UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

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))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

KENNAMETAL INC.

(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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KENNAMETAL INC.
1600 Technology Way
P.O. Box 231
Latrobe, Pennsylvania 15650-0231

Notice of Annual Meeting of Shareowners
to be held October 25, 2011

 

To the Shareowners of Kennametal Inc.:

 

The Annual Meeting of Shareowners of Kennametal Inc. (the “Company”) will be held at the Quentin C. McKenna Technology Center, located at the Company’s executive offices at 1600 Technology Way (on Route 981 South), Latrobe, Unity Township, Pennsylvania, on Tuesday, October 25, 2011 at 2:00 p.m. (Eastern Time) to consider and act upon the following matters:

 

1. The election of one director for a term to expire in 2013 and the election of three directors for terms to expire in 2014;

 

2. The ratification of the selection of the independent registered public accounting firm for the fiscal year ending June 30, 2012;

 

3. The reapproval of the Kennametal Inc. Management Performance Bonus Plan;

 

4. An advisory vote on executive compensation; and

 

5. An advisory vote on the frequency of future advisory votes on executive compensation.

 

Shareowners also will be asked to consider such other business as may properly come before the meeting. The Board of Directors has fixed Friday, September 2, 2011 as the record date (the “Record Date”). Only shareowners of record at the close of business on the Record Date are entitled to notice of, and to vote at, the Annual Meeting.

 

If you plan to attend the Annual Meeting, please note that each shareowner must present valid picture identification, such as a driver’s license or passport. Additionally, shareowners holding stock in brokerage accounts (“street name” holders) must bring a copy of a brokerage statement reflecting stock ownership as of the Record Date to be admitted to the Annual Meeting. No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the Annual Meeting.

 

Whether or not you plan to attend the Annual Meeting, please complete, date and sign the enclosed proxy card and return it in the enclosed envelope, or vote by telephone or via the Internet as instructed on the enclosed proxy card, to ensure your shares are voted at the Annual Meeting.

 

By Order of the Board of Directors

 

 

Kevin G. Nowe

Vice President, Secretary

and General Counsel

 

September 14, 2011

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF SHAREOWNERS TO BE HELD
OCTOBER 25, 2011

 

 

This proxy statement and the 2011 Annual Report are available for viewing at
http://bnymellon.mobular.net/bnymellon/kmt

 

TABLE OF CONTENTS

 

 

When is the 2011 annual meeting?

 

The 2011 annual meeting of shareowners (the “Annual Meeting”) will be held on Tuesday, October 25, 2011 at 2:00 p.m. (Eastern Time) at the Quentin C. McKenna Technology Center, located at our executive offices at 1600 Technology Way (on Route 981 South), Latrobe, Unity Township, Pennsylvania, 15650.

 

When was this Proxy Statement mailed to shareowners?

 

This proxy statement was first mailed to shareowners on or about September 19, 2011.

 

Why did I receive this Proxy Statement?

 

The Board of Directors of Kennametal Inc. (“we,” “us,” “Kennametal” or the “Company”) is soliciting proxies to be voted at the Annual Meeting to be held on October 25, 2011, and at any adjournment of the Annual Meeting. When we ask for your proxy, we must provide you with a proxy statement that contains certain information specified by law.

 

What will the shareowners vote on at the Annual Meeting?

 

Five items:

 

 

Will there be any other items of business on the agenda?

 

We do not expect any other items of business; however, in case there is an unforeseen need, the accompanying proxy card gives discretionary authority to the persons named in the proxy card with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.

 

Who is entitled to vote?

 

Shareowners as of the close of business on Friday, September 2, 2011 (the “Record Date”) may vote at the Annual Meeting. For matters other than the election of directors (for which you are permitted to cumulate votes), you have one vote for each share of capital stock you held on the Record Date, including shares:

 

 

What constitutes a quorum?

 

A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the Annual Meeting. As of the Record Date, 79,555,171 shares of our capital stock were issued and outstanding. Abstentions and broker non-votes (which are explained below) will be counted for purposes of determining a quorum, but will not be counted as votes cast.

How many votes are required for the approval of each item?

 

There are different vote requirements for each of the proposals.

 

 

Explanation of “Broker Non-votes.”  If your shares are held by a broker (in street name), the broker will ask you how you want your shares to be voted. If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions to your broker, one of two things can happen, depending on the type of proposal. For the ratification of the selection of the independent auditors, which is considered a “routine” matter, the broker may vote your shares in its discretion. The broker does not have the discretion to vote your shares for the election of directors, the reapproval of the Kennametal Inc. Management Performance Bonus Plan, the advisory vote on executive compensation or the advisory vote on the frequency of future advisory votes on executive compensation; these are considered “non-routine” matters. If you do not provide voting instructions to your broker for these non-routine matters, the broker may not vote your shares on these proposals at all. When that happens, it is called a “broker non-vote.”

 

How do I vote by proxy?

 

If you are a shareowner of record, you may vote your proxy by any one of the following methods.

 

 

How do I vote shares that are held by my broker?

 

If you own shares held by a broker or other nominee, you may instruct your broker or other nominee to vote your shares by following the instructions that the broker or nominee provides to you. Most brokers offer voting by mail, by telephone and on the Internet.

 

How do I vote my shares in the 401(k) plan?

 

You may instruct the plan trustee on how to vote your shares in the 401(k) plan by mail, by telephone or on the Internet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card rather than a proxy card. You will receive the voting instruction card from the plan trustee in the mail.

 

How can I revoke a proxy or change my vote?

 

You have the right to revoke your proxy at any time before the meeting by (1) notifying our Secretary in writing or (2) delivering a later-dated proxy card by telephone, on the Internet or by mail. If you are a shareowner of record, you may also revoke your proxy by voting in person at the Annual Meeting.

 

How will the named proxies vote my shares?

 

The shares represented by all properly executed proxies received by the Secretary prior to the Annual Meeting and not revoked will be voted. If you specify a voting choice on the proxy card (or the proxy given by telephone or via the Internet), the shares will be voted in accordance with that choice. If you return your signed proxy card but do not indicate your voting preferences, the Named Proxies (hereinafter defined) will vote on your behalf for the election of the nominees for director listed below, for the ratification of the selection of the independent auditor, for the reapproval of the Kennametal Inc. Management Performance Bonus Plan, for the approval of our executive compensation and for an annual advisory vote on executive compensation.

 

How will the two advisory votes related to executive compensation be treated?

 

Although the advisory votes to approve our executive compensation and to approve the frequency of future advisory votes on our executive compensation are non-binding, our Board of Directors will review the results of these votes and, consistent with our record of shareowner engagement, will take them into account in making future determinations concerning executive compensation and the frequency of advisory votes on executive compensation.

 

What does it mean if I receive more than one proxy card?

 

It means that you hold shares in more than one account. To ensure that all of your shares are voted, sign and return each card. Alternatively, if you vote by telephone or on the Internet, you will need to vote once for each proxy card and voting instruction card you receive.

 

Who tabulates the votes?

 

The votes are tabulated by BNY Mellon Shareowner Services, which acts as an independent inspector of election.

 

What should I do if I want to attend the Annual Meeting?

 

If you plan to attend the Annual Meeting, you must present valid picture identification, such as a driver’s license or passport. If you hold your shares in a brokerage account, you must also bring a copy of a brokerage statement reflecting stock ownership as of the Record Date to be admitted to the Annual Meeting. Please do not bring cameras, recording equipment, electronic devices, large bags, briefcases or packages with you. You will be asked to check in with our security personnel and none of these items will be permitted in the Annual Meeting.

 

If you have questions about directions, admittance or parking, you may call 724-539-5000.

 

Can I view the Proxy Statement and 2011 Annual Report electronically?

 

Yes. Copies of this proxy statement and our 2011 Annual Report to Shareowners (the “2011 Annual Report”) are available free of charge for electronic (online) access and viewing at http://bnymellon.mobular.net/bnymellon/kmt.

 

You may also view the proxy statement and 2011 Annual Report free of charge on our website at www.kennametal.com in the “Investor Relations” section under the “SEC Filings” tab.

What is “householding”?

 

We have adopted “householding,” a procedure under which shareowners of record who have the same address and last name and do not receive proxy materials electronically will receive only one copy of our annual report and proxy statement unless one or more of these shareowners notifies us that they wish to continue receiving individual copies. This procedure saves printing and postage costs by reducing duplicative mailings. Shareowners who participate in householding will continue to receive separate proxy cards. Householding will not affect dividend check mailings. Beneficial shareowners can request information about householding from their banks, brokers or other holders of record.

 

What if I want to receive a copy of the annual report and proxy statement?

 

You may request a proxy statement or annual report via our website, www.kennametal.com, in the “Investor Relations” section under the “SEC Filings” tab. Select “Printed Materials Request” from the “Investor Toolkit” menu. If you prefer, you may call our Secretary at 724-539-5776 or write to Kennametal Inc., Attention: Secretary, 1600 Technology Way, Latrobe, Pennsylvania 15650:

 

 

We will deliver the requested documents to you promptly upon your request.

 

How can I contact the Company, the Board of Directors, the Lead Director or any of the Independent Directors?

 

The address of our principal executive offices is 1600 Technology Way, Latrobe, Pennsylvania 15650.

 

You can send written communications to any of our Board members, addressed to:

 

Kennametal Inc.
c/o Kevin G. Nowe
Vice President, Secretary and General Counsel
1600 Technology Way
Latrobe, Pennsylvania 15650.

 

We will forward any communication we receive to the relevant director(s), except for advertisements, solicitations or other matters unrelated to the Company.

 

What are the procedures for submitting a shareowner proposal or nomination for the 2012 annual meeting?

 

We expect to hold our 2012 annual meeting in October 2012. If a shareowner wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we receive it by May 22, 2012. Proposals should be addressed to our Secretary at Kennametal Inc., 1600 Technology Way, Latrobe, Pennsylvania 15650. Proposals must comply with Rule 14a-8 of Regulation 14A of the SEC proxy rules and must contain certain information specified in the Company’s By-Laws.

 

In addition, our By-Laws provide that any shareowner wishing to propose any other business at the 2012 annual meeting must give the Company written notice no earlier than May 1, 2012 and no later than July 1, 2012. That notice must provide certain other information as described in the By-Laws.

 

Shareowner nominations for directors to be elected at the 2012 annual meeting must be submitted to the Secretary in writing no earlier than May 1, 2012 and no later than July 1, 2012. The By-Laws contain certain requirements for the information that must be provided in any shareowner nomination, including information about the nominee and the nominating shareowner. Please see “Committee Functions — Nominating/Corporate Governance Committee” under the “Board of Directors and Board Committees” section of this proxy statement for additional information regarding shareowner nominations to be considered by the Nominating/Corporate Governance Committee.

