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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

(Amendment No. _____)


Filedby the Registrant  x

Filed by a Party other than the Registrant  o


Check the appropriate box:

o

Preliminary Proxy Statement

o

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)

x

Definitive Proxy Statement

o

Definitive Additional Materials

o

Soliciting Material Pursuant to §240.14a-12

MTS SYSTEMS CORPORATION

(Name of Registrant as Specified in Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

x

No fee required

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1)

Title of each class of securities to which transaction applies:

2)

Aggregate number of securities to which transaction applies:

3)

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

4)

Proposed maximum aggregate value of transaction:

5)

Total fee paid:

o

Fee paid previously with preliminary materials.

o

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

1)

Amount Previously Paid:

2)

Form, Schedule or Registration Statement No.:

3)

Filing Party:

4)

Date Filed:



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 graphic

MTS Systems Corporation

14000 Technology Drive
Eden Prairie, MN 55344-2290
Telephone 952-937-4000
Fax: 952-937-4515

Info@mts.com
www.mts.com

Telephone 952-937-4000
Fax: 952-937-4515
Info@mts.com
www.mts.com
December 27, 2011

December 30, 2009

Dear MTS Shareholder:

On behalf of the Board of Directors, you are invited to attend the Company’s annual meeting of shareholders. The meeting will be held on Wednesday, February 10, 2010, at 3:00 p.m., central standard time, at the Company’s headquarters in Eden Prairie, Minnesota.

We would like all of our shareholders to be represented at the meeting, in person or by proxy. Last year, 91% of the shares were voted and we thank our shareholders for their response. We urge you to cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials, over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Please help us to achieve another high response rate for the meeting on February 10, 2010. Please vote your proxy even if you plan to attend the meeting.

Dear MTS Shareholder:
On behalf of the Board of Directors, you are invited to attend the Company’s annual meeting of shareholders. The meeting will be held on Wednesday, February 8, 2012, at 3:00 p.m., Central Standard Time, at the Company’s headquarters in Eden Prairie, Minnesota.

We would like all of our shareholders to be represented at the meeting, in person or by proxy. Last year, 90% of the shares were voted, and we thank our shareholders for their response. We urge you to cast your vote, as instructed in the Notice of Internet Availability of Proxy Materials, over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Please help us to achieve another high response rate for the meeting on February 8, 2012. Please vote your proxy even if you plan to attend the meeting.
Very truly yours,


Laura B. Hamilton

graphic

Chair and Chief Executive Officer

David J. Anderson
Chairman of the Board




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MTS SYSTEMS CORPORATION


NOTICE OF ANNUAL MEETING OF SHAREHOLDERS


TO BE HELD FEBRUARY 10, 2010

8, 2012


The annual meeting of shareholders of MTS Systems Corporation (the “Company”) will be held on Wednesday, February 10, 2010,8, 2012, at the Company’s headquarters located at 14000 Technology Drive, Eden Prairie, Minnesota 55344. The meeting will convene at 3:00 p.m., Central Standard Time, for the following purposes:


1.

To elect sixseven directors to hold office until the next annual meeting of shareholders or until their successors are duly elected;


2.

To ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for fiscal 2010;

2012;

3.

To restatehold a non-binding, advisory vote regarding the compensation of the Company’s named executive officers; and approve the MTS Systems Corporation Executive Variable Compensation Plan; and


4.

To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.


The foregoing items of business are more fully described in the proxy statement made available over the Internet and, upon request, in paper copy.


The Board of Directors has set the close of business on December 15, 2009,14, 2011, as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the meeting and at any adjournments or postponements thereof.


For the Board of Directors,


Bruce W. Mooty

graphic
Louis L. Ainsworth
Secretary

MTS Systems Corporation
14000 Technology Drive

Eden Prairie, Minnesota 55344

December 30, 2009

All shareholders are cordially invited to attend the annual meeting of shareholders in person. Whether or not you expect to personally attend, please vote over the Internet at www.proxyvote.com or by telephone at 1-800- 690-6903. Alternatively, you may request a paper proxy card, which you may complete, sign and return by mail. The proxy is solicited by the Board of Directors and may be revoked or withdrawn by you at any time before it is exercised.



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Page

MTS Systems Corporation

14000 Technology Drive

Eden Prairie, Minnesota 55344

December 27, 2011
All shareholders are cordially invited to attend the annual meeting of shareholders in person. Whether or not you expect to personally attend, please vote over the Internet at www.proxyvote.com or by telephone at 1-800-690-6903. Alternatively, you may request a paper proxy card, which you may complete, sign and return by mail. The proxy is solicited by the Board of Directors and may be revoked or withdrawn by you at any time before it is exercised.
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Page
GENERAL

1

ABOUT THE ANNUAL MEETING AND PROXY MATERIALS

1

What is the purpose of the Annual Meeting?

1

Why did I receive a notice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?

1

Who is entitled to vote?

1

Who can attend the Annual Meeting?

2

What constitutes a quorum?

2

How do I vote?

2

When do I vote?

2

3

Can I change my vote after I vote electronically or return my proxy card?

3

What does the Board recommend?

3

What vote is required to approve each Proposal?

3

Who will count the vote?

4

What does it mean if I receive more than one Notice of Internet Availability?

4

How will voting on any other business be conducted?

4

How are proxies solicited?

4

What is “householding”?

4

Who pays for the cost of this proxy solicitation?

5

PROPOSAL 1: ELECTION OF DIRECTORS

5

General Information

5

Nominees

5

Voting Information and Board Voting Recommendation

7

8

Other Information Regarding the Board

7

8

IndependentNon-Employee Director Compensation

8

12

PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

10

14

Fees and Services

10

14

Pre-Approval Policy

10

14

Board Voting Recommendation

10

15

AUDIT COMMITTEE REPORT

11

15

PROPOSAL 3: RESTATEMENT AND APPROVAL OF THE MTS SYSTEMS EXECUTIVE VARIABLE COMPENSATION (“EVC”) PLANRisk Considerations in Our Compensation Programs

11

15

Summary of the EVC Plan

12

Purpose of the EVC Plan

12

Eligibility and Participation

12

Performance Goals

12

Bonus Awards

12

Payment of Bonus Awards

12

Administration

12

Amendment and Termination

13

New Plan Benefits

13

Equity Compensation Plan Information

13

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Board Voting Recommendation

13

EXECUTIVE COMPENSATION

14

16

Compensation Discussion and Analysis

14

16

Compensation Committee Report

20

30

Summary Compensation Table

20

31

Supplemental Table to the All Other Compensation Column

21

Grants of Plan BasedPlan-Based Awards in Fiscal 20092011

21

32

Outstanding Equity Awards at 2009Fiscal2011 Fiscal Year End

22

34

Option Exercises and Stock Vested in Fiscal 20092011

22

35

Pension Benefits for Fiscal 20092011

23

35

Non-Qualified Deferred Compensation

23

35

Potential Payments Upon Termination or Change In Control

23

36
PROPOSAL 3: NON-BINDING ADVISORY VOTE REGARDING THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
40

General Information
40
Board Voting Recommendation
40
OTHER INFORMATION

26

41

Security Ownership of Principal Shareholders and Management

26

41

Related Party Transactions

26

42

Section 16(a) Beneficial Ownership Reporting Compliance

27

42

Compensation Committee Interlocks and Insider Participation
42
Shareholder Proposals

27

Proposals Included in the Proxy Statement

27

Proposals Not Included in the Proxy Statement

27

43






MTS SYSTEMS CORPORATION

PROXY STATEMENT
GENERAL

GENERAL


This proxy statement is furnished to the shareholders of MTS Systems Corporation (the “Company,” “we,” “us,” or “our”) in connection with the solicitation of proxies by the Board of Directors of the Company (the “Board”) to be voted at the annual meeting of shareholders to be held on Wednesday, February 10, 20108, 2012 (the “Annual Meeting”), at 3:00 p.m., Central Standard Time, at the Company’s headquarters located at 14000 Technology Drive, Eden Prairie, Minnesota 55344, or any adjournments or postponements thereof. This proxy statement and the form of proxy, along with the Annual Report for the fiscal year ended October 3, 2009,1, 2011, is being first sent or given to shareholders on or about December 30, 2009.

27, 2011.


ABOUTABOUT THE ANNUAL MEETINGMEETING AND PROXY MATERIALS


What is the purpose of the AnnualAnnual Meeting?


At the Annual Meeting, shareholders will vote upon (1) the election of sixseven directors, (2) the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2012, (3) restatement and approvala non-binding, advisory vote regarding the MTS Systems Corporation Executive Variable Compensation Plan,compensation of the Company’s named executive officers, and (4) such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. In addition, our management will report on the performance of the Company and respond to questions from shareholders.


Why did I receive a noticenotice in the mail regarding the Internet availability of proxy materials this year instead of a full set of proxy materials?


Pursuant to rules adopted by the Securities and Exchange Commission (the “SEC”), we have elected to provide access to our proxy materials over the Internet. Accordingly, we are sending a Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) to our shareholders of record and beneficial owners. All shareholders will have the ability to access the proxy materials on the website referred to in the Notice of Internet Availability or request a printed set of the proxy materials at no cost to the shareholder. Instructions on how to access the proxy materials over the Internet or to request a printed copy may be found in the Notice of Internet Availability.


If you do not affirmatively elect to receive printed copies of the proxy materials, you will only be able to view our proxy materials electronically on the Internet. ViewingProviding our proxy materials to shareholders on the Internet saves us the costs ofrather than printing and mailing hard copies saves us these materials.costs. We encourage our shareholdersyou to view our proxy materials on the Internet. Shareholders who have affirmatively elected to receive a printed set of our proxy materials may change their election and elect to view all future proxy materials on the Internet instead of receiving them by mail.


Who is entitled to vote?


Only shareholders of record at the close of business on December 15, 200914, 2011 (the “Record Date”) will be entitled to vote at the Annual Meeting, or any adjournments or postponements thereof. Each outstanding share of the Company’s common stock, $0.25 par value (the “Common Stock”), entitles its holder to cast one vote on each matter to be voted upon.


Shareholders have cumulative voting rights in the election of directors. If any shareholder gives proper written notice to any officer of the Company before the Annual Meeting, or to the presiding officer at the Annual Meeting, that shareholder may cumulate their votes for the election of directors by multiplying the number of votes to which the shareholder is entitled by the number of directors to be elected and casting all such votes for one nominee or distributing them among any two or more nominees. If such notice is given by any shareholder, votes for directors by all shareholders will be cumulated. For instance, if a shareholder only votes for one nominee, such vote will be automatically cumulated and cast for that nominee. If a shareholder has voted for more than one nominee,

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the total number of votes that the shareholder is entitled to cast will be divided equally among the nominees for whom the shareholder has voted.

Who can attend the AnnualAnnual Meeting?


All shareholders as of the Record Date, or their duly appointed proxies, may attend the Annual Meeting.


What constitutes a quorum?quorum?


The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares of our Common Stock outstanding on the Record Date will constitute a quorum. A quorum is required for business to be conducted at the Annual Meeting. As of the Record Date, 16,561,03115,732,374 shares of our Common Stock were outstanding.

outstanding, so holders of at least 7,866,188 shares of our Common Stock must be present, in person or by proxy to have a quorum.


If you vote your proxy electronically through the Internet or by telephone, or submit a properly executed paper proxy card, even if you abstain from voting, you will be considered part of the quorum. Broker non-votes will be counted as present for purposes of determining the existence of a quorum.


How do I vote?vote?


You may vote in one of the following ways:


1)

By Internet:You may access the website at www.proxyvote.comto cast your vote 24 hours a day, 7 days a week. You will need your control number found in the Notice of Internet Availability. Follow the instructions provided to obtain your records and create an electronic ballot.


2)

By telephone:If you reside in the United States or Canada, you may call 1-800-690-6903by using any touch-tone telephone, 24 hours a day, 7 days a week. Have your Notice of Internet Availability in hand when you call and follow the voice prompts to cast your vote.


3)

By mail: If you request a paper proxy card, mark, sign and date each proxy card you receive and return it in the postage-paid envelope provided or to the location indicated on the proxy card.


4)

In person at the Annual Meeting:If you are a shareholder of record, pleaseyou can bring your proxy card to the Annual Meeting to vote your shares in person. If you hold your shares in street name, you must request a legal proxy from your broker or nominee to vote in person at the Annual Meeting.


Shares represented by proxies submitted through the Internet or by telephone, or those paper proxy cards properly signed, dated and returned, will be voted at the Annual Meeting in accordance with the instructions set forth therein. If a proxy is properly submitted, whether through the Internet, by telephone, or by mail using a paper proxy card, but contains no instructions, the shares represented thereby will be voted FORall directors in Proposal 1,FOR ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 20102012 in Proposal 2, and FORrestatement and approval of the MTS Systems Corporation Executive Variable Compensation Plannon-binding, advisory vote regarding the compensation of the Company’s named executive officers in Proposal 3, and at the discretion of the proxy holders as to any other matters which may properly come before the Annual Meeting.


The Internet and telephone voting procedures are designed to verify shareholders’ identities, allow them to give voting instructions and confirm that their instructions have been recorded properly. Shareholders voting through the Internet or by telephone should be aware that they may incur costs to access the Internet or for telephone charges and that these costs will be at the expense of the shareholder.

When do I vote? vote?


If you wish to vote by Internet or telephone, you must do so before 11:59 p.m. Eastern Standard Time on February 9, 2010.7, 2012. After that time, Internet and telephone voting will not be permitted and a shareholder who wantspermitted. If you want to vote after February 7, 2012 or revoke an earlier proxy, you must submit a signed proxy card or vote in person.


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Can I change my vote after I vote electronically or return my proxy card?


Yes. Even after you have voted electronically through the Internet or by telephone or submitted your proxy card, you may change your vote at any time before the proxy is exercised at the Annual Meeting. You may change your vote by:


1)

Returning a later-dated proxy by Internet, telephone or mail;


2)

Delivering a written notice of revocation to our Assistant Corporate Secretary at 14000 Technology Drive, Eden Prairie, Minnesota 55344; or


3)

Attending the Annual Meeting and voting in person. A shareholder’sYour attendance at the Annual Meeting will not by itself revoke a proxy given by the shareholder. Personsthat you have previously submitted. Shareholders who hold shares through a broker or other intermediary should consult that party as to the procedures to be used for revoking a vote.


What does the Board recommend?recommend?


The Board’s recommendations are set forth after the description of the proposals in this proxy statement. In summary, the Board recommends a vote:


1)

FOR the election of each of the nominated directors (see Proposal 1 on page 5);


2)

FORthe ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 20102012 (see Proposal 2 on page 10)14); and


3)

FORthe restatement and approval of the MTS Systems Corporation Executive Variable Compensation Plannon-binding, advisory vote regarding the compensation of the Company’s named executive officers (see Proposal 3 on page 11)40).


If you return a properly executed proxy card without specific voting instructions, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board.


With respect to any other matter that properly comes before the Annual Meeting, the proxy holders will vote as recommended by the Board or, if no recommendation is given, at their own discretion.


What vote is required to approve each Proposal?


For Proposal 1, the election of directors, each shareholder will be entitled to vote for sixseven nominees, and the sixseven nominees receiving the highest number of “FOR”votes will be elected.


For ProposalProposals 2 and 3, respectively, the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2012 and the non-binding, advisory vote regarding the compensation of the Company’s named executive officers, each shareholder will beis entitled to one vote for each share of Common Stock held, and the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.

For Proposal 3, the restatement and approval of the MTS Systems Corporation Executive Variable Compensation Plan, each shareholder will be entitled to one vote for each share of Common Stock held, and the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.


With respect to any other matter that properly comes before the Annual Meeting, the affirmative vote of the holders of a majority of the shares of Common Stock represented in person or by proxy and entitled to vote on the proposal will be required for approval.


A properly executed proxy marked “ABSTAIN” with respect to Proposal 2 or Proposal 3, and any other matter that properly comes before the Annual Meeting, will not be voted, although it will be counted for purposes of determining whether there is a quorum. Accordingly, abstentions will have the same effect as a negative vote.


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A “WITHHELD”vote will be counted for purposes of determining whether there is a quorum, but will not be considered to have been voted in favor of the director nominee with respect to whom authority has been withheld.

A properly executed proxy marked “ABSTAIN” with respect to Proposals 2 or 3, and any other matter that properly comes before the Annual Meeting, will not be voted, although it will be counted for purposes of determining whether there is a quorum. In Proposals 2 and 3, abstentions will have the same effect as a negative vote.
If your shares are held in the “street name” of a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to the proposal to be acted upon. If you do not give your broker instructions as to how to vote your shares, your broker has authority under New York Stock Exchange rules to vote those shares for or against “routine” matters, such as the ratification of accounting firms. Brokers cannot vote on their customers’ behalf on “non-routine” proposals such as the election of directors and approval of the MTS Systems Corporation Executive Variable Compensation Plan.non-binding, advisory vote on the compensation of the Company’s named executive officers. These rules apply notwithstanding the fact that shares of our Common Stock are traded on the NASDAQ Global Select Market.

If your brokerage firm votes your shares on “routine” matters only because you do not provide voting instructions, your shares will be counted for purposes of establishing a quorum to conduct business at the Annual Meeting and in determining the number of shares voted for or against the routine matter. If your brokerage firm lacks discretionary voting power with respect to an item that is not a routine matter and you do not provide voting instructions (a “broker non-vote”), your shares will be counted for purposes of establishing a quorum to conduct business at the Annual Meeting, but will not be counted in determining the number of shares voted for or against the non-routine matter.


Who will count the vote?vote?


Broadridge Financial Solutions, Inc. will act as inspector of elections to determine whether or not a quorum is present and tabulate votes cast by proxy or in person at the Annual Meeting.


What does it mean if I receive more than one Notice of Internet Availability?


If your shares are registered in more than one account, you will receive more than one Notice of Internet Availability. To ensure that all your shares are voted, vote electronically through the Internet or by telephone, or sign, date and return a paper proxy card for each Notice of Internet Availability. We encourage you to have all accounts registered in the same name and address (whenever possible). You can accomplish this by contacting Broadridge Financial Solutions, Inc., by telephone at 800-542-1061 or in writing at Broadridge, 51 Mercedes Way, Edgewood, New York 11717.


How will voting on on any other business be conducted?


We do not know of any business to be considered at the Annual Meeting other than the matters described in this proxy statement. However, if any other business is properly presented at the Annual Meeting, your proxy gives authority to each of Laura B. HamiltonDavid J. Anderson and Bruce W. MootyWilliam V. Murray to vote on such matters at their discretion.


How are proxiesproxies solicited?


In addition to use of the Internet and mail, proxies may be solicited by our officers, directors, and other employees by telephone, through electronic transmission, facsimile transmission, or personal solicitation. No additional compensation will be paid to such individuals.


What is “householding”“householding”?


We may send a single Notice of Internet Availability, as well as other shareholder communications, to any household at which two or more shareholders reside unless we receive other instruction from you. This practice, known as “householding”“householding,” is designed to reduce duplicate mailings and printing and postage costs, and conserve natural resources. If your Notice of Internet Availability is being householded and you wish to receive multiple copies of the Notice of Internet Availability, or if you are receiving multiple copies and would like to receive a single copy, or if you would like to opt out of this practice for future mailings, you may contact Broadridge Financial Solutions, Inc., by telephone at 800-542-1061 or in writing at Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717.


Who pays for the costcost of this proxy solicitation?


We will bear the entire cost of the solicitation of proxies, including the preparation, assembly, printing and mailing of the Notice of Internet Availability, the proxy statement and any additional information furnished to shareholders. We will reimburse banks, brokerage houses, and other custodians, nominees and certain fiduciaries for their reasonable expenses incurred in mailing proxy materials to their principals.


PROPO

PROPOSALSAL 1


ELECTION OF DIRECTORS


General InformationInformation

Six


Seven directors will be elected at the Annual Meeting. Upon the recommendation of the Governance and Nominating Committee, the Board has nominated for election the sixseven persons named below. Each has consented to being named a nominee and will, if elected, serve until the next annual meeting of shareholders or until a successor is elected. Each nominee listed below is currently a director of the Company, and each with the exception of Mr. Anderson and Ms. Steinel, was elected by the shareholders. Mr. Anderson was appointed by the Board as a director effective May 21, 2009, and Ms. Steinel was appointed by the Board as a director effective September 30, 2009. Joseph M. O’Donnell resigned from the Board effective May 17, 2009, in connection with a change in his employment. On November 6, 2009 Lois M. Martin, citing conflicting commitments, announced her intention not to stand for re-election when her current term ends on February 10, 2010. Merlin E. Dewing passed away on December 2, 2009.


Nom

Nomineesinees


The names of the nominees, their principal occupations for at least the past five years and other information are set forth below:



graphic
David J. Anderson – Age 62
64
Director since 2009

Chair since August 2011

Director of Modine Manufacturing Company (developer and manufacturer of thermal management systems and components) and a member of its Corporate Governance and Nominating Committee and Audit Committee since 2010; Director of Schnitzer Steel Industries, Inc. (a metals recycling company)(metals recycler and a membersteel manufacturer) and Chair of its Nominating and Corporate Governance Committee; servesCommittee and Committee member since 2009; Co-Vice Chairman of Sauer-Danfoss, Inc. (developer and manufacturer of fluid power and electronic components and systems for mobile equipment applications) from 2008 until June 2009; President, Chief Executive Officer and Director of Sauer-Danfoss Inc. from 2002 until he retired in January 2009; held various senior management positions with Sauer-Danfoss Inc. from 1984 to 2008; prior to 1984, held various positions in sales, marketing and applications engineering within several manufacturing and distribution businesses. Mr. Anderson served on the Boardsboards of directors of the National Fluid Power Association and the National Fluid Power Association’sAssociation Education and Technology and Education Foundation, Chairingchairing each in 2008/2009; Executive Director2008 and Co-Vice President2009.
Mr. Anderson’s qualifications to sit on our Board and to serve as the Chair of Sauer-Danfoss Inc. (providerthe Board include his more than 40 years of high-performance systemsindustrial business experience and components for a broad range of mobile equipment applications) from July 2008his chief executive officer and operations experience. He also has technology and engineering experience, the ability to January 2009; Presidentformulate and Chief Executive Officer of Sauer-Danfoss Inc. from July 2002 to January 2009execute strategy and a Director of Sauer-Danfoss Inc. from July 2002 until July 2008; Executive Vice President - Strategic Business Development of Sauer-Danfoss Inc. from May 2000 to July 2002; from 1984 to May 2000 held various senior management positions with Sauer­Danfoss Inc. and Sauer-Danfoss (US) Company; from 1970 to 1984 held various executive position in business development, sales, marketing and applications engineering within manufacturing and distribution businesses in the fluid power industry.

financial expertise.


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Jean-Lou Chameau – Age 56
58
Director since 1998

President, California Institute of Technology (Caltech) since September 2006; Provost and Vice President at the Georgia Institute of Technology (Georgia Tech) June 2001 to August 2006; Dean of the College of Engineering and Georgia Research Alliance Eminent Scholar from 1997 to June 2001; Vice Provost for Research and Dean of Graduate Studies from 1995 to 1997; President of Golder Associates, Inc. (a provider of ground engineering, earth, and environmental services) from 1994 to 1995; Director of the School of Civil and Environmental Engineering at Georgia Tech from 1991 to 1994; Professor of Geotechnical Engineering at Purdue University from 1980 to 1991. Served on several boards includingMr. Chameau currently serves as Trustee, Board of Trustees of the Advisory CommitteeCalifornia Institute of Technology, Director of John Wiley & Sons and of Safran, member of InterWest Partners Internet2,Advisory Committee, member of the Executive Committee, Council on Competitiveness, and member of the Academic Research Council, Singapore. He is a member of Singapore and the Council on Competitiveness. Elected to theU.S. National Academy of Engineering and the French Académie des Technologies.
Mr. Chameau’s qualifications to sit on our Board include his executive experience in 2009.

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Laura B. Hamilton – Age 48
Director since 2007

Chaira large organization with a national laboratory and his expertise in engineering, science, research and technology. He also has extensive knowledge and experience in budgetary and financial responsibilities, strategic planning, human capital development, Europe and Asia business, and federal agency funding of the Board since September 2008; Chief Executive Officer of the Company since January 2008; Presidentresearch and Chief Operating Officer of the Company from June 2007 to January 2008; Senior Vice President of the Company’s Test Division from 2003 to 2007; Vice President of the Company’s Materials and Aerospace Divisions from 2000 to 2003; Director of Business Process Improvement from 1999 to 2000; various management positions with Quest Diagnostics (national clinical laboratory) from 1995 to 1999; various management positions with Corning, Inc. (manufacturer of specialty glass and ceramics) from 1989 to 1995; various positions, ending with Tax Manager, with Arthur Young and Company (public accounting firm) from 1984 to 1989.

development.


graphic
Brendan C. Hegarty – Age 67
69
Director since 1998

Consultant

Director of Colm Campbell Company, Inc. (holding company of SAE Power, Inc., a manufacturer of switching power supplies) since 2003;1994; Chief Executive Officer of Nano Magnetics (start­upNanoMagnetics (start-up nanotechnology company located in the United Kingdom) from 2001 to 2002; consultant with NanoMagnetics until he retired in 2003; Executive Vice President and Chief Operating Officer of Seagate Technology (manufacturer of computer disk drives) from 1993 to 1998; Senior Vice President and Chief Technical Officer of Seagate Technology from 1989 to 1993; Vice President of Thin Film Head Operations for Control Data Corporation (computer hardware and software company) from 1988 to 1989; management and executive positions with IBM (computer hardware and software company) from 1967 to 1987.

