Ecolab DEF 14A 2014
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Statement Pursuant to Section 14(a) of
NOTICE OF 2014
FOR MAY 8, 2014
March 24, 2014
Dear Fellow Stockholder:
You are cordially invited to join us for our Annual Meeting of Stockholders, to be held at 10:00 a.m. on Thursday, May 8, 2014, in the Auditorium of the Landmark Center, 75 West 5th Street, Saint Paul, Minnesota 55102. The Notice of Annual Meeting and the Proxy Statement that follow describe the business to be conducted at our Annual Meeting. We urge you to read both carefully.
We hope you plan to attend our Annual Meeting. However, if you will not be able to join us, we encourage you to exercise your right as a stockholder and vote. Please sign, date and promptly return the accompanying proxy card, or make use of either our telephone or Internet voting services. Stockholders not in attendance may listen to a broadcast of the meeting on the Internet. Webcast instructions will be available on-line at www.ecolab.com/investor.
YOUR VOTE IS IMPORTANT!
Your vote is a valuable part of the investment made in our Company, and is the best way to influence corporate governance and decision-making. Please take time to read the enclosed materials and vote!
Whether or not you plan to attend the meeting, please complete the accompanying proxy and return it in the enclosed envelope. Or, you may vote by telephone or the Internet. If you attend the meeting, you may vote your shares in person even though you have previously returned your proxy by mail, telephone or the Internet.
PLEASE REFER TO THE ACCOMPANYING MATERIALS FOR VOTING INSTRUCTIONS.
To the Stockholders of Ecolab Inc.:
The Annual Meeting of Stockholders of Ecolab Inc. will be held on Thursday, May 8, 2014, at 10:00 a.m., in the Auditorium of the Landmark Center, 75 West 5th Street, Saint Paul, Minnesota 55102, for the following purposes (which are more fully explained in the Proxy Statement):
Our Board of Directors has fixed the close of business on March 11, 2014 as the record date for the determination of stockholders entitled to notice of and to vote at the meeting.
March 24, 2014
The Board of Directors of Ecolab Inc. is using this Proxy Statement to solicit proxies from the holders of Ecolab Common Stock, par value $1.00 per share ("Common Stock"), for use at the 2014 Annual Meeting of Ecolab Stockholders. We are first mailing this Proxy Statement and accompanying form of proxy to Ecolab stockholders on or about March 24, 2014.
Quorum A quorum of stockholders is necessary to hold a valid meeting. The presence in person or by proxy at the meeting of holders of a majority of the outstanding shares of Common Stock entitled to vote at the meeting is a quorum. Abstentions and broker non-votes count as present for establishing a quorum. Common Stock held by Ecolab in our treasury does not count toward a quorum.
Voting instructions are included on your proxy card. If you properly complete your proxy and submit it to us in time to be tabulated, one of the individuals named as your proxy will vote your Common Stock as you have directed. You may vote for or against each proposal, or you may abstain from voting on a proposal. With respect to the election of directors, you may vote for or against each nominee, or you may abstain from voting on the election of one or more nominees.
Proposal 1: Election of Directors Each nominee will be elected by a majority of the votes cast in uncontested elections. We currently expect that the election of directors at our meeting will be uncontested. Under the majority voting standard, a nominee must receive a number of "FOR" votes that exceeds 50% of the votes cast with respect to that director's election. Votes cast with respect to a nominee include votes FOR or AGAINST a nominee and exclude abstentions and broker non-votes.
In a contested election, directors will be elected by a plurality vote. A contested election is an election in which the number of candidates for election as directors exceeds the number of directors to be elected. Under the plurality standard, the 14 nominees receiving the most number of "FOR" votes will be elected as directors.
If an uncontested nominee for director does not receive an affirmative majority of "FOR" votes, he or she will be required to promptly offer his or her resignation to the Board's independent Governance Committee. That committee will then make a recommendation to the Board as to whether the offered resignation should be accepted or rejected, or whether other action should be taken. The Board will publicly announce its decision regarding the offered resignation and the rationale behind it within 90 days after the election results have been certified. Any director who offered his or her resignation will not be permitted to vote on the recommendation of the Governance Committee or the Board's decision with respect to his or her resignation.
Unless a contrary choice is specified, proxies solicited by our Board of Directors will be voted FOR the election of the 14 nominees named in this Proxy Statement. If, for any reason, any nominee becomes unavailable for election prior to our Annual Meeting, the proxies solicited by our Board of Directors will be voted FOR such substituted nominee as is selected by our Board of Directors, or our Board of Directors, at its option, may reduce the number of directors to constitute the entire Board.
Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm The affirmative vote of a majority of the total votes cast by holders of shares present in person or represented by proxy at the Annual Meeting and entitled to vote will constitute ratification of the appointment of PricewaterhouseCoopers LLP. Unless a contrary choice is specified, proxies solicited by our Board of Directors will be voted FOR ratification of the appointment of PricewaterhouseCoopers LLP.
Proposal 3: Re-Approve Ecolab Inc. Management Performance Incentive Plan, as Amended The affirmative vote of a majority of the total votes cast by holders of shares present in person or represented by proxy at the Annual Meeting will constitute approval of the Ecolab Inc. Management Performance Incentive Plan, as amended. Unless a contrary choice is specified, proxies solicited by our Board of Directors will be voted FOR the re-approval of the Management Performance Incentive Plan, as amended.
Proposal 4: Advisory Vote to Approve the Compensation of Executives Disclosed in this Proxy Statement The affirmative vote of a majority of the total votes cast by holders of shares present in person or represented by proxy at the Annual Meeting and entitled to vote will constitute approval of the compensation of executives disclosed in this Proxy Statement. Unless a contrary choice is specified, proxies solicited by our Board of Directors will be voted FOR approval of the compensation of executives disclosed in this Proxy Statement.
