Texas Instruments DEF 14A 2015
Documents found in this filing:
United States Securities and
Washington, D.C. 20549
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 16, 2015
You are cordially invited to attend the 2015 annual meeting of stockholders on Thursday, April 16, 2015, at the cafeteria on our property at 12500 TI Boulevard, Dallas, Texas, at 9:00 a.m. (Central time). At the meeting we will consider and act upon the following matters:
●the election of directors for the next year,
●advisory approval of the companys executive compensation,
●ratification of the appointment of Ernst & Young LLP as the companys independent registered public accounting firm for 2015, and
●such other matters as may properly come before the meeting.
Stockholders of record at the close of business on February 17, 2015, are entitled to vote at the annual meeting.
We urge you to vote your shares as promptly as possible by: (1) accessing the Internet website, (2) calling the toll-free number or (3) signing, dating and mailing the enclosed proxy.
TABLE OF CONTENTS
PROXY STATEMENT MARCH 4, 2015
Voting procedures and quorum
TIs board of directors requests your proxy for the annual meeting of stockholders on April 16, 2015. If you sign and return the enclosed proxy, or vote by telephone or on the Internet, you authorize the persons named in the proxy to represent you and vote your shares for the purposes mentioned in the notice of annual meeting. This proxy statement and related proxy are being distributed on or about March 4, 2015. If you come to the meeting, you can vote in person. If you do not come to the meeting, your shares can be voted only if you have returned a properly signed proxy or followed the telephone or Internet voting instructions, which can be found on the enclosed proxy. If you sign and return your proxy but do not give voting instructions, the shares represented by that proxy will be voted as recommended by the board of directors. You can revoke your authorization at any time before the shares are voted at the meeting.
A quorum of stockholders is necessary to hold a valid meeting. If at least a majority of the shares of TI common stock issued and outstanding and entitled to vote are present in person or by proxy, a quorum will exist. Abstentions and broker non-votes are counted as present for purposes of establishing a quorum. Broker non-votes occur when a beneficial owner who holds company stock through a broker does not provide the broker with voting instructions as to any matter on which the broker is not permitted to exercise its discretion and vote without specific instruction.
Scheduled to be considered at the meeting are the election of directors, an advisory vote regarding approval of the companys executive compensation and ratification of the appointment of our independent registered public accounting firm. Each of these matters is discussed elsewhere in this proxy statement. On each of these matters you may vote for, against or abstain. The vote required for the election of directors and approval of the other matters is shown in the table below.
Election of directors
Directors are elected at the annual meeting to hold office until the next annual meeting and until their successors are elected and qualified. The board of directors has designated the following persons as nominees: RALPH W. BABB, JR., MARK A. BLINN, DANIEL A. CARP, CARRIE S. COX, RONALD KIRK, PAMELA H. PATSLEY, ROBERT E. SANCHEZ, WAYNE R. SANDERS, RUTH J. SIMMONS, RICHARD K. TEMPLETON and CHRISTINE TODD WHITMAN.
If you return a proxy that is not otherwise marked, your shares will be voted FOR each of the nominees.
Nominees for directorship
All of the nominees for directorship are directors of the company. For a discussion of each nominees qualifications to serve as a director of the company, please see pages 75-77. If any nominee becomes unable to serve before the meeting, the persons named as proxies may vote for a substitute or the number of directors will be reduced accordingly.
Director nomination process
The board is responsible for approving nominees for election as directors. To assist in this task, the board has designated a standing committee, the Governance and Stockholder Relations Committee (the G&SR Committee), which is responsible for reviewing and recommending nominees to the board. The G&SR Committee is comprised solely of independent directors as defined by the rules of The NASDAQ Stock Market (NASDAQ) and the boards corporate governance guidelines. Our board of directors has adopted a written charter for the G&SR Committee. It can be found on our website at www.ti.com/corporategovernance.
It is a long-standing policy of the board to consider prospective board nominees recommended by stockholders. A stockholder who wishes to recommend a prospective board nominee for the G&SR Committees consideration can write to the Secretary of the G&SR Committee, Texas Instruments Incorporated, P.O. Box 655936, MS 8658, Dallas, TX 75265-5936. The G&SR Committee will evaluate the stockholders prospective board nominee in the same manner as it evaluates other nominees.
In evaluating prospective nominees, the G&SR Committee looks for the following minimum qualifications, qualities and skills:
●Outstanding achievement in the individuals personal career.
●Breadth of experience.
●Soundness of judgment.
●Ability to make independent, analytical inquiries.
●Ability to contribute to a diversity of viewpoints among board members.
●Willingness and ability to devote the time required to perform board activities adequately (in this regard, the G&SR Committee will consider the number of other boards on which the individual serves as a director, and in particular the boards policy that directors should not serve on the boards of more than three other public companies).
●Ability to represent the total corporate interests of TI (a director will not be selected to, nor will he or she be expected to, represent the interests of any particular group).
Stockholders, non-employee directors, management and others may submit recommendations to the G&SR Committee.
All nominees for directorship are directors of the company.
The board believes its current size is within the desired range as stated in the boards corporate governance guidelines.
Board diversity and nominee qualifications
As indicated by the criteria above, the board prefers a mix of background and experience among its members. The board does not follow any ratio or formula to determine the appropriate mix. Rather, it uses its judgment to identify nominees whose backgrounds, attributes and experiences, taken as a whole, will contribute to the high standards of board service at the company. The effectiveness of this approach is evidenced by the directors participation in the insightful and robust yet respectful deliberation that occurs at board and committee meetings and in shaping the agendas for those meetings.
As it considered director nominees for the 2015 annual meeting, the board kept in mind that the most important issues it considers typically relate to the companys strategic direction; succession planning for senior executive positions; the companys financial performance; the challenges of running a large, complex enterprise, including the management of its risks; major acquisitions and divestitures; and significant research and development (R&D) and capital investment decisions. These issues arise in the context of the companys operations, which primarily involve the manufacture and sale of semiconductors all over the world into industrial, automotive, personal electronics, communications equipment and enterprise systems markets.
As described below, each of our director nominees has achieved an extremely high level of success in his or her career, whether at multi-billion dollar multinational corporate enterprises, major U.S. universities or significant governmental organizations. In these positions, each has been directly involved in the challenges relating to setting the strategic direction and managing the financial performance, personnel and processes of large, complex organizations. Each has had exposure to effective leaders and has developed the ability to judge leadership qualities. Ten of them have experience in serving on the board of directors of at least one other major corporation, and two have served in high political office, all of which provides additional relevant experience on which each nominee can draw.
In concluding that each nominee should serve as a director, the board relied on the specific experiences and attributes listed below and on the direct personal knowledge, born of previous service on the board, that each of the nominees brings insight and the willingness to ask difficult questions to board deliberations.
●As chairman and CEO of Comerica Incorporated and Comerica Bank (2002-present) and through a long career in banking, has gained first-hand experience in managing large, complex institutions, as well as insight into financial markets.
●As Audit Committee chair at the company (April 19, 2013-present), chief financial officer of Comerica Incorporated and Comerica Bank (1995-2002), controller and later chief financial officer of Mercantile Bancorporation (1978-1995), and auditor and later audit manager at the accounting firm of Peat Marwick Mitchell & Co. (1971-1978), has gained extensive audit knowledge and experience in audit- and financial control-related matters.
●As CEO and a director of Flowserve Corporation (2009-present), has gained first-hand experience in managing a large, multinational corporation operating in global industrial markets, with ultimate management responsibility for the organizations financial performance and significant capital and R&D investments.
●As chief financial officer of Flowserve Corporation (2004-2009), chief financial officer of FedEx Kinkos Office and Print Services Inc. (2003-2004) and vice president and controller of Centex Corporation (2000-2002), has developed a keen appreciation for audit- and financial control-related matters.
