Proxy Statement - Notice of Shareholders Meeting (preliminary) (pre 14a)

Date : 07/20/2018 @ 4:04PM
Source : Edgar (US Regulatory)
Stock : Netapp, Inc. (NTAP)
Quote : 81.975  -0.785 (-0.95%) @ 12:58PM

Proxy Statement - Notice of Shareholders Meeting (preliminary) (pre 14a)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Amendment No.      )

Filed by the Registrant                                Filed by a Party other than the Registrant  

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material Pursuant to §240.14a-12

NETAPP, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

  

 

 

  (2) Aggregate number of securities to which transaction applies:

  

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

  

 

 

  (4) Proposed maximum aggregate value of transaction:

  

 

 

  (5) Total fee paid:

  

 

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

  

 

 

  (2) Form, Schedule or Registration Statement No.:

  

 

 

  (3) Filing Party:

  

 

 

  (4) Date Filed:

  

 

 

 

 


LOGO

NETAPP, INC.

1395 Crossman Avenue

Sunnyvale, California 94089

 

 

 

 

 

You are cordially invited to attend the Annual Meeting of Stockholders, and any adjournment, postponement or other delay thereof (the “Annual Meeting”), of NetApp, Inc., a Delaware corporation (“NetApp”), which will be held on Thursday, September 13, 2018 at 3:30 p.m. local time, at NetApp’s headquarters, 1395 Crossman Avenue, Sunnyvale, California 94089. We are holding the Annual Meeting for the following purposes:

 

  1. To elect the following individuals to serve as members of the Board of Directors until the 2019 Annual Meeting of Stockholders or until their respective successors are duly elected and qualified: T. Michael Nevens, Gerald Held, Kathryn M. Hill, Deborah L. Kerr, George Kurian, Scott F. Schenkel, George T. Shaheen and Richard P. Wallace;  

 

  2. To approve an amendment to NetApp’s Amended and Restated 1999 Stock Option Plan to increase the share reserve by an additional 9,000,000 shares of common stock;  

 

  3. To approve an amendment to NetApp’s Employee Stock Purchase Plan to increase the share reserve by an additional 2,000,000 shares of common stock;  

 

  4. To hold an advisory vote to approve Named Executive Officer compensation;  

 

  5. To ratify the appointment of Deloitte & Touche LLP as NetApp’s independent registered public accounting firm for the fiscal year ending April 26, 2019;  

 

  6. To ratify the stockholder special meeting provisions in NetApp’s bylaws; and  

 

  7. To transact such other business as may properly come before the Annual Meeting.  

The foregoing items of business are more fully described in the Proxy Statement that accompanies this Notice of Annual Meeting of Stockholders. The Board of Directors has fixed the close of business on July 17, 2018, as the record date for determining the stockholders entitled to notice of and to vote at the Annual Meeting.

In accordance with the rules and regulations of the Securities and Exchange Commission, we have elected to provide access to our proxy materials over the Internet. Accordingly, NetApp will mail, on or about July 24, 2018, a Notice of Internet Availability of Proxy Materials to its stockholders of record and beneficial owners. The Notice of Internet Availability of Proxy Materials will identify: (1) the website where our proxy materials will be made available; (2) the date, time and location of the Annual Meeting; (3) the matters to be acted upon at the Annual Meeting and the Board of Directors’ recommendation with regard to each matter; (4) a toll-free telephone number, an e-mail address, and a website where stockholders can request a paper or e-mail copy of the Proxy Statement, (together with a form of proxy) and our Annual Report on Form 10-K; (5) instructions on how to vote your shares by proxy; and (6) information on how to obtain directions to attend the Annual Meeting and vote in person by ballot. All proxy materials will be available free of charge.

To assure your representation at the Annual Meeting, you are urged to cast your vote as instructed in the Notice of Internet Availability of Proxy Materials over the Internet or by telephone as promptly as possible. You may also request a paper proxy card to submit your vote by mail, if you prefer. Any stockholder of record attending the Annual Meeting may vote in person by ballot, even if such stockholder has previously voted over the Internet,


voted by telephone or returned a signed proxy card. Any beneficial owner who is not a stockholder of record will be required to show a legal proxy from such stockholder’s bank, broker or other nominee in order to vote in person by ballot at the Annual Meeting.

Thank you for your interest in NetApp.

BY ORDER OF THE BOARD OF DIRECTORS,

 

 

LOGO

Chief Executive Officer and President

Sunnyvale, California

August     , 2018

YOUR VOTE IS EXTREMELY IMPORTANT. TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU ARE URGED TO VOTE BY TELEPHONE OR OVER THE INTERNET AS PROMPTLY AS POSSIBLE. ALTERNATIVELY, YOU MAY REQUEST A PAPER PROXY CARD, WHICH YOU SHOULD SIGN, DATE AND RETURN BY MAIL


PROXY SUMMARY

    1  

Voting Matters and Recommendation

    1  

Fiscal 2018 Business Highlights

    1  

Corporate Governance and Executive Compensation

    2  

Director Nominees

    2  

Corporate Governance and Executive Compensation Highlights

    2  

Cautionary Statement Regarding Forward-Looking Statements

    3  

GENERAL INFORMATION

    5  

Why am I receiving these materials?

    5  

Why did I receive a Notice in the mail regarding the Internet availability of proxy materials?

    5  

Who can vote at the Annual Meeting?

    5  

When and where will the Annual Meeting take place?

    6  

How do I gain admittance to the Annual Meeting?

    6  

How many shares must be present to hold the Annual Meeting?

    6  

How many shares of NetApp common stock are entitled to vote at the Annual Meeting?

    6  

Who will count the votes?

    6  

How many votes are required for each proposal?

    6  

How do I vote?

    6  

How can I change my vote or revoke my proxy?

    7  

What are abstentions and broker non-votes?

    7  

How many copies of the proxy materials will be delivered to stockholders sharing the same address?

    7  

Where may I obtain a copy of the Annual Report?

    8  

Who pays for the solicitation of proxies?

    8  

How and when may I submit proposals for consideration at next year’s Annual Meeting of Stockholders?

    8  

Proposals to be Considered for Inclusion in NetApp’s Proxy Materials

    8  

Director Nominations for Inclusion in NetApp’s Proxy Materials (Proxy Access)

    8  

Other Proposals and Nominations

    8  

OUR BOARD OF DIRECTORS

    10  

CORPORATE GOVERNANCE

    14  

Summary

    14  

Board Leadership Structure

    14  

Corporate Governance Guidelines

    14  

Strategy and Risk Oversight

    14  

Succession Planning

    15  

Independent Directors

    15  

Committees of the Board of Directors

    15  

Corporate Governance and Nominating Committee

    15  

Compensation Committee

    16  

Audit Committee

    16  

 

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Director Selection

    16  

Meetings and Committees of our Board of Directors

    18  

Stockholder Meeting Attendance for Directors

    19  

Code of Conduct

    19  

Political Contributions Policy

    19  

Personal Loans to Executive Officers and Directors

    19  

Stockholder Communications Policy

    19  

DIRECTOR COMPENSATION

    20  

Director Compensation Table

    20  

Summary of Director Compensation Policy

    21  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    24  

Section 16(a) Beneficial Ownership Reporting Compliance

    26  

COMPENSATION DISCUSSION AND ANALYSIS

    27  

Executive Summary

    27  

Fiscal 2018 Company Performance

    27  

Total Stockholder Return Performance

    28  

Compensation Objectives and Key Fiscal 2018 Compensation Actions

    28  

Key Elements of Fiscal 2018 Compensation

    30  

Our Process for Determining and Administering Our Compensation Program

    31  

Say-on-Pay

    32  

Competitive Market Data

    32  

Pay Positioning

    33  

Components of Compensation

    33  

Base Salary

    33  

Executive ICP

    33  

Long-Term Stock-Based Incentive Compensation

    36  

Alignment of Performance and Compensation

    39  

Stock Ownership Guidelines

    41  

Recovery of Incentive-Based Compensation

    41  

Anti-Hedging and Anti-Pledging Policies

    41  

Other Compensation for NEOs

    42  

Severance and Change of Control Arrangements

    42  

Perquisites

    42  

Other Benefits and Reimbursements

    42  

Tax Deductibility of Compensation

    43  

COMPENSATION COMMITTEE REPORT

    44  

EXECUTIVE COMPENSATION AND RELATED INFORMATION

    45  

Summary Compensation Table

    45  

Grants of Plan-Based Awards

    47  

Outstanding Equity Awards at Fiscal Year End

    49  

 

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Option Exercises and Stock Vested for Fiscal 2018

    50  

Nonqualified Deferred Compensation

    50  

Nonqualified Deferred Compensation for Fiscal 2018

    51  

Pension Benefits

    51  

TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

    52  

Potential Payments upon Termination or Change of Control

    52  

Change of Control Severance Agreements

    52  

Term of Change of Control Severance Agreement

    52  

Circumstances Triggering Payment under Change of Control Severance Agreement

    52  

Timing and Form of Severance Payments under Change of Control Severance Agreement

    53  

Severance Payments Under Change of Control Severance Agreement

    53  

Conditions to Receipt of Severance under Change of Control Severance Agreement

    53  

Excise Tax under Change of Control Severance Agreement

    54  

Definitions Contained in Change of Control Severance Agreement

    54  

PBRSUs

    55  

Executive Medical Retirement Plan

    55  

Estimated Payments Upon Termination of Employment and/or a Change of Control

    56  

Equity Compensation Plan Information

    59  

PAY RATIO

    60  

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    61  

CERTAIN TRANSACTIONS WITH RELATED PARTIES

    61  

AUDIT COMMITTEE REPORT

    62  

MANAGEMENT PROPOSALS

    63  

Proposal Number 1: Election of Directors

    63  

Proposal Number 2: Amendment to the Company’s Amended and Restated 1999 Stock Option Plan

    64  

Proposal Number 3: Amendment to the Company’s Employee Stock Purchase Plan

    75  

Proposal Number 4: Advisory Vote to Approve Named Executive Officer Compensation (“Say-On-Pay”)

    81  

Proposal Number 5: Ratification of Independent Registered Public Accounting Firm

    83  

Proposal Number 6: Proposal for Ratification of the Stockholder Special Meeting Provisions in the Company’s Bylaws

    85  

OTHER BUSINESS

    87  

Annex A

    A-1  

Non-GAAP Financial Measures

    A-2  

Appendix A

    A-1  

Appendix B

    B-1  

Appendix C

    C-1  

 

iii


PROXY SUMMARY

This summary highlights information contained within this Proxy Statement. It does not contain all the information found in this Proxy Statement and is qualified in its entirety by the remainder of this Proxy Statement. You should read the entire Proxy Statement carefully and consider all information before voting. Page references are supplied to help you find further information in this Proxy Statement.

Voting Matters and Recommendation

 

     
Voting Matter

 

  

Board Vote Recommendation

 

  

Page

 

 

Election of eight director
nominees

 

  

 

FOR each nominee

  

 

63

 

Approval of an amendment to NetApp’s Amended and Restated 1999 Stock Option Plan

 

  

 

FOR

  

 

64

 

Approval of an amendment to NetApp’s Employee Stock Purchase Plan

 

  

 

FOR

  

 

75

 

Advisory approval of our
executive compensation

 

  

 

FOR

  

 

81

 

Ratification of appointment of independent registered public accounting firm

 

  

 

FOR

  

 

83

 

Ratification of the stockholder special meeting provisions in NetApp’s bylaws

 

  

 

FOR

  

 

85

 

Fiscal 2018 Business Highlights

In fiscal 2018, NetApp generated $5.9 billion in net revenues. GAAP net income for fiscal 2018 was $76 million, or $0.28 per share, 1 and was impacted by a one-time charge of approximately $850 million primarily as a result of the one-time mandatory transition tax on accumulated foreign earnings required under the 2017 Tax Reform Reconciliation Act. Non-GAAP net income in fiscal 2018 was $957 million, or $3.47 per share. 2 Over the course of the year, we generated $1.48 billion in cash flows from operations. We also returned approximately $1.01 billion to stockholders, comprised of approximately $794 million through share repurchases and $214 million through dividends. Through share repurchases and dividends, we have returned approximately $6.5 billion to stockholders since May 2013.

 

1 GAAP earnings per share is calculated using the diluted number of shares for the period presented. A reconciliation of non-GAAP to GAAP results can be found in Annex A.

2 Non-GAAP earnings per share is calculated using the diluted number of shares for the period presented. A reconciliation of non-GAAP to GAAP results can be found in Annex A.

 

1


In fiscal 2018, NetApp continued to advance its Data Fabric Strategy. In a world where technology is changing our everyday lives, digital transformation remains top of mind for executives. When successful in their digital transformation, organizations use technology to create new customer touchpoints, reinventing customer experiences and relationships through business-oriented approaches to data. Additionally, organizations are able to create innovative business opportunities, taking advantage of emerging market opportunities by rapidly deploying new technologies, optimizing operations and adopting an operating model that provides efficiencies and funds new innovation. NetApp delivers a Data Fabric built for the data-driven world. Our Data Fabric simplifies and integrates data management across Clouds and On-premises to accelerate digital transformation, enabling our customers to manage, secure and protect their data at the scale needed to accommodate the exponential data growth of the digital world. The Data Fabric delivers integrated data management services and applications for data visibility and insights, data access and control, and data protection and security. By coupling the strength of our Data Fabric strategy and the benefits we deliver to customers with a more efficient and agile business, we believe that we can generate long-term value for stockholders.

See also the Fiscal 2018 Company Performance section within our “ Compensation Discussion and Analysis ” on page 27 of this Proxy Statement. Detailed information on our products and our financial performance can be found in our Annual Report on 10-K for the year ended April 27, 2018.

 

Corporate Governance and Executive Compensation

Director Nominees

 

         

Name of Nominee

 

  

Age

 

  

Director Since

 

  

Independent

 

  

NetApp Committee

Memberships

 

         
T. Michael Nevens*    68    2009    Yes   

Audit, Corporate Governance and Nominating (Chair)

 

         
Gerald Held    70    2009    Yes   

Compensation

 

         
Kathryn M. Hill    61    2013    Yes   

Compensation (Chair), Corporate Governance and Nominating

 

         
Deborah L. Kerr    46    2017    Yes   

Audit

 

         
George Kurian    51    2015    No     

 

 

         
Scott F. Schenkel    50    2017    Yes   

Audit

 

         
George T. Shaheen    74    2004    Yes   

Compensation

 

         
Richard P. Wallace    58    2011    Yes   

Compensation

 

* Chairman of the Board

Audit Committee Financial Expert

Corporate Governance and Executive Compensation Highlights

We are committed to good corporate governance, which promotes the long-term interests of our stockholders and strengthens our Board and management accountability. Our executive compensation program is designed to hold our executives accountable for results over the long-term and reward them for consistently strong

 

2


corporate performance. Since the 2017 Annual Meeting of Stockholders (“2017 Annual Meeting”), in response to feedback from our stockholders, we adopted proxy access bylaws and agreed to share diversity data on our website, which we will update annually. We also adopted bylaw provisions providing stockholders holding at least 25% of the outstanding stock of the Company the right to request special stockholder meetings, which we are asking stockholders to ratify in the Annual Meeting.

Governance and executive compensation highlights include:

 

    Other than the Chief Executive Officer, our Board comprises all independent directors (8 out of 9 directors);

 

    Separation of the roles of Chairman and Chief Executive Officer;

 

    Four new directors joined the Board in the last five years;

 

    Increased board diversity;

 

    Majority voting in the uncontested election of directors;

 

    Each director is required to submit an irrevocable, conditional resignation effective only upon both (1) the failure to receive the required vote for reelection and (2) our Board’s acceptance of such resignation;

 

    Three active standing Board committees with 100% independent members;

 

    Proxy access bylaws;

 

    Stockholder right to call special meeting;

 

    Performance-based equity compensation;

 

    Annual say-on-pay vote;

 

    Director and executive stock ownership guidelines;

 

    Anti-hedging and anti-pledging policies;

 

    Compensation clawback policy;

 

    Diversity data posted on Company website;

 

    Board involvement in setting long-term corporate strategy;

 

    Board oversight of risk management, including financial, operational, strategic, privacy, data security, legal and regulatory risks;

 

    Annual Board and Board committee self-evaluations;

 

    Annual assessment of director compensation; and

 

    Robust Code of Conduct.

For more information about our corporate governance practices, please refer to the information under “Corporate Governance” beginning on page 14 of this Proxy Statement. For more information about our executive compensation program, please refer to the information under “Compensation Discussion and Analysis” beginning on page 27 of this Proxy Statement.

Cautionary Statement Regarding Forward-Looking Statements

This Proxy Statement may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are all statements (and their underlying assumptions) included in this Proxy Statement that refer, directly or indirectly, to future events or outcomes and, as such, are inherently not factual, but rather reflect only our current projections for the future. Consequently, forward-looking

 

3


statements usually include words such as “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar words, in each case, intended to refer to future events or circumstances. Our future results may differ materially from our past results and from those projected in the forward-looking statements due to various uncertainties and risks, including, but not limited to, those described in Item 1A (Risk Factors) of Part I of our Annual Report on Form 10-K and any additional risk factors disclosed in Item 1A (Risk Factors) of Part II of our Quarterly Report on Form 10-Q for the quarter ended July 27, 2018. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward-looking statements due to the factors described in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q, as well as other important factors.

 

4


LOGO

PROXY STATEMENT

1395 Crossman Avenue

Sunnyvale, California 94089

FOR THE ANNUAL MEETING OF STOCKHOLDERS OF

NETAPP, INC.

To Be Held Thursday, September 13, 2018

 

GENERAL INFORMATION

 

Why am I receiving these materials?

The Board of Directors of NetApp, Inc. (“Board” or “Board of Directors”) has made these materials available to you on the Internet or, upon your request, has delivered printed proxy materials to you in connection with the solicitation of proxies for use at our 2018 Annual Meeting of Stockholders, and any adjournment, postponement or other delay thereof (the “Annual Meeting”). NetApp, Inc., a Delaware corporation, is referred to in this Proxy Statement as the “Company,” “NetApp,” “we” or “our.” This Proxy Statement describes proposals on which you, as a stockholder, are being asked to vote. It also gives you information on these proposals, as well as other information, so that you can make an informed decision. As a stockholder, you are invited to attend the Annual Meeting and are requested to vote on the items of business described in this Proxy Statement.

 

Why did I receive a Notice in the mail regarding the Internet availability of proxy materials?

In accordance with rules and regulations adopted by the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each of our stockholders, we are furnishing proxy materials to our stockholders over the Internet. If you received a Notice of Internet Availability of Proxy Materials (the “Notice”) by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice instructs you as to how you may access and review all of the information contained in the proxy materials. The Notice also instructs you as to how you may submit your proxy over the Internet or by telephone. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice.

 

Who can vote at the Annual Meeting?

Stockholders of record as of the close of business July 17, 2018 (the “Record Date”) are entitled to vote at the Annual Meeting. If your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A., you are considered, with respect to those shares of common stock, the stockholder of record. If your shares of common stock are held by a bank, broker or other nominee, you are considered the “beneficial owner” of those shares, which are held in “street name.” As the beneficial owner, you have the right to direct your bank, broker or other nominee how to vote your shares by following the voting instructions that your bank, broker

 

5


or other nominee provides you. If you do not provide your bank, broker, or other nominee with instructions on how to vote your shares, your bank, broker or other nominee may not vote your shares with respect to any non-routine matters, but may, in its discretion, vote your shares with respect to routine matters. For more information on routine and non-routine matters, see “What are abstentions and broker non-votes?” below.

 

When and where will the Annual Meeting take place?

The Annual Meeting will be held on Thursday, September 13, 2018, at 3:30 p.m. local time at the Company’s headquarters at 1395 Crossman Avenue, Sunnyvale, California 94089. You may contact the Company at (408) 822-6000 for directions to the Annual Meeting.

 

How do I gain admittance to the Annual Meeting?

Each stockholder must present a valid picture identification, such as a driver’s license or passport, and proof of stock ownership as of the Record Date for entrance to the Annual Meeting. Stockholders holding shares of common stock in brokerage accounts through a bank, broker or other nominee may be required to show a brokerage or account statement reflecting their stock ownership. Cameras, recording devices and other electronic devices will not be permitted at the Annual Meeting.

 

How many shares must be present to hold the Annual Meeting?

To hold the meeting and conduct business, a majority of NetApp’s shares of common stock issued and outstanding and entitled to vote, in person or by proxy, at the Annual Meeting must be present in person or by proxy. This is called a quorum.

 

How many shares of NetApp common stock are entitled to vote at the Annual Meeting?

At the Annual Meeting, each holder of common stock is entitled to one vote for each share of common stock held by such stockholder on the Record Date. On the Record Date, the Company had 261,545,628 shares of common stock outstanding and entitled to vote at the Annual Meeting. No shares of the Company’s preferred stock were outstanding. There are no cumulative voting rights.

 

Who will count the votes?

A representative of Broadridge Financial Solutions, Inc. will act as the inspector of elections and tabulate the votes.

 

How many votes are required for each proposal?

