UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

 

(RULE 14a-101)

 

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

Keycorp

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

127 PUBLIC SQUARE
CLEVELAND, OHIO 44114

 

March 21, 2007

 

DEAR SHAREHOLDER:

 

You are cordially invited to attend the 2007 Annual Meeting of Shareholders of KeyCorp which will be held at The Forum Conference Center, 1375 East Ninth Street, Cleveland, Ohio, on Thursday, May 10, 2007, at 8:30 a.m., local time.

 

All holders of record of KeyCorp Common Shares as of March 13, 2007 are entitled to vote at the 2007 Annual Meeting.

 

As described in the accompanying Notice and Proxy Statement, you will be asked to elect four directors for three-year terms expiring in 2010, to consider a proposal to amend KeyCorp’s Code of Regulations, to consider a proposal submitted by a KeyCorp shareholder, and to ratify the appointment of Ernst & Young LLP as independent auditors for 2007.

 

KeyCorp’s Annual Report for the year ended December 31, 2006 is enclosed.

 

Your proxy card is enclosed. You can vote your shares by telephone, the internet, or by mailing your signed proxy card in the enclosed return envelope. Specific instructions for voting by telephone or the internet are attached to the proxy card.

 

Sincerely,

 

Henry L. Meyer III

  Chairman of the Board

 

127 PUBLIC SQUARE
CLEVELAND, OHIO 44114

 

The 2007 Annual Meeting of Shareholders of KeyCorp will be held at The Forum Conference Center, 1375 East Ninth Street, Cleveland, Ohio, on Thursday, May 10, 2007, at 8:30 a.m., local time, for the following purposes:

 

1. To elect four directors to serve for three-year terms expiring in 2010;

 

2. To vote upon an amendment to KeyCorp’s Regulations to reduce the size of KeyCorp’s Board of Directors to no fewer than 12 and no more than 16 directors;

 

3. To consider and act upon a shareholder proposal requesting necessary steps to cause the annual election of all directors;

 

4. To ratify the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as independent auditors for KeyCorp for the fiscal year ending December 31, 2007; and

 

5. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof.

 

Only holders of KeyCorp Common Shares of record as of the close of business on March 13, 2007 have the right to receive notice of and to vote at the Annual Meeting and any postponement or adjournment thereof.

 

By Order of the Board of Directors

 

Paul N. Harris

  Secretary

 

March 21, 2007

 

 

YOUR VOTE IS IMPORTANT.  YOU CAN VOTE YOUR SHARES BY TELEPHONE, THE INTERNET, OR BY MAILING YOUR SIGNED PROXY CARD IN THE RETURN ENVELOPE ENCLOSED WITH THE PROXY CARD FOR THAT PURPOSE. SPECIFIC INSTRUCTIONS FOR VOTING BY TELEPHONE OR THE INTERNET ARE ATTACHED TO THE PROXY CARD.

 

TABLE OF CONTENTS

 

 

127 PUBLIC SQUARE
CLEVELAND, OHIO 44114

 

This Proxy Statement is furnished commencing on or about March 21, 2007 in connection with the solicitation on behalf of the Board of Directors of KeyCorp of proxies to be voted at the 2007 Annual Meeting of Shareholders on May 10, 2007, and at all postponements and adjournments thereof. All holders of record of KeyCorp Common Shares at the close of business on March 13, 2007 are entitled to vote. On that date there were 393,919,243 KeyCorp Common Shares outstanding and entitled to vote at the meeting. Each such share is entitled to one vote on each matter to be considered at the meeting and a majority of the outstanding KeyCorp Common Shares shall constitute a quorum.

 

Contingent upon the amendment of KeyCorp’s Regulations pursuant to Issue Two which Issue will be voted upon prior to the election of Directors at the 2007 Annual Meeting, the size of the Board of Directors (also sometimes referred to as the “Board”) will be established as of the Annual Meeting at 13 members. The Board will be divided into two classes of four members each and one class of five members. The terms of these classes will expire in 2008, 2009, and 2010, respectively. The nominees for directors for terms expiring in 2010 are listed below. All properly appointed proxies will be voted for these nominees unless contrary specifications are properly made, in which case the proxy will be voted or withheld in accordance with such specifications. All nominees are current members of the Board. Should any nominee become unable to accept nomination or election, the proxies will be voted for the election of such person, if any, as shall be recommended by the Board or for holding a vacancy to be filled by the Board at a later date. The Board has no reason to believe that the persons listed as nominees will be unable to serve. In the election of directors, the properly nominated candidates receiving the greatest number of votes shall be elected. Under KeyCorp’s Majority Voting Policy which is set forth on pages 9 and 10 of this proxy statement, if a nominee receives more “withheld” votes than “for” votes, the nominee must submit an offer to resign as a director to the KeyCorp Board of Directors. The Nominating and Corporate Governance Committee of the Board of Directors will consider the resignation and will submit its recommendation as to whether to accept or reject the resignation to the Board of Directors which will act on the recommendation and publicly disclose its decision.

 

Pursuant to rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the following information lists, as to nominees for director and directors whose terms of office will continue after the 2007 Annual Meeting, the principal occupation or employment, age, the year in which each first became a director of KeyCorp, and directorships in registered investment companies or companies having securities which are registered pursuant to, or that are subject to certain provisions of, the Exchange Act. The information provided is

as of January 1, 2007 unless otherwise indicated. KeyCorp was formed as a result of the merger on March 1, 1994 of the former KeyCorp, a New York corporation (“Old Key”), into Society Corporation, an Ohio corporation (“Society”), whereupon Society changed its name to KeyCorp. In the case of nominees or continuing directors who were directors of Old Key, the year in which such individual became a director of Old Key is also included in the following information. Except as otherwise indicated, each nominee or continuing director has had the same principal occupation or employment during the past five years.

 

 

 

 

Board of Directors.  During the year ended December 31, 2006, there were seven meetings of KeyCorp’s Board of Directors. Each continuing member of KeyCorp’s Board attended at least 75% of the aggregate of the meetings held by KeyCorp’s Board of Directors and the meetings held by the committees of the Board on which such member served during 2006.

 

KeyCorp Board members are expected to attend KeyCorp’s Annual Meetings of Shareholders. All Board members attended the 2006 Annual Meeting.

 

KeyCorp’s Board of Directors currently exercises certain of its powers through its Audit, Compensation and Organization, Executive, Nominating and Corporate Governance, and Risk Management Committees. Each Committee has a Charter that can be found at www.key.com/ir.

 

Audit Committee.  Ms. Martin (Chair elect) and Messrs. Campbell (Chair), Dallas, and Ten Eyck are the current members of the Audit Committee. The functions of this Committee generally include matters such as oversight review of the financial information provided to KeyCorp’s shareholders, appointment of KeyCorp’s independent auditors, review of fees and services of the independent auditors, oversight review of the material examinations of KeyCorp and its affiliates conducted by federal and state regulatory and supervisory authorities, service as the audit committee of KeyCorp’s banking subsidiaries, oversight review relating to financial reporting, compliance, legal, and information security and fraud risk matters, and supervision and direction of any special projects or investigations deemed necessary. KeyCorp’s Audit Committee met fifteen times in 2006.

 

Compensation and Organization Committee.  Dr. Cartwright and Messrs. Cutler (Chair) and Menascé are the current members of KeyCorp’s Compensation and Organization Committee. The functions of this Committee generally include matters such as review and approval of KeyCorp’s compensation philosophy and related programs, determination of the compensation and terms of employment of senior management, determination of participants and awards under executive incentive compensation plans and supplemental compensation plans, approval of (or amendments to) employee and officer retirement, compensation and benefit plans, review of organization structure and staffing, review of KeyCorp’s depth of management and plans for management development and succession, review of the Compensation Discussion and Analysis for the proxy statement, and review of KeyCorp’s directors’ and officers’ liability insurance program. KeyCorp’s Compensation and Organization Committee met seven times in 2006.

 

Relative to executive compensation, the Committee reviews and approves Chief Executive Officer and other corporate senior executive officer goals and objectives and evaluates performance in light of those goals and objectives. Based on this evaluation, the Committee approves compensation and compensation changes. The Committee takes into account, among other factors, the recommendation of the Chief Executive Officer and his direct reports as to the compensation of other less senior executives. The Committee has employed the services of Mercer Human Resources Consulting, Inc. to assist the Committee in its evaluation of executive compensation. Mercer reports directly to the Committee. A representative of Mercer attends Committee meetings and frequently meets privately with the Committee at the meetings. The scope of Mercer’s services to the Committee includes assisting the Committee in setting base salary, long-term and short-term incentive compensation performance targets, assisting the Committee in determining an appropriate peer group for executive compensation comparisons, assisting the Committee in determining progress against incentive compensation performance goals, and reporting on trends in executive compensation, as well as any other ad hoc services relating to executive compensation

requested by the Committee. A fuller explanation of the Committee process relative to executive compensation can be found in the Compensation Discussion and Analysis found on pages 39 to 49 of this proxy statement. The Committee may delegate its authority to a subcommittee of its members.

 

Executive Committee.  Dr. Cartwright, Ms. Martin, and Messrs. Hogan, Meyer (Chair), Stevens, and Ten Eyck are the current members of KeyCorp’s Executive Committee. The functions of the Executive Committee are to exercise the authority of the Board of Directors, to the extent permitted by law, on any matter requiring Board or Board committee action between Board or Board committee meetings. The Executive Committee met two times in 2006.

 

Nominating and Corporate Governance Committee.  Messrs. Bares (Chair), Campbell, Cutler, Menascé, and Sanford are members of KeyCorp’s Nominating and Corporate Governance Committee. The functions of the Committee include matters such as oversight of board corporate governance matters generally and the annual review and recommendation to the Board of Directors of a director compensation program which may include equity based and incentive compensation plans. The Nominating and Corporate Governance Committee met seven times in 2006.

 

The Committee uses market data to aid it in its annual review of KeyCorp’s director compensation program. No compensation consultant is used in determining director compensation and no executive officer has any role in determining the amount of compensation although the Committee may seek assistance from executive officers of KeyCorp in designing equity compensation plans. The Committee may delegate its authority to a subcommittee of its members.

 

The Committee identifies and reviews the qualifications of prospective directors and recommends to the Board candidates for election as directors. Nominations for the election of directors by KeyCorp’s Board of Directors may be made by the affirmative vote of a majority of the directors then in office. Shareholders and Board members may submit to the Chair of the Committee any potential nominee that the shareholder or director would like to suggest. The Committee presently uses an independent search firm to aid the Committee in identifying candidates.

 

Any shareholder recommendation for a director nominee should contain background information concerning the recommended nominee, including (a) the name, age, business, and residence address of such person; (b) the principal occupation or employment of such person for the last five years; (c) the class and number of shares of capital stock of KeyCorp that are beneficially owned by such person; (d) all positions of such person as a director, officer, partner, employee, or controlling shareholder of any corporation or other business entity; (e) any prior position as a director, officer, or employee of a depository institution or any company controlling a depository institution; and (f) a statement of whether such individual would be willing to serve if nominated or elected. Any shareholder recommendation should also include, as to the shareholder giving the written notice, (a) a representation that the shareholder is a holder of record of shares of KeyCorp entitled to vote at the meeting at which directors are to be elected and (b) a description of all arrangements or understandings between the shareholder and such recommended person and any other person or persons (naming such person or persons). Shareholder recommendations should be provided to the Secretary of KeyCorp who will forward the materials to the Chair of the Committee.

 

The Committee uses the following criteria in director recruitment: (a) the nominee must have a record of high integrity and other requisite personal characteristics and must be willing to make the required time commitment; (b) the nominee should have extensive experience as a very senior officer of a large institution (profit or nonprofit);

(c) the nominee should have a high level of expertise in areas of importance to KeyCorp (such as technology, global commerce, marketing, finance, management, etc); (d) in the case of outside directors, the nominee should meet the “independence” criteria set forth in KeyCorp’s Standards for Determining Independence of Directors; (e) the nominee should not be serving as a director of more than (i) two other public companies if he or she is a CEO of a public company, or (ii) three other public companies if he or she is not a CEO of a public company; (f) the nominee must be capable of working with the rest of the Board and contributing to the overall Board process; and (g) additional factors in evaluating the above skills would be a preference for nominees that improve the diversity of the Board in terms of gender, race, religion and/or geography. The above criteria other than (a) are not rigid rules that must be satisfied in each case, but are flexible guidelines to assist in evaluating and focusing the search for director candidates.

 

Risk Management Committee (formerly known as the Finance Committee).  Messrs. Alvarez, Bares, Hogan, and Sanford (Chair) are the current members of KeyCorp’s Risk Management Committee. The functions of the Risk Management Committee generally include oversight review of risk management matters relating to credit risk, market risk, interest rate risk, and liquidity risk, asset/liability management policies and strategies, compliance with regulatory capital requirements, KeyCorp’s capital structure and capital management strategies, including compliance with regulatory capital requirements, KeyCorp’s portfolio of “Corporate-Owned Life Insurance,” technology-related plans, policies, and major capital expenditures, and the capital expenditure process. In addition, the Committee is charged with exercising the authority of the Board of Directors in connection with the authorization, sale and issuance by KeyCorp of debt and certain equity securities and the approval of certain capital expenditures. The Committee is also charged with making recommendations to the Board of Directors with respect to KeyCorp’s dividend and share repurchase authorizations. The Risk Management Committee met seven times in 2006.

 

The Board of Directors has established and follows a corporate governance program and has assigned the Nominating and Corporate Governance Committee responsibility for the program. Following are KeyCorp’s Corporate Governance Guidelines as adopted by the Board of Directors upon recommendation of the Nominating and Corporate Governance Committee.

 

I. DIRECTOR RESPONSIBILITY

 

Members of the Board of Directors are expected to exercise their business judgment to act in what they believe to be in the best interests of KeyCorp. In discharging this responsibility, Board members are entitled to rely on the honesty and integrity of KeyCorp’s senior officers and outside advisors and consultants. Board members are expected to attend Board meetings and meetings of committees upon which they serve and to review materials distributed in advance of meetings.

 

II. BOARD OF DIRECTORS SELF ASSESSMENT

 

The Board conducts an annual self-assessment process under the auspices of the Nominating and Corporate Governance Committee through self-assessment questionnaires to all Board members. The questionnaires are divided into two parts with the first part consisting of general Board self-assessment questions and the second part consisting of individual director self-assessment questions. The results of the general Board portion of the director self-assessment questionnaires are reviewed by the Board and changes in KeyCorp’s corporate governance process

are based on the results of the Board’s review and analysis of the self-assessment questionnaires. Pursuant to the self-assessment process, the Board reviews, among other matters, agenda items, meeting presentations, advance distribution of agendas and materials for Board meetings, interim communications to directors, and access to and communications with senior management. The results of the individual director self-assessment portion of the questionnaire are reviewed by the members of the Nominating and Corporate Governance Committee. In evaluating the effectiveness of the incumbent directors whose terms are expiring at a particular annual shareholders meeting and who are therefore subject to re-nomination to the Board, the Committee reviews the directors’ effectiveness in light of the results of the incumbent directors’ individual self-assessment questionnaires, in light of the Board’s Director Recruitment Guidelines, and in light of the existing mix of skills, core competencies and qualifications of the Board as a whole.

 

III. EXECUTIVE SESSIONS OF OUTSIDE DIRECTORS

 

The outside [non-management] directors meet in executive session without inside directors or executive management present. The Chair of the Nominating and Corporate Governance Committee presides over these executive sessions.

 

IV. BOARD COMPOSITION

 

Not more than three directors will be “inside” directors (i.e., directors who are at the time also officers of KeyCorp). A retired Chief Executive Officer of KeyCorp shall no longer serve on the Board after he or she ceases to hold such office, except for a short (approximately 6 months or less) interim transition period in which such person may serve as Chairman of the Board after ceasing to be Chief Executive Officer.

 

V. DIRECTOR INDEPENDENCE

 

The Board has adopted standards for determining “independence” of directors and determined that at least two-thirds of KeyCorp’s directors and all members of the Board committees performing the audit, compensation, corporate governance, and nominating functions must meet these independence standards. The standards for determining independence are [discussed on pages 13 to 15 of this proxy statement]. In addition, members of the Audit Committee are not permitted to receive any compensation from KeyCorp other than the compensation described in Section X below.

 

VI. MAJORITY VOTING

 

In an uncontested election, any nominee for director who receives a greater number of votes “Withheld” from his or her election than votes “For” such election (a “Majority Withheld Vote”) shall submit to the Board of Directors promptly following certification of the shareholder vote a written offer to resign as a director. The Nominating and Corporate Governance Committee shall consider the resignation offer and recommend to the Board whether to accept or reject it. The Board will act on the Nominating and Corporate Governance Committee’s recommendation within 90 days following certification of the shareholder vote. As soon as practicable thereafter, the Board will disclose its decision (citing the reasons for rejecting the resignation offer, if applicable), in a press release to be disseminated in accordance with KeyCorp’s Disclosure Policy. Any director who submits a written offer to resign as a director pursuant to this provision shall not participate in the Nominating and Corporate Governance Committee recommendation or Board action regarding whether to accept or reject the resignation offer. However, if each member of the Nominating and Corporate Governance Committee received a Majority

Withheld Vote at the same election, then the directors who meet KeyCorp’s independence standards and who did not receive a Majority Withheld Vote shall appoint a special committee comprised exclusively of independent directors to consider the resignation offers and recommend to the Board to accept or reject them. Further, if the only directors who did not receive a Majority Withheld Vote in the same election constitute three or fewer directors, all directors may participate in the Board action regarding whether to accept or reject the resignation offers.

 

VII. DIRECTOR LEGAL OR CONSULTING FEES

 

The Board has determined that in the event that a director or a firm affiliated with a director performs legal, consulting or other advisory services for KeyCorp, the amount of fees for such legal, consulting or advisory services payable to such director and such director’s affiliated firm in any calendar year shall not exceed $50,000 in the aggregate unless the Audit Committee otherwise approves.

 

VIII. DIRECTOR RETIREMENT

 

The Board has adopted a retirement policy whereby an incumbent director is not eligible to stand for election as a director upon reaching age 70. Under the policy, a director is also requested to submit his or her resignation from the Board to the Nominating and Corporate Governance Committee in the event that the director retires from or otherwise leaves his or her principal occupation or employment. The Nominating and Corporate Governance Committee can choose to accept or reject the resignation.

 

IX. DIRECTOR RECRUITMENT

 

The Board has adopted a formal policy delineating director recruitment guidelines to be utilized by the Board in identifying and recruiting director nominees for Board membership. The policy guidelines are designed to help insure that KeyCorp is able to attract outstanding persons as director nominees to the Board.

 

X. DIRECTOR COMPENSATION

 

The Board has determined that approximately 50% (in value) of the Board’s compensation should be equity compensation in order to more closely align the economic interests of directors and shareholders. In addition, each year the Board reviews the cash component of its compensation which is in the form of director fees.

 

XI. DIRECTOR STOCK OWNERSHIP GUIDELINES

 

KeyCorp has adopted stock ownership guidelines for KeyCorp’s outside directors which specify that each outside director should, by the fourth anniversary of such director’s initial election, own at least 7,500 KeyCorp Common Shares, of which at least 1,000 shares should be directly owned by the director and be in the form of actual shares. For purposes of these guidelines, except for the 1,000 actual share requirement, Common Shares include actual shares, deferred or phantom stock units, and restricted shares.

 

XII. DIRECTOR ORIENTATION

 

A new director orientation is conducted for all new directors. The orientation consists of meetings with the Chief Executive Officer and other members of senior management including the senior officer who acts as the liaison for the committee(s) upon which the new director will serve.

 

XIII. DIRECTOR CONTINUING EDUCATION

 

Each director is expected to attend at least one Institutional Shareholder Services (ISS) approved director training or education session during each three-year term he or she is elected to as a director. KeyCorp will reimburse the reasonable costs and expenses of the training or education session incurred by the director (not including spousal expenses), including registration fees, travel, hotel accommodations and related meals, provided, however, if a director attends an ISS approved session which will cover another company on whose board the director also serves, KeyCorp will, if the other company is willing, appropriately share the costs and expenses with the other company. Management will circulate brochures to directors of sessions. Directors are asked to advise management when they are signing up for a session.

 

XIV. LIMITATION ON PUBLIC COMPANY DIRECTORSHIPS

 

Directors should not serve as a director of more than three other public companies (for a total of four including KeyCorp), except that a director who is the chief executive officer of a public company should only serve as a director of up to two other public companies (for a total of three including KeyCorp and his or her own company).

 

XV. REPRICING OPTIONS

 

The Board has determined that KeyCorp will not reprice options.

 

XVI. ONE YEAR HOLDING OF OPTION SHARES

 

The Compensation and Organization Committee has adopted a policy that stock options granted to the Chief Executive Officer, the Chief Administrative Officer, the Chief Financial Officer and all other Section 16 executives of KeyCorp will contain a provision requiring that all net shares obtained upon exercise of the option (less the applicable exercise price and withholding taxes) must be held for at least one year following the exercise date or, if later, until the executive’s stock ownership meets KeyCorp’s stock ownership guidelines. The policy applies to all options granted to such officers from and after the policy’s adoption.

 

XVII. SENIOR EXECUTIVE STOCK OWNERSHIP GUIDELINES

 

KeyCorp has adopted stock ownership guidelines for KeyCorp’s senior executives which specify that the Chief Executive Officer should own KeyCorp Common Shares with a value equal to at least six times salary, of which 10,000 should be in the form of actual shares, that all members of KeyCorp’s Management Committee should own KeyCorp Common Shares with a value equal to at least four times their respective salary, of which 5,000 should be in the form of actual shares, and other corporate senior executives whose compensation is subject to individual review and approval by the Compensation and Organization Committee should own KeyCorp Common Shares with a value at least equal to two times their respective salary, of which 2,500 should be in the form of actual shares. Newly hired executives and executives whose stock ownership did not meet the most recent guidelines at the time of adoption have a reasonable period to achieve the specified level of ownership. For purposes of these guidelines, Common Shares include actual shares, restricted shares and phantom stock units.

 

XVIII. EXTENSIONS OF CREDIT COLLATERALIZED BY KEYCORP STOCK

 

The Board has determined that neither KeyCorp nor its subsidiaries will extend to any director or executive officer covered by KeyCorp’s stock ownership guidelines credit collateralized by KeyCorp stock.

 

XIX. FORMAL EVALUATION OF CHIEF EXECUTIVE OFFICER

 

The Compensation and Organization Committee conducts an annual evaluation of the Chief Executive Officer which includes soliciting input from the full Board. The results of the annual evaluation are discussed with the Board as a whole in executive session.

 

XX. ACCESS TO MANAGEMENT AND INDEPENDENT ADVISORS

 

Board members have complete access to KeyCorp’s management. If the Board member feels that it would be appropriate, the member is asked to inform the Chief Executive Officer of his or her contact with the officer in question. Members of senior management normally attend portions of each Board meeting. The Board may, when appropriate, obtain advice and assistance from outside advisors and consultants.

 

XXI. SUCCESSION PLANNING/MANAGEMENT DEVELOPMENT

 

The Compensation and Organization Committee, as a part of its oversight of the management and organizational structure of KeyCorp, annually reviews and approves KeyCorp’s management succession plan for the CEO and other senior officers and annually reviews KeyCorp’s program for management development and, in turn, reports on and reviews these matters, and their independent deliberations, with the Board in executive session.

 

XXII. AUDITOR PROHIBITED FROM DOING PERSONAL TAX WORK FOR SENIOR EXECUTIVE OFFICERS

 

KeyCorp’s independent auditors shall not serve as the personal tax advisors or preparers for KeyCorp senior executives who are members of KeyCorp’s Management Committee, officers of KeyCorp in a financial reporting oversight role or their immediate families unless exempted by the rules of the Public Company Accounting Oversight Board, or executives of KeyCorp who are expatriates.

 

XXIII. CORPORATE GOVERNANCE FEEDBACK

 

The Board encourages management to meet periodically with significant investors to discuss KeyCorp’s corporate governance practices. Management reports the results of the meetings to the Nominating and Corporate Governance Committee in order that the Board can more readily consider the views of significant investors when the Board shapes its corporate governance practices.

 

XXIV. COMMITTEE STRUCTURE

 

The Board exercises certain of its powers through its Audit, Compensation and Organization, Nominating and Corporate Governance, Executive, and Risk Management Committees. Each Committee has a Charter that defines the scope of its duties and responsibilities. Each Committee reviews its Charter annually and recommends its approval to the full Board which in turn approves the Charter. The Audit, Compensation and Organization, and Nominating and Corporate Governance Committees are comprised of only independent directors. Each Board member sits on at least one Committee. The frequency, length and agendas of Committee meetings are determined by the Committee Chair in consultation with Committee members and appropriate members of senior management. The Committee Chair reports to the full Board on the matters undertaken at each Committee meeting. The Audit, Compensation and Organization, and Nominating and Corporate Governance Committees (which consist solely of independent directors) meet in executive session on a regular basis.

 

Under Section III of the KeyCorp Corporate Governance Guidelines, the Board of Directors has selected the Chair of the Nominating and Corporate Governance Committee to preside over the executive sessions of the outside directors of the Board. KeyCorp has established procedures to permit confidential, anonymous (if desired) submissions to the presiding director of concerns regarding KeyCorp. Interested parties may make their comments and views about KeyCorp known to the directors by directly contacting the presiding director by mailing a statement of their comments and views to KeyCorp at its corporate headquarters in Cleveland, Ohio. Such correspondence should be addressed to the Presiding Director, KeyCorp Board of Directors, care of the Secretary of KeyCorp, and marked “Confidential.”

 

As part of its Corporate Governance Guidelines, the Board has adopted categorical standards to determine Director independence that conform to the New York Stock Exchange independence standards. The specific KeyCorp standards are set forth on KeyCorp’s website: www.key.com/ir. Generally, under these standards, a director is not independent:

 

1) if he or she or an immediate family member has received during any twelve-month period within the last three years more than $100,000 in direct compensation from KeyCorp (other than current or deferred director fees) (directly compensated individual);

 

2) if, within the past three years, he or she has been employed by KeyCorp or an immediate family member has been an executive officer of KeyCorp (former employee);

 

3) if a) he or she or an immediate family member is a current partner of a firm that is KeyCorp’s internal or external auditor; b) he or she is a current employee of such a firm; c) he or she has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance practice; or d) he or she or an immediate family member was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on KeyCorp’s audit within that time (former auditor);

 

4) if, within the past three years, he or she has been employed by a company upon whose Board an executive officer of KeyCorp concurrently serves or an immediate family member has been employed as an executive officer by a company upon whose compensation committee an executive officer of KeyCorp concurrently serves (interlocking director);

 

5) if he or she is affiliated with a firm that is an attorney, investment advisor, or consultant to KeyCorp (attorney, investment banker, or consultant);

 

6) if he or she is employed by, or an immediate family member is an executive officer of, a significant customer or supplier of KeyCorp. An entity is a significant customer of KeyCorp if during any of the last three years the customer made payments for property or services to KeyCorp in an amount that exceeded the greater of $1 million or 2% of the customer’s consolidated gross revenues. Likewise, an entity is a significant supplier of KeyCorp if during any of the last three years the amount paid to the supplier by KeyCorp exceeded the greater of $1 million or 2% of the supplier’s consolidated gross revenues (significant customer or supplier);

 

7) if he or she is an executive officer of a not-for-profit entity that has received significant contributions from KeyCorp during the last three years. An entity will be deemed to have received significant contributions from KeyCorp if KeyCorp’s annual contribution to the entity exceeds the greater of $1 million or 2% of the entity’s total annual revenues (significant charitable contribution recipient); or

 

8) if he or she has, or is affiliated with an entity that has, a loan from KeyCorp which a) was not made in the ordinary course of business by a KeyCorp subsidiary, b) was not made on the same terms as comparable transactions with other persons, c) involved when made more than the normal risk of collectibility, or d) is characterized as criticized or classified by the KeyCorp subsidiary (non-independent borrower).

 

Messrs. Meyer and Stevens are not independent because they are employees of KeyCorp. The Board of Directors has determined that all other members of the Board of Directors (i.e., Dr. Cartwright, Ms. Martin, and Messrs. Alvarez, Bares, Campbell, Cutler, Dallas, Hogan, Menascé, Sanford, and Ten Eyck) are independent, and that Douglas McGregor was independent prior to his retirement on November 10, 2006. The determination was made by reviewing the relationship of each of these individuals to KeyCorp in light of the KeyCorp categorical standards of independence and such other factors, if any, as the Board deemed relevant. Members of the Audit, Compensation and Organization, and Nominating and Corporate Governance Committees are all independent.

 

In determining the independence of the aforementioned members of the Board of Directors, the Board considered certain transactions, relationships, or arrangements between those directors and KeyCorp. The Board determined that none of these transactions, relationships, or arrangements is in conflict with KeyCorp’s categorical standards of independence and that no such transaction, relationship or arrangement is material or impairs any director’s independence for any other reason. The transactions, relationships, and arrangements considered by the Board and determined to be immaterial were as follows: Mr. Hogan served during 2006 and continues to serve on an advisory board of KeyBank National Association and received $1,000 for such service in 2006. Dr. Cartwright and Messrs. Bares, Campbell, Cutler, Dallas, Hogan, McGregor, Sanford, and Ten Eyck were customers of one or more of KeyCorp’s subsidiary banks or other subsidiaries during 2006 and had transactions with such banks or other subsidiaries in the ordinary course of business. In addition, Dr. Cartwright and Messrs. Bares, Campbell, Cutler, Dallas, Hogan, Menascé, Sanford, and Ten Eyck are officers of, or have a relationship with, corporations or are members of partnerships that were customers of such banks or other subsidiaries during 2006 and had transactions with such banks or other subsidiaries in the ordinary course of business. All loans included in such transactions were made on substantially the same terms, including rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risks of collectibility or present other unfavorable features. Similar transactions continue to be effected during 2007. Finally, a limited liability company in which Mr. Hogan has no interest but which is owned by Mr. Hogan’s brother was and continues to be the landlord of a KeyBank National Association Branch at an annual rent of approximately $56,000 per year. The parcel upon which the branch is situated is subject to an eminent domain proceeding and upon conclusion of the proceeding the branch will be moved to a parcel owned by KeyBank National Association.

 

KeyCorp has adopted a Policy for Review of Transactions between KeyCorp and its Directors, Executive Officers, and Other Related Persons. A copy of the Policy can be found at www.key.com/ir. The transactions subject to the Policy include any transaction, relationship, or arrangement with KeyCorp in which any director, executive officer or other related person has a direct or indirect material interest other than transactions, relationships or arrangements excepted by the Policy. These exceptions include transactions available to all KeyCorp employees generally, transactions involving compensation or indemnification of executive officers or directors authorized by

the Board of Directors or one of its committees, transactions involving reimbursement for routine expenses, and transactions occurring in the ordinary course of business. The Nominating and Corporate Governance Committee is responsible for applying the Policy and uses the factors included in the Policy in making its determinations. These factors include whether the transaction is in conformity with KeyCorp’s Code of Ethics and Corporate Governance Guidelines and is in KeyCorp’s best interests; whether the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party; whether the transaction would be disclosable under Item 404 of Regulation S-K under the Exchange Act; and whether the transaction could call into question the independence of any of KeyCorp’s outside directors.

 

Currently, the size of the Board of Directors is fixed at 14 members divided into three classes. Under the Regulations as presently in effect, the size of the Board of Directors is required to be between 14 and 17 members. The shareholders are being asked to amend the Regulations to reduce the potential size of the Board to between 12 and 16 members. The result of this amendment will be to reduce the maximum Board size to 16 and the minimum Board size to 12.

 

The Board of Directors is unanimously recommending this amendment because it is of the opinion that a smaller Board can operate more effectively and efficiently for the benefit of KeyCorp’s shareholders. The size of KeyCorp’s Board has been gradually reduced from 22 members in 1994 to the current 14 members and, if this Amendment is adopted, will be further reduced to 13 members at the 2007 Annual Meeting.

 

Although the size of the Board is presently fixed at 14, a vacancy on the Board of Directors exists and there are now only 13 Directors in office. If the Amendment is not adopted, the vacancy will be filled by the Board. If the amendment is adopted, the Board size will be fixed at 13 members, with two classes having four members each and the third class having five members.

 

KeyCorp’s Regulations will continue to provide that, if the Board of Directors or shareholders change the number of directors, the three classes of the Board of Directors will be divided into as equal a number of directors as possible. The Regulations will also continue to provide that no reduction in the size of the Board shall of itself shorten the term of any incumbent director.

 

In the event the shareholders increase the number of directors and fail to fill the vacancy or vacancies created thereby, or in the event the Board of Directors increases the number of directors and thereby creates a vacancy or vacancies, the Board of Directors may fill such vacancy or vacancies for the respective unexpired terms.

 

The text of the proposed amendment is set forth in Appendix A to this proxy statement.

 

Vote Required.  Pursuant to Article X of the Regulations, Article II, Section 1 of the Regulations, which is the section of the Regulations establishing the size of the Board of Directors, may be amended by the affirmative vote of holders of shares entitled to exercise three-quarters of the voting power on such proposal, unless such amendment is recommended by two-thirds of the entire authorized Board of Directors, in which case the requisite vote is a majority of the voting power of KeyCorp. Because at least two-thirds of the entire authorized Board of Directors has

recommended this proposed amendment, the affirmative vote of the holders of KeyCorp Common Shares entitling them to exercise a majority of the voting power of KeyCorp is required to adopt this amendment to the Regulations.

 

The Board of Directors of KeyCorp unanimously recommends that the shareholders vote FOR adoption of this amendment to the Regulations.

 

The following proposal was submitted for inclusion in this proxy statement by Mr. Gerald R. Armstrong, 820 Sixteenth Street, #705, Denver, Colorado. Mr. Armstrong owns 20,080 KeyCorp Common Shares.

 

Shareholder Proposal.  “Resolved: That the shareholders of KEYCORP request its Board of Directors to take those steps necessary to eliminate the classification of terms of its Board of Directors to require that all Directors stand for election annually. The Board declassification shall be completed in a manner that does not affect the unexpired terms of the previously-elected Directors.”

 

Supporting Statement.  This proposal has been approved by shareholders in past annual meetings; however, our directors have failed to honor their shareholders’ wishes and have not presented the appropriate amendment.

 

The proponent believes the election of directors is the strongest way that shareholders influence the directors of any corporation. Currently, the board of KEYCORP is divided into three classes with each class serving three-year terms. Because of this structure, shareholders may only vote for one-third of the directors each year. This is not in the best interest of shareholders because it reduces accountability.

 

Now is the time to allow shareholders greater accountability from their directors by electing all directors annually.

 

The proponent recommended this to Associated Banc-Corp, Fifth-Third Bancorp, and Wintrust Financial Corporation in 2006 and each adopted the proposal.

 

A past year’s annual report boasted about stock price appreciation. Today, it remains less than at that time. BusinessWeek on November 13, 2006, reported that KeyCorp was recommended as a “BUY” by only three respected analysts. Wells Fargo & Company was rated a “BUY” by eighteen analysts. All others in the report were rated higher than KEYCORP.

 

A study by researchers at Harvard Business School and the University of Pennsylvania’s Wharton School titled “Corporate Governance and Equity Prices” (Quarterly Journal of Economics, February, 2003) looked at the relationship between corporate governance practices (including classified boards) and firm performance. The study found a significant positive link between governance practices favoring shareholders (such as annual directors’ elections) and firm value.

 

WEST COAST BANCORP, a competitor in the northwest, adopted one-year terms for all of its directors and caused it to become effective in one annual meeting. Its proxy statement stated: “Annual election will facilitate the election of directors who will, in the view of a majority of shareholders, manage the company in the best interests of the company and its shareholders.”

 

The proponent regards as unfounded the concern expressed by some that annual election of all directors could leave companies without experienced directors in the event that all incumbents are voted out by shareholders. In the unlikely event that shareholders do vote to replace all directors, such a decision would express dissatisfaction with the incumbent directors and reflect a need for change.

 

If you agree that the shareholders of KEYCORP may benefit from the greater accountability of annual elections, please vote “FOR” this proposal.

 

Board of Directors Recommendation and Statement.  The Board of Directors unanimously recommends that shareholders vote AGAINST this proposal for the following reasons:

 

Contrary to the proponent’s assertion, the KeyCorp Board of Directors has previously placed before the shareholders an amendment to KeyCorp’s Code of Regulations to require the annual election of directors. In 2002, such an amendment was placed before the shareholders and the amendment failed to pass.

 

When the Board of Directors placed the proposed amendment before the shareholders it recommended against its passage. The Board continues to believe that it is not in the best interests of the shareholders to declassify the Board of Directors and therefore recommends that the shareholders vote against this year’s proposal. The reasons for the Board’s position and the process it followed to make this determination are as follows:

 

Initially, the Nominating and Corporate Governance Committee of the KeyCorp Board of Directors reviewed the proposal to require the annual election of directors. The Nominating and Corporate Governance Committee consists solely of independent outside directors. After careful consideration, the Committee concluded that KeyCorp’s classified board is in the best interests of KeyCorp and its shareholders, and the Committee subsequently recommended to the full Board of Directors that it recommend a shareholder vote against the proposal. The Board of Directors unanimously concurred with the Committee’s recommendation.

 

KeyCorp’s Board of Directors is divided into three classes of directors, each of which serves for staggered three-year terms. These staggered terms are an effort to balance two very important concerns, those being the need for shareholders to express their opinion about the Board’s performance each year and the need for KeyCorp’s directors to focus on KeyCorp’s long-term success.

 

The Board believes that KeyCorp’s ability to succeed in producing long-term shareholder value requires long-term planning, capital commitments, and careful and consistent application of financial and other resources. The classified board gives KeyCorp an advantage in that a majority of the directors at any given time will have experience in and knowledge of the business and operations of KeyCorp.

 

Election of directors by classes is a common practice that has been adopted by many companies and currently exists at a majority of the 500 companies comprising the 2005 Standard & Poor’s 500 Index.

 

In the opinion of KeyCorp’s Board, a classified board of directors facilitates continuity and stability of leadership and policy by assuring that experienced individuals familiar with the corporation and its business will be on the board of directors at all times. A classified board of directors is also intended to prevent precipitous changes in the corporation’s policies, business strategies and operations. A classified board protects shareholder interests from coercive attempts from outsiders to gain control. Board classification is intended to encourage any person seeking to acquire control of KeyCorp to initiate such action through arm’s-length negotiations with the Board of Directors so as to benefit KeyCorp’s shareholders.

 

Although the proponent has criticized KeyCorp’s stock performance, it should be noted that KeyCorp’s stock has outperformed its 2006 peer group based on one-year, three-year, and five-year total shareholder returns. This is evidenced by the performance graph on page 43 of KeyCorp’s Annual Report to Shareholders for the year ended December 31, 2006.

 

This proposal requests the Board to take those steps necessary to cause the annual election of all directors. One of those steps would be to amend KeyCorp’s Regulations. As noted, the amendment of the Regulations was placed before the shareholders in 2002 and the shareholders rejected the proposed amendment.

 

The amendment, repeal or alteration of the provisions of the Regulations providing for a classified board must be made by the affirmative vote of the holders of shares entitling them to exercise three-quarters of the voting power of KeyCorp on such proposal unless such amendment, repeal, or alteration is recommended by two-thirds of the Board of Directors, in which case the amendment, repeal or alteration would require the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of KeyCorp on such proposal. If this proposal is approved by the shareholders at this Annual Meeting and the Board of Directors were to determine again to submit a repeal or amendment of the provisions in KeyCorp’s Regulations providing for a classified Board to the shareholders for a vote at a future meeting, approval of the repeal or amendment would require the affirmative vote of three-quarters of KeyCorp’s Common Shares unless two-thirds of the Board of Directors were to recommend approval of such repeal or amendment.

 

A vote in favor of this proposal is an advisory recommendation to the Board of Directors.

 

Vote Required.  Approval of this proposal will require the affirmative vote of a majority of the KeyCorp Common Shares represented in person or by proxy at the Annual Meeting.

 

The Board of Directors unanimously recommends that shareholders vote AGAINST this proposal.

 

The Audit Committee of the Board of Directors of KeyCorp has appointed Ernst & Young LLP (“Ernst & Young”) as KeyCorp’s independent auditors to examine the financial statements of KeyCorp and its subsidiaries for the year 2007. The Board of Directors recommends ratification of the appointment of Ernst & Young. The favorable vote of the holders of a majority of the KeyCorp Common Shares represented in person or by proxy at the Annual Meeting will be required for such ratification.

 

A representative of Ernst & Young will be present at the meeting with an opportunity to make a statement if such representative desires to do so and to respond to appropriate questions.

 

Although shareholder approval of this appointment is not required by law or binding on the Audit Committee, the Audit Committee believes that shareholders should be given the opportunity to express their views. If the shareholders do not ratify the appointment of Ernst & Young as KeyCorp’s independent auditors, the Audit Committee will consider this vote in determining whether or not to continue the engagement of Ernst & Young.

 

The Board of Directors unanimously recommends that shareholders vote FOR the ratification of this appointment.

 

The executive officers of KeyCorp are principally responsible for making policy for KeyCorp, subject to the supervision and direction of KeyCorp’s Board of Directors. All officers are subject to annual election at the annual organizational meeting of the directors. Mr. Meyer has an employment agreement with KeyCorp.

 

There are no family relationships among directors, nominees, or executive officers. Other than Ms. Mooney and Messrs. Bunn, Harris, Hyle, and Weeden, all have been employed in officer capacities with KeyCorp or one of its subsidiaries for at least the past five years.

 

Set forth below are the names and ages of the executive officers of KeyCorp as of January 1, 2007, positions held by them during the past five years and the year from which held, and, in parentheses, the year they first became executive officers of KeyCorp.

 

THOMAS W. BUNN (53)

 

2005 to present: Vice Chair, KeyCorp; 2002-2005: Senior Executive Vice President, KeyCorp; 1990-2000: Managing Director, Bank of America Corporation (financial services). (2002)

 

PAUL N. HARRIS (48)

 

2003 to present: Executive Vice President, General Counsel, and Secretary, KeyCorp; 2000-2003: Partner, Thompson Hine LLP (law firm). (2004)

 

CHARLES S. HYLE (55)

 

2004 to present: Executive Vice President and Chief Risk Officer, KeyCorp; 1998-2003: Managing Director and Global Head of Portfolio Management, Barclays Capital (financial services). (2004)

 

HENRY L. MEYER III (57)

 

Chairman, President, and Chief Executive Officer, KeyCorp. (1987)

 

BETH E. MOONEY (51)

 

2006 to present: Vice Chair, KeyCorp; 2004-2006: Senior Executive Vice President and Chief Financial Officer, AmSouth Bancorp (financial services); 2000-2004: Senior Executive Vice President, AmSouth Bancorp. (2006)

 

ROBERT L. MORRIS (54)

 

2006 to present: Chief Accounting Officer, KeyCorp; 2000-2006, Controller, KeyCorp. (2006)

 

THOMAS C. STEVENS (57)

 

Vice Chair and Chief Administrative Officer, KeyCorp. (1996)

 

JEFFREY B. WEEDEN (50)

 

2002 to present: Senior Executive Vice President and Chief Financial Officer, KeyCorp; 2001-2002: President and Chief Executive Officer, MFN Financial Corporation (financial services); 1999-2002: President and Chief Operating Officer, MFN Financial Corporation. (2002)

 

 

The following table sets forth the compensation paid by KeyCorp in 2006 to the CEO, CFO and each of the three highest paid executive officers of KeyCorp other than the CEO and CFO for the year ended December 31, 2006.

 

 

Footnotes:

 

 

 

 

ALL OTHER COMPENSATION

 

The following chart sets forth details of Other Annual Compensation provided by KeyCorp as presented in the Summary Compensation Table above.

 

 

 

Footnotes:

 

 

GRANTS OF PLAN-BASED AWARDS

 

 

 

 

Short-Term Incentive Compensation (Non-equity incentive plan awards) — KeyCorp’s CEO and the senior officers reporting directly to him (including Ms. Mooney and Messrs. Weeden, Stevens, and Bunn) participate in the Annual Performance Plan (the “Plan”) which was approved by shareholders and consequently delivers awards which are tax deductible to KeyCorp. The Compensation and Organization Committee establishes specific targets for these senior officers. The overall potential funding under the Annual Performance Plan is based on KeyCorp’s total revenue, but individual awards are based on economic profit added, earnings per share, and return on equity, as described in the following paragraph. The Compensation and Organization Committee assesses participants’ performance against these goals to determine the incentive earned by each. Under KeyCorp’s 2006 Annual Incentive Plan, the Committee assigned weights to the following performance factors relative to plan: economic profit added (EPA), earnings per share (EPS) and return on equity (ROE). In establishing goals for each factor, the Committee considered KeyCorp’s 2006 operating plan, the outlook for the industry and KeyCorp’s peer group, and

the median performance of peer companies during the preceding 3- and 5-year periods. At year-end, the Committee compared KeyCorp’s performance relative to each target as follows- if actual performance is:

 

 

The Compensation and Organization Committee may adjust payouts for changes in accounting rules, gains from the sales of subsidiaries or assets outside the ordinary course of business, or a restructuring or other non-recurring charge or adjustment. Based on all factors, the Committee funds a pool that will establish a payout percentage between 0% and 300% for performance results relative to the achievement of the annual goals set by the Committee. The Committee may increase or decrease that percentage by as much as 30% up or down to account for factors such as the quality of earnings, the overall performance of the economy and the industry, earnings per share growth and return on equity compared to peers and other qualitative items. Awards to the CEO and his direct reports under the Performance Plan are made using the standards applied and the performance percentage calculated under the Incentive Plan. For each executive, the Committee considers his or her target compensation, progress toward the individual performance goals set forth in his or her scorecard, and his or her contribution to the achievement of KeyCorp’s financial and strategic objectives. Aggregate awards to the CEO and his direct reports may not exceed the maximum bonus pool created under the Performance Plan.

 

Long-Term (Equity-based) Incentive Compensation — The Committee believes that KeyCorp employees will be aligned with shareholders if they are eligible to receive stock-based, or equity compensation. The Company’s Long-Term Compensation Program is designed to promote sound decisions and actions over three-year periods, or cycles. It does so by increasing employees’ share ownership, aligning their long-term financial interests with those of shareholders and retaining high-performing employees. In 2004, the Committee introduced performance-based restricted stock and expanded the eligibility for restricted stock awards to a broader group of senior managers. There are two long-term incentive compensation plan performance cycles in progress that use restricted stock and an additional three year cycle commencing in 2007, in addition to stock option awards.

 

The design features of the 2005-2007 and 2006-2008 performance cycles are:

 

 

For 2005 and 2006 awards, the Committee has selected three performance factors and assigned a weight to each. Each has a defined cumulative three-year goal for threshold, target and maximum performance. The factors

are EPA, EPS and ROE. At the end of the performance cycle, the Committee determines KeyCorp’s performance relative to each factor as follows:

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table provides information regarding outstanding equity award grants held at December 31, 2006 by each of the executive officers named in the Summary Compensation Table.

 

 

OPTION EXERCISES AND STOCK VESTED

 

The following table provides information regarding exercises of stock options and vesting of restricted stock during the year ended December 31, 2006, by the executive officers named in the Summary Compensation Table, along with the value of such officers’ exercised stock options or vested shares upon exercise or vesting.

 

 

PENSION BENEFITS

 

The following table presents an estimation of the present value of the benefits payable under each pension plan in which an executive named in the Summary Compensation Table participates along with their applicable years of service.

 

 

 

Footnotes:

 

 

KeyCorp Cash Balance Pension Plan — Upon meeting plan eligibility requirements, all full and part time employees of KeyCorp and its participating subsidiaries participate in the KeyCorp Cash Balance Pension Plan. The Cash Balance Pension Plan is a defined benefit plan that provides a quarterly benefit accrual for each plan participant based on the participant’s years of “vesting service” and “compensation.” For purposes of the Cash Balance Pension Plan, eligible compensation generally means the entire amount of compensation paid to employees by reason of their employment as an employee of KeyCorp, as reported for federal income tax purposes, including elective deferrals under the KeyCorp 401(k) Savings Plan and KeyCorp Flexible Benefits Plan. However, amounts attributable, for example, to exercise of stock appreciation rights and/or stock options, non-cash remuneration, moving expenses, relocation bonuses, fringe benefits, deferred compensation, lump sum severance payments, signing bonuses or any funds paid following termination or retirement from KeyCorp are excluded from the plan’s definition of compensation. KeyCorp has established a bookkeeping account in each participant’s name which is credited with KeyCorp’s contributions on a quarterly basis for each quarter in which the participant remains employed by KeyCorp and works a minimum of 250 hours during that quarter. Participants’ Plan accounts are also credited with interest credits on a quarterly basis. The Pension Plan requires 5 years of service for vesting.

 

KeyCorp Excess Cash Balance and Second Excess Cash Balance Pension Plans — In addition to the KeyCorp Cash Balance Pension Plan, KeyCorp also maintains the KeyCorp Excess Cash Balance Pension Plan and the Second Excess Cash Balance Pension Plan (“Excess Plans”). The Excess Plans provide all officers salary grade or equivalent 86 and above with the pension plan benefit that would have been accrued under the Cash Balance Pension Plan “but for” the compensation limits of Section 401(a)(17) and benefit accrual limits of Section 415 of the Internal Revenue Code. Ms. Mooney will and Messrs. Stevens, Bunn, and Weeden currently participate in the Excess Plans. To be eligible for an early retirement benefit under the Excess Plans, a participant must be age 55 with a minimum of 5 years of “vesting service” (as defined in the plan) or must be “terminated under limited circumstances” with a minimum of 25 years of service, provided the participant executes a non-compete and non-solicitation agreement with KeyCorp.

 

KeyCorp Second Supplemental Retirement Plan — The KeyCorp Second Supplemental Retirement Plan provides a grandfathered group of KeyCorp officers with a supplemental retirement benefit that is in addition to the benefit that the participant is otherwise eligible to receive under the Cash Balance Pension Plan. The Second Supplemental Retirement Plan was frozen to new participants in 1995; it currently maintains nine active participants including Mr. Meyer. Participants in the Second Supplemental Retirement Plan are not eligible to participate in the KeyCorp Excess Plans. The Second Supplemental Retirement Plan provides participants with a plan benefit which equals up to 63% of the participant’s “final average compensation” when the Second Supplemental Retirement Plan benefit is combined with the participant’s pension plan benefit and age 65 social security benefit. Eligible compensation generally means base salary and incentive compensation (short-and long-term) paid to employees by reason of their employment with KeyCorp, as reported for federal income tax purposes, or the money which would have been paid but for the employee’s pre-tax deferrals to the KeyCorp 401(k) Savings Plan and benefit elections under the KeyCorp Flexible Benefits Plan and amounts deferred under the various Key-sponsored deferred compensation plans. However, amounts attributable, for example, to exercise of stock appreciation rights and/or stock options, noncash remuneration, moving expenses, relocation bonuses, signing bonuses, fringe benefits, lump sum severance payments, or any funds paid following termination or retirement from KeyCorp are excluded from the plan’s definition of compensation. To be eligible for an early retirement benefit under the plan, a participant must be age 55 with 10 years of “credited service” (as defined in the plan) or must be “terminated under

limited circumstances” with a minimum of 25 years of credited service, provided the participant executes a non-compete and non-solicitation agreement with KeyCorp.

 

For purposes of the Second Supplemental Retirement Plan, the term “final average compensation” means the annual average of the participant’s highest aggregate “compensation” (as defined in the plan) for any period of 5 consecutive years during the 10 year period preceding the participant’s termination date. For certain participants, including Mr. Meyer, the term “final average compensation” includes certain long term incentive awards comprised of up to 50% performance based restricted stock.

 

NONQUALIFIED DEFERRED COMPENSATION

 

The following table shows the deferred compensation activity for the executives named in the Summary Compensation Table. All executive nonqualified and KeyCorp contributions to each plan are also included in current year compensation presented in the Summary Compensation Table.

 

 

Second Excess 401(k) Savings Plan — The Second Excess 401(k) Savings Plan was designed to provide officers with a salary grade equivalent of 86 and above with a nonqualified retirement benefit which is generally reflective of the retirement benefit that they would have been entitled to receive under the tax-qualified KeyCorp 401(k) Savings Plan, but for the various limitations contained in the Internal Revenue Code. The Second Excess 401(k) Savings Plan is an unfunded plan and the value of plan benefits is reflected on a bookkeeping basis on KeyCorp’s general ledger. Eligible employees may defer up to 6% of eligible compensation and receive a dollar for dollar company match on their contributions. Company match vests after three years of vesting service. Employee monies can be invested on a bookkeeping basis in funds mirroring those in the 401(k) Savings Plan. The employer

match is invested on a bookkeeping basis in the KeyCorp Common Stock Fund. Vested balances are distributed upon retirement or termination as follows:

 

 

Automatic Deferral Plan — The KeyCorp Automatic Deferral Plan is designed to require key employees of KeyCorp to automatically defer a percentage of their incentive compensation accrued under a KeyCorp-sponsored incentive compensation plan to the Automatic Deferral Plan until that incentive compensation becomes vested. The Automatic Deferral Plan is designed in conjunction with applicable KeyCorp-sponsored incentive compensation plans to require participants to automatically defer a set percentage of incentive compensation to the Automatic Deferral Plan when incentive compensation exceeds $100,000 for the applicable deferral period. An employee meeting the eligibility and plan participation requirements shall automatically defer the following amounts from their applicable incentive award:

 

 

Incentive compensation deferrals (“Participant Deferrals”) are reflected in a bookkeeping Plan account established in the participant’s name, and are automatically “invested” on a bookkeeping basis in the plan’s Common Stock Account. KeyCorp also provides a matching contribution equal to 15% of Participant Deferrals for the applicable deferral period. This matching contribution is also credited on a bookkeeping basis to participant accounts, and is similarly “invested” on a bookkeeping basis in the plan’s Common Stock Account. Participant Deferrals and matching contributions are subject to a three-year graded vesting period. If the participant who is less than 55 years of age with less than 5 years of service voluntarily elects to terminate employment with KeyCorp prior to completing this vesting requirement, or if discharged for cause, both unvested Participant Deferrals as well as unvested matching contributions are automatically forfeited. Upon vesting, the participant’s account balance with all earnings and gains thereon is automatically distributed in KeyCorp Common Shares.

 

Second Deferred Compensation Plan — The Second Deferred Compensation Plan was designed to provide officers with a salary grade equivalent of 86 and above with the opportunity to defer income under the plan until the employee’s termination from KeyCorp. The Second Deferred Compensation Plan permits eligible employees to defer, on a pretax basis, up to 50% of base salary, and up to 100% of incentive compensation awarded under a KeyCorp sponsored incentive compensation plan. Pretax deferrals are reflected in a bookkeeping plan account established in the participant’s name, and at the participant’s direction are “invested” on a booking basis in the plan’s Interest-Bearing Account, the plan’s KeyCorp Phantom Common Stock Account, or in one or more of the plan’s several Investment Funds mirroring those in the qualified 401(k) Savings Plan. KeyCorp provides a Matching Contribution of up to 6% of Participant Deferrals deferred under the plan for each applicable Plan year. Additionally, if the participant elects to invest Participant Deferrals in the Plan’s Phantom Common Stock Account until retirement from KeyCorp at age 65, KeyCorp also provides an additional 4% Matching Contribution (i.e., for a total Matching Contribution of up to 10%) on those Participant Deferrals. Participation in the Second Deferred

Compensation Plan is voluntary. Participant Deferrals along with all earnings, gains and losses thereon are always 100% vested. Vesting for purposes of receiving the 6% Matching Contribution is upon completion of three years of vesting service and for purposes of receiving the additional 4% is upon completion of three years of vesting service and attainment of Normal Retirement which is retirement on or after age 65. Distributions of vested benefits is made upon termination or retirement based on participant elections made at the time of deferral to receive plan benefits as either a lump sum payment or as a series of installment payments over a period of 60, 120, or 180 months.

 

Deferred Bonus Plan — The KeyCorp Deferred Bonus Plan has been designed to provide selected candidates with a mandatory deferral vehicle for signing bonus awards that are subject to a vesting requirement. While deferred under the Plan, the deferred bonus award is invested on a bookkeeping basis in the KeyCorp Phantom Common Stock Account, and is able to grow in value as Key’s stock grows in value. Participants are fully vested in their deferred bonus award upon completion of three years of vesting service or on a three-year graded vesting schedule as determined at the time of grant. Upon vesting, participants receive an automatic lump sum payment of their vested bonus award in KeyCorp common shares, less applicable taxes, unless they have elected to have their deferred bonus award transferred to the KeyCorp Second Deferred Compensation Plan.

 

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

 

KeyCorp is party to an employment agreement with Mr. Meyer and change of control agreements with certain of its other senior officers, including Ms. Mooney and Messrs. Stevens, Bunn, and Weeden.

 

On December 22, 2005, KeyCorp notified Mr. Meyer and the recipients of the change of control agreements that their agreements would be modified as of January 1, 2007. The new agreements are very similar to the prior agreements, except that severance payments for individuals who had agreements as of that date have been reduced to include only 50% (as opposed to 100%) of the officer’s average long-term incentive compensation in the severance computation, and severance payments for new recipients (including Ms. Mooney) do not include any payment with respect to long-term incentive compensation.

 

Employment Agreement with Mr. Meyer.  KeyCorp originally entered into the employment agreement with Mr. Meyer on May 15, 1997. As noted above, it was most recently amended on January 1, 2007. Pursuant to the employment agreement, Mr. Meyer is to be employed by KeyCorp as its Chairman, President, and Chief Executive Officer for a constantly renewing three-year term at a base salary of not less than $1,000,000 per annum plus full participation in all incentive and other compensatory plans available generally to KeyCorp’s executive officers.

 

Severance Payable Upon Involuntary Termination

 

If Mr. Meyer’s employment is terminated by KeyCorp without cause at any time, he is entitled to the following:

 

 

 

Severance Payable Upon Constructive Termination

 

The same severance benefits as described above are payable under Mr. Meyer’s agreement if his employment is constructively terminated. Under the employment agreement, Mr. Meyer may consider himself constructively terminated if at any time:

 

 

Severance Upon Constructive Termination After a Change of Control

 

The same severance benefits as described above are also payable under Mr. Meyer’s agreement if his employment is constructively terminated after a change in control. Mr. Meyer may consider himself constructively terminated if, after a “change of control,” as defined below:

 

 

 

Definition of Cause

 

Under the employment agreement, KeyCorp will have “cause” to terminate Mr. Meyer’s employment before a change of control if he commits a felony, acts dishonestly in a way that is materially inimical to the best interests of KeyCorp, competes with KeyCorp, abandons and consistently fails to attempt to perform his duties, or if a bank regulatory agency issues a final order requiring KeyCorp to terminate or suspend his employment. KeyCorp will have “cause” to terminate Mr. Meyer’s employment after a change of control if he is convicted of a felony, acts dishonestly and feloniously in a way that is materially inimical to the best interests of KeyCorp, competes with KeyCorp or if a bank regulatory agency issues a final order requiring KeyCorp to terminate or suspend his employment.

 

Indemnification

 

Mr. Meyer is entitled to continuing indemnification to the fullest extent permitted by Ohio law for actions against him by reason of his being or having been a director or officer of KeyCorp or any related entity and to payment of certain legal fees incurred in enforcing his rights under his employment agreement.

 

Change of Control Agreements.  As noted above, KeyCorp is a party to change of control agreements with certain of its other senior officers (including Ms. Mooney and Messrs. Stevens, Bunn, and Weeden), which in most cases provide that if, at any time within two years following a change of control, the officer’s employment is terminated by KeyCorp (except for cause, as described below), or the officer is determined to be constructively discharged (because the officer’s base salary, incentive compensation or stock option opportunity is reduced or the executive is required to relocate the executive’s principal place of employment more than 35 miles from its location prior to the change of control), severance benefits will apply. Severance benefits consist of:

 

 

Each change of control agreement also provides a three-month “window period,” commencing fifteen months after the date of a change of control, during which the officer may resign voluntarily and receive similar severance benefits based on an eighteen-month period if the officer determines in good faith that the officer’s position, responsibilities, duties, status or reporting relationships are materially less than or reduced from those in effect before the change of control or KeyCorp’s headquarters is relocated outside of the greater Cleveland metropolitan area.

 

For purposes of the change of control agreements, “cause” includes conviction of a felony, dishonesty in the course of employment that constitutes a felony and is inimical to the best interest of KeyCorp or a subsidiary, imposition by a bank regulatory agency of a final order of suspension or removal, or competing with KeyCorp.

 

Section 280G Excise Tax on Payments.  In general, the employment and change of control agreements with the officers named in the Summary Compensation Table provide for a tax gross-up if any payment exceeds the limits established under Section 280G of the Internal Revenue Code so that the officer will receive the same after-tax payment as would have been the case if Section 280G did not apply.

 

Amounts Payable Under Agreements.  The following table sets forth the amounts payable under Mr. Meyer’s employment agreement and the change of control agreements effective January 1, 2007. Note that this table does not include any benefits payable to the executive officers included in the Summary Compensation Table under the retirement plan(s) of KeyCorp or any subsidiary (see page 27 of this proxy statement), or any payout to the executive officers included in the Summary Compensation Table under KeyCorp’s deferred compensation plan(s) (see page 29 of this proxy statement). Additional information about the amounts payable to the executive officers included in the Summary Compensation Table in the event of retirement, death or permanent disability is presented separately after the table.

 

 

 

 

 

Benefits Payable Upon Retirement, Death or Disability

 

Equity Incentive Plans

 

Key’s equity incentive plans treat all participants as follows in determining benefits payable upon retirement, death or disability.

 

Performance-based Restricted Stock and Stock Performance Shares

 

 

 

 

Time-Lapsed Restricted Stock

 

 

 

 

Stock Options

 

 

 

 

DIRECTOR COMPENSATION

 

The following table sets forth certain information regarding the compensation earned by or paid to each non-employee director who served on the Board of Directors in 2006. Directors who are employees are not compensated for their services as directors.