Document:

.

Description of

SENIOR OFFICERS DEFERRED COMPENSATION PLAN

of

Arrow Financial Corporation

Arrow Financial Corporation (the “Company”) maintains an unfunded Senior Officers Deferred Compensation Plan (the “Plan”).  Under the Plan, any Senior Officer (as defined below) may elect in writing on or before December 31 of any year to defer receipt of all or any portion of the Senior Officer’s compensation for the following calendar year.  Once made, a deferral continues to be in effect for all ensuing calendar years unless and until the Senior Officer, by written notice, amends the election (to defer a greater or lesser amount of compensation) or terminates the election or until such person ceases to be a Senior Officer.  An amendment or termination of a deferral election, or cessation of participation due to a change in status, will take effect only as of the commencement of the ensuing calendar year.

Under the Plan, a Senior Officer is defined to include any full-time employee of the Company or any subsidiary of the Company who is designated as a “Senior Officer” by the Company.  It is intended that amounts deferred under the Plan, and accumulated interest thereon, will not be deemed taxable income to the participating Senior Officer, and will not be deductible compensation from the standpoint of the Company or its subsidiaries, until such amounts are actually distributed.

The Company maintains for each Senior Officer participating in the Plan a separate Plan account.  The account is credited with the dollar amount of deferrals, together with accrual of interest thereon from time to time at a rate equal to the highest rate currently being paid on individual retirement accounts by the Company’s subsidiary, Glens Falls National Bank and Trust Company.

Upon a Senior Officer’s Termination of Employment, deferred amounts and accumulated interest thereon in the Senior Officer’s Plan account are distributed to the Senior Officer in a single lump sum or, if the Senior Officer shall have so designated in his initial deferral election, in such number of equal annual installments and over such periods as shall have been designated, not to exceed five (5) years.  Such distribution or distributions are to commence on the first business day of the month following the six month anniversary of the Senior Officer’s Termination of Employment.

A Senior Officer will be permitted one opportunity to change the form of payment initially elected under the Plan provided that (i) such election will not take effect until 12 months after the date on which the election is made; (ii) the commencement of the payment or payments must be deferred for at least 5 years after the date such payment or payments would otherwise have commenced; and (iii) such election must be made at least 12 months before the date the payment or payments would otherwise have commenced.

In the case of financial hardship, the Board may approve the immediate distribution to the Senior Officer of all or any portion of the amount in the Senior Officer’s Plan account, whether or not the employment or officer status of the Senior Officer shall have terminated.  A distribution will be on account of financial hardship if the distribution is on account of an unforeseeable emergency, as defined in Internal Revenue Code Section 409A(a)(2)(B)(ii) and the regulations thereunder, and such distribution is made in accordance with the rules set forth in such regulations.  The distribution cannot exceed the amount required to meet such hardship and only to the extent such amount is not reasonably available from the Senior Officer’s other resources.

Upon the death of a Senior Officer prior to full distribution of amounts in the Senior Officer’s Plan account, all remaining amounts in the Plan shall be distributed to the beneficiary or beneficiaries designated by the Senior Officer, or in lieu of such designation to the estate of the Senior Officer.   Such distribution will be made in a lump sum payment within 60 days following the date of the Senior Officer’s death, provided that the beneficiary(ies) or estate may not specify the calendar year of distribution.

For purposes of this Plan, the term “Termination of Employment” means separation from service, as defined in Section 409A of the Internal Revue Code of 1986 and the regulations thereunder, from the Company and all its Affiliates.  For purposes of the preceding sentence, the term “Affiliates” means all corporations and business entities that are, along with the Company, members of a controlled group of corporations and businesses, as defined in Internal Revenue Code Sections 414(b) and 414(c), except that the language “at least 50 percent” is used instead of “at least 80 percent in applying the rules of Sections 414(b) and 414(c). 

Senior Officers Deferred Compensation Plan - Initial Election

Election to Defer Base Salary

To the Board of Directors of Arrow Financial Corporation:

I, the undersigned, a senior officer of Arrow Financial Corporation or an affiliate company do hereby elect to defer the receipt of _____% of my annual base salary under the Senior Officers Deferred Compensation Plan adopted by the Board of Directors of Arrow Financial Corporation.

My election shall continue from calendar year to calendar year unless I inform the Board of Directors, in writing, of my election to amend or terminate further deferment of base salary under said plan, which amendment or termination shall be effective as of the commencement of the ensuing calendar year.

Payment Method Election

I request distribution of the fees hereby deferred together with the interest credited thereon, to be made on the first business day of the month following the six month anniversary of my Termination of Employment (as defined in the Plan), in the following form:

____ Lump Sum.

____ Annual Installments divided evenly over ____ Years (maximum 5 years.)

I acknowledge that I have one opportunity to change my method of payment after making this Initial Election and that the following rules apply:

·

The new election cannot be effective for at twelve (12) months after it is made.

·

Commencement of the payment must be delayed to a date at least five (5) years from the date payment would otherwise have commenced.

·

The election to change the method of payment must be made at least twelve (12) months before the first scheduled payment would otherwise have been made.

Beneficiary Designation

For purposes of said Plan, I hereby designate __________ as my Primary Beneficiary, if living at the time of my death and, if not, then __________ as my Contingent Beneficiary.  I understand that I will have the right to change such beneficiary at any time prior to my death or prior to all of the funds credited to my account being disbursed to me under the terms of said Plan.

Date ___________________

Signed 

Print Name 

Witness.

Arrow Financial Corporation

SHORT TERM INCENTIVE PLAN

0

PLAN OBJECTIVES:

The Short Term Incentive Plan (“STIP”) is designed to incentivize certain key employees of the Company to improve the Company’s overall performance and success by providing them with an opportunity to receive an annual cash bonus award upon the achievement of annual corporate and individual goals and Company profitability. The objectives of the Plan are to:

-

facilitate the achievement of the Company’s growth and earnings while continuing the Company’s commitment to exemplary community service 

 

-

improve the competitive position of the Company

-

focus and facilitate  the annual operating planning process

-

recognize, motivate and reward the performance of Senior Officers contributing to the Company's growth and success.

This Plan document summarizes the STIP and includes guidelines for the determination and distribution of Awards hereunder. 

DEFINITIONS

Various terms used in this Plan are defined as follows:

-

Award:  A cash payment due hereunder in accordance with the terms and conditions of this Plan. 

-

Company:   Arrow Financial Corporation and its subsidiaries.

-

Base Salary:   The annualized regular cash compensation of an employee at the beginning of a Plan Year excluding any bonuses, contributions by the Company to employee benefit programs, or other compensation not designated as salary.

-

Board of Directors:   The Board of Directors of Arrow Financial Corporation.

-

Chief Executive Officer:   The Chief Executive Officer of Arrow Financial Corporation.

-

Committee:   The Compensation Committee of the Board of Directors, or other committee duly authorized by the Board of Directors to administer this Plan.

-

Key Employees:   The officer positions listed in Appendix A attached hereto and incorporated herein, from which Plan Participants will be selected. 

-

Net Operating Earnings (NOE):  The net operating earnings of the Company as calculated by the Company from time to time. 

-

Plan Participant: A Key Employee designated by the Committee from time to as a current participant in this Plan.

-

Plan:    Arrow Financial Corporation Short Term Incentive Plan (STIP). 

-

Plan Year:   The Company's fiscal year.

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STIP:   Arrow Financial Corporation Short Term Incentive Plan. 

-

Strategic Plan:   The annual Strategic Plan established by the Company and approved by the Board of Directors which includes a NOE target as a primary financial objective of the Company for each Plan Year.

PARTICIPATION

Full-time Officers of the Company or one of its subsidiaries who qualify as a Key Employee are eligible to participate in the Plan.  A Plan Participant in any particular Plan Year is a Key Employee who is selected to participate in the Plan for such year upon the recommendation of the Chief Executive Officer and approval of the Committee.   The categories of Key Employees who may be designated for participation in each Plan Year are listed in Appendix A. 

 

PERFORMANCE-BASED COMPENSATION

Awards provided under this Plan will be based upon the achievement of one or more corporate, subsidiary and/or individual performance goals as determined by the Committee. Specifically, performance will be based on:

 

Corporate Results – the Company’s actual financial performance measured against the NOE financial objectives of the Company for the Plan Year derived from the Strategic Plan and/or other corporate financial measures determined by the Committee.

Subsidiary Results - the actual performance of  a subsidiary of the Company or a group, division or department thereof  measured against the financial and other non-financial objectives set for such subsidiary, or group, division or department thereof, for the Plan Year. 

Individual Performance – the performance of a Plan Participant during a Plan Year as measured against individual performance goals and overall contributions determined primarily through an end-of-year evaluation and recommendation by the Chief Executive Officer; provided, however that the Committee shall evaluate the performance of and make determinations with respect to Awards in favor of the Chief Executive Officer.

- Performance Weighting

 

The contribution of a Plan Participant to the achievement of corporate goals varies from position to position and by Plan Year. Moreover, each Plan Participant bears a unique responsibility for the achievement of corporate, subsidiary (or group/division/department thereof) and individual performance goals.

 

For these reasons, corporate, subsidiary, and individual performance will each have a unique impact on the calculation of Awards for each Plan Participant based on the achievement of performance goals and the weighting of those goals.  However, Plan Participants may not receive an Award if corporate performance falls below the threshold level, even if subsidiary and individual performance goals are achieved. 

 

- The Strategic Plan

The Company prepares and the Board approves an annual Strategic Plan which includes a number of financial performance goals, including NOE targets for the Plan Year. 

 

Under the Plan, achievement of NOE targets is deemed representative of Company growth and performance.  Each Plan Year the Committee will determine a set of NOE performance goals that includes a satisfactory level of achievement, an expected level of achievement, and a superior level of achievement.  If the Company’s actual performance falls within the NOE range (i.e., between a satisfactory level and up to a superior level) an award to Plan Participants may be appropriate based upon the achievement of other applicable goals and the weighting of those goals.   Standards for superior or satisfactory results will be determined by the Committee each year and may vary year-to-year. Actual results will be compared to this target range at the end of the Plan Year to determine whether performance has been of an superior or satisfactory level, or whether it falls somewhere in between. Corporate performance will be measured separately against the applicable Corporate NOE goal. Individual performance will be subject to a discretion­ary evaluation.  

- Award Opportunity

 

Individual target Awards under the Plan shall be based upon a percentage of the Plan Participant's base salary that may be earned upon achievement of the applicable corporate, subsidiary, and individual performance goals at a mid-range performance level, that is, mid-way between satisfactory and superior levels. The target Award when added to Base Salary is designed to provide a competitive level of compensation for the position.

A range of actual Awards, based upon the target Awards, will be available for payment for performance that is satisfactory or is superior (or falls within these ranges), as determined by the Committee:

 

·

the Maximum Award- payable for superior performance, will equal 150% of the target Award

 

·

the Minimum Award - payable for satisfactory performance, will equal 50% of the target Award.

 

The Maximum Award, when combined with base salary, is designed to provide a premium level of compensation; the Minimum Award combined with base salary is designed to provide a less than average level of compensation.

 

If actual results fall between superior and satisfactory levels, an Award in an intermediate amount will be calculated using interpolation as determined by the Committee. This Award will be greater or less than the expected target Award in the same proportion that overall performance exceeds or falls short of the target Award. Performance below the satisfactory level will not receive an Award.

ILLUSTRATION OF AWARD DETERMINATION

 

An example of the calculation that would be involved in determining Award amounts is shown in Appendix B.

PAYMENT OF AWARDS

 

All Awards under this Plan shall be payable in cash as soon as practicable after the end of the Plan Year, but not later than the 15th day of the third month following the end of the fiscal year of the Company.  At the election of the Plan Participant, an Award may be deferred in whole or in part, under the Senior Officer Deferred Compensation Plan in accordance with the terms of such plan.

 

To be eligible for payment of an Award under this Plan, a Plan Participant must be in the active full-time employment of the Company at the close of the Plan Year and at the time the actual Award payments are made, except under the circumstances described below. If the active full-time employment of a Plan Participant with the Company is terminated by death, disability, retirement, or if the Plan Participant is on an approved leave of absence on the last day of the Plan Year or on the date of the payment of an Award, the Committee may in its sole discretion approve an Award to such Plan Participant, based on the proportion of the Plan Year that he or she was in active service with the Company. In the event of the death of a Plan Participant, any such approved Award shall be payable to the beneficiary of the Plan Participant designated by the Plan Participant under the Company's group life insurance program or, in the absence of a valid designation, the Plan Participant's estate.

 

Termination of Employment by a Plan Participant for any other cause prior to the date of Award payment shall disqualify such Plan Participant from the payment of any Award which may have been determined and/or approved previously by the Committee.

 

Any Plan Participant may have his or her Award under the Plan reduced proportionately on the basis of the number of months actually served in his or her position during the Plan Year, if less than a full Plan Year, as determined by the Committee. 

The Committee has sole discretion to approve each Award made hereunder to each Plan Participant.

ADMINISTRATION AND CONTROL

 

The Plan shall be administered by the Board of Directors through the Committee with certain duties and responsibilities shared with the Chief Executive Officer.

 

- The Committee

 

The Committee shall, subject to the provisions of this Plan, determine the Key Employees who shall constitute a Plan Participant in each Plan Year, expected Award opportunities and performance weightings; determine expected, satisfactory and superior financial goals, including a range of NOEs for each Plan Year based on the Company’s Board of Director’s approved Strategic Plan; and review of financial results after the Plan Year to determine where actual results fall in this scale; determine the individual Award for the Chief Executive Officer; review and approve individual Awards to other Plan Partici­pants based on the recommendation of the Chief Executive Officer; determine procedures as may be required to administer the Plan in the interest of the Board of Directors, the Company and the Plan Participants; and recommend to the Board of Directors any modifications or amendments to the Plan.  

- The Chief Executive Officer

 

The Chief Executive Officer shall, subject to the provisions of this Plan, recommend to the Committee those Key Employees eligible to participate in this Plan as  Plan Participant, their expected Award opportunities and performance weights; review and advise on  all individual Awards to  Plan Participants other than himself; participate with the Committee in reaching all such Award determinations for final approval; direct the prompt payment of all approved Awards; and recommend to the Board a funding formula (e.g., 10 percent of after-tax income (before securities transactions) after deducting 7 percent of beginning shareholders' equity) to be used for the coming year. 

- The Board of Directors

 

The Committee with the approval of the Board of Directors retains the authority to amend, modify, suspend or discontinue this Plan at any time. However, no such discontinuation, suspension or amendment shall adversely affect the right of any Plan Participant with respect to an Award made prior to such action.

1

Arrow Financial Corporation

SHORT TERM INCENTIVE PLAN

APPENDIX A

KEY EMPLOYEES*

(List of Eligible Officers)

Arrow Financial Corporation Executive Officers

Subsidiary Bank Presidents

Other Selected Company and Bank Officers

*The Committee Determines and Can Expand or Reduce the Number of Plan Participants Each Plan Year based on the Recommendation of the Chief Executive Officer. 

APPENDIX B

AWARD POOL CALCULATION: (FOR ILLUSTRATIVE PURPOSES ONLY)

Prior Year Ending Equity 

$70,000

(1) 

7% Reserved For Shareholders

  x .07

 

SUB-TOTAL

$4,900M 

Current Year's N.O.E., A.T. 

-10,000

TOTAL ADJ. N.O.E.

`

$  5,100

 

(1) 

MAX. AWARD FUND IN ANY YEAR

IS 10% x $5,100M

$510M

2

APPENDIX B (Cont.)

SAMPLE AWARD WORKSHEET

		
	 
	 

	I.

Corporate Goal – NOE

	$

	II.

Award Pool

	Equity 12/31 Est. 

	$

	7% to Shareholders

	$

	NOE Goal 

	$

	Available NOE

	$

	10% Max. Pool

	$

						
	 
	 
	 
	 
	 
	 

	III.   Participants

	Base Salary

(as of January 1 of Plan Year)

	Award Potential

( % of Base Salary)*

	Award Amount*

(at 100% of Goal)

	Goals – Basis for Award

	Corp.

	Indiv.

	CEO

	 

	50%

	 

	100%

	-

	Executive/Senior Officer #2

	 

	20%

	 

	  25%

	75%

	Executive/Senior Officer #3

	 

	20%

	 

	  25%

	75%

	Executive/Senior Officer #4

	 

	20%

	 

	  25%

	75%

	Executive/Senior Officer #5

	 

	18%

	 

	  25%

	75%

	Executive/Senior Officer #6

	 

	12%

	 

	  25%

	75%

	Executive/Senior Officer #7

	 

	12%

	 

	  25%

	75%

	Executive/Senior Officer #8

	 

	12%

	 

	25%

	75%

	Executive/Senior Officer #9

	 

	12%

	 

	  25%

	75%

	Executive/Senior Officer #10

	 

	12%

	 

	  25%

	75%

	Executive/Senior Officer #11

	 

	12%

	 

	25%

	75%

	Executive/Senior Officer #12

	 

	10%

	 

	25%

	75%

	Executive/Senior Officer #13

	 

	10%

	 

	25%

	75%

	Executive/Senior Officer #14

	 

	10%

	 

	25%

	75%

	Executive/Senior Officer #15

	 

	10%

	 

	25%

	75%

	Executive/Senior Officer #16

	 

	10%

	 

	25%

	75%

	TOTAL

	 

	 

	 

	 

	 

							
	 
	 
	 
	 
	 
	 
	 

	CEO TARGETS

	 

	TARGET

	 

	Expected Level (Midpoint of Satisfactory and Superior)

	Actual

Level

	9/30 

Peer

	Weight

	1

	NOE**

	$

	 

	 

	 

	60%

	2

	ROE

	%

	 

	 

	 

	10%

	3

	Efficiency Ratio

	%

	 

	 

	 

	10%

	4

	Non-Performing Loans

	%

	 

	 

	 

	10%

	5

	Net Charge-offs

	%

	 

	 

	 

	10%

	 
	** Satisfactory – ($        ); Superior – ($        ).  If the Company earns less than ($       ), Award will be 0%

* Based on attaining 100% of the Company goal.  Attainment of less than 90% of the Company goal will result in no Awards being paid.  Attainment of 90% of the Company goal will result in payment of 50% of the Award Potential, with an additional 5% of the Award Potential paid for each 1% increase in Company goal above 90%.  Attainment of 110% or more of the Company goal will result in payment of 150% if the Award Potential.  All of the above defined payments may be reduced based on the attainment of Individual goals, and in the case of the CEO, additional Company performance goals as shown above.  Payment of Awards, if any, equal to or greater than the payments described above, is at the final discretion of the Compensation Committee.

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