Securities Owned by Directors and Management

As discussed on page 29,30, non-employee Directors are expected to own shares with a valuation equal to at least five times their annual cash retainer within five years of election. As of March 12, 2021,11, 2022, all independent Directors met the Common Stock ownership guideline except: Ms. Nestegard, who first became subject to the guideline in 2018 and Ms. Nick, who first became subject to the guideline in 2020;2020, and Ms. Thomas, who first became subject to the guideline in 2021; both are both making expected progress toward meeting the guideline.

Common Stock ownership guidelines applicable to NEOs are discussed on pages 2930 and 49. The Board reviewed executive stock ownership in April 2020.2021. As of March 12, 2021,11, 2022, all NEOs met their respective share ownership guideline, except: Ms. Owen, who was promoted to a position with a higher stock ownership guideline in 2019, and again in 2020, and2020; Mr. Morris who is making expected progress toward meeting her guideline;was promoted to a position with a higher stock ownership guideline in 2022; and Ms. Thickens, who first became subject to a stock ownership guideline with her promotion in 2019, and who is2019; all three are making expected progress toward meeting her guideline.their guidelines.

In determining whether Directors and NEOs met the Common Stock ownership guidelines, we include deferred shares and RSUs because we believe these derivative holdings accomplish similar objectives as stock ownership, namely they encourage Directors and NEOs to have a stake in the Company and they align the Directors' and NEOs' interests with those of shareholders.

Pledging, Hedging, and Short Sales of Common Stock Prohibited

ALLETE's solid financial and operational performance is rooted in a foundation of sound governance practices, a skilled and engaged Board, and focused attention to our corporate values and culture.

The Board provides oversight, actively ensuring that the Company is managed in a way that builds
long-term value for shareholders and 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—at the foundation of all we do—are important to ALLETE's long-term success and profitability.

Governance Policies

Our Corporate Governance Guidelines address the Board's responsibilities, committee responsibilities, Director selection, andBoard operating policies, Director compensation, expectations for Directors, Director stock ownership, and other matters. These guidelines were most recently revised in October 2020.February 2022.

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:

Director Independence Determinations

In considering the independence of the Directors, the CGC examined any transactions between Directors and the Company in 2020.2021. In particular, the CGC considered Mr. Hoolihan's relationship to Industrial Lubricant Company (ILCO). Through 2017, Mr. Hoolihan served as chief executive officer of ILCO and had an ownership interest in that company. Since January 2018, ILCO has beenis 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 subsidiaries, BNI Energy, Ltd. During 2020,2021, Company payments to ILCO totaled $532,540.$572,356. 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 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. The 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 20192020 and 20182019 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 525an approximately 600 MW to 550 MWproposed combined-cycle natural gas-fired generating facility, which wouldwas to be jointly owned by Dairyland and a subsidiary of the Company. TheOriginally, the Company would purchasehave purchased approximately 50 percent of NTEC's output starting in 2025. In October 2021, the Company's subsidiary sold a portion of its original 50% stake in NTEC to a subsidiary of Basin Electric Power Cooperative (Basin Electric). The Company’s subsidiary now owns 20% of the NTEC project, Basin Electric owns 30%, and Dairyland continues to own 50% of the planned facility. The total project cost is estimated to be approximately $700 million, of which the Company’s subsidiary's portion is expected to be approximately $350$150 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, is independent.

Board Diversity and Director Nominations

ALLETE seeks Directors whose ethical conduct, commitment onto sustainability as outlined in the Corporate Sustainability Report, 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 20212022 Annual Meeting includes sixfive 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 hethey 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 histhe candidate's qualifications to the Corporate Governance Committee, c/o Corporate Secretary, ALLETE, Inc., 30 West Superior Street, Duluth, MN 55802.

Board Leadership Structure

In accordance with ALLETE's Corporate Governance Guidelines, direct that the independent Directors are to selecthave selected an independent Lead Director ifbecause the Board Chair is not an independent Director. The Lead Director performs the following duties:

The Board believes that its leadership structure—an experienced Executivea combined Board Chairman,Chair 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.

