April 20, 2010

 

Dear CTS Shareholder:

 

You are cordially invited to attend the 2010 Annual Meeting of Shareholders of CTS Corporation. The meeting will be held on Wednesday, May 26, 2010, at 9:30 a.m. Central Daylight Time, at the Hilton Chicago O’Hare Airport Hotel in Chicago, Illinois.

 

The official meeting notice, proxy statement, and proxy form are enclosed. These materials were first mailed to shareholders on April 20, 2010. We hope you will attend the meeting in person. Whether you plan to attend the meeting or not, we encourage you to read this proxy statement and vote your shares. The vote of every shareholder is important.

 

We look forward to seeing you at the meeting.

 

Vinod M. Khilnani
Chairman, President and
Chief Executive Officer

 

Notice of the Annual Meeting of Shareholders

 

To Be Held On

May 26, 2010

 

To CTS Shareholders:

 

The 2010 Annual Meeting of Shareholders of CTS Corporation will be held on Wednesday, May 26, 2010 at 9:30 a.m. Central Daylight Time, at the Hilton Chicago O’Hare Airport Hotel in Chicago, Illinois. To obtain directions to the meeting location, please call (574) 523-3800.

 

Only shareholders of record at the close of business on April 9, 2010 may vote at this meeting or any adjournments that may take place. At the meeting, shareholders will vote on:

 

1. Election of directors for the ensuing year;

 

2. Ratification of the appointment of Grant Thornton LLP as CTS’ independent auditor for 2010; and

 

3. Any other business properly presented at the meeting.

 

Your Board of Directors recommends that you vote in favor of the director-nominees and ratify the appointment of Grant Thornton LLP.

 

By Order of the Board of Directors,

 

Richard G. Cutter
Secretary

 

April 20, 2010

 

 

 

 

PROXY STATEMENT

 

 

ANNUAL MEETING OF SHAREHOLDERS

 

To be held on
May 26, 2010

 

This proxy statement was first mailed to shareholders on April 20, 2010, and is furnished in connection with the solicitation by the Board of Directors (“Board”) of CTS Corporation (“CTS”) of proxies to be voted at the 2010 Annual Meeting of Shareholders (“Annual Meeting”). The following is important information in a question-and-answer format regarding the meeting and this proxy statement.

 

 

 

2.	RATIFICATION OF THE APPOINTMENT OF GRANT THORNTON LLP AS CTS’ INDEPENDENT AUDITOR FOR 2010.

 

PROPOSAL 1: ELECTION OF DIRECTORS

 

CTS’ Articles of Incorporation provide that the number of directors will be between three and fifteen, as fixed from time-to-time by the Board of Directors. The CTS Board of Directors has established the current number of authorized directors at eight. There are eight director-nominees for election. Detailed information on each is provided below. All directors are elected annually and serve one-year terms or until their successors are elected and qualified.

 

Nominees for the Board of Directors.  Each director-nominee named below is currently a director of CTS Corporation. The ages shown are as of April 20, 2010, the date on which this proxy statement was first mailed to shareholders. Each director-nominee has agreed to serve as a director if elected. If one or more of the nominees become unavailable for election, the members of the Board of Directors will, in their sole discretion and pursuant to authority granted by the CTS Corporation bylaws, nominate and vote for a replacement director or reduce the authorized number of directors.

 

Age 65

 

Mr. Catlow is Dean of the College of Business at Concordia University. Mr. Catlow served as President of Ameritech Cellular Services, a wireless communications service provider, from 1998 until his retirement in 2000. Mr. Catlow previously served as Executive Vice President of Ameritech and as President of Ameritech International, Inc., where he directed Ameritech international investments and was responsible for global acquisitions and alliances. The Board believes Mr. Catlow’s experience in international business, his experience in the wireless communications infrastructure industry and his experience as a top level executive make him well qualified to serve as a director.

 

Age 67

 

Mr. Ciancia has been a partner in Corporate Development International, Inc., a corporate search firm specializing in mergers, acquisitions and divestitures, since 1998. Previously, Mr. Ciancia served as President of Uponor ETI, a supplier of PVC pipe products, specialty chemicals and PVC compounds. The Board

believes Mr. Ciancia’s experience in international mergers and acquisitions and his experience as a top level executive make him well qualified to serve as a director.

 

Age 68

 

Mr. Cody is the retired Vice Chairman of Macy’s, Inc. (formerly known as Federated Department Stores, Inc.), a nationwide department store retailer, serving from February 2003 through March 2010. Prior to assuming this position, he served as Executive Vice President, Legal and Human Resources of Federated Department Stores, Inc. since 1992. Until May 2008, Mr. Cody was also a Director of LCA Vision, Inc. The Board believes that Mr. Cody’s extensive legal, tax, human resources, and top level executive experience, garnered in service of a major New York Stock Exchange listed corporation, as well as his experience serving as a director of another company, make him well qualified to serve as a director.

 

Age 51

 

Ms. Collawn is President and Chief Executive Officer of PNM Resources, Inc., a multi-state utilities corporation serving electricity and natural gas customers. PNM Resources, Inc. is traded on the New York Stock Exchange under the symbol PNM. Ms. Collawn has served in this capacity since March 2009. In March of 2009 she was also made a Director of PNM Resources, Inc. Immediately prior to that, she was President and Chief Operating officer since August 2008 and Utilities President at PNM Resources, Inc. from June 2007 to August 2008. Prior to that, Ms. Collawn was President and Chief Executive Officer of Public Service Company of Colorado, an Xcel Energy, Inc. subsidiary, from October 2005. Previously, Ms. Collawn had served as President of Customer and Field Operations of Xcel Energy from July 2003 and as President of the Retail Services Group of Xcel Energy from March 2001. The Board believes that Ms. Collawn’s experience as a sitting President and Chief Executive Officer of a publicly traded corporation, as well as substantial operations experience, make her well qualified to serve as a director.

 

Age 73

 

Mr. Hemminghaus is Lead Independent Director of CTS Corporation’s Board of Directors. He previously served as Chairman from July 2007 to May 2009. He is the retired Chairman and Chief Executive Officer of Ultramar Diamond Shamrock Corporation, a corporation that refined and marketed petroleum products on a retail and wholesale basis, serving from 1996 until 2000. Mr. Hemminghaus is a past Chairman of the Federal Reserve Bank of Dallas. Mr. Hemminghaus also serves as a Director of Tandy Brand Accessories, Inc. and the Southwest Research Institute. Until May 2009, he was a Director of Xcel Energy, Inc. The Board believes that Mr. Hemminghaus’ experience as Chief Executive Officer of a publicly traded corporation and experience serving as a director of other companies makes him well qualified to serve as a director.

 

Age 69

 

Mr. Henning is the retired Deputy Chairman of Ernst & Young LLP, an independent accounting firm, serving from 1999 to 2000. Mr. Henning served as Chief Executive Officer of Ernst & Young International, Inc. from 1993 until 1999. Mr. Henning also serves as a Director of Omnicom Group, Inc. and Landstar Systems, Inc. Until October 2009, Mr. Henning was a Director of Highlands Acquisition Corporation. The Board believes that Mr. Henning’s substantial international tax and accounting experience garnered thorough service with one of the world’s preeminent accounting firms, and his experience serving as a director of other companies, makes him well qualified to serve as a director. Mr. Henning’s tax and accounting acumen also enable his service as CTS’ Audit Committee financial expert.

Age 57

 

Mr. Khilnani is Chairman of the Board of Directors, President, and Chief Executive Officer of CTS Corporation. Mr. Khilnani joined CTS Corporation in May 2001 as Senior Vice President and Chief Financial Officer. In July 2007, he was elected President and appointed Chief Executive Officer. He was appointed Chairman of the Board of Directors in May of 2009. Mr. Khilnani also serves as a Director, member of the Nominating and Governance Committee, and member of the Compensation Committee for Brush Engineered Materials, Inc. The Board believes that Mr. Khilnani’s more than 30 years of leadership experience and acumen in finance, strategy, mergers and acquisitions and operating roles based in the United States and Europe, including 18 years at Cummins, Inc., as well as extensive experience as a top executive at CTS, all make him well qualified to serve as a director.

 

Age 60

 

Mr. Profusek is the Head of Mergers & Acquisitions for Jones Day, a global law firm which he joined in 1975. Mr. Profusek also serves as a Director of Valero Energy Corporation and is a member of Valero’s Compensation and Nominating and Governance Committees. The Board believes that Mr. Profusek’s substantial experience in mergers and acquisitions, corporate finance and experience serving as a director of other companies make him well qualified to serve as a director.

 

 

 

 

PROPOSAL 2: RATIFICATION OF APPOINTMENT OF GRANT THORNTON LLP AS INDEPENDENT AUDITOR

 

Grant Thornton LLP has served as CTS’ independent auditor since June 2005 and has been appointed by the Audit Committee to continue as CTS’ independent auditor for 2010. In the event that ratification is not approved by a majority of the shares of CTS common stock represented at the Annual Meeting in person or by proxy and entitled to vote on the matter, the Audit Committee and the Board of Directors will review the Audit Committee’s future selection of independent auditors.

 

Representatives of Grant Thornton LLP will be present at the Annual Meeting. The representatives will be available to respond to appropriate questions. The representatives will also be afforded an opportunity at such time to make such statements as they desire.

 

 

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides information about shares of CTS common stock that could be issued under all of CTS’ equity compensation plans as of December 31, 2009:

 

 

 

SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires CTS’ directors, executive officers and certain persons who own more than 10% of CTS’ common stock to file with the Securities and Exchange Commission and the New York Stock Exchange, initial reports of ownership and reports of changes in ownership of CTS common stock. Executive officers, directors and holders of at least 10% of CTS’ common stock are required to furnish CTS with copies of all Section 16(a) reports they file. Based solely on written representations from reporting persons and on our review of Section 16(a) reports provided by those individuals, CTS believes that all required Section 16(a) filings were completed in a timely manner in 2009, with the exception of one report on one transaction for Vinod M. Khilnani, a purchase of 200 shares of CTS stock, which was filed one day late.