Proposal 5: Stockholder Proposal Requesting an Independent Board Chair The affirmative vote of a majority of the total votes cast by holders of shares present in person or represented by proxy at the Annual Meeting and entitled to vote will constitute approval of the proposal. Unless a contrary choice is specified, proxies solicited by our Board of Directors will be voted AGAINST the proposal.
Communications with Directors Our stakeholders and other interested parties, including our stockholders and employees, can send substantive communications to our Board using the following methods published on our website at www.ecolab.com/investors/corporate-governance:
All substantive communications regarding governance matters or potential accounting, control, compliance or auditing irregularities are promptly relayed or brought to the attention of the Lead Director or Chair of the Audit Committee following review by our management. Communications not requiring the substantive attention of our Board, such as employment inquiries, sales solicitations, questions about our products and other such matters, are handled directly by our management. In such instances, we respond to the communicating party on behalf of the Board. Nonetheless, our management periodically updates the Board on all of the on-line communications received, whether or not our management believes they are substantive. In addition to on-line communications, interested parties may direct correspondence to our Board of Directors, our Board Committees or to individual directors at our headquarters address, repeated at the top of page 1 of this Proxy Statement.
Any stockholder nomination for directors must comply with the advance notice procedures set forth in Article II, Section 3 of our By-Laws. Under our By-Laws, to be in proper written form, the stockholder's notice to our Corporate Secretary must set forth as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address, residence address and record address of the person, (ii) the principal occupation or employment of the person, (iii) the number of shares owned beneficially or of record by the person, (iv) any information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations promulgated thereunder, (v) the nominee holder for, and number of, shares owned beneficially but not of record by the person, (vi) whether and the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement has been made, the effect or intent of which is to mitigate loss to or manage risk or benefit of share price changes for, or to increase or decrease the voting power of, the person with respect to any shares beneficially owned, (vii) to the extent known, the name and address of any other stockholder supporting the nominee for election or reelection as a director on the date of such stockholder's notice, (viii) a description of all arrangements or understandings between or among persons pursuant to which the nomination(s) are to be made by the stockholder and (ix) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice. Any ownership information shall be supplemented by the stockholder giving the notice not later than ten (10) days after the record date for the meeting as of the record date. The notice must be accompanied by a written consent of the proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Company unless nominated in accordance with the foregoing procedures. This summary is qualified in its entirety by reference to the full text of our By-Laws, which can be found on our website at www.ecolab.com/investors/corporate-governance.
In terms of our principles for composition of the Board generally, and qualifications for director nominees specifically, we refer you to our Corporate Governance Principles, which can be found on our website at www.ecolab.com/investors/corporate-governance. Under these provisions, for example:
Other criteria relevant to service as a director of our Company are also set forth in our Corporate Governance Principles.
All directors are encouraged to submit to the Governance Committee the name of any person deemed qualified to serve on the Board, together with information on the candidate's qualifications. The Governance Committee screens and submits to the full Board the names and biographical information of those persons considered by the Committee to be viable candidates for election as directors. The same evaluation process and criteria are used by the Committee (i) for recommendations for director candidates submitted by stockholders in accordance with our Restated Certificate of Incorporation and By-Laws and (ii) for recommendations submitted by any other source, such as a director or a third-party search firm.
Committee to the full Board for appointment as directors. See Mr. Casale's and Ms. Vautrinot's biographies on pages 14 and 18, respectively. Mr. Casale was appointed as a director in December 2013 for a term expiring at this year's Annual Meeting. In addition, Mr. Casale was included by the Board of Directors on the slate of nominees for election for a term expiring at the 2015 Annual Meeting, and, as such, he is included in the group of nominees for election at this Annual Meeting. Ms. Vautrinot was appointed to the Board in February 2014 for a term expiring at this year's Annual Meeting. In addition, Ms. Vautrinot was also included by the Board of Directors on the slate of nominees for election for a term expiring at the 2015 Annual Meeting, and, as such, she is included in the group of nominees for election at this Annual Meeting.
Certain Beneficial Owners The following table sets forth information as to entities which have reported to the Securities and Exchange Commission ("SEC") or have advised us that they are a "beneficial owner," as defined by the SEC's rules and regulations, of more than 5% of our outstanding Common Stock.
Corporate Governance Materials and Code of Conduct Our Company is managed under the overall direction of our Board of Directors for the benefit of all stockholders. Written materials concerning policies of our Board of Directors, corporate governance principles and corporate ethics practices, including our Code of Conduct as last amended in 2012, are available on our website at www.ecolab.com/investors/corporate-governance.
We intend to promptly disclose on our website should there be any amendments to, or waivers by the Board of Directors of, the Code of Conduct.
As stated in our Corporate Governance Principles, the Board believes that it is best not to have a fixed policy on whether the offices of Chairman and Chief Executive Officer are to be held by one person or not. In May 2013, the Board determined that its current board leadership structure remains appropriate and best serves the interests of stockholders at this time. In making that annual determination, the Board considered numerous factors, including the benefits to the decision-making process with a leader who is both Chairman and Chief Executive Officer; the significant operating experience and qualifications of Mr. Baker; the importance of deep Ecolab knowledge in exercising business judgment in leading the Board; the size and complexity of our business; the significant business experience and tenure of our directors; and the qualifications and role of our Lead Director.
