There are currently ten
directors – four in the class whose terms expire at the Annual Meeting and who are proposed to be re-elected for terms expiring
at the Annual Meeting of Shareholders in 2020; three in the class whose terms expire at the Annual Meeting of Shareholders in 2018;
and three in the class whose terms expire at the Annual Meeting of Shareholders in 2019.
The Board proposes that
the four director nominees named in the summary below, each of whom was unanimously recommended by the Nominating and Governance
Committee, be re-elected as directors at the Annual Meeting. Each individual elected as a director at the Annual Meeting will hold
office for a three-year term, expiring at the Annual Meeting of Shareholders in 2020, and until his successor is duly elected and
qualified, or until his earlier death, resignation or removal from office. The individuals named as proxy holders in the form of
proxy
solicited by the Board intend to vote the common shares represented by the proxies received under this solicitation for the
Board’s nominees, unless otherwise instructed on the form of proxy. If any nominee becomes unable to serve or for good cause
will not serve as a candidate for election as a director, the individuals designated to vote the proxies will have full discretion
to vote the common shares represented by the proxies they hold for the election of the remaining nominees and for the election
of any substitute nominee designated by the Board. The Board has no reason to believe that any of the Board’s nominees will
be unable to serve or for good cause will not serve as a director of the Company if elected.
The information set forth
below, concerning the age, principal occupation, other affiliations and business experience of each director has been furnished
to the Company by such director as of August 1, 2017. Except where otherwise indicated, each director has had the same principal
occupation for the last five years. There are no family relationships among any of the current directors, director nominees and
executive officers of the Company.
Michael J. Endres, age
69, has served continuously as a director of the Company since 1999 and is a member of the Executive Committee and the Compensation
Committee. Mr. Endres serves as a special limited partner in Stonehenge Partners, Inc., a private equity investment firm
he co-founded in August 1999. His duties include, among other things, the examination of specific company financial characteristics,
balance sheet and income statement analysis, as well as industry growth rates and trends, and management of the acquisition and
disposition of the firm’s investments. Mr. Endres has served as a director of Huntington Bancshares Incorporated since
April 2003 and is a member of its Technology Committee and its Executive Committee. Mr. Endres has also served as a
director of W.W. Williams Company (and its successor TRI-W Group), a privately-held company, since October 2011, Conterra AG, a
privately-held company since 2014, and Calibre Group LLC, a privately-held company since 2015. Mr. Endres served as a director
of Tim Hortons Inc. from 2006 until December 2014 when it was acquired by Restaurant Brands International, where he was Chair of
its Audit Committee and a member of its Executive Committee. Mr. Endres received a B.S. from Miami University. Mr. Endres
has a depth of experience in equity investing, business development, strategic initiatives and acquisitions, financial analysis,
leadership and management, and is a director of various companies. This experience, along with his financial expertise and his
history as a director with the Company, make him a valuable asset to the Board and its various committees, and well qualified to
continue to serve on the Board.
Ozey K. Horton, Jr., age
66, has served continuously as a director of the Company since 2011 and is a member of the Compensation Committee and the Nominating
and Governance Committee. He is an independent advisor and serves as Director Emeritus of McKinsey & Company, a management
consulting firm, from which he retired in February 2011. Prior to that time, Mr. Horton served as a Director in the Atlanta office
of McKinsey & Company from 1981 through February 2011. Over the years, Mr. Horton led numerous corporate growth, strategic,
mergers and acquisitions, and performance improvement initiatives at global clients across a range of industries — especially
in the basic industrials space (such as metals and mining; pulp, paper and packaging; chemicals; and energy). He has also led several
practices within McKinsey & Company: as founder of the global pulp, paper and packaging practice; co-leader of the global basic
materials practice; and leader of the global operations practice within the energy and materials sector. Prior to his service with
McKinsey & Company, Mr. Horton had early career experiences in manufacturing, corporate development and project engineering.
Mr. Horton has served as a director of Louisiana-Pacific Corporation, a global leader in engineered wood products, since September
2016, where he is a member of the Finance & Audit Committee and a member of the Nominating and Corporate Governance Committee.
Mr. Horton serves as a member of the Metso Corporation Board, the Dabbagh Group Holding Co. Ltd. Board and the Spoleto Festival,
USA Board. He also serves as a member of the Gaillard Performance Hall Foundation Capital Campaign Cabinet, the MUSC Hollings Cancer
Center Advisory Board, and the Liberty Fellows Senior Advisor Group. Mr. Horton has extensive experience working in Europe, South
America, India and Asia. Mr. Horton has a B.S.E. in civil and environmental engineering from Duke University and a Masters of Business
Administration from the Harvard Business School. Mr. Horton’s wide-ranging experience working with manufacturing and other
companies, both domestically and globally, provides unique expertise to the Board, and these attributes make him well suited to
continue to serve on the Board.
Peter Karmanos, Jr., age
74, has served continuously as a director of the Company since 1997, is Chair of the Nominating and Governance Committee and is
a member of the Executive Committee. Mr. Karmanos founded Compuware, a software development company, in 1973. He served as Chairman
of the Board, Chief Executive Officer and a director of Compuware from its founding until June 2011. He continued to serve as Executive
Chairman of the Board and a director of Compuware until March 2013, when he resigned from that board. Mr. Karmanos has the entrepreneurial
spirit that built a billion dollar company from a start-up and the business acumen of the Chairman and Chief Executive Officer
of an S&P 500 corporation. Mr. Karmanos is a Partner in MadDog Technology, LLC, a company that specializes in advanced technology
and mobile device development. Mr. Karmanos has also served as a director for Taubman Centers, Inc. since 2000 and is a member
of its Compensation Committee. He serves as a director for the Barbara Ann Karmanos Cancer Institute, Detroit Renaissance, and
New Detroit Coalition, and on the Board of Governors for the National Hockey League. Mr. Karmanos has a wealth of public company
management and information technology experience. This includes extensive skill and background dealing with the growth, operation
and management of a large public company as its co-founder and Chairman. In addition, his skills and expertise in information technology
bring valuable insight to the Board. All of these attributes make him well qualified to continue to serve on the Board.
Carl A. Nelson, Jr., age
72, has served continuously as a director of the Company since 2004, is the Chair of the Audit Committee and is a member of the
Executive Committee. Mr. Nelson was a partner with Arthur Andersen, LLP and retired in February 2002, after 31 years of service.
Mr. Nelson had served as Managing Partner of the Arthur Andersen Columbus, Ohio office, and was the leader of the firm’s
consulting services for the products industry in the United States. Mr. Nelson has served as a director of Advanced Drainage
Systems, a $1billion public-owned drainage-pipe manufacturer, since 2016 and is a member of its Compensation and Succession Committees.
He has served as a director of Star Leasing Company, a $115 million ESOP-owned company that leases semi-trailers through ten facilities
across six states since 2013, where he is a member of its Compensation Committee. Mr. Nelson is a Certified Public Accountant and
a member of The Ohio Society of Certified Public Accountants and the American Institute of Certified Public Accountants. Mr. Nelson
received his B.S. in Accounting from The Ohio State University and a Masters of Business Administration from the University of
Wisconsin. Mr. Nelson has taught in the MBA and executive education programs at The Ohio State University and is a member
of the Dean’s Advisory Council for the Fisher College of Business at The Ohio State University. Mr. Nelson has significant
public company accounting and financial expertise. Mr. Nelson has vast experience as a business consultant on a variety of projects
involving areas such as large scale technology implementation, defining strategic initiatives, strategic planning and projects
with significant change requirements. As an “audit committee financial expert”, as defined by applicable SEC Rules,
Mr. Nelson has served the Board well as the Chair of the Audit Committee since 2004. All of these attributes make him well qualified
to continue to serve on the Board.
John B. Blystone, age
64, has served continuously as a director of the Company since 1997 and as the Lead Independent Director of the Company since January
2007. He is the Chair of the Compensation Committee and a member of the Executive Committee. Mr. Blystone served as Chairman of
the Board, President and Chief Executive Officer of SPX Corporation, a global provider of technical products and systems, industrial
products and services, flow technology, cooling technologies and services and service solutions, from December 1995 to December
2004, when he retired. From 1991 to 1995, Mr. Blystone served in various managerial and operating roles with General Electric Company.
Mr. Blystone served as Chairman of the Board of Freedom Group, Inc., which manufactures and markets firearms, ammunition and related
products, from August 2010 to March 2012. Mr. Blystone serves as a director for Blystone Consulting, LLC and as General Partner
of Blystone Capital Partners. Mr. Blystone received his B.A. from the University of Pittsburgh. Mr. Blystone has extensive business
experience in managing and operating both domestic and international operations, including as a chief executive officer of a large
public company. He has expertise in acquisitions, financial and business analysis, and in generally managing issues that face a
large public company. Mr. Blystone’s business acumen, his long service on our Board, and his collegial style and leadership
resulted in his election as the Lead Independent Director of the Company and make him well qualified to serve on the Board.
Committees
of the Board
Chairperson
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Member
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Audit
Committee Financial Expert
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*
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Independent
director under NYSE Rules.
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Executive
Committee
The
Executive Committee acts in place of, and on behalf of, the Board in the intervals between meetings of the Board. The Executive
Committee has all of the authority of the Board, other than the authority (a) to fill vacancies on the Board or on any committee
of the Board, (b) to amend the Company’s Code of Regulations, (c) that has been delegated by the Board exclusively to other
committees of the Board, and (d) that applicable law or the Company’s governing documents do not permit to be delegated
to a committee of the Board.
Audit
Committee
The
Board has determined that each member of the Audit Committee qualifies as an Independent Director under the applicable NYSE Rules
and under SEC Rule 10A-3. The Board believes each member of the Audit Committee is qualified to discharge his or her duties on
behalf of the Company and satisfies the financial literacy
requirement
of the NYSE Rules. The Board has also determined that each of Ms. Anderson, Mr. Davis and Mr. Nelson qualifies as an “audit
committee financial expert” as that term is defined in Item 407(d)(5) of SEC Regulation S-K by virtue of their respective
experience, including that described on pages 22, 22 and 21, respectively, of this Proxy Statement. No member of the Audit Committee
serves on the audit committee of more than two other public companies.
At
least annually, the Audit Committee evaluates its performance, reviewing and assessing the adequacy of its charter and recommending
any proposed changes to the full Board, as necessary to reflect changes in regulatory requirements, authoritative guidance and
evolving practices.
The
Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee is organized and
conducts its business pursuant to a written charter. The primary responsibility of the Audit Committee is to assist the Board
in the oversight of the financial and accounting functions, controls, reporting processes and audits of the Company. Specifically,
the Audit Committee appoints and evaluates the Company’s independent registered public accounting firm and approves the
audit engagement, including fees and terms, and non-audit engagements, if any, of such firm. The Audit Committee, on behalf of
the Board, reviews, monitors and evaluates: (a) the Company’s consolidated financial statements and the related disclosures,
including the integrity and quality of the consolidated financial statements; (b) the Company’s compliance with legal and
regulatory requirements, including the financial reporting process; (c) the Company’s systems of disclosure controls and
procedures and internal control over financial reporting and its accounting and financial controls; (d) the performance, qualifications
and independence of the Company’s independent registered public accounting firm, including the performance and rotation
of the lead and concurring partners of that firm; (e) the performance of the Company’s internal audit function; (f) the
annual independent audit of the Company’s consolidated financial statements; and (g) financial, reporting and compliance
risk management. The Audit Committee also prepares the report that the SEC Rules require be included in the Company’s annual
proxy statement.