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

Directors are assigned to committees of the Board of Directors by the full Board of Directors each year following their election at the Annual Meeting.

 

Compensation Committee

 

The Compensation Committee is a standing committee of the Board of Directors. Directors Collawn, Catlow, Cody, and Henning are the current members of the Compensation Committee. Each member of the Compensation Committee is an independent director as defined by the New York Stock Exchange Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines. The Committee held four meetings in 2009. A copy of the Compensation Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/compensationcharter.htm.

The Compensation Committee establishes executive compensation policies and reviews and approves senior executive and director compensation. The Compensation Committee reviews and approves corporate goals and objectives relevant to the Chief Executive Officer’s compensation, evaluates the Chief Executive Officer’s performance against those objectives, and makes recommendations to the Board of Directors regarding the Chief Executive Officer’s compensation. The Compensation Committee also administers the CTS Corporation Management Incentive Plan and the CTS Corporation 2009 Omnibus Equity and Performance Incentive Plan. Annually, the Compensation Committee conducts an evaluation of its performance for the fiscal year.

 

The Compensation Committee does not delegate authority to perform any of the foregoing functions with respect to the compensation of any executive officer. In 2009, the Compensation Committee delegated authority to make cash incentive or equity awards to non-executive officers to the Chief Executive Officer and/or the Senior Vice President, Administration subject to specific numeric limits. The Chief Executive Officer recommends to the Compensation Committee the form and level of compensation for each executive officer other than himself. The Compensation Committee recommends the Chief Executive Officer’s form and level of compensation to the full Board of Directors for approval.

 

In 2009, the Senior Vice President, Administration regularly reported to the Compensation Committee regarding market trends in executive compensation. He also provided background information, such as peer benchmark data, to assist the Compensation Committee in making decisions about executive compensation. The Compensation Committee may direct senior functionaries of the corporation’s human resources department to research specific issues and make recommendations to the Committee.

 

Compensation Committee Interlocks and Insider Participation

 

Directors Collawn, Catlow, Cody, and Henning were appointed to the Compensation Committee following their election to the Board of Directors at the 2009 Annual Meeting of Shareholders of CTS Corporation. During 2009, no executive officer of CTS served as a director of any other entity for which any CTS director was an executive officer.

 

Nominating and Governance Committee

 

The Nominating and Governance Committee is a standing committee of the Board of Directors. Directors Ciancia, Catlow, Cody, and Collawn are the current members of the Nominating and Governance Committee. Each member of the Nominating and Governance Committee is an independent director as defined by the New York Stock Exchange Corporate Governance Listing Standards and the CTS Corporation Corporate Governance Guidelines. The Nominating and Governance Committee held five meetings in 2009. A copy of the Nominating and Governance Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/governancecharter.htm.

 

The Nominating and Governance Committee reviews and makes recommendations to the Board of Directors concerning committee assignments and director-nominees for election at the Annual Meeting. The Nominating and Governance Committee also develops the CTS Corporation Corporate Governance Guidelines for the approval of the Board of Directors and makes recommendations on matters of corporate governance. CTS’ bylaws describe the process for nominating a candidate for election to the Board of Directors at the Annual Meeting of Shareholders. CTS does not have a formal policy concerning whether the Nominating and Governance Committee will consider director-nominees submitted by shareholders. CTS did not receive any shareholder director-nominees for election at the Annual Meeting. At this time, the Board of Directors does not believe a formal policy regarding shareholder director-nominees is necessary since CTS’ bylaws provide a process for nomination of directors and no shareholder nominations for director have been received in past years.

 

The Nominating and Governance Committee reviews with the Board of Directors, on an annual basis, the requisite skills and director characteristics of any new members as well as the composition of the Board of Directors as a whole. This review includes an assessment of whether each non-management director

qualifies as independent and an assessment of the diversity, age, skills, and experience of the directors in the context of the needs of the Board of Directors. Although the Nominating and Governance Committee has not established any specific minimum criteria or qualifications that a candidate must possess, the Nominating and Governance Committee seeks candidates who possess the experience necessary to make a valuable contribution to the Board of Directors. The Board construes the notion of diversity broadly, considering differences in viewpoint, professional experience, education, skills, and other individual qualities, in addition to race, gender, and national origin. The Board of Directors does not have a formal diversity policy, but considers diversity as one criteria evaluated as a part of the total package of attributes and qualifications a particular candidate possesses. The Board believes that its efforts to foster a diverse board have been effective; while all directors are skilled in business, a variety of points of view, educational backgrounds, and experience are represented on the Board. Additionally, key positions such as Chairman of the Board of Directors and Chairperson of the Compensation Committee are currently held by ethnically and gender-diverse Board members. The Nominating and Governance Committee may retain search firms for the purpose of identifying and evaluating director candidates. The Nominating and Governance Committee also considers director-nominees identified by management and by non-management directors.

 

Audit Committee

 

The Audit Committee is a standing committee of the Board of Directors. Directors Henning, Catlow, Ciancia, and Hemminghaus, are the current members of the Audit Committee. Each member of the Audit Committee is financially literate and meets the independence standards applicable to audit committee members under the New York Stock Exchange Corporate Governance Listing Standards, as well as the CTS Corporation Corporate Governance Guidelines and the Audit Committee Charter. The Board of Directors has determined that Mr. Henning qualifies as an audit committee financial expert under the criteria set forth in Item 407(d)(5)(ii) of Regulation S-K.

 

The Audit Committee held nine meetings in 2009. A copy of the Audit Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/auditcharter.htm.

 

The Audit Committee is responsible for appointing the independent auditor, approving engagement fees and all non-audit engagements, and reviewing the independence and quality of the independent auditor. The Audit Committee reviews audit plans, audit reports, and recommendations of the independent auditor, and the internal audit department. The Audit Committee reviews systems of internal accounting controls and audit results. The Audit Committee also reviews and discusses with management CTS’ financial statements, earnings press releases, and earnings guidance. In addition, the Audit Committee also reviews CTS’ compliance with public-company regulatory requirements and the CTS Code of Ethics.

 

Finance and Strategic Initiatives Committee

 

The Finance and Strategic Initiatives Committee is a standing committee of the Board of Directors. Directors Profusek, Hemminghaus, and Khilnani are the current members of the Finance and Strategic Initiatives Committee. The Finance and Strategic Initiatives Committee held two meetings in 2009. A copy of the Finance and Strategic Initiatives Committee Charter may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/financecharter.htm.

 

The Finance and Strategic Initiatives Committee reviews and makes recommendations to the Board of Directors concerning corporate financing arrangements, tax strategies, dividend policy, financial structure, acquisition and divestiture strategies, and similar matters. Additionally, the Finance and Strategic Initiatives Committee reviews and approves capital project appropriation requests for capital projects that are above certain prescribed limits.

 

FURTHER INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

Attendance

 

During 2009, the Board of Directors held seven meetings. In 2009, all of the directors attended 100% of the meetings of the Board of Directors and the standing committees of which they were then members, either in person or telephonically. (Mr. Gerald H. Frieling, Jr. retired from the Board in 2009 at the end of his term and did not stand for reelection at the 2009 Annual Meeting of Shareholders; nonetheless, he attended all board and relevant committee meetings until his retirement.) It is the policy of the Board of Directors that each director endeavor to attend each Annual Meeting of Shareholders, unless exigent circumstances arise. Each director standing for re-election at the 2009 Annual Meeting of Shareholders attended that meeting.

 

Director Independence

 

The CTS Corporation Corporate Governance Guidelines provide that an independent director is one who:

 

 

For purposes of determining whether a director has a material relationship with the corporation apart from his service as a director, the Board of Directors has determined that the corporation’s purchase of regulated electric and gas service from a utility company does not constitute a material relationship.

Additionally, for purposes of determining whether a director has a material relationship with CTS Corporation apart from his or her service as a director, any transaction that is not required to be disclosed pursuant to Item 404(a) of Regulation S-K shall be deemed categorically immaterial. A copy of the CTS Corporation Corporate Governance Guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/guidelines.htm.

 

The Board of Directors has determined that each non-management director is an independent director and has no material relationship with CTS Corporation, apart from his or her service as a director. The Board of Directors made this determination by reference to the definition of an independent director contained in the New York Stock Exchange Corporate Governance Listing Standards and by reference to the standards set forth in the CTS Corporation Corporate Governance Guidelines. As a result, the Board of Directors concluded that Walter S. Catlow, Lawrence J. Ciancia, Thomas G. Cody, Patricia K. Collawn, Roger R. Hemminghaus, Michael A. Henning, and Robert A. Profusek are each independent directors.

 

CTS does not have a written policy specific to transactions with related persons. However, CTS does have written policies and procedures with respect to conflicts of interest. The CTS Corporation Corporate Governance Guidelines provide that the Nominating and Governance Committee shall review any situation which might be construed to disqualify a director as independent and to make a recommendation to the Board of Directors regarding the director’s service on board committees and nomination for re-election to the Board of Directors. The Nominating and Governance Committee Charter further provides that the Nominating and Governance Committee shall review any potential director conflicts of interest and recommend appropriate action to the Board of Directors.

 

Meetings of Non-Management Directors

 

It is the policy of the Board of Directors to hold an independent session excluding management directors at each regular scheduled Board of Directors’ meeting. In 2009, an independent session was held at each regular board meeting. The Lead Independent Director of the Board of Directors, Mr. Hemminghaus, presides over the independent sessions.

 

Board Leadership Structure

 

CTS does not have a policy as to whether the role of Chief Executive Officer and Chairman of the Board of Directors should be separate or combined, or whether the Chairman should be a management or non-management director. In the recent past, the Board has been structured with an independent, non-management director as Chairman and alternatively structured with a combined Chairman/Chief Executive Officer and an independent, non-management Lead Independent Director.