Any shareowner may obtain a copy of the By-Laws or any of our corporate governance materials by submitting a written request to the Secretary at Kennametal Inc., 1600 Technology Way, Latrobe, Pennsylvania 15650.

 

Who pays for the solicitation of proxies?

 

Kennametal pays all costs related to the Company’s solicitation of proxies. We may solicit proxies by mail, or our directors, officers or employees may solicit proxies personally, by telephone, facsimile or the Internet. We have retained the services of Morrow & Co., LLC, 470 West Avenue, Stamford, CT 06902 to assist in soliciting proxies from brokerage houses, custodians, nominees, other fiduciaries and other shareowners of the Company. We will pay all fees and expenses of Morrow & Co., LLC in connection with the solicitation; we do not expect those fees and expenses to exceed $8,500. We will reimburse brokerage firms and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for sending proxy materials to shareowners and obtaining their votes.

 

Fiscal Year.

 

Kennametal’s fiscal year begins each year on July 1 and ends on the following June 30. Any reference to a “year” in this Proxy Statement is to a fiscal year. For example, references to “2011” or “Fiscal 2011” mean the fiscal year beginning July 1, 2010 and ending June 30, 2011.

 

Stock Split.

 

Where applicable, the figures presented in this proxy statement have been adjusted to reflect the 2-for-1 stock split effected by the Company on December 18, 2007.

 

Kennametal seeks directors with strong reputations and experience in areas relevant to the strategy and operations of our businesses, particularly industries and growth segments that we serve, as well as key geographic markets where we operate. Our Board of Directors has nominated one of our current directors, William J. Harvey, for re-election to serve as a director of the Third Class with a term that will expire in 2013. Our Board has also nominated three of our current directors, Philip A. Dur, Timothy R. McLevish and Steven H. Wunning, for re-election to serve as directors of the First Class with a term that will expire in 2014. Each of the nominees for election as a director at the Annual Meeting and each of the Company’s current directors holds or has held senior executive positions in large, complex organizations and has operating experience that meets our objectives, as described below. In these positions, they have also gained experience in core management skills, such as strategic and financial planning, public company financial reporting, corporate governance, risk management and leadership development.

 

We have provided additional information about each nominee and each director whose term of office will continue after the Annual Meeting below, including the specific characteristics and traits that we believe qualify these individuals to serve as directors of our Company.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINEES.

 

 

 

 

Important Information about Proxies and Cumulative Voting

 

Our Board of Directors selected the persons named on the enclosed proxy card (the “Named Proxies”) to act as proxies for the Annual Meeting. The Named Proxies have advised the Board that, unless authority is withheld, they will vote the shares represented by them for the election of the nominees named above. Each of the nominees has indicated his willingness to serve as a director. If, at the time of the meeting, any of the nominees is not available to serve as a director (a situation we do not anticipate), the Board may nominate another person in the nominee’s stead. In that unlikely event, the Named Proxies intend to vote the shares represented by them for such other person or persons as may be nominated by the Board.

 

Kennametal shareowners have cumulative voting rights in the election of directors. When voting for directors, you may multiply the total number of shares that you are entitled to vote by the number of directors to be elected in a class. You may then cast the whole number of votes for one nominee or distribute them among the nominees as desired. If you’ve given voting instructions to a proxy, that person will follow your instructions. If you have not otherwise instructed the proxy as to cumulative voting, the proxy will have the discretion to exercise cumulative voting rights. Directors are elected by a plurality of votes cast; this means that the individual who receives the largest number of votes cast for a Director of the Third Class will be elected to that class and the three individuals who receive the largest number of votes cast for a Director of the First Class will be elected to that class.

 

All of our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller, must strictly adhere to our Code of Business Ethics and Conduct (sometimes referred to as the “Code”).

 

The Code of Business Ethics and Conduct is designed to:

 

 

We view violations of the Code very seriously. Personal consequences for violations can be severe and can include termination and/or legal action. Directors, officers and employees who know of or suspect a violation of the Code must report the matter to us promptly. Any of these individuals can report a concern or potential violation of the Code:

 

 

The Code of Business Ethics and Conduct is posted on our website at www.kennametal.com on the “Corporate Governance” page, which is accessible under the “Investor Relations” tab. We will disclose any future amendments to the Code that relate to our directors or executive officers on our website, as well as any waivers of the Code that relate to directors and executive officers.

 

Our Board of Directors adopted the Kennametal Inc. Corporate Governance Guidelines (the “Guidelines”) to assist the Board in the exercise of its duties and responsibilities and to serve the best interests of the Company. The Guidelines reflect the Board’s commitment to monitor the effectiveness of policy and decision-making both at the Board and management level.

 

A complete copy of the Guidelines is available on our website at www.kennametal.com on the “Corporate Governance” page, which is accessible under the “Investor Relations” tab. Any changes to the Guidelines in the future will also be posted on our website. Following is a summary that provides highlights of our Guidelines and many related corporate governance matters:

 

Selection of New Director Candidates and Criteria for Board Membership

 

 

 

Board Composition and Independence

 

 

 

 

 

Outside Board Membership

 

Management directors are required to seek and obtain the approval of the Board before accepting outside board memberships. Non-management directors must advise the Chairman of the Board and the Chair of the Nominating/Corporate Governance Committee in advance of accepting an invitation to serve on another board. Sitting on another public company’s board should not create a conflict of interest or impair the director’s ability to provide sufficient time to carry out his or her duties as a director of the Company.

 

Retirement Age

 

Unless otherwise determined by the Nominating/Corporate Governance Committee due to special circumstances, no director may be nominated for re-election or re-appointment to the Board if he or she would be age seventy-three (73) or older at the time of election or appointment.

 

Conflicts of Interest

 

Directors must avoid any action, position or interest that conflicts with an interest of the Company, or gives the appearance of conflict. We solicit information annually from directors in order to monitor potential conflicts of interest. Any potential conflict of interest must be immediately reported to the Chairman of the Board, the Chair of the Nominating/Corporate Governance Committee and the Lead Director, if one has been designated, for evaluation. If a director has a personal interest in a matter before the Board, the director must disclose the interest to the Board, excuse himself or herself from participation in the matter and not vote on the matter.

 

Directors Orientation and Continuing Education

 

 

Board Compensation

 

 

Board Leadership Structure

 

Our Board is led by Mr. Cardoso, our Chairman, President and Chief Executive Officer. Mr. Cardoso has served as our President and Chief Executive Officer since January 2006 and as our Chairman since January 2008. Our By-Laws and Guidelines give the Board the flexibility to determine whether the roles of Chief Executive Officer and Board Chairman should be held by the same person or by two separate individuals. Each year in October, the Board evaluates our leadership structure and determines the most appropriate structure for the coming year based upon its assessment of our position, strategy and long term plans for our Company. The Board also considers the specific circumstances facing the Company and the characteristics and membership of the Board. At this time, the Board has determined that having Mr. Cardoso serve as both the Chief Executive Officer and the Chairman is in the best interest of our shareowners. We believe this structure makes the best use of the Chief Executive Officer’s extensive knowledge of the Company, our strategic initiatives and our industry, and also fosters real-time communication between management and the Board.

 

When the roles of Chairman and Chief Executive Officer are combined in one individual, as they are now, the Board also has the ability to designate a Lead Director to provide additional leadership and guidance to the Board. Larry D. Yost currently serves as our Lead Director, a position he has held since January 2008, when Mr. Cardoso assumed the Chairman role. As our Lead Director, Mr. Yost consults with the Chairman to set agendas and establish Board priorities and procedures. He presides over executive sessions of the non-management directors and acts as the principal liaison between the non-management directors and the Chief Executive Officer. Our Guidelines contain a list of the various responsibilities with which Mr. Yost, as Lead Director, is tasked. In addition to the responsibilities described above, the Lead Director also:

 

 

Selection of Agenda Items for Board Meetings

 

Agendas for Board meetings are established by the Chairman in consultation with the Lead Director, Board members and Chief Executive Officer (where a person other than the Chairman occupies this position). Board members are also encouraged to raise, at any Board meeting, subjects that are not on the agenda for that meeting.

 

The Chair of each committee, taking into account recommendations of committee members and in consultation with appropriate management, establishes the agenda for each committee meeting.

 

Distribution of Board Materials

 

A preliminary agenda and presentation materials are distributed to Board and committee members in advance of each meeting, to the extent practicable.

 

Executive Sessions of the Board/Communications with Directors

 

 

 

We will forward any communication regarding our Company to the appropriate director or directors as soon as practicable.

 

Board Access to Management and Independent Advisors

 

 

Assessing the Performance of the Board

 

The Board’s performance is assessed annually to determine whether the Board and its committees are functioning effectively. The Nominating/Corporate Governance Committee oversees this assessment.

 

Board Committees

 

 

Board of Director Review and Approval of Related Person Transactions

 

 

 

 

 

 

Formal Evaluation of the Chief Executive Officer

 

 

Succession Planning

 

Each year, the Chief Executive Officer delivers a report on succession planning to the Board, which includes an assessment of senior officers and their potential to succeed the Chief Executive Officer and other senior management positions.

 

Review of the Guidelines and Code of Business Ethics and Conduct

 

The Nominating/Corporate Governance Committee annually reviews the Guidelines and the Code of Business Ethics and Conduct and recommends any changes to the Board.

 

The Board’s Oversight of Risk Management

 

The Board recognizes that companies face a variety of risks, including credit risk, liquidity risk, strategic risk and operational risk. The Board believes an effective risk management system will (1) timely identify the material risks that the Company faces, (2) communicate necessary information with respect to material risks to senior executives and, as appropriate, to the Board or relevant Board Committee, (3) implement appropriate and responsive risk management strategies consistent with Company’s risk profile, and (4) integrate risk management into Company decision-making. The Board has designated the Audit Committee to take the lead in overseeing risk management. The Audit Committee makes periodic reports to the Board regarding briefings provided by management and advisors as well as the committee’s own analysis and conclusions regarding the adequacy of the Company’s risk management processes. The full Board receives an annual overview of the Company’s enterprise risk management operations, material risks and uncertainties facing the Company, and the Company’s strategic and operational plans for addressing and mitigating those risks. In addition to the formal compliance program, the Board encourages and management promotes a corporate culture that incorporates risk management into the Company’s

corporate strategy and day-to-day business operations. The Board also continually works, with the input of our management and executive officers, to assess and analyze the most likely areas of future risk for the Company.

