American Equity Investment Life Holding Company (AEL)

AEL » Topics » Compensation Discussion and Analysis

This excerpt taken from the AEL DEF 14A filed Apr 22, 2008.

Compensation Discussion and Analysis

        Our compensation policies and programs are designed to:

    attract and retain highly qualified and motivated executive officers and employees;

    encourage and reward achievement of our annual and long-term goals; and

    encourage executive officers and employees to become stockholders with interests aligned with those of other stockholders.

        Section 162(m) of the Internal Revenue Code limits deductible compensation to $1 million per named executive, with the exception of "performance-based compensation." Compensation to our executive officers in 2007 and all prior years was below this threshold and thus fully deductible for federal income tax purposes. We anticipate that all future compensation will be fully deductible.

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        Mr. Noble's Compensation.    David J. Noble is the founder of the Company and has had a compensation program significantly different from the other named executives in this Proxy Statement and from the chief executive officers of most public companies. From the formation of the Company through 2005, Mr. Noble elected to receive an annual base salary of $60,000. Beginning in 2006, this base salary was increased to $120,000. In 2007, Mr. Noble did receive a cash bonus of $400,000. From time to time, the Compensation Committee has made recommendations to the Board of Directors concerning an increase in Mr. Noble's compensation to reflect his leadership, the scope of his responsibilities and the Company's growth and profitability. We anticipate that the Compensation Committee will again review the level of Mr. Noble's compensation in 2008 and will make a recommendation concerning an increase in base salary and/or a cash bonus.

        In January 1996, shortly after he formed the Company, Mr. Noble created a stock option agreement designed to permit him to maintain a specified level equity ownership in the Company. At that time, he was the sole stockholder, sole director and sole employee of the Company. This agreement was modified in 1997 and again in 1998 (i) to limit the total number of options under the agreement to 960,000 options, the terms of which are described below in the Outstanding Equity Awards table, and (ii) to provide 240,000 warrants to acquire shares of our Common Stock on terms identical to warrants granted to shareholders in our first private placement of Common Stock in 1996. Mr. Noble exercised all of the warrants in 2000, and he paid the exercise price for the warrants with the proceeds of a forgivable loan of $800,000 made to him by the Company. Mr. Noble recognized compensation in connection with this loan over a period of 5 years during which annual installments of principal and interest at 61/2% per annum were forgiven. The last such installment was forgiven in 2005.

        In connection with a private placement of our Common Stock in December 1997, we provided management subscription rights ("MSR's") to acquire shares of Common Stock to members of the Board of Directors of the Company, including Mr. Noble, and the Board of Directors of its primary life subsidiary. The private placement included a rights offering (the "Rights Offering") to all stockholders of the Company at that time, and permitted each stockholder to acquire one share of Common Stock for each share then owned at an exercise price of $5.33 per share. The MSR's provided to Directors were similar to the rights to all shareholders in that (i) each Director received one right for each share then owned and one-half share for each option or warrant then held; and (ii) all MSR's had an exercise price of $5.33 per share. The MSR's differed from those provided to all shareholders in that they could be exercised at any time during the 5-year period following the Rights Offering, and that period was later extend by the Board of Directors for an additional 3 years, with an expiration date of December 1, 2005.

        Mr. Noble initially received 1,680,000 MSR's based upon his holdings of our Common Stock, options and warrants in December 1997, and of those he gave 621,875 to senior officers of the Company during 2003. Mr. Noble exercised his remaining 1,058,125 MSR's in 2005, and paid an aggregate cash exercise price of $5,639,806. Because the MSR's had an extended exercise period, they were deemed to be compensatory upon exercise under tax and accounting rules to the extent of the excess of the market value of the shares of Common Stock acquired over the exercise price on the date of exercise. Accordingly, Mr. Noble recognized $6,264,100 of compensation in 2005. All other holders of MSR's exercised them in full in 2005 and recognized compensation for their value.

        Upon the initial public offering ("IPO") of our Common Stock in December 2003, the Compensation Committee approved grants of stock options under the 2000 Employee Stock Option Plan to a broad group of employees, including Mr. Noble, who received 50,000 options at that time. This is the only grant of stock options Mr. Noble has ever received under our employee stock option plans.

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        Other Named Executives.    The primary elements of compensation for the named executives in this Proxy Statement, other than Mr. Noble, includes:

    Base pay;

    Discretionary annual cash bonuses;

    Non-equity incentive compensation based on net receipts from new annuity sales; and

    Long-term equity incentive compensation through stock options.

        Mr. Noble determines the amount of base salary and discretionary annual cash bonuses paid to senior officers of the Company. From time to time Mr. Noble has retained Mercer Human Resources Consulting to prepare a compensation study which compares the levels of compensation paid to our senior officers to the levels of a designated group of peer companies and to the financial services industry generally. While Mr. Noble considers this information in establishing salary and discretionary bonus levels, he does not target a specific level of compensation relative to the peer group or industry data. The levels of total compensation paid to the senior officers of the Company, including Mr. Noble, typically have been below the median levels of total compensation paid to officers of peer companies.

        Non-Equity Incentive Compensation.    A key element of the compensation of all employees of the Company including the named executives, other than Mr. Noble, is a cash incentive plan based upon net receipts of premiums from new annuity sales. This plan is available to all employees and is intended to encourage all employees to focus on our annual sales goals and to maintain the high levels of service to sales agents and policyholders for which the Company is known. Prior to 2007, the bonus pool consisted of 5 basis points (0.05%) of net premiums received from annuity sales during the six-month periods preceding each semi-annual distribution date. Distributions were made in cash on a pro rata basis equal to the ratio which each employee's gross salary bears to the total payroll expense for the relevant period and the relevant group of participants.

        The Company established the American Equity Investment Employee Stock Ownership Plan ("ESOP") effective July 1, 2007. With the formation of the ESOP, the bonus pool that previously consisted of 5 basis points was changed to 8 basis points. A distribution of 4 basis points will be made in cash as described above and 4 basis points will be contributed to the ESOP. The principal purpose of the ESOP is to provide each eligible employee with an equity interest in the Company. Employees become eligible once they have completed a minimum of six months of service. Employees become 100% vested after two years of service.

        Stock Ownership and Long Term Equity Compensation.    We emphasize long term equity compensation in our total compensation package for all employees, and particularly for senior officers. We believe this helps align the interests of such employees and officers with shareholders and creates an incentive to build our Common Stock value through growth in profitability targets including gross spread earnings on our annuity liability reserves, net operating earnings, and return of operating earnings on average equity. Senior officers of the Company are required to own shares of our Common Stock. Although no particular level of stock ownership is required, each of the named executives holds stock in amounts significant to his or her individual net worth. In addition, long term equity compensation has been provided in the form of stock options granted under employee stock option plans adopted by our Board of Directors and approved by the shareholders. In past years through and including 2004, Mr. Noble has recommended to the Compensation Committee the approval of grants of stock options to senior officers based upon discretionary parameters. As a result of changes in accounting rules relating to employee stock options, no options have been granted since 2004 while we evaluate the impact of the new rules and other alternatives for long term equity compensation.

        All options granted under our employee stock option plans from and after our IPO have an exercise price equal to the closing public market value of the shares on the date of grant. There has

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been no backdating. Options granted prior to the IPO have an exercise price equal to the fair value of the shares as determined by our Board of Directors in its discretion. All options granted under our employee stock option plans have a 6-month vesting period and may be exercised for a period of no more than ten years from the date of grant. The maximum number of shares which may be granted to any employee in any one year is 225,000. The exercise price of an option may be paid in cash, Common Stock or by a promissory note. We have also established a "cashless exercise" arrangement whereby an optionee delivers an exercise notice and irrevocable instructions to an approved registered broker to sell shares and deliver the exercise price in cash to us.

        Change of Control Arrangements.    We have no written employment contracts or severance agreements with any of our officers or employees. To promote retention of senior managers, we have entered into change of control agreements with a small group of our executives including each of the named executives except Mr. Noble. Each January 1 the term of each of these agreements is automatically extended one year unless we have given 90 days notice that we will not extend the term of the agreement. With certain exceptions, an executive is entitled to payments for a period of 36 months following a change in control if his or her employment is terminated. Such payments are equal to three times the amount of the executive's base salary plus cash bonuses. These agreements also provide for the continuation of health, dental and life insurance benefits during the 36-month period. If payments under these agreements become subject to the "golden parachute" excise tax imposed by Internal Revenue Code Sections 280G and 4999, then the named executives will be entitled to receive an additional "gross-up" payment that is sufficient to pay the golden parachute excise tax and all other taxes, interest and penalties associated with the excise tax and gross-up payment. During the term of the agreement and during the period in which the executive is entitled to continued salary payments, the executive may not (i) solicit or entice any other employee to leave us or our affiliates to go to work for any competitor, or (ii) request or advise a customer or client of ours or our affiliates to curtail or cancel its business relationship with us or our affiliates.

        Non-Qualified Deferred Compensation Arrangements.    We permit senior officers of the Company to defer on an elective basis a specified portion of their base salaries, annual cash bonuses and/or amounts paid under the cash incentive plan. Any such deferrals must be made pursuant to a non-qualified deferred compensation agreement between the officer and the Company, and deferred amounts are contributed to the American Equity Officers Rabbi Trust. The investment of deferred amounts is directed by the individual officers and the return on such investments is added to the deferred account balance of such officer. No above market returns are paid on deferred amounts. Ms. Carlson, Ms. Richardson and Mr. Wingert have each invested a portion of their deferred compensation accounts in our Common Stock, and dividends paid on our stock have been credited to their accounts. The balance of the deferred compensation accounts will be distributed to each executive who has elected to make such deferrals upon his or her death, disability or separation from service. During 2006, PriceWaterhouseCoopers LLP ("PWC"), our tax consultant, was directed to review our non-qualified deferred compensation arrangement for compliance with new tax laws and regulations under Section 409A of the Internal Revenue Code of 1986, as amended, and will make amendments to such arrangements per PWC's recommendations during the period permitted under such laws and regulations.

        In addition, Mr. Wingert has a non-qualified Deferred Compensation Agreement with us pursuant to which he will be entitled to receive 4,500 shares of Common Stock on a deferred payment basis for services rendered during our initial start-up period. Dividends are not paid on these shares as they are reserved but not issued or outstanding. Mr. Wingert will become entitled to receive a distribution of the shares upon his death, disability or separation from service with the Company.

        Perquisites and Other Compensation.    Several of the named executives, excluding Mr. Noble, receive perquisites including car allowances and payment of private club dues. In addition, we offer a

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package of insurance benefits to all employees including health, dental, long term disability and life insurance. We also have a qualified 401(k) plan for all employees after 30 days of employment and attainment of age 18. We match 50% of employee contributions to the plan up to 4% of total compensation, subject to the limitations specified in the Code.

This excerpt taken from the AEL DEF 14A filed Apr 26, 2007.

Compensation Discussion and Analysis

Our compensation policies and programs are designed to:

·       attract and retain highly qualified and motivated executive officers and employees;

·       encourage and reward achievement of our annual and long-term goals; and

·       encourage executive officers and employees to become stockholders with interests aligned with those of other stockholders.

Section 162(m) of the Internal Revenue Code limits deductible compensation to $1 million per named executive, with the exception of “performance-based compensation.”  Compensation to our executive officers in 2006 and all prior years was below this threshold and thus fully deductible for federal income tax purposes. We anticipate that all future compensation will be fully deductible.

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