Mr. Hegarty’s qualifications to sit on our Board include his over 44 years of executive management experience in technical, industrial business. He has technical research and development management experience, manufacturing experience and international management and investment experience.
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Emily M. Liggett – Age 56
Director since 2010
President and Chief Executive Officer of Novatorque, Inc. (manufacturer of high-efficiency electric motor systems) since 2009; President and Chief Executive Officer of Apexon, Inc. (provider of supply chain optimization software solutions for global manufacturers) from 2004 to 2007; President and Chief Executive Officer of Capstone Turbine Corporation (provider of microturbine systems for clean, continuous distributed energy generation) from 2002 to 2003; various management and executive roles at Raychem Corporation (manufacturer of materials, electronics, telecom and energy products acquired by Tyco International in 1999) from 1984 to 2001, including Corporate Vice President of Raychem and Managing Director of Tyco Ventures. Ms. Liggett currently serves on the board of directors of the Purdue University School of Engineering Advisory Board. She has served on the board of directors of Immersion Corporation, a public company, within the last five years.
Ms. Liggett’s qualifications to sit on our Board include her chief executive officer and management experience in a variety of technical industrial companies. She has managed worldwide businesses, partnerships, and international joint ventures. She also has public company and private company operating and board experience, and expertise in strategy, operations, new product development, sales, marketing, and business development for highly technical businesses.

graphic
William V. Murray – Age 51
Director since 2010

Interim Chief Executive Officer of the Company since August 2011; President and Chief Executive Officer of ReShape Medical, Inc. (an early stage medical device company developing a non-surgical treatment for obesity) from 2008 until he voluntarily resigned effective December 10, 2010; President and Chief Executive Officer of Murray Consulting, Inc. (provider of executive management consulting and interim executive management services in the medical technology/life science industries) from 2006 to 2007; Division President of Molecular Biology at Applied Biosystems, Inc. (now part of Life Technologies) (life science tools company) from 2005 to 2006; Group President of Respiratory Technologies of VIASYS Healthcare, Inc. (now part of CareFusion) from 2003 to 2004; held various senior executive positions at Medtronic, Inc. (a medical products company) from 1992 to 2003, including President Pacing Business; held various product development and engineering management positions at Medtronic, Inc. from 1985 to 1992; design engineer at Motorola, Inc. from 1983 to 1985. Mr. Murray currently serves on the board of LifeSync Corporation.
Mr. Murray’s qualifications to sit on our Board include his over 19 years of senior executive positions in various technical and manufacturing companies, including his role as interim Chief Executive Officer of the Company, with significant experience in product and business development, operations, business growth strategies and global profit and loss responsibilities.


graphic
Barb J. Samardzich – Age 51
53
Director since 2001

Vice President, Product Development Ford of Europe for Ford Motor Company (car and truck manufacturer) since September 2011; Vice President of Global Product Programs of Ford Motor Company from January 2011 to September 2011; Vice President of Powertrain Engineering of Ford Motor Company (maker of cars, trucks, SUVs and other vehicles) since 2005;from 2005 to 2010; Executive Director - Small FWD and RWD Vehicles of Ford Motor Company from 2002 to 2005; Chief Engineer for the Automatic Transmission Engineering Operations of Ford Motor Company from 2000 to 2002; Quality Director for the Small and Medium Vehicle Center of the European operations of Ford Motor Company from 1999 to 2000; Chief Program Engineer for F650/F750 Ford trucks of Ford Motor Company from 1998 to 1999; previously held various positions in the Powertrain division of Ford Motor Company from 1990 to 1998; various engineering, sales and marketing positions in the Commercial Nuclear Fuel Division of Westinghouse Electric Corporation from 1981 to 1990.

Ms. Samardzich’s qualifications to sit on our Board include her extensive management and operations experience at a worldwide automotive manufacturing company. She has significant engineering experience, value creation and profit and loss responsibilities.


graphic
Gail P. Steinel – Age 52
54
Director since 2009

President and owner

Owner of Executive Advisors (provider of leadership development services and advice on entering new markets and improving operations)strategic / profit improvement consulting) since 2007; Executive Vice President, Consumer, Industrial & Technology business unit at BearingPoint (a global technology and management consulting company) from 2002 to 2007; progressive management experience at Arthur Andersen (provider of audit, tax and consulting services), where her final position was Global Managing Partner of the Business Consulting Division, from 19841979 to 2002. Ms. Steinel serves on several boards, including the Board of Trustees of Federal Realty Investment Trust and is Chairperson of its Audit Committee,Committee.
Ms. Steinel’s qualifications to sit on our Board include her global managing partner experience running a large global business, more than 26 years of business management consulting providing global strategy, policy development, complex problem solving and the non­profit organization, Shelter our Sisters.

operations consulting services, as well as her financial expertise and experience as a certified public accountant.


6

Table of Contents

Voting Information and Board RecommendationVoting Recommendation


In accordance with Minnesota law, directors are elected by a plurality of votes cast. The sixseven nominees receiving the highest number of votes will be elected. If any nominee is unable to serve as a director, the persons named in the proxies have advised that they will vote for the election of such substitute nominee as the Board may propose. It is intended that proxies will be voted for such nominees. The proxies cannot be voted for a greater number of persons than six.

seven.


THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” EACH NOMINEE LISTED.LISTED

.


Other Information Regarding the the Board


Meetings and Independence.The Board met 914 times during fiscal 2009. The Board also took action in writing in lieu of a meeting 2 times during fiscal 2009.2011. All of the directors attended at least 93.8%95% of the number of Board meetings and meetings of Board committee meetingscommittees on which he or she served that were held during fiscal 2009. 2011. It is our policy that all directors should attend the Annual Meeting. All directors attended last year’s annual meeting of shareholders.

The Governance and NominatingAudit Committee of the Board has determined that each current member of the Board other than Ms. HamiltonMr. Murray, who is and Mr. O’Donnell was,currently serving as interim Chief Executive Officer, is independent, as defined by the applicable rules for companies listed on the NASDAQ Stock Market. Dr. Chameau, oneIn making this determination with respect to Ms. Samardzich, the Audit Committee considered that the Company sold approximately $2.6 million in vehicle testing goods and services to Ford Motor Company in fiscal 2011. The Audit Committee determined that the aggregate dollar amount of the transactions are below the threshold for the NASDAQ Stock Market independence rules and that the transactions do not present a real, potential or perceived conflict between Ms. Samardzich’s interests and the Company’s interests.
Governance Review. In August 2011, the Board of Directors split the roles of the Chairman of the Board and the Chief Executive Officer, naming David J. Anderson as the new Chairman of the Board and William V. Murray as interim Chief Executive Officer, both continuing directors of the Company. In connection with that action, the Board, under the supervision of its Governance and Nominating Committee, undertook a thorough review of the Company’s governance documents, including its Bylaws, Corporate Governance Guidelines and committee charters.

On November 22, 2011, the Board adopted changes to its Bylaws that modernize the Bylaws to enable the Company to take advantage of the flexibility permitted under the revised Minnesota corporation statutes. The most significant changes included delineating the roles of Chairman of the Board and Chief Executive Officer and more clearly providing that the roles can be held by different persons. A copy of the revised Bylaws, along with the rest of the Company’s governance documents, are available on our independent directors, serves as our Lead Director. It is our policy that all directors should attend the Annual Meeting. All directors, except Mr. Andersonwebsite at www.mts.com (select “Investor Relations” and Ms. Steinel who were not then directors, attended last year’s annual meeting of shareholders.click on “Corporate Governance”).


Board Committees.Each of our Committeesthree standing committees operates under a written charter adopted by the Board. These charters are available to shareholders on our website at www.mts.com(select (select “Investor Relations” and click on “Corporate Governance”).


The Audit Committee of the Board, composed of Ms. Steinel (Chair) (who joined on September 30, 2009, Mr. Chameau, and was elected Chair on December 2, 2009), Dr. Chameau, Ms. Martin, Mr. Anderson, (who joined on December 2, 2009), and Mr. Dewing (who served as Chair throughout fiscal 2009), methad 8 timesregular meetings during fiscal 2009.2011. All members of our Audit Committee satisfy the NASDAQ Stock Market listing standards for Audit Committee membership. The Board has determined that Ms. Steinel and Ms. Martin areMr. Anderson each is an “audit committee financial experts”expert” under the Sarbanes-Oxley Act of 2002. Among other duties, the Audit Committee (i) selects our independent registered public accounting firm; (ii) reviews and evaluates significant matters relating to our audit and internal controls; (iii) reviews and approves management’s processes to ensure compliance with laws and regulations; (iv) reviews the scope and results of the audits by, and the recommendations of, our independent registered public accounting firm; and (v) pre-approves, in accordance with its pre-approval policy, all audit and permissible non-audit services and fees provided by our independent registered public accounting firm. The Audit Committee also reviews our audited consolidated financial statements and meets prior to public release of quarterly and annual financial information. The Chair of the Audit Committee or the full Audit Committee meets with our management prior to filing our quarterly and annual reports containing financial statements with the SEC. A report of the Audit Committee is contained in this proxy statement.


In fiscal 2011, the Board established the Audit Committee/Special Purpose to oversee the Company’s internal investigation into matters involving government contracting, certification and import/export practices that was undertaken following (i) the commencement of an investigation by the United States Attorney’s Office in January 2011 into representations made by the Company in the federal government’s online certification and representation (ORCA) system and (ii) the suspension by the U.S. Air Force in March 2011 of the Company from entering into new federal government contracts. The Audit Committee/Special Purpose has also overseen the Company’s reorganization and reinvigoration of its compliance programs and the Company’s entry into an Administrative Agreement with the U.S. Air Force in September 2011, at which time the suspension was lifted. The Audit Committee/Special Purpose was composed of members of the Audit Committee, and Mr. Hegarty acted as an advisor. The Audit Committee/Special Purpose met 44 times during fiscal 2011.

The Compensation Committee of the Board is currently composed of Ms. Samardzich (Chair), Mr. Hegarty,Ms. Steinel, and Mr. Anderson (who joined on July 1, 2009),Hegarty. Mr. Murray served as the Chair of the Compensation Committee until he was appointed to the position of interim Chief Executive Officer, at which time he was removed from the committee and replaced by Mr. Hegarty. The Compensation Committee met 68 times during fiscal 2009.2011. All members are independent directors as defined by the rules applicable to companies listed on the NASDAQ Stock Market. Market, are “non-employee directors” as that term is defined in Rule 16b-3 under the Securities Exchange Act of 1934, and are “outside directors” as that term is used in Section 162(m) of the Internal Revenue Code.

Among other duties, the Compensation Committee (i) reviews and makes recommendations to the Board regarding our employment practices and policies; (ii) in executive session, annually reviews and recommends to the independent directors of the full Board the compensation paid to our Chief Executive Officer and evaluates the performance of our Chief Executive Officer; (iii) annually reviews and recommends to the full Board the compensation paid to the other executive officers; (iv) administers and reviews the Company’s retirement plans and approves any amendments related to such plans; (v) administers and grants awards under our stock optionequity incentive and annual incentive plans (the Compensation Committee acts in executive session when granting options to Ms. Hamilton)the Chief Executive Officer); (vi) reviews management and leadership developmentapproves stock ownership guidelines for executive officers and succession plans for management (subjectmonitors adherence to review by the independent directors of the full Board for the Chief Executive Officer position);such guidelines; and (vii) approves the Compensation Discussion and Analysis for our proxy statement. A report of the Compensation Committee is contained in this proxy statement.

The Governance and Nominating Committee of the Board, composed of Dr. ChameauMs. Liggett (Chair), Mr. Hegarty, Ms. Steinel (who joined on December 2, 2009),Chameau and Mr. Dewing (who served throughout fiscal 2009),Hegarty, met


7

Table of Contents

5 8 times during fiscal 2009.2011. All members are independent directors as defined by the rules applicable to companies listed on the NASDAQ Stock Market. Among other duties, the Governance and Nominating Committee (i) reviews and approves Board governance practices; (ii) administers the Board evaluation;evaluation process; (iii) reviews and approves Board compensation;compensation of non-employee directors; (iv) monitors adherence to the stock ownership guidelines applicable to non-employee directors; and (iv)(v) identifies, screensevaluates and recommends potential director candidates and director nominees for selection by the Board.


Director Nomination Process. Process. In identifying prospective director candidates, the Governance and Nominating Committee (for purposes of this Director Nomination Process sub-section, the “Committee”) considers recommendations from shareholders and recommendations from business and professional sources, including executive search firms. During fiscal 2009, we retained Heidrick & Struggles,

In evaluating director candidates, the Committee believes that all members of the Board should have personal and professional integrity, an absence of conflicts of interest, and an ability to understand and respect the advisory and proactive oversight responsibility of the Board. In addition, all members of the Board should meet independence requirements, comply with director orientation and education guidelines, commit sufficient time to attend Board and committee meetings and fully perform the duties of a director.

In addition to these threshold criteria, the Committee also considers the contributions a candidate is expected to make to the collective functioning of the Board. The Committee seeks directors who will contribute to the Board in areas such as strategy and policy development, technology and engineering, human capital development, financial expertise, international business development and best practices, industrial business value creation, and public company chief executive search firm,officer perspective.

Candidates are expected to identify potentialeffectively perform the role of a director candidates. The Governanceby demonstrating broad perspective and Nominatingan inquiring mind, being well prepared for and actively participating in Board and committee meetings, contributing expertise to the Board and committees, listening well, expressing views candidly, applying experience and expertise, being respectful to others and appropriately representing the shareholders.

While it does not have a specific written policy with regard to the consideration of diversity in identifying director nominees, the Committee believes the Board should reflect a variety of opinions, perspectives, personal and professional experiences and backgrounds. Although not part of any formal policy, the goal is to have a balanced and diverse Board, with members whose skills, backgrounds and experiences will enhance the quality of the Board’s deliberations and decisions and cover the spectrum of areas that impact the Company’s business. Each member of the Board should contribute to the overall Board composition, with the goal of creating a diverse Board that can work collaboratively to guide the success of the Company and represent shareholder interests.

The Committee’s policy is to consider qualified candidates for positions on the Board who are recommended in writing by shareholders. Shareholders wishing to recommend candidates for Board membership rather than directly nominating an individual should submit the written recommendations in writing to our Secretary at least 90 days prior to the date corresponding to the previous year’s annual meeting of shareholders, with the submitting shareholder’s name, address, and pertinent information about the proposed nominee. When evaluating the qualifications of potential new directors or the continued service of existing directors, the Governance and Nominating Committee will consider a variety of criteria, including the individual’s integrity, experience dealing with complex problems, specialized skills or expertise, diversity of background, independence, financial expertise, freedom from conflicts of interest, ability to understand the role of a director, the needs of the Board, and ability to fully perform the duties of a director. Candidates recommended by shareholders will generally be considered in the same manner as any other candidate; however, special consideration will be given to existing directors desiring to stand for re-election given their history of service and their knowledge of the Company, as well as the Board’s knowledge of their level of contribution resulting from such service.


A shareholder intending to nominate an individual as a director at an annual meeting of shareholders, rather than recommend the individual to the Governance and Nominating Committee for consideration as a nominee, must comply with the advance notice requirements set forth in our Bylaws. Our Bylaws provide that any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors provided that such shareholder has provided written notice of such intention to our Secretary. Such notice must be given not fewer than 90 days nor more than 120 days prior to the meeting date corresponding to the previous year’s annual meeting of shareholders date, except in certain circumstances, and must contain certain required information about the nominee.


Shareholders wishing to recommend for nomination or nominate a director should contact the Company’s Secretary for a copy of the relevant procedure and a full delineation of the criteria considered by the Governance and Nominating Committee when evaluating potential new directors or the continued service of existing directors.

Board Leadership Structure. Our Board leadership structure currently includes a non-executive Chairman of the Board and a separate Chief Executive Officer. These roles were combined until August 2011 when Laura B. Hamilton, who had been serving as the Chair and Chief Executive Officer, resigned from the Company by mutual agreement with the Board. The Board then appointed Mr. Murray as interim Chief Executive Officer and Mr. Anderson as non-executive Chairman of the Board, both of whom had already been serving as directors. The Board is currently engaged in a search for a Chief Executive Officer and intends to maintain the separateness of the Chief Executive Officer and Chairman roles for the time being. However, the Board has not adopted a policy of separateness and will periodically re-evaluate its leadership structure as the Company’s situation changes.

The primary role of our Chief Executive Officer is to manage the business affairs of the Company, and the primary role of our Chair is to preside over all Board activities and ensure Board effectiveness in all aspects of its functioning. This role includes working with the Chief Executive Officer to set the Board agenda, ensuring that clear, accurate and timely information is provided to the Board, managing Board meetings to allow time for discussion of complex or difficult issues, and promoting active participation by all Board members. The Chair may also assist the Chief Executive Officer in managing the Company’s relationships with investors and other external stakeholders.

The Board has determined that the separation of the Chairman and Chief Executive Officer roles is appropriate for the Company at this time because it enables the interim Chief Executive Officer to focus more closely on the day-to-day operations of the Company, which includes expanding the opportunities for growth and profitability, and effectively managing the Company’s exposure to compliance and other risks. The Board also values the increased involvement of Mr. Anderson as a leader and benefits more directly from his extensive industry and executive experience.

Board Role in Risk Oversight. Management is responsible for designing and implementing the Company’s day-to-day risk management processes, controls and oversight. The Board, as a whole and through its Committees, has broad responsibility for the oversight of risk management as well as specific risk management accountability for governance, overall risk appetite, executive compensation, CEO succession, and the control environment including financial reporting. In its risk management role, the Board has the responsibility to satisfy itself that the risk management processes and controls are adequate and functioning as designed and that Company business is conducted in compliance with proper governance and applicable laws and regulations. The Board views risk in the context of major strategic and operational decisions relative to the anticipated benefits. The Board further recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive and to achieve its long-term performance expectations.

The Board believes the Company has good internal processes to identify, manage and mitigate risk and has implemented a new code of conduct as well as process and procedure enhancements during fiscal 2011 that further enhance the risk management oversight. In addition, the Company hired a General Counsel/Chief Compliance Officer who has primary oversight over compliance. Risk management is embedded in the business management system which begins with the Company’s strategy. The key steps of the business management system are the on-going monitoring and assessment of the external environment, the evaluation/validation of the strategic priorities and initiatives, the development of mid-range and annual operating plans, the execution of the annual operating plan and the ongoing monitoring and management of the business. In addition, the Board believes there is an appropriate internal control environment to identify, manage and mitigate risks.

As a critical part of its risk management oversight role, the Board encourages full, open and ongoing communication with management. The Board regularly engages in discussion with management on strategic, operational and governance matters to ensure that risks are identified, managed and mitigated on a timely basis. Senior management attends quarterly Board meetings and the Board also engages with members of the management team to review and discuss specific topics in addition to the quarterly meetings which provide the Board with evidence of risk management in practice.

The Board implements its risk oversight function both as a whole and through committees. Much of the work is delegated to various committees, which meet regularly and report back to the full Board. All committees have significant roles in carrying out the risk oversight and management function. Each committee is comprised entirely of independent directors and is responsible for overseeing risks associated with its respective area of responsibility.
The Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to the accounting and financial reporting principles and policies and internal audit controls and procedures. The Audit Committee oversees the financial statements and the independent audit thereof. It evaluates the performance and independence of outside auditors and selects appropriate outside auditors annually. The Audit Committee is responsible for monitoring risks related to financial assets, accounting, legal and corporate compliance. In addition, the Audit Committee discusses legal and compliance matters and assesses the adequacy of Company risk-related internal controls. The Audit Committee members meet separately with representatives of our independent auditing firm, the Internal Assurance leader, and outside legal counsel.

In the spring of 2011, the Board established the Audit Committee/Special Purpose to review compliance and government-related functions and activities and monitor and approve resources, as appropriate. It fulfills these responsibilities by conducting regular reviews with support from Company personnel, independent auditors, consultants and outside legal counsel.

The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with our compensation policies and programs. The Compensation Committee is responsible for determining salaries, incentives and other elements of total compensation for our executive officers, and it administers our various compensation and benefit plans to ensure sound pay practices with features that mitigate risk without changing the incentive nature of the compensation. A separate discussion regarding the risk considerations in our compensation programs, including the processes which are put in place by the Compensation Committee and management to identify, manage and mitigate potential risks in compensation, can be found on page 15 of this proxy statement.

The Governance and Nominating Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization, membership, and structure. The Governance and Nominating Committee is responsible for recommending director candidates to our Board, overseeing processes for shareholders to nominate director candidates, and evaluating the performance of directors, committees and the Board. The Governance and Nominating Committee is also responsible for developing, periodically reviewing and recommending corporate governance principles and procedures to the Board, and overseeing director orientation and continuing education.

The Chair of each committee provides a committee report at each Board meeting which enables the Board to fulfill its risk oversight responsibilities. Since risk oversight is an ongoing process and inherent in the Company’s strategic and operational decisions, the Board also discusses risk in relation to specific proposed actions.

Communications with the Board. Board. The Board provides a process for shareholders to communicate with it.its members. The manner in which shareholders can send communications to the Board is set forth on our website at www.mts.com(select (select “Investor Relations” and click on “Corporate Governance”).


Board Evaluation. The Governance and Nominating Committee leads the Board engages in an annual evaluation of its performance as a board of directors.


Code of Business Conduct. We have in place a code of ethics, known as the “MTS Code of Business Conduct,” which applies to all our directors, officers, employees, and contractors. We believe that theThe Code not only documents our historic good business practices but also sets forth guidelines for ensuring that all of our personnel act with the highest standards of integrity. The MTS Code of Business Conduct, as well as any waivers from and amendments to the Code, are posted on our website at www.mts.com(select (select “Investor Relations” and click on “Corporate Governance”).


Non-Employee Dire

Independent Directorctor Compensation


Directors who are not otherwise directly or indirectly compensated by the Company are each paid fees in the form of an annual retainer of $40,000, which includes compensation for all Board meetings. In addition, committee members are compensated at a rate of $1,000 per meeting attended. The Chair of the Audit Committee receives an additional $10,000 annually, the ChairsChair of the Compensation Committee receives an additional $6,000 annually, and the Chair of the Governance and Nominating Committee receivereceives an additional $5,000 annually, andannually. When the Chair of the Board is also an executive officer of the Company, the non-employee directors elect from amongst themselves a Lead Director, who receives an additional $15,000 annually.


8

The Audit Committee/Special Purpose was formed by the Board in the spring of 2011 as a result of the investigation of the Company by the United States Attorney’s Office and the suspension of the Company by the U.S. Air Force from entering into new federal contracts. This special committee met 44 times during the last half of fiscal 2011, and its members devoted a significant amount of time and effort, both in meetings and outside them, to overseeing the Company’s internal investigation into the matters involving government contracting, certification and import/export practices undertaken in response to the government’s actions.
The Board of Directors, in recognition of the significant contributions by the members of this special committee, determined in November 2011 that two members of the committee should receive compensation in addition to their normal compensation. Mr. Hegarty, who was not a member of the Audit Committee and did not receive normal meeting fees for Audit Committee/Special Purpose meetings, will be paid $44,000 for his services—an amount equal to the normal meeting fees had he been a member of the Audit Committee. Ms. Steinel, who chaired the Audit Committee/Special Purpose and directed the committee’s activities, will be paid $88,000 for her services to the Company in this role, which is in addition to the normal meeting fees for attendance at the special committee meetings.

Upon election or re-election to the Board at each of our annual meetings of shareholders, each non-employee director receiveswill receive shares of restricted stock under our 20062011 Stock Incentive Plan in an amount determined by the Board. At the Annual Meeting, eachEach non-employee director will receive an annual restricted stock award grant with the number of shares (rounded to the next whole share) equal to $80,000 divided by the closing price of our Common Stock on the date of the Annual Meeting. Each such annual restricted stock award is granted on the date the non-employee director is elected or re-elected to serve on the Board and vests as to one-third of the shares on the date of each of the three regular annual meetings of shareholders following the date of grant, provided such director continues to serve. If a non-employee director is electedappointed to the Board prior to the annual meeting of shareholders, the non-employee director may receive a pro-rated restricted stock award depending upon, among other things, the length of time until the next annual restricted stock award grant. If a non-employee director resigns, retires or otherwise terminates his or her service as a director following ten years of service as a director, all unvested shares of restricted stock will then vest. If a non-employee director retires, resigns or otherwise terminates his or her service as a director after having served fewer than ten years, any restricted shares which have not vested as of the date of termination of service will be forfeited. Non-employee directors are also reimbursed for travel expenses to Board meetings.


Effective upon his appointment as Chairman of the Board on August 25, 2011, Mr. Anderson is receiving annual compensation of $110,000 in cash and $110,000 in restricted stock that will vest ratably over three years, in addition to regular Board and committee meeting fees.

