UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN

PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant x

Filed by a Party other than the Registrant o

Check the appropriate box:

o                   Preliminary Proxy Statement        o Soliciting Material Under Rule 14a-12

o                   Confidential, For Use of the

Commission Only (as

permitted

by Rule 14a-6(e)(2))

x                 Definitive Proxy Statement

Definitive Additional

o                   Materials

AMERICAN STATES WATER COMPANY

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Directions for Attending the 2013 Annual Meeting

We will hold the 2013 annual meeting at The Langham, 1401 South Oak Knoll Avenue, Pasadena, California 91106.

For shareholders of record, either the detachable portion of your proxy card or your Notice is your ticket to the 2013 annual meeting.  Please present your ticket when you reach the registration area at the 2013 annual meeting.

For shareholders who hold shares through a brokerage firm, bank or other shareholder of record, your admission ticket is the copy of your latest account statement showing your investment in our common shares.  Please present your account statement to one of our representatives at the 2013 annual meeting.  You cannot vote your shares at the 2013 annual meeting unless you have obtained a legal proxy from your broker, bank or other shareholder of record.  A copy of your account statement is not sufficient for this purpose.

Directions to The Langham

American States Water Company

Proxy Statement for 2013 Annual Meeting

TABLE OF CONTENTS

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April 10, 2013

American States Water Company

630 East Foothill Blvd.

San Dimas, California 91773

2013 Proxy Statement

The Securities and Exchange Commission, or SEC, has adopted rules to allow us to elect to use the Internet as our primary means of furnishing our proxy statement, electronic proxy card and our Annual Report on Form 10-K for the year ended December 31, 2012 to our shareholders.  As a result, on or about April 10, 2013, we are mailing to most of our shareholders a Notice of Internet Availability of Proxy Materials referred to herein as the Notice.  The Notice contains instructions on how to access our proxy materials over the Internet at www.proxyvote.com and how to request a paper copy of our proxy materials.  The proxy materials will be posted on the Internet no later than the date we begin mailing the Notice.  On or about April 10, 2013, we are mailing to all remaining shareholders a paper copy of our proxy materials.  We are sending a Notice or proxy materials to each of our shareholders of record in connection with the solicitation by our board of directors of proxies to be voted at our 2013 annual meeting and any adjournments thereof.

We have set the record date for determining the shareholders entitled to vote at the 2013 annual meeting as the close of business on March 28, 2013.  As of March 28, 2013, we had 19,283,505 common shares outstanding.  We do not have any other outstanding equity securities.  Each of our common shares is entitled to one vote.

We will hold our 2013 annual meeting on May 21, 2013 at 10:00 a.m., Pacific Time, at The Langham, 1401 South Oak Knoll Avenue, Pasadena, California 91106.

INFORMATION ABOUT THE 2013 ANNUAL MEETING

What is the purpose of the 2013 annual meeting?

At our 2013 annual meeting, we will ask our shareholders to elect directors to class II who will serve until our annual meeting of shareholders in 2016, or until our shareholders duly elect their qualified successors.  We will also ask shareholders to ratify the appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm, and to vote on any other matter which may properly come before the 2013 annual meeting or any adjournment, including any proposal to adjourn the 2013 annual meeting.  In addition, we will ask shareholders to approve the 2013 Non-Employee Directors Stock Plan, or 2013 directors plan, and an advisory vote approving the compensation of our named executive officers, commonly referred to as a “say-on-pay” proposal.

Even if you are able to attend the 2013 annual meeting, we encourage you to vote early using the mail, telephone or Internet methods described below.

Who may attend the 2013 annual meeting?

Our shareholders and our representatives may attend our 2013 annual meeting.  If you are a shareholder of record on the record date, you must bring either the detachable portion of your proxy card or your Notice in order to gain admission to our 2013 annual meeting.  You are a shareholder of record if your shares are registered directly in your name.  We mailed this proxy statement or the Notice directly to you if you are a shareholder of record.

If you are a shareholder who holds shares through a brokerage firm, bank or other shareholder of record on the record date, you must bring a copy of your latest account statement showing your investment in our common shares.  If you are a beneficial owner of our shares, your broker, bank, trustee or nominee sent this proxy statement or the Notice to you.

How may I vote my shares in person at the 2013 annual meeting?

If you are the shareholder of record, you may vote your shares in person at the 2013 annual meeting if you have either the detachable portion of your proxy card or your Notice as proof of identification.  If you are the beneficial owner of shares held in street name, you may vote your shares at the meeting if you obtained a legal proxy from your broker, bank or other shareholder of record.  Participants in Golden State Water Company’s 401(k) plan may not vote their 401(k) shares in person at the 2013 annual meeting since the 401(k) plan trustee is the shareholder of record of these shares.

How may I vote my shares without attending the 2013 annual meeting?

All proxies that shareholders properly sign and return, unless properly revoked, will be voted at the 2013 annual meeting or any adjournment thereof in accordance with the instructions indicated on the proxy.

You may vote your shares without attending the 2013 annual meeting by mail, telephone or Internet.

Voting by Mail

¡                 If you received a paper copy of the proxy materials, you may sign, date and return your proxy card in the pre-addressed, postage-paid envelope provided.

Voting by Telephone

¡                 You may vote by proxy using the toll-free telephone number listed on the proxy card.  Please have your Notice or the proxy card in hand before calling.

¡                 If your shares are held through a brokerage firm, bank or other shareholder of record, you may vote by telephone only if the shareholder of record (broker, bank or other shareholder of record) offers that option to you.

¡                 Votes submitted by telephone must be received by 11:59 p.m., Eastern Time, on May 20, 2013 in order to be voted at the 2013 annual meeting.  Participants in Golden State Water Company’s 401(k) plan may vote their 401(k) plan shares by telephone, but must do so by the date set forth below.

Voting by Internet

¡                 You may also vote by proxy using the Internet.  The Internet address is www.proxyvote.com which is also listed on the Notice and the proxy card.  Please have the proxy card or Notice in hand before going online.  You may also view our proxy statement and 2013 annual report at this website.  If your shares are held through a brokerage firm, bank or other shareholder of record, you may vote by the Internet only if the shareholder of record (broker, bank or other shareholder of record) offers that option to you.

¡                 Votes submitted by Internet must be received by 11:59 p.m., Eastern Time, on May 20, 2013 in order to be voted at the 2013 annual meeting.  Participants in Golden State Water Company’s 401(k) plan may vote their 401(k) plan shares by Internet, but must do so by the date set forth below.

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Regardless of whether or not you attend the 2013 annual meeting in person, we encourage all of our shareholders to vote using one of the methods described above.

Participants in Golden State Water Company’s 401(k) plan may vote their 401(k) plan shares using any of the methods described above.  Votes submitted by telephone or using the Internet must be received by 11:59 p.m., Eastern Time, on May 17, 2013 in order for us to forward your instructions to the 401(k) plan trustee.  The trustee will vote 401(k) plan shares as to which no directions are received in the same ratio as 401(k) plan shares with respect to which directions are received from other participants in the 401(k) plan, unless contrary to the Employee Retirement Income Security Act of 1974.

May I change my vote after I submit a proxy?

You may revoke your proxy at any time before the named proxies vote at the 2013 annual meeting by any of the following methods:

¡                 filing with us a written notice of revocation of the proxy bearing a later date,

¡                 attending the 2013 annual meeting and voting in person, or

¡                 presenting a written notice of the revocation of the proxy at the 2013 annual meeting.

If you hold your shares through a broker, bank or other shareholder of record, then you must obtain a legal proxy in order to take any of these actions.

Please bear in mind that your execution of a proxy will not affect your right to attend the 2013 annual meeting or any adjournment thereof and vote in person; however, your attendance at the 2013 annual meeting will not, by itself, revoke your proxy, unless you take one of the actions listed above.

How may I cast my vote?

In the election of directors, you may vote your shares for the nominees in the following manner:

¡                 “FOR ALL” of the nominees,

¡                 “WITHHOLD ALL” (you may withhold your authority to vote for any individual nominee(s) by marking the “For All Except” box and writing the number(s) of the nominee(s) on the line provided), or

¡                 “FOR ALL EXCEPT,” and write the number(s) of the nominee(s) on the line provided for any individual nominee(s) for whom you choose to withhold your authority to vote.

With respect to the vote to approve the 2013 directors plan, the advisory vote to approve the compensation of our named executive officers and the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm, you may vote your shares in the following manner:

¡                 “FOR,”

¡                 “AGAINST,” or

¡                 “ABSTAIN.”

Each share is entitled to one vote on each of these matters.

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May I cumulate my votes for a director?

You may not cumulate your votes for a director (i.e., cast for any candidate a number of votes greater than the number of common shares that you hold on the record date) unless you or another shareholder:

¡                 places the candidate’s name in nomination prior to the voting, and

¡                 prior to the voting, gives notice of an intention to cumulate votes at the 2013 annual meeting.

If you or any other shareholder gives notice prior to voting of an intention to cumulate votes, then all shareholders may cumulate their votes for candidates who have been nominated.

How does the board recommend that I vote at the 2013 annual meeting?

Our board recommends that you vote your shares:

¡                 “FOR ALL” of the nominees for class II director,

¡                 “FOR” the 2013 directors plan,

¡               “FOR” approval of the compensation of the named executive officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, compensation tables and any related material disclosed in this proxy statement, referred to herein as a “say-on-pay” advisory vote, and

¡                 “FOR” the proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm.

How will the named proxies vote if I send in my proxy without voting instructions?

The named proxies will vote “FOR ALL” of the board’s nominees to be elected as directors, “FOR” the 2013 directors plan, “FOR” the approval of the compensation of the named executive officers, as disclosed pursuant to the compensation disclosure rules of the SEC, including the compensation discussion and analysis, compensation tables and  any related materials disclosed in this proxy statement, and “FOR” the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm if you send in your proxy without voting instructions.  The named proxies will also vote in favor of such other matters as are incident to the conduct of the 2013 annual meeting, unless otherwise instructed.

