THG 2019 Proxy Statement

THE HANOVER INSURANCE GROUP 2019 PROXY STATEMENT 35 and ensure his retention through the closing of a transaction to maintain stability within the organization and allow a potential buyer sufficient time to implement its own post-closing incentive and retention program. During the first quarter of 2018, the Committee made its usual and customary annual compensation decisions with respect to Mr. Fowle, which included a modest increase to his base salary, and a target annual bonus award and long-term equity incentive award on substantially similar terms and amounts as in prior years. These initial pay decisions, however, were made with the expectation that his actual compensation for the year would most likely be superseded by a more robust retention arrangement that was already being designed for the Committee’s consideration. Accordingly, we believe that it is more appropriate and instructive to our shareholders to focus our discussion of Mr. Fowle’s 2018 compensation on his retention arrangement discussed below. On May 23, 2018, the Company, through its subsidiary, Chaucer Underwriting Services Limited, entered into a formal retention arrangement with Mr. Fowle (the “ Retention Agreement ”), the material terms of which are as set forth below: Milestone Bonus. Mr. Fowle was awarded a $268,000 (£200,000) cash milestone bonus (i) half to be paid on the earlier of the execution of an agreement for the sale of Chaucer or July 31, 2018; and (ii) the remainder to be paid on the earlier of the closing of the Chaucer Sale or January 2, 2019. In addition to the retention and future considerations described above, in setting the amount of the cash milestone bonus, the Company took into consideration the fact that, in light of Chaucer's 2017 results, which were significantly affected by catastrophe losses, Mr. Fowle was not paid a 2017 short-term incentive compensation award; Success Fee. Mr. Fowle was awarded an $1,072,000 (£800,000) cash success fee to be paid following the completion of the Chaucer Sale. If the Chaucer Sale had not occurred prior to April 1, 2019, one-half of the award would be forfeited, and the remaining portion would be paid on the second anniversary of the grant date; Treatment of Outstanding Equity Awards. Since the Chaucer Sale would not trigger the “change in control” vesting provisions provided under his applicable equity grant agreements (which only applied in the event of a change in control of THG), all of Mr. Fowle’s outstanding equity awards (2016 TBRSUs and PBRSUs granted in 2017 and 2018) would be forfeited upon the closing of the Chaucer Sale. In recognition of the value of such forfeited awards, in the event Chaucer was sold prior to April 1, 2019, we agreed to make a cash payment to Mr. Fowle in lieu of such awards. Such payment would be based, generally, upon the number of shares that would have vested had a “change in control” vesting acceleration event occurred in connection with the Chaucer Sale, and assumed that our share price would equal the average closing price of our common stock determined over the 30-day period preceding closing of the sale. The performance metrics associated with PBRSUs were deemed achieved, depending on the award, at “target” or actual performance through closing (or “deemed” performance for incomplete performance periods). Pursuant to this provision of the Retention Agreement, Mr. Fowle is expected to be paid approximately $1.14 million. Treatment of Outstanding 2016 Long-Term Cash Award. Provided the Chaucer Sale occurred prior to April 1, 2019, we agreed to pay Mr. Fowle’s 2016 Long-Term Cash Award (which was otherwise scheduled to vest during the second quarter of 2019) based upon Chaucer’s actual performance for the 2016 and 2017 performance years, and the greater of actual or target performance for the 2018 performance year. Pursuant to this provision of the Retention Agreement, Mr. Fowle is expected to be paid approximately $129,000 (£96,500). Annual Bonus Award. Assuming the Chaucer Sale occurred prior to April 1, 2019, we agreed to pay Mr. Fowle his 2018 STIP at the greater of “actual” performance (achievement of certain levels of Return on Allocated Capital (ROAC) during 2018) or his “target” award. Pursuant to this provision of the Retention Agreement, Mr. Fowle is expected to be paid $589,600 (£440,000), which represents his target 2018 STIP. Enhanced Severance. In the event Mr. Fowle is terminated (other than for cause), or Mr. Fowle resigns for “good reason” (generally, a reduction in compensation or requirement to relocate), at any time within 18 months following the Chaucer Sale, he is entitled to severance equal to one year’s base salary plus benefits and would be relieved of certain post-termination covenants restricting his ability to work in the Lloyd’s market. Since the primary objective of the Retention Agreement was to ensure that Mr. Fowle remained with the Company through the closing of the transaction, in order to be eligible to receive payment under the Retention Agreement, he is required to remain employed by Chaucer (and not be under notice of termination given by either party) through the applicable payment date. Other than the milestone bonus, the entitlements under the Retention Agreement are generally not payable until three months following the closing of the Chaucer Sale (March 28, 2019). The Committee agreed to guarantee Mr. Fowle’s annual bonus at the target payment level, and, with respect to certain long-term awards, to guarantee that performance for the 2018 year be achieved at target, but only if the Chaucer Sale occurred prior to April 1, 2019, to enhance the retentive value of such awards and encourage assistance in the sale process. Such guarantees resulted in actual payouts for the impacted awards that were higher than would have been paid had we not entered into the Retention Agreement. For purposes of this disclosure, all payments that have been made or are expected to be made to Mr. Fowle under the Retention Agreement are reflected in the Summary Compensation Table below. • • • • • •