Compensation Reference Guide for U.S. Salaried Associates

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1 Compensation Reference Guide for U.S. Salaried Associates At Timken, future growth begins with you. It s Timken people who create the value our customers demand and that value-creating capability makes talent our most important differentiator. It s also why we invest in you and the Timken team, providing challenging, rewarding work that matters and the satisfaction of knowing your contributions make a difference for industries worldwide. We actively contribute to your continued success with ongoing learning, global career opportunities and meaningful challenges that draw on your expertise. And we offer competitive pay programs directly tied to the results you and Timken achieve to help us continue to win in the marketplace. The reference material that follows* applies to all U.S. salaried associates indicated in the appendix below. For pay programs specific to your location, consult with your local human resource representative for additional detail. *The Company has the right to change or discontinue programs at any time. 1

2 Pay Strategy Our pay philosophy drives competitive total compensation, which includes formal payfor-performance plans, and we always strive to pay at levels such that Timken associates value working at the Company. Our total compensation plans include both competitive base pay and an annual incentive opportunity, which offers higher rewards when individual and Company performance exceed established goals and lower rewards when individual or Company performance falls short. How Pay is Determined We establish pay by evaluating each position using standard methods in the compensation industry. Members of the compensation team and human resource (HR) representatives evaluate the job description, which is developed and submitted by the pay manager, to determine the corresponding job grade, taking into account jobs of comparable size and value in the competitive employment market. Compensation specialists then establish the target pay level for each job grade by assessing the competitive employment market. The process includes determining both base pay and annual incentive opportunity, with base pay driven by the job grade of the position performed and competencies required on the job. Over time, individuals can advance within and even beyond a target pay level as their proficiencies develop and performance levels increase. Base Salary and Adjustments Each year, the Company conducts a global salary review and sets an annual salary increase budget based on labor market trends and the Company s ability to absorb increases in salary costs. This money is then allocated based on merit. Pay managers consider and balance two main factors as they allocate the annual merit budget: 1) the associate s individual performance as reviewed through the Company s Talent Management Process (TMP) as well as 2) the associate s actual pay position and current competency on the job compared to the target pay position. Allocation recommendations made by the managers are reviewed in a rollup process to assure consistency across the Company. Beyond annual merit, a base pay change may occur when an associate changes position. This includes: A move to a new position with a higher job grade a promotion, which typically results in a base pay increase; or A transfer to a new position at the same grade a lateral transfer, which provides an associate with a new career experience but does not typically result in a base pay change. A change to a lower job grade could result in a salary reduction to adjust the base pay to fit more closely with the appropriate pay level for the new position. Short-Term Incentive The Company utilizes a variety of short-term incentive plans to drive behaviors that foster business growth and improve performance as well as variablize costs. 2

3 Many associates participate in the Company s broad-based short-term incentive plan called the Annual Performance Award (APA), while other associates receive rewards through local short-term incentive plans that focus on specific business unit or plant performance measures. Your local Human Resource representative can share further specifics on your annual short-term incentive plan participation. Annually, the Company establishes the following for each plan: Specific Key Performance Indicators (KPIs) the plan rewards. Performance level required for each KPI to achieve the target, maximum and threshold as well as the Plan s minimum level required, called the Circuit Breaker. Exclusions are identified. Note that our standard approach is all in, meaning factors like restructuring are considered a business expense and are included in KPI measurement. In determining the award, The plan payout percentage is formulaically calculated based on the measure of accomplishment of each KPI as compared to the performance requirements. The target percentage opportunity for each associate is based on the job grade Eligible earnings are earnings paid during the year. The sum of all individual target payouts in the plans creates a budget pool. The short-term incentive plans provide flexibility to shift budget from underperforming areas to higher-performing areas by functional area, business unit, geography or other group, as warranted. The award can also be zeroed out entirely when performance is poor. The allocation recommendations provided by managers are reviewed in a rollup process to assure consistency across the Company. The award payment is: Made following the performance period; Deposited into the bank account where normal base salary payments are deposited; Taxed using rates as per Federal, State and local laws; Eligible for 401(k) contribution and for Company-matching contributions o Your contribution percent in effect at the time of the payment is deducted from the incentive award payment. Considered ineligible earnings for life insurance calculations; 3