How will the named proxies vote if a nominee is unable to serve as director?

In the event any one or more of the nominees is withdrawn from nomination as a director or is unable to serve for any reason, a contingency not now anticipated, the named proxies may vote for a substitute nominee or nominees, unless otherwise instructed by a shareholder on his or her proxy.

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What vote is required to approve each of the proposals?

Proposal 1

Candidates for the board of directors receiving the highest number of affirmative votes of the shares entitled to vote at the 2013 annual meeting in person or by proxy (up to the number of directors to be elected) will be elected.  Votes cast against a candidate or votes withheld will have no legal effect.  Brokers are not authorized to vote on this proposal unless you instruct otherwise.

Proposal 2

A majority of our common shares present at the 2013 annual meeting in person or by proxy must vote in favor of the 2013 directors plan and the total vote cast must represent over 50% in interest of all shares entitled to vote on the proposal in order for grants of restricted stock units to be made under the 2013 directors plan.  Abstentions on this proposal will have the effect of a vote against the proposal.  Brokers are not authorized to vote on this proposal unless you instruct otherwise.

Proposal 3

The compensation of the named executive officers, as disclosed pursuant to the compensation rules of the SEC, including the compensation discussion and analysis, compensation tables and any related material disclosed in this proxy statement will be approved upon an affirmative vote of a majority of our common shares represented in person or by proxy and voting, provided that the shares voting affirmatively also constitute at least a majority of the required quorum at the 2013 annual meeting.  Abstentions on this proposal will not be considered as a vote cast for or against this proposal.  Brokers are not authorized to vote on this proposal unless you instruct otherwise.  This vote is advisory and non-binding on the company, the compensation committee and the board.

Proposal 4

The appointment of PricewaterhouseCoopers LLP, as our independent registered public accounting firm, will be ratified by the affirmative vote of those present in person or by proxy and voting, provided that the shares voting affirmatively also constitute at least a majority of the required quorum at the 2013 annual meeting.  Abstentions on this proposal will not be considered as a vote cast for or against this proposal.  Brokers are authorized to vote on this proposal unless you instruct otherwise.

What happens if cumulative voting for directors occurs?

If we conduct voting for directors by cumulative voting, then you may cast a number of votes equal to the number of directors authorized multiplied by the number of shares you have a right to vote.  You may cast your votes for a single candidate or you may distribute your votes on the same principle among as many candidates in whatever proportion you desire.

The accompanying proxy card will grant the named proxies discretionary authority to vote cumulatively if cumulative voting applies.  Unless you instruct the named proxies otherwise, the named proxies will vote equally for each of the candidates for the office of director; provided, however, that if sufficient numbers of our shareholders exercise cumulative voting rights to elect one or more candidates, the named proxies will:

¡                 determine the number of directors they may elect,

¡                 select such number from among the named candidates,

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¡                 cumulate their votes, and

¡                 cast their votes for each candidate among the number they are entitled to vote.

What is the quorum requirement for the 2013 annual meeting?

A quorum is present if shareholders holding a majority of shares entitled to vote on the record date are present at the 2013 annual meeting, either in person or by proxy.  We will count shares represented by proxies that reflect abstentions and broker non-votes as present and entitled to vote for purposes of determining the presence of a quorum.  The term “broker non-vote” refers to shares held by brokers or nominees who have not received instructions on how to vote from the beneficial owners or persons entitled to vote if the broker or nominee indicates on the proxy that the broker or nominee does not have discretionary power to vote on the matter.

Who bears the costs of proxy distribution and solicitation?

We will bear the entire cost of preparing, assembling, printing and mailing proxy statements, and the costs of any additional materials, which the board may furnish to you.  We will solicit proxies by U.S. mail in the case of beneficial owners that own 2,000 or more shares or, in the case of all other shareholders, brokers, banks and other nominees, by mailing a notice containing instructions on how to access our proxy materials and vote.  We have engaged the services of Morrow & Company for $8,000 to assist us in soliciting proxies.  We may also solicit proxies by telephone, or personally, by directors, officers and regular employees of the company who will receive no extra compensation for performing these services.

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

It means your shares are either registered differently or appear in more than one account.  Please provide us with voting instructions for all proxy and voting instruction cards that you receive.

Who will serve as inspector of election?

The board of directors has appointed Broadridge Financial Solutions, Inc. to act as the inspector of election.  The inspector of election will count all votes cast, whether in person or by proxy.

How is an annual meeting adjourned?

Shareholders may adjourn an annual meeting by the affirmative vote of a majority of the shares represented at the annual meeting, in person or by proxy, even if a quorum is not present.  If a proposal is made to adjourn the 2013 annual meeting in order to enable management to continue to solicit proxies in favor of a proposal, the proxies will be voted in favor of adjournment, unless otherwise instructed.

In the absence of a quorum at the 2013 annual meeting, no business may be transacted at the 2013 annual meeting other than an adjournment.  We may conduct any business at an adjourned meeting which we could have conducted at the original meeting.

We are not required to give you notice of an adjournment of an annual meeting if we announce the time and place of the adjournment at the annual meeting at which the adjournment takes place.  We must, however, give you notice of the adjourned meeting if the adjournment is for more than 45 days or, if after the adjournment, we set a new record date for the adjourned meeting.

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BOARD STRUCTURE AND COMMITTEES

How is the board of directors structured?

The board of directors currently consists of eleven directors, with an independent non-management director serving as its chair.  The board has approved a reduction in the size of the board to nine directors effective upon election of the successors to the current class II directors at the 2013 annual meeting.

The board is divided into three classes (class I, class II and class III).  Shareholders elect directors in each class to serve for a three-year staggered term expiring in successive years or until shareholders duly elect their successors.  The term of the class III directors will expire at the 2014 annual meeting.  The term of the class I directors will expire at the 2015 annual meeting.  The term of the directors elected to class II at the 2013 annual meeting will expire at the 2016 annual meeting.

Mr. Lloyd E. Ross, the chair of the board, is a non-voting ex-officio member of all committees of the board, is the presiding director for executive sessions of the board and acts as lead director of the board.  The board holds executive sessions of the board following regularly scheduled meetings and on an as-needed basis, some of which are non-management executive sessions.  Currently, Mr. Robert J. Sprowls, who is also president and chief executive officer of the company, is the only employee director that participates in executive sessions of the board.  He does not participate in non-management executive sessions.  The board held four executive sessions of the board in 2012, all of which included non-management executive sessions.

The board of directors has determined that Mr. Ross and nine of the other members of the board are independent directors of the company.  The board believes that this leadership structure, in which the chair is an independent director acting as the lead director, ensures a greater role for the other independent directors in the oversight of the company and active participation of the independent directors in setting agendas and establishing priorities and procedures for the board.  The board further believes that this leadership structure is preferred by a significant number of our shareholders.  The board has used this leadership structure since the formation of the company as a holding company in 1998.

What is the board’s role in risk oversight?

The board does not manage risk.  Rather the board oversees enterprise risk management, or ERM, performed under the direction of the chief executive officer and chief financial officer.  The board satisfies this responsibility by obtaining information from each committee chair regarding the committee’s risk oversight activities and from regular reports directly from officers and other key management personnel responsible for risk identification, risk management and risk mitigation strategies.  The reporting processes are designed to provide visibility to the board about the identification, assessment and management of critical risks and management’s risk mitigation strategies.

The board has not established a risk oversight committee.  Instead, each committee oversees risks within its area of responsibility.

The audit and finance committee considers financial risks and exposures, particularly financial reporting, tax, accounting, disclosure and internal control over financial reporting, financial policies, investment guidelines, credit and liquidity matters and the company’s retirement plans.  The audit and finance committee receives regular reports from the internal auditor of the company in order to assist it in overseeing financial risks.  The chair of the audit and finance committee also serves as a liaison between the audit and finance committee and the anti-fraud committee of the company.  The audit and finance committee is not responsible for the oversight of non-financial risks.  The oversight of non-financial risks is performed by the full board and other committees.

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The nominating and governance committee considers risks and exposures relating to corporate governance and succession planning for the board and the chief executive officer.  The nominating and governance committee is also responsible for making recommendations regarding the delegation of risk oversight responsibilities to committees of the board and the policies and procedures for coordinating the risk oversight responsibilities of the board, the ERM liaison, if any, and each of the committees and the board.

The compensation committee considers risks associated with executive and employee compensation programs.  The ASUS committee oversees the risks and exposures associated with the company’s contracted services operations.

Diana M. Bontá was appointed as a liaison between the board and management with respect to providing additional oversight of the company’s ERM programs.  Dr. Bontá reports to the full board regarding management’s implementation of the company’s ERM program and other matters relevant to the risk oversight responsibilities of the board.

What are the procedures for changing the number of directors?

Under our bylaws, the board of directors may increase the authorized number of directors up to eleven without obtaining shareholder approval so long as we list our common shares on the New York Stock Exchange.  We currently have eleven directors on our board.  The board of directors may also decrease the number of authorized directors to no less than six without obtaining shareholder approval.  If the number of authorized directors is decreased to six, then the board will cease to be classified; provided, that the decrease in the number of directors cannot shorten the term of any incumbent director.

The board has approved a reduction in the size of the board to nine directors effective upon election of the successors to the current class II directors at the 2013 annual meeting.  The board will continue to be classified into three classes following this reduction in board size.  If the number of directors were to be further reduced to seven or eight directors, then the number of board classes would be reduced to two; provided that the decrease in the number of classes cannot shorten the term of any incumbent director.

Unless otherwise approved by our shareholders, the board of directors will cease to be classified if our common shares are not listed on the New York Stock Exchange.

How are vacancies filled on the board of directors?

The majority of the remaining directors may fill vacancies on the board, except those existing as a result of a removal of a director, though less than a quorum.  If the board consists of only one director, the sole remaining director may fill all vacancies on the board.  Each director so elected will hold office until the end of the term of the director who has been removed, or until the director’s successor has been duly elected and qualified.  Our shareholders also have the right to elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors.

Under what circumstances may a director be removed from the board?

Under California law, a member of the board of directors may be removed:

¡                by the board of directors as the result of a felony conviction or court declaration of unsound mind,

¡                by the shareholders without cause, or

¡                by court order for fraudulent or dishonest acts or gross abuse of authority or discretion.

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Generally, shareholders may not remove a director if the votes cast against removal are sufficient to elect the director if voted cumulatively at an election of directors held at the time of removal.  In addition, no director may be removed by shareholders by written consent unless all shareholders vote for removal of the director.

What committees does the board of directors have?

The board has three standing committees:

¡                an audit and finance committee,

¡                a nominating and governance committee, and

¡                a compensation committee.

Each committee operates under a written charter which identifies the purpose of the committee and its primary functions and responsibilities.  Copies of committee charters are available on our website at www.aswater.com.

The board has also established a committee, known as the ASUS committee, to review our contracted services business.  This committee also operates under a written charter.

From time to time, the board establishes special committees or appoints members of the board to serve as liaisons between the board and management with respect to special projects.  Three members of the board served as liaisons between the board and/or its committees and management in 2012.

How often did the board and each of the committees meet during 2012?

During 2012:

¡                directors met, as a board, six times,

¡                the audit and finance committee met six times,

¡                the nominating and governance committee met eight times,

¡                the compensation committee met ten times, and

¡                the ASUS committee met five times.

No board member in 2012 attended less than 75% of the meetings of the board.  No committee member in 2012 attended less than 75% of the committee meetings of any committee in which he or she was a member.

NOMINATING AND GOVERNANCE COMMITTEE

What are the functions of the nominating and governance committee?

The nominating and governance committee assesses qualifications of candidates to fill vacancies on the board and makes recommendations to the board regarding candidates to fill these vacancies.  The nominating and governance committee also recommends to the board changes in the company’s corporate governance policies and procedures, CEO succession and board training.

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How does the nominating and governance committee assess candidates to fill vacancies on the board?

The nominating and governance committee assesses nominees for directors on the basis of a number of qualifications, including:

¡                a reputation for integrity, honesty and adherence to high ethical standards;

¡                holding or having held a generally recognized position of leadership;

¡                business acumen, business or governmental experience and an ability to exercise sound business judgment in matters that relate to our current and long-term objectives;

¡              an interest and ability to understand the sometimes conflicting interests of our various constituencies, including shareholders, employees, customers, regulators, creditors and the general public;

¡                an interest and ability to act in the interests of all shareholders;

¡                an ability to work constructively with groups of diverse perspectives and to tolerate opposing viewpoints;

¡                a commitment to service on the board, including commitment demonstrated by prior board service; and

¡                a willingness to challenge and stimulate management.

Each director, other than the chief executive officer of the company, is also expected to satisfy the independence requirements of the board.

In addition to the criteria set forth above, the nominating and governance committee considers how the skills and attributes of each individual candidate or incumbent director work together to create a board that is collegial, engaged and effective in performing its duties.  In order to achieve this objective, the committee believes that the background and qualifications of the directors, considered as a group, should provide a significant mix and diversity of professional and personal experience, knowledge and skills that will allow the board to fulfill its responsibilities.  The committee construes the concept of diversity broadly so as to include a variety of opinions, perspectives, personal experiences and backgrounds and other differentiating characteristics, including gender and ethnicity.

The process used by the committee in assessing candidates for director is a subjective one.  The committee has considered knowledge, skills and experience in the following areas to be helpful to the board in selecting nominees for director:

¡                finance

¡                accounting

¡                engineering

¡                real estate

¡                construction

¡                government contracting

¡                public utility and/or other regulated industry

¡                corporate governance

¡                customer and community service

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For information on the specific backgrounds and qualifications of our current directors, see “Proposal 1: Election of Directors.”

As part of its annual self-assessment process, the board also evaluates directors on a variety of criteria, including:

¡                 independence

¡                 commitment, time and energy devoted to service on the board

¡                 overall and likely future contributions to the board

¡                 attendance at, and preparation for, board and committee meetings

¡                 effectiveness as chair of the board or a committee

¡                 collegiality

¡                 understanding the role of the board and the committees on which he or she serves

¡                 judgment and appropriateness of comments

¡                 skill set relative to board needs

¡                 understanding of the company’s business, industry and risks

¡                 willingness to challenge and stimulate management

The nominating and governance committee considers candidates recommended by board members, professional search firms, shareholders and other persons, in addition to board members whose terms may be expiring.  The manner in which the nominating and governance committee evaluates a new person as a nominee does not differ based on who makes the nomination.

What is the role of the board in the nomination process?

After the board receives the nominating and governance committee’s recommendations on nominees, the board then nominates director candidates the board deems most qualified for election at an annual meeting.

If a vacancy or a newly created board seat occurs between annual meetings, the board is responsible for filling the vacancy or newly created board seat in accordance with our bylaws as described above under the heading, “How are vacancies filled on the board of directors?”

Who are the members of the nominating and governance committee?

Ms. Anne M. Holloway is the chair of the nominating and governance committee.  Mr. James L. Anderson, Dr. Bontá and Mr. James F. McNulty are members of this committee.  Mr. Ross serves as a non-voting ex-officio member of this committee.

How may a shareholder nominate a person to serve on the board?

You may submit the name of a person for election as a director either by submitting a recommendation to the nominating and governance committee or by directly submitting a name for consideration at a shareholder meeting.  In either event, you must submit the name of the nominee in writing to our corporate secretary at our corporate headquarters between February 20, 2014 and March 7, 2014, in order for your nominee to be considered for election as a director at the 2014 annual meeting.  If we change the 2014 annual meeting date by more than 30 days from the date of our 2013 annual meeting or a special meeting is held, you will have another opportunity to submit nominations.  In this case, the corporate secretary must receive your nomination at our corporate headquarters no later than the close of business on the tenth day following the earlier of the date on which we mail you notice of the meeting or we publicly disclose the meeting date.

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Your notice to the corporate secretary must contain:

¡                 all information that the SEC requires us to disclose in our proxy statement about the nominee,

¡                 a consent by the nominee to be named in the proxy statement and to serve as a director if elected,

¡                 the name and address of the record and beneficial owner, if any, of the shares making the nomination, and

¡                 the number of shares held.

If you submit a name for consideration by the nominating and governance committee, we may also ask you to provide other information reasonably related to the recommended individual’s qualifications as a nominee.  The person recommended should be able to, upon request and with reasonable advance notice, meet with one or more members of the nominating and governance committee and/or the board of directors to inquire into the nominee’s qualifications and background and otherwise to be interviewed for purposes of the nomination.

If you plan to submit a name directly for nomination as a director at a shareholder meeting, you must comply with all requirements of the Securities Exchange Act of 1934 in connection with soliciting shareholders to vote for your nominee.

We have made no material changes in 2013 to these procedures for the nomination of directors.

Have we paid fees to any third party to assist us in evaluating or identifying potential nominees to the board?

The company engaged Spencer Stuart for assistance in identifying potential candidates to fill a vacancy on the board.  Spencer Stuart identified several potential candidates.  Other potential candidates were identified by other members of the board.  The company paid Spencer Stuart fees in the amount of $98,100 in 2012 for performing these services.

Did we receive any nominations for director from certain large beneficial owners of our common shares?

We have not received any nominations from a shareholder or a group of shareholders owning more than 5% of our outstanding common shares.

AUDIT AND FINANCE COMMITTEE

Who are the members of the audit and finance committee?

Mr. Gary F. King is the chair of the audit and finance committee.  Ms. Sarah J. Anderson, Mr. John R. Fielder, Mr. Robert F. Kathol and Ms. Janice F. Wilkins are members of this committee.  Mr. Ross serves as a non-voting ex-officio member of this committee.

Does the audit and finance committee have any audit committee financial experts?

The board of directors determined that all members of the audit and finance committee are financially literate, that Mr. King, Ms. Anderson, Mr. Kathol and Ms. Wilkins are “audit committee financial experts” and that all members of the audit and finance committee are independent under the standards set forth in Rule 10A-3 of the Securities Exchange Act of 1934 and the rules of the New York Stock Exchange.

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Audit and Finance Committee Report

Functions of the Audit and Finance Committee

The audit and finance committee:

¡                 reviews significant public documents containing financial statements provided to shareholders and regulatory agencies and reviews all periodic reports filed with the SEC;

¡                 discusses with the company’s independent registered public accounting firm its plans, if any, to use the work of internal auditors;

¡                 reviews the internal audit function, including its competence and objectivity and proposed audit plans for the coming year, including intended levels of support for and coordination with the external audit process;

¡                 discusses with the internal auditors and the company’s independent registered public accounting firm, the financial statements and the results of the audit;

¡                 discusses with the company’s independent registered public accounting firm any significant matters regarding internal controls over financial reporting that have come to its attention during the conduct of the audit;

¡                 reviews the qualifications of our independent registered public accounting firm and appoints (and has sole authority to terminate) our independent registered public accounting firm;

¡                 reviews and approves fees charged by our independent registered public accounting firm;

¡                 reviews and evaluates the effectiveness of our process for assessing significant financial risks and the steps management takes to minimize these financial risks;

¡                 reviews and makes recommendations to the board of directors regarding related party transactions;

¡                 reviews accounting and financial human resources;

¡               establishes procedures for the receipt, retention and treatment of complaints that the company receives regarding accounting, internal controls or auditing matters, and the confidential anonymous submission by our employees of concerns regarding questionable accounting or auditing matters or related party transactions; and

¡                 reviews the committee’s charter and its own performance annually.

Management has the primary responsibility for our financial statements, internal controls, disclosure controls and the financial reporting process.  PricewaterhouseCoopers LLP, our registered public accounting firm, is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and issuing a report based on its findings.  The audit and finance committee’s responsibility is to monitor and oversee our financial reporting process.  PricewaterhouseCoopers LLP reports directly to the audit and finance committee and the board of directors.

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Discussions with Independent Auditors

PricewaterhouseCoopers LLP provided to the audit and finance committee the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit and finance committee concerning independence, and the audit and finance committee discussed with PricewaterhouseCoopers LLP the independent accountant’s independence.  The audit and finance committee also reviewed and discussed our audited consolidated financial statements with PricewaterhouseCoopers LLP and the matters required by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T, including the firm’s evaluation of our internal control over financial reporting and the overall quality of our financial reporting.

Discussions with Management

During 2012, the committee reviewed and discussed with management the company’s audited consolidated financial statements.  Management has represented to the audit and finance committee that our internal controls over financial reporting have no material weaknesses and that management prepared the company’s consolidated financial statements in accordance with generally accepted accounting principles.

Recommendation for Inclusion in Form 10-K

Based upon the audit and finance committee’s discussions with management and  PricewaterhouseCoopers LLP, the audit and finance committee’s review of the representations of management and the reports and presentations of PricewaterhouseCoopers LLP to the audit and finance committee, the audit and finance committee recommended that the board of directors include the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC.

This report is submitted by:

Gary F. King, Chair

Sarah J. Anderson, Member

John R. Fielder, Member

Robert F. Kathol, Member

Janice F. Wilkins, Member

COMPENSATION COMMITTEE

What are the functions of the compensation committee?

Our compensation committee, which consists entirely of independent directors:

¡                 reviews the performance of our executive officers in January of each year and at the time of the hiring or promotion of an executive officer;

¡                 selects a compensation consultant to assist the committee in evaluating the amount or form of executive and director compensation;

¡                 recommends the salary for each executive officer, including the salary of Mr. Sprowls, the president and chief executive officer of the company, for ratification by the independent members of the board;

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Unless otherwise provided by the board, the compensation committee does not have the authority to delegate its authority to a subcommittee.

What fees have we paid for services provided by our compensation consultant and its affiliates?

The compensation committee engaged Pearl Meyer & Partners to prepare a survey of executive compensation trends and pay practices of other companies and to make recommendations to the compensation committee regarding the amount and types of compensation to be paid to our executive officers in 2012 (hereafter referred to as the engagement).  The aggregate amount of fees paid to Pearl Meyer & Partners in 2012 in connection with the engagement was $103,863.  The compensation committee had the sole authority to appoint Pearl Meyer & Partners, oversee the executive compensation services provided by Pearl Meyer & Partners and to approve the compensation paid to Pearl Meyer & Partners for these services.

Is our compensation consultant independent?

The compensation committee believes that the consulting advice that it has received from Pearl Meyer & Partners was objective.  The committee has assessed the independence of Pearl Meyer & Partners pursuant to SEC rules and concluded that no conflicts of interest exist between the company and Pearl Meyer & Partners (or any individuals working on the company’s account on behalf of Pearl Meyer & Partners).  In reaching such determination, the committee considered the following enumerated factors, all of which were attested to or affirmed by Pearl Meyer & Partners:

¡                 During 2012, Pearl Meyer & Partners provided no services to and received no fees from the company other than in connection with the engagement.

¡                 The amount of fees paid or payable by the company to Pearl Meyer & Partners for services provided during the 2012 calendar year represented less than 1% of Pearl Meyer & Partners’ total revenue for the same period.

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¡                 Pearl Meyer & Partners has adopted and implemented adequate policies and procedures designed to prevent conflicts of interest, which policies and procedures were provided to the company.

¡                 There are no business or personal relationships between Pearl Meyer & Partners and any member of the compensation committee other than in respect of the engagement, or work performed by Pearl Meyer & Partners for any other company, board of directors or compensation committee for whom such committee member also serves as an independent director.

¡                 There is no business or personal relationships between Pearl Meyer & Partners and any executive officer of the company other than in respect of the engagement.

¡                 Pearl Meyer & Partners owns no stock of the company.

Compensation Committee Interlocks and Insider Participation

Mr. Anderson is the chair of the compensation committee.  Ms. Holloway and Dr. Bontá are members of this committee.  Mr. Ross is a non-voting ex-officio member of this committee.

The board has determined that no member of this committee has a material relationship with the company, either directly or indirectly as a partner, shareholder or officer of an organization that has a material relationship with us or any other relationship with the company that the board of directors determined would affect the independence of that member.

No member of this committee is a current or former officer or employee of the company or any of its subsidiaries.  None of the executive officers of the company is (or has been during the past three years) a member of the board of directors or the compensation committee of any company on which any of our directors serves as an executive officer, director or member of the compensation committee.  No compensation committee member or any entity in which such member has a 5% or more interest or by whom such member is employed has received any consulting, advisory or other compensatory fees paid by the company or any of its subsidiaries, other than fees received by such member for serving on our board of directors, committees of our board or acting as a liaison between the board and/or its committees and management on matters specified by the board.  We are not aware of any facts or circumstances that would make any member of the compensation committee an affiliate of the company.

GOVERNANCE OF THE COMPANY

Is each of our board and committee members independent?

Based on information solicited from each director, the board has determined that none of our directors, other than Mr. Sprowls, has a material relationship with us, either directly or indirectly as a partner, shareholder or officer of an organization that has a relationship with us and is otherwise independent under the corporate governance standards of the New York Stock Exchange.  We have not adopted any other categorical standards for determining whether a board member is independent.

The board determined that Mr. Anderson, Ms. Anderson, Dr. Bontá, Mr. Fielder, Ms. Holloway, Mr. Kathol, Mr. King, Mr. McNulty, Ms. Wilkins and Mr. Ross are independent directors.  In determining that these directors are independent, the board considered the following facts:

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We did not identify any other businesses or other relationships between us and any non-employee director that would affect the independence of these directors nor did the board consider any other relationships or transactions in determining director independence.  The board has also affirmatively determined that all members of the audit and finance committee, nominating and governance committee and compensation committee, including Mr. Ross, are independent directors under the corporate governance listing standards of the New York Stock Exchange and that all members of the audit and finance committee are independent under the standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934.

No member of the audit and finance committee served on more than three public company boards during 2012.

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Do we have any relationships with any executive officers?

No executive officer or nominee or any of his or her immediate family members had any indebtedness to us, any business relationships with us or any transactions or proposed transactions with us since January 2012.

What procedures do we use for reviewing and approving transactions between us and our directors and executive officers?

We have adopted a code of conduct and guidelines on significant governance issues which include policies and procedures regarding relationships between us and our directors and executive officers.  Information about how to obtain a copy of the code of conduct and guidelines on significant governance issues is set forth in this proxy statement under the heading, “Obtaining Additional Information from Us.”

Under the company’s guidelines on significant governance issues, directors are expected to make business opportunities relating to the company’s business available to the company before pursuing the opportunity for the director’s own or another’s account.  Neither the board nor the audit and finance committee have approved any other guidelines that would permit a director or executive officer to engage in any transactions or actions that would create a conflict of interest.  All conflict of interest transactions must be approved by disinterested members of the board and the audit and finance committee in accordance with California law and the rules of the New York Stock Exchange.

Our code of conduct prohibits any director or executive officer from engaging in any transactions or other actions which create a conflict of interest, except under guidelines approved by the board or the audit and finance committee.  A conflict of interest arises if a director or executive officer takes an action or has interests that may make it difficult for the director or executive officer to act objectively or effectively and include:

Our guidelines on significant governance issues also require each director to disclose to the board any financial or personal interest in any transactions that comes before the board for approval.  Each director and executive officer is also required to disclose annually any relationships with the company and to declare that all such relationships during the prior year have been disclosed.  Our board did not consider any transactions in which any member of the board or executive officer had an interest in 2012.

We do not provide loans, loan guarantees or otherwise extend credit, directly or indirectly, to any of our executive officers or directors.

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Have any of our directors, executive officers or affiliates been involved in certain legal proceedings during the past ten years?

None of our current executive officers, directors or any affiliate or owner of more than 5% of our common shares has been a party adverse to us in any material legal proceeding or been involved in any legal proceedings that the SEC has identified as being material to the evaluation of the ability or integrity of a director or executive officer.

What is our policy regarding attendance by board members at our annual meetings?

We adopted a policy that each director should make every reasonable effort to attend each annual meeting of shareholders.  All directors, other than Mr. Fielder, were present at our 2012 annual meeting.  Ms. Anderson was elected as a director of the company at the company’s annual meeting in 2012.  Mr. Fielder was appointed to the board on January 2, 2013.

What is the process for shareholders and other interested persons to send communications to our board?

You or any interested person may, at any time, communicate in writing with the chair of the board who presides at regularly scheduled board meetings and executive sessions, any particular director or non-management directors as a group, by writing to our corporate secretary at American States Water Company, 630 East Foothill Boulevard, San Dimas, California 91773.  We will provide copies of written communications received at this address to the relevant director or the non-management directors as a group unless the corporate secretary, in her reasonable judgment, considers the communications to be improper for submission to the intended recipient(s).  Examples of communications considered improper for submission include customer complaints, solicitations, ordinary work employee grievances, communications that do not relate directly or indirectly to our business, and communications that relate to improper or irrelevant topics.

What are the requirements for submission of shareholder proposals?

If you want us to include your shareholder proposal in our proxy materials for the 2014 annual meeting, you must submit the proposal to our corporate secretary at American States Water Company, 630 East Foothill Boulevard, San Dimas, California 91773.  Our corporate secretary must receive your proposal no later than December 11, 2013.  Your proposal must also satisfy the other requirements for shareholder proposals set forth in Rule 14a-8 under the Securities Exchange Act of 1934.

A shareholder making a shareholder proposal should state as clearly as possible the course of action that the shareholder believes we should follow.  If we place a shareholder proposal on the proxy card, we will provide, in the form of proxy, the means for other shareholders to specify, by checking a box, as to whether they want to approve, disapprove or abstain from voting on the shareholder proposal.

If you want your shareholder proposal to be considered at the 2014 annual meeting and you have not met the deadline for us to include your shareholder proposal in our proxy materials, you may nevertheless submit your proposal for consideration at the 2014 annual meeting if you comply with the following procedures.

You must deliver or mail your notice to our corporate secretary at American States Water Company, 630 East Foothill Boulevard, San Dimas, California 91773 stating that you intend to submit a shareholder proposal at our 2014 annual meeting.  Our corporate secretary must receive your notice between February 20, 2014 and March 7, 2014, unless we change our 2014 annual meeting date by more than 30 days from the date of our 2014 annual meeting, in which case, our corporate secretary must receive your notice no later than the close of business on the tenth day following the day on which we mail you notice of the meeting or the date on which we publicly disclose the date of the meeting.

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Your notice to our corporate secretary must include for each matter you propose to bring before the 2014 annual meeting:

STOCK OWNERSHIP

Are there any large owners of our common shares?

The following table identifies shareholders who own more than 5% of our outstanding common shares on April 1, 2013.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

(1)                                      Based on the Schedule 13G filed with the SEC on February 1, 2013, BlackRock Inc. has sole voting and dispositive power over 1,568,340 of our common shares.

(2)                                      Based on the Schedule 13G filed with the SEC on February 22, 2013, The Vanguard Group, Inc. has sole voting power over 31,110 of our common shares, sole dispositive power over 1,313,266 of our common shares and shared dispositive power over 26,310 of our common shares.

(3)                   Based on the Schedule 13G filed with the SEC on February 14, 2013, Neuberger Berman Group LLC has shared voting power over 1,075,511 of our common shares and shared dispositive power over 1,115,711 of our common shares.

(4)                                      Percent of class is based on 19,283,505 common shares outstanding on April 1, 2013, 107,616 common shares which our directors and executive officers as a group have the right to acquire on or prior to May 31, 2013, and 91,163 common shares which other employees of the company have the right to acquire on or prior to May 31, 2013.

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How much stock do directors and executive officers own?

We are providing you information in the table below regarding the number of our common shares beneficially owned by our directors and executive officers as of April 1, 2013, including common shares which each director and executive officer has a right to acquire on or prior to May 31, 2013.

SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

*Less than 1%

(1)                                      Mr. Ross and Mr. Kathol have a right to acquire, on or prior to May 31, 2013, 6,000 of our common shares through the exercise of stock options granted pursuant to the 2003 directors plan.  Ms. Holloway has a right to acquire, on or prior to May 31, 2013, 7,000 of our common shares through the exercise of stock options granted pursuant to the 2003 directors plan.  Mr. King has a right to acquire, on or prior to May 31, 2013, 3,000 of our common shares through the exercise of stock options granted pursuant to the 2003 directors plan.  Ms. Anderson, Dr. Bontá, Mr. McNulty, Ms. Wilkins, and Mr. Fielder have not been granted any stock options.

(2)                                      Mr. Kathol and Mr. King are entitled to receive a pay-out of all of the restricted stock units granted to them under the 2003 directors plan as a result of their retirement from the board upon the election of their successors at the 2013 annual meeting.

(3)                   Mr. Sprowls has the right to acquire 18,646 and 23,719 of our common shares on or prior to May 31, 2013 through the exercise of stock options granted pursuant to the 2000 plan and 2008 plan, respectively.

(4)                                      Ms. Kruger has the right to acquire 1,158 of our common shares on or prior to May 31, 2013 through the exercise of stock options granted pursuant to the 2008 plan.

 (5)                                    Mr. Harris has the right to acquire 1,158 of our common shares on or prior to May 31, 2013 through the exercise of stock options granted pursuant to the 2008 plan.

(6)                                      Ms. Tang has the right to acquire 4,302 and 3,408 of our common shares on or prior to May 31, 2013 through the exercise of stock options granted pursuant to the 2000 plan and 2008 plan, respectively.

(7)                                      Mr. Scanlon has the right to acquire 966 of our common shares on or prior to May 31, 2013 through the exercise of stock options granted pursuant to the 2008 plan.

 (8)                                    Of this amount, our directors and executive officers as a group have the right to acquire 107,616 of our common shares on or prior to May 31, 2013 through the exercise of stock options or the pay-out of restricted stock units that have vested.  We have not included in this table common shares relating to dividend equivalents that may be received by our directors and executive officers with respect to dividends declared by the board after April 1, 2013 or restricted stock units which the directors will have a right to acquire on the date of the 2013 annual meeting pursuant to the 2013 directors plan, if the 2013 directors plan is approved by shareholders at the 2013 annual meeting.

(9)                   Percent of class is based on 19,283,505 common shares outstanding on April 1, 2013, 107,616 common shares which our directors and executive officers as a group have the right to acquire on or prior to May 31, 2013, and 91,163 common shares which other employees of the company have a right to acquire on or prior to May 31, 2013.

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Section 16(a) Beneficial Ownership Reporting Compliance

We have adopted procedures to assist our directors and executive officers in complying with Section 16(a) of the Securities Exchange Act of 1934, including assisting directors and executive officers with preparing and filing statements on Form 3, Form 4 and, if applicable, Form 5.  We believe, on the basis of our review of the statements filed by directors and executive officers in 2012, that the following statements on Form 4 were filed late:

¡                 All officers filed statements on Form 4 seventeen days late with respect to restricted stock units granted to them on February 15, 2012.

¡                 Mr. Sprowls filed a statement on Form 4 three days late with respect to restricted stock units granted to him on May 29, 2012.

PROPOSAL 1:  ELECTION OF DIRECTORS

We have provided information below about each of our directors including their ages, years of service as a director of the company, educational background, business experience, service on other boards and community service activities.  We have also included information about the qualifications, attributes or skills of each director that were considered by the board at the time the board nominated each director.  The process used by the board in nominating directors is a subjective one and is based on the recommendations of the nominating and governance committee, the background and qualifications of each of the other members of the board, considered as a group, and, to the extent applicable, the evaluation of the performance of each director based on previous service on the board, board committees and as liaisons between management and the board or a committee.

What is the experience of each nominee for election as a director?

Our board of directors has nominated three persons as class II directors for a three-year term expiring at the end of our annual meeting of shareholders in 2016 or until their successors are duly elected and qualified.

The ages of the directors reported below are as of April 1, 2013.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR ALL” OF THE NOMINEES LISTED BELOW.

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What is the experience of our other directors?

Our board has four class III directors with terms expiring at the end of the annual meeting in 2014 or until their successors are duly elected and qualified.  However, Mr. Sprowls, who is currently a class III director, will become a class II director if he is elected to the board of directors at the 2013 annual meeting.  He will cease to be a class III director at that time.

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Our board has three class I directors with terms expiring at the end of the annual meeting in 2015 or until their successors are duly elected and qualified.

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Two of the company’s board members are retiring this year.

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defense, technology and utility industries.  He was designated as an industry expert by Deloitte & Touché in public utilities, real estate, aerospace and defense, telecommunications and information technology and as a mergers and acquisitions specialist.

Mr. King has a BBA degree and an MBA from the University of Michigan.

Mr. King has served on the Board of Directors of the American Red Cross (Los Angeles Chapter) and Foothill Family Service.  He has also served on the finance committee of the American Red Cross (Los Angeles Chapter), the finance committee of the YMCA of Metropolitan Los Angeles and the Allocations Committee of the United Way of Los Angeles.

Mr. King will continue to serve as a class II director of the board until his successor is duly elected to the board at the 2013 annual meeting.

How did we compensate our directors in 2012?

We paid fees to each of our directors monthly in cash and made awards of restricted stock units to our directors in 2012 pursuant to the terms of the 2003 directors plan as more particularly described below.  We also reimbursed each of our directors in 2012 for expenses incurred in the performance of his or her duties as a director.  We did not provide any compensation to Mr. Fielder in 2012 since he did not become a director of the company until January 2013.  We paid compensation to Mr. Dodge in 2012 until his retirement at our 2012 annual meeting on May 22, 2012.

DIRECTOR(1) COMPENSATION FOR 2012(3)

(1)                   Mr. Sprowls, the president and chief executive officer of the company in 2012, was also a director of the company.  We did not pay him any additional compensation for his services as a director or member of the ASUS committee.

(2)                   The amounts in this column reflect the aggregate grant date fair value of the awards, including dividend equivalent rights, computed in accordance with FASB ASC Topic 718.  We provide information regarding the assumptions used in calculation of these amounts in Note 12 to our financial statements for the year ended December 31, 2012 in our Annual Report on Form 10-K filed with the SEC.  We did not make any other form of stock award to any director in 2012.  None of our directors forfeited any stock awards in 2012.  Mr. Ross, Mr. Anderson, Ms. Anderson, Dr. Bontá, Ms. Holloway, Mr. Kathol, Mr. King, Mr. McNulty and Ms. Wilkins had a balance of 10,838, 10,473, 1,384, 3,949, 10,348, 10,838, 3,949, 2,642 and 2,216 restricted stock units, respectively, credited to his or her account at December 31, 2012.

(3)                   We did not grant any options to directors in 2012.  Mr. Dodge had options to acquire 8,000 of our common shares outstanding at December 31, 2012.  Ms. Holloway had options to acquire 7,000 of our common shares outstanding at December 31, 2012.  Mr. Ross and Mr. Kathol had options to acquire 6,000 of our common shares outstanding at December 31, 2012.  Mr. King had options to acquire 3,000 of our common shares outstanding at December 31, 2012.  We have not granted any options to Dr. Bontá, Mr. McNulty, Ms. Anderson or Ms. Wilkins.

(4)                                      We provide our board members and executive officers a blanket accident insurance policy.  The policy is intended to provide coverage for traveling on company business or on assignment for the benefit of our company.  We allocated one–third of the premium of $7,027 (three year premium) for coverage under the blanket accident insurance policy equally to our board members and executive officers.  The cost was $106 per person in 2012.  We also reimburse our board members for the related cost of travel and meals of their spouses when attending regular board and committee meetings.

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Director Fees

We paid fees to non-employee directors of the board in 2012 for services rendered on the following basis:

§                 to each non-employee director, an annual retainer of $20,000, increased to $25,000 effective May 1, 2012, for service on the board, payable in equal monthly installments;

§                 to Mr. Ross, an additional annual retainer of $100,000 for his services as chair of the board, payable in equal monthly installments;

§                 to Mr. King, an additional annual retainer of $15,000 for his services as chair of the audit and finance committee, payable in equal monthly installments;

§                 to Mr. Anderson, an additional annual retainer of $9,000, increased to $12,000 effective May 1, 2012, for his services as chair of the compensation committee, payable in equal monthly installments;

§                 to Ms. Holloway, an additional annual retainer of $7,500 for her services as chair of the nominating and governance committee, payable in equal monthly installments;

§                 to Mr. McNulty, an additional annual retainer of $7,500, effective May 2012, for his services as chair of the ASUS committee, payable in equal monthly installments;

§                 to each outside director, other than Mr. Ross, and to each outside director who was a member of a committee, a fee of $1,200 for each board or committee meeting attended, other than the annual organizational meeting and telephonic meetings;

§                 to each non-employee director, other than Mr. Ross, and to each outside director who was a member of a committee, a fee of $600 for each telephonic board or committee meeting attended;

§                 to Dr. Bontá, $3,000 for serving as ERM liaison;

§                 to Ms. Holloway, $3,600 for time spent on considering additional nominees to the board; and

§                 to Mr. Anderson, Ms. Anderson and Mr. King $600 each for time spent on considering additional nominees to the board.

Stock Awards

Under the terms of our 2003 directors plan, we automatically granted to each non-employee director in 2012:

§                 restricted stock units on the date of the annual meeting in an amount equal to twice the then current annual retainer payable by the company for services rendered as a director divided by the closing price of our common shares on the trading day immediately preceding the date of the annual meeting as shown on The Wall Street Journal, website (www.online.wsj.com), and

§                 restricted stock units on each dividend record date in an amount equal to the cash dividends payable on this date on a number of shares equal to the aggregate number of restricted stock units credited to each non-employee director’s restricted stock unit account divided by the closing price of our common shares on the dividend record date, as shown on The Wall Street Journal, website (www.online.wsj.com), which we refer to as dividend equivalents.

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Other Compensation Plans for Directors

We have no incentive compensation, deferred compensation or pension plans for non-employee directors.

Stock Ownership Guidelines

We have requested each member of our board to accumulate and hold common shares of the company, restricted stock units or other equity equivalents (other than stock options) granted by the company equal in value to four times his or her annual retainer for board service, plus 1,000 common shares, within three years after his or her appointment as a director.  The nominating and governance committee may suspend or adjust these guidelines if the nominating and governance committee determines that the guidelines are unduly burdensome by reason of personal circumstances affecting a director, are unduly affected by temporary declines in the price of our common shares or there has been a recent change in the compensation of directors.  We have not exempted any of our directors from compliance with these guidelines.

We consider these guidelines to have been satisfied once the minimum ownership requirements have been satisfied regardless of subsequent changes in the market value of our common shares.  One of the company’s directors does not currently satisfy these guidelines.  It is anticipated that he will satisfy these guidelines by the end of 2014.  He does, however, satisfy the stock ownership guidelines established by Institutional Shareholder Services, a proxy advisory firm.

PROPOSAL 2: TO APPROVE THE 2013 NON-EMPLOYEE DIRECTORS STOCK PLAN

The company currently maintains the 2003 directors plan.  Pursuant to the 2003 directors plan, non-employee directors are entitled to receive stock-based compensation upon the date of each annual meeting.  The 2003 directors plan expires on May 19, 2013.  Except for the 2003 directors plan, the company does not have any incentive, deferred compensation or pension plans for non-employee directors.

The board adopted the 2013 directors plan, for the purpose of continuing to provide the non-employee directors with stock-based compensation.  The 2013 directors plan will be effective as of May 21, 2013, subject to shareholder approval at the 2013 annual meeting.  The grants provided to non-employee directors are described in the “Specific Benefits” section below.

What benefits will be paid to directors under the 2013 directors plan?

The amount or number of restricted stock units authorized by the 2013 directors plan in calendar year 2013 and for each future year during the term of the 2013 directors plan is not currently determinable because the number of restricted stock units depends on future variables such as stock prices, the amount of the annual retainer, the amount of dividends paid, if any, and the number of eligible directors.  In no event, however, will more than 500,000 restricted stock units be granted during the term of the 2013 directors plan to non-employee directors, without shareholder approval.

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The following chart represents the benefits or amounts that would have been received by or allocated to each of the following groups in 2012 if the 2013 directors plan had been in effect in 2012.

New Plan Benefits Table

(1)                                Only directors who are not officers or employees of the company are eligible to participate in the 2013 directors plan.

(2)                                Based on an annual retainer of $25,000, the number of non-employee directors immediately following the 2012 annual meeting and the closing price of our common shares on May 21, 2012 (the last trading day prior to the 2012 annual meeting) of $36.70 and on August 31, 2012 and November 30, 2012 (the dividend payment dates for dividend equivalents on restricted stock units) of $43.58 and $45.50, respectively.

What are the terms of the 2013 directors plan?

The principal terms of the 2013 directors plan are summarized below.  The following summary is qualified in its entirety by reference to the full text of the 2013 directors plan, which is attached as Attachment I to this proxy statement.

Purpose

The purpose of the 2013 directors plan is to attract, motivate and retain non-employee directors by providing them with stock-based compensation and to encourage directors to increase their stock ownership in the company.

Eligibility

Only the company’s non-employee directors are eligible to participate in the 2013 directors plan.  There will be eight non-employee directors on the board immediately following the election of directors.

Administration

The board has appointed the compensation committee to administer the 2013 directors plan.  The compensation committee has broad authority under the 2013 directors plan, including, for example, the authority:

·                 to construe and interpret the 2013 directors plan and to resolve any questions concerning the amount of benefits payable to a participant (except that no member of the committee may participate in a decision relating solely to his or her benefits),

·                 to determine adjustments to the terms of the 2013 directors plan in response to extraordinary transactions,

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·                 to maintain all necessary records for administration of the 2013 directors plan, and

·                 to make and publish forms, rules and procedures for the administration of the 2013 directors plan.

Shares Authorized

The board has authorized an aggregate of 500,000 common shares that may be issued or delivered under the 2013 directors plan.  The maximum number of common shares that may be delivered to any individual in a calendar year is 5,000 shares.  Each share limit and award under the 2013 directors plan is subject to adjustment for certain changes in the company’s capital structure, reorganizations and other extraordinary events as described below.

If grants contemplated would exceed aggregate limits under the 2013 directors plan, the company will prorate any new credits of restricted stock units among the participants.  If no additional common shares are available for issuance, participants will not be credited additional restricted stock units and dividend equivalent rights will instead be paid in cash.

The 2013 directors plan does not limit the authority of the board or the compensation committee to grant awards or authorize any other compensation under any other plan or authority.

Type of Awards

The 2013 directors plan authorizes the grant of restricted stock units.

Restricted Stock Units

A restricted stock unit represents an unfunded bookkeeping entry which serves as a unit of measurement relative to one common share for purposes of determining the amount of the payment.  Subject to limited exceptions, all restricted stock units are payable solely in common shares.  Stock units credited under the 2013 directors plan are at all times fully vested and non-forfeitable ninety days after the date of grant.

Annual Restricted Stock Unit Awards

Immediately after each annual meeting of shareholders commencing in 2013, each eligible director in office immediately following the annual meeting is entitled to be credited the number of restricted stock units equal to two times the amount of the then-current annual retainer payable by the company for services rendered as a director for such year, divided by the fair market value of a common share on the last trading date prior to the annual meeting.  The current annual retainer payable by the company is $25,000.

Restricted stock unit awards are at all times fully vested ninety days after the date of grant.  Restricted stock units credited to an eligible director’s restricted stock unit account under the 2013 directors plan will become payable on the vesting date.  The distribution will be made in a lump sum as soon as practicable, but no later than thirty days, following the applicable vesting date.

Dividend Equivalents

As of each dividend payment date, each eligible director’s restricted stock unit account will be credited with a number of restricted stock units equal to an amount that represents the dividends that would have been payable as of the dividend payment date on the number of units then credited to his or her restricted stock unit account divided by the fair market value of a common share on the dividend payment date.  Dividend equivalent restricted stock units are paid at the same time and in the same

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manner as the restricted stock units to which they relate, subject to limitations on the number of common shares that may be issued under the 2013 directors plan.

Restrictions on Transfer

Subject to customary exceptions, restricted stock units are generally non-transferable, except by will or the laws of descent and distribution or beneficiary designation.

Adjustment

The number, maximums and kind of shares available for issuance or transfer under the 2013 directors plan and outstanding restricted stock units are subject to adjustment for extraordinary dividends or distributions of property to the company’s shareholders and upon certain reorganizations, merger, combination, consolidations, recapitalizations, reclassifications, stock splits, stock dividends, asset sales or other similar events.

Termination of or Changes to the 2013 Directors Plan or Awards

The board may amend or terminate the 2013 directors plan (including outstanding awards) and does not contemplate seeking shareholder approval for amendments except to the extent required by applicable law or rules of the New York Stock Exchange or otherwise deemed necessary or advisable by the board.  However, no amendment or termination may cancel or adversely affect a participant’s rights with respect to amounts or restricted stock units credited to his or her restricted stock unit account, without his or her consent, except as otherwise provided in the 2013 directors plan.  The 2013 directors plan will remain in effect until terminated in accordance with the terms of the 2013 directors plan.

Securities Underlying Restricted Stock Units

The market value of the common shares as of April 1, 2013 was $55.94.  The company intends to register 500,000 common shares under the 2013 directors plan under the Securities Act of 1933.   Common shares issued under the 2013 directors plan will be listed on the New York Stock Exchange.

What is the federal income tax treatment of grants under the 2013 directors plan?

The federal income tax consequences of the 2013 directors plan under current federal law are summarized in the following discussion of general tax principles applicable to the 2013 directors plan.  This summary is not intended to be exhaustive and does not describe state or local tax consequences.

Awards

The company is generally entitled to deduct, and the participant will recognize taxable income in, an amount equal to the fair market value of the common shares distributed in payment of restricted stock units at the time of payment.

Section 409A

To the extent that Section 409A of the Internal Revenue Code is applicable, we intend to administer the 2013 directors plan and any grants made thereunder in a manner consistent with the requirements of Section 409A, and any regulations and other guidance promulgated with respect to Section 409A by the U.S. Department of Treasury or Internal Revenue Service.  All awards under the 2013 directors plan are intended either (i) to be exempt from Section 409A or (ii) to comply with Section 409A, and the compensation committee intends to administer the 2013 directors plan in a manner consistent with that intent.

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What vote is required to approve the 2013 directors plan?

The board has approved the 2013 directors plan and believes it to be in the best interest of the company and its shareholders.  All non-employee directors are eligible to receive awards under the 2013 directors plan and thus have a personal interest in its approval.

The board unanimously recommends a vote FOR the approval of the 2013 directors plan.

The affirmative vote of the holders of a majority of the common shares represented in person or by proxy and entitled to vote on this Proposal is required for approval of the 2013 directors plan.  In addition, the total number of votes cast on this Proposal must represent over 50% in interest of all common shares entitled to vote on this Proposal in order for this proposal to become effective.

What securities have we authorized for issuance under equity compensation plans?

We have made stock awards to our executive officers and managers under the 2000 plan and the 2008 plan.  We have also made stock awards to our non-employee directors under the 2003 directors plan.  We provide information regarding the securities which have been issued and which are available for issuance under these plans in the table set forth below as of December 31, 2012.  This table does not include any common shares that may be issued under our 401(k) plan.

Future awards under the 2013 directors plan will be made in accordance with the terms of the 2013 directors plan.  The amount of the awards will depend upon the amount of the annual retainer payable to directors on the date of each annual meeting during the term of the 2013 directors plan, together with dividend equivalents thereon.  The amount of the dividend equivalents will depend upon the amount of the award, the amount of dividends declared, if any, and the fair market value of our common shares on the dividend record date.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS(1)

(As of December 31, 2012)

(1)          Amounts shown under column (a) are for options granted only with a weighted average remaining contractual term of 4.69 years.  At December 31, 2012, there were 93,025 restricted stock units outstanding that had been granted to employees under the 2008 plan and 56,641 restricted stock units outstanding that had been granted to directors under the 2003 directors plan.  Each restricted stock unit was issued with dividend equivalent rights in the form of additional restricted stock units until the initial restricted stock unit vests or is terminated earlier pursuant to the terms of the grant. Under the 2008 plan, for each restricted stock unit granted, the number of shares available for issuance under the 2008 plan will be reduced by 2.45 shares.

(2)          Of this amount, there were no securities available for future grants under the 2000 plan, 618,800 securities available for future grants under the 2008 plan (including 136,673 securities which we are permitted to carryover from the 2000 plan under the terms of the 2008 plan), and 101,879 securities remaining available for future issuance under the 2003 directors plan.  Under the terms of the 2003 directors plan, only 118,000 shares may be issued in the form of restricted stock units.  As of December 31, 2012, 103,121 restricted stock units have been issued under the terms of the 2003 directors plan and no additional securities may be issued, other than securities issued pursuant to dividend equivalent rights on restricted stock units previously granted to directors. As a result, only 14,879 of the 101,879 shares are available for issuance under the 2003 directors plan and may in fact be used for future issuances.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT

YOU VOTE “FOR” APPROVAL OF THE 2013 DIRECTORS PLAN.

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EXECUTIVE OFFICERS

What has been the business experience of our executive officers during the past five years?

We have set forth the principal occupation of each of our executive officers in the following table.  Unless otherwise specified, the principal position of the executive officer is with American States Water Company.  Mr. Sprowls, Ms. Tang and Ms. Farrow are also officers of each of our direct and indirect subsidiaries.  The age of each executive officer is current as of April 1, 2013.

EXECUTIVE EXPERIENCE TABLE

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Compensation Discussion and Analysis

In this section, we describe the philosophy and objectives of our executive compensation programs, explain the compensation decision-making process, summarize the individual components of total compensation for our named executive officers and provide you with our assessment of our compensation program in 2012.  We provide more detailed information regarding the compensation paid to our named executive officers during the past three years in the tables following this section and in the narrative discussion after each of these tables.

Executive Summary

The principal elements of our compensation program include a base salary, annual cash incentives, a portion of which is based on achieving financial and operational performance objectives and annual equity grants.  We refer to these elements of compensation as total direct compensation.  The compensation committee considers each of these elements independently before assessing whether its overall compensation program is competitive with that of its peer group and other companies with which the company competes for executive talent.

The compensation committee set the following target percentages for each component of total direct compensation in 2012, assuming that each named executive officer earned the aggregate target annual objective and discretionary bonus under the terms of the 2012 short-term incentive program and that Mr. Sprowls earned his performance awards.

In determining the target percentages for each component of total direct compensation, the compensation committee considered the practices of our peer group, the views and practices of the California Public Utilities Commission, or CPUC,  in setting rates, the practices of the two water utilities regulated by the CPUC that are members of our peer group and the preference of proxy advisory firms for significant portions of total direct compensation to consist of variable pay based on the satisfaction of objective performance targets.  The compensation committee also believes that it is important for more of the compensation of the chief executive officer to be dependent on performance than that of the other executive officers.  The total target direct compensation in 2012 of Mr. Sprowls was set at 2.5 times the average of the total target direct compensation of the company’s three senior vice presidents.

TOTAL TARGET DIRECT COMPENSATION

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(1)                   The value of restricted stock units included in the calculation is based on the price of our common shares on the date of grant (February 15, 2012) of $36.63.  This table undervalues, to some extent, the value of restricted stock units since all restricted stock units were granted with dividend equivalent rights.  The value of restricted stock units depends upon the value of dividends paid by the company during the year.

(2)                   The value of performance stock awards included in the calculation is based on the price of our common shares on the date of grant (May 29, 2012) of $36.61.  This table undervalues, to some extent, the value of performance awards since all performance awards were granted with dividend equivalent rights.  The value of restricted stock units credited to the performance award account depends upon the value of dividends paid by the company during the year.

The mix of total actual direct compensation paid to our named executive officers depends upon the amount of the objective and discretionary bonuses awarded by the compensation committee based on the company’s financial and operational performance in 2012 and the value of restricted stock units and performance awards credited to each named executive officer’s restricted stock unit and performance award accounts on each dividend payment date for dividend equivalent rights credited with respect to each restricted stock unit and performance award.  The objective criteria considered by the compensation committee in 2012 in connection with the awarding of the objective cash bonus to each executive officer consisted of a number of different performance criteria, including earnings per share measures, relative stock price, internal control measures and operational measures which are discussed in more detail in this section under “Elements of Executive Compensation-Short Term Cash Incentives.”  The performance criteria in the performance award granted to Mr. Sprowls in May 2012 was based on the net earnings of the company and its subsidiaries on a consolidated basis for the period April 1, 2012 through December 31, 2012.

We set forth the actual percentages for each component of total direct compensation paid to each named executive officer for 2012 in the following table based on the actual bonuses awarded to each named executive officer and the value of restricted stock units credited to each named executive officer’s restricted stock unit and performance award accounts in 2012 for dividend equivalent rights granted with each restricted stock unit and performance award:

TOTAL ACTUAL DIRECT COMPENSATION(1)

(1)                   Total direct compensation excludes the change in the value of each executive officer’s pension and all other compensation set forth in the Summary Compensation Table.

(2)                   Amount paid in cash upon satisfaction of objective criteria set forth in the 2012 short-term incentive program.

(3)                   The calculation is based on the price of our common shares (i) on the date of grant (February 15, 2012) of $36.63, and (ii) on the dividend payment dates for dividend equivalents on the restricted stock units granted of $36.38, $36.61, $43.58 and $45.50 on March 1, June 1, August 31, and November 30, 2012, respectively.

(4)                                      The calculation is based on the price of our common shares (i) on May 29, 2012 (the date of grant) of $36.61, and (ii) on the dividend payment dates for dividend equivalents on the restricted stock units granted of $43.58 and $45.50 on August 31, and November 30, 2012, respectively.

The total actual direct compensation of Mr. Sprowls in 2012 was 2.5 times the average of the total actual direct compensation of the company’s three senior vice presidents.  Mr. Sprowls’ total actual direct compensation was below the median of total direct compensation of other chief executive officers

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based upon a report prepared by Pearl Meyer & Partners of the estimated compensation of chief executive officers of members of our peer group, as adjusted by Pearl Meyer & Partners using general survey data.

In May 2012, our shareholders cast an advisory vote approving the compensation of our named executive officers, as disclosed in our 2012 proxy statement.  Approximately 92.58% of the votes cast on this matter supported our 2012 “say-on-pay” proposal.  The compensation committee considered this result and determined that it was not necessary at this time to make any major changes to the compensation program in response to this advisory vote.

Changes in our Compensation Program

The compensation committee annually reviews our executive and director compensation programs.  As a result of the annual review in 2012, the compensation committee made the following changes in our executive and director compensation programs in 2012:

§                 approved an amendment to the 2008 plan to permit the grant of performance awards intended to satisfy the performance-based exception from the tax deductibility limitations of Section 162(m) of the Internal Revenue Code,

§                 granted performance awards to Mr. Sprowls in May 2012 following shareholder approval of the amendment to the 2008 plan in order to increase the proportion of his total target direct compensation dependent upon the financial and operational performance of the company; these performance awards were intended to satisfy the tax deductibility limitations of Section 162(m) of the Internal Revenue Code,

§                 developed a new long-term stock performance award program applicable to executive officers in order to increase the proportion of total target direct compensation of executive officers dependent upon the long-term financial and operational performance of the company; the first awards under this new program were granted in March 2013; these performance awards are also intended to satisfy the tax deductibility limitations of Section 162(m),

§                 increased the target annual bonus awards under the short-term cash incentive program in order to increase the proportion of total target direct cash compensation of executive officers dependent upon the financial and operational performance of the company as described in this Section under “Elements of Executive Compensation-Short-Term Cash Incentives,”

§                 revised the stock ownership guidelines for Mr. Sprowls as described in this Section under “Stock Ownership Guidelines,”

§                 increased the annual retainer payable to directors by $5,000 due to the increased work load of directors and in order to make the company’s director compensation more competitive with that of our peer group, and

§                 increased the annual retainer payable to the chair of the compensation committee by $3,000 due to the increased work load of the compensation committee chair.

We provide more detailed information regarding the compensation paid to our directors in 2012 under “Proposal 1: Election of Directors-How do we compensate our directors?”

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Objectives of the Executive Compensation Program

The compensation committee desires to implement the company’s executive compensation program in a manner that will enable the company to:

§                 attract, retain and motivate talented and experienced executives,

§                 provide fair, equitable and reasonable compensation to each executive officer,

§                 reward job performance, and

§                 further align the interests of our executive officers with that of our shareholders and customers.

Compensation Committee Process

The compensation committee annually reviews our compensation programs in order to assess whether the program continues to meet the objectives of the program.  The compensation committee typically engages a compensation consultant to assist the committee.

The compensation committee engaged Pearl Meyer & Partners in October 2011 as a compensation consultant to the committee.  The committee extended this engagement in 2012.  The compensation committee selected the following peer group of companies, after consultation with management and Pearl Meyer & Partners, based on industry (water, gas and electric utilities) and size of annual revenues (between $100 million and $1 billion):

§                 ALLETE, Inc.

§                 Aqua America, Inc.

§                 California Water Service Group

§                 Central Vermont Public Service Corporation

§                 Chesapeake Utilities Corporation

§                 El Paso Electric Company

§                 ITC Holdings Corporation

§                 MGE Energy, Inc.

§                 Northwest Natural Gas Company

§                 SJW Corp

§                 South Jersey Industries, Inc.

§                 The Empire District Electric Company

§                 UIL Holdings Corporation

§                 Unitil Corporation

The compensation committee considered compensation information for this same group of companies during the past three years with the exception of ALLETE, Inc., El Paso Electric Company and Northwest Natural Gas Company, which were added to the peer group in 2012.  Three members of the peer group are in the water industry, two of which are also regulated by the CPUC, the regulator of the company’s principal subsidiary.  The compensation committee gives greater weight to the practices of these two companies since the company competes with these companies for executive talent and is subject to similar regulatory oversight.  In addition, the compensation committee believes that the financial and operational performance of these companies and the compensation programs of these companies are particularly relevant since the ability of these companies to earn their authorized rate of return and to obtain rate adjustments for changes in employee compensation are also affected to some

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extent by the rules, regulations and practices of the CPUC.  These companies are, to some extent, also affected by the same weather, climate and economic conditions as the company.  All of the other companies are utilities or utility holding companies.

Pearl Meyer & Partners also provided the compensation committee in January 2012 with its competitive assessment of the company’s executive compensation program based on information derived by Pearl Meyer & Partners from four different general market surveys, the Mercer-2011 Executive Compensation Survey (all industries), the Watson Wyatt-2010/2011 Top Management Compensation Survey (all industries) and two confidential/proprietary general industry surveys.  The competitive assessment was summary in nature, did not identify any particular company and did not contain any information regarding the compensation program of any particular company.  Accordingly, the compensation committee did not consider the compensation practice of any particular company, other than the compensation practices of members of its peer group, in designing any of the company’s compensation plans.

In addition to the information provided by Pearl Meyer & Partners, the compensation committee considered:

Risk Considerations

In establishing and reviewing the company’s compensation program, the compensation committee considers whether the program encourages unnecessary or excessive risk taking and has concluded that it does not.  Base salaries, which constitute the largest component of total direct compensation for all employees of the company, are fixed in amount and thus do not encourage excessive risk taking.

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The compensation committee considers a variety of factors in awarding additional cash compensation based on the performance of its executive officers, including factors based on earnings performance, customer satisfaction, capital improvements and internal accounting controls.  The committee believes that, as a result of this mix of factors, the company’s short-term cash incentive program appropriately balances risk and the committee’s desire to compensate executives for accomplishments that are important to the company’s customers and shareholders.

In order to mitigate risks that may be associated with performance-based compensation, the compensation committee maintains a policy to recoup performance-based compensation payments if:

§                 we calculated the amount of the compensation based on achieving financial results that were subsequently subject to an accounting restatement due to material noncompliance with a financial reporting requirement under the securities laws,

§                 we identified the need for the accounting restatement within three years after the date of the filing of financial results that were subsequently restated, and

§                 we would have paid a lesser amount to the executive officer based on the restated financial results.

In addition, in 2011, the compensation committee amended the form of stock award agreements to provide for recoupment of the award or the value, proceeds or other benefits received by a grantee upon the exercise of stock options, the vesting of restricted stock or restricted stock unit awards or the sale of the underlying common shares, as provided in our policy for recoupment of performance-based awards, as such policy may be amended from time to time, or as may otherwise be required under applicable law.  A similar provision is included in the performance award agreement approved by the compensation committee for Mr. Sprowls in 2012 and in the performance award agreements for performance awards granted in 2013.

Under our cash performance incentive plan, no executive officer is permitted to receive a bonus under this plan, whether based on objective criteria or a subjective assessment of performance (referred to as a discretionary bonus), that exceeds $400,000.  The compensation committee believes that this limitation helps discourage excessive risk-taking by executive officers.

The compensation committee also makes stock awards to executive officers and managers.  The awards have been staggered and subject to three-year vesting schedules.  The compensation committee believes that this further discourages excess risk-taking by executives.  In addition, the vesting schedule serves as a retention vehicle for executive officers and managers.

In addition to establishing and reviewing our compensation program, the compensation committee also examines the pay practices and policies relating to all employees of the company.  On the basis of this examination, the compensation committee has concluded that our pay practices and policies do not appear to involve any risks that could have a material adverse effect on us.

Elements of Executive Compensation

Our compensation program consists of base salary, short-term cash incentives, stock awards, retirement benefits, severance arrangements and welfare and other benefits and perquisites.  We discuss each of these elements in more detail below.

Base Salary

The compensation committee considered the following factors in making adjustments to the base salaries of individual executive officers in 2012:

§                 the competitiveness of our compensation of each executive officer compared to executive officers of our peer group in comparable positions,

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§                 the desire to compensate executives in comparable positions in a similar manner; Robert Sprowls is our chief executive officer; Denise Kruger, McClellan Harris III and Eva Tang are senior vice presidents; and Patrick Scanlon is a vice president,

§                 a subjective assessment of each executive’s performance during 2011, including his or her performance in the areas of our business over which he or she had individual responsibility, and

§                 a review of the company’s financial performance and management’s accomplishments during 2011.

After consideration of the factors described above, the compensation committee increased the base salary of Mr. Sprowls, Ms. Kruger, Mr. Harris, Ms. Tang and Mr. Scanlon by 5.09%, 3.74%, 3.76%, 7.00% and 4.01%, respectively, in February 2012.

Short-Term Cash Incentives

We adopted a short-term cash performance incentive plan in order to motivate executives who participate in the plan to maximize our performance from a financial, operations and customer service perspective.  We believe that the performance incentives set forth in our annual short-term cash incentive programs adopted pursuant to this plan will permit us to meet our objectives.  Our customers and shareholders benefit if we achieve our customer service objectives.  Our customers and shareholders also benefit if we are able to attract capital at a lower cost as the result of improved financial performance.

In March 2012, the compensation committee approved a short-term incentive program under this plan which gave each named executive officer the opportunity to receive:

§                 a bonus under the performance incentive plan based on achieving objective performance criteria in 2012, and

§                 a discretionary bonus based on a subjective assessment by the compensation committee of the executive officer’s performance in 2012 following the end of the year.  In making this subjective assessment, the compensation committee took into account the recommendations of the chief executive officer based on his subjective assessment of the performance of the other executive officers and a subjective assessment of the performance of each executive officer by other members of the board.

In March 2012, the compensation committee approved an increase in the amount of the target annual bonus awards under this program from 30% of base salary to 50% of base salary for the chief executive officer, from 20% of base salary to 25% of base salary for senior vice presidents and from 15% of base salary to 20% of base salary for vice presidents in order to increase the proportion of total target cash compensation of executive officers dependent upon the financial and operational performance of the company.  The compensation committee also took into account information provided by Pearl Meyer & Partners which indicated that the short-term cash incentives paid by the company to our named executive officers in 2011 were below average compared to that of our peer group.

Under Section 162(m) of the Internal Revenue Code, we may generally only deduct up to $1,000,000 of the compensation paid to a named executive officer, unless the compensation is performance-based and has been paid pursuant to a plan approved by shareholders. The performance incentive plan was approved by shareholders at our annual meeting in 2010.  We intend the objective bonuses paid to our executive officers under the short-term cash incentive program to qualify as performance-based within the meaning of Section 162(m).

Under the 2012 short-term cash incentive program adopted pursuant to the short-term incentive plan, we set objective performance goals at threshold, target and maximum levels based on the objectives in our internal business plans described in the table below.  We also disclose in this table our actual performance in 2012 for each of the performance goals set by the compensation committee in March 2012.

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PERFORMANCE GOALS