●As chairman and CEO (2000-2005) and president (1997-2001, 2002-2003) of Eastman Kodak Company, has gained first-hand experience in managing a large, multinational corporation focused on worldwide electronics markets, with ultimate management responsibility for the corporations financial performance and its significant investments in capital and R&D.
●As chairman of the board of directors of Delta Air Lines, Inc. (2007-present), a director of Norfolk Southern Corporation (2006-present) and a director of Liz Claiborne, Inc. (2006-2009), has helped oversee the strategy and operations of major multinational corporations in various industries, including some that are capital-intensive.
●As chairman (2013-present), CEO and a director (2010-present) of Humacyte, Inc., executive vice president and president of Global Pharmaceuticals at Schering-Plough Corporation (2003-2009) and executive vice president and president of Global Prescription Business at Pharmacia Corporation (1997-2003), has gained first-hand experience in managing large, multinational organizations focused on medical-related markets, with responsibility for those organizations financial performance and significant capital and R&D investments. Is also a director of Cardinal Health, Inc. (2009-present) and Celgene Corporation (2009-present).
●As U.S. Trade Representative (2009-2013), has gained first-hand experience in managing a complex organization that operates on an international scale and developed insight into issues bearing on global economic activity, international trade policies and strategies and the workings of foreign governments.
●As Senior Of Counsel of Gibson, Dunn & Crutcher LLP (2013-present), and as a partner of Vinson & Elkins, LLP (2005-2009), has gained first-hand experience as an advisor to numerous multinational companies.
●As a director of Brinker International, Inc. (1997-2009) and Dean Foods Company (1997-2009), has helped oversee the strategy and operations of other large corporations.
●As chairman and CEO (2009-present) of MoneyGram International, Inc., senior executive vice president of First Data Corporation (2000-2007) and president and CEO of Paymentech, Inc. (1991-2000), has gained first-hand experience in managing large, multinational organizations, including the application of technology in the financial services sector, with ultimate management responsibility for their financial performance and significant capital investments.
●As Audit Committee chair at the company (2006-April 18, 2013), a member of the audit committee at Dr Pepper Snapple Group, Inc., chief financial officer of First USA, Inc. (1987-1994) and an auditor at KPMG Peat Marwick for almost six years before joining First USA, has developed a keen appreciation for audit- and financial control-related matters.
●As a director of Dr Pepper Snapple Group, Inc. (2008-present) and a director of Molson Coors Brewing Company (2005-2009), has helped oversee the strategy and operations of other major multinational corporations.
●As chairman and CEO (2013-present), president (2012-2014) and chief operating officer (2012) of Ryder System, Inc., and as president of its Global Fleet Management Solutions business segment (2010-2012), has gained first-hand experience in managing a large, multinational, transportation-related organization, with responsibility for the organizations financial performance and significant capital investments.
●As executive vice president and chief financial officer (2007-2010) and as senior vice president and chief information officer (2003-2005) of Ryder System, Inc., has developed a keen appreciation for audit- and financial control-related issues and gained first-hand experience with all technology-related functions of a large, multinational corporation focused on transportation and logistics.
●As chairman (1992-2003) and CEO (1991-2002) of Kimberly-Clark Corporation, has gained first-hand experience in managing a large, multinational consumer goods corporation, with ultimate management responsibility for its financial performance and its significant capital and R&D investments.
●As chairman of Dr Pepper Snapple Group, Inc. (2008-present) and a director of Belo Corporation (2003-2013), has helped oversee the strategy and operations of other large corporations.
●As president of Brown University (2001-2012) and president of Smith College (1995-2001), has gained first-hand experience in managing large, complex institutions, and developed deep insight into the development and training of professionals, including engineers, scientists and technologists, on whom the company relies for its next generation of employees.
●As a director of Fiat Chrysler Automobiles N.V. (2014-present), Chrysler Group LLC (2012-2014) and Mondelez International, Inc. (2012-present) and as a former director of The Goldman Sachs Group, Inc. (2000-2010), has helped oversee the strategy and operations of other large corporations.
●As a 34-year veteran of the semiconductor industry, serving the last 19 years at a senior level at the company, including as chairman since 2008, CEO since 2004 and director since 2003, has developed a deep knowledge of all aspects of the company and of the semiconductor industry.
●As Administrator of the Environmental Protection Agency (2001-2003) and Governor of the state of New Jersey (1994-2000), has gained first-hand experience managing a large, complex organization and developed keen insight into the workings of government on the federal and state level and how they might impact company operations.
●As a director of S.C. Johnson & Son, Inc. (2003-present) and United Technologies Corp. (2003-present), has helped oversee the strategy and operations of other large corporations.
Communications with the board
Stockholders and others who wish to communicate with the board, a board committee or an individual director, may write to them at: P.O. Box 655936, MS 8658, Dallas, TX 75265-5936. All communications sent to this address will be shared with the board, committee or individual director as applicable.
The board has a long-standing commitment to responsible and effective corporate governance. We annually conduct extensive governance reviews and engage in investor outreach specific to governance and executive compensation matters. The boards corporate governance guidelines (which include the director independence standards), the charters of each of the boards committees, TIs code of business conduct and our code of ethics for our CEO and senior financial officers are available on our website at www.ti.com/corporategovernance. Stockholders may request copies of these documents free of charge by writing to Texas Instruments Incorporated, P.O. Box 660199, MS 8657, Dallas, TX 75266-0199, Attn: Investor Relations.
Annual meeting attendance
It is a policy of the board to encourage directors to attend each annual meeting of stockholders. Such attendance allows for direct interaction between stockholders and board members. In 2014, all directors attended TIs annual meeting of stockholders.
The board has determined that each of our directors is independent except for Mr. Templeton. In connection with this determination, information was reviewed regarding directors business and charitable affiliations, directors immediate family members and their employers, and any transactions or arrangements between the company and such persons or entities. The board has adopted the following standards for determining independence.
For purposes of these independence determinations, company and family member will have the same meaning as under NASDAQ rules.
Board and committee meetings
During 2014, the board held nine meetings. The board has three standing committees described below. The committees of the board collectively held 20 meetings in 2014. Each director attended at least 87 percent of the board and relevant committee meetings combined. Overall attendance at board and committee meetings was approximately 97 percent.
Committees of the board
The Audit Committee is a separately designated standing committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. All members of the Audit Committee are independent under NASDAQ rules and the boards corporate governance guidelines. Since April 19, 2013, the committee members have been Mr. Babb (Chair), Mr. Blinn and Ms. Simmons. The Audit Committee is generally responsible for:
●Appointing, compensating, retaining and overseeing TIs independent registered public accounting firm.
●Reviewing the annual report of TIs independent registered public accounting firm related to quality control.
●Reviewing TIs annual and quarterly reports to the SEC, including the financial statements and the Managements Discussion and Analysis portion of those reports, and recommending appropriate action to the board.
●Reviewing TIs audit plans.
●Reviewing before issuance TIs news releases regarding annual and interim financial results and discussing with management any related earnings guidance that may be provided to analysts and rating agencies.
●Discussing TIs audited financial statements with management and the independent registered public accounting firm, including a discussion with the firm regarding the matters required to be reviewed under applicable legal or regulatory requirements.
●Reviewing relationships between the independent registered public accounting firm and TI.
●Reviewing and discussing the adequacy of TIs internal accounting controls and other factors affecting the integrity of TIs financial reports with management and with the independent registered public accounting firm.
●Creating and periodically reviewing TIs whistleblower policy.
●Reviewing TIs risk assessment and risk management policies.
●Reviewing TIs compliance and ethics program.
●Reviewing a report of compliance of management and operating personnel with TIs code of business conduct, including TIs conflict of interest policy.
●Reviewing TIs non-employee-related insurance programs.
●Reviewing changes, if any, in major accounting policies of the company.
●Reviewing trends in accounting policy changes that are relevant to the company.
●Reviewing the companys policy regarding investments and financial derivative products.