In accordance with our Corporate Governance Principles, the independent directors, after recommendation of the Governance Committee, re-appointed Jerry W. Levin as Lead Director in May 2013. As detailed in Mr. Levin's biography and qualifications on page 16, Mr. Levin has extensive public company board experience. Mr. Levin also is independent and is the Board's longest serving director, with 21 years of continuous service, so he has considerable knowledge of our business. Specific responsibilities of the Lead Director, as enumerated in our Corporate Governance Principles, include:
Mr. Baker continues to work closely with Mr. Levin to ensure the smooth and effective operation of the Board.
Strategic risk, which relates to the Company properly defining and achieving its high-level goals and mission, as well as operating risk, the effective and efficient use of resources and pursuit of opportunities, is regularly monitored and managed by the full Board through the Board's regular and consistent review of the Company's operating performance and strategic plan. For example, at each of the Board's six regularly scheduled meetings throughout the year, management provided the Board presentations on the Company's various business units as well as the Company's performance as a whole. Agenda items were included for significant developments as appropriate, for example, significant acquisitions such as the acquisition of Champion Technologies announced in October 2012 and completed in April 2013, important market developments and management succession. Pursuant to the Board's established monitoring procedures, Board approval is required for the Company's strategic plan and annual plan which is reported on by management at each Board meeting. Similarly, significant transactions, such as acquisitions and financings are brought to the Board for approval.
Reporting risk, which relates to the reliability of the Company's financial reporting, and compliance risk, relating to the Company's compliance with applicable laws and regulations, are primarily overseen by the Audit Committee. The Audit Committee meets at least five times per year and, pursuant to its charter and core agendas, receives input directly from management as well as the Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, regarding the Company's financial reporting process, internal controls and public filings. The Committee also receives regular updates from the Company's General Counsel and the Chief Compliance Officer regarding any Code of Conduct issues or legal compliance concerns and annually receives a summary of all Code of Conduct incidents during the preceding year from the General Counsel. See "Board Committees Audit Committee" below for further information on how the Audit Committee monitors, and assists the Board of Directors' oversight of, reporting and compliance risks.
The Company believes that its leadership structure, discussed in detail above, supports the risk oversight function of the Board. While the Company has a combined Chairman of the Board and Chief Executive Officer, we have a Lead Director, strong directors chair the various Board Committees involved in risk oversight, there is open communication between management and directors, and all directors are actively involved in the risk oversight function.
and practices to review; (2) we inventoried plans and practices that fell within the materiality framework; (3) we reviewed the identified plans and practices against our evaluation framework established in consultation with the Compensation Committee's independent compensation consultant, Frederic W. Cook & Co., Inc.; (4) we identified factors, processes or procedures in place which may mitigate any risks in identified plans and practices; and (5) the Compensation Committee reviewed the results of the analysis with Frederic W. Cook & Co., Inc. Our risk assessment revealed that our compensation programs do not create risks that are reasonably likely to have a material adverse effect on the Company. In making this determination, we took into account the compensation mix for our employees as well as various risk control and mitigation features of our programs, including varied and balanced performance targets, review procedures for incentive pay calculations, appropriate incentive payout caps, the Company's rights to cancel incentive awards for employee misconduct, discretionary authority of the Compensation Committee to reduce award pay-outs, internal controls around customer and distributor pricing and contract terms, our stock ownership guidelines, prohibition on hedging Company stock and our compensation recovery ("clawback") policy.
The Committee fulfills, and assists the Board of Directors' oversight of, its responsibilities to monitor (i) the quality and integrity of our consolidated financial statements and management's financial control of operations; (ii) the qualifications, independence and performance of the independent accountants; (iii) the role and performance of the internal audit function; and (iv) our compliance with legal and regulatory requirements. The Committee meets regularly and privately with our management and internal auditors and with our independent registered public accounting firm, PricewaterhouseCoopers LLP.
A report of the Audit Committee is found under the heading "Audit Committee Report" at page 44.
The Board of Directors has determined that each member of the Audit Committee is "independent" and meets the independence and other requirements of Sections 303A.02 and 303A.07(b) of the listing standards of the New York Stock Exchange, and Rule 10A-3 under the Exchange Act, as well as of our Board. The Board has determined that each of Mses. Reich and VanDeWeghe and Messrs. Casale, Chazen, Johnson and Lumpkins is an "audit committee financial expert" under the SEC's rules and should be so designated. Further, the Board has determined, in its business judgment, that Mses. Reich and VanDeWeghe and Messrs. Casale, Chazen, Johnson and Lumpkins has "accounting and related financial management expertise" and that each member of the Audit Committee is "financially literate" under the New York Stock Exchange's listing standards.
To assist the Committee in the design and review of the executive and director compensation programs, the Committee has selected and retained Frederic W. Cook & Co., Inc. ("Cook & Co."), an independent compensation consulting firm, which reports directly to the Committee. As requested from time to time on behalf of the Committee, Cook & Co. provides the Committee with market data regarding various components of executive and director compensation, reviews the methodology on which
compensation is based and designed, and informs the Committee of market trends in executive and director compensation. Cook & Co. performs no services for us other than those performed on behalf of the Committee.
The Committee has considered the independence of Cook & Co. in light of SEC rules and New York Stock Exchange listing standards. In connection with this process, the Committee has reviewed, among other items, a letter from Cook & Co. addressing the independence of Cook & Co. and the members of the consulting team serving the Committee, including the following factors: (i) other services provided to us by Cook & Co.; (ii) fees paid by us as a percentage of Cook & Co.'s total revenue; (iii) policies or procedures of Cook & Co. that are designed to prevent conflicts of interest; (iv) any business or personal relationships between the senior advisor of the consulting team with a member of the Committee; (v) any Ecolab stock owned by the senior advisor; and (vi) any business or personal relationships between our executive officers and the senior advisor. The Committee discussed these considerations and concluded that the work performed by Cook & Co. and its senior advisor involved in the engagement did not raise any conflict of interest.
The Board of Directors has determined that each member of the Compensation Committee meets the independence requirements of the SEC (including Rule 16b-3), the New York Stock Exchange, Section 162(m) of the IRS Code and of our Board.
The Board of Directors has determined that each member of the Governance Committee meets the "independence" requirements of the SEC, the New York Stock Exchange and of our Board.
We also paid the following supplemental retainers to the Lead Director, committee chairs and members of the Audit Committee:
All reasonable travel, telephone and other expenses incurred by directors on behalf of Ecolab were reimbursed.
Non-employee directors may elect to defer some, or all, of the cash portion of their annual retainer and additional fees in a cash account or a deferred stock unit account until cessation of Board service. Amounts deferred in the cash account earn interest at market rates and amounts deferred in the stock unit account are credited with dividend equivalents. Upon cessation of Board service, deferred amounts (whether in the interest-bearing account or in the stock unit account) are paid in a lump sum or in equal installments to a maximum of ten years as elected by the director. The aggregate number of stock units held by each non-employee director is set forth under footnote (3) to the "Security Ownership Executive Officers and Directors" table at page 6.
Director stock option grants are made on the date of the Annual Meeting of Stockholders, and have an exercise price which is the average of the high and low market price on the date of grant. We believe that the use of the average of the high and low market price on the date of the grant removes same day stock volatility. We do not have a program, plan or practice to time stock option grants to directors in coordination with the release of material non-public information. Director stock options vest 25% at the end of each three-month period following the grant date. The options granted to directors under the 2001 Plan may be transferred to defined family members or legal entities established for their benefit.
The Board of Directors' independence policy is also available on our website at www.ecolab.com/investors/board-of-directors.
Based on the review of the Governance Committee, the Board of Directors has determined that the following directors, including those on the slate of nominees for election to the Board at this year's Annual Meeting (other than Mr. Baker), are, and have been since January 1, 2013, or the date which they became an Ecolab director if later than January 1, 2013, independent in accordance with the listing standards of the New York Stock Exchange, the rules and regulations of the SEC, applicable law and the Board's "independence" policy: Barbara J. Beck, Leslie S. Biller, Carl M. Casale, Stephen I. Chazen, Jerry A. Grundhofer, Arthur J. Higgins, Joel W. Johnson, Michael Larson, Jerry W. Levin, Robert L. Lumpkins, C. Scott O'Hara (retired from the Board in May 2013), Victoria J. Reich, Daniel S. Sanders (retired from the Board in May 2013), Mary M. VanDeWeghe, Suzanne M. Vautrinot and John J. Zillmer.
The Board determined that Douglas M. Baker, Jr. is not "independent," due to his status as the current Chief Executive Officer.
The Governance Committee of the Board of Directors is responsible for reviewing, approving or ratifying transactions in excess of $120,000 with the Company's executive officers or directors, including their immediate family members, or any greater than 5% stockholder known to us. Our practices and procedures for identifying transactions with related persons are located in the charter of the Governance Committee. The Governance Committee considers the related person's relationship to the Company and interest in the transaction; the material facts of the transaction, including the proposed aggregate value of such transaction; the benefits to the Company of the proposed related person transaction; if applicable, the availability of other sources of comparable products or services; an assessment of whether the proposed related person transaction is on terms that are comparable to the terms available to an unrelated third party or to employees; and such other factors and information as the Governance Committee may deem appropriate. The Governance Committee determined that there were no such transactions with related persons during 2013, nor any currently anticipated transactions.
Our Board of Directors currently consists of 15 members. Director Mary M. VanDeWeghe has indicated that she will retire from the Board as of May 8, 2014. Ms. VanDeWeghe had stayed on the Board to ensure a smooth transition following the Nalco merger and is retiring in connection with the substantial progress made on the integration of Nalco and Ecolab. Accordingly, the Board has taken action to reduce the size of the Board to 14 members effective immediately prior to the time of the 2014 Annual Meeting. The 14 nominees, if elected, will serve a one-year term ending as of the 2015 Annual Meeting expected to be held on May 7, 2015.
Pursuant to the recommendation of the Governance Committee, Mses. Beck, Reich and Vautrinot and Messrs. Baker, Biller, Casale, Chazen, Grundhofer, Higgins, Johnson, Larson, Levin, Lumpkins and Zillmer were nominated for election as Directors. The Board of Directors has no reason to believe that any of the named nominees is not available or will not serve if elected.
The following information with regard to business experience, qualifications and directorships has been furnished by the respective director nominees or obtained from our records.
The Compensation Committee has reviewed and discussed the following Compensation Discussion and Analysis of the Company with management. Based on their review and discussion, the Compensation Committee recommended to the Board of Directors, and the Board has approved, the inclusion of the Compensation Discussion and Analysis in both the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 8, 2014.
The Company's Compensation Discussion and Analysis provides information about the Company's executive compensation philosophy and the components of its compensation programs, including information about how compensation for the fiscal year ended December 31, 2013 for the Company's named executive officers meets the compensation philosophy's goals and is aligned with the Company's 2013 financial goals and performance. The Compensation Discussion and Analysis helps readers better understand the information found in the Summary Compensation Table and other accompanying tables located in this proxy statement.
