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The following is an excerpt from a DEF 14A SEC Filing, filed by KEYCORP /NEW/ on 3/21/2007.
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KEYCORP /NEW/ - DEF 14A - 20070321 - EXECUTIVE_COMPENSATION

 
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
 
SUMMARY COMPENSATION TABLE
 
The following table sets forth the compensation paid by KeyCorp in 2006 to the CEO, CFO and each of the three highest paid executive officers of KeyCorp other than the CEO and CFO for the year ended December 31, 2006.
                                                                 
                                  Change in
             
                                  Pension
             
                                  Value and
             
                                  Nonqualified
             
                            Non-Equity
    Deferred
    All other
       
                Stock
    Option
    Incentive Plan
    Compensation
    Compensation ($)
       
Name and Principal Position
  Salary ($)     Bonus ($)     Awards ($) (1)     Awards ($) (1)     Compensation ($) (2)     Earnings ($) (3)     (see chart below)     Total ($)  
 
Henry L. Meyer (4)
    992,308             2,658,239       1,885,540       2,966,400       3,167,141       355,157       12,024,785  
Jeffrey B. Weeden (5)
    525,000             840,514       581,341       875,000       83,849       106,210       3,011,914  
Thomas C. Stevens (6)
    625,000             964,903       668,858       850,000       127,986       115,441       3,352,188  
Thomas W. Bunn (7)
    525,000             1,040,936       704,152       2,275,000       147,721       250,176       4,942,985  
Beth E. Mooney (8)
    361,731       1,200,000       154,569       342,223       1,175,000             149,799       3,383,322  
 
 
Footnotes:
 
(1) Stock Awards and Option Awards are represented as the cost of awards over the requisite service period, as described in Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R) and detailed on page 89 of KeyCorp’s 2006 Annual Report. FAS 123R defines a requisite service period as the period or periods over which an employee is required to provide service in exchange for a share-based payment. Stock awards are granted as Performance-based Restricted Stock or Performance Shares under the Long Term Incentive Compensation Plan as more fully described in the Compensation Discussion and Analysis on pages 39 to 49 of this proxy statement and the Grants of Plan-Based Awards Table on page 22 of this proxy statement.
 
 
(2) Non-equity incentive plan compensation refers to Short-Term Incentive Compensation as discussed on page 22 of this proxy statement.
 
 
(3) No above market or preferential earnings were paid on deferred compensation. Above market earnings are defined as amounts above 120% of the IRS Section 1274(d) Long-term Annual Federal Rate. Summary of retirement plan provisions is found on pages 27 and 28 of this proxy statement.
 
 
(4) Meyer — Short-term incentive compensation award includes $794,920 deferral consisting of 20% mandatory deferral of amounts between $100,000 and $500,000, 25% between $500,000 and $1,000,000 and 30% above $1,000,000. 2006 change in pension value and nonqualified deferred compensation earnings includes the following changes in the present value: $65,309 (Cash Balance Pension Plan) and $3,101,832 (Supplemental Retirement Plan).
 
 
(5) Weeden — Salary includes deferral of $31,500, and short-term incentive compensation award includes $215,825 deferral consisting of 20% mandatory deferral of amounts between $100,000 and $500,000, and 25% over $500,000 plus 6% voluntary deferral of remaining amount. 2006 change in pension value and nonqualified deferred compensation earnings includes the following changes in the present value: $13,693 (Cash Balance Pension Plan) and $70,156 (Second Excess Cash Balance Plan).
 
 
(6) Stevens — Salary includes deferral of $32,500, and short-term incentive compensation award includes $338,125 deferral consisting of 20% mandatory deferral of amounts between $100,000 and $500,000, and


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25% over $500,000 plus 25% voluntary deferral of remaining amount. 2006 change in pension value and nonqualified deferred compensation earnings includes the following changes in the present value: $19,852 (Cash Balance Pension Plan), $16,238 (Excess Cash Balance Plan), and $91,896 (Second Excess Cash Balance Plan).
 
(7) Bunn — Salary includes deferral of $31,500, and short-term incentive compensation award includes $587,500 deferral consisting of 20% mandatory deferral of amounts between $100,000 and $500,000, 25% between $500,000 and $1,000,000 and 30% above $1,000,000. 2006 change in pension value and nonqualified deferred compensation earnings includes the following changes in the present value: $13,882 (Cash Balance Pension Plan) and $133,839 (Second Excess Cash Balance Plan).
 
 
(8) Mooney — commenced employment with KeyCorp on April 28, 2006 and received a $400,000 current and an $800,000 deferred signing bonus. Short-term incentive compensation award includes deferral of $486,875 consisting of 20% mandatory deferral of amounts between $100,000 and $500,000, 25% between $500,000 and $1,000,000, and 30% above $1,000,000 plus 25% voluntary deferral of remaining amount.
 
ALL OTHER COMPENSATION
 
The following chart sets forth details of Other Annual Compensation provided by KeyCorp as presented in the Summary Compensation Table above.
 
                                         
                      KeyCorp
       
          Perquisites
          Contributions
       
          and Other
    Tax
    to Defined
    Total
 
    Personal Use
    Personal
    Reimbursements
    Contribution
    all other
 
Name
  of Aircraft ($)     Benefits ($)     (Gross Ups) ($)     Plans ($)     Compensation ($)  
 
Henry L. Meyer (1)
          34,013       12,079       309,065       355,157  
Jeffrey B. Weeden (2)
          4,682       0       101,528       106,210  
Thomas C. Stevens (3)
          7,203       2,713       105,525       115,441  
Thomas W. Bunn (4)
          16,692       10,719       222,765       250,176  
Beth E. Mooney (5)
          54,871       29,340       65,588       149,799  
 
 
Footnotes:
 
(1) Meyer — Perquisites and tax gross ups include the following: $12,611 (club dues), $2,961 (disability), $1,600 (security system), $16,842 (financial planning) $10,719 (tax gross up on club dues), and $1,360 (tax gross up on security system). Defined contribution plan company contributions include $13,200 (KeyCorp 401(k) Savings Plan), $176,627 (KeyCorp Deferred Savings Plan), and $119,238 (KeyCorp Automatic Deferral Plan).
 
(2) Weeden — Perquisites include the following: $2,182 (disability) and $2,500 (financial planning). Defined contribution plan company contributions include $13,200 (KeyCorp 401(k) Savings Plan), $62,265 (KeyCorp Deferred Savings Plan), and $26,063 (KeyCorp Automatic Deferral Plan).
 
(3) Stevens — Perquisites and tax gross ups include the following: $3,192 (club dues), $2,961 (disability), $1,050 (financial planning), and $2,713 (tax gross up on club dues). Defined contribution plan company contributions include $13,200 (KeyCorp 401(k) Savings Plan), $25,125 (KeyCorp Automatic Deferral Plan), and $67,200 (KeyCorp Deferred Savings Plan).
 
(4) Bunn — Perquisites and tax gross ups include the following: $12,611 (club dues), $2,481 (disability), $1,600 (financial planning), and $10,719 (tax gross up on club dues). Defined contribution plan company contributions


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include $13,200 (KeyCorp 401(k) Savings Plan), $88,125 (KeyCorp Automatic Deferral Plan), and $121,440 (KeyCorp Deferred Savings Plan).
 
(5) Mooney — Perquisites and tax gross ups include the following: $4,520 (club dues), $50,351 (moving allowance), $25,498 (tax gross up on moving allowance), and $3,842 (tax gross up on club dues). Defined contribution plan company contributions include $13,200 (KeyCorp 401(k) Savings Plan), $38,625 (KeyCorp Automatic Deferral Plan), and $13,763 (KeyCorp Deferred Savings Plan).
 
GRANTS OF PLAN-BASED AWARDS
 
                                                                                             
                                                        All other
             
                                                        Option
             
                                                        Awards:
    Exercise or
    Grant Date
 
                                                        Number of
    Base Price
    Fair Value of
 
                                                        Securities
    of Option
    Stock and
 
    Grant
  Estimated Future Payouts Under Non-Equity Incentive Plan Awards ($)     Estimated Future Payouts Under Equity Incentive Plan Awards (#)     Underlying
    Awards
    Option
 
Name
  Date   Minimum     Threshold     Target     Maximum     Minimum     Threshold     Target     Maximum     Options (#)     ($/Sh)     Awards (1)  
 
Henry L. Meyer
  1/1/06           1,030,000       2,060,000       6,180,000                                            
    2/7/06                                   28,237       56,474       112,948                   2,000,000  
    7/21/06                                                     260,000       36.37       1,923,835  
Jeffrey B. Weeden
  1/1/06           300,000       600,000       1,800,000                                            
    2/7/06                                   9,883       19,766       39,532                   700,000  
    7/21/06                                                     90,000       36.37       665,835  
Thomas C. Stevens
  1/1/06           250,000       500,000       1,500,000                                            
    2/7/06                                   10,589       21,178       42,356                   750,000  
    7/21/06                                                     100,000       36.37       739,835  
Thomas W. Bunn
  1/1/06           725,000       1,450,000       4,350,000                                            
    2/7/06                                   11,471       22,942       45,884                   812,500  
    7/21/06                                                     105,000       36.37       776,835  
Beth E. Mooney
  5/1/06           450,000       900,000       2,700,000                                            
    5/1/06                                   7,981       15,962       31,924                   600,000  
    5/1/06                                                     125,000       37.59       840,000  
 
 
(1) KeyCorp uses the Black-Scholes option pricing model to estimate the fair value of employee stock option grants. In applying this model, basic assumptions are made concerning variables such as expected option term, risk-free interest rate, and KeyCorp’s stock price volatility and future dividend yield.
 
Short-Term Incentive Compensation (Non-equity incentive plan awards)  — KeyCorp’s CEO and the senior officers reporting directly to him (including Ms. Mooney and Messrs. Weeden, Stevens, and Bunn) participate in the Annual Performance Plan (the “Plan”) which was approved by shareholders and consequently delivers awards which are tax deductible to KeyCorp. The Compensation and Organization Committee establishes specific targets for these senior officers. The overall potential funding under the Annual Performance Plan is based on KeyCorp’s total revenue, but individual awards are based on economic profit added, earnings per share, and return on equity, as described in the following paragraph. The Compensation and Organization Committee assesses participants’ performance against these goals to determine the incentive earned by each. Under KeyCorp’s 2006 Annual Incentive Plan, the Committee assigned weights to the following performance factors relative to plan: economic profit added (EPA), earnings per share (EPS) and return on equity (ROE). In establishing goals for each factor, the Committee considered KeyCorp’s 2006 operating plan, the outlook for the industry and KeyCorp’s peer group, and


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the median performance of peer companies during the preceding 3- and 5-year periods. At year-end, the Committee compared KeyCorp’s performance relative to each target as follows- if actual performance is:
 
  •  Not achieved at a factor’s threshold level, the factor will not fund.
 
  •  Achieved at a factor’s threshold level, 50% of that factor’s payout will fund.
 
  •  Achieved at a factor’s target level, 100% of that factor’s payout will fund.
 
  •  At the factor’s maximum level, 300% of that factor’s payout will fund.
 
The Compensation and Organization Committee may adjust payouts for changes in accounting rules, gains from the sales of subsidiaries or assets outside the ordinary course of business, or a restructuring or other non-recurring charge or adjustment. Based on all factors, the Committee funds a pool that will establish a payout percentage between 0% and 300% for performance results relative to the achievement of the annual goals set by the Committee. The Committee may increase or decrease that percentage by as much as 30% up or down to account for factors such as the quality of earnings, the overall performance of the economy and the industry, earnings per share growth and return on equity compared to peers and other qualitative items. Awards to the CEO and his direct reports under the Performance Plan are made using the standards applied and the performance percentage calculated under the Incentive Plan. For each executive, the Committee considers his or her target compensation, progress toward the individual performance goals set forth in his or her scorecard, and his or her contribution to the achievement of KeyCorp’s financial and strategic objectives. Aggregate awards to the CEO and his direct reports may not exceed the maximum bonus pool created under the Performance Plan.
 
Long-Term (Equity-based) Incentive Compensation  — The Committee believes that KeyCorp employees will be aligned with shareholders if they are eligible to receive stock-based, or equity compensation. The Company’s Long-Term Compensation Program is designed to promote sound decisions and actions over three-year periods, or cycles. It does so by increasing employees’ share ownership, aligning their long-term financial interests with those of shareholders and retaining high-performing employees. In 2004, the Committee introduced performance-based restricted stock and expanded the eligibility for restricted stock awards to a broader group of senior managers. There are two long-term incentive compensation plan performance cycles in progress that use restricted stock and an additional three year cycle commencing in 2007, in addition to stock option awards.
 
The design features of the 2005-2007 and 2006-2008 performance cycles are:
 
  •  The CEO and his direct reports receive half of their restricted stock award in the form of performance based restricted stock and half as performance shares to be paid in cash.
 
  •  Performance-based restricted stock and performance shares cliff vest three years from their grant date to the extent KeyCorp achieves defined performance goals. Executives forfeit these shares if the goals are not achieved.
 
For 2005 and 2006 awards, the Committee has selected three performance factors and assigned a weight to each. Each has a defined cumulative three-year goal for threshold, target and maximum performance. The factors


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are EPA, EPS and ROE. At the end of the performance cycle, the Committee determines KeyCorp’s performance relative to each factor as follows:
 
  •  If actual performance does not meet the threshold level, executives forfeit their performance-based restricted stock and performance shares.
 
  •  If actual performance reaches the threshold level, half of these shares will vest.
 
  •  If actual performance reaches the target level, all of these shares will vest.
 
  •  At the defined maximum performance level for each measure, 200% of the target will vest for the 2005-2007 and 2006-2008 cycles.
 
  •  Performance for each factor is interpolated on a linear basis.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
The following table provides information regarding outstanding equity award grants held at December 31, 2006 by each of the executive officers named in the Summary Compensation Table.
 
                                                     
                                Stock Awards  
        Option Awards           Equity Incentive
 
        Number of
    Number of
                Equity Incentive
    Plan Awards: Market
 
        Securities
    Securities
                Plan Awards: Number
    or Payout Value of
 
        Underlying
    Underlying
                of Unearned Shares,
    Unearned Shares,
 
        Unexercised
    Unexercised
    Option
    Option
    Units or Other
    Units or Other
 
        Options (#)
    Options (#)
    Exercise
    Expiration
    Rights that Have
    Rights that Have
 
Name
  Grant Date   Exercisable     Unexercisable (1)     Price ($)     Date     not Vested (#) (2)     not Vested ($)  
 
Henry L. Meyer
  1/14/1998     80,000             32.8438       1/14/2008                  
    1/13/1999     85,000             30.7500       1/13/2009                  
    1/13/1999     25,000             40.0000       1/13/2009                  
    1/13/1999     25,000             45.0000       1/13/2009                  
    1/13/1999     25,000             50.0000       1/13/2009                  
    1/18/2000     47,300             21.2500       1/18/2010                  
    11/15/2000     100,000             22.9375       11/15/2010                  
    1/17/2001     400,000             28.2500       1/17/2011                  
    1/17/2002     400,000             24.6050       1/17/2012                  
    7/17/2003     400,000             25.6400       7/17/2013                  
    7/23/2004     173,334       86,666       29.2700       7/23/2014                  
    7/22/2005     100,000       200,000       34.3950       7/22/2015                  
    7/21/2006           260,000       36.3700       7/21/2016                  
    Aggregate
non-option
                                               
    awards                                     205,009       7,796,492  


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                                Stock Awards  
        Option Awards           Equity Incentive
 
        Number of
    Number of
                Equity Incentive
    Plan Awards: Market
 
        Securities
    Securities
                Plan Awards: Number
    or Payout Value of
 
        Underlying
    Underlying
                of Unearned Shares,
    Unearned Shares,
 
        Unexercised
    Unexercised
    Option
    Option
    Units or Other
    Units or Other
 
        Options (#)
    Options (#)
    Exercise
    Expiration
    Rights that Have
    Rights that Have
 
Name
  Grant Date   Exercisable     Unexercisable (1)     Price ($)     Date     not Vested (#) (2)     not Vested ($)  
 
Jeffrey B. Weeden
  9/30/2002     52,859             24.7050       9/30/2012                  
    7/17/2003     100,000             25.6400       7/17/2013                  
    7/23/2004     56,667       28,333       29.2700       7/23/2014                  
    7/22/2005     28,334       56,666       34.3950       7/22/2015                  
    7/21/2006           90,000       36.3700       7/21/2016                  
    Aggregate
non-option
                                               
    awards                                     64,644       2,458,411  
Thomas C. Stevens
  1/13/1999     50,000             30.7500       1/13/2009                  
    1/18/2000     50,000             21.2500       1/18/2010                  
    1/17/2001     150,000             28.2500       1/17/2011                  
    1/17/2002     75,000             24.6050       1/17/2012                  
    7/17/2003     125,000             25.6400       7/17/2013                  
    7/23/2004     64,667       32,333       29.2700       7/23/2014                  
    7/22/2005     33,334       66,666       34.3950       7/22/2015                  
    7/21/2006           100,000       36.3700       7/21/2016                  
    Aggregate
non-option
                                               
    awards                                     76,930       2,925,648  
Thomas W. Bunn
  7/17/2003     125,000             25.6400       7/17/2013                  
    7/23/2004     70,000       35,000       29.2700       7/23/2014                  
    7/22/2005     35,000       70,000       34.3950       7/22/2015                  
    7/21/2006           105,000       36.3700       7/21/2016                  
    Aggregate
non-option
                                               
    awards                                     82,108       3,122,567  
Beth E. Mooney
  5/1/2006           125,000       37.5900       5/1/2016                  
    Aggregate
non-option
                                               
    awards                                     15,962       607,035  

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Footnotes:
   
(1)   Option Awards
  Option awards vest based on a 1/3 per year vesting schedule.
    7/23/2004 Grant — Unvested options will vest on 7/23/2007.
    7/22/2005 Grant — 1/2 of unvested options will vest on 7/22/2007; 1/2 of unvested options will vest on 7/22/2008.
    7/21/2006 Grant — 1/3 of unvested options will vest on 7/21/2007; 1/3 of unvested options will vest on 7/21/2008; 1/3 of unvested options will vest on 7/21/2009.
    5/1/2006 Grant (Mooney) — 1/3 of unvested options will vest on 5/1/2007; 1/3 of unvested options will vest on 5/1/2008; 1/3 of unvested options will vest on 5/1/2009.
(2)   Stock Awards
  Performance-based restricted stock and cash performance awards will vest 3 years from grant date to the extent performance requirements are met.
    Meyer — 31,163 performance-based restricted shares and 31,162 cash performance shares vested on 2/19/07; 29,610 performance-based restricted shares and 29,610 cash performance shares will vest 2/15/08; 28,237 performance-based restricted shares and 28,237 cash performance shares will vest 2/7/09; 26,990 cash performance shares will vest 12/31/09.
    Weeden — 10,128 performance-based restricted shares and 10,128 cash performance shares vested on 2/19/07; 9,620 performance-based restricted shares and 9,620 cash performance shares will vest 2/15/08; 9,883 performance-based restricted shares and 9,883 cash performance shares will vest 2/7/09; 5,382 performance-accelerated restricted shares will vest 12/31/09.
    Stevens — 11,686 performance-based restricted shares and 11,686 cash performance shares vested on 2/19/07; 11,100 performance-based restricted shares and 11,100 cash performance shares will vest 2/15/08; 10,589 performance-based restricted shares and 10,589 cash performance shares will vest 2/7/09; 10,180 performance-accelerated restricted shares will vest 12/31/09.
    Bunn — 12,660 performance-based restricted shares and 12,659 cash performance shares vested on 2/19/07; 12,030 performance-based restricted shares and 12,030 cash performance shares will vest 2/15/08; 11,471 performance-based restricted shares and 11,471 cash performance shares will vest 2/7/09; 9,787 performance-accelerated restricted shares will vest 12/31/09.
    Mooney — 7,981 performance-based restricted shares and 7,981 cash performance shares will vest 5/1/09.


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OPTION EXERCISES AND STOCK VESTED
 
The following table provides information regarding exercises of stock options and vesting of restricted stock during the year ended December 31, 2006, by the executive officers named in the Summary Compensation Table, along with the value of such officers’ exercised stock options or vested shares upon exercise or vesting.
 
                                 
    Option Awards     Stock Awards  
    Number of Shares
    Value
    Number of Shares
    Value
 
    Acquired on
    Realized on
    Acquired on
    Realized on
 
Name
  Exercise (#)     Exercise ($)     Vesting (#)     Vesting ($)  
 
Henry L. Meyer
    52,700       802,358              
Jeffrey B. Weeden
    72,141       877,163              
Thomas C. Stevens
    50,000       188,313              
Thomas W. Bunn
    125,000       1,327,500              
Beth E. Mooney
                       
 
PENSION BENEFITS
 
The following table presents an estimation of the present value of the benefits payable under each pension plan in which an executive named in the Summary Compensation Table participates along with their applicable years of service.
 
                     
              Present Value of
 
        Number of Years
    Accumulated
 
Name
  Plan name   Credited Service (#)     Benefit ($) (1)  
 
Henry L. Meyer
  Cash Balance Pension Plan     34       850,824  
    Second Supplemental Retirement Plan     34       11,837,213  
Jeffrey B. Weeden
  Cash Balance Pension Plan     4       45,537  
    Second Excess Cash Balance Plan     4       162,614  
Thomas C. Stevens
  Cash Balance Pension Plan     10       139,662  
    Excess Cash Balance Plan     10       362,428  
    Second Excess Cash Balance Plan     10       165,419  
Thomas W. Bunn
  Cash Balance Pension Plan     4       49,767  
    Second Excess Cash Balance Plan     4       379,238  
Beth E. Mooney
  Cash Balance Pension Plan            
    Second Excess Cash Balance Plan            
 
 
Footnotes:
 
(1) The estimated present value of the accumulated benefit in the Second Supplemental Retirement Plan is calculated based on age 65 normal retirement benefits discounted at a 5.50% in accordance with Statement of Financial Accounting Standard No. 87 as detailed on page 92 of Key’s 2006 Annual Report.
 
The values presented for the Cash Balance Pension, Excess Cash Balance and the Second Excess Cash Balance Plans represent the respective account balances as of December 31, 2006.


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KeyCorp Cash Balance Pension Plan  — Upon meeting plan eligibility requirements, all full and part time employees of KeyCorp and its participating subsidiaries participate in the KeyCorp Cash Balance Pension Plan. The Cash Balance Pension Plan is a defined benefit plan that provides a quarterly benefit accrual for each plan participant based on the participant’s years of “vesting service” and “compensation.” For purposes of the Cash Balance Pension Plan, eligible compensation generally means the entire amount of compensation paid to employees by reason of their employment as an employee of KeyCorp, as reported for federal income tax purposes, including elective deferrals under the KeyCorp 401(k) Savings Plan and KeyCorp Flexible Benefits Plan. However, amounts attributable, for example, to exercise of stock appreciation rights and/or stock options, non-cash remuneration, moving expenses, relocation bonuses, fringe benefits, deferred compensation, lump sum severance payments, signing bonuses or any funds paid following termination or retirement from KeyCorp are excluded from the plan’s definition of compensation. KeyCorp has established a bookkeeping account in each participant’s name which is credited with KeyCorp’s contributions on a quarterly basis for each quarter in which the participant remains employed by KeyCorp and works a minimum of 250 hours during that quarter. Participants’ Plan accounts are also credited with interest credits on a quarterly basis. The Pension Plan requires 5 years of service for vesting.
 
KeyCorp Excess Cash Balance and Second Excess Cash Balance Pension Plans  — In addition to the KeyCorp Cash Balance Pension Plan, KeyCorp also maintains the KeyCorp Excess Cash Balance Pension Plan and the Second Excess Cash Balance Pension Plan (“Excess Plans”). The Excess Plans provide all officers salary grade or equivalent 86 and above with the pension plan benefit that would have been accrued under the Cash Balance Pension Plan “but for” the compensation limits of Section 401(a)(17) and benefit accrual limits of Section 415 of the Internal Revenue Code. Ms. Mooney will and Messrs. Stevens, Bunn, and Weeden currently participate in the Excess Plans. To be eligible for an early retirement benefit under the Excess Plans, a participant must be age 55 with a minimum of 5 years of “vesting service” (as defined in the plan) or must be “terminated under limited circumstances” with a minimum of 25 years of service, provided the participant executes a non-compete and non-solicitation agreement with KeyCorp.
 
KeyCorp Second Supplemental Retirement Plan  — The KeyCorp Second Supplemental Retirement Plan provides a grandfathered group of KeyCorp officers with a supplemental retirement benefit that is in addition to the benefit that the participant is otherwise eligible to receive under the Cash Balance Pension Plan. The Second Supplemental Retirement Plan was frozen to new participants in 1995; it currently maintains nine active participants including Mr. Meyer. Participants in the Second Supplemental Retirement Plan are not eligible to participate in the KeyCorp Excess Plans. The Second Supplemental Retirement Plan provides participants with a plan benefit which equals up to 63% of the participant’s “final average compensation” when the Second Supplemental Retirement Plan benefit is combined with the participant’s pension plan benefit and age 65 social security benefit. Eligible compensation generally means base salary and incentive compensation (short-and long-term) paid to employees by reason of their employment with KeyCorp, as reported for federal income tax purposes, or the money which would have been paid but for the employee’s pre-tax deferrals to the KeyCorp 401(k) Savings Plan and benefit elections under the KeyCorp Flexible Benefits Plan and amounts deferred under the various Key-sponsored deferred compensation plans. However, amounts attributable, for example, to exercise of stock appreciation rights and/or stock options, noncash remuneration, moving expenses, relocation bonuses, signing bonuses, fringe benefits, lump sum severance payments, or any funds paid following termination or retirement from KeyCorp are excluded from the plan’s definition of compensation. To be eligible for an early retirement benefit under the plan, a participant must be age 55 with 10 years of “credited service” (as defined in the plan) or must be “terminated under


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limited circumstances” with a minimum of 25 years of credited service, provided the participant executes a non-compete and non-solicitation agreement with KeyCorp.
 
For purposes of the Second Supplemental Retirement Plan, the term “final average compensation” means the annual average of the participant’s highest aggregate “compensation” (as defined in the plan) for any period of 5 consecutive years during the 10 year period preceding the participant’s termination date. For certain participants, including Mr. Meyer, the term “final average compensation” includes certain long term incentive awards comprised of up to 50% performance based restricted stock.
 
NONQUALIFIED DEFERRED COMPENSATION
 
The following table shows the deferred compensation activity for the executives named in the Summary Compensation Table. All executive nonqualified and KeyCorp contributions to each plan are also included in current year compensation presented in the Summary Compensation Table.
 
                                                             
                                      Amount of
       
                                      Aggregate
       
                                      Balance at
       
                                      Last FYE
       
                                      also Reported
       
        Executive
    KeyCorp
    Aggregate
          Aggregate
    in Prior Years’
       
        Contributions
    Contributions
    Earnings
    Aggregate
    Balance
    Summary
    Plan
 
        in Last
    in Last
    in Last
    Withdrawals/
    at Last
    Compensation
    Entry
 
   
Plan
  FY ($)     FY ($)     FY ($)     Distributions ($)     FYE ($)     Tables     Date  
 
Henry L. Meyer
  Second Excess 401(k) Plan     176,627       176,627       537,531             3,507,978       2,012,734       1987  
    Automatic Deferral Plan     794,920       119,238       216,045       428,311       1,748,418       947,600       1999  
    Second Deferred Compensation Plan                 786,430             6,066,978       3,430,356       1997  
Jeffrey B. Weeden
  Second Excess 401(k) Plan     57,851       57,851       61,818             448,334       324,280       2002  
    Automatic Deferral Plan     173,750       26,063       51,444       83,253       411,845       216,584       2002  
    Second Deferred Compensation Plan     73,575       4,415       1,838             35,228             2002  
Thomas C. Stevens
  Second Excess 401(k) Plan     55,013       55,013       169,695             1,197,702       717,294       1996  
    Automatic Deferral Plan     167,500       25,125       53,856       104,529       411,845       216,584       1999  
    Second Deferred Compensation Plan     203,125       12,188       238,441             1,865,647       1,114,911       1996  
Thomas W. Bunn
  Second Excess 401(k) Plan     119,550       119,550       98,771             680,027       557,050       2002  
    Automatic Deferral Plan     587,500       88,125       208,203       547,275       1,341,634       649,750       2002  
    Second Deferred Compensation Plan     31,500       1,890       477,693             3,690,005       2,534,422       2002  
Beth E. Mooney
  Automatic Deferral Plan     257,500       38,625                   296,125             2006  
    Second Deferred Compensation Plan     229,375       13,763                   243,138             2006  
    Deferred Bonus Plan           800,000       40,359             840,359             2006  
 
Second Excess 401(k) Savings Plan  — The Second Excess 401(k) Savings Plan was designed to provide officers with a salary grade equivalent of 86 and above with a nonqualified retirement benefit which is generally reflective of the retirement benefit that they would have been entitled to receive under the tax-qualified KeyCorp 401(k) Savings Plan, but for the various limitations contained in the Internal Revenue Code. The Second Excess 401(k) Savings Plan is an unfunded plan and the value of plan benefits is reflected on a bookkeeping basis on KeyCorp’s general ledger. Eligible employees may defer up to 6% of eligible compensation and receive a dollar for dollar company match on their contributions. Company match vests after three years of vesting service. Employee monies can be invested on a bookkeeping basis in funds mirroring those in the 401(k) Savings Plan. The employer


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match is invested on a bookkeeping basis in the KeyCorp Common Stock Fund. Vested balances are distributed upon retirement or termination as follows:
 
  •  If a participant’s vested plan account balance equals or exceeds $50,000, it will be distributed in a series of monthly installment distributions over a period of ten years.
 
  •  If a participant’s vested plan account balance as of termination or retirement is under $50,000, it will be distributed as an automatic cash-out as a single lump sum cash payment.
 
Automatic Deferral Plan  — The KeyCorp Automatic Deferral Plan is designed to require key employees of KeyCorp to automatically defer a percentage of their incentive compensation accrued under a KeyCorp-sponsored incentive compensation plan to the Automatic Deferral Plan until that incentive compensation becomes vested. The Automatic Deferral Plan is designed in conjunction with applicable KeyCorp-sponsored incentive compensation plans to require participants to automatically defer a set percentage of incentive compensation to the Automatic Deferral Plan when incentive compensation exceeds $100,000 for the applicable deferral period. An employee meeting the eligibility and plan participation requirements shall automatically defer the following amounts from their applicable incentive award:
 
  •  20% of the employee’s incentive award between $100,000 and $500,000,
 
  •  25% of the employee’s incentive award between $500,000 and $1,000,000, and
 
  •  30% of the employee’s incentive award greater than $1,000,000.
 
Incentive compensation deferrals (“Participant Deferrals”) are reflected in a bookkeeping Plan account established in the participant’s name, and are automatically “invested” on a bookkeeping basis in the plan’s Common Stock Account. KeyCorp also provides a matching contribution equal to 15% of Participant Deferrals for the applicable deferral period. This matching contribution is also credited on a bookkeeping basis to participant accounts, and is similarly “invested” on a bookkeeping basis in the plan’s Common Stock Account. Participant Deferrals and matching contributions are subject to a three-year graded vesting period. If the participant who is less than 55 years of age with less than 5 years of service voluntarily elects to terminate employment with KeyCorp prior to completing this vesting requirement, or if discharged for cause, both unvested Participant Deferrals as well as unvested matching contributions are automatically forfeited. Upon vesting, the participant’s account balance with all earnings and gains thereon is automatically distributed in KeyCorp Common Shares.
 
Second Deferred Compensation Plan  — The Second Deferred Compensation Plan was designed to provide officers with a salary grade equivalent of 86 and above with the opportunity to defer income under the plan until the employee’s termination from KeyCorp. The Second Deferred Compensation Plan permits eligible employees to defer, on a pretax basis, up to 50% of base salary, and up to 100% of incentive compensation awarded under a KeyCorp sponsored incentive compensation plan. Pretax deferrals are reflected in a bookkeeping plan account established in the participant’s name, and at the participant’s direction are “invested” on a booking basis in the plan’s Interest-Bearing Account, the plan’s KeyCorp Phantom Common Stock Account, or in one or more of the plan’s several Investment Funds mirroring those in the qualified 401(k) Savings Plan. KeyCorp provides a Matching Contribution of up to 6% of Participant Deferrals deferred under the plan for each applicable Plan year. Additionally, if the participant elects to invest Participant Deferrals in the Plan’s Phantom Common Stock Account until retirement from KeyCorp at age 65, KeyCorp also provides an additional 4% Matching Contribution (i.e., for a total Matching Contribution of up to 10%) on those Participant Deferrals. Participation in the Second Deferred


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Compensation Plan is voluntary. Participant Deferrals along with all earnings, gains and losses thereon are always 100% vested. Vesting for purposes of receiving the 6% Matching Contribution is upon completion of three years of vesting service and for purposes of receiving the additional 4% is upon completion of three years of vesting service and attainment of Normal Retirement which is retirement on or after age 65. Distributions of vested benefits is made upon termination or retirement based on participant elections made at the time of deferral to receive plan benefits as either a lump sum payment or as a series of installment payments over a period of 60, 120, or 180 months.
 
Deferred Bonus Plan  — The KeyCorp Deferred Bonus Plan has been designed to provide selected candidates with a mandatory deferral vehicle for signing bonus awards that are subject to a vesting requirement. While deferred under the Plan, the deferred bonus award is invested on a bookkeeping basis in the KeyCorp Phantom Common Stock Account, and is able to grow in value as Key’s stock grows in value. Participants are fully vested in their deferred bonus award upon completion of three years of vesting service or on a three-year graded vesting schedule as determined at the time of grant. Upon vesting, participants receive an automatic lump sum payment of their vested bonus award in KeyCorp common shares, less applicable taxes, unless they have elected to have their deferred bonus award transferred to the KeyCorp Second Deferred Compensation Plan.
 
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
 
KeyCorp is party to an employment agreement with Mr. Meyer and change of control agreements with certain of its other senior officers, including Ms. Mooney and Messrs. Stevens, Bunn, and Weeden.
 
On December 22, 2005, KeyCorp notified Mr. Meyer and the recipients of the change of control agreements that their agreements would be modified as of January 1, 2007. The new agreements are very similar to the prior agreements, except that severance payments for individuals who had agreements as of that date have been reduced to include only 50% (as opposed to 100%) of the officer’s average long-term incentive compensation in the severance computation, and severance payments for new recipients (including Ms. Mooney) do not include any payment with respect to long-term incentive compensation.
 
Employment Agreement with Mr. Meyer.   KeyCorp originally entered into the employment agreement with Mr. Meyer on May 15, 1997. As noted above, it was most recently amended on January 1, 2007. Pursuant to the employment agreement, Mr. Meyer is to be employed by KeyCorp as its Chairman, President, and Chief Executive Officer for a constantly renewing three-year term at a base salary of not less than $1,000,000 per annum plus full participation in all incentive and other compensatory plans available generally to KeyCorp’s executive officers.
 
Severance Payable Upon Involuntary Termination
 
If Mr. Meyer’s employment is terminated by KeyCorp without cause at any time, he is entitled to the following:
 
  •  an amount equal to three times the sum of his base salary plus his average annual incentive and 50% of his average long-term incentive compensation in a lump sum within 30 days after the termination;
 
  •  the benefit of continuing participation in all KeyCorp retirement and savings plans through the third anniversary of the termination;


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  •  a lump sum payment equal to the amount of company contributions Mr. Meyer would have received under the KeyCorp Deferred Savings Plan as if he had deferred 6% of base salary plus incentive compensation for the three-year period following termination of employment;
 
  •  the benefit of continuing medical, disability, and group term life insurance coverage through the third anniversary of the termination;
 
  •  all stock options (other than so-called “performance options,” which are options that vest or become exercisable only if certain stock price and/or financial performance tests are achieved) become fully exercisable; and
 
  •  specified other benefits (club dues, office space, secretarial support, and tax preparation assistance for a five year period and meeting fees and expenses if Mr. Meyer attends the annual meeting of shareholders of KeyCorp at the request of the Chief Executive Officer).
 
Severance Payable Upon Constructive Termination
 
The same severance benefits as described above are payable under Mr. Meyer’s agreement if his employment is constructively terminated. Under the employment agreement, Mr. Meyer may consider himself constructively terminated if at any time:
 
  •  his base salary is reduced other than in connection with an across-the-board salary reduction applicable to all executive officers of KeyCorp, or he is excluded from full participation in any incentive or other compensatory plan applicable to executive officers;
 
  •  he is demoted or removed from office;
 
  •  KeyCorp requests his resignation or retirement at a time when KeyCorp does not have grounds to terminate his employment for cause; or
 
  •  his principal place of employment is relocated outside of the Cleveland metropolitan area.
 
Severance Upon Constructive Termination After a Change of Control
 
The same severance benefits as described above are also payable under Mr. Meyer’s agreement if his employment is constructively terminated after a change in control. Mr. Meyer may consider himself constructively terminated if, after a “change of control,” as defined below:
 
  •  his base salary is reduced or he is excluded from full participation in any incentive or other compensatory plan that was available to him during the one-year period prior to the change of control;
 
  •  the annual incentive compensation paid to him or the equity compensation opportunities provided to him during the two year period immediately following the change of control is less than his average annual incentive compensation or the equity compensation opportunities provided to him before the change of control;
 
  •  his position, duties, and responsibilities are materially reduced;


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  •  he is unable to continue to carry out his responsibilities and duties as Chairman of the Board and Chief Executive Officer; or
 
  •  the headquarters of the surviving entity is outside of the Cleveland metropolitan area.
 
Definition of Cause
 
Under the employment agreement, KeyCorp will have “cause” to terminate Mr. Meyer’s employment before a change of control if he commits a felony, acts dishonestly in a way that is materially inimical to the best interests of KeyCorp, competes with KeyCorp, abandons and consistently fails to attempt to perform his duties, or if a bank regulatory agency issues a final order requiring KeyCorp to terminate or suspend his employment. KeyCorp will have “cause” to terminate Mr. Meyer’s employment after a change of control if he is convicted of a felony, acts dishonestly and feloniously in a way that is materially inimical to the best interests of KeyCorp, competes with KeyCorp or if a bank regulatory agency issues a final order requiring KeyCorp to terminate or suspend his employment.
 
Indemnification
 
Mr. Meyer is entitled to continuing indemnification to the fullest extent permitted by Ohio law for actions against him by reason of his being or having been a director or officer of KeyCorp or any related entity and to payment of certain legal fees incurred in enforcing his rights under his employment agreement.
 
Change of Control Agreements.   As noted above, KeyCorp is a party to change of control agreements with certain of its other senior officers (including Ms. Mooney and Messrs. Stevens, Bunn, and Weeden), which in most cases provide that if, at any time within two years following a change of control, the officer’s employment is terminated by KeyCorp (except for cause, as described below), or the officer is determined to be constructively discharged (because the officer’s base salary, incentive compensation or stock option opportunity is reduced or the executive is required to relocate the executive’s principal place of employment more than 35 miles from its location prior to the change of control), severance benefits will apply. Severance benefits consist of:
 
  •  A lump sum severance benefit equal to three years’ compensation, with compensation equal to:
 
  •  base salary plus average short-term incentive compensation and 50% of average long-term incentive compensation for Messrs. Stevens, Bunn and Weeden, and
 
  •  base salary plus average short-term incentive compensation for Ms. Mooney;
 
  •  continued participation in all applicable KeyCorp retirement plans and savings plans for the three-year period following termination of employment;
 
  •  a lump sum payment equal to the amount of company contributions the officer would have received under the KeyCorp Deferred Savings Plan as if the officer had deferred 6% of base salary plus incentive compensation for the three-year period following termination of employment; and
 
  •  the continuation of health benefits for eighteen months following termination of employment or until the officer secures other employment, if earlier (or, if the officer is age fifty with at least fifteen years of service at the time of termination of employment, the officer may elect to participate in the KeyCorp Retiree Medical Plan at KeyCorp’s cost).


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Each change of control agreement also provides a three-month “window period,” commencing fifteen months after the date of a change of control, during which the officer may resign voluntarily and receive similar severance benefits based on an eighteen-month period if the officer determines in good faith that the officer’s position, responsibilities, duties, status or reporting relationships are materially less than or reduced from those in effect before the change of control or KeyCorp’s headquarters is relocated outside of the greater Cleveland metropolitan area.
 
For purposes of the change of control agreements, “cause” includes conviction of a felony, dishonesty in the course of employment that constitutes a felony and is inimical to the best interest of KeyCorp or a subsidiary, imposition by a bank regulatory agency of a final order of suspension or removal, or competing with KeyCorp.
 
Section 280G Excise Tax on Payments.   In general, the employment and change of control agreements with the officers named in the Summary Compensation Table provide for a tax gross-up if any payment exceeds the limits established under Section 280G of the Internal Revenue Code so that the officer will receive the same after-tax payment as would have been the case if Section 280G did not apply.
 
Amounts Payable Under Agreements.   The following table sets forth the amounts payable under Mr. Meyer’s employment agreement and the change of control agreements effective January 1, 2007. Note that this table does not include any benefits payable to the executive officers included in the Summary Compensation Table under the retirement plan(s) of KeyCorp or any subsidiary (see page 27 of this proxy statement), or any payout to the executive officers included in the Summary Compensation Table under KeyCorp’s deferred compensation plan(s) (see page 29 of this proxy statement). Additional information about the amounts payable to the executive officers included in the Summary Compensation Table in the event of retirement, death or permanent disability is presented separately after the table.
 
                                                         
          Involuntary or Constructive Termination After a Change of Control        
                      Retirement,
                   
          Base
          Deferred
                   
    Retirement or
    Salary/
          Compensation
                   
    Termination     Average
          and Stock Option
          Involuntary or
       
    Vested
    Short Term and
          Vesting
          Constructive
       
Benefits / Payments
  Retirement
    Long term
          due to
          Termination After a
    Total Payable
 
Upon Termination
  and Deferred
    Incentive
    Continued Benefit
    Change in
          Change of Control
    After a Change
 
($000s)
  Compensation (1)     Compensation     Plan Participation     Control     Tax Gross-Up (2)     Total (3)     of Control (4)  
 
Henry L. Meyer
    26,153       15,700       7,200       3,666       14,083       40,649       66,802  
Jeffrey B. Weeden
    654       5,438       583       1,224       3,666       10,911       11,565  
Thomas C. Stevens
    4,851       5,775       695       1,104       4,114       11,688       16,539  
Thomas W. Bunn
    4,522       9,657       1,210       2,506       6,100       19,473       23,995  
Beth E. Mooney
    5       5,175       694       895       2,886       9,650       9,655  
 
 
(1) Vested Retirement and Deferred Compensation includes vested balances in the 401(k) Savings Plan, Cash Balance Pension Plan, Second Supplemental Retirement Plan, Second Excess 401(k) Savings Plan, Second Excess Cash Balance Pension Plan, Second Deferred Compensation Plan, and for Mr. Meyer, continued office space and secretarial support.
 
(2) Tax gross up amounts can vary dramatically depending upon the time period on which base wages are calculated. Internal Revenue Code Section 280G rules specify that change of control payments cannot exceed three times a 5-year average of taxable compensation. Gross up amounts can be higher or lower depending on the 5-year period that applies.


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(3) Each executive’s change of control agreement, other than Mr. Meyer’s, provides for a 3-month window period during which he or she may voluntarily resign and receive severance benefits if the officer determines in good faith that his or her position, responsibilities, duties, status, or reporting relationships are materially less than or reduced from those in effect before the change of control or KeyCorp’s headquarters is relocated outside the greater Cleveland metropolitan area. Mr. Meyer’s employment agreement does not include a window period. The amounts payable to each named executive who terminates employment during a window period are in lieu of the amounts set forth in the above table and are as follows: Mr. Weeden — $6,421,000, Mr. Stevens — $6,866,000, Mr. Bunn — $11,364,000, and Ms. Mooney — $5,272,000.
 
All employees participate in the KeyCorp Separation Pay Plan which provides for payment of one times base and incentive compensation (subject to a $500,000 cap) plus vesting of unvested benefits if there is a change of control. The amounts that would be payable for the executives if only covered by these arrangements and not an individual change of control agreement are: Mr. Meyer — $4,166,000, Mr. Weeden — $1,724,000, Mr. Stevens — $1,604,000, Mr. Bunn — $3,006,000, and Ms. Mooney — $1,395,000.
 
(4) In the event of termination under a change of control, the amounts shown under Retirement or Termination and the amounts shown under Involuntary or Constructive Termination After a Change of Control would be payable.
 
Benefits Payable Upon Retirement, Death or Disability
 
Equity Incentive Plans
 
Key’s equity incentive plans treat all participants as follows in determining benefits payable upon retirement, death or disability.
 
Performance-based Restricted Stock and Stock Performance Shares
 
  •  Employees who retire at age 55 plus 5 years of service or greater or who die or become disabled could receive a prorated award as follows:
 
  •  Shares will be vested on a prorated basis if the retirement occurs within the performance period. The employee could receive prorated shares at the conclusion of the performance period based on the employee’s active status during the performance period and Key’s performance against target.
 
  •  All employees who terminate voluntarily or involuntarily will forfeit all rights to any unvested long term incentive compensation awards.
 
Time-Lapsed Restricted Stock
 
  •  Employees who retire at age 55 plus 5 years of service or greater or who die or become disabled could receive a prorated award as follows:
 
  •  Time-lapsed shares will be vested on a prorated basis.
 
  •  All employees who terminate voluntarily or involuntarily will forfeit all rights to any unvested long term incentive compensation awards.


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Stock Options
 
  •  Employees who retire at age 55 plus 5 years of service or greater or who die or become disabled could receive a prorated award as follows:
 
  •  Stock options will be vested on a prorated basis.
 
  •  All employees who terminate voluntarily or involuntarily will forfeit all rights to any unvested stock option awards.
 
  •  All employees who terminate voluntarily, involuntarily, or retire will be able to exercise any vested stock option awards after the termination date per the Plan provisions.
 
DIRECTOR COMPENSATION
 
The following table sets forth certain information regarding the compensation earned by or paid to each non-employee director who served on the Board of Directors in 2006. Directors who are employees are not compensated for their services as directors.
 
                                 
    Fees Earned or Paid
          All Other
       
Name
  in Cash ($)     Stock Awards ($) (1)     Compensation ($) (2)     Total ($)  
 
Ralph Alvarez
    50,000       72,031             122,031  
William G. Bares
    76,500       93,570       45,492       215,562  
Edward P. Campbell
    93,000       93,570       16,623       203,193  
Dr. Carol A. Cartwright
    56,000       93,570       22,970       172,540  
Alexander M. Cutler
    74,000       93,570       10,611       178,181  
H. James Dallas
    62,000       78,767             140,767  
Henry S. Hemingway (3)
    20,583       16,661       77,048       114,292  
Charles R. Hogan (4)
    57,000       93,570       34,888       185,458  
Lauralee E. Martin
    66,500       86,973       2,904       156,377  
Douglas J. McGregor (5)
    70,667       89,040       26,615       186,322  
Eduardo R. Menascé
    65,000       93,570             158,570  
Steven A. Minter (6)
    23,583       16,661       14,934       55,178  
Bill R. Sanford
    75,000       93,570             168,570  
Peter G. Ten Eyck, II
    65,000       93,570             158,570  


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Footnotes:
                                             
              In-the-money
       
        Number of securities
    amount of
    Number of shares or
 
        underlying unexercised
    unexercised
    units of stock held
 
    OUTSTANDING EQUITY AWARDS
  options (#)
    options ($)
    that have not
 
(1)  
AT FISCAL YEAR-END
  exercisable/ unexercisable     exercisable/ unexercisable     vested (#)  
 
    Ralph Alvarez                             1,948  
    William G. Bares     42,800             522,706             6,691  
    Edward P. Campbell     37,300             522,706             6,691  
    Dr. Carol A. Cartwright     42,300             513,035             6,691  
    Alexander M. Cutler     30,000             468,193             6,691  
    H. James Dallas                             4,086  
    Henry S. Hemingway     49,800             611,728              
    Charles R. Hogan     49,800             611,728             6,691  
    Lauralee E. Martin                             6,691  
    Douglas J. McGregor     42,800             522,706              
    Eduardo R. Menascé                             6,691  
    Steven A. Minter     5,500                          
    Bill R. Sanford     30,000             468,193             6,691  
    Peter G. Ten Eyck, II     49,800             611,728             6,691  
 
       Options shown represent those granted under the 1994 Directors’ Stock Option Plan and the 1997 Stock Option Plan for Directors, which was replaced by the Directors’ Deferred Share Plan in 2003.
 
Dr. Cartwright, Ms. Martin and Messrs. Alvarez, Bares, Campbell, Cutler, Dallas, Hogan, McGregor, Menascé, Sanford, and Ten Eyck each received stock awards in 2006 with a grant date fair market value of $69,968.
 
Stock Awards are represented as the cost of awards over the requisite service period, as described in Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (FAS 123R). FAS 123R defines a requisite service period as the period or periods over which an employee is required to provide service in exchange for a share-based payment.
 
(2) All Other Compensation amounts represent 2006 earnings in the Directors Deferred Compensation Plan.
 
(3) Mr. Hemingway retired from KeyCorp’s Board of Directors on May 11, 2006.
 
(4) Cash fees include $1,000 received by Mr. Hogan for serving as a director on the Tacoma KeyBank National Association Advisory Board.
 
(5) Cash fees include $25,000 received by Mr. McGregor for serving as a director on the board of Blackhawk, a subsidiary of KeyCorp. Mr. McGregor retired from KeyCorp’s Board of Directors on November 10, 2006.
 
(6) Mr. Minter retired from KeyCorp’s Board of Directors on May 11, 2006.
 
Directors’ Compensation.   Directors’ compensation consists of two components — cash and stock based (or equity compensation). Each year the Nominating and Corporate Governance Committee reviews the amount and


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form of directors’ compensation payable at KeyCorp in comparison to directors’ compensation payable at peer bank holding companies. The Nominating and Corporate Governance Committee reports the results of its annual review to the full Board and recommends to the full Board changes, if any, in directors’ compensation.
 
Cash Component.   Directors (other than Messrs. Meyer and Stevens who receive no director fees) receive cash fees consisting of a $35,000 annual retainer, payable in quarterly installments, $1,500 for attendance at each Board or committee meeting except that fees for each scheduled Board or committee telephonic meeting are $1,000 for each meeting, and $1,500 for attendance at officially sanctioned meetings at which the director represents KeyCorp and which require a substantial time commitment. The Audit Committee chairperson receives additional compensation of $5,000 per quarter and outside directors who serve as chairpersons of the other committees receive additional compensation of $2,500 per quarter.
 
Stock Based Component.   The Board has determined that approximately 50% (in value) of the Board’s compensation should be equity compensation in order to more closely align the economic interests of directors and shareholders. In May 2003, the shareholders of KeyCorp approved the Directors’ Deferred Share Plan as a replacement for the granting of stock options under the 1997 Stock Option Plan for Directors. Under the Directors’ Deferred Share Plan, each of the non-employee directors is automatically granted, on an annual basis, “phantom” KeyCorp common shares (“Deferred Shares”) having an aggregate value equal to 200% of the annual cash retainer payable to a director. Each grant is subject to a minimum three-year deferral period which is accelerated upon a director’s retirement or death. Until otherwise determined by the Nominating and Corporate Governance Committee, the Deferred Shares are paid 50% in common shares and 50% in cash. In 2006, each Director was granted 1,913 Deferred Shares. Messrs. Meyer and Stevens were not eligible to participate in the Directors’ Deferred Share Plan during 2006 because they were employees of KeyCorp.
 
Terminated Director Stock Option Plans.   Prior to the Directors’ Deferred Share Plan, directors of KeyCorp were awarded stock options under the 1997 Stock Option Plan for Directors or its predecessor plan, the 1994 Directors’ Stock Option Plan. Both plans have been terminated except with respect to awards granted prior to the date of their respective terminations, and no shares remain available for grant under either plan. The KeyCorp 1994 Directors’ Stock Option Plan provided for grants to each of the non-employee directors, on an annual basis, of options to purchase 3,500 KeyCorp common shares. The KeyCorp 1997 Stock Option Plan for Directors provided for grants to each of the non-employee directors, on an annual basis, of stock options having a value (determined on a formula basis) on the grant date equal to 2.75 times the annual cash retainer payable to a director. All options granted under both plans vested upon grant and expire ten years after grant. The purchase price of the option shares was equal to the fair market value on the date of grant.
 
Second Director Deferred Compensation Plan   Under the KeyCorp Second Director Deferred Compensation Plan, directors are given the opportunity to defer for future distribution payment of director fees and further defer payment of Deferred Shares. Deferred payments of director fees are invested in either an interest bearing account (at an interest rate equal to 1/2% higher than the effective annual yield of the Moody’s Average Corporate Bond Yield Index) or a KeyCorp Common Shares account (in which the directors’ deferred compensation is invested on a bookkeeping basis in “phantom” KeyCorp common shares upon which dividends are accrued quarterly but which cannot be voted or transferred during the deferral period). Deferred payments of Deferred Shares are invested solely in the common shares account. Distributions to the directors under the Second Director Deferred Compensation Plan in respect to the interest bearing account are in the form of cash and under the Common Shares account are in the form of KeyCorp common shares.


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COMPENSATION DISCUSSION AND ANALYSIS
 
KeyCorp’s executive compensation and benefits programs are designed to support two primary objectives:
 
  •  Attracting, retaining and motivating a talented team of executives that is capable of effectively leading KeyCorp and delivering strong total return to shareholders; and
 
  •  Ensuring that performance goals and compensation reflect a “pay for performance” philosophy.
 
The overall aim of the compensation and benefits programs is to align the interests of KeyCorp executives with the interests of shareholders. In practice, this means that executives receive compensation in an amount that reflects the value they deliver to shareholders and how the company performs compared to its peers. When KeyCorp performs well, their compensation is higher; when KeyCorp performs below the median of its peers, their compensation is less.
 
Peer Group Comparisons
 
Each year, the Compensation and Organization Committee (the “Compensation Committee”) surveys KeyCorp’s peers to analyze and assess the compensation and benefits they provide for their executive officers. Although KeyCorp’s total compensation packages target median pay among the peer group for median performance by comparable executives, the individual elements of KeyCorp’s program (base salary, annual and long-term incentive compensation, and benefits) may vary from peer medians.
 
Since 2002 the peer companies that the Compensation Committee has studied to calibrate pay and performance are the large super-regional banks as defined by the Standard and Poor’s Regional Bank Index and Diversified Bank Index (formerly the S&P Bank Index). These indices are appropriate for benchmarking pay and performance for several reasons: the indices consist of financial services firms with diversified business mixes that are similar to KeyCorp’s business mix; KeyCorp competes with these firms for customers and executive talent; and firms in the indices are selected independently by S&P. Therefore, these diversified companies are the best peers for total company performance and for senior executive pay comparisons. For the Line of Business executives, direct market share competitors, bank and non-bank, are selected to supplement the corporate peer group.
 
Standard and Poor’s modifies the members in each index from time to time based on criteria such as total asset or sales size and/or merger and acquisition activity. The number of listed banks has varied from eighteen to twenty-one in the last few years. The current peer companies are Regions Financial, PNC Financial, Wells Fargo, Synovus Financial, Compass Bancshares, Marshall & Ilsley, M&T Bank, Zions Bancorp, Wachovia Corp., Commerce Bancorp, U.S. Bancorp, SunTrust Banks, BB&T Corp., Huntington Bancshares, National City Corp., Comerica Inc., Fifth Third Bank and First Horizon. Mercer Human Resource Consulting, the Compensation Committee’s independent external executive compensation consultants, analyzes the financial and market performance for KeyCorp and its peers annually and agrees that this continues to be an appropriate peer group for KeyCorp’s pay and performance benchmarking.
 
Performance Metrics
 
Selecting the appropriate performance metrics is critical to KeyCorp’s pay for performance philosophy. Since 2004, the performance metrics used for both KeyCorp’s annual and long-term incentive plans have been earnings per share (EPS), return on equity (ROE) and economic profit added (EPA). Using the same metrics for several years


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in a row has ensured a consistent focus for KeyCorp employees. However the Compensation Committee analyzes these measures and their weightings annually to ensure they remain appropriate.
 
As described below, each of these metrics offers a different benefit, and as a group the Compensation Committee and management believe they drive improved shareholder return and foster maximum value for KeyCorp’s assets.
 
  •  EPS measures profitability per share. EPS growth is easily comparable to peers, and the metric is commonly used by the investment community to communicate expectations of performance.
 
  •  ROE measures profitability relative to capital used to generate earnings, and also is easily compared to peers.
 
  •  EPA measures profit generated in excess of the risk-adjusted cost of capital. Using this metric encourages employees to allocate assets to purposes most likely to generate growth and returns.
 
The Committee’s independent external compensation consultants have studied these performance metrics to determine how important they are — both alone and in combination — to KeyCorp’s mission of creating value for its shareholders. The consultants have confirmed to the Compensation Committee that EPS, ROE and EPA are strong indicators of corporate financial performance, demonstrate value creation and are important to the investment community, individually and in combination.
 
Elements of Total Compensation
 
Consistent with KeyCorp’s pay for performance philosophy, the Compensation Committee believes that KeyCorp can better motivate executive officers to enhance shareholder return if a relatively large portion of their compensation is “at risk”— that is, contingent upon the achievement of performance objectives. Under our compensation structure, the mix of base salary, annual incentive, and long-term incentive varies depending on the officer’s position level. The table below shows generally how total compensation is broken down into those three elements for the CEO and his direct reports:
 
                         
    Base
    Annual Incentive
    Long Term Incentive
 
    Compensation     Target     Target  
 
CEO
    14 %     30 %     56 %
Direct Reports
CFO/CAO
    20 %     24 %     56 %
Others
    20 %     35 %     45 %
 
The Compensation Committee believes that the compensation of executives who set the overall strategy for the business and have the greatest ability to execute that strategy should be predominantly performance-based. Consequently, at least 80% of the target compensation of the CEO and his direct reports is performance-based, with over one-half of the target total compensation of the CEO, CFO and CAO based on the achievement of long-term results (that is, results measured over a three year period). The balance of the CEO’s direct reports have about 45% of their target total compensation conditioned on the achievement of corporate long-term results.
 
Base Salary
 
Base salary represents the portion of each executive officer’s total compensation that is fixed, or not at risk. The Compensation Committee reviews each executive officer’s base salary annually, and makes adjustments to reflect


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the competitive market, the amount of time since the individual executive’s last adjustment, and the executive’s contributions to KeyCorp’s success and accomplishment of individual and unit goals. In 2006, the Committee reviewed market data and met with their independent external compensation consultant and determined to increase the base salary of the CEO. The market data for the CEO’s position had increased and it had been four years since his last increase.
 
Incentive Compensation
 
Incentive compensation represents the “at risk” portion of an executive’s pay. With incentive compensation, KeyCorp executives receive a lower total reward than comparable executives at peer companies when KeyCorp underperforms those companies, and a higher total reward when KeyCorp’s performance surpasses that of its peers.
 
Incentive compensation is delivered in two ways — through short-term (annual) and long-term plans. As noted above, the proportions vary with the executive’s ability to influence the implementation of KeyCorp’s business strategy and foster long-term financial success.
 
KeyCorp’s annual incentive compensation plans focus mainly on annual operating and financial performance goals linked to the strategic plan established by the Board. The Committee then supplements these corporate goals with other financial and non-financial performance goals for the CEO. Similarly, the CEO creates a scorecard that sets individual performance goals for each direct report that is aligned with his or her objectives. Each scorecard has revenue and expense goals focused on enhancing shareholder value, as well as goals related to credit quality, compliance and leadership. The categories are common for each executive but the individual goals are based upon line operating plans and objectives.
 
Incentive Compensation Plans
 
KeyCorp has two incentive compensation plans: the Annual Incentive Plan (the “Incentive Plan”) and the Annual Performance Plan (the “Performance Plan”). Each is designed to reward executive officers when KeyCorp achieves predetermined financial and performance goals. The Incentive Plan funds awards to KeyCorp’s executive officers whereas the Performance Plan is a separate plan for the CEO and his direct reports.
 
The primary reason for KeyCorp to maintain the separate incentive plan for the CEO and his direct reports is in order to comply with Internal Revenue Code Section 162(m). Section 162(m) precludes a public company from taking an income tax deduction for compensation in excess of $1 million paid to its CEO or any of its four other highest paid executive officers. However, the $1 million cap does not apply to a bonus or any other compensation paid pursuant to a performance-based incentive compensation plan that is approved by the shareholders. KeyCorp’s shareholders approved the goals set forth in the Performance Plan in 2004. In 2006 Keycorp paid $8,400,000 in compensation that was deductible under the Plan. The Committee may pay non-deductible compensation under certain circumstances.
 
The key features of the two plans are summarized below.
 
Annual Incentive Plan
 
The Compensation Committee takes several steps to set the basis for awards under the Incentive Plan. First, at the beginning of the year, the Committee establishes three goals for each of EPS, ROE and EPA. These goals are at


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different levels, considered “threshold,” “target,” and “maximum.” In establishing these goals, the Compensation Committee considers KeyCorp’s operating plan for the coming year, the outlook for the industry and KeyCorp’s peer group, and the median performance of peer companies during the preceding three- and five-year periods. The Committee also assigns a specific weight to each metric. The assigned weights for 2006 were 50% for EPS and 25% each for ROE and EPA. These weightings reflect the significant value KeyCorp places on growth in earnings — an important measure for shareholders. Concurrently, the Compensation Committee establishes target compensation amounts for each officer. Generally, target pay equals the median pay for comparable positions at peer companies.
 
To certify awards at year-end, the Compensation Committee measures KeyCorp’s actual results — making adjustments for changes in accounting rules, gains from the sale of subsidiaries or assets outside the ordinary course of business, or a restructuring or other non-recurring charge or adjustment, if appropriate. If performance matches the threshold goals for each of EPS, EPA and ROE, the Incentive Plan will fund 50% of the aggregate target pay. If results fall below threshold for one or more measure, there is no funding for that measure. However, the Compensation Committee has the discretion to fund up to 25% of target pay to reward incremental progress and to facilitate retention of critical employees. When results meet target goals, the Incentive Plan will fund 100% of the aggregate target pay. In the event results meet the maximum goals, the Incentive Plan will fund up to 300% of aggregate target pay. The maximum potential funding was set at 300% of target to give the Compensation Committee significant flexibility to reward executives should KeyCorp perform at an exceptional level relative to specific financial goals and in the top decile of the peer group.
 
The Compensation Committee may alter the performance percentage by as much as 30% in either direction to account for factors such as the quality of earnings, the overall performance of the economy and the industry, earnings per share growth and return on equity compared to peers and other qualitative items.
 
To determine the bonus pool for the Incentive Plan, the Compensation Committee multiplies the performance percentage by the aggregate target compensation that was established at the start of the year for achieving all performance goals.
 
For 2006, the bonus pool was equal to 144% of target in recognition of the positive performance versus plan, the successful strategic divestitures of Champion Mortgage and McDonald brokerage, the beneficial acquisition of ORIX Capital Markets, LLC, growth in revenues, growth in core deposits, good expense control, growth in earnings per share from continuing operations and strong talent acquisition.
 
Once the bonus pool is constituted, individual payouts are based on each executive officer’s performance and contribution to KeyCorp, taking into account the performance and contribution of the group or business line that the officer leads. An individual award may vary from zero to some multiple of target pay. Aggregate awards under the Annual Incentive Plan for all the executives as well as the CEO and his direct reports may not exceed the bonus pool.
 
Annual Performance Plan
 
In the first quarter, a shareholder-approved performance metric is selected to create an annual maximum bonus pool in the Performance Plan for the year to come. For 2006, the bonus pool was set at no more than 0.55% of total revenue, a measure that emphasizes the importance of revenue growth by sharing a portion of it with the individuals in the best position to affect KeyCorp’s results.


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Awards to the CEO and his direct reports under the Performance Plan are made using the standards applied and the performance percentage calculated under the Incentive Plan. For each executive, the Compensation Committee considers his or her target compensation, progress toward the individual performance goals set forth in his or her scorecard, and his or her contribution to the achievement of KeyCorp’s financial and strategic objectives. Aggregate awards to the CEO and his direct reports may not exceed the maximum bonus pool created under the Performance Plan.
 
Based on the Committee’s assessment of 2006 performance discussed above, the Committee has recognized the CEO’s strong leadership in improving the company’s business mix and its financial results during 2006, a three-year compounded annual total shareholder return of 13.3%, and the significant improvement in Key’s financial performance relative to the peer group of regional and diversified banks. As a participant in KeyCorp’s Annual Performance Plan, the CEO received 144% of his target opportunity or $2,966,400. This award was based on Key’s actual performance relative to the EPA, ROE, and EPS goals, peer performance as well as the Committee’s assessment of his individual performance.
 
Long-Term Incentive Compensation
 
KeyCorp’s Long-Term Compensation Plan is equity based and is designed to encourage long-term decision making. Long-term is defined as three-year periods that correspond with KeyCorp’s strategic planning time frame. The Compensation Committee believes that by increasing employees’ share ownership; equity-based plans align employees’ long-term financial interests with those of shareholders.
 
Historically, Key’s primary form of equity compensation was stock options. In the past, at least 80% of an executive officer’s long-term compensation consisted of options. However, in the last few years, KeyCorp has moved away from such heavy reliance on options for several reasons. First, KeyCorp began to expense options in 2003 after adopting FAS 123(R), making options more costly to grant. Second, given Key’s low stock price volatility, stock options were not a particularly effective motivational tool. Third, in 2003 KeyCorp needed to accelerate performance improvement and improve retention tools. Therefore, in 2004, the Compensation Committee decreased stock options to 50% of long-term incentive opportunity, and introduced performance-based restricted stock to create a balance between the focus on the market price of KeyCorp’s stock and on specific long-term goals that reinforce the achievement of KeyCorp’s strategic plan. One hundred percent of the equity awarded to the CEO and his direct reports is performance-based; they do not receive service-based equity (i.e., time-lapsed restricted stock). Of their restricted stock, half is in the form of performance-based restricted stock and half is cash performance shares. Cash performance shares are phantom stock, meaning all of their value is driven by the performance of KeyCorp’s actual stock, but when performance shares vest the owner receives their value in cash. These cash payments enable an executive to experience some of the intended value of the award without selling stock so long as he or she has met KeyCorp’s stock ownership guidelines, which are discussed below.
 
A new long-term three-year performance cycle begins each year on January 1. The value of the total target award is based on the median total long-term incentive award opportunity for comparable positions within KeyCorp’s peer group. There are currently two long-term incentive compensation plan performance cycles (2005-2007 and 2006-2008) in progress with a new one starting in 2007.
 
Stock options vest one-third per year for three years from the date of grant. This vesting schedule provides some value to recipients to reward improvements in stock performance and progress toward the cumulative three-


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year performance goals. Performance-based restricted stock and performance shares vest three years from their grant date to the extent KeyCorp achieves defined performance goals during the vesting period. These awards enhance retention because all shares are forfeited if the executive is not employed by KeyCorp for the entire vesting period (except in the case of death, disability or retirement).
 
The 2005 and 2006 awards were based on KeyCorp’s defined cumulative EPS, EPA and ROE goals for the three-year period. The weights assigned to these metrics are the same as the weights assigned under the Incentive Plan and similar to the Incentive Plan, there are goals for “threshold,” “target” and “maximum” performance levels. At the end of the performance cycle, the Compensation Committee determines KeyCorp’s performance relative to each factor as follows:
 
  •  If actual performance does not meet the threshold level, executives forfeit their performance-based restricted stock and performance shares.
 
  •  If actual performance reaches the threshold level, half of the performance shares will vest.
 
  •  If actual performance reaches the target level, all of the performance shares will vest.
 
At the defined maximum performance level for each measure, 200% of the performance shares will vest for the 2005-2007 and 2006-2008 cycles.
 
The CEO received a long-term incentive award under the terms of the Long-Term Compensation Program for the 2006-2008 performance cycle. The total value of the long-term incentive award was based on market data reflecting the long-term incentive compensation of CEOs at peer companies. The Committee awarded him a target grant of 56,474 shares (one-half as performance-based restricted stock and one-half as performance shares payable in cash) for the three-year cycle 2006-2008; the award had a value of $2,000,000, based on a share price of $35.415 on the award date and will vest three years from the grant date contingent upon KeyCorp’s cumulative results on the three performance factors (EPA, EPS and ROE).
 
Mr. Meyer also was awarded a stock option with an exercise price of $36.37 (the market value of a KeyCorp Common Share on the award date) covering 260,000 KeyCorp Common Shares, which will vest one-third each year for the next three years.
 
Policies Relating to Equity Compensation
 
Our equity-based awards align the interests of our executive officers with those of our shareholders in several other respects as well:
 
Conditional awards.   All restricted stock and special retention options are awarded on the condition that the recipient execute an agreement that (1) restricts his or her post-employment use of confidential information, and (2) prohibits the recipient, for one year, from soliciting KeyCorp clients or hiring its employees.
 
Clawback provisions.   If an employee engages in “harmful activity” prior to, or within six months after, that individual ceases to work for KeyCorp, then (1) any profits he or she realizes upon exercising any covered option on or after one year prior to termination of employment must be paid back to Key, and (2) he or she must forfeit all unexercised covered options. Harmful activity is broadly defined to include wrongfully using or disclosing, or failing to return, confidential KeyCorp information, as well as soliciting KeyCorp clients or hiring KeyCorp employees.


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Market value strike price.   KeyCorp bases the exercise price of all stock options on the closing market price of its common shares on the option grant date and does not subsequently change the exercise price. The Committee does not re-price options and KeyCorp has not and will not back-date options.
 
Award Grant Date.   The Board determined that performance-based shares should be granted at the same time that the Compensation Committee establishes performance goals, which is in the first quarter. Therefore, the total long-term incentive award is approved, and the performance-based restricted stock and performance shares are awarded, at the February meeting of the Compensation Committee. KeyCorp’s options are awarded at the July meeting of the Compensation Committee to correspond with the Company’s leadership review process.
 
Non-tax-qualified.   Incentive stock options are granted to senior executives up to the maximum limit prescribed by the Internal Revenue Code and any balance is awarded as non-qualified options.
 
Executive Stock Ownership Guidelines
 
The Committee believes that executives become aligned with shareholders’ interests by owning stock, and that ownership should extend beyond shares that are granted as a part of compensation. Therefore, KeyCorp has stock ownership guidelines for senior executives, as well as some specific requirements for beneficially owned shares (i.e., shares purchased by the individual outside of Key-sponsored plans). These guidelines are as follows:
 
  •  The CEO should own common shares with a value equal to at least six times his annual salary, including a minimum of 10,000 beneficially owned shares. For this purpose, the value of the CEO’s stock is evaluated quarterly, using the closing price at the end of the quarter.
 
  •  The CEO’s five direct reports should own common shares with a value (again, determined quarterly) equal to at least four times their salary, including a minimum of 5,000 beneficially owned shares.
 
  •  Newly hired or promoted executives have a reasonable period of time — typically three to five years — to achieve requisite ownership levels.
 
  •  Actual shares and restricted shares owned by the executive officer, and phantom shares owned under KeyCorp’s Excess 401(k) Savings Plan and deferred compensation plans, all count toward the ownership requirements (but not the beneficial ownership requirements). Unexercised stock options do not count toward ownership requirements.
 
  •  The CEO and all Section 16 officers are required to hold 100% of net shares obtained upon exercising any stock options (less the applicable exercise price and withholding taxes) for at least one year following the exercise date or, if later, until the executive meets the guideline.
 
The Compensation Committee regularly reviews the stock ownership of the senior management team to monitor compliance with these guidelines and discusses ownership status with the CEO. At December 31, 2006, the named executives owned, in the aggregate, 264% of the common shares specified by the guidelines — or more than twice the requisite amount. As of December 31, 2006, the CEO and the other named executives all met the guidelines with the exception of Ms. Mooney, who joined Key in May 2006.


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Retirement Plans
 
KeyCorp provides opportunities for all employees to save for retirement in two benefit plans: a voluntary 401(k) Savings Plan and a company-funded Cash Balance Pension Plan. As described below, KeyCorp also has an Excess Cash Balance Pension Plan for certain executives and, until recently, sponsored an Excess 401(k) Plan. In combination, the current plans provide a competitive benefit that balances employer and employee contribution and risk.
 
Savings Plans
 
KeyCorp’s 401(k) Savings Plan is voluntary; employees are eligible to participate as of their first paycheck. KeyCorp matches pre-tax contributions, dollar-for-dollar, up to an amount equal to 6% of pay, by contributing KeyCorp common stock to each participant’s plan account. Participants can choose among fourteen funds for investing their pre-tax contributions.
 
For all senior managers, through 2006, Key maintained an Excess 401(k) Plan — a non-qualified plan designed to extend the retirement benefit received in the 401(k) Savings Plan to highly compensated employees whose participation in the qualified 401(k) plan is limited by IRS regulations. The investment options were the same, except on a phantom basis, as those offered under the 401(k) Savings Plan. However, under the American Jobs Creation Act of 2005, the Excess 401(k) Plan was treated as deferred compensation rather than the retirement benefit it was intended to be. As a result of this legislation, and to simplify KeyCorp’s benefits, effective December 29, 2006, the Excess 401(k) Plan was discontinued and balances were merged into a Deferred Savings Plan that went into effect January 1, 2007.
 
Pension Plans
 
After one year of service, all employees who are at least 21 years old and have at least 1,000 hours of service are eligible to participate in the KeyCorp Cash Balance Pension Plan. The Pension Plan provides a quarterly benefit accrual to each participant based on compensation and years of service, and vests at five years of service.
 
For all senior managers, Key also maintains the Excess Cash Balance Pension Plan, which offers the non-qualified retirement benefit that highly compensated employees would have received in the Cash Balance Pension Plan if not for the limitations imposed by the IRS. The Excess Cash Balance Pension Plan benefits vests once an employee attains age 55 with five years of service.
 
Finally, Key maintains the Second Supplemental Retirement Plan (SSRP), which was frozen to new participants in 1995 when the Cash Balance and Excess Cash Balance Plans were introduced. The SSRP provides participants with a retirement benefit that equals up to 63% of “final average compensation” when combined with a participant’s Cash Balance Pension Plan benefit and age 65 Social Security benefit. As a long service (34 years) executive, the CEO is one of the six remaining (no other Named Executives) participants in this plan. In general, pension plans that calculate a benefit based on final average pay provide a greater retirement benefit, particularly for very long tenured employees. However, since final average pension plans were common in 1995, and the participants each have a long tenure with KeyCorp and reasonably relied on the benefit, the Compensation Committee felt that it was appropriate for KeyCorp to honor its SSRP commitment. All executives hired since 1995 participate in the same plans as all other employees of similar age, tenure, compensation and level.


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Deferred Compensation
 
KeyCorp maintains a mandatory Automatic Deferred Compensation Plan, and until recently also sponsored a voluntary Deferred Compensation Plan. The CEO and his direct reports participate in both plans.
 
The Automatic Deferred Compensation Plan was designed to retain employees who earn annual incentive compensation awards greater than $100,000 during a plan year. Each year, twenty percent of awards between $100,000 and $500,000, 25% of awards between $500,000 and $1,000,000, and 30% of awards greater than $1,000,000 are automatically deferred. There is a 15% company match, and all amounts are invested in Key common stock in a phantom account for that year. One-third of each year’s account vests every year after the deferral.
 
The Deferred Compensation Plan provided all senior managers with the opportunity to defer income (up to 50% of base salary and 100% of incentive plan awards) until termination or retirement. There was a 6% company match and the investment options were the same as those in the 401(k) Savings Plan (with the addition of an interest-bearing fund). All deferrals were vested immediately, and all 6% matches were vested after three years of service. The Deferred Compensation Plan was intended to provide a competitive, tax-advantaged mechanism for managers to supplement retirement savings. To accommodate changes in government regulations and to simplify KeyCorp’s benefits, effective December 29, 2006, the Deferred Compensation Plan was discontinued and balances were merged into the new Deferred Savings Plan.
 
Perquisites and Other Benefits
 
The Compensation Committee annually reviews the perquisites that senior managers receive. The primary perquisite for senior managers is reimbursement for tax preparation and financial planning services. The total expenditures for the CEO and his direct reports for these services are minimal.
 
The CEO is provided a home security system valued at approximately $2,500 per year. He does not use the corporate aircraft for personal reasons, nor does he provide it to others for personal use.
 
The Compensation Committee believes that luncheon and country clubs can serve as appropriate forums for building client relationships and for community interaction. KeyCorp pays for club memberships for select members of management based on demonstrable business requirements, which are reviewed annually.
 
Executive officers participate in the same health and welfare plans (medical, dental, life and long-term disability insurance), charitable gift match (up to $2,000 per employee year or $4,000 per year if an employee is a member of the board of a qualifying non-profit organization), and discounts on Key’s products that are available to all employees of similar age and years of service.
 
The Compensation Committee regularly reviews KeyCorp’s perquisites and believes they are appropriate and modest when compared to peer companies and are necessary to attract and retain high-caliber talent, particularly given the active consolidation environment in the industry.
 
Severance Benefits
 
KeyCorp maintains a Separation Pay Plan for all employees (including the CEO and his direct reports). The Separation Pay Plan will assist an employee if his or her position is eliminated or modified and no other comparable


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position is available at a Key location in the same geographic area. The separation pay benefit ranges from a minimum of two weeks of base salary to a maximum of 52 weeks of base salary, depending on years of service and job level. The separation pay benefit for senior managers is 52 weeks of base salary upon hire to reflect the longer time period required for these individuals to find comparable employment.
 
Separation pay is paid through salary continuation installments. Employees are eligible to continue medical and dental benefits under COBRA on a pre-tax basis at the Key employee rate during the salary continuation period. (This counts as part of the 18-month COBRA period for the continuation of health coverage.) Participation in all other benefits, such as the 401(k) Savings Plan, the Cash Balance and Excess Cash Balance Pension Plans, life insurance and disability coverage, cease when the salary continuation period begins.
 
Change of Control
 
There has been a great deal of merger and acquisition activity in the financial services industry and the Board believes it is in the best interests of shareholders if a select group of KeyCorp’s executive officers are able to objectively evaluate the potential merits of a change-of-control transaction without being distracted by the potentially adverse personal impact on themselves. Also, the existence of a change-of-control benefit helps KeyCorp to attract senior executives. As is common in the industry, Key has two tiers of benefits: Tier 1 for the CEO, his direct reports and nine executives and Tier 2 for fourteen other executives. The Committee believes that the total potential value of all change of control agreements with KeyCorp executives is not disproportionate to the overall market value of KeyCorp.
 
KeyCorp’s change-of-control agreements provide benefits if one of two things happens: the executive’s employment is terminated, or he/she is constructively discharged within two years after a change of control. A lump sum severance benefit is paid as follows:
 
         
    Multiple of Earnings  
 
Tier 1
    3X  
Tier 2
    2X  
 
Earnings are defined as base salary plus the average of annual incentive and 50% of long-term incentive compensation for executives that were covered by change-of-control agreements prior to 2005. Long-term incentive is excluded from the earnings definition for executives first having a change of control agreement in 2006.
 
Terminated executives may continue to participate in all applicable retirement plans for two years (under Tier 2 agreements) or three years (under Tier 1 agreements). KeyCorp pays for the executive to continue medical and dental benefits under COBRA for up to the 18-month COBRA period or until the executive becomes employed. All stock options vest immediately upon a change of control, and restricted stock vests if the employee is terminated within two years after a change of control. In addition, terminated employees are entitled to receive any vested benefits that they otherwise would have received under all applicable retirement and deferred compensation plans. These benefits are paid according to the plan provisions and are not increased or accelerated.
 
Tier 1 agreements provide a tax gross up for all Internal Revenue Code Section 4999 taxes imposed as a result of change-of-control benefits. Tier 2 benefits are capped to ensure that no excise taxes will be imposed.


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Governance
 
Responsibility for developing and administering KeyCorp’s pay-for-performance philosophy rests with the Compensation Committee. Committee members are independent directors who have retained an independent external compensation consultant and also seek expert advice from legal counsel and accounting practitioners. They also consult with KeyCorp’s managers and human resource professionals. Members’ specific functions are to:
 
  •  Approve KeyCorp’s compensation philosophy and related programs.
 
  •  Hire and supervise an independent compensation consultant.
 
  •  Annually review and approve KeyCorp’s performance goals for incentive plans.
 
  •  Assess how, to what degree, and under what conditions the CEO and other senior executives meet performance goals, and how those individuals should be compensated for their achievements.
 
  •  Annually review and approve the compensation of KeyCorp’s CEO and other senior executives, including their base pay and incentive and equity awards.
 
  •  Approve and administer equity-based plans and determine associated awards and grants.
 
  •  Approve the hiring, promotion and employment terms of KeyCorp’s CEO and other senior executives, including the terms of any related agreements, such as change-of-control or termination.
 
  •  Annually review with the CEO and Board how KeyCorp is organized and staffed, the depth of its “bench strength” and its management development and succession plans.
 
  •  Annually assess KeyCorp’s competitiveness in the marketplace and the effectiveness of programs designed to enhance performance.
 
  •  Consider the aggregate compensation payable to the CEO and other senior executives under a variety of scenarios, such as upon retirement or under a change-of-control situation to ensure that the amount of pay is consistent with KeyCorp’s compensation philosophy.


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