The table below shows cash compensation paid to non-employee directors for fiscal 2009.2011. The table also shows the dollar amounts recognized by us for financial statement reporting purposes during fiscal 20092011 for restricted stock awards.

Name

 

Fees earned or
paid in cash
($) (1)

 

Stock Awards
($) (2)(3)4)

 

All Other
Compensation
($) (5)

 

Total
($)

 

 

 

 

 

 

 

 

 

 

 

David Anderson (6)

 

11,000

 

11,002

 

0

 

22,002

 

Jean-Lou Chameau

 

74,000

 

91,882

 

2,721

 

168,603

 

Merlin E. Dewing

 

62,000

 

80,029

 

2,721

 

144,750

 

Brendan C. Hegarty

 

50,000

 

91,882

 

2,721

 

144,603

 

Lois M. Martin (7)

 

47,000

 

80,029

 

2,721

 

129,750

 

Joseph M. O’Donnell (8)

 

20,000

 

0

 

446

 

20,446

 

Barb J. Samardzich

 

50,000

 

80,029

 

2,721

 

132,750

 

Gail P. Steinel (9)

 

0

 

0

 

0

 

0

 


_____________________

Director Compensation for Fiscal 2011

Name 
Fees earned or
paid in cash
($) (1)
  
Stock Awards
($) (2)(3)
  
All Other
Compensation
($) (4)
  
Total
($)
 
David J. Anderson                                            90,000   80,033   3,619   173,652 
Jean-Lou Chameau                                            119,000   80,033   4,009   203,042 
Brendan C. Hegarty                                            93,000   80,033   4,009   177,042 
Emily M. Liggett      ��                                     48,000   80,033   2,249   130,282 
William V. Murray (5)                                          
  50,000   80,033   2,249   132,282 
Barb J. Samardzich                                            50,750   80,033   4,009   134,792 
Gail P. Steinel                                            197,000   80,033   2,675   279,708 

(1)


(1)Includes annual retainer and committee meeting fees paid in cash.

cash, as well as amounts paid to Mr. Hegarty and Ms. Steinel for their service on the Audit Committee/Special Purpose.

(2)

Amounts represent compensation expense recognizedaggregate grant date fair value during fiscal 20092011 under SFAS 123R,FASB ASC Topic 718, based on the valuation and utilizing the assumptions discussed in Note 2 to our Notes to Consolidated Financial Statements for the fiscal year ended October 3, 2009. Dr. Chameau and Mr. Hegarty’s recognized expense reflects their eligibility for accelerated vesting of their restricted stock awards upon retirement from the board after serving for 10 years.

(3)

1, 2011. Each of Dr.Mr. Anderson, Mr. Chameau, Mr. Dewing, Mr. Hegarty, Ms. Martin,Liggett, Mr. O’Donnell,Murray, Ms. Samardzich and Ms. SamardzichSteinel was granted 2,973awarded 1,866 shares of restricted stock during fiscal 2009year 2011 with a grant date fair value of $80,003. This restricted stock was granted on February 4, 2009. Mr. Anderson was granted 1,888 shares of restricted stock on May 20, 2009 with a grant date fair value of $40,007. Generally, the full grant date fair value is the amount of expenses in our financial statements over the awards’ vesting period, based on the valuation and utilizing the assumptions discussed in Note 2 to our Notes to Consolidated Financial Statements for the fiscal year ended October 3, 2009.

$42.89 per share.

(4)

(3)

As of October 3, 2009,1, 2011, the named directors held restricted stock awards in the following amounts:number of restricted shares: Mr. Anderson – 1,888; Dr.4,581; Mr. Chameau – 4,992; Mr. Dewing – 4,992;4,942; Mr. Hegarty – 4,992; and4,942; Ms. Liggett – 3,202; Mr. Murray – 3,202; Ms. Samardzich – 4,992. In accordance with the stock incentive plan, Mr. Dewing’s restricted stock awards were forfeited upon his death on December 2, 2009.

4,942; and Ms. Steinel – 3,951.

(5)

(4)

Reflects cash dividends paid on unvested restricted stock awards in fiscal 2009.

2011.

(6)

(5)

Represents amounts paid to Mr. Anderson joinedMurray as an independent director prior to his appointment as interim Chief Executive Officer on August 25, 2011. Amounts paid to Mr. Murray as interim Chief Executive Officer in fiscal 2011 are included in the BoardSummary Compensation Table on May 21, 2009.

page 31.

(7)

Ms. Martin will forfeit the 2,678 shares of unvested restricted stock awarded to her in fiscal years 2008 and 2009 when her tenure on the Board of Directors expires effective upon the commencement of the annual meeting on February 10, 2010.

(8)

Mr. O’Donnell joined the Board on November 24, 2008 and resigned from the Board on May 17, 2009. The restricted stock awarded to Mr. O’Donnell on February 4, 2009 was forfeited upon his resignation.

(9)

Ms. Steinel joined the Board on September 30, 2009.

13


9

PROPOS

PROPOSALAL 2


RATIFICATION OF APPOINTMENT OF

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


THIS SECTION SHOULD BE READ IN CONJUNCTION
WITH THE “AUDIT COMMITTEE REPORT” BELOW.


KPMG LLP (“KPMG”), an independent registered public accounting firm, has been our independent registered public accounting firm since May 31, 2002. The Audit Committee has selected KPMG to serve as our independent registered public accounting firm and to serve as auditors for the fiscal year ending October 2, 2010.September 29, 2012. Shareholder ratification of the appointment is requested. Consistent with our Audit Committee Charter and the requirements of the Sarbanes Oxley Act of 2002 and applicable rules and regulations of the SEC and the NASDAQ Stock Market, the ratification of the appointment of independent auditors by the shareholders will in no manner impinge upon or detract from the authority and power of the Audit Committee to appoint, retain, oversee and, if necessary, disengage the independent auditors. In the event the appointment of KPMG is not ratified by the shareholders, the Audit Committee will make another appointment to be effective at the earliest feasible time.


Representatives of KPMG are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.


Fees and ServicesServices


The following table presents aggregate fees for professional services rendered by KPMG in fiscal years 20082010 and 20092011 for the audit of our annual financial statements and for other services.

 

 

Fiscal Year
($000’s)

 

 

 

2008

 

2009

 

Audit Fees(1)

 

$

1,585

 

$

1,545

 

Audit-Related Fees(2)

 

 

14

 

 

14

 

Tax Fees(3)

 

 

55

 

 

12

 

All Other Fees

 

 

—

 

 

—

 

Total fees

 

$

1,654

 

$

1,571

 


_____________________

  
Fiscal Year
($000’s)
 
       
  2010  2011 
Audit Fees(1)                                                                  
 $1,192  $1,565 
Audit-Related Fees(2)                                                                  
  15   15 
Tax Fees(3)                                                                  
  21   20 
All Other Fees                                                                    —   — 
Total fees                                                              $1,228  $1,600 

(1)

(1)Includes annual audit of consolidated financial statements and Sarbanes-Oxley Section 404 attestation services.

(2)

Audit-related fees consist of fees for audits of our employee benefit plan.

(3)

Tax fees consist of fees for tax compliance and tax consultation services.


The amounts in the table do not include out-of-pocket expenses incurred by KPMG. The Audit Committee pre-approved all non-audit services described in the table. The Audit Committee has determined that the provision of the services identified in the table is compatible with maintaining the independence of KPMG.


Pre-Approva

Pre-Approvall Policy


The Audit Committee’s current practice on pre-approval of services performed by the independent registered public accounting firm is to require pre-approval of all audit services and permissible non-audit services. The Audit Committee reviews each non-audit service to be provided and assesses the impact of the service on the firm’s independence. In addition, the Audit Committee has delegated authority to grant certain pre-approvals to the Audit Committee Chair. Pre-approvals granted by the Audit Committee Chair are reported to the full Audit Committee at its next regularly scheduled meeting.

Board Voting RecommendationRecommendation


THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSAL
TO RATIFY THE APPOINTMENT OF KPMG LLP.


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AUDIT COMMITTEECOMMITTEE REPORT


The Audit Committee is presently composed of fourthree directors who are independent, as defined by the applicable rules for companies listed on the NASDAQ Stock Market. The Audit Committee operates under a written charter adopted by the Board, a copy of which is available to shareholders on our website at www.mts.com(select (select “Investor Relations” and click on “Corporate Governance”).

Management is responsible for our internal controls over the financial reporting processes. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements and internal controls in accordance with auditing standards generally accepted in the United States and for issuing reports on such audit. The Audit Committee’s responsibility is to monitor and oversee these processes.


Management has represented to the Audit Committee that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, and the Audit Committee has reviewed and extensively discussed the consolidated financial statements with management and KPMG, our independent registered public accounting firm.


In reviewing our fiscal 20092011 audited consolidated financial statements, the Audit Committee discussed with KPMG matters required to be discussed by Statement on Auditing Standards No. 61. KPMG also provided to the Audit Committee the written disclosures required by Independence Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with KPMG that firm’s independence.


Based upon the Audit Committee’s discussions with management and KPMG and the Audit Committee’s review of the representations of management and the reports of KPMG, the Audit Committee recommended that the Board include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2009,1, 2011, which was filed with the SEC on December 2, 2009.

November 30, 2011.


SUBMITTED BY THE AUDIT COMMITTEE

OF THE COMPANY’S BOARD OF DIRECTORS

Gail P. Steinel (Chair)          Jean-Lou Chameau          David J. Anderson

Risk Considerations in Our Compensation Programs


During fiscal 2010, management conducted a thorough risk assessment described below to evaluate the risks associated with the Company’s compensation practices, policies and programs for all employees, including the named executive officers. Based on this review and assessment, management and the Compensation Committee concluded at that time that our compensation program does not encourage excessive or inappropriate risk-taking that is reasonably likely to result in a material adverse affect on us.

During fiscal 2011, management revisited this risk assessment by identifying and analyzing any changes in compensation policies and practices that had been made since the fiscal 2010 assessment had been conducted. Management determined that no significant changes had been made and no undue compensation risk was identified. Because no significant changes were made from the prior year, management and the Compensation Committee concluded that risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

The fiscal 2010 risk assessment was conducted with the assistance of the Compensation Committee’s independent consultant, Towers Watson. Compensation programs were reviewed broadly, including a qualitative analysis of program designs and corporate governance processes, as well as an analysis of directional alignment of historical pay and performance outcomes. Members of the Board and senior management were interviewed to gain a variety of perspectives on risk. Questions centered on how the Company currently identifies and measures various types of risk, the roles and responsibilities of players in the risk management process, and the level of risk encouraged or mitigated by the Company’s current compensation plans.
As part of this risk assessment process, management and the Compensation Committee identified several components of our compensation programs that effectively reduced risk. Following the fiscal 2011 review and analysis, the Compensation Committee reaffirmed that these components, set forth below, continue to reflect our position on compensation risk:

Gail P. Steinel (Chair)

Jean-Lou Chameau

●

Lois M. Martin

David J. Anderson

Our use of different types of compensation provides a balance of short-term and long-term incentives with fixed and variable components;

●Our compensation plan design and the governance processes work together to minimize exposure to excessive risk, while creating a focus on operational activities that contribute to long-term shareholder value creation;

●The metrics used to determine the amount of a participant’s bonus under our short-term incentive plans focus on a combination of Company-wide metrics and business unit performance using a balance of profitability and capital efficiency measures;

●Our bonus plans impose threshold and maximum payout levels on bonus awards to limit windfalls;

●Commission-based payments represent a limited component of our historical overall compensation program;

●Our programs include clawback provisions and allow the use of negative discretion for our named executive officers;

●Our stock ownership guidelines discourage excessive risk taking; and

●Our system of internal controls places a strong focus on avoiding undue financial risk through rigorous review processes.

PROPOSAL 3

RESTATEMENT AND APPROVAL OF THE

MTS SYSTEMS CORPORATION EXECUTIVE VARIABLE COMPENSATION PLAN


Compensation Discussion and Analysis

Section 162(m)


Executive Summary

We are a leading global supplier of test systems and industrial position sensors. Our operations are organized and managed in two business segments, the Test segment and the Sensors segment. The Test and Sensors segments represented approximately 80% and 20%, respectively, of our revenue for fiscal 2011. Sales outside of the Internal Revenue CodeUnited States, including export sales from U.S. businesses, accounted for approximately 70% of 1986 (“Code”our revenue in fiscal 2011.

Our compensation policies and objectives during fiscal 2011 were influenced by a variety of factors, including uncertainty regarding the extent to which worldwide economic conditions would continue to impact our operating results. Our operating results had improved in fiscal 2010 over fiscal 2009, with particular strengths in increased orders and improved earnings per share, but uncertainty about prospects for 2011 remained. In addition, uncertainty increased during the fiscal year with the investigation initiated in January 2011 by the U.S. Department of Commerce and the U.S. Attorney’s Office for the District of Minnesota and the related suspension imposed by the U.S. Department of the Air Force, which began in March 2011 and was lifted in September 2011. This temporary suspension barred the Company from U.S. Government contracting and from directly or indirectly receiving the benefits of federal assistance programs during that time.
As a result of this uncertainty related to the economy and how it would impact our industry and our business, and as a reaction to the government investigation and suspension, the Compensation Committee (for purposes of this Compensation Discussion and Analysis, the “Committee”) limitstook a conservative approach to compensation programs in fiscal 2011, while also focusing on attracting and retaining top talent to manage the Company in challenging circumstances. Highlighted below are some of the key actions and decisions with respect to our federal income tax deductionexecutive compensation programs for fiscal 2011 as approved by the Committee with counsel from its independent compensation consultant, Towers Watson:

●
Strong Performance-Based Compensation Awards and Payouts. Our executive compensation is tightly linked with performance.

●As with past years, we adopted an Executive Variable Compensation (EVC) Plan through which the named executive officers were eligible to earn cash incentive compensation based upon achievement of specific financial objectives for fiscal 2011 recommended by the Committee and approved by the Board that are designed to challenge the named executive officers to high performance.

●The Committee chose to adjust payouts under the EVC Plan to our named executive officers for fiscal 2011 performance downward from the amounts that would have been payable based only on achievement of the fiscal 2011 financial objectives. The Committee exercised its negative discretion because it believed that, in light of the U.S. Department of Commerce investigation and temporary suspension imposed by the U.S. Department of the Air Force, the Company’s and named executive officers’ performance in fiscal 2011 was not completely captured by reference to the financial objectives alone.

●As named executive officers assume greater responsibility, a larger portion of their total cash compensation is designed to and does become dependent on Company, business unit, and individual performance.

●The Committee targets annual base salaries around the median base salaries of salary survey data, with the EVC Plan designed to allow the named executive officer to earn above target compensation only when the named executive officer delivers, and as a Company we deliver, performance that is also above our targets.

●The Committee actively considers the impact of unusual or one-time events on our financial performance in setting the performance goals under the EVC Plan. None of the financial objectives were adjusted on this basis in fiscal 2011.

●
Adjustments to Long-Term Incentive Awards. The Committee decided to grant only stock options to the named executive officers in fiscal 2011 instead of a mix of stock options and restricted stock units so that the named executive officers’ equity ownership results are aligned with our shareholders’ results regardless of the outcome of the U.S. Department of Commerce investigation.

●
Lifting of Salary Freeze. The salary freeze that had been in effect in fiscal 2010 was lifted for fiscal 2011.

●
Appropriate Comparisons. As part of our salary structure analysis, we compare market information, adjusted for revenue size, to current base salaries.

●In fiscal 2010, we adjusted the market data used to evaluate base salaries by returning to the revenue scope we had used in fiscal years 2006 to 2008. We maintained those lower revenue scopes in fiscal 2011 since the Committee believed that those levels appropriately reflected our Company’s likely revenue outcomes for fiscal 2011. As in past years, the Committee also conducted a proxy review based on comparator companies and then requested Towers Watson to review management’s processes to set salary ranges for our U.S.-based named executive officers.

●The base salary for Joachim Hellwig, our named executive officer who resides in Germany, was analyzed in the context of a European salary survey in which our Company participated during fiscal 2010. To maintain its commitment to using appropriate, current comparisons to market demands when establishing base salary ranges, the Committee has adopted the practice of analyzing market data for Mr. Hellwig’s position annually, instead of biannually as had been done in the past.
●
Stock Ownership Expectations. Our compensation programs encourage employees to build and maintain an ownership interest in the Company. We have established specific stock ownership guidelines for named executive officers, which were reviewed and updated by the Committee in fiscal 2011 to reference current base salary and average common stock price in determining the fixed number of shares under the guidelines and will continue to be reviewed annually by the Committee.

●
Emphasis on Quality Compensation Practices. We renewed our commitment to several significant compensation practices that we believe contribute to good governance.

●Our EVC Plan that was approved by shareholders at the fiscal 2009 annual meeting of shareholders held in February 2010 and the 2011 Stock Incentive Plan that was approved by shareholders at the fiscal 2010 annual meeting of shareholders held in February 2011 both contain a recoupment or “clawback” provision. These clawback provisions require a named executive officer to forfeit and allow us to recoup any payments or benefits received by the named executive officer under the EVC Plan or the 2011 Stock Incentive Plan under certain circumstances, such as certain restatements of our financial statements, termination of employment for cause, and breach of an agreement between us and the named executive officer.

●
As described under the Risk Considerations in Our Compensation Programs section, the Committee conducted a review of the Company’s compensation policies and practices for fiscal 2011 and concluded that they do not create risks that are reasonably likely to have a material adverse effect on the Company. The Committee has identified effective risk management as one of its primary compensation objectives.

●Our compensation consultant is retained directly by and reports to the Committee. Our compensation consultant does not provide any services to management personally and had no prior relationship with any of our named executive officers.

Named Executive Officers in excessFiscal 2011

Our named executive officers for fiscal 2011 consist of $1 million per individual paid tothe following persons, including the two persons who served as our Chief Executive Officer during the fiscal year, the person who served as our Chief Financial Officer during the fiscal year, and our three highest paidCompany’s two other executive officers, excludingofficers:

●Laura B. Hamilton, former Chair and Chief Executive Officer,

●William V. Murray, interim Chief Executive Officer and President,

●Susan E. Knight, Chief Financial Officer and Vice President,

●Joachim Hellwig, Vice President, Sensors Business Unit, and

●Kathleen M. Staby, Vice President of Human Resources and Strategy.

Ms. Hamilton resigned from the Chief Financial Officer. Compensation that is performance-based within the requirements of Code Section 162(m) and is approvedCompany by our shareholders will not be subject to the deduction limit. Therefore, in order to maximize our tax deduction,mutual agreement with the Board of Directors is requestingeffective August 25, 2011. On that shareholders approvedate, the MTS Systems Corporation Executive Variable Compensation Plan (the “EVC Plan”).

The EVC Plan will authorize the Compensation Committee (the “Committee”) to award cash bonuses to senior management employees, including theBoard of Directors named William V. Murray as interim Chief Executive Officer and David J. Anderson as non-executive Chairman of the three executive officers subjectBoard. Both Messrs. Murray and Anderson were serving as independent directors of the Company at the time.


In consideration for a release of claims, covenants not to Code Section 162(m), based oncompete with the achievementCompany or disclose confidential information, and certain other provisions contained in the Separation Agreement, dated as of pre-established objective financialAugust 25, 2011, by and business performance goals. If approved bybetween the shareholders,Company and Ms. Hamilton, we provided Ms. Hamilton with severance benefits described in “Potential Payments Upon Termination or Change in Control.” The compensation being paid to Mr. Murray in his capacity as interim Chief Executive Officer is described under the EVC Plan will be effective for bonuses awardedheading “Interim Chief Executive Officer Compensation” later in this Compensation Discussion and Analysis.
Unless otherwise specified, references in this Compensation Discussion and Analysis to decisions made with respect to our fiscal years beginning innamed executive officers refer to decisions that applied to Ms. Hamilton before her separation from service and after October 2010.

Our shareholders previously approved a similar EVC Plan at the January 2005 annual meeting, which governed the bonus awards to senior executives for each fiscal year since October 2004. The principal changes to the EVC Plan approved in 2005 are as follows:

•

The categories of financial performance goals now include the broader categories of financial performance contained in our 2006 Stock Incentive Plan (described below under Performance Goals);

The Committee may now adjust downward the performance goals so that bonuses will be paid upon lesser achievements, but may only decreaseMs. Knight, Mr. Hellwig and not increase the amount of any Bonus AwardMs. Staby. References to the Chief Executive Officer and the three executive officers subjectare to Code Section 162(m) after the performance


11

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goals have been established; and

The Company may, as a condition to new awards, cancel and recover bonus amounts received by executives in the event financial mismanagement is discovered, or the executive violates Company policies or agreements, such as a non-compete or non-disclosure agreements.

Summary of the EVC Plan

Purpose of the EVC Plan

The purpose of the EVC Plan is to focus efforts on achievement of financial objectives that are important to the success of MTS and to reward our executives when our financial performance meets or exceeds the established objectives.

Eligibility and Participation

From time to time, the Committee will select from among the senior management employees who will be eligible to participate in the Plan. This will include officers subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934 and those executive officers subject to Code Section 162(m). As a frame of reference, for the fiscal year ended October 3, 2009, there were 5 executive officers eligible to participate in the current EVC Plan.

Performance Goals

The Committee will establish, with respect to each participant or group of participants, the financial goal(s) (“Performance Goals”) for the fiscal year or other period (“Performance Period”) from among the following categories, either on an absolute basis, rate basis, or a comparative basis with other companies considered by the Committee to be a peer of MTS or other benchmark: share price, total shareholder return; earnings per share (basic or diluted), earnings (before or after interest, taxes, depreciation, and/or amortization or any combination thereof); operating income; gross or net sales, gross or net revenues, growth in revenues, income or earnings; ratios, such as expenses or market share; return on equity or assets; cash flow; and working capital. In setting the Performance Goals, the Committee may take into account or exclude the impact of certain events, for example, acquisitions, divestitures or changes in accounting practices.

Bonus Awards

Not later than 90 days after the beginning of the fiscal year, the Committee will, with respect to each eligible executive or group of eligible executives: (i) establish the Performance Goal or Goals by which the financial performance of MTS will be measured and establish the Performance Period over which such Performance Goals will be measured; (ii) determine the percentage of each executive’s salary that may be awarded as bonus for the Performance Period, up to the maximum bonus to any executive for any fiscal year of $2,000,000; (iv) determine each executive’s bonus based on the attainment of the financial objectives for the Performance Period; and (v) determine the frequency at which each bonus will be paid when attained.

Payment of Bonus Awards

Earned bonus amounts shall be paid within 90 days after the end of our fiscal year and only after the Committee certifies that the relevant Performance Goals established at the beginning of the Performance Period have been met. The Committee has the right to reduce the amount of any award even if the Performance Goals have been attained. We may cancel and recover bonus amounts received by employees in the event financial mismanagement is discovered, or, if the terms of the award so provide, the employee violates our policies or agreements, such as a non-compete or non-disclosure agreements. Each senior executive may elect, in accordance with the terms of our qualified pension and non-qualified deferred compensation plans, to defer some or the entire bonus otherwise payable to the executive.

Administration

The EVC Plan is administered by the Compensation Committee of the Board of Directors. The present members of the Committee are deemed to be independent non-employee directors, as defined under Section 162(m). In addition, each member of the Committee is independent under the NASDAQ Stock Market listing standards. The


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Committee retains exclusive authority to determine the Performance Goals and award bonuses under the EVC Plan to the Chief Executive Officer and the three executive officers subject to Code Section 162(m), but the Committee may delegate to the Chief Executive Officer the authority to determine bonuses awarded to other executives.

Amendment and Termination

The Committee may amend, modify, suspend or terminate the EVC Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law. The Committee will seek shareholder approval of any amendment determined to require shareholder approval or to be advisable under the regulations of the Internal Revenue Service or other applicable laws or regulations.

New Plan Benefits

No benefits or amounts have been awarded or received under the EVC Plan. Thus, it is not possible to determine the benefits that will be received by eligible participants in the fiscal year beginning in October 2010 if the EVC Plan were to be approved by the shareholders. However, the following table indicates the bonus amounts paid under our current EVC Plan that was in effect for the fiscal year ending October 3, 2009, which were based on Earnings Per Share (“EPS”), Earnings Before Interest and Taxes (“EBIT”) as a Rate to Revenue, Revenue, and Working Capital as a Rate to Revenue (“WCRR”):

Name and Position

Dollar Value ($)

Laura B. Hamilton

17,479

Joachim Hellwig

0

Susan E. Knight

7,764

Alfred Richter

4,772

Kathleen M. Staby

4,085

Executive Group

34,100

Equity Compensation Plan Information

The following table sets forth the aggregate information regarding grants under all equity compensation plans as of October 3, 2009:

Plan Category

 

Number of Securities to

be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(in thousands)
(a)

 

 

Weighted-Average Number of Securities Remaining Available for

Exercise Price of Outstanding Warrants and Rights
(b)

 

Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))(1)
(in thousands)
(c)

 

Equity compensation plans approved by security holders

 

1,566

 

$

33.88

 

1,437

 

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved by security holders

 

—

 

 

—

 

—

 

 

 

 

 

 

 

 

 

 

Total

 

1,566

 

$

33.88

 

1,437

 

(1)

Includes 478 shares available for issuance under the 2002 Employee Stock Purchase Plan as of October 3, 2009.

