THG 2019 Proxy Statement

THE HANOVER INSURANCE GROUP 2019 PROXY STATEMENT 28 Specifically, this program is designed to motivate and reward: • achievement of annual targeted financial goals; • overall contribution to the Company; • achievement of annual operating business goals and strategic priorities that are linked to overall corporate financial results and other business priorities; and • demonstration of core leadership competencies. 2018 Short-Term Incentive Compensation Target Awards NEO Target Award as a % of Base Salary Rate John C. Roche 110% Jeffrey M. Farber 100% J. Kendall Huber 85% Richard W. Lavey 75% Bryan J. Salvatore 75% In 2018, the target award was increased for (i) Mr. Huber from 75% to 85% of base salary, and (ii) Mr. Salvatore from 70% to 75% of base salary. These increases were made in recognition of each NEO’s expertise, experience, and breadth of responsibilities, and market compensation levels. The Committee retains discretion to determine the individual bonus amount to be paid to each NEO. In determining the individual awards for our NEOs, for 2018, the Committee primarily considered: • the funding level achieved under our Leadership Short-Term Incentive Compensation Plan (“ Leadership STIP ”); and • each NEO’s individual performance. Each of these is described below. The funding level achieved under the Leadership STIP. The Leadership STIP is a performance-based bonus program that provides incentive cash compensation opportunities to officers and higher-level employees, including our NEOs. For 2018, potential funding under the Leadership STIP ranged from 0% to a maximum of 200% of target based on the following three performance components: (i) as-reported operating income; (ii) ex-cat operating income; and (iii) the strategic objectives discussed below. The Committee chose this combination of performance metrics because these are the primary measures by which the Board evaluates our financial and operating performance. When originally adopted in February 2018, the two financial metrics were to include the results of our Chaucer business unit. In light of the impending sale of Chaucer and the reclassification during the third quarter, as required by GAAP, of Chaucer’s results as discontinued operations, the Committee modified the metrics to exclude Chaucer’s results (as indicated in, and discussed following, the table below). Achievement of these performance metrics is expected to enhance our stock value and shareholder returns in both the short- and long-term. However, the Committee expressly retains the discretion to increase or decrease the funding pool and individual awards based upon any factor it deems appropriate. Set forth below are the operating income and ex-cat operating Income levels required to obtain threshold, target and maximum funding levels for the plan: Funding Level Operating Income (in millions) Ex-Cat Operating Income (in millions) Threshold (50% Funding) $298 $433 Target (100% Funding) $425 - $459 $619 - $653 Maximum (Up to 200% Funding) $597 $849 The minimum level of operating income and ex-cat operating income (each, as adjusted to exclude the Chaucer business unit) required to achieve target funding levels was increased by $39 million (10%) and $66 million (12%), respectively, above similarly adjusted 2017 targets, and were $98 million (30%) and $40 million (7%), respectively, above the actual levels achieved (as adjusted to exclude Chaucer’s results) in 2017. Targets established for 2018 were set at levels reflecting the Company’s anticipated increased earnings power and planned strategic investments, as well as our desire to set goals that, while reasonably obtainable, represent a legitimate and meaningful challenge to the organization. They were also set with the expectation that we would seek to sell Chaucer during the year. During 2018, operating income was $406.5 million and ex-cat operating income was $625.7 million. Accordingly, under the formula set forth in the Leadership STIP, these two funding components of the program were achieved at 95% and 100% of target, respectively. Had we incorporated Chaucer’s results into our operating income and ex-cat operating income funding scale as originally designed, our performance against these metrics would have been slightly less favorable, but the overall funding level for the program would not have materially changed.