ESSENDANT INC DEF 14A 2016
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant
Filed by a Party other than the Registrant
Check the appropriate box:
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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One Parkway North Boulevard
Deerfield, Illinois 60015
April 13, 2016
On behalf of the Board of Directors and management of Essendant Inc., I cordially invite you to attend the 2016 Annual Meeting of Stockholders. The Annual Meeting will be held on Wednesday, May 25, 2016, at 2:00 p.m. Central Time, at the Companys offices located at One Parkway North Boulevard, Deerfield, Illinois.
At this years Annual Meeting, the matters to be considered by stockholders are the election of three Class III directors to serve for a three-year term expiring in 2019, the ratification of the selection of the Companys independent registered public accounting firm for 2016, an advisory vote on executive compensation and the transaction of such other business as may properly come before the meeting. The Board of Directors has unanimously recommended a vote FOR election of the nominees named in the accompanying Proxy Statement, FOR ratification of the selection of Ernst & Young LLP as the Companys independent registered public accounting firm, and FOR approval of our executive compensation.
Whether or not you plan to attend the Annual Meeting, we encourage you to read the accompanying Proxy Statement and vote promptly. To ensure that your shares are represented at the meeting, we recommend that you submit a proxy to vote your shares through the Internet by following the instructions set forth in the Notice of Internet Availability of Proxy Materials. You may also vote by telephone or mail by requesting a paper copy of the proxy materials, which will include a proxy card with instructions on how to vote. The Notice of Internet Availability of Proxy Materials contains instructions on how to request paper copies of the proxy materials. This way, your shares will be voted even if you are unable to attend the meeting. This will not, of course, limit your right to attend the meeting or prevent you from voting in person at the meeting if you wish to do so.
Your Directors and management look forward to personally meeting those of you who are able to attend.
Charles K. Crovitz
Chairman of the Board
One Parkway North Boulevard
Deerfield, Illinois 60015
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The Board of Directors has unanimously recommended a vote FOR election of the nominees, FOR ratification of the selection of the independent registered public accounting firm, and FOR approval of our executive compensation.
The record date for the Annual Meeting is the close of business on Monday, March 28, 2016. Only stockholders of record as of that time and date are entitled to notice of, and to vote at, the meeting. Record holders of the Companys Common Stock as of the record date may submit their proxies by following the voting instructions set forth in the Notice of Internet Availability of Proxy Materials.
By Order of the Board of Directors,
Eric A. Blanchard
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 25, 2016
The proxy statement and Form 10-K are available at
TABLE OF CONTENTS
Table of Contents
TABLE OF CONTENTS
This summary highlights selected information that is provided in more detail throughout this Proxy Statement. This summary does not contain all of the information you should consider before voting, and you should read the full Proxy Statement before casting your vote.
Additional information about the Annual Meeting and voting can be found beginning on page 5.
Voting Matters and Board Recommendations
At this years Annual Meeting, our shareholders will vote on the following matters:
Executive Compensation Highlights
Changes to Executive Compensation Program
Corporate Governance Highlights
Proxy and Voting Information
The Board of Directors of Essendant Inc. (referred to as we, our or the Company in this Proxy Statement) is soliciting your proxy for use at our 2016 Annual Meeting of Stockholders and any adjournments or postponements thereof (the Annual Meeting).
What is a Notice of Internet Availability of Proxy Materials
Under rules of the Securities and Exchange Commission, we are furnishing proxy materials to our stockholders on the Internet, rather than mailing printed copies to our stockholders. If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the proxy materials unless you request one as instructed in that notice. Instead, the Notice of Internet Availability of Proxy Materials will instruct you as to how you may access and review the proxy materials on the Internet as well as vote your shares online. You may also vote by telephone or mail by requesting a paper copy of the proxy materials, which will include a proxy card with instructions on how to vote. The Notice of Internet Availability of Proxy Materials contains instructions on how to request paper copies of the proxy materials. We expect to commence mailing the Notice of Internet Availability of Proxy Materials to our stockholders on or about April 13, 2016.
Who May Vote
Holders of record of our Common Stock at the close of business on Monday, March 28, 2016 (the Record Date) may vote at the Annual Meeting. On that date, 37,102,335 shares of our Common Stock were issued and outstanding. Each share entitles the holder to one vote.
How to Vote
If you are a holder of record of our Common Stock (meaning, the shares are registered by our transfer agent directly in your own name) on the Record Date, you may submit a proxy with your voting instructions by the applicable deadline shown on the Notice of Internet Availability of Proxy Materials or proxy card using any of the following methods:
If you choose to submit your proxy with voting instructions by telephone or through the Internet, you will be required to provide your assigned control number shown on the Notice of Internet Availability of Proxy Materials or proxy card before your proxy and voting instructions will be accepted. Once you
PROXY AND VOTING INFORMATION
have indicated how you want to vote in accordance with those instructions, you will receive confirmation that your proxy has been submitted successfully by telephone or through the Internet.
If you hold your shares of our Common Stock in street name through a broker, bank, custodian, fiduciary or other nominee, you should review the separate Notice of Internet Availability of Proxy Materials supplied by that firm to determine whether and how you may vote by mail, telephone or through the Internet. To vote these shares, you must use the appropriate voting instruction form or toll-free telephone number or website address specified on that firms voting instruction form for beneficial owners.
How Proxies Work
Giving your proxy means that you authorize the persons named as proxies to vote your shares at the Annual Meeting in the manner you direct. If you hold any shares in the Companys Employee Stock Purchase Plan (ESPP), your proxy (whether given by mailing the proxy card or voting by telephone or through the Internet) will also serve as voting instructions to Computershare Trust Company, as nominee holder under the ESPP, with respect to the shares allocated to your account in the ESPP.
If you sign and return a proxy card, or use telephone or Internet voting, but do not specify how you want to vote your shares, the proxies will vote your shares FOR the election of each of the three director nominees, FOR the ratification of Ernst & Young LLP as the Companys independent registered public accounting firm for 2016, and FOR approval of our executive compensation. If you specify how you want to vote your shares on some matters but not others, the proxies will vote your shares as directed on the matters that you specify and as indicated above on the other matters described in this proxy statement. However, if you hold shares in the ESPP, Computershare Trust Company, as nominee holder under the ESPP, will not vote shares allocated to your ESPP account unless you indicate your voting instructions. The proxies will also vote your shares in their discretion on any other business that may properly come before the meeting.
Revocation of Proxies
If you have voted by submitting a proxy, you may revoke your proxy at any time before it is exercised at the Annual Meeting by any of the following methods:
A proxy card with a later date or written notice of revocation shall not constitute a revocation of a previously submitted proxy unless it is received by the Secretary of Essendant Inc. before the previously submitted proxy is exercised at the Annual Meeting.
To conduct the business of the Annual Meeting, we must have a quorum. Under our current Bylaws, a quorum for the Annual Meeting requires the presence, in person or by proxy, of the holders of a majority
PROXY AND VOTING INFORMATION
of the 37,102,335 shares of our Common Stock issued and outstanding on the Record Date. Under Delaware law and our Bylaws, we count instructions to withhold voting authority for director nominees, any abstentions and broker non-votes as present at meetings of our stockholders for the purpose of determining the presence of a quorum.
