The following is the Audit Committee’s report submitted to the Board of Directors for the year ended December 31, 2018.
Based on the foregoing review and discussions, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
This Compensation Discussion and Analysis contains a discussion of the material elements of compensation awarded to, earned by, or paid to the Company’s “Named Executive Officers” listed in the table below (“NEOs”), including our principal executive officer, the principal financial officer, and the next three most highly compensated executives of the Company in 2018.
We are a global leader in the design, development, manufacture and support of defect inspection, lithography, process control metrology, and process control software used by semiconductor and advanced packaging device manufacturers worldwide. We also provide services relating to the maintenance and repair of our products, installation services and training. Semiconductor capital equipment is our primary served market.
In 2018, for the first time in the Company’s public company history, the Company realized its fourth consecutive year of record sales. In addition, the Company maintained its operating income performance consistent with the two prior years. Both of these achievements helped to drive strong financial performance in 2018. The following reflects some of our financial accomplishments in 2018 as compared to 2017 and 2016:
Our Board recognizes the fundamental interest our stockholders have in the compensation of our executive officers. At our 2018 Annual Meeting, 96% of stockholders present at the meeting voted in favor of our advisory vote on executive compensation. Our stockholders also responded favorably to our 2018 Stock Plan, which was approved by stockholder vote on May 16, 2018.
Rewarding continuous improvement in financial and operating results and the creation of stockholder value are key attributes of our compensation philosophy, which serves as the framework for the Company’s executive compensation program. The Compensation Committee of the Board of Directors of the Company (referred to as the “Committee” or the “Compensation Committee”) has developed a set of core objectives and principles that it has used to develop the executive compensation program. The specific objectives of our executive compensation program are to:
Consistent with the foregoing, the Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific strategic and operating goals of the Company on both an annual and a long-term basis, and which aligns our executives’ interests with those of our stockholders. The Compensation Committee evaluates both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions. Based on that evaluation, the Compensation Committee designs the compensation provided to key employees to remain competitive relative to the compensation paid to similarly situated executives at competitor companies. The Compensation Committee believes executive compensation packages provided by the Company to its executives, including the NEOs, should include base salary, annual cash incentive opportunities, select perquisites and stock-based compensation, including equity incentive opportunities which rewards performance as measured against pre-established goals.
The following principles support the objectives and design of the compensation program:
To underscore the importance of “pay-for-performance” in our compensation philosophy and our Company’s culture, the Compensation Committee has developed incentive arrangements based on performance standards established at levels which the Committee believes, at target achievement, will incentivize our executives to meet or exceed industry performance. The incentive component of the Company’s executive compensation program, also referred to as the Key Executive Incentive Compensation Plan, rewards executives for achieving specific corporate, business unit and individual goals as well as strategic and operational measures depending on the executive involved.
Our long-term incentive program includes grants of performance-based stock units (“PSUs”) which are earned based on the achievement of Total Shareholder Return (“TSR”) performance relative to peers over a three (3) year period. Our long-term incentive program also includes service-based RSUs, which vest in equal annual increments over time. All grants are currently made under the stockholder approved Rudolph Technologies, Inc. 2018 Stock Plan and shares earned and vested are subject to the Company’s stock ownership and retention guidelines.
Our executive compensation program is generally comprised of four parts, each intended to address different objectives: base salary, annual cash performance incentives, long-term equity incentives, which generally are in the form of both performance-based vesting and service-based vesting RSU grants, and limited perquisites.
The table below highlights the foregoing key elements of our executive compensation structure.
The Compensation Committee aligns the Key Executive Incentive Compensation Plan, which encompasses our annual cash incentive plan and long-term incentive equity program, with the Company’s performance relative to pre-established performance goals based on the Company’s stated financial objectives, historical performance, and anticipated market and economic conditions for the performance period.
In adopting this design, the Compensation Committee considered a number of parameters, including the advice of its independent compensation consultant, comparable practices within the industry and the desire to achieve the goals underlying the compensation program. The Compensation Committee believes that as a result of this program the Company has been able to attract, retain and motivate executives and reward the achievement of strategic, operational and financial goals, thereby enhancing stockholder value.
Our Compensation Practices
|
The Compensation Committee has adopted the following practices and policies with respect to the Company’s executive compensation program:
|
|
What We Do
|
Committee Independence
|
The Compensation Committee consists of independent directors and reserves time at each meeting to meet in executive session without management present.
|
Independent Compensation Consultant
|
The Compensation Committee has engaged its own independent compensation consultant and annually assesses the consultant’s performance, independence, and whether any potential conflicts of interest exist.
|
Independent Legal Advisor
|
The Compensation Committee has engaged its own independent legal advisor specializing in corporate compensation issues, as necessary.
|
CEO Goal Setting and Performance
Evaluation
|
The Compensation Committee, with the input of the full Board, engages in formal goal setting and performance evaluation processes with the CEO.
|
Peer Group
|
The Compensation Committee has established formal criteria for the selection of peer group companies used as a competitive reference point with respect to executive and director compensation, program design and practices, and financial and stock performance.
|
Share Ownership Guidelines
|
The Company maintains rigorous share ownership guidelines, which apply to executives and directors, and serve as a risk-mitigating feature within our compensation structure.
|
Double Trigger
Change-in-Control
|
The Company has entered into employment agreements with senior executives, including the CEO, that contain change-in-control severance protection. Executives are entitled to severance in the event of both a change-in-control of the Company and a qualifying termination of employment (“double trigger”).
|
Clawback Policy
|
The Company has adopted a policy that provides for the recovery or adjustment of amounts previously awarded or paid to a NEO in the event that financial results or other performance measures on which the award or payment were determined are restated or adjusted.
|
What We Don’t Do
|
Anti-Hedging and Pledging Policies
|
The Company’s insider trading policy prohibits hedging transactions related to our Common Stock. Additionally, under the Company’s anti-pledging policy, non-employee directors and executive officers are prohibited from making any new pledges of Company securities as collateral for a loan, or otherwise making a new transfer of Company securities to a margin account.
|
Tax Gross-Ups on Perquisites or
Severance
|
The Company does not provide any tax gross-up payments to cover personal income taxes on perquisites or severance benefits related to a change-in-control.
|
34
From time to time, the Compensation Committee has engaged the services of outside compensation consultants to provide advice on compensation plans and issues related to the Company’s executive and non-executive employees. In 2018, the Committee again engaged Pay Governance LLC, an independent executive compensation consulting firm, to provide advice on the Company’s executive compensation arrangements. Pay Governance LLC does not provide any services other than those related to compensation consulting and does not provide any services to Company management. The Committee has determined that Pay Governance LLC is independent within the meaning of the Compensation Committee Charter and NYSE listing standards, and the work of Pay Governance LLC for the Committee does not raise any conflicts of interest.
Independent Legal Counsel
|
The Compensation Committee has engaged, as necessary, the services of independent outside legal counsel for compensation issues. No independent counsel was engaged for compensation issues in 2018.