For Proposal No. 1, a nominee for director will be elected to the Board if the number of votes cast “FOR” a nominee’s election exceed the number of votes cast “AGAINST” such nominee’s election. Approval of each of Proposal Nos. 2, 3, 4, 5, and 6 requires the affirmative vote of a majority of the stock having voting power present in person or represented by proxy. Voting results will be published in a Current Report on Form 8-K, which will be filed with the SEC within four business days of the Annual Meeting.

 

How do I vote?

The Company is offering stockholders of record four methods of voting: (1) you may vote by telephone; (2) you may vote over the Internet; (3) you may vote in person by ballot at the Annual Meeting; and (4) finally, you may request a proxy card from us and indicate your vote by signing and dating the card where indicated, and mailing or otherwise returning the card in the prepaid envelope provided.

 

6


If you submit a proxy card but do not specify your votes, your shares of common stock will be voted:

 

    “FOR” the election of all the nominees named in Proposal No. 1; and

 

    “FOR” Proposal Nos. 2, 3, 4, 5 and 6.

Uninstructed proxies will be voted in the proxy holder’s discretion as to any other matter that may properly come before the Annual Meeting.

If you hold your shares of common stock through a bank, broker or other nominee, you will receive a voting instruction form from your bank, broker or other nominee with instructions on how to vote. You will not be able to vote by ballot in person at the Annual Meeting unless you have previously obtained a legal proxy from your bank, broker or other nominee and present it with your ballot at the Annual Meeting. Please contact your bank, broker or other nominee for information on obtaining a legal proxy.

 

How can I change my vote or revoke my proxy?

Any stockholder of record voting by proxy has the power to revoke a proxy at any time before the polls close at the Annual Meeting. You may revoke your proxy by filing with the Secretary of the Company an instrument of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person by ballot. If you are the beneficial owner of your shares, you must contact the bank, broker or other nominee holding your shares and follow the instructions of such bank, broker or other nominee to revoke your proxy or change your vote.

 

What are abstentions and broker non-votes?

Abstentions will be counted for the purposes of determining both (1) the presence or absence of a quorum for the transaction of business; and (2) the total number of shares entitled to vote in person or by proxy at the Annual Meeting with respect to a proposal. Accordingly, abstentions will have the same effect as a vote against a proposal, except with respect to Proposal No. 1, where they will have no effect.

A “broker non-vote” occurs when a bank, broker or other nominee holding shares for a beneficial owner does not vote on a particular proposal because the bank, broker or other nominee does not have discretionary voting power with respect to such proposal and has not received voting instructions from the beneficial owner. Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum for the transaction of business, but will not be counted for the purpose of determining the number of votes cast on a proposal. Accordingly, a broker non-vote will make a quorum more readily attainable, but will not otherwise affect the outcome of the vote on a proposal.

If your shares are held in street name and you do not instruct your bank, broker or other nominee on how to vote your shares, your bank, broker or other nominee may, at its discretion, either leave your shares unvoted or vote your shares on routine matters, but is not permitted to vote your shares on non-routine matters. Proposal No. 5 is considered a routine matter. Proposal Nos. 1, 2, 3, 4 and 6 are considered non-routine matters.

 

How many copies of the proxy materials will be delivered to stockholders sharing the same address?

The SEC has adopted rules that permit companies and intermediaries, such as brokers, to satisfy delivery requirements for proxy materials with respect to two or more stockholders sharing the same address by delivering a single Proxy Statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for stockholders and cost savings for the Company. The Company and some banks and brokers household proxy materials unless contrary instructions have been received from one or more of the affected stockholders. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate Proxy Statement, or if you are receiving multiple copies of the Proxy

 

7


Statement and wish to receive only one, please (1) follow the instructions provided when you vote over the Internet; or (2) contact Broadridge Financial Solutions, Inc., either by calling toll free at (800) 542-1061 or by writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717.

 

Where may I obtain a copy of the Annual Report?

The Notice, this Proxy Statement and the Company’s Annual Report on Form 10-K for our fiscal year that ended on April 27, 2018 (the “Annual Report”) have been made available on our website. Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April, and our fiscal 2018 began on April 29, 2017 and ended on April 27, 2018 (“fiscal 2018”). The Annual Report is not incorporated into this Proxy Statement and is not considered proxy soliciting material. The Annual Report is posted at the following website address:

http://investors.netapp.com/annuals.cfm.

 

Who pays for the solicitation of proxies?

We will bear the cost of soliciting proxies. Copies of solicitation materials will be made available upon request to brokerage houses, fiduciaries, and custodians holding shares in their names that are beneficially owned by others to forward to such beneficial owners. The Company may reimburse such persons for their costs of forwarding the solicitation materials to such beneficial owners. The Company has retained D.F. King, & Co., an AST company, a professional proxy solicitation firm, to assist in the solicitation of proxies from stockholders of the Company. D.F. King, an AST company, may solicit proxies by personal interview, mail, telephone, facsimile, email, or otherwise. The Company expects that it will pay D.F. King a customary fee, estimated to be approximately $11,000, plus reasonable out-of-pocket expenses incurred in the process of soliciting proxies. In addition, the original solicitation of proxies may be supplemented by solicitation by telephone, electronic communication or other means by directors, officers, employees or agents of the Company. No additional compensation will be paid to these individuals for any such services.

 

How and when may I submit proposals for consideration at next year’s Annual Meeting of Stockholders?

The Company’s stockholders may submit proposals for consideration at the 2019 Annual Meeting. Stockholders may also recommend candidates for election to our Board of Directors for the 2019 Annual Meeting (see “ Corporate Governance — Corporate Governance and Nominating Committee ”).

Proposals to be Considered for Inclusion in NetApp’s Proxy Materials

Pursuant to Rule 14a-8 under the Exchange Act, stockholder proposals may be included in our 2019 Proxy Statement. Any such stockholder proposals must be submitted in writing to the attention of the Corporate Secretary, NetApp, Inc., 1395 Crossman Avenue, Sunnyvale, California 94089, no later than April 3, 2019, which is 120 calendar days prior to the first anniversary of the mailing date of this Proxy Statement.

Director Nominations for Inclusion in NetApp’s Proxy Materials (Proxy Access)

Under the Company’s proxy access bylaw, a stockholder (or a group of up to 20 stockholders) owning at least 3% of the Company’s outstanding stock continuously for at least three years may nominate and include in the Company’s annual meeting materials director nominees constituting up to the greater of two directors or twenty percent of the Board, provided that the stockholders and nominees satisfy the requirements specified in the bylaws. Notice of a proxy access nomination for consideration at our 2019 Annual Meeting must be received no later than April 3, 2019 and no earlier than March 4, 2019.

Other Proposals and Nominations

Under the Company’s bylaws, a proposal that a stockholder intends to present for consideration at the 2019 Annual Meeting but does not seek to include in the Company’s proxy materials for the 2019 Annual Meeting

 

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(including the nomination of an individual to serve as a director other than pursuant to our proxy access bylaw as described immediately above) must be received by the Corporate Secretary (at the address specified in the preceding paragraph) not less than 120 calendar days nor more than 150 days prior to the date of the 2019 Annual Meeting. The stockholder’s submission must include the information specified in the Company’s bylaws.

Stockholders interested in submitting such a proposal are advised to contact knowledgeable legal counsel with regard to the detailed requirements of applicable securities laws.

If a stockholder gives notice of a proposal or a nomination after the applicable deadline specified above, the notice will not be considered timely, and the stockholder will not be permitted to present the proposal or the nomination to the stockholders for a vote at the 2019 Annual Meeting.

 

9


OUR BOARD OF DIRECTORS

The name, age and position of each of the Company’s directors as of August 1, 2018 are set forth in the table below. Except as described below, each director has been engaged in his or her principal occupation during the past five years. There are no family relationships among any of our directors or executive officers. Mr. Earhart will be retiring from the Board at the Annual Meeting and is not standing for election. The Board thanks him for his distinguished service.

 

       

Name of Director        

 

  

Age

 

    

Position

 

    

Director Since

 

   

T. Michael Nevens*

 

   68

 

     Chairman of the Board

 

     2009

 

   

Alan L. Earhart*

 

   74

 

     Director

 

     2004

 

   

Gerald Held*

 

   70

 

     Director

 

     2009

 

   

Kathryn M. Hill*

 

   61

 

     Director

 

     2013

 

   

Deborah L. Kerr*

 

   46

 

     Director

 

     2017

 

   

George Kurian

 

   51

 

     Director

 

     2015

 

   

Scott F. Schenkel*

 

   50

 

     Director

 

     2017

 

   

George T. Shaheen*

 

   74

 

     Director

 

     2004

 

   

Richard P. Wallace*

 

   58

 

     Director

 

     2011

 

*Denotes Independent Director

T. MICHAEL NEVENS has been a member of our Board since December 2009 and Chairman since June 2015. From April 2014 until becoming Chairman in June 2015, Mr. Nevens was the Company’s Lead Independent Director. Since May 2006, Mr. Nevens has been a senior advisor to Permira Funds, an international private equity fund. Prior to his position with Permira Funds, Mr. Nevens spent 23 years advising technology companies with McKinsey & Co., where he managed the firm’s Global High Tech Practice and chaired the firm’s IT vendor relations committee. Mr. Nevens currently serves on the board of Ciena Corporation. He also served on the board of Altera Corporation until its acquisition by Intel Corporation in December 2015, as well as the board of Borland Software Corporation from 2004 until 2009. Mr. Nevens has a B.S. degree in physics from the University of Notre Dame and M.S. degree in industrial administration from Purdue University.

Our Board selected Mr. Nevens to serve as a director because his experience in equity investments and advising various technology companies throughout the world led our Board to conclude that he would be a valuable member of our Board, particularly as the Company seeks to grow internationally. His experience on the boards of both public and private technology companies also provides significant value and adds to his diverse perspective.

ALAN L. EARHART has been a member of our Board since December 2004. From 1970 until his retirement in 2001, Mr. Earhart held several positions with Coopers & Lybrand and its successor, PricewaterhouseCoopers LLP, an accounting firm, including most recently as managing partner of PricewaterhouseCoopers’ Silicon Valley offices. Mr. Earhart currently serves on the board of directors of Brocade Communication Systems, Inc. and TiVo Corporation (formerly known as Rovi Corporation), both public technology companies, and is an independent consultant and retired partner of PricewaterhouseCoopers. He previously served on the board of directors of

 

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Monolithic Power Systems Inc. and Quantum Corporation. Mr. Earhart holds a B.S. degree in accounting from the University of Oregon.

Our Board selected Mr. Earhart to serve as a director because he has a deep knowledge of financial and accounting issues. Through his work experience and service on the boards of several high technology public companies, Mr. Earhart has developed knowledge of the complex issues facing global companies today. In addition, Mr. Earhart qualifies as an “audit committee financial expert” under the rules and regulations of the SEC. Mr. Earhart is a skilled advisor who makes a strong contribution to the diversity of perspectives on our Board.

GERALD HELD has been a member of our Board since December 2009. Since 1999, Dr. Held has been the Chief Executive Officer of Held Consulting, LLC, a strategic consulting firm. From 2006 to 2010, he was the Executive Chairman of Vertica Systems, an analytic database company that was acquired by Hewlett-Packard Company. From 2002 to 2008, Dr. Held was on the board of Business Objects SA. He was also a founding director of Microplace, Inc., a microfinance marketplace that was acquired by eBay, Inc. and Chairman of Bella Pictures, Inc., which was acquired by CPI Corp. Dr. Held serves on the board of Informatica Corporation, a formerly public technology company, which was taken private by the Permira Funds and Canadian Pension Plan Investment Board. He also serves as chairman of the board of several private companies, including Tamr Inc., MemSQL Inc., and Madaket Inc. From 1976 to 1997, Dr. Held served in a variety of executive roles at Tandem Computers, Inc. and Oracle Corporation.

Our Board selected Mr. Held to serve as a director because he has over 40 years of experience in developing, managing and advising technology organizations. He also has experience leading organizations through periods of growth, including growing a startup company into a public company generating several billion dollars in annual revenue. In addition to his professional experience, Mr. Held has a strong technical background, including an M.S. degree in systems engineering from the University of Pennsylvania and a Ph.D. degree in computer science, specializing in relational database technology, from University of California, Berkeley.

KATHRYN M. HILL has been a member of our Board since September 2013. Ms. Hill served in a number of positions at Cisco Systems, Inc., a communications company, from 1997 to 2013, including, among others, Executive Advisor from 2011 to 2013, Senior Vice President, Development Strategy and Operations from 2009 to 2011, Senior Vice President, Access Networking and Services Group from 2008 to 2009 and Senior Vice President, Ethernet Systems and Wireless Technology Group from 2005 to 2008. Prior to Cisco, Ms. Hill had a number of engineering roles at various technology companies. Ms. Hill currently serves on the boards of Moody’s Corporation and Celanese Corporation. Ms. Hill received a B.S. degree in Computational Mathematics from Rochester Institute of Technology.

Our Board selected Ms. Hill to serve as a director because she has extensive experience in business management and leadership of engineering and operations. Ms. Hill also has experience leading global technology organizations. Our Board believes that this experience, as well as Ms. Hill’s service on the board of another public company, adds to our Board’s collective level of expertise, skills and qualifications.

DEBORAH L. KERR has been a member of our Board since November 2017. Ms. Kerr is a proven technology leader in the software industry with more than 25 years of diverse management experience. Since October 2017, Ms. Kerr has served as a Senior Advisor to Warburg Pincus. Previously, Ms. Kerr served as the Executive Vice President and Chief Product and Technology Officer at Sabre Corporation from 2013 to 2017. Prior to her appointment at Sabre Corporation, Ms. Kerr served as Executive Vice President, Chief Product and Technology Officer at FICO from 2009 until 2012. Ms. Kerr previously held senior leadership roles with Hewlett-Packard, Peregrine Systems and NASA’s Jet Propulsion Laboratory. Ms. Kerr serves on the boards of EXLService Holdings, Chico’s FAS, Inc. and International Airlines Group. From 2013 to 2017, Ms. Kerr served on the board of DH Corporation and previously served on the board of Mitchell International. Ms. Kerr holds a M.S. degree in Computer Science and B.A. degree in Psychology.

Our Board selected Ms. Kerr to serve as a director because she has significant experience leading product and technology organizations across various industries. She brings to the Board extensive leadership, product and technology experience, including broad knowledge of product management, marketing, development, IT, operations, technology strategy and trends, and expertise in cloud and digital. Our Board believes that this

 

11


experience, as well as Ms. Kerr’s service on the boards of other public companies, adds to our Board’s collective level of expertise, skills and qualifications.

GEORGE KURIAN has been a member of our Board since June 2015. Mr. Kurian was appointed as our Chief Executive Officer on June 1, 2015 and President on May 20, 2016. From September 2013 to May 2015, he was Executive Vice President of Product Operations, overseeing all aspects of technology strategy and product and solutions development across our product portfolio. Mr. Kurian joined NetApp in April 2011 as the Senior Vice President of the Storage Solutions Group and was appointed to Senior Vice President of the Data ONTAP group in December 2011. Prior to NetApp, from 2002 to 2011, Mr. Kurian held several positions at Cisco Systems, including most recently as Vice President and General Manager of the application networking and switching technology group. From 1999 to 2002, Mr. Kurian was the Vice President of product management and strategy at Akamai Technologies. Prior to that he was a management consultant with McKinsey and Company, and led software engineering and product management teams at Oracle Corporation. Mr. Kurian holds a B.S. degree in electrical engineering from Princeton University and an M.B.A. degree from Stanford University.

Our Board selected Mr. Kurian to serve as a director because, as the Company’s Chief Executive Officer, Mr. Kurian has direct day-to-day exposure to all aspects of our business. In addition, Mr. Kurian has extensive experience and knowledge of the Company and the industry. As a result of these and other factors, our Board believes that Mr. Kurian adds to our Board’s collective level of expertise, skills and qualifications.

SCOTT F. SCHENKEL has been a member of our Board since November 2017. Since 2015, Mr. Schenkel has served as Senior Vice President and Chief Financial Officer of eBay Inc., leading finance, analytics and information technology, as well as eBay’s Classifieds business unit. Previously, he spent six years as Senior Vice President and Chief Financial Officer of eBay Marketplace, where he was responsible for finance, analytics, strategy and innovation. Scott joined eBay in 2007 as Vice President of Global Financial Planning and Analytics. Previously, Scott spent nearly 17 years at General Electric in a variety of finance roles. He served as Chief Financial Officer of GE Healthcare Clinical Systems, Chief Financial Officer for GE Plastics Europe and Chief Financial Officer of GE Lighting Europe. Mr. Schenkel spent more than six years with GE’s Corporate Audit group and began his career as part of GE’s Financial Management Program. Mr. Schenkel received his B.S. degree from Virginia Polytechnic Institute and State University’s Pamplin College of Business.

Our Board selected Mr. Schenkel because he has more than 25 years of extensive business and financial leadership expertise across technology and commerce industries. Mr. Schenkel brings to our Board a deep knowledge of financial and accounting issues, operational expertise and a wealth of experience with financial planning and analytics, strategy, audit, mergers and acquisitions, acquisition integration, Six Sigma and process improvement. Mr. Schenkel qualifies as an “audit committee financial expert” under the rules and regulations of the SEC.

GEORGE T. SHAHEEN has been a member of our Board since June 2004. From December 2006 until July 2009, he was the Chief Executive Officer and Chairman of the Board of Directors of Entity Labs, Ltd., a technology company in the data collection, storage and analytics space. Mr. Shaheen was the Chief Executive Officer of Siebel Systems, Inc., a customer relationship management software company, from April 2005 until the sale of the company in January 2006. From October 1999 to April 2001, he served as the Chief Executive Officer and Chairman of the Board of Webvan Group, Inc. Prior to joining Webvan Group, Inc., Mr. Shaheen was the Chief Executive Officer and Global Managing Partner of Andersen Consulting, which later became Accenture. Mr. Shaheen currently serves as Chairman of the Board of Korn/Ferry International. He also serves on the boards of 24/7 Customer, Inc., Green Dot Corporation and Marcus & Millichap Inc. He has served as an IT Governor of the World Economic Forum and as a member of the Board of Advisors for the Northwestern University Kellogg Graduate School of Management. He has also served on the Board of Trustees of Bradley University. Mr. Shaheen received a B.S. degree in business and an M.B.A. degree from Bradley University.

Our Board selected Mr. Shaheen to serve as a director because he has significant experience leading, managing and advising companies. Mr. Shaheen’s consulting background gives him keen insight into sales and the customer-based service aspect of the Company’s operations. In addition, Mr. Shaheen has expertise on compliance matters as a result of his service on the boards of several private and public technology companies, including service as a chairman and member of the audit and compensation committees of those boards.

 

12


RICHARD P. WALLACE has been a member of our Board since March 2011. Mr. Wallace currently serves as the President and Chief Executive Officer of KLA-Tencor Corporation, a supplier of process control and yield management solutions for semiconductor and related microelectronics industries. He began his career at KLA Instruments in 1988 as an applications engineer and has held various general management positions throughout his 27-year tenure with the company. Mr. Wallace became the CEO of KLA-Tencor in January 2006. Mr. Wallace previously served as a member of the board of directors for Semiconductor Equipment and Materials International (SEMI), an industry trade association, and previously served as a member of the board of directors for Beckman Coulter from 2009 to 2011. Mr. Wallace earned his B.S. degree in electrical engineering from the University of Michigan and an M.S. degree in engineering management from Santa Clara University.

Our Board selected Mr. Wallace to serve as a director because of his experience as chief executive officer of a publicly traded high-technology company. He brings to the Board more than two decades of experience gained while working at a technology company that has experienced growth. Mr. Wallace offers a unique perspective and expertise that is relevant to leading and advising a growth company. His experience as a board member of another publicly traded company also provides important value and adds to his unique perspective.

 

13


CORPORATE GOVERNANCE

 

Summary

Our Board has adopted policies and procedures that our Board believes are in the best interests of the Company and its stockholders while being compliant with the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC and the Nasdaq Stock Market, LLC (“Nasdaq”).

Our Board leadership structure reflects our Company leadership needs and provides effective oversight of Company management and risk management. Eight of our nine directors are independent, including our Chairman of the Board. Within the last five years, the Company has added four new independent directors to our Board and increased Board diversity.

The operation and functions of the Board are governed by our Corporate Governance Guidelines. In addition, all of the Company’s directors, officers, and employees are subject to our Code of Conduct.

Further details on our governance practices are provided in the following sections.

 

Board Leadership Structure

Our Board does not view any particular leadership structure as preferred and routinely considers the appropriate leadership structure. This consideration includes the pros and cons of alternative leadership structures in light of the Company’s operating and governance environment at the time, with the goal of achieving the optimal model for Board leadership and effective oversight of management by our Board.

Our Board consists of nine directors, eight of whom are independent. Our only management director is Mr. Kurian, our Chief Executive Officer. Mr. Nevens, an independent director, holds the role of Chairman of the Board. The Board believes this structure benefits the Board and the Company by enabling the Chief Executive Officer to focus on operational and strategic matters while enabling the Chairman to focus on Board and governance matters, including, among other things, the creation of long-term stockholder value and long range strategic planning.

As described in more detail below, our Board of Directors has three standing committees, each of which is composed solely of independent directors and chaired by an independent director. Our Board delegates substantial responsibility to each Board committee, which regularly reports its activities and actions back to the Board. We believe that our independent Board committees and their respective chairs are an important aspect of our Board leadership structure.

