then WPS Resources Corporation (NYSE:WPS), now WEC Energy Group Inc.
Ms. Nick serves as a trustee and chair of the strategic planning and corporate governance committee for the State of Wisconsin Investment Board, which provided oversight of the eighth-largest pension fund in the United States and the 25th-largest pension fund globally with investments valued at over $120 billion. She also serves as a director, chair of the governance committee and member of the audit committee of Mead & Hunt, a national architecture and engineering firm. Ms. Nick served on the board of directors for the Electric Power Research Institute (EPRI), and was a member of the EPRI Governance and Nominating Committee.
With a career in the electric and gas energy industry that spanned four decades, Ms. Nick brings a wealth of knowledge, skills and experiences to the Board. She has extensive leadership, strategic, regulatory, operational, and developmental experience in five Midwest states. Ms. Nick also has a proven record of principled corporate governance. | | Barbara A. Nick | | Age: 63 | | Director Since: 2020 | | Audit Committee Member | | | | |
| | | | | | | Nominees for Director | | | | Ms. Owen serves as the President and CEO of ALLETE. She was elected ALLETE'sCEO on February 3, 2020 and was previously elected President on January 31, 2019. Since joining the Company as an attorney in 2002, Ms. Owen has served in various capacities. In 2010, Ms. Owen was appointed President of Superior Water, Light and Power Company, a wholly owned subsidiary of ALLETE, a position she held for more than six years. In that role, Ms. Owen led the development of the company’s growth strategy, operational improvements of electric, water, and gas infrastructure, including a multi-million dollar investment in new infrastructure to improve safety and reliability, and other measures to enhance service to customers. In 2012, Ms. Owen was also named a Vice President of Minnesota Power, an operating division of ALLETE, and on June 23,in 2014, she also became Vice President-ALLETEPresident–ALLETE Information Technology Solutions. Most recently beforeBefore becoming ALLETE President in January 2019, Ms. Owen served as ALLETE Senior Vice President, Chief Legal and Administrative Officer, and Secretary. She was appointed to thisthat role, onin November 26, 2016, and in it she had overall responsibility for the Company’s legal, information and operations technology strategy, cyber security, and human resources departments, while working closely with the Board on governance matters. Prior to joining ALLETE, Ms. Owen worked for four years in the United States Senate in Washington, D.C., with the Committee on Rules and Administration and in the office of former Senator Richard G. Lugar.
Ms. Owen has served on a variety of community and non-profit boards, including as vice chair of the Board of Trustees of the Duluth Superior Area Community Foundation, which promotes private giving for the public good and fosters generosity, civic engagement, and inclusiveness in northern Minnesota and Wisconsin; she also chairs the foundation's audit and scholarship committees.Wisconsin. At ALLETE, Ms. Owen has had a variety of roles with increasing responsibility and operational scope. She has experience developing and implementing regulatory policy and with business strategy development, enterprise risk management and compliance, cyber security, corporate governance, and organizational development. | | Bethany M. Owen |
| Age: 55 | | Director Since: 2019 | | | | | | Nominees for Director | | | | | | Robert P. Powers | | Age: 65 | | Director Since: 2017 | | Committee: Compensation Committee Chair | | | | Mr. Powers retired in August 2017 as vice chair and senior advisor to the chairman and chief executive officer of American Electric Power Company (NYSE:AEP), one of the largest electric utilities in the United States with more than five million customers in eleven states. Mr. Powers held numerous leadership positions at AEP prior to becoming vice chair in January 2017, including executive vice president and chief operating officer of AEP from 2010 to December 2016; president of AEP utilitiesUtilities from 2008 to 2010; executive vice president of AEP east utilitiesEast Utilities from 2006 to 2008; and executive vice president of generation from 2003 to 2006. Mr. Powers also spent 16 years with Pacific Gas and Electric Company, rising to site vice president and plant manager at the Diablo Canyon Nuclear Generating Station, and six years with the Tennessee Valley Authority as a health physicist. Mr. Powers is a longtime, active member of EEI and the former chair of the Center for Energy Workforce Development, an organization focused on recruiting technical talent to utilities. He also serves on the board of the James Foundation of Ohio State University's James Cancer Hospital.
Mr. Powers brings diverse regulated utility experience and strategic leadership, including expertise in strategic planning, executive compensation, and cybersecurity oversight. | | Robert P. Powers | | Age: 66 | | Director Since: 2017 | | Compensation Committee Chair | |
CORPORATE GOVERNANCE ________________________________________________________________
ALLETE's Boardsolid financial and operational performance is responsible for effectively governing the Company's affairs for our shareholders' benefit. To the extent appropriate under Minnesota law, the Board considers other constituents' interests, including thoserooted in a foundation of our employees, customers, suppliers,sound governance practices, a skilled and the communities in which we do business.
The independent Directors meet regularly in executive session for discussion without management present. The Board has direct access to management and meets with them individually when it deems appropriate. Theengaged Board, and its committees also retain their own independent advisors.
focused attention to our corporate values and culture.
Ongoing development is an important aspect of independent governance. Directors are asked to attend educational seminars and to share these experiences with the other Directors. During 2018, Directors attended educational courses presented by outside entities on a variety topics including: cyber security risk, tax reform, rapid social change, legal and reputation risk, business disruption, technology disruptors, decision making and the visionary board, board diversity, 2019 proxy issues and updates, workforce of the future, tax law changes and their impact on corporate reporting, power and utility board trends, and regulatory developments in the electric utility and broader energy industries.
In addition, Directors attended educational presentations hosted by the Company in 2018 covering the following topics: innovative renewable energy contracting alternatives, corporate reporting disclosure obligations and considerations, external landscape factors in the energy industry, and investor perspectives.
The Board provides oversight, actively ensuring that the Company is managed in a way that builds
long-term value for shareholders and its committees undertake self-evaluations on an annual basis.assures ALLETE’s vitality for shareholders and other stakeholders. We believe that giving consideration to the interests of all of our stakeholders and making decisions guided by Company values—with integrity as our North Star—are important to ALLETE's long-term success and profitability.
Governance Policies ALLETE's Corporate Governance Guidelines and Board committee charters are available on our website at www.allete.com/Governance.
Our Corporate Governance Guidelines address the Board's responsibilities, committee responsibilities, Director selection and operating policies, Director compensation, expectations for Directors, Director stock ownership, and other matters. These guidelines were most recently revised in October 2018.2020.
Each Board committee operates under its own charter. The Audit Committee Charter was last reviewed in February 2021 and last revised in January 2018.2018. The Compensation Committee Charter was last reviewed and revised in July 2018.2020. The Corporate Governance Committee Charter was last reviewed in October 2020 and last revised in October 2018.2017.
Director Independence Our Corporate Governance Guidelines provide that independent Directors will constitute a substantial majority of the Board. The Board has adopted independence standards that are consistent with the Director independence standards of the NYSE and the SEC. An “independent” Director is one who has no material relationship with the Company, other than as a Director, either directly or as a partner, shareholder, or officer of an organization that has a relationship with the Company. The CGC provides recommendations to the Board with respect to whether an individual Director is independent, and the Board annually reviews and makes an affirmative determination of each Director's independence. The CGC and the Board consider all relevant facts and circumstances in making independence recommendations and independence determinations. In addition, the Board has adopted certain categorical standards to assist in determining a Director's independence. A “material relationship” with the Company exists and, therefore, a Director will not be independent, if any of the following applies: •the Director is or has been employed by the Company within the last three years (other than as a former interim ChairmanChair or a former interim CEO); •a member of the Director's immediate family is or has been employed by the Company as an executive officer within the last three years; •the Director or an immediate family member has received, during any 12-month period in any of the last three years, more than $120,000 in direct compensation from the Company (other than Director and committee fees, pension, andor other forms of deferred compensation)compensation for prior service so long as such compensation is not contingent on continued service); •the Director is a current partner or employee of a firm that is the Company’s current independent registered public accounting firm; •the Director has an immediate family member who is a current partner of the Company’s current independent registered public accounting firm; •the Director has an immediate family member who is a current employee of the Company’s current independent registered public accounting firm and who personally works on the Company’s audit; •the Director or an immediate family member was, within the last three years, a partner or employee of the Company’s current independent registered public accounting firm and personally worked on the Company’s audit within that time; •the Director or an immediate family member is or has been, within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee at the same time;committee; •the Director is a current employee, or the Director's immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million or two percent of such other company’s consolidated gross revenues; •the Director has been, within the last three years, an employee, or the Director's immediate family member has been, within the last three years, an executive officer, of any business organization to which the Company was indebted at any time during the last three years in an aggregate amount in excess of five percent of the Company’s total assets; •the Director or an immediate family member has served, within the last three years, as an executive officer or general partner of an entity that has received an investment from the Company or any of its subsidiaries that exceeds the greater of $1 million or two percent of such entity’s total invested capital in any of the last three years; or
•the Director or an immediate family member has been an executive officer of a foundation, university, non-profit trust, or other charitable organization, within the last three years, for which the Company and its respective trusts or foundations, account or accounted for more than the greater of $250,000 or two percent of such charitable organization’s consolidated gross revenues, in any of the last three years.
Director Independence Determinations In considering the independence of the Directors, the CGC examined any transactions between Directors and the Company in 2018.2020. In particular, the CGC considered Mr. Hoolihan's relationship to Industrial Lubricant Company (ILCO). ThroughoutThrough 2017, Mr. Hoolihan served as chief executive officer of ILCO and had an ownership interest in thethat company. Since January 2018, ILCO has been owned and operated by Mr. Hoolihan's immediate family members. ILCO provides lubricant products and services to one of the Company's generating facilities and to one of the Company's wholly owned subsidiaries, BNI Energy, Ltd. During 2018,2020, Company payments to ILCO totaled $803,081.$532,540. The CGC reviewed the ILCO transactions, without Mr. Hoolihan's participation, and determined that the transactions with ILCO did not constitute a material relationship for purposes of the Company’s categorical standards in determining a Director’s independence. Further, Mr. Hoolihan also had no personal involvement in the transactions and the transactions were not material to him or to any person or entity with whom he has an affiliation. Therefore, theThe CGC concluded that Mr. Hoolihan did not have a direct or indirect material interest in the transactions. The CGC previously considered similar transactions that occurred in 20172019 and 20162018 and reached the same conclusions. Based on this, the CGC recommended to the Board, and the Board determined, that these transactions did not impair Mr. Hoolihan's independence.
In addition, prior to joining the Board, Ms. Nick served as president and chief executive officer of Dairyland Power Cooperative (Dairyland) until her retirement in July 2020. As previously disclosed, Dairyland and a subsidiary of the Company have entered into agreements for the construction and operation of the proposed Nemadji Trail Energy Center (NTEC), a 525 MW to 550 MW combined-cycle natural gas-fired generating facility, which would be jointly owned by Dairyland and a subsidiary of the Company. The Company would purchase approximately 50 percent of NTEC's output starting in 2025. The total project cost is estimated to be approximately $700 million, of which the Company’s portion is expected to be approximately $350 million. The CGC reviewed Ms. Nick’s prior role at Dairyland in light of the proposed NTEC project and determined that it did not constitute a material relationship for purposes of the Company’s categorical standards in determining a Director’s independence. Based on the facts and circumstances, the CGC recommended to the Board, and the Board determined, that the NTEC project did not impair Ms. Nick’s independence.
The CGC concluded and recommended that the Board determine that each non-employee Director was independent. The Board reviewed the CGC's conclusions and recommendations in light of the Company's independence standards and the NYSE's corporate governance rules and concluded that each Director, except Ms. Owen and Mr. Hodnik, and Ms. Owen, is independent.
There were no related-person transactions in 2018 that required Board review.
| | | | | | Board HighlightsOverview | Ÿ | CombinedExecutive Board Chairman and CEOChair | Ÿ | CEO Serves as Director | | Independent Lead Director | Ÿ | All Committees Comprised of and Chaired by Independent Directors | | All Directors, Except Ms. Owen and Mr. Hodnik, are Independent |
| | | | | | | | | | | | | | | | Board Composition | | DIVERSITY | | BOARD REFRESHMENT | | | |
| | | | | | | | | | | | | | | | | | | Board, Current Committee Memberships, and Meetings in 2020 | | | Board of Directors | Audit Committee | Compensation Committee | Corporate Governance Committee | | Alan R. Hodnik | | µ | | | | | Kathryn W. Dindo | | l | µ« | | | | George G. Goldfarb | | l | l« | | | | James J. Hoolihan | | l | | | l | Heidi E. Jimmerson1 | | l | l | l | l | | Madeleine W. Ludlow | | l | | l | µ | | Susan K. Nestegard | | l |
| l | l | | Douglas C. Neve | | l | l« | | l | | Barbara A. Nick | | l | l | | | | Bethany M. Owen | | l | | | | | Robert P. Powers | | l | | µ | | | Meetings Held in 2020: | | 12 | 6 | 6 | 4 | l = Member µ = Chair « = "Audit committee financial expert" within the meaning of SEC rules |
1 As Lead Director, Ms. Jimmerson is an ex officio member of each standing committee. The Lead Director's duties are described on page 23.
Board Diversity and Director Nominations ALLETE seeks Directors whose ethical conduct, commitment on sustainability, and diverse experiences, backgrounds, and perspectives will serve shareholders well and contribute to sound corporate governance. The Board values diversity and believes representation from a range of professional backgrounds, as well as a mix of gender, racial, cultural, geographic, and other diverse perspectives enhances effective governance and drives successful performance by increasing understanding of the expectations and viewpoints of our investors and other stakeholders. The slate of director nominations for the 2021 Annual Meeting includes six Directors who are women, which constitutes a majority of the Board. ALLETE is actively seeking for consideration candidates who will enhance the Board's racial and ethnic diversity.
The Corporate Governance Committee regularly reviews the skills, expertise, and attributes that are important for effective governance of the Company and recommends Director candidates to the Board. The Corporate Governance Committee will consider any person proposed by a Director, management, a search firm, or any shareholder. All Director candidates will be evaluated based on the criteria identified below, regardless of who proposed such person.
In selecting Director nominees, the Board considers multiple factors including: integrity, achievements, judgment, personal character, commitment to sustainability, how the candidate's relevant experience would complement and enhance the composition of the Board, Board succession plans, the candidate's ability and willingness to devote adequate time to Board duties, and the likelihood that she or he will be willing and able to serve on the Board for a sustained period. The Company seeks candidates whose diverse experience, backgrounds, and perspectives will contribute to robust discussion in the boardroom. The Board considers its overall balance of perspectives, backgrounds, and experiences; as part of this, the Board will consider whether a candidate's background will enhance the Board's racial and ethnic diversity. The Corporate Governance Committee will consider the candidate's independence in accordance with ALLETE's Corporate Governance Guidelines and the NYSE and SEC rules. Director nominees must be willing and able to devote adequate time and attention to Board service, must demonstrate independent thinking, a collaborative nature, and stakeholder awareness. Director nominees must have experience with business and strategic planning, as well as prior service on, or experience working closely with, a board of directors. In connection with the selection, due consideration will be given to a candidate's particular experience, including but not limited to: executive corporate leadership experience; understanding of board committee functions; understanding of generally accepted accounting principles; financial expertise (including qualification as an “audit committee financial expert” within the meaning of the SEC's rules); financing experience; auditing experience; human resource and executive compensation expertise; strategic planning and business development experience; experience with regulated utilities; strategic experience with renewable energy businesses or technologies; familiarity with the regions in which Company provides services; and community leadership.
The Board may engage a search firm to assist in identifying and conducting due diligence on potential Director nominees.
Before making contact with a potential candidate, the Corporate Governance Committee will notify the Board of its intent to do so, will provide the candidate's name and background information to the Board, and will allow time for Directors to comment. The Corporate Governance Committee will screen potential candidates for the Board. A majority of the Corporate Governance Committee members will interview any candidate before recommending that candidate to the Board. The recommendations of the Corporate Governance Committee will be timed so as to allow Board members an opportunity to interview the candidate prior to the nomination of the candidate. The Board as a whole is responsible for nominating individuals for election to the Board and for filling vacancies on the Board that may occur between annual shareholders' meetings.
A shareholder who wishes to propose a candidate should provide the person's name and a detailed background of her or his qualifications to the Corporate Governance Committee, c/o Corporate Secretary, ALLETE, Inc., 30 West Superior Street, Duluth, MN 55802.
Board Leadership Structure Our Board is currently structured with an Executive Chair, a CEO who serves as a Director, an independent Lead Director, and independent Committee chairs.
Mr. Hodnik, who served as CEO until February 3, 2020, has served as Board Chairman since 2011. When Ms. Owen, who has served on the Board since February 2019, was elected CEO effective February 3, 2020, Mr. Hodnik became the Company's Executive Chairman. As Executive Chairman, heMr. Hodnik presides over meetings of the Board, presides over meetings of the shareholders, consults with and advises the Board and its committees on the Company's business and affairs, and performs other duties as may be assigned by the Board.
In accordance with theALLETE's Corporate Governance Guidelines becausedirect that the Chairmanindependent Directors are to select an independent Lead Director if the Board Chair is not an independent Director, the Board has selected an independent Lead Director. The Lead Director performs the following duties:
•presides when the Board meets in executive session; •presides at Board meetings when the Chairman is not present to lead the Board's deliberations; •serves as an ex officio member of each Board committee; •serves as a liaison between the Chairman and the independent Directors when necessary to provide a supplemental communication channel; •works with the Chairman and the CEO to develop Board meeting agendas, schedules, and information to be provided to Directors; •leads the evaluation of CEO performance in consultation with the Corporate Governance Committee; and •performs other duties as requested by the independent Directors.
The Board believes that its leadership structure—a combinedan experienced Executive Board Chairman, and CEO, an independent Lead Director, and committees comprised of and chaired by independent Directors—is the most effective for ALLETE at this time. In reaching this determination, the Board considered factors including the Company's size, the diversity and experience of our independent Board members, Mr. Hodnik's and Ms. Owen's industry and governance experience, leadership succession planning, the Board's effective use of the Lead Director who provides coordination and leadership for the independent Directors, and the active engagement by all Directors. The Board believes there is no single best leadership structure that is most effective in all circumstances. The Board continually reviews its leadership structure and may decide to combine the positions of CEO and Chair if it deems that to be in the Company's and the shareholders' best interests.
As previously announced, Mr. Hodnik will retire effective May 31, 2021 and he is not standing for election to the Board at ALLETE's 2021 Annual Meeting.
| | | | | | | | Overview of Board, Current Committee Memberships, and Meetings in 2018 | | | | Board of Directors | Audit Committee | Compensation Committee | Corporate Governance Committee | | Alan R. Hodnik | | µ | | | | | Kathryn W. Dindo | | l | µ« | | | | Sidney W. Emery, Jr. | | l | | l | | | George G. Goldfarb | | l | l« | | | | James S. Haines, Jr. | | l | | l | l | | James J. Hoolihan | | l | | l | l | Heidi E. Jimmerson1 | | l | l | l | l | | Madeleine W. Ludlow | | l | | l | µ | | Susan K. Nestegard | | l |
| l | | | Douglas C. Neve | | l | l« | | l | Bethany M. Owen2 | | l | | | | | Robert P. Powers | | l | | µ | | | Leonard C. Rodman | | l | l | | l | | Meetings Held in 2018: | | 7 | 5 | 7 | 4 | l = Member µ = Chair « = "Audit committee financial expert" within the meaning of SEC rules |
| | 1
| As Lead Director, Ms. Jimmerson is an ex officio member of each standing committee. The Lead Director's duties are described on page 19.
|
| | 2
| Ms. Owen was elected to the Board on February 13, 2019. |
Board Committees The Board has three standing committees: the Audit Committee, the Compensation Committee, and the Corporate Governance Committee. We anticipate that committee chairs will rotate among Directors in the future.Directors. The Board recognizes that rotating chairs provides development for the Directors and allows a variety of perspectives in leadership positions.
Audit Committee The primary responsibility of the Audit Committee selects,is to assist the Board in its oversight responsibility for: •The integrity of the Company's financial statements and reviewsinternal controls over financial reporting; •The Company's compliance with corporate policies and procedures; •The Company's compliance with legal and regulatory requirements; •The qualifications and independence of the independence and performance of, theCompany's independent registered public accounting firm. firm; •The Audit Committee also reviewsperformance of the Company's independent registered public accounting firm; •The performance of the Company's internal audit function; •The review and resourcesevaluation of ALLETE's internal audit function, reviewsaccounting policies; and evaluates ALLETE's accounting policies, reviews •The review of periodic financial reports to be provided to the public, and, upon favorable review, recommendsrecommending approval of the Company's Consolidated Financial Statements.
As described in more detail in the Audit Committee Report beginning on page 74, all Audit Committee members are independent under ALLETE's Corporate Governance Guidelines, within the meaning of SEC rules, and in accordance with NYSE listing standards; all Audit Committee members are financially literate; and three of the five current Audit Committee members are "financial experts" under the definition provided by the SEC.
Compensation Committee The primary responsibility of the Compensation Committee establishesis to help discharge the Board's responsibilities related to compensating ALLETE's executives by: •Establishing the Company's philosophy and policies regarding executive and director compensation; •Setting compensation for the CEO and benefits for any other employee Director; •Setting performance goals and approving determinations of results; •Overseeing the administration of ALLETE's executive officers that areand director compensation programs; •Reviewing the compensation of Directors and executive management in a manner designed to be equitable, competitive in the marketplace, and consistent with the Company's executive compensation philosophy. The Compensation Committee also makesphilosophy; and •Making recommendations to the Board regarding Director compensation.
All members of the Compensation Committee qualify as “independent directors” under NYSE rules, “non-employee directors” under Rule 16b-3 under the Exchange Act, and “outside directors” under Section 162(m) of the Tax Code.
Corporate Governance Committee The Corporate Governance Committee makesoversees activities and reporting of ESG matters. The CGC oversees the Company's corporate governance practices by: •Making recommendations to the Board with respect to Board membership, function, committee structure and membership, succession planning for executive management, and application of corporate governance principles. It also performsprinciples; •Performing the functions of a Director nominating committee, overseesDirector-nominating committee; •Overseeing the Board's annual evaluation of the CEO,CEO; and •Developing and recommending to the Board standards for determining a director's independence and providing recommendations to the Board with respect to independence determinations. The CGC is authorized to exercise the authority of the Board in the intervals between Board meetings.
Director Meeting Attendance
Our Corporate Governance Guidelines provide that Directors are expected to regularly attend Board meetings and meetings of the committee or committees on which they serve. The Board held seven meetings during 2018 and each Director attended every Board meeting, except that three Directors each missed one meeting. Each Director attended at least 75 percent of the aggregate number of meetings held in 2018 by the committees on which they served. Directors standing for election are also expected to attend the Annual Meeting, and each Director but one attended the 2018 Annual Meeting.
Director Nominations
The Corporate Governance Committee recommends Director candidatesRisk Oversight
ALLETE, like other companies, is subject to the Board and will consider persons proposed by other Directors, management, search firms, or shareholders. We seek candidates whose diverse experiences, backgrounds and perspectives will contribute to robust discussion in the boardroom. The Board values diversity and strives to ensure the Board members reflect a range of ages as well as a variety of regionalrisks. These risks include, among others, financial and professional backgrounds. All Director candidates will be evaluated based on the criteria identified below, regardless of who proposed such person.
In selecting Director nominees, the Board considers the following factors: integrity, achievements, judgment, personal character, the fit of the candidate's relevant experience with the experience of other Board members, the candidate's abilityaccounting risks, strategic risks, regulatory risks, market and willingness to devote adequate time to Board duties,credit risks, capital deployment risks, operational risks, compensation risks, liquidity risks, litigation risks, reputation risks, natural disaster risks, and the likelihood that he or she will be willing and able to serve on the Board for a sustained period. The Corporate Governance Committee will consider the candidate's independence in accordance with ALLETE's Corporate Governance Guidelines and the NYSE and SEC rules. Director nominees must be willing and able to devote adequate time and attention to Board service, must demonstrate independent thinking, a collaborative nature, and stakeholder awareness, and must have experience with business and strategic planning, as well as prior service on, or working closely with, one or more other boards. In connection with the selection, due consideration will be given to a candidate's particular experience,technology risks, including but not limited to: understanding of board committee functions; understanding of generally accepted accounting principles; financial expertise (including qualification as an “audit committee financial expert” within the meaning of the SEC's rules); financing experience; auditing experience; human resource and executive compensation expertise; strategic planning and business development experience; experience with utilities, energy-centric businesses, or both; familiarity with the Company's service area; and community leadership.
The Board may engage a search firm to assist in identifying and conducting due diligence on potential Director nominees.
Before making contact with a potential candidate, the Corporate Governance Committee will notify the Board of its intent to do so, will provide the candidate's name and background information to the Board, and will allow time for Directors to comment. The Corporate Governance Committee will screen, personally interview, and recommend candidates to the Board. A majority of the Corporate Governance Committee members will interview any candidate before recommending that candidate to the Board. The recommendations of the Corporate Governance Committee will be timed so as to allow Board members an opportunity to interview the candidate prior to the nomination of the candidate.
A shareholder who wishes to propose a candidate should provide the person's name and a detailed background of his or her qualifications to the Corporate Governance Committee, c/o Secretary, ALLETE, Inc., 30 West Superior Street, Duluth, MN 55802.
Risk Oversight
cybersecurity risks. The Board is responsible for overseeing risk management at the Company. TheWhile the Board as a whole exercises direct oversight of strategic risks and other critical risk areas with enterprise-wide significance to the Company, and otheraspects of risk areas notoversight are delegated to oneBoard committees, which play a key role and can devote more time to reviewing specific risks within their respective areas of responsibility. We believe the Board provides effective oversight of the risks ALLETE faces.
Our standing Board committees regularly consider risks arising in their respective functional responsibility areas. Each of these committees receives regular reports from management that assist in its committees. The oversight of risks in its functional responsibility area. Key risk-management oversight assignments for the Board committees are as follows:
Audit Committee reviews and assesses the Company’s •Financial reporting processes, to manage financial reporting risk and to manage tax, and other financial risks; •Appointment, evaluation, and oversight of the Company's independent registered public accounting firm; •Oversight of internal audit function; •Corporate compliance, significant legal matters, and insurance programs; •Market and credit risks; and •Physical and cybersecurity risks. The
Compensation Committee oversees •Executive compensation programsdesign risks; and policies and their effect on risk-taking by management. The •Executive compensation administration risks.
Corporate Governance Committee oversees compliance with legal •Corporate governance risks; •Board succession and regulatory requirements, ALLETE’s Code of Business Conduct,composition; and other related policies.
•ESG reporting.
It
ALLETE's management is management’s responsibility to manageresponsible for managing enterprise risks. The Board has overall responsibility for risk oversight, including, as part of regular Board and committee meetings, oversight of how Company leadership manages risks relevant to the Company. The Company’s ERM program ensures that strategic goals align with ALLETE’s mission, vision, and values and that decision-making includes adequate consideration of the associated risks. ERM defines procedures for identifying, mitigating, and reporting significant risks. In 2018,2020, the Board received regular updates from senior management on ALLETE's risk appetite criteriaERM program and risk governance structure. The Board also reviewed ALLETE's updated strategy, including the strategy of each ALLETE business unit, to ensure appropriate consideration of risks and alignment with the Company's overall risk management objectives. In addition, management also provides the Board with regular updates of key enterprise risk indicators.
The Board's focus on effective risk oversight supports management as it establishes a tone and culture of effective risk management. Ms. Owen, Mr. Hodnik, and Ms. Jimmerson, as CEO, Executive Chair, and Lead Director, respectively, all play important roles in identifying significant risks to the Company and facilitating the Board's consideration of those risks. Among other things, they bothjointly review Board and committee agendas to ensure risks are appropriately addressed.considered. The Lead Director participates as an ex officio member on all Board committees.committees with full voting privileges on each committee.
Code of Business Conduct and Ethics ALLETE has adopted a written Code of Business Conduct (which includes our code of ethics) that applies to all Directors and Company employees and officers, including the CEO, the CFO, and the Chief Accounting Officer and Controller. The Code of Business Conduct also applies to our contractors, suppliers, and vendors. ALLETE's Code of Business Conduct is available on our website at www.allete.com/governance. Any amendment to, or waiver of, the Code of Business Conduct will be published on ALLETE's website promptly following the date of such amendment or waiver.
Shareholder Engagement
ALLETE believes it is important that our governance process include meaningful engagement with shareholders to understand their perspectives on corporate governance, executive compensation and other issues that matter to investors. We engage with shareholders throughout the year to: provide visibility and transparency into our businesses and our financial and operational performance; listen to shareholders' perspectives and understand shareholders' expectations of us; share our environmental and sustainability strategy and accomplishments; and receive feedback on our communications and disclosures to shareholders.
Throughout the year, senior management and our investor relations team meet with analysts and institutional investors to review financial and other business and strategic issues, as well as solicit input, provide perspective on Company policies and practices, and answer questions. We participate in investor conferences, other formal events and groups, and also in one-on-one meetings. We also engage with governance representatives of our large shareholders.
During 2020, we contacted shareholders owning approximately 58% of our outstanding Common Stock, resulting in substantive engagements with the holders of approximately 43% of our outstanding shares, We discussed topics including: ALLETE's financial and operational performance; growth initiatives; strategy updates; dividend practices; and corporate governance practices, as well as sustainability and environmental strategy, performance and reporting.
The Board receives regular reports form ALLETE's investor relations team about shareholder engagements and what our investors are telling us about topics that matter to them.
Sustainability and Corporate Responsibility Our commitment to sustainability is led and supported through strong Board leadership, intentional focus by the executive management team, and sound governance practices. The Board oversees ALLETE’s strategy and Enterprise Risk Management, including the evaluation of sustainability-related risks and opportunities, in a manner designed to drive performance for our shareholders and other stakeholders. We honor our commitments to the climate, our customers, and our communities by acting to advance sustainability goals. Corporate responsibility is integrated into our governance processes and is embedded in our strategy and our core values, namely: integrity, environmental stewardship, safety, employee growth, and community engagement.
We recognize that impacts from human activity, including climate change, are real, and we are taking action to transform the nation’s energy landscape through sustainable solutions. Our growth strategy and sustainability-in-action initiatives involve: continuing to reduce carbon emissions, delivering cleaner energy sources to our customers, strengthening the electric grid to account for more intermittent resources, and implementing innovative solutions to enhance resiliency for all our businesses. Our comprehensive program also includes a committed social focus including: supporting and building diversity, equity, and inclusion in our workforce, supply chains, safety initiatives, and community giving, as well as enhanced sustainability communication and disclosures.
| | | | | | | | | | | | | | | | Climate-Related Initiatives | | | | | | | | Sustainability-Focused Workforce Practices | |
The Corporate Governance Committee oversees the reporting of ESG matters. During 2020, management actively engaged with investors and other key stakeholders to discuss ALLETE's sustainability strategy and initiatives and to gain insights into stakeholders' perspectives about sustainability and corporate responsibility, and how to effectively measure, communicate and disclose our efforts. In March 2021, we released a detailed update to our Sustainability Report, which can be found at our website at http://www.allete.com/sustainability.