Shares Held Through Broker or Other Nominee
In general, a broker who holds securities as a nominee in street name has limited authority to vote on matters submitted at a stockholders meeting in the absence of specific instructions from the beneficial owner. In the absence of instructions from the beneficial owner or authorization from the regulatory agency of which the broker is a member to vote on specific matters without the need to obtain instructions from the beneficial owner, a broker will specify a non-vote on those matters. Brokers are typically permitted to vote for the ratification of the selection of the independent registered public accounting firm if they have not received instructions from the beneficial owner; however, brokers may not vote on the other matters described in this Proxy Statement without specific instructions from the beneficial owner.
Election of Directors
The nominees for director will be elected by a plurality of the votes cast at the Annual Meeting. This means that the three nominees who receive the greatest number of votes will be elected as directors. Broker non-votes and instructions to withhold authority to vote for one or more nominees are not counted for this purpose and will not affect the outcome of this election.
We have adopted a so-called plurality-plus standard. In accordance with procedures set forth in the Companys Corporate Governance Principles, any incumbent director (including the three nominees standing for election at the Annual Meeting) who receives a greater number of votes withheld from his or her election than votes FOR his or her election in an uncontested election will be expected to tender his or her resignation for consideration by the Companys Governance Committee. The Governance Committee will consider the resignation and, within 45 days following the date of the applicable annual meeting, make a recommendation to the Board concerning the acceptance or rejection of the resignation. The Board will then take formal action on the Governance Committees recommendation no later than 90 days following the date of the annual meeting. Following the Boards decision on the Committees recommendation, we will publicly disclose the Boards decision together with an explanation of the process by which the decision was made and, if applicable, the Boards reason or reasons for rejecting the tendered resignation.
Ratification of Ernst & Young
Ratification of the selection of Ernst & Young LLP as the Companys independent registered public accounting firm will require the affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote on such matter. Abstentions will be counted as represented and entitled to vote for purposes of determining the total number of shares that are represented and entitled to vote with respect to this proposal. As a result, an abstention from voting on this proposal will have the same effect as a vote AGAINST the matter. Broker non-votes will not be considered as represented and entitled to vote with respect to this proposal and will have no effect on the voting on this matter.
PROXY AND VOTING INFORMATION
Advisory Vote on Executive Compensation
The vote on the approval of our executive compensation is advisory and non-binding. However, we will consider our stockholders to have approved our executive compensation if the number of votes FOR this proposal exceeds the number of votes AGAINST this proposal. Accordingly, abstentions and broker non-votes will not affect the outcome of this advisory vote.
We do not know of any other matters to be submitted for stockholder action at the Annual Meeting.
Costs of Proxy Solicitation
We will bear the costs of soliciting proxies for the Annual Meeting. In addition to the solicitation by mail, proxies may be solicited personally or by telephone, facsimile or electronic communication by our directors, officers and other employees. Directors, officers and other employees of the Company who participate in soliciting proxies will not receive any additional compensation from the Company for doing so. Upon request, we will reimburse brokers, banks, custodians and other nominee record holders for their out-of-pocket expenses in forwarding proxy materials to their principals who are the beneficial owners of our Common Stock as of the Record Date.
PROPOSAL 1: ELECTION OF DIRECTORS
The Companys business and affairs are managed under the direction of our Board of Directors. The Board has responsibility for establishing broad corporate policies relating to the Companys overall performance rather than day-to-day operating details.
Our Board of Directors currently consists of nine members. The Board is divided into three classes, each of which is elected for a three-year term. The terms of the three current Class III Directors expire in 2016. The Class III Directors are current directors standing as nominees at the Annual Meeting for reelection to a three-year term expiring in 2019.
The nominees have indicated that they are willing and able to serve as Company Directors. If any nominee becomes unavailable for election for any reason, the persons named as proxies in the enclosed proxy card will have discretionary authority to vote the shares they represent for any substitute nominee designated by the Board of Directors, upon recommendation of the Governance Committee.
Information regarding each of the Director nominees and the Directors continuing in office, including his or her age, principal occupation, other business experience during at least the last five years, directorships in other publicly held companies during the last five years and period of service as a Company Director, is set forth below. Also included below is a discussion of the specific experience, qualifications, attributes and skills that led to the conclusion that the Director nominee or Director should serve on the Board.
PROPOSAL 1: ELECTION OF DIRECTORS
The nominees for election as Class III Directors at this years Annual Meeting, each to serve for a three-year term expiring in 2019, are set forth below:
PROPOSAL 1: ELECTION OF DIRECTORS
The other Directors, whose terms will continue after this years Annual Meeting, are as follows:
Class I Directors Continuing in Office until 2017 Annual Meeting
PROPOSAL 1: ELECTION OF DIRECTORS
Class II Directors Continuing in Office until 2018 Annual Meeting
PROPOSAL 1: ELECTION OF DIRECTORS
GOVERNANCE AND BOARD MATTERS
Corporate Governance Principles
The Company is committed to the use of sound corporate governance principles and practices in the conduct of its business. The Companys Board has adopted the Essendant Inc. Corporate Governance Principles (the Governance Principles) to address certain fundamental corporate governance issues. The Governance Principles provide a framework for Company governance activities and initiatives and cover, among other topics, Director independence and qualifications, Board and Committee composition and evaluation, Board access to members of management and independent outside advisors, Board meetings (including meetings in executive session without management present) and succession planning. These principles also provide for the separation of the position of Chairman of the Board, who would normally serve as the Companys lead independent Director, from that of Chief Executive Officer. The Governance Principles are included under Governance as part of the Investors section available through the Companys website at http://www.essendant.com. Neither the Governance Principles nor any other information contained on or available through the Companys website and referred to in this Proxy Statement is incorporated by reference in, or considered to be part of, this Proxy Statement.
Code of Conduct
The Companys Board of Directors also has adopted the Essendant Inc. Code of Business Conduct (the Code of Conduct). The Code of Conduct applies to all Directors, officers and employees, and covers topics such as compliance with laws and regulations, proper use of the Companys assets, treatment of confidential information, ethical handling of actual or apparent conflicts of interest, accurate and timely public disclosures, prompt internal reporting of violations and accountability for adherence to its guidelines. A copy of the Code of Conduct is included under Governance as part of the Investors section available through the Companys website at http://www.essendant.com.
The Companys Board of Directors has affirmatively determined that all of its members and the nominees, other than Mr. Aiken, the Companys President and Chief Executive Officer, are independent within the meaning of the Companys independence standards set forth in its Governance Principles. The Companys Governance Principles incorporate the director independence standards of The NASDAQ Stock Market, Inc. (NASDAQ), and reflect the Boards policy that a substantial majority of the Directors who serve on the Companys Board should be independent Directors. Indeed, for a number of years, a substantial majority of the Companys Board of Directors has been comprised of independent Directors.