 

Corporate Governance Guidelines

Our Board has adopted a formal set of Corporate Governance Guidelines concerning various issues related to Board membership, structure, function and processes; Board committees; leadership development, including succession planning; oversight of risk management; and our ethics helpline. A copy of the Corporate Governance Guidelines is available on our website at http://investors.netapp.com/corporate-governance.cfm.

 

Strategy and Risk Oversight

Our Board oversees and contributes to the formation of the Company’s strategy and provides oversight of management’s execution and refinement of our strategic plans. The Board engages in discussions regarding our corporate strategy at every Board meeting and, at least annually, receives a formal update on the company’s short- and long-term objectives, including the company’s operating plan and long-term strategic plan.

Our Board, as a whole and through its committees, also has responsibility for the oversight of risk management. With the oversight of our Board, our executive officers are responsible for the day-to-day management of the material risks the Company faces. In its oversight role, our Board has the responsibility to satisfy itself that the risk management processes designed and implemented by our executive officers are adequate and functioning as

 

14


designed. The involvement of our Board in setting our long-term business strategy is a key part of our Board’s oversight of risk management and allows our Board to assess and determine what constitutes an appropriate level of risk for the Company and review and consider management’s role in risk management. Our Board regularly receives updates from management and outside advisors regarding material risks the Company faces.

Each committee of our Board oversees specific aspects of risk management. For example, our Audit Committee oversees overall integrity of our financial statements, accounting and auditing matters, our compliance with legal, regulatory and public disclosure requirements, our enterprise risk management program, and our initiatives related to cybersecurity, including prevention and monitoring; our Compensation Committee oversees the management risks associated with succession planning and the relationship between our compensation policies and programs; and our Corporate Governance and Nominating Committee oversees the management of risks associated with director independence, conflicts of interest, board composition and organization, and director succession planning. Our committees regularly report their findings to our Board.

Other than when our Board or a committee of our Board meets in executive session, senior management attends all meetings of our Board and its committees and is available to address questions raised by directors with respect to risk management and other matters.

 

Succession Planning

The Board plans for succession to the position of CEO and other senior management positions to help ensure continuity of leadership. To assist the Board in this effort, the CEO provides the Board with an assessment of other executives and their potential as a suitable successor. The CEO also provides the Board with an assessment of individuals considered to be potential successors to certain other senior management positions. The Board discusses and evaluates these assessments, including in private sessions, and provides feedback to the CEO. Specifically, in February 2017 and March 2018, the Board, including Mr. Kurian, reviewed and assessed the Company’s executive-level talent, with a focus on their potential to deliver on the Company’s strategy and long-term plan, and discussed strategies for addressing gaps. Management is responsible for developing retention and development plans for potential successors and periodic progress reports and reviews are provided to the Board.

 

Independent Directors

A majority of our Board is composed of “independent directors,” as defined in the applicable laws and regulations of the SEC and the Listing Rules of Nasdaq. The independent directors regularly meet in executive session, without management, as part of the normal agenda of our Board meetings. Our Chairman, Mr. Nevens, is a non-employee director and is independent (as defined by the Nasdaq Listing Rules).

 

Committees of the Board of Directors

Our Board of Directors maintains three standing committees and has adopted a charter for each that meets applicable Nasdaq rules. Charters are reviewed by their respective committees annually and are available at http://investors.netapp.com/corporate-governance.cfm.

Corporate Governance and Nominating Committee

The responsibilities of the committee include:

 

    Review of matters concerning corporate governance and providing recommendations to the Board

 

    Review of composition of the Board of Directors and its committees and providing recommendations to the Board

 

    Evaluation of the performance of the Board

 

    Review of conflicts of interest of members of the Board and corporate officers

 

15


    Review and approval of related person transactions

 

    Oversight and management of risks associated with director independence, conflicts of interest, board composition and organization, and director succession planning

All of the members of the Corporate Governance and Nominating Committee meet the applicable requirements for independence from Company management.

Compensation Committee

The responsibilities of the committee include:

 

    Review of the Company’s overall compensation and benefits philosophy and strategy and advising the Company’s management

 

    Oversight, evaluation and approval of the compensation of the Company’s Chief Executive Officer, other executive officers and non-employee directors

 

    Review and approval of the Company’s compensation and benefits plans and programs in accordance with the Compensation Committee charter

 

    Oversight of the management of risks associated with the Company’s compensation policies and programs

 

    In accordance with Nasdaq rules, review and assessment of the independence of any compensation consultant, legal counsel or other advisor that provides advice to the Compensation Committee

All of the members of the Compensation Committee meet the applicable requirements for independence as defined by applicable Nasdaq and Internal Revenue Service rules.

Audit Committee

The responsibilities of the committee include:

 

    Oversight of the integrity of the Company’s financial statements and adequacy of the Company’s internal controls

 

    Appointment, compensation, retention, termination and oversight of the work of the Company’s independent registered public accounting firm, Deloitte & Touche LLP, which reports directly to the Audit Committee

 

    Oversight of the quality of the internal audit function of the Company, which reports directly to the Audit Committee

 

    Oversight of compliance with legal, regulatory and public disclosure requirements

All of the members of the Audit Committee meet the applicable requirements for independence from Company management and requirements for financial literacy. Each member of the Audit Committee has the requisite financial management expertise.    

 

Director Selection

Our Board has adopted guidelines for the identification, evaluation and nomination of candidates for director.

To assist with director nominations, our Board has assigned the Corporate Governance and Nominating Committee responsibility for reviewing and recommending nominees to our Board. Although there are no specific minimum qualifications for director nominees, the ideal candidate should have the highest professional and personal ethics and values, and broad experience at the policy-making level in business, government, education, technology, or public service. In evaluating the suitability of a particular director nominee, our Board considers a broad range of factors, including, without limitation, diversity of business experience, professional expertise, length of service,

 

16


character, integrity, judgment, independence, diversity (including with respect to race and gender), age, skills, education, understanding of the Company’s business, and other commitments. In addition, our Corporate Governance and Nominating Committee may consider such other factors as it may deem, from time to time, are in our and our stockholders’ best interests.

The Corporate Governance and Nominating Committee makes an effort to ensure that our Board’s composition reflects a broad diversity of experience, professions, skills, viewpoints, geographic representation, personal traits and backgrounds. Additionally, although we have no formal policy with respect to diversity, due to the global and complex nature of our business, our Board believes it is important to identify otherwise qualified candidates who would increase our Board’s racial, ethnic, gender and/or cultural diversity. No specific weights are assigned to particular criteria, and the Corporate Governance and Nominating Committee does not believe that any specific criterion is necessarily applicable to all prospective nominees. When the Corporate Governance and Nominating Committee reviews a potential new candidate, it looks specifically at the candidate’s qualifications in light of the needs of our Board at that time, given the then-current mix of director attributes. With respect to the nomination of continuing directors for re-election, each continuing director’s past contributions to our Board are also considered.

In the case of new director candidates, the Corporate Governance and Nominating Committee reviews whether the nominee is independent for Nasdaq purposes and recommends a determination to the Board, which determination is based upon applicable Nasdaq listing standards, applicable SEC rules and regulations and the advice of counsel, if necessary. The Corporate Governance and Nominating Committee generally relies on a variety of resources to compile a list of potential candidates, including, among other things and depending upon the circumstances, its network of contacts, searches of corporate, academic and government environments and resources, and, professional search firms. We believe utilizing such a broad variety of resources furthers our Board’s goal of ensuring the identification and consideration of a diverse range of qualified candidates, including, without limitation, women and minority candidates. After considering the function and needs of our Board, the Corporate Governance and Nominating Committee conducts appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates. The Corporate Governance and Nominating Committee meets to discuss and consider such candidates’ qualifications and then selects a nominee for recommendation to our Board by majority vote.

If the Corporate Governance and Nominating Committee determines that it wants to identify new independent director candidates for Board membership, it is authorized to retain and to approve the fees of third-party executive search firms to help determine the skills and qualifications that would best complement our Board and identify prospective director nominees.

The Corporate Governance and Nominating Committee uses the same process for evaluating all nominees, regardless of the source of the nomination. The Corporate Governance and Nominating Committee will retain the services of an executive search firm to assist it in identifying new candidates to join the Board.

A stockholder meeting the ownership requirements in our bylaws, including our proxy access bylaw, who desires to nominate a candidate for election to our Board must direct the nomination in writing to NetApp, Inc., 1395 Crossman Avenue, Sunnyvale, California 94089, Attention: Corporate Secretary in the time periods prescribed by the Company’s bylaws. The nomination must include the same information required by the Company’s bylaws in connection with the nomination of a director of our Board, including, without limitation, the candidate’s name and age; home and business contact information; principal occupation or employment and the name, type of business and address of the nominee’s employer; information regarding the nominee’s and the nominating person’s ownership of Company stock; a description of any arrangement or understanding of the nominee and the nominating person with each other or any other person regarding future employment or any future transaction to which the Company will or may be a party; and a written consent to be nominated and written statement that, if nominated, such candidate will tender an irrevocable advance resignation in accordance with the Company’s Corporate Governance Guidelines. As detailed in the Company’s bylaws, every nominee, whether nominated by the Board or a stockholder, must also deliver to the Company’s Corporate Secretary certain written representations and agreements, including a representation and agreement regarding such person’s agreement, arrangements or understandings with any person or entity as to how such person, if elected as a director of the Company, will act or vote on any issue or question.

 

17


Meetings and Committees of our Board of Directors

Our Board held seven meetings and also acted by written consent during fiscal 2018. During fiscal 2018, each member of our Board attended at least 75% of the aggregate of (1) the total number of meetings of our Board held during fiscal 2018; and (2) the total number of meetings held by all Board committees on which such director served, in each case covering the periods of fiscal 2018 during which such director served on our Board or such committees, as applicable, other than Deborah L. Kerr, who was appointed in November 2017 and attended 62.5% of such meetings. In addition, five of the nominees attended 100% of the Board meetings and meetings of the committees on which such director served.

There are no family relationships among executive officers, directors or nominees of the Company. Our Board currently has three standing committees, each of which is composed entirely of independent directors, and each of which operates under a charter approved by our Board: the Audit Committee, the Corporate Governance and Nominating Committee, and the Compensation Committee.

The members of the committees as of the date of this Proxy Statement are identified in the following table:

 

Director

 

  

Audit

 

  

Compensation

 

  

Corporate Governance
and Nominating

 

   

T. Michael Nevens

 

  

 

        Chair

 

   

Alan L. Earhart

 

   Chair

 

       

 

   

Gerald Held

 

       

 

    
   

Kathryn M. Hill

 

        Chair

 

  

 

   

Deborah L. Kerr

 

  

 

         
   

Scott F. Schenkel

 

  

 

         
   

George T. Shaheen

 

       

 

    
   

Richard P. Wallace

 

       

 

    

All members of the Audit Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of Nasdaq. Our Board has determined that Messrs. Earhart and Schenkel each qualify as an “audit committee financial expert” under the rules and regulations of the SEC. The Audit Committee reviews, acts on and reports to our Board with respect to various auditing and accounting matters, including the selection of the Company’s independent registered public accounting firm, the scope of the annual audits, fees to be paid to the independent registered public accounting firm, the performance of the Company’s independent registered public accounting firm, the accounting practices of the Company and other such functions as detailed in the Audit Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Audit Committee held ten meetings during fiscal 2018.

All members of the Compensation Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of Nasdaq and each member qualifies as an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code, as amended. The Compensation Committee establishes salaries, incentive and equity compensation programs, and other forms of compensation for our officers and non-employee directors; creates the compensation guidelines under which management establishes salaries for non-officers and other employees of the Company; and administers the compensation and benefit plans of the Company. In carrying out its responsibilities, the Compensation Committee reviews, at least annually, the compensation for the Chief Executive Officer, all executive vice presidents, all senior vice presidents and non-employee directors, the corporate goals relevant to compensation, and our executive and leadership

 

18


development policies. The functions of the Compensation Committee are detailed in the Compensation Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Compensation Committee meets regularly with its outside advisors independently of management. The Compensation Committee held six meetings during fiscal 2018.

All members of the Corporate Governance and Nominating Committee are independent in accordance with the applicable laws and regulations of the SEC and the Listing Rules of Nasdaq. The Corporate Governance and Nominating Committee evaluates and recommends to our Board candidates for Board membership and considers nominees recommended by stockholders who satisfy the conditions described above under “ Director Selection. ” The Corporate Governance and Nominating Committee also develops and recommends corporate governance policies and other governance guidelines and procedures to our Board. The functions of the Corporate Governance and Nominating Committee are detailed in the Corporate Governance and Nominating Committee Charter, which can be found on the Company’s website at http://investors.netapp.com/corporate-governance.cfm. The Corporate Governance and Nominating Committee held five meetings during fiscal 2018.

 

Stockholder Meeting Attendance for Directors

While we do not have a formal policy for director attendance at our annual meetings, historically they have been scheduled on the same day as a Board of Directors meeting and were attended by the directors. In 2017, all of the directors then serving attended the 2017 Annual Meeting in person.

 

Code of Conduct

The Company has adopted a Code of Conduct that includes a conflict of interest policy that applies to all directors, officers and employees. All employees are required to affirm in writing their understanding and acceptance of the Code of Conduct.

The Code of Conduct is posted on the Company’s website at: http://investors.netapp.com/corporate-governance.cfm. The Company will post any amendments to or waivers of the provisions of the Code of Conduct on its website.

 

Political Contributions Policy

The Company’s Political Contributions Policy and its Code of Conduct prohibit political contributions of any kind, by or on behalf of the Company. Our Code of Conduct also requires advance approval of any donation of NetApp assets or funds. We believe this provides an additional measure of oversight in enforcing our policy against Company political contributions.

 

Personal Loans to Executive Officers and Directors

The Company does not provide personal loans or extend credit to any executive officer or director.

 

Stockholder Communications Policy

Stockholders may contact any of the Company’s directors by writing to them c/o NetApp, Inc., 1395 Crossman Avenue, Sunnyvale, California 94089, Attn: Corporate Secretary. Employees and others who wish to contact our Board or any member of the Audit Committee to report questionable practices may do so anonymously by using this address and designating the communication as “confidential.”

 

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DIRECTOR COMPENSATION

The Compensation Committee evaluates the compensation and form of compensation for non-employee directors annually. As a part of this process, the Compensation Committee reviews general market data for director compensation as well as director compensation data from the Company’s peer group, the same group used for our executive compensation review, including cash compensation, equity compensation and stock ownership requirements. Non-employee director compensation is generally targeted at the market median and is periodically adjusted to maintain alignment with market and peer director pay practices. Non-employee directors receive annual cash retainers as well as equity awards for their service on our Board. Details of the compensation are discussed in the narrative below. Employee directors do not receive any compensation for their services as members of our Board.

 

Director Compensation Table

The table below summarizes the total compensation paid by the Company to our directors for fiscal 2018.

 

Name

  Fees
Earned
or Paid
in Cash
($)(1)
    Restricted
Stock
Units
($)(2)
    Option
Awards
($)(3)
    Nonequity
Incentive Plan
Compensation
($)
    Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation
($)
    Total
($)
 

T. Michael Nevens

    180,000       245,117       —         —         —         —         425,117  

Jeffry R. Allen (4)

    26,667       —         —         —         —         —         26,667  

Alan L. Earhart

    120,000       245,117       —         —         —         —         365,117  

Gerald Held

    75,000       245,117       —         —         —         —         320,117  

Kathryn M. Hill

    99,632       245,117       —         —         —         —         344,749  

Deborah L. Kerr

    44,667       246,720       —         —         —         —         291,387  

Scott F. Schenkel

    44,667       246,720       —         —         —         —         291,387  

George T. Shaheen

    75,000       245,117       —         —         —         —         320,117  

Stephen M. Smith (5)

    56,250       245,117       —         —         —         —         301,367  

Robert T. Wall (4)

    35,833       —         —         —         —         —         35,833  

Richard P. Wallace

    75,000       245,117       —         —         —         —         320,117  

George Kurian (6)

    —         —         —         —         —         —         —    

 

 

 

(1) The amounts in this column represent compensation that was earned in fiscal 2018. Our Board year does not correspond with our fiscal year. Our Board year begins on the date of each annual meeting and runs until the next annual meeting. Board fees are paid at the beginning of each quarter of the Board year. A portion of the fees earned during the first quarter of fiscal 2018 were paid in the last quarter of fiscal 2017 and are included in this table. A portion of the fees earned during the first quarter of fiscal 2019 were paid in the last quarter of fiscal 2018 and are not included in this table.

 

(2) The amounts reported represent the grant date fair value of time-based restricted stock unit (“RSU”) awards to the director under the Company’s Amended and Restated 1999 Stock Option Plan and are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (FASB ASC 718). Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report. These amounts do not necessarily represent the actual value that may be realized by the non-employee director.

 

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(3) The table below sets forth the number of shares of common stock subject to outstanding options and RSUs (including RSUs for which the payout of shares has been deferred by such director) held by the non-employee directors as of April 27, 2018:

 

Name    # of Outstanding
Options (in Shares)
     # of RSUs
(in Shares)
     Total Equity Awards
Outstanding
 

T. Michael Nevens

     22,831        6,150        28,981  

Alan L. Earhart

     —          14,066        14,066  

Gerald Held

     36,916        38,176        75,092  

Kathryn M. Hill

     26,997        6,150        33,147  

Deborah L. Kerr

     —          5,456        5,456  

Scott F. Schenkel

     —          5,456        5,456  

George T. Shaheen

     —          29,976        29,976  

Richard P. Wallace

     —          29,154        29,154  

 

(4) Messrs. Allen and Wall did not stand for re-election at the 2017 Annual Meeting and did not receive RSUs.

 

(5) Mr. Smith forfeited his RSUs in connection with his resignation from the Board in February 2018.

 

(6) During fiscal 2018, Mr. Kurian served as our Chief Executive Officer, President and a member of the Board. Mr. Kurian did not receive any additional compensation for serving on our Board. For more information on Mr. Kurian’s compensation as our Chief Executive Officer and President, please see the “Executive Compensation and Related Information—Summary Compensation Table” below.

 

Summary of Director Compensation Policy

The following table sets forth a summary of our total compensation policy for our non-employee directors as of the end of fiscal 2018:

 

Position

   Annual
Cash Retainer ($)
     Equity
Grants ($)
 
Board of Directors      

Lead Independent Director/Chairman

     135,000        250,000  

Board Member (other than Lead Independent Director/Chairman)

     60,000        250,000  
Audit Committee      

Chairperson

     50,000     

Member

     20,000     
Compensation Committee      

Chairperson

     37,500     

Member

     15,000     
Corporate Governance and Nominating Committee      

Chairperson

     25,000     

Member

     10,000     

 

 

In June 2018, in accordance with its annual practice, the Compensation Committee evaluated the compensation for non-employee directors, including benchmarking the directors’ cash and equity compensation against our Compensation Peer Group (as disclosed on page 32 of this Proxy Statement) modified to exclude SAP SE because it is a foreign company with limited public disclosure. In connection with this evaluation, the Compensation Committee reviewed the annual cash retainer, the annual equity grant, fees for committee services, grants on initial appointment, and stock ownership guidelines for our non-employee directors. The Compensation Committee surveyed market median total compensation for directors of peer companies and of companies in the broader technology market, average compensation per director of peer companies, premiums paid for committee chair positions against competitive market medians, the timing of cash compensation payments, and director equity grant practices and vesting provisions of peer companies. The Compensation Committee determined, with

 

21


the assistance of its independent advisor, that the cash retainer for our non-employee directors was below the cash retainer of peer companies, and that paying quarterly cash payments in arrears was more consistent with peer pay practices. Accordingly, effective September 1, 2018, the annual cash retainer to our non-employee directors will be increased from $60,000 to $75,000, and quarterly cash payments to directors will be paid in arrears.

Our non-employee directors receive automatic annual equity grants under the Automatic Award Program of the 1999 Plan pursuant to an outside director compensation policy adopted by our Board and the Compensation Committee, which may be revised from time to time as our Board or the Compensation Committee deems appropriate. Since fiscal 2016, all non-employee director automatic annual equity grants have been in the form of RSUs.

Following the 2017 Annual Meeting of Stockholders, each of the individuals re-elected as a non-employee director received a number of RSUs as indicated in the table below with respect to their automatic annual equity awards. In addition, Ms. Kerr and Mr. Schenkel received the grants reflected in the table below in connection with their respective appointments in November 2017. Mr. Smith forfeited his RSUs in connection with his resignation from the Board in February 2018.

 

Name

 

   RSUs

 

     Stock Option Grants
(in Shares)

 

   Stock Option
Exercise Price ($)

 

   Grant Date

 

 

T. Michael Nevens

     6,150      —      —        September 14, 2017  

Alan L. Earhart

     6,150      —      —        September 14, 2017  

Gerald Held

     6,150      —      —        September 14, 2017  

Kathryn M. Hill

     6,150      —      —        September 14, 2017  

Deborah L. Kerr

     5,456      —      —        November 15, 2017  

Scott F. Schenkel

     5,456      —      —        November 15, 2017  

George T. Shaheen

     6,150      —      —        September 14, 2017  

Stephen M. Smith

     6,150      —      —        September 14, 2017  

Richard P. Wallace

     6,150      —      —        September 14, 2017  

 

 

A newly elected or appointed non-employee director receives a grant of RSUs upon his or her first election or appointment to the Board with a value of $250,000 (if such election or appointment occurs before February of the applicable year) or with a value of $125,000 (if such election or appointment occurs in or after February of the applicable year). Because Ms. Kerr and Mr. Schenkel were appointed after February of the 2017-2018 Board year, they each received grants valued at approximately $125,000.

Equity awards for non-employee directors are represented as a dollar value. For these purposes, the value of any awards of RSUs will equal the product of (1) the fair market value of one share of common stock on the grant date of such award and (2) the aggregate number of RSUs.

Each non-employee director is also eligible to receive an annual cash retainer for his or her Board and committee service, pursuant to the terms of the outside director compensation policy. The Compensation Committee has approved a deferral program for our non-employee directors, which allows each non-employee director to elect to defer the receipt of his or her annual cash retainer until a later date in accordance with applicable tax laws. Additionally, for any automatic equity grant in the form of RSUs, the director may elect in accordance with federal tax laws when he or she will receive payout from his or her vested RSUs and defer income taxation until the award is paid. In connection with this deferral, a director may elect to receive payout within 30 days of the earliest of: (1) if the director so specifies, a specified date that is no earlier than January 1 of the second calendar year immediately following the date on which the RSUs vested; (2) the date the director ceases to serve as a director for any reason (in accordance with Section 409A of the Internal Revenue Code of 1986, as amended and the regulations thereunder); and (3) the date on which a Change of Control occurs. If the director does not specify a date per (1) above, then the RSUs shall be paid out upon the earlier to occur of (2) and (3) above. For the definition of “Change of Control”, please see “ Termination of Employment and Change of Control Agreements — Definitions Contained in Change of Control Severance Agreement ” below. An election to defer the payout of vested RSUs is not

 

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intended to increase the value of the payout to the non-employee director, but rather to give the non-employee director the flexibility to decide when he or she will be subject to taxation with respect to the award. Any election to defer payment of any vested RSUs will not alter the other terms of the award, including the vesting requirements.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

To the Company’s knowledge, the following table sets forth certain information regarding beneficial ownership of the Company’s common stock as of July 15, 2018, except as otherwise set forth below, by (1) each person or entity who is known by the Company to own beneficially more than 5% of the Company’s common stock; (2) each of the Company’s directors and nominees for director; (3) each of the Company’s executive officers set forth in the Summary Compensation Table; and (4) all of the Company’s current directors and executive officers as a group.

Except as indicated, the address of the beneficial owners is c/o NetApp, Inc., 1395 Crossman Avenue, Sunnyvale, California 94089. Information related to holders of more than 5% of the Company’s common stock was obtained from filings with the SEC pursuant to Sections 13(d) or 13(g) of the Exchange Act.

 

Name of Beneficial Owners

   Number of
Shares
Beneficially
Owned

 

    

 

Percentage
of

Class(1)

 

 

PRIMECAP Management Company(2)

     39,985,620        15.3

177 E. Colorado Blvd, 11 th Floor

     

Pasadena, CA 91105

     

The Vanguard Group(3)

     27,603,758        10.6

100 Vanguard Boulevard

     

Malvern, PA 19355

     

BlackRock, Inc.(4)

     20,282,566        7.8

55 East 52nd Street

     

New York, NY 10055

     

Vanguard Chester Funds — Vanguard Primecap Fund(5)

     14,494,500        5.5

100 Vanguard Boulevard

     

Malvern, PA 19355

     

George Kurian(6)

     137,439        *  

Ronald J. Pasek(7)

     60,735        *  

Joel D. Reich(8)

     34,160        *  

Henri P. Richard(9)

     74,382        *  

Matthew K. Fawcett(10)

     39,668        *  

T. Michael Nevens(11)

     49,951     

Alan L. Earhart(12)

     18,971        *  

Gerald Held(13)

     35,807        *  

Kathryn M. Hill(14)

     26,910        *  

Deborah L. Kerr

     0        *  

Scott F. Schenkel(15)

     5,456     

George T. Shaheen(16)

     6,150        *  

Richard P. Wallace(17)

     7,132        *  

All current directors and executive officers as a group (13 persons)(18)

     496,761        *  

 

* Less than 1%

 

(1) Percentage of Class is based on 261,291,505 shares of common stock outstanding on July 15, 2018. Shares of common stock subject to stock options and RSUs that are currently exercisable or will become exercisable or issuable within 60 days of July 15, 2018 are deemed outstanding for computing the percentage of the person or group holding such options and/or RSUs, but are not deemed outstanding for computing the percentage of any other person or group. This table does not include the vested options or RSUs held by our directors for which release has been deferred. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.

 

24


(2) Information concerning stock ownership was obtained from Amendment No. 5 to the Schedule 13G filed with the SEC on February 27, 2018 by PRIMECAP Management Company which reported sole voting power with respect to 12,712,995 of such shares of common stock and sole dispositive power with respect to all 39,985,620 shares of common stock.

 

(3) Information concerning stock ownership was obtained from Amendment No. 4 to the Schedule 13G filed with the SEC on February 9, 2018 by The Vanguard Group which reported sole voting power with respect to 384,007 of such shares of common stock and sole dispositive power with respect to 27,176,698 shares of common stock.

 

(4) Information concerning stock ownership was obtained from Amendment No. 6 to the Schedule 13G filed with the SEC on February 8, 2018 by BlackRock, Inc. which reported sole voting power with respect to 17,284,654 of such shares of common stock and sole dispositive power with respect to all 20,282,566 shares of common stock.

 

(5) Information concerning stock ownership was obtained from Amendment No. 1 to the Schedule 13G filed with the SEC on February 2, 2018 by Vanguard Chester Funds — Vanguard Primecap Fund which reported sole voting power with respect to 14,494,500 of such shares of common stock and sole dispositive power with respect to all 0 shares of common stock.

 

(6) Consists of 137,439 shares of common stock held of record by Mr. Kurian.

 

(7) Consists of 60,735 shares of common stock held of record by Mr. Pasek.

 

(8) Consists of (i) 7,760 shares of common stock held of record by Mr. Reich; and (ii) 26,400 shares of common stock issuable to Mr. Reich upon exercise of outstanding stock options exercisable within 60 days of July 15, 2018, all of which were fully vested as of such date.

 

(9) Consists of 74,382 shares of common stock held of record by Henri Richard and Gay Richard JWTROS .

 

(10) Consists of 39,668 shares of common stock held of record by Mr. Fawcett.

 

(11) Consists of (i) 20,970 shares of common stock held of record by The Nevens Family 1997 Trust; (ii) 22,831 shares of common stock issuable to Mr. Nevens upon exercise of outstanding stock options exercisable within 60 days of July 15, 2018, all of which were fully vested as of such date; and (iii) 6,150 shares of common stock issuable to Mr. Nevens upon the vesting of RSUs within 60 days of July 15, 2018.

 

(12) Consists of (i) 12,821 shares of common stock held of record by Mr. Earhart; and (ii) 6,150 shares of common stock issuable to Mr. Earhart upon the vesting of RSUs within 60 days of July 15, 2018.

 

(13) Consists of (i) 7,391 shares of common stock held of record by Mr. Held; and (ii) 28,416 shares of common stock issuable to Mr. Held upon exercise of outstanding stock options exercisable within 60 days of July 15, 2018, of which were fully vested as of such date.

 

(14) Consists of (i) 20,760 shares of common stock held of record by Kathryn Hill Trustee of the Kathryn Hill 2007 U/A/D 1/10/2007 Reserve Account; and (ii) 6,150 shares of common stock issuable to Ms. Hill upon the vesting of RSUs within 60 days of July 15, 2018.

 

(15) Consists of 5,456 shares of common stock issuable to Mr. Schenkel upon the vesting of RSUs within 60 days of July 15, 2018.

 

(16) Consists of 6,150 shares of common stock issuable to Mr. Shaheen upon the vesting of RSUs within 60 days of July 15, 2018.

 

(17) Consists of 7,132 shares of common stock held of record by Mr. Wallace.

 

(18) Consists of (i) 389,058 shares of common stock held of record by our current directors and executive officers; (ii) 77,647 shares of common stock issuable upon the exercise of outstanding options held by our directors and exercisable within 60 days of July 15, 2018, all of which were fully vested as of such date; and (iii) 30,056 shares of common stock issuable upon the vesting of RSUs within 60 days of July 15, 2018.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers and persons who own more than 10% of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of changes in their ownership of common stock and other equity securities of the Company. Executive officers, directors and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.

Based solely on the review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during fiscal 2018, its executive officers, directors and greater than 10% stockholders complied with all Section 16 filing requirements, except a late Form 4 filed by Mr. Richard on July 20, 2017 reporting a sale of Company stock and a late Form 4 filed by Mr. Reich on November 20, 2017 reporting a release of RSUs.

 

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COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis (“CD&A”) provides information on our executive compensation program and our compensation philosophy for our named executive officers (“NEOs”), who in fiscal 2018 were:

 

    George Kurian, Chief Executive Officer and President

 

    Ronald J. Pasek, Executive Vice President and Chief Financial Officer

 

    Joel D. Reich, Executive Vice President and General Manager, NetApp Storage Systems and Software business unit

 

    Henri Richard, Executive Vice President, Worldwide Field and Customer Operations

 

    Matthew K. Fawcett, Senior Vice President, General Counsel and Secretary

The Board has delegated to the Compensation Committee sole authority and responsibility for establishing and overseeing salaries, incentive compensation programs, and other forms of compensation for our executive officers, general remuneration policies for the balance of our employee population and for overseeing and administering our equity incentive and benefits plans.

 

Executive Summary

NetApp is the data authority for the hybrid cloud. We provide a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments. Together with our partners, we empower global organizations to unleash the full potential of their data.

Fiscal 2018 Company Performance

Fiscal 2018 was an important milestone in NetApp’s transformation. We successfully pivoted to the growth areas of the market and improved operational discipline to deliver sustained and profitable growth. Through a focus on execution, we grew total revenue by 7%, while improving both gross and operating margins from fiscal year 2017. Most notably, product revenue grew 15% and we expanded product gross margins by 350 basis points. Growth in revenue from strategic solutions was strong and revenue from mature solutions stabilized, as expected.

 

    Our net revenues increased 7% in fiscal 2018 compared to fiscal 2017, primarily due to an increase of 15% in product revenues, partially offset by a 3% decrease in software and hardware maintenance and other services revenues.

 

    Our Strategic solutions, 3 which represent our pivot to the growth areas of the market, are aligned to our customers’ top IT imperatives and position us to lead in the new era of IT. In fiscal 2018, these solutions grew to 71% of net product revenue and grew at a rate of 24% from fiscal 2017. As expected, headwinds from our Mature solutions lessened over the course of the year. The combination of these two dynamics yielded positive growth of product revenue for the year.

 

    Our GAAP gross margin was 62.6% in fiscal 2018 and 61.4% in fiscal 2017. Our non-GAAP gross margin improved to 63.4% in fiscal 2018, from 62.3% in fiscal 2017, driven by a 350 basis point increase in product gross margin 4 .

 

    GAAP operating margin was 19.0% in fiscal 2018 and 12.0% in fiscal 2017. The combination of revenue growth and cost rationalization enabled NetApp to improve Non-GAAP operating margin to 19.0% in fiscal 2018, from 17.2% in fiscal 2017 4 .

 

3   Strategic solutions include Clustered ONTAP, branded E-Series, SolidFire, converged and hyper-converged infrastructure, and optional add-on software products. Mature solutions include 7-mode ONTAP, add-on hardware and related operating system (OS) software and original equipment manufacturers (OEM) products.
4   A reconciliation of non-GAAP to GAAP results can be found in Annex A.

 

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Below is a brief summary of our financial performance for fiscal 2018 compared to fiscal 2017:

 

       
   Financial Performance    Fiscal 2017    Fiscal 2018    Change

Net revenues

 

   $5.52 billion

 

   $5.91 billion

 

   7%

 

GAAP gross margin

 

   61.4%

 

   62.6%

 

   1.2 p.p

 

Non-GAAP gross margin 5

 

   62.3%

 

   63.4%

 

   1.1 p.p.

 

GAAP operating margin

 

   12.0%

 

   19.0%

 

   7.0 p.p

 

Non-GAAP operating margin 5

 

   17.2%

 

   19.0%

 

   1.8 p.p.

 

Cash flows from operations

 

   $986 million

 

   $1,478 million

 

   49.9%

 

The Company paid cash dividends of $0.20 per outstanding common share in each quarter of fiscal 2018 for an aggregate of $214 million in cash dividends. We repurchased and retired 15 million shares of our common stock for an aggregate of $794 million, bringing our total cash returned to stockholders to approximately $1.01 billion in fiscal 2018. We closed fiscal 2018 with $5.39 billion in cash and short-term investments.

Total Stockholder Return Performance

As reflected in the table below, our strong financial performance resulted in an annualized total stockholder return (“TSR”) performance that compares well against the S&P 500 Information Technology Index and S&P 500 Index.

 

 
Annualized Total Stockholder Return
   
     

1-Year (%)

Fiscal 2018

 

 

3-Year (%)

Fiscal 2016 – Fiscal 2018 

 

   

  NetApp, Inc.

 

   65%

 

  24%

 

   

  S&P 500 Information

  Technology Index

 

   27%

 

  18%

 

   

  S&P 500 Index

 

   12%

 

  8%

 

Compensation Objectives and Key Fiscal 2018 Compensation Actions

The Compensation Committee’s objectives for our executive compensation programs are:

 

    Drive long-term stock price appreciation by linking a meaningful portion of executive compensation to financial and non-financial measures that will drive or reflect the creation of stockholder value;

 

    Help recruit and retain experienced and highly qualified executives given the competitive labor environment in which the Company competes for such talent; and

 

    Motivate our executives to perform to the best of their abilities while holding them accountable for business results, and for obtaining those results ethically.

In accordance with our program objectives, the Compensation Committee took the following key actions with respect to executive compensation in fiscal 2018:

Executive Incentive Compensation Plan (ICP)

In fiscal 2018, the cash awards under the Executive Incentive Compensation Plan (ICP) were tied to both Company financial and individual performance goals for fiscal 2018. In fiscal 2018, the Company adjusted non-GAAP

 

5   A reconciliation of non-GAAP to GAAP results can be found in Annex A.

 

28


operating profit to include stock-based compensation expense for purposes of determining incentive compensation, including executive incentive compensation. The Compensation Committee believes that this change incents conservative management of equity compensation. Based on the translation of performance relative to target Company financial goals, the executive incentive compensation pool was funded at 157.5% of target in fiscal 2018. See Components of Compensation- Executive ICP on page 33.

Long-Term Stock-Based Incentive Compensation

In fiscal 2018, the Compensation Committee granted performance-based restricted stock units (“PBRSUs”) and time-based restricted stock units (“RSUs”) to all of our NEOs. The target mix of equity awards was 75% PBRSUs and 25% RSUs for the CEO and 60% PBRSUs and 40% RSUs for the other NEOs. Half of the PBRSUs granted to each NEO in fiscal 2018 are scheduled to vest at the end of two years and the remaining PBRSUs are scheduled to vest at the end of three years. The PBRSU awards are earned based on NetApp’s relative TSR compared to the median TSR of companies listed on the S&P 1500 Composite Technology Hardware and Equipment Index and are intended to align the interests of the NEOs with the Company’s stockholders with respect to the long-term performance of the Company.

With respect to the PBRSUs granted in fiscal 2016 that vested in fiscal 2018, as a result of strong relative TSR, Mr. Kurian earned 163.3% of such PBRSUs and the other NEOs that received such grants earned 160.0% of such PBRSUs, based on NetApp’s relative TSR performance against the companies in the applicable index. Mr. Kurian’s share award as a percentage of target differed from that of the other NEOs because Mr. Kurian received his PBRSU award at a later date than the other NEOs due to his promotion to CEO in June 2016. With respect to the PBRSUs granted in fiscal 2017 that vested in fiscal 2018, the NEOs earned 200.0% of such PBRSUs, based on NetApp’s strong relative TSR performance against the companies in the applicable index.

For fiscal 2019, executives will receive PBRSUs that vest at the end of three years based on the achievement of a cumulative Adjusted Operating Income measure (weighted 50%), consistent with how Adjusted Operating Income is measured for the Executive ICP, in addition to relative TSR (weighted 50%). In addition, instead of measuring the performance objectives against the performance of an index, performance will be measured against a selected group of peer companies to increase the relevance of the benchmark to our business. See Components of Compensation- Long-Term Stock Based Incentive Compensation on page 36.

 

29


Key Elements of Fiscal 2018 Compensation

The following table describes the elements of our fiscal 2018 executive compensation program and the objectives for each element.

 

         
Type

 

 

Element

 

 

Key Characteristics

 

 

Objective

 

 

How We Determine
Amount

 

   

Fixed

  Base Salary   Fixed, regular cash compensation   Designed to promote excellence in the day-to-day management and operation of our business  

Qualifications and

experience, scope

of responsibilities,

future potential,

past performance,

tenure and

competitive market

data

 

   

Variable; annual; performance-

based

  Executive Incentive Compensation   Cash incentive tied to achievement of 2018 operating profit, revenue and individual performance metrics  

Aligns executive compensation to our annual performance and creates accountability for NEOs to enhance the value of the Company and drive strategic objectives

 

  Targets based on competitive market data and CEO recommendations
   

Fixed; long-term

  Time-Based RSUs   Vest annually in equal installments over four years  

Promotes retention while aligning the ultimate award value directly with changes in our stock price over the vesting period

 

  Competitive market data and CEO recommendations
   

Variable; long-term; performance-

based

  PBRSUs  

50% of PBRSUs vest after a two-year performance period and 50% vest after a three-year performance period based on our TSR compared to the S&P 1500 Technology Hardware and Equipment Index

 

 

  Provides strong alignment between the interests of the NEOs and the stockholders   Competitive market data and CEO recommendations

 

30


Our Process for Determining and Administering Our Compensation Program

 

 

LOGO

COMPENSATION LIFE CYCLE APRIL-JUNE JANUARY-MARCH JULY-SEPTEMBER OCTOBER-DECEMBER Review performance against goals; Approve all elements of compensation for NEOs for prior and current fiscal years Review compensation risk assessment and disclosure; Review equity usage and projections; Update Stock Plan, as appropriate; File proxy statement; Determine compensation consultant independence; Hold annual meeting, including director elections and say-on-pay vote Review and update peer group; Conduct competitive analysis; Develop or update incentive plans for next fiscal year Conduct shareholder outreach, as appropriate; Review compensation strategy and program, including incentive plans

At the outset of each fiscal year, the Compensation Committee establishes a formal planning calendar to ensure a consistent and deliberative approach to its executive compensation decisions, including scheduling its process for evaluating competitive market data, reviewing compensation strategy and ensuring that its pay programs support the business strategy, approving executive pay actions, administering executive incentive plans, and reporting outcomes to stockholders.

In making its decisions regarding compensation, the Compensation Committee obtains the advice and counsel of Farient Advisors LLC (“Farient”), the Compensation Committee’s independent compensation consultant. In fiscal 2018, Farient provided information and guidance on our compensation strategy, peer group, competitive pay levels and pay practices, investor trends, alignment between our executive pay and performance, design of our incentive plans, including performance measures and goals, our annual compensation risk assessment, and Board compensation. Farient did not provide any services to the Company other than those requested and approved by the Compensation Committee. The Compensation Committee assessed the independence of Farient pursuant to SEC rules and concluded that no conflict of interest exists that would prevent Farient from independently representing the Compensation Committee.

The Compensation Committee also solicits input from our CEO regarding all elements of the compensation to be paid to those executives reporting to him, including all of the NEOs other than himself. As part of the annual review process, our CEO provides compensation recommendations for the executives consistent with our pay principles. His recommendations are based on his assessment of each NEO’s responsibilities and contributions to overall Company performance. With respect to compensation for our CEO, the Chair of the Compensation Committee solicits input from our CEO and the Board of Directors as to their perspectives of the CEO’s and the Company’s performance, and from Farient regarding CEO compensation relative to the market and Company performance. The Compensation Committee deliberates and makes decisions on our CEO’s compensation without the CEO present.

The Compensation Committee established an equity subcommittee. This subcommittee is currently composed of our CEO and the Executive Vice President of Human Resources. The subcommittee may award equity to employees who hold positions at the Vice President level or below according to equity grant guidelines established by the Compensation Committee each year, and provided that the equity subcommittee may not grant awards in excess of the pool authorized by the Compensation Committee.

 

31


Say-on-Pay

NetApp values the input of our stockholders on our compensation programs. We hold an advisory vote on executive compensation on an annual basis, and, following the recommendation of our stockholders on frequency of votes at the 2017 Annual Meeting, we will continue to do so. We also regularly communicate with our stockholders to better understand their opinions on governance issues, including compensation. Our stockholders will have the opportunity once again at this year’s Annual Meeting to endorse our executive compensation program through the stockholder advisory vote to approve executive compensation (commonly known as a “say-on-pay” vote) included as Proposal No. 4 in this Proxy Statement. Last year, over 97% of the stockholder votes cast on this proposal (excluding broker non-votes) in our September 2017 meeting were in favor of our executive compensation proposal. The Compensation Committee believes that the result of this vote affirms our stockholders’ support for our approach to executive compensation. Although the Compensation Committee’s consideration of fiscal 2018 executive compensation occurred earlier than September 2017, with compensation for most elements established by June 2017, deliberations of fiscal 2018 compensation did consider stockholder views on performance-based equity compensation. The Compensation Committee will continue to consider input from stockholders and the outcome of our annual say-on-pay votes when making future executive compensation decisions. We encourage you to review this CD&A, together with the compensation tables that follow, prior to casting your advisory vote on the “say-on-pay” proposal.

Competitive Market Data

To establish the market rate of pay for NEOs, the Compensation Committee reviews data from a targeted peer group of similarly situated technology companies. To determine the appropriate peer group, the Compensation Committee considers companies that are similar in one or more of the following criteria: revenue, number of employees, market capitalization and other comparable business considerations such as a change in industry dynamics (including mergers and acquisitions). In addition to focusing on our direct product line competitors, we consider other companies with whom we compete for talent in our various markets for which data is available.

For fiscal 2018, the Compensation Committee reviewed the Company’s compensation peer group used to benchmark compensation of our NEOs, as well as our broader executive population, with assistance and guidance from Farient. To determine pay levels, the Compensation Committee focused on a set of technology companies where the median revenue of the group approximates NetApp’s revenue and the business model characteristics of the group most closely resemble those of NetApp. The Compensation Committee also used relevant subsets of these peers to investigate certain other pay practices, including the mix of compensation vehicles and measures used in incentive plans.

The fiscal 2018 “Compensation Peer Group” consisted of:

 

Adobe Systems Inc.

Alphabet Inc.

Amazon Web Services

Apple Inc.

BMC Software

Broadcom Corporation

Brocade Communications Systems, Inc.

CA Technologies

Cisco Systems, Inc.

Citrix Systems, Inc.

CommVault Systems, Inc.

Dell/EMC

Hewlett-Packard Enterprise Company

  

Hitachi Data Systems

Intel Corporation

International Business Machines Corp.

Intuit Inc.

Juniper Networks, Inc.

KLA-Tencor Corp.

Logitech International

Marvell Technology

Micron Technology

Microsoft Corporation

Nimble Storage

Nutanix

Open Text

    

Oracle Corp.

Pure Storage

QLogic Corp.

QUALCOMM Incorporated

Red Hat, Inc.

Salesforce.com

SanDisk Corp.

SAP SE

Seagate Technology

Symantec Corporation

Teradata Corporation

VMware, Inc.

Western Digital Corp.

Yahoo! Inc.

 

 

32


Pay Positioning

The Compensation Committee has established a pay positioning philosophy that considers the highly competitive market for talent in which we participate and the relatively aggressive incentive goals for our organization. As a starting point, the Compensation Committee looked at each NEO’s current compensation and the ranges of base salary, target annual cash incentive and equity compensation at the 25th, 50th, and 75th percentiles within the Compensation Peer Group. The Compensation Committee then applied its judgment in determining proper levels of each component of compensation for NEOs. The end result for fiscal 2018 was a total compensation package for NEOs targeted at between the 50 th and 65 th percentile for total compensation relative to the Compensation Peer Group. The actual total compensation received by the NEOs approximated the median.

A majority of each NEO’s total compensation is performance-based, meaning that the actual value realized is subject to short-term financial performance, individual performance, or long-term stock price performance. Target pay positioning may vary by individual based on a wide range of considerations, including each executive’s role, skills, and overall impact on the management and strategic development of the Company.

 

Components of Compensation

Base Salary

The Compensation Committee determined that increases in the NEOs’ base salaries were merited due to their individual performance and leadership during the first phase of the Company’s transformation, as well as strong stockholder returns and to maintain market competitiveness. The fiscal 2018 base salaries were as follows:

 

       

   Name

 

  

Fiscal 2017 Base Salary

 

  

Fiscal 2018 Base Salary

 

  

Percentage Increase

 

 

George Kurian

 

   $875,000

 

   $925,000

 

   5.7%

 

 

Ronald J. Pasek

 

   $550,000

 

   $585,000

 

   6.4%

 

 

Joel D. Reich

 

   $475,000

 

   $513,000

 

   8.0%

 

 

Henri Richard

 

   $550,000

 

   $575,000

 

   4.5%

 

 

Matthew K. Fawcett

 

   $500,000

 

   $520,000

 

   4.0%

 

Executive ICP

The Compensation Committee annually approves metrics and goals for our Executive Compensation Plan (“Executive ICP”) with payment of incentives, if any, shortly following the end of the fiscal year. In fiscal 2018, the cash awards under the Executive ICP were tied to achievement of both Company and individual annual performance goals. The Compensation Committee believes that an incentive plan tied to operational and individual performance metrics drives accountability by our NEOS to achieve objectives that are important for ultimately driving stock price performance. This plan was designed to, among other things, satisfy the requirements for 162(m) deductibility of performance-based executive compensation expenses, however, except for certain grandfathered arrangements, the performance-based compensation exemption was eliminated as of January 1, 2018 with the passage of the Tax Cuts and Jobs Act of 2017.

Target Awards

Target Executive ICP awards for NEOs are set so that target total short-term cash compensation (salary plus target Executive ICP award) is between the 50 th and 65 th percentile relative to the Compensation Peer Group. For fiscal 2018, our NEOs’ target total short-term cash compensation was positioned at approximately the median relative to the Compensation Peer Group.

 

33


In fiscal 2018, the Compensation Committee increased Mr. Kurian’s target Executive ICP award from 160% to 170% of his salary in recognition of his experience and contributions as CEO and the competitive pay position to the market.

 

       

   Name

 

  

Fiscal 2017 Target ICP
Award % of Salary

 

  

Fiscal 2018 Target ICP
Award % of Salary

 

    

        Increase        

 

 

   George Kurian

 

   160%

 

    

 

170

 

 

   10 p.p.

 

 

   Ronald J. Pasek

 

   110%

 

    

 

110

 

 

   0 p.p

 

 

   Joel D. Reich

 

   110%

 

    

 

110

 

 

   0 p.p.

 

 

   Henri Richard

 

   110%

 

    

 

110

 

 

   0 p.p.

 

 

   Matthew K. Fawcett

 

   80%

 

    

 

80

 

 

   0 p.p.

 

Threshold Goal and Determination of Awards

To earn any award under the Executive ICP for fiscal 2018, NetApp was required to achieve a threshold goal of $436 million in operating profit. If the threshold goal was not achieved, none of the participants in the Executive ICP were eligible to earn any incentive cash compensation. If NetApp achieved the operating profit threshold, each participant was eligible to earn a maximum award of 200% of such participant’s target award. The Compensation Committee could, in its discretion, reduce the actual award earned by each participant in accordance with achievement by the Company of revenue and operating profit goals (“Financial Goals”) and achievement by the NEO of individual Management Business Objectives (“MBOs”) tied to the Company’s strategic business objectives, as further described below.

Once the threshold goal was achieved, the Compensation Committee determined the Executive ICP pool based on company revenue (weighted 1/3 rd ) and Adjusted Operating Income (weighted 2/3 rds ). Subject to the limitation of the overall award pool, the Compensation Committee determined awards to each NEO based on a combination of financial performance relative to financial goals (75%) and the achievement by each NEO of their MBOs (25%) as shown below:

 

LOGO

Financial Goals (75%) MBOs (25%) Revenue Adjusted Operating Income Individual Goals

Financial Goals

The Compensation Committee believes that the continued use of revenue and operating profit in our Executive ICP drove the right decisions and behaviors. Moreover, these measures are intended to reflect the Company’s business strategy, which includes making tradeoffs between operating profit and revenue growth, encouraging executives to make balanced decisions intended to benefit the Company as a whole, while mitigating the potential for executives taking undue risks. The measures, weighting and rationales for the Financial Goals are as follows:

 

     

   Measure

 

  

Weighting

 

  

Rationale

 

 

Revenue

 

   1/3 rd

 

  

Encourage growth and the creation of stockholder value

 

 

Adjusted Operating Income

 

  

 

2/3 rds

 

  

Encourage effective management of Company resources and the creation of stockholder value

 

The measure of non-GAAP operating profit is derived from net revenues from our products and services and the costs related to the generation of those revenues, such as cost of revenue, sales and marketing, research and development, and general and administrative expenses. Non-GAAP operating profit for fiscal 2018, both on an actual and target basis, excluded items that we believe are not reflective of our short-term operating performance,

 

34


such as amortization of intangible assets, acquisition-related income and expenses, restructuring charges and gains on the sale of or losses on impairments of assets. We publicly disclose a detailed reconciliation of GAAP to non-GAAP net income and operating profit, along with other statement of operations items, on a regular basis with the Company’s quarterly earnings announcements. In early fiscal 2018, to incentivize disciplined use of equity by management, the Company adjusted non-GAAP operating profit to include stock-based compensation expense for purposes of determining incentive compensation, including Executive ICP (“Adjusted Operating Income”). The target Adjusted Operating Income for Executive ICP was set at $872 million. In fiscal 2017, we did not adjust non-GAAP operating profit to include stock-based compensation expense for purposes of calculating Executive ICP. If we had calculated it in the same manner as we calculated Adjusted Operating Income for fiscal 2018 (i.e. including $195 million in stock-based compensation expense), the Adjusted Operating Income for fiscal 2017 would have been $755 million.

Prior to or shortly after the beginning of each fiscal year, including fiscal 2018, the Board approves an annual operating plan (or “AOP”) that includes a measure of Adjusted Operating Income and revenue. The AOP is derived from results of the prior year as well as the Company’s expectations for its performance relative to its strategy, the Company’s competitors and the overall market for the upcoming year. The fiscal 2018 Adjusted Operating Income and revenue goals for Executive ICP were set at the expected level of achievement of the AOP.

For fiscal 2018, the portion (75%) of Executive ICP based on Financial Goals was calculated based on the Company’s achievement of revenue and Adjusted Operating Income versus targets, with revenue weighted at one-third and Adjusted Operating Income weighted at two-thirds. In establishing our Adjusted Operating Income and revenue goals, we set the targets shown in the chart below. The target Adjusted Operating Income for Executive ICP was set at $872 million. As noted above, if we had calculated Adjusted Operating Income for fiscal 2017, the actual Adjusted Operating Income for fiscal 2017 would have been $755 million. (†)

 

             
    

Fiscal 2018
Revenue
Goals
($MMs)
(1/3
rd
weighting)

 

 

% of
Target

 

 

% of
Target
Award

 

 

Fiscal 2018
Adjusted
Operating
Income
Goals
($MMs)
(2/3
rds
weighting)

 

 

% of
Target

 

 

% of
Target
Award

 

 

Maximum

 

    $6,325

 

  110%

 

  200%

 

    $1,003

 

  110%

 

  200%

 

 

Target

 

    $5,750

 

  100%

 

  100%

 

    $872

 

  100%

 

  100%

 

 

Threshold

 

    $4,888

 

  85%

 

  25%

 

    $698

 

  80%

 

  20%

 

 

<Threshold

 

  <$4,888

 

  <85%

 

  0%

 

  <$698

 

  <80%

 

  0%

 

 

Fiscal 2018 Achievement

 

    $5,911

 

  103%

 

  128%

 

    $965

 

  111%

 

  171%

 

 

(†) Amount of awards determined by interpolating for performance between discrete points shown in the table.

In fiscal 2018, the Company achieved 111% of our annual Adjusted Operating Income goal, translating into 171% of the target award, and 103% of our annual target revenue goal, translating into 128% of the target award. Based on the translation of performance relative to target goals for the blend of revenue and operating profit into a percent of target awards, the Executive ICP pool was funded at 157.5% of target.

Once the Executive ICP pool was determined, the Compensation Committee allocated the pool and calculated the actual awards for each executive based on achievement by the Company of the revenue and operating profit targets, which results were applied to 25% and 50% respectively of their award and the executive’s achievement of their MBOs and associated performance rating, which determined the payout percentage (0% to 200%) for the 25% of their target award allocated based on their individual MBOs.

 

35


Individual MBOs

For fiscal 2018, the 25% of the Executive ICP pool was allocated to awards based on individual performance, as measured by the achievement of an executive’s individual MBOs, each of which was designed to help achieve the Company’s strategic objectives and drive individual accountability. The MBOs for the NEOs related to the Company’s strategic objectives within the following categories: (1) Acquire new customers; (2) Win with the portfolio and become the hybrid cloud data leader; (3) Transform to excel operationally; and (4) Accelerate the organizational foundation.

At the end of fiscal 2018, Mr. Kurian considered each NEO’s achievement of his or her MBOs for the period and then determined each NEO’s individual rating on a scale of 1 to 5. Based on Mr. Kurian’s determination of the NEO’s rating, Mr. Kurian then recommended to the Compensation Committee a payout percentage of between 0% and 200% for each NEO of such NEO’s target individual MBO. After reviewing Mr. Kurian’s assessment and recommendation, the Compensation Committee determined and approved the payout percentage. For Mr. Kurian, the Compensation Committee, in consultation with Mr. Kurian, determined Mr. Kurian’s achievement of his MBOs. At the end of fiscal 2018, Mr. Kurian submitted the self-assessment to the Compensation Committee. After reviewing Mr. Kurian’s self-assessment and making its own evaluation of Mr. Kurian’s performance after consulting with the Board, the Compensation Committee determined and then approved Mr. Kurian’s payout amount in accordance with the chart below. In assessing Mr. Kurian’s achievements and approving his compensation, the Compensation Committee considered his achievements within a broader set of expectations including strategic leadership, organizational quality and effectiveness, management abilities, and responsiveness to economic conditions.

Based on the level of performance described above on both the Company and individual performance metrics for fiscal 2018, the incentive compensation payouts to the NEOs under the Executive ICP were as follows.

 

                   

   Name

 

 

Target
Award

 

   

Target
Corporate
Financial
Award

 

   

Corporate
Financial
Award as
a % of
Target
(Weighted
75%)

 

 

Target

Individual
MBO

 

   

Individual
MBO
Award as
a % of
Target
(Weighted
25%)

 

   

Actual
Corporate
Financial
Award

 

   

Actual
Individual
MBO
Award

 

   

Fiscal 2018
Executive
ICP

 

   

Actual
Award
as a %
of
Target
Award

 

George Kurian

 

   

 

$1,572,500

 

 

 

   

 

$1,179,375

 

 

 

  157.5%

 

   

 

$393,125

 

 

 

   

 

114%

 

 

 

   

 

$1,857,516

 

 

 

   

 

$450,000

 

 

 

   

 

$2,307,516

 

 

 

  147%

 

Ronald J. Pasek

 

   

 

$643,500

 

 

 

   

 

$482,625

 

 

 

  157.5%

 

   

 

$160,875

 

 

 

   

 

120%

 

 

 

   

 

$760,134

 

 

 

   

 

$193,050

 

 

 

   

 

$953,184

 

 

 

  148%

 

Joel D. Reich

 

   

 

$564,300

 

 

 

   

 

$423,225

 

 

 

  157.5%

 

   

 

$141,075

 

 

 

   

 

85%

 

 

 

   

 

$666,579

 

 

 

   

 

$119,914

 

 

 

   

 

$786,493

 

 

 

  139%

 

Henri Richard

 

   

 

$632,500

 

 

 

   

 

$474,375

 

 

 

  157.5%

 

   

 

$158,125

 

 

 

   

 

150%

 

 

 

   

 

$747,141

 

 

 

   

 

$237,188

 

 

 

   

 

$984,328

 

 

 

  156%

 

Matthew K. Fawcett

 

   

 

$416,000

 

 

 

   

 

$312,000

 

 

 

  157.5%

 

   

 

$104,000

 

 

 

   

 

100%

 

 

 

   

 

$491,400

 

 

 

   

 

$104,000

 

 

 

   

 

$595,400

 

 

 

  143%

 

Long-Term Stock-Based Incentive Compensation

The grant of equity awards to our NEOs is designed to align their interests with those of the stockholders and provide them with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the business.

Equity award guidelines for our NEOs were targeted, on average, at approximately the 50 th percentile relative to the Compensation Peer Group. The size of the actual equity grant to each NEO is designed to create a meaningful opportunity for stock ownership and is based on several factors, including the NEO’s current position, level of performance, strategic importance to the Company, potential for future responsibility and promotion over time, as well as the remaining share reserve under the Company’s equity plan. The Compensation Committee does not place any particular weight on any one individual factor and does not strictly adhere to any specific guidelines in making its determinations.

 

36


In fiscal 2018, the Compensation Committee granted PBRSUs and RSUs to all of our NEOs. As shown in the chart below, the target mix of equity awards was 75% PBRSUs and 25% RSUs for the CEO and 60% PBRSUs and 40% RSUs for the other NEOs. We believe that this mix of long-term performance-based versus time-based awards for these executives appropriately reflects their relative impact upon, and accountability for, our stock price performance over time.

 

LOGO

CEO Other NEOs 25 75 40 60 PBRSUs Time-based RSUs PBRSUs Time-based RSUs

PBRSUs

The PBRSUs granted in fiscal 2018 allow the recipient to earn a variable number of shares of our common stock based on the relative performance of our TSR compared to the median TSR of companies listed in the S&P 1500 Composite Technology Hardware and Equipment Index (“Hardware and Equipment Index”), composed of 78 companies at the beginning of the performance period.

 

LOGO

PBRSU Grant 50% of Grant 50% of Grant 2-Year RTSR 3-Year RTSR Relative TSR (1) Perf. Vs. S&P 1500 Tech Hardware & Equipment Index % of Target Shares (2) > +30% pts 200% 0% 100% -20% pts 50% < -20% pts 0% Shares awarded at end of Year 2 Shares awarded at end of Year 3

As depicted in the chart above, the fiscal 2018 PBRSUs have the following features:

 

    50% of the total number of PBRSUs may be earned and issued at the end of a two-year performance period and 50% of the total number of PBRSUs may be earned and issued at the end of a three-year performance period.

 

    The number of earned PBRSUs will be determined based on the Company’s TSR measured against the TSR of the companies listed in the Hardware and Equipment Index during separate two-year and three-year performance periods. At the end of each performance period, our TSR will be compared to the median TSR of the companies listed in the Hardware and Equipment Index at the end of the applicable performance period, and the actual award amount will be determined according to the relevant payout schedule.

 

    The PBRSUs will not vest until the completion of the applicable performance period, and with limited exceptions for death, disability and qualifying retirement, vesting is subject to continued service through the vesting date, which is the last day of each performance period.

The Compensation Committee believes that TSR is an important indicator of the Company’s long-term performance and provides strong alignment between the interests of the NEOs and the stockholders. Separate performance periods help to moderate volatility and encourage and reward sustained and continuous growth

 

37


which aligns the interests of the NEOs and our stockholders. The Hardware and Equipment Index was selected to measure performance because it represents the broader market against which we compete for talent and represents the broad range of our business operations while also being objectively determinable.

The performance period for the executives’ PBRSUs commenced on April 29, 2017 and will conclude at the end of our fiscal 2019 and fiscal 2020, respectively. As a result, the PBRSUs granted in fiscal 2018 were not eligible to vest in fiscal 2018.

The performance period for: (1) the PBRSUs granted in fiscal 2016 with a three-year vesting period and (2) the PBRSUs granted in fiscal 2017 with a two-year vesting period both ended as of April 27, 2018. The Compensation Committee certified the performance and vesting for the NEOs as follows:

 

           

   Name

 

  

Award

 

    

Target Number of
PBRSUs

 

    

PBRSUs
Vested

 

    

Relative
TSR %

 

    

% of Target
Vested

 

 

  George Kurian

    

 

Fiscal 2016 3-year

Fiscal 2017 2-year

 

 

 

 

    

 

85,750

87,500

 

 

 

 

    

 

140,055

175,000

 

 

 

 

    

 

19%

47%

 

 

 

 

    

 

163.3%

200.0%

 

 

 

 

  Ronald J. Pasek

    

 

Fiscal 2016 3-year

Fiscal 2017 2-year

 

 

 

 

    

 

N/A

23,982

 

 

 

 

    

 

N/A

47,964

 

 

 

 

    

 

N/A
47%

 

 
 

 

    

 

N/A

200.0%

 

 

 

 

  Joel D. Reich

    

 

Fiscal 2016 3-year

Fiscal 2017 2-year

 

 

 

 

    

 

18,850

27,000

 

 

 

 

    

 

30,160

54,000

 

 

 

 

    

 

18%

47%

 

 

 

 

    

 

160.0%

200.0%

 

 

 

 

  Henri Richard

    

 

Fiscal 2016 3-year

Fiscal 2017 2-year

 

 

 

 

    

 

N/A

45,472

 

 

 

 

    

 

N/A

90,944

 

 

 

 

    

 

N/A

47%

 

 

 

 

    

 

N/A

200.0%

 

 

 

 

  Matthew K. Fawcett

    

 

Fiscal 2016 3-year

Fiscal 2017 2-year

 

 

 

 

    

 

20,300

19,500

 

 

 

 

    

 

32,480

39,000

 

 

 

 

    

 

18%

47%

 

 

 

 

    

 

160.0%

200.00%

 

 

 

 

The performance period for the fiscal 2016 three-year grants to Messrs. Reich and Fawcett began on April 27, 2015, whereas the performance period for the fiscal 2016 three-year grant to Mr. Kurian began on June 1, 2015 due to his promotion to CEO in June 2015. Messrs. Pasek and Richard were not employees at the time of the fiscal 2016 grants. The performance period for the fiscal 2017 two-year grants to all of the NEOs began on April 30, 2016 and ended on April 27, 2018.