Additional
duties and responsibilities set forth in the Audit Committee’s charter include:
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reviewing,
with the Company’s financial management, internal auditors and independent registered
public accounting firm, the Company’s accounting procedures and policies and audit
plans, including staffing, professional services to be provided, audit procedures to
be used, and fees to be charged by the Company’s independent registered public
accounting firm and reviewing the activities of and the results of audits conducted by
the Company’s internal auditors and independent registered public accounting firm;
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reviewing
with the Company’s independent registered public accounting firm the attestation/audit
report of the Company’s independent registered public accounting firm on the effectiveness
of the Company’s internal control over financial reporting filed with the Company’s
Annual Report on Form 10-K;
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establishing
procedures for the receipt, retention and treatment of complaints received by the Company
regarding accounting, internal accounting controls or auditing matters, as well as the
confidential, anonymous submissions by employees of the Company of concerns regarding
questionable accounting or auditing matters;
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setting
and maintaining hiring policies for employees or former employees of the Company’s
independent registered public accounting firm;
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receiving
reports concerning any non-compliance with the Company’s Code of Conduct by any
officers or directors of the Company and approving, if appropriate, any waivers therefrom;
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administering
the Company’s Related Person Transaction Policy and approving, if appropriate,
any “related person” transactions with respect to the Company’s directors
or executive officers;
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●
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reviewing
with senior management the Company’s major financial risk exposures and the steps
being taken to monitor and control them as well as the Company’s guidelines and
policies with respect to risk assessment and risk management and overall antifraud programs
and controls;
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directing
and supervising any special investigations into matters which may come within the scope
of the Audit Committee’s duties; and
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other
matters required by the Financial Accounting Standards Board, the American Institute
of Certified Public Accountants, the Public Company Accounting Oversight Board, the SEC,
NYSE and other similar bodies or agencies which could have an effect on the Company’s
consolidated financial statements.
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Pursuant
to its charter, the Audit Committee has the authority to engage and terminate such legal counsel and other consultants and advisors
as it deems appropriate to carry out its functions, including the sole authority to approve the fees and other terms of retention
of such legal counsel and other consultants and advisors.
The
Audit Committee met four times during Fiscal 2017. The Audit Committee’s report relating to Fiscal 2017 begins on page 70
of this Proxy Statement.
Compensation
Committee
The
Board has determined that each member of the Compensation Committee qualifies as an Independent Director under the applicable
NYSE Rules. The Board has also determined that each member of the Compensation Committee satisfies the additional independence
standards for members of a compensation committee under the applicable NYSE Rules. All members of the Compensation Committee also
qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”), and as “non-employee directors” for purposes of Rule 16b-3 under the Exchange
Act.
The
Compensation Committee periodically reviews and reassesses the adequacy of its charter and recommends any proposed changes to
the full Board, as necessary to reflect changes in regulatory requirements, authoritative guidance and evolving practices. The
Compensation Committee evaluates its performance at least annually.
The
Compensation Committee’s charter sets forth the duties and responsibilities of the Compensation Committee, which include:
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discharging
the Board’s responsibilities relating to compensation of the Company’s Chief
Executive Officer and executive management, including reviewing and approving the compensation
philosophy, policies, objectives and guidelines for the Company’s executive management;
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reviewing
and approving, if it has been deemed appropriate, the Company’s peer group companies
and data sources for purposes of evaluating the Company’s compensation competitiveness
and establishing the appropriate competitive positioning of the levels and mix of compensation
elements;
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reviewing
and approving corporate goals and objectives, including performance goals, relevant to
Chief Executive Officer and executive management compensation and evaluating the performance
of the Chief Executive Officer and executive management in light of the approved corporate
goals and objectives;
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reviewing
and approving the metrics to be used for the determination of payouts under cash-based
and equity-based incentive programs;
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setting
the compensation of the Chief Executive Officer and other executive officers, including
the amount and types of compensation;
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preparing,
producing, reviewing and/or discussing with the Company’s management, as appropriate,
such reports and other information required by applicable laws, rules, regulations or
other standards with respect to executive and director compensation, including those
required for inclusion in the Company’s proxy statement and/or Annual Report on
Form 10-K;
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providing
recommendations to the Board on Company-sponsored compensation-related proposals to be
considered at the Company’s annual shareholder meetings, including Say-on-Pay and
Say-on-Frequency proposals, and the review and consideration of the results of such votes;
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reviewing,
and advising the Board with respect to, Board compensation;
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administering
the Company’s equity-based incentive compensation plans, our other executive incentive
compensation programs, and any other plans and programs which the Board designates;
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reviewing
and discussing with the Company’s management, the Company’s compensation
risk management disclosures required by SEC Rules relating thereto;
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in
consultation with the Nominating and Governance Committee, reviewing, evaluating and
making recommendations to the Board concerning shareholder proposals relating to executive
and/or director compensation issues and the Company’s responses thereto; and
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carrying
out such other roles and responsibilities as the Board may designate or delegate to the
Compensation Committee.
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The
Compensation Committee’s processes and procedures to determine executive compensation, including the use of compensation
consultants and the role of executive officers in the executive compensation decision-making process, are described in the sections
captioned “EXECUTIVE COMPENSATION — Compensation Discussion and Analysis — Role of the Compensation Committee”
and “— Executive Compensation Philosophy and Objectives” beginning on page 32 and page 34, respectively, of
this Proxy Statement.
Pursuant
to its charter, the Compensation Committee has sole authority to retain and terminate any compensation consultant, legal counsel
or other advisor, as the Compensation Committee deems appropriate to assist the Committee in the performance of its duties, including
the sole authority to approve the fees and other terms and conditions of retention. Prior to any such retention, the Compensation
Committee assesses any factors relevant to such consultant’s, legal counsel’s or advisor’s independence from
management, including the factors specified in NYSE’s Corporate Governance Standards or other listing rules, to evaluate
whether the services to be performed will raise any conflict of interest or compromise the independence of such consultant, legal
counsel or advisor.
The
Compensation Committee met three times during Fiscal 2017. The Compensation Discussion and Analysis regarding executive compensation
for our NEOs begins on page 32 of this Proxy Statement, and the Compensation Committee Report for Fiscal 2017 is on page 50 of
this Proxy Statement.
Nominating
and Governance Committee
The
Board has determined that each member of the Nominating and Governance Committee qualifies as an Independent Director under the
applicable NYSE Rules. The Nominating and Governance Committee periodically reviews and assesses the adequacy of its charter and
recommends any proposed changes to the full Board, as necessary to reflect changes in regulatory requirements, authoritative guidance
and evolving practices. The Nominating and Governance Committee evaluates its performance at least annually.
Under
the terms of its charter, the Nominating and Governance Committee is to:
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develop
and periodically review principles of corporate governance and recommend them to the
Board for its approval;
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review
the Articles of Incorporation, the Code of Regulations and the Corporate Governance Guidelines
of the Company and recommend to the Board any changes deemed appropriate;
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review
the procedures and communication plans for shareholder meetings and ensure that required
information regarding the Company is adequately presented;
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review
and make recommendations to the Board regarding (a) the composition and size of the Board
in order to ensure that the Board has the proper expertise and its membership consists
of persons with sufficiently diverse backgrounds, (b) the criteria for the selection
of Board members and Board committee members, and (c) Board policies on age and term
limits for Board members;
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plan
for continuity on the Board as existing Board members leave the Board;
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with
the participation of the Chairman of the Board, identify and recruit candidates for Board
membership, evaluate Board candidates recommended by shareholders and arrange for appropriate
interviews and inquiries into the qualifications of the candidates;
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identify
and recommend individuals to be nominated for election as directors by the shareholders
and to fill vacancies on the Board;
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with
the Compensation Committee, provide for an annual review of succession plans for the
Chairman of the Board and Chief Executive Officer in the case of his resignation, retirement
or death;
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evaluate
the performance of current Board members proposed for re-election, and recommend to the
Board whether such members of the Board should stand for re-election; oversee an annual
evaluation of the Board as a whole; conduct an annual evaluation of the Nominating and
Governance Committee; and oversee the evaluation of the other Board committees and of
management; and
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with
the Chairman of the Board, periodically review the charter and composition of each Board
committee and make recommendations to the Board as to changes in charters, the creation
of additional committees or, with the Chairman of the Board, recommend to the Board individuals
to be chairs and members of Board committees; so that each Board committee is comprised
of members with the appropriate qualities, skills and experience for the tasks of the
committee.
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To
the extent not otherwise delegated to the Audit Committee, the Nominating and Governance Committee is also to:
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review
the relationships between the Company and each director, whether direct or as a partner,
officer or equity owner of an organization that has a relationship with the Company,
for conflicts of interest (all members of the Board are required to report any such relationships
to the Company’s General Counsel);
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address
actual and potential conflicts of interest a Board member may have and issue to the Board
member having an actual or potential conflict of interest instructions on how to conduct
himself/herself in matters before the Board which may pertain to such an actual or potential
conflict of interest; and
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make
appropriate recommendations to the Board concerning determinations necessary to find
a director to be an Independent Director.
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The
Nominating and Governance Committee met one time during Fiscal 2017.
Board’s
Role in Risk Oversight
Our
management is principally responsible for defining, identifying and assessing the various risks facing our Company, formulating
enterprise risk management policies and procedures and managing our risk exposures on a day-to-day basis. A risk committee, comprised
of senior executives, directs this process. Management provides an annual risk assessment to the Board, with quarterly updates.
The Board’s responsibility is to oversee our risk management processes by understanding and evaluating management’s
identification, assessment and management of the Company’s critical risks.
The
Board as a whole has responsibility for this risk oversight, assisted by the Audit Committee and the Compensation Committee. Areas
of focus include strategic, operational, liquidity, market, financial, reporting, succession, compensation, compliance and other
risks. The Audit Committee is tasked with oversight of financial, reporting and compliance risk management, the Compensation Committee
is tasked with oversight of compensation risk management, and the Board as a whole oversees all other risk management.
TRANSACTIONS
WITH CERTAIN RELATED PERSONS
Review,
Approval or Ratification of Transactions with Related Persons
The
Company’s policy with respect to related person transactions is addressed in the Company’s written Related Person
Transaction Policy (the “Policy”), which supplements the Company’s written Code of Conduct provisions addressing
“conflicts of interest”. As described in the Code of Conduct, conflicts of interest can arise when an employee’s
or a director’s personal or family relationships, financial affairs or an outside business involvement may adversely influence
the judgment or loyalty required for performance of his or her duties to the Company. In cases where there is an actual or even
the appearance of a conflict of interest, the individual involved is required to notify his or her supervisor or the Company’s
Ethics Officer. The supervisor will then consult with management and the Ethics Officer, as appropriate. The Code of Conduct provides
that any action or transaction in which the personal interest of an executive officer or a director may be in conflict with those
of the Company is to be reported to the Audit Committee. The Audit Committee must investigate and, if it is determined that such
action
or
transaction would constitute a violation of the Code of Conduct, the Audit Committee is authorized to take any action it deems
appropriate.
The
Policy was adopted by the Board and is administered by the Audit Committee and the Company’s General Counsel. The Policy
applies to any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships,
in which: the Company participates, directly or indirectly; the amount involved exceeds or is expected to exceed $120,000; and
a “related person” has, had or will have a direct or indirect material interest. Under the Policy, a “related
person” is any person:
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who
is or was an executive officer, a director or a director nominee of the Company, or an
immediate family member of any such individual; or
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who
is or was the beneficial owner of more than 5% of the Company’s outstanding common
shares, or an immediate family member of any such individual.