Board Committees

The primary responsibility of the Audit Committee is to assist the Board in its oversight responsibility for:

As described in more detail in the Audit Committee Report beginning on page 74,78, 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 fivesix current Audit Committee members are "financial experts" under the definition provided by the SEC.

The primary responsibility of the Compensation Committee is to help discharge the Board's responsibilities related to compensating ALLETE's executives by:by performing the following duties:

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.

The Corporate Governance Committee oversees activities and reporting of ESG matters. The CGC overseesexercises oversight responsibility for the Company's corporate governance practices by:

The CGC is authorized to exercise the authority of the Board in the intervals between Board meetings.

Risk Oversight

ALLETE, like other companies, is subject to a variety of risks. TheseBroadly, these risks include, among others, financial and accounting risks, strategic risks, regulatory risks, market and credit risks, capital deployment risks, operational risks, compensation risks, liquidity risks, litigation risks, reputation risks, pandemic-related risks, natural disaster risks, and technology risks, including cybersecurity risks. The Board is responsible for overseeing risk management at the Company. While the Board as a whole exercises direct oversight of strategic risks and other critical risk areas with enterprise-wide significance to the Company, aspects of risk oversight are delegated to Board 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 oversight of risks in its functional responsibility area. Key risk-management oversight assignments for the Board committees are as follows:

ALLETE's management is responsible 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 2020,2021, the Board received regular updates from senior management on ALLETE's ERM 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.

Code of Business Conduct and Ethics

Shareholder Engagement

ALLETE believes it is important that our governance processprocesses 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; to share our environmental and sustainability strategy and accomplishments; and to 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 2020,2021, we contacted shareholders owning approximately 58%57% of our outstanding Common Stock, resulting in substantive engagements with the holders of approximately 43%38% of our outstanding shares,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, and the climate 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.

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 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

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'sthe 2021 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 2020,2021, Directors attended educational courses presented by outside entities on a variety topics including: economic updates; governance

strategic issues facing the power and utility industry; investor perspectives; understanding the energy industry; utility trends; investment trends; board oversight of corporate culture; leadership in divisive times; crisis management; a new vision for ESG; understanding investors' short-regulatory trends and long-term expectations; redefining "purpose" as a growth engine; understandingchallenges; return-to-the-workplace challenges and opportunities; the role of regulatorsthe board in theESG; ESG conversation; linkingmetrics and investor disclosures; ESG performancestakeholder communication strategy; human capital oversight; crisis management; financial reporting; trends in corporate governance; board refreshment; board composition; and executive compensation; audit committee "hot topics;" and trending topics in the utilities industry.board evaluations.

In addition, Directors attended educational presentations hosted by the Company in 20202021 covering the following topics: clean energy landscape and opportunities; large-power utility sector shareholder landscape; corporatecustomer perspective on the steel industry, sustainability, competition, and shareholder expectations; strategicMinnesota's Iron Range; and forward 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 page 49.

The CGC regularly reviews the stock ownership guidelines and may recommend changes to the Board as it deems appropriate.

Related Person Transactions

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:

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 stakeholders may communicate directly with our Board, with any specified group of Directors, such as a Board committee or the non-management Directors, or with 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.

We are asking our shareholders to cast a non-binding, advisory vote approving compensation for our NEOs as reported in this Proxy Statement.

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.

The Board recommends a vote “FOR” the advisory vote to approve executive compensation.

Ms. OwenMr. Adams served as Senior Vice President and CFO for all of 2021. In January 2022, Mr. Adams announced his plan to retire from the Company in June 2022. On February 9, 2022, Mr. Morris was elected CEO effective February 3, 2020, whenappointed Senior Vice President and CFO, succeeding Mr. Hodnik became Executive Chairman. References to the CEO in the CD&A discussion below refer to Ms. Owen.Adams as CFO.

EXECUTIVE SUMMARY

NEOs have a significant portion of their compensation tied to Company performance. Annual incentives focus on achieving annual financial, strategic, and operational, and valuessafety goals. Long-term incentives facilitate stock ownership and reward long-term growth and profitability. As explained in this CD&A, ALLETE's 20202021 performance directly affected our NEOs' compensation for 2020.each NEO's 2021 compensation.

Annual incentives reward shorter-term strategic goals as well as operational and values-based accomplishments. Our AIP rewards one-year financial performance measured by net income and cash from operating activities, subject to certain adjustments that are described in more detail beginning on

page 43. To calculate the financial goals for annual incentive purposes, the ECC established specified adjustments at the beginning of the performance period.period certain adjustments. The ECC also 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 20202021 Annual Report on Form 10-K, Net Income Attributable to ALLETE for the year ended December 31, 2020,2021, prior to adjustment, was $174.2$169.2 million (compared to $185.6$174.2 million for 2019)2020). As described in detail on page 45, for AIP purposes, Net Income Attributable to ALLETE was increaseddecreased by $10.26$1.9 million after making adjustments related to the following: (1) net income associated withexcluding ALLETE Properties operations; (2) net income related to ALLETE Properties cash released from escrow; (3) the Minnesota Power rate case settlement; and (4) acquisition activities and associated operations.financial results.

As disclosed in ALLETE's 20202021 Annual Report on Form 10-K, Cash from Operating Activities for 2020,2021, prior to adjustment, was $299.8$263.5 million (compared to $249.5$299.8 million for 2019)2020). As described in detail on page 45, for AIP purposes, Cash from Operating Activities was increased by $25.55$69.2 million after making adjustments related to reflect:
(1) the following: (1)exclusion of a pension contribution made in cash; (2) the exclusion of 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 that were not budgeted; (4) a method-of-accounting change for the Minnesota Power fuel adjustment clause; and (5) an adjustment for ALLETE Clean Energy build-own-transfer construction projects included in excess of budget.inventory.

In addition to financial metrics, the annual incentive also measures performance relative to strategic, goals and operational, and valuessafety goals. Our strategicStrategic goals vary from year to year, but generally focus on our ability to grow our business, address changing expectations of customers and stakeholders, and improve our operating efficiency. Our operating and valuesOperational goals are tied to the Company’sALLETE's reliability performance againstand safety and reliability measures.goals measure safety performance. For 2020,2021, the ECC determined that the Company’s strategic performance wasfell between target and superior. This rating was based on the ECC's evaluation of the Company’s performance in enhancing the customer experience, addressing customer competitiveness and advancing sustainability. Performance on 2020The ECC determined that the Company's operational and values goals wasperformance fell between threshold and target.target and the safety goals were not met due to an employee fatality.

As shown in the following chart, financial results along with performance on strategic, and operational and valuessafety goals, resulted in an ALLETE annual incentive payout for 20202021 that equaled 100.3115.3 percent of target (compared to 94.9100.3 percent in 2019)2020).

Our 20202021 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 increased base salarysalaries for all NEOs in 2020, except Mr. Hodnik, who transitioned from CEO to Executive Chairman on February 3, 2020, with a compensation arrangement that is discussed below.2021. Ms. Owen's base salary increased by 5418 percent in connection withrecognition of her promotionperformance in the CEO role to CEO.which she was promoted in 2020 and to bring her compensation closer to market. Mr. AdamsMorris and Mr. MorrisAdams each received a base salary increase of 34 percent in recognition of their performance and to bring their compensation closer to market. Ms. Johnson and Ms. Thickens each received a base salary increase of 5 percent. These increases of 16 percent and 20 percent, respectively,were in recognition of their performance in thetheir respective 2021 roles to which they were promoted in 2019 and to align compensation with or bring their compensation closer to market.the market median.

The ECC increased annual and long-term target opportunities for Ms. Owen in connection with her promotion to CEO in February 2020. Annual and long-termAIP target opportunities were also increased in 20202021 for Ms. Owen, Mr. Morris, and Ms. Thickens, to reinforceand the LTIP target opportunities were increased for Ms. Owen and Mr. Morris. These increases reinforced the alignment of pay for performance and, to bringfor Ms. Owen and Ms. Thickens, brought their total target compensation closer to the market median; Mr. Morris' 2021 annual and long-term incentive compensation opportunity increases aligned with the market median. These annual incentive opportunities and the total target long-term incentive opportunitiesopportunity increases were as shown below:

In each case, the total long-term incentive opportunity increase was allocated 75 percent to target PSA opportunity (Ms. Owen–$225,000 increase;75,000 increase and Mr. Morris–$37,500 increase; and Ms. Thickens–$18,75018,500 increase) and 25 percent to RSUs (Ms. Owen–$75,000 increase;25,000 increase and Mr. Morris–$12,500 increase; and
Ms. Thickens–$6,2506,500 increase).

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 CEO's compensation, for the CEO, and in 2020, the ECC set the compensation for the Executive Chairman. Both werewhich is reviewed and ratified by the Board without the CEO's or Executive Chairman's participation.

At the beginning of theeach year, the ECC, with the CEO, establishesCEO's recommendation, approves 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 2020,2021, the ECC reviewed Pearl Meyer's 20192020 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

TheFor all NEOs, the CEO recommendsmakes compensation recommendations 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 histhe NEO's 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 histheir 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 and target opportunities under the Company's incentive compensation plans.

Compensation Consultant Independence

The ECC's independent compensation consulting firm for 20202021 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 2020.2021.

Executive Compensation Studies

The October 2019 CEO benchmarking study compared (then-CEO) Mr. Hodnik'sMs. Owen'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 ofALLETE's CEO compensation elements were comparableconsistent with the compensation elements generally available to market.CEOs. The report further indicated that Ms. Owen's base salary, annual incentive opportunity and long-term incentive opportunity were each below the 25th percentile of market median. In offering its CEO succession planning guidance, Pearl Meyer advised that a newly-promoted chief executive officer'ssetting the CEO's compensation typically is set initially at or nearfor 2021, the lower end ofECC also considered Ms. Owen's tenure in the overall market range for chief executive officers and increased to the middle of the range within a few years based on performance.position.

Using these processes, ECC made the following determinations in 2020:2021: (1) theeach NEOs' compensation includesincluded appropriate elements; (2) Ms. Owen's base salary, annual incentiveAIP target opportunity, and LTIP target opportunity should be increased based on her promotion to CEO;increased; (3) in recognition of his Executive Chairman role, Mr. Hodnik'sMorris' base salary, should remain at its previous rateAIP target opportunity, 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 incentiveLTIP target opportunity should be substantially reduced and provided solely in the form of an RSU grant;increased; (4) Mr. Morris' and Ms. Thickens' base salaries, annual incentivesalary and AIP target opportunities, and LTIP target opportunitiesopportunity 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 valuessafety goals. Long-term incentives reward long-term profitability, and facilitate stock ownership, as well asand 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 thateach 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.

20202021 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' 20202021 target opportunities for annual and long-term incentives and her or his base salary as of December 31, 2020.2021.

Annual Incentive Awards

The 2020 annual incentive2021 AIP financial measures, established at the beginning of the 20202021 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.

With respect to both the Net Income and Cash from Operating Activities metrics, the ECC established thespecific exclusions and adjustment guidelines at the beginning of the performance period.

OperationalStrategic, operational, and valuessafety goals are both linked to strategic and operational objectives and aligned with ALLETE's core values: integrity, safety, employee growth, community engagement, and environmental stewardship.

ALLETE's 2021 strategic goals were to advance both customer competitiveness and sustainability. Specific sustainability goals encompassed continuing to reduce carbon emissions, advancing diversity, equity, and inclusion in our workforce, supply chain, and community giving, and enhancing sustainability communication and disclosures. Our 20202021 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 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.

To calculate the financial goals for annual incentiveAIP purposes, the ECC established specified adjustmentsexclusions and exclusionsadjustment guidelines at the beginning of the plan year. The ECC also determined at the beginning of the plan year that it would make any determinations regardingevaluate on a case-by-case basis the effect of discrete, non-recurring events that might occur during the plan year on a case-by-case basis.year.

Our 2020The predetermined exclusion of ALLETE Properties financial results caused a decrease in our 2021 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)purposes. After this exclusion, 2021 net income associated withfor AIP purposes was slightly above target at $167.3 million.

As disclosed in ALLETE's 2021 Annual Report on Form 10-K, Cash from Operating Activities for 2021, prior to adjustment, was $263.5 million (compared to $299.8 million for 2020).Adjustments resulted in an overall increase of $69.2 million to cash from operating activities for AIP purposes. Based on predetermined exclusions, the ECC adjusted cash from operating activities for AIP purposed to exclude: (1) a pension contribution made in cash (increased cash from operating activities by $10.3 million); (2) ALLETE Properties operations (decreased net incomecash from operating activities by $.4$2.2 million); and (2) adjustments related to acquisition(3) asset decommissioning costs that were not budgeted (decreased cash from operating activities and associated operations (increased net income by $1.02$1.1 million). In addition, the ECC made discretionary adjustments based on its review of the following non-recurring events:following: (1) net income related to ALLETE Propertiesa method-of-accounting change for the Minnesota Power fuel adjustment clause (increased cash released from escrow (increased net incomeoperating activities by $1.34$56.4 million); and (2) the Minnesota Power rate case settlementALLETE Clean Energy build-own-transfer construction projects included in inventory (increased net incomecash from operating activities by $8.3$5.8 million). After these adjustments, 2020 net income for annual incentive purposes was slightly below target at $184.5 million.

The ECC believes that the annual incentiveAIP 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 Januaryat the beginning of each year. Although the ECC can make additional grants at other times of the year, it did not do so in 20202021 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.

PSAs reward executives for performance over a three-year period. Rewarding executives for creating long-term shareholder value links pay to performance.

For all outstanding 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 will be 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 thethree-calendar-year performance period. The amount of the payment with respect to any award is determined at the end of the three-year period. In 2020,2021, NEOs were granted PSAs for the three-year performance period beginning on January 1, 2020,2021, and ending on December 31, 2022.2023.

For the 2020-20222021-2023 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 outstanding 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.

RSUs are used as a retention incentive and to encourage stock ownership. One RSU entitles the granteeNEO 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 incentive2021 LTIP 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 of which 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$71.50 the estimated fair value of a PSA (TSR) as of December 31, 2019.2020. For PSAs with EPS CAGR as the associated performance metric, the valuation was calculated using a per-share value of $81.17,$61.94, the closing price for Common Stock on
December 31, 2019.2020. The number of RSUs granted to the NEOs was also calculated using a per-share value of $81.17.$61.94.

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 2020.2021.

OTHER GUIDELINES, POLICIES, BENEFITS, AND PRACTICES

NEOs are expected to meet her or histheir stock ownership guideline within seven years after first becoming subject to the stock ownership guidelines. An NEONEOs who isare promoted to a position with a higher stock ownership expectation hashave five years from the promotion to meet her or histheir new guideline.

The stock ownership guidelines essentially require that each NEO retain 100% of any equity she or he receivescommon stock they receive under the LTIP (after share withholding to satisfy tax obligations) until she or he hasthey have 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 already met her or his stock ownership guideline or is making reasonable progress toward meeting thetheir stock ownership guideline. Common Stock ownership levels as of March 12, 2021,11, 2022, and how ownership is measured against stock ownership guidelines as of March 12, 2021,11, 2022, 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:

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