Role Of Executives In Establishing Compensation
|
The Compensation Committee makes all determinations regarding executive compensation subject to approval by the independent members of the Board. On an annual basis, the Committee evaluates our CEO’s performance in light of the goals and objectives established for measuring his or her performance at the beginning of the previous fiscal year. The results of this evaluation guide the Committee in setting our CEO’s salary, cash incentive award opportunity and equity compensation. The CEO does not participate in the Compensation Committee’s or Board’s deliberations regarding his or her compensation.
With regard to compensation for executives other than the CEO, the Committee seeks input from the CEO. Each year, the CEO is responsible for establishing proposed personal and corporate objectives for each of the Company’s other executives, including our other NEOs. These objectives, subject to the approval of the Compensation Committee, are reviewed and agreed upon by the CEO with the executive. In addition, as part of the annual performance review of the Company’s executives, the CEO assesses the performance of his or her direct reports and recommends any merit increase to be proposed for each individual. These recommendations are compiled by the CEO into executive compensation plans which include any proposed merit increases, each executive’s personal and corporate objectives, proposed annual incentive award opportunities (expressed as a percentage of their base salary) and equity grant proposals, and are submitted to the Compensation Committee for review and consideration for approval. At the Compensation Committee meeting during which the executive compensation plans are reviewed, the CEO attends the initial session to present the proposed plans and to answer questions. Thereafter, the Compensation Committee meets without the CEO present to review, discuss and recommend for approval all executive compensation plans, subject to any modifications made by the Committee. The Committee then recommends such compensation packages to the independent members of the Board of Directors for approval.
|
Compensation Committee Activity
|
During 2018, the Compensation Committee met five (5) times. As discussed above, in early 2018 the Company’s CEO met with the Compensation Committee to present the proposed compensation plans for each of the Company’s executives as well as the proposed incentive award opportunities under the 2018 Employee Cash Bonus Program for certain non-executive employees. At each of its meetings held during 2018, the Compensation Committee met in executive session, without the presence of the CEO or any other Company executives, to review the relevant compensation matters.
In 2018, the Compensation Committee took a number of actions. These included reviewing and recommending for approval by the independent members of the Board:
|
•
|
the annual compensation of the Company’s CEO for 2018;
|
|
•
|
annual compensation for each of our other executive officers for 2018;
|
|
•
|
the Key Executive Incentive Compensation Plan and Employee Cash Bonus Programs for 2018; and
|
|
•
|
the service-based and performance-based equity incentive awards and related performance targets for the Company’s executives for 2018.
|
In reviewing and setting the annual compensation for each executive of the Company, the Compensation Committee considered the amounts payable under each of the elements of their respective compensation plans, including base salary, annual cash
35
incentive aw
ards, equity grants and perquisites. The Committee took into consideration both the Company’s internal pay equity as well as the competitive environment within which the Company operates. In each instance, the Committee determined that the base salary and
annual and long-term incentive award opportunities for the individual executives were at an acceptable level for 201
8
and that the perquisites were appropriate for the related positions.
In late 2018, the Compensation Committee, reviewed our annual- and long-term incentive programs for 2019. At this time, measures were again selected that were determined to be consistent with advancing the interests of the Company’s stockholders and aligning and supporting the Company’s business strategy.
Based on the foregoing, in early 2019, the Compensation Committee met and took a number of actions. These included the review and recommendation for approval by the independent members of the Board of:
|
•
|
the annual compensation of the Company’s CEO for 2019;
|
|
•
|
the annual compensation for each of our other executive officers for 2019;
|
|
•
|
the Key Executive Incentive Compensation Plan and Employee Cash Bonus Programs for 2019; and
|
|
•
|
the service-based and performance-based equity incentive awards and related performance targets for the Company’s executives for 2019.
|
In order to meet its objective of maintaining competitive executive compensation packages, the Committee obtains third-party compensation information from time to time and reviews executive compensation programs of comparable, publicly held, high technology companies.
The Committee has engaged independent compensation consultants at various times in the development and evaluation of its compensation programs. To the extent that independent compensation consultants are not engaged to consult with the Committee with respect to compensation for a position or time period, the Committee obtains market compensation information using internal resources at the Company. The Committee reviews data related to compensation levels and programs of other similar companies prior to making its decisions, but only considers such information in a general manner in order to obtain a better understanding of the current compensation practices within our industry. In the fall of 2012 and through 2019, the Committee engaged Pay Governance LLC to provide peer group data and perform an assessment of compensation levels provided to executives.
Data representing company proxy disclosures and industry compensation surveys was used in conducting this assessment. The peer group of industry related companies that was developed was based generally on the following criteria:
|
•
|
Semiconductor equipment industry (publicly traded companies);
|
|
•
|
Revenues of approximately $500 million or less;
|
|
•
|
Market capitalization of less than $1 billion; and
|
|
•
|
Competitors for business and employee talent.
|
Since the initially establishing a compensation peer group with advice of our compensation consultant, our list of peer companies has evolved. Companies have been removed over time due to being acquired or a re-evaluation of the fit with the Company’s peer group criteria, while other companies have been added. The peer group for the 2019 and 2018 review (which was used to make decisions regarding the respective year’s compensation), as approved by the Committee, consisted of the following companies.
36
|
|
|
|
|
|
Companies Included In
Compensation Peer Group For 2019
|
Advanced Energy Industries, Inc.
|
Cohu, Inc.
|
Maxwell Technologies, Inc.
|
Amtech Systems, Inc. (1)
|
DSP Group, Inc.
|
Nanometrics Incorporated
|
Axcelis Technologies Inc.
|
EMCORE Corporation
|
Sigma Designs, Inc.
|
Brooks Automation Inc.
|
FormFactor Inc.
|
Veeco Instruments, Inc.
|
|
|
|
Companies Included In Compensation Peer Group For 2018 But Excluded For 2019
|
Electro Scientific Industries, Inc.
(1)
|
Xcerra Corporation
(1)
|
|
|
(1)
|
Removed in 2019 due to being acquired by another company.
|
The pay practices of the foregoing peer group were analyzed for base salary and short-term and long-term incentives. Periodically, peer groups are used to evaluate other programs such as executive retirement, perquisites and severance policies. Our peer group data is supplemented by broader technology industry data from compensation surveys to further facilitate the evaluation of compensation levels and design. Compensation levels are generally developed at the low (25
th
percentile), middle (50
th
percentile) and high (75
th
percentile) end of the market for each pay element (base salary and short-term and long-term incentives) and for total compensation.
While the Committee considers market data for each pay element and in total, the Committee does not specifically target any particular market compensation level. Instead, the Committee uses its discretion in setting the compensation levels as appropriate.
2018 AND 2019 ELEMENTS OF OUR COMPENSATION PLANS
|
Compensation Program Design
|
The compensation program provided to the Company’s executive officers is generally comprised of four parts, each intended to address different objectives: base salary, annual cash performance incentive awards, long-term incentives that generally are in the form of both performance-based stock units and service-vesting RSU grants, and limited perquisites. Executives are also entitled to participate in benefit programs available to all Company employees, such as our ESPP and 401(k) Plan. This design was adopted for executives by the Committee taking into consideration a number of parameters including the independent compensation consultant’s advice, comparable practices within the industry and the desire to achieve the goals underlying the compensation program. The Committee believes that as a result of this program the Company can attract, retain and motivate employees and reward the achievement of strategic operational and financial goals, thereby enhancing stockholder value.
Annually, the Committee reviews the elements of the compensation package as well as the overall package afforded to the executives. At this time, the Committee, in its discretion, can recommend adjustments to the elements of the program to the independent members of the Board of Directors for review and approval. This review would typically be performed coincident with the evaluation of the individual executive’s performance in relation to their Key Executive Incentive Compensation Plan goals, salary adjustment and equity grants, if any, as discussed below.
The Committee and Board believe that each of the elements as well as the entire compensation package for Company executives is appropriate for the Company given its performance, industry, current challenges and environment.
Based on the objectives discussed in the foregoing section, the Committee seeks to structure our equity and cash incentive compensation program to motivate executives to achieve the business goals set by the Company and reward the executives for achieving such goals, which we believe aligns the financial incentives of our executives with the interests of our stockholders. The Committee primarily uses salary, perquisites and other executive benefits as a means for providing base compensation to employees for their knowledge and experience and for fulfilling their basic job responsibilities.
In establishing these components of the executive compensation package, it is the Committee’s intention to set total executive compensation at a sufficient level to attract and retain a strong motivated leadership team, while remaining reasonable and in line with stockholder perception of overall fairness of executive compensation.
Base salary levels for executive officers of the Company have been generally established at or near the start of each year. The Company’s annual executive cash incentive bonuses are administered through its Key Executive Incentive Compensation Plan. The plan provides guidelines for the calculation of annual non-equity incentive-based compensation, subject to the Committee’s
37
oversight and the Company’s and executive’s achievement of corporate and individual goals. Generally, at its first meeting each year, the Committee determines final
bonuses for executive officers earned in the preceding year based on each individual’s performance and the performance of the Company through its audited financial statements, and also reviews the incentive program to be established for the current year a
nd approves the group of executives eligible to participate in the plan for that year.
Each of the Company’s executives, including our NEOs, is eligible to receive equity compensation, which has recently been in the form of PSU and RSU grants under the Company’s stockholder approved 2018 Stock Plan. All full-time and part-time employees are eligible for equity grants. The Committee believes that through the Company’s broad-based equity compensation plan, the economic interests of all employees, including the executives, are more closely aligned with those of our stockholders. It is also believed that this approach will allow the Company to use equity as an incentive in a balanced manner that supports the recruitment and retention of top talent.
The Committee generally recommends for approval by the independent members of the Board the grant of equity awards at the first regularly scheduled meeting of the Board or upon completion of the Committee’s review and approval process. The Committee and the Board do not generally grant equity awards at other times during the year, other than in the case of a new hire, promotion or other exceptional circumstances.
|
Impact Of Performance On Compensation
|
The performance of the Company and of the executive has a direct impact on the compensation received by such executive from the Company. On an annual basis, the CEO reviews the performance and compensation for the Company’s executives to determine any potential salary adjustment for each individual. This assessment takes into consideration a number of factors, including the Company’s profitability; the performance of applicable business units; the executive’s individual performance and measurable contribution to the Company’s success; and pay levels of similar positions with comparable companies in the industry and within similar technology industries.
In addition, both Company and individual performance are assessed by the CEO when proposing to the Committee any annual cash incentive payout to the NEOs (other than the CEO) under the annual cash incentive component of their Key Executive Incentive Compensation Plan. The plan includes various incentive level opportunities based on the executive’s accountability and impact on Company operations, with target award opportunities that are established as a percentage of base salary. Typically, these targets range from 30% to 100% of base salary for the executives in the plan. For our NEOs, 2018 and 2019 target annual cash bonus opportunities were set as follows:
|
|
Target Annual Cash Incentive Percentage
|
Name
|
|
2019
|
2018
|
Michael P. Plisinski
|
|
100.0%
|
100.0%
|
Steven R. Roth
|
|
60.0%
|
60.0%
|
Robert A. Koch
|
|
40.0%
|
35.0%
|
Richard Rogoff
|
|
45.0%
|
45.0%
|
Elvino da Silveira
|
|
40.0%
|
40.0%
|
Under the annual cash incentive component of our Key Executive Incentive Compensation Plan, payout is based upon achievement of corporate and personal objectives with no payout unless the Company meets the threshold level of at least one of the Board approved corporate financial targets established as part of the plan. Personal objectives are awarded only upon clear achievement of the associated goal. Failure to meet the personal objectives thereby has a negative impact on the ultimate bonus payout.
In addition to a review of the prior year’s objectives, the CEO and each executive also confer to propose new individual performance targets for the executives (including the NEOs, other than the CEO) for the current year, which are combined with the corporate targets into an annual cash incentive opportunity proposal. The personal targets that are established are designed to result in additional incremental value to the Company if they are achieved. These personal performance targets in 2018 included goals related to additional corporate and/or business unit financial measures, operational measures and activities, transactional activities, and marketing initiatives, depending on the executive involved. The target level of the corporate component to the bonus goals was set based on the Company’s financial budget established by the Board at the beginning of the year. The determination of these goals is made annually to meet the changing nature of the Company’s business.
Upon completion of the prior year’s results and prior to implementation of the current year’s proposed Key Executive Incentive Compensation Plan, the results for each participating executive employee are submitted to, and reviewed by, the Compensation Committee, which considers the CEO’s recommendations for executives other than the CEO and determines the final bonus
38
earned by each executive based on Company and individual performance. The Compensation Committee then establishes the Company and individual metrics applicable to the current year’s Key Executive Incentive Compensation Plan. T
hereafter, the Committee’s recommendations are presented to the independent members of the Board for approval of the achieved incentive payment, if any, and of the new plan for the current year. If, during the year, there are changes to the Key Executive I
ncentive Compensation Plan that are proposed, such changes are presented to the Compensation Committee for its consideration. The Compensation Committee may exercise discretion in relation to its recommendation to the independent members of the Board regar
ding an individual’s award under the Key Executive Incentive Compensation Plan based upon its review.
An executive’s role, responsibilities, individual performance and contribution to the Company are factors considered in determining the size of any discretionary equity grant that may be recommended by the Compensation Committee to the independent members of the Board of Directors for approval as long-term incentive to the individual.
Based upon the foregoing, the compensation that an executive may realize in the course of a year can be impacted by the positive or negative performance of such individual as well as Company performance. We intend for an individual’s compensation under the Key Executive Incentive Compensation Plan to be proportionate to the Company’s and his or her performance against established goals. Similarly, equity awards that are performance-based are intended to be proportionate to the Company’s performance under goals established for the Company. This review and evaluation are more subjective when applied to salary adjustments. In this case, an executive’s performance is evaluated by taking into consideration the executive’s contribution to the Company, the significance of the individual’s achievements in relation to the overall corporate goals and mission, and the executive’s effectiveness in his or her role within the Company and then weighed against the performance of other executives. Industry norms and reference to comparative company data are considered to the extent appropriate. Thus, there is no precise, objective formula that is applied in determining salary adjustments.
Compensation Plan Design And Decisions For 2018 And 2019
|
For 2018, the Compensation Committee conducted a review of our compensation programs and determined that the 2018 NEO compensation plan would retain the same four basic elements as the prior year’s plan as these align our programs with our current business strategy and include the pay for performance aspect of our executive compensation program. Taking into account the Company’s 2017 performance and outlook for 2018, each NEO’s performance and responsibilities, and current market compensation rates for each NEO position, among other criteria, the Compensation Committee recommended, and the Board approved the updated program and compensation plan structure for our NEOs as detailed below.
Further, for 2019, the Committee determined that the 2019 NEO compensation plan would retain the same four basic elements as the 2018 plan. Taking into account the Company’s 2018 performance and outlook for 2019, each NEO’s performance and responsibilities, and current market compensation rates for each NEO position, among other criteria, the Compensation Committee recommended, and the Board approved the program and compensation plan structure for our NEOs also as detailed below.
The Company provides executives and other employees with base salary to compensate them for services rendered during the fiscal year. Base salaries for executive officers are established considering a number of factors, including the executive’s:
|
•
|
Individual performance;
|
|
•
|
Role and responsibilities;
|
|
•
|
Measurable contribution to the Company’s profitability and success; and
|
|
•
|
The base salary levels of similar positions with comparable companies in the industry.
|
The Compensation Committee supports the compensation philosophy of moderation for elements such as base salary and perquisites and other executive benefits. As noted above, under “Impact of Performance on Compensation,” base salary decisions are made as part of the Company’s formal annual review process and are influenced by the performance of the Company and the individual.
The CEO’s recommendations for salary adjustments (other than his or her own) are reviewed and modified as deemed appropriate by the Compensation Committee and presented to the independent members of the Board for approval.
39
The Compensation Committee approved a 9.4% increase to the CEO’s base salary and increases ranging from 2.0% to 3.0% for the base salaries of each of our other NEOs for 2018. The CEO’s increase was approved in order to bring the CEO’s base salary within the median of the Company’s 2018 Compensation Peer Group, as defined above in the “Peer Companies” section. There were no increases due to promotions for any NEO in 2018.
For 2019, the Compensation Committee approved a 3.0% increase to the CEO’s base salary and increases ranging from 2.0% to 3.0% for the base salaries of each of our other NEOs.
|
Annual Cash Incentive Compensation
|
An executive’s annual cash incentive award under the Key Executive Incentive Compensation Plan generally depends on the financial performance of the Company relative to profit, revenue and other financial targets and the executive’s individual performance. The incentive opportunity is generally set at a higher percentage for more senior officers, with the result that such officers have a higher percentage of their potential total cash compensation at risk. All executive employees, including all of our NEOs, participate in the Company’s Key Executive Incentive Compensation Plan, if and when established, which is designed to generate additional incentive for maximizing the employee’s performance in realizing the corporate strategic and financial goals and mission.
The Compensation Committee may, but is not required to, establish a Key Executive Incentive Compensation Plan for any given year.
When implemented, an executive may earn an annual incentive award due to success as it relates to the executive’s individual goals, as long as the Company’s financial performance meets at least the threshold level of at least one of the corporate financial performance goals.
Upon completion of the year, the individual’s and the Company’s results with respect to the performance targets are then assessed and presented to the Committee. The Committee reviews the proposed payouts and suggests changes to the extent it deems such action necessary. Key Executive Incentive Compensation Plan awards are paid out following completion of the annual audit by the Company’s independent registered public accounting firm. This generally occurs in the first quarter of each year.
Annual Cash Incentive Plan For 2018
|
Consistent with prior years, the annual cash incentive component of the 2018 Key Executive Incentive Compensation Plan (“2018 Plan”) included corporate goals, business unit or department goals (if applicable) and personal goals. The 2018 Plan was established such that each NEO’s potential cash award was subject to the achievement of 2018 corporate financial objectives relating to corporate revenue and non-GAAP operating income (“Corporate Goals”). Earning of the potential cash award under the 2018 Plan would begin upon achieving 80% of the corporate revenue target and/or 70% of the corporate non-GAAP operating income target. As in prior years, had the Company not reached either of the corporate revenue or non-GAAP operating income threshold levels, then no payout whatsoever under the 2018 Plan would have been earned by the executives.
For those NEOs who were associated with a particular Company business unit or department, a portion of their cash bonus potential was allocated to business unit/department financial performance goals. In 2018, these goals were the achievement of 2018 business unit revenue and non-GAAP operating income objectives (“Business Unit Goals”). Earning of the potential cash award apportioned to the Business Unit Goals would begin upon achieving 85% of the business unit revenue target and/or 85% of the business unit non-GAAP operating income target.
The final component of the 2018 Plan was the inclusion of personal performance goals that were specific to the individual NEO. The NEO personal performance goals in 2018 included targets related to senior management planning, additional corporate financial measures, operational measures and activities, product development measures or marketing initiatives, depending on the executive involved. Cash bonuses arising from the personal performance goals were drafted to be awarded on an “each or nothing” basis.
Provided that either of the Corporate Goal performance thresholds was met, then the cash incentive component of the 2018 Plan was designed and administered as follows:
40
|
•
|
Cash bonuses arising from the Corporate Goals and the Business Unit Goals were awarded starting at a 50% level at the respective goal threshold and increasing linearly up to the 2018 Plan target amounts.
|
|
•
|
If the 2018 Plan target was exceeded in either or both Corporate Goal categories, then the cash payout would increase as follows:
|
|
◦
|
Corporate Revenue: From 100% to 120% of target, additional cash compensation would be earned linearly up to 200% of this target.
|
|
◦
|
Non-GAAP Operating Income: From 100% to 130% of target, additional cash compensation would be earned linearly up to 200% of this target.
|
|
•
|
Upon achieving either of the Corporate Goals, the Business Unit Goals, if applicable, and personal performance goals could be earned in full.
|
|
•
|
No further cash payout would be realized if either of the Business Unit Goals was exceeded.
|
The targets established in 2018 for the Corporate Goals, Business Unit Goals and Personal Goals were of comparable difficulty compared to prior years.
For 2018, the target cash incentive percentages remained unchanged for each of the NEOs as compared to the prior year. Additionally, of the NEOs, only Mr. Rogoff had a portion of his potential cash bonus allocated to Business Unit Goals in 2018.
In each year the Company has offered the Key Executive Incentive Compensation Plan, the corporate targets have been established at levels in excess of the overall industry projections in order that the Company drive to outperform the industry. In 2017, the Company achieved 102.2% of the corporate revenue and 113.0% of the non-GAAP operating income goals. The Company achieved the following performance results (dollars in millions) in 2018:
Performance Measure
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Actual Performance Achieved
|
|
Actual Performance Achieved as Percentage of Target
|
Corporate Revenue
|
|
$236.6
|
|
$295.8
|
|
$355.0
|
|
$273.8
|
|
81.4%
|
Non-GAAP Operating Income (1)
|
|
$49.1
|
|
$70.2
|
|
$91.3
|
|
$58.7
|
|
72.7%
|
|
(1)
|
This non-GAAP financial measure excludes the impact of amortization of intangibles and share-based compensation expenses.
|
|
The following tables reflect the 2018 Plan performance component percentages at target and based on actual achievement for each NEO for 2018:
|
|
Corporate
Target Variable Components
|
|
Business Unit / Department
Target Fixed Components
|
|
|
Name
|
|
Revenue
|
|
Non-GAAP
Operating Income
|
|
Revenue /
Gross Margin
|
|
Operating Income /
Market Share
|
|
Personal Goals
|
Michael P. Plisinski
|
|
35%
|
|
35%
|
|
n/a
|
|
n/a
|
|
30%
|
Steven R. Roth
|
|
35%
|
|
35%
|
|
n/a
|
|
n/a
|
|
30%
|
Robert A. Koch
|
|
35%
|
|
35%
|
|
n/a
|
|
n/a
|
|
30%
|
Richard Rogoff (1)
|
|
15%
|
|
15%
|
|
20%
|
|
20%
|
|
30%
|
Elvino da Silveira
|
|
35%
|
|
35%
|
|
n/a
|
|
n/a
|
|
30%
|
|
(1)
|
Mr. Rogoff’s Business Unit Target Variable Components were Business Unit Revenue and Business Unit Operating Income.
|
|
|
|
Corporate Achieved Variable
Components
|
|
Business Unit / Department
Achieved Fixed Components
|
|
|
|
|
Name
|
|
Revenue
|
|
Non-GAAP
Operating Income
|
|
Revenue /
Gross Margin
|
|
Operating Income
/ Market Share
|
|
Personal
Goals
|
|
Total
Achieved
|
Michael P. Plisinski
|
|
28.5%
|
|
25.4%
|
|
n/a
|
|
n/a
|
|
22.0%
|
|
75.9%
|
Steven R. Roth
|
|
28.5%
|
|
25.4%
|
|
n/a
|
|
n/a
|
|
27.5%
|
|
81.4%
|
Robert A. Koch
|
|
28.5%
|
|
25.4%
|
|
n/a
|
|
n/a
|
|
22.0%
|
|
75.9%
|
Richard Rogoff
|
|
12.2%
|
|
10.9%
|
|
0%
|
|
0%
|
|
18.0%
|
|
41.1%
|
Elvino da Silveira
|
|
28.5%
|
|
25.4%
|
|
n/a
|
|
n/a
|
|
10.0%
|
|
63.9%
|
In 2018, while the Company exceeded the threshold levels of the corporate revenue and non-GAAP operating income financial performance goals established under our annual and long-term incentive program, our NEOs did not meet all of their individual metrics established under our annual incentive program. As a result, our NEOs earned cash bonus awards for 2018 under our annual cash incentive program below target levels. Actual amounts paid to our NEOs under our 2018 annual cash incentive
41
component of the 2018 Plan are reported below in the Non-Equity Incentive Plan Compensation column of our Summary Compensation Table.
Annual Cash Incentive Plan For 2019
|
For 2019, the Compensation Committee adopted an annual cash incentive plan as part of the NEO compensation program that was consistent with the 2018 plan. As in 2018, the 2019 cash incentive component is structured such that each NEO’s potential cash award is subject to the achievement of 2019 corporate financial objectives relating to corporate revenue and corporate non-GAAP operating income. The financial goal targets established for 2019 are of comparable difficulty as compared to prior years. Further, the performance ranges for each metric are consistent with those utilized in 2018 including a payout level for threshold performance at 50% of target and the same target level to achieve the maximum payout by exceeding the corporate performance objectives for each of the corporate financial metrics. As in the past, the cash bonus payout is contingent on meeting at least one of the 2019 corporate revenue or corporate non-GAAP operating income goals. Should the Company not reach the threshold level for either the 2019 corporate revenue or corporate non-GAAP operating income goal, then no payout under the plan will be made to executives.
Each 2019 Key Executive Incentive Compensation Plan (“2019 Plan”) is again divided into up to three (3) components: Corporate Goals, Business Unit Goals (if applicable) and personal performance goals. Provided that either of the Corporate Goal thresholds is met, the cash bonus potential of the 2019 Plan may again be realized. The annual cash incentive component of the 2019 Plan was designed and shall be administered in the same manner as described above under “Annual Cash Incentive Plan for 2018”.
As in 2018, only executives associated with a particular Company business unit or department had a portion of their cash bonus potential allocated to Business Unit Goals in 2019.
The personal performance goals for the NEOs in 2019 include individual targets that, depending upon the executive, may relate to any of the following: corporate leadership development, additional corporate financial measures, operational measures and activities, product development measures, intellectual property initiatives and strategic business projects.
The following table reflects a comparison of the structure of the annual cash incentive components of the 2018 and 2019 Plans.
Key Executive Incentive Compensation Plan -
Annual Cash Incentive Provisions
|
|
2018
|
2019
|
Payout if both financial metric thresholds are not reached
|
|
0%
|
0%
|
Corporate revenue threshold
|
|
80%
|
80%
|
Corporate non-GAAP operating income threshold
|
|
70%
|
70%
|
Payout upon attaining corporate financial metrics' threshold levels
|
|
50%
|
50%
|
Payout upon attaining corporate financial metrics' target goals
|
|
100%
|
100%
|
Payout upon attaining corporate financial metrics' maximum goals
|
|
200%
|
200%
|
Corporate revenue metric upside performance range
|
|
100%-120%
|
100%-120%
|
Corporate non-GAAP operating income metric upside performance range
|
|
100%-130%
|
100%-130%
|
Business unit/department goal payout
|
|
Variable
|
Variable
|
Personal goal payout
|
|
Fixed
|
Fixed
|
|
Long-Term Equity Incentive Plan
|
The Compensation Committee currently administers the Company’s 2018 Stock Plan, which was approved by stockholder vote on May 16, 2018.
Employees and members of management, including the Company’s NEOs, generally receive annual equity grants (collectively, “Grants”) at or about the time of their performance reviews each year from a pool of shares established under the 2018 Stock Plan. The Company’s long-term incentive compensation program seeks to align the executives’ interests with the Company’s stockholders by rewarding successes in stockholder returns. Additionally, the Committee desires to foster an ownership mentality among executives by providing stock-based incentives as a portion of compensation.
Over the past several years, the Committee has annually awarded executives with grants of performance-based and service-based RSUs.
42
The purpose of the Grant program is to provide incentive to executives and other key employees of the Company to work to maximize long
-term return to the Company’s stockholders. The number of Grants awarded to each executive officer is initially determined on a discretionary rather than formula basis by the Compensation Committee.
In awarding Grants to the executive officers, the CEO (except in connection with his or her own Grants) and the Committee consider a number of subjective factors, including the executive’s position and responsibilities at the Company, the executive’s individual performance, the number of Grants held (if any) and other factors that they may deem relevant.
Long-Term Equity Incentive Program For 2018
|
The long-term equity incentive component of the 2018 Plan was divided between PSU grants and service-based RSU grants. For 2018, the Compensation Committee established the portion of our NEOs’ long-term incentive awards granted in the form of PSUs at 50% and the portion of our long-term incentive awards granted in the form of service-vesting RSUs at 50%, reflecting our commitment to pay-for-performance.
Performance-Based Stock Units:
Under the 2018 Plan, TSR was employed with the long-term equity incentive program associated with the PSUs. TSR combines price appreciation and dividends paid to show the total return to a stockholder as an annualized percentage, thus directly linking executive pay to stock price changes. The period of measurement for this long-term equity incentive element was established at three (3) years. This design of performance incentive was implemented to align our NEOs’ incentive compensation with an appropriate measure of the Company’s long-term performance while also employing a metric that is believed to be important to stockholders.
In order to implement the TSR measure a performance peer group was established (“TSR Peers”). The formation of the TSR Peers took into consideration each of the companies in the Company’s compensation peer group currently projected to be standalone operations in three (3) years and supplements them with additional industry-specific companies in order to produce a broader, yet relevant, base of comparative TSR performance companies. The TSR Peers for the 2018 Plan was initially set-up to as a comparison to a performance peer group consisting of eighteen (18) companies of which ten (10) companies are from the Company’s 2018 compensation peer group and an additional eight (8) companies are from within the Company’s industry. During 2018, two (2) companies in both the 2018 compensation peer group and the TSR Peers were acquired and no longer qualify as comparative companies under the TSR (Electro Scientific Industries, Inc. and Xcerra Corporation). The sixteen (16) TSR peer group companies for the long-term equity incentive component of the 2018 Plan currently are as follows:
|
|
|
2018 Long-Term Equity Incentive Program - Peer Group Companies
|
Advanced Energy Industries, Inc.
|
Cohu, Inc.
|
Nanometrics Incorporated
|
Applied Materials, Inc.
|
FormFactor, Inc.
|
PDF Solutions, Inc.
|
ASML Holding N.V.
|
KLA Corporation
|
Teradyne, Inc.
|
Axcelis Technologies, Inc.
|
Kulicke & Soffa Industries, Inc.
|
Veeco Instruments, Inc.
|
Brooks Automation, Inc.
|
Lam Research Corporation
|
|
Camtek Ltd.
|
MKS Instruments, Inc.
|
|
|
•
|
The performance and standards to earn the PSU equity awards are as follows:
|
|
|
TSR Performance Relative to Peers
|
RSUs Earned as % of Target
|
Below 30
th
Percentile
|
0%
|
30
th
Percentile
|
50%
|
55
th
Percentile
|
100%
|
80
th
Percentile and above
|
200%
|
|
•
|
The PSU award payout will be calculated on a straight-line basis between the 30th & 55th and the 55th & 80th percentile levels referenced above.
|
43
|
•
|
A negati
ve TSR cap was instituted which limits any PSUs earned to target level
if the Company’s TSR i
s negative over the performance period and our TSR ranks above the target performance level.
|
|
•
|
Earned PSUs are not subject to additional service-based vesting conditions.
|
Service Vesting Restricted Stock Units:
For 2018, fifty percent (50%) of each NEO’s equity grant was comprised of time-based RSUs. Each service-based RSU award is subject solely to service-based vesting in equal annual increments over a three (3) year vesting period.
For 2018, the Compensation Committee recommended and the independent members of the Board approved adjustments to the long-term incentive grant values provided to our CEO and other NEOs that ranged from +0.0% to +41.8% when compared to values granted the prior year. As discussed above, PSUs granted in early 2018 are subject to a measure of the Company’s relative TSR measured over the three-year performance period; thus, determination of the final TSR results shall take place in February of 2021. At such time, any PSUs earned based on our TSR performance relative to the specified peer companies will fully vest.
Long-Term Equity Incentive Program For 2019
|
The long-term equity incentive component of the 2019 Plan continues to be divided between PSU grants and service-based RSU grants. Consistent with that which was implemented in 2018, the Compensation Committee determined to maintain the portion of our NEOs’ long-term incentive awards granted in the form of PSUs and service-vesting RSUs each at 50%.
In 2019, the Committee granted equity awards to our NEOs with the dollar value allocated to each NEO and the structure of the long-term equity incentive component determined in a similar manner as that implemented in 2018 and discussed above. As implemented in 2018, the 2019 performance-based long-term equity incentive of our NEO compensation program is based on the metric of TSR. The following parameters are included in the design of the long-term equity incentive program in 2019:
Performance-Based Stock Units:
For 2019, fifty percent (50%) of each NEO’s equity grant is comprised of PSUs. The relative TSR plan design includes the following features:
|
•
|
The performance period will cover a three-year period (2019 through 2022, for awards granted in early 2019).
|
|
•
|
Performance will be assessed using TSR, which measures growth in stock price, plus any dividends paid, during the performance period.
|
|
•
|
TSR performance will be compared to the same TSR Peers as utilized in 2018, based on the same rationale established for these benchmark companies, with the addition of three (3) companies, CyberOptics Corporation, Photronics, Inc. and Ultra Clean Holdings Inc. to replace the two that were acquired in 2018. Thus, the 2019 TSR Peers shall be:
|
|
|
|
2019 Long-Term Equity Incentive Program - Peer Group Companies
|
Advanced Energy Industries, Inc.
|
CyberOptics Corporation
|
PDF Solutions, Inc.
|
Applied Materials, Inc.
|
FormFactor, Inc.
|
Photronics, Inc.
|
ASML Holding N.V.
|
KLA Corporation
|
Teradyne, Inc.
|
Axcelis Technologies, Inc.
|
Kulicke & Soffa Industries, Inc.
|
Ultra Clean Holdings Inc.
|
Brooks Automation, Inc.
|
Lam Research Corporation
|
Veeco Instruments, Inc.
|
Camtek Ltd.
|
MKS Instruments, Inc.
|
|
Cohu, Inc.
|
Nanometrics Incorporated
|
|
|
•
|
The performance and standards to earn the PSU equity awards are unchanged from 2018.
|
|
•
|
The PSU award payout will be calculated on a straight-line basis between the 30th & 55th and the 55th & 80th percentile levels referenced above.
|
|
•
|
A negative TSR cap has been instituted which limits any PSUs earned to target level if the Company’s TSR is negative over the performance period and our TSR ranks above the target performance level.
|
|
•
|
Earned PSUs are not subject to additional service-based vesting conditions.
|
44
Service Vesting Restricted Stock Units:
For 2019, fifty percent (50%) of each NEO’s equity grant is comprised of
time-based RSUs. The time required for the RSUs to fully vest is three (3) years from the date of grant. As a result, each service-based RSU award is subject solely to service-based vesting in equal annual increments over the three (3) year vesting perio
d.
The following table reflects a comparison of the structure of the long-term equity incentive components of the 2018 and 2019 Plans.
Key Executive Incentive Compensation Plan -
Long-Term Equity Incentive Provisions
|
|
2018
|
2019
|
Performance-based / Service-based grant breakout
|
|
50%-50%
|
50%-50%
|
Service-based grant vesting period
|
|
33.3% annually
over 3 years
|
33.3% annually
over 3 years
|
Performance-based grant evaluation period
|
|
3 years
|
3 years
|
Performance-based grant metric(s)
|
|
TSR
|
TSR
|
Performance-based grant vesting period
|
|
100% upon earning
|
100% upon earning
|
Performance threshold for earning grant
|
|
30
th
TSR percentile
|
30
th
TSR percentile
|
Percent of grant earned at threshold
|
|
50%
|
50%
|
Measure at which 100% of grant is earned
|
|
55
th
TSR percentile
|
55
th
TSR percentile
|
Maximum grant upside
|
|
200%
|
200%
|
Measure at which maximum upside of grant is earned
|
|
80
th
TSR percentile
|
80
th
TSR percentile
|
|
Personal Benefits And Perquisites
|
All employees of the Company, including its executives, are eligible to participate in the following benefit plans and programs (“Benefit Package”):
|
•
|
Health and dental insurance;
|
|
•
|
Elective vision care program;
|
|
•
|
Life insurance and accidental death and dismemberment coverage;
|
|
•
|
Short- and long-term disability insurance with supplemental income continuation;
|
|
•
|
Health care and dependent care flexible spending account programs;
|
|
•
|
Employee assistance program (EAP);
|
|
•
|
Tuition reimbursement plan;
|
|
•
|
Employee stock purchase plan;
|
|
•
|
Employee referral bonus program; and
|
|
•
|
Length of service awards.
|
The Company, in its discretion, may offer to reimburse the expenses that an employee incurs as a result of the Company requiring the individual to relocate their primary residence for employment purposes.
The Committee believes that these benefits are consistent with industry practice and are important in recruiting and retaining qualified employees.
In addition to the above Benefit Package, executive employees, including NEOs, receive the following:
|
•
|
A monthly car allowance;
|
|
•
|
Company-paid tax preparation services; and
|
|
•
|
Company-paid membership in one (1) airline executive club.
|
45
The foregoing perquisites were determined based on a review of comparable company offerings performed by the Company and the Comm
ittee’s compensation consultant and are evaluated annually as part of the compensation review. The Committee believes that these benefits are reasonable and consistent with the Company’s overall compensation program and better enable the Company to attract
and retain superior employees for key positions.
Executive Perquisites For 2018
|
In 2018, executive base perquisites provided to the NEOs included a monthly car allowance, income tax preparation fee payment and airline club membership. These perquisites remained unchanged from those provided to the NEOs in the prior year.
Executive Perquisites For 2019
|
In 2019, executive base perquisites, including a monthly car allowance, income tax preparation fee payment and airline club membership remained unchanged from that provided to the NEOs in 2018.
Retirement Provision For Equity Awards
|
As part of their review of the overall compensation program for all Company employees, including the NEOs, the Compensation Committee determined that the implementation of a retirement provision related to equity awards would continue to incentivize individuals as they near the end of their employment with the Company. Previously, upon retirement of an employee any equity grants that had not vested were forfeited. Thus, any incentive realized through the service-vesting schedule for Company equity grants was diminished. As a result, the Compensation Committee assessed various retirement provision alternatives and recommended to the Board, and the Board approved, the following retirement provision:
|
•
|
An employee is “retirement eligible” if they achieve a combination of age plus years of service with the Company totaling 70, with a base minimum age of 58 years old and a minimum service requirement of five years.
|
|
•
|
Retirement under the provision then would occur when an employee has become retirement eligible and has formally notified the Company of his/her intention to retire from the employ of the Company on a date certain and does so retire or as otherwise approved by the Compensation Committee.
|
|
•
|
Upon such retirement by the employee, any equity awards granted in 2017 and onward shall vest based on:
|
|
◦
|
The vesting schedule established for time-based equity awards; or
|
|
◦
|
The actual performance results for performance-based equity awards.
|
|
•
|
For clarity, in the event of an employee’s retirement under the provision, there will be no acceleration of an award’s vesting schedule or forfeiture of unvested awards granted in or after 2017.
|
|
Employee Stock Purchase Plan
|
The Company has maintained an Employee Stock Purchase Plan since 1999. The Company’s 2018 Employee Stock Purchase Plan was approved by stockholders in 2018 and is currently administered by the Compensation Committee.
Under the terms of our current and prior Employee Stock Purchase Plans, eligible employees may elect to have up to fifteen percent (15%) of eligible compensation deducted from their base salary and applied to the purchase of shares of Company Common Stock. The price the employee pays for each share of stock is ninety-five percent (95%) of the fair market value of the Company Common Stock at the end of the applicable six-month purchase period. The Employee Stock Purchase Plan qualifies as a non-compensatory plan under Code Section 423.
The Company does not offer a non-qualified deferred compensation plan.
46
CORPORATE AND GOVERNANCE
POLICIES
|
Employment And Change-In-Control Agreements
|
While the Company utilizes employment agreements on a limited basis, we currently maintain employment agreements or arrangements with each of our NEOs.
In 2000, the Company entered into a management agreement with Mr. Roth, effective as of July 24, 2000. Mr. Roth previously had employment agreements with the Company when it was a private entity, and, at the time of the Company’s initial public offering, his agreement was redrafted to reflect terms believed to be appropriate for such officer’s service in his capacity with a publicly held corporation.
Upon the appointment of Mr. Plisinski to the position of CEO, he entered into a new employment agreement with the Company. This agreement superseded the executive employment agreement that Mr. Plisinski had entered into with August Technology Corporation which was assumed by the Company upon its merger with August Technology in 2006.
Mr. Plisinski’s employment agreement provides for a term of two (2) years with automatic renewals for additional two-year terms and Mr. Roth’s agreement provides for a term of one (1) year with automatic renewals for additional one-year terms, unless the Company or the applicable executive delivers a notice of non-renewal to the other party. Mr. Plisinski’s agreement prohibits him from competing with the Company in any way or soliciting its employees during his term of employment and for two (2) years after termination of his employment. Mr. Roth’s agreement prohibits him from competing with the Company in any way or soliciting its employees during his term of employment and for one (1) year after termination of his employment.
Certain of our executive officers are also entitled to payments upon a qualifying termination of employment following a Change-in-Control event. The Committee believes that providing severance in a Change-in-Control situation is beneficial to stockholders so that executives may remain objectively neutral when evaluating a transaction that may be beneficial to stockholders yet could negatively impact the continued employment of the executive. As a result, in August 2009, the Compensation Committee further authorized the Company to enter into a Change-in-Control Agreement with Mr. Koch and other Company executives and authorized amendment to the management agreement of Mr. Roth to include comparable Change-in-Control terms. In February 2014, the Company entered into a Change-in-Control Agreement with Mr. Rogoff and Mr. da Silveira with comparable Change-in-Control terms. Further, Mr. Plisinski’s employment agreement also contains Change-in-Control terms.
See “Potential Payments Upon Termination of Employment or Change-in-Control” below for a description of these arrangements and potential payments that the NEOs would have been entitled to receive upon applicable hypothetical termination scenarios as of December 31, 2018.
|
Other Elements Of Post-Termination Compensation
|
The Company does not have a practice of providing retirement benefits, including any supplemental executive retirement plans (SERP), to its executives, other than through its 401(k) plan and the retirement provision for equity grants effective in 2017. The Company retains the discretion to utilize the offer of severance and/or change-in-control protection as an incentive in its hiring and retention of executives.
|
Non-Solicitation And Non-Competition Policy
|
The Company maintains a policy of entering into an agreement with each of its new executives, which contains both non-solicitation and non-competition provisions. The non-solicitation provisions apply for one (1) year after termination of the individual’s employment while the non-competition provisions are in effect during the individual’s employment and generally for one (1) year thereafter. Each of the Company’s executives has entered into these covenants with the Company, except Mr. Plisinski, whose non-solicitation and non-competition provisions are in place during, and extend for two (2) years after the end of, his employment with the Company. In each case, these covenants have been implemented to protect the confidential information, goodwill and other assets of the Company. For those individuals with employment agreements, should a breach of the non-solicitation or non-competition terms of their agreements occur, this could give rise to the Company declaring a breach under the agreement and terminating all severance payments thereunder.
47
|
|
General Termination Benefits
|
Upon termination of an executive’s employment with the Company, the individual is entitled to receive his or her base salary earned through the termination date, along with a payout for all accrued but unused vacation time earned though such date. Thereafter, further cash compensation to the executives is discontinued, except to the extent that severance or change-in-control payments are required to be made in accordance with individual or Company severance protection arrangements. Certain executives with the Company who have entered into employment agreements are entitled to elect to continue group health or other group benefits as allowed by COBRA with continued Company co-payments for agreed post-termination periods. The Company retains the right to offer severance and/or payment of COBRA benefits to any individual who is terminated from the Company at its discretion.
|
Stock Ownership/Retention Guidelines
|
The Company has established guidelines related to stock ownership and retention for its executives and its outside directors to further align the interest of the executives and non-employee directors with the interests of stockholders, to have a stake in the long-term financial future of the Company and to further promote the Company’s commitment to sound corporate governance while allowing them to prudently manage their personal financial affairs.
In 2005, the Board established the Company’s initial stock ownership policy. Since that time, the policy has been periodically amended such that the stock ownership and retention levels currently in effect are the following:
|
|
|
Company Role
|
Company Common Stock Holding Requirement
|
Effective Date
|
Non-Employee Directors
|
3x value of total cash
compensation (1)
|
Within 3 years of initial election to Board
|
CEO
|
3x value of CEO’s
base annual salary
|
Within 3 years of hire/promotion
|
CFO, COO, Business Unit GM, VP Worldwide Sales, General Counsel
|
1x value of executive’s
base annual salary
|
Within 3 years of hire/promotion
|
VP reporting directly to CEO (excluding above)
|
5,000 shares
|
Within 1 year of date of hire/promotion
|
VP not reporting directly to CEO
|
2,500 shares
|
Within 1 year of date of hire/promotion
|
|
(1)
|
Includes annual cash retainer and any fee paid for service as a Committee Chair, Lead Director or Chairman.
|
In assessing compliance with the foregoing guidelines, the Company takes into consideration only the ownership of Common Stock in the Company. To that end, unearned PSUs, unvested service based RSUs and vested or unvested stock options do not qualify as shares for purposes of compliance with the Company’s stock ownership and retention guidelines.
Compliance with the Company’s stock ownership and retention guidelines is reviewed annually by the Nominating & Governance Committee. At their last review on January 22, 2019, the Nominating & Governance Committee determined that all executives and directors who were with the Company and acting in their executive/director capacities for periods in excess of one (1) year were in compliance with the ownership requirements or would be upon the first quarter 2019 vesting of RSU grants. Should any individual in the future not own the minimum number of required shares after notice by the Nominating & Governance Committee, additional action, including possible removal from the executive role or a determination to not nominate the director for election, would be considered by the Board.
The Nominating & Governance Committee has scheduled its review of the Company’s stock ownership and retention guidelines for its January 2020 meeting and at this annual review will evaluate the appropriateness of the foregoing stock ownership levels for 2020 based in part on the trailing three-year weighted average of the Company’s stock price at the time of the evaluation, as well as other considerations such as market conditions and comparable practices within the industry.
48
|
|
Prohibition On Hedging And Pledging Of Company Stock
|
In order to ensure that our executives, including our NEOs, bear the full risk of the Company’s stock ownership, our insider trading policy prohibits hedging transactions related to our Common Stock. Additionally, under the Company’s anti-pledging policy, non-employee directors and executive officers are prohibited from making any new pledges of Company securities as collateral for a loan, or otherwise making a new transfer of Company securities to a margin account, provided that non-employee directors may pledge their securities when obligated to do so to realize the consummation of potential mergers, acquisitions and similar transactions with which the Company may be involved from time to time.
Adjustments Or Recovery Of Prior Compensation
|
The Company adopted a policy which provides for the recovery or adjustment of amounts previously awarded or paid to a NEO in the event that financial results or other performance measures on which an award or payment were determined are to be restated or adjusted. In addition, if the Company is required to restate its financial results due to material noncompliance with any financial reporting requirements as a result of misconduct, the Sarbanes-Oxley Act of 2002 requires the CEO and CFO to disgorge:
|
•
|
Any bonus or other incentive-based or equity-based compensation received from the Company during the 12-month period following the first public issuance of the non-compliant financial reporting document; and
|
|
•
|
Any profits realized from the sale of Company stock during that 12-month period.
|
In addition, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the SEC to direct the national securities exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy. The SEC has not finalized its rules related to these clawback policies. Once the final rules are in place, the Company will adjust its policy, as necessary, to comply with SEC regulations.
|
Compensation Program Risk Assessment
|
In 2017, the Compensation Committee engaged the compensation consultant to conduct a comprehensive review of our executive compensation program and practices including an assessment of whether possible compensation design features may have the potential to incentivize the NEOs to take risks that are reasonably likely to have a material adverse effect on the Company. The compensation risk assessment covered potential risks and risk mitigating features in each of the following areas: compensation philosophy and pay mix; performance measures used in incentive plans; goal setting and payout leverage and caps; calculation and verification of performance outcomes for incentive payments; and other features. Based on this compensation risk assessment framework, the Committee evaluated our current executive compensation policies, practices and programs and believes they do not create risks that are reasonably likely to have a material adverse effect on the Company.
|
IRS Limits On Deductibility Of Compensation
|
Prior to the 2018 tax year, Section 162(m) of the IRC limited the tax deductibility of annual compensation paid to any publicly held corporation’s CEO and three other highest compensated officers excluding the CFO, to the extent that the officer’s compensation (other than qualified performance-based compensation) exceeded $1 million. Although the Compensation Committee considers deductibility issues when approving executive compensation elements, the Committee believes that the other compensation objectives, such as attracting, retaining and providing appropriate incentives to executives, are important and can supersede the goal of maintaining deductibility. Consequently, the Compensation Committee generally makes compensation decisions without regard to deductibility, as the Committee believes it has appropriately structured its compensation programs to provide incentives to our executives to increase Company return and stockholder value. Recent changes in the tax laws eliminated the “performance-based” exception, and the limitation on deductibility has been expanded to include all named executive officers. As a result, beginning in 2018, the Company may no longer deduct compensation paid to our named executive officers in excess of $1 million.
49
CONCLUSION
In reviewing its compensation programs, the Company has concluded that each element of compensation as well as the total compensation opportunities for its NEOs and its other executive officers are reasonable, appropriate and in the interests of the Company and its stockholders. The Company believes that this compensation program appropriately satisfies the Company’s goals of establishing a compensation package that attracts and retains a strong motivated leadership team, aligns the financial incentives of the executives with the interests of the stockholders, and rewards the achievement of specific annual, long-term and strategic goals of the Company. The Company believes that the compensation program which has been established and is reflected herein has enabled it to recruit and secure a talented and motivated leadership team by which the Company drives toward the ultimate objective of improving stockholder value.
50