Beginning in fiscal 2019, our executives will receive PBRSUs that vest at the end of three years based on continued employment with the Company and the achievement of a cumulative Adjusted Operating Income measure (weighted 50%), consistent with how Adjusted Operating Income is measured for the Executive ICP, in addition to relative TSR (weighted 50%). In addition, instead of measuring the relative TSR performance objectives against the performance of an index, performance will be measured against a selected group of peer companies to increase the relevance of the benchmark to our business. These changes will result in a uniform three-year vesting period for PBRSUs, instead of the two- and three-year vesting. Having the PBRSUs vest partly based on Adjusted Operating Income instead of completely based on relative TSR will also provide a more direct reward for long-term profitable growth.

 

LOGO

50% of 3-Year RTSR Grant PBRSU Grant 50% 3-Year of Cum. AOI Grant

 

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Time-Based RSUs

Time-based RSUs allow the recipient to earn a fixed number of shares of our common stock for their continued service to the Company. Recognizing that a large portion of the NEOs’ equity compensation is at risk through the PBRSU program discussed above, the Compensation Committee also grants time-based RSUs to promote retention while aligning the ultimate award value directly with changes in our stock price over the vesting period. The RSUs vest in equal annual installments on each annual anniversary of the grant date beginning on the first anniversary of the grant date, subject to continued service through the applicable vesting date. The mix of PBRSUs versus RSUs is reviewed by the Compensation Committee annually and may fluctuate from year to year.

The following chart shows the grants of PBRSUs and RSUs to our NEOs in fiscal 2018.

 

   

Name

 

  

Target Number of
PBRSUs

 

  

Maximum Number
PBRSUs (1)

 

  

RSUs

 

George Kurian

 

   170,900

 

   341,800

 

   57,000

 

Ronald J. Pasek

 

   55,000

 

   110,000

 

   36,000

 

Joel D. Reich

 

   44,000

 

   88,000

 

   29,000

 

Henri Richard

 

   57,000

 

   114,000

 

   38,000

 

Matthew K. Fawcett

 

   30,000

 

   60,000

 

   20,000

 

 

(1) This is based on a 200% maximum number of PBRSUs relative to target, per the terms of the award.

Alignment of Performance and Compensation

Each year the Compensation Committee, on behalf of the Board, requests that Farient evaluate the relationship between our executive compensation and our financial performance and stockholder return. In addition to conducting quantitative analyses commonly relied upon by independent proxy governance organizations to test the alignment of our CEO’s pay and performance, Farient uses its proprietary pay for performance alignment model to test whether the Company’s Performance-Adjusted Compensation TM (PAC TM ) was: (1) reasonable in comparison to the Company’s revenue size and the Compensation Peer Group (excluding outliers), and (2) sensitive to the Company’s TSR over time. PAC includes our CEO’s salary, actual annual incentive compensation, the performance-adjusted value of long-term incentives, averaged over three-year rolling periods, and the value of other compensation, as reported in the Summary Compensation Table. Performance is defined as TSR, averaged over the same three-year rolling periods. Each data point on the chart below, which is adjusted for inflation and the Company’s size, represents PAC over a three-year period and TSR for the same three-year period.

 

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As indicated by the chart below, the Compensation Committee concluded there was a strong relationship between our CEO’s PAC and the Company’s performance. This is because our CEO’s PAC generally fluctuates with performance, recognizing that there is some variation in the pattern of pay since not all pay elements are directly dependent upon TSR. Although our CEO’s fiscal 2018 PAC was above the upper border of the Alignment Zone due to the high level of realizable pay as a result of NetApp’s 24% annualized TSR over the three-year period from fiscal 2016 through fiscal 2018, the Compensation Committee considered our CEO’s PAC to be reasonable over time.

LOGO

NETAPP CEO Total PACTM VS. Peer Group pay for Performance alignment over 3 year period ending in year shown Annualized PACTM (218 $MMs) $5.9B Revenue Annualized 3-Year TSR

Based on its review of Farient’s analyses, the Compensation Committee was satisfied as to the coherence and integrity of our executive pay program because the Company’s pay practices move in concert with the Company’s performance.

The link between Company performance, the performance of our stock, and compensation for our NEOs is illustrated by the following charts, which show the portion of the major elements of the fiscal 2018 compensation for our NEOs disclosed in the Summary Compensation Table below.

 

LOGO

Kurian Pay Mix - Fiscal 2018 8% 15% 77% Salary Annual Incentive Long-Term Stock Based Incentive Other NEO Aggregate Pay Mix - Fiscal 2018 13% 14% 73% Salary Annual Incentive Long-Term Stock Based Incentive

 

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As these charts illustrate, most of Mr. Kurian’s compensation and the aggregate pay mix for the other NEOs (which varies depending on the NEO) is performance-based – the actual value realized is subject to the Company’s short-term financial performance or long-term stock price performance. By linking more of our NEOs’ total compensation to performance, the Company emphasizes variable pay, which is consistent with the Company’s pay-for-performance philosophy.

 

Stock Ownership Guidelines

The Board believes that stock ownership by the Company’s directors and executives helps to align the interests of the Company’s directors and executives with the interests of the Company’s stockholders. To extend and maintain that ownership perspective over time, the Company has established the following minimum share ownership guidelines for the Company’s directors, CEO, and Executive Vice Presidents:

 

   

Position

 

  

Guideline as a Multiple of

Salary/Cash Board Retainer

 

 

  Independent Directors

 

  

 

5x

 

 

CEO

 

  

 

5x

 

 

EVPs

 

 

  

 

2x

 

 

The Company’s executives had five years from the adoption date of these stock ownership guidelines in fiscal year 2013 (i.e. until fiscal 2018) to meet these guidelines. Newly appointed directors and executives have five years from the time they are elected, appointed, hired, or promoted, as the case may be, to meet these guidelines. The stock ownership guideline for directors was increased in May 2017 from three times their cash retainer to five times their cash retainer, and the directors have until May 2022 to meet the new guideline. Once achieved, ownership at the guideline amount must be maintained. All of the executives were in compliance with the guidelines as of the end of fiscal 2018. All of the directors, other than Ms. Kerr and Mr. Schenkel, also met the guidelines as of the end of fiscal 2018. Ms. Kerr and Mr. Schenkel were appointed to the Board in November 2017 and are not required to meet the guidelines until 2022.

 

Recovery of Incentive-Based Compensation

At the recommendation of the Compensation Committee, the Board adopted a policy that gives the Board discretion to require that designated Company employees, including the NEOs and all persons holding the position of Executive Vice President and Senior Vice President, repay cash incentive or equity compensation to the Company if the Board determines that the individual’s actions caused or partially caused the Company to materially restate all or a portion of its financial statements on which such compensation was calculated. Such determination must be made by the Board within three years of the date of filing of the applicable financial statements. The Compensation Committee believes that the Company’s clawback policy is in keeping with good standards of corporate governance and mitigates the potential for excessive risk taking by Company executives. The SEC is expected to adopt regulations requiring national listing exchanges to enact listing standards governing policies providing for the recovery of incentive-based compensation, and the Company will revise and update its clawback policy within the time periods necessary to comply with such listing standards.

 

Anti-Hedging and Anti-Pledging Policies

Our Board has adopted a policy prohibiting all employees, including the NEOs and members of the Board, from engaging in any hedging transactions with respect to any equity securities of the Company held by them, which includes the purchase of any financial instrument (including prepaid variable forward contracts, equity swaps,

 

41


collars, and exchange funds) designed to hedge or offset any decrease in the market value of such equity securities. In addition, under the Company’s Insider Trading Policy, employees of the Company, including the NEOs and members of the Board, are prohibited from pledging the Company’s securities as collateral for a loan.

 

Other Compensation for NEOs

Severance and Change of Control Arrangements

The Compensation Committee maintains change of control severance agreements for its key senior executives to: (1) assure we will have the continued dedication and objectivity of our senior executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key senior executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that was competitive with our peer group. The Compensation Committee from time to time determines which key senior executives will receive a change of control severance agreement. Individuals are selected as needed to support the above outlined objectives.

The terms of the individual Change of Control Severance Agreements are described in further detail in the section below titled “ Potential Payments upon Termination or Change in Control .” The Compensation Committee believes that these change of control severance agreements satisfy the objectives above and ensure that key executives are focused on the Company’s goals and objectives and the interests of our stockholders.

Effective June 22, 2016, the Company entered into Change of Control Severance Agreements with each of our NEOs, which superseded their existing Change of Control Severance Agreements, as amended. Please see “ Termination of Employment and Change of Control Agreements – Change of Control Severance Agreements ” below for further information on the new Change of Control Agreements.

Perquisites

Certain of our executives at the Executive Vice President level and above are eligible to participate in the Company’s Executive Retirement Medical Plan, which upon retirement provides a health reimbursement account to reimburse eligible retired executives for premiums paid for individual insurance covering the retiree and any eligible dependents for the period from January 1, 2017 through December 31, 2019. On or after December 31, 2019 but ending on December 31, 2021, participants in the Executive Retirement Medical Plan will be eligible to receive a lump sum cash payment equal to two years of projected health care costs, or a prorated portion thereof, pursuant to the methodology set forth in the Executive Retirement Medical Plan. The Executive Retirement Medical Plan terminates on December 31, 2019. In fiscal 2016, the Compensation Committee closed the Executive Retirement Medical Plan to the executives eligible for participation as of November 12, 2015 and participation in the plan is not offered to Company executives who were not eligible for the plan on that date. Mr. Kurian and Mr. Reich will be eligible to receive benefits under the Executive Retirement Medical Plan as well as a lump sum payment (or pro-rata portion) if they retire prior to 2019 or 2021, as applicable, and satisfy all of the requirements under the Executive Medical Retirement Plan. Our NEOs are also entitled to a preventative care medical benefit of up to $2,500 per calendar year not available to nonexecutives. The Compensation Committee approved the use of a car service by Mr. Kurian for travel between his residence and the office in an amount of up to $40,000 per year so that he can conduct business during his commute. In fiscal 2018, the expense for Mr. Kurian’s car service was $5,203. The Compensation Committee also approved payment by the Company of rental expenses for Mr. Reich for a residence and rental furniture in Sunnyvale, California, along with a gross-up for associated taxes. Although Mr. Reich is based on the Company’s Waltham, Massachusetts office, his position requires frequent travel to the Company’s headquarters in Sunnyvale. In fiscal 2018, the Company paid $109,513 for Mr. Reich’s housing related expenses.

Other Benefits and Reimbursements

NEOs are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance, our 401(k) plan and our nonqualified deferred compensation

 

42


program. Effective January 1, 2015, we match 100% of the first 2% of eligible earnings contributed to our 401(k) plan, and match 50% of the next 4% of eligible earnings contributed, up to a maximum of $6,000 per calendar year. Under the Company’s nonqualified deferred compensation program (discussed in further detail below), participating employees (including the NEOs) may defer a percentage of their compensation. The program permits contributions on a tax deferred basis in excess of IRS limits imposed on 401(k) plans as permitted and in compliance with Internal Revenue Code Section 409A. The only additional retirement benefits (other than the 401(k) plan) that we offer to certain of our NEOs are those under the Executive Retirement Medical Plan discussed above.

 

Tax Deductibility of Compensation

Prior to January 1, 2018, Section 162(m) of the Code generally disallowed a tax deduction to publicly held companies for compensation paid to certain executive officers to the extent that compensation exceeded $1 million per officer in any year unless such compensation was considered “performance-based compensation.” The Company generally sought to maximize the deductibility for tax purposes of all elements of compensation. For fiscal 2018, our 1999 Plan was structured so that any compensation recognized by an executive officer in connection with the exercise of his or her outstanding options under the plan would qualify as performance-based compensation and would not be subject to the $1 million limitation. In addition, our 1999 Plan allowed our Compensation Committee to structure the PBRSUs as performance-based compensation under Section 162(m), and our Executive Compensation Plan allowed us to structure our cash incentives that are paid thereunder to qualify for a deduction under Section 162(m). As a result of the Tax Cuts and Jobs Act, and except for certain grandfathered arrangements, Section 162(m) was amended to eliminate the deduction for performance-based compensation for periods after 2018. The Compensation Committee is expected to consider the potential future effects of Section 162(m) (as amended) when determining NEO compensation, including the added flexibility in structuring compensation in light of the elimination of the performance-based compensation deduction.

 

43


COMPENSATION COMMITTEE REPORT

The information contained in the following Compensation Committee Report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based upon such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

Submitted by the Compensation Committee of the Board of Directors:

Kathryn Hill, Chair

Gerald Held

George T. Shaheen

Richard P. Wallace

 

44


EXECUTIVE COMPENSATION AND RELATED INFORMATION

 

Summary Compensation Table

The table below summarizes the compensation information for the NEOs for fiscal 2018, fiscal 2017, and fiscal 2016.

 

Name and
Principal Position

 

  Year

 

    Salary
($)(1)

 

    Bonus
($)(2)

 

    Stock
Awards
($)(3)

 

    Option
Awards
($)

 

    Non-Equity
Incentive Plan
Compensation
($)(4)

 

    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)

 

    All Other
Compensation
($)(5)

 

    Total
($)

 

 

George Kurian

    2018       925,000       —         9,611,646       —         2,307,516       —         15,205       12,859,367  

Chief Executive Officer
and President(6)

    2017       875,000       —         6,179,678       —         1,920,650       —         29,913       9,005,241  
    2016       786,538       44,990       8,196,616       —         477,366       —         8,813       9,514,323  

Ronald J. Pasek

    2018       585,000       —         3,757,967       —         953,184       —         11,751       5,307,902  

Executive Vice President and Chief Financial
Officer(7)

    2017       550,000       —         3,458,446       —         795,424       —         17,418       4,821,288  
    2016       31,731       —         —         —         —         —         208       31,939  
                 

Joel D. Reich

    2018       513,000       —         3,013,903       —         786,493       —         120,848       4,434,244  

Executive Vice President and General Manager, NetApp Storage Systems and Software Business
Unit(8)

    2017       475,000       —         2,324,632       —         673,894       —         147,656       3,621,182  
    2016       419,454       24,202       2,243,252       —         180,589       —         10,967       2,878,463  
                 
                 
                 

Henri P. Richard

    2018       575,000       —         3,920,631       —         984,328       —         16,975       5,496,934  

Executive Vice President, Worldwide Field and Customer Operations(9)

    2017       530,962       400,000       5,154,717       —         760,589       —         17,277       6,863,545  
                 
                 

Matthew K. Fawcett

    2018       520,000       —         2,063,490       —         595,400       —         8,724       3,187,614  

Senior Vice President, General Counsel and Secretary(10)

    2017       500,000       —         1,678,901       —         515,900       —         8,017       2,702,818  
    2016       489,231       20,529       2,539,327       —         153,186       —         7,716       3,209,989  
                 

 

(1) Our fiscal 2018 and fiscal 2017 were both 52-week years. Fiscal 2016 was a 53-week year and therefore the salary for 2016 contains an extra week of pay.

 

(2) Amounts shown for fiscal 2016 represent a one-time discretionary bonus approved by the Compensation Committee in recognition of the recipients’ successful execution and completion of the acquisition of SolidFire, Inc. and the integration of the SolidFire, Inc. business into the Company. Amount shown for Mr. Richard in fiscal 2017 represents a one-time signing bonus in connection with the commencement of his employment with the Company.

 

(3) Amounts shown represent the aggregate grant date fair value as calculated for financial statement reporting purposes in accordance with FASB ASC 718 for RSUs, PBRSUs and stock option awards, as applicable, granted in fiscal 2018, fiscal 2017, and fiscal 2016. The estimated fair value of PBRSUs is calculated based on the Monte Carlo simulation method at the date of grant. This estimated fair value for PBRSUs is different from (and lower than) the maximum value of PBRSUs set forth above. These amounts do not necessarily represent actual value that may be realized by the NEOs. Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report.

 

45


(4) Amounts shown include the portion of cash compensation deferred at the respective NEO’s election under the Company’s 401(k) plan and/or nonqualified deferred compensation plan, as applicable.

 

(5) All Other Compensation Table

 

Name

   Year      401(k)
($) (A)
     Life
Insurance
Coverage

($) (B)
     Other
($)
     Total
($)
 

George Kurian

     2018        6,000        4,002        5,203  (C)       15,205  
     2017        6,000        4,002        19,911  (C)       29,913  
     2016        6,000        2,813        —          8,813  

Ronald J. Pasek

     2018        6,000        5,751           11,751  
     2017        12,000        5,418        —          17,418  
     2016        —          208        —          208  

Joel D. Reich

     2018        6,329        5,006        109,513  (D)       120,848  
     2017        6,433        4,584        136,639  (D)       147,656  
     2016        6,915        4,052        —          10,967  

Henri P. Richard

     2018        6,000        10,975           16,975  
     2017        10,064        7,213        —          17,277  

Matthew K. Fawcett

     2018        6,000        2,724           8,724  
     2017        6,000        2,017        —          8,017  
     2016        6,046        1,670        —          7,716  

 

  (A) Amounts shown represent Company’s matching contributions under the tax-qualified 401(k) plan.

 

  (B) Amounts shown represent the imputed income of term life insurance coverage in excess of $50,000.

 

  (C) Amounts shown represent the use of a car service between Mr. Kurian’s residence and the office so that he may conduct business during his commute.

 

  (D) Amounts shown represent rental expenses for a residence and rental furniture in Sunnyvale, along with a gross-up for the taxes on those benefits.

 

(6) Mr. Kurian became our CEO in June 2015. He previously served as our Executive Vice President of Product Operations, and first became an NEO effective September 20, 2013. Mr. Kurian received 147% of his eligible earnings for fiscal 2018, 137% of his eligible earnings for fiscal 2017, and 60.7  % of his eligible earnings for fiscal 2016.

 

(7) Mr. Pasek received 148% of his eligible earnings for fiscal 2018, and 131% of his eligible earnings for fiscal 2017. Mr. Pasek became our Executive Vice President and Chief Financial Officer in March 2016.

 

(8) Mr. Reich received 139% of his eligible earnings for fiscal 2018, 129% of his eligible earnings for fiscal 2017, and 43.1% of his eligible earnings for fiscal 2016. He first became a NEO effective June 2015.

 

(9) Mr. Richard received 156% of his eligible earnings for fiscal 2018, and 130% of his eligible earnings for fiscal 2017. Mr. Richard became our Executive Vice President, Worldwide Field and Customer Operations in May 2016.

 

(10) Mr. Fawcett received 143% of his eligible earnings for fiscal 2018, 129% of his eligible earnings for fiscal 2017, and 31.3% of his eligible earnings for fiscal 2016. Mr. Fawcett became our Senior Vice President, General Counsel and Secretary in September 2010.

 

46


Grants of Plan-Based Awards

The table below summarizes information concerning all plan-based awards granted to the NEOs during fiscal 2018, which ended on April 27, 2018.

 

           

 

Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards(1)

    

 

Estimated Future Payouts
Under Equity Incentive Plan
Awards(2)

     All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#)(3)
     Grant
Date Fair
Value of
Stock
Awards
($)(4)(5)
 

Name

   Grant
Date
     Threshold
($)
     Target
($)
     Maximum
($)
     Threshold
(#)
     Target
(#)
     Maximum
(#)
       

George Kurian

     06/01/17        —          —          —          —          —          —          57,000        2,145,879  
     06/01/17        —          —          —          42,725        85,450        170,900        —          3,735,874  
     06/01/17        —          —          —          42,725        85,450        170,900        —          3,729,893  
        345,950        1,572,500        3,145,000                 

Ronald J. Pasek

     06/01/17        —          —          —          —          —          —          36,000        1,355,292  
     06/01/17        —          —          —          13,750        27,500        55,000        —          1,202,300  
     06/01/17        —          —          —          13,750        27,500        55,000        —          1,200,375  
        141,570        643,500        1,287,000                 

Joel D. Reich

     06/01/17        —          —          —          —          —          —          29,000        1,091,763  
     06/01/17        —          —          —          11,000        22,000        44,000        —          960,300  
     06/01/17        —          —          —          11,000        22,000        44,000        —          961,840  
        124,146        564,300        1,128,600                 

Henri P. Richard

     06/01/17        —          —          —          —          —          —          38,000        1,430,586  
     06/01/17        —          —          —          14,250        28,500        57,000        —          1,246,020  
     06/01/17        —          —          —          14,250        28,500        57,000        —          1,244,025  
        139,150        632,500        1,265,000                 

Matthew K. Fawcett

     06/01/17        —          —          —          —          —          —          20,000        752,940  
     06/01/17        —          —          —          7,500        15,000        30,000        —          654,750  
     06/01/17        —          —          —          7,500        15,000        30,000        —          655,800  
        91,520        416,000        832,000                 

 

(1) Amounts shown in these columns represent the range of possible cash payouts for each NEO under the Company’s Executive Compensation Plan, as determined by the Compensation Committee in May 2017. Please see the discussion in the “ Executive ICP ” section of the “ Compensation Discussion and Analysis ” above.

 

(2) Represents awards of PBRSUs granted under the Stock Issuance Program of the 1999 Plan. Each PBRSU has performance-based vesting criteria (in addition to the service-based vesting criteria) such that the PBRSU cliff-vests at the end of either an approximate two-year or three-year performance period, which began on the date specified in the grant agreement and ends the last day of fiscal 2019 or 2020, respectively. The number of shares of common stock that will be issued to settle the PBRSUs at the end of the applicable performance and service period will range from 0% to 200% of a target number of shares originally granted, and will depend upon our TSR as compared to an index TSR (each expressed as a growth rate percentage) calculated as of the applicable period end date. For additional information regarding the specific terms of the PBRSUs granted to our NEOs in fiscal 2018, see the discussion of “ PBRSUs ” in the “ Compensation Discussion and Analysis ” above. Upon vesting, each PBRSU automatically converts into one share of Company common stock, and does not have an exercise price or expiration date.

 

(3) The RSUs were granted under the Stock Issuance Program of the 1999 Plan. Each award vests as to 25% of the shares beginning on the first anniversary of the grant date and 25% on each of the next three anniversaries of the grant date, subject to the NEO’s continuous service with the Company through each such date.

 

(4)

The amounts shown represent the aggregate grant date fair value as calculated for financial statement reporting purposes in accordance with FASB ASC 718 for RSUs and PBRSUs, as applicable, granted in fiscal

 

47


  2018. The estimated fair value of PBRSUs is calculated based on a Monte Carlo simulation method at the date on which the PBRSUs are granted. This estimated fair value for PBRSUs is different from (and lower than) the maximum value of PBRSUs set forth below. These amounts do not necessarily represent actual value that may be realized by the NEOs. Assumptions used in the valuations of these awards are included in Note 11 of the Annual Report.

 

(5) The ratio of the number of shares subject to the target PBRSU awards and the RSUs awards is consistent with the mix of PBRSUs to RSUs described in the CD&A (that is, 75%/25% for our CEO and 60%/40% for our other NEOs), but the grant date fair values do not match these ratios. This discrepancy is a function of how values are calculated for financial statement reporting purposes in accordance with FASB ASC 718.

 

48


Outstanding Equity Awards at Fiscal Year End

The following table sets forth information regarding stock options and stock awards held by the NEOs as of April 27, 2018.

 

          Option Awards

 

    Stock Awards

 

 
    Grant
Date

 

   

 

 

 

 

 

 

 

 

 

 

Number of Securities
Underlying Unexercised
Options
(#)

    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)

 

    Option
Exercise
Price
($)

 

    Option
Expiration
Date

 

    Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)

 

    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)

 

    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)

 

    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)

 

 
    Exercisable

 

    Unexercisable

 

               

George Kurian

    06/03/2013  (1)      7,020       —         —         37.64       06/02/2020       —         —         —         —    
    10/15/2013  (1)      36,000       —         —         40.70       10/14/2020       —         —         —         —    
    06/03/2014  (2)      154,100       6,700       —         36.59       06/02/2021       —         —         —         —    
    06/03/2014  (3)      —         —         —         —         —         13,275       894,735       —         —    
    08/03/2015  (3)      —         —         —         —         —         21,450       1,445,730       —         —    
    08/03/2015  (3)      —         —         —         —         —         21,450       1,445,730       —         —    
    06/01/2016  (3)      —         —         —         —         —         43,725       2,947,065       —         —    
    06/01/2016  (4)      —         —         —         —         —         —         —         87,500       5,897,500  
    06/01/2017  (3)      —         —         —         —         —         57,000       3,841,800       —         —    
    06/01/2017  (4)      —         —         —         —         —         —         —         85,450       5,759,330  
    06/01/2017  (4)      —         —         —         —         —         —         —         85,450       5,759,330  

Ronald J. Pasek

    05/16/2016  (3)      —         —         —         —         —         48,096       3,241,670       —         —    
    06/01/2016  (3)      —         —         —         —         —         24,231       1,633,169       —         —    
    06/01/2016  (4)      —         —         —         —         —         —         —         23,983       1,616,454  
    06/01/2017  (3)      —         —         —         —         —         36,000       2,426,400       —         —    
    06/01/2017  (4)      —         —         —         —         —         —         —         27,500       1,853,500  
    06/01/2017  (4)      —         —         —         —         —         —         —         27,500       1,853,500  

Joel D. Reich

    06/01/2011  (1)      5,000       —         —         53.22       05/31/2018       —         —         —         —    
    11/15/2013  (1)      25,000       —         —         41.42       11/14/2020       —         —         —         —    
    06/03/2014  (2)      700       700       —         36.59       06/02/2021       —         —         —         —    
    06/03/2014  (3)      —         —         —         —         —         3,250       219,050      
    06/23/2015  (3)      —         —         —         —         —         5,700       384,180       —         —    
    06/23/2015  (3)      —         —         —         —         —         6,850       461,690       —         —    
    06/01/2016  (3)      —         —         —         —         —         27,000       1,819,800       —         —    
    06/01/2016  (4)      —         —         —         —         —         —         —         27,000       1,819,800  
    06/01/2017  (3)      —         —         —         —         —         29,000       1,954,600       —         —    
    06/01/2017  (4)      —         —         —         —         —         —         —         22,000       1,482,800  
    06/01/2017  (4)      —         —         —         —         —         —         —         22,000       1,482,800  

Henri P. Richard

    06/01/2016  (3)      —         —         —         —         —         45,472       3,064,813       —         —    
    06/01/2016  (4)      —         —         —         —         —         —         —         45,473       3,064,880  
    06/15/2016  (5)      —         —         —         —         —         26,607       1,793,312       —         —    
    06/01/2017  (3)      —         —         —         —         —         38,000       2,561,200       —         —    
    06/01/2017  (4)      —         —         —         —         —         —         —         28,500       1,920,900  
    06/01/2017  (4)      —         —         —         —         —         —         —         28,500       1,920,900  

Matthew K. Fawcett

    06/01/2011  (1)      21,500       —         —         53.22       05/31/2018       —         —         —         —    
    06/03/2013  (1)      15,625       —         —         37.64       06/02/2020       —         —         —         —    
    06/03/2014  (2)      22,959       2,296       —         36.59       06/02/2021       —         —         —         —    
    06/03/2014  (3)      —         —         —         —         —         10,625       716,125       —         —    
    06/23/2015  (3)      —         —         —         —         —         9,700       653,780       —         —    
    06/23/2015  (3)      —         —         —         —         —         5,700       384,180       —         —    
    06/01/2016  (3)      —         —         —         —         —         19,500       1,314,300       —         —    
    06/01/2016  (4)      —         —         —         —         —         —         —         19,500       1,314,300  
    06/01/2017  (3)      —         —         —         —         —         20,000       1,348,000       —         —    
    06/01/2017  (4)      —         —         —         —         —         —         —         15,000       1,011,000  
    06/01/2017  (4)      —         —         —         —         —         —         —         15,000       1,011,000  

 

49


 

(1) All shares subject to the option are fully vested.

 

(2) For this option, 1/48 th of the shares subject to the option vest monthly in equal installments over four years measured from the grant date, subject to continued service through each applicable vesting date.

 

(3) For these awards, 1/4 th of the RSU shares awarded on the grant date vest over four years on each anniversary of the grant date, subject to continued service on each applicable vesting date.

 

(4) These awards are PBRSUs. The number of shares and value of the shares reported in the table is the target amount as of April 27, 2018. Up to an additional 100% of the target amount may be earned, depending on the relative performance of our TSR compared to the median TSR of the companies listed in the Hardware and Equipment Index.

 

(5) For this award, 1/2 of the RSU shares awarded on the grant date vest on the first anniversary of the grant date and 1/2 of the RSU shares vest on the second anniversary of the grant date, subject to continued service through each applicable vesting date.

 

Option Exercises and Stock Vested for Fiscal 2018

The following table provides information regarding options and stock awards exercised and vested, respectively, and the value realized for each of the NEOs during fiscal 2018.

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on
Exercise
(#)

 

     Value
Realized on
Exercise
($)(1)

 

     Number of Shares
Acquired on
Vesting
(#)

 

    Value
Realized on
Vesting
($)(2)

 

 

George Kurian

     103,080        910,966      467,105  (3)      28,367,965  

Ronald J. Pasek

     —          —          72,075  (4)      4,843,207  

Joel D. Reich

     32,700        596,854        125,444  (5)      7,609,951  

Henri P. Richard

     —          —          132,708  (6)      8,038,560  

Matthew K. Fawcett

     89,220        1,116,342        123,530  (7)      7,125,844  

 

(1) Represents the product obtained by multiplying (1) the number of shares of the Company’s common stock issued upon the exercise of stock options; by (2) the excess of the closing price of the Company’s common stock on the Nasdaq Global Select Market on the exercise date over the exercise price per share.

 

(2) Represents the product obtained by multiplying (1) the number of shares of the Company’s common stock issued upon the vesting of RSUs and PBRSUs; by (2) the closing price of the Company’s common stock on the Nasdaq Global Select Market on the vesting date.

 

(3) Of this amount, 231,549 shares were withheld by the Company to satisfy tax withholding requirements.

 

(4) Of this amount, 32,840 shares were withheld by the Company to satisfy tax withholding requirements.

 

(5) Of this amount, 61,009 shares were withheld by the Company to satisfy tax withholding requirements.

 

(6) Of this amount, 52,484 shares were withheld by the Company to satisfy tax withholding requirements.

 

(7) Of this amount, 59,881 shares were withheld by the Company to satisfy tax withholding requirements.

 

Nonqualified Deferred Compensation

Under the Company’s Deferred Compensation Plan, key employees, including the NEOs, may defer from 1% to 100% of the compensation they receive. The Deferred Compensation Plan allows contributions on a tax deferred basis in excess of IRS limits imposed on 401(k) plans as permitted and in compliance with Internal Revenue Code Section 409A. Eligible employees may defer an elected percentage of eligible earnings that include base salary, sales incentive compensation, and Company incentive compensation. Eligible employees are director level and

 

50


higher employees who are on the U.S. payroll. Elections made under the Deferred Compensation Plan are irrevocable for the period (plan year) to which they apply, and cannot be changed or terminated. If no new election is made for a subsequent plan year, the election will be 0%. Previous elections do not carry forward.

Interest (earnings) generated by amounts held in the plan is not calculated by the Company or related to the Company’s earnings in the last fiscal year. Instead, deferrals are placed (at the participant’s direction) into a variety of publicly traded mutual funds administered through Fidelity Investments. The mutual funds available mirror those in our 401(k) plan. Available mutual funds are selected and monitored by the 401(k) Committee, which is comprised of a group of executives (none of whom are NEOs), with input from an outside investment advisor as well as Fidelity Investment Advisors. Participants are permitted to make changes to their investment choices (but not their deferral percentages) at any time, but always within the family of publicly traded mutual funds. Neither common stock of the Company nor securities of any other issuers are included among the investment choices. However, it is possible that common stock of the Company may compose a portion of the portfolio of investments held by these mutual funds.

At the time of initial election, the participant must also elect a distribution option. Distribution options include a Separation Account (paid six months after termination of employment) or an In-Service Account (paid at a specified fixed future date). Participants are not permitted to change the timing of a Separation Account. In-Service Account distributions begin on January 15 of the specified year, and deferrals must be at least two years old before distribution can begin. Participants are permitted to delay the timing of an In-Service Account, but any such modification to timing must delay the distribution for at least five years.

The following table represents the executive contributions, earnings and account balances for the NEOs in the Deferred Compensation Plan.

Nonqualified Deferred Compensation for Fiscal 2018

 

Name

   Executive
Contributions
in Last Fiscal
Year
($)

 

     Company
Contributions
in Last Fiscal
Year
($)(1)

 

     Aggregate
Earnings
in Last
Fiscal
Year
($)(2)

 

     Aggregate
Withdrawals/
Distributions
($)

 

     Aggregate
Balance at
Last Fiscal
Year End
($)

 

 

George Kurian

     —          —          —          —          —    

Ronald J. Pasek

     —          —          4,106        —          195,882  

Joel D. Reich

     —          —          —          —          —    

Henri P. Richard

     86,250        —          11,996        —          166,077  

Matthew K. Fawcett

     121,385        —          9,935        —          140,175  

 

(1) The Company does not make contributions to the Deferred Compensation Plan.

 

(2) The amounts in this column correspond to a composite of the actual market earnings on a group of investment funds selected by the applicable NEO for purposes of tracking the notional investment return on his account balance for fiscal 2018. No portion of the reported amount was “above market” or “preferential.” Accordingly, amounts reported in the aggregate earnings column are not reported in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column of the Summary Compensation Table.

 

Pension Benefits

The Company does not provide pension benefits or a defined contribution plan to the NEOs other than the tax-qualified 401(k) plan.

 

51


TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

 

Potential Payments upon Termination or Change of Control

Change of Control Severance Agreements

On June 22, 2016, the Company entered into Change of Control Severance Agreements (the “Change of Control Agreements”) with key senior executives, including each of the NEOs, which superseded their prior change of control severance agreements.

The Compensation Committee believes these agreements are necessary for us to retain key senior executives in the event of an acquisition of the Company. In approving the agreements, the Compensation Committee’s objectives were to (1) assure we would have the continued dedication and objectivity of our senior executives, notwithstanding the possibility of a change of control of the Company, thereby aligning the interests of these key senior executives with those of the stockholders in connection with potentially advantageous offers to acquire the Company; and (2) create a total executive compensation plan that is competitive with our Compensation Peer Group.

Term of Change of Control Severance Agreement

Each Change of Control Agreement has a term of three years. If a Change of Control (as defined below) occurs at any time during the term of the agreement, the term of the Change of Control Agreement will extend automatically for 24 months following the effective date of the Change of Control. If a senior executive becomes entitled to severance benefits pursuant to his or her Change of Control Agreement, the Change of Control Agreement will not terminate until all of obligations of the Change of Control Agreement have been satisfied.

Circumstances Triggering Payment under Change of Control Severance Agreement

Each Change of Control Severance Agreement provides that if the Company terminates a senior executive’s employment without Cause (as defined below) or if the senior executive resigns for Good Reason (as defined below), and such termination or resignation occurs on or within 24 months after a Change of Control, the senior executive will receive certain benefits (as described below). The senior executive will not be entitled to any benefits, compensation or other payments or rights upon his or her termination following a Change of Control other than as set forth in his or her Change of Control Severance Agreement.

If the senior executive voluntarily terminates his or her employment with the Company (other than for Good Reason during the period that is on or within 24 months after a Change of Control), or if the Company terminates the senior executive’s employment for Cause, then the senior executive will not be entitled to receive severance or benefits except for those (if any) provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

If the Company terminates the senior executive’s employment as a result of the senior executive’s disability, or if the senior executive’s employment terminates due to his or her death, then the senior executive will not be entitled to receive severance or benefits, except for those (if any) provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

If the senior executive voluntarily terminates his or her employment and such termination is for Good Reason, or if the Company terminates the senior executive’s employment without Cause, and in either event such termination does not occur on or within 24 months after a Change of Control, then the senior executive will not be entitled to receive severance or benefits except for those (if any) as provided in the Company’s existing severance and benefits plans and practices or pursuant to other written agreements with the Company.

The Company has general severance guidelines applicable to all employees, including the NEOs, providing for additional months of pay and welfare benefits based on years of service, plus periods of access to a career center and office resources, one-on-one coaching, and access to an online jobs database, but payment of any severance and other benefits pursuant to the guidelines is discretionary. For NEOs, these severance guidelines provide for up to twelve months salary and continuation of welfare benefits and payment of prorated non-equity incentive plan

 

52


benefits. However, if the senior executive is eligible to receive any payments under his or her Change of Control Severance Agreement, the senior executive will not be eligible to receive any payments or benefits pursuant to any Company severance plan, policy, guidelines or other arrangement.

Timing and Form of Severance Payments under Change of Control Severance Agreement

Unless otherwise required by Section 409A of the Internal Revenue Code, any severance payments to be made pursuant to the Change of Control Severance Agreement will be paid in a lump sum as soon as practicable following the senior executive’s termination date. No severance or other benefits will be paid or provided until a separation agreement and release of claims between the senior executive and the Company becomes effective. If the senior executive should die before all of the severance has been paid, any unpaid amounts will be paid in a lump-sum payment to the senior executive’s designated beneficiary.

Severance Payments Under Change of Control Severance Agreement

If the Company terminates a senior executive’s employment without Cause or if the senior executive resigns for Good Reason and such termination occurs on or within 24 months after a Change of Control, the senior executive will receive the following benefits:

 

  The sum of (1) 150% (200% in the case of Mr. Kurian) of the senior executive’s annual base salary as in effect immediately prior to the senior executive’s termination date or (if greater) at the level in effect immediately prior to the Change of Control; and (2) 150% (200% in the case of Mr. Kurian) of the senior executive’s target annual bonus in effect immediately prior to the senior executive’s termination date or (if greater) at the level in effect immediately prior to the Change of Control;

 

  All expense reimbursements, wages, and other benefits due to the senior executive under any Company plan or policy (except that a senior executive will not be eligible to receive any benefits under any Company severance plan, policy or other arrangement); and

 

  Accelerated vesting of the senior executive’s outstanding equity awards as follows:

 

    Equity awards subject to time-based vesting will vest as to that portion of the award that would have vested through the 48-month period following the applicable senior executive’s termination date had the senior executive remained employed through such period. Additionally, the senior executive will be entitled to accelerated vesting as to an additional 100% of the then unvested portion of all of his or her outstanding equity awards that are scheduled to vest pursuant to performance-based criteria, if any, unless otherwise provided in the applicable award agreement governing the equity award.

 

    Each senior executive will have one year following the date of his or her termination in which to exercise any outstanding stock options or other similar rights to acquire Company stock (but such post termination exercise period will not extend beyond the original maximum term of the award).

 

    If the senior executive elects continuation coverage pursuant to COBRA for himself or herself and his or her eligible dependents, the Company will reimburse the senior executive for the COBRA premiums for such coverage until the earlier of (1) 18 months (24 months in the case of Mr. Kurian); or (2) the date upon which the senior executive and/or the senior executive’s eligible dependents are covered under similar plans.

Conditions to Receipt of Severance under Change of Control Severance Agreement

The senior executive’s receipt of any payments or benefits under the Change of Control Severance Agreement will be subject to the senior executive continuing to comply with the terms of any confidential information agreement entered into between the senior executive and the Company and complying with the provisions of the Change of Control Severance Agreement. Additionally, the receipt of any severance payment under the Change of Control Severance Agreement is conditioned on the senior executive signing and not revoking a separation agreement and release of claims with the Company, with such release to be effective no later than March 15 of the year following the year in which the termination occurs.

 

53


Excise Tax under Change of Control Severance Agreement

In the event that the severance payments and other benefits payable to the senior executive pursuant to his or her Change of Control Severance Agreement constitute “parachute payments” under Section 280G of the U.S. tax code and would be subject to the applicable excise tax, then the senior executive’s severance benefits will be either (1) delivered in full; or (2) delivered to such lesser extent which would result in no portion of such benefits being subject to the excise tax, whichever results in the receipt by the senior executive on an after-tax basis of the greatest amount of benefits. To the extent the senior executive’s severance benefits are delivered in full, the Company will not provide the senior executive any tax gross-up to cover the cost of any excise tax.

Definitions Contained in Change of Control Severance Agreement

Each Change of Control Severance Agreement defines “Cause” as: (1) the senior executive’s continued intentional and demonstrable failure to perform his or her duties customarily associated with his or her position (other than any such failure resulting from the senior executive’s mental or physical disability) after the senior executive has received a written demand of performance from the Company and the senior executive has failed to cure such nonperformance within 30 days after receiving such notice; (2) the senior executive’s conviction of, or plea of nolo contendere to, a felony that the Board of Directors reasonably believes has had or will have a material detrimental effect on the Company’s reputation or business; or (3) the senior executive’s commission of an act of fraud, embezzlement, misappropriation, willful misconduct, or breach of fiduciary duty against, and causing material harm to, the Company.

Each Change of Control Severance Agreement defines “Change of Control” as any of the following events: (1) a change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group (either, a “Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the Company, except that any change in the ownership of the stock of the Company as a result of a private financing of the Company that is approved by the Board of Directors will not be considered a Change of Control; (2) a change in the effective control of the Company which occurs on the date that a majority of the members of the Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election; or (3) a change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any Person acquires (or has acquired during the 12 month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. Notwithstanding the foregoing provisions of this definition, a transaction will not be deemed a Change of Control unless the transaction qualifies as a change of control event within the meaning of Section 409A of the Internal Revenue Code.

Mr. Kurian’s Change of Control Severance Agreement defines “Good Reason” as his termination of employment within 90 days following the expiration of any cure period following the occurrence of any of the following, without his consent: (1) a material reduction of his authority or responsibilities, provided that a reduction of authority or responsibilities that occurs as a direct consequence of a Change of Control and the Company becoming part of larger entity will not be considered a material reduction of Mr. Kurian’s authority or responsibilities; and any change which results in Mr. Kurian ceasing to have the same functional supervisory authority and responsibility following a Change of Control or a change in Mr. Kurian’s reporting position so that he no longer directly reports to the Chief Executive Officer or Board of Directors of the parent entity following a Change of Control will constitute a material reduction of his authority or responsibilities; (2) a material reduction in his base salary or target annual incentive (“Base Compensation”), unless the Company also similarly reduces the Base Compensation of all other employees of the Company; (3) a material change in the geographic location at which he must perform services; (4) any purported termination of his employment for “Cause” without first satisfying the procedural protections set forth in his agreement; or (5) the failure of the Company to obtain the assumption of the agreement by a successor and/or acquirer and an agreement that he will retain substantially similar responsibilities in the acquirer or the merged or surviving company as he had prior to the transaction.

 

54


The Change of Control Severance Agreement for each of the other senior executives, including the other NEOs, defines “Good Reason” as the termination of employment within 90 days following the occurrence of any of the following, without the senior executive’s consent: (1) a material reduction of the senior executive’s authority or responsibilities, relative to the senior executive’s authority or responsibilities in effect immediately prior to such reduction, or a change in the senior executive’s reporting position such that the senior executive no longer reports directly to the officer position or its functional equivalent to which the senior executive was reporting immediately prior to such change in reporting position (unless the senior executive is reporting to the comparable officer position of the parent corporation in a group of controlled corporations following a Change of Control); (2) a material reduction in the senior executive’s base salary or target annual incentive (“Base Compensation”), unless the Company also similarly reduces the Base Compensation of all other employees of the Company with positions, duties and responsibilities comparable to the senior executive’s; (3) a material change in the geographic location at which the senior executive must perform services; (4) any purported termination of the senior executive’s employment for “Cause” without first satisfying the procedural protections set forth in his or her agreement; or (5) the failure of the Company to obtain the assumption of the agreement by a successor and/or acquirer and an agreement that the senior executive will retain substantially similar responsibilities in the acquirer or the merged or surviving company as he or she had prior to the transaction.

PBRSUs

In the event of a change of control of the Company prior to the expiration of the applicable two or three-year performance period for a PBRSU grant, the relative performance of the Company’s TSR using the per share value of the Company’s common stock payable to stockholders in connection with the change of control will be measured against the median TSR of the companies listed in the Hardware and Equipment Index for the same period to determine the number of shares that vest at the end of the applicable performance period based on the payout schedule described in the “ PBRSUs ” section of the “ Compensation Discussion  & Analysis ” of this proxy (such vesting, the “Change of Control Vesting”), subject to continuous service by the NEO through the end of the performance period. If the NEO is terminated without “Cause” or resigns for “Good Reason” (each as defined in the NEO’s Change of Control Agreement) prior to the first anniversary (and, in the case of Mr. Kurian, the second anniversary) of the Change of Control, the vesting of the PBRSUs will accelerate upon the date on which the NEO is terminated or resigns and the number of PBRSUs that vest will be determined in accordance with the Change of Control Vesting. If the NEO’s employment terminates due to the NEO’s death or permanent disability (a “Qualifying Termination), then the measurement period for TSR shall terminate on the date of the Qualifying Termination and the number of PBRSUs that vest (measured based on the actual performance of the Company’s TSR against the median TSR of the companies listed in the Hardware and Equipment Index) will be prorated based the percentage of time worked during the applicable performance period. In the event of the voluntary termination of employment by the NEO either (a) after reaching 62 years of age or (b) on or after reaching 55 years of age following a minimum of ten (10) years of continuous service to the Company of its subsidiaries, the NEO’s PBRSUs will remain outstanding through the applicable performance period and the number of PBRSUs that vest will be prorated based the percentage of time worked during the applicable performance period.

 

Executive Medical Retirement Plan

The Company adopted the Executive Medical Retirement Plan (the “Medical Plan”) in 2005. As a result of changes in market compensation practices and changes in the healthcare market, the Medical Plan was closed to new participants in November 2015 and in November 2016 the plan design was amended, effective January 1, 2017, to reduce costs to the Company. The Medical Plan will terminate on December 31, 2019. To participate in the Medical Plan, individuals must have been in the position of CEO or Executive Vice President as of November 12, 2015 and also meet certain age and service requirements as of the date of retirement. As amended, the Medical Plan provides a health reimbursement account to reimburse eligible retired executives for premiums paid for individual insurance covering the retiree and any eligible dependents for the period from January 1, 2017 through December 31, 2019. On or after December 31, 2019 but ending on December 31, 2021, participants in the Medical Plan will be eligible to receive a lump sum cash payment equal to two years of projected health care costs, or a prorated portion thereof, pursuant to the methodology set forth in the Medical Plan.

 

55


The only NEOs who could qualify to participate in the Medical Plan are Messrs. Kurian and Reich. They will only receive benefits outlined in the Medical Plan if they were to retire prior to December 31, 2021 and have met all Medical Plan requirements. Assuming Messrs. Kurian and Reich retired on April 27, 2018, the last day of our fiscal year, and satisfied all Medical Plan requirements, the present value of the benefits that each of Mr. Kurian and Mr. Reich would have been entitled to receive is $172,000 and $161,000, respectively. Note that these amounts represent the present value of benefits to be received based on certain actuarial assumptions and it is likely that actual costs will differ from the assumptions utilized and scenarios presented.

 

Estimated Payments Upon Termination of Employment and/or a Change of Control

The following table provides information concerning the estimated payments and benefits that would be provided in the circumstances described above for each of the NEOs serving as of the end of fiscal 2018 pursuant to the Change of Control Severance Agreements in effect at that time. Payments and benefits are estimated assuming that the triggering event took place on the last business day of fiscal 2018 (April 27, 2018), and the price per share of the Company’s common stock is the closing price of the Nasdaq Global Select Market as of that date of $67.40. There can be no assurance that a triggering event would produce the same or similar results as those estimated below if such event occurs on any other date or at any other price, or if any other assumption used to estimate potential payments and benefits is not correct. Due to the number of factors that affect the nature and amount of any potential payments of benefits, any actual payments and benefits may be different.

 

         Potential Payments Upon  
         Involuntary Termination
Other Than For Cause
    Voluntary Termination
For Good Reason
 
Name    Type of Benefit   Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
    Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
 

George Kurian

   Cash severance payments     —       

 

 

 

5,165,000 

 

(1) 

    —          5,165,000  (1) 
  

 

Vesting acceleration of time-based
equity (2)

    —          10,781,487  (3)      —          10,781,487  (3) 
  

 

Vesting acceleration of PBRSUs

    17,461,832  (4)      34,832,320  (3)(5)      17,461,832  (4)      34,832,320  (3)(5) 
  

 

Continued coverage of employee
benefits (6)(9)

    —          49,100        —          49,100   
  

 

Total termination benefits

    17,461,832        50,827,907        17,461,832        50,827,907   
  

 

Total previously vested equity value

    5,917,936        5,917,936        5,917,936        5,917,936   
  

 

Full “walk away” value

    23,379,768        56,745,843        23,379,768        56,745,843   

 

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         Potential Payments Upon  
         Involuntary Termination
Other Than For Cause
    Voluntary Termination
For Good Reason
 
Name    Type of Benefit   Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
    Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
 

 

Ronald J. Pasek

   Cash severance payments     —          1,842,750  (7)      —          1,842,750  (7) 
  

 

Vesting acceleration of time-based
equity (2)

    —          2,231,547  (3)      —          2,231,547  (3) 
  

 

Vesting acceleration of PBRSUs

    5,244,315  (4)      10,646,908  (3)(5)      5,244,315  (4)      10,646,908  (3)(5) 
  

 

Continued coverage of employee
benefits (8)

    —          36,400        —          36,400   
  

 

Total termination benefits

    5,244,315        14,757,605        5,244,315        14,757,605   
  

 

Total previously vested equity value

    —          —          —          —     
  

 

Full “walk away” value

    5,244,315        14,757,605        5,244,315        14,757,605   

 

Joel D. Reich

   Cash severance payments     —          1,615,950  (7)      —          1,615,950  (7) 
  

 

Vesting acceleration of time-based
equity (2)

    —          3,496,037  (3)      —          3,496,037  (3) 
  

 

Vesting acceleration of PBRSUs

    4,897,634  (4)      9,570,800  (3)(5)      4,897,634  (4)      9,570,800  (3)(5) 
  

 

Continued coverage of employee
benefits (8)(9)

    —          27,700        —          27,700   
  

 

Total termination benefits

    4,897,634        14,710,487        4,897,634        14,710,487   
  

 

Total previously vested equity value

    741,967        741,967        741,967        741,967   
  

 

Full “walk away” value

    5,639,601        15,452,454        5,639,601        15,452,454   

 

Henri P. Richard

   Cash severance payments     —          1,811,250  (7)      —          1,811,250  (7) 
  

 

Vesting acceleration of time-based
equity (2)

    —          5,117,177  (3)      —          5,117,177  (3) 
  

 

Vesting acceleration of PBRSUs

    7,287,879  (4)      13,813,360  (3)(5)      7,287,879  (4)      13,813,360  (3)(5) 
  

 

Continued coverage of employee
benefits (8)

    —          27,700        —          27,700   
  

 

Total termination benefits

    7,287,879        20,769,487        7,287,879        20,769,487   
  

 

Total previously vested equity value

    —          —          —          —     
  

 

Full “walk away” value

    7,287,879        20,769,487        7,287,879        20,769,487   

 

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         Potential Payments Upon  
         Involuntary Termination
Other Than For Cause
    Voluntary Termination
For Good Reason
 
Name   Type of Benefit    Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
    Prior to
Change of
Control
($)
    On or Within
24 Months
Following
Change of
Control
($)
 

 

Matthew K. Fawcett

 

 

Cash severance payments

     —          1,404,000  (7)      —          1,404,000  (7) 
 

 

Vesting acceleration of time-based
equity (2)

     —          3,375,025  (3)      —          3,375,025  (3) 
 

 

Vesting acceleration of PBRSUs

     3,437,333  (4)      6,672,600  (3)(5)      3,437,333  (4)      6,672,600  (3)(5) 
 

 

Continued coverage of employee
benefits (8)

     —          38,200        —          38,200   
 

 

Total termination benefits

     3,437,333        11,489,825        3,437,333        11,489,825   
 

 

Total previously vested equity value

     1,477,237        1,477,237        1,477,237        1,477,237   
 

 

Full “walk away” value

     4,914,570        12,967,062        4,914,570        12,967,062   

 

(1) Pursuant to the applicable terms of Mr. Kurian’s Change of Control Severance Agreement, as amended, in effect on April 27, 2018, this amount represents the sum of 200% of the Mr. Kurian’s annual base salary and 200% of Mr. Kurian’s target annual bonus.

 

(2) Reflects the aggregate value of unvested option grants with exercise prices less than or equal to $67.40, the closing price of our common stock on the Nasdaq Global Select Market on April 27, 2018, and other equity awards. For unvested option grants with exercise prices less than or equal to $67.40, aggregate market value is determined by multiplying (1) the number of shares subject to such options as of April 27, 2018; by (2) the difference between $67.40 and the exercise price of such options. Does not reflect any dollar value associated with the acceleration of options with exercise prices in excess of $67.40. For unvested RSUs, aggregate market value is determined by multiplying (1) the number of shares subject to such awards as of April 27, 2018; by (2) $67.40. If there is no amount listed in this row, all of the senior executive’s unvested outstanding options have an exercise price in excess of $67.40 and the individual does not hold any unvested restricted stock and/or RSUs.

 

(3) Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 27, 2018, equity awards that are subject to time-based vesting will vest as to that portion of the award that would have vested through the 48-month period following the senior executive’s termination date had the senior executive remained employed through such period. Additionally, the senior executive will be entitled to accelerated vesting as to an additional 100% of the then-unvested portion of all of his outstanding equity awards that are scheduled to vest pursuant to performance-based criteria, unless otherwise provided in the applicable award agreement governing the equity award. Under the terms of the grant agreements for the PBRSUs, the performance period for the grant is deemed to end upon a change of control of the Company and the Company’s TSR is measured against the median TSR of the companies listed in the Hardware and Equipment Index and the actual award amount.

 

(4) Pursuant to the terms of the grant agreement for the PBRSUs, if the senior executive’s employment terminates due to the his or her death or permanent disability (a “Qualifying Termination”), then the measurement period for TSR shall terminate on the date of the Qualifying Termination and the number of PBRSUs that vest (measured based on the actual performance of the Company’s TSR against the median TSR of the companies listed in the Hardware and Equipment Index) will be prorated based the percentage of time worked during the applicable performance period.

 

58


(5) Pursuant to the terms of the grant agreement for the PBRSUs, the vesting of the PBRSUs will accelerate upon the date on which the senior executive is terminated or resigns and the number of PBRSUs that vest will be determined in accordance with the Change of Control Vesting. For purposes of this table, the closing price of the Company’s common stock on April 27, 2018 ($67.40) is used as the per share value of the Company’s common stock payable to stockholders in connection with the change of control.

 

(6) Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 27, 2018, if Mr. Kurian continuation coverage pursuant to COBRA for himself and his eligible dependents, the Company will reimburse Mr. Kurian for the COBRA premiums for such coverage until the earlier of (1) 24 months; or (2) the date upon which Mr. Kurian and/or his eligible dependents are covered under similar plans.

 

(7) Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 27, 2018, this amount represents the sum of 150% of the senior executive’s annual base salary and 150% of the senior executive’s target annual bonus.

 

(8) Pursuant to the applicable terms of the Change of Control Severance Agreement in effect on April 27, 2018, if the senior executive elects continuation coverage pursuant to COBRA for the senior executive and his or her eligible dependents, the Company will reimburse the senior executive for the COBRA premiums for such coverage until the earlier of (1) 18 months; or (2) the date upon which the senior executive and/or his or her eligible dependents are covered under similar plans.

 

(9) Assumes that the senior executive elects to continue coverage of employee benefits under COBRA, and does not continue coverage under the Medical Plan. Please see the section entitled Executive Medical Retirement Plan for further information on the value of benefits provided through the Medical Plan.

 

Equity Compensation Plan Information

The following table provides information as of April 27, 2018 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans. The table does not include information with respect to shares subject to outstanding options and awards granted under equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally granted those options and awards. Footnote 5 to the table sets forth the total number of shares of common stock issuable upon the exercise of those assumed options and awards as of April 27, 2018 and the weighted-average exercise price.

 

     A      B      C  
     Number of Securities
to be Issued upon
Exercise of
Outstanding Options, and
vesting of RSU and PBRSU
Awards (#)(2)
     Weighted-
Average
Exercise Price of
Outstanding
Options ($)(3)
     Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (#) (Excluding Securities
Reflected in Column A)(4)
 

Equity compensation plans approved by
stockholders (1)

     9,810,676      $ 38.07        30,720,611  

Equity compensation plans not approved by stockholders (5)

     —          —          —    

Total (6)

     9,810,676        38.07        30,720,611  

 

(1) The category consists of the 1999 Plan and the Purchase Plan.

 

(2)

Includes 941,404 shares of common stock issuable upon exercise of outstanding options, 7,408,560 shares of common stock issuable upon vesting and payout of shares subject to outstanding RSU awards and 1,460,712 shares of common stock issuable upon vesting and payout of shares subject to PBRSU awards, assuming the maximum number of shares vest. Excludes purchase rights accruing under the Company’s

 

59


  Purchase Plan. The Purchase Plan was approved by the stockholders in connection with the initial public offering of the Company’s common stock. Under the Purchase Plan, each eligible employee may purchase up to 1,500 shares of common stock at semiannual intervals on the last business day of May and November of each year at a purchase price per share equal to 85% of the lower of (1) the closing selling price per share of common stock on the employee’s entry date into the two-year offering period in which that semiannual purchase date occurs; or (2) the closing selling price per share on the semiannual purchase date.

 

(3) Column B does not take into account shares issuable upon the vesting of outstanding RSUs and PBRSUs, which have no exercise price.

 

(4) Includes (1) 23,658,009 shares of common stock available for issuance under the 1999 Plan; and (2) 7,062,602 shares available for issuance under the Purchase Plan. As of July 15, 2018, 19,097,234 shares were available for issuance under the 1999 Plan. As of July 15, 2018, 5,858,216 shares are available for issuance under the Purchase Plan.

 

(5) The table does not include information for equity compensation plans assumed by the Company in connection with mergers and acquisitions of the companies that originally established those plans. As of April 27, 2018, there were a total of 698,699 shares subject to outstanding awards under all equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 281,798 shares were subject to outstanding option awards and 416,901 shares were subject to outstanding restricted stock or RSU awards. The outstanding stock options had a weighted-average exercise price of $8.19 per share and a weighted-average remaining term of 6.90 years as of such date. No additional awards may be granted under those assumed plans.

 

(6) As of April 27, 2018, there were a total of 11,490,683 shares subject to outstanding awards under all of the Company’s equity compensation plans, including equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 1,223,202 shares were subject to outstanding option awards and 10,267,481 shares were subject to outstanding full value awards. The outstanding stock options had a weighted-average exercise price of $31.19 per share and a weighted-average remaining term of 3.48 years as of such date. As of July 15, 2018, there were a total of 10,180,750 shares subject to outstanding awards under all of the Company’s equity compensation plans, including equity compensation plans assumed by the Company in connection with mergers and acquisitions, of which 817,840 shares were subject to outstanding option awards and 9,362,910 shares were subject to full value awards. The outstanding stock options had a weighted-average exercise price of $29.79 and a weighted-average remaining term of 3.54 years as of such date.

 

PAY RATIO

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of George Kurian, our CEO.

To identify the median of the annual total compensation of all our employees, we relied on a methodology and certain material assumptions, adjustments, and estimates as described in this paragraph. We determined our median employee from the global Company employee population (except the CEO) as of March 5, 2018 (a date within the last three months of the Company’s last completed fiscal year) using expected annual total compensation for fiscal 2018 as of March 5, 2018. Expected annual total compensation included base salary, cash incentive payments, commissions, the grant date value of any equity awards and the value of fringe benefits received. All foreign currencies were converted to U.S. dollars using the exchange rates in effect on March 5, 2018. We annualized the salaries but not the cash and equity incentive compensation of the employees that were not employed by the Company for the full fiscal year. We did not exclude any employees from the calculation of the median or use any cost-of-living adjustments.

After we determined the median employee, we calculated the median employee’s annual total compensation for fiscal 2018 as of April 27,2018 in the same manner that we calculate our CEO’s total compensation as shown

 

60


in the Summary Compensation Table. We determined that the median employee’s annual total compensation was $157,467. Our CEO’s annual total compensation was $12,859,367 as shown in the Summary Compensation Table. The fiscal 2018 ratio of our CEO’s annual total compensation to that of our median employee is 82:1.

NetApp believes that its methodology, which is consistent with the requirements of the SEC, yielded a reasonable estimate of the pay ratio. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, apply certain exclusions, and make reasonable estimates and assumptions that reflect their compensation practices. Thus, the pay ratio reported by other companies may not be comparable to the pay ratio we are reporting, as other companies may have different employment and compensation practices and may use different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2018, the members of the Compensation Committee were Robert T. Wall (through September 14, 2017), Gerald Held, Kathryn M. Hill (from September 14, 2017), George T. Shaheen, Stephen M. Smith (through February 7, 2018) and Richard P. Wallace. None of these individuals was at any time during fiscal 2018, or at any other time, an officer or employee of the Company. No executive officer of the Company serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or Compensation Committee.

 

CERTAIN TRANSACTIONS WITH RELATED PARTIES

Our Corporate Governance and Nominating Committee is responsible for the review, approval, and ratification of transactions with related persons. Specifically, the Corporate Governance and Nominating Committee has the authority to:

 

    Consider questions of possible conflicts of interest of members of our Board and corporate officers;

 

    Review actual and potential conflicts of interest of members of our Board and corporate officers, and clear any involvement of such persons in matters that may involve a conflict of interest;

 

    Establish policies and procedures for the review and approval of “related person transactions,” as defined in applicable SEC rules;

 

    Conduct ongoing reviews of potential related person transactions; and

 

    Review and approve all related person transactions.

Pursuant to the SEC’s rules and regulations, “related persons” include, but are not limited to, the Company’s directors, executive officers, and beneficial owners of more than 5% of the Company’s outstanding common stock. If the determination is made that a related person has a material interest in any Company transaction, then the Corporate Governance and Nominating Committee, consisting of all independent directors, is responsible for reviewing and approving or ratifying it. An approved transaction would be disclosed in accordance with the SEC rules if required. If the related person at issue is a director of the Company, or a family member of a director, then that director would not participate in those discussions.

 

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AUDIT COMMITTEE REPORT

The information contained in the following Audit Committee Report shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.

The Audit Committee has reviewed and discussed the Company’s consolidated financial statements with management and Deloitte & Touche LLP, the Company’s independent registered public accounting firm (“Deloitte & Touche”). The Audit Committee has discussed with Deloitte & Touche the matters required to be discussed by Statement of Auditing Standards 13