 

Currently, CTS’ President and Chief Executive Officer, Mr. Khilnani, serves as Chairman of CTS’ Board of Directors. Mr. Khilnani is the only one of CTS’ eight directors who is not independent. He does not receive any additional compensation for his service on the Board, or for serving as Chairman. The Chairman sets the agenda and runs the regular meetings of the Board of Directors. Having the Chairman and Chief Executive Officer positions combined is efficient in that the person with primary responsibility for managing the corporation’s day-to-day operation is well positioned to lead the regular board meetings as the Board evaluates key business and strategic issues. Mr. Hemminghaus presently serves as Lead Independent Director. He is a past Chairman of the Board. The Lead Independent Director is the leader of the independent directors, and leads all meetings of independent directors, which normally occur after each Board meeting. He receives an annual retainer of $15,000, in addition to his ordinary director compensation, for this service. The Board has established this leadership structure because the Board believes it is effective, efficient, and appropriate to the corporation’s size and complexity. Additionally, this structure represents a cost-effective allocation of responsibilities.

 

Contrasting with the cost and efficiency benefits is the desire to ensure that control over both management and corporate governance is not overly invested in one person. The Board is confident that, as currently constituted, it provides ample counterbalance to a combined Chairman/ Chief Executive Officer and

that it continues to provide suitable independent oversight of management. The independent directors on the Board are all accomplished professionals possessing substantial real world business and business-related experience. Additionally, all have served on CTS’ Board for a number of years. As discussed above, the independent directors meet in separate session excluding all management including the Chairman/ Chief Executive Officer at each regular meeting of the Board. Further, any director has the right to submit items to be heard at any Board meeting. Lastly, the independent directors outnumber the Chairman/ Chief Executive Officer by a large supermajority.

 

The Board reviews the current board leadership structure annually as it appoints its Chairman. While the Board has presently determined that it is appropriate for Mr. Khilnani to serve in a combined role of Chairman and Chief Executive Officer, the Board retains the right to separate those roles at any point in the future if it determines that such a separation would be in the best interests of the corporation and the shareholders.

 

Board of Directors’ Role in Risk Oversight

 

As a part of its oversight function, the Board monitors how management operates the corporation. Risk is an important part of deliberations at the Board and committee level throughout the year. Committees consider risks associated with their particular areas of responsibility. For example, the Audit Committee evaluates risk associated with accounting, financial reporting, and legal compliance as it reviews those functions, and the Compensation Committee considers compensation related risks and risk mitigation when it sets compensation levels and structures compensation policies. In addition, the Board of Directors as a whole considers risks affecting the corporation generally. To that end, the Board conducts periodic reviews of corporate risk management policies and procedures and annually reviews risk assessments prepared by management as a part of the corporation’s enterprise risk management process. The enterprise risk management process evaluates the corporation’s major risk exposures and the steps management has taken to monitor and control these exposures. Therefore, the Board and its committees consider, among other items, the relevant risks to the corporation when granting authority to management and approving business strategies. The Board has utilized this risk management structure for a number of years. Although the Board retains the right to make changes in risk oversight responsibilities from time-to-time, the Board anticipates that the risk management responsibilities will continue in a substantially similar manner as described above, whether or not the Board’s leadership structure changes.

 

Director Education

 

The CTS Corporate Governance Guidelines encourage all directors to participate in director continuing education programs. CTS reimburses directors for attendance at such programs. In addition, management monitors and reports to the directors regarding significant corporate governance initiatives. The directors also receive a presentation on new developments in corporate governance no less frequently than annually.

 

Stock Ownership Guidelines

 

The Board of Directors has adopted CTS stock ownership guidelines that apply to non-employee directors and executives in order to align their interests with those of shareholders and promote enduring shareholder value. The guidelines are administered by the Compensation Committee. A copy of the guidelines may be obtained free of charge from CTS’ website at http://www.ctscorp.com/governance/stockog.htm.

 

Code of Ethics

 

CTS has adopted a Code of Ethics that applies to all CTS employees, including the principal executive officer, the principal financial officer, the principal accounting officer and/or controller, and all other executive officers and non-employee directors. The CTS Code of Ethics includes ethical standards concerning conflicts of interest and potential conflicts of interest. With respect to executive officers and other employees, potential conflicts of interest must be reported to management. The Audit Committee is responsible for reviewing

compliance with the Code of Ethics and reviews any potential conflict of interest involving an executive officer. A copy of the CTS Code of Ethics may be obtained free of charge from CTS’ Secretary upon request or from CTS’ website at http://www.ctscorp.com/governance/code_of_ethics.htm.

 

Communications to Directors

 

Shareholders and other interested parties may address written communications to individual directors, including non-management directors, or to the Board of Directors as a whole, by writing to Richard G. Cutter, Vice President, Secretary and General Counsel, at CTS’ corporate office located at 905 West Boulevard North, Elkhart, Indiana, 46514. All communications from shareholders must include the name and address of the shareholder as it appears on the record books of CTS Corporation and the name and address of the beneficial owner, if any, on whose behalf the communication is submitted. CTS’ Secretary will compile such communications and forward them to the directors on a periodic basis. However, CTS’ Secretary has authority to disregard any communication which is primarily an advertisement or solicitation or which is threatening, obscene, or similarly inappropriate in nature. Communications that have been disregarded for these reasons may be reviewed by any non-management director upon request.

 

STOCK OWNERSHIP INFORMATION

 

Five Percent Owners of Common Stock. The table below lists information about the persons known by CTS Corporation to beneficially own at least 5% of its common stock as of December 31, 2009, unless a different date is indicated below. There were 33,893,172 shares of CTS common stock issued and outstanding as of December 31, 2009. The information below is derived solely from the most recent Schedules 13D or 13G, and amendments thereto, filed with the Securities and Exchange Commission.

 

 

 

 

 

Directors’ and Officers’ Stock Ownership.  The following table shows how much CTS common stock each named executive officer, director, and all executive officers and directors as a group, beneficially owned as of April 9, 2010, including shares covered by stock options exercisable within 60 days of April 9, 2010. Please note that, as reported in this table, beneficial ownership includes those shares a director or officer has the power to vote or transfer, as well as shares owned by immediate family members that reside in the same household with the director or officer. The shares shown as beneficially owned by all current directors and officers do not include 1,458,900 shares held by the Northern Trust Company as Trustee of the CTS Corporation Master Retirement Trust. The CTS Corporation Benefit Plan Investment Committee has voting and investment authority over those shares.

 

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

This compensation discussion and analysis provides details about CTS’ compensation practices for the named executive officers whose names appear in the tables below. The information provided in this section should be read together with the tables and narratives that accompany the information presented.

 

The following executives are CTS’ named executive officers for 2009, as that term is defined by the Securities and Exchange Commission:

 

 

The Compensation Committee met four times in 2009 to discuss compensation matters. CTS believes that its policies and practices as presented in this compensation discussion and analysis reflect the corporation’s compensation philosophy and enable it to attract, motivate, and retain high quality executive management. CTS is mindful that executive compensation has drawn increasing scrutiny in recent years. While CTS believes that its compensation practices have historically been prudent, care is taken to ensure that named executive officers receive a reasonable amount of compensation in exchange for their services, that executives are properly incentivized to achieve CTS goals, and that compensation opportunities are balanced and limited so that executive interests coincide with those of shareholders. These goals are achieved through a number of techniques, such as: balancing fixed pay vs. incentive-based compensation; selecting appropriate and broad-based performance metrics; establishing reasonable performance thresholds; capping performance-based compensation awards at maximum levels; requiring multiple-year performance periods for performance-based awards; and vesting a significant amount of compensation over two-to-five year periods. In this way, CTS believes that executives will consider the impact of decisions in both the short and long terms and executives will exercise careful judgment, so that the overall long term wellbeing of the corporation is not placed in jeopardy.

 

CTS uses a mix of cash and equity to compensate its executives. The elements of compensation for each named executive officer consist of base salary, annual cash incentives, performance-based equity awards, time-based equity awards, retirement benefits, perquisites, and health and welfare benefits. Although not determinative, the Compensation Committee considers the median of peer group data provided by Towers Watson and data that it compiles from reputable public compensation databases as guidelines when setting CTS executives’ total compensation. The Compensation Committee also considers a number of other factors when establishing executive compensation and recommending total compensation for the Chief Executive Officer. As an example of these other factors, CTS took into account the severe and worldwide economic recession that affected almost every company in 2009, including CTS. As CTS asked its employees to make sacrifices for the good of the corporation, named executive officers were not exempted. Named executive officers were asked to make the same sacrifices as all other U.S.-based employees. Therefore, in 2009, named executive officer base salaries were frozen and, from February to November, reduced by five percent. In addition, in June, Mr. Khilnani took an additional two and one-half percent reduction, making his temporary base salary reduction larger than that taken by any other U.S.-based employee. Named executive officers took furloughs similar to those taken by other employees in various business units. Finally, from February 2009 to January 2010, the company match of all non-union employees’ 401(k) contributions was suspended, including those for named executive officers.

 

A substantial part of total compensation for CTS’ named executive officers is based on performance and is at-risk each year. As a named executive officer takes on more responsibility with CTS, the Compensation

Committee generally increases the percentage of his or her total compensation that is at-risk. As a result, our named executive officers have a substantial percentage of their total compensation opportunities based on at-risk, variable elements of compensation. CTS believes that this practice is appropriate because the corporation’s named executive officers have the greatest ability to drive performance, and, therefore, should have the most to gain or lose in terms of compensation opportunities based on performance. In light of those facts, it is possible for CTS’ named executives to earn above-market compensation in any year, but they may earn below-market compensation as well, depending on individual and corporate performance for that year.

 

Compensation Philosophy

 

CTS centers total compensation for each named executive officer position at approximately the fiftieth percentile of compensation for similar positions at similarly situated companies based on market survey data, although this is a guideline rather than a fixed rule. CTS considers compensation within 15% of the median number to be a competitive range. CTS’ practice to place its executive compensation at approximately the fiftieth percentile is based upon a philosophy that by using a median award, CTS is able to balance motivating the executive with what it perceives as market-competitive factors in being able to recruit and retain top executive talent.