This Compensation Discussion and Analysis focuses on our executive pay program as it relates to the following executive officers:
The Company's compensation programs have contributed to its strong growth and returns over the past decade. The mix of annual salary, annual cash incentive bonus and long-term incentives, as more fully described in this Compensation Discussion and Analysis, has motivated executives to meet the Company's annual growth targets (in most years, strong revenue and operating income growth accompanied by double-digit EPS, or adjusted EPS, growth) while balancing necessary investments in the business in order to achieve attractive, long-term stockholder returns. Evidence of the Company's consistently strong performance can be seen in both our financial performance and stock appreciation over the past decade. For the ten-year period from January 1, 2004 to December 31, 2013, the Company's adjusted earnings per share have increased 225%. During this same ten-year period, our stock price has appreciated 281% versus the S&P 500's 66% increase. More recently, 2013 reported sales and adjusted diluted earnings per share (earnings per share excluding the impact of special gains and charges and discrete tax items)(1) increased 12% and 19%, respectively, over 2012. Our 2013 share performance (up 45% for the year) has outperformed the S&P 500 for the tenth consecutive year and twelve of the last thirteen years.
The chart below depicts our 10-year adjusted earnings performance from January 1, 2004 through December 31, 2013 (left axis) and our stock price performance versus the S&P 500 Composite Index over the same period (right axis).
executives to focus on limited components of our business (see "Annual Cash Incentives" on page 26 and "Long-term Equity Incentives" on page 28);
The Compensation Committee of the Board of Directors oversees the design and administration of our executive compensation programs according to the processes and procedures discussed in the Corporate Governance section of this Proxy Statement, located at pages 8 and 9 hereof. The Committee is advised by an independent compensation consultant as it deems appropriate.
First, at the 2013 Annual Meeting, our stockholders approved the amendment of our 2010 Stock Incentive Plan to, among other things, increase the number of shares of our Common Stock authorized for issuance under the plan by 17,000,000 shares and provide that the accelerated vesting and payout of a performance-based award in connection with a change in control will be based on assumed target, rather than maximum, level of performance.
Second, as noted at page 23, we modified the peer group that we use in conjunction with competitive industry surveys to create competitive compensation scenarios for our named executive officers to refocus the peer group on companies most similar to Ecolab in size and business model. We reduced the size of the peer group from 23 companies to 19 companies by focusing on fewer companies which are more consistent to Ecolab in terms of size and market focus. While the peer group adjustment does not materially impact Ecolab's position at the market median for compensation, we believe it represents a more appropriate comparison group long-term. The revised peer group of 19 companies was developed after the establishment of 2013 base salaries and annual incentive compensation. It was utilized for determining long-term equity incentives in 2013 and will additionally be used for establishing base salaries, annual incentive compensation as well as long-term incentives in 2014 (see "Program Objectives and Reward Philosophy" on page 23).
Third, we made changes to the Company's Mirror Savings Plan, a non-qualified plan described at page 38, to (a) provide for 2014 to serve as a transition year for eligible executives of our Nalco and Champion subsidiaries by permitting such executives to defer bonus payments but not base salary earned in 2014 and to provide a match on base salary over the IRS limits on compensation in qualified plans for such executives in 2014 as though they had been eligible to defer base salary (a "deemed match") and (b) simplify the base salary deferral elections for all executives in the plan for amounts earned after the 2014 calendar year by reducing the amount of base salary deferral from 25% to the amount necessary for an executive to receive the maximum company match on base salary above the IRS pay cap. None of the named executive officers is eligible for the 2014 deemed matching contribution under the plan.
In addition to the above changes, several changes which were approved in 2012 to our U.S. qualified and non-qualified retirement plans became effective January 1, 2013. In connection with these changes, in 2013 eligible Nalco employees began accruing cash balance pension benefits under the Company's Pension Plan (described at page 36), and certain Nalco executives became newly eligible to participate in the Mirror Pension Plan (described at page 37). Eligible Champion employees entered the Pension Plan in 2014, and certain Champion executives entered the Mirror Pension Plan in 2014 as well. The Company's broad-based tax-qualified defined contribution/401(k) retirement plans were amended effective January 1, 2013, to provide an enhanced matching contribution for certain individuals who became participants in the Pension Plan after January 1, 2007. Similar changes were made to the Mirror Savings Plan and certain Nalco executives became newly eligible to participate in this plan in 2013, and certain Champion executives became eligible to participate in this plan in 2014. The enhanced matching contribution is equal to (i) 100%
of the amount of the participant's deferrals that do not exceed 4% of covered compensation plus (ii) 50% of the participant's deferrals that exceed 4% but do not exceed 8% of covered compensation. Mr. Blanco is eligible for the enhanced matching contribution under the deferred compensation plans.
Our philosophy is to position the aggregate of these elements of compensation in the median range of our competitive market, adjusted for the Company's current size. For annual cash incentives, our philosophy generally is to also position them at a level commensurate with the Company's performance based on adjusted earnings per share compared to EPS growth in the Standard & Poor's 500. We position annual cash incentives and long-term incentives to provide lower than median compensation for lower than competitive market performance and higher than median compensation for higher than competitive market performance. This approach provides motivation to executives without incentivizing inappropriate risk-taking to achieve pay-outs, as we believe that the Company's prospects for growth are generally at least as favorable as the average of the S&P 500. For stock options, our grant processes do not permit backdating and, as described under Long-Term Equity Incentives, are granted on the same date as the Compensation Committee approval date.
This Compensation Discussion and Analysis contains statements regarding incentive targets and goals. These targets and goals are disclosed in the limited context of the Company's compensation programs and should not be understood to be statements of management's expectations or estimates of results or other guidance.
In General We use executive compensation (i) to support our corporate vision and long-term financial objectives, (ii) to communicate the importance of our business results, (iii) to retain and motivate executives important to our success and (iv) to reward executives for contributions at a level reflecting our performance. Our executive compensation program, that is the compensation package as a whole as well as each element of compensation, is designed to be market competitive in order to attract, motivate and retain our executives in a manner that is in the best interests of our stockholders. Our executive compensation program is further designed to reinforce and complement ethical and sustainable management practices, which is supported in part by our compensation recovery (or "clawback") policy, promote sound risk management and align management interests (such as sustainable long-term growth) with those of our stockholders. We believe that our long-term equity incentive program, which typically accounts for at least half of our named executive officers' total annual compensation, is an effective tool in aligning our executives' interests with those of our stockholders and incentivizing long-term value creation.
Additionally, for purposes of benchmarking 2013 base salaries and annual incentive compensation for the named executive officers, we utilized competitive data from a comparison group of 23 companies constructed from the screening process conducted in 2012 by the Compensation Committee's independent compensation consultant, Frederic W. Cook & Co., based on input from the Company and the Compensation Committee with respect to the selection criteria (the "Peer Group"). During 2013, utilizing the same process we modified the size of the Peer Group from 23 companies to 19 companies by eliminating five companies and adding one company. The revised Peer Group was utilized in conjunction with the market surveys for determining long-term equity incentives in 2013 and will additionally be used in conjunction with the market surveys for establishing base salaries, annual incentive compensation and long-term incentives in 2014. Both the Peer Group constructed in 2012 and the revised Peer Group are comprised of companies in the Chemicals, Containers & Packaging, Paper Products, Oil & Gas Equipment & Services and Industrial Conglomerates industries under the Global Industry Classification Standards (GICS) taxonomy with annual revenues of one-fourth to four times the annual revenues of the Company, within a reasonable size range in various other measures such as annual operating income, total employees and market capitalization, and meeting several other criteria, such as inclusion in the Company's primary GICS industry classification and positioning the Company near the median in terms of size. The
companies comprising the Peer Group constructed in 2012 and the revised Peer Group, as well as the information on each that the Compensation Committee reviewed at the time the Peer Group was revised, are set out below.
We used the average of size-adjusted data from two surveys and the Peer Group data for benchmarking 2013 base salary and annual cash incentive compensation. The 2012 Towers Watson CDB Executive Compensation Survey includes over 435 corporate entities that range in revenue from approximately $1 billion to over $50 billion. Including subsidiaries, this survey includes over 800 participants. We also used the 2012 Aon Hewitt TCM Executive Regression Analysis Survey, which includes over 450 corporate entities that range in revenue from approximately $2 million to $469 billion. For benchmarking long-term incentives, we used the average of the competitive data yielded by the Peer Group, the 2013 Towers Watson CDB Long-Term Incentive Plan report and the Frederic W. Cook & Co. 2013 Survey of Long-Term Incentives. The Towers Watson survey has over 365 participants which range in revenue from less than $1 billion to greater than $20 billion. The Frederic W. Cook & Co. survey has 61 participants which range in revenue from $2.5 billion to $421 billion.
We size adjust the survey data by inserting the annual revenue for the Company (for use with the principal executive officer, principal financial officer and the chief supply chain officer) or the applicable business unit (for use with the leaders of particular business units) into a statistical regression model supplied by the survey providers, which then computes the size-adjusted median by position for base salaries and annual cash incentives. We use the average of the size-adjusted medians from the two surveys and the Peer Group data as the standard by which we set base salary and annual cash incentive targets. For long-term
incentive guidelines, we calculate the size-adjusted median by applying the median long-term incentive value as a percentage of salary from the Towers Watson and Frederic W. Cook & Co. long-term incentive surveys and the Peer Group data to the size-adjusted base salary.
The MPIP is designed to meet the requirements of Internal Revenue Code Section 162(m) regarding performance-based compensation and is administered by the Compensation Committee, who selects the participants each year, establishes the annual performance goal based upon performance criteria that it selects, the performance target and a maximum annual cash award dependent on achievement of the performance goal. For 2013, the Compensation Committee selected diluted earnings per share as the performance measure under the MPIP. The Compensation Committee certifies the extent to which the performance goal has been met and the corresponding amount of the award earned by the participants, with the ability to exercise downward discretion to lower, but not raise, the award to an amount based upon the metrics used for our broader-based Management Incentive Plan cash incentive and to recognize individual performance. In effect, the MPIP establishes the maximum bonus payouts for the named executive officers, while the Management Incentive Plan criteria are used by the Compensation Committee to guide the exercise of its downward discretion in determining the actual pay-outs which have historically been (and were in 2013) well below the MPIP maximum permitted payouts. As described under Long-Term Equity Incentives below, the Compensation Committee has similarly positioned the performance-based restricted stock units to meet the requirements of Section 162(m).
We have designed and administered our deferred compensation, equity compensation and change-in-control severance plans to be in compliance with federal tax rules affecting non-qualified deferred compensation. In accordance with FASB Accounting Standards Codification 718, Compensation Stock Compensation, for financial statement purposes, we expense all equity-based awards over the service period for awards expected to vest, based upon their estimated fair value at grant date. Accounting treatment has not resulted in changes in our equity compensation program design for our named executive officers.
In General The Compensation Committee reviews base salaries for the named executive officers and other executives annually in December effective for the following fiscal year, and increases are based on changes in our competitive market, changes in scope of responsibility, individual performance and time in position. Our philosophy is to pay base salaries that are within the median range of our size-adjusted competitive market. When an executive officer is new to his/her position, his/her initial base salary will likely be at the low end of the median range but, if performance is acceptable, his/her base salary will be increased over several years to arrive at the median.
In General To determine the 2013 award payments (which were paid in March 2014), the Committee reviewed the performance of the named executive officers and other executives at its February 2014 meeting. With respect to the 2013 awards, the Committee established a performance goal under the MPIP to determine maximum pay-out potential and then used the goals described below with respect to the Management Incentive Plan (or MIP) to determine whether and to what degree the actual payout amount for each named executive officer's annual cash incentive award would be less than the maximum permitted amount.
Performance Measures Under the MIP, we use a mix of overall corporate, business unit and individual performance measures to foster cross-divisional cooperation and to assure that executives have a reasonable measure of control over the factors that affect their awards. This performance measure mix varies by executive position. For 2013, the performance measure mix for the named executive officers is summarized in the table on page 27.
In establishing these goals for 2013 we took into consideration our prior year results, overall economic and market trends, other large companies' performance expectations and our anticipated business opportunities, investment requirements and the competitive situation. For 2013, the adjusted diluted earnings per share goals were: payout at 40% of the target award opportunity (minimum level) at $3.08; payout at 100% of the target award opportunity (target level) at $3.33; payout at 140% percent of the target award opportunity (140% level) at $3.50; and payout at 200% of the target award opportunity (maximum level) at $3.57 or greater. Payouts for results between performance levels are interpolated on a straight-line basis. Actual 2013 adjusted diluted earnings per share were $3.54 resulting in the achievement of the adjusted diluted earnings per share goal at 174% of target.
For Mr. Handley, who is our president and chief operating officer, and Mr. Blanco, who is our executive vice president and chief supply chain officer, as indicated in the table on page 27, 30% and 35%, respectively, of their annual cash incentive is based upon a 2013 total division operating income goal. For 2013, the total division operating income goals were: 5.4% growth over 2012 total division operating income for payout at 40% of the target award opportunity (minimum level); 9.8% growth over 2012 total division operating income for payout at 100% of the target award opportunity (target level); 12.7% growth over 2012 total division operating income for payout at 140% percent of the target award opportunity (140% level); and 17.2% growth over 2012 total division operating income for payout at 200% of the target award opportunity (maximum level). Champion's results for 2012 and the period prior to the acquisition in 2013 were included for purposes of determining the growth of 2013 total division operating income over 2012 total division operating income for Messrs. Handley and Blanco. Payouts for results between performance levels are interpolated on a straight-line basis. Adjusted as noted above, 2013 total division operating income grew 13.6% over 2012 total division operating income resulting in the achievement of the total division operating income goal at 152% of target.
For Mr. Taylor, who manages a particular business unit for us, as indicated in the table on page 27, 70% of his annual cash incentive is based upon his 2013 business unit performance goal which is measured against the achievement of revenue and operating income goals. For Mr. Taylor, the revenue and operating income goals are weighted equally. The 2013 revenue goal for Mr. Taylor was 5.2% growth over 2012 revenue for payout at the minimum level, 9.2% growth for payout at the target level, 11.9% growth for payout at the 140% level and 17.7% growth for payout at the maximum level. The 2013 operating income goal for Mr. Taylor was 10.3% growth over 2012 operating income for payout at the minimum level, 15.7% growth for payout at the target
level, 19.3% growth for payout at the 140% level and 28.4% growth for payout at the maximum level. Champion's results for 2012 and the period prior to the acquisition in 2013 were included for purposes of determining the growth of 2013 business unit revenue and operating income over 2012 business unit revenue and operating income for Mr. Taylor. No pay-out is made with respect to the business unit revenue goal unless the business unit achieves at least the minimum level on its operating income goal. Pay-outs for results between these two performance levels are interpolated on a straight-line basis. Adjusted as noted above, revenue growth and operating income growth were 11.2% and 22.1%, respectively, resulting in achievement by Mr. Taylor of his business unit goal at 144% of target.
For two of our named executive officers (Messrs. Schmechel and Blanco) who hold staff positions (principal financial officer, and executive vice president and chief supply chain officer, respectively), as indicated in the table on page 27, 30% of their annual cash incentive is based upon attainment of individual performance goals. This component of staff position awards under the MIP is set at 30% of the performance measure mix for annual cash incentives so that achievement of these goals is a component of the award but remains balanced against achievement of corporate performance goals. The 2013 individual performance objectives for our principal financial officer and the chief supply chain officer are specific, qualitative, achievable with significant effort and, if achieved, provide benefit to the Company. Mr. Schmechel's individual performance goals covered organizational and strategic initiatives, including developing talent and projects to increase efficient service delivery. Mr. Blanco's individual performance goals also covered organizational and strategic initiatives, including strengthening the Supply Chain organization, a focus on safety, service and savings, developing a comprehensive Supply Chain strategy and driving improved Supply Chain metrics. Mr. Schmechel and Mr. Blanco each achieved 140% of their individual target performance goals. The Compensation Committee, with input from the principal executive officer, approved the annual cash incentives as shown on the table on page 27, including the component based on the principal financial officer's and chief supply chain officer's achievement of their respective 2013 individual performance goals.
The Compensation Committee reviews and approves all adjustments to our overall corporate results and significant adjustments to our business unit performance results. The 2013 annual cash incentive payouts were made in accordance with the overall corporate results and business unit performance results established for the named executive officers without adjustment.
In General The Compensation Committee granted long-term equity incentives to our named executive officers and other executives in December 2013, consistent with its core agenda and past practice of granting these incentives at its regularly scheduled December meeting. For 2013, our long-term equity incentive program consisted of an annual grant of stock options and performance-based restricted stock units, weighted approximately equally in terms of grant value.
Our program continues to be based on pre-established grant guidelines that are calibrated annually to our competitive market. Grant guidelines for 2013 for the named executive officers were developed on a position-by-position basis using competitive data from the revised Peer Group and market data from the Towers Watson CDB Long-Term Incentive Plan report for general industry companies and the Frederic W. Cook & Co. 2013 survey of Long-Term Incentives. The survey data represent the median range of long-term incentive values adjusted for size based on revenue. The average of the three data points is used for determining the guideline.
Actual grants may be above or below our guidelines based on our assessment of individual performance and future potential. Generally, long-term equity incentives are granted on the same date as our Compensation Committee approval date and in no event is the grant date prior to the approval date.
In General Our named executive officers participate in all of the same health care, disability, life insurance, pension, and 401(k) benefit plans made available generally to the Company's U.S. employees. In addition, our named executive officers are eligible to participate in a deferred compensation program, restoration plans for the qualified 401(k) and pension plans, and, with respect to certain of our named executive officers, an executive disability and life benefit and a supplemental retirement benefit. The non-qualified retirement plans supplement the benefits provided under our tax-qualified plans, taking into account compensation and benefits above the IRS limits for qualified plans. These plans are described in more detail on pages 36 to 39. In the case of Mr. Taylor, he does not participate in these plans, but rather Mr. Taylor participates in certain plans offered to localized employees by a non-U.S. subsidiary. Mr. Taylor also continues to participate in the same executive death benefit plan that he participated in prior to the Nalco merger. The named executive officers also receive limited perquisites described in more detail in footnote (6) to the Summary Compensation Table.
The Company has maintained a private aircraft use policy for several years authorizing the use of private aircraft for business and personal use by the Company's Chairman of the Board and Chief Executive Officer and, under certain circumstances, business use by its directors and certain other executives. In 2013, the Governance Committee of the Board of Directors approved a modification to the private aircraft use policy to, among other things, limit personal use of private aircraft by the Chairman of the Board and Chief Executive Officer to $100,000 of unreimbursed usage per year. Although the Chairman of the Board and Chief Executive Officer has always reimbursed the Company for the cost of personal use in past years, though not required to, in the current year he did have minimal unreimbursed personal usage. Additional information with respect to this perquisite is provided in more detail in footnote (6) to the Summary Compensation Table on page 31.
In General The terms of our Change-In-Control Severance Compensation Policy, including the events constituting a change in control under our policy, are described on pages 42 and 43. Our policy applies to all elected officers, including the named executive officers, except those who are covered by separate change-in-control or similar agreements with the Company or a subsidiary, a circumstance which arises only in the case of an executive having such an agreement with a company we acquire. Such an executive will become covered automatically under the Company's change-in-control policy when the existing agreements terminate or expire. Mr. Taylor was covered by a separate change-in-control agreement with Nalco which expired on July 31, 2013, at which time he became covered by the Company's policy.
In General We have in place stock retention and ownership guidelines to encourage our named executive officers and other executives to accumulate a significant ownership stake so they are vested in maximizing long-term stockholder returns. Our guidelines provide that the principal executive officer own Company stock with a market value of at least six times current base salary. The Company also requires other corporate officers to own Company stock with a market value of at least three times current base salary. Until the stock ownership guideline is met, our principal executive officer, principal financial officer and president are expected to retain 100% of all after-tax profit shares from exercise, vesting or payout of equity awards. Our other officers are expected to retain 50% of all after-tax profit shares from exercise, vesting or payout of equity awards. For purposes of complying with our guidelines, stock is not considered owned if subject to an unexercised stock option or unvested performance based restricted stock unit. Shares owned outright, legally or beneficially, by an officer or his or her immediate family members residing in the same household and shares held in the 401(k) plan count towards meeting the guideline. Our named executive officers and other officers may not pledge shares or enter into any risk hedging arrangements with respect to Company stock.
The Company's Board of Directors has adopted a policy requiring the reimbursement of annual cash incentive and long-term equity incentive payments made to an executive officer due to the executive officer's misconduct, as determined by the Board. Each of our executive officers has agreed in writing to this policy. This policy was filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 as Exhibit (10)W.
In General The table below illustrates how total compensation for our named executive officers for 2013 was allocated between performance based and fixed components, how performance based compensation is allocated between annual and long-term components and how total compensation is allocated between cash and equity components:
and creating long-term shareholder value that is a greater responsibility in his position than in the positions of the other named executive officers, and is consistent with the competitive market for the CEO position. The level of compensation of Mr. Baker reflects the many responsibilities of serving as chief executive officer of a public company. Accordingly, Mr. Baker's median range competitive pay levels (including long-term equity awards) reflect his broader scope and greater responsibilities compared to our other named executive officers.
The following table shows cash and non-cash compensation for the years ended December 31, 2013, 2012 and 2011 for the persons serving as the Company's "Principal Executive Officer" and "Principal Financial Officer" during the year ended December 31, 2013 and for the next three most highly-compensated executive officers who were serving in those capacities at December 31, 2013.
assumptions used in determining these values. The specific assumptions used in the valuation of the options granted in 2013 are summarized in the table below:
amount, and a maximum permitted cash payout of 300% of the participant's base salary for the period of participation in 2013 to the extent the goal is achieved. The MPIP permits the Committee to exercise downward discretion and pay an amount which is less than the amount of the maximum permitted payout that may have been earned by the participant. In applying this downward discretion, the Committee is guided by applying operating metrics established under the MIP at the beginning of 2013. In the case of the named executive officer participants, the potential payouts that could be earned under the MIP for 2013 and that would be used to guide the Committee's discretion under the MPIP are noted in the MPIP row of the above table. Actual payouts to each of the named executive officers with respect to 2013 are included under the Non-Equity Incentive Plan Compensation column in the Summary Compensation Table at page 31. Refer to the Compensation Discussion and Analysis beginning at page 26 for more detail regarding the MPIP and MIP performance goals. Each award is subject to and interpreted in accordance with the terms and conditions of the MPIP or MIP, as applicable, and no amount will be paid under the MPIP or the MIP unless and until the Committee has determined the extent to which the applicable performance goal has been met, the corresponding amount of the award earned by the participant and the degree to which the Committee chooses to exercise its permitted discretion under the MPIP.