Board Voting Recommendation

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE

PROPOSAL TO APPROVE THE EVC PLAN.


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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Named Executive Officers

The following Compensation Discussion and Analysis describes, among other items, the material elements of compensation for the following individuals, collectively referred to as the “named executive officers”:

Laura B. Hamilton, Chair and Chief Executive Officer

Ms. Hamilton.

Joachim Hellwig, Vice President


Susan E. Knight, Chief Financial Officer and Vice President

Alfred Richter, Senior Vice President

Kathleen M. Staby, Vice President

Overview

This Compensation Discussion and Analysis describes the key principles and approaches used to determine the compensation of the named executive officers and should be read in conjunction with the tables and narrative included in the rest of the Executive Compensation section of this proxy statement. All compensation paid to the Chief Executive Officer (“CEO”) is determined by the independent directors of the full Board, as defined by the applicable rules for companies listed on the NASDAQ Stock Market, following recommendations made by the Compensation Committee of the Board. All compensation paid to the named executive officers other than the CEO is determined by the full Board and takes into account recommendations made by the CEO and the Compensation Committee. The Compensation Committee is composed solely of independent non-employee directors who meet regularly each fiscal year. During fiscal 2009, the Compensation Committee engaged Towers Perrin, an external compensation consultant, in certain matters related to executive compensation.

Executive Compensation Philosophy and Objectives


Our philosophy for compensating executives is to provide fair total cash compensation consistent with job markets in which we compete and reward performance. Compensation levels for the named executive officers reflect base salary for the executive’s role in theat our Company, the market value of the position, performance in that position and the opportunity for additional rewards when we either meet or exceed business objectives that are supportive of the business strategy. To attract and retain the best people, we offer meaningful rewards when executives, their business unit, and the Company as a whole achieve specific business goals or when outstandingsuccessful individual performance is demonstrated. Performance rewards fluctuate based on the results of established objectives and provide executives with the opportunity to earn additional compensation beyond their base salary.


We structure our compensation components to support our overall compensation philosophy and the following executive compensation objectives:


●to establish and maintain a systematic compensation program whereby executives are compensated in relation to their level of responsibilities and their work performance;

●to maintain a program which will enable us to attract and retain qualified and competent executives;

●to provide flexibility within the compensation program to meet changing competitive and economic conditions;

●to maintain equitable and consistent relationships between positions within the Company;

●to ensure that compensation policies and practices are consistent with effective risk management; and

●to align executive and shareholder interests.

We believe our compensation philosophy and objectives reflect a responsible balance of competitive compensation, sound risk management and accountability to shareholders.

Information Used in the Compensation Process

Compensation Consultant

Under the Committee’s charter, the Committee has the authority to select, retain and compensate executive compensation consultants and other experts as it deems necessary to carry out its responsibilities.

For assistance with fiscal 2011 compensation, the Committee engaged Towers Watson, an executive compensation consultant, to provide it with information regarding compensation of named executive officers, non-executive officers and directors. Specifically, Towers Watson was asked by the Committee to (1) review the analysis prepared by our management of executive compensation for each cash component of compensation (base salary and short-term incentive compensation) and provide feedback regarding management’s analysis of compensation-related data, (2) provide information regarding competitive compensation values of long-term incentive compensation to help the Committee in deliberations related to long-term equity decisions, (3) provide information to aid with the compensation decisions made in conjunction with Ms. Hamilton’s termination of service, Mr. Murray’s appointment to the interim Chief Executive Officer position and the creation of the non-executive Chairman of the Board position, (4) provide data on appropriate compensation to be paid to members of the Audit Committee for their service on the Audit Committee/Special Purpose, (5) provide information and considerations as to the appropriate effect the government investigation and suspension should have on total compensation, and (6) review and provide information on the comparator group used to confirm survey data related to some of our named executive officer positions. The Committee also engaged Towers Watson to conduct a thorough review our EVC Plan, including a market trend analysis and an internally focused review on the program’s effectiveness. This EVC Plan review began in March 2011 and thus did not inform the design of our EVC Plan awards for fiscal 2011.

to establish and maintain a systematic compensation program whereby executives are compensated in relation to their level of responsibilities and their work performance;

to maintain a program which will enable us to attract and retain qualified and competent executives;

19

to provide flexibility within the compensation program to meet changing competitive and economic conditions;

to maintain equitable and consistent relationships between positions within the Company; and

to align executive and shareholder interests.


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Determining Competitive Compensation Evaluation Process

To assure


The Committee annually assesses “competitive market” compensation for each component of compensation using a number of sources.

The Committee went through much the same process as in prior years reviewing relevant information relating to base salaries. For fiscal 2011, as in past years, our compensation programs are suitably competitive,management developed a base salary benchmark tool for the Compensation Committee with the assistance of management and Towers Perrin, regularly reviews outside compensation programs to align our compensation levels to market practices. A combination ofbased upon executive salary survey data that was adjusted for comparability by business, revenue, executive position, and informationage of data. For fiscal 2011, executive salary survey data for U.S.-based executives was obtained from aTowers Watson’s Data Services Survey Report on Top Management Compensation and Mercer’s Executive Compensation Survey. For Mr. Hellwig, who resides in Germany, executive salary survey data was obtained from the Towers Watson CompSource 2011 General Industry Survey for Germany. The results of the benchmark tool were then referenced against proxy compensation data from our comparator group, described below, as a supplemental data source. Towers Watson then reviewed the benchmark tool to give the Committee feedback regarding the methodology.

For each position, the base salary benchmark tool produces a median and a competitive salary range, with the minimum and maximum end of companies is used in these reviews.

Salary Survey Data

As in previous years, in fiscal 2009 wethe range at approximately 80% and 120% of the median, respectively. The Committee used the Watson Wyatt top managementbenchmark tool to assess the median and Mercerrange of competitive salaries for fiscal 2011 and compare these to the base salaries for the named executive salary surveysofficers to determine the need for comparison purposes in connection with determining the salaries of our executive officers. These surveys were selected based on the comparison of benchmark positions available, ability to adjust survey data to similar size organizations, and sample of reporting organizations.

Comparator Group

adjustments.


Our direct competitors are either privately owned companies or business units within much larger public companies; therefore, acompanies. A broad and reliable base of compensation data from these companies is not readily available. Accordingly, for comparative purposes,the comparator group we use a group thatto confirm the base salary data from our benchmark tool consists of durable goods manufacturing companies, most of which do not compete with us directly but several of which compete with us for management talent. Our comparator group is reviewed on an annual basis by the Committee. Our comparator group for fiscal 2011 consists of the following companies:

Actuant Corporation

Hurco Companies Inc.
Arctic Cat Inc.
Measurement Specialties Inc.
Axcelis Technologies Inc.
Mettler-Toledo International Inc.
Badger Meter Inc.
MKS Instruments Inc.
Brooks Automation Inc.
Moog Inc.
Cabot Microelectronics Corp
National Instruments Corporation
Cohu Inc.

Perceptron Inc.
CyberOptics Corporation
Roper Industries Inc.
Dionex Corporation
Symmetricom Inc.
ESCO Technologies Inc.
Tennant Company
FARO Technologies Inc.
Teradyne Inc.
Graco, Inc.

GSI Group Inc.

Hurco Companies
K-Tron International
Keithley Instruments Inc.
Measurement Specialties Inc.
Mettler-Toledo International Inc.
MKS Instruments Inc.
Moog Inc.
National Instruments Corporation
Perceptron Inc.
Roper Industries Inc.
Symmetricom Inc.
Tennant Company
Teradyne Inc.

Analysis of Data. In general, we attempt

For short-term cash incentive compensation, which for fiscal 2011 was delivered to target each component of total compensation at or around the 50th percentile ofnamed executive officers through the EVC Plan, the Committee also reviewed market data and executive salary survey information. We believe this allows us to attract and retain executives with a necessary level of skill and talent for our business.

Executive salary survey data is used at the median levelinformation that had been compiled and adjusted based on revenue responsibility forby management and Towers Watson. For each executive position. Survey benchmark positions were selected to determine salary range midpoints based on market medians. Theof the named executive officer benchmark positions include those of chairman and chief executive officer, chief executive officer, chief financial officer, top financial executive, top division executive and top human resources executive. The base salary survey dataofficers, other than Mr. Hellwig, the Committee compared the target amounts under the EVC Plan for these benchmark positions is agedfiscal 2011 to the middlesurvey information relating to median amount of non-salary cash compensation paid to executive officers as a percentage of base salary.


Additionally, Towers Watson prepares for the following year in order to account for future market movement. This data is used to produce a salary structure midpoint. We establish a salary structure range, identifying a minimum and maximum value for each level, approximating 80% and 120%Committee an annual analysis of the midpoint, respectively.long-term equity incentive compensation. The base salary and short-term incentive compensation benchmark data is collected and analyzed internally and reviewed by Towers Perrin. This analysis is then reviewed with the Compensation Committee and used to update base salary structures and short-term incentive targets. Based on this review, the Compensation Committee approved an overall increase of 4.1% in the executive salary structure from fiscal 2008 to fiscal 2009.

Our long-term incentive compensation is reviewed by Towers Perrin. They conductincludes a market analysisreview of our equity grant guidelines,structure, comparing the value of our long-term incentive award guidelines to market data. For fiscal 2009,2011, comparative information was obtained from Towers Perrin’s 2008Watson’s 2010 Executive Compensation Database long-term incentive tables for companies with revenues less than $1 billion. The marketCommittee used this data was discounted by 20% to reflect an expectation that grantestablish competitive guideline ranges and median values would come down duefor equity awards to the economic environment and anticipated effects on market compensation practices. Due to the complex nature of the economic impact on long-term incentive compensation and the comparison of the market data,


15

named executive officers.
Role of Management

In determining compensation for named executive officers, other than the Chief Executive Officer, the Committee decidedsolicits input from the Chief Executive Officer regarding the duties and responsibilities of the other named executive officers and the results of performance evaluations. The Chief Executive Officer also recommends to maintain the fiscal 2008 structure for use in determining grant levels for fiscal 2009. While this decision resulted in a grant structure which delivered grant values below market data, the Committee believed thisthe base salary for all named executive officers and, in developing his or her recommendations, may request input from the Vice President of Human Resources and Strategy from time to be prudenttime relating to base salaries of the named executive officers (other than his or her own). The Chief Executive Officer, Chief Financial Officer and Vice President of Human Resources and Strategy develop recommendations for the Committee regarding the financial performance goals under the EVC Plan and the minimum, target and maximum levels of achievement of the performance goals. The Chief Executive Officer and Vice President of Human Resources and Strategy are invited to attend meetings of the Committee from time to time.  No named executive officer attends any independent director executive session of the Committee or is present during deliberations or determination of such named executive officer’s compensation.

The Committee makes recommendations to the Board regarding compensation for the named executive officers, other than the Chief Executive Officer.  With respect to the Chief Executive Officer, the Committee makes recommendations to the independent directors, which is the full Board except for the Chief Executive Officer.

Shareholder Vote

At our last annual meeting of shareholders held on February 9, 2011, we asked our shareholders to approve, by advisory vote, the compensation of our named executive officers as described in the Compensation Discussion and Analysis, the compensation tables, and the related disclosures contained in our proxy statement for that annual meeting.  The proposal was approved by our shareholders with 97% of the votes cast being “for” approval and only 3% of the votes cast being “against” approval.  In light of the uncertaintyoverwhelming approval by our shareholders of our named executive officers’ compensation, the market dataCommittee did not make changes in our compensation policies and practices in response to the current economic environment.

shareholder vote.


Components of Compensation Components

The primary


During fiscal 2011, the components of our executive compensation programs include:

consisted of base salary, short-term cash incentive, long-term equity incentive, broad-based benefits and other perquisites.  The named executive officers were eligible to participate in the same benefit programs as were available to our other employees.

In the following table we have outlined our main objectives regarding:

●Why we choose to pay each component;

●The basis for payment of each component or what each component is designed to reward; and

●How we determine the amount for each component.
How Component Was Determined
Element of 
Compensation
Why Component is Paid & Basis for Component
for Named Executive Officers
for Fiscal 2011
Base SalaryTo provide a fixed level of competitive income, based on:
Within range of competitive pay,
targeted to median of market data
●    the individual’s scope of responsibility
●   the individual’s level of performance and experience

base salary;

short-term incentives;

21

long-term incentives; and

Table of Contents
Element of
Compensation		Why Component is Paid & Basis for ComponentHow Component Was Determined
for Named Executive Officers
for Fiscal 2011
Short-Term Cash Incentive
To provide focus and rewards for achievement of fiscal year financial goals:
●   EVC Plan, with Committee-determined performance goals and minimum/target/maximum levels of achievement for each named executive officer
●    Performance goals for fiscal 2011:
—   Earnings Per Share (“EPS”) weighted at 30%
—   Earnings Before Interest and Taxes (“EBIT”) weighted at 30%
—   Revenue weighted at 25%
—   Working Capital as a Rate to Revenue (“WCRR”) weighted at 15%
Performance based
Long-Term Equity Incentive
To provide an incentive for delivering long-term shareholder value, to align interests of executives and shareholders, and to retain executives
●    Value of awards determined with reference to grant guideline ranges
●    Value based on recipient’s responsibilities, individual performance, previous awards granted and progress toward satisfying the stock ownership guidelines
●    Delivered through stock options, restricted stock units (RSUs), or a combination thereof, each vesting in equal installments over a 3-year period
Value of equity awards designed to be within the range of competitive pay, targeted to median of market data
Award consisted of stock options only so that the named executive officers’ equity ownership results will be aligned with the results of our shareholders regardless of the outcome of the U.S. Department of Commerce investigation
Element of
Compensation
Why Component is Paid & Basis for ComponentHow Component Was Determined
for Named Executive Officers
for Fiscal 2011

Benefits
To provide competitive retirement and health benefits
U.S.-based named executive officers participate in most of the same benefit plans made available to our other U.S.-based employees. They include:
●     Retirement savings plan with a Company match and annual fiscal year contribution as a percentage of earnings
●     Disability and life insurance
●     Health and welfare (medical, vision and dental)
U.S.-based named executive officers also are eligible to participate in our non-qualified Executive Deferred Compensation Plan, which allows us to provide non-qualified benefits that are identical to the tax-qualified plan benefits but on income above the allowable level of the qualified plans.
One of our named executive officers, Mr. Hellwig, who resides in Germany, does not participate in our benefits programs available to U.S. employees.  In accordance with his employment agreement, we make an annual contribution on Mr. Hellwig’s behalf to a retirement pension insurance fund.
Based upon competitive market
Perquisites
To provide limited executive perquisites
•All of our named executive officers received either a car allowance or use of a Company-owned automobile
Based upon competitive market

Determining Mix of Compensation

The Committee does not have a set policy or formula for weighting the elements of compensation for each named executive officer. Instead, the Committee considers market factors relevant to that executive and perquisites.

Base Salary. Base salary reflects the executive’shis or her tenure, role inwithin the Company and contributions. In general, as named executive officers assume greater responsibility, a larger portion of their total cash compensation is payable as short-term cash incentive, which is variable based on performance, as opposed to base salary, and a larger portion of their total direct compensation (that is, compensation other than benefits and perquisites) comes in the market valueform of long-term equity incentive.


For fiscal 2011, the target amounts of the position.

Salary structures provide a rangeChief Executive Officer’s compensation was divided between the compensation elements as follows: 42% long-term equity incentive, 33% base salary, 23% short-term cash incentive, and 2% other compensation. The target amounts of paythe total direct compensation for each level. We use base salaries to provide competitive compensation to attract and retain talented executives. The Compensation Committee generally targetsof the other three named executive officers were within the following ranges: 16%-33% long-term equity incentive, 43%-56% base salary, levels atand 19%-21% short-term cash incentive.


Fiscal 2011 Base Salaries

Annually, the median of market data collected through our benchmarking process. Adjusting base salaries to achieve or approach median is consistent with the Compensation Committee’s philosophy. The Compensation Committee considers the following factors in setting annual base salaries:

the individual’s scope of responsibility;

the individual’s level of performance and experience;

any promotions resulting in increases in responsibility; and

competitive salaries within the market, drawing on data from our compensation survey analysis and the group of comparative companies.

On an annual basis, the Compensation Committee makes recommendations to the full Board on base salaries for named executive officers, other than the CEO,Chief Executive Officer, and makes recommendations to the independent directors of the Board regarding the base salary of the Chief Executive Officer. These recommendations are based upon a number of factors, including competitive salaries and individual performance.  The recommendations are made in November of each year, and any resulting adjustments to base salaries take effect in the following January.

As in prior years, the Committee reviewed base salary datasets developed by our management and Towers Watson as the Committee considered adjustments to base salaries for fiscal 2011.  These datasets provided the Committee with information regarding median level of base salary for each named executive officer position and a range of competitive base salaries.  The Committee’s review of the salary surveys used suggested that the range for competitive base salaries had increased and shifted upward by approximately 1.8% from fiscal 2010 to fiscal 2011 for U.S.-based named executive officer positions other than the Chief Executive Officer and was static for the CEO.

Chief Executive Officer.  The independent directors evaluate our CEO’s performancepeer group proxy review reflected no significant differences from the survey data.


The European salary survey data the Committee reviewed this year indicated that a larger market adjustment was in order for Mr. Hellwig’s base salary.  The new data included a more in-depth review of pay practices within the German market than what the Committee had been using in prior years and determine her annualsuggested that Mr. Hellwig’s base salary in consultation with an outside compensation consultant. Similarly,would need to be adjusted upward 10% to be slightly above median for the CEO evaluatesrelevant market based on his experience and contribution to the organization. Going forward, Mr. Hellwig’s base salary will be compared to similar market data annually.

Additionally, we have a systematic approach for evaluating the performance of our named executive officers, with base salaries affected primarily by the performance evaluation for the prior fiscal year.  The process begins by establishing specific, individualized performance goals at the beginning of the fiscal year for each named executive officer, as well as identifying or reaffirming the core competencies of the position.  The Chief Executive Officer proposes individual performance goals that are reviewed by the Committee and approved by the independent members of the Board.  The Chief Executive Officer works with the other named executive officers to establish appropriate individual performance goals for the other named executive officers.  These individual performance goals relate to our customers and our market, organizational improvements, and financial measures.

The Chief Executive Officer regularly provides reports and updates throughout the year regarding his or her progress toward achievement of these individual performance goals.  The performance of the named executive officer is assessed by the independent directors of the Board, in the case of the Chief Executive Officer, or by the Chief Executive Officer, in the case of the other named executive officers.  As part of this performance review, the independent directors of the Board or the Chief Executive Officer, as the case may be, considers the named executive officer’s demonstration of competencies of that executive’s role and achievement of the individual performance goals established for that fiscal year.

Following fiscal 2010, the independent directors evaluated the performance of the Chief Executive Officer for the purposes of recommending her 2011 base salary and specifically evaluated her achievement of her individual performance goals for fiscal 2010.  The Chief Executive Officer conducted a similar performance review for the other named executive officers for the purposes of recommending their 2011 base salaries and provided the Committee with a summary of the performance review results for each of the other named executive officers, usingofficers.  In view of the samevariety of the factors identified aboveand the amount of information considered as well as the complexity and subjectivity of these matters, the Committee did not find it practical to, and did not attempt to, make compensation recommendationsspecific assessments of, quantify, rank or otherwise assign relative weights to the Compensation Committee. Considering these recommendations and advice byindividual performance goals of any named executive officer.  Likewise, the outside consultant,Committee did not attempt to specifically quantify or mathematically correlate the Compensation Committee establisheseffect upon a recommended annualnamed executive officer’s base salary for the other2011 of that named executive officers.

Duringofficer’s performance evaluation.


Based on the market analysis and performance evaluations conducted early in fiscal 2009,2011, the Board increased Ms. Hamilton’s annualCommittee recommended increases in the base salaries for the U.S.-based named executive officers ranging from 3.0% to 4.8%.  In light of the market analysis that was performed with respect to Mr. Hellwig’s position, his significant qualifications and the quality of his performance over the past several fiscal years, the Committee recommended that his base salary from $500,000be increased by 14%, with 10% of the increase attributable to $525,000 effective January 18, 2009. Thisthe market adjustment mentioned above.
The following table shows the base salary increase was provided due to Ms. Hamilton’s individual performance against individual objectives. In July 2009, the Company announced cost reduction actions which include a salary freezesalaries for fiscal 2010.

When determining the other named executive officers’ salaries, the Compensation Committee took into consideration overall individual performance against individual objectives, scope of responsibility, and competitive market data.

Short-Term Incentives.

Through the Executive Variable Compensation Plan (“EVC Plan”), the Compensation Committee attempts to focus efforts of the named executive officers on achievementfor fiscal 2011, as well as the proximity of near termthe fiscal 2011 base salary to the median of the market data for the same or similar position.


Named Executive Officer 
Fiscal 2011 Annualized
Base Salary
 
Fiscal 2011 Annualized Base
Salary as a Percent of
Median of Base Salary
Comparable
 
Laura B. Hamilton
 $550,000 90% 
       
Susan E. Knight
 $333,342 111% 
       
Joachim Hellwig (1) 
 €244,940 104% 
       
Kathleen M. Staby
 $254,177 104% 
       
(1)Annualized base salary in Euros for fiscal 2011 is approximately $339,560, using the average exchange rate of $1.38630 for fiscal 2011.

Design of EVC Plan and Review of 2011 Performance

Consistent with its compensation philosophy and the objectives of annual cash incentive programs generally, the Committee implemented the EVC Plan as our performance-based short-term cash incentive program.

Under the EVC Plan, the named executive officers were eligible for cash bonuses depending upon our financial objectivesperformance as compared to four performance goals and market competitive short-term incentive targets appropriate to their position. The four performance goals selected by the Committee and approved by the Board for fiscal 2011 were the same as were selected for fiscal 2010, except that arethe EBIT Rate to Revenue measure used in fiscal 2010 was changed to be EBIT for fiscal 2011, as had been the case in years prior to fiscal 2009, as a result of the increased economic certainty and revenue stabilization the Company has been experiencing. The Committee also weighted the four performance goals for fiscal 2011 in the same manner as fiscal 2010. The minimum, target and maximum amounts selected for each goal, however, were more challenging for fiscal 2011 than they were for fiscal 2010 in recognition of our improved financial outlook at the beginning of fiscal 2011 when the goals were set.

The Committee determined the performance goals under the EVC Plan as part of our annual planning process and selected these four performance goals as critical to our success reward accomplishments when performance meets or exceeds established targets or business plan objectives and more closely tie total cash compensation (base salary plus EVC) to our financial results. All named executive officers participate in our EVC Plan and are eligible to earn annual awards.

Performance goals are tied to financial measures under the EVC Plan. Ms. Hamilton, Ms. Knight, and Ms. Staby are assigned to corporate performance goals. Mr. Hellwig is assigned to a combination of corporate and Sensors business unit performance goals. Mr. Richter is assigned to a combination of corporate and Test business unit performance goals. We believefiscal 2011. The Committee believes the combination of performance goals selected underfor the EVC Plan providesprovide an appropriate balance between income statement and balance sheet management while also focusing on shareholder value. For fiscal 2009, ourThe following is a summary of the four performance goals included Earnings Per Share (“EPS”), Earnings Before Interest and Taxes (“EBIT”) as a Rate to Revenue, their relative weighting:


GoalDescriptionWeight
EPS
Earnings per share for fiscal 201130%
EBIT
Earnings before interest and taxes for fiscal 201130%
Revenue
Revenue for fiscal 201125%
WCRR
Working capital as a rate to revenue for fiscal 2011 (as a percentage, calculated by dividing working capital by revenue)15%

For Ms. Hamilton, Ms. Knight and Working Capital as a Rate to Revenue (“WCRR”). EBIT as a Rate to Revenue replacedMs. Staby, all performance goals were total Company measures. For Mr. Hellwig, the absolute EBIT


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Table of Contents

EPS performance goal for fiscal 2009. As with other companies, Revenue declines caused us to re-evaluatewas a total Company measure, but the absolute EBIT performance goal in order to maintain a focus on profitability in a declining revenue environment.remaining measures were determined based upon achievement by the Sensors business unit. The weightings of these performance goals are similar across all business units. Each performance goal is assigned a payout range. Incentive payments vary above and below the target based on the financial results in comparison to theCommittee established performance goals. Targets are setgoals based on business plan expected results. Factors taken into consideration when establishing payout ranges include degreeunit (rather than total Company) performance for Mr. Hellwig to reflect his accountability for the performance of difficultythat business unit. The Committee also believes that the leader of the established plan, historic performance and continuous improvement expectations. Additional factors taken into consideration at the business unit has a meaningful opportunity to directly impact the achievement of the performance goals through his individual performance as the leader of that business unit.


The Committee also established minimum, target and maximum levels of achievement for each of the performance goals. Achievement of any of the performance goals at less than target level include percentagewould result in a decreasing bonus until the achievement fails to meet the minimum performance goals, at which point the named executive officer would be entitled to no payout relating to that goal. Regardless of contributionthe achievement as compared to the Company and size of the business unit. The minimum level or hurdle represents that level of performance below which no award is paid. The maximum stretch target of a performance goal represents the maximum level of performance awarded under the plan. Between the target and the maximum stretch target the payout is greater than 100% because the actual results are above established target. A maximum multiplier of two is assignedgoals, payouts relating to each performance goal. Therefore,goal under the EVC Plan was capped at two times and therefore, no individualparticipant could receive a payout can be more than 200% of the weighting assigned to that performance goal.