 

CTS does not generally utilize a specific formula for allocating total compensation between current and long-term compensation or between cash and non-cash compensation. The amount allocated to each element of compensation generally reflects allocation percentages in benchmark data for comparable positions. Factors such as level of experience, responsibilities, demonstrated performance, time with the corporation, achievement of individual and corporate goals, risk, and retention considerations also affect the compensation level and structure. The amount of total compensation realized or potentially realizable from prior compensation awards does not directly influence the level of compensation paid or future pay opportunities. Factors such as the tax and accounting treatment of different forms of compensation may influence the form and structure of executive compensation, but do not necessarily affect the total level of compensation to be provided.

 

CTS offers executive compensation packages that contain a variety of elements. Total compensation packages are designed to achieve each of CTS’ compensation objectives as follows:

 

Guided by this philosophy, CTS has specifically designed and administered its executive compensation program to achieve three main objectives:

 

 

Role of Management in Executive Compensation Decisions

 

For 2009, Mr. Khilnani relied on the competitive information provided by external compensation consultants and compiled by Mr. Cummins, CTS’ former Senior Vice President, Administration. After reviewing the data compiled by Mr. Cummins, who retired on December 31, 2009, Mr. Khilnani recommended a total compensation package to the Compensation Committee for each named executive officer other than himself. Ordinarily, as a benchmark, Mr. Khilnani’s general aim is to align each executive officer’s total compensation at approximately the fiftieth percentile of similarly situated executives. This practice is consistent with CTS’ compensation philosophy in that by using the fiftieth percentile, or median compensation, as a guideline in setting total compensation, the corporation will be able to attract, motivate, and retain qualified executives to lead the corporation. However, in 2009, due to the pervasive and difficult economic conditions, Mr. Khilnani recommended no increases for any executive’s base salary.

 

How Executive Compensation is Determined

 

The Compensation Committee discusses the data used by Mr. Khilnani, considers his recommendations, and ultimately decides on total compensation for each named executive officer. At the February meeting of the Board of Directors, the Compensation Committee set targets for compensation opportunities that are intended to qualify as performance-based awards under Section 162(m) of the Internal Revenue Code. For all executives other than the Chief Executive Officer, total compensation packages for the year are finalized when approved by the Compensation Committee. The Compensation Committee recommends a total compensation package for the Chief Executive Officer to the Board of Directors. This package becomes final upon approval by the Board of Directors. As Mr. Khilnani is the Chairman of the Board of Directors, he abstains from voting upon his own compensation.

 

The Compensation Committee has the responsibility to ensure that a market analysis of executive compensation is performed at regular intervals, generally every one to two years. As discussed above, the Compensation Committee considers the recommendations of the Chief Executive Officer in setting total compensation awards for each executive other than himself. The Compensation Committee also considers market data compiled by or obtained from compensation consultant professionals when it sets total compensation for CTS executive officers, including the Chief Executive Officer.

 

In the fall of 2008, management recommended, and the Compensation Committee approved, a proposal to modify the executive compensation review process. Under the former process, the various elements of executive compensation were reviewed at separate times of the year. The revised process enables all elements of executive compensation to be reviewed each year during the Compensation Committee’s February meeting. Reviewing compensation in total streamlines and consolidates review and recommendation activities, promotes a better understanding of each executive’s complete compensation package, and improves administrative efficiency. These process changes were approved by the Compensation Committee to be implemented in a phased fashion for future compensation cycles. These changes were intended to be applied in 2009; however, actions taken in response to the global economic recession caused the postponement of implementation of these actions until economic conditions improved. The changes were implemented for the 2010 compensation cycle.

Overall Mix and Structure of Compensation

 

Annually, the Compensation Committee considers the total compensation opportunities for each named executive officer and determines how total compensation should be allocated across the different elements of compensation offered by CTS. The Compensation Committee does not follow a definitive policy when determining the mix of and structure for total compensation. Instead, it considers level of experience, responsibilities, demonstrated performance, time with the corporation, achievement of individual and corporate goals, risk, and retention considerations.

 

Generally, the Compensation Committee considers market practices, as reflected in the market survey data provided by Towers Watson, to obtain a baseline of total compensation for each executive. Using this as a starting point, the Compensation Committee engages in discussion to consider the Chief Executive Officer’s recommendations with the objective of ensuring that a substantial portion of each named executive officer’s total compensation is at-risk and balanced in proportion to the corporation’s performance in the short-term versus the long-term. CTS balances compensation to encourage executives to vigorously pursue increased performance while discouraging incentives to take excessive risks that would be beneficial in the short-term, but harmful in the long run. In this way, CTS believes that it is able to align the interests of the named executive officers with those of the shareholders year-over-year, as well as over the long-term.

 

Cash incentives and equity compensation opportunities increase across the executive officer positions consistent with increasing responsibility. This structure generally means that the most senior executives will have a higher percentage of their total compensation at-risk and variable than the less senior executives. As a result, the most senior executive officers who have the greatest ability to drive CTS’ performance have the most to gain or lose based on corporate and individual performance.

 

In addition to cash and equity components, CTS offers its executives retirement, health and welfare benefits, and perquisites. The corporation believes that retirement benefits, health and welfare benefits, and a modest level of perquisites are standard practice in most peer group companies and are expected components of overall compensation benefits provided to CTS’ named executive officers.

 

How CTS Benchmarks Executive Compensation Using Market Data

 

For the 2009 annual executive compensation review, Mr. Cummins assembled benchmark data from well-regarded sources for all elements of compensation, including base salary, perquisites, annual incentives, incentive targets, and equity awards. This benchmark information was used by Mr. Khilnani to recommend a compensation package for each executive officer in accordance with CTS’ compensation philosophy. The benchmark data was also provided to the Compensation Committee and used as a starting point in considering executive compensation packages.

 

Towers Watson.  Every one to two years, CTS obtains benchmark data reports from Towers Watson for all executive officer positions in order to determine current prevailing pay rates for such positions. For years in which CTS does not purchase executive compensation data from Towers Watson, Towers Watson will provide guidance on the industry and market total compensation increases year-over-year. Towers Watson provides CTS with detailed, comprehensive, and sophisticated compensation analysis that enables CTS to make well-informed decisions on executive compensation. Towers Watson produces the benchmark data reports through analysis of information derived from multiple large surveys on the pay practices of other companies. CTS’ executive officer positions are compared to positions with similar job responsibilities in general industry and the electronics and scientific equipment industry. Towers Watson determines competitive pay based on regression analysis, a statistical technique that considers the relationship between total revenues and compensation. Towers Watson uses information provided by CTS to determine which survey and benchmark positions are appropriate comparisons for CTS’ officer positions.

 

Based on its review of corporate pay practices, Towers Watson has explained to CTS that total compensation levels that are within 15% of the median of the market data are generally considered to be within the range of competitive practice. The Compensation Committee considered this guidance by Towers

Watson when establishing 2009 compensation levels, although the Compensation Committee may deviate from this guideline in light of a particular executive’s unique circumstances, such as level of experience, skills, and tenure with the corporation. In cases where compensation for an executive falls substantially below the 15% of median data threshold, consistent with CTS’ compensation philosophy, the Compensation Committee will ordinarily recommend a larger increase to bring the compensation in line with the acceptable median over time.

 

The data provided by Towers Watson does not indicate the corporations from which it is derived but provides the Compensation Committee with median data about executive officers’ total compensation from companies that are of similar size and revenue to CTS. CTS does not require Towers Watson to limit the peer group to CTS’ industry because compensation data is not available for all of its competitors and also because CTS believes that it is important to consider compensation practices at other companies of comparable size and scope in order to attract and retain executive talent.

 

Although CTS does not have access to the identities of the benchmarked companies, management and the Compensation Committee have confidence in the Towers Watson market data reports because the data is pulled from large, detailed, and comprehensive survey data, because the market data for the Chief Executive Officer and Chief Financial Officer are compared against the Equilar benchmark data (discussed below), and because Towers Watson is an experienced compensation consultant used by CTS on numerous occasions and its benchmark data has historically proven appropriate in attracting and retaining qualified and talented executives of the caliber CTS desires.

 

To prepare for the new executive compensation review schedule, Towers Watson benchmark compensation reports were completed and reviewed in September 2008 for use in setting 2009 executive compensation levels. Benchmark compensation reports were received for executive titles that included Chief Executive Officer (Mr. Khilnani), Chief Financial Officer (Ms. Belusar), President (Mr. Schroeder), General Counsel and Secretary (Mr. Cutter) and Vice President, Human Resources (Mr. Cummins), among others. Additionally, in late 2009, an additional survey was conducted to examine then-current market conditions.

 

Equilar.  Mr. Cummins consulted the web-based Equilar compensation database as a source for benchmark data primarily for the Chief Executive Officer and Chief Financial Officer positions. Equilar draws data from proxy statements and reports filed with the Securities and Exchange Commission. It is difficult for CTS to establish a “pure” peer group because relatively few companies are the same size and have the same business segments as CTS. Therefore, the companies chosen for benchmark purposes were selected because they fit at least one criterion of similar revenue, similar size, similar industry or similar products and services to CTS. The companies selected for benchmarking in 2009 were ArvinMeritor, Inc., AVX Corporation, Benchmark Electronics, Inc., BorgWarner, Inc., Celestica, Inc., Flextronics International, Ltd., Frequency Electronics, Inc., Gentex Corporation, Jabil Circuit, Inc., KEMET Corporation, Key Tronic Corporation, Kimball International, Inc., LaBarge, Inc., Lear Corporation, LittelFuse, Inc., Methode Electronics, Inc., Molex Incorporated, Plexus Corp., RF Micro Devices, Inc., Sanmina-Sci Corporation, Sparton Corporation, Spectrum Control, Inc., Stoneridge, Inc., Sypris Solutions, Inc., Technitrol, Inc., Triquint Semiconductors, Inc., Vishay Intertechnology, Inc., and Williams Controls, Inc. The Equilar peer group is reviewed annually to ensure that all of the peers continue to meet at least one of the selection criteria. Mr. Cummins performed this review in 2009. Peers who no longer meet such criteria, or for which information is no longer available through Equilar, may be eliminated or replaced. The 2009 peer group was the same as that used by CTS in 2008; no companies were removed or replaced.