In determining that Mr. Taylor is independent, the Board considered that Mr. Taylor and his spouse are owners of Taylor Made Business Solutions (TMBS), where his spouse also serves as the Chief Executive Officer, and that TMBS purchased $11,280 of products and services from Essendant Co. (ECO), a wholly-owned subsidiary of the Company, during 2015. The amount of purchases was less than 5% of gross revenues of ECO. The Board concluded that such transactions constituted an insignificant percentage of TMBS purchases and the Companys sales, that Mr. Taylor had no direct involvement in such transactions and that such transactions, therefore, did not affect Mr. Taylors independence. Based on the same information and the representations from the Companys management that such transactions were in the ordinary course of business at the same prices and on the same terms as are available to customers of the Company generally, the Audit Committee of the
GOVERNANCE AND BOARD MATTERS
Board concluded that such transactions were exempt under the Companys related person transaction approval policy. The Governance Committee also reviewed the relationship and determined that there is no conflict with the Companys Corporate Governance Principles, and that the relationship did not impair Mr. Taylors independence.
Board Leadership Structure
The Companys Bylaws call for the Chairman of the Board to be elected by the Board from among its members and to have the powers and duties customarily associated with the position of a non-executive Chairman. Consistent with the Companys Corporate Governance Principles, the Board expects that in most circumstances the only member of the Companys management who would be invited to serve on the Board would be the Companys chief executive officer. However, the Companys Bylaws also provide that, while the Chairman may hold an officer position, under no circumstances may the Chairman also serve as the President or Chief Executive Officer of the Company. The Chairman of the Board normally serves as the Companys lead independent Director and chairs executive sessions of the Board. Charles K. Crovitz has served as the Companys independent Chairman since December 2011.
These principles are further enhanced in the Companys Corporate Governance Principles which assist the Board in the exercise of its responsibilities and in serving the best interests of the Company and its stockholders. This structure is intended to serve as a framework within which the Board may conduct its business in accordance with applicable laws, regulations, and other corporate governance requirements.
The Governance Committee is responsible for evaluating potential candidates for Board membership. In its evaluation process and to ensure that the Board benefits from diverse perspectives, the Committee considers such factors as the experience, perspective, background, skill sets, race, and gender makeup of the current Board as well as the candidates individual qualities in leadership, character, judgment and ethical standards. The Committee does not have a separate policy on diversity. However, pursuant to the Companys Corporate Governance Principles, diversity is one of the criteria to be positively considered for board membership. For this purpose, the Committee considers diversity broadly as set forth above. The Governance Committee believes our directors represent a diverse base of perspectives and reflect the racial and gender diversity of the Companys employees, customers and shareholders, as well as an appropriate level of tenure, as further illustrated below.
GOVERNANCE AND BOARD MATTERS
Boards Role in Risk Management
The Board of Directors takes an active role in risk oversight of the Company both as a full Board and through its Committees.
Strategic risk, which is risk related to the Company properly defining and achieving its high-level goals and mission, as well as operating risk, which is risk relating to the effective and efficient use of resources and pursuit of opportunities, are regularly monitored by the full Board through regular and consistent review of the Companys operating performance and strategic plan. For example, at each of the Boards five regularly scheduled meetings throughout the year, management provides to the Board presentations on the Companys various business units as well as the Companys performance as a whole. In addition, the Board discusses risks related to the Companys business strategy at the Boards strategic planning meetings every year in July and September and at other meetings as appropriate. Similarly, significant transactions, such as acquisitions and financings, are brought to the Board and Finance Committee for approval.
Reporting risk and compliance risk are primarily overseen by the Audit Committee. Reporting risk relates to the reliability of the Companys financial reporting, and compliance risk relates to the Companys compliance with applicable laws and regulations. The Audit Committee meets at least four times per year and, pursuant to its charter and established processes, receives input directly from management as well as from the Companys independent registered public accounting firm, Ernst & Young LLP, regarding the Companys financial reporting process, internal controls, and public filings. The Companys internal audit function leads an annual risk assessment to refresh its ongoing risk-based work plan which includes coverage of financial, operational, and compliance risks, reporting results to the Audit Committee on a regular basis. The Companys Disclosure Committee, Compliance Committee, and Enterprise Risk Management Committee, each consisting of senior level staff from the legal, finance, human resources, and information technology departments, as well as each business unit, meet regularly to address financial reporting, compliance issues, and other enterprise-wide risks and identify any additional actions required to mitigate these risks. Each of these management committees reports its activities regularly to the Audit Committee. The Audit Committee also receives regular updates from the Companys in-house attorneys regarding any Hotline reports, Code of Conduct issues or other legal compliance concerns. See Board Committees Audit Committee below for further information on how the Audit Committee fulfills, and assists the Board of Directors oversight of, reporting and compliance risks.
Additionally, the Finance Committee, Technology Advisory Committee, and Human Resources Committee each provide risk oversight and monitoring with respect to the Companys capital structure and corporate finance, cyber security, deployment of technology, and structure of compensation programs, respectively. See the individual descriptions of these committees for further information regarding their roles.
Non-management Directors meet regularly in executive sessions without management. In accordance with the Companys Governance Principles, executive sessions are held at least four times a year. The Companys independent Chairman of the Board presides at such sessions.
The Board and each of the Audit, Governance, Human Resources, Executive, Finance, and Technology Advisory Committees conduct an annual self-evaluation, as contemplated by the
GOVERNANCE AND BOARD MATTERS
Companys Governance Principles and the charters of such Board committees. The Board also obtains peer evaluations of individual Director performance in the course of its self-evaluation process.
Board Meetings and Attendance
The Board of Directors held 13 meetings during 2015. Each Director attended more than 75% of the aggregate number of meetings of the Board of Directors and of the Board Committees on which he or she served.
The Board of Directors has established six standing committees an Audit Committee, a Governance Committee, a Human Resources Committee, a Finance Committee, a Technology Advisory Committee, and an Executive Committee. The Governance Committee serves as and performs the functions of a Board nominating committee. Each of the standing committees operates under a written charter adopted by the Board. The charters for the committees are available at essendant.com/proxymaterials.
The current membership and number of meetings held by each such standing committee during 2015 are as follows:
Audit Committee. The Board has determined that all of the above members of the Audit Committee are independent pursuant to NASDAQs current listing standards and Rule 10A-3 of the Securities Exchange Act of 1934 (the Exchange Act). No member of the Audit Committee received any compensation from
GOVERNANCE AND BOARD MATTERS
the Company during 2015 other than for services as a member of the Board or one or more of its committees. The Board also has determined that all Audit Committee members are financially literate and have financial management expertise, in accordance with NASDAQ listing standards. In addition, the Board of Directors has determined that Roy W. Haley and Susan J. Riley qualify as audit committee financial experts within the meaning of applicable SEC regulations.
The principle functions of the Audit Committee involve assisting the Companys Board of Directors in fulfilling its oversight responsibilities relating to: (1) the integrity of the Companys financial statements; (2) the soundness of the Companys internal control systems; (3) assessment of the independence, qualifications and performance of the Companys independent registered public accounting firm; (4) performance of the internal audit function; and (5) the Companys enterprise risk management, legal, regulatory, and ethical compliance programs. The Audit Committees seven meetings during 2015 included reviews with management and the Companys independent registered public accounting firm regarding the Companys financial statements before their inclusion in the Companys annual and quarterly reports filed with the SEC. For additional information, see Report of the Audit Committee.
