Committees of our Board of Directors
Our Bylaws permit our Board of Directors to designate one or more committees, including (i) an Audit Committee, (ii) a Compensation Committee and (iii) a Nominating and Corporate Governance Committee. The current members of each of these committees are set forth in the following table:
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Name
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Audit
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Compensation
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Nominating and Corporate Governance
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Lawrence B. Burrows
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X
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Daniel S. Fulton
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X
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X
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Steven J. Gilbert
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X
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X*
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Vicki D. McWilliams
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X
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X
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Constance B. Moore
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X
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X*
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Thomas B. Rogers
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X*
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X
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__________
* Committee Chair
The Audit, Compensation, and Nominating and Corporate Governance committees each have a written charter that is available on our website at
www.tripointegroup.com
in the Corporate Governance—Governance Documents section of the Investors webpage. We also have an Executive Land Committee, comprised of Messrs. Burrows, Fulton, and Gilbert, which reviews and approves land acquisitions or dispositions with a purchase price greater than $30 million but less than $75 million.
Audit Committee
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The Audit Committee of our Board of Directors, pursuant to its written charter, oversees, among other matters:
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our financial reporting, auditing and internal control activities;
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the integrity and audits of our financial statements;
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our compliance with legal and regulatory requirements;
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the qualifications and independence of our independent auditors;
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the performance of our internal audit function and independent auditors; and
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our overall risk exposure and management.
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Duties of the Audit Committee also include the following:
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annually reviewing and assessing the adequacy of the Audit Committee charter and the performance of the Audit Committee;
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being responsible for the appointment, retention and termination of our independent auditors and determining the compensation of our independent auditors;
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reviewing with the independent auditors the plans and results of the audit engagement;
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evaluating the qualifications, performance and independence of our independent auditors;
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having sole authority to approve in advance all audit and non-audit services by our independent auditors, the scope and terms thereof, and the fees therefor;
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reviewing the adequacy of our internal accounting controls;
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periodically reviewing with management our cybersecurity program;
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meeting at least quarterly with our senior management team, internal audit staff and independent auditors in separate executive sessions; and
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preparing the Audit Committee report required by SEC regulations to be included in our annual proxy statement.
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The Audit Committee is currently comprised of four directors, Messrs. Rogers and Fulton and Mses. McWilliams and Moore, each of whom is a non-employee and satisfies the independence requirements under the applicable listing standards of the NYSE and the applicable rules of the SEC, and otherwise satisfies the applicable requirements for audit committee service imposed by the Exchange Act, the NYSE, as well as any other applicable legal or regulatory requirements. Our Board of Directors, in its business judgment, has determined that each of these members is "financially literate" under the rules of the NYSE. Mr. Rogers serves as the Chairperson of the Audit Committee. Our Board of Directors has designated Mr. Rogers as the Audit Committee "financial expert," as that term is defined by the SEC. The Audit Committee met four times during fiscal year 2018.
Compensation Committee
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The Compensation Committee of our Board of Directors, pursuant to its written charter, has the following responsibilities, among others:
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assists our Board of Directors in developing and evaluating potential candidates for executive officer positions and overseeing the development of executive succession plans;
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administers, reviews and makes recommendations to our Board of Directors regarding our compensation plans;
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annually reviews and approves our corporate goals and objectives with respect to compensation for executive officers and, at least annually, evaluates each executive officer's performance in light of such goals and objectives to set each executive officer's annual compensation, including salary, bonus and equity and non-equity incentive compensation, subject to approval by our Board of Directors;
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provides oversight of management's decisions regarding the performance, evaluation and compensation of other officers;
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reviews our incentive compensation arrangements to confirm that incentive pay does not encourage unnecessary risk-taking and reviews and discusses, at least annually, the relationship between risk management policies and practices, business strategy and our executive officers' compensation;
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assists management in complying with our proxy statement and annual report disclosure requirements;
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discusses with management the compensation discussion and analysis required by SEC regulations; and
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prepares a report on executive compensation to be included in our annual proxy statement.
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The Compensation Committee may form, and delegate authority to, subcommittees when it deems appropriate to the extent permitted under applicable law. In addition, the Compensation Committee may delegate some or all of its authority under our 2013 Long-Term Incentive Plan (the "2013 LTIP") to our Board of Directors or, subject to applicable law, to our Chief Executive Officer or such
other executive officer as the Compensation Committee deems appropriate; provided, that the Compensation Committee may not delegate its authority under the 2013 LTIP to our Chief Executive Officer or any other officer with regard to the selection for participation in the 2013 LTIP of an executive officer, director, or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, price, or amount of an award to such an officer, director, or other person.
The Compensation Committee is currently comprised of four directors, Mses. McWilliams and Moore and Messrs. Fulton and Gilbert, each of whom is a non-employee and (i) satisfies the independence requirements under the applicable listing standards of the NYSE and the applicable rules of the SEC, (ii) otherwise satisfies the applicable requirements for compensation committee service imposed by the Exchange Act and the NYSE, (iii) meets the requirements for a "non-employee director" contained in Rule 16b‑3 under the Exchange Act, and (iv) meets the requirements for an "outside director" for the purposes of Section 162(m) of the Internal Revenue Code (before enactment of the Tax Cuts and Jobs Act), as well as any other applicable legal or regulatory requirements.
Our Chief Executive Officer, President, Chief Financial Officer, and Chief Human Resources Officer do not participate in the Compensation Committee's deliberations concerning their own compensation or the compensation of directors. However, they meet with the Compensation Committee and provide input regarding the amount and form of the compensation of our executive officers and key employees. No other executive officers participate in the Compensation Committee's deliberations of the amount or form of the compensation of executive officers or directors.
The Compensation Committee has the authority to retain and terminate any compensation consultant to be used to assist in the evaluation of executive officer compensation. The Compensation Committee has engaged Semler Brossy Consulting Group, LLC ("Semler Brossy") as its independent compensation consultant. The compensation consultant provides the Compensation Committee with data about the compensation practices and levels of a peer group of companies and other companies that may compete with us for executives and develops recommendations for structuring our compensation programs. The compensation consultant is retained by, and reports directly to, the Compensation Committee and does not provide any services directly to us or our management. The Compensation Committee met three times during the fiscal year 2018.
Compensation Committee Interlocks and Insider Participation.
No member of the Compensation Committee is, or has been at any time, our officer or employee, nor has any member had any relationship with us requiring disclosure under Item 404 of Regulation S-K. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee.
Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee of our Board of Directors, pursuant to its written charter, has the following responsibilities, among others:
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identifies individuals qualified to become members of our Board of Directors and ensures that our Board of Directors has the requisite expertise and its membership consists of persons with sufficiently diverse and independent backgrounds;
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develops, and recommends to our Board of Directors for its approval, qualifications for director candidates and periodically reviews these qualifications with our Board of Directors;
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reviews the committee structure of our Board of Directors and recommends directors to serve as members or chairs of each committee of our Board of Directors;
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reviews and recommends committee slates annually and recommends additional committee members to fill vacancies as needed;
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develops and recommends to our Board of Directors a set of corporate governance guidelines applicable to us and, at least annually, reviews such guidelines and recommends changes to our Board of Directors for approval as necessary; and
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oversees the annual self-evaluations of our Board of Directors and management.
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The Nominating and Corporate Governance Committee is currently comprised of three directors, Messrs. Gilbert, Burrows and Rogers, each of whom is a non-employee and satisfies the independence-related requirements of the NYSE as well as any other applicable legal or regulatory requirements. The Nominating and Corporate Governance Committee met once during fiscal year 2018.
In evaluating candidates for nomination to our Board of Directors, the Nominating and Corporate Governance Committee takes into account the applicable requirements for directors under the Exchange Act and the listing standards of the NYSE. The Nominating and Corporate Governance Committee may take into consideration such other factors and criteria that it deems appropriate in evaluating a candidate, including the candidate's judgment, skill, integrity, diversity, business or other experience, time availability in light of other commitments, and conflicts of interest. The Nominating and Corporate Governance Committee may (but is not required to) consider candidates suggested by management or other members of our Board of Directors. Although the Nominating and Corporate Governance Committee does not have a formal policy on diversity with regard to its consideration of director nominees, it considers diversity in its selection process and seeks to nominate candidates that have a diverse range of views, backgrounds, leadership, and business experience.
Policy Regarding Stockholder Recommendations
We identify new director candidates through a variety of sources. Although the Nominating and Corporate Governance Committee does not have a formal policy regarding consideration of director candidates recommended by stockholders, our Corporate Governance Guidelines provide that, when formulating its director nomination recommendations, the Nominating and Corporate Governance Committee will consider candidates recommended by stockholders and others, as it deems appropriate. In considering candidates submitted by stockholders, the Nominating and Corporate Governance Committee will take into consideration applicable legal and exchange listing requirements, the needs of our Board of Directors and the qualifications of the candidate. Stockholders may propose director nominees by adhering to the advance notice procedures described in the section entitled "Stockholder Proposals for 2020 Annual Meeting" in this proxy statement. The Nominating and Corporate Governance Committee may also establish procedures, from time to time, regarding submission of candidates by stockholders and others.
In considering director candidates for election at the annual meeting, the Nominating and Corporate Governance Committee did not consider nominees other than the seven incumbent directors listed in Proposal No. 1 of this proxy statement, as no new candidates were proposed and the seven incumbent directors continue to exhibit the qualifications described above.
Code of Business Conduct and Ethics
Our Board of Directors has adopted the TRI Pointe Group, Inc. Code of Business Conduct and Ethics that applies to all officers, directors and employees. Additionally, our Board of Directors has adopted the TRI Pointe Group, Inc. Code of Ethics for Senior Executive and Financial Officers that applies to the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer (or persons performing similar functions to the aforementioned officers). The Code of Business Conduct and Ethics along with the Code of Ethics for Senior Executive and Financial Officers are available on our website at
www.tripointegroup.com
in the Corporate Governance—Governance Documents section of the Investors webpage. If any substantive amendments to either the Code of Business Conduct and Ethics or the Code of Ethics for Senior Executive and Financial Officers are made, or any waiver from a provision of either Code is granted to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website. We have adopted these codes as guides for future conduct and they should not be considered to constitute representations as to past compliance.
Corporate Governance Guidelines
Our Corporate Governance Guidelines are available on our website at
www.tripointegroup.com
in the Corporate Governance—Governance Documents section of the Investors webpage.
Stockholder Communications with our Board of Directors
Our stockholders and other interested persons who want to communicate directly with our Board of Directors as a group, the Chairman of our Board of Directors, the non-management directors as a group, or any individual director may do so by delivering such communication in care of our Corporate Secretary at: TRI Pointe Group, Inc., Presiding Director or Non-Management Directors c/o Corporate Secretary, 19540 Jamboree Road, Suite 300, Irvine, California 92612.
All communications must be accompanied by the following information:
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if the person submitting the communication is a stockholder, a statement of the number of shares of our common stock that the person holds;
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if the person submitting the communication is not a stockholder, the nature of the person's interest in us;
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any special interest, meaning an interest not in the capacity as a stockholder, of the person in the subject matter of the communication; and
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the address, telephone number and e-mail address, if any, of the person submitting the communication.
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Communications received in writing are forwarded to (i) our Board of Directors, (ii) the non-management directors as a group, or (iii) any individual director to whom the communication is directed. However, the following communications will not be forwarded: any threatening, incoherent, obscene, defamatory or similarly inappropriate communication; any communication that involves an ordinary business matter (such as a job inquiry, a business account or transaction, a request for information about us, form letters, spam, invitations and other forms of mass mailings); surveys; and any communication that does not relate to matters relevant to us or our business, unless requested by a director or at management's discretion. At each meeting of our Board of Directors, a summary of all such communications received since the last meeting that were not forwarded will be presented and those communications are available to directors on request.
COMPENSATION DISCUSSION AND ANALYSIS
In this Compensation Discussion and Analysis, we describe our compensation practices, programs, and decisions for our named executive officers ("NEOs"), who were as follows for 2018:
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Thomas J. Mitchell, President and Chief Operating Officer ("COO")
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Michael D. Grubbs, Chief Financial Officer ("CFO") and Treasurer
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David C. Lee, Vice President, General Counsel and Secretary
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Glenn J. Keeler, Vice President and Chief Accounting Officer
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For more information regarding our current executive officers, see "Management."
Introduction and Compensation Philosophy
We design our compensation programs to achieve the following key objectives:
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align the interests of our executive officers with those of our stockholders;
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motivate executive officers to grow long-term stockholder value;
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reinforce our pay for performance culture by aligning the compensation realized by our executive officers with the achievement of company goals;
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provide total compensation opportunities that allow us to attract, retain and motivate talented executive officers; and
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promote desired behavior through incentive compensation without encouraging imprudent risk-taking.
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Outlined below are the tools we use to obtain these objectives:
Link Pay to Performance
: We link a significant portion of executive officer compensation to performance. On average, more than one-half of 2018 NEO total compensation was performance-based and was tied to several financial performance metrics.
Balance Performance Considerations
: We utilize short-term and long-term performance awards to motivate performance while mitigating incentives for undue risk-taking.
Short-Term Performance.
In 2018, we granted cash incentive awards with payouts based on achievement of pre-tax income objectives for the year.
Long-Term Performance.
In 2018, we granted equity awards in the form of restricted stock units ("RSUs") to motivate long-term performance, align the interests of our executive officers with those of our stockholders, and encourage retention. On average, more than one-half of 2018 NEO total compensation was equity based. In the case of Messrs. Bauer, Mitchell, and Grubbs, 60% of the RSUs granted in 2018 (at target performance) were performance-based and 40% were time-based. The RSUs awarded to Messrs. Lee and Keeler were 100% time-based.
Maintain Rigorous Stock Ownership Guidelines
: Our minimum stock ownership guidelines encourage ownership and further align the interests of our executive officers with those of our stockholders.
These pay practices are discussed in more detail under "—2018 NEO Compensation Decisions" below.
Other Compensation and Governance Practices
What We Do
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ü
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Independent Consultant:
Our Compensation Committee engages an independent compensation consultant that does not provide any other services to us.
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Independent Chairman of the Board of Directors:
We separate the roles of Chairman of the Board of Directors and Chief Executive Officer. This separation allows the Chairman to focus on the effectiveness of our Board of Directors and oversight of our senior management while our CEO focuses on executing our strategy and managing our business.
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ü
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Prohibition on Hedging:
We prohibit all directors, officers and employees from engaging in transactions that have the effect of hedging the economic value of their interests in our common equity.
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Clawback Policy:
We have a policy that provides for recoupment of incentive compensation in the event of an accounting restatement and misconduct of an executive officer.
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Equity Grant Time Policy:
We have adopted a policy regarding the timing of equity awards.
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What We Do Not Do
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Provide Tax Gross Ups on Change in Control Benefits.
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Provide Excessive Executive Perquisites.
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Provide Tax Gross Ups on Perquisites or Benefits.
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Guarantee Base Salary Increases or Incentive Payments for Executives.
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Allow for Re-Pricing of Underwater Stock Options without Stockholder Approval.
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Compensation Decision-Making Process
Role of the Compensation Committee
The Compensation Committee is responsible for reviewing and approving, on an annual basis, the corporate goals and objectives with respect to the compensation of all of our executive officers, as described in the Compensation Committee Charter. The Compensation Committee relies on its own review and the advice of its independent compensation consultant in establishing executive officer pay. The Compensation Committee seeks the input of the CEO in making executive officer pay decisions, but the Compensation Committee makes all decisions.
In February 2018, the Compensation Committee approved, subject to the approval of our Board of Directors, annual incentive performance objectives for fiscal year 2018 and long-term incentive awards to our NEOs under our 2013 LTIP. After the completion of fiscal year 2018, the Compensation Committee recommended and our Board of Directors (i) approved 2018 annual incentive payouts for our NEOs based on the achievement of the performance objectives established at the beginning of the year, and (ii) determined achievement of performance objectives with respect to the long-term incentive awards granted to Messrs. Bauer, Mitchell, and Grubbs in 2016 that had a performance period ending December 31, 2018. A description of these payouts can be found under "—2018 NEO Compensation Decisions" below. In February 2019, the Compensation Committee recommended and our Board of Directors approved annual incentive performance objectives for fiscal year 2019 and long-term incentive awards to our executive officers under our 2013 LTIP.
Independent Compensation Consultant to the Compensation Committee
The Compensation Committee has engaged Semler Brossy as its independent compensation consultant. Semler Brossy's duties include preparation of material for the Compensation Committee's executive officer pay analysis, review of our peer group, recommendations for non-employee director compensation, discussion and analysis of potential incentive programs, review and analysis of executive officer employment agreements, and work on behalf of the Compensation Committee to review management's recommendations to the Compensation Committee about executive officer pay matters. Semler Brossy has been retained by, and reports directly to, the Compensation Committee, and does not provide any services to us other than those described above. The Compensation Committee has assessed Semler Brossy's independence in light of the SEC requirements and NYSE listing standards relating to adviser independence and determined that Semler Brossy's work does not raise any conflict of interest or independence concerns.
Peer Group and Market Data
The Compensation Committee examines market data annually to understand both pay levels and pay practices. The Compensation Committee primarily reviews data from a peer group that consists of publicly-traded homebuilding companies, which the Compensation Committee believes is an appropriate list of competitors for business and talent. The Compensation Committee uses peer group data to assess the reasonableness of executive officer pay and generally seeks to ensure the aggregate compensation for the executive officers is comparable over time to companies similar to us. For Messrs. Lee and Keeler, the Compensation Committee reviews pay data from compensation surveys for both homebuilders and non-homebuilders when assessing pay decisions.
Over time, the Compensation Committee intends to target aggregate pay for our executive officers around the median of our peers. The Compensation Committee does not have an explicit pay positioning strategy relative to peers by component of pay or by executive, and our pay levels for Messrs. Bauer and Mitchell are intentionally less differentiated than would be expected in the market given our legacy as a private company and the greater sharing of management responsibilities between these executives than would be the case at many other peer companies.
The Compensation Committee, in consultation with Semler Brossy and our management, periodically reviews and considers changes to the makeup of our peer group. The companies in our 2018 peer group are shown in the table below. As further discussed below, the Compensation Committee also based vesting of one-half of the performance-based RSUs granted to Messrs. Bauer, Mitchell, and Grubbs in 2018 on our total stockholder return ("TSR") relative to our peer group.
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Our Peer Group
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Beazer Homes USA
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M/I Homes
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D.R. Horton
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Meritage Homes
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Hovnanian Enterprises
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NVR
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KB Home
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PulteGroup
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Lennar
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Taylor Morrison
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M.D.C. Holdings
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Toll Brothers
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For 2018, the Compensation Committee eliminated D.R. Horton and Lennar from our peer group for aggregate pay benchmarking purposes, although both D.R. Horton and Lennar remained in our peer group for purposes of measuring our relative TSR. D.R. Horton and Lennar were removed for benchmarking purposes because the annual revenue of each company was greater than five times the annual revenue of TRI Pointe. As a result, the Compensation Committee determined both to be outliers for pay comparison purposes.
Advisory Vote on Executive Compensation
At our 2014 Annual Meeting of Stockholders, our stockholders voted on an advisory basis with respect to the frequency of future advisory votes to approve the compensation of our NEOs. Approximately 66.4% of the votes cast on this proposal were cast for a frequency of every three years. Our Board of Directors concluded that a vote every three years was the most appropriate timeframe for stockholders to assess our executive officer pay practices because these practices continue to evolve and change with the transformation of the Company, and these changes will take place over a timeframe longer than a single year.
At our 2017 Annual Meeting of Stockholders, our stockholders voted to approve on an advisory basis the compensation of our NEOs. More than 97.5% of the votes cast with respect to this proposal were cast for approval of our NEOs' compensation. The Compensation Committee determined that the executive compensation philosophy and compensation elements continued to be appropriate. Although we continue to refine our compensation programs as a public company, we have not made any change specifically in response to the advisory vote of our stockholders.
Pay Design and Compensation Elements
Our compensation programs are comprised of the following compensation elements:
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Base salary.
The base salaries of our executive officers are intended to provide a competitive level of fixed compensation in order to attract, retain, and motivate talented executive officers. Base salaries are generally set based on each executive officer’s responsibilities, performance, skills, and experience as compared with relevant market data.
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Annual Incentive Program.
In furtherance of our compensation philosophy to award incentive bonuses based on performance, we design our annual incentive programs to motivate and reward executive officers for achieving pre-established company financial performance objectives.
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Long-term Incentive Awards.
The Compensation Committee believes that a substantial portion of each executive officer's compensation should be in the form of long-term equity incentive compensation. While our annual incentive programs reward executive officers for actions that impact short- and mid-term performance, the Compensation Committee recognizes that long-term equity incentive awards also serve the interests of our stockholders by:
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giving these key employees the opportunity to participate in the long-term appreciation of our common stock;
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encouraging executive officers to create and sustain stockholder value over longer periods because the value of equity awards is directly attributable to changes in the price of our common stock over time; and
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promoting executive officer retention because the full value of equity awards cannot be realized until vesting occurs, which generally requires continued employment for multiple years.
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In addition, a significant portion of the long-term incentive awards granted to Messrs. Bauer, Mitchell, and Grubbs are in the form of performance-based equity awards linked to specified performance metrics.
2018 NEO Pay Programs
In 2018, the Compensation Committee continued the process of aligning our pay practices with other large homebuilders.
The graphs below illustrate the relative average mix of the (i) base salary, (ii) annual incentive target, and (iii) long-term incentive award target for Messrs. Bauer, Mitchell, and Grubbs and all other NEOs for 2018. The incentive mix for Messrs. Bauer, Mitchell, and Grubbs was more substantially performance-based, recognizing the higher level of responsibility of these NEOs and their greater ability to influence overall business results.
The table below summarizes the three elements of 2018 compensation for our NEOs. In addition to these compensation elements, our NEOs participate in benefits and other programs as described in "—Other Compensation Programs and Policies."
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Pay Element
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Purpose
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2018 Description
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Base Salary
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Provide a competitive level of fixed compensation to attract, retain and motivate talented executive officers
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The Compensation Committee reviewed fixed cash compensation levels and made adjustments depending on the executive officer’s responsibilities, performance, skills, and experience as compared to relevant market data.
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Annual Cash Incentive
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Motivate and reward executive officers for achieving pre-established company performance goals
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The Compensation Committee approved cash performance awards for our NEOs under the 2013 LTIP with a performance period of January 1, 2018 to December 31, 2018. Actual payout amounts were based on the Company's level of achievement of the 2018 fiscal year adjusted pre-tax income annual incentive performance objective (equal to the Company's business plan) established by the Compensation Committee.
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Long-term Incentive
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Motivate and reward executive officers' contributions to enhancing long-term stockholder value and the achievement of long-term business objectives; encourage executive retention
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Messrs. Bauer, Mitchell, and Grubbs were granted a mix of performance-based and time-based RSUs, with 60% of the awards in the form of performance-based RSUs (at target performance) and 40% of the awards in the form of time-based RSUs. This mix of performance-based and time-based incentives is consistent with our peers and balances performance and retention objectives. The performance-based RSUs have a performance period from January 1, 2018 to December 31, 2020 and are allocated in equal parts to two separate performance metrics: (i) TSR, with vesting based on our TSR relative to our peer-group; and (ii) earnings per share ("EPS"). The Compensation Committee believes these performance metrics reward appropriately for Company performance over time and align the executive's interests with those of our stockholders. The long-term incentive awards for Messrs. Lee and Keeler were 100% time-based RSUs. The award values for Messrs. Lee and Keeler are intended to reflect their individual performance, contributions, responsibilities, skills, and experience.
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2018 NEO Compensation Decisions
In evaluating 2018 NEO compensation decisions and making its recommendation to our Board of Directors, the Compensation Committee considered median executive pay for the top three executives at other publicly-traded homebuilding companies (see "—Peer Group and Market Data" above) but did not target any specific percentile of market when making individual pay decisions. Pay for our CEO and COO continues to be less differentiated than is typical of other large homebuilders given our legacy as a private company and the nature of the shared management responsibilities of Messrs. Bauer and Mitchell.
Base Salary
Based on the Compensation Committee's recommendation, our Board of Directors approved 2018 base salary increases for certain of our NEOs. The Compensation Committee and our Board of Directors considered each of the NEO's responsibilities, performance, skills and experience as compared with relevant peer group market data in determining to increase their base salaries. The Compensation Committee took the recommendations of Mr. Bauer into consideration when determining the compensation of Messrs. Lee and Keeler.
The table below compares the NEOs' base salaries for 2018 and 2017.
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Executive
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2018
Base Salary
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2017
Base Salary
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%
Increase
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Douglas F. Bauer
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$
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800,000
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$
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775,000
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3%
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Thomas J. Mitchell
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$
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770,000
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$
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745,000
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3%
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Michael D. Grubbs
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$
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600,000
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$
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600,000
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0%
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David C. Lee
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$
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500,000
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—
(1)
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—
(1)
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Glenn J. Keeler
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$
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290,000
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$
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280,000
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4%
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__________
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(1)
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Mr. Lee became an executive officer of the Company in January 2018 in connection with his appointment as Vice President, General Counsel and Secretary.
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Annual Cash Incentive
At the beginning of 2018, based on the Compensation Committee's recommendation, our Board of Directors approved annual incentive targets for our NEOs. These annual incentive targets were defined as a percentage of their base salaries and were determined based on each NEO's responsibilities, skills, and experience as compared with relevant market data. The 2018 annual incentive targets for Messrs. Bauer, Mitchell, and Grubbs were increased as part of our transition to market-based practices and reflected a rebalancing between short-term and long-term incentives designed to bring the mix of pay more into line with peer practices.
The table below compares the NEOs' 2018 and 2017 annual incentive targets:
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2018 Annual Incentive Target
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2017 Annual Incentive Target
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Executive
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% of Salary
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$
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% of Salary
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$
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Douglas F. Bauer
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160%
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$
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1,280,000
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140%
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$
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1,085,000
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Thomas J. Mitchell
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160%
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$
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1,232,000
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140%
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$
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1,043,000
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Michael D. Grubbs
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125%
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$
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750,000
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120%
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$
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720,000
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David C. Lee
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25%
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$
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125,000
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—
(1)
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—
(1)
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Glenn J. Keeler
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75%
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$
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217,500
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75%
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$
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210,000
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__________
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(1)
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Mr. Lee became an executive officer of the Company in January 2018 in connection with his appointment as Vice President, General Counsel and Secretary.
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For 2018, based on the Compensation Committee's recommendation, our Board of Directors established pre-tax income as the performance metric for cash performance awards to all NEOs. Pre-tax income is a common metric used within the homebuilding industry in general and the Compensation Committee and our Board of Directors believe it is well aligned with the objective of stockholder value creation.
For 2018, based on the Compensation Committee's recommendation, our Board of Directors approved an adjusted pre-tax income annual incentive performance objective of $357.4 million, which was equal to our business plan. Adjusted pre-tax income means our income from continuing operations before taxes, as reported in our consolidated financial statements for the relevant periods, after such adjustments thereto as the Compensation Committee recommends and our Board of Directors deems appropriate in its sole discretion (i) to exclude the effect of extraordinary, unusual and/or nonrecurring items, including net income attributable to non-controlling interests, and changes in applicable accounting
standards and (ii) to reflect such other factors as the Compensation Committee and our Board of Directors deem appropriate to fairly reflect pre-tax income. Payouts were based on our level of achievement of this performance objective and were calculated based on percentages of each NEO's annual incentive target, as set forth in the table below:
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Performance Objective Achievement Level
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% of Business Plan
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NEO Payout
(as % of 2018 Annual Incentive Target)
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Below Threshold
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Below 75%
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0%
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Threshold
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75%
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50%
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Target
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100%
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100%
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Maximum
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125%
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200%
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Achievement between the threshold, target, and maximum levels would be determined by straight line interpolation and achievement below threshold would result in zero incentive payout for the NEO.
The Company's pre-tax income for fiscal year 2018 was approximately $362.1 million, and based on the Compensation Committee's determination, our Board of Directors certified that our adjusted pre-tax income for 2018 was approximately $379.3 million, or 106.1% of the annual incentive performance objective.
See "—Non-GAAP Measures" below for a reconciliation of adjusted pre-tax income to the most directly comparable GAAP financial measure.
The table below presents the results of our 2018 annual cash incentive program and the corresponding payouts to each of the NEOs based on these results.
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2018 Annual Incentive Payout
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Annual Incentive Based on Pre-tax Income
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% of Target
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% of Salary
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$
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Douglas F. Bauer
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124.4%
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199.2%
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$
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1,593,600
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Thomas J. Mitchell
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124.4%
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199.2%
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$
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1,533,840
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Michael D. Grubbs
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124.4%
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155.6%
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$
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933,750
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David C. Lee
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124.4%
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31.1%
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$
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155,625
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Glenn J. Keeler
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124.4%
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93.4%
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$
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270,788
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Long-Term Incentives
At the beginning of 2018, based on the Compensation Committee's recommendation, our Board of Directors determined the target value of the long-term incentive awards that would be granted to each of the NEOs in 2018 based on the NEO's responsibilities, skills, experience and contributions. The Compensation Committee and our Board of Directors also took into consideration the relative mix of cash and equity compensation relative to our peers when determining the target value of long-term incentives. Recognizing the higher level of responsibility of Messrs. Bauer, Mitchell, and Grubbs and their greater ability to influence overall business results, based on the Compensation Committee's recommendation, our Board of Directors structured the 2018 long-term incentive program so that these three NEOs were granted a mix of performance-based and time-based RSUs. All of the long-term incentive awards granted to Messrs. Lee and Keeler in 2018 were time-based RSUs.
The target value of the long-term incentive awards granted to the NEOs in 2018 was as follows:
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2018 Long-term Incentive Award Target Values
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Executive
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Performance- Based RSUs
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Time-Based RSUs
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Total
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Douglas F. Bauer
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$
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1,560,000
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$
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1,040,000
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$
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2,600,000
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Thomas J. Mitchell
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$
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1,500,000
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$
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1,000,000
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$
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2,500,000
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Michael D. Grubbs
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$
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720,000
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$
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480,000
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$
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1,200,000
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David C. Lee
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$
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—
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$
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50,000
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$
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50,000
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Glenn J. Keeler
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$
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—
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$
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244,575
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$
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244,575
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In determining the target value of long-term incentive awards that would be granted in 2018, the Compensation Committee and our Board of Directors considered the value of the long-term incentive awards granted in 2017 and the structure of the 2017 long-term incentive program. Based on the Compensation Committee's recommendation, our Board of Directors maintained the target value of the long-term incentive awards granted to Messrs. Bauer, Mitchell, and Grubbs in 2018 as compared to 2017. Our Board of Directors increased the target value of long-term incentive awards with respect to Mr. Keeler in recognition of his roles and responsibilities within the Company.
Based on the Compensation Committee's recommendation, our Board of Directors structured the 2018 long-term incentive program for Messrs. Bauer, Mitchell, and Grubbs to be 60% performance-based RSUs (at target performance) and 40% time-based RSUs. This mix of performance-based and time-based incentive awards is consistent with our peers and balances performance and retention objectives.
Performance-based RSUs
Our Board of Directors granted 184,179, 177,095, and 85,005 performance-based RSUs to Messrs. Bauer, Mitchell, and Grubbs, respectively, pursuant to our 2013 LTIP. The number of performance-based RSUs was determined by multiplying (i) the quotient of (x) the target value of the award and (y) the closing market price of the Company's common stock on the date of grant by (ii) two, representing the maximum number of RSUs that may vest assuming our attainment of the maximum performance objective set by the Compensation Committee. Based on the Compensation Committee's recommendation, our Board of Directors selected TSR as the performance metric for one-half of the performance-based RSUs granted in 2018, with vesting of the RSUs based on our TSR relative to our peer group, which the Compensation Committee and our Board of Directors believe rewards appropriately for performance over time and aligns the executive's interests with those of our stockholders. The Compensation Committee recommended and our Board of Directors selected EPS as the performance metric for the other one-half of the performance-based RSUs granted in 2018 in order to further align the interests of the NEOs with those of our stockholders.
Based on the Compensation Committee's recommendation, our Board of Directors structured the performance-based RSUs so that the vesting, if at all, of these RSUs will be based on our percentage attainment of specified threshold, target, and maximum performance objectives with respect to each performance metric. With respect to the performance-based RSUs allocated to each performance metric:
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•
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at threshold performance, the NEO will vest in 25% of the performance-based RSUs, representing 50% of the target value of the performance-based RSUs on the grant date;
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•
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at target performance, the NEO will vest in 50% of the performance-based RSUs, representing 100% of the target value of the performance-based RSUs on the grant date;
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•
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at maximum performance, the NEO will vest in 100% of the performance-based RSUs, representing 200% of the target value of the performance-based RSUs on the grant date;
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•
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the percentage of the performance-based RSUs that will vest if our performance is between the threshold, target, and maximum performance levels will be determined by straight line interpolation; and
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•
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achievement below threshold would result in vesting of zero of the performance-based RSUs.
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In the case of the TSR performance-based RSUs, the performance objectives are as set forth in the table below (TSR percentile means our percentile rank during the performance period relative to the TSR for our peer group):
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Performance Level
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The Company’s TSR Percentile on Vesting Date
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Percentage of Award that Vests
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Maximum
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75
th
TSR Percentile and Above
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100%
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Target
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50
th
TSR Percentile
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50%
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Threshold
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35
th
TSR Percentile
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25%
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Below Threshold
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Below 35
th
TSR Percentile
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0%
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In the case of the EPS performance-based RSUs, the performance objectives are as set forth in the table below:
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Performance Level
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The Company’s Cumulative EPS
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Percentage of Award that Vests
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Maximum
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125% of Cumulative EPS Plan and Above
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100%
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Target
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100% of Cumulative EPS Plan
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50%
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Threshold
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75% of Cumulative EPS Plan
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25%
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Below Threshold
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Below 75% of Cumulative EPS Plan
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0%
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The performance period for the performance-based RSUs is January 1, 2018 to December 31, 2020. If the performance-based RSUs do not vest on or before December 31, 2020, they will be cancelled and forfeited for no consideration. TSR is determined based on changes in stock price plus dividends paid during the applicable performance period. Our Board of Directors may make adjustments to our peer group based on developments that occur during the performance period, such as removing from the peer group, retroactively to the beginning of the performance period, any company no longer existing as an independent entity or which has announced it is being acquired.
In the case of the EPS performance-based RSUs, our Board of Directors may adjust EPS as it deems appropriate to (i) exclude the effect of extraordinary, unusual, and/or nonrecurring items and changes in applicable accounting standards and (ii) reflect such other factors as it deems appropriate to fairly reflect earnings per share growth.
The Compensation Committee and our Board of Directors believe exceptional Company performance is required to achieve the maximum performance objective and that it would be difficult to achieve maximum vesting of the performance-based RSUs. The difficulty of attaining the performance objectives for the performance-based RSUs is inherently uncertain because they are subject to a number
of factors beyond the control of either the Company or the NEO, including overall economic conditions, the performance of the securities markets generally, and other risks and uncertainties that we face, including those described in our annual report on Form 10‑K and other SEC filings.
Time-based RSUs
Our Board of Directors also granted 61,393, 59,031, 28,335, 2,951, and 14,437 time-based RSUs to Messrs. Bauer, Mitchell, Grubbs, Lee, and Keeler, respectively, vesting one-third each year beginning on the first anniversary. The number of time-based RSUs granted to each NEO was determined by dividing the target value of the award by the closing market price of the Company's common stock on the date of grant. The 2018 time-based RSU awards promote executive officer retention by vesting annually as to one-third of each award over a three-year period.
The value of the awards to Messrs. Lee and Keeler was based on recommendations made by our CEO to the Compensation Committee after evaluation of each such NEO's responsibilities, skills, experience, and contributions, and relevant market information.
2019 Executive Officer Pay Programs
Based on the Compensation Committee's recommendation, our Board of Directors took the following actions with respect to 2019 executive compensation:
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•
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Base Salary.
Our Board of Directors approved a 2019 base salary increase for Mr. Keeler of $35,000 based on competitive market practices for executive officers in a similar role. Our Board of Directors did not make any changes to the 2019 base salaries for the other NEOs.
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•
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Annual Cash Incentive Program.
Our Board of Directors approved a target annual incentive percentage increase for Mr. Lee, increasing his 2019 target annual incentive percentage to 35% from 25% in 2018. Our Board of Directors did not make any changes to the target annual incentive percentages for the other NEOs. The payout amounts, if any, may range from 0% to 200% of the target annual incentive based on the Company's achievement of an adjusted pre-tax income performance objective and will be calculated based on percentages of each officer's target.
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•
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Long-Term Incentive Program.
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For 2019, our Board of Directors granted Messrs. Bauer, Mitchell, and Grubbs a mix of performance-based and time-based RSUs, with 60% of the awards in the form of performance-based RSUs (at target performance) and 40% of the awards in the form of time-based RSUs. This mix of performance-based and time-based incentives is consistent with the awards made in 2018 and balances performance and retention objectives. The performance-based RSUs are allocated to two separate performance metrics as follows: (i) 30% are tied to TSR, with vesting based on the Company's TSR relative to its peer-group homebuilders; and (ii) 70% are tied to EPS. Based on the recommendation of the Compensation Committee, our Board of Directors adjusted the allocation of performance-based RSUs tied to TSR and EPS for 2019 to place additional emphasis on long-term financial results, as well as better align with the competitive practices of our peer group. The performance period for the performance-based RSUs is January 1, 2019 to December 31, 2021. The Compensation Committee and our Board of Directors believe these performance metrics reward
appropriately for Company performance over time and align the executive's interests with those of our stockholders. The long-term incentive awards for Messrs. Lee and Keeler are 100% time-based RSUs as these executives have less direct responsibility and impact over driving TSR.
Our Board of Directors granted 247,619, 238,095, and 114,285 performance-based RSUs to Messrs. Bauer, Mitchell, and Grubbs, respectively. The number of performance-based RSUs granted to these executive officers in 2019 was determined by multiplying (i) the quotient of (x) the target value of the award and (y) the closing market price of the Company's common stock on the date of grant by (ii) two, representing the maximum number of RSUs that may vest assuming our attainment of the maximum performance objective set by our Board of Directors based on the Compensation Committee's recommendation. These performance-based RSUs were granted pursuant to our 2013 LTIP.
Our Board of Directors also awarded 82,539, 79,365, 38,095, 8,904, and 22,261 time-based RSUs to Messrs. Bauer, Mitchell, Grubbs, Lee, and Keeler, respectively, vesting one-third each year beginning on the first anniversary of the grant date of the award units.
The target total annual compensation of our current executive officers for 2019 is as follows:
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2019 Total Target Compensation by Element
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Executive
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Base
Salary
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Target
Annual Incentive
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Target
Long-term
Incentive
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Total
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Douglas F. Bauer
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$
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800,000
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$
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1,280,000
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$
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2,600,000
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$
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4,680,000
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Thomas J. Mitchell
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$
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770,000
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$
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1,232,000
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$
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2,500,000
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|
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$
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4,502,000
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Michael D. Grubbs
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$
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600,000
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$
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750,000
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$
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1,200,000
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|
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$
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2,550,000
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Glenn J. Keeler
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$
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325,000
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$
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243,750
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$
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280,500
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$
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849,250
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David C. Lee
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$
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500,000
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$
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175,000
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$
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112,200
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$
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787,200
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For comparison, the target total annual compensation of Messrs. Bauer, Mitchell, Grubbs, Lee, and Keeler in 2018 was as follows:
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2018 Total Target Compensation by Element
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Executive
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Base
Salary
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Target
Annual Incentive
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Target
Long-term
Incentive
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Total
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Douglas F. Bauer
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$
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800,000
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$
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1,280,000
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$
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2,600,000
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$
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4,680,000
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Thomas J. Mitchell
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$
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770,000
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$
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1,232,000
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$
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2,500,000
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$
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4,502,000
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Michael D. Grubbs
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$
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600,000
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$
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750,000
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$
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1,200,000
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|
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$
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2,550,000
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Glenn J. Keeler
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$
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290,000
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$
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217,500
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$
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244,575
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$
|
752,075
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David C. Lee
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$
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500,000
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(1)
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$
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125,000
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$
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50,000
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$
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725,000
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__________
(1) In addition, Mr. Lee received a $50,000 signing bonus when he was hired in January 2018.
2016 Performance-Based RSUs
In March 2016, our Board of Directors granted Messrs. Bauer, Mitchell, and Grubbs performance-based RSUs tied to TSR, with vesting based on the Company's TSR relative to its peer-
group homebuilders. The performance period for the performance-based RSUs was January 1, 2016 to December 31, 2018. The vesting, if at all, of these performance-based RSUs was based on our percentage attainment of specified threshold, target, and maximum performance objectives as set forth in the table below:
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Performance Level
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The Company's TSR Percentile on Vesting Date
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Percentage of Award that Vests
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Maximum
|
75
th
TSR Percentile and Above
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100%
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Target
|
55
th
TSR Percentile
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50%
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Threshold
|
35
th
TSR Percentile
|
37.5%
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Below Threshold
|
Below 35
th
TSR Percentile
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0%
|
On February 20, 2019, based on the Compensation Committee's recommendation, our Board of Directors determined that the Company’s relative TSR for the performance period ending December 31, 2018 was below threshold and therefore none of the TSR performance-based RSUs vested.
Other Compensation Programs and Policies
Severance and Change in Control Benefits
The Company has employment agreements with each of Messrs. Bauer, Mitchell, and Grubbs. These agreements govern their treatment upon a termination of employment, among other considerations. The change in control component of these agreements reflects our belief that the interests of stockholders will be best served if the interests of these executives are aligned with the stockholders, and that providing change in control benefits should eliminate or at least reduce disincentives to pursue potential change in control transactions that may be in the best interests of stockholders.
The Company also has severance and change in control protection agreements with each of Messrs. Lee and Keeler. These agreements govern the treatment of each of them upon a termination of employment, including in connection with a change in control.