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All
related person transactions are to be brought to the attention of the Company’s management who will then refer each matter
to the Company’s General Counsel and the Audit Committee. Each director, director nominee or executive officer of the Company
must notify the Company’s General Counsel in writing of any interest that such individual or an immediate family member
of such individual has, had or may have, in a related person transaction. In addition, any related person transaction proposed
to be entered into by the Company must be reported to the Company’s General Counsel by the employee of the Company who has
authority over the transaction. On an annual basis, each director, director nominee and executive officer of the Company must
complete a questionnaire designed to elicit information about existing and potential related person transactions. Any potential
related person transaction that is raised will be analyzed by the Company’s General Counsel, in consultation with management
and with outside counsel, as appropriate, to determine whether the transaction, arrangement or relationship does, in fact, qualify
as a related person transaction requiring review by the Audit Committee under the Policy.
Under
the Policy, all related person transactions (other than those deemed to be pre-approved or ratified under the terms of the Policy)
will be referred to the Audit Committee for approval (or disapproval), ratification, revision or termination. Whenever practicable,
a related person transaction is to be reviewed and approved or disapproved by the Audit Committee prior to the effectiveness or
consummation of the transaction. If the Company’s General Counsel determines that advance consideration of a related person
transaction is not practicable, the Audit Committee will review and, in its discretion, may ratify the transaction at the Audit
Committee’s next meeting. However, the Company’s General Counsel may present a related person transaction arising
between meetings of the Audit Committee to the Chair of the Audit Committee who may review and approve (or disapprove) the transaction,
subject to ratification by the Audit Committee at its next meeting if appropriate. If the Company becomes aware of a related person
transaction not previously approved under the Policy, the Audit Committee will review the transaction, including the relevant
facts and circumstances, at its next meeting and evaluate all options available to the Company, including ratification, revision,
termination or rescission of the transaction, and take the course of action the Audit Committee deems appropriate under the circumstances.
No
director may participate in any approval or ratification of a related person transaction in which the director or an immediate
family member of the director is involved. The Audit Committee may only approve or ratify those transactions the Audit Committee
determines to be in the Company’s best interest. In making this determination, the Audit Committee will review and consider
all relevant information available to it, including:
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the
terms (including the amount involved) of the transaction and the related person’s
interest in the transaction and the amount of that interest;
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the
business reasons for the transaction and its potential benefits to the Company, and whether
the transaction was undertaken in the ordinary course of the Company’s business;
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whether
the terms of the transaction are fair to the Company and no less favorable to the Company
than terms that could be reached with an unrelated third party;
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the
impact of the transaction on the related person’s independence; and
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whether
the transaction would present an improper conflict of interest for any director, director
nominee or executive officer of the Company, taking into account the size of the transaction,
the overall financial position of the related person, the direct or indirect nature of
the related person’s
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interest
in the transaction and the ongoing nature of any proposed relationship and any other
factors the Audit Committee deems relevant.
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Any
related person transaction previously approved or ratified by the Audit Committee or otherwise already existing that is ongoing
in nature is to be reviewed by the Audit Committee annually.
Under
the terms of the Policy, the following related person transactions are deemed to be pre-approved or ratified (as appropriate)
by the Audit Committee even if the aggregate amount involved would exceed $120,000:
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interests
arising solely from ownership of the Company’s common shares if all shareholders
receive the same benefit on a pro rata basis (
i.e.
, dividends);
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compensation
to an executive officer of the Company, as long as the executive officer is not an immediate
family member of another executive officer or a director of the Company and the compensation
has been approved by the Compensation Committee or is generally available to the Company’s
employees;
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compensation
to a director for services as a director if the compensation is required to be reported
in the Company’s proxy statements;
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interests
deriving solely from a related person’s position as a director of another entity
that is a party to the transaction;
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interests
deriving solely from the related person’s direct or indirect ownership of less
than 10% of the equity interest (other than a general partnership interest) in another
person which is a party to the transaction; and
|
|
●
|
transactions
involving competitive bids.
|
In
addition, the Audit Committee will presume that the following transactions do not involve a material interest:
|
●
|
transactions
in the ordinary course of business with an entity for which a related person serves as
an executive officer, provided (i) the affected related person did not participate in
the decision of the Company to enter into the transaction, and (ii) the aggregate amount
involved in any related category of transactions in a 12-month period is not greater
than the least of (a) $1,000,000, or (b) 2% of the other entity’s consolidated
gross revenues for such other entity’s most recently completed fiscal year, or
(c) 2% of the Company’s consolidated gross revenues for the Company’s most
recently completed fiscal year;
|
|
●
|
donations,
grants or membership payments to non-profit organizations, provided (a) the affected
related person did not participate in the decision of the Company to make such payments,
and (b) the aggregate amount in a 12-month period does not exceed the lesser of $500,000
or 1% of the non-profit organization’s consolidated gross revenues for its most
recently completed fiscal year; and
|
|
●
|
Company
use of facilities (such as dining facilities and clubs) if the charges for such use are
consistent with charges paid by unrelated third parties and are fair, reasonable and
consistent with similar services available for similar facilities.
|
Transactions
with Related Persons
The
Company is a party to certain agreements relating to the rental of aircraft to and from JMAC, Inc., a private investment company
(“JMAC”), which is owned by John P. McConnell, Chairman of the Board and Chief Executive Officer of the Company, and
members of his family. JMAC Air, LLC (“JMAC Air”) is owned by JMAC. Under the agreement with JMAC Air, the Company
may lease aircraft owned by JMAC as needed for a rental fee per flight; and under the agreement with the Company, JMAC is allowed
to lease aircraft operated by the Company, on a per-flight basis, when the Company is not using the aircraft. The Company also
makes its pilots available for a per-day charge, to JMAC Air and Blue Jackets Air, LLC (“Blue Jackets Air”) which
primarily provides air transportation services for the Columbus Blue Jackets (“CBJ”), a National Hockey League (“NHL”)
team of which John P. McConnell is the majority owner. The rental fees paid to the Company under the per-flight rental agreements
are set based on Federal Aviation Administration (“FAA”) regulations. The Company believes the rental fees set in
accordance with such FAA regulations for Fiscal 2017 exceeded the direct operating costs of the
aircraft
for such flights. Also, based on quotes for similar services provided by unrelated third parties, the Company believes that the
rental rates paid to JMAC are no less favorable to the Company than those that could be obtained from unrelated third parties.
For
Fiscal 2017: (a) the Company paid an aggregate amount of $216,385 under the JMAC Air lease agreement and received $39,694 for
airplane rental and pilot services; and (b) the Company received an aggregate amount of $1,000 from Blue Jackets Air for pilot
services.
During
Fiscal 2017, the Company, either directly or through business expense reimbursement, paid approximately $165,618 to Double Eagle
Club, a private golf club owned by the McConnell family (the “Club”). The Company uses the Club’s facilities
for Company functions and meetings, and for meetings and entertainment for customers, suppliers and other business associates.
Amounts charged by the Club to the Company are no less favorable than those that are charged to unrelated members of the Club
for the same type of use.
During
Fiscal 2017, the Company, either directly or indirectly, paid approximately $161,350 to the CBJ for suite expenses, game tickets
and special event tickets, often used in connection with meetings and entertainment for customers, suppliers and other business
associates at prices no less favorable than those charged to third parties.
During
Fiscal 2017, the Company paid $150,000 in naming rights and sponsorship recognition for the CBJ winter park, a community outdoor
skating rink and entertainment area near Nationwide Arena, managed by the CBJ in a public park setting.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Role
of the Compensation Committee
The
Compensation Committee reviews and administers the compensation for the Chief Executive Officer (the “CEO”) and other
members of executive management of the Company, including the named executive officers (the “NEOs”) identified in
the “Fiscal 2017 Summary Compensation Table” beginning on page 51 of this Proxy Statement. The Compensation Committee
also oversees the Company’s annual incentive plan for executives, long-term incentive program, restricted common share awards,
stock option plans, and non-qualified deferred compensation plans. A more detailed discussion of the duties of the Compensation
Committee is set forth in the section captioned “PROPOSAL 1: ELECTION OF DIRECTORS – Committees of the Board –
Compensation Committee” starting on page 27.
The
Compensation Committee is comprised of four directors, each of whom qualifies as an Independent Director under the applicable
NYSE Rules, and is free from any relationship (including disallowed consulting, advisory or other compensatory arrangements) prohibited
by applicable laws, rules or regulations or that, in the opinion of the Board, is material to his or her ability to be independent
from management of the Company in connection with the duties of a member of the Compensation Committee or to make independent
judgments about the Company’s executive compensation. Each member also qualifies as an “outside director” for
purposes of Section 162(m) of the Internal Revenue Code and as a “non-employee director” for purposes of Rule 16b-3
under the Exchange Act.
The
Compensation Committee has sole authority to retain and terminate such compensation consultants, legal counsel and other advisors,
as the Compensation Committee deems appropriate to fulfill its responsibilities, including sole authority to approve the fees
and other terms of retention. The Compensation Committee has retained an independent compensation consultant, Willis Towers Watson,
for the purpose of assisting the Compensation Committee in fulfilling its responsibilities, including providing advice on the
amount and form of executive and director compensation. Management also periodically retains Willis Towers Watson to provide additional
services to the Company with respect to advising on compensation matters. Fees for these additional services were less than $113,000
in Fiscal 2017. The Compensation Committee has conducted an assessment, which included the consideration of the six factors specified
in the NYSE Corporate Governance Standards and SEC Rule 10C-1(b)(4), to evaluate whether the services performed by Willis Towers
Watson raise a conflict of interest or compromise the independence of Willis Towers Watson. Based upon this assessment, the Compensation
Committee determined that Willis Towers Watson qualifies as an independent compensation consultant and its work does not raise
any conflict of interest.
While
the Compensation Committee retains Willis Towers Watson, in carrying out assignments for the Compensation Committee, Willis Towers
Watson may interact with the Company’s management including the Vice President-Human Resources, the Vice President-Administration,
General Counsel and the Executive Vice President and Chief Financial Officer and their respective staffs in order to obtain information.
In addition, Willis Towers Watson may, in its discretion, seek input and feedback from management regarding its work product prior
to presentation to the Compensation Committee in order to confirm information is accurate or address certain issues.
The
agendas for the Compensation Committee’s meetings are determined by the Compensation Committee’s Chair with assistance
from the CEO, the Vice President-Human Resources and the Vice President-Administration, General Counsel. These individuals, with
input from the Compensation Committee’s compensation consultant, make compensation recommendations for the NEOs and other
executive officers. However, decisions regarding the compensation of the NEOs are made solely by the Compensation Committee.
After
each regularly scheduled meeting, the Compensation Committee may meet in executive session. When meeting in executive session,
the Compensation Committee may have a session with the CEO only, a session with the compensation consultant only, and a session
with Compensation Committee members only. The Compensation Committee Chair reports on Compensation Committee actions to the full
Board at the following Board meeting.
Stock
Ownership Guidelines
In
order to further emphasize the stake that the Company’s directors and senior executives have in fulfilling the goal of building
and increasing shareholder value, and to deepen the resolve of executive leadership to fulfill that goal, the Company has established
stock ownership guidelines for directors and senior executives.
Stock
Ownership Guidelines
|
Covered
Person(s)
|
Multiple
of base salary or
annual cash retainer, as applicable
|
Chief
Executive Officer
|
5
times
|
Directors
|
5
times
|
Chief
Financial Officer
|
3.5
times
|
Chief
Operating Officer
|
3.5
times
|
Senior
Vice Presidents and Business Unit Presidents
|
2.5
times
|
Other
Senior Executives
|
1.25
times
|
For
purposes of these guidelines, stock ownership includes common shares held directly or indirectly, common shares held in an executive’s
401(k) plan account(s) and theoretical common shares credited to the bookkeeping account of an executive or a director in one
of the Company’s non-qualified deferred compensation plans. Each covered executive or director is expected to attain the
target level of stock ownership within five years from the date he or she is appointed or elected to the position.