 

The Board of Directors held six meetings during 2011. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he served (during the periods the director served on the committee). We expect our directors to attend our Annual Meeting absent exceptional circumstances. All of the members of the Board of Directors attended the annual meeting in October 2010, except for Mr. Harvey who did not join the Board until March 2, 2011.

 

The table below shows committee membership and the number of meetings of the full Board and each committee in 2011.

 

 

The Board has three standing committees: Audit, Compensation and Nominating/Corporate Governance. Each member of these committees is independent under the NYSE’s listing standards, SEC regulations and the standards set forth in the Corporate Governance Guidelines discussed above.

 

Each committee has a written charter, which details its duties and responsibilities. The committee charters are posted on our website at www.kennametal.com on the “Corporate Governance” page, which can be found under the “Investor Relations” tab.

 

Each committee performs an annual self-evaluation, using the roles and responsibilities outlined in its committee charter as a foundation for the review and evaluation. The Nominating/Corporate Governance Committee reviews and considers the results of each committee’s self-evaluation. The Chair of each committee also reports the results of the committee’s self-evaluation to the full Board.

 

Audit Committee:  The Audit Committee assists the Board in overseeing the Company’s financial reporting process. You can find additional information about the functions of the Audit Committee under the “Audit Committee Report” section of this proxy statement. The Board has determined that all of the members of the Audit Committee are “financially literate,” and that Mr. Stranghoener and Mr. McLevish each qualify as an “audit committee financial expert” as that term is defined by SEC regulations.

 

Compensation Committee:  The Compensation Committee’s functions include: recommending an overall compensation policy to the Board; having direct responsibility for matters relating to compensation of our executive officers; overseeing the Company’s compensation policies and procedures and monitoring risks related to them; advising the Board regarding management succession; and administering our equity compensation plans, cash incentive plans and deferred compensation plans. The Compensation Committee has the authority under its charter to delegate any of its duties and responsibilities (or functions) to a subcommittee of the Compensation Committee

consisting of one or more members, as appropriate. You can find additional information about the Compensation Committee’s functions and processes in the “Compensation Discussion and Analysis” section of this proxy statement.

 

Compensation Committee Interlocks and Insider Participation: There are no Compensation Committee interlocks and no insider participation in compensation decisions that are required to be disclosed in this proxy statement.

 

Nominating/Corporate Governance Committee:  The Nominating/Corporate Governance Committee’s functions include: ensuring that the Board is properly constituted to meet its fiduciary responsibilities; identifying and recommending qualified candidates for membership to the Board; having direct responsibility for matters relating to the compensation of our directors; and recommending directors for committee membership. The committee also takes a leadership role in shaping the Company’s corporate governance.

 

The Nominating/Corporate Governance Committee will evaluate shareowner nominees on the same basis as all other nominees. Section 8 of our By-Laws describes the process by which shareowners may submit director nominations at an annual meeting or special meeting. Any shareowner of the Company who is entitled to vote at a meeting, who has complied with the notice procedures set forth in Section 8 may propose a director nomination. The procedures for a shareowner to nominate a director include the following:

 

 

The foregoing summary of our shareowner director nomination procedures is not complete and is qualified in its entirety by reference to the full text of our bylaws that has been publicly filed with the SEC and is available at www.sec.gov.

 

The Board has delegated primary responsibility for matters relating to compensation of our directors to the Nominating/Corporate Governance Committee. Because the Nominating/Corporate Governance Committee is also responsible for the recruitment of new directors and ensuring that the Board and committees are properly constituted, the Board believes that compensation matters relating to our directors should also reside with the Nominating/Corporate Governance Committee. The Nominating/Corporate Governance Committee recommends the overall compensation structure for directors to the Board for full review and approval.

 

Committee Review of Director Compensation

 

The Nominating/Corporate Governance Committee reviews director compensation on a regular basis. Historically, the committee responsible for director compensation matters has undertaken a comprehensive review of our director compensation program no less than once every two years. The Nominating/Corporate Governance

Committee has the authority to retain outside advisors in connection with its review and analysis of director compensation matters.

 

Equity Ownership by Directors

 

The Board believes that directors should hold meaningful equity ownership positions in the Company. Accordingly, a significant portion of overall director compensation is in the form of Company equity, as shown in the “Overview of Director Compensation” section below. Our Stock Ownership Guidelines and Insider Trading Policy requires our directors to accumulate and maintain equity ownership in the Company having a value of no less than five times the annual retainer within five years of the date they become subject to the policy.

 

Overview of Director Compensation

 

We do not pay any additional cash compensation to management employees who serve as directors. In addition, no director who is employed by the Company may serve on any committee. Currently, Mr. Cardoso, who serves as the Chairman of the Board, is the only employee of the Company that serves as a director. The compensation paid to Mr. Cardoso is included in the 2011 Summary Compensation Table and the related text and compensation tables. Our non-employee directors receive a combination of cash and equity compensation for their services as a director or committee member as described below.

 

Cash Compensation for Non-Employee Directors

 

In 2011, our non-employee directors were entitled to receive the following cash compensation:

 

 

Equity Compensation

 

Equity compensation for our non-employee directors consists of:

 

 

Perquisites and Personal Benefits

 

All non-employee directors receive $50,000 of life insurance coverage, which is paid for by the Company. In addition, for Fiscal 2011 directors received tax reimbursements for income imputed to them for the premiums we paid for this insurance. Beginning in Fiscal 2012, however, directors will no longer receive such tax reimbursements. We also reimburse directors for customary travel and related expenses for their attendance at Board or committee meetings.

Deferred Fee Plan

 

We have a Deferred Fee Plan for outside directors (the “Deferred Fee Plan”). On an annual basis, our non-employee directors may elect to defer payment of all or a portion of the cash fees they are entitled to receive from the Company for their services as a director or committee member all of which amounts will be credited as stock credits under the Directors Stock Incentive Plan (described below).

 

Directors Stock Incentive Plan

 

Under the Directors Stock Incentive Plan, any non-employee director may elect (i) to receive shares of the Company’s capital stock in lieu of all or a portion of any cash compensation they are otherwise entitled to receive or (ii) to have stock credits credited to an account established by the Company for such participating director.

 

If a non-employee director elects to receive shares of the Company’s capital stock in lieu of all or a portion of the compensation otherwise payable to such director, the director will receive, on the date that the compensation otherwise would have been paid, the number of shares of capital stock of the Company that could have been purchased on that date based on the amount of compensation subject to the election and the fair market value of the Company’s capital stock on that date.

 

If a non-employee director makes a stock credit election, an account established for the non-employee director and maintained by the Company is credited with that number of stock credits equal to the number of shares of capital stock that could have been purchased with the amount of compensation subject to a stock credit election based on the fair market value of the Company’s capital stock on the day that the compensation would have been paid to the non-employee director. Dividend equivalents are credited to the account of any director who has elected to receive stock credits in lieu of compensation. Dividend equivalents are calculated at the same rate as the current dividend; there is no preferential or above-market earnings potential for deferrals into stock credits. In the event of a change in control, issued and outstanding shares of capital stock equal to the aggregate number of stock credits in each non-employee director’s stock credit account would be contributed to a deferred compensation trust (a so-called “Rabbi Trust”) established by the Company and administered by an independent trustee.

 

Matching Gifts Program

 

Directors are eligible to participate in our Matching Gifts Program, which is also generally available to all U.S. employees. Under the program, the Kennametal Foundation will match gifts to qualified institutions on a dollar-for-dollar basis up to $5,000 per calendar year.

 

2011 Director Compensation

 

The following table shows the actual compensation we paid to our non-employee directors for service on the Board and applicable committees in 2011. Mr. Cardoso does not receive additional compensation for his service on our Board.

 

2011 Non-Employee Director Compensation(1)

 

 

 

Supplemental Table to 2011 Non-Employee Director Compensation Table

 

 

 

 

Functions of the Audit Committee

 

The Audit Committee (“we” or the “committee”) assists the Board in its oversight of: the quality and integrity of the Company’s financial statements, internal controls and disclosures; the Company’s compliance with legal and regulatory requirements; the performance, qualifications and independence of the Company’s independent auditors; and the performance of the internal audit function. We have the sole authority to appoint, retain, terminate and replace the Company’s independent auditors, subject to shareowner ratification with respect to retention at the next regularly scheduled annual meeting of shareowners. We perform an annual self-assessment to evaluate the composition, activities and interactions of the committee and submit the results of the self-assessment to both the Nominating/Corporate Governance Committee and the Board.

 

Responsibilities

 

Management is responsible for the Company’s financial reporting process and system of internal controls and for the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The independent auditors are responsible for planning and carrying out an audit of the financial statements and internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (“PCAOB”) and issuing a report on that audit. Our responsibility is to provide oversight to these processes. We do not certify the financial statements or guarantee the auditor’s report. To fulfill our oversight role, we rely (without independent verification) on the information provided to us, the representations made by management and the independent auditors and the report of the independent auditors.

 

Complaints

 

Anyone, including any Company employee, who has a complaint or concern regarding the Company’s accounting, internal auditing controls or auditing matters may communicate that complaint or concern to the committee:

 

 

 

Monitoring Activities in 2011

 

We held eight (8) meetings in 2011. During these meetings, we discussed with management, the internal auditors and the Company’s independent auditors, PricewaterhouseCoopers LLP (“PwC”) (to the extent applicable), the quality and adequacy of the Company’s internal control over financial reporting, the internal audit function’s organization, responsibilities, budget and staffing and the results of internal audit examinations. We also reviewed with both PwC and the internal auditors their respective audit plans, audit scope and identification of audit risks, and met separately with PwC and with the internal auditors, without management present, to discuss the results of their examinations, their evaluations of the Company’s internal control over financial reporting and the overall quality of the Company’s financial reporting. We reviewed the interim financial information contained in each quarterly earnings announcement and each Form 10-Q filed with the SEC in 2011 and discussed this information with PwC and with the Company’s Chief Financial Officer and Corporate Controller prior to release. We also reviewed and discussed with both management and PwC the audited financial statements for the year ended June 30, 2011 prior to release.

 

The discussions with PwC included the matters required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU section 380), as adopted by the PCAOB in Rule 3200T, related to communication with audit committees. We received from PwC written disclosures and the letter required by applicable requirements of the PCAOB regarding PwC’s communications with us concerning their independence, and discussed with PwC their independence.

