2014 Regal-Beloit Proxy

Risk Assessment of Compensation Policies and Practices

We seek to design our compensation policies and practices to reflect a balanced approach between incentives to achieve short‐term and longer‐term objectives, both of which we believe will help us achieve sustained growth and success over the long term. While we recognize that the pursuit of our financial performance objectives and the link between the amount of compensation earned under our incentive arrangements and achievement of the objectives may lead to employee behavior that increases certain risks to our company, we believe that we have designed our compensation programs and policies to mitigate these concerns and help to ensure that our policies and practices are consistent with our risk profile. Our Board relies on our Compensation and Human Resources Committee to address significant risk exposures facing the company with respect to compensation, with appropriate reporting of these risks to be made to the full Board. The Committee, with the assistance of management and independent compensation consultants, periodically evaluates our compensation policies and practices to assess whether the risks arising from these policies and practices are likely to have a material adverse effect on our company and to assess the effect on these risks of any changes to our enterprise risk profile. The Committee did not recommend or implement any material changes in 2014 as a result of its most recent assessment, but has identified or implemented the following measures, among others, that it believes serve to mitigate any risks arising from our compensation policies and practices: ! We use SVA as the performance measure under our annual cash incentive plans for our executive officers and certain of our key non‐executive officer employees in part because it ties rewards for participants to both short‐term and long‐term results that we actually realize. We believe that SVA is the corporate performance measure that is tied most directly, both theoretically and empirically, to the creation of long‐term shareholder value. By focusing on our financial performance as a function of invested capital, our SVA‐based annual cash incentive plans create incentives for prudent investments in assets that are capable of providing strong long‐term returns. ! We have capped payouts under our SVA‐based cash incentive plan for our executive officers at 200% and any cash incentive amounts earned in a year above 100% of the target amount for the year are paid over time in installments, with one‐third of the above‐target amount being paid to the participant in cash after the end of each of the following three years, so long as the NEO has not voluntarily terminated his or her employment with us or has been terminated for cause. We believe that capping the maximum annual cash incentive and deferring over three years the payment of any cash incentive amounts earned above the target cash incentive value serve to limit participants’ incentives to take short‐term or inappropriately risky measures to increase payouts in any given year. ! Our SAR, RSU and PSU awards under our long‐term incentive compensation arrangements are subject to five‐ and three‐year vesting or performance periods, respectively, which we believe fosters employee retention and further helps to mitigate incentives to take short‐ term risks, while encouraging our employees to focus on our sustained growth over the long term. In addition, we have capped the payouts under the PSU awards at 200% of the target amount to limit participants’ incentives to take short‐term or inappropriately risky measures to increase payouts in any given year.

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