Payout targets are stated as For fiscal 2011 the Committee added a percentagehurdle for the WCRR goal, representing the point above which a 50% payout would begin and below which there would be no payout relating to the WCRR goal. The Committee included the hurdle to ensure that no payouts would be made with respect to the WCRR goal at lower performance points. Therefore, for fiscal 2011 payouts for any of annual base salary, with the percentage based on an individual’s level within the Company and competitive data from our compensation survey analysis and our group of comparator companies. Cash awards cangoals could range from 0% to 200% of target, but there could be no payouts for the WCRR goal between 0% and payouts are based on three factors: (1) the degree to which performance goals are met; (2) the target payment percentage assigned to the executive; and (3) the base salary paid during the fiscal year. 50% of target.

In addition, since the Compensation Committee believes the EPS performance goal provides a strong link between the incentive program and shareholder value, in years whenif the target level of EPS achievement was not met, EVC Plan participants would be limited to target payout under the plan regardless of the results of all performance goals. Within this provision of the EVC Plan, if the EPS target is not met an executive may receive a payout in excess of 100% for an individual performance goal so long as the executive’s aggregate payout under the EVC Plan participants are limited tois not in excess of 100% payout maximum regardless.

The table below shows the bonus amounts as a percentage of their individualrespective base salaries that would be earned by the named executive officers under the EVC Plan upon our achievement of the target and maximum for each performance goal.

Named Executive Officer 
% of Fiscal 2011 Base Salary at
Target Achievement
 
% of Fiscal 2011 Base Salary
at Maximum Achievement
 
Laura B. Hamilton                                 70% 140% 
        
Joachim Hellwig                                 35% 70% 
        
Susan E. Knight                                 50% 100% 
        
Kathleen M. Staby                                 35% 70% 

Target levels of achievement of each performance goal were set based on the expected results for fiscal 2011 under our business plan. Minimum and maximum levels of achievement were set based upon various factors, including the degree of difficulty inherent in the business plan and achievement of the target, our historic financial performance, and continuous improvement expectations. For the business unit performance.performance goals, the Committee also considered the percentage of contribution to our overall financial performance by that business unit and size of the business unit. The CompensationEVC Plan is designed so that payout should occur 80% of the time for any one goal.

The differences among the named executive officers of the bonus opportunity at the target level was primarily a function of their position within our Company and the corresponding grade level assigned to that position. Named executive officers with the same grade level were assigned the same bonus opportunity at the target level. The Committee may makehas historically set the bonus opportunity at the target level at the same percentage for the same positions each year, with adjustments being made annually to the incentiveother primary factors affecting payout awards based on unanticipated financial events or special circumstances.

Forunder the EVC – base salaries and the performance goals. However, the Committee reviews, primarily for trend information, data from our compensation survey analysis and our group of comparator companies relating to the median short-term compensation earned at comparable companies by executive officers in comparable positions.


The table below sets forth for fiscal 2009,2011 the corporate goals, minimum, target, and maximum ranges are outlined inlevels for each performance goal as established under the chart below. AllEVC Plan, as well as the actual achievement of that performance goal for fiscal 2011 and the percentage above the target level of that achievement.

Corporate Goal (1)
 Minimum   Target  Maximum  Result  
Percent of
Target Achieved
 
EPS
 $1.36   $1.98  $3.96  $3.24   164%
                      
EBIT (in 000)
 $33,500   $48,000  $96,000  $74,220   155%
                      
Revenue (in 000)
 $350,000   $409,000  $560,000  $467,368   139%
                      
WCRR
  23.6 
% (2)
  19.3%  9.7%  20.1%  91%



(1)Specific business unit performance goals and their corresponding minimum, target and maximum amounts are not disclosed due to the competitive harm of such disclosure. In general, the Committee sets target goals for the business unit to be achievable if the business unit executes its business plan reasonably well, minimum goals should be achieved a majority of the time, and maximum goals will be very challenging to meet.

(2)Represents the hurdle performance required at which 50% payout begins.
Based on the results for fiscal 2011, the potential payouts to each named executive officers had 30%officer under the EVC Plan by performance goal were calculated as follows based upon their respective fiscal 2011 base salaries:

    
 Named Executive Officer and
 Potential Payout Attributable to Performance Goal (1)
 
Performance Goal % Achieved  Susan E. Knight  
Joachim Hellwig (2)
  Kathleen M. Staby 
EPS  164% $81,088  $56,553  $43,156 
                 
EBIT  155% $76,624  $42,418  $40,780 
                 
Revenue  139% $57,254  $34,660  $30,472 
                 
WCRR  91% $22,497  $0  $11,973 
                 
Total  144% $237,463  $133,631  $126,381 
                 
Total as % of Target      144%  116%  144%
(1)Under the terms awards made under the EVC Plan, a participant in the EVC Plan must have been employed at the end of the fiscal year to be eligible for a payout under the EVC Plan. Because Ms. Hamilton’s separation from service was effective August 25, 2011, she was not eligible for a payout under the EVC Plan.

(2)Achievement of performance goal relating to EBIT, Revenue and WCRR of corporate performance for fiscal 2011 does not apply to Mr. Hellwig. Amounts attributable to each of these measures represents amounts attributable to actual achievement in fiscal 2011 by the Sensors business unit of the performance goal noted. Currency converted from Euros to U.S. Dollars using the average exchange rate of $1.38630 for fiscal 2011.

In light of their short-term incentivethe U.S. Department of Commerce investigation and temporary suspension imposed by the U.S. Department of the Air Force, the Committee chose to adjust each named executive officer’s potential payout downward. The actual amounts paid to each named executive officer under the EVC Plan for fiscal 2011 are as follows: Ms. Knight — $189,970; Mr. Hellwig — $126,949; and Ms. Staby — $101,105. The Committee believes that the adjusted amounts more accurately reflect the Company’s and named executive officers’ performance in fiscal 2011 than the amounts calculated above with reference only to achievement of the financial objectives.

The Committee has selected EPS, EBIT, Revenue and Orders for the performance goals in fiscal 2012. The Orders goal will replace the Working Capital Rate to Revenue goal used in previous years. The Committee believes that focusing on Orders is appropriate to achieve overall Company growth and improve shareholder value. Targets established for each of the performance goals focused on growth over the previous year’s performance, with no payout available on any one goal if performance results fall below fiscal 2011 results. Weightings assigned to each goal will remain the EPS goal.

Corporate Goal

 

Minimum

 

Target

 

Maximum

 

Result

 

% Achieved

 

 

 

 

 

 

 

 

 

 

 

 

 

EPS

 

$2.04

 

$2.55

 

$3.32

 

$1.03

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT Rate to Revenue

 

10.6%

 

13.3%

 

17.8%

 

6.1%

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (in 000)

 

427,500

 

475,000

 

527,250

 

408,881

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

WCRR

 

24.2%

 

21.0%

 

18.9%

 

23.2%

 

31%

 

Specific business unit performance goals and their corresponding minimum, target and maximum ranges are not disclosed due to the confidential nature of business unit performance. In general, target goals are viewedsame as achievable if the Company and/or the business unit execute their business plan reasonably well, minimum goals should be met a majority of the time, and maximum goals will be very challenging to meet. Historically, over the past threein fiscal years, including2011.


Fiscal 2011 Long-Term Incentive Awards

For fiscal 2009 EPS performance resulted in achieving 0% to 155% of target. Other corporate performance goals resulted in achieving 0% to 146% of target. Sensors business unit performance goals resulted in achieving 0% to 200% of the target. Test business unit performance goals resulted in achieving 0% to 141% of target.

Ms. Hamilton’s target award was set at 70% of her annual base salary. The target award for the other named executive officers ranged from 35% to 50% of their annual base salary. The individual fiscal 2009 EVC incentive payoutand 2010, our long term-incentive awards ranged from 0% to 6% of the target award.

Long-Term Incentives. In order to attract and retain executive officers and align their financial interests with the interests of our shareholders, equity based long-term incentives are provided. In fiscal 2009, our long-term incentive awards were in the form of stock options and restricted stock units. The Compensation Committee believes the public trading price of our Common Stock is a strong measure of corporate performance. The stock option grant feature of our 2006 Stock Incentive Plan is designed to provide executives with the right to purchase a financial stake in the Company. In order to retain executives to implement our strategy, the Committee approved the use of time-vested restricted stock units. The Committee determined that providing individuals with a mixconsisted of stock options and restricted stock units would provide continued retention benefitsgranted to the named executive officers at the discretion of the Committee and an appropriate balanceapproved by the Board of interests. BothDirectors for the named executive officer other than the CEO and the independent directors of the Board for the CEO. The Committee chose to award both stock options and restricted stock units enable participantsduring those years instead of stock options only, which had been the Company’s prior practice, primarily because of the retention benefits presented by restricted stock units, which account for stock price volatility due to achieveexternal factors outside management performance, and to reflect a growing market practice of using two equity vehicles for incentive compensation.


However, for fiscal 2011 the ownership guidelines established byCommittee and the Company.

Our annual stock option grant structure was compared againstindependent directors of the Board granted long-term incentive market data by Towers Perrin. Towers Perrin discounted the market data by 20% to reflect an expectation that market long-term incentive levels would come down dueawards to the economic environmentnamed executive officers in the form of stock options only. When making its grant decisions in May 2011, the independent directors of the Board identified the following reasons for changing the grant practice from the prior two years: (1) the U.S. Department of Commerce investigation of the Company was ongoing with an uncertain outcome; (2) while restricted stock units have an inherent underlying value independent of performance or events, options do not; (3) a grant consisting of 100% options aligns the executives with shareholders regardless of the outcome of the U.S. Department of Commerce investigation; and anticipated effects on market compensation practices. They then


17

(4) the independent directors believed it was important to treat all of the named executive officers consistently.

The Committee and independent directors determined that the value of the awards to be granted would be based on performance and potential and would remain independent of concerns regarding the U.S. Department of Commerce investigation. In determining the number of shares to grant, the Committee reviewed the equity grant structure developed for fiscal 2011, which established grant guideline ranges (minimum, target, and maximum) for each named executive officer based upon Towers Watson’s analysis of market data. The grant guideline range was between 22% below to 22% above the target opportunity. Towers Watson provided the Compensation Committee with information as to the dollar amountvalue and number of options necessary to provide compensation comparable to the 50th percentilemedian of market for comparable positions. The Compensation Committee reviewedpositions for each named executive officer.

After reviewing this information, the Committee and based onindependent directors determined to award an aggregate level of value that was comparable to what was awarded to the market uncertainty made a decisionnamed executive officers in fiscal 2010. The value of awards to leave theindividual named executive officers varied somewhat from their respective awards in fiscal 2008 structure in place. The grant structure provides a grant guideline range (minimum, target,2010 and maximum) based on position. The grant guideline range provides for awards between 24% below to 24% abovefrom the target opportunity. The Committee then determined an exchange rate for the restricted stock unitsamounts to account for the associated higher value.

Factors considered when determining award size include the recipient’sreflect scope of responsibility, individual performance, previous awards granted, and progress toward satisfying the stock ownership guidelines. Awards granted in fiscal 2009, which were betweenThe Committee did not quantify or assign weights to these other criteria. The individual awards ranged from 20% below target and 3%to 20% above the target opportunity, are reflected in the Grantstarget.


The following table shows for each of Plan Based Awards Table.

Under our established annual stock award grant date guidelines, all awards for the named executive officers the number of shares underlying the stock option award and the value of the award, as well as a comparison to the target amount established for each position. These awards were approved atby the Committee and the Board in May 19, 2009 Board meeting for2011 and, under our equity grant policy, granted on the first business day of the fiscal fourth fiscal year quarter (June 29, 2009)(July 5, 2011). The exercise price foroptions are all non-qualified stock options andthat vest in incremental installments of one-third per year commencing on the grant price for all restricted stock units was the closing price onfirst anniversary of the date of grant rather thanand expire five years after the earlier date of approval.

Benefits and Perquisites. In order to attract and retain executive officers, we offer retirement, health and welfare programs that are competitive within our local markets. These programs are available to our U.S. based employees and include:

grant.

 
Named Executive Officer
 
Number of Shares
Underlying Stock
Options
  Value of Award  
Value of Award as
Percent of Target
Award Value
 
Laura B. Hamilton(1)
  80,000  $755,696   100%
             
Joachim Hellwig  12,000  $113,354   120%
             
Susan E. Knight  16,000  $151,139   80%
             
Kathleen M. Staby  10,000  $94,462   100%
             

•

Retirement Savings Plan. While we do not offer a defined benefit plan to any U.S. employees, we sponsor a defined contribution Retirement Savings Plan for all U.S. employees. All U.S. executive officers, including the named executive officers, participate in this Retirement Savings Plan. The Retirement Savings Plan includes two Company contribution components. The first component is a fiscal year contribution provided for all U.S. employees under which we provide a 3% contribution on earnings below the Social Security wage base and 6% on earnings above the Social Security wage base, up to the limits allowed under U.S. law. The second component is a match contribution for all U.S. employees under which we match employee 401(k) contributions. The match is 50% on the first 6% of compensation contributed to the Retirement Savings Plan. The Retirement Savings Plan uses a calendar year-end “true-up” matching contribution feature to ensure that participants receive the maximum matching contribution available, by making up any loss in matching contributions resulting from the participant’s individual savings strategies. To be eligible to receive the year-end “true-up” match, the participant must be employed on the last day of the calendar year. The Compensation Committee approves changes to the fiscal year contribution and our matching formula. Both the fiscal year contribution and the matching contribution for the named executive officers in fiscal 2009 are reported in the Summary Compensation Table.

(1)

•

Disability and Life Insurance. All U.S. executive officers, includingUpon the named executive officers, are eligible fortermination of Ms. Hamilton’s employment on August 25, 2011, all of her unvested stock option were forfeited. Therefore, she did not receive any value from the same disability and life insurance programs offered to all U.S. employees. These programs provide short- and long-term disability and various life insurance benefits, some of which are optional and paid fully by the executive officer.

award reported above.

•

Health and Welfare. All U.S. executive officers, including the named executive officers, and their dependents are covered under the same programs offered to all U.S. employees. These programs provide medical, vision, and dental benefits.

We have historically limited the number of perquisites offered to executive officers. The perquisites and other benefits offered to executive officers exclusively include the following:

•

Supplemental Retirement Benefit. As part of Mr. Hellwig’ s offer of employment, he receives an annual contribution to a retirement pension insurance fund. Mr. Hellwig works in Germany where regional differences support such a program. No other named executive officer receives supplemental retirement benefits.


•

Car benefit. In geographies where prevailing market practices provide, some executive officers may receive a cash allowance while others may receive use of a Company automobile. In fiscal 2009, Ms. Hamilton, Ms. Knight and Ms. Staby received a car benefit cash allowance of $8,710. Mr. Richter was employed in the middle of the year and therefore received a car benefit cash allowance of $4,690. Mr. Hellwig was the only named executive officer to be provided with a Company automobile.


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Table of Contents

•

Other Perquisites and Benefits. Executives may also receive other perquisites through various other agreements and plans or in the event of special circumstances. These other perquisites are sometimes required to attract and retain executive officers. There were no other perquisites provided to the named executive officers during fiscal 2009. Mr. Richter received restricted stock award with a grant date fair value of $200,018, a signing bonus of $25,000 and a relocation bonus of $150,000 as part of his offer of employment. The relocation bonus is payable in two equal installments with the first being paid upon hire and the second payment following the first anniversary of employment. The restricted stock award is included in the Grants of Plan Based Awards Table. Both the signing bonus and first installment of the relocation bonus are included in the Summary Compensation Table.

•

Non-Qualified Deferred Compensation. In addition to tax-qualified retirement benefits provided to all eligible employees under the Retirement Savings Plan, our executive-level employees, including the named executive officers, are permitted to defer up to 90% of their base salary and/or short-term incentive payment into the Executive Deferred Compensation Plan. The intention of the Executive Deferred Compensation Plan is to provide participating individuals with benefits that would otherwise be available to them under our tax-qualified plans but for the application of limitations on benefits to highly-compensated employees imposed by the Internal Revenue Code of 1986. The Executive Deferred Compensation Plan is unfunded, meaning our obligation to make payments under the plan is unsecured.

Compensation Policies


Stock Incentive Grant Policy. Policy. The Compensation Committee recognizes the importance of adhering to specific practices and procedures in the granting of stock incentives. In accordance withAccordingly, the Committee has developed a formal policy relating to the grant of stock incentives. Our policy is that grants of stock incentives, other than new hire grants, will be made by the Committee once per year. Our practice has been that the Committee meets in May each year in order to approve the awards and, as specified in our stockgrant policy, the Compensation Committee approves annual stockawards will have a grant date that is the first business day of the fiscal fourth quarter. Stock incentive grants for named executive officers at its meeting each May, other than stock incentive grants for the CEO whichawards to our Chief Executive Officer are approved by the independent directors of the full Board following a recommendation by the Compensation Committee. Our policy is that the grant date awards by the Committee to new hires will be the 15th day of the month following the month of hire or, if the market is closed that day, the first prior business day in which the market is open.

Under the stockgrant policy, the exercise priceCommittee may delegate authority to make awards to a subcommittee consisting only of independent directors or to one or more executive officers. The Committee delegated authority to the Chief Executive Officer to make awards of stock options, is based on the closing price on the date of grant and options generally vest in three equal annual installments beginning on the first anniversary of the date of grant and have a five-year term. Also under the stock policy, the restricted stock units generally vest in three equal installments beginning on the first anniversaryor a combination of the date of the grant. The Compensation Committee believes these vesting provisionsstock options and option terms reinforce the objectives ofrestricted stock units, other than to our 2006executive officers, under our 2011 Stock Incentive Plan on July 5, 2011, the first business day of the fourth quarter of fiscal 2011. In connection with this delegation of authority, the Committee limited the awards to 240,000 shares of stock, with each restricted stock unit granted reducing the total shares available for grant by 2.5 shares.

Engagement of Compensation Consultant. The Committee has the sole authority to retain or replace the compensation consultant and the compensation consultant reports to the Committee. For fiscal 2011, the Committee engaged Towers Watson as its compensation consultant. In order to ensure the consultant is free from influence that could compromise its work for the Committee and to ensure its accountability to the Committee, the Committee from time to time analyzes information relating to the independence of the compensation consultant and the relationships among the consultant, management and the company.

Executive Compensation Clawback Policy. We added a recoupment or “clawback” provision to our EVC Plan that was approved by shareholders at the fiscal 2009 annual meeting of shareholders held on February 10, 2010. Our 2011 Stock Incentive Plan, which was approved by our shareholders at the fiscal 2010 annual meeting of shareholders held on February 9, 2011, contains a similar provision. These clawback provisions require an executive officers.officer to forfeit and allow us to recoup from the executive officer any payments or benefits received by the executive officer under the EVC Plan or the 2011 Stock Incentive Plan under certain circumstances, such as certain restatements of our financial statements, termination of employment for cause, and breach of an agreement between us and the executive officer.


Stock Ownership Guidelines. Guidelines. To align our named executive officers’ interests with our shareholders’ interests, the Compensation Committee expects our named executive officers to acquire significant equity ownership in our Common Stock. Wethe Company. Accordingly, we have in placeadopted stock ownership guidelines requiring each named executive officer to achieve an equity ownership level equal to a specified multiple of his or her base salary within five years of being appointed toas a named executive officer role.

or within five years of change in named executive officer status resulting in an increased required level of ownership. The minimum equity ownership levels as a multiple of base pay are as follows: five times annual base salary for our Chair and our CEO,the Chief Executive Officer; three times annual base salary for ourthe Chief Financial Officer and our Sr.any Senior Vice President,President; and one times annual base salary for our other named executive officers. Shares owned outright or controlled by the participant or his or her immediate family members residing in the same household, shares acquired upon stock option exercise, shares held in our Employee Stock Purchase Plan, and restricted stock issued and held as part of an executive’s long-term compensation, whether or not vested, all count toward satisfaction of our equity ownership guidelines. The Compensation Committee reviews progress against these guidelines on a regular basis and is satisfied with the progress made by our named executive officers in fiscal 2009 toward achievement of these ownership goals.


Our independent directors have also imposed upon themselves a guideline for achieving significant equity ownership in our Common Stock. Each of ourownership. Our independent directors isare expected to achieve an ownership of our Common Stock equal to a minimum of five times their annual cash retainer.


The following types of share ownership are counted toward satisfaction of our equity ownership guidelines: (i) shares owned outright or controlled by the named executive officer or director or his or her immediate family members residing in the same household, (ii) shares acquired upon stock option exercise, (iii) shares held in our employee stock purchase plan, (iv) shares of restricted stock issued as part of an executive’s long-term compensation, whether or not vested and (v) shares underlying restricted stock units only when vested and held.

Although certain of our named executive officers and directors are not required to meet the applicable guidelines until five years from the date he or she first becomes subject to the guidelines, the Committee reviewed the progress of the named executive officers and directors toward the ownership guidelines as of the end of fiscal 2011 and determined that all of the named executive officers and directors either met the ownership guidelines as required or were on track for meeting the ownership guidelines within the established timeframes.

Tax Deductibility of Compensation. CompensationOur. Section 162(m) of the Internal Revenue Code limits our ability to deduct compensation in excess of $1 million paid to the Chief Executive Officer or any of the three other most highly compensated executive officers (other than the Chief Financial Officer), unless the compensation qualifies as “performance-based compensation.” Among other things, in order to be deemed performance-based compensation, the compensation must be based on the achievement of pre-established, objective performance criteria and must be pursuant to a plan that has been approved by our shareholders. The EVC Plan and the 20062011 Stock Incentive Plan have each been structured with the intention that cash incentive payments and stock options awardedour deduction for compensation paid under these plans canwould qualify as “performance-based compensation” and be qualified performance-based compensation, which is tax-deductible to us under Section 162(m) of the Internal Revenue Code. The Compensation Committee intends to continue its practice of paying competitive compensation in order to attract and retain the senior executives necessary to manage business in the best interests of the Company and our shareholders. Under some circumstances, this practice may require us to pay compensation in excess of $1,000,000$1 million to certain key executives. Although we intend to maximize the deductibility of compensation paid to executive officers, we also intend to maintain the flexibility to take actions considered to be in our best interests including, where appropriate, entering into compensation arrangements under which payments are not deductible under Section 162(m).


19

Interim Chief Executive Officer Compensation

Our Board of Directors appointed Mr. Murray as interim Chief Executive Officer effective August 25, 2011 and provided a term sheet setting forth the compensation he would receive in that role. The compensation package summarized on the term sheet was designed to reflect the value Mr. Murray would bring to the position, with his deep understanding of the Company and his demonstrated leadership skills, as well as the difficulties and uncertainty inherent in serving in an interim role.

Pursuant to the term sheet, Mr. Murray is paid an annual base salary of $590,000 and was granted an initial annualized bonus of $410,000, payable monthly. In recognition of the particularly disruptive effect that a short tenure in the interim role can have, the base salary and initial bonus are guaranteed to be paid for at least six months following Mr. Murray’s appointment unless he voluntarily resigns from his role as interim Chief Executive Officer or is terminated from that position for cause.

In accordance with the term sheet, Mr. Murray was also awarded a performance-based bonus opportunity on November 22, 2011. This bonus has a maximum value of $770,000, payable 70% in the form of restricted stock units granted under our 2011 Stock Incentive Plan and 30% in the form of cash. A total of 14,081 restricted stock units were granted, representing 70% of $770,000, divided by the fair market value of a share of our common stock on November 22, 2011 ($38.28). The performance period for the bonus began on October 1, 2011 and will run until the termination of the interim Chief Executive Officer position when a full-time Chief Executive Officer is appointed by the Board of Directors.

The performance objectives, which were established by the Committee in conjunction with the Chair of the Board, include a combination of financial goals for the Company for fiscal 2012 and strategic and operational goals geared to specific accomplishments that would position our Company to further drive growth and profitability under new leadership. The financial goals include quarterly targets for revenue, gross margin, EBIT and EPS, and the strategic and operational goals encompass activities related to compliance and ethics, organizational leadership, investor relations, product introductions and delivery, strategic planning and Board functioning.

Upon the termination of the interim Chief Executive Officer role, and the corresponding termination of the performance period, the Committee will measure Mr. Murray’s performance against the performance goals, which will be adjusted as necessary to reflect the length of the performance period, and determine the percentage of the $770,000 total opportunity that would be paid out if the performance period had been an entire year. This annualized amount will then be adjusted to reflect the portion of a year that Mr. Murray had served since his appointment on August 25, 2011. The cash to be awarded based on these calculations is payable immediately, and the restricted stock units that will vest based on these calculations are scheduled to settle on August 25, 2012 with one share of our Common Stock issuable for each vested restricted stock unit.

Mr. Murray also receives interim living benefits consisting of interim housing in Minneapolis, utilities associated with the interim housing, related living expenses, and travel by Mr. Murray and Mr. Murray’s spouse to and from their home in California. Mr. Murray also participates in our standard retirement and health benefit plans and receives a car allowance equivalent to that received by our other named executive officers.