The board has determined that all members of the Audit Committee are financially sophisticated, as the board has interpreted such qualifications in its business judgment. In addition, the board has designated Mr. Babb as the audit committee financial expert as defined in the Securities Exchange Act of 1934, as amended.
The Audit Committee met six times in 2014. The Audit Committee holds regularly scheduled meetings and reports its activities to the board. The committee also continued its long-standing practice of meeting directly with our internal audit staff to discuss the audit plan and to allow for direct interaction between Audit Committee members and our internal auditors. Please see page 110 for a report of the committee.
All members of the Compensation Committee are independent. From April 19, 2013, to April 17, 2014, the committee members were Ms. Cox (Chair), Ms. Patsley and Mr. Sanchez. Since April 18, 2014, the committee members have been Mr. Sanchez (chair), Ms. Patsley and Ms. Whitman. The committee is responsible for:
●Reviewing the performance of the CEO and determining his compensation.
●Setting the compensation of the companys other executive officers.
●Overseeing administration of employee benefit plans.
●Making recommendations to the board regarding:
○Institution and termination of, revisions in and actions under employee benefit plans that (i) increase benefits only for officers of the company or disproportionately increase benefits for officers of the company more than other employees of the company, (ii) require or permit the issuance of the companys stock or (iii) the board must approve.
○Reservation of company stock for use as awards of grants under plans or as contributions or sales to any trustee of any employee benefit plan.
●Taking action as appropriate regarding the institution and termination of, revisions in and actions under employee benefit plans that are not required to be approved by the board.
●Appointing, setting the compensation of, overseeing and considering the independence of any compensation consultant or other advisor.
The Compensation Committee met seven times in 2014. The Compensation Committee holds regularly scheduled meetings, reports its activities to the board, and consults with the board before setting annual executive compensation. Please see page 97 for a report of the committee.
In performing its functions, the committee is supported by the companys Human Resources organization. The committee has the authority to retain any advisors it deems appropriate to carry out its responsibilities. The committee retained Pearl Meyer & Partners as its compensation consultant for the 2014 compensation cycle. The committee instructed the consultant to advise it directly on executive compensation philosophy, strategies, pay levels, decision-making processes and other matters within the scope of the committees charter. Additionally, the committee instructed the consultant to assist the companys Human Resources organization in its support of the committee in these matters with such items as peer-group assessment, analysis of the executive compensation market, and compensation recommendations.
The Compensation Committee considers it important that its compensation consultants objectivity not be compromised by other engagements with the company or its management. In support of this belief, the committee has a policy on compensation consultants, a copy of which may be found on www.ti.com/corporategovernance. During 2014, the committee determined that its compensation consultant was independent of the company and had no conflict of interest.
The Compensation Committee considers executive compensation in a multistep process that involves the review of market information, performance data and possible compensation levels over several meetings leading to the annual determinations in January. Before setting executive compensation, the committee reviews the total compensation and benefits of the executive officers and considers the impact that their retirement, or termination under various other scenarios, would have on their compensation and benefits.
The CEO and the senior vice president responsible for Human Resources, who is an executive officer, are regularly invited to attend meetings of the committee. The CEO is excused from the meeting during any deliberations or vote on his compensation. No executive officer determines his or her own compensation or the compensation of any other executive officer. As members of the board, the members of the committee receive information concerning the performance of the company during the year and interact with our management. The CEO gives the committee and the board an assessment of his own performance during the year just ended. He also reviews the performance of the other executive officers with the committee and makes recommendations regarding their compensation. The senior vice president responsible for Human Resources assists in the preparation of and reviews the compensation recommendations made to the committee other than for her compensation.
The Compensation Committees charter provides that it may delegate its power, authority and rights with respect to TIs long-term incentive plans, employee stock purchase plan and employee benefit plans to (i) one or more committees of the board established or delegated authority for that purpose; or (ii) employees or committees of employees except that no such delegation may be made with respect to compensation of the companys executive officers.
Pursuant to that authority, the Compensation Committee has delegated to a special committee established by the board the authority to grant a limited number of stock options and restricted stock units under the companys long-term incentive plans. The sole member of the special committee is Mr. Templeton. The special committee has no authority to grant, amend or terminate any form of compensation for TIs executive officers. The Compensation Committee reviews the grant activity of the special committee.
Governance and Stockholder Relations Committee
All members of the G&SR Committee are independent. From April 19, 2013 to April 17, 2014, the committee members were Ms. Whitman (Chair), Mr. Carp and Mr. Sanders, with Mr. Kirk joining the committee on September 19, 2013. Since April 18, 2014, the committee members have been Mr. Sanders (chair), Mr. Carp, Ms. Cox and Mr. Kirk. The G&SR Committee is generally responsible for:
The G&SR Committee met seven times in 2014. The G&SR Committee holds regularly scheduled meetings and reports its activities to the board. Please see page 75 for a discussion of stockholder nominations and page 77 for a discussion of communications with the board.
Board leadership structure
The boards current leadership structure combines the positions of chairman and CEO, and includes a lead director who presides at executive sessions and performs the duties listed below. The board believes that this structure, combined with its other practices (such as (a) including on each board agenda an opportunity for the independent directors to comment on and influence the proposed strategic agenda for future meetings and (b) holding an executive session at each board meeting), allows it to maintain the active engagement of independent directors and appropriate oversight of management.
The lead director is elected by the independent directors annually. The independent directors have elected Mr. Sanders to serve as lead director. The duties of the lead director are to:
In addition, the lead director has authority to call meetings of the independent directors.
The board, led by its G&SR Committee, regularly reviews the boards leadership structure. The boards consideration is guided by two questions: would stockholders be better served and would the board be more effective with a different structure. The boards views are informed by a review of the practices of other companies and insight into the preferences of top stockholders, as gathered from face-to-face dialogue and review of published guidelines. The board also considers how board roles and interactions would change if its leadership structure changed. The boards goal is for each director to have an equal stake in the boards actions and equal accountability to the corporation and its stockholders.
The board continues to believe that there is no uniform solution for a board leadership structure. Indeed, the company has had varying board leadership models over its history, at times separating the positions of chairman and CEO and at times combining the two, and now utilizing a lead director.
Risk oversight by the board
It is managements responsibility to assess and manage the various risks TI faces. It is the boards responsibility to oversee management in this effort. In exercising its oversight, the board has allocated some areas of focus to its committees and has retained areas of focus for itself, as more fully described below.
Management generally views the risks TI faces as falling into the following categories: strategic, operational, financial and compliance. The board as a whole has oversight responsibility for the companys strategic and operational risks (e.g., major initiatives, competitive markets and products, sales and marketing, and research and development). Throughout the year the CEO discusses these risks with the board during strategy reviews that focus on a particular business or function. In addition, at the end of the year, the CEO provides a formal report on the top strategic and operational risks.
TIs Audit Committee has oversight responsibility for financial risk (such as accounting, finance, internal controls and tax strategy). Oversight responsibility for compliance risk is shared by the board committees. For example, the Audit Committee oversees compliance with the companys code of conduct and finance- and accounting-related laws and policies, as well as the companys compliance program itself; the Compensation Committee oversees compliance with the companys executive compensation plans and related laws and policies; and the G&SR Committee oversees compliance with governance-related laws and policies, including the companys corporate governance guidelines.
The Audit Committee oversees the companys approach to risk management as a whole. It reviews the companys risk management process at least annually by means of a presentation by the CFO.
The boards leadership structure is consistent with the board and committees roles in risk oversight. As discussed above, the board has found that its current structure and practices are effective in fully engaging the independent directors. Allocating various aspects of risk oversight among the committees provides for similar engagement. Having the chairman and CEO review strategic and operational risks with the board ensures that the director most knowledgeable about the company, the industry in which it operates and the competition and other challenges it faces shares those insights with the board, providing for a thorough and efficient process.