Meetings of Independent Directors
At each regularly scheduled Board meeting, the independent, non-employee Directors meet in executive session for discussion without management present. These meetings are chaired by the Lead Director. The Board has direct access to management and meets with them individually when it deems appropriate.
Board Contact with Management and Independent Advisors
Executive officers and other management employees are regularly included in Board and Committee meetings, as deemed appropriate. Directors may meet individually with executive officers and other management employees.
The Board and its committees also retain their own independent advisors.
Board and Committee Evaluations
The Board and its committees undertake self-evaluations on an annual basis.
The Board's self-evaluation includes soliciting opinions from the Directors about topics related to Board effectiveness including: •The sufficiency of and timeliness of briefing materials provided to Directors; •The content and conduct of Board meetings; •The adequacy of time allocated to, and the quality of, presentations and discussions; •The Board's access to management; •The Board’s understanding of issues; •The Board’s consideration of shareholders’ interests in making decisions; •The overall mix of characteristics and skill sets represented by Board members; and •Any area previously identified by Board members as requiring improvement.
The assessments are used to improve Board performance and effectiveness.
Each Board committee's self-evaluation addresses matters the committee considers relevant to its performance, including a review and assessment of the adequacy of the committee's charter. A report on each committee's self-evaluation is presented to the Board.
Meeting Attendance Our Corporate Governance Guidelines provide that Directors are expected to regularly attend Board meetings and meetings of the committee or committees on which they serve. The Board held twelve meetings during 2020 and each Director attended every Board meeting, including Ms. Nick, who was elected to the Board on July 28, 2020 and attended every Board meeting held in 2020 since she became a Director. Each Director attended at least 95 percent of the aggregate number of meetings held in 2020 by the committees on which they served, including Ms. Nick, who attended every meeting held in 2020 since she became a Director for the committee on which she served. Directors standing for election are also expected to attend the Annual Meeting and each Director nominee standing for election in May 2020 attended last year's Annual Meeting.
Director Continuing Education
Ongoing development is an important aspect of governance. In addition to the frequent updates on corporate governance practices and requirements provided by the Company, Directors are asked to attend educational seminars, and to share their experiences with the other Directors. During 2020, Directors attended educational courses presented by outside entities on a variety topics including: economic updates; governance trends; investment trends; board oversight of corporate culture; leadership in divisive times; crisis management; a new vision for ESG; understanding investors' short- and long-term expectations; redefining "purpose" as a growth engine; understanding the role of regulators in the ESG conversation; linking ESG performance and executive compensation; audit committee "hot topics;" and trending topics in the utilities industry.
In addition, Directors attended educational presentations hosted by the Company in 2020 covering the following topics: energy and utility sector shareholder landscape; corporate sustainability and shareholder expectations; strategic and market developments in the electric utility industry; fiduciary duties; enterprise risks; regulatory perspectives; and safety strategy and trends.
Stock Ownership Guidelines The Corporate Governance Committee has determined that non-employee Directors, as well as executive officers, should have an equity interest in the Company. The CGC believes that such equity ownership aligns the Directors' interests with those of the Company's shareholders. Accordingly, the Board has adopted stock ownership guidelines.
Directors are expected to own at least 500 shares of Common Stock prior to their election to the Board. Further, within five years of their election to the Board, non-employee Directors are expected to own shares worth at least five times the amount of the annual cash retainer paid to Directors. Executive stock ownership guidelines are discussed in the CD&A on pages 41 and 42.page 49.
The CGC regularly reviews the stock ownership guidelines and may recommend changes to the Board as it deems appropriate.
Related Person Transactions The Board recognizes that in the ordinary course of business, transactions may occur between ALLETE and its subsidiaries and entities with which some of our Directors and officers are or may have been affiliated. Such transactions are evaluated in accordance with ALLETE's Related Person Transaction Policy, which was last reviewed and approved by the Board in July 20182020 and is available at www.allete.com/Governance.
Related persons include Directors, Director nominees, executive officers, and five percent shareholders, as well as their immediate family members and any entity controlled by these individuals or in which these individuals have a substantial financial interest.
The Related Person Transaction Policy applies to a financial transaction or arrangement, or a series of similar transactions or arrangements, which exceeds $25,000 annually or $6,250 quarterly, in which a related person has or will have a direct or indirect material interest.
Transactions between the Company and a related person generally require advance approval by the Corporate Governance Committee. If a new situation arises where advance approval is not practical, it is discussed with the Chair of the CGC, or with another CGC member designated by the Committee; an appropriate response might include subsequent ratification by the CGC.
The CGC also periodically reviews and assesses related person relationships to ensure ongoing fairness to the Company. Any member of the CGC who has an interest in a transaction will abstain from voting, but may participate in the discussion if invited to do so by the CGC Chair, or the Lead Director if the CGC Chair has an interest in the transaction. The CGC considers factors it deems relevant in determining whether to approve a related person transaction, including:
•the extent of the related person's interest in the transaction; •the availability of comparable products or services from non-related persons; •whether the transaction is on terms comparable to those that could be obtained in an arm's-length dealing with an unrelated third party; •the business reasons to enter into the transaction; •whether the transaction could impair the independence of a Director; •whether the annual amount involved exceeds the greater of $200,000 or 5 percent of the recipient's gross revenues for the year; and •whether the transaction would present an improper conflict of interest, taking into account the size of the transaction, the overall financial position of the related person, the direct or indirect relationship of the related person, and the ongoing nature of any proposed relationships.
Code of Business Conduct and Ethics
ALLETE has adopted a written Code of Business Conduct (which includes our code of ethics) that applies to all Directors and Company employees and officers, including the CEO, the CFO, and the Controller. The Code of Business Conduct also applies to our contractors, suppliers, and vendors. ALLETE's Code of Business Conduct is available on our website at www.allete.com/Governance. Any amendment to, or waiver of, the Code of Business Conduct will be published on ALLETE's website promptly following the date of such amendment or waiver.
Sustainability and Corporate Responsibility
At ALLETE, we recognize that impacts from human activity, including climate change, are real, complex, and interrelated. We are committed to answer the call to transform the nation’s energy landscape through innovative and sustainable solutions. Please see our website at
http://www.allete.com/Sustainability for information about ways that ALLETE is demonstrating our commitment to sustainability.
Communications between Shareholders and Other Interested Parties and the Board We believe that it is an important aspect of corporate governance to facilitate direct communication between the Board and shareholders and other stakeholders. Shareholders and other interested parties who wish tostakeholders may communicate directly with theour Board, with any specified group of Directors, such as a Board committee or the non-management Directors, or a particular Director, may do so by addressingwith any individual Director. Such communications should be in writing and addressed to the Lead Director, c/o Corporate Secretary, ALLETE, Inc., 30 West Superior Street, Duluth, MN 55802.
Communications that are determined to be primarily commercial in nature, such as business solicitations and advertisements, will not be forwarded to the Board.
ITEM NO. 2—ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION _________________________________________________________________________________________________________________________________
We are asking our shareholders to cast a non-binding, advisory vote approving compensation for our NEOs as reported in this Proxy Statement.
ALLETE's executive compensation program is designed to enhance shareholder value while attracting and retaining experienced, qualified executives. To fully understand ALLETE's 20182020 executive compensation, we encourage you to read the CD&A, starting on page 27,32 as well as the compensation tables and narrative disclosures that follow the CD&A. Those sections describe how our compensation programs are designed to achieve ALLETE's compensation objectives and provide detailed information on the 20182020 compensation of our NEOs.We believe our executive compensation program reflects a pay-for-performance philosophy and is aligned with shareholders' long-term interests.
This proposal, commonly known as "say-on-pay," is required under Section 14A of the Exchange Act. Although this say-on-pay vote is advisory and not binding on the Company, the Compensation Committee and the Board will review the voting results and will take the outcome of the vote into account when considering future executive compensation decisions.
We have determined to hold a say-on-pay vote each year until the next non-binding, advisory shareholder vote on how frequently to hold the say-on-pay vote, commonly known as "say-on-frequency." The next say-on-frequency vote will be held no later than the 2023 Annual Meeting.
The Board recommends a vote “FOR” the advisory vote to approve executive compensation.
COMPENSATION DISCUSSION AND ANALYSIS _________________________________________________________________
This CD&A explains ALLETE's executive compensation program and 20182020 compensation for the following NEOs: | | | | | | | | | | | | | | Bethany M. Owen | President and CEO | | | Alan R. Hodnik | Executive Chairman and CEO | | | Robert J. Adams | Senior Vice President and CFO | | Bradley W. Oachs | Senior Vice President and President Regulated Operations | | Nicole R. Johnson | Bethany M. Owen | President | | Patrick K. Mullen | Senior Vice President - External Affairs | | Deborah A. Amberg | Former Senior Vice President and Chief StrategyAdministrative Officer Regulated Operations | | | Steven W. Morris | Vice President, Chief Accounting Officer, and Controller | | | Margaret A. Thickens | Vice President, Chief Legal Officer, and Corporate Secretary |
On January 31, 2019, the Board elected Ms. Owen as ALLETE's President. Prior to that date, and throughout 2018, Ms. Owen served as Senior Vice President, Chief Legal and Administrative Officer, and Secretary, andwas elected CEO effective February 3, 2020, when Mr. Hodnik was ALLETE's Chairman, President, and CEO.became Executive Chairman. References to the CEO in the CD&A discussion below refer to Ms. Owen.
As part of our focus during 2018 on rescaling the operations and overall cost structure of our regulated business, Minnesota Power, the Company eliminated the position held by Ms. Amberg, and, as a result her employment with the Company ended on November 28, 2018.
EXECUTIVE SUMMARY
COVID-19 Pandemic Response
This past year has brought particular challenges for ALLETE as well as notable accomplishments. From the outset of the COVID-19 pandemic, one of our top priorities has been protecting the safety and health of our employees and their families, and also our customers and communities, as we continued to provide safe and reliable services. To that end, ALLETE acted, early and often, to help promote employee safety across all of our businesses, while continuing to provide safe and reliable essential energy services to our customers. As in other uncertain economic times, we also took steps to ensure that our financial health remained strong, preserving our ability to execute our strategy over the long term. Recognizing the importance of transparency, especially during trying times like these, frequent communication with employees, customers, and other stakeholders also was a key priority for 2020.
In November 2019, Minnesota Power requested a rate increase to cover rising operating expenses, expiring contracts, and regulatory costs. By April 2020, with the spread of COVID-19 impacting the health and financial well-being of many of our customers and communities, Minnesota Power proposed a resolution to settle the rate case with a lower rate increase to customers than was initially requested. The resulting rate case settlement, and associated customer refunds, was, in part, a recognition of the critical importance of Minnesota Power's mission to deliver safe, reliable, and affordable energy, particularly during the initial onset of the pandemic.
ALLETE has been doing more than merely weathering the pandemic; through strong leadership and tremendous efforts by employees at all levels, we delivered solid 2020 financial and operational results. Our employees have demonstrated deep resiliency and steadfast commitment, as we have had to continually respond to changing circumstances and reassess the means by which we accomplish our critical strategic objectives.
Recognizing the critical role our employees play in executing our strategy across ALLETE, there were no broad programs to reduce employee staffing levels, hours of work, or compensation arrangements. The ECC followed its standard practices with regard to making its determinations under the annual and long-term incentive plans. The ECC did not reduce performance targets under either the AIP or LTIP. However, part of the ECC's standard practice for assessing performance for AIP purposes, established at the beginning of the plan year, includes making determinations on a case-by-case basis regarding discrete, non-recurring events that might occur during the plan year. As discussed below, the ECC exercised discretion under the AIP in 2020, related to the COVID-19 pandemic, to exclude the impact of the rate case settlement from the calculation of AIP net income and the impact of the associated customer refunds from the calculation of AIP cash from operating activities.
Compensation Philosophy We use compensation as a toolOur executive programs are designed to attractalign NEO's interests with the interests of our shareholders and retain the leaders on whom ALLETE's success depends. Our compensation program provides competitively benchmarked base compensation (fixed), as well as incentive compensation for accomplishing goals that will create long-term shareholder value (variable).other stakeholders. Our compensation philosophy is based on these fundamental principles:
•We link compensation to performance. •We balance compensation elements. •Our compensation is competitive and consistentaligned with ALLETE's core values. •The ECC and the Board exercise independent judgment. •We require executive stock ownership to align executives' interests with shareholders' interests. •We consider tax and accounting rules.
Compensation Practices | | | | | | | | | | | | | What We Do | | þ | | Link PayEnsure that a substantial portion of each NEO's compensation is variable, at-risk, and subject to Performanceperformance-based metrics. | | þ | | Balance Compensation ElementsCap incentive compensation. | | þ | | Cap Incentive CompensationUse multiple metrics to measure performance. | | þ | | Use Independent Compensation Consultantan independent compensation consultant. | | þ | | Require Executive Stock Ownershipexecutive stock ownership. | | þ | | Prohibit Hedging, Pledging, and Short SalesRequire NEO to hold shares until stock ownership guideline is met. | | þ | | Prohibit hedging, pledging, and short sales. | | þ | | Require Double-Triggera double-trigger for a CIC Severance Plan Paymentspayment. | | þ | | HaveApply a Compensation Recoverycompensation recovery ("Clawback"clawback") Policypolicy to incentive compensation. |
| | | | | | | | | | | | | What We Don't Do | | ý | | No Employment AgreementsEnter into employment agreements with NEOsour NEOs. | | ý | | No Dividend Equivalents PaidPay dividend equivalents on Unvestedunvested RSUs or Unearned Performance Sharesunearned performance shares. | | ý | | No Stock OptionsProvide stock options. | | ý | | No Excessive PerquisitesProvide excessive perquisites. | | ý | | No Tax Gross-Ups ProvidedProvide tax gross-ups (except on relocation expenses paid under ALLETE's broad-based policy). |
2018 Financial, Strategic, and Operational and Values
2020 Performance for Incentive PlansCompensation NEOs have a significant portion of their compensation tied to Company performance. Annual incentives focus on achieving annual financial, strategic, and operational and values goals. Long-term incentives facilitate stock ownership and reward long-term growth and profitability. As explained in this CD&A, ALLETE's 20182020 performance directly affected our NEOs' compensation for 2018.2020.
Annual incentives reward shorter-term strategic goals as well as operational and values-based accomplishments. Our AIP rewards one-year performance measured by net income and cash from operating activities, subject to certain adjustments that are described in more detail beginning on page 36. Annual incentives43. To calculate the financial goals for annual incentive purposes, the ECC established specified adjustments at the beginning of the performance period. The ECC also reward shorter-term strategic and operational and values-based accomplishments.determined at the beginning of the plan year that it would make any determinations on a case-by-case basis regarding discrete, non-recurring events that might occur during the plan year.
As disclosed in ALLETE's 20182020 Annual Report on Form 10-K, Net Income Attributable to ALLETE for the year ended December 31, 2018,2020, prior to adjustment, was $174.1$174.2 million (compared to $172.2$185.6 million for 2017)2019). For annual incentive purposes, ALLETE net income meansAs described in detail on page 45, Net Income Attributable to ALLETE adjustedwas increased by $10.26 million after making adjustments related to excludethe following: (1) net income associated with ALLETE Properties investments, severance expense associated withoperations; (2) net income related to ALLETE Properties cash released from escrow; (3) the rescaling of the operations and overall cost structure of Minnesota Power a regulated utility division of ALLETE,rate case settlement; and the effect of changes in tax law or accounting principles.(4) acquisition activities and associated operations.
As disclosed in ALLETE's 20182020 Annual Report on Form 10-K, Cash from Operating Activities for 2018,2020, prior to adjustment, was $433.1$299.8 million (compared to $402.9$249.5 million for 2017)2019). For annual incentive purposes, cash from operating activities meansAs described in detail on page 45, Cash from Operating Activities adjustedwas increased by $25.55 million after making adjustments related to excludethe following: (1) cash associated with ALLETE Properties operations; (2) cash released from escrow related to ALLETE Properties; (3) a pension contribution made in cash; (4) refunds related to Minnesota Power rate case settlement; (5) cash related to ALLETE Properties operationsacquisition activities; and the effect(6) asset decommissioning expenses in excess of changes in tax law or accounting principles. The basis for making adjustments was established at the beginning of the performance period.budget.
In addition to financial metrics, the annual incentive also measures performance ofrelative to strategic goals and operational and values goals. Our strategic goals vary from year to year, but generally focus on our ability to grow our business, diversify our power sources,address changing expectations of customers and stakeholders, and improve our operating efficiency. Our operating and values goals are tied to the Company’s performance against safety and reliability measures. For 2018,2020, the ECC approveddetermined that the Company’s strategic performance as “above target.”was between target and superior. This rating was based on the ECC's evaluation of the Company’s strong performance in enhancing the areas ofcustomer experience, addressing customer competitiveness, and advancing growth, retaining customers, addressing cost competitiveness for customers, and improving operational efficiency.sustainability. Performance on 2018 safety and2020 operational and values goals were belowwas between threshold and target.
As shown in the following chart, financial results along with performance on strategic and operational and values goals, resulted in an ALLETE annual incentive payout for 2018 equal to 115.22020 that equaled 100.3 percent of target (compared to 119.194.9 percent in 2017)2019).
| | | | | | | | | | | | | | 2018 ALLETE Annual Incentive Results | | Financial Metrics | | Measurement | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | Net Income | $172.9 million | $176.9 million | $190.2 million | $176.3 million | | | 50.0% | 92.6% | 46.3% | | Cash from Operating Activities | $367.7 million | $408.5 million | $449.4 million | $434.5 million | | | 25.0% | 163.6% | 40.9% | | Strategic Goals | | | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | Achieve Growth, Competitiveness and Operational Efficiency | Address Customer Cost Competitiveness Advance Strategic Positioning to Retain Load and Grow Regulated Earnings | Above Target | | | 15.0% | 166.7% | 25.0% | | Operational and Values Goals | | | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | | | | | | | | | | | | Outage Duration |
50%ile
|
62.5%ile
|
75%ile
|
<50%ile
| | | 10% | 30% | 3.0% | | Outage Frequency |
50%ile |
62.5%ile
|
75%ile
|
<50%ile
| | | Safety Training | 80% | 90% | 100% | 100% | | | Safety Observations | 80% | 90% | 100% | 97% | | | | Incident Rates | 50%ile | 62.5%ile | 75%ile | 57%ile | | | | Severity Rate | 50%ile | 62.5%ile | 75%ile | 97%ile | | | | | | | | | | | | | | | | | Total | 115.2% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 ALLETE Annual Incentive Results | | Financial Metrics | | Measurement | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | Net Income | $167.2 million | $185.8 million | $204.4 million | $184.5 million | | | 50.0% | 96.4% | 48.2% | | Cash from Operating Activities | $296.7 million | $329.7 million | $362.7 million | $325.4 million | | | 20.0% | 93.5% | 18.7% | | Strategic Goals | | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | Competitiveness, Sustainability, and Customer Service | Address Customer Competitiveness, Advance Sustainability, and Enhance the Customer Experience | Between Target and Superior | | | 18.0% | 144.4% | 26.0% | | Operational and Values Goals | | Threshold | Target | Superior | Actual | | | Weighting | Unweighted Results | Payout | | | | | | | | | | | | Outage Duration |
50th percentile
|
62.5th percentile
| 75th percentile | Between Target and Threshold | | | 12.0% | 61.7% | 7.4% | | Outage Frequency | 50th percentile | 62.5th percentile | 75th percentile | Between Target and Threshold | | | | Outage Interruptions | 50th percentile | 62.5th percentile | 75th percentile | Between Target and Threshold | | | Safety
Observations | 85% | 98% | N/A | Above Target | | | | Safety Incident Rate | 60th percentile | 75th percentile | 80th percentile | Below Threshold | | | | Safety Severity Rate | 60th percentile | 75th percentile | 80th percentile | Between Target and Threshold | | | | | | | | | | | | | | | Total | 100.3% |
Long-term incentives reflect performance over multi-year periods. Performance shares, awarded under the LTIP, reward TSR targets relative to peer group companies over a three-year period. ALLETE's TSR for the three-year period ended December 31, 2018,2020, was 65.1negative 7.9 percent, ranking us in the 818thst percentile among the peer group, which was significantly above targetbelow threshold and resulted in ano performance share payout equal to 188.6 percent of target.payout.
| | | | | | | | | | 20162018 - 20182020 Long-Term Incentive Results | | TSR Ranking Relative to Peer Companies | | | | | 85th percentile | Superior | | Actual: à
81st percentile
| 50th percentile | Target | | | | | | 30th percentile | Threshold | Actual:8th percentile à | | | | | | | | | | | | |
2018
2020 Compensation Decisions Our 20182020 executive compensation program remained materially consistent with prior years. As part of an annual review of ALLETE's executive compensation program, the ECC enhanced and refined certain performance measurements. To better emphasize the Company's commitment to long-term growth objectives and to align with benchmarking data from our compensation peer group, we added a second performance metric for LTIP grants in 2020: earnings per share compound annual growth rate, or EPS CAGR. This performance metric was added to measure, in absolute terms, how well the Company performs on long-term goals. Operational goals were also reviewed and Customer Average Interruption Duration Index, or CAIDI, was added as a new reliability measurement in the annual incentive plan. In addition, reliability goals measurement were modified such that achievements are measured on a quarterly, rather than an annual, basis, which the ECC believes provides a more comprehensive representation of reliability throughout the year.
The ECC based its 2018 compensation decisions on business factors, and peer-companypeer company compensation data, and pay-for-performance compensation analysis from Pearl Meyer, its independent compensation consultant. The ECC also considered each NEO's role, hisher or herhis performance, and other relevant factors, including the most recent shareholder advisory vote on executive compensation.
In addition, when determiningThe ECC increased base salary changes, the ECC strongly weighed Company competitiveness. In light of coal plant closures, recent regulatory outcomes, and the need to rescale the operations and overall cost structure of Minnesota Power, a regulated utility division of ALLETE,for all NEOs in 2020, except Mr. Hodnik, recommended, and the ECC agreed,who transitioned from CEO to Executive Chairman on February 3, 2020, with a compensation arrangement that no NEO would receive an annual market-based salary increase in 2018. Mr. Oachs'is discussed below. Ms. Owen's base salary increased by 554 percent in 2018 in connection with the ongoing planher promotion to gradually raise hisCEO. Mr. Adams and Mr. Morris each received a base salary increase of 3 percent, in recognition of their performance and to bring their compensation closer to market. Ms. Johnson and Ms. Thickens received base salary increases of 16 percent and 20 percent, respectively, in recognition of their performance in the market median as he gained experienceroles to which they were promoted in his new role.2019 and to bring their compensation closer to market.
Although the ECC recognized that Mr. Hodnik's compensation was below market median, both the ECC and Mr. Hodnik believe his compensation was appropriate during 2018, a period when the Company needed to carefully balance the rates approved by its regulators and the returns reasonably expected by its shareholders. Mr. Hodnik's 2018 salary, target annual incentive opportunity, and target long-term incentive opportunity were not increased from the prior year.
The ECC increased annual and long-term target opportunities for the NEOs except Ms. AmbergOwen in connection with her promotion to CEO in February 2020. Annual and Mr. Hodnik, and increased the long-term incentive target opportunities were also increased in 2020 for the NEOs, except Mr. HodnikMorris, and Mr. Mullen, designedMs. Thickens to reinforce the alignment of pay for performance and to bring their total compensation closer to the market median.
The following NEOs received increases in 2018 to their These annual incentive opportunity:
| | | | | | | | | 2018 Target Annual Incentive Opportunity (Percentage of Base Salary) | | 2017 Target Annual Incentive Opportunity (Percentage of Base Salary) | | Mr. Adams | | 60% | | 50% | | Mr. Oachs | | 50% | | 45% | | Ms. Owen | | 50% | | 40% | | Mr. Mullen | | 45% | | 40% |
The following NEOs received increases in 2018 to theiropportunities and the total target long-term incentive opportunity,opportunities were as shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Target AIP Opportunity
(% of Base Salary) | | | Target LTIP Opportunity
($) | | | 2020 | | 2019 | | | 2020 | | 2019 | | Ms. Owen | | 80%1 | | 65% | | | $600,000 | | $300,000 | | Mr. Morris | | 40% | | 35% | | | $150,000 | | $100,000 | | Ms. Thickens | | 40% | | 35% | | | $175,000 | | $150,000 |
1 Ms. Owen's target AIP opportunity effective January 1, 2020 was 65 percent. Her AIP opportunity was increased to
80 percent in the following table:connection with her promotion to CEO in February 2020. Ms. Owen's total AIP target opportunity for 2020
equaled 78.75 percent (i.e., 1/12 at 65 percent and 11/12 at 80 percent). | | | | | | | | | 2018 Total Target Long-Term Incentive Opportunity
| | 2017 Total Target Long-Term Incentive Opportunity
| | Mr. Adams | | $350,000 | | $275,000 | | Mr. Oachs | | $300,000 | | $250,000 | | Ms. Owen | | $275,000 | | $225,000 | | Ms. Amberg | | $250,000 | | $225,000 |
In each case, 75 percent of the total long-term incentive opportunity increase was allocated 75 percent to the NEO's target PSA opportunity (for(Ms. Owen–$225,000 increase; Mr. Adams, $56,250; for Mr. Oachs $37,500; forMorris–$37,500 increase; and Ms. Owen, $37,500; and for Ms. Amberg, $18,750)Thickens–$18,750 increase) and 25 percent to RSUs (for(Ms. Owen–$75,000 increase; Mr. Adams, $18,750; forMorris–$12,500 increase; and
Ms. Thickens–$6,250 increase).
Based on a determination made by the ECC in 2019 in connection with her promotion in June 2019, Ms. Johnson's target long-term incentive opportunity increased, effective January 1, 2020, to $200,000 (compared to $150,000 in 2019). Ms. Johnson's total long-term incentive opportunity increase was allocated 75 percent to target PSA opportunity ($37,500 increase) and 25 percent to RSUs ($12,500 increase).
As Executive Chairman, Mr. Oachs $12,500; for Ms. Owen $12,500; and for Ms. Amberg, $6,250).
Although these changesHodnik's base annual salary remained unchanged in 2020 but decreased proportionally, after May 2020, when his service became less than full-time. Mr. Hodnik received a 2020 annual target opportunity equal to the sum of 100% of his salary for the period January through May and 50% of his salary for the period June through December. Mr. Hodnik received a 2020 long-term incentive plan award of $400,000 in the form of restricted stock units that will vest on May 31, 2021.
With respect to all NEOs, listed aboveexcept Mr. Hodnik, the 2020 changes described in this section better aligned the NEOs' total compensation with the compensationthat of ALLETE's peer companies,companies; total compensation, for all NEOshowever, remained below the market median.
| | | | | | | | | | | | | | | | | | | COMPENSATION ELEMENTS SUMMARIZED: WHAT WE PAY AND WHY | | | | | | | | Element | Key Characteristics | Why We Pay this Element | How the Amount is Determined | 2020 Decisions and Outcomes | | Fixed | Base Salary | Competitive cash compensation. | Helps attract and retain executive talent. | We consider market data and other information from the ECC's independent compensation consultant, as well as experience, responsibilities, role within the executive group, and individual performance. | NEO base salary increase:
Ms. Owen–54 percent;
Mr. Adams–3 percent;
Ms. Johnson–16 percent;
Mr. Morris–3 percent; and
Ms. Thickens–20 percent
Increases reflected job performance and were designed to bring base compensation closer to market median. Ms. Owen's increase was associated with her promotion to CEO in 2020. | | Variable: Short-term Incentive | AIP | Payable in cash based on achievement of annual goals. In addition to financial targets, strategic and operational goals are linked to operational objectives and ALLETE's core values. | Rewards achievement of annual financial, strategic, and operational and values goals. | The ECC approves performance measures, targets, and individual award opportunities, sets terms, and has discretion to reduce, increase, or eliminate awards. | ALLETE achieved near-target net income, near-target cash flow from operating activities, and above-target strategic and operational and values performance, resulting in an annual incentive payment equal to 100.3 percent of target | | Variable: Long-term Incentive | PSAs with TSR Metric
| Payable in Common Stock at the end of the performance period based on achieving
relative TSR goal over a three-year period; 37.5% of total target LTIP opportunity. | Links NEO pay to performance; facilitates stock ownership, aligns NEO's interests with long-term shareholder value; and helps retain executive talent. | ALLETE's TSR relative to peer companies at the end of the three-year period determines the payout factor. Dividend equivalent shares are paid in connection with earned PSAs. | ALLETE TSR for the three-year performance period ending December 31, 2020, ranked 8th percentile among peer group, resulting in no payout. For 2018-2020 and 2019-2021 performance periods, the TSR metric applied to 75% of the total target LTIP opportunity. | PSAs with EPS CAGR Metric
| Payable in Common Stock at the end of the performance period based on achieving
EPS CAGR goal over a three-year period; 37.5% of total target LTIP opportunity. | Links NEO pay to performance; facilitates stock ownership, aligns NEO's interest with financial
measures important to Company growth; and helps retain executive talent. | ALLETE's EPS CAGR at the end of the three-year period determines the payout factor. Dividend equivalent shares are paid in connection with earned PSAs. | New performance metric beginning with the 2020-2022 performance period. | RSUs
| Payable in Common Stock at the time of vesting; 25% of total target LTIP opportunity; subject to time-based vesting. | Coupled with PSAs, facilitates stock ownership, aligns the interests of executive officers with long-term shareholder value, and helps retain executive talent. | One RSU entitles the NEO to receive one share of Common Stock (and dividend equivalents) when the RSU vests at the end of a three-year period. | RSUs granted in 2018 vested on December 31, 2020. |
PROCESS FOR DETERMINING EXECUTIVE COMPENSATION
The ECC establishes our executive compensation philosophy and objectives and oversees the administration of our executive compensation programs. The ECC sets the compensation for the CEO, and in 2020, the ECC set the compensation for the Executive Chairman. Both were reviewed and ratified by the Board without the CEO's or Executive Chairman's participation.
In setting the CEO's compensation, the ECC considers the Board's annual evaluation of the CEO's performance, which assesses, among other things, performance relative to annual objectives established by the Board. The ECC also compares the CEO's compensation to the compensation of CEOs at other investor-owned electric utilities. Compensation benchmarking data is adjusted for the Company's size as measured by revenue and provides a market context for the ECC's decisions. The ECC also approves the compensation of the other NEOs after considering the CEO's recommendations regarding such compensation.
At the beginning of the year, the ECC, with the CEO, establishes performance goals and measures, award dates, performance or vesting periods, and forfeiture provisions for annual and long-term incentive awards.
As part of our ongoing commitment to monitor pay-for-performance alignment, in October 2020, the ECC reviewed Pearl Meyer's 2019 pay-for-performance analysis, which confirmed our view that our executive compensation programs are linked to performance, balanced, fair, competitive, and contain mainstream provisions.
Role of Management The CEO recommends to the ECC compensation for all other NEOs except the Executive Chairman. Recommendations are based, in part, on each NEO's experience and responsibility level and the CEO's assessment of her or his performance. The CEO works with each NEO at the beginning of the year to identify individual goals that are aligned with strategic objectives within each NEO's scope of responsibility. The CEO reviews each NEO's performance during the year identifying accomplishments, areas of strength, and areas for development. The CEO bases her evaluation on her knowledge of the NEO's performance and discussions with each NEO about her or his self-assessment. The CEO's recommendation is also based on the executive compensation studies described on the following page. The CEO also recommends to the ECC financial and non-financial performance measures under the Company's incentive compensation plans.