 

Management and the Compensation Committee evaluate the Equilar data against the Towers Watson benchmark data discussed previously. When compared, the data sources should reveal similar benchmark compensation ranges for the Chief Executive Officer and the Chief Financial Officer. A wide disparity may reveal that the Equilar peer group is inadequately representative or that the Towers Watson data is distorted, and should be reexamined. The comparison of this data helps to assure management and the Compensation Committee that the benchmark data used is appropriate. For 2009, the Equilar data was found by management and the Compensation Committee to be within an acceptable range.

Elements of Total Compensation

 

Base Salary.  Base salary is included as an element of total compensation to ensure that each named executive officer receives a suitable minimum return for his or her service to the corporation each year. A sufficient base salary helps to assure that executives do not become unduly focused on achievement of shorter-term incentive awards that may be to the detriment of the overall long-term health of the corporation. Ordinarily, the Compensation Committee determines reasonable base salaries for its named executive officers by aligning base compensation for each named executive officer at approximately the fiftieth percentile of peer executives as set forth in Towers Watson’s benchmark compensation reports. The Compensation Committee considers the executive’s duties, responsibilities, past performance and time with the corporation in setting base salary. In response to the severe and worldwide economic recession which began in 2008 and continued into 2009, CTS froze all employee salaries, including those for named executive officers at then-current levels.

 

The annual base salaries for named executive officers set in 2008 and retained for 2009 are as follows: Mr. Khilnani — $550,000; Ms. Belusar — $288,750; Mr. Schroeder — $341,857; Mr. Cutter — $260,416, and Mr. Cummins — $275,731.

 

In further response to the severe economic conditions prevailing in 2009, all CTS executive officer base salaries were temporarily reduced by five percent. This occurred at the same time other CTS U.S.-based employee salaries were reduced by five percent. This temporary salary reduction began the first pay period of February 2009 and expired the first pay period of November 2009, concurrent with the reinstatement of full salaries for those other CTS employees whose salaries were also temporarily reduced. Additionally, Mr. Khilnani’s initial salary reduction was five percent; however, in June 2009, Mr. Khilnani reduced his salary an additional two and one-half percent, bringing his reduction to seven and one-half percent of base salary. Furthermore, certain executive officers each took one week of unpaid furlough during 2009. CTS believes that as it looks to reduce costs throughout the corporation, executive pay should also be considered in such cost-reduction measures.

 

Non-Equity Incentive Plan Compensation.  CTS believes that it is important to motivate its executives to achieve annual corporate financial goals. Therefore, CTS puts a substantial part of each executive’s total compensation at-risk by tying it directly to overall corporate performance. CTS uses an annual management incentive plan, or MIP, established pursuant to the terms of the CTS Corporation 2007 Management Incentive Plan, in order to focus CTS’ executives on the most critical of its shorter-term financial metrics each year. The MIP provides for annual cash payments to named executive officers based on CTS’ financial performance and achievement of individual goals. An executive’s ultimate award is determined under a formula that provides for payment of zero to 200% of a target award based on CTS’ actual performance versus the established quantitative financial performance goals. In addition, the Compensation Committee may adjust awards downwards based upon the executive’s actual performance versus individual goals.

 

Awards under the annual MIP are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. In order to qualify under Section 162(m) of the Internal Revenue Code, the material terms of the plan must be approved by the shareholders at least every five years, and goals must generally be set within the first 90 days of each fiscal year. The terms of the CTS Corporation 2007 Management Incentive Plan were approved by shareholders at the June 2007 Annual Meeting of Shareholders.

 

How Management Incentive Plan Target Awards and Performance Goals are Set.  Each February, the Compensation Committee establishes a target award and quantitative financial performance goals for each executive. Target awards are set as a percentage of base salary. In setting targets, the Compensation Committee takes into consideration the median percentile targets in the Towers Watson benchmark reports as well as internal parity. As an example, if review of the Towers Watson benchmark data discloses that, on average, it is customary for a position to be offered an annual cash incentive representing 45% of salary, CTS will usually use a range centered on that 45% mark when it decides what is appropriate for performance-

based annual cash awards. CTS’ practice to structure its executive annual cash incentive compensation at approximately the fiftieth percentile is based upon a philosophy that by using a median award, CTS is able to balance motivating the executive with what it perceives as market-competitive factors in being able to recruit and retain top executive talent.

 

Quantitative financial performance goals are based on CTS’ established business plan for the fiscal year. Management prepares, and the Board of Directors review, a business plan for each fiscal year that includes projections on sales, earnings, key balance sheet metrics, and cash flow for each business unit. The business plan considers prior year results, strategic initiatives, approved forward investment plans, projected market demands, competition, improvement initiatives, and other factors in establishing plan budgets and results. Provided that a metric is a performance measure authorized under the terms of the CTS Corporation 2007 Management Incentive Plan, the Compensation Committee may use any of the metrics set out in the business plan to establish quantitative financial performance goals for the annual MIP.

 

In 2009, the Compensation Committee set quantitative financial performance goals using CTS’ operating earnings (per applicable business unit) and CTS’ earnings per share. Operating earnings was selected as a metric because operating earnings is an objective, quantitative value easily measured for performance purposes. CTS chose earnings per share from CTS’ annual business plan as a metric because it believes that earnings per share is a direct measurement of overall corporate performance which takes into consideration market conditions and provides a quantitative measurement from which CTS is able to assess the performance of its named executive officers for each particular year.

 

The Compensation Committee set the performance level for each of these metrics for each executive and established a minimum performance level that must be reached before an award is paid for performance based on a particular metric. When establishing performance levels for particular metrics, the Compensation Committee will consider past and projected performance levels for both the corporation and the executive, external market conditions, presumptions for the coming year, and desired overall share performance targets for that year.

 

Individual performance goals for each executive are specific items within each executive’s area of job responsibility that are related to the business plan and overall corporate objectives. These are set at the same time as the quantitative financial performance goals.

 

Likelihood of Executive Achieving Management Incentive Plan Goals.  Management endeavors to establish a plan that demands challenging, but achievable results given expected business conditions. While actual awards will vary above and below target from year to year, CTS expects that over a period of several years, payouts under the MIP will average about 100% of target. Over the past five years, payouts under the MIP based on corporate metrics alone averaged 101% of target. Over the past five years, payouts under the MIP, including corporate and business unit metrics, averaged 78% of target.

For years 2005 through 2009, the target and actual awards percentages for all participating executives are shown below:

 

Historical Incentive Plan Result (2005-2009)

 

 

Determination of Actual Awards.  Actual MIP award payments are based on a formula and may vary from zero to 200% of the target award based on achievement of the quantitative financial performance goals over a range that begins below the business plan targets and extends above the business plan targets. The payout “cliff” drops to zero if performance falls below a threshold level of plan achievement. On the upside, payout increases linearly as performance exceeds the business plan. However, payout is capped at double the target amount. One consequence of this cliff threshold and payout performance formula is that the executive’s risk of receiving no award is greater than the executive’s opportunity to obtain an award that is substantially above target. Another consequence is that payouts above target represent a fraction of the expected return to the corporation from “better than plan” performance. Since payments are capped, an executive cannot increase MIP awards beyond a fixed amount, counterbalancing the incentive to pursue outsized short-term rewards at the expense of the long-term health of the corporation.

 

How 2009 Awards were Calculated.  For CTS executives with overall corporate responsibility (Mr. Khilnani, Ms. Belusar, Mr. Cutter and Mr. Cummins) performance measurements are weighted 100% for CTS’ earnings per share objective. For the executive with business unit responsibilities (Mr. Schroeder) performance measurements are weighted 40% as to earnings per share objectives and 60% weighted as to business unit operating earnings objectives. The target award for Mr. Khilnani was 100% of base salary. For Mr. Schroeder and Ms. Belusar, the target award was 50% of base salary. For Mr. Cutter and Mr. Cummins, the target incentive was 45% of base salary. These target awards were derived in part from competitive data provided by Towers Watson and in part by the Compensation Committee’s judgment on internal equity of the positions, their relative value to the corporation, and the desire to maintain a consistent annual target award incentive for certain key executive officers of the corporation and the business units.

 

As mentioned previously, the named executive officers were eligible to earn from 0% to 200% of their target award. The award opportunities available to each named executive officer ranged from no payment if the goals were met below the 55% performance level to a 200% payout if the goals were met at or above the 195% performance level.

The table below lists each named executive officer’s 2009 base salary, which was used to calculate the annual target award, the officer’s 2009 annual incentive plan quantitative financial performance goals, the 2009 performance level results, and the total annual MIP incentive earned for 2009.

 

 

 

 

Use of Discretion for Downward Adjustments.  The incentive plan is based upon an expected set of events, regulations, external conditions, and assumptions regarding the management team’s ability to achieve those results. While it is understood that not all factors impacting the business results are within management’s control, the business plan is expected to reflect reasonable assumptions regarding such factors, and management is expected to adjust to such factors, as best possible, while still working to achieve or exceed targeted results. Despite management efforts, such factors may still negatively impact results. However, it is also recognized that some factors outside management’s control may have undue impact on results, defeating the intent of the incentive in terms of motivating or rewarding participants. In order to comply with Section 162(m) of the Internal Revenue Code, however, the incentive plan precludes the Compensation Committee from exercising discretion to increase awards payable to those employees designated by the Compensation Committee as covered employees as part of the year-end calculations. As a result, targets are established at a consistent level lower than that reflected in the business plan. Establishing covered employees’ calculated incentive factors under the incentive plan at a level that enables the Compensation Committee to use its discretion to adjust awards downward achieves the same result that can be obtained by adjusting performance measures for non-covered employees (employees not subject to Section 162(m)). If no unusual condition occurs, the Compensation Committee will adjust the final result downward so that covered employees achieve the same target level achievement as non-covered employees. For 2009, the Compensation Committee downwardly adjusted the earnings per share result from $0.36 to $0.32, so that a consistent target achievement was met. Additionally, the Compensation Committee downwardly adjusted Mr. Schroeder’s operating earnings result from $(9.644) million to $(10.144) million.

 

Performance-Based Equity Compensation

 

Performance-based equity grants encourage strong financial performance while aligning executive compensation with shareholder interests. Under the terms of the performance-based plans, executives may earn restricted stock unit awards based upon achievement of financial objectives that CTS believes are beneficial to the corporation and shareholders or based upon CTS’ overall performance relative to peers over a longer term. Strong financial performance is encouraged since increasing levels of performance will result in increasing awards to the executive. Evaluating performance by comparison to peers helps to assure a true measure of performance under current market conditions.

 

2008-2009 Performance Restricted Stock Unit Plan.  In February 2008, under the terms of the CTS Corporation 2004 Omnibus Long-Term Incentive Plan, the Compensation Committee established a two-

year performance-based equity compensation plan called the 2008-2009 Performance Restricted Stock Unit Plan. Depending upon the level of CTS’ achievement of sales growth and CTS’ total stockholder return relative to an enumerated peer group over a two-year period (fiscal years 2008 and 2009), a named executive officer could earn a restricted stock unit award of zero to 200% of a target award established for his or her position. Relative total stockholder return was selected as the performance measure for this period as it is a meaningful measure to our shareholders, comparing CTS’ stock price appreciation against the stock price appreciation of our peers. It is a particularly useful measure in volatile economic times. Sales growth was selected to reinforce senior management’s focus on increasing sales.

 

The Towers Watson benchmark market data discussed previously was used by the Compensation Committee in setting the target awards. 60% of the target award was weighted to relative total stockholder return and 40% of the target award was weighted to sales growth. The peer group used to measure relative total stockholder return originally consisted of 29 peer companies. The plan contains a peer group adjustment protocol that requires the removal from the peer group of any company that on the last day of a performance period had been delisted from its exchange, if the peer or its successor was not relisted on the same or another specified exchange within 30 days. In such event, the relative total stockholder return is calculated as if the delisted company was never a peer. However, a bankrupt company will be retained as a bottom performer in the peer group for calculation purposes as bankruptcy is clearly indicative of poor performance. After application of the peer group adjustment protocol removed EPCOS AG, the peer group consists of the same companies used for the Equilar comparison discussed above.

 

Similar to the MIP plan discussed above, the payout amount drops to zero if performance falls below a threshold level of plan achievement. The award payout is also capped at 200% of target reducing the incentive to overemphasize performance goals which may not be beneficial to the corporation over the longer-term. Additionally, substantially greater weight is assigned to the broad-based performance goal of total stockholder return, thereby encouraging executives to focus on improving the overall health and performance of the corporation rather than sacrificing all other considerations in favor of the top line measure of sales growth. Finally, since awards are settled in full value equity, and CTS executives are generally expected to retain their stock awards, executives are incentivized to consider the long term implications of actions taken to achieve the performance awards.

 

All named executive officers were participants in the 2008-2009 Performance Restricted Stock Unit Plan. The awards were intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The performance goals and target awards were established by the Compensation Committee at its meeting in February 2008. In order to earn an award, the participants were required to remain in the employ of the corporation throughout the performance period, which ended December 31, 2009. Performance was measured at the end of the performance period. CTS’ achievement level for the relative total stockholder return portion of the award was 100%; however, CTS failed to meet the minimum threshold for the sales growth portion of the award. Awards for achievement of the performance goals were granted in 2010 in the form of restricted stock units and vested immediately, subject to certification of 2009 fiscal year results by CTS’ independent auditor. Awards were settled on the basis of one share of CTS stock for each restricted stock unit on the settlement date, on January 2, 2010.

 

2009-2010 Performance Restricted Stock Unit Plan.  In February 2009, under the terms of the CTS Corporation 2004 Omnibus Long-Term Incentive Plan, the Compensation Committee established another two-year performance-based equity compensation plan, called the 2009-2010 Performance Restricted Stock Unit Plan. Depending upon CTS’ total stockholder return relative to an enumerated peer group over a two-year performance period (fiscal years 2009 and 2010), a named executive officer may earn a restricted stock unit award of zero to 200% of a target award established for his or her position. Relative total stockholder return was selected as it is a meaningful measure to our shareholders, comparing CTS’ stock price appreciation against the stock price appreciation of our peers. The Compensation Committee did not select sales growth as a metric for the 2009-2010 Performance Restricted Stock Unit Plan due to volatile economic conditions and the lack of visibility beyond the first two quarters of 2009 at the time when the plan was adopted.

The peer group used to measure relative total stockholder return consists of 28 peer companies, the same companies used for the Equilar comparison discussed above. The peer group adjustment protocol for this plan places companies delisted due to performance reasons and bankrupt companies at the bottom of the peer group performers. Any peer company that does not exist at the end of a performance period for any reason other than bad performance shall, for purposes of calculating relative total stockholder return, be removed from the peer group and treated as if it was never a part of the peer group.

 

Similar to the 2008-2009 Performance Restricted Stock Unit Plan discussed above, the payout amount drops to zero if performance falls below a threshold level of plan achievement. The award payout is again capped at 200% of target. However, in the 2009-2010 Performance Restricted Stock Unit Plan, all of the performance goal weight is assigned to the broad-based performance goal of total stockholder return, emphasizing focus on the overall health and performance of the corporation compared to its peer group. Awards are again settled in full value equity.

 

All named executive officers, with the exception of Mr. Schroeder and Mr. Cummins, are participants in the 2009-2010 Performance Restricted Stock Unit Plan. The awards are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The performance goals and target awards were established by the Compensation Committee at its meeting in February 2009. Performance will be measured at the end of the performance period, and awards for achievement of the performance goals will be granted in 2011 in the form of restricted stock units and will vest immediately, subject to certification of 2010 fiscal year results by CTS’ independent auditor. Awards will be settled on the basis of one share of CTS stock for each restricted stock unit on the settlement date, which will be no later than March 15, 2011.

 

Chief Executive Officer Performance Share Agreement.  In addition to his participation in the long-term incentive plans described above, Mr. Khilnani is a party to an ongoing Performance Share Agreement with CTS, with grants made under the terms of the 2004 Omnibus Long-Term Incentive Plan. Under this agreement, CTS established a performance-based restricted stock unit award for Mr. Khilnani. An aggregate of 25,000 units may be earned over the course of three separate performance periods, commencing on July 2, 2007, July 2, 2008, and July 2, 2009, respectively, and ending on July 1, 2010, July 1, 2011, and July 1, 2012, respectively. Vesting will occur, if at all, at a rate of up to 150% of the target award on the end date of each performance period and is tied exclusively to CTS’ total stockholder return relative to an enumerated peer group of companies. The vesting rate will be determined using a matrix based on CTS’ percentile ranking compared to the peer group. The peer group used to measure relative total stockholder return originally consisted of 32 peer companies; however, the plan contains a peer group adjustment protocol. This protocol requires the removal from the peer group of a company that on the last day of a performance period is delisted from its exchange, if the peer or its successor is not relisted on the same or another specified exchange within 30 days. In such event, the relative total stockholder return is calculated as if the delisted company was never a peer. However, a bankrupt company will be retained in the peer group for calculation purposes as bankruptcy is clearly indicative of poor performance. After application of the peer group adjustment protocol set forth in the plan, removing EPCOS AG, Aeroflex Incorporated, Sirenza Microdevices, Inc., and Solectron Corporation, the peer group consists of the same companies used for the Equilar comparison discussed above.

 

Although the above performance-based equity awards will be settled out of the 2004 Omnibus Long-Term Incentive Plan, since the CTS Corporation 2009 Omnibus Equity and Performance Incentive Plan (or 2009 Omnibus Plan) was approved by shareholders at the 2009 annual shareholders meeting, all future performance-based equity compensation will be awarded under the terms of the 2009 Omnibus Plan.

 

Time-Based Equity Compensation

 

CTS believes that stock ownership and equity-based compensation are valuable tools for motivating employees to improve CTS’ long-term performance. CTS also believes that equity grants are an effective way to align executive and shareholder interests, because a significant amount of an executive’s potential income is directly tied to enhancing shareholder value. Time-based equity grants also play a critical role in retaining

and motivating executive talent by assuring executives that if they remain an employee in good standing throughout the service period they are assured an equity award. The retention of qualified executives over the longer term assists CTS in retaining valuable institutional knowledge. Further, time-based equity compensation helps to assure that executives are able to meet their obligations under CTS’ stock ownership guidelines. The Compensation Committee considers time-based equity grants as part of its review of annual executive compensation. In recent years, the Compensation Committee has generally met in June to conduct this review; however, consideration of time-based equity grants moved to February of each year beginning in 2010.

 

2009 Grants.  For 2009 time-based equity compensation grants, CTS issued restricted stock units under the 2009 Omnibus Plan. Restricted stock unit awards under the 2009 Omnibus Plan are provided to executives, as well as a broader group of management employees. The Committee grants restricted stock unit awards to executive officers, other than the Chief Executive Officer, and general managers. The Compensation Committee recommends a restricted stock unit grant for the Chief Executive Officer that is approved by the full Board of Directors. Restricted stock unit awards are settled one share of CTS common stock for each unit upon vesting. For new hires or to recognize significant individual contributions, the Compensation Committee may grant individual restricted stock unit awards to executive officers at different times during the year and may use alternative vesting schedules or distribution options.

 

In June 2009, the Compensation Committee awarded restricted stock units vesting over a three-year term to each named executive officer, except for Mr. Khilnani, Mr. Schroeder and Mr. Cummins, based on the recommendation of management. Management based its recommendations on the number of units to be awarded on peer data obtained from Equilar and Towers Watson as discussed above. CTS did not grant any stock options in 2009. As noted above, Mr. Khilnani’s restricted stock unit award was recommended by the Compensation Committee and approved by the entire Board, excepting Mr. Khilnani. CTS believes that the general practice of deferred vesting of equity awards over several years further helps to align the interests of executives with shareholders. Since a substantial portion of each executive’s compensation is paid out in the form of time-based equity grants, and since the value of equity will vary over time, depending mostly upon the overall performance and strength of the corporation, actions taken in one year may substantially affect an executive’s compensation over the course of many subsequent years. Therefore, executives are encouraged to consider the longer-term health of the corporation, in addition to shorter-term considerations. CTS also believes that deferred vesting helps in the retention of executives, as the terms of restricted stock unit grants provide that any unvested portion of a grant is forfeited in the event of any termination, including retirement.

 

CTS Hedging/Pledging Policy

 

CTS has adopted a policy which prohibits directors and officers who receive CTS securities from engaging in any transaction in which they may profit from short-term speculative swings in the value of the corporation’s securities or pledging the corporation’s securities in lending transactions. These individuals may not engage in the purchase or sale of put and call options, short sales, and other hedging transactions designed to minimize the risk in owning CTS securities. These individuals may not pledge the corporation’s securities as collateral for a loan, including, without limitation, in a margin account. The prohibitions described above do not apply to the exercise of stock options granted as a part of a CTS incentive plan.

 

Retirement Benefits and Plans

 

CTS’ retirement plans are designed to provide a competitive level of retirement benefits necessary to attract and retain executive talent. Retirement benefits encourage executive retention to the extent that executives are rewarded with increased benefits for extending their term of service. CTS offers a 401(k) plan to all current executives and a defined benefit plan to most current executives. Executives who participate in the defined benefit plan also participate in a supplemental executive retirement plan.

 

Defined Contribution Plan.  Participation in the CTS Corporation Retirement Savings Plan, a 401(k) plan which we refer to as the CTS 401(k) plan, is voluntary and is open to substantially all U.S.-based CTS

employees. The company’s matching contribution levels are governed by the rules in effect when employees began employment with CTS. Under the terms of the plan that are or were applicable to Mr. Khilnani, Mr. Schroeder, Mr. Cutter, and Mr. Cummins, CTS matches an employee’s contributions $.50 for every dollar, up to 6% of eligible pay, for a maximum matching contribution of 3%, subject to limitations under the Internal Revenue Code. Under the terms of the plan that are applicable to Ms. Belusar, CTS matches an employee’s contributions dollar for dollar up to the first 3% of eligible pay, and thereafter at $.50 for every dollar up to the next 2% of eligible pay, for a maximum matching contribution of 4%, subject to limitations under the Internal Revenue Code.

 

In light of the current business recession, effective the first pay date after February 20, 2009, CTS suspended all company matching contributions to the CTS 401(k) plan, except those for bargaining unit employees. This suspension therefore applied to all named executive officers. The company match for employee contributions, including named executive officers, was restored effective the first pay date after January 10, 2010.

 

Defined Benefit Plan.  Mr. Khilnani, Mr. Schroeder, Mr. Cutter and Mr. Cummins are or were eligible to participate in the CTS Corporation Pension Plan, which we refer to as the Pension Plan. The Pension Plan is a tax-qualified defined benefit plan. On April 1, 2006, CTS closed the Pension Plan to new entrants. Employees and executives who joined CTS after that date, such as Ms. Belusar, were ineligible to join the Pension Plan, and thus cannot earn benefits under the Pension Plan.

 

The Pension Plan requires participants to complete a period of vesting service in order to become eligible for a benefit. Each of the eligible named executive officers has completed the required vesting service period. The Pension Plan benefit is based on a formula representing a factor of average monthly earnings over a period of time multiplied by credited service, which determines the monthly benefit. Certain participants may elect an early retirement benefit at age 55, at a reduced benefit. Mr. Khilnani, Mr. Schroeder, and Mr. Cutter are eligible to take early retirement.

 

Under the terms of the Pension Plan, annual incentive compensation counts toward determining the average earnings used in the benefit calculation. Thus, these benefits are directly affected by earned incentive compensation.

 

Supplemental Executive Retirement Plans.  Each named executive officer who participates in a qualified defined benefit plan also participates in a supplemental executive retirement plan, called an Individual Excess Benefit Retirement Plan. The purpose of the supplemental executive retirement plans is to restore retirement benefits the executive would otherwise have earned under the qualified defined benefit plan in the absence of limitations under the Internal Revenue Code and to provide a competitive level of retirement benefits. Benefits earned under a supplemental executive retirement plan are unfunded and are not insured by the Pension Benefit Guaranty Corporation.

 

The terms of the Pension Plan, the CTS 401(k) Plan, and the Individual Excess Benefit Retirement Plans are discussed under the caption “2009 Pension Benefits” below.

 

Other Compensation

 

CTS provides a limited set of perquisites and other compensation in order to attract, motivate, and retain executive talent. For 2009, compensation for named executive officers included a quarterly cash perquisite allowance for nonreimbursed travel expenses, reimbursement for financial planning services, reimbursement for tax preparation services, and reimbursement for an annual executive physical. Other compensation includes imputed income on life insurance benefits.

 

To create parity among the executives, as well as to better manage the potential costs associated with these perquisites, several program changes were introduced effective January 1, 2009. The changes implemented annual caps on the reimbursement of tax preparation services and executive physicals, and changed the mode of payment for financial planning services from reimbursement to a predetermined quarterly cash perquisite allowance. In addition, Mr. Schroeder’s temporary living allowance to compensate

him for the increased cost of living associated with his relocation to California from Indiana was ended in February 2009 with Mr. Schroeder’s relocation to Illinois to assume the leadership role for the corporation’s Electronic Components business.

 

Health and Welfare Benefits

 

Named executive officers are eligible to participate in a standard set of health and welfare benefits, including medical insurance, dental insurance, vision insurance, life insurance, accidental death & dismemberment insurance, disability insurance, dependent life insurance, an employee assistance plan, and health care and dependent care reimbursement accounts. The same terms of participation that apply to salaried employees generally govern the participation of named executive officers in these benefits.

 

Agreements with Named Executive Officers

 

Chief Executive Officer Employment Agreement.  In conjunction with his assumption of the duties of President and Chief Executive Officer, Mr. Khilnani entered into an employment agreement with CTS effective July 2, 2007. The term of this employment agreement was two years, and it expired July 1, 2009. For a complete understanding of the employment agreement, please see the section of this proxy statement titled “Employment Agreement with Vinod M. Khilnani” below. The purpose of this agreement was to provide assurances to and promote the retention of our top executive, a key position. No other named executive officer has, or had, an employment agreement with CTS in 2009.

 

Executive Severance Policy.  Effective September 10, 2009, CTS enacted an Executive Severance Policy. This policy formalizes and standardizes the corporation’s severance practices for certain officers and key employees and also was enacted in lieu of issuing a new employment agreement to replace Mr. Khilnani’s expired employment agreement. For a complete understanding of the executive severance policy, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change-in-Control” below.

 

Change-In-Control Severance Agreements.  On December 5, 2007, CTS entered into change-in-control severance agreements with Mr. Khilnani, Mr. Schroeder, Mr. Cutter, and Mr. Cummins. Mr. Cummins’ agreement expired with his retirement from CTS on December 31, 2009. The purpose of these agreements is to retain executives and encourage them to focus on corporate interests during times of change and uncertainty. For a complete understanding of the severance agreements, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change-in-Control” below.

 

On January 22, 2008, CTS entered into a change-in-control severance agreement with Ms. Belusar, similar to the terms of the severance agreements for other named executive officers. Ms. Belusar, however, will not receive certain retirement plan make-whole provisions as she is not a participant in the Pension Plan and does not have an Individual Excess Benefit Retirement Plan. For a complete understanding of Ms. Belusar’s severance agreement, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change-in-Control” below.

 

Cummins Consulting Agreement.  Mr. Cummins retired from CTS effective December 31, 2009. On December 20, 2009, Mr. Cummins entered into a consulting agreement with CTS, requiring him to be available for twelve months post-retirement on an irregular, part-time basis for consultation on various matters. For a complete understanding of Mr. Cummins’ consulting agreement, please see the section of this proxy statement titled “Cummins Consulting Agreement” below.

 

Policy on Recovery of Awards

 

The CTS Corporation 2007 Management Incentive Plan, under which the annual MIP is administered, and the 2009 Omnibus Plan each include a provision to address recoupment of incentive awards in the event of financial restatements. The recoupment provisions provide that if the Board of Directors learns of any intentional misconduct by a plan participant which contributes to CTS having to restate its financial statements, the Board may require that individual to reimburse CTS for the difference between any award he or

she received and the amount of the award he or she would have received based on the financial results as restated.

 

Stock Ownership Guidelines

 

The Board of Directors has adopted stock ownership guidelines which are administered by the Compensation Committee. The stock ownership guidelines define expected stock ownership levels for executive officers, general managers and non-employee directors. The guidelines are available online at: http://www.ctscorp.com/governance/stockog.htm. The intent of the guidelines is to require executives and directors to maintain a significant equity stake in CTS. The stock ownership guidelines provide that executives and directors are expected to retain at least 75% of their equity awards until threshold ownership levels have been attained and at least 25% of any equity awards received from CTS once they have achieved the threshold levels. To avoid placing an undue tax or cash flow burden on the individual, threshold levels are established based on the premise that they will be attainable through retention of equity awards over five years.

 

The Chief Executive Officer guideline applicable to Mr. Khilnani is 100,000 share units. The guideline applicable to Ms. Belusar and Mr. Schroeder is 40,000 share units. The guideline applicable to Mr. Cutter and Mr. Cummins is 30,000 share units. In calculating compliance with the guidelines, each executive is credited with one share unit for each share of CTS stock beneficially owned by him or her, including shares held in the CTS 401(k) Plan and shares of restricted stock, for each restricted stock unit, and for each share subject to a stock option that he or she holds. Both vested and non-vested shares of restricted stock and restricted stock units shall be included in calculating total share units, but shares subject to non-vested stock options are not included.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the CTS Corporation Board of Directors has reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in CTS’ Annual Report on Form 10-K for year ended December 31, 2009 and this proxy statement.

 

CTS CORPORATION 2009 COMPENSATION COMMITTEE

 

 

EXECUTIVE COMPENSATION

 

Please note that, due to amendments to Item 402 of Regulation S-K respecting equity award valuation methodologies, companies are required to recalculate the Summary Compensation Table for all named executive officers for prior years. Therefore, the summary compensation table amounts shown below do not match amounts shown in CTS summary compensation tables from previous years. The change in equity award valuation methodology affects the amounts shown in column (e) and (j) below.

 

Please also note column (h), Change in Pension Value and Non-Qualified Deferred Compensation Earnings, is impacted by three calculations: the year-over-year change in accrued benefit that results from additional services and change in compensation; the discount rate used to determine the present value of the pension benefit; and the interest rate used to calculate the non-qualified deferred compensation. The basis used for the interest rate to calculate the non-qualified deferred compensation changed in 2009 from segmented rates published by the IRS reflecting “phase-in” to the 30 year Treasury rate. There was a

significant decline in both the discount rates and interest rates used for 2008 and 2009, resulting in a sharp increase in the present values of amounts reflected in column (h).

 

2009 Summary Compensation Table

 

 

 

 

2009 Grants of Plan-Based Awards

 

 

 

 

Compensation Generally

 

Employment Agreement with Vinod M. Khilnani.  On June 14, 2007, CTS entered into an employment agreement with Mr. Khilnani, which became effective on July 2, 2007. The term of the agreement was two years and it expired July 1, 2009. The agreement vested Mr. Khilnani all of the duties customarily incident to the positions of President and Chief Executive Officer in publicly traded companies. The agreement provided that Mr. Khilnani’s salary, bonus, and other compensation would be recommended by the Compensation Committee and set by the Board of Directors. The agreement also provided that Mr. Khilnani’s base salary should not be reduced below $500,000, the base salary in effect on the date of the agreement, unless there was in effect a general salary reduction affecting all of CTS’ employees. Per the agreement, Mr. Khilnani was entitled to participate in incentive compensation programs on terms no less favorable than other CTS senior executive officers, and he was entitled to participate in CTS’ pension, retirement savings, health and welfare, and other employee benefit plans on a basis consistent with that offered to other salaried employees of CTS, to the extent permitted by law.

 

The agreement provided that if CTS terminated Mr. Khilnani’s employment under certain circumstances or Mr. Khilnani terminated his employment for good reason, as defined in the agreement, CTS would provide Mr. Khilnani with compensation equal to his current base salary and his target incentive compensation for the calendar year prior to termination for a period of two years following the termination date. To bring the payment provisions into compliance with Section 409A of the Internal Revenue Code, on December 3, 2007, CTS amended Mr. Khilnani’s agreement to reflect that those severance benefits would be paid in a single

lump sum cash payment as soon as practicable but not more than 90 days after the date of Mr. Khilnani’s separation from service (within the meaning of Section 409A); provided, however, that if Mr. Khilnani was a specified employee as defined in Section 409A, such payment would be paid on the earlier of (1) the first day of the seventh month following the date of his separation from service or (2) his death. In addition, this amendment clarified that termination did not occur under the employment agreement until such event qualified as separation of service within the meaning of Section 409A and clarified that Mr. Khilnani would be ineligible for additional severance under CTS’ Severance Pay-Exempt Salaried Employees Policy, or any successor to that policy, if he were in fact paid severance pursuant to his employment agreement.

 

In lieu of entering into a new employment agreement with Mr. Khilnani, and to formalize and standardize the corporation’s severance practices for other officers and key employees, CTS enacted an Executive Severance Policy effective September 10, 2009. For a complete understanding of the executive severance policy, please see the section of this proxy statement titled “Potential Payments Upon Termination or Change-in-Control” below.

 

Mr. Khilnani does not receive any compensation for his service as a director of the corporation.

 

Compensation Arrangements.  CTS did not have employment agreements with any executive officers other than Mr. Khilnani for 2009. Annual base salary for each named executive officer, other than Mr. Khilnani, is determined by the Compensation Committee of the Board of Directors. Mr. Khilnani’s annual base salary is determined by the Board of Directors based on a recommendation by the Compensation Committee.

 

Cummins Consulting Agreement.  Mr. Cummins retired from the corporation effective December 31, 2009. On December 20, 2009, Mr. Cummins entered into a Consulting Agreement with CTS. This agreement requires him to be available on an irregular, part-time basis for consultation on various matters related to his professional background and experience. Such matters will include but not be limited to CTS’ historical and general business, environmental, and real estate matters. Mr. Cummins will be required to work no more than twenty hours per month on average. Mr. Cummins shall receive $4,150 per month for these services. In addition, he will be reimbursed for any expenses related to the consulting services, provided that CTS approves such expenses in writing in advance. Mr. Cummins is an independent contractor and is required to pay all taxes related to his services under the agreement and will indemnify CTS if the corporation is required to pay any such taxes. Mr. Cummins shall not have authority to contract for CTS or bind CTS with respect to third parties unless specifically authorized to do so. CTS shall not be required to pay or keep in effect any health, life, or other insurance for Mr. Cummins. Mr. Cummins is obligated to protect CTS’ confidential information and assign all intellectual property he may write, invent, conceive, discover, develop, or learn during or in connection with the consulting services. The term of the Consulting Agreement begins January 1, 2010 and expires December 30, 2010.

 

Non-Equity Incentive Plan Compensation.  In 2009, each named executive officer, along with other officers and key employees, participated in the annual MIP. The Compensation Committee adopted this annual cash incentive plan under the terms of the 2007 CTS Corporation Management Incentive Plan approved by the shareholders in 2007. Corporate-wide and strategic business unit quantitative financial performance goals were established for the 2009 fiscal year under the annual MIP. Each participant was also assigned individual performance goals for the 2009 fiscal year which contributed to CTS’ financial performance. A target award was established for each participant based on a percentage of his or her base salary. The Compensation Committee established the performance goals and target awards for each named executive officer, other than Mr. Khilnani. The Board of Directors approved the performance goals and target award for Mr. Khilnani based on a recommendation by the Compensation Committee. The percentage of achievement of performance goals determined the percentage of the target award which each participant earned. Amounts shown in the Summary Compensation Table reflect awards based on achievement of operating earnings (per applicable business unit) and CTS’ earnings per share goals. Determination of the achievement of quantitative performance goals was subject to the completion of the annual audit and certification of CTS’ 2009 fiscal year results by its independent auditor. CTS paid the awards to participants in

the form of lump sum cash payments. A chart detailing the targets and payouts for each executive officer, and additional information on how awards are calculated appears in the Compensation Discussion and Analysis section of this proxy statement entitled “Annual Cash Incentives.”

 

Performance-Based Equity Compensation.  In order to tie a substantial portion of executive pay to the overall financial performance of the corporation, while aligning the interests of CTS’ executives with those of shareholders over the longer term, CTS has established performance-based equity compensation plans under the terms of the 2004 Omnibus Long-Term Incentive Plan. The terms of the 2008-2009 Performance Restricted Stock Unit Plan pay an executive a percentage between 0-200% of a target award in restricted stock units, based upon how well the corporation performs in two key metrics, sales growth and relative total shareholder return, over a two year performance period. Sixty percent of the target award is weighted to relative total stockholder return and 40% of the target award is weighted to sales growth. The peer group used to measure relative total stockholder return is the same peer group used for the Equilar comparison discussed previously. All named executive officers are participants in the 2008-2009 Performance Restricted Stock Unit Plan. The awards are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The performance goals and target awards were established by the Compensation Committee at its meeting in February 2008. Restricted stock units for achievement of the performance goals have vested and were issued in 2010.

 

CTS also has established the terms of the 2009-2010 Performance Restricted Stock Unit Plan which operates in much the same manner, with a possible payout of 0-200% of a target award payable in restricted stock units, but in this plan the sole performance measure is relative total shareholder return. The peer group used to measure relative total stockholder return is the same peer group used for the 2008-2009 Performance Restricted Stock Unit Plan. All executive officers with the exception of Mr. Schroeder and Mr. Cummins are participants in the 2009-2010 Performance Restricted Stock Unit Plan. The awards are also intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. The performance goals and target awards were established by the Compensation Committee at its meeting in February 2009. Restricted stock units for achievement of the performance goals will vest and be issued in 2011 subject to certification of 2010 fiscal year results by CTS’ independent auditor. Finally, Mr. Khilnani and the corporation have entered into a performance-based compensation arrangement. An aggregate of 25,000 units may be earned over the course of three separate performance periods, commencing on July 2, 2007, July 2, 2008, and July 2, 2009, respectively, and ending on July 1, 2010, July 1, 2011, and July 1, 2012, respectively. Vesting will occur, if at all, at a rate of up to 150% of the target award on the end date of each performance period and is tied exclusively to CTS total stockholder return relative to an enumerated peer group of companies. The vesting rate will be determined using a matrix based on CTS’ percentile ranking compared to the peer group. The peer group is the same peer group used for the Equilar comparison discussed previously.

 

Time-Based Equity Compensation.  The Compensation Committee has historically awarded equity-based compensation to named executive officers on an annual basis. In 2009, the Compensation Committee awarded the named executive officers other than Mr. Khilnani restricted stock units and stock options under the 2009 Omnibus Plan. The Board of Directors approved the grant of restricted stock units to Mr. Khilnani under the CTS Corporation 2009 Omnibus Plan based on the recommendation of the Compensation Committee. Restricted stock unit awards distribute one share of CTS common stock for each unit upon vesting. The award recipient does not receive dividends or other rights related to CTS common stock until vested. Restricted stock units granted in 2009 vest over a three year schedule. Non-vested restricted stock units are forfeited upon termination of employment, except in the case of death, disability or change-in-control of the corporation, which events accelerate the vesting of restricted stock units.

 

Outstanding Equity Awards at 2009 Fiscal Year-End