International Flavors & Fragrances DEF 14A 2014
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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NOTICE OF 2014 ANNUAL MEETING OF SHAREHOLDERS
March 25, 2014
It is my pleasure to invite you to attend International Flavors & Fragrances Inc.s 2014 Annual Meeting of Shareholders (the 2014 Annual Meeting). The meeting will be held on Tuesday, May 13, 2014, at 10:00 a.m. Eastern Daylight Time, at our corporate office, located at 533 West 57th Street, 9th Floor, New York, NY 10019. At the meeting, you will be asked to:
Only shareholders of record as of the close of business on March 17, 2014 may vote at the 2014 Annual Meeting. A live audio webcast of our Annual Meeting will be available at our website, www.iff.com, starting at 10:00 a.m. and a replay will be available on our website.
It is important that your shares be represented at the 2014 Annual Meeting, regardless of the number of shares you may hold. Whether or not you plan to attend, please vote using the Internet, by telephone or by mail, in each case by following the instructions in our proxy statement. Doing so will not prevent you from voting your shares in person if you are present.
I look forward to seeing you on May 13, 2014.
We mailed a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy statement and our 2013 Annual Report on or about March 26, 2014.
Our proxy statement and our 2013 Annual Report are available online at www.proxyvote.com.
Except as stated otherwise, information on our website is not part of this proxy statement.
This proxy summary highlights information contained elsewhere in this proxy statement and does not contain all information that you should review and consider. Please read the entire proxy statement with care before voting.
VOTING MATTERS AND BOARD RECOMMENDATION
2013 FINANCIAL HIGHLIGHTS
In 2013, we achieved our long-term growth targets and continued to execute key elements of our long-term growth strategy by
2013 was a solid year for the Company in financial and operational performance, delivering strong results for our shareholders.
* See reconciliation of GAAP to Non-GAAP financial measures in Exhibit A to this proxy statement.
For more information relating to the Companys financial performance, please review our 2013 Annual Report on Form 10-K filed with the SEC on February 25, 2014.
2013 GOVERNANCE AND EXECUTIVE COMPENSATION HIGHLIGHTS
The following facts outline certain of our corporate governance policies and executive compensation standards. For a comprehensive discussion of our corporate governance policies, see Corporate Governance, beginning on page 10 of this proxy statement and for executive compensation, see Compensation Discussion and Analysis, beginning on page 27 of this proxy statement.
TABLE OF CONTENTS
Proxy Statement for 2014 Annual Meeting of Shareholders to be held on May 13, 2014
I. ANNUAL MEETING INFORMATION
We also will consider other business that properly comes before the meeting in accordance with New York law and our By-laws.
If your shares are held in a stock brokerage account or by a bank, trust or other nominee or custodian (each, a Broker), including shares you may own as a participant in one of our 401(k) plans, you are considered the beneficial owner of those shares, which are held in street name. A Notice has been forwarded to you by or on behalf of your Broker, who is considered the shareholder of record of those shares. As the beneficial owner, you have the right to direct your Broker how to vote your shares by following its instructions for voting.
Detailed instructions for Internet and telephone voting are set forth on the Notice, which contains instructions on how to access our proxy statement, annual report and shareholder notice online, and the printed proxy card.
If your shares are held in one of our 401(k) plans, your proxy will serve as a voting instruction for the trustee of the 401(k) plan, who will vote your shares as you instruct. To allow sufficient time for the trustee to vote, your voting instructions must be received by 11:59 pm Eastern Time on May 8, 2014. If the trustee does not receive your instructions by that date, the trustee will vote the shares you hold through the 401(k) plan in the same proportion as those shares in the 401(k) plan for which voting instructions were received.
If you are a beneficial shareholder, you must follow the voting procedures of your Broker.
Under our By-laws, in an uncontested election of directors, as we have this year, a majority of votes cast is required in order for a director to be elected, which means that a nominee must receive a greater number of votes FOR his or her election than votes AGAINST in order to be elected.
Under our By-laws, the affirmative vote of a majority of the votes cast is required to ratify the selection of PWC as our independent registered public accounting firm for the 2014 fiscal year.
Proposal 3 is an advisory vote. This means that while we ask shareholders to approve a resolution regarding Say on Pay, it is not an action that requires shareholder approval. If a majority of votes are cast FOR the Say on Pay proposal, we will consider the proposal to be approved.
The table below sets forth, for each proposal on the ballot, whether a Broker can exercise discretion and vote your shares absent your instructions and if not, the impact of such Broker non-vote on the approval of the proposal.
If your shares are held in street name, you may change your vote by following your nominees procedures for revoking or changing your proxy.
II. PROPOSAL I ELECTION OF DIRECTORS
Our Board of Directors currently has twelve members. Upon the recommendation of the Nominating and Governance Committee of our Board, our Board has nominated each of our current directors for election at the 2014 Annual Meeting for a one-year term that expires at the 2015 Annual Meeting. Each nominee has consented to serve if elected. Proxies cannot be voted for a greater number of persons than the number of nominees named.
Pursuant to our Corporate Governance Guidelines, a person that has previously served for twelve consecutive full annual terms on the Board cannot continue to serve as a director following the subsequent annual meeting of shareholders, unless (i) such person is a Grandfathered Person or one of our officers or (ii) the Board has made a determination that the nomination of such person would be in the best interests of our Company and our shareholders. Grandfathered Persons are eligible to serve as directors until the annual meeting of shareholders which occurs after the date that the director has turned 72. As of the date of this proxy statement, Mr. Martinez, a Grandfathered Person, is 74. Pursuant to the recommendation of the Nominating and Governance Committee, the Board has determined that it is in the best interests of the Company and our shareholders to re-nominate Mr. Martinez for an additional term in light of his extensive experience and substantial contributions as Lead Director of the Board.
We believe that each of our nominees possesses the experience, skills and qualities to fully perform his or her duties as a director and to contribute to our success. Each of our nominees is being nominated because he or she possesses the highest standards of personal integrity and interpersonal and communication skills, is highly accomplished in his or her field, has an understanding of the interests and issues that are important to our shareholders and is able to dedicate sufficient time to fulfilling his or her obligations as a director. Our nominees as a group complement each other and each others respective experiences, skills and qualities.
Each nominees principal occupation and other pertinent information about the particular experience, qualifications, attributes and skills that led the Board to conclude that such person should serve as a director appears on the following pages.
The Board recommends a vote FOR the election of each of the following director nominees.
Corporate Governance Guidelines
Our Board of Directors is responsible for overseeing the management of our Company. The Board has adopted Corporate Governance Guidelines which set forth our governance principles relating to, among other things:
A copy of our Corporate Governance Guidelines is available through the Investors Corporate Governance link on our website, www.iff.com.
Independence of Directors
The Board has affirmatively determined that each of our current directors (other than Mr. Tough, our CEO) meet our independence requirements and those of the NYSEs corporate governance listing standards. In making each of these independence determinations, the Board considered all of the information provided by each director in response to detailed inquiries concerning his or her independence and any direct or indirect business, family, employment, transactional or other relationship or affiliation of such director with us. Our review of the information provided in response to these inquiries indicated that none of our independent directors has any material relationship with us, or has engaged in any transaction or arrangement that might affect his or her independence.
Board Leadership Structure
As stated in our Corporate Governance Guidelines, the Board does not have a policy that requires a separation of the Chairman of the Board and CEO positions. The Board believes that it is important to have the flexibility to make this determination from time to time based on the particular facts and circumstances then affecting our business.
Currently, we combine the positions of Chairman and CEO. We believe that the CEO, as the Companys chief executive, is in the best position to fulfill the Chairmans responsibilities, including those related to identifying emerging issues facing our Company, and communicating essential information to the Board about our performance and strategies. We also believe that the combined role of Chairman and CEO provides us with a distinct leader and allows us to present a single, uniform voice to our customers, business partners, shareholders and employees. If at any point in time the Board feels that its current leadership structure may be better served by separating the roles of Chairman and CEO, it may then determine to separate these positions.
In order to mitigate any potential disadvantages of a combined Chairman and CEO, the Board has created the position of Lead Director to facilitate and strengthen the Boards independent oversight of our performance, strategy and succession planning and to promote effective governance standards. The independent directors of the Board elect a Lead Director from among the independent directors. Our current Lead Director is Mr. Martinez.
The duties of our Lead Director include:
Our Board has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee, each of which operates under a written charter adopted by the Board. Each Committee reviews its charter at least annually and recommends charter changes to the Board as appropriate. In December 2013, each of the Audit Committee, the Compensation Committee and the Nominating and Governance Committee reviewed its charter, and amended them where appropriate. Each Committee charter provides that the Committee will annually review its performance. A current copy of each of the Audit Committee, Compensation Committee and Nominating and Governance Committee charters is available through the Investors Corporate Governance link on our website, www.iff.com.
The table below provides the current membership and chairperson for each of our Committees and identifies our current Lead Director.
X = Committee member
Board and Committee Meetings
Our Board of Directors held six meetings during 2013. The Audit Committee held seven meetings, the Compensation Committee held five meetings and the Nominating and Governance Committee held six meetings during 2013. Each of our directors attended at least 75% of the total meetings of the Board and Committees on which he or she served during 2013. All of our directors who were serving on the day of last years annual meeting of shareholders attended that meeting in person or by teleconference, other than Mr. Bottoli, who was unable to attend for medical reasons. Under our Corporate Governance Guidelines, unless there are mitigating circumstances, such as medical, family or business emergencies, Board members should endeavor to participate (either in person or by telephone) in all Board meetings and all Committee meetings of which the director is a member and to attend our annual meeting of shareholders. Our non-employee directors, all of whom are currently independent, meet in executive session, without the presence of any corporate officer or member of management, in conjunction with regular meetings of the Board and Committees. During 2013, our non-employee directors met in executive session as part of every regularly scheduled Board and Committee meeting.
The Audit Committees responsibilities include overseeing and reviewing:
Under procedures adopted by the Audit Committee, the Audit Committee reviews and pre-approves all audit and non-audit services performed by our independent accountant. The Audit Committee may, when it deems appropriate, delegate certain of its responsibilities to one or more Audit Committee members or subcommittees.
Independence and Financial Expertise
The Board reviewed the background, experience and independence of the Audit Committee members and based on this review, the Board determined that each member of the Audit Committee:
The Compensation Committees responsibilities include:
Under its charter, the Compensation Committee is responsible for assisting the Board in ensuring that long-term and short-term compensation provide performance incentives to management, and that compensation plans are appropriate and competitive and reflect the goals and performance of management and our Company. As discussed in more detail in this proxy statement under the heading Compensation
Discussion and Analysis, the Compensation Committee considers Company-wide performance against applicable annual and long-term performance goals pre-established by the Compensation Committee, taking into account economic and business conditions, and comparative compensation and benefit performance levels.
If the Compensation Committee deems it appropriate, it may delegate certain of its responsibilities to one or more Compensation Committee members or subcommittees.
The Board reviewed the background, experience and independence of the Compensation Committee members and based on this review, the Board determined that each member of the Compensation Committee:
Role of Compensation Consultant
The Compensation Committee has the sole authority to retain compensation consultants or advisors to assist it in evaluating CEO, senior executive and non-employee director compensation. From time to time, management also retains its own outside compensation consultants. In 2013, the Compensation Committee directly engaged W.T. Haigh & Company (Haigh & Company) as its independent compensation consultant. Haigh & Companys work with the Committee in 2013 included analyses, advice, guidance and recommendations on executive compensation levels versus peers, market trends and incentive plan designs, and an assessment of the risk and reward structure of executive compensation plans, policies and practices. The Committee also engaged Haigh & Company for recommendations and review of non-employee director compensation in 2013. Haigh & Company does not provide any non-executive, compensation-related services to us. The Compensation Committee considered the independence of Haigh & Company and determined that no conflicts of interest were raised.
Role of Management
Our Compensation Committee relies on management for legal, tax, compliance, finance and human resource recommendations, data and analysis for the design and administration of the compensation, benefits and perquisite programs for our senior executives. The Compensation Committee combines this information with the recommendations and information from its independent compensation consultant.
Our CEO, our Senior Vice President, Human Resources (SVP HR) and our Senior Vice President, General Counsel and Corporate Secretary (General Counsel) generally attend Compensation Committee meetings. CEO performance and compensation are discussed by the Compensation Committee in executive session, with advice and participation from the Compensation Committees independent compensation consultant as requested by the Compensation Committee. Our CEO and SVP HR, without the presence of any other members of senior management, actively participate in the compensation discussions of our senior executives, including making recommendations to the Compensation Committee as to the amount and form of compensation (other than their own).
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee was at any time during 2013 or at any other time an officer or employee of our Company. None of our executive officers serves as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our Board or Compensation Committee.
The Nominating and Governance Committees responsibilities include:
The Nominating and Governance Committee may, when it deems appropriate, delegate certain of its responsibilities to one or more Nominating and Governance Committee members or subcommittees.
The Board reviewed the background, experience and independence of the Nominating and Governance Committee members and based on this review, the Board determined that each member of the Nominating and Governance Committee meets the independence requirements of the NYSEs corporate governance listing standards.
Our Nominating and Governance Committee has established a policy regarding the consideration of director candidates, including candidates recommended by shareholders. The Nominating and Governance Committee, together with other Board members, from time to time, as appropriate, identifies the need for new Board members. Proposed director candidates who satisfy the criteria described below and who otherwise qualify for membership on the Board are identified by the Nominating and Governance Committee. In identifying candidates, the Nominating and Governance Committee seeks input and participation from other Board members and other appropriate sources so that all points of view are considered and the best possible candidates identified. The Nominating and Governance Committee may also engage a search firm to assist it in identifying potential candidates. Members of the Nominating and Governance Committee and other Board members, as appropriate, interview selected director candidates, evaluate the director candidates and determine which candidates are to be recommended by the Nominating and Governance Committee to the Board. Our Nominating and Governance Committee evaluates the suitability of potential candidates nominated by shareholders in the same manner as other candidates recommended to the Nominating and Governance Committee.
Under our By-laws, if a shareholder wishes to submit a director candidate for consideration by the Nominating and Governance Committee, the shareholder must submit that recommendation to the Nominating and Governance Committee, c/o the Secretary of International Flavors & Fragrances Inc., in writing,
not less than 90 days nor more than 120 days prior to the anniversary date of the prior years annual meeting of shareholders, except if the annual meeting is not within 30 days of the anniversary date of the prior years annual meeting, then any recommendation to the Nominating and Governance Committee must be received no later than 10 days following the mailing of notice of the annual meeting or public disclosure of the annual meeting date, whichever occurs first. The request must be accompanied by the information concerning the director candidate and nominating shareholder described in Article I, Section 3(d)(2) of our By-laws. The Nominating and Governance Committee may also request any additional background or other information from any director candidate or recommending shareholder as it may deem appropriate.
Board candidates are considered based on various criteria which may change over time and as the composition of the Board changes. At a minimum, our Nominating and Governance Committee considers the following factors as part of its review of all director candidates and in recommending potential director candidates to the Board:
To ensure independence and to provide the breadth of needed expertise and diversity of our Board, our By-laws currently require our Board to have twelve members. The Board periodically reviews its size and makes appropriate adjustments. While the Nominating and Governance Committee has not adopted a formal diversity policy with regard to the selection of director nominees, diversity is one of the factors that the Nominating and Governance Committee considers in identifying director nominees. As part of this process, the Nominating and Governance Committee evaluates how a particular candidate would strengthen and increase the diversity of the Board in terms of how that candidate may contribute to the Boards overall balance of perspectives, backgrounds, knowledge, experience, skill sets and expertise in substantive matters pertaining to our business. The Nominating and Governance Committee also annually reviews each current Board members suitability for continued service as a member of our Board. In addition, each director is required to notify the Chairman of the Nominating and Governance Committee of his or her intention to join or leave the board of another company or of any change in status, including changes in employment or skill set, so that the Nominating and Governance Committee can review the change and make a recommendation to the full Board regarding the continued appropriateness of the directors Board membership.
Board Role in Overseeing Risk
Our Board is actively involved in the oversight of risks that could affect our Company. This oversight is conducted primarily through the Audit and Compensation Committees of the Board, but the full Board has retained responsibility for the general oversight of risks. While the Board oversees our risk management, our management is primarily responsible for day-to-day risk management processes, and reports to the full Board and the Audit and Compensation Committees regarding these processes. We believe this division of responsibility is the most effective approach for addressing risk management.
Management maintains an enterprise risk management (ERM) process which is designed to identify and assess our global risks and to develop steps to mitigate and manage risks. The Board receives regular reports on the ERM process. The Board and the Audit Committee focus on the most significant risks facing us, including operational risk, financial risk, regulatory risk, litigation risk, tax risk, credit risk and liquidity risk, as well as our general risk management strategy, and how these risks are being managed. The Audit Committee is
primarily responsible for assisting the Board in reviewing and assessing with management our ERM process, our risk profile and our policies and practices with respect to risk assessment and risk management, in particular as they relate to financial risk. The Compensation Committee is primarily responsible for overseeing the management of risks associated with compensation policies and practice, our compensation plans (including equity compensation plans and programs), severance, change in control and other employment-related matters.
In the fourth quarter of 2013, the Compensation Committee, working with its independent compensation consultant, conducted a risk assessment of our executive compensation programs. The goal of this assessment was to determine whether the general structure of our executive compensation policies and programs, annual and long-term performance goals or the administration of the programs posed any material risks to our Company. In addition, with the input of our SVP HR, the Compensation Committee reviewed compensation programs and policies below the executive level in a Company-wide risk assessment. The Compensation Committee shared the results of this review with our full Board of Directors.
The Compensation Committee determined, based on the reviews of its independent compensation consultant and managements input and other factors, that the compensation policies and practices for the Companys employees in 2013, including the established performance goals and incentive plan structures, did not result in excessive risk taking or the implementation of inappropriate business decisions or strategies by the Companys senior executives or employees generally, and that there are no risks arising from our compensation policies and practices for our employees that are reasonably likely to have a material adverse effect on the Company.
Transactions with Related Persons
In 2013, there were no transactions and there are no currently proposed transactions in excess of $120,000 in which the Company was or will be a participant and in which any director, director nominee or executive officer of the Company, any known 5% or greater shareholder of the Company or any immediate family member of any of the foregoing persons had or will have a direct or indirect material interest as defined in Item 404(a) of Regulation S-K.
Related Person Transactions Policy
In accordance with SEC rules, our Board of Directors has adopted a written policy for the review and the approval or ratification of any related person transaction. This policy is available through the Investors - Corporate Governance link on our website, www.iff.com. Under the policy, a related person is specifically defined as an executive officer, a director, a director nominee, a beneficial owner of more than 5% of any class of voting securities, an immediate family member of any of the foregoing, or a controlled entity, which is defined as an entity owned or controlled by any of the foregoing or in which any such person serves as an officer or partner, or together with all of the foregoing persons, owns 5% or more equity interests. The policy defines a related person transaction as a transaction or series of transactions involving a related person and the Company, excluding employment arrangements involving an executive officer or other senior officer or employee of the Company and director compensation arrangements. The policy requires that any such transaction be approved or ratified by the Nominating and Governance Committee. If accounting issues are involved in the transaction, the Nominating and Governance Committee will consult with the Audit Committee if deemed appropriate.
Pursuant to the policy, a related person transaction will be approved or ratified only if the Nominating and Governance Committee determines that it is being entered into in good faith and on fair and reasonable terms which are in the best interest of our Company and our shareholders. In determining whether to approve or ratify a transaction, the Nominating and Governance Committee considers the following factors, to the extent relevant:
No related person may participate in the review of a transaction in which he or she may have an interest. In addition, except for non-discretionary contributions made pursuant to our matching contributions program, a charitable contribution by our Company to an organization in which a related person is known to be an officer, director or trustee, is subject to approval or ratification by the Nominating and Governance Committee.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics (the Code of Ethics) that applies to all of our employees, including our CEO and our CFO (who is also our principal accounting officer). We also have adopted a Code of Conduct for Directors and a Code of Conduct for Executive Officers (together with the Code of Ethics, the Codes). The Codes are available through the Investors Corporate Governance link on our website, www.iff.com.
Only the Board or the Audit Committee may grant a waiver from any provision of our Codes in favor of a director or executive officer, and any such waiver and any amendments to the Codes will be publicly disclosed on our website, www.iff.com.
Share Retention Policy
We encourage our executives and directors to own our common stock so that they share the same long-term investment risk as our shareholders. In December 2013, the Compensation Committee recommended, and the Board approved, changes that made directors subject to our Share Retention Policy.
Under the Share Retention Policy, each executive and director must retain shares of Company common stock based on a targeted ownership level. There is no deadline by which an executive or director must meet his or her retention requirement. The targeted ownership level for directors is five times the cash portion of the annual retainer (not including any retainer for service as a committee chairperson or lead director). The targeted ownership levels for executives are (1) the lesser of shares equal in value to five times base salary or 120,000 shares for our CEO, (2) the lesser of shares equal in value to three times base salary or 35,000 shares for our CFO and Group Presidents, and (3) the lesser of shares equal in value to two times base salary or 20,000 shares for our SVP, General Counsel.
If an executive or director does not meet the targeted ownership level, the executive or director may not sell or transfer any shares held in an equity, deferred compensation or retirement plan account managed by us, and the executive or director must retain such shares in such accounts until the targeted ownership level is met. For executives, until the retention requirement is met, the executive must also retain a portion (50%, in the case of our named executive officers) of any shares of common stock acquired from the exercise of a stock option or stock settled appreciation right or the vesting of restricted stock or a restricted stock unit (after payment of any exercise price and taxes).
Our Share Retention Policy provides executives and directors flexibility in personal financial planning, yet requires them to maintain ongoing and substantial investment in our common stock. As of March 7, 2014, all of our named executive officers and directors are in compliance with their individual retention requirements. Additional detail regarding ownership of our common stock by our executives and directors is included in this proxy statement under the heading Securities Ownership of Management, Directors and Certain Other Persons.
Policy Regarding Derivatives, Short Sales, Hedging and Pledges
Under our insider trading policy, directors and executive officers, including our named executive officers, are prohibited from entering into transactions designed to hedge against economic risks associated with an investment in our common stock. These individuals may not trade in derivatives in our securities (such as put and call options), effect short sales of our common stock, or enter into monetization transactions or similar arrangements (such as prepaid variable forwards, equity swaps, collars or exchange funds) relating to our securities. These individuals are also prohibited from holding shares of our common stock in margin accounts or pledging shares of our common stock as collateral for a loan.
Annual Director Cash and Equity Compensation
In 2013, each non-employee director received an annual retainer of $200,000 relating to the service year from the 2013 Annual Meeting of Shareholders (the 2013 Annual Meeting) to the 2014 Annual Meeting. Of this amount, we paid $100,000 in cash in November 2013, and we paid $100,000 in Restricted Stock Units (RSUs) issued under our shareholder-approved stock award and incentive plan on the date of the 2013 Annual Meeting. These RSUs vest on the third anniversary of the grant date and are subject to accelerated vesting upon a change in control. The 1,295 RSUs granted to each director on the date of the 2013 Annual Meeting was calculated using the closing market price of our common stock on the grant date. Any director who is an employee of our Company does not receive any additional compensation for his or her service as a director.
Annual Committee Chair and Lead Director Compensation
During 2013, the Chair of each of the Audit Committee and Compensation Committee and the Lead Director received an annual cash retainer of $15,000 in addition to the annual retainer described above. The Chair of the Nominating and Governance Committee received an additional annual cash retainer of $10,000.
Participation in our Deferred Compensation Plan
Non-employee directors are eligible to participate in our Deferred Compensation Plan (DCP). A non-employee director may defer all or a portion of his or her cash compensation as well as any RSUs granted to him or her, subject to tax law requirements. Additional details regarding our DCP may be found in this proxy statement under the heading Executive Compensation Non-Qualified Deferred Compensation. Non-employee directors are not entitled to matching contributions or the 25% premium on deferrals into our common stock fund that are applicable to employees under the DCP.
We reimburse our non-employee directors for travel and lodging expenses incurred in connection with their attendance at Board and Committee meetings, our shareholder meetings and other Company-related activities.
In addition, each current and former director who began service as a director before May 14, 2003 is eligible to participate in our Director Charitable Contribution Program (DCCP). Under the DCCP, directors were paired together and our Company purchased joint life insurance policies on the lives of each paired set of participating directors. We are the owner and sole beneficiary of the policies and are responsible for payment of any premiums. In 2009, the insurance policies were restructured so that no further premiums are required. Assuming no changes to the current Federal tax laws relating to charitable contributions, and if certain other assumptions are met, we expect to recover all of the premium costs that have been paid by us and the after-tax cost of our anticipated charitable contributions pursuant to this program. After a covered director dies, we will donate $500,000 to one or more qualifying charitable organizations previously designated by the deceased director.
Directors first elected on or after May 14, 2003 do not participate in the DCCP. However, all current directors, including those who participate in our DCCP, are eligible to participate in our Matching Gift Program. Under this program, we match, on a dollar for dollar basis, contributions made by directors to qualifying charitable organizations up to a maximum of $10,000 per person per year.
The following table details the compensation paid to or earned by our non-employee directors for the year ended December 31, 2013.
2013 Directors Compensation
Changes to Directors Compensation
The Compensation Committee reviews our non-employee director compensation on an annual basis. In late 2013, the Compensation Committee, with the assistance of Haigh & Company, its independent compensation consultant, conducted a review of our non-employee director compensation and, as a result of this review, recommended to the Board, and the Board approved, the following changes to the non-employee director compensation structure, effective for 2014:
AND CERTAIN OTHER PERSONS
Directors and Executive Officers
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 7, 2014, by each current director, the persons named in the Summary Compensation Table in this proxy statement and all current directors and executive officers as a group. To our knowledge, except as otherwise indicated, beneficial ownership includes sole voting and dispositive power with respect to all shares.
Certain Other Owners
The following table sets forth information regarding each person known by us to be the beneficial owner of more than 5% of our outstanding common stock, as of March 7, 2014, based on a review of filings with the SEC. Unless otherwise indicated, beneficial ownership is direct.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee of our Board of Directors has selected PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014, and our Board has directed that our management submit that selection for ratification by our shareholders at the 2014 Annual Meeting. Although ratification is not required by our By-laws or otherwise, we are submitting the selection of PwC to our shareholders for ratification as a matter of good corporate governance. The Audit Committee will consider the outcome of our shareholders vote in connection with the Audit Committees selection of our independent registered public accounting firm in the next fiscal year, but is not bound by the shareholders vote. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time if it determines that a change would be in the best interests of our Company and our shareholders.
Representatives of PwC are expected to attend the 2014 Annual Meeting, where they will be available to respond to questions and, if they desire, to make a statement.
Our Board of Directors recommends a vote FOR the ratification of the Audit Committees selection of PwC as our Independent Registered Public Accounting Firm for 2014.
Principal Accountant Fees and Services
The following table provides detail about fees for professional services rendered by PwC for the years ended December 31, 2013 and December 31, 2012.
Pre-Approval Policies and Procedures for Audit and Permitted Non-Audit Services
The Audit Committee has established policies and procedures to pre-approve all audit and non-audit services to be provided by the independent registered public accounting firm to our Company by category, including audit-related services, tax services and other permitted non-audit services. Under the policy, the Audit Committee pre-approves all services obtained from our independent registered public accounting firm by category of service, including a review of specific services to be performed, fees expected to be incurred within each category of service and the potential impact of such services on auditor independence. The term of any pre-approval is for the financial year, unless the Audit Committee specifically provides for a different period in the pre-approval. If it becomes necessary to engage the independent registered public accounting firm for additional services not contemplated in the original pre-approval, the Audit Committee requires separate pre-approval before engaging the independent registered public accounting firm. To facilitate the process, the policy delegates pre-approval authority to the Audit Committee chairperson to pre-approve services up to $20,000, and the Audit Committee may also delegate authority to one or more of its members to pre-approve services. The Audit Committee member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
All services rendered by PwC to our Company are permissible under applicable laws and regulations. During 2013, all services performed by PwC which were subject to the SECs pre-approval requirements were approved by the Audit Committee in accordance with the Audit Committees pre-approval policy in effect during 2013.
AUDIT COMMITTEE REPORT
The Audit Committee (we, us or the Committee) operates in accordance with a written charter, which was adopted by the Board of Directors. A copy of that charter is available on the Companys website through the Investors Corporate Governance link on the Companys website at www.iff.com. The Committee comprises four directors whom the Board has determined are independent, as required by the applicable listing standards of the NYSE and the rules of the SEC, and each of whom qualify as an audit committee financial expert as defined by the rules of the SEC.
Management has the primary responsibility for the financial statements and the reporting process, including internal control over financial reporting and disclosure controls and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. The Companys independent registered public accounting firm, PricewaterhouseCoopers, LLP (PwC), is responsible for performing an integrated audit of the Companys financial statements and internal control over financial reporting in accordance with the auditing standards of the Public Company Accounting Oversight Board (PCAOB).
The Committee oversees the Companys financial reporting process and internal control structure on behalf of the Board of Directors. We met seven times during 2013, including meeting regularly with PwC and the Companys internal auditor, both privately and with management present. For 2013, we have reviewed and discussed the Companys audited financial statements with management. We have reviewed and discussed with management its process for preparing its report on its assessment of the Companys internal control over financial reporting, and at regular intervals we received updates on the status of this process and actions taken by management to respond to issues and deficiencies identified. We discussed with PwC its audit of the financial statements and of the Companys internal control over financial reporting. We discussed with PwC and the Companys internal auditors the overall scope and plans for their respective audits.
We have discussed with PwC the matters required to be discussed by PCAOB Auditing Standard No. 16, Communications with Audit Committees. We also received the written disclosures and the letter from
PwC as required by applicable requirements of the PCAOB regarding the independent accountants communications with the Audit Committee concerning independence, and discussed with PwC its independence. We concluded that PwCs independence was not adversely affected by the non-audit services provided by PwC, the majority of which consisted of audit-related and tax compliance services.
Based on the reviews and discussions referred to above, we recommended to the Board (and the Board subsequently approved our recommendation) that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for filing with the SEC.
In determining whether to retain PwC as the Companys independent registered public accounting firm for the 2014 fiscal year, we took into consideration a number of factors, including:
Based on this evaluation, we believe that it is in the best interests of the Company and its shareholders to retain PwC as the Companys independent registered public accounting firm for 2014, which the shareholders will be asked to ratify at the 2014 Annual Meeting of Shareholders.
Katherine M. Hudson (Chair)
Henry W. Howell, Jr.
Arthur C. Martinez
Dale F. Morrison
This Compensation Discussion and Analysis is designed to provide our shareholders with a clear understanding of our compensation philosophy and objectives, compensation-setting process, and the 2013 compensation of our named executive officers, or NEOs. As discussed in Proposal III of this proxy statement, we are conducting our annual Say on Pay vote that requests your approval of the compensation of our NEOs as described in this section and in the tables and accompanying narrative contained below under Executive Compensation. To assist you with this vote, you should review our compensation philosophies, the design of our executive compensation programs and how, we believe, these programs have contributed to our financial performance.
For 2013, our NEOs were:
The core of our executive compensation philosophy is that our executives pay should be linked to achievement of financial and operational performance metrics that build shareholder value. Consequently, we designed our compensation program to motivate and reward our executives for the achievement of both annual and long-term business goals that are challenging yet attainable and by providing a significant portion of compensation that is variable and tied directly to Company and individual performance. We believe that executive compensation should (i) be tied to overall Company performance; (ii) reflect each executives level of responsibility; (iii) reflect individual performance and contributions; and (iv) include a significant equity component. We believe that by keeping the majority of executive pay variable and equity-based we can best ensure alignment with shareholder value and Company growth.
Our 2013 NEO Pay Was Tied to Our 2013 Performance
In 2013, we had an excellent year of performance, especially when noting the still volatile global economic environment. We again met our long-term goals, achieving local currency sales growth of 5%, adjusted operating profit growth of 11%, and adjusted EPS growth of 12%. We continued to execute on our three strategic pillars during the year, including:
Based on these accomplishments, we exceeded all of the target levels for our performance metrics under our LTIP (as described below). For our AIP (as described below), we exceeded the target levels for all four performance metrics at the corporate level and for our Fragrances business unit, and three out of the four performance metrics for our Flavors business unit. As a result of these achievements, the 2013 annual compensation of our NEOs increased as compared to their respective compensation in 2012.
2013 Annual Incentive Plan Targets and Payout. Our 2013 Annual Incentive Plan (AIP) performance targets were based on our annual profitability targets, our 2013 budget and our 2012 actual results. Our AIP continues to be based on the achievement of four financial performance metrics that management and the Board believe are significant indicators of our financial performance: (1) local currency sales growth, (2) operating profit, (3) gross margin and (4) working capital. These performance metrics are measured (A) at the consolidated corporate level for our CEO, our CFO and our General Counsel and (B) at both the consolidated corporate level and the business unit level for the Group President of each of our business units.
For 2013, at the corporate level, we exceeded our targets in all four performance metrics. As a result, the overall corporate AIP payout was approximately 158% of the target award for our CEO, our CFO and our General Counsel, whom are evaluated solely on corporate performance for purposes of our AIP. Our Fragrance business unit also exceeded its targets in all four performance metrics, resulting in an AIP payout, when combined with the corporate level performance, of approximately 179% of the target award for our Group President, Fragrances. Our Flavors business unit returned strong performance on three out of four of the Flavors group performance metrics, however local currency sales growth was below target. This resulted in an AIP payout, when combined with the corporate level performance, of approximately 131% of the target award for our Group President, Flavors.
Long-Term Incentive Plan Results for 2013. Our LTIP is structured in three-year cycles, which are administered in four equally-weighted performance segments: Year 1, Year 2, Year 3 (each an annual performance segment) and cumulative performance over the three-year period (the cumulative performance segment). During the three annual performance segments, Company performance is measured against two equally-weighted financial metrics. For the 2011-2013 LTIP cycle, these two metrics were Earnings Per Share (the EPS) and our Total Shareholder Return (TSR) versus the S&P 500. For the 2012-2014 LTIP cycle and 2013-2015 LTIP cycle, these two metrics were Economic Profit (EP) and TSR. TSR is the sole financial metric for the cumulative segment for all of the current LTIP cycles.
For 2013, our EPS was $4.46, as adjusted for 2013 non-core items described below. As a result our NEOs earned approximately 127% of the EPS goal for Year 3 of the 2011-2013 LTIP Cycle. For 2013, our EP was $243 million, as adjusted for 2013 non-core items. As a result, our NEOs earned approximately 190% of the EP goal for Year 1 in the 2013-2015 LTIP cycle and for Year 2 of the 2012-2014 LTIP cycle. Our TSR for 2013 was at the 49th percentile and generated a payout of approximately 77%. Our cumulative TSR for the 2011-2013 LTIP cycle was at the 58th percentile, and resulted in a 115% payout.
For additional details regarding these summary AIP and LTIP findings, including the threshold, target and maximum levels for each performance metric, please see the sections below titled Direct Compensation Components and 2013 Compensation Decisions Annual Incentive Plan and - Long Term Incentive Plan.
Compensation-Related Corporate Governance
To ensure continued alignment of compensation with Company performance and the creation of shareholder value, we maintain strong compensation-related corporate governance policies, including the following:
Our Executive Compensation Program
We pay for performance. Our NEOs target compensation for 2013 reflects our commitment that a significant portion of our executive compensation should be variable and tied directly to achievement of our short-term and long-term financial and operational objectives.
During 2013, as in prior years, our NEOs direct compensation primarily consisted of (1) base salary, (2) AIP awards, (3) LTIP awards and (4) Equity Choice Program (ECP) awards. During 2013, 77% of the average target direct compensation payable to our CEO and our other four NEOs was variable, and the ultimate value of such variable compensation was tied directly to stock price performance or performance versus pre-defined annual and long-term performance metrics. 73% of this variable, performance-based compensation was tied to long-term performance metrics.
We align the interests of our executives with those of our shareholders. We have designed our executive compensation program to provide a significant portion of our executives total direct compensation in the form of equity and to encourage their direct investment in the Company as well as long-term ownership. For 2013, approximately 56% of the variable target compensation payable to our CEO and our other four NEOs was payable in equity. For 2013, the proportion of long-term incentive compensation opportunity provided in the form of equity versus cash for the CEO and the average of our other four NEOs, as a group, was as follows:
Target Long-Term Incentive Compensation
We require our executives to meet certain share ownership guidelines. Our executives, including our NEOs, are required to meet certain share ownership guidelines to align our executives interests with those of our shareholders under our Share Retention Policy. Our NEOs are not permitted to pledge shares that are counted towards their retention requirements as collateral for individual loans. Additional information about our Share Retention Policy is set forth above under Corporate Governance Share Retention Policy.
Compensation Setting Process
Our Compensation Committee (the Committee) is responsible for overseeing the design, implementation and administration of long-term and short-term compensation (including equity awards, benefits and perquisites) for all executive officers and other members of senior management. The Committee recommends CEO compensation to the full Board for its approval. During 2013, as in the prior year, the Committee engaged W.T. Haigh & Company (Haigh & Company) as its independent compensation consultant to assist the Committee in fulfilling its responsibilities. During fiscal year 2013, Haigh & Companys work with the Committee included analyses, advice, guidance and recommendations on executive compensation levels versus peers, market trends and incentive plan designs. Haigh & Company is engaged exclusively by the Committee on executive and director compensation matters and does not have other consulting arrangements with the Company.
Our CEO and SVP HR evaluate the performance and, with input from Haigh & Company, the competitive pay position for senior management members that report directly to the CEO, including our NEOs, and make recommendations to the Committee concerning each such employees target annual compensation. Our CEO follows the same process with regard to the target compensation for our SVP HR, without her input, and the Committee follows the same process with regard to the target compensation for our CEO, without his input.
As part of its compensation setting process, the Committee also considers the results of the prior years shareholder advisory vote on our executive compensation. It believes these voting results provide useful feedback regarding whether shareholders agree that the Committee is achieving its goal of designing an executive compensation program that promotes the best interests of the Company and its shareholders by providing its executives with appropriate compensation and meaningful incentives. As part of its 2013 compensation setting process, the Committee reviewed the results of the 2012 shareholder advisory vote, in which 95.6% of the votes cast were voted in favor of our executive compensation.
Principles for Setting Compensation Targets
On an annual basis, the Committee reviews and approves the compensation of our NEOs. We use a global grading structure for our NEOs, with compensation ranges for each grade. Our NEOs are placed in a particular grade based on internal factors (including scope of responsibilities and job complexity) and an external market evaluation. The external market evaluation is based on published third party general survey information and a review of similar positions within our selected peer groups described below. This process is referred to as market benchmarking.
The Committee reviews its external market benchmarking and peer group data annually. The Committees goal is to position target total direct compensation (salary, annual incentive compensation, long-term incentive compensation and equity awards) between the 50th to 75th percentile of relevant market benchmarks and to position target total cash compensation at median or slightly above. In July 2012, the Committee reviewed peer group data with our independent compensation consultant for purposes of determining the appropriate peer group for 2013 compensation decisions.
2013 Benchmarking for CEO, CFO and Group Presidents. For 2013 compensation decisions regarding (i) the CEO, (ii) the CFO and (iii) each of the Group Presidents, the Committee, based on recommendations from Haigh & Company, decided to benchmark compensation against the average of (1) its Select Peer Group and (2) the General Industry Cut of the Towers Watson General Industry Index Survey.
The Select Peer Group was chosen using the following criteria:
For 2013, the Select Peer Group consisted of the following companies:
At the time of the Committees determination of the Select Peer Group, we were positioned at approximately the 38th percentile of the Select Peer Group in terms of revenue, the primary scope comparison measure, for the respective fiscal year. Our current relative revenue is positioned at approximately the 35th percentile of the Select Peer Group.
The 2013 Select Peer Group was modified from the prior years group by (i) removing companies that had been acquired or were no longer publicly-traded companies (Alberto-Culver and Del Monte) and (ii) adding a company with similar business lines (Sensient Technologies). As discussed above, the Committee weighed the compensation data derived from a General Industry Cut of the Towers Watson General Industry Index Survey equally with the Select Peer Group data. The General Industry Cut comprises 192 companies having $1 billion to $6 billion in reported revenues, with median revenues of $2.7 billion. Energy and financial companies were excluded from this selection as the Committee believed that the industry business models and the pay practices of these two industries are less comparable to ours, particularly in a volatile economic climate.
In July 2013, the Committee reviewed its Select Peer Group with Haigh & Company for purposes of its upcoming 2014 compensation setting process. As a result of this review, the Committee revised the selection criteria described above by removing the requirement that R&D expense be generally over 1% of total revenue and modified the size of comparable U.S. publicly-traded companies to be generally based on revenue of $1 billion to $7 billion and market capitalization of $1 billion to $14 billion, and determined to replace one of the companies in its 2013 Select Peer Group, Ralcorp Holdings, Inc., which was acquired in 2013, with Coty, Inc., which went public in 2013.
2013 Benchmarking for Other Executive Officers. Based on recommendations by its compensation consultant, the Committee determined that the Select Peer Group did not provide sufficient comparative data for the other executive officer positions that were reviewed by the Committee. Consequently, for all other executive officer positions, including the General Counsel, instead of using the Select Peer Group, the Committee used the aggregate data available from a select cut of the Towers Watson General Industry Index that (i) identified themselves as belonging to the consumer products or the food and beverage industry and
(ii) had revenues between $1 billion and $6 billion (the Consumer Products Select Cut). The Committee averaged (1) the Consumer Products Select Cut with (2) the Towers Watson General Industry Index to determine median and 75th percentile target compensation.
For 2013, the Consumer Products Select Cut comprised 22 companies, (including seven companies that are also part of the Select Peer Group) with reported revenues of between $1 billion and $6 billion, with median revenue of $3.8 billion. The companies included in the Consumer Products Select Cut were as follows:
Use of Market Reference Ranges. The Committees independent compensation consultant derives the median and 75th percentile market reference values for each executive position based on the average of the two relevant compensation indexes. The Committees consultant then analyzes each NEOs actual pay from the prior fiscal year and target total direct compensation and target total cash compensation against the median and the 75th percentile of each executives market reference range and reviews this analysis with the Committee and, in the case of the compensation of NEOs other than the CEO, with the CEO. Individual components of total direct compensation are benchmarked versus market on an individual basis for our CEO, on an average basis for our CFO and Group Presidents, collectively, and on an average basis for our Senior Vice Presidents, collectively. In determining target total direct compensation for each executive in 2013, the Committee considered the consultants market reference analysis. In addition, the Committee considered a number of other important factors, including each executives:
The Committee uses the market reference range in order to establish a starting point for the compensation levels that the Committee believes would provide our NEOs with competitive compensation. However, the actual target total direct compensation approved by the Committee may be above or below the market reference range based on the Committees review of market compensation levels, its desire to create internal pay equity among our executives and the individual factors set forth above.
For 2013, the target total direct compensation of our CEO and each of our other NEOs was between the 50th and the 75th percentile of the relevant market reference range. Actual compensation paid for the year, as compared to target compensation approved at the beginning of the year, may differ depending on Company and individual performance. Consequently, the actual pay received by a NEO may be higher or lower than his or her market reference range.
Compensation Elements and Targeted Mix
Our executive compensation program includes direct compensation and indirect compensation elements. Our indirect compensation comprises (i) our Deferred Compensation Program, (ii) a limited perquisite program, (iii) severance and other benefits under our Executive Separation Policy, (iv) benefits under an Executive Death Benefit Plan and (v) long-term disability coverage. We believe that direct compensation, which constituted an average of 96% of total actual compensation paid to our NEOs in 2013, should be the principal form of compensation.
The table below provides a brief description of the principal elements of direct compensation, whether such compensation is fixed or variable, and the compensation program objectives served by each pay element. From time to time, the Committee may also approve discretionary bonuses to officers in connection with their initial employment, for extraordinary individual performance or a significant contribution to Company strategic objectives, or for retention purposes.
The payouts under our AIP and LTIP plans are based on our achievement of performance metrics set at the beginning of the relevant measurement period, while our ECP awards are granted at the beginning of each year and reflect the performance of the NEO in the prior year and are used as a retention tool. These payouts will vary from year to year and thus our NEO compensation will vary with performance.
For 2013, at target AIP and LTIP achievement levels and actual ECP awards, the components of total direct compensation for our CEO and the average of our other four NEOs, as a group, were as follows:
We believe that the significant portion of direct compensation that is variable, 82% in the case of our CEO and an average of 73% in the case of our other NEOs, closely aligns our executives compensation opportunity with our performance by enabling our executives to earn more than target compensation if we achieve superior performance, or causing them to earn less than target compensation if we do not meet our performance goals or if the value of our common stock does not increase over time. The proportionately greater variable portion of direct compensation targeted for our CEO reflects his role and responsibility as our executive most accountable to our shareholders for company-wide performance.
Long-term compensation to our NEOs includes LTIP awards and ECP awards. LTIP awards, if earned, are paid 50% in common stock and 50% in cash. Equity makes up a larger portion of total long-term compensation than cash. This approach, combined with our Share Retention Policy discussed above, is intended to promote significant long-term stock ownership by each of our executives and to align their interests, and their at-risk longer term compensation, with those of our shareholders.
The Committee periodically reviews the mix between short-term and long-term incentive compensation opportunities and between cash and non-cash opportunities based on (1) benchmarking and other external data, (2) recommendations from our independent compensation consultant and (3) recommendations from our CEO and SVP HR.
The Committee reviews the salaries of our NEOs annually. In January 2013, the Committee reviewed the base salaries of its NEOs. Messrs. Berryman, Mirzayantz and Vaisman, who each received salary increases effective July 1, 2012, did not receive salary increases in 2013. Mr. Toughs salary was also not adjusted as part of this review. Based on the interval since the last base salary adjustment and her individual performance, the Committee increased the base salary of Ms. Chwat by $15,000, effective April 1, 2013, which was the effective date of Company salary increases generally.
Annual Incentive Plan
The Company maintains the AIP for our NEOs and other employees. Overall, the Committee seeks to establish corporate performance goals that are challenging yet attainable. For our NEOs, 2013 AIP payouts depended on the achievement of specific Company-wide quantitative performance goals, along with individual contributions toward the enterprise results based on business unit goals for the Group Presidents. Each year the Committee sets an AIP target (stated as a percentage of base salary) for each NEO. For 2013, the Committee decided to maintain the AIP percentage targets at the same level as 2012. However, as a result of the salary increase described above, the AIP dollar target amount was increased for Ms. Chwat.
Performance Metrics and Capped AIP Payouts: Based on a review of the annual and long-term financial goals, operational plans and strategic initiatives and the prior years actual results, the Committee annually sets the financial performance metrics for the Company and the respective business units that it will use to measure performance as well as the relative weighting that will be assigned to each metric. The Committee then approves threshold, target and maximum performance levels for each performance metric. Upon achievement of the relative performance level, an executive has the opportunity to earn up to the following AIP target award for such metric:
2013 AIP Performance Metrics: As discussed above, for 2013 AIP awards, the Committee approved four financial performance metrics: (1) local currency sales growth, (2) operating profit, (3) gross margin percentage and (4) working capital percentage. These performance metrics were selected for the following reasons:
For 2013, the weighting assigned to each of the financial performance metrics was as follows:
The 2013 weightings for corporate and business unit participants remained unchanged, and continue to assign greater weight to local currency sales growth and operating profit goals because the Committee believes that these two performance metrics are the most relevant measures of overall annual Company performance and are key to driving sustained long-term growth.
Determination of 2013 Performance Levels: In determining our 2013 AIP performance levels, the Committee considered our annual targets for 2013, our 2012 actual results and reviewed payout trends over the prior three-year and five-year periods. The Committee determined to maintain for 2013 AIP payout levels and ranges as utilized for 2012
2013 Corporate and Business Unit AIP Performance: Our actual performance against our 2013 AIP corporate financial metrics is set forth in the tables below. In establishing AIP financial performance metrics and in determining actual achievement against performance metrics, we eliminated the impact of certain non-core expenses (net of related benefits realized during the period) and non-core gains in order to reflect our fundamental operating results. For 2013, the AIP target performance levels and actual achievement against the target performance levels excluded costs or income associated with (i) the closing of our Fragrance ingredients plant in Augusta, Georgia, (ii) plant closings or partial closings in Europe and Asia, (iii) the sale of non-operating assets, (iv) certain tax-related items and (v) unbudgeted mark-to-market adjustments related to our Deferred Compensation Plan (together, the 2013 non-core items). Similarly, we excluded the effects of incentive compensation provisions in calculating gross margin performance in order to better focus on the underlying operating performance of our product portfolio. The Committee believes that the necessary self-funding of incentive compensation payments is covered in the operating profit component of the AIP program.
The table below reflects the 2013 AIP financial metrics, their respective targets and the payouts earned for each metric and overall by each NEO that is evaluated solely on corporate performance: Messrs. Tough and Berryman and Ms. Chwat.
During 2013, our corporate performance was between target and maximum for each performance metric. The actual dollar amount earned by each NEO is set forth below under 2013 Individual AIP Payouts.
Fragrane Business Unit Performance
The table below reflects the 2013 AIP financial metrics, their respective targets and the payouts earned for each metric and overall by our Group President, Fragrance.
During 2013, our Fragrance business unit performance exceeded the maximum for each performance metric. The actual dollar amount earned by our Group President, Fragrance is set forth below under 2013 Individual AIP Payouts.
Flavors Business Unit Performance
The table below reflects the 2013 AIP financial metrics, their respective targets and the payouts earned for each metric and overall by our Group President, Flavors.
During 2013, our Flavors business unit performance was between target and maximum for each of operating profit, gross margin and working capital, and was below target for local currency sales growth. The actual dollar amount earned by our Group President, Flavors is set forth below under 2013 Individual AIP Payouts.
2013 Individual AIP Payouts
The AIP payout for 2013 for the NEOs, based on the actual achievement of each of the financial performance metrics, is included under the heading Grants of Plan-Based Awards in this proxy statement. Based on the Corporate and Business Unit performance outlined in the tables above, 2013 AIP payouts were as follows:
Long-Term Incentive Plan
We believe that LTIP awards reward our executive officers, including our NEOs, for financial results and align their interests with the interests of our shareholders. Annually, the Committee reviews the LTIP to determine (1) the metrics that should be used to encourage long-term success, (2) the weightings that should be applied to such metrics and (3) the annual and cumulative targets for such metrics. The Committee believes that commencing a new three-year LTIP cycle each year helps to (i) provide a regular opportunity to re-evaluate long-term metrics, (ii) align goals with the ongoing strategic planning process and (iii) reflect changes in our business priorities and market factors. The Committee also annually sets a total LTIP target award for each NEO, which reflects the total LTIP value a NEO has the opportunity to receive at the end of the three-year cycle if we meet all our targets. To the extent that we meet the minimum target financial goals or the maximum financial goals, the actual payout to the NEO could be significantly less or more than the total LTIP target award.
Performance Segments. Given the difficulty in setting long-term goals in the current economic environment, the Committee believes that the LTIP should continue to comprise four performance segments, consisting of three annual performance segments (Year 1, Year 2 and Year 3) and a cumulative segment covering the three-year period. In each performance segment, 25% of the total LTIP target award is earned.
Performance Metrics. During the three annual performance segments, Company performance is measured against two equally-weighted financial metrics. For the 2011-2013 LTIP cycle, these two metrics were earnings per share (EPS) and total shareholder return versus the S&P 500 (TSR). Commencing with the 2012-2014 LTIP cycle, the Committee decided to use TSR and Economic Profit (EP) instead of EPS as the financial metrics for measuring Company performance for the three annual performance segments. As part of a strategic review of our businesses in 2010, we began including EP in the evaluation of relative performance across our business portfolio. We believe that evaluating EP helps us identify the sources and drivers of value across our businesses. Furthermore, we believe that EP growth is closely linked to the creation of shareholder value. Consequently, the Committee believes that changing from EPS to EP more closely aligned our compensation with the creation of long-term shareholder value. EP measures operating profitability after considering (i) all our operating costs, (ii) income taxes and (iii) a charge for the capital employed in the business. Capital employed primarily includes working capital, property, plant and equipment, and intangible assets. The capital charge is determined by applying the estimated weighted average cost of capital (WACC) times the average invested capital employed. The estimated WACC rate is the blended average cost of our debt and equity capital.
For the cumulative performance segment, Company performance continues to be measured by TSR. The Committee believes that TSR as compared to other public companies in which shareholders may choose to invest is a good indicator of our overall long-term performance, and directly ties our executives compensation opportunity to our share price appreciation and dividend payments relative to a major large-cap index.
TSR is calculated by measuring the change in the market price of stock plus dividends paid (assuming the dividends are reinvested) for the Company and the S&P 500 companies over the performance period. The market price for purposes of calculating the TSR of the Company and the S&P 500 on each year-end or cycle-end date is determined based on the average closing price per share of each companys common stock over the period of 20 consecutive trading days preceding that date, as reported by a reputable reporting service.
For each of the three annual performance segments, each of the EP or EPS goal, as the case may be, and the TSR goal are set at the beginning of the each annual performance segment and are equally weighted. For the cumulative segment, the TSR goal is set at the beginning of the three-year cycle.
The table below sets forth the relative weightings of each metric for the 2011-2013 LTIP cycle.
The table below sets forth the relative weightings of each metric for the 2012-2014 LTIP cycle and the 2013-2015 LTIP cycle that was approved by the Committee at the beginning of 2013:
At the end of each year, the Committee reviews our annual performance and cumulative performance for the then-ended three-year cycle. To the extent that our annual performance has met or exceeded the threshold annual EP or EPS goal, as the case may be, and the threshold annual TSR goal, the Committee approves banking the credit that will be applied to the payout at the end of the three-year cycle. For the three-year cycle then-ended, the Committee approves the total payout, taking into consideration the performance for each of the prior annual performance segments.
2013-2015 LTIP Target Awards
In early 2013, the Committee approved the following total LTIP target awards to our NEOs for the 2013-2015 performance cycle:
The Committee set the cumulative three-year TSR Goal for the 2013-2015 LTIP cycle at the same level that had been set for the prior years LTIP cycle, as follows:
For the 2013-2015 LTIP cycle, the Committee determined that 50% of the value of any payouts would be paid in cash and 50% would be paid in shares, consistent with the 2011-2013 and 2012-2014 LTIP cycles. The Committee believes that paying 50% of the LTIP value in shares creates a stronger alignment between executives and shareholders, and provides additional incentive for executives to achieve superior Company performance and to produce share price appreciation over the three-year performance cycle. The number of shares of our common stock for the 50% portion that would be paid in stock is determined based on the market price of the common stock at the beginning of the cycle. For the 2013 cycle, it was based on $65.95 per share, the average closing market price for the twenty trading days prior to January 2, 2013, the first stock trading day of the cycle. At the conclusion of each of the first two annual performance segments, the dollar value and number of shares will be banked based on the performance of each such segment. When the final performance segment and the three-year cycle are concluded and the LTIP payouts are approved by the Committee, the cumulative dollar value and cumulative number of shares will be paid to the executive.
Annual LTIP Goals and 2013 LTIP Performance
In early 2013, the Committee also set (1) the threshold, target and maximum 2013 annual EP goal for the 2012-2014 and 2013-2015 LTIP cycles, (2) the threshold, target and maximum 2013 annual EPS goal for the 2011-2013 LTIP cycle and (3) the threshold, target and maximum annual TSR goal which applies to each of the three current LTIP performance cycles, as follows:
2012-2014 and 2013-2015 LTIP Cycle Performance
For the 2013 segment of the 2012-2014 and 2013-2015 LTIP cycles, our EP of $243 million, as adjusted for 2013 non-core items, was between the target performance level of $226 million and maximum performance level of $245 million. As a result, our NEOs earned approximately 190% of the EP goal for the year. Our TSR for 2013 was at the 49th percentile, and as a result, our NEOs earned approximately 77% of the TSR goal for the 2013 segment. The LTIP award earned and banked for the 2013 segment of the 2012-2014 and 2013-2015 LTIP cycles was therefore equal to approximately 134% of target.
2011-2013 LTIP Performance and Payout
For the 2013 segment of the 2011-2013 LTIP cycle, our EPS of $4.46, as adjusted for 2013 non-core items, was between the target performance level of $4.38 and maximum performance level of $4.68. As a result, our NEOs earned approximately 127% of the EPS goal for the year. As noted above, our TSR for 2013 was at the 49th percentile, resulting in our NEOs earning approximately 77% of the TSR goal for the 2013 segment. Our cumulative TSR was positioned at approximately the 58th percentile versus the S&P 500, which equates to a payout of 115% of target.
The overall payout for the 2011-2013 LTIP cycle was approximately 105% of target, based on the following EPS and TSR results against objectives, as determined by the Committee.
The LTIP payout for the 2011-2013 performance cycle for the NEOs, based on the actual achievement of quantitative objectives, is discussed in greater detail following the Grants of Plan-Based Awards Table.
During the 2013 segment of the 2011-2013 LTIP performance cycle, EP grew approximately 20%. For the LTIP performance cycles that concluded in 2009 through and including 2013, the actual overall corporate percentage payout under the LTIP against those long-term cycle performance goals ranged from approximately 91% to 150%, with an average payout of 119% over the five LTIP performance cycles.
Equity Choice Program
We believe that equity is a key component of our long-term incentive compensation as it (1) provides participants with a meaningful stake in the Company, thereby aligning their interests more closely with
shareholders, (2) encourages participants to focus on long-term success and (3) helps to attract and retain top talent. We believe that our Equity Choice Program (ECP) is an effective vehicle to encourage ownership as it provides participants the flexibility to allocate their award among three types of equity.
Annually our Committee determines the dollar range of ECP awards for each level of participating executive based on peer group and long-term incentive practices survey data, a review of the competitiveness of the combined value of the ECP awards and LTIP awards with market practices and other factors that it deems appropriate. For 2013, these ranges were as follows:
The Committee then approves the actual dollar award to be granted to each NEO other than the CEO, and recommends to the independent members of the Board of Directors for approval the actual dollar award for the CEO. All ECP awards are generally subject to a vesting period of approximately three years, which the Committee believes is consistent with a goal of executive retention, is an attractive tool for recruiting, motivating and retaining executive talent and encourages alignment with shareholders by reinforcing investment and ownership in our Company by our executives.
ECP participants, including all of our NEOs, may choose from three types of equity award grants (1) Purchased Restricted Stock (PRS), (2) stock settled appreciation rights (SSARs), and (3) Restricted Stock Units (RSUs). PRS is assigned an adjustment factor of 120% to provide incentive to participants to invest in and accumulate shares to promote retention and increase alignment of participants interests with those of our shareholders. Elections are made in 5% increments. Based on the participants election, a participants dollar award value is converted into PRS, SSARs or RSUs on the grant date based on the market price of our common stock on such date.
The table below sets forth each of the three types of equity awards offered and their adjustment factor. During 2013, ECP participants, including all of our NEOs, made choices based on the differences among the equity award types described below.
As an example of how the ECP offers the participant a range of outcomes, the following table shows the different number of shares and values to the participant at vesting for an ECP award of $500,000. For all three choices, vesting occurs approximately three years from the grant date:
2013 Equity Choice Program Awards
In January 2013, the Committee approved the 2013 ECP values awarded to each executive, including our NEOs, with an effective grant date of April 30, 2013. The period of time between approval of ECP values and the actual grant date gives ECP participants time to make their irrevocable ECP elections and to arrange finances for the purchase of PRS if so elected. The Committee determined that the 2013 ECP grants would vest on April 1, 2016, which is slightly less than three years from the grant date, to enable participants to use vested PRS shares to acquire new PRS shares in 2016, to the extent granted.
For 2013, similar to prior years, the actual amount of ECP awards was based on an evaluation of the NEOs individual performance, long-term potential and market factors, including retention considerations. The following table sets forth the 2012 and 2013 ECP awards for our NEOs:
Reflecting our 2012 performance, the ECP awards granted in 2013 to each of our NEOs, other than our CFO and Group President, Flavors, was at or above the award received in 2012. For 2013, the Committee increased the ECP Award of our CEO, our Group President, Fragrances, and our General Counsel, reflecting our NEOs high level of performance and to provide a total 2013 long-term award opportunity (ECP award plus 2013 LTIP target award) that was fully competitive with market benchmarks. The actual value of this award will depend on future stock price performance.
The following table shows the ECP dollar award value approved by the Committee for each NEO during 2013 and the percentage and adjusted dollar value after application of the adjustment factor of each type of award elected by each NEO:
The actual equity award grants to each NEO, based on the above elections, are identified in the Grants of Plan-Based Awards Table. Information on prior ECP awards that vested in 2013 can be found in the Options Exercised and Stock Vested Table.
In additional to direct compensation, the Committee believes that providing executive officers reasonable indirect compensation enhances the competitiveness of our compensation program. During 2013, the indirect compensation programs available to our NEOs included (i) the ability to participate in a Deferred Compensation Program, or DCP, (ii) a limited perquisite program, (iii) the ability to receive severance and other benefits under our Executive Separation Policy, or ESP, (iv) the ability to receive benefits under an Executive Death Benefit Plan and (v) Long Term Disability coverage. The Committee regularly reviews the cost and benefits of these programs.
Deferred Compensation Plan
As part of our compensation program, we offer U.S.-based executives and other senior employees an opportunity to participate in our DCP. Pursuant to the terms of the DCP, we provide the same level of matching contributions to our executive officers that are available to other employees under our 401(k) savings plan. We also use the DCP to encourage executives to acquire deferred shares of our common stock that are economically equivalent to ownership of our common stock but on a tax-deferred basis. We do this to encourage executives to be long-term owners of a significant equity stake in us and to enhance the alignment between the interests of executives and those of our shareholders.
Our costs in offering the DCP consist of the time-value of money costs, the cost of the matching contribution that supplements the 401(k) savings plan, administrative costs and a 25% premium for cash deferred in an executives DCP account contingent on the executive remaining employed by the Company (other than for retirement) for the full calendar year following the year when such deferral is made. If notional investments within the DCP increase in value, the amount of our payment obligation will increase. The time-value of money cost results from the delay in the time at which we can take tax deductions for compensation payable to a participating executive.
Additional information about the DCP and supplemental matching contributions and premiums on cash deferrals under the DCP made for NEOs may be found below under 2013 Non-Qualified Deferred Compensation.
Our NEO perquisites program offers non-monetary benefits that are competitive and consistent with the marketplace as determined through a market study conducted by our independent compensation consultant. Under the perquisites program, executives are eligible to receive certain benefits including:
As part of his employment agreement our CEO is entitled to receive a $25,000 annual allowance for financial planning, tax preparation and estate planning services, rather than the above limits. He is also entitled to have us pay for dues for a luncheon club in Manhattan, but this perquisite was not exercised in 2013. The personal value of all perquisites (other than the annual physical examination) is reported as income to the individual and accordingly is subject to tax. The Committee believes that the total value of our perquisites program is reasonable. Additional details concerning perquisites are included in the footnotes to the All Other Compensation Table.
Executive Separation Policy
We provide severance and other benefits under our ESP to executives whose employment is terminated not for cause, upon retirement, death or disability, and in the event of a termination by the executive for good reason in connection with a change in control of the Company. This policy helps us in competing with other companies in recruiting and retaining qualified executives. When recruiting an executive from another company, the executive in most cases will seek contract terms that provide compensation if his or her employment is terminated by us in cases in which the executive has not engaged in misconduct. The
level of separation pay under the ESP is based on a tier system and each executives assigned tier is based on the executives grade level. All our NEOs are in Tier I. The specific separation pay by tier was developed with the assistance of our independent compensation consultant and determined by the Committee. Our CEO receives severance of 12 months in accordance with the terms of his letter agreement. We believe that the ESP provides a level of separation pay and benefits that is within a range of competitive practice of our peer group companies.
A discussion of our ESP and the payments that each of our NEOs would have been eligible to receive had a covered termination occurred as of December 31, 2013 is set forth below under Potential Payments upon Termination or Change in Control.
Executive Death Benefit Plan
Our Executive Death Benefit Plan provides participants, including each of the NEOs, with a pre-retirement death benefit equal to twice the participants annual base salary (excluding bonus and other forms of compensation) less $50,000, the death benefit provided by our basic group term life insurance plan for employees and retirees. The plan also provides a death benefit post-retirement, or pre-retirement after attaining age 70, equal to one times the participants base salary (excluding bonus and other forms of compensation) for the year in which the participant retires or reaches the age of 70, assuming the participant was an executive officer, less $12,500 of group coverage for retired participants and less $50,000 for senior participants (those who have attained the age of 70 and remain employed with the Company).
Supplemental Long Term Disability
We offer our U.S.-based employees Long Term Disability (LTD) coverage at Company expense, which provides a benefit, calculated as a percentage of base salary, in the case of full disability. Under our group plan, the maximum base salary is $300,000, and the maximum monthly benefit is $15,000. In July 2013, the Committee authorized the purchase of Supplemental LTD insurance to provide a maximum monthly benefit of $25,000 for U.S.-based employees, including our NEOs, who earn a base salary plus bonus in excess of the maximum base salary of $300,000 under our group plan. The Supplemental LTD insurance premium, like our basic group LTD policy, is fully paid by the Company and is taxable income to employees upon receipt of the benefit.
Historically, our various clawback policies provided that incentive compensation and severance could be recovered from our NEOs and other employees based on an accounting restatement or an employees violation of non-competition, non-solicitation, confidentiality and similar covenants pursuant to our 2010 Stock Award and Incentive Plan (or SAIP), our ESP and our letter agreement with our CEO.
In 2013, the Committee and Board engaged in an extensive review of our existing clawback provisions and best governance practices in our industry and in general. As a result of this review, in early 2014, the Committee and Board expanded the scope of our compensation recoupment, or clawback, policies. The triggers for recovery of compensation were amended to include financial misstatements, without regard to fault, and an employees willful misconduct or violation of a Company policy that is materially detrimental to the Company, as determined by the Committee. All compensation under our SAIP, including AIP, LTIP, ECP and other cash and equity awards is subject to clawback, as well as payments made under our ESP.
We generally attempt to structure executive compensation to be tax deductible. However, the Committee also believes that under some circumstances, such as to attract or to retain key executives, to recognize outstanding performance or to take into account the external business environment, it may be important to compensate one or more key executives above tax deductible limits.
2014 Compensation Actions
In February 2014, Mr. Vaisman, our Group President, Flavors, announced his intention to retire effective April 1, 2014. The Board appointed Matthias Haeni, our Regional General Manager for Flavors Europe, Africa, and the Middle East, to succeed Mr. Vaisman. In connection with his promotion and his transfer to the United States, the Compensation Committee approved Mr. Haenis compensation package after consultation with its compensation advisor. Upon his promotion, Mr. Haenis compensation will be adjusted in-line with the levels of compensation currently provided to our Group Presidents. In addition, in connection with his relocation to the United States, Mr. Haeni will be eligible to receive transitional assistance associated with his tax, housing and retirement savings for a limited period.
This Compensation Discussion and Analysis includes the following non-GAAP financial measures: local currency sales, adjusted operating profit and adjusted earnings per share. Please see Exhibit A of this proxy statement for a reconciliation of such metrics.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis included in this proxy statement. Based on those reviews and discussions, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement for filing with the Securities and Exchange Commission and incorporated by reference into the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
J. Michael Cook (Chair)
Marcello V. Bottoli
Roger W. Ferguson, Jr.
Alexandra A. Herzan
VIII. PROPOSAL III ADVISORY VOTE ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (known as the Dodd-Frank Act) requires us to provide our shareholders with the opportunity to approve, on a nonbinding, advisory basis, the compensation of our NEOs as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC, often referred to as Say on Pay.
As discussed in detail in the Compensation Discussion and Analysis and the compensation tables and narratives that follow, the compensation program for our NEOs is designed (i) to attract, retain and motivate our executives who are critical to our success, (ii) to reward achievement of both annual and long-term performance goals, and (iii) to align the interests of our executives with those of our shareholders. Pursuant to our compensation program, an average of 77% of our NEOs 2013 target total direct compensation is considered variable and tied to our Companys performance based on a number of financial goals and Company stock price performance and dividend return (TSR).
We believe that our executive compensation program strikes the appropriate balance between utilizing responsible, measured pay practices and rewarding the achievement of financial and operational performance metrics that build shareholder value. This balance is evidenced by the following:
For additional information on the compensation program for our NEOs, including specific information about compensation in 2013, please see the information in this proxy statement under the heading Compensation Discussion and Analysis, along with the compensation tables and narrative descriptions that follow.
We provide our shareholders with the opportunity to cast the Say on Pay vote on an annual basis. In accordance with the Dodd-Frank Act, the Say on Pay vote will be an advisory vote regarding our Companys NEO compensation program generally and does not examine any particular compensation element individually. Because the Say on Pay vote is advisory, it is not binding on our Company, our Compensation Committee or our Board. However, the Compensation Committee intends to review the results of the advisory vote and will be cognizant of the feedback received from the voting results as it completes its annual review and engages in the compensation planning process.
Accordingly, we will ask our shareholders to vote on the following resolution at the 2014 Annual Meeting:
RESOLVED, that, the compensation paid to the Companys NEOs, as disclosed in this proxy statement for our 2014 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables and related narrative disclosure, is hereby approved.
The Board of Directors believes the compensation of our NEOs is appropriate and promotes the best interests of our shareholders and therefore recommends that shareholders vote FOR approval of this resolution.
Summary Compensation Table
The following table sets forth the 2013, 2012 and 2011 compensation for:
We refer to the executive officers included in the Summary Compensation Table as our NEOs. A detailed description of the plans and programs under which our NEOs received the following compensation can be found in this proxy statement under the heading Compensation Discussion and Analysis.
2013 Summary Compensation Table
2013 All Other Compensation
Our Board elected Douglas D. Tough as its non-executive Chairman effective October 1, 2009 and, pursuant to the terms of a letter agreement dated September 8, 2009 between our Company and Mr. Tough, he became our executive Chairman and Chief Executive Officer effective March 1, 2010.
Under this agreement, Mr. Toughs employment is on an at-will basis until terminated by either party. Mr. Tough is entitled to the following compensation under the agreement:
The letter agreement provides for non-competition, non-solicitation, non-disclosure, cooperation and non-disparagement covenants.
Mr. Toughs letter agreement grants him certain rights upon termination of his employment. These rights are described in this proxy statement under the heading Termination of Employment and Change in Control Arrangements Other Separation Arrangements.
None of our other NEOs is a party to a written employment agreement. Their compensation is approved by the Compensation Committee and is generally determined by the terms of the various compensation plans in which they are participants and which are described in this proxy statement more fully above in the Compensation Discussion and Analysis, in the narrative following the Grants of Plan-Based Awards Table and under the heading Termination of Employment and Change in Control Arrangements. In addition, their salary is reviewed, determined and approved on an annual basis by our Compensation Committee. Executives also may be entitled to certain compensation arrangements provided or negotiated in connection with their commencement of employment with our Company.
Grants of Plan-Based Awards
The following table provides information regarding grants of plan-based awards to our NEOs during 2013. The amounts reported in the table under Estimated Future Payouts under Non-Equity Incentive Plan Awards and Estimated Future Payouts under Equity Incentive Plan Awards represent the threshold, target and maximum awards under our AIP and LTIP programs. The performance conditions applicable to the AIP and LTIP are described in the Compensation Discussion and Analysis.
With regard to the AIP, the percentage of each NEOs target award that was actually achieved for 2013 based on satisfaction of the AIP performance conditions is discussed in the Compensation Discussion and Analysis. The amount actually paid to each NEO in 2014 based on 2013 performance under the AIP is included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
With regard to the LTIP, the amounts of each NEOs award that were actually achieved for 2011-2013 based on satisfaction of the performance conditions for the 2011-2013 LTIP and the 2013 segment of each of the 2012-2014 LTIP and 2013-2015 LTIP cycles are set forth following the Grants of Plan-Based Awards Table. In addition, cash amounts earned by each NEO for the cumulative and 2013 segment of the 2011-2013 LTIP cycle and the 2013 segments of the 2012-2014 LTIP and 2013-2015 LTIP cycles are also included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. However, any cash or shares credited to a NEO based on achievement of performance conditions during a segment will not be paid until completion of the full LTIP cycle.
2013 Grants of Plan-Based Awards