Kforce DEFA14A 2012
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x Filed by a party other than the Registrant ¨
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ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 19, 2012
Supplemental Information Regarding Proposal 3
Approval of Kforces Executive Compensation
Commencing on or about June 7, 2012, the following materials will be used by officers of Kforce Inc. to communicate about Proposal 3 Approval of Kforces Executive Compensation for the upcoming Annual Meeting of Shareholders to be held on June 19, 2012, and may be sent to certain shareholders.
Dear Shareholders of Kforce Inc.:
At the Annual Meeting of Shareholders of Kforce Inc. to be held on June 19, 2012, shareholders will cast a non-binding advisory vote on a proposal to approve the compensation of Kforces named executive officers (NEOs). Proposal 3 in Kforces 2012 proxy statement includes relevant information regarding this matter. Proposal 3, commonly known as a say-on-pay proposal, is not intended to address any specific item of compensation, but rather the overall compensation of our NEOs and the philosophy, policies and practices described in our proxy statement in accordance with the SECs compensation disclosure rules. This Supplemental Information is being provided to give you additional information regarding Proposal 3. Kforces Board of Directors has unanimously recommended a non-binding advisory vote for the approval of Proposal 3.
Recently, ISS Proxy Advisory Services (ISS) has recommended its clients vote against Proposal 3. After careful review of ISSs rationale for its advice, Kforce disagrees with the ISS recommendation, as well as the underlying methodology used in the ISS report. As is discussed in greater detail below, Kforce disagrees with the ISS recommendation for the following reasons:
Kforce urges you to carefully consider the following points prior to voting on Proposal 3.
The annual incentive compensation is structured to be the greater of the incentive calculated under either the: (i) relative revenue performance measurement or (ii) the level of attainment of EPS and revenue measurements. In 2012, prior to the Compensation Committee receiving the final calculations Kforces NEOs recommended to the Compensation Committee, and the Compensation Committee approved, to forego the amounts that would have been achieved using the relative revenue performance measurement even though the calculation would have resulted in more PARS awards being earned by the NEOs for the 2011 measurement period. Instead, the performance-based annual incentive compensation was determined based on the level of revenue and EPS achieved during 2011, which resulted in fewer PARS awards being earned by the NEOs. The decision to forego measurement of the annual incentive compensation using relative revenue performance resulted in an aggregate reduction in the grant date fair value of the PARS awards of $1,760,550. In 2011, the NEOs recommended, and the Compensation Committee approved, discretionary reductions in the NEOs 2010 annual incentive compensation of $3,814,813 (approximately 88% of the aggregate annual incentive compensation earned). Both the election to forego measurement of the annual incentive compensation under the relative revenue performance method for 2011 and the discretionary reductions to the 2010 annual incentive compensation were unanimously decided upon by the NEOs as certain aspirational goals were not achieved during both measurement periods.
ISS has expressed the opinion that repeated voluntary reductions in payouts, initiated by the NEOs and not the Compensation Committee, does not indicate either a well-designed incentive structure or strong committee oversight. Kforce disagrees with this ISS assertion. The voluntary reductions in NEO annual incentive compensation during 2011 and 2012 do not reflect inadequate Compensation Committee oversight given the sequence of events leading to the reductions in payouts. The recommendations by the NEOs to reduce the compensation for both 2010 and 2011 were:
The ISS report incorrectly describes the time-based vesting condition applicable to the ALTI awards as a performance-based condition. As a result, the ISS report incorrectly characterizes the March 2012 acceleration of the vesting of the ALTI awards as the elimination of a forward-looking performance condition.
During 2011, the performance of Kforces common stock ranked 5th within the industry peer group selected by Kforce, which resulted in a suggested equity grant pool of 2.67% of our common shares outstanding. Given the limited number of remaining shares available for issuance under the 2006 Stock Incentive Plan to fulfill the equity grant for the 2011 performance period, the Compensation Committee authorized and made an ALTI grant to each NEO, with an aggregate initial target total payout for all NEOs of $9,553,161. The aggregate initial target total value was based on the fair market value of the equity grant (based on a closing stock price of $12.76 on January 3, 2012) that would have been received by each NEO, absent the limitation on the number of shares available for issuance. As with the awards of PARS granted in prior years as a result of performance, the payout of these ALTI awards was subject to an additional time-based vesting condition over three years. As a result, the ALTI award followed the same process as the prior years PARS awards, with the exception that it was denominated in cash rather than equity.
If, as in prior years, Kforce had granted PARS rather than ALTI awards in January 2012, the value of the PARS awards would fluctuate based on the performance of Kforce stock and would ultimately have a different value at the time of vesting as compared to the grant date fair value. The terms of the ALTI awards incorporated an element of risk similar to prior PARS awards by adjusting the vesting value for the performance of the stock during the three-year vesting period to provide further shareholder alignment. Under the original terms of the ALTI awards, upon each vesting date, the ultimate annual payout, as a percentage of target, would have been based on Kforces Common Stock ranking each year relative to its industry peer group for the respective year. If, however, Kforces common stock return had been negative for any annual measurement period, its annual payout as a percentage of target would have been decreased by one ranking. The provision for variation in the ALTI value during the time-based vesting period was not established as an additional performance condition, but rather to allow for fluctuation in the ultimate value of the award similar to the PARS awards. As was the case with the PARS granted in prior years, the performance condition applicable to the ALTI awards was satisfied during 2011, and the sole vesting condition affected by the March 2012 vesting acceleration was the three-year time-based vesting condition.
The ISS report incorrectly states that Kforce has not disclosed how the long-term incentive award size will vary based on different total shareholder return rankings. However, the ISS report itself describes in detail, based on disclosures from Kforces proxy statement, the formula for determining long-term incentive awards based on previous years.
Additionally, as part of the continuous review and comparison of NEO compensation, the Compensation Committee mandated an additional limitation based on market capitalization, in the form of a cap based on common shares outstanding. The Compensation Committee placed a maximum cap on the value of long-term incentives (both in the form of equity and alternative long-term incentives) that may be awarded based on 2012 performance. This cap, which was not in place during 2011, will further limit total compensation related to the 2012 performance period for: (i) the CEO and (ii) in the aggregate, all Kforce employees. The maximum cap is now in effect and limits the value of long-term incentives to 0.50% of the market capitalization of Kforce Inc. for the CEO. In the aggregate, all employees are restricted to a total of 2.00% of the market capitalization of Kforce Inc.
The Compensation Committee exercised its discretion to accelerate the vesting of substantially all of the outstanding and unvested restricted stock and ALTI effective March 30, 2012. It is important to remember that the Board, after careful deliberation, determined that the acceleration was in the best interests of Kforce and its shareholders. A failure to accelerate would have resulted in a substantial tax liability to Kforce in 2012, adversely impacting earnings. The Committee also put in place a six-month required holding period for the accelerated shares, recognizing the reduction in the retention incentive (although, as discussed elsewhere, we believe this reduction was slight) inherent in the unvested shares prior to the acceleration.
The ISS report criticizes the vesting acceleration in part because it circumvents the retention incentive, or other purposes for which the restrictions were initially put in place. The facts do not support this criticism as Kforces CEO, President and CFO hold significant amounts of Kforce shares without regard to the accelerated shares.
As a result of the acceleration each of the NEOs now holds an additional significant financial stake in Kforce, which will enhance the alignment of the interests of Kforces shareholders and NEOs. The weighted average remaining vesting period for the accelerated shares was 2.3 years. After consideration of the new six-month holding period, the time period affected by the loss of retention incentive is 1.8 years. The ISS report criticizes the retention value of the six-month holding period due to its brevity, while also dismissing the significance of Kforces enhanced stock ownership guidelines because they have already been more than met by most NEOs . We fundamentally believe a higher ownership level by the NEOs results in better alignment with shareholders in virtually all circumstances, including those currently in place at Kforce.
The ISS report states the acceleration of the ALTI vesting constitutes more than 80% of the total value of the CEOs and other NEOs accelerated awards. We disagree with this statement for the following reasons:
We believe this actual outcome is significantly different than ISS calculation and presents a much different picture of the relative impact of the acceleration on the PARS and ALTI figures.
The pay-for-performance analysis in the ISS report is based on a comparison to a peer group selected by ISS based on Global Industry Classification Standard (GICS) code and revenue.
By comparison, the Compensation Committee annually reviews compensation paid under a three-year NEO compensation plan to assess compliance with the plan and to analyze our executive compensation (base salary, annual, and long-term incentive compensation) relative to the competitive market for similar executive officers within an industry peer group selected by Kforce. The Kforce industry peer group selection is based on: (i) peer company customers; (ii) revenue footprint; (iii) geographical presence; (iv) talent; (v) capital; (vi) size; (vii) complexity of operating model; and (viii) annual revenues.
We believe the Kforce selection criteria yields a robust industry peer group more tightly focused on Kforces direct business competitors and those companies generally viewed by investors as similar to Kforce. The tightly focused peer group in turn supports the relative shareholder return criteria that forms the core of our long-term equity-based incentive plan. We believe this interlocked system serves shareholders much better than a GICS code/revenue-based peer group that may not be reflective of competitors and how investors view the staffing industry and decide to make long-term investments in the industry.
During May 2012, additional information, which is included in Exhibit A, was provided to ISS prior to the release of their recommendations. The information provided explains Kforces positions in greater detail and discusses how the data in the Summary Compensation Table within the 2012 Proxy Statement does not present a complete picture of the NEOs actual compensation. We believe the Earned Compensation For Corresponding Year of Performance Table (included in the attached Exhibit A), which was included in the 2012 Proxy Statement and provided to ISS, more accurately reflects the NEOs actual compensation than the Summary Compensation Table, which was ultimately used by ISS.
SUMMARY OF DISCLOSURES1 RELATING TO
ACCELERATION OF VESTING OF RESTRICTED STOCK AND
ALTERNATIVE LONG-TERM INCENTIVE AWARDS AND
OTHER EXECUTIVE COMPENSATION ISSUES
1 All information contained in this summary is available in one or more of the following public filings: (i) Proxy Statement filed April 27, 2012; (ii) Form 8-K Current Report filed April 3, 2012; and (iii) Form 10-Q Quarterly Report filed May 7, 2012.
Kforce Inc. has significantly enhanced disclosure in the Compensation Discussion and Analysis (CD&A) section of the Proxy to assist shareholders to better understand the following items related to Executive Compensation:
Description of Vesting Acceleration
Purpose of Vesting Acceleration
Rationale for Vesting Acceleration
Additional Discussion of Performance-Based Pay
Discussion of Earned Compensation
The Stock Awards column of the Summary Compensation Table in the Proxy (page 38) does not present a complete picture of the actual pay earned by the Executives.
Discussion of Earned Compensation (continued)
We have included a table entitled Earned Compensation for Corresponding Year of Performance in the Proxy (page 33). The table is included below:
EARNED COMPENSATION FOR CORRESPONDING YEAR OF PERFORMANCE
For Fiscal Years Ended December 31, 2011, 2010 and 2009
Discussion of Compensation Practices Adopted
The Compensation Committee regularly considers additional compensation practices to strengthen its governance over Executive Compensation. The following additional compensation practices were adopted:
Future Plans Relating to Equity and Incentive Compensation