The G&SR Committee has responsibility for reviewing and making recommendations to the board on compensation for non-employee directors, with the board making the final determination. The committee has no authority to delegate its responsibility regarding director compensation. In carrying out this responsibility, it is supported by TIs Human Resources organization. The CEO, the senior vice president responsible for Human Resources and the Secretary review the recommendations made to the committee. The CEO also votes, as a member of the board, on the compensation of non-employee directors.
The compensation arrangements in 2014 for the non-employee directors were:
The board has determined that annual grants of equity compensation to non-employee directors will be timed to occur when grants are made to our U.S. employees in connection with the annual compensation review process. Accordingly, such equity grants to non-employee directors are made in January. Please see the discussion regarding the timing of equity compensation grants on page 95.
Directors are not paid a fee for meeting attendance, but we reimburse non-employee directors for their travel, lodging and related expenses incurred in connection with attending board, committee and stockholders meetings and other designated TI events. In addition, non-employee directors may travel on company aircraft to and from these meetings and other designated events. On occasion, directors spouses are invited to attend board events; the spouses expenses incurred in connection with attendance at those events are also reimbursed.
Under the Director Plan, some directors have chosen to defer all or part of their cash compensation until they leave the board (or certain other specified times). These deferred amounts were credited to either a cash account or stock unit account. Cash accounts earn interest from TI at a rate currently based on Moodys Seasoned Aaa Corporate Bonds. For 2014, that rate was 4.56 percent. Stock unit accounts fluctuate in value with the underlying shares of TI common stock, which will be issued after the deferral period. Dividend equivalents are paid on these stock units. Directors may also defer settlement of the restricted stock units they receive.
We have arrangements with certain customers whereby our employees may purchase consumer products containing TI components at discounted pricing. In addition, the TI Foundation has an educational and cultural matching gift program. In both cases, directors are entitled to participate on the same terms and conditions available to employees.
Non-employee directors are not eligible to participate in any TI-sponsored pension plan.
2014 director compensation
The following table shows the compensation of all persons who were non-employee members of the board during 2014 for services in all capacities to TI in 2014.
The table below shows the aggregate number of shares underlying outstanding stock options held by the named individuals as of December 31, 2014.
We are providing the following advisory vote on named executive officer compensation as required by Section 14A of the Securities Exchange Act. The company holds this vote annually.
Proposal regarding advisory approval of the companys executive compensation
The board asks the shareholders to cast an advisory vote on the compensation of our named executive officers. The named executive officers are the chief executive officer, chief financial officer and three other most highly compensated executive officers, as named in the compensation tables on pages 98-110.
Specifically, we ask the shareholders to approve the following resolution:
RESOLVED, that the compensation paid to the companys named executive officers, as disclosed in this proxy statement pursuant to the Securities and Exchange Commissions compensation disclosure rules, including the Compensation Discussion and Analysis, compensation tables and narrative discussion on pages 86-110 of this proxy statement, is hereby approved.
We encourage shareholders to review the Compensation Discussion and Analysis section of the proxy statement, which follows. It discusses our executive compensation policies and programs and explains the compensation decisions relating to the named executive officers for 2014. We believe that the policies and programs serve the interests of our shareholders and that the compensation received by the named executive officers is commensurate with the performance and strategic position of the company.
Although the outcome of this vote is not binding on the company or the board, the Compensation Committee of the board will consider it when setting future compensation for the executive officers.
The board of directors recommends a vote FOR the resolution approving the named executive officer compensation for 2014, as disclosed in this proxy statement.
Compensation Discussion and Analysis
This section describes TIs compensation program for executive officers. It will provide insight into the following:
Currently, TI has 10 executive officers. These executives have the broadest job responsibilities and policy-making authority in the company. We hold them accountable for the companys performance and for maintaining a culture of strong ethics. Details of compensation for our CEO, CFO and the three other highest paid individuals who were executive officers in 2014 (collectively called the named executive officers) can be found in the tables beginning on page 98.
The committees strategy for setting cash and non-cash compensation is described in the table that follows immediately below. Its compensation decisions for the named executive officers for 2014 are discussed on pages 89-94. Benefit programs in which the executive officers participate are discussed on pages 95-96. Perquisites are discussed on page 96.
Compensation philosophy and
The primary elements of our executive compensation program are as follows:
Near-term compensation, paid in cash
The committee sets the Comparator Group. In general, the Comparator Group companies (1) are U.S.-based, (2) engage in the semiconductor business or other electronics or information technology activities, (3) have executive positions comparable in complexity to those of TI and (4) use forms of executive compensation comparable to TIs.
Shown in the table below is the Comparator Group used for the compensation decisions for 2014.
The committee set the Comparator Group in July 2013 for the base salary and equity compensation decisions it made in January 2014. For a discussion of the factors considered by the committee in setting the Comparator Group, please see page 72 of the companys 2014 proxy statement.
In July 2014, the committee conducted its regular review of the Comparator Group in terms of industry, revenue and market capitalization. With the advice of its compensation consultant, the committee determined that the group was still comparable overall to TI. Accordingly, it used the same Comparator Group for the bonus decisions in January 2015 relating to 2014 performance as it used to set salary and equity compensation in January 2014. The table below compares the group to TI in terms of revenue and market capitalization.
* Trailing four-quarter revenue as reported by Thomson Reuters on February 2, 2015. Market capitalization as of December 31, 2014.
Analysis of compensation determinations for 2014
* 2014 annual rate for Mr. Crutcher and Mr. Anderson includes salary increase approved in June 2014.
The committee set the 2014 base-salary rate for each of the named executive officers in January 2014. In keeping with its strategy, the committee set the annual base-salary rates to be below the estimated median level of salaries expected to be paid to similarly situated executives of the Comparator Group in 2014.
In June 2014, the committee increased the salary rate for Mr. Crutcher and Mr. Anderson as they assumed new leadership roles. The salary adjustments were consistent with the policy described in the preceding paragraph.
The salary differences between the named executive officers were driven primarily by the market rate of pay for each officer, and not the application of a formula designed to maintain a differential between the officers.
In January 2014, the committee awarded equity compensation to each of the named executive officers. The committees objective was to award to those officers equity compensation that had a grant date fair value at approximately the median market level, in this case the 40th to 60th percentile of the 3-year average of equity compensation (including an estimate of amounts for 2014) granted by the Comparator Group.
In assessing the market level, the committee considered information presented by TIs Compensation and Benefits organization (prepared using data provided by the committees compensation consultant) on the estimated value of the awards expected to be granted by the Comparator Group to similarly situated executives. The award value was estimated using the same methodology used for financial accounting.
For each officer, the committee set the desired grant value. The committee decided to allocate the value equally between restricted stock units and options for each officer, to give equal emphasis to promoting retention, motivating the executive and aligning his interests with those of shareholders.
Before approving the grants, the committee reviewed the amount of unvested equity compensation held by the officers to assess its retention value. In making this assessment, the committee used its judgment and did not apply any formula, threshold or maximum. This review did not result in an increase or decrease of the awards.
The exercise price of the options was the closing price of TI stock on January 23, 2014, the second trading day after the company released its annual and fourth quarter financial results for 2013. All grants were made under the Texas Instruments 2009 Long-Term Incentive Plan, which shareholders approved in April 2009.
In addition to the January 2014 awards described above, the committee awarded restricted stock units to Mr. Anderson as he assumed new and broader responsibilities in June 2014. The award was intended to increase the retention value of his outstanding equity compensation. In setting the value, the committee applied its judgment following a review of the current retention value.
All grants have the terms described on pages 102-103. The differences in the equity awards between the named executive officers were primarily the result of differences in the applicable estimated market level of equity compensation for their positions, and not the application of any formula designed to maintain differentials between the officers.
In addition, the committee considered our strategic progress by reviewing how competitive we are in key markets with our core products and technologies, as well as the strength of our relationships with customers.
One-year relative performance on the three measures and one-year strategic progress were the primary considerations in the committees assessment of the companys 2014 performance. In assessing performance, the committee did not use formulas, thresholds or multiples. Because market conditions can quickly change in our industry, thresholds established at the beginning of a year could prove irrelevant by year-end. The committee believes its approach, which assesses the companys relative performance in hindsight after year-end, gives it the insight to most effectively and critically judge results and encourages executives to pursue strategies that serve the long-term interests of the company and its shareholders.