 

Based on these reviews and these meetings, discussions and reports, we have recommended to the Board of Directors that the Company’s audited consolidated financial statements be included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2011 for filing with the SEC. We have retained PwC as the Company’s auditor for the fiscal year ending June 30, 2012, and are submitting that decision for shareowner ratification at the Annual Meeting as discussed below.

 

Audit Committee

 

Timothy R. McLevish, Chair

Lawrence W. Stranghoener

Steven H. Wunning

Larry D. Yost

 

The Audit Committee has retained PwC as the Company’s independent auditors for the fiscal year ending June 30, 2012. As a matter of good corporate practice, the Audit Committee is submitting its selection to our shareowners for ratification at the Annual Meeting. Unless otherwise directed by the shareowners, proxies will be voted in favor of the ratification of the selection of PwC as the Company’s independent auditors for the fiscal year ending June 30, 2012. In the event that this selection is not ratified by the shareowners, the Audit Committee will consider this vote in determining its future selection of an auditor. Even if the selection is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if it determines that a change would be in the best interests of the Company and its shareowners.

 

Representatives of PwC attended all meetings of the Audit Committee held during 2011. The Audit Committee reviewed the non-audit services provided by PwC in 2011 and, based on that review, determined that the non-audit services provided by PwC were compatible with maintaining the independence of PwC.

 

Representatives of PwC will attend the Annual Meeting, and will have the opportunity to make a statement at the meeting if they wish. They also will be available to respond to appropriate questions from shareowners in accordance with the rules of the meeting.

 

 

Fees and Services

 

Fees for professional services (including expense) rendered by PwC to the Company and its subsidiaries in 2010 and 2011 were as follows (in millions):

 

 

 

 

 

Audit Committee Pre-Approval Policy

 

The Audit Committee annually adopts a policy for pre-approval of audit and non-audit services to be provided by the independent auditors. Under the policy, the Audit Committee pre-approves categories of services and fee caps for each category. The pre-approved services include: (i) audit services, such as statutory audits and internal control-related services, services associated with regulatory filings and consultations regarding disclosure treatment of certain transactions or events; (ii) audit-related services, such as due diligence and accounting consultations; (iii) tax services, such as tax compliance (domestic and international) and tax planning and advice; and (iv) other permissible non-audit services that the Audit Committee believes will not impair the auditor’s independence. The Audit Committee must specifically pre-approve the terms of the annual audit services engagement. All other audit and permissible non-audit services not specifically covered by the policy, and any proposed services which materially exceed the pre-approved fee levels, require separate specific pre-approval by the Audit Committee. The Audit Committee may delegate specific engagement pre-approval authority to one or more of its members. The member(s) to whom such authority is delegated must present any pre-approval decisions to the Audit Committee at its next scheduled meeting for ratification. The policy requires the auditor to provide the Audit Committee with detailed supporting documentation regarding the specific services to be provided.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF PwC AS THE COMPANY’S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 2012.

 

Executive Summary

 

The following is an overview of our executive compensation philosophy and programs as detailed further in this Compensation Discussion and Analysis (“CD&A”):

 

 

 

 

Highlights of Kennametal’s Fiscal 2011 Performance and Links to our Performance-Based Awards

 

 

The highlights of our 2011 executive compensation program resulting from our 2011 Company performance were as follows:

 

 

Summary of Compensation Actions for Fiscal 2011 and Changes Implemented for Fiscal 2012

 

The following information highlights the Compensation Committee’s key compensation decisions for Fiscal 2011. These decisions were made with the advice of the Compensation Committee’s independent consultant, which was Towers Watson at the time. These decisions are discussed in greater detail in the CD&A. The key compensation decisions made in July 2010 were as follows:

 

 

Executive Compensation Philosophy

 

Kennametal’s executive compensation philosophy is premised on the following basic principles, which we believe form the foundation of effective and responsible compensation programs:

 

 

 

The Compensation Committee has responsibility for the oversight and administration of our executive compensation program. The Compensation Committee works with its compensation consultant and members of our management to collect and analyze relevant data during the compensation decision-making process, but it is the Compensation Committee that ultimately oversees and approves all compensation matters regarding our executives, including our NEOs.

 

Objectives of the Executive Compensation Program

 

To support our overall compensation philosophy, we have designed our executive compensation program to:

 

 

Design of Our Executive Compensation Program

 

Overall Design of the Executive Compensation Program

 

Each of our executives receives a compensation and benefits package comprised of the five basic components described in the table below. The table summarizes some important information about these components for 2011, and we describe each one in more detail later in this CD&A.

 

 

We’ve designed our executive compensation program to target total compensation at the median level for similar positions within our industry and peer group. There is potential for actual compensation to be above or below median compensation depending on Company and individual performance. We believe that target compensation under our incentive plans should allow for above-median compensation for exceptional performance, as well as below-median compensation when performance falls below our expectations. Also, we may deviate from the median if, in the judgment of management and/or the Compensation Committee, the value of an executive’s experience, performance and specific skill set warrants. For individual executives, compensation may also vary depending on the executive’s experience, responsibility and expertise, such person’s contribution to our business strategy and the market’s demand for such skills and talent.

 

The foundation of our program is based on a system of salary bands. Each executive position is situated within a salary band, which generally defines opportunities for base salary, annual incentives and long-term incentives. There are ranges associated with the salary bands, which reflect each position’s internal value, scope and complexity of responsibilities and market competitiveness. The pay ranges give the Compensation Committee flexibility to position individual compensation above or below market median levels depending on job performance, professional qualifications, business experience, technical expertise and career potential.

 

Factors that Influence Compensation

 

The Compensation Committee believes that an effective compensation program reflects a balance between individual factors (i.e., level of responsibility, skills, experience, expertise and individual performance), organizational measures (i.e., Company or business unit performance), and external or market factors (i.e., competitive benchmarking and survey data). We incorporate each of these factors into the design of our executive compensation program. Accordingly, we compensate our executives based upon an assessment of:

 

 

 

Relationship Between Pay and Performance

 

In January 2011, our Compensation Committee reviewed the relationship between our CEO’s “realizable compensation” and the Company’s performance from Fiscal 2008 through Fiscal 2010 which was the period that both compensation and performance data was readily available for our peers. The analysis, which was prepared by the Compensation Committee’s consultant, Pay Governance, compared our CEO’s realizable compensation and the Company’s performance, relative to our peer group, in order to assess whether the Company’s performance and the realizable compensation paid to our CEO were aligned. The peer group utilized for this analysis is the same peer group utilized for the Fiscal 2011 compensation decisions made by the Compensation Committee.

 

Realizable compensation is defined as (i) base salary, (ii) actual bonus earned, (iii) the aggregate current value of restricted stock/restricted unit grants made during the period, (iv) the aggregate in-the-money value of stock option grants made during the period and (v) the actual payouts of performance-based equity awards with performance periods beginning and ending during the three-year performance period and the estimated payout for unvested performance-based equity awards granted during the three-year performance period. Realizable compensation was calculated in the same manner for our CEO and the CEOs of our peer group companies. The realizable value of long-term equity-based awards were valued using each company’s closing stock price on June 30, 2010. This approach is different than analyzing target compensation or the fair value of equity awards at their grant date.

 

The financial performance of the Company and the peer companies were evaluated over the same three-year period as realizable compensation using the following three (3) performance measures: (i) ROIC; (ii) EBIT growth; and (iii) total shareholder return (TSR). Two of these measures (ROIC and EBIT growth) were selected because they are used in the Company’s short-term and/or long-term incentive plans and were considered by Pay Governance to be reasonable indicators of Company performance. The Company’s percentile ranking for each performance measure relative to the peers was averaged to form a composite performance ranking.

 

Over the three-year period, our CEO’s realizable compensation ranked in the first quartile of the peer group while our composite performance also ranked in the first quartile of the peer group. This means that our CEO’s realizable compensation is positioned well below the middle of the peer group but our performance was also ranked below the middle of the peer group. The Compensation Committee observed that the relatively low positioning of realizable compensation (i.e., below the 25th percentile) was attributable to the following factors:

 

 

 

Based on this analysis and the above observations, the Compensation Committee is satisfied with the alignment of our CEO’s realizable compensation with the performance of the Company. The chart below provides an illustration of this realizable pay-for-performance analysis over the three-year period from Fiscal 2008 through Fiscal 2010.

 

Pay-for-Performance Alignment

 

 

Variable Compensation and Promotion of a Long-Term Perspective

 

We increase the variable component of compensation for our executives as they progress through our management levels and adjust the ratio of short-term to long-term compensation to promote accountability and a long-term perspective. We structure our executive compensation program so that the proportion of variable vs. fixed compensation increases as the role and responsibility of the executive increases. We think this is appropriate because the executives are best positioned to be able to affect the Company’s performance, and therefore they should receive a substantial portion of total compensation value in the form of long-term incentives that measure and reward Kennametal’s performance over a period of greater than one year. The table below illustrates that the actual percentage of variable pay relative to total compensation depends on the executive’s position within the Company. Generally speaking, the higher an executive’s position within the Company, the greater the proportion of pay that is linked to Company performance and shareowner returns. Similarly, as an executive rises to positions of greater responsibility within our Company, short-term compensation begins to decrease proportionally and long-term compensation represents a greater proportion of total compensation.

The following chart summarizes the breakout of fixed versus variable compensation and short-term versus long-term compensation paid to our NEOs in Fiscal 2011.

 

 

Competitive Compensation

 

Pay Positioning Relative to Market — Benchmarking.

 

When we make compensation decisions, we compare the compensation paid to our executive officers to the compensation paid to similarly-positioned executives at other companies to gain a general understanding of current market compensation practices for these positions. Specifically, we benchmark total compensation levels and certain of the individual elements of our compensation packages (mainly base salary, annual incentives (together, “total cash compensation”)) and long-term incentives (together with total cash compensation, “total direct compensation”) to both published survey data of comparable companies and to a custom peer group of public companies within the manufacturing industry. Benchmark data is part of the external information we consider when designing and executing our compensation programs.

 

Pay Governance, the Compensation Committee’s compensation consultant, assists the Compensation Committee in its benchmarking efforts. Pay Governance collects compensation data for our peer group companies from available sources, including, in most cases, the executive compensation data included in the most recently available annual proxy statement for each company. Pay Governance can also provide survey data representing industry-specific and general industry companies included in the Towers Watson and Mercer executive compensation databases. Pay Governance, in consultation with management, provides the Compensation Committee with the results of its benchmarking efforts on an annual basis. The benchmarking data helps us assess the competitiveness of our executives’ compensation compared to that of other executives at our peer companies and in the broader market. We also use the data to help ensure proper alignment between executive and shareowner interests, and to assess compensation versus Company performance.