According
to the stock ownership guidelines, once an executive or a director reaches the target ownership level, and so long as those common
shares are retained and the individual remains subject to the same guideline level, there is no obligation to purchase additional
common shares as a result of fluctuations in the price of the Company’s common shares.
All
directors and executive officers have met their target ownership levels.
Anti-Hedging
Policy
The
Company prohibits directors, officers (including the NEOs) and other key employees of the Company from engaging in hedging transactions
with respect to common shares of the Company.
Company
Compensation Philosophy
A
basic philosophy of the Company has long been that employees should have a meaningful portion of their total compensation tied
to performance and that the Company should use incentives which are intended to drive and reward performance. In furtherance of
this philosophy, there is broad-based participation among full-time, non-union employees of the Company in some form of incentive
compensation program. These programs include cash
profit-sharing
programs, which compute payouts based on a fixed percentage of profits, and annual incentive bonus programs that primarily tie
bonuses to the operating results of the Company or the applicable business unit.
The
Company has also made broad-based grants of equity awards periodically to a number of salaried employees below the executive level.
Executive
Compensation Philosophy and Objectives
The
Company’s objectives with respect to executive compensation are to attract and retain highly-qualified executives, to align
the interests of management with the interests of shareholders and to provide incentives, based primarily on Company performance,
for reaching established Company goals and objectives. To achieve these objectives, the Compensation Committee has determined
that total compensation for executives will exhibit the following characteristics:
|
●
|
It
will be competitive in the aggregate, using broad-based business comparators to gauge
the competitive market;
|
|
●
|
It
will be performance-oriented and highly leveraged, with a substantial portion of the
total compensation tied to performance, primarily that of the Company and/or that of
the applicable business unit;
|
|
●
|
It
will align the interests of management and the interests of shareholders; and
|
|
●
|
It
will promote long-term careers at the Company.
|
The
Company’s practice has long been that executive compensation be highly leveraged. The Company’s compensation program
emphasizes performance-based compensation (pay-at-risk) that promotes the achievement of short-term and long-term Company objectives.
The Company believes it is appropriate to provide a balance between incentives for short-term performance and incentives for long-term
profitability of the Company. The Company’s executive compensation program, therefore, includes both an annual cash incentive
bonus program and a long-term incentive compensation program. The Company also believes it is appropriate for long-term incentives
to have a cash compensation component and an equity-based compensation component, which incentivize executives to drive Company
performance and align their interests with those of the Company’s shareholders. The individual components of executive compensation
are discussed below.
In
fulfilling its responsibilities, the Compensation Committee annually reviews certain market compensation information with the
assistance of its independent compensation consultant, Willis Towers Watson, who is directly engaged by the Compensation Committee
to prepare the information. This includes information regarding compensation paid to officers with similar responsibilities from
a broad-based group of more than 450 companies (the “comparator group”). A list of the entities in the comparator
group is set forth on Appendix I to this Proxy Statement.
The
comparator group is comprised predominantly of manufacturing companies, maintained in the executive compensation data base of
Willis Towers Watson at the time the study is conducted, with median revenues of $5.8 billion. Changes in the comparator group
occur as companies begin or cease participation in the data base, due to a sale, merger or acquisition of the companies included
or for other reasons. The Compensation Committee neither selects nor specifically considers the individual companies which are
in the comparator group. For comparison purposes, due to variances in the size of the companies in the comparator group, regression
analysis, which is an objective analytical tool used to determine the relationship between data, is used to adjust data. The Compensation
Committee believes that using this broad-based comparator group minimizes the effects of changes to the group due to changes in
data base participation, lessens the impact a single entity can have on the overall data, provides more consistent results and
better reflects the market in which the Company competes for executive talent.
During
its review process, the Compensation Committee meets directly with its compensation consultant and reviews comparator group information
with respect to base salaries, annual cash incentive bonuses and long-term incentive compensation programs. The Compensation Committee
considers comparator group information provided by the compensation consultant as an important factor in determining the appropriate
levels and mix of executive compensation.
For
its June 2015 meeting, the Compensation Committee had Willis Towers Watson prepare and review information on a more focused group
of companies to assure that compensation information from this group was not significantly different than the information obtained
from the broad-based comparator group discussed above. After reviewing this information, the Compensation Committee determined
that the results of the two groups were not significantly different. The Compensation Committee continues to believe that the
use of a broad-based comparator group provides more consistent information and is preferable for the reasons set forth above.
Base
salaries of the NEOs and other executives generally fall below market median comparables developed from the comparator group,
although the actual base salaries of the NEOs and other executives vary from individual to individual and from position to position
due to factors such as time in the position, performance, experience, internal equity and other factors the Compensation Committee
deems appropriate. Annual cash incentive bonus opportunities to be paid to the NEOs and other executives for achieving targeted
levels of performance are generally above what the compensation consultant considers market median for annual bonuses because
base salaries are intentionally set below market median comparables. In setting normal annual long-term incentive compensation
opportunities of the NEOs and other executives, the Compensation Committee generally starts with the market median developed by
the compensation consultant, and then makes adjustments the Compensation Committee deems appropriate.
While
comparator group information is a factor considered in setting compensation, where a specific NEO’s or other executive’s
annual cash incentive bonus and long-term incentive compensation fall relative to the market median developed from the comparator
group will vary based upon internal equity and other factors listed in the preceding paragraph. Annual cash incentive bonuses
and long-term incentive compensation actually paid may vary significantly depending on Company and/or business unit performance
during the applicable year(s).
The
Compensation Committee uses tally sheets as a tool to assist in its review of executive compensation. These tally sheets contain
the components of the CEO’s and other NEOs’ current and historical compensation, including base salary, annual cash
incentive bonuses and long-term incentive compensation. These tally sheets and other information provided to the Compensation
Committee also show the estimated compensation that would be received by the CEO and other NEOs under certain scenarios, including
in connection with a change in control of the Company.
While
prior compensation or amounts realized or realizable from prior awards are given some consideration, the Compensation Committee
believes that the current and future performance of the Company, its business units and the individual executive officers should
be the most significant factors in setting the compensation for the Company’s executive officers.
The
CEO’s performance is annually evaluated by the Compensation Committee and/or the full Board. The criteria considered include:
overall Company performance; overall leadership; the CEO’s performance in light of, and his development and stewardship
of, the Company’s philosophy and its current and long-term strategic plans, goals and objectives; development of an effective
senior management team; appropriate positioning of the Company for future success; and effective communications with the Board
and stakeholders. At the request of Mr. McConnell, his base salary and overall compensation have been well below market median
levels. The Compensation Committee also evaluates the performance of the other NEOs when annually reviewing and setting executive
compensation levels. The criteria considered for the other NEOs are similar to those for the CEO, adjusted to reflect each NEO’s
position, with a focus on the applicable business unit for any NEO who is a business unit President.
Compensation
Risk Analysis
The
Company’s executive compensation programs are designed to be balanced, with a focus on both achieving consistent, solid
year-over-year financial results and growing shareholder value over the long term. The highest amount of compensation can be attained
under these programs, taken as a whole, through consistently strong performance over sustained periods of time. This provides
strong incentives for achieving success over the long term and avoiding excessive risk-taking in the short term.
The
Company has long believed that compensation incentives, based primarily upon Company earnings or similar performance measures,
have played a vital role in the success of the Company. Making profit-sharing, bonuses and/or other incentive payments broadly
available to all levels of non-union employees has fostered an ownership mentality throughout the workforce which has resulted
in long-term employment and a desire to drive
consistent
financial performance. The Company’s culture, aided by this ownership mentality, is focused on striving to continually improve
performance and achieve long-term success without engaging in excessive risk-taking.
We
do not believe that our compensation incentives encourage excessive risk-taking for the following reasons:
|
●
|
Base
salaries are a sufficient component of total compensation, minimizing the need for excessive
risk-taking.
|
|
●
|
The
performance goals under the annual cash incentive bonus plan are based upon realistic
earnings per share (“EPS”), business unit operating income (“EOI”)
and economic value added (“EVA”) levels, reviewed and approved by the Board,
that the Compensation Committee believes can be attained without taking inappropriate
risks or materially deviating from normal operations, expected continuous improvement
or approved strategy.
|
|
●
|
The
long-term cash performance awards and performance share awards are based upon performance
over three-year periods which mitigates the taking of short-term risk.
|
|
●
|
In
setting targets for annual cash incentive bonuses and long-term incentive compensation,
restructuring charges and non-recurring items are eliminated and results are adjusted
to eliminate inventory holding gains or losses (where appropriate for the Company or
the business unit under consideration), which limit rewards for risky behavior outside
the ordinary course of business.
|
|
●
|
Stock
options generally contain a three-year incremental vesting schedule and provide rewards
based on the long-term performance of our common shares.
|
|
●
|
Restricted
common share awards generally have a cliff vesting period of three years and further
link executive compensation to the long-term value of Worthington’s common shares.
|
The
Company’s stock ownership guidelines and anti-hedging policy also drive stock ownership among executives, again aligning
their interests with the interests of Worthington’s shareholders and the long-term growth in the value of the Company’s
common shares. This is most evident in the shareholdings of CEO, John P. McConnell, who is by far the Company’s largest
shareholder. His potential financial reward for long-term growth in the value of the Company’s common shares far outweighs
any short-term compensation he may receive as a result of any excessive short-term risk-taking.
The
Compensation Committee has granted special performance-based/time-vested restricted common share awards to select NEOs in recent
years. These awards are viewed as particularly appropriate as they are earned by top management only when the Worthington common
share price increases significantly and, thus, the Company’s shareholders are also significantly benefited. The target price
was set at more than 44% above the then all-time high average closing price of the Company’s common shares for any consecutive
thirty-day period prior to the applicable grant date. While these awards do require a significant increase in the price of Worthington’s
common shares to vest, the Compensation Committee believes that the common share price targets for these awards are reasonable
targets which can be met with steady consistent growth in the Company’s performance without the need for any undue risk-tasking.
The time-based vesting and holding period requirements mitigate the incentive for risky behavior intended to drive only a short-term
common share price increase, and instead encourage activity that would lead to steady increases in financial results and a common
share price which can be maintained.
Cash
Compensation Earned in Fiscal 2017 and Company Performance
Short-term
cash compensation includes the base salary and the annual cash incentive bonus paid to the Company’s executives, including
the CEO and the other NEOs. Effective September 2016, base salaries for most executives increased 3%, with larger increases being
given to certain executives, such as those promoted to new positions or given broader responsibilities. Mr. McConnell requested
that he not receive a base salary increase for Fiscal 2017. Base salaries paid in Fiscal 2017 were generally below median levels
of the comparator group.
Consistent
with the philosophy of our executive compensation program, annual cash incentive bonuses for the NEOs for Fiscal 2017 were up
from Fiscal 2016, reflecting the strong financial results, including record earnings per share. For Fiscal 2017, Corporate, Steel
Processing, and Pressure Cylinders annual incentive bonuses were earned at 115%, 130% and 89% of target, respectively, after being
paid at 101%, 99%, and 45%, respectively, for Fiscal 2016.