Compensation CommitteeCommittee Report


The Compensation Committee has discussed and reviewed the Compensation Discussion and Analysis set forth above with management. Based upon this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.


SUBMITTED BY THE COMPENSATION COMMITTEE

OF THE COMPANY’S BOARD OF DIRECTORS


Barb J. Samardzich (Chair)

Gail P. Steinel

Brendan C. Hegarty

David J. Anderson


Summary Compensation Table


The following table sets forth the cash and non-cash compensation with respect to each named executive officer during fiscal 2009.

2011.

Name and Principal
Position

 

Year

 

Salary
($)

 

Bonus
($)(2)

 

Stock
Awards
($)

 

Option
Awards
($)(3)

 

Non-
Equity
Incentive
Plan
Compen-
sation
($)(4)

 

Change

In
Pension
Value
And
Non-
Qualified
Deferred
Compen-
sation
Earnings
($)(5)

 

All Other
Compen-
sation
($)(6)

 

Total
($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

2009

 

532,684

 

—

 

240,435

 

719,250

 

17,479

 

—

 

26,350

 

1,536,198

 

Chair and Chief

 

2008

 

374,042

 

 

 

 

 

363,721

 

306,141

 

 

 

25,365

 

1,069,269

 

Executive Officer

 

2007

 

275,622

 

 

 

 

 

258,808

 

101,583

 

 

 

25,014

 

661,027

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joachim Hellwig(1)

 

2009

 

306,806

 

—

 

30,825

 

92,475

 

0

 

16,487

 

26,484

 

473,077

 

Vice President

 

2008

 

304,025

 

 

 

 

 

95,330

 

190,781

 

16,367

 

30,608

 

637,111

 

 

 

2007

 

257,464

 

 

 

 

 

108,151

 

140,323

 

13,539

 

27,546

 

547,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Susan E. Knight

 

2009

 

331,250

 

—

 

61,650

 

184,950

 

7,764

 

—

 

26,723

 

612,337

 

Chief Financial Officer

 

2008

 

304,586

 

 

 

 

 

196,319

 

207,745

 

 

 

25,365

 

734,015

 

and Vice President

 

2007

 

290,084

 

 

 

 

 

225,190

 

156,368

 

 

 

25,014

 

696,656

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alfred Richter

 

2009

 

149,999

 

100,000

 

259,613

 

179,813

 

4,772

 

—

 

7,459

 

701,656

 

Sr. Vice President

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kathleen M. Staby

 

2009

 

249,012

 

—

 

30,825

 

92,475

 

4,085

 

—

 

26,632

 

403,029

 

Vice President

 

2008

 

224,657

 

 

 

 

 

86,483

 

107,260

 

 

 

25,365

 

443,765

 

 

 

2007

 

209,639

 

 

 

 

 

91,180

 

79,103

 

 

 

25,014

 

404,936

 


__________________

Name and Principal
Position
 
Year
 
Salary
($)
  
Bonus
($)
  
Stock
Awards(1)
($)
  
Option
Awards(1)
($)
  
Non-
Equity
Incentive
Plan
Compen-
sation(2)
($)
  
Change
In
Pension
Value
And
Non-
Qualified
Deferred
Compen-
sation
Earnings(3)
($)
  
All
Other
Compen-
sation(4)
($)
  
Total
($)
 
Laura B. Hamilton(5)
2011  497,878   -   0   755,696   0   -   646,613   1,900,188 
former Chair and Chief2010  524,992       380,646   269,190   534,850       26,216   1,735,894 
Executive Officer2009  532,684       240,435   164,361   17,479       26,350   981,308 
                                  
Joachim Hellwig(6)
2011  329,135   -   0   113,354   126,949   19,502   40,535   629,475 
Vice President2010  286,803       48,654   33,648   171,524   17,249   31,291   589,169 
 2009  306,806       30,825   21,132   0   16,487   26,484   401,734 
                                  
Susan E. Knight2011  330,352   -   0   151,139   189,970   -   26,886   698,347 
Chief Financial Officer2010  323,627       91,584   63,932   235,503       25,843   740,489 
and Vice President2009  331,250       61,650   42,264   7,764       26,723   469,652 
                                  
William V. Murray(7)
2011  49,922   34,167   -   -   -   -   12,663   96,752 
interim Chief                                 
Executive Officer                                 
                                  
Kathleen M. Staby2011  251,168   -   0   94,462   101,105   -   26,886   473,621 
Vice President2010  244,400       48,654   33,648   124,494       25,934   477,130 
 2009  249,012       30,825   21,132   4,085       26,632   331,687 

(1)

Currency converted from Euros to U.S. Dollars using the average exchange rate of $1.44515 for fiscal 2009.

(2)

(1)

Mr. Richter received as part of his offer of employment a signing bonus of $25,000 and a relocation bonus of $75,000. Provided he remains employed as of the first anniversary of his employment date, he will receive an additional $75,000 relocation bonus at that time.

(3)

Amounts represent compensation expense recognized duringthe aggregate grant date fair value of restricted stock units and stock options that were granted in each fiscal 2009 under SFAS 123(R), based on the valuation andyear as computed in accordance with FASB ASC Topic 718 utilizing the assumptions discussed in Note 2 to our Notes to Consolidated Financial Statements for the fiscal year ended October 3, 2009.

1, 2011.

(4)

(2)

Amounts awarded for fiscal 2009 EVC.

2011 performance under the EVC Plan and paid out in the first quarter of fiscal 2012. Ms. Hamilton was not eligible to receive a payout under the EVC Plan because her separation from service occurred prior to the end of fiscal 2011.

(5)

(3)

Represents increase in present value provided under the Employer Pension Commitment for Mr. Hellwig. We do not pay above-market or preferential earnings on non-qualified deferred compensation.


(6)

(4)

These amounts include all other compensation as described in the following table:


20

Supplemental Table to the All Other Compensation Column

 

 

Retirement Plan

 

 

 

 

 

 

 

Name

 

Match
$

 

Fiscal Year
Contribution
$

 

Car
$ (1)

 

Payment for unused vacation
$ (2)

 

Total
$

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

6,900

 

10,740

 

8,710

 

—

 

26,350

 

Joachim Hellwig

 

—

 

—

 

14,163

 

12,321

 

26,484

 

Susan E. Knight

 

7,273

 

10,740

 

8,710

 

—

 

26,723

 

Alfred Richter

 

2,769

 

—

 

4,690

 

—

 

7,459

 

Kathleen M. Staby

 

7,182

 

10,740

 

8,710

 

—

 

26,632

 


__________________

  Retirement Plan                
Name 
Match
$
  
Fiscal Year
Contribution
$
  
Car(a)
$
  
Payment
for Unused
Vacation(b)
$
  
Severance,
Insurance and
Outplacement(c)
$
  
Temporary
Living
Expenses(d)
$
  
Total
$
 
 
Laura B. Hamilton
  7,350   0   7,370   42,839   589,055   -   646,613 
Joachim Hellwig  -   -   13,586   26,949   -   -   40,535 
Susan E. Knight  7,350   11,496   8,040   -   -   -   26,886 
William V. Murray  1,362   0   670   -   -   10,631   12,663 
Kathleen M. Staby  7,350   11,496   8,040   -   -   -   26,886 

(1)

(a)Represents cash car allowance for Ms. Hamilton, Ms. Knight, Mr. RichterMurray and Ms. Staby, and all expenses for Mr. Hellwig (as required by Mr. Hellwig’s employment agreement).


(2)

(b)

Represents cash payment made in accordance with employment contract on payment for unused vacation (as required by Ms. Hamiliton’s separation agreement and Mr. Hellwig’s employment agreement).


(c)Represents $550,000 for severance, $15,000 for outplacement and $24,055 in employer cost of medical, dental, disability and life insurance in accordance with Ms. Hamilton’s separation agreement. See “Potential Payments Upon Termination or Change in Control” for more information.

(d)Represents expenses incurred for interim housing in Minneapolis, utilities associated with interim housing, related living expenses, and travel by Mr. Murray and Mr. Murray’s spouse to and from their home in California.

(5)Ms. Hamilton’s employment terminated on August 25, 2011.
(6)Currency converted from Euros to U.S. Dollars using the average exchange rate of $1.38630 for fiscal 2011.
(7)Represents amounts paid to Mr. Murray in the capacity of interim Chief Executive Officer beginning with his appointment on August 25, 2011. Payments made to Mr. Murray as an independent director prior to his appointment as interim Chief Executive Officer are included in the Director Compensation for Fiscal 2011 table on page 13.

Grants of Plan Based Awards in Fiscal 2009 2011


As reflected in the table below, the named executive officers (other than Mr. Murray) received two types of plan-based awards for their service in fiscal 2011: (a) stock options granted on July 5, 2011 under the MTS Systems Corporation 2011 Stock Incentive Plan, and (b) an award under our EVC Plan, payable in the first quarter of fiscal 2012.

Stock Options

Consistent with the provisions of our Stock Incentive Grant Policy, the stock options were granted to our named executive officers on the first business day of our fourth fiscal quarter. The following table describesexercise price of the potential rangeoptions is the fair market value of annuala share of our common stock on that day, as determined under our 2011 Stock Incentive Plan (the last reported sales price on the NASDAQ Global Select Market). The stock options granted to the named executive officers in 2011 will become exercisable and vest in incremental installments of one-third per year, commencing on the first anniversary of the date of grant, and have a term of five years.

Unless an option holder is terminated for cause, vested stock options are exercisable for 90 days after the termination of the option holder’s employment, or 180 days upon death, disability or retirement. If an option holder is terminated for cause, as defined in our 2011 Stock Incentive Plan, all unexercised options will immediately terminate. The Compensation Committee may, at any time after the award is granted, vest part or all of the unvested options as it deems appropriate.

These stock options would become fully exercisable upon the occurrence of a change in control as defined in our 2011 Stock Incentive Plan. The Compensation Committee may require options be exercised prior to the change in control, may pay cash or other securities to cancel awards in connection with the change in control, or may provide for the successor to substitute its stock for outstanding awards.
EVC Awards

Under our EVC Plan, the named executive officers can receive cash payouts after the completion of each fiscal year if specified performance goals established at the beginning of the fiscal year are attained. For each named executive officer, a cash incentive amount, expressed as a percentage of his or her base salary, is established for performance at each of the target and maximum levels. The EVC Plan awards for fiscal 20092011 were structured so that the cash incentive paid to each named executive officer would be 0% to 200% of the payout level established for performance at the target level for each goal.

Information about the potential payout levels established for each named executive officer and the stock options, restricted stock,nature and restricted stock units granted duringweighting of the goals selected for fiscal 2009.

2011 can be found under “Compensation Discussion and Analysis.” The actual amounts paid pursuant to our EVC Plan for fiscal 2011 performance are listed in the “Non-Equity Incentive Plan Compensation” column to the “Summary Compensation Table.”

 

 

 

 

 

 

 

 

Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards

 

All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)

 

All
Other
Option
Awards:
Number
of
Securities
Underly

ing
Options
(#)

 

Exercise
or
Base
Price of

Option
Awards
($/Sh)(1)

 

Grant
Date
Fair
Value
of Stock
and
Option
Awards
($)(2)

 

Name

 

Grant
Date

 

Approval
Date

 

Award
Type

 

Target
($)

 

Maximum
($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

 

 

 

 

Cash

 

367,500

 

735,000

 

—

 

—

 

—

 

—

 

 

 

6/29/2009

 

5/19/2009

 

RSU

 

—

 

—

 

11,700

 

—

 

—

 

240,435

 

 

 

6/29/2009

 

5/19/2009

 

Options

 

—

 

—

 

—

 

35,000

 

20.55

 

164,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joachim Hellwig

 

 

 

 

 

Cash

 

107,382

 

214,764

 

—

 

—

 

—

 

—

 

 

 

6/29/2009

 

5/19/2009

 

RSU

 

—

 

—

 

1,500

 

—

 

—

 

30,825

 

 

 

6/29/2009

 

5/19/2009

 

Options

 

—

 

—

 

—

 

4,500

 

20.55

 

21,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Susan E. Knight

 

 

 

 

 

Cash

 

161,817

 

323,633

 

—

 

—

 

—

 

—

 

 

 

6/29/2009

 

5/19/2009

 

RSU

 

—

 

—

 

3,000

 

—

 

—

 

61,650

 

 

 

6/29/2009

 

5/19/2009

 

Options

 

—

 

—

 

—

 

9,000

 

20.55

 

42,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alfred Richter

 

 

 

 

 

Cash

 

150,000

 

300,000

 

—

 

—

 

—

 

—

 

 

 

4/15/2009

 

2/28/2009

 

RSA

 

—

 

—

 

9,351

 

—

 

—

 

200,018

 

 

 

6/29/2009

 

5/19/2009

 

RSU

 

—

 

—

 

2,900

 

—

 

—

 

59,595

 

 

 

6/29/2009

 

5/19/2009

 

Options

 

—

 

—

 

—

 

8,750

 

20.55

 

41,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kathleen M. Staby

 

 

 

 

 

Cash

 

85,540

 

171,081

 

—

 

—

 

—

 

—

 

 

 

6/29/2009

 

5/19/2009

 

RSU

 

—

 

—

 

1,500

 

—

 

—

 

30,825

 

 

 

6/29/2009

 

5/19/2009

 

Options

 

—

 

—

 

—

 

4,500

 

20.55

 

21,131

 


__________________

                  All Other       
               All Other  Option       
               Stock  Awards:     Grant 
               Awards:  Number  Exercise  Date 
       Estimated Future  Number  of  or  Fair Value 
       Payouts Under Non-  of  Securities  Base Price  of Stock 
       Equity Incentive Plan  Shares of  Underly-  of  and 
       Awards(2)  Stock or  ing  Option  Option 
  Grant  Approval Award Target  Maximum  Units  Options  Awards  Awards 
Name Date  Date 
Type(1)
 ($)  ($)   (#)   (#)(3)  
($/Sh)(4)
  
($)(5)
 
                            
Laura B. Hamilton  -   - Cash  375,133   750,266   -   -   -   - 
  7/5/2011  5/31/2011 Options  -   -   -   80,000   43.61   755,696 
Joachim Hellwig(6)
  -   - Cash  102,641   205,282   -   -   -   - 
  7/5/2011  5/31/2011 Options  -   -   -   12,000   43.61   113,354 
Susan E. Knight  -   - Cash  165,177   330,354   -   -   -   - 
  7/5/2011  5/31/2011 Options  -   -   -   16,000   43.61   151,139 
William V. Murray  -   - -  -   -   -   -   -   - 
Kathleen M. Staby  -   — Cash  87,317   174,634   -   -   -   - 
  7/5/2011  5/31/2011 Options  -   -   -   10,000   43.61   94,462 

(1)

(1)The grants of stock options were made pursuant to the 2011 Stock Incentive Plan.

(2)Represents awards made pursuant to the EVC Plan for Ms. Hamilton, Mr. Hellwig, Ms. Knight, and Ms. Staby. There is no threshold level for these awards. The 2011 EVC performance goals are described under “Compensation Discussion and Analysis – Design of EVC Plan and Review of 2011 Performance.” On November 22, 2011, Mr. Murray received a performance-based award consisting of the opportunity to receive cash and equity that is described under “Compensation Discussion and Analysis – Interim Chief Executive Officer Compensation.”

(3)These options have an exercise price equal to the closing price on the grant date, with a five-year term exercisable in three equal annual installments beginning on the first anniversary of the grant date.

(4)Closing market value of shares on grant date.


(2)

(5)

Fair value of $4.6958 calculatedCalculated using a multiple option form of the Black-Scholes option valuation model with assumptions for interest rate, expected life, share price volatility and dividend yield as described in Note 2 to our Notes to Consolidated Financial Statements for the fiscal year ended October 3, 2009.

1, 2011, resulting in a grant date fair value of $9.4462 per share.


21

(6)Mr. Hellwig’s approved target amount under the EVC Plan was €76,893, and the approved maximum amount was €153,786. The dollar amounts shown in the table were calculated by using the conversion rate of $1.33485, which was the average exchange rate for fiscal 2010.
Outstanding EquityAwards at 2009 2011 Fiscal Year End

 

 

Option Awards

 

Stock Awards

 

 

 

Number of Securities
Underlying Unexercised
Options

 

 

 

 

 

Number of
Shares or
Units of Stock
Held That
Have Not
Vested

 

Market
Value of
Shares or
Units of
Stock Held
That Have
Not Vested

 

Name

 

Exercisable
(#)

 

Un-
Exercisable
(#)(1)

 

Option
Price
($)

 

Option
Expiration
Date

 

(#)

 

($)(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

23,500

 

—

 

35.15

 

7/5/10

 

 

 

 

 

 

 

21,000

 

—

 

39.14

 

7/3/11

 

 

 

 

 

 

 

30,000

 

30,000

 

46.03

 

7/2/12

 

 

 

 

 

 

 

23,334

 

46,666

 

35.88

 

6/30/13

 

 

 

 

 

 

 

0

 

35,000

 

20.55

 

6/29/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,700

 

329,121

 

Joachim Hellwig

 

11,800

 

—

 

35.15

 

7/5/10

 

 

 

 

 

 

 

9,800

 

—

 

39.14

 

7/3/11

 

 

 

 

 

 

 

6,134

 

3,066

 

46.03

 

7/2/12

 

 

 

 

 

 

 

3,334

 

6,666

 

35.88

 

6/30/13

 

 

 

 

 

 

 

0

 

4,500

 

20.55

 

6/29/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,500

 

42,195

 

Susan E. Knight

 

23,500

 

—

 

35.15

 

7/5/10

 

 

 

 

 

 

 

21,000

 

—

 

39.14

 

7/3/11

 

 

 

 

 

 

 

12,667

 

6,333

 

46.03

 

7/2/12

 

 

 

 

 

 

 

6,334

 

12,666

 

35.88

 

6/30/13

 

 

 

 

 

 

 

0

 

9,000

 

20.55

 

6/29/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

84,390

 

Alfred Richter

 

0

 

8,750

 

20.55

 

6/29/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,351

 

263,044

 

 

 

 

 

 

 

 

 

 

 

2,900

 

81,577

 

Kathleen M. Staby

 

8,300

 

—

 

35.15

 

7/5/10

 

 

 

 

 

 

 

9,000

 

—

 

39.14

 

7/3/11

 

 

 

 

 

 

 

5,867

 

2,933

 

46.03

 

7/2/12

 

 

 

 

 

 

 

3,334

 

6,666

 

35.88

 

6/30/13

 

 

 

 

 

 

 

0

 

4,500

 

20.55

 

6/29/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,500

 

42,195

 


__________________

  Option Awards  Stock Awards 
  Number of Securities        Number of  Market Value 
  Underlying Unexercised        Shares or  of Shares or 
  
Options (1)
        Units of  Units of 
     Option     Stock Held  Stock Held 
     Un-  Exercise  Option  That Have  That Have 
  Exercisable  Exercisable  Price  Expiration  Not Vested  Not Vested 
Name  (#)   (#)  ($)  Date   (#)  
($)(2)
 
                      
Laura B. Hamilton(3)
  45,000   -   46.03  7/2/12        
   70,000   -   35.88  6/30/13        
   23,334   -   20.55  6/29/14        
   13,334   -   28.62  7/6/15        
                  0   0 
Joachim Hellwig  9,200   -   46.03  7/2/12         
   10,000   -   35.88  6/30/13         
   3,000   1,500   20.55  6/29/14         
   1,667   3,333   28.62  7/6/15         
   0   12,000   43.61  7/5/16         
                  1,633   50,035 
Susan E. Knight  19,000   -   46.03  7/2/12         
   19,000   -   35.88  6/30/13         
   6,000   3,000   20.55  6/29/14         
   3,167   6,333   28.62  7/6/15         
   0   16,000   43.61  7/5/16         
                  3,133   95,995 
William V. Murray  0   0   0   -   3,202   98,109 
                         
Kathleen M. Staby  8,800   -   46.03  7/2/12         
   10,000   -   35.88  6/30/13         
   3,000   1,500   20.55  6/29/14         
   1,667   3,333   28.62  7/6/15         
   0   10,000   43.61  7/5/16         
                   1,633   50,035 

(1)

(1)Stock options granted with a 5 yearfive-year term, exercisable in three equal installments each year beginning on the first anniversary of the grant date.


(2)

MarketFor Mr. Hellwig, Ms. Knight and Ms. Staby, the market value of unvested restricted stock and restricted stock units equals the closing price of our common stockCommon Stock on the NASDAQ Stock Market at fiscal year end ($28.13)30.64) multiplied by the number of shares or units. The restricted stock and restricted stock units vest in three equal annual installments each year beginning on the first anniversary of the grant date.

For Mr. Murray, the market value is applicable to restricted stock awards he received in his role of independent director prior to his appointment as interim Chief Executive Officer. The restricted stock awards vest in three equal annual installments beginning on the first anniversary of the annual meeting of shareholders after the date of the grant.

Option Exercises and Stock Vested in Fiscal 2009

Name

 

Number of
Shares
Acquired
on Exercise
(#)

 

Value Realized
on Exercise
($)

 

 

 

 

 

 

 

Laura B. Hamilton

 

—

 

—

 

Joachim Hellwig

 

—

 

—

 

Susan E. Knight

 

24,000

 

5,969

 

Alfred Richter

 

—

 

—

 

Kathleen M. Staby

 

—

 

—

 



22

(3)Ms. Hamilton’s employment terminated on August 25, 2011. Under the terms of her separation agreement, she may exercise any stock options that had vested as of August 25, 2011 for a period of 180 days following such date. Any shares of restricted stock and any restricted stock units that were not vested as of August 25, 2011 were forfeited.
Option Exercises and Stock Pension BenefitsVes forted in Fiscal 20092011

  Options Awards  Stock Awards 
Name 
Number of
Shares
Acquired
 on Exercise
(#)
  
Value
Realized
on Exercise
($)
  
Number of
Shares
Acquired
 on Vest(1)
(#)
  
Value
Realized
on Vest(2)
($)
 
             
Laura B. Hamilton  0   0   5,608   238,512 
Joachim Hellwig  0   0   1,067   45,378 
Susan E. Knight  21,000   137,154   1,346   57,131 
Kathleen M. Staby  9,000   49,565   717   30,493 
William V. Murray  0   0   1,866   80,033 

Name

(1)

For Ms. Hamilton, Ms. Knight, and Ms. Staby, the number of shares acquired equals the difference between the number of restricted stock units vested and the number of restricted stock units withheld by the Company to cover tax withholding requirements. The number of restricted stock units that vested before the withholding was for Ms. Hamilton 8,334, for Ms. Knight 2,067, and for Ms. Staby 1,067. Messrs. Hellwig and Murray did not have any restricted stock units withheld.


(2)The value realized on the vesting of the restricted stock units is the fair market value of our Common Stock at the time of vesting.
Pension Benefits for Fiscal 2011

NamePlan Name

Number of
Years
Credited
Service
(#)

Present Value
of Accumulated
Benefit
($)(1)

Payments
During Last
Fiscal Year
($)

Joachim Hellwig

Employer Pension Commitment

NA

N/A

203,415

—

232,549		-

__________________

(1)

(1)Currency converted from Euros to U.S. Dollars using the exchange rate of $1.44515$1.3863 for fiscal 2009.

2011.


Employer Pension Commitment for Joachim Hellwig.MTS Sensor Technologie GmbH & Co KG (“MTS Sensors”), our wholly-owned subsidiary, is obligated to pay Mr. Hellwig a life-long retirement pension in the amount of €1,278 per month after his 65th birthday or earlier in the event of a disability. In the event of Mr. Hellwig’s death, Mr. Hellwig’s spouse will receive a pension of €766.94 per month for her lifetime. The survivor’s pension is terminated should Mr. Hellwig’s spouse re-marry. MTS Sensors is obligated to pay the earned portion of Mr. Hellwig’s retirement benefit even if Mr. Hellwig’s employment is terminated for any reason other than death or disability. Upon becoming eligible for payments, Mr. Hellwig, or Mrs. Hellwighis wife in the event she is to receive the retirement benefit, is entitled to a one-time lump sum payment equal to the cash value of the liability for future retirement benefit payments. There is no number of years credited service requirement to the benefit provided.


Non-Qualified DeferredDeferred Compensation


Our Executive Deferred Compensation Plan is a non-qualified plan that provides a select group of employees, including all of the named executive officers, with the option to defer up to 90% of base salary or short-term cash incentive. Independent directors are also eligible to participate in the Executive Deferred Compensation Plan and may elect to defer up to 90% of the director’s fees we paid.

pay.


Participants’ deferred compensation accounts earn a monthly rate of return based on an established interest rate. The interest rate is approved by the Compensation Committee in November of each year for the following calendar year. Historically, the ten-year government treasury note rate as of the first business day of the calendar year has been used. As such, the interest rate for calendar 20082010 was 4.04 %3.83% and for calendar 20092011 was 2.167%3.36%.

At the time of the deferral election, participants must also select a distribution date and form of distribution. Participants may elect to receive distribution in a single payment, installments, or combination thereof. Distribution elections cannot change unless the election is to postpone payment until the fifth anniversary of separation from service or, if later, age 60 and the election must be made at least 12 months before separation from service. In no case can an earlier distribution election be allowed.