The Audit Committee operates under a written charter most recently amended as of October 5, 2015. The charter was last reviewed by the Committee in October 2015.
Governance Committee. The Governance Committee evaluates corporate governance principles and makes recommendations to the full Board regarding governance matters, including evaluating and recommending Director compensation, overseeing the evaluation by the Board of Directors of the performance of the Companys Chief Executive Officer and the Board, and reviewing succession planning with respect to the Chief Executive Officer. The Companys Board has determined that all of the members of the Governance Committee are independent pursuant to current NASDAQ listing standards. In performing the functions of a nominating committee, the Governance Committee reviews and makes recommendations to the full Board concerning the qualifications and selection of Director candidates, including any candidates that may be recommended by Company stockholders.
The Governance Committee operates under a written charter most recently amended as of December 8, 2015. The charter was last reviewed by the Committee in December 2015.
Human Resources Committee. The Human Resources Committee of the Board of Directors generally acts as a Board compensation committee. It reviews and approves or makes recommendations to the Board of Directors with respect to compensation, employment agreements, and benefits applicable to executive officers. The Human Resources Committee also oversees the development and administration of compensation and benefits.
The agendas, meetings, and calendar are developed and set by the Chair of the Human Resources Committee with input from the Human Resources Department and the Chief Executive Officer. The Chairman, Chief Executive Officer, other members of management, and outside advisors may be invited to attend all or a portion of a Human Resources Committee meeting, other than an executive session of the Human Resources Committee members, depending on the nature of the agenda items. Neither the Chief Executive Officer nor any other member of management votes on items before the Human Resources Committee; however, the Human Resources Committee and the Board of Directors solicit the views of the Chief Executive Officer on compensation matters, including the compensation of our executive officers.
Among its executive compensation oversight responsibilities, the Human Resources Committee approves the base salaries, annual incentive compensation targets, benefits, and perquisites of our executive officers, other than the Chief Executive Officer. In the case of compensation for the Chief
GOVERNANCE AND BOARD MATTERS
Executive Officer, the Human Resources Committee makes a recommendation to the full Board of Directors for approval. The Human Resources Committee generally oversees the development and administration of our compensation and benefits plans, programs, and practices and reviews and makes determinations based on applicable data and analysis. Recommendations are made by the Committee to the Board on overall compensation and benefits objectives. With respect to our annual incentive programs, the Human Resources Committee approves performance targets under our 2015 Long-Term Incentive Plan or criteria applicable to other executive officer bonuses and reviews attainment of such targets or satisfaction of other relevant criteria. The Human Resources Committee also administers and approves equity grants to our executive officers under our 2015 Long-Term Incentive Plan. The Committee also advises and consults with the Governance Committee and the Board on non-employee director compensation.
At the request of the Board, a risk analysis of 2015 compensation policies and practices was conducted. The Human Resources Committee received a report from the Companys Internal Audit department regarding Aon Hewitts analysis of whether the Companys compensation policies and practices for all employees, including executive officers, are reasonably likely to incent employees to take excessive risks or other actions inconsistent with Company policy that would result in a material adverse effect on the Company. Aon Hewitt identified all compensation policies and practices, analyzed whether they might motivate employees to take inappropriate risks and also considered internal controls that mitigate any such risks. After completion of this analysis, Aon Hewitt and management reported to the Committee their conclusion that none of the Companys compensation policies and practices is reasonably likely to incent employees to take excessive risks that would result in a material adverse effect on the Company, and the Committee concurred with their conclusion.
The Human Resources Committee may establish its own procedural rules except as otherwise prescribed by the Companys Bylaws, applicable law, or the NASDAQ listing standards. The Human Resources Committee may delegate any of its responsibilities to a subcommittee comprised of one or more members of the Human Resources Committee, subject to such terms and conditions (including required reporting back to the full Committee) as the Human Resources Committee may prescribe.
The Human Resources Committee has the authority to retain directly (and terminate the engagement of) any outside compensation consultants, outside counsel, or other advisors that the Human Resources Committee in its discretion deems appropriate to assist it in the performance of its functions, with the sole authority to approve related retention terms and fees for any such advisors. We will provide for appropriate funding, as determined by the Human Resources Committee, for payment of compensation to such outside advisors the Human Resources Committee retains.
During 2015 the Human Resources Committee engaged the services of an independent consultant, Meridian Compensation Partners, LLC (Meridian). Meridian provided the Human Resources and Governance Committees with updates on compensation trends and regulatory developments, advice on proxy disclosures with regard to compensation matters, and other assistance in related items as requested by the Committees, including review of various materials prepared for the Committees by management. In completing its work, Meridian was engaged directly on behalf of the Committees, did no other work for the Company or any of its senior executives, and had no other ties to the Company. For additional information, see Executive Compensation Compensation Discussion and Analysis Use of Consultants.
The Human Resources Committee has assessed the independence of Meridian pursuant to the rules of the U.S. Securities and Exchange Commission and NASDAQ and concluded that no conflict of interest exists that would prevent Meridian from independently representing the Human Resources Committee.
GOVERNANCE AND BOARD MATTERS
The Human Resources Committee operates under a written charter most recently amended as of June 1, 2015. The charter was last reviewed by the Committee in February 2014.
Executive Committee. The Executive Committee has the authority to act upon any corporate matters that require Board approval, except where Delaware law requires action by the full Board or where the matter is required to be approved by a committee of independent Directors in accordance with applicable regulatory requirements.
Finance Committee. The purpose of the Finance Committee is to review and provide guidance to the Companys Board of Directors and management with respect to the Companys: (1) present and future capital structure requirements and opportunities; (2) plans, strategies, policies, proposals, and transactions related to corporate finance; (3) potential acquisitions and divestitures; and (4) Company financial risk management activities and plans.
The Finance Committee operates under a written charter most recently amended as of June 1, 2015. The charter was last reviewed by the Committee in February 2014.
Technology Advisory Committee. The purpose of the Technology Advisory Committee is to assist the Companys Board of Directors in fulfilling its oversight responsibilities relating to: (1) alignment of the Companys information technology (IT) strategic direction, investment needs, and priorities with its overall business and marketing strategies; (2) the Companys marketing initiatives, including Digital-based marketing and merchandising efforts; (3) assessment of the Companys portfolio of IT assets and systems; (4) promotion of an effective, efficient, scalable, flexible, secure, and reliable IT infrastructure; and (5) consideration of the impact of emerging IT developments that may affect the IT functions ability to support the needs of the business.
The Technology Advisory Committee operates under a written charter most recently amended as of February 10, 2016. The charter was last reviewed by the Committee in February 2016.
Consideration of Director Nominees
The Governance Committee periodically assesses the Boards size and composition and whether there may be any near-term vacancies on the Board due to retirement or otherwise. The Governance Committee uses a variety of methods to identify and evaluate potential Director nominees when the need for a new or additional Director is identified. It may seek or receive candidate recommendations from other Board members, members of the Companys senior management, stockholders, or other persons. In addition, if and when it deems appropriate, the Governance Committee may retain an independent executive search firm to assist it in identifying potential Director candidates. Any such candidates may be evaluated at regular or special meetings of the Governance Committee and the Governance Committee may solicit input from other Directors.