4 Deferred to future distribution schedule for eligible associates who participate in the Company s deferred compensation program. Short-term incentive eligibility includes: Full-time salaried associates, or others whose employment agreement and or MySuccess record includes eligibility, active as of December 31 of the performance year; Associates who retire, die, are laid off due to job elimination for a reason other than performance, or accept voluntary layoff prior to year-end. The eligible incentive payment for an individual in this group is based on earnings in the performance year prior to separation; Associates who take Family Medical Leave Act at any time during the performance year, with the eligible incentive payment based on actual earnings in the performance year; Associates who transfer from an employment category that was not eligible for a short-term incentive into an employment category that is eligible, with only those earnings under the eligible category being considered for the award calculation. The following are ineligible for annual incentive: Temporary associates, bargaining unit associates, associates who were discharged or quit, interns, co-ops and career training students. Note: If an intern or career training student is hired as a full-time associate on or prior to December 31 of the performance year, then earnings worked as an intern or career training student are included in the award calculation. Corporate Service Corporate service, also called Continuous Service, accrues during your active, continuous full-time employment with the Company and serves as the basis for determining the level of various benefits including vacation, short-term disability, severance and Family Medical Leave Act (FMLA). The following associates do not accrue corporate service: Paid Hourly for Worked Performed (PHWP) associates Part-time associates Temporary associates Summer interns, year-round interns, co-ops and career training students. Holidays The ten Company-recognized paid holidays are: New Year s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, the day after Thanksgiving, 4

5 the day before Christmas, Christmas Day and one additional holiday designated by the Company. When a holiday falls on Saturday or Sunday, the Company designates the day on which the holiday is observed. Plant locations can adjust holidays (replacing any of the named above with a different day) to meet production requirements. If, as a non-exempt associate or exempt associate eligible for extra compensation for certain hours beyond the normal week, you are scheduled and work on a Company-recognized holiday, you receive pay for the holiday plus pay for the hours worked, plus a premium if you qualify. Vacation Program Full-time, active salaried associates are eligible for vacation. Vacation accrues on an earn-as-you-go basis at the rate of 1/10 th of your respective annual allowance per month for the first full 10 months of the year worked. Your actual number of annual vacation days depends upon your continuous service as of December 31 each vacation year. For example, your 2016 annual vacation allowance depends upon your continuous service completed by December 31, Number of years of service as of Dec. 31 for the current calendar year Vacation days per year Less than to to or more 25 Vacations must be pre-approved by your manager, who must take departmental staffing needs into consideration. Approval for vacation time off need not be given if it would result in too many associates being on vacation at any one time. You can borrow up to five days of vacation from the next vacation year with advanced approval of your manager. With the advanced approval of your manager, all associates (except those in California) can carry over into the next vacation year up to five days of unused vacation. For associates in California, refer to local handbook for details. Vacation may be taken in increments as small as 1/2 day at a time. A Company-recognized holiday that falls on a working day within a vacation period is not considered a vacation day. Should Company offices unexpectedly close for any day other than a recognized holiday, a vacationing associate does not receive extra vacation allowance. While on vacation, your regular salary is deposited to your bank account on the normal payday. If you separate from the Company and have not used your vacation, you may be paid at the time of separation for any earned vacation days outstanding. 5

6 If you are called to military duty, you may elect to be paid for any unused accrued vacation time. If you elect not to be paid for any unused accrued vacation time, you remain eligible to use your accrued vacation when you are reemployed or reinstated. If you permanently separate from the Company, you are paid for any accrued unpaid vacation. You do not accrue vacation while on military leave but continue to accrue seniority for vacation eligibility purposes while on military leave. Funeral Leave The Company recognizes that you may have to miss work due to the death of a family member. You receive up to a maximum of five (5) consecutively scheduled work days to make arrangements and to attend the funeral of your spouse or child (including your stepchild when s/he has lived with you in an immediate family relationship). You receive up to a maximum of three (3) consecutively scheduled work days to make arrangements and attend the funeral of your mother, father, brother, sister, mother-in-law, fatherin-law, grandparents or grandchildren (including stepfather, stepmother, stepbrother, stepsister when s/he has lived with you in an immediate family relationship). Pay Administration Timken partners with ADP to provide associates access to pay information online anywhere, anytime. You may access your pay information, pay history and W-2 forms via MySuccess. The Company deposits your net pay into your account on the last day of your pay period. If the last day of the pay period falls on a Saturday or a Sunday, your pay is deposited on the preceding Friday. Any shortages or overpayments should be called to the attention of your manager at once. To change the financial institution and/or your account number, contact the Payroll Department with the new information prior to the beginning of the pay period. Overtime Pay For Non-Exempt And Exempt Associates The Fair Labor Standards Act requires that nonexempt associates who work more than 40 hours in one work week must be paid at least one and one-half times their normal rate for those hours in excess of 40. An alternative to paying overtime is to reduce the hours in a particular work week to 40 by granting compensating time off within the same work week. Flex-time must be granted and taken by the associate within the same work week as the over 40 hours would have otherwise occurred. Certain types of jobs recognized by the Act because of their duties and responsibilities or other reasons are exempt from overtime pay requirements. These exempt positions fall in the categories of executive, administrative, professional or outside sales. At The Timken Company, we classify each position as either exempt or nonexempt. 6

7 Exempt associates who are not eligible for extra pay for certain hours beyond the normal week are not entitled to compensating time off on an hour-for-hour basis. However, a manager can make accommodations, including reasonable time away from work, to recognize an exempt associate who has worked longer-than-normal hours to complete a project or responded to a heavy workload. In unique cases of extended requirements for extra hours by an exempt associate, the manager of the exempt associate should contact the local HR Manager who would review the case with the HR Director to make a determination on how the situation should be handled. Exempt associates are paid the full amount of salary for each week in which they perform work without regard to the number of days or hours worked subject only to the reductions listed below. Exempt associates salaries are not subject to reduction because of variations in the quality or quantity of the work performed. Salaries of exempt associates, however, may be subject to certain deductions made in good faith, which are permissible under the Fair Labor Standards Act. These deductions include, but are not limited to: Penalties for violations of Timken safety rules; Unpaid disciplinary suspensions for one or more full days for violation of Timken workplace conduct rules as outlined in the associate handbook; Absences from work for one or more full days for personal reasons other than sickness or disability; Full days not worked during the first and last weeks of employment; and Unpaid leave taken pursuant to the Family and Medical Leave Act. Exempt employees who believe that deductions taken violate this policy should promptly report their concerns to the Manager of Disbursements. If, after investigating, a deduction was improperly made, the Company reimburses the employee. 7

8 Appendix (Participating Company Locations) Altavista Brg Plant Asheboro Plant Augusta ME Birmingham Boca Raton Office Broomfield Bucyrus Brg Plant Canton Corporate Offices Carlyle Plant Casper Charlotte District Chicago District Cleveland District Dayton Denver Detroit District Duncan Packaging & Dist Center Ferndale Fulton Gaffney Bearing Plant Gambrinus Roller Plant High Speed OEM Honea Path Plant Houston - TGS Irving Sales Office Keene Bearing Plant King of Prussia Lenexa Plant Lincolnton Bearing Plt Los Alamitos Sales Office Manchester Mascot Plant Milwaukee Sales Office Mokena New Castle New Haven New Phil Bearing Plt North Canton - Main Ogden Plant Pasco Peoria District Philadelphia District Pittsburgh District Portland ME Pulaski Plant Santa Fe Springs Shiloh Plant Smith Services TG&S - Carolina Service Ctr TG&S - Indiana Service Ctr Timken Aerospace Lebanon Timken Aviation Timken Los Alamitos Tyger River Plant World Headquarters (WHQ) 8

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