Name

 

Executive
Contributions
in Last FY
($)

 

Registrant
Contributions
in Last FY
($)

 

Aggregate
Earnings
in Last FY
($)(1)

 

Aggregate
Withdrawals/
Distributions
($)

 

Aggregate
Balance
at Last FYE
($)

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

—

 

—

 

9,229

 

—

 

398,261

 


__________________

 
Name
 
Executive
Contributions
in Last FY
($)
  
Registrant
Contributions
in Last FY
($)
  
Aggregate
Earnings
in Last FY
($)(1)
  
Aggregate
Withdrawals/
Distributions
($)
  
Aggregate
Balance
at Last FYE
($)
 
                
Laura B. Hamilton  -   -   22,102   -   701,545 

(1)

(1)Earnings are determined on a calendar year basis. Earnings were 4.04%3.83% and 2.167%3.36% for 20082010 and 2009,2011, respectively.


Potential Payments Upon TerminationTermination or Change Inin Control


Payments and benefits received by the named executive officers upon termination of employment or a change in control of our Company are governed by the arrangements described below and quantified atrelated quantifications. Except with respect to Ms. Hamilton, whose separation of service was effective on August 25, 2011, the end of this section. We have estimatedquantifications are estimates based on the amounts involved assumingassumption that the termination or change in control became effective as of the last business day of fiscal 2009. The actual amounts2011.

Separation Agreement with Ms. Hamilton

We entered into a Separation Agreement with Ms. Hamilton that was effective as of August 25, 2011, the day Ms. Hamilton ceased to be paid can only be determined at the timeserve as our Chief Executive Officer and Chair of the named executive officer’s departure from the Company.

As described in more detail below, we are party to agreements with certain of our executive officers that together establish the terms of the employment relationship between the Company and the executive, the terms under which that relationship may be ended, and the rights and obligations of the parties after the employment relationship ends.


23

Table of Contents

Employment Agreement

Effective January 1, 1991, MTS Sensors entered into an employment contract with Mr. Hellwig.Board (the “Separation Date”). Pursuant to the contract, Mr. Hellwig may terminateSeparation Agreement, Ms. Hamilton received 12 months’ base salary ($550,000), paid in a lump sum 15 business days following her execution and delivery of the contract uponSeparation Agreement. For a period of six months prior written notice. MTS Sensors may also terminatefollowing the contract for good cause or by a resolution of MTS as shareholder of MTS Sensors. Mr. Hellwig’s contract contains a confidentiality provision and a two-year non-compete clause after termination of the contract. The contract expiresSeparation Date, Ms. Hamilton will continue to be enrolled in the yearCompany-sponsored health care plan in which she participated before the separation, as well as any life insurance and disability plans provided by the Company through the completion of Mr. Hellwig’s 65th birthday.

Severance Agreement

We have a formalized Severance Agreement with Mr. Richter.such six-month period. Furthermore, if Ms. Hamilton elects to continue coverage under the health care plan pursuant to COBRA, the Company has agreed to pay the cost of such coverage until the earlier of 18 months after the Separation Date or the date on which she is no longer eligible for COBRA coverage. The SeveranceSeparation Agreement provides for continuation of compensation and benefits described belowthat the Company will make outplacement services available to Ms. Hamilton for 12 months following terminationthe Separation Date.


Pursuant to the Separation Agreement, Ms. Hamilton was also paid for earned and unused vacation time she had accrued through the Separation Date and was eligible for reimbursement for reasonable business expenses appropriately incurred prior to the Separation Date in furtherance of her employment by us other thanwith the Company. The Separation Agreement does not provide for cause. Mr. Richter’s Severanceany accelerated vesting of equity awards, but it does provide that stock options granted under the 2006 Stock Incentive Plan or the 2011 Stock Incentive Plan that had vested as of the Separation Date may be exercised for 180 days following the Separation Date. Any unvested stock options, shares of restricted stock, or restricted stock units were forfeited.

In consideration for the payments and benefits provided to her under the Separation Agreement, Ms. Hamilton agreed to the following terms and conditions, among others: she will expire two years fromnot sue or otherwise file any claim against the employment dateCompany; for the six-month period during which she is receiving benefits under the Separation Agreement, she will not render services directly or indirectly to any competing organization located in any market in which the Company was doing business as of March 30, 2009.

The Severancethe Separation Date; and she will not make any disparaging, derogatory, or defamatory remarks about the Company. In addition, the Separation Agreement provides monthly payments overthat the applicable period$550,000 lump-sum payment representing 12 months of time based uponMs. Hamilton’s base salary can be recaptured by the highest annual salaryCompany if we establish that, during any 12-month periodher employment with the Company or during the preceding 36 months and the average annual executive variable compensation and fiscal year retirement contribution received during the three most recent fiscal years ending immediately prior to termination. Additionally, we pay the employer share of Mr. Richter’s group life and health insurance premiums during the applicable18-month period of time. All premium payments are contingent on Mr. Richter making the appropriate timely written elections to continue group benefits following his date of termination. As a condition of the receipt of these payments, Mr. Richter must agree not to render services to any entity concerning any competing product during the applicable period of time. Severance benefits are forfeited and may be recaptured if it is determined that Mr. Richterher separation, Ms. Hamilton engaged in conduct detrimental to the Company including conduct that would resultconstitute “cause” as defined in termination for cause, conducther Change in violationControl Agreement (see below), she violated the non-competition and confidentiality provisions of the MTS Employee Agreement, violation of the noncompetition clause in the SeveranceSeparation Agreement, or if ourthe Company’s financial statements are required tomust be restated resulting fromas a result of errors, omissions, or fraud by Ms. Hamilton during her employment with the Company.

The total compensation paid to Ms. Hamilton in conjunction with her separation from service on August 25, 2011 is as follows:

12 months of base salary $550,000 
Health, Life, Disability and COBRA(1)
  24,055 
12 months of outplacement services  15,000 
Earned and unused vacation time  42,839 
Total value $690,283 
(1)Costs used for COBRA represent existing premium equivalents.

Terms of Mr. Richter. Additionally,Murray’s Employment as Interim Chief Executive Officer

The terms upon which we agreed to employ Mr. Richter must agree to maintainMurray as our interim Chief Executive Officer contained certain termination protections. His annual base salary of $590,000 and initial bonus of $410,000 are payable for at least six months following his appointment on August 25, 2011, even if his service as interim Chief Executive Officer ceases before the confidentialityexpiration of certain information deemed by us to be proprietary. In the eventthat period (unless he voluntarily terminates such service or such service is terminated for cause). If Mr. Murray’s service as interim Chief Executive Officer had been terminated involuntarily and not for cause on October 1, 2011, he would have received a total cash benefit of $415,911, representing base salary and initial bonus through February 25, 2012, which would have been payable on a change of control, the terms of the monthly basis.

Change in Control Agreement described below will supersede the terms of the Severance Agreement.

Change In Control Agreementwith Ms. Knight and Ms. Staby

In December 2008, we entered into amended Change in Control Agreements with Ms. Hamilton, Ms. Knight, and Ms. Staby andStaby. Ms. Hamilton’s agreement is of no further effect except to the extent that the definition of “cause” provided in March 2009 athe Change in Control Agreement with Mr. Richter.

was incorporated into her Separation Agreement, as described above.


In the event of a change in control and either (i) retirement after age 65 or an involuntary termination other than for cause, death, disability or disabilityretirement or (ii) voluntary termination for good reason within two years after a change in control, each of Ms. Knight and Ms. Staby will be entitled to receive a lump-sum payment equal to two times theirher annual compensation. Annual compensation includes annual base salary and the average of the cash incentive payment made pursuant to the EVC Plan for the prior three fiscal years. In addition, each will be entitled to continuation of theirher benefits for a period of 2418 months and reimbursement of legal fees in connection with the termination, including fees associated with the enforcement of the Change in Control Agreements.


As a condition of the receipt of such benefits, each executive has agreed not to render services to any entity offering any competing product for a period of one year following the date of termination unless the change in control was not approved by the Board.


In general, a “change in control” would occur if:

30% or more of the Company’s outstanding voting stock was acquired by any person;

current members of the Board or their successors elected or nominated by such members ceased to constitute at least a majority of the Board; or


●30% or more of the Company’s outstanding voting stock was acquired by any person;

the Company consummated a merger, consolidation, share exchange, division or other reorganization with another company.

●current members of the Board or their successors elected or nominated by such members ceased to constitute at least a majority of the Board; or
●the Company consummated a merger, consolidation, share exchange, division or other reorganization with another company and the Company’s shareholders hold 50% or fewer of the outstanding shares of the post-merger company.


For purposes of the Change in Control Agreements, “cause” means:


●the willful and continued failure by the executive to perform substantially the duties and responsibilities of the executive’s position with the Company after a written demand for substantial performance is delivered to the executive by the Board, which demand specifically identifies the manner in which the Board believes that the executive has not substantially performed the duties or responsibilities;
●the conviction of the executive by a court of competent jurisdiction for felony criminal conduct which, in the good faith opinion of the Company, would impair the executive’s ability to perform his or her duties or impair the business reputation of the Company; or
●the willful engaging by the executive in fraud or dishonesty that is demonstrably and materially injurious to the Company, monetarily or otherwise.

the willful and continued failure by the executive to perform substantially the duties and responsibilities of the executive’s position with the Company after a written demand for substantial performance is delivered to the executive by the Board, which demand specifically identifies the manner in which the Board believes that the executive has not substantially performed the duties or responsibilities;


24

37

Table of Contents

the conviction of the executive by a court of competent jurisdiction for felony criminal conduct which, in the good faith opinion of the Company, would impair the executive’s ability to perform his or her duties or impair the business reputation of the Company; or

the willful engaging by the executive in fraud or dishonesty that is demonstrably and materially injurious to the Company, monetarily or otherwise.

For purposes of the Change in Control Agreements, “good reason” means:

the authority, responsibilities or duties assigned to the executive, as compared to those in effect immediately prior to the change in control, are materially and adversely diminished without the executive’s written consent;


a material reduction by the Company in the executive’s annual compensation including, but not limited to, base pay or short- and long-term incentive pay in effect immediately prior to a change in control;

●the authority, responsibilities or duties assigned to the executive, as compared to those in effect immediately prior to the change in control, are materially and adversely diminished without the executive’s written consent;

a material reduction in the budget over which the executive retains authority;

●a material reduction by the Company in the executive’s annual compensation including, but not limited to, base pay or short- and long-term incentive pay in effect immediately prior to a change in control;

the material change in the geographic location at which the executive must perform services; or

●a material reduction in the budget over which the executive retains authority;
●the material change in the geographic location at which the executive must perform services; or

any material violation of the Change in Control Agreement by the Company, including any purported termination of the executive’s employment that is not made pursuant to a notice of termination satisfying the requirements of the Change in Control Agreement.

●any material violation of the Change in Control Agreement by the Company.

Change in control payments are generally payable in a single lump sum within 30 days after the date of termination. The amount payable under the Change in Control Agreement will be reduced by any amounts payable under other employment-related agreements that provide for similar payments. AAt the election of the named executive officer, a change in control payment under the Change in Control Agreements, as well as any other compensation under other plans or agreements that is contingent upon a change in control, may be reduced, in the manner provided in the Change in Control Agreement to the extent necessary to avoid excise taxation to the executive and non-deductibility to the Company under federal income tax laws applicable to “parachute payments.” If payments are not reduced so as to avoid the excise tax, the named executive officer, and not the Company, is responsible for the payment of any excise taxes imposed on the payments.

Employment Agreement with Mr. Hellwig

Effective January 1, 1991, MTS Sensors entered into an employment contract with Mr. Hellwig. Pursuant to the contract, Mr. Hellwig may terminate the contract upon six months’ prior written notice. MTS Sensors may also terminate the contract for good cause or by a resolution of MTS Systems Corporation as sole shareholder of MTS Sensors. Mr. Hellwig’s contract contains a confidentiality provision and a two-year non-compete clause after termination of the contract. The Company shall determinecontract expires in the order and amounts by which the amounts due are reduced.

Ouryear of Mr. Hellwig’s 65th birthday.


Equity Incentives

Both of our 2006 Stock Incentive Plan allowsand 2011 Stock Incentive Plan provide for acceleration of stock incentives upon a change in control.control if the awards have not been assumed or substituted by an acquiring entity. Upon a change in control, any stock incentive will immediately vest and be exercisable and any restrictions will lapse.

In general, a “change in control” would occur under either of our stock incentive plans if:

●
30% or more of the Company’s outstanding voting stock was acquired by any person;
●
current members of the Board or their successors elected or nominated by such members ceased to constitute at least a majority of the Board;
●
the Company consummated a merger, consolidation, share exchange, division or other reorganization with another company unless the Company’s shareholders hold 51% or more of the outstanding shares of the post-merger company;
●
the Company consummated an agreement for the sale or disposition of the assets for a total consideration equal to 51% or more of the aggregate market value of the Company’s outstanding stock; or
●
the Company adopts a plan of complete liquidation or winding up of the Company.

Notwithstanding the foregoing, unless the Compensation Committee determines otherwise at or prior to the change in control, no stock incentive that is subject to any performance criteria for which the performance period has not expired shall accelerate at the time of a change in control.

Our 2006 Stock Incentive


Short-Term Cash Incentives

Under the terms of the awards made pursuant to the EVC Plan, generally allowsif a named executive officer’s employment with the Company is terminated for any reason other than death before the end of the fiscal year on which the performance goals are based, the officer will not receive any payout under the EVC Plan. If a pro-rata portion of anynamed executive officer dies during the fiscal year on which the performance shares to be paid out upon an executive’s death, disability or retirement. The payment isgoals are based, a prorated payout based on the extent to whichactual achievement of the performance targets were satisfiedgoals at the end of the performance period and pro-ratedfiscal year will be made to the officer’s estate. Such a payout will be proportionately reduced based upon the time the officer was employed during the fiscal year.
Estimated Payments for Named Executive Officers Serving at the lengthEnd of employment within the performance period.

Fiscal 2011


Assuming that a termination event or change in control occurred on October 3, 2009,1, 2011, the total compensation payable to eachthe following named executive officer who was employed by us on such dateofficers is as set forth in the table below.

The named executive officers are not entitled to any benefits in conjunction with a termination of employment that is not related to a change in control, except for Mr. Murray, as described above.

 

 

Severance Agreement
(Involuntary Not For Cause Termination)

 

Change in Control Agreement

 

Name

 

Cash Payment
($)

 

Accelerated
Vesting
($)

 

Benefits
($)

 

Total Value
($)

 

Cash Payment
($)(1)

 

Accelerated
Vesting
($)(2)

 

Benefits
($)(3)

 

Total Value
($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laura B. Hamilton

 

—

 

—

 

—

 

—

 

1,333,469

 

594,421

 

20,593

 

1,948,483

 

Joachim Hellwig(4)

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Susan E. Knight

 

—

 

—

 

—

 

—

 

895,184

 

152,610

 

20,342

 

1,068,136

 

Alfred Richter(5)

 

304,772

 

—

 

11,983

 

316,755

 

603,181

 

410,946

 

24,987

 

1,039,114

 

Kathleen M. Staby

 

—

 

—

 

—

 

—

 

615,768

 

76,305

 

18,108

 

710,181

 


__________________

  Termination of Employment in Conjunction with a Change in Control  
Change in Control
(without Termination of Employment)
 
 
Name
 
Cash Payment
($)
  
Accelerated Vesting
($)(1)
  
Benefits
($)
  
Total Value
($)
  
Cash Payment
($)
  
Accelerated Vesting
($)(1)
  
Benefits
($)
  
Total Value
($)
 
Joachim Hellwig  -   71,903   -   71,903   -   71,903   -   70,903 
                                 
Susan E. Knight  828,862(2)  139,058   17,678(4)  985,598   -   139,058   -   139,058 
                                 
William V. Murray  415,911(3)  98,109   -   514,020   -   98,109   -   98,109 
                                 
Kathleen M. Staby  646,119(2)  71,903   15,471(4)  793,890   -   71,903   -   70,903 

(1)

As described under the Change in Control Agreement summary above, all U.S. named executive officers would receive 24 monthly payments.

(2)

(1)

Represents the aggregate value at October 3, 2009, of stock options, (stock price less exercise price), restricted stock awards, and restricted stock units held by each named executive officer that were not vested as of such date thatOctober 1, 2011 but whose vesting and exercisability would have been vestedaccelerated under the terms of the 2006 Stock Incentive Plan and exercisablethe 2011 Stock Incentive Plan (assuming that the awards were not assumed or substituted by an acquiring entity). The value of accelerating each unvested stock option is equal to the difference between the closing sale price of a share of our Common Stock on the NASDAQ Global Select Market on October 1, 2011 (the “Stock Price”) and the exercise price of such option. The value of accelerating each unvested restricted share and restricted stock unit is equal in each case to the Stock Price.


(2)Pursuant to the named executive officer’s Change in Control Agreement, represents two times her annual compensation (consisting of annual base salary and the average of the cash incentive payment made pursuant to the EVC Plan for each of the prior three fiscal years).

(3)If Mr. Murray’s service as interim Chief Executive Officer had been terminated involuntarily and other than for cause on October 1, 2011, he would have received a total cash benefit of $415,911, representing base salary and initial bonus through February 25, 2012, which would have been payable on a monthly basis. This payment would be made upon the termination of Mr. Murray’s employment regardless of whether a change in control. Under the 1997 and 2006 stock programs, restricted stock awards, restricted stock units, and options fully vest upon change in control.

control had occurred.

(3)

(4)

The value includesPursuant to the aggregate ofnamed executive officer’s Change in Control Agreement, represents payments made for life, disability, and accident and health insurance benefits.

benefits for 18 months following termination.


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(4)

Mr. Hellwig’s employment agreement does not provide payments upon termination or in the event of a change in control.

(5)

Mr. Richter’s Severance Agreement will expire two years from the employment date of March 30, 2009.

PROPOSAL 3

NON-BINDING, ADVISORY VOTE REGARDING THE COMPENSATION
OF THE COMPANY’S NAMED EXECUTIVE OFFICERS

General Information

Federal legislation enacted in 2010 (Section 14A of the Securities and Exchange Act of 1934 (the “Exchange Act”)) requires that, starting in last year’s proxy statement, we include a non-binding shareholder vote on our executive compensation every one, two or three years (commonly referred to as “Say-on-Pay”) and a non-binding shareholder vote to advise on the frequency of the Say-on Pay vote (commonly referred to as “Say-When-on-Pay”), which vote must be held at least once every six years.

As previously disclosed, at the Company’s Annual Meeting of Shareholders held on February 9, 2011, a majority of votes of the shareholders of the Company were cast in favor of holding an annual Say-on-Pay vote. Based on the results of the shareholder vote, the Board decided that the Company will hold a Say-on-Pay vote annually until the next required Say-When-on-Pay vote or until the Board determines that it is in the best interest of the Company to hold such vote with a different frequency.

Accordingly, shareholders are being asked to vote on the following resolution:

RESOLVED, that the shareholders of MTS Systems Corporation approve, on an advisory basis, the compensation of the Company’s Named Executive Officers, as described in the Compensation Discussion and Analysis section, the compensation tables, and the accompanying narrative disclosure, set forth in the Company’s proxy statement.

The compensation of our named executive officers is disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosures contained on pages 16 to 39 of this proxy statement. As discussed in those disclosures, we believe that our compensation policies and decisions are focused on pay-for-performance principles and are strongly aligned with the long-term interests of our shareholders. Compensation of our named executive officers is designed to enable us to attract and retain talented and experienced senior executives to lead the Company successfully in a competitive environment.

Your vote on Proposal 3 is advisory, and therefore not binding on the Company, the Compensation Committee, or the Board. The vote will not be construed to create or imply any change to the fiduciary duties of the Company or the Board, or to create or imply any additional fiduciary duties for the Company or the Board. However, our Board and our Compensation Committee value the opinions of our shareholders and to the extent there is any significant vote against the named executive officer compensation as disclosed in this proxy statement, we will consider our shareholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns.

Board Voting Recommendation

THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE PROPOSAL TO APPROVE THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS, AS DESCRIBED IN THE COMPENSATION DISCUSSION AND ANALYSIS SECTION, THE COMPENSATION TABLES, AND THE ACCOMPANYING NARRATIVE DISCLOSURE, SET FORTH IN THIS PROXY STATEMENT.
OTHER INFORMATION


Security Ownershipof Principal Shareholders and Management


The following table sets forth, as of the close of business on December 15, 2009,14, 2011, the number and percentage of outstanding shares of our Common Stock beneficially owned (i) by each person who is known to us to beneficially own more than five percent of our Common Stock, (ii) by each director and director nominee, (iii) by each executive officer named in the Summary Compensation Table, and (iv) by all our directors and executive officers as a group:

Name and Address of Beneficial Owner

 

Number of Shares
Beneficially Owned

 

Note

 

Percent
of Class

 

 

 

 

 

 

 

 

 

Mairs and Power, Inc.
332 Minnesota Street, Suite W-1520
Saint Paul, MN 55101

 

1,813,318

 

(1)

 

10.96

%

Barclays Global Investors

UK Holdings Limited
1 Churchill Place
Canary Wharf
London X0 E14 5HP

 

1,213,292

 

(2)

 

7.33

%

Laura B. Hamilton

 

146,161

 

(3),(4),(5)

 

 

*

Susan E. Knight

 

87,201

 

(3),(6)

 

 

*

Kathleen M. Staby

 

40,404

 

(3)

 

 

*

Joachim Hellwig

 

39,731

 

(3)

 

 

*

Jean-Lou Chameau

 

15,645

 

 

 

 

*

Barb J. Samardzich

 

13,195

 

 

 

 

*

Alfred Richter

 

9,351

 

(3)

 

 

*

Lois M. Martin

 

9,145

 

 

 

 

*

Brendan C. Hegarty

 

8,411

 

 

 

 

*

David J. Anderson

 

1,888

 

 

 

 

*

Gail P. Steinel

 

0

 

(7)

 

 

*

All directors and executive officers as a group (11 persons)

 

371,132

 

 

 

2.24

%


__________________

Name and Address of Beneficial Owner 
Number of Shares
Beneficially Owned
  Note  
Percent
of Class
 
          
Mairs and Power, Inc.  1,418,200    (1)  12.1%
332 Minnesota Street, Suite W-1520            
Saint Paul, MN 55101            
BlackRock, Inc.  1,195,403    (2)  7.81%
40 East 52nd St.
            
New York New York 10022            
The Vanguard Group, Inc.  767,736    (3)  5.01%
100 Vanguard Blvd.            
Malvem, PA 19355            
Laura B. Hamilton  210,530   (4) (5)  * 
Susan E. Knight  72,786   (4), (6)  * 
Kathleen M. Staby  38,567   (4), (7)  * 
Joachim Hellwig  34,097    (4)  * 
Jean-Lou Chameau  20,639       * 
Barb J. Samardzich  18,189       * 
Brendan C. Hegarty  10,939       * 
David J. Anderson  6,882       * 
Gail P. Steinel  4,994       * 
Emily M. Liggett  3,870       * 
William V. Murray  3,870       * 
All directors and executive officers as a group (13 persons)  444,864    (8)  2.78%
*Less than 1%.

(1)

According to the Form 13FSchedule 13G/A filed on November 13, 2009February 8, 2011 with the SEC, Mairs and Power,SEC.


(2)According to the Schedule 13G filed on February 7, 2011 with the SEC.

(3)According to the Schedule 13G filed on February 10, 2011 with the SEC. Includes 22,633 shares over which The Vanguard Group, Inc. has reported that as of September 30, 2009 it has sole voting power and 745,103 shares over which The Vanguard Group, Inc. has sole investment power over 1,813,318 shares.

dispositive power.

(2)

According to the Form 13F filed on November 12, 2009 with the SEC, Barclays Global Investors UK Holdings Ltd. – N/A has reported that as of September 30, 2009 it has sole voting power and shared-investment power over 1,102,558 shares and no voting power and shared investment power over 110,734 shares.


(3)

(4)

Includes the following number of shares which could be purchased under stock options exercisable within 60 days of December 15, 2009:14, 2011: Ms. Hamilton 97,834 shares; Mr. Hellwig, 31,068– 151,688 shares; Ms. Knight 63,501– 47,167 shares; Mr. Richter, 0Ms. Staby – 23,467 shares; and Ms. Staby, 26,501Mr. Hellwig – 23,867 shares.


(4)

(5)

Includes 3,0213,101 shares owned by Ms. Hamilton’s spouse, who solely controls the voting and investment power over those shares.

(5)

Due to an administrative error the fiscal 2008 Proxy Statement erroneously reported that Ms. Hamilton directly owned 78,546 shares when in fact at that time she directly owned 42,717 shares and her spouse directly owned 3,005 shares.


(6)

Includes 10,000 shares owned jointly with Ms. Knight’s spouse. Voting and investment power over those shares are shared accordingly.


(7)Includes 181 shares acquired pursuant to the MTS Dividend Reinvestment Plan.

(8)Includes 19,501 shares held by executive officers not listed in this table which could be purchased under stock options exercisable within 60 days of December 14, 2011.