In evaluating any identified or submitted candidates for the Board, the Governance Committee seeks to achieve a balance of knowledge, skills, experience, and capability on the Board and to address the Board membership criteria set forth in the Companys Governance Principles. In addition, the Governance Committee believes that candidates must have high personal and professional ethics and integrity, with values compatible with those of the Company; broad and substantial experience at a senior managerial or policy-making level as a basis for contributing wisdom and practical insights; the ability to make significant contributions to the Companys success; and sufficient time to devote to their duties as a Director. In addition, the Governance Committee believes it is important that each Director represent the interests of all stockholders.
GOVERNANCE AND BOARD MATTERS
The Governance Committees policy is to consider properly submitted stockholder nominations for Director candidates in the same manner as a committee-recommended nominee. To recommend any qualified candidate for consideration by the Governance Committee, a stockholder should submit a supporting written statement to the Companys Secretary at Essendant Inc., One Parkway North Boulevard, Deerfield, Illinois 60015-2559 in accordance with the procedures described later in this Proxy Statement under the heading Stockholder Proposals. This written statement must contain: (i) as to each nominee, his or her name and all such other information as would be required to be disclosed in a proxy statement with respect to the election of such person as a Director pursuant to the Exchange Act; (ii) the name and address of the stockholder providing such recommendation, a representation that the stockholder is the record owner of shares entitled to vote at the meeting, the number of shares owned, the period of such ownership, and a representation that the stockholder intends to appear in person or by proxy to nominate the person specified in the statement; (iii) whether the nominee meets the objective criteria for independence of directors under applicable NASDAQ listing standards and the Companys Governance Principles; (iv) a description of all arrangements or understandings, and any relationships, between the stockholder and the nominee or any other person or persons (naming such person(s)) pursuant to which the nomination is to be made by the stockholder; and (v) the written consent of each nominee to serve as a Director if so elected.
Communications with the Board and Annual Meeting Attendance
Any stockholder who desires to contact the Companys Chairman of the Board, who serves as its lead independent Director, or the other members of the Board of Directors may do so by writing to: Chairman of the Board, or Board of Directors, Essendant Inc., One Parkway North Boulevard, Deerfield, Illinois 60015-2559. All such written communications will be forwarded to and collected by the Companys Secretary and delivered in the form received to the Chairman of the Board or, if so addressed or deemed appropriate based on the facts and circumstances outlined in the communication, to another member of the Board or a chair of one of its standing committees. However, unsolicited advertisements, invitations or promotional materials may not be forwarded to Directors, in the discretion of the Secretary.
Directors are encouraged to attend annual meetings of the Companys stockholders. All of the Companys Directors then serving on the Board of Directors attended the 2015 Annual Meeting of Stockholders.
Compensation Discussion and Analysis
Other Compensation Information
Compensation Discussion and Analysis
The following Compensation Discussion & Analysis (CD&A) describes the background, objectives and structure of our 2015 executive compensation programs. This CD&A is intended to be read in conjunction with the tables beginning on page 43, which provide further historical compensation information for our following named executive officers (NEOs):
Cody Phipps resigned effective May 4, 2015.
Todd Shelton resigned as SVP and CFO as of November 12, 2015 and his employment terminated January 15, 2016.
2015 Business Highlights
Essendant is a leading national wholesale distributor of workplace essentials including traditional office products and office furniture, janitorial, sanitation and breakroom supplies, technology products, industrial supplies, automotive aftermarket tools and equipment. We operated in a challenging environment in 2015. In addition to the continuing secular decline in office products consumption, we responded to a severe downturn in the oilfield and energy sectors that significantly affected the revenues and earnings of our ORS Industrial business. Despite these challenges, we achieved a number of financial, operational, and strategic goals in 2015:
We believe our pay-for-performance compensation structure, which puts a substantial percentage of executives compensation at risk, and our compensation philosophy, which is designed to focus executives on building long-term stockholder value, were key drivers of the Companys accomplishments in the face of significant market headwinds.
2015 Incentive Payouts
While we delivered solid financial performance in 2015, our performance was below our internal performance goals, which resulted in below-target incentive payouts under our annual cash incentive plan and under outstanding performance-based equity awards.
Key Leadership Changes
We made several changes to our management team in 2015:
2015 Key Compensation Decisions
The Companys executive compensation program is designed to attract and retain talented executives and to reward them appropriately for their contributions to the Company. In making compensation decisions, the Human Resources Committee consults Meridian Compensation Partners, LLC, the Committees independent compensation consultant, and analyzes the Companys compensation practices compared to the practices of a comparison group of companies.
The Human Resources Committee took into consideration several factors to determine 2015 compensation levels for our named executive officers, including our financial and business results and comparative compensation information. Key compensation decisions include:
Compensation Governance Practices
Our solid compensation governance framework and pay-for-performance practices provide appropriate incentives to our executives to achieve our financial and strategic goals without encouraging them to take excessive risks in their business decisions.
At the 2015 Annual Meeting, our executive compensation was approved by approximately 99% of the shares voted. The Human Resources Committee views this vote result, which is in line with previous support levels, as a strong expression of our stockholders continued satisfaction with our executive compensation structure and philosophy. The Committee considered this strong support in determining to primarily continue the general philosophy and elements of the Companys executive compensation programs for fiscal year 2016.
Target Total Compensation
The mix of pay between fixed and variable compensation and the portion of variable compensation linked to the value of Company common stock is consistent with the Human Resources Committees objective of promoting a strong pay-for-performance culture by putting a substantial percentage of executives compensation at risk. As reflected in the following charts, 80% of the Mr. Aikens 2016 target compensation will be variable or at-risk, and 74% of the 2015 target compensation for our other current NEOs was variable or at risk.
Compensation Philosophy and Objectives
The Companys executive compensation program is designed to attract and retain talented executives and to reward them appropriately for their contributions to the Company. Our executive compensation program is intended to support our strategic objectives and align the interests of our executives and our stockholders.
Our executive compensation program consists of base salary, annual cash incentives, and long-term equity incentives, as well as benefits that are generally available to our salaried employees and limited perquisites. We believe that spreading compensation across these three primary components achieves our compensation objectives as follows:
ü Competitive executive target pay levels
ü Balance fixed and at-risk compensation appropriately
ü Balance short-term and long-term goals appropriately
ü Align the interests of management and stockholders
ü Manage compensation risk
Use of Consultants
In 2015, Aon Hewitt provided consulting services to management, including consulting on compensation philosophy and plan design, as well as executive job compensation analysis. The Company engages a compensation consulting firm to conduct a formal compensation benchmark study every other year. The information from the studies completed by Aon Hewitt in October 2012 and August 2014 were used to recommend compensation changes in 2014 and 2015, respectively.
The Human Resources Committee has separately retained an independent consultant, Meridian Compensation Partners, LLC, to advise the Committee on compensation matters (including its review of management recommendations with respect to base salary adjustments, annual cash incentive awards and long-term incentive equity awards for executive officers) and to inform the Committee of regulatory developments and implications. Meridian provides no other services to the Company.
The Governance Committee of our Board of Directors oversees the annual evaluation of our President and CEOs performance. The Human Resources Committee recommends to the independent directors on the Board, for Board approval, adjustments to our President and CEOs annual base salary, annual cash incentive award targets and long-term incentive targets. Our President and CEO annually reviews the performance of all other executive officers and makes recommendations to the Human Resources Committee, for its approval, with respect to their base salary adjustments and annual cash and long-term incentive targets. The Human Resources Committee approves the final base salary adjustments and incentive targets of the other named executive officers and exercises its discretion in modifying any recommended adjustments or incentive targets.
Compensation Competitive Analysis
The Human Resources Committee reviewed the recommendations of management and Aon Hewitt and selected the companies listed below for our 2015 comparator group. The comparator group consists of companies that are comparable to us in revenue or number of employees, are in similar industries to ours, or are wholesalers.
2015 Peer Group
Due to variances in revenue between the Company and some of the companies in our comparator group, regression analysis a statistical technique for investigating and modeling the relationship between variables is used to estimate the effect that revenue variances have on executive compensation and to adjust the Compensation Data for such variances among the companies. This adjusted data is used to create marketplace compensation profiles for our executives. Our total compensation mix is targeted at setting base salary at the 50th percentile of these marketplace compensation profiles and setting annual cash and long-term target incentives at about the 50th percentile. Our targets generally allow us to recruit, motivate, and retain the executive talent necessary to develop and execute our strategy. However, we may depart from these targets when appropriate based on the performance level of an individual, his or her unique contributions to the Company, market factors, retention risks, or other considerations.
Elements of Compensation
The chart below shows the elements that make up total direct compensation for our executives. Base salary is fixed pay that recognizes the executives role and responsibilities. Annual cash incentive awards are variable and reward achievement of annual financial, operating, and individual goals. Long-term incentives are awarded in the form of performance-based restricted stock units (RSUs) that support the achievement of our three-year financial plan and restricted stock that supports retention and the creation of long-term stockholder value. Annual cash incentives and long-term incentives are awarded under our 2015 Long-Term Incentive Plan (LTIP).
Base salaries are reviewed based on the following factors:
In 2015, Mr. Phipps salary was increased to match the 50th percentile for chief executive officers of our comparator group. Mr. Blanchards salary was increased to bring it closer to the 50th percentile. Mr. Connollys salary was increased in connection with his promotion to Chief Operating Officer.
Annual Bonus (Management Cash Incentive Awards Plan)
All of our named executive officers participated in the MIP, which promotes the Companys pay-for-performance philosophy by providing executives with direct financial incentives in the form of annual cash incentive awards for achieving Company performance goals.
Each named executive officers annual cash incentive award target under the MIP is set as a percentage of his or her base salary, which generally approximates the median for annual cash incentives awarded to similar level positions, subject to adjustment by the Human Resources Committee (or, in the case of the CEOs award target, by the independent directors on the Board) to reflect the executives responsibilities, job performance and contribution to overall business goals. Each year, the Committee establishes target financial performance measures at levels that are consistent with our expectations. In 2015, the Committee established these measures based on the expectation that our long-term diluted earnings per share percentage growth rate will be in the high single digits.
The threshold, target and maximum levels of each performance measure are set each year with the following objectives:
The table below shows the threshold, target, and maximum performance measure levels the Human Resources Committee established during the first quarter of 2015. This mix of performance measures encourages employees to focus appropriately on the Companys key financial and strategic objectives. The potential payout on each performance measure was 0% to 200% of the target award related to that measure, depending on whether our performance on that measure was at or below threshold (payout of 0%), between threshold and target (payout greater than 0% but less than 100%), between target and maximum (payout between 100% and 200%), or at or above maximum (payout of 200%). For performance between Threshold and Target or Target and Maximum, the achievement percentage for each performance measure was determined by linear interpolation. The Committee certified the following actual performance level and percentage of target payout for each of the 2015 MIP performance measures for the named executive officers.
2015 Performance Metrics
For purposes of the MIP, EBIT is defined as earnings before interest and taxes after eliminating unusual or non-recurring items; cost is defined as operating expenses plus cost components of gross margin covering occupancy, advertising materials, distress loss, net delivery freight and net advertising freight; and working capital is defined as total current assets (excluding cash and cash equivalents) less total current liabilities (excluding short term debt). The Committee approved adjustments to the performance measures to eliminate the net impact of the following events (the Adjustments) on EBIT, cost as a percentage of net sales, and working capital as a percentage of net sales (as so adjusted, Adjusted EBIT, Adjusted Cost Factor, and Adjusted Working Capital Efficiency, respectively): write offs of previously capitalized costs from financing activities; the impact on financial results of any acquisitions or dispositions during 2015, such impact to be as projected in the final financial valuation of the transaction presented to the Board prior to the Boards approval of the transaction; charitable contributions to the Essendant Charitable Foundation; impairment of goodwill and other intangible assets; curtailment, settlement or termination of any pension plans; litigation or claim judgments and settlements; and restructuring costs and extraordinary items identified in the Companys audited financial statements, including footnotes.
Although management exceeded cost savings targets in 2015, our results fell short of the threshold levels of the MIP performance metrics. The Human Resources Committee determined that Adjusted Cost Factor, as defined, would not appropriately reward management for their cost savings achievements. The Adjusted Cost Factor definition measured costs against net sales after giving effect to the Adjustments (Adjusted Revenue). Revenue experienced declines in 2015 due primarily to weakness in the energy and industrial sectors; decreased sales of paper and janitorial and sanitation products were also contributing factors. Actual 2015 costs (as defined for purposes of MIP after giving effect to the Adjustments described above and the adjustments to operating expenses shown on Appendix A (to the extent not reflected in the Adjustments) and after eliminating reductions in variable costs attributable to the shortfall in actual net sales compared to net sales under our 2015 operating plan (Plan Revenue)) were $870 million, compared to 2015 operating plan costs of $883 million. Applying $870 million of costs against Plan Revenue would have resulted in an Adjusted Cost Factor of 15.01%, better than a MIP target of 15.25%. Although that level of achievement would have resulted in an overall MIP payout of approximately 30%, the Committee, taking into consideration all aspects of our performance, determined that a payout of 25% of MIP target was appropriate.
For each named executive officer, 20% of the payout approved by the Human Resources Committee for all executive officers as a group was subject to an adjustment by the Human Resources Committee (or the independent directors on the Board, in the case of Mr. Aiken), based on the Committees/Boards assessment of the executives individual performance against specific individual performance targets. For outstanding performance, the executives total payout could have been increased up to 10%, from 25% to 27.5%. For unsatisfactory performance, the executives total payout could have been decreased as much as 20%, from 25% to 20%. The Human Resources Committee and, for Mr. Aiken, the Board assessed the achievements for each named executive officer against the performance goals and determined not to adjust the payouts for individual performance factors.
The annual cash incentive award payout chart below reflects our achievement of the MIP performance measures for the past ten years and underscores our pay-for-performance approach. As shown in the chart, the MIP payout has been at or above the overall target level three times in the last ten years, but during that period we have never achieved the maximum performance level. The annual incentive payout percentage over the last ten years (excluding 2009 in which executive officers did not participate in the MIP) has averaged 83%:
In order for the Company to receive an income tax deduction for MIP amounts payable to MIP participants who are covered employees for purposes of Section 162(m) of the Internal Revenue Code (the Code), the payouts to Mr. Connolly, Mr. Blanchard, and Mr. Phillips as calculated under the MIP are paid from a separate pool established under the stockholder-approved LTIP (the MIP incentive pool). Mr. Aiken and Mr. Shanks were not covered by the MIP incentive pool because they joined the Company after the MIP incentive pool was established. The MIP incentive pool for 2015 was an amount
equal to 10% of 2015 EBIT (as defined under the MIP). The Committee used its discretion to reduce the payouts to each participant covered by the MIP incentive pool to equal the 25% payout described above.
Sign On Bonus
Mr. Aiken received a $166,000 sign on bonus for joining the Company as Interim President and CEO. This bonus was paid to compensate Mr. Aiken for compensation he gave up as the Company asked him to leave his prior employer.
Long-Term Equity Incentive Awards
In 2015 the Human Resources Committee awarded long-term equity incentive awards to the Companys executives, including the named executive officers. Executives participate in these programs based on their: (1) ability to make a substantial contribution to the Companys financial results, (2) level of responsibility, (3) market practice for comparable roles, (4) performance, and (5) leadership potential. Executive participation (other than the CEO) is determined by the Committee based on the recommendations of the CEO, rather than automatically based on title, position, or salary level. The economic value of each named executive officers total LTIP awards is generally targeted at about the median value of equity awards to executives in similar positions based on comparator group and general industry compensation data, subject to adjustment by the Committee to reflect the foregoing factors, as well as the Companys desire to retain executives.
As part of our recurring LTIP grant process, the targeted economic value of 2015 LTIP awards for each NEO was as follows:
Mix of Equity Incentive Awards
Our regular long-term equity compensation program consisted of two types of awards:
Prior to 2015, awards to all NEOs were divided 70%-30% between performance-based RSUs and time-based restricted stock. In 2015 the Human Resources Committee and, for the President and the CEO, the Board modified the allocation between performance-based RSUs and time-based restricted stock to align with allocation practices typically used by companies in our comparator group and by industry generally. The economic grant date value of the awards made to Mr. Connolly, Mr. Blanchard, Mr. Phillips and Mr. Shelton was split evenly between performance-based RSUs and time-based restricted stock. The economic grant date value of Mr. Phipps 2015 performance-based RSU award was 60% of his full-year target. Mr. Phipps did not receive the balance of his 2015 full-year target economic value because he resigned prior to the September 2015 grant of time-based restricted stock.
All of the long-term equity incentive awards granted to Mr. Aiken and Mr. Shanks in 2015 were time-based restricted awards. See Other 2015 Restricted Stock AwardsNew Hire Awards. Commencing in 2016, the target economic value of Mr. Aikens long-term equity award will be split 60%-40% between performance-based RSUs and time-based restricted stock, and the target value of Mr. Shanks award will be split evenly between performance-based RSU awards and time-based restricted stock.
2015 Restricted Stock Awards
Except for the November 2015 award to Mr. Shanks discussed below, restricted stock granted to named executive officers in 2015 vests in three equal, annual increments, except that if the aggregate adjusted diluted earnings per share of the Company for the four quarters preceding a vesting date do not exceed $0.50, the restricted stock scheduled to vest on that date will be forfeited. (The $0.50 earnings per share requirement is designed to provide tax deductibility as described below. See Additional Compensation Policies and Practices Tax Deductibility.)
The Committee also approved and granted restricted stock awards that were not part of the annual granting cycle. See Other 2015 Restricted Stock Awards.
2015 Performance-Based RSU Awards
In 2015, the Committee changed the design of the long-term performance award based on market best practices and the Committees determination of the most appropriate structure to incentivize and reward executives for pursuing the creation of long-term stockholder value. The 2015 awards, granted on March 15, 2015, have a three-year cumulative performance period, with cliff-vesting at the end of that time, and utilize two performance metrics: Adjusted Working Capital Efficiency (as defined above) and Adjusted Cumulative Net Income (defined as the sum of the Companys net income for the three years ending December 31, 2017, as recalculated based on the Adjustments described on page 33). Prior to 2015, performance-based RSUs were eligible for annual vesting. The change to three-year cliff vesting avoids the complexity of rolling vesting and aligns with the vesting schedule for performance-based equity awards typically used by companies in our comparator group and by industry generally.
Other 2015 Restricted Stock Awards
Management Team Transition Awards
Upon Mr. Phipps resignation, the Board wanted to ensure the continuity of the management team going forward. The experience and seniority of our leadership team is critical to our future success. Given the CEO change and the related uncertainty, the independent directors of the Board approved one-time retention awards for Messrs. Connolly, Shelton, Blanchard, and Phillips with a target economic value equal to 150% of each executives annual LTIP award target. Each awardee received fifty percent of this award in the form of restricted stock in June 2015, with grant date values of $599,982, $461,981, $281,261, and $281,261, repayments respectively. The Board believes that restricted stock is a strong retention vehicle. The remaining fifty percent of each award was delivered as a performance-based RSU grant in March 2016. The Companys objective is to attract and retain the best talent available and to invest in those individuals who deliver long-term productivity; as such, the Board believed these awards were in the long-term interests of the Company and its stockholders.
In connection with his appointment as President and CEO of the Company, initially on an interim basis and then on a permanent basis, Mr. Aiken received restricted stock awards with a grant date value of $2 million. The amount of these awards was determined based on comparison data, Mr. Aikens prior executive experience, and Essendants compensation practices for its previous president and chief executive officer. The Human Resources Committee and the Board approved these awards as time-based restricted stock because Mr. Aiken joined the Company after the Board had established the performance requirements for the 2015 performance-based awards and because Mr. Aiken did not have a management role in establishing the performance plan. Commencing in 2016, 60% of Mr. Aikens annual LTIP award is expected to be performance based and 40% is expected to be time based.
In connection with his hiring as CFO, Mr. Shanks received $250,000 in restricted stock in November 2015. In March 2016 Mr. Shanks received an award of performance-based RSUs with a target economic value of $250,000. The March 2016 award was in addition to his annual March award. The November 2015 award will cliff vest three years from the grant date. The March 2016 award will cliff vest three years from the grant date to the extent the applicable performance metrics have been achieved. In 2016 Mr. Shanks will also be eligible for annual LTIP awards, which are expected to be divided equally between performance-based RSUs and time-based restricted stock.
No Performance-Based Restricted Stock Units Earned in 2015
The 2013 and 2014 performance-based RSUs were scheduled to vest in three annual increments targeted at 1/3 of the number of units granted, but ranging from:
The performance metric for the 2013 RSUs was economic profit.2 The performance metric for the 2014 RSUs was adjusted net income.3
Companys Cumulative Economic Profit and Adjusted Net Income Goals and
Corresponding Performance Factors During the Performance Periods Indicated
The number of RSU awards earned by each executive as of any vesting date was calculated using the following formula:
(Performance Factor x Cumulative Unit Percentage x Number of RSUs Awarded) Number of Previously Earned RSUs
The Performance Factor for each vesting date was derived from the table above based on the Companys cumulative economic profit or adjusted net income, as applicable, through the applicable vesting date. The Performance Factors as of the vesting date for the performance periods ended December 31, 2015 under the 2013 and 2014 RSU awards were 30% and 0%, respectively. The December 31, 2015 Cumulative Unit Percentage was 66 2/3% for the 2014 RSUs and 100% for the 2013 RSUs. The Number of RSUs Awarded was the number of RSUs granted to the applicable
executive by the Company. The Number of Previously Earned RSUs was the number of RSUs that had been earned on prior vesting dates.
Under the formula for determining the number of RSUs earned as of each vesting date, no RSUs would be earned if the economic profit or the adjusted net income, as applicable, as of the vesting date was equal to or less than the Threshold amount specified in the table. Based on the Companys cumulative economic profit for the three-year period ended December 31, 2015, and the Companys cumulative adjusted net income for the two-year period ended December 31, 2015, no additional shares vested on March 1, 2016 under the RSU award agreements issued in March 2013 and March 2014. These results demonstrate the alignment of compensation delivery with performance measure achievement.
2016 Compensation Program
The Human Resources Committee approved the following aspects of the 2016 compensation program for executive officers:
Stock Ownership Guidelines
The Company and its stockholders are best served by managing the business with a long-term perspective while delivering strong annual results. We believe stock ownership is an important tool to strengthen the alignment of interests of stockholders, directors, and executive officers. Our guidelines specify that each director and executive officer should retain 100% of any shares of Company common stock acquired (net of required tax withholding) through equity-based grants made by the Company
under our incentive plans, until he or she attains and continues to maintain ownership equal to at least the multiple of cash retainer or annual base salary set forth in the table below. As of December 31, 2015 all of the current directors and NEOs had attained such ownership, except for Mr. Aiken and Mr. Shanks, who joined the Company in 2015, and Mr. Williams, who joined the Board in 2014. All directors and executive officers complied with the retention aspects of the stock ownership guidelines in 2015.
The value of all of the following types of Company stock, stock units or stock options owned by or granted to the participant qualifies toward the participants attainment of the target multiple of pay:
Based on an amendment to the stock ownership guidelines adopted by the Human Resources Committee in February 2014, unvested restricted stock units that are subject to performance conditions will cease to count toward share ownership in February 2017.
The Board and the Committee may reduce future long-term incentive grants or other compensation provided to executives who do not comply with the guidelines.
Recoupment (Clawback) Policy
Under our clawback policy, we are allowed to recoup incentive compensation previously paid to our executive officers if there is a restatement of financial statements or if any executive commits fraud or engages in other misconduct. The Committee adopted this policy in anticipation of SEC rules that will require such policies, and we intend to make any changes to our policy that may be required to comply with those final rules. Our form RSU and restricted stock award agreements include provisions requiring the forfeiture of any such awards, shares issued under such awards, and proceeds from the sale of any shares issued under such awards if the participant breaches certain covenants, including non-competition and non-solicitation restrictions that apply during the term of employment and for two years thereafter.
Anti-Hedging and Pledging Policies
Under our insider trading policy, directors and executive officers, as well as other employees, are prohibited from the following activities with respect to Company common stock:
As of January 1, 2016, no shares of Company common stock were pledged by any director or executive officer.
Section 162(m) of the Code generally limits the corporate tax deduction for compensation paid to the chief executive officer and the three other most highly compensated executives (other than the CFO) to $1 million annually, unless certain requirements are satisfied. To maximize the corporate tax deduction, the MIP, the LTIP and the MIP incentive pool were designed so that certain awards under those plans can comply with the requirements of Section 162(m) of the Code and the MIP and the MIP incentive pool were established under the stockholder-approved LTIP. As the $1 million limit does not apply to compensatory amounts that qualify as performance-based compensation under Section 162(m), certain of our performance-based awards made pursuant to these plans are intended to qualify for corporate tax deductibility.
We intend to use performance-based compensation to minimize the effect of the limits imposed by Section 162(m) to the extent that compliance with Code requirements does not conflict with our compensation objectives. In some cases, however, we believe the loss of some portion of a corporate tax deduction may be necessary and appropriate in order to provide the compensation necessary to attract and retain qualified executives.
Perquisites and Other Benefits
We provide cash allowances in lieu of separate perquisite programs such as auto allowances, financial planning reimbursements, physical examination reimbursements, and supplemental liability insurance. Based on the Compensation Data, the independent directors on the Board approve the perquisite allowance for Mr. Aiken and the Human Resource Committee approves the perquisite allowances for the other named executive officers.
Other executive benefits include:
Our executives are eligible to participate in all of our other employee benefit plans, such as medical, dental, vision, long-term disability and 401(k) plan. Executives hired prior to January 1, 2008 are also eligible to receive a pension benefit from our frozen pension plan. See Executive Compensation Retirement Benefits. We believe these benefits support our goal of attracting and retaining key executive talent, as well as promote the health, well-being, and financial security of our executives.
We have entered into employment agreements with each of the NEOs except Mr. Shanks. Mr. Shanks is covered by the Companys Executive Severance Plan. The employment agreements and the Executive Severance Plan provide for severance benefits in the event of termination by the Company without cause or by the executive for good reason. These benefits are intended to attract and retain executives and to facilitate an orderly transition upon certain terminations. See Executive Compensation Employment Contracts and Employment Termination and Change of Control Arrangements.
The named executive officers benefits in the event of a change of control have a double trigger, meaning the executives are not automatically entitled to severance upon a change of control. Rather, they are entitled to receive severance following a change of control only if, within the period of time specified in their respective employment contracts or the Executive Severance Plan, their employment is terminated by the Company without cause or by the executive for good reason.
Change of control severance benefits help to maintain the named executive officers objectivity in decision-making on potential corporate transactions and provide another vehicle to align the interests of the named executive officers with the interests of our stockholders. The use of a double-trigger for the payment of change of control severance benefits encourages executives to remain with us through the closing of a change of control transaction, providing stability at a critical time.
Human Resources Committee Report
The Human Resources Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Human Resources Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference in the Companys Annual Report on Form 10-K.
The Human Resources Committee:
Susan J. Riley, Chair
Alexander M. Schmelkin
Paul S. Williams
Summary Compensation Table
The following table summarizes the compensation of all persons serving as principal executive officer (CEO) and principal financial officer (CFO) in fiscal 2015 and the next three highest compensated executive officers who were serving as such at December 31, 2015.
Grants of Plan-Based Awards During 2015
The compensation plans under which the grants in the following table were made are described under Compensation Discussion and AnalysisElements of CompensationLong-Term Equity Incentive Awards. The LTIP permits different types of awards, including but not limited to stock options, restricted stock awards, stock appreciation rights, cash incentives awards, and performance-based awards. The LTIP requires that in the event of a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, or exchange of shares), outstanding equity awards will be proportionately adjusted.
Outstanding Equity Awards at December 31, 2015