proxy_stmt.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.          )

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Soliciting Material under §240.14a-12
 
ITT EDUCATIONAL SERVICES, INC.
 
(Name of Registrant as Specified In Its Charter)
 
________________________________________________________________
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ITT Educational Services, Inc.
 
 






2012 Annual Meeting
Notice and Proxy Statement



 
 

 


Table of Contents
 
Page
     
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
 
ii
PROXY STATEMENT
 
1
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
 
1
PROPOSAL ONE: ELECTION OF THREE DIRECTORS TO SERVE UNTIL THE 2015 ANNUAL MEETING OF SHAREHOLDERS AND UNTIL THEIR SUCCESSORS ARE ELECTED AND HAVE QUALIFIED
 
4
Nominees for Director
 
5
Directors Continuing in Office
 
6
Meetings, Independence, Leadership and Committees of the Board of Directors
 
7
Indemnification Obligations
 
11
PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP TO SERVE AS ITT/ESI’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR ITS FISCAL YEAR ENDING DECEMBER 31, 2012
 
12
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
12
Audit Committee Report
 
12
Audit, Audit-Related, Tax and All Other Fees
 
13
Audit and Non-Audit Services Pre-Approval Policy
 
14
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
16
EXECUTIVE OFFICERS
 
16
PROPOSAL THREE: ADVISORY VOTE TO APPROVE THE COMPENSATION PAID TO ITT/ESI’S NAMED EXECUTIVE OFFICERS, AS DISCLOSED PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC, INCLUDING THE COMPENSATION DISCUSSION AND ANALYSIS, COMPENSATION TABLES AND NARRATIVE DISCUSSION, IN THIS PROXY STATEMENT
 
17
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
 
18
Compensation Discussion and Analysis
 
18
Compensation Committee Report
 
32
Compensation-Related Risk Assessment
 
33
Summary Compensation Table
 
34
Amount of Salary and Bonus in Proportion to Total Compensation
 
37
Grants of Plan-Based Awards Table
 
39
Employment Contracts
 
40
Non-Equity Incentive Plan Awards and Bonuses
 
40
Equity Compensation and Qualified Savings Plans
 
40
Outstanding Equity Awards at Fiscal Year-End Table
 
48
Option Exercises and Stock Vested Table
 
50
Pension Benefits Table
 
51
Pension Plans
 
52
Nonqualified Deferred Compensation Plan Table
 
55
Nonqualified Deferred Compensation Plans
 
56
Potential Payments Upon Termination or Change In Control
 
57
Director Compensation Table
 
64
Director Compensation
 
67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
69
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
 
72
SHAREHOLDER PROPOSALS FOR 2013 ANNUAL MEETING
 
74
ADDITIONAL INFORMATION
 
75
Code of Ethics
 
75
Transfer Agent Information
 
75
Shareholder Information
 
75
Annual Report to Shareholders
 
75



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ITT EDUCATIONAL SERVICES, INC.
13000 North Meridian Street
Carmel, IN 46032-1404
______________________

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 8, 2012
_________________________


The 2012 Annual Meeting of Shareholders of ITT Educational Services, Inc. (“ITT/ESI”) will be held at the Crystal City Marriott, 1999 Jefferson Davis Highway, Arlington, Virginia 22202, on Tuesday, May 8, 2012, at 9:00 a.m., local time, for the following purposes:

1.
 
To consider and vote upon three proposals described in the accompanying Proxy Statement providing for:
       
   
Proposal One:
Election of three Directors to serve until the 2015 Annual Meeting of Shareholders and until their successors are elected and have qualified.
       
   
Proposal Two:
Ratification of the appointment of PricewaterhouseCoopers LLP to serve as ITT/ESI’s independent registered public accounting firm for its fiscal year ending December 31, 2012.
       
   
Proposal Three:
Advisory vote to approve the compensation paid to ITT/ESI’s named executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, in the accompanying Proxy Statement.
       
2.
 
To act upon such other matters that may properly come before the meeting.
 
All shareholders of record at the close of business on March 9, 2012 will be entitled to vote at the meeting.

It is important that your shares be represented at this meeting. Whether or not you expect to be present, please vote as soon as possible. We have provided information on available voting methods in the accompanying Proxy Statement. If you attend the meeting, you may revoke your proxy and vote in person.


By Order of the Board of Directors,


 
Christine G. Long
 
Senior Vice President, General Counsel
 
and Secretary


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ITT EDUCATIONAL SERVICES, INC.
13000 North Meridian Street
Carmel, IN 46032-1404
____________________________

PROXY STATEMENT

Annual Meeting of Shareholders
May 8, 2012
____________________________

This Proxy Statement and accompanying proxy are being provided to shareholders on or about March 23, 2012 in connection with the solicitation by the Board of Directors of ITT Educational Services, Inc. (“ITT/ESI,” “we” or “us”) of proxies to be voted at the 2012 Annual Meeting of Shareholders (“Annual Meeting”) to be held at 9:00 a.m., local time, Tuesday, May 8, 2012, at the Crystal City Marriott, 1999 Jefferson Davis Highway, Arlington, Virginia 22202, for the purposes set forth in the accompanying notice.

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

Why did I receive a Notice of Internet Availability of Proxy Materials?

Many of our shareholders will receive a Notice of Internet Availability of Proxy Materials (the “Notice”), which was or will be sent to shareholders on or about March 23, 2012.  We are furnishing our proxy materials to our shareholders on the Internet, unless the shareholder has previously requested printed copies.  Printed copies of our proxy materials furnished at the previous request of our shareholders were or will be sent to those shareholders on or about March 23, 2012.

If you received a Notice by mail or e-mail, you will not receive a printed copy of our proxy materials unless you request such a copy in the manner described in the Notice.  The Notice also instructs you as to how you may access and review this Proxy Statement and our 2011 Annual Report on Form 10-K, and how you may submit your proxy to vote at the Annual Meeting.

Who is entitled to vote at the Annual Meeting?

Holders of our common stock outstanding at the close of business on March 9, 2012, the record date for the Annual Meeting (the “Record Date”), are entitled to vote their shares at the Annual Meeting.  As of the Record Date, 24,750,849 shares of our common stock were issued and outstanding.  Each share of our common stock is entitled to one vote on each matter properly brought before the Annual Meeting.

What will shareholders vote on at the Annual Meeting and how does the Board of Directors recommend that I vote?

There are three proposals that shareholders will vote on at the Annual Meeting:

·  
election of three directors to serve until the 2015 Annual Meeting of Shareholders and until their successors are elected and have qualified;
·  
ratification of the appointment of PricewaterhouseCoopers LLP (“PWC”) to serve as our independent registered public accounting firm for our fiscal year ending December 31, 2012; and
·  
advisory vote to approve the compensation paid to our Named Executive Officers (those executive officers identified in the Compensation Discussion and Analysis below), as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission (“SEC”), including the Compensation Discussion and Analysis, compensation tables and narrative discussion, in this Proxy Statement.

The Board of Directors recommends that you vote FOR all three proposals.


 
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What is the difference between holding shares as a shareholder of record and as a beneficial owner?

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, you are considered, with respect to those shares, the “shareholder of record.”  The Notice has been or will be sent directly to you, unless you previously requested printed copies of our proxy materials.

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the “beneficial owner” of those shares held in “street name.”  The Notice has been or will be sent to you by your broker, bank or other holder of record who is considered, with respect to those shares, to be the shareholder of record.  As the beneficial owner, you have the right to direct your broker, bank or other holder of record on how to vote the shares in your account.

How do I vote?

Record Holders

If you are a record holder, you may vote by using any of the following methods.

Through the Internet.  You may submit a proxy through the Internet by following the instructions on the Notice or the instructions on the proxy card if you previously requested to receive paper copies of our proxy materials or you request paper copies in connection with this Annual Meeting.  If you submit a proxy through the Internet, you do not need to return a proxy card.  The Internet voting facility for shareholders of record will close at 11:59 p.m., Eastern Time, on May 7, 2012.

By Telephone.  If you receive a proxy card by mail because you have previously requested to receive paper copies of our proxy materials or you request paper copies in connection with this Annual Meeting, you may submit a proxy by telephone by dialing the toll-free telephone number shown on the proxy card and following the recorded instructions.  If you submit a proxy by telephone, you do not need to return a proxy card.  The telephone voting facility for shareholders of record will close at 11:59 p.m., Eastern Time, on May 7, 2012.

By Mail.  If you receive a proxy card by mail because you have previously requested to receive paper copies of our proxy materials or you request paper copies in connection with this Annual Meeting, you may vote by completing, signing, dating and mailing that proxy card in the pre-addressed postage-prepaid envelope that will be included when the proxy card is sent to you.

In Person at the Annual Meeting.  If you attend the Annual Meeting, you may vote your shares in person.  We encourage you, however, to vote by proxy card, through the Internet or by telephone even if you plan to attend the meeting so that your shares will be voted in the event you later decide not to attend the meeting.

Beneficial Owners

If you are a beneficial shareholder, you may vote by using any voting instruction card provided by your broker, bank or other record holder or by following their instructions for voting through the Internet or by telephone.  If you are a beneficial shareholder who would like to vote in person at the Annual Meeting, you must obtain a legal proxy from your broker, bank or other holder of record and present it at the Annual Meeting.

Pursuant to the rules of the New York Stock Exchange (“NYSE”), brokers may not exercise discretion to vote shares on the following matters if the beneficial shareholder does not give voting instructions:

·  
the election of directors; and
·  
the approval of the compensation paid to our Named Executive Officers.

Accordingly, if you are a beneficial shareholder and wish your shares to be voted on these matters, you must give your broker voting instructions.


 
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What does it mean if I receive more than one Notice or proxy card?

If you received more than one Notice or proxy card, your shares are registered in more than one name or are registered in different accounts.  Please follow the voting instructions included in each Notice and proxy card to ensure that all of your shares are voted.

May I change my vote after I have submitted a proxy?

If you are a shareholder of record, you have the power to revoke your proxy at any time before the shares it represents are voted, by:

·  
delivering to our Secretary an instrument revoking the proxy;
·  
delivering a new proxy in writing, through the Internet or by telephone, dated after the date of the proxy being revoked and, in the case of telephone or Internet voting, before 11:59 p.m., Eastern Time, on May 7, 2012; or
·  
attending the Annual Meeting and voting in person (attendance without casting a ballot will not, by itself, constitute revocation of a proxy).

If you are a beneficial shareholder, you may submit new voting instructions by contacting your broker, bank or other holder of record.  You may also revoke your previous voting instructions by voting in person at the Annual Meeting if you obtain a legal proxy from your broker, bank or other holder of record and present it at the Annual Meeting.

How will the proxies be voted?

Clark D. Elwood and Daniel M. Fitzpatrick, two of our executive officers, have been selected by our Board of Directors to serve as proxy holders for the Annual Meeting.  All shares of our common stock represented by properly delivered proxies received in time for the Annual Meeting will be voted at the Annual Meeting by the proxy holders in the manner specified by the shareholder.  If a written proxy card is signed by a shareholder and returned without instructions, the shares of our common stock represented by the proxy will be voted:

·  
FOR the election of the three director nominees named in this Proxy Statement;
·  
FOR the ratification of the appointment of PWC; and
·  
FOR the approval of the compensation paid to our Named Executive Officers as disclosed in this Proxy Statement.

What is the quorum required at the Annual Meeting?

In order for business to be conducted at the Annual Meeting, a quorum must be present.  A quorum will be present if the holders of a majority of the shares issued and outstanding as of the Record Date and entitled to vote are represented in person or by proxy at the Annual Meeting.  Votes cast by proxy or in person at the Annual Meeting will be tabulated by the election inspector appointed for the meeting and will determine whether a quorum is present.  The election inspector will treat abstentions and broker non-votes as shares that are present for purposes of determining the presence of a quorum.  A broker non-vote occurs when a broker, bank or other holder of record holding shares for a beneficial owner does not vote on a particular proposal because that holder does not have discretionary voting power for that particular item (for example, the election of directors) and has not received voting instructions from the beneficial owner.

What are the voting requirements to approve each of the proposals?

Election of Three Directors.  To be elected, a Director nominee must receive a majority of the votes cast with respect to such Director, which means that the number of shares voted “for” that Director’s election must exceed the number of shares voted “against” that Director’s election.  Shareholders will not be allowed to cumulate their votes in the election of Directors.  Abstentions and broker non-votes will not be considered as votes cast on this proposal and therefore will have no effect on the outcome of this proposal.

Ratification of the Appointment of the Independent Registered Public Accounting Firm.  The affirmative vote of a majority of the shares of our common stock represented in person or by proxy at the Annual Meeting and entitled to vote is required to ratify the appointment by the Audit Committee of the Board of Directors of PWC as our independent registered public accounting firm for our fiscal year ending December 31, 2012.  Abstentions will be considered shares represented at the Annual Meeting and entitled to vote on this proposal.  Accordingly, an abstention will have the same effect as a vote against this proposal.

 
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Advisory Vote on the Approval of the Compensation Paid to Our Named Executive Officers.  The affirmative vote of a majority of the shares of our common stock represented in person or by proxy at the Annual Meeting and entitled to vote is required to approve the compensation paid to our Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, in this Proxy Statement.  Abstentions will be considered shares represented at the Annual Meeting and entitled to vote on this proposal.  Accordingly, an abstention will have the same effect as a vote against this proposal.  Broker non-votes will not be considered shares entitled to vote on this proposal and, therefore, will have no effect on the outcome of this proposal.  The shareholder vote to approve the compensation paid to our Named Executive Officers is an advisory vote only and, therefore, the result of that vote will not be binding on our Board of Directors or Compensation Committee.  Our Compensation Committee will, however, consider the outcome of the vote when evaluating our executive compensation principles and practices.

Could other matters be decided at the Annual Meeting?

As of the date of this Proxy Statement, our Board of Directors is not aware of any matters, other than those described in this Proxy Statement, which are to be voted on at the Annual Meeting.  If any other matters are properly raised at the Annual Meeting, however, the persons named as proxy holders intend to vote the shares represented by your proxy in accordance with their judgment on such matters.

Who is paying for the costs of this proxy solicitation?

We will pay all expenses of solicitation of proxies.  Our officers, Directors and other employees may solicit proxies, without additional compensation, by telephone, electronic mail, facsimile or mail, or by meetings with shareholders or their representatives.  We also will reimburse brokers, banks and other record holders for their charges and expenses in forwarding proxy material to beneficial owners.


PROPOSAL ONE: ELECTION OF THREE DIRECTORS TO SERVE UNTIL THE 2015 ANNUAL MEETING OF SHAREHOLDERS AND UNTIL THEIR SUCCESSORS ARE ELECTED AND HAVE QUALIFIED

Our Board of Directors currently consists of nine Directors divided into three classes. Each class contains three Directors.  The term of one class expires each year. Generally, each Director serves until the annual meeting of shareholders held in the year that is three years after the Director’s election and thereafter until the Director’s successor is elected and has qualified.

At the meeting, three Directors are to be elected to hold office for a three-year term to expire at the 2015 Annual Meeting of Shareholders and until their successors are elected and have qualified. The proxy holders intend to vote such proxy for the election to the Board of Directors of Joanna T. Lau, Samuel L. Odle and John A. Yena, three current Directors whose terms expire this year, unless you direct them to vote otherwise.

The voting standard for election of the Director nominees is a majority vote standard.  This majority vote standard is in effect because this is an uncontested election of Directors (i.e., the number of nominees for Director did not exceed the number of Directors to be elected, as of the date that was 14 days in advance of the date that this Proxy Statement was filed with the SEC).  For any contested elections, the Directors would be elected by a plurality of the shares of our common stock voted in person or by proxy at the meeting.

All of the Director nominees for this Annual Meeting are currently serving on our Board of Directors.  If any nominee is not elected at the Annual Meeting, he or she is expected to tender his or her resignation to our Board of Directors.  Our Board of Directors will act on the tendered resignation and publicly disclose its decision regarding the tendered resignation within 90 days from the date of the certification of the election results.  In making its decision regarding the tendered resignation, our Board of Directors may consider any factors or other information that it considers appropriate and relevant.  If a Director’s resignation is not accepted by our Board of Directors, the Director will continue to serve until the end of the term of his or her class and until his or her successor is duly elected, or his or her earlier resignation or removal.  If a Director’s resignation is accepted by our Board of Directors, then the Board may fill the resulting vacancy or decrease the size of the Board.

 
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Each of the nominees has consented to serve as a Director. If for any reason a nominee should become unable or unwilling to accept nomination or election, the proxy holders intend to vote the proxy for the election of such other person as our Board, upon the recommendation of the Nominating and Corporate Governance Committee, may select. Alternatively, our Board may reduce the number of Directors to eliminate the vacancy.

Our Board of Directors does not have a policy with respect to the Directors’ attendance at our annual shareholder meetings, but all of our Directors are encouraged to attend those meetings.  Our 2011 Annual Meeting of Shareholders was held on May 3, 2011, and eight of the nine members of our Board of Directors attended that meeting.

The Nominating and Corporate Governance Committee, in concluding that the nominees for Director and the continuing Directors should serve as our Directors, considered the specific experience, qualifications, attributes and skills of each such individual.  Since each Director and nominee for Director is a current Director of ours, the Committee also considered the significant contributions that each such individual has made to our Board of Directors and its committees during his or her tenure as a Director.  The Committee believes that each of the Directors and nominees for Director possesses judgment, integrity, the ability to make independent inquiries and a willingness to devote adequate time to Board duties.  In addition, the Nominating and Corporate Governance Committee believes that each Director and nominee for Director brings a strong and particular background, experience and set of skills to our Board, giving the Board as a whole competence and experience in a wide variety of areas.

Set forth below is a brief summary of each Director’s principal occupation, business affiliations and certain other information, as well as a summary description of the experiences, qualifications, attributes and skills that led the Nominating and Corporate Governance Committee to the conclusion that each such person should serve as a Director of ours. Unless otherwise indicated, each Director’s principal occupation has been the same for the past five years.  There is no family relationship between any of our Directors or executive officers.

Nominees for Director

Term Expiring at the 2012 Annual Meeting.

JOANNA T. LAU, age 53, has served as chairperson and chief executive officer of Lau Acquisition Corporation (doing business as LAU Technologies), a management consulting and investment firm, since March 1990.  She is also a director of DSW Inc.  During the past five years, Ms. Lau was also a director of TD Banknorth Inc.  Ms. Lau has been a Director of ours since October 2003.

Director Qualifications:  Joanna T. Lau’s experience as the chairperson and chief executive officer of Lau Acquisition Corporation has provided her with leadership skills and the ability to analyze varied aspects of a company’s business.  Her experience includes developing and implementing a turnaround and growth strategy for a company.  Ms. Lau currently serves, and has served for over 11 years, as a director of other public companies.

SAMUEL L. ODLE, age 62, has served as president and chief executive officer of Methodist Hospital (“MH”) and Indiana University Hospital (“IUH”) and executive vice president of Indiana University Health (formerly Clarian Health Partners) (“IU Health”), an Indianapolis-based private, non-profit healthcare organization comprised of MH, IUH and Riley Hospital for Children, since July 2004.  Mr. Odle has been a Director of ours since January 2006.

Director Qualifications:  Samuel L. Odle’s experience in executive positions at MH, IUH and IU Health have provided him with the ability to analyze and assess numerous aspects of a complex and highly-regulated organization.  He also possesses leadership skills and decision-making abilities as a result of his executive experience.  Mr. Odle’s services as Chairman of the American College of Healthcare Executives also provided him with a national perspective on the healthcare industry.  The healthcare industry is an area that we are focusing on for future growth for our programs of study.

JOHN A. YENA, age 71, has served as chairman of the board, emeritus of Johnson & Wales University (“J&W”), a postsecondary educational institution, since November 2011. Mr. Yena served as chairman of the board of J&W from June 2004 until November 2011.  During the past five years, he was also a director of Bancorp Rhode Island, Inc.  Mr. Yena has been a Director of ours since May 2006.

 
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Director Qualifications:  John A. Yena has extensive experience in higher education, most recently as the chairman emeritus and chairman (and prior to that as the president and chief executive officer) of J&W.  This experience has provided him with a strong understanding of the particular issues facing postsecondary institutions such as ours.  Over his career, Mr. Yena has also been involved in a number of national educational organizations, furthering the breadth of his experience in our industry.  He is also currently a member of the board of commissioners of the Accrediting Bureau of Health Education Schools.  Mr. Yena has served as a director of public companies for over 11 years.

The Board of Directors recommends a vote FOR each of the nominees listed above.

Directors Continuing in Office

Term Expiring at the 2013 Annual Meeting.

JOHN F. COZZI, age 50, has served as a managing director of AEA Investors LP, a private equity firm, since January 2004.  Mr. Cozzi has been a Director of ours since October 2003.