(7)

Ms. Steinel joined the Board on September 30, 2009.


Related Party Transactions

The Audit Committee is responsible for the review and approval of all related party transactions between the Company and any of our executive officers, directors or director nominees, or any immediate family member of any such person. Pursuant to a related party transactions approval procedure adopted by the Audit Committee, all related party transactions that involve amounts in excess of $120,000 and in which a related party has or will have a direct or indirect material interest, or transaction in which any of our directors or any of their affiliated organizations


26

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is a party, must be approved in advance by the Audit Committee. If the proposed transaction involves a member of the Audit Committee, such member will not participate in the deliberations or vote on the proposed transaction. Related party transactions may be approved if the Audit Committee in good faith determines them to be (i) fair and reasonable to us, (ii) on terms no less favorable than could be obtained by us if the transaction did not involve a related party, and (iii) in our best interests.


During fiscal 2009,2011, MTS Sensors purchased approximately $1,026,405$2.0 million of mechanical components and remote-mechanic workbench services from Mark-Tronik GmbH (“Mark-Tronik”). MTS Sensors is owned by MTS Systems GmbH, one of our wholly-owned subsidiaries. The brother-in-law of Mr. Hellwig, our Vice President and General Manager of MTS Sensors, is the owner and general manager of Mark-Tronik. The prices paid by MTS Sensors were, and will continue to be, the subject of arms-length negotiation on terms no less favorable to MTS Sensors than MTS Sensors could otherwise obtain. Mr. Hellwig did not participate in negotiating or executing the MTS Sensors agreement with Mark-Tronik. Prior to the beginning of fiscal 2010, theThe Audit Committee has reviewed and approved these related party transactions after determining they met the required standards for approval.


During fiscal 2009,2011, we purchased approximately $230,000$1.2 million of legal services from Gray Plant Mooty Mooty and& Bennett, P.A. (“GPM”). The sister of Ms. Hamilton, our former Chair and CEO, is a shareholder of GPM. GPM had provided legal services to us prior to the sister of Ms. Hamilton joining GPM. The prices paid by us were and will continue to be, the subject of arms-length negotiation on terms no less favorable to us than we could otherwise obtain. GPM was selected to provide legal services through a competitive bid process coordinated by Ms. Knight, our Vice President and CFO, that included a variety of law firms. Ms. Hamilton’s sister had no involvement in the bid process, doesdid not provide legal services to us, iswas neither the billing attorney nor the relationship attorney on our account, and doesdid not directly receive any compensation from transactions with us. Prior to the beginning of fiscal 2010, theThe Audit Committee has reviewed and approved these related party transactions after determining they met the required standards for approval.

GPM is no longer providing legal services to our Company.


The Audit Committee also reviewed three other transactions between the Company and third parties that occurred during fiscal 2009.2011. In each case it was determined that since the third partyaffiliate of the Company did not have a direct or indirect material interest, the transactions were not related party transactions.


Section 16(a) BeneficialOwnership Reporting ComplianceCompliance


The rules of the SEC require us to disclose the identity of directors, executive officers and beneficial owners of more than 10% of our Common Stock who did not file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934. Based solely on a review of copies of such reports and written representations from reporting persons, we believe that all directors and executive officers complied with all filing requirements applicable to them during fiscal 2009.

2011.


Compensation Committee Interlocks and Insider Participation

No member of our Compensation Committee has ever been an officer or employee of our Company or any of our subsidiaries and affiliates or has had any relationship with our Company requiring disclosure in our proxy statement other than service as a director. None of our executive officers has served on the board of directors or on the compensation committee of any other entity, any officer of which served either on our Board of Directors or on our Compensation Committee.
Shareholder Proposals


Proposals Included in the Proxy Statement


Proposals of our shareholders that are intended to be presented by such shareholders at our fiscal 20102012 annual meeting to be held in early 20112013 and that shareholders desire to have included in our proxy materials related to such meeting must be received by us at our principal executive offices no later than 5:00 p.m., Central time, September 1, 2010,Time, August 29, 2012, which is 120 calendar days prior to the anniversary of this year’s mailing date. Upon timely receipt of any such proposal we will determine whether or not to include such proposal in the proxy statement and proxy in accordance with applicable regulations governing the solicitation of proxies.


Proposals Not Included in the Proxy Statement


If a shareholder wishes to present a proposal at our fiscal 20102012 annual meeting to be held in early 2013 or to nominate one or more directors and the proposal is not intended to be included in our proxy statement relating to that meeting, the shareholder must give advance notice to us prior to the deadline for such meeting determined in accordance with our bylaws.Bylaws. In general, our bylawsBylaws provide that such notice should be addressed to the Secretary and be no less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting, except in certain circumstances. For purposes of our fiscal 20102012 annual meeting, such notice must be received no earlier than October 13, 201011, 2012 and not later than November 12, 2010.10, 2012. These time limits also apply in determining whether notice is timely for purposes of rules adopted by the SEC relating to the exercise of discretionary voting authority. Our


27

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bylaws set out specific requirements that such shareholders and written notices must satisfy. Copies of those requirements will be forwarded to any shareholder upon written request to the Secretary of the Company.


Our management knows of no matters other than the foregoing to be brought before the Annual Meeting. However, this proxy gives discretionary authority in the event that additional matters should be presented.


A copy of our Annual Report and Form 10-K for the fiscal year ended October 3, 2009,1, 2011, which includes audited financial statements, will be furnished without charge to any shareholder who requests it in writing from Michael J. Hoff, Assistant Corporate Secretary, MTS Systems Corporation, 14000 Technology Drive, Eden Prairie, Minnesota 55344, and are also available from the SEC’s Internet site at www.sec.gov or via our Internet site at www.mts.comwww.mts.com..


Important Notice Regarding Internet Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com.







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MTS Systems Corporation

Executive Variable Compensation (EVC) Plan

Approved by the Board of Directors November 24, 2009

Approved by Shareholders February ____, 2010

Plan Effective as of October 3, 2010




Table of Contents

Sectiongraphic

MTS SYSTEMS CORPORATION
14000 TECHNOLOGY DRIVE
EDEN PRAIRIE, MN 55344

Page

VOTE BY INTERNET - www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time on February 7, 2012. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS
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Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

Section 1.Establishment and General Purpose of the Plan

1

Section 2.Definitions

1

Section 3.Administration

2

Section 4.Eligibility and Participation

3

Section 5.Performance Goals and Performance Periods

4

Section 6.Qualified Performance-Based Compensation

5

Section 7.Payment of Bonus Awards; Recoupment

6

Section 8.Amendment and Termination

7

Section 9.Miscellaneous

8






ii


Table of Contents

Section 1.

Establishment and General Purpose of the Plan

1.1

Establishment. On November 24, 2009, the Board of Directors of MTS Systems Corporation, upon recommendation by the Compensation Committee of the Company’s Board of Directors, approved an incentive plan for executives as described herein. The name of this plan is the “MTS Systems Executive Variable Compensation (EVC) Plan” (the “Plan”). The material terms of the Plan shall be submitted for approval by the shareholders of the Company at the Company’s 2010 Annual Meeting of Shareholders. The Plan shall be effective, subject to its approval by the shareholders of the Company, beginning with the Company’s fiscal year beginning October 3, 2010. No payments shall be made pursuant to the Plan until after the shareholders of the Company have approved the Plan.

1.2

Purpose. The purpose of the Plan is to focus efforts on achievement of near term financial objectives that are critical to the success of MTS Systems Corporation; to reward accomplishments when performance meets or exceeds established targets or business plan objectives; and to more closely tie total compensation (salary plus EVC) to the financial results of the Company. It is intended that, unless otherwise designated by the Committee at the time of the award, the “Performance-Based Awards” under this Plan shall be exempt from the limitation on the deductibility of compensation under §162(m) of the Code.

Section 2.

Definitions

Definitions as used in the Plan are:

2.1

“Affiliate” means any person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Company.

2.2

“Bonus Award” means the grant of the right to receive a cash bonus payable by the Company upon achievement of the Performance Goals as of the end of the Performance Period as designated by the Committee in accordance with the terms of the Plan.

2.3

“CEO” means the Chief Executive Officer duly elected by the Board.

2.4

“Code” means the Internal Revenue Code of 1986, as amended.

2.5

“Company” means MTS Systems Corporation, a corporation organized under the laws of the State of Minnesota (or any successor corporation).

2.6

“Committee” means the Compensation Committee of the Board of Directors. In the absence of the appointment of the Committee, references in the Plan to the Committee shall refer to the Board of Directors.

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Table of Contents

2.7

“Employee” means a person who performs services to the Company and who is regularly paid through the payroll of the Company, whether or not an officer or member of the Board, but excluding any temporary employee and any person serving the Company only in the capacity of a member of the Board of Directors.

2.8

“Named Executive” means the persons serving as CEO and the four highest paid officers of the Company other than the CEO as of the last day of the Company’s fiscal year.

2.9

“Outside Director” means a Director of the Company who: (a) is not a current employee of the Company or Affiliate; (b) is not a former employee of the Company or Affiliate who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration (including any payment in exchange for goods or services) from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Section 162(m) of the Code and regulations thereunder.

2.10

“Participant” means an Employee who is eligible and is selected by the Committee to participate in the Plan.

2.11

“Performance-Based Award” is defined in Section 6.1 of the Plan.

2.12

“Performance Goals” is defined in Section 5.1 of the Plan.

2.13

“Performance Period” means the measuring period of time determined by the Committee, consisting of a period of any length, over which the Performance Goals established by the Committee must be achieved to earn a Bonus Award under the Plan.

2.14

“Plan” means the MTS Systems Corporation Executive Variable Compensation (EVC) Plan.

2.15

“Plan Year” means the applicable fiscal year of the Company.

Section 3.

Administration

3.1

Composition of the Committee. The Compensation Committee of the Board of Directors shall administer the Plan, except that, with respect to any Bonus Award to any Named Executive that constitutes a Performance-Based Award, the Committee administering this Plan, or a subcommittee thereof, shall be composed solely of two or more persons who are Outside Directors.

3.2

Power and Authority of the Committee. The Committee is authorized to make all decisions as required in the administration of the Plan and to exercise its discretion to establish, amend, suspend, terminate, define, interpret, construe, apply, approve, withdraw and make any exceptions to the terms of the Plan it deems necessary or advisable for the proper administration of the Plan not inconsistent with the terms of this Plan. The Committee shall have the power and authority to grant Bonus Awards, including Performance-Based Awards, to Participants, including Named Executives, pursuant to the terms of the Plan. In particular, the Committee shall have the authority:

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Table of Contents

a.

to select eligible Employees to whom Bonus Awards may from time to time be granted hereunder;

b.

to determine the Performance Period, the Performance Goals, and the criteria to determine the amount due under the Bonus Award (including, but not limited to, the degree to which the Performance Goals are met, the base salary or other compensation on which the Bonus Award is paid), and with respect to Participants who are not Named Executives, any other criteria or factors on which part or all of the Bonus Award will be based;

c.

to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Bonus Award granted hereunder (including, but not limited to, any restriction on, forfeiture of, or repayment of any Bonus Award); and

d.

to make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.

3.3

Delegation of Authority. Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may delegate to the CEO of the Company the authority to exercise the powers specified in Section 3.2; provided, however, that no such authority shall be delegated to the CEO with respect to any Bonus Award that constitutes a Performance-Based Award to a Named Executive.

3.4

Rule Making and Interpretations. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Bonus Award granted under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan.

Section 4.

Eligibility and Participation

4.1

Eligibility. The Company maintains the Plan primarily for Employees who are executive officers or senior management employees. The Committee shall select, from among the executive officers and senior management employees those Employees who will be eligible to participate in the Plan from time to time, in its sole discretion. Executives eligible for other variable compensation (i.e. commissions) are not eligible to participate in the Plan.

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Table of Contents

4.2

Participation. The Committee shall determine the date as of which each eligible Employee shall commence to participate in the Plan and the Bonus Award to which the Employee is then eligible. Selection as an eligible Employee to be a Participant in this Plan with respect to any designated Performance Period does not guarantee that the Employee will be selected to be a Participant in any other Bonus Award under this Plan, and the Committee shall not have any obligation for uniformity of treatment among eligible Employees.

4.3

Effect on Employment. In the absence of any specific agreement to the contrary, no Bonus Award to a Participant under the Plan shall affect any right of the Company or any Affiliate, to terminate, with or without cause, the Participant’s employment with the Company or any Affiliate at any time. Neither the establishment of the Plan, nor the granting of any Bonus Award hereunder, shall give any Participant (i) any rights to remain employed by the Company or any Affiliate; (ii) any benefits not specifically provided for herein or in any Bonus Award granted hereunder; or (iii) any rights to prevent the Company or any Affiliate from modifying, amending or terminating any of its other benefit plans of any nature whatsoever.

Section 5.

Performance Goals and Performance Periods

5.1

Performance Goals. Unless and until the Board proposes for shareholder vote and shareholders approve a change in the general performance measures set forth in this Section, the performance measure(s) to be used by the Committee for purposes of making Bonus Awards shall be chosen from among the following: (a) earnings per share; (b) net income (before or after taxes); (c) return measures (including, but not limited to, return on assets, equity or sales); (d) cash flow return on investments (net cash flows divided by owners equity); (e) earnings before or after taxes, depreciation and/or amortization; (f) revenues and or sales (gross or net); (g) operating income (before or after taxes); (h) total shareholder return; (i) corporate performance indicators (indices based on the level of certain services provided to customers); (j) cash generation, working capital, profit and/or revenue targets; (k) growth measures, such as revenue or sales growth; (l) ratios, such as expenses or market share and/or (m) share price (including, but not limited to, growth measures and total shareholder return). In setting performance goals using these performance measures, the Committee may establish goals on an absolute basis, rate basis, or relative to a peer group performance or other benchmark, and may exclude the effect of changes in accounting standards and non-recurring unusual events specified by the Committee, such as write-offs, capital gains and losses and acquisitions and dispositions of businesses.

5.2

Performance Period. The Committee shall establish the Performance Period over which the performance goals shall be achieved in order to earn the Bonus Award. The Performance Periods may run concurrently and may contain interim dates during the Performance Period on which the achievement of the Performance Goals will be determined. A Performance Period may be of any length, and must be established prior to the start of such period or within the first ninety (90) days of such period (provided that the performance criteria are not in any event set after 25% or more of such period has elapsed).

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5.3

Modifications to Performance Goal Criteria. Subject to the requirements of Section 6, the Committee shall have the discretion to adjust the determinations of the degree of attainment of the Performance Goals. In the event that the applicable tax and/or securities laws and regulatory rules and regulations change to permit Committee discretion to alter the Performance Goals described in Section 5.1 without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval.

Section 6.

Qualified Performance-Based Compensation

6.1

Compliance With Code Section 162(m). Unless the Committee irrevocably designates otherwise at the time the Bonus Award is granted, each Bonus Award to a Named Executive shall constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Code (hereinafter referred to as a “Performance-Based Award”). Each of the provisions of Sections 6.2 to 6.7, and all of the other terms and conditions of the Plan as applied to any Performance-Based Award, shall be interpreted in such a fashion so as to qualify such compensation paid thereunder as “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

6.2

Shareholder Approval. Any Performance-Based Award shall be null and void and have no effect whatsoever unless the Plan shall have been approved by the shareholders of the Company at the Company’s 2010 Annual Meeting of Shareholders and periodically thereafter as may be required under Code §162(m).

6.3

Limit of Performance Goals. The right to receive a Performance-Based Award shall be determined solely on account of the attainment of one or more pre-established, objective Performance Goals included in Section 5 of the Plan, as selected by the Committee in connection with the grant of the Performance-Based Award.

6.4

Maximum Performance-Based Award. The maximum bonus that may be paid to any Participant pursuant to any Performance-Based Award with respect to any fiscal year shall not exceed $2,000,000.

6.5

Timing of Performance-Based Award. The Committee shall, not later than 90 days after the beginning of each Performance Period:

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a.

designate the Named Executives who will be Participants for such fiscal year; and

b.

establish the Performance Goals for each Named Executive for that Performance Period solely based on those Performance Goals set forth in Section 5 above

6.6

Certification. Following the end of the Performance Period and prior to payment of any Performance-Based Award to any Named Executive under the Plan, the Committee shall certify in writing as to the attainment of the Performance Goals upon which any Performance-Based Award is based.

6.7

Discretionary Reduction. The Committee, in its sole discretion, may reduce, in whole or in part, the payout otherwise payable to any Named Executive under any Performance-Based Award. The Committee shall have no authority or discretion to change any Performance-Based Award with respect to any Named Executive after the establishment of the Performance-Based Award that would result in the increase of any amount payable under this Plan.

Section 7.

Payment of Bonus Awards; Recoupment

7.1

Payouts; Deferral. Payouts of Bonus Awards will be made in cash or other readily-available funds within 90 days of the end of the Performance Period, provided that, with respect to Performance-Based Awards, the Committee certifies to the achievement of the Performance Goals as provided in Section 6.6 prior to the end of such 90 day period. To the extent permitted under the terms of any qualified pension or nonqualified deferred compensation plan maintained by the Company, the Participant may elect to defer payment of part or all of the Bonus Award, which to the extent deferred, shall thereafter be governed by the terms and conditions of that qualified pension or nonqualified deferred compensation plan.

7.2

Taxes. In order to comply with all applicable federal or state income, social security, payroll, withholding or other tax laws or regulations, the Company may take such action, and may require a Participant to take such action, as it deems appropriate to ensure that all applicable federal or state income, social security, payroll, withholding or other taxes, which are the sole and absolute responsibility of the Participant, are withheld or collected from such Participant.

7.3

Nontransferability. Except as otherwise determined by the Committee, no right under any Bonus Award shall be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of during the time in which the requirement of continued employment or attainment of Performance Goals has not been achieved and prior to the date of actual payout.

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7.4

Impact of Restatement of Financial Statements. If any of the Company’s financial statements are required to be restated resulting from errors, omissions or fraud, the Committee may (in its sole discretion, but acting in good faith) direct that the Company recover all or a portion of any Bonus Award with respect to any fiscal year of the Company the financial results of which are negatively affected by such restatement. The amount to be recovered from the Participant shall be the amount by which the Bonus Award exceeded the amount that would have been payable to the Participant had the financial statements been initially filed as restated, or any greater or lesser amount (including, but not limited to, the entire award) that the Committee shall determine. The Committee may limit the application of this Section 7.4 to those responsible for the misstatement or to the Named Executives but in no event shall the amount to be recovered by the Company be less than the amount required to be recovered as a matter of law. The Committee shall determine whether the Company shall effect any such recovery (a) by seeking repayment from the Participant, (b) by reducing (subject to applicable law and the terms and conditions of the applicable plan, program or arrangement) the amount that would otherwise be payable to the Participant under any compensatory plan, program or arrangement maintained by the Company or any of its affiliates, (c) by withholding payment of future increases in compensation (including the payment of any discretionary bonus amount) or grants of compensatory awards that would otherwise have been made in accordance with the Company’s otherwise applicable compensation practices, or (d) by any combination of the foregoing.

7.5

Forfeiture and Recoupment. Without limiting in any way the generality of the Committee’s power to specify any terms and conditions of a Bonus Award consistent with law, and for greater clarity, the Committee may specify that the Participant’s rights, payments, and benefits with respect to a Bonus Award under this Plan shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions. Such events shall include, but shall not be limited to, termination of employment or services under certain or all circumstances, violation of material Company policies, breach of noncompetition, confidentiality, nonsolicitation, noninterference, corporate property protection, or other agreement that may apply to the Participant, or other conduct by the Participant that the Committee determines is detrimental to the business or reputation of the Company and its subsidiaries.

Section 8.

Amendment and Termination

8.1

Term of Plan. The Plan shall continue in operation indefinitely, subject to the right of the Committee to terminate the Plan at any time; provided, however, that no Performance-Based Awards shall be granted after the fiscal year ending in 2015 unless and until the Performance Goals here have been reapproved by the Company prior to that time.

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8.2

Amendments to and Termination of Plan. Except to the extent prohibited by applicable law and unless otherwise expressly provided in the Plan, the Committee may amend, alter, suspend, discontinue or terminate the Plan; provided, however, that notwithstanding any other provision of the plan, without the approval of the shareholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval would cause any compensation paid pursuant to any Performance-Based Award granted to no longer qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Code and regulations thereunder.

8.3

Correction of Defects, Omissions and Inconsistencies. Except to the extent prohibited by applicable law and unless otherwise expressly provided in the Plan, the Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Bonus Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.

Section 9.

Miscellaneous

9.1

Governing Law. The Plan and all of the Participants’ rights thereunder shall be governed by and construed in accordance with the internal laws of the State of Minnesota.

9.2

Severability. If any provision of the Plan, or any Bonus Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan, or any Bonus Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan and the Bonus Award, such provision shall be stricken as to such jurisdiction, and the remainder of the Plan, any such Bonus Award shall remain in full force and effect.

9.3

No Trust or Fund Created. Neither the Plan nor any obligations to pay a Bonus Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other person. To the extent that any person acquires a right to receive payments from the Company or any Affiliate pursuant to a Bonus Award, such right shall be no greater than the right of any unsecured general creditor of the Company or of any Affiliate.

9.4

Nature of Payments. Any and all cash payments pursuant to any Bonus Award granted hereunder shall constitute special incentive payments to the Participant, and, except to the extent that such plan or agreement expressly provides to the contrary, such payments shall not be taken into account in computing the amount of the Participant’s salary or compensation for purposes of determining any pension, retirement, death or other benefits under:

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a.

any pension, retirement, profit sharing, bonus, life insurance or other employee benefit plan of the Company or any Affiliate or

b.

any agreement between the Company (or any Affiliate) and the Participant

9.5

Headings. Headings are given to the Sections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.










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(MTS LOGO)
MTS SYSTEMS CORPORATION
14000 TECHNOLOGY DRIVE
EDEN PRAIRIE, MN 55344

VOTE BY INTERNET -www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time on February 9, 2010. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.

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Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.



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M18584-P85710

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THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

For
All

Withhold
All

MTS SYSTEMS CORPORATION

 For 
All 

Withhold
All 

For All
Except

To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below.


graphic

The Board of Directors recommends that you vote FOR Proposals 1, 2, and 3 below.

the following:

o

o

o

1.

Election of Directors

£

£

£

1. 

To elect six directors:
NOMINEES:

Nominees
01) David J. Anderson
04) Emily M. Liggett
02) Jean-Lou Chameau
03) Laura B. Hamilton



04)

05) William V. Murray
03) Brendan C. Hegarty
05)		06) Barb J. Samardzich
06)
07) Gail P. Steinel

The Board of Directors recommends you vote FOR proposals 2 and 3.

For

Against

Abstain

For

Against

Abstain

2.

To ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for fiscal 2010.

2012.

o

£

o

£

o

£

3.

To restate and approvehold a non-binding, advisory vote regarding the MTS Systems Corporation Executive Variable Compensation Plan.

compensation of the Company’s named executive officers.

o

£

o

£

o

£

4. 

To transact such other business as may properly come before the meeting or any adjournments or postponements thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

NOTE:THIS PROXY/VOTING INSTRUCTION, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED FOR ITEMS 1, 2, AND 3. DISCRETIONARY AUTHORITY IS HEREBY CONFERRED AS TO ALL OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.

For address changes and/orchange/ comments, please check this box and
write them on the back where indicated.

mark here. (see reverse for instrutions)

o

£

This proxy should be marked, dated and signed by the shareholder(s) exactly as his, her or their name(s) appear(s) hereon, and returned promptly in the enclosed envelope. Persons signing in a fiduciary capacity should so indicate. If shares are held by joint tenants or as community property, both should sign.

Signature [PLEASE SIGN WITHIN BOX]

Date

Date

Signature (Joint Owners)

Date

Date


Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:
The Annual Report, Notice and& Proxy Statement and Annual Reportis/ are available at www.proxyvote.com.






M18585-P85710        


PROXY

MTS SYSTEMS CORPORATION

Proxy for the Annual Meeting of Shareholders
February 10, 2010

SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned shareholder of MTS Systems Corporation, a Minnesota corporation (the “Company”), hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement and hereby appoints Laura B. Hamilton and Bruce W. Mooty, each with the power to appoint a substitute, and hereby authorizes them to represent and to vote all the shares of Common Stock of the Company, held of record by the undersigned on December 15, 2009, at the ANNUAL MEETING OF SHAREHOLDERS to be held on February 10, 2010, and any adjournments or postponements thereof.

Address Changes/Comments: 


PROXY

MTS SYSTEMS CORPORATION
Proxy for the Annual Meeting of Shareholders
February 8, 2012
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of MTS Systems Corporation, a Minnesota corporation (the "Company"), hereby acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement and hereby appoints David J. Anderson and William V. Murray, each with the power to appoint a substitute, and hereby authorizes them to represent and to vote all the shares of Common Stock of the Company, held of record by the undersigned on December 14, 2011, at the ANNUAL MEETING OF SHAREHOLDERS to be held on February 8, 2012, and any adjournments or postponements thereof.
  Address change/comments:
(If you noted any Address Changes and / or Comments above, please mark corresponding box on the reverse side.)
Card to be signed on the reverse side
(If you noted any Address Changes/Comments above, please mark corresponding box on the reverse side.)