In the comparison of relative performance, the committee used the following companies (the competitor companies):2
This list includes both broad-based and niche suppliers that operate in our key markets or offer technology that competes with our products. The committee considers annually whether the list is still appropriate in terms of revenue, market capitalization and changes in business activities of the companies. In July 2014, the committee removed LSI Corporation from the list following its acquisition by another company. The committee made no other change to the list of competitor companies in 2014.
Assessment of 2014 performance
The committee spent extensive time in December and January assessing TIs results and strategic progress for 2014. The committee considered both quantitative and qualitative measures and applied judgment in its assessment. The companys performance improved from the prior year on both an absolute and relative basis (see list of competitor companies above), putting it in a stronger position for the near and long terms. Commensurate with this improvement, the committee set bonuses 15 percent higher than last year for the named executive officers, with two exceptions for promotions. The assessments for each measure are below.
Revenue and margin
CAGR (compound annual growth rate) is calculated using the formula (Ending Value/Beginning Value)1/number of years-1.
Before setting the bonuses for the named executive officers, the committee considered the officers individual performance. The performance of the CEO was judged according to the performance of the company. For the other officers, the committee considered the factors described below in assessing individual performance. In making this assessment, the committee did not apply any formula or performance targets.
Mr. March is the chief financial officer. The committee noted the financial management of the company.
In June 2014, Mr. Crutcher became responsible for all of the companys product lines and sales activities. Previously he was responsible for the companys analog semiconductor product lines. The committee noted the financial performance and strategic position of the product lines and activities for which he is responsible.
In June 2014, Mr. Anderson became responsible for the companys analog semiconductor product lines. Previously he was responsible for the companys High Performance Analog product line. The committee noted the financial performance and strategic position of the product lines for which he is responsible.
Mr. Ritchie is responsible for the companys semiconductor manufacturing operations. The committee noted the performance of those operations, including their cost-competitiveness and inventory management.
The bonuses awarded for 2014 performance are shown in the table on page 94. The differences in the amounts awarded to the named executive officers were primarily the result of differences in the officers level of responsibility and the applicable market level of total cash compensation expected to be paid to similarly situated officers in the Comparator Group. The bonus of each named executive officer was paid under the Executive Officer Performance Plan described on pages 97 and 100.
Results of the compensation
useful to see the data presented in this form. Although the committee does not target a specific level of total compensation, it considers information similar to that in the table to ensure that the sum of these elements is, in its judgment, in a reasonable range. The principal differences between this table and the summary compensation table are explained in footnote 5 below.5
For Mr. Templeton, the Total was higher for 2014 than for 2013 due about equally to the higher level of his bonus and the higher grant date fair value of his equity compensation. For Mr. March, the Total was higher for 2014 primarily due to the higher level of his bonus. For the other officers, the Total was higher for 2014 primarily due to the higher grant date fair value of their equity compensation.
The compensation decisions shown above resulted in the following 2014 compensation mix for the named executive officers:
Process for equity
On occasion, the committee may grant stock options or restricted stock units to executives at times other than January. For example, it has done so in connection with job promotions and for purposes of retention.
We do not back-date stock options or restricted stock units. We do not accelerate or delay the release of information due to plans for making equity grants.
If the committee meeting falls in the same month as the release of the companys financial results, the committees practice is to make grants effective (i) after the results have been released or (ii) on the meeting day if later. In other months, its practice is to make them effective on the day of committee action. The exercise price of stock options is the closing price of TI stock on the effective date of the grant.
Most recent stockholder advisory vote
on executive compensation
Like other established U.S. manufacturers, we have had a U.S. qualified defined benefit pension plan for many years. At its origin, the plan was designed to be consistent with those offered by other employers in the diverse markets in which we operated, which at the time included consumer and defense electronics as well as semiconductors and materials products. In order to limit the cost of the plan, we closed the plan to new participants in 1997. We gave U.S. employees as of November 1997 the choice to remain in the plan, or to have their plan benefits frozen (i.e., no benefit increase attributable to years of service or change in eligible earnings) and begin participating in an enhanced defined contribution plan. Mr. Templeton and Mr. Crutcher chose not to remain in the defined benefit plan. As a result, their benefits under that plan were frozen in 1997 and they participate in the enhanced defined contribution plan. Mr. Anderson, who joined the company in 1999, participates in the enhanced defined contribution plan. The other named executive officers have continued their participation in the defined benefit pension plan.
The Internal Revenue Code (IRC) imposes certain limits on the retirement benefits that may be provided under a qualified plan. To maintain the desired level of benefits, we have non-qualified defined benefit pension plans for participants in the qualified pension plan. Under the non-qualified plans, participants receive benefits that would ordinarily be paid under the qualified pension plan but for the limitations under the IRC. For additional information about the defined benefit plans, please see pages 104-106.
Employees accruing benefits in the qualified pension plan, including the named executive officers other than Mr. Templeton, Mr. Crutcher and Mr. Anderson, also are eligible to participate in a qualified defined contribution plan that provides employer matching contributions. The enhanced defined contribution plan, in which Mr. Templeton, Mr. Crutcher and Mr. Anderson participate, provides for a fixed employer contribution plus an employer matching contribution.
In general, if an employee who participates in the pension plan (including an employee whose benefits are frozen as described above) dies after having met the requirements for normal or early retirement, his or her beneficiary will receive a benefit equal to the lump-sum amount that the participant would have received if he or she had retired before death. Having already reached the age of 55 and at least 20 years of employment, Mr. Templeton, Mr. March and Mr. Ritchie are eligible for early retirement under the pension plans.
Because benefits under the qualified and non-qualified defined benefit pension plans are calculated on the basis of eligible earnings (salary and bonus), an increase in salary or bonus may result in an increase in benefits under the plans. Salary or bonus increases for Mr. Templeton and Mr. Crutcher do not result in greater benefits for them under the companys defined benefit pension plans because their benefits under those plans were frozen in 1997. Mr. Anderson does not participate in the companys defined benefit pension plans. The committee considers the potential effect on the executives retirement benefits when it sets salary and performance bonus levels.
The executive officers deferred compensation account balances are unsecured and all amounts remain part of the companys operating assets. The value of the deferred amounts tracks the performance of investment alternatives selected by the participant. These alternatives are a subset of those offered to participants in the defined contribution plans described above. The company does not guarantee any minimum return on the amounts deferred. In accordance with SEC rules, no earnings on deferred compensation are shown in the summary compensation table on page 98 for 2014 because no above market rates were earned on deferred amounts in that year.
Employee stock purchase
Compensation following employment
termination or change in control
The Texas Instruments 2009 Long-Term Incentive Plan generally establishes double-trigger change-in-control terms for grants made in 2010 and later years. Under those terms, options become fully exercisable and shares are issued under restricted stock unit awards (to the extent permitted by Section 409A of the IRC) if the grantee is involuntarily terminated within 24 months after a change in control of TI. These terms are intended to encourage employees to remain with the company through a transaction while reducing employee uncertainty and distraction in the period leading up to any such event.
Stock ownership guidelines and policy
Short sales of TI stock by our executive officers are prohibited. It is against TI policy for any employee, including an executive officer, to engage in trading in puts (options to sell at a fixed price on or before a certain date), calls (similar options to buy), or other options or hedging techniques on TI stock.
Consideration of tax and accounting
treatment of compensation
The Texas Instruments Executive Officer Performance Plan is intended to ensure that performance bonuses under the plan are fully tax deductible under Section 162(m). The plan, which shareholders approved in 2002, is further described on page 100. The committees general policy is to award bonuses within the plan, although the committee reserves the discretion to pay a bonus outside the plan if it determines that it is in the best interest of the company and our shareholders to do so. The committee set the bonuses of the named executive officers for 2014 performance at the levels described on page 94. The bonuses were awarded within the plan.