Compensation Consultant Independence The ECC's independent compensation consulting firm for 2020 was Pearl Meyer. Pearl Meyer is engaged by, and reports directly to, the ECC. The ECC has the sole authority to hire or terminate its compensation consultant. It is the ECC's policy that its Chair pre-approve any additional services its independent compensation consultant performs for management. The ECC reviewed and confirmed Pearl Meyer's independence in 2020.
Executive Compensation Studies Annually, the ECC reviews the peer group that ALLETE uses for compensation benchmarking purposes. Compensation benchmarking is based on published salary surveys and proxy statement data from compensation benchmarking peer companies. Because there is a strong correlation between executive compensation pay levels and company size, the ECC compares executive pay levels with those at companies that are similar in size to ALLETE as measured by market capitalization and revenue. For this reason, ALLETE's compensation peer group was made up of a subset of all the companies in the EEI Index in 2019, which is the group used to determine the Company's relative TSR under the LTIP. Even within this subset, however, the companies range in size significantly. Accordingly, the compensation data is size adjusted to establish appropriate market compensation comparisons for ALLETE. In 2019, the ECC approved the following 15-company peer group for 2020: | | | | | | | | | | Compensation Benchmarking Peer Group | | Alliant Energy Corporation | IDACORP, Inc. | Otter Tail Corporation | | Avista Corporation | MDU Resources Group, Inc. | PNM Resources, Inc. | | Black Hills Corporation | MGE Energy, Inc. | Pinnacle West Capital Corporation | | El Paso Electric Company | NorthWestern Corporation | Portland General Electric Company | | Hawaiian Electric Industries, Inc. | OGE Energy Corp. | Unitil Corporation |
During 2019, Vectren Corporation and CenterPoint Energy, Inc. merged. Based on its revenue size after the merger, Vectren Corporation was no longer included in ALLETE's compensation benchmarking peer group. With this company's removal from the peer group, Pinnacle West Capital Corporation was added to maintain a comparison group size that was aligned with Pearl Meyer's recommendation.
In October 2019, the ECC directed Pearl Meyer to conduct a compensation benchmarking study for the then-CEO. At the same time, in preparation for a potential CEO transition, the ECC directed Pearl Meyer to provide a CEO succession planning analysis that included a benchmarking study for a potential transition role of an Executive Chairman. These studies provided the basis for compensation recommendations made in February 2020 in relation to Ms. Owen's promotion to CEO and Mr. Hodnik's transition to Executive Chairman.
The October 2019 CEO benchmarking study compared (then-CEO) Mr. Hodnik's compensation to an external market using size-adjusted data from published surveys and compensation data disclosed in the proxy statements of the 15-company peer group. The study also analyzed CEO pay-for-performance practices and effectiveness. The Pearl Meyer report indicated that the elements of CEO compensation were comparable to market. In offering its CEO succession planning guidance, Pearl Meyer advised that a newly-promoted chief executive officer's compensation typically is set initially at or near the lower end of the overall market range for chief executive officers and increased to the middle of the range within a few years based on performance.
The CEO succession planning analysis indicated that in setting compensation for a transitional executive chair role, long-term incentive opportunities are generally reduced by a greater amount than cash compensation elements. Mr. Hodnik's 2020 compensation was established based on his change in role and responsibilities, including the level of support he was expected to provide to Ms. Owen and other executive officers, while also maintaining stability and consistency on the Board during the transition.
In October 2019, the ECC also directed Pearl Meyer to conduct a compensation study for the other NEOs, excluding (then-CEO) Mr. Hodnik. This study provided the basis for compensation recommendations made in 2020 for the NEOs, except Ms. Owen and Mr. Hodnik. Pearl Meyer's analysis compared the other NEOs' base salaries and annual and long-term target incentive opportunities to market data using the same survey sources and proxy statement data used in the CEO analysis. The Pearl Meyer report indicated that total direct compensation, base salaries, target total cash compensation, and long-term incentive opportunities for the other NEOs were, to varying degrees, below market median. In addition to relying on the independent analysis for the other NEOs, the CEO and ECC also considered each NEO's specific roles within the organization and tenure in their position.
Using these processes, ECC made the following determinations in 2020: (1) the NEOs' compensation includes appropriate elements; (2) Ms. Owen's base salary, annual incentive target opportunity, and LTIP target opportunity should be increased based on her promotion to CEO; (3) in recognition of his Executive Chairman role, Mr. Hodnik's base salary should remain at its previous rate and decreased proportionally after May 2020 when his service became less than full-time, his annual incentive opportunity should reflect an amount that was equal to his previous level for the portion of the year through May 2020 and then reduced by fifty percent for the remainder of 2020, and his long-term incentive opportunity should be substantially reduced and provided solely in the form of an RSU grant; (4) Mr. Morris' and Ms. Thickens' base salaries, annual incentive target opportunities, and LTIP target opportunities should be increased; and (5) Mr. Adams' and Ms. Johnson's base salaries should be increased.
HOW WE LINK EXECUTIVE PAY TO PERFORMANCE
A significant portion of our NEO's compensation is tied to Company performance. Annual incentives focus on achieving annual financial, strategic, and operational and values goals. Long-term incentives reward long-term profitability and facilitate stock ownership, as well as provide an incentive to remain employed with the Company.
Total compensation generally increases as position and responsibility increase; at the same time, a greater percentage of total compensation is tied to performance, and therefore at risk, as reflected in our NEOs' annual and long-term incentive opportunities.
We consider market data and Pearl Meyer's advice in setting executive compensation. We establish market ranges for our NEOs' compensation using data from investor-owned electric utilities. In setting individual compensation, we consider experience in the position, performance, job responsibilities, and relative role among the executive management group. If market data were insufficient to establish a range for a specific position, we would also consider internal equity among our NEOs, taking into account the relative responsibilities for that position.
We generally set compensation so that when target performance is achieved under the Company's incentive compensation plans, total compensation is near the market median of ALLETE's compensation peer group. Consistent with our pay-for-performance philosophy, NEOs earn higher compensation when actual performance exceeds target goals. Conversely, when the Company does not meet target goals, total compensation will generally fall below the median.
2020 total compensation opportunity for the NEOs was divided between base salary and incentive opportunities. The charts below illustrate the breakdown of compensation elements expressed as a percentage of total target compensation: The chart on the right reflects an average for all NEOs except Ms. Owen and Mr. Hodnik of the percentage of total target compensation that is represented by each compensation element. For both charts, total target compensation is calculated using the NEOs' 2020 target opportunities for annual and long-term incentives and her or his base salary as of December 31, 2020.
Annual Incentive Awards At the beginning of each year, the ECC, with the CEO, approves performance measures and targets for the annual incentive awards, as well as individual target award opportunities. The ECC has discretion to establish the terms of annual incentive awards and also the ability to reduce, increase, or eliminate awards, regardless of whether applicable performance goals have been achieved. The ECC sets annual incentive opportunity levels for our NEOs such that if the Company achieves target goals, the combination of salary and annual incentives will result in total cash compensation near the market median for ALLETE's compensation peer group. | | | | | | | | | | | | | | | | 2020 Annual Incentive Target Opportunities | | | | Annual Incentive Target Opportunity as a
Percentage of Base Salary | | | Ms. Owen1 | | 78.75% | | | Mr. Hodnik2 | | 75.2% | | | Mr. Adams | | 65% | | | Ms. Johnson | | 45% | | | Mr. Morris | | 40% | | | Ms. Thickens | | 40% | |
1 Ms. Owen's total 2020 target opportunity was prorated with 1/12 at 65% and 11/12 at 80%, resulting in an average of 78.75%. 2 Mr. Hodnik's total 2020 target opportunity was set at $415,200, which was equal to 100% of his annualized base salary for the period January through May and 50% for the period June through December.
The 2020 annual incentive performance goals, weighting, and measures, applicable to all NEOs, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ALLETE Annual Incentive Performance Goals, Weighting, and Measures | | | Performance Goals | | Weighting | | Measures | | | | | | Threshold | | Target | | Superior | | Net Income1 | | 50% | | $167.2 million | | $185.8 million | | $204.4 million | | Cash from Operating Activities2 | | 20% | | $296.7 million | | $329.7 million | | $362.7 million | | | Strategic | | 18% | | Described below. | | | Operational and Values | | 12% | | |
1 Threshold net income was set at 90 percent of the Company's budgeted net income, target was set at budget, and superior was set at 110 percent of budget. Net income for annual incentive calculation purposes is described in more detail below. 2 Threshold cash from operating activities goal was set at 90 percent of the Company's budgeted cash from operating activities; target goal was set at budget, and superior goal was set at 110 percent of budget. Cash from operating activities for annual incentive calculation purposes is described in more detail below.
ALLETE Annual Incentive Financial Goals The 2020 annual incentive financial measures, established at the beginning of the 2020 plan year, were net income (weighted at 50%) and cash from operating activities (weighted at 20%). The ECC selected net income because it is a widely-used financial performance measure that reflects the combination of revenue generation and expense management. Cash from operating activities was selected because it indicates the Company's ability to generate funds internally for capital projects, to repay debt, and to pay dividends and interest. Both measures also can affect the Company's stock price.
•ALLETE Net Income. For annual incentive purposes, net income means Net Income Attributable to ALLETE adjusted in connection with the following: (1) net income associated with ALLETE Properties operations; (2) net income related to ALLETE Properties cash released from escrow (3) Minnesota Power rate case settlement; and (4) adjustments related to acquisition activities and associated operations.
•Cash from Operating Activities. For annual incentive purposes, cash from operating activities means Cash from Operating Activities adjusted in connection with the following: (1) cash associated with ALLETE Properties operations; (2) cash released from escrow related to ALLETE Properties; (3) a pension contribution made in cash; (4) refunds related to Minnesota Power rate case settlement; (5) cash related to acquisition activities; and (6) asset decommissioning expenses in excess of budget.
With respect to both the Net Income and Cash from Operating Activities metrics, the ECC established the exclusions and adjustment guidelines at the beginning of the performance period.
ALLETE Annual Incentive Strategic Goals and Operational and Values Goals ALLETE's 2020 strategic goals were to address customer competitiveness, to advance sustainability, and to enhance customer experiences.
Operational and values goals are linked to operational objectives and ALLETE's core values: integrity, safety, employee growth, community engagement, and environmental stewardship. Our 2020 operational and values goals were designed to demonstrate continuous safety improvement, as well as ALLETE's commitment to the environment and customer service as measured by goals relating to safety leading and lagging indicators, environmental stewardship, and system reliability.
The operational goals are focused on system reliability and were measured quarterly by the System Average Interruption Duration Index, System Average Interruption Frequency Index, and Customer Average Interruption Duration Index relative to the EEI utilities' three-year average results. The safety goal included tracking the number and severity of incidents recorded with the Occupational Safety and Health Administration, while also implementing proactive safety measures designed to support "zero injury" efforts. An employee fatality, or a willful disregard of environmental, reliability, or any Federal Energy Regulatory Commission regulation or standard, would have resulted in a reduction to or non-payout for this goal.
The ECC reviews the allocation between financial and strategic and operational goals each year. For 2020, our strategic goals and our operational and values goals represented a combined 30 percent of the overall opportunity and their achievement was measured independently of the financial goals. Therefore, it would have been possible to earn an annual incentive payout based on achieving strategic and operational and values goals even if financial goals had not been met.
The CEO, with input from senior management, reports the progress made on strategic goals and operational and value goals to the ECC. The ECC then determines the extent to which performance targets have been achieved.
2020 Annual Incentive Results The NEOs earned 100.3 percent of their 2020 target annual incentive opportunity (compared to 94.9 percent in 2019). As disclosed in ALLETE's 202 Annual Report on Form 10-K for the year ended December 31, 2020, Net Income Attributable to ALLETE was $174.2 million (compared to $185.6 million for 2019). Cash from Operating Activities was $299.8 million (compared to $249.5 million for 2019). Annual incentives also reward strategic and operational accomplishments.
To calculate the financial goals for annual incentive purposes, the ECC established specified adjustments and exclusions at the beginning of the plan year. The ECC also determined at the beginning of the plan year that it would make any determinations regarding discrete, non-recurring events that might occur during the plan year on a case-by-case basis.
Our 2020 net income for AIP was increased by a total of $10.26 million. The ECC made the following adjustments based on the pre-established adjustments and exclusions: (1) net income associated with ALLETE Properties operations (decreased net income by $.4 million); and (2) adjustments related to acquisition activities and associated operations (increased net income by $1.02 million). In addition, the ECC made discretionary adjustments based on its review of the following non-recurring events: (1) net income related to ALLETE Properties cash released from escrow (increased net income by $1.34 million); and (2) the Minnesota Power rate case settlement (increased net income by $8.3 million). After these adjustments, 2020 net income for annual incentive purposes was slightly below target at $184.5 million.
Our 2020 cash from operating activities for AIP was increased by a total of $25.55 million. The ECC made adjustments based on the pre-established adjustments and exclusions in connection with the following: (1) cash associated with ALLETE Properties operations (decreased cash from operating activities by
$0.6 million); (2) a pension contribution made in cash (increased cash from operating activities by
$10.68 million); (3) cash related to acquisition activities (increased cash from operating activities by
$.98 million); and (4) asset decommissioning expense in excess of budget (increased cash from operating activities by $0.7 million). In addition, the ECC made a discretionary adjustments based on its review of the following one-time events: (1) cash released from escrow related to ALLETE Properties (increased cash from operating activities by $2.09 million); and (2) customer refunds related to Minnesota Power's rate case settlement (increased cash from operating activities by $11.7 million). After these adjustments, 2020 cash from operating activities for annual incentive purposes was slightly below target at $325.4 million.
ALLETE's strategic and operational and values goals were achieved at a combined level that fell between target and threshold. The ALLETE annual incentive results were calculated as follows: | | | | | | | | | | | | | | | | | | | | | | 2020 ALLETE Annual Incentive Payout | | Performance Goal | | Weighting | | Unweighted Results | | Payout1 | | Net Income | | 50% | | 96.4% | | 48.2% | | Cash from Operating Activities | | 20% | | 93.5% | | 18.7% | | Strategic Goals | | 18% | | 144.4% | | 26.0% | | Operational and Values Goals | | 12% | | 61.7% | | 7.4% | | Total | | 100% | | | | 100.3% |
1 Payout is expressed as a percentage of the NEO's annual incentive target opportunity.
The ECC believes that the annual incentive provides appropriate motivation and does not encourage excessive business risks because it has multiple goals that align with the objectives of different stakeholders (e.g., shareholders, customers, regulators, and employees). The annual incentive provides payment opportunity levels that are market-competitive, and includes a cap on the maximum award amount.
Long-Term Incentive Awards: PSAs and RSUs We use long-term incentive compensation to reward executives for achieving business objectives that are designed to grow long-term shareholder value. The time-vesting and forfeiture provisions associated with long-term incentive compensation also encourage NEOs to stay with the Company. Long-term incentive compensation elements consist of PSAs and RSUs.
The ECC grants the PSAs and RSUs under the LTIP in January of each year. Although the ECC can make additional grants at other times of the year, it did not do so in 2020 for any NEO. We do not time equity awards to the release of material, non-public information. ECC meeting schedules are generally set six months prior to the start of the calendar year.
Performance Share Awards (PSAs) PSAs reward executives for performance over a three-year period. Rewarding executives for creating long-term shareholder value links pay to performance.
For all performance periods that include 2020 performance, performance is measured, in whole or in part, by ALLETE's TSR (i.e., the investment return for a share of Common Stock, assuming full dividend reinvestment) relative to a group of peer companies. The ECC selected relative TSR because it measures the value shareholders realize from their investment in Common Stock as compared to investment opportunities available in comparable companies. Beginning with the 2020-2022 performance period, performance is also measured by EPS CAGR. The ECC selected EPS CAGR because it measures, in absolute terms, how the Company's earnings per share over the three-year period compares to our established long-term growth objectives.
The performance period begins on the first day of the first calendar month in the period. The amount of the payment with respect to any award is determined at the end of the three-year period. In 2020, NEOs were granted PSAs for the three-year performance period beginning on January 1, 2020, and ending on December 31, 2022.
For the 2020-2022 performance period, target relative TSR was set at the 50th percentile among the peer group, with threshold set at the 30th percentile, and superior set at the 85th percentile. If ALLETE's relative TSR percentile at the end of the performance period falls below threshold, no PSAs will be earned. Straight-line interpolation will be used to determine earned awards based on a relative TSR percentile result between threshold, target, and superior.
For all performance periods that include 2020 performance (2018-2020, 2019-2021, and 2020-2022), ALLETE's TSR was or will be compared to the TSR of a peer group made up of the companies in the EEI Stock Index. The ECC believes that the companies comprising the EEI Stock Index reflect comparable investment alternatives available to shareholders. The specific peer group we use consists of all the companies that were in the EEI Stock Index as of December 31 of the last year in each three-year performance period, and that have been in the EEI Stock Index for at least three full years as of that date.
The EEI Stock Index companies as of December 31, 2020, based on information published as of that date, were as follows: | | | | | | | | | TSR Peer Group Companies* | | Alliant Energy Corporation | Entergy Corporation | Otter Tail Corporation | | Ameren Corporation | Evergy, Inc. | PG&E Corporation | | American Electric Power Company | Eversource Energy | Pinnacle West Capital Corporation | | Avangrid, Inc. | Exelon Corporation | PNM Resources, Inc. | | Avista Corporation | FirstEnergy Corp. | Portland General Electric Company | | Black Hills Corporation | Hawaiian Electric Industries, Inc. | PPL Corporation | | CenterPoint Energy, Inc. | IDACORP, Inc. | Public Service Enterprise Group, Inc. | | CMS Energy Corporation | MDU Resources Group, Inc. | Sempra Energy | | Consolidated Edison, Inc. | MGE Energy, Inc. | The Southern Company | | Dominion Energy, Inc. | NextEra Energy, Inc. | Unitil Corporation | | DTE Energy Company | NiSource, Inc. | WEC Energy Group, Inc. | | Duke Energy Corporation | NorthWestern Corporation | Xcel Energy Inc. | | Edison International | OGE Energy Corp. | |
* Companies can be dropped from or added to the EEI Stock Index during the performance period due to mergers or other activities. If a company is dropped from the EEI Stock Index during the performance period, no information related to that company will be included in the performance calculation. A company that is newly added to the EEI Stock Index after the start of the performance period also will be excluded from the performance calculation. If a company in the EEI Stock Index at the beginning of a performance period undergoes a corporate restructuring during the performance period and the company remains in the EEI Stock Index following the transaction, the company will be included in the performance calculation. During 2018, two companies in the EEI Stock Index Great Plains Energy Incorporated and Westar Energy, Inc. merged to create Evergy, Inc. During 2019, SCANA Corporation merged with Dominion Energy, Inc., and Vectren Corporation merged with CenterPoint Energy, Inc. During 2020, El Paso Electric was dropped from the EEI Stock Index after being acquired by a private investment fund.
During the three-year performance period ending on December 31, 2020, ALLETE's shareholders realized a TSR of negative 7.9 percent, ranking us in the 8th percentile of the company peer group, resulting in no PSA payout.
For the 2020-2022 performance period, EPS CAGR will be measured using ALLETE's pro forma EPS for the year ending December 31, 2019 as the baseline, and calculating ALLETE's annual pro forma EPS at the end the three-year performance period. Target was set at the midpoint of earnings guidance, or six percent, with threshold at four percent, and superior at eight percent. If the EPS CAGR percentage result at the end of the performance period is below threshold, no PSAs with the EPS CAGR performance metric will be earned. Straight-line interpolation will be used to determine earned awards based on the EPS CAGR percentage result between threshold, target, and superior.
Restricted Stock Units (RSUs) RSUs are used as a retention incentive and to encourage stock ownership. One RSU entitles the grantee to receive one share of Common Stock and accrued dividend equivalents after the RSU vests at the end of a three-year period.
The table below shows 2020 long-term incentive target opportunities for the NEOs. For all NEOs, except Mr. Hodnik, the target opportunities were allocated as follows: 75 percent to PSAs (half of which use relative TSR as the performance metric and half use EPS CAGR as the performance metric) and 25 percent to RSUs. For Mr. Hodnik, his target long-term incentive opportunity was allocated 100 percent to RSUs to align with his transition to Executive Chair and planned retirement in 2021. The Company retained Mercer to calculate the estimated fair value of PSAs. For PSAs with relative TSR as the associated performance measure, the estimated fair value reflects a modeled probability of achieving the performance goals, employing a Monte-Carlo simulation model that uses an underlying Black-Scholes methodology. The target number of PSAs (TSR) is determined by dividing each NEO's target award opportunity—shown in the table below—by $89.99 the estimated fair value of a PSA (TSR) as of December 31, 2019. For PSAs with EPS CAGR as the associated performance metric, the valuation was calculated using a per-share value of $81.17, the closing price for Common Stock on
December 31, 2019. The number of RSUs granted to the NEOs was also calculated using a per-share value of $81.17.
| | | | | | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Target Opportunities for 2020–2022 Performance Period | | Total Target Opportunity | | Allocation of Long-Term Incentive Plan Target Opportunity | | | PSAs with
TSR Performance Metric | PSAs with
EPS CAGR Performance Metric | % of Total Target Opportunity | RSUs | % of Total Target Opportunity | | Ms. Owen | $600,000 | | 2,500 | | 2,772 | | 75% | 1,848 | 25% | | Mr. Hodnik | $400,000 | | — | | — | | — | 4,928 | 100% | | Mr. Adams | $350,000 | | 1,458 | | 1,617 | | 75% | 1,078 | 25% | | Ms. Johnson | $200,000 | | 833 | | 924 | | 75% | 616 | 25% | | Mr. Morris | $150,000 | | 625 | | 693 | | 75% | 462 | 25% | | Ms. Thickens | $175,000 | | 729 | | 808 | | 75% | 539 | 25% |
The ECC has discretion to modify or eliminate awards, whether or not performance goals have been achieved. The ECC did not exercise discretion to modify or eliminate LTIP awards during 2020.
OTHER GUIDELINES, POLICIES, BENEFITS, AND PRACTICES
Executive Stock Ownership Guidelines We believe NEOs should be ALLETE shareholders to encourage them to act as owners and focus on long-term, sustained performance when making business decisions. We use Common Stock to fund NEO's long-term incentive compensation and a portion of the Company's contribution to NEOs'
tax-qualified, defined-contribution retirement savings plan accounts.
NEOs are expected to own Common Stock in accordance with the share ownership guidelines that have been established by the Corporate Governance Committee as discussed on page 29. The applicable share ownership guidelines are as follows: | | | | | | | | | | | | | | | | Executive Stock Ownership Guidelines | | | Position | | Stock Ownership Value as Multiple of Salary1 | | | Chief Executive Officer | | 5X | | | Executive Chairman | | 3X | | | Chief Financial Officer | | 3X | | | Other NEOs | | 1X | | | | | | |
1 The salary used to calculate Mr. Hodnik's stock ownership guideline takes into account that his service is less than full-time. NEOs are expected to meet her or his stock ownership guideline within seven years after first becoming subject to the stock ownership guidelines. An NEO who is promoted to a position with a higher stock ownership expectation has five years from the promotion to meet her or his new guideline.
The stock ownership guidelines essentially require that each NEO retain 100% of any equity she or he receives under the LTIP (after share withholding to satisfy tax obligations) until she or he has achieved the applicable ownership guideline.
At least annually, the Corporate Governance Committee reviews Common Stock ownership to confirm that the NEOs have met or are making reasonable progress toward their stock ownership guidelines. The Corporate Governance Committee may, on a case-by-case basis, make adjustments to stock ownership guidelines to fit a particular situation.
Each NEO has met her or his stock ownership guideline or is making reasonable progress toward meeting the guideline. Common Stock ownership levels as of March 12, 2021, and how ownership is measured against stock ownership guidelines as of March 12, 2021, are shown in the table on page 11.
Compensation Recovery Policy Our Compensation Recovery Policy, sometimes called a clawback policy, allows ALLETE to recover incentive payments and other forms of compensation from NEOs if any of the following events occur: •Financial restatement. In the event of an accounting restatement due to material non-compliance with financial reporting rules, we can recover any excess payments made pursuant to the AIP or the LTIP in the three-year period prior to the date on which the Company is required to prepare the restatement. •Error. In the event of a material error in the measurement of performance criteria, we can recover any excess payments made pursuant to the AIP or the LTIP during the three years prior to the discovery of the error. •Misconduct. If an NEO engages in criminal behavior or work-related dishonesty, we can recover any AIP awards, LTIP awards, and bonuses that were paid during and subsequent to the period of misconduct.
Shareholder Advisory VotingHOW WE LINK EXECUTIVE PAY TO PERFORMANCE
A significant portion of our NEO's compensation is tied to Company performance. Annual incentives focus on Executive Compensationachieving annual financial, strategic, and operational and values goals. Long-term incentives reward long-term profitability and facilitate stock ownership, as well as provide an incentive to remain employed with the Company. Each year, shareholders cast an advisory vote on
Total compensation generally increases as position and responsibility increase; at the same time, a greater percentage of total compensation is tied to performance, and therefore at risk, as reflected in our NEOs' annual and long-term incentive opportunities.
We consider market data and Pearl Meyer's advice in setting executive compensation. We establish market ranges for our NEOs' compensation commonly knownusing data from investor-owned electric utilities. In setting individual compensation, we consider experience in the position, performance, job responsibilities, and relative role among the executive management group. If market data were insufficient to establish a range for a specific position, we would also consider internal equity among our NEOs, taking into account the relative responsibilities for that position.
We generally set compensation so that when target performance is achieved under the Company's incentive compensation plans, total compensation is near the market median of ALLETE's compensation peer group. Consistent with our pay-for-performance philosophy, NEOs earn higher compensation when actual performance exceeds target goals. Conversely, when the Company does not meet target goals, total compensation will generally fall below the median.
2020 total compensation opportunity for the NEOs was divided between base salary and incentive opportunities. The charts below illustrate the breakdown of compensation elements expressed as a "say-on-pay." Atpercentage of total target compensation: The chart on the 2018 Annual Meeting, 96 percentright reflects an average for all NEOs except Ms. Owen and Mr. Hodnik of the votes castpercentage of total target compensation that is represented by our shareholders were to approveeach compensation element. For both charts, total target compensation is calculated using the Company's 2017 executive compensation on an advisory basis.NEOs' 2020 target opportunities for annual and long-term incentives and her or his base salary as of December 31, 2020.
We believe that this say-on-pay vote affirms our executive compensation philosophy and objectives. The ECC considers the result of the say-on-pay vote as it makes its compensation decisions and the most recent shareholder advisory approval was a factor in the ECC's decision not to make any fundamental changes to ALLETE's executive compensation program.
Annual Incentive Awards
At the Company's 2017 Annual Meeting, shareholders supportedbeginning of each year, the Company's recommendationECC, with the CEO, approves performance measures and targets for the annual incentive awards, as well as individual target award opportunities. The ECC has discretion to holdestablish the advisory say-on-pay vote on anterms of annual basis. We believeincentive awards and also the ability to reduce, increase, or eliminate awards, regardless of whether applicable performance goals have been achieved. The ECC sets annual say-on-pay voting promotes shareholder awarenessincentive opportunity levels for our NEOs such that if the Company achieves target goals, the combination of executivesalary and annual incentives will result in total cash compensation and allows shareholders to provide feedback on a regular basis. Annual say-on-pay voting is also consistent withnear the market median for ALLETE's desire to maintain effective relationships with our shareholders. We will hold a say-on-pay vote on an annual basis until the next advisory vote on the frequency of say-on-pay proposals.
| | | | | | | | | | | | | | | COMPENSATION ELEMENTS SUMMARIZED: WHAT WE PAY AND WHY2020 Annual Incentive Target Opportunities | | | | | | | | Element | Key Characteristics | Why We Pay this Element | How the Amount is Determined | 2018 Decisions and Outcomes | FIXED: | Annual Incentive Target Opportunity as a
Percentage of Base Salary | Competitive cash compensation. | Helps attract and retain executive talent. | We consider market data and other information from the ECC's independent compensation consultant, as well as experience, responsibilities, role within the executive group, and individual performance. | No NEO salary increases except Mr. Oachs' base salary increased by 5 percent in connection with the ongoing plan to gradually raise his base salary to the market median as he gained experience in his new role. | VARIABLE: | Annual Incentive | Payable in cash based on achievement of annual goals. In addition to financial targets, strategic and operational goals are linked to operational objectives and ALLETE's core values. | Rewards achievement of annual financial, strategic, and operational and values goals. | The ECC approves performance measures, targets, and individual award opportunities, sets terms, and has discretion to reduce, increase, or eliminate awards. | ALLETE achieved near-target net income, above-target cash flow from operating activities, and above-target strategic and operational and values performance, resulting in an annual incentive payment equal to 115.2 percent of target for all NEOs except Ms. Amberg, whose annual incentive payment was atOwen1
95 percent of target, reflecting the combination of ALLETE's results and SWL&P's results
(below-target net income and slightly-above-target strategic and operational and values performance).
| | 78.75% | | Long-term Incentive: PSAs | Payable in Common Stock at the end of the performance period based on achieving
multi-year performance goals.
| Coupled with RSUs, facilitates stock ownership, aligns the interests of executive officers with long-term shareholder value, and helps retain executive talent. | PSA payment is determined by measuring ALLETE's TSR relative to peer companies' TSRs over a three-year period. Dividend equivalents shares are paid in connection with earned PSAs. | TSR for the three-year performance period ending December 31, 2018, ranked 81Mr. Hodnikst percentile among peer group, resulting in a payout equal to 188.6 percent of target.2
| | 75.2% | | Long-term Incentive: RSUs | Payable in Common Stock at the time of vesting.Mr. Adams | Coupled with PSAs, facilitates stock ownership, aligns the interests of executive officers with long-term shareholder value, and helps retain executive talent. | One RSU entitles the NEO to receive one share of Common Stock (and dividend equivalents) when the RSU vests at the end of a three-year period.65% | RSUs granted in 2016 vested on
December 31, 2018.
| | Ms. Johnson | | 45% | | | Mr. Morris | | 40% | | | Ms. Thickens | | 40% | |
1 Ms. Owen's total 2020 target opportunity was prorated with 1/12 at 65% and 11/12 at 80%, resulting in an average of 78.75%.
2 Mr. Hodnik's total 2020 target opportunity was set at $415,200, which was equal to 100% of his annualized base salary for the period January through May and 50% for the period June through December.
The 2020 annual incentive performance goals, weighting, and measures, applicable to all NEOs, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ALLETE Annual Incentive Performance Goals, Weighting, and Measures | | | Performance Goals | | Weighting | | Measures | | | | | | Threshold | | Target | | Superior | | Net Income1 | | 50% | | $167.2 million | | $185.8 million | | $204.4 million | | Cash from Operating Activities2 | | 20% | | $296.7 million | | $329.7 million | | $362.7 million | | | Strategic | | 18% | | Described below. | | | Operational and Values | | 12% | | |
1 Threshold net income was set at 90 percent of the Company's budgeted net income, target was set at budget, and superior was set at 110 percent of budget. Net income for annual incentive calculation purposes is described in more detail below. 2 Threshold cash from operating activities goal was set at 90 percent of the Company's budgeted cash from operating activities; target goal was set at budget, and superior goal was set at 110 percent of budget. Cash from operating activities for annual incentive calculation purposes is described in more detail below.
PROCESS FOR DETERMINING EXECUTIVE COMPENSATION
Role of the Compensation CommitteeALLETE Annual Incentive Financial Goals
The ECC establishes our executive compensation philosophy and objectives and oversees the administration of our executive compensation programs. The ECC sets the CEO's compensation, which is reviewed and ratified by the Board without the CEO's participation. In setting the CEO's compensation, the ECC considers the Board's2020 annual evaluation of the CEO's performance, which assesses, among other things, his performance relative to annual objectivesincentive financial measures, established by the Board. The ECC also compares the CEO's compensation to the compensation of CEOs at other investor-owned electric utilities. Compensation benchmarking data is adjusted for the Company's size as measured by revenue and provides a market context for the ECC's decisions. The ECC also approves the compensation of the other NEOs after considering the CEO's recommendations regarding such compensation.
At the beginning of the year, the ECC, with the CEO, establishes performance goals and measures, award dates, performance or vesting periods, and forfeiture provisions for annual and long-term incentive awards.
As part of our ongoing commitment to monitor pay-for-performance alignment, in October 2018, the ECC reviewed Pearl Meyer's 2017 pay-for-performance analysis, which confirmed our view that our executive compensation programs are linked to performance, balanced, fair, competitive, and contain mainstream provisions.
Role of Management
The CEO recommends compensation for all other NEOs to the ECC for approval. Recommendations are based, in part, on each NEO's experience and responsibility level and the CEO's assessment of his or her performance. The CEO works with each NEO at the beginning of the 2020 plan year, were net income (weighted at 50%) and cash from operating activities (weighted at 20%). The ECC selected net income because it is a widely-used financial performance measure that reflects the combination of revenue generation and expense management. Cash from operating activities was selected because it indicates the Company's ability to identify individualgenerate funds internally for capital projects, to repay debt, and to pay dividends and interest. Both measures also can affect the Company's stock price.
•ALLETE Net Income. For annual incentive purposes, net income means Net Income Attributable to ALLETE adjusted in connection with the following: (1) net income associated with ALLETE Properties operations; (2) net income related to ALLETE Properties cash released from escrow (3) Minnesota Power rate case settlement; and (4) adjustments related to acquisition activities and associated operations.
•Cash from Operating Activities. For annual incentive purposes, cash from operating activities means Cash from Operating Activities adjusted in connection with the following: (1) cash associated with ALLETE Properties operations; (2) cash released from escrow related to ALLETE Properties; (3) a pension contribution made in cash; (4) refunds related to Minnesota Power rate case settlement; (5) cash related to acquisition activities; and (6) asset decommissioning expenses in excess of budget.
With respect to both the Net Income and Cash from Operating Activities metrics, the ECC established the exclusions and adjustment guidelines at the beginning of the performance period.
ALLETE Annual Incentive Strategic Goals and Operational and Values Goals ALLETE's 2020 strategic goals thatwere to address customer competitiveness, to advance sustainability, and to enhance customer experiences.
Operational and values goals are alignedlinked to operational objectives and ALLETE's core values: integrity, safety, employee growth, community engagement, and environmental stewardship. Our 2020 operational and values goals were designed to demonstrate continuous safety improvement, as well as ALLETE's commitment to the environment and customer service as measured by goals relating to safety leading and lagging indicators, environmental stewardship, and system reliability.
The operational goals are focused on system reliability and were measured quarterly by the System Average Interruption Duration Index, System Average Interruption Frequency Index, and Customer Average Interruption Duration Index relative to the EEI utilities' three-year average results. The safety goal included tracking the number and severity of incidents recorded with the Occupational Safety and Health Administration, while also implementing proactive safety measures designed to support "zero injury" efforts. An employee fatality, or a willful disregard of environmental, reliability, or any Federal Energy Regulatory Commission regulation or standard, would have resulted in a reduction to or non-payout for this goal.
The ECC reviews the allocation between financial and strategic objectives withinand operational goals each NEO's scopeyear. For 2020, our strategic goals and our operational and values goals represented a combined 30 percent of responsibility. the overall opportunity and their achievement was measured independently of the financial goals. Therefore, it would have been possible to earn an annual incentive payout based on achieving strategic and operational and values goals even if financial goals had not been met.
The CEO, reviews each NEO's performance duringwith input from senior management, reports the year regarding accomplishments, areas of strength,progress made on strategic goals and areas for development. The CEO bases his evaluation on a written self-assessment completed by each NEO, the CEO's knowledge of his or her accomplishments,operational and discussions with each NEO. The CEO's recommendation is also based on the executive compensation studies described on the following page. The CEO also recommends to the ECC financial and non-financial performance measures under the Company's incentive compensation plans.
Compensation Consultant Independence
The ECC's independent compensation consulting firm for 2018 was Pearl Meyer. Pearl Meyer is engaged by, and reports directlyvalue goals to the ECC. The ECC hasthen determines the sole authorityextent to hire or terminate its compensation consultant. It iswhich performance targets have been achieved.
2020 Annual Incentive Results The NEOs earned 100.3 percent of their 2020 target annual incentive opportunity (compared to 94.9 percent in 2019). As disclosed in ALLETE's 202 Annual Report on Form 10-K for the ECC's policy that its Chair pre-approve any additional services its independent compensation consultant performsyear ended December 31, 2020, Net Income Attributable to ALLETE was $174.2 million (compared to $185.6 million for management.2019). Cash from Operating Activities was $299.8 million (compared to $249.5 million for 2019). Annual incentives also reward strategic and operational accomplishments.
To calculate the financial goals for annual incentive purposes, the ECC established specified adjustments and exclusions at the beginning of the plan year. The ECC reviewedalso determined at the beginning of the plan year that it would make any determinations regarding discrete, non-recurring events that might occur during the plan year on a case-by-case basis.
Our 2020 net income for AIP was increased by a total of $10.26 million. The ECC made the following adjustments based on the pre-established adjustments and confirmed Pearl Meyer's independenceexclusions: (1) net income associated with ALLETE Properties operations (decreased net income by $.4 million); and (2) adjustments related to acquisition activities and associated operations (increased net income by $1.02 million). In addition, the ECC made discretionary adjustments based on its review of the following non-recurring events: (1) net income related to ALLETE Properties cash released from escrow (increased net income by $1.34 million); and (2) the Minnesota Power rate case settlement (increased net income by $8.3 million). After these adjustments, 2020 net income for annual incentive purposes was slightly below target at $184.5 million.
Our 2020 cash from operating activities for AIP was increased by a total of $25.55 million. The ECC made adjustments based on the pre-established adjustments and exclusions in 2018.connection with the following: (1) cash associated with ALLETE Properties operations (decreased cash from operating activities by
$0.6 million); (2) a pension contribution made in cash (increased cash from operating activities by
$10.68 million); (3) cash related to acquisition activities (increased cash from operating activities by
$.98 million); and (4) asset decommissioning expense in excess of budget (increased cash from operating activities by $0.7 million). In addition, the ECC made a discretionary adjustments based on its review of the following one-time events: (1) cash released from escrow related to ALLETE Properties (increased cash from operating activities by $2.09 million); and (2) customer refunds related to Minnesota Power's rate case settlement (increased cash from operating activities by $11.7 million). After these adjustments, 2020 cash from operating activities for annual incentive purposes was slightly below target at $325.4 million.
ALLETE's strategic and operational and values goals were achieved at a combined level that fell between target and threshold.
The ALLETE annual incentive results were calculated as follows: | | | | | | | | | | | | | | | | | | | | | | 2020 ALLETE Annual Incentive Payout | | Performance Goal | | Weighting | | Unweighted Results | | Payout1 | | Net Income | | 50% | | 96.4% | | 48.2% | | Cash from Operating Activities | | 20% | | 93.5% | | 18.7% | | Strategic Goals | | 18% | | 144.4% | | 26.0% | | Operational and Values Goals | | 12% | | 61.7% | | 7.4% | | Total | | 100% | | | | 100.3% |
1 Payout is expressed as a percentage of the NEO's annual incentive target opportunity.
The ECC believes that the annual incentive provides appropriate motivation and does not encourage excessive business risks because it has multiple goals that align with the objectives of different stakeholders (e.g., shareholders, customers, regulators, and employees). The annual incentive provides payment opportunity levels that are market-competitive, and includes a cap on the maximum award amount.
Executive Compensation Studies
Annually,Long-Term Incentive Awards: PSAs and RSUs
We use long-term incentive compensation to reward executives for achieving business objectives that are designed to grow long-term shareholder value. The time-vesting and forfeiture provisions associated with long-term incentive compensation also encourage NEOs to stay with the Company. Long-term incentive compensation elements consist of PSAs and RSUs.
The ECC grants the PSAs and RSUs under the LTIP in January of each year. Although the ECC reviewscan make additional grants at other times of the year, it did not do so in 2020 for any NEO. We do not time equity awards to the release of material, non-public information. ECC meeting schedules are generally set six months prior to the start of the calendar year.
Performance Share Awards (PSAs) PSAs reward executives for performance over a three-year period. Rewarding executives for creating long-term shareholder value links pay to performance.
For all performance periods that include 2020 performance, performance is measured, in whole or in part, by ALLETE's TSR (i.e., the investment return for a share of Common Stock, assuming full dividend reinvestment) relative to a group of peer companies. The ECC selected relative TSR because it measures the value shareholders realize from their investment in Common Stock as compared to investment opportunities available in comparable companies. Beginning with the 2020-2022 performance period, performance is also measured by EPS CAGR. The ECC selected EPS CAGR because it measures, in absolute terms, how the Company's earnings per share over the three-year period compares to our established long-term growth objectives.
The performance period begins on the first day of the first calendar month in the period. The amount of the payment with respect to any award is determined at the end of the three-year period. In 2020, NEOs were granted PSAs for the three-year performance period beginning on January 1, 2020, and ending on December 31, 2022.
For the 2020-2022 performance period, target relative TSR was set at the 50th percentile among the peer group, that ALLETE uses for compensation benchmarking purposes. Compensation benchmarking iswith threshold set at the 30th percentile, and superior set at the 85th percentile. If ALLETE's relative TSR percentile at the end of the performance period falls below threshold, no PSAs will be earned. Straight-line interpolation will be used to determine earned awards based on published salary surveysa relative TSR percentile result between threshold, target, and proxy statement data from compensation benchmarking peer companies. During 2017, The Empire District Electric Companysuperior.
For all performance periods that include 2020 performance (2018-2020, 2019-2021, and 2020-2022), ALLETE's TSR was removed fromor will be compared to the benchmarkingTSR of a peer group after it was acquired and no longermade up of the companies in the EEI Stock Index. Because there is a strong correlation between executive compensation pay levels and company size,The ECC believes that the ECC compares executive pay levels with those atcompanies comprising the EEI Stock Index reflect comparable investment alternatives available to shareholders. The specific peer group we use consists of all the companies that are similar in size to ALLETE as measured by market capitalization and revenue. For this reason, ALLETE's compensation peer group was made up of a subset of companieswere in the EEI Stock Index as of December 31 of the last year in 2017each three-year performance period, and that are usedhave been in the EEI Stock Index for TSR comparison purposes. Even within this subset, however, the companies range in size significantly. Accordingly, the compensation data is size adjusted to establish appropriate market compensation comparisons for ALLETE. The ECC approved the following 16-company peer group for 2018:at least three full years as of that date.
The EEI Stock Index companies as of December 31, 2020, based on information published as of that date, were as follows: | | | | | | | | | Compensation BenchmarkingTSR Peer Group Companies* | | Alliant Energy Corporation | IDACORP,Entergy Corporation | Otter Tail Corporation | | Ameren Corporation | Evergy, Inc. | PG&E Corporation | | American Electric Power Company | Eversource Energy | Pinnacle West Capital Corporation | | Avangrid, Inc. | Exelon Corporation | PNM Resources, Inc. | | Avista Corporation | FirstEnergy Corp. | Portland General Electric Company | Avista Corporation | MGE Energy, Inc. | Vectren Corporation | | Black Hills Corporation | NorthWestern Corporation | Westar Energy, Inc. | El Paso Electric Company | OGE Energy Corp. | Unitil Corporation | Great Plains Energy Incorporated | Otter Tail Corporation | | | Hawaiian Electric Industries, Inc. | PNMPPL Corporation | | CenterPoint Energy, Inc. | IDACORP, Inc. | Public Service Enterprise Group, Inc. | | CMS Energy Corporation | MDU Resources Group, Inc. | Sempra Energy | | Consolidated Edison, Inc. | MGE Energy, Inc. | The Southern Company | | Dominion Energy, Inc. | NextEra Energy, Inc. | Unitil Corporation | | DTE Energy Company | NiSource, Inc. | WEC Energy Group, Inc. | | Duke Energy Corporation | NorthWestern Corporation | Xcel Energy Inc. | | Edison International | OGE Energy Corp. | |
In October 2017,* Companies can be dropped from or added to the ECC directed Pearl MeyerEEI Stock Index during the performance period due to conduct two compensation benchmarking studies for ALLETE: one formergers or other activities. If a company is dropped from the CEO and another forEEI Stock Index during the other NEOs. These studies provided the basis for compensation recommendations made in January 2018.
The CEO benchmarking study compared Mr. Hodnik's compensationperformance period, no information related to an external market using size-adjusted data from published surveys and compensation data disclosedthat company will be included in the proxy statementsperformance calculation. A company that is newly added to the EEI Stock Index after the start of the 16-company peer group. The studyperformance period also analyzed CEO pay-for-performance practiceswill be excluded from the performance calculation. If a company in the EEI Stock Index at the beginning of a performance period undergoes a corporate restructuring during the performance period and effectiveness. The Pearl Meyer report indicated that the elementscompany remains in the EEI Stock Index following the transaction, the company will be included in the performance calculation. During 2018, two companies in the EEI Stock Index Great Plains Energy Incorporated and Westar Energy, Inc. merged to create Evergy, Inc. During 2019, SCANA Corporation merged with Dominion Energy, Inc., and Vectren Corporation merged with CenterPoint Energy, Inc. During 2020, El Paso Electric was dropped from the EEI Stock Index after being acquired by a private investment fund.
During the three-year performance period ending on December 31, 2020, ALLETE's shareholders realized a TSR of Mr. Hodnik's compensation were comparable to market and well balanced. The report further indicated that Mr. Hodnik's base salary was aligned withnegative 7.9 percent, ranking us in the 25th percentile, while target total cash compensation and target total direct compensation were between the 25th and 50th8th percentile of the market range. company peer group, resulting in no PSA payout.
For the 2020-2022 performance period, EPS CAGR will be measured using ALLETE's pro forma EPS for the year ending December 31, 2019 as the baseline, and calculating ALLETE's annual pro forma EPS at the end the three-year performance period. Target was set at the midpoint of earnings guidance, or six percent, with threshold at four percent, and superior at eight percent. If the EPS CAGR percentage result at the end of the performance period is below threshold, no PSAs with the EPS CAGR performance metric will be earned. Straight-line interpolation will be used to determine earned awards based on the EPS CAGR percentage result between threshold, target, and superior.
Restricted Stock Units (RSUs) RSUs are used as a retention incentive and to encourage stock ownership. One RSU entitles the grantee to receive one share of Common Stock and accrued dividend equivalents after the RSU vests at the end of a three-year period.
The reporttable below shows 2020 long-term incentive target opportunities for the NEOs. For all NEOs, except Mr. Hodnik, the target opportunities were allocated as follows: 75 percent to PSAs (half of which use relative TSR as the performance metric and half use EPS CAGR as the performance metric) and 25 percent to RSUs. For Mr. Hodnik, his target long-term incentive opportunity was allocated 100 percent to RSUs to align with his transition to Executive Chair and planned retirement in 2021. The Company retained Mercer to calculate the estimated fair value of PSAs. For PSAs with relative TSR as the associated performance measure, the estimated fair value reflects a modeled probability of achieving the performance goals, employing a Monte-Carlo simulation model that uses an underlying Black-Scholes methodology. The target number of PSAs (TSR) is determined by dividing each NEO's target award opportunity—shown in the table below—by $89.99 the estimated fair value of a PSA (TSR) as of December 31, 2019. For PSAs with EPS CAGR as the associated performance metric, the valuation was calculated using a per-share value of $81.17, the closing price for Common Stock on
December 31, 2019. The number of RSUs granted to the NEOs was also indicatedcalculated using a per-share value of $81.17.
| | | | | | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Target Opportunities for 2020–2022 Performance Period | | Total Target Opportunity | | Allocation of Long-Term Incentive Plan Target Opportunity | | | PSAs with
TSR Performance Metric | PSAs with
EPS CAGR Performance Metric | % of Total Target Opportunity | RSUs | % of Total Target Opportunity | | Ms. Owen | $600,000 | | 2,500 | | 2,772 | | 75% | 1,848 | 25% | | Mr. Hodnik | $400,000 | | — | | — | | — | 4,928 | 100% | | Mr. Adams | $350,000 | | 1,458 | | 1,617 | | 75% | 1,078 | 25% | | Ms. Johnson | $200,000 | | 833 | | 924 | | 75% | 616 | 25% | | Mr. Morris | $150,000 | | 625 | | 693 | | 75% | 462 | 25% | | Ms. Thickens | $175,000 | | 729 | | 808 | | 75% | 539 | 25% |
The ECC has discretion to modify or eliminate awards, whether or not performance goals have been achieved. The ECC did not exercise discretion to modify or eliminate LTIP awards during 2020.
OTHER GUIDELINES, POLICIES, BENEFITS, AND PRACTICES
Executive Stock Ownership Guidelines We believe NEOs should be ALLETE shareholders to encourage them to act as owners and focus on long-term, sustained performance when making business decisions. We use Common Stock to fund NEO's long-term incentive compensation and a portion of the Company's contribution to NEOs'
tax-qualified, defined-contribution retirement savings plan accounts.
NEOs are expected to own Common Stock in accordance with the share ownership guidelines that have been established by the Corporate Governance Committee as discussed on page 29. The applicable share ownership guidelines are as follows: | | | | | | | | | | | | | | | | Executive Stock Ownership Guidelines | | | Position | | Stock Ownership Value as Multiple of Salary1 | | | Chief Executive Officer | | 5X | | | Executive Chairman | | 3X | | | Chief Financial Officer | | 3X | | | Other NEOs | | 1X | | | | | | |
1 The salary used to calculate Mr. Hodnik's compensation was alignedstock ownership guideline takes into account that his service is less than full-time. NEOs are expected to meet her or his stock ownership guideline within seven years after first becoming subject to the stock ownership guidelines. An NEO who is promoted to a position with growth in pre-tax incomea higher stock ownership expectation has five years from the promotion to meet her or his new guideline.
The stock ownership guidelines essentially require that each NEO retain 100% of any equity she or he receives under the LTIP (after share withholding to satisfy tax obligations) until she or he has achieved the applicable ownership guideline.
At least annually, the Corporate Governance Committee reviews Common Stock ownership to confirm that the NEOs have met or are making reasonable progress toward their stock ownership guidelines. The Corporate Governance Committee may, on a case-by-case basis, make adjustments to stock ownership guidelines to fit a particular situation.
Each NEO has met her or his stock ownership guideline or is making reasonable progress toward meeting the guideline. Common Stock ownership levels as of March 12, 2021, and one-year TSR.
Pearl Meyer's analysis compared the other NEOs' base salaries and annual and long-term target incentive opportunities to market data using the same survey sources and proxy statement data usedhow ownership is measured against stock ownership guidelines as of March 12, 2021, are shown in the CEO analysis. The Pearl Meyer report indicated that total directtable on page 11.
Compensation Recovery Policy Our Compensation Recovery Policy, sometimes called a clawback policy, allows ALLETE to recover incentive payments and other forms of compensation for the otherfrom NEOs was below the market median, with limited variance from executive to executive. The report also indicated that base salary and target total cash compensation were below market median for all other NEOs, except Ms. Amberg. Long-term incentive opportunities were below the market median for all other NEOs.
Based on the executive compensation studies, the ECC madeif any of the following determinations for 2018: (1)events occur:
•Financial restatement. In the NEOs' compensation includes appropriate elements; (2) Mr. Oachs’ base salary, annual incentive target opportunity,event of an accounting restatement due to material non-compliance with financial reporting rules, we can recover any excess payments made pursuant to the AIP or the LTIP in the three-year period prior to the date on which the Company is required to prepare the restatement. •Error. In the event of a material error in the measurement of performance criteria, we can recover any excess payments made pursuant to the AIP or the LTIP during the three years prior to the discovery of the error. •Misconduct. If an NEO engages in criminal behavior or work-related dishonesty, we can recover any AIP awards, LTIP awards, and LTIP target opportunity should be increased; (3) Mr. Adams'bonuses that were paid during and subsequent to the period of misconduct. Ms. Owen's annual incentive target and LTIP target opportunities should be increased; (4) Mr. Mullen's annual incentive target should be increased; and (5) Ms. Amberg's LTIP target opportunity should be increased.
HOW WE LINK EXECUTIVE PAY TO PERFORMANCE
A significant portion of our NEOs'NEO's compensation is tied to Company performance. Annual incentives focus on achieving annual financial, strategic, and operational and values goals. Long-term incentives reward long-term profitability and facilitate stock ownership, as well as provide an incentive to remain employed with the Company.
Total compensation generally increases as position and responsibility increase; at the same time, a greater percentage of total compensation is tied to performance, and therefore at risk, as reflected in our NEOs' annual and long-term incentive opportunities.
We consider market data and Pearl Meyer's advice in setting executive compensation. We establish market ranges for our NEOs' compensation using data from investor-owned electric utilities data.utilities. In setting individual compensation, we consider experience in the position, performance, job responsibilities, and relative role among the executive management group. If market data were insufficient to establish a range for a specific position, we would also consider internal equity among our NEOs, taking into account the relative responsibilities for that position.
We generally set compensation so that when target performance is achieved under the Company's incentive compensation plans, total compensation is near the market median of ALLETE's compensation peer group. Consistent with our pay-for-performance philosophy, NEOs earn higher compensation when actual performance exceeds target goals. Conversely, when the Company does not meet target goals, total compensation will generally fall below the median.
20182020 total compensation opportunity for the NEOs was divided between base salary and incentive opportunities. The charts below illustrate the breakdown of compensation elements expressed as a percentage of total target compensation:
The chart on the right reflects an average for all NEOs except Ms. Owen and Mr. Hodnik of the average of each elementpercentage of total target compensation for all our NEOs except the CEO.that is represented by each compensation element. For both charts, total target compensation is calculated using the NEOs' 20182020 target opportunities for annual and long-term incentives and hisher or herhis base salary as of December 31, 2018, except with respect to Ms. Amberg whose base salary is as of her last day of employment on2020. November 28, 2018.
Annual Incentive Awards At the beginning of each year, the ECC, with the CEO, approves performance measures and targets for the annual incentive awards, as well as individual target award opportunities. The ECC has discretion not only to determineestablish the terms of annual incentive awards butand also the ability to reduce, increase, or eliminate awards, regardless of whether applicable performance goals have been achieved. The ECC sets annual incentive opportunity levels for our NEOs such that if the Company achieves target goals, the combination of salary and annual incentives will result in total cash compensation near the market median for ALLETE's compensation peer group. | | | | | | | | | | | | | | | 20182020 Annual Incentive Target Opportunities | | | | Annual Incentive Target Opportunity as a
Percentage of Base Salary
| | | Mr. HodnikMs. Owen1 | | 100%78.75% | | | Mr. Hodnik2 | | 75.2% | | | Mr. Adams | | 60%65% | | | Mr. Oachs | | 50% | | | Ms. OwenJohnson | | 50% | | | Mr. Mullen | | 45% | | | Ms. AmbergMr. Morris | | 40% | | | Ms. Thickens | | 40% | |
1 Ms. Owen's total 2020 target opportunity was prorated with 1/12 at 65% and 11/12 at 80%, resulting in an average of 78.75%. 2 Mr. Hodnik's total 2020 target opportunity was set at $415,200, which was equal to 100% of his annualized base salary for the period January through May and 50% for the period June through December.
The 20182020 annual incentive performance goals, weighting, and measures, applicable to all NEOs, except Ms. Amberg, were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ALLETE Annual Incentive Performance Goals, Weighting, and Measures | | | Performance Goals | | Weighting | | Measures | | | | | | Threshold | | Target | | Superior | | Net Income1 | | 50% | | $172.89167.2 million | | $176.90185.8 million | | $190.18204.4 million | | Cash from Operating Activities2 | | 25%20% | | $367.66296.7 million | | $408.51329.7 million | | $449.36362.7 million | | | Strategic | | 15%18% | | Described below. | | | Operational and Values | | 10%12% | |
| | 1
| Threshold net income was set at the Company's budgeted amount, target was set at 102 percent of budget, and superior was set at 110 percent of budget. Net income for annual incentive calculation purposes is described in more detail below. |
| | 2
| Threshold cash from operating activities goal was set at 90 percent of the Company's budgeted amount; target goal was set at budget, and superior goal was set at 110 percent of budget. Cash from operating activities for annual incentive calculation purposes is described in more detail below. |
1 Threshold net income was set at 90 percent of the Company's budgeted net income, target was set at budget, and superior was set at 110 percent of budget. Net income for annual incentive calculation purposes is described in more detail below. 2 Threshold cash from operating activities goal was set at 90 percent of the Company's budgeted cash from operating activities; target goal was set at budget, and superior goal was set at 110 percent of budget. Cash from operating activities for annual incentive calculation purposes is described in more detail below.
ALLETE Annual Incentive Financial Goals The 20182020 annual incentive financial measures, established at the beginning of the 20182020 plan year, were net income (weighted at 50%) and cash from operating activities (weighted at 25%20%). The ECC selected net income because it is a widely-used financial performance measure that reflects the combination of revenue generation and expense management. Cash from operating activities was selected because it indicates the Company's ability to generate funds internally for capital projects, to repay debt, and to pay dividends and interest. Both measures also can affect the Company's stock price.
•ALLETE Net Income. For annual incentive purposes, ALLETE net income means Net Income Attributable to ALLETE adjusted to excludein connection with the following: (1) net income associated with ALLETE Properties investments, severance expense associated with the rescaling of the operations and overall cost structure ofoperations; (2) net income related to ALLETE Properties cash released from escrow (3) Minnesota Power a regulated utility division of ALLETE,rate case settlement; and the effect of changes in tax law or accounting principles. The basis for making these(4) adjustments was established at the beginning of the performance period.related to acquisition activities and associated operations.
•Cash from Operating Activities. For annual incentive purposes, cash from operating activities means Cash from Operating Activities adjusted in connection with the following: (1) cash associated with ALLETE Properties operations; (2) cash released from escrow related to excludeALLETE Properties; (3) a pension contribution made in cash; (4) refunds related to Minnesota Power rate case settlement; (5) cash related to ALLETE Properties' operationsacquisition activities; and (6) asset decommissioning expenses in excess of budget.
With respect to both the effect of changes in tax law or accounting principles. The basis for making these adjustments wasNet Income and Cash from Operating Activities metrics, the ECC established the exclusions and adjustment guidelines at the beginning of the performance period.
ALLETE Annual Incentive Strategic Goals and Operational and Values Goals ALLETE's 20182020 strategic goals were to achieve growth,address customer competitiveness, to advance sustainability, and operational efficiency goals by addressingto enhance customer cost competitiveness, advancing operational efficiency through power supply and delivery positioning, and growing regulated earnings.experiences.
Operational and values goals are linked to operational objectives and ALLETE's core values: integrity, safety, employee growth, community engagement, and environmental stewardship. Our 20182020 operational and values goals were designed to demonstrate continuous safety improvement, as well as ourALLETE's commitment to the environment and customer service as measured by goals relating to safety leading and lagging indicators, environmental stewardship, and system reliability.
The operational goalgoals are focused on system reliability and were measured quarterly by the System Average Interruption Duration Index, and System Average Interruption Frequency Index, and Customer Average Interruption Duration Index relative to the EEI utilities' three-year average results. The safety goal included tracking the number and severity of incidents recorded with the Occupational Safety and Health Administration, while also implementing proactive safety measures designed to support "zero injury" efforts. An employee fatality, or a willful disregard of environmental, reliability, or any Federal Energy Regulatory Commission regulation or standard, would resulthave resulted in a reduction to or non-payout for this goal.
The ECC reviews the allocation between financial and strategic and operational goals each year. For 2018, ALLETE's2020, our strategic goals and our operational and values goals represented a combined 2530 percent of the overall opportunity and their achievement was measured independently of the financial goals. Therefore, it would have been possible to earn an annual incentive payout based on achieving strategic and operational and values goals even if financial goals had not been met.
The CEO, with input from senior management, reports the progress made on strategic goals and operational and value goals to the ECC. The ECC then determines the extent to which performance targets have been achieved.
Ms. Amberg's 2018 annual incentive performance goals, weighting, and measures were divided between the ALLETE plan described above, which constituted 25
2020 Annual Incentive Results The NEOs earned 100.3 percent of her total 2018their 2020 target annual incentive opportunity and the SWL&P plan described below, which constituted 75 percent of her total 2018 annual incentive opportunity.
| | | | | | | | | | | SWL&P Annual Incentive Performance Goals, Weighting, and Measures | Performance Goals | | Weighting | | Measures | | | | | Threshold | | Target | | Superior | Net Income (ALLETE)1
| | 15% | | $172.89 million | | $176.90 million | | $190.18 million | Net Income (SWL&P)2
| | 55% | | $3.73 million | | $4.14 million | | $4.55 million | Strategic | | 15% | | Described below. | Operational and Values | | 15% | |
| | 1
| Net income (ALLETE) for annual incentive calculation purposes is described in more detail above. |
| | 2
| For SWL&P, threshold net income was set at 90 percent of the SWL&P's budget, target was set at budget, and superior was set at 110 percent of budget. |
SWL&P's 2018 strategic goals were to achieve successful regulatory outcomes and to advance its customer excellence strategy by deploying technology enhancements related to metering infrastructure and customer service. Operational and values goals mirrored ALLETE goals described above, with measurements related to SWL&P's performance.
The CEO determines the extent to which SWL&P performance targets have been achieved.
2018 Annual Incentive Results
The NEOs, except Ms. Amberg, earned 115.2 percent of their 2018 target opportunity (compared to 119.194.9 percent in 2017)2019).
As disclosed in ALLETE's 2018202 Annual Report on Form 10-K Net Income Attributable to ALLETE for the year ended December 31, 2018,2020, Net Income Attributable to ALLETE was $174.1$174.2 million (compared to $172.2$185.6 million for 2017)2019). Cash from Operating Activities was $433.1$299.8 million (compared to $402.9$249.5 million for 2017)2019). Annual incentives also reward strategic and operational accomplishments.
ForTo calculate the financial goals for annual incentive purposes, the goals ALLETE net incomeECC established specified adjustments and cash from operating activities are designatedexclusions at the beginning of the plan year. The ECC also determined at the beginning of the plan year to be adjusted using specified resets and exclusions. 2018that it would make any determinations regarding discrete, non-recurring events that might occur during the plan year on a case-by-case basis.
Our 2020 net income for AIP was adjustedincreased by a total of $10.26 million. The ECC made the following adjustments based on the pre-established adjustments and exclusions: (1) net income associated with ALLETE Properties operations (decreased net income by $.4 million); and (2) adjustments related to exclude a lossacquisition activities and associated operations (increased net income by $1.02 million). In addition, the ECC made discretionary adjustments based on its review of the following non-recurring events: (1) net income related to ALLETE Properties ($0.5cash released from escrow (increased net income by $1.34 million); and severance expenses related to(2) the rescaling of the operations and overall cost structure of its regulated business, Minnesota Power ($1.7rate case settlement (increased net income by $8.3 million). After these exclusions, 2018adjustments, 2020 net income for annual incentive purposes was slightly below target at $176.3$184.5 million. Cash
Our 2020 cash from operating activities for AIP was adjustedincreased by a total of $25.55 million. The ECC made adjustments based on the pre-established adjustments and exclusions in connection with the following: (1) cash associated with ALLETE Properties operations (decreased cash from operating activities by
$0.6 million); (2) a pension contribution made in cash (increased cash from operating activities by
$10.68 million); (3) cash related to excludeacquisition activities (increased cash from operating activities by
$.98 million); and (4) asset decommissioning expense in excess of budget (increased cash from operating activities by $0.7 million). In addition, the ECC made a discretionary adjustments based on its review of the following one-time events: (1) cash released from escrow related to ALLETE Properties operations ($0.2(increased cash from operating activities by $2.09 million); and 2018 deferred taxes ($1.1(2) customer refunds related to Minnesota Power's rate case settlement (increased cash from operating activities by $11.7 million). After these exclusions, 2018adjustments, 2020 cash from operating activities for annual incentive purposes was aboveslightly below target $434.46at $325.4 million.
ALLETE's strategic and operational and values goals were achieved at a combined level that fell between target and superior.threshold. The ALLETE annual incentive results were calculated as follows: | | | | | | | | | | | | | | | | | | | | | | 2020 ALLETE Annual Incentive Payout | | Performance Goal | | Weighting | | Unweighted Results | | Payout1 | | Net Income | | 50% | | 96.4% | | 48.2% | | Cash from Operating Activities | | 20% | | 93.5% | | 18.7% | | Strategic Goals | | 18% | | 144.4% | | 26.0% | | Operational and Values Goals | | 12% | | 61.7% | | 7.4% | | Total | | 100% | | | | 100.3% |
| | | | | | | | | | | 2018 ALLETE Annual Incentive Payout | | Performance Goal | | Weighting | | Unweighted Results | | Payout1 | Net Income | | 50 | % | | 92.6 | % | | 46.3% | | Cash from Operating Activities | | 25 | % | | 163.6 | % | | 40.9% | | Strategic Goals | | 15 | % | | 166.7 | % | | 25.0% | | Operational and Values Goals | | 10 | % | | 60.0 | % | | 3.0% | | Total | | 100 | % | | | | 115.2% |
| | | Payout is expressed as a percentage of the NEO's annual incentive target opportunity.
|
Ms. Amberg earned 95 percent of her 2018 target annual incentive opportunity (compared to 97.1 percent in 2017).
Twenty-five percent of Ms. Amberg's award was tied to ALLETE goals and was earned at 115.2 percent of target opportunity. For the 75 percent of her award tied to SWL&P goals, the payout was 88.3 percent. SWL&P's net income came in above threshold and below target at $3.8 million (resulting in a 30.2 percent payout); SWL&P's strategic and operational goals were achieved at above target (resulting in a 43.8 percent payout).
The SWL&P annual incentive results were calculated as follows:
| | | | | | | | | | | 2018 SWL&P Annual Incentive Payout | | Performance Goal | | Weighting | | Unweighted Results | | Payout1 | ALLETE Net Income | | 15 | % | | 95.3 | % | | 14.3% | | SWL&P Net Income | | 55 | % | | 54.9 | % | | 30.2% | | Strategic and Operational and Values Goals | | 30 | % | | 146.0 | % | | 43.8% | | Total | | 100 | % | | | | 88.3% |
| | 1
| Payout is expressed as a percentage of Ms. Amberg's annual incentive target opportunity.
|
The ECC believes that the annual incentive provides appropriate motivation and does not encourage excessive business risks because it has multiple goals that align with the objectives of different stakeholders (e.g., shareholders, customers, regulators, and employees). The annual incentive provides payment opportunity levels that are market-competitive, and includes a cap on the maximum award amount.
Long-Term Incentive Awards: PSAs and RSUs We use long-term incentive compensation to reward executives for achieving business objectives that are designed to grow long-term shareholder value. The time-vesting and forfeiture provisions associated with long-term incentive compensation also encourage NEOs to stay with the Company. Long-term incentive compensation elements consist of PSAs and RSUs.
The ECC grants the PSAs and RSUs under the LTIP in January of each year. Although the ECC can make additional grants at other times of the year, it did not do so in 20182020 for any NEO. We do not time equity awards to the release of material, non-public information. ECC meeting schedules are generally set six months prior to the start of the calendar year.
Performance Share Awards (PSAs) PSAs reward executives for multi-year performance over a three-year period. Rewarding executives for creating long-term shareholder value links pay to performance.
For all performance periods that include 2020 performance, performance is measured, in whole or in part, by ALLETE's TSR (i.e., the investment return for a share of Common Stock, assuming full dividend reinvestment) relative to a group of peer companies. The ECC selected relative TSR because it measures the value shareholders realize from their investment in Common Stock as compared to investment opportunities available in comparable companies. Rewarding executives for creatingBeginning with the 2020-2022 performance period, performance is also measured by EPS CAGR. The ECC selected EPS CAGR because it measures, in absolute terms, how the Company's earnings per share over the three-year period compares to our established long-term shareholder value further links pay to performance.growth objectives.
The performance period begins on the first day of the first calendar month in the period. The amount of the payment with respect to any award is determined at the end of the three-year period.
In 2018,2020, NEOs were granted PSAs for the three-year performance period beginning on January 1, 2018,2020, and ending on December 31, 2020.2022.
For the 2016-2018, 2017-2019,2020-2022 performance period, target relative TSR was set at the 50th percentile among the peer group, with threshold set at the 30th percentile, and 2018-2020superior set at the 85th percentile. If ALLETE's relative TSR percentile at the end of the performance period falls below threshold, no PSAs will be earned. Straight-line interpolation will be used to determine earned awards based on a relative TSR percentile result between threshold, target, and superior.
For all performance periods that include 2020 performance (2018-2020, 2019-2021, and 2020-2022), ALLETE's TSR was or will be compared to the TSR of a peer group made up of the companies in the EEI Stock Index as our peer group.Index. The ECC believes that the companies comprising the EEI Stock Index reflect comparable investment alternatives available to shareholders. The specific peer group used to determine actual payout results are those utilitywe use consists of all the companies that were in the EEI Stock Index as of December 31 of the last year in each three-year performance period, and that have been in the EEI Stock Index for at least three full years as of that date.
The EEI Stock Index companies as of December 31, 2018,2020, based on information published as of that date, were as follows: | | | | | | | | | TSR Peer Group Companies* | | Alliant Energy Corporation | Entergy Corporation | PG&EOtter Tail Corporation | | Ameren Corporation | Evergy, Inc. | Pinnacle West CapitalPG&E Corporation | | American Electric Power Company | Eversource Energy | PNM Resources, Inc.Pinnacle West Capital Corporation | | Avangrid, Inc. | Exelon Corporation | Portland General Electric CompanyPNM Resources, Inc. | | Avista Corporation | FirstEnergy Corp. | PPL CorporationPortland General Electric Company | | Black Hills Corporation | Hawaiian Electric Industries, Inc. | Public Service Enterprise Group, Inc.PPL Corporation | | CenterPoint Energy, Inc. | IDACORP, Inc. | SCANA CorporationPublic Service Enterprise Group, Inc. | | CMS Energy Corporation | MDU Resources Group, Inc. | Sempra Energy | | Consolidated Edison, Inc. | MGE Energy, Inc. | The Southern Company | | Dominion Energy, Inc. | NextEra Energy, Inc. | Unitil Corporation | | DTE Energy Company | NiSource, Inc. | Vectren CorporationWEC Energy Group, Inc. | | Duke Energy Corporation | NorthWestern Corporation | WECXcel Energy Group, Inc. | | Edison International | OGE Energy Corp. | Xcel Energy Inc. | El Paso Electric Company | Otter Tail Corporation | |
* Companies can be dropped from or added to the EEI Stock Index during the performance period due to mergers or other activities. If a company is dropped from the EEI Stock Index during the performance period, no information related to that company will be included in the performance calculation. A company that is newly added to the EEI Stock Index after the start of the performance period also will be excluded from the performance calculation. If a company in the EEI Stock Index at the beginning of a performance period undergoes a corporate restructuring during the performance period and the company remains in the EEI Stock Index following the transaction, the company will be included in the performance calculation. During 2016, the following three companies were dropped from the EEI Stock Index: Cleco Corporation, Pepco Holdings, Inc., and TECO Energy, Inc. During 2017, The Empire District Electric Company was dropped. During 2018, two companies in the EEI Stock Index Great Plains Energy Incorporated and Westar Energy, Inc., merged to create Evergy, Inc. During 2019, SCANA Corporation merged with Dominion Energy, Inc., and Vectren Corporation merged with CenterPoint Energy, Inc. During 2020, El Paso Electric was dropped from the EEI Stock Index after being acquired by a private investment fund.
During the three-year performance period ending on December 31, 2018,2020, ALLETE's shareholders realized a TSR of 65.1negative 7.9 percent, ranking us in the 818stth percentile of the company peer group, and resulting in payoutno PSA payout.
For the 2020-2022 performance period, EPS CAGR will be measured using ALLETE's pro forma EPS for the year ending December 31, 2019 as the baseline, and calculating ALLETE's annual pro forma EPS at the end the three-year performance period. Target was set at the midpoint of 188.6earnings guidance, or six percent, with threshold at four percent, and superior at eight percent. If the EPS CAGR percentage result at the end of target.the performance period is below threshold, no PSAs with the EPS CAGR performance metric will be earned. Straight-line interpolation will be used to determine earned awards based on the EPS CAGR percentage result between threshold, target, and superior.
Restricted Stock Units (RSUs) RSUs are used as a retention incentive and to encourage stock ownership. One RSU entitles the NEOgrantee to receive one share of Common Stock and accrued dividend equivalents after the RSU vests at the end of a three-year period.
The table below shows 20182020 long-term incentive target opportunities for the NEOs. TheFor all NEOs, except Mr. Hodnik, the target opportunities were allocated as follows: 75 percent to PSAs (half of which use relative TSR as the performance metric and half use EPS CAGR as the performance metric) and 25 percent to RSUs. For Mr. Hodnik, his target long-term incentive opportunity was allocated 100 percent to RSUs to align with his transition to Executive Chair and planned retirement in 2021. The Company retainsretained Mercer to calculate the estimated fair value of a PSA, whichPSAs. For PSAs with relative TSR as the associated performance measure, the estimated fair value reflects a modeled probability of achieving the performance goals, employing a Monte-Carlo simulation model that uses an underlying Black-Scholes methodology. The target number of PSAs (TSR) is determined by dividing each NEO's target award opportunity—shown in the table below—by $81.68,$89.99 the estimated fair value of a PSA (TSR) as of December 29, 2017.31, 2019. For PSAs with EPS CAGR as the associated performance metric, the valuation was calculated using a per-share value of $81.17, the closing price for Common Stock on
December 31, 2019. The number of RSUs granted to the NEOs was also calculated using a per-share value of $74.36, the closing price for Common Stock on December 29, 2017.$81.17. | | | | | | | | | | | Long-Term Incentive Target Opportunities for 2018–2020 Performance Period | | | Total Target Opportunity | | Allocation of Long-Term Incentive Plan Target Opportunity | | | | PSAs |
| % of Total Target Opportunity | RSUs | % of Total Target Opportunity | | Mr. Hodnik | $1,250,000 | | 11,478 |
| 75% | 4,203 |
| 25% | | Mr. Adams | $350,000 | | 3,214 |
| 75% | 1,177 |
| 25% | | Mr. Oachs | $300,000 | | 2,755 |
| 75% | 1,009 |
| 25% | | Ms. Owen | $275,000 | | 2,525 |
| 75% | 925 |
| 25% | | Mr. Mullen | $150,000 | | 1,377 |
| 75% | 504 |
| 25% | | Ms. Amberg | $250,000 | | 2,296 |
| 75% | 841 |
| 25% |
| | | | | | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Target Opportunities for 2020–2022 Performance Period | | Total Target Opportunity | | Allocation of Long-Term Incentive Plan Target Opportunity | | | PSAs with
TSR Performance Metric | PSAs with
EPS CAGR Performance Metric | % of Total Target Opportunity | RSUs | % of Total Target Opportunity | | Ms. Owen | $600,000 | | 2,500 | | 2,772 | | 75% | 1,848 | 25% | | Mr. Hodnik | $400,000 | | — | | — | | — | 4,928 | 100% | | Mr. Adams | $350,000 | | 1,458 | | 1,617 | | 75% | 1,078 | 25% | | Ms. Johnson | $200,000 | | 833 | | 924 | | 75% | 616 | 25% | | Mr. Morris | $150,000 | | 625 | | 693 | | 75% | 462 | 25% | | Ms. Thickens | $175,000 | | 729 | | 808 | | 75% | 539 | 25% |
The ECC has discretion to reducemodify or eliminate awards, whether or not performance goals have been achieved, but does not have discretion to increase awards beyond the performance that is achieved. The ECC did not exercise discretion to reducemodify or eliminate LTIP awards during 2018.2020.
OTHER GUIDELINES, POLICIES, BENEFITS, AND PRACTICES
Executive Stock Ownership Guidelines We believe NEOs should be ALLETE shareholders to encourage them to act as owners and focus on long-term, sustained performance when making business decisions. We use Common Stock to fund the NEO's long-term incentive compensation and a portion of the Company's contribution to the NEOs'
tax-qualified, defined-contribution retirement savings plan accounts.
NEOs are expected to own Common Stock in accordance with the share ownership guidelines that have been established by the Corporate Governance Committee as discussed on page 23.29. The applicable share ownership guidelines are as follows: | | | | | | | | | | | | | | | | Executive Stock Ownership Guidelines | | | Position | | Stock Ownership Value as Multiple of Salary1 | | | Chief Executive Officer | | 5X | | | Executive Chairman | | 3X | | | Chief Financial Officer | | 3X | | | Other NEOs | | 1X | | | | | | | | Executive Stock Ownership Guidelines | | | Position | | Stock Ownership Value as Multiple of Base Salary | | | Chief Executive Officer | | 5X | | | President | | 4X | | | Chief Financial Officer | | 3X | | | Senior Vice President | | 2X | | | | | | |
1 The salary used to calculate Mr. Hodnik's stock ownership guideline takes into account that his service is less than full-time.
NEOs are expected to meet the applicableher or his stock ownership guideline within seven years after first becoming subject to the stock ownership guidelines. An NEO who is promoted to a position with a higher stock ownership expectation has five years from the promotion to meet hisher or herhis new guideline.
The stock ownership guidelines essentially require that each NEO retain 100% of any equity she or he receives under the LTIP (after share withholding to satisfy tax obligations) until she or he has achieved the applicable ownership guideline.
At least annually, the Corporate Governance Committee reviews Common Stock ownership to confirm that the NEOs have met or are making reasonable progress toward their stock ownership guidelines. The Corporate Governance Committee may, on a case-by-case basis, make adjustments to stock ownership guidelines to fit a particular situation.
Each NEO has met hisher or herhis stock ownership guideline or is making appropriatereasonable progress toward meeting the guideline. Common Stock ownership levels as of March 15, 2019,12, 2021, and how ownership is measured against stock ownership guidelines as of March 12, 2021, are shown in the table on page 8.11.
Compensation Recovery Policy Our Compensation Recovery Policy, sometimes called a clawback policy, allows ALLETE to recover incentive payments and other forms of compensation from NEOs if any of the following events occur: •Financial restatement. In the event of an accounting restatement due to material non-compliance with financial reporting rules, we can recover any excess payments made pursuant to the AIP or the LTIP in the three-year period prior to the date on which the Company is required to prepare the restatement. •Error. In the event of a material error in the measurement of performance criteria, we can recover any excess payments made pursuant to the AIP or the LTIP during the three years prior to the discovery of the error. •Misconduct. If an NEO engages in criminal behavior or work-related dishonesty, we can recover any AIP awards, LTIP awards, and bonuses that were paid during and subsequent to the period of misconduct.
Shareholder Advisory Voting on Executive Compensation Each year, shareholders cast an advisory vote on executive compensation, commonly known as a "say-on-pay." At the 2020 Annual Meeting, more than 95 percent of the votes cast by our shareholders approved the Company's 2019 executive compensation on an advisory basis.
We believe that this say-on-pay vote affirms our executive compensation philosophy and objectives. The ECC considers the result of the say-on-pay vote as it makes its compensation decisions and the most recent shareholder advisory approval was a factor in the ECC's decision not to make any fundamental changes to ALLETE's executive compensation program.
At the Company's 2017 Annual Meeting, shareholders supported the Company's recommendation to hold the advisory say-on-pay vote on an annual basis. We believe annual say-on-pay voting promotes shareholder awareness of executive compensation and allows shareholders to provide feedback on a regular basis. Annual say-on-pay voting is also consistent with ALLETE's desire to maintain effective relationships with our shareholders. We will hold a say-on-pay vote on an annual basis until the next advisory vote on the frequency of say-on-pay proposals.
Pledging, Hedging, and Short Sales by NEOs Prohibited NEOs are prohibited from holding Common Stock in a margin account or otherwise entering into any pledge arrangement that would permit a third party to sell the securities without the NEO's consent or knowledge. In addition, no NEO may enter into any transaction that allows him or her to be insulated from the full risk or reward of Common Stock ownership (i.e., hedging) nor may an NEO enter into any transaction that allows him or her to benefit fromif the devaluationvalue of the Common Stock decreases (i.e., short sale).
Retirement and Other Broad-Based Benefits We provide benefits, including retirement benefits, to attract and retain executive talent. Retirement benefits also reward long-term service with the Company. NEOs are eligible for retirement benefits under the same plans available to other eligible employees. TheyNEOs are also eligible for supplemental retirement benefits under our supplemental executive retirement plans.
NEOs are also eligible to participate in a range of broad-based employee benefits, including vacation pay, sick pay, disability benefits, a flexible compensation plan, an employee stock purchase plan, group term life insurance, and both active and post-retirement health benefits.
Tax-Qualified Retirement Benefits WeFor NEOs, other than Ms. Thickens, who was hired after September 2006, we provide tax-qualified retirement benefits to the NEOs from two primary sources: (1) the RSOP, a
defined-contribution retirement savings and stock ownership plan, and (2) traditional defined benefit pension plans. Since October 2006, we have emphasized delivering nonunion retirement benefits through the RSOP; therefore, for Ms. Thickens, her tax-qualified retirement benefit comes only from the RSOP. Both the RSOP and pension plan benefits are intended to be tax-qualified.
The RSOP has features of both an employee stock ownership plan and a 401(k) savings plan. These retirement benefits are intended to be tax-qualified. Since October 2006, we have emphasized delivering nonunion retirement benefits through the RSOP; only the NEOs' service through September 30, 2006 will be counted for calculating his or her benefit under the pension plans. In 2018, after assessing Company cost competitiveness and reviewing benefits benchmarking, the Company froze its nonunion pension plan benefits; no earnings after November 30, 2018 will be considered for calculating the NEO's pension benefits. The present value of each NEO's pension benefits as of December 31, 2018, is shown in the Pension Benefits table on page 53. The 2018 increase in the pension benefits value for each NEO is included in column (f) of the Summary Compensation Table on page 47.
NEOs may elect to defer salary into the RSOP up to the limits imposed by the Tax Code and the RSOP. In addition, we contribute to the NEOs' RSOP accounts a matching contribution of up to four percent of base salary plusfor all NEOs, except Ms. Thickens, and up to five percent for Ms. Thickens. All NEOs, except Ms. Thickens, are also eligible for an annual Company contribution of between 8.5 percent and 11.5 percent of base salary, depending on the NEO's age. Ms. Thickens is eligible for an annual contribution of six percent. Amounts contributed by the Company to the NEOs under the RSOP are included in column (h) of the Summary Compensation Table on page 54.
For the nonunion pension plans, only service through September 30, 2006 will be counted as credited service for calculating her or his benefit under the pension plans. Mr. Hodnik's credited service for purposes of his union pension plan benefit reflects the actual years that he was a participant in the union pension plan. In 2018, after assessing Company cost competitiveness and reviewing benefits benchmarking data, we froze pension plan benefits for all nonunion employees; no earnings after November 30, 2018 will be considered for calculating the pension benefits. The present value of each eligible NEO's pension benefits as of December 31, 2020, is shown in the Pension Benefits table on page 61. The 2020 increase in the pension benefits value for each eligible NEO is included in
column (g) of the Summary Compensation Table on page 47.54.
Supplemental Executive Retirement Benefits We provide supplemental retirement benefits to the NEOs through the SERP, our non-tax-qualified retirement plan. Generally, the SERP is designed to provide retirement benefits to the NEOs that, in the aggregate, substantially equal the benefits theythe NEOs would have been entitled to receive if the Tax Code did not limit the types and amounts of compensation that can be considered under tax-qualified benefit plans. Providing SERP benefits is also a recruiting and retention strategy for executive talent because it provides additional retirement planning opportunities.
The SERP has three components: a supplemental pension benefit, a supplemental defined contribution benefit, and a deferral account benefit.
On December 31, 2004, the Company froze SERP I with respect to all deferrals and vested accrued retirement benefits. Effective January 1, 2005, the Company established SERP II to comply with Section 409A of the Tax Code. SERP II covers compensation initially deferred and retirement benefits accrued or vested after December 31, 2004.
Supplemental executive retirement benefits were reviewed in 2018 in light of Company cost competitiveness and benchmarking data. Credited service for calculating the supplemental pension benefits was frozen as of December 31, 2018. In addition, amounts an NEO defers to his or her SERP II deferral account after December 31, 2018, will no longer receive a fixed annual interest crediting rate and will instead be credited or debited with notional gains or losses until the balance has been paid in full.
The SERP benefits are discussed in more detail starting on page 55.63.
Perquisites The Company gives executives limited perquisites. Perquisites are tailored to the individual NEO, take into account business purpose, and may include: club memberships; reimbursement for financial and tax planning services; identity theft coverage; office parking spaces; approved travel, meal, and entertainment expenses for spouses; and executive physicals. As required by the Tax Code, we impute income to the NEOs for reimbursement of personal expenses andexpenses; we provide no tax gross-ups for this imputed income.
The ECC has reviewed all perquisites and determined that they are a minimal component of total compensation and facilitate the NEOs' performance of their job responsibilities.In 2018,2020, each NEO received less than $10,000 in perquisites.
Severance Benefits We have no employment agreements with any of our NEOs. Under the CIC Severance Plan, NEOs could receive severance benefits in connection with a change in control of the Company. The CIC Severance Plan would provide benefits in the event of an involuntary termination of employment (or resignation following certain unfavorable changes made to an NEO's duties, compensation, or benefits) occurring within six months before, or up to two years after, a change in control. The CIC Severance Plan is designed to encourage executives to remain dedicated and objective when evaluating transactions that could result in a loss of employment in connection with a potential change in control and to minimize the risk that executives would depart prior to a change in control. The ECC believes that the most effective way to accomplish these objectives is to require both a change in control and termination of employment before severance benefits are paid. This ensures that NEOs would not receive severance benefits unless they are adversely affected by a change in control.
The CIC Severance Plan would provide each NEOMs. Owen, Mr. Hodnik, and Mr. Adams with a lump-sum severance payment of 2.5equal to two and one-half times their annual cash compensation. The CIC Severance Plan would provide Ms. Johnson, Mr. Morris, and Ms. Thickens with a lump-sum severance payment equal to two times their annual cash compensation. The CIC Severance Plan also contains a modified payment cap whereby the payment would be reduced below the Tax Code Section 280G safe harbor amount if the NEOthat would retainresult in a greater after-tax amount to the NEO than the after-tax amount that would be retained if the Company paid an unreduced benefit subject to the excise tax. We provide no tax gross-up in connection with any severance payments.payments under the CIC Severance Plan. As it does each year, the ECC reviewed the terms of the CIC Severance Plan in 2020, in consultation with Pearl Meyer. The ECCMeyer, and believes that the CIC Severance Plan is in linealigns with marketmainstream practice.
The SERP II includes a change in control provision that accelerates payment of the supplemental executive retirement benefits and deferral account benefits, earned after December 31, 2004, upon a termination of employment in connection with a change in control. There are also change in control features in both the AIP and the LTIP. The change in control features in the SERP II, the AIP, and the LTIP are designed to protect NEOs from losing previously-granted benefits on account of a change in control.
The potential value of the change in control severance benefits is discussed more fully in the “Potential Payments Upon Termination or Change in Control” section starting on page 59.66.
On November 29, 2018, the Company entered into an agreement with Ms. Amberg in connection with the elimination of her position that consisted of the combined roles of Senior Vice President
ALLETE–Chief Strategy Officer Regulated Operations and President SWL&P. The agreement entitles Ms. Amberg to receive a lump-sum payment of $344,866 as well as the following benefits: payment of health care benefits under COBRA for 18 months, payment of core life insurance benefits for
18 months, payment of up to $10,000 for outplacement services, and payment of up to $5,000 for tax consulting, financial planning, or estate planning services.
Tax and Accounting Considerations We attempt to structure the NEOs' compensation soin a manner that all elements of pay are tax-deductible bymaximizes the Company. For years after 2017, however,Company's ability to recognize tax-deductions. Section 162(m) of the Tax Code limits to $1 million the amount of compensation that we may deduct in any year with respect to our NEOs and any other employee who was a covered employee for Section 162(m) purposes for any preceding taxable year beginning after December 31, 2016.year. For periods before 2018, that limit did not apply to “performance-based compensation” within the meaning of Section 162(m). If the Company was unable to deduct an annual incentive award earned in 2018, then the amount of the NEO's annual incentive award paid currently was capped at the maximum deductible amount and the non-deductible portion was deferred to the NEO's supplemental executive retirement plan account, which is described on page 57. Recognizing the need to maintain flexibility in administering our executive compensation program, and the recent changes in the laxtax law, the ECC has the authority to approve compensation that may not be tax deductible.
Section 280G of the Tax Code limits the amount that we may deduct for payments in connection with a change in control, commonly referred to as “parachute payments." If total payments in connection with a change in control exceed the Section 280G limits, the Company's deduction would be limited and the recipient's parachute payments would be subject to an excise tax. The CIC Severance Plan has a modified severance payment cap that limits payments to a level below the safe harbor amount provided by Tax Code Section 280G if the NEO would retain a greater after-tax amount than the after-tax amount that would be retained if the Company paid an unreduced benefit that was subject to the excise tax.
In addition to tax deductibility, we also consider the accounting implications of each compensation element. Because the primary objectives of our compensation programs are tied to performance, however, the ECC may design a compensation structure regardless of whether it qualifies for a tax deduction or more favorable accounting treatment if deemed in the Company's best interest. We do not provide tax gross-ups on payments to NEOs, except in connection with relocation expenses covered under the Company's broad-based relocation policy.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed the CD&A and discussed it with management. Based upon such review and the related discussions, the Compensation Committee has recommended to the Board that the CD&A be included in this Proxy Statement and the 2018ALLETE's 2020 Annual Report on
Form 10-K.
March 28, 201925, 2021
Compensation Committee Robert P. Powers, Chair James S. Haines, Jr.
James J. Hoolihan
Sidney W. Emery, Jr.
Madeleine W. Ludlow Susan K. Nestegard Heidi E. Jimmerson, ex officio
EXECUTIVE COMPENSATION TABLES
The following table sets forth information for the last three fiscal years.Information for fiscal years 20162018 is not provided for Mr. Morris and Ms. Johnson because neither was an NEO prior to fiscal year 2019 and information for fiscal years 2018 and 2019 is not provided for Ms. OwenThickens because she was not an NEO prior to fiscal year 2017. Information for fiscal years 2016 and 2017 is not provided for Mr. Mullen because he was not an NEO prior to fiscal year 2018.
| | | | | | | | | | | | | | | | Summary Compensation Table–2018 | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | Name and Principal Position1 | Year | Salary | Stock Awards2 | Non-Equity Incentive Plan Compensation3 | Change in Pension Value4 | All Other Compensation5 | Total | | Alan R. Hodnik | 2018 | $633,421 | $1,291,261 | $726,906 | $709,665 | $132,205 | $3,493,458 | | Chairman and CEO | 2017 | $623,574 | $1,130,234 | $729,626 | $868,081 | $112,568 | $3,464,083 | | | 2016 | $613,584 | $999,067 | $436,029 | $602,455 | $127,303 | $2,778,438 | | | | | | | | |
| | Robert J. Adams | 2018 | $357,870 | $361,578 | $246,413 | $175,938 | $71,332 | $1,213,131 | | Senior Vice President and CFO | 2017 | $327,456 | $248,653 | $212,296 | $200,894 | $51,177 | $1,040,476 | | | 2016 | $282,454 | $142,745 | $108,512 | $119,353 | $50,197 | $703,261 | | | | | | | | |
| | Bradley W. Oachs | 2018 | $381,090 | $309,947 | $219,373 | $225,305 | $71,868 | $1,207,583 | | Senior Vice President and President | 2017 | $351,870 | $226,059 | $194,400 | $226,991 | $63,311 | $1,062,631 | | Regulated Operations | 2016 | $292,780 | $142,745 | $128,816 | $43,809 | $47,150 | $655,300 | | | | | | | | |
| | Bethany M. Owen | 2018 | $295,888 | $284,088 | $169,779 | $49,454 | $52,732 | $851,941 | | President | 2017 | $268,956 | $203,404 | $140,421 | $45,838 | $43,309 | $701,928 | | | 2016 | — |
| — |
| — |
| — |
| — |
| — |
| | | | | | | | | | | Patrick K. Mullen | 2018 | $256,728 | $154,894 | $132,578 | $50,259 | $53,715 | $648,174 | | Senior Vice President External Affairs | 2017 | — |
| — |
| — |
| — |
| — |
| — |
| | | 2016 | — |
| — |
| — |
| — |
| — |
| — |
| | | | | | | | | | | Deborah A. Amberg | 2018 | $315,685 | $258,316 | $120,164 | $217,627 | $615,798 | $1,527,590 | | Former Senior Vice President and Chief | 2017 | $344,867 | $203,404 | $133,980 | $173,867 | $54,483 | $910,601 | | Strategy Officer Regulated Operations | 2016 | $338,731 | $214,119 | $130,911 | $116,123 | $57,499 | $857,383 |
2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Summary Compensation Table–2020 | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | Name and Principal Position1 | Year | Salary | Bonus2 | Stock Awards3 | Non-Equity Incentive Plan Compensation4 | Change in Pension Value5 | All Other Compensation6 | Total | | | | | | | | | | | | | | | | | | | | Bethany M. Owen | 2020 | $537,128 | — | | $596,185 | $434,424 | $307,375 | $110,232 | $1,985,344 | | President and CEO | 2019 | $337,450 | — | | $267,311 | $190,388 | $141,691 | $73,432 | $1,010,272 | | 2018 | $295,888 | — | | $284,088 | $169,779 | $49,454 | $52,732 | $851,941 | | | | | | | | | | | | | | | | | | | | Alan R. Hodnik | 2020 | $555,017 | — | | $414,543 | $416,446 | $1,766,933 | $159,281 | $3,312,220 | | Executive Chairman | 2019 | $667,933 | — | | $1,113,733 | $634,743 | $2,093,019 | $196,586 | $4,706,014 | | 2018 | $633,421 | — | | $1,291,261 | $726,906 | $709,665 | $132,205 | $3,493,458 | | | | | | | | | | | | | | | | | | | | Robert J. Adams | 2020 | $405,449 | — | | $347,746 | $268,981 | $619,418 | $98,319 | $1,739,913 | | Senior Vice President and | 2019 | $390,626 | $40,000 | $311,875 | $247,087 | $557,208 | $97,669 | $1,644,465 | | CFO | 2018 | $357,870 | — | | $361,578 | $246,413 | $175,938 | $71,332 | $1,213,131 | | | | | | | | | | | | | | | | | | | | Nicole R. Johnson | 2020 | $287,127 | — | | $198,701 | $136,051 | $49,566 | $63,899 | $735,344 | | Vice President and Chief | 2019 | $241,099 | $25,000 | $133,619 | $104,266 | $43,598 | $47,570 | $595,152 | | Administrative Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | Steven W. Morris | 2020 | $285,068 | — | | $149,046 | $116,381 | $82,061 | $54,231 | $686,787 | | Vice President, Chief | 2019 | $278,543 | $25,000 | $89,128 | $93,545 | $86,415 | $61,114 | $633,745 | | Accounting Officer, and | | | | | | | | | | Controller | | | | | | | | | | | | | | | | | | | | | | | | | | | | Margaret A. Thickens | 2020 | $288,497 | — | | $173,832 | $125,351 | — | | $48,466 | $636,146 | | Vice President, Chief Legal | | | | | | | | | | Officer, and Corporate | | | | | | | | | | Secretary | | | | | | | | |
1 The principal positions shown above are as of March 15, 2019. On January 31, 2019, the Board elected12, 2021. 2 The amounts in column (d) represent discretionary cash bonuses paid to Mr. Adams, Ms. Owen as ALLETE's President. Prior to that date, and throughout 2018, Ms. Owen served as Senior Vice President, Chief Legal and Administrative Officer, and Secretary,Johnson, and Mr. Hodnik wasMorris in connection with their roles in the sale of U.S. Water Services. 3 The amounts shown in column (e) represent the actuarial value of a future payout for RSUs and PSAs granted in 2020 pursuant to the LTIP and are not amounts that were paid to the NEO in the year reported. The actual amount that the NEO will earn will depend on the extent to which long-term incentive goals are achieved and on the then-current market price of Common Stock. The actual value each NEO realized in 2020 from stock awards in prior years is shown in the "Option Exercises and Stock Vested" table on page 61. The amounts in column (e) relate to RSU and PSA opportunities awarded to the NEOs during 2020. The amounts shown reflect the grant date fair value determined in accordance with generally accepted accounting principles under ASC 718, using the same assumptions used in the valuation of compensation expenses disclosed in Note 12 to the Company's Consolidated Financial Statements contained in ALLETE's Chairman, President, and CEO.2020 Annual | | 2
| The amounts shown in column (d) represent the actuarial value of the future payout, but are not amounts that were paid to the NEOs in the year reported. The actual amount that an NEO will earn will depend on the extent to which long-term incentive goals are achieved and on the then-current market price of Common Stock. The actual value each NEO realized in 2018 from stock awards in prior years is shown in the "Option Exercises and Stock Vested" table on page 53. The amounts in column (d) relate to PSA and RSU opportunities awarded to the NEOs during 2018. The amounts shown reflect the grant date fair value determined in accordance with generally accepted accounting principles under ASC 718, using the same assumptions used in the valuation of compensation expenses disclosed in Note 16 to the Company's Consolidated Financial Statements contained in the 2018 Annual Report on Form 10-K, but based on a modeled probability of reaching performance goals and excluding the effect of estimated forfeitures. This estimated value was calculated by our consultant Mercer using a Monte-Carlo simulation model that used an underlying Black-Scholes methodology. The grant date fair value is the total amount that we will recognize as an expense over the awards' vesting period, except that the amounts shown do not include a reduction for forfeitures. The amounts shown in column (d) for 2018 are comprised of the following: |
Report on Form 10-K, but based on a modeled probability of reaching performance goals and excluding the effect of estimated forfeitures. All values were calculated by our consultant, Mercer. For PSAs with TSR as the performance metric, the estimated value was calculated using a Monte-Carlo simulation model with an underlying Black-Scholes methodology. For both RSUs and PSAs with EPS CAGR as the performance metric, the estimated value was calculated using the closing price of Common Stock on January 30, 2020. The grant date fair value is the total amount that we will recognize as an expense over the awards' vesting period, except that the amounts shown do not include a reduction for forfeitures. The amounts shown in column (e) for 2020 are comprised of the following:
| | | | | | | PSAs* | | | | RSUs | | PSAs* | | RSUs | | PSAs with TSR Metric | | PSAs with EPS CAGR Metric | | Bethany M. Owen | | Bethany M. Owen | | $155,454 | | $207,550 | | $233,181 | | Alan R. Hodnik | | $303,120 | | $988,141 | Alan R. Hodnik | | $414,543 | | — | | — | | Robert J. Adams | | $84,885 | | $276,693 | Robert J. Adams | | $90,681 | | $121,043 | | $136,022 | | Bradley W. Oachs | | $72,769 | | $237,178 | | | Bethany M. Owen | | $66,711 | | $217,377 | | | Patrick K. Mullen | | $36,348 | | $118,546 | | | Deborah A. Amberg | | $60,653 | | $197,663 | | | Nicole R. Johnson | | Nicole R. Johnson | | $51,818 | | $69,156 | | $77,727 | | Steven W. Morris | | Steven W. Morris | | $38,863 | | $51,888 | | $58,295 | | Margaret A. Thickens | | Margaret A. Thickens | | $45,341 | | $60,522 | | $67,969 |
* The maximum grant date fair value for each NEO's unearned 20182020 PSAs, assuming the highest level of performance were to be achieved, is as follows: Mr. Hodnik—Ms. Owen—$1,976,282,881,462, Mr. Adams—$553,386, 514,130,
Ms. Johnson—$293,766, Mr. Oachs—Morris—$474,356, Ms. Owen—$434,754, Mr. Mullen—$237,092,220,366, and Ms. Amberg—Thickens—$395,326.256,982. 3 4 The amounts in column (e)(f) reflect annual incentive awards earned in 20182020 and paid in 2019. 2021.
5 The amounts shown include any portionin column (g) represent the actuarial increase during 2020 in the value of retirement benefits earned by each NEO under our retirement plans, which are described in detail beginning on page 62, and were not paid to NEOs in the award that was deferred at the NEO's election. Ms. Amberg's award was prorated to reflect her separation from service on November 28, 2018.year reported. | | 4
| The amounts shown in column (f) represent the actuarial increase during 2018 in the value of retirement benefits earned by each NEO under our retirement plans, which are described in detail beginning on page 54, and were not paid to the NEOs in the year reported. |
5 6 The amounts in column (g)(h) for 20182020 are comprised of the following:
| | | | | | | | | | | | | | Company RSOP Contributions, Flexible Compensation Benefits, and Life Insurance Premiums | Company Contributions
Under SERP II | | Bethany M. Owen | | $51,032 | $59,200 | | Alan R. Hodnik | | $52,949 | $106,332 | | Robert J. Adams | | $51,174 | $47,145 | | Nicole R. Johnson | | $50,344 | $13,555 | | Steven W. Morris | | $42,070 | $12,161 | | Margaret A. Thickens | | $37,847 | $10,619 |
| | | | | | | | | | Company RSOP Contributions, Flexible Compensation Benefits, and Life Insurance Premiums | Company Contributions Under SERP II | Acceleration of Outstanding Equity Awards in Connection with Retirement* | Payments in Connection with Separation from Service** | | Alan R. Hodnik | | $50,783 | $81,422 | — | — | | Robert J. Adams | | $49,297 | $22,035 | — | — | | Bradley W. Oachs | | $49,405 | $22,463 | — | — | | Bethany M. Owen | | $40,719 | $12,013 | — | — | | Patrick K. Mullen | | $45,148 | $8,567 | — | — | | Deborah A. Amberg | | $40,536 | $15,200 | $163,693 | $396,369 |
* Ms. Amberg's employment ended on November 28, 2018, resulting in an accelerated vesting of the following outstanding RSU grants: 1,183 RSUs granted in January 2016, 593 RSUs granted in January 2017, and 265 RSUs granted in January 2018. Dividend equivalent shares also vested in connection with each grant. Ms. Amberg's receipt of these shares is subject to a non-elective, six-month deferral. The value of the accelerated vesting was calculated by multiplying the exact (non-rounded) number of shares acquired on vesting by the closing price of Common Stock on November 28, 2018.
**Amount shown was paid or accrued in connection with a separation agreement between the Company and Ms. Amberg as follows: (1) a lump-sum payment of $344,866; (2) $36,503 for 18 months of Company-paid health care premiums and life insurance premiums, of which $7,916 is for amounts actually paid through March 2019, and the remainder reflects a reasonable estimate of the additional amounts to be paid; (3) $10,000 for outplacement services; and (4) $5,000 for tax consulting and financial planning services.
The following Grants of Plan-Based Awards table shows the range of each NEO's annual and long-term incentive award opportunities granted for the fiscal year ended December 31, 2018.2020. The narrative following the table describes the terms of each incentive award.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Grants of Plan-Based Awards–2020 | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | Name and Award Type1 | Grant Date | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards2 | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units | Grant Date Fair Value of Stock and Option Awards3 | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | | Bethany M. Owen | | | | | | | | | | | Annual Incentive | 01/30/20 | $157,300 | $357,500 | $715,000 | — | | — | | — | | — | | — | | Annual Incentive4 | 02/03/20 | $33,275 | $75,625 | $151,250 | — | | — | | — | | — | | — | | | PSAs (TSR metric) | 01/30/20 | — | | — | | — | | 1,250 | | 2,500 | | 5,000 | | — | | $207,550 | | PSAs (CAGR metric) | 01/30/20 | — | | — | | — | | 1,386 | | 2,772 | | 5,544 | | — | | $233,181 | | RSUs | 01/30/20 | — | | — | | — | | — | | — | | — | | 1,848 | | $155,454 | | Alan R. Hodnik | | | | | | | | | | | Annual Incentive | 01/30/20 | $182,688 | $415,200 | $830,400 | — | | — | | — | | — | | — | | | RSUs | 01/30/20 | — | | — | | — | | — | | — | | — | | 4,928 | | $414,543 | | Robert J. Adams | | | | | | | | | | | Annual Incentive | 01/30/20 | $117,998 | $268,177 | $536,354 | — | | — | | — | | — | | — | | | PSAs (TSR metric) | 01/30/20 | — | | — | | — | | 729 | | 1,458 | | 2,916 | | — | | $121,043 | | PSAs (CAGR metric) | 01/30/20 | — | | — | | — | | 809 | | 1,617 | | 3,234 | | — | | $136,022 | | RSUs | 01/30/20 | — | | — | | — | | — | | — | | — | | 1,078 | | $90,681 | | Nicole R. Johnson | | | | | | | | | | | Annual Incentive | 01/30/20 | $59,683 | $135,644 | $271,288 | — | | — | | — | | — | | — | | | PSAs (TSR metric) | 01/30/20 | — | | — | | — | | 417 | | 833 | | 1,666 | | — | | $69,156 | | PSAs (CAGR metric) | 01/30/20 | — | | — | | — | | 462 | | 924 | | 1,848 | | — | | $77,727 | | RSUs | 01/30/20 | — | | — | | — | | — | | — | | — | | 616 | | $51,818 | | Steven W. Morris | | | | | | | | | | | Annual Incentive | 01/30/20 | $51,055 | $116,033 | $232,066 | — | | — | | — | | — | | — | | | PSAs (TSR metric) | 01/30/20 | — | | — | | — | | 313 | | 625 | | 1,250 | | | $51,888 | | PSAs (CAGR metric) | 01/30/20 | — | | — | | — | | 347 | | 693 | | 1,386 | | — | | $58,295 | | RSUs | 01/30/20 | — | | — | | — | | — | | — | | — | | 462 | | $38,863 | | Margaret Thickens | | | | | | | | | | | Annual Incentive | 01/30/20 | $54,990 | $124,977 | $249,953 | — | | — | | — | | — | | — | | | PSAs (TSR metric) | 01/30/20 | — | | — | | — | | 365 | | 729 | | 1,458 | | — | | $60,522 | | PSAs (CAGR metric) | 01/30/20 | — | | — | | — | | 404 | | 808 | | 1,616 | | — | | $67,969 | | RSU | 01/30/20 | — | | — | | — | | — | | — | | — | | 539 | | $45,341 |
| | | | | | | | | | | | | | | | | | | | Grants of Plan-Based Awards–2018 | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | Name and Award Type1 | Grant Date | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards2 | Estimated Future Payouts Under Equity Incentive Plan Awards | All Other Stock Awards: Number of Shares of Stock or Units | Grant Date Fair Value of Stock and Option Awards3 | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | | Alan R. Hodnik | | | | | | | | | | | Annual Incentive | 01/22/18 | $283,948 | $630,995 | $1,261,990 | — |
| — |
| — |
| — |
| — |
| | PSAs | 01/22/18 | — |
| — |
| — |
| 5,739 |
| 11,478 |
| 22,956 |
| — |
| $988,141 | | RSUs | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 4,203 |
| $303,120 | | Robert J. Adams | | | | | | | | | | | Annual Incentive | 01/22/18 | $96,255 | $213,900 | $427,800 | — |
| — |
| — |
| — |
| — |
| | PSAs | 01/22/18 | — |
| — |
| — |
| 1,607 |
| 3,214 |
| 6,428 |
| — |
| $276,693 | | RSUs | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 1,177 |
| $84,885 | | Bradley W. Oachs | | | | | | | | | | | Annual Incentive | 01/22/18 | $85,693 | $190,428 | $380,856 | — |
| — |
| — |
| — |
| — |
| | PSAs | 01/22/18 | — |
| — |
| — |
| 1,378 |
| 2,755 |
| 5,510 |
| — |
| $237,178 | | RSUs | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 1,009 |
| $72,769 | | Bethany M. Owen | | | | | | | | | | | Annual Incentive | 01/22/18 | $66,320 | $147,378 | $294,756 | — |
| — |
| — |
| — |
| — |
| | PSAs | 01/22/18 | — |
| — |
| — |
| 1,263 |
| 2,525 |
| 5,050 |
| — |
| $217,377 | | RSUs | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 925 |
| $66,711 | Patrick K. Mullen
| | | | | | | | | | | Annual Incentive | 01/22/18 | $51,788 | $115,085 | $230,170 | — |
| — |
| — |
| — |
| — |
| | PSAs | 01/22/18 | — |
| — |
| — |
| 689 |
| 1,377 |
| 2,754 |
| — |
| $118,546 | | RSUs | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 504 |
| $36,348 | | Deborah A. Amberg | | | | | | | | | | Annual Incentive4 | 01/22/18 | $54,316 | $137,946 | $275,892 | — |
| — |
| — |
| — |
| — |
| PSAs5 | 01/22/18 | — |
| — |
| — |
| 1,148 |
| 2,296 |
| 4,592 |
| — |
| $197,663 | RSUs6 | 01/22/18 | — |
| — |
| — |
| — |
| — |
| — |
| 841 |
| $60,653 |
| | 2 1 | 2018 annual incentive awards for all NEOs, except Mr. Hodnik and Mr. Adams, were made under the AIP. Annual awards for Mr. Hodnik and Mr. Adams were made under the LTIP. PSAs and RSUs were granted under the LTIP for all NEOs. |
| | 2
| Actual awards earned are shown in column (e) of the Summary Compensation Table on page 47. |
| | 3
| Reflect the grant date fair value determined in accordance with generally accepted accounting principles under ASC 718, using the same assumptions used in the valuation of compensation expense disclosed in Note 16 to the Company's Consolidated Financial Statements contained in the 2018 Annual Report on Form10-K, but based on a modeled probability of reaching performance goals and excluding the effect of estimated forfeitures. Amounts shown for PSAs and RSUs are the values of the awards for accounting purposes. The value an NEO realizes from performance shares will depend on actual Common Stock performance relative to the peer company group, discussed on page 40 and the market price of Common Stock. The value an NEO realizes from RSUs depends on the market value of Common Stock at the time of vesting. |
| | 4
| Calculated as of the grant date and assumed that Ms. Amberg would remain employed for all of 2018. Ms. Amberg's actual award, shown in column (e) of the Summary Compensation Table on page 47, was based on actual 2018 results but prorated to reflect that her employment ended on November 28, 2018. |
| | 5
| Calculated as of the grant date and assumed that Ms. Amberg would remain employed for the full performance period. |
| | 6
| Calculated as of the grant date and assumed that Ms. Amberg would remain employed for the full RSU vesting period. |
Ms. Amberg's employment ended on November 28, 2018, resulting in an accelerated vesting of outstanding RSU grants and dividend equivalent shares associated with those grants. Ms. Amberg's receipt of these shares is subject to a non-elective, six-month deferral. Amounts she will receive are included in column (g)(f) of the Summary Compensation Table on page 47.54.
3 These amounts reflect the grant date fair value determined in accordance with generally accepted accounting principles under ASC 718, using the same assumptions used in the valuation of compensation expenses disclosed in Note 12 to the Company's Consolidated Financial Statements contained in ALLETE's 2020 Annual Report on Form10-K for the year ended December 31, 2020, but based on a modeled probability of reaching performance goals and excluding the effect of estimated forfeitures. Amounts shown for PSAs and RSUs are the values of the awards for accounting purposes. The value an NEO realizes from performance shares with TSR as the performance metric will depend on actual Common Stock performance relative to the peer company group, as discussed beginning on page 45, and the market price of Common Stock. The value an NEO realizes on PSAs with EPS CAGR as the performance metric will depend on the Company's baseline pro forma EPS for the year ending December 31 of the year prior to the beginning of the three-year performance period and ALLETE's pro forma earnings per share at the end the three-year performance period, as discussed on page 47, and the market price of Common Stock. The value an NEO realizes from RSUs depends on the market value of Common Stock at the time of vesting.
4 Ms. Owen's received an additional AIP opportunity in connection with her promotion to CEO on February 3, 2020.
GRANTS OF PLAN-BASED AWARDS DISCUSSION
The Company's 2018NEOs received incentive awards for all NEOs consistedin 2020 consisting of an annual incentive opportunityopportunities and a long-term incentive opportunityopportunities, which were allocated between PSAs and RSUs.
Annual Incentive Opportunity Annual incentive awards are discussed in detail in the Compensation Discussion and Analysis section beginning on page 27. 201832. Our 2020 annual incentive goal weightings, reflected in columns (c), (d), and (e) of the Grants of Plan-Based Awards table on page 49, are56, were as follows:
•Threshold amount shown in column (c)—the minimum annual incentive award, ranging from 15.7517.6 percent to 4534.65 percent of base salary as of December 31, 2018,2020, that would be payable if net income, cash from operating activities, and strategic goals were achieved at threshold and there was no progress on operational and values goals.
•Target amount shown in column (d)—the target annual incentive award, ranging from 40 percent to 10078.75 percent of base salary as of December 31, 2018,2020, that would be payable if net income, cash from operating activities, strategic goals, and operational and values goals all were achieved at the target level.
•Maximum amount shown in column (e)—maximum annual incentive award, ranging from 80 percent to 200157.5 percent of base salary as of December 31, 2018,2020, that would be payable if net income, cash from operating activities, strategic goals, and operational and values goals were achieved at the superior level.
Goal achievements that fall between threshold and target, and between target and superior, are interpolated on a straight-line basis.
The amounts shown in column (e)(f) of the Summary Compensation Table on page 4754 include annual incentive awards earned in 20182020 at 115.2100.3 percent of target for all NEOs, except Ms. Amberg. As discussed beginning on page 37, Ms. Amberg's annual incentive opportunity was weighted 25 percent to ALLETE's goals and 75 percent to SWL&P's goals, resulting in an incentive award earned in 2018 at 95 percent of her target.NEOs. Annual incentive award amounts, expressed as a percentage of the NEO's base salary, ranged from 3540.1 percent to 115
79.0 percent.
EachAn NEO may elect to receive hisher or herhis annual incentive award in cash, or to defer some or all of the awards in accordance with SERP II. NEOsAn NEO who retire, die,retires, dies, or becomebecomes disabled during the year remainremains eligible to receive a prorated annual incentive award, based on actual results at the end of the year. NEOsAn NEO who terminateterminates employment for any other reason forfeitduring the performance period forfeits any annual incentive award. In the event of a change in control, annual incentive awards would be calculated as if the end of the performance year had occurred, based on the Company's performance at the time of the change in control. Any awards earned would be prorated based on the number of months in the performance year which had elapsed as of the time of the change in control.
PSAs The PSAs for the three-year performance period beginning January 1, 2018,2020, are reflected in the Grants of Plan-Based Awards table on page 49. 56. Beginning with the 2020-2022 performance period, PSAs are divided into two grants, each with different performance metrics. Fifty percent of the target opportunity is allocated to PSAs with relative TSR as the performance metric, as described beginning on page 46; the other fifty percent of the target opportunity is allocated to PSAs with EPS CAGR as the performance metric, as described on page 47.
Specifically, with respect to PSAs with TSR as the performance metric, the amounts shown in column (f), (g), and (h) reflect the following:
•Threshold amount shown in column (f)—the minimum 20182020 PSA payable, set at 50 percent of the target amount,opportunity, which would be earned if ALLETE's TSR percentile ranking for the three-year performance period was at the 30th percentile among the peer group. If our TSR percentile ranking fell below threshold among the peer group at the end of the performance period falls below threshold, no PSAs would be paid.
•Target amount shown in column (g)—the target PSA payable, which would be earned if ALLETE's TSR percentile ranking wasamong the peer group at the end of the performance period falls at the 50th percentile.
•Maximum amount shown in column (h)—the maximum PSA payable, set at 200 percent of the target opportunity, which would be earned if ALLETE's TSR percentile ranking for the three-year performance period is at the 85th percentile or higher among the peer group.
Specifically, with respect to the PSAs with EPS CAGR as the performance metric, amounts shown in column (f), (g), and (h) reflect the following:
•Threshold amount shown in column (f)—the minimum 2020 PSA payable, set at 50 percent of the target opportunity, which would be earned if ALLETE's EPS CAGR at the end of the three-year performance period equates to a four percent average annual EPS growth rate. If our EPS CAGR result falls below threshold at the end of the performance period, no PSAs would be paid.
•Target amount shown in column (g)—the target PSA payable, which would be earned if ALLETE's EPS CAGR at the end of the three-year performance period equates to a six percent average annual EPS growth rate.
•Maximum amount shown in column (h)—the maximum PSA payable, set at 200 percent of the target amount, which would be earned if ALLETE's TSR percentile ranking forCAGR at the end of the three-year performance period was at the 85th percentile or higher among the peer group.equates to an eight percent average annual EPS growth rate.
PSAs are earned as a result of TSR percentile rankings
Goal achievements that fall between threshold and maximum, whichtarget, and target and superior, are interpolated on a straight-line basis.
Dividend equivalents accrue during the performance period and allow NEOs to receive the value of dividends that would have been paid on Common Stock between the grant date and the date the performance shares are paid, but only if performance goals are achieved. If earned, performance shares and dividend equivalents are paid in Common Stock after the end of the performance period. An NEO who retires, dies, or becomes disabled during the performance period remains eligible to receive a prorated payment of performance shares. Upon a change in control, PSAs would immediately vest and be paid out on a prorated basis, including dividend equivalents, at the greater of the target level or the level earned based on the actual TSR rankingperformance as of the date of the change in control.
The grant date fair value for performance shares with the relative TSR performance metric is based on a modeled probability of reaching the performance goalsgoal. The grant date fair value for performance shares awarded to each NEO,with the EPS CAGR performance metric was calculated using the closing price of Common Stock on January 30, 2020. The total grant date fair value of the PSAs is included in the amountsamount shown in column (d)(e) of the Summary Compensation Table on page 47.54.
Performance shares awarded for the 2017-20192019-2021 and 2018-20202020-2022 performance periods remain unearned unless and until the performance goals are achieved at the end of the performance periods. The performance shares awarded to each NEONEOs for those periods are shown in column (d) of the Outstanding Equity Awards at Fiscal Year-End table on page 52.59. The estimated market value of the unearned performance shares, assuming superiorthreshold performance in the case of the 2017-20192019-2021 and the 2018-20202020-2022 performance periods, is shown in column (e) of that table. The actual value to the NEOs for the performance period 2019-2021, if any, will be determined at the end of the performance periodsperiod based solely on the Company's actual TSR ranking forat the end of the three-year performance periods.
Duringperiod. The actual value to the 2016-2018NEOs for the performance period the Company's shareholders realized a TSR of 65.1 percent, ranking us in the 81st percentile of the company peer group and resulting in payout of 188.6 percent of target performance. Earned performance shares are included in column (b) of the Outstanding Equity Awards at Fiscal Year-End table on page 52.
The Summary Compensation Table on page 47 reflects in column (d) the grant date fair value of the PSAs granted in the year in which the three-year performance period commenced. The number of shares of Common Stock that each NEO will earn pursuant to the 2018 PSA grant2020-2022, if any, will be based on the Company's TSR percentile ranking within an EEI company peer groupdetermined at the end of the performance period based both on the Company's actual TSR ranking and the Company's EPS CAGR results at the end of the three-year performance period. The
For the 2018-2020 performance period, the Company had a relative TSR of negative 7.9 percent, which ranked in the 8th percentile among the peer group and other PSA design terms are discussedresulted in the Compensation Discussion and Analysis section beginning on page 39.no payout.
RSUs The number of RSUs awarded to the NEOs in 20182020 is shown in column (i) of the Grants of Plan-Based Awards table on page 49.56. Each RSU entitles the NEO to receive one share of Common Stock when the unit vests at the end of a three-year period. The RSUs granted in 20182020 will vest on December 31, 2020.2022. The NEOs must remain employed by the Company at the time RSUs vest to receive the Common Stock. Dividend equivalents accrue during the vesting period.period, but are paid only if the RSUs vest. Dividend equivalents allow the NEOsNEO to receive the value of dividends that would have been paid on Common Stock during the vesting period, but only if the RSUs vest.period. RSUs and dividend equivalents are paid in Common Stock after the end of the vesting period. UponIf an NEO's retirement, disability,NEO retires, becomes disabled, or death,dies, a prorated number of the RSUs would immediately vest. In the event of a change in control, restrictions in RSU grants will be deemed to have expired upon the change in control and a prorated number of the RSUs would immediately vest, unless the RSU grant is fully assumed by the successor corporation. If the RSU grant were to be fully assumed, a prorated number of RSUs would immediately vest if the NEO's employment were to be terminated by the successor corporation for reasons other than cause within 18 months of the change in control.
The full grant date fair value for RSUs awarded to each NEO is included in the amount shown in column (d)(e) of the Summary Compensation Table on page 47.54. The number of unvested RSUs outstanding at the end of 2018,2020, including dividend equivalents, is shown in column (b) of the following Outstanding Equity Awards at Fiscal Year-End table, while the value of the award as of December 31, 2018,2020, is shown in column (c).
RSUs are also discussed in the CD&A section on pages 3946 and 41.48.
| | | | | | | | | | | | | Outstanding Equity Awards at Fiscal Year-End–2018 | | | (a) | | | (b) | (c) | (d) | (e) | | | | | | Stock Awards | | | Name | | | Number of Shares or Units of Stock That Have Not Vested1 | Market Value of Shares or Units of Stock That Have Not Vested2 | Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested3 | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested4 | | | | | Alan R. Hodnik |
|
| 45,016 |
| $3,431,120 | 54,752 |
| $4,173,197 | | | Robert J. Adams |
|
| 7,481 |
| $570,202 | 13,560 |
| $1,033,543 | | | Bradley W. Oachs |
|
| 7,189 |
| $547,946 | 11,960 |
| $911,591 | | | Bethany M. Owen |
|
| 3,591 |
| $273,706 | 10,862 |
| $827,902 | | | Patrick K. Mullen | | | 3,583 |
| $273,096 | 6,570 |
| $500,765 | | | Deborah A. Amberg |
|
| 6,112 |
| $465,857 | 4,965 |
| $378,432 |
| | | | | | | | | | | | | | | | | | | | | | Outstanding Equity Awards at Fiscal Year-End–2020 | | (a) | | | (b) | (c) | (d) | (e) | | | | Stock Awards | | Name | | | Number of Shares or Units of Stock That Have Not Vested1 | Market Value of Shares or Units of Stock That Have Not Vested2 | Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested3 | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested4 | | | Bethany M. Owen | | | 4,131 | | $255,874 | 4,358 | | $269,935 | | Alan R. Hodnik | | | 14,559 | | $901,784 | 6,113 | | $378,639 | | Robert J. Adams | | | 3,746 | | $232,027 | 3,398 | | $210,472 | | Nicole R. Johnson | | | 1,773 | | $109,820 | 1,698 | | $105,174 | | Steven W. Morris | | | 1,234 | | $76,434 | 1,212 | | $75,071 | | Margaret A. Thickens | | | 785 | | $48,623 | 931 | | $57,666 |
| | 1
| The amounts in column (b) for all NEOs except Ms. Amberg, are comprised of the following: (i) the performance shares earned for the 2016-2018 performance period that the NEOs received in Common Stock on February 1The amounts in column (b) are comprised of RSUs granted on January 22, 2018, January 30, 2019, and (ii) RSUs granted on January 20, 2016, January 23, 2017, and January 22, 2018, plus dividend equivalents. RSUs vest over a three-year period provided the NEO continues to be employed by the Company. For Ms. Amberg, the amount reflects only the performance shares earned for the 2016-2018 performance period and received in Common Stock on February 1, 2019. |
| | 2
| The amounts in column (c) were calculated by multiplying the number of shares and units in column (b) by $76.22, the closing price of Common Stock on December 31, 2018. |
| | 3
| The amounts in column (d) represent the Common Stock that would be payable for outstanding PSAs if superior performance were achieved for the 2017-2019 and 2018-2020 performance periods (a TSR ranking of 85th percentile among the peer group comprised of EEI Stock Index companies as described on page 40). If the performance period had ended on December 31, 2018, performance shares would have been paid for the 2017-2019 performance period at |
134 percent and at 120.3 percentJanuary 30, 2020, plus dividend equivalents. RSUs vest over a three-year period provided the NEO continues to be employed by the Company. No PSAs were earned for the 2018-2020 performance period. period and for that reason those awards are not included.
2 The amount shown for Ms. Amberg reflectsamounts in column (c) were calculated by multiplying the reduced (prorated) amount for which she remained eligiblenumber of units in column (b) by $61.94, the closing price of Common Stock on December 31, given2020. 3 The amounts in column (d) represent the Common Stock that her employmentwould be payable for outstanding PSAs if threshold performance were achieved for the 2019-2021 and 2020-2022 performance periods. For the PSAs based on the TSR metric, this means a TSR ranking at the 30th percentile among the peer group comprised of the EEI Stock Index companies as described beginning on page 46 and for PSAs based on the EPS CAGR metric, this means a four percent average annual EPS growth rate as discussed on page 47). If the performance period had ended on December 31, 2020, no PSAs would have been earned for the 2019-2021 performance period or the 2020-2022 performance period. November 28, 2018.
| | 4 4 The amounts in column (e) were calculated by multiplying the number of shares and units in column (d) by $61.94, the closing price of Common Stock on December 31, 2020.
| The amounts in column (e) were calculated by multiplying the number of shares and units in column (d) by $76.22, the closing price of Common Stock on December 31, 2018. |
| | | | | | | | | | Option Exercises and Stock Vested–2020 | | (a) | (b) | (c) | | Stock Awards | | Name | Number of Shares Acquired on Vesting1 | Value Realized on Vesting2 | | Bethany M. Owen | 955 | $80,365 | | Alan R. Hodnik | 5,309 | $446,594 | | Robert J. Adams | 1,168 | $98,254 | | Nicole R. Johnson | 421 | $35,412 | | Steven W. Morris | 421 | $35,412 | | Margaret A. Thickens | 112 | $9,449 |
1 The amounts reflect the RSUs that vested at the end of the 2017-2019 vesting period, which were paid in Common Stock on January 30, 2020. All amounts shown have been rounded to the nearest whole share, whereas actual Common Stock payments included fractional shares. 2 The value realized on vesting, shown in column (c), was calculated by multiplying the number of shares acquired on vesting, as shown in column (b), by $84.12, the closing price of Common Stock on the January 30, 2020 payment date.
| | | | | Option Exercises and Stock Vested–2018 | | (a) | (b) | (c) | | | Stock Awards | | Name | Number of Shares Acquired on Vesting1 | Value Realized on Vesting2 | | Alan R. Hodnik | 4,532 | $319,778 | | Robert J. Adams | 499 | $35,209 | | Bradley W. Oachs | 755 | $53,273 | | Bethany M. Owen | 332 | $23,426 | | Patrick K. Mullen | 332 | $23,426 | | Deborah A. Amberg | 3,048 | $234,742 |
| | | | | | | | | | | | | Pension Benefits–2020 | | (a) | (b) | (c) | (d) | Name1 | Benefit Plan | Number of Years Credited Service2 | Present Value of Accumulated Benefit3 | | Bethany M. Owen | Nonunion Pension Plan | 4.42 | $153,306 | | SERP II | 16.50 | $550,889 | | Alan R. Hodnik | Nonunion Pension Plan | 11.75 | $546,797 | | Union Pension Plan | 12.75 | $1,323,367 | | SERP II | 36.75 | $9,263,428 | | Robert J. Adams | Nonunion Pension Plan | 19.67 | $839,890 | | SERP II | 31.92 | $1,541,120 | | Nicole R. Johnson | Nonunion Pension Plan | 9.25 | $202,783 | | Steven W. Morris | Nonunion Pension Plan | 5.67 | $216,138 | | SERP II | 17.92 | $267,687 |
| | 1
| The amounts reflect the RSUs that vested at the end of the 2015-2017 vesting period, which were paid in Common Stock on February 1, 2018. All numbers shown have been rounded to the nearest whole share, whereas actual Common Stock payments included fractional shares. Ms. Amberg's total amount also includes 1,183 RSUs granted on January 22, 2016, 593 RSUs granted on January 23, 2017, and 265 RSUs granted on January 22, 2018, all of which vested in connection with her separation from service on |
November 28, 2018, but have1 Ms. Thickens is not been paidincluded in the table above because they are subject,she is not eligible for qualified or non-qualified pension benefits having joined the Company after September 30, 2006, when pension retirement benefits under Tax Code Section 409A,both the qualified and non-qualified plans were closed to a non-elective,new participants.
six-month delay. Ms. Amberg's vested but not yet paid RSUs will continue to earn dividend equivalents until they are paid.
| | 2 2 | The value realized on vesting (shown in column (c)) is calculated by multiplying the number of shares acquired on vesting (as shown in column (b)) by $70.56, the closing price of Common Stock on the February 1, 2018 payment date, except that the portion of Ms. Amberg's RSUs that vested in 2018 in connection with her separation from service but have not yet been paid are valued using $80.20, the closing price of Common Stock on November 28, 2018. |
| | | | | | | Pension Benefits–2018 | | (a) | (b) | (c) | (d) | (e) | | Name | Benefit Plan | Number of Years Credited Service1 | Present Value of Accumulated Benefit2 | Payments During Last Fiscal Year | | Alan R. Hodnik | Nonunion Pension Plan | 11.75 | $396,812 | — | | | Union Pension Plan | 12.75 | $960,368 | — | | | SERP II | 36.75 | $5,916,459 | — | | Robert J. Adams | Nonunion Pension Plan | 19.67 | $565,298 | — | | | SERP II | 31.92 | $639,086 | — | | Bradley W. Oachs | Nonunion Pension Plan | 17.08 | $624,559 | — | | | SERP II | 29.25 | $842,639 | — | | Bethany M. Owen | Nonunion Pension Plan | 4.42 | $102,012 | — | | | SERP II | 16.50 | $153,117 | — | | Patrick K. Mullen | Nonunion Pension Plan | 15.92 | $431,056 | — | | | SERP II | 28.08 | $278,888 | — | | Deborah A. Amberg | Nonunion Pension Plan | 16.25 | $440,331 | $1,941 | | | SERP II | 28.25 | $818,917 | — |
| | 1
| The numbers in column (c) for SERP II reflect actual years of service with the Company. No service has been credited under nonunion defined-benefit pension plan since September 30, 2006. Mr. Hodnik's credited service under the union |
defined-benefit pension plan reflects thehis actual years thatof service in a union position. The numbers in column (c) for SERP II reflect years of service with the Company through December 31, 2018.
3 The amounts shown in column (d) represent the discounted net present value of the annual annuity payments to which the NEO would be entitled at retirement assuming she or he was a participant inretires at age 62, the earliest age at which NEOs can receive unreduced pension benefits. In addition to retirement age, the following assumptions were used to calculate the present value of accumulated benefits: discount rate of 2.54 percent; cost of living adjustment of 1.9 percent; and female spouses are assumed to be three years younger than male spouses. The amounts for all NEOs reflect the accumulated pension benefits over the years of credited service shown for each plan. | | 2
| For the NEOs, except for Ms. Amberg, the amounts shown in column (d) represent the discounted net present value of the annual annuity payments to which each NEO would be entitled at retirement assuming he or she retires at age 62, the earliest age at which NEOs can receive unreduced pension benefits. Because Ms. Amberg was retirement eligible when her employment ended on November 28, 2018, the amounts shown for her represent the discounted net present value of the annuity payments paid on her behalf after her employment ended. In addition to retirement age, the following assumptions were used to calculate the present value of accumulated benefits: discount rate of 4.39 percent; cost of living adjustment of 1.9 percent; and female spouses are assumed to be three years younger than male spouses. The amounts reflect the accumulated pension benefits over the years of credited service shown for each plan. |
PENSION BENEFITS DISCUSSION
ALLETE's nonunion defined-benefit pension is intended to be tax-qualified and covers some of our nonunion employees, including the NEOs.all NEOs, except Ms. Thickens. Pension benefits are calculated based on years of service and final average earnings. As a result of a company-wide nonunion benefit change, no employee including any NEO, accrued additional credited service for nonunion pension benefits after September 30, 2006. In 2018, additional changes were made to all participating nonunion employees' pension benefits to freeze final average earnings as of November 30, 2018. The nonunion pension benefit is calculated as a life annuity using the following formula:
| | | | | | | | | | | | | | | | | | | | | | | | | 0.8% | × | (years of credited service from July 1, 1980
through September 30, 2006)
| | × | final average earnings through November 30, 2018* | | plus (for NEOs hired before July 1, 1980): | | 10% | + | (1% × years of credited service
prior to July 1, 1980)
| | × | final average earnings through November 30, 2018* |
* Final average earnings includes the highest consecutive 48 months of salary in the fifteen-year period ending on November 30, 2018.
Mr. Hodnik is also entitled to a union defined-benefit pension based on bargaining unit positions he previously held with the Company. UnionThe union defined-benefit pension benefits areis also designed to be
tax-qualified and cover the majoritycovers a portion of our unionbargaining unit employees. Mr. Hodnik's credited service for purposes of his union defined-benefit pension reflects the actual years that he wasserved in a participant in the union pension plan.position. This benefit is calculated as a life annuity using the following formula:
| | | | | | | | | | | | | | | | | | | | | | 10% | + | (1% × years of credited service) | | × | final average earnings through November 30, 2018* |
* Final average earnings includes the highest consecutive 48 months of salary in the ten-year period ending on November 30, 2018.
The remaining terms of the union pension benefits areplan benefit is substantially the same as the terms of the nonunion pension benefitsplan benefit (and the plans are collectively referred to as the "Retirement Plans").
Normal retirement age under the Retirement Plans is age 65 with at least five years of continuous service with the Company. NEOs become eligible for an unreduced early-retirement benefit at age 62 if they have at least 10 years of continuous service, or at age 58 if they have at least 40 years of continuous service. NEOs are first eligible for a reduced early-retirement benefit at age 50 with at least 10 years of continuous service. Early-retirement benefits are calculated by reducing the retirement benefit by 4 percent for each year and partial year between age 62 and the early-retirement benefit commencement age. Each eligible NEO, except Ms. Johnson, is currently eligible to receive early-retirement
early retirement benefits.
The normal form of benefit payment under the nonunion pension plan for a married participant is a life annuity with a 60 percent surviving spouse benefit. The normal form of benefit payment under the union pension plan for a married participant is a life annuity with a 50 percent surviving spouse benefit. The normal form of payment for single participants under boththe Retirement Plans is a life annuity. At normal retirement age, each optional form of benefit payment is the actuarial equivalent of the normal form of benefit payment for boththe Retirement Plans. The Retirement Plans do not provide for lump sum distributions unless the lump sum equivalent value is $10,000 or less. Once pension benefit payments have commenced, the benefit adjusts in future years to reflect changes in cost of living, with a maximum adjustment of 3three percent per year.
The Tax Code limits both the annual earnings that may be considered in calculating benefits under the Retirement Plans and the annual benefit amount that the Retirement Plans may deliver to an NEO. The SERP plans are designed to provide supplemental pension benefits, paid out of general Company assets, to eligible executives including the NEOs in amounts sufficientgenerally designed to maintain total pension benefits upon retirement at the level that would have been provided by our Retirement Plans if those benefits were not restricted by the Tax Code.
The SERP formula is calculated as follows: | | | | | | | | | | | | | | | | | | | | | | | | | 0.8% | × | (years of credited service from July 1, 1980 through retirement or, if earlier, December 31, 2018) | | × | SERP final average earnings* | | plus, for NEOs hired before July 1, 1980: | | 10% | + | (1% x years of credited service prior to
July 1, 1980)
| | × | SERP final average earnings* |
* SERP final average earnings includes the sum of the NEO's (i) annual salary in excess of the Tax Code limits imposed on nonunion qualified retirement benefits and (ii) annual incentive awards over the highest consecutive 48-month period. The highest consecutive 48-month period for (i) and (ii) above can be different; both, however, must fall within the last 15 years of service.
The present value of eacheligible NEO's SERP pension benefit as of December 31, 2018,2020, is shown in the Pension Benefits table on page 53.61. The 20182020 increase in the SERP II pension benefit value for each eligible NEO is included in column (f)(g) of the Summary Compensation Table on page 47.54.
Each eligible NEO has elected a date when hisher or herhis SERP retirement benefit payments will commence and has elected the form of benefit payment. The normal form of payment for SERP II is a 15-year annuity. The optional forms of payment for SERP II benefits are a life annuity or a lump sum, each of which is actuarially equivalent to the normal form of payment.
SERP II benefits vest and become payable only if the NEO (i) retires after reaching age 50 with 10 years of service, (ii) becomes disabled after reaching age 50 with 10 years of service, or (iii) reaches age 50 after becoming disabled with 10 years of service. Vested SERP II benefit payments commence upon the earlier of retirement or disability, or, if a disability occurs prior to vesting, the earlier of attaining age 65 or the date of death. Payment of the SERP II benefits accrued after December 31, 2004 would be accelerated and paid as a lump sum upon a termination of employment in connection with a change in control.
In all other respects, the eligibility requirements for SERP retirement benefits and the calculation of SERP early retirement benefits are the same as Retirement Plan A'sthe nonunion pension plan's eligibility requirements and early retirement benefits discussed above.
On December 31, 2004, the Company froze SERP I with respect to all plan benefits. Effective January 1, 2005, the Company established SERP II to comply with Section 409A of the Tax Code. SERP II covers compensation initially deferred, and supplemental pension and supplemental defined contribution benefits accrued or vested, after December 31, 2004.
Effective October 1, 2006, the Company froze eligibility for supplemental pension benefits under SERP II. Individuals who were not SERP II participants and eligible for supplemental pension benefits on September 30, 2006, are not eligible for supplemental pension benefits.
Supplemental executive retirement benefits were reviewed in 2018 in light of Company cost competitiveness and benchmarking data. Credited service for calculating the supplemental pension benefits was frozen as of December 31, 2018. In addition, amounts an NEO defers to her or his SERP II deferral account after December 31, 2018, will no longer receive a fixed annual interest crediting rate and will instead be credited or debited with notional gains or losses until the balance has been paid in full. In response to changes in the tax law discussed on page 52, SERP II was also amended in 2018, effective January 1, 2019, to eliminate the provision that required a non-elective deferral of the portion of a participant's AIP that the Company could not deduct by application of Section 162(m) of the Tax Code.
As of December 31, 2018,2020, all NEOs, except Ms. Johnson and Ms. Thickens, have vested SERP retirementsupplemental pension benefits. Because Ms. Johnson and Ms. Thickens were not eligible to participate in SERP II before September 30, 2006, they are not eligible for SERP supplemental pension benefits.
| | | | | | | | | | | | Non-Qualified Deferred Compensation–2018 | | (a) | (b) | (c) | (d) | (e) | (f) | (g) | | Name | Plan | Executive
Contributions
in 20181 | Company
Contributions
in 20182 | Aggregate Earnings in 20183 | Aggregate
Withdrawals or Distributions in 2018 | Aggregate Balance as of
December 31, 20184 | | Alan R. Hodnik | SERP I | — |
| — |
| $(6,656) | — |
| $348,187 | | | SERP II | $31,550 | $808,328 | $(74,058) | — |
| $2,308,245 | | Robert J. Adams | SERP I | — |
| — |
| $(5,759) | — |
| $121,606 | | | SERP II | — |
| $22,035 | $(5,799) | — |
| $83,803 | | Bradley W. Oachs | SERP I | — |
| — |
| $(2,461) | — |
| $49,406 | | | SERP II | $11,384 | $22,463 | $(28,733) | — |
| $728,214 | | Bethany M. Owen | SERP I | — |
| — |
| $(8,264) | — |
| $67,606 | | | SERP II | — |
| $12,013 | $(14,353) | — |
| $122,285 | | Patrick K. Mullen | SERP I | — |
| — |
| $(15,080) | — |
| $192,082 | | | SERP II | — |
| — |
| $(36,776) | — |
| $546,898 | | Deborah A. Amberg | SERP I | — |
| — |
| $939 | $70,328 | $17,453 | | | SERP II5 | — |
| — |
| $(4,681) | — |
| $964,849 |
| | 1
| The amounts shown in column (c) includes the salary that was earned (as reported in column (c) of the Summary Compensation Table on page 47) and deferred in 2018:Mr. Hodnik—$31,550, and Mr. Oachs—$11,384.
|
| | 2
| The amounts shown in column (d) includes the following: (i) SERP annual make-up award that was earned in 2018 and automatically deferred in 2019 (reported in column (g) of the Summary Compensation Table on page 47): |
Mr. Hodnik—$81,422, Mr. Adams—$22,035, Mr. Oachs—$22,463, and Ms. Owen—$12,013; and (ii) for Mr. Hodnik, the amount reflects $726,906 of the 2018 annual incentive award that was automatically deferred in 2019 (reported in
column (e) of the Summary Compensation Table on page 47).
| | 3
| The amounts in column (e) represent unrealized and realized gains or losses based on the crediting rates associated with the investment funds selected by each NEO. |
| | 4
| The aggregate balances shown for SERP II include compensation that was earned and deferred in 2016 and 2017, and reported in the Summary Compensation Table under the applicable year in the following cumulative amounts: |
Mr. Hodnik—$612,361, Mr. Adams— $12,126, Mr. Oachs—$179,083, and Ms. Amberg—$166,733. These amounts have since been adjusted for investment performance (i.e., earnings and losses) and deferrals credited during 2018. The aggregate balances shown for the SERP I include compensation that was previously earned and reported in the Summary Compensation Table prior to 2009; those balances have been adjusted subsequently for investment performance.
5 In connection with her separation from service on November 28, 2018, Ms. Amberg will receive SERP II distributions beginning in 2019; she received no SERP II distributions in 2018 because they are subject, under Tax Code Section 409A, to a non-elective, six-month delay. Ms. Amberg will earn interest on her SERP II balance until it is distributed in full.
ALLETE provides a supplemental defined contribution benefit and a deferral account benefit to the NEOs. The SERP II supplemental defined contribution benefit provides a benefit that is substantially equal to the benefit the NEO would have been entitled to receive if the Tax Code did not impose limitations on the types and amounts of compensation that can be included in the benefit calculations under the ALLETE and Affiliated Companies Flexible Compensation Plan and the RSOP. Annually, each NEO may elect to defer some or all of her or his salary and annual incentive award to a SERP II deferral account, on a before-tax basis, some or all of his or her salary and annual incentive award.account. NEOs whose base salary is below the tax-qualified benefit plan'splans' annual compensation limitslimit may also elect to defer some or all of the SERP II defined contribution benefit. NEOs can select among different crediting rates to apply to deferral balances under the SERP Plans which primarilyand the investment options generally match the investment options available to all employees under the RSOP. These investment options include mutual funds and similar investments. The NEOs may change their investment elections at any time. The amount of the 20182020 SERP II defined contribution benefit received by each NEO is included in column (h) of the Summary Compensation Table on page 47.54. The aggregate amount each NEO elected to defer and the amount that the Company contributed to the SERP II in 20182020 are shown in the Non-Qualified Deferred Compensation table above.on page 65.
Each NEO has elected a date when benefit payments from hisher or herhis SERP I and SERP II deferral accounts will commence and has elected the form of benefit payment. Generally, SERP I and SERP II deferral account benefit payments will not begin earlier than the elected commencement date. However, for contributions made prior to January 1, 2005, the full SERP I deferral account balance will be paid prior to the scheduled commencement date to any NEO who is not retirement eligible under the pension plans to retire at the time he or she terminates employment with the Company. In addition, anAn NEO may request an early distribution of some or all of hisher or herhis SERP I deferral account balance upon a demonstrated severe financial need or, at any time prior to the elected commencement date, may elect an early withdrawal of contributions made to hisher or herhis account prior to January 1, 2005, subject to a 10 ten percent early withdrawal penalty.
An NEO isNEOs may not allowed to elect to receive an early withdrawal of amounts contributed to her or his SERP II deferral account after December 31, 2004, to his or her SERP II deferral account, except that heshe or shehe may request early withdrawal in the event of an unforeseen emergency, which request is subject to the approval of the ECC. Contributions made to a SERP II deferral account after December 31, 2004, willwould be paid in full upon a termination of the NEO's employment in connection with a change in control.
NEOs may elect to receive his or hertheir SERP deferral account balance in the form of either a lump sum payment or monthly installments over a 5-, 10-, or 15-year period, or a combination of lump sum payment and monthly installments.
The NEOsNEOs' SERP balances for deferrals made on or before December 31, 2018, will receive a fixed
7.5 percent annual interest crediting rate until paid in full; balancebalances for deferrals made on or after
January 1, 2019, will be will be credited or debited with notional gains or losses until the balance has been paid in full.
| | | | | | | | | | | | | | | | Non-Qualified Deferred Compensation–2020 | | (a) | (b) | (c) | (d) | (e) | | Name | Plan | Company Contributions in 20201 | Aggregate Earnings in 20202 | Aggregate Balance as of December 31, 20203 | | Bethany M. Owen | SERP I | — | $11,683 | $95,814 | | SERP II | $59,200 | $8,645 | $223,396 | | | | | | | Alan R. Hodnik | SERP I | — | $12,578 | $430,766 | | SERP II | $106,332 | $131,942 | $4,089,681 | | | | | | | Robert J. Adams | SERP I | — | $22,361 | $172,878 | | SERP II | $47,145 | $17,906 | $192,981 | | | | | | | Steven W. Morris | SERP I | — | $662 | $6,231 | | SERP II | — | $140,837 | $1,332,094 |
1 The amounts shown in column (c) reflect SERP annual make-up awards that were earned in 2020 and automatically deferred in 2021 (reported in column (h) of the Summary Compensation Table on page 54). 2 The amounts in column (d) represent unrealized and realized gains or losses based on the crediting rates associated with the investment funds selected by each NEO. 3 The aggregate balances shown for SERP II include compensation that was earned and deferred in 2018 and 2019, and reported in the Summary Compensation Table under the applicable year in the following cumulative amounts: Ms. Owen—$44,050, Mr. Hodnik—$1,335,523, Mr. Adams— $69,742, and Mr. Morris—$12,139. These amounts have since been adjusted for investment performance (i.e., earnings and losses) and deferrals credited during 2020. The aggregate balances shown for the SERP I include compensation that was earned prior to 2009; those balances have been adjusted subsequently for investment performance.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The NEOs are covered by the CIC Severance Plan covers each NEO.Plan. Under the CIC Severance Plan, a change in control generally means any one of the following events:
•Acquisition of more than 50 percent of the total fair market value or total voting power of Common Stock by any person, entity, or group acting together; •Acquisition in any 12-month period of 40 percent or more of the Company's assets by any person, entity, or group acting together; •Acquisition in any 12-month period of 30 percent or more of the total voting power of Common Stock by any person, entity, or group acting together; or •A majority of members of the Board is replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of appointment or election.
Each NEO is entitled to receive specified benefits in the event hisher or herhis employment is involuntarily terminated during the period beginning six months before and ending two years after a change in control. An involuntary termination is deemed to occur if (i) the Company terminates the employment of the NEO other than for cause, or (ii) the NEO resigns from hisher or herhis employment with good reason. Cause generally includes reasons such as failure to perform duties, willful misconduct, or felony convictions. Good reason generally means a material reduction in the NEO's responsibilities or authority; a material reduction in hisher or herhis supervisory responsibilities or authority; a material reduction in base salary, incentive compensation, or other benefits; a material breach by the Company of an agreement under which an NEO provides services; or reassignment to another geographic location more than 50 miles from the NEO's current job location.
Under the CIC Severance Plan, all NEOsif a triggering event had occurred on December 31, 2020, Ms. Owen, Mr. Hodnik, and Mr. Adams would be entitled to receive a lump sum severance payment of 2.5equal to two and one-half times their annual compensation as of December 31, 2018.2020. Ms. Johnson, Mr. Morris, and Ms. Thickens would be entitled to a payment equal to two times their annual compensation as of December 31, 2020. Annual compensation includes base salary and an amount representing a target award under the annual incentive in effect for the year of termination. The CIC Severance Plan has a modified severance payment cap that limits payments to a level below the safe harbor amount provided by Tax Code Section 280G if the NEO would retain a greater after-tax amount than the after-tax amount that would be retained if the Company paid an unreduced benefit that was subject to the excise tax.
The AIP and LTIP also have change in control features. Under the AIP, in the event of a change in control (as defined in the AIP), any award earned based on actual results as of the date of the change in control will be prorated based on the number of months in the performance year elapsed as of the date of the change in control. Under the LTIP, in the event of a change in control (as defined in the LTIP), restrictions in RSU grants would be deemed to have expired upon the change in control and a prorated number of the RSUs would immediately vest, unless the RSU grants were fully assumed by the successor corporation. If the RSU grants were fully assumed, a prorated number of RSUs would immediately vest if the NEO's employment was terminated by the successor corporation for reasons other than cause within 18 months of the change in control. If a change in control were to occur, PSAs would immediately pay out on a prorated basis at the greater of target level or the level earned, based on then-current actual TSR ranking.ranking and, with respect to the 2020-2022 performance period, then-current EPS CAGR results.
As a condition of receiving payments under the CIC Severance Plan, participants must sign a waiver of potential claims against the Company and must agree not to disclose confidential information, engage in any business in competition with the Company for a period of one year, recruit any employee or Director of the Company for employment for a period of two years, or publicly criticizedisparage the Company.
Estimated Potential Payments Upon Termination Associated with a Change in Control The table below illustrates the value that would have been received by the NEONEOs if a change in control had occurred on December 31, 2018,2020, and if, as a result, the NEO's employment had been terminated on the same date. Ms. Amberg is not included | | | | | | | | | | | | | | | | | | | | | | Ms. Owen | Mr. Hodnik | Mr. Adams | Ms. Johnson | Mr. Morris | Ms. Thickens | Severance Payment1 | $2,457,813 | $2,208,440 | $1,701,893 | $874,150 | $812,232 | $874,837 | Annual Incentive Plan2 | — | | — | | — | | — | | — | | — | | Performance Shares3 | $240,493 | $504,811 | $210,947 | $100,342 | $70,219 | $42,016 | Unvested RSUs4 | $149,833 | $585,457 | $157,100 | $70,756 | $48,086 | $22,236 | SERP II Pension5 | — | | — | | — | | — | | — | | — | | SERP II Defined Contribution5 | — | | — | | — | | — | | — | | — | | Benefits6 | $41,832 | $81,978 | $66,818 | $61,867 | $52,548 | $51,460 | Outplacement Services7 | $25,000 | $25,000 | $25,000 | $25,000 | $25,000 | $25,000 | Total Payments8 | $2,914,971 | $3,405,686 | $2,161,758 | $1,132,115 | $1,008,085 | $1,015,549 |
1 The values for severance payments were calculated based on December 31, 2020, base salary, target annual incentive, and the applicable severance benefit multiple of salary. Under the CIC Severance Plan, if payments constitute "excess parachute payments" within the meaning of Tax Code Section 280G, the payments would be reduced only if the executive would receive a greater net after-tax benefit than she or he otherwise would receive with no reduction in the table because she left servicepayments. The amounts shown above reflect no such reductions. 2 The performance period ended on November 28, 2018.December 31, 2020. Therefore, no benefit acceleration would have occurred under this scenario. | | | | | | | | | | | |
| Mr. Hodnik |
| Mr. Adams |
| Mr. Oachs |
| Ms. Owen |
| Mr. Mullen |
| Severance Payment1 | $3,161,040 | $1,429,426 | $1,428,796 | $1,108,165 | $929,531 | Annual Incentive Plan2 | — |
| — |
| — |
| — |
| — |
| Performance Shares3 | $3,560,290 | $630,337 | $598,765 | $347,919 | $254,022 | Unvested RSUs4 | $372,244 | $88,498 | $78,876 | $71,399 | $44,651 | SERP II Pension5 | — |
| — |
| — |
| — |
| — |
| SERP II Defined Contribution5 | — |
| — |
| — |
| — |
| — |
| Benefits6 | $69,870 | $56,310 | $56,580 | $35,660 | $33,570 | Outplacement Services7 | $25,000 | $25,000 | $25,000 | $25,000 | $25,000 | Total Payments8 | $7,188,444 | $2,229,571 | $2,188,017 | $1,588,143 | $1,286,774 |
| | 1
| The values for severance payments were calculated based on December 31, 2018, base salary, target annual incentive, and the applicable severance benefit multiple of salary. Under the CIC Severance Plan, if payments constitute "excess parachute payments" within the meaning of Tax Code Section 280G, the payments would be reduced only if the executive would receive a greater net after-tax benefit than he or she otherwise would receive with no reduction in payments. The amounts shown above reflect no such reductions. |
| | 2
| The performance period ended on December 31, 2018. Therefore, no benefit acceleration would have occurred under this scenario. |
3 Outstanding performance shares for the 2016-2018, 2017-2019,2018-2020, 2019-2021, and 2018-20202020-2022 performance periods would accelerate under this scenario. Under the LTIP, if a change in control occurs,and employment termination were to occur, performance shares would be paid on a prorated basis based on the number of months that had transpired as of December 31, 2020 for each applicable three-year performance period and using the greater of actual performance or target as of December 31, 2018.2020. The award values shown assume performance shares would be prorated, as applicable, as of December 31, 2018reflect the proration, were calculated at target, and paid as follows: at 188.6 percent of target forreflect the 2016-2018 performance period; at 134 percent of target for the 2017-2019 performance period; and at 120.3 percent of target for the 2018-2020 performance period. Award values were based on the $76.22$61.94 closing price of Common Stock on December 31, 2018.2020. | | 44 Under the LTIP, if a change in control and employment termination were to occur, unvested RSUs would vest and be payable on a prorated basis based on the number of months that had transpired between the start of the three-year vesting period and December 31, 2020 relative to the full three-year vesting period. The values shown reflect the $61.94 closing price of Common Stock on December 31, 2020. | The award values for RSUs were calculated and prorated as of the date of the change in control using $76.22, the closing price of Common Stock on December 31, 2018. |
| | 5
| The CIC Severance Plan does not provide for any additional age or service credit for supplemental executive retirement benefits. |
| | 6
| The values for benefit payments were based on the applicable severance multiplier times the sum of (i) medical, dental, and basic group term life insurance benefit premiums, and (ii) Company contributions under the Flexible Compensation Plan. |
| | 7
| The Company will pay outplacement service providers directly up to the amount shown for the cost of outplacement services provided to the NEOs. No amount will be paid unless the NEO chooses to utilize outplacement services within the time frame specified in the CIC Severance Plan. |
| | 8
| The CIC Severance Plan provides that if payments are delayed as a result of Tax Code Section 409A, interest is required to be paid at the short-term applicable federal rate. The amounts shown exclude interest. |
5 The CIC Severance Plan does not provide for any additional age or service credit for supplemental executive retirement benefits under the SERP. 6 The values for benefit payments were based on the applicable severance multiplier times the sum of (i) medical, dental, and basic group term life insurance benefit premiums, and (ii) Company contributions under the Flexible Compensation Plan. 7 The Company will pay outplacement directly to service providers up to the amount shown for the cost of outplacement services provided to the NEOs. No amount will be paid unless the NEO utilizes outplacement services within the time frame specified in the CIC Severance Plan. 8 The CIC Severance Plan provides that if payments are delayed as a result of Tax Code Section 409A, interest is required to be paid at the short-term applicable federal rate. The amounts shown exclude interest.
Estimated Potential Payments Upon Termination Due to Retirement, Disability, or Death NEOsIf an NEO were to retire, become disabled, or die, she or he would become entitled to areceive prorated PSA after their retirement, disability, or deathPSAs if TSR performancePSA goals are achieved at the conclusion of the applicable three-year performance period. The LTIP also provides for immediate, accelerated vesting of RSUs, on a prorated basis, upon an NEO's retirement, disability, or death. The following table illustrates the value the NEOs would have received in connection with accelerated vesting and payments triggered by a retirement, disability, or death had the event occurred on December 31, 2018. The amount shown2020.
| | | | | | | | | | | | | | | | | | | | | | Ms. Owen | Mr. Hodnik | Mr. Adams | Ms. Johnson | Mr. Morris | Ms.Thickens | Annual Incentive1 | — | | — | | — | | — | | — | | — | | Performance Shares2 | — | | — | | — | | — | | — | | — | | Unvested RSUs3 | $149,833 | $585,457 | $157,100 | $70,756 | $48,086 | $22,236 | | Total Payments | $149,833 | $585,457 | $157,100 | $70,756 | $48,086 | $22,236 |
1 Because the annual performance period ended on December 31, 2020, no acceleration of benefits would have occurred. 2 Outstanding performance shares for Ms. Amberg reflects what she received, or is eligible to receive, in connection with her employment ending on November 28, 2018. | | | | | | | | | | | | | | | | Mr. Hodnik |
| Mr. Adams |
| Mr. Oachs |
| Ms. Owen |
| Mr. Mullen |
| Ms. Amberg |
| Annual Incentive1 | — |
| — |
| — |
| — |
| — |
| — |
| Performance Shares2 | $3,560,290 | $630,337 | $598,765 | $347,919 | $254,022 | $734,661 | Unvested RSUs3 | $372,244 | $88,498 | $78,876 | $71,399 | $44,651 | $163,675 | Severance4 | — |
| — |
| — |
| — |
| — |
| 396,369 |
| | Total Payments | $3,932,534 | $718,835 | $677,641 | $419,318 | $298,673 | $1,294,705 |
| | 1
| Because the performance period ended on December 31, 2018, no acceleration of benefits would have occurred. |
| | 2
| Outstanding performance shares for the performance periods 2016-2018, 2017-2019, and 2018-2020, 2019-2021, and 2020-2022 would be earned on a prorated basis under this scenario if TSR performance goals were achieved at the conclusion of each three-year performance period. The award values shown assume performance shares would have been earned based on TSR performance of 188.6 percent of target for the 2016-2018 performance period, 134 percent of target for the 2017-2019 performance period, and 120.3 percent of target for the 2018-2020 performance period through December 31, 2018. For all NEOs except Ms. Amberg, award values were calculated using $76.22, the closing share price on December 31, 2018. |
Ms. Amberg separated from service on November 28, 2018, and was eligible to receive a prorated paymentbasis under this scenario if TSR and EPS CAGR performance goals were achieved at the LTIPconclusion of each
three-year performance targets were achieved. Ms. Amberg's grant for the 2016-2018 performance period was prorated at 35/36, her grant for the 2017-2019 performance period was prorated at 23/36, and her grant for the 2018-2020 performance period was prorated at 11/36. Ms. Amberg'speriod. The award values shown assume no payout for all three of the performance periods based on actual performance through December 31, 2020.
3 The award values for RSUs were calculated using $80.20,and prorated based on the $61.94 closing share price on December 31, 2020. November 28, 2018.
| | 3
| For all NEO's except Ms. Amberg, the award values for RSUs were calculated and prorated based on the $76.22 closing share price on December 31, 2018. Ms. Amberg's outstanding RSUs vested on a pro rata basis when her employment ended on November 28, 2018. Ms. Amberg's 2016 grant was prorated at 35/36, 2017 grant at 23/36, and her 2018 grant was prorated at 11/36. Ms. Amberg's award values were calculated using $80.20, the closing share price on |
November 28, 2018.
| | 4
| Amount shown was paid or accrued in connection with a separation agreement between the Company and Ms. Amberg as follows: (1) a lump-sum payment of $344,866; (2) 18 months of Company-paid health care premiums and life insurance premiums; (3) $10,000 for outplacement services; and (4) $5,000 for tax consulting and financial planning services. |
CEO PAY RATIO
Employees drive ALLETE’s success. Our compensation strategy is designed to compensate all employees appropriately and competitively. WeWhen determining employee compensation, we consider multiple factors including market data, job responsibilities, experience, performance, and internal equity when determining employee pay.equity.
Because ALLETE's employee population changed in 2018 enough to result in a change toFor purposes of this CEO pay ratio disclosure, we identified a newhave used the same median employee identified last year. Because there has been no material change in our employee population or our employee compensation arrangements, and there have been no material changes in the median employee's circumstances, we believe that using the same median employee is appropriate for 2018.our 2020 pay ratio disclosure. ALLETE's median employee was identified in 2019 by computing the median annual W-2 Medicare reported wages for all employees, other than the CEO,then-CEO, who were employed on December 21, 2018,20, 2019, which was the last day of ALLETE's 20182019 payroll reporting period. We did not make assumptions, adjustments, or estimates; nor did we annualize compensation for any full-time employee who was not employed for all of 2018.2019. We then calculated the median employee's 2020 annual total compensation using the same methodology used to report the NEO's compensation in the Summary Compensation Table on page 47.54.
TheBoth Ms. Owen and Mr. Hodnik served as CEO (non-concurrently) in 2020. Ms. Owen, who was elected CEO on February 3, 2020, held the position for 332 days of the year and Mr. Hodnik for 33 days. We calculated the CEO's 2020 annual total compensation reportedby calculating the compensation provided to Ms. Owen and Mr. Hodnik for the time they each served as CEO and then combining the two figures. Specifically, we prorated the respective amounts of 2020 salary, annual bonus, change in column (h)pension value and all other compensation by the portion of the Summary Compensation Tableyear in which they served as CEO, applying the increased salary for Ms. Owen in connection with her promotion. Ms. Owen's equity awards were included in full (and Mr. Hodnik in 2018 is $3,493,458. This amount is 36Hodnik's excluded), as she was serving as CEO on the annual grant date and only her award was designed to reflect that role. Using this methodology, the CEO's 2020 total compensation was $2,067,829, or 19 times that of the median employee’s total 2020 compensation of $97,018.$108,922.
We believe the foregoing pay ratio disclosure is a reasonable estimate calculated in a manner consistent with Securities and Exchange Commission Item 402(u) of Regulation S-K. The SEC rules for identifying the median employee and calculating that employee’s annual total compensation allow companies to make reasonable assumptions and estimates, and to apply a variety of methodologies and exclusions that reflect their compensation practices. As a result, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different compensation practices, may utilize assumptions, adjustments, or estimates, and also may employ different methodologies and exclusions in calculating their own pay ratios.
DIRECTOR COMPENSATION
The ECC has primary responsibility for developing and evaluating the non-employee Director compensation programs,program, which areis then approved by the Board.
The ECC reviews non-employee Director compensation annually. The ECC receives adviseadvice from its independent compensation consultant, Pearl Meyer, to help ensure that non-employee Director compensation is market based,market-based, aligned with shareholder interests, and consistent with our compensation principles. Pearl Meyer reviews each director compensation program element and total director compensation, comparing those to the director compensation of the same group of peer companies used to evaluatein connection with designing ALLETE's executive compensation. See “Process for Determining Executive Compensation," page 40,39, for athe list of the peer group companies. Pearl Meyer also examines director compensation data from similarly-sized companies in all industries. The ECC reviews Pearl Meyer's benchmarking report and determines whether to recommend to the Board any changes to non-employee Director compensation.
Based on its review and evaluation in 2018,December 2019, the ECC determined that non-employee Director compensation was below the market median. To align withcompensation more closely to the Company's focus on competitiveness, however, no changes were implementedmarket median, effective January 1, 2020, the Board approved a fifteen percent increase to the stock retainer ($93,000 compared to $80,850 in 2019) and cash retainer ($75,000 compared to $65,100 in 2019) for non-employee Director compensation for 2018.Directors. The Board also approved, effective January 1, 2020, a $9,900 increase to the Lead Director's cash retainer ($115,000 compared to $105,100 in 2019).
The following table sets forth the non-employee Director compensation earned in 2018:2020: | | | | | | | | | | | | | Director Compensation—2020 | | (a) | (b) | (c) | (d) | | Name | Fees Earned or Paid in Cash1 | Stock Awards1,2 | Total | | Kathryn W. Dindo | $94,000 | $93,000 | $187,000 | | George G. Goldfarb | $84,000 | $93,000 | $177,000 | | James J. Hoolihan | $82,500 | $93,000 | $175,500 | | Heidi E. Jimmerson | $115,000 | $93,000 | $208,000 | | Madeleine W. Ludlow | $95,000 | $93,000 | $188,000 | | Susan K. Nestegard | $87,500 | $93,000 | $180,500 | | Barbara A. Nick | $42,000 | $85,250 | $127,250 | | Douglas C. Neve | $91,500 | $93,000 | $184,500 | | Robert P. Powers | $90,000 | $93,000 | $183,000 |
1 Ms. Jimmerson, Mr. Goldfarb, Mr. Hoolihan, Ms. Nestegard, Mr. Neve, and Mr. Powers elected to defer their 2020 stock retainer. Mr. Goldfarb and Mr. Neve elected to defer their full 2020 cash retainers; Ms. Jimmerson elected to defer $96,750 of her 2020 cash retainer. These amounts were deferred under the Deferral Plan II. 2 For all Directors except Ms. Nick, the amounts shown in column (c) reflect the grant date fair value of the annual stock retainer paid on June 1, 2020. On that date, Directors each received 1,740.921 shares of Common Stock valued based on a share price of $53.42 (the five-day average closing price, including the date that is ten calendar days prior to June 1, 2020). Ms. Nick received a prorated stock retainer in connection with her election to the Board, which occurred on July 28, 2020. On September 9, 2020, Ms. Nick received 1,575.203 shares of Common Stock the calculation of which was based on a share price of $54.12 (the five-day average closing price, including the date that is ten calendar days prior to
September 9, 2020).
| | | | | | Director Compensation—2018 | | (a) | (b) | (c) | (d) | | Name | Fees Earned or
Paid in Cash1 | Stock
Awards1, 2 | Total | | Kathryn W. Dindo | $81,000 | $77,000 | $158,000 | | Sidney W. Emery, Jr. | $69,500 | $77,000 | $146,500 | | George G. Goldfarb | $71,000 | $77,000 | $148,000 | | James S. Haines, Jr. | $81,375 | $77,000 | $158,375 | | James J. Hoolihan | $76,167 | $77,000 | $153,167 | | Heidi E. Jimmerson | $87,000 | $77,000 | $164,000 | | Madeleine W. Ludlow | $80,333 | $77,000 | $157,333 | | Susan K. Nestegard | $70,000 | $109,083 | $179,083 | | Douglas C. Neve | $78,500 | $77,000 | $155,500 | | Robert P. Powers | $72,625 | $77,000 | $149,625 | | Leonard C. Rodman | $78,500 | $77,000 | $155,500 |
| | 1
| Mr. Haines, Ms. Jimmerson, Ms. Nestegard, Mr. Neve, and Mr. Powers elected to defer their 2018 stock retainer fees. Mr. Goldfarb and Mr. Rodman elected to defer all Director retainer fees (stock and cash); Ms. Jimmerson elected to defer $71,280 of her cash retainer fees. These amounts were deferred under the Deferral Plan II. Not included in the table are Mr. Hodnik, who received no additional compensation in connection with his Board service, and Ms. Owen, who was elected to the Board in 2019 and who also receives no additional compensation in connection with her Board service. |
| | 2
| Amounts shown in column (c) reflect the grant date fair value of the annual stock retainer paid on June 1, 2018. On that date, each Director received 1,033.141 shares of Common Stock valued based on a share price of $74.53 (the five-day average closing price, including the date that is ten calendar days prior to June 1, 2018). Additionally, for Ms. Nestegard, her amount reflects a prorated stock retainer of 466.124 shares of Common Stock valued based on a share price of $68.83 (the five-day average closing price, including the date that is ten calendar days prior to March 8, 2018). Ms. Nestegard received this prorated stock payment in relation to her election to the Board on January 16, 2018. |
Employee Directors receive no additional compensation for their services as Directors. Accordingly, neither Mr. Hodnik nor Ms. Owen received noany additional compensation as a Director orfor their service on the Board Chair in 2018.2020. The 2020 compensation for the NEOs is covered in detail in the CD&A beginning on page 32.
Under the terms of the ALLETE Director Stock Plan, ALLETE pays each non-employee Director an annual retainer fee, a portion of which is paid in cash and a portion of which is paid in Common Stock as set forth below: | | | | | | | | | | | | | | | | Non-Employee Director Retainers—2020 | | | Cash | | Stock | | | All Directors | $75,000 | | $93,000 | | | Lead Director (Additional) | $40,000 | | — | |
| | | | | | | | Non-Employee Director Retainer Fees—2018 | | | | Cash | | Stock | | | | Lead Director | $87,000 | | $77,000 | | | | All Other Directors | $62,000 | | $77,000 | |
In addition, weWe also pay each non-employee Director, other than the Lead Director, an annual cash retainer fee for each committee membership and committee chair assignment as set forth below:
| | | | | | | | | | | | | | | | Non-Employee Committee Retainers—2020 | | | Member | | Additional Chair Retainer | | | Audit Committee | $9,000 | | $10,000 | | | Compensation Committee | $7,500 | | $7,500 | | | Corporate Governance Committee | $7,500 | | $5,000 | |
| | | | | | Non-Employee Committee Retainer Fees—2018 | | | Member Fee | | Chair (Includes Member Fee) | | Audit Committee | $9,000 | | $19,000 | | Compensation Committee | $7,500 | | $15,000 | | Corporate Governance Committee | $7,500 | | $12,500 |
Committee retainer fees are prorated based on the actual term of service per year.
The Lead Director receives her designated cash retainer and the Director stock retainer, fee, but does not receive any other committee or chair retainers.
Director and committee retainers are prorated based on the actual term of service per year.
Directors may elect to receive all or part of the cash portions of their retainer fees in Common Stock.
The Company provides a deferral account benefit to the Directors under the terms of the Deferral Plans. On December 31, 2004, the Company froze Deferral Plan I with respect to all deferrals. Effective January 1, 2005, the Company established Deferral Plan II to comply with Section 409A of the Tax Code. Deferral Plan II governs all cash retainers initially deferred after December 31, 2004. On May 1, 2009, the Board amended Deferral Plan II to permit Directors to elect to defer their stock retainers.
Annually, each Director may elect to defer to a Deferral Plan II cash account some or all of hisher or herhis cash retainer fees. Directors can select among different investment crediting rates to apply to deferral cash account balances under the Deferral Plans. These investment options include mutual funds and similar investments. The Directors may change their investment elections at any time.
Annually, each Director also may elect to defer to a Deferral Plan II stock account some or all of hisher or herhis stock retainer fees. Deferred stock retainer fees are credited to a Director's stock account, which has a single investment option that mirrors the performance of our Common Stock and is credited with dividend equivalents equal to cash dividends that are declared and paid on our Common Stock.
Each Director elects a date when benefit payments from hisher or herhis Deferral Plan I and Deferral Plan II accounts will commence and the form of benefit payment. Generally, Deferral Plan I and Deferral Plan II account benefit payments will not begin earlier than the elected commencement date. Directors may, however, request an early distribution of some or all contributions made to hisher or herhis Deferral Plan I account prior to January 1, 2005, subject to a 10 percent early withdrawal penalty.
A Director ismay not allowed to elect to receive an early withdrawal of amounts contributed to hisher or herhis Deferral Plan II account after January 1, 2005, except that heshe or shehe may request an early withdrawal in the event of an unforeseen emergency, which request is subject to the approval of the ECC.
A Director may elect to receive hisher or herhis Deferral Plan cash and stock account balances in the form of either a lump sum payment or annual installments over a 5-, 10-, or 15-year period, or a combination of both. A Director's Deferral Plan cash account balance will be credited or debited with notional gains or losses until the balance has been paid in full. A Director will receive dividend equivalents on hisher or herhis Deferral Plan II stock account balance until paid in full.
ITEM NO. 3—RATIFICATION OF THE SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has selected PricewaterhouseCoopers as the Company's independent registered public accounting firm for the year 2019.2021. PricewaterhouseCoopers has acted in this capacity since October 1963.
While the Audit Committee is responsible for the selection, retention, evaluation of independence and performance, approval of fees and retention terms, oversight, and termination (when appropriate) of the Company’s principal independent accountants, the Audit Committee and Board request that shareholders ratify the selection of PricewaterhouseCoopers as the Company's independent registered public accounting firm as a matter of good corporate practice. The Audit Committee is not required to take any action as a result of the outcome of this vote, but will take it into consideration. Even if the selection is ratified by shareholders, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its shareholders.
A representative of PricewaterhouseCoopers is expected to be present at the 20192021 Annual Meeting. The representative will have an opportunity to make a statement if heshe or shehe so desires and will be available to respond to appropriate questions.
The Board recommends a vote “FOR” ratifying the selection of PricewaterhouseCoopers as the Company's independent registered public accounting firm for 2019.
2021.
AUDIT COMMITTEE REPORT
The Audit Committee is comprised of five non-employee Directors, each of whom has been determined by the Board to be “independent” under ALLETE's Corporate Governance Guidelines, and within the meaning of the rules of both the NYSE and the SEC. The Board has also determined that each member of the Audit Committee is financially literate and that Ms. Dindo, Mr. Goldfarb, and Mr. Neve are each an “audit committee financial expert” within the meaning of the rules of the SEC. The Audit Committee operates pursuant to a written charter. The Audit Committee charter, which was reviewed in January
February 20192021 and last revised in January 2018, is available on the Company's website at www.allete.com/Governance. The Audit Committee assists in the Board's oversight of the integrity of the Company's financial reports, compliance with legal and regulatory requirements, the qualifications and independence of the independent registered public accounting firm, both the internal and external audit processes, and internal controls over financial reporting. The Audit Committee reviews and recommends to the Board that the audited financial statements be included in the Annual Report.
During 2018,2020, the Audit Committee met and held separate discussions with members of management and the Company's independent registered public accounting firm, PricewaterhouseCoopers, regarding certain audit activities and with the Company's Chief Audit Officer regarding the plans for and results of selected internal audits. The Audit Committee reviewed the quarterly financial statements. It reviewed with management and the independent registered public accounting firm the effectiveness of internal controls over financial reporting and the Company's compliance with laws and regulations.
The Audit Committee received and reviewed the written disclosures and letters from PricewaterhouseCoopers specified by applicable requirements of the Public Company Accounting Oversight Board (PCAOB) regarding the independent registered public accounting firm's communications with the Audit Committee concerning independence and discussed the firm's independence with the independent registered public accounting firm. The Audit Committee has received written material addressing PricewaterhouseCoopers' internal quality control procedures and other matters, as required by the NYSE listing standards.
The Audit Committee has: (i) reviewed and discussed the Company's Consolidated Financial Statements for the year ended December 31, 2018,2020, with the Company's management and with the Company's independent registered public accounting firm; (ii) met with management to discuss all quarterly and annual financial reports prior to their issuance and to discuss significant accounting issues and management judgments; and (iii) discussed with the Company's independent registered public accounting firm the matters required to be discussed under the rules adopted by the PCAOB. Management represented to the Audit Committee that the Company's Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America.
Based on the above-mentioned review and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the 2018ALLETE's 2020 Annual Report on Form 10-K.
Audit Committee Pre-Approval Policies and Procedures The Audit Committee has pre-approval policies and procedures related to the provision of audit and non-audit services by the independent registered public accounting firm. Under these procedures, the Audit Committee pre-approves both the type of services to be provided by the independent registered public accounting firm and the estimated fees related to these services. During the pre-approval process, the Audit Committee considers the impact of the types of services and the related fees on the independence of the independent registered public accounting firm. The services and fees must be deemed compatible with the maintenance of the independence of the independent registered public accounting firm, including compliance with the SEC's rules and regulations.
The Audit Committee will, as necessary, consider and, if appropriate, pre-approve the provision of additional audit and non-audit services by the independent registered public accounting firm that were not encompassed by the Audit Committee's annual pre-approval and that are not prohibited by law. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve, on a case-by-case basis, these additional audit and non-audit services, provided that the Chair shall promptly report any decisions to pre-approve such services to the Audit Committee.
Audit and Non-Audit Fees The following table presents fees for professional audit services rendered by PricewaterhouseCoopers for the audit of the Company's annual financial statements for the years ended December 31, 20182020 and December 31, 2017,2019, and fees billed for other services rendered by PricewaterhouseCoopers during those periods. All audit and non-audit services and fees for 20182020 and 20172019 were pre-approved by the Audit Committee. The Company has considered and determined that the provision of the non-audit services noted below is compatible with maintaining PricewaterhouseCoopers' independence.
| | | | | | | | | | | | | | 2018 |
| | 2017 |
| | | | Audit Fees1 | | $1,853,500 | | $1,980,700 | | | | Audit-Related Fees2 | | 10,000 |
| | — |
| | | | Tax Fees3 | | 1,865 |
| | 35,596 |
| | | | All Other Fees4 | | 2,700 |
| | 2,700 |
| | | | Total | | $1,868,065 | | $2,018,996 | |
| | 1
| Audit fees were incurred in connection with audit work performed on the integrated audit of the Consolidated Financial Statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as required regulatory audits, subsidiary audits, accounting consultations, and services in connection with securities offerings. |
| | 2
| Audit-related fees were incurred in connection with accounting consultation related to acquisitions or dispositions. |
| | 3
| Tax fees consisted of tax consultation services. |
| | 4
| Other fees consisted of license fees for accounting research software. |
March 28, 2019
| | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | Audit Fees1 | | $1,675,000 | | $1,689,000 | | | Audit-Related Fees2 | | 45,000 | | | — | | | | Tax Fees3 | | 12,500 | | | 19,756 | | | | All Other Fees4 | | 2,700 | | | 20,700 | | | | Total | | $1,735,200 | | $1,729,456 | |
1 Audit fees were incurred in connection with audit work performed on the integrated audit of the Consolidated Financial Statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as required regulatory audits, subsidiary audits, accounting consultations, and services in connection with securities offerings. 2 Audit-related fees consisted of consultation services related to new system implementation. 3 Tax fees consisted of tax consultation services. 4 Other fees consisted of license fees for accounting research software and training provided to ALLETE's internal audit group.
March 25, 2021
Audit Committee | | | | | | | Kathryn W. Dindo, Chair | | | George G. Goldfarb | | | Douglas C. Neve | | Leonard C. RodmanBarbara A. Nick | | Heidi E. Jimmerson, ex officio | |
OTHER BUSINESS _________________________________________________________________________________________________________________________________
The Board knows of no other business to be presented at the 20192021 Annual Meeting. However, if any other matters properly come before the Annual Meeting, it is the intention of the persons named in the proxy form to vote the Common Stock represented thereby pursuant to the proxies in accordance with their judgment in such matters.
All shareholders are respectfully asked to vote their proxies so that the necessary vote may be present at the Annual Meeting.
Shareholder Proposals for the 20202022 Annual Meeting All proposals from shareholders to be considered for inclusion in the Proxy Statement relating to the Annual Meeting scheduled for May 12, 2020,10, 2022, must be received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN 55802-2093 not later than November 29, 2019.25, 2020. The Company's Bylaws provide that for business to be properly brought before an annual meeting by a shareholder, the shareholder must have delivered timely notice to the Company's Secretary. To be timely, advance notice for business to be brought before an Annual Meeting generally must be received not less than 90 days nor more than 120 days prior to the anniversary of the immediately preceding Annual Meeting. Therefore, for the Annual Meeting scheduled for May 12, 2020,10, 2022, ALLETE must receive a shareholder's notice between January 14, 2020,11, 2021 and February 13, 2020.10, 2021. A shareholder's notice must also comply with the informational and other requirements set forth in the Company's Bylaws. The persons to be named as proxies in the proxy card relating to the 20202022 Annual Meeting may have the discretion to vote their proxies in accordance with their judgment on any matter as to which ALLETE did not have notice in accordance with the advance notice provisions in the Company's Bylaws, without discussion of such matter in the Proxy Statement relating to the 20202022 Annual Meeting.
By order of the Board of Directors,
/s/ Margaret A. Thickens Margaret A. Thickens Vice President, Chief Legal Officer, and Corporate Secretary
March 28, 2019
March 25, 2021 Duluth, Minnesota
ALLETE, INC. ANNUAL MEETING OF SHAREHOLDERS Tuesday, May 14, 201911, 2021 10:30 a.m. CDT Duluth Entertainment Convention CenterThe Annual Meeting of Shareholders will be conducted solely via live webcast.
Lake Superior BallroomPlease visit: www.proxydocs.com/ALE
350 Harbor Drive
Duluth, MN
| | | | | | | | | | | | | ALLETE, Inc. | | | | 30 West Superior Street | | proxy | | Duluth, MN 55802-2093 | |
This proxy is solicited by the Board of Directors for use at the Annual Meeting of Shareholders on May 14, 2019.11, 2021. Alan R. Hodnik, Bethany M. Owen, and Margaret A. Thickens, or anyeither of them, with power of substitution, are hereby appointed proxies of the undersigned to vote all shares of ALLETE, Inc. common stock owned by the undersigned at the Annual Meeting of Shareholders to be held in the Lake Superior Ballroom of the Duluth Entertainment Convention Center, 350 Harbor Drive, Duluth, Minnesota,online, via an Internet webcast at 10:30 a.m. CDT on Tuesday, May 14, 2019,11, 2021, or any adjournments or postponements thereof, with respect to the election of Directors, an advisory vote to approve executive compensation, ratification of the selection of an independent registered public accounting firm, and any other matters as may properly come before the meeting.
This proxy confers authority to vote each proposal listed on the other side unless otherwise indicated. If no choice is specified, the proxy will be voted FOR each nominee in Item 1, FOR Item 2, and FOR Item 3. If any other business is transacted at said meeting, this proxy shall be voted in the discretion of the proxies. This proxy is solicited on behalf of ALLETE, Inc., and may be revoked prior to its exercise. Please complete, sign, date and return this Proxy Card using the enclosed envelope. Alternatively, authorize the above-named proxies to vote the shares represented on this Proxy Card online or by phone as described below. Shares cannot be voted unless these instructions are followed, or other specific arrangements are made to have the shares represented at the meeting. By responding promptly, you may help save the costs of additional proxy solicitations. Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on May 14, 2019:11, 2021: The Notice and Proxy Statement and 20182020 Annual Report on Form 10-K are available atat: www.proxypush.com/alewww.proxydocs.com/ALE.
Vote by Internet, Telephone, or Mail. Internet and Telephone Voting Available 24 Hours a Day, 7 Days a Week Your phoneInternet or Internettelephone vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed, and returned your proxy card. | | | | | | | | | | | | | | | | : | | ( | | * | | INTERNET | | TELEPHONE | | MAIL | | | | | | : | | ( | | * | INTERNET | | PHONE | | MAIL | | www.proxypush.com/ale | | 1-866-883-3382 | | Mark, sign, and date your proxy card and return it in the postage-paid envelope provided. Must be received by May 10, 2021. | | | | | | Use the Internet to vote your proxyproxy. | | Use a touch-tone telephone to
vote your proxy. | | Mark, sign, and date your proxy | until 12:00 p.m. (CDT) on
| | vote your proxy until 12:00 p.m. | | card and return it in the | May 13, 2019. | | (CDT) on May 13, 2019. | | postage-paid envelope provided.
|
If you vote your proxy by Internet or by telephone, you do NOT need to mail back your Proxy Card.
| | | | | | | | | Shareowner Services | | P.O. Box 64945 | | St. Paul, MN 55164-0945 |
Address Change? Mark box, sign, and indicate changes below: □ TO VOTE BY INTERNET OR TELEPHONE, SEE REVERSE SIDE OF THIS PROXY CARD.
TO VOTE BY MAIL AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL ITEMS BELOW, SIMPLY SIGN, DATE, AND RETURN THIS PROXY CARD.
The Board of Directors recommends a vote FOR each nominee in Item 1, FOR Item 2, and FOR Item 3. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1. Election of directors: | | | | | | | | | | | | FOR | AGAINST | ABSTAIN | | | | FOR | AGAINST | ABSTAIN | | a. | Kathryn W. Dindo | ¨ | ¨ | ¨ | | f. | Madeleine W. LudlowSusan K. Nestegard | ¨ | ¨ | ¨ | | b. | George G. Goldfarb | ¨ | ¨ | ¨ | | g. | Susan K. NestegardDouglas C. Neve | ¨ | ¨ | ¨ | | ò Please fold here - Do not separate ò | | c. | Alan R. Hodnik | ¨ | ¨ | ¨ | | h. | Douglas C. Neve | ¨ | ¨ | ¨ | | d. | James J. Hoolihan | ¨ | ¨ | ¨ | | h. | Barbara A. Nick | ¨ | ¨ | ¨ | | d. | Heidi E. Jimmerson | ¨ | ¨ | ¨ | | i. | Bethany M. Owen | ¨ | ¨ | ¨ | | e. | Heidi E. JimmersonMadeleine W. Ludlow | ¨ | ¨ | ¨ | | j. | Robert P. Powers | ¨ | ¨ | ¨ |
| | | | | | | | | | | | | | | | | | | | | | | | 2. Advisory vote to approve executive compensation. | | ¨ | ForFOR | ¨ | AgainstAGAINST | ¨ | AbstainABSTAIN |
| | | | | | | | | | | | | | | | | | | | | | | | 3. Ratification of the selection of PricewaterhouseCoopers LLP as ALLETE's independent registered public accounting firm for 2019.2021. | | ¨
| ForFOR | ¨
| AgainstAGAINST | ¨
| AbstainABSTAIN |
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED AS THE BOARD RECOMMENDS. THE PROXIES ARE ALSO AUTHORIZED TO VOTE IN THEIR DISCRETION UPON SUCH OTHER BUSINESS AS MAY PROPERLY BE BROUGHT BEFORE THE MEETING AND ANY ADJOURNMENTS THEREOF.
Date _____________________________________
| | | | | | | | | | | Signature(s) in Box Please sign exactly as your name(s) appears on Proxy. If held in joint tenancy, all persons should sign. Trustees, administrators,administrators, etc., should include title and authority. Corporations should provide full name of corporation and title of authorized officer signing the Proxy. |
|
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Telephone: Call 1 (866) 870-3684 in the U.S. or Canada, using a touch-tone phone, and follow the instructions to log in and order copies.
Email: Send an email topaper@investorelections.comwith the words, “ALLETE, Inc. Materials Request” in the subject line. The email must include:
