DEF 14A
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NOTICE & PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  x                             Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨  

Preliminary Proxy Statement

 

¨  

CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14A-6(E)(2))

 

x  

Definitive Proxy Statement

 

¨  

Definitive Additional Materials

 

¨  

Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

NORTHERN TRUST CORPORATION

(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

 

x  

No fee required

 

¨  

Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

  (1)

Title of each class of securities to which transaction applies:

 

  

 

  (2)

Aggregate number of securities to which transaction applies:

 

  

 

  (3)

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

 

  

 

  (4)

Proposed maximum aggregate value of transaction:

 

  

 

  (5)

Total fee paid:

 

  

 

 

¨  

Fee paid previously with preliminary materials.

 

¨  

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

  (1)

Amount Previously Paid:

 

  

 

  (2)

Form, Schedule or Registration Statement No.:

 

  

 

  (3)

Filing Party:

 

  

 

  (4)

Date Filed:

 

  

 

 

 

 


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LOGO

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

OF NORTHERN TRUST CORPORATION

 

Date:    Tuesday, April 17, 2012
Time:    10:30 a.m., Chicago Time
Place:   

Northern Trust Corporation

50 South LaSalle Street

(northwest corner of LaSalle Street and Monroe Street)

Chicago, Illinois 60603

Purposes:    The purposes of the annual meeting are to:
  

      Elect 11 directors to serve on the board of directors until the 2013 annual meeting of stockholders and until their successors shall have been elected and qualified;

  

      Hold an advisory vote on executive compensation;

  

      Approve the Northern Trust Corporation 2012 Stock Plan;

  

      Ratify the appointment of KPMG LLP as the Corporation’s independent registered public accounting firm for the 2012 fiscal year;

  

      Hold a vote on two stockholder proposals, if properly presented at the annual meeting; and

  

      Transact any other business that may properly come before the annual meeting.

Record Date:    You may vote if you are a stockholder of record on February 22, 2012.
Voting:   

IMPORTANT—PLEASE VOTE PROMPTLY

 

It is important that your shares be represented at the annual meeting. We urge you to vote your shares by telephone or through the Internet as described on your proxy card or your Notice Regarding the Availability of Proxy Materials. You also may vote your shares by attending the annual meeting and voting in person or by completing and returning your proxy card.

March 8, 2012

ROSE A. ELLIS

Corporate Secretary


Table of Contents

TABLE OF CONTENTS

 

INTRODUCTION

     1   

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON APRIL 17, 2012

     1   

COMMON QUESTIONS REGARDING OUR ANNUAL MEETING AND PROXY STATEMENT

     2   

A Notice Regarding the Availability of Proxy Materials

     2   

Electronic Access to the Proxy Materials

     2   

Who May Vote

     2   

Voting Your Proxy

     2   

Revoking Your Proxy

     4   

Voting in Person

     4   

Householding Information

     4   

Quorum and Vote Required for Approval

     4   

Solicitation of Proxies

     5   

ADMITTANCE TO THE ANNUAL MEETING

     6   

ITEM 1—ELECTION OF DIRECTORS

     6   

INFORMATION ABOUT THE NOMINEES FOR DIRECTOR

     7   

BOARD AND BOARD COMMITTEE INFORMATION

     12   

Audit Committee

     12   

Business Risk Committee

     12   

Business Strategy Committee

     13   

Compensation and Benefits Committee

     13   

Corporate Governance Committee

     14   

Executive Committee

     14   

Meetings

     15   

CORPORATE GOVERNANCE

     16   

Director Independence

     16   

Board Leadership Structure

     17   

Risk Oversight

     17   

Stockholder Outreach

     18   

Executive Sessions

     19   

Corporate Governance Guidelines

     19   

Management Development and Succession Planning

     19   

Director Nominations and Qualifications

     19   

Communications with the Board and Independent Directors

     20   

Code of Business Conduct and Ethics

     21   

Related Person Transaction Policy

     21   

Compensation and Benefits Committee Interlocks and Insider Participation

     23   

SECURITY OWNERSHIP OF THE BOARD AND MANAGEMENT

     24   

Section 16(a) Beneficial Ownership Reporting Compliance

     25   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     26   

EXECUTIVE COMPENSATION

     27   

Compensation and Benefits Committee Report

     27   

 

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COMPENSATION DISCUSSION AND ANALYSIS

     28   

Executive Summary

     28   

2011 Advisory Vote on Executive Compensation and Federal Reserve Review

     30   

2011 Compensation Decisions for Named Executive Officers

     30   

Philosophy and Approach to Executive Compensation

     35   

Determining Awards

     40   

Elements of Northern Trust’s Executive Compensation Program

     42   

SUMMARY COMPENSATION TABLE

     55   

GRANTS OF PLAN-BASED AWARDS

     58   

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     60   

OPTION EXERCISES AND STOCK VESTED

     63   

PENSION BENEFITS

     64   

Pension Plan and Supplemental Pension Plan

     64   

NON-QUALIFIED DEFERRED COMPENSATION

     68   

Deferred Compensation Plan

     69   

Supplemental TIP

     71   

POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT OR A CHANGE IN CONTROL OF THE CORPORATION

     72   

Employment Security Agreements

     72   

Equity Compensation Plans and Agreements

     76   

DIRECTOR COMPENSATION

     78   

General

     78   

2011 Director Compensation

     79   

2012 Director Compensation

     80   

Deferral of Compensation

     80   

ITEM 2— ADVISORY VOTE ON EXECUTIVE COMPENSATION

     81   

ITEM 3—APPROVAL OF THE NORTHERN TRUST CORPORATION 2012 STOCK PLAN

     83   

Overview

     83   

Why You Should Vote for the Adoption of the 2012 Plan

     83   

Description of the 2012 Plan

     84   

New Plan Benefits

     88   

Summary of Federal Income Tax Consequences

     88   

Information About Other Equity Compensation Plans

     90   

Vote Required for Approval

     90   

AUDIT COMMITTEE REPORT

     91   

ITEM 4—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     93   

Appointment of Independent Registered Public Accounting Firm

     93   

Fees of Independent Registered Public Accounting Firm

     93   

Pre-Approval Policies and Procedures of the Audit Committee

     94   

ITEM  5—STOCKHOLDER PROPOSAL REGARDING ACCELERATED VESTING OF EQUITY AWARDS IN A CHANGE IN CONTROL SITUATION

     95   

 

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ITEM 6—STOCKHOLDER PROPOSAL REGARDING INDEPENDENCE OF THE BOARD CHAIRMAN

     98   

OTHER BUSINESS

     100   

STOCKHOLDER PROPOSALS FOR 2013 ANNUAL MEETING

     101   

EXHIBIT 1—NORTHERN TRUST CORPORATION CATEGORICAL STANDARDS OF DIRECTOR INDEPENDENCE

     102   

APPENDIX A—NORTHERN TRUST CORPORATION 2012 STOCK PLAN

     A-1   

 

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NORTHERN TRUST CORPORATION

50 South LaSalle Street

Chicago, Illinois 60603

March 8, 2012

PROXY STATEMENT

INTRODUCTION

Our 2012 annual meeting of stockholders will be held on Tuesday, April 17, 2012 at 10:30 a.m., Chicago time, at the office of Northern Trust Corporation (the “Corporation” or “Northern Trust”) located at 50 South LaSalle Street (northwest corner of LaSalle Street and Monroe Street) in Chicago, Illinois. We invite you to attend the annual meeting and vote your shares directly.

You do not need to attend the annual meeting to vote your shares. Instead, you may vote your shares by telephone or through the Internet, or you may complete, sign, date, and return your proxy card (a postage-paid envelope is included with your proxy materials if you received a full set of the proxy materials). Instructions for voting by telephone or through the Internet can be found on your proxy card or your notice regarding the availability of proxy materials.

The Corporation’s board of directors is soliciting your proxy to encourage your participation in the voting at the annual meeting. This proxy statement provides you with information about each proposal and other matters that you may find useful in voting your shares.

On March 8, 2012, we began mailing or otherwise making available our proxy materials to all stockholders entitled to vote at the annual meeting. Our proxy materials include our 2011 annual report to stockholders, which contains detailed information about the Corporation’s activities and financial performance in 2011.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON APRIL 17, 2012

This proxy statement, the 2011 annual report to stockholders, and a link to the means to vote by Internet or telephone are available at www.proxyvote.com.

 

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COMMON QUESTIONS REGARDING OUR ANNUAL MEETING

AND PROXY STATEMENT

A Notice Regarding the Availability of Proxy Materials

Pursuant to the rules recently adopted by the Securities and Exchange Commission (the “SEC”), for some of our stockholders we are providing access to our proxy materials over the Internet. The rules permit us to send a Notice Regarding the Availability of Proxy Materials (the “Notice”) to some or all of our stockholders of record and beneficial owners. All stockholders have the ability to access the proxy materials on the website referred to in the Notice, www.proxyvote.com, or to request a printed set of proxy materials on this site or by calling toll-free 1-800-690-6903. Complete instructions for accessing the proxy materials over the Internet or requesting a printed copy may be found in the Notice. In addition, stockholders may request to receive all future proxy materials in printed form by mail or electronically by e-mail on the website above or when voting electronically.

Electronic Access to the Proxy Materials

The Notice provides instructions regarding how to view our proxy materials for the annual meeting on the Internet and how to instruct us to send our future proxy materials to you electronically by e-mail.

Choosing to receive your future proxy materials by e-mail will save us the cost of printing and mailing documents to you and will reduce the impact of our annual stockholders’ meetings on the environment. If you choose to receive future proxy materials by e-mail, you will receive an e-mail next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by e-mail will remain in effect until you terminate it.

Who May Vote

Record holders of the Corporation’s common stock at the close of business on February 22, 2012 may vote at the annual meeting. On that date, the Corporation had 241,231,673 shares of common stock outstanding. The shares of common stock held in the Corporation’s treasury will not be voted.

You are entitled to one vote for each share of common stock that you owned of record at the close of business on February 22, 2012. The proxy card or Notice, as applicable, indicates the number of shares you are entitled to vote at the annual meeting.

Voting Your Proxy

Whether or not you plan to attend the annual meeting, we urge you to vote your shares promptly.

If you are a “stockholder of record” (that is, you hold your shares of the Corporation’s common stock in your own name), you may vote your shares by proxy using any of the following methods:

 

   

Using the Internet site listed on the Notice or the proxy card;

 

   

Calling the toll-free telephone number listed on the proxy card (Notice recipients should first visit the Internet site listed on the Notice before voting by telephone); or

 

   

Completing, signing, dating, and returning your proxy card.

 

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The telephone and Internet voting procedures set forth on the Notice and the proxy card are designed to authenticate stockholders’ identities, to allow stockholders to provide their voting instructions, and to confirm that their instructions have been properly recorded. If you vote by telephone or through the Internet, you should not return your proxy card.

If you are a “beneficial owner,” also known as a “street name” holder (that is, you hold your shares of the Corporation’s common stock through a broker, bank, or other nominee), you will receive from the record holder, in the form of a Notice or otherwise, voting instructions (including instructions, if any, on how to vote by telephone or through the Internet) that you must follow in order to have your shares voted at the annual meeting. Please note that the rules that guide how brokers vote your stock have changed. Brokers may no longer vote your shares on the election of directors or certain executive compensation matters without your specific instructions. Consequently, it is important that you communicate your voting instructions so your vote can be counted by using any of the following methods:

 

   

Using the Internet site listed on the Voting Instruction Form;

 

   

Calling the toll-free telephone number listed on the Voting Instruction Form (note that form of a Notice recipients should first visit the Internet site listed on the Voting Instruction Form before voting by telephone); or

 

   

Completing, signing, dating, and returning your Voting Instruction Form.

If you own shares of common stock as a participant in The Northern Trust Company Thrift-Incentive Plan (“TIP”), or as a participant in any other employee benefit plan of the Corporation, you will receive a voting instruction card that covers the shares credited to each of your plan accounts.

Whether you vote by Internet, telephone or mail, your shares will be voted in accordance with your instructions. If you sign, date, and return your proxy card without indicating how you want to vote your shares, the proxy holders will vote your shares in accordance with the following recommendations of the board of directors:

 

Item 1

      FOR the election of each nominee for director;

Item 2

      FOR the approval, by an advisory vote, of the 2011 compensation of the Corporation’s named executive officers, as disclosed in this proxy statement pursuant to the compensation disclosure rules of the SEC;

Item 3

      FOR the approval of the Northern Trust Corporation 2012 Stock Plan;

Item 4

      FOR the ratification of the appointment of KPMG LLP as the Corporation’s independent registered public accounting firm for the fiscal year ending December 31, 2012;

Item 5

      AGAINST the stockholder proposal regarding accelerated vesting of equity awards in a change in control situation, if such proposal is properly presented at the annual meeting; and

Item 6

      AGAINST the stockholder proposal regarding independence of the board chairman, if such proposal is properly presented at the annual meeting.

The proxy holders are authorized to vote as they shall determine in their sole discretion on any other business that may properly come before the annual meeting.

 

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Revoking Your Proxy

You may revoke your proxy at any time before it is voted at the annual meeting by:

 

   

Sending a written notice of revocation to the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement;

 

   

Submitting another signed proxy card with a later date;

 

   

Voting by telephone or through the Internet at a later date; or

 

   

Attending the annual meeting and voting in person.

Voting in Person

You may come to the annual meeting and vote your shares in person by obtaining and submitting a ballot that will be provided at the meeting. However, if your shares are held by a broker, bank, or other nominee in street name, to be able to vote at the meeting you must obtain a proxy, executed in your favor, from the record holder of your shares, indicating that you were the beneficial owner of the shares on February 22, 2012, the record date for voting.

If you need directions to the annual meeting, please call (312) 630-6000.

Householding Information

We are delivering only one annual report and proxy statement (or, as applicable, the Notice) to record stockholders who share the same address unless they have notified us that they wish to continue receiving multiple copies. This practice, known as “householding,” reduces duplicate mailings, saves printing and postage costs as well as natural resources and will not affect dividend check mailings. If you wish to receive separate copies of future proxy materials, please contact Broadridge toll free at 1-800-542-1061, or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, NY 11717. Stockholders who wish to receive a separate set of proxy materials now should contact Broadridge at the same phone number or mailing address and the materials will be delivered to you promptly upon your request.

Quorum and Vote Required for Approval

A quorum of stockholders is necessary to hold a valid meeting. A quorum will exist if a majority of the outstanding shares entitled to vote at the meeting is present in person or by proxy at the annual meeting. Abstentions and broker non-votes, if any, will be counted as present for purposes of establishing a quorum. A “broker non-vote” will occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions from the beneficial owner. Please note that the rules that guide how brokers vote your stock have changed. Brokers may no longer vote your shares on the election of directors or certain executive compensation matters without your specific instructions. Please return your proxy card or vote by telephone or through the Internet so your vote can be counted. Inspectors of election appointed for the annual meeting will tabulate all votes cast in person or by proxy at the annual meeting. In the event a quorum is not present at the annual meeting, we expect that the annual meeting will be adjourned or postponed to solicit additional proxies.

 

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The following table indicates the vote required for approval of each item to be presented to the stockholders at the annual meeting and the effect of “withhold” votes, abstentions, and broker non-votes.

 

Item   Required Vote   Effect of “Withhold” Votes,
Abstentions, Broker Non-Votes
Item 1—Election of Directors   Affirmative vote of a majority of the shares of common stock present and voting.  

  “Withhold” votes will have the effect of a vote AGAINST the election of directors.

 

  Broker non-votes will have no effect on the voting for the election of directors.

Item 2—Advisory Vote on Executive Compensation   Affirmative vote of a majority of the shares of common stock present and voting.  

  Abstentions will have the effect of a vote AGAINST this proposal.

 

  Broker non-votes will have no effect on the voting for this item.

Item 3—Approval of the Northern Trust Corporation 2012 Stock Plan   Affirmative vote of a majority of the shares of common stock present and voting.  

  Abstentions will have the effect of a vote AGAINST approval.

 

  Broker non-votes will have no effect on the voting for this item.

Item 4—Ratification of the appointment of KPMG LLP as the Corporation’s independent registered public accounting firm for fiscal year 2012   Affirmative vote of a majority of the shares of common stock present and voting.  

  Abstentions will have the effect of a vote AGAINST ratification.

 

  Broker non-votes will have no effect on the voting for this item.

Items 5—6—Stockholder Proposals   Affirmative vote of a majority of the shares of common stock present and voting.  

  Abstentions will have the effect of a vote AGAINST ratification.

 

  Broker non-votes will have no effect on the voting for this item.

Solicitation of Proxies

The Corporation will pay all costs of soliciting proxies. The Corporation has retained Georgeson Inc. to assist with the solicitation of proxies for a fee of $24,500, plus reimbursement of reasonable out-of-pocket expenses. In addition, we may also use our officers and employees, at no additional compensation, to solicit proxies either personally or by telephone, Internet, letter, or facsimile.