The
amounts of long-term cash and equity awards earned for the three-year period ended Fiscal 2017 were also up, reflecting the record
results in both Fiscal 2017 and Fiscal 2016. However, the Company’s weaker performance in Fiscal 2015 negatively impacted
the results for the three-year periods ended with Fiscal 2017 and Fiscal 2016. Thus, despite the strong performance by the Company
in both Fiscal 2017 and Fiscal 2016, long-term incentive payouts for the three-year periods ended with each of those fiscal years
below 100% of target levels. Long-term incentive cash and equity payouts for the three-year period ended Fiscal 2017 were earned
at 92% of target at Corporate, 46% at Steel Processing, and 46% at Pressure Cylinders after being paid out at 70% at Corporate,
78% at Steel Processing and 35% at Pressure Cylinders for the three-year period ended Fiscal 2016.
The
Compensation Committee believes that the Company performed well in Fiscal 2017, achieving record earnings per diluted common share,
led by strong results in Steel Processing. The strong year in Steel Processing was made even stronger due to its price risk management
practices which help manage inventory and steel costs, and increases in steel prices which resulted in inventory holding gains
in the first and fourth quarters of the year. (These inventory holding gains were adjusted out in calculating results for incentive
compensation.) Pressure Cylinders had mixed results, as a strong performance in the consumer products business was partially offset
by weakness in some industrial products and soft demand for oil and gas equipment products, particularly in the beginning of the
year, and expenses related to the AMTROL acquisition. The Company has cut the work force and other variable costs and generally
right-sized its oil and gas equipment and its Engineered Cabs businesses and both of those operations showed some improvement
toward the end of the year. The Company’s joint ventures continued to perform well, although equity income was down 4% from
a strong Fiscal 2016.
The
Company is seeing continued success from Transformation 2.0 which is being driven throughout the Company. This program provides
an enhanced playbook using rapid Kaizen events, lean principles and value-based pricing analysis and strategies. Management believes
that this effort has had a positive impact throughout our businesses.
The
direct relationship of annual incentive compensation earned by the Company’s NEOs to Company performance is exemplified
by the amount of compensation earned by the NEOs not only in Fiscal 2017 but also in past years as follows:
Fiscal
Year
|
Performance
|
Annual Incentive Bonuses Earned
|
2009
|
Difficult
year due to recession
|
No
bonus payouts
|
2010
|
Performance
improved and exceeded expected levels, aided by the Transformation and other actions taken by management in response to the
depressed market conditions
|
Annual
incentive bonuses earned
|
2011
|
Strong
growth in earnings
|
Annual
incentive bonuses were paid at close to maximum levels
|
2012
|
EPS
continued to grow, but targets were higher
|
Annual
incentive bonuses earned at 110% of target levels, but down 20% - 40% from Fiscal 2011 amounts
|
2013
|
Diluted
EPS, as reported, was up 15% (21% excluding the effect of inventory holding gains or losses and restructuring charges), but
targets were higher
|
Annual
incentive bonuses for Corporate executives were down 15% - 30% from Fiscal 2012 amounts
|
2014
|
Both
diluted EPS and adjusted EPS were up approximately 10%
|
Annual
incentive bonuses for Corporate executives were up between 13% and 17% from the lower levels in Fiscal 2013
|
Fiscal
Year
|
Performance
|
Annual Incentive Bonuses Earned
|
2015
|
Weaker
performance caused largely by challenging conditions in certain key markets
|
Annual
incentive bonuses of the NEOs were earned at 63% - 77% of target levels and were down on average 29% from Fiscal 2014
|
2016
|
Improved
results, with then record EPS, despite continued challenges in certain markets
|
Annual
incentive bonuses of the Corporate and Steel Processing NEOs were earned at approximately 100% of target levels and were up
from Fiscal 2015
|
2017
|
Continued
improved results, with record EPS despite continued challenges in certain markets
|
The
annual incentive bonuses of the NEOs were up again, with Corporate payouts reaching 115%, Steel Processing 130%, and Pressure
Cylinders 89% of target levels
|
The
relationship of incentive compensation earned to Company results is also reflected in payments which have been earned under the
long-term performance cash and performance share awards.
Performance
Period
(Fiscal
years)
|
Performance
|
Results
|
2007-2009
|
Performance
impacted by recession
|
No
long-term performance-based incentive compensation was paid
|
2008-2010
|
Performance
impacted by recession
|
No
long-term performance-based incentive compensation was paid
|
2009-2011
|
Strong
performance in Fiscal 2011 could not overcome the drag early in the performance period caused by the recession
|
No
long-term performance-based incentive compensation was paid
|
2010-2012
|
Strong
performance in Fiscal 2011 and 2012
|
Long-term
cash and long-term performance share incentive compensation was earned at somewhat above threshold levels (Corporate payout
at 61% of target)
|
2011-2013
|
Continued
improvement of results
|
Long-term
cash and long-term performance share incentive compensation was earned between target and maximum levels
|
2012-2014
|
Continued
improvement of results
|
Long-term
cash and long-term performance share incentive compensation was earned between target and maximum levels
|
2013-2015
|
Weaker
results in Fiscal 2015
|
Corporate
and Steel Processing payouts fell below target levels. Payouts at 88% and 89%, respectively
|
Performance
Period
(Fiscal years)
|
Performance
|
Results
|
2014-2016
|
Record
Fiscal 2016, but Fiscal 2015 performance hurt results for the 3-year period
|
Corporate
and Steel Processing payouts fell between target and threshold, paying out at 70% and 78%, respectively of target levels,
as performance targets were higher
|
2015-2017
|
Despite
another record year, the weak results in Fiscal 2015 kept payouts below target levels
|
Long-term
cash and performance share incentive compensation was earned at 92% of target for Corporate executives, and 46% of target
for Steel Processing and Pressure Cylinders executives
|
The
Company’s financial position continues to strengthen as the Company generated a significant amount of cash during Fiscal
2017. This enabled the Company to pay most of the purchase price for the AMTROL acquisition (approximately $283.0 million) out
of Company cash. On July 28, 2017, the Company completed a $200.0 million public offering for long-term senior notes maturing
in 2032, and its balance sheet remains on a very sound footing. As of July 28, 2017, the Company had in place $774.4 million of
long-term debt, issued on favorable terms maturing in tranches between 2020 and 2032. The Company also has in place a revolving
credit facility with total commitments of $500 million, maturing April 2020.
The
Company has also been able to reward its shareholders by steadily increasing its quarterly dividend from $0.12 per share for Fiscal
2012, to $0.13 per share for Fiscal 2013, to $0.15 per share for Fiscal 2014, to $0.18 per share for Fiscal 2015, to $0.19 per
share for Fiscal 2016, to $0.20 per share for Fiscal 2017, and to $0.21 for the first quarter of Fiscal 2018.
The
Company did not buy back any stock through its buyback program during Fiscal 2017, in anticipation of the AMTROL acquisition.
However, it intends to remain active in this program, under appropriate conditions.
Say-on-Pay
Consideration
At
the Company’s 2016 Annual Meeting of Shareholders, the Company’s shareholders approved the executive compensation
as disclosed in the proxy statement for that Annual Meeting, with more than 88% of the common shares represented by those shareholders
present in person or represented by proxy at the 2016 Annual Meeting voting for approval. The vote for approval was in excess
of 96%, excluding broker non-votes. The Compensation Committee evaluated the results of this strongly supportive advisory vote,
together with the other factors and data discussed in this Compensation Discussion and Analysis, in determining executive compensation
policies and making executive compensation decisions.
Compensation
Components
Base
Salaries
Base
salaries for the NEOs and other executive officers are set to reflect the duties and responsibilities inherent in each position,
individual levels of experience, performance, market compensation information, internal equity among positions in the Company,
and the Compensation Committee’s judgment. The Compensation Committee annually reviews information regarding compensation
paid by the comparator group to executive officers with similar responsibilities. It is the Compensation Committee’s intent,
in general, to set base salaries below market median levels, with consideration given to the factors listed above, and have total
annual cash compensation driven by bonuses.
Effective
June 27, 2017, the Compensation Committee approved new base salaries which will become effective August 27, 2017, as follows:
John McConnell - $663,063; Andy Rose - $503,773; Mark Russell - $557,333; Geoff Gilmore - $504,000; and John Lamprinakos - $375,000.
These base salaries reflect increases of 3% for Messrs. McConnell, Rose and Russell and of 5% for Mr. Gilmore and 17% for Mr.
Lamprinakos who were in new positions beginning in Fiscal 2017.
The
Company’s CEO, John P. McConnell accepted the 3% increase in his base salary, after having turned down a salary increase
recommended for him by the Compensation Committee in each of the prior two years.
Annual
Incentive Compensation
The
NEOs and certain other key employees of the Company participate in the Company’s annual cash incentive bonus program under
which annual bonus awards are tied to attainment of target results. These awards are generally tied to achieving specified levels
(threshold, target and maximum) of corporate and/or business unit performance for the applicable 12-month performance period.
The type of performance measured and the weighting of those measurements is shown below. Restructuring charges and non-recurring
gains and losses are excluded from all calculations, and the impact of inventory holding gains or losses are factored out in calculating
corporate EPS and Steel Processing business unit EOI.
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For
corporate executives
, the goals are tied to corporate performance.
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Payouts
are generally tied to achieving specified levels (threshold, target and maximum) of corporate
EVA and corporate EPS (adjusted as noted above), with each performance measure carrying
a 50% weighting.
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For
business unit executives
, the goals are tied to both corporate performance and the
performance of their respective business units.
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Payouts
are generally tied to achieving specified levels (threshold, target and maximum) of adjusted
corporate EPS, 20% weighting; business unit EOI (adjusted as noted above), 30% weighting;
and business unit EVA, 50% weighting.
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For
performance falling between threshold and target or between target and maximum, the award is linearly prorated. If threshold levels
are not reached for any performance measure, no bonus will be paid under that performance metric.
Annual
incentive bonuses are paid within a reasonable time following the end of the performance period in cash, unless the Board specifically
provides for a different form of payment. In the event of a change in control of the Company, followed by the actual or constructive
termination of a participant’s employment during the relevant performance period, the annual incentive bonus award of the
participant would be considered to be earned at the target level and payable as of the date of actual or constructive termination
of employment.
Annual
incentive bonuses for the NEOs for Fiscal 2017 were up for Fiscal 2017 as results reached 115% of target levels for Corporate,
130% for Steel Processing and 89% for Pressure Cylinder executives.
Annual
incentive bonuses earned by the NEOs for Fiscal 2017, Fiscal 2016 and Fiscal 2015, are shown in the “Fiscal 2017 Summary
Compensation Table” beginning on page 51 of this Proxy Statement in the “Annual Incentive Bonus Award” column
within “Non-Equity Incentive Plan Compensation”. The Compensation Committee made discretionary cash bonus awards of
$52,320 to Mr. Gilmore in Fiscal 2017, and $6,750 in Fiscal 2016 in recognition of his service.
On
June 27, 2017, the Compensation Committee granted annual incentive bonus awards to the NEOs for Fiscal 2018. These annual cash
incentive bonus awards are shown in the “Annual Cash Incentive Bonus Awards Granted for Fiscal 2018” table beginning
on page 60 of this Proxy Statement.
Long-Term
Incentive Compensation
The
Compensation Committee has implemented a long-term incentive compensation program for the NEOs and other executives, which consists
of:
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Annual
stock option grants;
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Long-term
performance share awards based on achieving measurable financial results over a three-fiscal-year
period;
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Long-term
cash performance awards based on achieving measurable financial results over a three-
fiscal-year period; and
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Restricted
common share awards.
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Long-term
performance share awards, long-term cash performance awards, and restricted common share awards are made under the Worthington
Industries, Inc. Amended and Restated 1997 Long-Term Incentive Plan (the “1997 LTIP”). Stock options are generally
granted out of one of the Company’s stock option plans or under the 1997 LTIP. All of these plans have been approved by
the Company’s shareholders.
The
Compensation Committee added awards of restricted common shares to the long-term incentive program beginning in Fiscal 2012, and
somewhat reduced the size of the other long-term incentive awards. Beginning with awards for Fiscal 2014, the Compensation Committee
increased the portion of long-term incentive awards made in the form of restricted common shares and correspondingly reduced the
portion provided through stock options.
In
setting the size of the overall normal long-term incentive compensation awards, the Compensation Committee generally begins by
looking at market median values for the comparator group, and then making adjustments for the individual for items such as the
executive officer’s time in the position, internal equity, performance and such other factors as the Compensation Committee
deems appropriate. The percentage of the long-term compensation provided by each type of award (long-term cash performance awards,
long-term performance share awards, stock options and restricted common shares) is determined by the Compensation Committee. The
value given to stock options for purposes of these awards is determined by the Compensation Committee based on input from its
compensation consultant taking into account the anticipated grant date fair value calculated under applicable accounting rules
and the stock option values used for recent annual grants. The same is true for restricted common shares, the value of which is
generally based on a recent market price of the common shares. Likewise, the value of the long-term performance share awards is
generally based upon the number of common shares that can be earned at target, multiplied by a recent common share price. The
value used for long-term cash performance awards is generally the amount that can be earned at target. The amount of each type
of award granted to an executive officer is determined consistent with the above factors, with the specific amount determined
by the Compensation Committee on a subjective basis combining all of the factors considered.
The
Compensation Committee believes that using a blend of restricted common share awards, stock option awards, long-term performance
share awards and long-term cash performance awards represents a particularly appropriate and balanced method of motivating and
rewarding senior executives. Restricted common share awards and stock option awards align the interests of employee recipients
with those of shareholders by providing value tied to appreciation in the Company’s common share price. Long-term cash performance
awards motivate long-term results because their value is tied to sustained financial achievement over a multiple-year period.
Long-term performance share awards blend both of these features because the number of performance shares received is tied to sustained
financial achievement over a multiple-year period, and the value of those performance shares is tied to the price of the Company’s
common shares. The Compensation Committee believes the combination of these forms of incentive compensation is superior to reliance
upon only one form and is consistent with the Company’s compensation philosophy and objectives.
The
Compensation Committee generally approves annual restricted common share awards, annual stock option grants and long-term performance
share and long-term cash performance awards at its June meeting. The stock option grants and restricted common share awards are
generally made effective following the meeting and after the Company has reported its earnings for the just-completed fiscal year.
Long-term performance share awards and long-term cash performance awards have been based on performance over a three-year period
beginning with the first day of the first fiscal year in that period. An explanation of the calculation of the compensation expense
relative to the equity-based long-term incentive compensation is set forth in the section captioned “Equity-Based Long-Term
Incentive Compensation Accounting” beginning on page 46 of this Proxy Statement.
Neither
the Company nor the Compensation Committee has backdated stock option grants to provide for lower exercise prices, nor have they
repriced or offered buy-outs of underwater stock options. Current plan provisions prohibit such repricing without shareholder
consent.
Stock
Options
Stock
options are generally awarded annually to the NEOs and a select group of executive officers. In practice, the number of common
shares covered by an option award generally depends upon the employee’s position and external market data. It had also been
the practice of the Company to award stock options to a broader group of key employees every two or three years, and to grant
stock options at other times to selected key employees such as when their employment began or they received a promotion. Stock
options provide employees with the opportunity
to
participate in increases in shareholder value as a result of common share price appreciation, and further the Company’s
objective of aligning the interests of management with the interests of shareholders.
As
noted above, starting in Fiscal 2014, the Compensation Committee decreased the portion of long-term incentive awards made to the
executive group in the form of stock options and increased the portion provided through awards of restricted common shares. The
Compensation Committee also authorized grants of restricted common shares to a broader group of key employees, rather than providing
stock options. The Compensation Committee made this change to restricted common shares in lieu of stock options based on a number
of factors, including that restricted common share awards are less dilutive than stock options having the same grant date fair
value and are generally better understood and appreciated by employees.
The
following describes the Compensation Committee’s general practice in granting stock options, excluding grants tailored to
meet specific circumstances.
Nearly
all stock options granted to employees since June 1, 2011 have been non-qualified stock options which vest at a rate of 33% per
year and fully vest at the end of three years. In the event an optionee’s employment terminates as a result of retirement,
death or total disability, any unexercised stock options outstanding and exercisable on that date will remain exercisable by the
optionee or, in the event of death, by the optionee’s beneficiary, until the earlier of either the fixed expiration date,
as stated in the applicable stock option award agreement, or 36 months after the last day of employment due to retirement, death
or total disability. Should termination occur for any reason other than retirement, death or disability, unexercised stock options
are generally forfeited. In the event of a change in control of the Company (as defined in the respective stock option plans or
award agreements), followed by an actual or constructive termination of employment, stock options then outstanding will become
fully vested and exercisable. The Compensation Committee may allow an optionee to elect, during the 60-day period following a
change in control, to surrender a stock option or a portion thereof in exchange for a cash payment equal to the excess of the
change in control price per share over the exercise price per share.
Effective
June 30, 2016, the Company made awards of non-qualified stock options to 33 employees to purchase an aggregate of 111,000 common
shares, with an exercise price equal to $42.30, the fair market value of the common shares on the grant date. Of those stock options,
an aggregate of 66,700 common shares were covered by stock options awarded to the current NEOs.
The
stock option grants to the NEOs in Fiscal 2017 are detailed in the “Grants of Plan-Based Awards for Fiscal 2017” table
on page 54 of this Proxy Statement. For purposes of the “Grants of Plan-Based Awards for Fiscal 2017” table, stock
options are valued based on a grant date fair value and calculated in accordance with Financial Accounting Standards Board Accounting
Standards Codification Topic 718 (“ASC 718”). This value for stock options is also reported in the “Option Awards”
column of the “Fiscal 2017 Summary Compensation Table” beginning on page 51 of this Proxy Statement.
Information
on options granted, effective June 29, 2017, to NEOs for Fiscal 2018 is set forth in the section captioned “Long-Term Performance
Awards, Option Awards and Restricted Common Share Awards Granted in Fiscal 2018”, beginning on page 60.
Long-Term
Performance Awards – General
Since
Fiscal 2006, the Company has awarded a select group of key executives, including the NEOs, long-term cash performance awards and
long-term performance share awards which are earned based upon results over a prospective three-fiscal-year performance period.
These
long-term performance awards are intended to reward executives for achieving pre-established financial goals over a three-year
period. Restructuring charges and non-recurring items are excluded from all calculations and corporate EPS and Steel Processing
business unit EOI results are adjusted for inventory holding gains or losses.
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For
corporate executives
, the goals are tied to corporate performance.
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Payouts
are generally tied to achieving specified levels (threshold, target and maximum) of cumulative
corporate EVA and growth in corporate EPS (adjusted as noted above) over the performance
period, with each performance measure carrying a 50% weighting.
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For
business unit executives
, the goals are tied to both corporate performance and the
performance of their respective business units.
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Cumulative
corporate EVA and adjusted corporate EPS growth measures together carry a 50% weighting,
and business unit EOI targets (adjusted as noted above) are weighted 50%.
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If
the performance level falls between threshold and target or between target and maximum, the award is linearly prorated. Payouts,
if any, would generally be made in the quarter following the end of the applicable performance period. Calculation of Company
results and attainment of performance measures are made solely by the Compensation Committee based upon the Company’s consolidated
financial statements.
The
Compensation Committee determines the appropriate changes and adjustments and may make adjustments for other unusual or non-recurring
events, including, without limitation, changes in tax and accounting rules and regulations, extraordinary gains and losses, mergers
and acquisitions, and purchases or sales of substantial assets, provided that, if Section 162(m) of the Internal Revenue Code
would be applicable to the payout of the award, any such change or adjustment, if not provided for when the targets are set, must
be permissible under Section 162(m).
These
performance measurements have been chosen because the Compensation Committee believes that:
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The
corporate EPS growth metric strongly correlates with the Company’s growth in equity
value;
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EOI
at a business unit ties directly into Company EPS growth; and
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The
cumulative corporate EVA target, which is driven by net operating profit in excess of
the cost of capital employed, keeps management focused on the most effective use of existing
assets and pursuing only those growth opportunities which provide returns in excess of
the cost of capital.
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The
Company has used these, or similar performance measures, since long-term cash performance awards were first granted for the performance
period ended May 31, 1998.
The
Compensation Committee periodically considers whether to change the performance measures used under the incentive awards and reviews
the types of measures used by other companies and other relevant information provided by its compensation consultant. After reviewing
this matter in detail at its June 2016 meeting, the Compensation Committee determined to continue to use the performance measures
set forth above, for the reasons discussed.
Payouts
have been made based on the achievement of corporate and business unit three-year performance targets in each of the last six
years. No payments of these awards for corporate performance were made in the three-year periods ending with Fiscal 2009, Fiscal
2010 or Fiscal 2011, as targets for those three-year periods were set prior to the recession which adversely affected results
in those three-year periods.
The
Company posted record results in Fiscal 2017 following record results in 2016. However, challenging conditions in Fiscal 2015
resulted in weaker results for that year, which negatively impacted results for the three-year performance periods ended Fiscal
2017 and Fiscal 2016. As a result, payouts made to the executive officers with respect to both long-term cash and long-term performance
share awards still fell below 100% of target for the period ended with Fiscal 2017. Awards were paid at 92% for Corporate executives,
46% for Steel Processing executives and 46% for Pressure Cylinders executives of target values.
Long-Term
Cash Performance Awards
Long-term
cash performance awards have been part of the long-term performance awards granted to key members of management since they were
first awarded in 1998. They are intended to reward executives for achieving pre-established financial goals over a three-fiscal-year
period. These long-term cash performance awards may be paid in cash, common shares or any combination thereof, as determined by
the Compensation Committee at the time of payment. To date, earned long-term cash performance awards have been paid in cash. If
the performance criteria are met, payouts are generally made in the quarter following the end of the performance period. Nothing
is paid under the long-term cash performance awards if none of the three-year financial thresholds are met.
Treatment
of awards on a change in control or a termination of employment, including termination due to death, disability or retirement,
is discussed below in the section captioned “Long-Term Performance Awards – Impact of Termination/Change in Control”.
The performance measures for the long-term cash performance awards are discussed above in the section captioned “Long-Term
Performance Awards – General”.
Long-term
cash performance awards earned for the three-year performance period ended May 31, 2017 are described above in the section captioned
“Long-Term Performance Awards – General”. The amount of the awards earned by the NEOs for this period is shown
in the “Fiscal 2017 Summary Compensation Table” beginning on page 51 of the Proxy Statement under the “3-year
Cash Performance Award” column within “Non-Equity Incentive Plan Compensation”. The long-term cash performance
awards earned were paid in cash.
Long-term
cash performance awards granted in Fiscal 2017 for the three-year performance period ending May 31, 2019 are reported in the “Grants
of Plan-Based Awards for Fiscal 2017” table on page 54 of this Proxy Statement.
Information
on long-term cash performance awards granted in Fiscal 2018 for the three-year performance period ending May 31, 2020 is shown
in the “Long-Term Performance Awards, Option Awards and Restricted Common Share Awards Granted in Fiscal 2018” table
beginning on page 61 of this Proxy Statement.
Long-Term
Performance Share Awards
Performance
share awards have constituted a portion of the long-term performance awards granted to key members of management since June 2006.