Director Qualifications:  John F. Cozzi’s years of experience in private equity and investment banking have exposed him to a broad range of issues affecting businesses, including a number of businesses in our industry.  His work has included analyzing and focusing on improving various aspects of businesses, including operations, strategies and financial performance.  Mr. Cozzi’s background also includes experience driving the strategic direction and growth of numerous organizations.  Mr. Cozzi’s experience in corporate finance, including financial accounting and reporting, has led our Board of Directors to determine that he is an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K under the Securities Exchange Act of 1934 (the “Exchange Act”).

KEVIN M. MODANY, age 45, has served as our Chairman since February 2008 and as our Chief Executive Officer since April 2007.  He also served as our President from April 2005 through March 2009.  From April 2005 through March 2007, Mr. Modany also served as our Chief Operating Officer.  Mr. Modany has been a Director of ours since July 2006.

Director Qualifications:  Kevin M. Modany’s day-to-day involvement in our business has provided him with extensive knowledge and understanding of our company and our industry.  Mr. Modany had previous experience in advising other companies on financial and operational matters, and he had in-depth involvement in the financial and operational aspects of our company before becoming our Chief Executive Officer.  As our Chief Executive Officer, he has developed strong leadership skills.  Mr. Modany is able to provide our Board of Directors with insight and advice related to the effect of the Board’s decisions, both internally and externally.

LLOYD G. WATERHOUSE, age 60, served as chief executive officer and president of Harcourt Education, a global education company serving students and teachers, adult learners and readers, from September 2006 until his retirement in January 2008.  Mr. Waterhouse is also a director of SolarWinds, Inc.  During the past five years, he was also a director of Digimarc Corporation, i2 Technologies, Inc. and Atlantic Mutual Insurance Companies.  Mr. Waterhouse has been a director of ours since April 2009.

Director Qualifications:  Lloyd G. Waterhouse’s experience in executive roles at Harcourt Education and Reynolds and Reynolds Co. (where he was chief executive officer and chairman from April 2001 through July 2004) has provided him with leadership skills and the ability to analyze and address numerous aspects of a company’s business.  His work has included experience in driving strategic direction and encouraging growth at companies.  During the course of his career, Mr. Waterhouse has been involved with education-related activities and initiatives for over 19 years.  While at IBM Corporation (“IBM”), where he served for a number of years as president or general manager of various business units, Mr. Waterhouse held leadership positions with IBM’s internal and external educational-related businesses and managed IBM’s relationships with research universities.  Mr. Waterhouse also currently serves as a member of the Board of Visitors of the Penn State Smeal College of Business and on the board of Ascend Learning, LLC, a provider of technology-based learning solutions.  His experience at Harcourt Education also provided Mr. Waterhouse with knowledge in the curriculum development area.  Mr. Waterhouse has served as a director of public companies for over 12 years.

 
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Term Expiring at the 2014 Annual Meeting.

JOHN E. DEAN, age 61, is an attorney who has specialized in higher education law since April 1985.  Mr. Dean has been a partner at the Law Offices of John E. Dean since June 2005.  Mr. Dean has also served as a principal of Washington Partners, LLC, a public affairs firm, since June 2002.  Mr. Dean has been a Director of ours since December 1994.

Director Qualifications:  John E. Dean has specialized in higher education law since April 1985 and has been a principal of a public affairs firm since 2002.  He has broad knowledge and experience with issues surrounding higher education and our industry.  Mr. Dean’s work provides him with current and valuable knowledge and insight of the actions of Congress and the U.S. Department of Education related to higher education matters.  His experience has also led to a strong understanding of the workings of government and public policy, particularly in areas affecting our company.

JAMES D. FOWLER, JR., age 67, served as senior vice president and director, human resources of ITT Industries, Inc., an industrial, commercial machinery and equipment company, from November 2000 until his retirement in October 2002.  Mr. Fowler has been a Director of ours since April 1994.

Director Qualifications:  James D. Fowler, Jr.’s past experience in the human resources area has provided him with strong understanding of, and skills related to, the compensation and benefits areas.  As an executive in the human resources area, Mr. Fowler’s work included managing and directing other individuals and provided him with leadership and consensus-building skills.  Mr. Fowler also possesses government relations experience through his work with a Fortune 100 company.

VIN WEBER, age 59, has served as co-chairman and partner of Mercury Public Affairs LLC (doing business as Mercury/Clark & Weinstock), a public affairs and lobbying firm, since October 2011.  Mr. Weber was a partner at Clark & Weinstock Inc. (“C&W”) from 1994 until October 2011 and was the chief executive officer of C&W from 2007 until October 2011.  During the past five years, he was also a director of Lenox Group, Inc.  Mr. Weber has been a Director of ours since December 1994.

Director Qualifications:  Vin Weber has had significant involvement in public policy and management matters during his career.  This has contributed to Mr. Weber’s experience in, and strong understanding of, the workings of government and public policy.  Mr. Weber’s public policy involvement has been in a variety of highly-regulated areas, including higher education, during which he has developed strong knowledge and political insight about our industry.  Mr. Weber also served in the U.S. House of Representatives from 1980 to 1992.   Mr. Weber has served as a director of public companies for over 17 years.

Meetings, Independence, Leadership and Committees of the Board of Directors

Meetings.  During 2011, there were 11 meetings of the Board of Directors. During 2011, each of the Directors attended 75% or more of the aggregate number of meetings of the Board of Directors and the standing Board committees on which he or she served.

Independent Directors.  Our Board of Directors currently contains eight non-employee Directors: Messrs. Cozzi, Dean, Fowler, Odle, Waterhouse, Weber and Yena, and Ms. Lau.  Our Board of Directors has adopted categorical standards to assist it in making determinations of independence.  Any transactions, relationships or arrangements that we may have with any of our Directors are immaterial, so long as none of those transactions, relationships or arrangements caused the Director to violate any of our categorical standards of independence.  Our categorical standards of independence are contained in Section 5 of our Corporate Governance Guidelines and are posted on our website at www.ittesi.com.  Our Board of Directors has determined that each of our current non-employee Directors is independent, and each of the non-employee Directors in 2011 was independent, pursuant to our categorical standards of independence and in accordance with Section 303A.02 of the NYSE Listed Company Manual.  In the application of our categorical standards of independence to determine the independence of each non-employee Director for service on our Board of Directors and on its Audit, Compensation and Nominating and Corporate Governance Committees, there were no transactions, relationships or arrangements with our non-employee Directors that were required to be disclosed pursuant to Item 404(a) of Regulation S-K under the Exchange Act, or if not disclosed, that our Board considered.

 
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The non-employee Directors on our Board of Directors meet at regularly scheduled executive sessions without our management.  The Directors on our Board of Directors who are determined to be independent meet by themselves in executive session at least once annually.  Our Board of Directors has chosen the Chair of the Nominating and Corporate Governance Committee, currently Vin Weber, to preside over the executive sessions of our non-employee and independent Directors (“Presiding Director”).  Interested parties may send communications to the non-employee Directors, independent Directors or the entire Board of Directors by e-mail to PresidingDirector@ittesi.com or by regular mail addressed to:

ITT Educational Services, Inc.
13000 North Meridian Street
Carmel, IN 46032-1404
Attention: Presiding Director

Although such communications are available to any Director who wishes to review them, our General Counsel initially reviews all communications and forwards to the Presiding Director those communications that meet certain criteria set by the non-employee Directors.

Leadership.  The Chairman of our Board of Directors, Kevin M. Modany, is also our Chief Executive Officer.  Our Presiding Director is our lead independent Director, who presides over the executive sessions of our non-employee and independent Directors.  Our Corporate Governance Guidelines provide that the Board of Directors should be free to choose its Chairman in any way that seems best for our company at any given point in time, based on the recommendation of the Nominating and Corporate Governance Committee.  Therefore, the Board of Directors does not have a policy on whether the role of the Chairman and Chief Executive Officer should be separate or combined.  Our Chief Executive Officer has responsibility for the day-to-day operations of our company, communicating with constituents of our company and implementing our company’s strategy and other decisions of the Board.  Since all of these items are an important focus at the Board of Directors’ meetings, at this time the Nominating and Corporate Governance Committee and the full Board of Directors believe that it is more efficient and effective to have our Chief Executive Officer act as the chairperson of the Board.  The Board of Directors also recognizes the important leadership roles that the Presiding Director has in leading the executive sessions of our non-employee and independent Directors, and that the chairpersons of each of the committees of the Board have in leading their respective committee meetings and reviewing agendas in advance of such meetings.

Role in Risk Oversight.  The Board of Directors oversees our risk management processes to determine whether those processes are functioning as intended and are consistent with our business and strategy.  The Board conducts this oversight primarily through the Audit Committee, although some aspects of risk oversight are performed by the full Board of Directors or another committee.  On a quarterly basis, the full Board of Directors receives updates and information from management related to our company’s enterprise risk management program.

The Audit Committee is specifically tasked with, among other things:

·  
reviewing with our management and our independent registered public accounting firm our risk assessment and risk management, including:
·  
the guidelines and policies governing the process by which management assesses and manages our exposure to risk, and
·  
our major financial risk exposures and the steps taken by management to monitor and control those exposures;
·  
overseeing our systems of internal controls regarding finance, accounting, legal compliance and ethics;
·  
periodically reviewing legal, regulatory and related governmental policy matters; and
·  
reviewing management policies and programs relating to our compliance with legal and regulatory requirements, business ethics, business integrity, conflicts of interest and environmental matters.

The Audit Committee has standing items on its meeting agendas relating to these responsibilities.  In addition, members of our management who have responsibility for designing and implementing our risk management processes, such as our Chief Compliance Officer, regularly meet with the Audit Committee in separate executive sessions after each Committee meeting.  The Audit Committee members, as well as each other Director, have access to our Chief Compliance Officer, Chief Financial Officer and any other member of our management, for discussions between meetings as warranted.  The Audit Committee provides reports to the full Board of Directors on risk-related items on a quarterly basis.
 
 
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Committees.  The standing committees of the Board of Directors are the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.  The Academic Committee was discontinued in 2011.

Audit Committee.  Our Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act.  Our Board of Directors has adopted a written charter for the Audit Committee, a current copy of which may be obtained from our website at www.ittesi.com.  The functions of the Audit Committee are to assist the Board of Directors in its oversight of:

·  
the integrity of our financial statements and other financial information provided by us to any governmental body or the public;
·  
our compliance with legal and regulatory requirements;
·  
our systems of internal controls regarding finance, accounting, legal compliance and ethics that our management and the Board of Directors establish;
·  
our auditing, accounting and financial reporting processes generally;
·  
the qualifications, independence and performance of our independent registered public accounting firm; and
·  
the performance of our compliance and internal audit functions.

The Audit Committee also performs other functions as detailed in the Audit Committee’s charter, including, without limitation, appointing, compensating, retaining and overseeing our independent registered public accounting firm and pre-approving all services to be provided to us by our independent registered public accounting firm.

The Audit Committee held five meetings during 2011. The members of the Audit Committee throughout 2011 were, and the current members are, John F. Cozzi, John E. Dean (Chairperson), Joanna T. Lau and Lloyd G. Waterhouse.  Our Board of Directors has determined that John F. Cozzi is an “audit committee financial expert,” as that term is defined in Item 407(d)(5) of Regulation S-K under the Exchange Act, and is independent pursuant to our categorical standards of independence, Section 303A.02 of the NYSE Listed Company Manual and Rule 10A-3 of the Exchange Act.  Each of the current members of the Audit Committee is independent and each of the members of the Audit Committee in 2011 was independent, pursuant to our categorical standards of independence, Section 303A.02 of the NYSE Listed Company Manual and Rule 10A-3 of the Exchange Act.

Compensation Committee.  Our Board of Directors has adopted a written charter for the Compensation Committee.  A current copy of the charter may be obtained from our website at www.ittesi.com.  The principal function of the Compensation Committee is to discharge the Board of Directors’ responsibilities relating to compensation of our Directors and officers.  The Compensation Committee has overall responsibility and authority for approving and evaluating our Director and officer compensation plans, policies and programs.  The Compensation Committee also performs other functions as detailed in the Compensation Committee’s charter.  The Committee’s charter provides that it may delegate some or all of its responsibility and authority to subcommittees and/or our executive officers when the Compensation Committee deems the delegation to be appropriate.  The elements of the compensation program for our executives presently consist of base salary, equity-based compensation, qualified retirement savings, pension benefits, employee benefits, perquisites, and potential payments upon termination of employment or a change in control of us.  See “Compensation of Executive Officers and Directors–Compensation Discussion and Analysis.”  Each element is determined by the Compensation Committee with the assistance of an independent compensation consultant, upon the recommendation of our Chief Executive Officer, except for each element of our Chief Executive Officer’s compensation, which is determined solely by the Compensation Committee with the assistance of an independent compensation consultant. See “Compensation of Executive Officers and Directors – Compensation Discussion and Analysis – Process for Establishing Compensation.”

The elements of the compensation program for our non-employee Directors presently consist of an annual retainer, equity-based compensation, nonqualified deferred compensation, perquisites and potential payments upon termination of services as a non-employee Director or a change in control of us.  See “Compensation of Executive Officers and Directors – Director Compensation.”  Each element is determined by the Compensation Committee with the assistance of an independent compensation consultant and our Chief Executive Officer.

The compensation consulting firm used by the Compensation Committee in 2011 was Farient Advisors LLC (“Farient”).  The consulting firm is retained directly by the Compensation Committee and has helped the Compensation Committee develop an appropriate agenda for performing the Compensation Committee’s responsibilities.  In this regard, the consultant advises and assists the Compensation Committee:

·  
in determining the appropriate objectives and goals of our executive and Director compensation programs;
·  
in designing compensation programs that fulfill those objectives and goals;
·  
regarding the external and internal equity of our executive officers’ total compensation and the primary components of that compensation;
 
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·  
in evaluating the effectiveness of our compensation programs;
·  
in identifying appropriate pay positioning strategies and pay levels in our executive compensation program; and
·  
in identifying comparable companies and compensation surveys for the Compensation Committee to use to benchmark the appropriateness and competitiveness of our executive compensation program.

The Compensation Committee has retained the consultant as an outside advisor to provide information and objective advice regarding executive and Director compensation.  All of the decisions with respect to our executive and Director compensation, however, are made by the Compensation Committee alone and may reflect factors and considerations other than, or that may differ from, the information and recommendations provided by the consultant.  The consultant may, from time to time, contact our executive officers for information necessary to fulfill its assignment and may make reports and presentations to and on behalf of the Compensation Committee that our executive officers also receive.  Farient and its affiliates did not provide any other services to us or our affiliates during 2011.

The Compensation Committee held five meetings during 2011.  The members of the Compensation Committee throughout 2011 were, and the current members are, John F. Cozzi (Chairperson), James D. Fowler, Jr., Samuel L. Odle and John A. Yena.  Each of the current members of the Compensation Committee is independent, and each of the members of the Compensation Committee in 2011 was independent, pursuant to our categorical standards of independence and Section 303A.02 of the NYSE Listed Company Manual.  In addition, each of the current members of the Compensation Committee is, and each of the members of the Compensation Committee in 2011 was, a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act and an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “IRC”).  None of the Compensation Committee members during 2011 was:

·  
an officer or employee of ours;
·  
a former officer of ours; or
·  
involved in a relationship requiring disclosure as a related person transaction pursuant to Item 404 of Regulation S-K under the Exchange Act or as an interlocking executive officer/director pursuant to Item 407(e)(4)(iii) of Regulation S-K under the Exchange Act.

Nominating and Corporate Governance Committee.  Our Board of Directors has adopted a written charter for the Nominating and Corporate Governance Committee.  A current copy of the charter may be obtained from our website at www.ittesi.com.  The functions of the Nominating and Corporate Governance Committee, which are detailed in its charter, are to:

·  
assist the Board of Directors by identifying individuals qualified to become Directors, and recommend to the Board of Directors the Director nominees for each annual meeting of shareholders;
·  
develop and recommend to the Board of Directors the Corporate Governance Guidelines applicable to us;
·  
lead the Board of Directors in its annual review of the Board of Directors’ performance; and
·  
recommend to the Board of Directors Board members for each standing Board committee.

The Nominating and Corporate Governance Committee held two meetings during 2011.  The members of the Nominating and Corporate Governance Committee throughout 2011 were, and the current members are, John E. Dean, Samuel L. Odle, Vin Weber (Chairperson) and John A. Yena.  Each of the current members of the Nominating and Corporate Governance Committee is independent and each of the members of the Nominating and Corporate Governance Committee in 2011 was independent, pursuant to our categorical standards of independence and Section 303A.02 of the NYSE Listed Company Manual.

The Nominating and Corporate Governance Committee will consider Director candidates recommended by our shareholders.  A shareholder who wishes to recommend a Director candidate for consideration by the Nominating and Corporate Governance Committee should send the recommendation to our Secretary at ITT Educational Services, Inc., 13000 North Meridian Street, Carmel, Indiana 46032-1404, who will forward it to the Committee.  Any such recommendation should include a description of the candidate’s qualifications for Board service, the candidate’s written consent to be considered for nomination and to serve if nominated and elected, and addresses and telephone numbers for contacting the shareholder and the candidate for more information.  A shareholder who wishes to nominate an individual as a Director candidate at an annual meeting of shareholders, rather than recommend the individual to the Nominating and Corporate Governance Committee as a nominee, must comply with the advance notice requirements set forth in our By-Laws.  See “Shareholder Proposals for 2013 Annual Meeting.”

 
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The Nominating and Corporate Governance Committee selects nominees for Directors on the basis of each candidate’s broad experience, judgment, integrity, ability to make independent inquiries, understanding of our business environment and willingness to devote adequate time to the duties of our Board of Directors.  The Nominating and Corporate Governance Committee identifies possible nominees for a Director who meet specified objectives in terms of the composition of our Board of Directors that are established by law, the NYSE and/or our Board of Directors.  The only specified qualities and skills that the Nominating and Corporate Governance Committee believes are necessary for one or more of our Directors to possess and the only specific standards for the overall structure and composition of our Board of Directors are those imposed by law and the NYSE or contained in our Corporate Governance Guidelines and the charters of the standing committees of our Board of Directors, such as independence, financial expertise and age.

Our Corporate Governance Guidelines provide that our Nominating and Corporate Governance Committee is to take into account such factors as geographic, occupational, gender, race and age diversity, among other factors, when identifying possible nominees for Director.  The Committee implements that policy, and assesses its effectiveness, by examining the diversity of all of the Directors on the Board when it selects nominees for Directors.  The Committee has noted that the Directors’ geographic locations, occupations, gender, race and age are reasonably diverse and, therefore, the diversity policy has been effective.  The diversity of Directors is one of the factors that the Nominating and Corporate Governance Committee considers, along with the other selection criteria described above.

The Nominating and Corporate Governance Committee utilizes various resources for identifying nominees for Directors, including, but not limited to, recommendations of our Directors, management and shareholders, the media, industry affiliations, government service and search firms.  The Nominating and Corporate Governance Committee evaluates nominees for Directors by assessing the nominees’ qualities, skills and potential contributions to our Board based on available information, against the qualities, skills and contributions sought and the current composition of our Board.

Academic Committee.  The Academic Committee was discontinued effective April 18, 2011 and held no meetings in 2011.  The members of the Academic Committee in 2011 were James D. Fowler, Jr., Joanna T. Lau, Lloyd G. Waterhouse, Vin Weber and John A. Yena (Chairperson).  Each of the members of the Academic Committee in 2011 was independent, pursuant to our categorical standards of independence and Section 303A.02 of the NYSE Listed Company Manual.

Indemnification Obligations

On November 3, 2010, a complaint in a securities class action lawsuit was filed against us and two of our current executive officers in the United States District Court for the Southern District of New York by the Operating Engineers Construction Industry and Miscellaneous Pension Fund, individually and on behalf of all others similarly situated (the “Securities Litigation”).  On January 21, 2011, the court named the Wyoming Retirement System as the lead plaintiff in the Securities Litigation.  On April 1, 2011, an amended complaint was filed in the Securities Litigation. The amended complaint alleges, among other things, that from October 23, 2008 through August 13, 2010, the defendants violated Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, by misrepresenting our financials and future business prospects, which caused our common stock to trade at artificially inflated prices. The plaintiff seeks, among other things, the designation of this action as a class action, an award of unspecified damages, interest, costs, attorney’s fees, equitable relief and injunctive relief.

On November 12, 2010, a complaint in a shareholder derivative lawsuit was filed against three of our current executive officers and all of our current Directors in the United States District Court for the Southern District of New York by Antonio Cosing, derivatively and on behalf of ITT Educational Services, Inc. (the “Cosing Lawsuit”). The complaint alleges, among other things, that from October 23, 2008 through August 13, 2010, the defendants breached their fiduciary duties to us, abused their ability to control and influence us, grossly mismanaged us, caused us to waste corporate assets and were unjustly enriched, by making false and misleading statements and engaging in fraudulent business practices. The complaint seeks, among other things, unspecified damages, equitable and/or injunctive relief, restitution, disgorgement of profits, benefits and other compensation, an order directing us to reform our corporate governance and internal procedures, costs, disbursements and attorneys’ fees.  On December 14, 2010, the Cosing Lawsuit was consolidated into the Securities Litigation.

On November 22, 2010, another complaint in a shareholder derivative lawsuit was filed against seven of our current officers and all of our current Directors in the United States District Court for the Southern District of Indiana by Roger B. Orensteen, derivatively on behalf of ITT Educational Services, Inc.  The complaint alleges, among other things, that, from January 2008 through August 2010, the defendants violated Sections 10(b) and 20(a) of the Exchange Act, breached their fiduciary duties to us, abused their ability to control and influence us, grossly mismanaged us, caused us to waste corporate assets and were unjustly enriched, by making false and misleading statements and engaging in fraudulent business practices. The complaint seeks, among other things, unspecified damages, restitution, disgorgement of profits, benefits and other compensation, an order directing us to reform our corporate governance and internal procedures, costs, disbursements and attorneys’ fees.
 
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On December 3, 2010, another complaint in a shareholder derivative lawsuit was filed against two of our current executive officers and all of our current Directors in the United States District Court for the Southern District of New York by J. Kent Gregory, derivatively on behalf of ITT Educational Services, Inc. (the “Gregory Lawsuit”). The complaint alleges, among other things, that the defendants breached their fiduciary duties to us, were unjustly enriched by us and misappropriated information about us, by making false and misleading statements and engaging in fraudulent business practices. The complaint seeks, among other things, unspecified damages, restitution, disgorgement of profits, benefits and other compensation, an order directing us to reform our corporate governance and internal procedures, costs, disbursements and attorneys’ fees.  The Gregory Lawsuit was consolidated into the Cosing Lawsuit on December 13, 2010 and further consolidated into the Securities Litigation on December 14, 2010.

The officers named in one or more of the securities class action and shareholder derivative lawsuits described above include: Jeffrey R. Cooper, Clark D. Elwood, Nina F. Esbin, Eugene W. Feichtner, Daniel M. Fitzpatrick, Kevin M. Modany and Martin Van Buren.

Certain of our officers and Directors are or may become a party in certain of the actions described above. Our By-laws and Restated Certificate of Incorporation obligate us to indemnify our officers and Directors to the fullest extent permitted by Delaware law, provided that their conduct complied with certain requirements. We are obligated to advance defense costs to our officers and Directors, subject to the individual’s obligation to repay such amount if it is ultimately determined that the individual was not entitled to indemnification. In addition, our indemnity obligation can, under certain circumstances, include indemnifiable judgments, penalties, fines and amounts paid in settlement in connection with those actions.

PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP TO SERVE AS ITT/ESI’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR ITS FISCAL YEAR ENDING DECEMBER 31, 2012

The Audit Committee of our Board of Directors has appointed PWC to serve as our independent registered public accounting firm for our fiscal year ending December 31, 2012. This firm has audited our financial statements since 1994.  Although shareholder ratification of the selection of PWC to serve as our independent registered public accounting firm is not legally required, our Board of Directors has determined to afford our shareholders the opportunity to express their opinions on the matter of auditors and, accordingly, is submitting to our shareholders at the Annual Meeting a proposal to ratify the Audit Committee’s appointment of PWC. If a majority of the shares represented at the Annual Meeting, in person or by proxy, are not voted in favor of the ratification of the appointment of PWC, the Audit Committee will consider the facts and circumstances surrounding the vote and may reconsider such appointment. Notwithstanding this selection, and the ratification of this selection by our shareholders, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in our best interests.  A representative of PWC is not expected to be present at the meeting.

The Board of Directors recommends a vote FOR the ratification of the appointment of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm for our fiscal year ending December 31, 2012.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Audit Committee Report

The Audit Committee oversees our financial reporting process on behalf of our Board of Directors.  Our management has the primary responsibility for our financial statements and the reporting process, including the system of disclosure controls and procedures and internal control over financial reporting.  PWC, who is our independent registered public accounting firm, is responsible for expressing an opinion on the conformity of our audited financial statements with generally accepted accounting principles.  The Audit Committee has reviewed and discussed with our management and PWC the audited financial statements for our 2011 fiscal year.  The Audit Committee also has reviewed and discussed with our management and PWC our management’s report and PWC’s attestation report on internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

 
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The Audit Committee discussed with PWC the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees (Codification of Statements on Auditing Standards, AU 380), as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T.  This discussion involved certain information relating to PWC’s judgments about the quality, not just the acceptability, of our accounting principles and included such other matters as are required to be discussed with the Audit Committee under standards established by the PCAOB.

The Audit Committee also has received the written disclosures and the letter from PWC required by applicable requirements of the PCAOB regarding PWC’s communications with the Audit Committee concerning independence, and has discussed with PWC its independence from us and our management.  In addition, the Audit Committee considered whether PWC’s independence would be jeopardized by providing non-audit services to us.

Based on the review and discussions referred to above, the Audit Committee recommended to our Board of Directors, and the Board has approved, that the audited financial statements for our 2011 fiscal year be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for filing with the SEC.

Audit Committee
John F. Cozzi
John E. Dean, Chair
Joanna T. Lau
Lloyd G. Waterhouse

Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Exchange Act that may incorporate future filings (including this Proxy Statement, in whole or in part), the preceding Audit Committee Report shall not be incorporated by reference in any such filings.

Audit, Audit-Related, Tax and All Other Fees

The following table sets forth fees for audit services provided by PWC for the audit of our consolidated financial statements for the years ended December 31, 2011 and 2010, and fees billed for other services rendered by PWC during those periods:

Type of Service
 
       2011     .
 
       2010     .
Audit
 
$1,002,000 (1)
 
$927,700 (2)
Audit-Related
 
$182,424 (3)
 
$364,176 (3)
Tax
 
$275,745 (4)
 
$311,409 (4)
All Other
 
$1,800 (5)
 
    $1,800 (5)
_______________________
 
(1)  
Represents fees for the following services associated with the audit or review of our financial statements:
·  
auditing our annual consolidated financial statements for our 2011 fiscal year;
·  
reviewing our consolidated financial statements included in our Quarterly Reports on Form 10-Q which were filed with the SEC in our 2011 fiscal year;
·  
conducting reviews of our internal control over financial reporting and assisting with requirements related to internal control over financial reporting in 2011;
·  
conducting statutory audits (such as federal and state student financial aid compliance audits) for 2011;
·  
conducting an audit of one of our wholly-owned subsidiaries’ separate company financial statements for its 2011 fiscal year; and
·  
providing other audit services in connection with statutory and regulatory filings or engagements for our 2011 fiscal year.
  Those services were rendered in both the 2011 and 2012 calendar years.
(2)  
Represents fees for the following services associated with the audit or review of our financial statements:
·  
auditing our annual consolidated financial statements for our 2010 fiscal year;
·  
reviewing our consolidated financial statements included in our Quarterly Reports on Form 10-Q which were filed with the SEC in our 2010 fiscal year;
·  
conducting reviews of our internal control over financial reporting and assisting with requirements related to internal control over financial reporting in 2010;
·  
conducting statutory audits (such as federal and state student financial aid compliance audits) for 2010;
 
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·  
conducting an audit of one of our wholly-owned subsidiaries’ separate company financial statements for its 2010 fiscal year; and
·  
providing other audit services in connection with statutory and regulatory filings or engagements for our 2010 fiscal year.
  Those services were rendered in both the 2010 and 2011 calendar years.
(3)  
Represents fees for services rendered in the period indicated that were related to the performance of the audit or review of our financial statements and were not reported as Audit services.  The nature of those services included, without limitation:
·  
financial statement audits of our employee benefit plans;
·  
assistance with respect to accounting, financial reporting and disclosure treatment of transactions or events, including:
·  
consultations with us;
·  
assistance with understanding and implementing related final and proposed rules, guidance, standards and interpretations from accounting rulemakers, the SEC and the NYSE; and
·  
helping us assess the actual or potential impact of final or proposed rules, guidance, standards and interpretations from accounting rulemakers, the SEC and the NYSE; and
·  
in 2010, review of SEC comment letters and responses.
(4)  
Represents fees for tax services rendered in the period indicated.  The nature of those services included, without limitation:
·  
the preparation and/or review of original and amended income, franchise and other tax returns with respect to international, federal, state and local tax authorities;
·  
assistance with tax audits and appeals before federal, state and local tax authorities; and
·  
tax advice and assistance related to employee benefit plans and statutory, regulatory or administrative developments, and tax credits and refund opportunities.
(5)  
Represents fees for a subscription to PWC’s accounting research tool.
 
Audit and Non-Audit Services Pre-Approval Policy

The Audit Committee has adopted a policy that sets forth the procedures and conditions pursuant to which services proposed to be performed by our independent registered public accounting firm may be pre-approved by the Audit Committee.  Under the Audit Committee’s policy, unless a type of service has received pre-approval by the Audit Committee without consideration of specific case-by-case services (“general pre-approval”), it requires specific pre-approval by the Audit Committee if it is to be provided by our independent registered public accounting firm.

For both types of pre-approval, the Audit Committee considers whether such services are consistent with the SEC’s rules on auditor independence.  The Audit Committee also considers whether our independent registered public accounting firm is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with our business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance our ability to manage or control risk or improve audit quality.  All such factors are considered as a whole, and no one factor is necessarily determinative.

In deciding whether to pre-approve any audit and non-audit services, the Audit Committee is also mindful of the relationship between fees for audit and non-audit services and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and tax services and the total amount of fees for certain permissible non-audit services classified as all other services.

The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers a different period and states otherwise and except that the pre-approvals related to an audit of our annual consolidated financial statements will last until that audit is completed.  The Audit Committee annually reviews and pre-approves the services that may be provided by our independent registered public accounting firm without obtaining specific pre-approval.  The Audit Committee may add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations.

The policy does not delegate the Audit Committee’s responsibilities to pre-approve services performed by our independent registered public accounting firm to our management.  The Audit Committee may delegate either type of pre-approval authority to one or more of its members.  The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.  The Audit Committee has delegated both types of pre-approval authority to the Chairperson of the Audit Committee with respect to any requests for services to be performed by our independent registered public accounting firm that cannot be delayed without inconvenience until the next scheduled Audit Committee meeting.

 
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Pre-approval fee levels or budgeted amounts for all services to be provided by our independent registered public accounting firm are established annually by the Audit Committee.  Any proposed services exceeding those levels or amounts require specific pre-approval by the Audit Committee.

All requests or applications for services to be provided by our independent registered public accounting firm that do not require specific approval by the Audit Committee are submitted to our Chief Financial Officer and must include a detailed description of the services to be rendered.  Our Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee.

Requests or applications to provide services that require specific approval by the Audit Committee are submitted to the Audit Committee by both our independent registered public accounting firm and Chief Financial Officer.

All of the fees reported in the table above as “Audit,” “Audit-Related,” “Tax” and “All Other” services rendered by PWC in our 2011 and 2010 fiscal years were pre-approved by the Audit Committee.

The annual audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee.  Audit services include all services performed to comply with the PCAOB’s standards, including, without limitation, the annual financial statement audit (including required quarterly reviews), subsidiary audits, equity investment audits and other procedures required to be performed by our independent registered public accounting firm to be able to form an opinion on our consolidated financial statements.  These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit or quarterly review.  Audit services also include services performed in connection with the independent registered public accounting firm’s report on internal control over financial reporting.  The Audit Committee monitors the audit services engagement as necessary and also approves, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, our structure or other items.

In addition to the annual audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval of other audit services, which are those services that our independent registered public accounting firm reasonably can provide.  Other audit services include:

·  
statutory audits (such as federal and state student financial aid compliance audits) or financial audits for our subsidiaries or affiliates;
·  
services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings; and
·  
consultations with our management concerning accounting, financial reporting or treatment of transactions or events.

Any audit services that the Audit Committee generally pre-approves are reflected in the minutes of the Audit Committee meeting at which the services were pre-approved.  All other audit services not reflected in the Audit Committee’s meeting minutes must be specifically approved by the Audit Committee before they are performed.

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the independent registered public accounting firm.  Since the Audit Committee believes that the provision of audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to audit-related services.  Audit-related services include, among others:

·  
due diligence services pertaining to potential business acquisitions or dispositions;
·  
consultations concerning accounting, financial reporting or disclosure treatment of transactions or events not classified as “audit services”;
·  
assistance with understanding and implementing new and proposed accounting and financial reporting guidance from rulemaking authorities;
·  
financial statement audits of employee benefit plans;
·  
assistance with assessing the actual or potential impact of final or proposed rules, standards or interpretations from accounting authorities;
·  
agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters;
·  
attest services not required by statute or regulation;
·  
information systems reviews not performed in connection with the financial statement audit;
 
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·  
subsidiary or equity investee audits not required by statute or regulation that are incremental to the audit of the consolidated financial statements;
·  
review of the effectiveness of the internal audit function;
·  
general assistance with understanding and implementing requirements of SEC rules and stock exchange listing standards; and
·  
consultations and audits in connection with acquisitions.

Any audit-related services that the Audit Committee generally pre-approves are reflected in the minutes of the Audit Committee meeting at which the services were pre-approved.  All other audit-related services not reflected in the Audit Committee’s meeting minutes must be specifically approved by the Audit Committee before they are performed.

Tax services include tax compliance, planning and advice, as well as tax only valuation services, including transfer pricing and cost segregation.  Since the Audit Committee believes that the provision of tax services does not impair our independent registered public accounting firm’s independence, and the SEC has stated that the independent registered public accounting firm may provide such services, the Audit Committee believes it may grant general pre-approval to tax services.  The Audit Committee will not permit the retention of the independent registered public accounting firm in connection with a transaction initially recommended by our independent registered public accounting firm, the sole business purpose of which may be tax avoidance and the tax treatment of which may not be supported in the IRC and related regulations.  The Audit Committee will consult with our Chief Financial Officer or outside counsel to determine that the tax planning and reporting positions are consistent with the policy.

Any tax services that the Audit Committee generally pre-approves are reflected in the minutes of the Audit Committee meeting at which the services were pre-approved.  All tax services not reflected in the Audit Committee’s meeting minutes must be specifically approved by the Audit Committee before they are performed.

The Audit Committee believes, based on the SEC’s rules prohibiting the independent registered public accounting firm from providing specific non-audit services, that other types of non-audit services are permitted.  Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as all other services that it believes are routine and recurring services, would not impair the independence of our independent registered public accounting firm and are consistent with the SEC’s rules on auditor independence.

Any other services that the Audit Committee generally pre-approves are reflected in the minutes of the Audit Committee meeting at which the services were pre-approved.  All other services not reflected in the Audit Committee’s meeting minutes must be specifically approved by the Audit Committee before they are performed.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our executive officers and Directors, and persons who own more than 10% of our common stock, to file reports of ownership with the SEC. These persons also are required to furnish us with copies of all Section 16(a) forms they file.  Based solely on our review of copies of such forms received by us, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that, during 2011, all of our executive officers, Directors and greater than 10% shareholders complied with all applicable filing requirements, except for a gift of our common stock made by Mr. Fowler in 2010 that was reported late on a Form 4 in 2011.

EXECUTIVE OFFICERS

Name
 
Age
 
Position
Kevin M. Modany
 
45
 
Chairman and Chief Executive Officer
Clark D. Elwood
 
51
 
Executive Vice President, Chief Administrative and Legal Officer
Eugene W. Feichtner
 
56
 
Executive Vice President and President, ITT Technical Institute Division
Daniel M. Fitzpatrick
 
52
 
Executive Vice President, Chief Financial Officer
June M. McCormack
 
63
 
Executive Vice President and President, Online Division
Glenn E. Tanner
 
64
 
Executive Vice President, Chief Marketing Officer
Martin Van Buren
 
44
 
Executive Vice President, Chief Information Officer
 
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Kevin M. Modany has served as our Chairman since February 2008 and as our Chief Executive Officer since April 2007.  He also served as our President from April 2005 through March 2009.  From April 2005 through March 2007, Mr. Modany also served as our Chief Operating Officer.  Mr. Modany has been a Director of ours since July 2006.

Clark D. Elwood has served as an Executive Vice President and our Chief Administrative Officer since April 2009 and as our Chief Legal Officer since April 2010.  He served as a Senior Vice President of ours from December 1996 through March 2009, as our Secretary from October 1992 through March 2010, and as our General Counsel from May 1991 through March 2010.

Eugene W. Feichtner has served as an Executive Vice President and as President, ITT Technical Institute Division since April 2009.  He served as our Senior Vice President, Operations from March 2004 through March 2009.

Daniel M. Fitzpatrick has served as our Executive Vice President, Chief Financial Officer since April 2009.  He served as our Senior Vice President, Chief Financial Officer from June 2005 through March 2009.

June M. McCormack has served as an Executive Vice President since April 2009 and as our President, Online Division since May 2008.  Ms. McCormack served as executive vice president, servicing, information technology and sales marketing of SLM Corporation from October 2005 through December 2007.

Glenn E. Tanner has served as our Executive Vice President, Chief Marketing Officer since April 2009.  He served as our Senior Vice President, Marketing from April 2007 through March 2009.  From October 2002 through March 2007, Mr. Tanner served as our Vice President, Marketing.

Martin Van Buren has served as our Executive Vice President, Chief Information Officer since April 2009.  He served as our Senior Vice President, Chief Information Officer from April 2008 through March 2009.  From January 2004 through March 2008, Mr. Van Buren served as our Vice President, Information Technology.
 
PROPOSAL THREE: ADVISORY VOTE TO APPROVE THE COMPENSATION PAID TO ITT/ESI’S NAMED EXECUTIVE OFFICERS, AS DISCLOSED PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC, INCLUDING THE COMPENSATION DISCUSSION AND ANALYSIS, COMPENSATION TABLES AND NARRATIVE DISCUSSION, IN THIS PROXY STATEMENT

We are asking you to approve the compensation paid to our Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, in this Proxy Statement.  This proposal, commonly known as a say-on-pay proposal, gives our shareholders the opportunity to express their views on our executive compensation.  The vote on this say-on-pay proposal is not intended to address any specific element of compensation.  In accordance with the advisory vote conducted at the 2011 Annual Meeting of Shareholders on the frequency of future say-on-pay votes, we are currently conducting say-on-pay votes on an annual basis.  The next advisory vote on the frequency of say-on-pay votes will be conducted no later than the 2017 Annual Meeting of Shareholders.

As discussed in more detail below in the Compensation Discussion and Analysis section of this Proxy Statement, our executive compensation program is designed to attract, retain and motivate skilled executives.  Based on its review of all of the elements of our executive officers’ compensation, the Compensation Committee found that the compensation paid to our executive officers in 2011 was reasonable in light of market practices and effective in fulfilling the Committee’s compensation objectives of competition, alignment with shareholder interests and focus.

In early 2011, the Compensation Committee was required to make changes to our executive compensation program as a result of new Incentive Compensation Regulations (as defined below in the Compensation Discussion and Analysis) affecting our industry.  As a result, while it would prefer to base executive compensation on performance-related metrics, the risk of violating the Incentive Compensation Regulations prevented, and will prevent, the Committee from basing compensation amounts or adjustments on individual or company performance.  The Compensation Committee will continue to monitor the Incentive Compensation Regulations.  If the U.S. Department of Education (the “ED”) provides clear guidance on the scope and breadth of the regulations, the Committee will evaluate once again utilizing performance metrics when awarding executive compensation, to the extent so permitted.

 
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In January 2012, in setting compensation for 2012, our Compensation Committee considered the results of the say-on-pay vote at our 2011 Annual Meeting of Shareholders.  The Committee also considered discussions that our Chairman and Chief Executive Officer had with certain of our shareholders that own a significant percentage of our common stock regarding our executive compensation program and any concerns that such shareholders had related to it.  Our Chairman and Chief Executive Officer was told by some of those shareholders that while they would prefer that we base executive compensation on performance metrics, as we did prior to 2011, they understand that we have concluded that to do so would present a significant risk of violating the Incentive Compensation Regulations.  None of the shareholders that our Chairman and Chief Executive Officer talked to identified any other areas of concern related to our executive compensation program.

Further, the Compensation Committee determined, after consulting with regulatory counsel in late 2011, that it does not believe that the Incentive Compensation Regulations prohibit compensation related to the attainment of management objectives that are not based in any part, directly or indirectly, on activities engaged in at any point in time through the completion of an educational program for the purpose of enrollment of students for any period of time or the award of financial aid to students.  As a result, in January 2012, the Committee established a short-term compensation component for our executive officers that will be payable in early 2013, if certain management objectives are satisfied during 2012.  These management objectives, which are described in more detail in the Compensation Discussion and Analysis section of this Proxy Statement, are not in any way related to the enrollment of students or the award of financial aid.

Accordingly, the Board of Directors recommends that our shareholders vote FOR the following resolution at the Annual Meeting:
 
"Resolved, that the compensation paid to ITT Educational Services, Inc.'s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and narrative discussion in this Proxy Statement, is approved."
 
As an advisory vote, the outcome of the vote on this Proposal Three will not be binding on us, our Board of Directors or our Compensation Committee.  However, as was the case with the results of the say-on-pay vote at the 2011 Annual Meeting of Shareholders, our Compensation Committee will consider the outcome of this year's vote when evaluating our executive compensation principles and practices and making future compensation decisions for our Named Executive Officers.

The Board of Directors recommends a vote FOR the approval of the compensation paid to our Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the Compensation Discussion and Analysis, compensation tables and narrative disclosure, in this Proxy Statement.


COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Compensation Discussion and Analysis

This discussion explains the compensation program for our executives, including the Named Executive Officers.  The individuals included as Named Executive Officers in this Proxy Statement are:

·  
Kevin M. Modany, who served as our Chief Executive Officer during all of 2011;
·  
Daniel M. Fitzpatrick, who served as our Chief Financial Officer during all of 2011; and
·  
Clark D. Elwood, Eugene W. Feichtner and June M. McCormack, who were our three other most highly compensated executive officers during 2011.

This discussion describes the following:

·  
the objectives of our compensation program;
·  
what our compensation program is designed to reward;
·  
each element of compensation;
·  
why we choose to pay each compensation element;
·  
how we determine the amount to pay and, where applicable, the formula with respect to each compensation element;
·  
how each compensation element and our decisions regarding that element relate to our overall compensation objectives and affect our decisions regarding other compensation elements; and
 
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·  
our consideration of the results of the most recent shareholder advisory vote on the compensation of our Named Executive Officers and any related effect on our executive compensation policies and decisions.

Executive Summary.  Our executive compensation program is designed to attract, retain and motivate skilled executives.  Based on its review of all of the elements of our executive officers’ compensation, the Compensation Committee found that the compensation paid to our executive officers in 2011 was reasonable in light of market practices and effective in fulfilling the Committee’s compensation objectives, as described below.  See “—Compensation Objectives.”

In early 2011, the Compensation Committee was required to make changes to our executive compensation program as a result of new regulations affecting our industry.  On October 29, 2010, the ED issued final regulations that severely limit the types of, and bases for awarding, compensation to employees of postsecondary education institutions, like us.  These regulations, commonly referred to as the “Incentive Compensation Regulations,” generally prohibit us from providing any commission, bonus or other incentive payment based in any part, directly or indirectly, upon success in securing student enrollments or the award of financial aid.  The ED has defined this prohibition to include anything of value for services rendered (other than a fixed salary or wage) that is:

·  
based in any part, directly or indirectly, on activities engaged in at any point in time through the completion of an educational program for the purpose of enrollment of students for any period of time or the award of financial aid to students; and
·  
provided to any employee who undertakes recruiting or admitting of students, makes decisions about and awards federal student financial aid, or has responsibility for any such activities.

The limiting language of the Incentive Compensation Regulations is very broad and the ED has not provided sufficient guidance on the breadth or scope of the regulations. As a result, we believe that the Incentive Compensation Regulations can be interpreted to cover all of our employees (including our executive officers) and to prohibit the payment of compensation based on any performance-related metric.  We reached this conclusion after consulting with regulatory counsel and considering that any alternative conclusion would involve a high level of risk for our company.  An institution that is found to be in noncompliance with the Incentive Compensation Regulations could face significant monetary penalties, limitations on its operations and/or termination of its eligibility to participate in all federal student financial aid programs.  The Incentive Compensation Regulations became effective on July 1, 2011.

The Compensation Committee determined that, while it would prefer to continue to base executive compensation on performance metrics, the risk of violating the Incentive Compensation Regulations prevented, and will prevent, the Committee from basing compensation amounts or adjustments on individual or company performance after the July 1, 2011 effective date of the Incentive Compensation Regulations.  The Compensation Committee recognized that, while the short- and long-term performance of both the individual executive officers and us will no longer be used in compensation decisions, such performance will be reviewed by the full Board of Directors when evaluating the continued employment of each executive officer.  The Compensation Committee determined that it would continue to be guided by the following objectives in determining the compensation of our executives: competition, alignment with shareholder interests and focus.

As a result of the prohibition on basing any portion of the executives’ compensation on performance, the Compensation Committee did not establish an annual bonus program for 2011.  Instead, in order to achieve the objectives noted above, the Compensation Committee used the following compensation elements as part of the 2011 executive compensation program, as described in more detail below under “—Compensation Elements”:

·  
base salary;
·  
special bonus;
·  
depending on the executives’ choice as to the form of the award, a grant of stock options that vests over a three-year period and/or restricted stock units (“RSUs”) that vests and settles in shares of our common stock over a three-year period;
·  
a grant of RSUs that vests and settles on the first anniversary of the grant date in cash based on the average of the closing market prices of our common stock over the 20 trading-day period prior to the settlement date;
·  
employee benefits;
·  
perquisites; and
·  
qualified retirement savings.

 
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Compensation Objectives.  The Compensation Committee is guided by the following objectives in determining the compensation of our executives:

·  
Competition.  The Committee believes that compensation should reflect the competitive marketplace in order for us to attract, retain and motivate talented executives.
·  
Alignment with Shareholder Interests. Compensation should include equity-based compensation awards in order to align the executives’ interests with those of our shareholders.
·  
Focus.  The Committee believes that certain elements of compensation should provide some security to our executives to allow them to continue to focus on our financial and operating results, their individual performance and their job responsibilities.

Compensation Elements.  The elements of our compensation program, a description of the purpose of each element and the objectives that each element supports are shown in the table below.  See “– Compensation Objectives.

Compensation Element
 
Purpose
 
Link to Compensation Objectives
Base Salary
 
Fixed cash component used to help us attract, motivate and retain our executives.
 
· Competition
· Focus
         
Special Bonus – 2011
 
Discretionary cash component used to help us motivate and retain our executives.
 
· Competition
· Focus
 
         
Short-Term Compensation – Beginning 2012*
 
 
Variable cash component used to help us motivate and retain our executives.
 
· Competition
· Focus
 
         
Equity-Based Compensation (e.g., Time-Based Stock Options and/or Restricted Stock Unit Awards)
 
Used to promote equity ownership in us by our executives.
 
Aligns the executives’ interests with those of our shareholders.
 
· Competition
· Alignment with Shareholder Interests
· Focus
         
Qualified Retirement Savings (i.e., 401(k) Plan Contributions)
 
Used to help us provide stable compensation and some security to our executives, in order to help them save for retirement on a tax-deferred basis.
 
· Competition
· Focus
         
Nonqualified Deferred Compensation
 
Provided some security to our executives and helped them save a portion of their compensation for retirement on a tax-deferred basis.
 
· Deferrals and contributions are no
   longer made under these plans.
         
Pension Benefits (i.e., Qualified and Nonqualified Retirement Plan Earnings)
 
Allowed executives to focus on their job responsibilities while employed and provided some security upon retirement.
 
· Benefit accruals under our pension
   plans were frozen as of March 31,
   2006.
         
Employee Benefits
 
Provides stable compensation and some security to our executives, in order to allow them to focus on their job responsibilities.
 
· Competition
· Focus
 
         

 
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Perquisites
 
Used to recognize our executives based on their responsibilities.
 
Helps our executives focus on their job responsibilities.
 
· Competition
· Focus
         
Potential Payments Upon Termination of Employment or a Change in Control of Us
 
Provides for payments in connection with a change in control and/or involuntary termination of employment.
 
Provides some security to our executives to help them focus on their job responsibilities and to encourage them to remain employed with us during a critical time of a potential change in control.
 
· Competition
· Alignment with Shareholder Interests
· Focus
____________________
 
*
For more information about the 2012 short-term compensation element, see “—2012 CompensationShort-Term Compensation.”

2011 Compensation

Base Salary.  Salaries provide a necessary element of stability in the total compensation program and, as such, are not subject to variability.  Salaries are set and administered to reflect the value of the job in the marketplace.  In January 2011, the Compensation Committee established the salary levels for the Named Executive Officers, that became effective on March 28, 2011, based on a review of:

·  
individual and company performance;
·  
the base salaries of executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking as described under “—Process for Establishing CompensationBenchmarking”; and
·  
the area and level of job responsibilities of each executive.

The Committee also concluded that, until such time, if any, that the ED provides clear and sufficient guidance regarding performance-based salary adjustments under the Incentive Compensation Regulations, future adjustments to the salary levels of each executive would be based solely on:

·  
the base salaries of executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking;
·  
the area and level of job responsibilities of each executive;
·  
tenure; and
·  
adjustments in the cost of living.

The following table sets forth the annualized base salary information for each of the Named Executive Officers as of March 28, 2011.

Named Executive Officer
 
2011 Annualized
     Base Salary    .
 
Dollar Increase Over
Prior Year
 
Percentage
Increase Over
   Prior Year   .
Kevin M. Modany
 
$788,250
 
$19,250
 
2.5%
Daniel M. Fitzpatrick
 
$332,000
 
$8,000
 
2.5%
Clark D. Elwood
 
$327,000
 
$8,000
 
 2.5%
Eugene W. Feichtner
 
$302,500
 
$7,500
 
2.5%
June M. McCormack
 
$270,000
 
$7,000
 
2.7%

 
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        Special Bonus.  On December 21, 2010, the Compensation Committee approved the payment of a special bonus in cash to each of our executives who was still employed by us on June 27, 2011.  The Committee determined to award the special bonuses in order to help motivate and retain those executives, as well as to recognize their extraordinary efforts during a particularly difficult regulatory and legislative environment affecting us and our industry.  The bonus amounts that were paid to each of the Named Executive Officers on June 29, 2011 were as follows:

 
Named Executive Officer
 
2011 Special Bonus Award
Kevin M. Modany
 
$1,153,500
Daniel M. Fitzpatrick
 
$324,000
Clark D. Elwood
 
$319,000
Eugene W. Feichtner
 
$295,000
June M. McCormack
 
$263,000

Annual Bonus Awards.  Prior to 2011, the Compensation Committee established annual bonus parameters intended to serve as an incentive for our executives to achieve performance targets established by the Committee for that year.  As previously discussed, in January 2011, the Compensation Committee determined that it would no longer base executive compensation on performance metrics, due to the Incentive Compensation Regulations.  As a result, the Committee did not establish an annual bonus award component of executive compensation for 2011.

Equity-Based Compensation.  The Compensation Committee believes that equity-based compensation should be a major component of the total compensation for executives. The Committee believes that the use of our common stock in the payment of compensation enhances our executives’ commitment to our company over the long-term, because the value of equity-based compensation awards, such as time-based stock options, restricted stock and RSUs, helps align the executives’ interests with those of our shareholders.  The type and value of the equity-based compensation awards vary based on the executive’s level and type of responsibilities.

In January 2011, the Compensation Committee reviewed the forms of equity awards made to executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking.  The comparator data indicated that a number of companies grant equity-based compensation in a combination of forms, primarily both stock options and RSUs (or restricted stock).  As a result, the Compensation Committee decided that it would add RSUs as one of the forms of equity compensation that it would grant to our senior executives in 2011.  The Committee also decided to provide our senior executives with a choice among stock options, RSUs or a combination thereof.

To determine the amounts to be awarded under this equity-based grant, the Committee reviewed the amount of the equity awards granted in the previous five years to executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking, and calculated the average percentage that those awards bore to the applicable company’s outstanding common shares.  The Committee utilized that information to determine the upper quartile range of peer practices based on the percentage of common stock outstanding.  See “—Process for Establishing CompensationBenchmarking.”  For each executive, the Compensation Committee then set within that range the number of shares that would be included in the award if it consisted entirely of a stock option based on the executive’s individual performance in 2010 and, for all executives other than our Chief Executive Officer, the recommendation of our Chief Executive Officer.  The Compensation Committee used a binomial option pricing model to determine the fair value of such stock options.  Each executive was permitted to choose stock options, RSUs or a combination thereof in 25% increments that, combined, equaled the binomial option pricing model fair value applicable to that executive.  The number of RSUs to be included in the award were then calculated by dividing the portion of the fair value elected to be received by the executive in the form of RSUs by the closing market price of our common stock on the date of grant.

The following table sets forth information about the stock options and RSUs that were granted under the 2006 ITT Educational Services, Inc. Equity Compensation Plan (“2006 Equity Compensation Plan”) effective January 27, 2011 to each Named Executive Officer based on his or her election as described above.

 
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Stock Options
 
RSUs
       
 
 
Named Executive Officer
 
Number of Securities Underlying Option Granted
 
Exercise Price
 
Expiration Date
 
Number of RSUs
 
Form of Settlement
 
Grant Date (1)
 
Date Compensation Committee Took Action (2)
Kevin M. Modany
 
125,000 (3)
 
$69.43
 
01/27/18
 
N/A (4)
 
N/A (4)
 
01/27/11
 
01/17/11
Daniel M. Fitzpatrick
 
16,500 (3)
 
$69.43
 
01/27/18
 
2,380 (5)
 
Common Stock (6)
 
01/27/11
 
01/17/11
Clark D. Elwood
 
N/A (7)
 
N/A (7)
 
N/A (7)
 
9,519 (5)
 
Common Stock (6)
 
01/27/11
 
01/17/11
Eugene W. Feichtner
 
10,000 (3)
 
$69.43
 
01/27/18
 
4,327 (5)
 
Common Stock (6)
 
01/27/11
 
01/17/11
June M. McCormack
 
N/A (7)
 
N/A (7)
 
N/A (7)
 
8,654 (5)
 
Common Stock (6)
 
01/27/11
 
01/17/11
____________________
 
(1)
The effective date of the stock option and RSU grants.
 
(2)
The stock option and RSU grants were approved by the Compensation Committee during a Committee meeting on January 17, 2011, and had an effective grant date of January 27, 2011, which was the fifth business day following the date we publicly disclosed our financial and operating results for the fiscal quarter and year ended December 31, 2010.
 
(3)
Nonqualified stock option granted at 100% of the closing market price of a share of our common stock on January 27, 2011, the effective date of the grant.  One-third of the option is exercisable on the anniversary date of the grant in each of the years 2012, 2013 and 2014.
 
(4)
Not applicable.  The Named Executive Officer did not elect to receive any portion of this award in the form of RSUs.
 
(5)
The period of restriction for this RSU grant lapses in thirds on the anniversary date of the grant in each of the years 2012, 2013 and 2014.
 
(6)
Each RSU in the group of RSUs for which the period of restriction lapses will be settled on the last day of that period of restriction and will be paid as soon as administratively practicable thereafter by the delivery of one share of our common stock.
 
(7)
Not applicable.  The Named Executive Officer did not elect to receive any portion of this award in the form of stock options.

In January 2011, the Compensation Committee also authorized a separate grant of RSUs to our executives effective January 27, 2011, which RSUs settled in cash on the first anniversary of the grant date of the RSUs.  The Committee chose this additional form of equity-based compensation because it contributes to the cash component of the total direct compensation of our executives, while at the same time helps to align our executives’ interests with those of our shareholders.  The following table sets forth information about these RSUs that were granted to the Named Executive Officers.

Named Executive Officer
 
Number of RSUs
 
Form of Settlement
 
Grant Date (1)
 
Date Compensation Committee Took Action (2)
Kevin M. Modany
 
11,354 (3)
 
Cash (4)
 
01/27/11
 
01/17/11
Daniel M. Fitzpatrick
 
3,109 (3)
 
Cash (4)
 
01/27/11
 
01/17/11
Clark D. Elwood
 
3,062 (3)
 
Cash (4)
 
01/27/11
 
01/17/11
Eugene W. Feichtner
 
2,615 (3)
 
Cash (4)
 
01/27/11
 
01/17/11
June M. McCormack
 
2,334 (3)
 
Cash (4)
 
01/27/11
 
01/17/11
____________________
 
(1)
The effective date of the RSU grant.
 
(2)
The RSU grants were approved by the Compensation Committee during a Committee meeting on January 17, 2011, and had an effective grant date of January 27, 2011, which was the fifth business day following the date we publicly disclosed our financial and operating results for the fiscal quarter and year ended December 31, 2010.
 
(3)
The period of restriction for this RSU grant lapsed on January 27, 2012.
 
(4)
These RSUs settled on the last day of the period of restriction and were paid as soon as administratively practicable thereafter in cash in an amount equal to $62.79 for each RSU, which was the average of the closing market prices of our common stock over the 20 trading day period prior to the settlement date.

 
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2012 Compensation

Base Salary.  In January 2012, the Compensation Committee established the salary levels for the Named Executive Officers, that became effective on February 13, 2012, based on a review of:

·  
the base salaries of executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking;
·  
the area and level of job responsibilities of each executive; and
·  
inflationary factors.

The following table sets forth the annualized base salary information for each of the Named Executive Officers as of February 13, 2012.

Named Executive Officer
 
2012 Annualized
     Base Salary    .
 
Dollar Increase Over
Prior Year
 
Percentage
Increase Over
   Prior Year   .
Kevin M. Modany
 
$788,250
 
$0
 
0%
Daniel M. Fitzpatrick
 
$335,320
 
$3,320
 
1%
Clark D. Elwood
 
$330,270
 
$3,270
 
1%
Eugene W. Feichtner
 
$305,525
 
$3,025
 
1%
June M. McCormack
 
$272,700
 
$2,700
 
1%

Short-Term Compensation.  In January 2012, the Compensation Committee established a short-term compensation element for our executive officers that will be payable in early 2013, if certain management objectives (the “2012 Management Objectives”) are accomplished during 2012.  The Committee determined, after consulting with regulatory counsel in late 2011, that the Incentive Compensation Regulations do not prohibit compensation related to the attainment of management objectives that are not based in any part, directly or indirectly, on activities engaged in at any point in time through the completion of an educational program for the purpose of enrollment of students for any period of time or the award of financial aid to students.  The 2012 Management Objectives are not in any way related to the enrollment of students or the award of financial aid.  Instead, the 2012 Management Objectives consist of various business objectives that relate to certain initiatives that are part of our strategic plan.  The 2012 Management Objectives include:

·  
develop and implement a new learning technology application;
·  
design, develop and implement modifications and enhancements to the comprehensive model for assessment of student learning;
·  
reach all 2012 curriculum development and design milestones by certain dates;
·  
successfully execute the 2012 advertising and marketing strategy;
·  
obtain the requisite regulatory authorizations consistent with the 2012 operating plan;
·  
execute corporate development initiatives identified in our strategic plan;
·  
reach all 2012 milestones for an updated student information system by certain dates; and
·  
compile student and employer satisfaction data that demonstrate anticipated levels of satisfaction.

The determination of whether the 2012 Management Objectives are accomplished by our executive officers will be made by the Compensation Committee in early 2013.  The Committee intends to assign five points to each 2012 Management Objective that it determines was accomplished.  The following table sets forth the maximum short-term compensation percentage that is associated with the aggregate number of points assigned to the 2012 Management Objectives that the Compensation Committee determines were accomplished in 2012:

 
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Aggregate
Number of Points
 
Maximum Short-Term
Compensation Percentage
40
 
200.0%
35
 
175.0%
30
 
150.0%
25
 
125.0%
20
 
100.0%
15
 
75.0%
10
 
50.0%
 5
 
25.0%

To determine the maximum short-term compensation amount that an executive officer may receive, the maximum short-term compensation percentage (determined as described above) will be multiplied by a standard short-term compensation percentage of annualized base salary as of December 31, 2012, ranging from 32% to 100%, with the percentage depending on the officer’s position, and the result will be multiplied by the officer’s annualized base salary.  The following table sets forth the 2012 standard short-term compensation percentage of annualized base salary as of December 31, 2012 for each of the Named Executive Officers:

 
 
Named Executive Officer
 
2012 Standard Short-
Term Compensation Percentage of
Annualized Base Salary
Kevin M. Modany
 
100%
Daniel M. Fitzpatrick
 
65%
Clark D. Elwood
 
65%
Eugene W. Feichtner
 
60%
June M. McCormack
 
60%

An executive officer’s actual short-term compensation payment, however, may be more or less than the officer’s potential short-term compensation as calculated as described above.  An executive officer’s actual short-term compensation amount will be based on the Compensation Committee’s discretionary assessment of the officer’s individual contribution toward accomplishing each 2012 Management Objective.  Any 2012 short-term compensation payment will be made in cash.  The Compensation Committee may, in its sole discretion, modify the terms of the short-term compensation element at any time before it is paid.

Equity-Based Compensation.  In January 2012, the Compensation Committee reviewed the amount of the equity awards granted in the previous five years to executives in the same or similar positions at the comparator companies that the Committee uses for benchmarking, and calculated the average percentage that those awards bore to the applicable company’s outstanding common shares.  The Committee utilized that information to determine the upper quartile range of peer practices based on the percentage of common stock outstanding.  See “—Process for Establishing CompensationBenchmarking.”  For each executive, the Compensation Committee then set within that range the number of shares that would be included in the award if it consisted entirely of a stock option based on the executive’s level and type of responsibilities.  The Compensation Committee used a binomial option pricing model to determine the fair value of such stock options, and each executive received one-half of the fair value applicable to that executive in the form of stock options and the other half of that value in RSUs.  The number of RSUs to be included in the award were then calculated by dividing the portion of the fair value received by the executive in the form of RSUs by the closing market price of our common stock on the date of grant.

The Compensation Committee reviewed the equity-based compensation granted to our executive officers prior to 2011.  The Committee recognized that the market price of our common stock has significantly declined in recent periods.  The Committee believes that such stock price decline was caused by outside forces unrelated to our operating and financial results prior to 2011 that were primarily regulatory and legislative in nature.  As a result of the decline in our stock price, a significant portion of the stock options held by our executive officers have an exercise price that exceeds the current market price of our common stock (“Underwater”), which has substantially eroded the value of those stock options.  The Compensation Committee also consulted with Farient about the reasonableness of providing a supplemental award to our executive officers that would relate to a portion of the intended value of the Underwater stock options.  Following extensive review and discussion, the Committee determined that it would make a supplemental grant of RSUs to our executive officers in order to provide those officers with a portion of the unrealized value that the Committee originally intended to provide to those officers through the award of the stock options that are Underwater (the “Supplemental Grant”).  The Committee decided that the value of the Supplemental Grant to each executive officer would be equal to 50% of the fair value (calculated as of December 31, 2011 using a binomial pricing model) of all outstanding stock options awarded prior to 2011 to that executive officer that were Underwater as of January 23, 2012 (the “Value”).  The Compensation Committee determined, based on Farient’s analysis, that the Value represented a conservative and reasonable portion of the unrealized value of those stock option awards.

 
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The Value was divided by the closing market price of our common stock on the effective date of the Supplemental Grant to determine the number of RSUs in the grant.  In addition, in order to provide a means for retaining our executive officers, the Compensation Committee determined that the Supplemental Grant would not vest until the third anniversary of the effective date of the Supplemental Grant.

The following table sets forth information about the stock options and RSUs that were granted under the 2006 Equity Compensation Plan effective February 13, 2012 to each Named Executive Officer as described above.

   
Stock Options
 
RSUs
       
Named Executive Officer
 
Number of Securities Underlying Option Granted
 
Exercise Price
 
Expiration Date
 
Number of RSUs in Annual Grant
 
Number of RSUs in Supplemental Grant
 
Grant Date (1)
 
Date Compensation Committee Took Action (2)
Kevin M. Modany
 
62,500 (3)
 
$75.16
 
02/13/19
 
21,796 (4)
 
44,229 (5)
 
02/13/12
 
01/23/12
Daniel M. Fitzpatrick
 
11,000 (3)
 
$75.16
 
02/13/19
 
3,836 (4)
 
8,545 (5)
 
02/13/12
 
01/23/12
Clark D. Elwood
 
11,000 (3)
 
$75.16
 
02/13/19
 
3,836 (4)
 
7,807 (5)
 
02/13/12
 
01/23/12
Eugene W. Feichtner
 
10,000 (3)
 
$75.16
 
02/13/19
 
3,488 (4)
 
7,780 (5)
 
02/13/12
 
01/23/12
June M. McCormack
 
10,000 (3)
 
$75.16
 
02/13/19
 
3,488 (4)
 
6,421 (5)
 
02/13/12
 
01/23/12
____________________
 
(1)
The effective date of the stock option and RSU grants.
 
(2)
The stock option and RSU grants were approved by the Compensation Committee during a Committee meeting on January 23, 2012, and had an effective grant date of February 13, 2012.
 
(3)
Nonqualified stock option granted at 100% of the closing market price of a share of our common stock on February 13, 2012, the effective date of the grant.  One-third of the option is exercisable on the anniversary date of the grant in each of the years 2013, 2014 and 2015.
 
(4)
The period of restriction for this RSU grant lapses in thirds on the anniversary date of the grant in each of the years 2013, 2014 and 2015.
 
(5)
The period of restriction for this RSU grant lapses in full on February 13, 2015.

Other Elements of Compensation

Retirement Plans

Qualified Retirement Savings.  Our executives participate in our ESI 401(k) Plan, a qualified defined contribution plan, that is designed to provide substantially all of our employees with a tax-deferred, long-term savings vehicle.  See “– Equity Compensation and Qualified Savings Plans – ESI 401(k) Plan.”

Nonqualified Deferred Compensation.  Due to federal limitations that preclude our highly-compensated employees from fully participating in the ESI 401(k) Plan, we established the ESI Excess Savings Plan, an unfunded, nonqualified deferred compensation plan for a select group of our management, including the Named Executive Officers.  We froze the ESI Excess Savings Plan, effective for plan years beginning on and after January 1, 2008, such that executives may no longer make elective deferrals and we no longer make contributions under the ESI Excess Savings Plan.  Amounts previously credited to an executive under the ESI Excess Savings Plan, however, continue to accrue interest in accordance with the terms of the ESI Excess Savings Plan until those amounts are distributed pursuant to the plan’s terms.  See “– Nonqualified Deferred Compensation Plans – ESI Excess Savings Plan.”


 
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In addition, we established the ESI Executive Deferred Bonus Compensation Plan (the “Deferred Bonus Plan”), an unfunded, nonqualified deferred compensation plan, for a select group of our management and highly-compensated employees, including the Named Executive Officers.  The Deferred Bonus Plan allows eligible employees to defer payment of all or a portion of his or her annual bonus compensation and to earn interest on any annual bonus compensation payable in the form of cash and deferred under the plan.  Since the Committee did not establish an annual bonus award component of executive compensation for 2011, executives did not receive any compensation that they could elect to defer under the Deferred Bonus Plan with respect to 2011.  See “– Nonqualified Deferred Compensation Plans – Deferred Bonus Plan.”

The terms of the ESI Excess Savings Plan and the Deferred Bonus Plan, including the interest rate on the earnings on the Named Executive Officers’ account balances under each plan, are based on common and typical terms and types of nonqualified deferred compensation plans that had been adopted by other publicly traded companies at the time that we adopted those plans.

Pension Benefits.  Pension benefits provide retirement compensation that is based on the salary and bonus compensation paid to the employee during his or her employment.  We froze the benefit accruals under the ESI Pension Plan and ESI Excess Pension Plan for all participants in the plans on March 31, 2006, such that no further benefits accrue under those plans after March 31, 2006.  Participants do, however, continue to be credited with vesting service and interest credits according to the terms of those plans.  See “– Pension Plans – ESI Pension Plan” and “– ESI Excess Pension Plan.”

Employee Benefits and Perquisites

Employee Benefits. All of our executives are eligible to participate in our employee benefits, which include medical and dental benefits, vision insurance, flexible spending account, tuition reimbursement, disability insurance, vacation leave, sick leave, bereavement leave, ITT Technical Institute tuition discounts and an employee assistance program that can help employees find answers to various kinds of personal concerns by offering consultation, support, information, planning and referrals.  The employee benefits are generally available on a non-discriminatory basis to all full-time and part-time regular employees.

Perquisites.  We also provide limited perquisites to our executives, including the Named Executive Officers, that vary based on the executive’s level.  The perquisites include use of a company car for our Chief Executive Officer only, a tax return preparation and financial planning allowance, tickets to sporting, theater and other events, enhanced disability benefits, an annual physical examination and relocation assistance for newly-hired executive officers from outside the Indianapolis metropolitan area whom we ask to relocate.  The value and type of perquisites made available to our executives are based on the value and type of perquisites that had been made available to executives at other publicly-traded companies at the time that we began making those perquisites available, and at the time of each subsequent annual review by the Compensation Committee of those perquisites.  The Compensation Committee believes that our executives value the perquisites provided to them and, given that the cost to us of the perquisites is not significant, the Committee has determined to continue providing these perquisites to our executives.

The perquisites that we provided to our Named Executive Officers in 2011 are disclosed in the Summary Compensation Table and footnotes thereto in this Proxy Statement.  See “– Summary Compensation Table.”  In January 2012, the Compensation Committee approved the value and type of perquisites to be provided in 2012 to the Named Executive Officers, which are consistent with the value and type of perquisites provided to them in 2011.  The aggregate incremental cost to us in 2012 for providing all of the 2012 perquisites to the Named Executive Officers is not expected to exceed $125,000.

Potential Payments Upon Termination of Employment or a Change In Control of Us

Senior Executive Severance Plan.  Our executive officers, including the Named Executive Officers, participate in the ITT Educational Services, Inc. Senior Executive Severance Plan (the “Senior Executive Severance Plan”), which provides for severance benefits if:

·  
we terminate the executive’s employment, other than for cause, or when the executive terminates his or her employment for good reason, in each case within two years after the occurrence of a change in control of us; or
·  
we terminate the executive’s employment, other than for cause, if a change in control of us is imminent.


 
-27-

 

The benefits vary depending on the executive’s level and include, among other things, two or three times the executive’s base salary and bonus and a stipend equal to two or three times the annual cost of certain employee benefits.  See “– Potential Payments Upon Termination or Change in Control – Senior Executive Severance Plan.”

The Compensation Committee believes that a change in control transaction, or potential change in control transaction, would create uncertainty regarding the continued employment of our executives.  This is because many change in control transactions result in significant organizational changes, particularly at the senior executive level.  In order to encourage our executives to remain employed with us during an important time when their continued employment in connection with or following a transaction is often uncertain and to help keep our executives focused on our business rather than on their personal financial security, we believe that providing certain of our executives with severance benefits upon the specified terminations of employment is in the best interests of our company and our shareholders.

The benefits under the Senior Executive Severance Plan are not payable merely because a change in control transaction occurs or is imminent.  Instead, payment of the severance benefits is only triggered if a change in control has occurred or is imminent and certain types of termination of employment occur within certain limited time periods.  The Compensation Committee has determined that this “double trigger” requirement is appropriate and reasonable.

If benefits are triggered under the Senior Executive Severance Plan, our Chief Executive Officer would be entitled to payments under the “three times” multiplier and the other covered executives would be entitled to payments under the “two times” multiplier.  Our Chief Executive Officer would also be entitled to certain benefits that would not be available to the other covered executives, including that our Chief Executive Officer would receive a tax gross-up payment on any excise taxes and that his severance benefits would not be limited in the event of the imposition of an excise tax.  The Compensation Committee believes that our Chief Executive Officer should receive the higher multiplier and the enhanced benefits given his high level of responsibility and the substantial duties that he has with us, as well as the fact that it is common market practice for a chief executive officer to receive a higher level of severance benefits than other executive officers.

The amount and type of severance pay made available to our executive officers are based on common and typical amounts and types of severance pay that were made available to executives by other publicly-traded companies at the time that these benefits were determined.

Other Plans.  In addition, awards granted under our equity compensation plans and all or a portion of the contributions, benefits and earnings under our qualified savings plan, nonqualified deferred compensation plans and pension plans may vest and/or become payable to the participating employees, including the Named Executive Officers, if the participating employee’s employment terminates in certain situations or we undergo a change in control.  See “– Potential Payments Upon Termination or Change In Control.”  The accelerated vesting and payments are useful in providing security to our executives and helps them to focus on their job responsibilities, instead of the safety of compensation that they have previously been awarded or paid.  Further, the accelerated vesting of equity compensation awards upon a change in control:

·  
provides employees with the same opportunities as shareholders, who are free to sell their equity at the time of the change in control event and thereby realize the value created at the time of the transaction;
·  
ensures that employees do not have the fate of their outstanding equity tied to the future success of the new and different company that results from the change in control;
·  
can be a strong retention device during change in control discussions, particularly for those employees whose equity represents a significant portion of their total pay package; and
·  
treats all employees the same regardless of their employment status after the transaction.

Process for Establishing Compensation.  The Compensation Committee of our Board of Directors has overall responsibility and authority for approving and evaluating the compensation programs and policies pertaining to our executives and Directors.  Each year, the Compensation Committee reviews all elements of all of our executive officers’ compensation and the internal pay equity of our Chief Executive Officer’s compensation compared to our other executive officers’ compensation.  The Compensation Committee also annually reviews the tally of total compensation of our executives in order to determine that the amount of compensation is within appropriate competitive parameters.  The tally information is not, however, a key factor in the Committee’s current compensation decisions, because the tally information is reflective of past competitive market practice.

The Compensation Committee has met, and will continue to meet, in executive sessions which are not attended by any of our employees.  The Committee regularly reports its activities to our Board of Directors.

 
-28-

 
When making executive compensation decisions, the Compensation Committee also considers, for all executives other than our Chief Executive Officer, the recommendation of our Chief Executive Officer.  Our Chief Executive Officer recommends salary levels, equity-based compensation awards and perquisites for our other executives based on their salary grade level.  Our Chief Executive Officer’s compensation is determined solely by the Compensation Committee with the assistance of the Committee’s independent compensation consultant.  The Compensation Committee applies the same principles for executive compensation in determining our Chief Executive Officer’s compensation that it applies in determining the compensation of our other executive officers.  The Compensation Committee has established a higher level of compensation for our Chief Executive Officer than the levels for our other executive officers, due to:

·  
the high level of responsibility that he has with us;
·  
the substantial duties and responsibilities that he has to us; and
·  
the fact that the market and comparator compensation information demonstrates higher levels of compensation for chief executive officers both within and outside of our industry.

Independent Compensation Consultant.  The Compensation Committee directly retains a consultant from an independent compensation consulting firm to provide advice on aspects of our executive and Director compensation programs. The Committee requests written reports and holds meetings with the consultant, which are not attended by any of our employees, in order to obtain independent opinions on compensation proposals.  The independent compensation consultant helps the Committee determine the amount and, where applicable, the formula for each element of the compensation program for each executive.  The independent compensation consultant also assists the Committee in selecting the companies used for benchmarking and comparison purposes.  The Compensation Committee retained the independent compensation consulting firm Farient Advisors LLC (“Farient”) to advise it on 2011 and 2012 compensation determinations.  For additional information about the role of Farient, see “Proposal One: Election of Three Directors to Serve Until the 2015 Annual Meeting of Shareholders and Until Their Successors are Elected and have Qualified – Meetings, Independence, Leadership and Committees of the Board of Directors – Committees – Compensation Committee.”

Determinations.  In determining and recommending the compensation of our executives, the Compensation Committee consults with Farient and, along with our Chief Executive Officer, makes assessments after deliberate and thorough review and consideration of various factors.  In 2011, these factors included:

·  
the competitive marketplace and, in particular, how the level of an executive’s compensation compares with the compensation paid to executives in the same or similar positions and with similar responsibilities at comparator companies; and
·  
the level and area of job responsibilities of the executive.

In 2012, the factors considered were not performance-related and included:

·  
the competitive marketplace and, in particular, how the level of an executive’s compensation compares with the compensation paid to executives in the same or similar positions and with similar responsibilities at comparator companies;
·  
the level and area of job responsibilities of the executive; and
·  
inflationary factors.

The Compensation Committee met in executive session in January 2011 to review the overall performance of our Chief Executive Officer during 2010, particularly with respect to our long range strategies and the achievement of both financial and non-financial goals and objectives.  Consideration was given to our Chief Executive Officer’s extraordinary efforts during a particularly difficult regulatory and legislative environment affecting us and our industry.  The Compensation Committee also met with our Chief Executive Officer to review the overall performance of the other Named Executive Officers during 2010.  The Committee reviewed a tally of the total compensation received by each of the executive officers in 2010 and information from Farient.  In order to avoid violating the Incentive Compensation Regulations, the Compensation Committee determined that, after the July 1, 2011 effective date of the regulations, it would no longer take into account performance-related factors when awarding compensation.  The Compensation Committee decided, however, that it would reexamine its determination with respect to considering performance-related factors when awarding compensation, if and when the ED provides clear and sufficient guidance on the breadth and scope of the Incentive Compensation Regulations.

 
-29-

 
The Compensation Committee met in executive session in January 2012 to review a tally of the total compensation received by each of the executive officers in 2011 and information provided by Farient.  The Committee reviewed guidance on the Incentive Compensation Regulations published by the ED in 2011 and noted that such guidance further increases the uncertainty about the types of compensation that are prohibited and which activities and employees are covered by the Incentive Compensation Regulations.  As a result, the Compensation Committee determined that, while it would prefer to base executive compensation on performance metrics, the high level of risk related to violating the Incentive Compensation Regulations prevented it from doing so.

In January 2012, our Compensation Committee considered the fact that, at the 2011 Annual Meeting of Shareholders, our shareholders approved the compensation paid to our Named Executive Officers as disclosed in the Proxy Statement for our 2011 Annual Meeting, but that the votes cast for that advisory proposal totaled approximately 55% of the shares represented at the 2011 Annual Meeting.  The Committee considered discussions that our Chairman and Chief Executive Officer had with certain of our shareholders that own a significant percentage of our common stock regarding our executive compensation program and any concerns that such shareholders had related to it.  Our Chairman and Chief Executive Officer was told by some of those shareholders that while they would prefer that we base executive compensation on performance metrics, as we did prior to 2011, they understand that we have concluded that to do so would present a significant risk of violating the Incentive Compensation Regulations.  Despite understanding these limitations on our executive compensation program, some of those shareholders were required to follow formulaic internal or external voting guidelines and, therefore, may have been forced to cast a vote against our executive compensation proposal when otherwise they may not have.  None of the shareholders that our Chairman and Chief Executive Officer talked to identified any other areas of concern related to our executive compensation program.  The Compensation Committee considered the feedback received from these shareholders and reiterated that it too would prefer to include performance-based metrics in our executive compensation program, but that the risk of violating the Incentive Compensation Regulations is too high.  As a result, the Committee is not able to make changes to the program at this time to address concerns related to the lack of performance-based metrics.  The Committee noted that it continues to monitor the ED for any guidance that might reduce the risk of certain types of performance-based compensation violating the Incentive Compensation Regulations.

Further, the Compensation Committee also determined, after consulting with regulatory counsel in late 2011, that it does not believe the Incentive Compensation Regulations prohibit compensation related to the attainment of management objectives that are not based in any part, directly or indirectly, on activities engaged in at any point in time through the completion of an educational program for the purpose of enrollment of students for any period of time or the award of financial aid to students.  As a result, in January 2012, the Committee established a short-term compensation component for our executive officers that will be payable in early 2013, if certain management objectives are satisfied during 2012.  Such management objectives are not in any way related to the enrollment of students or the award of financial aid.  See “—Compensation Elements—2012 CompensationShort-Term Compensation.”

Equity-Based Compensation.  The Compensation Committee is responsible for determining equity-based compensation paid to our executives.  All equity-based compensation awards to our executives at the Senior Vice President level and above are granted exclusively by our Compensation Committee.  The Compensation Committee has delegated limited authority to our Chief Executive Officer to grant equity-based compensation awards to our newly-hired executives below the Senior Vice President level and other key employees.

Equity-based compensation is granted to our executives and other key employees under the following circumstances:

·  
the Compensation Committee has typically made grants to our executives and other key employees annually during its first regularly scheduled meeting of the calendar year, which grants become effective prospectively, after the public disclosure of our financial and operating results for our prior fiscal year;
·  
the Compensation Committee has typically made grants to our newly-hired executives at the Senior Vice President level and above at a Committee meeting occurring either:
·  
prior to the date that the executive’s employment with us begins, in which case the effective date of the grant is typically the executive’s first day of employment with us but, if the markets are closed on that day, is the next subsequent day that the markets are open; or
·  
after the executive’s employment with us begins, in which case the effective date of the grant is the date of the Committee meeting or a subsequent date specified by the Committee at its meeting; and
·  
pursuant to authority delegated to him by the Compensation Committee, our Chief Executive Officer typically grants equity-based compensation to our newly-hired executives below the Senior Vice President level and other key employees on the newly-hired employee’s first day of employment with us.

 
-30-

 
In each of the above circumstances, the exercise price of any stock option granted is the closing market price of a share of our common stock on the effective date of the stock option grant.  In addition, the number of any RSUs or shares of restricted stock is based on the closing market price of a share of our common stock on the effective date of the RSU or restricted stock grant.

We do not time our release of material non-public information for the purpose of affecting the value of our executives’ compensation, nor do we time our grants of equity-based compensation to take advantage of material non-public information.  Nevertheless, our process for granting equity-based compensation (as described above) may result in equity-based compensation, including stock options, being granted to our executives and other key employees at times when our Board of Directors or the Compensation Committee is in possession of material non-public information about us.  This possibility is not taken into account in determining whether to make the equity-based compensation awards or the amount or value of those awards.

Benchmarking.  The Compensation Committee believes that compensation decisions are complex and should be made after a review of the compensation levels paid to executives in the same or similar positions at other comparator companies.

In setting and administering the compensation program and policies for our executives, the Committee attempts to target:

·  
the cash portion of the compensation of our executives to the median of the range of the cash compensation provided to executives of comparator companies, based on the dollar amount of such compensation; and
·  
the equity-based compensation of our executives to the upper quarter of the range of equity-based compensation provided to executives of comparator companies, based on the number of shares awarded as a percentage of the number of shares outstanding.

This is intended to result in targeting the overall total direct compensation of our executives to the upper third of the range of compensation provided to executives of comparator companies.  The upper third of the range is targeted in order to attract and retain a higher than average level of executive.

The companies used for the comparisons vary from time to time.  For 2011 compensation determinations, the Compensation Committee benchmarked the appropriateness and competitiveness of our executive compensation program against a market composite that consisted of 13 companies in our industry and broad market surveys of companies with annual revenues of between $1.0 billion and $2.5 billion, adjusted for an industry premium.  The 13 companies in our industry that were used include:

· 
American Public Education, Inc.;
 
· 
Education Management Corporation;
· 
Apollo Group, Inc.;
 
· 
Grand Canyon Education, Inc.;
· 
Bridgepoint Education, Inc.;
 
· 
Learning Tree International, Inc.;
· 
Capella Education Company;
 
· 
Lincoln Educational Services Corporation;
· 
Career Education Corp.;
 
· 
Strayer Education, Inc.; and
· 
Corinthian Colleges, Inc.;
 
· 
Universal Technical Institute, Inc.
· 
DeVry, Inc.;
     

For 2011 compensation determinations, the Compensation Committee also reviewed compensation information of 20 high performing companies in the consumer discretionary and healthcare services and facilities industries with similar size, growth, margin and capital efficiency characteristics as us, excluding companies with very different business models.  The Committee did not benchmark our 2011 executive compensation against those companies, but instead used such information as a second check of the industry-specific data to ensure relevance.  The 20 companies that were used include:

· 
Aeropostale, Inc.;
 
· 
John Wiley & Sons, Inc.;
· 
Amedisys, Inc.;
 
· 
Life Time Fitness, Inc.;
· 
AmSurg Corp.;
 
· 
MEDNAX, Inc.;
· 
The Buckle, Inc.;
 
· 
Morningstar, Inc.;
· 
Chipotle Mexican Grill, Inc.;
 
· 
O’Reilly Automotive, Inc.;
· 
Choice Hotels International, Inc.;
 
· 
Priceline.com Incorporated;
· 
Deckers Outdoor Corporation;
 
· 
Scripps Networks Interactive, Inc.;
· 
Guess?, Inc.;
 
· 
Urban Outfitters, Inc.;
· 
The Gymboree Corporation;
 
· 
VCA Antech, Inc.; and
· 
J.Crew Group, Inc.;
 
· 
Weight Watchers International, Inc.

 
-31-

 
For 2012 compensation determinations, the Compensation Committee benchmarked the appropriateness and competitiveness of our executive compensation program against a market composite that consisted of 13 companies in our industry and a subset of six of those market comparator companies that were selected by Farient based on their size, type of operations and longevity in the industry.  The 13 companies in our industry that were used were the same 13 companies utilized in 2011 as listed above.  The six companies that were included in the industry subset were as follows:
 
· 
Apollo Group, Inc.;
 
· 
DeVry, Inc.;
· 
Career Education Corp.;
 
· 
Education Management Corporation; and
· 
Corinthian Colleges, Inc.;
 
· 
Strayer Education, Inc.

To determine the range of compensation in 2012, the Compensation Committee supplemented the compensation data of the comparator companies within our industry with summary statistics of compensation data obtained from Mercer’s Executive Compensation and Performance 2011 survey.

Additional Compensation Matters.

Clawback, Stock Ownership and Hedging Policies.  We do not have any policies regarding automatic adjustment or recovery of compensation paid or awarded to our executives in the event any of the performance measures upon which that compensation was paid or awarded are restated or adjusted, such that the compensation paid or awarded would have been less under the restated or adjusted performance measures.  Beginning in 2011, our executive compensation is no longer based on performance measures due to the Incentive Compensation Regulations, so such a policy is not necessary with respect to compensation paid or awarded with respect to that year and beyond.

We do not impose any specific equity or security ownership requirements on our executives.  We believe that the equity-based compensation paid to our executives serves to align their interests with those of our shareholders. We believe that it is improper and inappropriate for any employee or Director to engage in short-term or speculative transactions involving our securities.  It is our policy that our executives and Directors are prohibited from purchasing or selling any publicly traded options for our securities, including the trading of any call or put, the writing of any call or put, hedging or the use of collars.

The Impact of Accounting and Tax Treatments on the Compensation.  Section 162(m) of the IRC limits the allowable deduction for compensation paid or accrued with respect to the chief executive officer and each of the three other most highly compensated executive officers (other than the chief financial officer) of a publicly held corporation to no more than $1 million per year.  In light of Section 162(m), it is the policy of the Compensation Committee to modify, when appropriate, our executive compensation program to maximize the tax deductibility of compensation paid to our executive officers.  Accordingly, our equity-based compensation plans include a fixed limit on the awards that may be granted to any individual in any given year.  As a result, any future gains that may be realized on the stock options granted under our equity-based compensation plans will be deductible by us.  The Committee’s ability to maximize the tax deductibility of other forms of compensation beginning July 1, 2011, however, is limited by the Incentive Compensation Regulations because those regulations can be reasonably interpreted to prohibit the payment of performance-based compensation, which is a principal exception to the Section 162(m) compensation calculation.

Section 409A of the IRC provides certain requirements for deferred compensation arrangements.  Those requirements, among other things, limit flexibility with respect to the time and form of payment of deferred compensation.  If a payment or award constitutes deferred compensation subject to Section 409A and the applicable requirements are not satisfied, the recipient could be subject to tax on the award and all other deferred compensation of the same type, and an additional 20% tax and interest at the underpayment rate plus 1%, at the time the legally binding right to the payment or award arises or, if later, when that right ceases to be subject to a substantial risk of forfeiture.  Payments or awards under our plans and arrangements either are intended to not constitute “deferred compensation” for Section 409A purposes (and will thereby be exempt from Section 409A’s requirements) or, if they constitute “deferred compensation,” are intended to comply with the Section 409A statutory provisions and final regulations.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K under the Exchange Act with our management.  Based on that review and discussions, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our Proxy Statement for our 2012 Annual Meeting of Shareholders for filing with the U.S. Securities and Exchange Commission (“SEC”).

Compensation Committee
John F. Cozzi, Chair
James D. Fowler, Jr.
Samuel L. Odle
John A. Yena

 
-32-

 

Compensation-Related Risk Assessment

Our Compensation Committee conducted an assessment of the risks related to our compensation policies and practices in January 2012.  In conducting this assessment, the Compensation Committee noted several features of our compensation programs that reduce the likelihood of excessive risk-taking, including the following:

·  
We have established internal controls, enterprise risk management and a compliance program to discourage and identify any excessive risk-taking by our employees.
·  
There is a balanced mix of cash, equity, annual and longer-term components.
·  
Due to the Incentive Compensation Regulations, our compensation programs are not based on the performance of our employees.
·  
While our short-term compensation element is based on certain management objectives for a particular year:
·  
the maximum short-term compensation percentage is capped at 200% of the standard short-term percentage of executives’ annualized base salary, to protect against disproportionately large shorter-term incentives;
·  
the Compensation Committee has substantial discretion on which to base the actual amount of the short-term compensation payments, including the ability to consider and reduce a payment amount if the Committee determined that an executive caused our company to incur unnecessary or excessive risk;
·  
the management objectives include eight different business objectives that are company-wide objectives as opposed to individual objectives, encouraging decision-making that is in the best long-term interests of our company and our shareholders; and
·  
the management objectives are not unreasonable or clearly unattainable without excessive risk-taking.
·  
A significant portion of our executives’ total compensation consists of equity-based long-term awards, most of which vest over a period of three years, which encourages our executives to focus on sustaining our long-term interests.  The equity grants are also made annually, so executives always have unvested awards that could decrease in value if our business is not managed for the long term.
·  
Some of our non-executive employees are eligible to receive equity awards.  For those non-executive employees who are eligible to receive equity awards, the equity awards encourage those employees to focus on our long-term interests.

Based on these factors, the Compensation Committee believes that our compensation policies and practices encourage behaviors that are aligned with our long-term interests, and that numerous factors, such as the lack of performance-related incentives, dissuade our employees from taking risks for short-term gain.  As a result, the Compensation Committee determined that any risks arising from our compensation policies and practices are not reasonably likely to have a material adverse effect on our company.

 
-33-

 


Summary Compensation Table

The following table sets forth information regarding the compensation of the Named Executive Officers for each of our last three completed fiscal years.

Summary Compensation Table for Fiscal Years 2011, 2010 and 2009
Name and
Principal Position
 
Year
                               
   
Salary (1)
 
Bonus (2)
 
Stock
Awards (3)
 
Option
Awards(4)
 
Non-Equity
Incentive Plan Compensation (5)
 
Change in Pension Value
and Non-qualified Deferred Compensation
Earnings (6)
 
All Other
Compensation(7)
 
Total (8)
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
(g)
 
(h)
 
(i)
 
(j)
Kevin M. Modany
 
2011
 
$783,438
 
$1,153,500
 
$788,308
 
$3,612,500
 
$              0
 
$10,664
 
$64,044
 
$6,412,454
   Chairman and Chief
   Executive Officer
 
2010
 
$758,000
 
$             0
 
$           0
 
$5,448,750
 
$   480,625
 
$  1,431
 
$57,161
 
$6,745,967
 
2009
 
$712,500
 
$             0
 
$           0
 
$5,405,000
 
$1,450,000
 
$11,275
 
$49,397
 
$7,628,172
                                     
Daniel M. Fitzpatrick
 
2011
 
$330,000
 
$324,000
 
$381,101
 
$   476,850
 
$              0
 
$         0
 
$15,976
 
$1,527,927
    Executive Vice
    President, Chief
    Financial Officer
 
2010
 
$319,250
 
$           0
 
$           0
 
$   958,980
 
$   131,625
 
$         0
 
$19,217
 
$1,429,072
 
2009
 
$300,000
 
$           0
 
$           0
 
$1,081,000
 
$   396,500
 
$         0
 
$17,117
 
$1,794,617
                                     
Clark D. Elwood
 
2011
 
$325,000
 
$319,000
 
$873,499
 
$            0
 
$              0
 
$68,464
 
$11,267
 
$1,597,230
   Executive Vice President,
   Chief Administrative and
   Legal Officer
 
2010
 
$314,250
 
$           0
 
$           0
 
$   958,980
 
$   129,594
 
$11,583
 
$11,532
 
$1,425,939
 
2009
 
$295,000
 
$           0
 
$           0
 
$1,081,000
 
$   390,000
 
$49,298
 
$12,293
 
$1,827,591
                                     
Eugene W. Feichtner
 
2011
 
$300,625
 
$295,000
 
$481,983
 
$   289,000
 
$              0
 
$75,601
 
$11,499
 
$1,453,708
  Executive Vice President  
  and President, ITT
  Technical Institute
  Division
 
2010
 
$290,000
 
$           0
 
$           0
 
$   871,800
 
$   110,625
 
$43,588
 
$11,500
 
$1,327,513
 
2009
 
$267,500
 
$           0
 
$           0
 
$   945,875
 
$   330,000
 
$49,781
 
$  8,224
 
$1,601,380
                                     
June M. McCormack
 
2011
 
$268,250
 
$263,000
 
$762,897
 
$            0
 
$              0
 
$         0
 
$13,145
 
$1,307,292
  Executive Vice
  President and President,
  Online Division
 
2010
 
$258,500
 
$           0
 
$           0
 
$   871,800
 
$     98,625
 
$         0
 
$10,378
 
$1,239,303
 
2009
 
$242,500
 
$           0
 
$           0
 
$   945,875
 
$   294,000
 
$         0
 
$30,408
 
$1,512,783
_________________________
(1)
Amounts shown represent the dollar value of base salary earned during each of the years indicated.
(2)
Amounts shown represent the dollar value of discretionary bonus amounts earned in the stated year.  Under Item 402(a) of Regulation S-K under the Exchange Act, any bonus award that is paid above the amounts earned by the Named Executive Officer under, or that is otherwise paid to the Named Executive Officer without regards to, pre-established performance targets is to be reported in this column.  The amounts earned under pre-established performance targets are reported in column (g), “Non-Equity Incentive Plan Compensation,” of the Summary Compensation Table.  The amounts shown in this column for 2011 consist of a special bonus that was paid to our executives in June 2011.  The Compensation Committee approved the special bonuses in December 2010, to be paid to our executives who were still employed by us on June 27, 2011, in order to help motivate and retain those executives, as well as to recognize their extraordinary efforts during a particularly difficult regulatory and legislative environment affecting us and our industry.
(3)
Amounts shown represent the aggregate grant date fair value, computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification TM (“ASC”) Topic 718 (“ASC 718”), of all awards of stock granted to the Named Executive Officer in the year indicated.  For 2011, amounts shown include grants of RSUs that settle in cash and grants of RSUs that settle in shares of our common stock.  The aggregate grant date fair value with respect to each year indicated includes any earnings, such as dividends, that may be received on the stock awards.  To determine the grant date fair value of stock awards, we use the closing market price of a share of our common stock on the effective date of the stock award.  The amounts ultimately realized by the Named Executive Officers from the stock awards will depend on the price of our common stock in the future and may be quite different from the values shown.
(4)
Amounts shown represent the aggregate grant date fair value, computed in accordance with ASC 718, of all awards of stock options granted to the Named Executive Officer in the year indicated.  The option awards relate solely to shares of our common stock.  None of the Named Executive Officers has received any stock appreciation rights (“SARs”) from us. We did not adjust or amend the exercise price of any options previously awarded to any of the Named Executive Officers, whether through amendment, cancellation or replacement grants, or any other means (such as a repricing), or otherwise materially modify such awards, during any of the years indicated.   We used a binomial option pricing model to determine the grant date fair value of the stock options granted in each of the years indicated, which takes into account the variables defined below:

 
-34-

 

·  
“Volatility” is a statistical measure of the extent to which the stock price is expected to fluctuate during a period and combines our historical stock price volatility and the implied volatility as measured by actively traded stock options.
·  
 “Expected life” is the weighted average period that those stock options are expected to remain outstanding, based on the historical patterns of our stock option exercises, as adjusted to reflect the current position-level demographics of the stock option grantees.
·  
“Risk-free interest rate” is based on interest rates for terms that are similar to the expected life of the stock options.
·  
“Dividend yield” is based on our historical and expected future dividend payment practices.
The following table sets forth the assumptions supporting those variables that were used to determine the values reported with respect to the stock options granted to the Named Executive Officers in each of the years indicated:

 
Assumptions Associated with
Stock Options Granted In
 
2011
 
2010
 
2009
Volatility
48%
 
43%
 
54%
Expected life (in years)
4.7
 
4.6
 
4.5
Risk-free interest rate
1.8%
 
2.2%
 
1.6%
Dividend yield
None
 
None
 
None

The amounts ultimately realized by the Named Executive Officers from the option awards will depend on the price of our common stock in the future and may be quite different from the values shown.
(5)
Amounts shown represent the dollar value of all amounts earned for services performed during each of the years indicated pursuant to awards under non-equity incentive plans.  There were no earnings on any outstanding non-equity incentive plan awards during any of the years indicated.  The amounts reported are the annual bonus awards earned in the stated year in accordance with pre-established performance targets and paid in the subsequent year.  As described above under “—Compensation Discussion and Analysis – Compensation Elements2011 CompensationAnnual Bonus Awards,” the Compensation Committee did not establish an annual bonus award for 2011.  Under Item 402(a) of Regulation S-K under the Exchange Act, our annual bonus award in previous years was defined to be non-equity incentive plan compensation, instead of bonus compensation, to the extent that the outcome with respect to the relevant performance targets under our bonus parameters was substantially uncertain at the time the performance targets were established by the Compensation Committee and communicated to the participants.  As a result, the annual bonus award was intended to serve as an incentive for performance to occur over a specified fiscal year, which caused it to be reported in this column.  Amounts shown in this column include any portion of the award that may have been deferred by the Named Executive Officers under the Deferred Bonus Plan.  See “– Nonqualified Deferred Compensation Plans – Deferred Bonus Plan.”
(6)
Amounts shown represent the sum of:
·  
the aggregate increase in actuarial present value of the Named Executive Officer’s accumulated benefit on an annualized basis under all defined benefit and actuarial pension plans (including supplemental plans) from the pension plan measurement date used for financial statement reporting purposes with respect to our audited financial statements for the prior completed fiscal year to the pension plan measurement date used for financial statement reporting purposes with respect to our audited financial statements for the covered fiscal year; and
·  
the above-market or preferential earnings on compensation that is deferred on a basis that is not tax-qualified, including such earnings on nonqualified defined contribution plans.
The aggregate change in actuarial present value of the Named Executive Officer’s accumulated benefit on an annualized basis under each of the following plans is presented in the table below:
·  
the Retirement Plan for Salaried Employees of ITT Corporation (the “Old Pension Plan”), a non-contributory defined benefit pension plan;
·  
the ESI Pension Plan, a cash balance defined benefit plan; and
·  
the ESI Excess Pension Plan, an unfunded, nonqualified retirement plan.
See “– Pension Plans.”  In addition, the above-market or preferential earnings on compensation that is deferred on a basis that is not tax-qualified for the benefit of the Named Executive Officers under the ESI Excess Savings Plan, an unfunded, nonqualified retirement plan are specified in the table below.  There were no above-market or preferential earnings on compensation that is deferred on a basis that is not tax-qualified for the benefit of the Named Executive Officers under the Deferred Bonus Plan, an unfunded, nonqualified deferred compensation plan, in 2011, 2010 or 2009.  See “– Nonqualified Deferred Compensation Plans.”

 
-35-

 


 
 
 
 
 
Named
Executive Officer    .
 
 
Old Pension Plan Aggregate Change in Present Value of Accumulated
         Benefit       .
 
 
ESI Pension Plan Aggregate Change in Present Value of Accumulated
        Benefit       .
 
ESI Excess Pension Plan Aggregate Change in Present Value of Accumulated
        Benefit       .
 
ESI Excess Savings Plan Above-Market or Preferential Earnings on Deferred Compensation (A)
 
 
 
 
 
 
 
     Total    .
Kevin M. Modany
                   
2011
 
$         0
 
$   3,905
 
$   5,034
 
$1,725
 
$10,664
2010
 
$         0
 
$(2,530)
 
$(3,262)
 
$1,431
 
$  1,431
2009
 
$         0
 
$   4,272
 
$   5,509
 
$1,494
 
$11,275
Daniel M. Fitzpatrick
                   
2011
 
$         0
 
$          0
 
$          0
 
$       0
 
$         0
2010
 
$         0
 
$          0
 
$          0
 
$       0
 
$         0
2009
 
$         0
 
$          0
 
$          0
 
$       0
 
$         0
Clark D. Elwood
                   
2011
 
$43,016
 
$13,807
 
$10,787
 
$   854
 
$68,464
2010
 
$16,829
 
$(3,892)
 
$(2,070)
 
$   716
 
$11,583
2009
 
$19,304
 
$ 16,387
 
$12,869
 
$   738
 
$49,298
Eugene W. Feichtner
                   
2011
 
$61,583
 
$11,091
 
$  2,803
 
$   124
 
$75,601
2010
 
$26,423
 
$13,508
 
$  3,554
 
$   103
 
$43,588
2009
 
$30,830
 
$14,812
 
$  4,032
 
$   107
 
$49,781
June M. McCormack
                   
2011
 
$         0
 
$          0
 
$         0
 
$       0
 
$         0
2010
 
$         0
 
$          0
 
$         0
 
$       0
 
$         0
2009
 
$         0
 
$          0
 
$         0
 
$       0
 
$         0
 
_______________
(A)
Interest is above-market only if the rate of interest exceeds 120% of the applicable federal long-term rate, with compounding (as prescribed under Section 1274(d) of the IRC), at the rate that corresponds most closely to the rate under the applicable plan at the time the interest rate or formula is set.  In the event of a discretionary reset of the interest rate, the requisite calculation is made on the basis of the interest rate at the time of such reset, rather than when originally established.  Only the above-market portion of the interest is included.

(7)
Amounts shown represent all other compensation for each of the years indicated that could not properly be reported in columns (c) through (h) of the Summary Compensation Table, as follows:

   
                                                                            Perquisites (A) .
   
Named
Executive Officer
 
Use of a Company
     Car (B)
 
Tax Return and Financial Planning
Allowance (C)
 
Event Tickets (D)
 
Enhanced Disability
Benefits (E)
 
Annual
Physical
Examination (F)
 
Perquisites
Total
 
ITT/ESI
Contributions Under ESI 401(k)
   Plan (G)
 
All Other Compensation (H)
                                 
Kevin M. Modany
                               
2011
 
$23,674
 
$15,765
 
$11,083
 
$6,503
 
$       0
 
$57,025
 
$7,019
 
$64,044
2010
 
$16,825
 
$15,380
 
$9,419
 
$6,344
 
$1,843
 
$49,811
 
$7,350
 
$57,161
2009
 
$12,873
 
$14,500
 
$7,280
 
$5,981
 
$1,372
 
$42,006
 
$7,391
 
$49,397
Daniel M. Fitzpatrick
                               
2011
 
$         0
 
$  3,320
 
$2,898
 
$2,739
 
$       0
 
$  8,957
 
$7,019
 
$15,976
2010
 
$         0
 
$  3,240
 
$5,954
 
$2,673
 
$       0
 
$11,867
 
$7,350
 
$19,217
2009
 
$         0
 
$  3,050
 
$2,563
 
$2,516
 
$       0
 
$  8,129
 
$8,988
 
$17,117
Clark D. Elwood
                               
2011
 
$         0
 
$  1,550
 
$       0
 
$2,698
 
$       0
 
$  4,248
 
$7,019
 
$11,267
2010
 
$         0
 
$  1,550
 
$       0
 
$2,632
 
$       0
 
$  4,182
 
$7,350
 
$11,532
2009
 
$         0
 
$  1,955
 
$       0
 
$2,475
 
$     35
 
$  4,465
 
$7,828
 
$12,293
Eugene W. Feichtner
                               
2011
 
$         0
 
$  3,025
 
$    887
 
$2,496
 
$       0
 
$  6,408
 
$5,091
 
$11,499
2010
 
$         0
 
$  2,950
 
$1,153
 
$2,434
 
$       0
 
$  6,537
 
$4,963
 
$11,500
2009
 
$         0
 
$     875
 
$        0
 
$2,269
 
$       0
 
$  3,144
 
$5,080
 
$  8,224
June M. McCormack
                               
2011
 
$         0
 
$  2,700
 
$       0
 
$2,228
 
$2,666
 
$  7,594
 
$5,551
 
$13,145
2010
 
$         0
 
$  2,588
 
$        0
 
$2,170
 
$       0
 
$  4,758
 
$5,620
 
$10,378
2009
 
$         0
 
$          0
 
$        0
 
$2,021
 
$6,147
 
$  8,168
 
$5,573
 
$30,408 (I)
_______________
(A)
Amounts shown represent the aggregate incremental cost to us for the perquisites provided to the Named Executive Officers in each of the years indicated.
(B)
The methodology for computing the aggregate incremental cost to us for providing use of a company car involves compiling the expenses that were paid by us or reimbursed to the Named Executive Officer for the Named Executive Officer’s use of the vehicle.  Those expenses include:
 
-36-

 
·  
the lease payments on the car that were paid by us in 2009 and the portion of 2010 during which we leased the car used by Mr. Modany;
·  
the cost of insurance premiums relating to the car that were paid by us;
·  
the cost of gasoline used in the car that was paid or reimbursed by us; and
·  
the cost of maintenance and repairs of the car that was paid or reimbursed by us.
In addition, during 2010, the lease on the car previously utilized by Mr. Modany terminated, and we purchased a vehicle for Mr. Modany’s use.  As a result, the aggregate incremental cost to us for providing use of a company car to Mr. Modany includes the amount of depreciation expense recognized on the vehicle:
·  
in 2010 for the portion of 2010 that we owned the car; and
·  
in 2011 for the entire year.
(C)
The methodology for computing the aggregate incremental cost to us for providing a tax return and financial planning allowance involves determining the sum of all receipts for tax return and financial planning services that are submitted by and reimbursed to the Named Executive Officer up to the amount of the allowance authorized by the Compensation Committee (i.e., 2% of annualized base salary as of the effective date of any increase in base salary for that fiscal year for Mr. Modany, and 1% of annualized base salary as of the effective date of any increase in base salary for that fiscal year for each of the other Named Executive Officers).
(D)
The methodology for computing the aggregate incremental cost to us for providing event tickets involves identifying the specific events that the Named Executive Officer and his or her guests attended during the year and attributing the actual costs paid by us or reimbursed to the Named Executive Officer for the Named Executive Officer and his or her guests to attend the event.  Those costs include:
·  
the portion of a license fee for a private suite and associated spectator seats used by the Named Executive Officer and his or her guests;
·  
the cost of food and beverages consumed by the Named Executive Officer and his or her guests in connection with the event;
·  
the cost of tickets used by the Named Executive Officer and his or her guests to attend the event; and
·  
the cost of parking fees incurred by the Named Executive Officer and his or her guests to attend the event.
(E)
The methodology for computing the aggregate incremental cost to us for providing enhanced disability benefits involves:
·  
multiplying the monthly charge to us per employee for the enhanced short-term disability benefits by the number of months;
·  
multiplying the annual charge to us per $100 of coverage for the enhanced long-term disability benefits by the number of $100 increments in the coverage; and
·  
adding together the sum of the amounts calculated in the prior two bullet points.
(F)
The methodology for computing the aggregate incremental cost to us for providing annual physical examinations involves determining the expenses for such examination that have been paid by us directly to the provider or reimbursed to the Named Executive Officer.
(G)
Amounts shown represent our contributions or other allocations made under the ESI 401(k) Plan, a defined contribution plan, for the benefit of the Named Executive Officers in each of the years indicated.  See “– Equity Compensation and Qualified Savings Plans – ESI 401(k) Plan.”
(H)
Amounts shown do not include our cost for employee benefits that do not discriminate in scope, terms or operation in favor of our executive officers and that are available generally to all full-time and part-time regular employees, including, without limitation, medical and dental benefits, vision insurance, flexible spending account, business travel and accident insurance, and disability insurance.
(I)
The total amount reported for Ms. McCormack for 2009 also includes a payment in the amount of $16,667 made by us to Ms. McCormack in reimbursement to her for lost consulting fees and legal expenses related thereto in connection with the termination of a consulting arrangement with a third party as a result of her beginning employment with us.
(8)
Amounts shown represent the sum of the dollar values for each compensation element in columns (c) through (i) in each of the years indicated.

Amount of Salary and Bonus in Proportion to Total Compensation

The salary, non-equity incentive plan and bonus compensation and salary, non-equity incentive plan and bonus compensation, as a percentage of each Named Executive Officer’s total compensation, for the years indicated was as follows:

 
-37-

 


Named
Executive Officer       .
 
Salary
 
Non-Equity Incentive Plan and Bonus
Compensation (1) .
 
Salary and Non-Equity Incentive Plan and Bonus
Compensation (1)
 
Total
Compensation (2)
 
Salary as a Percentage of Total
Compensation
 
Non-Equity Incentive Plan and Bonus Compensation as a Percentage of Total Compensation
 
Salary and Non-Equity Incentive Plan and Bonus Compensation as a Percentage of Total
Compensation
Kevin M. Modany
                           
2011
 
$783,438
 
$1,153,500
 
$1,936,938
 
$6,412,454
 
12.2%
 
18.0%
 
30.2%
2010
 
$758,000
 
$   480,625
 
$1,238,625
 
$6,745,967
 
11.2%
 
7.1%
 
18.4%
2009
 
$712,500
 
$1,450,000
 
$2,162,500
 
$7,628,172
 
9.3%
 
19.0%
 
28.3%
Daniel M. Fitzpatrick
                           
2011
 
$330,000
 
$   324,000
 
$   654,000
 
$1,527,927
 
21.6%
 
21.2%
 
42.8%
2010
 
$319,250
 
$   131,625
 
$   450,875
 
$1,429,072
 
22.3%
 
9.2%
 
31.6%
2009
 
$300,000
 
$   396,500
 
$   696,500
 
$1,794,617
 
16.7%
 
22.1%
 
38.8%
Clark D. Elwood
                           
2011
 
$325,000
 
$   319,000
 
$   644,000
 
$1,597,230
 
20.4%
 
20.0%
 
40.3%
2010
 
$314,250
 
$   129,594
 
$   443,844
 
$1,425,939
 
22.0%
 
9.1%
 
31.1%
2009
 
$295,000
 
$   390,000
 
$   685,000
 
$1,827,591
 
16.1%
 
21.3%
 
37.5%
Eugene W. Feichtner
                           
2011
 
$300,625
 
$   295,000
 
$   595,625
 
$1,453,708
 
20.7%
 
20.3%
 
41.0%
2010
 
$290,000
 
$   110,625
 
$   400,625
 
$1,327,513
 
21.8%
 
8.3%
 
30.2%
2009
 
$267,500
 
$   330,000
 
$   597,500
 
$1,601,380
 
16.7%
 
20.6%
 
37.3%
June M. McCormack
                           
2011
 
$268,250
 
$   263,000
 
$   531,250
 
$1,307,292
 
20.5%
 
20.1%
 
40.6%
2010
 
$258,500
 
$     98,625
 
$   357,125
 
$1,239,303
 
20.9%
 
8.0%
 
28.8%
2009
 
$242,500
 
$   294,000
 
$   536,500
 
$1,512,783
 
16.0%
 
19.4%
 
35.5%
___________________
(1)  
The amounts of non-equity incentive plan and bonus compensation reported in this table include the amounts of such compensation as reported in the Non-Equity Incentive Plan Compensation and Bonus columns of the Summary Compensation Table for each of the years indicated.
(2)  
Amounts shown represent the sum of the dollar values for each compensation element that we are required to report in the Summary Compensation Table for each of the years indicated. See “– Summary Compensation Table.”

Generally in the years indicated, the amount of salary has represented less than 25%, and the amount of salary and non-equity incentive plan and bonus compensation combined has represented 18% to 45%, of the Named Executive Officer’s total compensation.  In addition, depending on our performance, the amount of non-equity incentive plan compensation in 2009 and 2010 could have ranged from 11.25% to 200% of the Named Executive Officer’s salary, depending on the Named Executive Officer’s position.  As a result, the better our performance in either of those years, the greater the percentage that non-equity incentive plan compensation represented of the Named Executive Officer’s total compensation for that year.  This result corresponded to the goal of the compensation program for our executives and with the Compensation Committee’s intentions prior to July 1, 2011.  The increases in non-equity incentive plan and bonus compensation, and salary and non-equity incentive plan and bonus compensation, in each case as a percentage of total compensation, in 2011 compared to 2010 were primarily the result of the special bonus awarded in 2011 to our Named Executive Officers, as described in “—Compensation Discussion and Analysis – Compensation Elements2011 CompensationSpecial Bonus.”

 
-38-

 


Grants of Plan-Based Awards Table

The following table sets forth information regarding grants of plan-based awards in 2011 to each of our Named Executive Officers.

Grants of Plan-Based Awards in Fiscal Year 2011

Named
Executive Officer
 
Grant Date (1)
 
Date Compensation Committee
Took Action to Grant Awards (2)
 
All Other Stock Awards: Number of Shares of Stock or Units
 
All Other Option Awards: Number of Securities Underlying Options
 
Exercise or Base Price of Option Awards
($/sh) (3)
 
Grant Date Fair Value of Stock and Option Awards (4).
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
(g)
Kevin M. Modany
                       
Stock Option Award(5)
 
01/27/11
 
01/17/11
 
N/A
 
125,000
 
$69.43(6)
 
$3,612,500
RSU Award(7)
 
01/27/11
 
01/17/11
 
11,354 (8)
 
N/A
 
N/A
 
$788,308
Daniel M. Fitzpatrick
                       
Stock Option Award(5)
 
01/27/11
 
01/17/11
 
N/A
 
16,500
 
$69.43 (6)
 
$476,850
RSU Award(7)
 
01/27/11
 
01/17/11
 
2,380 (9)
 
N/A
 
N/A
 
$165,243
RSU Award(7)
 
01/27/11
 
01/17/11
 
3,109 (8)
 
N/A
 
N/A
 
$215,858
Clark D. Elwood
                       
RSU Award(7)
 
01/27/11
 
01/17/11
 
9,519 (9)
 
N/A
 
N/A
 
$660,904
RSU Award(7)
 
01/27/11
 
01/17/11
 
3,062 (8)
 
N/A
 
N/A
 
$212,595
Eugene W. Feichtner
                       
Stock Option Award(5)
 
01/27/11
 
01/17/11
 
N/A
 
10,000
 
$69.43 (6)
 
$289,000
RSU Award(7)
 
01/27/11
 
01/17/11
 
4,327 (9)
 
N/A
 
N/A
 
$300,424
RSU Award(7)
 
01/27/11
 
01/17/11
 
2,615 (8)
 
N/A
 
N/A
 
$181,559
June M. McCormack
                       
RSU Award(7)
 
01/27/11
 
01/17/11
 
8,654 (9)
 
N/A
 
N/A
 
$600,847
RSU Award(7)
 
01/27/11
 
01/17/11
 
2,334 (8)
 
N/A
 
N/A
 
$162,050
________________________
“N/A” means not applicable.
(1)
Defined as the date of the grant for financial statement reporting purposes pursuant to ASC 718.
(2)
The awards were granted by the Compensation Committee during a Committee meeting on January 17, 2011 and became effective on January 27, 2011, which was the fifth business day following the date we publicly disclosed our financial and operating results for the fiscal year ended December 31, 2010.
(3)
Amounts shown represent the per-share exercise or base price of the options granted in the fiscal year.
(4)
Amounts shown represent the grant date fair value, computed in accordance with ASC 718, of each stock and option award granted to the Named Executive Officer in 2011. There were no adjustments or amendments made in 2011 to the exercise price of any option awards held by any of the Named Executive Officers, whether through amendment, cancellation or replacement grants, or any other means (such as a repricing), or that otherwise materially modified any option awards.
(5)
Represents a nonqualified stock option to purchase our common stock that was granted under the 2006 Equity Compensation Plan.  See “– Equity Compensation and Qualified Savings Plans – 2006 Equity Compensation Plan.”
(6)
Nonqualified stock option granted at 100% of the closing market price of a share of our common stock on the effective date of the grant. One-third of the shares subject to each option granted is exercisable on the anniversary date of the grant in each of the years 2012, 2013 and 2014.
(7)
Represents a grant of RSUs that was made under the 2006 Equity Compensation Plan.  See “—Equity Compensation and Qualified Savings Plans – 2006 Equity Compensation Plan.”
(8)
The period of restriction for this RSU grant lapsed on January 27, 2012.  The RSUs were settled on the last day of the period of restriction and were paid in cash in an amount equal to $62.79 for each RSU in the grant, which was the average of the closing market prices of our common stock over the 20 trading day period prior to the settlement date.
(9)
The period of restriction for this RSU grant lapses in thirds on the anniversary date of the grant in each of the years 2012, 2013 and 2014.  These RSUs will be settled in shares of our common stock, one share for each RSU in the grant.

 
-39-

 

Employment Contracts

We have not entered into an employment contract, whether written or oral, with any of the Named Executive Officers.

Non-Equity Incentive Plan Awards and Bonuses

The annual bonus award in years prior to 2011 was intended to serve as an incentive for performance to occur over a specified fiscal year, because the outcome with respect to the relevant performance targets under our bonus parameters was substantially uncertain at the time the performance targets were established by the Compensation Committee and communicated to the participants.  Pursuant to the SEC’s regulations, our annual bonus awards were typically classified in the tables in our proxy statements as non-equity incentive plan compensation, instead of bonus compensation, due to the annual bonus awards being based on pre-established performance targets.  As described in more detail in the Compensation Discussion and Analysis section of this Proxy Statement, because the Incentive Compensation Regulations became effective on July 1, 2011, our Compensation Committee did not establish performance targets for purposes of an annual bonus plan for 2011.  A special bonus, however, was paid to our executives in June 2011, which is classified in the tables in this Proxy Statement as bonus compensation.

Under the Deferred Bonus Plan, each eligible employee may elect to defer payment of all or a portion of his or her annual bonus award in the same form that the bonus is otherwise payable, either in cash or shares of our common stock.  See “– Nonqualified Deferred Compensation Plans – Deferred Bonus Plan.”  None of the Named Executive Officers deferred payment of any portion of his or her annual bonus award received in 2009, 2010 or 2011.

Equity Compensation and Qualified Savings Plans

1997 Stock Plan.  On May 13, 1997, our shareholders approved our adoption of the 1997 ITT Educational Services, Inc. Incentive Stock Plan (the “1997 Stock Plan”), which became effective on the same date and provides for the grant of:

·  
stock options that are intended to qualify as “incentive stock options” under Section 422 of the IRC;
·  
nonqualified stock options;
·  
SARs;
·  
performance shares and restricted stock; or
·  
any combination of the foregoing, as the Compensation Committee may determine, as well as substitute stock options, SARs and restricted stock.

The 1997 Stock Plan expired on May 13, 2007.  The only awards that have been granted under the 1997 Stock Plan are nonqualified stock options and restricted stock.  As a result of our shareholders’ approval of our adoption of the 2006 Equity Compensation Plan at the 2006 Annual Meeting of Shareholders on May 9, 2006, no awards have been, or will be, made under the 1997 Stock Plan after May 9, 2006.  As of December 31, 2011, the total number of shares of our common stock that were subject to unexercised nonqualified stock option awards granted under the 1997 Stock Plan was 536,267.  There were no other outstanding awards under the 1997 Stock Plan as of December 31, 2011.

Recipients of awards under the 1997 Stock Plan must be, or have been at the time of grant, key employees (including any officer or Director who is also an employee) whose responsibilities and decisions directly affect our performance or the performance of any of our subsidiaries or other affiliates.

The Compensation Committee administers the 1997 Stock Plan and made determinations with respect to the designation of those employees who would receive awards, the number of shares to be covered by options and restricted stock awards, the exercise price of options and other option terms and conditions.  The Compensation Committee may impose such additional terms and conditions on an award as it deems advisable.  Shares of our common stock issued under the 1997 Stock Plan may be made available from the authorized but unissued shares of our common stock, from treasury stock or from shares purchased on the open market.

Nonqualified stock options under the 1997 Stock Plan must expire within ten years after grant.  The exercise price for nonqualified stock options must be at least equal to the fair market value of our common stock on the date of grant.  A nonqualified stock option may be exercised only by the employee who received the option (or his or her estate or designated beneficiary) within:

·  
five years after the date of his or her termination of employment resulting from the employee’s death, total disability or retirement, but in no event later than the expiration of the original term of the option; or
 
-40-

 
·  
three months after the date of his or her termination of employment resulting from any other reason, except for the employee’s voluntary resignation or termination for cause, but in no event later than the expiration of the original term of the option.

If an optionee voluntarily resigns or is terminated for cause, the nonqualified stock options are canceled immediately.

The 1997 Stock Plan provides for the automatic protection of intended economic benefits by key employees upon the occurrence of an acceleration event.  See Exhibit No. 10.8 to our Quarterly Report on Form 10-Q for the second fiscal quarter ended June 30, 1997, Exhibit No. 10.38 to our Quarterly Report on Form 10-Q for the second fiscal quarter ended June 30, 2003 and Exhibit No. 10.58 to our Quarterly Report on Form 10-Q for the third fiscal quarter ended September 30, 2006 filed with the SEC for a complete copy of the 1997 Stock Plan, as amended.  Notwithstanding any other provisions of the 1997 Stock Plan, upon the occurrence of an acceleration event:

·  
all options will generally become exercisable immediately for a period of 60 calendar days;
·  
options will continue to be exercisable for a period of seven months in the case of an employee whose employment is terminated other than for cause or who voluntarily terminates employment because of a good faith belief that such employee will not be able to discharge his or her duties;
·  
“limited stock appreciation rights” will be granted automatically on all outstanding options not otherwise covered by a SAR, which will generally be exercisable immediately in full, will entitle the holders to the same exercise period referred to in the bullets above and will be settled fully in cash based on a formula price generally reflecting the highest price paid for a share of our common stock during the 60-day period preceding the exercise date; and
·  
restrictions applicable to awards of restricted stock will be waived automatically.

Options or restricted shares which are granted, accelerated or enhanced upon the occurrence of a takeover may give rise, in whole or in part, to “excess parachute payments” within the meaning of Section 280G of the IRC and, to such extent, will be nondeductible by us and subject to a 20% excise tax to the awardee.

An “acceleration event” is generally defined in the 1997 Stock Plan as any of the following events:

·  
a report on Schedule 13D is filed with the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person (within the meaning of Section 13(d) of the Exchange Act), other than us, ITT Corporation (a Nevada corporation (“ITT Nevada”) that was formerly affiliated with ITT Corporation, an Indiana corporation), one of our subsidiaries or any employee benefit plan sponsored by us, ITT Nevada or one of our subsidiaries, is the beneficial owner directly or indirectly of 20% or more of the outstanding shares of our common stock;
·  
any person (within the meaning of Section 13(d) of the Exchange Act), other than us, ITT Nevada, one of our subsidiaries or any employee benefit plan sponsored by us, ITT Nevada or one of our subsidiaries, purchases shares pursuant to a tender offer or exchange offer to acquire any shares of our common stock (or securities convertible into our common stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or more of the outstanding shares of our common stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to acquire our common stock);
·  
our shareholders approve:
·  
any consolidation or merger of us in which we are not the continuing or surviving corporation or pursuant to which shares of our common stock would be converted into cash, securities or other property, other than a merger of us in which holders of our common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before; or
·  
any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of our assets; or
·  
a change in a majority of the members of our Board of Directors within a 12-month period, unless the election or nomination for election by our shareholders of each new Director during such 12-month period was approved by the vote of two-thirds of the Directors then still in office who were Directors at the beginning of such 12-month period.

2006 Equity Compensation Plan.  On May 9, 2006, our shareholders approved our adoption of the 2006 Equity Compensation Plan, which became effective on the same date and provides that awards may be granted to our and our subsidiaries’ employees and Directors.  The approximate number of persons eligible to participate in the 2006 Equity Compensation Plan is 950.  The 2006 Equity Compensation Plan permits the grant of the following types of awards:

 
-41-

 
·  
stock options (incentive and nonqualified);
·  
SARs;
·  
restricted stock;
·  
RSUs;
·  
performance shares;
·  
performance units; and
·  
other stock-based awards.

No award may be granted under the 2006 Equity Compensation Plan after May 9, 2016.

Administration.  The 2006 Equity Compensation Plan is administered by a committee consisting of two or more members of our Board of Directors (the “Plan Committee”).  It is intended that each member of the Plan Committee will be a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act, an “outside director” under regulations promulgated under Section 162(m) of the IRC, and an “independent director” under the NYSE listing standards.  Our Board of Directors has currently designated the Compensation Committee as the Plan Committee for the 2006 Equity Compensation Plan; however, the entire Board will act as the Plan Committee with respect to awards to non-employee Directors.  Subject to applicable law, the Plan Committee may delegate its authority under the 2006 Equity Compensation Plan.

Shares Subject to the 2006 Equity Compensation Plan.  The total number of shares of our common stock available for awards under the 2006 Equity Compensation Plan is 4,000,000, subject to antidilution adjustments.  Each share underlying stock options and SARs granted under the 2006 Equity Compensation Plan, and not forfeited or terminated, will reduce the number of shares available for future awards under the 2006 Equity Compensation Plan by one share.  The delivery of a share in connection with a “full-value award” (i.e., an award of restricted stock, RSUs, performance shares, performance units or any other stock-based award with value denominated in shares) will reduce the number of shares remaining for other awards by three shares.

The source of shares for issuance under the 2006 Equity Compensation Plan may be authorized and unissued shares or treasury shares.

If an award under the 2006 Equity Compensation Plan is forfeited or terminated for any reason before being exercised, fully vested or settled, as the case may be, then the shares underlying that award will be added back to the remaining shares and will be available for future awards under the 2006 Equity Compensation Plan.  The number of shares available for future awards under the 2006 Equity Compensation Plan, however, will be reduced by: (a) any shares subject to an award that are withheld or otherwise not issued upon the exercise of the award to satisfy the participant’s tax withholding obligations or to pay the exercise price of the award; and (b) shares subject to an award that is settled in cash in lieu of shares.

Pursuant to the 2006 Equity Compensation Plan, subject to antidilution adjustments:

·  
the maximum aggregate number of shares that may be delivered in connection with stock options intended to be incentive stock options under Section 422 of the IRC (“incentive stock options”) may not exceed 4,000,000 shares;
·  
the maximum aggregate number of shares that may be granted to an individual participant during any calendar year pursuant to:
·  
all forms of awards is 200,000 shares;
·  
incentive stock options is 200,000 shares;
·  
restricted stock and RSU awards is 100,000 shares; and
·  
performance share awards is 100,000 shares; and
·  
the maximum aggregate compensation that may be paid pursuant to performance units awarded in any one calendar year to an individual participant is $1,000,000, or a number of shares having an aggregate fair market value not in excess of that amount.

Further, no incentive stock option will be granted to a participant if as a result of such grant the aggregate fair market value of shares with respect to which incentive stock options are exercisable for the first time in any calendar year would exceed $100,000.

 
-42-

 
No Repricing.  The 2006 Equity Compensation Plan prohibits repricing of stock options or SARs, including by way of an exchange for another award with a lower exercise price, unless shareholder approval is obtained.

Stock Options.  Stock options granted under the 2006 Equity Compensation Plan may be either nonqualified or incentive stock options.  Each option grant will be evidenced by an award agreement between the optionee and us setting forth the terms and conditions of the option.  The Plan Committee will set the exercise price of each option, provided that the exercise price may not be less than 100% of the fair market value of our common stock on the date the option is granted.  The 2006 Equity Compensation Plan defines “fair market value” as the closing price of our common stock on the effective date of the option grant or, if that date is not a trading day, on the most recent trading day prior to the effective date of the option grant.  In addition, in the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of our stock, the exercise price of the incentive stock option will not be less than 110% of the fair market value of our common stock on the effective date of the option grant.

The Plan Committee will determine the term of each stock option that it grants under the 2006 Equity Compensation Plan; however, the term may not exceed seven years from the date of grant.  Moreover, in the case of an incentive stock option granted to a participant who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of our stock, the term of the option may not exceed five years from the date of grant.

If an optionee’s employment or service terminates due to death or disability:

·  
all of the optionee’s stock options with time-based vesting provisions will become immediately exercisable and will remain exercisable until the earlier of:
·  
the date three years after the date of the optionee’s death or disability, or
·  
the date the options expire in accordance with their terms; and
·  
with respect to the optionee’s options with performance-based vesting provisions:
·  
the optionee will forfeit all such options that are not exercisable as of the date of death or disability; and
·  
options that were exercisable as of the date of death or disability will remain exercisable until the earlier of (a) the date three years after such date, or (b) the date the options expire in accordance with their terms.

For stock options granted prior to November 24, 2010, termination of an optionee’s employment or service due to retirement is treated in the same manner as termination of employment or service due to death or disability.  In all cases, incentive stock options will not be exercisable for more than three months following an optionee’s death or retirement or more than one year following the termination of an optionee’s employment by reason of disability.

Upon termination by us of an optionee’s employment or service without cause, or upon termination of employment or service by the optionee for a reason other than death or disability (or retirement for stock options granted prior to November 24, 2010):

·  
an optionee will forfeit all of his or her options that had not yet become exercisable; and
·  
options that were exercisable as of the date of the optionee’s termination will remain exercisable until the earlier of (a) the date 90 days after the date of termination, or (b) the date the options expire in accordance with their terms.

Upon termination of employment or service for cause, an optionee will immediately forfeit all of his or her outstanding options.

SARs.  SAR grants may be either freestanding or tandem with option grants.  Each SAR grant will be evidenced by an agreement that will specify the number of shares to which the SAR pertains, the grant price, the term of the SAR and such other provisions as the Plan Committee shall determine.  The grant price of a freestanding SAR will not be less than 100% of the fair market value of our common stock on the effective date of the SAR grant, and the grant price of a tandem SAR will equal the exercise price of the related option. The Plan Committee will determine the term of each SAR that it grants under the 2006 Equity Compensation Plan; however, the term may not exceed seven years from the date of grant.

Upon exercise of a SAR, the holder will receive payment from us in an amount equal to the product of (a) the excess of the fair market value of our common stock on the date of exercise over the grant price and (b) the number of shares with respect to which the SAR is exercised.  At the discretion of the Plan Committee, payment to the holder of a SAR may be in cash, shares of our common stock or a combination thereof.

 
-43-

 
If the employment or service of a holder of a SAR is terminated, the SAR will be treated in the same manner as options are treated.

Restricted Stock and Restricted Stock Units.  Each restricted stock or RSU grant will be evidenced by an agreement that specifies the applicable period of restriction, the number of restricted shares or RSUs granted, the vesting or settlement date, and such other provisions as the Plan Committee determines.

The period of restriction applicable to an award of restricted stock or RSUs is at least one year for awards with a time-based period of restriction granted after November 24, 2010 and all awards with a performance-based period of restriction, and was at least three years for awards with a time-based period of restriction granted prior to November 24, 2010.

Participants holding restricted stock may exercise full voting rights and will receive all regular cash dividends paid with respect to those shares.  Except as otherwise determined by the Plan Committee, all other distributions paid with respect to the restricted stock will be credited to the participant subject to the same restrictions on transferability and forfeitability as the underlying restricted stock.

When the applicable period of restriction on the restricted stock ends, the stock will become freely transferable, and the participant will be entitled to receive a certificate evidencing those shares.  When the applicable period of restriction ends, RSUs will be settled and paid.  At the time of the grant, the Plan Committee shall determine whether the RSUs will be settled by delivery of shares, payment in cash of an amount equal to the fair market value of the shares on the settlement date or the average of the fair market value of the shares over a specified number of days prior to the settlement date, or a combination of shares and cash.

With respect to restricted stock with a time-based period of restriction:

·  
upon a participant’s death or disability, the period of restriction will lapse immediately; and
·  
upon termination of a participant’s employment or service with us for any reason other than death or disability, the participant will forfeit all unvested restricted stock immediately after the termination of employment or service.

With respect to restricted stock with a performance-based period of restriction, upon termination of a participant’s employment or service with us for any reason, the participant will forfeit all unvested restricted stock immediately after the termination of employment or service.

With respect to RSUs with a time-based period of restriction:

·  
upon a participant’s death or disability, the period of restriction will lapse immediately, and the RSUs will be settled immediately thereafter; and
·  
upon termination of a participant’s employment or service with us for any reason other than death or disability, the participant will forfeit all of his or her unvested RSUs immediately after the termination of employment or service.

For RSUs with a time-based period of restriction awarded prior to November 24, 2010, upon a participant’s retirement, the participant will retain his or her unvested RSUs and the period of restriction will lapse in accordance with its original terms.

With respect to RSUs with a performance-based period of restriction, upon termination of a participant’s employment or service with us for any reason, the participant will forfeit all of his or her unvested RSUs immediately after the termination of employment or service.

Performance Shares and Performance Units.  Each grant of performance shares and performance units will be evidenced by an agreement that specifies the number of shares or units granted, the applicable performance measures and performance periods, and such other provisions as the Plan Committee determines.  Except as otherwise provided in the applicable award agreement, upon termination of employment or service or upon a change in control or subsidiary disposition, the performance period for performance shares and performance units must be at least one year.

 
-44-

 
A participant will not have voting rights or other rights as a shareholder with respect to the shares subject to an award of performance shares or performance units until the time, if at all, when shares are issued to the participant pursuant to the terms of the applicable award agreement.

As soon as practicable following the completion of the performance period applicable to outstanding performance shares or performance units, the Plan Committee will certify in writing the extent to which the applicable performance measures have been attained and the resulting final value of the award earned by the participant and to be paid upon its settlement.  The Plan Committee, in its sole discretion as specified in the award agreement, may pay earned performance shares or performance units by delivery of shares or by payment in cash or a combination thereof.

If a participant terminates employment or service with us for any reason prior to the end of the performance period respecting an award of performance shares or performance units, the participant will forfeit any and all right to payment under the performance shares or performance units.

Other Stock-Based Awards.  The Plan Committee has the right to grant other stock-based awards that may include, without limitation, grants of shares based on attainment of performance measures, payment of shares as a bonus or in lieu of cash based on attainment of performance measures, and the payment of shares in lieu of cash under other of our incentive or bonus programs.

Except as otherwise provided in the applicable award agreement, upon a termination of employment or service or upon a change in control or subsidiary disposition, other stock-based awards will have a minimum period of restriction of one year, which period may, in the Plan Committee’s discretion, lapse on a pro-rated, graded, or cliff (i.e., all at once) basis.  An award of payment in shares in lieu of cash under other of our incentive or bonus programs, or awards to non-employee Directors as part of their retainer or other Board fees, will not be subject to the minimum period of restriction limitation described above.

The Plan Committee may determine to pay a non-employee Director’s regular annual retainer, retainer for Board committee memberships, retainer for chairperson duties, fees for attendance at Board or Board committee meetings, or any other retainers or fees in the form of another stock-based award under the 2006 Equity Compensation Plan.  The Plan Committee may also determine to permit the non-employee Directors to elect whether to receive all or a portion of such retainers and fees in the form of other stock-based award.  Any such other stock-based awards would not be subject to any restrictions (other than restrictions applicable to our “affiliates”).

Performance-Based Awards.  The Plan Committee may grant awards that are intended to qualify as “performance-based compensation” for purposes of deductibility under Section 162(m) of the IRC.  For any such award, the Plan Committee will establish the goals to be used within 90 days after the commencement of the performance period, or, if the number of days in the performance period is less than 90, the number of days equal to 25% of the performance period applicable to such award.  The 2006 Equity Compensation Plan sets forth certain performance measures from which the Plan Committee may select for these awards.  The Plan Committee may establish performance measures, in its discretion, on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries, business segments, functions, salary grade levels, or positions, and in either absolute terms or relative to the performance of one or more comparable companies or an index covering multiple companies.  In addition, unless otherwise determined by the Plan Committee, measurement of performance measures will exclude the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, as well as the cumulative effects of tax or accounting changes, each as determined in accordance with generally accepted accounting principles or identified in our financial statements, notes to the financial statements, management’s discussion and analysis,  or other filings with the SEC.  As a result of the Incentive Compensation Regulations, the Plan Committee will not grant performance-based awards on or after July 1, 2011.

Change in Control, Cash-Out and Subsidiary Disposition.  Except as otherwise provided in the applicable award agreement, if we experience a change in control:

·  
any and all outstanding stock options and SARs granted under the 2006 Equity Compensation Plan with time-based vesting provisions will become immediately exercisable;
·  
any restrictions imposed on restricted stock, RSUs and other stock-based awards granted under the 2006 Equity Compensation Plan with time-based vesting provisions will lapse; and
·  
any and all performance shares, performance units and other awards (if performance-based) granted under the 2006 Equity Compensation Plan will vest on a pro rata monthly basis, including full credit for partial months elapsed, and will be paid (a) based on the level of performance achieved as of the date of the change in control, if determinable, or (b) at the target level, if not determinable.

 
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In addition, the Plan Committee may, in its sole discretion, determine that: (a) all outstanding stock options and SARs will be terminated upon the occurrence of a change in control and that each participant will receive, with respect to each share subject to the options or SARs, an amount in cash equal to the excess of the consideration payable with respect to one share in connection with the change in control over the option’s exercise price or the SAR’s grant price; and (b) options and SARs outstanding as of the date of the change in control may be cancelled and terminated without payment, if the consideration payable in connection with the change in control is less than the option’s exercise price or the SAR’s grant price.

Further, the Plan Committee has the authority to provide for the automatic full vesting and exercisability of one or more outstanding unvested awards under the 2006 Equity Compensation Plan and the termination of restrictions on transfer and repurchase or forfeiture rights on the awards, in connection with a disposition of a subsidiary of ours, but only with respect to those participants who are at the time engaged primarily in service with the subsidiary involved in the subsidiary disposition.

A change in control means the occurrence of one or more of the following:

·  
the acquisition by any person (within the meaning of Section 13(d) of the Exchange Act), other than us, a subsidiary of ours or any employee benefit plan sponsored by us or a subsidiary of ours, of a beneficial ownership directly or indirectly of 20% or more of the outstanding shares of our common stock, provided that an increase in the percentage of the outstanding shares of our common stock beneficially owned by any person (within the meaning of Section 13(d) of the Exchange Act) solely as a result of a reduction in the number of shares of our common stock then outstanding due to the repurchase by us of such common stock shall not constitute a change in control, however any subsequent acquisition of shares of our common stock by any person (within the meaning of Section 13(d) of the Exchange Act) resulting in such person beneficially owning 20% or more of the outstanding shares of our common stock shall constitute a change in control;
·  
the purchase by any person (within the meaning of Section 13(d) of the Exchange Act), other than us, a subsidiary of ours or any employee benefit plan sponsored by us or a subsidiary of ours, of shares pursuant to a tender offer or exchange offer to acquire our common stock (or securities convertible into common stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 15% or more of the outstanding shares of our common stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to acquire common stock);
·  
our shareholders approve (a) any consolidation or merger of us in which we are not the continuing or surviving corporation or pursuant to which shares of our common stock would be converted into cash, securities or other property, other than a merger of us in which holders of our common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before, or (b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of our assets;
·  
a change in a majority of the members of our Board of Directors within a 12-month period, unless the election or nomination for election by our shareholders of each new Director during such 12-month period was approved by the vote of two-thirds of the Directors then still in office who were Directors at the beginning of such 12-month period; or
·  
the liquidation or dissolution of us.

Notwithstanding any other provision of the 2006 Equity Compensation Plan, with respect to any provision or feature of the plan that constitutes or provides for a deferred compensation plan subject to IRC Section 409A, no event or transaction will constitute a change in control unless it is a change in control within the meaning of IRC Section 409A.

Adjustments of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events.  The Plan Committee may make adjustments in the terms and conditions of, and the criteria included in, awards under the 2006 Equity Compensation Plan in recognition of unusual or nonrecurring events (including, without limitation, changes in capitalization) affecting us or our financial statements or of changes in applicable law, regulations, or accounting principles, whenever the Plan Committee determines that such adjustments are appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the 2006 Equity Compensation Plan.  With respect to any awards intended to comply with the performance-based exception under the 2006 Equity Compensation Plan, unless otherwise determined by the Plan Committee, any such exception will be specified at such times and in such manner as will not cause such awards to fail to qualify under the performance-based exception.

 
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IRC Section 409A Compliance.  The 2006 Equity Compensation Plan has been designed so that certain types of awards (such as options, SARs and restricted stock) generally will not be “deferred compensation” for IRC Section 409A purposes and will thereby be exempt from Section 409A’s requirements.  Certain other types of awards, however, may be deferred compensation under Section 409A, and in those cases, the 2006 Equity Compensation Plan is intended to comply with the Section 409A standards.  For example, with respect to any award that constitutes deferred compensation within the meaning of Section 409A, any amount payable on account of separation from service to a “specified employee,” as defined in Section 409A, will not be paid earlier than the date that is six months following the specified employee’s separation from service.

See Exhibit No. 10.55 to our Current Report on Form 8-K, dated May 9, 2006, Exhibit 10.57 to our Quarterly Report on Form 10-Q for the third fiscal quarter ended September 30, 2006, Exhibit 10.61 to our Quarterly Report on Form 10-Q for the second fiscal quarter ended June 30, 2007, Exhibit 10.32 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and Exhibit 10.12 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC for a complete copy of the 2006 Equity Compensation Plan and its amendments.

2011 Awards.  During 2011, the following equity-based compensation awards were granted under the 2006 Equity Compensation Plan:

·  
nonqualified stock options to our key employees to purchase an aggregate of 159,500 shares of our common stock;
·  
an aggregate of 188,122 RSUs to our key employees, which RSUs settle in shares of our common stock;
·  
an aggregate of 50,363 RSUs to our key employees, which RSUs settle in cash; and
·  
an aggregate of 11,296 RSUs to our non-employee Directors, which RSUs settle in shares of our common stock.

Equity Compensation Plan Information. The following table sets forth information, as of December 31, 2011, about shares of our common stock that may be issued under our equity compensation plans that (a) have been approved by our shareholders and (b) have not been approved by our shareholders.

Equity Compensation Plan Information

   
Number of Securities to be Issued Upon Exercise of Outstanding Options,
   Warrants and Rights   .
 
Weighted Average Exercise Price of Outstanding Options, Warrants
       and Rights     .
 
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities
  Reflected in Column (a))  .
Plan Category                                                   .
 
(a)
 
(b)
 
(c)
             
Equity compensation plans
           
    approved by security holders (1)
           1,972,387
 
         $81.77  (2)
 
         1,679,942   (3)(4)(5)
Equity compensation plans
           
    not approved by security holders (6)
              140,804
 
          40.16  (2)
 
                  N/A (7)