 

When we evaluate our compensation structure, we compare the target range for total direct compensation, the mix of compensation components and the allocation of those components in our executives’ individual compensation packages against benchmark data. Each year, we evaluate the total cash compensation and total direct compensation we provide to our executives against the benchmark data to determine whether our compensation structure accurately reflects our goal of providing compensation at approximately the median level within our peer group and industry. We analyze both target compensation opportunities as well as the actual compensation paid to our executives. The Compensation Committee considers this information, along with data provided by Pay Governance and Company and individual performance factors when it sets compensation levels.

 

We use the same custom peer group for compensation purposes as we do for comparing our financial performance. We periodically review our peer group to ensure that the peer companies continue to be appropriate comparisons for performance purposes and for compensation purposes. Many of the companies in our current peer group are included because they are similar to Kennametal in terms of revenue, market capitalization, operational scope, or organizational complexity. While some of the peers are smaller than we are, others are larger. Nevertheless, we include these companies to help us understand the effect size and complexity has on compensation levels and designs.

The following companies comprised our peer group for both performance and compensation purposes for Fiscal 2011:

 

 

How Compensation Decisions Are Made

 

Role of the Compensation Committee and CEO in Determining Executive Compensation.

 

The Compensation Committee is responsible for designing and implementing our executive compensation programs, evaluating executive performance, including that of the Chairman, President and CEO, and overseeing the development of executive succession plans. All of the members of our Compensation Committee have been deemed by our Board to be independent. The Compensation Committee solicits information from our management and from its compensation consultant during the compensation-setting process, but it is the Compensation Committee that ultimately sets and approves compensation for our CEO and all other executives.

 

The Compensation Committee uses substantially the same process for determining CEO compensation as it uses for determining the other executive officers’ compensation. Each year, the Compensation Committee reviews all components of compensation for the CEO and for each of our other executives over the course of several regularly-scheduled meetings from April to July. Final compensation decisions are made in July for the current fiscal year. The Compensation Committee is assisted in its review by members of management, the human resources department, and its compensation consultant.

 

In keeping with our compensation philosophy, the Compensation Committee considers three main categories of information with respect to each executive: (i) individual performance; (ii) Company performance; and (iii) market data. The Compensation Committee evaluates each executive’s current compensation and solicits input from management on the executive’s future potential, performance for the year, leadership skills, and contribution to the Company’s performance. The Compensation Committee also considers factors relating to the Company, such as our overall performance and achievement of specific strategic and operational initiatives. Finally, the Compensation Committee assesses the market competitiveness of each executive’s total compensation package.

 

CEO Compensation.  The Compensation Committee meets with the CEO each year in July (the beginning of our fiscal year) to set the CEO’s performance goals (both individual and Company objectives) for the fiscal year. These goals are then reflected in the CEO’s individual performance plan for the year. The CEO periodically reports on his progress with respect to his performance goals at Compensation Committee meetings throughout the year. At the end of the year, the Compensation Committee evaluates, in consultation with the Lead Director and the rest of the non-management directors or the Board generally, as it deems necessary or appropriate, the CEO’s performance against the goals included in his performance plan for the year and determines and approves the CEO’s compensation, either as a committee or together with the other independent directors (as directed by the Board), based in part on his achievement of those goals and in part on the Company’s performance, while taking in to account the overall objectives of our compensation program. The Compensation Committee also considers the compensation being paid to other chief executive officers at similarly situated companies in making compensation decisions affecting the CEO.

 

Other Executives’ Compensation.  Each year in August, each of our other executives must also develop an individual performance plan for the fiscal year (with goals that align with the CEO’s objectives, and include individual and Company objectives). These plans are discussed with and approved by the CEO and the executives

report to the CEO on their progress towards the achievement of the goals set forth in their plans periodically throughout the year. At the end of the year, the CEO and the Compensation Committee together assess the performance of our other executives. Based upon these evaluations and recommendations from the CEO, the Compensation Committee determines the other executives’ compensation. The other executives do not play a role in the determination of their compensation, other than discussing individual performance objectives and achievements with the CEO.

 

Role of the Compensation Consultant.

 

During Fiscal 2011, the compensation consulting team from Towers Watson which had been advising the Compensation Committee, separated from Towers Watson and joined a newly-formed compensation consulting firm, Pay Governance. At its July 2010 meeting, the Compensation Committee approved the retention of Pay Governance to perform the services previously provided by Towers Watson. This transition became effective September 2010. Pay Governance provides no other services to the Company.

 

The role of the compensation consultant is to make sure the Compensation Committee has the objective information and expertise necessary to make informed decisions that are in the best long-term interests of our business and shareowners. The compensation consultant also keeps the Compensation Committee informed as to compensation trends and developments affecting public companies in general and our industry in particular. The Compensation Committee solicits advice and counsel from Pay Governance on all matters related to executive compensation design and delivery. Specifically, Pay Governance provides the following types of services to the committee:

 

 

A Pay Governance consultant attends most Compensation Committee meetings and may attend executive sessions at the request of the committee. Consultants from Pay Governance also collaborate with our management team for purposes of meeting planning, program design and analysis and other logistics, but all executive compensation-related services performed by Pay Governance are ultimately at the direction of the Compensation Committee.

 

The Compensation Committee reviews the fees and performance of its consultant each year and provides feedback as necessary. The Compensation Committee has the authority to terminate the relationship with its consultant at any point in time.

 

Components of our Executive Compensation Program

 

Throughout this discussion of the components of our executive compensation program, we provide commentary on the factors that the Compensation Committee considers when it engages in the compensation setting process, which is a very disciplined process that is applied consistently for our CEO and all other executives. We provide a general overview of the process that is followed for all executives with respect to each compensation component.

Base Salary

 

Base salary is the fixed element of our executives’ annual compensation. We pay it to provide a competitive level of fixed income for our executives. We target base salary levels for each position at median pay levels for similar positions in the market. The amount of base salary an executive receives depends primarily on the salary band within which his or her position lies. The actual level of base salary an executive ultimately receives, however, depends upon an annual evaluation of the executive based on certain objective and subjective factors. Objective factors include the executive’s level of responsibility, skills and training, accomplishment of the goals set forth in such person’s annual individual performance plan, and, for newer executives, prior experience. Subjective factors include the Compensation Committee’s assessment of the executive’s future potential and individual contributions. The Compensation Committee evaluates the CEO with input from the Lead Director and the other non-management Board members as noted above. The CEO evaluates each of the executives who report directly to him. Both objective and subjective factors are considered, as relevant, and the CEO makes recommendations to the Compensation Committee for changes to base salary during the annual compensation setting process. The Compensation Committee evaluates the CEO’s and other executives’ base salary on an annual basis, and may make changes in its discretion as part of the broader compensation setting process.

 

In setting the NEOs’ base salaries for Fiscal 2011, the Compensation Committee considered all of the factors described above for each executive as well as an examination of the market data.

 

Base Salary Decisions for Fiscal 2011

 

In July 2010, the Compensation Committee reviewed base salary levels, the applicable market data and the individual factors noted above and approved merit increases for Fiscal 2011 for each of our NEOs as follows: Mr Cardoso: 4.7%, Mr. Simpkins: 2.7%, Mr. Tucker: 3.1%, Mr. Weihl: 21.8% (increase reflects adjustment for change in responsibilities which came with Mr. Weihl’s promotion to Vice President, Integrated Supply Chain and Logistics), and Mr. Jacko: 3.0%.

 

In addition to the changes to base salaries approved by the Compensation Committee at its July 2010 meeting, Mr. Tucker’s base salary was increased from $335,000 to $400,000, effective December 8, 2010, and Mr. Jacko’s base salary was increased from $350,000 to $375,500, effective June 1, 2011. Mr. Tucker’s adjustment was made to reflect the change in responsibilities associated with his promotion from Vice President, Chief Technology Officer to Vice President & President, Business Groups. Mr. Jacko’s adjustment was made to address competitive market conditions.

 

Base Salary Decisions for Fiscal 2012

 

In July 2011, the Compensation Committee approved base salary increases for Fiscal 2012 for each of the NEOs as follows: Mr. Cardoso: 4.0%, Mr. Simpkins: 4.4%, Mr. Tucker: 6.5%, Mr. Weihl and Mr. Jacko: 0%.

 

Annual Incentives

 

Overview of Management Performance Bonus Plan (Prime Bonus Plan).  The Management Performance Bonus Plan, which we refer to as the “Prime Bonus Plan,” is a shareowner-approved, formula-based, pay-for-performance annual cash incentive plan. The Prime Bonus Plan is the main vehicle we use to reward participants for their contributions to strong annual business performance. The purpose of the Prime Bonus Plan is to motivate participants to help the Company to achieve shorter-term financial goals, which are designed to create sustainable shareowner value, and to reward them to the extent we achieve those goals. All of our executives, our senior management team members, and certain of our key employees participate in the Prime Bonus Plan.

 

Bonuses under the Prime Bonus Plan are determined according to the following formula:

 

Target Bonus Amount x Achievement of Performance Goals x Modifier = Prime Bonus Award

The following table presents the possible payouts under the Prime Bonus Plan at different levels of performance:

 

 

With respect to each performance goal, no bonus is awarded if actual performance is less than 80% of the performance goal. Under the terms of the Prime Bonus Plan, the Compensation Committee makes the same adjustments for non-recurring or unusual items in determining whether performance goals have been met as we make to our financial results as reported to our shareowners.

 

Target Bonus Amounts.  Individual target bonus amounts are based on a combination of individual factors and market-competitive data and are established as a percentage of base salary. Consistent with our executive compensation philosophy, individuals with greater job responsibilities have a greater proportion of their total cash compensation tied to Company performance through the Prime Bonus Plan. Each year, the Compensation Committee sets target bonus amounts for our CEO and other executives based on recommendations from our management and the CEO (except with respect to his own target bonus) and its own evaluation of the competitiveness of each executive’s compensation package based on input from its compensation consultant.

 

Performance Goals.  We link Prime Bonus opportunities directly with Company performance, business unit performance and the maximization of shareowner value. Each executive is assigned performance goals at the beginning of the fiscal year based upon the performance goals of the Company that are approved by the Board. The Board approves the goals for overall Company performance based upon management’s financial and strategic plans.