They are intended to reward executives for both achieving pre-established financial goals over the three-fiscal-year period and
increasing the common share price. The long-term performance share awards are paid in common shares and the value is determined
not only by the number of common shares earned, but also by the value of the common shares at the time the awards are earned and
the common shares are paid out. If the performance criteria are met, payouts are generally made the quarter following the end
of the performance period. Nothing is paid under the performance share awards if none of the three-year financial threshold measures
are met.
Treatment
of awards on a change in control or a termination of employment, including termination due to death, disability or retirement,
is discussed below in the section captioned “Long-Term Performance Awards – Impact of Termination/Change in Control”.
The performance measures for the long-term performance share awards are discussed above in the section captioned “Long-Term
Performance Awards – General”. Long-term performance share awards earned for the three-year performance period ended
May 31, 2017, are described above in the section captioned “Long-Term Performance Awards – General”. The long-term
performance share awards earned were paid in common shares.
Long-term
performance share awards granted in Fiscal 2017 for the three-year performance period ending May 31, 2019 are reported in the
“Grants of Plan-Based Awards for Fiscal 2017” table on page 54 of this Proxy Statement. An explanation of the calculation
of the compensation expense relative to those awards is set forth in the section captioned “Equity-Based Long-Term Incentive
Compensation Accounting” beginning on page 46 of this Proxy Statement. If the performance criteria are met, the performance
shares earned would generally be issued in the quarter following the end of the performance period.
Information
on long-term performance share awards granted in Fiscal 2018 for the three-year performance period ending May 31, 2020 is shown
in the “Long-Term Performance Awards, Option Awards and Restricted Common Share Awards Granted in Fiscal 2018” table
beginning on page 61 of this Proxy Statement.
Long-Term
Performance Awards – Impact of Termination/Change in Control
In
general, termination of employment results in termination of long-term cash performance awards and long-term performance share
awards. However, if termination is due to death, disability or retirement, a pro rata payout will be made for performance periods
ending 24 months or less after termination of employment based on the number of months of employment completed by the participant
during the performance period before the effective date of termination, provided that the applicable performance goals are achieved.
No payout will be made for performance periods ending more than 24 months after termination of employment. Unless the Compensation
Committee specifically provides otherwise at the time of grant, in the event of a change in control of the Company followed by
an actual or constructive termination of employment, all long-term cash performance awards and long-term performance share awards
would be considered to be earned and payable in full at the maximum level, and immediately settled or distributed.
Annual
Restricted Common Share Awards to Executives
Effective
June 30, 2016, the Compensation Committee granted annual restricted common share awards to 33 employees covering an aggregate
of 115,625 restricted common shares, which will cliff vest on the third anniversary of the grant date. Of those awards, an aggregate
of 70,700 restricted common shares were awarded to the NEOs. Restricted common share awards are intended to reward and incent
executives by directly aligning the interests of management with the interests of shareholders. The vesting provision of the restricted
common shares also serves as a management retention incentive. For further details with respect to the restricted common share
awards granted to the NEOs effective June 30, 2016, see the “Stock Awards” column of the “Fiscal 2017 Summary
Compensation Table” beginning on page 51 of this Proxy Statement.
Restricted
common share awards to the NEOs in Fiscal 2017 are detailed in the “Grants of Plan-Based Awards for Fiscal 2017” table
on page 54 of this Proxy Statement. For purposes of the “Grants of Plan-Based Awards for Fiscal 2017” table, restricted
stock awards are valued based on grant date fair value and calculated in accordance with ASC 718. This value for restricted stock
awards is also reported in the “Stock Awards” column of the “Fiscal 2017 Summary Compensation Table” beginning
on page 51 of this Proxy Statement.
For
further details with respect to the restricted common share awards granted to the NEOs effective June 29, 2017, see the “Long-Term
Performance Awards, Option Awards and Restricted Common Share Awards Granted in Fiscal 2018” table beginning on page 61
of this Proxy Statement.
Other
Restricted Common Share Awards
Between
August 26, 2016 and April 6, 2017, the Company made awards to 1,208 employees covering an aggregate of 390,025 restricted common
shares, which will cliff vest on the third anniversary of the grant date. None of these awards were made to an NEO.
Special
Performance-Based/Time-Vested Restricted Common Share Award
The
Compensation Committee has at times made special “one off” performance-based/time-vested long-term incentive awards
to certain key employees with vesting tied to the price of the Company’s common shares attaining certain levels. The Compensation
Committee made a special award, effective June 24, 2014, of 25,000 performance-based/time-vested restricted common shares to Mr.
Gilmore. The term of this restricted common share award is five years and the restricted common shares will vest if both: (a)
the closing price of the Company’s common shares equals or exceeds $60.00 per share for 30 consecutive days during the five-year
term ending June 24, 2019; and (b) Mr. Gilmore has remained continuously employed by the Company for five years (i.e., through
June 24, 2019). If Mr. Gilmore’s employment is terminated by the Company without “cause” or if Mr. Gilmore dies
or becomes permanently disabled after the performance condition has been met but before the time-based vesting condition has been
met, the restricted common shares will be fully vested as of the date of termination. In the case of death or disability, the
Compensation Committee may elect, in its sole discretion, to accelerate the vesting of all or a portion of these restricted common
shares. In the event of a change in control followed by an actual or constructive termination of employment (as defined by the
Compensation Committee), these restricted common shares will vest, subject to any Internal Revenue Code Section 280G limitation
imposed by the Compensation Committee. These awards are shown in the “Stock Awards” column for 2015 in the “Fiscal
2017 Summary Compensation Table”
As
a leader of one of the Company’s key business units, Mr. Gilmore is a key player in driving the Company’s Transformation
efforts and financial results. The CEO and the Board have identified Mr. Gilmore as a key executive who has an important role
and responsibility in leading the Company forward in his capacity as a business unit President. The Compensation Committee believes
this special restricted common share award serves as a strong retention mechanism that provides a unique incentive to Mr. Gilmore
to further enhance the Company’s success, and directly ties his compensation to the Company’s first corporate goal
of increasing the value of our shareholders’ investment.
The
Compensation Committee believes the $60.00 per share closing price for 30 consecutive days to be an appropriate performance target,
as its achievement will not only reward Mr. Gilmore, but also the shareholders in general, as the $60.00 stock price would be
more than 44% above the all-time high average closing price of the Company’s common shares for any consecutive 30-day period
prior to the June 24, 2014 grant date. The Compensation Committee believes this to be reasonable target which can be reached by
steady, consistent growth in the Company’s performance, without the need for any undue risk-taking. Further, the Compensation
Committee
believes
that the five-year time-based vesting (coupled with his other stock holdings and equity awards), reduces the incentive for risky
behavior intended to drive only a short-term increase in the price of the common shares, and instead encourages activity which
would lead to steady increases in financial results and the stock price which can be maintained.
Clawback
Policy
The
Company does not have a specific clawback policy. If the Company is required to restate its earnings as a result of material non-compliance
with a financial reporting requirement due to misconduct, under Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”),
the CEO and the CFO would be required to reimburse the Company for any bonus or other incentive-based or equity-based compensation
received by them from the Company during the 12-month period following the first filing with the SEC of the financial document
that embodied the financial reporting requirement, and any profits realized from the sale of common shares of the Company during
that 12-month period, to the extent required by SOX.
On
July 1, 2015, the SEC issued proposed rules relating to clawback policies which the Company is in the process of reviewing. Once
the proposed SEC rules have been adopted and NYSE has, in turn, adopted new listing standards addressing the clawback policy requirements,
the Company will adopt a clawback policy which satisfies the final rules.
Equity-Based
Long-Term Incentive Compensation Accounting
The
accounting treatment for equity-based long-term incentive compensation is governed by ASC 718. Options are valued using the Black-Scholes
pricing model based upon the grant date closing price per common share underlying the option award, the expected life of the option,
the risk-free interest rate, the dividend yield, and the expected volatility. Further information concerning the valuation of
options and the assumptions used in that valuation is contained in “Note A – Summary of Significant Accounting Policies
– Stock-Based Compensation” and “Note J – Stock-Based Compensation” of the Notes to Consolidated
Financial Statements in “Item 8. – Financial Statements and Supplementary Data” of the Company’s Annual
Report on Form 10-K for Fiscal 2017 filed on July 24, 2017 (the “2017 Form 10-K”).
Long-term
performance share awards payable in common shares are initially valued using the grant date closing price per common share based
on the target award, and compensation expense is recorded prospectively over the performance period on a straight-line basis.
This amount is then adjusted on a quarterly basis based upon an estimate of the performance level anticipated to be achieved for
the performance period in light of actual and forecasted results.
Long-term
cash performance awards are initially valued at the target level, and compensation expense is recorded prospectively over the
performance period on a straight-line basis. This amount is then adjusted on a quarterly basis based on an estimate of the performance
level anticipated to be achieved for the performance period in light of actual and forecasted results.
Restricted
common shares are valued at fair value as of the date of grant and the calculated compensation expense is recognized on a straight-line
basis over their respective vesting periods. For restricted common shares with only time-based vesting, fair value is generally
equal to the closing price of the common shares at the respective grant date. If the vesting is subject to other conditions, such
as the special performance-based/time-vested restricted common share award, the value is generally calculated under a Monte Carlo
simulation model. Further information concerning the valuation of restricted common shares and the assumptions used in that valuation
is contained in “Note A – Summary of Significant Accounting Policies – Stock-Based Compensation” and “Note
J – Stock-Based Compensation” of the Notes to Consolidated Financial Statements in “Item 8. – Financial
Statements and Supplementary Data” of the Company’s 2017 Form 10-K.
Deferred
Profit Sharing Plan
The
NEOs participate in the Worthington Industries, Inc. Deferred Profit Sharing Plan (the “DPSP”), together with most
other full-time, non-union employees of the Company. The DPSP is a 401(k) plan and is the Company’s primary retirement plan.
Contributions made by the Company to participants’ accounts under the DPSP are generally based on 3% of eligible compensation
which includes base salary, profit-sharing, bonus and annual cash incentive bonus payments, overtime and commissions, up to the
maximum limit set by the Internal Revenue Service (“IRS”) from year to year ($270,000 for calendar 2017). In addition,
the NEOs and other participants in the DPSP may elect to make voluntary contributions up to prescribed IRS limits. These voluntary
contributions are
generally
matched by Company contributions of 50% of the first 4% of eligible compensation contributed by the participant. Distributions
under the DPSP are generally deferred until retirement, death or total and permanent disability.
Non-Qualified
Deferred Compensation
The
NEOs and other highly-compensated employees are eligible to participate in the Worthington Industries, Inc. Amended and Restated
2005 Non-Qualified Deferred Compensation Plan (as amended, the “2005 NQ Plan”). The 2005 NQ Plan is a voluntary, non-tax
qualified, unfunded deferred compensation plan available only to select highly-compensated employees for the purpose of providing
deferred compensation, and thus potential tax benefits, to these employees.
Under
the 2005 NQ Plan, executive officers of the Company may defer the payment of up to 50% of their base salary and up to 100% of
their bonus and/or annual cash incentive bonus awards. Amounts deferred are credited to the participants’ bookkeeping accounts
under the 2005 NQ Plan at the time the base salary and/or bonus/annual cash incentive bonus awards would have otherwise been paid.
In addition, the Company may make discretionary employer contributions to the participants’ bookkeeping accounts in the
2005 NQ Plan. In recent years, the Company has made employer contributions in order to provide the same percentage of retirement-related
deferred compensation to executive officers compared to other employees that would have been made but for the IRS limits on annual
compensation that may be considered under the DPSP. For the 2017, 2016 and 2015 calendar years, the Company made contributions
to the 2005 NQ Plan for participants equal to (i) 3% of an executive’s annual compensation (base salary plus bonus/annual
cash incentive bonus award) in excess of the IRS maximum; and (ii) a matching contribution of 50% of the first 4% of annual compensation
contributed by the executive to the DPSP to the extent not matched by the Company under the DPSP. Participants in the 2005 NQ
Plan may elect to have their bookkeeping accounts treated as invested (a) with a rate of return reflecting: (i) the returns on
those investment options available under the DPSP; or (ii) a fixed interest rate set annually by the Compensation Committee (1.88%
for Fiscal 2017), or (b) in theoretical common shares reflecting increases or decreases in the fair market value of the Company’s
common shares with dividends deemed reinvested. Any portion of a participant’s bookkeeping account credited to theoretical
common shares must remain credited to theoretical common shares until distributed. Otherwise, participants in the 2005 NQ Plan
may change the investment options for their bookkeeping accounts as of the time permitted under the DPSP for the same or a similar
investment option.
Employees’
bookkeeping accounts in the 2005 NQ Plan are fully vested. Payouts of amounts credited to theoretical common shares are made in
whole common shares and cash in lieu of fractional shares. Payouts of amounts credited to all other investment options are made
in cash. Payments will be made as of a specified date selected by the participant or, subject to the timing requirements of Section
409A of the Internal Revenue Code, when the participant is no longer employed by the Company. Payments are made either in a lump
sum or in installment payments, all as chosen by the participant at the time the deferral is elected. The Compensation Committee
may permit hardship withdrawals from a participant’s account under defined guidelines.
Contributions
or deferrals for the period before January 1, 2005, are maintained under the Worthington Industries, Inc. Non-Qualified Deferred
Compensation Plan, effective March 1, 2000 (as amended, the “2000 NQ Plan”). Contributions and deferrals for periods
on or after January 1, 2005 are maintained under the 2005 NQ Plan, which was adopted to replace the 2000 NQ Plan in order to comply
with the provisions of the then newly-adopted Section 409A of the Internal Revenue Code applicable to non-qualified deferred compensation
plans. Among other things, the provisions of Section 409A generally are more restrictive with respect to the timing of deferral
elections and the ability of participants to change the time and manner in which accounts will be paid. The 2005 NQ Plan and the
2000 NQ Plan are collectively referred to as the “Employee Deferral Plans”.
Perquisites
The
Company makes club memberships available to NEOs and certain other executives because it believes that such memberships can be
useful for business entertainment purposes. In 2007, the Company elected to no longer provide executives with leased Company vehicles
and generally eliminated leased Company vehicles for all employees unless a substantial portion of their business time involves
travel, as is the case with those individuals in outside sales.
For
security reasons, the NEOs occasionally use Company airplanes for personal travel. In such cases, the NEOs who use Company airplanes
for personal use are charged an amount equal to the SIFL rate set forth in the regulations promulgated by the United States Department
of the Treasury (“Treasury Regulations”), which is generally less than the Company’s incremental costs.
Other
Company Benefits
The
Company provides employees, including the NEOs, a variety of other employee welfare benefits including medical benefits, disability
benefits, life insurance, and accidental death and dismemberment insurance, which are generally provided to employees on a Company-wide
basis.
Change
in Control
The
Company has no formal employment contracts or other stand-alone change in control provisions relative to the NEOs or other top
executives. It does have certain change in control provisions in its various compensation plans, as described below.
The
Company’s stock option plans generally provide that, unless the Board or the Compensation Committee provides otherwise,
upon a change in control of the Company, all stock options then outstanding will become fully vested and exercisable as of the
date of the change in control, followed by an actual or constructive termination of employment. In addition, the Compensation
Committee may allow the optionee to elect, during the 60-day period from and after the change in control, to surrender the stock
options or a portion thereof in exchange for a cash payment equal to the excess of the change in control price per share over
the exercise price per share.
For
purposes of the Company’s stock option plans (the 1997 LTIP, the Amended and Restated 2003 Stock Option Plan (the “2003
Stock Option Plan”) and the 2010 Stock Option Plan), a change in control will be deemed to have occurred when any person,
alone or together with its affiliates or associates, has acquired or obtained the right to acquire the beneficial ownership of
25% or more of the Company’s outstanding common shares, unless such person is: (a) the Company; (b) any employee benefit
plan of the Company or a trustee of or fiduciary with respect to any such plan when acting in that capacity; or (c) any person
who, on the date the applicable plan became effective, was an affiliate of the Company owning in excess of 10% of the Company’s
outstanding common shares and the respective successors, executors, legal representatives, heirs and legal assigns of such person
(an “Acquiring Person Event”). In addition, in the case of stock options granted under the 2003 Stock Option Plan
and the 2010 Stock Option Plan, a change in control will also be deemed to have occurred if there is a change in the composition
of the Board with the effect that a majority of the directors are not “continuing directors” (as defined in each plan).
If
a change in control followed by an actual or constructive termination of employment had occurred as of May 31, 2017, the value
of the unvested stock options which would have vested upon the change in control (based upon (a) the difference, if any, between
(i) the closing market price of the Company’s common shares on May 31, 2017 ($41.97), and (ii) the per share exercise price
of each such stock option, multiplied by (b) the number of common shares subject to the unvested portion of each such option),
for each of the NEOs would have totaled:
NEO
|
Value
of Unvested Options
If Vesting Accelerated
|
John
P. McConnell
|
$257,830
|
B.
Andrew Rose
|
$125,230
|
Mark
A. Russell
|
$125,230
|
Geoffrey
G. Gilmore
|
$
62,609
|
John
G. Lamprinakos
|
$
44,200
|
Long-term
cash performance awards and long-term performance share awards generally provide that, unless the Board or the Compensation Committee
provides otherwise, upon a change in control of the Company followed by an actual or constructive termination of employment, all
such awards would be considered earned and payable in full at the maximum amounts and would be immediately settled or distributed.
For purposes of the 1997 LTIP (under which the long-term cash performance awards and long-term performance share awards have been
granted), a change in control will be deemed to have occurred when there is an Acquiring Person Event as defined above.
If
a change in control followed by an actual or constructive termination of employment had occurred as of May 31, 2017, the aggregate
value of the long-term cash performance awards and the number of common shares underlying long-term performance share awards,
which would have been distributed to each of the NEOs would have totaled:
NEO
|
Long-Term
Cash
Performance Awards
|
Long-Term
Performance Share Awards
|
John
P. McConnell
|
$6,000,000
|
104,000
|
B.
Andrew Rose
|
$3,600,000
|
49,000
|
Mark
A. Russell
|
$3,600,000
|
49,000
|
Geoffrey
G. Gilmore
|
$1,920,000
|
26,866
|
John
G. Lamprinakos
|
$1,600,000
|
23,168
|
Each
of the NEOs received time-vested restricted common share awards granted effective June 30, 2016, June 26, 2015, and June 30, 2014,
and Mr. Lamprinakos received a restricted common share award on September 22, 2015. All of these restricted common share awards
provide that upon a change in control followed by an actual or constructive termination of employment, the restricted common shares
will vest and the restrictions will lapse. If a change in control followed by an actual or constructive termination of employment
had occurred as of May 31, 2017, the number of time-vested restricted common shares (and accrued dividends on those common shares)
that would have vested and been distributable to each of the NEOs as of such date are set forth below. The closing price of the
common shares on May 31, 2017, was $41.97.
NEO
|
#
of Restricted
Common Shares
|
Accrued
Dividends
|
John
P. McConnell
|
74,500
|
$100,060
|
B.
Andrew Rose
|
39,000
|
$51,840
|
Mark
A. Russell
|
39,000
|
$51,840
|
Geoffrey
G. Gilmore
|
23,000
|
$29,880
|
John
G. Lamprinakos
|
32,700
|
$34,810
|
The
25,000 special performance-based/time-vested restricted common share award granted to Mr. Gilmore as of June 24, 2014 also provides
that upon a change in control followed by an actual or constructive termination of employment, the restricted common shares will
vest and the restrictions will lapse. If a change in control followed by an actual or constructive termination of employment had
occurred as of May 31, 2017, the number of restricted common shares, and accrued dividends on those common shares, that would
have vested and been distributable as of such date are set forth below. The closing price of the common shares on May 31, 2017,
was $41.97.
NEO
|
#
of Restricted
Common Shares
|
Accrued
Dividends
|
Geoffrey
G. Gilmore
|
25,000
|
$52,000
|
Annual
cash incentive bonus awards provide that if during a performance period, (a) a change in control of the Company (as defined in
the plan) occurs and (b) the participant’s employment with the Company terminates on or after the change in control, the
participant’s award would be considered earned and payable as of the date of the participant’s actual or constructive
termination of employment in the amount designated as target for such award and would be settled or distributed following the
date of the participant’s actual or constructive termination of employment. The target amounts for annual cash incentive
bonus awards granted to the NEOs for the 12-month performance period ended May 31, 2017, are shown in the “Grants of Plan-Based
Awards for Fiscal 2017” table on page 54 of this Proxy Statement.
Under
the Employee Deferral Plans, participants’ bookkeeping accounts will generally be paid out as of the date of the change
in control. See the “Non-Qualified Deferred Compensation for Fiscal 2017” table on page 59 of this Proxy Statement
for further information.
The
Compensation Committee believes that these change in control provisions are appropriate and well within market norms, particularly
because the Company has no formal employment contracts or other formal stand-alone change in control provisions relative to the
NEOs or other executives.
Tax
Deductibility
Section
162(m) of the Internal Revenue Code generally limits the deduction that the Company may take for certain remuneration paid in
excess of $1,000,000 to any “covered employee” of the Company in any one taxable year. Currently, Section 162(m) of
the Internal Revenue Code only applies to the Company’s CEO as well as the three other most highly compensated officers
of the Company (not including the Company’s CFO). Compensation which qualifies as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Internal Revenue Code and the related Treasury Regulations will not be taken into
account in determining whether this $1,000,000 deduction limitation has been exceeded. Awards granted under the Company’s
stock option plans generally qualify as “qualified performance-based compensation” under Section 162(m) of the Internal
Revenue Code and restricted common shares with vesting tied to performance measures would also generally qualify. The Compensation
Committee intends to tailor the long-term incentive compensation awards granted under the 1997 LTIP (except for restricted common
share awards which do not have a performance-based vesting requirement) and the awards granted to executive officers under the
Company’s annual cash incentive bonus program to so qualify. The Compensation Committee believes that the awards granted
for Fiscal 2017 and Fiscal 2018 under the Company’s annual cash incentive bonus program as well as the long-term cash performance
awards and long-term performance share awards granted for the three-year periods ending May 31, 2019 and May 31, 2020, under the
1997 LTIP will qualify for the “qualified performance-based compensation” exemption under Section 162(m). See the
description of these awards in the sections captioned “Grants of Plan-Based Awards” beginning on page 54 of this Proxy
Statement, “Annual Cash Incentive Bonus Awards Granted for Fiscal 2018” beginning on page 60 of this Proxy Statement
and “Long-Term Performance Awards, Option Awards and Restricted Common Share Awards Granted in Fiscal 2018”, beginning
on page 60 of this Proxy Statement.
The
Compensation Committee intends to continue to examine the best method to pay incentive compensation to executive officers, which
will include consideration of the application of Section 162(m) of the Internal Revenue Code.
In
all cases, whether or not some portion of a covered employee’s compensation is tax deductible, the Compensation Committee
will continue to carefully consider the net cost and value to the Company of its compensation policies.