ITEM 11 - EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

ROLE OF THE BOARD OF GOVERNORS AND STATUTORY COMPENSATION AND BENEFITS REQUIREMENTS AND LIMITATIONS

The Board of Governors of the Postal Service establishes executive officer compensation and benefits, subject to the requirements and limitations of federal law. The Board has delegated to its Compensation and Management Resources Committee ("Compensation Committee") authority for initial review of management proposals related to compensation and benefits for executive officers. The Compensation Committee, which meets several times throughout the year, is composed solely of presidentially-appointed, Senate-confirmed Governors who are independent of postal management. The Compensation Committee makes recommendations to the full Board for their review and approval.

Federal law governing the Postal Service, set forth in Title 39 of the United States Code, provides that compensation and benefits for all officers in the Postal Service shall be comparable to the compensation and benefits paid for comparable levels of work in the private sector of the economy. The Postal Service is the second largest civilian employer in the nation, with approximately 646,000 career and non-career employees as of the end of fiscal year 2011. The Postal Service operates nearly 214,000 motor vehicles and more than 32,000 retail units. In 2011, the Postal Service delivered 168 billion pieces of mail, almost half of the world's mail, and generated $66 billion in revenue. In 2011, the Postal Service ranked 109th in Fortune Magazine's listing of Fortune Global 500 Companies. By way of comparison, two of our largest competitors ranked 166th and 261st on this list. If the Postal Service were listed on the Fortune 500 annual ranking of America's largest corporations, it would be ranked 34th. The same two of our largest competitors are ranked 48th and 73rd on that list.

Given the Postal Service's size and scope of operations, the comparability requirement in Title 39 would suggest that the Postal Service's executive officer compensation and benefits should be on par with the compensation and benefits of the very largest private sector companies in the United States. Even in these challenging economic times, comparably sized companies typically provide their top executives with annual salaries well in excess of $1 million and total compensation and benefits valued at several million dollars. These compensation packages typically consist of annual and long-term performance incentives, including a combination of cash payments and stock options and a number of benefits and perquisites.

Although the law governing the Postal Service provides that executives and others should be compensated at a level comparable to the private sector, the law does not afford the Governors the tools to achieve a standard of compensation comparable to the private sector. Postal law imposes three different caps on compensation for postal employees. The first cap provides that no officer or employee may be paid compensation "at a rate in excess of the rate for level I of the Executive Schedule under section 5312 of title 5" of the United States Code. 39 U.S.C. § 1003(a). This compensation cap was set at $196,700 for calendar year 2009, $199,700 for calendar year 2010 and $199,700 for calendar year 2011.

With the approval of the Board, however, the Postal Service may develop a program to award a bonus or other reward in excess of the compensation cap discussed above, as long as this does not cause the total compensation paid to the officer in a year to "exceed the total annual compensation payable to the Vice President [of the United States] under [3 U.S.C. § 104] as of the end of the calendar year in which the bonus or award is paid." 39 U.S.C. § 3686(a)-(b). This total compensation cap was $227,300 for calendar year 2009, $230,700 for calendar year 2010 and $230,700 for calendar year 2011. In approving any such program, the Board must determine that the bonus or award is based on a performance appraisal system that makes meaningful distinctions based on relative performance.

In addition, the Board may allow up to 12 officers or employees of the Postal Service in critical senior executive or equivalent positions to be paid total annual compensation up to "120 percent of the total annual compensation payable to the Vice President [of the United States] under [3 U.S.C. § 104] as of the end of the calendar year in which such payment is received." 39 U.S.C. § 3686(c). Based on the Vice President's salary for calendar years 2009, 2010 and 2011, this compensation cap was $272,760 for calendar year 2009, $276,840 for calendar year 2010 and $276,840 for calendar year 2011.

By law, postal employees, including executive officers, are entitled to participate in either the Civil Service Retirement System or Federal Employees Retirement System, depending on when their federal employment began. These retirement systems are described later in this compensation discussion and analysis. In addition, in order to remain competitive with comparable employment in private industry and other parts of the federal government, postal policy also authorizes certain additional benefits for all officers of the Postal Service, including executive officers. These include participation in the Federal Employees Health Benefits plan, paid life insurance, a periodic physical examination and parking. Other than changes required by law, the Board must authorize any increases to benefits for officers.