 

Once the Board has approved the performance goals for the Company, the Compensation Committee reviews and approves the bonus structure and individual goals for the CEO and all other executive officers. To ensure alignment with our shareowners’ interests, the Compensation Committee assigns the CEO both quantitative and qualitative goals that are aggressive, designed to stretch performance, and will significantly impact the growth or improvement of a business unit or our Company. For each of the other executives, the Compensation Committee, with the input of the CEO, sets performance objectives that it considers achievable but that require personal performance and stewardship appreciably above the plan levels for the coming year. These performance goals vary by executive, are weighted and combine performance of the individual, the Company and the particular business unit or function for which the executive has responsibility.

 

The Prime Bonus Plan for Fiscal 2011 was generally designed such that a certain percentage of a participant’s bonus opportunity (usually 70%) was based upon the performance of the participant’s specific function, business unit and/or region/sub-region, and an additional percentage (usually 30%) on the performance of the Company. In this manner, the majority of a participant’s bonus opportunity is linked directly with results that he or she is best positioned to impact, yet a significant portion of the bonus opportunity still links to the Company’s performance. Certain of our executives are not assigned to any one particular business unit, however. The bonus opportunities for each of our NEOs are described in the “2011 Prime Bonuses” section below.

 

Modifier.  At the outset of each fiscal year, the Compensation Committee may or may not select a key initiative to use as a modifier in the calculation of Prime Bonus amounts for that year. The calculated Prime Bonus amounts are then adjusted based upon the level of performance with respect to that key initiative. There was no modifier applied to the 2011 Prime Bonus.

 

Individual Performance.  At its July meeting each year, the Compensation Committee reviews each executive officer’s achievement of his performance goals for the previous year and approves any corresponding amounts to be paid under the Prime Bonus Plan. In connection with Prime Bonus determinations, the Compensation Committee considers the individual performance of the executive and the recommendations of the CEO (for all other executives). The Compensation Committee has the discretion to adjust downward the calculated Prime Bonuses for our executives in the course of its review.

2011 Prime Bonuses.

 

Changes to 2011 Prime Bonus Program.

 

The Compensation Committee made several changes to the general design of the Prime Bonus program for Fiscal 2011, mainly to align the program with our new operating structure. The 2011 Prime Bonus program funded at target with the accrual being adjusted accordingly throughout the year. The payout curve remained the same for participants in Fiscal 2011 as it did in Fiscal 2010. Corporate performance goals were based on three measures: (i) Sales Growth (35% weight), (ii) EPS (40% weight), and (iii) ROIC (25% weight). Individual goals for the 2011 awards related to corporate performance for all participants, but for Mr. Wiehl also included goals related to our ISCL business unit.

 

2011 Target Bonus Amounts.  For 2011, the Compensation Committee approved target bonus amounts for our NEOs as follows:

 

 

2011 Company Performance Goals.  At its July 2010 meeting, the Board established corporate performance goals for the Company of: Sales Growth ($241.0 million), EPS ($2.00) and Adjusted ROIC, a non-GAAP financial measure, (10.3%). At the time it set these goals, the Board considered the targets to be challenging for the Company, but achievable if the financial and strategic plans of the Company were well executed. These goals were then used by the Compensation Committee when it reviewed and approved performance measures and target goals for each of our executives.

 

Adjusted ROIC is a non-GAAP financial measure and is defined by the Company as the previous 12 months’ net income, adjusted for interest expense, noncontrolling interest expense and special items, divided by the sum of the previous five quarters average balances of debt and total equity. The most directly comparable GAAP measure is return on invested capital calculated utilizing GAAP net income.

 

2011 Performance Goals for the NEOs.

 

Carlos M. Cardoso — Chairman of the Board, President and CEO

 

Performance goals for Mr. Cardoso were based on the financial and strategic plans for the Company. Mr. Cardoso’s 2011 Prime Bonus opportunity was composed of two components:

 

 

Generally, the achievement of Mr. Cardoso’s individual performance goals were to be rewarded proportionally for performance between 80% and 100% of the target goals. At the time they were put in place, the Compensation Committee considered these performance objectives strategically important and aggressive, but achievable with concentrated effort and focus by Mr. Cardoso.

Frank P. Simpkins — Vice President and CFO

John R. Tucker — Vice President & President Business Groups; and

John H. Jacko Jr.  — Vice President & Chief Marketing Officer

 

Messrs. Simpkins, Tucker and Jacko were not assigned to one particular business unit in 2011, which means that their Prime Bonus opportunity was based fully on performance results at the corporate level (100% of Prime Bonus opportunity). Performance goals were set for these executives based on the corporate performance goals described above. At the time they were put in place, the Compensation Committee considered these performance objectives strategically important and aggressive, but achievable with concentrated effort and focus by the executive.

 

Philip H. Weihl — Vice President, Integrated Supply Chain and Logistics

 

In 2011, Mr. Weihl’s Prime Bonus opportunity was based partly on performance results at the corporate level (50% of bonus opportunity) and partly on the performance results related to EBIT, a non-GAAP financial measure, of our ISCL business unit (50% of bonus opportunity). At its July 2010 meeting, the Board established an EBIT performance goal for our ISCL business unit of $140.26 million. At the time they were put in place, the Compensation Committee considered these performance objectives strategically important and aggressive, but achievable with concentrated effort and focus by Mr. Weihl.

 

EBIT is an acronym for Earnings Before Interest and Taxes and is a non-GAAP financial measure. The most directly comparable GAAP measure is net income. EBIT is calculated as net income plus interest and taxes. Kennametal adjusted EBIT for 2011 for minority interest expense, interest income and special items

 

2011 Performance

 

Prime Bonuses for 2011.  As calculated, the Prime Bonus program paid out at 200% of target for 2011 for those executives with 100% weighting on the corporate measures discussed above. This includes Messrs. Cardoso, Simpkins, Tucker and Jacko. This level of payout was earned because actual performance for 2011 exceeded the maximum performance goals for the period (see “Highlights of Kennametal’s Fiscal 2011 Performance and Links to our Performance-Based Awards” section of this CD&A for a discussion of the Company’s performance with respect to these goals). However, the actual Prime Bonus paid to Mr. Weihl was 166.3% due to his metric being based 50% on Kennametal performance results and 50% on ISCL EBIT results (for which target was exceeded but maximum was not achieved). Actual ISCL EBIT results were determined by the Board to be $131.12 million for Fiscal 2011. The following tables show the performance achieved and the amount of Prime Bonus compensation received in 2011 for each of our NEOs.

 

Carlos M. Cardoso

 

 

Named Executives other than Carlos M. Cardoso and Philip H. Weihl

 

Philip H. Weihl

 

 

Changes for 2012 Prime Bonus Program.  The Compensation Committee made several minor changes to the design of the Prime Bonus program for 2012. The awards granted under the 2012 Prime Bonus program will be funded at target and the accrual will be adjusted accordingly throughout the year. The payout curve and target opportunities will remain the same for participants. Corporate performance goals will continue to include Sales Growth (35% weight), EPS (40% weight), ROIC (20% weight) and a new metric, On Time Delivery (5% weight), will be added. Additionally, performance against a Safety Recordable Incidents target will be introduced for 2012 and serve as a modifier capable of influencing the final award size by +/- 10%. The Compensation Committee believes the introduction of the On Time Delivery metric and Safety Recordable Incidents modifier will reinforce a 100% safety mindset among the Company’s leaders. Mr. Cardoso’s award opportunity was also adjusted for Fiscal 2012 such that 100% of his award will be based upon the corporate performance goals and 20% will be based upon Mr. Cardoso’s achievement of specified strategic goals and initiatives. The payout of the 2012 Prime Bonus program awards are subject to shareowner approval of the Kennametal Inc. Management Performance Bonus Plan (see “Proposal III — Reapproval of the Kennametal Inc. Management Performance Bonus Plan” section of this proxy statement).

 

Long-Term Incentives

 

Overview of Long-Term Incentive Programs.  Kennametal’s long-term incentives are designed to focus our employees on sustainable, long-term performance. We use these incentives because we believe they promote an ownership culture, align the interests of our employees and shareowners, and foster the long-term perspective necessary to increase shareowner value. They also aid in retention and help advance stock ownership by our employees.

 

All of our executives, members of senior management, and a significant number of key employees are eligible to receive long-term incentive awards under our broad-based LTI program. We use a portfolio approach to our LTI program, which includes stock options, restricted unit awards and performance unit awards. We provide more information about each of these components below. Certain of our executives participated in a one-time, strategic 4-year program called the “2008 Strategic Transformational Equity Program” (the “STEP”) which is also described below.

 

The Compensation Committee approves all equity and other long-term incentive awards for our executives. All long-term incentive awards, including those under the LTI and the STEP, have been granted under either the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (the “2002 Plan”) or the Kennametal Inc. Stock and Incentive Plan of 2010 (the “2010 Plan”), which was approved by the Company’s shareowners at the 2010 annual meeting. We have not granted any awards under the 2002 Plan since our 2010 annual meeting, when shareowners approved the 2010 Plan, and may not grant any future awards under this plan. The 2002 Plan provided and the 2010 Plan provide for the granting of nonstatutory and incentive stock options, restricted stock awards, stock unit awards, and other types of incentive awards.

 

Target Long-Term Incentive Award Amounts.  Each year the Compensation Committee establishes target LTI opportunities for each of our executives based on peer group proxy data and survey data provided by its compensation consultant. LTI opportunities are determined on an individual basis based on the executive’s performance and career potential (individual factors). The Compensation Committee also takes into account what our peers are providing in terms of long-term compensation for similarly-situated executives (external factors). The Compensation Committee sets target LTI opportunities for our executives for the relevant 3-year cycle at its meeting in July of the each year.

2011 LTI Decisions

 

The following table shows the target level LTI opportunities set for each of our NEOs under our LTI program for Fiscal 2011:

 

 

In August 2010, eligible executives received 20% of their 2011 LTI value in restricted units (time vested); 30% of their LTI value in stock options (time vested and expiring in 10 years); and 50% of their LTI value in performance units (each of which are described below).

 

Timing of Equity Grants.  The Compensation Committee grants equity-based awards to our executives on both an annual and an as-desired basis. We do not have any program, plan or practice to time annual or ad hoc grants of equity-based awards in coordination with the release of material non-public information or otherwise.

