HEINZ H J CO DEF 14A 2012
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant ¨
Check the appropriate box:
H. J. HEINZ COMPANY
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
H. J. Heinz Company
One PPG Place, Suite 3100
Pittsburgh, Pennsylvania 15222
July 6, 2012
Dear Fellow Shareholder:
It is my pleasure to invite you to attend the Annual Meeting of Shareholders of H. J. Heinz Company at 9:00 a.m. Eastern Time on Tuesday, August 28, 2012, at the Fairmont Pittsburgh, 510 Market Street, Pittsburgh, Pennsylvania 15222.
The following pages contain the formal Notice of the Annual Meeting and the Proxy Statement. If you plan to attend the Meeting and you are a registered shareholder, please detach the Admission Ticket from the enclosed proxy card and bring it to the Meeting. If you are a beneficial owner of shares held in street name through a bank, broker, or other intermediary, please contact your bank, broker, or other intermediary to obtain evidence of ownership and a legal proxy, which you must bring with you to the Meeting.
At this years Annual Meeting, you will be asked to elect as directors the 12 nominees named in the attached Proxy Statement, ratify the selection of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm, approve the H. J. Heinz Company Fiscal Year 2013 Stock Incentive Plan, re-approve the performance measures included in the H. J. Heinz Company Third Amended and Restated Fiscal Year 2003 Stock Incentive Plan, and cast an advisory vote approving the Companys named executive officer compensation.
Your vote is important. Whether you plan to attend the Annual Meeting in person or not, we hope you will vote your shares as soon as possible. Please mark, sign, date, and return the accompanying proxy card or voting instruction form in the postage-paid envelope or instruct us by telephone or via the Internet as to how you would like your shares voted. Instructions are included on the proxy card and voting instruction form.
William R. Johnson
Chairman of the Board, President and
Chief Executive Officer
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 28, 2012
TABLE OF CONTENTS
When and where is the Annual Meeting?
The Companys Annual Meeting of Shareholders will be held at 9:00 a.m. Eastern Time on Tuesday, August 28, 2012 at the Fairmont Pittsburgh, 510 Market Street, Pittsburgh, Pennsylvania 15222.
Who is entitled to vote?
You are entitled to vote at the Annual Meeting if the Companys records on June 19, 2012 (the record date) reflected that you owned the Companys common stock, par value $.25 (Common Stock), or Third Cumulative Preferred Stock, $1.70 First Series (Preferred Stock). As of June 19, 2012, there were 320,262,170 shares of Common Stock and 6,125 shares of Preferred Stock outstanding.
How many votes is each share entitled to?
Each share of Common Stock has one vote, and each share of Preferred Stock has one-half vote. The enclosed proxy card or voting instruction form shows the number of shares that you are entitled to vote.
How do proxies work?
The Board of Directors is asking for your proxy. Giving us your proxy means that you authorize us to vote your shares at the Annual Meeting. You may vote FOR or AGAINST all or some of our director nominees or abstain from voting for any director. You may also vote FOR or AGAINST the other items or abstain from voting for any item.
What is the difference between holding shares as a shareholder of record and being a beneficial owner of shares?
A shareholder of record or registered shareholder is a shareholder whose ownership of H. J. Heinz Company stock is reflected directly on the books and records of our transfer agent, Wells Fargo Shareowner Services. If you hold Heinz stock through a bank, broker, or other intermediary, then you are the beneficial owner of shares held in street name.
How do I vote if I am a shareholder of record?
We urge you to vote by proxy even if you plan to attend the Annual Meeting so that we will know as soon as possible that enough votes will be present for us to conduct business at the Annual Meeting.
How do I vote if I am a beneficial owner of shares held in street name (i.e., through a bank, broker, or other intermediary)?
How do I vote if I hold shares in one or more of the Companys employee benefit plans?
Shares held in a benefit plan that you are entitled to vote will be voted by the plan trustee pursuant to your instructions using the voting instruction card provided by the trustee or following the other instructions provided by the trustee.
Will my shares be voted if I do not vote using one of the methods described above?
How will my shares be voted if I sign, date, and return my proxy card, the voting instruction form provided by my bank, broker, or other intermediary, or the voting instruction card provided by my benefit plan trustee without indicating how I want to vote on any of the proposals?
What proposals are being submitted to shareholders, how many votes are needed to approve each proposal, and what are the Boards recommendations?
As of the date this Proxy Statement went to press, the Company was not aware of any additional matters to be raised at the Annual Meeting.
In an uncontested election, an incumbent director who is not reelected because he or she does not receive a majority of the votes cast would nonetheless continue in office because no successor has been elected. This is referred to as the director holdover rule. In that event, the incumbent director must offer to tender his or her resignation to the Board. The Corporate Governance Committee will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Committees recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. Any director who tenders his or her resignation will not participate in the decisions of the Corporate Governance Committee or the Board with respect to his or her own resignation.
How do abstentions and broker non-votes count for voting purposes?
Only votes FOR or AGAINST a proposal count as votes cast. Abstentions and broker non-votes count for quorum purposes but are not considered to be votes cast. With the exception of the vote required to approve Item 3 (Approval of FY2013 Stock Incentive Plan), which, under the listing standards of the NYSE (the NYSE Rules), requires that the total vote cast on the proposal must represent more than 50% of all securities entitled to vote, an abstention or broker non-vote will not affect the votes required to approve any of the above proposals.
Can I change my vote?
Shareholders of record. Yes. You may revoke your proxy and change your vote before it is cast at the Annual Meeting by submitting a new proxy card with a later date, by casting a new vote via the Internet or telephone, by notifying the Companys Corporate Secretary in writing, or by voting in person at the Annual Meeting. If you do not properly revoke your proxy, properly executed proxies will be voted as described above.
Beneficial holders of shares held in street name (i.e., through a bank, broker, or other intermediary). Yes. You must follow the specific instructions provided to you by your bank, broker, or other intermediary to change or revoke any voting instructions you have already provided to them.
Benefit plan holders. You must follow the specific instructions provided to you by the plan trustee to change or revoke any voting instructions you have already provided to the trustee.
What is a quorum?
A quorum is the number of shares that must be present, in person or by proxy, in order for business to be transacted at the Annual Meeting. At least a majority of the outstanding shares eligible to vote (with each share of Preferred Stock counting as one-half of a share for purposes of the quorum) must be represented at the Meeting, either in person or by proxy, in order to transact business. Abstentions and broker non-votes count for quorum purposes but are not considered to be votes cast. As noted above, the NYSE Rules require that the total vote cast on Item 3 (Approval of FY2013 Stock Incentive Plan) represent more than 50% of all securities entitled to vote. Therefore, abstentions and broker non-votes could affect our ability to reach this threshold, even if we have the necessary quorum for purposes of votes on the other items being submitted to shareholder vote.
What does it mean if I receive more than one proxy card?
If you hold your shares in multiple accounts, or in both registered and street name, you will receive a proxy card, voting instruction form, or voting instruction card for each account. Please mark, sign, date, and return each proxy card or form you receive. If you choose to vote by telephone or the Internet, please vote each proxy card or form you receive.
Who will tabulate the votes?
A representative from our transfer agent, Wells Fargo Shareowner Services, will tabulate the votes and act as inspector of election. Votes cast by proxy (including Internet and telephone votes) or in person at the Annual Meeting will be tabulated by the inspector of election. The inspector will also determine whether a quorum is present at the Annual Meeting.
Who are the proxy solicitors and what are the solicitation expenses?
We have hired MacKenzie Partners, Inc. to assist us in the distribution of proxy materials and the solicitation of proxies by mail, e-mail, telephone, facsimile, and/or personal meetings. We estimate the fees of MacKenzie Partners, Inc. to be $15,000 plus expenses, which will be paid by the Company. Our officers, directors, and employees may also assist us with solicitation efforts, but they will not receive any extra compensation for these activities.
Do I need a ticket or other evidence of ownership to attend the Annual Meeting?
How can I listen to the Annual Meeting if I do not attend in person?
You are invited to listen to the Annual Meeting webcast live via the Internet on Tuesday, August 28, 2012, at www.heinz.com, beginning at 9:00 a.m. Eastern Time. The audio portion of
the event will also be available in a listen-only mode via telephone conference call. For the telephone conference call option, dial 1-877-703-6110 (within the U.S./Canada) or 1-857-244-7309 (outside the U.S./Canada) and mention passcode 72973844 at least 15 minutes prior to the designated starting time. Using the webcast will enable you to view the slides shown at the Meeting and hear the speakers. Neither the webcast nor the teleconference will enable you to ask questions or to vote your shares. Information included on our website, other than the Proxy Statement and form of proxy, is not part of the proxy solicitation material.
The webcast of the Annual Meeting will be archived on the Companys website at www.heinz.com for two years. A replay of the teleconference will be available at 11:00 a.m. Eastern Time on August 28 and for 30 days thereafter at 1-888-286-8010 (within the U.S./Canada) or 1-617-801-6888 (outside the U.S./Canada) using the following passcode: 38215149.
How do I access the Annual Meeting via the Internet?
To access the Annual Meeting via the Internet, please go to www.heinz.com. The minimum technical requirements to view this broadcast online are: OPERATING SYSTEM: Windows ME, Windows NT4 SP4, Windows 2000, Windows XP, Windows Vista, or Apple Mac OS X. INTERNET BROWSERS: For Windows operating systems, you must have Microsoft Internet Explorer 6+ or Firefox 2.0+. For Mac operating systems, you must have Mozilla Firefox 1.7+, Netscape 7.0+, Opera 8.0+ or Safari 1.3+. MEDIA PLAYERS: Flash Player 9.0+, Windows MediaPlayer 7 or later, or RealPlayer 9.0 or later (downloadable when you register for the webcast at www.heinz.com). HARDWARE: 400 MHz of faster processor, 128 MB RAM and a 16-bit color video display card. In order to hear the audio portion, your PC must be equipped with a 16-bit or better sound card and speakers. A screen resolution of 1024x768 is recommended. INTERNET CONNECTION: A fast connection to the Internet such as T1, DSL, or cable modem in recommended. If your connection is a 56K modem, you will experience lower quality sound and/or video.
What is householding?
Householding is a procedure that permits the Company to send a single set of its Annual Report and proxy materials to any household at which two or more shareholders reside if the Company believes they are members of the same family. Each shareholder will continue to receive a separate proxy card for voting and attendance purposes. Householding reduces the volume of duplicate information you receive, as well as the Companys expenses. A number of brokerage firms and Wells Fargo Shareowner Services, our transfer agent, have instituted householding. If your family has multiple Heinz accounts, you may have received a householding notification from your broker or the transfer agent. Please contact your broker or the transfer agent directly if you have questions, require additional copies of the Proxy Statement or Annual Report, or wish to opt out of householding. These options are available to you at any time. Upon written or oral request to the transfer agent or your broker, a separate copy of the Proxy Statement or Annual Report will be sent promptly to any shareholder of record to whom householding applies.
Can I elect to receive the Proxy Statement and Annual Report electronically?
Yes. If you vote via the Internet in accordance with the instructions on your proxy card or voting instruction form, you may elect to receive future Proxy Statements and proxy cards, and Annual Reports, including the report on Form 10-K, via the Internet instead of receiving paper copies in the mail. You may also elect to receive your proxy materials electronically at any time by contacting the transfer agent or your broker.
How do I obtain a copy of the Companys materials related to corporate governance?
The Companys Corporate Governance Principles, charters of each standing Board committee, Global Code of Conduct, Global Operating Principles, Supplier Guiding Principles, Corporate Social Responsibility Report, and other materials related to our corporate governance can be found on the Companys website at www.heinz.com. In addition, this information is available in print free of charge to any shareholder who requests it by contacting the Corporate Secretary at P.O. Box 57, Pittsburgh, Pennsylvania 15230.
What is the deadline for submitting shareholder proposals, nominating a director, and bringing other business before the 2013 Annual Meeting?
The Companys By-Laws prescribe the procedures shareholders must follow to nominate directors at, or to bring other business before, shareholder meetings. To nominate a candidate for director at the Annual Meeting to be held in 2013, your notice of the nomination must be received by the Company during the period beginning at 12:01 a.m. Eastern Time on December 8, 2012 and ending at 11:59 p.m. Eastern Time on March 8, 2013. The notice must describe various matters regarding the nominee, including name, address, occupation, and shares held. To bring other matters before the 2013 Annual Meeting, notice must be received by the Company within the time limits described above and must meet Company By-Law requirements. To include a shareholder proposal in the Companys Proxy Statement and proxy card for that Meeting, your notice and proposal must be received by the Company no later than 11:59 p.m. Eastern Time on March 8, 2013 and must comply with the requirements of Rule 14a-8 of the Securities Exchange Act of 1934, as amended. Copies of the Companys By-Laws may be obtained free of charge from the Corporate Secretary.
SECURITY OWNERSHIP OF CERTAIN PRINCIPAL SHAREHOLDERS
Set forth below is the name, address, and stock ownership of the only person known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, based on information provided by the beneficial owner in a public filing made with the Securities and Exchange Commission (SEC).
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth all equity securities of the Company beneficially owned as of April 30, 2012, by each director, director nominee, and executive officer named in the Summary Compensation Table, and all directors, director nominees, and executive officers as a group, being 23 in number. The individuals and others included in the group listed below do not own shares of the Companys Preferred Stock.
Role and Composition of the Board of Directors
The Companys Board of Directors believes that good corporate governance principles and practices provide a strong framework to assist the Board in fulfilling its responsibilities to shareholders. The Board recognizes the interests of the Companys shareholders, employees, customers, suppliers, consumers, creditors, and the communities in which it operates, who are all essential to the Companys success. Accordingly, the Board has adopted corporate governance principles relating to its role, composition, structure, and functions. The Board periodically reviews the principles and other corporate governance matters.
Role of the Board and Management
The Companys business is conducted by its employees, managers, and officers under the direction of the chief executive officer (the CEO) and the oversight of the Board. The Board of Directors is elected by the shareholders to oversee management and to ensure that the long-term interests of the shareholders are being served. Directors are expected to fulfill duties of care and loyalty and to act with integrity as they conduct Board matters.
As part of its general oversight function, the Board actively reviews and discusses reports by management on the performance of the Company, its strategy, goals, financial objectives, and prospects, as well as issues and risks facing the Company. The opinions of the independent, non-Management Development and Compensation Committee Board members are solicited with respect to the selection, evaluation, and determination of compensation and succession planning for the CEO and other executive officers. The Board oversees processes designed to maintain the quality of the Company, including the integrity of the financial statements, compliance with laws and ethical standards, and relationships with stakeholders, including shareholders, employees, customers, suppliers, consumers, creditors, and the communities in which the Company operates.
Board Membership Qualifications
The Board has the responsibility for nominating director candidates for approval by shareholders and filling vacancies. The Corporate Governance Committee is responsible for recommending candidates to the Board, as well as recommending the selection criteria used in seeking nominees for election to the Board. The Board has adopted director nominee selection criteria, which are set forth in the section of this Proxy Statement entitled Director Qualifications. In determining whether to recommend a director for re-election, the Corporate Governance Committee also considers the directors past attendance at meetings and participation in and contribution to the activities of the Board. The Corporate Governance Committee may use the services of an executive search firm to assist the Company in identifying potential nominees and to participate in the evaluation of candidates for Board membership. Shareholders may suggest nominees for consideration by submitting names of nominees and supporting information to the Corporate Secretary of the Company.
Size of the Board
The Companys By-Laws establish that the Board shall fix the number of directors from time to time so long as the number so determined shall not be less than three. The Board periodically reviews the appropriate size of the Board. Since Fiscal Year 2006, the size of the Board has been established as 12 Board members.
The Board executes its oversight function in a strong and independent manner, evidenced in part by the independence of each of the members of the Audit, Management Development and Compensation, Corporate Governance, and Corporate Social Responsibility Committees.
The Board has designated the Chairman of the Corporate Governance Committee, Thomas J. Usher, who has deep and varied experience with publicly-traded companies in the capacities of CEO, chairman, and director, as the Presiding Director. In that role, Mr. Usher presides over all executive sessions of the non-management directors and acts as principal liaison between the Chairman of the Board and the non-management directors. With the rest of the Corporate Governance Committee, the Presiding Director interviews Board candidates, recommends membership of Board committees to the Board, and makes recommendations about retention of consultants to the Board. The Presiding Director also serves as the contact director for shareholders, leads the Board and committee evaluation process, and is involved in communicating any sensitive issues to the directors.
The CEO and senior executive officers are selected by the Board based upon recommendations from the Management Development and Compensation Committee. The Board determines whether the role of Chairman and CEO should be separate or combined based upon its judgment as to the most appropriate structure for the Company at a given point in time. William R. Johnson has served as the Companys Board Chairman and CEO since 2000. Based on its most recent review of the Companys Board leadership structure and the continued strong performance of the business, the Board has determined that this structure is optimal because it (i) provides the Company with strong, unified, and consistent leadership, (ii) leverages Mr. Johnsons extensive knowledge of our global business, the food industry, and competitive environment in connection with the Boards strategic oversight of the Company, and (iii) facilitates timely communication between management and the Board on critical business matters given the complexity of our global business. Additionally, the Board believes that the CEO is generally in the best position to inform our independent directors about our global operations and issues important to the Company. It is also important that the Company be represented to our employees, shareholders, customers, suppliers, and other stakeholders with one voice, and a combined Chairman and CEO position provides such clarity and consistency. Given the current challenging regulatory and market environment, coupled with the need to execute our ongoing strategic plans, the Board believes that having one person serving as both the Chairman and CEO provides clear, decisive, and effective leadership.
A number of Board and committee processes and procedures, including regular executive sessions of non-management directors, annual Board and committee self-evaluations, and annual evaluations of our Chairman and CEOs performance, serve as regular checks as to the efficacy of this arrangement.
Ethics and Conflicts of Interest
The Board expects its directors, as well as the Companys officers and employees, to act ethically at all times and to acknowledge their adherence to the policies comprising the Companys Global Code of Conduct. The Board will not permit any waiver of any ethics policy for any director or executive officer. The Board will resolve any conflict of interest question involving a director, the CEO, or a member of the Office of the Chairman, and the CEO will resolve any conflict of interest issue involving any other officer of the Company. The Global Code of Conduct is available at www.heinz.com.
In order to align the interests of directors with shareholders, each non-management director is required to own 10,000 shares of Company stock within five years of his or her election to the Board.
Retirement and Resignation
No director may stand for re-election after attaining age 72, except for any director who was serving on the Board as of June 12, 1996. Should a directors principal occupation or business association change substantially during his or her tenure as a director, that director shall tender his or her resignation for consideration by the Chairman of the Board and the Corporate Governance Committee. The Chairman and the Corporate Governance Committee will recommend to the Board whether to accept or reject the resignation offer. Any director who is a full-time employee of the Company shall offer to resign from the Board at the time of his or her retirement, resignation, or removal from full-time employment.
The Board does not believe that it should establish term limits. While term limits could help ensure that there are fresh ideas and viewpoints available to the Board, they have the disadvantage of causing the loss of the contributions of directors who over time have developed increasing insight into the Company and its operations and, therefore, provide an increasing contribution to the Board as a whole. As an alternative to term limits, the Corporate Governance Committee periodically reviews director contributions to the Board, and the Board has a mandatory retirement age (as described above).
Number and Responsibilities of Committees
The current five committees of the Board are Audit, Management Development and Compensation, Corporate Governance, Corporate Social Responsibility, and Executive. The membership of the first four committees is required to consist entirely of independent directors, based on the NYSEs requirements and the Companys Director Independence Standards. The Executive Committee is comprised of the Companys Chairman and CEO and the chair of each of the first four committees. The Board may form new committees, disband an existing committee, and delegate additional responsibilities to a committee. The responsibilities of the committees are set forth in written charters, which are reviewed periodically by the committees, the Corporate Governance Committee, and the Board, and can be found on the Companys website at www.heinz.com and are available in print to any shareholder upon request.
Assignment, Rotation, and Removal of Committee Members
Members are appointed to committees by the Board of Directors upon recommendation of the Corporate Governance Committee. Committee assignments are based on a directors business and professional experience, qualifications, and public service. The need for continuity, subject matter expertise, and tenure, and the desires of the individual Board members are also considered. Consideration is given to rotating committee members from time to time if rotation is likely to improve committee performance or facilitate the work of the committee. Directors generally serve on a working committee for approximately five to seven years before rotating. A committee member may be removed from a committee by a majority vote of the independent directors of the full Board.
The chair of each committee, in consultation with committee members and in compliance with the committees charter requirements, determines the frequency of committee meetings and develops meeting agendas. The full Board is apprised of matters addressed by the committees in their meetings.
The chair of each committee rotates periodically. It is currently anticipated that chairs will serve for a period of four to eight years unless otherwise agreed to by the Chairman of the Board and the chair of the Corporate Governance Committee.
Regular meetings of the Board are held at least six times per year and typically extend over two days. Once a year, the Board attends a strategic planning session that normally extends over three days. The Board may hold additional meetings, including by teleconference or other electronic means, as needed, to discharge its responsibilities. The Chairman of the Board, in consultation with other Board members, establishes the agenda for each Board meeting. Each Board member may suggest items for inclusion on the agenda.
Executive Sessions and Presiding Director
The non-management directors of the Board meet in regularly scheduled executive sessions at each Board meeting. The chair of the Corporate Governance Committee is the Presiding Director and chairs the executive sessions for non-management directors.
Information and data that is important to the business to be considered at a Board or committee meeting is distributed well in advance of the meeting, to the extent possible.
The Board annually assesses the effectiveness of the Board and its committees.
Management Evaluation, Succession, and Compensation
The performance of the CEO is evaluated annually by the Management Development and Compensation Committee, in consultation with the full Board, based upon objective criteria, including the performance of the business and the accomplishment of goals and strategic objectives. This Committee also makes recommendations to the Board with respect to CEO succession. The CEO reviews management succession planning and development with the full Board of Directors on an annual basis. The Management Development and Compensation Committee evaluates performance in setting CEO and senior executive officer salary, bonus, and other incentive and equity compensation.
The Board periodically reviews director compensation based upon benchmarking information of peer group companies. The Corporate Governance Committee is responsible for recommending any changes in Board compensation. In discharging this duty, the Committee is guided by the following considerations: compensation should fairly pay directors for the work required for a company of Heinzs size and scope; compensation should align directors interests with the long-term interests of shareholders; and the structure of compensation should be transparent and understandable.
Board Access to Management and Independent Advisors
Members of the Board have free access to the employees of the Company, and Board committees have the authority to retain such outside advisors as they determine appropriate to assist in the performance of their functions. Additionally, members of the Board periodically visit Company facilities.
Approval of Strategic and Financial Objectives
The overall strategy of the Company is reviewed periodically at Board meetings. In addition, the Board conducts a multi-day annual planning session at which the Companys strategy is assessed in detail.
Orientation and Education
The Board and the Company provide orientation for new directors on the Companys corporate structure and organization, business units, strategic plan, significant accounting and risk-management issues, governance policies, and Global Code of Conduct. In addition, on an ongoing basis, directors participate in educational programs and/or seminars.
Communication with Management and Directors
The response to any shareholder proposal is the responsibility of management subject to oversight by the appropriate Board committee. The Board is apprised of shareholder proposals and the Companys response to such proposals. Shareholders and other interested parties may contact the Presiding Director or other non-management directors via the Corporate Secretary of the Company at P.O. Box 57, Pittsburgh, Pennsylvania 15230, or via facsimile at (412) 456-7868.
Shareholder Rights Plan Policy
The Board adopted a policy under which it will seek shareholder approval within one year in the event the Board adopts a shareholder rights plan, commonly known as a poison pill. The Company does not currently have a shareholder rights plan in place.
Disclosure and Review of Corporate Governance Principles
The Companys Corporate Governance Principles and all Board committee charters can be found on the Companys website at www.heinz.com and are also available in print to any shareholder upon request. The Corporate Governance Committee reviews the Corporate Governance Principles periodically and reports the results of this review to the full Board.
DIRECTOR INDEPENDENCE STANDARDS
Pursuant to NYSE listing standards, the Board of Directors has adopted a formal set of Director Independence Standards (the Standards) with respect to the determination of director independence. In accordance with the Standards, the Board must determine that an independent director has no material relationship with the Company other than as a director. The Standards specify the criteria by which the independence of the directors will be determined, including strict guidelines for directors and their immediate family members with respect to past employment or affiliation with the Company or its independent registered public accounting firm. The Standards set forth categories of relationships that will not be considered material relationships that would impair a directors independence.
The Standards prohibit Audit Committee members from receiving compensation from the Company, other than as a director or under certain retirement plans, and from being an affiliated person, as defined by the SEC. The Standards also prohibit directors from serving on the Management Development and Compensation Committee if they receive directly or indirectly any remuneration as defined by Section 162(m) of the Internal Revenue Code of 1986, as amended, if they have ever been a Company officer or a former employee of Heinz who receives compensation for prior services, or if they have any direct or indirect material interest in a transaction that must be disclosed under SEC Regulation S-K Item 404(a).
The Board has determined that every director, with the exception of Mr. Johnson, is independent under the Standards, as applicable.
The Standards can be found on the Companys website at www.heinz.com.
POLICIES ON BUSINESS ETHICS AND CONDUCT
All Company employees and directors, including the CEO, the Chief Financial Officer, and the Principal Accounting Officer, are required to abide by the Companys long-standing Global Code of Conduct to ensure that the Companys business is conducted in a consistently legal and ethical manner. The Global Code of Conduct forms the foundation of a comprehensive program that requires compliance with all corporate policies and procedures and seeks to foster an open relationship among colleagues that contributes to good business conduct and an abiding belief in the integrity of our employees. The Companys policies and procedures cover all areas of professional conduct, including employment policies, conflicts of interest, intellectual property, and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of the Companys business.
Employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Global Code of Conduct. The Audit Committee has established a policy and procedure to receive, retain, and resolve complaints regarding accounting, internal accounting controls, or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters, including a toll-free ethics and compliance hotline. The hotline may also be accessed by employees via the Internet from their home computers or other remote locations.
The full text of the Global Code of Conduct can be found on the Companys website at www.heinz.com and is available in print to any shareholder upon request.
RELATED PERSON TRANSACTIONS
The Related Person Transaction Policy of the Board ensures that the Companys transactions with certain persons are not inconsistent with the best interests of the Company. A Related Person Transaction is a transaction with the Company in an amount exceeding $120,000 in which a Related Person has a direct or indirect material interest. A Related Person includes the executive officers, directors, nominees to the Board of Directors, and more than five percent shareholders of the Company, and any immediate family member of such a person. Under the Companys written Related Person Transaction Policy, Company management screens for any potential Related Person Transactions, primarily through the annual circulation of a Directors and Officers Questionnaire (D&O Questionnaire) to each member of the Board of Directors and each officer of the Company that is a reporting person under Section 16 of the Securities Exchange Act of 1934. The D&O Questionnaire contains questions intended to identify Related Persons and transactions between the Company and Related Persons. If a Related Person Transaction is identified, such transaction is brought to the attention of the Corporate Governance Committee for its approval, ratification, revision, or rejection in consideration of all of the relevant facts and circumstances.
Mr. Peltz, a director of the Company, is the non-executive Chairman and a significant stockholder of The Wendys Company (formerly Wendys/Arbys Group, Inc.) (Wendys). In Fiscal Year 2012, Wendys company-owned restaurants purchased approximately $14.4 million of our products through several distributors at prices determined pursuant to a supplier agreement. Mr. Peltz had no involvement in the negotiations of the supplier agreement. The transactions with Wendys were reviewed and ratified by the Corporate Governance Committee, as required by the Companys Related Person Transaction Policy.
Fiscal Year 2012 Meetings
Each incumbent director of the Company attended 91% or more of the aggregate number of meetings of the Board and committees on which the director served. As a general matter, all Board members are expected to attend the Annual Meeting. At the Companys 2011 Annual Meeting, all members of the Board were present.
Committee Duties and Responsibilities
Management Development and Compensation Committee
Corporate Governance Committee
Corporate Social Responsibility Committee
THE ROLE OF THE BOARD IN RISK OVERSIGHT
In the normal course of its business, the Company is exposed to a variety of risks, including reputation, strategic, financial, economic, political, legal, regulatory, supply chain, food safety and quality, talent management, and information technology. The identification, understanding, and management of risk are critical for the successful management of the Company. Risk consideration is an integral component of our operational decision-making and annual planning processes (i.e., Strategic Plan, People and Organization Plan, and Annual Operating Plan) and is also embedded into our strong internal control environment. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive on a global basis and to achieve the Companys strategic business objectives. The Board of Directors recognizes it is charged with risk oversight and since 2004 has supported the Companys risk management function, including through the
establishment of an Office of Risk Management in 2006 to assist with its risk oversight duties. The Office of Risk Management further built upon and exists in conjunction with the strong internal control environment and culture established by the Corporate Audit and Ethics and Compliance Departments. The Office of Risk Management includes Enterprise Reputation and Risk Management (ER2M), Food Safety and Quality, and Operational Risk Management functions. The ER2M function facilitates the common and regular, global, cross-functional approach to identify, prioritize, measure, and manage key business risks. It provides consistent risk considerations and mitigation solutions globally across our functional areas and business units.
Company management is responsible for the day-to-day risk and mitigation efforts. The ER2M process engages our key business leaders and functional heads via surveys, interviews, and regular risk reporting to develop and maintain global risk information. The Office of Risk Management monitors, evaluates, and recommends policies and processes to handle key aspects of risk and to assess the adequacy of risk remediation plans. The Office of Risk Management reporting structure requires ongoing risk input from key business functions, including the Quality Assurance, Health and Safety, Environmental and Sustainability, and Ethics and Compliance areas.
Under the Companys risk management framework, the Company coordinates its risk management efforts with our Global Risk Governance owners, including World Headquarters global functional leaders (e.g., strategy, financial control, legal, corporate governance, ethics and compliance, information technology, human resources, food safety and quality, operational risk management, supply chain, communications, and Corporate Audit) and our Business Unit management leadership. The Office of Risk Management also routinely reviews its findings, recommendations, the status of key risks and risk appetite with our Global Risk Governance owners and the Office of the Chairman, which is the most senior policy-making executive management group in the Company led by the Chairman and CEO. A representative of the Office of Risk Management also participates in the Disclosure Committee meetings.
While risk oversight is a full Board responsibility, the task of monitoring the ER2M process has been delegated to the Audit Committee of the Board of Directors. Our Chief Supply Chain Officer, who is a member of the Office of the Chairman, and the Vice President ER2M and Ethics and Compliance present a comprehensive review of the Companys corporate risk assessment and actions to the Audit Committee twice a year and to the full Board annually. The assessment discussions focus on the key risks identified and actions taken. Oversight responsibility for each risk type is allocated among the full Board and its committees. Each committee receives updates from the Companys accountable executives. Company management reviews key risks with each committee at least annually, and throughout the year on an as needed basis. This integrated and ongoing process facilitates the Boards oversight of the Companys risks.
The full Board of Directors oversees key commercial and strategy-related risks including marketing and sales, research and development, and supply chain. Also, each committee plays a significant role in carrying out the risk oversight function. In particular:
Finally, with regard to compensation risk, Company management has surveyed the design of all of its incentive compensation policies and programs and reviewed the results with the Management Development and Compensation Committee. The Companys compensation programs are designed with features that mitigate risk without diminishing the incentive nature of the compensation. Our programs are intended to encourage and reward prudent business judgment and appropriate risk-taking over the long term, coupled with one or more specific features to mitigate risk, including:
In addition, the Management Development and Compensation Committees compensation consultant has conducted a review and advised the Committee that the Companys Fiscal Year 2012 executive compensation programs have a reasonable balance between risk and reward. The Companys executive compensation programs include the following specific features to mitigate risk:
REPORT OF THE AUDIT COMMITTEE
The primary role of the Audit Committee is to oversee the Companys processes to provide for the reliability and integrity of the accounting policies, financial statements, and financial reporting and disclosure practices of the Company. The Audit Committee oversees managements establishment and maintenance of an adequate system of internal control over financial reporting. The Audit Committee retains the Companys independent registered public accounting firm and oversees their independence, qualifications, and effectiveness. In addition, the Audit Committee oversees the independence, objectivity, and performance of the internal audit function, which reports directly to the Chair of the Audit Committee. Management has primary responsibility for the financial reporting process, including the Companys internal control over financial reporting. The independent registered public accounting firm is responsible for auditing the Companys financial statements and internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board.
In the performance of its oversight function and its duties, the Audit Committee has reviewed and discussed the Companys audited financial statements with management and the independent registered public accounting firm. The Audit Committee also has discussed with the independent registered public accounting firm the matters required to be discussed by the Public Company Accounting Oversight Board relating to communications with audit committees. In addition, the Audit Committee has received from the independent registered public accounting firm the letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountants communications with the Audit Committee concerning independence from the Company, has discussed with the independent registered public accounting firm the auditors independence, and has considered whether the independent registered public accounting firms provision of non-audit services to the Company is compatible with maintaining the independent registered public accounting firms independence.
The Audit Committee has discussed with the Companys internal auditors and independent registered public accounting firm the overall scope and plan for their respective audits. The Audit Committee meets separately with both the internal auditors and the independent registered public accounting firm, without management present, to discuss the results of their examinations, their audits of the Companys financial statements and internal control over financial reporting, and the overall quality of the Companys financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee has recommended to the Board of Directors, and the Board has approved, that the Companys audited financial statements be included in the Companys 2012 Annual Report to Shareholders and Annual Report on Form 10-K for the year ended April 29, 2012, for filing with the Securities and Exchange Commission (SEC). In giving its recommendation to the Board of Directors, the Audit Committee has relied on (i) managements representation that the financial statements have been prepared with integrity and objectivity and in conformity with generally accepted accounting principles, and (ii) the report of the Companys independent registered public accounting firm with respect to such financial statements.
The Board of Directors has determined that all members of the Audit Committee are independent, as defined by the Companys Director Independence Standards, the current rules of The New York Stock Exchange (NYSE), and the SECs rules that implement certain provisions of the Sarbanes-Oxley Act of 2002. The Board of Directors has also determined that Mr. OHare is an audit committee financial expert as defined in the SECs rules. Consistent with the Audit Committee Charter, no member of the Audit Committee serves simultaneously on the audit committees of more than two other public companies.
RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP has been the independent registered public accounting firm and has audited the consolidated financial statements of the Company since 1979. In addition to performing the audit of the Companys consolidated financial statements, PricewaterhouseCoopers LLP provided various audit-related and tax services during Fiscal Year 2012. The following table shows fees for professional services rendered by PricewaterhouseCoopers LLP for the past two fiscal years (in thousands):
Audit fees relate to professional services rendered for the integrated audit of the consolidated financial statements of the Company and of the Companys internal control over financial reporting, audits of the financial statements of certain subsidiaries and certain statutory audits, the issuance of consents, reviews of the Companys quarterly consolidated financial statements, and assistance with the review of documents filed with the SEC. These fees increased by approximately $756,000 primarily due to additional statutory audits and review of SEC filings requested by the Company.
Audit-related fees relate primarily to audits of employee benefit plans, agreed upon procedures, financial due diligence, and other attestation services. These fees increased by approximately $176,000 in Fiscal Year 2012 due to additional services provided related to acquisition and divestiture activities. Tax compliance services consist of fees related to the preparation of tax returns and transfer pricing services, and these fees decreased by approximately $106,000 due to fewer services requested by the Company. Other tax services consist of fees related to tax planning regarding domestic and international taxes and work on due diligence related to acquisitions. These fees increased by approximately $390,000 in Fiscal Year 2012 due to services provided related to acquisition activities.
The Audit Committee prohibits the Company or any of its affiliates from receiving services from the Companys independent registered public accounting firm that could be considered to have an impact on independence and services prohibited by the Sarbanes-Oxley Act of 2002 and SEC regulations.
In accordance with Audit Committee policy and legal requirements, all services to be provided by the independent registered public accounting firm in a category are pre-approved by the Audit Committee prior to engagement. The pre-approved services are budgeted, and the Audit Committee requires the independent registered public accounting firm and management to report actual fees versus the budget periodically throughout the year by category of service. If necessary, the Chair of the Audit Committee has been delegated authority to pre-approve additional services and then notify the entire Audit Committee of the additional services and estimated fees at the next Audit Committee meeting.
The following table sets forth the compensation paid to the non-employee directors of the Company in Fiscal Year 2012:
Non-employee directors receive the following annual compensation:
Annual restricted stock unit grants are restricted for six months, during which time directors receive cash dividend equivalents at the same rate as paid on the Companys Common Stock. Non-employee directors may defer some or all of their cash into either a Heinz common stock fund or a cash account and may defer equity compensation into a Heinz common stock fund. Amounts deferred into Heinz stock units are credited with additional stock units equal to the dollar amount of dividends paid from time to time. Sums deferred into cash accounts accrue interest calculated periodically at the prime rate. All amounts deferred are paid in stock or in cash, as specified by the director, on a date elected by the director at the time of the deferral. Currently, six directors have elected to defer some or all of their compensation.
Directors are reimbursed for travel to Board of Directors meetings for their actual out-of-pocket travel cost, up to the cost of a first-class, commercial airline ticket. The Company may, at its discretion, provide transportation via Company-operated aircraft or third-party charter aircraft. Directors are reimbursed for reasonable expenses incurred while traveling to or from Board of Directors meetings or while conducting business on behalf of the Company. To the extent a director or a directors spouse uses the Company aircraft for personal travel, the director will receive imputed income for such use at the Standard Industry Fare Level established by the Internal Revenue Service, and the aggregate incremental cost of such use, if any, will be included in the All Other Compensation column in the table above.
The Company has maintained a charitable award program funded by insurance policies on the lives of non-employee directors who were members of the Board of Directors prior to 1995 as part of the Companys overall program to promote charitable giving at that time. Under the program, following the death of a covered non-employee director, the Company will donate $1,000,000 to qualifying charitable organizations recommended by the non-employee director and approved by the Company. The Company is reimbursed from the proceeds of the life insurance policies. Participants derive no financial benefit from these programs.
Non-employee directors who were on the Board prior to January 31, 1994 will receive, upon retirement on or after age 70, a pension benefit for life equivalent to $30,000 annually.
Mr. Johnson, the only employee director, receives no additional compensation for serving on the Board or any committee.
Our Corporate Governance Principles require our directors to possess the experience and skills necessary to oversee the management of the Company and to serve the long-term interests of all shareholders and the best interests of the Company. In addition, the Board seeks candidates who recognize the interests of the Companys employees, customers, suppliers, consumers, creditors, communities in which the Company operates, and other constituencies. This requires skilled individuals with varying characteristics and experiences. The Board has established general qualification requirements for service on the Board that are applicable to all directors. In addition,
the Board believes that there are other specific qualities, attributes, and experiences that should be represented on the Board, but not necessarily by each director.
General Qualifications for All Directors
Under our Corporate Governance Principles, nominees for director are selected on the basis of their business and professional experiences and qualifications, public service, and diversity of background, taking into account the skills and attributes of the continuing members of the Board. We endeavor to have a Board representing diverse experience and a proven track record of success in each directors business, profession, and other fields, and in areas that are germane to the Companys global activities. As part of the nomination process, the Corporate Governance Committee evaluates diversity in a broad sense, seeking individuals who demonstrate leadership skills and who represent a wide scope of shareholder interests by identifying candidates from diverse businesses, professions, and other fields and who have diverse viewpoints and ethnic and cultural backgrounds.
In addition, the Corporate Governance Committee will require for nomination as a director (whether nominated by the Corporate Governance Committee or by one or more of our shareholders) persons who:
In determining whether to recommend a director for re-election, the Corporate Governance Committee also considers the directors past attendance at meetings as well as participation in, and contribution to, the activities of the Board.
The Corporate Governance Committee, as well as the Board, believes that its current Board members meet these criteria with diversity and depth of experience that enables them to effectively oversee management of the Company. The following description of each nominee set forth below includes biographical information, on a director-by-director basis, which highlights some of the specific experience and background of each nominee that led the Board to conclude that each director is qualified to serve on the Board. The Corporate Governance Committee and the Board took this information into account in concluding that each nominee is qualified to serve as one of the Companys directors. In addition to the qualifications evidenced by the biographical information set forth below, the Corporate Governance Committee and the Board determined that each of the nominees possesses certain intangible attributes and skills, which also led to the conclusion that each nominee meets the criteria set forth in our Corporate Governance Principles and is qualified to serve as a director.
Specific Qualifications to be Represented on the Board as a Whole
The Board believes that a diversity of background, perspectives, and experience is beneficial to the execution of its oversight function, and it has identified certain key attributes to be represented on the Board. The Companys business is global in scope and, as a result, the Board believes that international experience in global publicly-traded businesses and specific knowledge of certain geographical areas is important for effective and growth-driven leadership and should be represented on the Board.
The Companys business involves sophisticated financial transactions involving many countries and different currencies, and a strong financial background is considered essential and should be represented on the Board. Marketing is a key factor to success in a consumer-driven industry and a major part of the Companys business, so the Board seeks individuals with strong sales, advertising, marketing, and media experience. The Company must comply with numerous regulatory requirements in the United States and across the globe and interact with various governmental agencies. Therefore, the Board believes that governmental, regulatory, and political acumen should be represented on the Board. Because the Company manufactures an extensive line of food products and uses a wide variety of raw materials, the Board believes that knowledge of the Companys business and operations and the food industry should also be represented, and also seeks members with leadership experience as a CEO of a large, publicly-traded company. Finally, the Company is committed to sustainability and health and wellness, and therefore looks for experience in risk management and corporate social responsibility in prospective Board members.
1. Election of Directors
(Item 1 on proxy card)
You will have the opportunity to elect our entire Board of Directors, currently consisting of 12 members, at the Annual Meeting. Each of our directors is elected annually and serves until the next Annual Meeting of Shareholders or until a successor is elected or qualified.
The Board of Directors has nominated the 12 people listed below for election as directors at the Annual Meeting. If any of the nominees becomes unable or unwilling to serve, the proxies will be voted for the election of such other person as may be designated by the Board of Directors. Information relating to each nominee, including his or her period of service as a director of the Company, principal occupation, specific experience, other biographical material, and qualifications are described below.
Each of the 12 nominees must receive a majority of the votes cast in order to be elected. A majority of votes cast means that the number of shares voted for a director must exceed the number of shares cast against that director. An incumbent director who is not reelected because he or she does not receive a majority of the votes cast would nonetheless continue in office because no successor has been elected. This is referred to as the director holdover rule. In that event, the incumbent director must offer to tender his or her resignation to the Board. The Corporate Governance Committee will make a recommendation to the Board on whether to accept or reject the resignation, or whether other action should be taken. The Board will act on the Committees recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. The director who tenders his or her resignation will not participate in the decisions of the Corporate Governance Committee or the Board with respect to his or her own resignation.
The Board of Directors recommends a vote FOR the election of each of the nominees named above.
2. Ratification of the Selection of Independent Registered Public Accounting Firm
(Item 2 on proxy card)
The Audit Committee of the Board of Directors is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit the Companys financial statements. The Audit Committee has appointed PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for Fiscal Year 2013. PricewaterhouseCoopers, or one of its predecessor firms, have been retained as the Companys independent registered public accounting firm continuously since 1979.
The Audit Committee is responsible for approving the audit fee of the independent registered public accounting firm. In order to assure continuing auditor independence, the Audit Committee periodically considers whether there should be a regular rotation of the independent registered public accounting firm. Further, in conjunction with the mandated rotation of the independent registered public accounting firms lead engagement partner, the Audit Committee and its Chair will continue to be directly involved in the selection of the new lead engagement partner. The members of the Audit Committee and the Board believe that the continued retention of PricewaterhouseCoopers to serve as the Companys independent registered public accounting firm is in the best interests of the Company and its shareholders.
The Audit Committee has recommended that the shareholders ratify the selection of PricewaterhouseCoopers LLP as the Companys independent registered public accounting firm for Fiscal Year 2013.
The Board of Directors recommends a vote FOR the ratification of the selection of PricewaterhouseCoopers LLP as independent registered public accounting firm for Fiscal Year 2013.
A representative of PricewaterhouseCoopers LLP is expected to attend the Annual Meeting and be available to make a statement or respond to questions.
3. Approval of the H. J. Heinz Company Fiscal Year 2013 Stock Incentive Plan
(Item 3 on proxy card)
We are asking shareholders to approve the H. J. Heinz Company Fiscal Year FY2013 Stock Incentive Plan (the FY2013 Stock Incentive Plan). The H. J. Heinz Company Third Amended and Restated Fiscal Year 2003 Stock Incentive Plan (the FY03 Stock Incentive Plan), which is discussed under Item 4 below, has provided equity awards for the past 10 years. While we expect that the FY03 Stock Incentive Plan will have adequate shares for our Fiscal Year 2013 awards, it is not expected to have sufficient shares available for issuance in Fiscal Year 2014 based on our current expectations for annual awards. As of May 31, 2012, there were 4,298,712 shares available for issuance under the FY03 Stock Incentive Plan.
The proposed FY2013 Stock Incentive Plan provides for awards consisting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance-based cash awards, or any combination of these types of awards. The Board of Directors has concluded that the adoption of the proposed FY2013 Stock Incentive Plan is in the best interests of the Company and its shareholders because it will enable the Company to attract and retain highly qualified individuals who, by virtue of their abilities and qualifications, make important contributions to the Company that promote the Companys long-term success.
A summary of the principal terms of the FY2013 Stock Incentive Plan is set forth below. This summary is qualified in its entirety by the terms of the FY2013 Stock Incentive Plan, as proposed to be adopted, which is attached to this Proxy Statement as Appendix A. In the event of any inconsistencies between this description and the plan document, the terms of the plan document will control.
The Board of Directors has unanimously approved the adoption of the FY2013 Stock Incentive Plan and recommends a vote FOR this proposal.
The terms of the FY2013 Stock Incentive Plan are substantially similar to those of the FY03 Stock Incentive Plan, which was approved by approximately 87% of the shareholders who voted at the Annual Meeting held on September 12, 2002. The Board of Directors adopted the FY2013 Stock Incentive Plan on June 13, 2012, subject to the approval of shareholders at the Annual Meeting. If adopted, the Company will reserve 10 million shares of Common Stock for issuance under the FY2013 Stock Incentive Plan. This amount represents approximately 3.12% of the Companys Common Stock issued and outstanding as of May 31, 2012. The maximum number of shares of Common Stock that may be delivered to participants under the FY2013 Stock Incentive Plan shall be 10 million shares. Upon forfeiture or cancellation of stock options, stock appreciation rights, restricted stock, restricted stock units, and performance shares prior to vesting, the shares of Common Stock subject thereto shall again be available for awards under the FY2013 Stock Incentive Plan. Shares surrendered in a net exercise (i.e., an option exercise in which shares are surrendered back to the Company to cover costs) and shares withheld for payment of withholding taxes associated with other stock awards shall not be recycled.
In any given 12-month period, an individual participant under the FY2013 Stock Incentive Plan may not receive more than: (i) 2 million shares underlying options and stock appreciation rights and (ii) 2 million shares underlying any other stock-based awards. In any one fiscal year, an individual participant may receive a maximum of $10 million for cash awards intended to be performance-based awards under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code), subject to certain limitations. Furthermore, no more than 50% of the aggregate share reserve may be issued under awards other than options and stock appreciation rights.
Purpose. The purpose of the FY2013 Stock Incentive Plan is to provide the Companys employees, directors, and other participants (collectively, the participants) selected by the Management Development and Compensation Committee of the Board of Directors (the MDCC) with an incentive, through ownership of shares of Common Stock, to continue in the Companys service and to help the Company to compete effectively with other enterprises for the services of qualified individuals. The awards granted under the FY2013 Stock Incentive Plan are intended to increase participants value to the Company by further aligning the interests of the participants with the interests of the Companys shareholders and to motivate the participants to achieve long-range goals.
Administration. The FY2013 Stock Incentive Plan will be administered by the MDCC, which the plan provides must be comprised solely of three or more directors who are independent as defined by the NYSE, and are outside directors as defined under Code Section 162(m) and its applicable regulations. Except to the extent prohibited by applicable law or the rules of the applicable stock exchange, the MDCC may allocate or delegate all or any portion of its responsibilities and powers to any one or more of its members, the Chief Executive Officer, a committee of Company officers, or another Company officer subject to Section 16 of the Securities Exchange Act of 1934 (the Exchange Act), except with respect to awards to persons subject to Section 16 of the Exchange Act.
The FY2013 Stock Incentive Plan authorizes the MDCC to select those participants to whom awards may be granted, to determine whether and to what extent awards are granted, to determine the number of shares of Common Stock or other consideration to be covered by each award, to determine the terms and conditions of awards, to amend the terms of outstanding awards, and to take any other action consistent with the terms of the FY2013 Stock Incentive Plan as the MDCC deems appropriate.
Eligibility. Awards may be granted to employees of the Company and its subsidiaries, non-employee directors, and other participants selected by the MDCC. Approximately 430 employees are likely to participate in the FY2013 Stock Incentive Plan each year, given that approximately 750 employees and former employees currently hold stock option and restricted stock unit awards under the Companys stock option plans and the FY03 Stock Incentive Plan. There are currently 11 non-employee directors and approximately 430 employees expected to continue to participate in the FY03 Stock Incentive Plan each year. Although the FY2013 Stock Incentive Plan provides for awards to non-employee and non-director participants selected by the MDCC, based on historical experience, it is anticipated that a limited number of such awards would be granted.
Section 162(m). The maximum number of shares with respect to which options or stock appreciation rights may be granted to an individual participant in any 12-month period shall be 2 million shares. To the extent required by Code Section 162(m) or the regulations thereunder, in applying the foregoing limitation, if any option or stock appreciation right is canceled, the canceled award continues to count against the maximum number of shares with respect to which options and stock appreciation rights may be granted to a participant.
Term. The FY2013 Stock Incentive Plan shall have a term of 10 years. However, the expiration of the plan will not cancel any awards previously granted under the plan. Instead, any such awards will remain in effect in accordance with their terms and the terms of the plan.
Terms and Conditions of Awards. The MDCC may grant awards subject to vesting schedules or restrictions and contingencies in the Companys favor. However, the awards may be accelerated such that they are fully vested, exercisable, and released from any restrictions or contingencies under the following circumstances: (i) options and stock appreciation rights will become fully exercisable upon the participants death or disability, or, with certain exceptions, the occurrence of a change in control (as defined in the FY2013 Stock Incentive Plan), or under other circumstances as determined by the MDCC in its discretion; (ii) restricted stock or restricted stock units that vest upon (A) completion of a specific period of service or (B) achievement of performance goals, will, in each case be fully vested and released from restrictions and contingencies, to the extent permitted by the MDCC, upon the participants death, disability, or involuntary termination without cause, or, with certain exceptions, the occurrence of a change in control; and (iii) a pro-rata portion of performance shares and cash-based performance awards will become payable, to the extent earned, upon the occurrence of a change in control. In general, the FY2013 Stock Incentive Plan defines change in control as any of the following events: an acquisition, other than directly from the Company, by a person (as defined for purposes of Section 13(d) or 14(d) of the Exchange Act) that results in such person having ownership of shares of the Companys stock having 20% or more of the combined voting power of the Companys voting securities; a change in the composition of the Companys Board of Directors such that the members of the Board as of the effective date of the FY2013 Stock Incentive Plan (the Incumbent Board) cease to constitute at least two-thirds of the Board of Directors except for any new directors who were approved by a vote of at least two-thirds of the Incumbent Board; a merger, consolidation or reorganization involving the Company or a subsidiary of the Company unless the voting securities of the Company prior to such transaction continue to constitute at least 60% of the combined voting power of the outstanding voting power of the surviving corporations voting securities, the members of the Incumbent Board constitute
more than one-half of the members of the board of directors of the surviving corporation, and no person (other than the Company and certain other entities) has beneficial ownership of 15% of more of the combined voting power of the surviving corporations voting securities; a complete liquidation or dissolution of the Company; or the completion of the sale or other disposition of all or substantially all of the assets of the Company, other than to a subsidiary of the Company.
The MDCC may provide that stock-based awards earn dividends or dividend equivalents, which may be paid in cash, shares, or credited to an account designated in the name of the participant. Participants may be required or permitted to defer the issuance of shares or cash settlements under awards, and may be entitled to interest for the deferral period.
Each option granted under the FY2013 Stock Incentive Plan shall be designated as either an incentive stock option or a non-statutory stock option. No option or stock appreciation right may be granted with a term in excess of 10 years from the date of grant.
Performance shares or cash awards will be conditioned on the achievement of performance goals based on one or more performance measures determined by the MDCC over a performance period as prescribed by the MDCC of not less than one year. Performance goals may be established on a corporate-wide basis or with respect to one or more Business Units, divisions or subsidiaries, and may be in either absolute terms or relative to the performance of one or more comparable companies or an index covering multiple companies. Performance measures means criteria established by the MDCC relating to any of the following: revenue; earnings before interest, taxes, depreciation and amortization (EBITDA); operating income; pre- or after-tax income; cash flow; cash flow per share; net earnings; earnings per share; return on equity; return on invested capital; return on assets; economic value added (or an equivalent metric); share price performance; total shareholder return; improvement in or attainment of expense levels; improvement in or attainment of working capital levels; ability to execute against customer service goals; innovation as measured by a percentage of sales from new products; days in inventory; profit margin; market share; diversity; revenue growth; return on sales; strategic positioning; cash conversion cycle; and employee productivity and satisfaction metrics. Performance measures may be applied by excluding the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, and the cumulative effects of accounting changes, each as defined by generally accepted accounting principles and/or International Financial Reporting Standards to the extent applicable in the United States.
Exercise Price. The FY2013 Stock Incentive Plan authorizes the MDCC to grant options and stock appreciation rights at an exercise price of not less than 100% of the fair market value of the shares on the date of grant. The exercise price is generally payable in cash, check, surrender of pre-owned shares of Common Stock, cashless exercise and sale, or by such other means determined by the MDCC.
Option Repricing Prohibited. The exercise price for any outstanding option or stock appreciation right may not be decreased after the date of grant, nor may any outstanding option or stock appreciation right be surrendered as consideration for the grant of a new option or stock appreciation right with a lower exercise price. Additionally, no outstanding underwater options or stock appreciation rights may be cancelled in exchange for cash, other awards, or securities. The MDCC also may not take any other action that has the effect of buying out, repricing, replacing or regranting through cancellation underwater options or stock appreciation rights, including, but not limited to, any action that would be treated as a repricing under applicable rules or listing requirements adopted by the NYSE.
Termination of Employment. An option or stock appreciation right may not be exercised after the expiration date of such award, except in limited circumstances involving non-statutory
options and stock appreciation rights exercised after the death or disability of a participant. For
five years from the date of retirement, options and stock appreciation rights will continue to vest and be exercisable under the provisions of the grant. An option or stock appreciation right will vest immediately upon the date of the participants death or determination that a participant is disabled, and in such case the option or stock appreciation right will be fully exercisable for a period of one year from the date of death or determination that a participant is disabled. If a participants employment with the Company is involuntarily terminated for cause, any outstanding options held by such participant will be canceled. If a participants employment is involuntarily terminated by the Company without cause (as defined in the FY2013 Stock Incentive Plan), options will continue to vest and will be exercisable for ninety days from the date of termination unless the MDCC determines otherwise. The vesting of options may be accelerated, subject to certain exceptions, upon the occurrence of a change in control. In all other events of termination of employment, unvested awards are canceled on the date of termination of employment. The vesting of restricted stock or restricted stock units may be accelerated to the extent permitted by the MDCC in the event of the participants death, disability, or involuntary termination without cause, or, subject to certain exceptions, upon the occurrence of a change in control. In each case, the MDCC retains discretion to establish alternative vesting and exercisability rules.
Transferability of Awards. An option or stock appreciation right shall be exercisable during the participants lifetime only by the participant, his or her guardian or legal representative, or by such other means as the MDCC may approve that are not inconsistent with or contrary to applicable securities laws. Generally, awards may not be transferred other than by will or the laws of descent and distribution. The MDCC may, however, amend outstanding awards to provide for transfer, without payment of consideration, to immediate family members of the participant or to trusts or partnerships for such family members. Furthermore, a participant may designate a beneficiary for the award in the event of his or her death.
Adjustments Upon Changes in Capitalization. The number and types of shares covered by outstanding awards, the number of shares authorized for issuance under the FY2013 Stock Incentive Plan, the exercise price of each outstanding award, and the maximum number and types of shares that may be granted to any participant in a fiscal year may be appropriately adjusted by the MDCC in the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, reorganization, spin-off or other distribution (other than ordinary cash dividends) of the Companys assets to shareholders, or any other change affecting shares or the value of shares or Awards under the plan.
Amendment or Termination of the Plan. The Board of Directors may amend or terminate the FY2013 Stock Incentive Plan at any time, subject to shareholder approval in certain circumstances described in the FY2013 Stock Incentive Plan. No amendment or termination of the FY2013 Stock Incentive Plan may adversely affect outstanding awards unless consented to by each participant in writing. However, the Board of Directors may amend the FY2013 Stock Incentive Plan without shareholder approval or the consent of participants in order to facilitate qualification of incentive stock options, ensure compliance with Code Section 409A, or preserve the deduction under Code Section 162(m).
Awards issued under the FY2013 Stock Incentive Plan to covered employees (as defined in Code Section 162(m)) are intended to preserve the deduction under Code Section 162(m). However, the MDCC reserves the right to issue awards which are not fully deductible. Further, because of ambiguities and uncertainties as to the application and interpretation of Code Section 162(m), no assurance can be given, notwithstanding the MDCCs efforts, that an award intended to satisfy the requirements for deductibility does, in fact, do so.
Material Differences Between the FY2013 Stock Incentive Plan and the FY03 Stock Incentive Plan
Following is a description of the material differences between the FY2013 Stock Incentive Plan and the FY03 Stock Incentive Plan:
Under the FY03 Stock Incentive Plan, in any given 36-month period, an individual participant may not receive more than: (a) 3 million shares underlying options and stock appreciation rights, (b) 1 million shares underlying any other stock-based awards and (c) $10 million for cash awards intended to be performance-based awards under Section 162(m) of the Code, subject to certain limitations.
Except as discussed above, the material terms of the FY2013 Stock Incentive Plan are substantially the same as the terms of the FY03 Stock Incentive Plan.
Certain Federal Tax Consequences
The grant to a participant of a stock option or stock appreciation right under the FY2013 Stock Incentive Plan normally will not result in any federal income tax consequences to the participant or to the Company at the time of the grant.
Upon exercise of a non-statutory stock option, the participant recognizes ordinary compensation income on the difference between the option exercise price and the fair market value of the shares on the date of exercise. Upon a subsequent disposition of the shares, the participant will receive capital gain or loss treatment.
In the case of an incentive option, the participant recognizes no federal taxable income upon exercising the option (subject to the alternative minimum tax rules discussed below), provided that if the option is not exercised during employment or within three months (one year in the case of death or disability) after termination of employment, the tax treatment described above for non-statutory options will apply. In the event of a disposition of stock acquired upon exercise of an incentive option, the tax consequences depend upon how long the participant has held the shares. If the participant does not dispose of the shares within two years after the incentive option was granted, or within one year after exercise, the participant will recognize a long-term capital gain (or loss) equal to the difference between the sale price of the shares and the exercise price. Failure to satisfy either of the above holding periods results in ordinary compensation income in the year of disposition (a disqualifying disposition) equal to the lesser of (i) the difference between the amount realized on the disposition and the exercise price or (ii) the difference between the fair market value of the stock on the exercise date and the exercise price. Any gain to the participant in excess of the amount taxed as ordinary income will be treated as capital gain. The difference between the fair market value of the shares at exercise and the exercise price is classified as an item of adjustment in the year of exercise of an incentive option for purposes of the participants alternative minimum tax. This treatment will not apply if there is a disqualifying disposition in the same calendar year in which the incentive stock options are exercised.
Upon exercise of stock appreciation rights, the participant will normally recognize ordinary compensation income for federal income tax purposes equal to the amount of cash and the fair market value of stock, if any, received upon such exercise. The participant will recognize capital gain or loss upon the disposition of any stock received on exercise of a stock appreciation right equal to the excess of the amount realized on such disposition over the ordinary income recognized upon exercise.
The grant of restricted stock will subject the recipient to ordinary compensation income on the difference between the amount paid for such stock and the fair market value of the shares on the date that the restrictions lapse. Upon a subsequent disposition of the shares, the participant will receive capital gain or loss treatment. Recipients of restricted stock may within 30 days after issuance make a Section 83(b) election to recognize as ordinary compensation income in the year that restricted stock is received the amount equal to the spread between the amount paid for
such stock and the fair market value on the date of the issuance of the stock, in which case the recipient recognizes no further compensation income upon the lapse of restrictions, and any subsequent disposition will give rise to capital gain or loss based on the difference between the compensation income recognized under the election and the sale proceeds.
Recipients of restricted stock units will recognize no income at the time of grant of such units, will recognize ordinary compensation income upon receipt of unrestricted shares, and will receive capital gain or loss treatment on subsequent disposition of any shares received.
Recipients of stock-based awards who earn dividends or dividend equivalents will recognize ordinary compensation income on any dividend payments received during the period before compensation income is recognized with respect to the award. Compensation income recognized by a participant in the various situations discussed above may be subject to withholding for federal income and employment tax purposes.
The Company will be entitled to an income tax deduction in the same amount and at the same time as ordinary compensation income is recognized by an award recipient in the various situations described above, subject to the requirement of reasonableness, certain limitations imposed by Code Section 162(m), and the satisfaction of withholding obligations. The Company will not receive a deduction at the time of exercise by the recipient of an incentive option.
Capital gain or loss is treated as long-term or short-term depending on whether the shares are held for more than one year following exercise (one year following lapse of the restrictions in the case of restricted stock). Capital gain income is not subject to tax withholding, and the Company is not entitled to receive a tax deduction with respect to such income.
The foregoing is only a summary of the federal income tax consequences related to awards under the Fiscal Year FY2013 Stock Incentive Plan, and is based upon federal income tax laws in effect on the date of this Proxy Statement. Reference should be made to the applicable provisions of the Code. This summary does not purport to be complete, and does not discuss the tax laws of any municipality, state, or foreign country to which the participant may be subject.
New Plan Benefits
No benefits or amounts have been granted, awarded, or received under the FY2013 Stock Incentive Plan. In addition, the MDCC will determine the number and types of awards that will be granted under the FY2013 Stock Incentive Plan in the future. It is therefore not possible to determine the benefits that will be received by individual participants if the FY2013 Stock Incentive Plan is approved by the shareholders. We expect that awards under the FY2013 Stock Incentive Plan will be granted in a manner substantially consistent with historical awards under the FY03 Stock Incentive Plan.
Approval of this proposal will require the affirmative vote of a majority of the votes cast, either in person or by proxy, at the Annual Meeting, provided that the vote cast on the proposal represents over 50% in interest of all securities entitled to vote.
The Board of Directors has unanimously approved the adoption of the FY2013 Stock Incentive Plan and recommends a vote FOR this proposal.
4. Re-approval of Performance Measures Included in the H.J. Heinz Company Third Amended and Restated Fiscal Year 2003 Stock Incentive Plan
(Item 4 on proxy card)
We are asking shareholders to re-approve the performance measures included in the FY03 Stock Incentive Plan. As of May 31, 2012, there were 4,298,712 shares available for issuance under the FY03 Stock Incentive Plan.
The FY03 Stock Incentive Plan is intended to comply with Section 162(m) of the Code, and the regulations promulgated thereunder, enabling the Company to deduct amounts paid under the plan, as performance-based compensation, to the Companys Chief Executive Officer and each of its other three most highly-paid executive officers, excluding the Chief Financial Officer. Code Section 162(m) requires shareholder approval of the material terms of the performance measures applicable to awards intended to qualify as performance-based compensation under the FY03 Stock Incentive Plan. Section 162(m) also requires re-approval of those performance measures every five years because our MDCC retains discretion to use different measures under different performance-based awards. Accordingly, we are asking shareholders to re-approve the performance measures included in the FY03 Stock Incentive Plan for purposes of maximizing tax deductions to the Company under Section 162(m) for any future performance-based compensation paid under that plan. The performance measures described below are the same measures approved by shareholders in 2002 with 87% of the vote and reapproved by shareholders in 2007 with 96% of the vote.
The terms and conditions of the FY03 Stock Incentive Plan and the FY2013 Stock Incentive Plan are substantially similar. Thus, please refer to the description of the FY2013 Stock Incentive Plan included in Item 3 above, including the section entitled Material Differences Between the FY2013 Stock Incentive Plan and the FY03 Stock Incentive Plan, for information regarding the material terms of the FY03 Stock Incentive Plan. The full text of the FY03 Stock Incentive Plan is attached to this Proxy Statement as Appendix B.
Eligibility. Awards may be granted to employees of the Company and its subsidiaries, directors, and other participants selected by the MDCC. There are currently 11 non-employee directors. Although the FY03 Stock Incentive Plan provides for awards to non-employee and non-director participants selected by the MDCC, based on historical experience, it is anticipated that only a limited number of such awards would be granted.
Performance Measures. Performance measures means criteria established by the MDCC relating to any of the following: revenue; earnings before interest, taxes, depreciation and amortization (EBITDA); operating income; pre- or after-tax income; cash flow; cash flow per share; net earnings; earnings per share; return on equity; return on invested capital; return on assets; economic value added (or an equivalent metric); share price performance; total shareholder return; improvement in or attainment of expense levels; improvement in or attainment of working capital levels; ability to execute against customer service goals; and innovation as measured by a percentage of sales from new products. Performance measures may be applied by excluding the impact of charges for restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring items, and the cumulative effects of accounting changes, each as defined by generally accepted accounting principles.
Award Limits. In any given 36-month period, an individual participant under the FY03 Stock Incentive Plan may not receive more than: (i) 3 million shares underlying options and stock appreciation rights, (ii) 1 million shares underlying any other stock-based awards, and (iii) $10 million for cash awards intended to be performance-based compensation under Section 162(m), subject to certain limitations. The exercise price for a stock option or stock appreciation right may not be less than 100% of the fair market value of the shares on the date of grant. The $10 million limit for cash awards is modified proportionately for performance periods other than 36 months, but no further adjustment is made for performance periods in excess of 60 months. The aggregate number of shares that may be issued as incentive stock options to all participants under the FY03 Stock Incentive Plan is 9,989,558 shares, and no more than 50% of the aggregate share reserve may be issued under awards other than options and stock appreciation rights. To the extent required by Section 162(m) or the regulations thereunder, if any option or stock appreciation right is canceled, the canceled award continues to count against the maximum number of shares with respect to which options and stock appreciation rights may be granted to a participant.
Plan Benefits. The MDCC will determine the number and types of awards that will be granted under the FY03 Stock Incentive Plan in the future. We expect that future awards under the FY03 Stock Incentive Plan will be granted in a manner substantially consistent with historical awards under the plan. For information regarding past grants and outstanding equity awards, see the disclosure in this Proxy Statement under Grants of Plan-Based Awards (Fiscal Year 2012) and Outstanding Equity Awards at Fiscal Year-End (Fiscal Year 2012).
The MDCC also may provide that stock-based awards earn dividends or dividend equivalents, which may be paid in cash, shares, or credited to an account designated in the name of the participant. Participants may be required or permitted to defer the issuance of shares or cash settlements under awards, and may be entitled to interest for the deferral period.
Approval of this proposal will require the affirmative vote of a majority of the votes cast, either in person or by proxy, at the Annual Meeting.
The Board of Directors recommends a vote FOR the re-approval of the performance measures included in the FY03 Stock Incentive Plan.
5. Advisory Vote Approving the Companys Named Executive Officer Compensation
(Item 5 on proxy card)
Section 14A of the Securities Exchange Act of 1934, as amended (the Exchange Act), requires that we conduct periodic advisory votes to approve the Companys named executive officer compensation (say on pay votes). Based on the results of the shareholder advisory vote on the frequency of say on pay votes at the 2011 Annual Meeting and the Boards recommendation, the Company will conduct say on pay votes on an annual basis.
Our executive pay programs are governed by the Boards Management Development and Compensation Committee (the MDCC). When making named executive officer (NEO) compensation decisions, this Committee considers public compensation data from the companies in our Compensation Peer Group, advice from its independent executive compensation consultant, and other information regarding performance and competitiveness of pay.
At the 2011 Annual Meeting, approximately 95% of the votes cast were in favor of our first say on pay proposal, indicating strong support for the Companys named executive officer compensation. As a result, the MDCC made no material changes to the structure of our executive compensation programs or pay for performance philosophy for Fiscal Year 2012.
We encourage shareholders to review the Compensation Discussion and Analysis (CD&A), as well as the Summary Compensation Table and other related tables and narrative discussion, included in this Proxy Statement. This disclosure provides detailed information regarding our executive compensation policies and practices. As described in the CD&A, we believe that our executive compensation programs align pay and performance and play a vital role in driving strong financial results and attracting and retaining a highly experienced, successful management team.
Our executive compensation practices are directly linked to our key business objectives and our fundamental goal of creating value for our shareholders. These practices include:
Despite a continually challenging economic environment, the Company delivered strong operating results for Fiscal Year 2012. The Companys TSR (including reinvested dividends) for the three-year period ended April 29, 2012 was approximately 75.46%, outperforming both our TSR Peer Group and the Standard & Poors 500 Index. In Fiscal Year 2012, the Company delivered EPS of $3.35 (excluding special items), which was in the high end of our target, record sales of $11.6 billion, and record net income of $1.09 billion (excluding special items). The Company also continued its consecutive quarters of growth in organic sales (volume plus price), which now stand at 28. In light of the fact that the Companys performance did not exceed the financial targets applicable to the incentive programs by the same magnitude as in Fiscal Year 2011, the CEOs Fiscal Year 2012 pay was below his Fiscal Year 2011 pay. CEO total pay, as indicated in the Summary Compensation Table, declined by approximately 12.5% as compared to Fiscal Year 2011 total pay. (Please refer to the CD&A and the related tables for a discussion of how our performance, as measured by these financial measures, was considered by the MDCC when making compensation decisions. Please see Managements Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for a more detailed description of our Fiscal Year 2012 financial results and reconciliations of certain non-GAAP financial measures.)
The MDCC has carefully developed our compensation program to align executive compensation with Company performance and the creation of long-term shareholder value. The Board of Directors believes that our compensation program accomplishes these objectives and therefore recommends that shareholders vote in favor of the following resolution:
RESOLVED, that the shareholders approve, on an advisory basis, the Companys named executive officer compensation, as described in the Companys Proxy Statement for the 2012 Annual Meeting of Shareholders.
This advisory vote will not be binding upon the Board of Directors or the MDCC, but they will carefully consider the outcome of the vote when determining future executive compensation programs.
The above resolution approving the Companys named executive compensation on an advisory basis will require the affirmative vote of a majority of the shares cast, either in person or by proxy, at the Annual Meeting.
The Board of Directors recommends a vote FOR the advisory approval of the Companys named executive officer compensation as described in this Proxy Statement.
6. Other Business
The Board of Directors does not intend to present any business at the Annual Meeting not described in this Proxy Statement. If other matters are properly presented at the Annual Meeting, the persons named in the proxy will have the discretion to vote on those matters for you. At the date this Proxy Statement went to press, the Company was not aware of any additional matters to be raised at the Annual Meeting.
COMPENSATION DISCUSSION AND ANALYSIS
H. J. Heinz Company has a long-standing tradition of delivering strong performance for our shareholders, as well as serving our customers and supporting the communities in which we operate. We believe that our executive compensation programs are appropriately structured to enhance our efforts to deliver above market shareholder returns consistent with our culture and the traditions that have guided us for the past 143 years.
In this Compensation Discussion and Analysis (the CD&A), we address the compensation objectives, policies, and practices relating to the Fiscal Year 2012 compensation earned by our chief executive officer (the CEO), the chief financial officer, and the three other most highly compensated executive officers whom we refer to collectively as the named executive officers (the NEOs).
The executive compensation programs described below and in the accompanying tables have played a vital role in driving strong financial results and appropriately aligning pay and performance, and are designed to attract and retain a highly experienced, successful team to manage our Company. Our pay programs are directly linked to our key business objectives and designed to create value for our shareholders.
Our ingredients for sustainable shareholder value creation include a highly talented and motivated leadership team that is guided by a dedicated Board of Directors and governed by a long history of ethical, common sense principles. As highlighted below and described in greater detail throughout the CD&A, the executive compensation programs and practices at Heinz are appropriately aligned with Company performance and the long-term interests of our shareholders and link a significant portion of pay to sustained business performance over a multi-year period without encouraging excessive risk-taking.
How We Performed in Fiscal Year 2012
Despite a challenging economic environment that featured decreased consumer spending coupled with significant inflation in commodities and transportation costs, the Company delivered record sales, operating income, and net income for Fiscal Year 2012 (excluding charges related to productivity initiatives), resulting in superior returns to Heinz shareholders. For the year, stock price appreciation plus reinvested dividends resulted in a 7.6% return. This was above the 5.8% return generated by the Standard & Poors 500 Index during the same period.
The table below and the following discussion compares the strength of our Fiscal Year 2012 performance with the strong performance the Company delivered in Fiscal Year 2011, including some of the financial measures that are incorporated into the Companys various incentive programs and used by the MDCC to determine the incentive compensation to be paid to each NEO. The targets for each financial measure are established based on the approved annual operating plan for the Company, and target ranges for these measures are disclosed to shareholders. As unplanned opportunities for acquisitions, divestitures, productivity improvements, and other initiatives are approved, the impact (whether negative or positive) is excluded from our incentive arrangements, as indicated in the footnotes to the chart below. Also, due to required capital investments in emerging markets and Project Keystone (a multi-year program designed to drive productivity and make the Company more competitive by adding capabilities, harmonizing global processes, and standardizing our systems through SAP), the Companys Operating Free Cash Flow (cash from operations less capital expenditures net of proceeds from disposal of property, plant, and equipment) (OFCF) goal for Fiscal Year 2012 was set lower than Fiscal Year 2011, and the Company exceeded that goal. These financial results are reflective of strong performance in the U.K. and emerging markets, offset by a more challenging year for our Australian and U.S. businesses. In light of the fact that the Companys performance was not as strong as it had been in Fiscal Year 2011, the CEOs Fiscal Year 2012 pay (salary plus annual bonus plus performance-based RSU, stock option, and LTPP awards) was below his Fiscal Year 2011 pay. CEO total pay, as indicated in the Summary Compensation Table, declined by approximately 12.5% as compared to Fiscal Year 2011 total pay.
CEO Salary and Performance-Based Pay
Please see Managements Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for a more detailed description of our Fiscal Year 2012 financial results and reconciliations of certain non-GAAP financial measures. In addition, please see our 2012 Annual Report, which has been mailed with this Proxy Statement, for reconciliations of certain non-GAAP financial measures.
Comparison of FY12 and FY11 Performance
(Dollars in Millions, except Earnings per Share)
In addition, the Company accomplished the following in Fiscal Year 2012:
Three-Year Total Shareholder Return
The following chart shows how a $100 investment in the Companys Common Stock on April 30, 2009 would have grown to $175.46 on April 29, 2012, with dividends reinvested quarterly. The chart also compares the total shareholder return in the S&P 500 Index and the Companys Fiscal Year 2011 Fiscal Year 2012 LTPP TSR Peer Group over the same period, with dividends reinvested quarterly. As illustrated below, the Companys Common Stock outperformed both the S&P 500 Index and the Companys Fiscal Year 2011-Fiscal Year 2012 TSR Peer Group during this period.
As described in this CD&A, the Company has:
Last years inaugural say on pay vote resulted in approval of approximately 95% of shareholders, indicating strong support for the MDCCs decisions and our existing executive compensation programs. As a result, the MDCC made no material changes in the structure of our executive compensation programs or pay for performance philosophy. At the 2012 Annual Meeting of Shareholders, we will again hold the annual advisory vote to approve our named executive officer compensation (see Item 5). The MDCC will continue to consider the results of these advisory votes when making future decisions regarding named executive officer compensation.
CEO Pay for Performance
In establishing the annual target pay (salary plus the annual incentive, performance-based RSU, stock option, and LTPP awards) for the CEO, the MDCC, in conjunction with its independent executive compensation consultant:
In compensating the CEO for Fiscal Year 2012 performance, the MDCC:
* Total from Summary Compensation Table
Analysis of Fiscal Year 2012 NEO Pay Changes
When making NEO compensation decisions for Fiscal Year 2012, the MDCC first considered competitive pay and benefit practices for similar positions within the Compensation Peer Group (as described below). The MDCC also reviewed legal and regulatory requirements as well as individual and Company performance, and other competitive trend data provided by its independent executive compensation consultant. In Fiscal Year 2012, compensation tally sheets for the NEOs were prepared by our Total Rewards staff and reviewed by the MDCC and the MDCCs executive compensation consultant. Information from these tally sheets was considered by the MDCC in making NEO pay-related decisions and guided the MDCCs design of cash and non-cash compensation and benefit programs. The MDCC specifically used tally sheets in the following contexts for each NEO:
Other factors considered by the MDCC in determining final target pay include executive experience and time in position, personal performance, potential future contributions, the Companys Executive Pay Guidelines (discussed below), and the Companys financial performance. The MDCC exercises its discretion in setting target total compensation and target individual compensation elements that may vary from the Compensation Peer Group median based upon consideration of these factors. After reviewing NEO competitive pay data, tally sheets, and other factors described above, the MDCC determined that the annual compensation opportunities provided to the CEO and the other NEOs were consistent with the MDCCs expectations for Fiscal Year 2012.
Compensation Actions in Fiscal Year 2012
Highlights of the Companys compensation actions for Fiscal Year 2012 include:
Our NEO compensation programs are designed to reward superior financial performance and to achieve the following objectives established by the MDCC:
The MDCC believes that providing a mix of compensation elements best promotes its objectives as described above and, therefore, it annually examines the mix for each of our NEOs. The total compensation program for NEOs consists of the following:
In determining total compensation and allocating the elements of total compensation for the NEOs individually and as a group, the MDCC is assisted by: (i) the CEO and the Chief People Officer, who make recommendations regarding potential changes to NEO pay (the CEO does not participate in discussions regarding his pay) based on performance, regulatory, competitiveness, and retention considerations; (ii) an independent executive compensation consultant from Mercer retained exclusively by the MDCC to advise the MDCC on all matters related to CEO and other NEO compensation; and (iii) the Total Rewards staff within our Human Resources Department, which acts as a liaison between the MDCC and its executive compensation consultant and collects information and prepares materials for the MDCCs use in making compensation decisions. Since the selection of the individual Mercer consultant by the MDCC in Fiscal Year 2007, the Mercer consultant has not provided and does not provide any services to management or other Heinz employees. At the request of the MDCC, the consultant participates in each meeting of the Committee, providing guidance on market, regulatory, legislative, and governance concerns as well as conducting the annual review of NEO compensation. The MDCC formally evaluates its executive compensation consultant annually, without the input of management. The MDCCs consultant attended all of the MDCC meetings in Fiscal Year 2012 either in person or by telephone.
In Fiscal Year 2012, Mercer received approximately $238,932 in fees from the Company in connection with the services related to executive and director compensation, including consultation on the design of the FY2013 Stock Incentive Plan. Mercer and its affiliates also received approximately $652,754 in fees from the Company in Fiscal Year 2012 in connection with its provision of other services, which consisted primarily of services related to compensation tools and surveys, as well as our subsidiaries generally available pension plans as requested by the pension plan trustees. The Mercer teams that provide these services to us are independently managed and are separate from the compensation consultant who provides executive and director compensation services. The decision to engage Mercer on all other compensation-related services was made by management and the pension plan trustees and reported to the MDCC.
Fiscal Year 2012 Executive Pay Guidelines
The MDCC confirmed our Executive Pay Guidelines, which, in the aggregate, approximated the median total compensation of the Compensation Peer Group (adjusted for size and other factors as described below), based on its judgment and that of its executive compensation consultant on the use of the compensation data from our Compensation Peer Group. The Fiscal Year 2012 Executive Pay Guidelines, which are expressed as a percentage of base salary and reflect target award amounts, are shown below and were unchanged for NEOs from Fiscal Year 2011.
The MDCC may exercise its discretion in setting target awards for performance-based RSU, stock option, and LTPP awards at +25% to 100% of the amounts set forth above. For Fiscal Year 2012, the MDCC exercised its discretion in making awards to the NEOs and granted the CEO an annual stock option award and a Fiscal Year 2012 Fiscal Year 2013 LTPP award that were below the above guidelines by 3.8% and 2.1%, respectively.
For Fiscal Year 2012, the actual total compensation of the NEOs was above the median of total compensation paid to executives holding equivalent positions in the Compensation Peer Group because: (i) the Company, in general, outperformed its peer group; and (ii) performance under the LTPP was above the financial targets established by the MDCC, although below the maximum. NEO payouts under the annual incentive plan ranged from 84.7% to 147.9% of target, with the CEO receiving 118.9% of his target annual incentive award and the NEOs Fiscal Year 2011 Fiscal Year 2012 LTPP was paid at 126.2% of target.
Analytical Tools Peer Groups
One of the primary objectives of our NEO compensation programs is to provide target compensation at the median of our Compensation Peer Group. The MDCC believes this practice is appropriate because it is based on an objective analysis of the Compensation Peer Group pay data provided by the MDCCs executive compensation consultant, and because Heinz directly competes with these companies to recruit and retain executive talent. By targeting NEO compensation at the median of the Compensation Peer Group when performance is at target, we enhance our ability to attract and retain a highly skilled and motivated executive leadership team, which is fundamental to our growth and delivery of long-term value to shareholders. Heinz uses market comparisons to assess the competitiveness of total compensation for each NEO, as well as all material components of such compensation. Our key data sources include:
The compensation components used for comparison purposes include many of those disclosed in the Summary Compensation Table and the Grants of Plan Based Awards table. We compare both the value of such compensation as well as the prevalence of individual components based upon available data. We analyze the following components:
We utilize two peer groups: one for comparison purposes in establishing the Executive Pay Guidelines and one for measuring financial performance under the LTPP. The composition of each peer group is reviewed by the MDCC at least once a year. Recently, the MDCC removed Sara Lee Corporation from both the Fiscal Year 2013 Compensation Peer Group and the Fiscal Year 2012 Fiscal Year 2013 TSR Peer Group due to their pending reorganization. In addition,
Kraft Foods, Inc. was removed from the Fiscal Year 2012 Fiscal Year 2013 TSR Peer Group due to its announced split into two distinct companies. The MDCC will review the characteristics of the resulting companies for inclusion in our peer groups once the split occurs. Despite its size, the MDCC agreed to keep PepsiCo, Inc. in the Compensation Peer Group due to the global nature of its businesses, its global brands, and its similarity to Heinz. The MDCC also added Dean Foods Company to the Compensation Peer Group for Fiscal Year 2013. Currently, seven of the 12 companies in the Compensation Peer Group are in the Fiscal Year 2011 Fiscal Year 2012 TSR Peer Group and six are in the Fiscal Year 2012 Fiscal Year 2013 TSR Peer Group.
The Compensation Peer Group is reviewed to confirm that its members are sources of talent for the Company and also that it includes companies that are of comparable size and composition to Heinz, have global brands, and derive a significant portion of their revenues from outside the U.S. The TSR Peer Group utilized for the LTPP is reviewed to ensure that its members are companies against which we compete in the capital markets. The purpose and composition of each peer group is as follows:
Compensation Peer Group The Compensation Peer Group consists of 12 leading consumer packaged goods (CPG) companies that are similar to Heinz in several key business parameters and that have been sources of executive talent for the Company or are companies our executives have been recruited to join. The companies in the Compensation Peer Group meet a majority of the following criteria:
The peer group used for Fiscal Year 2012, based on these criteria, was comprised of the following companies:
TSR Peer Group for Fiscal Year 2011-Fiscal Year 2012 This peer group is comprised of the following companies in the S&P 500 Index whose consumer packaged goods businesses are similar to Heinzs:
TSR Peer Group for Fiscal Year 2012-Fiscal Year 2013 The MDCC adjusted this peer group for Fiscal Year 2012-Fiscal Year 2013 to include only companies whose consumer packaged goods businesses are most similar to Heinzs. As a result, Hormel Foods Corporation and The J.M. Smucker Company were added to the Fiscal Year 2012-Fiscal Year 2013 TSR Peer Group, and Archer-Daniels-Midland Company and Tyson Foods, Inc. were removed. In addition,
Sara Lee Corporation was removed from the TSR Peer Group by the MDCC based on the announced reorganization of that company. The MDCC decided to make these adjustments to the TSR Peer Group based upon the recommendation of the MDCCs executive compensation consultant. As such, the Fiscal Year 2012-Fiscal Year 2013 TSR Peer Group is comprised of the following companies in the S&P 500 Index whose consumer packaged goods businesses are most similar to Heinzs:
The MDCC believes the companies that comprise the TSR Peer Group reflect the performance of our industry and, therefore, that the TSR Peer Group is the most appropriate peer group against which to measure Heinzs financial performance. The change in our stock price plus aggregate dividend payments, or TSR, over a two-year performance period is compared to the TSR of the TSR Peer Group to determine a portion (50% at target) of the payment made to participants in the LTPP as described further under Long Term Performance ProgramMaterial Factors.
How Performance is Measured and Rewarded
1. Company and/or business unit financial metrics; and
2. Individual performance.
The financial metrics, as described further under Senior Executive Incentive Compensation PlanMaterial Factors, used for all NEO compensation programs are similar to those that the investment community uses to project the future return from a companys stock:
1. Sales growth;
2. Profitability (both pre- and post-tax);
3. Cash flow generation; and
In addition, the creation of shareholder wealth as measured by relative TSR is also a key financial metric used to determine NEO compensation.
Our NEO compensation programs incorporate these metrics as illustrated in the chart below:
(1) Includes Fiscal Year 2011-2012 and Fiscal Year 2012-2013 LTPP awards
The specifics regarding how these metrics determine equity awards and incentive plan payouts are described below under Senior Executive Incentive Compensation Plan Material Factors.
Our Performance Management & Development (PMD) process is used by the MDCC to establish individual performance goals for each of the NEOs on an annual basis and then to measure actual results against those goals. At the beginning of the fiscal year, the CEO reviews and approves goals for the other NEOs and recommends individual performance goals for himself to the MDCC. The MDCC then reviews, refines, and ultimately establishes the CEOs goals. At the end of the fiscal year, the CEO reviews his performance and the performance of the other NEOs against their respective individual personal goals with the MDCC. Without any NEOs present, the MDCC assigns a performance rating to each NEO and considers these performance ratings in determining:
The specifics regarding how performance ratings influenced base salary, award grants, and payouts in Fiscal Year 2012 are described in detail under each programs description below.
Base salaries are the foundation for all of the NEO compensation programs as the amounts of incentive payments, equity awards, and benefits are, in most cases, linked to salary, as set forth in the Executive Pay Guidelines. As salary changes, all of the other elements also change proportionately and the overall compensation mix remains the same. Salaries of the NEOs are reviewed on an annual basis, as well as at the time of a promotion or other change in responsibilities. Salary changes typically take effect in May of each year. In addition to the quantitative metrics identified in the preceding table, salary increases are based on an evaluation of the individuals most recent performance rating, level of pay compared to data from the Compensation Peer Group, and difficulty of replacement. For Fiscal Year 2012, the MDCC took into account the foregoing factors in deciding to increase the salary of the CEO by 4.0% to recognize his individual performance (the first increase to the CEOs base salary since Fiscal Year 2009) and provide competitive salary increases to the other NEOs, ranging from 3.0% to 4.6% consistent with historical percentage increases. For Fiscal Year 2013, the MDCC approved no salary increases for the CEO, other NEOs, and all other Section 16 officers.
Annual Cash Incentive Awards
NEOs are eligible to earn annual cash awards under the SEICP from a pool of funds created from 1.5% of our net income and with reference to the same financial metrics for bonuses paid under the AIP (see previous chart). The SEICP is intended to reward NEOs for achieving targeted levels of performance. The upside and downside variation around the target award opportunity facilitates the objective of varying annual cash compensation to reflect our operating performance
and the contribution of each NEO. The Fiscal Year 2012 target awards and payments are described below in the narrative following the Summary Compensation Table under the heading Senior Executive Incentive Compensation PlanMaterial Factors.
LONG-TERM INCENTIVE COMPENSATION
Our Long-Term Incentive (LTI) Compensation Program provides performance-based RSU, stock option, and LTPP awards. This program is primarily designed to reward outstanding long-term financial performance and the creation of shareholder value while also helping us to attract and retain key executives. In addition, the use of RSUs and stock options promotes stock ownership for NEOs.
The MDCC annually reviews the competitiveness of our LTI awards both in target value and mix between the various elements of LTI, based on data from the Compensation Peer Group and advice from its executive compensation consultant. The MDCC also annually examines the PMD rating, tally sheets, and the compensation earned by each NEO under prior LTI awards to better determine the size of new grants necessary to achieve the stated compensation objectives.
The NEOs do not influence the size or timing of their individual annual LTI awards, which are generally awarded at the same time each year as part of a formal annual grant process administered by the MDCC. However, the CEO may recommend to the MDCC an adjustment to the size of the LTI award that would have been determined under the Executive Pay Guidelines for an individual NEO (other than the CEO), based on considerations such as Company or Business Unit financial performance, individual performance, retention, long-term potential, and the NEOs PMD rating. These adjustments can range from an increase of 25% to a decrease of 100% in the target award for each NEO. The MDCC approves all LTI awards granted to NEOs and has the discretion to make adjustments to the established target award opportunities for each LTI program, which may be above or below the target guideline based on the factors discussed above. As described under Fiscal Year 2012 Executive Pay Guidelines, the MDCC made discretionary adjustments to the annual LTI awards for the CEO for Fiscal Year 2012, reducing the CEOs annual stock option award and Fiscal Year 2012 Fiscal Year 2013 LTPP award by 3.8% and 2.1%, respectively.
The timing of LTI awards is based on the following:
Timing of Grants by LTI Compensation Program
Performance-based Restricted Stock Units
Each year, the MDCC approves annual grants of performance-based RSUs to each NEO. Target RSU awards for NEOs are based on the established Executive Pay Guidelines. In making this annual grant, the MDCC determines the value of the RSUs to be granted to participants and the vesting and forfeiture provisions. To further align our equity programs with the Companys financial performance, the annual grant of RSUs awarded in August 2011 will only vest contingent upon achieving the operating income (OI) financial performance threshold for Fiscal Year 2012 established by the MDCC. This metric was expressed in constant currency and could be adjusted to exclude special items and accounting changes. It was selected because it complements the portfolio of metrics used by the Company in its incentive programs and reflects operational performance before the effects of interest, taxes, and other transactions. The OI financial performance threshold established by the MDCC for the Fiscal Year 2012 grant was $1,460.8 million. Because the financial performance threshold for the Fiscal Year 2012 grant was achieved, the RSUs will vest 25% per year on each of the first four anniversaries of the grant date.
The MDCC has occasionally varied the vesting schedule to address circumstances where the awards were intended to facilitate greater retention of key employees, to recognize exceptional performance, to address cash flow issues for non-U.S. based individuals due to the timing of tax payments, or to align with the regulatory requirements of various countries. These awards have contained provisions including either accelerated vesting in the case of special performance awards, such as vesting one-third after the first two years and then one-third in years three and four with forfeiture of all unvested units upon termination; or full vesting on the third or fifth anniversary of the grant without the possibility of earlier vesting in the case of special retention awards. For NEOs who are approaching retirement or are retirement eligible, the MDCC has, from time-to-time, established vesting provisions that result in full forfeiture of any unvested portion of an award if the NEO retires prior to the date of vesting.
Each year, the MDCC determines the number of non-qualified stock options to be granted to each NEO and the vesting and forfeiture provisions. Target stock option awards for NEOs are based on the established Executive Pay Guidelines. All options are granted at an exercise price equal to the closing price of our Common Stock on the NYSE on the date of grant. Accordingly, the stock options will have value only if the market price of our Common Stock increases after the grant date. The approach to vesting and expiration is influenced by considerations such as competitiveness, retention impact, and cost. The MDCC generally grants, and in Fiscal Year 2012 granted, stock options that vest 25% per year on each of the first four anniversaries of the grant date. The MDCC has occasionally granted awards that vest on a different schedule where the awards are intended to recognize new hires or promotions; to facilitate greater retention of key employees; or to recognize the exceptional performance of certain individuals. For NEOs who are approaching retirement or are retirement eligible, the MDCC has, from time-to-time, established vesting provisions that result in full forfeiture of any unvested portion of an award if the NEO retires prior to the date of vesting.
Each year, the MDCC approves annual LTPP awards providing for cash payments based on financial measures over a two-year period, following its review of our prior year performance and business plans for future years. Target LTPP awards for NEOs are based on the established Executive Pay Guidelines. Our two LTPPs are described below under Long Term Performance ProgramsMaterial Factors.
Benefits and Perquisites
The Company provides retirement, including supplemental retirement, and other benefits at levels that approximate the median of our Compensation Peer Group, and support succession planning, based on the following principles:
Supplemental retirement benefits must support one or more of the following objectives:
Each benefit and perquisite must support one or more of the following objectives:
Change in Control
The MDCC believes that a competitive change in control agreement for NEOs is necessary to retain senior leadership and maintain managements objectivity should we become engaged in a change in control situation. Annually, the MDCC reviews compensation tally sheets that indicate what LTI awards (i.e., RSU, stock option, or LTPP) retirement-eligible NEOs would forfeit upon retirement and upon a change in control. Based on this analysis for Fiscal Year 2012, the MDCC concluded that there was little financial incentive for the CEO, who is retirement-eligible, and the other NEOs to remain with the Company in the midst of a change in control, and that we did not have a strong deterrent to other companies seeking to hire the NEOs during a change in control transition. Therefore, the MDCC reaffirmed its view that in the event of a change in control, our double trigger severance protection agreements for the CEO and the other NEOs would be necessary to retain their leadership during a change in control transition. For Fiscal Year 2012, the MDCC made no changes to these agreements.
In order to receive the benefit from the severance protection agreement, there must be two triggering events, a change in control and a qualifying termination of employment within 24 months, as described further below under Severance Protection Agreements.
STOCK OWNERSHIP GUIDELINES
The Company maintains stock ownership guidelines for the NEOs and approximately 90 other executives (the Stock Ownership Guidelines) to further encourage share ownership by senior management and to further align the interests of our executives with those of our shareholders. These guidelines are expressed as a multiple of salary, which varies by executive level. The MDCC monitors compliance with the Stock Ownership Guidelines and reviews compliance on an annual basis. For purposes of determining ownership, the MDCC includes shares owned outright in the executives name or through a broker, shares held in trust, vested and unvested RSUs, and shares acquired through the Companys employee stock purchase plan, 401(k) plan, and the Employee Retirement and Savings Excess Plan (the Excess Plan). Heinz shares are also available as an investment option in one of the deferred compensation programs. For the NEOs,
the actual number of shares required to be owned is determined annually, in late December, using the NEOs salary as of April 1 and the 60-business day average share price. This approach reduces the impact of stock price fluctuations.
The Stock Ownership Guidelines in effect for Fiscal Year 2012 were increased by the MDCC to further strengthen alignment with shareholders and are as follows:
Until ownership guidelines are met, executives must retain at least 75% of the after-tax gain on shares acquired through the exercise of options and retain 75% of shares of Common Stock received upon the vesting of RSUs on an after-tax basis. Additionally, any LTPP-eligible executives who have not met their ownership guidelines will receive 50% of the payment of their after-tax LTPP awards in cash and 50% in escrowed vested restricted stock. The CEO also has the authority, except with respect to Section 16 officers, at his discretion to pay 25% of an executives after-tax annual bonus payment in escrowed vested restricted stock if such executive has not achieved the minimum ownership requirement within five years following appointment to a position subject to Stock Ownership Guidelines. The MDCC also has the discretion to reduce or eliminate future LTI awards for executives who do not achieve their minimum ownership requirement within that five-year period or do not retain the specified after-tax gain on Heinz shares acquired through exercises of stock options or vesting of RSUs. All of the NEOs have exceeded their minimum ownership requirements for Fiscal Year 2012.
TAX DEDUCTIBILITY OF PAY
Section 162(m) of the Code imposes a limit of $1,000,000 on the amount of non-performance-based compensation that Heinz may deduct in any one year with respect to its CEO and each of its other three most highly-paid executive officers, excluding the Chief Financial Officer. Mr. Johnsons Fiscal Year 2012 salary of $1,299,618 is the only salary that was above the $1,000,000 threshold, and, as such, $299,618 of his salary as well as the value of his perquisites and the value of cash dividend equivalents paid on unvested RSUs as determined under the Code are not deductible by the Company.
All annual incentives and long-term incentive amounts are designed to be deductible when they are paid to the NEOs because they meet the definition of qualified performance-based compensation under Section 162(m). However, to maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the MDCC has not adopted a policy requiring all compensation to be deductible. The MDCC considers the impact of Section 162(m) of the Code on the Company when making pay decisions, and its normal practice is to take such action as is necessary to preserve our tax deduction to the extent consistent with our compensation objectives. However, the MDCC reserves the right to forego any or all of the tax deduction if it believes it to be in the best interests of the Companys shareholders.
RISK ANALYSIS OF NEO COMPENSATION POLICIES AND PRACTICES
The MDCCs independent executive compensation consultant annually reviews with the MDCC the design of our annual and long-term incentive programs for NEOs to assist the MDCC in achieving our objective of an appropriate balance between risk and potential reward for executives. Using the Compensation Committee Checklist for Assessing Incentives and Risk developed by the Center on Executive Compensation, which was established at the direction of the Board of Directors of the HR Policy Association, coupled with a review of key documents
governing these incentive programs, the MDCC and its consultant concluded that the Fiscal Year 2012 executive compensation plans appear to have been designed in a manner to:
EXECUTIVE COMPENSATION CLAWBACK POLICY
We intend to adopt a general compensation recovery (clawback) policy applicable to all annual and LTI incentive award plans and arrangements for our executives after the SEC adopts final rules implementing the requirements of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Summary Compensation Table (Fiscal Year 2012)
Benefits under the Program that were paid to or on behalf of Mr. Moran in British pound sterling (GBP) have been converted from GBP to United States Dollars (USD) using the average daily exchange rate for FY12, which was 1.591734 USD per GBP.
The following narrative provides additional information about the various compensation plans, programs, and policies reflected in the Summary Compensation Table, although the Executive Estate Life Insurance Program did not result in any compensation reported in the Table.
Executive Estate Life Insurance Program
In December 2001, we adopted an Executive Estate Life Insurance Program (EELIP) for certain eligible executives. Under the EELIP, in 2001 and 2002, eligible executives relinquished compensation in exchange for a loan from us equal to 150% of the amount relinquished (EELIP Loans). The proceeds of each EELIP Loan were used to fund a life insurance policy purchased by the executives family trust. Each of the EELIP Loans was subject to vesting, and we will automatically be repaid the amount of the then outstanding principal and interest of the applicable EELIP Loan from the proceeds of the policy after the death of the participant and/or the death of the participants spouse, as applicable. Messrs. Johnson and Milone have outstanding EELIP Loans to us that fully vested on or before September 2003. These EELIP Loans accrue interest at the annual rate of 4.99% and 4.6%, respectively. As of April 29, 2012, the total amounts due to us plus the accrued interest under each of the EELIP Loans were $8,105,708 and $264,055 for Messrs. Johnson and Milone, respectively. The EELIP Loans to Messrs. Johnson and Milone are permitted to remain outstanding under the Sarbanes-Oxley Act of 2002, so long as their terms are not materially modified.
Senior Executive Incentive Compensation Plan Material Factors
The SEICP provides an annual cash incentive pool of 1.5% of our net income (the Incentive Pool) for possible award to the NEOs. The maximum award for any one participant cannot exceed 40% of the Incentive Pool, with the total allocation to all NEOs limited to no greater than 100% of the Incentive Pool.
In Fiscal Year 2012, NEOs were eligible to earn annual cash awards under our SEICP with reference to the metrics established for the AIP in the following manner:
AIP metrics are comprised of Company-wide financial metrics, business unit financial metrics, and personal goals. The Company-wide metrics for financial performance for the Fiscal Year 2012 AIP were:
1. Earnings per Share (EPS)
EPS = net income / average fully-diluted shares outstanding
2. Operating Free Cash Flow (OFCF)
OFCF = cash flow from operating activities capital expenditures + proceeds from dispositions of property, plant, and equipment
3. Net Sales Value (NSV)
NSV = gross sales deals and allowances, excluding the impact of foreign currency
The Business Unit (BU) specific metrics for financial performance were:
1. Business Unit Operating Income (BU OI)
BU OI = NSV operating costs
2. Business Unit Operating Free Cash Flow (BU OFCF)
BU OFCF = cash flow from operating activities (intercompany royalties, as applicable, and dividend income + change in intercompany receivables/payables) capital expenditures + proceeds from dispositions of property, plant, and equipment
3. Business Unit Net Sales Value (BU NSV)
BU NSV = gross sales deals and allowances
The individual personal goals for Fiscal Year 2012 for Mr. Johnson included achieving specific milestones against our leadership succession plan and guiding our initiatives regarding productivity, global product quality, and diversity. The individual personal goals for Fiscal Year 2012 for the other NEOs included financial metrics that were specific to their businesses, goals related to global productivity initiatives, product quality, and personnel development such as talent development and increasing diversity in executive positions.
For Fiscal Year 2012, the specific targets and weightings for the NEOs were:
The MDCC assessed the Companys performance in Fiscal Year 2012 and the NEOs achievement of individual personal goals in determining annual incentive bonuses under the SEICP. The Company achieved 101.6% of the EPS target, 104.9% of the OFCF target, and 99.6% of the NSV target. The business units achieved between 90.4% and 117.7% of their respective OI targets, between 92.5% and 151.2% of their respective OFCF targets, and between 97.8% and 103.9% of their NSV targets. In addition, the MDCC determined that several of the NEOs exceeded their personal goals. In light of these results, the MDCC approved annual incentive bonuses for several of the NEOs, including the CEO, in amounts greater than the target award, but well below last years awards and well below the maximum amounts payable to each NEO under the Incentive Pool. The MDCC utilized less than 40% of the available Incentive Pool. The bonuses were paid in cash to each NEO after the end of Fiscal Year 2012.
LTPP (Fiscal Year 2011-Fiscal Year 2012)
Our performance under the two LTPP metrics of TSR and two-year average after-tax ROIC resulted in a total payment of 126.2% of the target award. Specifically, the Companys TSR ranked fifth within the twelve-company TSR Peer Group over the two-year period, which resulted in the payment of 62.5% versus the 50% target award opportunity. The Companys ROIC was 105.5% of target, which resulted in a payment of 63.7% versus the 50% target award opportunity.
Grants of Plan-Based Awards (Fiscal Year 2012)
The following tables and narrative provide additional information about the various compensation plans, programs, and policies reflected in the Grants of Plan-Based Awards table.
Annual Awards. The MDCC granted annual RSU awards to the NEOs at target award values determined in accordance with the Executive Pay Guidelines described in the CD&A. The actual number of RSUs granted was determined by dividing the target award value by the closing price of our stock on the NYSE on the date of the grant, rounded using the traditional rounding convention. RSUs vest 25% per year after achievement of the performance metric described under Performance-based Restricted Stock Units above.
The NEOs receive cash dividend equivalents on RSUs during the restricted period at the same rate that shareholders receive dividends on our Common Stock. Beginning with the Fiscal Year 2009 awards, cash dividend equivalents accrue each quarter but are not paid until the next annual vesting date, provided that the performance metric has been achieved, and, at that time, will be paid only with respect to the portion of the awards that vest. The annual award is included as compensation for the year of the grant for purposes of calculating benefits for participants in the H. J. Heinz Company Supplemental Executive Retirement Plan (SERP) and the H. J. Heinz Company Employees Retirement and Savings Plan.
Each NEO has agreed to non-competition, non-solicitation, and confidentiality covenants pursuant to their RSU award agreements. The NEO agrees, during the term of employment and for eighteen months after termination of employment, not to compete against the Company and not to solicit any other employee of the Company for employment outside of the Company. Each NEO also agrees, during the term of employment and any time thereafter, not to use or disclose the Companys confidential information for purposes other than the furtherance of our business purposes. The NEO consents to the issuance of an injunction with respect to any conduct that
leads to a breach of any of these covenants. A breach of these covenants could also result in the forfeiture of the NEOs unvested RSUs.
In the event of an NEOs retirement, and assuming that any applicable performance threshold has been met, the RSUs will continue to vest according to their original schedule. In the event of the death or disability of an NEO, and assuming that any applicable performance threshold has been met, the RSUs will continue to vest according to their original schedule, but in no event later than the last business day of the month of the one-year anniversary of the date of termination of employment. Commencing with Fiscal Year 2011 awards, if an NEOs employment is terminated without cause, any unvested RSUs will be forfeited unless the executive executes a release of claims against the Company, in which case the RSUs will continue to vest in the same manner as in the case of death or disability. For all other terminations, except as described below under RSU Change in Control Provisions, all unvested RSUs will be forfeited.
Stock OptionsMaterial Factors
The MDCC granted annual stock option awards to the NEOs at target award values determined in accordance with the Executive Pay Guidelines. The actual number of options granted was determined by dividing the target award value by the value of a Company stock option computed using the Black-Scholes pricing model for the date of grant, rounded using the traditional rounding convention. Stock options vest 25% per year on the first four anniversaries of the date of the grant.
Each NEO has agreed, pursuant to the stock option award agreement, to the same non-competition, non-solicitation, and confidentiality covenants set forth in their RSU award agreements. In the event of any breach by the NEO of these covenants, the NEO must immediately return to us the pre-tax income resulting from any exercise of the options or any portion thereof, unless such exercise occurred more than twelve months prior to the date of the termination of the NEOs employment with the Company. A breach of these covenants could also result in the forfeiture of any unexercised portion of the options.
In the event of retirement, the stock options granted to the NEOs will continue to vest according to their original schedule and expire on the earlier of five years after retirement or the original expiration date. If an NEO dies while an employee or within five years after retirement, all of the stock options will vest upon death and then expire on the earlier of one year after death or the original expiration date. In the event of disability while employed, the stock options will vest upon disability and then expire on the earlier of one year after the disability or the original expiration date. Commencing with the Fiscal Year 2011 awards, if an NEOs employment is terminated without cause, the stock options will continue to vest according to their original schedule and expire 90 days after separation unless a release of claims against the Company is executed by the NEO, in which case the stock options will expire on the earlier of five years after the date of termination or the original expiration date. For all other terminations, except as described below under Stock Option Change in Control Provisions, unvested stock options will be forfeited.
Long Term Performance ProgramMaterial Factors
The LTPP (Fiscal Years 2012-2013) has two independently measured and equally weighted financial metrics:
After-Tax Return on Invested Capital (ROIC)Fifty percent (50%) of the target award opportunity will be determined by our performance against a two-year ROIC metric established by the MDCC.
ROIC for Fiscal Years 2012-2013 will be calculated as follows:
The percentage of the target LTPP award that can be earned for the Fiscal Years 2012-2013 performance period based on ROIC is summarized in the following chart:
If the Board approves an acquisition or divestiture during a performance period, it may consider an adjustment to the ROIC targets based on the impact the transaction will have on ROIC. In addition, Annual After-Tax Operating Profit and Annual Average Invested Capital may be adjusted to eliminate the after-tax effects of any charges that may be excluded when determining performance against the financial measures under the LTPP.
Relative Total Shareholder Return (TSR)Fifty percent (50%) of the target award opportunity will be determined by our two-year TSR growth rate (the TSR Value) compared to the two-year TSR growth rates of the other companies in the TSR Peer Group, previously described in the CD&A.
TSR Value for Fiscal Years 2012-2013 will be calculated as follows:
The percentage of the target LTPP award that can be earned for the Fiscal Years 2012-2013 performance period is based on our percentile ranking within the TSR Peer Group as shown in the following chart:
The total LTPP payout for the Fiscal Years 2012-2013 performance period will be determined by adding the percentage of target award earned for each metric and multiplying this amount by the target award granted to each participant at the beginning of the performance period, or during the performance period in the case of new hires and promotions. In the event of a qualifying termination (retirement, death, or disability) during the first year of the performance period, the award will be pro-rated and paid at the end of the performance period based on the actual results achieved. If a qualifying termination occurs during the second year of the performance period, the full award will be paid (without pro-rating) at the end of the performance period based on the actual results achieved. This approach recognizes the contributions of the individual to the two-year performance results. Commencing with awards for the Fiscal Years 2012 -2013 performance period, if an NEOs employment is involuntarily terminated without cause, the LTPP award will be forfeited upon separation unless a release of claims against the Company is executed by the NEO, in which case the LTPP award will be prorated (if applicable) and paid in the manner described above for a qualifying termination. For all other terminations, all unpaid LTPP awards will be forfeited.
Each NEO has agreed to non-solicitation and confidentiality covenants pursuant to their LTPP award agreements. The NEO agrees, during the term of employment and for eighteen months after termination of employment, not to solicit any other employee of the Company for employment outside of the Company. Each NEO also agrees, during the term of employment and any time thereafter, not to use or disclose the Companys confidential information for purposes other than the furtherance of our business purposes. The NEO consents to the issuance of an injunction with respect to any conduct that leads to a breach of any of these covenants. A breach of these covenants could also result in the forfeiture of any unpaid portion of the award to which the NEO would otherwise be entitled pursuant to the agreement.
The following table sets forth the Outstanding Equity Awards, including awards of stock options and RSUs, of the NEOs as of the end of Fiscal Year 2012:
Outstanding Equity Awards at Fiscal Year-End (Fiscal Year 2012)