When setting equity compensation, the committee considers the cost for financial reporting purposes of equity compensation it intends to grant. Its consideration of the cost of grants made in 2014 is discussed on pages 90-91 above.
Compensation Committee report
The Compensation Committee of the board of directors has furnished the following report:
The committee has reviewed and discussed the Compensation Discussion and Analysis (CD&A) with the companys management. Based on that review and discussion, the committee has recommended to the board of directors that the CD&A be included in the companys annual report on Form 10-K for 2014 and the companys proxy statement for the 2015 annual meeting of stockholders.
2014 summary compensation table
The table below shows the compensation of the companys CEO, CFO and each of the other three most highly compensated individuals who were executive officers during 2014 (collectively called the named executive officers) for services in all capacities to the company in 2014. For a discussion of the amount of a named executive officers salary and bonus in proportion to his total compensation, please see the CD&A on pages 86-94.
The perquisites and personal benefits are as follows: $68,243 for Mr. Templeton, consisting of personal use of company aircraft ($57,095), financial counseling and an executive physical. Financial counseling and an executive physical were made available to the other named executive officers, but the amounts attributable to those officers were below the disclosure thresholds. The amount shown for personal use of aircraft is the incremental cost, which we valued using a method that takes into account: landing, parking and flight planning services expenses; crew travel expenses; supplies and catering expenses; aircraft fuel and oil expenses per hour of flight; communications costs; a portion of ongoing maintenance; and any customs, foreign permit and similar fees. Because company aircraft are primarily used for business travel, this methodology excludes the fixed costs, which do not change based on usage, such as pilots salaries and the lease or purchase cost of the company-owned aircraft.
The following table shows the grants of plan-based awards to the named executive officers in 2014.
None of the options or other equity awards granted to the named executive officers was repriced or modified by the company.
For additional information regarding TIs equity compensation grant practices, please see pages 88, 90-91, 95, 97 and 102-103.
Outstanding equity awards at fiscal year-end 2014
The following table shows the outstanding equity awards for each of the named executive officers as of December 31, 2014.
The Option Awards shown in the table above are non-qualified stock options, each of which represents the right to purchase shares of TI common stock at the stated exercise price. For grants before 2007, the exercise price is the average of the high and low price of TI common stock on the grant date. For grants after 2006, the exercise price is the closing price of TI common stock on the grant date. The term of each option is ten years unless the option is terminated earlier pursuant to provisions summarized in the chart below and in the paragraph following the chart. Options vest (become exercisable) in increments of 25 percent per year beginning on the first anniversary of the date of the grant. The chart below shows the termination provisions relating to stock options outstanding as of December 31, 2014. The Compensation Committee of the board of directors established these termination provisions to promote employee retention while offering competitive terms.
Options may be cancelled if, during the two years after employment termination, the grantee competes with TI or solicits TI employees to work for another company, or if the grantee discloses TI trade secrets. In addition, for options received while the grantee was an executive officer, the company may reclaim (or claw back) profits earned under grants if the officer engages in such conduct. These provisions are intended to strengthen retention and provide a reasonable remedy to TI in case of competition, solicitation of our employees or disclosure of our confidential information.
Options granted after 2009 become fully vested if the grantee is involuntarily terminated from employment with TI (other than for cause) within 24 months after a change in control of TI. Change in control is defined as provided in the Texas Instruments 2009 Long-Term Incentive Plan and occurs upon (1) acquisition of more than 50 percent of the voting stock or at least 80 percent of the assets of TI or (2) change of a majority of the board of directors in a 12-month period unless a majority of the directors then in office endorsed the appointment or election of the new directors (Plan definition). These terms are intended to reduce employee uncertainty and distraction in the period leading up to a change in control, if such an event were to occur. For options granted before 2010, the stock option terms provide that upon a change in control of TI, the option becomes fully vested to the extent it is then outstanding; and if employment termination (except for cause) has occurred within 30 days before the change in control, the change in control is deemed to have occurred first. Change in control is defined in these pre-2010 options as (1) acquisition of 20 percent of TI common stock other than through a transaction approved by the board of directors, or (2) change of a majority of the board of directors in a 24-month period unless a majority of the directors then in office have elected or nominated the new directors (together, the pre-2010 definition).
The Stock Awards in the table of outstanding equity awards at fiscal year-end 2014 are RSU awards. Each RSU represents the right to receive one share of TI common stock on a stated date (the vesting date) unless the award is terminated earlier under terms summarized below. In general, the vesting date is approximately four years after the grant date. Each RSU includes the right to receive dividend equivalents, which are paid annually in cash at a rate equal to the amount paid to stockholders in dividends. The table below shows the termination provisions of RSUs outstanding as of December 31, 2014.
These termination provisions are intended to promote retention. All RSU awards contain cancellation and clawback provisions like those described above for stock options. The terms provide that, to the extent permitted by Section 409A of the IRC, the award vests upon involuntary termination of TI employment within 24 months after a change in control. Change in control is the Plan definition. These cancellation, clawback and change-in-control terms are intended to conform RSU terms with those of stock options (to the extent permitted by the IRC) and to achieve the objectives described above in the discussion of stock options.
In addition to the Stock Awards shown in the outstanding equity awards at fiscal year-end 2014 table on pages 101 and 102, Mr. Templeton holds an award of RSUs that was granted in 1995. The award, for 120,000 shares of TI common stock, vested in 2000. Under the award terms, the shares will be issued to Mr. Templeton in March of the year after his termination of employment for any reason. These terms were designed to provide a tax benefit to the company by postponing the related compensation expense until it was likely to be fully deductible. In accordance with SEC requirements, this award is reflected in the 2014 non-qualified deferred compensation table on page 106.
2014 option exercises and stock vested
The following table lists the number of shares acquired and the value realized as a result of option exercises by the named executive officers in 2014 and the value of any RSUs that vested in 2014. For option exercises, the value realized is calculated by multiplying the number of shares acquired by the difference between the exercise price and the market price of TI common stock on the exercise date. For RSUs, the value realized is calculated by multiplying the number of RSUs that vested by the market price of TI common stock on the vesting date.
2014 pension benefits
The following table shows the present value as of December 31, 2014, of the benefit of the named executive officers under our qualified defined benefit pension plan (TI Employees Pension Plan) and non-qualified defined benefit pension plans (TI Employees Non-Qualified Pension Plan (which governs amounts earned before 2005) and TI Employees Non-Qualified Pension Plan II (which governs amounts earned after 2004)). In accordance with SEC requirements, the amounts shown in the table do not reflect any named executive officers retirement eligibility or any increase in benefits that may result from the named executive officers continued employment after December 31, 2014.
TI Employees Pension Plan
The TI Employees Pension Plan is a qualified defined benefit pension plan. Please see page 95 for a discussion of the origin and purpose of the plan. Employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in this plan.
A plan participant is eligible for normal retirement under the terms of the plan if he is at least 65 years of age with one year of credited service. A participant is eligible for early retirement if he is at least 55 years of age with 20 years of employment or 60 years of age with five years of employment. As of December 31, 2014, Mr. Templeton, Mr. March and Mr. Ritchie were eligible for early or normal retirement.
A participant may request payment of his accrued benefit at termination or any time thereafter. Participants may choose a lump sum payment or one of six forms of annuity. In order of largest to smallest periodic payment, the forms of annuity are: (i) single life annuity, (ii) 5-year certain and life annuity, (iii) 10-year certain and life annuity, (iv) qualified joint and 50 percent survivor annuity, (v) qualified joint and 75 percent survivor annuity, and (vi) qualified joint and 100 percent survivor annuity. If the participant does not request payment, he will begin to receive his benefit in April of the year after he reaches the age of 70½ in the form of annuity required under the IRC.