Compensation for postal executive officers is significantly below that of the private sector. In 2010, Towers Watson found that USPS executive base salaries are significantly below market when compared against published survey data of comparable jobs in the private sector. Although market data for equity or other long-term incentives was not a focus of that analysis, inclusion of such data would likely cause USPS executive total compensation to fall even further from the comparator marketplace.

COMPENSATION PHILOSOPHY AND OBJECTIVES

The Board recognizes that there is a significant disconnect between the comparability requirement and the compensation caps in the law governing the Postal Service and that the various compensation caps do not enable the Board to provide compensation and benefits for executive officers that are fully comparable to the private sector. The Board also recognizes that many of the compensation and benefit tools available in the private sector, such as equity ownership, are not available to the Postal Service, given its status as part of the federal government. These limitations make it difficult for the Postal Service to compete in the marketplace for executive officers and to retain current executive officers.

To attempt to achieve some level of comparability within the confines of the law, the Board has designed a compensation system that balances amounts paid as salary to executives in a given year, with the ability of the executive to earn additional compensation by meeting performance goals and objectives; a portion of this compensation may need to be deferred because of the compensation caps. The financial challenges facing the Postal Service significantly influenced the decisions on compensation for fiscal year 2011, as customers continue to change the way they use the Postal Service's products and services. The Board was also mindful of the impact of the economy and the political arena on the Postal Service's business.

Within the confines of its legislative authority, the Board's philosophy is that:

THE COMPENSATION PROGRAM

In 2007, after enactment of the Postal Act of 2006, the Compensation Committee of the Board of Governors retained the services of Watson Wyatt (now Towers Watson), an independent consulting firm specializing in executive compensation matters, to assist the Board in implementing the compensation provisions of the Postal Act of 2006 and to review and update the overall program for officer compensation and benefits.

The Compensation Committee recommended and the Board approved a salary band for the Postmaster General to be set at the legislative salary cap. In doing so, the Board's objectives were to design a compensation program that optimized the legislative flexibility granted by the Postal Act of 2006, reduced internal pay compression, improved external marketplace competitiveness and honored legislative constraints and existing pay ranges, consistent with the recommendations from Towers Watson. For the other executive officers, the Board set pay bands based on salary relationships of comparable executive officers in the comparator external market. In general, the Board has maintained these types of pay band relationships since 2007.

When the Governors appointed the current Postmaster General, they set his salary at the legislative salary cap. Given the Postal Service's significant financial challenges when he assumed office, the current Postmaster General asked the Governors not to award him any additional compensation, beyond salary and the general types of benefits provided to postal executives. The Governors agreed.

Over the years, the Governors have authorized the Postmaster General to establish actual salaries for the other executive officers, within the confines of the salary ranges established by the Governors. For calendar year 2011, after reviewing recommendations from the Postmaster General and the Compensation Committee and in light of the Postal Service's dire financial condition, the Governors froze salary ranges and salaries.

In 2011, the Postal Service continued to employ a national performance assessment program ("NPA") to set annual performance goals and metrics that vary among executive officers and are weighted to reflect appropriately the degree to which an executive is able to influence the overall performance of the Postal Service. Annual NPA metrics and targets generally take into consideration the Postal Service's performance during the prior year and particular challenges the Postal Service expects to face during the upcoming year. The NPA places emphasis on objective, measurable performance indicators. The Governors also set individual metrics and targets for the Postmaster General and Deputy Postmaster General and authorize the Postmaster General to establish individual metrics and targets for other officers.

Generally, the Board establishes annual Pay-for-Performance (PFP) incentive opportunities to provide incentives and to reward the Postmaster General and the Deputy Postmaster General for reaching various levels of performance. The Postmaster General establishes annual PFP incentive opportunities to provide incentives and to reward the other executive officers for reaching various levels of performance. Incentive payouts are not made for a particular goal if the Postal Service or the individual fails to meet minimum acceptable performance standards. While, in some years, annual PFP incentives are paid out in cash or deferred for future payment where required due to the compensation caps, it was determined that, in light of the Postal Service's financial condition, no performance awards would be paid for fiscal year 2011. This will be the fourth consecutive year that compensation for executive officers has been impacted by either a freeze in salary and/or a non- payment of performance lump sums.

The Postal Service has continued to use the NPA process to measure performance during fiscal year 2011 even though there will be no associated compensation. NPA performance goals and rewards fall into several categories. These include areas that an officer may directly influence, such as service, efficiency, employee satisfaction, and productivity, as well as those that are more susceptible to being affected by general economic conditions, such as revenue generation.

The Board believes that this mix of goals has helped the Postal Service to continue to deliver high-quality service even in the face of an unsettled economy. Particularly in a troubled economy, in order to remain viable, the Postal Service must serve its customers with the highest levels of efficiency and productivity. Measuring results and sharing information with executive officers on their performance is one way that the Postal Service sustains this performance.

For each goal, the Postmaster General establishes indicators identifying the type of performance that will enable the Postal Service to achieve or surpass the goal. These performance indicators are aligned at the corporate, functional, and individual levels and are weighted. The higher an individual's position is in the organization, the more his or her PFP goals will be tied to overall corporate performance. The executive officers' goals are aligned with national performance goals and linked to the overall success of the Postal Service.

Once the goals and indicators are established, executive officers are advised as to what the Postal Service expects of them in terms of performance during the year, how their performance will impact the entire Postal Service, and in years when performance incentives are authorized, the potential level of performance-based incentives they can expect depending on the Postal Service's and their individual performance. Under this program, an individual executive officer can receive a rating of Non-Contributor, Contributor, High Contributor or Exceptional Contributor, with a numerical rating within each category, depending on how the Postal Service performs on the national indicators and the individual's performance, as determined by the Postmaster General. As shown in the chart below, a rating of Non-Contributor would result from an overall numerical rating of 1 to 3. A rating of Contributor would result from a numerical score of 4 to 9. A rating of High Contributor would result from a score of 10 to 12 and a rating of Exceptional Contributor would result from a score of 13 to 15.

Overall Performance Rating
Adjective Rating Number Rating
Exceptional Contributor (EC) 13, 14, 15
High Contributor (HC) 10, 11, 12
Contributor (C) 4, 5, 6, 7, 8, 9
Non Contributor (NC) 1, 2, 3

In years when a salary freeze is not in effect and when performance incentives are authorized, the individual executive officer's performance rating would make the officer eligible for an increase to base salary as well as a performance-based lump sum payment. Due to statutory cap limitations, increases to the maximum of the salary range for executive officers generally follow the percentage increase to the Executive Schedule for any given year. Any salary increases for executive officers are limited by these maximums and are solely performance based as determined by the Postmaster General. Lump sum incentive payments are based on the executive officer's performance rating given by the Postmaster General and multiplied by a range of 1.33% to 2.50% based on the degree to which the individual has achieved previously set individual goals and metrics. The Postmaster General's discretion on PFP incentives for executive officers in a given year is limited by the Postal Service's overall performance on NPA goals and metrics. Generally, officer performance scores must average to the Postal Service's overall NPA performance score for the fiscal year.

Salary increases, if any, are determined after the end of the fiscal year, and any new salaries become effective for the following calendar year. Although management achieved very significant accomplishments in addressing the many challenges the Postal Service faced in fiscal year 2011, the Governors determined that salaries should remain frozen in calendar year 2012 in light of the Postal Service's current financial situation. For the same reason, the Governors did not award the Postmaster General a performance incentive for fiscal year 2011. Likewise, the Postmaster General, with the approval of the Governors, determined that performance incentives should not be paid for fiscal year 2011 for the other named executive officers. Although the Postal Service's financial situation caused the Governors to freeze salaries and not to allow incentive awards, the Governors noted that, despite the significant continuing decline in mail volumes over the past several years, management has continued to take aggressive actions within its control to reduce costs, maintain excellent service and secure revenue. Despite declining volume, management improved total factor productivity by reducing the workforce, overtime, and supplier expenses, as well as through a number of other process improvement efforts. In addition to maintaining high levels of service, management also maintained employee satisfaction, introduced a number of new products and services, increased customer access and offered mailers pricing incentives to help stem the volume decline. Management continued to streamline operations, closing a number of facilities and establishing a process to optimize network and retail operations. The Governors also noted that the Postal Service received an unqualified opinion from its external auditors as to the effectiveness of internal controls. Finally, management also took significant actions to pursue legislative reform in areas key to the Postal Service's ability to provide universal service in the future.

Components of the executive officer compensation and benefits program are further outlined below.

BASE SALARY

Base salaries provide a level of financial security that is appropriate for the executive's position within the Postal Service. Within the confines of law, base salaries are scaled within pay ranges designed to be competitive with the market median. As discussed above, maximum payouts in a given year are set by federal law. Executive officer salaries are reviewed at least annually and adjusted, as appropriate, to reflect factors such as individual performance, range of responsibilities, value and contribution to the organization, and experience. However, as discussed above, the Governors decided to freeze executive officer salaries for calendar year 2012, continuing the freeze already in place for calendar year 2011.

ANNUAL INCENTIVE

Annual incentives serve as a mechanism for adjusting total compensation levels commensurate with the attainment of planned results, thereby ensuring affordability and appropriate return to the Postal Service. As discussed above, the Postal Service uses the NPA program to set annual corporate performance goals and metrics. The Governors set the goals and indicators for the Postmaster General and the Deputy Postmaster General, and the Postmaster General establishes goals and indicators for the other executive officers. The Postmaster General's and the Deputy Postmaster General's performance is determined based on the degree to which they have achieved the previously -set goals and metrics. Likewise, executive officers' individual performance ratings are determined by the Postmaster General based on the degree to which the individual has achieved the previously -set individual goals and metrics. As discussed above, performance incentives will not be paid for fiscal year 2011 due to the Postal Service's dire financial condition.

OTHER COMPENSATION INCENTIVES

Executive officers are also eligible for performance awards for specific activities that reflect a high degree of leadership. Only a small number of these individual awards are given out in a typical year. For fiscal year 2011, no performance awards of this type will be awarded. In addition, executive officers are eligible for retention and recruitment incentives designed to attract and retain highly talented and marketable individuals in key postal positions. The payment of some of these awards may be deferred, in whole or in part, due to the Postal Service's compensation limits.

RETIREMENT ANNUITIES

Officers are covered either by the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Both systems have a defined benefit component and a defined contribution component. CSRS and FERS service is creditable for Medicare coverage. FERS service is creditable for Social Security.

CSRS Defined Benefit: The CSRS Basic Benefit annuity is a percentage of the high-3 salary multiplied by years of service. The percentage is 1.5% for the first 5 years of service, plus 1.75% from 5 years to 10 years of service and 2% for all years of service thereafter. Optional retirement thresholds are age 55 with 30 years of service, age 60 with 20 years of service, and age 62 with 5 years of service, with a requirement of completing at least 5 years of creditable civilian service. The annuity is fully indexed to the Consumer Price Index (CPI). Disability, early retirement, deferred and survivor benefits are available.

FERS Defined Benefit: The FERS Basic Benefit annuity is 1 percent of high-3 salary per year of service, or 1.1 percent for retirement at age 62 with at least 20 years of service. Optional retirement thresholds are the Minimum Retirement Age (MRA is 55 to 57 depending on year of birth) with 30 years of service, age 60 with 20 years of service, age 62 with 5 years of service, or MRA with 10 years of service (at a reduced benefit), with a requirement of completing at least 5 years of creditable civilian service. Employees who retire at MRA with 30 years of service, or at age 60 with 20 years of service, receive a retirement supplement approximating the value of Social Security benefits attributable to federal service; this benefit is paid until age 62. Beginning at age 62, the annuity is indexed to CPI, fully when the CPI increase is 2 percent or less, at 2 percent when the CPI increase is between 2 and 3 percent, and at CPI - 1 when the CPI is at least 3 percent. Disability, early retirement, deferred and survivor benefits are available.

Defined Contribution: The Thrift Savings Plan (TSP) is similar to 401(k) plans. CSRS and FERS employees may contribute up to the indexed IRS maximum ($16,500 in 2011). There is no Postal Service contribution for CSRS employees. For FERS employees, after an initial waiting period of 6 months to a year, the Postal Service makes an automatic contribution of 1 percent of basic pay and a matching contribution of up to 4 percent of basic pay, for a total employer contribution of up to 5 percent of basic pay. Employees who will be at least age 50 in the year of contribution may make a separate catch-up contribution up to the indexed IRS maximum ($5,500 in 2011). TSP investment options are a government securities fund; index funds that track the Barclays Capital Aggregate Bond Index, the S&P 500, the Wilshire 4500, and the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) stock index; and lifecycle funds.

SUPPLEMENTAL NON-QUALIFIED DEFERRED COMPENSATION

Where appropriate and on a highly selective basis, the Postal Service offers supplemental non-qualified deferred compensation as a recruitment or retention tool.

LIFE INSURANCE

Officers are entitled to basic group life insurance coverage under the Federal Employees Group Life Insurance (FEGLI) Program in the amount of their annual basic salary, rounded up to the next $1,000, plus $2,000. If basic coverage is held, an officer will also receive an additional $10,000 coverage (Option A) and Option B coverage up to three times their salary. All premiums for Option A, Option B, and basic coverage are paid by the USPS. At their own expense, officers may elect additional Option B coverage in an amount equal to two times their salary. Also at their own expense, officers may elect Option C, family optional insurance coverage, of up to 5 multiples of $5,000 for their spouse and $2,500 for each eligible dependent child. Officers continuously covered under FEGLI for the 5 years immediately preceding retirement, or since the first opportunity, may continue coverage during retirement (if entitled to an immediate annuity). USPS pays former officers an actuarially determined lump sum to cover the cost of Option A premiums during retirement to retiring officers.

HEALTH BENEFITS

The Postal Service participates in the Federal Employees Health Benefits ("FEHB") program, which allows all career employees to enroll in one of a number of self only or self and family health benefit plans offered as part of this program. Currently, the Postal Service pays the full cost of the premium for its officers and executives. Beginning in January 2012, the Postal Service will, over a three-year period, increase the percentage its officers and executives pay until the percentage matches the percentage paid by employees in the rest of the federal government. In 2012, the Postal Service share of the premium will be reduced from 100 percent to 91 percent of the federal weighted average premium, limited to not more than 94.75 percent of the total premium for any given plan, and enrolled officers and executives will pay the balance of the premium for the plan they select.

Employees who retire with immediate entitlement to an annuity are eligible to continue FEHB coverage into retirement as long as they have participated in an FEHB plan for the five years preceding their retirement or since their first opportunity. Officers are under the same cost sharing formula as other Postal Service and Federal retirees - the Postal Service pays according to the federal premium formula, which is 72 percent of the federal weighted average premium, limited to not more than 75 percent of the total premium for any given plan, with the retiree paying the balance of the premium for the plan they select.

OTHER BENEFITS

To remain competitive with the comparator marketplace, the Postal Service also offers the following additional benefits to its executive officers: periodic physical examinations, parking, financial counseling services, employer-paid life insurance premiums, and membership in up to two airline clubs per year.

FISCAL YEAR 2011 EXECUTIVE OFFICER COMPENSATION

SUMMARY COMPENSATION TABLE
Fiscal Year Salary a Bonus b Non-equity incentive plan compensation c Change in pension value and Nonqualified deferred compensation earnings d All other compensation e Total
Patrick R. Donahoe 1
Postmaster General & CEO
2011 $271,871 - - $81,954 $30,404 $384,229
2010 $247,615 - $31,100 $195,472 $6,901 $481,088
2009 $240,000 - - $317,538 $39,591 $597,129
John E. Potter 2
Former Postmaster General & CEO
2011 $53,239 - $286,840 $ (24,427) $16,858 $332,510
2010 $273,296 - $228,088 $219,095 $77,939 $798,418
2009 $265,320 - - $393,054 $76,276 $734,650
Joseph Corbett
Chief Financial Officer & Executive VP
2011 $239,000 - $30,000 $23,376 $18,107 $310,483
2010 $236,231 - $58,600 $19,950 $18,901 $333,682
2009 $150,385 $75,000 - $11,891 $7,121 $244,397
Megan Brennan
Chief Operating Officer & Executive Vice President
2011 $225,308 $25,000 - $67,512 $41,176 $358,996
2010 - - - - - -
2009 - - - - - -
Ellis Burgoyne
Chief Information Officer & Executive Vice President
2011 $220,846 $25,763 - $228,384 $33,695 $508,688
2010 - - - - - -
2009 - - - - - -
Anthony J. Vegliante
Chief Human Resources Officer & Executive VP
2011 $240,000 - $60,000 $56,931 $12,736 $369,667
2010 $236,923 - $37,800 $101,777 $9,342 $385,842
2009 $230,000 - - $199,763 $10,627 $440,390

1 Mr. Donahoe was appointed Postmaster General & CEO as of December 4, 2010. Mr. Donahoe's FY11 (prior to December 4, 2010), FY10 and FY09 data reflect compensation as the Deputy Postmaster General & COO.

2 Mr. Potter was Postmaster General & CEO through December 3, 2010, for the FY11 period.

a Salaries for executive level officers were frozen for calendar year 2011. The salary amounts vary from FY11, FY10 and FY09 because salaries are based on the calendar year and not the fiscal year. Therefore, FY11 salary amounts include a portion of calendar year 2010 salary amounts, FY10 salary amounts include a portion of calendar year 2009 salary amounts and FY09 salary amounts include a portion of calendar 2008 salary amounts. Ms. Brennan and Mr. Burgoyne were not named executive officers in FY10 or FY09 and, as such, information for these fiscal years is not reported for them.

b Pursuant to a contract with the Postal Service, the amount shown for Mr. Corbett in this column was awarded as a recruitment incentive in FY09. Ms. Brennan and Mr. Burgoyne were each paid $25,000 in FY11 as a recruitment lump-sum when they were promoted to their respective positions as Chief Operating Officer and Chief Information Officer. In addition, Mr. Burgoyne was awarded $763 in his previous position as Vice President, Area Operations.

c The amounts in this column reflect the performance-based incentive compensation awarded to executive officers in prior fiscal years; as noted above, this incentive compensation was not awarded for FY11. Former Postmaster General Potter's non-equity incentive plan compensation was deferred due to the compensation cap and is being paid in ten annual installments as he has retired from Postal Service employment. The amount for FY10 for Mr. Potter includes a lifetime achievement award and a severance payment per his contract. Pursuant to Mr. Corbett's employment contract, his non-equity incentive plan compensation includes $30,000 in deferred performance-based compensation for FY10 and FY11. Pursuant to a retention contract with the Postal Service, Mr. Vegliante was awarded a performance-based retention of $60,000 for FY11; this amount was deferred. Any amounts that could not be paid to an executive officer due to the compensation cap or their contract were deferred for future payment.

d Mr. Donahoe, former Postmaster General Potter, Mr. Burgoyne and Mr. Vegliante participate in the Civil Service Retirement System (CSRS), which is a defined benefit plan. Mr. Corbett and Ms. Brennan participate in the Federal Employees Retirement System (FERS), a portion of which is a defined benefit plan. The calculation of retirement annuities under CSRS and FERS is explained in the Pension Benefits table, the associated note and in the Retirement Annuities section of the Compensation Discussion and Analysis. The amounts shown in column (h) for each of these individuals are the amounts by which the value of their annuities has increased since the end of the prior fiscal year. "Nonqualified deferred compensation earnings" is defined as above-market earnings on deferred income. There were no reportable amounts of non-qualified deferred compensation earnings for the named executive officers in FY2011, with the exception of Mr. Corbett, whose above-market earnings on deferred income was $238.

e For all executive officers listed, the 'All Other Compensation" category includes financial planning services, Thrift Savings Plan employer matching contribution for FERS employees, non-cash awards, parking, physical examinations, life insurance premiums paid for by the Postal Service, airline clubs, and relocation costs. Security costs valued at $19,471 are also included for the Postmaster General.

GRANTS OF PLAN-BASED AWARDS

The following table presents information regarding potential non-equity incentive awards to the named executive officers for fiscal year 2012. Whether executive officers receive an award and, if so, the amount of an award for fiscal year 2012 will depend on the Postal Service's and the individual's performance.

Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Name Grant Date Threshold Target Maximum
Patrick R. Donahoe October 2011 $14,728 $33,221 $103,815
Joseph Corbett October 2011 $12,715 $28,680 $89,625
Megan Brennan October 2011 $12,502 $28,200 $88,125
Ellis Burgoyne October 2011 $12,236 $27,600 $86,250
Anthony J. Vegliante October 2011 $12,768 $28,800 $90,000

Note: The USPS Pay-for-Performance (PFP) program relies on a 15-point scale with clearly defined and transparent corporate goals. The PFP plan target in any given year is set at a rating of 6. Incentives are not paid for any rating below or equal to 3. The maximum threshold for payment is set at a rating of 15. Individual ratings vary but the corporate score is used as the regulator. As noted above, no incentives were paid for FY 2011.

PENSION BENEFITS

The table below shows the present value of accumulated pension benefits payable to the named executive officers.

Name Plan Name Number of years credited service Present value of accumulated benefit
Patrick R. Donahoe CSRS Annuity 36 Years $3,254,725
John E. Potter CSRS Annuity 32.5 Years $3,179,788
John E. Potter USPS Pension Benefit 32.5 Years $1,350,318
Joseph Corbett FERS Annuity 3 Years $55,818
Megan Brennan FERS Annuity 25 Years 456,198
Ellis Burgoyne CSRS Annuity 33 Years $2,477,835
Anthony J. Vegliante CSRS Annuity 34 Years $2,650,816

Note: Former Postmaster General Potter is the only USPS officer who was awarded a USPS Pension Benefit pursuant to contractual agreement. The amount for Mr. Potter's USPS Pension benefit is payable for his attainment of required performance objectives over the six-year period from June 2001 - June 2007 and was not based on Mr. Potter's years of service to the Postal Service. In 2007, the Board discontinued the USPS Pension Benefit and froze the amount of that benefit. Instead, from that time until his retirement, Mr. Potter was eligible for a performance incentive each year if he met required performance objectives. The above amount of USPS Pension Benefit is being paid to former Postmaster General Potter in monthly installments as he has retired from postal service employment. A survivor annuity equal to 55% of the amount payable to Mr. Potter will be paid to his spouse should Mr. Potter pre-decease her. All officers, including former Postmaster General Potter, are eligible for CSRS or FERS retirement benefits available to career employees of the Federal Government. These benefits are described in the Retirement Annuities section of the Compensation Discussion and Analysis. The present value of the accumulated CSRS or FERS benefit represents the value of the pension over the individual's actuarial lifetime, as of September 30, 2011. Mr. Donahoe, Mr. Potter, Mr. Burgoyne and Mr. Vegliante participate in CSRS, and Mr. Corbett and Ms. Brennan participate in FERS. Mr. Potter has retired and Mr. Donahoe, Mr. Burgoyne and Mr. Vegliante are eligible for retirement, the calculation of which is described in the Retirement Annuities section of the Compensation Discussion and Analysis. The valuation for Ms. Brennan assumes she has reached retirement eligibility. The valuation for Mr. Corbett assumes that he has satisfied vesting requirements for retirement; however, because of his short tenure with the Postal Service, his retirement annuity has not vested.

NONQUALIFIED DEFERRED COMPENSATION

The following table presents information regarding the contributions to, and earnings on, the named executive officers' deferred compensation balances during the fiscal year ended September 30, 2011 and also shows the total deferred amounts for the named executive officers as of September 30, 2011.

Name Executive contributions in last fiscal year 1 Aggregate earnings in last fiscal year 2 Aggregate balance at September 30, 2011 3
Patrick R. Donahoe - $302 $7,655
John E. Potter $10,000 $34,865 $815,788
Joseph Corbett $30,000 $1,634 $71,508
Anthony J. Vegliante $60,000 $2,833 $64,033

1 The amounts in this column represent amounts deferred due to the compensation cap or contract agreements. The amount shown for former Postmaster General Potter reflects an award to him that was deferred as of Dec. 3, 2010, the date he retired from the Postal Service. The amounts shown for Mr. Corbett and Mr. Vegliante reflect lump-sum retention payments required by their employment agreements which have been deferred.

2 The Postal Service calculates interest on deferred compensation semi-annually at 5.0% per year. Interest is prorated from the relevant pay period of the deferral.

3 Former Postmaster General Potter's balance includes awards and performance incentives he earned in the 1990s before becoming Postmaster General, performance incentives he earned during the period from 2001 to 2008 and interest paid on these amounts. This total amount for Mr. Potter is being paid in equal installments over a 10-year period pursuant to his contract with the Postal Service, the first payment of which was made in January 2011. Mr. Potter has retired from Postal Service employment.

DIRECTOR COMPENSATION

The following table presents information regarding the compensation of the members of the Board of Governors.

Name Fees earned or paid in cash All other compensation Total
Louis J. Giuliano $36,900 - $36,900
Mickey D. Barnett $37,500 - $37,500
James H. Bilbray $40,200 - $40,200
Carolyn Lewis Gallagher $7,467 - $7,467
Alan C. Kessler $31,600 - $31,600
Thurgood Marshall, Jr. $39,900 - $39,900
James C. Miller III $38,700 - $38,700
Dennis J. Toner $35,200 - $35,200
Ellen C. Williams $36,900 - $36,900

Note: Each Governor receives a basic stipend of $30,000 per year plus $300 per day for not more than 42 days of meetings each year. Governors Gallagher and Kessler were members of the Board during FY11. Governor Gallagher's term ended and Governor Kessler resigned from the Board during the fiscal year.

POTENTIAL PAYMENTS UPON TERMINATION

As described in the Compensation Discussion and Analysis, in 2009 the Postal Service entered into an employment agreement with Joseph Corbett, the Chief Financial Officer, for recruitment and retention purposes. Mr. Corbett's agreement provides for deferred compensation payable in installments commencing on the date of his separation from the Postal Service or October 22, 2019, whichever is later. In 2010, the former Postmaster General entered into an employment agreement with Mr. Vegliante. That agreement was amended on November 14, 2011. A copy of the amendment is attached hereto as Exhibit 10.6. As amended, the agreement clarifies that Mr. Vegliante's retention incentive is performance-based and provides for his 2011 deferred compensation to be paid no sooner than one year after his departure from the Postal Service.

The Postmaster General and all of the other named executives are subject to the standard policies governing the CSRS or FERS, as described in the Compensation Discussion and Analysis. The present value of these CSRS and FERS benefits are found in the Pension Benefits table in the Compensation section of this report. The information below describes and quantifies certain compensation, in addition to that due pursuant to CSRS or FERS, that would become payable under existing plans and arrangements if the named executive officer's employment had terminated on September 30, 2011. Additionally, pursuant to statutes and regulations generally applicable to federal employees, the named executives would be entitled to receive the federal employer's standard contribution toward retiree health benefits, in the event they have qualifying service and participated in the Federal Employees Health Benefits Plan for the requisite period of time prior to retiring.

DEFERRED COMPENSATION

All federal employees, including Postal Service employees, are subject to annual compensation limits established pursuant to federal statutes and regulations. When amounts earned by federal employees cannot be paid because of these compensation limits, these payments are deferred until a year in which their payment would not cause total annual compensation paid to the employee to exceed the compensation limit, or the year in which an employee leaves federal service, whichever occurs first. Named executive officers appearing in the Nonqualified Deferred Compensation table in the Executive Officer Compensation section of this report have deferred compensation in the amounts indicated therein. These amounts would have been paid to them in a lump-sum or pursuant to their contract with the Postal Service following their departure, had they ended their Postal Service employment on September 30, 2011. Mr. Corbett's employment agreement provides for deferred incentives linked in part to his performance. Mr. Corbett began accruing deferred performance-based compensation at the end of fiscal year 2010. When Mr. Corbett concludes his Postal Service employment, or on October 22, 2019, if that date is later than Mr. Corbett's departure from the Postal Service, his deferred compensation will be paid to him in three approximately equal annual installments. Mr. Vegliante's 2011 deferred compensation will be paid to him no sooner than one year after his departure from the Postal Service.

SUPPLEMENTAL PENSION BENEFIT

The Governors have not authorized a supplemental pension benefit for any executive officer at this time.

SEVERANCE PAYMENT

Mr. Corbett is entitled to a severance payment of $230,000, in the event the Postal Service terminates his employment for any reason other than for cause or breach of contract.

INSURANCE BENEFITS

The Governors have not authorized supplemental insurance benefits for any executive officer at this time. The insurance benefits to which all postal executives are entitled are described above.

OUTPLACEMENT ASSISTANCE

The Governors have not authorized any outplacement assistance for any executive officer at this time.

ACCRUED ANNUAL LEAVE

All Postal Service employees are entitled to receive and accrue paid days off, known as annual leave. Upon their separation from the Postal Service, all employees, including the named executive officers, are entitled to be paid, in a lump-sum, the value of all accrued annual leave. The table below shows the accrued value of the annual leave of the named executive officers, as of September 30, 2011.

Accrued Value of Executive Officers' Annual Leave, as of September 30, 2011
Name Value of accrued annual leave
Patrick R. Donahoe $188,331
Joseph Corbett $30,335
Megan Brennan $77,166
Ellis Burgoyne $13,048
Anthony J. Vegliante $236,307

COMPENSATION COMMITTEE REPORT

The Compensation and Management Resources Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation and Management Resources Committee recommended to the Governors that the Compensation Discussion and Analysis be included in this Report.

The Compensation and Management Resources Committee