 

 

Stock Option Awards.  We use stock option awards to align the interests of our employees with those of our shareowners and focus our employees on delivering superior total shareowner return over the long term (10 years). Under the 2002 Plan and the 2010 Plan, the exercise price for a stock option award may not be less than the fair market value of our shares at the time the option is granted. Fair market value is determined by taking the average of the highest and lowest sales prices as quoted on the New York Stock Exchange — Composite Transactions reporting system for the last trading day prior to the grant date. Stock option grantees can only profit from stock option awards if our stock price increases over time; conversely, grantees receive no value if our stock price decreases. We typically grant stock option awards to our executives annually as part of our broader LTI program, but occasionally we grant special stock option awards, either alone or in connection with other awards, to employees for attraction, retention or recognition purposes. Vesting schedules for our stock option awards vary according to the purpose for which they are granted. Awards granted under the LTI typically time vest at the rate of one-fourth per year over four years. A stock option award granted for attraction purposes, upon hiring, or for special recognition purposes may have a different vesting schedule (for example, 50% may vest on the second anniversary of the grant date, and 25% each year thereafter). In every case, the stock option awards help further our retention objective as any unvested portion is forfeited if an executive voluntarily terminates employment. Stock option awards expire ten years from the date of grant, which we believe helps to promote the long-term perspective that is key to our growth and success. Both the 2002 Plan and the 2010 Plan prohibit the repricing of stock options and do not contain a full reload feature.

 

The number of shares underlying the stock options awarded to each NEO in Fiscal 2011 was determined by dividing 30% of the total target LTI opportunity value by the compensation value of the option on the grant date (essentially using the assumptions disclosed in the notes to our consolidated financial statements for our 2011 Form 10-K, but considering the full term of the option (10 years)).

 

Restricted Unit Awards. Prior to 2010, we granted restricted stock awards as part of our LTI program, but we have transitioned to grants of restricted unit awards for ease of administration and compliance purposes. We grant restricted unit awards because we believe they build ownership in the Company and serve to promote the retention

of our employees, thereby aligning the interests of our employees and our shareowners. As is the case with stock option awards, we typically grant restricted unit awards annually to our executives as part of our broader LTI program, but we sometimes make these grants for other purposes. For example, we may grant these awards to attract new talent or to recognize or motivate our employees. Like stock option awards, restricted unit awards granted under the LTI typically vest at the rate of one-fourth per year over four years. Also similar to our stock option awards, the vesting schedules may differ depending on the reasons for the grant of restricted units. We believe that restricted unit awards help promote our retention efforts in that any unvested portion of a restricted unit award is forfeited if an executive voluntarily terminates his or her employment with us.

 

The number of restricted units awarded to each NEO in Fiscal 2011 was determined by dividing 20% of the total target LTI opportunity value by the fair market value of our stock on the last trading day prior to the grant date.

 

Performance Unit Awards. For certain of our executives, including our NEOs, the Compensation Committee approved an annual grant of performance units for Fiscal 2011. These awards are performance-based and can only be earned by achieving certain levels of EBIT margin goals established by the Compensation Committee. The Compensation Committee has established specific EBIT margin goals for the fiscal years 2011, 2012 and 2013 to which one-third of the performance units may be earned each year. Goals have been established at threshold, target and maximum award levels for each year. Performance units earned are subject to an additional service condition that requires the executive to be employed by us at the payment date following the 3-year performance period (which for the awards granted in August 2010 means August 2013). The table below presents the EBIT margin goals for the first tranche of the performance unit awards granted in August 2010:

 

 

The following table presents the possible payouts for performance unit awards at different levels of performance:

 

 

Performance goals at the threshold level have been established for each year to reflect 80% of the target goal while performance goals at the maximum level have been established for each year to reflect 110% of the target goal. Units earned for achieving the threshold goal will equal 50% of the target shares for the given year while shares earned for achieving the maximum goal will equal 200% of the target shares for the given year. Shares earned for achievement of the target goal will equal 100% of the target share for the year.

 

Performance Units Earned for the 2011 Performance Period.  At its meeting in July of 2011, the Compensation Committee determined that the EBIT margin goals for Fiscal 2011 had been achieved at 14.1%, the maximum performance level. As a result, the Compensation Committee determined that the performance units had been earned at 200% of the Target amount. As explained above, these performance units will continue to be subject to a service condition that requires the executive to be employed by us at the payment date following the 3-year

performance period. The table below sets forth the number of performance units deemed by the Compensation Committee to have been earned by each of the NEOs for Fiscal 2011.

 

 

Cash LTIP Awards.  In the past we granted contingent, long-term incentive cash awards (which we refer to as “Cash LTIP” awards) under our 2002 Plan to our executives and to other key employees. We have not granted these awards since 2009 and do not intend to grant them in the future, based on our transition to the granting of performance units awards.

 

Results for 2009 — 2011 Cash LTIP Awards.  In July 2008, the Compensation Committee granted Cash LTIP awards for fiscal years 2009-2011, payable in August 2011, if the Company achieved specified performance goals. Performance goals for the 2009-2011 LTIP cycle were based upon EPS (the three year plan goal for cumulative EPS was $11.07) and ROIC (the three year plan goal, as measured at the end of the three-year measurement period, which was June 30, 2011, was 14.2%). At its July 2011 meeting, the Compensation Committee determined that the EPS metric result was $4.78 for the applicable period and the ROIC metric result was 14.8% for the applicable period. Based on these results, the Compensation Committee determined that the award would pay out at 60.6%, resulting in payments to the NEOs as set forth in the table below:

 

 

Strategic Transformational Equity (STEP) Program.  In 2008, the Compensation Committee approved a special, long-term program under the 2002 Plan called the 2008 Strategic Transformational Equity Program (the “STEP”). The STEP was designed to propel the Company to superior levels of performance that, if achieved, would have provided an opportunity for premium compensation to participants and a significant return to our shareowners. The STEP had a retention component as well, because the awards are generally forfeited if a participant terminates his employment with the Company during the four-year period that began October 1, 2007 and ends September 30, 2011 (the “STEP Performance Period”). Each STEP participant was awarded a certain number of stock units under the STEP (the “Units”); the Units were granted at the maximum level. In general, Units could be earned if certain performance conditions were met at certain measurement dates during the Performance Period.

 

Performance Conditions.  The STEP awards were broken down in to two components with thirty five percent (35%) of the total number of Units which a participant could earn based on our total shareowner return at the measurement dates and sixty five percent (65%) of the total number of Units which a participant could earn based on our cumulative adjusted earnings per share on the same measurement dates (these conditions are referred to in this discussion as the “STEP Performance Conditions”). The STEP Performance Conditions were designed to require exceptional financial performance during the STEP Performance Period.

 

Payout under the STEP.  The payment of any Units earned under the STEP is also conditioned upon the participant being employed by us on the payment date, subject to certain limited exceptions (such as death and disability). According to current projections, we do not expect the STEP Performance Conditions to be satisfied. As a result, we do not believe that there will be a payout under the STEP.

Changes for 2012 LTI Program.

 

The following table shows the target level LTI opportunities set for each of our NEOs under our LTI program for 2012:

 

 

At its July 2011 meeting, the Compensation Committee approved LTI awards to be granted to executives in early August 2011 in substantially the same form and design as those granted in August 2010. These awards consisted of time vesting restricted units (representing 20% of the LTI award), stock options (representing 30% of the LTI award) and performance share units (representing 50% of the LTI award).

 

With respect to the performance unit awards granted by the Compensation Committee at its July 2011 meeting, the Compensation Committee established specific EBIT margin goals for the fiscal years 2012, 2013 and 2014 to which one-third of the original performance units may be earned each year. Goals have been established at threshold, target and maximum award levels for each year. Performance units earned are subject to an additional service condition that requires the executive to be employed by us at the payment date following the 3-year performance period (which for the awards granted in July 2011 means July 2014).

 

The following table presents the possible payouts for performance unit awards at different levels of performance:

 

 

Special Recognition, Attraction and Retention Awards

 

On a limited and selective basis, we sometimes pay additional compensation to our employees in the form of special recognition, attraction or retention awards. For example, we may provide a special award to an individual to reimburse him/her for compensation he/she would forfeit by terminating previous employment, or to recognize contributions to a critical strategic initiative.

 

Employees at all levels of the Company are eligible to receive special awards. We may provide awards in the form of cash bonuses, equity awards, or via a mixture of cash and equity awards, in each case depending on the reason for the bonus. The amount of any special recognition or retention award depends on the reason it is being granted. The Compensation Committee must approve any special awards for our executives. There were no awards of this nature made to any NEOs during Fiscal 2011.

 

Retirement Programs

 

We maintain both qualified and non-qualified defined benefit retirement plans that are designed to work together to provide retirement pay to our executives. We provide pension and retirement benefits as part of our broader executive compensation program to attract and retain our executives.

 

Qualified Plans.  We maintain two principal qualified retirement plans for substantially all U.S. employees, including our executive officers. The Retirement Income Plan (“RIP”) is a defined benefit pension plan. As of December 31, 2003, the RIP was frozen for non-grandfathered participants and is no longer offered to new employees. None of our NEOs were grandfathered under the RIP. The Thrift Plus Plan (“TPP”) is a defined contribution or “401(k)” plan in which all of our executives participate.

Non-Qualified Plans.  We maintain two non-qualified retirement plans for our executives. Certain of our executives participate in the Supplemental Executive Retirement Plan (“SERP”), which provides for monthly payments for a participant’s lifetime. Under the SERP, there is no right to payments if a participant leaves the Company before age 56; beginning at age 56, benefits in the SERP vest 20% per year until the age of 60, when benefits become 100% vested.

 

In 2007, the Compensation Committee replaced the SERP with the Executive Retirement Plan (“ERP”). Only those executives for whom vesting under the SERP had commenced as of December 31, 2006 continue to participate in the SERP. None of the NEOs participate in the SERP. Executives who were not vested under the SERP, including all of our NEOs, participate in the ERP, which provides for a lump sum payment of benefits to a participant upon termination (but only to the extent the executive has vested under the plan).

 

The amount payable under each retirement plan for each NEO is determined by the plan’s benefit formula. The amount of benefits varies based upon the plan, the executive’s years of service with us, and the executive’s compensation.

 

Executive Benefits and Perquisites

 

In June 2010 management examined its approach to perquisites and recommended certain changes to the Compensation Committee. Beginning in Fiscal 2011, we transitioned from the provision of individual perquisites toward the provision of an annual fixed perquisite allowance (equal to $20,000 in the aggregate) to each executive officer (paid in two installments in June and December of each year). To promote our emphasis on the health, safety and wellness of our employees, the Compensation Committee decided to retain officer life insurance and an annual executive physical in addition to the perquisite allowance. The perquisite allowance may be used by the executive in his or her discretion for financial planning fees, business or country club memberships, or any other appropriate perquisite, and will not be grossed up for tax purposes. The perquisite allowance replaced our past practice of reimbursing executive officers for individual perquisite expense. We believe that the perquisite allowance is reasonable based on competitive market practices and gives our executives the flexibility to choose the form of benefits they receive. It also eliminates the Company’s costs of administering the perquisites program.

 

The perquisite allowance and other personal benefits paid to our NEOs (life insurance and executive physicals) for 2011 are listed in a supplemental table in the footnotes to the 2011 Summary Compensation Table. Other than the perquisite allowance and other personal benefits included therein, our executives have the same benefits that are generally provided to other salaried employees, including eligibility to participate in group medical and dental plans, vision, long- and short-term disability, group life insurance, accidental death and dismemberment insurance, business travel accident insurance, health care and dependent care spending accounts, qualified retirement plans, and other benefits, in accordance with the terms of the programs.

 

Stock Ownership Guidelines and Insider Trading Policy

 

We have adopted Stock Ownership Guidelines for directors, executives and key managers to effectively link the interests of management and our shareowners and to promote an ownership culture throughout our organization. We believe that stock should be acquired and held in quantities that encourage management to make decisions and take actions that will enhance Company performance and increase its value. These guidelines were first adopted in 1995 and are reviewed annually by the Compensation Committee at its October meeting as a standing agenda item.

Employees have five years from the date they become subject to the guidelines to acquire the requisite holdings. The current guidelines are:

 

 

Shares owned outright, restricted stock and restricted units, deferred stock credits, and shares owned in benefit plans (such as a 401(k)) count toward fulfilling the ownership guidelines.

 

We have an insider trading policy that prohibits executives from engaging in any transaction in our stock unless that transaction has been pre-cleared and approved. Although we generally do not mandate when executives may trade, our policy strongly encourages them to trade only during established window periods, which open 2 days after our quarterly earnings release and remain open for one month thereafter.

 

Employment Agreements

 

We have employment agreements with all of our executive officers. We have summarized the material terms of these agreements below. Mr. Cardoso’s agreement contains some modified provisions, which are identified where applicable in the summary.

 

General.  The agreements require our executives to devote their entire time and attention to the business and affairs of Kennametal while they are employed.

 

Term.  There is no predetermined term. Each executive entered into the agreement upon commencing duties as an executive officer of our Company.

 

Compensation.  Except as noted below, the executive officer’s base salary, size of bonus award, if any, and any other compensation for services are not specified under the agreements but rather are determined by the Compensation Committee upon the commencement of employment and assignment of the executive to a salary band. Thereafter, the Compensation Committee makes determinations regarding base salary, incentive awards, and all other components of compensation as described in this CD&A.

 

Mr. Cardoso’s agreement was amended December 6, 2005 to, among other things, set his primary Prime Bonus target level at 90% of his base salary. (Mr. Cardoso’s current incentive opportunities are discussed elsewhere in this CD&A and in the executive compensation tables that follow.)

 

Non-competition/non-disclosure.  Unless we provide prior consent in writing, if an executive voluntarily terminates his employment or we terminate his employment for cause, then for three years after the date of termination, the executive officer cannot, in any geographic area in which Kennametal is offering its services and products: (a) directly or indirectly engage in, or (b) assist or have an active interest in, or (c) enter the employ of, or act as agent for, or advisor or consultant to, any entity which is or is about to become directly or indirectly engaged in any business that is competitive with any business of the Company or any of our subsidiaries or affiliates in which the executive is or was engaged. The non-competition provisions do not apply if we terminate an executive without cause. However, in case of termination for any reason, the executive officer cannot disclose any of our confidential or trade secret information.

 

Assignment of Inventions.  Each executive officer must assign to us all inventions conceived or made during his employment with Kennametal.

Termination.  The executive officer’s employment may be terminated by either party at any time, for any reason or no reason at all; provided, that the Company may only terminate an executive officer’s employment with the approval and authorization of the Board.

 

Severance.  If, with Board authorization, we involuntarily terminate an executive officer’s employment (other than Mr. Cardoso’s) prior to a change in control and not for cause, the executive is entitled to 12 months severance in the form of salary continuation. Our executive officers are not entitled to severance under any other termination scenario outside of a change in control context.

 

If, with Board authorization, Mr. Cardoso’s employment is terminated by us prior to a change in control and not for cause, Mr. Cardoso is entitled to up to 24 months severance in the form of salary continuation. Severance amounts would be offset by any salary earned by Mr. Cardoso in the event he obtains other employment during that 24-month period.

 

Change in Control.  Under certain circumstances, the agreements provide for payments to an executive officer if his employment is terminated after a change of control. See “Termination Conditions and Arrangements” below and the “Potential Payments Upon Termination or Change in Control” section of this proxy statement for a more detailed discussion.

 

Termination Conditions and Arrangements

 

In a non-change in control context, our employment agreement with our executives provides for severance if the executive’s employment is terminated by us without “cause.” Additional details regarding the severance provisions and potential payments to our NEOs outside of a change in control context can be found in the “Potential Payments upon Termination or Change in Control” section.

 

Our executive employment agreement, stock and incentive plans and certain of our retirement and post-employment plans contain change in control provisions. The change in control provisions in the executive employment agreements are applicable only for those executives that have entered into these agreements, which includes each of our NEOs. The provisions of our incentive plans and retirement plans are applicable to a broader base of our employees and include all those who participate in those plans. We include these provisions because we believe they help to align executive, Company, and shareowner interests. If we evaluate a possible transaction, we want our management to focus on the potential fit with our corporate goals and strategy and the creation of long-term value for our shareowners. We believe that change in control protections enable our management to consider corporate transactions objectively and to decide whether they are in the best interests of the Company and its shareowners without undue concern over whether the transactions may jeopardize future employment.

 

The change in control protections under the executive employment agreement only provide payments upon the occurrence of a “double trigger.” For severance benefits to be “triggered,” a change-in-control must take place and an executive must be involuntarily terminated by us (not for “cause”) or must leave for “good reason” or in connection with Disablity (as defined in the executive employment agreements) within 36 months following the change-in-control. For additional information concerning the change in control arrangements for our NEOs, see the “Potential Payments upon Termination or Change in Control” section of this proxy statement.

 

Elimination of partial excise tax gross-up in new agreements.  The Company will provide a payment adjustment if, due to excise taxes imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the executive’s net after-tax benefits are less than intended under the cash severance component described above. The Compensation Committee has approved the elimination of the partial excise tax gross-up provisions in all prospective executive officer employment agreements.

 

Recoupment of Awards and Incentive Payments

 

In any case where there has been an allegation of fraud or misconduct, the Board of Directors would investigate and carefully review the facts and circumstances of the alleged misconduct before determining the appropriate course of action. If, after completing its investigation, the Board were to determine that an employee or officer did engage in fraudulent behavior or misconduct, the Board would take appropriate action, which could include, among other things, termination of employment, institution of legal proceedings against the wrongdoer, or bringing the

misconduct to the attention of the proper authorities. If the misconduct results in a material restatement of the Company’s financial results, then the Board, in addition to the above remedies, may also seek repayment of any bonus received for the period restated, seek repayment of gains realized as a result of exercising stock options awarded for the period restated, or cancel any outstanding stock options or other equity or incentive compensation.

 

The Company also incorporates restrictive covenants (prohibiting working for competitors for a period following separation from employment and disclosure of confidential or proprietary information) into the executive employment agreements, the STEP, the SERP, and the ERP. If the Board of Directors determines that a violation of any one of these covenants has occurred, it may, in its discretion, discontinue any future payments and/or take appropriate legal action to recoup amounts paid under these programs.

 

Tax, Accounting, and Regulatory Considerations

 

We consider the affect of tax, accounting and other regulatory requirements in designing and implementing compensation programs, and while these factors may impact plan designs, ultimately decisions reflect the pay strategy of the Company and the program intent.

 

Section 162(m) of the Code imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s chief executive officer or any of the company’s three other most highly compensated executive officers who are employed as of the end of the year. This limitation does not apply to compensation that meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation paid only if the individual’s performance meets pre-established objective goals based on performance criteria approved by shareowners). For 2011, the payout of annual bonuses under the Prime Bonus Plan and long-term performance awards, if any, were intended to satisfy the requirements for deductible compensation.

 

Tools and Analytics

 

The Compensation Committee utilizes various tools and analytics provided by both Pay Governance and our internal management and human resources personnel to execute its duties. These tools and analyses provide internal and external context and perspective to assist the Compensation Committee with its decision making process. The Compensation Committee reviews and considers the following information, as appropriate, when making compensation decisions:

 

 

The information above is reviewed either annually or by special request of the Compensation Committee.

Compensation for Non-Employee Directors

 

The Nominating/Corporate Governance Committee has responsibility for the review and oversight of non-employee director compensation. The role of the Nominating/Corporate Governance Committee in this context is explained in further detail in the “Ethics and Corporate Governance” section of this proxy statement. The compensation of non-employee directors in 2011 is described more fully in the “Board of Directors Compensation and Benefits” section of this proxy statement.

 

The Compensation Committee (“we” or “the committee”) recommends an overall compensation policy to the Board, has direct responsibility for matters relating to compensation of the executive officers, advises the Board regarding management succession, and administers the Company’s equity compensation plans and deferred compensation plans. Management has the primary responsibility for the Company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the Compensation Discussion and Analysis section of this proxy statement. Based on that review, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for filing with the Securities and Exchange Commission.

 

Compensation Committee

 

William R. Newlin, Chair

Ronald M. DeFeo

Philip A. Dur

William J. Harvey

Lawrence W. Stranghoener

Steven H. Wunning

 

During 2011, the Compensation Committee directed our management to work with Pay Governance, its compensation consultant, to conduct a risk assessment of all of our compensation policies and practices to ensure that they do not foster risk taking above the level of risk associated with our business model. Based upon that review and a review by management of the Company’s internal controls, the Compensation Committee has concluded that the Company’s compensation programs do not encourage executives or other employees to take inappropriate risks that are reasonably likely to have a material adverse effect on the Company. The Compensation Committee based its conclusion on a variety of factors, including the following specific aspects of the Company’s compensation practices:

 

 

The Executive Compensation Tables show the compensation paid to our CEO, our CFO and the three other most highly compensated executive officers for Fiscal 2011. These individuals are our NEOs for Fiscal 2011.

 

2011 Summary Compensation Table

 

 

 

Notes and Supplemental Tables to the 2011 Summary Compensation Table

 

 

 

 

 

2011 Grants of Plan-Based Awards