The pension formula for the qualified plan is intended to provide a participant with an annual retirement benefit equal to 1.5 percent multiplied by the product of (i) years of credited service and (ii) the average of the five highest consecutive years of his base salary plus bonus up to a limit imposed by the IRS, less a percentage (based on his year of birth, when he elects to retire and his years of service with TI) of the amount of compensation on which his Social Security benefit is based.
If an individual takes early retirement and chooses to begin receiving his annual retirement benefit at that time, such benefit is reduced by an early retirement factor. As a result, the annual benefit is lower than the one he would have received at age 65.
If the participants employment terminates due to disability, the participant may choose to receive his accrued benefit at any time prior to age 65. Alternatively, the participant may choose to defer receipt of the accrued benefit until reaching age 65 and then take a disability benefit. The disability benefit paid at age 65 is based on salary and bonus, years of credited service the participant would have accrued to age 65 had he not become disabled and disabled status.
The benefit payable in the event of death is based on salary and bonus, years of credited service and age at the time of death, and may be in the form of a lump sum or annuity at the election of the beneficiary. The earliest date of payment is the first day of the second calendar month following the month of death.
Leaves of absence, including a bridge to retirement, are credited to years of service under the qualified pension plan. Please see the discussion of leaves of absence on page 108.
TI employees non-qualified pension plans
TI has two non-qualified pension plans: the TI Employees Non-Qualified Pension Plan (Plan I), which governs amounts earned before 2005; and the TI Employees Non-Qualified Pension Plan II (Plan II), which governs amounts earned after 2004. Each is a non-qualified defined benefit pension plan. Please see pages 95-96 for a discussion of the purpose of the plans. As with the qualified defined benefit pension plan, employees who joined the U.S. payroll after November 30, 1997, are not eligible to participate in Plan I or Plan II. Eligibility for normal and early retirement under these plans is the same as under the qualified plan (please see above). Benefits are paid in a lump sum.
A participants benefits under Plan I and Plan II are calculated using the same formula as described above for the TI Employees Pension Plan. However, the IRS limit on the amount of compensation on which a qualified pension benefit may be calculated does not apply. Additionally, the IRS limit on the amount of qualified benefit the participant may receive does not apply to these plans. Once this non-qualified benefit amount has been determined using the formula described above, the individuals qualified benefit is subtracted from it. The resulting difference is multiplied by an age-based factor to obtain the amount of the lump-sum benefit payable to an individual under the non-qualified plans.
Amounts under Plan I will be distributed when payment of the participants benefit under the qualified pension plan commences. Amounts under Plan II will be distributed subject to the requirements of Section 409A of the IRC. Because the named executive officers are among the 50 most highly compensated officers of the company, Section 409A of the IRC requires that they not receive any lump sum distribution payment under Plan II before the first day of the seventh month following termination of employment.
If a participant terminates due to disability, amounts under Plan I will be distributed when payment of the participants benefit under the qualified plan commences. For amounts under Plan II, distribution is governed by Section 409A of the IRC, and the disability benefit is reduced to reflect the payment of the benefit prior to age 65.
In the event of death, payment under both plans is based on salary and bonus, years of credited service and age at the time of death and will be in the form of a lump sum. The earliest date of payment is the first day of the second calendar month following the month of death.
Balances in the plans are unsecured obligations of the company. For amounts under Plan I, in the event of a change in control, the present value of the individuals benefit would be paid not later than the month following the month in which the change in control occurred. For such amounts, the pre-2010 definition of a change in control (please see page 102) applies. For all amounts accrued under this plan, if a sale of substantially all of the assets of the company occurred, the present value of the individuals benefit would be distributed in a lump sum as soon as reasonably practicable following the sale of assets. For amounts under Plan II, no distribution of benefits is triggered by a change in control.
Leaves of absence, including a bridge to retirement, are credited to years of service under the non-qualified pension plans. For a discussion of leaves of absence, please see page 108.
TI Employees Survivor Benefit Plan
TIs qualified and non-qualified pension plans provide that upon the death of a retirement-eligible employee, the employees beneficiary receives a payment equal to half of the benefit to which the employee would have been entitled under the pension plans had he retired instead of died. We have a survivor benefit plan that pays the beneficiary a lump sum that, when added to the reduced amounts the beneficiary receives under the pension plans, equals the benefit the employee would have been entitled to receive had he retired instead of died. Because Messers. Templeton, March and Ritchie were eligible for early retirement in 2014, their beneficiaries would be eligible for benefits under the survivor benefit plan if they were to die.
2014 non-qualified deferred compensation
The following table shows contributions to the named executive officers deferred compensation account in 2014 and the aggregate amount of his deferred compensation as of December 31, 2014.
Please see page 96 for a discussion of the purpose of the plan. An employees deferred compensation account contains eligible compensation the employee has elected to defer and contributions by the company that are in excess of the IRS limits on (i) contributions the company may make to the enhanced defined contribution plan and (ii) matching contributions the company may make related to compensation the executive officer deferred into his deferred compensation account.
Participants in the deferred compensation plan may choose to defer up to (i) 25 percent of their base salary, (ii) 90 percent of their performance bonus, and (iii) 90 percent of profit sharing. Elections to defer compensation must be made in the calendar year prior to the year in which the compensation will be earned.
During 2014, participants could choose to have their deferred compensation mirror the performance of one or more of the following mutual funds, each of which is managed by a third party (these alternatives, which may be changed at any time, are a subset of those offered to participants in the defined contribution plans): Northern Trust Short Term Investment Fund, Northern Trust Aggregate Bond Index Fund-Lending, Northern Trust Russell 1000 Value Index Fund-Lending, Northern Trust Russell 1000 Growth Index Fund-Lending, Northern Trust Russell 2000 Index Fund-Lending, Northern Trust MidCap 400 Index Fund-Lending, Fidelity Puritan Fund, BlackRock Equity Index Fund F, BlackRock (EAFE) (Europe, Australia, Far East) Equity Index Fund F, BlackRock Lifepath Index 2020 Fund F, BlackRock Lifepath Index 2030 Fund F, BlackRock Lifepath Index 2040 Fund F, BlackRock Lifepath Index 2050 Fund F and BlackRock Lifepath Index Retirement Fund F. From among the available investment alternatives, participants may change their instructions relating to their deferred compensation daily. Earnings on a participants balance are determined solely by the performance of the investments that the participant has chosen for his plan balance. The company does not guarantee any minimum return on investments. A third party administers the companys deferred compensation program.
A participant may request distribution from the plan in the case of an unforeseeable emergency. To obtain an unforeseeable emergency withdrawal, a participant must meet the requirements of Section 409A of the IRC. Otherwise, a participants balance is paid pursuant to his distribution election and is subject to applicable IRC limitations.
Amounts contributed by the company, and amounts earned and deferred by the participant for which there is a valid distribution election on file, will be distributed in accordance with the participants election. Annually participants may elect separate distribution dates for deferred compensation attributable to a participants (i) bonus and profit sharing and (ii) salary. Participants may elect that these distributions be in the form of a lump sum or annual installments to be paid out over a period of five or ten consecutive years. Amounts for which no valid distribution election is on file will be distributed three years from the date of deferral.
In the event of the participants death, payment will be in the form of a lump sum and the earliest date of payment is the first day of the second calendar month following the month of death.
Like the balances under the non-qualified defined benefit pension plans, deferred compensation balances are unsecured obligations of the company. For amounts earned and deferred prior to 2010, a change in control does not trigger a distribution under the plan. For amounts earned and deferred after 2009, distribution occurs, to the extent permitted by Section 409A of the IRC, if the participant is involuntarily terminated within 24 months after a change in control. Change in control is the Plan definition.
Potential payments upon termination or change in control
None of the named executive officers has an employment contract with the company. They are eligible for benefits on generally the same terms as other U.S. employees upon termination of employment or change in control of the company. TI does not reimburse executive officers for any income or excise taxes that are payable by the executive as a result of payments relating to termination or change in control.