 

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ADMITTANCE TO THE ANNUAL MEETING

Stockholders as of the record date, or their duly appointed proxies, may attend our annual meeting on April 17, 2012. Registration will begin at 9:30 a.m., and seating will begin at 10:00 a.m. If you attend, please note that you will need to bring with you an admission ticket (located on the top portion of the rear side of the proxy card) or proof of ownership of the Corporation’s common stock to enter the meeting. If you arrive at the meeting without an admission ticket, we will admit you only if we are able to verify that you are a stockholder of the Corporation. Also, you may be asked to present valid picture identification, such as a driver’s license or passport. For safety and security reasons, cameras and recording devices will not be permitted in the meeting.

If you are receiving a full set paper copy of our proxy materials and your shares of common stock are held by a broker, bank, or other nominee in street name, your admission ticket is the left side of your voting instruction form. If you do not bring the left side of your voting instruction form, you will need proof of ownership to be admitted to the meeting. A recent brokerage statement or letter from a bank or broker is an example of proof of ownership.

If you are receiving the Notice without a full set paper copy of our proxy materials, your Notice will serve as your admission ticket.

ITEM 1—ELECTION OF DIRECTORS

Stockholders will be asked to elect 11 directors at this year’s annual meeting. Set forth below is detailed information with respect to the 11 nominees, all of whom are currently serving as directors of the Corporation and its principal subsidiary, The Northern Trust Company (the “Bank”). Robert C. McCormack, a director of the Corporation since 2000, and Enrique J. Sosa, a director of the Corporation since 2007, will not stand for reelection as directors at the annual meeting.

Each of the 11 director nominees has consented to serve as a director if elected at this year’s annual meeting. Each nominee elected as a director will serve until the next annual meeting and until his or her successor has been elected and qualified. If any nominee is unable to serve as a director at the time of the annual meeting, your proxy may be voted for the election of another nominee proposed by the board or the board may reduce the number of directors to be elected at the annual meeting.

Under the majority voting policy as set forth in the Corporation’s by-laws, a nominee for director in an uncontested election (such as this year’s election where the only nominees are those recommended by the board of directors) must receive the affirmative vote of a majority of the votes present and voting at a meeting of stockholders. In contested elections, the affirmative vote of a plurality of the votes present and voting will be required to elect a director. The Corporate Governance Guidelines require an incumbent director who fails to receive the affirmative vote of a majority of the votes present and voting in an uncontested election at a meeting of stockholders to submit his or her resignation, with such resignation to be considered by the members of the Corporate Governance Committee and the board other than such incumbent director. In such event, the board of directors will act to accept or reject the incumbent director’s resignation no later than 90 days following the date of the stockholders’ meeting.

The board of directors unanimously recommends that you vote FOR the election of each nominee.

 

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INFORMATION ABOUT THE NOMINEES FOR DIRECTOR

The following information about the nominees for election to the board of directors of the Corporation at the 2012 annual meeting of stockholders is as of December 31, 2011, unless otherwise indicated.

 

LOGO

  

LINDA WALKER BYNOE, Director since 2006, Age 59

 

President and Chief Executive Officer, Telemat Ltd. since January 1995 (Project management and consulting firm).

 

Ms. Bynoe is a director of Anixter International Inc., Prudential Retail Mutual Funds, and Simon Property Group, Inc. and a trustee of Equity Residential.

 

The board of directors concluded that Ms. Bynoe should serve as a director based on her diverse consulting and investment experience, her expertise in public accounting, corporate governance, managing a private equity investment portfolio, and strategy development, and her experience as a director of financial services and other complex global corporations.

LOGO

  

NICHOLAS D. CHABRAJA, Director since 2007, Age 69

 

Retired Chairman and Chief Executive Officer, General Dynamics Corporation (Worldwide defense, aerospace, and other technology products manufacturer). Mr. Chabraja served as Chief Executive Officer of General Dynamics Corporation from June 1997 through July 2009 and as Chairman from June 1997 to May 2010.

 

Mr. Chabraja is a director of General Dynamics Corporation and the non-executive chairman of Tower International, Inc. He is a former director of Ceridian Corporation.

 

The board of directors concluded that Mr. Chabraja should serve as a director based on his experience leading a complex global corporation and risk oversight experience as Chairman and Chief Executive Officer of General Dynamics Corporation.

 

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LOGO

  

SUSAN CROWN, Director since 1997, Age 53

 

Vice President, Henry Crown and Company since 1984 (Worldwide company with diversified manufacturing operations, real estate, and securities) and Chairman, SCE since 2008 (Philanthropic foundation).

 

Ms. Crown is a director of Illinois Tool Works Inc. and Vice Chair of the Board of Trustees of Rush University Medical Center in Chicago. Ms. Crown is a former trustee of Yale University.

 

The board of directors concluded that Ms. Crown should serve as a director based on her experience at Henry Crown and Company, a firm managing a broad range of investments and manufacturing operations, as well as her leadership and risk oversight experience as a director of Illinois Tool Works Inc. and other organizations. The board considered that Ms. Crown has extensive experience with civic and not-for-profit organizations, having founded a not-for-profit organization, The SCE Foundation, and served on the boards of many similar organizations. The board also considered that Ms. Crown’s current and former positions as a board member on various large organizations, both commercial and not-for-profit, have given Ms. Crown a valuable perspective on many governance and corporate responsibility topics.

LOGO

  

DIPAK C. JAIN, Director since 2004, Age 54

 

Dean of INSEAD since May 2011 (Educational institution). Dean Emeritus of Kellogg School of Management, Northwestern University, from September 2009 to May 2011, Sandy and Morton Goldman Professor in Entrepreneurial Studies and Professor of Marketing since September 2009 and 1994 to July 2001, Dean from July 2001 through August 2009, Associate Dean for Academic Affairs from July 1996 to June 2001 (Educational institution).

 

Mr. Jain is a Visiting Professor of Marketing at WHU-Otto Beisheim Graduate School of Management, Koblenz, Germany; Indian School of Business, Hyderabad, India; Hong Kong University of Science and Technology, Hong Kong; and Recanati Graduate School of Business Administration at Tel Aviv University, Israel (All educational institutions).

 

Mr. Jain is a director of Deere & Company, Reliance Industries Limited, India, and Global Logistics Properties, Singapore. He is a former director of Hartmarx Corporation and Peoples Energy Corporation.

 

The board of directors concluded that Mr. Jain should serve as a director based on his academic experience, his business administration positions both in the United States and abroad, his global consulting experience, including his experience and research in marketing and competitive market analysis, and his experience as a director of other complex global corporations.

 

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LOGO

  

ROBERT W. LANE, Director since November 2009, Age 62

 

Retired Chairman and Chief Executive Officer, Deere & Company (Worldwide provider of agricultural, construction, and forestry equipment and financial services). Mr. Lane served as Chairman of Deere & Company from August 2000 to February 2010 and as Chief Executive Officer from May 2000 through July 2009.

 

Mr. Lane is a director of Bayerische Motoren Werke (BMW) A.G., General Electric Company, and Verizon Communications Inc. He is a former director of Deere & Company.

 

The board of directors concluded that Mr. Lane should serve as a director based on his experience leading a complex global corporation and risk oversight experience as Chairman and Chief Executive Officer of Deere & Company and as a director of other complex global corporations, including his global management experience.

LOGO

  

EDWARD J. MOONEY, Director since 1996, Age 70

 

Retired Délégué General-North America since March 2001, Suez Lyonnaise des Eaux (Worldwide provider of energy, water, waste and communications services); Retired Chairman and Chief Executive Officer, Nalco Chemical Company since March 2000 (Manufacturer of specialized service chemicals acquired by Suez Lyonnaise des Eaux in November 1999).

 

Mr. Mooney is a director of Cabot Microelectronics Corporation, FMC Technologies, Inc., and PolyOne Corporation and the lead director of FMC Corporation. He is a former director of Commonwealth Edison Company (a subsidiary of Exelon Corporation).

 

The board of directors concluded that Mr. Mooney should serve as a director based on his global management and risk oversight experience as Chairman and Chief Executive Officer of Nalco Chemical Company and his experience as a director of other complex global corporations.

 

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LOGO

  

JOHN W. ROWE, Director since 2002, Lead Director since April 2010, Age 66

 

Chairman and Chief Executive Officer, Exelon Corporation (Energy company) from April 2002 to the present and President at various times during and after 2000. Mr. Rowe will retire upon the consummation of Exelon’s acquisition of Constellation Energy Group, Inc.

 

Mr. Rowe is a director of Allstate Corporation and Exelon Corporation. He is also a director of Commonwealth Edison Company and PECO Energy, subsidiaries of Exelon Corporation. Mr. Rowe is a former director of Sunoco Corporation.

 

The board of directors concluded that Mr. Rowe should serve as a director based on his management, regulatory, government relations, and risk oversight experience as Chief Executive Officer at Exelon Corporation and prior to that, at New England Electric System and Central Maine Power Company, and his experience as a director of financial services and other complex corporations.

LOGO

  

MARTIN P. SLARK, Director since 2011, Age 57

 

Vice Chairman and Chief Executive Officer, Molex Incorporated since 2005 and President and Chief Operating Officer from 2001 to 2005 (Manufacturer of electronic, electrical, and fiber optic interconnection products and systems).

 

Mr. Slark is a director of Molex Incorporated, Hub Group, Inc. and Liberty Mutual Insurance Company (not a public company).

 

The board of directors concluded that Mr. Slark should serve as a director based on his experience leading a complex global corporation and risk oversight experience as Vice Chairman and Chief Executive Officer of Molex Incorporated and as a director of other complex global corporations.

 

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LOGO

  

DAVID H. B. SMITH, JR., Director since April 2010, Age 45

 

Executive Vice President, Policy & Legal Affairs and General Counsel, Mutual Fund Directors Forum since November 2005 (Nonprofit membership organization for investment company directors). Previously, Mr. Smith held several positions at the U.S. Securities and Exchange Commission from 1996 to 2005, including Associate Director in the Division of Investment Management.

 

Mr. Smith is a director of Illinois Tool Works Inc. and a trustee of Carleton College.

 

The board of directors concluded that Mr. Smith should serve as a director based on his regulatory and leadership experience in the finance industry gained from his roles at the SEC and the Mutual Fund Directors Forum. The board also considered that Mr. Smith’s interest as a beneficiary of a trust that holds a significant amount of the Corporation’s common stock further aligns his interests with the interests of the Corporation’s stockholders.

LOGO

  

CHARLES A. TRIBBETT III, Director since 2005, Age 56

 

Managing Director, Russell Reynolds Associates since December 1989, Chairman of the firm’s Leadership Assessment and Promotions Board since 2006, and Co-Leader of the firm’s CEO/Succession Planning and Board Services Practice since December 1995 (Major executive recruiting firm that advises and consults with Fortune 500 corporations on matters relating to succession planning, compensation, corporate governance, and recruiting).

 

The board of directors concluded that Mr. Tribbett should serve as a director based on his global leadership consulting experience evaluating and identifying senior management professionals and his leadership experience as a Managing Director of Russell Reynolds Associates.

LOGO

  

FREDERICK H. WADDELL, Director since 2006, Age 58

 

Chairman of the Board since November 2009 and Chief Executive Officer since January 2008 of the Corporation and the Bank, President from February 2006 through September 2011, Chief Operating Officer from February 2006 to January 2008, and Executive Vice President of the Bank from September 1997 to February 2006 and of the Corporation from March 2003 to February 2006.

 

Mr. Waddell is a Class A Director of the Federal Reserve Bank of Chicago.

 

Since joining Northern Trust in 1975, Mr. Waddell has held leadership positions in a variety of the Corporation’s business units. The board concluded that Mr. Waddell should serve as a director based on his experience and ongoing responsibilities with respect to the Corporation’s businesses.

 

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BOARD AND BOARD COMMITTEE INFORMATION

Audit Committee

Current Members: Directors Mooney (Chair), Bynoe, Chabraja, Lane, McCormack, and Smith

Number of Meetings in 2011: Six

Oversight Activities:

 

   

Appoints and evaluates the performance and independence of the Corporation’s independent registered public accounting firm

   

Meets with internal audit representatives; receives and discusses the internal audit program and the results of examinations

   

Meets with the Corporation’s independent registered public accounting firm; reviews and discusses their reports issued with respect to the Corporation’s annual consolidated financial statements and the internal financial control structure and procedures for financial reporting

The board of directors has determined that, in its opinion, all current members of the Corporation’s Audit Committee are “independent” directors, as defined by The NASDAQ Stock Market (“NASDAQ”), and “audit committee financial experts,” as defined by the applicable SEC regulations.

The board of directors of the Corporation has adopted a formal charter, most recently revised in October 2009, that governs the duties and responsibilities of the Audit Committee. The Audit Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

Business Risk Committee

Current Members: Directors Bynoe (Chair), Mooney, Slark, Smith, and Sosa

Number of Meetings in 2011: Five

Oversight Activities:

 

   

Reviews the risks inherent in the businesses of the Corporation and its subsidiaries in the following categories and the controls and mitigants for such risks: credit risk, market and liquidity risk, fiduciary risk, operational risk, and the regulatory component of compliance risk

   

Reviews the process by which risk-based capital requirements are determined, including the internal capital adequacy assessment process for the Corporation and its subsidiaries

The board of directors has determined that, in its opinion, all current members of the Corporation’s Business Risk Committee are “independent” directors as defined by NASDAQ. The board of directors of the Corporation has adopted a formal charter, most recently revised in January 2010, that governs the duties and responsibilities of the Business Risk Committee. The Business Risk Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

 

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Business Strategy Committee

Current Members: Directors Jain (Chair), Lane, Slark, and Tribbett

Number of Meetings in 2011: Four

Oversight Activities:

 

   

Reviews the strategic direction of the Corporation

   

Reviews the strategic initiatives of the business units of the Corporation and its subsidiaries

   

Reviews the management of strategic risk for the Corporation and its subsidiaries

   

Ensures the integration of corporate social responsibility principles related to environmental and social practices into the strategic direction and strategic initiatives of the Corporation and its business units and the governance of those practices

The board of directors has determined that, in its opinion, all current members of the Corporation’s Business Strategy Committee are “independent” directors as defined by NASDAQ.

The board of directors of the Corporation has adopted a formal charter, most recently revised in October 2010, that governs the duties and responsibilities of the Business Strategy Committee. The Business Strategy Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

Compensation and Benefits Committee

Current Members: Directors Chabraja (Chair), Crown, Jain, McCormack, Rowe, and Sosa

Number of Meetings in 2011: Five

Oversight Activities:

 

   

Oversees the development and operation of the Corporation’s compensation policies, systems, and related control processes

   

Reviews and approves the overall goals and purposes of the Corporation’s compensation programs including its incentive programs so that they achieve an appropriate balance and are consistent with safety and soundness principles (including appropriate risk considerations)

   

Meets with internal human resources representatives and outside consultants and reviews compensation policy, executive compensation levels, and emerging market trends and developments regarding compensation practices

   

Recommends stock and cash benefit and incentive plans, programs, and payments

   

Administers certain stock and cash benefit and incentive plans and programs

   

Oversees management development and succession planning

   

Reviews, with input of risk management personnel, management’s assessment of the effectiveness of the Corporation’s incentive compensation arrangements and practices to assess the extent to which such arrangements and practices discourage inappropriate risk-taking behavior by participants and are consistent with the Corporation’s safety and soundness

 

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The board of directors has determined that, in its opinion, all current members of the Corporation’s Compensation and Benefits Committee are “independent” directors as defined by NASDAQ.

The board of directors of the Corporation has adopted a formal charter, most recently revised in February 2012, that governs the duties and responsibilities of the Compensation and Benefits Committee. The Compensation and Benefits Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

The Committee retained Aon Hewitt (formerly Hewitt Associates, LLC) (“Aon Hewitt”), a nationally recognized compensation and benefits consulting firm, to provide compensation and benefits advice, including information regarding competitive market data, relevant legal and regulatory requirements, and corporate best practices in the compensation and benefits area. Representatives of Aon Hewitt attended all meetings of the Committee at which 2011 executive compensation decisions were made.

For information about the role of the Committee, compensation consultants, and management in the consideration and determination of executive and director compensation, please refer to the “Compensation Discussion and Analysis—Determining Awards” presented elsewhere in this proxy statement.

Corporate Governance Committee

Current Members: Directors Rowe (Chair), Crown, Mooney, and Tribbett

Number of Meetings in 2011: Five

Oversight Activities:

 

   

Evaluates and recommends candidates for nomination to the board of directors

   

Recommends structure and membership of board committees

   

Considers candidates for the board recommended by stockholders

The board of directors has determined that, in its opinion, all current members of the Corporation’s Corporate Governance Committee are “independent” directors as defined by NASDAQ.

The board of directors of the Corporation has adopted a formal charter, most recently revised in February 2010, that governs the duties and responsibilities of the Corporate Governance Committee. The Corporate Governance Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

Executive Committee

Current Members: Directors Waddell (Chair), Bynoe, Chabraja, Jain, Mooney, and Rowe

Number of Meetings in 2011: None

Oversight Activities:

 

   

Empowered to act for the board of directors, to the full extent permitted by law, between meetings of the board of directors

 

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The board of directors has determined that, in its opinion, all current members of the Corporation’s Executive Committee, other than Mr. Waddell, are “independent” directors as defined by NASDAQ.

The board of directors of the Corporation adopted a formal charter in November 2006 that governs the duties and responsibilities of the Executive Committee. The Executive Committee charter is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

Meetings

The Corporation’s board of directors held seven meetings during 2011. All persons who were directors during 2011 attended at least 75% of these meetings and meetings of committees on which they served. The Corporation has a Corporate Governance Guideline that states that all directors are expected to attend the annual meeting of the Corporation’s stockholders. All of the directors attended the 2011 annual meeting of stockholders.

 

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CORPORATE GOVERNANCE

Director Independence

The board of directors has determined that, in its opinion, each person who served as a director of the Corporation in 2011 (including William D. Smithburg who retired from the board of directors on April 19, 2011) and each director nominee for 2012 (other than Frederick H. Waddell, the Chairman and Chief Executive Officer of the Corporation and the Bank) is an “independent” director as defined under applicable NASDAQ rules. The board of directors has adopted categorical standards to assist it in making the annual determinations of independence. These categorical standards are attached as Exhibit 1 to this proxy statement, and a copy of the categorical standards is available on the Corporation’s website at www.northerntrust.com. In making its determinations of independence, the board considered the criteria for independence set forth in stock exchange corporate governance rules, the categorical standards of independence described above, and all relevant facts and circumstances to ascertain whether there was any relationship between a director or director nominee and the Corporation that, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director, or any material relationship with the Corporation (either directly or as a partner, stockholder, or officer of an organization that has a relationship with the Corporation). The board also considered any transactions, relationships, or arrangements between the Corporation and each director of the Corporation in 2011 (including Mr. Smithburg) or director nominee for 2012 that constitute related party transactions under the RPT Policy described in the “Related Person Transaction Policy” section below. For 2011, the board considered the following categories and types of transactions, relationships, and arrangements:

 

   

The Corporation’s payment, directly, and indirectly through a property manager, of less than the greater of $1 million or 2% of the consolidated gross annual revenues of the other entity during the most recent completed fiscal year for electric utility services provided by a public utility (at rates or charges fixed in conformity with law or governmental authority) owned by a corporation, at which a director served as an executive officer and director during 2011 (Rowe); and

 

   

The Corporation’s payment of net underwriting discounts to, and receipt of net referral fees from, on non-preferential terms in the ordinary course of business, an entity at which a director’s immediate family member was an employee, in each case less than the greater of $1 million or 2% of the consolidated gross annual revenue of the recipient entity during the most recent completed fiscal year (Bynoe).

The board of directors also considered the following types of services provided by the Corporation or its subsidiaries in the ordinary course of business to directors of the Corporation in 2011 (including Mr. Smithburg) and their “related persons” as described in the “Related Person Transaction Policy” section below (as indicated by the name of the applicable current or former director or director nominee):

 

Trust and related services   Chabraja, Lane, McCormack, Mooney, Rowe, Slark, Smith, Smithburg
Credit services and other banking services (e.g., deposits, checking, treasury management)   Bynoe, Chabraja, Crown, Jain, Lane, McCormack, Mooney, Rowe, Slark, Smith, Smithburg, Sosa
Asset servicing, asset management, securities lending, foreign exchange, and related services   Bynoe, Chabraja, Crown, Lane, McCormack, Mooney, Rowe, Slark, Smith, Smithburg, Sosa
Qualified retirement plan services   Chabraja, Rowe
Brokerage services   Bynoe, Chabraja, Crown, Jain, Lane, McCormack, Rowe, Smith, Smithburg

 

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Board Leadership Structure

The current leadership structure of the board of directors includes the Chairman and CEO and a Lead Director appointed annually by the Corporation’s independent directors.

The board of directors believes that combining the positions of Chairman and CEO is the most appropriate for the Corporation at this time. Having one person as Chairman and CEO provides unified leadership and direction to the Corporation and strengthens the ability of the CEO to develop and implement strategic initiatives and respond efficiently in crisis situations. The board also believes the combination of the Chairman and CEO positions is appropriate in light of the substantial independent oversight provided by the board of directors.

The board of directors believes that leadership of the independent directors is important. Accordingly, the Corporation’s independent directors designate annually a Lead Director. Mr. Rowe currently serves as the Corporation’s Lead Director.

The Lead Director’s duties are described in the Corporation’s Corporate Governance Guidelines and include, among other things, (a) the authority to call at any time a special meeting of the board or a special executive session of the independent directors, (b) presiding at all regular and any special meetings of the board at which the Chairman is not present, including all regular and any special executive sessions of the independent directors, (c) agreeing annually with the Chairman and CEO on the number and length of regular board meetings, (d) the authority to add items to the agenda of any regular or special meeting of the board, (e) preparing the agenda for all regular and any special executive sessions of the independent directors, (f) presiding at all regular and any special executive sessions of the independent directors, and (g) conducting, by means of an interview with each independent director, the independent directors’ annual evaluation of the Chairman and CEO’s performance and then communicating the results to the Compensation and Benefits Committee and to the Chairman and CEO. A copy of the Corporate Governance Guidelines is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

In addition to the Lead Director, the board of directors has a substantial majority of independent directors. Ten out of eleven director nominees are “independent” directors as defined under applicable NASDAQ rules. The Audit Committee, Business Risk Committee, Business Strategy Committee, Compensation and Benefits Committee, and Corporate Governance Committee are composed solely of independent directors, and the Executive Committee, with the exception of Mr. Waddell, is composed of independent directors. Consequently, independent directors directly oversee critical matters and appropriately monitor the Chairman and CEO.

Risk Oversight

The board of directors conducts its risk oversight function through the Audit, Business Risk, Business Strategy, and Compensation and Benefits Committees.

The Audit Committee conducts the Corporation’s management of risks relating to financial reporting and the legal component of compliance risk. The Business Strategy Committee oversees the Corporation’s management of strategic risk for the Corporation and its subsidiaries.

 

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The Business Risk Committee conducts the Corporation’s management of risks relating to the business of the Corporation and its subsidiaries in the following categories: credit risk, market and liquidity risk, fiduciary risk, operational risk, and the regulatory component of compliance risk. The Business Risk Committee has approved a corporate risk appetite statement articulating the Corporation’s expectation that risk is consciously considered as part of strategic decisions and in day-to-day activities. The Corporation’s business units are expected to manage business activities consistent with the corporate risk appetite statement. The Business Risk Committee also reviews and approves the framework by which risk based capital requirements are determined, including the capital adequacy assessment process for the Corporation and its subsidiaries. The entire board of directors reviews the level and adequacy of capital of the Corporation and its subsidiaries. For a further description of the risk management policies and practices of the Corporation’s management, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” in the Corporation’s 2011 Annual Report to Stockholders.

The Compensation and Benefits Committee, at least annually, conducts a review, with appropriate input of risk management personnel, of management’s assessment of the effectiveness of the Corporation’s incentive compensation arrangements and practices to assess the extent to which such arrangements and practices discourage inappropriate risk-taking behavior by participants and are consistent with the Corporation’s safety and soundness.

The charters for the Audit, Business Risk, Business Strategy, and Compensation and Benefits Committees provide that the committees may meet with the individuals who supervise day-to-day risk management responsibilities of the Corporation and other members of management, consultants or advisors, as each committee deems appropriate.

The Audit, Business Risk, Business Strategy, and Compensation and Benefits Committees consist solely of independent directors.

Stockholder Outreach

The Corporation recognizes the importance of stockholder communications to help our investors understand our performance and strategies and to allow our stockholders to express their views on issues important to the Corporation. In light thereof and in connection with the results of our 2011 advisory vote on executive compensation, during the fourth quarter of 2011, we reached out to some of our institutional stockholders to invite comments on governance issues, executive compensation, and other matters. The board of directors considered our stockholders’ views when contemplating revisions, if any, to be made to the Corporation’s policies and practices. In particular, the Compensation and Benefits Committee carefully considered stockholder views when devising the Corporation’s 2012 executive compensation program and 2012 executives’ compensation packages. Refer to the “Compensation Discussion and Analysis” section included elsewhere in this proxy statement for a further discussion of the 2012 executive compensation updates.

In addition, during the first quarter of 2012, the Corporation reached out to two stockholders regarding their request to include stockholder proposals in this proxy statement. Through our engagements with the stockholders, the Corporation was able to better understand the stockholders’ views regarding our policies and procedures. The Corporation carefully considered recommendations made by the stockholders during our discussions and decided to revise certain of our corporate governance policies and procedures and public disclosure thereof. As a result, both stockholders withdrew their proposals.

 

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Executive Sessions

The independent directors of the Corporation met in executive sessions separate from management six times during 2011. The Lead Director or, in his or her absence, another independent director designated by the Lead Director presides at executive sessions of the independent directors.

Corporate Governance Guidelines

The Corporation has had Corporate Governance Guidelines in place since May 2000. These guidelines were most recently revised in February 2010. The Corporate Governance Committee is responsible for reviewing and reassessing, at least annually, the adequacy of the Corporate Governance Guidelines and recommending any changes to the board of directors for its approval. The Corporate Governance Guidelines embody many of the Corporation’s long-standing practices and incorporate new policies and procedures that strengthen its commitment to corporate governance best practices. A copy of the Corporate Governance Guidelines is available on the Corporation’s website at www.northerntrust.com and available in print to any stockholder who requests it in writing from the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement.

Management Development and Succession Planning

The Compensation and Benefits Committee oversees executive management and succession planning. Pursuant to the Corporate Governance Guidelines and the charter for the Compensation and Benefits Committee, the Compensation and Benefits Committee conducts an annual management development and succession planning review. All of the Corporation’s directors are invited to and typically all participate in this review. Following the review, the Compensation and Benefits Committee makes recommendations concerning management development and succession planning.

In connection with setting the compensation of the Corporation’s Chairman and CEO, as more fully described below in “Compensation Discussion and Analysis,” the Compensation and Benefits Committee and the board of directors review the performance of the Chairman and CEO in light of the Chairman and CEO’s responsibilities to the Corporation, including the development of short-term and long-term strategic plans, goals and objectives, the development of an effective senior management team, positioning of the Corporation for current and future success, and effective communications with all of the Corporation’s constituencies. These criteria, among others, would also be considered by the board of directors in evaluating any successor Chairman and CEO candidates. This management review process also includes a review of other senior employees of the Corporation, with a focus on developing internal candidates for advancement within the Corporation.

In the event of the unexpected death, incapacity, or resignation of the Chairman and CEO, the charter for the Corporate Governance Committee provides that the Corporate Governance Committee will discuss and make a recommendation to the board of directors, after consultation with the Chairman of the Compensation and Benefits Committee, for an appropriate successor. The board of directors also has adopted a Business Continuity Plan that, among other things, delineates a process for appointing an interim Chairman and CEO in the event the Chairman and CEO becomes incapacitated.

Director Nominations and Qualifications

The Corporate Governance Committee is responsible for considering, evaluating, and recommending candidates for director. The Committee will consider persons nominated by stockholders in accordance with the nomination procedures specified in the Corporation’s by-laws or

 

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otherwise recommended by stockholders. The Corporation’s by-laws provide that stockholders may propose director nominations only if they give timely written notice, directed to the attention of the Corporation’s Corporate Secretary at the address indicated on the first page of this proxy statement, not less than 120 days prior to the anniversary date of the prior year’s annual meeting. The notice must contain the information required by the by-laws. Stockholders may recommend candidates for director by following the procedures for communicating with directors described below under “Communications with the Board and Independent Directors.”

In its evaluation of director candidates, including persons recommended by stockholders, the Committee considers the factors specified in the Corporation’s Corporate Governance Guidelines to ensure the board has a diversity of perspectives and backgrounds, including the nature of the expertise and experience required for the performance of the duties of a director of a corporation engaged in the Corporation’s business and such matters as: relevant business and industry experience, professional background, age, current employment, community service, and other board service. The Committee also considers the racial, ethnic, and gender diversity of the board in assessing candidates. The Committee seeks to identify, as candidates for director, persons with a reputation for and record of integrity and good business judgment who (i) have experience in positions with a high degree of responsibility and are leaders in the organizations with which they are affiliated, (ii) are free from conflicts of interest that could interfere with a director’s duties to the Corporation and its stockholders, and (iii) are willing and able to make the necessary commitment of time and attention required for effective board service. The Committee also takes into account a candidate’s level of financial literacy, and monitors the mix of skills and experience of the directors in order to assess whether the board has the necessary tools to perform its oversight function effectively. A full listing of the characteristics and qualifications of director candidates considered by the Committee is set forth in the Corporate Governance Guidelines on the Corporation’s website at www.northerntrust.com. Following its evaluation process, the Committee recommends its director nominees to the full board of directors, and the board makes the final determination of director nominees based on its consideration of the Committee’s recommendation and report.

Communications with the Board and Independent Directors

Stockholders and other interested persons may communicate any concerns they may have regarding the Corporation, including recommendations of candidates for director, to the board of directors or to any member of the board of directors by writing to them at the following address:

Northern Trust Corporation

Attention: [Board of Directors]/[Board Member]

c/o Corporate Secretary

Northern Trust Corporation

50 South LaSalle Street, M-9

Chicago, Illinois 60603

Communications directed to the independent directors should be sent to the attention of the Lead Director, c/o the Corporate Secretary, at the address indicated above.

Any stockholder or other interested person who has a particular concern regarding accounting, internal accounting controls, or other audit matters that he or she wishes to bring to the attention of the Audit Committee of the board of directors may communicate those concerns to the Audit Committee or its Chairman, using the address indicated above.

 

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A majority of the independent directors of the Corporation has approved procedures with respect to the receipt, review and processing of, and any response to, written communications sent by stockholders and other interested persons to the board of directors. Any written communication regarding accounting, internal accounting controls, or other matters are processed in accordance with procedures adopted by the Audit Committee.

Code of Business Conduct and Ethics

The board of directors of the Corporation has adopted a Code of Business Conduct and Ethics, most recently revised in July 2011, to:

 

   

Promote honest and ethical conduct, including fair dealing and the ethical handling of actual or apparent conflicts of interest;

 

   

Promote full, fair, accurate, timely, and understandable public disclosure about the Corporation;

 

   

Promote compliance with applicable laws and governmental rules, codes, and regulations wherever the Corporation does business;

 

   

Ensure the protection of the Corporation’s legitimate business interests; and

 

   

Deter wrongdoing.

The code satisfies applicable SEC and NASDAQ requirements and applies to all directors, officers (including the Corporation’s principal executive officer, principal financial officer, principal accounting officer and controller), and employees of the Corporation and its subsidiaries. A copy of the code is available on the Corporation’s website at www.northerntrust.com. The Corporation intends to disclose any amendments to the code, and all waivers from the code for directors and executive officers, by posting such information on its website.

Related Person Transaction Policy

The board of directors of the Corporation, through its Audit Committee, has adopted the “Northern Trust Corporation Policy and Procedures with Respect to Related Person Transactions” (the “RPT Policy”), which was most recently revised in February 2012. The RPT Policy governs the review, approval, or ratification of transactions between the Corporation or its subsidiaries and any related persons. “Related persons” means the Corporation’s directors, nominees for director, executive officers, greater than five percent beneficial owners, members of their immediate family, and any firm, corporation, or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person and all other related persons has a 10% or greater beneficial interest.

 

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The RPT Policy provides that the Corporation may undertake certain pre-approved related person transactions in the ordinary course of business without specific review, approval or ratification, including the following pre-approved transactions:

 

   

An extension of credit to a related person that is made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the lender and does not involve more than the normal risk of collectibility or present other unfavorable features;

 

   

Certain other ordinary course transactions in which the Corporation or its subsidiaries provide products or services to related persons on terms no less favorable to the Corporation and its subsidiaries as those prevailing at the time for comparable services to non-related persons;

 

   

A transaction involving services as a bank depositary of funds, transfer agent, registrar, trustee under a trust indenture, or similar services;

 

   

A transaction where the rates or charges involved in the transaction are determined by competitive bids, or the transaction involves the rendering of services as a common or contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority;

 

   

A transaction with another company at which a related person’s only relationship is as an employee, a limited partner or a beneficial owner of less than 10% of the company’s outstanding common equity, provided the aggregate amount of the transaction does not exceed the greater of $1 million or 2% of the other company’s annual revenues;

 

   

Certain charitable contributions, grants or pledges of grants or contributions to organizations for which a related person serves as an executive officer where the aggregate amount of the transaction does not exceed the lesser of $1 million or 2% of the organization’s total annual receipts;

 

   

Transactions where the related person’s interest arises solely from the ownership of the Corporation’s common stock and all stockholders receive the same benefit on a pro rata basis; and

 

   

Compensation paid to executive officers and directors of the Corporation that is reported in the Corporation’s proxy statement or otherwise approved or recommended by the Compensation and Benefits Committee.

Any other related person transaction involving amounts in excess of $120,000 must be approved or ratified by the Audit Committee or the Audit Committee Chair. In considering related person transactions, the Audit Committee or the Audit Committee Chair shall consider all relevant facts and circumstances and shall approve only those related person transactions that are in, or otherwise not inconsistent with, the best interests of the Corporation and its subsidiaries. The RPT Policy also provides that (a) the Corporation shall not hire an immediate family member of an executive officer or director unless the employment arrangement is reviewed and approved by the Compensation and Benefits Committee and (b) no child, stepchild, or parent of an executive officer shall be hired by the Corporation.

 

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In 2011, certain related persons were clients of, and engaged in the types of transactions identified in the bullet points above with, the Corporation and its subsidiaries. These transactions were undertaken in the ordinary course of business and on terms no less favorable to the Corporation and its subsidiaries as those prevailing at the time for comparable transactions with non-related persons. None of these transactions or any transactions in which the Corporation or its subsidiaries sold or purchased products and services were material to the Corporation or the other entity involved. Any extensions of credit to directors and executive officers of the Corporation were permitted under the provisions of the Sarbanes-Oxley Act of 2002.

Compensation and Benefits Committee Interlocks and Insider Participation

The Compensation and Benefits Committee of the board of directors consists of Directors Chabraja (Chair), Crown, Jain, McCormack, Rowe, and Sosa. None of the members of the Compensation and Benefits Committee is or ever was an officer or employee of the Corporation or any of its subsidiaries. In addition, none of our executive officers served on any compensation committee or any board of directors of another company, of which any of our directors was also an executive officer. For information relating to any transactions between members of the Compensation and Benefits Committee and the Corporation, please refer to “Related Person Transaction Policy” above.

 

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SECURITY OWNERSHIP OF THE BOARD AND MANAGEMENT

The following table shows the beneficial ownership of the Corporation’s common stock for each director and director nominee, each executive officer named in the Summary Compensation Table included elsewhere in this proxy statement, and all directors and executive officers of the Corporation as a group, as of January 1, 2012, unless otherwise indicated.

 

Name   Common Stock (1) and Stock
Units (2) Owned as of January 1, 2012
 

No. of      

Shares      

  Percent of    
Class    
  No. of
Stock Units

Linda Walker Bynoe

  2,000   *       9,735

Nicholas D. Chabraja

  9,224   *       3,326

Susan Crown

  22,400     *     16,689

Steven L. Fradkin

  457,985(3)   *     68,977

Dipak C. Jain

   2,175    *     22,534

Robert W. Lane

   9,425    *       2,834

Robert C. McCormack

  6,090,932(4)     2.53%       8,252

Edward J. Mooney

  0   *     15,401

William L. Morrison

  545,333(3)   *     75,914

Michael G. O’Grady

  0   *     32,234

Stephen N. Potter

  340,035(3)   *     63,876

John W. Rowe

  11,000     *     29,266

Jana R. Schreuder

  316,786(3)   *     59,500

Martin P. Slark

     1,000   *       1,849

David H. B. Smith, Jr.

         17,317(5)(6)   *       1,849

Enrique J. Sosa

    1,000     *     14,978

Charles A. Tribbett III

    1,000     *     20,262

Frederick H. Waddell

     999,324(3)     *   260,893

All directors and executive officers as a group

  10,511,362(3)(4)(5)   4.36%   958,817

 

(1) The information contained in this table was furnished to the Corporation by the individuals named in the table and reflects the SEC’s definition of beneficial ownership. Except as noted below, the nature of beneficial ownership for shares shown in this table is sole voting and/or investment power (including shares as to which spouses and minor children of the individuals covered by this table have such power).

(2) All stock units shown in the table are vested, except for (i) 1,849.19 unvested stock units held by each non-employee director and (ii) the following unvested stock units held by the executive officers named in the Summary Compensation Table on page 55 of this proxy statement (the “named executive officers”): Mr. Fradkin, 58,404 unvested stock units; Mr. Morrison, 68,404 unvested stock units; Mr. O’Grady, 32,234 unvested stock units; Mr. Potter, 58,404 unvested stock units; Ms. Schreuder, 58,404 unvested stock units; Mr. Waddell, 189,764 unvested stock units; and all directors and executive officers as a group, 732,654 unvested stock units. Stock units and performance

 

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stock units held by directors and executive officers do not have voting rights. Stock units held by the non-employee directors include stock units representing (i) deferred cash compensation which, when paid, will be paid out in cash based upon the then current value of the common stock and/or (ii) deferred stock units which will be distributed in stock. See “Director Compensation—Deferral of Compensation” for additional information.

(3) The number of shares shown includes shares issuable pursuant to stock options exercisable within 60 days after January 1, 2012, as follows: Mr. Fradkin, 392,662 shares; Mr. Morrison, 484,777 shares; Mr. Potter, 302,861 shares; Ms. Schreuder, 281,177 shares; Mr. Waddell, 843,301 shares; and all directors and executive officers as a group, 3,812,109 shares.

(4) Robert C. McCormack, as co-trustee with the Bank and certain other individuals, shares voting and investment power for 3,632,763 shares or 1.51% of the outstanding common stock. As co-trustee with the Bank, Mr. McCormack shares voting and investment power for 896,400 shares or 0.37% of the outstanding common stock. With respect to 1,221,176 shares or 0.51% of the outstanding common stock, he serves as co-trustee with the Bank and has sole voting and investment power. In addition, Mr. McCormack, as co-trustee with the Bank, has sole voting and investment power and is a beneficiary with respect to 319,742 shares or 0.13% of the outstanding common stock that are held in a trust.

(5) David H. B. Smith, Jr., as co-trustee with another individual, shares voting and investment power for 500 shares held in a trust.

(6) Mr. Smith is a beneficiary of a trust that holds 1,362,880 shares, but he has no investment or voting power with respect to the shares held in the trust. These shares are not reflected in the table.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation’s directors and executive officers, and beneficial owners of more than 10% of the Corporation’s stock, if any, to file with the SEC initial reports of ownership and reports of changes in ownership of any securities of the Corporation. Copies of these reports must also be provided to the Corporation.

To the Corporation’s knowledge, all the Corporation’s directors, executive officers, and beneficial owners of more than 10% of the Corporation’s stock made on a timely basis all filings required during 2011, except that Ms. Aileen Blake, an executive officer of the Corporation, filed a late Form 4 to report a divestment of 95.25 shares of the Corporation’s common stock held through her TIP account. In making these disclosures, the Corporation relied on copies of the reports provided to the Corporation and written representations from reporting persons that no other reports were required.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table includes information concerning common stock ownership of stockholders who were the beneficial owners of more than 5% of the outstanding shares of the Corporation’s common stock as of January 1, 2012, unless otherwise indicated. The beneficial ownership information for the Bank relates to shares held by trusts and other fiduciary accounts for which the Bank and its affiliates individually acted as sole or co-fiduciary.

 

   
Name and Address   Common Stock
Owned as of January 1, 2012
 
   
           No. of Shares           Percent of Class  
   

The Northern Trust Company (1)

50 South LaSalle Street

Chicago, Illinois 60603

    23,466,135        9.74
   

T. Rowe Price Associates, Inc. (2)

100 E. Pratt Street

Baltimore, Maryland 21202

    19,646,684        8.15

 

(1) As of January 1, 2012, the Bank and its affiliates individually acted as sole or co-fiduciary with respect to trusts and other fiduciary accounts which owned, held or controlled through intermediaries in the aggregate 23,466,135 shares over which the Bank and its affiliates had, directly or indirectly, sole or shared voting power and/or sole or shared investment power, or 9.74% of the outstanding common stock. This aggregate number of shares includes 5,892,043 shares held by certain trusts described in footnotes 4 and 6 to the “Security Ownership of the Board and Management” table presented elsewhere in this proxy statement, or 2.44% of the outstanding common stock. No single trust or other fiduciary account held a beneficial ownership interest in excess of 5.00%. Of these shares, the Bank and its affiliates had sole voting power with respect to 10,222,771 shares or 4.24% of the outstanding common stock, and they shared voting power with respect to 11,409,682 shares or 4.73% of the outstanding common stock. They had sole investment power with respect to 3,250,052 shares or 1.35% of the outstanding common stock, and they shared investment power with respect to 12,641,486 shares or 5.25% of the outstanding common stock.

(2) T. Rowe Price Associates, Inc. beneficially owns 19,646,684 shares, or 8.15% of the outstanding common stock, in trust accounts for the economic benefit of the beneficiaries of those accounts. It holds sole voting power over 5,152,947 shares or 2.14% of the outstanding common stock and sole investment power over 19,646,684 shares or 8.15% of the outstanding common stock. Information as to T. Rowe Price Associates, Inc. is based upon a report on Schedule 13G filed with the SEC on February 10, 2012.

The Corporation’s directors and employees as a group beneficially owned approximately 6.56% of the Corporation’s outstanding common stock as of January 1, 2012. In addition, the Corporation estimates that at least 1.88% of the Corporation’s outstanding common stock was beneficially owned by the Corporation’s retirees as of January 1, 2012.

 

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EXECUTIVE COMPENSATION

Compensation and Benefits Committee Report

The Compensation and Benefits Committee of the board of directors hereby furnishes the following report to the stockholders of the Corporation in accordance with rules adopted by the SEC.

The Compensation and Benefits Committee states that it has reviewed and discussed with management the Corporation’s Compensation Discussion and Analysis contained in this proxy statement.

Based upon this review and discussion, the Compensation and Benefits Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

This report is submitted on behalf of the members of the Compensation and Benefits Committee:

Nicholas D. Chabraja, Chair

Susan Crown

Dipak C. Jain

Robert C. McCormack

John W. Rowe

Enrique J. Sosa

 

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COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

The performance and achievements of our named executive officers helped lead Northern Trust to deliver sound financial results in what continues to be a challenging economic environment. New business, strategic acquisitions and a conservative approach to managing the business contributed to the Corporation’s strong financial position in 2011.

Appropriately linking the compensation of our named executive officers to the performance of our business is important to the continued growth and success of Northern Trust. The following chart highlights important considerations in the development, review and approval of our named executive officers’ compensation. The details of each of these highlights are included in the following pages of this Compensation Discussion and Analysis.

 

Philosophy & Objectives

Executive Compensation Philosophy

 

See pages 35-39 for details

 

Intended to help us attract, retain and motivate the best talent

 

  Focused on long-term performance

 

  Aligned with stockholder interests

 

  Competitive in the marketplace

 

  Designed to discourage inappropriate risk-taking

Pay Appropriately Aligned to Performance

 

See pages 30-31 for details

 

Relative rankings considered by the Compensation and Benefits Committee

 

  Return on equity

 

  Revenue growth

 

  Pre-tax profit margin

 

  Earnings per share growth

Mix of Total Compensation Supports Business Objectives

 

See pages 32-37 for details

 

Pay mix reflects our strong focus on variable incentives, particularly equity

 

  Typically 80% to 90% of total pay opportunity is variable

 

  Typically 60% or more of total pay opportunity is provided through equity

 

Both compensation packages and robust stock ownership guidelines for named executive officers reinforce the importance of delivering value for stockholders

 

  When Northern Trust’s stock price rises, equity received through annual pay packages and executives’ other equity holdings increase in value; when the stock price declines, so does the value of named executive officers’ holdings

 

  Multi-year vesting schedules for equity grants reinforce a focus on long-term performance

 

  Robust executive stock ownership guidelines that equal or exceed typical requirements among our peers reinforce the link to stockholders’ interests

Pay Competitively Compared to Peers

 

See pages 37-38 for details

 

  Our executive pay levels are tested against a peer group including U.S. trust and custody banks that are our key, direct competitors as well as certain other U.S. banks

 

  Our peer group excludes firms whose business or scale is significantly different than ours

 

  We strive to reasonably position our total compensation against both median and size-adjusted pay levels among our peers

Risk Management

 

See pages 38-39 for details

 

  Our programs are designed and monitored to ensure that they do not encourage inappropriate risk-taking

 

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Decisions and Actions

Factors Guiding Compensation Decisions

 

See pages 30-31 for details

 

  Reflect both financial and, to a lesser degree, non-financial performance

 

  Assess corporate and business unit performance against a series of standards

 

  Use discretion when assessing results in key areas to ensure they are important to long-term stockholder value, including avoidance of excessive risk-taking

 

  Consider advice of the Compensation and Benefits Committee’s independent outside consultant

 

  Consider recommendations of the Chairman and CEO for decisions regarding named executives officers other than the Chairman and CEO

 

  Take into account current and historical compensation, as well as competitive pay practices within a defined peer group

Decisions and Activities Related to Compensation for 2011

 

See page 30-36 for details

 

  Majority of named executive officers received a salary increase in 2011

 

  Majority of named executive officers have not received a salary increase in 2012

 

  Maximum annual incentive awards were directly linked to operating results through corporate net income.

 

  Actual awards—decided in 2012 for 2011 performance—reflect that earnings for 2011 were down relative to 2010 and that annual cash awards for the majority of named officers were also reduced

 

  Equity awards granted in February 2011 will vest over four years

 

  50% of the award value was granted in stock options, which will yield value only in the event that our stock price appreciates

 

  50% of the award value was granted in time-vesting restricted stock units (RSUs)

 

  A targeted group of peer companies was identified in order to focus on key trust and custody banks as well as certain other U.S. banks

 

  Inclusion of excise tax gross ups was discontinued in new executive employment security agreements

2012 Program Updates

 

See page 48 for details

 

  Updates to the long-term incentive compensation program for the named executive officers will reinforce performance and the link between compensation and increasing stockholder value. Long-term incentive compensation will be comprised of three elements. Each element will make up one-third of long-term incentive compensation:

 

  Performance stock units (PSUs): Awarded with a specified performance-based (return on equity) vesting target that incorporates performance and risk metrics

 

  Stock options: To further discourage inappropriate risk taking, stock options have decreased from 50% of the total value of each named executive officer’s long-term incentive compensation in 2011 to one-third in 2012

 

  Long-term cash: Mandatorily deferred cash incentives will be settled in cash or shares after three years and will be subject to forfeiture or reduction upon the occurrence of certain risk-based events

 

  Consistent with the Corporation’s risk-mitigation strategies for its compensation programs, long-term compensation for 2012 for named executive officers incorporates more expansive clawback provisions that deter certain types of conduct, including conduct that could affect the accuracy of the Corporation’s financial statements

 

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2011 Advisory Vote on Executive Compensation and Federal Reserve Review

The Corporation’s executive compensation was approved, on an advisory basis, by its stockholders at the Corporation’s April 19, 2011 annual meeting. During the fourth quarter of 2011 and the first quarter of 2012, the Corporation engaged in discussions with a number of our institutional stockholders about the design of our executive compensation program and related topics. The Compensation and Benefits Committee (as used in this section, the Committee) carefully considered stockholder feedback received and the results of the 2011 advisory vote in both establishing the 2012 executive compensation program, which reflects the changes described above under “2012 Program Updates,” and determining the 2012 named executive officers’ compensation packages.

With stockholder feedback and the results of the 2011 advisory vote in mind, the Committee also:

 

   

Narrowed the list of firms in our compensation peer group to key trust and custody banks as well as certain other U.S. banks

 

   

Reviewed the competitive compensation data and median data for such narrowed peer group to help inform the February 2012 decisions on pay relative to performance

And, as a further consequence of stockholder feedback, this proxy statement clearly reflects the Committee’s 2011 decision to discontinue the inclusion of excise tax gross ups in all new executive employment security agreements.

Northern Trust also has been engaged with the Federal Reserve, who has been reviewing incentive compensation practices at large complex banking organizations (LCBOs), including Northern Trust. The Federal Reserve’s principal focus is to insure that compensation arrangements at LCBOs do not inappropriately encourage excessive risk-taking.

The Federal Reserve, in particular, views stock options as a form of incentive compensation that can create inappropriate risk-taking. In working with the Federal Reserve, Northern Trust has reduced the proportion of stock options relative to overall equity compensation, and increased the proportion of PSUs and long-term cash, which in the view of the Federal Reserve, do not present the same inherent risk.

2011 Compensation Decisions for Named Executive Officers

In determining total compensation for the named executive officers, the Committee reviews the Corporation’s business performance, the individual’s achievement of objectives, and the median total compensation packages paid by the Corporation’s peers (see pages 37-38 of this proxy statement for more details on the peer group).

 

   

Northern Trust posted solid operating results in 2011, maintained a strong and conservative financial position and continued to grow client assets under custody and management. These results were achieved despite a challenging economic environment that included low interest rates and weak global economic conditions. We continued to successfully add new clients and to expand relationships with existing clients, both personal and institutional. This enabled the Corporation to grow the business organically and partially to offset the impact of the environment on our revenues. Northern Trust’s

 

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business performance is a reflection of the strength and talent of our employees, including our named executive officers who have led the Corporation through this market uncertainty.

 

   

2011 net income of $603.6 million decreased 10% versus 2010

 

   

2011 diluted earnings per common share of $2.47 decreased 10% versus 2010

 

   

Pre-tax profit margin of 23.4% in 2011

 

   

Return on equity of 8.6% in 2011

 

   

The Committee also considered the impact of restructuring, acquisition and integration related charges, the revenues and expenses associated with acquisitions, and the expense reduction related to an indemnification liability related to Visa, Inc. in its determination of performance.

 

   

The Committee considered that long-term and short-term performance, as indicated by return on equity, also supported the assessment that corporate performance compared favorably to our peers. The Corporation’s return on equity exceeded the median average return on equity of our peers over three and five year time periods and was consistent with, although slightly lower than, our peers’ median one-year return on equity.

1, 3 and 5 Year Return on Equity Peer Comparison

 

LOGO

 

   

Consistent with the Corporation’s philosophy of aligning pay with performance, the Committee reviewed these performance measures, among others, and determined that overall 2011 performance was consistent with the peer group performance and that the Chairman and CEO’s pay should remain consistent with the median compensation among the Corporation’s peer companies.

 

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Chairman and CEO

To determine the size of each element in the Chairman and CEO’s total compensation package, in addition to the business results listed above, the Committee considered a variety of performance factors including:

 

   

2011 profit plan achievement

 

   

Capital planning

 

   

New business development

 

   

Corporate development/acquisitions

Additionally, the Committee considered the Chairman and CEO’s success in achieving his individual objectives related to leadership, compliance and risk management, client service, employee relations, communication, ethics and diversity, and development of senior officers.

Weighing these performance factors and objectives collectively, the Committee determined that total compensation for the Chairman and CEO should remain consistent with the median compensation among the Corporation’s peer companies.

Base Salary

During its February 2011 meeting, the Committee increased the Chairman and CEO’s base salary to $975,000. This decision was guided by competitive market data from peer group companies, the Committee’s objective to align base salaries with the median level of the peer group, as well as the Chairman and CEO’s performance and tenure in the position.

At its February 2012 meeting, the Committee determined that the Chairman and CEO’s salary should remain unchanged since it is modestly higher than the 2011 median size-adjusted salary of the Corporation’s peer group.

Annual Cash Incentive

Under the provisions of the Management Performance Plan (MPP), the reported earnings of $603.6 million in 2011 provided for a maximum funding opportunity for the Chairman and CEO of $3,621,600. Additionally, based on the peer group market data, the Committee determined that the peer group median cash incentive level, adjusted for size, was $1,900,000.

Taking into consideration the limits set forth in the MPP, the available competitive market data, as well as the performance measures and individual objectives as listed above, the Committee determined the Chairman and CEO’s actual cash incentive award to be $1,600,000 for 2011. Compared to the 2010 cash incentive award of $2,000,000, the year over year decrease in the Chairman and CEO’s 2011 award reflected that the Corporation’s earnings for 2011 were down relative to 2010.

Long-Term Incentive

In determining the total long-term incentive grant for the Chairman and CEO, the Committee took into account the Corporation’s performance measures listed above, as well as the median and

 

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size-adjusted total compensation packages paid by the Corporation’s peers. Based on these factors, as well as our objective to make long-term compensation the most significant component of overall compensation, the Committee set the Chairman and CEO’s long-term incentive compensation award in respect of 2011 performance, granted in February 2012, at $7,000,000, which was consistent with the blended 2011 median and size-adjusted long-term compensation level reported by our peer companies, and lower than the Chairman and CEO’s long-term incentive award of $8,000,000 made in February 2011 for 2010 performance.

As illustrated in the following chart, the Chairman and CEO’s compensation from 2010 to 2011 decreased by 12.3%.

 

 
Salary and Incentive Compensation1  
     
           Annual Compensation        
       
                 Incentive Compensation3        
                 
Name   Year     Salary2     Cash     Stock
Options4
    RSUs     PSUs     Long-
term Cash
    Total  
Frederick H. Waddell      2011      $ 956,250      $ 1,600,000      $ 2,333,333      $ 0      $ 2,333,333      $ 2,333,334      $ 9,556,250   
    2010      $ 900,000      $ 2,000,000      $ 4,000,000      $ 4,000,000      $ 0      $ 0      $ 10,900,000   

1 The Salary and Incentive Compensation chart above is an overview of the Committee’s salary, cash incentive, stock options, RSUs, PSUs and deferred cash compensation decisions for the Chairman and CEO with respect to 2011 and 2010. The equity grants described for 2011 were in fact made in 2012 in respect of 2011 performance and thus do not appear in the Summary Compensation Table on page 55 of this proxy statement. Further details of the Chairman and CEO’s compensation in 2011 can be found in the Summary Compensation Table on page 55 of this proxy statement.

2 Actual salary paid in that year.

3 Incentives earned for performance in that year but paid/granted in the following year (e.g. stock options listed for 2010 were granted in 2011 based on performance in 2010). The value of these awards is listed in the Summary Compensation Table for the year of grant pursuant to SEC rules.

4 Northern Trust’s policies and internal valuation methodology treats stock options as equal to one-third of the grant price. A different valuation methodology is required to be used in the Summary Compensation Table pursuant to the SEC rules.

 

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The mix of total compensation for our Chairman and CEO, as illustrated in the chart below, demonstrates our emphasis on variable compensation, with significant focus on long-term incentive components.

 

LOGO

Other named executive officers

Similar to the approach for determining the Chairman and CEO’s annual compensation, the Committee evaluates the combination of business performance, individual achievement of objectives and competitive market data to determine the amount for each element of a named executive officer’s 2011 compensation.

Base Salaries

At its meeting in February 2011, based on updates in the competitive salary market data among the Corporation’s peer group companies, the Committee chose to increase the base salaries for Messrs. Fradkin, Morrison and Potter, and Ms. Schreuder by $50,000, each.

In October, Mr. Morrison received a $100,000 salary increase to reflect his appointment as President and COO.

During its February 2012 meeting, the Committee increased Mr. O’Grady’s salary by $25,000 to reflect the competitive salary market data for his position and left all other named executive officers’ salaries unchanged. The decision to leave salaries unchanged, similar to that for the Chairman and CEO, results in salary levels that remain consistent with median salaries for similar positions among the Corporation’s peer group.

Annual Cash Incentive

Based on the target and limits set forth in the MPP for each named executive officer, as well as the Corporation’s performance and achievement of individual objectives, the Committee set a cash incentive of $750,000 for Mr. Morrison, $675,000 for Mr. Fradkin and Ms. Schreuder, $650,000 for Mr. Potter, and $350,000 for Mr. O’Grady. Mr. O’Grady’s cash incentive reflects a partial year since he joined the Corporation during 2011. To reflect that earnings for 2011 were down relative to 2010, the annual cash awards for the majority of named officers were reduced.

 

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Long-Term Incentive

In determining the total long-term incentive grants made in 2012 in respect of 2011 performance (which do not appear in the Summary Compensation Table on page 55 of this proxy), the Committee took into account the Corporation’s performance, as well as the median total compensation levels among the Corporation’s peers. Based on these factors, the Committee set the following long-term awards: $3,500,000 for Mr. Morrison and $2,100,000 for Messrs. Fradkin, O’Grady and Potter and Ms. Schreuder.

Philosophy and Approach to Executive Compensation

Northern Trust’s compensation philosophy is to attract, motivate and retain talent, including executive-level talent who will contribute to our long-term success. With the goals of solid long-term financial performance and creating long-term stockholder value, Northern Trust’s executive compensation program and compensation decisions are framed by four core values.

 

 

Northern Trust Executive Compensation Core Values

 

      Focused on long-term performance

      Aligned with stockholder interests

      Competitive in the marketplace

      Designed to discourage inappropriate risk-taking

 

Focused on Long-Term Performance

Northern Trust’s executive compensation program is strongly focused on incentive compensation, which is intended to help drive long-term financial performance. Currently, 80% to 90% of each named executive officer’s total pay opportunity consists of variable compensation. Cash and equity awards, as described in this proxy, are based on each named executive officer’s performance. The Committee determines and approves annual cash incentives for Northern Trust’s named executive officers under the provisions of the stockholder-approved MPP.

Aligned with Stockholder Interests

Northern Trust’s executive compensation program is designed to align the interests of the named executive officers with those of its stockholders by tying a significant portion of an executive’s total compensation to the longer-term performance of the Corporation’s common stock. Long-term, equity-based compensation is the most significant component of overall compensation as it generally provides 60% or more of named executive officers’ total target compensation. The emphasis on long-term vesting schedules applied to these incentives contributes to continuity and stability within the Corporation’s executive leadership and encourages executives to act as owners with a tangible stake in Northern Trust.

 

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The following graph demonstrates how the value of Northern Trust’s equity-based compensation awarded over the past five years, including 2011, has been impacted by changes in our stock price.

 

LOGO

Supporting the alignment with stockholders’ interests, Northern Trust has a long-standing practice of emphasizing stock ownership and maintaining robust stock ownership guidelines for named executive officers at or above industry practice.

 

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Stock Ownership Guidelines

Northern Trust maintains formal stock ownership guidelines for named executive officers with minimum ownership levels as shown in the following chart:

 

Stock Ownership Guidelines for Named Executive Officers
   
Chairman and CEO   Expected to maintain minimum share ownership levels to a value of ten times base salary
   
President and Chief Operating Officer or Vice Chairman   Expected to maintain minimum share ownership levels to a value of seven times base salary
   
Other Named Executive Officers   Expected to maintain minimum share ownership levels to a value of five times base salary

It is expected that each named executive officer will meet the minimum ownership level not later than five years from the date the named executive officer becomes a member of a particular covered group.

Until such time as any named executive officer meets the minimum ownership level requirement, he or she is expected to retain 100% of the net, after-tax shares received from share distributions or stock option exercises.

The calculation of shares of common stock includes those that are:

 

   

Purchased on the open market

 

   

Owned jointly with or separately by spouse and children

 

   

Held through the Thrift Incentive Plan

 

   

Obtained through stock option exercises but not including unexercised stock options and stock award distributions

 

 

   

50% of unvested (or vested but not yet distributed) RSUs, PSUs, stock awards and deferred stock units

 

 

   

50% of deferred long-term cash incentives intended to be distributable in the form of stock

As of February 13, 2012, the Chairman and CEO and each other named executive officer met or exceeded Northern Trust’s stock ownership guidelines. Consistent with those guidelines, Mr. O’Grady, who commenced employment with the Corporation on August 15, 2011, has five years from that date in which to reach the applicable share ownership threshold set forth in the chart above.

Competitive in the Marketplace

The Corporation believes a competitive executive compensation program is key to attracting, retaining and motivating the best executive talent. Therefore, the Committee evaluates the competitiveness of Northern Trust’s named executive officer compensation program against a peer group that reflects key trust and custody banks, as well as certain other U.S. banking organizations. This peer group, used for assessing the competitiveness of named executive officer pay, specifically excludes certain other direct competitors whose size or scope are significantly larger and might distort the appropriate pay comparison comparisons.

 

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The combination of the character and relative size of the Corporation’s businesses makes it challenging to identify any definitive, single group of companies as peers for compensation purposes. However, Northern Trust established the peer group based in part on data and analysis provided by Towers Watson, an independent compensation consultant. The peer group is identified below.

 

Northern Trust Named Executive Officer 2011 Peer Group

 

These companies are used for market assessment of compensation for the Chairman and CEO and the other named executive officers. This peer group reflects:

 

      Trusts and custody banks that Northern Trust directly competes against for global talent in virtually all lines of business

      Other U.S. banks that vary in size and are used to evaluate the competitiveness of our executive compensation

 

   

The Bank of New York Mellon Corporation

 

Comerica Incorporated

 

Fifth Third Bancorp

 

KeyCorp

 

The PNC Financial Services Group, Inc.

  

State Street Corporation

 

SunTrust Banks, Inc.

 

U.S. Bancorp

 

Wells Fargo & Company

The Corporation believes that this group of peer companies fairly represents a wide range of our competitors and certain other U.S. banking organizations and is an appropriate group of companies against which Northern Trust can gauge the competitiveness of the Corporation’s executive compensation program for the named executive officers.

The Committee regularly reviews the composition of Northern Trust’s peer group and makes updates based on changes within the peer group companies, industry consolidation and the Corporation’s own evolving global presence. In 2010, the Corporation used an extensive list of peer companies. For 2011, the Corporation identified a more targeted group of peer companies, as listed above, in order to focus on key trust and custody banks, as well as certain other U.S. banking organizations. The Committee believes that the revised peer group allows it to better gauge the competitiveness of our named executive officers compensation program against our peers.

Northern Trust does not use peer compensation data to set precise pay levels by position. Rather, the peer data and data provided by compensation consultants are used to validate relative competitive pay for our named executive officers.

Designed to Discourage Inappropriate Risk-Taking

As noted above, the Corporation is involved in an ongoing assessment of its incentive compensation program in connection with the Federal Reserve’s review of incentive compensation arrangements at LCBOs. Northern Trust concluded its compensation arrangements did not inappropriately encourage excessive risk-taking, in part because the Corporation is not involved with many of the lines of business that have often exposed other financial institutions to

 

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excessive risk-taking, such as origination or securitization of sub-prime mortgage loans or significant proprietary derivatives trading.

 

Northern Trust actively monitors employees to ensure that they work within established risk frameworks and limits. To reinforce the importance of incorporating risk management into our compensation framework, beginning in 2012, we have added long-term incentive components in the form of PSUs and long-term cash. PSUs, which contain performance hurdles for named executive officers and are payable in shares if these hurdles are attained, incorporate performance and risk. Long-term cash, which will be settled in cash or stock, will be required to be deferred for three years and will be subject to forfeiture or reduction upon the occurrence of certain risk-based events. Furthermore, a substantial portion of the compensation of senior management is in the form of long-term equity that vests over a multi-year

  

Company-wide Training on Northern Trust’s Risk Management Expectations

 

In response to Federal Reserve guidance to the financial industry, Northern Trust provided detailed education to its workforce—including named executive officers—about Northern Trust’s risk management expectations and the incentive adjustments that may be made to awards for those who expose the Corporation to material risk.

 

It is our expectation that all executive officers appropriately understand the Northern Trust risk management framework and how the framework reinforces the Corporation’s compensation strategy.

period and has an inherent risk adjustment factor based on Northern Trust’s share value. And, consistent with the Corporation’s risk-mitigation strategies for its compensation programs, long-term compensation for 2012 for named executive officers incorporates more expansive clawback provisions that deter certain types of conduct, including conduct that could affect the accuracy of the Corporation’s financial statements.

In order to address the Federal Reserve’s view that stock options can induce more risk taking than other types of equity based compensation, Northern Trust has reduced the proportion of its equity compensation awards generally that are composed of stock options and has replaced those awards with PSUs and long-term cash, which are viewed as less likely to induce inappropriate levels of risk taking.

The Committee annually assesses with input from risk management personnel the effectiveness of Northern Trust’s incentive compensation and the extent to which such arrangements and practices discourage inappropriate risk-taking. We expect to continue to monitor and, if necessary, revise our incentive compensation program to ensure that it appropriately balances the desires of stockholders, the needs of the business and risk concerns.

 

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Determining Awards

Role of the Committee

During its February meeting, the Committee determines the appropriate level of executive compensation and each element of cash and equity compensation for all named executive officers. The Committee makes executive compensation decisions after careful review and analysis of appropriate performance information, as well as historical and market compensation data.

The Committee considers all elements of Northern Trust’s executive compensation program together rather than each compensation element individually. The Committee also considers the impact that compensation decisions may have on the potential values of other pay and benefit programs.

While performance in non-financial areas may or may not directly affect the specific financial metrics for a particular year, the Committee has the discretion to reward extraordinary individual performance in non-financial areas that are important to long-range growth and enhancement of stockholder value. This flexibility allows the Committee to best reflect:

 

   

Northern Trust’s business model and strategy

 

   

Prevailing market trends

 

   

Rapidly evolving financial and regulatory environment

 

   

Cross-functioning executive assignments and cross-training

 

   

Risk management objectives

The Committee also evaluates the performance of the Chairman and CEO against his objectives for the past year as stated on page 32.

Role of the Chairman and CEO

As part of the Committee’s compensation review and approval process, the Committee receives recommendations from the Chairman and CEO on the total compensation packages for each of Northern Trust’s named executive officers, other than his own. The Chairman and CEO’s evaluations of the other named executive officers are based on performance against the past year’s performance expectations, initially formulated by the Chairman and CEO at the beginning of the performance period. These performance expectations are comprised of a mix of objective and subjective factors, which are not formulaically weighted or scored. With input from the Corporation’s Head of Corporate Risk Management, the Chairman and CEO also evaluates each named executive officer’s performance with regard to business unit risks and individual adherence to risk and compliance policies and procedures.

The Chairman and CEO presents recommendations in a report at the Committee’s February meeting. The Committee gives substantial weight to the recommendations of the Chairman and CEO, but retains the ultimate oversight and responsibility to make modifications to the total compensation package and individual compensation elements. The Committee provides the final approval of the compensation of each named executive officer.

 

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The Committee may grant additional equity awards during other times of the year to newly hired or newly promoted named executive officers based on the recommendation of the Chairman and CEO. In October 2011, subsequent to his hire in August 2011, Mr. O’Grady was granted equity awards valued at approximately $2,500,000. In July 2011, Mr. Morrison was granted 10,000 RSU’s valued at $436,400 in recognition of his promotion to President and COO effective October 1, 2011. In isolated cases, the Committee may grant additional equity awards for retention purposes. No such retention awards were granted to named executive officers in 2011.

Role of Human Resources

The Corporation’s Human Resources Department assists the Committee in making executive compensation decisions, including collecting and providing the Committee current and historical compensation data. Additionally, the Head of Human Resources and Administration attends and participates in all Committee meetings.

The Human Resources Department also assists the Chairman and CEO in formulating the recommendations for compensation of all other named executive officers other than the Chairman and CEO. The Human Resources Department provides historical and current market data for executive pay in the industry, information concerning the historical and current compensation of named executive officers, and the comparison of stock ownership measured against stock ownership guidelines approved by the Committee.

Role of Aon Hewitt

The Committee has retained Aon Hewitt as its human resources consulting firm for matters pertaining to executive compensation. The Committee confers with Aon Hewitt to ensure that decisions and actions are consistent with stockholders’ long-term interests and compensation-related best practices within the financial services industry. Aon Hewitt also directly provides to the Committee market data, which the Committee references when determining compensation for the named executive officers.

Aon Hewitt’s representative generally attends meetings of the Committee throughout the year during which compensation is reviewed and approved. Aon Hewitt’s representative provides general insights into compensation trends and prevailing market practices, presents its views on the compensation proposed by the Committee and participates in Committee meeting discussions. Aon Hewitt also undertakes specific projects when assigned by the Committee. In 2011, the Corporation paid Aon Hewitt and its affiliates $77,185 for executive compensation advisory services to the Committee.

Aon Hewitt and its affiliates have also provided services unrelated to executive compensation to the Corporation and the trust for The Northern Trust Company Pension Plan (the “Pension Plan”) in 2011 and prior years. In 2011, the Corporation paid Aon Hewitt and its affiliates $3,041,452 in fees for other services, which included the administration of the Northern Trust Corporation Deferred Compensation Plan (the “DCP”), TIP, the Northern Trust Corporation Supplemental Thrift-Incentive Plan (the “Supplemental TIP”), the Northern Trust Corporation Supplemental Pension Plan (the “Supplemental Pension Plan”) and certain other retiree benefit plans, as well as valuation, budgeting and other general communication and consulting services relating to retirement plans. In 2011, the trust for the Pension Plan paid Aon Hewitt and its affiliates $835,304 in fees for other services, which included administration, actuarial and tax services related to the Pension Plan.

 

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The fees paid to Aon Hewitt and its affiliates for other services by the Corporation and the Pension Plan trust were not approved in advance by the board of directors or the Committee; however, the board of directors and the Committee were aware of the other services being provided to the Corporation by Aon Hewitt and its affiliates.

Timing of Equity Compensation Award Procedures

The Committee acts in strict compliance with the requirements of the Amended and Restated Northern Trust Corporation 2002 Stock Plan, including the requirement that stock options may not be granted at less than 100% of the fair market value of Northern Trust’s common stock on the date of grant. For each grant approved by the Committee, the date of grant is the date on which the Committee acts to approve the award. Northern Trust does not time the grants of its equity compensation awards for the purpose of affecting the value of such executive compensation. Equity awards to named executive officers are generally made in February.

Deductibility of Executive Compensation

The Corporation views the tax deductibility of executive compensation under Section 162(m) of the Code as an important factor in determining the forms and amounts of executive compensation. The Corporation, through the Committee, reviews each material element of compensation on a continuing basis and takes steps to assure deductibility if that can be accomplished without sacrificing flexibility and other important elements of the overall executive compensation program.

Elements of Northern Trust’s Executive Compensation Program

There are seven principal elements of the Northern Trust Executive Compensation Program. The Committee evaluates all elements of compensation collectively, rather than reviewing each independently. The Committee establishes total executive compensation that appropriately rewards performance, ensures alignment with stockholders’ interests and remains responsive to competitive factors in the marketplace for executive talent.

 

Key Elements of Named Executive Officer Total Compensation
Compensation
Element
  Link to Compensation
Philosophy
  Type of Plan   Key Features
Base Salary   Targeted at competitive levels among peer group companies to provide a competitive salary   Cash  

Base salaries provide a fixed level of annual income consistent with a named executive officer’s position and responsibilities, competitive pay practices, and internal equity of pay among the named executive officers.

 

Base salaries, as described in this proxy, reflect 2011 compensation-related decisions and payments.

 

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Key Elements of Named Executive Officer Total Compensation
Compensation
Element
  Link to Compensation
Philosophy
  Type of Plan   Key Features
Annual Cash Incentive  

Aligns a named executive officer’s annual cash incentive award with stockholders’ interests by linking maximum award to a percentage of net income and actual award to executive’s performance.

 

Provides total compensation opportunities that are targeted at competitive levels among the peer group companies.

  Cash  

Annual cash incentives are approved under the MPP. Awards under the MPP are intended to qualify as performance-based compensation as they are tied to net income results and may not exceed a fixed maximum.

 

Cash awards, as described in this proxy, are linked to each named executive officer’s performance in 2011, although paid in 2012.

Long-Term Compensation   Aligns compensation with the interests of stockholders by motivating them to act as owners. Also provides total compensation opportunities that are targeted at competitive levels among the peer group companies.   Stock  

Long-term, equity-based compensation is the most significant component of overall compensation. 2011 grants were in the form of nonqualified stock options (50%) and restricted stock units (50%).

 

For 2012, long-term incentive compensation will be comprised of three elements: PSUs, stock options and long-term cash. Each element will make up one-third of long-term incentive compensation.

 

2011 individual performance is considered when determining named executive officers’ equity awards to be delivered in 2012.

Retirement and Health and Welfare Benefits   Targeted at the median level of a peer group of companies to provide benefits that are competitive against the peer group companies.  

Deferred Compensation

Pension

401(k)

Health / Welfare

 

Benefits are designed with the entire Northern Trust workforce in mind and are not specifically structured for the named executive officers.

 

For 2012, refer to the changes to the Pension Plan as described on page 50.

 

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Key Elements of Named Executive Officer Total Compensation
Compensation
Element
  Link to Compensation
Philosophy
  Type of Plan   Key Features
Perquisites  

Perquisites are intended to be limited in number and modest in dollar value. Perquisites are minimal and not a significant component of compensation.

 

Annually reviewed to ensure types and costs of perquisites remained aligned with Northern Trust compensation philosophy.

 

Financial Consulting / Tax Return Preparation

Personal Auto Use Reimbursement

Relocation Assistance

  Perquisites are intended to assist named executive officers in the performance of their duties on behalf of Northern Trust and provide limited compensation for activities that have a combined personal and business purpose.
Change in Control Benefits   Critical to Northern Trust’s ability to attract and retain key executives and remain competitive against the peer group companies.  

Cash

Retirement and Health and Welfare Benefits

Service credit

Excise tax reimbursement

  Change in control benefits are intended to provide sufficient security so the executive is not distracted from job duties, financially threatened by potential job loss or motivated to act contrary to the best interests of the Corporation and its stockholders prior to, during or after a change in control.
Severance Benefits   Critical to Northern Trust’s ability to attract and retain employees and remain competitive against the peer group companies.  

Cash

COBRA

 

All Northern Trust employees, including named executive officers, are eligible for these severance benefits, which are designed to support the entire workforce’s needs. These benefits are available to the executive officers on the same terms and conditions as all Northern Trust employees.

 

Severance benefits provide reasonable benefits to employees who are involuntarily terminated without cause due to a reduction in force, job elimination or similar reasons specified in the severance plan.

 

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Base Salary

 

The Committee believes that base salaries should provide a fixed level of annual income consistent with a named executive officer’s position and responsibilities, competitive pay practices and internal equity among the named executive officers. Base salaries, as described in this proxy, reflect 2011 actions and payments.

 

Base Salaries Aligned with Market

 

Base salary levels for the named executive officers are consistent with competitive salary market data among peer group companies. In 2011, a majority of executives received a base salary increase due to updates in the market data.

The Committee uses discretion in determining base salaries. It does not take a formulaic approach to setting target base salary levels but considers the following factors:

 

   

Individual performance and contributions over the prior year relative to established goals and expectations for the position

 

   

Internal pay equity for comparable key executive officer positions

 

   

Base salary targets that balance market pay practice with internal equity

 

   

Experience and qualifications of the individual executive

 

   

The named executive officer’s tenure in the position or a position of similar level

 

   

Any significant changes in assignment or scope of responsibility

For new executives, the Committee’s philosophy is to increase actual base salary gradually to the appropriate target pay level as the named executive officer gains experience and tenure in the new position.

In 2011, a majority of named executive officers received a base salary increase to reflect updates in the competitive market data or reflect individual performance or tenure. The changes included increasing the base salary of the Chairman and CEO to $975,000 based on his tenure and guideline adjustments, and increasing the base salaries of the other named executive officers to $600,000.

Base salary adjustments generally are effective April 1. Salary adjustments for promoted executives typically take effect upon the executive’s promotion date and assumption of new responsibilities. Upon his October 1, 2011 promotion to President and COO, Mr. Morrison received a salary increase to $700,000.

 

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Annual Cash Incentive

 

 

Our annual cash incentives are designed to reward the named executive officer’s role in attaining annual Corporation goals, which are reflected in attainment of positive consolidated net income, then adjusted based on other relevant performance measures described below. The Committee determines and approves annual cash incentives for the Corporation’s named executive officers under the provisions of the stockholder-approved MPP. Awards under the MPP are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Annual cash incentives, as described in this proxy, are linked to each named executive officer’s performance in 2011 as well as being tied to the Corporation’s net income. Awards may not exceed a fixed maximum.

 

Annual Cash Incentive Aligned with Stockholders’ Interests

 

By establishing the maximum for the MPP as a percentage of Northern Trust’s net income, the Corporation directly aligns named executive officers’ annual cash incentive awards with performance that impacts our stockholders.

 

If the Corporation does not achieve positive net income, the MPP prohibits the granting of incentive awards for that year.

As determined by the MPP, the annual cash incentive maximums are as follows:

 

   

Annual cash incentives for the Chairman and CEO may not exceed 0.6% of consolidated net income

 

   

Annual cash incentives for the President, any Vice Chairman, the COO, or a combined President and COO position may not exceed 0.4% of consolidated net income

 

   

Annual cash incentives for all other named executive officers may not exceed 0.3% of consolidated net income

 

   

No annual incentives can be paid in the absence of positive net income

Award limitations under the MPP reflect our executive compensation philosophy. By establishing the maximum funding opportunity as a percentage of net income for the prior year, Northern Trust directly aligns named executive officers’ incentives with the interests of its stockholders. If net income rises, the named executive officers’ potential award values rise as well. Furthermore, if the organization does not achieve positive net income, the MPP prohibits the granting of incentive awards for that year.

In February 2012, the Committee reviewed the maximum funding opportunity for each named executive officer based on the limits defined by the MPP. For the Chairman and CEO, the maximum funding opportunity was determined to be $3,621,600. The Committee considered overall performance results, the maximum funding limit defined by the MPP and the median cash incentive award data reported by peer firms and awarded the Chairman and CEO actual cash incentive award of $1,600,000. A similar rationale was applied by the Committee in determining the cash incentive awards for the other named executive officers, with actual awards aligned primarily with competitive peer group medians.

 

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Awards are adjusted to reflect the Corporation’s net income, but the final determination of annual cash incentives is not tied to any specific formula. Instead, the Committee uses discretion to consider multiple financial measures such as return on equity, growth in revenue, earnings per share growth, and pre-tax profit margin. To a lesser degree, the Committee also considers non-financial measures in determining annual awards based on factors such as:

 

   

Applicable business unit financial and operating results

 

   

Individual performance factors

 

   

Risk management

 

   

Recommendations of the Chairman and CEO for named executive officers other than the Chairman and CEO

 

   

With respect to the Chairman and CEO, the Committee also considered the performance factors and objectives previously discussed on page 32.

Long-Term Compensation

Long-term, equity-based compensation is the most significant component of overall compensation and is designed to reward the performance of the named executive officers over time, as reflected in the Corporation’s long-term stock performance. Equity compensation typically takes the form of non-qualified stock options, RSUs or PSUs settled only in common stock of Northern Trust. The Committee emphasizes long-term equity to align compensation with the interests of the stockholders. The Committee believes that equity compensation encourages executives to act as owners with an equity stake in Northern Trust, discourages inappropriate risk-taking and contributes to continuity and stability within the Corporation’s executive leadership.

At its February 2011 meeting, the Committee considered market data and the recommendations of Aon Hewitt in determining long-term compensation awards for 2011. The Committee decided to deliver the awards to all named executive officers in the form of 50% non-qualified stock options and 50% RSUs.

The Committee considers a variety of individual factors to determine the actual dollar value of equity compensation for each named executive officer. The dollar value of equity compensation is generally defined as 100% of the fair market value at the time of grant for all RSUs or PSUs and one-third of the fair market value of the shares underlying grants of stock options at the time of grant for all stock options. For 2011, consistent with both the prior year’s guideline and with the new peer group’s median long-term compensation levels , the guideline dollar value of equity compensation was seven times base salary for the Chairman and CEO and approximately three and one-half to five times base salary for the other named executive officers.

When determining equity compensation, the Committee has discretion to take consider the base salary adjustment, the annual cash incentive, prior equity awards granted to a named executive officer, and individual performance over the prior year. The Committee is allowed flexibility in determining the value of total equity compensation for each named executive officer based on a review of objectives and subjective factors.

 

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There is no formula that assigns specific weights to these factors and the importance of these factors may vary year to year. In addition to consideration of the median long-term incentive compensation reported by peer banks, the following are the specific objective and subjective factors considered by the Committee in setting total long-term incentive compensation for each named executive officer for 2011 at its February, 2012 meeting:

 

   

Experience and tenure

 

   

Prior and expected individual performance

 

   

Potential long-term impact on the financial success of Northern Trust

 

   

Strategic leadership, teamwork and individual contributions as a member of Northern Trust’s Management Group

 

   

Committee’s desire to maintain internal equity in long-term incentive opportunity

 

   

Mix of total compensation relative to each element of compensation

 

   

Recommendations of the Chairman and CEO with respect to other named executive officers

 

   

Advice of the Committee’s independent compensation consultant

Stock option grants made in 2011 to the named executive officers are shown in the Grants of Plan-Based Awards table presented on page 58. Stock options granted in 2011 vest in equal annual installments over a four-year vesting period.

RSU awards made in 2011 to the named executive officers are shown in the Grants of Plan-Based Awards table presented on page 58. RSUs awarded in 2011 vest on the third (50%) and the fourth (50%) anniversaries of grant, subject to the executive’s continued employment with Northern Trust.

 

For 2012, the following changes are being made to long-term compensation. These changes apply to the grants made in February 2012

Long-term incentive compensation will be comprised of three elements. Each element will make up one-third of the value of long-term incentive compensation:

 

   

PSUs: Awarded with a specified performance-based vesting target that inherently incorporates performance and risk

 
   

Stock options: To discourage risk taking, stock options have decreased from 50% of the total value of each named executive officer’s long-term incentive compensation in 2011 to one-third in 2012

 
   

Long-term cash: Mandatorily deferred cash incentives will be settled in cash or shares after three years and payment will be contingent upon an assessment of an individual’s risk management practices

 

For named executive officers, incorporation of more expansive clawback provisions that deter certain types of conduct, including conduct that could affect the accuracy of the Corporation’s financial statements

 

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Retirement and Health and Welfare Benefits

Retirement benefits are generally designed with the entire Northern Trust workforce in mind and are not specifically structured for the named executive officers. The design of the Corporation’s retirement program for employees, including the named executive officers, reflects the following considerations:

 

   

Income replacement: Northern Trust designs its retirement benefits, including employer-provided contributions and Social Security benefits, for an employee with 25 years of service equal to approximately 80% of current pension-eligible income

 

   

Individual savings: The retirement program encourages employees to contribute to their individual retirement savings through participation in TIP and the Supplemental TIP

 

   

Competitiveness: Northern Trust targets total retirement benefits at approximately the median level of a retirement benefits peer group of companies

The named executive officers are eligible for:

 

   

Pension Plan

 

   

Supplemental Pension Plan

 

   

TIP

 

   

Supplemental TIP

The Pension Plan and the Supplemental Pension Plan provide all of the named executive officers, except for Mr. O’Grady, with an annual benefit determined under the Pension Plan’s Traditional Formula. The annual benefit under the Traditional Formula is equal to the participant’s average compensation for his or her highest 60 consecutive calendar months prior to retirement (“average compensation”) multiplied by 1.8% and then further multiplied by years of credited service, up to a maximum of 35 years. This amount is reduced by an amount based on the participant’s Social Security covered compensation and credited service.

Mr. O’Grady’s employment with the Corporation began on August 15, 2011. Therefore, under the terms of the Pension Plan, his benefits under the Pension Plan and Supplemental Pension Plan are calculated under the Pension Plan’s “Pension Equity Plan (PEP) Formula,” rather than the Traditional Formula. Under the PEP Formula, each year a participant earns a specific pension credit “percentage,” determined in accordance with a schedule in the Pension Plan, which varies directly with his or her total number of years of credited service. A participant’s PEP Formula lump sum amount is equal to the sum of his or her pension credit percentages multiplied by “average compensation.” A participant’s annual benefit under the PEP Formula is equal to a single life annuity commencing at age 65 that is the actuarial equivalent of his PEP Formula lump sum amount.

The portion of each named executive officer’s benefit, calculated under either the Traditional Formula or the PEP Formula as applicable, not in excess of various limits imposed by the Code and the Pension Plan, is paid under the Pension Plan. The portion of the executive’s benefit in excess of these amounts, if any, is paid under the Supplemental Pension Plan. A participant’s annual benefit under the Traditional Formula is reduced if the participant retires and begins receiving benefit payments before

 

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age 62, or age 60 under certain circumstances. A participant’s annual benefit under the PEP Formula is reduced if the participant retires and begins receiving payments before age 65. All named executive officers, except for Mr. O’Grady, have completed three years of vesting service, and thus are fully vested in their pension benefits.

Like many companies, Northern Trust is looking to reduce both short and longer-term expense volatility of its Pension Plan while continuing to provide a compensation package that is competitive within its peer group. As a result, the Corporation has made the following changes to the Pension Plan effective April 1, 2012.

 

   

All participants, including the named executive officers, will accrue benefits under the PEP Formula for credited service after March 31, 2012.

 

   

Participants will retain any accrued benefit earned under the Traditional Formula, which will be based on their credited service and average compensation calculated as of March 31, 2012, provided that their average compensation as of March 31, 2012 will be indexed at a rate of 1.5% per year for any period on and after April 1, 2012, during which the participants earn credited service under the Pension Plan.

 

   

The PEP Formula will be amended effective April 1, 2012.

As a result of these changes, the current named executive officers, other than Mr. O’Grady, will be entitled to an annual benefit equal to the sum of their accruals:

 

   

Under the Traditional Formula for credited service before April 1, 2012, with average compensation adjusted as described above, and

 

   

Under the amended PEP Formula for any credited service, if any, after March 31, 2012.

Mr. O’Grady will continue to accrue a benefit based solely on the PEP Formula for his credited service. He will be entitled to an annual benefit equal to the sum of his accruals:

 

   

Under the current PEP Formula for credited service before April 1, 2012, and

 

   

Under the amended PEP Formula for any credited service after March 31, 2012.

Under TIP, named executive officers can defer a portion of their base salary and receive employer matching contributions equal to 50% of the first 6% of deferred salary. If the Corporation meets an annual earnings goal, the Corporation will make a contingent matching contribution of 50% of the first 3% of deferred salary to TIP, for a maximum matching contribution of 4.5% of salary. The contingent matching contribution was made to TIP for 2011, since the Corporation reached its earnings goal for that year. However, TIP has been amended to provide that no contingent matching contribution will be made for 2012, even if the Corporation meets it earnings goal for that year.

Under Supplemental TIP, named executive officers can contribute a portion of their base salary that exceeds the annual Code compensation limit ($245,000 in 2011). The Corporation makes a matching contribution under Supplemental TIP using the formula in TIP, provided, however, that Supplemental TIP matching contributions are limited to 50% of the first 6% of deferred salary. All named executive officers, except Mr. O’Grady, are fully vested in their retirement benefits under TIP and Supplemental TIP.

 

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Specified values for each named executive officer’s retirement benefits appear on page 64.

The named executive officers also participate in Northern Trust’s health and welfare benefits, including medical, retiree medical, dental, disability and life insurance programs, on the same terms as other employees.

Perquisites

 

Perquisites are intended to assist named executive officers in the performance of their duties on behalf of Northern Trust and provide compensation for activities that have a combined personal and business purpose. The Corporation’s perquisites are intended to be limited in number and modest in dollar value in to the cash and equity elements of compensation. The

 

Perquisites Aligned with the Philosophy of Northern Trust

 

The Committee annually reviews the types and costs of perquisites to ensure they remain aligned with the compensation philosophy of Northern Trust.

Committee annually reviews the types and costs of perquisites to ensure they remain aligned with the compensation philosophy of the Corporation.

Northern Trust provided the following types of perquisites to its named executive officers in 2011:

 

   

Financial Consulting/Tax Return Preparation

 

   

Personal Auto Use Reimbursement

 

   

Relocation Assistance

The Corporation also reimburses named executive officers for the payment of personal income taxes in connection with the use of company automobiles for business-related purposes.

The dollar value of each perquisite provided to the named executive officers in 2009, 2010 and 2011 can be found in the Summary Compensation Table on page 55.

 

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Change in Control (CIC) Benefits

 

Northern Trust has entered into employment security
arrangements for certain key executive officers of the
Corporation, including each named executive officer. The
purpose of these agreements is to provide an executive with
sufficient security so that the executive is not distracted from
job duties, financially threatened by potential job loss, or
potentially motivated to act contrary to the best interests of
Northern Trust and its stockholders prior to, during, or after a
change in control.

 

The Corporation further believes the employment
security agreements are critical to its ability to attract and retain
key executives for the following reasons:

 

Change in Control and
Severance Benefits Help
Northern Compete with Peer
Group Companies

 

Northern Trust believes the
employment security agreements
and severance benefits are critical
to compete with its peer group
companies to attract and retain
talent, including at the executive
level.

 

   

The Corporation does not have employment agreements with its named executive officers

 

   

The protection afforded by the employment security agreements provides appropriate incentives that align with the best interests of the Corporation and its stockholders

 

   

Change in control benefits for executives are standard among peer group companies and are important to a competitive total compensation package

 

   

Change in control benefits under the employment security agreements generally include:

 

   

A lump sum cash payment equivalent to three years’ base salary and bonus, and a prorated bonus for the year of termination

 

   

Continuation of medical, dental, life insurance and other similar benefits for three years

 

   

Full vesting of unvested stock options, RSUs and PSUs upon an actual change in control, with or without termination of employment, or upon termination during a pending change in control

 

   

A post-termination stock options exercise period equal to the lesser of five years or the original expiration date for all outstanding non-qualified stock options and incentive stock options granted on or after September 25, 2001

 

   

A three-year age and service credit for benefits under the Supplemental Pension Plan, and up to an additional three years of age and/or service credit to determine eligibility and subsidy for participation in Northern Trust’s retiree medical program

 

   

For new agreements in 2011 and subsequent years, no reimbursement for any excise tax imposed on payments under the agreements or for taxes imposed on such reimbursement amounts

 

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In order to receive benefits under the employment security agreements, two events must occur (except as noted above with respect to equity awards):

 

   

A change in control must occur

 

   

The executive must terminate employment “with good reason” or the executive’s employment must be terminated by the Corporation “without good cause” within two years following the change in control

 

   

“With good reason” termination includes a material reduction in job duties or responsibility, materially reduced or adverse changes in employment compensation or benefit programs, and requirements for travel or relocation

 

   

“Without good cause” termination includes involuntarily termination, such as criminal conviction involving dishonesty, fraud or breach of trust, and willful and substantial non-performance.

A change in control is generally defined in the employment security agreements to include the acquisition of 20% or more of the Corporation’s common stock, certain mergers, consolidations and asset transfers, or the election—without the consent of two-thirds of the incumbent board of directors—of the lesser of three directors or a majority of the directors then in office. The employment security agreements also protect a named executive officer if the executive’s employment terminates during the period pending a change in control, defined generally as the period after the acquisition of 15% or more of the Corporation’s common stock or entry into an agreement with respect to, or public announcement of the intention to take, an action constituting a change in control event and prior to the effective time of the change in control event. Beginning in 2011, Northern Trust discontinued inclusion of excise tax gross ups in new employment security agreements.

Disclosure of potential change in control benefits payable to each named executive officer, assuming a change in control of the Corporation and termination of employment on December 31, 2011, is set forth in the Potential Payments Upon Termination of Employment or a Change in Control of the Corporation section on page 72.

Northern Trust has discontinued inclusion of tax gross ups in new employment security agreements for executive officers. The form of employment security agreement that reflects this change was filed as an exhibit to the Corporation’s second quarter 2011 Quarterly Report on a Form 10-Q. This change is reflected in the employment security agreement for Mr. O’Grady, who joined the Corporation in August 2011, and it is the Committee’s intention that all future employment security agreements will not include excise tax gross up provisions.

Severance Benefits

The purpose of the severance plan is to provide reasonable benefits to employees who are involuntarily terminated without cause due to a reduction in force, job elimination or similar reasons specified in the severance plan. Northern Trust believes that the availability of severance benefits allows the Corporation to compete with its peer group companies in attracting and retaining talent. The named executive officers participate in this plan on the same terms as all other eligible and similarly situated Northern Trust employees.

 

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Under such circumstances, named executive officers are eligible to receive severance benefits that include:

 

   

A lump sum payment of two weeks of base salary for each year of completed service up to, but less than 25 years, or 52 weeks of base salary for 25 years or more of completed service to the Corporation. Benefits may not exceed two times the lesser of the named executive officer’s annualized base salary for the year preceding the named executive officer’s termination, or the annual Internal Revenue Service Code compensation limit for retirement plans for the year of termination.

 

   

A Consolidated Omnibus Budget Reconciliation Act (“COBRA”) subsidy based on their length of service to help cover the costs of continuation coverage under the employer’s medical and dental plans, full vesting under TIP and Supplemental TIP, one additional year of vesting service under the Pension Plan and the Supplemental Pension Plan, enhanced early retirement eligibility under the Pension Plan for employees who have reached age 54 with 14 years of credited service, and outplacement assistance.

 

   

These benefits are contingent upon execution of a release, waiver and settlement agreement with the Corporation. Severance payments will be reduced by any severance payments made under employment security agreements or any other benefit plan, program or individual contract.

 

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SUMMARY COMPENSATION TABLE

The following table sets forth compensation information for the Corporation’s Chairman and CEO, current and former chief financial officer, and the three other most highly compensated executive officers for the year ended December 31, 2011.

 

Name and

Principal

Position

(a)

  Year
(b)
   

Salary

($)(1)

(c)

   

Bonus

($)

(d)

   

Stock

Awards

($)(2)

(e)

   

Option

Awards

($)(3)

(f)

   

Non-Equity

Incentive

Plan

Compen-
sation
($)(4)

(g)

   

Change in

Pension

Value and

Nonqualified

Deferred

Compensation

Earnings

($)(5)

(h)

   

All

Other

Compen-
sation

($)(6)

(i)

   

Total

($)

(j)

 

Frederick H. Waddell

Chairman, and Chief Executive Officer

    2011      $ 956,250             $ 4,000,008      $ 3,581,932      $ 1,600,000      $ 4,078,538      $ 88,672      $ 14,305,400   
    2010      $ 900,000             $ 3,500,005      $ 2,977,647      $ 2,000,000      $ 3,306,902      $ 75,527      $ 12,760,081   
    2009      $ 900,000             $ 2,597,068      $ 4,968,921      $ 2,000,000      $ 1,332,078      $ 93,003      $ 11,891,070   

William L. Morrison

President and Chief Operating Officer, Former Chief Financial Officer

    2011      $ 612,500             $ 1,686,442      $ 1,119,358      $    750,000      $ 821,577      $ 32,194      $ 5,022,071   
    2010      $ 550,000             $ 1,000,016      $ 850,769      $ 700,000      $ 612,218      $ 160,017      $ 3,873,020   
    2009      $ 550,000             $ 865,689      $ 1,656,319      $    700,000      $ 398,419      $ 31,750      $ 4,202,177   
                                                                       

Michael G. O’Grady

Executive Vice-President and Chief Financial Officer(7)

    2011      $ 208,333      $ 325,000      $ 1,250,035      $ 854,260      $ 25,000      $ 7,380      $ 0      $ 2,670,008   
    2010                                                           
    2009                                                           

Steven L. Fradkin

President—Corporate and Institutional Services

    2011      $ 587,500             $ 1,250,042      $ 1,119,358      $ 675,000      $ 1,012,591      $ 31,493      $ 4,675,984   
    2010      $ 550,000             $ 1,000,016      $ 850,769      $    725,000      $ 672,377      $ 27,284      $ 3,825,446   
    2009      $ 550,000             $ 865,689      $ 1,656,319      $ 700,000      $ 313,677      $ 34,570      $ 4,120,255   

Stephen N. Potter

President—Northern Trust Global Investments

    2011      $ 587,500             $ 1,250,042      $ 1,119,358      $ 650,000      $ 1,390,523      $ 26,821      $ 5,024,244   
    2010      $ 537,500             $ 1,000,016      $ 850,769      $    675,000      $ 1,017,805      $ 22,008      $ 4,103,098   
    2009      $ 500,000             $ 865,689      $ 1,656,319      $ 675,000      $ 341,576      $ 28,102      $ 4,066,686   

Jana R. Schreuder

President—Personal Financial Services

    2011      $ 587,500             $ 1,250,042      $ 1,119,358      $ 675,000      $ 1,501,040      $ 33,033      $ 5,165,973   
    2010      $ 550,000             $ 1,000,016      $ 850,769      $    700,000      $ 1,154,597      $ 23,133      $ 4,278,515   
    2009      $ 550,000             $ 865,689      $ 1,656,319      $ 725,000      $ 427,703      $ 37,575      $ 4,262,286   

 

(1) Salary. Effective April 1, 2011, the salary of Mr. Waddell was increased to $975,000 and salaries for Mr. Morrison, Mr. Fradkin, Mr. Potter and Ms. Schreuder were increased to $600,000. In addition, effective October 1, 2011, Mr. Morrison’s annual base salary rate was increased to $700,000 in connection with his appointment as President and Chief Operating Officer.

(2) Stock Awards. This column shows the grant date fair value of the restricted stock unit awards computed in accordance with FASB ASC Topic 718. See footnote 23 to the Consolidated Financial Statements contained in the Corporation’s 2011 Annual Report to Stockholders for a discussion of the assumptions made by the Corporation in the valuation of these stock unit awards, including that dividend equivalents will be paid on these stock unit awards.

Dividend equivalents on restricted stock units and performance stock units held or deferred by a named executive officer are paid on a current basis. Dividend equivalents paid on restricted stock units and performance stock units of each named executive officer in 2009 were: Mr. Waddell: $175,674; Mr. Morrison: $86,238; Mr. Fradkin: $68,853; Mr. Potter: $48,170; and Ms. Schreuder: $52,399. Dividend equivalents paid on restricted stock units and performance stock units of each named executive officer in 2010 were: Mr. Waddell: $243,720; Mr. Morrison: $72,012; Mr. Fradkin: $72,593;

 

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Mr. Potter: $58,954; and Ms. Schreuder: $58,535. Dividend equivalents paid on restricted stock units of each named executive officer in 2011 were: Mr. Waddell: $282,717; Mr. Morrison: $73,906; Mr. O’Grady $0; Mr. Fradkin: $74,536; Mr. Potter: $68,233; and Ms. Schreuder: $63,922.

(3) Option Awards. This column shows the grant date fair value of the option awards computed in accordance with FASB ASC Topic 718. See footnote 23 to the Consolidated Financial Statements contained in the Corporation’s 2011 Annual Report to Stockholders for a discussion of the assumptions made by the Corporation in the valuation of these option awards, including that dividend equivalent payments are factored into the option valuation. The footnotes to the “Outstanding Equity Awards at Fiscal Year-End” table beginning on page 60 of this proxy statement contain vesting and other additional information about the stock option awards made in 2009, 2010 and 2011.

(4) Non-Equity Incentive Plan Compensation. This column shows the annual cash incentives earned by the named executive officers in 2009, 2010, and 2011 under the MPP.

(5) Change in Pension Value and Nonqualified Deferred Compensation Earnings. This column shows the increase from each of December 31, 2008 to December 31, 2009, from December 31, 2009 to December 31, 2010 and from December 31, 2010 to December 31, 2011 (in each case, the measurement date used for reporting purposes in the Corporation’s applicable Annual Report to Stockholders) in the actuarial present value of accumulated benefits for each named executive officer under the Pension Plan and the Supplemental Pension Plan. It does not include any above-market or preferential earnings on deferred compensation as the Corporation does not pay above-market or preferential interest on the deferred compensation of its named executive officers.

 

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(6) All Other Compensation. The table below provides a breakdown of the amounts shown in the “All Other Compensation” column for each named executive officer in 2009, 2010 and 2011.

 

            Perquisites (a)     Other Compensation     Total  
Name   Year    

Financial

Consulting/

Tax Return

Preparation

Services

   

Personal

Use of

Corporation’s

Automobiles

   

Relocation

(b)

   

Tax

Reimburse-
ments

(c)

   

TIP/
Supplemental

TIP

Contributions

(d)

        

Frederick H. Waddell

    2011      $ 13,500      $ 25,559             $ 17,250      $ 32,363      $ 88,672   
    2010      $ 13,500      $ 21,782             $ 13,245      $ 27,000      $ 75,527   
    2009      $ 13,500      $ 24,218             $ 14,785      $ 40,500      $ 93,003   

William L. Morrison

    2011      $ 7,500      $   1,548             $ 1,096      $ 22,050      $ 32,194   
    2010      $ 6,500      $   1,611      $ 78,736      $ 56,670      $ 16,500      $ 160,017   
    2009      $ 7,000                           $ 24,750      $ 31,750   

Michael G. O’Grady

    2011                                             
    2010                                             
    2009                                             

Steven L. Fradkin

    2011      $ 9,300      $ 523             $ 370      $ 21,300      $ 31,493   
    2010      $ 9,500      $ 777             $ 507      $ 16,500      $ 27,284   
    2009      $ 9,240      $ 351             $ 229      $ 24,750      $ 34,570   

Stephen N. Potter

    2011      $ 5,000      $ 305             $ 216      $ 21,300      $ 26,821   
    2010      $ 5,000      $ 535             $ 348      $ 16,125      $ 22,008   
    2009      $   5,000      $ 412             $ 190      $ 22,500      $ 28,102   

Jana R. Schreuder

    2011      $ 11,733                           $ 21,300      $ 33,033   
    2010      $ 6,633                           $ 16,500      $ 23,133   
    2009      $ 12,825                           $ 24,750      $ 37,575   

 

 

(a) Perquisites. All perquisites are valued based on the aggregate incremental cost to the Corporation, as required by the SEC’s rules. The “Compensation Discussion and Analysis—Perquisites” section of this proxy statement contains additional information about the perquisites provided by the Corporation to its named executive officers.

(b) Relocation. The amounts in this column represent the payment of or reimbursement to Mr. Morrison for temporary living, travel, household goods transportation, and other expenses under the Corporation’s relocation program in connection with his relocation from Florida to Illinois.

(c) Tax Reimbursements. This column shows the amount of tax reimbursement associated with the use of the Corporation’s automobiles for business-related purposes and, in Mr. Morrison’s case, his relocation expenses.

(d) TIP/Supplemental TIP Contributions. This column reflects matching contributions made on behalf of the named executive officers to TIP and Supplemental TIP, both of which are defined contribution plans, as described above under “Compensation Discussion and Analysis—Retirement and Health and Welfare Benefits.”

(7) Mr. O’Grady joined the Corporation on August 15, 2011 as an Executive Vice-President and became Chief Financial Officer on October 1, 2011. His compensation is reported only from August 15, 2011 forward. The bonus amount represents a minimum bonus guaranteed to Mr. O’Grady in 2011 in connection with his commencement of employment with the Corporation.

 

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GRANTS OF PLAN-BASED AWARDS

The following table sets forth information for each named executive officer with respect to:

 

   

Estimated possible payouts under non-equity incentive plan awards for 2011;

 

   

Estimated future payouts under equity incentive plan awards for 2011;

 

   

Other stock awards made in 2011; and

 

   

Stock options granted in 2011.

 

         

Estimated Possible Payouts

Under Non-Equity Incentive

Plan Awards(2)

   

Estimated Future

Payouts Under Equity

Incentive Plan

Awards

   

All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units
(#)(3)

(i)

   

All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(4)

(j)

   

Exercise
or Base
Price of
Option
Awards
($/sh)(5)

(k)

   

Grant
Date Fair
Value of
Stock and
Option
Awards(6)

(l)

 

Name

(a)

 

Grant
Date(1)

(b)

 

Thresh-
old
($)

(c)

   

Target
($)

(d)

   

Maxi-
mum
($)

(e)

   

Thresh-
old
(#)

(f)

   

Target
(#)

(g)

   

Maxi-
mum
(#)

(h)

         

Frederick H. Waddell

  —       —          2,000,000        3,621,600                                                           
    2/14/2011                                                             227,964      $ 52.640      $ 3,581,932   
    2/14/2011                             0        0        0        75,988                      $ 4,000,008   

William L. Morrison

  —       —          700,000        2,414,400                                                           
    2/14/2011                                                             71,239      $ 52.640      $ 1,119,358   
    2/14/2011                             0        0        0        23,747                      $ 1,250,042   
    7/19/2011                                                     10,000                      $ 436,400   

Michael G. O’Grady

  —       —          N/A        1,810,800                                                           
    10/18/2011                                                             96,700      $ 38.780      $ 854,260   
    10/18/2011                             0        0        0        32,234                      $ 1,250,035   

Steven L. Fradkin

  —       —          725,000        1,810,800                                                           
    2/14/2011                                                             71,239      $ 52.640      $ 1,119,358   
    2/14/2011                             0        0        0        23,747                      $ 1,250,042   

Stephen N. Potter

  —       —          675,000        1,810,800                                                           
    2/14/2011                                                             71,239      $ 52.640      $ 1,119,358   
    2/14/2011                             0        0        0        23,747                      $ 1,250,042   

Jana R. Schreuder

  —       —          700,000        1,810,800                                                           
    2/14/2011                                                             71,239      $ 52.640      $ 1,119,358   
    2/14/2011                             0        0        0        23,747                      $ 1,250,042   

 

(1) Grant Date. In each case, the “Grant Date” reflects the date on which the Compensation and Benefits Committee acted to approve the grant of the award.

(2) Estimated Possible Payouts Under Non-Equity Incentive Plan Awards. These columns show the range of potential payouts under the MPP based on the Corporation’s performance in 2011. “Threshold” is not applicable as the MPP authorizes the Compensation and Benefits Committee to award annual cash incentives ranging from $0 to the “Maximum”. The MPP defines the Maximum for each position as follows: Chairman, the CEO or a combined Chairman and CEO position—0.6% of consolidated net income; President, any Vice Chairman, COO, or a combined President and COO—0.4% of consolidated

 

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net income; and the other named executive officers—0.3% of consolidated net income. No target awards were established under the MPP for 2011. Pursuant to SEC regulations, the amount set forth under the target column represents the amount awarded to the named executive officer in respect of 2010 performance (except in the case of Mr. O’Grady, who did not participate in the MPP in 2010). The Committee considers a range of financial and non-financial factors and exercises discretion in determining the actual award provided that such awards may not exceed the “Maximum” defined in the MPP.

(3) All Other Stock Awards: Number of Shares of Stock or Units. This column shows the number of restricted stock units granted to the named executive officers in 2011.

(4) All Other Option Awards: Number of Securities Underlying Options. This column shows the number of shares that may be issued to the named executive officers upon exercise of stock options granted in 2011.

(5) Exercise Price. In 2011, the exercise price for all stock options was the closing sale price of the Corporation’s common stock on the date of grant.

(6) Grant Date Fair Value. The grant date fair value of the stock and option awards was computed in accordance with FASB ASC Topic 718.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth information for each named executive officer with respect to:

 

   

Each stock option to purchase common stock that had not been exercised and remained outstanding at December 31, 2011; and

 

   

Each award of restricted stock units that had not vested and remained outstanding at December 31, 2011.

 

     
     Option Awards(1)     Stock Awards  
               

Name

(a)

 

Number

of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

(b)

   

Number

of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

(c)

   

Equity

Incentive

Plan

Awards:

Number

of

Securities

Underlying

Unexer-

cised

Unearned

Options

(#)

(d)

 

Option

Exercise

Price

($)

(e)

   

Option

Expiration

Date

(f)

   

Number

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

(#)(2)

(g)

   

Market

Value

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

($)(3)

(h)

 

Frederick H. Waddell

    1,913        0            52.300000        5/20/2012        189,764      $ 7,526,040   
      23,087        0            52.300000        5/20/2012                   
      22,024        0            32.615000        2/18/2013                   
      90,000        0            49.120000        2/17/2014                   
      75,000        0            44.465000        2/15/2015                   
      76,761        0            52.095000        2/21/2016                   
      65,105        0            63.360000        2/20/2017                   
      94,764          31,588            71.230000        2/19/2018                   
      135,404        135,404            57.540000        7/21/2019                   
      51,481        154,442            50.990000        2/15/2020                   
      0        227,964            52.640000        2/14/2021                   

William L. Morrison

    3,635        0            53.655000        2/19/2012        68,404      $ 2,712,903   
      1,913        0            52.300000        5/20/2012                   
      38,087        0            52.300000        5/20/2012                   
      3,066        0            32.615000        2/18/2013                   
      6,934        0            32.615000        2/18/2013                   
      5,519        0            32.615000        2/18/2013                   
      90,000        0            49.120000        2/17/2014                   
      75,000        0            44.465000        2/15/2015                   
      63,328        0            52.095000        2/21/2016                   
      40,247        0            63.360000        2/20/2017                   
      31,589          10,529            71.230000        2/19/2018                   
      45,135          45,135            57.540000        7/21/2019                   
      14,709          44,127            50.990000        2/15/2020                   
      0          71,239            52.640000        2/14/2021                   

Michael G. O’Grady

    0          96,700            38.780000        10/18/2021        32,234      $ 1,278,400   

 

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     Option Awards(1)     Stock Awards  
               

Name

(a)

 

Number

of

Securities

Underlying

Unexercised

Options

(#)

Exercisable

(b)

   

Number

of

Securities

Underlying

Unexercised

Options

(#)

Unexercisable

(c)

   

Equity

Incentive

Plan

Awards:

Number

of

Securities

Underlying

Unexer-

cised

Unearned

Options

(#)

(d)

 

Option

Exercise

Price

($)

(e)

   

Option

Expiration

Date

(f)

   

Number

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

(#)(2)

(g)

   

Market

Value

of

Shares

or

Units

of

Stock

That

Have

Not

Vested

($)(3)

(h)

 

Steven L. Fradkin

    2,796        0            53.655000        2/19/2012        58,404      $ 2,316,303   
      1,913        0            52.300000        5/20/2012                   
      28,087        0            52.300000        5/20/2012                   
      50,000        0            49.120000        2/17/2014                   
      55,000        0            44.465000        2/15/2015                   
      57,571        0            52.095000        2/21/2016                   
      40,247        0            63.360000        2/20/2017                   
      31,589          10,529            71.230000        2/19/2018                   
      45,135          45,135            57.540000        7/21/2019                   
      14,709          44,127            50.990000        2/15/2020                   
      0          71,239            52.640000        2/14/2021                   

Stephen N. Potter

    1,295        0            53.655000        2/19/2012        58,404      $ 2,316,303   
      1,913        0            52.300000        5/20/2012                   
      18,087        0            52.300000        5/20/2012                   
      21,934        0            32.615000        2/18/2013                   
      3,680        0            32.615000        2/18/2013                   
      25,000        0            49.120000        2/17/2014                   
      30,000        0            44.465000        2/15/2015                   
      24,180        0            52.095000        2/21/2016                   
      26,042        0            63.360000        2/20/2017                   
      26,850          8,950            71.230000        2/19/2018                   
      45,135        45,135            57.540000        7/21/2019                   
      14,709        44,127            50.990000        2/15/2020                   
      0        71,239            52.640000        2/14/2021                   

Jana R. Schreuder

    1,398        0            53.655000        2/19/2012        58,404      $ 2,316,303   
      1,913        0            52.300000        5/20/2012                   
      18,087        0            52.300000        5/20/2012                   
      25,000        0            49.120000        2/17/2014                   
      42,219        0            52.095000        2/21/2016                   
      35,512        0            63.360000        2/20/2017                   
      31,589        10,529            71.230000        2/19/2018                   
      45,135        45,135            57.540000        7/21/2019                   
      14,709        44,127            50.990000        2/15/2020                   
      0        71,239            52.640000        2/14/2021                   

 

(1) Stock Options. Stock options are granted with an exercise price equal to the closing sale price of the common stock on the date of grant and expire 10 years after the date of the grant. This approach is designed to motivate the executive to contribute to the creation of stockholder value over the long term. The Corporation currently grants only non-qualified stock options because it believes that the tax benefits to the Corporation of non-qualified stock options outweigh the potential tax benefits to the executives of incentive stock options. All stock options granted in 2006 and thereafter are scheduled to

 

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vest in equal annual installments over a four-year vesting period determined by the Committee. If the executive dies or becomes disabled, the stock options (whether vested or unvested) become vested and may be exercised until the earlier of five years following death or disability or the expiration date of the option. If the executive retires, the stock options continue to vest in accordance with their terms and, once vested, may be exercised until the earlier of five years following retirement or the expiration date of the option. If the executive’s employment is terminated under certain circumstances entitling the executive to severance benefits, the executive’s stock options (whether vested or unvested) may be exercised until the earlier of 180 days following termination of employment or the expiration date of the option, provided that if the executive is retirement eligible upon his or her termination of employment under the severance plan, the executive’s stock options (whether vested or unvested) become vested upon the executive’s termination of employment and may be exercised until the earlier of five years from the executive’s effective date of retirement or the expiration of the option. If the executive is a member of the Management Group on the date of grant, is age 55 or older with a minimum of 10 years of employment on the date of termination of employment, and is not otherwise retirement-eligible pursuant to the Corporation’s retirement policy, the stock options continue to vest and, once vested, may be exercised until the earlier of five years following termination of employment or the expiration date of the option. In other instances, vested stock options expire on the earlier of three months following termination of employment or the expiration date of the option, and unvested stock options expire on termination of employment. Upon a change in control of the Corporation, all stock options become vested and exercisable.

(2) Number of Restricted Stock Units. This column shows the number of unvested restricted stock units held by the named executive officers as of December 31, 2011. Restricted stock units vest 50% on the third anniversary of the date of grant and 50% on the fourth anniversary of the date of grant. Restricted stock unit awards entitle an executive to receive one share of common stock in the year in which the award vests. Restricted stock units vest over a specified vesting period determined by the Committee. Dividend equivalents on the restricted stock units are paid on a current basis prior to vesting and distribution. If the executive dies, becomes disabled, or retires during the vesting period, or the executive’s employment is terminated during the vesting period under certain circumstances entitling the executive to severance benefits, the executive or the executive’s beneficiaries will be entitled to receive a distribution of a prorated number of restricted stock units immediately upon the occurrence of the triggering event. If the executive is a Management Group member on the date of grant, is age 55 or older on the date of termination of employment, and does not violate certain restrictive covenants concerning confidentiality and non-solicitation during the vesting period, a prorated number of stock units is eligible for distribution upon each remaining vesting date in the vesting period. In other instances where the executive leaves the Corporation during the vesting period, the restricted stock units are forfeited. In the event of a change in control, all restricted stock units become fully vested, and are immediately distributable.

(3) Market Value of Restricted Stock Units. This column shows the market value of the unvested restricted stock units held by the named executive officers, based on a price of $39.66 per share (the closing market price of the Corporation’s common stock on December 30, 2011, as reported by NASDAQ).

 

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OPTION EXERCISES AND STOCK VESTED

The following table sets forth information for each named executive officer with respect to:

 

   

The exercise during 2011 of stock options to purchase shares of the Corporation’s common stock;

 

   

The dollar amount realized upon exercise of the stock options;

 

   

The number of shares acquired in 2011 upon the vesting of restricted stock units; and

 

   

The dollar amount realized upon vesting of the restricted stock units.

 

     
     Option Awards     Stock Awards  
         

Name

(a)

 

Number of Shares

Acquired on Exercise

(#)

(b)

   

Value

Realized on

Exercise

($)(1)

(c)

   

Number of

Shares Acquired

On Vesting

(#)

(d)

   

Value Realized

On Vesting

($)

(e)

 

Frederick H. Waddell

    22,024      $ 151,415        0      $ 0   

William L. Morrison

    0      $ 0        0      $ 0   

Michael G. O’Grady

    0      $ 0        0      $ 0   

Steven L. Fradkin

    0      $ 0        0      $ 0   

Stephen N. Potter

    0      $ 0        0      $ 0   

Jana R. Schreuder

    851      $ 38,402        0      $ 0   

 

(1) Value Realized on Exercise. The value realized on the exercise of stock options represents the pre-tax difference between the option exercise price and the fair market value of the common stock on the date of exercise, multiplied by the number of shares of common stock covered by the stock options held by the named executive officers.

 

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PENSION BENEFITS

 

         

Name

(a)

 

Plan

Name

(b)

 

 Number of 

Years

Credited

Service

(#)

(c)

   

Present Value
 of Accumulated 

Benefit

($)

(d)

   

Payments
 During Last 

Fiscal Year

($)

(e)

 

Frederick H. Waddell