See the "Executive Compensation—Potential Payments Upon Termination or Change in Control" section of this proxy statement for further information regarding the severance and change in control provisions of these agreements and a quantification of the compensation to be received in the event of a change in control or termination of the employment of Messrs. Bauer, Mitchell, Grubbs, Lee, and Keeler as of December 31, 2018.
Benefits
Our executive officers participate in retirement and benefit plans generally available to our, and on the same terms as, other employees. These benefits include a 50% match on their 401(k) contributions up to $8,250 as well as medical, vision, dental, employee assistance program, life insurance and long-term disability coverage. We also provide certain of our executive officers with a reimbursement of life insurance premiums and reimbursement of club membership dues.
Equity Grant Time Policy
It is the policy of the Compensation Committee that regular annual equity awards are granted on the later of the second business day after the public release of fiscal year-end earnings, or (if later) the
Monday following the date on which the Compensation Committee approves the awards. The Compensation Committee may in its discretion make equity awards at other times in connection with new hires, promotions, or special circumstances. The grant date for these awards will be the Monday following the date on which the Compensation Committee approves the award. If the grant date is a Monday and a closing price is not reported for that day, the grant date will be the next following day on which a closing price is reported.
Stock Ownership Guidelines
Our Board of Directors has adopted the following stock ownership guidelines:
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Position
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Ownership Guideline
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Directors
|
5 times annual cash retainer
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CEO
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5 times base salary
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COO
|
5 times base salary
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CFO
|
3 times base salary
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Corporate vice presidents
|
1 times base salary
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Presidents of homebuilding subsidiaries
|
1 times base salary
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Directors and executive officers have five years from the date on which they become subject to the guidelines to satisfy the applicable guideline level. For the purposes of these guidelines, ownership includes shares beneficially owned and unvested restricted stock and RSU awards subject only to time-based vesting. Unexercised options, whether vested or not, do not count as stock "owned" under these guidelines. During the applicable five-year transition period, if a participant is not in compliance with the applicable guideline, he or she is required to retain 60% of shares earned net of taxes from any of our incentive plans until he or she is in compliance with the guidelines. If a participant fails to achieve the required ownership during the applicable five-year transition period, that person will thereafter be required to retain 100% of shares earned net of taxes until the targeted ownership level is attained.
"
Clawback
"
Policy
The Compensation Committee administers our "clawback" policy that provides for recoupment from our executive officers of incentive compensation in the event of certain restatements of our financial results. Incentive compensation under this policy means all cash bonuses and equity compensation awarded to a covered executive, the amount, payment and/or vesting of which was calculated based wholly or in part on the application of objective performance criteria. It does not cover an executive's base salary. A trigger event occurs under the policy when we are required to prepare an accounting restatement of our financial statements due to a material noncompliance with any financial reporting requirement under the securities laws. If, following a trigger event, the Compensation Committee determines that:
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•
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the amount of any incentive compensation awarded to, or received by, a covered executive during the three-year period preceding the date on which we are required to prepare the accounting restatement would have been lower (and not earned) had it been calculated based on the restated financial results; and
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|
•
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the executive engaged in fraud, intentional misconduct or gross negligence, the Compensation Committee will seek to recoup from the executive the after-tax portion of the difference between the awarded compensation and the actual compensation.
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The Compensation Committee is not required to seek recoupment from an executive if it determines that seeking recovery would not be in our best interests. In making this determination, the Compensation Committee may take into account, among other factors, the probability of success under applicable law; the cost of seeking recoupment; the effect of seeking recoupment on any pending or threatened investigations, litigation or other proceedings involving us; the difficulty of proof; the possibility of counterclaims against us; and the amount subject to recoupment. The Compensation Committee is authorized under the policy to determine in its discretion the method for obtaining recoupment.
No Hedging of Company Stock
As described further in the our policy on insider trading, all directors, officers, and other employees are prohibited from entering into transactions which have the effect of hedging the economic value of any direct or indirect interests of the person in our common equity.
Tax Deductibility; Section 162(m)
As a publicly-traded company, we are subject to Section 162(m) of the Internal Revenue Code ("Section 162(m)") which limits our ability to deduct for U.S. income tax purposes compensation in excess of $1 million paid to our CEO and three other most highly compensated officers (other than the CFO) unless the compensation is performance-based under Section 162(m). The Tax Cuts and Jobs Act made significant changes to Section 162(m). Beginning in 2018, Section 162(m) limited deductions to $1 million for compensation paid to our CFO as well as our CEO and our three other most highly compensated officers. In addition, beginning in 2018 the exception to the $1 million deduction limitation for commission and performance-based compensation was eliminated. However, compensation paid pursuant to a written binding agreement in effect on November 2, 2017 that has not been materially modified thereafter is grandfathered and can continue to qualify for the performance-based compensation exemption, assuming all other Section 162(m) requirements are met. Because of the ambiguities and uncertainties as to the scope of this grandfather provision, no assurance can be given that compensation originally intended to qualify for the exemption will, in fact, be fully deductible.
The Compensation Committee and our Board of Directors consider tax deductibility to be an important, but not the sole, or primary, consideration in setting executive compensation. Because the Compensation Committee and our Board of Directors also recognize the need to maintain flexibility to make compensation decisions that may not meet the standards of Section 162(m) when necessary to enable us to continue to attract, retain, and motivate talented executive officers, it reserves the authority to approve potentially non-deductible compensation.
Non-GAAP Measures
In this Compensation Discussion and Analysis, we reference adjusted pre-tax income, a financial measure used by the Compensation Committee in connection with executive compensation calculated other than in accordance with U.S. generally accepted accounting principles ("GAAP"), which is reconciled to the nearest GAAP financial measure in the information below. This non-GAAP financial measure may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
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Reconciliation of Adjusted Pre-Tax Income for 2018 Annual Cash Incentive (dollars in thousands)
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Year Ended December 31, 2018
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Income before income taxes
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$
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362,067
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|
Add: $17.5 million settlement payment in connection with the settlement of a lawsuit involving a 1987 legacy WRECO land sale and transaction related expenses of $1,286,000 in connection with an acquisition
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$
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18,786
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Less: Net income attributable to noncontrolling interest
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$
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(1,602
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)
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Adjusted pre-tax income
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$
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379,251
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