The following programs may result in payments to a named executive officer whose employment terminates. Most of these programs have been discussed above. For a discussion of the impact of these programs on the compensation decisions for 2014, please see page 96.
Qualified and non-qualified defined
benefit pension plans
Survivor benefit plan
Deferred compensation plan
In the case of a resignation pursuant to a separation arrangement, an executive officer (like other employees above a certain job grade level) will typically be offered a 12-month paid leave of absence before termination, in exchange for a non-compete and non-solicitation commitment and a release of claims against the company. The leave period will be credited to years of service under the pension plans described above. During the leave, the executive officers stock options will continue to become exercisable and his RSUs will continue to vest. Amounts paid to an individual during a paid leave of absence are not counted when calculating benefits under the qualified and non-qualified pension plans.
In the case of a separation arrangement in which the paid leave of absence expires when the executive officer will be at least 50 years old and have at least 15 years of employment with the company, the separation arrangement will typically include an unpaid leave of absence, to commence at the end of the paid leave and end when the executive officer has reached the earlier of age 55 with at least 20 years of employment or age 60 (bridge to retirement). The bridge to retirement will be credited to years of service under the qualified and non-qualified pension plans described above. Stock options will continue to become exercisable and RSUs will remain in effect, but for grants made before 2014, the number of RSUs will be reduced as described in note * on page 103.
Change in control
Our only program, plan or arrangement providing benefits triggered by a change in control is the TI Employees Non-Qualified Pension Plan. A change in control at December 31, 2014, would have accelerated payment of the balance under that plan. Please see page 106 for a discussion of the purpose of change in control provisions of that plan as well as the circumstances and the timing of payment.
Upon a change in control there is no acceleration of vesting of stock options and RSUs granted after 2009. Only upon an involuntary termination (not for cause) within 24 months after a change in control of TI will the vesting of such stock options and RSUs accelerate. Please see pages 97 and 102-103 for further information concerning change in control provisions relating to stock options and RSUs.
For a discussion of the impact of these programs on the compensation decisions for 2014, please see page 96.
The table below shows the potential payments upon termination or change in control for each of the named executive officers.
Audit Committee report
The Audit Committee of the board of directors has furnished the following report:
As noted in the committees charter, TI management is responsible for preparing the companys financial statements. The companys independent registered public accounting firm is responsible for auditing the financial statements. The activities of the committee are in no way designed to supersede or alter those traditional responsibilities. The committees role does not provide any special assurances with regard to TIs financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent registered public accounting firm.
The committee has reviewed and discussed with management and the independent accounting firm, as appropriate, (1) the audited financial statements and (2) managements report on internal control over financial reporting and the independent accounting firms related opinions.
The committee has discussed with the independent registered public accounting firm, Ernst & Young, the required communications specified by auditing standards together with guidelines established by the SEC and the Sarbanes-Oxley Act.
The committee has received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board, regarding the independent registered public accounting firms communications with the Audit Committee concerning independence, and has discussed with Ernst & Young the firms independence.
Based on the review and discussions referred to above, the committee recommended to the board of directors that the audited financial statements be included in the companys annual report on Form 10-K for 2014 for filing with the SEC.
Proposal to ratify appointment of independent registered public accounting firm
The Audit Committee of the board has the authority and responsibility for the appointment, compensation, retention and oversight of the work of TIs independent registered public accounting firm. The Audit Committee has appointed Ernst & Young LLP to be TIs independent registered public accounting firm for 2015.
TI has engaged Ernst & Young or a predecessor firm to serve as the companys independent registered public accounting firm for over 60 years. In order to assure continuing auditor independence, the Audit Committee periodically considers whether the annual audit of TIs financial statements should be conducted by another firm.
The lead audit partner on the TI engagement serves no more than five consecutive years in that role, in accordance with SEC rules. The Audit Committee Chair and management have direct input into the selection of the lead audit partner.
The members of the Audit Committee and the board believe that the continued retention of Ernst & Young to serve as the companys independent registered public accounting firm is in the best interest of the company and its investors. Consequently, the board asks the stockholders to ratify the appointment of Ernst & Young. If the stockholders do not ratify the appointment, the Audit Committee will consider whether it should appoint another independent registered public accounting firm.
Representatives of Ernst & Young are expected to be present, and to be available to respond to appropriate questions, at the annual meeting. They have the opportunity to make a statement if they desire to do so; they have indicated that, as of this date, they do not.
The fees for services provided by Ernst & Young to the company are described below:
Audit fees. Ernst & Youngs Audit Fees were $9,134,000 in 2014 and $8,662,000 in 2013. The services provided in exchange for these fees were our annual audit, including the audit of internal control over financial reporting, reports on Form 10-Q, assistance with public debt offerings, statutory audits required internationally and accounting consultations.
Audit-related fees. Ernst & Youngs fees for Audit-related services were $797,000 in 2014 and $685,000 in 2013. The services provided in exchange for these fees included employee benefit plan audits, certification procedures relating to compliance with local-government or other regulatory standards for various non-U.S. subsidiaries, and access to Ernst & Youngs online research tool.
Tax fees. Ernst & Youngs fees for professional services rendered for tax compliance (preparation and review of income tax returns and other tax-related filings) and tax advice on U.S. and foreign tax matters were $1,802,000 in 2014 and $1,836,000 in 2013.
All other fees. Ernst & Youngs fees for all other professional services rendered were $32,000 in 2014 and $95,000 in 2013 for the TI Foundation audit, training and assistance with insurance claims.
Pre-approval policy. The Audit Committee is required to pre-approve the audit and non-audit services to be performed by the independent registered public accounting firm in order to assure that the provision of such services does not impair the firms independence.
Annually the independent registered public accounting firm and the director of internal audits present to the Audit Committee services expected to be performed by the firm over the next 12 months. The Audit Committee reviews and, as it deems appropriate, pre-approves those services. The services and estimated fees are presented to the Audit Committee for consideration in the following categories: Audit, Audit-related, Tax and All other (each as defined in Schedule 14A of the Securities Exchange Act). For each service listed in those categories, the committee receives detailed documentation indicating the specific services to be provided. The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee reviews on at least a quarterly basis the services provided to date by the firm and the fees incurred for those services. The Audit Committee may revise the list of pre-approved services and related fees from time to time, based on subsequent determinations.
In order to respond to time-sensitive requests for services that may arise between regularly scheduled meetings of the Audit Committee, the committee has delegated pre-approval authority to its Chair (the Audit Committee does not delegate to management its responsibilities to pre-approve services). The Chair reports pre-approval decisions to the Audit Committee and seeks ratification of such decisions at the Audit Committees next scheduled meeting.
The Audit Committee or its Chair pre-approved all services provided by Ernst & Young during 2014.
The board of directors recommends a vote FOR ratification of the appointment of Ernst & Young LLP as the companys independent registered public accounting firm for 2015.
As of February 17, 2015, 1,047,142,301 shares of TI common stock were outstanding. This is the only class of capital stock entitled to vote at the meeting. Each holder of common stock has one vote for each share held. As stated in the notice of annual meeting, holders of record of the common stock at the close of business on February 17, 2015, may vote at the meeting or any adjournment of the meeting.
Security ownership of certain beneficial owners
The following table shows the only persons who have reported beneficial ownership of more than 5 percent of the common stock of the company. Persons generally beneficially own shares if they have the right to either vote those shares or dispose of them. More than one person may be considered to beneficially own the same shares.
Security ownership of directors and management
The following table shows the beneficial ownership of TI common stock by directors, the named executive officers and all executive officers and directors as a group. Each director and named executive officer has sole voting power (except for shares obtainable within 60 days, shares subject to RSUs and shares credited to deferred compensation accounts as detailed in the footnotes to the table) and sole investment power with respect to the shares owned. The table excludes shares held by a family member if a director or executive officer has disclaimed beneficial ownership. No director or executive officer has pledged shares of TI common stock.
* less than 1 percent
(1) Included in the shares owned shown above are: